There are dots to connect here. They’re real, and they’re spectacular.
Let me begin with a brief exchange from a 1978 interview, conducted by reporter Jeremiah Novak. He was speaking with two American members of the Trilateral Commission (TC), a group founded in 1973 by David Rockefeller and his intellectual flunkey, Zbigniew Brzezinski.
NOVAK: Yes, but why doesn’t President Carter come out with it and tell the American people that [US] economic and political power is being coordinated by a [Trilateral Commission] committee made up of Henry Owen and six others? After all, if [US] policy is being made on a multinational level, the people should know.
RICHARD COOPER [Trilateral Commission member]: President Carter and Secretary of State Vance have constantly alluded to this in their speeches.
KARL KAISER [Trilateral Commission member]: It just hasn’t become an issue.
This through-the-looking-glass moment summed up the casual arrogance of Trilateral members: of course US government policy was in the hands of Trilateralists; what else would you expect?
US government policy most certainly covers the area of international trade—and Cooper and Kaiser were foreshadowing blockbuster trade treaties to come: e.g., NAFTA, GATT (which established the World Trade Organization), CAFTA, and now, the Trans-Pacific Partnership (TPP), which is being negotiated in secret among 12 nations responsible for a major amount of world trade and world GDP.
Here are two key Trilateral quotes that reflect this global outlook—by which I mean a world dominated by mega-corporations:
“The nation state as a fundamental unit of man’s organized life has ceased to be the principal creative force: International banks and multinational corporations are acting and planning in terms that are far in advance of the political concepts of the nation-state.” — Zbigniew Brzezinski, 1969.
Any doubt on the question of Trilateral Commission goals is answered by David Rockefeller himself, the founder of the TC, in his Memoirs (2003):
“Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure—one world, if you will. If that is the charge, I stand guilty, and I am proud of it.”
“Integrated global political and economic structure” means: domination of populations via giant corporations.
Here is the payoff. The current US Trade Representative (appointed by Obama in 2013), who is responsible for negotiating the TPP with 11 other nations, is Michael Froman, a former member of the Trilateral Commission. Don’t let the word “former” fool you. TC members resign when they take positions in the Executive Branch of government. And when they serve in vital positions, such as US Trade Representative, they aren’t there by accident. They’re TC operatives with a specific agenda.
Let’s move along to Monsanto, one of those mega-corporations the Trilateralists fervently favor.
From 2001 to 2008, a man named Islam Siddiqui was a staunch US lobbyist for, and vice president of, CropLife America. Siddiqui represented Monsanto, BASF, Bayer, Dow, DuPont, Syngenta—the biggest and most aggressive biotech GMO corporations in the world.
On October 21, 2011, Siddiqui’s new appointment (by Obama) was confirmed. He became the federal government’s Chief Agricultural Negotiator, and served in that position until he resigned on December 12, 2013. During his tenure, Siddiqui, Monsanto’s man, was up to his ears in negotiating the TPP.
“What we need now in the 21st century is another revolution… you would not do it just by conventional breeding. You need to have use of 21st century technologies, including biotechnology, genetic [GMO] technology… And these molecules, which are being used (inaudible), they are state-of-the-art technologies, using molecular biology. Especially in chemicals [pesticides], they have less harsh footprint on the environment, they are more green, in terms of the adverse effects and ecological effects. They are also tested more thoroughly.”
Siddiqui’s tenure negotiating US interests in the TPP surely favored big biotech, and all the companies who make their living selling GMO crop-seeds and pesticides.
The predicted outcome of the TPP vis-à-vis GMOs? It’s obvious. Nations who resist the importation of GMO food crops will be sued, in private tribunals, for interfering with “free trade.”
This is the future writ large, unless the TPP is derailed.
Consider the local movement in Hawaii’s Maui County, where in the last election, citizens voted to block long-standing Monsanto/Dow experimentation with GMOs and their attendant pesticides, until an independent investigation could assess the health effects of those reckless open-air activities.
Monsanto immediately sued to suspend the force of the vote, successfully obtained an injunction, and the case has been hung up in federal court ever since.
Under the TPP, all successful local community actions against GMOs and their pesticides, anywhere in the 12-member countries, would be viewed per se as obstructions to free trade; and instead of engaging in a public and messy court battle, corporations could simply sue (or threaten to sue) the offending member country in a private tribunal, automatically defeat the local communities, and win a cash judgment.
Attempts to label GMOs, and previous laws allowing labeling in various countries, could be arbitrarily canceled.
Consider the recent astounding action of US Trade Representatives in Europe. Using yet another disastrous trade treaty under negotiation, the TTIP (Transatlantic Trade and Investment Partnership), US Trade Reps pressured the European Union (EU) to modify its stance on pesticides.
“EU dropped pesticide laws due to US pressure over TTIP, documents show… US trade officials pushed EU to shelve action on endocrine-disrupting chemicals linked to cancer and male infertility to facilitate TTIP free trade deal”.
Note: this repressive and criminal action didn’t even involve a treaty that had been ratified. The pressure was all about the so-called positive economic impact the TTIP would have, when passed, for Europe. And in the face of that money benefit, and the threat of its removal (by ditching the TTIP negotiations), who would dare curb the import and use of chemicals that achieve something as “minor” as disrupting human endocrine systems and causing male infertility and cancer?
This is the sort of judgment we can look forward to, if and when the TTP and the TTIP are ratified.
This is the face of corporate Globalism. This is the face of the Globalist Trilateral Commission.
Living agreements are arbitrary changes that can be made to the treaty, by Presidential fiat, without consulting Congress, after the treaty has been ratified.
That’s right. In other words, the treaty is the treaty until it isn’t, until it’s something more, something different, something worse, something that empowers mega-corporations to a greater degree than previously negotiated.
Because those corporations, those Monsantos and Dows and Syngentas, wouldn’t want to miss a trick, wouldn’t want to forego suddenly realizing how they can exert even more dominance, would they?
“Trade agreements have a history of displacing small farmers and destroying local food economies. Ten years following the passage of NAFTA (North American Free Trade Agreement) 1.5 million Mexican farmers became bankrupt because they could not compete with the highly subsidized US corn entering the Mexican market.
“In the same 10 years Mexico went from a country virtually producing all of its own corn to a country that now imports at least half of this food staple. Mexican consumers are now paying higher prices for Monsanto’s GMO corn.”
It isn’t just GMOs. Suppose a US pharmaceutical company decides to export a new drug to Japan or Australia or Canada, all members of the TPP. And suppose the drug is highly toxic. And suppose the governments of those nations object. The US company could sue, win a huge $$ judgment, and force the export to go through anyway.
This is an oligarchic dictatorship of corporations on a global scale. Along with a purposeful dumb-show, played out by government officials: “I don’t even know much about what’s in the trade treaty. And if I did, I couldn’t tell you.” So far, Senator Sessions is the only exception.
Those people who still believe that One World United, delivered to us by the powers-that-be, will lead to a better life for all, need to put that fairy tale away and see the underlying framework and the underlying betrayal.
The Globalist/Trilateral Community aims to destroy the rights and power of all communities, and ultimately, destroy all people who still have a grip on the word freedom.
This is the grinning nightmare descending in the long night, professing to help us all, claiming to know the details of better living through chemistry, asserting that trade treaties couldn’t harm a flea…and television news assures us that, at worst, this is just another he-said he-said debate, nothing to worry about, be happy, march forward, eyes closed, mouths shut, mind quiet.
(To read about Jon’s mega-collection, Power Outside The Matrix, click here.)
It took just a few days after the stunning defeat of Obama’s attempt to fast-track the Trans Pacific Partnership bill in the Senate at the hands of his own Democratic party, before everything returned back to normal and the TPP fast-track was promptly passed. Why? The simple answer: money. Or rather, even more money.
Because while the actual contents of the TPP may be highly confidential, and their public dissemination may lead to prison time for the “perpetrator” of such illegal transparency, we now know just how much it cost corporations to bribe the Senate to do the bidding of the “people.” In the Supreme Court sense, of course, in which corporations are “people.”
According to an analysis by the Guardian, fast-tracking the TPP, meaning its passage through Congress without having its contents available for debate or amendments, was only possible after lots of corporate money exchanged hands with senators. The US Senate passed Trade Promotion Authority (TPA) – the fast-tracking bill – by a 65-33 margin on 14 May. Last Thursday, the Senate voted 62-38 to bring the debate on TPA to a close.
Those impressive majorities follow months of behind-the-scenes wheeling and dealing by the world’s most well-heeled multinational corporations with just a handful of holdouts.
Using data from the Federal Election Commission, the chart below (based on data from the following spreadsheet) shows all donations that corporate members of the US Business Coalition for TPP made to US Senate campaigns between January and March 2015, when fast-tracking the TPP was being debated in the Senate.
The result: it took a paltry $1.15 million in bribes to get everyone in the Senate on the same page. And the biggest shocker: with a total of $195,550 in “donations”, or more than double the second largest donor UPS, was none other than Goldman Sachs.
The summary findings:
Out of the total $1,148,971 given, an average of $17,676.48 was donated to each of the 65 “yea” votes.
The average Republican member received $19,673.28 from corporate TPP supporters.
The average Democrat received $9,689.23 from those same donors.
The amounts given rise dramatically when looking at how much each senator running for re-election received.
Two days before the fast-track vote, Obama was a few votes shy of having the filibuster-proof majority he needed. Ron Wyden and seven other Senate Democrats announced they were on the fence on 12 May, distinguishing themselves from the Senate’s 54 Republicans and handful of Democrats as the votes to sway.
In just 24 hours, Wyden and five of those Democratic holdouts – Michael Bennet of Colorado, Dianne Feinstein of California, Claire McCaskill of Missouri, Patty Murray of Washington, and Bill Nelson of Florida – caved and voted for fast-track.
Bennet, Murray, and Wyden – all running for re-election in 2016 – received $105,900 between the three of them. Bennet, who comes from the more purple state of Colorado, got $53,700 in corporate campaign donations between January and March 2015, according to Channing’s research.
Almost 100% of the Republicans in the US Senate voted for fast-track – the only two non-votes on TPA were a Republican from Louisiana and a Republican from Alaska.
Senator Rob Portman of Ohio, who is the former US trade representative, has been one of the loudest proponents of the TPP. (In a comment to the Guardian Portman’s office said: “Senator Portman is not a vocal proponent of TPP – he has said it’s still being negotiated and if and when an agreement is reached he will review it carefully.”) He received $119,700 from 14 different corporations between January and March, most of which comes from donations from Goldman Sachs ($70,600), Pfizer ($15,700), and Procter & Gamble ($12,900). Portman is expected to run against former Ohio governor Ted Strickland in 2016 in one of the most politically competitive states in the country.
Seven Republicans who voted “yea” to fast-track and are also running for re-election next year cleaned up between January and March. Senator Johnny Isakson of Georgia received $102,500 in corporate contributions. Senator Roy Blunt of Missouri, best known for proposing a Monsanto-written bill in 2013 that became known as the Monsanto Protection Act, received $77,900 – $13,500 of which came from Monsanto.
Arizona senator and former presidential candidate John McCain received $51,700 in the first quarter of 2015. Senator Richard Burr of North Carolina received $60,000 in corporate donations. Eighty-one-year-old senator Chuck Grassley of Iowa, who is running for his seventh Senate term, received $35,000. Senator Tim Scott of South Carolina, who will be running for his first full six-year term in 2016, received $67,500 from pro-TPP corporations.
“It’s a rare thing for members of Congress to go against the money these days,” said Mansur Gidfar, spokesman for the anti-corruption group Represent.Us. “They know exactly which special interests they need to keep happy if they want to fund their reelection campaigns or secure a future job as a lobbyist.
“How can we expect politicians who routinely receive campaign money, lucrative job offers, and lavish gifts from special interests to make impartial decisions that directly affect those same special interests?” Gidfar said. “As long as this kind of transparently corrupt behavior remains legal, we won’t have a government that truly represents the people.”
In other news, following last week’s DOJ crackdown on now openly criminal FX market manipulation and rigging by the big banks, in which precisely zero bankers have been arrested, we are happy to announce that “transparently corrupt behavior” in the Senate, and everywhere else, will remain not only legal, but very well funded.
But what is truly scariest, is just how little it costs corporations to bribe America’s “elected” politicians, and make them serve the best interests of a few billionaire shareholders over the grave of what once used to be America’s middle class.
The source was quoted as saying that the U.S. destroyer Ross was moving along the edge of Russia’s territorial waters and heading in their direction.
“The crew of the ship acted provocatively and aggressively, which concerned the operators of monitoring stations and ships of the Black Sea Fleet,” RIA quoted the source as saying.
“Su-24 attack aircraft demonstrated to the American crew readiness to harshly prevent a violation of the frontier and to defend the interests of the country.”
“Apparently, the Americans have not forgotten the April 2014 incident when one Su-24 practically ‘blacked out’ all of the electronics on board the newest American destroyer Donald Cook,” the source said.
Russia’s Defence Ministry was not immediately available to comment on the report.
Saturday’s incident is the latest in a series of border surveillance confrontations between Russia and the West. Europeans, especially the Baltic states, have repeatedly sounded the alarm over Russian jets coming close to their borders.
The US is rotating several warships in and out of the Black Sea, where Russia’s naval bases are located. The USS Vella Gulf, USS Ross, USS Truxton, and the USS Taylor – as well as warships from other NATO member states – were spotted in the area over the past few months.
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This appears to be the first reported ship-to-plane ‘encounter’ and, just as US and China tensions are escalating in the South China Sea, it appears US and Russian military ‘discussions’ are shifting from words and proxy-fighting.
As previously reported by both IMF and Greek sources, Greece now has less than a week before it defaults on its June 5 payment to the IMF, a payment which it can’t make simply because it run out of money even before its last “payment” to the IMF on May 12.
“What’s mine is yours, for a fee,” is the mantra of the new normal “sharing economy,” as various segments of our heretofore under-utilized assets are variously ‘rented’ out for the enjoyment of others. However, as a report by the Rhode Island Department of Health suggests, perhaps we are sharing just a little too much. Sexually transmitted diseases are on the rise in the US, with health officials pointing the finger at casual sex arranged through social media as “the perfect storm.” With gonorrhea up 30%, HIV infections up by 33%, and syphilis soaring a shocking 79% in the last year alone, perhaps they have a point.
The report notes that “new cases of HIV and syphilis continued to increase among gay, bisexual, and other men who have sex with men at a faster rate than in other populations,” adding that “infection rates of all STDs continued to have a greater impact on the African-American, Hispanic, and young adult populations.”As RT reports,
While better testing partly explains the increase, health officials also highlighted “high-risk behaviors that have become more common in recent years,” such as “using social media to arrange casual and often anonymous sexual encounters.”
Other risky behavior factors were: “Having sex without a condom, having multiple sex partners, and sex while under the influence of drugs or alcohol.”
Rhode Island officials say their alarming STD rates are part of a trend throughout the US. Although the latest statistics from the Centers for Disease Control and Prevention (CDC) are from 2013, there have been reports of spikes in HIV and syphilis from New York and Texas to Utah.
An STD clinic in Salt Lake County, Utah, has started asking patients about specific contact apps. Lynn Beltran, an epidemiologist at the clinic, told ABC she was not surprised to see a rise in STDs.
“It’s been the perfect storm,” said Beltran. “Our attitude kind of shifted, where it became more acceptable to engage in casual sex.”
Beltran said she had seen an uptick in syphilis and gonorrhea rates, and that many of the newly diagnosed patients said they were sexually active through dating apps.
Between 2003 and 2009, when prostitution wasn’t illegal in Rhode Island due to a clerical error, the state registered a 39-percent decrease in gonorrhea infections among women. A 2014 study by the National Bureau of Economic Research also found a 31-percent decrease in the number of rapes reported to the police.
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So too much of a good thing is bad for you…which reminds us…
Greece has very little in the way of bargaining power with European creditors.
Outside of gimmicks like tapping its SDR reserves, Athens has no cash to make payments to the IMF in June and, perhaps more importantly, there’s very little in the way of wiggle room when one looks at revenues versus spending (see below), meaning Greece will also struggle to pay public sector employees which, in combination with Greeks’ consternation about the safety of their deposits, could contribute to social unrest and put unwelcome political pressure on PM Alexis Tsipras and his Syriza party that swept to power just five months ago on a defiant (and apparently naive) anti-austerity platform.
The troika (and Germany) knows this of course and they are also acutely aware that Spain’s Podemos and Portugal’s Socialists are watching the Greek drama closely for the slightest indication of concessions from the IMF or from the EU. In other words, the standoff is now just as much about politics as it is about economics, and the ‘institutions’ do not want any Syriza sympathizers to be able to say that Greece made anyone blink by threatening an exit from the currency bloc.
What all of the above means is that for better or worse, Greece has essentially no leverage because for many European officials, trading austerity concessions for the right to maintain the idea of euro indissolubility is no longer a desirable outcome as it could embolden anti-austerity governments in larger, more influential countries.
All of that said, Greece still has one card to play: the so-called ‘Russian pivot’. Over the course of negotiations between Syriza and the troika Moscow has, at various times, sought to take advantage of the hostilities between Athens and Brussels by making a series of overtures including the possibility of a €5 billion advance on Greece’s portion of the Turkish Stream natural gas pipeline and an invitation for the country to join the BRICS bank, a possibility Goldman’s Jim O’Neill wrote off as a politically-motivated “joke.”
But Vladimir Putin isn’t fond of joking (unless he’s participating in his yearly town hall meeting with the Russian people) and sure enough, less than two months ahead of this year’s BRICS Summit in Ulfa, it appears Greece may accept Moscow’s invite.
Greece is preparing and will probably submit a request to participate in the new development bank for BRICS countries and has secured Russia’s support on the issue, Productive Reconstruction, Environment and Energy Minister Panagiotis Lafazanis told ANA-MPA news agency on Friday evening.
“During my meeting with Russian Deputy Finance Minister Sergey Storchak, we secured the decisive Russian support to Greece’s request for participation in the new development bank of BRICS countries. The relevant request for Greece’s participation…will be symbolic and will be paid in installments, while right after operations begin, it will be able to accept financial support,” the minister said.
Lafazanis added that technical details were also discussed on how to submit the request so that it will be accepted after discussions within the Greek government conclude.
He also noted that he also discussed the credit facility that will be provided by Russian banks to the Greek company which will undertake the construction of the new gas pipeline which will cross Greece.
“Repayment of the Russian loan will be achieved by the profits made through the operation of the pipeline and this facility is not related to loans or economic assistance between states,” he said.
As mentioned above, this comes as Russia, Brazil, India, China, and South Africa are set to officially launch the BRICS bank and a related reserve pool when the group of emerging powers convenes on July 8-9 in Russia. It also comes as Moscow looks set to put plans for a Eurasian currency bloc into motion and as the Central Bank of Russia explores the possibility of establishing a BRICS-associated alternative to SWIFT.
Additionally, China’s recent $50 billion commitment to Brazil underscores the degree to which BRICS nations are expanding their economic and political cooperation in the face of declining Western hegemony. The BRICS bank speaks to the idea that the world’s most influential emerging markets now feel it necessary to support each other in the face of what they view as a half-hearted attempt on the part of the world’s existing multilateral institutions to serve EM interests or even to give them representation that’s comparable to their place in the world economy. Here’s what we said on Friday:
Much like the China-led AIIB, the BRICS bank is in many ways a response to the failure of US-dominated multilateral institutions to meet the needs of modernity and offer representation that’s commensurate with the economic clout of its members.
Why would Russia want Greece to join the bank? The motivation is clearly geopolitical consdering that Greece is broke, and what’s interesting about the statement from Lafazanis is that it appears to suggest that Greece’s paid in capital would come in installments while Athens would immediately be eligible for a loan from the bank.
In short, Putin would like nothing better than to establish a symbolic relationship with the first country to break from the supposedly indissoluble currency bloc, especially given the situation in Ukraine. Meanwhile, Greece is out of leverage, especially now that recent regional and municipal elections in Spain have proven to Athens’ EU creditors that the austerity (or, ‘fauxterity‘ as we’re fond of calling it) revolt is very real. We’ll see what, if any, impact this latest Russian pivot trial balloon has on Greek debt deal negotiations.
Two weeks ago, we took a look at Baltimore in the aftermath of violent protests that left the city in ashes late last month. The astonishing statistic: from April 27 to May 14, there were 23 homicides in the city, for an average of 1.3 each day.
We summed up the situation as follows: “But out of sight, out of mind for the rest of the country and we imagine that just as high crime rates and a generalized sense of despair were ignored before the riots, so too will they be ignored now that the media spectacle has died down … at least until the next “purge.”
In fact, May was the city’s bloodiest month since 1999 with more than 30 people shot on Memorial Day weekend alone. Here, courtesy of The Baltimore Sun, is a recap of those who were murdered in Baltimore from May 17 through May 25 alone:
Shaquil Hinton, 21, was killed at 12:29 a.m. Monday in the 800 block of W. Fayette St. in Poppleton, police said. He lived in the same block according to police.
Charles K. Jackson Jr., 32, was killed at 12:51 a.m. Sunday in the 900 block of Ducatel St. in Reservoir Hill, police said. Jackson lived nearby, in the 2300 block of Callow Ave., police said.
Hassan Fields, 20, was killed at 9:06 a.m. Saturday in the 100 block of S. Augusta Ave. in Irvington, police said. Fields lived in the 3700 block of W. Franklin St. in Allendale. When reached by phone, Fields’ father declined to comment.
Umika Smith, 24, was killed at 1:28 p.m. Saturday in the 2000 block of Hollins St. in Boyd-Booth. No phone number was listed for her address in the same block. A double shooting happened nearby the following day, injuring a man and a woman, police said.
Bruce Fleming Jr., 23, was killed at 2 p.m. Saturday in the 2800 block of St. Lo Drive in Clifton Park, near Heritage High School, police said. Police said he lived in the 4800 block of Harford Road in Lauraville.
Tyrin Diggs, 19, was killed at 11:06 p.m. Friday in the first block of Benkert Ave. in Saint Josephs, police said. Diggs lived on the 700 block of E. Pontiac Ave. in Brooklyn, police said.
James Mckoy, 21, was killed at 11:51 p.m. Friday in the 1900 block of Wilhelm St., in Carrollton Ridge, police said. He lived in the 300 block S. Monroe St. in the same neighborhood, police said.
Kelvin Warfield, 25, was killed at 4:50 p.m. on Sunday, May 17, in the 100 block of S. Arlington Ave. in Hollins Market, police said. Warfield lived in the 2500 block of W. Fayette St., police said.
Additionally, a 9-year-old shot in the leg was among the victims in the shootings that took place over Memorial Day weekend, Baltimore police said.
Baltimore is not alone.
The racially charged protests and demonstrations that have swept the country as a result of perceived police misconduct involving African American “suspects” has created what St. Louis police chief Sam Dotson calls “The Ferguson Effect”, whereby law enforcement are now more reluctant to use force to counter illegal activity for fear of prosecution or, more poignantly, for fear of finding themselves cast as the villain that catalyzes widespread civil unrest. This effect, some say, has led to a dramatic increase in violent crime throughout the country.
In Milwaukee, homicides were up 180% by May 17 over the same period the previous year. Through April, shootings in St. Louis were up 39%, robberies 43%, and homicides 25%. “Crime is the worst I’ve ever seen it,” said St. Louis Alderman Joe Vacarro at a May 7 City Hall hearing.
Murders in Atlanta were up 32% as of mid-May. Shootings in Chicago had increased 24% and homicides 17%. Shootings and other violent felonies in Los Angeles had spiked by 25%; in New York, murder was up nearly 13%, and gun violence 7%.
Those citywide statistics from law-enforcement officials mask even more startling neighborhood-level increases. Shooting incidents are up 500% in an East Harlem precinct compared with last year; in a South Central Los Angeles police division, shooting victims are up 100%.
By contrast, the first six months of 2014 continued a 20-year pattern of growing public safety. Violent crime in the first half of last year dropped 4.6% nationally and property crime was down 7.5%. Though comparable national figures for the first half of 2015 won’t be available for another year, the January through June 2014 crime decline is unlikely to be repeated…
Almost any police shooting of a black person, no matter how threatening the behavior that provoked the shooting, now provokes angry protests..
Acquittals of police officers for the use of deadly force against black suspects are now automatically presented as a miscarriage of justice…
This incessant drumbeat against the police has resulted in what St. Louis police chief Sam Dotson last November called the “Ferguson effect.” Cops are disengaging from discretionary enforcement activity and the “criminal element is feeling empowered,” Mr. Dotson reported. Arrests in St. Louis city and county by that point had dropped a third since the shooting of Michael Brown in August. Not surprisingly, homicides in the city surged 47% by early November and robberies in the county were up 82%.
Similar “Ferguson effects” are happening across the country as officers scale back on proactive policing under the onslaught of anti-cop rhetoric. Arrests in Baltimore were down 56% in May compared with 2014.
“Any cop who uses his gun now has to worry about being indicted and losing his job and family,” a New York City officer tells me. “Everything has the potential to be recorded. A lot of cops feel that the climate for the next couple of years is going to be nonstop protests.”
And while Heather Mac Donald — the author of the WSJ piece, Thomas W. Smith fellow at the Manhattan Institute, and the author of “Are Cops Racist?” — may be correct to say that “contrary to the claims of the ‘black lives matter’ movement, no government policy in the past quarter century has done more for urban reclamation than proactive policing. Data-driven enforcement, in conjunction with stricter penalties for criminals and “broken windows” policing, has saved thousands of black lives, brought lawful commerce and jobs to once drug-infested neighborhoods and allowed millions to go about their daily lives without fear,” it certainly seems reasonable to suggest that the logic behind the following statement from an NYPD officer Mac Donald interviewed for her piece seems questionable at best:
“Does an officer need to be unconscious before he can use force? If someone is willing to fight you, he’s also willing to take your gun and shoot you. You can’t lose a fight with a guy who has already put his hands on you because if you do, you will likely end up dead.”
Whatever position you care to take on the above, what’s clear is that race relations in America are deteriorating, as are class relations with policy decisions at the highest levels serving only to exacerbate the divide between the rich and the poor (as discussed in “America’s Class Segregation Problem In Four Charts“), thus creating still more tension in poor communities that have already sufferred from a lack of real opportunities for decades.
Does the recent wave of protests and demonstrations mark an epochal shift in American society or will this all be quietly swept under the rug in order to maintain the appearance of social stability?
Most adult Americans today are unaware of what caused the War of 1812, who started it, what the outcome was, or even who the belligerents were. If I recall correctly, my grade school / high school History Class covered The War Of 1812 — aka America’s Second War Of Independence, or America’s Forgotten War — for a total of maybe one week. And what a worthless week it was. Like most history teachers I’ve ever had, they turned an exciting story into a dry bundle of boring crap … focusing on memorizing dates and random events without getting to the real story behind the story; i.e. why did it happen, how does the war affect us today, and what can we learn from it? This is a crying shame because the war had a tremendous impact on American political development, territorial expansion, and national identity.
A 19th century French historian said, “History studies not just facts and institutions, its real subject is the human spirit.” The word ‘history’ comes from the Greek, and literally means “knowledge acquired by investigation”. So, let us investigate the War Of 1812, and the spirit of humanity which caused it … and changed America forever.
OVERALL SUMMARY
There were two major reasons given for the war.
First, Britain was at war with France since 1793. For twenty years the British claimed they had the right – as a legitimate and necessary wartime measure — to intercept American ships on the high seas, seize and keep their cargoes, and search the crews for British navy deserters. The British between 1807 and 1812 seized some 400 American ships and cargoes worth millions of dollars.
Second, was the British practice of ‘impressment’. A chronic manpower shortage in the Royal Navy led the Brits to stop American merchant vessels on the high seas and remove seamen. Between 1803 and 1812 the Brits captured an estimated six to nine THOUSAND Americans in its dragnet. These men were subjected to all the horrors of British naval discipline—enforced with the cat-o’-nine-tails—and made to fight a war that was not their own.
America felt this violated its rights as a neutral and sovereign nation. So, we declared war against the Brits in 1812.
THE END OF THE REVOLUTIONARY WAR SEEDED THE WAR OF 1812
Isn’t that often the case … that the end of one war, and the demands of the victor, eventually leads to yet another war? The war for American Independence lasted until 1783 when the peace treaty with the British was signed. Imagine the giddy feeling you would have had at that time. Freedom! Independence! But the rational exuberance was met with irrational naivete.
The American populace, including its politicians, assumed that the British would continue to allow access to British ports …. as if nothing at all happened! America assumed that the Brits needed our wheat, the British Navy needed our timber, hemp, and tar, and British colonies in the West Indies needed our fish, wheat, and salt to feed their slaves. This was a big miscalculation.
Canada and Ireland delivered most of the same goods. In fact, America needed the Brits more than they needed us as we depended on British manufacturing goods. America had zero leverage, and it was Britain that dictated foreign policy. They admitted American raw materials on a case-by-case basis, excluded manufactured goods altogether from entering England, and closed West Indian ports to American goods. Bullocks to America! What could America do? Nothing. We had no navy to back up our demands.
1801 – A PIVOTAL YEAR
George Washington negotiated the Jay Treaty in 1795. The Brits negotiated from a position of strength, and conversely, America from weakness. In a nutshell, the treaty granted the Brits virtually unlimited access to American markets in exchange for limited access to British markets in the West Indies. It also allowed British creditors to recover debts owed by Americans.
In 1801, Thomas Jefferson was elected president and James Madison was named his secretary of state. They quickly abrogated the treaty.
Madison took a hard-line approach towards the Brits. Even back in 1790, as a Congressman from Virginia, he championed the idea of countering British trade restrictions with a series of discriminatory tariffs via import taxes. George Washington and John Adams rejected the idea. Now, however, as Secretary of State, Madison hoped to implement what he believed was a long overdue aggressive trade policy against Britain. But, he shot himself in the foot big time …. by reversing the naval-building policies of John Adams
John Adams succeeded in his priority of strengthening the United States Navy. When he was elected in 1796, the navy had only three battleships. Five years later, in 1801, the navy had fifty … more than enough to defend America’s coastline and maintain a viable presence in the Caribbean.
Jefferson, and Madison, undid all this for several reasons. They felt maintaining a navy was too expensive. As Republicans they believed in frugal, tax-cutting government. And they believed that a large military posed a domestic threat in that the officer corps could harbor aristocratic ambitions and become a tool for would-be tyrants. Lastly, they felt navies led countries into unnecessary foreign entanglements. As such, Jefferson invested only in small gunboats for coastal patrols. The battleships atrophied. By 1812, the United States had only a dozen seaworthy battleships of any size.
Jefferson and Madison certainly were not stupid men. Yet, one must wonder “What were they thinking??” With no leverage (military power) to bring to the negotiating table, did they expect the Brits to just quietly and unquestioningly bend to American demands? Hardly! As should have been expected, Britain continued to apply both its commercial and naval power to dictate — by force as necessary — trade and maritime policy to the United States.
MORE HALF-ASSED DECISIONS AND ERRONEOUS BELIEFS
All governments do dumb-shit things, even that of our Founding Fathers.
So, in 1807 Jefferson tried to pressure the Brits and French by convincing Congress to secure a radical embargo against all foreign trade. (Embargo!!! Our government still loves them to this very day. When will we ever learn?) American ships were forbidden from trading overseas. The embargo only hurt America. It was quickly scrapped.
It was replaced with the Non-Intercourse Act. This act had nothing to do with the cessation of attacking the pink fortress. It allowed trade with all countries except Britain and France. It also allowed the President to restore trade with either country IF either belligerent ended its maritime harassment. That only intercoursed the American people, and didn’t work out either.
So, in 1810 Madison signed the ridicules Macon’s Bill No.2. Even he didn’t like it, but he could not yet get Congress to pass a war resolution. The bill authorized Madison to impose trade restrictions against one offending country if the other lifted its trade restrictions against the United States. In other words, the United States would commercially punish country A if country B agreed to allow America to trade freely. Pitting two countries against each other didn’t work either.
What was the result of all these half-assed measures to intimidate the British? They shopped elsewhere! For example, between 1808-1812 the Canadian timber industry exploded with its exports to England, increasing by 500%. Canadian agricultural production also increased greatly. The Brits were eating beef, Americans were eating crow.
Madison was getting desperate. He was conjuring up even more rigorous measures against the British fearing that the window of opportunity for gaining concessions through commercial pressure would soon close forever. His conjuring included plans for war.
He figured it would be a little war, and a quick one. (How many times have our Dear Leaders told us that? Especially since 1960?) Most of the British army and navy were bogged down in Europe, fighting a brutal war with Napoleon. The French controlled most of Europe, and the little Frenchie dictator assembled a 700,000-man army for an invasion of Russia. All Madison wanted was the right to trade freely and, gain the respect owed to the United States as an independent nation. He calculated that since he wasn’t seeking territory or conquest, that Britain would surely be willing to negotiate rather than have to deploy valuable ships and troops thousands of miles away from the war in Europe. Madison miscalculated. Madison was wrong to believe that the British would rush to negotiate with him. The British even refused Tsar Alexander I’s invitation to mediate in 1813.
Britain’s commitment to battle only strengthened over the first two years of the war. Madison was even wrong about the impact of the European war on America. He felt that when the European war ended, that the British would send the bulk of their armies to battle the United States. When you need popular support for a quick and easy war, you still need a little fear-mongering. “The British will come!!” One reason the Brits didn’t redeploy their troops was that American military incompetence at the beginning of the war made it unnecessary. More fortuitously, after more than two decades of continual war, the Brits had had enough, and by 1814 were more than happy to soften their demands. (The British Invasion finally took place about 150 years later. But with guitars and drums.)
THE FRENCH CONNECTION — TAKING ADVANTAGE OF MACON’S BILL
The Brits had the world’s strongest navy, and couldn’t be coerced into lifting its restrictions. France, on the other hand, had everything to gain. Their Berlin (1806) and Milan (1807) decrees imposed severe trade restrictions against any country trading with Britain. But France’s navy was not sufficiently powerful enough to enforce these decrees. So, in compliance with Macon’s Bill, France could force the United States to restrict itself. In other words, France repealed its restrictions against the United States, thus forcing the United States to suspend its trade with Great Britain. Thus, on August 5, 1810 the French lifted the Berlin and Milan decrees. Madison, in turn, ended all trade with Britain on Feb. 2, 1811.
The New England Federalists — who were dependent upon trade with Britain for their economic sustenance — immediately attacked the announcement. The claimed Napoleon could not be trusted, and that it would lead America into war. They were correct. Napoleon refused to release American ships already held in French ports, and continued to harass American shipping. America would declare war on June 18, 1812.
MADISON FINALLY GETS HIS WAR
It’s not entirely fair to say, as some do, that this was strictly Madison’s war. He had help. The Speaker of the House of Representatives, Henry Clay of Kentucky, his principal assistant, John C. Calhoun of South Carolina, and other southern and western representatives were collectively known as “Warhawks” and pressured Madison into asking Congress to declare war against Great Britain.
The United States in 1812
MILITARY COMPARISONS
When the war started, the American army consisted of 7,000 regulars. (Theoretically, there were also thousands of citizen soldiers in the militia. While the Constitution granted the president the authority to call them into service to suppress insurrections and repel invasions … the legal consensus was that state militia could only be ordered to meet these duties in their own states). Anyway, the military was poorly trained. The army’s officer corps was a ragtag outfit …most had never seen combat … and the ones that did were old, having last seen service in the Revolution, thirty years earlier. West Point, established ten years earlier, had fewer than one hundred graduates ready to assume command. The navy, as mentioned above, was a puny force. By 1812, the US Navy counted only twelve ships of any size, and only three fully dressed battleships.
The Brits had 250,000 battle-hardened men in uniform. True, the bulk of those were in Europe. Nevertheless, 6,000 were stationed in Canada … augmented by 2,000 Canadians, and roughly 3,000 Indians. The British Navy consisted of 500 ships …. 80 of them permanently stationed in the West Atlantic between Canada and the Caribbean. It should have been a rout.
THE CANADIAN DEBACLE
In the long run, the American navy could not possibly defeat their British counterparts. American politicians concluded the most realistic path to pressuring Britain was by targeting Canada …. which seemed like an easy target with a population of only 500,000 compared to 7.7 million in the United States in 1812. Virginia Congressman John Randolph even stated the conquest of Canada would be “a holiday campaign … with no expense of blood or treasure on our part”. (You know … just like that quick war in Iraq and Afghanistan which we were promised.)
Madison grossly miscalculated support from the Canadian populace. He believed the Canadians wished to be liberated from Britain … that they wanted their own 1776 moment. Why not? About two-thirds of the Canadian population had migrated there from the United States. So, the grand plan was to invade Canada when war broke out. The US Army would capture British territory, quickly, and force Britain to the negotiating table. After all, Britain certainly would not want to lose this colony, and they certainly would not divert troops from the European war, and therefore they would be delighted to negotiate favorable maritime rights America had been pursuing. In exchange, America would give Canada back (although there were some who wanted to make Canada part of America). Sounds logical. But, the devil is in the details, and this plan was SNAFU right from the get go.
The correct military strategy was to attack the British at Montreal. A concentrated force sailing up the Hudson River and over Lake Champlain probably could have captured the city. However, recall that the New England Federalists strongly opposed the war. Madison greatly feared that New England’s militias, most necessary to a concentrated attack on Montreal, would simply refuse to turn out for battle! On to to crappy Plan B!
Madison decided to launch a three-pronged northern invasion; 1) attack Montreal, 2) attack Fort Detroit in the far west, and 3) a third army would leave from Fort Niagara and into Canada at the western end of Lake Ontario. America lost the battle of Detroit without firing a shot. The Fort Niagara campaign was divided amongst two generals, neither had military experience, both were appointed political dogs who argued with each other and refused support at critical times, and out of 1,300 men, 900 were captured. The battle for Canada ended about as soon as it started.
Yes, folks, one can make the case that Canada — with a little help from their friends — defeated the United States in the War Of 1812. The immediate impact of the war was to strengthen Canada’s loyalty to England. The United States still had interest in conquering Canada – more half-assed ideas, really – but, by the 1890’s the two nations formed a permanent bond. For all practical purposes, the War Of 1812 was Canada’s war of independence, and they won.
A BRIEF REPRIEVE – US NAVAL VICTORIES
Old Ironsides defeats HMS Guerriere
Out-gunned and out-manned the US Navy did achieve some clear victories, even early in the war. In 1812, the USS Constitution —aka, “Old Ironsides” — defeated HMS Guerriere in a ferocious battle off the coast of Nova Scotia. In the same year, the USS United States captured HMS Macedonian, a fully dressed 38-gun battleship. In September 1813, the United States achieved further naval success on Lake Erie. Also in 1813, Commander Perry’s fleet of ten ships outmaneuvered a squadron of six British ships despite being outgunned by the much larger enemy vessels. The same Perry who left Americans with a memorable line: “We have met the enemy and they are ours.” A month later, William Henry Harrison – yes, the future president – crossed Lake Erie and defeated the British and their Indian allies in the Battle of the Thames. Tecumseh — leader of the pan-Indian confederation – was killed in that battle. Many of Britain’s Indian allies subsequently abandoned the alliance, and America’s northwest frontier was secured.
MORE BAD NEWS ON THE POLITICAL FRONT
On the political front there was much bad news. Commander Perry – the navy’s best field officer – was “promoted” to a desk job. William Harrison was accused by Secretary Of War, John Armstrong, of financial impropriety, and Harrison, another excellent field commander, was forced to resign.
The cost of the war broke the Treasury. By 1814, $34 million dollars (a hefty sum in its day) was borrowed to finance the war.
Madison sent a delegation (including John Quincy Adams) to meet with Czar Alexander in St. Petersburg, but the British left before the delegation arrived and the whole thing was an embarrassment.
Madison probably suffered a severe anxiety attack on May 30, 1814 — the day the French signed a peace treaty with Britain and its allies. Madison strongly believed that a good portion of Britain’s 250,000 troops would make their way to Canada.
THE HOUSE, THE HOUSE, THE HOUSE IS ON FIRE!!!
Madison didn’t have wait long for some of his fears to come to fruition. Two months after the French-British peace treaty Royal Navy ships carrying about 6,000 British regulars sailed into Chesapeake Bay. Secretary of War, John Armstrong, did not believe the Brits would attack the swampy and forest-shrouded city of Washington … that the British had more interest in the coastal cities. Bad call, muchacho! American forces actually outnumbered the Brits. However, poor intelligence – such as Americans being badly deployed – and a multitude of errors, and many American deserters, led to the British marching virtually unchallenged into the city. Then the Brits burned all public buildings except the Patent Office …. and the White House.
BASTARDS !!!!!!!!!!!!
[Worthy Of Further Study: Dolley Madison, the greatest First Lady of them all. Thomas Jefferson spent few resources on the presidential mansion, believing it would detract from the emphasis of a simple and frugal government. He also avoided elaborate social gatherings at the White House, as he believed they “stank” of the aristocratic courts of Europe. As such, when the Madisons moved into the White House in 1809, the building itself was in disrepair. Dolly established a new philosophy … that the White House should be decorated in a manner appropriate to the dignity of the office it represented. So, she completely refurnished the White House and transformed it into a compelling symbol for the new nation — not nearly as ostentatious as found in European palaces, but rather a quiet dignity within the framework of American political ideology. But, it was more than just a symbol. Dolly also turned it into an arena of governance. The many social events she planned were done with the intention of placing the White House at the center of Washington society … with her husband at the center of policy decisions and deal making. And as her beloved White House burned to the ground, she risked her life gathering up critical White House documents … as well as the great Gilbert Stuart portrait of President George Washington, and carried them away to safety.]
SIZE MATTERS!!
To his credit (I suppose) Madison never wavered that the United States would eventually achieve victory. Where did that confidence come from? Let’s recap:
—— the Treasury is depleted, the Canada campaign was a disaster, the Navy which actually won battles has its best commanders sitting behind a desk, military desertions are significant, military ineptness abounds, New England not only won’t help the cause but it threatening to secede while at the same time trying to negotiate a separate peace deal with the Brits, even as 7,500 British soldiers were headed towards New Orleans, and now his capital is burned! Hooahhh!!
To understand the source of his confidence one must look thirty years earlier. During debates over the suitability of a republican form of government to a country as large as America, Madison argued that America’s size would prevent any faction or narrow interest group from dominating the government. Now he believed that the United States could absorb battles lost at Detroit, Niagara, and even Washington, and that it could prevail despite the disloyalty of the Federalists in New England. The United States was simply too large, and consequently, too resilient, to be defeated. In other words, America was too big to fail!
HOW DID THE SUPERIOR BRITS MANAGE TO F*** THIS UP?
It seems, at least in this instance, that Madison was right about America’s size. British fortunes suddenly turned for the worse.
After burning (and looting) the capital, the Brits marched to Baltimore … and met a different fate at the hands of a more skillfully deployed American force of both militia and army regulars. American sharpshooters picked off one-by-one the British division approaching the city from the south. Meanwhile, the big guns at Fort McHenry prevented the British fleet from entering the city’s harbor. By September, the British were forced to withdraw and abandon their campaign in the Chesapeake. Simultaneously, American forces stationed on Lake Champlain turned back a British invading army and 11,000 British troops were forced to retreat back into Canada. Mid-1814 ended relatively well for the Americans.
More importantly, back in England, British leaders lost the hearts & minds of their subjects. After 20 years of fighting France, and before that, fighting in the American Revolution … well, the people were simply fed up with war. The British became much more preoccupied in rebuilding Europe after the final defeat of Napoleon. A London newspaper even harshly criticized the burning of Washington. On top of all that, even military leaders were questioning whether victory was possible. The Duke of Wellington, the hero of Waterloo, was offered command of the British force in North America … and, he declined, saying the American continent could never be subdued. The loud drums of war fell deadly quiet.
WE WON! WE WON!!! Ummmmmm …. WHAT DID WE WIN?
This combination, military defeats in America and the loss of will to fight back in England, led to a peace treaty being signed in Ghent, Belgium on Dec. 24, 1814. The war would officially end in February 1815 after ratification by both governments.
However, the Ghent talks actually started earlier in the year in August 1814. Madison sent five delegates – including John Quincy Adams and John Clay – and amongst American demands were the end of impressment …. and turning over Canada to the United States. Madison had balls! The Brits made even more ridicules demands; a new Canadian border located farther to the south, the creation of an independent Indian state in the northwest, British navigation rights on the Mississippi River, the exclusion of American fishing boats from the Grand Banks and the the exclusion of the American Navy from the Great Lakes. The Brits had no brains!
But, in Ghent by December 1814 all parties dropped their aggressive demands. A simple ceasefire was proposed, prisoners of war would be exchanged, and captured territories from both sides would be returned.
STUNNINGLY, impressment – one of the two major reasons for going to war in the first place — was not even mentioned. Maritime issues and trade policies – the other major reason for going to war – was mentioned, but only that it would be addressed at some future conference1.
Strangely, the American diplomats were ecstatic. Why??? After all that bloodshed and destruction, the Ghent Treaty insured that both sides gained absolutely nothing … as if the war never happened. A Canadian historian wrote;
“It was as if no war had been fought, or to put it more bluntly, as if the war that was fought was fought for no good reason. For nothing has changed; everything is as it was in the beginning save for the graves of those who, it now appears, have fought for a trifle.”
[1NOTE: By Dec 1814 the British practice of impressment had all but ended. And, since France was no longer an enemy of Britain, the Royal Navy no longer needed to stop American shipments to France. Nevertheless, the United States and Britain would argue about trade restrictions and access to markets for the next fifteen years after Ghent! By 1830, the West Indies were far less important to American exporters than new markets in Latin America. Also by 1830, Britain’s commitment to mercantilism had been replaced internally by support for free trade. In other words, the issues that so bothered Madison would have been resolved of their own accord in due time … WITHOUT A WAR. The War of 1812 wasn’t concluded at Ghent …. it died of old age.]
INJUN INTERLUDE #1: UP A CREEK
Worthy of much further study than I have room for here, is the significant victory by Jackson over the Creek Nation. At one time or another the Brits, French, Spanish, and even other Indian Nations (Tecumseh and his Shawnee) aligned with various factions within the Creeks to make war against the United States. The war against the Creeks officially ended in the Treaty of Fort Jackson just five months before the war’s final battle at New Orleans.
A couple staggering statistics; 1) about 15% of the Creek population was decimated and, 2) the treaty resulted in an enormous land grab as the Creeks lost 36,000 square miles of their territory (half of Alabama, and southern Georgia).
The Creeks, and to a lesser extent other Indian tribes, were to play a significant role in the British alliance to attack New Orleans. Had the Creeks won their war, the combined forces might very well have overcome Jackson’s army, and New Orleans might have been lost.
INJUN INTERLUDE #2: TECUMSEH, THE GREAT SHAWNEE WARRIOR
Tecumseh was sick and tired of seeing the social and cultural deterioration, inter-tribal conflict, and white encroachment on Indian lands. So, he developed a plan. Indians needed to restore control over their lives. The only way to do this, he said, was to be unified, to overcome tribal differences, rebuild their integrity, and create a Pan-Indian alliance strong enough to defeat the military forces supporting white expansion. Starting in 1807, he and his brother (Tenskwatawa – “The Prophet”) traveled throughout the interior of America building this alliance of Indian tribes. The obstacles were huge, especially overcoming the decades of inter-tribal prejudices, fears, and wars. But, Tecumseh was a powerful and compelling orator.
In village after village he preached unity to a dispirited people. He urged them to reject the pollutants of the white man; alcohol, European dress, Christianity. He also preached great patience. He said they must avoid all confrontations with the whites until the confederation was large and strong enough to effectively resist the power of white armies. Isolated skirmishes would only weaken them. They must wait until the time was right,
Legend has it that Tecumseh said he would send a message when the time was right. He would stamp his foot—and when he did, the earth would shake, the buffalo would stampede, the skies would become dark with birds taking flight, huge cracks would open in the earth’s surface, and the great river would flow backwards.
But, his brother, the Prophet, couldn’t wait. He launched into a fiery oratory and convinced his followers of his own bullshit – that the white man’s bullets could not harm them. So, in Nov. 1811 the Prophet battled an American force led by William Henry Harrison at Tippecanoe Creek. The Prophet lost, and the dream of a Pan-Indian alliance died with it. Tecumseh would go on to align his small remnant of the Indian confederation with the British, fought in the battle of Detroit, and was killed at the Battle of the Thames in 1813, disbanding the alliance forever.
Most interestingly though, on Dec. 16, 1811, just over a month after the disaster at Tippecanoe, a great earthquake shook Arkansas and was felt throughout the Mississippi Valley, from Canada to the Gulf of Mexico – the New Madrid earthquake. According to eyewitnesses, buffalo stampeded, the skies became dark with birds taking flight, huge cracks opened in the earth’s surface, and the great Mississippi River flowed backward.
Tecumseh’s prophecy had come to pass …. just not the way he expected.
WHAT THE HELL …. LET”S HAVE ONE MORE BATTLE IN NEW ORLEANS
The popular opinion amongst historians is that there simply wasn’t enough time to cross the oceans to stop the British attack on New Orleans. I don’t buy it.
The Ghent Peace Treaty was signed on Dec.24, 1814. On Dec. 13th, a British fleet had landed about forty miles east of New Orleans. It must have taken at least a month to get there. The Brits commenced fire on January 8, 1815. The British Commanders and Generals surely must have known that peace talks were in process. So, a prudent thing to do would have been to at least wait to see the results.
And don’t forget that the Ghent talks were initiated way back in August. Even during those negotiations the dastardly Brits had four invasions planned or underway; 1) the destruction of Washington, 2) the destruction of Baltimore, 3) the Battle of Plattsburgh – where 10,000 British troops tried to cut off New England, and 4) and the Battle Of New Orleans. The treacherous British had an Olive Branch in one hand, and a Murderous Dagger in the other.
Two things made this battle so important. First, a victory in New Orleans would have been a major boon for the British giving them access to the interior of the U.S. via the Mississippi River. Secongly, it would have given the Brits greater ability for their desire to seal off the United States from the Gulf of Mexico, further isolating the nation. (Furthermore — and this is my pure conjecture — it could have led to a reversal of the Louisiana Purchase, cutting the size of the United States in half.) But, this much is absolutely certain; it would have given the Brits a major trump card in negotiating the Ghent Treaty.
A popular opinion is that the British would have honored the Ghent Treaty even if they won the battle. Of course, we’ll never know but, I find that opinion enormously preposterous. The Brits, still butt-sore about the beating they took in the Revolutionary War – a war they still would not admit they lost in 1814 – hated America and wanted revenge and destruction. And what history is there of Britain – or any country – winning a huge major battle and then just walking away from it? None. A major victory such as New Orleans would absolutely have resulted in the United States being forced into major concessions. If fact, I wouldn’t be surprised if it would have led to an outright abrogation of the treaty. The Brits were ruthless bastards when it suited them, and never forget, they really hated America.
What should be crystal clear is that far from being a senseless battle, a British victory at New Orleans would have drastically changed the future of America. But, they didn’t win. They were annihilated. Let’s look at some interesting details.
THE BATTLE OF NEW ORLEANS …. ONE OF AMERICA’S MOST IMPORTANT VICTORIES EVER
On the other hand, if you want to skip this section, just watch this 3 minute song by Johnny Horton — he does a fine job ‘splaining it! Nice pics too!
The British force consisted of roughly 8,000 troops — including Royal Fusiliers, Highlanders, Light Infantry, and Light Dragoons — disciplined troops with plenty of battle experience, having just defeated the French.
Why capture New Orleans? Lord Castlereagh, the British foreign secretary, said that once the large seaport towns of America were “laid in ashes” and New Orleans captured, that the British would have command of “all the rivers of the Mississippi valley and the Lakes … the Americans would be little better than prisoners in their own country.” The Brits also intended to prevent America from having any access to all of the Gulf Of Mexico.
General Andrew Jackson first had to prepare the city’s defenses … not an easy task. New Orleans had a very diverse population and resisted organization. So, Jackson threatened to blow up the provincial legislature if it did not comply with his demands, one of which was to suspend habeas corpus. So, he declared martial law, turned the city into a military camp, and took over complete control of the city’s resources. This got their attention.
He organized all available manpower—frontiersmen, militiamen, regular soldiers, Indians, slaves, townspeople including the city’s unusually large population of free blacks and even the famous river pirate, Jean Lafitte — about 4,000 in total. And then he built the “Jackson Line” –a defensive line between the city and the approaching British forces. Rodriguez Canal was a ten-foot-wide millrace located just off the Mississippi River. Using local slave labor, Madison widened the canal into a defensive trench. He then built an eight foot tall earthen rampart, twenty feet wide in parts, buttressed with timber, and protected by eight artillery batteries When completed, it stretched nearly a mile from the east bank of the Mississippi to a nearly impassable marsh. Jackson told his men “Here we shall plant our stakes and not abandon them until we drive these red-coat rascals into the river, or the swamp.”
The British commander, Cochrane, felt the area could be taken with minimal forces with the help of the Spanish, Indians, and even the people of New Orleans who he felt would welcome the British as liberators. In retrospect, fairly idiotic assumptions.
The bottom line; it was a hopeless tactical situation for the British with a swamp to the east of the American lines, and the Mississippi River to west. This left the British with only one route of attack—straight into the guns of the American forces tucked inside a dry canal.
Tennessee and Kentucky riflemen laid withering fire against the advancing British lines, killing or wounding more than 2,000 British soldiers, including three generals and seven colonels, in less than an hour. One British veteran of the Napoleonic Wars claimed it was “the most murderous fire I ever beheld before or since.” American casualties were about 13 killed, and 39 wounded.
[NOTE: Considerably more Americans were killed in the skirmishes leading up to the final battle. For example, 6,000 British troops snuck into the British headquarters at Villeré’s plantation. Jackson resolved to attack immediately before the British advance was reinforced and organized. He assembled 1,800 men in a battle called “Night Attack”, and repelled the British, but not before suffering 215 casualties.)
New Orleans was a tremendous victory—one which made Andrew Jackson a national hero, and propelled him into the office of President. And, regardless of the reason for the battle, whether or not it was necessary, Madison certainly knew the fine art of Presidential spinning; — necessary war, reluctantly entered, rights, patriotism, and heroes – all in one brief sentence. (He might as well have been talking about Iraq.)
“the late war, although reluctantly declared by Congress, had become a necessary resort to assert the rights and independence of the nation. It has been waged with a success which is the natural result of the wisdom of the legislative councils, of the patriotism of the people, of the public spirit of the militia, and of the valor of the military and naval forces of the country Peace.”
1)- First and foremost, let’s be brutally frank about the REAL reason for this war; PRIDE and PATRIOTISM! The Brits didn’t respect our independence. The French didn’t. Spain didn’t. Most of the world thought it was just a fluke. Madison was convinced the country had to prove to the rest of the world, as well as to itself, that this new experiment in republican government was a permanent fixture in the family of nations. And the way to go about that was to confront Britain – the world’s most powerful nation – that violating American rights would not go unchallenged or unpunished. Unbridled Patriotism …so sweet in the Revolutionary War, souring in the War Of 1812, and look where it got us today.
2)- The war reinforced the Executive branch’s de facto monopoly over foreign policy. When all’s said and done, this was Madison’s war. Another example: John Quincy Adams would defend Gen. Andrew Jackson’s invasion of Spanish Florida in the undeclared war on the Seminoles. Dissenting members of Congress could do nothing but gripe.
3) A NEW way of looking at the Constitution emerged. Henry Clay said (emphasis mine); —
“A new world has come into being since the Constitution was adopted. Are the narrow, limited necessities of the old thirteen states … as they existed at the formation of the present Constitution, forever to remain a rule of its interpretation? Are we to forget the wants of our country? I trust not, sir. I hope for better and nobler things.” Evidently, the concept of a Living Constitution took root a long, long time ago.
4)- The war changed how Americans viewed the military. The Army and Navy became professional. The State Militia took a back seat. Now the nation embraced military spending as a necessity … even during times of peace.
“The most painful, perhaps the most profitable, lesson of the war was the primary duty of the nation to place itself in a state of permanent preparation for self-defense” —— future President John Quincy Adams
Many learned that connection with the military is great for one’s political career. Of the eleven presidents between Madison and Lincoln, seven of them got their start in public life or boosted their public careers during the War of 1812.
It only took 29 years after the end of the Revolutionary War for America to declare its first war. Strangely enough, this war was a complete and utter waste of human and capital resources. The precedent was set. It wouldn’t be the last such time America fought such a war.
5)—Politicians learned that with proper spin and propagandizing the people can be rallied to LOVE A GOOD WAR. Precious few citizens were in strong favor of the war when it first started. But, at war’s end, the people were ecstatic. A common refrain throughout the country is depicted in this piece written in 1815 by a group known as “republican citizens of Baltimore” stating that the war;
“ … has revived, with added luster the renown which brightened the morning of our independence: it has called forth and organized the dormant resources of the empire: it has tried and vindicated our republican institutions: it has given us that moral strength, which consists in the well earned respect of the world, and in a just respect for ourselves. It has raised up and consolidated a national character, dear to the hearts of the people, as an object of honest pride and a pledge of future union, tranquility, and greatness.”
War is good for slogans and jingoes. “Don’t give up the ship” and “We have met the enemy and they are ours” and “Uncle Sam” and cute names for war equipment “Old Ironsides”, and populist songs abounded. Symbols, slogans, songs and sayings; that’s how you condition people’s minds as to what it means to be an American. Mold ‘em like clay into whatever form you want. At least there’s no record of Madison proclaiming “America is the greatest country in the world!!”.
6)- The war permanently changed America’s economic model. Previous presidents, especially Jefferson, championed an agrarian economy. He hoped that commerce would not dominate America or its politics since that preoccupation would inevitably draw the country into perpetual international turmoil. Shortages caused by the various embargos, as well as the war itself, led to the fast growth of the manufacturing sector in the United States. Manufactures wanted protection from foreign competition once peace was restored, even forming the ‘American Society of the Encouragement of American Manufacturers’, a pro-tariff group. Active promotion of commerce required further expansion of American military strength. In other words, America would promote “free trade” with the government’s help in aggressively opening foreign markets ….. and threatening retaliation in the case of uncooperative regimes by displaying the military card. It wasn’t all that long before “free trade” gave way to mercantilism — a special-interest economic protectionism.
7)- The devious and greedy amongst us started to notice that war is damn good racket. Shortly after the war, in 1817, the New York Stock Exchange was founded … born in a bubble created by the war. One year later the bubble burst in The Panic Of 1818. The war showed that hard money was for weenies. Paper money was the way to go, and reams of it was printed so the government could borrow it and finance the war. Note-issuing banks spread like wildfire. Once the war ended, imports swelled which led to falling commodity prices which led to big trouble for war-grown manufacturers. Businesses went bust while simultaneously some became filthy rich. See book —- > https://mises.org/library/panic-1819-reactions-and-policies
8)- Politicians learned that war makes government more powerful … and a great way to increase taxes. Albert Gallatin, secretary of the Treasury from 1801 to 1814, said that because of the war, the “people are more American; they feel and act more as a nation ….. the war has laid the foundation of permanent taxes and military establishments, which the Republicans had deemed unfavorable to the happiness and free institutions of the country.”
9)- The war ended a political party. The Federalist Party, the party of Washington and Adams, the party that had dominated national affairs during the 1790s, was all but dead after the war. They were staunchly against the war. They were even ready to introduce legislation requiring a two-thirds vote of approval for all future declarations of war, and that legislation restricting trade, such as the embargo, should also require a two-thirds vote. That is, until the stunning news of Jackson’s victory at New Orleans arrived in Washington. They picked the wrong cause. The country was in no mood for an anti-war party. And, within a few years of the war, they just faded into oblivion.
10)- Expansionism. The victory over not only the Brits, but also over the Indians in the Northwest and Southwest, opened up the West as never before, and resulted in huge territorial gains. Westward expansion, in turn, indirectly led to the Civil War forty six years later because it was bitter disagreement about the expansion of slavery, rather than its existence in the Old South, which was a key reason for the War of Northern Aggression.
GOOD, BAD, or UGLY?
I originally titled this article “1812: The War That Changed America Forever For Worse”. I’m not sure whether or not that conclusion is 100% accurate. The “inconsequential” war certainly and drastically changed America, of that there is no doubt. Whether for the good, or bad, you’ll have to decide for yourself.
On the positive side, the war did cement American independence. It proved that to defeat America on its home ground, a very, very large army, and a great commitment to prolonged and bloody war, was going to be needed. At the start of the war even Americans wondered whether the republic could survive a real crises. Many felt with Governor Morris did, that — ‘it was as vain to expect the permanency of democracy as to construct a palace on the surface of the sea.’ Now they had their answer.
Americans would no longer be oriented towards Britain. We achieved freedom from Europe. We would turn to developing our own vast resources, and forget about Europe. Our National Government was here to stay.
The end of the war led to a burst of patriotism in the USA as evidenced, in part, by the immediate and widespread popularity of “The Star Spangled Banner” The Nile Register wrote — “Who would not be an American? Long live the republic! All hail! Last asylum of oppressed humanity!” Such a comment would have never been made before the war. A whole new national identity arose in “the dawn’s early light”.
On the negative side; the war left the country with constitutional revisionism, centralized power, protectionism, mercantilism, expansionism, blind patriotism, and militarism. That decentralist small-government thingy conceived by the Founding Fathers didn’t last very long, did it? One must wonder “War, what is it good for? Was it all worth it?”
Recently, calls for US ‘boots on the ground’ in Syria have gotten louder after ISIS captured a UNESCO World Heritage site in Syria, overran Ramadi in Iraq, and took credit for a suicide bombing in a Saudi mosque.
The US is now reportedly looking at its options including sending so-called “spotters” to Iraq who will help to make US airstrikes more effective and meanwhile, uber hawks like Senator John McCain (who has himself had a bit of trouble shaking rumors that he was once photographed with the same ISIS forces he now wants to annihilate) saying that as many as 10,000 US troops are necessary to turn the tide. From Bloomberg:
Arizona Republican Senator John McCain, chairman of the Senate Armed Services Committee, speaks during panel discussion at regional security summit in Singapore.
Islamic State is winning in Iraq, Syria: McCain
Air strikes without foreign troops on the ground providing real time targeting information aren’t effective: McCain.
McCain says he blames President Barack Obama’s decision to withdraw troops from Iraq for emergence of Islamic State.
Here’s a bit of color from Stratfor on the current situation on the ground:
Last week, the Islamic State seized the ancient city of Palmyra from Syrian President Bashar al Assad’s forces. The city’s capture adds to the many defeats Damascus has suffered over the past six months, compounding its problems as it faces threats on multiple fronts.
The Islamic State’s victory in Palmyra is notable for two reasons. First, it has completely isolated loyalist forces in Deir el-Zour province, including the 137th Mechanized Brigade and the elite 104th Republican Brigade. Second, Palmyra’s location — a critical crossroads in the center of Syria — gives the Islamic State a strategic base from which it can launch attacks on key locations in the surrounding area.
The Islamic State’s maneuvers in Homs province, where Palmyra is located, denote a shift in its strategy in Syria. Previously, the Islamic State fought against the People’s Protection Units in Kobani and al-Hasaka while maintaining its positions in Aleppo province.
Earlier in the conflict, Damascus removed its forces from Homs province and deployed them against the growing rebel threat of Jaish al-Fateh in Idlib province. The redeployment, which transferred the elite Tiger Forces and Desert Falcons away from the Islamic State’s area of operations, will now be seen as a mistake. The elite forces have been unable to halt rebel advances in Idlib, and their departure from Homs has left the government highly vulnerable on its eastern flank.
The Islamic State now threatens the Syrian government’s core territory, which stretches from Damascus to Aleppo. It is likely that the government will try to take the fight to Islamic State forces stationed in Palmyra, if not to recapture the city then to pin the group down in a single location and keep it from spreading to other strongholds. Either way, any action al Assad takes in response to the Islamic State’s success in Homs will expose Damascus on other fronts.
Here are the visuals…
* * *
Indeed it appears as though President Bashar al-Assad is well on his way to losing control. We’ll close with what we said last week:
As you can see, there are now plenty of excuses to put boots on the ground first in Iraq, and then in Syria. Put simply: if there was ever an opportune time to play the ISIS card on the way to ousting Assad and securing a route for Qatari natural gas to flow to Europe thus breaking Gazprom (and Putin’s) stranglehold, this is surely it.
On the 7th of January two gunmen attacked the office of Charlie Hebdo, a French weekly magazine. The shooters were two brothers who belonged to the Yemeni branch of the Islamist terrorist organization Al-Qaeda. The attack resulted in 11 casualties and many injured, while the shooters were shot a few days later in an exchange of fire with the police. Charlie Hebdo is a satire magazine, and its jokes and cartoons and its secular approach are widely considered anti-religious. Social media went into a frenzy with the hashtag “Je suis Charlie”. Four days later two million people including tens of world leaders participated in a rally for national unity in Paris, and over three million participated across France. A lot of questions were raised by this tragic event and its aftermath that we will look at in this article.
The gunmen who attacked Charlie Hebdo and their get-away car
Photo via Reuters TV
How Free Should Free Speech be When it Comes to Religion?
Let’s start with the obvious: What was the motive of the shooters? According to witness reports of the attack, one of the shooters said “You are going to pay for insulting the Prophet”. Charlie Hebdo’s cartoons and jokes are regarded as quite controversial, as they mock all religions, whether Islam, Christianity or Judaism. When respect to Islam, they repeatedly published cartoons of Mohammed, which infuriated Muslim communities worldwide as images of the Prophet are not allowed to be depicted according to Islamic teachings. Not only was the magazine sued for this, its editor-in-chief, who was killed in the attack, had been on the hit list of the Al-Qaeda branch in Yemen for some time.
Certainly these attacks have added to a climate of tension and fear, and many would classify Charlie Hebdo’s satire as hate speech or a discriminatory form of expression. But the bottom line is that it is an opinion, which you can choose to agree or disagree with. To redress an opinion with a barrel of a gun is never the right answer. Freedom of speech has been widely established, but is constantly under attack. Even after having codified freedom of speech and expression into their constitutions, many Western countries have introduced contradictory defamation laws. The line has clearly not been drawn. However, why should there be a line in the first place?
