• FIFA Confirms Russia Will Be Stripped Of 2018 World Cup If "Evidence Of Bribery" Emerges

  Ten days ago, when the FIFA scandal broke out, it took just a few hours to figure out what the US DOJ’s motive was. The answer was simple: stripping the 2018 (and 2022) World Cup hosts, i.e., Russia (and to a lesser extent Qatar), of their respective hosting venues, and long before the Blatter’s resigned we said:

  What happens next? Sepp Blatter’s reelection this coming Friday, which until yesterday had been guaranteed, is now virtually assured to fail as Putin’s frontman at FIFA is shown the door.

   

  What else likely happens? Following some dramatic procedural changes, Russia loses the hosting of the 2018 World Cup.

  And moments after Blatter’s unexpected resignation we doubled down:

  And now Russia is stripped of the 2018 World Cup

  — zerohedge (@zerohedge) June 2, 2015

  One day later, we learned that as the FIFA corruption scandal kept growing, the jaws surrounding Russia started to close following a report thatthe FBI had launched a probe into the Russia 2018 World Cup award.

  There was just one thing missing: someone at FIFA admitting that the necessary and sufficient condition for Russia (if not so much Clinton Foundation donor Qatar) to be stripped of their hosting rights, would be evidence of bribery during the selection process. Which would be a low threshold indeed: if the past two weeks have confirmed it is that every single World Cup award stretching all the way back to France in 1998 and likely prior (such as the US in 1994) was as a result of illegal back-room dealings.

  Today, the last missing piece finally fell into place, after Domenico Scala, the independent chairman of FIFA’s audit and compliance committee, told a Swiss newspaper that Russia and Qatar could be stripped of their World Cup hosting rights if evidence emerges of bribery in the bidding process. From Reuters:

  “If evidence should emerge that the awards to Qatar and Russia only came about thanks to bought votes, then the awards could be invalidated,” Scala told SonntagsZeitung in an interview published on Sunday.

   

  “This evidence has not yet been brought forth.”

  It shortly will be, even as both countries – as expected – have denied wrongdoing in the conduct of their bids for the 2018 and 2022 tournaments, which were not the subject of charges announced by U.S. prosecutors last week against FIFA officials.

  Ironically, British Foreign Secretary Philip Hammond said he supported Qatar hosting the 2022 tournament but said Britain would work with another country if FIFA re-opened the bidding process.

  Perhaps the Clinton foundation will merely refund the Qatar “proceeds” if the Mid-east nation is stripped of its hosting rights. Or perhaps the US will simply make it up by “accidentally” blowing up Bashar al Assad’s home and ending once and for all the last hurdle to launching the Qatari natgas pipeline to Europe (in the process, the US also successfully isolating Gazprom as Europe’s sole outside energy provider).

  

  For Russia, the fate of Assad and Syria is a booby-trapped bridge it will have not choice but to cross eventually. But as for the fate of the Russian 2018 World Cup, the irony is that by forcibly stripping Putin of hosting rights, it will do Russia not one favor but two as we explained on Thursday:

  • first, Putin will save billions in funds for far better uses (the IRR on mass sport spectacles is terrible), and avoid the bottomless pit that is building if not bridges, then surely road, to nowhere and stadiums that will be used once only to become grazing grounds for sheep in the years to come.
  • more importantly, for a country fanned by nationalistic fervor, Putin will be able to wave the patriotic flag and slam the evil USA for not only meddling in other people’s affairs, but taking away what was rightfully Russia’s, thereby boosting his nationalism-inspired popularity to even greater heights.

  Or, to loosely paraphrase Hans Gruber, “You asked for miracles, Theo, I give you the DOJ.”

  

  

  
  
  

  

• A Professor Speaks Out: How Coddled, Hyper Sensitive Undergrads Are Ruining College Learning

  Submitted by Michael Krieger of Liberty Blitzkrieg

  A Professor Speaks Out: How Coddled, Hyper Sensitive Undergrads Are Ruining College Learning

  Things have changed since I started teaching. The vibe is different. I wish there were a less blunt way to put this, but my students sometimes scare me — particularly the liberal ones.

   

  I once saw an adjunct not get his contract renewed after students complained that he exposed them to “offensive” texts written by Edward Said and Mark Twain. His response, that the texts were meant to be a little upsetting, only fueled the students’ ire and sealed his fate.  That was enough to get me to comb through my syllabi and cut out anything I could see upsetting a coddled undergrad, texts ranging from Upton Sinclair to Maureen Tkacik — and I wasn’t the only one who made adjustments, either.

   

  The current student-teacher dynamic has been shaped by a large confluence of factors, and perhaps the most important of these is the manner in which cultural studies and social justice writers have comported themselves in popular media. I have a great deal of respect for both of these fields, but their manifestations online, their desire to democratize complex fields of study by making them as digestible as a TGIF sitcom, has led to adoption of a totalizing, simplistic, unworkable, and ultimately stifling conception of social justice. The simplicity and absolutism of this conception has combined with the precarity of academic jobs to create higher ed’s current climate of fear, a heavily policed discourse of semantic sensitivity in which safety and comfort have become the ends and the means of the college experience.

       – From the Vox article: I’m a Liberal Professor, and My Liberal Students Terrify Me

  The article at the center of today’s piece is truly excellent and demands much thought and introspection. One of the main themes here at Liberty Blitzkrieg since inception, has been the contention that the American population has turned into a nation of coddled, fearful serfs.

  It’s not quite clear to me when this transformation actually happened, but the first undeniable evidence within my lifetime was the public’s reaction to the terror attacks of September 11, 2001. I’ve written about this before, most specifically in the post, How I Remember September 11, 2001. Here’s an excerpt:

  In the days following the collapse, all I wanted was for the towers to be rebuilt just like before. I wanted the skyline back to what I had know since the day I came into this earth at a New York City hospital to be restored exactly as I had always known it. Career-wise, I felt I should leave Wall Street. I thought about going back to graduate school for political science, or maybe even join the newly created Department of Homeland Security (yes, the irony is not lost on me). I read a lengthy tome on Osama Bin Laden and al-Qaeda. I was an emotional and psychological mess, and it was when I was in this state of heightened distress that my own government and the military-industrial complex took advantage of me.

   

  It wasn’t just me of course. It was an entire nation that was callously manipulated in the aftermath of that tragedy. The courage and generosity exhibited by so many New Yorkers and others throughout the country and indeed the world was rapidly transformed into terrifying fear. Fear that was intentionally injected repeatedly into our daily lives. Fear that translated into pointless wars and countless deaths. Fear that was used to justify the destruction of our precious civil rights. Fear that was used to initiate a gigantic power grab and the source of tremendous profits for the corporate-statists and crony-capitalsits. Unfortunately, that is the greatest legacy of 9/11.

  It was the American public’s fearful and panicked emotional response to the attacks that allowed authoritarians and corrupt politicians to seamlessly and expeditiously steamroll over the civil rights of the citizenry. Unsurprisingly, this act of cowed submissiveness sent a signal to the less ethically inclined amongst us, and in the decade and a half since the attacks, the U.S. has rapidly deteriorated into something barely distinct from a Banana Republic.

  This infestation of cowardice, anti-intellectualism and fear has permeated almost every nook and crany of American life, including academics. So much so, that a college professor has just penned an article titled: I’m a Liberal Professor, and My Liberal Students Terrify Me. Even more worrisome, he felt the need to write it under a pseudonym due to the fear of backlash.

  This is not what makes a great nation. Here are some excerpts from Vox:

  I’m a professor at a midsize state school. I have been teaching college classes for nine years now. I have won (minor) teaching awards, studied pedagogy extensively, and almost always score highly on my student evaluations. I am not a world-class teacher by any means, but I am conscientious; I attempt to put teaching ahead of research, and I take a healthy emotional stake in the well-being and growth of my students.

   

  Things have changed since I started teaching. The vibe is different. I wish there were a less blunt way to put this, but my students sometimes scare me — particularly the liberal ones.

   

  Not, like, in a person-by-person sense, but students in general. The student-teacher dynamic has been reenvisioned along a line that’s simultaneously consumerist and hyper-protective, giving each and every student the ability to claim Grievous Harm in nearly any circumstance, after any affront, and a teacher’s formal ability to respond to these claims is limited at best.

   

  I once saw an adjunct not get his contract renewed after students complained that he exposed them to “offensive” texts written by Edward Said and Mark Twain. His response, that the texts were meant to be a little upsetting, only fueled the students’ ire and sealed his fate.  That was enough to get me to comb through my syllabi and cut out anything I could see upsetting a coddled undergrad, texts ranging from Upton Sinclair to Maureen Tkacik — and I wasn’t the only one who made adjustments, either.

  A bizarre form of censorship and anti-intellectualism, but a very dangerous one nonetheless.

  I am frightened sometimes by the thought that a student would complain again like he did in 2009. Only this time it would be a student accusing me not of saying something too ideologically extreme — be it communism or racism or whatever — but of not being sensitive enough toward his feelings, of some simple act of indelicacy that’s considered tantamount to physical assault. As Northwestern University professor Laura Kipnis writes, “Emotional discomfort is [now] regarded as equivalent to material injury, and all injuries have to be remediated.” Hurting a student’s feelings, even in the course of instruction that is absolutely appropriate and respectful, can now get a teacher into serious trouble.

   

  The academic job market is brutal. Teachers who are not tenured or tenure-track faculty members have no right to due process before being dismissed, and there’s a mile-long line of applicants eager to take their place. And as writer and academic Freddie DeBoer writes, they don’t even have to be formally fired — they can just not get rehired. In this type of environment, boat-rocking isn’t just dangerous, it’s suicidal, and so teachers limit their lessons to things they know won’t upset anybody.

   

  This shift in student-teacher dynamic placed many of the traditional goals of higher education — such as having students challenge their beliefs — off limits. While I used to pride myself on getting students to question themselves and engage with difficult concepts and texts, I now hesitate. What if this hurts my evaluations and I don’t get tenure? How many complaints will it take before chairs and administrators begin to worry that I’m not giving our customers — er, students, pardon me — the positive experience they’re paying for? Ten? Half a dozen? Two or three?

   

  The current student-teacher dynamic has been shaped by a large confluence of factors, and perhaps the most important of these is the manner in which cultural studies and social justice writers have comported themselves in popular media. I have a great deal of respect for both of these fields, but their manifestations online, their desire to democratize complex fields of study by making them as digestible as a TGIF sitcom, has led to adoption of a totalizing, simplistic, unworkable, and ultimately stifling conception of social justice. The simplicity and absolutism of this conception has combined with the precarity of academic jobs to create higher ed’s current climate of fear, a heavily policed discourse of semantic sensitivity in which safety and comfort have become the ends and the means of the college experience.

   

  This new understanding of social justice politics resembles what University of Pennsylvania political science professor Adolph Reed Jr. calls a politics of personal testimony, in which the feelings of individuals are the primary or even exclusive means through which social issues are understood and discussed. Reed derides this sort of political approach as essentially being a non-politics, a discourse that “is focused much more on taxonomy than politics [which] emphasizes the names by which we should call some strains of inequality [ … ] over specifying the mechanisms that produce them or even the steps that can be taken to combat them.” Under such a conception, people become more concerned with signaling goodness, usually through semantics and empty gestures, than with actually working to effect change.

  This is more or less how politics functions in the U.S. today. Fake and superficial narratives take position at center stage, while the really big existential issues are never addressed, or merely brushed under the rug.

  The press for actionability, or even for comprehensive analyses that go beyond personal testimony, is hereby considered redundant, since all we need to do to fix the world’s problems is adjust the feelings attached to them and open up the floor for various identity groups to have their say. All the old, enlightened means of discussion and analysis —from due process to scientific method — are dismissed as being blind to emotional concerns and therefore unfairly skewed toward the interest of straight white males. All that matters is that people are allowed to speak, that their narratives are accepted without question, and that the bad feelings go away.

   

  In a New York Magazine piece, Jonathan Chait described the chilling effect this type of discourse has upon classrooms. Chait’s piece generated seismic backlash, and while I disagree with much of his diagnosis, I have to admit he does a decent job of describing the symptoms. He cites an anonymous professor who says that “she and her fellow faculty members are terrified of facing accusations of triggering trauma.” Internet liberals pooh-poohed this comment, likening the professor to one of Tom Friedman’s imaginary cab drivers.  But I’ve seen what’s being described here. I’ve lived it. It’s real, and it affects liberal, socially conscious teachers much more than conservative ones.

  This is how civilizations die. Slowly, and by a thousand small cuts.

  

  

  
  
  

  

• The Central Banks Are Losing Control Of The Financial Markets

  Submitted by Michael Snyder of The Economic Collapse blog

  

  Every great con game eventually comes to an end. 

  For years, global central banks have been manipulating the financial marketplace with their monetary voodoo.  Somehow, they have convinced investors around the world to invest tens of trillions of dollars into bonds that provide a return that is way under the real rate of inflation.  For quite a long time I have been insisting that this is highly irrational.  Why would any rational investor want to put money into investments that will make them poorer on a purchasing power basis in the long run?  And when any central bank initiates a policy of “quantitative easing”, any rational investor should immediately start demanding a higher rate of return on the bonds of that nation.  Creating money out of thin air and pumping into the financial system devalues all existing money and creates inflation.  Therefore, rational investors should respond by driving interest rates up.  Instead, central banks told everyone that interest rates would be forced down, and that is precisely what happened.  But now things have shifted.  Investors are starting to behave more rationally and the central banks are starting to lose control of the financial markets, and that is a very bad sign for the rest of 2015.

  And of course it isn’t just bond yields that are out of control.  No matter how hard they try, financial authorities in Europe can’t seem to fix the problems in Greece, and the problems in Italy, Spain, Portugal and France just continue to escalate as well.  This week, Greece became the very first nation to miss a payment to the IMF since the 1980s.  We’ll discuss that some more in a moment.

  Over in Asia, stocks are fluctuating very wildly.  The Shanghai Composite Index plunged by 5.4 percent on Thursday before regaining all of those losses and actually closing with a gain of 0.8 percent.  When we see this kind of extreme volatility, it is a very bad sign.  It is during times of extreme volatility that markets crash.

  Remember, stocks generally tend to go up during calm markets, and they generally tend to go down during choppy markets.  So most investors do not want to see lots of volatility.  Unfortunately, that is precisely what we are witnessing all over the world right now.  The following comes from the Wall Street Journal…

  “Volatility over the last days has been breathtaking, especially in bond markets,” said Wouter Sturkenboom, senior investment strategist at Russell Investments. He said that it rippled through equity and currency markets, which overreacted.

   

  The yield on the benchmark German 10-year bond touched 0.99%, its highest level since September, before erasing the day’s rise and falling back to 0.84%. The 10-year U.S. Treasury yield, which hit a fresh 2015 high of 2.42% earlier Thursday, recently fell back to 2.33%. Yields rise as prices fall.

  Sometimes when bond yields go up, it is because investors are taking money out of bonds and putting it into stocks because they are feeling really good about where the stock market is heading.  This is not one of those times.  As Peter Tchir has noted, the huge moves in the bond market that we are now seeing are the result of “sheer panic in the market”…

  In a morning note before the open, Brean Capital’s Peter Tchir wrote: “It is time to reduce US equity holdings for the near term and look for a 3% to 5% move lower. The Treasury weakness is NOT a ‘risk on’ trade it is a ‘risk off’ trade, where low yields are viewed as a risk asset and not a safe haven.” And Tom di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets, told Bloomberg, “This is sheer panic in the market from the standpoint of what’s been happening in Europe … Most of Wall Street is guarded here as far as taking on new positions.”

  But this wasn’t supposed to happen.

  After watching the Federal Reserve be able to successfully use quantitative easing to drive down interest rates, the European Central Bank decided to try the same thing.  Unfortunately for them, investors are starting to behave more rationally.  The central banks are starting to lose control of the financial markets, and bond yields are soaring.  I think that Peter Boockvar summarized where we are currently at very well when he stated the following…

  I’ve said this before but I’m sorry, I need to say it again. What we are witnessing in global markets is the inherent contradiction writ large that is modern day monetary policy where dangerously ZIRP, NIRP and QE are considered conventional policies. The contradiction is simply this: the desire for higher inflation if fulfilled will result in higher interest rates that central banks are trying so hard and desperately to suppress.

   

  Outside of the short end of the curve, markets will always win for better or worse and that is clearly evident now. The ECB is getting their first taste of the market talking back and in quite the violent way. In the US, the bond market is watching the Fed drag its feet (its never-ending) with wanting to raise interest rates and finally said enough is enough. The US Treasury market is tightening for them. Since mid April, the 5 yr note yield is higher by 40 bps, the 10 yr is up by 55 bps and the 30 yr yield is up by 65 bps.

  And if global investors continue to move in a rational direction, this is just the beginning.  Bond yields all over the planet should be much, much higher than they are right now.  What that means is that bond prices potentially have a tremendous amount of room to go down.

  One thing that could accelerate the global bond crash is the crisis in Greece. Negotiations between the Greeks and their creditors have been dragging on for four months, and no agreement has been reached.  Now, Greece has missed the loan payment that was due to the IMF on June 5th, and it is asking the IMF to bundle all of the payments that are due this month into one giant payment at the end of June…

  Greece has asked to bundle its four debt payments to the International Monetary Fund that fall due in June so that it can pay them in one batch at the end of the month, Greek newspaper Kathimerini reported on Thursday.

   

  The request is expected to be approved by the IMF, the newspaper said. That would mean Greece does not have to pay the first tranche of 300 million euros that falls due on Friday.

   

  Greece faces a total bill of 1.5 billion euros owed to the IMF over four installments this month.

  Of course that payment will not be made either if a deal does not happen by then.  And with each passing day, a deal seems less and less likely.  At this point, the package of “economic reforms” that the creditors are demanding from Greece is completely unacceptable to Syriza.  The following comes from an article in the Guardian…

  Fresh from talks in Brussels, Tsipras faced outrage on Thursday from highly skeptical members of his own Syriza party. A five-page ultimatum from creditors, presented by the European commission president, Jean-Claude Juncker, was variously described as shocking, provocative, disgraceful and dishonourable.

   

  “It will never pass,” said Greece’s deputy social security minister, Dimitris Stratoulis. “If they don’t back down, the country won’t be lost … there are alternatives that would cost less than our signing a disgraceful and dishonourable agreement.”

  Ultimately, I don’t believe that we are going to see an agreement.

  Why?

  Well, I tend to agree with this bit of analysis from Andrew Lilico…

  The Eurozone does not want to make any compromise with the current Greek government because (a) they don’t believe they need to because Greek threats to leave the euro are empty both because internal polling suggests Greeks don’t want to leave and because if they did leave that doesn’t really constitute any threat to the euro; (b) because they (particularly perhaps Angela Merkel) believe that under enough pressure the Greek government might collapse and be replaced by a more cooperative government, as has happened repeatedly before in the Eurozone crisis including in Italy and Greece itself; and (c) because any deal with Greece that is seen to involve or be presentable as any victory for the Greek government would threaten the political positions of governments in several Eurozone states including Spain, Portugal, Italy, Finland and perhaps even the Netherlands and Germany.

   

  Furthermore, it’s not clear to me that the Eurozone creditors at this stage would have much interest in any deal based upon promises, regardless of how much the Greek had verbally surrendered.  Things have gone too far now for mere words to work.  They would need to see the Greeks deliver actions — tangible economic reforms and tangible, credible primary surplus targets and a sustainable change in the long-term political mood within Greece that meant other Eurozone states might eventually get their money back.  That is almost certainly not doable at all with the current Greek government.  The only deal possible would be with some replacement Greek government that had come in precisely on the basis that it did want to do a deal and did want to pay the creditors back.

   

  On the Syriza side, I see no more appetite for a deal.  They believe that austerity has been ruinous for the lives of Greeks and that decades more austerity would mean decades more Greek economic misery.  From their point of view, default or even exit from the euro, even if economically painful in the short term, would be better than continuing with austerity now.

  You can read the rest of his excellent article right here.

  Without a deal, the value of the euro is going to absolutely plummet and bond yields over in Europe will go through the roof.  I am fully convinced that this is the beginning of the end for the eurozone as it is currently constituted, and that we stand on the verge of a great European financial crisis.

  And of course the financial crisis that is coming won’t just be in Europe.  The global financial system is more interconnected than ever, and there are tens of trillions of dollars in derivatives that are tied to foreign exchange rates and 505 trillion dollars in derivatives that are tied to interest rates.  When this giant house of cards collapses, the central banks won’t be able to stop it.

  In the end, could we eventually see the entire central banking system itself totally collapse?

  That is what Phoenix Capital Research believes is about to happen…

  Last year (2014) will likely go down in history as the “beginning of the end” for the current global Central Banking system.

   

  What will follow will be a gradual unfolding of the next crisis and very likely the collapse of the Central Banking system as we know it.

   

  However, this process will not be fast by any means.

   

  Central Banks and the political elite will fight tooth and nail to maintain the status quo, even if this means breaking the law (freezing bank accounts or funds to stop withdrawals) or closing down the markets (the Dow was closed for four and a half months during World War 1).

   

  There will be Crashes and sharp drops in asset prices (20%-30%) here and there. However, history has shown us that when a financial system goes down, the overall process takes take several years, if not longer.

  We stand at the precipice of the greatest economic transition that any of us have ever seen.

  Even though things may seem very “normal” to most people right now, the truth is that the global financial system is fundamentally flawed, and cracks in the system are starting to appear all over the place.

  When this system does collapse, it will take most people entirely by surprise.

  But it shouldn’t.

  All con games eventually fall apart in the end, and we are about to learn that lesson the hard way.

  

  

  
  
  

  

• "Go East, Young Firm": Chinese Companies Drop New York Listings, Return Home

  China’s equity market bubble has become the stuff of legend recently, as millions of newly-minted day traders, record margin debt, liberalized cross-border flows, and the inclusion of China A shares in two transitional EM FTSE Russell benchmark indices have created a veritable frenzy on the SHCOMP and, more spectacularly, on the Shenzhen exchange.

  Valuations have soared, as has turnover and the bubble chorus is growing appreciably louder by the day. The following excerpt from a recent BNP note captures the situation nicely.

  Momentum buying reinforced by market-capitalisation benchmark weightings could further inflate the bubble. In particular, imminent decisions on the inclusion of A-shares in global equity indices might see strong institutional buying buttress the retail mania for a time. Still, the exponential trends in turnover, margin debt and increasingly valuations imply that a climax is now unlikely to be too far away. The Shenzhen Composite’s P/E ratio is now over 66x (with a median P/E of 108x), compared with the 75.8x P/E at the 2008 bubble peak. 

   

  

  Of course not everyone thinks the historic run is likely to end anytime soon and indeed, the momentum serves as a siren song to many Chinese companies which have listed on the NYSE. Reuters has more:

  Chinese tech firms have fallen out of love with America, and it shows – a growing number of them are looking to drop their listings in New York and head back home.

   

  Many Chinese tech executives are betting on higher share valuations in China where stock markets have recently caught fire. They also hope to evade any legal mess when Beijing formally outlaws foreign shareholder control of firms in protected tech sectors.

   

  The numbers are hard to resist. China’s tech-driven ChiNext composite index has gained nearly 180 percent this year, eclipsing the 30 percent rise in the Nasdaq OMX China Technology Index that tracks offshore listed mainland firms .

   

  Firms listed on the Nasdaq index get an average share price equal to 11 times their earnings. On ChiNext, they get 133 times. There’s a debate over which ratio is more accurate, but Chinese executives blame U.S. ignorance of China.

   

  “American investors don’t understand the business model of Chinese gaming companies,” said a senior executive of one such firm planning to eject from New York and move back to a Chinese listing, speaking on condition of anonymity.

  Perhaps. Or maybe American investors don’t understand the valuations. 133X is a lofty multiple even for America’s generally clueless BTFDers and indeed, the mainstream financial media is now awash with reports about China’s stock bubble. 

  Whatever the case, China is relaxing restrictions on tech listings in an apparent effort to encourage more startups to repatriate as Shanghai transitions to a more prominent role in the financial world.

  Chinese investors’ enthusiasm for startup listings is relatively recent, whereas U.S. investors have been rewarding internet startups with high share prices for decades.

   

  But more important was the fact that Chinese regulators wouldn’t let such firms list in the first place. The China Securities Regulatory Commission (CSRC) has required any company to be profitable for several years before listing – a rule which ruled out most Chinese internet companies.

   

  “The obstacle to coming back has been removed,” said China Renaissance in an email to Reuters. 

  Companies have also devised workarounds for China’s profitability restrictions, including convenient (if nonsensical) coporate tie-ups:

  Profitability requirements are being eased, and there’s also a shortcut: a merger with a Chinese company with a listed shell.

   

  Chinese display advertising giant Focus Media, which bailed out of New York in 2013, said this week it will relist in China via a $7 billion reverse merger with rubber manufacturer Jiangsu Hongda in what analysts say is a model for returnees to follow.

  Finally, China may look to close a legal loophole that allows companies in restricted sectors to take in money from foreign investors, a move which could further discourage tech companies from pursuing US listings:

  Chinese law bans foreign investment in domestic internet firms. Investors get around the restrictions by buying into variable interest entities (VIEs) set up by the internet companies, including Alibaba. U.S. courts recognise that as equivalent to ownership of the companies.

   

  But now Chinese regulators are revising the foreign investment law. A draft version of the document published by China’s cabinet explicitly forbids “effective control” by foreigners of a Chinese company in a prohibited sector.

  For Wall Street this means no more hundred million dollar paydays from underwriting highly anticipated Chinese offerings.

  For American exchanges, it means that as long as China’s self-feeding equity mania persists, US listings make little economic sense. Especially if China makes a concerted effort to bring more companies home. 

  

  

  
  
  

  

• Obama Sidelines Kerry On Ukraine Policy

  Submitted by investigative historian Eric Zuesse

  

  Obama Sidelines Kerry On Ukraine Policy

  On May 21st, I headlined “Secretary of State John Kerry v. His Subordinate Victoria Nuland, Regarding Ukraine,” and quoted John Kerry’s May 12th warning to Ukrainian President Petro Poroshenko to cease his repeated threats to invade Crimea and re-invade Donbass, two former regions of Ukraine, which had refused to accept the legitimacy of the new regime that was imposed on Ukraine in violent clashes during February 2014. (These were regions that had voted overwhelmingly for the Ukrainian President who had just been overthrown. They didn’t like him being violently tossed out and replaced by his enemies.)

  Kerry said then that, regarding Poroshenko, “we would strongly urge him to think twice not to engage in that kind of activity, that that would put Minsk in serious jeopardy. And we would be very, very concerned about what the consequences of that kind of action at this time may be.” Also quoted there was Kerry’s subordinate, Victoria Nuland, three days later, saying the exact opposite, that we “reiterate our deep commitment to a single Ukrainian nation, including Crimea, and all the other regions of Ukraine.” I noted, then that, “The only person with the power to fire Nuland is actually U.S. President Barack Obama.” However, Obama instead has sided with Nuland on this.

  Radio Free Europe, Radio Liberty, bannered, on June 5th, “Poroshenko: Ukraine Will ‘Do Everything’ To Retake Crimea‘,” and reported that, “President Petro Poroshenko has vowed to seek Crimea’s return to Ukrainian rule. … Speaking at a news conference on June 5, … Poroshenko said that ‘every day and every moment, we will do everything to return Crimea to Ukraine.’” Poroshenko was also quoted there as saying, “It is important not to give Russia a chance to break the world’s pro-Ukrainian coalition,” which indirectly insulted Kerry for his having criticized Poroshenko’s warnings that he intended to invade Crimea and Donbass.

  Right now, the Minsk II ceasefire has broken down and there are accusations on both sides that the other is to blame. What cannot be denied is that at least three times, on April 30th, then on May 11th, and then on June 5th, Poroshenko has repeatedly promised to invade Crimea, which wasn’t even mentioned in the Minsk II agreement; and that he was also promising to re-invade Donbass, something that is explicitly prohibited in this agreement. Furthermore, America’s President, Barack Obama, did not fire Kerry’s subordinate, Nuland, for her contradicting her boss on this important matter.

  How will that be taken in European capitals? Kerry was reaffirming the position of Merkel and Hollande, the key shapers of the Minsk II agreement; and Nuland was nullifying them. Obama now has sided with Nuland on this; it’s a slap in the face to the EU: Poroshenko can continue ignoring Kerry and can blatantly ignore the Minsk II agreement; and Obama tacitly sides with Poroshenko and Nuland, against Kerry.

  The personalities here are important: On 4 February 2014, in the very same phone-conversation with Geoffrey Pyatt, America’s Ambassador in Ukraine, in which Nuland had instructed Pyatt to get “Yats” Yatsenyuk appointed to lead Ukraine after the coup (which then occured 18 days later), she also famously said “F—k  the EU!” Obama is now seconding that statement of hers.

  In effect, Obama is telling the EU that they can get anything they want signed, but that he would still move forward with his own policy, regardless of whether or not they like it.

  Kerry, for his part, now faces the decision as to whether to quit — which would force the EU’s hand regarding whether to continue with U.S. policy there — or else for Kerry to stay in office and be disrespected in all capitals for his staying on after having been so blatantly contradicted by his subordinate on a key issue of U.S. foreign policy. If he stays on while Nuland also does, then, in effect, Kerry is being cut out of policymaking on Europe and Asia (Nuland’s territory), altogether, and the EU needs to communicate directly with Obama on everything, or else to communicate with Nuland as if she and not Kerry were the actual U.S. Secretary of State. But if Kerry instead quits, then the pressure would be placed on EU officials: whether to continue with the U.S., or to reject U.S. anti-Russia policy, and to move forward by leaving NATO, and all that that entails?

  If they then decide to stay with the U.S., after that “F—k the EU!” and then this; then, the European countries are clearly just U.S. colonies. This would be far more embarrassing to those leaders than John Kerry would be embarrassed by his simply resigning from the U.S. State Department. It might even turn the tide and force the Ukrainian Government to follow through with all of its commitments under the Minsk II accords.

  It would be the most effective thing for Kerry to do at this stage. But, it would lose him his position as a (now merely nominal) member of Obama’s Cabinet.

  The way this turns out will show a lot, about John Kerry. The nations of Europe already know everything they need to know about Barack Obama. If Kerry quits, he’ll have respect around the world. If he stays, he’ll be just another Colin Powell.

  The ball is in Kerry’s court, and everyone will see how he plays it — and what type of man he is (and isn’t).

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

  

  

  
  
  

  

• "Literally, Your ATM Won’t Work…"

  By Bill Bonner Of Bonner And Partners

  Literally, Your ATM Won’t Work…

  While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us.

  Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates.

  Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage?

  Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared.

  The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

  The same thing could happen to the money supply…

  There’s Not Enough Physical Money

  Here’s how… and why:

  It’s almost seems impossible. Hard to imagine. Difficult to understand. But if you look at M2 money supply – which measures coins and notes in circulation as well as bank deposits and money market accounts – America’s money stock amounted to $11.7 trillion as of last month.

  But there was just $1.3 trillion of physical currency in circulation – about only half of which is in the US. (Nobody knows for sure.)

  What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. We never see it. Touch it. Feel it. Count it out. Or lose it behind seat cushions.

  Banks profit – handsomely – by creating this credit. And as long as banks have sufficient capital, they are happy to create as much credit as we are willing to pay for.

  After all, it costs the banks almost nothing to create new credit. That’s why we have so much of it.

  A monetary system like this has never before existed. And this one has existed only during a time when credit was undergoing an epic expansion.

  So our monetary system has never been thoroughly tested. How will it hold up in a deep or prolonged credit contraction? Can it survive an extended bear market in bonds or stocks? What would happen if consumer prices were out of control?

  Less Than Zero

  Our current money system began in 1971.

  It survived consumer price inflation of almost 14% a year in 1980. But Paul Volcker was already on the job, raising interest rates to bring inflation under control.

  And it survived the “credit crunch” of 2008-09. Ben Bernanke dropped the price of credit to almost zero, by slashing short-term interest rates and buying trillions of dollars of government bonds.

  But the next crisis could be very different…

  Short-term interest rates are already close to zero in the U.S. (and less than zero in Switzerland, Denmark, and Sweden). And according to a recent study by McKinsey, the world’s total debt (at least as officially recorded) now stands at $200 trillion – up $57 trillion since 2007. That’s 286% of global GDP… and far in excess of what the real economy can support.

  At some point, a debt correction is inevitable. Debt expansions are always – always – followed by debt contractions. There is no other way. Debt cannot increase forever.

  And when it happens, ZIRP and QE will not be enough to reverse the process, because they are already running at open throttle.

  What then?

  The value of debt drops sharply and fast. Creditors look to their borrowers… traders look at their counterparties… bankers look at each other…

  …and suddenly, no one wants to part with a penny, for fear he may never see it again. Credit stops.

  It’s not just that no one wants to lend; no one wants to borrow either – except for desperate people with no choice, usually those who have no hope of paying their debts.

  Just as we saw after the 2008 crisis, we can expect a quick response from the feds.

  The Fed will announce unlimited new borrowing facilities. But it won’t matter….

  House prices will be crashing. (Who will lend against the value of a house?) Stock prices will be crashing. (Who will be able to borrow against his stocks?) Art, collectibles, and resources – all we be in free fall.

  The NEXT Crisis

  In the last crisis, every major bank and investment firm on Wall Street would have gone broke had the feds not intervened. Next time it may not be so easy to save them.

  The next crisis is likely to be across ALL asset classes. And with $57 trillion more in global debt than in 2007, it is likely to be much harder to stop.

  Are you with us so far?

  Because here is where it gets interesting…

  In a gold-backed monetary system prices fall. But the money is still there. Money becomes more valuable. It doesn’t disappear. It is more valuable because you can use it to buy more stuff.

  Naturally, people hold on to it. Of course, the velocity of money – the frequency at which each unit of currency is used to buy something – falls. And this makes it appear that the supply of money is falling too.

  But imagine what happens to credit money. The money doesn’t just stop circulating. It vanishes. As collateral goes bad, credit is destroyed.

  A bank that had an “asset” (in the form of a loan to a customer) of $100,000 in June may have zilch by July. A corporation that splurged on share buybacks one week could find those shares cut in half two weeks later. A person with a $100,000 stock market portfolio one day could find his portfolio has no value at all a few days later.

  All of this is standard fare for a credit crisis. The new wrinkle – a devastating one – is that people now do what they always do, but they are forced to do it in a radically different way.

  They stop spending. They hoard cash. But what cash do you hoard when most transactions are done on credit? Do you hoard a line of credit? Do you put your credit card in your vault?

  No. People will hoard the kind of cash they understand… something they can put their hands on… something that is gaining value – rapidly. They’ll want dollar bills.

  Also, following a well-known pattern, these paper dollars will quickly disappear. People drain cash machines. They drain credit facilities. They ask for “cash back” when they use their credit cards. They want real money – old-fashioned money that they can put in their pockets and their home safes…

  Dollar Panic

  Let us stop here and remind readers that we’re talking about a short time frame – days… maybe weeks… a couple of months at most. That’s all. It’s the period after the credit crisis has sucked the cash out of the system… and before the government’s inflation tsunami has hit.

  As Ben Bernanke put it, “a determined central bank can always create positive consumer price inflation.” But it takes time!

  And during that interval, panic will set in. A dollar panic – with people desperate to put their hands on dollars… to pay for food… for fuel…and for everything else they need.

  Credit may still be available. But it will be useless. No one will want it. ATMs and banks will run out of cash. Credit facilities will be drained of real cash. Banks will put up signs, first: “Cash withdrawals limited to $500.” And then: “No Cash Withdrawals.”

  You will have a credit card with a $10,000 line of credit. You have $5,000 in your debit account. But all financial institutions are staggering. And in the news you will read that your bank has defaulted and been placed in receivership. What would you rather have? Your $10,000 line of credit or a stack of $50 bills?

  You will go to buy gasoline. You will take out your credit card to pay.

  “Cash Only,” the sign will say. Because the machinery of the credit economy will be breaking down. The gas station… its suppliers… and its financiers do not want to get stuck with a “credit” from your bankrupt lender!

  Whose credit cards are still good? Whose lines of credit are still valuable? Whose bank is ready to fail? Who can pay his mortgage? Who will honor his credit card debt? In a crisis, those questions will be as common as “Who will win an Oscar?” today.

  But no one will know the answers. Quickly, they will stop guessing… and turn to cash.

  Our advice: Keep some on hand. You may need it.

  

  

  
  
  

  

• Citi Clients "Complain How Difficult It Is To Make Money", "Everyone Is Worried About Liquidity Shocks"

  Back in early/mid 2007, just as the subprime bubble was bursting but Wall Street was desperate for the party to go on, when VIX was flirting with single digits (killing the swaption market due to lack of vol), when record, multi-billion LBOs were a daily thing, and when corporate bond spreads barely registered any risk on the horizon, there was one dominant trade for those credit traders who saw the writing on the wall (as they usually do 3-6 months ahead of their equity trading peers): going long cheap index puts while funding the cost of carry by selling a steep long end and pocketing the roll down.

  That trade is back.

  According to Citigroup’s Credit Index group led by Anindya Basu, “nearly every single investor conversation we have had recently has been about how difficult it is to make money in the current environment.”

  There are good reasons for investors to be concerned – the two big elephants in the room are showing no signs of leaving. The Greece saga continues to drag on with headlines driving markets, and mixed economic data out of the US is causing considerable uncertainty around the timing and pace of Fed rate hikes

  Citi adds that,”investors need to put money to work, but almost all investors lack conviction, bemoan the lack of opportunities given how tight spreads are, and continue to worry about market liquidity.” 

  Those investors must have read what Citi’s Matt King said two weeks ago, namely that the market as we know it no longer exists courtesy of central banks (something Zero Hedge has said since 2009).

  So what is the best way to position/trade in the current environment? Citi’s answer is putting the 2007 trade back on again: “Under these circumstances, we believe that option hedges funded by the substantial roll down of mezzanine tranches can be very attractive.”

  This is how those who just have to invest other people’s money are advised to do so via Citi:

  … the markets are awash in liquidity – recent fund flow data indicates continued inflows into corporate IG funds, and even HY funds have seen a reversal of some of the outflows (see Figure 1) – in fact, YTD, both IG and HY funds have experienced net positive inflows. So investors are now faced with the difficult choice of finding opportunities to generate alpha in markets that appear overpriced, while contending with the possibility of liquidity shocks when a sell off happens.

   

  

   

  Now, no one seems to disagree that put (payer) options could potentially provide the best hedges for such situations, if we could only find a way to pay for them. The problem is that in a tight spread environment such as now, investors have to be conscious about how much they can allocate to their hedging budget. One way to make this work is to move the put option strikes significantly out of the money, but that can often make the hedge less effective, especially if we need protection from the daily mark-to-market volatility.

   

  We believe that the steepness of current credit curves offers a way out (see Figure 2 (left)) – the carry from rolling down such steep curves, combined with some form of cheap leverage could potentially be enough to fund closer to ATM puts. From that perspective, we favor selling protection (going long) in index tranches which have steeper curves than the underlying indices (see Figure 2 (right)) – for example, IG 3-7% 3s5s are 63% of the 5y spread, compared to IG index 3s5s at 42% of the 5y. Similarly, HY 15-25% 3s5s are 55% of the 5y spread compared to HY index at 29% of the 5y.

   

  

   

  At the present time, it is our view that the mezzanine index tranches provide the most attractive vehicle for funding close-to-ATM option shorts. In addition to benefitting from the inherent (non-recourse) structural leverage, these tranches can also shield investors from actual default risks, which can be an important factor in an environment where idiosyncratic or sector specific (e.g. energy) risks are dominant.

   

  Combining the tranche and the option legs is advantageous in the following way. As spreads tighten, the trade benefits from the long tranche leg, while the option leg expires worthless. As spreads widen, the trade gains from the option leg and while mark-to-market losses on the tranche legs are partially compensated by the roll down. This can provide positive convexity.

  How to structure the trade:

  The details of our proposed trade are shown in Figure 3. We recommend buying December expiry 60 strike IG payers funded by selling protection in the 5y IG23 3- 7% tranche. We show the performance of the trade under different spread scenarios upon expiry in Figure 3 (red line). The trade is efficient in the sense it demonstrates positive convexity – upon option expiry, the P&L remains positive regardless of the direction of spread moves over a wide range of spreads. We chose a slightly in-the-money strike at 60bp since this exhibits better projected performance relative to strikes that are closer to the ATM 65bp strike.

   

  

   

  In effect, this trade can be thought of as a “payer spread” – selling protection on the IG23 3-7% tranche can be considered as selling an OTM payer option on defaults. In other words, we are long an ATM (technically in-the-money for this trade) payer option on IG in the conventional manner, but we are selling an OTM “default payer” option to fund this. The roll down characteristics of this “payer option” makes it anattractive way to fund the payer spread, rather than using a standard payer option.

  Whether Citi is merely looking for “clients” to take the opposite side of its own trade, or is legitimately pitching a funded, and deeply convex “fat tail” trade is unclear, but the fact that the very same trades that the entire hedge funds community (at least those who made money into the crash before both legs of the trade blew up) are starting to show up again is likely a cause for concern for those who are convinced the artificial, centrally-planned status quo of the past 7 years will continue indefinitely.

  As for Citi’s convictionless clients who “suffer” under the repressive, low vol regime: be happy you still have a job. Because just like Bill Gross, you may have identified both the trade and the timing of the “short (or long) of the century”, but if you execute it incorrectly and find yourself in a liquidity vacuum, your suffering will be the result of no longer having a job, artificial market conditions nowithstanding.

  

  

  
  
  

  

• Turkish Lira Plunges As Landmark Election Portends Political Uncertainty

  In an election that was, essentially, a litmus test for Recep Tayyip Erdogan’s plans to expand his powers, voters dealt the Turkish President and his Justice and Development Party (A.K.P.) a stinging blow at the ballot box on Sunday. 

  With 99% of the vote tallied, A.K.P appeared to have lost its parliamentary majority, winning only around 40% of the vote, a steep decline from 2011.

  The results likely mean the party will have around 260 seats in parliament, down from 327. A difficult coalition building effort will now ensue and Erdogan can call for new elections if a government isn’t formed within 45 days.

  What this means for political and social instability remains to be seen. 

  More color from The New York Times:

  Almost immediately, the results raised questions about the political future of Prime Minister Ahmet Davutoglu, who moved to that position from that of foreign minister last year and was seen as a loyal subordinate of Mr. Erdogan. Mr. Davutoglu, who during the campaign vowed to resign if the A.K.P. did not win a majority, told reporters on Sunday evening in brief comments, “whatever the people decide is for the best.” Mr. Davutoglu was due to speak later in the evening in Ankara.

   

  Mr. Erdogan, who as president was not on the ballot Sunday, will probably remain Turkey’s dominant political figure even if his powers have been rolled back, given his outsized personality and his still-deep well of support among Turkey’s religious conservatives, who form the backbone of his constituency. But even among those supporters, including ones in Kasimpasa, the Istanbul neighborhood where Mr. Erdogan spent part of his youth, there are signs that his popularity is flagging, partly because of his push for more powers over the judiciary and his crackdown on any form of criticism, including prosecutions of those who insult him on social media.

   

  “A lot of people in Kasimpasa have become disheartened by Erdogan’s aggressive approach in recent weeks,” said Aydin, 77, who gave only his first name because some of his family members are close to Mr. Erdogan. “I voted for the A.K.P. because it has become habit, but I think Erdogan lost votes this week.”

  And here’s Barclays on the implications going forward:

  So far, a single party government in Turkey has generally been perceived as a source of stability by the market and reaction to election results confirming such continuity has generally been positive. However, this perception seems to have somewhat evolved recently. Particularly, foreign investors sound less uncomfortable with a coalition government scenario on the basis of improvement in checks and balances, whereas local investor perception is more negative.

   

  In our view, local markets could trade poorly for an extended period should the election confirm a coalition government. First, it is still uncertain whether AKP would be able to attract support from MHP or HDP relatively swiftly and smoothly. While MHP stands as a natural coalition partner on the face of it, given the overlap in broader ideologies, the party’s disagreement with President Erdogan on many fronts and its reservations about the Kurdish peace process will likely make coalition process less straightforward. Indeed, MHP vice president Zuhal Topcu yesterday ruled out a coalition with AKP, accusing the party of making concessions to “terrorists” in an interview with Bloomberg. On the HDP front, external support for an AKP government seemed more likely than a coalition, given the sensitivities of both parties’ voter base.

   

  However, HDP officials recently ruled out external support to an AKP government.

   

  We think coalition negotiations could add another layer of uncertainty to the structure and focus of economic management, with which foreign investors already have concerns.

  Underscoring Barclays commentary, the lira just hit a record low against the dollar:

  • TURKISH LIRA PLUNGES 3.3% TO RECORD LOW 2.7523 AGAINST DOLLAR

  

  

  
  
  

  

• Another Bubble Alert: Home Down Payments Hit Three-Year Low

  Fannie Mae and Freddie Mac — the perpetually insolvent, bailed-out GSEs that a whole host of BTFDers and a few disgruntled billionaires swear can become cash cows again if they are just allowed to escape the evil clutches of government — are now allowed to back home loans with down payments as low as 3%. The decision to lower the minimum from 5% to 3% came from the GSEs’ regulator FHFA and its Director, Melvin Watt. Rather than retrace the entire story of how this came about, we’ll give you the Cliff’s Notes version as it appeared in Bloomberg last October: 

  Fannie Mae, Freddie Mac and their regulator are nearing agreement with mortgage issuers on efforts to boost lending and ease banks’ concerns that they will get stuck with bad loans when borrowers default.

   

  Melvin L. Watt, the director of the Federal Housing Finance Agency, will clarify in a Oct. 20 speech at the Mortgage Bankers Association conference in Las Vegas how some loans can be permanently exempted from the threat of buybacks, said the people, who asked not to be identified because the plans aren’t public. Watt will also discuss an effort that would allow borrowers to put down as little as three percent of the purchase price on loans backed by Fannie Mae and Freddie Mac, enabling borrowers with lower incomes to access the mortgage market, the people said. The two companies currently require a five percent down payment on most loans (ZH: this led FHA — which offers a 3.5% down payment product — to lower premiums in order to avoid losing market share.) 

  Needless to say, some GOP lawmakers were not pleased with this initiative, noting (correctly) that this simply encourages banks to return to pre-crisis underwriting standards and once again imperils taxpayers by putting Fannie and Freddie on the hook for loans made to borrowers who cannot afford their homes. Of course this kind of argument falls on deaf ears in a society where the answer to debt is still more debt and in a world where even the IMF now recommends “living with” debt rather than repaying it. 

  Given the above we weren’t surprised to learn that during Q1, the average down payment on single family homes, condos, and townhomes fell to just 14.8% — the lowest level since Q1 2012. RealtyTrac has more:

  The Q1 2015 U.S. Home Purchase Down Payment Report shows the average down payment for single family homes, condos and townhomes purchased in the first quarter was 14.8 percent of the purchase price, down from 15.2 percent in the previous quarter and down from 15.5 percent a year ago to the lowest level since Q1 2012..

   

  The report also shows that the average down payment for FHA purchase loans originated in the first quarter was 2.9 percent of the purchase price while the average down payment for conventional loans was 18.4 percent of the purchase price..

   

  FHA loans as a share of loan originations increased throughout the quarter, from 21 percent in January to 22 percent in February to 25 percent in March.

   

  “Down payment trends in the first quarter indicate that first time homebuyers are finally starting to come out of the woodwork, albeit it gradually,” said Daren Blomquist, vice president at RealtyTrac. “New low down payment loan programs recently introduced by Fannie Mae and Freddie Mac, along with the lower insurance premiums for FHA loans that took effect at the end of January are helping, given that first time homebuyers typically aren’t able to pony up large down payments..

   

  The share of low down payment loans — defined in the report as purchase loans with a loan-to-value ratio of 97 percent or higher, which would mean a down payment of 3 percent or lower — was 27 percent of all purchase loans in the first quarter, up from 26 percent in the fourth quarter and also 26 percent a year ago to the highest share since Q2 2013. Low down payment loans accounted for 83 percent of FHA purchase loans originated in the first quarter, while 11 percent of conventional loans were low down payment loans.

   

  “I see the rise in low down payments as a positive for our market. In Seattle, it’s primarily a function of the price growth in our region combined with buyers looking to take advantage of the new Fannie/Freddie 97 loan to value programs,” said OB Jacobi, president of Windermere Real Estate.

  And why not?

  After all, the average term on new car loans now sits at a record high 64 months, you can now refinance your credit cards with an online P2P loan from someone you’ve never met, and the government is actively promoting a ‘repayment’ plan for heavily-indebted college students that allows borrowers to make ‘payments’ of $0 on their way to complete loan forgiveness in just 300 short months.

  In other words, it’s no longer about credit risk. The only thing that matters is coming up with ways to re-leverage the economy. Someone else can deal with the fallout when the entire house of cards collapses on itself again down the road.

  

  

  
  
  

  

• The European "Template" For Dealing With Crises: Freezing Accounts, Bank Holidays, and Capital Controls…

  More and more analysts are beginning to take note of the “War on Cash.” However, they’re missing the fact that the actual template for what’s coming to the US first appeared in Europe back in 2012.

   

  Back in March of 2012, when the EU Crisis first began to spin out of control, then Prime Minister of France Nicolas Sarkozy openly called for the renegotiation of the Schengen Treaty: the treaty that established the 26-nation EU as a “borderless” entity in which individuals could move from one country to another with little difficulty and which also made trade among EU members easier.

   

  France was not alone either. A few months later, both France and Germany proposed imposing border controls in June of that same year.

   

              A Vote of No Confidence in Europe

   

  Germany and France's joint proposal to allow Schengen-zone countries to temporarily reintroduce border controls as a means of last resort might sound harmless. But doing so would damage one of the strongest symbols of European unity and perhaps even contribute to the EU's demise.

   

  Germany and France are serious this time. During next week's meeting of European Union interior ministers, the two countries plan to start a discussion about reintroducing national border controls within the Schengen zone. According to the German daily Süddeutsche Zeitung, German Interior Minister Hans-Peter Friedrich and his French counterpart, Claude Guéant, have formulated a letter to their colleagues in which they call for governments to once again be allowed to control their borders as "an ultima ratio" — that is, measure of last resort — "and for a limited period of time." They reportedly go on to recommend 30-days for the period.

   

  http://www.spiegel.de/international/europe/german-and-french-proposal-for-border-controls-endangers-european-unity-a-828815.html

   

  Why border controls? Well in truth, it was all about the money… specifically, physical cash. As we’ve noted before… with the vast majority of the global financial system based on digital money… the minute a significant number of depositors try to move their money OUT of a bank and INTO physical cash, the whole system can collapse.

   

  Again, Europe was ahead of the US in terms of proposing these terms. The below article dated from 2012 outlines the plan to limit cash withdrawals, shut down ATMs, and impose border controls to stop people from fleeing with their capital.

   

              Exclusive: EU floats worst-case plans for Greek euro exit: sources

   

  European finance officials have discussed as a worst-case scenario limiting the size of withdrawals from ATM machines, imposing border checks and introducing capital controls in at least Greece should Athens decide to leave the euro…

   

  As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union.

   

  http://money.msn.com/business-news/article.aspx?feed=OBR&date=20120611&id=15208663

   

  What are the key takeaways from this?

   

  1)   When the next crisis hits, the Powers That Be are only too happy to let the rule of law will go out the window.

   

  2)   The biggest problem they face is STOPPING people from moving their money into physical cash.

   

  3)   To stop #2, capital controls, border controls, and even a CARRY taxes (read here for more on this) will be imposed.

   

  Moreover, and I want to stress this, Europe has also shown us the template for how this mess will play out. Indeed, the 2013 banking crisis in Cyprus showed us EXACTLY how it will be in terms of speed and timing.

   

  The quick timeline for Cyprus is as follows:

   

  ·      June 25, 2012: Cyprus formally requests a bailout from the EU.

  ·      November 24, 2012: Cyprus announces it has reached an agreement with the EU the bailout process once Cyprus banks are examined by EU officials (ballpark estimate of capital needed is €17.5 billion).

  ·      February 25, 2013: Democratic Rally candidate Nicos Anastasiades wins Cypriot election defeating his opponent, an anti-austerity Communist.

  ·      March 16 2013: Cyprus announces the terms of its bail-in: a 6.75% confiscation of accounts under €100,000 and 9.9% for accounts larger than €100,000… a bank holiday is announced.

  ·      March 17 2013: emergency session of Parliament to vote on bailout/bail-in is postponed.

  ·      March 18 2013: Bank holiday extended until March 21 2013.

  ·      March 19 2013: Cyprus parliament rejects bail-in bill.

  ·      March 20 2013: Bank holiday extended until March 26 2013.

  ·      March 24 2013: Cash limits of €100 in withdrawals begin for largest banks in Cyprus.

  ·      March 25 2013: Bail-in deal agreed upon. Those depositors with over €100,000 either lose 40% of their money (Bank of Cyprus) or lose 60% (Laiki).

   

  The most important thing I want you to focus on is the speed of these events.

   

  Cypriot banks formally requested a bailout back in June 2012. The bailout talks took months to perform. And then the entire system came unhinged in one weekend.

   

  One weekend. The process was not gradual. It was sudden and it was total: once it began in earnest, the banks were closed and you couldn’t get your money out. ATMs were closed, capital controls were in place, full stop.

   

  There were no warnings that this was coming because everyone at the top of the financial food chain are highly incentivized to keep quiet about this. Central Banks, Bank CEOs, politicians… all of these people are focused primarily on maintaining CONFIDENCE in the system.

   

  How far will they go to maintain this trust?

   

  The Bank of Cyprus, the bank that imploded in 2013 and STOLE clients’ funds was voted Best Bank for Private Banking in Cyprus by EUROMONEY magazine in 2012!!!

   

  No joke…

   

  Bank of Cyprus has been named as the Best Bank for Private Banking in Cyprus, by the internationally acclaimed magazine EUROMONEY

   

  Bank of Cyprus Private Banking ranked first among Cypriot, Greek and other international financial institutions operating in Cyprus in the Private Banking sector…

   

  This recognition by EUROMONEY is ever more important in today’s macroeconomic environment as it reaffirms the Bank’s ability to safely and successfully respond to its clients’ financial needs and emphasizes its clients’ loyalty and trust.

   

  http://www.bankofcyprus.com.cy/en-GB/Cyprus/News-Archive/Best-Bank-for-Private-Banking/

   

  From best bank to totally broke and freezing clients’ accounts in less than one year.

   

  Europe has laid the template for what’s coming to the US.

   

  This is just the beginning. We've uncovered a secret document outlining how the Fed plans to incinerate savings.

   

  We detail this paper and outline three investment strategies you can implement

  right now to protect your capital from the Fed's sinister plan in our Special Report

  Survive the Fed's War on Cash.

   

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

   

  To pick up yours, swing by….

  http://www.phoenixcapitalmarketing.com/cash.html

   

  Best Regards

  Phoenix Capital Research

   

   

  

  
  
  

  

• Overeducated Writer Explains Why He Defaulted On His Student Loans, Asks "If He Is A Deadbeat"

  There are some valid points raised in Lee Siegel’s 1100 word rant against college loans (if not so much against college education). There are some bad ones. But two things are clear: the words “personal” and/or “responsibility” were used precisely zero times, and the op-ed writer, who described himself as “the author of five books who is writing a memoir about money“, is hardly a glowing advertisement for an education attained (funded with either debt or equity) at one of the Ivy League’s “best”, Columbia University.

  That, or the return on money after spending nearly a decade in university and taking out tens of thousands in loans just to achieve a Master of Philosophy degree.

  To wit:

  • Bachelor of Arts: Columbia University
  • Master’s Degree: Columbia University
  • Master of Philosophy: Columbia University

  

   

  Why I Defaulted on My Student Loans, originally published as an opinion piece in the NYT Sunday Review

  One late summer afternoon when I was 17, I went with my mother to the local bank, a long-defunct institution whose name I cannot remember, to apply for my first student loan. My mother co-signed. When we finished, the banker, a balding man in his late 50s, congratulated us, as if I had just won some kind of award rather than signed away my young life.

  By the end of my sophomore year at a small private liberal arts college, my mother and I had taken out a second loan, my father had declared bankruptcy and my parents had divorced. My mother could no longer afford the tuition that the student loans weren’t covering. I transferred to a state college in New Jersey, closer to home.

  Years later, I found myself confronted with a choice that too many people have had to and will have to face. I could give up what had become my vocation (in my case, being a writer) and take a job that I didn’t want in order to repay the huge debt I had accumulated in college and graduate school. Or I could take what I had been led to believe was both the morally and legally reprehensible step of defaulting on my student loans, which was the only way I could survive without wasting my life in a job that had nothing to do with my particular usefulness to society.

  I chose life. That is to say, I defaulted on my student loans.

  As difficult as it has been, I’ve never looked back. The millions of young people today, who collectively owe over $1 trillion in loans, may want to consider my example.

  It struck me as absurd that one could amass crippling debt as a result, not of drug addiction or reckless borrowing and spending, but of going to college. Having opened a new life to me beyond my modest origins, the education system was now going to call in its chits and prevent me from pursuing that new life, simply because I had the misfortune of coming from modest origins.

  Am I a deadbeat?

  In the eyes of the law I am. Indifferent to the claim that repaying student loans is the road to character? Yes. Blind to the reality of countless numbers of people struggling to repay their debts, no matter their circumstances, many worse than mine? My heart goes out to them. To my mind, they have learned to live with a social arrangement that is legal, but not moral.

  Maybe the problem was that I had reached beyond my lower-middle-class origins and taken out loans to attend a small private college to begin with. Maybe I should have stayed at a store called The Wild Pair, where I once had a nice stable job selling shoes after dropping out of the state college because I thought I deserved better, and naïvely tried to turn myself into a professional reader and writer on my own, without a college degree. I’d probably be district manager by now.

  Or maybe, after going back to school, I should have gone into finance, or some other lucrative career. Self-disgust and lifelong unhappiness, destroying a precious young life — all this is a small price to pay for meeting your student loan obligations.

  Some people will maintain that a bankrupt father, an impecunious background and impractical dreams are just the luck of the draw. Someone with character would have paid off those loans and let the chips fall where they may. But I have found, after some decades on this earth, that the road to character is often paved with family money and family connections, not to mention 14 percent effective tax rates on seven-figure incomes.

  Moneyed stumbles never seem to have much consequence. Tax fraud, insider trading, almost criminal nepotism — these won’t knock you off the straight and narrow. But if you’re poor and miss a child-support payment, or if you’re middle class and default on your student loans, then God help you.

  Forty years after I took out my first student loan, and 30 years after getting my last, the Department of Education is still pursuing the unpaid balance. My mother, who co-signed some of the loans, is dead. The banks that made them have all gone under. I doubt that anyone can even find the promissory notes. The accrued interest, combined with the collection agencies’ opulent fees, is now several times the principal.

  Even the Internal Revenue Service understands the irrationality of pursuing someone with an unmanageable economic burden. It has a program called Offer in Compromise that allows struggling people who have fallen behind in their taxes to settle their tax debt.

  The Department of Education makes it hard for you, and ugly. But it is possible to survive the life of default. You might want to follow these steps: Get as many credit cards as you can before your credit is ruined. Find a stable housing situation. Pay your rent on time so that you have a good record in that area when you do have to move. Live with or marry someone with good credit (preferably someone who shares your desperate nihilism).

  When the fateful day comes, and your credit looks like a war zone, don’t be afraid. The reported consequences of having no credit are scare talk, to some extent. The reliably predatory nature of American life guarantees that there will always be somebody to help you, from credit card companies charging stratospheric interest rates to subprime loans for houses and cars. Our economic system ensures that so long as you are willing to sink deeper and deeper into debt, you will keep being enthusiastically invited to play the economic game.

  I am sharply aware of the strongest objection to my lapse into default. If everyone acted as I did, chaos would result. The entire structure of American higher education would change.

