• Bitcoin Soars To 14-Month Highs As Major Exchange Eases Access For Chinese

  Bitcoin, at $444, is now up over 100% since we suggested, in early September, it would become the conduit for Chinese capital outflows following China's crackdown on capital controls. This afternoon's sudden BIS-induced plunge, taking the virtual currency down $50, has been entirely retraced and more as BTCC (China's leading Bitcoin Exchange) announced it will now accept direct deposits (making it significantly easier for Chinese to rotate their Yuan deposits into the virtual currency and out of the potential clutches of capital controlling communists).

   

  As BTCC details,

  Recent bitcoin price increases have reignited enthusiasm in buying bitcoin. BTCC is confident this trend will continue. As such, we are pleased to announce that we now accept direct deposits.

   

  Customers now need only log in, click on “Account,” then “Fund,” and then select the “Bank Deposit” option to fund their BTCC accounts through their bank accounts. All customers who have Chinese bank accounts will be able to make direct deposits through ATM transfers or online banking.

  And adds, even more crucially…

  BTCC will stop accepting customer deposits through agents on November 15.

  Which appeared to provide further dip-buying impetus to the recovery off the day's earlier mysterious plunge…

  

   

  Lifting BTC to $444 highs, more than double the September levels when we suggested it. Notice the rally is on rapidly increasingly volumes also (as word spreads and ease of access is enabled)…

  

   

  As we noted previously, this is the validation that, just as predicted here two months ago, bitcoin has become the go-to asset class for millions of Chinese savers seeking to quietly and under the radar transfer funds from point A to point B, whatever that may be, in the process circumventing the recently expanded governmental capital controls:

  While he didn’t provide any concrete numbers, he did comment last week on what was driving the adoption. “Some Chinese traders are expressing a view on the CNY exchange rate after the last devaluation and you have interest by mainland speculators to move to other assets after the stock market fallout,” he explained in an interview with Bitcoin Magazine.

  Which again brings us back to our conclusion from two months ago:

  … if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

  As of this moment, the total value of bitcoin is up from the $3 billion two months ago to a little over $5 billion. That means the ratio of Chinese deposits (at around $22 trillion) to bitcoin, is down to a far more "conservative" 4,400x.

  And now, again, imagine what could happen if these same Chinese depositors realize they have been lied about the non-performing loans "backing" their deposits and that instead of the official 1.5% bad debt ratio, the real number is really far greater, somewhere in the 20% ballpark as we will show shortly, suggesting major deposit impairments are no longer the stuff of Cypriot nightmares but just the thing hundreds of millions of Chinese depositors have to look forward to, and that they have just two possible choices to avoid said impairment: reallocating their savings into bitcoin or, of course, gold.

  *  *  *

  How will the Chinese regulators and government react to this? Especially as the volumes are start to become relevant.

  

  

  

  

  

• The Real Issues You Won't Hear From The 2016 Presidential Candidates This Election Year

  Submitted by John Whitehead via The Rutherford Institute,

  “Apparently, a democracy is a place where numerous elections are held at great cost without issues and with interchangeable candidates.”—Gore Vidal

  The countdown has begun.

  We now have less than one year until the 2016 presidential election, and you can expect to be treated to an earful of carefully crafted, expensive sound bites and political spin about climate change, education, immigration, taxes and war. 

  Despite the dire state of our nation, however, you can rest assured that none of the problems that continue to undermine our freedoms will be addressed in any credible, helpful way by any of the so-called viable presidential candidates and certainly not if doing so might jeopardize their standing with the unions, corporations or the moneyed elite bankrolling their campaigns.

  The following are just a few of the issues that should be front and center in every presidential debate. That they are not is a reflection of our willingness as citizens to have our political elections reduced to little more than popularity contests that are, in the words of Shakespeare, “full of sound and fury, signifying nothing.”

  The national debt. Why aren’t politicians talking about the whopping $18.1 trillion and rising that our government owes to foreign countries, private corporations and its retirement programs? Not only is the U.S. the largest debtor nation in the world, but according to Forbes, “the amount of interest on the national debt is estimated to be accumulating at a rate of over one million dollars per minute.” Shouldn’t the government being on the verge of bankruptcy be an issue worth talking about?

  Black budget spending. It costs the American taxpayer $52.6 billion every year to be spied on by the sixteen or so intelligence agencies tasked with surveillance, data collection, counterintelligence and covert activities. The agencies operating with black budget (top secret) funds include the CIA, NSA and Justice Department. Clearly, our right to privacy seems to amount to nothing in the eyes of the government and those aspiring to office.

  Government contractors. Despite all the talk about big and small government, what we have been saddled with is a government that is outsourcing much of its work to high-paid contractors at great expense to the taxpayer and with no competition, little transparency and dubious savings. According to the Washington Post, “By some estimates, there are twice as many people doing government work under contract than there are government workers.” These open-ended contracts, worth hundreds of millions of dollars, “now account for anywhere between one quarter and one half of all federal service contracting.” Moreover, any attempt to reform the system is “bitterly opposed by federal employee unions, who take it as their mission to prevent good employees from being rewarded and bad employees from being fired.”

  Cost of war. Then there’s the detrimental impact the government’s endless wars (fueled by the profit-driven military industrial complex) is having on our communities, our budget and our police forces. In fact, the U.S. Department of Defense is the world’s largest employer, with more than 3.2 million employees. Since 9/11, we’ve spent more than $1.6 trillion to wage wars in Afghanistan and Iraq. When you add in our military efforts in Pakistan, as well as the lifetime price of health care for disabled veterans and interest on the national debt, that cost rises to $4.4 trillion.

  Education. Despite the fact that the U.S. spends more on education than any other developed nation, our students continue to lag significantly behind other advanced industrial nations. Incredibly, teenagers in the U.S. ranked 36th in the world in math, reading and science.

  Civics knowledge. Americans know little to nothing about their rights or how the government is supposed to operate. This includes educators and politicians. For example, 27 percent of elected officials cannot name even one right or freedom guaranteed by the First Amendment, while 54 percent do not know the Constitution gives Congress the power to declare war. As one law professor notes:

  Only 36 percent of Americans can name the three branches of government. Fewer than half of 12th grade students can describe the meaning of federalism. Only 35% of teenagers can identify “We the People” as the first three words of the Constitution. Fifty-eight percent of Americans can’t identify a single department in the United States Cabinet. Only 5% of high school seniors can identify checks on presidential power, only 43% could name the two major political parties, only 11% knew the length of a Senator’s term, and only 23% could name the first President of the United States.

  A citizenry that does not know its rights will certainly not rebel while they are being systematically indoctrinated into compliance.

  Asset forfeiture. Under the guise of fighting the war on drugs, government agents (usually the police) have been given broad leeway to seize billions of dollars’ worth of private property (money, cars, TVs, etc.) they “suspect” may be connected to criminal activity. Then—and here’s the kicker—whether or not any crime is actually proven to have taken place, the government keeps the citizen’s property, often divvying it up with the local police who did the initial seizure. The police are actually being trained in seminars on how to seize the “goodies” that are on police departments’ wish lists. According to the New York Times, seized monies have been used by police to “pay for sports tickets, office parties, a home security system and a $90,000 sports car.”

  Surveillance. Not only is the government spying on Americans’ phone calls and emails, but police are also being equipped with technology such as Stingray devices that can track your cell phone, as well as record the content of your calls and the phone numbers dialed. That doesn’t even touch on what the government’s various aerial surveillance devices are tracking, or the dangers posed to the privacy and safety of those on the ground. Just recently, a 243-foot, multi-billion dollar military surveillance blimp drifted off, leaving a path of wreckage and power outages in its wake, before finally crash landing.

  Police misconduct. Americans have no protection against police abuse. It is no longer unusual to hear about incidents in which police shoot unarmed individuals first and ask questions later. What is increasingly common, however, is the news that the officers involved in these incidents get off with little more than a slap on the hands. Moreover, while increasing attention has been paid to excessive police force, sexual misconduct by police has been largely overlooked. A year-long investigation by the Associated Press “uncovered about 1,000 officers who lost their badges in a six-year period” for sexual misconduct. “Victims included unsuspecting motorists, schoolchildren ordered to raise their shirts in a supposed search for drugs, police interns taken advantage of, women with legal troubles who succumbed to performing sex acts for promised help, and prison inmates forced to have sex with guards.” Yet the numbers are largely underreported, covered up by police departments that “stay quiet about improprieties to limit liability, allowing bad officers to quietly resign, keep their certification and sometimes jump to other jobs.”

  Prison population. With more than 2 million Americans in prison, and close to 7 million adults in correctional care, the United States has the largest prison population in the world. Many of the nation’s privately run prisons—a $5 billion industry—require the state to keep the prisons at least 90 percent full at all times, “regardless of whether crime was rising or falling.” As Mother Jones reports, “private prison companies have supported and helped write ‘three-strike’ and ‘truth-in-sentencing’ laws that drive up prison populations. Their livelihoods depend on towns, cities, and states sending more people to prison and keeping them there.” Private prisons are also doling out harsher punishments for infractions by inmates in order to keep them locked up longer in order to “boost profits” at taxpayer expense. All the while, the prisoners are being forced to provide cheap labor for private corporations.

  SWAT team raids. Over 80,000 SWAT team raids are conducted on American homes and businesses each year. Police agencies, already empowered to crash through your door if they suspect you’re up to no good, now have radars that allow them to “see” through the walls of your home.

  Oligarchy. We are no longer a representative republic. The U.S. has become a corporate oligarchy. As a Princeton University survey indicates, our elected officials, especially those in the nation’s capital, represent the interests of the rich and powerful rather than the average citizen.

  Young people. Nearly one out of every three American children live in poverty, ranking America among the worst countries in the developed world. Patrolled by police, our schools have become little more than quasi-prisons in which kids as young as age 4 are being handcuffed for “acting up,” subjected to body searches and lockdowns, and suspended for childish behavior.

  Private property. Private property means little at a time when SWAT teams and other government agents can invade your home, break down your doors, kill your dog, wound or kill you, damage your furnishings and terrorize your family. Likewise, if government officials can fine and arrest you for growing vegetables in your front yard, praying with friends in your living room, installing solar panels on your roof, and raising chickens in your backyard, you’re no longer the owner of your property.

  Strip searches. Court rulings undermining the Fourth Amendment and justifying invasive strip searches have left us powerless against police empowered to forcefully draw our blood, forcibly take our DNA, strip search us, and probe us intimately. Accounts are on the rise of individuals—men and women alike—being subjected to what is essentially government-sanctioned rape by police in the course of “routine” traffic stops.

  Fiscal corruption. If there is any absolute maxim by which the federal government seems to operate, it is that the American taxpayer always gets ripped off. This is true, whether you’re talking about taxpayers being forced to fund high-priced weaponry that will be used against us, endless wars that do little for our safety or our freedoms, or bloated government agencies such as the National Security Agency with its secret budgets, covert agendas and clandestine activities. Rubbing salt in the wound, even monetary awards in lawsuits against government officials who are found guilty of wrongdoing are paid by the taxpayer.

  Militarized police. Americans are powerless in the face of militarized police. In early America, government agents were not permitted to enter one’s home without permission or in a deceitful manner. And citizens could resist arrest when a police officer tried to restrain them without proper justification or a warrant. Daring to dispute a warrant with a police official today who is armed with high-tech military weapons would be nothing short of suicidal. Moreover, as police forces across the country continue to be transformed into extensions of the military, Americans are finding their once-peaceful communities transformed into military outposts, complete with tanks, weaponry, and other equipment designed for the battlefield.

  These are not problems that can be glibly dismissed with a few well-chosen words, as most politicians are inclined to do. Nor will the 2016 elections do much to alter our present course towards a police state. Indeed, it is doubtful whether the popularity contest for the new occupant of the White House will significantly alter the day-to-day life of the average American greatly at all. Those life-changing decisions are made elsewhere, by nameless, unelected government officials who have turned bureaucracy into a full-time and profitable business.

  As I point out in my book Battlefield America: The War on the American People, these problems will continue to plague our nation unless and until Americans wake up to the fact that we’re the only ones who can change things for the better and then do something about it.

  This was a recurring theme for Martin Luther King Jr., who urged Americans to engage in militant nonviolent resistance in response to government corruption. In a speech delivered just a few months before his assassination, King called on Americans to march on Washington in order to take a stand against the growing problems facing the nation—problems that were being ignored by those in office because they were unpopular, not profitable or risky. “I don’t determine what is right and wrong by looking at the budget of the Southern Christian Leadership Conference. Nor do I determine what is right and wrong by taking a Gallup poll of the majority opinion,” remarked King. “Ultimately a genuine leader is not a searcher of consensus but a molder of consensus.”

  Guided by Gallup polls, influenced by corporate lobbyists, and molded by party politics, the 2016 presidential candidates are playing for high stakes, but they are not looking out for the best interests of “we the people.” As King reminds us:

  “Cowardice asks the question, ‘Is it safe?’ Expediency asks the question, ‘Is it politic?’ And Vanity comes along and asks the question, ‘Is it popular?’ But Conscience asks the question ‘Is it right?’ And there comes a time when one must take a position that is neither safe, nor politic, nor popular, but he must do it because Conscience tells him it is right.”

  

  

  

  

  

• US Ally Turkey Throws Journalists In Jail For "Attempting To Overthrow The Government"

  Let’s just be clear: while it’s not precisely clear what combination of voter fraud, intimidation, and coercion ultimately led to Sunday’s sweeping ballot box victory for AKP in Turkey, there’s little question that the election results reflect the will of President Recep Tayyip Erdogan more than they reflect the will of the people.

  Indeed, quite a few observers have voiced concerns over the election outcome including the US. 

  “We have both publicly and privately raised our concerns about freedom of the press, freedom of speech and freedom of assembly in Turkey,” White House Press Secretary Josh Earnest said on Monday. 

  For those unfamiliar with the backstory, Erdogan effectively started a civil war with the PKK in order to convince the public that only a dictator is capable of keeping the peace. Meanwhile, the PKK claims that Ankara has been using ISIS affiliates to stage what amount to false flag suicide bombings on Turkish citizens in order to frighten voters into relinquishing their support for the pro-Kurdish HDP. 

  The turmoil led directly to a plunging lira and crackdowns on anyone that even looked like they might be against the government. For example, here are some images from attacks on HDP offices in the lead up to the elections:

  

  

  

  

  

  Indeed, just a week prior to the events depicted above, Ankara arrested three Vice News journalists (two British citizens and an Iraqi) for allegedly “engaging in terror activity” on behalf of ISIS. And as we said at the time, the media crackdown didn’t stop there. Turkish police also raided Koza-Ipek Media which, as AFP noted, owns the “Turkish dailies Bugun and Millet, the television channels stations Bugun TV and Kanalturk and the website BGNNews.com and is close to Erdogan’s political rival, the US-based Muslim cleric Fethullah Gulen.”

  Now, in the wake of “elections” which virtually no impartial observer considers legitimate, Turkey has arrested the editors of a news magazine and charged them with attempting to orchestrate a “coup.” Here’s NBC:

  Editors of a left-leaning Turkish news magazine were charged on Tuesday with attempting to topple the government over a cover suggesting Sunday’s election strengthening President Tayyip Erdogan could lead to a “civil war,” the journal said.

  
  

  Nokta’s latest edition carried the cover headline “the beginning of civil war” after the ruling AK Party founded by Erdogan regained the parliamentary majority it had lost in a June poll.

   

  “Senior editors Cevheri Guven and Murat Capan have been sent to jail pending trial over charges of ‘staging a coup attempt’ and ‘attempting to overthrow the government,'” Nokta said on its Twitter account.

   

  Journalists accused of involvement in coup conspiracies against Erdogan have in the past been held in custody for months or even years awaiting trial.

  
  

  Turkey, which aspires to membership of the European Union, ranks towards the bottom of global press freedom rankings. Erdogan’s opponents fear Sunday’s election result, which could pave the way for him to assume greater presidential powers, could encourage increasingly authoritarian rule.

  Obviously, this is a complete farce. It’s Ankara that started the civil war and it began months ago. This is just another example of Erdogan persecuting dissent and frankly, it’s appalling that we’re talking about a NATO member and a country that’s considered one of the most important emerging markets in the world. 

  This is a backward state run by what amounts to a dictator and he’s managed to secure Washington’s tacit support for a brutal crackdown on his political foes by agreeing to let the US fly missions from Incirlik. This is, and always has been, an unholy alliance, and for those who contend that no matter what the political situation, we must still pay attention to Turkey due to its status as an up and coming economy, we encourage you to have a look at a six month chart of the lira prior to the post-election rally. That’s what happens when you’re a third world autocracy masquerading as a partially developed economy.  

  

  

  

  

  

  

• The Market Is Not The Economy

  After Q3’s magic…

  

   

  Q4, we have a problem…

  

   

  Just keep hoping.

   

  h/t @Not_Jim_Cramer

  

  

  

  

  

• Dogfights Next? US Sends F-15 Jets To "Counter" Russian Air Force Over Syria

  When the Obama administration announced it would soon put 50 (er… 100 we guess, since soldiers generally have two feet) boots on the ground in Syria, the US media immediately asked the wrong set of questions. 

  As we noted in “US Sends Troops To Syria: Here Are The Questions The Media Should Be Asking,” the Josh Earnest presser was nothing short of a joke, as the media peppered the Press Secretary with question after question about whether the President had gone back on his promise (made to the American people at least 16 times) to not put US ground troops into combat in Syria. 

  Of course that completely misses the point. And here’s why: 

  There have been boots on the ground in Syria and Iraq for years and indeed, the public seems to have forgotten that just five months ago, US commandos executed a raid in Syria that purportedly killed Islamic State’s “gas minister” (and yes, that’s just as absurd as it sounds).

   

  Additionally, Washington has made no secret of the now defunct “train and equip” program for Syrian rebels – clearly, the American public hadn’t thought very hard about who was doing the on-the-ground “training.”

   

  Finally, there’s no telling how many CIA operatives and black ops have been running around in Syria assisisting Saudi Arabia and Qatar’s proxy armies from the very beginning. 

  Given that, there are two questions everyone should be asking: 1) how does Washington plan to explain to Ankara that the Pentagon is set to embed US ground troops with the YPG in Syria and fly sorties from Incirlik in support of those ground troops when Turkey is literally flying from the exact same airbase on the way to bombing the exact same YPG forces with whom the US is set to embed?, and 2) how does the US intend to make sure that Russia doesn’t end up “accidentally” bombing US positions?

  Well, one way to answer both of those questions is to send US dogfighters to Syria. The Daily Beast reports: 

  The U.S. Air Force is deploying to Turkey up to a dozen jet fighters specializing in air-to-air combat—apparently to help protect other U.S. and allied jets from Russia’s own warplanes flying over Syria.

   

  Officially, the deployment of F-15C Eagle twin-engine fighters to Incirlik, Turkey—which the Pentagon announced late last week—is meant to “ensure the safety” of America’s NATO allies, Laura Seal, a Defense Department spokesperson, told The Daily Beast.

   

  That could mean that the single-seat F-15s and the eight air-to-air missiles they routinely carry will help the Turkish air force patrol Turkey’s border with Syria, intercepting Syrian planes and helicopters that periodically stray into Turkish territory.

   

  But more likely, the F-15s will be escorting attack planes and bombers as they strike ISIS militants in close proximity to Syrian regime forces and the Russian warplanes that, since early October, have bombed ISIS and U.S.-backed rebels fighting the Syrian troops.

  Well, kind of. We could always be wrong, but it seems unlikely that The Pentagon is going to send F-15s into battle against Russian fighter pilots in western Syria. What’s pretty clearly going on here is that Washington is sending just enough air support to ensure that once the Russians and Iranians secure Syria’s major cities in the west, the US has the capability to shoot down Russian jets should they threaten whatever the hell Washington’s spec ops are trying to accomplish near Raqqa in conjunction with the YPG. Anyway, back to The Daily Beast:

  Seal declined to discuss the deployment in detail, but hinted at its true purpose. “I didn’t say it wasn’t about Russia,” she said.

   

  Russia’s air wing in western Syria is notable for including several Su-30 fighters that are primarily air-to-air fighters. The Su-30s’ arrival in Syria raised eyebrows, as Moscow insists its forces are only fighting ISIS, but ISIS has no aircraft of its own for the Su-30s to engage.

   

  The F-15s the U.S. Air Force is sending to Turkey will be the first American warplanes in the region that are strictly aerial fighters. The other fighters, attack planes and bombers the Pentagon has deployed—including F-22s, F-16s, A-10s and B-1s—carry bombs and air-to-ground missiles and have focused on striking militants on the ground.

   

  In stark contrast, the F-15s only carry air-to-air weaponry, and their pilots train exclusively for shooting down enemy warplanes. It’s worth noting that F-15Cs have never deployed to Afghanistan, nor did they participate in the U.S.-led occupation of Iraq. The war in Syria is different.

  And while that is indeed interesting, the following is nonsense: 

  Incirlik and its growing contingent of warplanes is the key to a new northern strategy in the U.S. campaign against ISIS, an unnamed Pentagon official said on Oct. 30. “One of the principal things we will do to put pressure in the border area and into Syria is, quote, ‘thicken’ air operations in northern Syria.”

   

  “That means we want a greater density of planes striking. We need a greater density of intelligence assets developing targets. You—the White House announced A-10s, which are already on the ground at Incirlik, and F-15s forthcoming on—in Incirlik, to help in the counter-ISIL campaign,” the official added, using another acronym for ISIS.

  As we’ve said on too many occasions to count, if Washington and Ankara (both of which are flying from Incirlik) were that concerned about ISIS in the “border area”, then they wouldn’t have explicitly forbidden the YPG from advancing on ISIS west of the Euphrates. 