In my view, the right to speak freely should be absolute, and shouldn’t be restricted in any way. The essence of liberty lies in freedom from restrictions and control by an external entity. Ideas and thoughts are entitled to be expressed and circulated freely to whoever wishes to listen to them. This is what distinguishes democracies from authoritarian regimes. But what should govern controversial ideas, particularly when it comes to “sensitive” subjects like religion? Like the free market, free speech will govern itself and find its own equilibrium. In a society that upholds the right to free speech, there will be disagreements and these disagreements will lead to debate between the conflicting parties. The significance however lies in that these parties agree to disagree, and are willing to defend the right to free speech and expression at all costs.
Cartoon by David Pope
Renowned economist and strong advocate for libertarianism, Murray N. Rothbard, offers an interesting perspective, as he argues that free speech is connnected with where we can exercise this right. In other words, the right to speak is connected with the right to property. A man can exercise his right of free speech within the parameters of his own property, or within the property of someone who has willingly agreed to allow him to exercise this right on his premises. According to Rothbard:
“A person does not have a “right to freedom of speech”; what he does have is the right to hire a hall and address the people who enter the premises. He does not have a “right to freedom of the press”; what he does have is the right to write or publish a pamphlet, and to sell that pamphlet to those who are willing to buy it (or to give it away to those who are willing to accept it).”
Because it is a matter of property rights, you can exercise your right within your own property, but others can restrict you from exercising it on their property. At the end of the day, if you watch a show on TV that you disagree with, you can simply turn it off, and should you find an interesting article you can choose to read it or not. It is this freedom that should be and deserves to be defended!
I recently read an interesting article by Hans-Hermann Hoppe, which contained the following paragraph:
“The State in its long history has made some people richer and others poorer than they would have been otherwise. It killed some people and let others survive. It moved people around from one place to another. It promoted some professions, industries or regions and prevented or delayed and changed the development of others. It awarded some people with privileges and monopolies and legally discriminated against and disadvantaged others, and on and on. The list of past injustices, of winners and losers, perpetrators and victims, is endless.”
Although he wasn’t discussing freedom of speech in his article, I think the above is applicable to our discussion here. Even if a case could be made for limiting freedom of speech in certain cases such as discrimination or inciting violence, do we really want to entrust the government, historically the biggest killer and discriminator, with the task of defining where these limitations should lie?
Research into democide by R.J. Rummel suggests that governments killed altogether 262 million people in the last century.
Is Charlie Hebdo a “Convenient” Incident for Policymakers?
Since 9/11 the global war on terror was used to “justify” excessive legislation that restricted many basic and fundamental civil liberties and legitimized violation of privacy by the State. States have and will continue to misuse such incidents to further violate the civil liberties of citizens. By fueling hatred and anger against different religions and ethnic groups, states are very much applying the old political strategy of divide and conquer. The war on terror wouldn’t have gained this much support if it weren’t for fueling anger against Islam worldwide (let’s not forget that the US conveniently allied with Osama Bin Laden and his followers against the Soviets in Afghanistan in the 1980s).
It is astonishing how states get their way when tying their policies to emotionally-driven topics linked to identity and human life. The American public suddenly gave away its right to privacy through the Patriot Act, which was introduced under the pretext of deterring terrorism and to better support the authorities in finding and hunting down criminals that are targeting the American public. This leads us to recall our recent interview with former Czech President Mr. Václav Klaus, who made a rather honest and realistic statement:
“We experienced it in 2001 in America and it had very negative repercussions for us in Europe. I am afraid there will be a new wave of attempts to limit our personal freedom due to the so-called war against terrorism.”
Looking back on the interview his fears were more than justified, as we are now seeing similar developments such as in the US after 9/11! The lower house of parliament in France just passed a bill that has already been dubbed the “French Patriot Act”. Due to the huge majority in the lower house we expect it to pass the upper house as well. This bill lays down the rules regarding surveillance of all forms of communication without prior approval by a judge.
Furthermore, starting in September of this year, there will be massive new restrictions on the use of cash in France. Cash transactions over 1,000 Euro will no longer be allowed (down from 3,000 Euro). Foreign exchange transactions over 1,000 Euro will have to be recorded with an ID or passport of the person in question (down from 8,000 Euro). All cash deposits or withdrawals higher than 10,000 EUR per month will have to be reported to the anti fraud and money laundering agency. I think these developments only a few months after the Hebdo attack show clearly how this event is being misused to implement further restrictions on the civil liberties of the French population.
How Selective is Media Coverage in Connection with Acts of Terrorism and Violence?
Charlie Hebdo remained a focal topic in the media, the march in Paris was widely celebrated, and “Je suis Charlie” was everywhere on Facebook and Twitter. Other attacks did not receive this much attention, although they were equally gruesome and violent. Between the 3rd and 7th of January (the same day as the Charlie Hebdo attack) there were mass killings by Boko Haram in Nigeria. Boko Haram is a violent militia group that operates in northeastern Nigeria since 2009. In these four days it burned down 16 towns and villages, and overran the headquarters of the joint task force. The estimated number of casualties was ranging between hundreds and thousands.
Boko Haram djihadists in Nigeria
Photo credit: AP
How can such a mass killing be ignored? Isn’t terrorism a violation of human rights everywhere? On February 11th a gunman shot three citizens, a young Muslim couple and the woman’s sister, in the US town of Chapel Hill. The motive? Apparently it was a dispute over a parking issue. Meanwhile the families of the victims labeled it a hate crime. However, an article published in the British Independent newspaper put the real issue at the forefront:
“Would the media have covered the tragedy if Twitter didn’t exist, and what would have happened if the murderer was Muslim?”
What about hate crimes after Charlie Hebdo? France saw more attacks following the incident, which were not widely covered in the media, and certainly the list goes on around the world. An article in the UK’s Telegraph was entitled “’We’re leaving Britain – Jews aren’t safe here anymore’”. Yes, we knew racial and religious profiling was a problem, but how many of us knew that it has become so bad that people felt threatened and at constant risk? The article cited figures from the Community Security Trust (CST), which monitors anti-Semitism in Britain, which revealed a record 1168 incidents of anti?Semitism in 2014, which more than doubled from just a year earlier.
Where are the media reports on all this? What is at issue here is the selectivity of media coverage. Why do some stories deserve more coverage than others? We’ve established our case that free speech should be free from restrictions, but we also argue that media outlets should not be exploited for pushing certain political agendas.
Where Would we be if it Weren’t for Social Media and the Internet?
It takes revolutionary means to promote revolutionary ideas. The invention of the first European movable printing type with the Gutenberg Press was a revolutionary discovery which played a significant role during the time of reformation, as it enabled the mass-exposure of the ideas and concepts of the protestant faith, and the case for religious decentralization and secularism that threatened the power of political and religious authorities.
Johannes Gutenberg inspects the output from the movable type printing press he invented in the mid 15th century. It would prove to be a truly revolutionary invention
Image via Bettman-Corbis
Then why shouldn’t we be able to make the best out of today’s mass media and social networks – to exercise our right to post our opinions online with no Big Brother watching over our shoulders controlling what or what we cannot say on the worldwide web? Whether Charlie Hebdo, or other cases of religious violence, all have certainly put media coverage in the spotlight. If it weren’t for social media, we may not have noticed the biased mainstream coverage or how states are manipulating racial profiling to satisfy their agendas. The media and the State are under great scrutiny nowadays. Ever since Western countries have signed up for the global war on terror, they have willingly and knowingly aggravated and encouraged more and more discrimination, while further infringing on the very civil liberties they claim to be protecting.
For me, the most important takeaway from the tragic events in France is that we need to stay as vigilant as ever in defending our freedoms. As the aftermath of the Hebdo attack has shown, governments will misuse any opportunity they see to further restrict our freedom and arrogate more power to themselves. This is especially easy when people are faced with an understandably emotionally tense situation like 9/11 or other terrorist attacks. However, thanks to the Internet we are less prone to accept State propaganda and are able to get a more objective view of what is really happening in the world around us.
It’s always interesting to see a long term chart that reflects your real life experiences. I bought my first home in 1990. It was a small townhouse and I paid $100k, put 10% down, and obtained a 9.875% mortgage. I was thrilled to get under 10%. Those were different times, when you bought a home as a place to live. We had our first kid in 1993 and started looking for a single family home. We stopped because our townhouse had declined in value to $85k, so I couldn’t afford to sell. In 1995 I convinced my employer to rent my townhouse, as they were already renting multiple townhouses for all the foreigners doing short term assignments in the U.S. We bought a single family home in 1995 with the sole purpose of having a decent place to raise a family that was within 20 minutes of my job.
Considering home prices on an inflation adjusted basis were lower than they were in 1980, I was certainly not looking at it as some sort of investment vehicle. But, as you can see from the chart, nationally prices soared by about 55% between 1995 and 2005. My home supposedly doubled in value over 10 years. I was ecstatic when I was eventually able to sell my townhouse in 2004 for $134k. I felt so smart, until I saw a notice in the paper one year later showing my old townhouse had been sold again for $176k. Who knew there were so many greater fools.
This was utterly ridiculous, as home prices over the last 100 years have gone up at the rate of inflation. Robert Shiller and a few other rational thinking people called it a bubble. They were scorned and ridiculed by the whores at the NAR and the bimbo cheerleaders on CNBC. Something smelled rotten in the state of housing. We now know who was responsible. Greenspan and Bernanke were at least 75% responsible for the housing bubble and its eventual implosion, which essentially destroyed our economic system. They purposely kept interest rates at obscenely low levels, encouraging every Tom, Dick and Julio to buy a home with a negative amortization, no doc, nothing down, adjustable rate mortgage, so they could live the American dream of being in debt up to their eyeballs.
Greenspan and Bernanke were also responsible for regulating the Wall Street banks. They allowed them to leverage themselves 30 to 1. They allowed them to create fraudulent high risk mortgage products. They looked the other way as Wall Street sliced and diced these guaranteed to default mortgages into AAA rated derivatives that were then spread throughout the global financial system like ticking time bombs. As home prices rose three standard deviations above the long term average, these Ivy League educated geniuses cheered it all on. Bernanke saw no bubble, just as it was bursting. He saw no mal-investment or systematic risk from this orgy of greed and fraud. And then it all blew up in our faces, while the perpetrators walked away unscathed to pillage and rape once more.
And now we come to present day and something really smells fishy again. Home prices crashed by 40% between 2005 and 2012, putting prices back to 1978 on an inflation adjusted basis. All of the bubble gains were wiped out in the blink of an eye. Bernanke and his Wall Street owners had a real problem with this development. Wall Street banks had/have billions in toxic mortgages on their books and only accounting fraud by not having to mark them to market has kept these banks from having to declare bankruptcy. Bernanke, Geithner, and the Wall Street banks hatched their master plan to save themselves at the expense of young people in 2011/2012.
We know for a fact that real median household income is still 7% below 2007 levels and sits at the same level as 1989. We know for a fact that wages have been stagnant since 2007. We know for a fact GDP has barely broken 2% since 2009. We know for a fact the price of healthcare, food, energy, tuition, rent, and a myriad of other daily living expenses are dramatically higher since 2009. We know mortgage originations are at 1997 levels. We know housing starts are 60% below the 2005 highs and at levels seen during the 1991 and 1981 recessions. Existing home sales are 30% below the 2005 high, only up 10% from 2012 levels, and sitting at levels reached in 1999 before the boom.
A critical thinking person might wonder how median single family home prices could possibly skyrocket by 37% in the last three years when household incomes are falling, living expenses rising, and the number of houses being sold are at recessionary levels. The stinking rotting fish again sits in the hallways of the Eccles Building in Washington D.C. Janet “Yellowfish” Yellen has inherited the bubble blowing machine from Ben “Blowfish” Bernanke and has continued to inflate a new housing bubble, because one housing bubble just isn’t enough.
There is nothing free market about the 37% increase in home prices. It has absolutely nothing to do with supply and demand. It has nothing to do with normal families looking for a home. It has everything to do with the Federal Reserve’s 0% interest rates, the $3.5 trillion of QE injected into the economic gambling system, Wall Street banks withholding foreclosures from the market, hedge funds buying up tens of thousands of foreclosed homes and renting them out to the former middle class, Fannie and Freddie guaranteeing 70% of all sales, the government encouraging 3.5% subprime loans again, Chinese and Russian billionaires parking their ill gotten wealth in US real estate, and flippers reappearing in the same old places (Las Vegas, Phoenix, Florida, California).
The Federal Reserve created the last housing bubble and they’ve created the new housing bubble, along with stock and bond bubbles, with their easy money policies designed to enrich their Wall Street owners and the parasites who feed off the financial industry. Their entire plan smells to high heaven. They have thrown young people and most of the middle class overboard, while the bankers, billionaires, politicians, and connected cronies party like it was 2005 on their $250 million yachts.
Now what? The Fed says they are going to raise rates. The QE spigot has been turned off. The hedge funds are selling their buy and rent hovel investments, cash buyers are dwindling, the flippers who appeared in 2005 are back, Boomers are looking to sell and downsize, young people are already in debt up to their eyeballs thanks to the government doling out student loans like candy, the number of full-time good paying jobs continue to dwindle, and the rigged 37% price increase has priced millions of people out of the market.
The good news is the Wall Street banks have inflated their balance sheets and celebrated by giving themselves $20 billion in bonuses for a job well done. If mortgage rates rise to 4% or God forbid 5%, the entire housing complex would implode faster than a blowfish out of water. If you’ve bought in the last two years you will be underwater sleeping with the fishes like Luca Brasi in the not too distant future.
There appears to be little or nothing in the monetarists' handbook to enable them to assess the risk of a loss of confidence in the purchasing power of a paper currency. Furthermore, since today's macroeconomists have chosen to deny Say's Law, otherwise known as the laws of the markets, they have little hope of grasping the more subtle aspects of the role of money in price formation. It would appear that this potentially important issue is being ignored at a time when the Eurozone faces growing systemic risks that could ultimately challenge the euro's validity as money.
The euro is primarily vulnerable because it has not existed for very long and its origin as money was simply decreed. It did not evolve out of marks, francs, lira or anything else; it just replaced the existing currencies of member states overnight by diktat. This contrasts with the dollar or sterling, whose origins were as gold substitutes and which evolved in steps over the last century to become standalone unbacked fiat. The reason this difference is important is summed up in the regression theorem.
The theorem posits that money must have an origin in its value for a non-monetary purpose. That is why gold, which was originally ornamental and is still used as jewellery endures, while all government currencies throughout history have ultimately failed. It therefore follows that in the absence of this use-value, trust in money is fundamental to modern currencies.
The theorem explains why we can automatically assume, for the purposes of transactions, that prices reflect the subjective values of the goods and services that we buy. This is in contrast with money that is not consumed but merely changes hands, and both parties in a transaction ascribe to money an objective value. And this is why the symptoms of monetary inflation are commonly referred to as rising prices instead of a fall in the purchasing power of money.
The European Central Bank (ECB) is plainly assuming the euro is money on a par with any other major currency with a longer history. Despite caution occasionally expressed by sound-money advocates in Germany's Bundesbank, the ECB is aggressively pursuing monetary policies designed to weaken its currency. For example, it has reduced its deposit rate for Eurozone banks to minus 0.2%. This is wholly unnatural in a world where possession of money is always more valuable than an IOU. Furthermore banks are encouraged to limit their customers' cash withdrawals, often under the guise of fighting tax evasion or money laundering. But in Greece restrictions on cash withdrawals are clearly designed to protect the banks.
So far, there is nothing identified in this article that actually points to a destabilisation of the euro, other than it's generally a bad idea to fool around with peoples' rights to it. But lets assume for a moment that Greece defaults. In that case the Greek banking system would certainly collapse (assuming the ECB suspends its emergency liquidity assistance (ELA) because bad debts already on their balance sheets exceed tangible equity by a substantial margin. If that assistance is withdrawn, some €80bn of ELA will be lost. Furthermore, TARGET2 2 settlement imbalances at the other Eurozone central banks, which have arisen through capital flight from Greece and which are guaranteed by the ECB, total a further €42bn. This leaves the ECB in the hole for €122bn. Unfortunately, the ECB's equity capital plus reserves total only €96bn, so a Greek default would expose the euro's issuing bank to be woefully under-capitalised.
Therefore, if Greece defaults we would at least expect the validity of this relatively new euro to be challenged in the foreign exchange markets. Even if the ECB decided to rescue what it could from a Greek default by rearranging the order of bank creditors in its favour through a bail-in, it would still have to make substantial provisions from its own inadequate capital base. For this reason, rather than risk exposing the ECB as undercapitalised, it seems likely that Greece will be permitted to win its game of chicken against the Eurozone, forcing the other Eurozone states to come up with enough money to pay off maturing debt and cover public sector wages. So will that save the euro?
Perhaps it will, but if so maybe not for long. If the Eurozone's finance ministers give in to Greece, it will be harder for other profligate nations to impose continuing austerity. Anti-austerity parties, such as Podemas in Spain, are increasingly likely to form tomorrow's governments, and Spain faces a general election later this year. Prime Minister Renzi and President Hollande in Italy and France respectively are keen to do away with austerity and increase government spending as their route to economic salvation. Unfortunately for both the undercapitalised ECB and its young currency, they are increasingly likely to be caught in the crossfire between the Northern creditors and the profligate borrowers in the South.
Even if Greece is to be saved from default, the ECB will need to strengthen the Greek banks. This is likely to be done in two ways: firstly by forcing them to recapitalise with or without bail-ins, and secondly to restrict money outflows through capital controls and harsh limits on depositor withdrawals if need be. Essentially it is back to the Cyprus solution.
Whichever way Greece is played, Eurozone residents will see themselves having a currency that is becoming increasingly questionable. The bail-in debacle that was Cyprus is still etched in depositors' minds. Cyprus certainly has not been forgotten in Greece, where ordinary people are now resorting to buying mobile capital goods that can be easily sold, such as German automobiles, with the bank balances that cannot be withdrawn in cash and are otherwise at risk from a Cyprus-style bail-in. Greek depositors have realised that euro balances held in the banks are not reliably money. Folding cash is still money, but that is all, and furthermore the folding stuff is rationed.
The next blow for the euro could come from the exchange rate. If the euro continues to lose purchasing power on the foreign exchanges, it is likely to undermine confidence on the ground. And when that happens it will be increasingly difficult for the ECB to retrieve the situation and maintain the euro's credibility as money. It just doesn't seem sensible to take such enormous risks with a currency that has existed for only thirteen years.
Seymour Hersh And The Dangers Of Corporate Muckraking
“The Times wasn’t nearly as happy when we went after business wrongdoing as when we were kicking around some slob in government.” — Seymour Hersh
In its original meaning, “muckraking journalism” was all about exposing the awful power that corporations, trusts, and monopolies exercised over people and the broader public interest. So why doesn’t Seymour Hersh, considered the premiere “muckraker” of the past few decades, turn his fearless muckraking guns on private corporate power?
Ida Tarbell dug deep into Rockefeller’s Standard Oil empire and all the ways it exercised a kind of private government tyranny over huge swathes of public life; Tarbell’s work directly influenced the antitrust breakup of Standard Oil in 1911. Upton Sinclair exposed brutality in the meatpacking industry — on its workers, the slaughtered animals, and the diseased, rat-infested meats that eventually wound up in consumers’ homes — leading to the Meat Inspection Act and the Food and Drug Administration. Other muckraking exposés led to state-level child labor and workers’ comp laws, the progressive income tax amendment, and laws placing vast expanses of land and forests under federal protection from rapacious robber barons.
But Hersh and others we today call “muckrakers” focus almost exclusively on taking on government power and the national security state power — not the power of private governments (corporations, oligopolies) that exert so much mundane existential power over our mundane little existences. To the extent that muckrakers today do delve into concentrated private power, it’s usually to expose the influence of corporate money in government, which reinforces the basic operating assumptions today that power is in the hands of public government, and that corporate power is only a problem when it co-opts government power.
The nearly exclusive focus on fighting government power started with the baby boomers in the mid-late 1970s, as they retreated from politics and labor unions, and ditched the sort of university Marxist rhetoric that filled the pages of old Ramparts magazine issues.
There are a lot of reasons for this trend in muckraking journalism over the past few decades, away from fighting private corporate power, in favor of fighting government power — but the most obvious reason of all is the one you won’t hear about much because it’s not very glamorous or heroic: It’s better for your journalism career — and easier — to take on the government leviathan, than it is to take on private corporate power.
The best illustration of this is what happened when Seymour Hersh once tried his hand at corporate muckraking — and failed. The reasons he failed offer important lessons for anyone interested in understanding why investigative journalism chooses to emphasize and amplify some stories over others.
Before getting into the story, it’s important to situate Hersh’s politics back in the 1970s, when he first rose to fame exposing the horrific My Lai massacre and the massive illegal CIA domestic spying programs. Back in the mid-70s, when they were muckraking rivals, Bob Woodward described Hersh as “an old line radical . . . interested more in the abuse of really big power, concentrated power, in the military and international capitalism.” In the New York Times newsroom, editor Abe Rosenthal used to affectionately refer to Hersh as “my little commie.”
In 1975, Hersh was at the very top of his game. As I wrote about earlier this month, Hersh’s bombshell story in the New York Times exposing the massive CIA domestic spying program MH-CHAOS — which the Times dubbed “son of Watergate” — led to an entire year of Congressional committees and White House investigations into US intelligence abuses, followed by a rash of reforms, some serious, some half-baked.
That same year, as Hersh’s colleagues jumped on the muckraking-government bandwagon exposing intel agency abuses (after initially attacking Hersh’s CIA reporting), Hersh himself decided that it was time for a shift — to focus on fighting private corporate power and abuses. As Hersh told NY Times editor Abe Rosenthal:
“The biggest story in the next ten years is going to be corporations.”
After years in Washington, Hersh had moved to New York in 1975 and spent three years there because that’s where his wife was going to medical school. Moving from the capital of government power to the capital of capitalism helped focus Hersh on this other source of huge and often unaccountable power: corporations.
In principle, the New York Times agreed with Hersh’s idea — as managing editor Seymour Topping said in 1977,
“There is no reason why we should not scrutinize the private sector as we have government in the Watergate affair.”
But as the Times would find out when they tried this out, it’s a lot more dangerous and tricky to put a bug up private power’s ass than government power’s.
It started in 1976, when Hersh did a groundbreaking series of articles on perhaps the most powerful (and scary) mob attorney of the 20th century: Sidney Korshak, who served everyone from Al Capone, Sam Giancana and Jimmy Hoffa, to Hollywood-Vegas moguls Lew Wasserman and Kirk Kerkorian. Hersh’s story included allegations that Korshak had planted a camera and a call girl in Senator Estes Kefauver’s hotel room to blackmail him into halting an investigation into the mob, which Kefauver suddenly and unexpectedly did halt; and that many years later, it was thanks to a phone call from Korshak that Al Pacino was released from his MGM contract so that he could play the role of Michael Corleone in Paramount Pictures’ The Godfather.
But Korshak was not the type of guy people — journalists — felt comfortable writing about publicly. He once told a former New York Times journalist turned budding film producer,
“Do you know what’s the best insurance policy in the world that absolutely guarantees continued breathing? Silence.”
The ex-journalist, Peter Bart, immediately burned his notes, and went on to a successful career in Hollywood.
So it’s a wonder that Hersh and his collaborator on the Korshak articles, Jeff Gerth (now at ProPublica), didn’t find themselves in the obit pages shortly afterwards, their careers tragically cut short in mysterious car crashes or suicide overdoses. . . .
Instead, Hersh smelled blood: the Korshak articles opened his eyes to a company that was, in the 1970s, the symbol of aggressive, shady corporate power: Gulf & Western. Most people have probably forgotten Gulf & Western, once considered the most aggressively acquisitive conglomerate in the US, so aggressive that even Wall Street nicknamed the company “Engulf & Devour” (immortalized as the evil corporation in Mel Brooks’ “Silent Movie”). G&W’s best known subsidiary was Paramount Pictures, which Gulf & Western bought in the mid-1960s during its massive acquisition spree, underwritten by easy money from banking giants Chase Manhattan and Manufacturers Hanover.
Under Gulf & Western, Paramount made some classic films including Chinatown, The Godfather, Airplane!, and Three Days of the Condor. G&W also made the career of future media tycoon Barry Diller, who was named Paramount’s CEO and chairman in 1974 and served there for a decade.
Mob attorney Korshak was so integral to Gulf & Western’s Paramount subsidiary, he was known as the film company’s “consigliere,” and rumored to be the model for Robert Duvall’s consigliere character in Paramount’s “The Godfather.” Two years after acquiring Paramount in 1968, G&W pulled off a mind-boggling transaction with notorious Sicilian mafia financier Michele Sindona, who oversaw the mafia’s global heroin money laundering operations, managed the Vatican’s global portfolio (earning the nickname “God’s banker”), and helped the CIA move money around the globe. Somehow, Gulf & Western managed to exchange reams of worthless commercial paper in a broke subsidiary, Commonwealth United, at a vastly inflated price in exchange for a 10.5% stake in Sindona’s investment empire, Societa General Immobilaire — which was followed by another shady transaction giving half of Paramount Studio’s movie lot to Sindona’s mafia bank. Sindona explained the transaction thus:
“I always sell a company for less than it is worth to someone I want to please.”
In the mid-1970s, Sindona’s investment empire collapsed, triggering what was then the largest US bank failure in history — eventually leading to Sindona’s arrest and extradition to Italy, where was poisoned to death with cyanide.
G&W acquired so many companies in its mad buying spree in the late 60s and early 70s that by the time Hersh took the company on, it was the 19th largest employer in the USA. One of its subsidiaries was the Dominican Republic’s sugar monopoly, whose assets included the largest sugar refinery in the world. That made Gulf & Western the largest employer and taxpayer in the Dominican Republic, home to all sorts of American interventions over the years, and led to a scandal in which G&W and the Dominican Republic’s central bank secretly helped cook each other’s books through illicit transfers.
G&W’s chairman — and Hersh’s nemesis — was Charles Bluhdorn, the “Mad Austrian” and one of the most infamous names in the business world in his day. In the 1990s, years after Bluhdorn’s early demise by heart attack, he was described by the New Yorker as “the most ruthless conglomerateur of them all” and “the last of the great business eccentrics.”
But Hersh saw Bluhdorn in less flattering terms, telling his Times editors:
“If your local butcher pulled some of the acts these corporations pulled, he’d be in jail.”
To his editor Abe Rosenthal, Hersh insisted that Gulf & Western would be the Big Business Story of the decade: “I’ve been trying to get into big business stories since coming to NY, and this one is the ultimate,” Hersh wrote in a memo. He believed an exposé on Gulf & Western would “help explain how things work in this nation,” describing G&W as “almost an archetype of what is wrong, or suspected to be wrong, about modern big-time conglomerates,” a company that “grows bigger not by building better products, but by playing the stock market.” Indeed in many ways, the opportunities for fraud and abuse of power that a conglomerate as huge and murky as Gulf & Western were many. And some of its schemes used to hide or transfer losses and inflate earnings by moving assets between subsidiaries, and the ways in which Bluhdorn was able to milk the conglomerate as his own personal ATM machine by commingling personal loans with the conglomerate’s banks and its assets foreshadowed some of the fraudulent accounting and bonus schemes used by the big banks in our times, with catastrophic results for the global economy.
This backdrop to Hersh’s one foray into corporate muckraking is explained in Robert Miraldi’s 2012 biography on Hersh.
Hersh’s massive Gulf & Western exposé was published in the Times in 1977 — 13,000 words long, in three parts, revealing a private labyrinth of corporate fraud, abuse, tax avoidance schemes, and mobbed-up malfeasance. And yet — in spite of all the pre-publication hype, the story landed with a whimper. Something Hersh wasn’t at all used to. For one thing, the article’s language was unusually cautious and dull for a Hersh scoop. As New York magazine quipped,
[T]he general reaction has been a big yawn.
“I expected a lot more explosive stuff,” commented a former G. & W. executive.
The reason was pretty straightforward: unlike Hersh’s stories going after the CIA and the military, the Times was far more afraid, and careful, of the consequences of taking on a powerful private company (Gulf & Western) and getting sued out of existence. Unlike Hersh’s muckraking stories about illegal CIA spying and military massacres, the Times saddled Hersh with a team of editors and lawyers to vet his reporting, sucking the life out of the piece until it was almost unreadable. Among other things, the Times cut out all the colorful anonymous quotes that made his muckraking bombshells on the CIA (and more recently, on the Osama Bin Laden killing) such memorable reads.
Why? Again, because legally, you can get away with saying much more about government, spy agency, and military abuses without worrying about the legal consequences than you can about private corporations. And the flipside: private corporations have much more legal leeway to go vicious and dirty at a journalist and a publication than the government, which is constrained by the Constitution. It’s one of the benefits of contracting government work out to private contractors and agencies — they can legally get away with doing some of the dirty work that the government is barred from doing.
Again, from New York magazine’s postgame commentary:
We hear that the Hersh series may have been toned down considerably by some very tough letters to Times management from Martin Davis, a G. & W. executive vice-president, hinting at legal action.
…The overall impact of the series on the company’s stock was indeed minimal. The G. & W. stock dropped about 1-1/4 points—less than 10 percent in a very sharply declining market.
So not only was taking on private sector power more difficult and dangerous — it had far less impact and almost zero payoff for the ego, making it doubly unappealing for a blood-hungry muckraker like Hersh.
Afterwards, Hersh described G&W’s abusive efforts to kill or derail his story as unlike anything he’d ever experienced.
“I’ve never felt such personal animosity in all of my career, and that includes all of the reporting I’ve done [on the CIA and FBI].”
G&W vice president Charles Davis was assigned the role of company front man dealing with Hersh and the Times, and he was savage. He tried to go over Hersh’s head to the Times management and editors, complaining about what he described as Hersh’s “sick, twisted, malicious, hateful tactics.” G&W taped Hersh’s phone calls to them, recording Hersh calling Davis a “son of a bitch” and playing it back to his editors. They also claimed that Hersh had threatened to have them jailed if they didn’t answer his questions. The purpose was to drive a wedge between Hersh and his editors and management. They didn’t succeed in getting the story killed; but their relentless attacks did help influence the final flaccid outcome on paper and ensure that down the line, neither Hersh nor the Times had the will to repeat the miserable experience that comes with muckraking a corporate leviathan.
Finally, Hersh and his collaborator Jeff Gerth managed to arrange a sit-down interview with Davis and Gulf & Western lawyers. Afterwards, Hersh told his managing editor that their three hour meeting was “the most distressing interview I’ve had in more than 17 years in the business. These two men repeatedly insulted us and directly threatened us with legal action.” G&W wasn’t afraid of going low and dirty, threatening their families. At a followup meeting a week later between Hersh and G&W’s Davis, Hersh was told that company investigators had dug up “damning evidence” about Gerth’s father. (Shades here of Uber executive Emil Michael’s threats against Pando editor Sarah Lacy’s family.)
They could get away with this, again, because they’re a private company, not the government.
What also made the story so problematic for Hersh was the intense editing and vetting, which he didn’t have to deal with when writing on the CIA or military. From Miraldi’s biography:
[T]he accusations that Hersh made, based on the government probes that were under way, were dense, complicated, tedious, and difficult to follow. Probably the very tight editing by a wary band of editors and lawyers neutered some of the better material. Lee [the Times editor] made the reporters kill anonymous quotes, which Hersh always used to brighten up his stories (and irk Rosenthal).
A Washington Post profile on Hersh in 2001 also describes the problems Hersh faced taking on private power versus government power, saying that the Gulf & Western series,
caused them nothing but grief in the editing process. Part of the problem was that it was about the abuse of private power, a much dicier subject for many editors even than the CIA. “He had a story that were it about a public institution would have been in the paper the first time he wrote it, the first way he wrote it,” Kovach [Hersh’s former New York Times editor] says.
A few weeks after the Gulf & Western series was published, Newsweek published a more serious analysis at the difficulties Hersh and the Times had in doing the story, and how the experience had already turned off both Hersh and the New York Times from repeating anything like it:
The Hersh project provided a case-book study of the problems in investigating corporate affairs. First, the cost is high because of the time and expertise required; Hersh, 40, worked six months on the series with free-lance investigator Jeff Gerth, 32, a former business student. It may also be harder to find leaks in big corporations than in government, and Hersh fell back frequently on government sources.
Actually writing the story can be as much of a hassle as getting it. Many private citizens and businesses are in a stronger position than public officials to sue for damages and apply pressure. A Gulf & Western director repeatedly protested to Times executives about Hersh’s investigation while it was going on (his requests for a meeting were turned down), and editing and legal clearance took more than a month. The Times felt obliged to add so much background and legal qualification as to render some readers numb; many newspapers that take the Times news service found the stories too long or dull to run.
Even the appearance of impropriety can prompt a public official to resign, but businessman have rarely been held to that standard of public trust. And stories like Hersh’s may not involve such dramatic wrongdoings as payoffs to politicians.
And Newsweek interviewed Hersh himself, getting his own despondent thoughts on corporate muckraking in the modern era:
“It’s a gray area – what’s right, what’s wrong, what’s established practice,” Hersh himself conceded. “I don’t know if it was worth the effort, but these are issues people should be thinking about.”
…As for the Times, it has started a weekly “enterprise meeting” to coordinate and possibly cut off future investigations, and thus avoid – in Topping’s words – “frittering away our resources.”
The closest Hersh ever came to anything like corporate muckraking again was his 2001 New Yorker story on Mobil Oil’s role in the corrupt world of oil acquisitions in Kazakhstan and the Caspian Sea basin. It was a story about oil geopolitics and third world corruption, not about private corporate power; and yet even even this story, “owing to the complexity of the material, lacked the color and narrative momentum” (quoting the Columbia Journalism Review) of Hersh’s blockbuster a year earlier on Gen. Barry McCaffrey’s massacre of retreating Iraqi troops in the first Gulf War.
Finally, there’s this depressing update from Hersh’s biographer, from an interview he gave last year, on the question of whether reporting on private sector power today is harder or easier than when Hersh tried and failed:
Q: In discussing Hersh’s exposé of Gulf & Western in the 1970s, you talk about the complexity of reporting on business, noting that “disagreement begins…when it comes to [journalism’s] role vis-à-vis the private sector.” In today’s era of government bailouts of private enterprise, Occupy Wall Street, and reduced corporate regulation, do you think that views on business journalism have changed? If Hersh’s Gulf & Western piece were to be published today, do you think modern audiences would be more sympathetic and receptive than his readers were in the 1970s?
A: I suspect the opposite — that the early 1970s was a time when people were more inclined to distrust business. Corporate might is more entrenched today than ever. I don’t know if a publication today would allow a reporter to take apart a modern corporation the way the Times allowed Hersh and Jeff Gerth to go after G&W. It was really quite remarkable. Hersh chose the topic and then went after the company like a prosecutor seeking indictments. He was a brazen foe of GW. No one went to jail after the stories, but the company quickly lost its way and was gobbled up.
After that exhausting and brutalizing experience taking on private corporate power, Hersh threw in the towel on the private sector, and spent the next several years working on a scathing book taking down the most powerful “government slob” of the 1970s: Henry Kissinger. And Hersh has been making life hard on “government slobs” ever since — much to the slobs’ displeasure, and much to the relief of America’s all-powerful corporate tycoons.
If you’ve followed our commentary for awhile, you may have noticed that we don’t cover fundamental or economic data too often. That is for a good reason: we don’t use it, at all. Occasionally, however, a data point will cross the radar that piques our interest for whatever reason. So it is with the current state of U.S. Corporate Profits. The U.S. Bureau of Economic Analysis released the latest data today revealing that Corporate Profits (after Tax with Inventory Valuation Adjustment and Capital Consumption Adjustment) were down 9% for the 1st quarter and are now down 16% from their peak in the 3rd quarter of 2013.
Perhaps we don’t run in the right circles but we haven’t heard much regarding the significance of this trend on the stock market, which continues to trade near its all-time highs. Perhaps that’s a good thing considering we’ve found scant profitable uses for fundamental data in our investment approach (which is why we don’t use it). So we decided to take a look at it ourselves to see what effect similar historical precedents, assuming there were any, may have had on the stock market. This is what we looked for:
Quarters when Corporate Profits were down at least 12% from their 2-year high, and
the S&P 500 made a 2-year high at some point within the same quarter.
As it turns out, there have been 21 quarters meeting that criteria since 1960.
Many of the occurrences came in clusters in 1980, 1986-1987 and 1998-2000. There were also single occurrences in 1961, 2007, 2011 and the 1st quarter of last year. Without going into great depth of analysis, one can tell by the inauspicious dates that these circumstances have not worked out well in the past. The stock market may not have rolled over immediately in every occasion (e.g., 1986, 1998, 2014), but it usually ended up paying the piper.
Specifically, the average drawdown over the 2 years following these quarters was -18.6%. This compares with an average 2-year drawdown of -7.3% following all quarters since 1960.
We don’t follow economic and fundamental data too often since we’ve never found it very helpful in our investment decision-making process. At times, however, a certain data series will garner our attention. Often times, as is the case with Corporate Profits presently, it grabs our attention because it is receiving very little attention elsewhere. From just a cursory look at the current trend of falling Corporate Profits, however, it would appear to be a potential negative influence on the stock market that is trading near its all-time highs – if not immediately, then eventually.
Before the people realized that behind the “most transparent administration ever” there was nothing but double seasonal adjustments, drones and an impenetrable layer of propaganda and lies, there was…
And change, of course.
Sadly, at some point over the past six years the hope died, first for the people (if not the bankers), and then for the creator of the infamous “Hope” poster himself, Shepard Fairey who told Esquire magazine in an interview that Obama has not come even close to embodying the break with the past administration that Fairey and so many voters hoped he would.
“I mean, drones and domestic spying are the last things I would have thought [he’d support].”
But support them he did while crushing the much promised transparency and freedom for the masses, for one simple reason: money, the same reason why Fairey is almost willing to give Obama a pass, again. Money, and of course, power and control of the masses by the select few.
Still, the confused artist still isn’t fully ready to throw away all his idealism just yet:
I’ve met Obama a few times, and I think Obama’s a quality human being, but I think that he finds himself in a position where your actions are largely dictated by things out of your control.
A “quality human being” he may be, but when it comes to personal motives, money always wins. Just ask the Clinton Foundation. Even Fairey, who says he “agrees with Hilary on most issues” finally grasps that now:
… campaign finance structure makes me very angry, because it means that politicians are going to have to raise a huge amount of money, which narrows the field dramatically. There are only certain kinds of people that either have the preexisting resources or the willingness to work in way that will get them a lot of money from donors. That narrows the field right there. Then there’s the idea that the people who you are going to have to listen to are the people that are going to give you the biggest donation. That means lobbyists, special interest groups, and corporations are going to have politicians eager, disproportionally.
He adds: “I’m not giving him a pass for not being more courageous, but I do think the entire system needs an overhaul and taking money out of politics would be a really good first step.“
A systemic overhaul by whom? The same politicians who are nothing but “whores” to corporate lobby interests?
Or maybe the infamous artist should just blame the American public for agreeing to be swindled and manipulated by one liar after another, all of whom promise change yet end up merely perpetuating the broken, corrupt system they inherit from their predecessor and make it even worse.
Actually, that’s precisely what Fairey did. This is what he told Esquire:
We also need a public that isn’t so uneducated and complacent. I hate to say Americans are ignorant and lazy, but a lot of them are ignorant and lazy.… When you live in a place that has a lot of good things that make life easier, it’s easier to take them for granted. But what frustrates me to no end are people who want to blame Obama or blame anything that is something that if they were actually doing anything as simple as voting, it might not be as bad as it is. There’s a lot of finger pointing and very little action and very little research into the dynamics that created the situation that they’re unhappy about.
Actually, about that he’s quite accurate
However his message will be diluted and ignored, and the media will do is what it always does when facing a threat to the status quo: crush the messenger.
And conveniently, Fairey made it very easy for them: after all, and quite amusingly, his Hope poster itself was a fraud.
The artist was recently sentenced to two years of probation and fined $250,000 in 2012 for destroying documents and concealing others in an attempt to hide that he had used an Associated Press photograph as the basis for his “Hope” poster. And even more ironic, as Gawker wrote in 2009, Fairey himself was “lawsuit happy to artists who ape or parody his stuff.”
Unfortunately, in retrospect Fairey’s story is one of “tidiest little package” summaries of the banana republic status the US, and its leadership, has devolved to.
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In a press release dated September 17, 2014 the Federal Reserve updated their “policy normalization principles” that was laid out in 2011 when our monetary masters first flirted with the idea of “green shoots” turning into “escape velocity.” As mission got closer to completion eternal bliss for all subjects lucky enough to be under the reign of enlightened central planners was clearly within reach. Without the steady guidance and micromanagement of the Politburo we would all be jumping off the nearest high-rise as approximately 37 per cent of the US population apparently did in the 1930s.
Now, it did not quite work out that way and the normalization plan has been just as dormant as the economic promised land. Maybe, just maybe hope is not a viable long term plan after all. If household spending behaviour is reallycausedby perceptions about the future, neatly discounted into a surging Russell 2000, then, and only then, would our Ivory Tower economists be right. However, if that was the case there would be no need for scarcity in this world and we could essentially return to the Garden of Eden and live happily ever after.
The real world is unfortunately more complex and as shown by Ludwig von Mises, in his article of 1920 called “Economic Calculation in the Socialist Commonwealth,” there cannot be a pricing mechanism in a centralised society without a free market and if there is no mechanism for honest pricing there cannot be rational economic calculation.
In this light, isn’t the whole purpose of Federal Reserve, and their brethren’s, market interventions attempts, so far successfully, to impose upon free society a pricing structure that differs from the free market outcome?
Prices are like traffic signals, guiding resource flows, but if for some reason resources starts to flow in a direction that does not fit with some grand master plan our self-proclaimed money masters have laid out, they find it fitting to change its direction at their own discretion.
Who, in their right mind, would suggest that in a free market the most insolvent government on the planet, Japan, can fund itself for mere basis points when they have an explicit strategy to debase their currency by two per cent annually?
Have we not taken a giant step towards the society Mises suggest cannot perform rational economic calculation? And if we have, does this not mean vast amounts of resources are routinely being misallocated?
If resource flows have become distorted from all the monetary shenanigans witnessed over the last years it is a safe bet to assume it will resume its original, or intended rather, flow as central bank excesses are reversed.
And this brings us back to the press release which clearly states that the “…committee expects to cease or commence phasing out reinvestments” of securities holdings currently on the Federal Reserve balance sheet after it raises interest rates.
Now, we assume that the first 25 basis points to the Federal Fund Target Rate will come in September, the Fed should stop their reinvestments shortly after. By looking through the Federal Reserve balance sheet by CUSIP we can calculate the current maturity profile of both TSYs, TIPS, Agencies and MBSs which is provided in the chart below.
While there is no problem for 2015, by 2018 over 30 per cent of TSYs will have disappeared from the Federal Reserve’s balance sheet assuming no reinvestments. Since the US government is running a deficit, this means the reduction in Federal Reserve TSY holdings can be considerednetsupply of TSYs because the US Treasury will have to issue bonds to repay the Fed, and these bonds must be absorbed by the private sector.
With good collateral being in short supply these days added bonds will probably get bid within a reasonable, but presumably lower, price than today, but funding for extra TSY flow will come by through reallocation of existing private portfolios.
From the chart we see there will be a spike in H1 2016 and then the run-rate drops to around USD50bn per quarter until another spike in 2018.
With expected return on risk being what it is, one should not be surprised to see increasing market volatility as the Fed withdraws and the private sector tries to take up the slack.
Unless the economy tanks completely (more on this in a upcoming post) and added QE is felt necessary the Fed will be forced to continue to roll-over TSYs in perpetuity with the odd attempt to scale down the reinvestments to, say, 90 per cent of par, then 80 and so on.
Yes, there’s no point in hiding it. We would like to see a depression. Short, swift, and decisive – a quick and sharp end to the biggest credit expansion in all of history.
As secretary of the Treasury Andrew Mellon said after the 1929 stock market crash:
Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.
Credit Cannot Increase Forever
“It’s unbelievable,” said colleague Merryn Somerset Webb. Merryn is the editor of MoneyWeek magazine in London. “London property prices just keep going up and up. It’s so expensive our writers can’t afford to live here anymore. I’m thinking of moving the business to Edinburgh.”
You can’t build a solid economy on the jelly of unaffordable housing, unpayable debts, and unsustainable asset prices. But that’s what we’ve got. The only way to get down to something more reliable… more real… and healthier… is to wash away the financial glop and goo that has accumulated during the last 30 years.
One way or another, the credit expansion that began after War World II must come to an end. About that we have no doubt. Contrary to the evidence of the last half-century, credit cannot increase faster than income forever. It is mathematically, economically, and financially impossible.
But when will it stop? “The trouble with you guys,” says a loyal reader (or words to this effect), “is that you are generally right… but you are always early.” Early? Certainly. In the case of the credit bubble, we were nearly 40 years ahead of the curve. We saw the handwriting on the wall back in the 1970s! We thought it said, “The End Is Nigh for the Paper Money System.” After all, no paper money ever lasted for very long.
Not All Central Bankers Are Idiots…
But we misread the graffiti… We don’t know where “nigh” is, but we’re pretty sure the end wasn’t close to it. Because, here we are four decades later, and the paper money system is still going strong.
And guess what? We are still sure that it is headed for a debacle.
But when? “It could take another two or three decades.” That was the answer we got from a top central banker. We had the rare treat of dining with one last night. We’ll keep his identity to ourselves, to protect his job and the reputation of the central bank. But he was a breath of fresh air. And a relief. Now, we can say with confidence: Not all central bankers are idiots.
Here’s what he told us:
It is doomed, of course. But not necessarily soon. As long as the major tendency of the economy is toward deflation, central banks can print money without causing consumer price inflation. They can buy bonds and keep buying them.
When they buy bonds, they tend to lower interest rates. They also finance government deficits. And, from Japan’s example, it looks as though they can do it almost indefinitely.
That’s right: They can keep this gig going… until they can’t. When it ends is anybody’s guess. It is in the future, where no man goeth with GPS or map in hand…
Who Wants a Depression?
And we goeth there only in hopes of discovering a depression. Everyone else hopes to discover many more years of asset price inflation, boom, bubble, and central bank management. This distinction is an important one. At least WE think so.
Everyone in government, industry, commerce, and academia has an unspoken prejudice for the bubble. Wall Street wants to sell you stocks and bonds. Industry and commerce have products to unload… not to mention mergers and acquisitions to finance. And governments all over the planet are running deficits and counting on low interest rates to pay for their zombie wars and crony programs.
Who speaks for the future? Who stands up for a healthy, sane, and real economy? Who champions the cause of the little guy… the small investor… the small businessman… the ordinary working stiff?
This list could grow to 1,000 ideas, but I’ve kept it down to ten. In the future, I might update it and add some more.
There are a lot of bad ideas that dominate the world we live in today, most of which are uncritically accepted as the norm and fully embraced by society.
As a millennial myself, I’ve noticed my peers seem to accept most of these as conventional wisdom. Hook, line, and sinker.
Here are some ideas I was propagandized with that I hope my children will never have to “unlearn.”
1. Violence is normal.
Presidential candidates today are fighting over who can kill better by using drones or boots on the ground. By constantly threatening the use of violence against other countries, statists have conditioned the population into thinking that killing tens of thousands of people is normal behavior, instead of the immoral, dangerous provocation it is. Rather than being charged with murder, politicians and others that help support this behavior are often paid $250,000 or more a speech after they leave office, and referred to as Mr. President or former Chairman of the Federal Reserve.
Video games, movies, television shows, and even toys all have a common theme: death and destruction. For example, there’s nothing like teaching your child about policing in 2015 America via these Playmobil toys:
This isn’t normal; this is psychotic. And the sociopaths that rule over us are murdering and imprisoning people every day because “we the people” are not only allowing it, but often times, cheering it on.
Outside of self-defense, respecting other peoples’ property should become the new norm.
2. Political parties govern differently.
As a former Republican, I used to hate the Democrats. Now I see these two parties as just two wings on the same beast.
It’s true that they run with different themes and talking points, but in the end, they govern the same. They share the top donors, vote yes on the same wars, and never roll back a single thing the other does once in power.
Bush picked Bernanke to run the Fed, and Obama re-nominated him. Republicans like Nixon ran on an anti-war platform during the Vietnam era, until Reagan/Bush took over in the 80’s. Then the Democrats were anti-war in the 2000s, until Obama took over in 2008. Clinton, Bush, Obama… looking back at the last 25 years, I don’t see how anything has changed in the U.S. with regard to foreign policy, spending, or lying about U.S. economic data.
The oligarchs have us all fooled. Political parties are nothing more than spectator sport for a dumbed down public.
3. Patriotism is a virtue.
Why? It was an accident that I was born here. Am I grateful to be living in the U.S., surrounded by family and friends? Yes. All the same, I owe the U.S. government nothing. I am a sovereign man, and shouldn’t have to subscribe to any group or nation just because I happened to be born in a part of the world called North America.
I love everyone in this world, and I am not going to express loyalty for a specific region like a sports fan who loves his team only because it’s in the same city he resides in.
Governments are dangerous, and the U.S. is the most dangerous one at the moment. My love for the U.S. is no more than my love for the Bahamas or Europe.
4. Illegal aliens are evil criminals who desire to collect welfare from taxpayers.
For a long time, I couldn’t stand these people. Nevertheless, if I wasn’t randomly born in Los Angeles and was instead born just 144 miles south, in Tijuana, I would be doing the exact same thing the illegal aliens are doing. I would be attempting to better my life and my children’s lives by migrating north. Humans moving to different regions is a natural event; the only unnatural thing is the imaginary lines we call borders.
As far as the welfare, that’s a symptom of the disease we call government. It’s like me taking a tax deduction. While I don’t support the income tax, I’m not stupid, and I’m going to do everything I can to game the system and benefit myself.
5. Taxes are justified at gunpoint.
Taxes with the threat of jail or violence is wrong. I’m sorry, but I don’t owe you or anybody else a portion of the fruits of my labor – especially not under the threat of violence.
6. War is good for the economy.
I was told at a very young age, and even in high school, that war helped the economy boom. When you think about it, it makes no sense. Using production lines to create products that blow up into nothing is a tremendous waste of resources. Looking back, after WWII the U.S. cut spending by 50% and reduced the military from 12 million to 1.5 million. The evidence from the late 40’s and 50’s is that the economy boomed when we had less war.
7. Terrorists hate our freedom and culture.
Are there extremists? Absolutely. But the fact is the U.S. has troops in so many countries (see: The Golden Age of Black Ops – In Fiscal 2015 U.S. Special Forces Have Already Deployed to 105 Nations), and has a horrible track record of toppling democratically elected governments, supporting sociopaths, and arming rebels who later become “terrorists.” It’s no wonder than these policies occasionally come home to roost.
For one second, imagine that a nation bombed your neighbor and killed your son. What would your reaction be? These are the situations thousands across the world face on a consistent basis.
What if Iran had troops in Mexico and Canada, ships off our coasts, and drones over our air space? Would we want a nuclear bomb for defense?
George Washington was a terrorist in the eyes of Great Britain. If you want to know who’s dishing out much of the tyranny and chaos in the Middle East, as an American, you don’t have to look far from home.
8. The U.S. has a free market economy.
This is seriously stupid, but college professors and politicians repeat this mantra every day. In reality, the economy is so centrally planned that if the Fed alters one sentence in their statement, the Dow Jones could rally or fall by 200 points in an hour.
Meanwhile, regulations in some industries have forced business to have an entire division dedicated just to compliance. Even worse, many of these regulations are pushed by the larger corporations in order to drown out the competition with bureaucracy they can’t possibly afford.
There is no free market in the U.S. – only crony capitalism, manipulation, and a centrally planned system manned by busybodies.
9. U.S. troops are dying for my freedom.
This is a tough one, because you want to naturally love and respect anyone who does something for you, especially if it’s to protect you from harm. The only reason I even bring this up is because many of the troops are honest, decent young men looking to serve their country or be a part of something greater than themselves. Nevertheless, these men and women are merely being used and abused in a Game of Thrones-esque battle for global wealth and power. They are often just collateral damage for large corporations looking to expand their businesses into territories and countries that, without U.S. military intervention, would likely be thrown out by the locals.
I genuinely think the troops are willing to die for my freedom, but the corrupt American Empire poses a much greater threat to my freedom than any outside enemy we are constantly taught to fear.
10. My vote matters.
Remember in 2006 when the Democrats were going to get our fiscal house in order? Or was that in 2010, when the Republicans were going to do the same? I don’t know, but your vote doesn’t matter. The populace is easily manipulated and/or asleep when it comes to matters of importance, so why bother.
The vote counters and the media have already decided who’s acceptable and, of course, at the end of those strings are the oligarchs who run the world. See my post from last year: Election 2014 – Why I Opt Out of Voting.
Edward Snowden sacrificed his freedom to alert voters of high crimes in the U.S government, and many Americans have no idea who he is. Meanwhile, most politicians want to try him for treason.
* * *
Summary: The good news is that because of the communications revolution we are in right now, I truly feel like there is a great awakening happening. We see it in the alternative media boom, blogs like Liberty Blitzkrieg, ZeroHedge, and others are currently challenging conventional wisdom with ferocity and success.
Following today's "successful" vote confirming Sepp Blatter's 5th term running the farce called FIFA, and amid soccer's governing body being investigated by US and Swiss authorities over claims of corruption, we thought a summary of just where the money comes from and (apart from the $150 million in bribes and kickbacks to 14 executives) where it goes for the Swiss-based entity…
How does the Zurich-based multi-million-pound organisation make its money and what does it spend it on?
The US-led part of the twin investigations is looking at corruption among members of the Concacaf and Conmebol, the confederations that represent national associations across the Americas and the Caribbean, but the entire structure is considerably more broad…
Any uncertainty around the World Cup is a major concern to the organisation. Fifa's own financial reports give a clear indication of how reliant the organisation is on the income each tournament generates.
The World Cup is the most lucrative sporting event in the world, eclipsing even the Olympics. The 2014 qualifying rounds and final tournament brought in $4.8bn (£3.1bn) over four years and, after costs are taken into account, Fifa made a profit of more than $2bn.
Profit from the 2014 World Cup
How much money does Fifa hold on to?
Fifa re-invests the majority of its revenue but it does hold on to a proportion of any profit to create a cash reserve. Fifa says that the reserve is important as it is extremely difficult to find insurance to cover the possible last-minute cancellation of a World Cup.
The value of this reserve has grown sharply in the last decade from $350m (£228.6m) in 2005 to more than $1.5bn (£1bn) in 2014.
The US indictment alleges over $150m (£97m) in corruption during a period of over 20 years. That currently equates to around 10% of the money Fifa has on hand for emergencies.
A further worry for FIFA is that its sponsors and "partners" (extra-privileged sponsors) seem displeased by the latest bout of scandals. Coca-Cola are concerned that such accusations have “tarnished” the World Cup. Visa has warned that it may reassess its FIFA sponsorship unless the organisation can come to grips with its internal problems.
That is money FIFA will not want to lose. Marketing is a cornerstone of FIFA’s swelling balance sheet, accounting for about a third of its $2 billion in yearly revenues.
Increased interest in football from Asia and Africa has swelled the flow of money from television-broadcasting rights. A favourable tax status in Switzerland helps too: FIFA only pays around 1% of its income to state coffers. With cash rolling in, the organisation has built up healthy reserves of $1.5 billion, ostensibly for a rainy day.
At long last the storm clouds appear to be gathering.
To avoid a violent militaristic clash with China, or another cold war rivalry, the United States should pursue a simple solution: give up its empire.
Americans fear that China’s rapid economic growth will slowly translate into a more expansive and assertive foreign policy that will inevitably result in a war with the US. Harvard Professor Graham Allison has found: “in 12 of 16 cases in the past 500 years when a rising power challenged a ruling power, the outcome was war.” Chicago University scholar John Mearsheimer has bluntly argued: “China cannot rise peacefully.”
But the apparently looming conflict between the US and China is not because of China’s rise per se, but rather because the US insists on maintaining military and economic dominance among China’s neighbors. Although Americans like to think of their massive overseas military presence as a benign force that’s inherently stabilizing, Beijing certainly doesn’t see it that way.
According to political scientists Andrew Nathan and Andrew Scobell, Beijing sees America as “the most intrusive outside actor in China’s internal affairs, the guarantor of the status quo in Taiwan, the largest naval presence in the East China and South China seas, [and] the formal or informal military ally of many of China’s neighbors.” (All of which is true.) They think that the US “seeks to curtail China’s political influence and harm China’s interests” with a “militaristic, offense-minded, expansionist, and selfish” foreign policy.
China’s regional ambitions are not uniquely pernicious or aggressive, but they do overlap with America’s ambition to be the dominant power in its own region, and in every region of the world.
Leaving aside caricatured debates about which nation should get to wave the big “Number 1” foam finger, it’s worth asking whether having 50,000 US troops permanently stationed in Japan actually serves US interests and what benefits we derive from keeping almost 30,000 US troops in South Korea and whether Americans will be any safer if the Obama administration manages to reestablish a US military presence in the Philippines to counter China’s maritime territorial claims in the South China Sea.
Many commentators say yes. Robert Kagan argues not only that US hegemony makes us safer and richer, but also that it bestows peace and prosperity on everybody else. If America doesn’t rule, goes his argument, the world becomes less free, less stable and less safe.
But a good chunk of the scholarly literature disputes these claims. “There are good theoretical and empirical reasons”, wrote political scientist Christopher Fettweis in his book Pathologies of Power, “to doubt that US hegemony is the primary cause of the current stability.” The international system, rather than cowering in obedience to American demands for peace, is far more “self-policing”, says Fettweis. A combination of economic development and the destructive power of modern militaries serves as a much more satisfying answer for why states increasingly see war as detrimental to their interests.
International relations theorist Robert Jervis has written that “the pursuit of primacy was what great power politics was all about in the past” but that, in a world of nuclear weapons with “low security threats and great common interests among the developed countries”, primacy does not have the strategic or economic benefits it once had.
Nor does US dominance reap much in the way of tangible rewards for most Americans: international relations theorist Daniel Drezner contends that “the economic benefits from military predominance alone seem, at a minimum, to have been exaggerated”; that “There is little evidence that military primacy yields appreciable geoeconomic gains”; and that, therefore, “an overreliance on military preponderance is badly misguided.”
The struggle for military and economic primacy in Asia is not really about our core national security interests; rather, it’s about preserving status, prestige and America’s neurotic image of itself. Those are pretty dumb reasons to risk war.
There are a host of reasons why the dire predictions of a coming US-China conflict may be wrong, of course. Maybe China’s economy will slow or even suffer crashes. Even if it continues to grow, the US’s economic and military advantage may remain intact for a few more decades, making China’s rise gradual and thus less dangerous.
Moreover, both countries are armed with nuclear weapons. And there’s little reason to think the mutually assured destruction paradigm that characterized the Cold War between the US and the USSR wouldn’t dominate this shift in power as well.
But why take the risk, when maintaining US primacy just isn’t that important to the safety or prosperity of Americans? Knowing that should at least make the idea of giving up empire a little easier.
The jobs gap that has characterized the global economy since the crisis has cost some $1.2 trillion in lost wages and nearly $4 trillion in GDP. Employment growth worldwide has been just 1.4% since 2001, well below the 1.7% pace that prevailed prior to 2008. The result: there are 61 million fewer people employed globally than there would have been if pre-crisis trends had prevailed.
In the eurozone, where unemployment stands at 11.3% and where some countries — Spain being a prime example — are struggling under unemployment rates that approximate what the US experienced during the Great Depression, the ECB has been forced to effectively abandon its “single mandate” of promoting price stability in favor of a stance that’s more in-line with the Fed’s dual mandate that encompasses both price stability and maximum employment.
Against this backdrop, many Europeans are struggling to find work, but have no fear, Europe has a solution: fake jobs. The New York Times has more:
At 9:30 a.m. on a sunny weekday, the phones at Candelia, a purveyor of sleek office furniture in Lille, France, rang steadily with orders from customers across the country and from Switzerland and Germany. A photocopier clacked rhythmically while more than a dozen workers processed sales, dealt with suppliers and arranged for desks and chairs to be shipped.
Sabine de Buyzer, working in the accounting department, leaned into her computer and scanned a row of numbers. Candelia was doing well. Its revenue that week was outpacing expenses, even counting taxes and salaries. “We have to be profitable,” Ms. de Buyzer said. “Everyone’s working all out to make sure we succeed.”
This was a sentiment any boss would like to hear, but in this case the entire business is fake. So are Candelia’s customers and suppliers, from the companies ordering the furniture to the trucking operators that make deliveries. Even the bank where Candelia gets its loans is not real.
Candelia is one of a number of so-called “Potemkin” companies operating in France. Everything about these entities is imaginary from the customers, to the supply chain, to the banks, to the “wages” employees receive and while the idea used to be that the creation of a “parallel economic universe” would help to train the jobless and prepare them for real employment sometime in the future, these “occupations” are now serving simply as way for the out-of-work to suspend reality for eight hours a day. Here’s The Times again:
These companies are all part of an elaborate training network that effectively operates as a parallel economic universe. For years, the aim was to train students and unemployed workers looking to make a transition to different industries. Now they are being used to combat the alarming rise in long-term unemployment, one of the most pressing problems to emerge from Europe’s long economic crisis.
Ms. de Buyzer did not care that Candelia was a phantom operation. She lost her job as a secretary two years ago and has been unable to find steady work. Since January, though, she had woken up early every weekday, put on makeup and gotten ready to go the office. By 9 a.m. she arrives at the small office in a low-income neighborhood of Lille, where joblessness is among the highest in the country.
While she doesn’t earn a paycheck, Ms. de Buyzer, 41, welcomes the regular routine. She hopes Candelia will lead to a real job, after countless searches and interviews that have gone nowhere.
“It’s been very difficult to find a job,” said Ms. de Buyzer, who like most of the trainees has been collecting unemployment benefits. “When you look for a long time and don’t find anything, it’s so hard. You can get depressed,” she said. “You question your abilities. After a while, you no longer see a light at the end of the tunnel.”
This comes as Europe’s long-term employment problem deepens and triggers what we have described as a sell-fulfilling prophecy wherein unemployment leads to lower aggregate wages which in turn spells lower consumer spending, crippling the economy and discouraging companies from hiring:
Yet long-term unemployment — the kind that Ms. de Buyzer and nearly 10 million others in the eurozone are experiencing — has become a defining reality.
Last year, a staggering 52.6 percent of unemployed people in the eurozone were without work for a year or more, the highest on record, according to Eurostat, and many of those have been jobless more than two years.
“If you have a significant part of the population that’s not integrated, they won’t increase their spending, which dampens a possible recovery,” said Paul de Grauwe, a professor of European political economy at the London School of Economics. When a large number of people go jobless for long stretches, “you also subdue optimism, which will weigh on an economic turnaround”…
“It’s worrisome because we’re talking about many people who have been out of work for a very long time,” said Stefano Scarpetta, the director of employment, labor and social affairs at the Organization for Economic Cooperation and Development. “Their skills can become obsolete. They get stigmatized. They risk being disconnected from the workplace and society, with negative implications for them, their families and the economy.”
Of course, in today’s global economy, it’s difficult to propser even if you’re a make-believe company which is why it shouldn’t surprise you to learn that “Animal Kingdom”, a fake pet store, is on the verge of fake bankruptcy:
She looked at a stack of invoices, including some orders from virtual companies that had not been paid. “If this keeps up we’ll go out of business,” Mrs. Banuelos said, handing the papers to two women with instructions to follow up. “What’s our strategy to improve profitability?” she asked the group.
But never fear Potemkin companies, because you are not alone. There are other entities out there who are going bankrupt on paper while making things up as they go along in a “parallel” universe — those entities are called “central banks.”
Yesterday, New Yorkers walking by the Ocean Luxury Rental apartment building at 1 West St around 10:40am, were greeted with a gruesome sight: a 29-year-old man had just jumped to his death from the 24th floor.
According to initial reports, the man landed on a car that was driving toward the Battery Tunnel at the time. He was pronounced DOA at the scene.
Today, we learn that the tragic incident was merely the latest banker suicide, when according to the NY Post the still jumper was the latest in a long series of investment bankers who have decided to take their own life.
The 29-year-old man has been identified as Thomas J Hughes. The youngest of three brothers, Thomas was educated at the $52,000 a year Canterbury School in Milford, Connecticut and graduated with a degree in economics at Northwestern University where he was on the Varsity squash team before heading to Wall St and getting a job with Citibank
Most recently he was an associate at investment bank Moelis.
Hughes plunged from the 24th floor of the luxury Ocean apartment building at 1 West St. at about 10:40 a.m. and landed on a guardrail near the northbound Battery Park Underpass, narrowly missing a black SUV, in what appears to have been a premeditated suicide.
The man’s body was mangled by the impact, leaving one of the vehicle’s passengers horrified, witnesses said.
“I went outside, and the woman in the car was screaming, ‘I didn’t know where he came from!’ ” said Hans Peler, 48, a manager at the building’s parking garage. “It happened right in front of our guy who waves cars in with the flag. He was so shaken up, I told him to go home.”
A spokeswoman at Moelis & Company shared her condolences according to the Daily Mail: “We are saddened by the news of Tom’s death and send our sincere condolences to his family and friends at this very sad time. “Tom was a talented and valued team member and a positive force in our firm. He will be greatly missed.”
John Hughes, the father of the investment banker, said that he fears his son turned to drink and drugs to cope with the stress of work. He said Thomas had been under a ‘lot of pressure’ and that he even had to work on a recent holiday in the Bahamas, adding that his son was someone who “liked to work hard and liked to party” and feared that he found release in illegal drugs which turned him suicidal.
‘Thomas was a happy, jovial, successful, good looking, very sociable individual.
‘The only explanation is that I know he’s been working very hard and has been under a lot of pressure.
‘His work did not leave much time for enjoyment but that’s the nature of the assignment that he chose.
‘I also know that sometimes when one is in that environment you can turn to alcohol or other types of drugs…
‘…at a time when he was under stress he probably resorted to illegal drugs, causing this incredibly poor judgement, is probably the best I can say.
‘He must have had some problems that I was not privy to.’
Tourists in a nearby open-air bus that was stuck in traffic, saw more than they bargained for when the gruesome scene unfolded right in front of them. Then they quickly found their bearing and realized the tragedy would look perfect on their Instagram profile, and scrambled for their cellphones to snap pictures of the body, said workers at the building.
“The head hit the railing . . . Half his head is on one side of the railing, half on the other,” recalled Frank Rodriguez, 44, a handyman who was working nearby. “It’s never worth this . . . Life is too precious.”
Sources said the young banker had made several attempts to kill himself earlier in the morning, including cutting his wrists, before making the plunge.