  The collection agencies retained by the Department of Education would be exposed as the greedy vultures that they are. The government would get out of the loan-making and the loan-enforcement business. Congress might even explore a special, universal education tax that would make higher education affordable.

  There would be a national shaming of colleges and universities for charging soaring tuition rates that are reaching lunatic levels. The rapacity of American colleges and universities is turning social mobility, the keystone of American freedom, into a commodified farce.

  If people groaning under the weight of student loans simply said, “Enough,” then all the pieties about debt that have become absorbed into all the pieties about higher education might be brought into alignment with reality. Instead of guaranteeing loans, the government would have to guarantee a college education. There are a lot of people who could learn to live with that, too.

  

  

  

  
  
  

  

• 103 Years Later, Wall Street Turned Out Just As One Man Predicted

  In 1910, three years before the US Federal Reserve was founded, Senator Nelson Aldrich, Frank Vanderlip of National City (Citibank), Henry Davison of Morgan Bank, and Paul Warburg of the Kuhn, Loeb Investment House met secretly at Jekyll Island in Georgia to formulate a plan for a US central bank just years ahead of World War I.

  The result of their work was the so-called Aldrich Plan which called for a system of fifteen regional central banks, i.e., National Reserve Associations, whose actions would be coordinated by a national board of commercial bankers. The Reserve Association would make emergency loans to member banks, and would create money to provide an elastic currency that could be exchanged equally for demand deposits, and would act as a fiscal agent for the federal government.

  In other words, the Aldrich Plan proposed a “central bank” that would be openly and directly controlled by Wall Street commercial banks on whose behalf it would solely operate, instead of doing so indirectly, behind closed doors and the need for criminal probe of Yellen’s Fed seeking to find who leaked what to whom.

  The Aldrich Plan was defeated in the House in 1912 but its outline became the model for the bill that eventually was adopted as the Federal Reserve Act of 1913 whose passage not only unleashed the Fed as we know it now, but the entire shape of modern finance.

  In 1912, one person who warned against the passage of the Aldrich Plan, was Alfred Owen Crozier: a man who saw how it would all play out, and even wrote a book titled “U.S. Money vs Corporation Currency” (costing 25 cents) explaining and predicting everything that would ultimately happen, even adding some 30 illustrations for those readers who were visual learners. 

  The book, which is attached at the end of this post, is a must read, but even those pressed for time are urged to skim the following illustrations all of which were created in 1912, and all of which predicted just what the current financial system would look like.

  Or, in the words of Overstock’s CEO Patrick Byrne, “that’s uncanny“

  @zerohedge that’s uncanny.

  — Patrick Byrne (@OverstockCEO) June 5, 2015

  From “U.S. Money vs Corporation Currency” (which can and should be read for free on Google), here are the selected illustrations:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

   

  None of this was rocket science: should the power to create money fall into the hands of a private few, or an entity working purely on their behalf (and lest there is any confusion, a multi-trillion bailout of the US financial system and the ongoing ZIRP/QE regime has benefited almost entirely that handful of people who stood to lose trillions in paper wealth should US banking as we know it end), it would “inaugurate a financial and industrial reign of terror.” It was clear as day 103 years ago.

  

   

  Fast forward 103 years when who should end up with that power? A group of central banking career academics, currently in the midst of a criminal probe what and how much information they leaked to a select group of private Wall Street interests and commercial bankers.

  Why? Simple.

  

   

  The country now knows: “Democracy” forgot.

  

  * * *

  Full book below (link for free ebook):

  

  
  
  

  

• Citi: Euro Bond Market Faces "Historic" Levels Of Risk

  A little less than a month ago in “Two Years Later, The VaR Shock Is Back,” we outlined the similarities between the recent bout of bund selling and similar instances of safe haven havoc that have unfolded in the past. 

  More specifically, we discussed two self-fulfilling feedback loops that likely contributed to the sell-off. One of those self-feeding dynamics is known as a “VaR shock” and the concept is really quite simple. Here’s how we described it:

  A VaR shock simply refers to what happens when a spike in volatility forces hedge funds, dealers, banks, and anyone who marks to market to quickly unwind positions as their value-at-risk exceeds pre-specified limits.

  We went on the outline how QE sets the stage for episodic credit carnage:

  Predictably, VaR shocks offer yet another example of QE’s unintended consequences. As central bank asset purchases depress volatility, VaR sensitive investors can take larger positions — that is, when it’s volatility times position size you’re concerned about, falling volatility means you can increase the size of your position. Of course the same central bank asset purchases that suppress volatility sow the seeds for sudden spikes by sucking liquidity from the market. This means that once someone sells, things can get very ugly, very quickly. 

  Last week, the bund battering was back. Here’s Goldman:

  German long-dated government bonds (Bunds) have sold off aggressively this week. Returns on 10-year and 10-to-30- year bonds are negative to the tune of 6% and 16%, respectively, from the April 20 highs. Long-dated yield levels are back to roughly where they were in the last quarter of 2014, but their volatility is much higher. The 10-year benchmark rate has approached our end-2015 forecast. 

   

  Our correlation analysis indicates that the back-up in 10-year Bund yields has been affecting other markets and was pushing US Treasury yields higher. Exhibit 1 depicts the cumulative bullish or bearish signals generated by each of the four major bond markets, once contemporaneous and lagged inter-relations between rates are accounted for. As can be seen, Bunds are still in ‘in the driver’s seat’ in G4 rate markets, only this time they are moving ‘in reverse gear’. After contributing to a decline in global long-end rates since the Spring of 2014, they are now pushing them higher. 

   

  QE distortions: As we have discussed elsewhere, the way in which the ECB is conducting QE is leading to a ‘see-saw’ effect in the price action, particularly in markets with scarce supply. Consider that German 10-year yields were trading at around 35-40bp at the time of the March 5 press conference when President Draghi stated that the Eurosystem would not buy bonds yielding below the deposit rate, setting in motion a self-reinforcing price action largely unconnected to macro information. Seen in this light, around half of the sell-off from the 5bp lows on April 20 can be seen as the unwind of a ‘rational bubble’.

   

  

   

  Picking up where Goldman leaves off, if half of the sell-off represents the unwind of a “rational bubble” (where we assume “rational bubble” means the rapid yield compression that occurred when investors “rationally” anticipated that the entire bund curve was destined, by the design of PSPP, to converge on the depo rate) then the other half may represent a forced unwind into an increasingly illiquid market after Mario Draghi essentially warned that hightened volatility is set to become a permanent fixture in EU credit markets.  

  For their part, Citi suggests that although the April/May bund rout may have forced hedge funds and banks to recalibrate, longer-term holders have not yet moved to adjust to the new reality and while the ECB seems ambivalent — content to bask in PSPP’s “success” — EGB bond risk has soared. 

  Via Citi:

  Coming back to concept of bond market risk, we would expect high frequency investors (banks & HFs) to have reduced their risk-processing ability already in the sell-off four weeks ago. Other, less frequently trading investors (for example foreign central banks, insurance and pension funds, but also benchmarked mutual funds) might take some more time before adapting their limits to the new volatility environment. At the same time, the ECB – a large absorber of risk – is not altering its activity and even the front-loading is marginal (so far).

   

  VaR-measures are a better measure than just volatility or dv01 in the current environment as the total market risk is a function of outstanding market value, duration and volatility (we’re simplifying a lot here). The question then is: Do investors want to own bonds at 1% or 1-2bp yield per bp of realized vol, if risk is exploding (Figure 14)? Standard theory tells us that investors want to be compensated for their portfolio risk. That is the link between risk, term premium and bond yields. Figure 15 shows that the EGB market is at historical highs in terms of total market risk!

   

  

   

  With hoplessly illiquid core markets set become hoplessly illiquid-er during the summer “lull” (EGB net supply, QE inclusive, was set to be deeply negative in July and August and it isn’t clear to what extent font-loading will serve to mitigate supply constraints), investors should probably take Mario Draghi’s advice and prepare for severe turbulence.

  

  

  
  
  

  

• World’s 2nd Biggest Stock Breaks 28-Year Trendline

  By Dana Lyons, partner at Lyons Fund Management and founder of 401kPro.com

   

  

  On March 24, we posted a rare piece on an individual stock. As we do not invest in individual stocks, they are typically not our focus. Therefore, it takes extraordinary circumstances to inspire a post on a single stock. That was the case with the March 24 post which noted the fact that Exxon Mobil (XOM), the world’s 2nd biggest stock, was testing a trendline that began back in 1987.

  The origin of the trendline, based on a logarithmic scale of XOM, is the low point of the October 1987 crash. It then precisely connects the 1994 and 2010 lows. Interestingly, the stock stopped on a dime in March once it hit the vicinity of the post-1987 trendline. I say interestingly because, at the time, the stock appeared to be in no-man’s land. There were no obvious support or resistance levels in the vicinity. And yet, the stock stopped right on the trendline. It then proceeded to “walk up” the trendline for the next 18 days.

  To those who dismiss the influence of technical analysis and charting techniques on the behavior of stocks as completely random, I can hardly think of a better example of counter-evidence than this. What are the odds that a stock “respecting”, or adhering to, a nearly 3 decade-old trendline is completely random – for 18 days? Furthermore, after bouncing off this trendline into May, XOM returned to it over the past few weeks. It spent 6 straight days sitting squarely (again) on the trendline…before breaking below it yesterday.

  This breakdown marks the first day that Exxon Mobil has ever closed below this trendline. Now, assuming the stock’s behavior around the trendline is not completely random, and considering its capacity as the 2nd biggest stock in the equity market, the effect of this breakdown may be profound. Absent an immediate reversal back above the trendline, this loss of 28-year support would appear to open the door to more downside in the stock.

  

  

  
  
  

  

• "Shawshank Redemption" Inspires Real World Prison Break

  On Saturday, convicted murderers David Sweat and Richard Matt escaped from the maximum security wing of the Clinton Correctional Facility in upstate New York near the Canadian border.

  Escaping from a maximum security prison is not — we imagine anyway — a particularly easy task, but even as improbable jailbreaks go, this particular effort was quite remarkable. 

  

  In a scene straight out of “The Shawshank Redemption”, Sweat and Matt apparently busted through a steel wall, maneuvered down catwalks, cut through a steel pipe, left a Post-it note with the message “Have A Nice Day”, and crawled their way to freedom, emerging from a manhole outside of prison walls. The New York Times has more:

  Duping guards with dummies fashioned out of sweatshirts and using power tools to drill out of their cells, the men made their getaway late Friday or early Saturday, emerging on the other side of the prison’s 30-foot-tall walls, officials said..

   

  The governor marveled at the particulars of escape, in which the two inmates had cut through a steel wall of their adjacent cells, shinnied down a series of internal catwalks, and burrowed their way more than a city block away before emerging from a manhole. Mr. Cuomo said that there had been a number of contractors working in the facility, and that the escapees’ work may have been safeguarded by the silence of other prisoners.

   

  “I chatted with a couple of the inmates myself and said, ‘You must be a very heavy sleeper,’ ” the governor said. “They were heard, they had to be heard”..

   

  “When you look at how the operation was done, it was extraordinary,” Mr. Cuomo said on Saturday after being given a tour of the escape route. This was the first time in the prison’s history that anyone escaped from the maximum-security section of the facility, he said.

   

  The State Police said that Mr. Matt, 48, and Mr. Sweat, 34, were discovered missing during a 5:30 a.m. bed check.

   

  The inmates left a parting message, according to a picture posted to Twitter by Gareth Rhodes, the governor’s deputy press secretary. It shows a yellow Post-it note next to a hole cut in a pipe. On the note, a caricature of a man wearing a conical hat appears above the words: “Have a nice day!”

   

  

  

  

  

  

   

  A massive manhunt is now underway involving hundreds of law enforcement officers, K-9s, bloodhounds, and helicopters. 

  Despite their apparent sense of humor, Sweat and Matt are considered extremely dangerous and although authorities would appreciate any help they can get, Governor Cuomo had the folowing warning for New York residents:

  “These are dangerous people, and they are nothing to be trifled with.”

   

  

  

  
  
  

  

• Should We Raise The Voting Age?

  Submitted by Mark St. Cyr

  Should We Raise The Voting Age?

  I know at first blush the above headline reeks of “click bait.” However, that’s far from my intention. The reason why I used it, is exactly for the stopping power, as well as attention grabber I needed during a recent conversation. (If it could be called that)

  During a discussion amongst people of varying ages the discourse became heated and focused more on “who was to blame” for the current economic malaise throughout the country. As well as “who the fingers should be pointed at” as to fix it. Neither side seemed willing to budge or relent any ground. Yet, the side that seemed the most adamant was the “younger” of the two sides (although younger was not by much).

  They were also the most vocal in professing why “they were correct” as well as the one’s that were listening the least – and talking the most. Countering, or getting a word in edgewise without seeming to (or in reality) yell was near impossible. So I interjected with what I felt was a question that needed to be addressed if the “finger-pointing” argument if either side was to have any validity.

  Although I’m not going to touch with a 10? pole the arguments of left vs right. Or, who vs who. Or who should pay more or less. What I am not afraid to state, as well as remind anyone of is this: When it comes to taxes – everybody pays them in one form or another – nothing is free. And just like death – taxes (regardless of age) will at sometime need to be settled with the “ferryman.” Pure and simple. And by taxes I mean all – everything. i.e., taxing in all its forms be it business, personal, wealth, education, speech, freedom, safety etc., etc.

  You might want to debate they’re too high, or too low as to influence what one decides in the privacy of the voting booth. There’s nothing wrong with that and ideas should be expressed. However – knowing the implications; where they come from; the potential burdens on the young, old, neighbors, themselves, their families, the country and more is what has to be contemplated. Otherwise the arguments are nothing more than an assemblage of moot points only for the sake of verbal jousting.

  It’s not my place to say one is right or wrong. Again, that’s not my gist here. Nevertheless, when the argument falls between two sides and one of those sides has no experience in the effects of their decisions; and can only speak as to why in reasoning’s of platitudes, sound bites, or less? (i.e., Just because they think so.) Someone has to be the adult in the room and stop the merry-go-round of nonsensical reasoning or accusations. Which is where I found myself, as the appointed “ring master.”

  So when I interjected with the supposition “Maybe it’s time we need to raise the voting age?” Both sides stopped and took notice. Suddenly there was an argument on the table (which is what I’m known to do as to get to the real issue) neither contemplated. I believed it was a central (as well as clarifying) question that should be addressed by both sides if they were to continue further. For it opened the discussion more towards a tangible cause and effect both sides could, and did, have equal standing. Along with opening (hopefully) more reasoned arguments to answer for.

  This question focused and demanded qualitative answers. There could be no “just because” type answers from either side without making it blatantly obvious that’s all one had. (i.e., No real defensible argument. For “just because” type answers are just that.)

  I also elaborated the following in a true questioning manner. While at other times some bordered (and some were purely) the rhetorical. Whether or not any side agreed with the premise I stressed was not the case. However: knowing and understanding the intents and consequences contained within couldn’t go unanswered if: they wanted to continue on and try to reach an amicable conclusion. Whether it would be in half agreement, full agreement, or the willingness to agree they completely disagreed till more evidence or facts could be contemplated. But whatever the case: the talking (or half yelling) at each other had to cease. For as I’ve said many times “The best way to stop a headache is not with a stronger aspirin. It’s to first stop pounding your head against the wall.” And I could see the only thing everyone was contributing to was the severity of this “migraine.”

  (I started with asking the following as a premise for further insight and discussion. I wasn’t taking one side or another. The premise was purely for pushing the discussion forward where thinking and true reasoning needed to stem from. Nothing more.)

  I began with: Currently you can vote at 18. However, some of you are currently still in school (college), while some of you have recently just graduated. Others have since graduated and have yet to enter the work force. And, there are some that have since entered the work force yet, they are working in fields other than their chosen degree. And many combined still live at home. As a matter of fact, statics imply the number of college graduates that go back and live at home (i.e., parents or other family members) and remain there for years for whatever the reasons is quite high.

  On average, it takes about 3 or 4 years after the day you leave high-school to obtain and get yourself adjusted to enter the labor force with an associate degree. Yes, it’s a two-year “in school” thing. However, when you total up all the incidental time you’ll spend i.e., the summers in between, then graduate and settle back home time, get your bearings and start applying to businesses. It runs around 3 to 4 years. For a graduate degree, it’s about 5 to 6 when all is said and done.

  The average age after high school is about 18. So in essence, after an associates program you’re about 21. After a graduate somewhere around 23-24. And if a post-graduate about 25 or so give or take. The vast majority might not ever had, or may never hold a job of any type during this period.

  Not only that, they will live in a sheltered environment where all the rules are known, visible, and the only competition they’ll face is to answer taught, and known variables that will be asked during testing assignments. Where a mediocre score, if not an outright 1 point above a fail allows one to be included, as well as on the same stage or platform, as one who receives above average scoring. (e.g., This can be shown in the old joke that really isn’t: “What do they call a med-student who graduates at the bottom, and is last in their class? Doctor!)

  Add too this many of this same group have fought to be classified today as “children” until the age of 26 as to remain on their parents health insurance for the explicit reasoning that they “can’t and shouldn’t be made to afford it otherwise.” Also while remembering one isn’t considered legally as an “adult” to even drink alcohol till they’re 21.

  Yet, at the same time many (and many is just that: a vast preponderance) have taken on suffocating amounts of student debt in the pursuit of degrees or studies that when looked through the prism of prudent financial analysis shows; repayment (if even possible) may cripple one’s ability to move forward in pursuit of the things so many take for granted. i.e., Qualifying for a house, raising kids of their own, and more in the not so distant future.

  Does it seem this side should have equitable standing at the ballot box when their decisions will have the weight of enforcement by both law, and force under penalties of imprisonment or monetary damage when they may have never experienced a day in the real world outside of school?

  Think hard about how you address these points. For they are not only valid arguments – they are also very real. And although one may not feel the ramifications of these decisions today. Rest assured, they will – once they too enter what is known as real life.

  From the point of one side vs the other answer this question to yourself: Who is in the midst of what I just outlined? And should they be granted the right without any true understanding of the consequences of their actions? i.e., To vote for candidates, and laws to be passed where the ramifications will be borne by others? Or, those consequences may in fact backfire resulting to be far more devastating to they themselves in the future for they willy-nilly, or haphazardly voted them in – never contemplating the true ramifications.

  Again: Should a person or group that has never experienced what is known by all as “real life” while simultaneously being seen by many legal standards as not having the full credentials to be recognized as an “adult” have the ability to vote directly for, or vote for candidates responsible in the setting of the nations wage laws, tax laws, business law, national debt, business tax structures, business mandates, international trade policies, monetary policy, or most importantly – whether to send their brethren off to war where people die for real – not in some video game or movie? All the while they’ve never been responsible for anything more than “school” and in many cases not subject to feel the direct consequences of their votes until some 8 years or even longer after the age of 18?

  Not withstanding showing an inadequate fiduciary responsibility to themselves, never mind others, to pursue degrees that may in fact have no value in society for gainful employment? All the while taking on ever more burdensome debt that may never be paid back in their lifetimes without needing their own form of bailouts or debt forgiveness in the future? All this as they rail about “Wall St.” bailouts. Again, both sides should take a real hard look at not only these questions, but also the mirror.

  At the end both sides were a little taken back and knocked of their own self-appointed pedestals (which is what I hoped for). For as I stated earlier, The “younger” side wasn’t all that younger than the other. Many fit into the above from both sides. And you could see the wheels turning in their heads as they contemplated what I had just proposed.

  So now, with all that said, do I think we should raise the voting age? No. Of course not. Again: That’s not what I’m trying to argue.

  What I am trying to bring to light is: Far too many today are acting like children when in fact they are older (I’ll contend much older) than the many that not all that long ago set out and made a life for both themselves, as well as others. If I may be so bold I’ll use an example in which I played my own part.

  At 18 not only had the majority left school, many left at 16 or 17 never finishing (which is where I fell) and were out working odd or whatever jobs they could find. And trust me they were scarce in the 70’s. Sometimes we worked as many as we could handle at once with little to no sleep in between because if you wanted to eat – that’s what it took. (Many times I slept in my car, in the parking-lot as to not miss or be late. For a miss could mean being fired.)

  There was no “going back home” to live with your parents. Many at 18 were confronted by very loving parents and asked point-blank “So you’re 18 now. Have you thought about where your going to live?” Why? Because you were considered an adult in just about every aspect of life. And you had better of understood that or else life was going to get a whole lot tougher – sooner.

  For many by the age of 19 to 21 they were married, and most had their first child. They had apartments they were responsible for paying rent, utilities, food, as well as upkeep in household chores. Whether they could barely afford it or not. Want to eat? You had better learn to cook and make a meal of whatever you had on hand. A lot of times what was “on hand” was more like a finger. But we all did just that. There was no complaining because – there was no alternative. And for every generation going back it was the same if not more harsh. Want an example? Compare today’s employment prospects for a 20 something today as compared to someone the same age in let’s say 1938?

  By 25 most were in jobs that would turn out to be careers in one form or another. By 30 you were contemplating school districts for your kids, neighborhoods to raise them through high school and more. Today, there are more just shy of 30 (if not over) still living in their parents home with nothing more intense as to compare against a real word “family life” than a relationship that maybe lasted a year or so since college. The same may be for a job if that. All while under the guise of “Unless they can get a corner office with a title along with a smokin’ hot spouse – there’s no rush because – they aren’t settling.” As they remain in their parents home unemployed – and single.

  Before: the case for voting at 18 could easily be argued. For at 18 you were directly at the receiving end of consequences for your votes. Today? At 18? Answer that honestly. Especially if you are one that fits into the above scenario that I outlined in the beginning.

  Never mind what many deem as “the older generation.” If you are right now 25-ish. Do you want any 18-year-old today that you know voting into law something that can directly impact you for what ever the reason? Especially if they seem directly indifferent to anything you may hold as dear? And there would be nothing you can do about it (whether you like it or not) because it would be enforced by all the power that comes from being law. Are you starting to understand why knowing the consequences and truly weighing them against alternative scenarios is important? Important as in say…voting?

  Again, don’t let this point be lost on you. It truly is the crux of my argument. Think about it because what one thinks today as unimaginable can turn into reality tomorrow. If you think I’m trying to fear monger, or use the ole “when I went to school it was uphill both ways” argument. Think this…

  The most influential group coming up the ranks that may contemplate whether or not the voting age should, or should not be raised out of respect for future generations may very well be the next batch of newly minted 18 year old’s. Where they may decide to form a movement pursuing, pushing, and mobilizing their own grass-roots and numbers for its passage. Many think the argument only resides or will be borne from some organizing “old geezers” constituent. But history shows us surprises can come from where one least expects it.

  It’s quite possible (and perfectly lawful) it may very well be borne by some active and vocal group of 18 year-old’s the nation has ever seen. Remember, no matter what one thinks, or how hard one tries to escape it. The newest crop of 18 year-old’s at any time may take the sanctity of voting and its repercussions on the future more to heart than any predecessor – and decide for themselves how and when the “ferryman” in both death or taxes will be paid. After all – they will have to live the longest in what ever world they’re in, and may look at today’s constituent of 20 or 30 somethings – in the same light they look at their elders. Changes the whole landscape of who has the moral authority argument when put that way does it not?

  At the same time let’s not forget the reason why you or I can even sit here and contemplate these current arguments was made possible in no small part this weekend in history by a group of individuals younger than today’s most recent graduates. Those that stormed into the teeth of a relentless and unrelenting foe with thousands upon thousands of lives lost and even more wounded, so that we can contemplate (as well as vote on) the issues of the day going forward.

  If you want to impress upon yourself why voting in this country is looked upon with such reverence. Remembering D-Day should help you in that quest. Don’t take it for granted. Young – or old. And if you want more proof the world at any time could belong to someone 18.

  Alexander The Great conquered the known world at about age 18.

  

  

  
  
  

  

• Drivers in the Week Ahead

  The most important driver of the dollar remains the de-synchronization of the monetary policy cycle.  The early and more aggressive action by the US, and the institutional flexibility, leaves the Federal Reserve in a position to begin normalizing monetary policy several quarters at least ahead of the eurozone, the UK and Japan. Other countries, including China, Australia, New Zealand, Sweden, and Norway are also in the process or are anticipated to be, of easing policy as well.  

   

  Improvement in the US labor market is key. The strength of the May employment report strengthens conviction that the March weakness was a bit of a fluke, and in any event, not reflective of the underlying trends.  The same can be said of the contraction in Q1 GDP.  We recognize that the trend growth in the US economy has slowed on this side of the Great Financial Crisis.  The two drivers of growth–labor force growth and productivity, have slowed.  This means that even at 2% growth, the US economy can absorb the slack.  

   

  The IMF opined that the Federal Reserve should wait until next year to hike rates.  The Federal Reserve is unlikely to be swayed by the IMF’s logic.  Fed officials, or at least the leadership, accept some version of the  Phillips Curve, which posits that a tighter labor market will boost inflation.   The underlying view is that headline inflation gravitates toward core inflation, and labor costs drive core inflation.  Labor, like other commodities, is seen driven by supply and demand though a bit stickier.   Yellen has argued that she does not need to see core inflation rise much as long as the labor market slack is being absorbed to be reasonably confident that Fed’s 2% inflation target (core PCE deflator) will be reached in the medium term.  

   

  The most important US economic data in the coming days will be the May retail sales data.  Recall that after the strongest report in a year in March (1.2%), US consumers rested in April and retail sales were flat.  They returned in May.  The headline rate will be flattered by the strong auto sales that have already been reported.   The components used for GDP calculations are expected to rise 0.5%. The monthly average in Q1 was 0.02%. 

   

  Assuming the a consensus report in May, and a flat June, the monthly average in Q2 would be 0.16%. What this means is that consumption is likely to be a bigger contributor to Q2 GDP than Q1, and we have already learned that trade is exerting a smaller drag.  The Atlanta Fed GDPNow model says the US economy is tracking 1.1% Q2 GDP, and this is likely be revised higher after the retail sales report.   

   

  Another driver for the US dollar has been the dramatic sell-off in European bonds that pushed yields sharply higher.  As the long positions are unwound, the short euro hedge are bought back. There are two issues here:  the direction of yields and pace of the move.  German bunds appear to be at the heart of the matter.  The rise in German yields had a knock-on effect throughout the capital markets.  The 10-year yield approached zero in the middle of April, which culminated a multi-year decline in yields.  The last leg down in yields was sparked by European inflation falling into deflation territory.  

   

  There were also supply and demand dynamics at work.  The grand coalition in German had agreed to a balanced budget and paying down debt this year.  This curbed supply at the same moment that demand was increasing.  The increase in demand is partly a function of its safe haven status given the ongoing Greek drama.  German bunds are also used as collateral, not just an investment. The launch of the ECB’s sovereign bond-buying program is another source of demand.

   

  The decline in the interest rates, the euro and oil prices fueled an economic recovery in the euro zone. At the same time that the economy gained traction and credit growth expanded, oil prices began recovering.  This reduced the deflationary pressures.  April’s CPI was flat, and the preliminary May report was the first positive reading (0.3%) since last November. 

   

  If economic fundamentals explain the direction, what about the pace of the move?  In mid-April, many had expected the 10-year German bund yield to go negative, but it stopped just below five bp.   Three weeks later it was near 80 bp and a half week later (last week) it approached 100 bp. There appear to be several factors at work.  First, as Draghi noted, the low yields themselves leave the market more subject to volatility.  Second, the micro-structure of the market, with levered players using some variant of value-at-risk models, exacerbates movement.  

   

  As yields and vol fall, such participants take larger positions only to have to scramble out when vol increase.  Thirdly, the a combination of technology, regulation, and central bank activity appears to have contributed to the fragmentation of the market which while often generating strong volumes, diminishes liquidity.   Draghi’s failure to express much concern (instead he advised investors to get used to it) may have helps spur new selling.  

   

  The unresolved Greek crisis also keeps the market on edge.  The official creditors made an offer to Greece, which was very much in line with the “pretend and extend” strategy.  The Greek government summarily reject it.   The Greek government gets little sympathy from the political elites and investor class.  Nevertheless, its demand for debt relief is more realistic than pretending that its debt is sustainable.  Even the IMF has called for debt relief though it wants to exclude itself from the process.  It is willing to be more generous with EU money than with its own.    

   

  The Greek government has consistently maintained that it comes down to a political decision.  It has been accused of trying to have an end run around the Eurogroup of finance minister.  To the extent that the creditors finally offered its own proposal after Greece has submitted no less than three plans, it came about only with the intervention of officials at the highest level.   

   

  As European officials did in 2010-2011, they want to make an example of Greece.  They want to send a message that there is no alternative to the diktat of austerity.   But there is.  It is called debt relief.  This can take the orderly form of restructuring that EMU officials have permitted for private sector investors in Greece and Cyprus.    It can take a less organized form of default.  The more onerous the demand for austerity and refusal of the official creditors to devise a plan for debt restructuring, the more likely is a default.  A default under current conditions would make the Argentinian crisis look like a tea party.  Greece may very well have been dysfunctional before the crisis, but the cost to Europe of turning it into a failed state would be much higher than debt relief. 

   

  The dollar has rallied nearly 6% against the yen from the low seen on May 14 (~JPY118.90) to the high seen before the weekend (~JPY125.85).   Absent among the drivers is jawboning by Japanese officials.  If anything, government officials have been cautioning against sharp moves. Japanese companies,  like Fuji Heavy, have indicated that an “overly weak yen is not welcome.”  The macroeconomic considerations include the rise in US yields and the strong rise in Japanese stocks. Of the major G7 equity markets, the Nikkei is the only one to have rallied (~5.6%) over the past month.   

   

  In terms of flows, Japanese investors had stepped up their purchases of foreign bonds after early May. Before turning to small sellers in late May, Japanese investors had bought nearly JPY2.5 trillion of foreign bonds in the preceding three weeks.  Japanese pension funds are diversifying away from the JGB market toward domestic equities and foreign bonds.  The yen has reached levels, though that some asset managers are reevaluating whether they want to continue buying foreign bonds on an unhedged basis.  

   

  Speculators also have been exceptionally aggressive sellers of the yen over the past three weeks. We cite this figures from the speculative positioning in the futures market assuming that they are representative of that market segment of short-term leveraged momentum players.  

   

  One needs to appreciate that dollar-yen was confined to a broad trading range since last December. During this period, the gross short yen speculative positions at in the futures market were cut from 153k contracts (each contract is for 12.5 mln yen) to about 52.3k contracts by late April. This was the smallest speculative short yen position since November 2012.  In the past three CFTC reporting weeks, speculators have more than doubled their gross short yen position.  As of June 5, it stood at 132.4k contracts.  This three-week selling spree is the largest since in four years. 

   

  Indicative pricing in the options market is interesting.  The upside breakout for the dollar has coincided with a decline in implied volatility.  The three-month implied volatility has fallen from 10% in late-May to about 8.75% before the weekend.  

   

  At the same time, the premium for dollar calls (3-month 25 delta) have fallen from 0.9% to 0.3%. This suggests that instead of buying dollar calls while it is a rally, participants are selling dollar calls.   These participants could be long dollars and using the options market to buy downside protection.  It could also be Japanese exporters, whose exports to the US have been running more than a fifth above year ago levels, sell calls against their dollar receivables.   Some Japanese investors in US bonds may also be hedging their currency risk.  

   

  Japan will offer a revision to its initial Q1 GDP estimate of 2.4% at an annualized pace.  The market is divided about the outlook for the revision.  The Bloomberg consensus anticipates an upward revision to 2.8%.  This would be largely based on the strong upward Q1 caps.  Instead of falling by 0.2% as anticipated, it jumped 7.3%.  However, there is some risk that inventory accumulation that accounted for over half of Japan quarterly growth are revised down.   Hence, it will be a surprise regardless of the outcome.  

   

  Europe will report industrial production data for April.  After a weak March (-0.3%), industrial production in the eurozone is expected to have bounced back with the consensus around 0.4%.  However, it is not non-eurozone industrial production reports that may be more interesting.  Industrial output jumped 0.5% in the UK in March but is likely to have slowed in April.  The consensus expects a 0.1% rise though the risks seem on the downside.  Sterling has built a small shelf in the $1.5180-95 area (there is other technical support in the area, see here) and a disappointing report, which would play on ideas that the UK economy has peaked, would likely send sterling lower. The next target is the early May lows a cent lower.  

   

  Sweden reports industrial output and CPI figures.  The consensus is for a 0.2% increase in industrial production, but we see risk on the upside.  We look for the Swedish krona to be particularly data sensitive as the market is not convinced that the Riksbank QE is over.  The CPI figures are expected to show that Sweden is still experiencing deflation, but it appears to be diminishing.  

   

  At the same time, poor Norwegian industrial output figures (-4.9% month-over-month in April and a 2.9% fall in manufacturing output) has heightened speculation of a Norges Bank rate cut at the June 18 meeting.  Softness in this week’s CPI report will only fan such expectations.  The Norwegian krona broke down last week against the Swedish krona.  Although it looks over-extended, Nokkie is still vulnerable.  

   

  The Swiss National Bank meets the same day as Norges Bank.  It will likely confront a strengthening of deflationary forces as the franc’s appreciation following the lifting of its cap continues to filter through the economy.  With the risk of disruptive developments from the eurozone, the Swiss franc appears poised to strengthen against the euro.  Although Swiss officials have indicated that they are near the lower limit of rates with a minus 75 bp 3-month LIBOR target, there may be scope for a lower target, within the existing -1.25% to -0.25% current range.  

   

  The Reserve Bank of New Zealand meets on June 10.  The cash rate currently stands at 3.5%.  The OIS market is discounting roughly a 50% chance of a cut.  We had been leaning more in favor of a cut, but the 7.25% decline in New Zealand dollar against the US dollar since mid-May may have removed some urgency.  It finished at new multi-year lows against the dollar.   We are concerned that the RBNZ either disappoints those looking for a cut or that there is a sell-the-rumor, buy the fact” type of activity.  

   

  China reports its slew of monthly data.  On balance, the real sector is expected to have stabilized. That includes industrial production, retail sales, and investment.  China’s imports and exports likely remained soft (declining on a year-over-year basis), but this may result in a wider surplus.  Yuan loans and aggregate financing likely remained robust.  Perhaps the most important report is the CPI. Disinflationary, if not deflationary pressures are still evident.  The pace of increase in consumer prices has been halved since the recent peak in October 2013 at 3.2%.   Food prices are masking the decline in consumer prices.  Non-food prices are increasing by less than 1%.   A sharp slowing in the CPI (consensus is for 1.3% after 1.5% in April) may signal higher real interest rates, to which PBOC officials have been particularly sensitive.  

   

   

  The Mexican mid-term, and Turkey’s national elections are being held today.  The results are not yet available.  In Mexico, since the President cannot stand for re-election, the significance is about the legislative agenda for the next three years.  The peso finished last week at record lows against the US dollar.  In Turkey, the issue is whether the ruling AKP wins a super-majority that would give Erdogan a mandate to lead the country even further away from its secular and pro-European path.  It does not appear that he will get such a mandate.  If these results are borne out, the lira and Turkish assets may perform well at the start of the week.  

  

  

  
  
  

  

• De-Dollarization Du Jour: Russia's Largest Bank Issues Yuan-Denominated Guarantees

  The unipolar, dollar-dominated post-war world is shifting under Washington’s feet. 

  Leading the push towards multipolarity and de-dollarization are a resurgent Russia and China, the rising superpower. The demise of the Bretton Woods world order is perhaps nowhere more apparent than in the launch of the BRICS bank and the establishment of the AIIB. These new structures represent a move away from US-dominated multilateral institutions and their very existence suggests that a failure to adapt to economic realities and an inability or unwillingness to meet the needs of the modern world may soon drive institutions like the IMF into irrelevancy. 

  If the demise of the existing supranational economic order seems improbable, or if calls for its downfall appear at the very least to be premature, consider recent events. 

  While the US obstructs efforts to reform the IMF and give member countries representation that’s commensurate with their economic clout, and as the Fund itself bickers with the EU over aid to Greece, the BRICS bank (which hasn’t even officially launched) has offered Greece a spot at the table with some reports suggesting Athens may be able to contribute its paid in capital in installments while receiving aid in the interim. 

  China has pledged to invest some $50 billion in Pakistani infrastructure via Beijing’s Silk Road initiative and the AIIB. The money will fund power plants, roads, railways, and, perhaps most importantly, the Iran-Pakistan natural gas pipeline. The vast sum represents 53% more than the US has given Islamabad over the past 13 years combined. China is also set to invest an equally large sum in Brazil and is even considering the construction a railroad over the Andes, which would connect Brazil to China via the Pacific and ports in Peru. Meanwhile, lawmakers in Washington fight over whether infrastructure spending could have prevented an Amtrak derailment. 

  When considering the above, it’s important to understand that the BRICS bank isn’t simply a channel by which rising EM powers can ban together to project their growing influence in the face of the multilateral institutions which they feel have left them underrepresented. Similarly, the AIIB is more than a foreign policy tool that will allow Beijing to establish regional dominance.

  Both institutions will serve to accelerate de-dollarization. Russia, for instance, has proposed the establishment of a BRICS alternative to SWIFT. China, meanwhile, is set to ensure that the yuan plays an outsized role in lending through the AIIB. 

  In yet another sign that Russia and China are set to work together to extricate themselves from a dependence on the dollar specifically and on Western financial institutions more generally, Russia’s largest bank has, for the first time, extended yuan-denominated letters of credit in concert with the Chinese Export-Import bank. 

  More, via Sberbank:

  Sberbank issued its maiden letters of credit with financing from The Export-Import Bank of China for Baikal Bank’s client JSC Pharmasyntez.

   

  JSC Pharmasyntez approached Sberbank about the possibility to finance letters of credit in yuan (CNY) for the import contract to supply pharmaceutical products worth more than 29 mln yuan.

   

  The first LCs with financing from The Export-Import Bank of China have allowed the client to meet its current working capital needs while continuing to actively cooperate with Chinese suppliers.

   

  The development of cooperation with The Export-Import Bank of China expands Sberbank’s possibilities to finance clients’ foreign trade with Chinese counterparties.

  *  *  *

  Recall that last October, Russia and China opened a $25 billion currency swap line, an effort which not only serves to bolster ties between Moscow and Beijing in terms of investment and trade, but which also helps to secure Russia against the financial strain imposed by Western sanctions. 

  

  

  

  
  
  

  

• Tales From The Bizarro World

  Submitted by Erico Matias Tavares

  Tales from the Bizarro World

  Back in the 1960s, DC Comics introduced a parallel Earth called Bizarro, where everything is inverted and everyone is insane. They even have their own wacky Superman, which ends up being a formidable foe of his sane counterpart in our world.

  Or not in our world perhaps. Some events make us question in which of the two we might actually be living in: what if it was some version of Bizarro?

  Over the last decades scientists have been researching certain quirks in our brain, or cognitive biases, that make us act in rather illogical and peculiar ways under certain circumstances. Since Amos Tversky and Daniel Kahneman first introduced this notion in 1972, a growing body of evidence suggests that we may not be as rational as we once thought. And this impacts many areas of our lives, including our beliefs, attitudes towards certain events, political affiliations and so forth.

  A less scientific explanation for our illogical behaviors is that they may simply be the result of our imperfect human condition. That, or something in our environments could be poisoning our reasoning (we would argue, quite acutely in the case of Keynesian economists) similar to what happened to the Romans after they started using led in everyday life artifacts.

  Whatever the reason, consider the examples presented below, drawn from the fields of economics, politics, health, society and even religion. Now, to be clear, we don’t mean to pick on any country or anyone in particular, much less on their beliefs (except for those Keynesians). Remember, in the Bizarro World everyone is mad so presumably we are all in this together.

  Let’s proceed…

  • If you want to market a new medicine, first you need to spend years in a very expensive approval process to make sure it is completely safe to the public. However, at the same time, any adult can buy a particular and ubiquitous consumer product where it is clearly written in the package that if you use it will eventually kill you and all those around you‎
  • Keynesian economists tell us that in order to get richer we must save less and get deeper into debt‎
  • Obesity is estimated to kill three times as many as malnutrition
  • World governments spend trillions on weapons every year when we already have the capacity to blow up the planet many times over. But they always come up short when it comes to cleaning water supplies, providing healthcare, upgrading infrastructure, restoring nature and feeding people
  • How does a desert-like region such as Southern California decide to become so dominant in food production? All the water exported in the form of fresh produce, dairy, fresh fruits, rice and so on will NEVER return to that ecosystem
  • Hemp consumption can become a destructive addiction; but so can alcohol consumption. Why is only one of them illegal, or, depending on your views on the matter, why aren’t both legal in the same places?
  • A google search of “Kim Kardashian” generates 197 MILLION results (we speculate, to figure out what she actually does), just a tad less than the current US President “Barack Obama”
  • Some 30-40% of global food production is wasted
  • Western leaders, once the biggest supporters of free markets, now spend trillions intervening in the economy. The US government has been the world’s biggest employer for many years. The (Keynesian-inspired) theme is “we had to destroy capitalism in order to save it”
  • Everyone talks about the need to reduce debt levels, and yet since 2007 total debt around the world has increased by almost US$60 trillion
  • Politicians in the US seem to have gotten into the habit of approving major legislation without reading it
  • Pursuant to the Eurozone financial crisis in 2010, the Portuguese government was advised by international lenders to implement an aggressive austerity program. But public sector debt as a percentage of GDP ended up exploding as a result, reaching 166% last March from 108% in December 2009 – the exact opposite of the program’s goal. Nevertheless, the Portuguese government was recently praised by the architects of the program for delivering outstanding results (while being told, perhaps unsurprisingly, that more austerity is needed)
  • A famous actor passionately demands in front of a UN assembly that world governments take drastic action to reduce carbon emissions and tackle global warming. Maybe they could start with him. Just a few months earlier he rented a mega yacht (complete with its own helipad) off Rio de Janeiro to watch the World Cup in style and supposedly flew his mother and himself multiple times on a private jet while shooting one movie in the US
  • A country known as the “Land of the Free” has one of the largest prison populations on the planet‎; another with “Order and Progress” written on its flag has 19 of the world’s 50 most dangerous cities
  • A UK scientist achieves worldwide fame through his widely publicized efforts to debunk the existence of God, while admitting at the same time that creation might in fact be the result of intelligent design
  • In China, provincial governments have spent billions building new cities when most of their citizens can’t afford living there. Many remain empty
  • The Japanese government is so desperate to create inflation that it is printing more trillions of new debt, when even a modest ‎increase in nominal yields will explode its fiscal position
  • The West’s financial system received trillions in financial support in 2008 to avoid an implosion of the global economy. However, it has since become even bigger and more concentrated, and as such the associated systemic risk might now be larger than ever. The people who designed this financial system are also doing better than ever
  • Countries with the most abundant natural resources often have the poorest people
  • Most parents unconditionally love their children and would do anything to secure their future. So why are we bequeathing a world with ballooning financial debts, less freedoms, lower education standards and increasingly broken ecosystems?

  In his book “1984” George Orwell created his own version of an inverted world, where “war is peace, freedom is slavery, ignorance is strength”. That was quite a frightening vision.

  If we indeed live in the Bizarro World, what does that look like to you?

  

  

  
  
  

  

Digest powered by RSS Digest

• "Literally, Your ATM Won’t Work…"

  By Bill Bonner Of Bonner And Partners

  Literally, Your ATM Won’t Work…

  While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us.

  Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates.

  Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage?

  Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared.

  The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

  The same thing could happen to the money supply…

  There’s Not Enough Physical Money

  Here’s how… and why:

  It’s almost seems impossible. Hard to imagine. Difficult to understand. But if you look at M2 money supply – which measures coins and notes in circulation as well as bank deposits and money market accounts – America’s money stock amounted to $11.7 trillion as of last month.

  But there was just $1.3 trillion of physical currency in circulation – about only half of which is in the US. (Nobody knows for sure.)

  What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. We never see it. Touch it. Feel it. Count it out. Or lose it behind seat cushions.

  Banks profit – handsomely – by creating this credit. And as long as banks have sufficient capital, they are happy to create as much credit as we are willing to pay for.

  After all, it costs the banks almost nothing to create new credit. That’s why we have so much of it.

  A monetary system like this has never before existed. And this one has existed only during a time when credit was undergoing an epic expansion.

  So our monetary system has never been thoroughly tested. How will it hold up in a deep or prolonged credit contraction? Can it survive an extended bear market in bonds or stocks? What would happen if consumer prices were out of control?

  Less Than Zero

  Our current money system began in 1971.

  It survived consumer price inflation of almost 14% a year in 1980. But Paul Volcker was already on the job, raising interest rates to bring inflation under control.

  And it survived the “credit crunch” of 2008-09. Ben Bernanke dropped the price of credit to almost zero, by slashing short-term interest rates and buying trillions of dollars of government bonds.

  But the next crisis could be very different…

  Short-term interest rates are already close to zero in the U.S. (and less than zero in Switzerland, Denmark, and Sweden). And according to a recent study by McKinsey, the world’s total debt (at least as officially recorded) now stands at $200 trillion – up $57 trillion since 2007. That’s 286% of global GDP… and far in excess of what the real economy can support.

  At some point, a debt correction is inevitable. Debt expansions are always – always – followed by debt contractions. There is no other way. Debt cannot increase forever.

  And when it happens, ZIRP and QE will not be enough to reverse the process, because they are already running at open throttle.

  What then?

  The value of debt drops sharply and fast. Creditors look to their borrowers… traders look at their counterparties… bankers look at each other…

  …and suddenly, no one wants to part with a penny, for fear he may never see it again. Credit stops.

  It’s not just that no one wants to lend; no one wants to borrow either – except for desperate people with no choice, usually those who have no hope of paying their debts.

  Just as we saw after the 2008 crisis, we can expect a quick response from the feds.

  The Fed will announce unlimited new borrowing facilities. But it won’t matter….

  House prices will be crashing. (Who will lend against the value of a house?) Stock prices will be crashing. (Who will be able to borrow against his stocks?) Art, collectibles, and resources – all we be in free fall.

  The NEXT Crisis

  In the last crisis, every major bank and investment firm on Wall Street would have gone broke had the feds not intervened. Next time it may not be so easy to save them.

  The next crisis is likely to be across ALL asset classes. And with $57 trillion more in global debt than in 2007, it is likely to be much harder to stop.

  Are you with us so far?

  Because here is where it gets interesting…

  In a gold-backed monetary system prices fall. But the money is still there. Money becomes more valuable. It doesn’t disappear. It is more valuable because you can use it to buy more stuff.

  Naturally, people hold on to it. Of course, the velocity of money – the frequency at which each unit of currency is used to buy something – falls. And this makes it appear that the supply of money is falling too.

  But imagine what happens to credit money. The money doesn’t just stop circulating. It vanishes. As collateral goes bad, credit is destroyed.

  A bank that had an “asset” (in the form of a loan to a customer) of $100,000 in June may have zilch by July. A corporation that splurged on share buybacks one week could find those shares cut in half two weeks later. A person with a $100,000 stock market portfolio one day could find his portfolio has no value at all a few days later.

  All of this is standard fare for a credit crisis. The new wrinkle – a devastating one – is that people now do what they always do, but they are forced to do it in a radically different way.

  They stop spending. They hoard cash. But what cash do you hoard when most transactions are done on credit? Do you hoard a line of credit? Do you put your credit card in your vault?

  No. People will hoard the kind of cash they understand… something they can put their hands on… something that is gaining value – rapidly. They’ll want dollar bills.

  Also, following a well-known pattern, these paper dollars will quickly disappear. People drain cash machines. They drain credit facilities. They ask for “cash back” when they use their credit cards. They want real money – old-fashioned money that they can put in their pockets and their home safes…

  Dollar Panic

  Let us stop here and remind readers that we’re talking about a short time frame – days… maybe weeks… a couple of months at most. That’s all. It’s the period after the credit crisis has sucked the cash out of the system… and before the government’s inflation tsunami has hit.

  As Ben Bernanke put it, “a determined central bank can always create positive consumer price inflation.” But it takes time!

  And during that interval, panic will set in. A dollar panic – with people desperate to put their hands on dollars… to pay for food… for fuel…and for everything else they need.

  Credit may still be available. But it will be useless. No one will want it. ATMs and banks will run out of cash. Credit facilities will be drained of real cash. Banks will put up signs, first: “Cash withdrawals limited to $500.” And then: “No Cash Withdrawals.”

  You will have a credit card with a $10,000 line of credit. You have $5,000 in your debit account. But all financial institutions are staggering. And in the news you will read that your bank has defaulted and been placed in receivership. What would you rather have? Your $10,000 line of credit or a stack of $50 bills?

  You will go to buy gasoline. You will take out your credit card to pay.

  “Cash Only,” the sign will say. Because the machinery of the credit economy will be breaking down. The gas station… its suppliers… and its financiers do not want to get stuck with a “credit” from your bankrupt lender!

  Whose credit cards are still good? Whose lines of credit are still valuable? Whose bank is ready to fail? Who can pay his mortgage? Who will honor his credit card debt? In a crisis, those questions will be as common as “Who will win an Oscar?” today.

  But no one will know the answers. Quickly, they will stop guessing… and turn to cash.

  Our advice: Keep some on hand. You may need it.

  

  

  
  
  

  

• Capex Recovery Is Worst In History, BofAML Says

  One of the major themes we’ve discussed this year is the overwhelming tendency for US corporates to take advantage of record low borrowing costs and voracious demand from yield-starved investors by tapping credit markets and investing the proceeds in share repurchases. Setting aside the fact that this dynamic is embedding an enormous amount of risk in corporate credit (a booming primary market is a dangerous thing when the secondary market is completely illiquid and investors are staring down a Fed rate hike cycle), record issuance and buybacks have come at the expense of capex. 

  Price insensitive corporate management teams are leveraging their balance sheets in order to buyback shares, thereby artificially inflating the bottom line, boosting equity-linked compensation, and underwriting a stock market rally.

  

  This comes at the expense of capex (i.e. investing the proceeds from debt sales in future growth and productivity). While some will note that capex hit a record in absolute terms in 2014, that obscures the fact that if one looks at how companies are using cash, the trend is clearly towards buybacks and dividends and away from investment.

  

  This, we’ve argued, could imperil top line growth going forward, as financial engineering is not, in the final estimation, a viable growth strategy. 

  Against this backdrop, BofAML is out with a new note, calling business capex “a major drag” on the ‘recovery.’ Here’s more:

  Business investment has been one of the more important weak links to the sluggish recoveries in most advanced economies in the aftermath of the Great Recession of 2009. 

   

  In the United States, it took 18 quarters (4.5 years) before fixed business investment regained its pre-recession peak, in chain-volume terms. That compares with an average of just five quarters before business investment recovered to its peak level prior to the onset of previous post-War recessions; previously, it had never taken longer than three years for that milestone to be attained. 

   

  Since the Great Recession, US business investment has grown at an average annual rate of 4.9%, compared with the 8.1% average for the corresponding period of all post-war recoveries. This shortfall is a much larger than the 1.8pp shortfall for household consumption, and the 2.0 pp for residential investment.

   

  

  Why the weakness? As we have observed on many different occasions, banking and real estate crises tend to cause big recessions and abnormally slow recoveries. Rather than counter the balance sheet consolidation of the private sector, governments have pursued their own consolidation. It is hardly surprising that businesses lack confidence in any sustained upswing in demand that would justify taking the risks associated with large increases in investment. For many listed companies, returning surplus cash to shareholders through dividends or share buybacks has seemed a safer strategy.

  *  *  *

  In other words, it has taken three-and-a-half times longer for capex to recover from the recession versus the historical average. Worse, it has never taken longer than three years — it took four-and-a-half years this time around. This is directly attributable to companies opting for buybacks over fixed investment, which means two things: 1) the stock market rally is illusory, and 2) corporate America’s productive capacity has not grown with its market cap. 

  

  

  
  
  

  

• CoLD WaRRioR 2.0….

  

  
  
  

  

• SEC Reads Zero Hedge, Launches Crack Down On Activist Hedge Fund "Idea Dinners"

  In the summer of 2014, the biggest activist hedge fund story on anyone’s lips was whether Bill Ackman had broken securities laws when he had accumulated a massive $3 bilion stake, or roughly 9.7% of the outstanding stock of Allergan (using leverage via call options), in advance of Valeant’s announcement it would launch a hostile offer for Allergan. The punchline: Ackman had secretly collaborated with Valeant management in advance of the material, public announcement which sent Allergan shares soaring and was the primary reason for Ackman’s blockbuster year and billions in profits for Pershing Square.

  The story came and went (nowhere) because the man who had given Ackman the SEC’s tacit blessing that nothing bad would happen to Bill, as well as a green light to proceed with a trade that would land anyone else in prison, was none other than the former head of enforcement at the SEC, now a $5 million a year legal advisor at Kirkland and Ellis, Robert Khuzami (formerly general counsel of serial market manipulator Deutsche Bank). As a result, the SEC’s inquiry into whether Ackman had broken insider trading laws was quickly forgotten.

  However, aside from Ackman’s allegedly criminal trading, there was another, perhaps even more important tangent, one which only Zero Hedge picked up on last summer: the topic of idea dinners among hedge funds, in which in order to mitigate the securities violation, numerous activist hedge funds would collude with each other as a means of limiting their legal exposure, while altogether profiting when one or more of their group went “hostile” on the target du jour.

  This is what we said last August, when we asked “Is The SEC Asking These Hedge Funds Why They All Rushed Into Allergan Last Quarter?“

  It remains to be seen if frontrunning the general public on collusive, material, non-public information that a strategic would be about to announce a bid for Allergan is indeed “completely lawful”, however we do have a question: now that the SEC is formally investigating Ackman for what may be a massive frontrunning scam, is it also looking at all the other hedge funds which reported brand new stakes (some of which also entirely in the form of calls) in Allergan in the second quarter?

   

  The reason we ask is that as everyone knows, in order to diffuse the scent of criminality and dilute their culpability, what hedge fund managers, especially of the activist variety, will do nearly all the time ahead of a significant public announcement of a major stake, is to hold an “idea dinner” in which they preannounce to a select group of close friends what they are doing. As such, what ends up happening is that the benefactor of what may be an illegal tip off, or in this case collusion, is not only entity, but numerous, thus making it very difficult for the SEC to isolate just who “leaker zero” was, and who benefited from the information – certainly complicated if the beneficiaries are more than a dozen.

   

  Presenting exhibit A: this is the list of hedge funds and prop trading desks that according to Bloomberg (and CapIQ) announced brand new and quite material stakes, in Allergan, after building up a position some time in the second quarter, having no holdings as of the first quarter.

   

  

   

  It goes without saying that the list of “position initiators” is the who’s who of Idea Dinner participants with names such as York, Perry, Mason, Och Ziff, Eton Park, Viking, and so on.

   

  So, to recap: if the SEC is indeed serious about getting to the bottom of the Allergan insider-trading scam, is it also looking into just how these hedge funds decided to buy into Allergan in a quarter in which the stock soared on the Valeant/Ackman news?

   

  Because while it is perfectly legal if these funds did their homework and rather “mysteriously” all decided to buy into the stock at the same time, or put on M&A arbs after the hostile bid announcement, one wonders just how legal it would be if one or more of these investors only bought AGN stock after getting a “sure thing” tip from Ackman that he was about to go activist on Allergan with Valeant money, something which is certainly illegal.

   

  All that said, we aren’t holding our breath on the SEC actually doing its job for once, and certainly not before Pershing Square goes public. After all can’t hinder “capital formation” in these here unrigged markets.

  And so, 10 months later, our observations are once again proven prophetic… That, or the SEC reads this “fringe” website religiously for clues how to do its job, because as the WSJ reports the SEC has answered our question, and yes: the  SEC is finally asking not only “these” hedge funds why they all rushed into Allergan (see above), but into every other collusive activist take out target.

  According to the WSJ, the SEC is investigating “whether some activist investors teamed up to target companies without disclosing their alliances, potentially in violation of federal securities rules, according to people familiar with the matter.”

  The SEC’s enforcement division has recently opened multiple investigations and sent requests for information to a number of hedge funds, according to some of the people. Neither the names of the funds nor the companies they targeted could immediately be ascertained.

   

  As part of a broader effort to promote transparency, the SEC is looking at whether certain investors coordinated their efforts without filing appropriate disclosures. Federal securities regulations require investors who jointly agree to buy, sell or vote securities to disclose those arrangements, and to designate themselves as a group if they together own at least 5% of a company’s stock or are soliciting votes from other shareholders. Such formal, disclosed alliances have included a recent effort by Barington Capital Group LP and Macellum Capital Management LLC to win board seats at retailer Children’s Place Inc. 

  The WSJ says that “the issue has taken on greater importance as activist hedge funds, which accumulate stakes in companies and agitate for changes such as stepped up share buybacks and asset sales, have become a major force in corporate America in recent years. Activists sometimes tip potential hedge fund allies to their trading plans, a Wall Street Journal investigation found last year. The practice isn’t illegal as long as they don’t coordinate their trades.“

  Unfortunately for said activist hedge funds, it is impossible to play dumb when virtually all of them decided to take stakes in Allergan in the same quarter as Ackman was building up his massive stake. The punchline: they could and would have only done that if they knew there was a guaranteed bullish catalyst imminent. Such as Valeant announcing a hostile bid for Allergan, a Valeant which was collaborating with the biggest activist hedge fund in the US currently, Pershing Square.

  Surprisingly, until recently the SEC, perpetually clueless and corrupt, likened doing its job to cooking.

  Michele Anderson, who heads the SEC’s office of mergers and acquisitions, said at a conference in March that changing the regulations on activist disclosures has proved to be “like peeling an onion,” where efforts to tackle one issue simply reveal another.

  So, because it is difficult, it is best to not do your job at all, eh SEC?

  But then something appears to have changed.

  In a sign of the SEC’s new focus on the issue, the agency in March sent a letter to activist fund Bulldog Investors LLC about its campaign for board seats at Stewart Information Services Corp. , a provider of title insurance. The SEC asked whether Bulldog had any “agreements or understandings” with Foundation Asset Management LP, another fund that had run its own proxy fight at the company.

   

  Bulldog co-founder Phil Goldstein said in an interview that the funds never made any agreement about trading or voting shares. Scrutiny from the SEC could chill legal discussions between investors, he said, adding that it isn’t surprising that underperforming companies would draw interest from several activists.

  This is how the Bulldog guy justified collusive activity between activists:

  “If you go to a Grateful Dead concert, you’re going to find a lot of Grateful Dead fans,” he said. “They’re not a group. They just like the same music.”

  What he left out is that the result of going to a Grateful Dead concert with other “fans” isn’t a multi-million dollar payday for all said “fans” due to illegally collusive behavior.

  Which is precisely what activist hedge fund “idea dinners” and other such collusive actions represent.

  Apparently, even the most clueless SEC regulator, the one whose patronage of Wall Street means she has to recuse herself of pretty much doing her job entirely, SEC head Mary Jo White spoke up:

  “Our role at the SEC is not to determine whether activist campaigns are beneficial or detrimental in any given circumstance,” Ms. White said. “Rather, the agency’s central focus is making sure that shareholders are provided with the information they need and that all play by the rules.”

  Rules.

  Funny. The only rule is when the activist community bribes the SEC to make sure this latest “investigation” goes away, to make sure there is no paper trail. Otherwise, the mere suggestion that the next hedge fund idea dinner may be bugged by an SEC mole will mean that in the coming years “activist” alpha, which in the past few years was the only “strategy” outperforming the market, will promptly disintegrate just like the concept of “fair and efficient” capital markets in a rigged, centrally-planned world disintegrated years ago alongside with retail interest in it.

  

  

  
  
  

  

• Cold War 2.0 Heats Up: Washington Dusts Off Russia "Containment" Plans

  The “ceasefire” — if you can call it that — that has been in place in Ukraine since February’s Minsk Accord has fallen apart this week with the fiercest fighting in months claiming dozens of lives and prompting President Petro Poroshenko to launch a media blitz in an attempt to rally the West against what he claims is a renewed offensive by Russian-backed separatists. 