  

  In the final analysis, Washington has absolutely no idea what’s going to happen now that i) the PKK has suffered a bitter electoral defeat at the hands of Erdogan in Turkey, and ii) it’s just a matter of time before Hezbollah advances on Raqqa supported by Russian warplanes and so, the Pentagon is sending in the dogfighters to make sure that in case something goes horribly wrong, the US can shoot down whoever happens to be in the sky before the “50” spec ops get bombed. 

  

  

  

  

  

• America's Endangered Species: Uneducated, Middle-Aged, White

  Submitted by Eric Zuesse, author of They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of  CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.young ones, and not of old ones, and

  A Scientific Study Shows that in U.S., Uneducated Whites Are Now Dying Younger

  An article published in the latest issue of the Proceedings of the National Academy of Sciences (PNAS), documents that, ever since 1998 in the U.S, Whites who are of non-Hispanic origin have been dying younger and younger, and that this is especially true for those Whites who are low-educated (non-BA’ed) and middle-aged (45- to 54-year-old). But it’s true also for the other age-categories of non-Hispanic Whites.

  This study, by Anne Case and Angus Deaton, “Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century,” published now in PNAS, finds that, for the low-educated, group, “The change in all-cause mortality for white non-Hispanics 45–54 is largely accounted for by an increasing death rate from external causes, mostly increases in drug and alcohol poisonings and in suicide.” It “was driven primarily by increasing death rates for those with a high school degree or less. … Those with college education less than a BA saw little change in all-cause mortality over this period; those with a BA or more education saw death rates fall.”

  

  Whereas in 1998, only 2 persons per 100,000 in the White non-BA’ed group died from “poisonings” (drug and alcohol), that figure has steadily soared since then and is now above 30, a 15-fold increase.

  The suicide-rate rose from 16 to 25; and the rate from chronic liver disease rose from 16 to 21.

  Poisonings are thus now the leading cause of deaths within the low-educated White middle-aged group; lung cancer is #2; suicide is #3; chronic liver disease is #4; and diabetes is #5. The only one among the five major causes that has gone down among Whites since 1998 is lung cancer (perhaps a result of reduced smoking). However, the increase from diabetes has been only very slight, from 11 to 12.

  Table 2 in the article shows that for all White non-Hispanics aged 45-54, there were enormous increases (doubling in some, going to tenfold in others) in such categories as “days physical health was not good”; “days mental health was not good”; and difficulty with or related to “walking,” climbing stairs,” “standing,” “sitting,” “activities limited by physical or mental health,” “unable to work,” and “heavy drinking.”

  

  The article doesn’t speculate as to the causes of this mortality-rise among Whites.

  The question here is: what was done in or around 1998 that might have, to a greater degree than with other groups, adversely affected Whites, and especially low-educated ones, so as to have markedly and very disproportionately increased the stresses that can lead to deaths from poisonings (especially “drug and alcohol poisonings”), and from suicides?

  Blacks and Hispanics have always been highly stressed in the U.S.; so, their decline in death-rates was actually continuing during this time; we’re looking here only for a differential indicator, one which can explain the rapid plunge in the welfare of Whites, and especially of middle-aged ones, and especially of low-educated middle-aged ones — not of young or old ones. However, actually, the entire category of American (non-Hispanic) Whites has been dying younger than before, and this fact also needs to be part of the same explanation.

  American Whites, in their middle years, used to expect to outperform their parents; they used to expect to become better-educated and higher-income than their parents. Perhaps they no longer do.

  One cannot say that the white majority has suffered more than minorities have suffered during the economic stagnation that this nation has experienced since, actually, around 1980. For example, here, from the Economic Policy Institute, is a table showing America’s economic stagnation across groups:

  http://www.epi.org/publication/a-decade-of-flat-wages-the-key-barrier-to-shared-prosperity-and-a-rising-middle-class/
   

  Furthermore, here is the Conclusion from the 2010 study, “Foreclosures by Race and Ethnicity,” that Responsible Lending did, of the extent to which the George W. Bush economic crash and home-foreclosures, affected Whites, Blacks, and Latinos:

  “We have estimated that two million families have lost their primary homes and that AfricanAmerican and Latino borrowers have borne and will continue to disproportionately bear the burden of foreclosures.”

  Blacks and Hispanics were hit harder by the 2005-2008 foreclosure-crisis than Whites were. And yet, ever since 1998, for some reason, Whites (especially low-educated ones) have lost hope at a far greater percentage than have Hispanics or Blacks.

  Do Hispanics and Blacks have stronger psychological, and perhaps also physical, constitutions than Blacks and Hispanics do? They’ve always had lower suicide-rates than Whites. So: maybe they do.

  At this stage, one can only speculate as to the reasons behind the Case-Deaton findings.

  Source

  

  

  

  

  

• China Services PMI Rises (And Falls); Stocks Jump Led By Brokers, Exchanges On Shenzhen Trading Link Resumption

  Following Caixin China Manufacturing's 'surprise' jump higher (in the face of the official PMI flat), Caixin Services PMI just beat expectations and bounced considerably to a 'healthy expanding' 52.0 (despite official Services PMI plunge), bringing the Composite PMI to 49.9 – thus proving that billions of dollars of liquidity injections, market interventions, debt transfers to SOEs, arrests, shootings, and general thuggery has fixed China. For now stocks are rallying on this news but offshore Yuan is continuing to leak back to Friday's lows. The biggest gainers are the Chinese brokerages and exchanges (HKEx is up 8%) after PBOC Governor Zhou said a trading link with Shenzhen will start this year.

   

  Is China Fixed?

  

   

  Who knows?

  

  

   

  Chinese stocks are recovering on the 'good' news…

  

   

  Led by brokerages and exchanges…Hong Kong Exchanges & Clearing Ltd. shares surged the most in four months

  

   

  After the head of China’s central bank said a trading link with Shenzhen will start this year.

  HKEx rallied 5.4 percent, heading for the biggest gain since July 9 and extending this year’s advance to 23 percent. China needs to accelerate the opening of its financial markets, People’s Bank of China Governor Zhou Xiaochuan wrote in an article published on the PBOC’s website Tuesday.

   

  An expansion of Hong Kong’s exchange link to Shenzhen after a similar program with Shanghai started last November would come as a surprise to many investors who had anticipated a delay. Ten of the 13 respondents in a Bloomberg survey in September predicted the Shenzhen connect would start next year as authorities focus their efforts on stabilizing the mainland share prices in the wake of a $5 trillion selloff

  ut it seems the Yuan continues to weaken…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Hugh Hendry Says "Don't Panic"; Here Is Paul Singer Explaining Why You May Want To

  Earlier today, we presented the latest outlook by reformed bull Hugh Hendry, who had one message for his readers :  “it is ironic that we are perhaps best known for advising “that you panic”. However, if you are anxious at the wrong time it can prove very painful. Today, we would advise that you don’t panic!” He said a bunch of other things too (you can read his full letter here).

  So lest we be accused of being overly biased to the “rose-colored glasses” side, here is the counterpoint straight from Elliott management’s founder and prominent activist, Paul Singer who, contrary to Hendry, thinks panicking may not be a bad idea after all.

  The Calm Before The Who Knows What

  Businesspeople in today’s world are either concerned, actively sweating or oblivious to the rumblings and dangers around them. We recommend that both investors and businesspeople be highly alert to the implications of populism, the increasing concentration of power into the hands of unaccountable elites and the dissipation of the rule-of-law protections of liberty.

  It is very odd and dangerous that governments, satisfied with policies which, by raising asset prices (stocks, bonds, real estate, high-end art), are seemingly designed to make the rich richer, nevertheless simultaneously excoriate inequality as the cause of slow growth and societal disquiet. It is also strange that policymakers are not concerned by the obvious failure of monetary extremism to achieve the predicted levels of growth, or by the risks that may exist either in the continuation of the monetary experiment or in its ultimate unwinding. Policymakers who are sticking with the failed policy mix have invented creative explanations for why growth has been so bad for such a long a period of time. The most prevalent (and tautological) of these explanations is “secular stagnation,” a theory that the developed world simply cannot grow faster due to ageing populations, growth-destructive technologies and competition from cheap labor around the world. We disagree with this theory, and assert that it can be examined for validity only after a full range of first-line “fiscal” policies (as we have defined them) has been put firmly and comprehensively in place. In contrast to the “secular stagnationistas,” we believe that there is a great deal of low-hanging fruit (that is, far higher rates of growth in incomes, jobs and national wealth) to be had from simple changes in leadership and policies.

  The question of the day is: What will be the policy response of the developed world toward the currently deteriorating (at least in EMs and China) conditions, and the policy response if the deterioration spreads to Europe and the U.S.? If we know anything about the policy decision-making landscape in developed countries, it is that policymakers are all on super-keen-alert for signs of deflation (which they basically equate with credit collapse — a false and misleading connection, but that is a topic for another day). They will not remain passive in the face of a renewed global recession and/or financial crisis. So what will they do next, and how will it affect global markets? We can be reasonably certain that policymakers will not leap into action on the fiscal measures that we have described as the front-line policies needed to meaningfully quicken economic growth. Try to imagine more flexible and business-friendly tax, regulatory and labor policies being enacted by current political leadership in the U.S., Europe and Japan. Sorry, our imaginations — never inert — just can’t get there.

  What policymakers will do, in all likelihood, is hope and pray, and when that fails, they will likely double down on monetary extremism. This landscape is essentially baked, unless you think that sometime in the near future the global economy will turn higher, either on its own or in anticipation of such policy measures in the future. To many policymakers today, jawboning seems like a magic button, since  markets often create the desired result in anticipation of possible future actions. Consequently, governments may be able to get a particular outcome without requiring the central bankers to actually take any action.

  But the real risk (not necessarily because it is the highest probability but because its consequences would be so damaging) is that somewhere in the action/counteraction matrix of markets, economic adversity, and monetary actions and failures, market actors lose confidence. Such a loss could take a number of shapes and disrupt a multitude of different asset classes and markets. We are aware that the “informed” opinion of the world’s investors at present is that the U.S. dollar will always remain strong and never lose its special reserve currency position, thereby permitting the Fed to promulgate (at no cost) any monetary policy it deems necessary to save the U.S. economy. It is, however, not possible to predict the effects on “investor psychology” of the next set of creative and extreme monetary and fiscal policies (in this use of “fiscal,” we mean raw government spending) that surely will follow the next financial crisis or global downturn. At the outer edges of the most damaging of possibilities, bond markets could collapse in a flight from paper money; stock markets could collapse from a combination of much higher interest rates and expected new rounds of populist punitive policies; commodities markets could drop further (in recession) then soar (with a flight from paper money); inflation could plunge, and then skyrocket; more governments could evolve in a Venezuelan/Argentinian model (autocratic, populist, cronyism, corrupt, irrational); and/or gold prices could spike.

  Remember that we believe that doubling down on, or even expanding the scope and radicalism of, monetary policy is highly likely to be the policy response to a global downturn or financial crisis. And remember also episodes like the “taper tantrum,” where bond markets around the globe instantly tried to “discount” what they saw to be a future of continuously rising interest rates. Markets generally try to discount or front-run the future. Policymakers, currently smugly asserting that “inflationistas” are “wrong” because QE and ZIRP/NIRP have not caused generalized inflation after seven years, may be surprised indeed if the next round of (possibly expanded) monetary extremism causes markets to try to get “ahead” of monetary debasement. That could look like a self-reinforcing spiral of rejection of paper money.

  These thoughts and paths are suggestive. Nobody knows what such a landscape would look like in shape or detail, although the picture we want to paint is not a blueprint for disaster, but rather a suggestion of the kinds of things that could go awry given trends in modem markets, governments, policy and politics. What is clear, however, about the current environment, in which global growth is slowing, is that the policy options which governments have chosen to pursue are wrong. What will suffer as a result is growth and freedom.

  Other Observations About Current Policies And Their Implications 

  It appears that pumping up the wealth of the affluent is the principal goal of state policy throughout the developed world. It is not a collateral consequence, but the seriously pursued aim of policymakers who often spend their time railing against wealth and the wealthy. What is the policymakers’ desired result in this fetid mixture of policies and populism? If it is to restart their economies, it has failed. If it is to stir up resentment against the prosperous and enable the populists to get elected by giving benefits to those whose assets haven’t been levitated, or those who have no assets, then the policy mix is diabolical.

  Another implication of the current policy landscape is the dissipation of the habit and imperative of saving. A whole generation of young people has little concept of building a nest egg. It is not just government benefits that discourage this practice. It is also the absence of a reasonable rate of return. Many older people who thought saving money for their retirement was a good idea are now sorely disappointed (and poor) because they can’t get a fair rate of interest on their savings. Pension funds can’t meet their liabilities with zero or negative short-term interest rates and I% or 2% rates on 30-year bonds. The “bailout culture” often coincides with sustained weak growth because, among other consequences, successful companies have to compete with companies who are alive only because of cheap credit. Overcapacity and inefficient production are engendered by such policies, causing price and profit declines. Failure is an essential element of capitalism, and if failure is politically denied, the most effective, efficient and innovative solutions cannot “win” over the “living dead” who clutter markets and consumer baskets. Given the obviously deflationary effects of ZIRP and bailouts on growth, we can’t imagine why American and European policymakers have effectively looked at Japanese history since 1989 and said, “We just love what they have done for 25 years of no growth! Let’s do the same.”

  QE, ZIRP and NIRP not only distort the prices of financial assets, but also effectively bully investors into making decisions that they didn’t want to make, raising their risk levels far beyond what would be considered “normal” for such instruments.

  * * *

  And also making respectable, rational people capitulate and BTFD, unable to look at themselves in the mirror again…

  

  

  

  

  

• A Furious Trump Goes After Janet Yellen: "She Is Not Raising Rates Because Obama Told Her Not To"

  Having gone after the entire GOP primary playing field, earlier today during a press conference held in his very own Trump Tower, Donald Trump decided to target his ire at a more worth adversary:US monetary policy in general, and Janet Yellen in particular.

  This is what he said:

  “The question is should the Fed raise rates? They are not raising them because Obama has asked them not to raise them. In my opinion, he wants to get out of office, because we’re in a bubble and when those rates are raised, a lot of bad things are going to happen. In my opinion Janet Yellen is highly political and she’s not raising rates for a very specific reason: because Obama told her not to because he wants to be out playing golf in a year from now and he wants to be doing other things and he doesn’t want to see a big bubble burst during his administration.

  The clip:

  Naturally, the White House promptly denied the allegations: “Of course not,” White House spokesman Josh Earnest said when asked about the remarks by Trump. “This administration goes to great lengths to ensure that the Federal Reserve” can make monetary policies that are in the best interests of the country and the economy, Earnest said.

  This was to be expected.

  Then again, considering today’s rally which at least on the surface appears to be on a shift in sentiment (even if it is merely a continuation of the relentless short squeeze seen for the past month), now that a rate hike is again perceived bullish (which clearly does not explain why stocks soared on bearish economic data in October and hopes of rate hike delays) because “what would the Fed know if it is hiking that the market does not”, Yellen just may surprise Trump and Obama with a rate hike in just over one month.

  Which leads to the question: is Yellen as political as Trump claims, and if so, will Obama risk a market drop just in time for a presidential election that makes his golf game far less pleasant a year from now?

  

  

  

  

  

• 18 Bullets Showing That A Global Recession Is Already Here

  Submitted by Michael Snyder via The End of The American Dream,

  The stock market has been soaring, but all of the hard economic numbers are telling us that a major global recession is here.  This is so reminiscent of what happened back in 2008.  Back then, all of the fundamentals were screaming “recession” by the middle of that year, but the equity markets didn’t respond until later.  It appears that a similar pattern is playing out right now. 

  The trade numbers, the manufacturing numbers, the inventory numbers and even the GDP numbers are all saying that a very significant economic slowdown is happening, but stock traders haven’t gotten the memo yet.  In fact, stocks had an absolutely great month in October.  Of course just like in 2008, stocks will eventually catch up with reality.  It is just a matter of time.  The following are 18 numbers that scream that a crippling global recession has arrived…

  #1 According to the biggest bank in the western world, British banking giant HSBC, the world is already in a “dollar recession“.  Global GDP expressed in U.S. dollars is down 3.4 percent so far in 2015, and total global trade has fallen 8.4 percent.

   

  #2 In September, Chinese exports were down 3.7 percent compared to one year ago, and Chinese imports were down a whopping 20.4 percent compared to a year ago.

   

  #3 Demand for Chinese steel is down 8.9 percent compared to a year ago.

   

  #4 China’s rail freight volume is down 10.1 percent compared to last year.

   

  #5 In October, South Korean exports were down 15.8 percent from a year ago.

   

  #6 According to the Dutch government index, a year ago global trade in primary commodities was sitting at a reading of 150 but now it has fallen all the way down to 114.  What this means is that less commodities are being traded around the world, and that is a very clear sign that global economic activity is really slowing down.

   

  #7 U.S. exports are down 11 percent for the year so far.  The only other times they have fallen this dramatically since the turn of the century were during the last two recessions.

   

  #8 Since March, the amount of stuff being shipped by truck, rail and air inside the United States has been falling every single month on a year over year basis.  If less stuff is being moved around the country, does that mean that economic activity is growing or declining?  The answer, of course, is obvious.

   

  #9 The ISM Manufacturing Index, which is the most important measurement of U.S. manufacturing activity, has fallen for four months in a row.

   

  #10 The Dallas Fed’s Manufacturing Outlook has dropped for 10 months in a row.

   

  #11 Wholesale sales in the U.S. have fallen to the lowest level since the last recession.

   

  #12 The inventory to sales ratio has risen to the highest level since the last recession.  This means that there is a whole lot of unsold inventory that is just sitting around out there and not selling.

   

  #13 It looks like a new housing slump is emerging in the United States.  Sales of previously owned homes fell by 2.3 percent in September.

   

  #14 New home sales in the United States declined by a whopping 11.5 percent in September.

   

  #15 Wal-Mart is projecting that its earnings may fall by as much as 12 percent during the next fiscal year.

   

  #16 According to John Williams of shadowstats.com, if the government was actually using honest numbers the unemployment rate in the United States today would be 22.9 percent.

   

  #17 According to Challenger Gray, layoffs at major firms have risen to the highest level that we have witnessed since 2009.

   

  #18 The number of job openings in the United States declined by 5.3 percent during the month of August.  That was a very large plunge for just one month.

  None of the underlying issues that caused our problems back in 2008 and 2009 have been fixed.  Instead, we just became even bigger and bolder with our mistakes.  In the period between the last recession and today, we witnessed the greatest debt binge in the history of the planet.  Now a lot of that debt is starting to go bad, and the Bank for International Settlements says that their “dashboard of risk is flashing red”.  The following comes from a recent article in the Guardian entitled “Apocalypse now: has the next giant financial crash already begun?“…

  This summer, the Bank for International Settlements (BIS) pointed out that certain major economies were seeing a sharp rise in debt-to-GDP ratios, which were well outside historic norms. In China, the rest of Asia and Brazil, private-sector borrowing has risen so quickly that BIS’s dashboard of risk is flashing red. In two thirds of all cases, red warnings such as this are followed by a major banking crisis within three years.

  And that is exactly what we are heading for.  Whether it happens next week or several months from now, the truth is that we are steamrolling toward another great banking crisis, and it will be worldwide in scope.

  By the time that it is all said and done, I believe that the economic crisis that we are heading toward will be much worse than what we experienced back in 2008 and 2009.  The U.S. economy has never even gotten close to the level it was operating at prior to the last recession, and now the next crisis is upon us.

  But until stocks crash here in the United States, most people are going to ignore all of the numbers above and will just keep pretending that everything is going to be just fine.

  Just like in 2008, the irrational optimists are going to keep chanting their happy mantras for as long as they possibly can.

  

  

  

  

  

• Housing Crisis: Australians Resort To Renting Tents As Cost Of Living Skyrockets

  Last week we brought you “Million Dollar Shack,” a comedic yet sobering documentary that provides a first hand account of California’s housing bubble. 

  As we noted when we presented the clip, the short film embedded above has it all: absurd prices for rundown properties, soaring costs for rentals, even a tent in someone’s backyard that goes for $46 a night (you get an extension cord, one shower a day, and wi-fi). 

  Of course California isn’t the only place where the cost of living has gone through the roof.

  Indeed, between America’s transformation from a nation of homeowners to a nation of renters, capital fleeing China for international real estate, and the proliferation of ZIRP and NIRP, housing costs have skyrocketed from New York, to Oslo, to Hong Kong. As we pointed out last Thursday, UBS is now out warning that London risks a “substantial price correction should the fundamentals for estate investment deteriorate.” 

  

  All of this comes as DM central banks across the globe swear there’s no inflation and not only that, the same central banks cite a deflationary impulse on the way to cutting rates to zero or below which of course only serves to exacerbate the housing bubbles that are pricing the lower- and middle-classes out of the market. 

  The situation is so bad in London that one apartment seeker was recently shown the following “room” which she was told could be hers for “just” £500 a month.

  

  Well as it turns out, Silicon Valley and London aren’t the only places where tents and cots under the stairs are actually being marketed to renters. As Australian media reports, “tents outside” are now going for $90 a week. Here’s more:

  Renters in Melbourne are offering tents on a balcony instead of a normal bedroom — and people are desperate enough to move in.

   

  Those who want cheap rent in the city can find adverts on sites like Gumtree, promoting the low-cost housing solution.

   

  One tent is being rented out at Southbank for $90 a week.

   

  
  

   

  The seller, who already lives with two other people, had previously lived in the tent for six months.

   

  It is described as comfortable and has electricity and a mattress.

   

  The person who moves into the tent can share one of two toilets and can have access to the living room, kitchen and two new fridges.

  Flatmates.com.au chief executive Thomas Clement gently suggests that before you resort to living in a tent on someone’s porch, you consider living outside the city and dealing with the commute: 

  “More and more people want to live closer to the city centre and I believe that’s where some of the issues come in A lot of people are having affordability issues but the easy solution is move out of the city a little bit. I think people’s desire to live centrally is outweighing the logic of taking something affordable.”