The man — whom police did not immediately identify — was from a wealthy family in Westchester County, sources said. He had apparently become very successful on his own.
He owned his apartment in the 36-story Ocean complex, which overlooks The Battery and New York Harbor, and had just returned from a vacation in the Bahamas, sources said.
At this point we have lost count of how many bankers have taken their own lives in the past year, despite stocks rising to all time highs and an artificial “wealth effecting” environment which if nobody else, benefits the banker class. We dread to think what happens to New York’s pavements once the central planners finally lose control.
As we've been discussing of late here at PeakProsperity.com, humans desperately need a new story to live by. The old one is increasingly dysfunctional and rather obviously headed for either a quite dismal or possibly disastrous future. One of the chief impediments to recognizing the dysfunction of the old story and adopting a new one is the most powerful of all human emotional states: Denial.
I used to think that Desire was the most powerful human emotion because people are prone to risking everything in their lives – careers, marriages, relationships with their family and close friends – pursuing lust or accumulating 10,000 times more money and possessions than they need in their desire for “more.”
Perhaps it was my own blind spot(s) that prevented me from really appreciating just how powerful human denial really is. But here we are, 40 years after the Club of Rome and 7 years after the Great Financial Accident of 2008, collectively pretending that neither was a sign warning of the dangers we face — as a global society — if we continue our unsustainable policies and practices that assume perpetual growth.
Economic Denial
In the realm of economics, the level of collective denial gripping the earth’s power centers is extraordinary. Perhaps that should be of little surprise, as we're now at the height of the largest set of nested financial bubbles ever blown in world history.
The bigger the bubble(s) the bigger the levels of denial required to sustain their expansion. These bubbles are doozies, and that explains the massive and ongoing efforts to prevent any sort of reality from creeping into the national and global dialog.
To understand this pattern of avoidance of unpleasant realities, consider the behavior of cities — even entire nations — which cannot bring themselves to talk openly about their state of insolvency, let alone do something about it.
Chicago has amassed debt and underfunded liabilities totaling $63 billion, or more than $61,000 per household. Illinois already ‘enjoys’ the second highest property tax rate in the nation at 2.28 percent of a property’s value, which means the average property tax bill for the median home is $5,200 per year. On top of that, Illinois' income tax is a flat 5% and brings in a total of $18 billion from 4.7 million households, or $3,800 per household. Combined, that's $9,000 in taxes per year per average household (which earns $38,625).
Here's the brutal math: the current city deficit is 675% of current tax receipts. How exactly does Chicago plan to scrape another $61,000 out of each household on top of the existing tax bills?
It doesn’t. It has no plan. The plan is to simply remain in denial and ignore everything until it all breaks down. Which it has indeed started to do, with the ever-late, after-the-horse-has-already-left-the-barn downgrade of the city’s debt to junk status by Moodys.
Or perhaps we could note that of the six mayoral candidates seeking election to run the city of Philadelphia, not one has even talked about its massive $5.7 billion pension shortfall during the campaign, even as they promise expanded pre-kindergarten programs and tax cuts. Not one. Do you think that any of them has an actual plan to address that budget gap's dream-crushing burden?
They don’t. The only ‘plan’ they have is to remain in denial and ignore everything until it all breaks down. And then, we might guess, blame the prior administrations.
Japan has the most debt per person of any nation in the world, standing at nearly $100,000 per resident. And that burden is growing every year. Yet in 2005, Japan passed an important milestone as its population peaked at 128 million. It's been declining ever since. Japan lost 244,000 net residents in 2013, and is now trundling on a downwards population trajectory for the next 50-60 years. And at the same time, it is growing older — Japan has the second highest median age in the world.
Clearly that demographic profile is a recipe for economic shrinkage, not growth. And yet the Japanese central bankers and politicians are hell-bent on creating rapid economic growth via the twin cattle prods of reckless money printing and excessive government borrowing. How is it that the leaders of Japan have convinced themselves that rapid economic growth is what they need (instead of the more rational and opposite case of managed economic shrinkage)? What’s their plan, exactly?
They have no plan. The plan is to simply remain in denial and ignore everything until it all breaks down.
The same story is written everywhere, with every example sharing the same common element of presumed perpetual growth. Everybody plans on growing steadily, forever into the future, amen.
The United States is no different. It's own entitlement shortfalls, pegged at anywhere from $60 trillion to $220 trillion, are themselves still derived with the assumption of future growth.
Here’s the ‘plan’ for the US according to the CBO:
Yes, the ‘plan’ is for the US to someday have an economy equal to the entire current world GDP as it stands here in 2015. Does that make any sense to anybody at all? Who thinks that’s a realistic plan?
By 2080 when this is supposed to take place, the entire world will be past the peak of all known sources of energy. And Phosphate. And soil. And fresh water. And oceanic fish biomass. And who knows what else. And yet the CBO blithely assumes that US, all on its own, will be producing and consuming 100% of what the entire world does today.
The above chart helps us visualize one of the largest and most potentially destructive forms of denial on display. Our collective denial of limits. It's also good to remember that all of the entitlement shortfalls are 'only' as bad as they because of the assumption of uninterrupted US economic growth. Should economic growth fall short of that spectacular run that will take the US to a worldly level of consumption and production, then the entitlement programs will prove to be just that much more underfunded.
Ecological Denial
Sadly, it's on the natural fronts that human denial seems to be at its most extreme. Hollywood visions and SciFi fantasies aside (where humans live in sealed capsules and subsist entirely on man-made foods), humans are 100% utterly dependent on the natural world for their survival. Food, water, oxygen, and predictable temperatures and rainfall patterns provide the basics of life.
To focus on just one part, which I also detail in The Crash Course book, humans are rapidly degrading our soils upon which everything depends.
Not only are we obviously losing topsoil to erosion and generally turning soil into lifeless dirt by stripping out its biological diversity, we are mining these soils for their micro and macro nutrients yet have no coordinated plan for replacing them.
Obviously if you take minerals like calcium and magnesium out of the soils in the form of harvested grains and vegetables, they'll need to be replaced. Right now they are mainly flushed out to sea, never to be economically recovered.
The situation is pretty grim as I recently outlined in a recent report on our nation's poor soil management practices. Here’s some more context for that view:
Britain has only 100 harvests left in its farm soil as scientists warn of growing 'agricultural crisis'
Oct 20, 2014
Intense over-farming means there are only 100 harvests left in the soil of the UK’s countryside, a study has found.
With a growing population and the declining standard of British farmland, scientists warned that we are on course for an “agricultural crisis” unless dramatic action is taken.
Despite the traditional perception that there is a green and pleasant land outside the grey, barren landscape of our cities, researchers from the University of Sheffield found that on average urban plots of soil were richer in nutrients than many farms.
“With a growing population to feed, and the nutrients in our soil in sharp decline, we may soon see an agricultural crisis,” Professor Dunnett said.
“Meanwhile we are also seeing a sharp decrease in bio-diversity in the UK which has a disastrous knock-on effect on our wildlife Lack of pollinators means reduction in food.
Scientists in the UK are being matched by scientists elsewhere, noting that humanity’s general approach towards soils and farming are obviously destructive and exceptionally unsustainable. It should be setting off alarm bells that urban plots are found to be more nutrient-dense than many farms.
The loss of biodiversity is something that we just cannot yet fully comprehend, as all of nature is an enormously intertwined set of complex relationships. Of course, our failure to understand and appreciate the true role(s) of biodiversity will not protect us from the consequences of destroying it.
Any culture that ruins its soils cannot claim any sort of sophistication at all. That just flunks the basic IQ test. It’s not unlike watching a brilliant piano prodigy starve to death because he can't manage the details of making his own meals despite a well-stocked kitchen. No matter how beautifully he can play, he simply lacks the necessary skills to sustain himself.
Human security at risk as depletion of soil accelerates, scientists warn
May 7, 2015
Steadily and alarmingly, humans have been depleting Earth's soil resources faster than the nutrients can be replenished. If this trajectory does not change, soil erosion, combined with the effects of climate change, will present a huge risk to global food security over the next century, warns a review paper authored by some of the top soil scientists in the country.
The paper singles out farming, which accelerates erosion and nutrient removal, as the primary game changer in soil health.
"Ever since humans developed agriculture, we've been transforming the planet and throwing the soil's nutrient cycle out of balance," said the paper's lead author, Ronald Amundson, a professor of environmental science, policy and management at the University of California, Berkeley. "Because the changes happen slowly, often taking two to three generations to be noticed, people are not cognizant of the geological transformation taking place."
Notice the shifting baselines phenomenon happening here. Because the changes have taken place over three generations, our culture is incapable of recognizing the threat, let alone properly responding to it.
Instead of a bucolic pastime, farming has become just another mirror reflecting our destructive ways. Rather than carefully working within natural cycles, the average farming practice seeks to dominate and override nature.
Just spray and you’re done! Easy-peasy. Of course, this has the chance of knocking out your birds and your bees as well as the butterflies and who knows what other essential and beneficial insects as I recently laid out in the report: Suicide By Pesticide.
Pesticides kill the bugs we don’t want and many more besides. Herbicides knock out weeds, but also lots of other life-forms we do need and want kept alive. Fungicides knock out bad funguses and good ones alike.
This lazy approach to farming, although chemically sophisticated, lacks any real connection to the cycles of nature the most obvious one being the strip-mining of the macro and micro nutrients.
There was a reason that the herbivores roamed over the same grounds for hundreds of thousands and even millions of years. That worked to keep everything in balance and led to the creation of the thickest and healthiest soils imaginable when the American West was first plowed not all that long ago (by historical standards).
Horribly bleak study sees ‘empty landscape’ as large herbivores vanish at startling rate
May 4, 2015
They never ateanybody — but now, some of planet Earth’s innocentvegetarians face end times.Large herbivores — elephants, hippos, rhinos and gorillas among them — are vanishing from the globe at a startling rate, with some 60 percent threatened with extinction, a team of scientists reports.
The situation is so dire, according toa new study, that it threatens an “empty landscape” in some ecosystems “across much of the planet Earth.”
The authors were clear: This is a big problem — and it’s a problem with us, not them.
This slaughterand its consequences are not modest, the article said. In fact, the rate of decline is such that “ever-larger swaths of the world will soon lack many of the vital ecological services these animals provide, resulting in enormous ecological and social costs.”
Herbivores, it turns out, don’t just idle about munching on various green things. They play a vital role as “ecosystem engineers,” the paper said — expanding grasslands for plant species, dispersing seeds in manure, and, in the ultimate sacrifice, providing food for predators.
It’s the last paragraph that’s essential to understand.
Nature is so subtle and complex, that we have only recently learned that wolves shape rivers. Or perhaps the Native Americans knew that and it is our ‘modern’ culture that is only re-figuring all this out. I was confused by the thought of wolves shaping rivers the first time I heard it too, but it’s all laid out in this handy 4 minute video:
The loss of large herbivores will re-shape the landscape in ways that we do not yet understand and therefore cannot appreciate. But they are certainly ‘ecosystem engineers’ and the loss of those services, to put it in transactional terms that economists might relate to, will lead to a whole host of as-yet-undefined changes some of which we will regret.
We're Not At The Tipping Point; We've Already Past It
The roles of eating, digesting and spreading seeds and manure seem like things we can make do without, here at the apex of the petroleum age, but in a few short decades we will understand just how much energy was necessary and how much value was created by the actions of these herbivores.
In Part 2: Life Beyond The Tipping Point we look at the looming net energy crisis is mathematically certain to place increasing limits on the modern way of life, in our lifetime — likely much sooner than we want or are prepared for. In sum, despite the intent of world leaders to blindly deny the economic, ecological and energetic cliffs we are hurdling towards, society has already long past the point where painful ramifications can be avoided. At this stage, destiny will be determined at the individual level, depending on what steps each of takes now, before those ramifications arrive in force.
When last we checked in on what has to this point been a war only of words (although that could change quickly) between the US and China over the latter’s island-building efforts in the South China Sea, Beijing had just issued its 2015 defense white paper which signaled a shift in focus from “offshore waters defense” to “open seas protection” and also indicated that the PLA Air Force would move towards “offensive” strategies.
This was essentially a thinly-veiled reference to the country’s intention to set up what will effectively be a no-fly zone over the islands it’s built atop reefs in the Spratly archipelago. Earlier this month, a US spy plane had a close encounter of the PLA kind when a PA-8 Poseidon carrying a CNN crew was told to “Go Now!” by the Chinese Navy when the surveillance aircraft came too close to Fiery Cross Reef.
Washington has responded with all manner of amusing rhetoric including the characterization of China’s islands as “sand castles”. The US is also set to conduct war games with regional allies in a show of maritime force.
Now, the US says it has detected artillery on one of the man-made islands. WSJ has more:
U.S. surveillance imagery shows China has positioned weaponry on one of the artificial islands it is developing in the South China Sea, American officials said, supporting their suspicions that Beijing has been building up reefs for military purposes.
The U.S. imagery detected two Chinese motorized artillery pieces on one of the artificial islands built by China about one month ago. While the artillery wouldn’t pose a threat to U.S. planes or ships, U.S. officials said it could reach neighboring islands and that its presence was at odds with China’s public statements that the reclaimed islands are mainly for civilian use…
American officials said that the equipment more recently has either been removed or purposely obscured from view by the Chinese. It was unclear how or why the equipment was no longer visible…
A Chinese Embassy spokesman in Washington wouldn’t comment specifically on the weaponry, but said its development work within the Spratly Islands—known by the Chinese as the Nansha Islands—was primarily civilian.
“It needs to be emphasized that the Nansha Islands is China’s territory, and China has every right to deploy on relevant islands and reefs necessary facilities for military defense,” said Zhu Haiquan, the spokesman for the Chinese embassy. “However, the facilities on relevant islands and reefs are primarily for civilian purposes.”
Of course, China isn’t the only country to have built “sand castles” in the region, but it is the only country to have done so that isn’t a US ally, which Beijing quite plausibly contends is the reason for Washington’s hostility:
Ms. Hua and other Chinese officials assert that Washington has a double standard, criticizing the U.S. for being “selectively mute” about construction activities carried out by other countries in the region.
She didn’t name those claimants, but Vietnam, Taiwan, Malaysia and the Philippines have also engaged in reclamation and other work in areas they control.
“If it’s not a double standard, then there must be some hidden motives behind that,” Ms. Hua said at a daily media briefing.
Washington’s response: size matters.
U.S. officials said the reclamation efforts by those countries are on a far smaller scale than China.
In sum, China has created some 1,500 acres of new sovereign territory this year alone and has indicated it will defend that territory just as it would the mainland. That’s a problem, says US Defense Secretary Ash Carter who told an audience in Hawaii that make “no mistake”, the US intends to “fly, sail, and operate wherever international law allows, as [it] does all around the world.”
Clearly, Beijing’s position cannot coexist peacefully with Washington’s position which is why we continue to believe a shooting sand castle showdown may be in the cards.
In “Presenting The $77 Billion P2P Bubble” we took a close look at the P2P lending market which is expanding exponentially amid Wall Street’s efforts to securitize the loans on the way to creating a market for P2P-backed ABS.
As a reminder, P2P lending allows borrowers laboring under high-interest credit card debt to essentially refi via loans from individual lenders, thus transforming credit card debt into unsecured personal loans. As we noted, this only works if borrowers do not subsequently max out the credit cards they just paid off:
Consider also that P2P loans create the conditions whereby borrowers can refi high-interest debt via personal loans, transferring credit risk from large financial institutions to private lenders in the process. It’s not entirely clear what the implications of that shift might ultimately be, especially if the market continues to grow rapidly, but one thing is clear: using a relatively low-interest P2P loan to pay off a high-interest credit card is no different in principle than using a new credit card that comes with a teaser rate to pay off an old credit card. The borrower will very often max out the old card again and thus end up with twice the original amount of debt.
We were also quick to remark that as long as investors are buying the P2P-backed ABS, demand for the loans will only grow, causing lenders to lower underwriting standards in a repeat of the dynamic that led to the housing crisis:
It’s not difficult to imagine a scenario where this spins out of control as borrowers refi multiple credit cards with multiple P2P loans, only to run up still more credit card debt. Voracious demand for P2P-backed ABS will provide an incentive for P2P companies to ignore signs of trouble as they profit from providing the loans that feed lucrative securitizations.
If you needed proof of the above, we bring you the following mailer from the industry’s number-one player, LendingClub, which is now advertising the P2P-credit card refi opportunity to “pre-approved” borrowers who can get up to $35,000 with “no collateral required”:
Whether or not this kind of aggressive advertising is the result of a push to stimulate more demand for P2P loans which will in turn feed Wall Street’s securitization machine we can’t say for sure but it certainly looks as though LendingClub is hunting for more business and it’s probably fair to say that that means the race to the bottom is on in terms of recruiting underqualified borrowers.
And you thought the preliminary 0.2% Q1 GDP print from last month was bad. Moments ago, just as we warned, the BEA released its latest, first, revision of Q1 GDP (pre second-seasonal adjustments of course), and we just got confirmation that for the third time in the past four years, the US economy suffered a quarterly contraction, with the Q1 GDP revised drastically from a 0.2% growth to a drop of -0.7%: the worst print since snow struck, so very unexpectedly, last winter.
Incidentally, there has not been a US “expansion” with three negative quarters in it in the past 60 years.
Worse, the breakdown shows that far from being a non-core slowdown, consumption rose just 1.8%, below the 2.0% expected, and contributed just 1.23% of the bottom line GDP number. This was the worst Personal Spending contribution since Q1 of last year, when revised GDP dropped by -2.11%.
What is disturbing is that as noted before, inventories contributed the biggest component of Q1 GDP growth, adding $106 billion in nominal “growth.” Without that contribution, annualized GDP would have been worse than -3%!
And worst of all, was the plunge in corporate profits. According to the report:
Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) decreased $125.5 billion in the first quarter, compared with a decrease of $30.4 billion in the fourth.
Profits of domestic financial corporations decreased $2.6 billion in the first quarter, compared with a decrease of $12.5 billion in the fourth. Profits of domestic nonfinancial corporations decreased $100.4 billion, in contrast to an increase of $18.1 billion. The rest-of-the-world component of profits decreased $22.4 billion, compared with a decrease of $36.1 billion. This measure is calculated as the difference between receipts from the rest of the world and payments to the rest of the world. In the first quarter, receipts decreased $28.9 billion, and payments decreased $6.5 billion
Or visually, here was the third largest corporate profit crash since the financial crisis:
In short: welcome to the recession, which however will soon be double seasonally adjusted into another flourishing, of only stiatistically, “recovery.”
Bitcoin was supposed to be perfectly anonymous and completely untraceable: so much so that its true believers, such as libertarian Ross Ulbricht, aka Dread Pirate Roberts, felt empowered to launch the Silk Road, an underground online shopping bazaar similar to Amazon only one selling drugs and various other illegal paraphernalia.
The Silk Road quickly became massively successful and extremely profitable: so much so that Ulbricht promptly forgot the idealism that made him launch the project and quickly subverted the power and wealth it provided him for his own selfish ways, among which ordering the assassinations of subordinates who crossed him.
It turned out neither Bitcoin, nor the project, were as safe and anonymous as Ulbricht had hoped, and moments ago the Dread Pirate was sentenced to life in prison: a heavy sentence which according to the WSJ signals “the government’s seriousness in combating Internet crime.”
The Silk Road founder faced a mandatory minimum of 20 years in prison, but federal prosecutors asked the judge to give him “substantially” more than that, arguing that a harsh sentence is necessary to deter others from following in Mr. Ulbricht’s footsteps.
The punishment is a heavy price to pay for the 31-year-old, who had pleaded with the judge to spare him his old age and “leave a small light at the end of the tunnel.”
The sentence handed down by U.S. District Judge Katherine Forrest followed an emotional three-hour hearing. Judge Forrest said she spent more than 100 hours grappling with the appropriate sentence, calling the decision “very, very difficult.”
But ultimately, she gave Mr. Ulbricht the harshest sentence allowed under the law, saying Silk Road was “an assault on the public health of our communities” by making it easy for people around the world to buy illegal drugs.
“What you did with Silk Road was terribly destructive to our social fabric,” Judge Forrest said.
Judge Forrest said Mr. Ulbricht was “no better a person than any other drug dealer” and that his high education and privileged upbringing didn’t put him above the law.
Silly pirate: in America the only companies that are allowed by law to sell you drugs are the ‘legal’ pharmaceutical corporations, whose dealers owners use all those Obamacare-funded reimbursements from selling FDA approved anti-depressants and other mind-altering substances, to then go ahead and buy back their own stock.
And yet, it is a little troubling:
For manipulating “markets”, rigging and defrauding tens of billions from ordinary investors many of whom lost their life savings because they trusted regulators would do their duty and keep “markets” honest and efficient, the US Department of Justice arrested precisely zero bankers.
For granting the 2018 World Cup to Russia, the same Department of Justice decided to make a loud political statement and arrest virtually the entire pinnacle of FIFA, even if the harshest sentence that will be handed down is some deferred prosecution settlement.
For creating his own marketplace outside the domain of the conventional monetary regime, the US unloaded a ton of bricks on a 31 year old and sentenced him to life behind bars. Because, you know, it will deter all illegal transactions hereafter.
For those who are interested in the full story of the Silk Road and how a 29-year-old revolutionized drug distribution, the following 2-part mini series by Wired is a must read.
According to Gallup, America is now fatter than it has ever been before. But how can this possibly be? After all, Americans spend an astounding 60 billion dollars a year on weight loss programs and products. After putting so much time, effort and energy into losing weight, shouldn’t we be some of the healthiest people on the entire planet?
Sadly, the truth is that obesity has become a national epidemic, and we are known around the globe for our huge size. The term “fat Americans” has become synonymous with overweight tourists, and other cultures mock us for our apparent sloth. But could there be more to this than just the fact that we eat too much? Could it be possible that we have been fattened up by design?
Before we get to that, let’s take a look at some of the cold, hard numbers. The following are some of the statistics from the Gallup survey that I mentioned above…
-The national rate of obesity has risen to an all-time high of 27.7 percent. That is up from 27.1 percent in 2013, and it is much higher than the 25.5 percent number that we were sitting at in 2008.
-At 19.0 percent, Hawaii has the lowest rate of obesity in the entire country.
-At 35.2 percent, Mississippi has the highest rate of obesity in the entire country.
-The rest of the top 10 includes West Virginia, Louisiana, Arkansas, Oklahoma, Alabama, Kentucky, Indiana, Iowa and Missouri.
And remember, those numbers just cover obesity. You can definitely be overweight without meeting the official criteria for being “obese”. According to CNN, 70 percent of all Americans are overweight at this point. To say that we have a national crisis on our hands is a huge understatement.
One of the primary reasons why most of us are overweight is due to how our food is made. The American diet is highly processed and it is absolutely packed with obesity-causing ingredients such as sugar and high fructose corn syrup. And it is well documented that some of the additives that they put into our food are highly addictive and actually make you want to eat more. In fact, it has been reported that some of the additives are about as addictive as “opiates“, “heroin” and “cocaine“. The big food corporations want us to eat as much as possible, because when we eat more of their food they make more money.
Unfortunately, being overweight is not just an issue of not looking as good as we could. As Gallup explained, a whole host of health problems are related to obesity…
The national obesity rate in 2014 was the highest that Gallup and Healthways have measured since starting to track this measure in 2008. In a handful of states, more than a third of the population is obese.
Residents in these areas are less likely to eat healthily and exercise, and are more likely to suffer from chronic diseases like high blood pressure, high cholesterol, depression, diabetes, cancer and heart attacks.
Obesity-related health problems could drive up healthcare costs and potentially have larger economic implications for states that suffer most.
The strong relationship between obesity and overall well-being suggests that interventions geared toward encouraging exercise and healthy eating, while important, may not be enough to reverse the upward trend in obesity. Gallup has found that Americans’ desire to lose weight is not matched by their efforts. The mismatch between desired weight loss and weight loss efforts may stem from deficits in other areas of well-being. For instance, if residents don’t have a strong sense of purpose, struggle financially or lack supportive relationships, it will be much more difficult for them to buy healthy food, exercise regularly and achieve their weight loss goals.
Cancer, heart disease and diabetes are all huge money makers for the medical establishment. If you can believe it, 100 billion dollars was spent on cancer drugs last year alone. So there are people out there that are becoming exceedingly wealthy from all of our misery.
In addition, it is a fact that being overweight shaves years off of our lives. Just consider the following information that was shared by Natural News…
Published in the journal The Lancet Diabetes & Endocrinology, a study comparing young men and women of healthy weights to young obese individuals found that those who were overweight lost about 8.4 years off of their lives if they were men and 6.1 years off of their lives if they were women.
Similarly, the young obese men suffered 18.8 more years of poor health leading up to their early deaths compared to men of healthy weight, while young obese women suffered 19.1 years of poor health. Even when obesity emerged just in old age, both men and women were found to lose years off of their lives: for men, an average of 3.7 years and for women about 5.3 years.
So why doesn’t the medical establishment do more to help us lose weight and keep it off?
Well, if we were all at a healthy weight they would lose a tremendous amount of money. Right now, if the U.S. health care system was a separate country, it would be the 6th largest economy on the entire planet. The sicker that all of us are, the more money the medical establishment makes.
And then of course there is the massively bloated weight loss industry. As I mentioned above,60 billion dollars a year is spent on weight loss programs and products in the United States. If we were all at a healthy weight, we wouldn’t need to spend all of that money.
Tragically, most of those programs don’t work in the long run anyway. At least that is what one scientific study discovered…
In the end, the advice and products offer virtually no long-term return on investment—measured, of course, in pounds permanently lost. According to a 2006 study reported in The New England Journal of Medicine, most people who participate in weight-loss programs “regain about one-third of the weight lost during the next year and are typically back to baseline in three to five years.”
So what is the solution?
The key is to make healthy choices a lifestyle and not just a one time event.
If you “go on a diet” or you “do a cleanse”, but then you just go back and do the same things that you did before, you are going to end up at the exact same place you started.
If we want to be healthy, what we need to do is to design our lives so that we are doing the right things consistently. We need to be physically active, we need to eat healthy (lots of fruits and vegetables), and we need to avoid the things that we know will make us fat.
In the end, it isn’t that complicated. Thanks to the Internet, there is lots and lots of great health information out there that you can access for free. But you have got to be willing to make the right choices and to do the right things consistently.
Robert Shiller is a professor of economics and finance at Yale University. He is the author of Irrational Exuberance, which in 2000 predicted the collapse of the tech bubble and is now in its third edition. He was awarded the Nobel Prize in Economic Sciences in 2013 for his work on asset prices and financial market behavior.
In the attached interview he observes that the recent equity run-up seems to be driven more by fear than by exuberance, as a lack of confidence in the future prompts investors to save more and thereby bid up asset prices.
Below is an interview he gave to Goldman Sachs’ Allison Nathan
Allison Nathan: Are US stocks overvalued today?
Robert Shiller: I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.
But the CAPE ratio is not the only metric I watch. In my book Irrational Exuberance (3rd Ed., Princeton 2015) I discuss several metrics that help judge what’s going on in the market. These include my stock market confidence indices. One of the indicators in that series is based on a single question that I have asked individual and institutional investors over the years along the lines of, “Do you think the stock market is overvalued, undervalued, or about right?” Lately, what I call “valuation confidence” captured by this question has been on a downward trend, and for individual investors recently reached its lowest point since the stock market peak in 2000. The fact that people don’t believe in the valuation of the market is a source of concern and might be a symptom of a bubble, though I don’t know that we have enough data to prove it is a bubble. In general, I try to get a sense of investors’ excitement and anxieties through these kinds of measures and even by just reading the news. You might say that’s very unscientific, but I do what I can to understand the state of mind of investors, which I think is very important in understanding market moves.
Allison Nathan: Wharton professor Jeremy Siegel argues that using S&P 500 earnings data for the CAPE ratio inflates it. What is your response to this?
Robert Shiller: Jeremy Siegel’s 2013 paper that makes this argument does say that the CAPE ratio is useful. He just wants to make an improved CAPE ratio. And he proposes an alternative based on National Income and Product Account (NIPA) earnings, which he says yields a CAPE ratio that has predicted returns better, at least over the time period for which he has these earnings data. I think it is an interesting paper. But I am not ready to endorse the switch to NIPA earnings partly because they are conceptually a little different, valuing not just publicly traded stocks but also other companies. But the critical point he makes is that NIPA earnings—at least as of 2013—were higher than S&P 500 earnings, which made the market look less overvalued. Given that market valuations have continued to rise, I think that discussion has faded somewhat.
Allison Nathan: Is the equity market a bubble today?
Robert Shiller: I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there iscertainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going. So there is a bubble element to what we see. But I’m not sure that the current situation is a classic bubble because I’m not certain that most people have extravagant expectations. In fact, the current environment may be driven more by fear than by a sense of a new era. I detect a tinge of anxiety and insecurity now that is a factor in markets, which is quite different from other market booms historically.
Allison Nathan: How else does this period of apparent equity overvaluation compare to equity booms in the past?
Robert Shiller: This time around, bonds and, increasingly, real estate also look overvalued. This is different from other over-valuation periods such as 1929, when the stock market was very overvalued, but the bond and housing markets for the most part weren’t. It’s an interesting phenomenon.
Allison Nathan: What explains this phenomenon of asset valuations looking high across the board?
Robert Shiller: There are multiple answers to that question. But if I had to oversimplify with just one idea, it would be what I just alluded to a moment ago—that people are not confident in their future. They remember the financial crisis, and they worry. They hear about inequality through the Occupy Wall Street Movement and in many other places, and they worry where they will fall on the inequality spectrum in a decade or so. They observe the amazing but perhaps unsettling rise of information technology (IT), and they worry. As a result of all of this anxiety, they want to save more. But given the lack of options to invest in at a high return, they end up just bidding up the prices of existing assets. That, in turn, creates disappointment, more concern, and perhaps the feeling that they might be too late because of how much the market has already risen. But they still invest in it because of their anxieties.
Allison Nathan: What does this mean for market stability?
Robert Shiller: It means that the market could keep going up like this for some time. Its been an amazing run and looks like something that can’t keep going indefinitely, but it might continue for several more years. So market bulls may be right that the market runs further. I think that could happen too. But I take a different view of the drivers of these runs; I tend to view them as more irrational. I just don’t know when this bull market will end. And it might end very badly.
Allison Nathan: How concerned are you about a meaningful correction in the next six months to a year?
Robert Shiller: My concern has risen with the market. There could certainly be a correction in the next year. But the problem is that a correction might not come for five years. We just don’t have any way to forecast when it will come.
Allison Nathan: Was it appropriate for Fed Chair Janet Yellen to express concern about equity valuations?
Robert Shiller: I think that there is a moral imperative for Fed leadership to express some opinion about the market. They have a staff of experts—a whole research army—to study these issues, and people look to the Fed as an authority. Believers in efficient markets would say that we shouldn’t care about these opinions; that the market is smarter than any individual or any research team. But I disagree. I think that the market is not smart about these sorts of things and that we do need leadership from people who study these questions. And so I applaud Janet Yellen for making that statement, which helped put the current state of the market in perspective. One reason why the boom in the 1990s went on as long as it did is that Fed Chairman Alan Greenspan made very little of worries about the market. At one point he used the term “irrational exuberance,” which led to a sharp drop in markets, but he never came back to that theme.
Allison Nathan: Of all the expensive asset classes today, which looks the most convincingly like a bubble?
Robert Shiller: The bond market looks the most unusual relative to history, with real US yields just off record lows of recent years. The difference, though, between the stock market and the bond market is that historically the bond market doesn’t seem to crash like the stock market. Notably, if you go back to 1929, there was a huge crash in the stock market and not much action in the corporate bond market. That might come across as a surprise, but it’s history. We are now in different times, though, with a very long run of very low interest rates that has affected many countries in the world. So there could be a big correction in the bond market. I’m not forecasting that because I don’t like to forecast things that almost never happen. But it could happen. And that’s the problem we face.
Allison Nathan: What should investors do when so many assets look expensive?
Robert Shiller: I am not an investment advisor. But I would say that the main implication for most people is that they should save more because their portfolio probably won’t do as well as they imagined. And if they’re saving for some distant goal like retirement, they might be disappointed. People have learned about the power of compound interest. But what they don’t understand is that if interest rates are zero, you don’t get any compound interest. I think that there is complacency among investors today. People have seen how well the stock market has done over the last century. But the market might not do so well the next time. So you have to consider whether you are saving enough.
And as a general principle, I think people should diversify across assets and geographies because there is no way to predict what any one asset will do with any accuracy. I’ve been talking down US stocks because of their high valuation, but I would invest something into US stocks; I would just put a heavier contribution in stocks around the world, where CAPE ratios look lower. I keep coming back to the theme that there are lots of places outside of the US to invest. And I would also own bonds, real estate and commodities. Commodities are overlooked by many investors but they are an important part of an investing portfolio.
The reality is that people are not very good at diversifying. This has been documented in studies. They tend to be distracted, and focus too much on one sector or one thing that they have heard. They also tend to focus on their own country. There’s no reason why one should invest only in one’s own country. Quite the contrary, some people make the extreme statement you should short your own country and invest only elsewhere. I wouldn’t go to that extreme, but it is a plausible argument.
Allison Nathan: But is the strong US growth story relative to elsewhere enough to warrant buying US stocks?
Robert Shiller: The US looks pretty good and in some ways brilliant. The exciting news about technology seems to come largely from the US. For example, fracking, which is predominantly a US technology, transformed the energy market, and just within the last five years or so. And many electronics and IT advances are also coming from the US. So there is reason to believe in this country.
But I think that we also have to understand that we tend to be biased. One sees and appreciates one’s own country; that’s human nature that one has to correct for. Amazing things can happen elsewhere as well. You see that in much of the developing world; over the last half-century, there’s been remarkable economic progress and growth. And we’re going to see more and more advancement in those countries. So maybe the high US CAPE ratio is partly justified. But I think we have to nourish a healthy skepticism as investors and not get swayed too much by the idea that we’re living in a new era here.
Previously we looked at funding markets and currency proxies for detecting the end to the “dollar” pause that began on March 18. Broader credit markets agree with that assessment so far, as nominal yields and the UST curve shape have started, at least, to be redrawn back into the tightening format. Nominal yields and inflation breakevens turned right at May 6 when Janet Yellen spoke more of the common sense that should be the default setting for monetary everything.
The yield curve overall across the bulk of it has moved flatter, mostly within the past two weeks. Since May 14, the 5s10s has flattened rather sharply (an appropriate oxymoron) dropping from 72 bps all the way down to 60 bps Tuesday and 61 bps yesterday. The 30-year end fell from 248 bps against the 2s down to 224 bps yesterday; from 152 bps against the 5s down to 135 bps.
As noted previously, it isn’t so much that these moves are especially established in order to confirm an actual inflection but rather that everything has started moving again in the opposite direction at largely the same time. That would tend to rule out random volatility in various components which was at least arguable from May 6 at first. With the entire credit and funding markets turning now together, it increases the likelihood that this is something meaningful.
And that is what makes this all the more important, as if I am using the correct interpretation credit and funding markets are all backward in relation to where orthodox narratives suggest and often demand they be. If Yellen’s speech alluding to a stock bubble on May 6 turned the “exit” to ZIRP back on, then credit and funding should be behaving in the same manner as the middle of 2013 – rising nominal yields and a steeper yield curve (eurodollars too). But that was the behavior of the period just prior to May 6, when it was quite clear that credit was taken with the belief, of March 18, that the FOMC had changed its mind away from the exit.
That has really been the persistent trend since November 2013, where the more the FOMC talks about being convinced of a full economic recovery, and thus gets closer, in their collective mind, to an exit from ZIRP, the more upside down these markets get. The only way to explain that is what I alluded to also yesterday, namely that credit and funding are finding “there will not be any normalcy and any attempt to go backward undertakes what amounts to incalculable risk of being disastrous.” In this view, “backward” applies to the idea of financial (and economic) normalcy when operative financial conditions completely prevent that:
I personally find way too much complacency in blindly believing that going from B to C will be only a minor inconvenience. It would be dangerous even under the circumstances where the system shifted from the dealers to the Fed and back to the dealers, with an infinite series of potential dangers even there. But to undertake a total and complete money market reformation from dealers to the Fed to money funds? There are no tests or history with which to suggest this is even doable under current intentions. Poszar and Mehrling’s contributions more than suggest that difficulty, but I think that still understates whether or not we ever get that far.
That, I believe, describes this upside down nature coursing through credit and funding at the moment. Whenever the Fed or its top officials (they call themselves, often, thought leaders without ever demonstrating the capacity for wide-ranging curiosity) get back to this aching, nagging fear of not confirming their past success, eight years is a long time to be in an “emergency” after all, credit markets reciprocate with their irritating fear of centrality in these paradigm shifts themselves.
You could make the case that this is one instance, spread among many facets, where “markets” are just throwing a tantrum having become used to, and dependent on, central banks. There is undoubtedly some of that at work, as certain parts of the financial markets are unduly comfortable with the way things are at this moment, but that is much more so related to the risky parts of finance than the basis here. Funding markets, in particular, are the most closely associated with the changes to come (if, once more, we ever get that far) very much aware that this all amounts to a change not just in interest rates but in the very character of operation. That is far different than just being emotional over the Fed no longer babying and nursing closely financialist components (a reception carried more much openly by stocks).
Critics of the massive interventions (including institutions like the BIS) spawned since late 2008 have maintained that eventually they produce a market system that no longer operates like a market system. We have seen that in some moments as stocks will behave contrary to how they used to, “risk off” on seemingly good news and such, all in the view of monetary policy with usurped primacy. In the case of credit and funding, I think it is actually worse than that as it is the investors and financial agents playing the role of realism, literally making for this upside down re-arrangement. That is why November 2013 looms over everything, as the financial system peered closely at what the “exit” might look like and recoiled drastically in rejection of it.
Central banks took over everything and thus changed everything; they cannot simply declare themselves successful and just give it all back. That might (stress might) have been possible had it actually worked, a true and robust economic recovery to smooth the shift, but the majority part of that November 2013 recoil was the growing acceptance, throughout 2014 and into 2015, that it was never coming in the first place.
With the BEA set to double-adjust GDP prints in an effort to help eliminate the kinds of economic contractions “residual seasonality” that showed up in Q1, the statistically flourishing US economy should be deemed healthy enough to withstand the dreaded “liftoff” which, as Janet Yellen gingerly confirmed in a speech last Friday, is still on track for later this year. This sets up a potentially interesting situation because frankly, no one quite knows what will happen when someone actually moves to tighten policy. As we mentioned last week, global central banks have cut rates 572 times since Lehman or, once every three days.
Even the mere mention of less-accommodative monetary policy by everyone’s favorite bearded bureaucrat back in May of 2013 was enough to trigger EM carnage and as we’ve outlined ad nauseam, it’s hard to say what effect a rate hike cycle will have on credit markets that are devoid of liquidity, although we’ve seen a few examples lately (i.e. the bund VaR shock) of just how quickly things can go awry in broken markets.
Indeed, rates have been so low for so long, that many of the traders who will be on the front lines if and when the Fed ever does decide to start down the long path to normalizing policy have never, in their professional careers, seen a rate hike. Bloomberg has more:
This youth brigade — call it Wall Street’s class of 2009 – – is about to learn what higher rates from the Federal Reserve look like first hand. Their inexperience has left older, more experienced colleagues wondering how these relative youngsters will fare…
While the average Wall Street trader is 30 years old, about 30 percent started within the past five years, according to Emolument.com, a salary comparison website, which compiles data from its 50,000 financial services users. And two-thirds of traders have never seen a full Fed tightening cycle.
“What we’ve been through the past four years has been ‘what is the fastest, easiest money to find?’” said El Mihdawy, who studied economics at Columbia University. “If one day that narrative changes and investors no longer believe in the omnipotence of central banks, then it will bring back what was old school — fundamental analysis and really caring about what’s going on.”
While we certainly doubt that anyone will go back to “caring about what’s going on” anytime soon, what with the Mario Draghis and Haruhiko Kurodas of the world still knee deep in trillion-euro and trillion-yen debt monetization programs, and while we’ll be the first to acknowledge that even the industry’s most revered vertans are prone to making mistakes in markets which have been rendered completely inefficient (take the Bill Gross bund experience for example), one might still argue that when one in three traders started their careers in the post-crisis monetary twilight zone ,surviving a rate hike cycle in today’s mangled markets could prove to be quite the trial by fire.
Then again, as Bloomberg goes on to note, many Wall Street newcomers simply function as the carbon-based switch flippers for the algos which are actually running the show which sets up an even more frightening scenario wherein those with no experience operating in a normal economy with functioning capital markets are in control (or, perhaps more appropriately, “are being controlled by”) a legion of stop-hunting, vacuum tubes:
El Mihdawy, who once dreamed of becoming a professional tennis player, now works on Cantor Fitzgerald LP’s equity derivatives desk after joining the firm in 2009. That’s the same year Harvard University graduate Ezra Rapoport was venturing into finance, signing on with Transmarket Group to automate the firm’s bond-trading platform.
Rapoport embodies Wall Street’s evolution in more ways than one, including how computers dominate functions that used to be done by humans. Now 31, he’s a trader at Flammarion Capital Partners, a New York-based firm that makes markets in fixed-income futures through automated programs.
Everyone at Flammarion is in their 20s or 30s, he said.
Just as we noted back in December, this is the future of “trading”: 25-year-olds mining data faster than a fat finger can press buy. Draw your own conclusions about what this means for volatility in a rising rate environment.
For more perspective on rising rates and inexperienced traders, see the following interview with DoubleLine’s Jeff Gundlach. Here are a few excerpts:
“I became really interested in how wealth is destroyed and how people extrapolate environments forward.”
“Understanding the debt pyramid got me to a place that maybe will work in the future”
“There’s often one really big issue around which everything else ultimately seems to center.”
“More recently I’ve been thinking about two things, [first is] demographics which will help me think about Europe and China and Japan and places like that where the demographic tilt is at historic proportions.”
“The second is rising interest rates. The experience that many investment operations have with rising rates for most of us is very low for some it’s nonexistent.”
This past week, Houston, where I live, was flooded by a torrential down pour. However, it was not the rain itself that was the problem, it was the surge in rivers that flow through Houston. As far away as Austin and Dallas, rainfall had already began to flow into the San Jacinto and Colorado rivers which eventually culminated in rising water levels in Houston. Furthermore, Houston is designed so that water flows into the streets and eventually into the bayou and rivers out to the Gulf of Mexico. It didn't take much more rainfall to send the rivers cresting over their banks creating a castastrophe following Memorial Day.
Like Houston, the financial system has been flooded with liquidity over recent years which has ultimately only had one place to flow – the financial markets. That excess liquidity has sent prices soaring to record highs despite weakting macro economic data. While many hope that the Central Banks can somehow figure out how to keeps the rivers of liquidity from overflowing their banks, history suggests that eventually bad things will happen. Of course, for investors, that translates into a significant and irreperable loss of capital.
As I discussed earlier this week, the next decade will likely be rather disappointing for investors. To wit:
"When using a relative comparison, in this case 10-years, what Shiller's data does provide is a key understanding as to what market returns should be. The chart below compares Shiller's 10-year CAPE to 10-year actual forward returns from the S&P 500."
"From current levels history suggest that returns to investors over the next 10-years will likely be lower than higher. We can also prove this mathematically as well as shown.
Capital gains from markets are primarily a function of market capitalization, nominal economic growth plus the dividend yield. Using John Hussman's formula we can mathematically calculate returns over the next 10-year period as follows:
(1+nominal GDP growth)*(normal market cap to GDP ratio / actual market cap to GDP ratio)^(1/10)-1
Therefore, IF we assume that GDP could maintain 4% annualized growth in the future, with no recessions, AND IF current market cap/GDP stays flat at 1.25, AND IF the current dividend yield of roughly 2% remains, we get forward returns of:
(1.04)*(.8/1.25)^(1/10)-1+.02 = 1.5%
But there're a "whole lotta ifs" in that assumption. More importantly, if we assume that inflation remains stagnant at 2%, as the Fed hopes, this would mean a real rate of return of -0.5%. This is certainly not what investors are hoping for."
But despite the math, historical precedence or statistical tendancies, hopes run high that "this time is different."
This weekend's reading list explores the current state of the markets – is it rational or is it just nuts?
"Perhaps the best method for observing the economy though is to forget the statistically massaged economic data and just look at it through the lens of the market. I am not a believer in a strong version of the efficient market hypothesis but there is a wisdom of crowds and markets are right a heck of a lot more often than economists (even a clowder of economists; apparently their performance doesn't improve when their predictions are aggregated). And so, while I do find some uncomfortable year over year comparisons in some of the economic data, it is hard to square with what is happening in the currency, commodity, bond and stock markets."
"In 1841, Scottish journalist Charles Mackay wrote the classic, 'Extraordinary Popular Delusions and the Madness of Crowds.'
If he were alive today, Mackay would likely have had a field day with the new website, Mergerize, which by its own description, 'crowdsources predictions on mergers and acquisitions.'
It's only a matter of time before those crowdsourcing M&A speculation have their day of reckoning, as well. In the meantime, might as well play the slots. More fun and better odds."
"Unfortunately, the Federal Reserve has now created the third financial bubble in 15 years. Focusing on two variables – inflation and unemployment – the Fed has missed the most important consideration: the risk to financial stability. It is the same mistake the Fed made during the housing bubble. This mistake will ultimately end just as tragically. The only question is how much worse the Fed makes the situation in the interim. If investors develop a fresh preference for risk-seeking (which we can never rule out), we would observe that shift through the behavior of market internals, and we would expect to dial back our concerns about immediate market risk (though we would encourage a material safety net in any event). Even if that occurs, don't think for a second that the eventual outcome for the financial markets or the economy would ultimately be better for it."
"'Investors are being dragged kicking and screaming into the stock market because, while valuations are not cheap, there really aren't any better options,' Tom Mangan, who helps oversee about $6.4 billion as a money manager at James Investment Research in Xenia, Ohio, said by phone. 'Investors will have to identify undervalued stocks individually, not by sector.'
While elevated, the U.S. stock market's overall valuation isn't far from its historical average. The S&P 500's price-earnings ratio is 18.8, about 2.4 points above the 10-year mean and 38 percent below its 1999 record."
"From Bianco's note: 'Our PE/VIX market emotion indicator climbed to 1.3 on S&P trailing PE of 18 and 3m avg VIX of 14. A level between 1.2-1.5 signals complacency. There was similar complacency going into summer last year, with S&P trailing PE at 17.5 and a calm market kept VIX at 10-14. The complacency persisted to July but then faded as the risk of higher yields came on falling unemployment, but yields ultimately stayed subdued preventing any major summer sell-off. Yet a selloff began in late Sept as oil prices started cracking and the dollar climbing.'
Bianco illustrated this in a pair of charts, the bottom one decomposing the PE/VIX to its various components.
As you can see, this measure signaled similar warnings ahead of the dotcom bubble bursting the global financial crisis coming to a head."
"Although the events of 1999 are ancient history by many standards, some very clear memories no doubt remain for many investors. With technology and biotech stocks once again hot, a number of comparisons to the last bubble have been made. But the current environment can't come close to matching 1999, either in terms of valuations or in the sheer madness of the markets."
"The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I'm here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they're teaching at business school today is probably the most misguided concept everywhere."
"'In a bull market, there's a tendency for investors to think they're brilliant,' says Brad Barber, a finance professor at the University of California, Davis, and an expert in behavioral finance. Indeed, as share prices climb, investors' confidence grows and they start making all kinds of dubious claims.
Here are seven comments you have probably heard from friends—and that may have escaped your own lips."
"Because 'normal people' just do not think like this…" Tyler Durden via Zerohedge
If ever there was a day (or week) for this clip, today is it… "we got this… yay record highs…oh wait…"
First things first… "sustainable"
This was the worst week for US Macro in 5 weeks and today was the worst day for US Macro since last Thankgiving!
* * *
May ends with Silver best (+3.7%), bonds worst (-2%), with stocks just outperforming gold…
Treasury yields rose on the month with 30Y up 12bps, 2Y up around 4bps – but the last 10 days or so have seen notable strength…
"Sell (Trannies) In May" appears to have worked and the rest of the major indices scarped out small gains… (Trannies down 5 of the last 6 months and over 11% off the November highs)
Energy stocks were the worst in May and healthcare surged thanks to a huge squeezeback higher in Biotechs…
On the week, Trannies were also worst (down 4 of the last 5 weeks) making it the worst 3-week run (-5.4%) since Oct 2014 – notice the S&P managed to very briefly tag green for the week before tumbling back..
The last 6 weekly closes on the S&P (from oldest to most recent) are 2117, 2108, 2116, 2122, 2126, 2115 – less than 1%!
And finally, Trannies were the worst performer today also…and an ugly close
To round out the equity excitement – here are futures from Friday's close showing all the volatility away from US sessions…
Treasury yields and stocks decoupled mid-week – but stocks wanted to catch back down…
But in the week Treasury yields collapsed…led by the long-end…with some month-end, week-end profit taking at the close
With a dramatic 13bps flattening in 2s30s…the biggest weekly flattening since April 2013…
The USDollar fell for the 3rd day in a row but ended the week higher by around 0.7% – Aud was the weakest of the majors and Swissy strongest
Despite the swings in the dollar, gold continued to go absolutely nowhere (as did Silver) but copper tumbled as crude soared…
And finally crude… What is there to say when production in Russia, America, and OPEC are all at record highs on a day when growth is shown for its weakness. This is Crude's best day in 7 weeks! Epic short squeeze into last trading day of the month and ahead of next week's OPEC meeting
and your guess is as good as ours as to what stocks think of oil…
Charts: Bloomberg
Bonus Chart: Because well, you have to laugh really…
In “This Is What Happens When Millennials Try To Find A Job,” we discussed high youth unemployment rates and the difficulty many recent college graduates have in finding a job in today’s double-adjusted US economic “recovery.” We also noted that a lack of gainful employment opportunities and stagnant (at best) wage growth are forcing some millennials to delay “important life decisions … like buying a house.”
So while we were certainly not surprised to learn that excessive student loan and credit card debt were responsible for keeping many of America’s youth from buying their first home, we were surprised to discover that for millennials in around one third of US states, the chief impediment is apparently “not knowing how to start”…?
On Thursday evening we outlined what we called the “pension ponzi”, whereby state and local governments resort to the issuance of pension obligation bonds to plug underfunded pension liabilities. The idea is to arbitrage the spread between coupon payments and what the pension funds can presumably expect to make by investing the proceeds from the bond issue. Here’s a refresher:
Much like transferring a balance on a high interest credit card onto a new card with a teaser rate, this gimmick only works if you do not max out the original card again, because if you do, all you’ve done is doubled your debt burden. As it relates to pension liabilities, this means that what you absolutely cannot do is use the cash infusion as an excuse to get lax when it comes to pension funding because after all, that’s what caused the problem in the first place.
Aside from the rather obvious fact that borrowing huge sums of money to paper over problems has a tendency to promote the very same type of irresponsible behavior that got the borrower into trouble in the first place thus setting the stage for a scenario that ends up being twice as bad as it was initially, there’s also the fact that, as documented in these pages extensively, investment return assumptions for public pension plans are often at odds with reality. That is, projecting a 7% return in a world governed by ZIRP and NIRP means that in the best case scenario you are being absurdly optimistic and in a worst case scenario you’re likely taking greater risks in an effort to maximize returns.
The reason why officials are resorting to pension obligation bonds is that state and local governments in the US are finding themselves mired in fiscal crises, some of which are the result of poor policy decisions and others stem primarily from exogenous factors such as slumping oil prices. Compounding the problem was an Illinois Supreme Court decision which struck down a pension reform bid. That effectively set a legal precedent and left states and municipalities with fewer options when it comes to closing funding gaps.
We’ve covered all of this extensively and we thought we had likely seen it all when it comes to excuses for state and local budget gaps but in fact we have discovered yet another way for local governments to find themselves fiscally challenged: “true biker shootouts.”
The now infamous biker breastaurant shootout that unfolded two Sundays ago in the parking lot of a Waco, Texas Twin Peaks Sports Bar And Grill led to the arrest of more than 170 bikers and as you might imagine, that type of influx into the prison and legal system doesn’t come cheap. Here’s The Waco Tribune-Herald with more:
As lawyers threaten civil rights lawsuits, seek bond reductions and clamor that their biker clients have done nothing wrong, McLennan County is spending $7,958 a day to house those jailed in the May 17 Twin Peaks shootout.
According to county records, 173 of the 175 people who were arrested in the wake of the deadly brawl, which left nine dead and 18 wounded, remain jailed. Two bonded out with ankle monitors.
The mass arrests are presenting unprecedented challenges to the county’s criminal justice system and have McLennan County officials keeping a close eye on the potential devastating budgetary fallout from the incident. A week and a half after the shooting, the county has spent upward of $80,000 just to house the inmates.
“We’ve never had an issue of this magnitude, but another thing is all the other business here at the courthouse is still going on,” said 19th State District Judge Ralph Strother, the county’s senior judge who presides over one of McLennan County’s two primary felony courts.
It’s not just the cost of jailing the bikers that’s taking a toll, but the cost of litigation as at least 63 bikers have requested court-appointed attorneys:
Cathy Edwards, the county’s indigent defense coordinator, said of the 175 bikers at the county jail she interviewed, 63 have requested court-appointed attorneys. Edwards said she appointed 14 attorneys Wednesday to represent the bikers, including attorneys from Waco, Corsicana, Temple and Copperas Cove…
Court-appointed defense attorneys are paid $750 for a guilty plea in a first-degree felony case, $500 for a second-degree felony and $400 for third-degree and state jail felonies. They are paid the same fee if cases are dismissed.
If they itemize their time and prefer to be paid hourly, they are paid $75 for out-of-court preparation and $80 an hour while in court.
With the influx of new cases, county officials are keeping a close eye on how the cases are affecting budgets.
And although officials believe the current budget can withstand the pressure, country commissioner Ben Perry admits that “adjustments” may be necessary:
Stan Chambers, the McLennan County auditor, said if many of the bikers are released in coming days or weeks, the current county budget should be sufficient to handle the increased costs
“The commissioners court obviously has to support the decisions that law enforcement and the district attorney’s office make, and any adjustments that need to be made to the budget, we will do so,” Perry said.
So, in a hilariously absurd twist of fiscal fate, we can now add “incarcerated bikers” to the list of things which are imperiling state and local government finances in America.
It should also be noted that this serves to validate an important point we made earlier this month. Namely, that when it comes to true biker shootouts, accurately assessing the fallout ahead of time is virtually impossible.
First, earthquakes; then tsunamis; then household spending collapses for the 13th month in a row… and now Japan is dealing with a volcano. NHK reports that Kuchinoerabu-jima, a volcano on Kuchinerabu Islands (off the southern-most tip of Japan) has erupted "explosively." Officials have asked local inhabitants to evacuate the area. As yet there are no reported injuries.
*JAPAN PRIME MINISTER'S OFFICE SETS UP CRISIS CENTER ON VOLCANO
The volcano is at the southerm-most tip of Japan…
JMA Warning:
Bloomberg reports,
Japan Meteorological Agency raises warning level on volcano on island of Kuchinoerabujima, off southern coast of Japan’s Kagoshima, to highest level of 5 after “explosive” eruption.
Volcano name Kuchinoerabujima eruption alarm (residential areas) Heisei 07 minutes at 27 May 29 June 10 Fukuoka District Meteorological Observatory Kagoshima Local Meteorological Observatory
** (Heading) **
<Eruption warning to Kuchinoerabujima (eruption alert level 5, evacuation) Announces> ?Please refer to the strict vigilance (correspondence of evacuation, etc.) in a residential area of ??interest. <Pull the eruption alert level from 3 (Iriyama regulation) to 5 (evacuation)>
** (This statement) ** 1. Situation and forecast alarm matters of volcanic activity ?The new Takeshi, explosive eruption occurred in 59 minutes at 09 today (the 29th). This With the eruption, pyroclastic flow occurs, it has reached to the coast. ?Strict vigilance in Yakushima-cho Kuchierabujima residential areas the arrival of pyroclastic flow is expected ( Please refer to the correspondence) of the evacuation, and the like.
2. Target municipalities, etc. ?In the following municipalities, please strict vigilance, such as evacuation in the residential areas . Kagoshima Prefecture: Yakushima-cho
3. Such as disaster prevention on vigilance matters ?In the residential areas that stream of pyroclastic flow is imminent, strict vigilance (corresponding evacuation, etc.) Please refer to the. ?Please follow the instructions of evacuation, etc. of Yakushima-cho.?
<Pull the eruption alert level from 3 (Iriyama regulation) to 5 (evacuation)>
** (Note: The description of the eruption alert level) ** [Level 5 (evacuation)]: required evacuation and the like from the dangerous residential areas. [Level 4 (evacuation preparation)]: Prepare for evacuation in the necessary residential areas warning, disaster Required evacuation, etc. requiring assistance person.?????? [Level 3 (Iriyama regulation)]: climbing ban and Iriyama – site regulations to regulations dangerous areas Etc.. Evacuation preparation, etc. of a disaster requiring assistance person depending on the situation. [Level 2 (crater peripheral regulation)]: – site regulations of the crater around. [Level 1 (normal)]: – site regulations into the crater depending on the situation. (Note: The target area of ??evacuation and regulations, differ depending on local conditions and volcanic activity)
As Michael Snyder of The Economic Collapse blog, you may not have noticed, but our planet is becoming increasingly unstable. According to Volcano Discovery, 40 volcanoes around the globe are erupting right now, and only 6 of them are not along the Ring of Fire. If that sounds like a very high number to you, that is because it is a very high number. As I have written about previously, there were a total of 3,542 volcanic eruptions during the entire 20th century. When you divide that number by 100, that gives you an average of about 35 volcanic eruptions per year. So the number of volcanoes that are erupting right now is well above the 20th century’s average for an entire calendar year. And of course we are witnessing a tremendous amount of earthquake activity as well. Nepal was just hit by the worst earthquake that it had seen in 80 years, and scientists are telling us that the Himalayas actually dropped by an astounding 3 feet as a result of that one earthquake. How much more does our planet have to shake before people start paying attention?
Of course the things that we have been seeing lately are part of a much larger long-term trend. Seismic activity appears to have been getting stronger over the past few decades, and now things really seem to be accelerating. The following is how one news source recently summarized what we have been witnessing…
If it seems like earthquakes and erupting volcanoes are happening more frequently, that’s because they are. Looking at global magnitude six (M6) or greater from 1980 to 1989 there was an average of 108.5 earthquakes per year, from 2000 to 2009 the planet averaged 160.9 earthquakes per year: that is a 38.9% increase of M6+ earthquakes in recent years. Unrest also seems to be growing among the world’s super-volcanoes. Iceland (which is home to some of the most dangerous volcanoes on the planet), Santorini in Greece, Uturuncu in Bolivia, the Yellowstone and Long Valley calderas in the U.S., Laguna del Maule in Chile, Italy’s Campi Flegrei – almost all of the world’s active super-volcanic systems are now exhibiting some signs of inflation, an early indication that pressure is building in these volcanic systems.
But of course most Americans are never going to care about any of this until it starts affecting them personally.
Well, perhaps they should start paying attention to the warning signs. In recent weeks we have seen significant earthquakes in Michigan, Texas, Mississippi, California, Idaho And Washington. In addition, it is being reported that pressure is building in dormant volcanoes in Arizona and California. Just because we have not had a killer earthquake or a large volcanic eruption in the U.S. in recent years does not mean that it will always be that way. Right now the entire planet appears to be waking up, and this especially seems to be true of the Ring of Fire.
If you are not familiar with the Ring of Fire, just imagine a giant ring that runs around the outer perimeter of the Pacific Ocean. Approximately 90 percent of all earthquakes and approximately 75 percent of all volcanic eruptions occur within this area, and the entire west coast of North America is considered to be part of the Ring of Fire.
For so long, the west coast has been incredibly blessed not to have experienced a major seismic event. But scientists tell us that it is only a matter of time.
And right now, just about every other part of the Ring of Fire is shaking violently.
For example, a magnitude 6.8 earthquake just hit Japan on Wednesday…
A magnitude-6.8 earthquake that shook northeast Japan on Wednesday was an aftershock of the devastating 2011 quake that triggered a massive tsunami and nuclear power plant meltdown.
“We consider this morning’s earthquake to be an aftershock of the 2011 Northeastern Pacific Earthquake,” said Yohei Hasegawa, an official at the Japanese meteorological agency.
The temblor, which struck just after 6 a.m. local time (5 p.m. ET Tuesday), was sparked by the Pacific tectonic plate “subducting,” or moving under, the main land plate, he added.
Hasegawa warned that more tremors may be on the way.
Meanwhile, a series of very strong earthquakes have struck Papua New Guinea recently as well. The following comes from the Washington Post…
A powerful earthquake rattled Papua New Guinea on Thursday, the fourth strong quake to hit the South Pacific island nation in a week. The temblor prompted officials to issue a local tsunami warning, but it was lifted shortly afterward with no reports of damage.
The 7.1-magnitude quake struck about 150 kilometers (94 miles) southwest of the town of Panguna on Bougainville Island at a depth of 23 kilometers (14 miles), the U.S. Geological Survey reported.
Once again, just because things have always been a certain way does not mean that they will always be that way.
As Americans, we are not accustomed to being concerned about major earthquakes and massive volcanic eruptions, but that could soon change in a big way.
The truth is that our planet and our sun are changing in ways that are unpredictable and that our scientists don’t completely understand.
For example, a recent LiveScience article discussed the fact that scientists are deeply puzzled by the fact that the magnetic field of our planet is getting weaker 10 times faster than previously believed…
Scientists already know that magnetic north shifts. Once every few hundred thousand years the magnetic poles flip so that a compass would point south instead of north. While changes in magnetic field strength are part of this normal flipping cycle, data from Swarm have shown the field is starting to weaken faster than in the past. Previously, researchers estimated the field was weakening about 5 percent per century, but the new data revealed the field is actually weakening at 5 percent per decade, or 10 times faster than thought. As such, rather than the full flip occurring in about 2,000 years, as was predicted, the new data suggest it could happen sooner.
And in a previous article, I discussed how one scientist has discovered that activity on the sun is declining at a faster pace “than at any time in the last 9300 years” right now.
I don’t pretend to have all the answers for why these things are happening, but clearly some very unusual things are taking place.
Those men who wrote our Constitution made it perfectly intelligible to anyone who cared to read it. They also left some flexibility in its articles to ensure that as time passed and circumstances changed the document would remain viable as the indispensable protector of the republic they created and of the liberty of citizens who delegated a limited amount of their sovereign power to the national government through its provisions. And after a long and often angry ratification debate, the first congress added a bill of rights to the Constitution as that document’s first ten amendments. These amendments were fully as clear as the text — perhaps more so — but less flexible than the body of the document because they dealt with the tenets of republican liberty which, if regularly and deliberately violated by the national government, would require that Americans, to paraphrase Jefferson, demolish the existing government and erect a new one that would better safeguard their liberties and their republic’s security.
In recent decades, however, Americans have been treated to an endless stream of politicians, academics, lawyers, and pundits who describe the opaqueness of the Founder’s Constitution and the need for “experts” to decipher or infer what the document means. As a result, we now have presidents who take the country to war on their whim; politicians who are legally bribed by “campaign contributions” from rich individuals, corporations, labor unions, and foreign lobbies and governments based on an absurd reading of the Constitution; a public that is increasingly endangered by flamboyant blasphemers who seek violence and war under the protection of the First Amendment; and the routine criminality of executive branch officials who refuse to obey their oath of office to execute the laws. We also have the overwhelming majority of both political parties willing to destroy the Fourth Amendment in the name of providing for national security against an enemy they have resolutely refused to either stop motivating or militarily annihilate. Together these realities amount to a more-than-full justification for Americans to recall that, as Jefferson wrote, “it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.”
In the midst of America’s third consecutive despotic presidency — each more despotic than its predecessor, and all more than Nixon — the citizenry now sees two singularly courageous individuals standing up and saying the destruction of the Fourth Amendment must stop. The junior senator from Kentucky, Mr. Paul, and FOX’s senior judicial analyst, Judge Andrew Napolitano, have been and are saying that it is unconstitutional for any congress and/or president to order NSA to collect the electronic communications of all Americans. (NB: Note to Congressman Gowdy: Can’t you get Hillary Clinton’s e-mail from NSA? Or is the unconstitutional collection system rigged so the corrupt elite are exempt?) If the U.S. educational system was not run by people who yearn and work for despotism, and if that system taught civics and history instead of political indoctrination, the senator and the judge would not be so alone in their opposition to tyranny. (NB: Perhaps the sheep-like silence and passivity of much of the public toward this deliberate and cynical violation of their constitutionally protected rights is the best reason for destroying the federal Department of Education at the first opportunity.)
Those who support the destruction of the 4th Amendment, of course, do so because they have knowingly failed to provide for the security of the United States since Osama bin Laden declared war on the nation in August, 1996. The threat from al-Qaeda, and now from its progeny, the Islamic State, exists and is still growing because we have had three presidents who refused to either stop motivating the Islamists to attack us or to annihilate them, their supporters, and their infrastructure with U.S. military power. Instead, they have made Americans pay with the currency of their soldier-children’s lives and limbs and their liberty for the government’s deliberate failure to protect the republic against enemies foreign and domestic. Indeed, the last three presidents and their lieutenants have provided the bulk of America’s domestic enemies, and their transparently unconstitutional and enemy-protecting behavior is ample, accumulated justification for Americans to begin to look for ways to devise ”Guards for their future security.”
Last Thursday evening (21 May 2015) on Bret Baier’s excellent “Special Report”, Judge Napolitano concisely and clearly explained the intention of the White House and Congress to continue their illegal evisceration — it began with the Mr. Bush’s Patriot Act — of the Constitution’s 4th Amendment. Napolitano convincingly made his point and then another panelist — the Neoconservative Charles Krauthammer– replied that he was “dead wrong.” Krauthammer and his Neocon brothers, who labored mightily for the 2003 invasion of Iraq (lost war 1), the 2014 re-intervention (lost war 2), and now for the return ground troops to Iraq to lose again — pray God, three strikes and they are exiled to Israel — have been accurately described by the erudite political scientist Claes G. Ryn as the “New Jacobins”.