  Russian media contends the separatists were only defending themselves after they began to take artillery fire. Ukraine, by contrast, claims its soldiers came under attack by rebel tanks. “We had some storming action by between 500 and 1,000 servicemen of the militants, with a large number of tanks and armored machinery, apparently counting on being able to quickly capture Maryinka,” Poroshenko said.

  

  Now, Ukraine is stepping up calls for Washington to send lethal aid to Kiev, casting the conflict as a war on Western, democratic values. Here’s The NY Times:

  In what amounted to a multidimensional confidence-building campaign, President Petro O. Poroshenko of Ukraine tried on Friday to rally international support for his country and to maintain pressure on President Vladimir V. Putin of Russia, including economic sanctions.

   

  Mr. Poroshenko held a major news conference, gave interviews to foreign journalists, spoke by phone with President Obama and Chancellor Angela Merkel of Germany, and prepared to welcome two visiting prime ministers to Kiev, Shinzo Abe of Japan and Stephen Harper of Canada..

   

  “We will defend our country, our territorial integrity and our independence by ourselves,” Mr. Poroshenko said in an interview with journalists from a small group of foreign news organizations, including The New York Times. “We have weapons for that. But unfortunately we are fighting with the weapons from the 20th century, from the time of the Soviet Union, against the Russian — most modern — weapons of the 21st century.”

   

  He added, “Here we are defending freedom, we are defending democracy, we are defending European values, and the actual reason of this war is the right of the Ukrainian people to live under European standards, with European values, in the European Union.”

  To be sure, this is an opportune time for Poroshenko to appeal to the US and its allies for assistance (which makes last week’s Russian “offensive” seem rather convenient). President Obama will attend a G-7 summit in Germany this weekend and will now come equipped with ‘evidence’ to support calls for stepped up sanctions on Russia. Obama may be seeking to rally support ahead of what looks to be a major strategy shift in realtions between NATO and Moscow. WSJ has more:

  Obama administration officials are considering new deterrence strategies to rein in Russian meddling in Europe, in what some say would amount to an updated version of Cold War-era containment.

   

  The proposed approach involves beefing up the militaries of allies and would-be partners and rooting out government corruption, which they see Moscow exploiting to gain more influence.

   

  Some administration officials also want to expand the North Atlantic Treaty Organization to limit Moscow’s orbit. Membership for Ukraine or Georgia remains off the table, but some Pentagon and administration officials are advocating admitting the small Balkan country of Montenegro to solidify the country’s ties to the West and show that Mr. Putin doesn’t have a veto over alliance expansion.

   

  The longer-term measures under discussion, officials say, stem from a recognition that Moscow has refused to moderate its posture after its territorial grab last year in Ukraine, and that U.S. and European attempts at diplomacy and sanctions alone won’t be enough to force a change. Those measures would include stepping up training for European allies to help partner militaries resist the kinds of so-called hybrid tactics—like training surrogate forces and conducting snap border exercises—that Russia has used effectively in Ukraine.

   

  The impetus toward a policy shift also is driven by the conclusion that U.S. steps to reassure regional allies must be bolstered by other measures against possible Russian intrusions.

   

  The Pentagon also is drafting plans for where to position new stocks of military equipment for use in a crisis or for stepped-up training exercises. That would entail additional U.S. troops assigned to rotating duty in the region. But Washington remains opposed, for now, to rebuilding permanent U.S. troop formations in Europe.

   

  The administration is accelerating work on new military technologies to better counter Russian military advances and try to offset advances by Moscow, and deter Russia from using its increasing military prowess.

   

  The policy deliberations are gaining momentum. On Friday, Mr. Carter gathered a group of military leaders in Stuttgart, Germany, to discuss the broader U.S. strategy to Russia..

  
  

  Inside the White House, meanwhile, the National Security Council is at work on an overhaul of its Russia strategy that formally casts aside the policy of “reset” that dominated Mr. Obama’s first term.

  The only thing being “reset” now, it appears, is the Cold War. 

  For its part, Moscow says Kiev “constantly” threatens to violate the ceasefire and refuses to engage in constructive dialogue. 

  From The Guardian:

  “All agreements should be fully implemented so that no one is able to derail fragile progress by resuming military activity,” the Russian foreign ministry wrote on its Twitter feed, quoting minister Sergei Lavrov. “We must know who is shelling communities, thereby violating not only the Minsk agreements, but also international humanitarian law.”

   

  Lavrov blamed Kiev for this week’s upsurge in fighting.

   

  “The February Minsk agreements are constantly under threat because of the actions of the Kiev authorities, trying to walk away from their obligations to foster direct dialogue with Donbass,” he said.

  While it’s impossible to accurately assess the fluid situation on the ground, what does seem clear is that neither side has the will (or even the desire) to deescalate the conflict.

  For Washington, now seems like a particularly inopportune time to begin dusting off Cold War containment policies and ratcheting up the war rheotric with Russia. The US is already engaged in a tense war of words with China over the latter’s land reclamation projects in the South China Sea, and all signs point to boots on the ground in Iraq (and eventually Syria) by year end. Once again, US foreign policy now revolves squarely around the projection of military prowess. 

  *  *  *

  (a video from The Guardian shows gunbattles in Eastern Ukraine)

  

  

  
  
  

  

• The Slide Toward “Velvet Glove” Fascism Continues

  Submitted by Pater Tenenbrarum of Acting Man

  Government-Granted “Freedom”

  Orwellian Language – the Slide toward “Velvet Glove” Fascism Continues

  Sometimes we get the feeling the ruling elites are investing the laws they enact with a kind of impertinent, slap-in-your-face black humor. How else to explain the Orwellian names given to the liberty-crushing laws that have been put in place since the “war on terror” started?

  The latest example is the misnamed “Freedom Act”, the purpose of which appears to be to make legal what was hitherto plainly illegal – inter alia whole-sale spying by the government on the citizenry. The legislation has been sold to the serfs as absolutely necessary to “prevent terror attacks”. As we have previously pointed out, the average US citizen is statistically far more likely to die from drowning in a bathtub or simply by falling from a chair rather than from a terror attack. No special laws have been proposed yet to save us from the evil of bathtubs and chairs, in spite of the danger evidently emanating from these deadly household furnishings.

  Many people indeed begin to watch what they are saying once they are aware of being under constant surveillance. As we have previously argued, this undermines an important pillar of civilization.

  

  Cartoon via Terrence Nowicki

  Apart from the vanishingly small statistical likelihood of actually being harmed by terrorists, it is noteworthy that such laws – the true purpose of which is highly unlikely to be congruent with their stated purpose – are enacted even while the government engages in activities that are bound to worsen these statistics in the future. The so-called “war on terror” so far actually seems to be similarly successful as the “war on poverty” and the “war on drugs”. In fact, it appears to be ranking quite high on the list of the biggest government boondoggles.

  

  Since the “war on terror” started, terrorism has grown like never before. One should expect such outcomes to some extent, but this one is actually putting quite a few other failed government schemes to shame … via Washington Post, click to enlarge.

  To call a law the “Freedom Act” makes it sound as if freedom were something the government generously grants to its serfs. This is not so. Not surprisingly, upon closer inspection it looks like the new law hasn’t improved the previous state of affairs in the slightest. Instead it has probably made it even worse.

  

  Just keeping in touch with the newly liberated citizens – now and forever, Cartoon by Walt Handelsman  

  Supporting Terrorists

  Due to a FOIA request by Judicial Watch it has recently emerged that the government knew full well that its intervention in Syria (arming moderately mad mullahs in order to overthrow Assad) would probably result in the emergence of an “Islamic State” in Iraq and Syria. As Washington’s Blog and Zerohedge have pointed out, there are quite a few choice passages in this 2012 assessment by the Defense Intelligence Agency (we have left the typos and grammatical mistakes in the transcription below intact, we have only added a few commas to improve readability):

  “The general situation”:

  Internally, events are taking a clear sectarian direction.

  The Salafists, the Muslim Brotherhood and AQI are the major forces driving the insurgency in Syria.

  The West, Gulf countries and Turkey support the opposition; while Russia, China and Iran support the regime.

  “The effects on Iraq”:
  The opposition forces will try to use the Iraqi territory as a safe haven for its forces, taking advantage of the sympathy of the Iraqi border population, meanwhile trying to recruit fighters and train them on the Iraqi side, in addition to harboring refugees.
  If the situation unravels, there is the possibility of establishing a declared or undeclared Salafist principality in Eastern Syria (Hasaka and Der Zor) and this is exactly what the supporting powers to the opposition want, in order to isolate the Syrian regime, which is considered the strategic depth of the Shia expansion (Iraq and Iran).
  The deterioration of the situation has dire consequences on the Iraqi situation and are as follows:
  This creates the ideal atmosphere for AQI to return to its old pockets in Mosul and Ramadi and will provide a renewed momentum under the presumption of unifying the jihad among Sunni Iraq and Syria, and the rest of the Sunnis in the Arab world against what it considers the enemy, the dissenters. ISI could also declare an Islamic State through its union with other terrorist organizations in Iraq and Syria, which will create grave danger in regards to unifying Iraq and the protection of its territory.
  The renewing facilitation of terrorist elements from all over the Arab world entering into Iraqi arena.”

  (emphasis added)

  It is startling to learn that all of this was already known to government agencies in 2012, well before the world at large became aware of ISIS. Just think for a moment about this sentence: “…. there is the possibility of establishing a declared or undeclared Salafist principality in Eastern Syria (Hasaka and Der Zor) and this is exactly what the supporting powers to the opposition want.”

  

  Midwifing in the Middle Eas, Cartoon by Adam Zyglis

  In other words, ISIS has not only done precisely what was expected, but what the governments supporting the Syrian opposition wanted to happen. Radical salafists were armed to overthrow a tinpot dictator who represents no threat whatsoever to us. Many of the same politicians who voted in favor of this have at the same time incessantly promoted the alleged need to keep civil liberties undermined. According to them, provisions of the “Patriot Act” shouldn’t have been allowed to expire under any circumstances, inter alia to enable us to “defend against the threat posed by groups like ISIS”. Someone should perhaps remind these slime-molds that they knowingly and willingly helped to create this threat. The cynicism and hypocrisy are truly remarkable.

  

  John McCain posing with “moderately mad mullahs” in Syria. The man with the camera was later identified as terrorist Muhammad Nour, while the second man from the left was said to be his associate “Abu Ibrahim”. Both have allegedly been involved in the abduction of Lebanese Shia pilgrims. McCain’s office commented: “If the individual photographed with Senator McCain is in fact Mohamed Nour, that is regrettable.”

  Why should “we” get involved in the Sunni/Shia religious dispute at all, what has any of this got to do with us? Note that prior to the Iraq war, Sunni, Shia and Christian communities were living peacefully side by side in the region. One certainly cannot deny that both Saddam and Assad were, respectively are, quite unsavory dictators. And yet, the West has no problem with supporting the brutal theocratic regime of Saudi Arabia and the even more brutal junta of General al-Sisi that is currently ruling Egypt (where the courts are routinely sentencing hundreds of people to death in one go in Stalinesque show trials). This support is provided under the cover of “realpolitik”, the term regularly invoked when policies completely bereft of morals are pursued.

  

  Just trust us…, cartoon by Simon Kneebone

  Supporting radical fundamentalists in order to fight a regime one happens to dislike at a given moment is per experience especially dangerous. If there is a “lesser evil” in the Syrian conflict, we have yet to be apprised of its existence. The radicals fighting Assad are certainly happy to take Western money and weapons, just as the mujahedin of Afghanistan once did, but they are definitely not our “friends”. On the contrary, arming them will ultimately only invite blowback, a term coined by the CIA to describe the rash of unintended consequences that usually results from such interventions. It should be known by now that Islamist fundamentalists have especially large blowback potential. The recent murder of cartoonists in Paris has once again underscored this fact (the French government has reacted as one would expect, by curtailing the liberties of French citizens further).

  

  Spot the difference, Cartoon by Matt Wuerker

   

  Amending the Amendments

  No-one is saying that genuine terrorist threats shouldn’t be defended against. The question is whether surveillance of the entire population actually serves this goal. The evidence so far suggests that it doesn’t. As the former NSA chief publicly admitted, “one, or perhaps two” terrorist plots have actually been foiled by the NSA’s extended spying activities. Or perhaps none, as Michael Krieger avers. Who knows really? Our money is on “none”.

  Similarly, the extraordinary powers the government has arrogated to itself in other areas via the likewise Orwellian-sounding “Patriot Act” are unlikely to actually improve its record of providing safety. The previously allowed methods of detection and prevention of crime should be more than sufficient for this purpose. After all, “ticking bomb” scenarios exist only in Jack Bauer movies. If such a scenario were against all odds ever encountered in real life, we’re quite sure that those confronted by it wouldn’t let protocol stand in their way (and we can be just as certain that no-one would subsequently complain). For the citizens who are supposedly going to be “protected”, there is definitely no mileage in the shredding of the bill of rights.

  All over the world, anti-terror laws have been abused for purposes that have absolutely nothing to do with terrorism. These range all the way from “investigating copyright infringement” to “spying on noisy children”.

  

  Cartoon by Joel Pett

  If the process were honest, one would simply have to amend the 4^th and 5^th amendments a bit further. We propose the following changes: 

  “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

   

  There are certain exceptions when these rights shall be violated on a grand scale. As soon as the government declares something called “the war on drugs”, no-one shall be safe from arbitrary seizure of his effects by anyone ranging from Hicksville sheriffs to DEA agents at their whim. As soon as the government declares something called “the war on terror”, the passage about being secure from “unreasonable searches” will be suspended for the duration of the conflict, i.e., forever.  

   

  No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

   

  As soon as the government declares the never-ending “war on terror” mentioned in amendment 4, the whole rigmarole about “due process” shall be suspended as well.

  If these amendments were duly altered as proposed above, the courts would no longer have to engage in an unseemly song-and-dance about who has “standing” every time people are attempting to get them to rule on whether assorted anti-terror laws represent an infringement of the constitutional order.

  

  A vision of the potential future consequences of complaining too loudly, Cartoon by Ben Sargent

  Conclusion

  The fact that the newest anti-terror law has been named the “Freedom Act” is a big red flag all by itself. It certainly appears as if nothing has improved relative to the previous situation. At the same time, government intervention in far-away lands continues to be the biggest force generating more terrorism in the world. When blowback eventually ensues, we will no doubt be told that if we want to be “safe” we will need to surrender even more civil liberties. Unfortunately experience suggests that most people are either going to sleep through this or will even cheer their own enslavement on.

  History also shows that no society moves from a relatively free political system to full-scale authoritarianism in one fell swoop. Instead the process moves forward step-by-step, almost imperceptibly at first (in “salami tactic” fashion). A major characteristic of this process that can be observed time and again is that governments enact increasingly repressive legislation on the pretext of emergencies – at times real ones, and more often than not imagined ones. By the time people are waking up to what is going on, it is usually too late. None of this should therefore be taken lightly.

  

  Reaching the “too late” phase.

  

  

  
  
  

  

• EU's Junker Snubs Greek Prime Minister, Declines Phone Call

  In a speech to parliament on Friday, Greek PM Alexis Tsipras called a proposal drafted by the country’s creditors “an unpleasant surprise”.

  Tsipras, who submitted his own proposal to Angela Merkel, Francois Hollande, Jean-Claude Junker, and Mario Draghi on Monday just ahead of an emergency meeting between the four in Berlin, says the counterproposal he received on Wednesday from the troika was “unreasonable” and can’t possibly be the basis for a deal. He went on to say that Greece will not be “blackmailed” and even went so far as to suggest that the institutions’ draft was a negotiating “trick” and may ultimately be withdrawn. 

  While it’s as yet unclear whether Tsipras’ bluster is genuine or simply reflects the fact that thanks to the so-called “Zambia” option — whereby Greece will now bundle its June IMF installments into one payment due at the end of the month — the PM can now feign belligerence for another few weeks before ultimately conceding amid an acute liquidity crisis and a default to creditors.

  In the mean time, Tsipras must toe the line between adopting language that appeases the more radical members of Syriza, and testing the waters to discover what (if any) concessions would be acceptable to parliament. 

  As we’ve argued, the troika has every reason to stick to its guns. The risk of emboldening Syriza sympathizers in Spain and Portugal now far outweighs the projected fallout from a Grexit — or so the narrative goes.

  Greece, on the other hand, will face devastating economic consequences, political instability, and social unrest in the event the country returns to the drachma, meaning Tsipras’ move to effectively call the troika’s bluff might have been more show than anything else. That is, the longer the PM can put on a brave face, the harder he can say he fought when, in the end, he is forced to go to parliament with an unpopular deal or face an economic depression the depths of which are as yet impossible to measure. Here’s UBS with a bit of color on this:

  Seen from a positive angle, the bundling buys the Syriza government some time and arguably facilitates the cash-flow management in the immediate weeks ahead. But the bundling also raises concerns. It is a reflection, in our view, that the gulf between the Greek government and its international partners is still wide. It might also suggest that Prime Minister Tsipras is under significant pressure from the left wing of his party not to make concessions to the Troika. 

  If, on the other hand, Tsipras is serious about sticking with the mandate that got Syriza elected (which is possible), he got a rude awakening on Saturday when, insulted by the PM’s fire and brimstone speech to parliament, EU Commission President Jean-Claude Junker refused a meeting, noting that if Tsipras is serious about going down with the ship, there’s nothing left to talk about. FT has more:

  Alexis Tsipras, the Greek prime minister, asked to meet Jean-Claude Juncker on Saturday but was spurned by the European Commission president rankled by the Greek leader’s denunciation of his efforts to broker a bailout deal..

   

  In a fiery speech before the Greek parliament Friday night, Mr Tsipras lashed out, saying he was “unpleasantly surprised” by the offer made by Mr Juncker, calling the proposals “absurd” and “irrational, blackmailing demands”.

   

  “I would like to believe that this proposal was an unfortunate moment for Europe, or at least a bad negotiating trick, and will very soon be withdrawn by the same people who thought it up,” Mr Tsipras told the Greek parliament.

   

  According to a senior official with a Group of Seven delegation, which began gathering in southern Germany on Saturday ahead of a two-day summit of the leaders of the seven leading industrialised powers that begins Sunday, Mr Juncker believed Mr Tsipras’ speech in parliament left little to discuss.

   

  “Unless he seriously addresses the issues, there’s no reason to meet,” said the G7 official..

   

  Mr Juncker’s rejection of a meeting with Mr Tsipras returns the bailout talks to a point of stalemate just a week after creditors believed the talks were making progress for the first time in nearly four months.

   

  Many officials believe a deal to release €7.2bn in desperately-needed bailout aid needs to be reached ahead of a June 18 meeting of eurozone finance ministers so that Athens has enough time to implement an agreed set of economic reforms in order to get the rescue funds before the bailout expires at the end of the month.

   

  Without the €7.2bn in aid, Greece is expected to default on the €1.5bn IMF bill as well as two large sovereign bonds held by the ECB which come due in July and August totalling €6.7bn.

  And here’s Belgium’s finance minister Johan Van OvertveldtJohan Van Overtveldt:

  Greece (1/2) Hard to see what Greek prime minister wants to negotiate about with his partners after flatly rejecting their last proposals.

  — Johan Van Overtveldt (@jvanovertveldt) June 6, 2015

  Greece (2/2) it’s hard to avoid the conclusion that the Greek government does not want to accept the rules that make up a monetary union.

  — Johan Van Overtveldt (@jvanovertveldt) June 6, 2015

  For its part, Greece denies Tsipras requested a meeting and has resorted to what has become Athens’ favorite strategy when things go awry: blame Germany.

  A senior Greek official, however, denied that Mr Tsipras had requested a meeting with Mr Juncker. The official said Greece’s differences now lie with Berlin, not Mr Juncker in Brussels.

  While the hurt feelings will likely give way to reluctant (and painfully repetitive) talks next week, Junker has long been seen as generally receptive to Athens’ position, suggesting that Tsipras may have lost his best friend in his standoff with the troika.

  Meanwhile…

  • GREEK PROPOSAL REMAINS ON THE TABLE, GREEK GOVT OFFICIAL SAYS

  

  

  
  
  

  

• Forget the TPP: Wikileaks Releases Documents From The Equally Shady “Trade in Services Agreement"

  By Mike Krieger of Liberty Blitzkrieg

  Forget the TPP – Wikileaks Releases Documents from the Equally Shady “Trade in Services Agreement,” or TISA

  If it sounds complicated, it is. The important point is that this trade agreement contains a crucial discussion of governments’ abilities to meaningfully protect civil liberties. And it is not being treated as a human rights discussion. It is being framed solely as an economic issue, ignoring the implications for human rights, and it is being held in a classified document that the public is now seeing months after it was negotiated, and only because it was released through WikiLeaks.

   

  The process is also highly secretive—in fact, trade agreement texts are classified. While the executive branch does consult with members of Congress, even congressional staffers with security clearance have until recently been prevented from seeing the texts. Furthermore, certain trade industry advisers are allowed access to U.S. negotiating objectives and negotiators that the public and public interest groups do not have

       – From the Slate article: Privacy Is Not a Barrier to Trade

  

  If you haven’t heard about about the Trade in Services Agreement, aka TISA, don’t worry, you’re not alone. While I had heard of it before, I never read anything substantial about it until today. What sparked my reading interest on the subject were a series of very troubling articles published via several media outlets following a document dump by Wikileaks. Here’s how the whistleblower organization describes the TISA leak on it document release page:

  WikiLeaks releases today 17 secret documents from the ongoing TISA (Trade In Services Agreement) negotiations which cover the United States, the European Union and 23 other countries including Turkey, Mexico, Canada, Australia, Pakistan, Taiwan & Israel — which together comprise two-thirds of global GDP. “Services” now account for nearly 80 per cent of the US and EU economies and even in developing countries like Pakistan account for 53 per cent of the economy. While the proposed Trans-Pacific Partnership (TPP) has become well known in recent months in the United States, the TISA is the larger component of the strategic TPP-TISA-TTIP ‘T-treaty trinity’. All parts of the trinity notably exclude the ‘BRICS’ countries of Brazil, Russia, India, China and South Africa. 

  I’ve covered the extreme dangers of what’s colloquially known as trade “fast track” authority previously. In the post, As the Senate Prepares to Vote on “Fast Track,” Here’s a Quick Primer on the Dangers of the TPP, I noted:

   

  Passing this corporate giveaway masquerading as a “free trade deal” is a lengthy process; a process that begins today with a Senate vote on Trade Promotion Authority (TPA), also known as “fast track.”  Passing TPA would be Congress agreeing to neuter itself to a yes or no vote on a trade pact and ceding its power to amend it. Even worse, it would give trade deals this expedited process for six years, thus outlasting the current Administration, and applying to other “trade” deals like the TTIP. Mind you, TPA is being voted on while the TPP text remains completely hidden from the public.

  Naturally, “fast track” ultimately passed through the corrupt, rancid body known as the U.S. Senate despite the best efforts of people such as Elizabeth Warren to stop it. As noted in the above paragraph, fast track isn’t just about the TPP, it covers other deals already well in the works such as TTIP and TISA. Makes you wonder whether these other deals are even worse.

  For more information on TISA, let’s turn to the Huffington Post:

  The latest leak purports to include 17 documents from negotiations on the Trade In Services Agreement, a blandly named trade deal that would cover the United States, the European Union and more than 20 other countries. More than 80 percent of the United States economy is in service sectors.

   

  According to the Wikileaks release, TISA, as the deal is known, would take a major step towards deregulating financial industries, and could affect everything from local maritime and air traffic rules to domestic regulations on almost anything if an internationally traded service is involved.

   

  The pact would be one of three enormous deals whose passage through Congress could be eased with passage of Trade Promotion Authority, also known as fast-track authority. The Senate has passed fast-track, and it could be taken up in the House this month.

   

  “Today’s leaks of TISA (trade in services) text reveal once again how dangerous Fast Track Authority is when it comes to protecting citizen rights vs. corporate rights,” he added. “This TISA text again favors privatization over public services, limits governmental action on issues ranging from safety to the environment using trade as a smokescreen to limit citizen rights.”

   

  The Office of the United States Trade Representative and top European officials have repeatedly denied that TISA or the Transatlantic deal would impact local laws, releasing a joint statement to that effect earlier this spring.

   

  Still, the Wikileaks documents suggest that World Trade Organization-style tribunals would be expanded under TISA, and that such tribunals convened to resolve trade disputes can impact local laws. One such WTO tribunal ruled last month that the United States must repeal its laws requiring meat to be labeled with its country of origin, or face punitive tariffs on exports.

  I covered this ruling a couple of weeks ago in the post: Congress Moves to Eliminate Labels Showing Consumers Where Meat Comes from Following WTO Ruling

  Moving along to the UK Independent’s coverage of TISA:

  Wikileaks has warned that governments negotiating a far-reaching global service agreement are ‘surrendering a large part of their global sovereignty’ and exacerbating the social inequality of poorer countries in the process.

   

  The Trade in Services Agreement exposed in a 17 document dump by Wikileaks on Thursday relates to ongoing negotiations to lock market liberalizations into global law.

   

  Under the agreement, retailers like Zara or Marks & Spencers would have the right to open stores in any of the signing countries and be treated like domestic companies. A nationalized service, such as the British telecoms industry in the eighties, would have to ensure it was not harming competition under these terms.

   

  Wikileaks says that corporations would be able to use the law in its current form to hold sway over governments, deciding whether laws promoting culture, protecting the environment or ensuring equal access to services were ‘unnecessarily burdensome’, or whether knowledge of indigenous culture or public services was essential to achieve ‘parity’.

   

  “In other words, unaccountable private ‘trade’ tribunals would decide how countries could regulate activities that are fundamental to social well-being,” Wikileaks said.

  No wonder these deals are being keep so secret. Let’s now turn to Slate, which examined TISA’s potential threat to a human right that is increasingly under attack: personal privacy.

  On Wednesday, WikiLeaks released the draft text of the biggest international agreement you’ve probably never heard of: the Trade in Services Agreement, or TISA. And buried in one of the 12 leaked chapters (which are mostly on things like “air transport services” and “competitive delivery services”) is a volatile and crucial debate about online privacy and the global Internet.

   

  Trade agreements used to focus on things like tariffs, but they aren’t just about trade anymore. They consist of hundreds of chapters of detailed regulations, on subjects ranging from textiles to intellectual property law. TISA purports to promote fair and open global competition in services, thus increasing jobs. (You may have also heard about the Trans-Pacific Partnership, another trade agreement currently being negotiated and criticized. This one’s even more mammoth.) TISA is being negotiated between 23 countries representing some 75 percent of the global services market. Buried in its e-commerce annex are rules that will reshape the relationship between the free flow of information and online privacy.

   

  The Internet is global, but privacy regulations incorporate localized norms. The U.S., for example, protects only some things, like your video-watching history and health information, while the European Union has a comprehensive framework for safeguarding far more information.

   

  But TISA is different. The leaked draft language, proposed by the U.S. and several other countries, states that a government may not prevent a foreign services company “from transferring, [accessing, processing or storing] information, including personal information, within or outside the Party’s territory.” Essentially, this says that privacy protections could be treated as barriers to trade. This language could strike most privacy regulations as they apply to foreign companies—and not just in the EU. It would also apply to U.S. regulation of foreign companies at home. For instance, U.S. health privacy law requires patient consent for health information to be shared. This, technically, is a restriction on transferring information that could be invalidated by TISA, if nothing changes.  

   

  The subject matter TISA covers is already governed by a global agreement called GATS, which has an exception for privacy protections. In other words, privacy protections are explicitly not treated as trade barriers in GATS. The leaked draft language from TISA shows that there is an ongoing debate between countries over whether to create an explicit privacy exception within TISA itself. The result of this debate is hugely important for states that want privacy laws.

   

  If it sounds complicated, it is. The important point is that this trade agreement contains a crucial discussion of governments’ abilities to meaningfully protect civil liberties. And it is not being treated as a human rights discussion. It is being framed solely as an economic issue, ignoring the implications for human rights, and it is being held in a classified document that the public is now seeing months after it was negotiated, and only because it was released through WikiLeaks.

   

  TISA’s contents are not all bad, and protection of an open global Internet through trade could theoretically be a good thing. But these fine points should be openly debated, not bartered away in an enormous agreement that bundles privacy together with maritime transport services.

   

  The process is also highly secretive—in fact, trade agreement texts are classified. While the executive branch does consult with members of Congress, even congressional staffers with security clearance have until recently been prevented from seeing the texts. Furthermore, certain trade industry advisers are allowed access to U.S. negotiating objectives and negotiators that the public and public interest groups do not have.

   

  Trade agreements governing civil liberties (and jobs, and the environment, and public health … ) need to receive meaningful input from the public and its real representatives—not after negotiations are concluded, not through a Congress hampered by excessive executive secrecy, and not through vague negotiating objectives that fail to meaningfully address human rights and other values.

   

  Fast track just passed in the Senate. Senators including Bernie Sanders of Vermont, Elizabeth Warren of Massachusetts, and Sherrod Brown of Ohio tried to stop its passage but narrowly lost. Now, the vote is coming up in the House—maybe as soon as this week. About 2 million Americans have already signed a petition against the legislation. It would be sad indeed if one of the few times Congress decides to actually pass legislation, embrace bipartisanship, and show support of the president is a law that enables states to bargain away citizens’ freedoms behind closed doors.

  Actually, it would’t be sad, it would make perfect sense. As George Carlin so accurately noted:

  

  Finally, from the New Republic:

  On Wednesday, WikiLeaks brought this agreement into the spotlight by releasing 17 key TiSA-related documents, including 11 full chapters under negotiation. Though the outline for this agreement has been in place for nearly a year, these documents were supposed to remain classified for five years after being signed, an example of the secrecy surrounding the agreement, which outstrips even the TPP.

   

  TiSA has been negotiated since 2013, between the United States, the European Union, and 22 other nations, including Canada, Mexico, Australia, Israel, South Korea, Japan, Norway, Switzerland, Turkey, and others scattered across South America and Asia. Overall, 12 of the G20 nations are represented, and negotiations have carefully incorporated practically every advanced economy except for the “BRICS” coalition of emerging markets (which stands for Brazil, Russia, India, China, and South Africa).

   

  The deal would liberalize global trade of services, an expansive definition that encompasses air and maritime transport, package delivery, e-commerce, telecommunications, accountancy, engineering, consulting, health care, private education, financial services and more, covering close to 80 percent of the U.S. economy. Though member parties insist that the agreement would simply stop discrimination against foreign service providers, the text shows that TiSA would restrict how governments can manage their public laws through an effective regulatory cap. It could also dismantle and privatize state-owned enterprises, and turn those services over to the private sector. You begin to sound like the guy hanging out in front of the local food co-op passing around leaflets about One World Government when you talk about TiSA, but it really would clear the way for further corporate domination over sovereign countries and their citizens.

   

  You need to either be a trade lawyer or a very alert reader to know what’s going on. But between the text and a series of analyses released by WikiLeaks, you get a sense for what the countries negotiating TiSA want.

   

  First, they want to limit regulation on service sectors, whether at the national, provincial or local level. The agreement has “standstill” clauses to freeze regulations in place and prevent future rulemaking for professional licensing and qualifications or technical standards. And a companion “ratchet” clause would make any broken trade barrier irreversible.

   

  No restrictions could be placed on foreign investment—corporations could control entire sectors. 

   

  Corporations would get to comment on any new regulatory attempts, and enforce this regulatory straitjacket through a dispute mechanism similar to the investor-state dispute settlement (ISDS) process in other trade agreements, where they could win money equal to “expected future profits” lost through violations of the regulatory cap.

   

  For an example of how this would work, let’s look at financial services. It too has a “standstill” clause, which given the unpredictability of future crises could leave governments helpless to stop a new and dangerous financial innovation. In fact, Switzerland has proposed that all TiSA countries must allow “any new financial service” to enter their market. So-called “prudential regulations” to protect investors or depositors are theoretically allowed, but they must not act contrary to TiSA rules, rendering them somewhat irrelevant.

   

  Most controversially, all financial services suppliers could transfer individual client data out of a TiSA country for processing, regardless of national privacy laws. This free flow of data across borders is true for the e-commerce annex as well; it breaks with thousands of years of precedent on locally kept business records, and has privacy advocates alarmed.

   

  That’s perhaps TiSA’s real goal—to pry open markets, deregulate and privatize services worldwide, even among emerging nations with no input into the agreement. U.S. corporations may benefit from such a structure, as the Chamber of Commerce suggests, but the impact on workers and citizens in America and across the globe is far less clear. Social, cultural, and even public health goals would be sidelined in favor of a regime that puts corporate profits first. It effectively nullifies the role of democratic governments to operate in the best interest of their constituents.

  Basically, if you think the corporate-fascist state is overbearing and oppressive now, you ain’t seen nothing yet.

  

  

  
  
  

  

• Awkward: Day After EPA Finds Fracking Does Not Pollute Water, Top Oil Regulator Resigns Over Water Contamination

  Put this one in the awkward file: just hours after the EPA released yet another massive study (literally, at just under 1000 pages) which found no evidence that fracking led to widespread pollution of drinking water (an outcome welcome by the oil industry and its backers and criticized by environmental groups), the director of the California Department of Conservation,  which oversees the agency that regulates the state’s oil and gas industry, resigned as the culmination of a scandal over the contamination of California’s water supply by fracking wastewater dumping.

  

  An aerial view of pits containing production water from oil wells near California 33 and Lokern Road in Kern County
  

  This is what the allegedly impartial EPA said on Thursday when it released its long awaited study: “we did not find evidence that [hydraulic fracking has] led to widespread, systemic impacts on drinking water resources in the United States.”

  

  Tom Burke, science adviser and deputy assistant administrator of the EPA’s Office of Research and Development, told NPR that “we found the hydraulic fracturing activities in the United States are carried out in a way that has not led to widespread systemic impacts on drinking water resources. In fact, the number of documented impacts to drinking water resources is relatively low when compared to the number of fractured wells.”

  In retrospect the EPA surely wishes it had picked a slightly different time and date to release its “imparial” results because less than 24 hours later on Friday afternoon, Mark Nechodom, director of the California Department of Conservation who was appointed by governor Jerry Brown three years ago, abruptly resigned following an outcry over oil companies injecting their wastewater into Central Valley aquifers that were supposed to be protected by law.

  As LA Times reports, Nechodom “was named this week in a federal lawsuit filed on behalf of a group of Kern County farmers who allege that Brown, the oil and gas division and others conspired with oil companies to allow the illegal injections and to create a more lax regulatory environment for energy firms.”

  The lawsuit was filed under federal racketeering statutes and claims the conspiracy deprived Kern County farmers of access to clean water.

  According to SF Gate, Nechodom announced his resignation in a brief letter to John Laird, secretary of the California Natural Resources Agency. The Conservation Department is part of the resources agency. “I have appreciated being part of this team and helping to guide it through a difficult time,” Nechodom wrote

  Ironically, California’s oil regulator, the Division of Oil, Gas and Geothermal Resources, has been facing scrutiny from the U.S. Environmental Protection Agency after allowing oil producers to drill thousands of oilfield wastewater disposal wells into federally protected aquifers.

  It was not immediately clear if the oil companies which commissioned the EPA study “clearing” fracking are also charged in the wastewater dumping case but the answer is “probably.”

  Attorney Rex Parris, whose firm filed the lawsuit, said in a written statement Friday that the case alleges a broad and complex conspiracy involving other officials.“We are not surprised that Nechodom resigned a day after the filing of this lawsuit,” Parris said. “We are confident he is just one of many resignations to come.”

  In one tense hearing before lawmakers in March, Nechodom received a barrage of criticism from elected officials who recited one oversight failure after another. Nechodom sat stone-faced during the hearing, but eventually agreed, saying, “We all fell down.”

  It gets better:

  Nechodom’s resignation was unexpected, although he had increasingly been called upon by state officials to explain problems in the oil and gas division’s oversight of the oil industry and a parade of embarrassing blunders.

   

  The Department of Conservation failed to meet an April 30 deadline for making public a broad range of information regarding the source, volume and disposal of water used in oil and gas production.

  The punchline: “Nechodom blamed the reporting failure on “unforeseeable personnel and technical challenges.” Well at least he did not blame an “internal procedural error“, the passive voice excuse used by the ECB when it was revealed it had leaked critical details of its monetary policy to a select group of hedge funds.

  So how does one reconcile the seeming contradiction between Nechodom’s fall from grace and the fact that quite clearly, fracking has had a drastic impact on the quality of drinking water in California, with the EPA’s finding which bombastically states the following:

  This state-of-the-science assessment contributes to the understanding of the potential impacts of hydraulic fracturing on drinking water resources and the factors that may influence those impacts. The findings in this assessment can be used by federal, state, tribal, and local officials; industry; and the public to better understand and address any vulnerabilities of drinking water resources to hydraulic fracturing activities.

  In other words, use the “state-of-the-science” findings” to demolish all allegations that the oil industry may not have the public interest in mind… just ignore the farce that took place one day later with the director California Department of Conservation.

  But how is this possible? For the answer we go to a recent letter by the editor in chief of The Lancet, one of the world’s best known medical journals, who without fear proclaims what many have known intuitively most of their adult lives, namely that half of all “scientific literature” is false. To wit:

  “The case against science is straightforward: much of the scientific literature, perhaps half, may simply be untrue. Afflicted by studies with small sample sizes, tiny effects, invalid exploratory analyses, and flagrant conflicts of interest, together with an obsession for pursuing fashionable trends of dubious importance, science has taken a turn towards darkness.”

  In other words, half of what you read anywhere, especially in “scientific” literature, is a lie.

  Which brings us to the last line of the EPA executive summary: “This assessment can also be used to help facilitate and inform dialogue among interested stakeholders, and support future efforts, including: providing context to site-specific exposure or risk assessments, local and regional public health assessments, and assessments of cumulative impacts of hydraulic fracturing on drinking water resources over time or over defined geographic areas of interest. Finally, and most importantly, this assessment advances the scientific basis for decisions by federal, state, tribal, and local officials, industry, and the public, on how best to protect drinking water resources now and in the future.”

  Great job. The only thing left missing is the disclosure of how many billions in “donations” and “lobby spending” it took the oil industry for the EPA to goalseek the findings of this “impartial, scientific” organization.

  

  

  
  
  

  

• Table 9

  Submitted by Jim Quinn of The Burning Platform

  Table 9

  It seems the mainstream media is giddy with excitement over the 280,000 jobs supposedly created in May. The markets aren’t so happy, as good news is actually bad news. What excuse will Yellen and her fellow Wall Street puppets at the Federal Reserve use to not increase interest rates from emergency levels of 0.25%? The ten year Treasury rate immediately skyrocketed to 2.43% in seconds. It was at 1.64% in February. That’s a 46% decline in price in four months. Do you still think bonds are a safe investment? Guess what is tied to the 10 Year Treasury rate? Mortgage rates. There goes the fake housing recovery. Artificially high prices, higher mortgage rates, and young people unable to buy sounds like a perfect recipe for collapse.

  The MSM is cackling about the 280,000 new jobs, but you won’t hear them mentioning that the number of unemployed people went up by 125,000 as 208,000 people the BLS classified as not in the labor force last month decided they were in the labor force this month. What a crock. At least 20 million of the 93 million classified as not in the labor force can or will work, therefore they are unemployed.

  One month does not make a recovery. Let’s see what the YTD numbers show:

  • Since January, 594,000 more Americans are employed, an average of 149k per month. Considering the working age population has gone up by 732,000 since January, why is anyone crowing?
  • The BLS drones actually expect you to believe the unemployment rate has fallen from 5.7% in January to 5.5% today, because 442,000 Americans decided to voluntarily exit the labor force. That’s a hoot.

  The really good stuff is buried in Table A-9 of the BLS data dump. See for yourself:

   

  http://www.bls.gov/news.release/empsit.t09.htm

  As the MSM hacks and government apparatchiks try to convince you the jobs market is booming, Table A-9 tells a different story. Here is what is revealed:

  • The number of working age Americans went up by 2.8 million in the last year, or 236k per month. The number of new jobs must average 236k per month just to stay even. In the last year the economy added 2.9 million jobs, slightly above the workforce growth, but the BLS expects you to believe the unemployment rate plunged from 6.3% to 5.5%. Hilarious!!!
  • It’s the breakdown of jobs by age that really screams out. It is a known fact that people in the 45 to 54 age bracket are in their prime earning and spending years. In the last year the number of employed 45 to 54 year olds has DECLINED by 67,000. It DECLINED in May by 51,000. It has DECLINED by 187,000 since February.
  • It is a known fact that people over 55 dramatically reduce their spending as they approach and enter their retirement years. The Boomers have added 824,000 jobs in the last year, or 28% of all the new jobs added.
  • Only 117,000 jobs were added in the 35 to 44 year old bracket in the last year. So the age brackets that do the most spending in the country (35 to 54) have a net increase of 50k jobs in the last year. That is 1.7% of the total jobs added.
  • The remainder of the new low paying jobs are going to young people who are in debt up to their eyeballs. Now you should understand why there is no real recovery. The people who normally spend the most aren’t getting jobs. The people who don’t spend or can’t spend are getting the bulk of the low paying service jobs.

  

  • Of the 2.9 new jobs created in the last year, guess how many are classified as self-employment jobs? How about 935,000. That’s right. Your new job selling shit on Ebay or cutting three lawns per week is counted as a new job by the BLS drones. What a load of bull.
  • There are also 7 million people who hold multiple jobs. That is a sure sign of economic progress.
  • Almost 300k of the new jobs added in the last year were part-time shit jobs. 205k of the 464k jobs added since March are part-time jobs.

  Sorry to be a buzzkill, but today’s jobs numbers are not great. The job market sucks. Wages suck. The BLS will lie and obfuscate until morale improves. The MSM will regurgitate the lies. So it goes.

  

  

  
  
  

  

• In Major Escalation, Yemen Rebels Fire Scud Missile Into Saudi Arabia

  Just two days after reports indicated that Yemen’s Iran-backed Houthi rebels were prepared to participate in UN-brokered peace talks with Abd Rabbuh Mansur Hadi’s government in exile, clashes on the Saudi border have intensified. 

  On Friday, the Saudi press agency said it had used Apache helicopters and artillery to repel a Houthi-led advance, killing “dozens” of militants. Four Saudis were also killed. 

  Meanwhile, Riyadh stepped up airstrikes around the Yemeni capital targeting what the Saudis say were arms depots. The Houthis, however, say the aerial bombardment is inflicting untold civilian casualties, mostly women and children. Here’s Reuters:

  Coalition Arab bombings killed around 58 people across Yemen on Wednesday and Thursday, the state news agency Saba, controlled by the Houthis, said.

   

  48 people, most of them women and children, were killed in air strikes on their houses in the Houthi heartland in the rural far north adjoining Saudi Arabia.

   

  The reports could not be independently verified.

  On Saturday, Riyadh claimed the Houthis, in concert with forces loyal to former President Ali Abdullah Saleh, fired a scud missile at Saudi Arabia for the first time.

  The scud, which apparently targeted the city of Khamis Mushait in southwest Saudi Arabia, was intercepted by two Patriot missiles. “At 2:45am on Saturday morning, the Houthi militias and ousted [president] Ali Abdullah Saleh launched a Scud missile in the direction of Khamees al-Mushait, and praise be to God, the Royal Saudi air defences blocked it with a Patriot missile,” a statement said. 

  Khamis Mushait is home to the US-desiged and constructed King Khalid Air Force base, from which airstrikes on Houthi positions have been launched throughout the conflict.

  

  

  (King Khalid Air Force Base)

  Friday’s attack by Abdullah Saleh’s Republican Guard and the Houthis in the Jizan province was billed as the largest “offensive” mounted by the rebels since the onset of hostilities months ago. The fighting reportedly began when rebels fired rockets at Saudi positions and promptly ended when the Saudi army called in air support from Apache gunships.

  

  (a rebel fires on Saudi positions near the border)

  

  Note that this latest escalation comes a month and a half after Saudi Arabia declared a George Bush-style “mission accomplished”-type end to operation Decisive Storm, claiming the ‘coalition’ airstrikes had “successfully eliminated the threat to the security of Saudi Arabia.” 

  The declaration looks to have been a bit premature. 

  The Houthis are scheduled to attend peace talks in Geneva on June 14. That is unless the Saudis launch a ground invasion in the interim. 

  

  

  
  
  

  

• California Begins To Rip Up Lawns Because "The Whole Damn State [Is] Out Of Water"

  In early May, California’s water regulators backed a series of emergency measures proposed in an Executive Order issued by Governor Jerry Brown. The extraordinary conservation effort comes amid a historic drought, that some climatologists say will reach “Dust Bowl” proportions before all is said and done. 

  Recapping, the order called for a 25% reduction in overall water usage beginning on June 1 — so, last Monday. The state reduced its consumption by 13.5% in April (compared to 2013), suggesting residents will need to redouble their efforts if Brown’s targets are to prove realistic. While some communities have attempted to cast conservation as the “cool” thing to do, other localities say that in the absence of significant financial resources, the cuts simply aren’t feasible. AP has more:

  April’s best conservers included Santa Rosa, a city of 170,000 people north of San Francisco, which reported a 32 percent drop in April compared to the same month in 2013. The city offered a host of programs to achieve savings such as paying residents to reduce 52 football fields’ worth of lawn and giving away 50,000 low-flush toilets since 2007.

   

  Saved water “is the cheapest water you can find,” said David Guhin, water director for Santa Rosa. “It’s gotten to where lawns are uncool.”

   

  Cool or no, many communities are still falling far short.

   

  “Fifty-thousand toilets? Really? We don’t have that kind of money,” said Alan Tandy, city manager of Bakersfield, where water use increased by 1 percent in the latest state tally.

  If Tandy thinks he doesn’t have money to throw ‘down the toilet’ (so to speak) now, things could get materially worse if Bakersfield (which, as a side note, has a deal with Chevron to distribute water generated from fracking to local farmers) is unable to hit state-mandated targets. Here’s AP again:

  Starting this month, each community has a mandatory water reduction target, with some ordered to cut back as much as 36 percent.

   

  Water districts missing their targets face potential fines of up to $10,000 a day once June numbers are in, although a far more likely outcome will be state-ordered changes in local regulations, like toughening limits on lawn-watering.

  Of course one way to ensure that Californians cut back on watering their lawns is to simply encourage households to remove the grass altogether and replace it with something that needs far less water — like rocks.

  As The Guardian reports, grass has no real place in California anyway and is only present because Californians have never had to live without it and because the state’s citizens exhibit a peculiar nostalgia for the time they spent as British monarchs.

  Via The Guardian:

  There is pressure to take things one step further and turn to lawns. More precisely, to the ripping out of them.

   

  In his executive order, Brown called for the replacement of 50m sq ft of lawns with “drought-tolerant landscapes”, a goal to be achieved with the help of local subsidies and partial funding from the state’s water department.

   

  “Over 50% of household water usage is outdoors,” said Stephanie Pincetl, a professor and director of the California Center for Sustainable Communities at University of California, Los Angeles.

   

  California’s love for lawns is wholly unsuited to the state’s dry climate, Pincetl said, describing the attachment as an “inherited historic aesthetic” that comes straight out of the British Empire.

   

  “Turf serves no functional purpose other than it looks good,” said Bob Muir of the Metropolitan Water District of Southern California (MWDSC), which provides water to nearly 19 million Californians.

   

  The MWDSC recently voted to increase its conservation programme to a whopping $450m over two years, with money taking the form of rebates on turf removal operations and incentives on efficient faucets.

  Californians are taking the leap by the tens of thousands. Almost one year into that two-year period, Muir said, half of the money already spent (around $44m out of $88m) has been allocated to residents and businesses undertaking turf removal.

  Replacing one’s lawn with rocks and cacti has become so popular that it’s spawned a growth industry.

  Turf Terminators, a Los Angeles-based company created last July, has ripped up 5,000 lawns in less than a year, according to its head of business development, Andrew Farrell. The company started with three employees. It now has 565 full-timers.

   

  But even with help from a turf-terminating team from design to completion, ripping up your lawn is expensive.

  
  

  In Los Angeles, if you combine two separate subsidies from the city ($1.75 per sq ft), and the MWDSC ($2 per sq ft), you will most likely still have to put in some cash of your own.

  
  

  According to Farrell, the average turf-removal job costs between $5 and $8 per sq ft. This means someone on a budget with a modest front yard of 400 sq ft would still have to pay $500 out of their own pocket for a $2,000 operation, if they went for one of the cheaper options.

  
  

   

  If they wanted to go for something slightly more elaborate, the same resident would have to put in $1,700 of their own money for a $3,200 operation.

  In fact, Terf Terminators advertises the fact that you may be able to have your lawn dug up for free, by simply signing over your “water rebate” (taxpayer-funded grass removal subsidy) to the company. Here’s how it works (from the official Terf Terminators website):

  Here’s how Turf Terminators can afford to offer its services for free:

  • Turf Terminators has consulted regional, municipal, and local water authorities, including utilities and state agencies to understand various turf removal rebate programs offered in Southern California.
  • Turf Terminators utilizes water rebates from state water authorities that are offered per square foot of turf that is removed and replaced.
  • Customers assign their rights to state-offered water rebates over to Turf Terminators.
  • Turf Terminators’ contractors transform customers’ lawns and campuses while abiding by certain landscape requirements dictated by state, municipal and local authorities.
  • Turf Terminators’ in-house laborers, relationships with local nurseries and suppliers and access to wholesale prices allow it to provide landscaping services at a low cost.
  • Government water rebates cover the cost of Turf Terminators’ services, which it provides WITHOUT CHARGING ITS CUSTOMERS ANYTHING.

  

   

  \

   

  And while Turf Terminators and its nearly 600 new full-time employees (including, we assume, the guy in the raindrop suit shown above) tear up lawns, and while residents skimp on showers, the state’s lawmakers are doing what lawmakers in the US do best: nothing. 

  Via LA Times:

  Farrmers have watched fields turn fallow. Residents have skipped showers and ripped up lawns. But four years into California’s epic drought, Congress is status quo: gridlocked.

   

  The state’s splintered congressional delegation — despite its size and influence — has been stymied by fundamental disagreements over the causes of the drought and the role of the federal government in mitigating its consequences.

   

  If anything, recent fights have only hardened positions, with both sides questioning each other’s motives.

  Ultimately, the state now hopes Senator Dianne Feinstein can help to break the stalemate. We’ll leave you with the following, from Congressman Devin Nunes:

  “If they don’t do something soon they’re going to get the whole damn state out of water.”

   

  *  *  *

  4.1.15 Executive Order

  

  

  
  
  

  

• America, The Ponzi Scheme: A Commencement Speech For The Scammed

  By Tom Engelhardt of Tom’s Dipstach

  

  Going for Broke in Ponzi Scheme Americ:  You’ve Been Scammed!

  It couldn’t be a sunnier, more beautiful day to exit your lives — or enter them — depending on how you care to look at it. After all, here you are four years later in your graduation togs with your parents looking on, waiting to celebrate. The question is: Celebrate what exactly?

  In possibly the last graduation speech of 2015, I know I should begin by praising your grit, your essential character, your determination to get this far. But today, it’s money, not character, that’s on my mind. For so many of you, I suspect, your education has been a classic scam and you’re not even attending a “for profit” college — an institution of higher learning, that is, officially set up to take you for a ride.

  Maybe this is the moment, then, to begin your actual education by looking back and asking yourself what you should really have learned on this campus and what you should expect in the scams — I mean, years — to come. Many of you — those whose parents didn’t have money — undoubtedly entered these stately grounds four years ago in relatively straitened circumstances.  In an America in which corporate profits have risen impressively, it’s been springtime for billionaires, but when it comes to ordinary Americans, wages have been relatively stagnant, jobs (the good ones, anyway) generally in flight, and times not exactly of the best.  Here was a figure that recently caught my eye, speaking of the world you’re about to step into: in 2014, the average CEO received 373 times the compensation of the average worker.  Three and a half decades ago, that number was a significant but not awe-inspiring 42 times.

  Still, you probably arrived here eager and not yet in debt. Today, we know that the class that preceded you was the most indebted in the history of higher education, and you’ll surely break that “record.” And no wonder, with college tuitions still rising wildly (up 1,120% since 1978).  Judging by last year’s numbers, about 70% of you had to take out loans simply to make it through here, to educate yourself.  That figure was a more modest 45% two decades ago.  On average, you will have rung up least $33,000 in debt and for some of you the numbers will be much higher.  That, by the way, is more than double what it was those same two decades ago.

  We have some sense of how this kind of debt plays out in the years to come and the news isn’t good. Those of you with major school debts will be weighed down in all sorts of ways. You’ll find yourselves using your credit cards more than graduates without such debt.  You’ll be less likely to buy a home in the future.  A few decades from now, you’ll have accumulated significantly less wealth than your unindebted peers. In other words, a striking percentage of you will leave this campus in the kind of financial hole that — given the job market of 2015 — you may have a problem making your way out of.

  For those who took a foreign language in your college years, in translation you’ve paid stunning sums you didn’t have to leave yourself, like any foreclosed property, underwater. Worse yet, for those of you who dream of being future doctors, lawyers, financial wizards, architects, or English professors (if there are any of those anymore), that’s only the beginning. You’ll still have to pay exorbitantly for years of graduate school or professional training, which means ever more debt to come.

  Does this really sound like an education to you or does it sound more like a Ponzi scheme, like you’ve been scammed?

  Do I understand how all this works?  No.  I’m no expert on the subject.  What anyone should be able to see, however, is that the promise of higher education has, in this century, sunk low indeed and that what your generation has been learning how to endure while still in school is a form of peonage.  I’d binge drink, too, under the circumstances!

  Nobody feels good when they’ve been scammed, but at least you’re not alone on this great campus in needing to reassess what higher education means.  Many of your teachers turned out to be untenured part-timers, getting pitiful salaries.  They, too, were being scammed.  And even some of their esteemed tenured colleagues (as I know from friends of mine) are remarkably deep in the Ponzi pits.  It turns out that, as government money flowing onto campus has dried up, the pressure on some of those eminent professors, particularly in graduate programs, to essentially raise their own salaries has only been rising — a very highbrow version of peonage.  They increasingly need patrons, which generally means “friendly” corporations.  Talk about a scam!

  Demobilizing You

  Many of you undoubtedly think that your education is now over and it’s time to enter the “real world.”  I have news for you: you’ve been in that world for the last four years, hence the debt you’re dragging around behind you.  So, on a day when the sun’s in your eyes and it couldn’t be more apparent that the world’s not what you’ve been told it was, maybe you should apply the principles of the scam artist to the world you’re about to enter.  Unless you do so, you’ll simply be scammed again in the next phase of your life.

  Like the rest of us, presidents and politicians of every stripe have regularly told you that you belong to the one “indispensible” nation on the planet, a country “exceptional” in every way.  As a college-educated American, you’ve similarly been assured of how important you’ll be to that exceptional land.

  Get over it.  You’re going to find yourself living in an ever greyer, grimmer country — if you don’t believe me, check out the government’s unwillingness to fund essential infrastructure maintenance — to which you will be remarkably irrelevant.  And if the political elite, the plutocratic class, and the national security state have anything to do with it, in the future you’ll become ever more so.  In other words, you are to be relegated to the sidelines of what now passes for American life.

  Behind this reality, there’s a history.  Since the Vietnam era, the urge to demobilize Americans, to put them out to pasture, to stop them from interfering in the running of “their” country has only grown stronger.  When it comes to the military, for instance, the draft was sent to the trash bin of history in 1973 and most Americans were long ago demobilized by the arrival of an “all volunteer” force.  So, today, you have no obligation whatsoever to be part of that military, to serve in what is no longer, in the traditional sense, a citizen’s army.

  If that military isn’t really yours, the wars it’s been fighting since the dawn of the twenty-first century haven’t been your wars either, nor — despite the responsibility the Constitution reserves to Congress for declaring war — have they been that body’s.  Congress still has to pony up sums so extravagant for what’s charmingly called “defense” that the military budgets of the next seven countries combined don’t equal them.  It has, however, little genuine say about what wars are fought. Even when, as with the Islamic State, it is offered the modest opportunity to pass a new authorization for a war already long underway, its representatives, like most Americans, now prefer to remain on the sidelines.  In the meantime, the White House runs its own drone assassination campaigns via the CIA without anyone else’s say-so, while secretive paramilitaries and a secret military — the Special Operations forces — cocooned inside the larger military and growing like mad have changed the face of American war and it’s none of your business.

  Your role in all this is modest indeed: to pay as little attention as you want, endlessly thank the troops for their “service” when you run across them at airports or elsewhere, and leave it at that.  Of course, given the sums, verging on a trillion dollars a year, that “we” now put into the U.S. military and related national security outfits, and given our endless wars, conflicts, raids, and secret operations, that military does at least provide some job opportunities, though it has its own version of job flight — to so-called private contractors (once known as “mercenaries”).

  And if you think it’s only the military from which you’ve been demobilized, think again.  In these last years, so much of what the American government does has been swallowed up in a blanket of heavily enforced secrecy and fierce prosecutions of whistleblowers.  An expanding national security state, accountable neither to you nor to the legal system, has proven eager indeed to surveil your life, but not be seen by you.  In growing realms, that is, what once would have been called “the people’s business” is no longer your business.

  Your role, such as it is, is to get out of the way of the real players.  As with the military, so with that national security state: Americans are to thank its officials and operatives for their service and otherwise, for their own “safety,” remain blissfully ignorant of whatever “their” government does, unless that government chooses to tell them about it.

  The Corruption Sweepstakes

  It hardly needs to be said that this isn’t the normal definition of a working democracy or, for that matter, of citizenship.  Other than casting a vote every now and then, you are to know next to nothing about what your government does in your name.  And speaking of that vote, you’re being sidelined there, too, and buried in an avalanche of money.  Admittedly, in the media campaign season that now goes on non-stop from one election to the next, sooner or later you can still enter a polling place, if you care to, and cast your ballot.  Otherwise step aside.  These days, the first primary season or “Koch primary” is no longer for voters at all.  Instead, prospective candidates audition for the blessings and cash of plutocrats.

  Just how the vast sums of money flooding into American politics do their dirty work may not matter that much.  Specific contributions from the .01%, enacting their version of trickle-down politics, may not even elect specific candidates.  What matters most is the deluge itself.  These days in the American political system, money quite literally talks (especially on TV).  Via ads, it screams.  In the 2016 election season in which an unprecedented $10 billion is expected to be spent and just about every candidate will need his or her “sugar daddies,” the politicians will begin to resemble you; that is, they will find themselves dragging around previously unheard of debts to various plutocrats, industries, and deep pockets of every sort for the rest of their careers.

  Take just two recent examples of the new politics of money.  As the New York Times reported recently, Florida Senator Marco Rubio has been supported by a single billionaire auto dealer, Norman Braman, for his entire political career.  Braman hired him as a lawyer, hired his wife as a consultant to a family foundation, financed his legislative agenda, helped cover his salary at a local college, helped him right his personal finances and deal with his debt load, and is now about to put millions of dollars into his presidential campaign.  Rubio, as the article indicates, has returned the favor.  Though no one would write such a thing, this makes the senator quite literally a “kept” candidate.  Other plutocrats like the Koch brothers and their network of investors, reputedly ready to drop almost a billion dollars into the 2016 campaign, have been more profligate in spreading around their support and favors.

  Now, jump across the political aisle and consider Hillary Clinton.  As the Washington Post reported recently, she received a payment from eBay of $315,000 for a 20-minute talk at a “summit” that tech company sponsored on women in the workplace.  Over the last 16 months, in fact, she and her husband have raked in more than $25 million for such talks.  Hillary’s speeches pulled in $3.2 million from the tech sector alone, which she’s now pursuing for more direct contributions to her presidential campaign.  “Less than two months [after the eBay summit],” the Post added, “Clinton was feted at the San Francisco Bay-area home of eBay chief executive John Donahoe and his wife, Eileen, for one of the first fundraisers supporting Clinton’s newly announced presidential campaign.”