  Maybe. Or maybe prices are just too damn high. That is, maybe it’s not the renters that are being illogical – maybe it’s a market that’s been distorted by a variety of factors including, but certainly not limited to, ZIRP. In any event, we took a quick spin around Gumtree.com and found another amusig listing which, despite a valiant effort on “Debbie’s” part to sell it in a way that isn’t demeaning, is for all intents and purposes being pitched to vagrants:

  

   

  hi,everyone i know how backpacker can be to cramped in shareing rooms with no private or to put a tent up at a caravan park , i have a caravan i have parked in my drive way that i am gonna let out for short stay people who are travelling through.

   

  caravan has all utilities as reverse air con, microwave,toaster, kettel , small gas cooker, linen, it has 2 single beds or the table folds down to a double bed , where you have your own space,inside house you tv with foxtel if you like to use and socialised in side the house , share bathroom, kitchen if you like to cook up a storm, pergola out back with bbq that you can use if you like,internet at an extra cost.

   

  your close to shops , beach, and transport, i have dogs that are friendly love people for attention.

   

  PRICE

  $25 a night

  $30 a night for 2 people

  $5 a day for internet per person in house

  $155 if you stay7days for one person or for 2 is $190

  there is a security bond but depends on how long you stay.

   

  please text me or call no emails please Debbie.

  Yes, “no e-mails”, which shouldn’t be a problem because if you’re considering renting out Debbie’s driveway “caravan,” chances are you aren’t toting around a MacBook (unless you’re a jobless recent college graduate, in which case you probably left school with $35,000 in debt and five Apple products). Here’s more from Thomas Celement (cited above): 

  “We don’t believe it’s a reasonable way for people to live.”

   

  “People think share accommodation is a student thing but it’s not. The majority of people who live in share housing are around 27 and in their first or second job.

   

  “Living in a tent doesn’t connect with someone with a professional job.”

  No argument there. 

  Of course at the end of the day, if living on someone’s porch in a tent or in someone’s driveway in a “caravan” isn’t your style, you can always just go home…

  

  *  *  *

  

  

  

  

  

• Why Most Investors Will Never Go Back To Stocks Again, In One Chart

  The simple answer: the risk/return is simply not worth it.

  Whether it is two recent yet “generational” crashes still fresh in most investors’ minds, or the countless micro flash crashes witnessed daily and countless market fragmentation events thanks to the ubiquitous penetration of HFT in every asset class which have led to partial or wholesale market closures and a risk to principal far beyond what is embedded in the “fundamentals”, not to mention the risk that faith in central planning simply runs out in any given moment, for many equities are simply, as SocGen puts it, “too scary.”

  

   

  In short, for most return of capital is now far more important than return on capital.

  We note this just in case Steve Liesman is confused “why”…

  

  Source

  

  

  

  

  

• Goldman Warns "VIX Seems Low", Significantly Underpricing Economic Uncertainty

  "The options market seems to either be anticipating an inflection higher in the economic data, no rate hike, or an extreme lack of catalysts between now and year-end," according to Goldman Sachs' Krag Gregory. With VIX trading with a 13 handle, Gregroy warns, it is notably under-priced relative a 19 handle more in line with economic and policy uncertainty. The potential for volatility to swing higher seems more likely.

  The VIX landed at 14.2 on November 2nd, back down to its average closing level during the low volatility years of 2013 and 2014.

  

   

  That seems low to us given recent weakness in the U.S. economic data and a potential rate hike in December. The options market seems to either be anticipating an inflection higher in the economic data, no rate hike, or an extreme lack of catalysts between now and year-end.

  Argument for higher volatility: Uncertainty surrounding a mediocre economy + FOMC reaction function; GDP of 1.5% and ISM @ 50 are more consistent with a 19 VIX

   Our VIX model uses economic inputs to estimate trend VIX levels over time. With the ISM, consumer spending and unemployment data that we have in hand, our models would suggest baseline VIX levels of 19, not 14 and change. Reverse engineering our model we estimate that a 14 VIX is more consistent with an ISM new orders level above 60 (ISM high 50’s) given no change in consumer spending or the unemployment rate.

  

   

  The U.S. options market may be expecting economic stabilization, or a lower likelihood of a December rate hike given an ISM at 50.1.

  Volatility: Less room for error with ISM @ 50 and GDP is 1.5% rather than 3%

  GDP is 1.5% and ISM at 50.1: In our 2015 Volatility Forecast (January 20, 2015), we showed that the FOMC has tended to hike rates when the economy is on solid footing. U.S. real GDP growth has been 3% or higher during the quarter of the initial hike and the ISM averaged 57.6 the month of the hike and a robust 57 one- to three-months after a hike over the last three rate cycles. While the VIX is already pricing in an ISM level in the high 50's and the FED has put a December hike back on the table, the economy is well below where we were at the beginning of past hikes. The advance number for real GDP was +1.5% in Q3 and the ISM stands at 50.1. That gives us a lot less cushion than in past cycles.

  Implications: Modest U.S. and global growth may imply that U.S. market volatility (much like the FOMC) will be a lot more data dependent.

  The economy and the FOMC reaction function will be the key into year-end. Our point is that the potential for volatility to swing higher seems more likely when we are (1) at low VIX levels, (2) the economy is mediocre, and (3) the market is navigating the ramifications of a potential December rate hike.

  Bottom line: a VIX back at 2013-2014 levels seems low if a December rate hike really is in play. In terms of timing, it may be natural for volatility to take a breather after the intense market swings experienced in August-September, an earnings season, and three highly scrutinized central bank meetings (FOMC, ECB, BOJ). We would take advantage of lower option prices to implement direction views.

  Source: Goldman Sachs

  

  

  

  

  

• Peter Schiff On QE's Creeping Communism: Washington Joins Tokyo On The Road To Leningrad

  Submitted by Peter Schiff via Euro Pacific Capital,

  Most economists and investors readily acknowledge that the current period of central bank activism, characterized by extended bouts of quantitative easing and zero percent interest rates, is a newly-blazed trail in economic history. And while these policies strike some as counterintuitive, open-ended, and unimaginably expensive, most express comfort that our extremely educated, data-dependent, central bankers have a pretty good idea as to where the trail is going and how to keep the wagons together during the journey.

   

  But as it turns out, there really isn't much need for guesswork. As the United States enters its eighth year of zero percent interest rates, we should all be looking at a conveniently available tour guide along the path of perpetual easing. Japan has been doing what we are doing now for at least 15 years longer. Unfortunately, no one seems to care, or be surprised, that they are just as incapable as we have been in finding a workable exit. When Virgil guided Dante through Hell, he at least knew how to get out. Japan doesn’t have a clue.

   

  Despite its much longer experience with monetary stimulus, Japan's economy remains listless and has continuously flirted with recession. In spite of this failure, Japanese leaders, especially Prime Minister Shinzo Abe (and his ally at the Bank of Japan (BoJ), Haruhiko Kuroda), have recently doubled down on all prior bets. This has meant that the Japanese stimulus is now taking on some ominous dimensions that have yet to be seen here in the U.S. In particular, the Bank of Japan is considering using its Quantitative Easing budget to buy large quantities of shares of publicly traded Japanese corporations.

   

  So for those who remain in doubt, Japan is telling us where this giant monetary experiment leads to: Debt, stagnation and nationalization of industry. This is not a destination that any of us, with the possible exception of Bernie Sanders, should be happy about.

   

  The gospel that unites central bankers around the world is that the cure for economic contraction is the creation of demand. Traditionally, they believed that this could be accomplished by simply lowering interest rates, which would then spur borrowing, spending and investment. But when that proved insufficient to pull Japan out of its recession in the early 1990s, the concept of Quantitative Easing (QE) was born. By actively entering the bond market through purchases of longer-dated securities, QE was able to lower interest rates across the entire duration spectrum, an outcome that conventional monetary policy could not do.

   

  But since that time, the QE in Japan has been virtually permanent. Unfortunately, Japan's economy has been unable to recover anything resembling its former economic health. The experiment has been going on so long that the BoJ already owns more than 30% of outstanding government debt securities. It has also increased its monthly QE expenditures to the point where it now exceeds the Japanese government's new issuance of debt. (Like most artificial stimulants, QE programs need to get continually larger in order to produce any desirable effects). This has left the BoJ in dire need of something else to buy. Inevitably, it cast its eyes on the Japanese stock market.

   

  In 2010 the BoJ began buying positions in Japanese equity Exchange Traded Funds (ETFs). These securities, which track the underlying performance of the broader Japanese stock market, are one step removed from ownership of companies themselves. After five years of the policy, the BoJ now owns more than half the entire nation's ETF market. But that hasn't stopped it from expanding the program. In 2014, it tripled its ETF purchases to $3 trillion yen per year ($25 billion), and  the program may be tripled again in the near term. In just another example of how QE is a boon to the financial services industry, Japanese investment firms are currently issuing new ETFs just to give the BoJ something to buy.

   

  However, these purchases have not proven to be particularly effective in doing much of anything, except possibly pushing up ETF share prices. But even that has been a mixed blessing. ETFs are supposed to be the cart that is pulled along by stocks (which function as horses). But trying to move the market by buying ETFs creates a whole other level of potential price distortions. It also tends to limit the impact to those holders of financial assets, rather than the broader economy. For this reason the BoJ is now contemplating the more direct action of buying shares in individual Japanese companies.

   

  Such purchases would allow the Japanese government to accumulate sizable voting interests in some of Japan's biggest companies. Equity ownership would then allow, according to an economist quoted in Bloomberg, the Abe administration to demand that Japanese corporations adhere to the government's priorities for wage increases and heightened corporate spending. The same economist suggested, this "micro" stimulus provided by government controlled corporations may be more effective in spurring the economy than "macro" purchases of government bonds.

   

  These possibilities should horrify anyone who still retains any faith in free markets. The more than four trillion dollars of government bonds purchased through the Federal Reserve’s QE program since 2008 now sit on account at the Fed. Although these purchases may have distorted the bond market, created false signals to the economy, and may loom as a danger for the future (when the bonds need to be sold), they are primarily a means of debt monetization, whereby the government sells debt to itself. But purchases of equities would involve a stealth nationalization of industry, and would represent a hard turn towards communism.

   

  Many American observers will take comfort in their belief that the United States has already concluded its QE experiment and that we are heading in the opposite direction, toward an era of monetary tightening. This greatly misjudges the current situation.

   

  The U.S. economy is slowing remarkably, and despite the continuous assertions by the Fed that rate hikes are likely in the very near future, I believe we are stuck just as firmly in the stimulus trap as Japan. The main difference between the U.S. and Japan is that Japan began this "experiment" from a much stronger economic position. Japan was a creditor nation, with ample domestic savings and large trade surpluses. In contrast, the U.S. started as the world's largest debtor nation, with minimal savings, and enormous trade deficits. So if Japan, with its superior economic position, could not extricate itself from this trap, what hope does the United States have?

   

  If the Fed is unable to raise rates from zero, it will also be have no ability to cut them to fight the next recession. So the next time an economic downturn occurs (one may already be underway), the Fed will have to immediately launch the next round of QE. When QE4 proves just as ineffective as the last three rounds to create real economic growth, the Fed may have to consider the radical ideas now being contemplated by the Bank of Japan.

   

  So this is the endgame of QE: Exploding debt, financial distortion, prolonged stagnation, recurring recession, and the eventual government takeover of industry and the economy. This appears to be the preferred alternative of politicians and bankers who simply refuse to let the free markets function the way they are supposed to.

   

  If interest rates were never manipulated by central banks and QE had never been invented, the markets could have purged themselves years ago of the speculative bubbles and mal-investments. Sure we could have had a deeper recession, but it also could have been much shorter, and it could have been followed by a far more robust and sustainable recovery.

   

  Instead Washington has joined Tokyo on the road to Leningrad.

  

  

  

  

  

• Greek Island Runs Out Of Burial Ground Amid Flood Of Dead Refugees

  A surge in the number of bodies of refugees whose boats capsized as they desperately tried to reach Europe has filled the burial grounds of the Greek island of Lesbos to capacity, the island’s mayor said, adding that over 50 bodies remain unburied.

  As RT reports, The island’s morgues, cemeteries and emergency services have been overwhelmed with a record number of bodies of migrants who died trying to cross the Mediterranean in October. According to the latest UN data, over 218,000 people arrived in the EU during the month, beating the total annual number for the whole of 2014.

  Some 744,000 migrants and refugees have arrived in Europe in 2015 alone, of which at least 3,300 died while making the journey.

  Mayor Spyros Gallons told the Greek media that, while five funerals were held this weekend, 55 bodies remain at the morgue and the island is having a hard time finding burial ground for them.

  “Yesterday we held five funerals, but there are still 55 bodies at the morgue,” NBC News quoted Galinos as saying. “Who could have anticipated such a carnage in the Aegean?”

  Lesbos, with a population of 86,000, lies in the Aegean Sea near Turkey’s cost. It has served as one of the main destinations for refugees and other migrants trying to escape violence and poverty in Syria and other conflict zones in the Middle East and Africa.

  

   

  On Monday, the tragic situation was exacerbated, as 11 refugees, most of them children, drowned in the Aegean Sea while trying to reach Lesbos. Moreover, on Sunday another 15 people, including six children, died in the Aegean after their boat capsized off the Greek island of Samos.

   

  Galinos told the media that authorities are working on fast-tracking procedures for creating new burial ground next to the main cemetery.

  The situation on the island has also prompted ambulance workers to protest state budget cuts that have downsized the number of emergency vehicles to only three, despite the increasing number of refugees.

  As DW.com adds, Lesbos currently has 90,000 residents and 200,000 refugees…

  Mytilene is the largest city on the Greek island of Lesbos, in the northeast Aegean Sea not far from Turkey. It is an attractive place with massive docks. From there many large ferries run daily towards Piraeus and Kavala near the Macedonian border.

   

  And that is why there are thousands of refugees here – they want to keep going.

   

  The north coast of Lesbos is an orange streak. Thousands of lifejackets lie on the beach as far as the eye can see, having fulfilled their purpose for the refugees crossing from Turkey. So do the many rubber dinghies that the volunteers pierced right after their arrival so that they couldn't be pushed back onto the sea.

   

  The helpers come from England, the Netherlands, Spain and Germany. A few Greeks as well hurry about the beaches. But they limit themselves to "recovering" the valuable scraps of metals from the boats. By sunrise, some are already carrying away the motors of the boats that came in overnight. These are worth a few thousand euro a piece.

   

  

   

  The so-called "hotspot" in Moria, a barrack outside of Mytilene, has become a textbook example of the way processing is handled in Greece. By now the Greek police and officials from Frontex – the European Union border agency – have managed to register more than 5,000 refugees a day. However, the registration is not valid across the EU. It is usually full of loopholes; the information provided by refugees is not tested for its truth.

  In the end, everyone here receives a registration form that entitles them to travel on from Lesbos. As a matter of fact, the refugees are not allowed to leave Greece, and many will still be ultimately deported. But the authorities on Lesbos cannot do that themselves. Nor do they want to. They just want to sustain a bit of peace and order. And therefore as many refugees as possible must be moved on from the island, as fast as possible.

  

  

  

  

  

• The Unhackable iPhone Has Been Compromised: "Intelligence Agencies Can Intercept Calls, Messages, & Access Data"

  Submitted by Mac Slavo via SHTFPlan.com,

  Iphone maker Apple, Inc. claimed last month that their latest iteration of the wildly popular handheld device was unhackable. According to HackRead, the company is so convinced of its security successes that they issued a statement saying that data stored on a phone secured with a front screen passcode was impossible to access – even by highly talented intelligence agencies:

  The CIA and the FBI are always looking for backdoors in Apple devices, in fact, the agency spent years trying to hack iPhone and iPads according to documents released by NSA’s Edward Snowden.

   

  Now, with the new upgraded operating systems, Apple has termed it “impossible” to access any data from Apple devices. Though, the company can still access data from older phones.

   

  …

   

  According to the Apple’s response to the court, 90 percent of the devices has ios 8 installed and with the type of encryption already there in the phone, it’s nearly impossible to access the data without the passcode, which is only known to the original owner. Even Apple itself cannot find the code.

  But as we already know from recent hacks of Department of Defense computers, essential domestic grid infrastructure computers, and even NASA’s in-orbit spacecraft, in the digital age nothing is ever really secure.

  Within hours of Apple releasing their latest iOS 9 update a cyber security firm known as Zerodium issued a challenge to the hacker community and offered up a $1 million bounty for any team that could bypass Apple’s latest security features. For weeks it appeared that Apple was right. Scores of hackers around the world burned the midnight oil trying to hack the iphone before Zerodium’s bounty expired.

  But just few hours before the challenge came to end, one team submitted their exploits and vulnerabilities and Zerodium has confirmed that the Apple’s iOS 9 has been compromised.

  The exploits, according to experts, would give snoopers the ability to not only access the data on your phone, but intercept calls, text messages and even live chat conversations.

  Here’s the kicker: the exploit is remote, so it can be launched on your phone without you even knowing about it. Simply visiting a web site or receiving a certain kind of text message could initiate the jailbreak process on your phone and then install unwanted (and hidden) monitoring apps.

  According to Motherboard, the unhackable has been hacked… again:

  Bekrar explained that the winning team found a “number of vulnerabilities” in Chrome and iOS to bypass “almost all mitigations” and achieve “a remote and full browser-based (untethered) jailbreak.”

   

  If true, this is a considerable feat. No one had found a way (at least that’s publicly known) to jailbreak an iPhone remotely for more than a year, since iOS 7.

   

  …

   

  there’s no doubt that for some, this exploit is extremely valuable. Intelligence agencies such as the NSA and the CIA have run into problems when trying to hack into iPhones to spy on their targets, and the FBI has publicly complained about Apple’s encryption for months. This exploit would allow them to get around any security measures and get into the target’s iPhone to intercept calls, messages, and access data stored in the phone.

   

  …

   

  A source, who used to work for the NSA, told Motherboard a few weeks ago that $1 million is actually a good price for such an exploit, because “if you sell it to the right people” you can fetch much more.

  And who will Zerodium be selling this exploit to?

  You probably already know the answer:

  Bekrar and Zerodium, as well as its predecessor VUPEN, have a different business model. They offer higher rewards than what tech companies usually pay out, and keep the vulnerabilities secret, revealing them only to certain government customers, such as the NSA.

  So just in case you thought your data and private activities were safe from spying eyes, think again.

  The very people who we want to keep out of our private lives are the ones who will be the beneficiaries of the jailbreak.

  Now the NSA, FBI and other interested intelligence partners will have total access to your phone.

  

  

  

  

  

• How Beijing & The West Work Together To Manipulate The Global Currency War

  Submitted by Brendan Brown via The Mises Institute,

  From reading the commentaries you might have imagined that the process of a currency winning international reserve status depends on getting the IMF seal of approval. At least that seems to be the story with China.

  So, strange to tell, the great international monies of the past evolved either before the IMF was created or without its help. Think of the Deutsche mark and Swiss franc — the two upstarts of the 1970s and 1980s — or briefly the Japanese yen when it enjoyed great popularity. Their emergence was due to the path of monetary stability chosen by their issuing authorities together with complete freedom from restrictions.

  So why is the world of currency diplomacy now playing along with the nonsense of the IMF examining whether the Chinese yuan has met the criterion to become a reserve currency?

  Incidentally, the last time that Washington body bestowed “reserve currency status” it was with respect to the Australian dollar and Canadian dollar, on the eve of the bust for the respective commodity and carry trade bubbles which sent them to their respective skies.

  Beijing and DC Pick the Winners and Losers

  The question as to why the Western world is playing along with the official Chinese currency charade is part of a more general point. Why do Western governments pursue non-market trade diplomacy so enthusiastically with Beijing?

  Think of the repeated times that Chinese communist party dictators traveled to a particular Western capital to hand out their list of chosen beneficiaries of Chinese corporate (mostly state) spending. These dictators were welcomed by fawning officials and bureaucrats who assured us that they also brought up, with muted whispers and inaudible comments, the problem of human rights to their guest.

  And, by the same token, why are there high profile visits of Western leaders to China, presenting their own list of chosen industrialists selected to pick up the new business deals? This is not the way free markets, and global free trade, in particular, is meant to work.

  If it smells like a rat it probably is a rat, and so it is with respect to these deals by collusion between China and Western governments, and their chosen corporate protégés, whether on currency or trade or investment matters. This is all an exercise in some combination of crony capitalism (with cronies on both sides!) and diplomacy by stealth. The gains and gainers are deliberately kept opaque. The losers are much less evident than the gainers, on whichever side of the fence, but principle and practice tells us that the total losses are much larger than the gains.

  The Cronies’ Currency War

  In particular, how much more prosperous would China be today under a regime of currency freedom and well-functioning markets, than under the cozy order of restrictions and preferred access (to capital and trade) put together by Beijing and foreign governments in cahoots? And how much are Western priority systems for getting Chinese capital and orders to favored domestic destinations distorting the signals which guide the invisible hands? And how far is the secret — or not so secret — G-20 currency diplomacy, related to China, abetting the most serious episode of currency warfare since the 1930s?

  Think about the new currency offensive launched by Europe last month when ECB Chief Draghi’s calibrated remarks about further QE drove the euro down by 3–4 percent against the US dollar in 24 hours, which was double the extent of any Chinese currency maneuvers earlier in the summer. And in the bigger picture, China’s mini currency devaluation hardly smacks of currency warfare compared to moves ten or even twenty times greater by Europe and Japan in the past three years.

  So why did Beijing agree to the mild censoring which occurred at the last G-20 meeting (in Lima) of its own mini-devaluation when it could have called on Europe and Japan to halt their currency warfare?

  A plausible answer is that Beijing has no interest in facilitating the emergence of a free market in its currency together with full convertibility. If silence is required on currency warfare as the price of getting its coveted currency reserve status, then so be it.