The new Jacobin does not want competition in prescribing the right model [of government]. … The new Jacobin is convinced that he knows what is best for all mankind, and if much of mankind shows reluctance to follow his lead, it is to him a sign that injustice, superstition, and general backwardness or a misconceived modernistic radicalism is standing in the way of progress. The new Jacobin is not content with voicing his own ideas and letting the peoples of the world make their own decisions. They must recognize the superiority of his principles. Governments that do not do so appear to him perverse. … The world must be rid of unenlightened, undemocratic societies. If persuasion and diplomatic pressure fail, the forces of democracy should be willing to resort to military means, especially against powers that have the temerity of openly defying the United States. The new Jacobin desires strong, activist government that can enact what he considers virtuous purposes.
Intolerably, individuals fitting Professor Ryn’s description dominate both American political parties and for decades have made foreign policy for the United States. Since the early 1990s they have brought America constant war and its reliable companion, the steadily broadening erosion of constitutional liberty. The names of these people are well known. Beyond Krauthammer, the following are, to name just a few, members of the Jacobin/Neocon fold: Hillary Clinton, Marco Rubio, Madeline Albright, Lindsey Graham, Jeb Bush, Joseph Lieberman, Ted Cruz, Mike Huckabee, Barack Obama John Boehner, Joe Biden, Bill Kristol, John Bolton, and the 90-plus Senators who did not join Kentucky’s junior senator in defending the 4th Amendment. All of them, to judge by their words, believe it is the absolute right of the United States to intervene politically and militarily abroad wherever and whenever it chooses, and to impose by force what they define as “universal values”.
But their words are lies, there are no such things as universal values. There is only one value common to all men in all times and that is the universal lust for gaining and exercising arbitrary power, and that power is exactly what the Jacobin/Neocon crowd is after. They want power abroad and they want power over the American citizenry at home. They have proven they cannot attain power abroad — having lost every war they started — and they cannot get power at home unless Americans permit them to continue to systematically hollow out the Constitution and the Bill of Rights.
On that score, however, they are incrementally succeeding, and this success is the reason that Americans must begin thinking about what “new Guards for their future security” might be appropriate. And to ensure U.S. citizens can realistically discuss all options for preventing or destroying tyrannical government at home, the Founders left them the Second Amendment. After all, as Jefferson asked in 1787, “And what country can preserve its liberties, if the rulers are not warned from time to time, that this people preserve the spirit of resistance? Let them take arms.”
In “Cancel All Student Debt — The Petitions Begin,” we outlined The White House’s plan to explore “new bankruptcy options” for former students who, by virtue of an anemic US economic “recovery” or by virtue of their having majored in a subject that was exceedingly unlikely to land them a good job in any economy, find themselves in dire financial straits. On the heels of that, the calls began for the government to simply “cancel” the country’s $1.3 trillion student debt pile. Here, in what is a classic passage, is how we assessed the situation:
Sure, why not: leaving aside the very touchy topic of personal responsibility and accountability, in a world in which record debt is merely “replaced” by even more debt, and in which profits are privatized but losses are always socialized with taxpayers and future generations bearing the brunt in the form of a record $18.2 trillion in public debt (and some $7 trillion more if one adds the government-backed GSEs which one should), why not go ahead and “cancel” the debt. And don’t bother trying to explain the simple math that debt is never cancelled, as every liability is someone’s asset, and that asset holder will demand to be made whole in the form of more debt elsewhere or else, like Hank Paulson in 2008, it will scream mutual assured destruction and threaten to blow up the world unless bailed out.
Since then we’ve gone on to elaborate on the math behind underreported delinquency rates and taken an in-depth look at IBR, the “dirty little secret” that could end up costing taxpayers billions over time.
Finally, we highlighted a plan by Presidential candidate Bernie Sanders which would tax stock trades in order to make college free for everyone.
In the (perhaps misguided) spirit of free college for all we bring you the following from Senator Elizabeth Warren who wants you to “stand with her” to make “debt-free college” a reality.
Stand with Elizabeth Warren: Support debt-free college
Join Campaign For America’s Future and support Brian Schatz, Elizabeth Warren, Raul Grijalva, Keith Ellison, and other progressive leaders in Congress to get the debt out of college. These progressive champions are launching a new resolution to build support for debt-free college:
“Resolved, that Congress supports efforts to ensure that, through a combination of efforts, all students have access to debt-free higher education, defined to mean having no debt upon graduation from all public institutions of higher education.”
Our goal is simple: Get Congress on record in support of debt-free college and spark a movement to make it a reality. This resolution can be the start of something big — but we need your support to blow it wide open. Are you with us?
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Anyone who has ever dreamed of “blowing something wide open” with Elizabeth Warren can do so by clicking here.
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
Mr. Gowdy’s chief interest, according to people briefed on the inquiry, is a series of memos that Mr. Blumenthal — who was not an employee of the State Department — wrote to Mrs. Clinton about events unfolding in Libya before and after the death of Col. Muammar el-Qaddafi. According to emails obtained by The New York Times, Mrs. Clinton, who was secretary of state at the time, took Mr. Blumenthal’s advice seriously, forwarding his memos to senior diplomatic officials in Libya and Washington and at times asking them to respond. Mrs. Clinton continued to pass around his memos even after other senior diplomats concluded that Mr. Blumenthal’s assessments were often unreliable.
But an examination by The Times suggests that Mr. Blumenthal’s involvement was more wide-ranging and more complicated than previously known, embodying the blurry lines between business, politics and philanthropy that have enriched and vexed the Clintons and their inner circle for years.
While advising Mrs. Clinton on Libya, Mr. Blumenthal, who had been barred from a State Department job by aides to President Obama, was also employed by her family’s philanthropy, the Clinton Foundation, to help with research, “message guidance” and the planning of commemorative events, according to foundation officials.
Much of the Libya intelligence that Mr. Blumenthal passed on to Mrs. Clinton appears to have come from a group of business associates he was advising as they sought to win contracts from the Libyan transitional government. The venture, which was ultimately unsuccessful, involved other Clinton friends, a private military contractor and one former C.I.A. spy seeking to get in on the ground floor of the new Libyan economy.
Keeping tabs on the shadiness, cronyism and ineptitude of Hillary Clinton while she was Secretary of State alone is a full time job. I’m not even kidding, it feels like every day I wake up to another story that in itself should be enough to disqualify her as a Presidential candidate. Yet she remains the front runner to win in 2016, which proves without a shadow of a doubt that America is not a functioning democracy, but a clownish oligarch-owned Banana Republic.
Before I get into the many disturbing and dangerous angles to the Sidney Blumenthal story, it’s important to highlight what a complete and total disaster U.S. foreign policy in Libya has been during the Obama Administration. Rather than helping the situation, NATO destroyed the nation and left it far worse than it ever was underQaddafi. I highlighted this fact in detail earlier this year in the post, The Forgotten War – Understanding the Incredible Debacle Left Behind by NATO in Libya. Here’s an excerpt:
In retrospect, Obama’s intervention in Libya was an abject failure, judged even by its own standards. Libya has not only failed to evolve into a democracy; it has devolved into a failed state. Violent deaths and other human rights abuses have increased severalfold. Rather than helping the United States combat terrorism, as Qaddafi did during his last decade in power, Libya now serves as a safe haven for militias affiliated with both al Qaeda and the Islamic State of Iraq and al-Sham (ISIS). The Libya intervention has harmed other U.S. interests as well: undermining nuclear nonproliferation, chilling Russian cooperation at the UN, and fueling Syria’s civil war.?
As bad as Libya’s human rights situation was under Qaddafi, it has gotten worse since NATO ousted him. Immediately after taking power, the rebels perpetrated scores of reprisal killings, in addition to torturing, beating, and arbitrarily detaining thousands of suspected Qaddafi supporters. The rebels also expelled 30,000 mostly black residents from the town of Tawergha and burned or looted their homes and shops, on the grounds that some of them supposedly had been mercenaries. Six months after the war, Human Rights Watch declared that the abuses “appear to be so widespread and systematic that they may amount to crimes against humanity.”?
As a consequence of such pervasive violence, the UN estimates that roughly 400,000 Libyans have fled their homes, a quarter of whom have left the country altogether. ?
You wonder how American “leaders” can be so inept, and then you realize that they have no idea what they are doing. Rather than making informed policy decisions, U.S. leaders and their “advisors” are mainly thinking about how they can make millions in the wake of death and destruction they created. Don’t believe me? Read the following excerpts from the New York Times:
Mr. Gowdy’s chief interest, according to people briefed on the inquiry, is a series of memos that Mr. Blumenthal — who was not an employee of the State Department — wrote to Mrs. Clinton about events unfolding in Libya before and after the death of Col. Muammar el-Qaddafi. According to emails obtained by The New York Times, Mrs. Clinton, who was secretary of state at the time, took Mr. Blumenthal’s advice seriously, forwarding his memos to senior diplomatic officials in Libya and Washington and at times asking them to respond. Mrs. Clinton continued to pass around his memos even after other senior diplomats concluded that Mr. Blumenthal’s assessments were often unreliable.
But an examination by The Times suggests that Mr. Blumenthal’s involvement was more wide-ranging and more complicated than previously known, embodying the blurry lines between business, politics and philanthropy that have enriched and vexed the Clintons and their inner circle for years.
While advising Mrs. Clinton on Libya, Mr. Blumenthal, who had been barred from a State Department job by aides to President Obama, was also employed by her family’s philanthropy, the Clinton Foundation, to help with research, “message guidance” and the planning of commemorative events, according to foundation officials.
Much of the Libya intelligence that Mr. Blumenthal passed on to Mrs. Clinton appears to have come from a group of business associates he was advising as they sought to win contracts from the Libyan transitional government. The venture, which was ultimately unsuccessful, involved other Clinton friends, a private military contractor and one former C.I.A. spy seeking to get in on the ground floor of the new Libyan economy.
A free market economy this is not.
The projects — creating floating hospitals to treat Libya’s war wounded and temporary housing for displaced people, and building schools — would have required State Department permits, but foundered before the business partners could seek official approval.
Quite the business model. Bomb countries into oblivion, then make money building hospitals and temporary housing for displaced people. You can’t make this up.
It is not clear whether Mrs. Clinton or the State Department knew of Mr. Blumenthal’s interest in pursuing business in Libya; a State Department spokesman declined to say. Many aspects of Mr. Blumenthal’s involvement in the planned Libyan venture remain unclear. He declined repeated requests to discuss it.
Of course he did.
“We were thinking, ‘O.K., Qaddafi is dead, or about to be, and there’s opportunities,’ ” Mr. White said in a brief telephone interview. He added, “We thought, ‘Let’s try to see who we know there.’ ”
Mr. White declined to answer follow-up questions about what role Mr. Blumenthal was playing in the business venture. But Mr. Grange described Mr. Blumenthal as an adviser to Mr. White’s company, along with two other associates: Tyler Drumheller, a colorful former Central Intelligence Agency official, and Cody Shearer, a longtime Clinton friend.
Even as their plans sputtered, Mr. Blumenthal continued to draw on the business associates for information about Libya as he shaped his memos to Mrs. Clinton. Sometimes the two realms became blurred.
In January 2012, for example, Mr. Blumenthal sent Mrs. Clinton a memo describing efforts by the new Libyan prime minister to stabilize his fragile government by bringing in advisers with experience dealing with Western companies and governments.
Among “the most influential of this group,” Mr. Blumenthal wrote, was a man named Najib Obeida, who worked at the fledgling Libyan stock exchange. Mrs. Clinton had the memo forwarded to her senior State Department staff.
What Mr. Blumenthal did not mention was that Mr. Obeida was one of the Libyan officials Mr. Grange and his partners hoped would finance the humanitarian projects. The day before Mr. Blumenthal emailed Mrs. Clinton, Mr. Grange wrote to a senior Clinton aide at the State Department to introduce the venture with Mr. Obeida in Libya and seek an audience with the United States ambassador there. Mr. Grange said he had not received a reply.
Can you believe this? This clown Blumenthal was pretending to be passing on real intelligence to Hillary (and she repeatedly passed on his nonsense), all the while working to further business interests.
Mr. Blumenthal sent Mrs. Clinton at least 25 memos about Libya in 2011 and 2012, many describing elaborate intrigues among various foreign governments and rebel factions.
Mrs. Clinton circulated them, frequently forwarding them to Jake Sullivan, her well-regarded deputy chief of staff, and requesting that he distribute them to other State Department officials. Mr. Sullivan often sent the memos to senior officials in Libya, including the ambassador, J. Christopher Stevens, who was killed in the 2012 attacks in Benghazi.
In many cases, Mr. Sullivan would paste the text from the memos into an email and tell the other State Department officials that they had come from an anonymous “contact” of Mrs. Clinton.
He didn’t even have the decency to admit where the information was coming from, since Mr. Blumenthal was specifically banned by the Obama Administration from serving under Hillary in an official capacity. And you wonder why the American political system is circling the toilet bowl.
But the skepticism did not seem to sour Mrs. Clinton on Mr. Blumenthal. She continued to forward Mr. Blumenthal’s memos, often appending a note: “Useful insight” or “We should get this around asap.”
The emails suggest that Mr. Blumenthal’s direct line to Mrs. Clinton circumvented the elaborate procedures established by the federal government to ensure that high-level officials are provided with vetted assessments of available intelligence.
The above certainly explains why American foreign policy is such a dangerous joke, but it gets even worse. It appears the entire time Blumenthal was providing the State Department with inaccurate, crony and clownish “intelligence” on Libya, he was earning $10,000 per month from the Clinton Foundation. We learn from Politico that:
Sidney Blumenthal, a longtime confidant of Bill and Hillary Clinton, earned about $10,000 a month as a full-time employee of the Clinton Foundation while he was providing unsolicited intelligence on Libya to then Secretary of State Hillary Clinton, according to multiple sources familiar with the arrangement.
Blumenthal was added to the payroll of the Clintons’ global philanthropy in 2009 — not long after advising Hillary Clinton’s presidential campaign — at the behest of former president Bill Clinton, for whom he had worked in the White House, say the sources.
Blumenthal has been subpoenaed by the U.S. House committee investigating the 2012 attack on the U.S. consulate in Benghazi, Libya, and Clinton’s handling of it. He is expected to testify next week about a series of memos containing sometimes specious intelligence on the situation in Libya, which he sent to Hillary Clinton’s personal email account.
Clinton, whose efforts to hire Blumenthal as an adviser at the State Department were rebuffed by top aides to President Barack Obama, last week defended her relationship with her old ally but also minimized his influence.
To summarize, I think Ben Mathis-Lilley at Slate put it best:
To recap the whole situation: In 2011 and 2012, Hillary Clinton, as secretary of state, used an off-books email account to discuss national policy with a private citizen who might have been violating the law by participating in the conversation, who had a related business interest (though not a “financial interest”?) in the subject of his advice that he may or may not have disclosed to the government, and who was simultaneously employed in a questionable “full-time” capacity at significant expense to a nonprofit that has been accused of acting as the bag man for a Clintonian influence-peddling operation.
"The supply of oil continues to build," warns the CEO of one super-tanker fleet, and "all of this oil needs to go somewhere," which is why the surge in super-tankers to a seven year high strong suggests all is not well in the world's hopeful 'demand' picture. With charter rates up a stunning 57% in the last few weeks with millions of barrels being stored on ships is another indication that the oil glut is yet to dissipate (and in fact, as Bloomberg reports, is getting worse – with almost half a billion barrels of oil in transit to buyers at the start of June, the most this year). With OPEC's meeting around the corner, a sudden realization of this rising glut may send prices plummeting once again.
Four months into oil’s rebound from a six-year low, the tanker market is sending a clear signal that the rally is under threat.As Bloomberg reports,
A sudden surge in demand for supertankers drove benchmark charter rates 57 percent higher in the two weeks through May 20. OPEC will have almost half a billion barrels of oil in transit to buyers at the start of June, the most this year, while analysts say about 20 million barrels is being stored on ships in another indication the glut has yet to dissipate.
The Organization of Petroleum Exporting Countries is pumping the most oil in more than two years, determined to defend market share rather than prices. A record cut to the number of active U.S. drilling rigs and billions of dollars of spending reductions by companies since last year’s price plunge has yet to translate into a slump in barrels produced. The world is pumping about 1.9 million barrels a day more crude than it needs, according to Goldman Sachs Group Inc.
“Supply of oil continues to build,” said Paddy Rodgers, the chief executive officer of Antwerp, Belgium-based Euronav NV, whose supertanker fleet can haul 56 million barrels of crude. “All of this oil needs to go somewhere,” he wrote in an e-mail May 19.
Daily rates for supertankers on the industry’s benchmark route reached $83,412 on May 20, from $52,987 on May 6, according to the Baltic Exchange in London. While rates since retreated to $65,784, they’re still the highest for this time of year since at least 2008.
…
Spare tanker capacity in the Middle East has seldom been tighter. The combined excess of ships competing for the region’s exports stood at 6 percent last week, the lowest for the time of year in Bloomberg surveys of shipbrokers that started in 2009.
…
“The summer is not usually the time when rates really should go high,” Odysseus Valatsas, chartering manager at Dynacom Tankers Management in Glyfada, Greece, said by phone May 21.
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Last night's API inventory build also throws the "peak production" hopers meme under the bus.
Of course, for those looking for a silver lining here, there is always the kiss of death to super-tanker fleet operators…
Gartman: "Long of Seven Units of Oil Tanker Equities; Short of the S&P futures"
I looked over the weekly Petroleum Inventory Report put out by the EIA today, and the biggest takeaway by far was that US Oil Production set a new modern era high at 9.566 Million Barrels per day. The last high in US Production occurred in March, and it appeared that the US Production numbers were getting slightly weaker, and maybe the top in US Production was in. But this past week Production really ramped back up with a blowout number, and if it wasn`t for a week in which imports were unusually low for the week, there would have been another huge build in Oil Inventories for the week.
Energy Storage Hubs
Refineries were operating near full capacity on the week cranking out a utilization rate just shy of 94%, which also helped avoid another weekly inventory build in oil supplies. However, Cushing Oklahoma and the Gulf Coast Region barely budged in reducing the oil inventory surplus at those two crucial storage hubs. Cushing Oklahoma still has 60 Million Barrels stuck in storage facilities, while the Gulf Coast has 242 Million Barrels awaiting refinery for end use.
Shale Industry
However, the noteworthy takeaway is that despite a large reduction in drilling rigs, and the lower prices of the last year US Oil Production is still going up, and not tapering off at all! So much for the Saudi and OPEC strategy of putting a dent in US Oil Production by not cutting production and hoping to gain market share for their oil by putting the Shale Industry out of business.
Annual Comparison
For example, a year ago US Oil Production was 8.472 Million Barrels per day, and now after a market share price war between OPEC and the US Producers, the US is producing a record level of Production, a new modern era record since the EIA began tracking this data in 1983 at 9.566 Million Barrels per day. This is an increase of over 1 Million Barrels per day in US Oil Production in a year`s time, and considering the decline in drilling rigs, this speaks volumes about the increased efficiencies taking place in a lower price and cost environment.
Market Reaction
The oil keeps coming out of the ground at record levels, and throw in OPEC`s record output, and it doesn`t bode well for oil prices the second half of the year once the summer driving season ends and we start the building season all over again in oil inventories! We really are at risk of both the Cushing and Gulf Coast storage hubs reaching their storage limits over the next year, and it will be interesting how the oil market deals with this reality.
There are no free financial markets in America, or for that matter anywhere in the Western word, and few, if any, free markets of any other kind. The financial markets are rigged by the big banks, the Federal Reserve, and the Treasury in the interests of the profits of the few big banks and the dollar’s exchange value, which is the basis of US power.
There is a contradiction between a strong currency on one hand and on the other hand massive money creation in order to sustain zero and negative interest rates on the massive debt levels. This inconsistency is revealed by rising gold and silver prices.
When gold hit $1,900 an ounce in 2011 the Federal Reserve realized that the precious metal market was going to limit its ability to provide enough liquidity to keep the thoughtlessly deregulated financial system afloat. The rapid deterioration of the dollar in terms of gold and silver would sooner or later spill over into the exchange value of the dollar in currency markets. Something had to be done to drive down and to cap the gold price.
The Fed’s solution was to take advantage of the fact that the prices of gold and silver are determined in the futures market where paper contracts representing gold and silver are traded, and not in markets where the physical metal is actually purchased by people who take possession of it. The Fed realized that uncovered short sales provided enormous leverage over the prices of the metals and that it would be profitable for the bullion banks, such as JPMorgan, Scotia, and HSBC, to short the market heavily and then cover their shorts at lower prices produced by selling as a result of triggering stop-loss orders and margin calls.
Dave Kranzler and I have shown on numerous occasions that the bullion banks and the Federal Reserve make profits and protect the dollar by suppressing the prices of gold and silver. They do this by illegally selling huge numbers of uncovered shorts in the futures market. This illegal operation is supported by the so-called “regulatory authorities” who steadfastly refuse to intervene.
If memory serves, Matt Taibbi explained a few years ago how Goldman Sachs got position limits removed from speculators, so that now speculators can dominate market forces.
Neoliberal economists in service to the financial sector have created a rationale for why interest rates can be negative in the face of massive debt and money creation and a slew of troubled financial instruments from corporate junk bonds to sovereign debt. The rational is that there is too much saving: The excess of savings over investment forces down interest rates. The negative interest rates will discourage people from saving and encourage them to spend, because the price of consumption in terms of foregone future income from saving is zero. It even pays to consume, because saving costs more than it earns.
Economists argue this even though the Federal Reserve reported that a majority of Americans are so low on savings that they cannot raise $400 without selling personal possessions.
That economists would concoct such an absurd explanation for negative interest rates, an explanation obviously contradicted by empirical evidence, shows that economists are now prostitutes just like the media. The economists are lying in support of a Federal Reserve policy that benefits a handful of mega-banks at the expense of the rest of the world.
The absence of integrity in Western institutions and politicized professions is proof that Western civilization has declined into total decadence just as Jacques Barzun said.
It is amazing that there still are some Russians and some Chinese who want to be part of the sordid decadence that is the Western world.
It is just as amazing that Americans and Europeans are so trapped in The Matrix that they have no inkling that their future has been destroyed.
In a nation in which every third citizen is obese, it should come as no surprise that the leading cause of death in virtually all states (except the “healthier” ones) is heart disease. Which the map below, of most common sources of death in any state using CDC data, confirms is precisely the case.
Fig 1: Leading Cause Of Death By State
No surprises there.
However, that doesn’t mean that every “average” American is doomed to die from a heart attack.
According to a recent study by the CDC looking at the most distinctive deaths by state, by which they mean which type of death is abnormally represented relative to the national mean, Americans have a veritable cornucopia of ways in which they “pass” depending on which state they call home.
As the CDC observes, the resulting map depicts a variety of distinctive causes of death based on a wide range of number of deaths, from 15,000 deaths from HIV in Florida to 679 deaths from tuberculosis in Texas to 22 deaths from syphilis in Louisiana. The largest number of deaths mapped were the 37,292 deaths in Michigan from “atherosclerotic cardiovascular disease, so described”; the fewest, the 11 deaths in Montana from “acute and rapidly progressive nephritic and nephrotic syndrome.” The state-specific percentage of total deaths mapped ranged from 1.8% (Delaware; atherosclerotic cardiovascular disease, so described) to 0.0005% (Illinois, other disorders of kidney).
For the Illinois fans: the reason “gunshot wounds” is not shown is because it is not a part of the International Classification of Diseases, 10th Revision, which is where the CDC pulled its disease sample from.
So without further ado, here is the color-coded map of “most distinctive causes of death by state, 2001-2010.” Twenty-three different causes of death were identified. The most common was “other and unspecified acute lower respiratory infections,” seen in 6 states (Iowa, Kansas, Minnesota, Nebraska, Ohio, and Wisconsin).
While we patiently await Wall Street’s weathermen, formerly known as economists, to blame the next swoon in US GDP on California’s relentless drought, now in its fourth year, we wonder how many double seasonally-adjusted, pro-forma, non-GAAP GDP points India’s blistering heatwave will bring. Because if California thinks it has it bad, India has it far worse.
According to the National Post, soaring summer temperatures in India have left more than 1,400 people dead over the past month, officials said Thursday. Most of the 1,412 heat-related deaths so far have occurred in Andhra Pradesh and neighbouring Telangana, where temperatures have soared up to 47 C, according to government figures.
AccuWeather described India’s scorching weather as the most intense heat wave in India in recent years, adding that “a very active typhoon season, combined with drought in much of India, could have a significant impact on lives and property for more than a billion people in Asia during the summer of 2015.”
“The rains which have eluded us for the last couple of years have created serious drought conditions,” said state minister K.T. Rama Rao in Telangana, which was carved out of Andhra Pradesh as a separate state just last year.
India’s response to the stifling heat? In line with that of the Greek government and stockholders everywhere in the new normal: hope.
“This is unprecedented … so there is a little bit of panic,” he said. “Hopefully the monsoon will be on time. Hopefully we will receive rain very, very soon.”
For the locals it’s no laughing matter: “If I don’t work due to the heat, how will my family survive?” said construction worker Mahalakshmi, who earns a daily wage of about $3.10 in Nizamabad, a city about 150 kilometres north of the state capital of Hyderabad.
Other examples of just how bad it is:
Volunteers were passing out pouches of salted buttermilk or raw onions — both thought to be hydrating. People used handkerchiefs and scarves to block searing winds and stifling air from their faces.
Across the country, teenagers flocked to water basins and rivers to cool off. Many adults took refuge atop woven cots in the shade.
DasBoys dive into a water tank on a hot summer day in New Delhi Wednesday
Newspapers devoted full pages to covering the heat wave and its effects, with headlines saying “Homeless bake in tin shelters” and “birds & animals drop dead.”
An Indian farmer pushes his bicycle past a parched paddy field in Ranbir Singh Pura, about 34 km (21 miles) from Jammu, India.
In cities like New Delhi, crowds of office workers gathered around stalls selling fruit drinks and iced water, while police officers wearing sweat-soaked shirts squinted into the sun while directing road traffic.
ImagesAn Indian man uses a rickshaw to transport ice from an ice factory in Amritsar on Wednesday.
“We are even spraying the reptiles,” Delhi Zoo curator Riyaz Khan said, noting fans were also set up to keep enclosures cooler, while the animals were also receiving glucose in their drinking water.
The good news: cooling monsoon rains are expected to arrive next week in the southern state of Kerala and gradually advance north in coming weeks.
In the meantime, it is so hot the read is literally melting as shown in the following clip.
Presidents have always exercised emergency powers, but now thanks to dozens of new laws, regulations, court decisions and executive orders, Barack Obama is the most powerful president in all of U.S. history. Of course the U.S. Constitution does not actually give the president any special powers during a time of national emergency, but over time presidents have decided that they should be able to exercise such powers and the courts have generally agreed with them. During World War II and prior to that, these emergency powers were largely uncodified and were primarily used during times of war. But since World War II things have completely changed, and this has particularly been true since 9/11. Over the past decade or so, a whole host of extraordinary powers have specifically been given to the office of the president, and all that it takes to exercise them is a major “national emergency”. So if we do have a full-blown economic collapse, a historic natural disaster, a significant war or a massive pandemic, Barack Obama could use the emergency powers that he has been given to essentially take authority over everything.
There is not a single document or series of documents that contain all of the emergency powers that Barack Obama could potentially wield during a major national emergency. As I mentioned above, these powers come from literally dozens of laws, regulations, court decisions and executive orders. But in this article I will discuss a few important documents. One of these is a presidential directive that was issued during the second term of George W. Bush. It is entitled NATIONAL SECURITY PRESIDENTIAL DIRECTIVE/NSPD – 51/HOMELAND SECURITY PRESIDENTIAL DIRECTIVE/HSPD – 20, and you can take a look at it on the FEMA website right here. This document is primarily concerned with the continuity of our federal government in the event of a catastrophic emergency. So precisely what would constitute a “catastrophic emergency”? The following is how the document defines that term…
“Catastrophic Emergency” means any incident, regardless of location, that results in extraordinary levels of mass casualties, damage, or disruption severely affecting the U.S. population, infrastructure, environment, economy, or government functions;
That sounds quite broad to me. It could apply to all sorts of scenarios.
If we do have such a “catastrophic emergency”, the president essentially becomes a dictator at that point. The document certainly talks about the need to ensure that “constitutional government” continues, but during the course of the emergency there really is not much of a role for the other two branches of government to play. Instead, the “shadow government” takes over under the overall command of the president. The following is a short excerpt from the document…
The President shall lead the activities of the Federal Government for ensuring constitutional government. In order to advise and assist the President in that function, the Assistant to the President for Homeland Security and Counterterrorism (APHS/CT) is hereby designated as the National Continuity Coordinator. The National Continuity Coordinator, in coordination with the Assistant to the President for National Security Affairs (APNSA), without exercising directive authority, shall coordinate the development and implementation of continuity policy for executive departments and agencies. The Continuity Policy Coordination Committee (CPCC), chaired by a Senior Director from the Homeland Security Council staff, designated by the National Continuity Coordinator, shall be the main day-to-day forum for such policy coordination.
Of course the 11 page document that we have on the FEMA website is just the tip of the iceberg when it comes to continuity of government planning. Unfortunately, most of the plans are top secret and are not allowed to be seen by the public. Astonishingly, this even applies to members of Congress. The following comes from Wikipedia…
On July 18, 2007, Rep. Peter DeFazio (D-OR), a member of the U.S. House Committee on Homeland Security, requested the classified and more detailed version of the government’s continuity of government plan in a letter signed by him and the chairperson of the House Homeland Committee, which is supposed to have access to confidential government information. The president refused to provide the information, to the surprise of the congressional committee.
Another document that raises a lot of red flags is an executive order entitled “National Defense Resources Preparedness” that was issued by Barack Obama on March 16th, 2012. This particular executive order updates previous executive orders, and it gives the president extraordinary authority during a time of national emergency. Below, I have posted most of section 201 of that executive order. As you can see, it potentially gives Barack Obama authority over just about everything during a time of national emergency if he feels it is needed for “national defense”…
Sec. 201. Priorities and Allocations Authorities. (a) The authority of the President conferred by section 101 of the Act, 50 U.S.C. App. 2071, to require acceptance and priority performance of contracts or orders (other than contracts of employment) to promote the national defense over performance of any other contracts or orders, and to allocate materials, services, and facilities as deemed necessary or appropriate to promote the national defense, is delegated to the following agency heads:
(1) the Secretary of Agriculture with respect to food resources, food resource facilities, livestock resources, veterinary resources, plant health resources, and the domestic distribution of farm equipment and commercial fertilizer;
(2) the Secretary of Energy with respect to all forms of energy;
(3) the Secretary of Health and Human Services with respect to health resources;
(4) the Secretary of Transportation with respect to all forms of civil transportation;
(5) the Secretary of Defense with respect to water resources; and
(6) the Secretary of Commerce with respect to all other materials, services, and facilities, including construction materials.
(b) The Secretary of each agency delegated authority under subsection (a) of this section (resource departments) shall plan for and issue regulations to prioritize and allocate resources and establish standards and procedures by which the authority shall be used to promote the national defense, under both emergency and non-emergency conditions. Each Secretary shall authorize the heads of other agencies, as appropriate, to place priority ratings on contracts and orders for materials, services, and facilities needed in support of programs approved under section 202 of this order.
A similar executive order regarding national communications was issued on July 6th, 2012.
But the powers that Barack Obama could potentially wield during a time of national emergency are not just limited to what is written down. This may shock many Americans, but it is true. In the past, presidents have used their “emergency powers” to suspend habeas corpus, to place American citizens in internment camps and to seize private property. The following comes from Wikipedia…
A claim of emergency powers was at the center of President Abraham Lincoln’s suspension of habeas corpus without Congressional approval in 1861. Lincoln claimed that the rebellion created an emergency that permitted him the extraordinary power of unilaterally suspending the writ. With Chief Justice Roger Taney sitting as judge, the Federal District Court of Maryland struck down the suspension in Ex Parte Merryman, although Lincoln ignored the order. 17 F. Cas. 144 (1861).
President Franklin Delano Roosevelt similarly invoked emergency powers when he issued an order directing that all Japanese Americans residing on the West Coast be placed into internment camps during World War II. The U.S. Supreme Court upheld this order in Korematsu v. United States. 323 U.S. 214 (1944).
Harry Truman declared the use of emergency powers when he seized private steel mills that failed to produce steel because of a labor strike in 1952. With the Korean War ongoing, Truman asserted that he could not wage war successfully if the economy failed to provide him with the material resources necessary to keep the troops well-equipped. The U.S. Supreme Court, however, refused to accept that argument in Youngstown Sheet & Tube Co. v. Sawyer, voting 6-3 that neither Commander in Chief powers nor any claimed emergency powers gave the President the authority to unilaterally seize private property without Congressional legislation. 343 U.S. 579.
And it is important to keep in mind that Barack Obama now possesses far more power than any of those presidents ever did. All it is going to take for him to exercise those powers is a major national emergency. This is something that Jim Powell discussed in an article for Forbes…
Not long after that, we found ourselves in an open-ended national emergency declared on September 14, 2001 and extended since by both George W. Bush and Barack Obama. This means the president has standby powers from hundreds of statutes that would enable him to re-introduce military conscription, seize private property and in myriad ways establish a government-run economy.
Thankfully, things are still somewhat stable for the moment so Obama does not have a reasonable excuse to use all of the powers that he has been given. But that could change at any time. If we do see a “catastrophic emergency” in the next year or so, there are very few limits on what Barack Obama would be able to do. That includes potentially postponing or suspending the 2016 election so that he can remain in office throughout the course of the national emergency.
We have never seen such a thing happen before, and hopefully we never will. And of course it isn’t just Barack Obama that we need to be concerned about. A future leader of this nation could potentially be even worse than him. It has been exceedingly foolish for us to give a single person so much power in the event of a “catastrophic emergency”, and in the end we may regret this bitterly.
While Ben Bernanke will never agree that global economic growth has ground to a halt as a result of his monetary policies, a phenomenon which in the past year has been dubbed “secular stagnation” by the very serious weathermen (and will certainly never admit the reason for such stagnation), with every passing month one thing becomes clear: there can be no growth and certainly no prosperity for the broader population with a $200 trillion (and rising at over $10 trillion per year) overhang in global debt. And now, even Goldman gets it.
Having recently cut its estimate of US trend productivity growth to 1.5%, in a shocking move earlier today, Goldman admitted US trend growth is far less than previously speculated (or, “secularly stagnating“) and moments ago lowered its long-term potential GDP. The bank says: “after adjusting for a drag from government sector productivity and incorporating an updated assessment of trend labor force growth, we now see long-run potential GDP growth at 1¾%, half a percentage point below our prior estimate.”
This is a huge deal as Goldman just recalibrated every single economic (i.e., inflation, employment) and financial (i.e., bond rates, leverage) equation by more than 20%, not to mention the amount of implied residual slack in the economy. In short, an absolutely massive amount!
But whatever happened to Jan Hatzius’ repeat forecasts that the US would grow at an “above consensus” rate of 3-4% as far as they eye could see? When will he revise these?
In any event, all else equal, Goldman just admitted that the US standard of living will henceforth grow over 20% slower.
It also means that the Penguin express of Wall Street weathermen are about to jump on board, as will the various regional Feds starting with the Bill Dudley-run NY Fed, before aunt Yellen, too, has to admit that not only is the long-term US growth rate lower than previously expected, but that as a result, the slack in the economy is also far, far less and as a result, the Fed most certainly has a green light to hike, even as soon as June.
Full note below:
Lower Measured Productivity = Lower Potential GDP (Dawsey)
We recently reduced our estimate of US trend productivity growth to 1½%, mainly due to a downgrade in our view of trend total factor productivity (TFP). In today’s Daily, we refresh our view on potential GDP growth in light of our new productivity estimates. After adjusting for a drag from government sector productivity and incorporating an updated assessment of trend labor force growth, we now see long-run potential GDP growth at 1¾%, half a percentage point below our prior estimate.
In our most recent Weekly, we reduced our estimate of US trend productivity growth?traditionally measured as growth in nonfarm business output per hour—from 2% to 1½%. The most important factor behind slower productivity growth over the past decade appears to be a smaller contribution from the IT sector. Indeed, Exhibit 1 shows that trend productivity growth of around 1½% would be similar to that seen during the two decades through the mid-1990s, but would be significantly lower than that during the dot-com productivity boom. Although we have argued that measurement issues may be resulting in an undercount of value added by information technology, and as a result downwardly distorted productivity figures, we do not expect these measurement issues to be addressed any time soon. As such, we expect measured productivity growth to run below its historical average going forward.
Exhibit 1. Back to a Sluggish Rate of Measured Productivity Growth
Looking at the issue with a different lens, we have found the “growth accounting” approach to productivity forecasting to be helpful in past work. In this framework, productivity growth can be broken into: (1) the contribution from growth in capital services, (2) the contribution from changes in labor composition, and (3) growth in total factor productivity (i.e. the residual component). Based on the outlook for capital spending, labor force growth, educational attainment, and other demographic changes, we expect contributions from capital services and labor quality that are very similar to our prior estimates. Over the coming ten years, we expect capital services to contribute about 0.9 percentage point (pp) per year to productivity growth, and labor composition to add another 0.1pp.
However, our prior estimate for growth in total factor productivity (TFP) now looks too high. As the strong productivity period before 2004 fades further into the background and new data for 2013 and tentative estimates for 2014 have become available, our estimate of the TFP trend has fallen back to the ½% trend seen from 1974 to 1995 (Exhibit 2). That said, assessing the trend in TFP is difficult, not least due to heightened volatility in the years around the Great Recession. We think a reasonable confidence band around our TFP estimate is roughly 1 percentage point. Uncertainty aside, combining our point estimates for the contribution from capital services, labor composition, and TFP results in a trend productivity estimate of 1½%.
Exhibit 2. TFP Trend Looks Lower
Productivity measures that are typically quoted—including the official productivity release from the Labor Department—refer to growth in nonfarm business output per hour worked. In order to convert the estimate to “total economy” productivity, an adjustment must be made for the fact that (by virtue of how the national accounts are constructed) productivity in the government sector is a mechanical drag. Historically, subtracting about four-tenths of a percentage point has been appropriate (very roughly: 20% government share of GDP multiplied by roughly -2% “missing” productivity growth vs. the rest of the economy). However, as we anticipate a slower rate of productivity growth in the private sector vs. the historical average in the future, we think that a subtraction of roughly three-tenths is appropriate going forward.
The last piece needed to arrive at an updated estimate of potential GDP growth is a projection for growth in potential hours worked. Because weekly hours per employee will likely be stable over the long term, we focus on growth in the potential labor force. Using updated Census projections for population growth by age category released in December 2014, combined with an assumption of stable participation by age group in the long term, we think that potential labor force growth will average about 0.5 percentage point over the next ten years, similar to CBO’s assessment. Exhibit 3 shows that potential labor force is likely to be below growth in the 16+ population, as the average age of the US population is increasing and older individuals are less likely to participate in the labor force.
Exhibit 3. Potential Labor Force Growth Will Likely Fall Short of Population Growth
Adding up the pieces, growth in nonfarm business output per hour of 1½%, a “total economy” adjustment of about -0.3pp, and potential labor force growth of about 0.5pp sum to a potential GDP growth estimate of 1¾%, half a point below our prior estimate. Of course, the same “new economy” measurement issues that we identified as potentially affecting productivity growth feed through directly to measured GDP growth, and so we would be cautious of confident pronouncements that the true standard of living in the United States is likely to grow more slowly than in the past.
As the US Congress grapples with the ever-contentious Trans-Pacific Partnership – President Barack Obama’s signature trade legislation – a major stumbling block looms. On May 22, the Senate avoided it, by narrowly defeating – 51 to 48 – a proposed “currency manipulation” amendment to a bill that gives Obama so-called “fast-track” authority to negotiate the TPP. But the issue could be resurrected as the debate shifts to the House of Representatives, where support is strong for “enforceable currency rules.”
For at least a decade, Congress has been focusing on currency manipulation – a charge leveled at countries that purportedly intervene in foreign-exchange markets in order to suppress their currencies’ value, thereby subsidizing exports. In 2005, Senators Charles Schumer, a liberal Democrat from New York, and Lindsey Graham, a conservative Republican from South Carolina, formed an unlikely alliance to defend beleaguered middle-class US workers from supposedly unfair competitive practices. Stop the currency manipulation, went the argument, and America’s gaping trade deficit would narrow – providing lasting and meaningful benefits to hard-pressed workers.
A decade ago, the original Schumer-Graham proposal was a thinly veiled anti-China initiative. The ire that motivated that proposal remains today, with China accounting for 47% of America’s still outsize merchandise trade deficit in 2014. Never mind that the Chinese renminbi has risen some 33% against the US dollar since mid-1995 to a level that the International Monetary Fund no longer considers undervalued, or that China’s current-account surplus has shrunk from 10% of GDP in 2007 to an estimated 2% in 2014. China remains in the crosshairs of US politicians who believe that American workers are the victims of its unfair trading practices.
While this argument has great emotional and political appeal, it is deeply flawed, because the United States has an insidious saving problem. America’s net national saving rate – the sum total of household, business, and government saving (adjusted for the depreciation of aging capacity) – currently stands at 2.5% of national income. While that is better than the negative saving rates of 2008-2011, it remains well short of the 6.3% average of the final three decades of the twentieth century.
Lacking in saving and wanting to grow, America must import surplus savings from abroad. And to attract that foreign capital, it has no choice but to run equally large balance-of-payments deficits.
So it is no coincidence that the US economy has a chronic current-account deficit. While this shortfall has narrowed from a peak of 5.8% of GDP in 2006 to 2.4% in 2014, it still leaves the US heavily dependent on surplus foreign savings in order to grow.
This is where the trade deficit comes into play. The US does not just pluck surplus foreign savings out of thin air. To attract the capital it needs, America must send dollars overseas through foreign trade.
And it is here that the currency manipulation argument falls apart. In 2014, the US ran trade deficits with some 95 countries. In other words, America does not suffer from a small number of bilateral trade deficits that can be tied to charges of currency manipulation by countries like China, Japan, Malaysia, or Singapore. Rather, the US suffers from a multilateral trade imbalance with many countries, and this cannot be remedied through the imposition of bilateral penalties such as tariffs.
Without fixing its savings problem, restricting trade with a few so-called currency manipulators would simply redistribute the US trade deficit to its other trading partners. In effect, America’s trade balance is like a water balloon – applying pressure on one spot would simply cause the water to slosh elsewhere.
Moreover, this approach could easily backfire. For example, assuming that there is no increase in domestic US saving, penalizing a low-cost producer like China for currency manipulation would most likely cause the Chinese piece of America’s trade deficit to be reallocated to higher-cost producers. That would be the functional equivalent of a tax hike on middle-class families – precisely the constituency that so concerns Congress. Further complications would arise from putting the verdict on currency manipulation – presumably dependent on some type of “fair value” metric – in the hands of politicians.
This is also the twist that underscores the ultimate congressional hypocrisy. The charge of currency manipulation is nothing but a foil for the US to duck responsibility for fixing America’s saving problem. Lacking any semblance of a strategy to boost savings – not just a long-term fix to the federal government’s budget deficit, but also meaningful incentives for personal saving – US politicians have turned to yet another quick fix.
In the end, there is no way around it: If Congress does not like trade deficits, it needs to address America’s saving problem and stop fixating on misplaced concerns over currency manipulation.
None of this is to argue that the US should ignore unfair trading practices. As a member of the World Trade Organization, the US has ample opportunity to use that body’s dispute-resolution mechanism to adjudicate major problems with its trading partners. And it has enjoyed success with this approach. What Congress cannot do is pretend that wrong-footed trade policy is the answer to its inability or unwillingness to refocus its domestic policy agenda.
Of course, it is always easier to blame others than to look in the mirror. But history has not been kind to major trade blunders. Just as the Smoot-Hawley Tariff Act of 1930 sparked a global trade war that may well have put the “great” in the Great Depression, Congressional enactment of enforceable currency rules today could spark retaliatory actions that might devastate the free flow of trade that a sluggish global economy desperately needs.
The US Senate was wise in rejecting this dangerous option. We can only hope that similar wisdom prevails in the House of Representatives. Currency manipulation legislation is one tragedy that can and should be avoided.
One thing we’ve covered quite extensively of late is the growing fiscal crisis facing state and local governments in the US.
To recap a few of the more important (and amusing) stories, recall that Chicago recently saw its debt downgraded to junk status by Moody’s after the Illinois Supreme Court struck down a pension reform law which would have paved the way for Mayor Rahm Emanuel to push for similar changes in Chicago where underfunded pension liabilities are set to triple by 2018. Adding insult to injury, Moody’s decision also triggered some $2 billion in accelerated payment rights for the city’s creditors and jeopardized the refinancing of some $900 million in floating rate paper.
Meanwhile, in Kansas, GOP Governor Sam Brownback’s tax cuts have backfired, helping to blow an $800 million hole in the state’s budget resulting in cuts to education and proposed worker furloughs and prompting one angry waitress to advise Brownback to “tip the schools” rather than his server.
Down south things aren’t much better as falling oil prices have plunged Louisiana into a $1.6 billion fiscal abyss that’s now threatening to bankrupt LSU.
Visually, the situation looks like this…
Now, lawmakers fear the Illinois Supreme Court may have set a precedent that will hamper efforts to cut pension costs meaning state and local government officials will need to figure out alternative ways to plug the holes and as you might have guessed, option number-one is …drumroll… more debt.
Facing a shortfall of more than $50 billion in his state’s pensions, and with no simple solution at hand, Gov. Tom Wolf of Pennsylvania is proposing to issue $3 billion in bonds, despite the role that such bonds have already played in the fiscal woes of other places.
And he is not alone. Several states and municipalities are considering similar action as they struggle with ballooning pension costs.
Interest in so-called pension obligation bonds is expected to intensify in the wake of a recent Illinois Supreme Court decision that rejected the state’s attempt to overhaul its severely depleted pension system. The court ruled unanimously that Illinois could not legally cut its public workers’ retirement benefits to lower costs, forcing lawmakers to scramble for the billions of dollars it will take to keep the system intact.
While the Illinois ruling is not binding on other states, analysts think it may influence lawmakers elsewhere to look to alternatives to cutting public pensions…
“My reaction was, ‘Yeah, that’s going to play here,’ “ said John D. McGinnis, a lawmaker in Pennsylvania, which has also been diverting money from its pension system, setting the stage for a crisis as more and more public workers retire. The state has no explicit constitutional mandate to protect public pensions, as Illinois does, but that is irrelevant, said Mr. McGinnis, a Republican and former finance professor at Pennsylvania State University.
“The judiciary in Pennsylvania has been solidly of the belief that there are ‘implicit contracts,’ and you can’t deviate from them,” he said. If lawmakers in Harrisburg were to unilaterally cut pensions now, he said, they could be taken to court and be dealt a stinging rebuke, like their counterparts in Illinois.
‘Solving’ this problem by issuing bonds is an enticing option but at heart, it amounts to what one might call a “pension liability-bond arbitrage.” The idea is to borrow the money to plug the pension gap and invest it at a rate of return that’s higher than the coupon on the bonds, thus saving money over the long-haul.
Of course, much like transferring a balance on a high interest credit card onto a new card with a teaser rate (or refinancing a high interest credit card via a P2P loan) this gimmick only works if you do not max out the original card again, because if you do, all you’ve done is doubled your debt burden. As it relates to pension liabilities, this means that what you absolutely cannot do is use the cash infusion as an excuse to get lax when it comes to pension funding because after all, that’s what caused the problem in the first place. Here’s NY Times again:
Fiscal analysts say it is possible, in theory, to shape a pension obligation bond deal responsibly, but that is not what they usually see.
Instead, the deals are typically used to make troubled pension systems seem a little less troubled for a few years, allowing elected officials to celebrate a pension reform without having to make the system sustainable over the long term.
The flood of cash from the bonds may also tempt officials into taking a break from their pension-funding schedule — the very action that has caused so much pension distress to begin with. Skipping annual pension contributions produces an off-balance-sheet debt that can start growing exponentially.
Aside from the rather obvious fact that borrowing huge sums of money to paper over problems has a tendency to promote the very same type of irresponsible behavior that got the borrower into trouble in the first place thus setting the stage for a scenario that ends up being twice as bad as it was initially, there’s also the fact that, as documented in these pages extensively, investment return assumptions for public pension plans are often at odds with reality. That is, projecting a 7% return in a world governed by ZIRP and NIRP means that in the best case scenario you are being absurdly optimistic and in a worst case scenario you’re likely taking greater risks in an effort to maximize returns. Reinforcing the latter is the following graphic which shows the extent to which pensions have moved increasingly into riskier assets over time in an effort to stay solvent in a low rate environment:
And, for those who missed it, here is a sampling of the return assumptions from Chicago’s local government pension plans (ask yourself how one can possibly hope to hit these targets by investing conservatively in today’s markets):
As for pension obligation bonds well, they aren’t necessarily something you want to get involved with if you’re a yield-starved investor because as it turns out, helping broke states and municipaltiies perpetuate pension ponzis sometimes ends very poorly:
After declaring bankruptcy in 2013, Detroit sought to have $1.4 billion of pension obligation bonds voided outright, saying they had been sold illegally in 2005 and were not enforceable. Ultimately, Detroit settled the debt for about 13 cents on the dollar, the lowest recovery rate of any of its bonds.
Meanwhile, in San Bernardino, California (a city which still finds $650,000 to pay off victims of post-horse chase police brutality), investors learned the pension obligation bond lesson the hard way.
Via Bloomberg:
U.S. Bankruptcy Judge Meredith Jury on Monday threw out a lawsuit in which investors had claimed their pension bonds must be paid off at the same rate as the California Public Employees’ Retirement System in the San Bernardino bankruptcy. The $304 billion fund is the biggest in the U.S.
Jury acknowledged that her decision may discourage investors from buying pension-obligation bonds in the future.
“What I see as unfair, and might seem unfair to the outside world, does not matter under law,” Jury said, referring in part to the powerful remedies Calpers can seek if the city doesn’t honor its contract…
An investor who buys pension-obligation bonds “is just asking for trouble,” said Cohen, who manages $345 million for individual investors. The cities’ bankruptcies show that pensioners and municipal employees have an advantage over bondholders, she said.
In the end, at least one concerned Pennsylvania citizen (who is ironically a retired state employee) gets it and because we appreciate his candor, we’ll give retired accountant Barry Shutt the last word:
“When you’re borrowing money for pensions, you’re getting a new credit card to pay off the old one, and you still haven’t paid off the old one.”
Our beef with our own generation is not that it failed, but that it succeeded too well. It took control of government and used it like an ape uses a rock – to crack open a nut. But we’ll come back to that in a minute…
Yesterday, a London-based magazine and a TV station interviewed us. Both asked if we were “pessimistic.” “Of course not,” we replied. “We expect today’s financial system to fall apart in a terrible crash and depression. But we’re looking forward to it.” This was not exactly the answer they were looking for… And there’s not enough time in an interview to explain why this view makes any sense at all. The audience must have thought we had lost our mind.
We also had a meeting with our old friend and editor of the Gloom, Boom & Doom Report Marc Faber yesterday. He helped make sense of our “pessimism.”
“The system is corrupt,” he said. “The government. The banks. The central banks. Big business.”
People always use their wealth and power to try to protect themselves. Sometimes they use it to take wealth and power away from others, too. That’s corruption. Of course, that’s what government was designed for: to allow one group to rob another. If the elite could take no advantage from it, why would they bother with government at all?
Dirty Work
We baby boomers took over in the 1980s. We have been in charge ever since. Since then, we’ve corrupted the economy, the markets, and government. By the 1970s, some of the dirty work was already done: The Nixon administration had ditched honest money. Now, the coast was clear. We could use this new credit-based money to pervert the whole shebang.
The U.S. government used to be limited. That was the point of the Constitution – to restrict the feds’ power. Much of the restraint was financial. States were forbidden from making anything but gold and silver legal “tender.” But there was restraint when it came to foreign wars, too. Congress was supposed to bear the sole power not only to put troops in the field, but also to raise the money to pay for them.
Today, the Constitution is in a musty drawer somewhere; not even the Supreme Court justices can find it. The new money, along with a sans souci attitude toward debt, changed everything. Now, the feds can get away with anything – including murder – if they put the right spin on it.
Pretend to be fighting terrorists, drugs, cancer, racism, global warming, lack of consumer demand, or tobacco use and nobody asks questions.
Capitalism No More
The Reagan administration talked about balanced budgets and fiscal conservatism. But within months of arriving in Washington, the Republican Party rolled over. Since then, it’s scarcely ever met a zombie it didn’t like – especially if he had a gun in his hand. Wars overseas. Wars at home. Every fight cost money and every one was a loser. But not for everyone…
And now capitalism is no more – not in the 50 states at least. Now we have cronyism, in which businesses angle for favors from the feds.
Why the switch? It is more profitable.
Another old friend, Strategic Investment editor Jim Davidson, described the payoff:
The Sunlight Foundation reports on research it undertook between 2007 and 2012, tracking 200 of America’s most politically active corporations:
“After examining 14 million records, including data on campaign contributions, lobbying expenditures, federal budget allocations and spending, we found that, on average, for every dollar spent on influencing politics, the nation’s most politically active corporations received $760 from the government. The $4.4 trillion total represents two-thirds of the $6.5 trillion that individual taxpayers paid into the federal treasury.”
“That translates to a 75,900% rate of return,” says Jim.
Real capitalism means taking real risks… working hard… getting lucky… and discovering the future. Cronyism is safer and surer. It favors old, established businesses, the ones that can afford expensive lobbyists.
It doesn’t lead to wealth creation or progress, but it is easier for politicians and central planners to work with. They know where the money is! And they can plan for the past; it’s the future they have trouble with.
But wait… We came to praise our fellow boomers, not to bury them in scorn. Have we nothing nice to say about our own generation?
When we first brought the world's attention to the 330ET daily ramp in US equity markets, we were shrugged off as conspiracy wonks once again, but 2 years later – as trading activity has become increasingly focused in smaller and smaller windows during the trading day, so the mainstream media has finally been forced to admit that the US equity market has become nothing but Ebay – where everyone waits til the last second.
During the day, “people are watching the paint dry,” said Leonid Hmelnitsky, head of equities trading for Mellon Capital Management, a San Francisco money manager with $404 billion under management. “We’ve definitely seen the shift.”
Just as we noted 2 years ago, The Wall Street Journal reports across Wall Street, less trading is taking place at 3 p.m. or, in fact, most any time but the opening minutes and the final half hour.
The rising use of index funds, which generally prefer to trade at the close, is contributing to the shift. So are the scores of computer models sniffing out the best times to trade, when they have the greatest chance of matching up without driving the price higher or lower.
With the trend has come concerns about liquidity in the multitrillion-dollar U.S. stock market. As more volume migrates to the end of the session, liquidity—or the ability to buy or sell stocks easily at a given price—is harder to come by during midday hours, traders said. That makes trading away from the end of the day more costly, making it harder for traders looking to capitalize on favorable midday stock moves.
The shift also raises the prospect that stocks will be more vulnerable to outsize swings during low-volume trading hours in the middle of the day, an outcome that could expose investors, including retail stock buyers, to losses.
By the numbers it is quite stunning…
More than one in six trades in S&P 500-listed stocks took place between 3:30 and the 4 p.m. closing bell last year, according to an analysis by Ana Avramovic, trading strategist at Credit Suisse. The 17.8% of trades in that period compares with 13% in 2007.
For shares of smaller companies, 19.3% of trades were in the final 30 minutes, up from 14% in 2007. That is important because it can often be difficult for investors to trade smaller-company stocks without pushing the price up or down.
Even the closing minutes of trading have become more crowded. The final five minutes accounted for 6% of all volume last year, rising each year since 2010, according to Trade Informatics, a trading-analytics firm.
A growing reliance on computerized trading tools has accelerated the shift.
Such tools aim to lower costs and limit the impact money managers have on share prices. These include programs that dribble out trades at intervals, known as “volume weighted average price” algorithms. Their proliferation has led volumes to snowball at times when investors are already active, such as at the close.
“It just kind of feeds on itself,” said Joe Rodela, head of U.S. trading at Allianz Global Investors. “Volume attracts volume.” Mr. Rodela, who trades on behalf of portfolio managers at the $499 billion investment firm, said a greater share of Allianz’s own stock trades over the years take place later in the day. Trading later is cheaper and comes with less volatility, he said.
* * *
How is this good for the retail investor?
“In the middle of the day… you have such a liquidity void,” said Joe Spinelli, who heads trading in single stocks for the Americas at Deutsche Bank.
Perhaps even more worrisom, just like in the US, so in the case of a clearly rigged stock in the world's biggest bubble – all the rigging takes place in the very end of trading…
A Financial Times analysis of two years of trading data of Hanergy Thin Film stock — more than 800,000 individual trades on the Hong Kong Stock Exchange — shows that shares consistently surged late in the day, about 10 minutes before the exchange’s close, from the start of 2013 until February this year.
To make it more clear what this means…
As The FT reports, a trader who bought HK$1,000 ($129) worth of HTF at 9am on every day of trading since January 2 2013 and sold those shares at 3.30pm each day, would have seen their money shrink to HK$635 by February 2015.
But if they held on for just under half an hour more each time, the HK$1,000 would have turned into HK$8,430. This calculation does not include overnight gains.
* * *
Welcome to the Ebay Market… where every index is Hanergy.
For years, I have warned that we will face our worst nightmare – the collapse of socialism. In the death throes of this abomination that even the Ten Commandments listed as a serious sin, equal to “thou shalt not kill”, government will become the ugly beast that will devour society to retain power.
Of course, they will never see themselves that way, but they will justify in their minds that stripping us of our freedom, rights, privileges, and immunities, is necessary to maintain socialism for the good of the people.
We are running out of other peoples’ money, as Margaret Thatcher warned.
Karl Marx, who sought to change society by sheer force, set all this in motion. What has taken place is really scary, for indeed they have altered society far more than anyone dares to ponder.
Why is this Sovereign Debt Crisis collapse different from 1931? When the governments of the world defaulted on their debts in 1931, there were no pension funds. Government has exempted itself from all prudent reason for you take the state operated pension funds, like Social Security in the USA, where 100% of the money is in government bonds. They may have no intention of defaulting, but very few government have ever paid off their debts in the end. Then there are states who regulate pension funds requiring more than 80% to be in government bonds.
A Sovereign Debt Default this time around will wipe out socialism, yet the bulk of the people are clueless not merely about the risk, but the ramifications. Younger generations do not save to support their parents for that was government’s job post-Great Depression. Socialism has altered thousands of years of family structure following the ranting of Karl Marx. This has been one giant lab experiment that ended badly in China and Russia and is coming to a local government near you.
So this time it is SUBSTANTIALLY DIFFERENT. Government is now on the hook, which is part of the reason why they are moving to eliminate cash to prevent bank runs and to force society to comply with their demands. This is why we have people like Gordon Brown, who sold Britain’s gold reserves in 1999 making the low, claiming now that eliminating cash will eliminate the boom and bust of the business cycle. Let’s face it, Gordon Brown has NEVER been right when it comes to politics, not even once, and he has been the worst manager of finance that Britain has ever known. He sold the low in gold and now he presumes he can fulfill Marxism by eliminating cash. He postulates ideas that are theory without any support whatsoever. We cannot afford more arrogant people like this in politics who believe they have a right to experiment with society.
This time it is very different. They have wiped out society placing the entire scheme of socialism as a terrible nightmare that will end badly, and they have ruined the social family structure disarming people that for thousands of years was our very means of self-sufficient survival. These clown have set the tone for wiping out the dreams they sold the elderly, all while hunting taxes and causing job creation to implode as the youth has been converted into the lost generation. All this with pretend good intentions. Can you imagine the damage to society if they had actually intended this mess? They have lied to themselves and to the people. We have to crash and burn – that part is inevitable. Only when the economy turns down will we then argue over solutions.
Given the efforts in JPY carry and VIX clubbing to juice stocks today, this seemed appropriate…
But by the close… despite the best efforts of VIX and JPY, we ended red
Futures show we drifted lower overnight with the opening ramp helping bring things back
On the week, Nasdaq and Small Caps were lifted back green after early weakness…
Trannies hit "correction" 10% down territory…
It seems VWAP is going mainstream…
Treasuries and Stocks remain decoupled…
VIX was a gappy mess (that is a technical term only experienced traders will understand) that was on a mission to go lower…
VIX futures volume is getting massively concentrated… Thanks VXX rebalance
The USDollar slipped on the day – amid more volatility around the US open – led by EUR and CHF strength…4th day in a row of overnight USD buying and US session selling…
This is the first consecutuive days drop in USD in 2 weeks.
Treasury yields were very quiet today – short-end outperformed…
Gold for the 3rd day was deadsstick as was Copper and silver…
Gold has traded in a $5 range the last 3 days… with the USD a lot more volatile
Crude did its shenanigannery once again as inventrory draw gains were reversed on production surges and then machined higher into NYMEX close…
For the 4th day in a row, China opened with a dip last night… but this time it was different. A half-hearted BTFD-effort was met with major selling pressure. Between real-estate developer Kaisa's failed bailout and yet another entity defaulting (Zhuhai Zhongfu stock plummetted) it appears the 8% rip of the last few days in the Shenzhen Composite was just too much for Chinese housewives not to take some profits. By the end of the day, Shanghai Composite, CSI-300, and CHINEXT were all red on the week (the latter down hard) and the meteoric Shenzhen Composite up just 0.6% on the week (after its biggest daily drop in 2 years).
It was different this time…
Something does not look right… though panic may not be setting in yet…
Worst single-day drop in 2 years and almost worst since 2010…
Within the Shenzhen Composite 271 stocks (out of 1730) plunged by 9.99% or more(but Saimo Electric, Sichuan Maker Biotech, and Global Infotech all rose more than 40% on the day)
And 179 (of 1083 stocks) in The Shanghai Composite dropped 9.99% or more overnight…
In other words – this is the worst sell-off since the new smart investing public joined the casino.
As the farcical negotiations between Greece and its creditors unfold ahead of a June 5 IMF payment and as Alexis Tsipras is forced to spread false hope just to avoid a terminal bank run, a picture of the Greek endgame has emerged.
On the political front, the troika is intent on sending a strong message to leftist political parties (such as Spain’s Podemos and Portugal’s “ascendant” socialists) that using the threat of a euro exit as a way to extract austerity concessions is not a viable negotiating strategy. What this amounts to is an attempt on the part of the “institutions” to subjugate the political process to economics. In terms of skipping a payment to the IMF — who, as a reminder, effectively paid itself earlier this month by allowing Greece to tap its SDR reserves to pay the bills — there are a number of cross acceleration concerns which you can review by referring to the following graphic:
Now, amid accelerating deposit outflows and an hourly flow of conflicting headlines, Deutsche Bank is out with a fresh take on the Greek endgame including an analysis of both the political wrangling that would need to take place in order for parliamentary approval of concessions to creditors and the mechanics of a default to the IMF.
Via Deutsche Bank:
Little has changed in terms of developments on the ground. Despite a number of reports that negotiations may be split into separate chapters and disbursements with more difficult issues left for September, this remains unlikely. The consistent European position has been that a full staff-level agreement between the institutions – inclusive of the IMF – and Greece is required to unlock funding. Talks in this direction has been progressing in stop-start fashion over the last few weeks, with the Brussels Group (former Troika) reconvening again yesterday to continue negotiations. But progress remains slow, with multiple European and IMF officials over the last twenty four hours stating that more needs to be done to reach agreement…
The Greek government’s liquidity position will ultimately drive the timelines over the next few weeks. Close to 1.5bn EUR is due to the IMF in four instalments over the course of June, with Greek government officials repeatedly stating that there are insufficient cash buffers to satisfy these payments. Given that the last IMF payment was made by drawing down Greece’s SDR reserves at the fund, an exhaustion of cash buffers is a fair assumption. The most likely catalyst in coming weeks is therefore likely to be the Greek government’s ability or not to pay the IMF…
A number of press reports have suggested that there is a one-month grace period relating to a failure to pay the IMF. This likely confuses two issues: a non-payment and the implications this has on cross-default provisions on other loan instruments. IMF loans do not include any formally defined grace period, with fund staff required to send an urgent cable demanding payment to the Greek authorities immediately. This is then followed by a formal notification by the IMF Managing Director to the Executive Board of the failure to pay. It is this notification that is defined as an event of default in Greece’s EFSF and other official-sector loans, triggering cross-default. If this materializes, European creditors then have the right (but not the obligation), to accelerate EFSF loans, causing them to be immediately payable. In turn such an acceleration event would trigger cross-default and potential acceleration in the post-PSI Greek government bonds. The timing of the IMF notification letter is itself a political decision, however, as is the decision to accelerate EFSF loans. IMF guidelines suggest the notification to the board happens in a month. Our understanding is that the notification period may be flexible, with some reports last week suggesting that the Executive Board has requested that this notification happens sooner in the event of a failure to pay from Greece.
Either way, it is important to note that it is not the response of the IMF that will matter in the event of a non-payment. It is the role of the ECB that is crucial. The funding of the Greek banking system remains highly dependent on the central bank’s Emergency Liquidity Assistance, with a suspension or cap to this financing equivalent to an inability to make deposit withdrawals (or foreign transfers) from Greek banks and de facto capital controls.
The above underscores two important points that we’ve made on any number of occasions. First, whether, when, and to whom Greece defaults is ultimately a political decision that rests in the hands of the IMF and EU creditors. Once again, it’s all about using financial leverage to influence the future course of the currency bloc’s political landscape.
Second, the ECB ultimately controls the fate of the Greek banking sector and therefore Greek depositors because without ELA, banks simply can’t keep up with withdrawals, lending the lie to Tsipras’ Wednesday contention that there is “absolutely no danger” to depositors.
Next, Deutsche takes a look at possible outcomes to the Greek tragicomedy:
No agreement reached, followed by non-payment to the IMF (40% probability). This scenario would likely provoke the most negative reaction from the ECB.Even if cross-default provisions on Greek loans are not triggered immediately, the ECB would likely severely restrict Greek bank access to ELA financing. Rather than declaring the banks insolvent (similar to Cyprus), the most likely avenue for this would be to refuse to raise the regularly reviewed ELA financing ceiling, or more likely, to raise the haircuts required on Greek bank collateral. Our current calculations suggest that Greek banks have around 30-40bn of liquidity available to draw under existing collateral arrangements. An ECB decision to raise haircuts aggressively could leave an implicit “hard” ELA cap that is much smaller, effectively requiring the authorities to reach agreement within a matter of days depending on the pace of deposit outflows and collateral exhaustion.