  Say no more, right?  I mean, it’s obvious that no one pays such sums for words (of all things!), not without ulterior motives.  No deal has to have been made.  No direct or even indirect exchange of promises is necessary.  On the face of it, there is a word for such fees, as for Rubio’s relationship with Braman, as for the investor primaries of the new election season, as for so much else that involves “dark money” and goes to the heart of the present political process.  It’s just not a word normally used about our politicians or our system, not by polite pundits and journalists.  If we were in Kabul or Baghdad, not Washington or Los Angeles, we would know just what that word was and we wouldn’t hesitate to use it: corruption.

  The Un-Kept Americans

  We are, it seems, enmeshed in a new hybrid system, which fits the Constitution, the classic tripartite separation of powers, and the idea of democracy increasingly poorly. We have neither an adequate name for it, nor an adequate language to describe it. I’m talking here about the “real world” in which, at least in the old-fashioned American sense, you will no longer be a “citizen” of a functioning “democracy.”

  As that system, awash in plutocratic contributions to politics and taxpayer contributions to the military-industrial-homeland-security complex, morphs into something else, so will you, whether you realize it or not.  Though never thought of as such, your debt is part of the same system.  A society that programmatically trains its young into debt and calls that “higher education” is as corrupt as a wealthy country that won’t rebuild its own infrastructure.  Talk about the hollowing out of America: you are it.  No matter how substantial you may be in private, you are being impersonally emptied in what passes for the real world.

  If Marco Rubio and Hillary Clinton are kept politicians, then you are un-kept Americans.  You are the ones that no one felt it worth giving money to, only taking money from.

  Being on the sidelines, it turns out, is an expensive affair.  The question is: What are you going to do so that you aren’t there, and in debt, forever?

  Of course, there’s a simple answer to this question.  Think of it as the Rubio Solution.  You could each try to find your own billionaire.  But given the numbers involved and what you don’t have to offer in return, that seems an unlikely option.  Or, if you don’t want the version of higher education you experienced to morph into the rest of your lives, you — your generation, that is — could decide to stop thanking others for their “service” and leave those sidelines.

  They’re counting on you not to serve.  They assume that you’ll just stay where you are and take it, while they fleece the rest of us.  If instead you were to start thinking about how to head for the actual playing fields of America, I guarantee one thing: you’d screw them up royally.

  As you form into your processional now to exit this campus, let me just add: don’t underestimate the surprises the future has in store for all of us.  The people who sidelined you aren’t half as good at what they do as they think they are.  In so many ways, in fact, they’re a crew of bumblers.  They have no more purchase on what the future holds than you do.

  You’ve proved in these years that you can get by despite lousy odds.  You’ve lived a life to which no one (other than perhaps your hard-pressed parents) has made a contribution.  You’re readier than you imagine to take our future into your hands and make something of it.  You’re ready to become actual citizens of a future democracy.  Go for broke!

  Tom Engelhardt is a co-founder of the American Empire Project and the author of The United States of Fear as well as a history of the Cold War, The End of Victory Culture. He is a fellow of the Nation Institute and runs TomDispatch.com. His latest book is Shadow Government: Surveillance, Secret Wars, and a Global Security State in a Single-Superpower World.  This graduation speech was given only on the campus of his mind.

  

  

  
  
  

  

• The "Illegal Immigrant" Recovery? The Real Stunner In The Jobs Report

  Traditionally, when it comes to job numbers reported by the BLS’s Establishment (the source of the monthly nonfarm payrolls change) and Household (the source of the monthly unemployment rate data) surveys, there is a substantial discrepancy. However, in May’s far stronger than expected report, the two for the first time were almost identical: the Establishment Survey reported an increase of 280K jobs, while according to the Household survey 272K jobs were added.

  Impressive numbers in a month in which only 215K jobs were expected to be added.

  There were the usual kinks, of course. Two thirds of all jobs, according to the Establishment survey, were low-paying, low-quality jobs, primarily teachers, retail, temp help and waiters (something even CNBC has been forced to acknowledge):

  

   

  This has been the case throughout the recovery, and helps explain why while wage growth while barely rising for all workers, remains depressed and even negative inr eal terms for production and non-supervisory workers, which account for 83% of all US employment.

  

   

  There were other curiosities: the vast majority of jobs added in May, over 200K, were in the 20-24 age group, and the number of self-employed workers mysteriously soared by 350K to 10 million.

  But the biggest surprise came from Table 7, where the BLS reveals the number of “foreign born workers” used in the Household survey. In May, this number increased to 25.098 million, the second highest in history, a monthly jump of 279K.

  

   

  Assuming, the Household and Establishment surveys were congruent, this would mean that there was just 1K native-born workers added in May of the total 280K jobs added.

  Alternatively, assuming the series, which is not seasonally adjusted, was indicative of seasonally adjusted data, then the 272K increase in total Household Survey civilian employment in May would imply a decline of 7K native-born workers offset by the increase of 279K “foreign borns.”

  But while all of these comparisons are apples to oranges, using the BLS’ own Native-Born series, also presented on an unadjusted basis, we find the following stunner: since the start of the Second Great Depression, the US has added 2.3 million “foreign-born” workers, offset by just 727K “native-born”.

  

   

  This means that the “recovery” has almost entirely benefited foreign-born workers, to the tune fo 3 to 1 relative to native-born Americans!

  

   

  How does the BLS determine a foreign-born worker? This is its definition:

  The foreign born are persons who reside in the United States but who were born outside the country or one of its outlying areas to parents who were not U.S. citizens. The foreign born include legally-admitted immigrants, refugees, temporary residents such as students and temporary workers, and undocumented immigrants. The survey data, however, do not separately identify the numbers of persons in these categories.

  In other words, the “foreign-born” catogory includes both legal and illegal immigrants unfortunately, the BLS is unable, or unwilling, to distinguish between the two.

  As a result, it may well be, that the surprise answer why America’s labor productivity (which recently posted its worst 6 month stretch in 22 years) has plummeted in recent years and certainly months, confounding economists who are unable to explain why “solid” labor growth does not translate into just as solid GDP growth…

  

   

  … and why wage growth has gone precisely nowhere, is because the vast majority of all jobs since December 2007, or 75% to be specific, have gone to foreign-born workers, a verifiable fact. What is unknown is how many of these millions of “foreign-born” jobs have gone to illegal immigrant who are perfectly willing to work hard, and yet whose wage bargaining power is absolutely nil (after all they are happy just to have a job) thereby leading to depressed wages for native-born workers in comparable jobs, resulting in wage growth which over the past 8 years has been non-existant.

  

  Incidentally, this is the same lack of wage growth which has allowed the Fed to pump some $4 trillion into the stock market. Because far more than merely a domestic politics issues, the lack of wage growth and downstream inflation, is precisely what has permitted the Fed to maintain QE as long as it has.

  In other words, how many illegal workers cross the US border, may be the biggest variable shaping US monetary polic at the moment! And, in thought-experiment land, the more porous US immigration policy the longer the Fed will be allowed to maintain its ZIRP/QE experiment, and the higher the S&P will rise.
  

  Could it be that illegal immigration is the best friend of that 0.1% of the US population which has benefited exclusively from the Fed’s relentless injection of liquidity into risk assets via either ZIRP of QE?

  Note: this article is not meant to side on either side of the illegal immigration debate: the upcoming presidential elections will do enough of that. It merely seeks to fill a gaping hole in economist models which are unable to explain or rationalize why America’s seemingly “booming” jobs recovery, which is “firing on all fours” according to the BLS, is not manifesting itself in either inflationary pressures, or broad economic productivity.

  Source: Native-born workers; Foreign-born workers

  

  

  
  
  

  

• Capital Controls Explained: Argentina Edition

  By Simon Black of Sovereign Man

  Capital Controls Explained: Argentina Edition

  If there’s one thing I love about Argentina, it’s that no rational person here trusts the government.

  They’ve been screwed over so many times before by their politicians (and the banking system), they know it’s all lies.

  Curiously it keeps happening.

  This place has been enduring some of the worst measures imaginable– capital controls and exchange controls. Price controls. Media controls.

  The government controls nearly every aspect of the economy; in fact, Argentine President Cristina Fernandez de Kirchner actually told her nation on Wednesday that without the state there would be no growth.

  (Amazingly she followed that up with “No one can teach us how to make the economy grow.”)

  Yet despite being admittedly clueless, Cristina campaigns for even more government control, and even more authority.

  This is so typical of bankrupt nations.

  When governments find themselves in financial trouble because of the stupid decisions that they’ve made, their first response is to award themselves even more power to make even stupider decisions.

  And among the stupidest decisions that any government can make is imposing capital controls… something that Argentina has in abundance.

  Capital controls are like the Matrix; you can’t really explain what they are. You have to show people. Argentina does not disappoint.

  For years now, the government has heavily restricted the flow of funds out of the country.

  It’s actually a criminal offense to leave the territory with more than 10,000 USD in cash.

  Transferring money out of the country through the banking system requires significant paperwork.

  One of the first things they’ll do is bounce your funds transfer request to the tax office so that the government can ensure they’ve taken their fair share of your savings.

  Then, whatever funds are allowed to leave must be transferred at the official exchange rate, which is presently about 30% worse than the street rate (what they call the ‘blue rate’).

  This means that on top of already soaring inflation, taxes, and tariffs, locals are effectively paying 30% more for goods and services, especially anything that’s imported.

  For foreigners who don’t earn their money in pesos, Argentina is an attractive bargain. But for the average guy on the street here, life is painfully expensive. And it gets worse.

  That’s what happens with capital controls: you see a rapid decline in your standard of living as the government traps your savings in a bankrupt system.

  It’s like lying on the ground with a blindfold on while the government builds a coffin all around you.

  Little by little they fasten together all the sides, and then the top, nail by nail.

  You can’t see precisely what’s happening. But your senses tell you that something’s going on. And if you wait too long to get out of there, you’ll be trapped.

  Capital controls are like a coffin for your savings.

  And if you wait too long to at least move a portion of your money somewhere else, everything you’ve ever worked to achieve can be trapped and heavily devalued.

  The people here who have done well in Argentina’s never-ending financial crisis are the ones who established accounts abroad and moved money while they still had the chance.

  (Coincidentally one of the trending jurisdictions for Argentines to hold their money these days is Hong Kong.)

  Argentina is not alone– this is the path that nearly every bankrupt nation ends up following. Greece (and other nations in Europe) are already going down this road.

  It would be foolish to think that any government with an unsustainably high (and growing) debt level would fare any better.

  Argentina wasn’t always this way. It used to be one of the wealthiest in the world.

  But it’s an important reminder that no country– no matter how rich its economy or how large it’s military is today– is immune to the universal law of prosperity.

  Just like regular people, governments and nations must produce more than they consume. Those who don’t will run into trouble.

  They can delay. They can deceive. But they can never avoid the decline.

  

  

  
  
  

  

• "Einstein" Fooled By "Chinese" Hackers In Massive Government Data Breach

  On Friday, Beijing responded to allegations from Washington that China was responsible for a cyberattack on the US Office of Personnel Management that compromised the personal data of some 4 million government employees. 

  The accusations, China’s foreign ministry said, are “irresponsible” and “groundless.” 

  The OPM breach is the latest in a string of cyber ‘incidents’ that have coincidentally occurred in the wake of the Pentagon’s new cyber strategy. Here’s a recap:

  Since the announcement by Defense Secretary Ash Carter, the following cyber ‘events have occurred’: Penn State reports hackers have been stealing data from the university’s DoD-affiliated engineering department for years (blamed on Chinese hacker spies), the IRS says at least 10,000 tax returns have been compromised (blamed on “Russian organized crime syndicates”), and, on Thursday evening, Washington reportswhat may end up being the largest data breach in history (blamed on China). As noted last month, these events represent a remarkable step up the cyber attack accusation ladder compared to Washington’s attempt to blame North Korea for cyber-sabotaging James Franco and Seth Rogen last year.

  Whether or not the most recent virtual attack on the US did indeed emanate from China or one of Washington’s other so-called “cyberadversaries” (the list includes Iran, Russia, and North Korea) will likely never be known the public, but rest assured the blame will be placed with a state actor so as to ensure the DoD has some precedent to refer to when, for whatever reason, the Pentagon decides it’s time to deploy an “offensive” cyberattack later on down the road.

  Irrespective of where the attack originated, it appears obsolete technology was ultimately to blame, because as Bloomberg reports, “Einstein” wasn’t much help in preventing the intrusion. 

  Via Bloomberg:

  The hackers who stole personal data on 4 million government employees from the U.S. Office of Personnel Management sneaked past a sophisticated counter-hacking system called Einstein 3, a highly-touted, multimillion-dollar and mostly secret technology that’s been years in the making.

   

  It’s behind schedule, the result of inter-agency fights over privacy, control and other matters, and only about half of the government was protected when the hackers raided OPM’s databases last December.

   

  It’s also, by the government’s own admission, already obsolete..

   

  Over the last several months, U.S. officials have said that perimeter-based defenses such as Einstein, even backed by the National Security Agency’s own corps of hackers, can never prevent break-ins.

   

  Like banks and technology companies, government agencies must move to a model that assumes hackers will always get in, specialists said. They’ll need to buy cutting-edge technologies that can detect intruders inside networks and eject them quickly, before the data is gone.

  Of course that likely won’t be possible, because after all, no self-respecting bureaucracy processes important initiatives expeditiously and no modern US lawmaking body actually legislates.

  Given the slow pace of government acquisition, the inter-agency rivalries and budget fights, though, the initiative may take several years or more to implement, leaving the possibility that the new technology will be old by the time it’s installed.

   

  Congress has yet to act on the personnel agency’s Feb. 2 request for a $32 million budget increase for fiscal 2016, said Senator Angus King, a Maine independent, in an interview.

   

  “Most of the funds,” the agency said, “will be directed towards investments in IT network infrastructure and security.”

   

  The latest intrusion points to the need for Congress to pass a cybersecurity bill, White House Press Secretary Josh Earnest said. He stopped short of saying whether the measure would have prevented the OPM breach.

  That looks a bit like an attempt on the administration’s part to put the blame on an ineffectual Congress, which would seem to be counterproductive at a time when there is clearly a need for less pettiness and more compromise. Some lawmakers were quick to acknowledge this and moved swiftly to rise above Presidential finger-pointing by … pointing fingers back at the President.

  “It’s too early to determine at this point what precisely would have prevented this particular cyber-intrusion,” Earnest said Friday at a press briefing. “What is beyond argument is that these three pieces of legislation that the president sent to Congress five months ago would significantly improve the cybersecurity of the United States, not just the federal government’s cybersecurity, but even our ability to protect private computer networks”..

   

  “Where is the leadership?” said Cory Fritz, a spokesman for House Speaker John Boehner, an Ohio Republican. “The federal government has just been hit by one of the largest thefts of sensitive data in history, and this White House is trying blame anyone but itself. It’s absolutely disgusting.” 

  As you can see, everyone appears to be on the same page here as both the Executive and Legislative branches look set to work together on a comprehensive, bipartisan approach to preventing cyber intrusions. 

  Fortunately for the millions of federal employees who are now left to wonder whether or not their personal information is safe on government servers, Defense Secretary Ash Carter may ultimately take matters into his own hands by consulting someone who knows a thing or two about using technology to co-opt personal information:

  Defense Secretary Ashton Carter spoke to technology leaders in Palo Alto, California, in April, tossing around ideas for recruiting engineers for temporary missions in government and meeting with Facebook’s Mark Zuckerberg. 

  Have no fear America, Facebook will cyber-protect you from belligerent foreign governments.

  

  

  
  
  

  

• What Happens To Stock Prices After Layoffs

  Submitted by Daniel Drew of Dark Bid

  

  What Happens To Stock Prices After Layoffs

  Increasing synergies. Downsizing. Staying nimble. Cutting back. Restructuring. What do all these corporate buzzwords have in common? They’re all bullshit explanations for why you’re about to lose your job after years of commitment to the company.

  As the market climbs higher and higher, and we approach the ultimate privatization of all capital, it seems like the corporate propaganda is actually true. Maybe layoffs are making companies more efficient, and this creates shareholder value. The foreigners and the robots can replace us, and the shareholders will be better off.

  A case study of two of the largest conglomerates in America defies the message that the American worker is no longer needed. Consider General Electric and Honeywell. The International Business Times recently published an article called, “At General Electric Company, Workers Struggle To Find Footing As Shareholders Reap Windfalls.” GE threatened to close its capacitor plant in upstate New York. They said the only way they would keep the plant open was if the workers agreed to a pay cut from $28 to $11. The United Electrical Workers wouldn’t agree to that, so GE closed the plant and moved it to Clearwater, Florida. At the new plant, there is no union, and GE can pay their employees low wages.

  Meanwhile, GE buys back billions of dollars of its own stock, and CEO Jeff Immelt makes millions. Adam Hartung of Forbes called GE a case of “total leadership failure.” Ironically, Immelt is on the board of directors at The Robin Hood Foundation. Because nothing says “Robin Hood” like underpaying your employees and keeping the money for yourself. He is also the Chairman of The President’s Council on Jobs and Competitiveness. Immelt knows all about jobs and how to get rid of them. GE has eliminated 16,000 positions in the United States since 2008.

  At Honeywell, things are different. CEO David Cote wrote an article in the Harvard Business Review about his company’s “no layoff policy.” Instead of laying people off during the 2008 crash, they furloughed their employees to spread the pain around equally. This actually used to be standard corporate policy. Peter Cappelli, author of “Why Good People Can’t Get Jobs,” said,

  Until 1985 the U.S. Bureau of Labor Statistics didn’t even have a category for permanent job loss. Until then the assumption was that if a company laid you off, it would rehire you when the economy picked up. That changed during the 1981-1982 recession.

  By avoiding layoffs, companies can sidestep the cost of constant turnover. The whole process of hiring and firing is much more expensive than one would think. Less churn is better for everyone. A look at the 10-year stock performance of GE and HON is evidence of this. General Electric lost 21%, and Honeywell gained 164%.

  

  For Cote, it’s personal: He used to work at GE until Jack Welch, the former CEO, told him he would not be his successor. Now, with fair labor policies and an outperforming stock price, Cote has the last laugh.

  However, just when you start to trust a corporation, this happens:

  

  

  
  
  

  

• A Hopeful Edward Snowden Says "The Balance Of Power Is Beginning To Shift"

  It has been two years ago since Edward Snowden released to the world a trove of proof that the NSA, the US’ top spy organization, had been focused as much on spying on its own people as on threats from abroad, in the process crushing countless constitutional civil and personal liberties. For his whistleblowing efforts, he was forced into self-appointed exile in Russia to avoid a lengthy prison sentence in the US.

  Which is ironic, because on June 2, with the passage of the “Freedom Act” (which actually is an acronym for Uniting and Strengthening America by Fulfilling Rights and Ending Eavesdropping, Dragnet-collection and Online Monitoring Act), the NSA’s recording of US electronic communications officially ended, in effect validating Snowden’s efforts at halting the US conversion into a totalitarian police state.

  In reality NSA surveillance did not really end: bulk collection of Americans’ metadata is still allowed by phone companies, which is then accessible by the NSA. According to skeptics this makes intrusion into US private lives even more deliberate as private corporations are not subject to FOIA requests or government intervention: in effect Obama has washed his hands of all supervision over data collection even as the NSA still has full access to everything it could ever ask for (it is unclear why the massive NSA spy facility in Bluffdale, Utah will continue existing if the NSA is no longer allowed to intercept and record data).

  Still, for Snowden this was a minor, yet massive at the same time, victory. This is what he said in an op-ed in the aftermath of the passage of the Freedom Act:

  Privately, there were moments when I worried that we might have put our privileged lives at risk for nothing — that the public would react with indifference, or practiced cynicism, to the revelations.

   

  Never have I been so grateful to have been so wrong.

   

  Two years on, the difference is profound. In a single month, the N.S.A.’s invasive call-tracking program was declared unlawful by the courts and disowned by Congress. After a White House-appointed oversight board investigation found that this program had not stopped a single terrorist attack, even the president who once defended its propriety and criticized its disclosure has now ordered it terminated.

   

  This is the power of an informed public.

  Or, perhaps far worse, this is the power of the government to obfuscate, and to pretend it is reforming when in reality it is hunkering down even further.

  The answer remains to be seen, but for now Snowden is granted a moment of optimism. His op-ed ends:

  At the turning of the millennium, few imagined that citizens of developed democracies would soon be required to defend the concept of an open society against their own leaders.

   

  Yet the balance of power is beginning to shift. We are witnessing the emergence of a post-terror generation, one that rejects a worldview defined by a singular tragedy. For the first time since the attacks of Sept. 11, 2001, we see the outline of a politics that turns away from reaction and fear in favor of resilience and reason. With each court victory, with every change in the law, we demonstrate facts are more convincing than fear. As a society, we rediscover that the value of a right is not in what it hides, but in what it protects.

  Of course, his view that the “balance of power” has shifted will be validated when he returns on US soil and is not promptly handcuffed and whisked off to prison where he spend the next 20 years of his life. Sadly for him, and the post-terror generation, the balance has more more shifting to do, before there are real, tangible changes.

  Below is his full NYT Oped:

  The World Says No to Surveillance

  Two years ago today, three journalists and I worked nervously in a Hong Kong hotel room, waiting to see how the world would react to the revelation that the National Security Agency had been making records of nearly every phone call in the United States. In the days that followed, those journalists and others published documents revealing that democratic governments had been monitoring the private activities of ordinary citizens who had done nothing wrong.

  Within days, the United States government responded by bringing charges against me under World War I-era espionage laws. The journalists were advised by lawyers that they risked arrest or subpoena if they returned to the United States. Politicians raced to condemn our efforts as un-American, even treasonous.

  Privately, there were moments when I worried that we might have put our privileged lives at risk for nothing — that the public would react with indifference, or practiced cynicism, to the revelations.

  Never have I been so grateful to have been so wrong.

  Two years on, the difference is profound. In a single month, the N.S.A.’s invasive call-tracking program was declared unlawful by the courts and disowned by Congress. After a White House-appointed oversight board investigation found that this program had not stopped a single terrorist attack, even the president who once defended its propriety and criticized its disclosure has now ordered it terminated.

  This is the power of an informed public.

  Ending the mass surveillance of private phone calls under the Patriot Act is a historic victory for the rights of every citizen, but it is only the latest product of a change in global awareness. Since 2013, institutions across Europe have ruled similar laws and operations illegal and imposed new restrictions on future activities. The United Nations declared mass surveillance an unambiguous violation of human rights. In Latin America, the efforts of citizens in Brazil led to the Marco Civil, an Internet Bill of Rights. Recognizing the critical role of informed citizens in correcting the excesses of government, the Council of Europe called for new laws to protect whistle-blowers.

  Beyond the frontiers of law, progress has come even more quickly. Technologists have worked tirelessly to re-engineer the security of the devices that surround us, along with the language of the Internet itself. Secret flaws in critical infrastructure that had been exploited by governments to facilitate mass surveillance have been detected and corrected. Basic technical safeguards such as encryption — once considered esoteric and unnecessary — are now enabled by default in the products of pioneering companies like Apple, ensuring that even if your phone is stolen, your private life remains private. Such structural technological changes can ensure access to basic privacies beyond borders, insulating ordinary citizens from the arbitrary passage of anti-privacy laws, such as those now descending upon Russia.

  Though we have come a long way, the right to privacy — the foundation of the freedoms enshrined in the United States Bill of Rights — remains under threat. Some of the world’s most popular online services have been enlisted as partners in the N.S.A.’s mass surveillance programs, and technology companies are being pressured by governments around the world to work against their customers rather than for them. Billions of cellphone location records are still being intercepted without regard for the guilt or innocence of those affected. We have learned that our government intentionally weakens the fundamental security of the Internet with “back doors” that transform private lives into open books. Metadata revealing the personal associations and interests of ordinary Internet users is still being intercepted and monitored on a scale unprecedented in history: As you read this online, the United States government makes a note.

  Spymasters in Australia, Canada and France have exploited recent tragedies to seek intrusive new powers despite evidence such programs would not have prevented attacks. Prime Minister David Cameron of Britain recently mused, “Do we want to allow a means of communication between people which we cannot read?” He soon found his answer, proclaiming that “for too long, we have been a passively tolerant society, saying to our citizens: As long as you obey the law, we will leave you alone.”

  At the turning of the millennium, few imagined that citizens of developed democracies would soon be required to defend the concept of an open society against their own leaders.

  Yet the balance of power is beginning to shift. We are witnessing the emergence of a post-terror generation, one that rejects a worldview defined by a singular tragedy. For the first time since the attacks of Sept. 11, 2001, we see the outline of a politics that turns away from reaction and fear in favor of resilience and reason. With each court victory, with every change in the law, we demonstrate facts are more convincing than fear. As a society, we rediscover that the value of a right is not in what it hides, but in what it protects.

  

  

  
  
  

  

• Dollar Outlook

  The strong US employment data stopped the dollar’s downside correction in its tracks.  It offset the unwinding of the long German bund/short euro hedge that had sent the euro racing toward $1.14 after have fallen to $1.0820 in late-May.   The Japanese yen and New Zealand dollar fell to new multi-year lows. 

   

  The US job growth was the strongest in five months.  It follows other data that indicate that the Q1 contraction is not a fair representation of the economy.  Although the IMF opined that the Fed should wait until next year to raise rates, lift-off in September still seems to be the most likely scenario.   Next week’s retail sales data is expected to show American consumers resumed their shopping in May (consensus 1.1%) after taking April off (flat). 

   

  If we are right, and the dollar’s two-month downside correction is over, the Dollar Index should rise above the 97.80 area. Then it should challenge the trend line drawn off the March and April highs which comes in near 99.00 at the end of the month.  We would peg initial support in the 95.80 area. 

   

  The euro reversed low on June 4 as its became clear that Greece would going to refuse the demands of the official creditors for more austerity, tracing out a bearish shooting star pattern.  The strong employment report spurred follow through euro selling.  That selling saw the euro fall toward fulfilling the 61.8% retracement objective of it bounce off the $1.0820 area in late April.  That retracement level is found near $1.1035.  The euro pre-weekend sell-off stopped near $1.1050.  A move now above $1.1200 would neutralize the bearish technicals.

   

  The dollar rallied to JPY125.85 before the weekend, spurred by the sharp rise in US Treasuries and Fed expectations.  We often see the dollar-yen rate in ranges, and when it looks like it is trending, it is often moving from one range to another.   The lower end of the new range appears to be in the JPY123.50 area.   The market is looking for the upper end.   As these levels have not been seen since 2002, it is difficult to have much confidence in picking a chart point.   We suspect it may be in the JPY126.50-JPY127.00 area.   

   

  Ahead of the G7 summit, Japanese officials seemed to have tried leaning a little against the tide.  Several talked about the need to avoid disruptive moves.    The sub-text to its G7 partners was that the yen’s depreciation was not of their doing.  Three-month implied volatility rose to 10% at the end of May, and although the dollar has risen to new highs, implied vol finished the week at its lowest level since May 26 (~8.78%). 

   

  Sterling may be carving out a potential head and shoulders pattern.  The left shoulder was made in late-April by the spike to about $1.55.  The head was the post-election rally that briefly extended through $1.5800.  The right shoulder may have been carved out in recent days that ended with the spike to $1.5440.  The neckline is near $1.5180, which corresponds to the 100-day moving average (~$1.5170) and the 50% retracement (~$1.5190) of the rally from the multi-year low set in mid-April.  The pattern projects back to those lows.   

   

  The US dollar spent last week range-bound against the Canadian dollar.  Canada reported stronger than expected employment data of its own before the weekend.   It was the only currency to gain against the dollar on Friday.  While Australia and New Zealand are expected to cut rates, the Bank of Canada is on hold.  The second consecutive month of strong full-time jobs growth (the 77.8k full times positions would be the equivalent of the US growing more than 780k jobs in a two-month period), and greater confidence in the US economic recovery story, reduces the need for additional stimulus. Support is seen near CAD1.2370-CAD1.2400, and a break could see CAD1.2250-80.   

   

  The Aussie traded to almost $0.7820 on the back of a stronger than expected Q1 GDP report in the middle of the week, only to fall back to the recent lows near $0.7600 on poor April trade and retail sales and the contrasting strong US jobs data.   Corrective upticks could see it recover into the $0.7660-80 area.   The multi-year low was set in early April near $0.7535.   There is no meaningful chart support below there until the $0.7000 area.  

   

  Technical signals are giving little indication that the broad trading range in the July light sweet crude oil futures contract is about to end.  The lower end of the range is seen in the $56.50-80 area.  The upper end of the range is in the $61.50-70 area.  In the US oil rigs continue to slip but production remains strong.  Inventories were drawn down for five weeks (for a total around 12 mln barrels).  This appears to be largely accounted for by the increased demand by refineries as US gasoline demand is tracking ten-year highs. 

   

  Two forces lifted US 10-year Treasury yields in the past week.  First it was the sell-off in German bunds, in part encouraged by the diminished deflation risks.  From the June 1 low yield near 47 bp to June 4 high print (~1.0%), the yield doubled last week.  This pushed US Treasury yields higher.  The yield rose a little further on the strong employment data.  On the week, the 10-year Treasury yield rose 20 bp.  Among the major countries, only Japan (+8 bp) and Canada (+18) rose less.  The yield finished above the downtrend line drawn off the early January 2014 high near 3.05%.  The next targets are seen near 2.50% and then 2.65%   

   

  Of note, the 2-year yield rose only seven bp, and most of this took place in response to the employment figures.  The bearish flattening would seem to reflect the international dimension on the long end while the short-end is constrained by the anticipated gradual pace of Fed tightening, once lift-off takes place.   The 2-year yield is bumping against the multi-year highs seen in December 2014, January and March this year near 74 bp.  There is little between this and the 90 bp area seen in February and April 2011. 

   

  Rising US yields appeared to exert downside pressure on US stocks.  None of the major bourses rose last week.  Over the week, the S&P 500 lost a little more than 0.5%.  The S&P 500 found support ahead of 2080.  The technical condition deteriorated slightly, with both the RSI and MACDs moving lower, and the 5-day moving average broke below the 20-day average. 

   

   

  Observations based on speculative positioning in the futures market:

   

  1.  There were four significant gross position adjustments in the currency futures in the CFTC reporting week ending June 2.  The gross short speculative yen position continued to grow rapidly.  The nearly 20k contract increase is the third consecutive week of double digit growth.  During this time, the gross short position has risen by 70k contracts to stands at 132.4k.  The gross short speculative Australian dollar grew by 17.8k to 76.6k contracts.    The gross long and short Mexican peso positions grew significantly.  The gross long position rose 10k contracts to 34k, and the gross short position rose 22.7k contracts to 79.1k.

   

  2.  The increase in gross short positions accounted for the switch back to net short Australian dollar and Canadian dollar speculative positions.  The net Canadian dollar position had been long for the previous two reporting periods, but the 7.8k increase was sufficient to turn the net position short by a thousand contracts.  The net long position was trimmed by 600 contracts to 30.1k.  The net speculative Aussie position had been long for the past four reporting periods, but the 17,8k increase in the gross short position swung the net position to the short side by 13.3k contracts.  The gross longs were trimmed by 1.9k contracts.

   

  3.  The general pattern was to cut gross long currency futures positions as the US dollar rebounded.  There were three exceptions.  The gross long euro position increased by 5.3k contracts to 49.5k.  The gross long Swiss franc position rose by 1.3k contracts to 12.5k.  The gross long Mexican peso position rose 10k contracts to 34.0k.  The gross short currency futures positions were mostly grown. The two exceptions were the euro, which saw a 1.0k contract reduction (to stand at 215k contracts), and sterling, where the gross short position was pared by 1.8k contracts to 58.4k.

   

   

  4.  The speculative net short US 10-year Treasury position fell by 10k contracts to 73.6k.  This was a function of both longs and shorts being trimmed (15.8k and 25.8k contracts respectively).   The speculative net long light sweet crude oil futures position was reduced by 8.5k contracts to 339.5k. This was almost wholly the result of the liquidation of 7.6k long contracts (leaving 494.5k) and an increase of a little less than 1k short contracts (to 154.9k contracts).

  

  

  
  
  

  

Digest powered by RSS Digest

• Ron Paul Stunned That George Soros Seeks To "Expand War In Ukraine"

  Earlier this week, using hacked and leaked documents and pdfs created by, among others, George Soros’ most recent wife who is less than half his age, we showed something fascinating: the puppetmaster behind the entire Ukraine conflict may be none other than George Soros himself. To wit:

  Just days after George Soros warned that World War 3 was imminent unless Washington backed down to China on IMF currency basket inclusion, the hacker collective CyberBerkut has exposed the billionaire as the real puppet-master behind the scenes in Ukraine. In 3 stunning documents, allegedly hacked from email correspondence between the hedge fund manager and Ukraine President Poroshenko, Soros lays out “A short and medium term comprehensive strategy for the new Ukraine,” expresses his confidence that the US should provide Ukraine with lethal military assistance, “with same level of sophistication in defense weapons to match the level of opposing force,” and finally explained Poroshenko’s “first priority must be to regain control of financial markets,” which he assures the President could be helped by The Fed adding “I am ready to call Jack Lew of the US Treasury to sound him out about the swap agreement.”

  Needless to say, there was absolutely no mention of any of this in the broader media. However, despite the limited distribution of this very fascinating story which casts a vastly different light on the Ukraine conflict than one shone by the mainstream, it did catch the attention of one person: Ron Paul.

  In the following clip Ron Paul looks at the stunning implications of Soros’ involvement behind the scenes in Ukraine, how he may be pulling the strings in this most critical proxy war between East and West, and what he stands to gain.

  

  

  
  
  

  

• "The Simplest Way To Describe Keynesianism" In One Photo

  This is the simplest way to describe Keynesianism:

  

  via Alejandro Pedrosa

  

  

  
  
  

  

• Looking For The Next One: "All The Pieces Are Already In Position, Missing Now Only A Spark"

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  Looking For The Next One; Part 2, Finding Risk Rather Easily

  As noted in Part 1, The Fed sees no risks of bubble trouble because they are looking at it all from the 2008 perspective. That is completely wrong-headed; if there is a “next one” it will have nothing to do with subprime mortgages, or even mortgages and real estate. By March 2007, the conventional estimate is that there were $1.3 trillion in subprime mortgages outstanding, all of which caused inordinate decay in liquidity and pricing through wholesale mechanisms that turned out to be disastrously self-feeding and often contradictory (as an example, tranche pricing through correlation trading where correlation estimates were based on CDS prices derived from liquidity in hedging demand which traced back to tranche pricing). Everyone seems to simply assume that the subprime problem ended in 2008, if only by crash.

  That is true but only of mortgages. Deleveraging is myth as debt has still expanded, and greatly, just not in the same exact places. There are certainly auto and student loans that have exploded exponentially, especially in subprime categories, but if there is another credit bubble now, the third, it is undoubtedly corporate debt. The FOMC looks at corporate credit spreads being narrow and yields being low as a measure of its own success with QE, but that largely misses the real risks in such a condition – junk bonds are not meant to yield 5% or 6% because there is absolutely no cushion to that price!

  A junk bond that yields 12%, as it had historically, offers some interest cushion to the pricing in principle – that was the whole point of junk bonds to begin with, the basic financial factor of risk/reward to be gainfully compensated by recognizing and pricing much higher credit risk. Thus, if a junk bond issuer were to start trending toward negative factors it wouldn’t necessarily offer a disruptive circumstance as prices typically were not exaggerated until the very end closer to default. A junk bond issued at 5.5% offers absolutely no cushion, and worse, the entire predicate position of junk bonds at 5.5% is endless liquidity which artificially caps default rates at historical lows, self-feeding the upward trend in prices (if the weakest companies can get financing easily, they don’t default where they may have before but that does nothing to change their business circumstance especially in a weak economy). In other words, the fact of the corporate debt bubble is that it will, in the end, push defaults together into a single event rather than allow them to be interspersed more organically. Worse, the more that artificial impediment to creative destruction seeps the less of a rebalance there is in pricing.

  What good will a 5.5% yield be if defaults not only tick higher but do so in what looks like the snowball effect? That means the potential for selling is far, far higher under those circumstances than would ordinarily be the case where the Fed had not so intruded. Combine that with lack of liquidity systemically and the potential for disorder is enhanced beyond comprehension at this moment. Last month, Charter Communications floated three bond series of BB- junk, all priced with yields under 6%; May 2023 maturities with a worst yield of 5.125%; May 2025’s with a worst yield of 5.375%; and, May 2027’s with a worst yield of 5.875%. There isn’t even much “protection” or cushion in those prices if a recovery did actually show up and interest rates normalized, let alone systemic defaults finding general illiquidity.

  The problem seems to be, not unlike the 2003-07 period, lack of visibility. It seems as if there is vague awareness more generally about a junk bond problem but that it is taken as a minor affair; the vast majority of the deluge in corporate debt in this “cycle” has been investment grade. But that was also true of the housing finance debacle – $6 or $7 trillion in mortgages (depending on the source) overall but “only” $1.3 trillion in subprime. As I tabulated last week, corporate debt issuance (gross) was around $4.2 trillion in the QE3 period (defined as 2012-14) while junk gross was “only” $975 billion of that.

  

  Admittedly, this is a bit of mixed comparison, as gross issuance can often replace matured or outstanding debt or bonds, but I am just using the past three full calendar years on the corporate side. In some ways, that doesn’t even matter because these are all bonds that must be held somewhere by someone now (in other words, it is possible that a company may have issued a junk bond in 2012 and then floated a cheaper one in 2014 to retire the previous issue, meaning that there is some double counting in using gross issuance figures cumulatively, but given the short window here and the almost exponential increase in overall gross outstanding that is likely a limited occurrence).

  Some might view that as entirely manageable, especially as being only three-quarters the size of subprime mortgages in 2007. The overall credit market has swung far higher, meaning proportions dedicated to the riskiest sector is actually smaller, and junk bonds are traded much more lively and openly; subprimes and their related structures were highly illiquid and thus pricing was limited to narrow gauges.

  But that is not the extent of the corporate “subprime” problem, however, and it goes far greater to illiquidity and hidden regimes. In fact, leveraged loans may be the single largest problem in the corporate bubble universe under adverse conditions, even factoring any “gate” problems that will undoubtedly show up as corporate bond funds look to sell junk bonds if redemptions come in too hot. Leveraged loans are syndicated junk loans that are dispersed through the banking and financial system in almost exactly the same manner as MBS pieces were in the last bubble – and there is no real liquidity in them in which to offer robust and broad systemic pricing should it all go wrong.

  I wish this were a small problem, but the fact is that leveraged loan gross in the QE3 period actually far, far outpaces even junk bonds – some $1.6 trillion!

  

  And that’s not the fullest extent, either. We can add corporate debt CLO’s too, as even though not all are junk or of the leveraged loan type, they are essentially structured products with very low liquidity and open pricing just as dispersed throughout the financial system. That brings the total corporate bond bubble potential basis up to some $2.8 trillion!

  

  Not only is that an immense total, even if gross, it has taken place in a manner totally unknown to financial history. We have no real idea how corporate bond prices will perform with bond funds and leveraged loan “products” scattered so far and wide, inside and outside of the banking system, and with a decaying eurodollar system to try to hold it all together. If there is another financial crisis, it will indeed look nothing like 2008 in its consistency, but the patterns are all already arranged.

  All of this has taken place upon a foundation of illusion far too similar to the housing bubble – that economic growth would be sustained and robust, and that liquidity would be just as unfailing and dependable. That is the commonality among all asset bubbles, which the Yellen Doctrine asserts is unproblematic even where great financial imbalances are endemic; as they are assuredly now. That is a dangerous acceptance all its own, but for the Yellen Doctrine to survive, the flimsy bubble basis must as well. The herd is absolutely enormous and it will not take but a few to peel off toward the “sell” side to move prices into the snowball/stampede. The only reason that hasn’t happened yet is that the vast majority simply still don’t want to believe in any downside, especially one where the Fed got it all wrong; easy money is too much fun.

  How does all this maintain itself if and when economic growth tends toward the worst case and liquidity is steadily revealed as beyond sickly already?

  I don’t have the answers to that, obviously, but imagination being what it is this is not a pretty scenario. As stated at the outset, I wouldn’t even begin to venture a guess as the likelihood of it all going wrong other than to say it is much more realistic than is being talked about or even considered right now, and that a worst case at this point is really and truly a worst case. All the pieces are already in position, missing now only a spark. Maybe the Fed has more magic in its arsenal, but the eurodollar realities actually reveal that it never really did in the first place. There is now at least twice the leverage and still none of the financial cushion.

  

  

  

  
  
  

  

• Vietnam To Buy Fighter Jets, Drones From West To Counter Chinese 'Aggression'

  Earlier this week Philippine President Benigno Aquino — a self-proclaimed “amateur student of history” — warned Japanese lawmakers that the continual appeasement of China with regard to Beijing’s island construction project in the South China Sea poses a similar risk to the global balance of power as the pre-war appeasement of Hitler. 

  China did not appreciate the reference and had the following advice for “certain people in The Philippines”: 

  “…cast aside [your] illusions and repent [and] stop provocations and instigations.”

  In yet another sign that Beijing’s neighbors in the region (who have competing claims in the Spratlys) are seeking to guard against what they view as Chinese aggression, Vietnam is set to bolster its defense capabilities and deepen its security relationship with the US. 

  On a visit to Hanoi on Tuesday, Defense Secretary Ash Carter said the following:

  “As Defense Minister Gen. Phung Quang Thanh and I reaffirmed in our meeting today, we’re both committed to deepening our defense relationship and laying the groundwork for the next 20 years of our partnership. Following last year’s decision by the United States to partially lift the ban of arms sales to Vietnam, our countries are now committed for the first time to operate together, step up our defense trade and work toward co-production.” 

  The DoD’s official press release suggests Washington will play an active role in helping Vietnam to defend its claims via the build up of the country’s “maritime security capacity”:

  Carter also discussed maritime security issues and the South China Sea. He pledged continued U.S. support to build Vietnamese maritime security capacity and underscored U.S. commitment to a peaceful resolution to disputed claims there made in accordance with international law.

  More specifically, the US will facilitate the purchase by Vietnam of $18 million in American Metal Shark patrol vessels which will be used for “peacekeeping operations.” But that’s hardly the end of it. As Reuters reports, Vietnam is now looking to Western defense contractors to purchase drones, fighter jets, and maritime patrol aircraft. 

  Via Reuters:

  Vietnam is in talks with European and U.S. contractors to buy fighter jets, maritime patrol planes and unarmed drones, sources said, as it looks to beef up its aerial defenses in the face of China’s growing assertiveness in disputed waters.

   

  The battle-hardened country has already taken possession of three Russian-built Kilo-attack submarines and has three more on order as part of a $2.6 billion deal agreed in 2009. Upgrading its air force would give Vietnam one of the most potent militaries in Southeast Asia.

   

  The previously unreported aircraft discussions have involved Swedish defense contractor Saab, European consortium Eurofighter, the defense wing of Airbus Group and U.S. firms Lockheed Martin Corp and Boeing, said industry sources with direct knowledge of the talks.

   

  Defense contractors had made multiple visits to Vietnam in recent months although no deals were imminent, said the sources, who declined to be identified because of the sensitivity of the matter. Some of the sources characterized the talks as ongoing.

   

  One Western defense contractor said Hanoi wanted to modernize its air force by replacing more than 100 ageing Russian MiG-21 fighters while reducing its reliance on Moscow for weapons for its roughly 480,000-strong military.

  Here again we see the US facilitating the buildup of arms in the name of bolstering defense and increasing the “security capabilities” of nations Washington views as strategic partners.

  As indicated above, maintaing close military ties with Hanoi accomplishes two goals. First, it allows the US to rally yet another regional “ally” around the idea that China’s activities in the Spratlys constitute an unacceptable attempt to project power by redrawing maritime boundaries and creating thousands of acres of sovereign territory which did not previsouly exist. 

  Second, the West is more than happy to assist Vietnam with any shift away from relying on Russia for weapons (recall that in March, the US was quite displeased that Hanoi was still allowing nuclear-capable Russian bombers to refuel at a former US airbase).

  In the end, this is a win-win for Washington and marks yet another point of escalation in the South China Sea standoff.

  

  

  
  
  

  

• Memo To The Fed And Jon Hilsenrath: We're Not Here To Enrich Your Corporate Cronies

  Submitted by Charles Hugh-Smith from the OfTwoMinds blog,

  Memo to the Fed: you are the enemy of the middle class, capitalism and the nation. 

  The Federal Reserve is appalled that we’re not spending enough to further inflate the value of its corporate and banking cronies. In the Fed’s eyes, your reason for being is to channel whatever income you have to the Fed’s private-sector cronies–banks and corporations.

  If you’re being “stingy” and actually conserving some of your income for savings and investment, you are Public Enemy #1 to the Fed. Your financial security is nothing compared to the need of banks and corporations to earn even more obscene profits. According to the Fed, all our problems stem from not funneling enough money to the Fed’s private-sector cronies.

  Fed media tool Jon Hilsenrath recently gave voice to the Fed’s obsessive concern for its cronies’ profits, and received a rebuke from the middle class he chastised as “stingy.” Hilsenrath Confused Midde-Class “Responded Strongly” To “Offensive” Question Why It Isn’t Spending.

   

  Memo to the Fed and its media tool Hilsenrath: we’re not here to further enrich your already obscenely rich banker and corporate cronies by buying overpriced goods and services we don’t need. Our job is not to spend every cent we earn on interest to banks and mostly-garbage corporate goods and services. Our job is to limit the amount we squander on interest and needless spending. Our job is to build the financial security of our families by saving capital and prudently investing it in assets we control (as opposed to letting Wall Street control our assets parked in equity and bond funds).

  Your zero-interest rate policy (ZIRP) has gutted our ability to build capital safely. For that alone, you are an enemy of the middle class. Let’s say we wanted to buy a real asset that we control, for example, a rental house, rather than gamble our retirement funds on Wall Street’s Scam du Jour (stock buybacks funded by debt, to name the latest and greatest scam).

  Thanks to your policies of ZIRP and unlimited liquidity for financiers, we’ve been outbid by the Wall Street/private-equity crowd–your cronies and pals. They pay almost nothing for their money and they don’t need a down payment, while we’re paying 4.5% on mortgages and need 30% down payment for a non-owner occupied home. Who wins that bidding process? Those with 100% financing at near-zero rates.

  Here’s a short list of stuff we don’t need to buy:

  1. New house: overpriced. Debt-serfdom for a wafer-board/sawdust-and-glue mansion? Pay your banker buddies $250,000 in interest to buy a $300,000 house? Hope the bursting of the real estate bubble doesn’t wipe out whatever equity we might have? No thanks.

  2. New vehicle: overpriced. We can buy a good used car and a can of “new car smell” for half the price, or abandon car ownership entirely if we live in a city with peer-to-peer transport services. We can bicycle or ride a motorscooter.

  3. Anything paid with credit cards.

  4. Any processed food.

  5. A subscription to the Wall Street Journal and other financial-media cheerleaders for you, your banker buddies and Corporate America.

  How Wall Street Devoured Corporate America: Thirty years ago, the financial sector claimed around a tenth of U.S. corporate profits. Today, it’s almost 30 percent

  Here’s how your cronies have fared since you started your low-interest rate/free money for financiers policies circa 2001: corporate profits have soared:

  

  Now look at median household income adjusted for inflation: down 4%–inflation which we know is skewed to under-weight the big ticket items such as healthcare and college education that are skyrocketing in cost:

  

  And here’s how the middle class has fared since the Federal Reserve made boosting Wall Street and the too big to fail banks its primary goal, circa 1982: the bottom 90% have treaded water for decades, the top 9% did well and the top 1% reaped fabulous gains as a result of your policies.

  

  If you’re wondering why we’re not spending, look at our incomes (going nowhere), earnings on savings (essentially zero) and the future you’ve created: ever-widening income disparity, ever-greater financial insecurity, ever-higher risks for those forced to gamble in your rigged casino, and a political/financial system firmly in the hands of your ever-wealthier cronies.

  Capital–which includes savings–is the foundation of capitalism. If you attack savings as the scourge limiting corporate profits, you are attacking capitalism and upward mobility. The Fed is not supporting capitalism; rather, the Fed’s raison d’etre is crony-capitalism, in which insiders and financiers get essentially free money from the Fed in unlimited quantities that they then use to buy up all the productive assets.

  Everyone else–the bottom 99.5%–is relegated to consumer: you are not supposed to accumulate productive capital, you are supposed to spend every penny you earn on interest paid to banks and buying goods and services that further boost corporate profits.

  This inversion of capitalism is not just destructive to the nation–it is evil. Funneling trillions of dollars in free money for financiers while chiding Americans for not going deeper into debt is evil.

  Memo to the Fed: you are the enemy of capitalism, the middle class and the nation.

  * * *  

  And, best of all, all of this was known and described over 100 years ago when the motives behind the Aldrich Plan were revealed to the American people, and while rejected by Congress in 1912, it served as the foundation of the Federal Reserve Act of 1913 which ultimately led to the current economic devastation.
  

  
  

  

  

  
  
  

  

• DoJ To Tax Wall Street (Again) In MBS Probe

  Fresh off a farcical ‘crack down’ on “bad actor” banks that colluded to rig the $5 trillion-a-day FX market, the DoJ is launching another faux crusade against Wall Street.

  As a reminder, the Justice Department recently extracted guilty pleas from several TBTF banks in connection with forex manipulation. The entire effort was of course meaningless and ended with what amount to token fines and no jail time for any of the conspirators. Worse, the banks were able to obtain SEC waivers which ensured their ability to “efficiently” raise capital and participate in private offerings (among other important activities) would not be curtailed because after all, no one wants another “Arthur Andersen”.

  If you don’t see the connection between banks rigging FX markets and a decade-old accounting scandal, that’s because there isn’t one. Here’s what we said last month regarding the excuse for allowing Wall Street’s to obtain SEC waivers:

  The excuse for allowing Wall Street to skirt the very penalties that were put in place as a result of the very things for which the banks are now being prosecuted is two-fold: 1) there’s the so-called ‘Arthur Andersen effect’ whereby the decade-old collapse of an accounting firm and the layoffs that accompanied it are somehow supposed to represent what would happen if a Wall Street bank were not able to claim seasoned issuer status, and 2) curtailing a major bank’s ability to issue capital “speedily and efficiently”, participate in private placements, and manage mutual funds represents a systemic risk.

  So, emboldened by its recent “unprecedented” prosecutorial success, the DoJ will now pursue a fresh round of MBS-related settlements with banks that knowingly packaged and sold shoddy CDOs.

  Via WSJ:

  Up to nine banks are in line for the next round of billion-dollar payments related to soured mortgages as federal and state officials prepare their next set of cases, people familiar with the matter said.

   

  The Justice Department and state officials, which already have reaped almost $37 billion from the largest U.S. banks, are now targeting U.S. and European banks. Settlements with Goldman Sachs Group Inc. and Morgan Stanley could be finalized as early as late June, these people said.

   

  The settlements relate to securities backed by residential mortgages that plunged in value during the financial crisis. Banks are expected to pay from a few hundred million dollars to $2 billion or $3 billion each, depending on their size and the level of misconduct they allegedly employed in arranging the securities, some of these people said. The deals, which are expected to come individually rather than as a group, are likely to stretch out over months as details are worked out, these people said. Negotiations with most banks are still in early stages, these people said..

   

  The Justice Department could pursue settlements with large U.S. regional banks when these settlements are over, in part based on the amount of mortgage-related securities they underwrote and sold, some of these people said..

   

  Other banks expected to settle in coming months include Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings PLC, Royal Bank of Scotland Group PLC,UBS AG and Wells Fargo & Co.

  Most of them have disclosed that they are being investigated for mortgage matters, but the timing and size of potential fines haven’t been reported before..

   

  These settlements would represent a passing of the torch to new U.S. Attorney General Loretta Lynch, since settlements with J.P. Morgan, Citigroup and Bank of America were negotiated under her predecessor, Eric Holder.

   

  

  (Attorney General Loretta Lynch)

  Ah, yes. The proverbial “passing of the torch” from one crusader for justice to another.

  Or, more accurately, Loretta Lynch is now the person in charge of shaking down Wall Street for government protection money. As long as the banks pay their “taxes”, no one will ever go to jail, fines will never amount to more than a fraction of the profits reaped from the activities under scrutiny, and, most important of all, the SEC will ensure that the rules designed to punish “bad actor” banks will never be enforced. 

  We’ve said it before and we’ll say it again: it’s good to be TBTF.

  

  

  
  
  

  

• Quantifying The Global Sovereign Bond "Carnage": $625 Billion Lost Since March, And Counting

  Submitted by David Stockman’s ContraCorner

  Stay Out Of Harm’s Way

  Shock waves have been rumbling through the global bond market in the last few days. On April 17 the yield on the 10-year German bund pierced through the 5bps level, but yesterday it tagged 100bps. That amounted to a 20X move in 39 trading days.

  It also amounted to total annihilation if you were front running Mario Draghi’s bond buying campaign on 95% repo leverage and didn’t hit the sell button fast enough. And there were a lot of sell buttons to hit. The Italian 10-year yield has soared from a low of 1.03% in late March to 2.21% last night, and the yield on the Spanish bond has doubled in a similar manner.

  Needless to say, this is not by way of a lamentation in behalf of the euro-bond speculators who have had their heads handed to them in recent days. After harvesting hundreds of billions of windfall gains since Draghi’s mid-2012 “whatever it takes ukase” they were overdue to get slapped around good and hard.

  Instead, what we have here is just one more striking demonstration that financial markets are utterly broken. The notion of honest price discovery might as well be relegated to the museum of financial history.

  The exact catalyst for yesterday’s panicked global bond sell-off, apparently, was Draghi’s public confession that although the ECB would stay the course on its $1.3 trillion QE program, it cannot prevent short-run “volatility” in the trading pits.

  Why that should be a surprise to anyone is hard to fathom, but it does crystalize the “look ma, no hands” essence of today’s markets. The trading herd goes in the direction enabled by the central banks until a few dare devils finally fall off their bikes, causing an unexpected pile-up and inducing the pack to temporarily reverse direction.

  Thus, it is not surprising that a few traders got caught flat-footed in recent days. In the case of the insanely over-valued Italian 10 year bond, for instance, the price went straight up (and the yield straight down) for nearly 33 months.

  

  What was happening during that interval, of course, had nothing to due with the fundamentals. Italy’s real GDP was actually 3% lower in Q1 than it had been at the time of Draghi’s 2012 pronouncement.

  

  Likewise, during the interim its political system has lapsed into complete paralysis, and its public debt ratio to GDP has continued to rise. Among major DM economies its crushing debt burden is exceeded only by that of Greece and Japan.

  

  The Italian job engineered by Draghi, however, merely illustrates the universal global condition. Namely, financial systems have been transformed into central bank managed gambling dens where prices have been massively falsified by ZIRP and QE, and where short-term trading movements are entirely capricious wavelets that bear no rhyme or reason or any relationship to real world economic conditions.

  Accordingly, the financial casinos are the most dangerous, unstable and destructive institutions on plant earth. Anyone who values their accumulated wealth would be well advised to get out of harm’s way, and the sooner the better.

  After all, there is nothing unique about the euro bond market. The carnage visited upon it in the last few days can strike anywhere; it amounted to nothing more than a momentary stampede of the trading herd that was triggered by the loose phraseology of a clueless central banker who had previously incited a monumental bubble in the euro bond markets.

  In that regard, the US treasury market is every bit as vulnerable to pancaking in response to a central bank mis-step. As it happened, the spillover from Europe resulted in an upward lurch of the 10-year treasury note from a yield of 2.09% five days ago to 2.43% yesterday. Self-evidently that whipsaw—–which saw the 10-year yield surge from a 1.65% low in late February—–had absolutely nothing to do with developments on the US fiscal front or American economy.

  Indeed, the US treasury market—-the single most important securities market in the world—has been untethered from the fundamentals for years now. That’s partly owing to the Fed’s massive direct purchases under QE ($3.5 trillion of treasuries and GSEs since September 2008), and also its complimentary enablement of carry trade speculators who piled into the belly of the curve every time Bernanke hinted that more QE was hovering just ahead.

  And why not. ZIRP is the mother’s milk of rampant speculation; it results in the drastic mis-pricing of securities carried on free repo money. On the fiscal front,  there has been zero improvement in the present value of the nation’s dismal long-run fiscal outlook since the fall of 2008. Uncle Sam’s acknowledged balance sheet debt has soared from $9 trillion to $18 trillion and the $100 trillion of unfunded entitlement liabilities have accreted by even more.

  Likewise, there is nothing in the macro-economic firmament—-GDP, jobs or the so-called full-employment gap—–that explains the downward direction of the 10-year yield or the undulating wavelets along the way. This is central bank intrusion and suffocation of the debt markets pure and simple.

  

  10 Year Treasury Rate data by YCharts

  But here’s the thing. The dozen or so people running the worlds central banks and related institutions have no idea what they are doing, and for the most part are academics and apparatchiks who are completely ignorant about markets, to boot.

  If you didn’t hear the latest emission of tommyrot from the head of the IMF, here it is. Seeing no goods and services “inflation” in a world that is drowning in excess capacity—–funded by years of central bank financial repression——-Christine Lagarde now opines that ZIRP should be extended well into 2016. That is, into its 90th month running.

  We think a rate hike would be better off in 2016,” said Christine Lagarde, the IMF’s managing director at a press conference……

   

  In its annual review of the U.S. economy, the IMF said the central bank said the Fed should wait for “more tangible signs” of wage or price inflation than are currently evident.

   

  Inflation won’t reach the Fed’s 2% annual inflation target until mid-2017, Lagarde said.

  There you have it. The world’s markets are on fire with financial asset inflation, but the recycled French political hack running the IMF, who apparently learned economics from the Wikipedia page on Keynes, does not even understand an obvious truth. Namely, that the single most important price in all of capitalism is the money market interest rate because its the cost of gambling stakes in the casino.

  Needless to say, when you tempt gamblers with free money—-and then you keep it flowing for 90 months running—-you are nurturing the financial furies. Indeed, the global financial system is literally booby-trapped with freakish speculations that will erupt any day now in a manner that will make the recent German bund carnage look like a sunday school picnic.

  According to the latest authoritative reckoning of the pre-IPO venture capital start-up pipeline, for example, the top 20 deals—-ranging from Uber, Snapchat, Pinterest, Airbnb and Dropbox through Pure Storage—–have a current valuation of $100 billion. That compares to funded cash equity of $25 billion—–almost all of which has been supplied within the last two or three years.

  That’s right. The Silicon Valley punters have marked-up their own investments by 4X in anticipation of dumping them on the greater fools who have been lured into the IPO market for the third slaughter of this century. Meanwhile, the torrent of “burn rate” cash pouring into the San Francisco housing market means that slumlords are now getting $2,000 per month in rents from a bed and bath to share with 20 other persons.

  This will end in a fiery immolation, but not just along the northern reaches of the San Andreas Fault. The systematic falsification of financial markets by the central banks have literally herded trillions worth of investable funds into the most risky precincts of the bond market in a desperate scramble for yield.

  As Jeff Snider pointed out yesterday, that has resulted in the issuance of $2.8 trillion of new junk bonds, leveraged loans and CLOs (collaterized loan obligations) in just the last three years. All of these securities are drastically overvalued, and none of them are traded in markets that have even a modicum of real liquidity.

  

  When the subprime mortgage market began to slouch towards its monumental melt-down in March 2007, outstandings totaled just $1.3 trillion. But just in this precinct of the US high yield market there is now upwards of $3 trillion of financial time-bombs ready to blow.

  The fact is, the world’s financial system is saturated with speculations fostered by nearly two-decades of central bank credit inflation. Just since 2006, the footings of central bank balance sheets have expanded from $6 trillion to upwards of $22 trillion.