  Yes, a fully convertible Chinese currency might well find a substantially lower level than today’s official rate. Much would depend on what steps accompany the road to convertibility. Would there be broad-based liberalization in the Chinese economy and markets such as to make assets there more attractive to both domestic and international investors in the context of improved prospects of economic prosperity? Or would the road to convertibility simply facilitate a flight of capital out of the country with little foreign appetite to engage in the opposite direction?

  There is little indication that the Chinese leadership would take the market reform route, which incidentally might seriously undermine the basis of the rents enjoyed by themselves and their connected state enterprises. In effect, there is an unholy alliance between the West and Beijing on only limited reforms and the currency status quo as blessed by the IMF. Meanwhile, currency wars remain a protected activity of the large powers outside China.

  Official game plans do not always work out as hoped. It remains to be seen whether the continued and accelerated path of monetary easing by Beijing is consistent with only a mini-devaluation of the Chinese currency. There is anecdotal evidence of Chinese retail investors now engaging themselves in a new bout of yield-search frenzy in the local high-yield bond markets. That may not endure in the face of a rising tide of default. And the massive yuan carry trade which built up in the past few years could contract much more forcefully in coming months in the context of shrunken yield gaps and credit market cool-down.

   

  

  

  

  

  

• 162 Days Later, The Treasury Finally Updates The Total US Debt Number, And It Is…

  On March 16 of 2015, the US Treasury officially hit what was then the US statutory debt limit of $18.113 trillion. At that moment the Treasury started using “emergency” measures to fund itself while the total reported debt remained unchanged and just dollars below the technical debt limit. This prompted much confusion among the punditry, leading to questions how is it that for many months the US has not updated its official debt number.

  The reason is that until last Friday, the US had no official debt deal and as a result was unable to show legally the official current debt holdings.

  As of Friday, this peculiar situation has been resolved following the latest deal by both parties to suspend the debt ceiling until March 2017 which also means that we finally got an updated total public debt number.

  And so, after 162 work days without an update, the latest US debt number is $18,492,091,120,833.99 (yes, and 99 cents), an increase of $339.1 billion since the latest official pre-debt ceiling update. This is also 102.5% of GDP.

  

   

  And what is the new debt ceiling? Funny you should ask, because as noted above as part of the debt deal, the debt ceiling was “suspended”, not revised which means that as of this moment the US officially no longer has a debt ceiling.

  

   

  Why is the debt ceiling suspended? Simple: as we calculated two weeks ago, to provide enough room until March 2007, the total capacity on the US credit card would have to be $19.6 trillion. The problem is that while “selling” democrats the optics of a number that rounds up to $20 trillion would not be difficult at all (the only complaint would be why it is not $200 trillion), for many conservatives the realization that a GOP-controlled Congress just gave the US a blessing to issue another $1.1 trillion in debt would hardly be enjoyable.

  So what did Congress, both democrats and republicans, do? They decided to do away with the debt ceiling entirely, “temporarily” of course, so as not to show what the next debt target for the US will be. And once March 15, 2017 arrives up what then? Why the temporarily suspended debt limit will be extended for another 2 years, “temporarily” again. Because while US representatives don’t have the courage to tell their electorate what the number is, they also don’t have the guts to do away with the debt ceiling entirely either.

  And now: we look forward to the story about the next $43 million gas station somewhere in Afghanistan.

  

  

  

  

  

• The European Refugee "Invasion" In One Stunning Infographic

  A week ago, we brought you drone footage which vividly demonstrates the scope of Europe’s worsening migrant crisis. 

  The people flows into Germany alone are expected to top 1 million this year as desperate asylum seekers flee the war-torn Middle East where the West and Russia are busy taking opposite sides of the Sunni-Shiite divide on the way to facilitating a regional conflict that looks set to spill across the Iraq-Syria border and possibly into Afghanistan. 

  Indeed, the influx of refugees threatens to destabilize the EU as Germany’s insistence on the bloc-wide adoption of an open door policy has infuriated the likes of Hungary’s Viktor Orban who insists that if Europe’s cultural heritage is to be protected and preserved, a mandatory settlement arrangement simply isn’t a viable option. 

  Meanwhile, Alexis Tsipras – who everyone promptly forgot about once China replaced Greece as the market’s focal point – has weighed in from the front lines, expressing shame that the West is at least partially responsible for the migrant crisis due to its role in intentionally destabilizing Mid-East governments. 

  Now, Helsinki-based Lucify is out with a fascinating, interactive infographic on the refugee flow into Europe which we present below and which should help to illustrate just how dramatic a demographic shift this truly is.

  //

  

  

  

  

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• Key Apple Supplier Halts Hiring Due To Poor iPhone Sales

  Two months ago, Tim Cook reportedly wrote Jim Cramer that everything was awesome with iPhone sales in China. Days later, channel checks appeared to call Cook's statement into question. Several day ago, one of Apple's component makers – Dialog Semi – issued cautious guidance strongly suggesting iPhone sales momentum was weakening. Apple's earnings produced disappointment as China sales rather notably fell (but was quickly dismissed by analysts as US sales rose) and now, perhaps most worrying of all, Taiwan’s Pegatron Corp – maker of Apple's next-gen iPhone 6S and iPad – has halted hiring in its Shanghai factory as workers note "sales of iPhone 6S have been disappointing."

  In May 2013, Pegatron became "the new FoxConn" as then new Chief Executive Tim Cook, Apple divided its weight more equally with a relatively unknown supplier, giving the technology giant a greater supply-chain balance.

  Pegatron Corp., named after the flying horse Pegasus, will be the primary assembler of a low-cost iPhone expected to be offered later this year. Foxconn's smaller rival across town became a minor producer of iPhones in 2011 and began making iPad Mini tablet computers last year.

  Back in June 2014, everything was awesome:

  Two companies that assemble Apple’s iPhones and iPads are on a hiring spree, a signal that orders from the Cupertino-based group are ramping up ahead of the launch of a new device.
  not so much

   

  Taiwan’s Pegatron Corp, which employs 100,000 people, said on Monday that it is expanding its workforce in mainland China by 30 per cent to keep up with the production of smartphones.

  But now, in October 2015, the huge facility at Pegatron Technology's factory in Shanghai sports a deserted look, as China Daily reported moments ago.

  Gone are crowds waiting for job interviews or others who come to enquire about possible job openings.

   

  The facility, which at its peak employed around 100,000 people, has temporarily suspended hiring as demand for Apple products has waned considerably.

   

  The winding passage that leads to an interview room is all but deserted. Rather than excited faces, one can see young employees trudging out of the facility with fatigue and despair written large on their face.

   

  Zhang Libing, a 23-year-old from Anhui province, told China Daily that he had just resigned from his job at Pegatron as he was exhausted and fatigued with the long working hours. Next to him was a huge electronic screen that kept flashing the message that the company has put on hold all fresh hiring for the time being.

   

  "We are not surprised at that," Zhang said. "The sales of iPhone 6S have been disappointing. I am afraid that if we do not leave now, we will be laid off soon."

   

  …

   

  China, its biggest market outside the United States, accounted for nearly one-fourth of its total revenues in the fourth fiscal quarter because of its robust handset sales in the country. But fresh concerns have arisen over whether the company would be able to sustain the sales momentum.

   

  Fading enthusiasm for iPhones in China has dragged down the device prices in the parallel market and hit new orders to the supply chain partners.

   

  Pegatron was planning to hire roughly 40,000 workers for its Shanghai plants in the summer when Apple entrusted it with the iPhone 6S and iPad manufacturing. The current employee strength of the company remained unclear.

  It appears things have changed dramatically in a very short period of time…

  Cai Xiaoshuai left his hometown in Luoyang of Henan province and landed a job at the assembly line in Pegatron four months ago. But the 22-year-old man said he had had enough. His basic wage was 2,020 yuan ($320) per month and he had to work overtime for 2.5 hours every day to make sure that his salary would get close to 4,000 yuan.

   

  "Some of my friends went to Kunshan in Jiangsu province to try their luck there. But it seems that the electronics industry there is in an even worse shape. So I am thinking of staying on and checking out other opportunities in Shanghai. But I will definitely not work in any electronics company. I have had enough," said Cai.

  Which leaves us asking, as we did when doubts began to surface about Cook's letter to Cramer:

  So is AAPL the next AOL, and is Tim Cook the next Thorsten Heins?

   

  It all depends on China: if the world's most populous nation can get its stock market, its economy and its currency under control, then this too shall pass. The problem is that if, as many increasingly suggest, China has lost control of all three. At that point anyone who thought they got a great deal when buying AAPL at $92 will have far better opportunities to dollar-cost average far, far lower.

  Oh, and to anyone still holding their breath for AAPL to file a public statement which may well contain an outright lie, you may exhale now.

  

  

  

  

  

• Widening Probe Snags Most Senior Chinese Banker Yet, Sends Stocks Lower; RBA Sparks Commodity Slide, FX Turbulence

  It's a busy night in AsiaPac. The ubiquitous Japanese stock buying-panic at the open quickly faded. China weakened the Yuan fix quite notably and injected another CNY10bn of liquidity but news of the arrest of the President of China's 3rd largest bank and a graft investigation into Dongfeng Motor's general manager sparked greater uncertainty and Chinese stocks extended the losses from yesterday. Commodities had started to creep lower, with Dalian Iron Ore pushing 2-month lows with its biggest daily drop in 3 months, were extended when the Aussie central bank kept rates steady (as expected) but sparked turmoil in FX markets with forward guidance of th epotential for more easing.

   

  Japanese markets opened in their usual glory, then faded fast…

  

   

  China opened with more liquidity injections and a sizable weakening in the Yuan fix…

  

   

  Probes widened with AgBank (China's 3rd largest bank) President arrested…

  The president of China’s third-largest bank has been detained, local media reported on Monday — the most senior bank official to be swept up in President Xi Jinping’s sweeping anti-corruption campaign.

   

  Zhang Yun, president, vice-chairman, and deputy Communist party secretary of Agricultural Bank of China had been “taken away to assist an investigation”, Sina Finance and QQ Finance reported, using a known euphemism for corruption arrests. QQ cited an AgBank employee saying that Mr Zhang had been arrested on Friday and that executives had held a meeting late into the night to discuss a response.

   

  Mr Zhang is the most senior banker to be ensnared in China’s anti-corruption probe.

   

  In January, then-president of midsized Minsheng Bank, Mao Xiaofeng, was arrested in an investigation linked to a top aide to former president Hu Jintao. Days later Lu Xiaofeng, a board member at Bank of Beijing, was also arrested.

   

  More recently, police arrested the general manager and several other top executives at Citic Securities, China’s largest securities brokerage, for insider trading linked to the big fall in China’s stock market this year.

   

  Local media also reported on Monday that a famous hedge fund manager was under arrest for insider trading.

  And Dongfeng Motors general manager facing graft charges…

  A general manager of China's Dongfeng Motor Group is being investigated for suspected corruption, the country's graft watchdog said on Monday.

   

  Zhu Fushou was being investigated for "suspected severe violation of discipline", the Central Commission for Discipline Inspection (CCDI) said in a statement on its website. Discipline violations generally refer to corruption.

  All of which follow the weekend's extraordinary actions around Xu Xiang and the Zexi Fund – whose holdings (below) are all under more pressure again today (amid liquidation fears)…

  • Guangdong Electric Power
  • China Gezhouba
  • Guoxuan High-Tech
  • China Sports Industry
  • Shanghai Metersbonwe Fashion
  • Eastern Gold Jade
  • Founder Technology Group
  • Shanghai Tofflon Science
  • Hareon Solar Technology
  • Fujian Rongji Software
  • Anhui Xinlong Electrical
  • Shenzhen Desay Battery
  • Anhui Xinke New Materials
  • Jiangsu Alcha Aluminum
  • Tianjin Saixiang Technology
  • Jinzi Ham
  • Guangdong Eastone Century Tech
  • Nantong Jiangshan Agrochemical
  • Guangzhou Lingnan Group
  • Hangzhou Cable
  • Xiamen Academy of Building
  • Ningbo Kangqiang Electronics
  • Fujian Haiyuan Automatic
  • Tieling Newcity Investment
  • Ningbo United
  • Elec-Tech International

  All of which sparked selling pressure in Chinese stocks as recent re-leveraging was unwound for the 2nd day in a row…

  

   

  China is in big trouble…

  ????????????“?”? ??????????!! 4 BIG SOE banks 3Q net profit "Zero" growth, employees are queuing up to resign.

  — Simon Ting (@simonting) November 3, 2015

   

  And then RBA decides, as economists expected, not to cut rates

  • *RBA LEAVES KEY RATE AT 2.0% AS SEEN BY MAJORITY OF ECONOMISTS
  • *RBA: FINANCIAL MARKET VOLATILITY ABATED SOMEWHAT FOR THE MOMENT

  Which extended commodity losses…

  

   

  But of course fed the crowd some forward guidance hope:

  • *RBA SAYS INFLATION OUTLOOK MAY AFFORD SCOPE FOR POLICY EASING
  • *RBA: SUPERVISORY MEASURES HELPING CONTAIN HOUSING RISKS

  This erased Aussie stock gains and sparked chaos in the FX markets – despite the "no move" being expected…running stops high and low before settling back unch…

  

   

  One wonders who knew what early? Just like last time (and will the regulators get involved again)

  

   

  And US equity futures are drifting lower as USDJPY rolls over and Apple fears rise on Pegatron hiring freeze...

  

   

  Charts: Bloomberg

  

  

  

  

  

• Confusion: US Equities Drift Lower (China Higher), Yuan Surges & Purges As China Manufacturing Misses (And Beats)

  Confusion reigns… China's Manufacturing PMI is in contraction according to both the Official and Markit/Caixin measures (but the former was flat and missed while the latter rose and beat "confirming economic stability" according to the 'official' press). Following the largest strengthening fix for the Yuan in 10 years, both the onshore and offshore Yuan are weakening by the most since the August devaluation. Finally, having cliff-dived at the open, Chinese stocks have bounced back to unchanged on the Ciaxin PMI beat (but US equities drift lower still).

   

  It's a rise and a beat & a miss and a drop for Chinese manufacturing…

  

  The last two times the Caixin measure has diverged positively from the official data, it has converged lower in the next 3 months.

   

  After the biggest strengthening fix in 10 years…

   

  

   

  Onshore (and offshore Yuan) are weakening by the most since the August devaluation…

  

   

  Compressing the Onshore/Offshore spread back to zero…

  

   

  And finally Chinese stocks tumbled on the weak 'official' PMI and surged back to unchanged on the Caixin PMI…

  

   

  But US equities saw no such bounce as hopes for moar easing fade after comments on "stability" after the Caixin print…

  

   

  So chaos reigns once again…

   

  Charts: Bloomberg

  

  

  

  

  

• Bill Ackman Is Down 19% In 2015 Following 7.3% Loss In October On Valeant Plunge

  First the good news for Bill Ackman: as of October 31, it appears that Pershing Square has not had a spike in redemption requests (or if it has, it hasn’t granted them yet). We know this because as of October 31, Pershing Square’s AUM was $15.1 billion.

  

   

  This is down from $16.5 billion the month before. This means that the $1.4 billion drop in AUM is largely accounted for by the $75 or so drop in Valeant shares during the month of October (of which Ackman owned about 20 million for most of the month) and that there has been little additional changes to Pershing’s portfolio.

  The bad news is that at $15.1 billion, this is the lowest AUM for Bill Ackman in over a year…

  

   

  … and his current net performance for October and YTD is a deplorable -7.3%, and -19.0% respectively.

  And yet if this collapse in Pershing’s return YTD on the back of just one stock (memories of PS IV and Target come to mind) is enough to lead to the overdue unwinding of his hedge fund, we doubt the billionaire hedge funder will lose much sleep. He is largely set for life.

  However, we can’t say the same for those unlucky souls who invested in the stock of Dutch-listed stock of Pershing Square hodlings, which recently hit its all time low, and which – if the fund is unwound – will likely proceed to likewise liquidate on short notice. 

  

  

  

  

  

  

• A Brief History Of Crime: How The Fed Became The Undemocratic, Corrupt & Destructive Force It Is Today

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Perhaps the most famous, and prescient, financial cartoon in American history is the depiction of the Federal Reserve Bank as a giant octopus that would come to parasitically suck the life out of all U.S. institutions as well as free markets. The image is taken from Alfred Owen Crozier’s US Money Vs Corporation Currency, “Aldrich Plan,” Wall Street Confessions! Great Bank Combine, published in 1912, just a year before the creation of the Federal Reserve. Here it is in all its glory:

  

  Our ancestors were wiser and far more educated than modern Americans about the dangers posed by a centralized, monopolistic system charged with the creation and distribution of money, and our society and economy have paid a very heavy price for its ignorance.

  Indeed, some of today’s Fed critics aren’t even aware that the U.S. Central Bank originally had far less power than it does today. As concerned as they were, its early critics could never have imagined how perverted its mandate would become in the subsequent 100 years. A mandate that has now made it the single most powerful and destructive force on planet earth.

  Earlier today, I came across an excellent op-ed in the Wall Street Journal in which the author explains this transformation in just a few short paragraphs. Here’s some of what he wrote:

  History suggests that the only way to rein in the sprawling Federal Reserve is to end its money monopoly and restore the American people’s ability to use gold as a competing currency.

  The legislative compromise that created the Fed in 1913 recognized that the power to print money, left unchecked, could corrupt both the government and the economy. Accordingly, the Federal Reserve Act created the Federal Reserve System without a centralized balance sheet, a central monetary-policy committee or even a central office.

   

  The Fed’s regional banks were prohibited from buying government debt and required to maintain a 40% gold reserve against dollars in circulation. Moreover, each of the reserve banks was obligated to redeem dollars for gold at a fixed price in unlimited amounts.

   

  Over the past century, every one of these constraints has been removed. Today the Fed has a centrally managed balance sheet of $4 trillion, and is the largest participant in the market for U.S. government bonds. The dollar is no longer fixed to gold, and the IRS assesses a 28% marginal tax on realized gains when gold is used as currency.

   

  The largest increases in the Fed’s power have occurred at moments of financial stress. Federal Reserve banks first financed the purchase of government bonds during World War I. The gold-reserve requirement was dramatically reduced and a central monetary policy-committee was created during the Great Depression. President Richard Nixon broke the last link to gold to stave off a run on the dollar in 1971.

   

  This same combination of crisis and expediency played out in 2008 as the Fed bailed out a series of nonbank financial institutions and initiated a massive balance-sheet expansion labeled “quantitative easing.” To end this cycle, Americans need an alternative to the Fed’s money monopoly.

  And that, in a nutshell, is how American citizens lost their country and became a nation of debt serfs.

   

  

  

  

  

  

• The Reason For Bitcoin's Recent 60% Surge Revealed

  It was precisely two months ago, on September 2nd, when we explained that as a result of China’s recent currency devaluation, in order to mitigate the inevitable capital outflows that such an FX move would unleash, China was “scrambling to enforce capital controls” in order to prevent the exit of hot (and not so hot) money from China’s economy.

  We then said the following to explain why “this is great news for bitcoin”:

  Which is why we would not be surprised to see another push higher in the value of bitcoin: it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the previously documented “forking” with Bitcoin XT), however if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

  At the time of this forecast, the price of bitcoin was highlighted with the red arrow.

  

   

  And while we were confident it was indeed Chinese capital “mobility” using the bitcoin channel that was the impetus behind the nearly 60% surge in the price of the digital currency in past two months to fresh 2015 highs, moments ago we got the closest thing to a confirmation when Bitcoin Magazine reported that “China is leading the charge, with the price trading anywhere from $10-$15 above the rates on U.S. and European exchanges.”

  Bitcoin Magazine further adds that “China is experiencing unprecedented amounts of growth. On October 30th, Jack C. Liu, the Head of International at OKCoin, said, in a tweet, that it had been the “busiest day of the year @OKCoinBTC as #Bitcoin trades to 2015 high of $344. No clawbacks on futures, no downtime. Great day for us & industry.””

  Two days later, he went on to reveal that OkCoin had seen incredible demand for accounts on the exchange:

  Incredible new user growth for @OKCoinBTC USD and CNY. Two dozen plus handling KYC and customer service. We can onboard within 24-48 hours.

  — Jack C. Liu (@liujackc) November 2, 2015

  And here is the validation that, just as predicted here two months ago, bitcoin has become the go-to asset class for millions of Chinese savers seeking to quietly and under the radar transfer funds from point A to point B, whatever that may be, in the process circumventing the recently expanded governmental capital controls:

  While he didn’t provide any concrete numbers, he did comment last week on what was driving the adoption. “Some Chinese traders are expressing a view on the CNY exchange rate after the last devaluation and you have interest by mainland speculators to move to other assets after the stock market fallout,” he explained in an interview with Bitcoin Magazine.

  Which again brings us back to our conclusion from two months ago:

  … if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

  As of this moment, the total value of bitcoin is up from the $3 billion two months ago to a little over $5 billion. That means the ratio of Chinese deposits (at around $22 trillion) to bitcoin, is down to a far more “conservative” 4,400x.

  And now, again, imagine what could happen if these same Chinese depositors realize they have been lied about the non-performing loans “backing” their deposits and that instead of the official 1.5% bad debt ratio, the real number is really far greater, somewhere in the 20% ballpark as we will show shortly, suggesting major deposit impairments are no longer the stuff of Cypriot nightmares but just the thing hundreds of millions of Chinese depositors have to look forward to, and that they have just two possible choices to avoid said impairment: reallocating their savings into bitcoin or, of course, gold.

  

  

  

  

  

• Did Something Just Snap In China: Total SOE Debt Rises By $1 Trillion In One Month

  We found something unexpected when skimming through the website of China’s finance ministry.

  While most China pundits keep close track of China’s monthly loan creation and, especially these days, its Total Social Financing number to get a sense of what, if any, credit is being created outside of conventional lending channels within China’s shadow banking system, one just as critical please to keep track of Chinese credit is the monthly report on national state-owned and state holding enterprises. 