Agreement reached, but no time/unable to pass through the Greek parliament before IMF payment (30% probability). European creditors will require passage of prior actions through parliament before any disbursements are made. An agreement by the government at the last minute is possible, but there may be no time to secure financing before the domestic political process plays out. The current ruling majority and/or the opposition may refuse to support an agreement requiring a change in government coalition. In this event, it is possible the ECB provides interim financing to pay back the IMF via raising the amount of treasury bills that the Greek government is allowed to issue. However, we would consider it more likely that Greece is allowed to fall into arrears at the IMF and the ECB makes a less binding increase in haircuts on ELA collateral. The latter would maintain the pressure on the Greek side to ratify an agreement, but at the same time would allow ongoing liquidity provision to the banks so long as the approval process is moving in the right direction.
Agreement reached, followed by timely passage through the Greek parliament (30% probability). This would be the most positive scenario, with the government able to quickly draw upon support from its own majority or the opposition to pass the agreement. Assuming the upcoming Friday June 5th IMF payment cannot be made, this would require a staff- level agreement 2-3 days before. In this event we would expect the ECB to tolerate an increase in t-bill financing to make whole on the IMF payment if disbursements haven’t been made in time due to other national approval processes.
In sum, there is a 40% chance that Greece simply doesn’t pay the IMF next month triggering, at the very least, restrictions on ELA access and, in short order, capital controls as withdrawals could accelerate and (literally) break the bank within “a matter of days.”
Alternatively, there’s a 30% chance that a deal is reached but proves so politically contentious that its provisions can’t be approved in time, making a payment to the IMF logistically impossible and putting the ECB in the rather unpalatable position of having to decide how lenient it wants to be based on the central bank’s perception of ratification progress which, incidentally, is essentially the same position Mario Draghi has been in for quite sometime only next month, creditors stop getting paid.
And just in case there were any lingering doubts about where talks are headed or about whether the IMF will be willing to compromise on either pension reform or its demands for the EU to writedown Greek debt in order to make the country’s debt-to-GDP ratio more ‘sustainable’, we’ll close with the following three headlines that hit the wires this morning:
GREECE SAID TO BE FAR APART WITH CREDITORS ON DEBT TALKS
IMF SAID TO INSIST ON GREEK REFORMS INCLUDING PENSION CHANGES
IMF SAID TO BELIEVE DEBT RELIEF FOR GREECE MAY BE NECESSARY
* * *
Upcoming event and payments
Thursday May 28th – Eurogroup Working Group to discuss Greece
Monday June 1st – Bank holiday in Greece
Wednesday June 3rd – Weekly ECB review of ELA (and every Wednesday thereafter)
Wednesday June 3rd – ECB monetary policy meeting Friday
June 5th – 306 million EUR IMF payment
Friday June 12th – 344 million EUR IMF payment
Tuesday June 16th – 574 million EUR IMF payment Wednesday
June 17th – ECB non-monetary policy meeting
Thursday June 18th – Regular Eurogroup meeting
Monday July 13th – 459 million EUR IMF payment
July 14th – 87 million EUR interest payment
Monday July 20th – 3.5bn EUR maturity due to the ECB Tuesday
Thursday August 20th – 3.2bn EUR maturity due to the ECB
Our Opinion: Just default, tell them where to stick the payments. Greece cannot make these payments, they are bankrupt and have been for some time. They should never have been allowed to join the eurozone, they never fit the entry criteria, it was a fudge to get them in, it was always going to end this way.
Its time we had a true reckoning and a true reset of the economies, stop the pretense and lets start now on the road to recovery and a return to to sound money, sound policies and fairness.
Good riddance to Central Banks, good riddance to the Euro and good riddance to the EU – The experiment has failed, it was too rigid, too controlling and too prepared to manipulate.
Talks between Greece and its creditors went full-retard on Wednesday when the following soundbite from Canada’s FinMin Joe Oliver hit the wires:
“No Greek payment to IMF would be default to IMF”
That seemed self-evident to us, but in a world governed by debt, we suppose everyone occasionally needs to remind themselves that failure to make good on one’s obligations constitutes default.
In any event, Greece apparently owes quite a bit of money to the world’s drug suppliers because, as we reported earlier this week, Athens is now running short on bed sheets and painkillers in its hospitals as the consequences of being completely beholden to the ”institutions” which control the printing of a fiat currency become increasingly clear.
Here’s what we said on Sunday:
The idea that a developed country cannot provide basic emergency medical care because it is in poor standing with the institutions that print a fiat currency is patently absurd and simply isn’t tenable meaning that one way or another, this ‘situation’ will resolve itself in the coming weeks, an event which will put Europe’s broken bond markets to a rather difficult test.
Cash-strapped Greece has racked up mounting debts with international drugmakers and now owes the industry more than 1.1 billion euros ($1.2 billion), a leading industry official said on Wednesday.
The rising unpaid bill reflects the growing struggle by the nearly bankrupt country to muster cash, and creates a dilemma for companies under moral pressure not to cut off supplies of life-saving medicines.
Richard Bergstrom, director general of the European Federation of Pharmaceutical Industries and Associations, told Reuters his members had not been paid by Greece since December 2014. They are owed money by both hospitals and state-run health insurer EOPYY.
And in a further sign that, regardless of whatever outcome emerges from fraught talks between Syriza and group of creditors determined to use financial leverage as a means of subverting the democratic process in the EU, contingency plans are being discussed not only amongst ‘the institutions’ but amongst private sector firms as well:
Drugmakers and EU officials are now discussing options in the event Greece defaults on its debt or leaves the euro zone, disrupting imports of vital goods, including medicines.
“We have started a conversation in Brussels with the European Commission,” Bergstrom said. “We want the Commission to know that our companies are in this for the long run and are committed to Greece.”
There is a precedent for the pharmaceutical industry to agree exceptional supply measures during a financial crisis. It happened in Argentina in 2002, when some firms agreed to continue to supply drugs for a period without payment.
But the situation is complicated in Europe, given EU competition rules. They mean the Commission would need to take the initiative in approving any special scheme.
Drugmakers want any emergency program to include steps to mitigate spillover effects on other markets, including curbs on re-exports of drugs and a block on other governments referencing Greek prices when setting their own drug prices.
Simply turning off the supply is not an option for the industry, as Novo Nordisk discovered at the start of Greek debt crisis five years ago when it faced a storm of protest over plans to halt some insulin deliveries.
And while leaving Greeks with a shortage of “life-saving” drugs may “not be an option,” Greece has run out of options as well when it comes to coming up with the money to pay for basic medical supplies which means that without a deal, the world’s largest drugmakers could find themselves in the same financial place as the IMF and the ECB — that is, holding what amounts to IOUs from the Greek government.
The drugs industry has been here before. Greece also ran up large debts for its medicines in 2010-12, although they have since been repaid, with some companies receiving payment in government bonds that were subsequently written down in value.
Whether or not this is a precedent the industry will be willing to follow remains to be seen.
Mass surveillance under the Patriot Act is so awful that even its author says that the NSA has gone far beyond what the Act intended (and that the intelligence chiefs who said Americans aren’t being spied on should be prosecuted for perjury).
Specifically, the government is using a “secret interpretation” of the Patriot Act which allows the government to commit mass surveillance on every American.
So it’s a good thing that the Patriot Act may expire, but don’t get too excited …
Our sources say that the NSA is not too concerned, that it has secret interpretations of other authorities that give it much the same power that it would have had under the secret interpretation of 215 and other areas of the USAPATRIOT Act.
Under international human rights law, secret “law” doesn’t even qualify as “law” at all.
***
This includes not just the law itself, but the judicial and executive interpretations of written laws because both of those are necessary to ensure that people have clear notice of what will trigger surveillance.
This is a basic and old legal requirement: it can be found in all of the founding human rights documents. It allows people the fundamental fairness of understanding when they can expect privacy from the government and when they cannot. It avoids the Kafkaesque situations in which people … cannot figure out what they did that resulted in government scrutiny, much less clear their names. And it ensures that government officials have actual limits to their discretion and that when those limits are crossed, redress is possible.
***
To bring the U.S. in line with international law, it must stop the process of developing secret law and ensure that all Americans, and indeed all people who may be subject to its surveillance have clear notice of when surveillance might occur.
Top NSA whistleblower Bill Binney told us that nothing will change unless we fire all of the corrupt officials within the NSA and other government agencies.
Constitutional and civil rights attorney John Whitehead agrees:
It doesn’t matter who occupies the White House: the secret government with its secret agencies, secret budgets and secret programs won’t change. It will simply continue to operate in secret until some whistleblower comes along to momentarily pull back the curtain and we dutifully—and fleetingly—play the part of the outraged public, demanding accountability and rattling our cages, all the while bringing about little real reform.
Thus, the lesson of the NSA and its vast network of domestic spy partners is simply this: once you allow the government to start breaking the law, no matter how seemingly justifiable the reason, you relinquish the contract between you and the government which establishes that the government works for and obeys you, the citizen—the employer—the master.
Once the government starts operating outside the law, answerable to no one but itself, there’s no way to rein it back in, short of … doing away with the entire structure, because the corruption and lawlessness have become that pervasive.
It’s mostly not about trade. Only 5 of the 29 chapters are about traditional trade.
– Julian Assange in a recent interview with Democracy Now
I’ve focused a little bit more of my attention on the Trans-Pacific Partnership lately, as the Obama Administration scrambles to attain “fast-track” authority from Congress.
The content of this unbelievably dangerous gift to multi-national corporations is being kept secret from the public, and for very good reason.
* * *
For some background on the TPP and where it stands, see:
What little we know about the TPP has come from whistleblower site, Wikileaks. This is what Julian Assange thinks of this “trade” treaty in his own words.
Make no mistake, we have had our fair share of laughs at the expense of China’s equity mania, with the millions of new trading accounts opened by semi-literate housewives and security guards-turned day traders serving as the anchor for many an amusing post.
But as it turns out, China isn’t the only place where housewives are keen to express their view on financial markets because as you can see from the below, ‘Ms. Watanabe’ is positioning for a stronger yen even as Mr. Kuroda plunges Japan further into the largest ponzi scheme in the history of mankind in an effort to stoke hyperinflation to ‘rescue’ the country from a decades-long battle with deflation.
Via Nikkei:
Japanese day traders, colloquially and collectively known as “Mrs Watanabe”, are buying the yen as it nears eight-year lows, suspecting that policymakers would be reluctant to let the currency fall further as it would provoke criticism at home and abroad.
Last week, net dollar buying positions on the Tokyo Financial Exchange, Japan’s largest margin trading platform, had fallen almost 60 percent from a high hit in January, to stand among the lowest levels seen in the past year.
At Gaitame.com, another platform popular among margin FX traders, traders have even gone long in yen for the first time since late 2012, when Prime Minister Shinzo Abe was voted into power promising to reflate the economy through massive monetary stimulus, said Takuya Kanda, senior researcher at Gaitame.com Research…
So far at least, it looks like Japanese housewives may be getting squeezed because the JPY just hit an eight-year low against the dollar…
…but ‘Ms. Watanabe’ is a contrarian soul and apparently won’t be deterred…
Last week, the dollar finally broke out of its long-held, tight range between 119 and 121, edging up near the eight-year high of 122.04 yen touched in March.
Given the breakout, the dollar/yen’s technical outlook is bullish, usually a good time for day traders to buy dollars.
Yet, Japanese day traders are selling the dollar instead.
Whether that’s a good idea ahead of a widely-anticipated Fed rate hike and expectations that the BoJ will ease further in the event wage growth continues to disappoint and disinflationary pressures persist is certainly debatable but one thing is for sure, private equity has benefited handsomely from stakes in publicy-listed Japanese companies as Kuroda’s multi-trillion yen plunge protection has done wonders to help the Nikkei levitate. Reuters has more:
U.S. buyout funds Bain Capital and Cerberus Capital Management sold big stakes in two Japanese companies as the stock market surges – taking profits and avoiding an expected bout of volatility if the U.S. Federal Reserve raises rate later in the year, investors said.
The buyout specialists’ sales came as the market capitalization of shares listed on the Tokyo Stock Exchange’s main board hit a record high last week, surpassing the previous peak hit in December 1989, as Prime Minister Shinzo Abe deployed pro-growth economic policies to boost investor sentiment.
U.S. buyout firm Bain Capital is selling down its 70 percent stake in Japanese restaurant chain Skylark Co to less than half.
Skylark shares closed at 1,685 yen on Tuesday, 40 percent above the 1,200 yen at which Bain sold the stock in an initial public offering last year.
U.S. fund Cerberus last week launched the sale of up to $878 million worth of its shares in rail operator Seibu Holdings
“Recent sell downs of shares held by those buyout funds is a reflection of the surge in Japan’s stock market,” said Soichi Takata, head of private equity at Tokio Marine Asset Management Co. “But buyout firms are also probably mindful of the possible increase in market volatility later this year when U.S. interest rates begin to rise.”
Incidentally, Paul Singer is also exiting “ripe” positions in Japan:
Real estate securities also continues to be an area of current deployment of capital in new situations, but the deployment is more than offset by liquidations of ripe positions in certain markets, especially Japan.
Should ‘lift-off’ in the US stoke volatility in Japanese equities you can certainly expect the BoJ to move in with still more ETF (and perhaps individual stock) purchases because after all, you can’t designate your $100 billion equity book as “held-to-maturity”, meaning Kuroda will be forced to keep up the 35 billion yen daily market interventions for as long as absolutely possible lest a sell-off should blow a massive hole in the central bank’s balance sheet and that means running the printing presses until they begin to smoke and short circuit. What that will mean for all of the ‘Ms. Watanabes’ betting on a resurgent yen remains to be seen, but it will likely be supportive for Japanese equity markets which will help PE giants like Carlye Group take portfolio companies like Tsubaki Nakashima Co public and reap hefty profits in the process:
While there are not many public company shares held by private equity firms in Japan, U.S. buyout fund Carlyle Group owns almost all the shares in ball bearing maker Tsubaki Nakashima Co and the buyout fund could list the shares in the near future after failing in 2012, calling off an initial public offering of the company citing market conditions.
For Carlyle in Japan then, it truly is “all ball bearings these days.”
I spent my 20s living in London and whenever I landed up taking a black cab in London it was usually after I’d had too many drinks and my cognitive powers had gone kaput. I blame the fog of alcohol for that as there is simply no other explanation for being ripped off.
The shock when looking at my wallet the following morning came not from what had been spent on food and drink, but on what had been spent on a ride in a rattly old wagon of a vehicle that hasn’t had a design upgrade since Henry Ford decided horses were too slow.
In fact, I’d come to think that there were no homeless people on London’s streets, the “homeless” were merely office workers who’d missed the last tube home and couldn’t bear spending their weeks paycheck on a black cab.
Competition in the form of Uber is now providing a better, cheaper and more efficient service. It makes my heart leap for joy.
This is possibly the best thing to happen to the British way of life since the country was invaded by India and Pakistan, causing the widespread displacement of dingy eating houses smelling of grandmas’ curtains, hocking sausages and mash, with an incredible array of ethnic restaurants all selling delicious tasting cuisine.
Now, there was some truth to the value that a London cabbie could bring to the exchange. In order to get a license cab, drivers need to learn the streets of London like the back of their hand. No small task, I assure you. And as a passenger I would find that valuable if it weren’t for this piece of technology that made such knowledge largely obsolete – the GPS that sits on your smart phone.
Of course Londoners are not the only beneficiaries. The Americans have had it long before and it’s been working magic on their shores.
Driving a car is something that a teenager can and does do. It doesn’t require any particular level of skill. Recently NY medallions have been selling for over $1M. How on earth do we get to such an absurd situation where it costs over $1M in order to be “allowed” to drive a taxi in New York City?
Whenever we find absurdities where market forces are not left to solve problems, we find a market skewed by regulations where a tiny elite benefit while the majority suffer.
To understand why New York medallions sell for what seems to be an absurd price we need only look at the manipulation of the taxi market, namely a mandated limiting of supply of taxis. There are just over 13,000 medallions sold and they are strictly limited in supply.
This in itself is absurd. It’s the antithesis of a free market but nevertheless, the real reason that they are selling for ever increasing sums is due to the bond market.
Yup! The income stream from a medallion is pretty steady and as such the medallion is essentially a bond.
As we detail in our extensive report on global debt markets, interest rates have been butchered by successive central bankers so the hunt for yield has accelerated. If, for example, you can earn just $100,000 annually from your medallion, you’re looking at a 10% return. In today’s environment that looks pretty attractive. Even if you’re paying someone else to drive for you and that amounts to, say, $50,000 you’re still netting a real return of 5%. Again, not too bad in today’s yield starved world.
There are changes afoot in the bond market. Little do most purchasers of New York medallions realise that their actions are a result of central bank meddling.
I suspect that medallion purchasers are going to get hit from two sides. One from the repricing of risk in the global debt markets and two from disruptive technologies laying waste to archaic industries and practices.
There will always be those who mourn the loss of London’s black cabs and I say let them mourn. Not that long ago there was an outcry that we’d no longer have these things:
Remember them?
Now, I ask you to choose…
Yeah, I thought so. Me too!
I realise that many readers are reading this as it’s largely for financial and investment reasons.
I don’t have any particular thoughts on the current round of financing on Uber which values the company at $50 billion, other than to say that I’ve not quite figured out in all honesty why Uber is so special. There are no particular barriers to entry in this market, and it looks awfully like Uber is being valued like a monopoly.
Clearly they’ve shone the brightest thus far but this is a very short timeframe we’re talking about here. On the plus side, they actually have revenues, unlike Groupon who rose like a Phoenix only to collapse post IPO.
Certainly I think what Uber highlights more than anything is the very real fact that there are markets screaming out for disruption.
I’m in favour of Uber’s everywhere. I have written about disruptive industries and Uber is a great example of disruption to the taxi world. And it’s coming to the financial world too.
Some of the markets we’ve got our eye on in the venture capital space which are ripe for disruption are:
As I contemplate the list of private companies sitting in our due diligence pipeline, I’m terribly excited by the world that awaits. There are some truly enormous problems that the global economy faces, which we’ve detailed repeatedly on the blog.
One of those is a very real threat of capital moving rapidly out of current “safe” investments. At the same time, there are companies who are moving to take advantage of the current dysfunctional and broken system we have. This is one of the themes we’re actively investing in via Seraph. Sometimes it takes chaos to bring about change…
– Chris
“A free and open internet is a despot’s worst enemy.” – Jay Samit
When has crony capitalism really gotten out of control? How about when a major U.S. corporation (a huge defense contractor, no less) is publicly threatening government officials to leave the country if the federal government doesn’t continue to boost their profits through government handouts:
Boeing is stepping up pressure on opponents of the US Export-Import Bank with threats to shift manufacturing abroad if the agency that finances purchases by foreign customers is killed off next month.
The threats come as a new push is being made in Congress to find ways of wresting reauthorisation of the bank from a committee controlled by one of the agency’s fiercest opponents.
Scott Scherer, Boeing’s head of regulatory strategy at Boeing Capital, said the aerospace and defense group would “not sit idly by” if the ExIm Bank’s mandate was not renewed by the end of June. “Boeing is not going to let itself be hurt by the lack of an ExIm Bank,” he said in an interview with the Financial Times. “If it means sourcing … to other countries who will support us we may have to look at that. Other countries have more aggressive export policies. We will find an alternative.”
First, let me state the obvious: This basically sounds like blackmail to me, and I don’t think lawmakers should look at this kind of behavior favorably.
Second, it’s time for Boeing executives to understand that it’s not the role of the federal government to guarantee that they can sell as many planes as possible — they’ve benefited from the U.S.’s relatively free-market system; they should have to live with it.
And finally, I don’t think Boeing’s threat is very credible. Will Boeing really pick up its factories and move abroad if Ex-Im isn’t reauthorized? Is the possibility other governments might subsidize it really worth the transition costs and the risks of losing billions in defense contracts?
Thankfully, Jeb Hensarling, chairman of the House committee with jurisdiction over Ex-Im, called Boeing’s bluff:
The Republican chairman of the House Financial Services Committee rejected reports that Boeing Co. or other companies might move production overseas if Congress doesn’t reauthorize the U.S. Export-Import bank.
“I doubt I believe it,” Representative Jeb Hensarling of Texas said at a Washington press conference Tuesday about whether failing to extend the bank’s charter would drive major corporations out of the U.S. “I think it’s frankly a bit of bluster.”
Boeing, based in Chicago, might move some manufacturing overseas if Congress doesn’t extend the bank’s charter beyond June 30, the Financial Times reported May 17. It cited an interview with Scott Scherer, head of regulatory strategy at Boeing Capital.
Hensarling said he and others who oppose reauthorizing the Export-Import Bank are trying to “lead the party in a new direction” that will give priority to free enterprise over individual business interests.
Letting the Ex-Im Bank’s charter expire will go a long way to show that Republicans understand the difference between being pro-business and being pro-market — even if Boeing doesn’t.
Meet Marlon Paul Alvarez, 19, of Fort Lauderdale, Florida…
He faces grand theft charges after he was seen stuffing assault rifles down his pants at a pawn shop in Davie. As The Sun-Sentinel reports, made his first appearance in court Wednesday…
Broward Judge John Hurley expressed concern about Alvarez's behavior.
"You allegedly went into that pawn shop and removed an AK-47 rifle on display and stuck it down your pants," the judge read from the arrest report. "After a while, [you] pulled it out, put it back, then grabbed another assault rifle off another display [and] put that down your pants."
The owner of Public Pawn and Gun at 6798 Stirling Rd. noticed Alvarez limping out of the store with the assault rifle down his pant leg about 11:30 a.m. Tuesday, police said.
Owner Kevin Hughes confronted Alvarez outside and recovered the brand new $830 weapon before Alvarez ran off, the arrest report stated. Alvarez was seen on security video and the business owner was able to identify him when the suspect was arrested a short time later, police said.
Alvarez said in court he had moved to Florida from New York about one year ago and the judge noted there was a New York injunction ordering Alvarez to stay away from guns.
Assistant state attorney Eric Linder asked the judge to set a high bond. "It's one thing to try to steal a firearm, it's another thing trying to steal an AK47 and potentially trying to put a stolen firearm out on the street," Linder said. Hurley set bond at $25,000 for grand theft and the violation of a domestic violence injunction.
He revoked bond for a May 15 arrest on theft and drug possession charges in Pembroke Pines, Florida Department of Law Enforcement records showed.
"The court was just very concerned about your alleged behavior without even knowing your criminal background," Hurley said.
* * *
Finally after all that, according to the arrest report, Alvarez confessed to stealing the rifle.
We know that most western governments are deficit spending, borrowing heavily, in debt beyond the point of no return and must increase taxes and appropriations from their citizens.
We know that politicians will take the politically expedient path instead of addressing financial problems. We know they will “extend and pretend,” delay, and distract the populace.
We know that war has been a nearly constant distraction since 9-11 and that a crisis is often used as a justification for economic insanity, such as borrowing more to address an excessive debt problem. It seems likely that weakening economies, deflationary forces, excessive debt, massive unemployment, riots, economic anxiety, consumer price inflation, and so much more, will require more distractions. We should “rig for stormy weather” and expect another crisis and more wars.
Bankers, politicians and military contractors will benefit. IN OUR INSANE WORLD WE MIGHT ASK:
What happens to our financial system and the price of gold when western central banks are no longer willing or able to ship gold to Asia in exchange for fiat currencies held by Russia and China?
What would happen if the Chinese government announced that it will buy gold at $2,000 per ounce to boost their stockpile? When gold is no longer available at $2,000 per ounce, might they offer $4,000 or $6,000?
What would happen if the central banks of the world admitted that Quantitative Easing is primarily beneficial for banks and the wealthy, and that QE has been a failure at stimulating western economies?
What would happen to global confidence if central banks admitted that consumer prices will rise substantially due to QE and inflation of the money supply?
What would happen if commercial banks announced they will charge you for depositing your currency in their bank? (Oops, that has already happened.)
What should we expect if banks penalize savers for depositing (loaning) currency to a bank? We should expect an increasing use of cash – actual paper notes. But there appears to be a “war on cash” in western countries. Discourage cash, force deposits into banks, charge for those deposits, squeeze savers as much as possible, increase controls, and boost financial system bonuses.
What if bail-ins occur, and the banks take your deposited funds to pay off creditors, such as other banks who bought or sold derivative contracts? (If the bail-in is announced late on a Friday and the banks are closed the next week for “restructuring” you will have no opportunity to remove your currency from the bank. In Cyprus the insiders and politically connected escaped with their funds while many other individuals and businesses discovered their accounts had been “bailed-in.”)
What happens if governments eventually announce that most retirement accounts and pension plans will be required to purchase continually devaluing government issued bonds?
What happens if trust and confidence in the financial system are lost, banks no longer trust banks, businesses no longer trust they will be paid, and individuals no longer trust their governments or the pieces of paper we call money?
The Fed has reduced interest rates so investors are chasing yield in all the wrong places, such as junk bonds. What happens when many of those junk bonds, which may have been stuffed into your bond mutual funds and pension plans, are priced at their true value – much less than face value?
What are the consequences?
A few words come to mind: anger, anguish, bankruptcy, betrayal, depression, recession, repression, riots, stagflation, and trauma.
In a saner world, we will depend far less on fiat currencies that are devalued easily and inevitably. Instead we will trust gold and silver more and paper much less.
Summary: The Man in the Moon studies the pathology of Earth’s global economy and markets from a distance where there’s no gravitational pull towards empiricism or consensus. His findings: 1) the global economy is over-leveraged, fragile, stagnating, and increasingly centrally managed; 2) capital markets and asset performance have been captured by the perception of the ongoing value of money, and so; 3) unconventional investment analysis is prudent.
In Part 1, TMITM identifies the point of tension driving global output growth lower: ubiquitous leverage. Part 2 discusses “The Great Leveraging.” Part 3 explores the inevitable “Great Reconciliation”. Part 4 projects economy-saving exogenous influences one should expect. Part 5 builds a general investment framework for asset allocation.
Lunar View
The moon is about 239 thousand miles (384 thousand km) from Earth, many times more distant than the 30,000 foot level most investors think of as perspective-inducing. If an all-sentient Man in the Moon were to cast his eye upon Earth, interested only in building wealth for himself, where might his investment process begin? (With apogee-down analysis, no doubt.)To begin, he would surely grasp the gravity of disruptive innovations within telecommunications, logistics, robotics, transportation, farming, energy, payment services, and health care sectors. Breathtaking leaps forward have benefitted the global economy through creative destruction, a natural process pushing productivity gains.
When combined with an expanding global work force, innovation should have naturally driven the global economy to…well, economize, in turn driving consumer prices lower and affordability higher. Alas, deflation that benefits consumers would have been highly disruptive to entities that produce goods and services and to those that rely on inflation for sustainability, like banking systems.
Almost Copacetic
Entering 2015, the global economy seemed poised to expand. According to the World Bank:
”Global growth in 2014 was lower than initially expected, continuing a pattern of disappointing outturns over the past several years. Growth picked up only marginally in 2014, to 2.6 percent, from 2.5 percent in 2013. Beneath these headline numbers, increasingly divergent trends are at work in major economies…Overall, global growth is expected to rise moderately, to 3.0 percent in 2015, and average about 3.3 percent through 2017”
Despite such official optimism, the first quarter of 2015 is not providing hope that output is improving. Real GDP growth in the U.S. – among the growth leaders in developed economies last year – rose only 0.2 percent in the first quarter, significantly below expectations. The Atlanta Fed – the most accurate predictor of Q1 growth – further estimates Q2 output to be only 0.7 percent, implying weakness stretching beyond bad weather and port strikes. 2 And China, the world’s second largest economy and, with India, a reliable leader in output growth among emerging economies, reported Q1 nominal growth of 5.8 percent, a record low, and its Q2 trade figures show further deterioration.
To investors, future output growth seems to be just another input into asset allocation decisions, and not a very important one at that. Equity prices – corporate and property – are generally firm across domains. Bond prices remain well-bid; official funding and sovereign interest rates remain near record lows – in fact negative in some domains – implying either economic contraction is on the horizon or there’s a relative paucity of bonds (or both). And commodity prices (determined mostly by leveraged financial players trading leveraged derivative instruments rarely taking delivery) have dropped significantly, further implying lethargic global production.
Meanwhile, multinational businesses, each with an economy it calls home and a government to do its bidding, are aggressively allocating capital to boost short-term share values – abetted, it seems, by monetary authorities actively keeping economies and markets liquid. And although regional wars are taking human lives, confounding politicians, and adding volatility to the cost of energy, trade channels for resources remain mostly open. Lasting peace and prosperity? Hopefully…
The Dark Side
…but fundamental factors lie beneath the surface that pose significant threats to economies and investors. Balance sheets across the spectrum remain highly leveraged and continue to expand at a clip well beyond the rate of global output growth. For median households, debt levels continue to rise more than wage growth; for governments, obligations are rising more than tax revenues; for publicly-owned businesses, debt is rising faster than revenues; and for investors, debt could easily grow more than income and asset appreciation, suddenly and without warning should markets stall or fall. (If only interest rates were high enough to support another refinancing wave then monetary policy makers would know what to do!)
Growth and bull markets may come and go, but compounding debt is forever. There is not enough existing currency for debt extinguishment. This is why debt, per se, is not the fundamental problem – leverage is. Debt simply needs to be serviced, not necessarily repaid. Leverage ratios are most troubling however one chooses to calculate them: debt-to-GDP, debt-to-income, debt-to-base money, or, the most technically accurate (and the most telling indicator so far of central bank policy), bank assets-to-base money. (More on this in TMITM Part 3.)
Leverage reduction is generally discouraged by economic policy makers because it would create major structural problems. Indeed, in the U.S., even as bank balance sheets were de-leveraged from 2009 to 2014 through reserve-creating Quantitative Easing (QE), total credit market liabilities rose 17 percent.
Most economists today believe economies require constant credit growth for demand and output growth. As we are seeing, however, easy credit conditions do not necessarily lead to increasing production and capital formation, both of which would provide sustainable debt-servicing capabilities.
Increased savings rates would be just as bad to highly-leveraged economies, as it would decrease economic activity, in turn pressuring governments to invest money they don’t have and central banks to stimulate demand growth through even more credit creation, defeating the original purpose.
Global monetary authorities are boxed. Is it any wonder they fear deflation and see improving affordability as failing to create sufficient demand through credit growth? So much for economies economizing…
As it stands
The marginal buyers of sovereign debt today are:
leveraged liquidity providers, such as private banks and hedge funds, that do not care about ROIs in real terms, preferring to use sovereign debt to fund themselves with zero risk-weighted assets and produce nominally-positive net interest margins;
central banks with infinite, un-scrutinized balance sheets looking to keep their economies liquid and their private banks solvent;
currency reserve holders, like China and Japan, that cannot easily spend their reserves to buy corporate equity, and;
buy-side portfolios with relative return investment mandates forcing them to stay invested in assets guaranteeing losses in absolute terms.
While this line-up makes it easy to intellectualize low and negative interest rates, perhaps there is another, more fundamental driver: an underlying state of global economic dis-equilibrium in which:
there is too much money and credit per unit of production, and therefore;
real output is turning negative, and so;
Equilibrium Real Interest Rates are also turning negative?
Are negative real rates implying that credit must contract so that real production, capital formation, and employment might grow? Perhaps nominal (non-inflation adjusted) risk-free rates actually deserve to be negative given such bleak prospects for real output growth? (What would this imply about interest rate “normalization” currently contemplated by the Fed – a rate hike or a rate cut?)
If this real-contraction premise has merit, then it might explain why interest rates are lowest (or negative) in domains most susceptible to output contraction, and why global equity markets are firm. Where else can one hope to generate risk-adjusted positive real rates of returns, especially given the likely antidote to nominal output contraction: inflation?
Whether or not fundamentals matter, global monetary authorities must now ensure liquidity remains sufficient so that asset prices – as the collateral for systemic credit – do not fall. This is something on which TMITM can reliably bet.
Goodnight Boom
The global economy seems to be suffering from a late-stage paradox in the financial leveraging cycle in which nominal output growth has become counter-cyclical to real output growth. The more commerce and trade rely on credit growth and asset appreciation, the more the ultimate benefit of growing economies is diminished.
Despite this paradox, the pursuit of demand growth and nominal GDP growth through credit growth has been immortalized into global monetary policy orthodoxy, and growth (not affordability) remains the primary metric scrutinized by most economists and investors. Such is Earth’s epic economic battle presently. In this corner, naturally occurring economic productivity gains and deflation. In that corner, policy-manufactured inflation to maintain asset values and liquidity. Ding! Ding!
The inescapable conclusion is that real output is quickly withering, whether we deflate nominal output for contemporaneous inflation (i.e., CPI, PCE, PPI), 2% inflation targets policy makers hope to produce (e.g., the Fed, BOJ and BOE), or far more significant future inflation (via currency purchasing power loss), the seeds of which are currently being planted, that would flare suddenly in the next leveraging cycle.
It seems clear that output growth in the future must be negative in real terms, and, ultimately, that there will have to be some kind of leverage reconciliation.
If weaker GDP growth currently in the U.S. China, and elsewhere (and deflation in the UK) is foreshadowing a secular global economic contraction, then perhaps the course of this reconciliation will present itself sooner than most think?
With apologies to Margaret Wise Brown:
In the great green room There was a printing press And a television And a picture of – Global growth in distress.
And there were three central banks, shooting economic blanks And global depositories And political suppositories Seventy years of coordination Forty years of subordination Thirty years of financialization
Goodnight boom Goodnight soon Hello Man in the Moon
TMITM – Part 2 will explore “The Great Leveraging”.
The leader of Cuba between 1959 and 2008 was Fidel Castro. Fidel Castro is a controversial figure, with some viewing him is a dictator who nationalized property of foreign citizens without compensation. Citizens of Cuba seem to view him as more of as a Robin Hood figure, who helped the poor by bringing healthcare and education to all, equalizing wages, and building many concrete block homes for people who had only lived in shacks previously.
If we compare Cuba to its nearest neighbors Haiti and Dominican Republic (both of which were also former sugar growing colonies of European countries), we find that Cuba is doing substantially better than the other two. In per capita CPI in Purchasing Power Parity, in 2011, Cuba’s average was $18,796, while Haiti’s was $1,578, and the Dominican Republic was $11,263. In terms of the Human Development Index (which measures such things as life expectancy and literacy), in 2013, Cuba received a rating of .815, which is considered “very high”. Dominican Republic received a rating of .700, which is considered “High.” Haiti received a rating of .471, which is considered “Low.”
Cuba is known for its permaculture programs (a form of organic gardening), which helped increase Cuba’s production of fruit and vegetables in the 1990s and early 2000s.
In spite of all of these apparently good outcomes of Cuba’s experimentation with equal sharing of wealth, in recent years Cuba seems to be moving away from the planned economy model. Instead, it is moving to more of a “mixed economy,” with more entrepreneurship encouraged.
Since 1993, Cuba has had a two currency system. The goods that the common people could buy were in one set of stores, and were traded in one currency. Other goods were internationally traded, or were available to foreigners visiting Cuba. They traded in another currency. This system is being phased out. Goods are now being marked in both currencies and limitations on where Cubans can shop are being removed.
I don’t have explanations for all of the things that are going on, but I have a few insights on what is happening, based on several sources:
My recent visit to Cuba. This was a “people to people” educational program permitted by the US government;
My previous work on resource depletion, and the impacts it is happening on economies elsewhere;
Other published data about Cuba.
The following are a few of my observations.
1. Many island nations, including Cuba, are having financial problems related to dependence on oil.
Dependence on oil for electricity is one of the big issues affecting Cuba today. Island nations, including Cuba, very often use oil to produce much of their electricity supply, because it is easy to transport and can be used in relatively small installations. As long as the price of oil was low (under $20 barrel or so), the use of oil for electricity is not a problem.
Figure 1. Cuba’s energy consumption by source, based on EIA data.
Once the price of oil becomes high, the high cost of electricity makes it difficult to produce goods for export, because goods made with high-priced electricity tend not to be competitive with goods made where the cost of electricity is cheaper. Also, once the cost of oil rises, the price of imported food tends to rise, leading to a need for more foreign exchange fund for imports. In addition, the cost of vacation travel becomes more expensive, driving away potential vacationers. The combination of these effects tends to lead to financial problems for island nations.
Figure 2. Cuba balance of trade. (In US $. 000,000s omitted) Chart by Trading Economics.
2. Cuba has a low-cost arrangement for buying oil from Venezuela, but this can’t be depended on.
Venezuela is Cuba’s largest supplier of imported oil. The recent drop in oil prices creates a problem for Venezuela, because Venezuela needs high oil prices to profitably extract its oil and leave enough to fund its government programs. Because of these issues, Venezuela is having serious financial difficulties. Its financial rating is Caa3, which is even lower than Cuba’s rating. Cuba uses its excellent education system to provide physicians for Venezuela, and because of this gets a bargain price for oil. But it can’t count on this arrangement continuing, if Venezuela’s financial situation gets worse.
3. Neither high nor low oil prices are likely to solve Cuba’s financial problems; the real problem is diminishing returns (that is, rising cost of oil extraction).
Cuba finds itself in a dilemma similar to that that the rest of the world is experiencing–only worse because it is an island nation. The rising cost of oil extraction is pushing the world economy toward lower economic growth, because the higher cost of oil extraction is in effect making world’s production of goods and services less efficient (the opposite of growing efficiency, needed for economic growth). The extra effort needed to extract oil from deep beneath the sea, or used in fracking, makes it more expensive to produce a barrel of oil, and indirectly, the many things that a barrel of oil goes to produce, such as a bushel of wheat that Cuba must import.
Figure 3. Cuba’s oil consumption, separated between oil produced by Cuba itself and imported oil, based on EIA data.
If the price of oil is low, Venezuela’s financial problems will become worse, increasing the likelihood that Venezuela will need to cut back on its low-priced oil exports to Cuba.
Conversely, if the price of oil is high enough to enable profitability of oil extraction in Venezuela and Cuba, say $150 barrel, then airline tickets will be very expensive, cutting back tourism greatly. The cost of imported food is likely to be very high as well.
4. One way Cuba’s problems are manifesting themselves is in cutbacks to entitlements.
Back in the early 1960s, Fidel Castro’s plan for the economy was one of perfect communism–the government would own all businesses; every worker would receive the same wages; a large share of what workers receive would come in the form of entitlements. What has been happening recently is that these entitlements are being cut back, without wages being raised.
Wages for all government workers are extremely low–the equivalent of $20 month in US currency. This was not a problem when workers received essentially everything they needed through a very low-priced ration program and other direct gifts, but they become a problem when entitlements are cut back.
Each year, each Cuban family receives a ration booklet listing each member of the family, each person’s age, and the quantity of subsidized food of various types that that person is entitled to, based on the person’s age. Other items besides food, such as light bulbs, may be included as well.
Figure 4. Ration booklet being explained by one of tour leaders.
The store providing the subsidized food keeps a list of foods available and prices on a blackboard.
Figure 5. Ration price list on wall of store we visited.
One way that the standard of living of Cubans is being reduced because of Cuba’s financial problems is by cutbacks in the types of goods being subsidized. Also the quantities and prices are being affected, but the average wage of $20 month remains unchanged.
5. Another way Cuba’s financial problems are manifesting themselves is as higher prices charged to Cubans for goods not available through the ration program.
Since 1993, Cuba has had a two currency program. Cubans were able to purchase goods only in stores intended for Cuban residents using Cuban pesos. (This situation is similar to a company store program, in which a business issues pay in a currency which can only be used on goods available in the company story.) A second currency, Cuban Convertible Pesos (“CUC”), pegged 1:1 with the US dollar, has been used for the tourist trade, and for international purchases. Cubans were not allowed to purchase goods in businesses offering goods in CUCs.
Now the situation is changing. Goods in stores for Cubans marked in both currencies, and Cubans are permitted to purchase goods in more (or all?) types of businesses.
The change that seems to be occurring in the process of marking goods to both currencies is that goods as priced in Cuban pesos are becoming much more expensive for Cubans. Cubans are finding that their $20 per month paychecks are going less and less far. This is more or less equivalent to value of the Cuban peso falling relative to the US dollar. This decrease is difficult for international agencies to measure, because the prices Cubans were paying were not previously convertible to the US dollar. The big impact would occur in 2015, so is too recent to be included in most inflation data.
6. Another way Cuba’s problems are manifesting themselves is through low traffic on roads.
How much gasoline would you expect a person earning $20 month to buy, if gasoline costs about $5 gallon? Not a lot, I expect. Not surprisingly, we found traffic other than buses and taxis to be very low, especially outside Havana. Figure 6 shows one fairly extreme example. The three-wheeled bicycle in front is a popular form of taxi.
Figure 6. Example of low traffic on road. This road was not far from Havana.
If a person travels away from the Havana area, transport by horse and buggy is fairly common.
7. As a workaround for Cuba’s for falling inflation-adjusted wages of government workers, Cuba is permitting more entrepreneurship.
Certain workers, such as musicians and artists, have always been able to earn more than the average wage, through programs that allowed these workers to sell their wares and keep the vast majority of the sales price.
Now, individuals are able to form businesses and hire workers. These businesses generally pay wages higher than those offered by the government. Many of these businesses are private restaurants and gift shops, serving the tourist trade.
In addition, many individual citizens try to figure out small things that they can do (such as sell peanuts, pose for photos, or sing songs) to earn tips from foreigners. The amounts they earn act to supplement the wages they earn working for the government.
Other new businesses are in the food production sector. We met one farmer who was growing rice, with the help of twenty workers he had hired. The farmer used land that he had leased for $0 per year from the government. He dried his rice on an underutilized two-lane public road. The rice covered one lane for many miles.
Figure 7. Rice laid on road to dry.
The farmer sold most of his rice to the government, at prices it had set in advance. The farmer was able to pay his workers $80 per month, which is equal to four times the average government wage.
8. Cuban citizens and its government are concerned about the country’s financial problems and are finding other solutions in addition to entrepreneurship.
Cuban citizens are concerned, because with only $20 month of spendable income and higher prices on almost everything, they are being “pushed into a corner.” The vast majority of jobs are still government jobs, paying only an average of $20 month. There aren’t very many ways out.
In order to make ends meet, it is very tempting to steal goods from employers, and resell them at below market prices to others. We were warned to be very careful about changing money, because it is very common to be shortchanged, or to receive Cuban pesos (which are worth about 1/24th of a CUC) in change for goods purchased in CUCs.
One legitimate way of increasing the wealth of Cuban citizens is to increase remittances from relatives living in the US. Legislation making this possible has already been implemented. Estimates of remittances from the US to Cuba range from $2 billion to $3.5 billion per year, prior to the change.
Another way of increasing Cuban revenue is to increase tourism. Selling services abroad, such as sending a Cuban choir to perform for US audiences, also acts to increase Cuba’s revenue. Getting rid of the US embargo would help expand both tourism and the sale of Cuban services abroad. This is no doubt part of the reason why Cuba, under the leadership of Raul Castro (Fidel’s brother), is interested in re-establishing relationships with the United States.
9. Most of Cuba’s accumulated wealth from the past is depleting wealth that requires continuing energy inputs to maintain.
Cuba has many fine old buildings that are a product past glory days (sugar exporter, tobacco sales, casino operator). These buildings need to be maintained, or they fall apart with age. In other words, they need the addition of new building materials (requiring energy products to create and transport), if they are to continue to be used for their intended purpose.
Cuba now has a severe problem with old buildings falling apart from decay. I was told that three buildings per day collapse in Havana. With a chronic shortage of energy supplies, Cuba has been able to use these buildings from past days to give themselves a higher standard of living than otherwise would be possible, but this dividend is slowly coming to an end.
Likewise, fields used for growing sugar or tobacco are assets requiring continued energy investment. If the Cuban government were to stop plowing fields and adding fertilizer to restore lost nutrients,1 nature would take care of the problem in its own way–acacia (a type of nitrogen-fixing shrub/tree) would overtake the land, making it difficult to replant. The fact that the Cuban government did not keep adding energy products to some of the fields is a major reason the Cuban government is now leasing land for $0 an acre. Quite a bit of the land formerly used for sugar cane needs to be cleared of acacia before crops can be grown on it.
Even Cuba’s famed 1950s vintage autos are a depleting asset. Replacement parts are needed frequently to keep them operating.
The illusion that Cuba could afford to pay owners for the value of property appropriated by the Cuban government in 1959 is just that–an illusion. The wealth that was available was temporary wealth that could not be packaged and sent elsewhere. Sugar cane and tobacco had been grown in ways that depleted the soil. Furthermore, most workers had been paid very low wages. The buyers of these products had reaped the benefits of these bad practices in the form of low prices for sugar and tobacco products. It is doubtful whether Cuba could ever have paid the former owners for the land and businesses it appropriated, except with debt payable by future generations. It certainly cannot now.
10. I wasn’t able to find out much about the permaculture situation in Cuba, but my impression is that the outcome is likely to be determined by financial considerations.
Subsidies can work reasonably well, as long as the economy as a whole is producing a surplus. Such a surplus tends to occur when the cost of energy production is low, because then it is easy for a growing supply of low-priced energy to boost human productivity.
Now that Cuba’s economy is not faring as well, the government is finding it necessary to start evaluating whether approaches they are taking are really cost effective. More emphasis is placed on entrepreneurs producing goods at prices that are affordable by customers. Thus, an entrepreneur might operate a permaculture garden. My impression is that permaculture will do well, if it can produce goods at prices that consumers can afford, but not otherwise. Consumers who are starved for money are likely to cut back to the very basics (rice and beans?), making this a difficult requirement to meet.
11. Cuba has done better on keeping population down than many other countries.
If we look at the population growth trends since 1970, Cuba has done better than its nearby neighbors in keeping population down.
Figure 8. Cuba population compared to 1970 estimates, along with those of selected other countries, based on USDA population estimates.
In fact, Cuba’s 2014 population per square kilometer is low compared to its neighbors, as well.
Figure 8. Population for Cuba and several nearby areas expressed in population per square kilometer.
One thing that many people would point to in the low population growth statistics is the high education of women in Cuba. This is definitely the result of Fidel Castro’s policies.
It seems to me that housing issues play a role as well. Cuba has added very little housing stock in recent years, even though the population has grown. This means that either multiple generations must live together, or new homes must be built. Cuba hasn’t provided a way for doing this (financing, etc). Under these circumstances, most families will keep the number of children low. There is simply no more room for another person in state-provided housing. No one would consider building a shack with local materials, without electricity and water supply, as a work around.
12. In many ways, Cuba is better prepared for a fall in standard of living than most countries, but a change in its standard of living is still likely to be problematic.
As we traveled through Cuba, we saw a huge amount of land that either was currently planted in crops, or that could fairly easily be planted as crops. We also saw many acres over-run by acacia, but that still could support some feeding by animals. Cuba is not very mountainous, and generally gets a reasonable amount of water for at least part of the year. These are factors that are helpful for supporting a fairly large population, if crops are chosen to match the available rainfall.
The Cuban population is also well educated and used to working together. Neighbors tend to know each other, and work to support each other through community associations called Committees for the Defense of the Revolution.
The problem, though, is that the changes needed to live sustainably, without huge annual balance of payment deficits, are likely to be quite large. Sugar production in Cuba began in the early 1800s. Since that time, Cuba’s economy has been organized as if it were part of a much larger system. Cuba has grown large amounts of certain products (sugar cane and tobacco), and much less of products that its population eats regularly (wheat, rice, beans, corn, and chicken). Residents have gotten used to eating imported foods, rather than foods that grow locally. According to this document, the government of Cuba reported importing 60% to 70% of its “food and agricultural products,” amounting to $2 billion dollars, in 2014. Regardless of whether or not this percentage is calculated correctly, there is at least a $2 billion per year gap in revenue caused by eating non-local foods that needs to be closed.
In theory, Cuba can produce enough food for all of its current population, even without fossil fuels. Doing so would require changes to what Cubans eat. The diet would need to be revised to include greater proportions of foods that can be grown easily in Cuba (plantain, yucca, bread plant, etc.) and fewer foods that can’t. Many people would likely need to move to locations where they can help in the growing and distribution of these foods. Given the current lack of funding, most of these new homes and businesses would likely need to be built by residents using local materials. Thus, they would likely need to look like the shacks (without electricity or running water) that Fidel Castro was able to do away with as a result of his 1959 Revolution.
There might also need to be a reduction to the amount of healthcare and education available to all. This would also be a big let down, because people have gotten used to the current plan of free education and free modern medical care for all. Education and health care no doubt account for a big share of Cuba’s high GDP today, but Cuba may also need to bring down these costs down to an affordable level, if it is to have a sustainable economy.
As another example of “has the world gone mad?” – we present the following words of wisdom from BoJ Governor Kuroda-san:
*KURODA DOESN’T SEE ANY ASSET BUBBLE OR STOCK MARKET BUBBLE, OR ANY ‘FINANCIAL EXCESS’ IN ECONOMY
And in the interests of sanity, we highly suggest he not look at the chart below…
And while on the topic of utter insanity, ask yourself – as you read his statements of perplexing blind ignorance – just what happens to BoJ capital when his $95 billion equity portfolio suffers a 2%, 10%, 50% sell-off?
We suspect he wouldn’t be laughing as much had he seen the Bank of Japan’s dreadful underperformance of the market in the last few years…
When we start to talk about privacy and I ask him whether he thinks NSA whistleblower Edward Snowden is a hero or a villain his answer is prompt and unabashed.
"Total hero to me; total hero," he gushes. "Not necessarily [for] what he exposed, but the fact that he internally came from his own heart, his own belief in the United States Constitution, what democracy and freedom was about. And now a federal judge has said that NSA data collection was unconstitutional."
Snowden, who revealed classified NSA documents to reporters in 2013, is a fugitive from US prosecutors, living on a temporary visa in Russia, another nation he has criticised for its approach to privacy. The judgement Wozniak refers to is that of a federal court in New York, which earlier this month found Section 215 of the US Patriot Act, which authorised the mass surveillance programmes exposed by Snowden, to be insufficient grounds for justifying the NSA's collection of domestic communications data.
"So he's a hero to me, because he gave up his own life to do it," says Wozniak. "And he was a young person, to give up his life. But he did it for reasons of trying to help the rest of us and not just mess up a company he didn't like."
As stories emerge worldwide of implanted spyware in commercially available hard disks and in SIM cards sold to international telecoms companies, security specialists have incessantly offered solutions to the general public, as to how to shield private activities and data from prying eyes. Wozniak, however, is pessimistic about the prospects of protection, and believes the root cause of the problem extends back to the early years of OS development.
"It's almost impossible [to protect yourself] because today's operating systems generally get so huge that they can only come from a few sources, like Microsoft, Google and Apple," he says. "And those operating systems have so many millions of lines of code in them, built by tens of thousands of engineers over time, that it's so difficult to go back and detect anything in it that's spying on you. It's like having a house with 50,000 doors and windows and you have no idea where there might be a tiny little camera."
Woz is an ardent privacy advocate and bemoans the lost chances of computing's fledgling years, where he feels it may have been possible to block future attempts at monitoring.
"There is a type of technology that you can fairly securely today run on your computer and someone else's computer, [which allows you to] send them a message and it's private the way it should be," he says. "I believe that I should be allowed to send a message to my wife and nobody can know it unless they know our passwords.
In 1991, a system named PGP [Pretty Good Privacy] emerged for secure point-to-point data transfer. The data to be sent was encrypted on the machine that sent it and decrypted on the destination machine. Wozniak decries the technology as a lost opportunity for OS vendors.
"At that point in time, if Apple and Microsoft had built [PGP] into their operating system, it would have been a permanent part of email and all email would have been secure," he says. "Now we're talking about making laws that you cannot use encryption. It's almost like you can't have any secrets anymore. And the modern generation just accepts this as the status quo.
"Companies like Google and Facebook are trying to make money off knowing things about you; they're trying to funnel things to you and make money that way. Apple is only making good products that you can choose to buy if you want, so I look at Apple as being more the protector of privacy than anyone else."
* * *
Finally, Wozniak unleashes some other brutal truths…
"Everything is first-class [in Dubai]… The United States used to talk, when I was growing up, like that's what we were. The US would look like this if we didn't spend all our money on the military."
In Part 2, we look at currently proposed projects, and geopolitical rivalries that could stall and hamper progress.
Silk Road Projects:
It is important to understand that the new “Road’ is not a formal plan in any sense but merely a broad outline of goals, a work in progress, being filled in, opportunistically, with projects as they are developed, and as negotiations with target countries allow. The Road is also not a 'start-up' from scratch, but builds upon and extends a number of projects that have been ongoing with China's partners.
The Iran-Pakistan-China project (described in Part 1) is one of the few that provides more details, but it is still very much in the planning stage. The second proposed project, only recently made public, focuses on Russia. China is also proposing a partnership with India for its third project.
The Pakistan program is an important economic development project that ties in with the Road as one of the connecting dots along the way, while the proposed program for Russian could become the nexus for the entire Road project, and the proposed India project could become the crucial piece in tying it all together.
Russia and China, the Emerging Partnership:
What makes Russia important enough to include in the plan? A better question might be: how is it possible to leave out Russia, the largest country in Eurasia, from a plan to build across the entire region?
In a recent meeting in Moscow, celebrating the 70th anniversary of the allied victory in World War II – which saw Indian, Chinese, and Russia troops parading in Red Square – China and Russia signed multiple agreements to tie development of the Chinese sponsored Silk Road to the Russian sponsored Eurasian Economic Union (EAEU).
The EAEU plan is a Kremlin-sponsored trade union between Russian, Kazakhstan, Kyrgyzstan, Belarus and Armenia, that has been pilloried in the western press as part of Russia’s supposed underlying agenda to re-establish the Soviet Union. With Russia’s inclusion, the plan for the Silk Road will extend from Beijing to the border of Poland. The blossoming cooperation between Russia and China is not something to be ignored, according to former Indian diplomat M.K. Bhadrakumar:
“Clearly, the cold blast of western propaganda against the EAEU failed to impress China…China’s integration with the EAEU means in effect that a real engine of growth is being hooked to the Russian project. In reality, China is the key to the future of the EAEU. Significantly, Xi has combined his visit to Moscow with a tour of Belarus and Kazakhstan, the two other founder members of the EAEU….This is vital for the implementation of the Silk Routes via Russia and Central Asia.”
The Chinese/Russian agreements cover eight specific projects, starting with the development of a high speed railway that will connect Moscow and Kazan (Tatarstan Republic), and will be extended to China, connecting the two countries via Kazakhstan. China’s Railway Group has won a contract for $390 million to build the road, with China contributing an initial $5.8 billion toward total estimated costs of $21.4 billion. Eventually, the planners hope to link this project to Russia’s planned high speed railway to Europe.
Also, China's Jilii province has offered to build a cross-border high speed railway link between the two countries connecting with Russia's major Pacific port city, Vladivostok. In addition, the two nations are expanding their energy partnership through a variety of projects. As Oilprice reported in a May 12 article, “the Russian hydropower company RusHydro and China Three Gorges Corp. have signed a deal to cooperate on a 320-megawatt hydroelectric power project in Russia’s Far East…near the border between China and Russia.” As described, this is the largest dam project in China or Russia, already under construction, and is expected to generate 1.6 trillion watts of electrical energy per year, with an estimated cost of around $400 billion.
China has also proposed developing an economic corridor between Russia, Mongolia, and China, a plan likely to include the EAEU member states, the initial step in development of one of the major components of the Silk Road, the Eurasia Economic Corridor, a preferential trade zone stretching across the region.
Several smaller joint project deals were also signed, including establishing a $2 billion agriculture financing fund.
Geopolitics on the Silk Road:
Until very recently, it was widely assumed that the US would lead its western allies in a campaign against the Russian/Chinese deal to develop the Silk Road, but events have been reversing with remarkable speed.
With Obama desperately trying to keep the wars in Yemen, Syria, and Iraq from metastasizing across the region, Obama’s Middle East policy is at a crossroads, with none of the big issues likely to be resolved before his term ends. Clearly, the US President wants to concentrate on Asia and reduce the US presence in the Mid-East, a region that has bedeviled every President for more than a generation.
The Deal to Get Out:
In the midst of all this, and after more than a two year absence from Russia, Kerry and his entourage requested an immediate urgent meeting with Putin and Lavrov that was granted by the Kremlin.
There is widespread speculation over what might have taken place in the Kremlin meeting on May 8th. Yet, the fact that the meeting took place at all may be more important than any agreements reached, because it clearly shows some form of thaw in a relationship that’s in process.
The rumor out of Russia is that Kerry requested Putin’s help in resolving the ME conflicts and closing the nuclear deal with Iran, with the Russian President agreeing. The quid pro quo for Russia was the US lowering tensions in Ukraine. The issue of Crimea was apparently not even raised, while the visit ended with Kerry’s unprecedented warning to Kiev to abide by the Minsk 2 agreement for a truce in Ukraine’s eastern provinces.
Much of the news media is speculating that the US is starting to remove the ‘crime scene tape’ around the Kremlin. Whether this is really a US offer of an olive branch to Russia is still pretty much guesswork, and even if it were, how far the US is willing to go in accommodating the Kremlin is largely unknown. Stratfor, the popular internet intelligence newsletter, speculates that the US is willing to start easing sanctions on Russia.
Israel and the Gulf Kingdoms:
For the Israelis, any easing of tensions with Iran and Russia is very bad news. In the Middle East, Israel is the canary in the coal mine, and is always among the first to discern the faintest signs of political unrest in its region.
There's no denying the significance of Israel's reaction to the US/Iran nuclear deal and US coordination with Iran and Russia in Syria and Iraq. Israel placed all of its chips on its ability to stop the deals, and lost badly, while perhaps severely damaging its relationship with it largest ally, the US.
Now, the howls of protest and betrayal pour out of every media source in the country, and Israel is not the only one. Saudi Arabia also feels left out in the cold with the Iran deal.
Proposed Partnership with China and India:
If it were possible to put politics aside, there’s no question that China’s single best partner for the Road would be its giant neighbor India, bringing together the two most important markets for traders on the original ancient Silk Road. As the Associated Press reported on May 14, 2015:
“Both countries are members of the BRICS grouping of emerging economies, which is now establishing a formal lending arm, the New Development Bank, to be based in China's financial hub of Shanghai and headed by a senior Indian banker. India was also a founding member of the embryonic China-backed Asian Infrastructure Investment Bank.
The cooperation between China and India is only growing, and their needs appear to be compatible, as the AP goes on to note:
China is looking to India as a market for its increasingly high-tech goods, from high-speed trains to nuclear power plants, while India is keen to attract Chinese investment in manufacturing and infrastructure. With a slowing economy, excess production capacity and nearly $4 trillion in foreign currency reserves, China is ready to satisfy India's estimated $1 trillion in demand for infrastructure projects such as airports, roads, ports and railways.”
If India chooses to partner with China in the Silk Road, it could keep China building for the rest of the century, in a project that would combine the world’s most populous nations, with more than 2.6 billion people. With Russia already a partner, and Iran waiting in the wings to join, the project could add almost another quarter of a billion people, with a combined total of over one third the global population. A better fit would be hard to find.
But there is no shortage of historical baggage between China and India, ranging from a half century of unresolved border disputes; China’s growing relationship with Pakistan, India’s longtime adversary; and India’s close relationship with the US and Japan, both opposed to China’s claims in the South China Sea.
In a recent meeting in Beijing, China and India signed agreements for $22 billion in development projects, disappointing to many observers when compared to the $47 billion committed to the China/Pakistan deal. A former Indian diplomat, Bhadrakumar, argues, “that strategic distrust cannot be wished away,” and “…that India is not ready to replace the west as its development partner.”
It seems like the US influence with India has at least slowed prospects of recruiting India as a major Silk Road partner. Yet, the results are not so simple to predict since so many countries involved are dependent upon trade with China to the tune of hundreds of billions of dollars annually, and are also active trading partners with both Russia and Iran.
Even in the cold war, India became adept in its studied policy of co-existence with the Soviet Union and the US, which allowed India to play both sides. For pragmatic India, the choice of development partners may depend on the simple formula of 'following the money', given the fact that China is one of the few countries in the world with sufficient resources to finance the rebuilding of India's infrastructure.
The rush of western allies, including India, to join China's sponsored Asian Infrastructure Bank speaks clearly to the fact that western business is eager to take part in the Road projects. There are probably few banks in the world that would hesitate to finance major components of the project. However, whether the recent sea change in the US/Russian dynamic is a prelude for US support of the Silk Road project remains an open question.
Coming in June, Part 3: Prospects for Success and What it Means for Investors.
As regular readers are no doubt aware, the US and China are racing towards a maritime conflict stemming from Beijing’s construction of what Washington has condescendingly called “sand castles” in the Spratly archipelago.
Atop these man-made islands are cement plants, air strips, and soon-to-be lighthouses, as China boldly asserts its territorial claims on what are heavily-contested waters though which trillions in seaborne freight pass each year.
Now, with Beijing set to enforce what is effectively a no-fly zone over its new sovereign ‘territory’ we bring you the following graphic from WSJ which shows that when it comes to sheer size, China’s air force and Navy are beyond compare.
China’s promise to beef up its naval capabilities to prevent further “meddling” and “provocative actions” by rivals in the South China Sea is a daunting prospect for most of its neighbors, which already view Beijing’s fast-improving armed forces with trepidation…
As a recent Pentagon review of China’s military modernization drive noted, “China is investing in capabilities designed to defeat adversary power projection and counter third-party—including U.S.—intervention during a crisis or conflict.” In practice, that means hundreds of ballistic and cruise missiles positioned near the coast to deter Japanese or American warships from coming anywhere near Chinese territory. China has a substantial submarine fleet as well, piling on more risk for enemy ships.
We’ve documented the pitiable plight of America’s recent college graduates on a number of occasions over the last several months. The Class of 2015 is officially the most heavily-indebted graduating class in the history of US higher education, as each student will leave college with an average debt load of more than $35,000. These proud new graduates will enter a job market where they’ll quickly discover that the idea of a US economic ‘recovery’ is, as Steve Wynn recently put it, “a complete dream”. In fact, high unemployment rates among recent graduates was recently cited by Moody’s as a contributing factor to the ratings agency’s decision to place some $3 billion in student loan-backed ABS on review. This state of affairs is made all the more perilous by the fact that nearly half of college graduates only manage to land a low-wage job which, as the OECD has recently shown, likely won’t pay enough to allow one’s family to subsist above the poverty line.
Now, the same OECD is out with a new report which looks at the world’s youth unemployment problem in an effort to determine why it is that 35 million people between the ages of 16 and 29 are jobless. Spoiler alert: it turns out $35,000 doesn’t buy a very good education.
More than 35 million young people, aged 16-29, across OECD countries are neither employed nor in education or training (NEET). Overall, young people are twice as likely as prime-age workers to be unemployed.
The OECD Skills Outlook 2015 says that around half of all NEETs in the OECD are out of school and not looking for work and are likely to have dropped off the radar of their country’s education, social, and labour market systems (ZH: recall the case of America’s “vanishing worker”)
The report expands on the findings of the first OECD Survey of Adult Skills (PIAAC), published in 2013, and creates a detailed picture of how young people acquire and use their skills, as well as the potential barriers they face to doing both.
It shows that 10% of new graduates have poor literacy skills and 14% have poor numeracy skills. More than 40% of those who left school before completing their upper secondary education have poor numeracy and literacy skills.
Work and education are also too often separate worlds: less than 50% of students in vocational education and training programmes, and less than 40% of students in academic programmes in the 22 OECD countries and regions covered were participating in some kind of work-based learning at the time of the survey. Even young people with strong skills have trouble finding work. Many firms find it too expensive to hire individuals with no labour market experience.
All of the above helps to explain why two-thirds of graduates expect to rely on their parents for support after graduation. Parents, it turns out, have similar expectations.
The survey and related infographic also reveal the expectation of financial support does not end after turning the tassel at college graduation. Approximately 65 percent of parents expect to support their children for up to five years after college graduation. The proportion of parents who think they will need to help out for more than two years jumped to 36 percent, double what a similar Upromise survey in 2014 reported. Sixty-eight percent of students expect financial support from their parents post-graduation. Nearly half of students, however, would be willing to pay rent to live back at home.
And it’s no wonder, because paying rent to one’s parents is likely to be far cheaper than renting a one-bedroom apartment with the latter option officially out of reach for anyone making minimum wage:
In sum, 35 million people aged 16-29 are unemployed across the globe thanks to a skills gap and weak demand. As discussed last week, this state of affairs has cost the global economy somewhere on the order of $4 trillion in GDP since the crisis. Indeed, the job market for young people is now so abysmal that two-thirds of recent graduates and their parents have come to terms with the fact that parental support will be a necessity for as many as five years post graduation.
For all of those recent graduates who aren’t lucky enough to have majored in petroleum engineering and can’t count on years of family support, there’s always this option:
“Buying gold is just buying a put against the idiocy of the political cycle. It’s That Simple”
And since it is this same political cycle that is doing everything in its power to preserve what little credibility it has, and to avoid its naked idiocy from being revealed for all to see, it has done everything in its power to push the price of gold lower.
However, several entities refuse to be fooled by such “cheap” tricks. One is China, whose ravenous apetite for gold has been extensively discussed previously. The other is the Bank of Russia.
According to central bank data, Russia’s gold reserves rose to 40.1 million troy ounces as of May 1 compared with 39.8 million ounces a month earlier. Russia increased its gold holdings for many months in a row last year, as shown by central bank figures and represented in the chart below.
So why is Russia engaging in this gold-buying spree when it likely has more immediately gratifying ways to spend its reserves?
The answer was given by Dmitry Tulin, who manages monetary policy at the central bank, was as concise, as sensible, and as lucid as that given by Bass. From Reuters:
“As you know we are increasing our gold holdings, although this comes with market risks,” Tulin told lawmakers in the lower house of parliament.
“The price of it (gold) swings, but on the other hand it is a 100 percent guarantee from legal and political risks.”
And with global political risks only set to rise, since under central planning politicans are made obsolete and are thus even more prone to “idiocy”, expect Russian gold buying to continue indefinitely.
Research Affiliates, in their May newsletter, discussed the importance of "secular stagnation" and a coming decade of low returns. How low you ask? How about 1% kind of low?
"But Lance, the markets has returned 10% on average over the last century, so RA is probably going to be wrong."
Before you dismiss RA's comments, it is important to put them into some context. When low rates of return are discussed, it is not meant that each year will be low but that the return for the entire period will be low. The chart below shows 10-year rolling REAL, inflation-adjusted, returns in the markets. (Important note: Many advisors/analysts often pen that the market has never had a 10 or 20-year negative return. That is only on a nominal basis and should be disregarded as inflation must be included in the debate.)