  That’s all combustible monetary fuel that cannot be recalled; it can only be liquidated in the course of a monumental meltdown in the casino.

  So, yes, after the carnage of the past few days the global sovereign bond index has lost $625 billion since the bond bubble peak in late March. Call that spring training.

  

  

  
  
  

  

• Al-Qaeda Informant Says Yemen Lied To US, Secretly Channelled Money, Bombs

  In a speech on September 10, 2014, President Obama famously cited Yemen as a model of “success” in the war on terror. A little over six months later, Yemen was a failed state. 

  As we’ve documented exhaustively (here, here, and here for instance), the situation in Yemen is a reflection of failed US foreign policy. Washington’s tendency to pursue short-term, narrow-minded, geopolitical expediency at the expense of promoting long-term regional stability has led directly to multiple bloody proxy wars including the conflict that is unfolding in Yemen today. 

  As the US attempts to navigate what is now a hopelessly conflicted set of regional alliances, and as Washington tries to keep track of where the US supports Shiite militias versus where the CIA assists Sunni militants, a new picture has emerged of pre-Arab Spring Yemen. 

  In an exclusive interview with Al Jazeera, a former al-Qaeda informant for the Ali Abdullah Saleh government claims Abdullah Saleh and his lieutenants not only turned a blind eye to AQAP operations in the country, but in fact played a direct role in facilitating al-Qaeda attacks even as the government accepted anti-terrorism financing from the US government. 

  Via Al Jazeera:

  Hani Mujahid chose to tell his story to Al Jazeera because he felt trapped: When the al-Qaeda operative-turned Yemeni government informant tried to brief the CIA on his allegations that Yemen had been playing a double game in the fight against al-Qaeda, he found himself detained and badly beaten by Yemeni security personnel.

   

  No longer able to trust any of the stakeholders, he turned to the media to tell his story. If his allegations prove true, they will be deeply embarrassing to the US.

   

  But the testimony of men like Mujahid, erstwhile foot soldiers of al-Qaeda, is valuable in itself, offering the world unique insights into the motivations of the young men who answered Osama bin Laden’s call to arms.

   

  By his account, he became an insider at the highest levels of both al-Qaeda in the Arabian Peninsula (AQAP) and the Yemeni security services – and concluded that those two entities had more in common than was generally known..

   

  The story of Mujahid’s remarkable interview with the network began on December 5, 2013, when fighters from AQAP wearing Yemeni military fatigues shot their way past security inside the Ministry of Defence complex and mounted a prolonged and gruesome rampage that killed 52 people, most of them unarmed civilians and medics.  

   

  That attack prompted unprecedented unanimity in condemning AQAP among all of Yemen’s political and religious factions, outraged by the targeting of innocent Muslims in a hospital. It also appears to have prompted Mujahid to reach out to 42-year-old lawyer Abdul Rahman Barman..

   

  “Brother Abdul Rahman,” Mujahid’s text message to Barman read, “consider me a suicide attacker of another type. My bombing will be the information I shall divulge”. Barman closed his phone, unsure of whether his correspondent was just suffering from the high emotion of the day..

   

  Mujahid had previously met Barman through some of his other clients facing harassment by the security services of former President Ali Abdullah Saleh. Mujahid’sstory was not unfamiliar to the lawyer. Bin Laden’s message of “global jihad” as a response to the problems of the Muslim world had resonated with many young men in Yemen, and in 1998, Mujahid – unemployed, and with only a high school education at age 20 – decided to act on it..

   

  The US invasion of Afghanistan following the 9/11 attacks saw Mujahid and his al-Qaeda brethren retreat to Pakistan’s tribal areas in 2002, from where they staged cross-border attacks against the US and its allies before being arrested in September 2004 in Quetta by Pakistan’s Inter-Services Intelligence (ISI)..

   

  Mujahid says that while imprisoned at Sanaa’s squalid prison, he was tapped to work as an informer for Yemen’s two most powerful security services – the National Security Bureau (NSB) and the Political Security Organisation (PSO)..

   

  The first incident that troubled him, Mujahid explained, was a July 2, 2007, AQAP ambush that killed 10, including eight Spanish tourists. Mujahid says he warned his handlers of the preparations one week before the operation and then again on the morning of the attack, but that it went ahead without any interference.

   

  He was even more alarmed by the September 17, 2008, attack against the US embassy in Sanaa, which resulted in 19 deaths, most of whom were Yemeni citizens. In Al Jazeera’s documentary – Al-Qaeda Informant – Mujahid alleges that Colonel Ammar Mohammed Saleh, the then-president’s nephew who was second in command at the National Security Bureau, provided AQAP with money and arrangements to receive the explosives they needed for the attack.   

   

  Full article here

   

  

  

  
  
  

  

• "Stratospheric", "Irrational" Chinese Rally "Screams Speculative Bubble" To BNP

  On Friday, Shanghai-listed shares rose to their highest levels since 2008.

  The inexorable, self-feeding rally in Chinese stocks has recently been characterized by wild intraday swings. Take Thursday for instance, when a move by Golden Sun Securities to curb margin trading triggered panic selling, sending shares lower by more than 5% before the momentum abruptly shifted, and just like that, a straight-line, limit-up frenzied buying spree helped benchmark indices close green on the session. 

  

  This volatlity is spilling over into Hong Kong, which has in turn prompted officials to consider implementing a “cooling off period”, designed to calm traders down after the types of violent swings that are becoming commonplace as the rally continues. Here’s more via Bloomberg:

  The manic trading that makes China the world’s most volatile stock market is seeping across the border into Hong Kong.

   

  Swings in the 10 Hong Kong shares most traded by mainland investors over the city’s exchange link more than tripled in April, increasing at almost twice the rate as the benchmark Hang Seng Index. Last month, volatility in the most-active link shares, including Hanergy Thin Film Power Group Ltd. and Evergrande Real Estate Group Ltd., was little changed on average even as fluctuations in the Hang Seng shrank 30 percent.

   

  Chinese investors are gaining unprecedented freedom to bring their own brand of trading to overseas markets as the government eases capital controls to promote international use of the yuan.

   

  The seven-month-old exchange link with Hong Kong lets them buy a net 10.5 billion yuan ($1.4 billion) of shares in the former British colony each day. Authorities will soon let some wealthy individuals buy international shares and other assets under the so-called QDII2 program, China’s Securities Times reported last week.

   

  In Hong Kong, “I have people telling me now that they’re concerned about this volatility,” said Herald van der Linde, the head of Asia-Pacific equity strategy at HSBC Holdings Plc. “It becomes a little bit more like mainland China.”

   

  Hong Kong’s bourse is considering changes to its trading rules that would give investors a “cooling-off period,” limiting trades to a fixed range for five minutes whenever a stock price spikes more than 10 percent. The exchange currently has no limits on intraday swings and mainland bourses cap daily moves at 10 percent.

  China’s world-beating rally has been driven by a dangerous combination of margin debt and unprecedented growth in new stock trading accounts.

  Shares have also gotten a boost from the relaxation of trading restrictions and indeed, the quota on the Shanghai-Hong Kong connect is set to be abolished later this year, once a similar link is established between Hong Kong and the Shenzhen Comp.

  Still other factors have added fuel to the fire, including a new “mutual fund recognition” scheme that will facilitate cross-border mutual fund flows and, importantly, the inclusion of Chinese A shares in two transitional FTSE Russell indices, one of which will serve as the new benchmark for Vanguard’s $69 billion EM Index fund. 

  As you can see from the above, there are plenty of catalysts to drive shares ever higher, making the situation still more precarious with each passing day of trading. 

  

  Back in March, BNP gave up on trying to predict what happens when record margin debt collides head-on with millions of newly-minted, semi-literate day traders. “What happens next,” the bank wrote, “is clearly an unknown-unknown.”

  Despite the uncertainty inherent in trying to call blow-off tops, BNP is out with a new note on China’s equity “bubble trouble.” 

  Via BNP:

  China’s A-share markets continue to climb into the stratosphere. At the time of writing, the Shanghai Composite was up by around 52% YTD and more than 140% y/y. The even frothier (though much smaller) Shenzhen Composite has soared by more than 115% YTD and 185% y/y. Chinese equities remain the best-performing asset on the planet by a wide margin. The scale and speed of these gains scream ‘speculative bubble’. The workhorse definition of a bubble is large and sustained asset-price movements that are unexplainable by fundamentals. For stock markets, ‘fundamentals’ are, of course, earnings. It is noticeable that the A-share surge has coincided with both steady downward revisions to GDP growth and flat to falling profits  

   

  Equity margin debt has soared by almost 3% of GDP since the A-share market began its dizzying run-up last summer. Now pushing towards 3.5% of GDP, China’s outstanding margin debt exceeds that of the US, which itself has hit record highs (Chart 3). In classic bubble fashion, the pace of increase in margin debt has also accelerated. Over the last two months, margin debt has expanded at an annualised clip of 6% of GDP. 

   

  Bubbles ultimately burst: they expand continuously, then pop. The extreme reliance on leverage of this A-share run further foreshadows this inevitability.. As the increased supply of margin debt has been the key driver, market sensitivity to any restriction in its continued growth would cause an abrupt and most likely cascading price reaction. 

   

  
  

  And just as we said on Thursday, the inclusion of mainland shares in global EM benchmark indices could indeed prolong the bubble.

  How long the bubble can continue to inflate is the key question – but necessarily unanswerable. Inherently irrational, bubbles usually last longer than expected. Recent academic literature has emphasised the strong growth in global financial assets and associated buying power of institutional asset managers. Momentum buying reinforced by market-capitalisation benchmark weightings could further inflate the bubble. In particular, imminent decisions on the inclusion of A-shares in global equity indices might see strong institutional buying buttress the retail mania for a time. Still, the exponential trends in turnover, margin debt and increasingly valuations imply that a climax is now unlikely to be too far away. The Shenzhen Composite’s P/E ratio is now over 66x (with a median P/E of 108x), compared with the 75.8x P/E at the 2008 bubble peak. 

  Recall also, that when the PBoC implemented its second YTD RRR cut in April we said the following about the country’s equity bubble:

  In other words, the Chinese market may be “red hot”, but please don’t stop making it even redder. Because as long as China is unable to halt its housing hard-landing, it will gladly take an equity bubble in lieu of a housing bubble if that helps preserve the people’s wealth (the problem being that in China only 25% of household assets are in financial products – 75% is in real estate, something which as we showed before is inverted in the US). 

  This is echoed by BNP:

  The good news is that the inevitable bursting of the bubble is unlikely to have too pronounced a macroeconomic impact. Equity bubbles are less pernicious than credit and housing bubbles, where fixed liability and long duration ensure a much longer-lasting fallout. The bad news, of course, is that China is already labouring under the influence of an epic housing and credit market bubble, which has only just begun to deflate. A desire to mitigate the impact of that bubble is a key reason why the Chinese authorities have been so prepared to cheerlead and sustain the A-share surge through regulatory support. Clearly, a sharp pull-back in equity prices would partially reverse the aggressive loosening of financial conditions in the last few months that is showing signs of helping stabilise the economy in the near term.

  As suggested above, there are quite a few incentives for Beijing to do everything in its power to keep the music playing for as long as possible. Economc growth is decelerating, the government’s move to rein in shadow banking has curtailed credit creation, the real estate bubble is bursting, and the country’s economy is weighed down by $28 trillion in debt, making credit expansion efforts extraordinarily risky especially considering the alarming rate at which NPLs are rising.

  In other words, China needs a distraction. The country needs its equity bubble. 

  And while BNP may be correct to suggest that a Chinese stock market crash may not trigger an macro-catastrophe, investors would still be wise to remember that the more spectacular the boom, the more painful the inevitable bust. 

  

  

  
  
  

  

• 5 Things To Ponder: Odds And Ends

  Submitted by Lance Roberts of StreetTalk

  5 Things To Ponder: Odds And Ends

  Earlier this week I discussed the oxymoron of the “bearish bull market” suggesting that the deterioration in the technical backdrop of the market acting in a manner only seen at previous major market peaks.

  However, the real divergence is occurring within the market itself as shown in the chart.

   

  Currently, every single internal measure of momentum and relative strength have not only deteriorated, but are behaving in a manner that only previously existing during the last two major market peaks.

   

  This is what I meant by using the oxymoron of the “incredibly bearish bull market.” 

   

  Despite the significant number of economic, fundamental and technical data points that suggest risk has risen to elevated levels,the bullish exuberance in the market remains.“

  That last sentence is critically important. While there are many fundamental, economic and technical warning signs that suggest investor caution currently, the markets remain hovering near their all-time highs.
  

  I was speaking at a conference recently discussing this very important point of managing money. When managing money we can make logical assumptions about what we think will happen in the future. While that logical outcome will eventually mature, the markets can, and do, act illogically for longer than logical analysis would expect. Therefore, investors who try and predict future market outcomes, and act accordingly, suffer the outcomes of being wrong.

  Our job as investors is to make money, not by being right. This is why, despite the current evidence of deterioration, the markets remain bullishly biased for now suggesting the portfolios remain fully allocated. As investors we must be “patient”  in awaiting those market driven instructions. But patience, and complacency, are two entirely different things.

  While there is little doubt that a major market reversion is on the horizon, there is no evidence that such a correction is in the immediate future. Therefore, we wait patiently, but not complancently.

  So, while we wait patiently, this weekend’s reading list is a collection of articles that I just found very interesting that I thought were worth sharing with you.   

  1) The 7-Maleficent Behaviors Of Individuals by Robert Seawright via AboveTheMarket

  “The Magnificent Seven is a terrific 1960 movie “western” about seven gunfighters hired to protect a small Mexican village from marauding bandits. A re-make is currently in the works and the “original is itself a re-make of Akira Kurosawa’s Japanese classic, Seven Samurai. Meanwhile, Maleficent is the “Mistress of All Evil” in Sleeping Beauty who curses the infant princess to prick her finger on the spindle of a spinning wheel and die before the sun sets on her sixteenth birthday. Today I’m offering up a mash-up from these movies to outline what I’m calling the Maleficent 7 – seven inherent human problems and limitations that impede our ability to make good decisions generally and especially about money.”

  Read Also: The Great Bond SellOff by Bill Bonner via MoneyWeek

  2) How’s This For An Epic Fail by Cullen Roche via Pragmatic Capitalist

  “This month marks the 36th straight month in which the Fed has missed its inflation target.”

  

  Read Also: New Retirement Age Is Not 65, 80 or 95: It’s Higher by Eric Rosenbaum via CNBC

  3) The Most Crowded Trade On Wall Street: Denial by Jesse Felder via The Felder Report 

  “It just doesn’t matter.” This is the mantra of the bulls who, no matter what bearish evidence is presented, simply insist, “earnings don’t matter. Valuations don’t matter. Margin debt doesn’t matter. Market breadth doesn’t matter.” You name it and they defame it. I was recently told by a bull who was dead serious that, not only do none of these things matter, there is an invisible magical force more powerful than any of these them which ensures stocks will continue to march higher. I was dumbfounded.”

  

  Read Also: When It Comes To Investing: It’s Not Data Mining by Cliff Asness via AQR

  4) Fed Urged To Delay Rate Hikes Until 2015 by Kasia Klimasinska via BloombergBusiness

  “The Federal Reserve should delay raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its U.S. growth forecast for the second time this year.

  The lender also said that the dollar was ‘moderately overvalued’ and a further marked appreciation would be ‘harmful,’ in a statement released in Washington on Thursday on its annual checkup of the U.S. economy.””

  

  Read Also: Odds Of A Bear Market Are High And Rising by Mark Hulbert via MarketWatch

  5) 10 Bearish, 1 Bullish Chart by Meb Faber via Meb Faber Research

  “10 charts or stats to mull over this weekend.”

  

  Read:  The Trend In Profits And GDP by Dr. Ed Yardeni via Dr. Ed’s Blog

  ANYTHING HAPPEN YET? OKAY, OTHER STUFF WHILE WE WAIT
  

  Why Women Cheat by Noel Biderman, Founder/CEO Ashley Madison via CNBC

  “At the heart of it is being the object of desire. Someone thought you were the greatest thing and wanted to spend their life with you. Ripping that away from someone feels awful. Now they don’t even want to look at you, touch you, talk to you. But you have economic stability — A home. Kids. Family. You don’t want to walk away from that just because you feel less than desired. People think, ‘I’ll just put myself out there in an anonymous way.’ They want to rekindle that object of desire. You’ll often find women seeking this attention by Facebooking with past lovers.“

  Liquidity Everywhere, But Not A Drop To Drink by Tyler Durden via ZeroHedge

  “And yet almost every institutional investor, in almost every market, seems worried about liquidity. Even if it’s here today, they fear it will be gone tomorrow. They say that e-trading contributes much volume, but little depth for those who need to trade in size. The growing frequency of “flash crashes” and “air pockets” – often without obvious cause – adds weight to their fears.“

  Chart Of The Week by Julie Verhage via Bloomberg Business

  “‘Are stocks overvalued, depends on which measure you use.”

  

  

  
  
  

  

• Week Of Epic Bond Volatility Ends With A Whimper

  For all the talk and feverish anticipation of today’s payrolls number, which came in far stronger than expected on the headline assisted by a surge in self-employed Americans, some 370,000 to be exact, most of whom between the ages of 20 and 24 at least according to the BLS, the market reaction was largely a dud and after an initial spike lower, followed by a just as frenzied episode of BTFD, ES was locked in a trading range set by yesterday’s lows and VWAP of course.

  

   

  The weekly chart shows that while the three main indexes all closed modestly lower, the Russell managed to outperform but the biggest winner this week was the trannies, assisted by the recent drop in crude.

  

   

  However to see the real stock action catalyst one needs to step even further back, look at the one month volume chart, which shows a tale of two (volume) tapes: a rise on declining volume, and a drop from recent all time highs on ever higher volume. As the chart below shows, something snapped on May 26 when the trendline higher was broken, and selling on every higher volume has been the norm.

  

   

  And yet, today’s relatively quiet stock tape masks the real tension in markets which is not so much about equities, where volatility remains artificially supressed as we showed yesterday…

  

  …  but continued to be all about China, where the manic phase, punctuated by increasingly sharper, more frequent sell offs, clearly visible to all…

  

   

  … and most of all the bond market, where we either are approaching an inflationary inflection point, confirmed by the 10Y closing at the highest yield since 2014…

  

  … or are witnessing central banks slowly losing control, as shown in the following chart of MOVE, i.e., the Merrill bond market volatility index, which has been steadily rising in the past month…

  

  … and leading to a doubling in German Bund yields in the past week alone.

  

   

  Oil, on the other hand, was in its own world, trading according to the whims of stop-hunting algos and leading to the following perplexing monthly formation.

  

   

  In any event, something here has to break: either yields will finally springboard higher, leading to a dramatic end in debt-funded stock buybacks which are no longer accretive at rising yield levels, thus leading to a drop in stocks, or today’s close encounter with economic growth is shown to be short-lived once again and yields resume their trek lower, cross-asset volatility normalizes, which in turn allows equities to resume their “wealth effect” climb ever higher.

  Conveniently, with a number of key geopolitical events on the table, the resolution one way or another will reveal itself on very short notice.

  

  

  
  
  

  

• The Next Round of the War on Cash Will be Even More Aggressive

  For six years straight, the Fed has been trying to “trash” cash.

   

  First it cut interest rates to zero… making it so that savings deposits produced almost nothing in the way of interest income. Consider that at current rates, a retiree with $1 million in savings earns a measly $2,500 per year in interest income.

   

  The Fed’s hope was that by making it painful for savers to sit in cash, said savers would move into risk assets such as bonds and stocks. This has worked in that stocks are now in one of, if not THE biggest bubbles in history… while bonds are trading at yields never before seen outside of war-time.

   

  However, this has now created a NEW problem for the Fed.

   

  With bonds yielding so little, (AND increasingly volatile due to the lack of liquidity caused by QE), cash is once again looking increasingly attractive.

   

  Put it this way, if you had a choice between having your cash earn next to nothing but remain stable vs. watching your capital gyrate by 5% or more per year (while still earning next to nothing), which would you take?

   

  

   

  The answer is easy: you’d pick cash. Sure, you’d make next to nothing… but it sure beats the roller coaster ride you get in stocks or bonds. Indeed, cash actually produced the SAME return as stocks did last year… without the volatility!

   

  

   

  This has created a REAL problem for the Fed… and it’s going to result in a far more aggressive campaign to TRASH cash going forward.

   

  That campaign has already begun with several economists with close ties to the Fed calling to TAX cash… if not outlaw it altogether!

   

  This is not just idle chatter either. JP Morgan and other large banks are beginning to forbid clients from storing actual physical cash in safe boxes. More banks will be joining in on this as well the Government. Indeed, the state of Louisiana has made it illegal to buy second hand goods in cash.

   

  This is just the beginning. We've uncovered a secret document outlining how the Fed plans to incinerate savings.

   

  We detail this paper and outline three investment strategies you can implement

  right now to protect your capital from the Fed's sinister plan in our Special Report

  Survive the Fed's War on Cash.

   

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

   

  To pick up yours, swing by….

  http://www.phoenixcapitalmarketing.com/cash.html

   

  Best Regards

  Phoenix Capital Research

   

   

  

  
  
  

  

• Artist's Impression Of Iran Nuclear Deal "Monitoring"

  Presented with no comment…

  

  Source: Townhall.com

  

  

  
  
  

  

• Confused Economists Ponder Missing Wage Growth "Mystery"

  On Thursday, in “‘Where’s My Raise?’: American Workers Suddenly Realize The ‘Recovery’ Isn’t Real”, we once more took up the topic of America’s missing wage growth. 

  The idea that unemployment is trending lower while wage growth remains stagnant is perplexing to central bankers and although we solved this apparent mystery some three months ago, we understand that for PhD economists, it takes a while for things to sink in, which is why we’re happy to explain once more that there is in fact wage growth in America — just not for 80% of the workforce. 

  We suspect this still hasn’t hit home for the central planner/ Ivory Tower crowd, but we’re at least encouraged to learn that Fed economists are thinking very “seriously” about this vexing problem and indeed, the WSJ has taken the time to lay out nine prevailing theories from some of the country’s ‘finest’ economic minds. 

  Without further ado, here are some proposed explanations for non-existent wage growth in America, straight from your favorite Fed researchers:

  1. The labor market simply hasn’t healed from the 2007-09 recession, according to Chicago Fed economists Daniel Aaronson and Andrew Jordan. 

   

  2. Sluggish productivity growth and other long-term changes in the economy, such as workers’ declining labor share of overall national income, are restraining pay raises, according to Cleveland Fed economists Filppo Occhino and Timothy Stehulak. 

   

  3. Companies were unable to cut pay during the recession and later compensated by withholding raises during the expansion, according to San Francisco Fed economists Mary C. Daly and Bart Hobijn.

   

  4. The large number of part-time workers, including people who want full-time work but are stuck in part-time jobs, is weighing on wages, the Atlanta Fed said in its most recent annual report. 

   

  5. Not enough people have been quitting their jobs, according to Chicago Fed economists R. Jason Faberman and Alejandro Justiniano. 

   

  6. People who have left the formal workforce but still want a job are holding down pay because they might rejoin the pool of job seekers, according to Fed Board of Governors economist Christopher L. Smith.

   

  7. A shift in the makeup of the U.S. labor market to include more low-wage jobs is a factor, but not a big one, according to Atlanta Fed economist Whitney Mancuso. 

   

  8. The unemployment rate may not have fallen far enough yet to generate strong wage growth, Dallas Fed economists Anil Kumar and Pia Orrenius suggested. 

   

  9. Wage data may not tell a clear story about the state of the labor market at all, according to Richmond Fed economists Marianna Kudlyak, Thomas A. Lubik and Karl Rhodes. 

  So, in sum, the labor market may be stuck in a post-recession hangover, but it could also be that companies wanted to pay less during the downturn but couldn’t (because workers are just looking for an excuse to quit during a quasi-Depression). Or, the demand for full-time work is so great that employers can afford to pay less (which directly contradicts suggestion number three), which is somehow compounded by not enough people quitting. Alternatively, wage growth could (somehow) be supressed by people who have given up looking for a job but who may decide to look later and although common sense suggests that more low-wage jobs may contribute to lower wage growth, that’s probably not a “big” factor. Finally, it may be that unemployment simply hasn’t fallen enough yet or, the data may just need to be double-adjusted. 

  We have another suggestion: perhaps there never was a recovery in the first place and still-depressed global demand is curtailing consumption, profits, and investment.

  But admitting that would be to admit that trillions in QE has been an abject failure. That’s Keynesian heresy and is never to be spoken of again. 

  

  

  
  
  

  

• Get Used to Selloffs, Central Bankers Say as They Fret about the Terrifying Moment When Liquidity Evaporates

  Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter

  Axel Weber, president of the Bundesbank and member of the ECB’s Governing Council until he quit both in 2011 to protest the ECB’s bond purchases, quickly landed a new gig: chairman of UBS. WHIRR went the revolving door. From this perch, he warned in 2012 that the easy-money policies and the expansion of central-bank balance sheets would lead to “new turmoil in the financial markets.” Now that the turmoil has arrived, he’s at it again.

  “Volatility and repricing” – a euphemism for losses – are “part of getting back to normal,” he told NBC. We should get used to it, he said, echoing what ECB President Mario Draghi had said a couple of days ago. So no big deal. However, he was fretting “about the liquidity in the market, in particular under stress situations.”

  Despite unleashing a deafening round of QE on the European markets, the ECB has watched helplessly as government bonds have done the opposite of what they should have done: Prices have plunged, and yields have spiked. The German 10-year yield soared in seven weeks from 0.05% to over 1% on Thursday, before settling down a bit. And it wasn’t even a “stress situation.”

  US Treasuries have sold off sharply as well since the beginning of February, with the 10-year yield jumping from 1.65% to 2.31%, the worst selloff since the taper tantrum in 2013.

  Now one word is on the official panic list: “liquidity.” They’re thinking about the terrifying moment when it suddenly evaporates.

  Weber blamed central banks for the liquidity issues in the global bond markets. They’ve been buying “vast amounts of assets and putting them on their balance sheets”; not just government bonds but also corporate bonds. Since central banks “buy and hold,” they “take some liquidity out of the market.”

  He pointed at regulation that “has moved a lot of banks out of market-making into more long-term sustainable business models,” he said. UBS, for example, has turned from investment banking to wealth management.

  And the Fed’s forward guidance has changed from a nearly unified statement about not raising rates to a cacophony on whether to raise rates earlier or later. “That actually impacts pricing in the market; market moves are then translated into much bigger moves because people aren’t on the same page.”

  Everyone is chiming in with their fears that liquidity in the bond market will dry up just when you need it the most.

  The liquidity that investors believed they had in the bond markets was “illusory” during the last crisis, explained Fed Governor Daniel Tarullo at an Institute for International Finance summit on Thursday. Like Draghi, Weber, and many others, he said that investors should get used to more volatility. It’s liquidity they’re worried about.

  So in effect, get used to selloffs. It’s all part of “re-pricing,” as Weber had put it so eloquently. It’s the new normal. IF there is enough liquidity, “re-pricing” is going to be orderly. But that’s a big IF.

  The next crisis will “probably be oriented to lack of liquidity,” BlackRock CEO Larry Fink said at the same summit. And there’s “the potential for frozen markets….”

  That’s when everyone panics.

  But the bond rout might have another cause, one that has been assiduously denied all around: Inflation expectation (as measured by the difference in yield between 10-year Treasuries and 10-year Treasury Inflation Protected Securities) is 1.8%. On a 10-year investment, it’s logical that investors would want to beat inflation by a smidgen.

  Some markets are by nature illiquid. The housing market, for example. When you put a home on the market in normal times, you might get an acceptable offer after a couple of months. If the market turns sour, you might not be able to sell it at all at a price you can live with. Or you might have to drop the price by 30%. That’s lack of liquidity.

  At the rarefied air where properties sell for tens of millions of dollars, it can take years to unload a property. The California mansion used in Scarface came on the market in May 2014 at $34 million. Recently, the price was dropped to $17.8 million. Lack of liquidity. In the housing market, it’s expected.

  Homes, classic cars, art, farmland, a factory… they’re all more or less illiquid assets. Everyone knows it, and so it’s no big deal. Until there’s a bust, and then suddenly it’s a big deal.

  Bond markets are supposed to be fairly liquid, with the US Treasury market being the most liquid. Corporate bonds are less liquid. Each bond issue is different, and even in good times, it may take days to find a buyer for a particular bond at a price that won’t kill the seller. But when liquidity dries up – that is, when buyers with liquidity lose interest – these bond markets can seize, and that’s when forced selling leads to a collapse in prices, runs on bond funds, panic, and mayhem.

  Even conservative sounding “open end” bond funds can get eviscerated when they experience a run and are forced to sell their holdings into an illiquid market [Are These Ticking Time Bombs in Your Portfolio?].

  Stock markets are very liquid, supposedly. Trading is electronic, accomplished in microseconds, with prices disseminated globally in real time. Manipulation runs rampant, and you get screwed, but you can always assume that there is going to be someone at the other end willing to buy the crap you’re trying to dump. Until there isn’t.

  One day during the crash of the dotcom bubble, I received a friendly margin call from my broker and became one of the forced sellers. I tried to unload my trash first. One of the stocks was a former dotcom highflyer. I’d bought it at a beaten-down price a few months earlier, trying to catch a falling knife. So when I tried to sell it, there were no buyers willing to pay more than a few cents. Liquidity had totally evaporated before my very eyes, just when I needed it the most. Even in the stock market.

  But liquidity magically reappears when the price is low enough. For central bankers who’ve been inflating asset prices for years, and for investors who’ve gotten fat and lazy from these policies, that simple fact is a terrifying thing.

  The EU’s top regulator for insurers and pension funds wasn’t kidding when it warned that QE was triggering treacherous “volatility” in the bond markets. “Volatility” isn’t actually the right word. It implies ups and downs. But euro sovereign bonds have experienced a brutal rout. Read…  ECB Loses Its Grip, Bond Market Comes Unglued

  

  
  
  

  

• Greek Banks On Verge Of Total Collapse: Bank Run Surges "Massively" As Depositors Yank €700 Million Today Alone

  While the Greek government believes it may have won the battle, if not the war with Europe, the reality is that every additional day in which Athens does not have a funding backstop, be it the ECB (or the BRIC bank), is a day which brings the local banking system to total collapse.

  As a reminder, Greek banks already depends on the ECB for some €80.7 billion in Emergency Liquidity Assistance which was about 60% of total deposits in the Greek financial system as of April 30. In other words, they are woefully insolvent and only the day to day generosity of the ECB prevents a roughly 40% forced “bail in” deposit haircut a la Cyprus.

  

   

  The problem is that a Greek deposit number as of a month and a half ago is hopefully inaccurate. It is also the biggest problem for Greece, which has been desperate to prevent an all out panic among those who still have money in the banking system.

  Things got dangerously close to the edge last Friday (as noted before) when things for Greece suddenly looked very bleak ahead of this week’s IMF payment and politicians were forced to turn on the Hope Theory to the max, promising a deal with Europe had never been closer.

  It wasn’t, and instead Greece admitted its sovereign coffers are totally empty this week when it “bundled” its modest €345 million payment to the IMF along with others, for a lump €1.5 billion payment, which may well never happen.

  And the bigger problem for Greece is that after testing yesterday the faith and resolve of its depositors (not to mention the Troika, aka the Creditors) and found lacking, said depositors no longer believe in the full faith (ignore credit) of the Greek banking system.It may have been the Greek government’s final test.

  Because accoring to banking sources cited by Intelligent News, things today went from bad to horrible for Greek banks, when Greeks “responded with massive outflows to the Greece’s government decision to bundle the four tranches to IMF into one by the end of the June.”

  According to banking sources, the net outflows sharply increased on Friday and the available liquidity of the domestic banking system reduced at very low and dangerous levels.

   

  The same sources estimate the outflows on Friday around 700 million Euros from 272 million Euros on Thursday. The available emergency liquidity assistance (ELA) for the Greek banks is estimated around 800 million Euros. In addition, the outstanding amount of the total deposits of the private sector (households and corporations) has declined under 130 billion Euros or lower than the levels at early 2004.

   

  The total net outflows in the last 7 business days are estimated 3.4 billion Euros threatening the stability of the Greek banks.

  This means 2.5% of all Greek deposits were pulled in just the past 5 days! Indicatively, this is the same as if US depositors had yanked $280 billion from US banks (where total deposits amount to about $10.7 trillion)

  As further reported, the Bank of Greece is set to examine on Monday if Greece will urgently ask additional ELA. However, since one of the main conditions by the ECB to keep providing ELA to Greece is for its banks to be “solvent” (a condition which is only possible thanks to the ECB), one wonders at what point the Troika, whose clear intention it has been from day one to cause the Greek bank run in the process leading to the fall of the Tsipras government, will say “no more.”

  For those interested, according to IN, the deposit (out)flows in the last 7 business days are as follows:

  

   

  Finally, for those who missed it, here is the first hand account of the Greek bank run from precisely a week ago as retold by ZH contributor Tom Winnifrith:

  Witnessing the great bank run first hand as I deposit money in Greece

  Jim Mellon says that the Greeks should build a statue in my honour as on Friday I opened a bank account in Greece and made a deposit. Okay it was only 10 Euro, I need to put in another 3,990 Euro to get my residency papers so I can buy a car, a bike and a gun, but it was a start. But the scenes at the National Bank in Kalamata were of chaos, you could smell the panic and they were being replicated at banks across Greece.

  For tomorrow is a Bank Holiday here and if you are going to default on your debts/ switch from Euros to New Drachmas a bank holiday weekend is the best time to do it. And with debt repayments that cannot be met due on June 5 (next Friday) Greece is clearly in the merde. If it defaults all its banks go bust.

  But I had to open an account and make a deposit. Outside the bank in the main street of Kalamata there are two ATMs. The lines at both were ten deep when I arrived and when I left an hour later. Inside I was directed to the two desks marked “Deposit”. You go there to put in money, to open an account or if you are so senile that you cannot do basic admin of your account without assistance. As such it was me depositing cash and four octogenerians who had not got a clue about anything. Actually I lie. These folks may have been gaga but they were not so gaga that they were actually going to deposit cash, I was the sole depositer.

  Friday was also the day when pensions are paid into bank accounts. On the Wednesday and Thursday it was reported that Greeks withdrew 800 million Euro from checking accounts. Friday’s number will dwarf that. Whe you go to a Greek bank you pull off a ticket and wait for your number to be called. The hall in my bank contains about 60 seats all of which were filled. There were folks standing behind the seats and in fact throughout the hall, all wanting to get their cash out before the bank closed at 2 PM.

  At the side of the room, shielded by a glass screen sat a man behind a big desk. He tapped away at his screen and made phone calls. Ocassionally folks wandered over, shook papers in his face and harangued him having got no joy elsewhere. So I guess he was the bank manager. I rather expected him to end one phone call and stand up to say “That was Athens – all the money has gone, its game over folks.” But he didn’t. He may well do so at some stage soon.

  Eventually I got the the front of my five person queue of the senile and opened my account. Passport, tax number, phone number all in order. I handed over a 10 Euro note and the polite – if somewhat stressed – young man gave me about ten pieces of paper to sign and stamped my passbook. I have done my bit for Greece and have given it 10 Euro which I will lose one way or another in due course. So Jim – time to lobby for that statue.

  The Government did not put up a default notice on Friday as I half expected. The can kicking goes on. The ATMs will be emptied this weekend and on Tuesday and in the run up to a potential default day next Friday the banks will be packed again with folks taking out whatever money they can.

  It is not just the bank coffers that are being emptied. To get to The Greek Hovel where I sit now from my local village of Kambos is a two mile drive. On my side of the valley there is some concrete track but it is mainly a mud road. On the other side of the valley there is a deserted monastery so to honour the Church – even if there are no actual monks there – a concrete road was built in the good times. By last summer it was more pothole than road.

  By law, since I have water and electricity, I can demand that the road be mended and so last summer I went to the Kambos town hall (4 full time staff serving a population of 536) and did just that. They said “the steam roller is broken and we have no money but will try to do it in the Autumn.” They did not.

  But last week a gang of men appeared and the road is now pothole free, indeed in some places we have a whole new concrete surface. And as I head towards Kalamta there are extensive road mending programmes. At Kitries, the village has found money to renovate its beach front. It is a hive of activity across the Mani.

  Quite simply each little municipality is spending every cent it has as fast as it can. The Greek State asked all the town halls to hand over spare cash a few weeks ago to help with the debt repayment. The town halls know that next time it will not be a request but an order. But by then all the money they had hoarded will have been spent. That is Greekeconomics for you.

  Everyone knows that something has to give and that it will probanly happen this summer. The signs are everywhere

  

  

  
  
  

  

• "The Job Numbers Literally Do Not Add Up"

  By Jeff Snider of Alhambra Investment Partners

  Payroll Stats Become Even More Implausible

  Since Q1 GDP was revised lower by almost 1% that meant estimates of productivity were going to be even more out of alignment than they were at the first release. Of course, in a less massaged environment productivity might have preserved some sense if there was less rigidity from the BLS on the employment side. In other words, when “output” estimates were reduced (and they were, by more than GDP) it would make sense that everything would be revised downward in a more cohesive process. Instead, output was reduced significantly, by 1.4%, while total hours worked was marked down by all of 0.1%.

  As a result, productivity is revised from a nonsensical -1.9% to an even more skeptical -3.1%.

  

   

  If this was just a one-quarter problem, then it would be easy to dismiss as random variation or expected variance in all these statistics trying to tie together across real economy lags and such. But that is not the case, as productivity, and by extension the estimates for how “expensive” marginal labor is and thus the primary reason businesses hire and fire in the first place, has been seriously “off” for some time. With these latest estimates and revisions, productivity is now -0.7% over the last 5 quarters dating back to last year’s polar vortex. That just doesn’t make any sense in a meaningful context of business operations in the real economy – especially when the BLS is saying that this has been the best run of hiring in decades.

  The productivity figures alone show us how the BLS is likely overstating labor gains. Simply substitute a more meaningful level of productivity, such as the average gain during the less robust hiring period of 2003-07, and, by the rigid method of calculation here, total hours gained almost disappear entirely.

  

  

  The last time the Establishment Survey was as robust as the past year or so was 1999; then, the average productivity was 3.7%! That number actually makes sense intuitively, since businesses would have good reason to go on a hiring spree. Porting that to the current period, as in the mathematical construction of productivity here, would mean, holding output constant, that total hours in the past five quarters would have been not +2.7% but -1.7%. These numbers literally do not add up.

  The deeper you go into the maze of calculations, the more that sentiment grows, not dissipates. The “next step” is to take productivity and turn it into what is called Unit Labor Costs. This is one estimate for how much it “costs” businesses to employ labor, not just in terms of compensation but in terms of what comes out of the capital transformation of that labor input. Where productivity is low or especially negative, unit labor costs are exceedingly high because you pay workers and (assumed) more workers and get less out of them per unit. That is why it makes no intuitive sense for businesses to be hiring rapidly during periods of high unit labor costs, even where revenue growth is robust.

  

  

  In the past two quarters alone, because the BLS will not budge on their employment estimates, we are supposed to believe that businesses in the US have been falling over themselves to hire when doing so is historically very expensive. With the Q1 revisions to “output” moving downward significantly, unit labor costs in Q1 were revised up from 5% to 6.7%! That makes for two consecutive quarters of about 6%, which is usually what ignites, historically, recessions.

  

  Unit labor costs surge prior to each and every recession, which, again, makes sense, but the problem with this historical comparison is that the calculations more recently no longer conform to any truly identifiable pattern. What used to be fairly stable and at least consistent has turned into a muddle of numbers all over the place.

  

  That process appears to have started at the outset of the dot-com recession, gained into the Great Recession and has never abated apart from the typical negative labor costs only in 2009 and Q1 2010 (what recoveries are actually made of; negative and low labor costs at the margins show businesses to hire more and start the recovery process, not in the opposite manner as the BLS has it now). This obvious lack of consistency more than suggests problems in the various statistical pieces flowing into the calculations here.

  We are left with two primary interpretations in terms of the macro view (and a slew of mathematical and statistical quiddities that I won’t get into here); either these numbers are correct and US businesses have suddenly lost all ability to profitably to project and conduct business or the BLS is being stubborn in over-estimating labor utilization across-the-board. The third possibility, that output itself should be revised much, much higher I simply reject out of sheer overwhelming evidence to the contrary. The first explanation, dumb businesses, seems almost exhaustively implausible except for the interference of QE and economists’ ridiculous projections. It is possible, how likely is debatable, that businesses have simply rejected what they see of the current environment and ramped up hiring in anticipation of what every single economist the world over told them to. I have said before that I think that is a very real problem and is likely causing economic imbalances in certain places (inventory comes to mind) but I don’t believe that would be sufficient in such a broad labor scope.

  No, I think all the evidence continues to point to trend-cycle over-estimation and the BLS refusing to bend toward what is becoming irrefutable reality. There is absolutely nothing to suggest this is the best employment environment in decades, and the fact that the payroll numbers keep making that comparison only has one effect – to so skew “downstream” statistics as to preclude any other interpretation. With Payroll Friday upon us yet again, it is useful to keep this in mind that those payroll estimates not for actual job counts but of chained variations are completely bogus.

  

  

  
  
  

  

• QE Breeds Instability

  Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

  Central bankers have promised ad nauseum to keep rates low for long periods of time. And they have delivered. Their claim is that this helps the economy recover, but that is just a silly idea.

  What it does do is help create the illusion of a recovering economy. But that is mostly achieved by making price discovery impossible, not by increasing productivity or wages or innovation or anything like that. What we have is the financial system posing as the economy. And a vast majority of people falling for that sleight of hand.

  Now the central bankers come face to face with Hyman Minsky’s credo that ‘Stability Breeds Instability’. Ultra low rates (ZIRP) are not a natural phenomenon, and that must of necessity mean that they distort economies in ways that are inherently unpredictable. For central bankers, investors, politicians, everyone.

  That is the essence of what is being consistently denied, all the time. That is why QE policies, certainly in the theater they’re presently being executed in, will always fail. That is why they should never have been considered to begin with. The entire premise is false.

  Ultra low rates are today starting to bite central bankers in the ass. The illusion of control is not the same as control. But Mario and Janet and Haruhiko, like their predecessors before them, are way past even contemplating the limits of their powers. They think pulling levers and and turning switches is enough to make economies do what they want.

  Nobody talks anymore about how guys like Bernanke stated when the crisis truly hit that they were entering ‘uncharted territory’. That’s intriguing, if only because they’re way deeper into that territory now than they were back then. Presumably, that may have something to do with the perception that there actually is a recovery ongoing.

  But the lack of scrutiny should still puzzle. How central bankers managed to pull off the move from admitting they had no idea what they were doing, to being seen as virtually unquestioned maestros, rulers of, if not the world, then surely the economy. Is that all that hard, though, if and when you can push trillions of dollars into an economy?

  Isn’t that something your aunt Edna could do just as well? The main difference between your aunt and Janet Yellen may well be that Yellen knows who to hand all that money to: Wall Street. Aunt Edna might have some reservations about that. Other than that, how could we possibly tell them apart, other than from the language they use?

  The entire thing is a charade based on perception and propaganda. Politicians, bankers, media, the lot of them have a vested interest in making you think things are improving, and will continue to do so. And they are the only ones who actually get through to you, other than a bunch of websites such as The Automatic Earth.

  But for every single person who reads our point of view, there are at least 1000 who read or view or hear Maro Draghi or Janet Yellen’s. That in itself doesn’t make any of the two more true, but it does lend one more credibility.

  Draghi this week warned of increasing volatility in the markets. He didn’t mention that he himself created this volatility with his latest QE scheme. Nor did anyone else.

  And sure enough, bond markets all over the world started a sequence of violent moves. Many blame this on illiquidity. We would say, instead, that it’s a natural consequence of the infusion of fake zombie liquidity and ZIRP rates.

  The longer you fake it, the more the perception will grow that you can’t keep up the illusion, that you’re going to be found out. Ultra low rates may be useful for a short period of time, but if they last for many years (fake stability) they will themselves create the instability Minsky talked about.

  And since we’re very much still in uncharted territory even if no-one talks about it, that instability will take on forms that are uncharted too. And leave Draghi and Yellen caught like deer in the headlights with their pants down their ankles.

  The best definition perhaps came from Jim Bianco, president of Bianco Research in Chicago, who told Bloomberg: “You want to shove rates down to zero, people are going to make big bets because they don’t think it can last; Every move becomes a massive short squeeze or an epic collapse – which is what we seem to be in the middle of right now.”

  With long term ultra low rates, investors sense less volatility, which means they want to increase their holdings. As Tyler Durden put it: ‘investors who target a stable Value-at-Risk, which is the size of their positions times volatility, tend to take larger positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced selling. This is how QE increases the likelihood of VaR shocks.’

  QE+ZIRP have many perverse consequences. That is inevitable, because they are all fake from beginning to end. They create a huge increase in inequality, which hampers a recovery instead of aiding it. They are deflationary.

  They distort asset values, blowing up prices for stocks and bonds and houses, while crushing the disposable incomes in the real economy that are the no. 1 dead certain indispensable element of a recovery.

  You would think that the central bankers look at global bond markets today, see the swings and think ‘I better tone this down before it explodes in my face’. But don’t count on it.

  They see themselves as masters of the universe, and besides, their paymasters are still making off like bandits. They will first have to be hit by the full brunt of Minsky’s insight, and then it’ll be too late.

  

  

  
  
  

  

• Fed Unable To Comply With Congressional Subpoena Due To Criminal Probe

  On October 3, 2012, consulting firm Medley Global Advisors sent a newsletter to clients entitled “Fed: December Bound.” The “special report” essentially constituted an early leak of the minutes from the FOMC’s September meeting, at which the central bank launched the third installment of QE.

  An internal investigation by then-Chairman Bernanke revealed that indeed, some members of the committee had met with the firm that year but the names were not disclosed.On April 15, Congress sent Yellen a letter requesting that the Fed furnish a list of names no later than April 22.

  That deadline came and went with no response. 

  On May 4, the Fed acknowledged a DoJ and OIG criminal investigation into the leak, and in the same letter, Yellen admitted that indeed, she had met with the analyst who penned the newsletter at the center of the controversy:

  

  Subsequently, The Committee on Financial Services subpoenaed the Fed for records related to the central bank’s review. Now, the Fed has declined to comply in full citing the ongoing criminal investigation. More specifically, Yellen says the OIG has advised the Fed that providing access to the information requested by congress would risk “jeopardizing the investigation.”

  Note the irony: the Fed says it cannot comply with a Congressional subpoena regarding an alleged leak due to the fact that producing the requested documents could ultimately result in… a leak. In any event, the full letter is below. 

  Hensarling Letter 20150604

  

  

  
  
  

  

Digest powered by RSS Digest

• Tyranny: It Pisses Me Off

  Submitted by Brandon Smith via Alt-Market.com,

  

  Tyranny is not a wholly definable condition. There are many forms of tyranny and many levels of control that exist in any one society at any given time. In fact, the most despicable forms of tyranny are often the most subtle; the kinds of tyranny in which the oppressed are deluded into thinking that because they have “choices”, that necessarily makes them “free”. Tyranny at its very core is not always the removal of choice, but the filtering of choice – the erasure of options leaving only choices most beneficial to the system and its controllers.

  The choice may be between freedom and security, individual opinion and societal coherency, personal principle or collective indulgeance, catastrophic war or disaster multiplied by complacency, terrorism or surveillance, economic manipulation or financial Armageddon. We are presented with these so called choices everyday and they are about to become even more of a bane in our regular lives. But these are often engineered options that do not represent reality. We are led to believe that only one path or the other can be taken; that there is no honorable way, only the lesser of two evils. I am done with false choices and the lesser of two evils. I prefer to create my own options.

  Beyond method lies motivation; and tyranny begins where the best of intentions end. Every despotic action by government and collectivists today, from the NDAA, to the John Warner Defense Authorization Act, to mass electronic surveillance, to drones in our skies, to political correctness and social justice warrior tirades; all are given rationalization through “noble intentions”.  Most tyrants are not high level dictators, corrupt corporate CEOs, or politically obsessed wannabe-demigods with aspirations of empire. In fact, tyrants can be found all around you every day, in friends, family and millions of people you’ve never met or heard of in your life. While the elites at the top of the pyramid are the originators of most tyrannical shifts, it is the little minded mini-tyrants hovering around you like blood-gutted mosquitoes in the mall, at the bar, at home, and at the office that make the designs of statists a possible reality.

  They do not always participate directly in the construction of the cage. They just have a habit of doing nothing while it is being built around us. Some of them love the cage, and see it as a kind of affirmation of their own twisted ideals.

  Tyranny is for the most part the forced imposition of contrary principles into the sacred space of the individual. That is to say, people create tyranny when they enact or support the invasion of their beliefs and desires onto those who only wish to be left alone. Tyranny is only minimally about physical control and far more about psychological control. Physical threats are merely keys to the doorway of the mind.  And within this resides the great trick.  Too many of the ignorant believe that tyranny requires jackboots, armbands and concentration camps in order to be real.  In fact, tyranny begins with a single voice self-silenced by fear of collective disapproval and/or social and legal retribution.

  True tyranny is born in the putrid slithering hive of group-think, where the lazy and incompetent find refuge within the protective egg sack of intellectual idiocy.  Statists use the lie of abstract majority and the force of government to intrude upon the private ideals of those with opposing views.  In the end, it is not enough for them to extort your silence – eventually, they will demand your conversion to their faith, to their collective.  Basically, your rights end where their feelings begin.

  Your thoughts and ideas are subject to approval. They are not your own in a collectivist system.  THIS is what real tyranny is.

  Real slavery is not possible unless the slave is made to accept or even love his servitude. The conditions of structure and restriction and permission and “license” are often ingrained into the minds of participating serfs until they cannot comprehend the world without such arbitrary things. Acting outside the established box isn’t even considered. The rules are simply the rules, even though most people have forgotten why or how.  The more gullible proponents of social cohesion sometimes claim that the dichotomy between the individual and the collective is “false”.  This is utter nonsense.  If a collective is not VOLUNTARY, then it is by its very nature counter to the health and rights of the individual, which is why I always try to make the distinction between community and collectivism.  Collectivism is entirely destructive to the individual because collectivist systems cannot survive without removing individual thought and action.  The modus operandi of a collective is to erase independence so that the hive can function.  Anyone who states that individualism and collectivism are “complementary” is either a liar, or a simpleton of the highest degree.

  Fantastical constructs of social organization are used to justify themselves as self evident. Statists love the argument of society for society’s sake. We are born into this system whether we like it or not, they say. We benefit from the system and therefore we owe the system, they claim. The system is mother and father. The system provides all because we all provide for the system. Without the system, we are nothing.

  The clever trap of collectivism is that it makes participation of individuals a survival imperative for the group. A person is certainly not allowed to work against the advancement of the group, even if the group is morally reprehensible in their goals. However, totalitarian collectivism from socialism to fascism to communism does not even allow for people to refuse to participate. You are not allowed to walk away from the collective because if you do, you might hurt the overall performance of the collective. A gear in a machine cannot be allowed to simply up and leave that machine, or everything falls apart. See how that works…?

  People fall into tyrannical behaviors through what Carl Jung referred to as the “personal shadow”; the uglier cravings of our unconscious that fester into morally relative philosophies. One fact of life that you can always count on is this: All people want things. The kinds of things and the level of the want determine their willingness to do wrong. I’m not just talking about money and wealth. Some people want unfettered or unrealistic security, some people want fame, some people want adoration, some people want subservience, some people want to avoid all responsibility, some people want perpetual childhood, some people are shameless glory hounds, and some people want their worldview imprinted on every other person until all is uniform, uncluttered, homogenized, safe.

  People’s wants can be harnessed, manipulated and directed to disturbing ends, and the elites know very well how to do this.  The people who are harder to dominate are those who have discipline over their wants and thus control over their fears of not attaining those wants.  These are the men and women that frustrate the establishment.

  In my life I have met many people who cannot set aside their immediate desires even if their behavior is translating into eventual misery for themselves and everyone else. People who cannot balance the pursuit of wealth with a healthy level of charity. People who cannot participate in an endeavor without trying to co-opt or control that endeavor. People who marginalize the talents of others when they could be nurturing those talents. People who sneer or superficially criticize the valid accomplishments of others rather than cheering for them. People who see others as competition rather than allies in a greater task. People who fabricate taboos in order to shame others into subservience rather than relying on rational arguments.  It is weaknesses like these that cause smaller forms of tyranny, and such microcosms of despotism often culminate in wider enslavement. It is through the personal shadow that we fall victim to the collective shadow, the place where devils reside.

  Tyranny is an environment in which the very worst in us is fed caffeine and cocaine and allowed to run wild while pretending to be a model of principled efficiency.  It is a place where vile people are most likely to succeed.

  Frankly, I’m a little tired of those who consider themselves to be social advocates so overtly concerned with what we individuals are thinking or feeling or doing. We don’t owe them any explanations and we certainly never agreed to be a part of their ridiculous covens of academia and the mainstream. I have no patience for people who have the audacity to think they can mold the rest of us into abiding by their intrusive ideology. Is your goal to force me to adopt your collectivist philosophy because you are too biased or too sociopathic to compose an argument that convinces me to join voluntarily? Then I’m afraid one day I’ll probably react by shooting you.  Am I advocating violence?  Actually, the establishment and its statist cheerleaders are advocating violence through their trampling of individual liberty, but let me answer directly:

  Yes, I believe violence is often the only answer for such tyrants, historically and practically.   We have every right to be left alone, they have no right to their aggressive statism, and we have every right to defend ourselves.

  I am tired of oppressive social constructs that undermine our greater potential. I am tired of assumptions. Assumptions and lies fuel every aspect our world today, and this will only end in utter calamity. I am tired of tolerance for oppressive behaviors; tolerance for corruption and criminality leads only to more of the same. I am tired of compromise. I am tired of being told that a discriminating attitude is a bad thing, and that total acceptance is somehow “enlightened.” I am tired of people thinking pleasantries are a better method for combating stupidity than a good slap upside the head. In other words, it’s time to slap some people upside the head; be they friends, family, neighbors, whoever. The days of diplomacy are over. Our world is changing. And from this point on, there will be people who do tangible and voluntary good (the people who count), the passive spectators, and the people who stand in the way of people who do tangible and voluntary good.

  My advice? Don’t be a part of the latter group. The doers, the thinkers, the producers, the builders, the self-made and self sufficient- all may be trying to undo the damages of tyranny, but that does not mean we will continue to be nice about it when totalitarian groupies try to stop us.

  

  

  
  
  

  

• Vanguard To Buy Mainland China Shares For $69 Billion EM Index Fund

  Early last week, Chinese shares got a boost (because China’s millions of newly-minted, semi-literate day traders needed to be reassured after the Hanergy debacle) from three pieces of news. 

  The headline grabbers were: a report (citing unnamed sources) that indicated the quota on the Shanghai-Hong Kong link would be abolished once a similar setup with the Shenzhen exchange is in place later this year, and the announcement of a so-called “mutual fund recognition” scheme that will facilitate cross-border mutual fund flows.

  But some of the underlying momentum may have also been attributable to news that FTSE Russell will begin a gradual transition aimed at the eventual inclusion of Chinese A shares in global EM benchmark indices. An interim arrangement will involve two “transitional indices” that include Chinese mainland equities. 

  Now, Vanguard is set to benchmark its $69 billion FTSE EM index fund against one of these transitional indices.

  FT has more:

  A surprise move by Vanguard to include onshore Chinese A-shares in its flagship emerging market fund will “put pressure” on other asset managers to follow suit.

   

  Pennsylvania-based Vanguard, which has $3.3tn under management, has said its $50bn FTSE Emerging Markets exchange traded fund, the world’s largest such vehicle, is to adopt a 5.6 per cent weighting to mainland Chinese stocks.

   

  The move follows last week’s decision by index provider FTSE Group to launch a new emerging markets index with an initial China weighting of about 5 per cent, which will run alongside its existing index that has no exposure to A-shares (see table).

   

  Vanguard has opted to switch the benchmark for its ETF to this new FTSE index.

  This is potentially quite significant. As you can see from the below, the move will mean a nearly 5% allocation to mainland Chinese equities…

  

  …and, more importantly, will force other providers to follow suit…

  John Kennedy, investment director of Harvest Global Investments (UK), a subsidiary of Beijing-based Harvest Fund Management, China’s largest institutional asset manager, said: “Everything I read post the [FTSE] announcement was that this was going to be ignored by the world and his wife, so this is potentially quite a revelation.

   

  “To see somebody adopting it within the week is very very important indeed. It will have quite an impact because it’s a very prominent provider. I would expect others to follow.” Mr Kennedy, whose parent company manages $85bn of assets, about half of which is in A-shares, added:

   

  “The direction of travel is quite clear. International investors have got to think about how they are going to access mainstream Chinese equities and fixed income”.

  That said, there are significant logistical hurdles ahead:

  Vanguard’s move is an early indicator of what is likely to be an avalanche of overseas investment into the mainland market in the years to come, with most foreign institutions currently having little or no exposure to A-shares.

   

  The Shanghai and Shenzhen bourses are now large enough to account for 24.2 per cent of emerging market stock capitalisation, according to recent calculations by FTSE.

   

  However the main index providers have shied away from including these A-shares in their benchmarks because of concerns over capital controls and access for foreign investors.

   

  At present, foreign groups can invest in A-shares if they have a quota allowance under Beijing’s qualified foreign institutional investor or renminbi-denominated QFII schemes, for which just $125bn of allocations have so far been made, although this is increasing.

   

  Vanguard was recently awarded a Rmb10bn ($1.6bn) allocation, which it will use to buy A-shares for the ETF and an umbrella fund, which between them have $69bn of assets.

  Technical barriers to entry notwithstanding, the Shanghai and Shenzhen bourses are together large enough to account for nearly a quarter of EM market cap which speaks to the potential for incredible inflows once Beijing removes restrictions. 

  If there is no correction in between, it is truly frightening to consider how large China’s equity bubble will become if, as FTSE CEO Mark Makepeace contends, Chinese equities comprise 20% of global stock portfolios by 2018.

  *  *  *

  Statement from Vanguard:

  China A-shares in Emerging Markets Stock Index Fund

  The addition of China A-shares to the Emerging Markets Stock Index Fund and its ETF share class, VWO, the world’s largest emerging-markets ETF, will provide investors with more complete exposure to a key emerging economy and the second-largest stock market in the world by market cap. With the world’s second-largest GDP, China accounts for 20% of global trade and 7% of global consumption4. China A-shares will represent 5.6% of the new benchmark for the Emerging Markets Index Fund. Vanguard5 recently received a quota for China A-shares, which provide exposure to China’s largest issuers and a level of diversification that isn’t otherwise available in the market.

  China A-shares are equity shares in mainland China companies that are traded on the Shanghai and Shenzhen stock exchanges and are only available to foreign investors through regulated systems, including the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) systems or the Shanghai Hong Kong Stock Connect program.

  “As the first major emerging markets fund to add exposure to China A-shares, the fund will benefit investors with more diversification, deeper emerging markets exposure, and greater access to the growth potential of Chinese equities,” said Mr. McNabb. 

  

  

  

  
  
  

  

• Meet The NSAC – The US Government's Shadow Spy Agency

  Just when you thought you knew what the government's spy state was up to – thanks to Ed Snowden's heroics – along comes the National Security Analysis Cneter (NSAC). As PhaseZero exposes, they are not who you think they are. They are not the NSA or the CIA. The NSAC is an obscure element of the Justice Department that has grown from its creation in 2008 into a sprawling 400-person, $150 million-a-year multi-agency organization employing almost 300 analysts "for the purpose of monitoring the electronic footprints of terrorists and their supporters, identifying their behaviors, and providing actionable intelligence." Read that again "and their supporters." As PhaseZero concludes, this shadow government agency is considerably scarier than the NSA.