  Such as this one from October 22, which reports that as of September 30, total liabilities of state-owned enterprises had risen to 77.7 trillion yuan. Why is this notable? Because the monthly update just preceding it, reported a total debt figure of “only” 71.8 trillion yuan: a whopping increase of almost CNY 6 trillion, or USD $1 trillion, in just one month.

  This is the biggest monthly increase by a massive margin among China’s SOE by orders of magnitude, and yet just to get a sense of the magnitude of debt held at China’s SOEs, even this record monthly increase is not even 10% of the total debt held by China’s state-owned enterprises which stood at CNY78 trillion or USD $12 trillion at the end of September, more than the total Chinese GDP.

  

   

  What can explain this snap? There has been very little commentary on this particular surge aside from a report posted on Wall Street.cn, and translated by Chiecon, which reports the following:

  China’s state owned enterprises added almost 6 trillion yuan (around 1 trillion dollars) of debt in September, described by Luo Yunfeng, an analyst at Essence Securities, as “an unprecedented increase in leverage”. This means that not only is the government abandoning its deleverage policy, it is actually increasing leverage.

   

  According to Luo “it’s possible that debt that was originally classified as government debt, has been reallocated as SOE debt”.

   

  This might be a reflection of how the government plans to tackle its massive debt. Luo mentions that one of the obstacles to managing government debt is that it remains difficult to draw a line between government and SOE debt. The crux of of current reform plans to increase the role of market forces is aimed at resolving this issue.

   

  If it really is the case of shifting government debt to SOEs, then it represents a step forward for this reform, and the prospect of revaluing credit risk. Another implication, it seems unlikely there will be a pause in government debt increase over the fourth quarter.

   

  This raises the more important question of what will be the impact of this enormous debt? Over the past few years credit expansion has surpassed economic growth, and with the governments aggressive leverage, will this lead to a greater waste of resources?

  Ironically, “shifting” the debt – no matter how troubling – would be by far the more palatable explanation. Because if somehow China had quietly “created” $1 trillion in debt out of thin air parked subsequently on SOE balance sheets, that would suggest that things in China are orders of magnitude worse than anyone can possibly imagine.

  Still, if China did not create this debt now, it will eventually:

  This raises the more important question of what will be the impact of this enormous debt? Over the past few years credit expansion has surpassed economic growth, and with the governments aggressive leverage, will this lead to a greater waste of resources?

   

  [W]ith China experiencing slowing economic growth, and no turnaround on the horizon, its seems likely the Chinese government will continue to increase leverage. In September, China Merchants Securities stated that since Chinese government debt leverage ratio is still low, lower than the US, Europe and Japan, there is still more room for leverage.

  It’s low? Really? Because according to the following McKinsey chart total Chinese debt was $28.2 trillion as of Q2 2014 (it has since risen well over $30 trillion), and represents nearly 300% debt/GDP.

  

  But there is another implication. If China’s is indeed merely stuffing government debt on SOE balance sheets as the report suggests…

  Haitong Securities said at the start of the year that in order to prevent systemic risk the focus over the next few years will be on government leverage. Based on the experience of other countries, monetary easing almost certainly follows an increase in government leverage, with interest rates in the long term trending to zero.

  … then China, while ultimately having to engage in QE, will last out the current regime as long as possible, offloading government debt in ever greater amounts to SOE until finally their debt capacity is maxed out.

  Then, and only then, will China unleash the world’s last remaining debt monetization episode, whereby the PBOC will proceed to openly monetize the roughly $3-4 trillion in total debt China creates every year. At that point the “Minsky Moment” of not only China, but the entire world, will have arrived.

  

  

  

  

  

  

• Infrared Satellite Reveals Heat Flash At Time Of Russian Airplane Disaster

  Earlier today, we highlighted commentary from Russia’s Kogalymavia (the airline operating the ill-fated Airbus A321 which crashed in the Sinai Peninsula) where officials said human and technical factors weren’t responsible for the mid-air disaster which killed 224 people. 

  IS Sinai took credit for “destroying” the plane but it wasn’t immediately clear what the contention was in terms of just how the group went about sabotaging the flight. Subsequently, a series of analysts and commentators opined that there was simply no way the militants could have possessed the technology or the expertise to shoot down a plane flying at 31,000 feet, but as Kogalymavia put it, “a plane cannot simply disintegrate.” 

  In short, it seems as though something exploded, and while we can’t know for sure whether someone detonated on board or whether, as former NTSB investigator Alan Diehl told CNN, “final destruction” of the plane was the result of “aerodynamic forces or some other type of G-forces,” the circumstances are exceptionally suspicious especially given where the plane was flying and the current rather “tense” relationship between Moscow and Sunni extremists. 

  Now, the US has apparently ruled out the possibility that a projectile hit the plane but satellite imagery depicts a “heat flash” at the time of the crash which indicates “some kind of explosion on the aircraft itself, either a fuel tank or a bomb.” Here’s NBC:

  While many have speculated that a missile may have struck a Russian commercial airliner that went down over Egypt’s Sinai peninsula, U.S. officials are now saying satellite imagery doesn’t back up that theory.

   

  A senior defense official told NBC News late Monday that an American infrared satellite detected a heat flash at the same time and in the same vicinity over the Sinai where the Russian passenger plane crashed.

   

  According to the official, U.S. intelligence analysts believe it could have been some kind of explosion on the aircraft itself, either a fuel tank or a bomb, but that there’s no indication that a surface-to-air missile brought the plane down.

   

  That same infrared satellite would have been able to track the heat trail of a missile from the ground.

   

  “The speculation that this plane was brought down by a missile is off the table,” the official said.

   

  A second senior U.S. defense official also confirmed the surveillance satellite detected a “flash or explosion” in the air over the Sinai at the same time.

   

  According to the official, “the plane disintegrated at a very high altitude,” when, as the infrared satellite indicates, “there was an explosion of some kind.”

   

  That official also stressed “there is no evidence a missile of any kind brought down the plane.”

  We’d be remiss if we didn’t note that the video released by ISIS which purports to depict the plane exploding in mid-air doesn’t appear to show any kind of missile, but rather seems to suggest that someone on the ground knew the exact time when the aircraft was set to explode. 

  To be clear, there’s always the possibility that this is a coincidence and that the explosion which brought down the plane wasn’t terror related, but given the circumstances, you certainly can’t blame anyone for suspecting the worst and as we noted earlier, the Sinai Peninsula is well within the range of Russia’s warplanes flying from Latakia:

  

  

  

  

  

  

• Catalonia And The Move Against Empires

  Submitted by Jeff Thomas via InternationalMan.com,

  Recently, the people of Catalonia voted in favour of seceding from Spain.

  In the recent election, secessionist parties secured 72 out of the 135 seats, confirming that the majority of voters want secession. Artur Mas, region president of Catalonia and the leader of the Junts pel Sí movement, is seeking independence from Spain in 18 months.

  This is great news for libertarians the world over, as, to our minds, this is a clear step forward for the Catalan people and for those who seek greater freedom from governments worldwide. And, of course, any blow against the present trend toward empires is a step in the right direction.

  But, this is not the whole picture and, if we’re going to look at the greater truth instead of the truth that we’d like to see, things get a bit more complicated.

  Can They Pull it Off?

  First off, the mere fact that a majority of Catalans have, at this point, voted for independence is not sufficient to assure separation from Spain. Although Catalonia became a province of Spain through a rather arbitrary occurrence (a royal marriage in 1469) and Catalans have for centuries repeatedly behaved more as a conquered people than as loyal Spanish subjects, the territory has remained under Spanish rule for the most obvious of reasons: Spain has the greater power and is able to dominate.

  Although many Catalans seek a legally-recognised referendum from Madrid, Spanish Prime Minister Mariano Rajoy has called the separatist plan “a nonsense” and has stated that he will block it through the courts.

  It is perennially true that, once a given politician in any country feels he “owns” a piece of geography and its population, he will almost invariably hold onto it regardless of the will of the people, using force if necessary.

  And then, there are the practical benefits to being the ruler of a territory. In the case of Catalonia, Madrid has historically exacted more tax from Catalonia than it has paid out in benefits. Catalonia is a cash cow for the Madrid government. Surveys demonstrate that the majority of Catalans would choose to remain within Spain if they could be granted a more favourable tax regime.

  And so, what appears at first glance to be a victory in the quest for independence may not be quite so significant.

  Out of the Pan and into the Fire?

  But, let’s say that the secessionists prevail, that they achieve their goal. What then? Would Catalonia become a beacon of freedom for all the world to see? Well, possibly not. Artur Mas has already planned a central bank, tax authority, and even a Catalonian armed forces. In so doing, he is hoping to begin his reign in much the same way that the vast majority of politicians do, seeking to create controls that will assure his own power and wealth. (Cue The Who, singing “Meet the new boss; same as the old boss.”)

  And let’s not forget that all Catalans are not unified on the subject of independence. Polls over the years have flipped back and forth between a majority in favour of independence and a majority opposed to independence. As American independence visionary, Thomas Jefferson said:

  Democracy is nothing more than mob rule, where 51% of the people may take away the rights of the other 49%.

  In any move for independence, there are always those who unwillingly must pay for the new “freedom”, whether it be real or only imagined.

  This is not to say that the secessionists are wrong. It is only to say that, when considering change, it’s wise to step back and assess the overall situation, not merely the immediate goals of the movement.

  The Way of the Future?

  Finally, there is the world view. Internationally, the vote in Catalonia is being covered in the media, especially in Europe, where there are literally scores of secessionist movements, some of them with considerable support. Catalonia gives these efforts renewed vigour and, surely, with the EU shaking to its flimsy foundations, every successful move toward secession by any territory brings an end of the EU ever closer.

  And, to a lesser extent, there are secessionist movements around the globe. In the U.S., (which became a country as a result of independence from the UK), all 50 states have received secession petitions filed by their citizens. These have been signed by as few as 2,656 people (Vermont) to as many as 125,000 (Texas).

  It’s important to note that these numbers are not large and the state and federal governments of the U.S. can easily claim that secessionists are merely a crackpot fringe. However, when the empire, be it the EU, the U.S., or any other, past or present, reaches the point at which the government has become overlarge, overly domineering, and overly rapacious as to taxation and other forms of confiscation, secession movements will arise. (To be sure, the 1861 American secession of the southern states was not undertaken over the slavery issue, but over the increased power and economic dominance of the northern states over the southern states.)

  And this is to be expected. It’s the primary business of any government to grow its own power and wealth at the expense of its people. It’s therefore in the best interests of the people to do all they can to limit the size (and therefore the power) of their government.

  Even under the best forms of Government, those entrusted with power have, in time, and by slow operations, perverted it into tyranny. – Thomas Jefferson

  A government big enough to give you everything you want is strong enough to take everything you have. – Thomas Jefferson

  Small countries are more free and prosperous than large nation-states. – Ron Holland

  All of the above bear remembering. But a word on that last one, by Ron Holland. My own country, the Cayman Islands, is quite small (population 58,000); small enough that each of us who takes an interest can access our political leaders in a personal way. We find that this level of direct contract not only keeps them accessible to us, but places a lid on their ability to expand their ambitions to “rule”, rather than to “serve.”

  And, indeed, the Cayman Islands are decidedly freer and more prosperous than any of the world’s current empires.

  A long-held belief by the Amish, the Hutterites, and some sociologists is that the ideal population is a mere 150 people, the greatest number that an individual can relate to in a very personal and inter-dependent way. Certainly these communities are far more peaceful and rarely produce dictatorial leaders.

  The concept of secession is an admirable one and a move to secession will often arise whenever a government overreaches to the point of intolerance. In the case of empires, secession has served to increase freedom from the days of the fall of the Roman Empire on. Political leaders will always seek to create empires, whether large or small. The alternative to the ability to secede is the acceptance of tyranny and, therefore, secession, whilst not a panacea, is an essential tool of liberty.

  

  

  

  

  

• One Analyst Says China's Banking Sector Is Sitting On A $3 Trillion Neutron Bomb

  To be sure, we’ve long contended that official data on bad loans at Chinese banks is even less reliable than NBS GDP prints. Indeed, the lengths Beijing goes to in order to obscure the extent to which banks’ balance sheets are in peril is truly something to behold and much like the deficient deflator math which may be causing the country to habitually overstate GDP growth, it’s not even clear that China could report the real numbers if it wanted to. 

  We took an in-depth look at the problem in “How China’s Banks Hide Trillions In Credit Risk: Full Frontal”, and we’ve revisited the issue on a number of occasions noting in August that according to a transcript of an internal meeting of the China Banking Regulatory Commission, bad loans jumped CNY322.2 billion in H1 to CNY1.8 trillion, a 36% increase. Of course that’s just the tip of the iceberg. In other words, that comes from a government agency and although the scope of the increase sounds serious, it still translates into an NPL ratio of just 1.82%. Here’s a look at the “official” numbers (note that when one includes doubtful accounts, the ratio jumps to somewhere in the neighborhood of 3-4%):

  

  Source: Fitch

  There are any number of reasons why those figures don’t even come close to approximating reality. For instance, there’s Beijing’s habit of compelling banks to roll over bad loans, and then there’s China’s massive (and by “massive” we mean CNY17 trillion) wealth management product industry which, when coupled with some creative accounting, allows Chinese banks to hold some 40% of credit risk off balance sheet.

  

  Well as time goes on, and as market participants scrutinize the data coming out of the world’s second most important economy, quite a few analysts are beginning to take a closer look at the NPL data for Chinese banks. Indeed, if Beijing continues to move toward “allowing” defaults to occur (even at SOEs) and if China’s transition from smokestack economy to a consumption and services-driven model continues to put pressure on borrowers from the manufacturing sector, the situation is likely to deteriorate quickly. If you needed evidence of just how precarious things truly are, look no further than a recent report from Macquarie which showed that a quarter of Chinese firms with debt are currently unable to cover their annual interest expense (as you might imagine, it’s even worse for commodities firms). 

  

  Just two weeks after we highighted the Macquarie report, we took a look at research conducted by Hong-Kong based CLSA. Unsurprisingly, it turns out that Chinese banks’ bad debts ratio could be as high 8.1%, a whopping 6 times higher than the official 1.5% NPL level reported by China’s banking regulator. 

  

  We called that revelation China’s “neutron bomb” but it turns out we may have jumped the gun. According to Hong Kong-based “Autonomous Research”, the real figure may be closer to 21% when one takes into account the aforementioned shadow banking sector. Here’s more from Bloomberg:

  Corporate investigator Violet Ho never put a lot of faith in the bad loan numbers reported by China’s banks.

  Crisscrossing provinces from Shandong to Xinjiang, she’s seen too much — from the shell game of moving assets between affiliated companies to disguise the true state of their finances to cover-ups by bankers loath to admit that loans they made won’t be recovered.

   

  The amount of bad debt piling up in China is at the center of a debate about whether the country will continue as a locomotive of global growth or sink into decades of stagnation like Japan after its credit bubble burst. Bank of China Ltd. reported on Thursday its biggest quarterly bad-loan provisions since going public in 2006.

   

  Charlene Chu, who made her name at Fitch Ratings making bearish assessments of the risks from China’s credit explosion since 2008, is among those crunching the numbers.

   

  While corporate investigator Ho relies on her observations from hitting the road, Chu and her colleagues at

  Autonomous Research in Hong Kong take a top-down approach. They estimate how much money is being wasted after the nation began getting smaller and smaller economic returns on its credit from 2008. Their assessment is informed by data from economies such as Japan that have gone though similar debt explosions.

   

  While traditional bank loans are not Chu’s prime focus — she looks at the wider picture, including shadow banking — she says her work suggests that nonperforming loans may be at 20 percent to 21 percent, or even higher.

   

  
  

   

  “A financial crisis is by no means preordained, but if losses don’t manifest in financial sector losses, they will do so via slowing growth and deflation, as they did in Japan,” said Chu. “China is confronting a massive debt problem, the scale of which the world has never seen.”

  As a reminder, here’s a look at the scope of the “problem” Chu is describing:

  

   

  And here’s a bit more on special mention loans and the ubiquitous practice of “evergreening”:

  Slicing and dicing the official loan numbers, Christine Kuo, a senior vice president of Moody’s Investors Service in Hong Kong, focuses on trends in debts overdue for 90 days, rather than those classified as “nonperforming.” Another tactic some analysts use is to add nonperforming debt to “special mention” loans, those that are overdue but not yet classified as impaired, yielding a rate of 5.1 percent.

   

  Banks’ bad-loan numbers are capped by “evergreening,” the practise of rolling over debt that isn’t repaid on time, according to experts including Keith Pogson, a Hong Kong-based senior partner at Ernst & Young LLP. Pogson was involved in restructuring debt at Chinese banks in 1998, when their NPL ratios were as high as 25 percent.

  So let’s just be clear: if 8% is a “neutron bomb”, a 21% NPL ratio in China is the asteroid that killed the dinosaurs. Here’s why: 

  

  If one very conservatively assumes that loans are about half of the total asset base (realistically 60-70%), and applies an 20% NPL to this number instead of the official 1.5% NPL estimate, the capital shortfall is a staggering $3 trillion. 

  That, as we suggested three weeks ago, may help to explain why round after round of liquidity injections (via RRR cuts, LTROs, and various short- and medium-term financing ops) haven’t done much to boost the credit impulse. In short, banks may be quietly soaking up the funds not to lend them out, but to plug a giant, $3 trillion, solvency shortfall. 

  In the end, we would actually venture to suggest that the real figure is probably far higher than 20%. There’s no way to get a read on how the country’s vast shadow banking complex plays into this but when you look at the numbers, it’s almost inconceivable to imagine that banks aren’t staring down sour loans at least on the order of a couple of trillion. 

  To the PBoC we say, “good luck plugging that gap” and to the rest of the world we say “beware, the engine of global growth and trade may be facing a pile of bad loans the size of Germany’s GDP.”

  We close with the following from Kroll’s senior managing director in Hong Kong Violet Ho (quoted above):

  “A credit report for a Chinese company is not worth the paper it’s written on.”

  

  

  

  

  

• The UN Plans To Implement Universal Biometric Identification For All Of Humanity By 2030

  Submitted by Michael Snyder via The Economic Collapse blog,

  Did you know that the United Nations intends to have biometric identification cards in the hands of every single man, woman and child on the entire planet by the year 2030?  And did you know that a central database in Geneva, Switzerland will be collecting data from many of these cards?  Previously, I have written about the 17 new “Global Goals” that the UN launched at the end of September.  Even after writing several articles about these new Global Goals, I still don’t think that most of my readers really grasp how insidious they actually are.  This new agenda truly is a template for a “New World Order”, and if you dig into the sub-points for these new Global Goals you find some very alarming things.

  For example, Goal 16.9 sets the following target…

  “By 2030, provide legal identity for all, including birth registration”

  The United Nations is already working hard toward the implementation of this goal – particularly among refugee populations.  The UN has partnered with Accenture to implement a biometric identification system that reports information “back to a central database in Geneva”.  The following is an excerpt from an article that was posted on findbiometrics.com…

  The United Nations High Commissioner for Refugees (UNHCR) is moving forward with its plans to use biometric technology to identify and track refugees, and has selected a vendor for the project. Accenture, an international technology services provider, has won out in the competitive tendering process and will oversee the implementation of the technology in a three-year contract.

   

  The UNHCR will use Accenture’s Biometric Identity Management System (BIMS) for the endeavor. BIMS can be used to collect facial, iris, and fingerprint biometric data, and will also be used to provide many refugees with their only form of official documentation. The system will work in conjunction with Accenture’s Unique Identity Service Platform (UISP) to send this information back to a central database in Geneva, allowing UNHCR offices all over the world to effectively coordinate with the central UNHCR authority in tracking refugees.

  I don’t know about you, but that sure does sound creepy to me.

  And these new biometric identification cards will not just be for refugees.  According to a different FindBiometrics report, authorities hope this technology will enable them to achieve the UN’s goal of having this kind of identification in the hands of every man, woman and child on the planet by the year 2030…

  A report synopsis notes that about 1.8 billion adults around the world currently lack any kind of official documentation. That can exclude those individuals from access to essential services, and can also cause serious difficulties when it comes to trans-border identification.

   

  That problem is one that Accenture has been tackling in collaboration with the United Nations High Commissioner for Refugees, which has been issuing Accenture-developed biometric identity cards to populations of displaced persons in refugee camps in Thailand, South Sudan, and elsewhere. The ID cards are important for helping to ensure that refugees can have access to services, and for keeping track of refugee populations.

   

  Moreover, the nature of the deployments has required an economically feasible solution, and has demonstrated that reliable, biometric ID cards can affordably be used on a large scale. It offers hope for the UN’s Sustainable Development Goal of getting legal ID into the hands of everyone in the world by the year 2030 with its Identification for Development (ID4D) initiative.

  The Identification for Development (ID4D) initiative was originally launched by the World Bank, and they are proud to be working side by side with the UN to get “legal identity” into the hands of all.  The following comes from the official website of the World Bank…

  Providing legal identity for all (including birth registration) by 2030 is a target shared by the international community as part of the Sustainable Development Goals (target 16.9). The World Bank Group (WBG) has launched the Identification for Development (ID4D) cross-practice initiative, with the participation of seven GP/CCSAs sharing the same vision and strategic objectives, to help our client countries achieve this goal and with the vision of making everyone count: ensure a unique legal identity and enable digital ID-based services to all.

  Of course all of this is being framed as a “humanitarian” venture right now, but will it always stay that way?

  At some point will a universal biometric ID be required for everyone, including you and your family?

  And what would happen if you refused to take it?

  I could definitely foresee a day when not having “legal identification” would disqualify you from holding a job, getting a new bank account, applying for a credit card, qualifying for a mortgage, receiving any form of government payments, etc. etc.

  At that point, anyone that refused to take a “universal ID” would become an outcast from society.