There are two important points to take away from the data. First, is that there are several periods throughout history where market returns were not only low, but negative. Secondly, the periods of low returns follow periods of excessive market valuations. "This time is not different."
There are two main drivers behind the concept of a "decade of low returns" – secular stagnation and valuations.
Secular Stagnation
While I have written many times in the past about the importance of secular stagnation, RA points a much finer point on the argument.
"In a world of secular stagnation, the Federal Reserve may not be able to achieve a real rate of interest low enough to match the long-run equilibrium rate of interest. Equally insidious is secular stagnation's feeling of permanence; the trends at fault are slow moving and likely to persist well past the standard business-cycle horizon.
Deleveraging from our debt overhang—a hangover from the housing bubble now infecting many central governments—will take decades. The impact of aging demographics across the developed world is only just beginning to slow both labor force growth and productivity, and this trend will only strengthen in the coming years.
Likely, we have entered a period of secular stagnation heavily impacted by lingering debt overhangs, persistent demographic shifts in savings preferences, and increased efficiency of capital…these longer-run trends, which are powerful and long lasting, and will impact our economic outlook for many years to come. Current deeply negative interest rates will likely shift back toward zero, but within our investment horizon are unlikely to return anywhere close to the historical averages. As Michael Corleone discovered, it is not easy to escape genetic or demographic destiny."
Despite optimistic views that Central Bank interventions can stimulate economic growth and inflation through monetary policies, the reality is likely quite the opposite given the massive levels of global debt.
For the markets to generate a higher level of return in the future would require substantially higher levels of real growth. This is unlikely given the aging demographic trends, productivity increases which weigh on employment and wage growth, and debt servicing that diverts dollars from productive investments. This is not just a domestic issue, but a global one.
It is interesting that even though Central Banks acknowledge that it was the ramp up in debt and leverage that led to our current economic problems, it is somehow believed that it can be resolved by simply shuffling debt from governments to central banks. Eventually, the global debt levels will have to be dealt with. Until then, economic growth, inflationary pressures and interest rates will remain at historically low levels.
Valuation
As investors we are supposed to be investing for the "long term." Therefore, we should be viewing valuations as a predictor of returns over the next 10, 15 or 20 years which is the typical investment/savings time frames for individuals. David Leonhardt penned a similar view:
"The classic 1934 textbook 'Security Analysis' – by Benjamin Graham, a mentor to Warren Buffett, and David Dodd – urged investors to compare stock prices to earnings over 'not less than five years, preferably seven or ten years.' Ten years is enough time for the economy to go in and out of recession. It’s enough time for faddish theories about new paradigms to come and go.”
The chart below shows the long-term history of Shiller's Cyclically Adjusted P/E Ratio, which is a 10-year rolling average to smooth out short-term earnings volatility.
History shows that valuations above 23x earnings have tended to denote secular bull market peaks. Conversely, valuations at 7x earnings, or less, have tended to denote secular bull market starting points.
When using a relative comparison, in this case 10-years, what Shiller's data does provide is a key understanding as to what market returns should be. The chart below compares Shiller's 10-year CAPE to 10-year actual forward returns from the S&P 500.
From current levels history suggest that returns to investors over the next 10-years will likely be lower than higher. We can also prove this mathematically as well as shown.
Capital gains from markets are primarily a function of market capitalization, nominal economic growth plus the dividend yield. Using John Hussman's formula we can mathematically calculate returns over the next 10-year period as follows:
(1+nominal GDP growth)*(normal market cap to GDP ratio / actual market cap to GDP ratio)^(1/10)-1
Therefore, IF we assume that GDP could maintain 4% annualized growth in the future, with no recessions, AND IF current market cap/GDP stays flat at 1.25, AND IF the current dividend yield of roughly 2% remains, we get forward returns of:
(1.04)*(.8/1.25)^(1/10)-1+.02 = 1.5%
But there're a "whole lotta ifs" in that assumption. More importantly, if we assume that inflation remains stagnant at 2%, as the Fed hopes, this would mean a real rate of return of -0.5%. This is certainly not what investors are hoping for.
Lastly, the majority of analysis is based on the belief that individuals "bought and held" indexed based portfolios since the peak of the bull market in 1999. The problem is that in reality this is far from the truth and investors have suffered from harsh levels of capital destruction by "selling low and buying high" and loss of the singular most precious commodity of all – "time."
Since most investors have on average about 15 years to save for their retirement, the time lost in "getting back to even" is critical. As I have stated many times in the past – getting back to "even" is not an investment strategy.
The chart below illustrates these previous two points. It is the inflation adjusted return of a $100,000 investment in the S&P 500 from 1990 to present. The reason that 1990 is important is because that is when roughly 80% of all investors today begin investing. Roughly 80% of those began after 1995. If you don't believe me, go ask 10 random people when they started investing in the financial markets and you will likely be surprised by what you find.
Unfortunately, most investors rarely do what is "logical" but react "emotionally" to market swings. When stock prices are rising instead of questioning when to "sell," they are lured in near market peaks. The reverse happens as prices fall leading first to "paralysis" and "hope" that losses will soon be recovered. Eventually, near market bottoms the emotional strain is too great and investors "dump" shares at any price to preserve what capital they have left.
Despite the media's commentary that "if an investor had 'bought' the bottom of the market…" the reality is that few, if any, actually did. The biggest drag on investor performance over time is allowing "emotions" to dictate investment decisions. This is shown in the 2014 Dalbar Investor Study, which showed "psychological factors" accounted for roughly 50% of underperformance. In other words, investors consistently bought the "tops" and sold the "bottoms."
Markets are not cheap by any measure. If earnings growth continues to wane or interest rates rise, the bull market thesis will collapse as "expectations" collide with "reality." This is not a dire prediction of doom and gloom, nor is it a "bearish" forecast. It is just a function of how markets work over time.
For investors, understanding potential returns from any given valuation point is crucial when considering putting their "savings" at risk. Risk is an important concept as it is a function of "loss". The more risk that is taken within a portfolio, the greater the destruction of capital will be when reversions occur.
This time is "not different." The only difference will be what triggers the next valuation reversion when it occurs. If the last two bear markets haven't taught you this by now, I am not sure what will. Maybe three times really is a "charm."
First it was Gross, then Gundlach. Now billionaire hedge fund manager Paul Singer of Elliott Management has unveiled what he believes is the trade of this generation: being short “long-term claims on paper money, i.e., bonds.” He calls it the “bigger short.” First hinted at during the Grant’s Spring 2015 conference, he now goes into excruciating detail.
Select excerpts from Paul Singer’s latest letter.
The Big Short, of course, refers to short positions in credit in the period 2005-2007, more specifically structured credit. To be even more precise, it refers to subprime residential mortgage securitizations. It is also the name of a best-selling book by Michael Lewis about the housing and credit bubble. It was called the Big Short because many forms of credit were so overpriced that the risk/reward of taking on short positions before the financial crisis was extraordinarily favorable.
Today, six and a half years after the collapse of Lehman, there is a Bigger Short cooking. That Bigger Short is long-term claims on paper money, i.e., bonds.
History shows that it is fiendishly difficult to preserve the value of money which is backed by nothing but promises, because it is so tempting for rulers to debase their currency when they think it will help them repay their debts. The long-term preservation of the real value (i.e., the purchasing power) of fiat money and bonds is obviously of little or no importance to today’s creators of money – the major central banks – who currently can’t debase money fast enough for their tastes. Yet, the current prices of bonds are at all-time highs, and thus yields are at record lows, because the central banks are buying bonds with trillions of dollars of newly printed money, despite the facts that 1) the global financial emergency ended over six years ago and 2) the developed world has not suffered a renewed financial collapse or deep recession. The central bank actions are unprecedented under these conditions, and their policies are partially responsible for the sluggishness of the economic recovery in the developed world since the 2008 crash. Below we discuss why that is the case, and we set out a number of elements that lead us to the conclusion that the risk/reward profile of owning long-term high-quality bonds at today’s prices and yields is uniquely poor.
…
Our view is that central bankers have chosen, and doubled down on, a palliative (super-easy money and QE), which is unprecedented and extreme, and whose ultimate effects are unknowable. To be sure, the collapse in interest rates all along the curve, and a bull market in equities, “trophy real estate” and other assets, has had some effect on job creation. However, the effect is indirect, and in our opinion the benefits of complete reliance on monetary extremism are overwhelmed by the negatives and the risks. To begin with, such policies are inefficient in actually creating jobs and growth, and they worsen inequality: Investors prosper and the middle class struggles. The goal of leaders of developed nations and their central bankers should be more or less the same: enhanced growth and financial stability. But somehow the principal policy goal of both has become to generate more inflation. Both extreme deflation (credit collapse) and extreme inflation (which forces citizens to forego normal economic activities and become traders and speculators in a desperate attempt to keep up with the erosion of savings and value) are threats to societal stability, and we don’t actually think there is much to choose from between those extremes. But central bankers are completely focused on erasing any chance of deflation, and the tool to do so – currency debasement – is certainly near to hand. Therefore, the likelihood of deflation is highly remote. By contrast, the central bankers’ universal belief that inflation is easy to deal with if it accidentally overheats is arrogant and not supported by the historical record.
Furthermore, we fail to comprehend how owners of claims on money (that is, bondholders) can continue to ignore the fact that the goal of generating more inflation is aimed precisely at reducing the value of their capital. Central bankers obviously do not understand that the modern financial system is almost impossible to “manage,” and is fundamentally unsound as currently structured and leveraged. Given that reality, why should bondholders believe that central banks are capable of creating just enough inflation, and not a farthing more, in their current quest to rebubble-ize the world? We also question why bondholders believe that if inflation bursts its dictated boundaries despite central bank scolding, that policymakers can indeed, as a former Fed chairman and now immodest citizen blogger and incoming hedge fund advisor (Ben Bernanke) has said, cure it in “10 minutes.” We call to your attention the hand-wringing and agonizing now underway about raising U.S. policy rates by 25, 50 or 75 basis points over the next few months. Imagine the caterwauling in global financial markets if inflation surprises everyone on the upside and the right policy rate should be 2%, 4% or higher. Given the fragility of the financial system and its still-extreme leverage, even a few points of inflation and a few hundred basis points of increase in medium- and long-term interest rates could cause a renewed financial crisis.
Inflation is more or less a generalized diminution in the value of money. A bond is an instrument by which a promise to return, in the distant future, a fixed-in-currency amount of invested money is supplemented by periodic interest payments in the meantime. That’s it, and that’s all you get. Such interest payments are meant to compensate the investor for the use of his or her money, taxes (if any) and expected inflation. At currently prevailing interest rates in the developed world, if there is ANY inflation in the next 10 to 30 years, investors who buy or hold bonds at today’s prices and rates will have made a bad deal. And if inflation emerges from the stone-cold dead and walks, trots or (heaven forbid) gallops into the future, they will have made a very, very bad deal.
Equity values depend to an important degree on confidence that policymakers will continue to allow private enterprise, profits and private ownership of assets. But bonds, in our view, represent a greater leap of confidence. It is so much easier to purloin value from bondholders, and so tempting to rulers; in fact, the current leaders and policymakers have said in so many words that there is not enough debasement (that is, inflation) underway at present. You don’t need a weatherman to know which way the wind blows (according to Bob Dylan), but bondholders nevertheless continue to think, up to basically this moment, that it is perfectly safe to own 30-year German bonds at a yield of 0.6% per year, or a 20-year Japanese bond (issued by the most thoroughly long-term-insolvent of the major countries) at a little over 1% per year, or an American 30-year bond at scarcely above 2% per year.
Asset prices are skyrocketing because of massive public-sector purchases. The tinkering and experimentation that characterizes each round of novel central bank policy leads to more and more complicated unwanted consequences and convolutions. Central bankers are, in our view, getting “pretzeled” by all this flailing, yet they deliver it with aplomb and serene selfconfidence. Are they really taming volatility with their bond-buying, or just jamming it into a coiled spring?
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Sometimes inflection points take a while to actualize, even when they are long overdue. For example, the unsustainable dotcom stock boom went on and on in the late 1990s, with the American stock market PE passing its all-time historical high in 1995, before topping out in March 2000 at a level twice the previous 1929 and 1972 peaks. All it would take at the present time for a collapse in developed-country bond markets to begin is a loss of confidence in paper money, central bankers or political leadership. Any combination of these could occur due to the market’s fear or projection of future increased inflation, which could bring about or accompany a self-reinforcing cycle of securities depreciation and other asset price and or wage/cost appreciation. Or perhaps a bond market collapse could ensue as part of a currency crisis in which one or more of the major currencies suffer an unexpected precipitous decline. Up to now, bond markets have acted more like puppets on a string. It would be a large and unpleasant surprise, shaking a lot of assumptions, if bond markets softened as QE continues to build and expand globally.
Current conditions are extraordinary. There has been no global deleveraging since the GFC; in fact, worldwide debt has experienced a further massive increase in the last six years. Long-term entitlement programs have not been pared down to accommodate reality. Derivatives have not lessened in complexity and have actually grown in global size. Moreover, the financial statements of global financial institutions have not moved from opacity to transparency. The ingredients for a renewed financial crisis are in place, as is a possible “surprising” transformation of money debasement into highly-visible inflation.
A good or great trade is not created by just the prospect of a big move in a direction. The ability of investors to engage in a superior risk/reward profile, and to finesse the question of when the expected move will occur, is what separates “just-ok” trades from great trades. It is the extreme overpricing of bonds, and the universal confidence (unjustified, in our opinion) of investors in central banks and in the current mix of perceptions about what is safe and what is not, that makes the Bigger Short into possibly a great trade. To be sure, while a great trade is not a guarantee, at current prices the bond markets of Europe, the U.S., the U.K. and Japan present precious little future reward and a great deal of risk. No investor’s actuarial requirements or investment return goals can possibly be met by today’s long-term bond interest rates, but investors are holding them nonetheless because they have been making money on their bond holdings persistently and seemingly inexorably for the last few years. The day when their perceptions are challenged and they change their minds, only to find that the exit door has been blocked by everyone else doing an about-face at the same time, is going to be one heck of a day for those who have positions in bonds, whether long or short.
The Big Short was compelling pre-2007 because the pricing aberration in a specific type of debt was so huge that it didn’t cost much to wait for the trade to go right (the precise timing being impossible, as usual). We became interested in The Big Short when we saw data that subprime mortgages were defaulting at high rates even while house prices were rising. Today, the Bigger Short is in a much larger marketplace, so it can be undertaken in whatever size one can stomach, and the cost of effectuating it during the waiting period is really low. However, the power of the herd on the current upward bond price stampede is beyond anyone’s control, so one can lose money waiting for the trade to work out.
In terms of directional trades representing extremes of value, the Bigger Short is in a rare category. It is certainly not riskless, because nobody can predict how much staying power policymakers can have when they are unconstrained and have a theory (as unnerving as their theory is), and when citizens are passive and complicit in what we regard as central bankers’ risky policies. Of course, not every trader or investor is in a position to actually short bonds, but our reasoning is equally applicable to the decision of whether or not even to continue owning medium- and long-term bonds at today’s prices and yields.
This analysis is not just about one of the more interesting asymmetries of risk and reward in market history. Rather, it is about leaders abnegating their responsibilities to their citizens (in the case of presidents, prime ministers and legislators), and other policymakers (central bankers) engaging in risky, extreme and untried policies to the point where they are in way over their heads and violating (by design) the moral compact between governments and citizens that is the basis of paper money. Central bankers like to protect their “independence,” but that is absurd in the current context. In what sense are central bankers independent if their extreme policies just give cover to political leadership to do next to nothing to restore sustainable levels of growth? Central bank independence is a concept meant to protect the value of fiat money against grasping politicians, not to empower central bankers to pick winners and losers, allocate credit and behave as if they are fiscal authorities. Certainly the Fed’s “dual mandate” to pursue both monetary stability and maximum employment ought to be replaced with a single mandate to focus on financial and price stability. It doesn’t matter that the other major central banks are engaging in similar practices (QE and ZIRP or NIRP) despite lacking a maximum-employment mandate of their own; eliminating the dual mandate would still be an important symbolic act aimed at pushing back against the arrogance of the Fed and forcing the President and Congress to face up to their responsibilities for optimizing growth and sustainable employment.
The central bankers of the developed world are the architects and enablers of a policy mix whose most powerful result is to further enrich the already well-off, which is clearly posing a challenge to the social fabric of the developed world. It is possible that this situation could worsen if central bankers, frustrated by their economies’ refusal to dance to their incessant piping, step up the pace of their bond-buying and possibly convert it to more direct forms of money-printing, which at some point is certain to ignite the inflation that they have been trying merely to kindle. Don’t fall out of your seats if inflation then burns right through the finely-tuned “target” and keeps on going. If this happens, we all may find out whether they indeed can, or have the courage to, stop inflation in “10 minutes.
As central banks have scrambled to push risk assets ever higher in hopes of creating that elusive Keynesian inflationary “trickle down”, they are limited in the security they can buy. In fact, most can only purchase government treasurys, which they have done en masse. This is known as QE.
According to BofA calculations, central banks now own $22 trillion in “assets” – almost entirely in the form of government debt (an amount greater than the GDP of the US and Japan combined) – which they have to buy in order to create the balance sheet liability, reserves, which primary dealers and the world’s commercial banking system use to bid up risky assets.
Furthermore, according to Citigroup, the amount of debt monetizations in 2015 will be the greatest in history: so great is the scramble to reflate that central banks around the globe (most recently the BOJ’s expanded QE and the ECB’s brand new Q€) that the money printing academics have now gone all in.
As the chart above shows, the global financial situation is so grotesque, central banks will monetize all net debt issuance around the entire world just to push everyone into the riskiest of assets: stocks.
If there is still any question why nobody believes the fallacy of a “recovery”, the chart above should be sufficient to prove to anyone that there is no self-sustaining economy in the world anymore just one massive printing orgy and a doomed attempt to reflate $200 trillion in global debt at all costs.
But back to the topic of QE: as central banks rush to issue reserves, they have no choice but to buy government bonds. Some $22 trillion of them as we noted above. And what happens when epic, epic amounts of government debt are purchased by central banks (just yesterday the BOJ monetized about $10 billion in debt in its daily POMO – and this happens several time per week)? Well, as we have shown since 2012, the bond markets freeze up because central banks soak up all the liquidity, but more to the point, bond prices go up and yields go down.
And this is where traditional economists #Ref! out. Because what is the fundamental prerogative behind QE? It is not to push the S&P to 2100, 3100, or higher. It is to stimulate inflation. The problem however arises when central banks just can’t get enough of government Treasurys and their yields, as witnessed recently, go negative. In fact it was just a month ago when we showed that 53% of all global government bonds are yielding 1% or less!
And the punchline: what are bond yields? Well, in a normal world, they telegraph the market’s long-term inflation expectations. However, in this parallel banana universe in which everything is planned by a few clueless academics, all they “telegraph” is that central banks are the first, last and increasingly (hi Greece) only buyer of sovereign debt. The irony is that the higher stocks go, not because they should but because central banks push them higher, the lower yields slide as central banks buy more bonds to inject more reserves, to push stocks higher, to blow an ever greater asset bubble across all asset classes: both bonds and stocks.
Even more ironic is that not a day passes without one clueless pundit after another appearing on TV and reading from the teleprompter like a stoned zombie that one must not fight the Fed (and central banks) and buy stocks while shorting bonds. And yet what are central banks buying?
Not stocks (at least not officially in the case of the Fed; only the BOJ and the SNB admit to openly monetizing equities).
The answer: bonds.
In other words by simple bond math, the more central banks monetize, i.e. buy, bonds in hopes of pushing stocks, and inflation higher, the lower yields go. Along the way you get such monetary abortions as ZIRP, NIRP and so on, but the math is clear: central banks hope to push up risk assets by kicking everyone out of so-called riskless assets. Which is precisely why bonds have performed so well in the past several years: everyone has been frontrunning central banks!
And the more central banks push, the more bonds they have to monetize. Indeed, as shown in the chart above, in 2015 central banks will inject a record amount of liquidity into the global market, surpassing even the year of the Great Financial Crisis! All this liquidity pushes stocks higher… and drives yields lower.
At the same time, and here we fully agree with Singer, the global economy continues to deteriorate as ever more zero-cost, money equivalent debt is piled up, debt which will implode the second yield shoot higher and lead to a global domino-like default wave while the rich get richer courtesy of their risk asset holdings, pushing class inequality to record levels and beyond, and leading other legendary hedge fund managers such as Paul Tudor Jones to hint that it all will end in either war or revolution.
So what do central bankers do? They have no choice but push harder, and do more of the same, as in the BOJ and the ECB, both of which have either launched or boosted their bond monetization program in the past year. End result: more than half of all global bonds traded under 1% recently. Why? Because bond investors know central banks will be there to buy these bonds.
And hence the biggest paradox: the more deflation there is, the more QE there will be, the lower the yields, the more deflationary signals, the higher stocks go, and so on, in the most paradoxical circular argument in monetary history. Of course, for the Fed to stimulate inflation, it has to step away from monetization altogether, but that would mean an uncontrollable collapse in bond prices, an epic “taper tantrum” and a surge in yields (see Bunds as of a month ago), and worse, a collapse of faith in central planning.
Central banks can not have that, which would mean they would promptly re-engage once more and double down on their bond purchases restarting the cycle afresh. And so on, and so on.
Which brings us to the other definition of Singer’s bigger short: that of “long-term claims on paper money” which this complete sense, because Singer’s real short is not on bonds, but the economic system as we know it: one built on trillions of obligations to the future, also known as debt, also known as paper money.
As such we are left scratching our heads: if Singer is really advocating shorting the entire closed monetary system, why short bonds? After all, you may be right, but… in what denomination do you get your profits paid out: Dollars? Worthless. Euros? Just as worthless. Yen? Yeah, funny.
The point is that for Singer to be right, and he will be right one day, one can’t bet on a collapse of the current monetary system with hopes of being paid out in claims of the current monetary system.
It just doesn’t work.
Which leads us to believe that the real message in Singer’s latest letter is what is unsaid. Yes, bonds will crash, and stocks will explode in a hyperinflationary supernova, but the currency they are denominated in will become worthless the moment the claim is transferred. But one thing will remain: the thing that has stood the test of millennia, and has survived all man-made monetary crises to date. The one thing that will also survive the next market crash. That one item, of course, is what the former Fed Chairman and current blogger, called nothing but “tradition” (which he then admitted he does not really undestand).
In neo-feudal America, the financial aristocracy and political elite are judged under a different set of laws
By Gerald Celente
Neither a conspiracy nor conjecture: By every quantitative measure, 21st century America has degenerated from being the beacon of democracy to a neo-feudal state.
From crime and punishment to the vast wealth and income-inequality gap, the rules are different for the political elite and economic nobility than they are for the common man bound to live by the letter of the law and brought to justice for minor infractions — all while political insiders, corporate charlatans and financial bandits are left free to rape, pillage and plunder.
What should have been headline news and met with outrage last Wednesday barely made the front page of newspapers or the top of broadcast news. Deemed not as important as the murder of a wealthy family who lived near Vice President Biden, or the motorcycle gang war that left nine dead, five of the world’s largest banks, including JPMorgan Chase and Citigroup, pleaded guilty to felony charges for rigging the $5.3 trillion-a-day foreign-exchange markets.
Regardless of “brazenly illegal behavior” on a “massive scale,” the trend is clear: Despite a long track record of “breathtaking flagrancy” of stealing billions, the government, in case after case, gently hits banks with a slap-on-the-wrist fine — and not one top bankster is sent to jail.
It’s the same with whistleblowers and those who leak government information — more of whom the Obama Administration has sent to prison that all presidents combined. And when Washington insider, former general and CIA Director David Petraeus is caught giving his mistress classified material for her book, a small fine and no prison time result.
Cross the yellow line when driving, taillight out, don’t put on the turn signal, don’t lower the high beams, had one drink too many, can’t say the alphabet backward while standing on one foot… hefty fines and/or a handcuffed ride to the police station. Too poor to pay child support, missed a court date? Jail time.
Caught with a piece of crack the size of a kernel of popcorn, some marijuana, busted for shoplifting? Fifteen years in the prison industrial complex… or life without parole for the over 3,000 who committed non-violent crimes.
As with other articles and amendments to the Constitution that have been abrogated, We the Little People lost our right to have “equal protection of the laws.”
In neo-feudal America, the financial aristocracy and political elite are judged under a different set of laws.
While some have argued that President Obama and his folly-prone foreign policy debacle is the laughing stock of the world, it seems, as DefenseNews reports, that the Iraqi military is directly mocking America. Just a day after Defense Secretary Ash Carter accused them of cowardice, an umbrella group for mostly Shiite militia and volunteer fighters, Hashed al-Shaabi, said it had dubbed a military campaign to cut off the Islamic State group in Anbar province as "Operation Labaik ya Hussein," which roughly translates as "We are at your service, Hussein."
Defense Secretary Ash Carter offered a withering critique of the will of Iraqi defense forces in the fall of Ramadi to Islamic State.
“The Iraqi forces just showed no will to fight,” he said. “They were not outnumbered. In fact they vastly outnumbered the opposing force and yet they failed to fight and withdrew from the site…We can give them training, we can give them equipment. We obviously can’t give them the will to fight.”
For their part, the Iraqis denied Carter’s assessment – which amounted to calling Ramadi’s defenders cowards – blaming poor strategy and, ironically, inadequate air support for the defeat. But, as DefenseNews reports, the Iraqi forces had more to say…
The Pentagon expressed disappointment on Tuesday over a decision by Iraqi militias to impose an explicitly Shiite name for a military operation in Iraq's Sunni heartland, saying it could aggravate sectarian tensions.
An umbrella group for mostly Shiite militia and volunteer fighters, Hashed al-Shaabi, said it had dubbed a military campaign to cut off the Islamic State group in Anbar province as "Operation Labaik ya Hussein," which roughly translates as "We are at your service, Hussein."
The name refers to one of the most revered imams in Shiite Islam.
"I think it's unhelpful," spokesman Col. Steven Warren said.
"We've long said . . . the key to victory, the key to expelling ISIL from Iraq is a unified Iraq," Warren said, using an alternative acronym for the IS group.
That required "a unified Iraq that separates itself from sectarian divides, coalesces around this common threat and works to expel ISIL from Iraq," he said.
"The solution is a unified Iraqi government," he added.
Iraqi officials said about 4,000 fighters from the militia group were heading to the northern edge of Ramadi as a first step to eventually rolling back the IS jihadists from city, which fell to the extremists on May 17.
The Iraqi government and its American allies had been reluctant to send in Iran-backed Shiite militia in Anbar — a predominantly Sunni province. But the IS advance in Ramadi — a major blow for both Baghdad and the US-led coalition — prompted Iraq to approve the deployment of the militias.
Washington is wary of the militias with ties to Iran but has said it would support a role for all forces that remain under the authority of the Iraqi government.
"Many of them (militias in the Anbar area) are under the control of the central government," Warren said.
But he added: "I don't know whether if any that are there are not under the control of the government."
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Of course, there is always the chance that Iraqi military are refeering to Barack Hussein Obama of course…
As I document in my new book Battlefield America: The War on the American People, this fourth branch came into being without any electoral mandate or constitutional referendum, and yet it possesses superpowers, above and beyond those of any other government agency save the military. It is all-knowing, all-seeing and all-powerful. It operates beyond the reach of the president, Congress and the courts, and it marches in lockstep with the corporate elite who really call the shots in Washington, DC.
You might know this branch of government as Surveillance, but I prefer “technotyranny,” a term coined by investigative journalist James Bamford to refer to an age of technological tyranny made possible by government secrets, government lies, government spies and their corporate ties.
Beware of what you say, what you read, what you write, where you go, and with whom you communicate, because it will all be recorded, stored and used against you eventually, at a time and place of the government’s choosing. Privacy, as we have known it, is dead.
The police state is about to pass off the baton to the surveillance state.
Having already transformed local police into extensions of the military, the Department of Homeland Security, the Justice Department and the FBI are preparing to turn the nation’s soldier cops into techno-warriors, complete with iris scanners, body scanners, thermal imaging Doppler radar devices, facial recognition programs, license plate readers, cell phone Stingray devices and so much more.
This is about to be the new face of policing in America.
The National Security Agency (NSA) has been a perfect red herring, distracting us from the government’s broader, technology-driven campaign to render us helpless in the face of its prying eyes. In fact, long before the NSA became the agency we loved to hate, the Justice Department, the FBI, and the Drug Enforcement Administration were carrying out their own secret mass surveillance on an unsuspecting populace.
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. 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.
The raging debate over the fate of the NSA’s blatantly unconstitutional, illegal and ongoing domestic surveillance programs is just so much noise, what Shakespeare referred to as “sound and fury, signifying nothing.”
It means nothing: the legislation, the revelations, the task forces, and the filibusters.
The government is not giving up, nor is it giving in. It has stopped listening to us. It has long since ceased to take orders from “we the people.”
If you haven’t figured it out yet, none of it—the military drills, the surveillance, the militarized police, the strip searches, the random pat downs, the stop-and-frisks, even the police-worn body cameras—is about fighting terrorism. It’s about controlling the populace.
Legislation such as the USA Patriot Act serves only to legitimize the actions of a secret agency run by a shadow government. Even the proposed and ultimately defeated USA Freedom Act, which purported to restrict the reach of the NSA’s phone surveillance program—at least on paper—by requiring the agency to secure a warrant before surveillance could be carried out on American citizens and prohibiting the agency from storing any data collected on Americans, amounted to little more than a paper tiger: threatening in appearance, but lacking any real bite.
The question of how to deal with the NSA—an agency that operates outside of the system of checks and balances established by the Constitution—is a divisive issue that polarizes even those who have opposed the NSA’s warrantless surveillance from the get-go, forcing all of us—cynics, idealists, politicians and realists alike—to grapple with a deeply unsatisfactory and dubious political “solution” to a problem that operates beyond the reach of voters and politicians: how do you trust a government that lies, cheats, steals, sidesteps the law, and then absolves itself of wrongdoing to actually obey the law?
Since its official start in 1952, when President Harry S. Truman issued a secret executive order establishing the NSA as the hub of the government’s foreign intelligence activities, the agency—nicknamed “No Such Agency”—has operated covertly, unaccountable to Congress all the while using taxpayer dollars to fund its secret operations. It was only when the agency ballooned to 90,000 employees in 1969, making it the largest intelligence agency in the world with a significant footprint outside Washington, DC, that it became more difficult to deny its existence.
In the aftermath of Watergate in 1975, the Senate held meetings under the Church Committee in order to determine exactly what sorts of illicit activities the American intelligence apparatus was engaged in under the direction of President Nixon, and how future violations of the law could be stopped. It was the first time the NSA was exposed to public scrutiny since its creation.
The investigation revealed a sophisticated operation whose surveillance programs paid little heed to such things as the Constitution. For instance, under Project SHAMROCK, the NSA spied on telegrams to and from the U.S., as well as the correspondence of American citizens. Moreover, as the Saturday Evening Postreports, “Under Project MINARET, the NSA monitored the communications of civil rights leaders and opponents of the Vietnam War, including targets such as Martin Luther King, Jr., Mohammed Ali, Jane Fonda, and two active U.S. Senators. The NSA had launched this program in 1967 to monitor suspected terrorists and drug traffickers, but successive presidents used it to track all manner of political dissidents.”
Senator Frank Church (D-Ida.), who served as the chairman of the Select Committee on Intelligence that investigated the NSA, understood only too well the dangers inherent in allowing the government to overstep its authority in the name of national security. Church recognized that such surveillance powers “at any time could be turned around on the American people, and no American would have any privacy left, such is the capability to monitor everything: telephone conversations, telegrams, it doesn’t matter. There would be no place to hide.”
Noting that the NSA could enable a dictator “to impose total tyranny” upon an utterly defenseless American public, Church declared that he did not “want to see this country ever go across the bridge” of constitutional protection, congressional oversight and popular demand for privacy. He avowed that “we,” implicating both Congress and its constituency in this duty, “must see to it that this agency and all agencies that possess this technology operate within the law and under proper supervision, so that we never cross over that abyss. That is the abyss from which there is no return.”
The result was the passage of the Foreign Intelligence Surveillance Act (FISA), and the creation of the FISA Court, which was supposed to oversee and correct how intelligence information is collected and collated. The law requires that the NSA get clearance from the FISA Court, a secret surveillance court, before it can carry out surveillance on American citizens. Fast forward to the present day, and the so-called solution to the problem of government entities engaging in unjustified and illegal surveillance—the FISA Court—has unwittingly become the enabler of such activities, rubberstamping almost every warrant request submitted to it.
The 9/11 attacks served as a watershed moment in our nation’s history, ushering in an era in which immoral and/or illegal government activities such as surveillance, torture, strip searches, SWAT team raids are sanctioned as part of the quest to keep us “safe.”
Nothing changed under Barack Obama. In fact, the violations worsened, with the NSA authorized to secretly collect internet and telephone data on millions of Americans, as well as on foreign governments.
It was only after whistleblower Edward Snowden’s revelations in 2013 that the American people fully understood the extent to which they had been betrayed once again.
What this brief history of the NSA makes clear is that you cannot reform the NSA.
As long as the government is allowed to make a mockery of the law—be it the Constitution, the FISA Act or any other law intended to limit its reach and curtail its activities—and is permitted to operate behind closed doors, relaying on secret courts, secret budgets and secret interpretations of the laws of the land, there will be no reform.
Presidents, politicians, and court rulings have come and gone over the course of the NSA’s 60-year history, but none of them have done much to put an end to the NSA’s “technotyranny.”
The beast has outgrown its chains. It will not be restrained.
The growing tension seen and felt throughout the country is a tension between those who wield power on behalf of the government—the president, Congress, the courts, the military, the militarized police, the technocrats, the faceless unelected bureaucrats who blindly obey and carry out government directives, no matter how immoral or unjust, and the corporations—and those among the populace who are finally waking up to the mounting injustices, seething corruption and endless tyrannies that are transforming our country into a technocrized police state.
At every turn, we have been handicapped in our quest for transparency, accountability and a representative democracy by an establishment culture of secrecy: secret agencies, secret experiments, secret military bases, secret surveillance, secret budgets, and secret court rulings, all of which exist beyond our reach, operate outside our knowledge, and do not answer to “we the people.”
Thus, if this secret regime not only exists but thrives, it is because we have allowed it through our ignorance, apathy and naïve trust in politicians who take their orders from Corporate America rather than the Constitution.
If this shadow government persists, it is because we have yet to get outraged enough to push back against its power grabs and put an end to its high-handed tactics.
And if this unelected bureaucracy succeeds in trampling underfoot our last vestiges of privacy and freedom, it will be because we let ourselves be fooled into believing that politics matters, that voting makes a difference, that politicians actually represent the citizenry, that the courts care about justice, and that everything that is being done is in our best interests.
Indeed, as political scientist Michael J. Glennon warns, you can vote all you want, but the people you elect aren’t actually the ones calling the shots. “The American people are deluded … that the institutions that provide the public face actually set American national security policy,” stated Glennon. “They believe that when they vote for a president or member of Congress or succeed in bringing a case before the courts, that policy is going to change. But … policy by and large in the national security realm is made by the concealed institutions.”
In other words, it doesn’t matter who occupies the White House: the secret government with its secret agencies, secret budgets and secret programs won’t change. It will simply continue to operate in secret until some whistleblower comes along to momentarily pull back the curtain and we dutifully—and fleetingly—play the part of the outraged public, demanding accountability and rattling our cages, all the while bringing about little real reform.
Thus, the lesson of the NSA and its vast network of domestic spy partners is simply this: once you allow the government to start breaking the law, no matter how seemingly justifiable the reason, you relinquish the contract between you and the government which establishes that the government works for and obeys you, the citizen—the employer—the master.
Once the government starts operating outside the law, answerable to no one but itself, there’s no way to rein it back in, short of revolution. And by revolution, I mean doing away with the entire structure, because the corruption and lawlessness have become that pervasive.
Or maybe not, because for a company built on the successful creation, execution and marketing of gadgets with a two year average lifespan, the worst thing that can happen is for the world to glimpse the unpleasant reality behind the glitzy, futuristic facade for sale every day (usually with a 4-6 weeks delivery delay) in Cupertino.
Such as this video, taken in the Dominican Republic, showing a self-parking Volvo XC60 reversing itself, waiting, and then slamming into journalists who were gawking at the “fascinating” if somewhat homicidal creation, at full speed.
As the Independent reports, the horrifying pictures went viral and were presumed to have resulted from a malfunction with the car.
Only it wasn’t a malfunction.
Instead, in what is perhaps the most epic “option” in the history of automotive history, Volvo decided to make the special feature known as “pedestrian detection functionality” cost extra money.
It gets better: the cars do have auto-braking features as standard, but only for avoiding other cars — if they are to avoid crashing into pedestrians, too, then owners must pay extra.
“It appears as if the car in this video is not equipped with Pedestrian detection,” Volvo spokesperson Johan Larsson told Fusion. “This is sold as a separate package.”
The feature uses a radar and camera to see pedestrians.
“The pedestrian detection would likely have been inactivated due to the driver inactivating it by intentionally and actively accelerating,” Larsson said. “Hence, the auto braking function is overrided by the driver and deactivated.”
The blog that uploaded the video said that the two men “were bruised but are ok”. They said that “sources” had told them that “the drivers forgot to turn on ‘City-Safe’ mode”.
Indeed: a “self-driving” parking car which conveniently has an optional extra that stops the car from smashing into people.
In other words, unless you can fork over the extra couple thousand bucks, the future “self-driving” car becomes a war truck right out of Mad Max, filled with an insatiable desire to mangle and crush any carbon-based life forms that have the misfortune of crossing its path.
Just like in the video below. Presenting: the future.
A little over a month ago, China witnessed its first default by a state-owned enterprise when Baoding Tianwei Group, a subsidiary of state-run China South Industries Group, defaulted on a $14 million coupon payment. That event raised two important issues. First, it suggested that Beijing will not necessarily step in to rescue state-affiliated companies who find themselves in financial trouble and second, it underscored the degree to which China’s $14 trillion corporate debt pile presents a very real risk especially considering the rapidly increasing number of non-performing loans on the books of the country’s banking sector.
Today, we get still more evidence that China may be headed for a debt disaster as a third company has now defaulted on its onshore bonds.
This time it’s soft drink bottle maker Zhuhai Zhongfu Enterprise Co which, as Bloomberg reports, will come up nearly 450 million yuan short when a principal payment for paper issued in 2012 comes due on Thursday. Here’s more:
Zhuhai Zhongfu Enterprise Co., which supplies bottles for Coca-Cola Co. and PepsiCo Inc. in China, can only repay 148 million yuan ($23.9 million) of the 590 million yuan principal, according to a statement to the Shenzhen Stock Exchange Monday. It plans to pay all the 31.152 million yuan of interest. The manufacturer, which isn’t state-owned, sold the 5.28 percent securities in 2012…
Han Huiming, board secretary at Zhuhai Zhongfu, said when reached by phone Tuesday that the company will try to raise funds for the bond payment until the last moment.
The manufacturer, which is based in the southern city of Zhuhai and employees about 4,000 people, said in a May 21 statement that a bank consortium rejected its application for 500 million yuan of loans in May.
The Zhuhai branches of China Everbright Bank Co. and Bank of China Ltd. have limited its freedom to spend the 61 million yuan of capital on its accounts, it said.
Because Zhuhai Zhongfu is having a “liquidity crisis,” the company can’t collect enough money for the payment through its own business operations, according to the statement Monday.
Zhuhai Zhongfu’s orders have declined significantly since 2012 as its biggest clients increased their own production of bottles, according to a report from China International Capital Corp. on May 11. The company’s business with its three largest clients Coca-Cola, PepsiCo and Uni-President China Holdings Ltd. generated only 33 percent of revenue last year, down from 49 percent in 2011, according to CICC. Coca-Cola remains the manufacturer’s biggest customer, according to board secretary Han.
The shift comes as Coca-Cola and PepsiCo are increasingly focusing on cost-cutting to help support operating margins amid waning soft-drink demand, according to Bloomberg Intelligence.
All of the above notwithstanding, the company’s Shenzhen-listed shares had risen more than 120% YTD before they were halted last month with equity ‘investors’ completely ignoring the fundamental story as they have with virtually everything else that changes hands on the exchange which is now trading at a mind-bending 71 times earnings after at least 250 individual names traded limit-up on Tuesday.
Indeed, you didn’t even have to look at an income statement to know how risky of a bet this was because the debt was yielding near 20% before it was delisted last year.
The company’s notes yielded 19.33 percent in the secondary market on June 27 last year before being delisted from the exchange, according to exchange data.
Still, investors remain confident that Beijing, despite rhetoric to the contrary, will be loath to allow onshore defaults as $17 billion in principal payments come due in 2015, a figure that is set to rise exponentially over the next six years. Here’s Bloomberg again:
The People’s Bank of China may coordinate loan support for Baoding Tianwei Group Co. after it became the first state-owned entity to default on a coupon payment in April, OCBC said, citing local media. Restaurant-turned-Internet firm Cloud Live Technology was the first onshore issuer to miss a principal payment in April and has raised funds from “unclear” sources to partly repay noteholders, OCBC said.
Zhuhai Zhongfu, based in the southern city of Zhuhai, is still short 442 million yuan for a bond payment due Thursday, the company said in a statement to the Shenzhen stock exchange Monday. It will try to raise more money by May 26, it said.
Narrowing spreads on onshore bonds suggest investors are still counting on state guarantees, said OCBC, which compared Baoding’s situation with bailouts last year for Shanghai Chaori Solar Energy Science & Technology Co. and a trust product known as China Credit Equals Gold No. 1. The difference between AAA and BBB+ rated yields has fallen to 933 basis points from 942 at the start of the year, while the gap between AAA and AA notes shrank to 114 from 129, according to the report.
Chinese companies must repay an equivalent $16.9 billion of maturing onshore notes in 2015, Koh estimated in the report. That increases every year and will peak at $192.3 billion in 2021. Some 65 percent of institutions expect at least one more onshore default this quarter, according to a Bloomberg survey of 20 banks, brokerages and money managers published on May 18.
Clearly, this is a rather large problem, but as we outlined in “How China’s Banks Hide Trillions In Credit Risk,” the government will often force banks to roll over maturing debt in order to paper over (literally) what is almost certainly a deteriorating situation and in fact, the PBoC recently did a complete 180 on regulations around local government financing via LGFVs in an effort to jumpstart the shadow banking credit creation machine, a move which Fitch calls “an explicit form of regulatory forbearance.”
Whatever the case, it’s becoming increasingly clear that the combination of slumping economic growth and $28 trillion in debt has the potential to trigger a wave of defaults from both state-run and private borrowers, a state of affairs which will test Beijing’s resolve when it comes to projecting stability in the country’s credit markets.
With the US spiraling quickly towards a maritime conflict with China over the latter’s “construction projects” in the disputed South China Sea and with NATO doing its best to match Moscow’s Eastern European sabre-rattling on the way to facilitating the most serious confrontation between Russia and the West in decades, we thought it as good a time as any to bring you the following graphic which shows the percentage of your life that the US has been at war.
Simply put, if you were born in 1992 or later, America has been at war for at least two-thirds of your life and if you were born after 2001, well… you have never known life in the US without war.
More from The Washington Post:
Using somewhat subjective definitions of “at war” — Korea counts but Kosovo doesn’t in our analysis, for example — we endeavored to figure out how much of each person’s life has been spent with America at war. We used whole years for both the age and the war, so the brief Gulf War is given a full year, and World War II includes 1941. These are estimates.
But the beginning of the conflict in Afghanistan in (late) 2001 means that anyone born in the past 13 years has never known an America that isn’t at war. Anyone born after 1984 has likely seen America at war for at least half of his or her life. And that’s a lot of Americans.
Given recent events in Iraq and Syria, this isn’t likely to change anytime soon.
A little over two years ago, in the middle of April 2013, there was a gold crash that came seemingly out of nowhere. Worse, for gold investors anyway, that crash was repeated just a few months later. Where gold had stood just shy of $1,800 an ounce at the start of QE3, those cascades had brought the metal price down to just $1,200. For many, especially 'so-called' orthodox economists, it heralded the end of the “fear trade” and meant, unambiguously, that the recovery had finally at long last arrived.
As Felix Salmon wrote at Reuters in an article titled, The Fear Bubble Bursts:
As a result, the falling price of gold is more important than simply being an opportunity for schadenfreude around the likes of Glenn Beck or John Paulson or Zero Hedge…
The biggest problem in the markets right now is that they’re still far too risk-averse. Fear-based assets like gold, Treasury bonds, and cash are in high demand, while there isn’t enough money flowing through greed-based assets like stocks and bank loans and into the economy as a whole. Even if the stock market is expensive, the number of primary and secondary offerings remains low; similarly, banks are not expanding their loan books nearly fast enough…
My hope is that the price of gold will continue to fall, that goldbugs will look increasingly silly, and that as a result Americans with savings will conclude that the best thing to do with those savings is to put them to work in a productive manner, rather than self-defeatingly trying to protect what they have.
Gold has not continued that wished-for collapse, but hasn’t risen much either. In fact, the price of gold remained above $1,300 for only short periods and hasn’t been near that level outside of the January 2015 “Swiss problem.” Most gold analysis views it in terms of not just the “fear bubble” but also a proxy for interest rates and monetary policy. There is already a problem with that latter interpretation, as the price of gold began to its decline almost the moment QE3 started. Economists think of gold investors in only these terms, as emotional and irrational Fed-haters.
In the broader economic context, then, the fact that gold was falling at the same time QE’s had commenced provided that hoped-for economic confirmation. Gold adherents were getting their “debasement” but that gold prices were sharply reacting in the “wrong” direction which could only mean, to the mainline economic view, that QE wasn’t just debasing the dollar it was actually working while doing so.
Writing just prior to the second gold “slam” in June 2013, Nouriel Roubini took his best shots at framing gold’s descent as a victory for Ben Bernanke:
Third, unlike other assets, gold does not provide any income. Whereas equities have dividends, bonds have coupons, and homes provide rents, gold is solely a play on capital appreciation. Now that the global economy is recovering, other assets—equities or even revived real estate—thus provide higher returns. Indeed, U.S. and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009.
Fourth, gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing. The time to buy gold is when the real returns on cash and bonds are negative and falling. But the more positive outlook about the U.S. and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall. [emphasis added]
Roubini’s fourth point may be the most important, as it implies that there is a relationship between the Fed’s policies, especially QE’s, and the rate of inflation. However, recent history, especially in the two years since gold crashed, has proven that totally and fully incorrect. There has been no “inflation” much at all, and even to the point that the Fed’s preferred inflation target, the PCE deflator, has come in under the policy target of 2% for 35 straight months dating back to just before QE3 was rumored.
If QE3 and QE4 had any impact on “inflation” or recovery in the US it is not apparent. For a time in 2013, Roubini’s “rising real rate” scenario seemed to be somewhat plausible as the entire UST complex and yield curve shifted upward. While the PCE deflator did not much move, that temporary rise in nominal yields brought real rates up and appeared at first as if it might reflect at least the near-future possibility of the recovery and recovery financial dynamics.
But that all turned around in October and November 2013. In other words, anything resembling the recovery in these financial terms had a very short life. By November 2013, nominal yields had slowed their ascent and the overall UST yield curve turned durably bearish. Though real rates fell once more in the middle of 2014 as “inflation” ticked up slightly, since October 2014 “inflation” has declined far faster than nominal yields. So real interest rates have been rising, but not for the reasons outlined by Roubini and his orthodox notions of recovery.
Clearly, there is “something” missing here beyond just the recovery economists were so sure that gold’s crash was foretelling. Normalizing both economic and financial conditions would mean interest rates rising back toward where they were pre-crisis just as “inflation” picks up and remains at or slightly above 2%. Neither of those factors is evident anywhere at all in the two years since gold prices crashed.
The idea of gold prices behaving like a zero-coupon bond is in some ways relevant to this problem. Economists only think of the asset side of that paradigm while never moving beyond that into liabilities. A government bond is an asset, sure enough, but it can also be part of the liability structure in repo. Just as government bonds act as collateral, so too does gold. That has led to strict and lasting misinterpretation about the behavior of gold in 2008, which Roubini tried to incorporate within his anti-gold stance.
But, even in that dire scenario, gold might be a poor investment. Indeed, at the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times. In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls.
That isn’t what happened to gold, at all. You can disprove that theory rather easily, as I wrote contemporarily in April 2013 about the gold slam as it was occurring.
Gold prices crashed on three separate occasions in 2008, all of which were tied to problems in collateral chains and interbank financial irregularities. In the first episode, the price decline started when Bear Stearns failed and ended on May 2, 2008. That date stands out because that was the first time the Fed had expanded its list of acceptable and eligible collateral in its TSLF Schedule 2 to include non-GSE MBS paper as well as strictly non-mortgage ABS. In other words, the collateral implosion started by Bear Stearns “cold fusion” ended the moment the Fed debased not the currency or bank reserves but the list of “appropriate” interbank collateral.
As I described it in April 2013:
That means in times of extreme stress, gold acts like a universal liquidity stopgap – when all else fails, repo gold. The operational reality of a gold repo is a gold lease, charged at the forward rate (GOFO). In terms of market mechanics, a dramatic increase in gold leasing is seen as a massive increase in supply on the paper markets.
For various reasons in the past five years, collateral chains and the available collateral pool has dwindled dramatically. That has left banks to scramble for operational bypasses, but it also has led to periods of very acute stress. [emphasis in original]
As a representation of the “dollar”, then, gold prices act as a partial proxy of actual “dollar” availability balanced against that or any desperate bid for safety – and having very little to do with interest rate differentials.
That makes the trend in gold since QE3 started all the more interesting if we take in the “correct” context of the global “dollar.” Clearly, we cannot take falling gold as indicating a recovery because one never came and it surely looks to be further away now than then, an interpretation consistent with financial measures, yields and prices. But we can look at gold over the past three years since QE3 and link its behavior to that of the “dollar.”
While economists might still see QE as contributing to global “liquidity”, which it seems like it should what with all those trillions in bank “reserves” created, there has been persistent criticism of it as nurturing instead the opposite condition. The major part of creating all those bank “reserves” is to remove collateral in the process – transforming a repo-based system back toward a more-traditional idea of how banking used to work. But the wholesale system since August 2007 has been moving away from unsecured lending interbank and otherwise to almost purely repo.
The Fed has been very aware of this problem especially when it nearly destroyed repo in April 2011 (and then a desperate “dollar” problem only two months later?) by stripping the system of almost all t-bills toward the end of QE2 (which was the reason for Operation Twist). When planning and extrapolating for QE3, those operational constraints were at best secondary to the psychological effects that were supposed to accompany Bernanke’s massive and “open ended” monetary program. Getting everyone to “feel” better that the Fed was doing something big was meant as a far greater economic stimulant than the negative liquidity of depriving usable collateral in terrible quantities. The recovery from the defeat of pessimism, in Felix Salmon’s terms, was thought to be so much more powerful than the status of actual “dollar” circulation ability.
So much happy emotion was never really much of a “stimulant”, of course, but the negative factors on “dollar” circulation were very real. In many ways, the collapse in gold presaged this latest stage or leg in the collapse of the global “dollar”, eurodollars in particular, which starts to account for the economic behavior these past few years as well. Gold, then, since early 2008 has been telling us a lot about the tendency of the eurodollar standard toward outright imbalance and dysfunction. That is a condition that is not in any way conducive for a global recovery, which is one big reason why, despite orthodox giddiness over gold prices, it never came.
It also suggests that QE has acted as a depressant upon the global economy, net, depriving significant circulation ability in eurodollar channels and beyond. This would include not just reduced levels of collateral flow, but also bank balance sheet capacity overall in the full 2013 aftermath of QE3 and QE4. It would have been nice if gold’s price collapse was a signal of actual success, but instead it appears to be just another form of structural financial decay and the economic malaise (at best) that attends it. In that view, it is somewhat amazing that gold prices haven’t suffered further lower lows, which suggests that there may actually have been a significant safety bid all along. The “fear” bubble did not end; it was overwhelmed by QE’s depressive constant and the related countdown to the end of the eurodollar standard.
Gold price activity since QE3 has been a warning, and a big one, not cause for victory celebrations.
Late last month we outlined an IBTimes report which showed that Goldman Sachs paid nearly a quarter of a million dollars to Bill Clinton for a speech before lobbying the State Department (then run by Hillary Clinton) on legislation tied to the Export-Import Bank which would eventually approved a loan to a Chinese company that subsequently placed a $75 million purchase order with a Goldman-owned aircraft manufacturer. The implication, of course, was that the speaking engagement fee ultimately influenced the State Department’s decision making, a suggestion Goldman called “preposterous.”
The Clintons have also come under scrutiny for possible conflicts of interest arising from contributions to Clinton Foundation charities while Hillary Clinton served as the nation’s top diplomat. More specifically, a Reuters investigation revealed that the Foundation failed to report “tens of millions” of donations from foreign governments on three years’ worth of 990s, prompting the organization’s acting CEO Maura Pally to pen a lengthy blog post explaining the “mistake.” Shortly thereafter, Reuters found inaccuracies in Pally’s explanation, noting that in fact, Clinton broke transparency promises made to the Obama administration.
Now, the IBTimes is out with a new investigative piece that looks at the relationship between foreign government and corporate donors to Clinton charities and weapons deals negotiated under Hillary Clinton’s State Department which, as it turns out, approved $165 billion in arms deals to nations who had previously given money to the Clinton Foundation.
In the years before Hillary Clinton became secretary of state, the Kingdom of Saudi Arabia contributed at least $10 million to the Clinton Foundation, the philanthropic enterprise she has overseen with her husband, former president Bill Clinton. Just two months before the deal was finalized, Boeing — the defense contractor that manufactures one of the fighter jets the Saudis were especially keen to acquire, the F-15 — contributed $900,000 to the Clinton Foundation, according to a company press release.
The Saudi deal was one of dozens of arms sales approved by Hillary Clinton’s State Department that placed weapons in the hands of governments that had also donated money to the Clinton family philanthropic empire, an International Business Times investigation has found.
Under Clinton’s leadership, the State Department approved $165 billion worth of commercial arms sales to 20 nations whose governments have given money to the Clinton Foundation, according to an IBTimes analysis of State Department and foundation data. That figure — derived from the three full fiscal years of Clinton’s term as Secretary of State (from October 2010 to September 2012) — represented nearly double the value of American arms sales made to the those countries and approved by the State Department during the same period of President George W. Bush’s second term…
The Clinton-led State Department also authorized $151 billion of separate Pentagon-brokered deals for 16 of the countries that donated to the Clinton Foundation, resulting in a 143 percent increase in completed sales to those nations over the same time frame during the Bush administration. These extra sales were part of a broad increase in American military exports that accompanied Obama’s arrival in the White House.
These deals benefited the usual Middle East suspects with whom the Obama administration is now coordinating for the ouster of Assad…
The State Department formally approved these arms sales even as many of the deals enhanced the military power of countries ruled by authoritarian regimes whose human rights abuses had been criticized by the department. Algeria, Saudi Arabia, Kuwait, the United Arab Emirates, Oman and Qatar all donated to the Clinton Foundation and also gained State Department clearance to buy caches of American-made weapons even as the department singled them out for a range of alleged ills, from corruption to restrictions on civil liberties to violent crackdowns against political opponents.
…and were consummated even as Clinton herself acknowledged an explicit link between some beneficiaries and funding for the very same terrorists who are now set to become a scapegoat for the very same Assad ouster…
As secretary of state, Hillary Clinton also accused some of these countries of failing to marshal a serious and sustained campaign to confront terrorism. In a December 2009 State Department cable published by Wikileaks, Clinton complained of “an ongoing challenge to persuade Saudi officials to treat terrorist financing emanating from Saudi Arabia as a strategic priority.” She declared that “Qatar’s overall level of CT cooperation with the U.S. is considered the worst in the region.”
… and in case there was any doubt about Clinton’s ability to influence weapons sales to foreign governments…
Questions about the nexus of arms sales and Clinton Foundation donors stem from the State Department’s role in reviewing the export of American-made weapons. The agency is charged with both licensing direct commercial sales by U.S. defense contractors to foreign governments and alsoapproving Pentagon-brokered sales to those governments. Those powers are enshrined in a federal law that specifically designates the secretary of state as “responsible for the continuous supervision and general direction of sales” of arms, military hardware and services to foreign countries. In that role, Hillary Clinton was empowered to approve or reject deals for a broad range of reasons, from national security considerations to human rights concerns.
The report doesn’t stop there. There are also links between the Clintons and the military-industrial complex with the likes of Boeing, Lockheed Martin, and United Technologies all donating money to the Foundation before being listed as contractors on more than 100 arms deals.
That group of arms manufacturers — along with Clinton Foundation donors Boeing, Honeywell, Hawker Beechcraft and their affiliates — were together listed as contractors in 114 such deals while Clinton was secretary of state…
Boeing was one of three companies that helped deliver money personally to Bill Clinton while benefiting from weapons authorizations issued by Hillary Clinton’s State Department. The others were Lockheed and the financial giant Goldman Sachs.
In the end, this serves as further evidence that the person who is viewed, at least for the time being, as the likely next US Commander in Chief, has in the past been susceptible to the influence of foreign governments whose cash contributions to Clinton charities may have served to shape US weapons deals with Washington’s Middle Eastern allies. We’ll close with the following from Harvard professor Stephen Walt:
American foreign policy is better served if people responsible for it are not even remotely suspected of having these conflicts of interest.
One of the key architects of the Iraq war – John Bolton – previously said that the Iraq war was about oil, not protecting the United States from weapons of mass destruction. And see this.
The Arabs divided between Sunnis and Shias – I think the Sunni Arabs are never going to agree to be in a state where the Shia outnumber them 3-1. That’s what ISIS has been able to take advantage of.
I think our objective should be a new Sunni state out of the western part of Iraq, the eastern part of Syria run by moderates or at least authoritarians who are not radical Islamists. What’s left of the state of Iraq, as of right now, is simply a satellite of the ayatollahs in Tehran. It’s not anything we should try to aid.
In other words, one of the key architects of the Iraq war has openly called for partition of Iraq and Syria into a number of different countries … as the Neocons have been planning for over 20 years.
Postscript: The hawks are not exactly sad about the rise of ISIS.
“I got interested in her in 2008,” Kenyan Felix Kiprono tells The Nairobian newspaper, and now, in an official marriage request, the lawyer has offered US president Barack Obama 50 cows, 70 sheep, and 30 goats in exchange for his 16-year old daughter Malia’s hand in marriage. As AFP reports, Kiprono dismissed the notion he might be a gold-digger, adding that he and the young Obama would lead “a simple life,” and he will teach Malia how to milk a cow. This is not the first time a Kenyan has offered livestock in exchange for a President’s daughter…
A Kenyan lawyer has offered US president Barack Obama 50 cows and other assorted livestock in exchange for his 16-year old daughter Malia’s hand in marriage, a report said Tuesday. As AFP reports,
Felix Kiprono said he was willing to pay 50 cows, 70 sheep and 30 goats in order to fulfil his dream of marrying the first daughter.
“I got interested in her in 2008,” Kiprono said, in an interview with The Nairobian newspaper.
At that time President Obama was running for office for the first time and Malia was a 10-year-old.
“As a matter of fact, I haven’t dated anyone since and promise to be faithful to her. I have shared this with my family and they are willing to help me raise the bride price,” he said.
Kiprono said he intended to put his offer of marriage to Obama and hopes the president will bring his daughter with him when he makes his first presidential visit to Kenya, the country where his father was born, in July.
Obama’s Kenyan grandmother, who is in her early 90s, still lives in Kogelo, in western Kenya, home to a number of the president’s relatives.
“I am currently drafting a letter to Obama asking him to please have Malia accompany him for this trip. I hope the embassy will pass the letter to him,” he said.
Kiprono dismissed the notion he might be a gold-digger.
“People might say I am after the family’s money, which is not the case. My love is real,” he insisted.
The young lawyer, whose age was not revealed, said he had already planned his proposal, which would be made on a hill near his rural village, and the wedding at which champagne would be shunned in favour of a traditional sour milk called “mursik”.
Kiprono said that as a couple he and the young Obama would lead “a simple life”.
“I will teach Malia how to milk a cow, cook ugali (maize porridge) and prepare mursik like any other Kalenjin woman,” he said.
And while the gesture seems very generous, we would note that this is not the first time a Kenyan has offered livestock in exchange for a President’s daughter. In 2009, as CNN reports, Kenyan Godwin Kipkemoi Chepkurgor offered 40 goats and 20 cows for Chelsea Clinton’s love…
The Kenyan man first offered the dowry nine years ago to then-President Bill Clinton in asking for the hand of his only child. He renewed it Thursday after Secretary of State Hillary Clinton was asked about the proposal at a Nairobi town hall session.
CNN’s Fareed Zakaria, the session’s moderator, commented that given the economic crisis at hand, Chepkurgor’s dowry was “not a bad offer.”
However, Clinton said her daughter was her own person.
“She’s very independent,” she said. “So I will convey this very kind offer.”
* * * So what have we learned: Malia Obama is worth dramatically more than Chelsea Clinton (even adjusting for inflation).
Yesterday, in a troubling oped posted in China’s Global Times, a paper owned by the ruling Communist Party, China issued its loudest warning yet to the US to keep out of its affairs, in this case the various disputed territories in the South China Sea among them but not limited to China’s artificial islands in the Spratly chain which have become a topic of contention between China and various US allies in the region, when it said that war was “inevitable” between China and the United States unless Washington stopped demanding Beijing halt the building of artificial islands in the disputed waterway.
“We do not want a military conflict with the United States, but if it were to come, we have to accept it,” said The Global Times, which is among China’s most nationalist newspapers.
But is a military conflict, let alone an actual war, realistic in a world in which all political and diplomatic disagreements are solved either in the back room or using the capital markets?
According to Michael Auslin, a resident scholar and the director of Japan Studies at the American Enterprise Institute (AEI), where he specializes in Asian regional security and political issues, the answer is yes. Auslin proposes that with Beijing and Washington both laying down “red lines” in the South China Sea, the two superpowers are maneuvering themselves into a potential conflict since neither would be willing to back down over fears of losing face or realpolitik clout.
Beijing has not yet declared a formal air defense identification zone (ADIZ) over the South China Sea, unlike the one it established over part of the East China Sea in 2013, nor could it today enforce such a zone effectively with its current fighters.
However, with its reclamation activities continuing, and the Obama Administration apparently having decided to challenge China’s claims, the US and China are now potentially closer to an armed encounter than at any time in the past 20 years.
In an article in The Commentator, he lays out the three real-world scenarios under which it could happen.
1) Accident: The US Navy is reportedly considering sending ships within 12 miles of the manmade islands, thereby entering into what China claims is now sovereign territory. With Chinese naval and maritime patrol vessels in the waters, intimidation or harassment of US ships could lead to a collision, with each side responding in turn.
This is what China has done to ships of other nations, and an accident could lead to a stand-off. In the air, the Spratlys lie about 800 miles from China’s shores, already within the combat radius of China’s most advanced fighter jet (though Beijing has yet to show that it can effectively oppose US air patrols).
More worrisome, China is building airstrips on its islands, and may soon be able to launch planes from them to patrol the skies. Similarly, once its aircraft carrier is operational with an air wing, it can easily patrol the area. Any of those developments would dramatically increase the chances of a mid-air collision, such as happened in 2001 between a Chinese fighter and a US Navy surveillance plane.
2) Premeditation: Beijing has staked its geopolitical reputation in Southeast Asia on its claims to the South China Sea and now the building of the islands, which already cover more than 2,000 acres. As I wrote in National Review last week, unless they decide to back down, and risk losing influence in Asia, China’s leaders may decide that stopping American incursion into their newly claimed waters early on is the best opportunity to make the risks to Washington seem too high.
Once Chinese airplanes are on the islands, then they may decide to shadow US planes and prevent them from flying in “restricted” skies, for the same reason, leaving the US to decide how far to respond. Thus, they may force a confrontation, to try and get the Obama Administration to back down from getting involved in another military situation while it is dealing with the Middle East and Ukraine.
3) Indirect Conflict: China may well judge that it is too risky to directly challenge US ships and planes, but that it can make the same point by intercepting those of other countries. Already, the Philippines has claimed that China warned off its surveillance planes, and China has had regular maritime run-ins with the Philippines and Vietnam.
It may decide to stop foreign ships from passing by its new islands, or it may soon try to escort less advanced foreign planes out the skies above its islands. A direct conflict between China and any of its neighbors would, at this point, have a good chance of bringing in the US, in order to credibly claim that it is upholding international law (and, in the case of the Philippines, coming to the aid of a treaty ally).
His conclusion:
Beijing and Washington are each laying down redlines in the South China Sea, making the upholding of their claims a priority. In this, they are maneuvering themselves into a potential conflict.
With no de-escalation mechanisms, and deep distrust on both sides, the more capable China becomes in defending its claimed territory, the more risks the US will face in challenging those claims.
That is why each is trying to define the boundaries and set the pattern of behavior before the other does. That may not ensure that there will be a military encounter, but it steadily raises the chances of one.
What Auslin ignored to note is that with the entire world gripped in secular stagnation, a “controlled” war may be just what the sputtering economic engines of the world’s two largest economies need. The only question is how to assure any incipient conflict will remain “controlled.”
Neurosis is the inability to tolerate ambiguity. – Sigmund Freud (1886 – 1939)
To learn which questions are unanswerable, and not to answer them: this skill is most useful in times of stress and darkness. – Ursula K. Le Guin, “The Left Hand of Darkness” (1969)
Is everything connected, so that events create resonances like ripples across a net? Or do things merely co-occur and we give meaning to these co-occurrences based on our belief system? Lieh-tzu’s answer: it’s all in how you think. – “The Liezi”, ancient Taoist text attributed to Lie Yukou (c. 400 BC)
Deckard:
She’s a replicant, isn’t she?
Tyrell:
I’m impressed. How many questions does it usually take to spot them?
Deckard:
I don’t get it, Tyrell.
Tyrell:
How many questions?
Deckard:
Twenty, thirty, cross-referenced.
Tyrell:
It took more than a hundred for Rachael, didn’t it?
Deckard:
[realizing Rachael believes she’s human] She doesn’t know.
Tyrell:
She’s beginning to suspect, I think.