  If you have a telephone number that has ever been called by an inmate in a federal prison, registered a change of address with the Postal Service, rented a car from Avis, used a corporate or Sears credit card, applied for nonprofit status with the IRS, or obtained non-driver’s legal identification from a private company, they have you on file.

  They are not who you think they are. As Gawker's Phase Zero reports, they are not the NSA or the CIA. They are the National Security Analysis Center (NSAC), an obscure element of the Justice Department that has grown from its creation in 2008 into a sprawling 400-person, $150 million-a-year multi-agency organization employing almost 300 analysts, the majority of whom are corporate contractors.

  The Center has its roots in the Foreign Terrorist Tracking Task Force (FTTTF), a small cell established in October 2001 to look for additional 9/11-like terrorists who might have entered the United States. But with the emergence of significant “homegrown” threats in the late aughts, the Task Force’s focus was thought to be too narrow.

   

  

   

  NSAC was created to focus scrutiny on new threat, specifically on Americans, particularly Muslims, who might pose a hidden threat (the Task Force became a unit within NSAC’s bureaucratic umbrella). As Americans began traveling abroad to join al-Shabaab and then ISIS, the Center’s dragnet expanded to catch the vast pool of “youth” who also might fit a profile of either radicalism or law-breaking. Its mission runs the full gamut of “national security threats…to the United States and its interests,” according to a partially declassified Justice Department Inspector General report. That includes everything from terrorism to counter-narcotics, nuclear proliferation, and espionage.

   

  NSAC not only has a focus beyond foreign investigations or terrorists, but in the past year-and-a-half, according to documents obtained by Phase Zero and extensive interviews with contractors and government officials who have worked with the Center and the Task Force, it has also aggressively built up a partnership with the military, taking on deep background investigations of foreign-born and foreign-connected soldiers, civilians, and contractors working for the government. Its investigations go far beyond traditional security “vetting”; NSAC scours certain select government employees, contractors and their affiliates, examining multiple layers of connected relatives and associates. And the Center hosts dozens of additional “liaison” officers from other government agencies, providing those agencies with frictionless access to private information about U.S. residents that they would otherwise not have.

   

  Today, through a series of high-level classified authorities and commercial relationships, the Center has access to over 130 databases and datasets of information comprising some two billion records, over half of which are unique and not contained in any other government information warehouse. The Center is, in fact, according to interviews with government officials, the sole organization in the U.S. government with the authority to delve deeply into the activities and associations of foreigners and Americans alike.

  The Center’s powerful perch—and its virtually unlimited reach—brings the federal government closer than ever to the Holy Grail of connecting every dot, a dream that has been pursued by terrorist hunters since the failures that permitted the 9/11 attacks 14 years ago.

  The data access and analytic methods it uses grew out of a retrospective analysis of the vast reams of data about the 19 hijackers that law enforcement and intelligence agencies had indicators off, but never acted on. The Foreign Terrorist Tracking Task Force (originally called “F-tri-F” by insiders) meticulously reconstructed the actions of the 19 hijackers and other known law-breakers—how they lived their day-to-day lives and what they did to avoid intelligence detection—to find patterns and triggers of potential wrongdoing. They created thousands of pages of chronologies covering the 19 hijackers from the moment they entered the United States, trying to recreate what each did every day they were here.

   

  …

   

  Those patterns then became profiles that could be applied to vast amounts of disparate and unstructured data to sniff out similar attributes. Those attributes, once applied to individuals, became the legal predicate for collection and retention of data. If someone fit the profile, they were worthy of a second look. They were worthy of a second look if they might fit the profile.

   

  The American people have repeatedly rejected the notion of a domestic intelligence agency operating within our borders. Yet NSAC has become the real-world equivalent. Along the way in its development though, the Center has rarely been discussed in the federal budget or in congressional oversight hearings available to the public. And being neither solely a part of the intelligence community (IC) nor solely a law enforcement agency (and yet both), it skirts limitations that exist in each community, allowing it to collect and examine information on people who are not otherwise accused of or suspected of any crime.

  The Foreign Terrorist Tracking Task Force was always meant to be a proactive lookout, using data mining and the full gamut of public and private information to identify hidden operatives based upon their associations, movements or transactions.

  An internal document provided to Phase Zero describes the Task Force as organizing “data from many divergent public, government and international sources for the purpose of monitoring the electronic footprints of terrorists and their supporters, identifying their behaviors, and providing actionable intelligence to appropriate law enforcement, government agencies, and the intelligence community.”

   

  And their supporters. And their supporters. And their supporters. How many mouseclicks away is your name?

  Read more here…

  *  *  *
  Two words… Freddom? Schmeedom!

  

  

  
  
  

  

• The Real Reason Why There Is No Bond Market Liquidity Left

  Back in the summer of 2013, we first commented on what we called “Phantom Markets” – displayed quotes and prices, in not only equities, FX and commodities but increasingly in government bonds, without any underlying liquidity. The problem, which we first addressed in 2012, had gotten so bad, even the all important Treasury Borrowing Advisory Committee to the US Treasury had just sounded an alarm on the topic.

  Since then we have sat back and watched as our prediction was borne out, as bond market liquidity slowly devolved then sharply and dramatically collapsed recently to a level that is so unprecedented, not even we though possible, leading first to the October 15 bond flash crash and countless “VaR shock” events ever since.

  And while we urge those few carbon-based life forms who still trade for a living to catch up on our numerous posts on market “liquidity” and lack thereof, here is a quick and dirty primer on just why there is virtually no bond market left, courtesy of the man who, weeks ahead of the Lehman collapse when nobody had any idea what is going on, laid out precisely what happens in 2008 and onward in his seminal note “Are the Brokers Broken?”, Citigroup’s Matt King.

  Here is the gist of his recent note on the liquidity paradox which is a must read for everyone who trades anything and certainly bonds, while for the TL/DR crowd here is the 5 word summary: blame central bankers and HFTs.

  * * *
  

  The more liquidity central banks add, the less there is in markets

  • Water, water, everywhere — On many metrics, liquidity across markets seems abundant. Bid-offers are tight, if not always  back to pre-crisis levels. Notional traded volumes in credit and rates have reached all-time highs. The rise of e-trading is helping to match buyers and sellers of securities more efficiently than ever before.
  • Nor any drop to drink — And yet almost every institutional investor, in almost every market, seems worried about liquidity. Even if it’s here today, they fear it will be gone tomorrow. They say that e-trading contributes much volume, but little depth for those who need to trade in size. The growing frequency of “flash crashes” and “air pockets” – often without obvious cause – adds weight to their fears.
  • Yes, street regulation has played a role — The most frequently cited explanation is that increased regulation has driven up the cost of balance sheet and reduced the street’s appetite for risk, and hence ability to act as a warehouser between  buyers and sellers.
  • But so too have the central banks — And yet this fails to explain why even markets like FX and equities, which do not consume dealers’ balance sheets, have been subject to problems. We argue that in addition to regulations, central banks’ distortion of markets has reduced the heterogeneity of the investor base, forcing them to be the “same way round” over the past four years to a greater extent than ever previously. This creates markets which trend strongly, but are then prone to sudden corrections. It also leaves investors more focused on central banks than ever before – and is liable to make it impossible for the central banks to make a smooth exit.

  How Bad Is Liquidity Reall?

  From the BIS to BlackRock, and Jamie Dimon to Jose Vinals, everyone seems to be talking about market liquidity. Chiefly they seem to be fretting about a lack of it. Primary markets might be wide open, thanks in large part to the largesse of central banks, but the very same investors who are buying today seem deeply concerned about their ability to get out tomorrow.

  Liquidity as a concept is notoriously difficult to pin down. It has a reputation for being very much in evidence when not required, and then disappearing without trace the moment you need it. For strategists – and regulators – this represents a challenge: conventional metrics like bid-offer and traded volume can go only so far towards capturing what investors mean by liquidity. And yet because investors’ concept of liquidity tends very much to be focused on tail events, by definition, data to help monitor it are scarce.

  This paper tries to assess the evidence across markets, and evaluate what is driving it.

  Some observers have argued that even if liquidity is disappearing from some markets, it is being maintained – or even concentrated – in others. We argue in contrast that the risk of illiquidity is spreading from markets where it is a traditionally a problem, like credit, to traditionally more liquid ones like rates, equities, and FX. There is a bifurcation – but it is between decent liquidity much of the time and then sudden vacuums when it is really required, not across markets.

  We likewise take issue with the widespread notion that the problem is solely due to regulators having raised the cost of dealer balance sheet, and could be ameliorated if only there were greater investment in e-trading or a rise in non-dealer-to-non dealer activity. To be sure, we see the growth in regulation – leverage ratio and net stable funding ratio (NSFR) in particular – as one of the main reasons why rates markets are now starting to be afflicted, and indeed we expect further declines in repo volumes to add to such pressures. But illiquidity is a growing concern even in markets like equities and FX, which use barely any balance sheet at all, and where e-trading is the already the norm rather than the exception.

  Instead, we argue that in addition to bank regulations, there is a broad-based problem insofar as the investor base across markets has developed a greater tendency to crowd into the same trades, to be the same way round at the same time. This “herding” effect leads to markets which trend strongly, often with low day-to-day volatility, but are prone to air pockets, and ultimately to abrupt corrections. Etrading if anything reinforces this tendency, by creating the illusion of lliquidity which
  evaporates under stress.

  Such herding implies a reduction in the heterogeneity of the investor base. One potential cause is the way steadily more investor types having become subject to procyclical accounting and capital requirements in recent years, most obviously for insurance companies and pension funds.

  But the tendency towards illiquidity pockets even in markets where insurance and pension money is not dominant suggests a deeper cause. We think the most likely candidate is central banks’ increasing hold over markets. Over the past four years, it is expectations of central bank liquidity, not economic or corporate fundamentals, which have become the main driver of everything from €/$ to credit spreads to BTP yields.

  While central banks have always been significant market participants, their role has obviously grown since 2008. Most obviously, their global asset purchases have drastically reduced the net supply of securities available to be bought by investors. At the same time, we have seen a breakdown in a number of fundamental relationships which had previously correlated well with markets – and their replacement with metrics directly linked to central bank QE. Because the herding is not directly backed by leverage, it is unlikely to be reduced by macroprudential regulation.

  To date, the air pockets and flash crashes represent little more than a curiosity, having mostly been resolved very quickly, and having had little or no obvious feedthrough to longer-term market dynamics, never mind to the real economy.

  But we think ignoring them would be a mistake. Each has occurred against a largely benign economic backdrop, with little by way of a fundamental driver. And yet with each one, investors’ nervousness about the risk of illiquidity is likely to have been reinforced. When the time comes that investors do see a fundamental reason all to sell – most obviously because they start to doubt the extent of central banks’ support – their desire to be first through the exit is liable to be even greater.

  There when it’s not needed

  First, let us consider the evidence that all the fuss about liquidity is much ado about nothing. In many markets, under normal conditions, it is now possible to trade on more platforms, with more counterparties, and with tighter bid-offer, than ever before. While some market developments may perhaps point to the potential for problems, day-to-day liquidity remains remarkably good.

  Plenty of notional volume, with tight bid-offer

  The most obvious data point in this respect is that notional traded volumes in many markets are at or close to all-time highs.

  

  US credit, for example, saw nearly $27 trillion in secondary trading last year; HY volumes have doubled since the crisis (Figure 1). In government bonds, the increase was typically pre-crisis, but volumes have typically remained flat even in the face of a growing proportion of bonds being absorbed by the central banks (Figure 2). German Bunds are a notable  exception. Notional volumes in equities have fallen from precrisis peaks, but remain close to them in the US and Japan (Figure 3).

  Likewise, data on bid-offer across markets mostly paints a healthy picture. The BIS shows that bid-offer in govies has largely fallen back towards pre-crisis levels. Equity bid-offer is likewise close to pre-crisis lows, and seems to suggest that even quite large portfolios could be transacted at tight spread levels – provided volumes were split quite broadly across a large number of stocks (Figure 4). Bid-offer in credit remains wide to pre-crisis levels, as far as we can tell4, but is the tightest it has been since then (Figure 5). For small investors not correlated with the broader herd, these gains in notional volume and tight bid-offers will represent a very real ability to transact.

  

  Turnover in decline

  Admittedly, the positive message in these notional data is considerably mitigated when the growth in many markets – and in many investors’ portfolios, especially in rates and credit – is taken into consideration. Once transaction volumes are adjusted to show the difficulty an investor is likely to have moving a given percentage of the market, a very different picture emerges – and one which is much more consistent across markets.

  In credit, rates, and equities alike, turnover relative to market outstandings has fallen considerably. Corporate turnover has almost halved since the crisis (Figure 6). The decline in government bond turnover has been more protracted, but is just as drastic, especially in US Treasuries (Figure 7). Equity turnover is more obviously influenced by the rise and fall in outstandings with market movements, but has also suffered a post-crisis decline (Figure 8).

  

  For most investors, turnover is probably a more useful metric than straight traded volume. Monthly mutual fund inflows and outflows have generally grown as fund sizes have increased; for high-yield bond funds, net outflows seem to have been growing even in percentage terms, never mind in notional ones (Figure 9). Given that their share of the market has also been growing, the capacity to move a given percentage of the market is a much better guide than the ability to move a  given notional volume. The same tendency is not quite as pronounced in other long-term fund types, but seems also to be true for money market funds (Figure 10).

  

  And yet despite declining turnover, the fact remains that outflows to date have not led to obvious liquidity problems.

  ETFs, futures and indices – can they be more liquid than their underlying?

  If the mutual funds’ role in contributing to market liquidity risks has been exaggerated, then we think ETFs have been more maligned still. They may well be responsible for some of the reason “day-to-day” liquidity has held up so well, but we struggle to see that they can be blamed for any increase in its tendency to disappear under stress.

  The rise in ETFs has certainly been striking; in equities, in particular, net ETF sales have outstripped regular mutual fund sales in recent years (Figure 16), though in fixed income their rise has been slower. More striking still is that ETF trading now constitutes just under 30% of all US equity dollar volume. The rise of ETFs is probably one reason why, also in Europe, a growing proportion of daily volume is shifting away from intraday trades and towards end-of-day auctions (Figure 17).

  There may well be a positive feedback loop in which other large trades are increasingly executed at end-of-day auctions, precisely because investors know that liquidity is becoming concentrated there, and to avoid being seen for reporting purposes to have dealt away from the daily closing price.

  But what is striking in Figure 17 is that non-auction equity volumes have also been rising in recent years. Rather than ETFs subtracting from cash traded volume, they seem to have added to it. The same might be said for the rise of traded volume  in dark pools.

  In this respect, we see ETFs as very much akin to the CDS indices in credit, or futures in equities and rates. It is not that there is a fixed quantity of trading to be done, and that the arrival of a new instrument necessarily removes trades which would have been done elsewhere. If anything, we see the opposite phenomenon. Liquidity begets liquidity: when investors have new instruments with which to express views and refine their positions, it tends to encourage still more trading.

  In addition, in contrast with open-ended mutual funds, ETFs – like closed-end investment trusts – offer the possibility for prices to diverge from net asset values. This affords an additional cushion, especially during periods of market stress. The fact that ETF volumes have a tendency to increase relative to cash volumes during periods of stress – even though they then are likely to be trading at a discount – suggests that this cushion works well, and may even act to boost liquidity during stressed conditions. We have much sympathy for the way one ETF provider put it: “Everyone complains when they see our prices deviating from the underlying. But what they fail to realize is that at least people can and do actually trade at those prices: in troubled times, the prices shown on broker screens for underlying instruments are often a fiction.”

  So while we would agree with the statement that “no investment vehicle should promise greater liquidity than is afforded by its underlying assets”5, we think there is something for an exception for vehicles which are themselves tradable, and can trade with a basis relative to their underlyings. ETFs, CDS indices and futures can and do provide much more liquidity than their underlyings. This, though, is not so much because they “promise” more liquidity, as that they facilitate additional activity, much of which is crossed at the index level, and only a fraction of which is transmitted through to the underlying. While investors are periodically surprised and frustrated by these vehicles’ failure to perfectly track movements in their underlyings, this failure is in some ways the secret of their liquidity. Rather than stealing liquidity from the underlyings, we think their growth has added to it.

  Missing when required

  But if neither ETFs nor mutual funds can be held responsible for perceptions of reduced liquidity across markets, what can? The finger is most often pointed at the street. Many buysiders feel that dealers’ willingness to act as a liquidity provider even during good times has waned; might such reduced willingness also help explain an increased tendency of liquidity to evaporate altogether? We think this is much closer to the truth – but even so, we doubt it is the full story.

  Are the brokers broken?

  Such arguments have been voiced most persuasively in Jamie Dimon’s recent letter to JPM shareholders. He cited three factors: higher cost of balance sheet, explicit constraints for US banks as a result of the Volcker Rule, and in extremis the fact that the rescues of the likes of Bear Stearns, WaMu and Countrywide/Merrill have led not to gratitude but to heavy fines for JPMorgan and Bank of America, in at least one case following the abnegation of ex ante assurances otherwise.

  The effects of the latter two factors are hard to observe, and would probably become visible only in a proper crisis. Even then, they might in principle be offset by “Rainy Day” funds. These are pools of money being set up by asset managers precisely so as to take advantage of liquidity-related distortions. But it seems doubtful that these will ever reach the scale required to take 2008-style rescues, at least without large amounts of leverage.

  The effects of reduced dealer balance sheet, however, are visible already, and are contributing directly to the perception of illiquidity in fixed income. Unlike equities or FX, fixed income trading is fragmented across an extremely large number of outstanding securities. Only rarely can a willing buyer and seller of the same security be found at the same instant. As such, liquidity, particularly for larger trades, relies heavily on dealers’ ability to act as a warehouse, temporarily hedging a long position in one security with a short position in another. This requires both the availability of balance sheet, and the ability to borrow securities freely through repo. Both of these are now under threat from regulation.

  

  Why e-trading is no panacea

  E-trading works extremely well as an efficient means of uniting buyers and sellers of a given security – provided those buyers and sellers exist in the first place.

  That is, a buyer can probably find a seller faster now than they could a few years ago, when they had to rely solely on email and phone calls. In indices, in equities and in on-the-run govies, where many investors are ready and willing to trade the same security on either side of the market multiple times in an hour, this can bring about significant improvements (Figure 24).

  But in much of fixed income (and especially credit), liquidity is intrinsically fragmented. End investors’ willingness to buy and sell a large notional volume of a given security is simply not there in the first place (Figure 25). Even if investors could be persuaded to concentrate their positions in a given issuer on a smaller number of outstanding “benchmark” securities, as BlackRock has called for, issuers could never be persuaded to do so, since it would add to their refinancing risks. Issuers like the diversification that a multitude of outstanding securities brings.

  

  As such, it is no use efficiently putting together buyers and sellers when those buyers and sellers do not exist in the first place. This is why many traders report that – even when they have on occasions been able to offer ‘choice’ markets with zero bid-offer for a while, these have not necessarily resulted in any trading. End user liquidity remains fundamentally dependent on a counterparty’s willingness to act as a warehouse: to buy the security the seller wants to sell, to offer the security the buyer wants to buy, find a hedge of some sort and then move to unwind the position later. This is also why so many bond market participants – buyside and sellside – are opposed to efforts to copy-paste equity-inspired regulations into a fixed income framework in the interest of increased transparency.

  Nor is it obvious that there is an easy alternative to the existing broker-dealer model when it comes to warehouses. Bid-offers are tight enough that the market-making model relies upon leverage in order to generate a reasonable return on equity. Even if, say, asset managers or hedge funds are prepared to act as warehouses, for them to make money on the operation they will want to operate with leverage. But – as the clearing houses are now starting to find out, and banks discovered some time ago – such leverage represents precisely the sort of systemic risk that regulators are now keen to limit.

  As such, e-trading to date has done a great deal to boost what the IMF calls “flow”, or day-to-day liquidity, for small-sized trades. But when it comes to larger transactions, they can seldom be cleared (Figure 26).

  ‘Phantom liquidity’ – is the problem getting worse?

  There is an argument that the liquidity provided by e-trading seems to be more fleeting than that stemming from voice trades and personal relationships. When markets become volatile, e-trading operators tend to pull the plug – or, at best, reduce the size they are willing to trade. A recent IMF analysis concluded that it was precisely such a reduction in the depth of order books which seems to have led to the ‘flash rally’ in US Treasuries on October 15th 2014. A high dependence on electronic trading also seems to have contributed to the flash crash in equities on May 6th 2010.

  It is this phenomenon that is known as “phantom liquidity”, or the “liquidity illusion” – a tendency to evaporate when really needed. It does seem possible that e-trading may have added to such a tendency, by improving the appearance of liquidity under normal conditions, and then withdrawing it in periods of stress. This could help explain why some of the most obvious instances of recent illiquidity have occurred in markets which already have high proportions of trades conducted electronically.

  And yet beyond the anecdotal, quantitative data demonstrating an increased tendency towards “phantom liquidity” is extremely hard to pin down. After all, it makes predictions not about day-to-day circumstances but about tail events, which by definition are few and far between.

  The best evidence is probably some increase in bifurcation in day-to-day trading conditions, visible in daily volatility levels across markets. Rather than there being a steady stream of moderately volatile days (and liquidity conditions), volatility seems to be becoming more clustered than it used to be: there are many days with tight ranges and good liquidity, and then occasional days of extreme intraday volatility and reportedly poor liquidity – even though (as in the flash crash and flash rally) volumes on such days can actually remain quite high.

  Often, the volatility is thought to occur intraday, and therefore may not be captured by the net daily changes implicit in volatility metrics. Looking at intraday high-low ranges in markets paints a slightly clearer picture – but not decisively so. It does in general seem to us that intraday ranges have become more bifurcated since around 2005, most obviously with a period of low volatility prior to the financial crisis being followed by the extremely high ranges during the crisis itself, but also with post-crisis daily trading ranges being more bifurcated than prior to 2005.

  

  Low day-to-day volatility, punctuated by occasional sharp corrections, are exactly what we might anticipate if markets were becoming less liquid. In credit, for example, they are one of the features which distinguishes the cash market relative to the continual bouncing around of the CDS indices. And we have argued previously that markets seem to be becoming more subject to positive feedback loops, which see them trending steadily upward only to fall back suddenly and often unexpectedly.

  And yet the limited number of observations, and the variations across markets, make it hard to make confident statistical statements about any change in the shape of distributions. We are left with the unsatisfying conclusion that evaporating liquidity is as much a feeling voiced by many market participants as to what might happen under stress, illustrated by a few idiosyncratic examples, as it is a statistically demonstrable phenomenon.

  The evidence of increased herding

  A recipe for a perfectly liquid market would be one with a small number of homogeneous securities being traded by a much larger number of heterogeneous participants. This would do a great deal to improve the likelihood of a buyer and seller both wanting to transact in the same security at the same time, and hence being able to agree upon an appropriate price. Indeed, it has even been suggested that we might quantify markets’ potential for liquidity along such lines, taking the number of distinct market participants and dividing by the number of securities traded.15 This is one reason why liquidity in indices and futures is often so good, as they concentrate a large amount of activity in a small place.

  One potential explanation for growing illiquidity is that markets have been evolving in an exactly opposite direction. Not only has the number of securities traded been growing (in credit in particular), but the heterogeneity of market participants seems to have been reducing as well. Here too, the regulations are partly to blame, with more and more investors being forced both to mark to market and to hold capital or cover pension deficits on the basis of such mark to market calculations. In addition, though, it feels to us as though market participants are increasingly looking at the same factors when they make their investment decisions.

  For the last few years, valuations in more and more markets seem to have stopped following traditional relationships and instead followed global QE. Likewise in meetings with investors, we have been struck by how little time anyone spends discussing fundamentals these days, and how much revolves around central banks. Record-high proportions of investors think fixed income is expensive and think equities are expensive.  A growing number of property market participants seem to think real estate is expensive. And yet almost all have had to remain long, as each of these markets has rallied. Could it be that central bank liquidity has forced investors to be the same way round more so than previously, and that this is  making markets prone to sudden corrections.

  

  While it is hard to demonstrate conclusively, a growing weight of evidence would seem to point in such a direction. CFTC data on net speculative positioning in futures and options markets has become more extreme in recent years, and abrupt falls in net positioning have often coincided with sharp market movements. Net shorts in Treasuries reached record levels immediately prior to the flash rally, for example (Figure 29); net longs in commodities contracts preceded the sharp fall in commodities indices in the second half of last year, and record net euro shorts (Figure 30) and dollar longs are being squeezed at the moment. However, it could be argued that growth in notional contracts outstanding is a normal part of financial market deepening; normalizing by the net open interest would (at least in some cases) suggest recent positioning is not too far out of line with history.

  But other data also point to an increase in investor crowding. Our own credit survey shows that investors’ positions in credit since the crisis have not only been longer on average than ever previously, but also less mean reverting, and exhibiting less dispersion and less mean reversion (Figure 31). Fully 83% of those surveyed were long credit in December last year – a sizeable imbalance for any market. Similarly, the BAML global investor survey shows that investors have been long in equities for a longer period than would historically have been normal.

  Research specifically designed to detect investor herding has reached the same conclusion. An IMF analysis of the correlation between individual securities transactions by US mutual funds, using the vast CRSP database, shows a clear pickup in herding with the crisis, and then another one in late 2011. The herding seems to have occurred consistently across markets, but was more intense in credit and especially EM than in equities. It also occurred both among retail and among institutional investors. The IMF were unable to test for herding in government bonds and FX because of the much more limited number of securities.

  What we find striking about the herding numbers is the way they correlate with the metrics we use to track the scale of central bank interventions: rolling global asset purchases by DM central banks, and global net issuance of securities once central bank purchases (and, in this case, also LTROs) have been subtracted out. Over the past four years, we have had to use these metrics to help explain market movements when traditional fundamental relationships have broken down.

  Investors likewise agree on the dominance of central banks: in a survey of global credit derivatives investors we conducted in January this year, fully two thirds thought “central bank actions” would be the main driver of spreads this year, well ahead of “credit fundamentals”, “global growth trends” or “geopolitical risks”. Even if the central banks are only having to intervene because the systemic risks they are confronting have become bigger, the effect remains the same.

  

  This, then, would seem to be the final piece of the puzzle as to what is making markets prone to pockets of illiquidity. Central bank distortions have forced investors into positions they would not have held otherwise, and forced them to be the ‘same way round’ to a much greater extent than previously. The post-crisis increase in correlations, which has been visible both within credit and equities and across asset classes (Figure 35), stems directly from the fact that investors now increasingly find themselves focused on the same thing: central bank liquidity. Every so often, when they start to doubt their convictions, they find that the clearing price for risk as they try to reverse positions is nowhere near where they’d expected.

  This explains why the air pockets have not just been in markets where the street acts as a warehouser of risk. It explains why they have occurred not only in the form of sell-offs which could have caused multiple market participants to suffer from procyclical capital squeezes. It also explains why the catalysts have often, while often trivially small, have nevertheless been macro in nature, since they have boosted expectations of a change in central banks’ support for markets.

  Unfortunately, it leads to a rather ominous conclusion. The bouts of illiquidity will continue until central banks stop distorting markets. If anything, they seem likely to intensify: unless fundamentals move so as to justify current valuations, when central banks move towards the exit, investors will too.

  Rather than dismissing recent episodes as relatively harmless, then, we are supposed to worry how much larger a move could occur in response to a more obvious stimulus. While financial sector leverage has fallen, debt across the nonfinancial   sectors of almost every economy remains close to record highs, meaning that the potential for negative wealth effects in the real economy is very much there.

  In principle, markets could gap to a point where they went from being absurdly expensive to being absurdly cheap, and then – as investors stepped in again – gap tighter, perhaps even without very much trading. But the existence of the feedback loop to the real economy means that the fundamentals tend also to be affected by extreme market moves: “cheap” may be a moving target. This in turn could force central banks to step back in again.

  To sum up, we are left with a paradox. Markets are liquid when they work both ways. Market participants, though, find themselves increasingly needing to move the same way. This is not only because of procyclical regulation; it is also because central banks have become a far larger driver of markets than was true in the past. The more liquidity the central banks add, the more they disrupt the natural heterogeneity of the market. On the way in, it has mostly proved possible to accommodate this, as investors have moved gradually, and their purchases have been offset by new issuance. The way out may not prove so easy; indeed, we are not sure there is any way out at all.

  * * *  

  To which all we can add is: Good luck with the “exit”
  

  

  

  
  
  

  

• 40 Million People Will Be Out Of Work Next Year, OECD Warns

  While today’s IMF cut in US growth estimates served merely to reestablish long positions in the long end of the curve and to serve as a basis for this quarter’s IMF “comedy of errors” update, a more concerning update was presented by the far more credible OECD whose latest forecast is truly troubling for all those who claim the global economy is in a recovery.

  As reported by AFP, in the latest economic forecast from the Organization for Economic Cooperation and Development, the Paris-based body made up of 34 of the world’s most developed countries, the conclusion is that the world economy risks being bogged down in a low-growth spiral unless measures are taken to spur demand and incite businesses to boost their stubbornly sluggish investments.

  Hint: raise rates now, send the economy into a tailspin, do QE4 imminently, pretend it is to “boost the economy”, send the S&P500 to 3000. Rinse. Repeat.

  Coming just hours ahead of the IMF’s own slashing of US growth forecasts, yesterday the OECD cut its forecast for the U.S. economy. The OECD now expects U.S. economic growth to slow to 2% this year from 2.4% in 2014, compared to March when it forecast an acceleration to 3.1% in 2015. Odd: today’s IMF revised cut is nearly identical. One wonders if the IMF’s economists don’t merely read the OECD’s work and present it as their own?

  Canada’s growth estimate was also lowered to 1.5% from a March prediction of 2.2% and November’s estimate of 2.5%. It must have snowed harshly there too.

  Looking at the bigger picture, the overall global economic growth is now projected at just 3.1% this year — half a percent lower than the November estimate.

  The Eurozone is still expected to grow 1.4% this year, unchanged from the March forecast: should Greece exit the Eurozone, the OECD can just a minus sign in its next revision.

  The OECD also trimmed its forecasts slightly for China and Japan.

  The world economy has suffered from stubbornly weak growth throughout its recovery from 2009’s Great Recession. This, the OECD notes, “has had very real costs in terms of foregone employment, stagnant living standards in advanced economies, less vigorous development in some emerging economies, and rising inequality nearly everywhere.”

   

  The OECD says weak investment, with growth of little more than 2 per cent this year, is partly to blame for the slack recovery. Its forecast of stronger growth in 2016 hinges on its prediction that investment will almost double to 4 per cent next year — although it warns that this upturn “could remain elusive.”

  Of course, it could be unelusive if and when corporate buybacks become an official part of the GDP calculation, perhaps replacing such economic relics as fixed investment, which nobody really does any more.

  But perhaps the most disturbing, and factual (unlike the IMF’s forecast of Greek 2022 debt/GDP), finding is that unemployment in the OECD region has fallen only 1 per cent since its 2010 peak.

  In other words, by 2016, the group warned, 40 million people will be out of work, 7.5 million more than immediately before the crisis.

  Um, what recovery?

  Oh, and 40 million angry people we should add, with little hope of professional realization and lots of free time. Is it surprising why in recent months not a day passes without some mass violence event breaking out somewhere in the world (but mostly in the US)?

  And speaking of jobs, tomorrow we will learn if nearly 8 years after December 2007, the US will finally recover all the full-time jobs lost during the second great depression:

  

   

  … or if the job reality for most American potential employees is shown on the picture below.

  

  Job seekers line up outside at Choice Career Fairs’ New York career fair at the Holiday Inn Midtown in New York

  

  

  
  
  

  

• Did The US Department Of Justice Just Do Vladimir Putin A Great Favor

  Last year, in the aftermath of the western-mediated Ukraine presidential coup and subsequent proxy civil war between Russia and NATO countries, the US imposed sanctions, largely over the complaints of the German business lobby, on Moscow which did little to dent the Russian economy but crippled European exports to such a degree that a few months later the continent was on the verge of a triple dip recession which in turn paved the way for the ECB’s QE.

  That is not to say Russia was spared: Russia’s economy was also substantially impacted but not by US “costs”, since unlike the US, financial markets in Russia are a fraction of the size and importance they are in the west, but by the collapse in oil prices. It took US some 6 months to realize that for a commodity exporting powerhouse such as Russia, sanctions are meaningless, but crush the price of its main export and suddenly everything changes.

  This was the basis for various rounds of “secret” talks between John Kerry and Saudi Arabia: to punish Russia by lowering the price of oil, which also ended up smothering not only US shale production but the most vibrant part of the US economy, and its job creation dynamo, the state of Texas.

  Furthermore, the Russian economy had also been weakened recently by the Winter Olympics in Sochi, which may have been the grand spectacle Putin wanted to put on, but it came at a cost: the final bill is said to have topped $50 billion, much more than originally planned, although oil was still well above $100, in line with what had been Russia’s budgeted oil price for 2015-2017. 

  Which is why in retrospect, the DOJ’s crackdown against FIFA in general, and the Russian World Cup of 2018 in particular, may have been just the blessing in disguise that Putin, who whether he likes it or not has been forced to hunker down in cash conservation mode, wanted.

  According to Reuters, Russia expects to spend more than 660 billion rubles ($12 billion) on preparations including building six new stadiums, hotels, training grounds and health facilities. “Russia won the right to host the finals in 2010 with a bid promising to overhaul the transport system, build state-of-the-art sport facilities and put several regional cities on the map.”

  Costly, but meaningless, airport renovations and high-speed rail links are also needed to ease travel between the 11 host cities, the most distant of which, Yekaterinburg, is almost 2,000 km (1,250 miles) from Moscow.

  Below is Reuters’ map of all the Russia cities whose infrastructure would require massive renovations ahead of the event:
  

  Reuters further notes that last week the “government reduced planned spending on the World Cup by 3.5 billion rubles, the latest in a series of cuts made as the economy flags.”

  Since the start of 2015, the World Cup organizers have axed plans to build 25 hotels, cut the number of training grounds in each host city from four to three and reduced the capacity of some of the venues to save on building costs.

  Moscow’s Luzhniki stadium, which will stage the opening match and the final a month later, will be able to seat 81,000, down from the 89,000 originally billed.

   

  “This World Cup is an image project for Putin. He really has something to prove here,” a source close to the organizing committee said.

   

  But he added: “The approach to this World Cup now is to do what was promised, with no frills, and nothing more.”

   

  Michal Karas, editor-in-chief of website Stadium Database, said many high-tech features included in designs for Russia’s new stadiums have been scrapped as the weak rouble made imports more expensive.

  And therein lies the rub: when it comes to projecting an outward image, for Putin it is everything or nothing, no matter the cost. However, as a result of economic (and geopolitical) developments over the past year, the cost has started to matter. And as a result, suddenly the grand vision of the world cup had to be scaled down.

  Enter the US department of justice, and the FBI which as reported yesterday, is now investigating whether bribes were involved in the selection of Russia and Qatar as hosts of the 2018 and 2022 World Cup venues.  And as we predicted one week ago when the FIFA scandal broke out, it is only a matter of time before Russia is stripped of its World Cup hosting.

  Which would be not a single, but double victory for Putin:

  • first, Putin will save billions in funds for far better uses (the IRR on mass sport spectacles is terrible), and avoid the bottomless pit that is building if not bridges, then surely road, to nowhere and stadiums that will be used once only to become grazing grounds for sheep in the years to come.
  • more importantly, for a country fanned by nationalistic fervor, Putin will be able to wave the patriotic flag and slam the evil USA for not only meddling in other people’s affairs, but taking away what was rightfully Russia’s, thereby boosting his nationalism-inspired popularity to even greater heights.

  Finally, what better time and place to stage a massive false flag event than during a world cup, one where countless international, innocent casualties can be blamed on the host nation for not providing sufficient security, leading to an even greater outcry from the global media. No world cup matches, no false flag risk.

  So, ironically, the great FIFA scandal meant to strip Russia of its 2018 World Cup hosting may just end up being the deus ex win-win for Putin which the Russian leader never expected would fall straight into his lap.

  

  

  
  
  

  

• Wikileaks Reveals Full Text Of Trans-Pacific Partnership

  Finally “America’s biggest secret” has been revealed and now the full, formerly confidential text of the Trans-Pacific Partnership, aka Obamatrade, has been made public. You just have to be quick.

  

  

  
  
  

  

• Philippine President Compares China To Nazi Germany; Beijing Tells Him To "Repent"

  Anyone who follows geopolitical news knows that China is in the midst of a tense standoff with the US and its allies regarding Beijing’s land reclamation efforts in the South China Sea. 

  To recap, China is building artificial islands atop reefs in the Spratly archipelago. Although other countries have embarked on similar initiatives in the past, the scale of Beijing’s efforts is, according to the US, unparalleled.

  As the following graphic from WSJ shows, Taiwan, Malaysia, Brunei, The Philippines, and Vietnam all have sovereign claims in the area:

  

  China has constructed some 1,500 acres of sovereign territory in the Spratlys this year alone, leading its neighbors to cry foul and prompting the US to send surveillance aircraft to monitor the situation. Beijing views Washington’s interference as unacceptable (not to mention hypocritical) and has variously suggested that further intervention from the US could easily lead to a maritime “accident.”

  Over the past two weeks, the tension has escalated, culminating in China’s move to place artillery on one of its new islands and break ground on two lighthouses which will be used to provide “international public services.” 

  If you thought the war of words around the “sand castles” couldn’t get any more contentious (and absurd) you’d be wrong because Philippine President Benigno Aquino has now compared China’s “construction efforts” to the Nazi occupation of Czechoslovakia.

  “I’m an amateur student of history and I’m reminded of … how Germany was testing the waters and what the response was by various other European powers,” Aquino said, in a speech in Japan. 

   

  

  (Aquino speaks in Tokyo)

   

  “They tested the waters and they were ready to back down if, for instance, in that aspect, France said (to back down). But unfortunately, up to the annexation of the Sudetenland, Czechoslovakia, the annexation of the entire country of Czechoslovakia, nobody said stop. If somebody said stop to Hitler at that point in time, or to Germany at that time, would we have avoided World War II,” he added.

  Needless to say, Beijing was not pleased with the reference. Here’s more via The People’s Daily:

  China said on Wednesday that it was deeply shocked and dissatisfied with the Philippine president’s remarks likening China to Nazi Germany, warning Manila to stop provoking Beijing on the South China Sea issue.

   

  Foreign Ministry spokeswoman Hua Chunying said that the Philippines has tried to occupy Chinese islands for decades and has kept “colluding with countries outside the region to stir up trouble and sling mud at China”.

   

  “I once more seriously warn certain people in the Philippines to cast aside their illusions and repent, stop provocations and instigations, and return to the correct path of using bilateral channels to talk and resolve this dispute,” she said.

   

  During a speech in Japan on Wednesday, Philippine President Benigno Aquino compared China’s actions to Nazi Germany’s territorial expansion before the outbreak of World War II.

  Meanwhile, President Obama stopped short of likening the PLA to the SS, opting instead for a characteristically colorful (and asinine) colloquialism: 

  “The truth is, is that China is going to be successful, it’s big, it’s powerful, its people are talented and they work hard and, and it may be that some of their claims are legitimate. But they shouldn’t just try to establish that based on throwing elbows and pushing people out of the way.”

  It’s worth noting (again) that when the US accuses China of using its size and relative power to “push people out of the way”, Washington opens itself up to accusations of blatant hypocrisy. Indeed, as we mentioned when the South China Sea feud first began to simmer, using size, influence, and relative power to shape geopolitical outcomes is unspoken foreign policy in Washington.

  In any event, Aquino’s comments won’t do anything to stabilize the region because after all, once the Nazi name-calling starts, all bets are off.

  

  

  
  
  

  

• The Danes Are Revolting: Tax Administration Set On Fire

  In Fredensborg, Denmark, ten official cars from the Tax Administration Office were set on fire and destroyed overnight in a protest. As ExstraBladet reports, police received notification Wednesday night at 3:09 a.m. that the Tax Administration offices on Kratvej were on fire. So far, there are no suspects. But, as Martin Armstrong notes, the police will undoubtedly hunt for someone retaliating against the Tax Man.

   

  

  As Martin Armstrong further points out, this is not the first time the world has seen this…

  On February 18, 2010, a man in a dispute with the IRS for seizing his home flew his plane in a suicide mission directly into the IRS building in Austin, Texas.

  

  His battle against the Tax Man made him a hero to many.

  As the economy turns down and governments become far more aggressive to grab money from everyone, we should see a sharp rise in these types of incidents.

  This is part of the rising trend in civil unrest.

   

  This is all insane since money is no longer tangible; taxes are also no longer necessary. We should seriously address the fact that money is not what it used to be.

   

  We have moved forward in technology, science, medicine, and every field except economics. France is high on the list for a major tax revolution as nearly 50% of GDP is consumed by annual tax collections. That is totally insane. And they wonder why the rich flee and unemployment rises? This is the 21st century, not the 17th. Money has changed and taxes are no longer necessary, yet they create it anyway. That is like me giving you a $100 bonus and then charging you $50 to receive it.

  What’s the point? They spend more than they collect anyway.

  

  

  
  
  

  

• US Police And Prosecutors Fight To Retain Barbaric Right of “Civil Asset Forfeiture”

  by Mike Krieger of Liberty Blitzkrieg

  Land of the Unfree – Police and Prosecutors Fight Aggressively to Retain Barbaric Right of “Civil Asset Forfeiture”

  Efforts to limit seizures of money, homes and other property from people who may never be convicted of a crime are stalling out amid a wave of pressure from prosecutors and police.

   

  Their effort, at least at the state level, appears to be working. At least a dozen states considered bills restricting or even abolishing forfeiture that isn’t accompanied by a conviction or gives law enforcement less control over forfeited proceeds. But most measures failed to pass.

       – From the Wall Street Journal article: Efforts to Curb Asset Seizures by Law Enforcement Hit Headwinds
  
  The fact that civil asset forfeiture continues to exist across the American landscape despite outrage and considerable media attention, is as good an example as any as to how far fallen and uncivilized our so-called “society” has become. It also proves the point demonstrated in a Princeton University study that the U.S. is not a democracy, and the desires of the people have no impact on how the country is governed.

  Civil asset forfeiture was first highlighted on these pages in the 2013 post, Why You Should Never, Ever Drive Through Tenaha, Texas, in which I explained:

  In a nutshell, civil forfeiture is the practice of confiscating items from people, ranging from cash, cars, even homes based on no criminal conviction or charges, merely suspicion. This practice first became widespread for use against pirates, as a way to take possession of contraband goods despite the fact that the ships’ owners in many cases were located thousands of miles away and couldn’t easily be prosecuted. As is often the case, what starts out reasonable becomes a gigantic organized crime ring of criminality, particularly in a society where the rule of law no longer exists for the “elite,” yet anything goes when it comes to pillaging the average citizen.

   

  One of the major reasons these programs have become so abused is that the police departments themselves are able to keep much of the confiscated money. So they actually have a perverse incentive to steal. As might be expected, a program that is often touted as being effective against going after major drug kingpins, actually targets the poor and disenfranchised more than anything else.

  Civil asset forfeiture is state-sanctioned theft. There is no other way around it. The entire concept violates the spirit of the 4th, 5th and 6th amendments to the Constitution. In case you have any doubt:

  The 4th Amendment: The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

   

  The 5th Amendment: No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

   

  The 6th Amendment: In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defense.

  Civil asset forfeiture is a civil rights issue, and it should be seen as such by everyone. Just because it targets the entire population as opposed to a specific race, gender or sexual orientation doesn’t make it less important.

  The problem with opposition in America today is that people aren’t seeing modern battle lines clearly. The greatest friction and abuse occurring in these United States today comes from the corporate-fascist state’s attack against average citizens. It doesn’t matter what color or gender you are. If you are weak, poor and vulnerable you are ripe for the picking. Until people see the battle lines clearly, it will be very difficult to achieve real change. Most people are divided and conquered along their superficial little tribal affiliations, and they completely miss the bigger picture to the peril of society. Which is why women will support Hillary just because she’s a woman, not caring in the least that she is a compromised, corrupt oligarch stooge.

  In case you have any doubt about how little your opinion matters when it comes to the rights of police to rob you blind, read the following excerpts from the Wall Street Journal:

  Efforts to limit seizures of money, homes and other property from people who may never be convicted of a crime are stalling out amid a wave of pressure from prosecutors and police.

  Read that sentence over and over again until you get it. This is a free country?

  Critics have taken aim at the confiscatory powers over concerns that authorities have too much latitude and often too strong a financial incentive when deciding whether to seize property suspected of being tied to criminal activity.

   

  But after New Mexico passed a law this spring hailed by civil-liberties groups as a breakthrough in their effort to rein in states’ forfeiture programs, prosecutor and police associations stepped up their own lobbying campaign, warning legislators that passing such laws would deprive them of a potent crime-fighting tool and rip a hole in law-enforcement budgets.

   

  Their effort, at least at the state level, appears to be working. At least a dozen states considered bills restricting or even abolishing forfeiture that isn’t accompanied by a conviction or gives law enforcement less control over forfeited proceeds. But most measures failed to pass.

   

  “What happened in those states is a testament to the power of the law-enforcement lobby,” said Scott Bullock, a senior attorney at the Institute for Justice, a libertarian-leaning advocacy group that has led a push for laws giving property owners more protections.

  It seems the only people in America without a powerful lobby group are actual American citizens. See: Charting the American Oligarchy – How 0.01% of the Population Contributes 42% of All Campaign Cash

  Prosecutors say forfeiture laws help ensure that drug traffickers, white-collar thieves and other wrongdoers can’t enjoy the fruits of their misdeeds and help curb crime by depriving criminals of the “tools” of their trade. Under federal law and in many states, a conviction isn’t required.

  “White-collar thieves,” they say. Yet I haven’t seen a single bank executive’s assets confiscated. Rather, they received taxpayer bailout funds with which to pay themselves record bonuses after wrecking the global economy. Don’t forget:

  The U.S. Department of Justice Handles Banker Criminals Like Juvenile Offenders…Literally

  In Texas, lawmakers introduced more than a dozen bills addressing forfeiture during this year’s legislative session, which ended Monday. Some would either force the government to meet a higher burden of proof or subject forfeiture programs to more stringent financial disclosure rules and audits.

   

  But only one bill, which law-enforcement officials didn’t object to, ultimately passed. It requires the state attorney general to publish an annual report of forfeited funds based on data submitted by local authorities. That information, at the moment, is only accessible through freedom-of-information requests.

  This is what a corporate-statist oligarchy looks like.

  Shannon Edmonds, a lobbyist for the Texas District and County Attorneys Association, said local enforcement officers and prosecutors “educated their legislators about how asset forfeiture really works in Texas.

  Maryland Gov. Larry Hogan last month vetoed a bill that would, among other things, prohibit the state from turning over seized property to the federal government unless the owner has been charged with a federal crime or gives consent.

  Remember, the terrorists hate us for our freedom.

  Prosecutors said the Tenaha episode was an isolated breakdown in the system. “Everybody knows there are bad eggs out there,” Karen Morris, who supervises the Harris County district attorney’s forfeiture unit, told Texas lawmakers at a hearing this spring. “But we don’t stop prosecuting people for murder just because some district attorneys have made mistakes.”

  When police aren’t out there stealing your hard earned assets without a trial or charges, they can often be found pounding on citizens for kicks. I came across the following three headlines this morning alone as I was the scanning news.
  
  Cop Exonerated After Being Caught on Video Brutally Beating A Tourist Who Asked For A Tampon

  Kids in Police-Run Youth Camp Allegedly Beaten, Threatened By Cops
  
  Florida Cop Charged With On-Duty Child Abuse; Suspended With Pay

  This is not what freedom looks like.

  

  

  
  
  

  

• Who's Next? China Finally Starts Snapping Up Gold Miners

  Submitted by John Rubino via DollarCollapse.com,

  One (perhaps the only) bright spot in the past few year’s gold market has been Chinese and Indian demand for the metal. Here’s a chart, courtesy of Ed Steer’s Gold & Silver Daily, showing that the two countries have imported a cumulative 15,000 tonnes since 2008, which is not far from the total production of the world’s gold mines in that period.

  

  But physical bullion is only part of the story, and may not be the biggest one going forward. Speculation has been circulating for years that China’s miners, flush with cash from selling their low-cost output to the government, would soon start buying up the world’s in-ground gold reserves. Here’s a representative opinion from 2010:

  China buying Gold Mines Instead of Gold Bullion

  A top industry official from the China Gold Association told The China daily back in February that the Chinese purchase of IMF bullion would cause market speculation and volatility. Instead, China is continuing to buy gold not directly from the market but through acquiring gold mines…abroad!

  Dennis Gartman reported in March: “Perhaps we are to begin owning gold mines rather than gold futures of gold ETFs. We have avoided owning mines for years, preferring the “purer” play of owning gold rather than the mines, for we fear being exposed to poor mine management, or accidents in a mine that might do damage to the equity while gold itself moves higher. But if the Chinese authorities want to own mines, perhaps we have to consider doing so also…"

  Why shouldn’t this make sense? After all, where do investors want to put their money? Banks are unsafe. Stocks are unsafe and speculative. With Real Estate at least you have a tangible asset and it will hold some value despite market busts. And buying Gold Bullion, especially buying in large quantities, can cause the prices to fluctuate significantly.

  The best bet? Gold Mines! Maybe even patented gold mines where the investors own both the title to the land AND the Gold in the ground. Get ready to see a huge surge in gold mine buyers, especially from China!

  That was obviously a little optimistic, since mining shares have plunged in the ensuing five years. But price action notwithstanding, the speculation didn’t let up. From 2013:

  5 reasons China is coming to buy your gold mine

  Chinese producers are aggressively looking at picking up gold companies and mines elsewhere as domestic demand reaches record highs.

  Takeovers and asset purchases by Hong Kong and mainland miners increased to a record $2.2 billion in 2013 according to data compiled by Bloomberg.

  Chinese companies like Zijin Mining Group and Zhaojin Mining Industry Co are in a good position to to take a bite out of struggling North American and European-based producers because:

  • Chinese gold demand is soaring and at 1,000 tonnes will overtake Indian purchases this year, but domestic deposits are less than 5% of the global total.

  • Targets are cheap – the S&P/TSX Global Gold Index of the globe’s 49 biggest gold companies are down 31% this year alone.

  • Domestic Chinese producers enjoy some of the lowest cash costs – Zhaojin manages $549/oz, compared with a global average of $831/oz

  • Chinese and Hong Kong companies have access to cheap capital – Zijin got $4.9 billion in soft loans from a state bank for M&A

  • The majors are actively looking to sell as debt levels increase and high-cost mines are mothballed – Barrick could dump as many as 12 of its mines.

  Possible targets include:
  • Australia’s Mali-focused Papillion Resources ($390 million)
  • Toronto-based Iamgold ($2.5 billion)
  • Amara Mining active in West Africa ($48 million)
  • Perseus Mining ($325 million) with producing mines in Ghana and Cote d’Ivoire

  While these companies are looking to get rid of a number of mines:
  • Barrick Gold
  • Newmont Mining Corp
  • Gold Fields
  • Alacer Gold Corp

  Again, too early. Mining stocks are down by about half since that article was published.

  But now, finally, the China-buying-all-the-gold-mines scenario has begun to solidify. From last week:

  Barrick Gold Sells 50% Stake In Big PNG Gold Mine To The Chinese

  In what it describes as a ‘long-term strategic co-operation agreement which outlines the intent of both companies to collaborate on future projects’ Barrick (NYSE:ABX) is to sell a 50% stake in Barrick (Niugini) Limited (which owns 95% of the Porgera gold mine in Papua New Guinea) to China’s Zijin Mining (OTCPK:ZIJMY) for $298 million in cash. Barrick (Niugini) Mining is wholly-owned by its parent company.

  Porgera, in production terms, is one of the world’s larger gold mines. Barrick’s share of gold production in 2014 was 493,000 ounces at all-in sustaining costs of $996 per ounce. Barrick’s share of proven and probable mineral reserves as at December 31, 2014, was 3 million ounces of gold.

  From the Zijin standpoint this will all be a part of the overall Chinese move to secure supplies of strategic metals from around the world to meet its future needs. And China considers gold as very much a strategic metal on the economic front, particularly as it tries to increase its global trading influence over the next few years – which seems to be a key aim of the nation’s government. A $298 million outlay for a share in annual production amounting to 250-275,000 ounces of gold in a single year strikes one as a pretty good deal for the Chinese – and Porgera has an expected mine life of at least another five or six years, and this may well prove to be a conservative estimate.

  Despite the “win-win” rhetoric, it’s clear that at this point in the gold price cycle the power is with the deep-pocketed Chinese while the many, many miners who brought expensive mines on-line just in time for financing to dry up are there for the taking. So — just based on current market conditions and leaving aside long term strategic considerations — it’s reasonable to expect plenty of similar deals in the next few years, and that the end result will be Chinese control of reserves that dwarf the bullion now sitting in its bank vaults.

  Whether this is a buy signal for the gold mining sector remains to be seen. A falling gold price would, without doubt, more than offset the occasional merger. But in a world of stable to slightly higher gold prices, the presence of big Chinese buyers would make the dominant question “who will they buy next?” and that’s great news for the takeover candidates.

  

  

  
  
  

  

• Caught On Tape: Navy Releases Clip Of Russian Warplane "Buzzing" US Destroyer

  Last week saw what was seemingly the first ‘close encounter’ between a US warship (USS Ross) and a Russian Su-24 fighter jet in the Black Sea (after America’s “provocative and aggressive” behavior). The fly-by was ‘caught on tape’ aboard USS Ross and as Alert5 notes was released by The Navy this week who said both the ship and warplane were both in international waters and airspace at that time.

   

  

  

  
  
  

  

• Greece Unable To Make €300 Million IMF Payment, Requests "Bundling"

  With Greece and creditors unable to come to a compromise on a deal over the past several days, we’ve said repeatedly that despite claims to the contrary by Greek economy minister George Stathakis, Greece will not make Friday’s €300 million payment to the IMF and will instead request to have the payments bundled so as to buy PM Alexis Tsipras a few extra weeks to negotiate a deal and pass an agreement through parliament. 

  Indeed, we said the following on Sunday:

  It’s quite possible the sense of urgency around the negotiations has now eased because, as we mentioned on Saturday, it looks as though Greece can buy a few weeks by opting to “bundle” its June payments to the IMF, something the Greek government has denied (meaning it’s probably assured) but which seems increasingly likely especially given cryptic comments like this one from economy minister George Stathakis:

  • STATHAKIS SEES `TECHNICAL SOLUTION’ SOON TO MEET IMF PAYMENTS

  While it’s unclear whether that means the country will find yet another channel by which they can ask creditors to pay themselves back as they did with the IMF last month or whether that’s a reference to bundling the payments is unclear, but here’s what Stathakis told Corriere della Sera:

  
  

  “There shouldn’t be any neeed [to bundle the payments]”

  
  

  We shall see. 

  And then yesterday following the latest failure to reach a deal:

  Pretty clear now Greece will bundle IMF June payments despite official spokesman’s denial

  — zerohedge (@zerohedge) June 3, 2015

  However, Christine Lagarde was confident as recently as three hours ago:

  IMF chief Christine Lagarde said Thursday that she was “confident” that Greece will make a key debt payment on Friday, as the country mulls a new proposal from official creditors.

   

  Lagarde said the proposal offered by European creditors in talks Wednesday, with revised performance requirements for the Greek government, “clearly demonstrated significant flexibility on the part of the institutions.”

  Needless to say, we were rather skeptical when she said it:

  LAGARDE SAYS GREEK PAYMENT BUNDLING DOESN’T APPEAR IN CARDS #timestamp

  — zerohedge (@zerohedge) June 4, 2015

  Now may be an opportune time for Lagarde to update everyone her “confidence” level, because moments ago, what we knew was inevitable, was confirmed:

  • DJ GREECE SUBMITTED A REQUEST FOR BUNDLING JUNE IMF PAYMENTS INTO ONE — GREEK GOVERNMENT OFFICIAL

  And Reuters:

  Greece has asked to bundle its four debt payments to the International Monetary Fund that fall due in June so that it can pay them in one batch at the end of the month, Greek newspaper Kathimerini reported on Thursday.

   

  The request is expected to be approved by the IMF, the newspaper said. That would mean Greece does not have to pay the first tranche of 300 million euros that falls due on Friday.

   

  Greece faces a total bill of 1.5 billion euros owed to the IMF over four installments this month.

  And just like that, after effectively defaulting to the IMF a month ago, Greece has just re-effectively re-defaulted to the same IMF on its payment due tomorrow, which now will not be made, just as predicted.

  Then, adding to the confusion, Greek PM Tsipras tweeted some token statement which for some inexpicable reason had a photo of himself in the tweet:

  The Government will not accept extreme proposals. Our people have suffered enough during the past five years. #Greece pic.twitter.com/5wUSoNtw0I

  — Alexis Tsipras (@tsipras_eu) June 4, 2015

  All of the above of course indicates that Athens has rejected the proposal drafted by creditors on Tuesday and indeed we now have confirmation from the Greek finance ministry:

  “After 4 months of negotiations, creditor institutions submitted proposals which can’t solve the riddle of the economic crisis caused by the policies implemented in the last 5 years. The proposals submitted would deepen poverty and unemployment”

   

  “The agreement and solution which both Greece and Europe so badly need requires the immediate convergence of institutions to more realistic proposals, which will advance economic growth and social sensitivity. Greek government has submitted such proposals”

  Just like that, Greece has called the troika’s bluff and put the ball back into creditors’ court. For their part, Europe expects a re-counter proposal to the troika’s original counter proposal by June 8:

  The Euro Working Group expects Greece to respond to an EU proposal to conclude the country’s bailout by June 8, according to a person familiar with the talks.

  The farce continues.

  In any event, with Friday’s payment delayed, there are just a few more left.

  

  

  

  
  
  

  

• In These Cities, Jobs Are Plentiful And Housing Is Cheap

  If there are two things that are scarce in the US it’s good jobs and affordable housing. 

  As we’ve shown on any number of occasions, the “strong” jobs market is largely a fabrication — a creation of the BLS which, like the BEA will do what it has to in order to ensure that the myth of the US economic “recovery” can be sustained.

  In the real world, those with newly-minted master’s degrees are forced to wait tables while those fortunate enough to find work labor under non-existent wage growth while the Jamie Dimons of the world (perhaps that’s unfair, there’s only one Jamie Dimon) get rich on the back of Fed policy designed to enrich the wealthy while everyone else awaits a trickle-down “wealth effect” that will never come. 

  As for affordable housing, the following graphic from the National Low Income Housing Coalition betrays a sad fact. In no state in the union can a minimum wage worker afford a one bedroom apartment. 

  

   

  But all is not lost, because apparently, there are some places in America where the Goldilocks combination of good jobs and affordable housing actually exists. The following interactive graphic from Zillow shows where the so-called “sweet spots” are:

  

  

  

  
  
  

  

• The Evolution Of "Man"

  Presented with no comment…

   

  

   

  Source: Investors.com

  

  

  
  
  

  

• China Blamed For "Largest Theft Of US Government Data Ever" – 95% Of Federal Employees Affected

  A week ago, Russian “crime syndicates” were blamed when the IRS announced that a “major cyber breach allowed criminals to steal the tax returns of more than 100,000 people.” Today, it is China’s turn to be blamed following a report that the FBI is probing what has been described as “one of the largest thefts of government data ever seen.”

  

  The alleged penetration by Chinese hackers breached the files of the Office of Personnel Management, in which a vast amount of information about federal employees was accessed.  According to the WSJ, investigators believe the hack compromised the records of approximately 4 million individuals. Indicatively, according to the OPM, there are about 4.2 million total personnel, so the hack affected some 95% of all Federal workers.

  OPM Director Katherine Archuleta told the WSJ that: “we take very seriously our responsibility to secure the information stored in our systems, and in coordination with our agency partners, our experienced team is constantly identifying opportunities to further protect the data with which we are entrusted.”