  What the elite want to do is to make sure that everyone is “in the system”.  And it is a system that they control and that they manipulate for their own purposes.  That is one of the reasons why they are slowly but surely discouraging the use of cash all over the world.

  In Sweden, this movement has already become so advanced that they are now pulling ATMs out of even the most rural locations…

  The Swedish government abetted by its fractional-reserve banking system is moving relentlessly toward a completely cashless economy.  Swedish banks have begun removing ATMs even in remote rural areas, and according to Credit Suisse the rule of thumb in Scandinavia is “If you have to pay in cash, something is wrong.”  Since 2009 the average annual value of notes and coins in circulation in Sweden has fallen more than 20 percent from over 100 billion to 80 billion kronor.  What is driving this movement to destroy cash is the desire to unleash the Swedish central bank to drive the interest rate down even further into negative territory.  Currently, it stands at -0.35 percent, but the banks have not passed this along to their depositors, because depositors would simply withdraw their cash rather than leave it in banks and watch its amount shrink inexorably toward zero.   However, if cash were abolished and bank deposits were the only form of money, well then there would be no limit on negative interest rate policy as banks would be able to pass these negative interest rates onto their depositors without adverse consequences.  With everyone’s wages, salaries, dividends etc, paid by direct deposit into his bank account, the only way to escape negative interest rates would be to spend, spend, spend.  This, of course, is precisely  what the Keynesian economists advising governments and running central banks are aiming at….a pro-cash resistance movement is beginning to coalesce and the head of a security industry lobbying group relates,  “I’ve heard of people keeping cash in their microwaves because banks won’t accept it.”

  If you aren’t using cash, that means that all of your economic activity is going through the banks where it can be watched, tracked, monitored and regulated.

  Every time the elite propose something for our “good”, it somehow always results in them having more power and more control.

  I hope that people will wake up and see what is happening.  Major moves toward a one world system are taking place right in front of our eyes, and yet I hear very, very few people talking about any of this.

  So where do you think that all of this is eventually heading?

  

  

  

  

  

• S&P Puts Too-Big-To-Fail US Banks On Ratings Downgrade Watch, Blames Fed

  Having watched the credit markets grow more and more weary of the major US financials, it should not be total surprise that ratings agency S&P just put all the majors on watch for a rating downgrade:

  • *JPMORGAN, BANK OF AMERICA, WELLS FARGO, CITIGROUP, GOLDMAN SACHS, STATE STREET CORP, MORGAN STANLEY MAY BE CUT BY S&P

  Despite all the talking heads' proclamations on higher rates and net interest margins and 'strongest balance sheets' ever, S&P obviously sees something more worrisome looming. S&P blames The Fed's new resolution regime for its shift, implying "extraordinary support" no longer factored in. This comes just hours after Moody's put Bank of Nova Scotia on review also (blaming the move on concerns over increased risk appetite).

  The ratings agency cited significant measures taken by Canada's third-largest bank to increase its profitability over the past couple of years, which signal a "fundamental shift" in the bank's risk appetite.

   

  Over the past two years, Scotia has accelerated the growth in its credit card and auto finance portfolios "both of which are particularly prone to rapid deterioration during an economic shock and exhibit higher defaults and loss severities than mortgage portfolios," Moody's said in a note late Monday.

   

  While the bank's moves are aimed at increasing profitability to counter the lowest domestic net interest margins among Canada's six largest banks, Moody's believes they increase the prospect of future credit losses when the credit cycle turns.

  Goldman, Morgan Stanley & Citigroup rated A- with negative outlook, JPM has A rating with negative outlook, State Street rated A+ with negative outlook, according to Bloomberg data

  Who could have seen that coming?

  

   

  As Bloomberg noted earlier, The Fed's new proposal for a "final firewall" requiring total loss absorbing capacity (TLAC) buffers at the largest banks may be the driver of S&P's decision…

  U.S. banks may collectively need to add $90 billion in debt by Jan. 1, 2022, to help ensure an orderly wind down in case of failure, which may add $680 million to $1.5 billion in annual costs. Eight G-SIBs would hold a minimum of long-term debt (LTD) under the Fed's Oct. 30 TLAC proposal. LTD is meant to address "too-big-to-fail" concerns by having a known quantity of capital to help a bank transition through resolution. The Fed reasons that LTD could be used as a fresh source of capital, unlike existing equity.

   

  Companies Impacted: Using 4Q14 figures, the Fed estimates six U.S. G-SIBs collectively face a $120 billion TLAC and LTD shortfall. LTD stand-alone shortfall is approximate $90 billion. Among the eight G-SIBs are JP Morgan, Citigroup, Bank of America, Wells Fargo, Morgan Stanley, State Street and Bank of New York.

  All of which have seen risk-weighted assets surge since 2008…

  

   

  Just as we suspected, S&P's decision is based on The Fed's new regime:

  • *S&P CITES FED'S NOTICE OF RULEMAKING FOR ACTIONS ON EIGHT GSIBS
  • *S&P REVIEWS RESOLUTION REGIME FOR U.S. BANKS
  • *S&P SEES EXTRAORDINARY SUPPORT NO LONGER FACTORED IN GSIB RTGS
  • *S&P EXPECT TO RESOLVE CREDITWATCH ON GSIBS BY EARLY DEC.

  In other words right before The Fed's rate hike decision.

  Charts: Bloomberg

  

  

  

  

  

• Your Health Insurance Premiums Are About To Go Through The Roof -The Stunning Reason Why

  After years of delays and failed launches, Obamacare has finally taken hold, and with it the economic and financial implications from this mandatory tax are finally being felt.

  We have extensively covered how Obama’s Affordable Care Act will end up being a failure,  observing both the economic implications in “In Latest Obamacare Fiasco, Most Low-Income Workers Can’t Afford “Affordable Care Act” as well as its operational shortcomings in “Obamacare Is A Disaster: Co-Op Insurers Across America Are Collapsing, And Now There Is Fraud“, paradoxically even as Obamacare – a tax – was according to the BEA the single biggest contributor to GDP growth in the third quarter.

  Of course, the most obvious reason why Obamacare will have a dire impact the economy is also very simple: soaring healthcare premiums, also covered before…

  

   

  … which incidentally also explain why all those touted “gas savings” failed to materialize in discretionary spending behavior: all of the “saved” money went to cover rising health insurance costs.

  None of this should come as a surprise.

  What should, however, is that according to a very unexpected twist healthcare premiums are about to soar so much in the coming months that the shocking increases of the past year will seem like a walk in the park.

  The reason for this comes courtesy of a new report from the WSJ which explains something few if any had expected: corporate insurers are scrambling to profit from Obamacare!

  Yes, we know: Obamacare was written by the health insurance companies, and it was supposed to benefit them first and foremost as US households struggled to catch up to what most rational observers had said would be surging premiums. And, on the top line, it did just that: “under the ACA, insurers have seen an influx of new membership in individual plans and in Medicaid plans they administer for the government, expanding the industry’s total U.S. revenue to $743 billion in 2014, the year the law’s biggest changes took effect, from $641 billion the year before, according to a new analysis by consulting firm McKinsey & Co.“

  So far so good, and just as expected – incidentally, that 16% increase in industry revenue comes right out of your pocket, dear U.S. reader with the blessings of the US Supreme Court of course.

  But where it gets fascinating is that while the surge in the top-line was expected, what comes as close to a black swan as possible, is what happens below the revenue line on the insurers’ income statement.

  The stunning finding comes from a new analysis by McKinsey which notes that much of that revenue growth has been unprofitable! Health insurers lost a total of $2.5 billion, or on average $163 per consumer enrolled, in the individual market in 2014, McKinsey found. A number are also expecting to lose money on their marketplace business for 2015.

  

   

  The simple bullet point summary:

  • Insurance industry revenues surged by 16% thanks to Obamacare
  • However, its costs surged by… more than 16%

  How is this possible?

  Shouldn’t all the benefits courtesy of the Obamacare tax flow through largely unobstructed to the bottom line? The answer, it appears, is no.

  At big insurer Aetna Inc., the evidence of the law’s impact could be spotted last month in a Phoenix classroom, where Aetna was training a class of customer-service hires who will support a suite of re-engineered ACA marketplace plans dubbed “Leap.” Those products will have a different service approach, with fewer automated phone prompts and a completely new staff that is supposed to spend more time solving customers’ problems.

   

  A trainee stood at a whiteboard, drawing stick figures with speech bubbles in a Pictionary-style game. “Conversation?” asked a class member. “Transition of care?” ventured another. The teacher gave the answer: The new reps had to keep commitments to consumers. That meant calling them back if needed.

   

  With its Leap plans, Aetna is using many of the approaches that are gaining momentum in the industry. The Leap plans, which will roll out in four states this fall but are expected to be more widely available next year, rest on different technology than other Aetna products, including a new claims-processing platform, the company says.

   

  “It’s a mammoth change in the offering, with everything being brand-new,” said Dijuana Lewis, an Aetna executive vice president. Aetna said this week it would likely lose money in 2015 on its exchange business.

   

  The Leap insurance will include limited networks: In Arizona, it will be built around just one provider, the large Banner Health system. The Leap plans also aim to be easy to understand. For instance, they generally won’t include coinsurance, in which a consumer pays a percentage of the cost of a medical service, a concept many people find confusing.

  And, as we now learn, all these changes and all this “simplification” will cost lots of money. In fact more money, than the tax actually brings in for most.

  It appears that while US health insurers had modeled out their spike in revenue courtesy of Obamacare, not even they anticipated the associated costs the “Affordable” Care Act would entail.

  That, however, is amazing, because while everyone else was worse off as a result of Obamacare, at least the conventional wisdom was that the insurers would make off like bandits. Not only is that not the case, but Obamacare – in a glorious example of how government meddling destroys everything – is actually leading to reduces profit margins for the one group that was supposed to be a sure winner!

  However, since it is too late to undo Obamacare, what do these latest revelations mean?  According to the WSJ “now, a lot of insurers are recalibrating their approach for 2016, with changes visible at all levels of the industry—from pricing to product design.”

  Mostly pricing.

  The WSJ reminds us that “premiums for a type of plan that is closely watched as a signal of consumer costs—the second-lowest-priced insurance product in the law’s “silver” metal tier—will increase 7.5% on average across the roughly three dozen states that rely on the HealthCare.gov marketplace, according to the administration.”

  For larger companies, the losses were survivable. But rate increases create a risk that consumers may get sticker shock despite the availability of federal subsidies that reduce the cost sharply for many.

  Peter Wainwright, 63 years old, who retired from a telecommunications job, currently has a plan bought on California’s ACA marketplace. He and his wife don’t get a subsidy and pay about $2,230 a month, and the rate is increasing for 2016. “Everything has gone up,” said Mr. Wainwright, of Half Moon Bay, Calif.

  The punchline:

  The health law remade the individual market, forcing insurers to sell plans to all consumers and banning them from charging rates based on health conditions. Insurers struggled to predict their costs, and many didn’t set rates high enough to cover the care of those they enrolled.

  And since the insurers care far more about boosting profits than merely rising revenues which are more than offset by rising costs, and since most insurers are losing money on existing plans, expect all the rate increases incurred so far to be a mere walk in the park compared to the stratospheric premium surges that are about to be unveiled and that would make even the infamous Martin Shkreli green with envy.

  

  

  

  

  

• San Fran Fed Defends Rate Hike, Says Ignore Terrible Wage Growth Data

  It is becoming increasingly clear that, come hell, high water, or dismal data, The Federal Reserve will raise rates in December whether the market likes it (which it will guarantee) or the economy doesn't (which doesn't matter after all).

  A month ago, Stan Fischer dropped the first hint when he told Jackson Hole attendees that The Fed could ignore the inflation target because of transitory issues.

  Fischer said there's "good reason to believe that inflation will move higher as the forces holding down inflation dissipate further." He says, for example, that some effects of a stronger dollar and a plunge in oil prices have already started to diminish.

   

  Fischer added "The Fed should not wait until 2% inflation to begin tightening," thus making that data item irrelevant for deciphering The Fed's decisions.

  Then, having warned of global turmoil weighing on her decision to raise rates, Yellen reversed position and brushed off any concerns about global uncertainty.

  Yellen removed the "global economic developments" part as well:

   

  Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.

   

  So no matter what happens overseas, all clear given for rate hikes.

  And now, with the final nail in the coffin of data-dependent lies, The San Fran Fed just dismissed 'wage growth' as entirely irrelevent to future growth or inflation…

  These results do not imply that wages and prices are unrelated. Certainly they are tied together in the long run, and wage data will surely contain some information for future price inflation. However, after incorporating information from prices and activity measures, the marginal additional benefit of using wage data appears small.   

   

  Fundamentally, the weak forecasting power of wages for prices suggests that unexpectedly high or low inflation could occur regardless of the recent behavior of wages.   

   

  Researchers have extensively studied how wage data might help predict future price inflation. The overall conclusion of the literature is that wages generally provide less valuable insight into future prices than some other indicators.

   

  In fact, models that do not incorporate wages often result in superior inflation forecasts

  Thus enabling The Fed to justify a December rate-hike no matter how bad the data they are so dependent on turns out to be… Which explains this chart…

  

   

  As Dec rate-hike odds hit series record 52%… in the face of collapsing macro and micro data.

  

   

  

  

  

  

  

• Transcanada Just Killed The Keystone XL Pipeline

  In an ironic twist, just hours after we discussed the record capital outflow from Canada, resulting from the plunge in oil prices and the mothballing of Canada’s energy industry, Obama’s long-desired goal of killing the Keystone XL pipeline has finally come true.

  

  Moments ago, the WSJ reported that Alberta-based Transcanada asked to suspend its U.S. permit application, “throwing the politically fraught project into an indefinite state of limbo, beyond the 2016 U.S. elections.”

  Calgary, Alberta-based TransCanada Corp. sent a letter to the State Department, which reviews cross-border pipelines, to suspend its application while the company goes through a state review process in Nebraska it had previously resisted.

  “In order to allow time for certainty regarding the Nebraska route, TransCanada requests that the State Department pause in its review of the Presidential Permit application for Keystone XL,” the company said in the suspension request reviewed by The Wall Street Journal. “This will allow a decision on the Permit to be made later based on certainty with respect to the route of the pipeline.”

  The WSJ correctly notes that “the move comes in the face of an expected rejection by the Obama administration and low oil prices that are sapping business interests in Canada’s oil reserves.” Clearly the former was never an issue before, however the collapse in oil prices and the resultant plunge in CapEx spending means that the pipeline no longer made much economic sense.

  

  

  

  

  

• What The Oil And Gas Industry Is Not Telling Investors

  Submitted by Nick Cunningham via OilPrice.com,

  Oil prices crashed because of too much supply, but will rebound as production shrinks and demand rises. But what if long-term demand for oil ends up being sharply lower than what the oil industry believes?

  That is the subject of a new report from The Carbon Tracker Initiative, which looks at a range of scenarios that could blow up oil industry projections for long-term oil demand.

  Historically, Carbon Tracker says, energy demand has been driven by population, economic growth, and the efficiency (or inefficiency) of energy-using technologies. Carbon Tracker looks at a couple possible future scenarios in which those parameters are altered, resulting in dramatically lower rates of oil consumption.

  Carbon Tracker has been a pioneer in the concept of “stranded assets,” the notion that fossil fuel assets will lose their value as the world moves to restrict carbon emissions. If an oil field cannot be produced profitably in a carbon-constrained world – or cannot legally be produced because of certain regulations – then it ceases to have value. That puts investors’ dollars at risk, a risk that financial markets have not fully grappled with.

  However, in a new report, Carbon Tracker expands upon the possible scenarios in which oil demand may not live up to industry predictions.

  For example, if the world population hits only 8.3 billion by 2050 instead of the 9.7 billion figure typically cited by the UN, fossil fuel consumption could end up being 17 percent lower in 2050 than the oil industry thinks. Coal would be affected the most, with 25 percent reduction in demand compared to the business-as-usual case.

  How about GDP growth? The expansion of the global economy is pivotal to energy consumption. The industry typically bakes in a GDP growth rate of 2.8 to 3.6 percent per year into its forecasts. But these figures could be on the high end, especially since so much hinges on the ongoing blistering growth from China. But, using BP’s pessimistic GDP scenario in which China and India only grow at 4 percent per year, global energy demand could be 8.5 percent lower in 2035 than the business-as-usual case.

  

   

  Perhaps more threatening to future oil demand are global policies to ratchet down greenhouse gas emissions, as previously touched upon. Although international negotiations have largely failed to halt the growth of carbon emissions, a significant effort to zero out carbon over the long-term would necessarily cut deeply into demand. Industry projections largely ignore this possibility, as industry estimates for fossil fuel demand in the future would likely lead to average global warming of 4 to 6 degrees Celsius, exceeding the stated goal of capping warming at 2 degrees. More importantly, industry projections for fossil fuel use already exceed the totals that would result if the carbon reduction goals already laid out by countries heading into Paris are implemented. Caps on emissions would upend the entire business model of the oil industry.

  Carbon Tracker looks at a few other scenarios, including the possibility that renewable energy could make cost reductions and deployment much greater than the oil industry thinks. Indeed, energy prognosticators like the IEA consistently underestimate the market penetration of solar PV and wind. Actual deployment wildly exceeds every projection that the IEA publishes. It is not hard to see oil industry projections off the mark, undone by falling costs and rapid deployment of solar and wind.

  Moreover, the combination of energy storage and renewable energy could transform power markets, solving the problem of intermittent energy. Battery storage continues to get cheaper, another trend that the oil industry could be underestimating. Electricity market transformation would also help scale up battery manufacturing, which in turn would reduce the cost of electric vehicles.

  Take Toyota’s recent announcement that it will target a 90 percent reduction in greenhouse gas emissions from its vehicles by 2050 by developing fuel cell vehicles. There is a long way to go before such a scenario becomes viable, but the announcement should is a shot across the bow for the oil industry.

  In short, Carbon Tracker concludes, there are very real threats to the business models of oil companies, threats that need to be explained to investors. Right now, those threats are not being taken seriously.

  

  

  

  

  

  

• US Will Send Warships To China Islands "Twice A Quarter", Pentagon Says

  Last week, the US did a silly thing. The Pentagon sent the USS Lassen to Subi Reef in the Spratlys just to see if Washington could sail by China’s man-made islands in the South Pacific without getting shot at. 

  

  (Subi reef)

  

  (USS Lassen)

  As ridiculous as that sounds from a kind of “let’s not start World War III” perspective, it’s an entirely accurate assessment of Obama’s “freedom of navigation” exercise. There was no reason whatsoever for the US to be there and the pass-by served no purpose at all other than to test Beijing’s patience. 

  To be sure, China isn’t innocent here. They’ve built 3,000 acres of sovereign territory atop reefs in disputed waters and built runways, ports, and cement factories on their new “land” which understandably makes Washington’s regional allies like The Philippines a bit nervous. 

  Still, it isn’t as if the PLA is about to invade Australia and it seems likely that if one could listen in at The Pentagon, US officials could probably care less about these “sandcastles.” But America’s “friends” in the region think that “this is the time for courage” (to borrow and alter a classic Gartman-ism), and so, Washington felt compelled to sail a warship by the islands just to prove it could. China didn’t fire on or surround the US-flagged guided missile destroyer, but the PLA did follow it and Beijing subsequently expressed its extreme displeasure at the “exercise.” 

  As we noted before and after the “incident”, most “experts” believe the US will need to keep up the patrols if they’re to be “effective.” Sure enough, The Pentagon now says destroyers will sail within 12 nautical miles of the islands twice every three months. Here’s Reuters:

  The U.S. Navy plans to conduct patrols within 12 nautical miles of artificial islands in the South China Sea about twice a quarter, a U.S. defense official said on Monday.

   

  “We’re going to come down to about twice a quarter or a little more than that,” the official said. “That’s the right amount to make it regular but not a constant poke in the eye. It meets the intent to regularly exercise our rights under international law and remind the Chinese and others about our view.”

  Yes, because Washington doesn’t want to “poke anyone in the eye.”

  

  So, as The White House attempts to put on a brave face amid mounting threats to US hegemony, The Pentagon is apprently set to antagonize Beijing for no reason at all other than to appease America’s regional allies who are effectively asking if Big Brother is still dedicated to playing world police officer. 

  We close with China’s warning, issued last week: 

  “If the United States continues with these kinds of dangerous, provocative acts, there could well be a seriously pressing situation between frontline forces from both sides on the sea and in the air, or even a minor incident that sparks war.”

  

  

  

  

  

• How The Fed Has Backed Itself Into A Corner

  Submitted by Leonard Brecken via OilPrice.com,

  In my last article I outlined the case that the fall in commodities is a result of Fed policy more so than fundamentals. The fall in oil began, almost to the day, when the dollar began its rise last June and remained perfectly inversely correlated for rest of 2014 into part of 2015. In 2015, the dollar began to weaken as the U.S. economic growth myth got exposed and yet oil, instead of rising, fell further. The Iran deal helped, as well as OPEC continuing to pump oil above quota levels.

  Admittedly, U.S. oil inventories remain above historical levels, a trend that accelerated in the second half of last year, further fueling the decline in oil. To some extent, that oversupply was enabled by the Federal Reserve’s easy money via rising leverage, as speculation in futures markets drove oil prices up. However, the initial spark was probably tied to a change in the Federal Reserve policy of propping asset prices via Quantitative Easing (QE) vs. what’s going on now in threatening to raise rates.

  Coincidence?

  With Congress reaching a debt ceiling/budget deal, we learned more about how and why this occurred. Instead of more QE, it appears the government is opting for more fiscal stimulus in 2016 as the “deal” basically gives the White House unlimited spending thanks to a relaxed debt ceiling. Coincidence right? Of course not.

  Now it’s becoming clearer as to why this option was taken once again: allow the government to distort asset prices through intervention.