Deckard:
Suspect? How can it not know what it is?
– "Bladerunner" (1982)
I remember when I was a very little girl, our house caught on fire. I'll never forget the look on my father's face as he gathered me up In his arms and raced through the burning building out to the pavement. I stood there shivering in my pajamas and watched the whole world go up in flames. And when it was all over I said to myself. "Is that all there is to a fire?" – Jerry Lieber and Mike Stoller, "Is That All There Is?", as recorded by Peggy Lee (1969)
I call our world Flatland, not because we call it so, but to make its nature clearer to you, my happy readers, who are privileged to live in Space. – Edwin A. Abbott, “Flatland: A Romance of Many Dimensions” (1884)
Homey don't play that game. – Damon Wayans, “In Living Color” (1992)
There’s only one question that matters today in markets: why is the government bond market going up and down like a yo-yo? How is it possible that the deepest and most important securities in the world are currently displaying all the trading stability of a biotech stock?
As with all market questions of singular importance and vast attention, these are questions of meaning. We seek the why and we seek the cause because we are desperate to understand what it means. We are – all of us – convinced that this market behavior must mean something profound. Surely this insane quivering within the bond market means that we are on the cusp of a quantum shift in the market landscape. Surely this is the rumbling of a deep tectonic plate that presages a massive earthquake. Surely, as more than one Master of the Universe proclaimed at SALT the other week, the long-awaited bear market in government debt is nigh.
Maybe. Or maybe all those Masters of the Universe are just talking their book. I know … shocking.
We are all market neurotics today, in the Freudian sense of the word, incapable of handling ambiguity in Narrative after 5+ years of global coordination and cooperation among The Monetary Powers That Be, 5+ years of being told by a monolithic Voice of Command how we should think about every single data point that crosses our Bloomberg screen. This is the most hated bull market in history, precisely because we all believe that it is a creature of policy and Narrative, and when the Voices are silent or they say conflicting things, we start to freak out. We run from pillar to post, getting whipsawed at every turn. Importantly, the whipsawing is occurring in the securities that are most closely linked to policy and Narrative – government bonds – and that’s why I believe that what we’re experiencing is more akin to neurosis than some shift in market fundamentals.
Here’s my point: volatility ≠ instability. Or more precisely, a system can be volatile or unstable in a local sense but highly stable in a global sense.
Unfortunately, however, because we live in the local rather than the global … because every bit of our modern financial services system, particularly financial media, is by business necessity focused on the local rather than the global … we are as unaware of our true positioning in the world as Rachael in “Bladerunner”. Or Deckard, who sure seems like a replicant to me. From a local perspective these bond market gyrations make it seem as if we are totally unmoored and markets are on the brink of some life-altering change. From a global perspective, however, this is a tempest in a teacup. Or to paraphrase the late, great Peggy Lee, is that all there is to a bond market fire?
Okay, Ben, that’s quite a mouthful: “unstable in a local sense but highly stable in a global sense”. Translation, please?
The Rosetta Stone here is Information Theory, and to introduce that it’s probably easiest if I quote directly and extensively from one of my very earliest Epsilon Theory notes, “Through the Looking Glass”. I wrote this almost exactly 2 years ago, back when I only had a few hundred readers, so it should be fresh for 99% of the audience. It’s a lot to digest, but I promise that you won’t see markets in the same way once you finish. Information Theory is, in fact, the beating heart of Epsilon Theory. That said, one of the beautiful things about releasing content into the wild is that readers can do with it what they will. For the TLDR / Short Attention Span Theatre crowd, click here to skip to the chase on page 10.
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Defining the strength of a signal as the degree to which it changes assessments of future states of the world dates back to Claude Shannon’s seminal work in 1948, and in a fundamental way back to the work of Thomas Bayes in the 1700’s. Here’s the central insight of this work: information is measured by how much it changes your mind. In fact, if a signal doesn’t make you see the world differently, then it has zero information. As a corollary, the more confident you are in a certain view of the world, the more new information is required to make you have the opposite view of the world and the less information is required to confirm your initial view. There’s no inherent “truth” to any signal, no need to make a distinction between (or even think of) this signal as having true information and that signal as having false information. Information is neither true nor false. It is only more or less useful in our decision-making, and that’s a function of how much it makes us see the world differently. As a result, the informational strength of any signal is relative. The same signal may make a big difference in my assessment of the future but a tiny difference in yours. In that case, we are hearing the same message, but it has a lot of information to me and very little to you.
Let’s say that you are thinking about Apple stock but you are totally up in the air about whether the stock is going up or down over whatever your investment horizon might be, say 1 year. Your initial estimation of the future price of Apple stock is a coin toss … 50% likelihood to be higher a year from now, 50% likelihood to be lower a year from now. So you do nothing. But you start reading analyst reports about Apple or you build a cash-flow model … whatever it is that you typically do to gather information about a potential investment decision.
The graph below shows how Information Theory would represent the amount of signal information (generically represented as bits) required to change your initial assessment of a 50% likelihood of Apple stock going up over the next year to a post-signaling assessment of some new percentage likelihood. These are logarithmic curves, so even relatively small amounts of information (a small fraction of a generic bit) will change your mind about Apple pretty significantly, but more and more information is required to move your assessment closer and closer to certainty (either a 0% or a 100% perceived likelihood of the stock going up).
Of course, your assessment of Apple is not a single event and does not take place at a single point in time. As an investor you are constantly updating your opinion about every potential investment decision, and you are constantly taking in new signals. Each new update becomes the starting point for the next, ad infinitum, and as a result all of your prior assessments become part of the current assessment and influence the informational impact of any new signal.
Let’s say that your initial signals regarding Apple were mildly positive, enough to give you a new view that the likelihood of Apple stock going up in the next year is 60%. The graph below shows how Information Theory represents the amount of information required to change your mind from here. The curves are still logarithmic, but because your starting point is different it now only requires 80% of the information as before to get you to 100% certainty that Apple stock will go up in the next year (0.8 generic bits versus 1.0 generic bits with a 50% starting estimation). Conversely, it requires almost 140% of the same negative information as before to move you to certainty that Apple stock is going down.
What these graphs are showing is the information surface of your non-strategic (i.e., without consideration of others) decision-making regarding Apple stock at any given point in time. Your current assessment is the lowest point on the curve, the bottom of the informational “trough”, and the height of each trough “wall” is proportional to the information required to move you to a new assessment of the future probabilities. The higher the wall, the more information required in any given signal to get you to change your mind in a big way about Apple.
Now let’s marry Information Theory with Game Theory. What does an information surface look like for strategic decision-making, where your estimations of the future state of the world are contingent on the decisions you think others will make, and where everyone knows that everyone is being strategic?
I’m assuming we’re all familiar with the basic play of the Prisoner’s Dilemma, and if you’re not just watch any episode of Law and Order. Two criminals are placed in separate rooms for questioning by the police, and while they are both better off if they both keep silent, each is individually much better off if he rats his partner out while the partner remains silent. Unfortunately, in this scenario the silent partner takes the fall all by himself, resulting in what is called the “sucker pay-off”. Because both players know that this pay-off structure exists (and are always told that it exists by the police), the logical behavior for each player is to rat out his buddy for fear of being the sucker.
Below on the left is a classic two-player Prisoner’s Dilemma game with cardinal expected utility pay-offs as per a customary 2×2 matrix representation. Both the Row player and the Column player have only two decision choices – Rat and Silence – with the joint pay-off structures shown as (Row , Column) and the equilibrium outcome (Rat , Rat) shaded in light blue.
The same equilibrium outcome is shown below on the right as an informational surface, where both the Row and the Column player face an expected utility hurdle of 5 units to move from a decision of Rat to a decision of Silence. For a move to occur, new information must change the current Rat pay-off and/or the potential Silence pay-off for either the Row or the Column player in order to eliminate or overcome the hurdle. The shape of the informational surface indicates the relative stability of the equilibrium as the depth of the equilibrium trough, or conversely the height of the informational walls that comprise the trough, is a direct representation of the informational content required to change the conditional pay-offs of the game and allow the ball (the initial decision point) to “roll” to a new equilibrium position. In this case we have a deep informational trough, reflecting the stability of the (Rat , Rat) equilibrium in a Prisoner’s Dilemma game.
Now let’s imagine that new information is presented to the Row player such that it improves the expected utility pay-off of a future (Silence, Rat) position from -10 to -6. Maybe he hears that prison isn’t all that bad so long as he’s not a Rat. As a result the informational hurdle required by the Row player to change decisions from Rat to Silence is reduced from +5 to +1.
The (Rat , Rat) outcome is still an equilibrium outcome because neither player believes that there is a higher pay-off associated with changing his mind, but this is a much less stable equilibrium from the Row player’s perspective (and thus for the overall game) than the original equilibrium.
With this less stable equilibrium framework, even relatively weak new information that changes the Row player’s assessment of the current position utility may be enough to move the decision outcome to a new equilibrium. Below, new information of 2 units changes the perceived utility of the current Rat decision for the Row player from -5 to -7. Maybe he hears from his lawyer that the Mob intends to break his legs if he stays a Rat. This is the equivalent of “pushing” the decision outcome over the +1 informational hurdle on the Row player’s side of the (Rat , Rat) trough, and it is reflected in both representations as a new equilibrium outcome of (Silence , Rat).
This new (Silence , Rat) outcome is an equilibrium because neither the Row player nor the Column player perceives a higher expected utility outcome by changing decisions. It is still a weak equilibrium because the informational hurdle to return to (Rat , Rat) is only 1 informational unit, but all the same it generates a new behavior by the Row player: instead of ratting out his partner, he now keeps his mouth shut.
The Column player never changed decisions, but moving from a (Rat , Rat) equilibrium to a (Silence , Rat) equilibrium in this two time-period example resulted in an increase of utility from -5 to +10 (and for the Row Player a decrease from -5 to -6). This change in utility pay-offs over time can be mapped as:
Replace the words “Column Utility” with “AAPL stock price” and you’ll see what I’m going for. The Column player bought the police interrogation at -5 and sold it at +10. By mapping horizontal movement on a game’s informational surface to utility outcomes over time we can link game theoretic market behavior to market price level changes.
Below are two generic examples of a symmetric informational structure for the S&P 500 and a new positive signal hitting the market. New signals will “push” any decision outcome in the direction of the new information. But only if the new signal is sufficiently large (whatever that means in the context of a specific game) will the decision outcome move to a new equilibrium and result in stable behavioral change.
In the first structure, there is enough informational strength to the signal to overcome the upside informational wall and push the market to a higher and stable price equilibrium. In the second structure, while the signal moves the market price higher briefly, there is not enough strength to the signal to change the minds of market participants to a degree that a new stable equilibrium behavior emerges.
All market behaviors – from “Risk-On/Risk-Off” to “climbing a wall of worry” to “buying the effin’ dip” to “going up on bad news” – can be described with this informational structure methodology.
For example, here’s how “going up on bad news” works. First, the market receives a negative Event signal – a poor Manufacturing ISM report, for example – that is bad enough to move the market down but not so terrible as to change everyone’s mind about what everyone knows that everyone knows about the health of the US economy and thus move the market index to a new, lower equilibrium level.
Following this negative event, however, the market then receives a set of public media signals – a Narrative – asserting that in response to this bad ISM number the Fed is more likely to launch additional easing measures. This Narrative signal is repeated widely enough and credibly enough that it changes Common Knowledge about future Fed policy and moves the market to a new, higher, and stable level.
So what is the current informational structure for the S&P500? Well, it looks something like this:
The market equilibrium today is like a marble sitting on a glass table. It is an extremely unstable equilibrium because the informational barriers that keep the marble from rolling a long way in either direction are as low as they have been in the past five years. Even a very weak signal is enough to push the marble a long way in one direction, only to have another weak signal push it right back. This is how you get big price movements “for no apparent reason”.
Why are the informational barriers to equilibrium shifts so low today? Because levels of Common Knowledge regarding future central bank policy decisions are so low today. The Narratives on both sides of the collective decision to buy or sell this market are extremely weak. What does everyone know that everyone knows about Abenomics? Very little. What does everyone know that everyone knows about Fed tapering? Very little. What does everyone know that everyone knows about the current state of global growth? Very little. I’m not saying that there’s a lack of communication on these subjects or that there’s a lack of opinion about these subjects or that there’s a lack of knowledge about these subjects. I’m saying that there’s a lack of Common Knowledge on these subjects, and that’s what determines the informational structure of a market.
***
I wrote all that right before the Fed’s Taper Tantrum in the summer of 2013, which can be understood using this Information Theory framework as a massive public relations effort by Bernanke et al to create a new Common Knowledge structure that would shape the informational contours of the market. The immediate signal of this initial effort at “communication policy” was a big red arrow pointing left, and almost all asset classes everywhere around the world took a dive as the strong signal sent the equilibrium marble skittering to the downside across the largely flat informational surface. But the longer term effect of communication policy was just as Bernanke hoped (and as he spoke about extensively in his farewell address as Fed Chair): it built an enormous Common Knowledge “wall” off to the downside left of the market informational surface – a Fed put based not on continued asset purchases, but on continued wordsof Narrative influence.
Those words form the Narrative of Central Bank Omnipotence, the overwhelming belief by market participants that central bankers in general, and the Fed in particular, determine market outcomes, and for the past two years this has been the only thing that matters in markets. I’ve been tracking and studying political Narratives for my entire professional career, close to 30 years now, and I’ve never seen anything like this. It’s a heck of a trick that Bernanke started and Draghi perfected and Yellen continues, and it’s the key, I think, to seeing recent bond market turbulence in the most useful perspective.
Everything I wrote about the informational surface of the equity market in early summer 2013 is exactly applicable to the informational surface of the bond market in early summer 2015. The bond market today is like a marble sitting on a glass table. There are very few informational structures or barriers to keep the price of US bonds from skittering this way or that, within a price range as expressed in yield terms of, say, 2.25% and 1.85% on the 10-year bond. This is what always happens when the Fed comes out and says that it's increasingly "data dependent" …our local equilibria become much less stable when the Fed says that it hasn't made up its collective mind about the pace or scale of monetary policy shifts.
With an informational structure like this, the 10-year bond could trade anywhere on this segment of the price line. Moreover, it takes a signal with precious little information to change people’s minds about whether the US 10-year should yield 1.90% today or 2.20% tomorrow. Precious little information means just that – precious little information – and it’s a classic mistake to infer grand theories or reach sweeping conclusions on the basis of precious little information. Don’t do that.
I really can’t emphasize this point too strongly – monetary policy since March 2009 has created a phenomenally stable global equilibrium in both markets and the real economy, an equilibrium that since the summer of 2013 no longer depends on massive asset purchases by the Fed.
Does the stability of the global equilibrium require someone to be making asset purchases, if not the Fed then the ECB or BOJ? To some degree I’m sure it does. But then I remember that Draghi’s mere words and an OMT program constructed out of whole cloth were sufficient to save the Euro in the summer of 2012. My strong sense is that the launching of central bank asset purchase programs may move the entire informational structure farther along to the right of the price line (higher prices, lower yields), and vice versa leftwards along the price line if the programs stop, but they don’t diminish the Common Knowledge structures themselves. Maybe the locally unstable price range of the US 10-year as expressed in yield terms goes to 2.75% – 2.35% if the ECB were to summarily stop its asset purchase program, but I still think you have an extremely stable global informational structure on either side of that new range, whatever it is. Among market participants today there is almost unanimity of belief that central bankers Will. Not. Allow. a global recession to occur, much less a deflationary equilibrium. But at the same time there is also almost unanimity of belief that central bankers Can. Not. Create. a global recovery, much less an inflationary equilibrium. That unanimity of belief establishes a global informational equilibrium of unparalleled strength and stability, or at least unparalleled in my experience.
And that leads me to my other main point: a highly stable equilibrium cuts both ways, for good and for bad. Another way of saying that you’re in a highly stable equilibrium is to say that you’re well and truly stuck. Yes, there are HUGE informational barriers to prevent economic behaviors that would create a recession in the US or horribly crush any major market or asset class. But by the same token, there are also HUGE informational barriers to prevent economic behaviors that would spark robust growth in the US or wildly elevate any major market or asset class. I’m not saying that the doomsday or heavenly scenarios are impossible. I’m saying that it would take an almost unimaginably large amount of new information to change people’s minds about what everyone knows that everyone knows about markets today, for either scenario to occur. Could happen. But I really don’t think that’s how you want to place your bets. My money is on the long grey slog of the Entropic Ending.
I know it sounds weird for me to say that we’re living in a deep, deep valley with giant mountains on both sides of us when it feels like we’re a marble sitting on a glass table, but that’s exactly the mixed metaphor that I think accurately describes our lives as investors here in the Golden Age of the Central Banker. I know it sounds weird to think that we could be living in that deep, deep valley and yet be completely oblivious to its existence, completely convinced that the narrow field of view foisted on us day in and day out by the business imperatives of the financial services industry, especially financial media, is the only possible field of view. But myopically focused on what we are told to focus on is exactly how we humans (and replicants, too, I suppose) tend to live out our lives. Shifting our perspective to take a more global view, whether that’s on the dimension of time or emotion or, yes, asset price levels, is probably the most difficult thing any of us can hope to achieve, and it will always be an imperfect shift at best. Yet it’s never been more important to make that effort, else we allow our innate search for meaning to be subverted by mass-mediated, faux-authentic signalers that profit from making us look over here rather than over there. And I’m not just talking about market signals. It’s EVERY expression of power in the modern age – financial, political, legal, medical, etc. – that suffers from this mass-mediated form of social control, this manipulation of the Common Knowledge game. The human animal is a social animal. We are biologically evolved over millions of years to infer meaning from social signals. We swim in a sea of socially constructed signals, and we can no more ignore the words of Yellen or CNBC or a Master of the Universe than an ant can ignore the pheromones of her queen. We can’t ignore the words. But we can recognize them for what they are. We can ask ourselves “Is that all there is?” and take a more global view.
Sometimes there’s significance in signs and portents. Sometimes there’s real meaning to be gleaned from careful study of localized phenomena, from the interpretation of immediate events to generate far-reaching conclusions. Then again, sometimes a cigar is just a cigar, and that’s how I’m thinking about recent gyrations in the bond market.
One final point, perhaps the most important one I’ve got, and it’s addressed to everyone who asks questions like “so, Ben, when do you think the Fed is going to raise rates?” or “so, Ben, where do you think the price of oil goes from here?” The answer: I don’t know and I don’t really care. Seriously. These are unanswerable, entirely over-determined-in-retrospect questions, and the worst possible thing you can do with an unanswerable, entirely over-determined-in-retrospect question is to try to answer it in deterministic fashion! The popular fetish with demanding an Answer with a capital A to this sort of question is a crystallization of the market neurosis that afflicts us in the Golden Age of the Central Banker, and it’s the quickest path I know to poor investing.
What I DO care about is Adaptive Investing. What I DO care about is understanding the informational structures of the market that determine the likely market price reaction to some new signal, whether that’s a Yellen speech, an earnings report, or technical trading data. Trying to predict what that signal is going to be or when that signal is going to come is a losing proposition. Sorry, but I don’t play that game. And neither should you. My god, we need more pundit predictions about the Fed or oil prices like we need an asteroid to crash into the Earth. What we need is an investment and allocation STRATEGY for whatever comes down the pike, whenever it occurs. That’s exactly what an Information Theory perspective on markets can provide. Take another look at this informational surface.
This graph says nothing about when and what the Fed will do. It says everything about how to THINK about the bond market in a dynamic, non-myopic way, about how to prepare for probabilistic waves of new signals and how to react once they hit. There’s an entire investment and asset allocation strategy embedded in this graph, and I think it’s the most useful contribution I can make with Epsilon Theory, far more than adding one more voice to the cacophony of Fed “predictions” that drive our collective market neurosis. We are slowly being driven nuts by the paradoxes and ambiguities of the Golden Age of the Central Banker, a maddening time in the truest sense of the word, and I don’t begrudge anyone’s coping mechanisms or business models for dealing with this clinically insane market environment. I submit, however, that our mental health and financial health are best served by taking a strategic view of markets, a view that engages with the game without succumbing blindly to it. That and a regular dose of Epsilon Theory.
Hot on the heels of George Soros' warnings that we stand on the verge of World War 3, demanding Washington back off its anti-Yuan pressure, it appears "the good guys" are fighting back with their own good-cop, bad-cop propaganda. As Sputnik News reports, General hans-Lothar Domrose, NATO Commander of the Brunssum Allied Joint Force Command, said in an interview with German magazine Focus Online that Russian President Vladimir Putin is a tough-minded, forward-thinking politician who is capable of foreseeing situations, but also regards him as a dangerous "gambler," who "is willing to use nuclear weapons against NATO troops."
…unless the U.S. makes 'major concessions' and allows China's currency to join the IMF's basket of currencies, "there is a real danger China will align itself with Russia politically and militarily, and then the threat of world war becomes real."
And so NATO has decided to make it clear just who the bad gyuys are in any equation of global thermonuclear war (as Sputnik News reports),
General Hans-Lothar Domröse, Commander of Allied Joint Force Command Brunssum (The Netherlands) has revealed what NATO thinks of Russian President Putin.
In his interview with the German magazine Focus Online, Domröse called the Russian leader a tough-minded, forward-thinking politician who is capable of foreseeing the situation.
The general, however, added that Putin is a “gambler”, which might be dangerous. Unfortunately the general did not elaborate any further.
General Domröse also emphasized that neither NATO nor he personally consider Russia an enemy; at the worse, the country is seen as a potential threat. He stressed that no one in the alliance is interested in waging war; their purpose, rather, is to defend. He said that President Putin is aware of that, and that allows the general to sleep well.
The general is however concerned that President Putin might be willing to use nuclear weapons against NATO troops.
General, we are not already at war with Russia – in a propaganda war?
The Russian propaganda machine is running and acts. We will reply to the west on the truth quickly, and we gloss over anything. It may there be exceptions, but it is the principle. However, it is an old Russian tradition, matters only not admit it then to comment in a different light, and finally to make a U-turn. Let's take the example of the Crimea. It was said at the beginning: We are not. Then it was: Yes, there are also Russian soldiers. But they're on vacation . Soldier on vacation with equipment so. The summit was then entering into argument of President Putin: I had to intervene there.
Should the West respond with counter-propaganda?
He must not be primarily be lulled. I can understand the concern of our Baltic friends who warn repeatedly: Warning, not fall for the Russian scam. We have to be straight and honest go our way. Let the differences quietly made: We stick to the truth.
How is the Russian military presence in and around the Ukrainian troubled region?
The Russian armed forces are permanently very active since the beginning of Ukraine crisis in the air. We have over 300 airspace violations or fast-injury. On Russian territory at a location nearby Ukraine regiments, classic combat units. We also have time with Special Forces dealing with jeans and sunglasses, the seep.
They currently rely on a highly mobile task force, which is to make the eastern flank of NATO safer. How far are you with it?
We are nearing the realization of our plans, including the necessary infrastructure. We know from the Russian military exercises that Russia can move 100 000. soldiers very quickly. We have responded and the NATO Response Force, so to speak, our firefighters, reinforced, 13 000 to 30 000 men. NATO has also decided to make these forces available more quickly, thus reducing the alarms. And we need a spearhead, a sort of scouts who can start immediately. This is on the order of a brigade, good 5,000 men, supported by ships and aircraft, which can be moved within a week to counter a possible attack. First, they should put off, in the hope that there will be no further.
How credible deterrence may in such outnumbered ever be?
That's a relatively small troupe 5000-7000 man, so much is true. But its essential value is that it represents more than half of all NATO members. So there are around 20 different countries always on site. And just in case, each nation would be affected. But let me emphasize that: No one in NATO wants to wage a war. But we will protect the population. I believe that President Putin knows it. That's why I still sleep well.
NATO has Putin challenged by being moved up to close to the Russian borders?
That, sir, is nonsense. NATO is a values-based defense alliance. It is in principle open to like-minded people. Nations seek its own initiative to take charge. The Alliance itself will not do so on fishing expeditions to get more members into the basket.
Former members of the Warsaw Pact now belong to NATO and are still equipped with Russian military technique. Delivering the Russians still spare parts?
Currently, they do not. I hear you supplied on the open market.
Putin would be willing to use nuclear weapons against NATO troops?
We consider this issue with great concern. The Russians maintain the tactical use of nuclear weapons in the battle for a possible form of warfare.
I think President Putin is a forward-thinker. But also a gambler. That can also be dangerous. You have to make the cost of the use of [nuclear weapons] so high that it seems too expensive to him for him. Since we are on track. But I want to emphasize that neither NATO nor Domröse consider Russia as an enemy. Very well, but as a threat.
Over one and a half years ago we put in perspective the amount of money creation by China compared to the the liquidity injection by the Big 3 “developed world” central banks. The result was stunning.
Since then both the Chinese money machine, as well as those of the central banks has kept on pumping in injecting liquidity (in the process withdrawing liquidity from markets as Citi’s Matt King pointed out three weeks ago). A quick update comparing just China with the US shows that as of the most recent period, Chinese banks now have just shy of $30 trillion in assets, compared to almost 50% less for US banks.
To be sure, China’s gargantuan, unprecedented debt-issuance spree is nothing new: we have covered it extensively over the years…
….noting all the way back in 2012 that “If one takes the chart above showing the absolute level in Corporate debt, and assumes this is a valid proxy for total leverage growth across all other sectors, one can say, with a straight face, that if all Chinese debt on and off the books, including shadow leverage, were to be pooled, it would make America’s grand consolidated debt (excluding the $100 trillion in entitlements) of 345% appears quite modest.”
And here also, three years later, is Goldman admitting that China’s “Credit-led growth has created one of the biggest debt build-ups in recent years.” This is how Goldman explains what happened in China to launch this massive debt-funded growth:
… after the onset of the global financial crisis and the collapse in world demand, exports collapsed. The Chinese government’s response involved large infrastructure outlays via bank financing. This led to a notable increase in China’s credit intensity, as investment growth is a more credit-intensive than exports and consumption, with heavy borrowing requirements and long payback periods.
This can be seen from the growth in China’s nominal GDP and in total social financing (TSF), which is an aggregation of credit in both the banking and non-banking sectors. As shown in Exhibit 1, nominal GDP fell sharply in 2008, but rebounded strongly in 2009 following the sizeable increase in TSF. We then saw TSF growth slowing in 2010/11, although nominal growth held up as exports rebounded sharply. As export growth fell in 2012 and TSF growth slowed, nominal GDP dipped in 2011/12. We then saw TSF growth reaccelerate in 2012H2 to support growth. Since early 2013, TSF growth has decelerated again, as has nominal growth. This deceleration has continued in 2015, accompanied by additional loosening measures.
Then something changed: China realized that alongside record debt comes record bad debt.
We noted as much in the summer of 2013 when we reported that as China scrambled to intercept the relentless surge in non-performling loans, it would moderate its hollow, debt-funded growth. This was part of the new Politburo’s stated directive of reorienting the Chinese economy away from being entirely reliant on debt issuance to depend on more conventional growth catalysts; it also explains why China’s growth rate has plunged in the past 2 years and has officially dropped to a level just around 7% …
… and unofficially to just above 1%.
China did this almost entirely by choking off the growth of its most opaque funding sector residing within China’s “shadow banking” system: trust issuance, non-discounted bills and local government debt. These are the highlights we noted in November in “China’s Shadow Banking Grinds To A Halt As Bad Debt Surges Most In A Decade“
[W]hat is the main culprit for the contraction in China’s all important credit formation? In two words: shadow banking… as China finally reveals little by little the true extent of its gargantuan bad debt problem, it is also slamming the breaks on the shadow banking system that for years what the sector where marginal credit creation, and thus growth as well as bad debt formation, was rampant.
If the shadow banking collapse virus has finally jumped to China, there is no saying just how far Chinese GDP can drop if it is now constrained on the top side by surge in bad debt. One thing is certain: Japan’s paltry, in the grand scheme of things, expansion in its own QE will barely be felt if the record Chinese credit creation dynamo is indeed slamming shut.
Six months later, others caught on: first it was RBS, whose Andrew Roberts recently said China accounted for 85% of all global growth in 2012, 54% in 2013, and 30% in 2014. This is likely to fall to 24% this year. “If there is only one statistic that you need to know in the world right now, this is it.”
In other words, without China’s rampant credit creation, without an out of control shadow banking sector, not only is China’s growth doomed to a long period “secular stagnation”, to use a popular term these days, but so is the entire world.
Goldman agrees:
China’s policy response to the global financial crisis created one of the largest debt buildups as a share of GDP seen anywhere in the world over the past 50 years. Cognizant of the risks of such a large credit buildup, since early 2013 (when the current Chinese leadership took over), we have seen a notable shift by policymakers to make credit provision more transparent and productive. As discussed above, there was a notable rebound in TSF in 2012/2013 as GDP slowed. That TSF growth was, to a large extent, driven by the growth in trust financings, an area we have highlighted as one of the riskiest segments within China’s credit market. To control risks, policymakers made several attempts at curbing the growth in trust financings. In June 2013, 7-day repo rates spiked to as high as 28% intraday, as interbank rates were pushed up in an attempt to reduce the funding to the trust sector; and in mid-2014, the Chinese banking regulator adopted a number of measures, including restrictions on the informal securitisation of certain credit products and reiterating prudent risk management requirements. These measures successfully reduced the growth in trust financings, with net new trust financings (i.e., new issuance less redemptions) hovering around zero over the past ten months (Exhibit 2).
China succeeded in crushing its shadow banking sector, but at the expense of growth:
The administrative measures discussed above have been successful in controlling the riskiest elements within China’s credit markets, as both trust financing and LGFV financings have been contained. However, they have also had the effect of reducing the overall growth of TSF. In our view, these risk control measures have had the impact of not only controlling credit supply, but have also compounded the effect of weak growth in dampening credit demand.
We are confused why Goldman is confused by this: if rampant, out of control credit creation led to a burst of economic growth (built on hollow, non-performing loan foundations), it is only logical that as the flow from the shadow banking conduit is eliminated, so is a major portion of China’s GDP.
Sure enough:
Risk control measures and weak credit demand have dampened credit growth since the beginning of 2013, leading to a slowdown in GDP growth. To revive GDP growth, policymakers have undertaken a broad range of monetary easing measures, including lower interest rates, a reduction in the RRR, and other types of liquidity injections into the banking system, such as open market operations.
Here, however, China encounters a unique problem: unlike other central banks who will gladly crush their currency to boost exports and to stimulate corporate profits of multinationals, in China outright currency devaluation has been largely taboo for one main reason: the PBOC is terrified of capital outflows. In fact, as we showed recently when charting the combined Treasury holdings of China and “Belgium”, China appears to have been selling USD-denominated paper to fund the tens of billions in recent reserve outflows.
Note: the above capital flight has taken place even as the PBOC has kept the value of the Renminbi roughly flat, and in fact the CNY has appreciated drastically in recent months after declining in the early part of the year. One wonders how this chart would look like, and what would happen to US bond yields, if Chinese outflows accelerated in earnest, and China’s selling of US paper followed suit.
And since China is also contemplating whether to join the IMF’s Special Drawing Rights basket, which would require a stable currency, China has found it is next to impossible to devalue its way to growth: unlike the BOJ, the PBOC and the Fed in the past 7 years where currency debasement has been the only source of “growth”, albeit fading judging by the accelerating plunge in global trade volume (we ultimately believe that China will find it has no other option than to engage in Western-style QE before too late).
But while in addition to currency devaluation QE far more importantly also leads to soaring stock markets, also known as the “wealth effect” transmission channel, China can bypass all the unpleasantness of capital flight and currency devaluation and skip straight to the desert: a massive stock market surge, built on absolutely nothing but hopes of even more central bank interventions: a surge so big in fact China’s Shenzhen market is up 100% in 2015. Which is precisely what happened overnight.
But wait, that would mean that for China reflating the stock market bubble, which is far more shallow and penetrated by the domestic population than its comparable in the US or any other western nation, has become a policy mandate, same as in the US and every other western nation.
Bingo.
Goldman explains:
The equity market now plays an important role in terms of both the short-term policy objective (i.e., delivering this year’s growth target) and structural reform ambitions. Policy makers appear to have taken a largely benign view of the equity market rally, which, if sustained, can boost GDP by 0.5pp on our estimates through trading-related financial activities, and could add another 0.2pp or so through a rise in consumption from market wealth generation. We also see further potential benefits from ‘equitisation’ as it helps to replace debt with equity financing.
Wait a minute: isn’t it rising GDP that boosts stocks, not the other way around? Or did Goldman just invent the world’s first financial perpetual engine? Does that also mean that should the S&P crash back to its ex-$22 trillion in central bank liquidity fair value of ~400 that US GDP will be some 20, 30 or more percentage points lower (on any seasonally adjusted basis)?
Rational thought aside, what Goldman just confirmed is the following:
China’s credit growth in the Lehman aftermath was the dynamo that kept the world afloat from 2009 until 2012/13
Starting in 2013 China realized it has a big problem due to its nearly 300% in debt/GDP, and a soaring bad debt problem which threatens to metastasize into a default domino wave.
In mid-2014, Chinese shadow banking effectively ground to a halt, leading to a sharp contraction in both Chinese and global GDP (this explains the collapse in US Q1 GDP, just don’t tell anyone at the Fed which is too busy fabricating seasonal adjustment factor to account for all of the above).
Also in mid-2014 the Chinese relentless stock market rally started, which rose by 50% in 2014 and is up another 50% since then.
In other words, as China’s shadow banking bubble burst, China’s stock market bubble was given the Politburo’s official blessing.
This explains why despite what is quite clearly the world’s biggest and most visible asset price bubble since Nasdaq in the year 2000, China will do everything in its power to keep the bubble growing, massive – and pervasive – stock frauds such as Hanergy notwithstanding.
… but suddenly the fate of China’s economic prosperity, and that of the entire world, is in the hands of the Shanghai Composite, which needs to keep growing at about 2-3% each and every day just to keep the illusion of China’s growth, and preserve the illusion of global economic expansion.
It also means that now the credibility of each and every single banks will depend on maintaining the world’s biggest coordinated stock market blow off top: should the pace of expansion slow down, it would mean loss of faith and confidence in central planning, and thus in the very foundation on which the “recovery” of the past 7 years, both in capital markets and the underlying (or is that overlying) economy rests.
Said otherwise, when the Chinese stock bubble bursts, the shockwave will be heard around the globe, but at least it will unleash even more comedy from America’s weathermen-cum-economists, such as triple- and quadruple-seasonally adjusted data. Because even though the answer for the global slowdown is staring everyone in the face…
… one must always fabricate stories to “explain” why the world’s biggest experiment in central planning, where now even China is all in, is failing one limit up stock at a time.
Containers holding contaminated water at the crippled Fukushima nuclear power plant are at risk of hydrogen explosions, The Telegraph reports, with 10% of them found to be leaking. The discovery was reported to the Nuclear Regulation Authority (NRA), which raised concerns surrounding the potential hazards of accumulated hydrogen building up in the containers warning that "a spark caused by static electricity could cause a container to explode." TEPCO officials reassuringly note that they "think the possibility of an occurrence of hydrogen explosion from these storage facilities is extremely low, since there is no fire origin, or anything that generates static electricity nearby," but this is the same company that a recent IAEA report blasted for "failing to implement adequate safeguards at Fukushima – despite being aware of the tsunami risk."
Leaking containers at Japan’s embattled Fukushima nuclear power plant are at risk of possible hydrogen explosions, experts have claimed. As The Telegraph reports,
Almost 10 per cent of recently inspected containers holding contaminated water at the nuclear plant in northeast Japan were found to be leaking radioactive water.
The leakages, discovered during inspections by Tokyo Electric Power Co (Tepco), the operators of the plant, were thought to be caused by a build-up of hydrogen and other gases due to radiation contamination.
The discovery was reported to the Nuclear Regulation Authority (NRA), which raised concerns surrounding the potential hazards of accumulated hydrogen building up in the containers.
“If the concentration level is high, a spark caused by static electricity could cause a container to explode,” one NRA official told the Asahi Shimbun.
Tepco officials made the discovery while inspecting 278 of the plant’s 1,307 containers and found that 26 – close to ten per cent – had a leakage or overspill from their lids.
It is believed that gases had accumulated in the sediment at the base of the containers, prompting the volume of the liquid to expand and resulting in the overflow.
However, officials at Tepco stated that the risk of an explosion was believed to be minimal, with a series of measures being undertaken as a matter of urgency to resolve the faulty storage containers.
The operators also emphasised that there was no sign of radioactive water escaping beyond the confines of the concrete structures that encase the leaking containers.
“We think the possibility of an occurrence of hydrogen explosion from these storage facilities is extremely low, since there is no fire origin, or anything that generates static electricity nearby,” Mayumi Yoshida, a spokeswoman for Tepco, told the Telegraph.
Outlining measures to fix the problem, she added: “For temporary measures, we have been removing the leaked water, installing absorption materials, monitoring by patrol, keeping water level inside those facilities lower than set and keeping equipment which may generate fire away.
“In the long term, we’re going to lower the water level of current facilities so as to prevent further leakages.”
But this reassurance rings a little hollow given the recent report finding TEPCO at fault (as RT reports)…
The International Atomic Energy Agency (IAEA) said in a report that TEPCO failed to implement adequate safeguards at Fukushima – despite being aware of the tsunami risk. The document was obtained by Kyodo news agency on Monday.
According to the 240-page report, several analyses carried out between 2007 and 2009 predicted the possibility of an 8.3-magnitude earthquake on the coast of Fukushima, which could result in the plant being hit by a tsunami of around 15 meters.
However, TEPCO and Japanese authorities delayed responding to the predictions, feeling that "further studies and investigations were needed.”
"TEPCO did not take interim compensatory measures in response to these increased estimates of tsunami height, nor did NISA require TEPCO to act promptly on these results," reads the text.
The report, prepared by 180 experts from 42 countries, will be presented at the annual IAEA meeting in September, if approved by its board of directors in June.
Of all the peculiarities about human nature, one of the most interesting in my opinion is that we’re so resistant to change.
Humans simply don’t deal with it well. We tend to root. We find comfort in familiarity.
And, even when the familiar becomes unpleasant, we still put up with it. We prefer to suffer through something that we know rather than change things and risk the unknown.
This is why people stay in bad relationships. Or why they continue working for bosses they dislike at jobs they despise. It’s the fear of change.
But everyone… absolutely everyone… has a breaking point. It’s a point where the status quo becomes so uncomfortable, so painful, that we snap. And walk away.
It’s the same in finance. People stick with what they know, even if they have to endure a little pain and suffering.
Today’s current banking environment is the perfect example. In the US, interest rates for most bank accounts are so low that they fail to keep up with inflation.
You are doing very well if you can generate a whopping 0.5% interest. In Canada rates can be a bit higher.
But when you compare these rates to even the official rates of inflation, it’s clear that savers are guaranteed to lose money.
In Europe it’s even worse. Interest rates at many banks are negative… so savers are actually paying the banks.
In theory there’s nothing wrong with paying your banker, presuming that they’re providing a real service.
Traditionally, banks were no different than a secure storage facility: depositors would pay a fee in exchange for the bank safeguarding their savings.
These days a lot of people might pay 50 bucks a month at a U-Store-It place to store $10,000 worth of junk. So why not pay a small fee for a banker to store $10,000 worth of cash?
The reason is that banks don’t operate like a storage facility.
It’s not like the proprietor of the U-Store-It is loaning out your sofa to make a few bucks on the side. If he were, it would be called fraud, and he’d go to jail for it.
Banks, on the other hand, are actually ENCOURAGED to take your hard earned savings and make a few extra bucks on the side.
In fact they have a history of making often absurd loans and wild, overleveraged bets using your money. Not theirs.
So just consider how insulting this is to actually to pay them interest; paying for the privilege of them gambling with your savings. It’s obscene.
But like I said, we all have a breaking point. And there will reach a level where rates get so low (or negative) that no rational person would continue holding money at a bank.
Why bother? You could just withdraw most of your balance, then pay a small fee for a safety deposit box that you stuff full of cash. Cheaper. Easier. Better.
Cash in your hand might pay 0% interest… but at least it doesn’t cost you.
But there’s a huge problem with this approach: there’s very little physical cash in the system.
According to the Federal Reserve, the amount of physical US currency in circulation is about $1.3 trillion. Yet the amount of “M2” money supply is nearly ten times that amount.
So just imagine if even 10% of people hit their breaking points and withdrew their money in cash– there wouldn’t be enough cash in the system to support this demand. And the banks would subsequently collapse.
If governments have proven anything to us over the last seven years, it is that they will do anything to keep the banks from going down.
This is a major reason why they’re trying to get rid of cash, and in some cases even criminalize it under the ridiculous auspices of the war on terror.
In the US, some of the more prevalent names in finance have started calling for an outright ban of cash, including a prominent economist from Citigroup.
(This is a rather convenient position for Citigroup.)
Greece is another great example– they’ve already implemented a tax on cash withdrawals and wire transfers. And further restrictions will inevitably follow.
These measures are all different forms of capital controls, designed to prevent you from taking your money away from such a destructive system.
In fact, I expect the next round of capital controls will be designed to protect the banks… from you.
When a government is bankrupt, the central bank is nearly insolvent, the banking system is illiquid, and an entire population suffers from interest rates that are either negative or below the rate of inflation, capital controls are a foregone conclusion.
They’ll hit just as soon as enough people reach their breaking points… when they say ‘enough is enough’ and they take their money out of the banking system.
Governments have done it before: they’ll declare a ‘bank holiday’ and then impose some sort of freeze on withdrawals. Just like we saw in Cyprus in 2013. Or the US in 1933.
The data and history are very clear on what will likely happen. We just can’t pinpoint the date.
Very few people will guess correctly and withdraw their cash the day before capital controls are imposed.
That’s why it makes sense to take certain steps now.
Consider holding some physical cash, including some healthier currencies like the Swiss franc or Singapore dollar, as well as precious metals.
More importantly, consider moving a portion of your savings to a rainy day fund at a well-capitalized bank overseas in a jurisdiction that isn’t bankrupt.
After all, it’s hard to imagine that you’ll be worse off for having some savings at a strong, healthy bank that actually pays a reasonable rate of return.
Last week we brought you the US government’s official message to heavily-indebted students.
In short, the Department of Education is promoting so-called “Income Based Repayment” which allows borrowers to make monthly payments based on their disposable income. In the event a borrower cannot afford to service his or her debt — which is exceedingly likely in an economy characterized by what Moody’s calls “high unemployment rates for recent graduates” — some debtors will be allowed to count payments of $0 towards the 300 “eligible payments” necessary to have the balance of their debt forgiven. In other words, if you don’t make enough money and are willing to wait 25 years, your student loans will be written off at the expense of the US taxpayer.
So that’s one option available to 2015’s graduating college seniors who, as we reported earlier this month, are the most indebted college class in the history of US higher education. There are other options available as well including (gasp), repaying your loan in full and on time, but as the following graphic from the government shows, offloading some of the burden is always a possibility:
See the fine print on the graphic shown above. This repayment schedule assumes a “family of 1” in Alabama and a loan balance of $26,900.
The first thing to note about those assumptions is that when it comes to rentals, Alabama ranks fairly low on the list in terms of how expensive it is to pay rent and as we’ve seen, America is increasingly a nation of renters.
Second, the average amount of student debt for a senior graduating in 2015 is more than $35,000, some 30% above the amount factored into the government’s equation shown above.
So if you happen to live in a state where housing is far more affordable than it is in most other states and if your loan balance happens to be 30% below the national average, you can pay off your student debt under an IBR plan in only 240 months with a cost to the US taxpayer of only $2,355.
Now let’s look at what the cost to the US taxpayer under IBR would be if you lived in say, Illinois (which is by no means the most expensive place to rent in America) and had a family of three including two parents, each of which carrying the average loan balance of $35,000 and whose combined earnings match the national median household income of $51,000 (in other words, a far more realistic scenario than the hypothetical single guy in Alabama):
Suddenly the cost to taxpayers over the life of the loans jumps by 650% when the assumptions are adjusted to reflect the ‘American dream’ of a nuclear family, a more realistic figure for the cost of housing, and the actual national average for graduate debt.
Consider that, and consider that if the unemployment rate edges up over the coming years, the US will be looking at some $3.3 trillion in student loans.
I have been warning for some time that government was eyeing up pensions.The amount in private pension funds is about $19.4 trillion. The question that has been debated in secret behind the curtain is how to justify to the people taking that over. I have been warning that if this is seized by government, it will come after 2015.75. Just how that is to be accomplished was finally settled by the Supreme Court without any justification constitutionally.
The US Supreme Court ruled last week in the unanimous, 8-page decision in Tibble v. Edison holding that employers have a duty to protect workers in their 401(k) plans from mutual funds that are too expensive or perform poorly. That is simply astonishing since there is no constitutional requirement for even government to provide social benefits. The Supreme court held in HARRIS v. McRAE, 448 U.S. 297 (1980) it was explained that the constitution is negative not positive. There is no duty imposed upon the state to provide a program for that would convert the constitution from a negative restrain upon government to a positive obligation to provide for everyone.
If we take the fact that the constitution is NEGATIVE and was a restrain upon government, then this latest ruling is completely unfounded. Monday’s unanimous ruling sends a warning to employers that they now must improve their plans and it is now an obligation to project employees. This comes just in time for then the next step is government to seize private funds and prosecute employers who choose badly a fund manager. This fits perfectly just in time for the Obama administration’s next assault as they prepare a landmark change of its own by issuing rules requiring that financial advisers put the interest of customers ahead of their own. This creates a very gray area wide enough to justify public seizure of pension funds under management.
This ruling will have a dramatic impact upon investment management and we have already received calls asking about using our model for management purposes since it has one of the longest track records that can be verified in the industry. What this ruling imposes is a tremendous duty upon the plan fiduciary who must now back up his decision with proof. This may also have the impact of foreclosing new fund managers from entering the business since they will lack the track record.
Yet this decision is even deeper. It sets the stage to JUSTIFY government seizure of private pension funds to protect pensioners. When the economy turns down and things get messy, they are placing measures in place to eliminate money in and physical dimension, closing all tax loopholes, shutting down the world economy with FATCA, and preparing for the final straw of Economic Totalitarianism with the Supreme Court reversing its entire construction of the Constitution to impose a duty upon employers to ensure the 401K plans perform in a world where interest rates are going negative. You really cannot make up this level of insanity.
The message here is not that all 401(k)s are bad or too expensive. In fact, costs have fallen 30 percent over the past decade as more plan sponsors turn to low-cost passive investing options. But this can be highly dangerous for to lower costs they turn to government debt where there is no need for fund management decisions. Yes, when I did hedge fund management, the cost was 5% annually plus 20% performance. That cost went to staff around the world that had to monitor positions and the world economy on a 24 hours basis. You paid also NOT to trade for most losses took place when traders were bored are would trade to try to make money when there was nothing to be done. Our track recordwas the best ever in the industry with the lowest drawn down perhaps in fund management. But that risk reduction cost money.
Today, costs vary widely. Plans with more than $100 million in assets usually have total annual costs below 1% whereas the biggest plans usually are below 0.50%. In small plans, the costs can be as high as 2% today. The focus is now on cost – not performance.
Financial service companies can charge a range of management, administrative, marketing, distribution and record-keeping fees for 401(k) plans. Plan sponsors can assume the costs, but employees are paying at least 85% of all fees typically. It is true that most workers do not know they pay the bulk of the share of costs. A 2011 AARP survey found that 71% of retirement savers do not think they pay any investment fees at all. It is true that the fees make a huge difference in returns over time. However, this drive to lower costs has also lowered the quality of funds management.
The U.S. Department of Labor estimates that a 1% point difference on a current account balance of $25,000 will reduce total accumulations by 28% over 35 years, assuming average returns of 7% and no further contributions. The focus is all on these management fees without any consideration of the problem. Trying to manage money varies according to the size of the fund. The more you gather, often the lower the performance because the markets are not unlimited. You can pick up the phone and say “sell at the market” when you have a $100 million fund, you cannot do that with a $100 billion fund. So the management fee was also a means to reduce the number of clients and it was never a question of unlimited capacity to trade. The numbers on performance would decline with greater amounts of money under management for the manager lost flexibility.
The Supreme Court case clearly shows that lack of understanding of the industry yet the battle centered on the 401(k) plan’s use of retail-class mutual funds when less-expensive institutional shares were available. The difference between those classes typically is 25 basis points. This will now put pressure on large plans to cut costs further but will not have much impact on smaller plans. That is because big plans have the buying power to negotiate better deals but at the same time they are the easy target for lawyers making them much more attractive targets for litigation.
Cutting management fees to the bone may in fact set the stage for massive losses for many of the older better traders are now just resigning. The quality of the funds management is more likely than not going to decline noticeably.
Between the court ruling and the Obama administration’s push for stronger fiduciary rules send a strong message that government can much easier seize the pension fund management industry of course to “protect the consumer”.
In an unprecedented move against a government agency, which we are just waiting to hear blamed on Russia, The IRS has admitted that its data has ben compromised…
*IRS SAYS THIEVES ACCESSED TAX INFORMATION ON 100,000 PAYERS: AP
*IRS’S KOSKINEN SAYS THERE WAS UNAUTHORIZED ACCESS FEB-MAY
Thieves used an online service provided by the IRS to gain access to information from more than 100,000 taxpayers, the agency said Tuesday.
The information included tax returns and other tax information on file with the IRS.
The IRS said the thieves accessed a system called “Get Transcript.” In order to access the information, the thieves cleared a security screen that required knowledge about the taxpayer, including Social Security number, date of birth, tax filing status and street address.
“The IRS notes this issue does not involve its main computer system that handles tax filing submission; that system remains secure,” the agency said in a statement.
The IRS said thieves targeted the system from February to mid-May. The service has been temporarily shut down.
“In all, about 200,000 attempts were made from questionable email domains, with more than 100,000 of those attempts successfully clearing authentication hurdles,” the agency said. “During this filing season, taxpayers successfully and safely downloaded a total of approximately 23 million transcripts.”
Tax returns can include a host of personal information that can help someone steal an identity, including Social Security numbers and birthdates of dependents and spouses. However, the IRS said the thieves appeared to already have a lot of personal information about the victims.
The IRS said it is notifying taxpayers whose information was accessed.
* * * One wonders if they found Lois Lerner’s emails while they were in there?
Judicial Watch, shows that Western governments deliberately allied with al-Qaeda and other Islamist extremist groups to topple Syrian dictator Bashir al-Assad
From the first sudden, and quite dramatic, appearance of the fanatical Islamic group known as ISIS which was largely unheard of until a year ago, on the world’s stage and which promptly replaced the worn out and tired al Qaeda as the world’s terrorist bogeyman, we suggested that the “straight to beheading YouTube clip” purpose behind the Saudi Arabia-funded Islamic State was a simple one: use the Jihadists as the vehicle of choice to achieve a political goal: depose of Syria’s president Assad, who for years has stood in the way of a critical Qatari natural gas pipeline, one which could dethrone Russia as Europe’s dominant – and belligerent – source of energy, reaching an interim climax with the unsuccessful Mediterranean Sea military build up of 2013, which nearly resulted in quasi-world war.
The narrative and the plotline were so transparent, even Russia saw right through them. Recall from September of last year:
If the West bombs Islamic State militants in Syria without consulting Damascus, LiveLeak reports that the anti-ISIS alliance may use the occasion to launch airstrikes against President Bashar Assad’s forces, according to Russian Foreign Minister Sergey Lavrov. Clearly comprehending that Obama’s new strategy against ISIS in Syria is all about pushing the Qatar pipeline through (as was the impetus behind the 2013 intervention push), Russia is pushing back noting that the it is using ISIS as a pretext for bombing Syrian government forces and warning that “such a development would lead to a huge escalation of conflict in the Middle East and North Africa.”
But it’s one thing to speculate; it’s something entirely different to have hard proof.
And while speculation was rife that just like the CIA-funded al Qaeda had been used as a facade by the US to achieve its own geopolitical and national interests over the past two decades, so ISIS was nothing more than al Qaeda 2.0, there was no actual evidence of just this.
That may all have changed now when a declassified secret US government document obtained by the public interest law firm, Judicial Watch, shows that Western governments deliberately allied with al-Qaeda and other Islamist extremist groups to topple Syrian dictator Bashir al-Assad.
According to investigative reporter Nafeez Ahmed in Medium, the “leaked document reveals that in coordination with the Gulf states and Turkey, the West intentionally sponsored violent Islamist groups to destabilize Assad, despite anticipating that doing so could lead to the emergence of an ‘Islamic State’ in Iraq and Syria (ISIS).
According to the newly declassified US document, the Pentagon foresaw the likely rise of the ‘Islamic State’ as a direct consequence of the strategy, but described this outcome as a strategic opportunity to “isolate the Syrian regime.”
And not just that: as we reported last week, now that ISIS is running around the middle east, cutting people’s heads of in 1080p quality and Hollywood-quality (perhaps literally) video, the US has a credible justification to sell billions worth of modern, sophisticated weapons in the region in order to “modernize” and “replenish” the weapons of such US allies as Saudi Arabia, Israel and Iraq.
But that the US military-industrial complex is a winner every time war breaks out anywhere in the world (usually with the assistance of the CIA) is clear to everyone by now. What wasn’t clear is just how the US predetermined the current course of events in the middle east.
Now, thanks to the following declassified report, we have a far better understanding of not only how current events in the middle east came to be, but what America’s puppermaster role leading up to it all, was.
From Nafeez Ahmed: Secret Pentagon report reveals West saw ISIS as strategic asset Anti-ISIS coalition knowingly sponsored violent extremists to ‘isolate’ Assad, rollback ‘Shia expansion’, originally posted in Medium.
Hypocrisy
The revelations contradict the official line of Western government on their policies in Syria, and raise disturbing questions about secret Western support for violent extremists abroad, while using the burgeoning threat of terror to justify excessive mass surveillance and crackdowns on civil liberties at home.
Among the batch of documents obtained by Judicial Watch through a federal lawsuit, released earlier this week, is a US Defense Intelligence Agency (DIA) document then classified as “secret,” dated 12th August 2012.
The DIA provides military intelligence in support of planners, policymakers and operations for the US Department of Defense and intelligence community.
So far, media reporting has focused on the evidence that the Obama administration knew of arms supplies from a Libyan terrorist stronghold to rebels in Syria.
Some outlets have reported the US intelligence community’s internal prediction of the rise of ISIS. Yet none have accurately acknowledged the disturbing details exposing how the West knowingly fostered a sectarian, al-Qaeda-driven rebellion in Syria.
Charles Shoebridge, a former British Army and Metropolitan Police counter-terrorism intelligence officer, said:
“Given the political leanings of the organisation that obtained these documents, it’s unsurprising that the main emphasis given to them thus far has been an attempt to embarrass Hilary Clinton regarding what was known about the attack on the US consulate in Benghazi in 2012. However, the documents also contain far less publicized revelations that raise vitally important questions of the West’s governments and media in their support of Syria’s rebellion.”
The West’s Islamists
The newly declassified DIA document from 2012 confirms that the main component of the anti-Assad rebel forces by this time comprised Islamist insurgents affiliated to groups that would lead to the emergence of ISIS. Despite this, these groups were to continue receiving support from Western militaries and their regional allies.
Noting that “the Salafist [sic], the Muslim Brotherhood, and AQI [al-Qaeda in Iraq] are the major forces driving the insurgency in Syria,” the document states that “the West, Gulf countries, and Turkey support the opposition,” while Russia, China and Iran “support the [Assad] regime.”
The 7-page DIA document states that al-Qaeda in Iraq (AQI), the precursor to the ‘Islamic State in Iraq,’ (ISI) which became the ‘Islamic State in Iraq and Syria,’ “supported the Syrian opposition from the beginning, both ideologically and through the media.”
The formerly secret Pentagon report notes that the “rise of the insurgency in Syria” has increasingly taken a “sectarian direction,” attracting diverse support from Sunni “religious and tribal powers” across the region.
In a section titled ‘The Future Assumptions of the Crisis,’ the DIA report predicts that while Assad’s regime will survive, retaining control over Syrian territory, the crisis will continue to escalate “into proxy war.”
The document also recommends the creation of “safe havens under international sheltering, similar to what transpired in Libya when Benghazi was chosen as the command centre for the temporary government.”
In Libya, anti-Gaddafi rebels, most of whom were al-Qaeda affiliated militias, were protected by NATO ‘safe havens’ (aka ‘no fly zones’).
‘Supporting powers want’ ISIS entity
In a strikingly prescient prediction, the Pentagon document explicitly forecasts the probable declaration of “an Islamic State through its union with other terrorist organizations in Iraq and Syria.”
Nevertheless, “Western countries, the Gulf states and Turkey are supporting these efforts” by Syrian “opposition forces” fighting to “control the eastern areas (Hasaka and Der Zor), adjacent to Western Iraqi provinces (Mosul and Anbar)”:
“… 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 secret Pentagon document thus provides extraordinary confirmation that the US-led coalition currently fighting ISIS, had three years ago welcomed the emergence of an extremist “Salafist Principality” in the region as a way to undermine Assad, and block off the strategic expansion of Iran. Crucially, Iraq is labeled as an integral part of this “Shia expansion.”
The establishment of such a “Salafist Principality” in eastern Syria, the DIA document asserts, is “exactly” what the “supporting powers to the [Syrian] opposition want.” Earlier on, the document repeatedly describes those “supporting powers” as “the West, Gulf countries, and Turkey.”
Further on, the document reveals that Pentagon analysts were acutely aware of the dire risks of this strategy, yet ploughed ahead anyway.
The establishment of such a “Salafist Principality” in eastern Syria, it says, would create “the ideal atmosphere for AQI to return to its old pockets in Mosul and Ramadi.” Last summer, ISIS conquered Mosul in Iraq, and just this month has also taken control of Ramadi.
Such a quasi-state entity 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 one enemy. 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 territory.”
The 2012 DIA document is an Intelligence Information Report (IIR), not a “finally evaluated intelligence” assessment, but its contents are vetted before distribution. The report was circulated throughout the US intelligence community, including to the State Department, Central Command, the Department of Homeland Security, the CIA, FBI, among other agencies.
In response to my questions about the strategy, the British government simply denied the Pentagon report’s startling revelations of deliberate Western sponsorship of violent extremists in Syria. A British Foreign Office spokesperson said:
“AQ and ISIL are proscribed terrorist organisations. The UK opposes all forms of terrorism. AQ, ISIL, and their affiliates pose a direct threat to the UK’s national security. We are part of a military and political coalition to defeat ISIL in Iraq and Syria, and are working with international partners to counter the threat from AQ and other terrorist groups in that region. In Syria we have always supported those moderate opposition groups who oppose the tyranny of Assad and the brutality of the extremists.”
The DIA did not respond to request for comment.
Strategic asset for regime-change
Security analyst Shoebridge, however, who has tracked Western support for Islamist terrorists in Syria since the beginning of the war, pointed out that the secret Pentagon intelligence report exposes fatal contradictions at the heart of official pronunciations:
“Throughout the early years of the Syria crisis, the US and UK governments, and almost universally the West’s mainstream media, promoted Syria’s rebels as moderate, liberal, secular, democratic, and therefore deserving of the West’s support. Given that these documents wholly undermine this assessment, it’s significant that the West’s media has now, despite their immense significance, almost entirely ignored them.”
According to Brad Hoff, a former US Marine who served during the early years of the Iraq War and as a 9/11 first responder at the Marine Corps Headquarters in Battalion Quantico from 2000 to 2004, the just released Pentagon report for the first time provides stunning affirmation that:
“US intelligence predicted the rise of the Islamic State in Iraq and the Levant (ISIL or ISIS), but instead of clearly delineating the group as an enemy, the report envisions the terror group as a US strategic asset.”
Hoff, who is managing editor of Levant Report — ?an online publication run by Texas-based educators who have direct experience of the Middle East?—?points out that the DIA document “matter-of-factly” states that the rise of such an extremist Salafist political entity in the region offers a “tool for regime change in Syria.”
The DIA intelligence report shows, he said, that the rise of ISIS only became possible in the context of the Syrian insurgency?—?“there is no mention of US troop withdrawal from Iraq as a catalyst for Islamic State’s rise, which is the contention of innumerable politicians and pundits.” The report demonstrates that:
“The establishment of a ‘Salafist Principality’ in Eastern Syria is ‘exactly’ what the external powers supporting the opposition want (identified as ‘the West, Gulf Countries, and Turkey’) in order to weaken the Assad government.”
The rise of a Salafist quasi-state entity that might expand into Iraq, and fracture that country, was therefore clearly foreseen by US intelligence as likely?—?but nevertheless strategically useful?—?blowback from the West’s commitment to “isolating Syria.”
Complicity
Critics of the US-led strategy in the region have repeatedly raised questions about the role of coalition allies in intentionally providing extensive support to Islamist terrorist groups in the drive to destabilize the Assad regime in Syria.
The conventional wisdom is that the US government did not retain sufficient oversight on the funding to anti-Assad rebel groups, which was supposed to be monitored and vetted to ensure that only ‘moderate’ groups were supported.
However, the newly declassified Pentagon report proves unambiguously that years before ISIS launched its concerted offensive against Iraq, the US intelligence community was fully aware that Islamist militants constituted the core of Syria’s sectarian insurgency.
Despite that, the Pentagon continued to support the Islamist insurgency, even while anticipating the probability that doing so would establish an extremist Salafi stronghold in Syria and Iraq.
As Shoebridge told me, “The documents show that not only did the US government at the latest by August 2012 know the true extremist nature and likely outcome of Syria’s rebellion”?—?namely, the emergence of ISIS?—?“but that this was considered an advantage for US foreign policy. This also suggests a decision to spend years in an effort to deliberately mislead the West’s public, via a compliant media, into believing that Syria’s rebellion was overwhelmingly ‘moderate.’”
Annie Machon, a former MI5 intelligence officer who blew the whistle in the 1990s on MI6 funding of al-Qaeda to assassinate Libya’s former leader Colonel Gaddafi, similarly said of the revelations:
“This is no surprise to me. Within individual countries there are always multiple intelligence agencies with competing agendas.”
She explained that MI6’s Libya operation in 1996, which resulted in the deaths of innocent people, “happened at precisely the time when MI5 was setting up a new section to investigate al-Qaeda.”
This strategy was repeated on a grand scale in the 2011 NATO intervention in Libya, said Machon, where the CIA and MI6 were:
“… supporting the very same Libyan groups, resulting in a failed state, mass murder, displacement and anarchy. So the idea that elements of the American military-security complex have enabled the development of ISIS after their failed attempt to get NATO to once again ‘intervene’ is part of an established pattern. And they remain indifferent to the sheer scale of human suffering that is unleashed as a result of such game-playing.”
Divide and rule
Several US government officials have conceded that their closest allies in the anti-ISIS coalition were funding violent extremist Islamist groups that became integral to ISIS.
US Vice President Joe Biden, for instance, admitted last year that Saudi Arabia, the UAE, Qatar and Turkey had funneled hundreds of millions of dollars to Islamist rebels in Syria that metamorphosed into ISIS.
But he did not admit what this internal Pentagon document demonstrates?—?that the entire covert strategy was sanctioned and supervised by the US, Britain, France, Israel and other Western powers.
The strategy appears to fit a policy scenario identified by a recent US Army-commissioned RAND Corp report.
The report, published four years before the DIA document, called for the US “to capitalise on the Shia-Sunni conflict by taking the side of the conservative Sunni regimes in a decisive fashion and working with them against all Shiite empowerment movements in the Muslim world.”
The US would need to contain “Iranian power and influence” in the Gulf by “shoring up the traditional Sunni regimes in Saudi Arabia, Egypt, and Pakistan.” Simultaneously, the US must maintain “a strong strategic relationship with the Iraqi Shiite government” despite its Iran alliance.
The RAND report confirmed that the “divide and rule” strategy was already being deployed “to create divisions in the jihadist camp. Today in Iraq such a strategy is being used at the tactical level.”
The report observed that the US was forming “temporary alliances” with al-Qaeda affiliated “nationalist insurgent groups” that have fought the US for four years in the form of “weapons and cash.” Although these nationalists “have cooperated with al-Qaeda against US forces,” they are now being supported to exploit “the common threat that al-Qaeda now poses to both parties.”
The 2012 DIA document, however, further shows that while sponsoring purportedly former al-Qaeda insurgents in Iraq to counter al-Qaeda, Western governments were simultaneously arming al-Qaeda insurgents in Syria.
The revelation from an internal US intelligence document that the very US-led coalition supposedly fighting ‘Islamic State’ today, knowingly created ISIS in the first place, raises troubling questions about recent government efforts to justify the expansion of state anti-terror powers.
In the wake of the rise of ISIS, intrusive new measures to combat extremism including mass surveillance, the Orwellian ‘prevent duty’ and even plans to enable government censorship of broadcasters, are being pursued on both sides of the Atlantic, much of which disproportionately targets activists, journalists and ethnic minorities, especially Muslims.
Yet the new Pentagon report reveals that, contrary to Western government claims, the primary cause of the threat comes from their own deeply misguided policies of secretly sponsoring Islamist terrorism for dubious geopolitical purposes.
Dr Nafeez Ahmed is an investigative journalist, bestselling author and international security scholar. A former Guardian writer, he writes the ‘System Shift’ column for VICE’s Motherboard, and is also a columnist for Middle East Eye. He is the winner of a 2015 Project Censored Award, known as the ‘Alternative Pulitzer Prize’, for Outstanding Investigative Journalism for his Guardian work, and was selected in the Evening Standard’s ‘Power 1,000’ most globally influential Londoners.
Nafeez has also written for The Independent, Sydney Morning Herald, The Age, The Scotsman, Foreign Policy, The Atlantic, Quartz, Prospect, New Statesman, Le Monde diplomatique, New Internationalist, Counterpunch, Truthout, among others. He is the author of A User’s Guide to the Crisis of Civilization: And How to Save It (2010), and the scifi thriller novel ZERO POINT, among other books. His work on the root causes and covert operations linked to international terrorism officially contributed to the 9/11 Commission and the 7/7 Coroner’s Inquest.
Another day, another dip to be bought aggressively in China. The only catalyst for moar – aside from “well it was up yesterday” – is the news that the Shanghai-HK Stock Exchange aggregate quota will be abolished, leaving room for more speculative excess to flood into 500%-gainers. CSI-300 is now up almost 6% since Friday’s close and Shenzhen and CHINEXT are soaring back from underperformance yesterday. To round things out on a superlative note, the Shenzhen Composite – which contains all the ponzi-based self-collateralized idiot-makers, is now up over 100% year-to-date. Simply put, you can’t keep a bad market down…
Which has sent the Shenzhen Composite above the 100% return mark for 2015…
How great was the global economy in the first quarter?