  From the WSJ:

  An FBI spokesman said the agency is working with other parts of the government to investigate. “We take all potential threats to public and private sector systems seriously, and will continue to investigate and hold accountable those who pose a threat in cyberspace,” he said.

   

  The Office of Personnel Management, in a statement, said it detected the breach in April 2015 and is working with the Department of Homeland Security and the FBI.

   

  The Department of Homeland Security said it “concluded at the beginning of May” that the information had been stolen.

   

  The OPM said it could discover that even more records were stolen. It couldn’t be learned how many of those individuals are government officials and how many might be contractors.

  China has yet to respond officially, but as a reminder the last time the Pentagon accused China of hacking US defense programs, the communist nation was less than thrilled:

  The U.S. claims contain “errors in judgment,” Defense Ministry spokesman Geng Yansheng told reporters at a monthly news conference.

   

  “First, they underestimate the American Pentagon’s ability to protect its safety, and second, they underestimate the intelligence of the Chinese people,” Geng said. “China is entirely capable of producing the weaponry needed for national defense,” he added, pointing to recent domestic technological breakthroughs such as the country’s first aircraft carrier, new generation fighter jets, large transport planes and the Beidou satellite system.

   

  China has consistently denied claims its military is engaged in hacking, including those in a report by U.S. cybersecurity firm Mandiant that traced the hacking back to a People’s Liberation Army unit based in Shanghai.

  It was unclear how the FBI determined that Chinese hackers were behind the attack: supposedly computer experts in China were able to penetrate the massive US government firewalls, foregoing the guaranteed fame and riches from BTFD in Chinese stocks.

  In any event, the release of this data just days after the NSA’s massive surveillance powers were curbed is hardly a coincidence, although it remains to be seen if this latest penetration of government workers will generate any sympathy points with the massive spy agency, best known for cracking down not on foreign hackers but on domestic electronic communication.

  The revelation, however, is sure to inflame already tense relations between China and the US, which has reached a fever point in recent weeks over the escalation of Chinese encroachment into territories claimed by US allies in the South China Sea.

  

  

  
  
  

  

• Looking For The Next Big One: Part 1, Orderly Or Not?

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  I generally remain noncommittal about giving specific predictions about the future because there is simply no way toward predilection. We can think about probabilities as a guide for analysis, particularly in setting investment guidelines, but to offer targets for factors like GDP or some stock index is pointless. Even now, with all that is taking place of economic unraveling, there is still a non-trivial chance that GDP improves and stocks take off; I wouldn’t call that the baseline scenario but it’s enough to not ignore.

  That being said, recent indications have darkened the probability spectrum to the point that it may actually be worth examining a worst case scenario. My gut sense is that there is indeed a recession forming, and one that looks worse by the month, so there are numerous relevant factors that demand attention the greater the potential for it. That starts with leverage and any transmission from finance to the economy.

  If this is to be the third bubble episode in succession, the prior two do offer at least a useful guide as to potential even if their ultimate resolutions were quite different (to say the least). The dot-com bust that began in April 2000 took nearly three years to resolve itself, but remained suspiciously orderly in how that occurred. For a market event that took almost 60% off the S&P 500 high to low, it was both torturous and downright regular. The economy took its cues from that as well, despite fears of 1929 and asset-driven “deflation” there was no banking element in the reversal, and the recession itself, dated officially from March 2001 until November that year, was about as mild as a recession might go.

  Alan Greenspan took the credit for all that, even though he was belated in his response and his monetary monster was responsible for it (denials somehow still persist). If there was a monetary factor in limiting the collateral damage to the economy and larger financial system, it had nothing to do with his expedition with the federal funds rate into “ultra-low” territory, instead the action was all over the eurodollar system. In short, the ascendancy of the eurodollar standard provided a massive cushion against even the largest asset bubble ever seen (to that point) – demonstrating the sheer absurdity of the bubble that took its place.

  Convention views the housing bubble as arising sometime around 2003, but it is clear the world was fully engulfed long before then. The eurodollar effects (Greenspan’s idiotic idea of “global savings glut”) showed up as early as 1995 in so many places only a blind ideologue could have missed them. Thus, the dot-com bust was but a sideshow to wholesale finance that gave only partial and temporary pause then.

  

  In fact, the housing bubble was hit harder (relatively) in its infancy by the Asian flu than the dot-com bust, more than suggesting that offshore “dollar” influence. Greenspan did nothing but sit back and let the eurodollar insanity carve out his GDP mandate year after year, through debt upon debt, all the while the Fed thought its 19th century view of finance was the monetary equivalent of magic and genius.

  And that is why the 2008 bubble burst event was so much more dramatic. In these terms, it wasn’t necessarily the asset bubbles that were changing, it was the eurodollar standard that built them. Whereas there was solid financial flow in the 2000-03 period to keep that first bubble’s reversal orderly and far less problematic, starting in August 2007 liquidity underwent two successive reversals that ultimately amounted to total failure by 2008.

  

  In this context it is easy to see why 2008 was so devastating where 2001 was not. In response to getting everything wrong in 2008, the Fed (almost understandably) by the end of 2008 and into 2009 set about trying to recreate the economy and financial system as it existed at that 2007 peak. It finally evolved into the 21st century by shedding its role as “lender of last resort”, with anachronistic tools like the Discount Window, and belatedly entered the realm of derivative and shadow finance becoming “dealer of last resort” and even “market of last resort.” QE’s fell under that regime, both as a means to force spending in the economy and as intended (though ultimately meaningless) assurance to financial agents (the real “printing press”) for the debt-basis that is all that is allowed under activist central banking.

  The results of all of this have been far from fruitful, evidenced greatly at the start by the fact that there is still debate eight years later about whether or not a recovery has ever taken place. With that in mind, thinking about what might come next is already deficient just on the economic side (a recession with consumers already in the bunker before it ever began?). But there are also building dangers about financial feedbacks to consider, especially as it relates to the eurodollar standard in structural reverse. As shown above, through TIC flow, which is one meaningful method of presentation, the eurodollar standard has not been reconstituted despite all aimed efforts.

  Initially, there seemed great promise to the determination in that area, as late as April 2011 there appeared some likelihood of getting back to at least close to the pre-crisis mode of operation. But the euro crisis that summer, which was in no small way a parallel “dollar” crisis, ended any hopes for revisiting pre-2007 financialism. The Fed, as always, did not get that message and instead opted to simply make it worse by removing the one “pillar” that was holding even that limited rebound in place – tapering QE. Just the threat of doing so has strained and totally sapped global “dollar” liquidity to the point that minor disruptions become major global events (October 15, January 15).

  In short, the rebound in the eurodollar standard was never a permanent solution because it was as artificial as the economy it was intended to foster. Dealer capacity was rebuilt solely on the promise of QE-forever and that effect on bond prices as without pre-crisis conditions for gain-on-sale profit through proprietary “hedging” of inventory and providing liquidity through inventory and warehousing, there isn’t any real profit opportunity anymore. Spreads have been squeezed and avenues shut down (this, on its own, would not necessarily be an unwelcome result as financialism is due for several steps back, the problem, however, is where the Fed, again, intends on recreating 2006; in other words, you need the dealers and their activities to get you there, so you either have to accept what they do or stop trying to go back).

  As noted yesterday, liquidity is bad and getting worse which would seem to rule out the 2001 version of bubble reversions. With the eurodollar standard growing even more precarious, arguably as bad now as in 2008, there is no financial cushion should “risk” shift dramatically.

  

  

  
  
  

  

• Crowdsourcing US Police Brutality

  In the wake of the violent protests that left Baltimore in ashes at the end of April, US race relations and police misconduct are now the subject of intense debate in America. 

  One theory — dubbed the “Ferguson Effect” — claims police are now reluctant to engage in “discretionary enforcement” for fear of prosecution. “Discretionary enforcement” of course refers to the use of lethal force in the line of duty and the implication seems to be that in light of recent events, law enforcement officers are afraid that their actions will be scrutinized by the public. In extreme cases, such scrutiny could culminate in social unrest, something no one individual wishes to be blamed for. 

  Casting doubt on the so-called Ferguson Effect is a report from The Washington Post which shows that US police are shooting and killing “suspects” at twice the rate seen in the past. More specifically, 385 people have been killed by police in 2015 alone. Unsurprisingly, minority groups are overrepresented in cases involving the fatal shooting of unarmed suspects. 

  

  In a testament to how other developed countries view US policing, The Guardian is now crowdsourcing the number of people killed by police in the US and tracking it in real-time.

  The effort, which The Guardian is calling “The Counted”, has state-by-state breakdowns, names, per capita ranking, and pictures of the victims.

  

  

  

  (Full interactive site)

  We’ll leave it to readers to determine what it says about police accountability in America when other countries feel compelled to put a face and a name to hundreds of people whose deaths, if left in the hands of the US government, might have gone unnoticed or worse, undocumented. 

  *  *  *

  About the project (via The Guardian):

  The Counted is a project by the Guardian – and you – working to count the number of people killed by police and other law enforcement agencies in the United States throughout 2015, to monitor their demographics and to tell the stories of how they died.

  The database will combine Guardian reporting with verified crowdsourced information to build a more comprehensive record of such fatalities. The Counted is the most thorough public accounting for deadly use of force in the US, but it will operate as an imperfect work in progress – and will be updated by Guardian reporters and interactive journalists as frequently and as promptly as possible.

  Why is this necessary?

  The US government has no comprehensive record of the number of people killed by law enforcement. This lack of basic data has been glaring amid the protests, riots and worldwide debate set in motion by the fatal police shooting of Michael Brown, an unarmed 18-year-old, in Ferguson, Missouri, in August 2014.

  Before stepping down as US attorney general earlier this year, Eric Holder described the prevailing situation on data collection as “unacceptable”.

  The Guardian agrees with those analysts, campaign groups, activists and authorities who argue that such accounting is a prerequisite for an informed public discussion about the use of force by police.

  

  
  
  

  

• "Where's My Raise?": American Workers Suddenly Realize "Recovery" Isn't Real

  In March, we solved the mystery of America’s missing wage growth. Here is the conundrum facing PhD economists:

  One of the biggest conundrums, one that has profound monetary policy implications, and that has been stumping the Fed for the past year is how can it be possible that with 5.5% unemployment there is virtually no wage growth. The mystery only deepens when the Fed listens to so-called economist experts who tell it wage growth is imminent, if not here already, and it is merely not being captured by the various data series.

  In fact, the Fed is still trying to understand why wages aren’t rising more quickly. After all, once you triple-adjust the Q1 GDP print, the economy is on sound footing. Here’s an excerpt from Janet Yellen’s speech in Rhode Island last month:

  Finally, the generally disappointing pace of wage growth also suggests that the labor market has not fully healed. Higher wages raise costs for employers, of course, but they also boost the spending and confidence of customers and would signal a strengthening of the recovery that will ultimately be good for business. In the aggregate, the main measures of hourly compensation rose at a rate of only around 2 percent through most of the recovery.

  The answer to this apparent quandary, lies in the distinction between what the BLS classifies as “non-supervisory” workers and “supervisory” workers. The following charts tell the story nicely.

  

  

   

  What the above suggests is that in fact, wage growth in America has never been higher — for your boss. Or, put differently:

  For all who are still confused why there are no wage hikes despite the Fed’s relentless efforts to micromanage the economy and stimulate wage growth via trickle-down record high stock market prices, the answer is that there is wage growth.

   

  Just not for 83% of the working population.

  Now, with pundits parroting the “robust” jobs market refrain on the nightly news, “everyday Americans” are beginning to ask “where’s my raise?” WSJ has more:

  The unemployment rate here and in other thriving metropolitan regions across the U.S. is below where it was when the financial crisis blew a hole in the U.S. economy in 2008. Now, many American workers are asking: Where’s my raise?

   

  Questions about the slow pace of wage growth aren’t only stumping workers, but also economists and policy makers at the Federal Reserve—with the answers weighing on households and the larger U.S. economy.

   

  When U.S. unemployment rates fall, conventional notions of supply and demand predict wages will go up as firms bid for increasingly scarce workers, and there are signs of that, for example, in building trades and restaurants. “Basic economics hasn’t gone out the window,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in an interview. “When employment grows, wages will start to grow.”

   

  But a Wall Street Journal analysis of Labor Department data points to persistent constraints on worker pay, even as the economy approaches full employment. The Journal found 33 U.S. metropolitan areas—from the small to the sizable—where unemployment rates and nonfarm payrolls last year returned to prerecession levels. In two-thirds of those cities—including Columbus; Houston; Oklahoma City; Minneapolis-St. Paul, Minn.; and Topeka, Kan.—wage growth trailed the prerecession pace. 

  As The Journal goes on to note, the American Middle Class has been suffering from stagnant pay for quite some time:

  Stagnant incomes are a long-running problem for the American middle class. Median household income, adjusted for inflation, was $51,939 in 2013, only slightly higher than it was in 1988, when it was $51,514. Slow wage growth is part of the problem; adjusted for inflation, blue-collar pay has increased just 0.3% a year over the past quarter-century.

  This could be partially due to America’s vanishing workers (described in detail here):

  Companies tapping pools of workers who have disappeared from the U.S. unemployment tallies, creating what economists describe as hidden slack in the economy. Until this invisible labor supply is spent, these men and women, including part-timers, temporary workers and discouraged labor-market dropouts, could hold wages down. 

  Another possibility — and this speaks further to the anemic pace of the global economic “recovery” and the utter failure on the part of central bank policy to bring about sustained economic prosperity — is that an endemic lack of demand is keeping the so-called virtuous circle of increased wages, higher consumption, increased profits and investment levels from taking hold.

   

  In other words, as long as global trade is “in the doldrums” (to quote BofAML) and as long as aggregate demand is subdued, wage growth will remain elusive for more than three quarters of American workers.

  
  

  

  

  
  
  

  

Digest powered by RSS Digest

• China Is Crashing (Again)

  It appears – as opposed to what the world’s asset-gathering commission-takers would have one believe – that huge illiquid spikes in bond markets are not good for stocks. As the bond carnage continues to careen throughout Asia, Chinese stock investors appear to have decided enough is enough at doubling their money in a mere few months. After early weakness out of the gate, the ubiquitous dip-buyer-of-last-resort failed to appear as the afternoon session arrived and Chinese stock indices are down between 5% (Shanghai Comp – which never took out its previous highs) and 7% (CHINEXT which was up over 16% in the last 3 days) overnight. Everybody better be hoping for a disastrous jobs number on Friday or this drop may suddenly become the long lost ‘healthy’ correction in global stocks so many have called for.

   

  Today…

  

   

  And the last week… 10% correction… 16% face-ripper… 7% correction

  

   

  Every asset manager in the world is currently praying that MSCI does not include China in its indices or risk budgets everywhere will be blown and exposure to global equities will be forced lower.

   

  Charts: Bloomberg

  

  

  
  
  

  

• Free Speech, Facebook & The NSA: The Good, The Bad & The Ugly

  Submitted by John Whitehead via The Rutherford Institute,

  “A person under surveillance is no longer free; a society under surveillance is no longer a democracy.”—Writers Against Mass Surveillance

  THE GOOD NEWS: Americans have a right to freely express themselves on the Internet, including making threatening—even violent—statements on Facebook, provided that they don’t intend to actually inflict harm.

  The Supreme Court’s ruling in Elonis v. United States threw out the conviction of a Pennsylvania man who was charged with making unlawful threats (it was never proven that he intended to threaten anyone) and sentenced to 44 months in jail after he posted allusions to popular rap lyrics and comedy routines on his Facebook page. It’s a ruling that has First Amendment implications for where the government can draw the line when it comes to provocative and controversial speech that is protected and permissible versus speech that could be interpreted as connoting a criminal intent.

  That same day, Section 215 of the USA Patriot Act, the legal justification allowing the National Security Agency (NSA) to carry out warrantless surveillance on Americans, officially expired. Over the course of nearly a decade, if not more, the NSA had covertly spied on millions of Americans, many of whom were guilty of nothing more than using a telephone, and stored their records in government databases. For those who have been fighting the uphill battle against the NSA’s domestic spying program, it was a small but symbolic victory.

  THE BAD NEWS: Congress’ legislative “fix,” intended to mollify critics of the NSA, will ensure that the agency is not in any way hindered in its ability to keep spying on Americans’ communications.

  The USA FREEDOM Act could do more damage than good by creating a false impression that Congress has taken steps to prevent the government from spying on the telephone calls of citizens, while in fact ensuring the NSA’s ability to continue invading the privacy and security of Americans.

  For instance, the USA FREEDOM Act not only reauthorizes Section 215 of the Patriot Act for a period of time, but it also delegates to telecommunications companies the responsibility of carrying out phone surveillance on American citizens.

  AND NOW FOR THE DOWNRIGHT UGLY NEWS: Nothing is going to change.

  As journalist Conor Friedersdorf warns, “Americans concerned by mass surveillance and the national security state’s combination of power and secrecy should keep worrying.”

  In other words, telephone surveillance by the NSA is the least of our worries.

  Even with restrictions on its ability to collect mass quantities of telephone metadata, the government and its various spy agencies, from the NSA to the FBI, can still employ an endless number of methods for carrying out warrantless surveillance on Americans, all of which are far more invasive than the bulk collection program.

  As I point out in my new book Battlefield America: The War on the American People, just about every branch of the government—from the Postal Service to the Treasury Department and every agency in between—now has its own surveillance sector, authorized to spy on the American people. Just recently, for example, it was revealed that the FBI has been employing a small fleet of low-flying planes to carry out video and cell phone surveillance over American cities.

  Then there are the fusion and counterterrorism centers that gather all of the data from the smaller government spies—the police, public health officials, transportation, etc.—and make it accessible for all those in power.

  And of course that doesn’t even begin to touch on the complicity of the corporate sector, which buys and sells us from cradle to grave, until we have no more data left to mine. Indeed, Facebook, Amazon and Google are among the government’s closest competitors when it comes to carrying out surveillance on Americans, monitoring the content of your emails, tracking your purchases and exploiting your social media posts.

  “Few consumers understand what data are being shared, with whom, or how the information is being used,” reports the Los Angeles Times. “Most Americans emit a stream of personal digital exhaust — what they search for, what they buy, who they communicate with, where they are — that is captured and exploited in a largely unregulated fashion.”

  It’s not just what we say, where we go and what we buy that is being tracked. We’re being surveilled right down to our genes, thanks to a potent combination of hardware, software and data collection that scans our biometrics—our faces, irises, voices, genetics, even our gait—runs them through computer programs that can break the data down into unique “identifiers,” and then offers them up to the government and its corporate allies for their respective uses.

  All of those internet-connected gadgets we just have to have (Forbes refers to them as “(data) pipelines to our intimate bodily processes”)—the smart watches that can monitor our blood pressure and the smart phones that let us pay for purchases with our fingerprints and iris scans—are setting us up for a brave new world where there is nowhere to run and nowhere to hide.

  For instance, imagine what the NSA could do (and is likely already doing) with voiceprint technology, which has been likened to a fingerprint. Described as “the next frontline in the battle against overweening public surveillance,” the collection of voiceprints is a booming industry for governments and businesses alike. As The Guardian reports, “voice biometrics could be used to pinpoint the location of individuals. There is already discussion about placing voice sensors in public spaces, and [Lee Tien, senior staff attorney with the Electronic Frontier Foundation] said that multiple sensors could be triangulated to identify individuals and specify their location within very small areas.”

  Suddenly the NSA’s telephone metadata program seems like child’s play compared to what’s coming down the pike.

  That, of course, is the point.

  Whatever recent victories we’ve enjoyed—the Second Circuit ruling declaring the NSA’s metadata program to be illegal, Congress’ inability to reauthorize Section 215 of the Patriot Act, even the Supreme Court’s recognition that free speech on the internet may be protected—amount to little in the face of the government’s willful disregard of every constitutional safeguard put in place to protect us from abusive, intrusive government agencies out to control the populace.

  Already the American people are starting to lose interest in the spectacle of Congress wrangling, debating and negotiating over the NSA and the Patriot Act.

  Already the media outlets are being seduced by other, more titillating news: Caitlyn Jenner’s Vanity Fair cover, Kim Kardashian’s pregnancy announcement, and the new Fifty Shades of Grey book told from Christian’s perspective.

  What remains to be seen is whether, when all is said and done, the powers-that-be succeed in distracting us from the fact that the government’s unauthorized and unwarranted surveillance powers go far beyond anything thus far debated by Congress or the courts.

  

  

  
  
  

  

• Who Are Washington's Most Expensive Speakers?

  Recently, we’ve taken a look at some of the details surrounding speeches made by Bill and Hillary Clinton. As discussed in April, Goldman Sachs paid Bill Clinton nearly a quarter of a million dollars for a speaking engagement before lobbying Hillary’s State Department in an effort to secure $75 million in financing for a Chinese company that would later purchase aircraft from a Goldman-owned manufacturer.

  Seperately, we outlined Hillary Clinton’s keynote speech requirements which include the customary $225,000 plus a “chartered roundtrip private jet”, $1,000 for a stenographer, and a host of other “incidentals.”

  But the Clintons actually come cheap compared to a certain former Fed chair. Here’s a look at speaking engagement rates for some well-known former and current US officials (and one real estate magnate whose relevance to this list isn’t immediately discernable):

   

  

  *  *  *

  Two words: “everyday Americans”.

  

  

  
  
  

  

• THe BouNTiFuL GaMe…

  ,

   

   

  .

  .

  

  
  
  

  

• It's Official: The USA Freedom Act Is Just As Destructive As The USA Patriot Act

  Submitted by Simon Black via Sovereign Man blog,

  My general rule of thumb when it comes to legislation is that the more high-sounding the name, the more insidious the law.

  Exhibit A: the just-passed USA FREEDOM Act.

  “Freedom”. It sounds great.

  So great, in fact, that they stuck it in the title and built an absurd acronym around it– the real name of the law is “Uniting and Strengthening America by Fulfilling Rights and Ensuring Effective Discipline Over Monitoring Act of 2015″.

  U-S-A-F-R-E-E-D-O-M. Hooray!

  And without fail, the media has bought in to the myth, praising the government for heralding in a new era of liberty with headlines like “Congress Reins In NSA’s Spying Powers” and “NSA phone program doomed as Senate passes USA Freedom Act”.

  Unfortunately this is simply not the case. And shame on the mainstream media for making such thinly-researched, fallacious assertions.

  If anyone had actually taken the time to read the legislation, they’d see that most of the ‘concessions’ made by the government are entirely hollow.

  Secret FISA courts still exist. Lone wolf surveillance authority and roving wiretaps still exist. They can still grab oodles of other data like medical and business records.

  And the US Attorney General has even been awarded new ’emergency powers’ to use in his/her sole discretion… just in case the secret courts might be uncooperative.

  The big victory being cheered by the media pertains to the collection of phone records. This one is actually hilarious.

  The USA FREEDOM Act prevents the government from seizing and storing ‘call detail records’, the so-called meta-data information like your phone number, the other caller’s phone number, the length of the call, etc.

  But section 107(k)(3)(B) of the new law specifically states that ‘call detail records’ do NOT include the *actual content* of the call itself. Or your name. Address. Financial data. Cell-site location. Etc.

  So basically they can’t archive your phone number. But everything else is fair game. Congratulations on your freedom.

  Lawmakers also managed to sprinkle all sorts of other worthless provisions into the USA FREEDOM Act.

  For example, the Inspector General (IG) of the United States is required to issue a report discussing what civil liberty violations may have occurred over the last few years.

  Great. Except that IG reports are just that– reports. They have no teeth. And Congress can do with this one precisely what they do with every other IG report that gets issued: nothing.

  (Seriously, when was the last time you heard any ruckus about an IG report? Probably never.)

  They also stated that a panel of ‘advocates’ (whoever they may be) would attend and observe any secret FISA court hearing in which profound legal issues might be at stake.

  Again, sounds great. Except that, like the IG report, a panel of advocates has no teeth… no power to stop the court or spy agencies.

  Bottom line, these concessions may look good on paper, but they don’t amount to any real concession.

  This is a classic negotiation tactic. When working out a contentious deal, the stronger side will invariably offer some irrelevant concession that has no material impact on what they want.

  We did this several months ago for our Chilean agriculture fund, pushing through a substantial price reduction on a 2,000 acre property by ‘conceding’ to let the seller stay in the farm house for a few months.

  He felt like he got something, but for us the concession was pointless and ceremonial.

  The same thing happened here. And the American people just got played.

  The government has spent the last 14 years turning up the heat on the boiling frog. They increased the temperature by 100 degrees over that time… and have now turned it down 1 degree.

  Yet people are treating this like it’s some sort of victory.

  It’s not. And this is a sad reflection of how low people’s expectations have become of their own government and liberty.

   

  It’s a mistake to rely on a government to solve the problems that they themselves created.

   

  It’s a mistake to expect bureaucrats to voluntarily give up the power that they have awarded themselves… and have spent years abusing.

   

  It’s a mistake to wait for politicians to give you back the freedom that they’ve taken away.

  They don’t give a damn about your freedom. And they’re certainly not going to give it to you.

  But it still exists. It’s out there for anyone who cares enough to do something about it.

  When I was in the military everyone used to say ‘freedom isn’t free’. And this is totally true.

  Freedom starts with the individual. No one is going to give it to you. Becoming free means you have to put forth just a little bit of effort to take some common sense baby steps.

  

  

  
  
  

  

• America's Discouraged, Underpaid Workforce Turns To Drugs

  It’s not a fantastic time to be a job hunter in America. The US economic “recovery” officially stalled in Q1 no matter what Steve Liesman, The San Francisco Fed, and/or the BEA say after double-adjusting the numbers, and as we’ve shown, those who are highly skilled at delivering beer and wings to restaurant patrons are far better off than highly skilled factory workers or, indeed, than those with freshly-minted master’s degrees in today’s marketplace. 

  Of course, even for those who are lucky enough to find work, the picture isn’t pretty, as wage growth for the 80% of laborers classified by the BLS as “non-supervisors” remains largely absent, while for those unfortunate enough to be stuck in minimum wage positions, affording even a one bedroom apartment is now officially out of the question in every state.  

  Given this rather depressing backdrop, it’s little wonder that workers are inclined to “alter their mood” a bit before punching the clock. Indeed, over the past 24 months, a decades-old trend towards falling workplace drug usage has reversed itself, with 4% of workers now testing positive for either legal or illegal drug use:

  

  More, via WSJ:

  The share of U.S. workers testing positive for drugs appears to be on the rise, according to data from millions of workplace drug tests administered by one of the nation’s largest medical-screening laboratories.

   

  Traces of drugs—from marijuana to methamphetamine to prescription opiates—were found in 3.9% of the 9.1 million urine tests conducted for employers by Quest Diagnostics Inc. in 2014, up from 3.7% in 2013.

   

  While the numbers might seem small, they reflect the reversal of a longtime trend of declining drug use among workers. Before 2013, positives had dropped nearly every year for 24 years, from 13.6% in 1988 to a low of 3.5% in 2012. Some of the positive results are later discarded if a worker produces a doctor’s prescription for a legal drug, but the majority reflect illicit use, driven by increases in marijuana, cocaine and methamphetamine positives, said Dr. Barry Sample, director of science and technology for Quest’s diagnostics employer solutions business.

   

  Experts are unsure why drug usage is rising. Researchers haven’t been able to conclusively link drug consumption to economic cycles. A 2013 paper from the Federal Reserve Bank of St. Louis, for example, concluded that “the Great Recession did not generate a clear temporary or permanent pattern in rates of substance abuse.”

  Maybe it’s the weather…

  

  

  

  
  
  

  

• Bond Crash Continues – Aussie & Japan Yields Burst Higher

  The carnage in Europe and US bonds is echoing on around the world as Aussie 10Y yields jump 15bps at the open (to 3.04% – the highest in 6 months) and the biggest 2-day spike in 2 years.  JGBs are also jumping, breaking to new 6-month highs above 50bps once again raising the spectre of VAR-Shock-driven vicious cycles…

   

  

  

   

  The spectre of a self-feeding dynamic is something we’ve discussed at length before, most notably in 2013 when volatility-induced selling — reminiscent of the 2003 JGB experience — hit the Japanese bond market again, prompting us to ask the following rhetorical question: 

  What happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations? 

  The answer was this: A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan's banks.

  What we described is known as a VaR shock and simply refers to what happens when a spike in volatility forces hedge funds, dealers, banks, and anyone who marks to market to quickly unwind positions as their value-at-risk exceeds pre-specified limits.

  Predictably, VaR shocks offer yet another example of QE’s unintended consequences. As central bank asset purchases depress volatility, VaR sensitive investors can take larger positions — that is, when it’s volatility times position size you’re concerned about, falling volatility means you can increase the size of your position. Of course the same central bank asset purchases that suppress volatility sow the seeds for sudden spikes by sucking liquidity from the market. This means that once someone sells, things can get very ugly, very quickly. 

  Here’s more from JPM on the similarities between the Bund sell-off and the JGB rout that unfolded two years ago:

  The sharp rise in bond volatility over the past week or so is reminiscent of the VaR shocks of October 2014 in US rates and April 2013 in Japanese rates. The common feature of these rate volatility episodes was that there was no clear fundamental trigger. Instead, positions and flows experienced a sharp swing making these VaR episodes appearing more technical and unpredictable in nature. In October 2014, a violent capitulation on short positions at the front-end of the US curve had caused a collapse in UST yields. In April 2013, profittaking in long duration exposures post BoJ's QE announcement caused a sharp rise in JGB yields that started reversing two months after. 

  What is causing VaR shocks and why are they happening often? We argued before that one of the unintended consequences of QE is a higher frequency of volatility episodes or VaR shocks: investors who target a stable Value-at-Risk, which is the size of their positions times volatility, tend to take larger positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced selling. This, we note, is how QE increases the likelihood of VaR shocks.  

   

  The proliferation of VaR sensitive investors, such as hedge funds, mutual fund managers, risk parity funds, dealers and banks raise the sensitivity of bond markets to self- reinforcing volatility-induced selling. These investors set limits against potential losses in their trading operations by calculating Value-at-Risk metrics. Value-at-Risk (VaR) is a statistical measure that investors use to quantify the expected loss, over a specified horizon and at a certain confidence level, in normal markets. Historical return distributions and historical market volatility measures are often used in VaR calculations given the difficulty in forecasting volatility. This in turn induces investors to raise the size of their trading positions in a low volatility environment, making them vulnerable to a subsequent volatility shock. When the volatility shock arrives, VaR sensitive investors cut their duration positions as the Value-at-Risk exceeded their limits and stop losses are triggered. This volatility induced position cutting becomes self- reinforcing until yields reach a level that induces the participation of VaR-insensitive investors, such as pension funds, insurance companies or households.  

   

  The VaR shock in the JGB market in April 2013 contained most of the above characteristics. By looking at quarterly Flow of Funds data from the BoJ, it was Japanese banks, Broker/Dealers and foreign investors who sold JGBs at the time. And it was VaR insensitive investors, such as Pension Funds and Insurance Companies and Households (via investment trusts) who absorbed that selling along with the BoJ.

  As we warned last time, it appears the fireworks are far from over.

  Charts: Bloomberg

  

  

  
  
  

  

• The Definition Of An Unfree Market

  Commentary by Guy Haselmann of Scotiabank

  Unfree

  A market economy is one based on supply and demand with little or no government control.   Dictionary site ‘Investopedia’ states that “a completely free market is an idealized form of a market economy where buyers and sellers are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation.” 

  Toto, I don’t think we are in Kansas anymore.

  After the 2008 financial crisis, regulatory banking rules (i.e. macroprudential policies) conspired with zero (or negative) interest rates and asset purchases to exterminate the markets’ ability to freely calibrate clearing market prices based on supply and demand factors.   It is impossible for central banks to sustain controlling influence on market sentiment, investor behavior, correlations, and valuations, simply because effectiveness wanes over time. 

  As time passes, central bank stimulus stretches financial asset valuations in a manner that outpaces fundamental economic improvements, thus skewing future risk-reward distributions to the downside.  Investors slowly begin to boycott over-priced securities, which in turn compromises market liquidity.  Eventually the slow drip morphs into a cascade where central banks lose control of the process.

  • The October flash crash in Treasuries might be an example. 
  • Zimbabwe was the greatest modern example of lost control when its money printing policy resulted in a worthless currency after achieving an estimated inflation rate of 79 billion percent (no, really).
  • In January, the Swiss National Bank broke its currency-cap-promise resulting in its (G-10) currency moving over 40% in 10 minutes.
  • The ECB began its overly-hyped asset purchase program after markets had re-priced trillions of debt securities into negative yields.  Could the 14 point (44 bps) collapse this week in the price of German 30-year bonds be an indication of the collateral damage resulting from the ECB’s market involvement?

  Central bank policies have encouraged financial risk-taking, but central bankers offer (spurious) assurances that while pockets of froth exist, equity valuations (in particular) are ‘in-line with historical multiples’.  This advice may prove just as fatuous as it did in 2006/2007, when Bernanke testified before congress that the housing sector was not in a bubble. 

  At least FOMC members admit that they expect ‘bumpy’ markets when rate ‘lift-off’ occurs. They are fully aware that their policies have provided cheap financing for carry trades and speculation which is evident in near-record low yields and credit spreads, and record amounts of NYSE margin debt.  By most measures, stocks, bonds, and various real estate regions are over-valued.   Unfortunately, ‘fair’ value is a futile concept during non-free markets and aggressive interventionist policies.

  The historical movement of Portuguese yields is a worthy example of the sway of central bank policy. The Portuguese 10 year traded above 17.25% in 2012.  This past March it traded 55 basis points below the US 10-year yield to a level of 1.56%. Portugal’s debt-to-GDP ratio was 83.7% in 2010, 111% in 2012, and has been greater than 125% since 2013. Clearly, the drop in yield has not been a function of improving debt levels or free market determinants. It has also not been due to debt restructuring or due to a balanced budget (its budget deficit is >3%). The significant improvement in yields was mainly a function of aggressive central bank action on the part of the ECB.

  Fed’s Timing and Path

  In order for the FOMC to hike no later than the July meeting as I expect, they need to obtain some undefined amount of further evidence that weak Q1 GDP was indeed a transitory aberration; something each member believes.  Since every FOMC member expects a decent bounce-back in Q2 (which they believe will accelerate into the second half of 2015), it is unlikely that they need a full quarter of strong growth under their belt before voting to hike. There have been some pockets of economic strength, including the May auto sales yesterday which tallied to an astounding 17.79 million rate.

  When looking through the smoke screen of ‘data dependency’ the fact is that the Fed is basically within a whisker of its dual mandates.  At this point, waiting for some improved economic data has as much to do with its perception of maintaining its credibility as it does with receiving insurance that it is correct about Q1 being transitory.  

  At a higher level, the Fed’s experiment with zero interest rates and asset purchases pre-supposes the correctness of many Keynesian assumptions; many of which make little sense.  Investors are also asked to accept with a great leap of faith that the FOMC can provide some ideal mix of difficult-to-measure variables that achieves what it considers to be the ‘appropriate’ amount of inflation and economic growth.  It doesn’t take much to see how arbitrary this all is.

  Does the Fed know for certain that its policy over the past few quarters hasn’t actually been counter-productive?  Does the Fed truly have any sense how markets will react when it finally raises rates for the first time in nine years?   If monetary policy works on an 18 to 24 month lag, and the Fed is confident that Q1 was an aberration and inflation will ‘move toward 2% in the medium term’, then shouldn’t the Fed just hike rates at its June 17th or July 29th meeting?  Isn’t it possible that the uncertainty hanging over markets about the timing for lift-off has become more harmful than beneficial?

  Only if the economy is powered by the marginal borrower who will no longer borrow after a 0.25% hike, does it make sense to believe a hike will derail the economy.  Comparisons to 1937, where a hike pushed the US into recession, are incomparable and groundless. 

  On the other hand, maybe the FOMC is worried that the ‘no free lunch’ concept makes them suspicious of the possibility of a meaningfully deleterious market reaction which could have a negative impact on the broader economy.  However, under this logic, delaying a hike would only exacerbate such a response.

  If the Fed were to hike, say, in July, then it could spend a few months allowing markets to settle down before hiking a second time prior to the end of the year. When choosing to further remove accommodation in 2016, the Fed will likely prefer shrinking the balance sheet rather than hiking IOER.  This hiking-path scenario would allow the Fed to be as gradual as they have promised; maximizing the time between actions, which could help prevent undue stress on markets inflated by years of moral hazard ‘puts’ and massive central bank liquidity.

  On April 30th, I urged caution on Treasuries and advised holding powder to purchase in front of 2.40% 10 year yields.  I recommend making opportunistic purchases in the backend today, as well as re-establishing flatteners. I also advise re-entering volatility and US dollar longs.  A good argument could be made for these exposures regardless of the outcome of Friday’s employment data.  In March, I recommended the position ‘long US Treasuries vs. short EU periphery’.  This position should be maintained.

  “A great deal of intelligence can be invested in ignorance when the need for illusion is deep” – Saul Bellow

  

  

  
  
  

  

• Six Political Issues to Watch This Summer

  Via Goldman Sachs’ Alec Phillips,

  • The next several weeks are likely to be relatively eventful in Washington. While the votes are close, we expect the House to pass Trade Promotion Authority (TPA) this month, which should increase the likelihood that negotiators conclude talks on the Trans-Pacific Partnership (TPP).
  • The Supreme Court looks more likely to rule in favor of the Obama Administration in its decision on the Affordable Care Act, expected later this month, but the issue is likely to dominate the political agenda if the court rules against the current subsidy program.
  • A debate on bank and mortgage regulation in the Senate also looks possible, though at this point we believe major changes face an uphill climb.
  • Congress looks likely to miss another opportunity to enact a long-term infrastructure program, and will probably enact a temporary extension instead. This may also close the window of opportunity for tax reform until after the 2016 presidential election, since using repatriation-related corporate tax revenue to pay for highway spending had bipartisan support and was seen as a potential driver of reform. While highway legislation may not carry tax reform this year, it does look increasingly likely to carry an extension of the Export-Import Bank charter, which expires June 30.

  1. Trade Promotion Authority looks likely to pass this month

  After a failed first attempt and some uncertainty about potential amendments, the Senate finally passed legislation to reinstate Trade Promotion Authority (TPA), also known as “fast track,” which is generally viewed as critical to implementing the Trans-Pacific Partnership (TPP) currently being negotiated. From here, the remaining obstacle is the vote in the House of Representatives, which has always appeared to be a higher hurdle than the Senate.

  The House looks likely to vote on TPA at some point in the next three weeks. In our view, it is more likely that the House will pass TPA than defeat it, though the outcome is harder than usual to predict because support and opposition do not fall cleanly along party lines. In particular, the Obama Administration is counting mainly on Republicans to pass TPA in the House, but at least a few dozen of the 245 House Republicans look likely to vote against it, leaving the bill short of the 217 votes needed to pass. To make this up, at least 10 Democrats and potentially as many as 20 would need to support the measure. This seems to be roughly where Democratic support is as the moment, but the situation could clearly still change. That said, TPA has an institutional advantage: Republican congressional leaders, who support TPA, can time the vote for when support appears to be sufficient and can make multiple attempts if necessary.

  Negotiations on the Trans-Pacific Partnership appear to be in the final stages. It seems likely that the most of the outstanding issues could be settled reasonably soon after TPA is enacted, since some trading partners may be waiting for TPA passage before presenting their final offers. Once negotiations are concluded, it could take another few months for the agreement to be released and formally signed. TPA imposes some deadlines to expedite congressional consideration, but also imposes some waiting periods that could prolong some of the earlier steps in the process. In all, it is likely to take at least four months, and potentially a few months longer, from the time negotiations conclude until Congress can begin considering the agreement, meaning Congress is unlikely to begin considering the TPP agreement, even if it is finalized soon, until late 2015 at earliest.

  2. The Supreme Court should rule on ACA subsidies in the next few weeks

  The court is expected to rule soon–probably between June 22 and June 29–on the challenge to the Obama Administration’s implementation of insurance subsidies under the ACA. The plaintiffs in the case contend that because the law states that only insurance purchased on an exchange “established by the state” is eligible for subsidies, enrollees in the 34 states with federally run exchanges should not be subsidized. The outcome is far from clear, though questioning during the oral arguments in March suggested that at least five of the justices were more inclined to rule in favor of the administration, albeit for different reasons. Those arguments seemed to boil the case down to two questions: whether the current law is ambiguous, and whether denying subsidies to states that have not established their own insurance exchanges amounts to unconstitutional coercion of states by the federal government. If the court finds the law ambiguous, it seems likely to rule in favor of the administration. If the court finds that denying subsidies as a means of forcing states into action is unconstitutional, this would also likely preserve the status quo. The administration’s implementation of the law would be overturned only, it seems, if the court found that the law was clear and that only insurance purchased on exchanges “established by the state” (rather than the federal government) is eligible for the subsidies.

  In the event of a ruling against the administration, subsidies would probably be eliminated by August unless the court explicitly granted a grace period for Congress and/or the states to respond (for example, Justice Alito raised the possibility of delaying the effect of the court’s decision until year end). This would put political pressure on Congress to act, with little time to do so. Congressional Republicans have floated a few proposals to replace the subsidies, but face two potential obstacles. First, the leading proposals would eliminate the individual and employer mandates, which the White House would be likely to reject. Second, some Republicans object to replacing the subsidies if they are struck down, raising the possibility that intra-party divisions could lead to a stalemate. Ultimately, if the court rejects the administration’s implementation of the subsidies, there is a high probability that Congress would reinstate some form of financial assistance, but the process would create significant uncertainty and would probably involve changes to the health law beyond simply reversing the effect of the court’s decision.

  3. Senate banking legislation faces a tough road ahead

  In May the Senate Banking Committee passed wide-ranging legislation that would make changes to mortgage and bank regulation and some organizational changes at the Fed. Specifically, among other changes, the bill would (1) loosen mortgage lending standards by providing banks with a “safe harbor” from qualified mortgage rules for loans that they originate and hold entirely in their own portfolio, along with other criteria; (2) increase the threshold for financial institutions to be automatically designated as “systemically important” by the Financial Stability Oversight Council (FSOC) from $50 billion to $500 billion in assets (FSOC would still retain the ability to designate institutions below that level); (3) require the president to nominate and the Senate to confirm the President of the New York Fed, and (4) prohibit the Treasury from disposing of the preferred stock it holds in Fannie Mae and Freddie Mac without congressional approval.

  However, the bill faces an uphill battle in getting through the Senate. Democrats on the Banking Committee unanimously opposed the legislation, and it is unlikely to have sufficient support to pass in its current form. There is a possibility that Senate Banking Committee Chairman Shelby will be able to negotiate a slimmer package of reforms that might win some Democratic support, but most of the important provisions noted above would be unlikely to make the cut, in our view. The upshot is that the Senate seems unlikely to pass the bill that came out of committee, and if the Senate does ultimately pass a bill it would probably necessitate dropping most of the provisions of greatest interest to market participants.

  4. Transportation infrastructure spending looks likely to be punted…

  Congress has failed to pass a long-term transportation infrastructure spending program for several years, and another temporary patch ahead of the July 31 expiration of spending authority looks likely. The highway program currently spends more than it takes in via the gasoline tax, so Congress will need to plug this hole (estimated at $11 billion through year end) by transferring funds from the Treasury and using a package of spending cuts and/or tax increases to cover cost of doing so. The duration of the next extension is uncertain, but given the funding constraints, we would expect the upcoming patch to last only through year-end.

  5. …closing the window of opportunity for tax reform…

  The next extension of the highway spending bill probably marks the end of the road for tax reform until after the 2016 election. Some lawmakers in both parties have held out hope for an agreement that combines a long-term (i.e., six-year) infrastructure plan with corporate tax reform, using revenues from taxing repatriated foreign earnings to fill the highway program’s funding gap and potentially to boost spending. However, tax reform has failed to get off the ground this year, and even Senate Finance Committee Chairman Orrin Hatch (R-UT) conceded recently that Congress is “not even near doing tax reform at this point.” While we expect to see some additional activity on the issue–House Ways and Means Committee member Charles Boustany (R-LA) is expected to introduce an international corporate tax reform bill in the next several weeks and working groups in the Senate are expected to report shortly on potential areas of agreement– the lack of progress thus far and the short time left before other political distractions take over suggest that the political opening that tax reform seemed to have early this year has just about closed.

  6. …but creating an opening for reauthorization of the Export-Import Bank

  While the transportation bill looks unlikely to become a vehicle for tax reform, it has emerged as a potential vehicle for renewing the charter of the Export-Import Bank. Senate Majority Leader McConnell has promised to allow a vote on Ex-Im renewal this month, as part of a political agreement that allowed Trade Promotion Authority to move forward. Ex-Im supporters are likely to seek to combine renewal of the bank’s charter with some other must-pass legislation; the most obvious is the highway bill. If this occurs, it would increase the probability that the Ex-Im charter will be extended, at least temporarily. That said, since the highway program’s authority does not expire until July 31, such a strategy would also raise the probability that authority for the Ex-Im Bank to make new export credit loans and guarantees would expire at least temporarily.

  

  

  
  
  

  

• Why Did These Former Fed Members Admit Mathematically, Logically, & In Reality: "It's Over"?

  In the ironically titled "Paying For The Past" presentation, none other than Dick Fisher, Al Greenspan, and Larry Lindsey appear to have crossed the Rubicon of denial, lies, and deception to the dark-side of accepting reality. As Bill Holter asks, why exactly would these former Federal Reservists hint that, mathematically, logically, intuitively and in real life, IT'S OVER! Do they now realize what the crazy gold bugs have been saying all along is true and the day of reckoning is very close at hand.  They must be trying to get "out in front" of what is coming so they're on the record for historical and "legacy" purposes.  Nothing else makes any sense.

  

   

  As Bill Holter details…I could only chuckle after watching the interview because my entire writing can now consist of "yeah, what they said!".  Rather than write an entire article on this, I believe it might be better to let you watch what I was going to write, and we can move on to the "motives" of these three telling "mostly" the truth.  If you watch this interview, please keep in mind this one question "…and the alternative is"?

   

   
  Why exactly would these former Federal Reservists hint that, mathematically, logically, intuitively and in real life, IT'S OVER!  They did back peddle a little bit as the interview went on but "why" or better yet why now?  I believe they know what the crazy gold bugs have been saying all along is true and the day of reckoning is very close at hand.  They must be trying to get "out in front" of what is coming so they're on the record for historical and "legacy" purposes.  Nothing else makes any sense.  Are they "trying" to torpedo the system or to break confidence?  I highly doubt it but after watching the interview, would any kid with a paper route invest their money into the current system?  Are they trying to bad mouth the Fed now they are no longer employed there?  No, in fact, they each one pointed the blame at Congress.  It's Congress' fault we are in this mess!  "They" (Congress) spent the money and made the promises which cannot be honored and will ultimately be broken.
   
  There is a punch line of course, one these three men don't want you to hear!  Actually, the joke AND the punch line are both one in the same, "the money itself is bad and is the core to ALL economic and financial problems!".  You see, Congress could never had authorized all of the spending if the Treasury did not have the "money" in its coffers.  Yes Treasury could have borrowed money but would have been restrained if "money" was gold or something "real".  The only way that Congress has been able to get away with bankrupting the country was with the aid of … yes, the FEDERAL RESERVE these guys used to work for!  The Fed has in fact underwritten the scheme, if there was no Fed …the leverage could never have been built into the system.  Greenspan, Fisher and Lindsey of course know this but they can never admit it.  Were they to admit it, it would be an admission that they knew all along they were driving the bus over a cliff …with a roadmap wide open!
   
  All three spoke about the current state of interest rates and the unsustainability of the situation.  They ask "why", for what good reason are interest rates at levels only justified by a crisis?  The answer of course is; we are still in a crisis, we never exited and if rates HAD been increased …their greatest fears would have already been realized!  Mathematically, rates cannot go higher because of the inability to service interest payments (not to mention blowing up the leveraged interest rate derivatives) would come front and center.  They are trying to say the inability to pay is guaranteed to come …but is a future event.  If rates were to rise now, it becomes a current event.  It's really this simple!          
   
  Lawrence Lindsey even said at the 45 minute mark, "this is how they all end …including Zimbabwe"!  All "what" Larry?  Fiat currencies?  Or central banks who issue them?  This brings me to another article which has come out and ties in perfectly.  Actually, it ties in so well we can bring this entire article full circle and back to one of the gold bugs most central theses.  Zerohedge posted an article regarding a systemic bet being made by billionaire hedge fund manager Paul Singer.  Mr. Singer's strategy is simple, he calls it the "bigger short".  He believes interest rates have only one way to go, up.  He also believes we will see far more staggering defaults than we did in 2008-09.  He believes shorting the debt of the world is a no brainer trade and one where you can win ALL the marbles.
   
  Zerohedge of course picked up on the "minor flaw" in this strategy.  The very same flaw I might add that Harry Dent, Martin Armstrong and others are missing.  You see, when you "win", you must be "paid", but paid in "what" is the question.  Assuming Mr. Singer is correct and the system does collapse on itself and he "wins".  His win of course will be HUGE …but, he will be paid in dollars or euros or whatever fiat currency his trade is done in.  What will his winnings be worth if the currency itself is worth nothing?  It reminds me of Mikhail Barishnikoff in the movie "White Nights", he had a stack full of worthless rubles and threw them handful after handful up in the air while saying "rubles, rubles, lots and lots of rubles".  He had money …but it wasn't worth anything.
   
  You see, the currencies themselves are supported by the very debt Mr. Singer is selling short and expects to collapse!  Which now brings us back full circle to the crazy gold bugs.  This is exactly what they have been saying all along, a debt default will also mean a collapse in confidence of the currencies themselves and direct "fear capital" back into real money.  This will create huge demand, force supply into hiding and additionally revalue gold higher because the currencies themselves are losing value and confidence.  Gold bugs are not so different from those who see the dangers in the system from overheated markets and overleveraged debtors.  The only difference is that these nut jobs want what hasn't been for nearly 50 years, they want TRUE and REAL "SETTLEMENT"!  They actually want to get paid in something real!  How crazy is that?

  

  

  
  
  

  

• Tspiras Says "Don't Worry" About IMF Payment After Latest Failure To Clinch Deal

  Following this evening’s “private” meeting with Jean-Claude Juncker and Jeroem Dijsselbloem, Greek PM Alexis Tsipras once again admits that there is no deal. Both sides issued statements – The EU’s was a 3 sentence boiler-plate; and Tsipras was a brief press conference on Greek TV. In the interests of clarity we provide the statements (and their actual translations from “we have nothing to say” to “this is what we are trying not to say.”)

   

  The European Commission:

  *EU COMMISSION SAYS TALKS WITH TSIPRAS WERE CONSTRUCTIVE [no plates were thrown]

   

  *EU COMMISSION: INTENSE WORK ON GREECE TO CONTINUE [we are no closer at all to a deal]

   

  *EU COMMISSION SAYS PROGRESS MADE IN UNDERSTANDING POSITIONS [it is our way or no-way]

   

  It was agreed they will meet again – [seriously!?]

  Tspiras then explained:

  *BRUSSELS TALKS WERE CORDIAL: TSIPRAS [we finished dinner before plates were thrown]

   

  “DON’T WORRY,” TSIPRAS SAYS ABOUT FRIDAY IMF PAYMENT [Please do not pull all your deposits from Greek banks, everything is fine]

   

  “We are very close on an agreement on primary surpluses; that means that all the sides agreed to go further without the tough austerity measures of the past.” [Rest assured fellow Greek politicians, we will magically achieve a primary surplus with lower tax receipts and no austerity]

   

  “I think the realistic proposals on the table are the proposals of the Greek government” [sadly it seems the EU disagrees]

   

  “Aid accord w/ euro area, IMF is “in sight”” [like a mirage in the desert?]

   

  GREECE TO NEAR AGREEMENT WITH CREDITORS IN `NEXT DAYS’: TSIPRAS [if only The EU would back down on VAT and Pensions provisions]

   

  Tsipras “optimistic” European Commission intends to continue with a “realistic point of view” [when did hope become the international negotiating strategy]

  And finally Jeroem added:

  *DIJSSELBLOEM EXITS BRUSSELS TALKS, SAYS `MEETING WAS GOOD‘ [Only the cheap plates were thrown]

  *  *  *

  So to sum it all up – No Deal… no closer to a deal… and the same sticking points remain.

  For those looking for any glimmer of hope – they claims to be close to an agreement on fiscal targets – Almost no progress over pension system – Small progress on VAT & taxes

  EURUSD is drifting slowly lower – entirely unimpressed by this news… (if news is what it can be called)

  

  

  

  
  
  

  

• Cartoons Mocking “Goldman Rats” And Hillary Clinton Appear All Over NYC

  Submitted by Mike Krieger via Liberty Blitzkrieg blog

  It appears mysterious cartoons mocking “Goldman Rats” and Hillary Clinton are appearing all over NYC. The best one I’ve seen, is the image which shows the two entities as the unified oligarch oppressors they are. See: below:

  

  Business Insider notes that:

  A street artist has set their sights Goldman Sachs and is putting up stickers around New York City attacking the investment giant. 

   

  I spotted the Clinton sticker in a Brooklyn subway station last week, but it seems to have appeared in multiple locations. A blog dedicated to Brooklyn street art posted a picture taken of one of the stickers last month. 

   

  The Clinton sticker is clearly relatively new. In the sticker, the “H” in “Hillary” is copied from her campaign logo, which was unveiled when she launched her campaign in April. It echoes a line of attack that has been used by one of Clinton’s Democratic rivals, former Maryland Gov. Martin O’Malley (D), who has suggested Goldman Sachs would like to see her in the White House.

  While we don’t know who made the stickers, we should all be grateful to the creator. While the oligarchy remains firmly in place, we don’t have to respect them, and mocking corrupt cronies is the first step in delegitimizing their undeserved claims to positions of extreme wealth and power.

  For related articles, see:

  Hillary Clinton’s Poll Numbers Plunge to the Worst Since 2001

  Charting the American Oligarchy – How 0.01% of the Population Contributes 42% of All Campaign Cash

  Portrait of the American Oligarchy – The Very Troubling Income and Wealth Trends Since 1989

  Just Another Tale from the Oligarch Recovery – $100 Million Homes Being Built on Spec

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

  

  

  
  
  

  

• Top 10 Military Spenders

  Follow ZeroHedge in Real-Time on FinancialJuice with Voice News

  Hey Big Spender! Well, that’s what Shirley Bassey warbled out in 1967 when apparently the ‘minute you walked into the joint’ it was possible to see you ‘were a man of distinction’. It would seem, therefore, that a man is judged neither on the clothes he wears, nor on his manners these days. Not for a long time. These days, what counts is the amount of money that you spend. You don’t have to have it, you just need to flaunt it and brashly show it off to the rest of the world. It’s only dirty books that gather no dust, isn’t it? It’s only a dirty man that is able to do what he pleases; dirty being here the way the rich arms dealers are playing their tiresome game of I produce, I sell, you wage war, we tell everyone it’s bad and the kids will believe it. A man of distinction in today’s world is a man that throws his money in military monkey business, the shenanigans that our wealthiest nations excel at.

  The Stockholm International Peace Research Institute (SIPRI) carries out research on military spending around the world and measures how it changes. Most of the world’s armed countries are included in the study. Although, what country exactly isn’t armed these days? Any guesses? A French statesman, Georges Clemenceau, once said that “war is too serious a matter to be entrusted to the military”. That’s why the government always looks after it. One thing that he forgot to say also was that it was far too lucrative a business to let it out of the hands of the politicians. So, there are very few countries in the world that have no military force. Where are they and have you heard of all of them? Here’s the list (in alphabetical order):

  Countries with NO Military Force

  1. Andorra

  The principality in the Pyrenees mountain range has no military and even declared war on Germany in 1914 despite this fact. There were 10 men in the army that went to war in World War I as representatives of this small state. After the Great War the 10-man army was replaced by a 240-strong police force. France and Spain provide protection of the principality.

  2. Costa Rica

  After the Costa Rican Civil War and on December 1^st 1948 President José Figueres Ferrer abolished the military. Today the only force in the country is the Fuerza Pública providing ground law enforcement and border controls. Only under the Inter-American Treaty of Reciprocal Assistance (1947) would Costa Rica be protected if attacked. 21 countries including the USA and Cuba, for example would come to its assistance.

  3. Grenada

  There has been no army in this country since the US-led invasion took place in 1983 under the name Operation Urgent Fury. There is only the Royal Grenada Police Force. It is the Regional Security System that ensures that countries such as Antigua, Barbados and the Grenadines provide assistance in the event of a threat on the country.

  4. Lichtenstein

  This country abolished its army in 1868 following the Austro-Prussian War. Apparently, the country did not have enough money at the time in order to be able to afford an army. The police force is known as the Principality of Lichtenstein National Police Force. In the event of war it would be the European Union that would ensure its protection.

  5. Marshall Islands

  The Marshall Islands have been granted the status of a sovereign nation since 1983 under the Compact of Free Association.  The US acts as a protectorate and as such the Marshall Islands has no military force. There is, however, the Marshall Islands Police force that carries out every day duties in the country in order to ensure security.

  6. Nauru

   This is the smallest country in the world and it measures just 8.1 square miles. It has no standing army or military force. There is a Nauru Police Force but oddly there is no capital in the country. The last time that Nauru was attacked was by Nazi Germany in 1940 and at the time, as today if it were to be attacked, it was Australia that stepped in to provide assistance.

  7. Palau

  There exists a Palau National Police force but there is no military as such. Palau would obtain assistance from the USA since under the Compact of Free Association Palau is to all intents and purposes a protectorate of the USA.

  8. Samoa

  There is no military force in this country and it would have to rely on other countries to ensure its own defense. It has a treaty for such a purpose with New Zealand which undertook its protection as from 1962.

  9. Solomon Islands

  The Solomon Islands was a British protectorate as from 1893 and there was very little military force on the thousands of islands that make up the country. When the Solomon Islands created a government in 1976, it remained in relative stability, but with no military force until 1998. At that date until 2006, the country was rife with crime and ethnic conflicts and peace was restored only when New Zealand and Australia stepped in. However, there is no military and only a Solomon Islands Police Force today.

  10. Vatican

  There is no legal military present in the Vatican City. In the past the Noble Guard and the Palatine Guard were created to protect the Pope. However, these were abolished in 1970 by Pope Paul VI. Today there are only the Pontifical Swiss Guards. They are there to protect the pope and the Vatican Palace, but they are not legally speaking considered to be an army or a military force. The Gendarmerie Corps deal with traffic and keeping order as well as criminal investigations. Rome is responsible for the protection of the Vatican City.

   Obviously if there are so few that have banished, outlawed and abolished their military force, then there must be some reason behind wanting to do. It can’t be that there is just some overriding need to have some means of protecting yourself from that nasty neighbor that so longingly wants to invade you and to take from you what you never had but just made him believe you were hiding under the mattress.

  The top ten countries that spend the most on military are as follows and these are in ascending order. Wonder who’s at the top of the roost? Any guesses?

  Top 10 Military Spenders in the World

  10. Brazil

  Military Expenditure stands at $36.2 billion per year and it represents 1.4% of Gross Domestic Product in the country. In one year it has reduced its military spending by 3.9%. It imports $254 million and exports $36 million. Military spending increased rapidly during the 2000s, mainly due oil revenues increasing. It decreased by 4% in 2013. It is the military force that maintains order within the country and not just the police force.

  9. India

  India’s military spending for the latest available figures (2014) stands at $49.1 billion per annum, meaning a 2.5% share of GDP. Spending only decreased by 0.7% by comparison with 2013 and total imports represent a value of $5.6 billion (which is the highest figure in the word). Exports stand at a value of $10 billion. India is one of the highest spenders in the world on its military force. This is more than likely for its need to show outwardly that it is wealthy enough and capable enough of providing protection against Pakistan.