  The Yuan Threat

  As has been reported in the media, the IMF is likely to include the Yuan in its basket of currencies, basically opening the door to the Yuan becoming a reserve currency. This is occurring at the same time the petrodollar is being sold, as commodity oriented nations such as Saudi Arabia are selling wealth funds (i.e. U.S. dollars) to fill their budget gaps.

  Since this adds to downward pressure on the U.S. dollar, it’s no wonder the Federal Reserve has changed course. For one, a strong U.S. Dollar depresses commodities coming into an election year, boosting consumers in lower income brackets. The second motivation for a strong dollar is to ward off the threat of the Yuan replacing the Dollar as the reserve currency.

  Impending U.S Dollar Weakness

  The news that the Chinese government is considering relaxing capital controls and thus allowing the Yuan to appreciate, is a sign that they think the IMF inclusion of the Yuan is imminent. The displacement of the Petrodollar, even fractionally, will result in a drop in the U.S. Dollar. Thus, with this threat, if the Federal Reserve undertakes another round of QE it will further stoke U.S. Dollar weakness.

  That would reverse the commodity declines that began last summer, wreaking havoc on the standard of living especially for the lower income electorate the government depends on for votes, come 2016. So the Fed is weighing the negative consequences of a strong dollar on corporate profits vs. unleashing inflation on the electorate, pressuring long term interest rates. We now see which negative scenario they favor and why.

  This should further explain the influences on oil prices and clearly show that fundamentals aren’t the only thing at play on setting prices.

  

  

  

  

  

• "Somebody Will Do Something Stupid"

  Submitted by Jim Quinn via The Burning Platform blog,

  Is it just me, or does it seem like we are moving inexorably towards a global confrontation?

  China claims some islands in the South China Sea and we attempt to provoke a military response by sending a US warship within 12 miles of the disputed islands.

   

  We accuse both China and Russia of cyber terrorism on regular basis, even though we released the Stuxnet virus into the Iranian nuclear facilities and have used mass surveillance against people around the world, including allied leaders.

   

  We created ISIS as part of our grand strategy that included turning Iraq and Libya into lawless countries racked by civil war strife and religious zealotry.

   

  We created the Syrian refugee crisis by funding militants against Assad because Saudi Arabia and Qatar want to build a natural gas pipeline through Syria to Europe.

  We led the overthrow of a democratically elected, Russian friendly, government in the Ukraine, and have continuously provoked Russia in their own backyard.

   

  We have covered up the true culprit in shooting down of the Malaysian airliner over the Ukraine.

   

  We have colluded with Saudi Arabia to drive the price of oil down in an attempt to destroy the economies of Iran, Argentina and Russia. Putin has now called our bluff and entered Syria in full force, bombing the shit out of ISIS and proving the US had no intention of defeating these terrorists, because our military industrial complex depends upon having an enemy to fight. Now Obama is placing US troops in the line of fire between Russia, Syria, Turkey, Iran, and ISIS.

   

  Europe was already bankrupt, using trillions in new debt to pay off the unpayable debt they already had. Now they are being overrun by Muslim hordes who will cause their societies to splinter and cause chaos, violence, and war.

   

  Domestically, Obama has successfully splintered the country along the lines of race, religion, gun ownership, producers vs consumers, and wealth.

  There are a multitude of fuses affixed to dozens of powderkegs and little kids with matches are on the loose.

  I don’t know which of the fuses will be lit and which powderkeg will blow, but someone is bound to do something stupid, and then all hell will break loose.

   

  It could happen at any time. One military miscue. One assassination. One violent act that stirs the world. And the dominoes will topple, setting off fireworks not seen on this planet since 1939 – 1945. I can see it all very clearly.

  

  

  

  

  

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• Q&A: Will China Stop Its Bleeding with Even Tighter Capital Controls?

  By Chris at www.CapitalistExploits.at

  Let’s look at a couple of questions from the readers today, shall we?

  Hi Chris,

   

  I love your sharing of thoughts. Really insightful and though you may not realise it, you’ve helped me a lot. I’m an entrepreneur running flat out. I’m juggling so many things, some inevitably fall through the cracks and yet I feel like I have to beat my competitors. You and your team there have such a long and deep experience in investing, including early stage investing. As such, I figure you’ve seen a lot of guys in my position. What suggestions do you have? I’m losing my mind.

  Without knowing your business your comment reminded me of an event which sticks in my mind to this day.

  Many years ago, as a teenager, I was on my way to a part time job. I had only recently begun driving, and as such my car was a heap of scrap, about as aerodynamic as a quarry face. One day, driving in traffic, I witnessed another guy who cut me off as he was in a desperate hurry, trying to dodge in and out of two lane traffic going in the same direction. He was driving a lovely shiny new BMW and was red faced, and clearly about as agitated as a mosquito bite in the heat.

  I was in no particular rush and just going with the flow listening to music. The journey to my place of work was about 20 kilometers. When I arrived into the car park, lo and behold, there was this guy climbing out of his car. He’d managed to dodge, weave, drive his car as hard as he could, when he could, and emotionally was close to snapping. He had arrived at the same destination maybe 40 seconds before me but in a completely different state.

  What he should have done really is use his time as effectively as he could. He was trying to do something which was out of his control, namely get to where he was going faster than was really possible given the circumstances.

  I’m as guilty as anyone on this but it’s really important to focus on what’s important not what’s urgent. Understand that they’re not the same thing.

  Now, this next comment is not something I would normally bother publishing but I thought I’d share it since it does show some of the current zeitgeist where unsophisticated investors will make decisions not on any intellectual thought process but on something as inane as how many Twitter followers someone has. Social media reigns supreme.

  I was put onto your site by my financial advisor. The material is interesting but I notice that you’ve not got a lot of Twitter followers.

  Mmm… OK, then. Maybe I should focus less on investing my capital and more on my Twitter followers. I could care less if I only had 12 followers. Seemed to work for Jesus…

  If I stopped posting any content would the value of my thoughts and investment insights be less? As a matter of interest, I receive daily solicitations from “internet marketing professionals” who will deliver me any number of Facebook fans, Twitter followers, LinkedIn friends and more. Just sayin’.

  Onto the next one…

  Hi Chris,

   

  Thanks for the fantastic analysis of the RMB. I signed up literally just in time. I think the second article I read was on shorting the RMB and it made sense so I put it on even though at the time I stubbornly felt that the USD was going to hell. Something I’ve changed my opinion on after reading through your many posts and reports on the topic.

   

  I read a lot of commentary suggesting the the RMB would become the new world currency and that it would revalue higher. Your work was less emotional and just looked at the facts which swayed me.

   

  My question, if you’d be so kind to answer. You guys detailed how the USD carry trade created a demand for RMB but surely when those dollars enter China, or any recipient country they would ultimately land up as foreign exchange reserves. Furthermore, China then would have massive USD foreign exchange reserves meaning that the RMB should be more not less stable in a dollar rally. How do you think about this?

  Thank you! I suggest you try to forget about the noise and look at the numbers first. Once you’ve looked at the data then listening to divergent opinions is much easier. You’ll rapidly identify a professional from random opinionated people cluttering the net selling fear, mayhem and catastrophe at every corner, or whatever is the flavour of the day (see my comments about Twitter above).

  To answer your question. When the dollars came into China, largely due to them being made incredibly cheap due to Fed induced QE, this put upward pressure on the RMB – something the PBOC didn’t want. As an example, if you invested capital into something like a RMB CD then those dollars end up on the balance sheet of the Chinese bank. Chinese banks however aren’t typically in the business of lending out dollars but rather RMB. As such they sell the USD in the interbank market to obtain RMB which they can lend out. Banks are in the business of lending.

  That particular trade would cause downward pressure on the dollar (sale of dollars) and that’s not a good situation for an export driven economy such as China. As such the PBOC comes in and buys those dollars but to do so they print RMB thus creating a balance sheet debit. They effectively sterilize the purchase of RMB made by the Chinese bank.

  Everyone was happy with this scenario as dollar financing of China’s boom continued, GDP growth targets kept being met, and the RMB peg to the dollar was largely kept in check. What’s more the RMB – even though sterilization was occurring – was allowed to rise, thus creating a risk cushion on the currency swap by those short dollars. This itself incentivized more of the same behaviour.

  The problem is that for every action there is a consequence to that action. The net result is the PBOC balance sheet expanded as they either issued RMB denominated bonds or bills in exchange for the purchase of those dollars. They now have yuan denominated liabilities in massive quantities.

  This all worked so long as growth continued and so long as those RMB which the original bank had now lent out went into productive assets and there was no loan quality deterioration. Of course, that’s not what’s been happening. Since such large quantities of dollars were pouring into China, based on the growth story, so too the PBOC was creating insane amounts of RMB to sterilize those incoming dollars.

  That incredible creation of RMB had to go somewhere and it’s gone into, among other things, building of famous Chinese ghost cities. The incentive for this behaviour was compounded by the fact that Chinese government officials are rewarded based on GDP growth. Building useless ghost cities shows up as GDP growth but it’s completely unproductive despite what Paul Krugman may have to say about it.

  This is now a problem on multiple fronts:

  1. QE in the US has stopped and those same stimulative policies have NOT stopped in countries such as China. This divergence helps to create an additional bid for the dollar. The Fed doesn’t need to raise rates right now as there exists a synthetic tightening. When the rest of the world is easing and the US stops easing then this is dollar positive.
  2. The China growth story is now seriously in question. Without continued growth the trade unwinds.

  Combine this with the size of the carry trade we’ve discussed at length, and we have an incredible setup to make a lot of money as this plays out. What will continue to take place is foreign exchange outflows from China. At what point do we not just call it what it is? Capital flight.

  History tells us that capital flight is often followed by tighter capital controls, and ironically it is capital controls which will only exacerbate the pressures, meaning that when the final twig snaps the collapse comes all the harder. The pressures for China to devalue will only continue to mount and implementing tighter capital controls will not aid China in its bid to have their currency included in the SDR basket by the IMF.

  – Chris

  PS: If you enjoyed this note then you might also want to receive future write-ups just like this one as well as periodical subscriber-only free reports and more (no spam, though). We’re consistently building upon our investment framework, shared with you in these notes and we welcome the widest possible participation, as well as your thoughts and comments. You can join us HERE.

   

  “The function of leadership is to produce more leaders, not more followers.” – Ralph Nader

  

  

  

  

• Confusion: US Equities Drift Lower (China Higher), Yuan Surges & Purges As China Manufacturing Misses (And Beats)

  Confusion reigns… China's Manufacturing PMI is in contraction according to both the Official and Markit/Caixin measures (but the former was flat and missed while the former rose and beat "confirming economic stability" according to the 'official' press). Following the largest strengthening fix for the Yuan in 10 years, both the onshore and offshore Yuan are weakening by the most since the August devaluation. Finally, having cliff-dived at the open, Chinese stocks have bounced back to unchanged on the Ciaxin PMI beat (but US equities drift lower still).

   

  It's a rise and a beat & a miss and a drop for Chinese manufacturing…

  

  The last two times the Caixin measure has diverged positively from the official data, it has converged lower in the next 3 months.

   

  After the biggest strengthening fix in 10 years…

   

  

   

  Onshore (and offshore Yuan) are weakening by the most since the August devaluation…

  

   

  Compressing the Onshore/Offshore spread back to zero…

  

   

  And finally Chinese stocks tumbled on the weak 'official' PMI and surged back to unchanged on the Caixin PMI…

  

   

  But US equities saw no such bounce as hopes for moar easing fade after comments on "stability" after the Caixin print…

  

   

  So chaos reigns once again…

   

  Charts: Bloomberg

  

  

  

  

  

• Here Are The Five "Good News" That Can Cause A Market Selloff According To Bank of America

  “If bad news is great for stocks, then is good news bad?”

  Bank of America reminded us earlier that just this month, the PBoC cut rates, the ECB confirmed QE2, Sweden announced additional QE, and the BoJ promised additional easing if necessary ‘without hesitation’, and for markets, “the stimulus of October 2015 has worked, with equities and corporate bonds rallying hard.“

  The main driver of this newly unleashed central bank intervention? Terrible global economic data.

  BofA further says that “central banks are easing because global growth is weak” (in the process making global growth even weaker but at least pushing risk assets to new highs) adding that “global profits are down 4% since February. Even the US has struggled: payroll growth has decelerated and the latest US GDP growth rate was a pitiful 1.5% in Q3. And the level of US inventories is unambiguously recessionary.”

  But while “confidence in quantitative success for the economy is nonetheless low” the ‘loss of faith in central planning’ trade which emerged briefly in late August and September, promptly fizzled as “don’t fight the Fed” once again regained its top position on the pantheon of Wall Street aphorisms, right above BTFD.

  So if terrible economic news is great for stocks, will the opposite be true as well, especially with a resurgent hawkish Fed and odds of a December rate hike soaring to the highest level yet?

  

  Here are the five “good is bad” things which according to BofA, will change the narrative, and lead to a market selloff in November.

  What changes this narrative? What signals Q3 was the trough for macro expectations? What causes a market sell-off in bonds in November? Strong October data & market validation of a higher rates/higher growth scenario in coming quarters:

  • China PMI>50.5
  • US ISM>52
  • US payroll>225K
  • US banks rally: XLF>$26 would confirm stronger “domestic demand” expectations.
  • US dollar stable: if the Fed can hike without boosting dollar this is positive; DXY must not breach 100; a rally in ADXY (Asia FX index) above 110 crucial as this would erase the apocalyptic view of China growth prospects.

  There is another potential adverse catalyst: while often cited as a source of market strength, the end of Obama’s second term may be just the opposite.

  The “Wall Street boom, Main Street bust” narrative is one central banks would very much like to avoid in 2016, especially as 2016 is a US election year. And it’s worth noting that the end of a two-term Presidential cycle has often signaled the end of an excess valuation somewhere in the global financial markets: the overvaluation of the US$ after JFK/LBJ, the undervaluation of bonds after Ford/Carter, the overvaluation of tech after Clinton and the overvaluation of housing after Bush (see Chart 7).

   

  

  Will the S&P crash at the end of 2016? We won’t know, but it certainly would be a fitting conclusion to Obama’s second term if the stock bubble, the only thing Bernanke Yellen Obama “got right” and doubled it (at a cost of only $10 trillion in government debt), were to wipe out all its gains since 2009 and confirm to everyone just how naked the US president had been all along.

  

  

  

  

• Partner Of "China's Carl Icahn" Executed By Local Police After Attempting Escape Following Insider Trading Charges

  The name of Shanghai’s Xu Xiang is not a household name in US financial circles. It is in China.

  According to a recent profile in Want China Times (as of May 2014) Xiang, who heads the Shanghai-based Zexi Investment (founded in 2009 and since then generating literally impossible returns) is not only one of the richest Chinese investors, but has been called anything from China’s “Warren Buffett” to China’s “Carl Icahn.” He also has a reputation of being an activist within China’s stock market. To wit from May 2014:

  The major players in China’s capital market, including equity fund and insurance asset management firms, are gearing up to secure seats as members on the boards of directors in listed companies in a bid to influence these firms to give dividends, putting profit into their own pockets, according to Guangzhou’s Time Weekly. According to the newspaper Xu Xiang, head of Shanghai-based Zexi Investment, is one among these market players in China.

   

  Xu, from Ningbo in eastern China’s Zhejiang province, built his wealth from scratch through investments in the secondary capital market. Xu set up Zexi Investment in 2010 and gained a good reputation as a profit maker in the Chinese equity fund market. The fund is reported to currently manage more than 10 billion yuan (US$1.6 billion).

   

  A statistics report on the Shanghai stock exchange revealed that Zexi Investment has raised its stakes in several listed companies, including in conglomerate Ningbo United Group, since the beginning of this year. Xu’s investments have made Zexi more visible in the Chinese capital market.

   

  The newspaper reported that Xu’s strategy is not unusual in the US market and is similar to that of Warren Buffett, a prominent US equity investor, although this style is not often seen in China. The report said it is believed that more and more Chinese investors will follow Xu’s example by getting selected as members of the board of directors in listed companies to influence the companies.

   

  A manager in an equity fund firm, who declined to be named, told Time Weekly that Zexi had tried the same technique previously with Sino Life Insurance and Anbang Insurance Group. The fund manager suggested that insurance asset management companies invest in the secondary market.

   

  Xu has been called the Chinese version of American investor Carl Icahn. Icahn, 77, has repeatedly made his presence felt in the equity market, boosting his stakes in several major firms on Wall Street, such as Dale, Apple, and eBay.

  Zexi also appeared in US mainstream news late last week, as a result of Bloomberg’s report that while China’s stock market was crashing, “the country’s top 10 performers, run by Ze Quan Investment, Sunrise Investment, Zexi Investment and Yingyang Asset Management, found gains in the June-August period.” As the following Bloomberg chart shows, four of Zexi’s funds were among the top 10 performing hedge funds from June to August.

  

   

  It gets better: according to Zexi’s own website, the return of its various funds since 2010 is as high as a mindblowing 3944.9%!

  

  And then, perhaps related to Zexi’s tremendous outperformance, Xu’s name once again emerged late on Sunday in China, because as China’s Global Times reported, “Xu Xiang, general manager of the Shanghai-based company Zexi Investment, is under investigation for suspected inside trading, the Ministry of Public Security announced late Sunday.”

  Xu and several others allegedly obtained inside stocks information via illegal methods and participated in insider trading and manipulating stocks prices, a ministry statement said.

   

  The suspects have been placed under coercive measures, which include summons by force, bail, residential surveillance, detention and arrest.

  That is all the pithy announcement by the People’s Daily-affiliated newspaper had about the unexpected arrest of one of China’s capital markets scions over “insider trading” charges.

  Ok, this is China: crazy things happen all the time. But where things got outright ridiculous, was when moments ago when as China National Radio reports, Wu Shuang, a partner of Xu Xiang’s at Zexi, and also an insider trading suspect, was shot and killed by Chinese police when he “resisted and tried to escape.” The complete, google-translated brief note:

  Further investigation by the Ministry of Public Security, Xu Xiang criminal gang suspected of insider trading and other offenses are criminal detention. A member of their criminal group Wu Shuang tried to resist escape, the police shot on the spot. 

  And that was it.

  In fact, that was not even it, because moments after the report (which had been corroborated by Bloomberg) was released, CNR promptly 404’ed the entire story.

  

  And that’s not all: moments ago Bloomberg also reported that Shanghai police just raided Zexi Investment’s Shanghai office on Sunday, “taking away computers and other materials, according to a person familiar with the matter, in the latest attempt by Chinese authorities to crack down on strategies blamed for exacerbating a $5 trillion stock-market rout.”

  So what is the fate of Wu Shuang, or billionaire Xu Xiang for that matter? We probably will never know, although we have a feeling that a slot for China’s “next Carl Icahn” has just opened, especially since as of right now, trying to open the non-cached version of the Zexi Fund (the cached one can still be found here), has just been 503’ed, a fate we are certain has befallen its executives as well.

  

  

  

  

• The Military-Industrial Complex's Latest Best Friend – Barack Obama

  Submitted by Chuck Spinney via The Blaster blog,

  The Pentagon just won another small skirmish in its long war with Social Security and Medicare. That is the unstated message of the budget deal just announced gleefully by congressional leaders and the President.  To understand why, let’s take a quick trip down memory lane.

  Last January, President Obama submitted Fiscal Year (FY) 2016 budget to Congress, and he proposed to break the spending limits on both defense and domestic programs.  These limits are set by the long-term sequester provisions of the Budget Control Act of 2011  (BCA), which, for better or worse, is the law of the land, and Obama was asking Congress to change the law.  Mr. Obama wanted to finance his ramped up spending proposals by increasing taxes.  Of course, he knew that the Republican controlled Congress lusted for defense increases but hated domestic spending, particularly entitlements. Moreover, he knew increasing taxes was like waving the red cape in front of the Republican budget bulls.  So, he knew his budget would be dead on arrival.  Obama’s budget, nevertheless, had one virtue: it was up front about the intractable nature of the budget problem.  In effect, whether deliberately or not, Obama laid a trap that the Republicans merrily walked into during the ensuing spring and summer.

  Obama's gambit set into motion a tortured kabuki dance in the Republican controlled Congress.  The Republicans, as Obama well knew, wanted to keep up the appearances of adhering to the BCA.  But at the same time, they wanted desperately to shovel money into the Pentagon’s coffers.  The net result was that Obama’s proposal triggered a series of increasingly irrational Congressional negotiations, bizarre back-room deals and weird budget resolutions.  These machinations came to a head with the passage of a National Defense Authorization Act (NDAA) that proposed to (1) keep the Pentagon’s base budget at the BCA level of about $499 billion, but (2) pack the accounts in the Pentagon’s Overseas Contingencies Operations fund (OCO) with a programs and pork that should have been in its base budget.  The reason for the dodgy OCO 'slush fund' rested in the politically irresistible fact that the OCO is a separate war-fighting fund** for the Pentagon that is exempt from the spending limits set by the BCA’s sequester provisions.  The net result of the smoke and mirrors by the Budget and Armed Services Committees of Congress was a total defense budget that was almost identical to Obama’s original submission, but one that was not accompanied by his domestic funding increases or his tax increases.  And this monstrosity was all wrapped up in a ridiculous pretense of adhering to the BCA limits. 

  Last week, President Obama seemed to close the trap by vetoing the 2016 NDAA. But this too was smoke and mirrors.

  The veto put in motion yet another kabuki dance, this time behind closed doors between the White House and the leaders of Congress. The goal was to reach an overall budget deal that would avoid a government shutdown, which the majority Republicans were terrified of being blamed for on the eve of an election year.  At the same time, they wanted to dodge the BCA’s sequester bullet while they shoveled more money into the Pentagon. 

  That deal has now been joined, and the Republic has been saved, albeit at an unknown price.  Nevertheless, some of the sordid details of that price are now beginning to seep through the chinks in the Hall of Mirrors that is Versailles on the Potomac.