We know the US economy was crummy. The revised GDP estimate will likely sink into red mire. Hence the heated proposals these days, including at the Fed, to apply “a second round of seasonal adjustment” that would “correct” the first-quarter GDP estimate, no matter how bad, into positive territory. An elegant way of covering up an unsightly sore.
So was it just a crummy quarter in the US, or was it a global thing, in which case we might have to apply a “second round of” whatever to adjust the global downturn out of the picture?
Because here is the thing: in the first quarter, one of the crucial measures of the global economy – global trade – slumped the most since the Financial Crisis. But ironically, it wasn’t because of the USA.
The CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, just released its latest Merchandise World Trade Monitor, which covers global import volumes as well as global export volumes. The index dropped 0.1% in March to 136.5, after having already dropped 0.7% in February, and 1.7% in January. The index, which was set at 100 in 2005, is now down 2.5% from the peak of 140.0 in December. That 3.5-point decline was the sharpest since the Financial Crisis.
This chart, going back to January 2012, doesn’t exactly inspire confidence in the current state of the global economy:
To mitigate the volatility of these kinds of monthly numbers, the CPB offers a measure of trade volume “momentum,” which it defines as “the change in the three months average up to the report month relative to the average of the preceding three months.”
That trade momentum measure slumped 1.5% in March, the largest monthly decline since April 2011, after having edged down 0.4% in February. It now amounts to the most negative “momentum” since the Financial Crisis.
This chart, going back to 2010, looks even worse than the prior chart. This sort of thing isn’t supposed to happen in an expanding, or even a stagnating, global economy:
Both of the measures above involve import and export volumes. With volumes now actually declining and with new shipping capacity coming on line throughout the period, pricing per unit, in dollars, has plunged 15% since June 2014, and nearly 20% since the peak in March 2011. It’s now at the lowest level since May 2009:
But the trade debacle wasn’t spread evenly. For March, the CPB reported:
A positive turnaround occurred in both import and export growth in advanced economies. Imports bounced back strongly in the United States. They contracted deeply in Japan however. In emerging economies, import growth accelerated, but export growth became heavily negative on account of a deep fall in emerging Asia’s exports.
And that would be mostly China.
Hard-landing gurus have been predicting an imminent end of the China bubble for years. But there was no hard landing, or a soft landing, or any landing for that matter. China just kept on flying, fueled by an enormous credit bubble and monetary propellants. But now it’s running out of air. Read… China Momentum Indicator Plunges to “Hard Landing” Level
American diplomacy favors (majority) white, English-speaking countries (the UK, Canada, Australia and New Zealand) and non-Hispanic European settler states (Canada, Australia and New Zealand again, but also Apartheid South Africa and, of course, Israel).
South Africa eventually fell out of favor, thanks in part to boycott, divestment and sanctions efforts in Western countries.
Similar efforts now underway directed towards Israel are beginning to change public opinion too; though elite opinion, in the United States and the other settler states especially, has, so far, hardly budged.
Thanks to its lobby and its strategic location, Israel is still, for America, the most favored nation of all.
Western European countries are also favored, though to a lesser extent – thanks, again, to cultural affinities and historical ties. Those that sent large numbers of emigrants to North America generally have a leg up. France didn’t send many emigrants, but it is also favored, at least some of the time, for philosophical and historical affinities dating back to the American and French Revolutions.
With Saudi Arabia and the other Gulf monarchies, there are no deep or longstanding cultural and historical ties; quite the contrary. Nevertheless, those nations, Saudi Arabia especially, receive favored treatment too.
The events surrounding the death of Osama bin Laden provide a window into this strange and revealing state of affairs.
* * *
When Barack Obama lied about how Navy Seals murdered bin Laden, he blew apart a carefully constructed cover story concocted in Washington and Islamabad intended to conceal the role of Pakistani intelligence and the Pakistani military.
According to Seymour Hersh’s account in The London Review of Books, bin Laden had been in Pakistani custody at least since 2006. American intelligence learned of this some four years later, when a “walk-in” gave them information that checked out.
The raid itself took place a year after that, in time for the 2012 Presidential election in the United States.
The Pakistanis had reasons for keeping bin Laden in custody and out of American hands. It gave them leverage with the Taliban and with the remnants of Al Qaeda, as well as with other radical Islamist groups.
The Saudis wanted bin Laden kept in Pakistan too; away from the Americans. According to Hersh, they paid Pakistan generously for their trouble.
Hersh’s article does not dwell on their motives, but, in interviews he has given after his article went on line, he is less reticent.
The Saudis didn’t want the United States to get its hands on bin Laden because they didn’t want him to talk about Saudi involvement in 9/11 and other operations directed against Western interests.
This is only a conjecture, but it makes eminently good sense. It isn’t even news. Like the fact that the Israeli arsenal includes nuclear weapons, everybody knows about the Saudis’ role, but nobody in official circles or in the media that toes its line talks about it.
Since his article appeared, official Washington and mainstream media line have gone after Hersh with a degree of vehemence reminiscent of their attack on Edward Snowden.
They hate it when their bumbling is revealed, almost as much as when the hypocrisy of their claims to respect human rights and the rule of law is exposed.
But, for all the sound and fury, they have not effectively rebutted a single one of Hersh’s contentions – nor, for that matter, any of Snowden’s.
If Hersh is right, as he surely is, then two of America’s closest allies were, to say the least, not acting the way that allies should.
Capturing bin Laden was officially – and probably also really – a high priority for the United States. Pakistan and Saudi Arabia kept him from being captured.
However, none of this appears to have harmed U.S.-Pakistani or U.S.-Saudi relations.
The rulers of both countries depend on American support to survive. And yet, when they choose, they defy their protector with impunity. Israel isn’t the only country that wags the dog.
Pakistan gets carte blanche because, like Israel, it has the Bomb. Keeping the Bomb out of the hands of anyone who might use it – especially, against the United States or its interests abroad — is, understandably and legitimately, a goal of American diplomacy.
And so, the United States will do what it must to keep the Pakistani military and intelligence communities happy and on board.
This is not easy: the Pakistanis have been involved with radical Islamists from Day One. By all accounts, contacts survive to this day.
The United States encouraged these connections, especially when the prospect of getting the Soviet Union bogged down in Afghanistan clouded the thinking of diplomats in the Carter and Reagan administrations.
But, since even before the Americans became involved, the Pakistanis have been going their own way in Afghanistan – partly for cultural and historical reasons of their own, and partly to keep India at bay.
For all these reasons, the Americans have found it expedient to buy off the leaders of the Pakistani military and intelligence communities. Therefore, whenever possible, in light of the totality of their concerns, they give them what they want. What the Pakistanis wanted with the bin Laden killing was plausible deniability.
This was the point of the story that Obama blew. Therefore when he, or his political operatives, decided that, with the 2012 election looming, the moment was opportune to announce bin Laden’s death, they had to concoct a different story that would also keep the Pakistani role secret.
The one they made up had the added benefit of reinforcing the swashbuckling image that the Navy Seals, Obama’s Murder Incorporated, try to project. Hollywood got the message, and made the most of it. So did the Obama campaign.
But, for reasons Hersh explains, the fable they concocted was transparently implausible; a point not lost on observers at the time.
To point this out, back in the day, was to risk being taken for a “conspiracy theorist” – or, worse, a Romney supporter.
Now that a definitive account of what happened has appeared, it is plain who the real conspirators were.
And so, by now, only the willfully blind – and the Washington press corps — believe the tale Obama told.
Needless to say, it is not exactly news when Obama lies; in the “man bites dog” sense, it would be news if he didn’t.
And neither is the duplicity of Pakistan’s military and intelligence leadership surprising. Politics in the Indian sub-continent is as devious and convoluted as anywhere in the world.
In Pakistan, as in Iraq and Syria, the stewards of the American empire – the ones who worked for Bush and Cheney, and the ones who have worked for Obama and his hapless Secretaries of State — are in way over their heads. They are like the proverbial bull in the china shop; powerful and therefore destructive, but ultimately clueless.
American obeisance to the wishes of the Saudi royal family is not unusual either. The United States has been toadying up to them since the days of Franklin Roosevelt. They have oil, and we want to control what they do with it.
However, the fact that the American public, and its counterparts in other Western countries, goes along, almost without dissent, is puzzling in the extreme.
The American way, after all, is to villainize first, and ask questions later.
The Saudi royals, and the ruling potentates in the other Gulf kingdoms, are prime candidates for villainization. They are characters out of central casting.
One would think that a public that loathes, or has been made to loathe, Vladimir Putin and Bashar al-Assad – and that still goes livid at the very thought of the Iranian Ayatollahs and Saddam Hussein — would be out with pitchforks demanding the heads of each and every member of the Saudi ruling class.
They were, after all, if not the perpetrators, at least the protectors of the perpetrators, of 9/11, a “day of infamy,” our propaganda system tells us, equal only to the day the Japanese bombed Pearl Harbor.
And yet the public’s ire seldom turns the Saudis’ way.
This is all the more remarkable because they have neither a Bomb nor a domestic lobby that the entire American political class fears.
All they have is a massive public relations operation. Evidently, the flacks they hire know their trade. No matter how much money they are paid, they earn every cent.
* * *
Ironically, the Saudis’ hold over America’s political and economic elites is an unintended consequence of American diplomacy in the days when the United States was, or seemed to be, on the side of the angels.
When Britain or France wanted Middle Eastern oil – in Iraq or Iran, for example, — they took it. They were colonial powers; this is what colonial powers do.
Before World War II, American diplomats cultivated a different image. Washington’s cupidity may have been no less than London’s or Paris’; but, in the White House and at Foggy Bottom, the idea was to present the United States as, of all things, an anti-colonial power.
Never mind Puerto Rico or the Philippines or, for that matter, Hawaii and the several other Pacific islands that the U.S. Navy coveted; and never mind America’s obvious collusion – before, during, and after World War II — with the British and French empires.
It is true, though, that in the Middle East, American domination took a different form. When American oil companies wanted Middle Eastern oil, they didn’t seize it; they bought it from the rulers of the peoples who live on top of it.
And, if there weren’t rulers willing or able to sell, the Americans created them.
The House of Saud made out like bandits. For the oil companies, it was a small price to pay.
The U.S. got control of the oil without having to administer rebellious colonies. Meanwhile, local elites got rich. All they had to do for the money was give the Americans free rein and enforce the order that made American domination possible – with American help, of course, and with arms purchased from American corporations.
And so, until reality made the pretense unsustainable, the U.S. could present itself, throughout the Middle East, as a defender of anti-colonial, independence movements.
As other Gulf states broke free from British rule, the U.S. took over, applying the same model. This worked well — for a while.
Before long, though, the Saudi regime, and he others, became too big to fail.
This is why, even as the Clinton State Department floundered about cluelessly when the Arab Spring erupted, the prospect of allowing those regimes to fall was never seriously considered. For official Washington, this was as unthinkable as allowing nuclear Pakistan to “go rogue,” or not kowtowing to the Israel lobby.
When there is a disconnect between public and elite opinion, elites generally win, but not always: not when too many people care too much. American elites, eager to maintain the status quo, like the PR people the Saudis hire to keep public opinion from getting out of control, therefore have their work cut out for them.
Some of the reasons for this reflect poorly on the moral probity of public opinion in the West.
In their appearance, manner and demeanor, the Saudi ruling class epitomizes the Western idea of the Arab.
Even before Europeans inserted themselves into the Arab world, Arabs have occupied a special place in the imaginations of Western peoples.
Like many of the other peoples of the East, they were deemed mysterious and exotic, highly sexualized, and vaguely dangerous.
But, unlike Turks and Persians or the peoples of South Asia and the Far East, and like Africans and the indigenous peoples of the Americas and Australasia, Arabs were never quite regarded as fully human.
The Saudi PR machine therefore has deeply racialized attitudes to counter. The Saudis epitomize “the other”; this makes them a hard sell.
They also epitomize the retrograde, which makes them a hard sell for reasons that have nothing to do with racial or cultural stereotypes — and everything to do with modern political morality.
There is hardly a reactionary trend in the Muslim world that the Saudis haven’t supported financially; and there are few that they did not actually instigate or help shape.
Also, there are few places on earth where human rights and gender equality are less respected, or where liberal and democratic norms hold less sway, than in Saudi Arabia.
Elites in that country and in the other Gulf monarchies are rich and idle because they are sitting on top of vast oil reserves, and because they have accumulated so much wealth that they can exploit “guest workers” in the ways that masters exploit slaves. No one holds them to account for this or anything else untoward that they do.
In a world that permits, indeed encourages, private ownership of natural resources and the limitless accumulation of wealth — and that is largely indifferent to the harm petroleum extraction does — they won the lottery.
This could make them objects of envy, of course; and envy tinged with racial animosity is a lethal brew. Yet, for all practical purposes, the Saudis get a pass – not just in Western elite circles and within the political class of Western countries, but in Western public opinion too.
It has been this way ever since the phasing out of the short-lived Arab oil embargo brought on by American support for Israel in its 1973 war against Egypt.
The Saudis’ immunity from public rancor is all the more amazing because it would be easy to rationalize – indeed, to justify – turning them into objects of scorn.
Inasmuch as our moral intuitions took shape over many centuries, under conditions in which nearly everything everyone wanted was in short supply, we are inclined to think that, where the distribution of income and wealth are concerned, principles of fair play apply; and therefore that “free riding” on the contributions of others is morally reprehensible.
In existing capitalism – and, indeed, in all class divided societies – plenty of free riding nevertheless occurs. It is so commonplace that people often don’t notice it or don’t care. Sometimes, though, when people get something for nothing, it can be enough over the top to cause consternation. When the free riders stand out conspicuously, the level of consternation is typically enhanced.
Saudi Arabia’s feudal rulers, and their counterparts in other Gulf states, are about as over the top as it gets.
Other than maintaining the profoundly oppressive order that makes the status quo possible in the territories they control, it is hard to think of any contributions, productive or otherwise, that they make to justify the riches they receive.
But, as finance has superseded industry as the driving force behind the world’s overripe capitalist system, Western publics have become more accustomed than they used to be to rewarding unproductive people.
The robber barons of old, and the “industrialists” who succeeded them, at least played a role in increasing society’s wealth. The enterprises from which their riches derived made things. The money people at the cutting edge of capitalism today make money out of money, an activity even more useless than collecting rents for drilling rights.
Yet, hostility is seldom directed towards them. Quite the contrary: the richer they are, the more they are esteemed.
Could the sort of confused and obsequious thinking that has made hedge fund managers the heroes of our age account, in part, for how Saudi elites escape vilification? Is this yet another situation where, if you are rich enough, everything is forgiven?
No doubt, this is part of the explanation. But a government intent on keeping public and elite opinion on the same page is a more important factor. Add on a lavishly funded PR campaign and an entire category of miscreants gets off scot-free.
That there is no group of people on earth today to whom the epithet “malefactors of great wealth” more justly applies hardly matters. The Western public may not like them much or respect them; but, so long as they don’t flaunt their wealth too blatantly, hardly anyone complains when Western politicians let them call the shots.
Meanwhile, Islamophobia rages and a gullible public lives in mortal fear of terrorist bogeymen. And yet the Saudi elite gets a pass, notwithstanding the fact that nearly all the perpetrators of 9/11 — of the event that, more than any other, boosted Islamophobia and got the so-called war on terror going — were Saudi nationals. It is an amazing phenomenon.
* * *
In real democracies, governments would do what the citizens who put them in office want them to do. The United States and other Western democracies make a mockery of that ideal. But, even so, there are limits; governments cannot defy public opinion on matters of great moment indefinitely.
It is also the case, at least in the United States, that public opinion is affected significantly by the very government that is supposed to do what the people want – and therefore, ultimately, by the demands of the corporate and financial forces that corrupt democracy.
This is why propaganda matters. Keeping public opinion in line is a function, perhaps the main one, of propaganda systems. In America in the Age of Obama, that is one of the few things that works well.
We underestimate its effectiveness at our peril.
Enabling the Saudi ruling class, and the rulers of the other Gulf states, to direct American foreign policy to the extent that they do, and to get away with whatever they please, is hardly the least of it; but neither is it the only cause for concern.
In an article posted in the terrorist group’s English-language online magazine Dabiq (which as can be see below seems to have gotten its design cues straight from Madison Avenue and is just missing glossy pages filled with ‘scratch and sniff’ perfume ads ) ISIS claimed that it has enough money to buy a nuclear weapon from Pakistan and “carry out an attack inside the United States next year.”
In the article, the ISIS columnist said the weapon could be smuggled into the United States via its southern border with Mexico.
Curiously, the author of the piece is John Cantlie, a British photojournalist who was abducted by ISIS in 2012 and has been held hostage by the organization ever since; he has appeared in several videos since his kidnapping and criticized Western powers.
John Cantlie
As the Telegraph notes, “Mr Cantlie, whose fellow journalist hostages have all either been released or beheaded, has appeared in the group’s propaganda videos and written previous pieces. In his latest work, presumed to be written under pressure but in his hall-mark style combining hyperbole, metaphor and sarcasm, he says that President Obama’s policies for containing Isil have demonstrably failed and increased the risk to America.”
Cantlie describes the following “hypothetical” scenario in Dabiq :
Let me throw a hypothetical operation onto the table. The Islamic State has billions of dollars in the bank, so they call on their wil?yah in Pakistan to purchase a nuclear device through weapons dealers with links to corrupt officials in the region.
The weapon is then transported overland until it makes it to Libya, where the muj?hid?n move it south to Nigeria. Drug shipments from Columbia bound for Europe pass through West Africa, so moving other types of contraband from East to West is just as possible.
The nuke and accompanying muj?hid?n arrive on the shorelines of South America and are transported through the porous borders of Central America before arriving in Mexico and up to the border with the United States.
From there it’s just a quick hop through a smuggling tunnel and hey presto, they’re mingling with another 12 million “illegal” aliens in America with a nuclear bomb in the trunk of their car.
Cantlie continues:
Perhaps such a scenario is far-fetched but it’s the sum of all fears for Western intelligence agencies and it’s infinitely more possible today than it was just one year ago. And if not a nuke, what about a few thousand tons of ammonium nitrate explosive?
That’s easy enough to make. The Islamic State make no secret of the fact they have every intention of attacking America on its home soil and they’re not going to mince about with two muj?hid?n taking down a dozen casualties if it originates from the Caliphate. They’ll be looking to do something big, something that would make any past operation look like a squirrel shoot, and the more groups that pledge allegiance the more possible it becomes to pull off something truly epic.
Remember, all of this has happened in less than a year. How more dangerous will be the lines of communication and supply a year on from today? If the West completely failed to spot the emergence of the Islamic State and then the allies who so quickly pledged allegiance to it from around the world, what else of massive significance are they going to miss next?
In other words, even the “hypothetical operation” involving a nuclear attack on US soil would implicitly have the blessing of the US government. Which, considering the way the stock market surges every time the US economy deteriorates further on its way towards recession, probably means that a mushroom cloud appearing in some major US metropolitan area is just what the E-mini algos would need to send the S&P500 limit up.
Whereas over the past year, ever since the outbreak of the hostilities over the fate of Ukraine following the Victoria Nuland orchestrated presidential coup, relations between Russia and NATO have devolved to a Cold War 2.0 state as manifested by countless interceptions of Russian warplanes by NATO jets and vice versa as depicted in the following infographic…
… at least China was mercifully allowed to stay out of the fray between the Cold War enemies.
This all changed this month when first the Pentagon’s annual report to Congress this month cast China as a threat to regional and international peace and stability, followed several weeks ago when, with China aggressively encroaching into territories in the South China Sea claimed by US allies in the region such as Philippines, Vietnam and Japan, the US decided to get involved in yet another regional spat that does not directly involve it, and started making loud noises about China’s territorial expansion over the commodity-reach area.
China promptly relatiated by threatening a US spy plane during a routine overflight, while immediately thereafter the US retaliated at China’s escalation, and warned that building sea “sandcastles” could “lead to conflict.”
Far from shutting China up, earlier today China said it had lodged a complaint with the United States over a U.S. spy plane that flew over parts of the disputed South China Sea in a diplomatic row that has fuelled tension between the world’s two largest economies.
Quoted by Reuters, Chinese Foreign Ministry spokeswoman Hua Chunying said on Monday China had lodged a complaint and that it opposed “provocative behaviour” by the United States.
“We urge the U.S. to correct its error, remain rational and stop all irresponsible words and deeds,” she said. “Freedom of navigation and overflight by no means mean that foreign countries’ warships and military aircraft can ignore the legitimate rights of other countries as well as the safety of aviation and navigation.”
China had noted “ear-piercing voices” from many in the U.S. about China’s construction on the islands and reefs.
In other words, China just imposed an effective “no fly zone” for US spy planes, a dramatic shift from its recent posture when it tolerated and turned a blind eye to US spy plane overflights. Going forward, the US has been explicitly warned not to fly over China or risk the consequences.
This handout photo taken on March 16, 2015 by satellite imagery provider Digital Globe shows a satellite image of vessels purportedly dredging sand at Mischief Reef in the Spratly Islands in the disputed South China Sea
And just to confirm that if the US had hoped it could threaten Beijing into submission and force the Politburo into curbing its expanionist appetit, it was dead wrong, the nationalist Global Times, a paper owned by the ruling Communist Party’s official newspaper, the People’s Daily, said in a Monday editorial that war was “inevitable” between China and the United States unless Washington stopped demanding Beijing halt the building of artificial islands in the disputed waterway.
A war between the United States and China is “inevitable” unless Washington stops demanding Beijing halt its construction projects in the South China Sea, a Chinese state-owned newspaper warns.
“If the United States’ bottom line is that China has to halt its activities, then a US-China war is inevitable in the South China Sea,” The Global Times, an influential newspaper owned by the ruling Communist Party’s official newspaper the People’s Daily, said in an editorial Monday.
“We do not want a military conflict with the United States, but if it were to come, we have to accept it,” said The Global Times, which is among China’s most nationalist newspapers.
Beijing last week said it was “strongly dissatisfied” after a US spy plane defied multiple warnings by the Chinese navy and flew over the Fiery Cross Reef, where China is reportedly building an airfield and other installations.
“The intensity of the conflict will be higher than what people usually think of as ‘friction’,” it warned.
The paper also asserted that China was determined to finish its construction work in the South China Sea, calling it Beijing’s “most important bottom line.”
Such commentaries are not official policy statements, but are sometimes read as a reflection of government thinking.
More importantly, they serve as populism-timestamped warnings that US demands for a Chinese retreat over what the world’s most populous nation considers’ its own national interest, will backfire dramatically and the next time a US spy plane flies over the Spratly Islands, or Beijing’s smog for that matter, a very serious diplomatic incident may ensue.
Most Americans today have but two connections with those who serve and have served in the military, and especially those who have perished in that service. The first is the hollow seconds it takes to utter “Thank you for your service,” an seemingly autonomic reflex when seeing someone in uniform. The other occurs should they see a film about any of our many conflicts. Since America’s last declared war, which ended 70 years ago, Memorial Day has become an annual celebration of patriotic hypocrisy, when people might notice that the American flag they ran up their front yard pole last year is faded and frayed and, maybe, add a new one to their celebration’s shopping list.
True appreciation is measured by our depth of experience and understanding.
Today, less than 1 percent of the population reaps the benefits resulting from the service and sacrifice of the less than 1 percent of the population who serve the politicians elected by the majority of people who separate, and have no direct involvement with, these two segments of society. And this disconnection and separation is no accident.
During the war Congress declared the day after the attack on Pearl Harbor, citizens didn’t thank members of the military for their service because everyone, one way or the other, was involved and contributed to a successful outcome. For many, Korea is a forgotten conflict, but it set the stage for all the undeclared conflicts that followed. War, as Eisenhower warned, is big business, and public protest is a political challenge that complicates their promotion and prosecution. Vietnam proved this, and people protested because the draft could send any one of them into harms way. And on the nightly news they would watch their loved ones suffer for a cloudy cause.
The politicians, most of whom have never served and faced the possibility of a sudden end to life, solved this problem by replacing the draft with the all volunteer force. And never again would the news media work with the unrestricted access it had in Vietnam. Nor could they show the return of flag-draped transfer cases. “Privacy,” the politicians said, but certainly a planeload of flags bedecked boxes says something more—something different—than a missing-man flyover and the single triangle-folded flag presented to the family to conclude a funeral’s full military honors.
Understanding is the antidote for hypocrisy, and films that promote and criticize America’s endless series of conflicts can contribute to it. Watching requires more involvement than saying “Thanks” to a uniformed stranger. Put yourself in the protagonist’s place and wonder how you—and your family—would feel and deal with the consequences projected on the screen. Build on this understanding, test its veracity with questions and settle for nothing less than a direct answer to it, make it a resource that guides your daily decisions.
In so doing you can honestly honor those for whom this holiday was created after the nation’s most catastrophic conflict, the U.S. Civil War, which took the lives of roughly 620,000 individuals in military service.
Up until this moment, Greece may not have had the financial wherewithal to pay its creditors, forced instead to use circular math gimmicks in which the IMF paid the IMF for the country’s most recent €750 million due on May 12 when it effectively pre-defaulted and used SDR reserves as “payment”, but at least it had a united facade when facing Europe and political cohesion when dealing with the Troika.
That too may have just evaporated over the weekend, when in a surprisingly close vote showing just how deeply the ruling Greek Syriza party has splintered, the hard line “Left Platform” a faction within Syriza, proposed that Greece stop paying its creditors if they continue with “blackmailing tactics” and instead seek “an alternative plan” for the debt-racked country. Its motion called for the government to default on the IMF loans rather than compromise to creditor demands, among which a change to value-added tax rates, further liberalization of the labor market and changes to the pension system, including further cuts to pensions and wages.
According to the NYT, which first reported the vote outcome, the proposal was narrowly rejected with 95 people voting against and 75 in favor.
The Left Platform’s leader, Energy Minister Panagiotis Lafazanis, told the meeting default was preferable to surrender, even if it meant Greece tumbling out of the euro.
“Who says that an exit from the euro and a return to the national currency is a catastrophe?” Mr. Lafazanis said at the meeting.
Who? Well, all those – mostly bankers – who for the past 5 years bailed out European banks at the expense of preserving Greek participation in a doomed monetary union and avoiding the collapse of the Eurozone, an outcome which would lead to massive losses for the oligarchic status quo.
But back to Greece where with a vote as close as that, the genie of the full-blown dissent within Syriza, which has a tiny majority of just 12 seats in Greece’s 300 seat partliament, is out of the bottle which could mean that the Troika’s long sought after goal of pushing Greece into a political crisis, may be just around the corner.
As the WSJ reports, “Tsipras’s difficulty in selling a painful compromise to Syriza’s hard left, as well as to other parts of his ideologically diverse party, has become the largest obstacle to a deal. European officials and analysts—and privately even Greek government officials—say they don’t know whether the roughly 30 lawmakers who make up Left Platform will vote as defiantly as they talk if creditors’ terms are put before the Athens Parliament.”
That may be a moot point, since Greece needs a deal yesterday: as a reminder, Greece has about 10 days of cash left, and this time there is no kicking the can – if there is no deal by June 5, Greece will be in default first to the IMF, and soon to everyone else.
Worse, while Greece may not have decided to formally prioritize pensions and wages over IMF repayments, at least not yet, it has absolutely no working proposal to present to the Eurogroup ahead of this week’s latest meeting.
The Central Committee agreed on a text saying any deal with creditors must involve no pension cuts, a small budget surplus before interest, increased public investment and a restructuring of Greece’s debt—terms that lenders are unlikely to accept. The text isn’t binding on Mr. Tsipras’s government but indicates how hard it will be to sell a deal to Syriza.
But while some may have harbored hope that the Troika may agree to at least the smallest of concessions, after Sunday’s municipal vote in Spain which showed a dramatic plunge in popularity of the ruling PP, a harbinger of even even more “anti-austerity” platforms coming to power, Merkel will do everything in her power to make an example of Greece that nobody can dictate terms to the Troika and in the end it is a very simple choice: the German way or the autbahn.
And just like that Greece is suddenly caught between the devil and the deep red lines: an intransigent Troika and potential rebels within the party itself.
“The biggest threat may not end up being Mr. Lafazanis, but other parliamentary members who lack party discipline, who are newly elected and are completely unpredictable,” said Dimitris Keridis, an associate professor of international politics at Panteion University in Athens.
Parliamentarian Ioanna Gaitani, a self-described Trotskyite in the Left Platform, said Greece can survive a debt default and lenders aren’t respecting Syriza’s mandate.
“When faced with the pseudo-dilemma of ‘euro or national currency,’ the answer is a unilateral write-off of most of the debt, the taxation of large wealth, and the implementation of Syriza’s program,” she said. “For the Left, the needs of the people are above profits and debts.”
The best news perhaps for Greece and everyone else who has been following this ultra slow motion trainwreck for the past 5 years, is that it is nearly over (one can hope), and that when it comes to defaulting, Greece has a truly exceptional range of choices how to make sure its last Euro-denominated check bounces in the most dramatic fashion possible.
Meet the veteran who’s been reduced to peddling for change online to buy a new leg
Historian Will Durant once wrote “in the last 3421 years of recorded history only 268 have seen no war.”
This is astounding. Warfare is constantly with us, often for the most absurd reasons.
These days we’re told that the War on Terror makes us more free.
We’re programed on days like Memorial Day to sing songs about our freedom and to thank the people in uniform for making us more free.
The question I would respectfully submit is, do you feel more free today than you did 5, 10, 20 years ago?
We now live in an era of unprecedented government intrusion.
Senior citizens are thrown in jail for failing to file disclosure forms.
Spy agencies arrogantly engage in illegal surveillance on their own citizens.
And excessive force is so commonplace it barely registers as newsworthy any more.
Curiously a number of polls from 2013 and 2014, including Gallup and the Washington Post, actually show that more people are afraid of the government than of terrorism itself.
This isn’t freedom. And it’s a complete myth that soldiers fight and die in the name of freedom anymore.
Warfare today means that a few people at the top of the military industrial complex, banking, and oil services companies become extremely rich. And everyone else pays the price.
The price for everyday citizens is having less freedom than before.
The price for future generations is inheriting a tremendous war debt.
And the price for soldiers themselves is coming home wounded, limbless, or not at all.
In today’s podcast, I introduce you to Joe, one of those recent veterans who lost his right leg.
I recently met him while in the US, and he has an unbelievable story.
Despite losing a limb in combat, Joe can’t get a new leg because the FDA won’t approve the procedure that he needs.
It’s called osseointegration. And the FDA thinks that it might be too risky for Joe.
Risky. Kind of like being in a combat zone in a country that never should have been invaded to begin with for reasons that were all lies, all to support a war that only makes the country less free.
So since the government doesn’t think that Joe is responsible enough to make his own decisions, he now has to go overseas and pay tens of thousands of dollars out of his own pocket.
Joe doesn’t have the money; so a family member set up a donation page on the Internet trying to get help. (I’m not publishing the link here because I’m going to take care of it myself.)
It’s amazing when you think about it– a combat veteran who lost a leg supposedly fighting for ‘freedom’ can’t have the medical procedure he needs because a destructive government bureaucracy.
That’s what freedom means today in America. And nobody’s fighting for it.
Soldiers are off risking life and limb for oil companies, banks, and defense contractors. And citizens are distracted with bread and circuses.
All the while, government power continues to expand at the expense of the individual.
So today as we’re told to remember the fallen, we might also take a moment to remember the freedom we once had.
And to think through the options for winning it back once again.
Early last month we highlighted a ThinkProgress report which suggested that more people were killed in encounters with police in the US in the month of March than were killed in encounters with UK authorities in 100 years.
A new report by ThinkProgress.com unearthed disturbing figures when it came to the number of police-related deaths that occurred in America in the month of March alone.
Just last month, in the 31 days of March, police in the United States killed more people than the UK did in the entire 20th century. In fact, it was twice as many; police in the UK only killed 52 people during that 100 year period.
According to the report by ThinkProgess, in March alone, 111 people died during police encounters — 36 more than the previous month. As in the past, numerous incidents were spurred by violent threats from suspects, and two officers were shot in Ferguson during a peaceful protest. However, the deaths follow a national pattern: suspects were mostly people of color, mentally ill, or both.
In that context we bring you the following compare and contrast visual exercise.
The UK…
….versus the US…
Note: the suspect who was shot in the latter video clip was unarmed and died as a result of his injuries.
The officer responsible killed another suspect in 2013 — he was cleared of wrongdoing in both cases.
Following our exposure of the plunge in Lake Mead water levels post Friday's earthquake, officials were quick to point out that the drop was "due to erroneous meter readings" – which in itself is odd given we have not seen such an aberration before in the measurements. The data today shows a super surge in the Lake Mead water level – which, even more mysteriously, indicates from pre-earthquake to now, the Lake has risen by the most in a 3-day-period in years (as long as we have found history). How was this level 'manufactured' you ask? Simple – discharge flows from the Hoover Dam were curtailed dramatically. We are sure there is a simple explanation for all this…
Since the 1960s, Western economies have been afflicted by an acute problem in which they depend more and more on our psychological and emotional engagement(be it with work, with brands, with our own health and well-being) while finding it increasingly hard to sustain this. Forms of private disengagement, often manifest as depression and psychosomatic illnesses, do not only register in the suffering experienced by the individual; they are increasingly problematic for policy-makers and managers, becoming accounted for economically.
Yet evidence from social epidemiology paints a worrying picture of how unhappiness and depression are concentrated in highly unequal societies, with strongly materialist, competitive values. Workplaces put a growing emphasis on community and psychological commitment, but against longer-term economic trends towards atomization and insecurity. We have an economic model which mitigates against precisely the psychological attributes it depends upon.
In this more general and historical sense, then, governments and businesses ‘created the problems that they are now trying to solve.’ Happiness science has achieved the influence it has because it promises to provide the longed-for solution. First of all, happiness economists are able to put a monetary price on the problem of misery and alienation. The opinion-polling company Gallup, for example, has estimated that unhappiness of employees costs the US economy $500 billion a year in lost productivity, lost tax receipts and health-care costs. This allows our emotions and well-being to be brought within broader calculations of economic efficiency.Positive psychology and associated techniques then play a key role in helping to restore people’s energy and drive. The hope is that a fundamental flaw in our current political economy may be surmounted, without confronting any serious political–economic questions.
Psychology is very often how societies avoid looking in the mirror. The second structural reason for the surging interest in happiness is somewhat more disturbing, and concerns technology. Until relatively recently, most scientific attempts to know or manipulate how someone else was feeling occurred within formally identifiable institutions, such as psychology laboratories, hospitals, workplaces, focus groups, or some such. This is no longer the case. In July 2014, Facebook published an academic paper containing details of how it had successfully altered hundreds of thousands of its users’ moods, by manipulating their news feeds. There was an outcry that this had been done in a clandestine fashion. But as the dust settled, the anger turned to anxiety: would Facebook bother to publish such a paper in future, or just get on with the experiment anyway and keep the results to themselves?
Monitoring our mood and feelings is becoming a function of our physical environment. In 2014, British Airways trialled a ‘happiness blanket’, which represents passenger contentment through neural monitoring. As the passenger becomes more relaxed, the blanket turns from red to blue, indicating to the airline staff that they are being well looked after. A range of consumer technologies are now on the market for measuring and analyzing well-being, from wristwatches, to smartphones, to Vessyl, a ‘smart’ cup which monitors your liquid intake in terms of its health effects. One of the foundational neoliberal arguments in favor of the market was that it served as a vast sensory device, capturing millions of individual desires, opinions and values, and converting these into prices. It is possible that we are on the cusp of a new post-neoliberal era in which the market is no longer the primary tool for this capture of mass sentiment. Once happiness monitoring tools flood our everyday lives, other ways of quantifying feelings in real time are emerging that can extend even further into our lives than markets.
Concerns about privacy have traditionally seen it as something which needs to be balanced against security. But today, we have to confront the fact that a considerable amount of surveillance occurs to increase our health, happiness, satisfaction or sensory pleasures. Regardless of the motives behind this, if we believe that there are limits to how much of our lives should be expertly administered, then there must also be limits to how much psychological and physical positivity we should aim for. Any critique of ubiquitous surveillance must now include a critique of the maximization of well-being, even at the risk of being less healthy, happy and wealthy.
To understand these trends as historical and sociological does not in itself indicate how they might be resisted or averted. But it does have one great liberating benefit of diverting our critical attention outward upon the world, and not inward upon our feelings, brains or behavior. It is often said that depression is ‘anger turned inwards.’ In many ways, happiness science is ‘critique turned inwards’, despite all of the appeals by positive psychologists to ‘notice’ the world around us. The relentless fascination with quantities of subjective feeling can only possibly divert critical attention away from broader political and economic problems. Rather than seek to alter our feelings, now would be a good time to take what we’ve turned inwards, and attempt to direct it back out again. One way to start would be by turning a skeptical eye upon the history of happiness measurement itself.
On June 5, all eyes will be on OPEC as the group convenes in Vienna to discuss its course for the second half of 2015.
It will probably be straightforward with no change to the status quo but it could be dramatic.
The most bullish scenario that could occur would be for OPEC to reverse strategy and re-introduce production quotas.
The most bearish would be for OPEC to continue with no constraint at the same time as a nuclear agreement is reached allowing an unsanctioned Iran to re-enter the market at full throttle.
Not everyone is happy?
Remember that prior to the November meeting, Iran, Venezuela and (non-OPEC) Russia engaged in frenetic efforts to convince the group’s Gulf leaders to cut output which went unheeded.
The facts are very clear. No OPEC country can meet its budgetary requirements at this price level without digging deep into reserves. OPEC members face a financial crisis. They are collectively $1.6 bn poorer at this point in the year compared to last year.
To put this in perspective, data shows that prices are south of what 10 out of OPEC’s 12 members require for their annual budgets to break even. Qatar and Kuwait are exceptions, and Saudi Arabia holds $708 billion of reserves assets on which it can lean on for now.
So not suprisingly, from November to the present, officials from some of OPEC’s non-Gulf member countries have voiced concerns over OPEC’s Saudi-led market share strategy, as their economies feel the full brunt of lower prices which ironically may cause them to increase supply.
Saudi’s oil exports accounted for 89% of the country’s total revenue last year. The fall in oil prices is decreasing the value of these exports, leading to a potential budget shortfall. In its 2015 budget, Saudi plans to spend about $230 billion but expects to accrue in $190.7 billion in revenue, yielding an overall deficit of $38.6 billion. While the oil price assumption was not specified in the budget, it was calculated in December, when oil prices were between $55 and $70/bbl.
To maintain spending they will have no choice but to tap its $708 billion Sovereign Wealth Fund, which while enough for the short term it will not last forever when $50 billion is required to be drawn annually.
Is the strategy working??
However Saudi’s market share defense strategy seems to be working. As Saudi Arabia’s production rose to a record high US production growth has started to slow showing that the plan may have worked?
Saudi Vs US Rig Count
To judge success, its helpful to remember what the strategy coming out of the last meeting was exactly:
•Maintain production. This will continue to drive down prices. (Saudi has done just that, in fact saying it achieved record production of 10.3m barrels a day in April.)
• These lower prices will exert economic pressure on US producers who need higher prices to break even. (1Q earnings calls were replete with references to this reality as company management teams sought to explain their rationale for curtailing Capex, projects, and implementing headcount reductions.)
• If prices are driven down to $60/barrel, a fair portion of shale production becomes uneconomical. (WTI hit its low this cycle on March 17, at $43.46. Brent previously hit its low on January 13, at $45.59. These levels were well below the breakeven prices that analysts had assessed wherein unconventional drilling would be uneconomic. More importantly, however, the falling prices presaged a curtailment of existing activities, and the cash flow derived therefrom. Less cash flow = less investment = scaleback of activity.)
•With diminishing US shale production, OPEC will in the longer-term regain its clout in the global oil market. (Though the US is losing the market share battle, this does not immediately translate to a definitive “win” for OPEC.)
US Production Starting To Slow, But Companies Preparing To Ramp Up
The price of WTI increased over 40% from the low on the assumption that the glut is easing. As noted above, OPEC’s May report said this response began at the end of the third week of March. Further, the IEA’s monthly report projected US shale-oil output growth to slow by 80,000 bpd in May.
A recent Wall Street Journal report claiming that a paper has been prepared by the OPEC Secretariat which sees oil prices depressed for a decade and recommending the re-introduction of quotas vigorously denied. It is rare if not unprecedented to see such a strong denial from OPEC and it demonstrates the sensitivities that surround the next meeting. It is reasonable to assume that it is indicative of divided opinion as to how OPEC should respond to the price collapse.
Summing up there is nothing in the latest monthly reports from either OPEC or the EIA to suggest that the price fall has had a dramatic effect on global demand or non-OPEC supply. The crude supply excess was huge in 1Q and will continue to be huge in this quarter. Perhaps bulls can take some solace from the possibility that a lot of this excess has disappeared into Chinese strategic storage, never to re-appear. There is no way of being sure. Suffice it to say that last year global stocks built by an average of 900,000 bpd. This year they will grow by of the order of 1.5 mbpd.
The Meeting Before The Meeting
It is very important to note that the days leading up to the June 5 gathering have already been marked by busy travel schedules by both OPEC and non-OPEC representatives.
Russia’s Energy Minister Alexander Novak said he and other Russian officials will meet with OPEC to discuss whether to adjust production on June 2-3, according to Bloomberg. Novak met with officials from Venezuela, Mexico and Saudi Arabia prior to the November meeting.
So What next?
Bullish fears of the risk of a cut combined with a retracement of the dollar has given the bulls the upper hand against facts and forecasts of oversupply. These factors supporting the upward momentum cannot be underestimated and could drive prices even higher in the immediate future.
The current situation feels very similar to the first half of last year when the numbers were overwhelmingly bearish yet prices defied gravity and kept rising. A big surplus in the physical markets and very high levels of speculative length are a toxic combination. The big difference to last year is that the price level is 40% lower.
Looking at the broader fundamental picture, however, I cannot help but compare the current price strength to the myth of Sisyphus, the king of Corinth. He was condemned by gods to ceaselessly rolling a rock to the top of a mountain only to see it roll back down to repeat this action forever. The top of the current bull mountain might not be close but unless there is a fundamental change in the physical supply/demand balance, the rock might start rolling back down shortly again just like it did in the second half of 2008 and 2014 only for the bulls to start the arduous uphill battle all over again.
As you are aware, honey bees have been suffering from something called Colony Collapse Disorder. In practice, what this means is that the bees simply vanish from their hives, leaving behind their most precious worldly possessions: honey and larvae.
What causes these mysterious vanishing acts has been something of a mystery. But because the phenomenon began really ramping up in 2006, we can focus in on some suspects.
While it’s always possible that the bees are suffering ‘death from a thousand cuts’ — where it’s no one specific thing but rather a wide range of minor insults, ranging from loss of forage to herbicides to fungicides to pesticides — there’s actually quite strong evidence pointing to a specific class of pesticides called neonicotinoids.
This class of pesticides is massively and indiscriminately toxic. More specific to our investigation here, it was only introduced into widespread use shortly before the massive bee die-offs began.
Biocide = Suicide
Actually, it’s not really proper to call neonicotinoids ‘pesticides’ because they don't solely target pests. They should more accurately be called ‘biocides’ because they kill all insects equally and indiscriminately.
How toxic are they?
The neonics are so toxic that it's sufficient to simply lightly coat a seed with it before planting. When the seed grows to maturity, the plant will still have enough absorbed toxin circulating within its system to kill any insect that munches on it or sucks on its sap.
Think about that for a minute. Coat a kernel of corn with a neonic, sow it, and the mature plant will still be lethal to a corn borer when the corn ears develop several months later.
But not just to insects:
"A single corn kernel coated with a neonicotinoid can kill a song bird." As a long time environmental lawyer and campaigner, I should not have been stunned by that fact but I was. Shaking my head in dismay, I read on, "Even a tiny grain of wheat or canola treated with the …neonicotinoid… can fatally poison a bird."
Ugh. Boy, that depresses me — thinking of the mentality in play that allows one to conceive of and then use such powerful poisons simply because one wants to engage in lazy farming. Hard farming requires knowing how to rotate crops, use beneficial natural relationships, and work intimately with the land on which you farm so as to minimize pest losses while maximizing the abundance of both your crops and the local ecosystem.
Sadly, the indiscriminate neonic killers are being used very widely. The mentality at play might as well be kill them all and let god sort them out. And therefore we are literally taking out whole swaths of life; both observed as in the case of the honey bee, and unobserved in the case of the many, many organisms not commercially or recreationally important enough to us to notice and track.
Killing off organisms in an ecosystem using indiscriminate biocides is quite literally a slow form of suicide for us humans. As within, so without. You cannot poison and kill of the world around you without poisoning and killing yourself.
Simply put: We are killing ourselves. And the data is literally horrifying.
The Birds and the Bees
If the thesis that neonics are harmful to both pests and other life forms alike is correct, then we should be able to detect those effects both with direct studies and indirect measurements.
Here’s where the horrifying part comes in. All of the data agrees: neonics are stone cold killers.
Insecticides Linked To Farmland Bird Population Declines
July 10, 2014
A new study in the journal Nature has found that use of neonicotinoids is linked to a decline in the populations of farmland birds across Europe.
For the study, scientists from Radboud University in the Netherlands and the Dutch Centre for Field Ornithology and Birdlife Netherlands (SOVON) analyzed long-term data for both farmland bird populations and chemical amounts in surface water. They discovered that in locations where water held high amounts ofimidacloprid, a standard neonicotinoid, bird populations were known to decrease by an average of 3.5 percent on a yearly basis.
“In ten years it’s a 35 percent reduction in the local population, it’s really huge,” study author Hans de Kroon from Radboud University told Matt McGrath of BBC News. “It means the alarm bells are on straight away.”
The study team said the insecticide is probably coating seeds that the birds like to eat – as well as leaching into both water and soil around the sprayed areas. They added that neonicotinoids can persist in the environment for up to three years.
Here we have a study that shows huge and dramatic negative impacts on bird life. A massive culling of more than a third of the bird populations in ten years is a really disturbing figure. In places where the water held high concentrations of neonics, bird populations were hit hardest.
The other interesting finding in the above the study was that the neonics were found in the water supply. They are not supposed to end up there, but they do, as we now know:
Bee-Killing Pesticides Found in Midwest Rivers
Aug 4, 2014
PESTICIDES LINKED TOdeclining bee and bird populations have been found in streams across the upper Midwest, raising yet more concerns about these chemicals’ environmental effects.
Researchers from the United States Geological Survey tested waters at nine sites in Iowa and Nebraska. They found neonicotinoids in each, frequently at levels that may harm insects and the life that depends on them.
“This wasn’t a toxicity study, but there’s research out there indicating that these concentrations could be of concern,” said USGS chemist Michelle Hladik, lead author of the paper describing the survey in the journal Environmental Pollution.
Given just how toxic the neonics are, I have to wonder what the effect of them are on all the insect life that has water in its life stage: the mayflies, stoneflies and caddis flies. If these insects are killed, then you will find big declines in the bird populations that depend on those same insects for their food supply.
And/or if the insects are carrying sub-lethal levels of the neonic biocides in them, then the birds may be bio-concentrating the toxin to detrimental if not lethal levels in their own bodies.
I have to ask: What sort of a so-called ‘civilized’ nation, in this day and age, allows toxic levels of pesticides (or biocides as the case may be) to build up at hazardous levels in surface water in the first place?
What’s so important about selling a few bucks more to enable giant chemical firms and certain farmers to practice lazy farming that we’re willing to sacrifice the complete loss of critical elements of key ecosystems?
We may not tend to appreciate insects, but they are utterly and fabulously essential to everything we hold dear. You cannot just kill them all without upsetting the myriad finely-tuned systems of which both they and we are components.
While we have a lot of data on honey bees because they are commercially kept and tracked, the wild bees are not really tracked all that carefully. But we know enough to conclude that they, too, are suffering:
Neonicotinoid pesticides dramatically harm wild bees, study finds
APR 22, 2015
A common type of pesticide is dramatically harming wild bees, according to a new in-the-field study that outside experts say may help shift the way the U.S. government looks at a controversial class of chemicals.
But in the study published by the journal Nature on Wednesday, honeybees — which get trucked from place to place to pollinate major crops like almonds— didn't show the significant ill effects that wild cousins like bumblebees did. This is a finding some experts found surprising. A second study published in the same journal showed that in lab tests bees are not repelled by the pesticides and in fact may even prefer pesticide coated crops, making the problem worse.
Scientists in Sweden were able to conduct a study that was in the wild, but still had the in-the-lab qualities of having control groups that researchers covet. They used 16 patches of landscape, eight where canola seeds were coated with the pesticide and eight where they weren't, and compared the two areas.
When the first results came in, "I was quite, 'Oh my God,'" said study lead author Maj Rundlof of Lund University. She said the reduction in bee health was "much more dramatic than I ever expected."
In areas treated with the pesticide, there were half as many wild bees per square meter than there were in areas not treated, Rundlof said. In the pesticide patches, bumblebee colonies had "almost no weight gain" compared to the normal colonies that gained about a pound, she said.
The bumblebees are essential to the overall state of the ecosystems of the world because they pollinate things that honeybees don’t. There is some overlap, but the bumblebees are able to reach deeper into certain flowers and have different platn preferences than honeybees, so they are not replaceable. They are unique contributors. If they go away, so will the many plants that depend on them for their life cycle.
And it gets worse:
Beyond Honeybees: Now Wild Bees and Butterflies May Be in Trouble
MAY 6, 2014
Among other pollinators, iconic monarch butterfly declines are well documented: Their numbers are now at a small fraction of historical levels. And entomologist Art Shapiro of the University of California, Davis spent most of the last four decades counting butterflies across central California, and found declines in every region.
These declines don’t just involve butterflies that require very specific habitats or food sources, and might be expected to be fragile, but so-called generalist species thought to be highly adaptable. Many other entomologists have told Black the same thing.
“Species that used to be in all our yards are dropping out, but nobody’s monitoring them,” Black said.
It’s the butterflies, too. Certainly in my own personal experience, I’ve noticed a lot fewer butterflies in my backyard over the past several years. We plant flowers specifically for bees and butterflies, so I'm something of a casual tracker of their types and numbers.
Even more recently, we have solid data showing a dose-response where the heaviest neonic use correlates with the heaviest honeybee die-offs:
Bee Die-Offs Are Worst Where Pesticide Use Is Heaviest
May 14, 2015
The nation’s honeybee crisis has deepened, with colony die-offs rising sharply over last year’s levels, the latest survey from the US Department of Agriculture-funded Bee Informed Partnership shows. A decade or so ago, a mysterious winter-season phenomenon known as colony-collapse disorder emerged, in which bee populations would abandon their hives en masse. These heavy winter-season losses have tapered off somewhat, but now researchers are finding substantial summer-season losses, too.
And here’s a map a map depicting where losses are heaviest:
The article goes on to cite much of the direct as well as circumstantial evidence we have that these biocides are the culprits for much of the damage cited above. Take a look at both where the usage of the neonics is heaviest and when they began to be used in earnest (charts below) and then recall that the bee, butterfly, and bird declines all began around 2006 and have gotten measurably and drastically worse in the last few years.
Hmmmm….seems to me that in any court of law, and in the mind of any reasonable person, there’s enough evidence here to say that there’s a very big problem and the neonics are the likely culprits.
One bird that I’ve always loved in the Sparrow Hawk, or American Kestrel as it is now more properly called. The smallest of the hawks it is brightly colored and was a very prominent bird of my childhood. They used to be everywhere.
Now they are quite scarce in my area. And because nobody makes any money off of them, only a few ‘birders’ seem to notice or care.
But these mainly insect-eating birds are in serious decline:
American Kestrel Population Drops Dramatically, And Without Fanfare
Jul 29, 2014
On a national level, the American kestrel (Falco sparverius) population has been plummeting. Records from the North American Breeding Bird Survey, a massive annual data collection effort for more than 400 bird species overseen by the U.S. Geological Survey (USGS) and the Canadian Wildlife Service, show the kestrels have declined by an estimated one and a half percent each year between 1966 and 2010. The long-term loss is almost 50 percent of the population. That’s a big drop for a bird considered abundant in North America.
A handful of things could be causing the lower kestrel numbers, bird biologists say, including increased predation by Cooper’s hawks, continued exposure to pesticides, and competition at nesting sites by European starlings.
Every biologist struggles to explain the massive losses in their chosen area of study due to ‘natural causes.’ But the easier and more obvious choice is ‘humans are doing something, and it’s killing off this thing I am studying.’
So when we put all of the above together, it's obvious that Rachel Carson’s Silent Spring has taught the US EPA and businesses nothing at all.
You would think that in the wake of the DDT disaster that we’d be more careful. But that’s just not the case. The exact same mistakes are being made here again. And it is beyond a tragedy because this time it’s being done with our full awareness.
Obviously, the sorts of environmental impact and toxicity studies that were supposed to be done were either forgone, or done fraudulently.
The Response
After a lot of hue and cry, and years and years of solid studies and accumulating evidence, the EPA finally took a stand and issued new firm rules for the neonics.
However, don't just scan the headlines because you’ll end up with the wrong impression.
Read more carefully:
EPA Restricts Use of Pesticides Suspected of Killing Bees
Apr 2, 2015
The EPA has issued a moratorium on use of a type of pesticide theorized to be responsible for plummeting bee populations. Neonicotinoids are a class of common pesticides that recent research has pointed to as being harmful to birds, bees and other animals.
The EPA previously approved their use, but outcry over the damage being done has caused the agency to reverse course while more studies are done. On Thursday, the EPA sent letters to people and companies that have applied for outdoor use of the pesticide, saying that new use permits won’t be issued.
New uses of neonicotinoids will no long be approved “until the data on pollinator health have been received and appropriate risk assessments completed,” the EPA letter reads. Existing permits to use them, however, will not be rescinded — something wildlife and environmental advocacy groups are unhappy with.
The headline implies that the EPA is now limiting the amount of neonic being used but that's not the case at all. As a result of their 'ruling' even more could be used in the near future, or maybe less, but the ruling itself does nothing to restrict how neonics are currently being used because it only applies to 'new' uses.
Are you kidding me? This represents the ‘middle ground’ the EPA sought?
Every single current use of neonics will continue. By the way, one “use” is using neonics to treat corn. Or wheat, or any other already approved “use.” Those use maps above will continue unabated while the EPA 'studies' the issue, a process that could take a decade or more.
The ruling means that farmers newly considering using these biocides will not be blocked in any way shape or form as long as they are going to use them in a way that's already approved.
So, the exceptional and mounting damage will continue.
This is pathetic, and it is an outrage. It represents everything that is wrong with America today.
There is both economic damage being done to beekeepers and everybody who depends on their services, and there is massive environmental and ecosystem damage being done. The EPA has ruled that a few hundred million dollars of sales for major chemical companies outweigh every other right in this story, including the basic right of all life to simply live.
[Note for subscribers, this is a new set of paragraphs inserted to keep up with recent developments]
More recently, the Obama administration has unveiled the results of a task force meant to study the plight of the pollinators and make recommendations on how to support them.
On Tuesday, the Obama administration will announce the first National Strategy to Promote the Health of Honey Bees and Other Pollinators, a bureaucratic title for a plan to save the bee, other small winged animals and their breeding grounds.
The strategy, a copy of which was obtained by The Washington Post, will seek to manage the way forests burned by wildfire are replanted, the way offices are landscaped and the way roadside habitats where bees feed are preserved.
“What are we doing on bees?” Obama asked Holdren as they prepared to wrap up an Oval Office meeting in the summer of 2013. “Are we doing enough?”
That discussion led to the launch of the White House Pollinator Health Task Force, whose recommendations are being unveiled Tuesday.
CropLife America chief executive Jay Vroom, whose group represents pesticide manufacturers and participated in the task force, said that while his members might disagree with the EPA at times, they’ve “continued to be science-based and balanced” at the agency.
Not at all surprisingly, given the fact that we have 8 years of increasing and highly obvious evidence of neonicotinoid inflicted damage, the Obama task force came out with recommendations to study pesticides for a few more years and then devote a couple of nickels and a lot of lip service to increasing ‘habitat.’
I know that the task force came up with diddly squat because the main pesticide promoting trade association representing the manufacturers of pesticides and other agricultural chemicals, the ill-named CropLife America, loved the resulting recommendations.
That’s all I need to know that this task force was a joke, came up with nothing useful, and ended up protecting narrow economic interests as opposed to protecting broad life supportive aims.
The very idea that it’s habitat that’s at fault here, rather than the chemicals is just another insult to everyone of reasonable intelligence.
The American Way
I find it increasingly difficult to believe in the things the country in which I live stands for.
In Germany, where the various interests are more carefully balanced, and where people and beekeepers actually have some say, things are very different.
From 2008:
Germany bans chemicals linked to honeybee devastation
Germany has banned a family of pesticides that are blamed for the deaths of millions of honeybees. The German Federal Office of Consumer Protection and Food Safety (BVL) has suspended the registration for eight pesticide seed treatment products used in rapeseed oil and sweetcorn.
The move follows reports from German beekeepers in the Baden-Württemberg region that two thirds of their bees died earlier this month following the application of a pesticide called clothianidin.
"It's a real bee emergency," said Manfred Hederer, president of the German Professional Beekeepers' Association. "50-60% of the bees have died on average and some beekeepers have lost all their hives."
Tests on dead bees showed that 99% of those examined had a build-up of clothianidin. The chemical, produced by Bayer CropScience, a subsidiary of the German chemical giant Bayer, is sold in Europe under the trade name Poncho.
Several things are fascinating here. First, the neonic clothianidin is actually manufactured by a German company, and it’s the same company that sells the stuff in the US. You’d think that, if anything, the German government would work harder to protect the economic interests of its own companies more than the US EPA. But you’d be wrong.
Second, this was way back in 2008. German beekeepers had one very bad incident with the chemical, the appropriate tests were run, the risk was deemed unacceptable and the pesticide was yanked from the market.
That’s how these things are supposed to work.
Yet in the US, it is now seven years after that and the EPA has only gotten around to nixing new uses for the compounds that are now widely used and destroying insects and birds across a huge swath of the country.
Even if it would cost somebody a whole lot of money, and maybe even make farming a touch less lazy and require more effort, I would personally favor banning every and any pesticide and herbicide and fungicide until all of the appropriate long-term toxicological studies had been carried out. They are not that difficult to run, they just cost money and take time.
No ‘grandfathered’ uses. No exceptions. Prove the stuff is safe or else it cannot be sold or used.
But that’s because I would choose life over money. And that’s apparently where I part ways with my country, at least as far as the US government is concerned.
Unintended consequences
The prediction here is easy enough to make. The law of unintended consequences is going to rear up and bite us. Again.
One cannot simply wipe out entire swaths of insect and bird populations without causing eventual and massive difficulties.
One day we’ll wake up and wonder why some pest has gotten totally and uncontrollably out of hand. And if we chase it down, we’ll discover some beautifully complex natural cycle that involved a host species, a predator, a plant and animal and a few other creatures that used to dance to a song that had been written and perfected over a hundred million years of evolution.
Break the dance, and you break the web of life.
Mark my words, ‘insects’ is going to become a very hot topic over the next few years. And my sincere hope is that we do not destroy too much and that we figure this out before it’s too late.
For now, all I can say is: Shame on you, EPA. Deep, and lasting shame on all of you.
Conclusion
All of this leads me here: We desperately need a new narrative.
The old one not only allows but encourages the neonic story, and a hundred others just like it, to take root and flourish.
We cannot begin to fight each battle — neonics and fracking waste water disposal and leaking Gulf of Mexico wells and money in politics – and hope for anything more than a slight delay of the arrival of our miserable end.
Instead we have to have a new narrative where it is emotionally impossible for an EPA staffer to approve neonics because they would be too horrified to do so. I could not use them, but that's because I have an internal narrative that values all life.
While I certainly think people should fight these battles, those skirmishes are for naught if another crew (that’s us) is not paving the way for that new narrative at the same time.
If we were to have a new Declaration of Independence, it might start with these words (from our group effort):
"We hold these truths to be self-evident, that all people are created equal and that all life is sacred. That all people are endowed by their Creator with certain unalienable Rights and Responsibilities. That among these Rights are Life, Liberty and the pursuit of Happiness, and among these Responsibilities are to live in Harmony with Nature, to be Stewards for the Natural World, and to leave a World Worth Inheriting to our Posterity."
I am sickened by the damage being done by the neonics and I am dismayed by the pathetic and weak response by the so-called regulators at the EPA.
In a healthy culture these people would be packed off to new jobs, and they would be shunned by thoughtful people until they had atoned for their ridiculous actions.
But that is not yet the world in which we live.
A more subtle point to be made here is that each of us needs to prepare for the fact that the people in authority, even when confronted with compelling and obvious data, will choose to put profits over life and favor doing nothing over something.
In short, stories like this one cement my view that we face a future that will be shaped more by disaster than design, and that we each need to prepare for that as best we can.
“Zero Hedge long ago gave up discussing corporate fundamentals due to our long-held tenet that currently the only relevant pieces of financial information are contained in the Fed’s H.4.1, H.3 statements… macro economic data now is essentially one big joke.”
“we have been saying since day one […] that when it comes to securities price formation in a centrally-planned regime, it is flow not stock that matters.”
Those were the rantings of a “tinfoil hat-wearing”, “conspiracy theory-heavy” website, which dared to speak up time and again against widely-accepted economic and financial dogma, which has been the foundation of the Fed’s flawed experiment now in its 8th year.
And they were right.
Here is what the global head of credit strategy at Citigroup just said this last Friday.
If there were any lingering doubt, this week’s gyrations demonstrate neatly that it is central bank liquidity, not fundamentals, driving markets. It is the flow, not the anticipated stock, of QE which counts.
… Central bank policy pronouncements are almost the exclusive driver of market movements at the moment, not fundamentals. Almost all the fixed income investors we meet bought into this idea some time ago – perhaps unsurprising, given the extent to which credit spreads have been diverging from corporate leverage, and seem likely to continue to do so even as leverage rises further (Figure 4). In equities, there are still a few holdouts – but the longer that downward revisions to earnings revisions are met with record highs in markets (Figure 5), the more widely accepted the idea becomes.
… In govies, it has been slightly harder to fathom what is going on – but what remains clear is that it doesn’t have much to do with fundamentals. No wonder the backup in US yields is now fading when it occurs against the most protracted period of negative economic surprises since 2011 (Figure 6). Each successive month’s disappointment on retail sales adds to the likelihood that consumers’ appetite for spending vs saving has fundamentally altered – not just that the benefits from the oil price drop are a little slow to feed through (Figure 7).
… with central bank liquidity the ultimate source of all market movements, investors [are] forced to shun fundamentals and instead hang on the central banks’ every word. At some point, of course, the risk is that the taps are turned off: recent speeches from Yellen, Draghi and others do demonstrate an increasing unease with market behaviour, and an increased emphasis on financial stability and the need for structural reforms. But with the underlying economy still weak, and vulnerable to a sharp sell-off in markets, we fear they will find that mangling, once started, is hard to stop. Particularly when they remain at least partly in denial as to the extent of it.
And since the market no longer exists, and soon, courtesy of double seasonally adjusted “data” economic reporting and analysis will be just as meaningless, soon the Fed, having destroyed trading as we know it not to mention the US middle class, will also succeed in ending financial reporting once and for all.
Having previously shown that money can buy happiness, it appears, as Bloomberg reports, that the cost of buying that happiness is soaring. With well-managed government-provided statistics on inflation, why would one look elsewhere for clues as to the declining standards of living across much of America… but look we did and with wages stagnant, the 2900% surge in prices to Disneyland since 1971 makes ‘the happeist place on earth’ a place only the wealthy can afford to visit.
Ridding the world of Monsanto via a state buy-out would be a boon to humanity.
Capitalism fails in two situations: monopoly and state-capital cronyism. Monopoly extinguishes competition and that effectively extinguishes capitalism.
When the elites of the state and private capital collude, i.e. crony capitalism, the few gain power and wealth at the expense of the many.
The state (broadly speaking, government) fails when it serves the few at the expense of the many, while claiming to serve the interests of the many. The state only fulfills its purpose when it serves the interests of the many at the expense of the few who control the majority of the political power and private wealth.
Monsanto is the epitome of monopoly and crony-state collusion. But Monsanto's grip is not only on the throat of the nation– through its monopoly on seeds that it enforces globally, its grip is strangling the entire world.
Monopolies on food, energy and water (what I term the FEW resources) are not like monopolies on discretionary goods and services. People have to pay whatever the monopoly charges, as substitutes are either unavailable, very expensive or under the control of the same cartel/quasi-monopoly.
Before Monsanto extended its grip as the state-enforced seed monopoly, state universities and extension services developed seed strains and provided the seeds for a nominal cost.Over time, this publicly owned and managed system of providing low-cost seeds has eroded under pressure from for-profit private firms such as Monsanto and the benign neglect of a government that has been captured by private interests and self-serving elites.
The rapid advance of gene sequencing is opening new doors for much quicker development of conventional plant breeding techniques that require no genetic modification (GMO).
If the American people wanted to bestow a gift to the world that would be valued by billions of people yet would cost the American citizenry a ridiculously modest sum, it would be to nationalize Monsanto and provide its seed products for free. To do this requires letting go of all the self-serving neoliberal fantasies that crony-capitalists propagandize to protect their monopolies: for example, only the profit motive drives innovation, so only private companies can supply the world with advanced seeds.
All this propaganda boils down to defending monopoly and cronyism as capitalism–The Big Lie of all monopolists and crony-capitalists. This was the reason given for privatizing publicly owned utilities that are then transformed into highly profitable monopolies–the precise opposite of capitalism's primary engine of innovation.
Monsanto is worth around $57 billion. Compare this to the Federal debt of $18 trillion, or the full lifecycle cost of the bloated F-35 fighter aircraft program, which weighs in at $1 trillion. We should also compare $60 billion with the $16.8 trillion that the Federal Reserve loaned the world's too big to jail banks.
Ridding the world of Monsanto via a state buy-out would be a boon to humanity, and doing so for a mere $57 billion would be a bargain–especially when you consider the $3 trillion the state has squandered on endless wars of choice and the trillions of dollars the Federal Reserve and the government have squandered propping up the self-serving, parasitic cartel of too big to jail banks.
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