  8. Germany

  Military expenditure in this country is worth 1.4% of GDP and works out to $49.3 billion per year. There was no change by comparison with 2013 and total exports stand at $972 million, making it the world’s 6^th largest arms exporter. It is 36^th highest importer only in the world of arms, worth a value of $129 million. Since World War II Germany has being passive in world conflicts and its main role today is arms seller. Whereas the majority of countries in the world dropped their military spending when the financial crisis hit, Germany increased it by 2% as from 2008, until 2013.

  7. United Kingdom

  The UK spends $56.2 billion, representing 2.3% of GDP. As a percentage of GDP this is the 34^th highest country in the world. Between 2013 and 2014 there was a 2.6% drop in military spending due to the consequences of the financial crisis still and austerity measures. It exports are to the value of $1.4 billion and it is the 5^th highest arms seller in the world. It imports $438 million in military equipment and that means it is the 15^th highest importer in the world.

  6. Japan

  Japan spends 1% of its GDP on military and it is worth $59.44 billion. It imports $145 million-worth of military equipment today. Territorial disputes have led the country to arm itself more in case of need for defense against China.

  5. France

  France spends $62.3 billion on military and it stands at 2.2% of GDP, making it the 39^th highest country in the world. Spending decreased from 2013 by 2.3%. It exports a total of $1.5 billion and is currently the 4^th largest exporter of military equipment in the world.

  4. Saudi Arabia

  Saudi Arabia spends $62.8 billion on arms and the military and it represents a total of 9.3% of GDP (the 2^nd highest figure in the world). Between 2013 and 2014 it increased military spending by 14.3%. There is the overriding worry in the country that political turmoil and terrorism will overflow into the country from neighboring Yemen and Iraq.

  3. Russia

  Military expenditure stands at $84.9 billion per year in this country and it represents 4.1% of GDP making it the 10^th highest in the world.  It exports $8.3 billion per year and this is the world’s number one arms seller. By comparison it is the 33^rd highest arms importer only.

  2. China

  Military expenditure here is worth $171.4 billion, and it is worth 2% of GDP. It increased spending by 7.4% between 2013 and 2014. Military spending is representative of economic growth usually. The better the economy, the higher the spending. Or is it the spending on the military that fuels the economy?

  1. United States

  The USA spends $618.7 billion on the military and that is the 14^th highest percentage of GDP (3.8%). It saw its military budget decrease between 2013 and 2014 by 7.8%. It is the 2^nd highest exporter in the world and its market is worth $6.2 billion. It is the 8^th highest importer in the world and imports to the tune of $759 million. Military spending was cut due to austerity measures as well as the withdrawing of troops from Afghanistan and Iraq.

   

  According to J. K. Galbraith: “All candid economists concede the role of military expenditures in sustaining the modern economy. Some have held that expenditures for civilian purposes would do as well. The transition would be rather easy … [But] there is the problem of magnitude. For the price of a smallish fleet of manned supersonic bombers, a modern mass transit system could be built in virtually every city large enough to have a serious bus line. What would be built then?” That’s certainly food for thought. The views of Chomsky are that the ‘Pentagon System’ means that the military spending keeps the economy ticking over sweetly. The demand for arms in the word is a myth, a created, fake demand that is driven by business and economics.

  Big Spender, the song immortalized by Bassey, ends with ‘How’s about a few laughs? Laughs?’. Who’s laughing at the race to military success these days? Only the top countries make, sell, arm others and then create wars between countries, while they teach their children that they are doing it all in the name of democracy. Since when did producing and selling arms prevent warfare? Since when did arms dealing become so lucrative that everybody would be willing to start a war to get in on the act? Is that laughable? Ask Shirley! She’s about the only one that might have the answer!

  What’s your opinion of arms dealing today in the world? 

  

  

  
  
  

  

• The Next Escalation: FBI Launches Probe Of Russia 2018 World Cup Award

  With The FBI now reportedly investigating the award of The Soccer World Cup to Qatar and Russia, it appears, as Mises' Lew Rockwell exclaimed, "FIFA has got to change its name, it’s going to have to take out the “I” and put in an “A” for American." This sudden act of imperialism by The US, putting itself in charge of world soccer, as Paul Craig Roberts notes, it "is another Washington-British scam against Russia," adding "law is a weapon that Washington uses to achieve its agenda."

  Which is as we predicted a week ago, has only one goal:

  And now Russia is stripped of the 2018 World Cup

  — zerohedge (@zerohedge) June 2, 2015

  Recall:

  What happens next? Sepp Blatter's reelection this coming Friday, which until yesterday had been guaranteed, is now virtually assured to fail as Putin's frontman at FIFA is shown the door. What else likely happens?

   

  Following some dramatic procedural changes, Russia loses the hosting of the 2018 World Cup.

   

  And now, let's see how FIFA strips Russia of its 2018 World Cup hosting, which also as noted previously, was the entire reason for the sudden and unexpected DOJ crackdown on FIFA, whose corruption has been well known for decades.

  Paul Craig Roberts previously noted,

  “This is another Washington-British scam against Russia. It reminds me of the orchestrated press attack on the Sochi Olympics. Washington is trying to turn professional sport into a propaganda weapon against Russia. They are going to use this to take the World Cup away from Russia.”

  “There is no rule of law in the US. Law is a weapon that Washington uses to achieve its agenda.”

  And as the following interview with Mises Institute's Lew Rockwell confirms, it proves there is nothing Washington will not interfere with…

  RT: This story has generated a huge amount of interest around the world. From an economic point of view, there is also a lot at stake, isn’t there?

   

  Lew Rockwell: Well, there certainly is, but I think the political angle is more important. We’ve had this act of imperialism. Who put the US in charge of international football? They’re able to because FIFA made a mistake of having an office in New York. Probably that is a warning to anybody else: Don’t have an office on US soil because then they can use that to take control.

   

  Maybe the corruption charges are true, I don’t know, but again: Why is it the business of the US? I think that’s entirely because FIFA gave the World Cup in 2018 to Russia. This is just another anti-Russian move, and the US wanting to run the entire world, be in charge of every crime or alleged crime every place on the globe.

   

  RT: But doesn’t it have a case there, because there are allegations of $150 million being misappropriated? A lot of this money apparently went through American banks, so part of it happened on American soil. So do they have the right to investigate it?

   

  LR: They can investigate what happens on American soil, but they don’t have the right to go and arrest people in Switzerland or elsewhere. Would you say that England or Switzerland can go and arrest people in New York without the US government’s permission?

   

  I have to tell you, there is corruption in the US too: there is corruption in US sports; there is corruption in the US government; there is corruption in every government. The problem the US has with this is not corruption, the problem it has got is with the results – Blatter wasn’t doing what he was told to do. And I guess now he has done what he was told to do. Obviously something happened to him. Maybe it was just the sponsors’ withdrawing; maybe it was the CIA. Who knows, maybe he was personally threatened or his family. This is the way governments operate there, sort of big-time mafias. We don’t know what happened. But as I said, this is not a good thing for football, not a good thing for the world. FIFA has got to change its name, it’s going to have to take out the “I” and put in an “A” for American.

   

  RT: Do you think that major corporations, such as McDonald’s, played an important role here, forcing Sepp Blatter to resign?

   

  LR: I guess, yes. Of course they are the ones that could be pressured by the US. Even aside the scandal thing, imagine that the US gave them their marching orders, and they took them. And I can understand why companies don’t want to be involved in something that’s potentially corrupt. Although they put on great football games. I don’t know whether they are corrupt or not. I think there is probably corruption in many different international sports associations, because there is so much money at stake. That is not a good thing – people shouldn’t be corrupt, people shouldn’t give bribes, people shouldn’t take bribes. But again, the US is using this to take control of international football; that’s what going on.

   

  Never again will the World Cup happen in a country that the US doesn’t like. The whole world is threatened by the US, which would like to be the world government; nothing is beyond its ken; nothing is outside of its control; nothing can stand against it in the view of the US.

  *  *  *

   

  

  

  
  
  

  

• FBI Uses Surveillance "Air Force" To Monitor US Citizens, AP Finds

  In the wake of the violent protests, looting, and riots that shook Baltimore to its core and left parts of the city smoldering in late April, Benjamin Shayne — who had just sat down in his backyard to enjoy a radio broadcast of an Orioles game — inadvertently uncovered a secret FBI aerial surveillance program when he noticed a small plane circling overhead and asked Twitter if anyone could explain the aircraft’s low, circular flight pattern. As it turned out, one of Shayne’s followers had some answers:

  @scanbaltimore It’s registered to NG Research: http://t.co/mCWpUzvndp
  For some other info: http://t.co/cbCehxiCS0 pic.twitter.com/eGXFIKXCgr

  — Pete Cimbolic (@pete_cimbolic) May 3, 2015

  That exchange would culminate in a Washington Post article which outlined the “aerial support” provided to the Baltimore Police Department by the FBI. 

  We went on to take a closer look and, in “Meet The FBI’s Secret Eye In The Sky Overseeing The Baltimore Riots”, we postulated that the Cessna’s monitoring the riots may have been equipped with night vision equipment provided by Persistent Surveillance Systems, a company which has worked with the Baltimore PD in the past. Here’s a schematic (via WaPo):

  

  On the heels of the revelations, AP followed up and has much more on the FBI’s aerial surveillance program.

  Via AP:

  The FBI is operating a small air force with scores of low-flying planes across the country carrying video and, at times, cellphone surveillance technology — all hidden behind fictitious companies that are fronts for the government, The Associated Press has learned.

   

  The planes’ surveillance equipment is generally used without a judge’s approval, and the FBI said the flights are used for specific, ongoing investigations. The FBI said it uses front companies to protect the safety of the pilots and aircraft. It also shields the identity of the aircraft so that suspects on the ground don’t know they’re being watched by the FBI.

   

  In a recent 30-day period, the agency flew above more than 30 cities in 11 states across the country, an AP review found.

  The FBI claims the program is “not secret” and does not aim to collect “mass surveillance”, but as we discussed in depth in the article linked above (and as you can see from the graphic), it’s difficult to believe that the equipment on the planes is powerful enough to be of use to the FBI but somehow not capable of the types of mass surveillance that the planes over Baltimore were capable of. More from AP:

  “The FBI’s aviation program is not secret,” spokesman Christopher Allen said in a statement. “Specific aircraft and their capabilities are protected for operational security purposes.” Allen added that the FBI’s planes “are not equipped, designed or used for bulk collection activities or mass surveillance.”

   

  
  

   

  But the planes can capture video of unrelated criminal activity on the ground that could be handed over for prosecutions.

   

  Some of the aircraft can also be equipped with technology that can identify thousands of people below through the cellphones they carry, even if they’re not making a call or in public. Officials said that practice, which mimics cell towers and gets phones to reveal basic subscriber information, is rare.

  AP discovered the names of many of the shell companies the FBI has used to conduct the operation and in an ironic twist, the government asked the news agency not to reveal the names because then the Bureau would simply have to create new companies, a process which would cost taxpayers money. In other words: “if you reveal this information to taxpayers, it will cost them.”

  U.S. law enforcement officials confirmed for the first time the wide-scale use of the aircraft, which the AP traced to at least 13 fake companies, such as FVX Research, KQM Aviation, NBR Aviation and PXW Services.

   

  During the past few weeks, the AP tracked planes from the FBI’s fleet on more than 100 flights over at least 11 states plus the District of Columbia, most with Cessna 182T Skylane aircraft. These included parts of Houston, Phoenix, Seattle, Chicago, Boston, Minneapolis and Southern California.

   

  The FBI asked the AP not to disclose the names of the fake companies it uncovered, saying that would saddle taxpayers with the expense of creating new cover companies to shield the government’s involvement, and could endanger the planes and integrity of the surveillance missions. The AP declined the FBI’s request because the companies’ names — as well as common addresses linked to the Justice Department — are listed on public documents and in government databases.

   

  At least 13 front companies that AP identified being actively used by the FBI are registered to post office boxes in Bristow, Virginia, which is near a regional airport used for private and charter flights. Only one of them appears in state business records.

   

  
  

   

   

  The moral of the story: if you’re ever in your backyard relaxing and listening to a baseball game and happen to notice a Cessna making concentric circles overhead remember, it’s not paranoia if they’re really watching you.

  

  

  
  
  

  

• A Much Bigger Threat Than Our National Debt

  Submitted by Bill Bonner via Bonner & Partners,

  The markets are acting as though it was already summer. They are wandering around with little ambition in either direction. Meanwhile, we’ve been wondering about… and trying to explain… what it is we are really doing at the Diary.

  We expect a violent monetary shock, in which the dollar – the physical, paper dollar – disappears. But why?

  Credit Bubble, the Sequel

  As you know, we tend to take the side of the underdogs… as well as half-wits, dipsomaniacs, and unrepentant romantics. But currently, we are standing up for the young, the poor, and all the others the credit bubble has hurt and handicapped. It’s not that we are saints or do-gooders. We are just trying to make a living, like everybody else.

  But we come at it from a different direction than most. Almost all the movers and shakers have the same bias: They want to see the credit extravaganza continue.

  The Federal Reserve has already “invested” (if that’s the right word for throwing phony money down the drain in a futile and jackass effort to hold off the future) $4.5 trillion to protect the balance sheets of the elite. This money has been amplified by zero-interest-rate policies to something like $17 trillion of stock market gains… and umpteen trillion in bond and real estate profits. Naturally, the people who own these things – and not coincidentally provide early stage funding for congressional and presidential candidates – do not want to see a new movie. They want to see the sequel, Credit Bubble 5. Then Credit Bubble 6. And so on…

  And the show goes on! They buy their candidates. They place their ads. The newspapers they support voice their opinions. Their corporations wheel and deal on Wall Street, spinning off bonuses, fees… and even higher stock prices. And the pet economists appointed to run central banks do their bidding.

  Eyes Wide Open

  We’re not complaining about it. We’re just calling attention to it. Because we believe there is a lot of money to be lost by not recognizing what is going on… and perhaps a little money to be made too by following the plotline carefully. Most people do not recognize what is going on because they are paid not to recognize it.

  As we’ve pointed out many times, no central bank is going to hire a guy who thinks it should mind its own business.

  Few investors are going to dispute the happy ending. And nobody is going to be appointed secretary of the Treasury who quotes Andrew Mellon’s famous advice to President Hoover following the 1929 Crash to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate.”

  The credit bubble causes an extreme bias to the upside. Almost no one wants to see it end. Except us.

  *  *  *

  Is that because we are smarter or more virtuous? Not at all. It’s just that we are not paid to ignore things. And neither is any member of our team of worldwide analysts at Bonner & Partners – the small, independent publishing business behind the Diary. We are not beholden to the elite; we get no money from them. And our business model (and maybe our natural contrariness) tells us to open our eyes and try to see what others have missed. Yes, we own stocks. But capital gains take a back seat – far behind our desire to connect the dots.

  Beating Mr. Market

  Since we founded Agora Inc. – the parent company of Bonner & Partners – in 1980, we have published thousands of investment reports and recommendations. We now have analysts and economists in 10 different countries. Our advice and recommendations appear in French, German, Mandarin, Spanish, and Portuguese… as well as English.

  Is the advice good? Do the recommendations always go up? We recently commissioned an outside accountant to study them. The conclusion? Some good. Some not so good. Some do very well – with several of our paid-for advisories outpacing the S&P 500 over the last 10 years.

  …

  Our personal experience is similar: Sometimes we do well. Sometimes we don’t.

  This generally confirms what we know about the way the investment markets work: If you are lucky and work hard you can do a little better than the market.

  But Mr. Market is always hard to beat. The Efficient Market Hypothesis – which tells us that financial markets do not allow you to earn above-average returns without taking above-average risk – may overstate the case. But probably not by much.

  “Black Swan” Hunting

  On the other hand, when we look at the big macro events of the last 30 years, we find our team does very well.

  There were five major events that marked the period:

  1. The collapse of the Soviet Union
  2. The fall of the Japanese miracle economy in 1990
  3. The bursting of the dot-com bubble in 2000
  4. The attack on the World Trade Center in 2001 and the “War on Terror”
  5. The financial crisis of 2008 and the subsequent non-recovery

  These things are important because they were unanticipated. As our friend Nassim Taleb puts it, they were “black swans.” People weren’t ready for them. And most authorities said they wouldn’t happen.

  In the 1980s, for example, the CIA believed the Soviet Union was going from strength to strength. Until 1990, investors were betting heavily on a continuation of the Japanese boom. Same thing for the dot-com bubble. It was accompanied by the most delirious “this time it’s different” talk we’ve ever heard. And on the morning of September 11, 2001, nobody expected such a dramatic attack on Manhattan – especially not the people we paid billions of dollars to stay on top of it.

  And Fed chairmen Alan Greenspan and Ben Bernanke both admitted that the 2008 global financial crisis was unforeseeable. But the crash in real estate and finance of 2008 wasn’t unforeseeable at all.

  In 2003, my Agora colleague Addison Wiggin and I wrote a book called Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. The foreword to that book, penned by our friend Jim Rogers, summed up our thesis:

  As this book you hold in your hands demonstrates, artificially low interest rates and rapid credit creation policies set by Alan Greenspan and the Federal Reserve caused the bubble in U.S. stocks in the late 1990s.

   

  Now, policies being pursued at the Fed are making the bubble worse. They are changing it from a stock market bubble to a consumption and housing bubble.

   

  And when those bubbles burst, it’s going to be worse than the stock market bubble, because there are many more people involved in consumption and housing. When all these people find out that house prices don’t go up forever, with very high credit card debt, there are going to be a lot of angry people.

  And our analysts were all over the story years before the crisis hit. (As one reader commented: We are often very early.) As for the other big events, our analysts were on top of three out of four of them. The only one we missed was the attack on the World Trade Center. In the interest of full disclosure, it is also true that we saw many other things coming – such as the Y2K computer glitch in 2000 – that never happened. Still, we were able to see many of these events coming when so many others – including those responsible for keeping an eye on them – failed.

  *  *  *

  How We Get to Hyperinflation from Here

  How did we do it? Our customers pay us to notice things that others are paid not to notice. Bear markets, crashes, credit contractions… governmental, technical, and social catastrophes – nobody wants to look carefully for these things. Nobody wants them to happen. They make people poor, not rich. And yet, they do happen.

  It seems part of nature’s system that mistakes are punished, errors are corrected, and “bad” things happen from time to time. But like forest fires, they have a useful purpose: They clear away the dead wood and allow future growth.

  Currently, we are predicting a credit crisis – much worse than the 2008 meltdown.

  No one wants it – especially not the deadwood. But we put a high probability factor on this forecast. It is unavoidable… even if we don’t know exactly what form it will take.

  And we believe it will be foreshadowed by something even rarer and more unexpected – the disappearance of cash dollars.

  Just to be clear, our prediction is that the “Ice Age” of low rates and low growth for a long time – as predicted by many analysts and economists – won’t happen.

  Instead, a crisis will cause a crash on Wall Street. The banks will go broke. The credit system will seize up. People will line up at ATMs to get cash and the cash will quickly run out. This will provoke the authorities to go full central bank retard. They will flood the system with “money” of all sorts.

  The ice will melt into a tidal wave of hyperinflation.

  

  

  
  
  

  

• Presenting The Next Great Source Of Middle Class Prosperity

  On the heels of yesterday’s news that auto sales blew away expectations in May, posting their largest MoM increase since November 2013 on the back of record numbers across-the-board for financing (including average new car loan terms of 67 months and record high average payments of $488/month), we present the reincarnation of the home equity loan.

  With PNC’s “cash out auto loan,” you can put your vehicle “to work” by pledging it as collateral for a cash loan.

  Welcome to the Great American auto bubble, now at PNC soon at every bank near you.

  

  

  
  
  

  

• Former US FIFA Official Admits Taking Bribes In Selection Of French And South African World Cups

  With the crackdown against FIFA corruption escalating with every passing day, just 24 hours after Sepp Blatter announced his unexpected resignation moments ago it was revealed that former US FIFA executive Chuck Blazer, who had been suspended in 2013 from CONCACAF amid corruption allegations and who became a confidential FBI informant, admitted to taking bribes when deciding the winners of the 1998 (France) and 2010 (South Africa) world cups.

  The revelation was made when a November 25, 2013 transcript between Loretta Lynch and the former FIFA official was unsealed hours ago. While the full transcript (attached below) makes for a fascinating read, the key section is the following:

  From 1997 through 2013, I served as a FIFA executive committee member. One of my responsibilities in that role was participating in the selection of the host countries for the World Cup. I also served as General Secretary of CONCACAF from 1990 through December of 2011 , and was responsible for, among other things, participating in the negotiations for sponsorship and media rights.

  During my association with FIFA and CONCACAF, among other things, I and others agreed that I or a co-conspirator would commit at least two acts of racketeering activity. Among other things, I agreed with other persons in or around 1992 to facilitate the acceptance of a bribe in conjunction with the selection of the host nation for the 1998 World Cup.

   

  Beginning in or about 1993 and continuing through the early 2000s, I and others agreed to accept bribes and kickbacks in conjunction with the broadcast and other rights to the 1996, ‘1998, 2000, 2002, and 2003 Go1d Cups. Beginning in or around 2004 and continuing through 2011, I and others on the FIFA executive committee agreed to accept bribes in conjunction with the selection of South Africa as the host nation for the 2010 World Cup.

  It is worth noting that earlier today, South Africa’s sports minister Fikile Mbalula said that the previously disclosed payment of $10 million made to the Caribbean Football Union in 2008, was not a bribe and was not made to assure his country hosted the 2010 world cup. The US indictment released by America’s department of justice last week alleged that: “a high-ranking Fifa official caused payments … totalling $10m – to be wired from a Fifa account in Switzerland to a Bank of America correspondent account in New York … controlled by Jack Warner”.

  Blazer’s sworn testimony clearly confirms that South Africa did pad some bank accounts to make sure it was awarded the 2010 world cup.

  It is unclear as of yet who may have been the source of funding for the 1992 bribe – some 23 years ago – to assure France was the recipient of the 1998 world cup.

  Blazer not only admits to taking bribes but to evading taxes while a resident of New York:

  Between 2005 and 2010, while a resident of New York, New York, I knowingly and willfully failed to file an income tax return and failed to pay income taxes. In this way, I intentionally concealed my true income from the IRS, thereby defrauding the IRS of income tax owed. I knew that my actions were wrong at the time.

  For those curious, the residence in question was in the Trump Tower, where in a $6,000/month apartment he kept his cats.

  And while it is only a matter of time before even more such transcripts are unsealed revealing the acceptance of bribes by FIFA officials to award the hosting of the 2018 and 2022 World Cups to Russia and Qatar, respectively, following promptly by the stripping of these countries hosting rights, one perhaps even more stunning revelation is that the abovementioned Chuck Blazer had, and still has a blog, titled Travels with Chuck Blazer and his Friends… (hosted by blogspot) which was launched in 2007 and whose most recent post was in February 2014, or after the above sworn deposition took place and Blazer already knew he was facing a indictment.

  Just who are these “friends” of Blazer’s? These are some examples:

  Here is the 450 pound Chuck with Miss Universe:

  

   

  Chuck with Vladimir Putin in 2010. This is what Blazer said of that meeting:

  On August 5th, I had the pleasure of visiting with the Prime Minister of Russia, Vladimir Putin, in his private office in the Russian Federation Office Building. It was a very busy day in the nation’s capital, with the Prime Minister’s itinerary changed, keeping him grounded to his office, due to the rash of forest fires sweeping the Moscow region. That morning I received a call inviting me to come to the House of the Russian Government and have a chat.

   

  Primed and ready for the opportunity, I arrived on time and was brought to a room where I met the very skilled translator who was specialized in simultaneous translation; not with headphones and equipment, but by softly speaking in the complimentary language while each speaker was saying their piece. We chatted informally for a while and then my Exco colleague Sports Minister Mutko joined us, giving us the opportunity to practice and establish a working cadence of translation.

   

  About an hour passed, while the PM had his cabinet in his office to consider how to put out the fires and to reduce the tension and the dense smoke that filled the city. Rain would have helped, but the weatherman brought no relief and the politicians needed to continue to do their best to fight the fires while battling mounting negative public sentiment. Minister Mutko left the room and went to check on when we would be received. While he was gone, I was ushered into a small receiving room with three large comfortable chairs. I calmly waited on the one with my name placed by protocol to make sure I was seated in the right place. All of a sudden, word came to the room that we were to move to another place to actually meet. So, with the translator in tow, we walked down a long corridor and through a room full of cabinet members and key officials. As the large doors to his private inner sanctum swung open, I was greeted by a smiling and very affable leader of the government, Mr. Putin himself.

   

  A firm handshake and a personable smile set the tone for what turned out to be a very special experience. He guided me to sit on a leather couch in the near right corner of the room. At right angles to that couch was another matching one where he took up his position so that we flanked the corner of a large wood bordered coffee table. On my couch, sitting near enough to be part of the conversation was the translator; while on Mr. Putin’s was Vitaly Mutko. The conversation began in a normal enough way, each of us thanking the other for making time for the visit. Genial welcomes continued until at one moment, he looked at me with a very serious gaze and said, without cracking a smile, “You know, you look like Karl Marx!”

   

  I guess I could have responded to his observation in any of a dozen unpredictable ways. Instead, I simply winked at him and said, “I know”. This brought an immediate response with him lifting his right arm up in the air and thrusting it forward to give me my first High-5 from a Prime Minister. I must admit that it was unique after all we have heard about this famous leader of the Russian Republic with a work history in the KGB. So, who knew what to expect? I can tell you that this began a half hour exchange of wit, charm and effective communications.

   

  Shortly after the High-5, he had some questions about my blog. Yes, this same one you are reading now. He asked how it began. I told him about the World Cup in Germany and the fact that I had many special experiences which I wanted to share with people who didn’t have the same opportunities. So, I began Inside the World Cup, which ran until the final whistle in Berlin.

   

  Shortly thereafter, Travels with Chuck Blazer was born. I still had many experiences to share, albeit not accompanied by as much writing as during the World Cup. Instead, more pictures, since recreational writing at times can be very demanding in the face of other obligations. Following discussion on other topics, Mr. Putin rose and walked to a wall behind the table where his cabinet had just met. He slid open two massive doors, revealing a beautiful wooden inlaid map of the whole of Russia, which filled the expanse of the largest wall in the room. As he did this, he talked about a vacation he was about to go on during the waning days of summer. He said that security normally doesn’t like him talking about his plans in advance, but he wanted to share with me some of the plans he had in mind. He walked from the western edge of the map where his St. Petersburg home and Moscow were located and walked to the right towards Siberia and great river deltas and continental roadways being connected. He talked of the things he planned to do, but I must admit I thought he was just trying to show me how very large an 11 time zone land mass of Russia is, when walking from the map’s western edge to the eastern perimeter.

   

  Before returning to the table, he posed the question, “If I send you pictures from my trip, will you post them in your blog and then what will you do?”. I told him yes, the pictures would definitely appear and I would change the name of the blog to “Travels with Chuck Blazer and his Friends”. Indeed, what he was telling me was the real preview of his trip. So, I now happily do what I committed to him and share with you the pictures he has been kind enough to send to me. You will note the new title of the blog has now reflected the pictures from my friend. I hope this opens up my forum to allow for other generous contributions of the people I have had the pleasure to meet in my very special role with FIFA.

  

   

  And here is Chuck with Bill Clinton and a random blonde:

  

   

  Here is Chuck with Hillary:

  

   

  Chuck with UEFA head Michel Platini

  

   

  Pirate Chuck with a nurse:

  

   

  Chuck with a stripper

  

  And so on: more here.

  * * *

  Full unsealed transcript below

  

  
  
  

  

• "Bernanke & Greenspan Have Destroyed America" Schiff & Maloney Warn "People Don't Realize What Is Coming"

  Ali and Frazier, Laurel and Hardy, Mayweather and Pacquiao, Liesman and Santelli, and now Schiff and Maloney. Peter and Mike join clash of the titan-like to discuss their investment strategies and expose the charts the government doesn't want you to seeas "people like Bernanke are taken seriously still and the people that did predict [the crisis] are dismissed as lunatics half the time." The wide-reaching conversation covers everything from gold and stocks to The Fed and The Dollar – Bernanke "took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning." The air is coming out of the bubble, they warn, "Bernanke and Greenspan have absolutely destroyed America. People don’t realize what is coming…"

   

  Full interview here:

   

  Full transcript below:

  Mike: I was in Puerto Rico a little while back and Peter Schiff invited me over to his house and we were just amazed at how we are exactly on the same page when it comes to everything economically. And so he just made a trip out to California near my offices and we decided we’d get together and discuss some of this stuff. So on your travels Peter lately you were just at a show you were speaking. Where were you at?

  Peter: I was in Las Vegas. It’s great to see you again Mike. I was speaking to a very main stream audience of hedge fund managers at an annual conference there. And what was very interesting is even though the audience was, as I said, very main stream, and I was on a panel with a lot of very high profile, main stream individuals, the only person that really got applause was me. I also got some laughs because I told a few jokes, but I think people really got what I was saying and I had maybe 50 to 100 people come up to me afterwards and shake my hand. And really appreciate the candor with which I spoke and I really agree with what you had to say and I was saying some things that the mainstream never really hears about the real problem in the US economy and I blamed it all on the Fed and everybody else was a cheerleader there for the Fed. In fact, Ben Bernanke spoke at the same event as me and he was introduced as being the savior of the US economy and I think he damned it.

  Mike: I absolutely agree. I saw you had your picture taken with him right?

  Peter: Yes, we were at a cocktail party following the event and I thought people would get the irony of the juxtaposition between the two of us kind of having a glass to drink.

  Mike: I think that he and Greenspan have absolutely destroyed America. People don’t realize what is coming from the stored up energy from the manipulations that they did.

  Peter: And speaking of him, this was really the first chance I had to have a conversation with Ben Bernanke. Speaking of him, I really got the sense that he has no idea of the Fed’s culpability in the housing bubble or the ensuing financial crisis, he really doesn’t know. And he denies that the Fed had anything to do with that, that maybe it was pure happenstance or coincidence that we had a housing bubble and these very low interest rates. And because Ben Bernanke still doesn’t get the connection between the Fed’s mistakes of the past and the last crisis he certainly doesn’t understand the coming crisis, which is going to be far worse because the mistakes the Federal Reserve made in the aftermath of that crisis are far worse than the ones and far bigger than the ones that caused it.

  Mike: Right. Ben Bernanke’s overreaction was far bigger than Greeenspan’s reaction to the NASDAQ crash.

  Peter: And as a result the crisis in our future unfortunately is going to be far larger than the one that we just experienced.

  Mike: I wanted to show you a couple of things because I have a feeling that you and I will be exactly on the same page here. You know how indicators…there’s all these different factors in the economy and they’ll be going up at different rates. Suddenly one or two indicators start to point down when you’re near a top and then more of them start to point down and then things roll over and then there’s a crash and everybody thinks that nobody saw it coming. But there’s a few people that are watching this stuff that do see it coming.

  Peter: That’s exactly what they said about the last crash that nobody could have possibly predicted this except there were people who did predict it.

  Mike: You predicted that we were in a real estate bubble. I predicted that we were in a real estate bubble.

  Peter: Ben Bernanke denied that there was a real estate bubble. Even after it burst, he still couldn’t figure it out.

  Mike: And what amazes me is people like Bernanke are taken seriously still and the people that did predict it are dismissed as lunatics half the time. It really burns me up. But this is manufacturing new orders for consumer goods and this is from the Fed’s website and you can see this big plunge that it took in 2008. And there’s a big plunge that’s happening right now. That suggests to me if people aren’t ordering new goods it feels like this could be this summer maybe..

  Peter: Remember, the air is coming out of the bubble because the Fed halted or paused it’s quantitative easing program. Most people think they ended it but I think it’s just a pause because now everybody expects the Fed to raise interest rates because they think the recovery finally has enough traction that it no longer needs the emergency life support of 0% yet your chart is showing and a lot of other economic indicators are showing that the economy is already rolled over and is rapidly headed back to recession even though the Fed hasn’t raised them yet. All they’ve done is talk about raising them in the future and we’re already rolling back into recession.

  So I believe that the Fed is going to have to do another round of quantitative easing, that they’re not going to raise rates and that’s going to be a shocker. It’s going to send shock waves throughout the currency markets and the bond markets because everybody expects the Fed to raise rates and when they don’t do it because the economy is too fragile because it’s just a bubble, not a legitimate recovery then people are now going to have to second guess their idea that what the Fed worked instead of calling Ben Bernanke a hero a lot more people are going to say, wait a minute he wasn’t a hero what he did wasn’t heroic. He took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning.

  Mike: Yes the derivatives are bigger instead of smaller. Everything that was put in place to create that bubble that then popped. The two big [inaudible 00:05:36] banks are all bigger. Nothing has been addressed right?

  Peter: No. Those banks are now bigger than ever and if it was going to be a problem to let them fail in 2008 it’s going to be much bigger problem to let them fail in 2016. So the government has to do whatever it can unfortunately to keep the bubble from popping and I think the air is already coming out even without a rate hike but…

  Mike: So do I, yes.

  Peter: But more importantly, the reason that he’s been able to look like he’s succeeded is because of the illusion that it’s all temporary. Everybody believes that the Fed can normalize rates, shrink their balance sheet but when they realize that they can’t do that, that they’ve been lied to then this is going to be a major event for the currency markets or the financial markets when people come to terms with the predict that we’re in. That it’s QE infinity, that rates have to stay at zero in perpetuity. Because the debt is now so enormous that even the slightest increase in interest rates would collapse the system because there is just so much debt.

  Mike: I agree. I don’t think that they can raise interest rates. The next thing here is rejection of credit applications. And I wasn’t following this chart before. I just saw it in somebody’s newsletter. I think this is zero hedge maybe, but this is the crisis of ’08 and look at what happened in March for credit application rejections. So there’s something happening in the economy.

  Peter: One of it is the big transformation from full time employment to part time jobs. Everybody points to all the jobs that are being created and the low unemployment rate but the problem is that the unemployment rate dropped not because people found jobs but because a) they stopped looking or b) they settled for a part time job. So when people who used to have full time jobs now have part time jobs they don’t have the income to get the credit that they need.

  Mike: Right so they apply for a loan and it gets rejected.

  Peter: You know you have home ownership rates now at almost 30 year lows, yet rents are rising. I mean, now you have a record number of 50% or excuse me 25% of people who are renting now devote half their income to pay their housing costs. That’s never happened before. You have hardly anything left over for food or other expenditures that you have. And people are loaded up with student loans and unfortunately a lot of these college grads now have student loans and all they can get is minimum wage jobs and a lot of them are just part time. So people are trying to get by.

  In fact, a lot of people are actually enrolling in college now, not because they want the education but because they need the loans. They just want to get the money so they can pay their utility bills. They don’t even care and a lot of our college grads when they graduate with lots of debt, they can’t find jobs so they go to grad school to get a master’s degree so now they have even more debt but they still can’t get a job.

  Mike: Right, right. The big debt that has been plaguing us lately, the growth in debt. A lot of it is in student loans and auto loans. There are subprime auto loans now.

  Peter: As if the government didn’t learn their lesson from the housing bubble, they decided to create an auto bubble because when the governments.. when GM and Chrysler went bankrupt the government also acquired their financing divisions and they still own them. So the government after they bailed out these companies they certainly didn’t want them to fail again. They wanted to make it look like the ballot was a good idea. So they wanted to revive their profits by making it possible for just about anyone to buy a car. And so many people have been able to buy cars with zero down and they’ve been stretching out their payments so that now people are getting six and seven year auto loans.

  Mike: Right, the seven year auto loan. The car only lasts maybe that long. So you have no equity ever.

  Peter: Well the warranty only lasts for four years. Four or five years tops. And when these cars come out of warranty, try to have it repaired. We don’t have a lot of repair places anymore. It costs a fortune, and of course the value of the cars are plunging. People are going to have much less equity in their car than the remaining payments on their mortgage. And so they end up not making the payments. Now you’ve got to repossess the cars. But there is a huge bubble. But interestingly enough, the first four months of 2015, this was the worst start to a year in auto sales since 2009. So it looks to me like the air is coming out of the auto bubble already. We’ve already saturated the market and so this is just the beginning of the decline.

  Mike: Home mortgages, they’re going longer now than 30 years. There’s longer home mortgages being offered too, trying to keep that bubble inflated.

  Peter: Well, of course they’re offering 3.5% down payments now too with government guarantees which was part of the problem because 3.5% is not enough down to actually have skin in the game. It costs you more than that just to sell a house. So if you buy a house with 3.5% down, the minute your mortgage closes you’re already under water. But now the problem is you’re giving the homeowner a free gamble on the real estate market. Because if real estate prices go up, he can keep the profits, refinance. If prices go down, he could just walk away but better than that he can just stop making his payments altogether and live rent free for three years before they can kick you out.

  That’s really what they set up. I think a lot of the recent home buyers that did put 3.5% down are going to do just that. They’re just going to stop making their payments when they realize that they’re underwater especially when a lot of their repair bills come in. Because a lot of people were lulled into buying homes they couldn’t afford, once they see that it’s just not the mortgage but you also have maintenance and property taxes and some of these people might lose their jobs in this next recession so they no longer even have the income to service. And a lot of these people have adjustable mortgage. Imagine the people that are not even taking out 30 year fixed.

  Mike: With rates this low they are still buying an adjustable rate of mortgage.

  Peter: Because they couldn’t afford the fixed rate. That’s how stretched they are. You know the real solution to the housing market problem is to let real estate prices come down so that homes are affordable, but the government doesn’t want to do that because it will bankrupt all the banks that loaned on them so what their answer is to keep prices inflated and just make credit available by keeping interest rates low and keep throwing the lending standards out the window so that people can buy houses that they cant afford.

  Mike: Ben Bernanke recently commented on the savings glut. He doesn’t think people are spending enough and what is interesting is when you find out what constitutes savings paying down debt is not included in this calculation so any currency that goes to this that is considered savings for some reason. They consider paying down debt savings.

  Peter: Well it’s money you haven’t spent but I think when Bernanke is talking about a savings glut..

  Mike: That they’re paying for previous consumption basically..

  Peter: Right. But when they’re talking about the savings glut they’re referring in other countries, not the United States. We have a savings shortage. There’s maybe a glut of savings in Asia for example but people look at that.. I read an article recently about Chinese have this big savings problem. They have a bad habit of savings. Like smoking or something. Savings is a virtue, but we’re lecturing the Chinese, “You guys are saving too much. You need to spend more money.” One of the criticisms was that they don’t have social security. They expected the Chinese to save for their retirement. Imagine that. Allowing people the freedom to save for their own retirement. And we basically said “No.”

  China needs a gigantic Ponzi scheme run by the government. They should adopt social security so that the Chinese people won’t have to save anymore. As if savings are somehow undermining economic growth. But the only problem for China is that they’re squandering savings on US treasuries. They’re loaning the money to us and we’ll never pay it back. So that’s a waste of their savings they need to invest their savings productively in their own economy and I think that is going to happen and when it does the dollar is going to come crashing down.

  Mike: Yes, I agree and then the engineering of the entire economy and the illusion. This is interest rates from 1950 to today. And then we have base money as the red line here and then I plotted the Wilshire 5000 Total Market Cap Index so the value of the 5000 largest companies in America and what you see.. I’ll zoom in on this section here. You see that they took rates down to zero and at the same time created all this currency and the correlation between currency creation and the markets is just mind bogglinginly close. It’s a cannot possibly be an accident that the markets..

  Peter: Of course not and that’s why they can’t raise rates without bursting that bubble. To not understand how these things are connected the way that they are is one causes the other and I’ve heard people say, “Peter I’ve had 4%, 5% interest rates in the past so why can’t we go back there now?” It didn’t create a problem then because we didn’t have the enormity of the debt that we have now. It’s one thing to have higher interest rates when you don’t have a lot of debt. Sure you can afford it. But when you’re overwhelmed by debt you can’t afford it.

  The other thing is when you’ve been on 0% for 6 years you develop an addiction to that. We have built an entire economy around free money. You can’t take that away even if the interest rates are still low, even if they went to just 2% to 3%. Yes that’s still low. But not low enough for an economy addicted to 0%. If you’re a heroin addict and your body is used to a certain amount of heroin then your pusher says “I can only give you half of what I normally give you, but you still have some heroin.” That’s not gonna cut it. You’re already gonna start going through withdrawal.

  You know that’s why the Fed… supposedly we’ve been in a recovery for six years. Yet interest rates are still at zero. I mean if it was a real recovery they would have raised rates years ago. But they’re afraid to do it because they know it’s phony. But after a while they had to at least talk about raising interest rates. They have to pretend that there’s an exit strategy somewhere but you know just like someone who’s overweight and talks about going on a diet in the future they don’t go on one in the present. So the Fed wants to maintain the ruse that they can raise rates by talking about their intention to raise rates but they don’t actually do it and they play word games about “well we’re going to be patient” or “we’re going to wait a considerable period.” Now they take away the word patient but we’re not impatient. Now they’re saying “we can’t raise rates until unemployment improves.” Well it’s supposedly been improving. The unemployment rate is 5.5%. They initially said they would raise rates if it got to 6.5%. But the bottom line is that it doesn’t matter where the unemployment rate goes, doesn’t matter how high the inflation rate goes they can never raise rates without precipitating a worse financial crisis than the one we had in ’08.

  Mike: So you and I just absolutely agree that this entire recovery has been engineered through the creation of currency. Now if Keynesian economics was remotely plausible, if it worked would they have made it a QE2 or a QE3?

  Peter: Well no, it would have worked the first time.

  Mike: Right.

  Peter: The reason they’ve done it three times is because it fails every time which is why they’re going to do a fourth. Quantitative easing is like trying to put out a fire with gasoline. You can’t put the fire out, you just make the fire bigger. The problem is when all you have is gasoline that’s all you can do. The Keynesians don’t understand that their own remedy is the reason the patient is so sick and they just want to keep on administering it. But I don’t think we’ve had recovery. We haven’t recovered from anything. We’re sicker than ever. The average American knows that. The man on the street can feel his standard of living declining despite what the Federal Reserve. The cost of living is going up, the quality of jobs is going down, all the Fed is doing with its monetary policy is redirecting our resources from productive uses on main street to speculation on Wall Street. They’re propping up the stock market, they’re propping up housing, they’re diverting loans to things like education, they’re propping up health care but the real economy is disintegrating and Americans can feel that.

  If we actually had a real recovery we wouldn’t be talking about all the jobless recovery. The reason it’s jobless is because it’s not a recovery. If it was a recovery there would be good jobs and the jobs that are being created..you know I think the most interesting thing is who is getting them because they look at the labor force participation rate which is the lowest it’s been since the mid 1970s. And everybody wants to say it’s because the baby boom is retiring. So hey, there’s nothing we can do about it. We all know there’s a baby boom. They’re getting old, they must be retiring. That’s why the labor force is shrinking. A lot of people accept that on face value. Even Janet Yellen says that right?

  But the reality is the baby boomers, the older people, they are the ones working in record numbers. In fact, there are months when the only jobs that are created are for people 55 and older. It’s the younger people, people in their 20s and 30s that are leaving the labor force. And what’s happening is you have so many Americans who were retired who have to come out of retirement and take a part time job so they can pay their utility bills, so they can put food on the table. That’s where all the jobs are coming. So the labor force participation is not about people retiring. The people who should be retiring can’t afford to and the younger people who should be working can’t get jobs. That’s the truth behind the numbers.

  Mike: Yes. The markets are in a bubble. I think there’s a crash coming. This is Dr. Robert Shiller’s data. It’s a little bit of a confusing chart because it’s got two data plots in it and interest rates in red. But the valuation of the stock market, judge by PE ratios. You see bubbles in 1901 and then undervalued in 1921 and overvalued during the peak of the 1929 stock market bubble and without exception once it reaches a bubble it bounces on the way down but it has to go to undervaluation before a new bull market can start. There was a peak in 1966 of about 22 and the peak in 2000 where the PE ratio is over 45 which was absolute insanity and it started to bounce, it went down to fair value but then bounced back up into a bubble here at 27. We’re in an extreme bubble and so with these other indicators turning do you think we’re in for a stock market crash?

  Peter: I think first of all that it’s actually worse than that because the earnings have been manufactured by share buy backs because interest rates have been so low it’s been easy for companies to buy back their shares. So now their earnings per share number can be higher because there’s fewer shares. So they’re not really driving the profitability, they’re not driving the revenues, they’re just shrinking the share base but they’re subjecting their shareholders..

  Mike: So the earnings per share look better.

  Peter: Yes but now they all this debt but right now the interest rates are really low so it’s not hurting their earnings but what happens when interest rates rise and if they rise during a recession where they’re earnings are declining and they have no ability to pay the interest a lot of these companies that were buying back shares might have to come back to the market and resell the shares to raise money to service or repay debt that they can no longer afford.

  Mike: ..which will cause it to go way down to the greatest undervaluation in history I think.

  Peter: Right but the reason why I think there may not be a stock market crash even though one is warranted and in fact it would be a healthy development rather than to perpetuate the overvaluation and all the malinvestments that result from that. But I think this bubble is literally too big to pop. I think the Fed knows it. Again, that’s why they’ve been talking about raising rates..

  Mike: So you think they’ll do more of this, the quantitative easing for..

  Peter: The way you stop the value of the stock market from plunging is make the value of the dollar plunge and so rather than nominal prices declining real prices decline. So the real value of stocks let’s say measured in honest money like gold plunges because the Fed is trying to prop everything up. They’re trying to keep these bubbles from popping because they’re literally too big to pop. They think the mistake that they made in 2008 was turning off the spigots right, now they want to keep them wide open and so it’s the dollar that’s more likely to crash this time than the stock market.

  Mike: Yes. I do think though that if the problems first develop in other countries like if the Euro has a problem or if China has a problem we could see the dollar go higher. It might not but I think that we could see a very very short term deflation, that’s something that the Fed can’t control and then they will overreact and print into potentially a hyperinflation.

  Peter: I think we’ve already seen the dollar rally. In fact there is probably more agreement among traders, speculators in the dollar’s direction. Everybody believes that the dollar’s going to go up, everybody has longed to dollar, betting on it continuing to rise because everybody bought into this myth of legitimate U.S. recovery and they believed that the Fed was going to raise rates. So I doubt something that everybody expects to happen will in fact happen. What’s going to surprise everyone is dollar weakness. Everybody is positioned for dollar strength and I think that trade is already over. I think the dollar is fully valued or overvalued based on this belief and when everybody has ultimately has to come to the conclusion they were wrong, when the Fed is forced to admit the economy is much weaker than they thought and instead of a rate hike we get QE4 I think the dollar collapses. So I wouldn’t want to hold out waiting for another dollar rally. I think we’ve already had it. I think now the next thing for the dollar is a big drop.

  Mike: The move that the dollar made was..it’s less than a year right?

  Peter: Yes.

  Mike: Now imagine if you’re an importer or an exporter, what that’s doing to your business. This whole thing of national currencies is just a silly stupid game that countries play that hurts all of us, it hurts all of our prosperity. An importer or an exporter that sees the cost of their goods changed by 25% or the price that they’re able to get for goods going overseas by 25 % in six months this is something… if you chart it out, the exchange rates you can probably draw a line across it and say my business will be successful when this is under here and it’ll go broke when the exchange rate is above a certain amount. If we were using gold there wouldn’t be an exchange rates. Right? If they used honest money all over the world, if honest money was the money that we used in exchange.

  Peter: Yes, it would certainly be a lot easier to do business and we wouldn’t have all these imbalances. The United States couldn’t run these huge trade deficits if we had to pay for our imports with either exports or gold.

  Mike: Yes.

  Peter: But when we can pay for them just by printing money that costs nothing, we can make an unlimited quantity of it but this is going to end in disaster. This is something that’s never been tried on a global scale. We have had individual examples of fiat currencies being tried in one country or another and it always ends in disaster, it never works and countries always return to a gold standard but what’s unique about this time period since we went off the gold standard in 1971 since the world was on a dollar standard and when we went off the gold standard we took the entire world off of it and this has gone on for a while but I think we’re in the final stages of the world rejecting this monetary system where the dollar is at the center because it cannot work.

  Mike: Yes, I do too. When I was writing my book I loaded into a spreadsheet looking for cycles, every currency crisis, stock market crash, bank panics or whatever looking for some kind of cycle in there and what leapt out at me was that every 30 to 40 years the world has a new monetary system. And here we are like 43 years, going on 44 years after the end of the Bretton woods being on this global dollar standard. I think the days are numbered and that there is going to be a crisis and I think it is going to be soon. This is margin debt and the red line is just numerics, the total amount of dollars of margin debt but the blue is margin debt compared to the GDP of the country so the size of the economy. And this chart is already a year old but what you see is every time it got over a certain percentage of the economy here there was a stock market crash right after it got up to those levels and margin debt is back up to those levels.

  Peter: And more importantly though too the actual quality of our GDP has declined because so much of it is now just consumer spending finance by debt, the real wealth producing components manufacturing, mining, things like that those parts of our economy have been contracting. So the size of the GDP is very vulnerable to a collapse which would exacerbate those ratios especially if there was an increase in interest rates. So we’re certainly due for a stock market crash but the economy is so vulnerable that it really can’t withstand one anymore which is why I think again the Federal Reserve is going to do everything it can to prevent that from happening and there’s only one thing they can do is printing money but unfortunately the ultimate consequence there is even worse because a dollar crash is going to be much more damaging to the US economy and to the standard of living of the typical American than what a stock market crash or a real estate crash or banking crisis.

  But unfortunately the Fed doesn’t care abut that. It’s just trying to delay the inevitable. It doesn’t care how much worse it makes it during that time period because they’re hoping that there’ll be a different administration in charge at the time. They have no idea how much time we have so rather than face the music they want to keep on playing.

  Mike: Right just keep on blowing that balloon up bigger and bigger and every time it springs a leak they slap a band-aid on it and keep on blowing more air in. For some reason, people get used to living in a bubble. They like it and the politicians want to..

  Peter: Well, some people like it because there are some people that benefit from this process but there’s only a small sliver of the population. The overwhelming number is suffering don’t understand why. You know you talk about now we have this huge growing chasm between the very rich and everybody else. Call it 1% and the 99%. But this class warfare is being fueled by the very people who are creating it and they don’t even realize that it’s their policies that are doing it. It’s the monetary policies we have that are responsible for this widening divide. It’s not capitalism that’s doing it and just calling for higher taxes and more wealth distribution isn’t going to solve the problem. It’s only going to compound it. We have to get to the source of what is driving this and it’s the central bankers and their monetary policy and to the lesser extent the regulatory and taxing policy of the US government.

  Mike: Absolutely agreed. The gap between main street and Wall Street again, it’s engineered by all of this currency they created going into Wall Street and not to main street and that’s the reason wages haven’t grown. This chart that John Hussmann came up with where he took overvalued, overbought, overbullish indicators and internals weakening like earnings per share and added those factors together and what was interesting is every time there’s a major top this flashes up to very high levels. The 1987 stock market crash, it nailed that. And we’ve been getting these alarms going off over and over again lately. And it may not.. you may be right, the last time they started creating a lot of currency Wall Street partied but you did say that there’s going to come a time where they’re gonna start questioning the currency creation that it might be different this time. They might start partying on Wall Street first but do you think that even with massive currency creation though that people can say if they’ve got to do it again that means it really hasn’t worked?

  Peter: Well they have to come to that conclusion yet. Obviously they didn’t come to the conclusion with QE2 or 3 but I think there’s been so much anticipation and self congratulations by the Fed and the Keynesian economists and the Paul Krugmans of the world that when it doesn’t work, when we’re right back where we started with as far as back to recession and if we’ve gone through the entirety of a business cycle and rates have been at zero the entire time people might start to realize when can you ever raise rates? And if we’re doing a QE4 and instead of the Fed’s balance sheet shrinking from the current four and a half trillion we have to expand it to six to seven trillion, the idea that it’s ever going to go back down again people are going to see that for the ruse that it is and I do think there’s going to be a loss of confidence. Why anyone still has confidence in the Fed is beyond me. But I think that that confidence is going to go away and when it does you know you’ve destroyed the value of the currency.

  I think that as the world tries to shun the dollar denominated debt because the rates have to stay low, we can’t raise interest rates to make the dollar attractive because we can’t afford to pay those rates. So we have to keep the rates artificially low. We can only do that by creating more money but the more money we create the less it’s worth, the fewer people who actually want it. So then you have a situation where the Fed Reserve has to expand it’s QE program not just to mortgages and treasuries but to corporate bonds, to municipal bonds, they have to start buying everything. They become the buyer of only resort and then the dollar really has a crisis and now the Fed is in a position..

  Mike: How moral is that that there’s an entity that gets to create currency that is going to become the buyer of everything and they’re creating the currency to do it?

  Peter:It’s not moral at all, it’s theft is what it is. But eventually people are not going to want to be stolen from and they are going to rebel against that currency and they’re going to look for a safe haven. Something like gold where they can protect themselves from really this monetary looting.

  Mike: Most people don’t realize that when we’re in this grand experiment that the Keynesians that run things don’t actually know what they’re doing because this has never been done at this level before.

  Peter: Well the irons is it’s not an experiment because we know how it’s going to end. There’s no chance that this can work. Because history is replete with examples again on a smaller scale but if it doesn’t work on a small scale just putting it on a bigger scale doesn’t change the outcome. It maybe changes the dynamics.

  Mike: It makes the same outcome but much bigger to match the energy put into it.

  Peter: People that say this is some kind of experiment they’re wrong, they haven’t learned anything. We don’t have to experiment, we have history. We can learn from the mistakes of the past. The problem is that our central bankers and economists never learn from the mistakes of the past. They repeat them all.

  Mike: What I mean is from their point, they think they’ve got these little models that say if you do this this will happen but they don’t know that they actually can’t control it. They can influence stuff short term but..

  Peter: They think that this time it’s different or they can tweak it a little bit. It’s like somebody having another communist revolution saying, we’re gonna get it’s right. The Soviets didn’t get it right or the Chinese didn’t get it right, the Cubans or the North Koreans wherever it’s been tried, we’re gonna try it again. You don’t have to try communism again, it’s failed right.

  Mike: Right

  Peter: It doesn’t work. No matter how you want to repackage it, it’s never going to work but everybody thinks they’re smart enough they can make it work. And so you’ve got people now that think yes, we can make this work. Yes, it didn’t work in the past but we’re so smart that it’s gonna work now and it’s not going to work it’s going to fail even more spectacularly because it’s even bigger.

  Mike: Okay. We were talking about home ownership a little bit earlier. So this is a chart that goes back to 1980. It’s the levels of home ownership have dropped back down to 64% and it hit 69% during the peak of the real estate bubble.

  Peter: First of all, it’s going to go lower. But you’re really graphing the disintegration of the middle class who can no longer afford, thanks to the government to buy homes, and you had all these government programs designed to make home ownership more affordable and of course like everything the government does it backfires. And it’s now made home ownership less affordable and less desirable. So you have record numbers of people who are now renting their houses from hedge funds and private equity funds. And you know what’s been happening to rents for the past few years? They’ve been rising, 4% or 5% or 6% per year, more, 10% in some areas. Because people have no choice now but to rent and those rents don’t even make it into the CPI because they use something like owners equivalent rent and for some reason that never goes up.

  But the actual rent that people are paying is going up. That’s why I mentioned that right now you have 25% of renters have to spend half their income on their housing costs which is up considerably from where it was in 2007 right before the Great Recession started. The old rule of thumb used to be that housing costs should make up no more than a quarter of your income. And now people are devoting half their income. And of course everything else is getting more expensive. Food is getting more expensive, health care is getting more expensive, utility bills. The only life line that many Americans had is that gas prices came down. Gasoline got less expensive. That’s already changing. Oil prices are going back up. And people are wondering “Where was the benefit that we got because we didn’t see it in retail sales from the lower gas prices?” And there was a benefit, there were just so many other problems that you couldn’t see it because the consumer was drowning. Okay, now he’s got a lifeline here but you couldn’t see it. It wasn’t like they were spending the extra money, they needed the extra money for food. But now that lifeline is being yanked away because gas prices are going back up.

  Mike: And so this will go lower. Home ownership.

  Peter: Yes, because you need to eat, you need energy, there are certain things you have to buy.

  Mike: That figure of 50% to put a roof over your head.

  Peter: Yes.

  Mike: The percentage of your income going to home ownership or rent to put that roof over your head, that’s pretty much a constant that you can trace back to like ancient Roman times. You can only afford a certain percentage of your income and you can see when something’s in a bubble because it’s at or beyond a certain extreme.

  Peter: And think about this Mike because this is the cost of home ownership with interest rates at record lows. The Fed’s got rates at zero.

  Mike: Yes, so there’s nowhere to go.

  Peter: It’s never been cheaper to borrow money. Back in the day, in the 80’s, people were buying homes with 12% mortgages, 14% second mortgages, carried back by the seller. How could we have afforded that? Imagine how much wealthier Americans used to be in the past when they can buy a house? Put 20% down? And then pay 12% in mortgage on the remaining 80%? Now Americans are so broke they can barely scrape up 3.5% with a 2.5% adjustable rate mortgage. So you imagine where home prices will have to go, or where home ownership will have to go if we just had a return to low interest rates? Not zero, just historically low. Or if people were requiring a down payment again?

  Mike: Real estate would definitely crash.

  Peter: Of course, either the prices would crash or nobody would own any homes. It would all be owned by hedge funds.

  Mike: Yes. So levels of margin debt, we’ll skip that. These are different countries here and all of these countries are in Europe. The blue here is the different durations of their bonds that are in negative interest rate territory where you have to pay to loan the country your currency.

  Peter: It shows you how absurd this is. And right that old expression “Whom the God’s would destroy, they first made mad” Well, you can see we’re on the eve of destruction when the world is this crazy that you would actually pay somebody money to borrow from you. They have the use of your money and you get back less. I’m going to buy a bond for $1,000 knowing that I’m only going to get $999 back. I mean, what is the purpose of doing that? But you know, it’s actually worse than that because I do believe there are a lot of countries where their CPI is not accurately measuring what’s really going on with the cost of living. So there probably are a lot of other countries that have negative rates.

  Mike: So when you apply real rates to that you think much of the world is upside down.

  Peter: I think the United States has negative rates. We say “Oh we have 2% interest rates for a 10-year bond but our inflation is only a 0.5%.” I think our inflation rate is more than 2%. I don’t think the government’s statistics reflect how bad it really is.

  Mike: Right, I don’t believe so either. I call it the CP lie.

  Peter: Yes, we’ve got negative rates. The fact that there’s actually negative nominal rates where again you buy a bond for 1,000 Euros and you only get nine hundred and ninety something Euros when it matures. Or even the interest you make along the way when you add it to what you get back is still less than you originally loaned.

  Mike: Right. It’s crazy. This has never happened before in human history.

  Peter: It shows you we’re running out of rope here and now people are saying “Why should I buy that bond? I’m just going to hold on to cash.” “And the bank deposits have a negative rate, why even put my money in the bank? Why don’t I just put it in my mattress?” Now putting money under the mattress seems like it’s a more responsible thing to do than to loan it to a bank at a negative rate of interest. Because the bank could fail and you’ve lost your money. Why take a risk if you’re not going to be paid?

  Mike: Right. It’s illegal to put cash in a safe deposit box.

  Peter: Some of these countries want to make it illegal to even have cash. And they’re cracking down on people who are even conducting their business in cash which the way around that is own gold. Own real money. If they’re going to start punishing you for owning Euros or owning Yen or maybe owing dollars, okay, don’t own it. Own something real.

  Mike: Yes, that’s what I do. My total net worth is split up between cash and a vast majority is physical gold and silver.

  Now we’re going to talk about what you can do to protect yourself in this environment and Peter had some… we were talking about gold potentially basing here.

  Peter: Well, I think it’s been building this base now for a couple of years. You’ll notice every time we get down below 1200 people start saying “This is it! It’s going to collapse. Gold’s going below a 1000.”

   

  Source: SchiffGold.com