  According to this report in Defense News, the elements of the budget deal include:

  The deal raises the BCA spending caps (again) by $80 billion over next two years; including $50 billion in FY2016 and $30 billion in FY2017.  It also increases the Federal Government’s debt limit. 

  These spending increases would be split equally between defense and domestic programs, and they would be financed by two squirrelly provisions, to wit:

  The first financing gimmick cuts back Medicare and Social Security disability benefits. But if past is prologue, the cut to Medicare is likely to be reversed again next year, which is an election year — because everyone in Congress wants the endorsement of the American Medical Association (AMA).  The cut to Medicare providers was first made permanent law by the Balanced Budget Act of 1997, and since then Congress has reversed the scheduled provider cut 17 times.

   

  The second financing gimmick is to sell crude oil  from the US Strategic Petroleum Reserve. Ironically, this rather bizarre provision is peculiarly fitting to the culture of Versailles on the Potomac.  Few remember that the reserve was justified to the American people in 1975 as an insurance “cushion" to reduce the adverse effects of future rises in oil prices or supply disruptions engineered by OPEC, which is controlled by our supposed “ally” Saudi Arabia.  So why sell the reserve's oil when prices are near record lows (adjusted for inflation) compared to those of the last fifteen to twenty years, particularly since the Saudis are flooding the market to take out the US frackers?  Who benefits is a fascinating question with all sorts of twists and turns and is not yet answered.  But it is worth recalling the 1997 Balanced Budget Act had a provision to sell the Naval Petroleum Reserve at Elk Hills (sold in 1998) – at that time, the largest privatization of government assets in history, precisely when oil prices were at their lowest level (adjusted for inflation) since the 1960s. They sold it to Occidental Petroleum which made a killing.

  There is one thing the deal makes clear, however. The Pentagon's share of the spending increases would be $33 billion in FY16, made up of a $25B increase in the Pentagon’s base budget and an $8B increase in the OCO. As for how the Pentagon’s $15 billion increase in FY17 will be allocated, the report in Defense News is silent.

  So, there is good reason why champagne corks are popping in halls of the Military – Industrial – Congressional Complex (MICC) and its lobbying affiliates on K Street.  Indeed, to celebrate the triumph, the AF immediately announced it awarded Northrop-Grumman a huge concurrent engineering contract (Milestone B) to design and build the first 21 of 100 new long range strike bombers, which heretofore had been shrouded in heavy secrecy. No one knows what this bomber will even look like, let alone what the program will cost, but two years ago, there were reports of a “pre-cost-growth” total program cost estimate (R&D and production) reaching $81 billion. At least one of the MICC’s euphoric wholly-owned subsidiaries in the Fourth Estate has already written that 100 bomber is not enough, given the threats we face and the number of aging bombers that need to be replaced. 

  This new bomber program is  by far the largest weapon acquisition program yet started in the 21st Century.  Yet there has been no oversight, except by its advocates in the smoke-filled, super-secret secure compartmented information facilities (SCIFs) spread around Versailles.  Moreover, the bomber's heavy concurrency means that the production-related money will quickly start flowing to hundreds of congressional districts, well before it is designed.  So, before you can say sequester next year, the Bomber, like the troubled F-35 Joint Strike Fighter, will be unstoppable.  And, like the F-35, it will acquire a life of its own to live on, no matter how badly it fails to meet its cost goals, its capability specifications, or its production quotas — for the simple but powerful reason that a majority in Congress are being bought off today in a way that will ensure they vote for it tomorrow.  

  But there is more.  The new Bomber is just the beginning of the new defense boom that Mr. Obama and Congress are launching beneath the smoke and mirrors of their budget practices.  The Pentagon already has a  bow wave of increased spending for new weapons in its R&D pipeline.  In that sense, it is no accident that, a year ago, as he was departing the Pentagon, the Pentagon’s ineffectual comptroller Robert Hale characterized the new bomber as the “canary in the coal mine.” He was wringing his hands over the rapidly growing requirements for larger defense budgets in the future — requirements he helped to create.  Bow waves are a perennial feature in Pentagon planning.  I first heard the term in 1973.  The current bow wave, like its predecessors, will lead inexorably to more budget crises and more dodgy budget deals made by the best government money can buy.

  So, once again, Mr. Obama had a shot at leading from the moral high ground, and once again, he blew it.  He had the Republicans on the ropes, with all their warts on full display, but then he squandered an opportunity to effect even a pretense of challenging a thoroughly corrupt system. Obama’s most recent performance is yet more proof that he is no change agent.  A better characterization would be that he is merely another Manchurian Candidate, whose role is to protect the interests of the factions making up the shadow government that is now running the show – what former congressional staffer Mike Lofgren calls the US Deep State.***

  *  *  *

  * This essay is the second in a series of occasional essays on the nature of defense spending. The first can be found here.

  ** The OCO is a George W. Bush gimmick, created in 2001 after 9-11 to capitalize on the national hysteria to pay for the Global War on Terror by taking its costs off the books.  All our previous wars — e.g., WWI, WWII, Korea, Viet Nam, Kosovo — were funded out of the “base” defense budget and there was no need set up a special war fighting account. 

  *** Lofgren a former Republican congressional staffer on the House and Senate Budget Committees has written an important new book,  The Deep State: The Fall of the Constitution and the Rise of a Shadow Government. It will hit the stands next January.

  

  

  

  

  

• Things You'll Never See

  Presented with no comment…

   

  

   

  Source: Ben Garrison

  

  

  

  

  

• PBOC Fixes Chinese Yuan Higher By 0.54%, Most Since 2005

  On Friday morning, after the biggest surge in the onshore Yuan in a decade, we explained it as follows: “capital controls are to some extent counterintuitive. That is, the stricter the capital controls, the more people want to move their money out of the country. Here’s how we put it last month: “What better way to spark a capital exodus than with very vocal, and very effective capital controls. Just look at Greece.”

  Indeed, China will likely need to completely liberalize the capital account in the coming years in order to pacify the IMF which is poised to throw Beijing a bone and grant its RMB SDR bid. Inclusion could lead to some $500 billion in reserve demand.

   

  That helps to explain why overnight, the yuan soared the most in a decade after China moved to loosen capital controls with a trial program in the Shanghai free trade zone that would allow domestic individuals to directly buy overseas assets. The move marks another step towards capital account convertibility, thus bolstering Beijing’s bid for yuan internationalization.

  Ironically, this did absolutely nothing to ease the local population’s concerns that capital outflows are accelerating, and certainly did nothing at all to help the Chinese export economy, which as we saw from the overnight PMI numbers, deteriorated once more to new cycle lows.

  

   

  Fast forward to today when Westpac strategist Sean Callow said that the Froday jump in yuan’ spot rate on Friday and weaker dollar since last week’s close could mean largest daily gain in yuan fixing in several years, adding that the obvious policy priority for stronger yuan essentially sidelines fixing models for time being.

  Sure enough, as per the fixing limits established as part of the August 11 Yuan devaluation, moments ago the PBOC announced that it had set the Yuan at a USDCNY fixing of 6.3154, a strengthening of a massive 0.54% – the most since 2005 – following the manic end of trading PBOC intervention on Friday that sent the Yuan soaring some 300 pips from 6.3475 to 6.3175.

  

   

  So while the Chinese capital outflow is accelerating with every passing day, and which may now be best seen in the daily surge in the price of Bitcoin which has become a preferred means of circumventing China’s strengthened capital controls…

  

   

  … China is well on its way to not only filling the entire devaluation gap, but slamming its export industries with an increasingly stronger currency, and thus assuring that any stabilization in the Chinese economy is promptly wiped away.

  

  

  

  

  

• Putin's Approval Rating Reaches A New High

  Submitted by Pater Tenebrarum via Acting-Man.com,

  Regime Change Must Wait …

  According to a report at Russia Insider, something we thought would be nigh impossible has just happened – Vladimir Putin’s approval rating in Russia has soared to yet another all time high:

  “Russian President Vladimir Putin’s approval rating has reached historical maximum and hit almost 90%, according to a poll conducted by Russian Public Opinion Research Center (WCIOM). Putin’s approval rating has broken a new record reaching 89.9%. The last record was registered in June 2015 — 89.1%

   

  According to WCIOM, ‘such high rating of approval of the Russian president is registered, first of all, in connection with events in Syria, Russian aviation’s airstrikes at terrorist positions.’ Sociologists reminded that the Russian president’s rating has remained higher than 80% for the last two years. ‘Putin’s rating started growing in spring 2014 against the backdrop of Russia’s reunification with Crimea and Sevastopol. In March 2014, the rating stood at 76.2% on average, in April — at 82.2%, and in May — at 86.2%,’ WCIOM said.

   

  

  Putin adorned in his presidential ray-bans. He’s never been more popular in Russia

   

  We have put together a chart of Putin’s approval rating history by using the most recent chart available from the Levada Center (another Russian polling company) and complementing it with the result of the recent WCIOM survey (unfortunately we couldn’t find a chart of the WCIOM poll’s history, but various news reports that on Putin’s rating that have appeared over time suggest that the two polls are tracking each other very closely, so this amalgamated chart should serve):

   

  

  The Levada Center’s Putin approval rating survey, with the latest WCIOM survey result added at the end – click to enlarge.

   

  In short, all those who don’t like Putin or were hoping for some sort of regime change in Russia continue to be out of luck.

   

  Mainstream Media, Here and There

  One reason why we are even posting about this is that the Western press has also reported on the event, employing a somewhat less neutral tone of voice. For instance, the Washington Times writes: “Putin’s approval rating hits new high as Russia’s state media sells Syria campaign”

  “From triumphant reports about the “liquidation” of “terrorist training camps” to Kremlin-friendly analysts praising Moscow’s growing international influence, the official media’s coverage of Russia’s dramatic entry into Syria’s more than 4-year-old civil war has been decidedly upbeat — and one more reminder of the Kremlin’s ability to dictate the terms of popular debate.”

  Given that terrorist camps are apparently indeed liquidated by Russian air strikes, the Russian state media are not entirely wrong in this case. As Zerohedge recently reported, in a quite stunning recent development, even Iraq and Jordan are now cooperating with Russia and asking it to help them with subduing IS. They must have been impressed by something the Russians have done (very likely they are actually giving IS discernible problems).

  However, what makes the above sour grapes style reporting (no doubt echoed elsewhere in the Western media) especially funny is that while it is true that the Kremlin exerts extraordinary influence on the media in Russia, one wonders in what way their reportage on Syria is different from the reporting in the happily self-censoring US mainstream media on the Iraq war, especially in the run-up to said war.

  We seem to recall that there was unquestioning support of the administration’s quest to sell a war that was transparently based on little but lies. Anyone with an IQ above room temperature could simply not help realizing that the public was misled. The “free press” was happy to supply truly cheap propaganda in generous gobs (regardless of its presumed political leanings; e.g. the pro-socialist NYT was among the newpapers arguing most forcefully in favor of war and reported even the most ridiculous administration talking points as if they were gospel).

  This was as blindingly obvious as the propaganda dished up by the Pravda in Soviet times. In fact, the handful of people who dared to ask questions when there was still time to potentially reconsider the administration’s course received almost Stalinesque treatment (this continues to this day, only now the people getting the “treatment” are those who dare to question US policy vs. Russia).

  So this is clearly a case of the pot calling the kettle black. Who cares if the media are state-owned or if they are owned by a tiny corporate oligarchy that is in cahoots with the State? The result is exactly the same. This is not to say that Kremlin control over the Russian media deserves approval – far from it. When Putin kicked out the Yeltsin era oligarchs who basically ordered the latter’s government around as they pleased, he inter alia got rid of two media moguls. One of these, namely Boris Berezovsky, was probably the most powerful man in Russia during the Yeltsin era.

  Evidently Putin quickly realized that exerting control over the media would be to his advantage, and so his government started to suppress dissenting voices while giving pro-government propaganda a great deal of room, especially on TV. However, on average the citizens of Russia aren’t any less perceptive than the citizens of other nations. Roughly 107 million Russians are e.g. using social media, so we can assume that Russians are in general fairly internet-savvy.

   

  

  Russian social media users, in millions.

   

  Similar to how this works in the US, it is very easy for the Russian government to whip up nationalist fervor when it is conducting a military intervention abroad. Those questioning the wisdom of interventions will naturally be few and far between, but we are sure they know where to get their information, regardless of what is broadcast on TV.

  In an ironic twist, the places in the developed world where the population nowadays looks askance at any type of military engagement from the very outset are Germany and Japan – regardless of the rationalizations offered in its favor.

   

  Possible Social Mood-Related Implications

  Another aspect worth considering is that Putin’s consistently high approval rating is beginning to align with the trend of the Russian stock market – at least in ruble terms. Readers may recall that we once pointed out that president Bush’s sharply declining approval rating during his second term was one of several warning signs for the stock market at the time, as it indicated that the underlying social mood in the US was increasingly diverging negatively from stock prices.

   

  

  The MICEX Index, daily – surprisingly, it has maintained its recent uptrend in spite of oil prices weakening again and the ruble strengthening somewhat (on Tuesday the ruble has sold off sharply, but it remains quite a bit above its August low).

   

  Since the Russian stock market has given back about half of the gain it achieved earlier this year in dollar terms due to the weaker ruble (it rose by more than 40% in the space of five months in the first half), this is something one should keep an eye on, as opportunity probably continues to beckon. Eventually a more positive social mood should also be reflected in a stronger or at least stable currency.

  We realize of course that Russia’s economic fundamentals are quite weak at present, but they are not as weak as might have been expected in view of the decline in the oil price. Moreover, the currency’s value is primarily a matter of monetary inflation, yields and inflation expectations, and from these perspectives the ruble actually doesn’t look unattractive, ceteris paribus.

  Obviously, the oil price still represents a wild card at this juncture – its recent weakness has at least for the moment weakened the case for a potential trend change we have discussed in these pages a few weeks ago (we currently assume that the bottoming process is simply becoming more drawn out). Conversely, if a trend change were to actually happen, it would lend strong support to the ruble and the stock market.

   

  Conclusion

  Putin is proving remarkably durable as a politician. It is ironic that his approval rating is actually better during the current recession than it was during the preceding upswing, but one should never underestimate the emotional appeal of nationalism. We have little doubt that he indeed enjoys strong voter support (e.g. the Levada Institute is well-known for the quality of its data).

  Russia’s economic situation has forced the Putin administration to adopt a number of economic reforms as we have previously reported. While we are currently not sure whether these proposals have been fully implemented or how successful their implementation was/is, the pressure that has led to their adoption remains in place.

  Although the performance of the stock market and especially the ruble obviously remains highly dependent on energy prices, we continue to believe that the Russian stock market represents an opportunity based on valuation considerations alone. It is still the cheapest stock market in the world, and usually tends to magnify EM rallies. Also, once it gets going, it usually runs up a lot in a very short time, so it is often interesting from a shorter term trading perspective as well.

  

  

  

  

  

• Peak Unicorn

  Things are getting crowded in the once-exclusive unicorn club…

   

  This is all still-private unicorns since 2011 and charted them based on when they first joined the unicorn club.

  

  (click image for large legible version)

  While initially the chart shows unicorns being created at a relatively calm pace, the rhythm accelerates noticeably in late 2013 (right around the time Aileen Lee wrote her famous post coining the term unicorn in November 2013). Since then, there has been an explosion in unicorn creation, with over 60 new unicorns in 2015 alone.

   

  Source: CB Insights via Valuewalk.com

  

  

  

  

• Homicide Rates Cut In Half Over Past 20 Years (While New Gun Ownership Soared)

  Submitted by Ryan McMaken via The Mises Institute,

  The Pew Research Center reported last week that the murder rate was cut nearly in half from 7 per 100,000 in 1993 to 3.6 per 100,000 in 2013. Over the same period, overall gun deaths (including accidents and suicides) have fallen by one-third from 15.2 to 10.6 per 100,000.

  In spite of this, Pew reports, the American public believes that homicides and gun deaths are increasing in the United States. Those who think violence is getting worse should probably watch less television and look around them instead. The murder rate in the US is currently similar to 1950s levels.

  Meanwhile, the number of privately owned guns (and gun commerce in general) in the United States has increased substantially in recent decades.

  

   Source: Firearms Commerce in the US, Annual Statistical Update. (From BATF)

  According to the World Bank, here are the homicide rates in the US since 1995:

  

  Here's the homicide rate graphed against total new firearms (manufactured plus imported) in US (indexed with 1995 =100):

  

  Meanwhile, in Mexico, where the US Consulate counsels Americans to not even carry pocket knives in the face of "Mexico’s strict weapons laws." There is exactly one gun store in Mexico. In short, the Mexican experience is a perfect example of the effect of prohibition. A lack of legal access to guns leads to a need for illegal access.

  The murder rates in Mexico:

  

  Mexican politicians complain that weapons are easily smuggled from the United States, and that is the source of their problem. But if access to guns is the problem, shouldn't murder rates be much higher in the United States? Moreover, if gun smuggling is such a problem in Mexico, this is just another piece of evidence showing the weakness of prohibition laws in preventing access to the intended target of prohibition.

  Naturally, we can't blame everything on gun prohibition in Mexico, nor can we attribute the murder rate decline solely to more guns in the US. But we can say two things for sure: (1) Gun restriction in Mexico has not prevented enormous increases in the murder rate, and (2) increases in gun totals in the US have not led to a surge in the murder rate.

   

  

  

  

  

  

• US, Japanese Stocks Extend Losses; Turkish Lira Soars Most In 7 Years As Gold Mini-Flash-Crashes

  Despite the world seemingly exuberant at Turkey’s fraud election, sparking the biggest rally in the Lira since Nov 2008 (confirming once again that “markets love totalitarian governments,”) it appears the centrally-planned machinations of the US equity markets are not living up to their promises of wealth for all (and rate-hikes don’t matter). US and Japanese equity futures are opening notably lower, erasing all of the post-Fed exuberance with Dow Futs down over 200 points from pre-BoJ hope highs. Finally, gold futures were hammered lower at the Asia open (on heavy volume) only to rip back to practically unchanged.

   

  Lira loves the ‘fix’…

  

   

  Biggest daily jump since Lehman…

  

   

  Someone decided the thinly-traded pre-open markets on a Sunday night was an opportune time to flush 10s of thousands of ounce of paper gold (around $228 million notional) into the market…

  

   

  And maybe higher rates are bad after all…

  

   

  Japanese stocks are tumbling

  

   

  As the world, contrary to a surge in pent up expectations that China is finally fine, realize that it isn’t following this weekend’s miss in both the Manufacturing PMI, and slide in the non-manufacturing PMi to the lowest level since 2008.

  

   

  Finally, was the hawkish Fed hawkish not just to punk another iteration of Eurodollar/FF traders, but because its FRB/US model actually believes that there is no more slack in the economy and a December rate hike is imminent as reported earlier?

  

  

  

  

  

  

• "What The Heck Is Going On Here"

  Succinctly summarizing the state of the mainstream media’s cognitive dissonance at the state of ‘real’ America…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Ban Ki-Moon Condemns The American Stand On Syria, Endorses Putin's

  Authored by Eric Zuesse,

  In an interview with Spanish newspapers that was published October 31st, U.N. Secretary General Ban Ki-Moon condemned U.S. President Barack Obama’s demand that Syrian President Bashar al-Assad be removed from office, and Moon said: “The future of Assad must be determined by the Syrian people.”

  Here is the entire quotation:

  "The future of President Assad must be decided by the Syrian people. Now, I do not want to interfere in the process of Vienna, but I think it is totally unfair and unreasonable that the fate of a person [diplomatese here for: U.S. President Barack Obama’s demand that Assad be removed from the Presidency of Syria] to paralyze all this political negotiation. This is not acceptable. It's not fair. The Syrian government insists that Assad should be part of the transition. Many Western countries oppose the Syrian government’s position. Meanwhile, we lost years. 250,000 people have been killed. There are 13 million refugees or internally displaced. Over 50% of hospitals, schools and infrastructure has been destroyed in Syria. You must not lose more time. This crisis goes beyond Syria, beyond the region. It affects Europe. It is a global crisis.”

  The U.N. Secretary General is here implicitly blaming all of this – lots of blood and misery – on U.S. President Obama, and on the “many Western countries” who ally with him and have joined with him in demanding regime-change in Syria.

  The position of Russia’s President Vladimir Putin has been, and is, to the exact contrary of Obama’s: namely, that only an election by the Syrian people can determine whom Syria’s President should be. The U.N. Secretary General is here agreeing with Putin, and rejecting Obama’s demand, that the matter be determined instead by non-Syrians, and by non-democratic means (which is basically like George W. Bush did in Iraq, and like Barack Obama did in Libya).

  Suckers in the West fall for the Western aristocracies’ line that Putin and not Obama is wrong on this and is the cause of the dragged-out Syrian war. Such fools don’t even ask themselves whether in this dispute it is Obama, or instead Putin, who is supporting the most basic democratic principle of self-rule by the people. But the average individual is that manipulable: so manipulable as to think that black is white, and white is black; that good is bad, and bad is good. Totally manipulable.

  This interview was buried by Spanish newspapers, because the Spanish government is allied with the United States. For example, the most prominent Spanish newspaper to publish even quotations from this interview is El Pais, and their headline for the story is "Catalonia is not among the territories with the right to self-determination.” Even there, the headline is false. What Moon actually said instead on that issue of the Catalonian independence movement, was: “The Catalan question is a very delicate matter and, while the UN Secretary General, I'm not in a position to comment on that because it is a purely internal matter.” Lies and distortions in the Western ‘news’ media are that routine: so obvious, sometimes, virtually any intelligent reader can easily recognize that he’s reading lies and propaganda (like in that ‘news’ story).

  This newspaper actually buried the part about Assad and Obama (the blockbuster in the entire story) near the end, but not at the very end, of its report, because one of the standard things that ‘news’ media do if they want to de-emphasize a particular point is to bring the matter up near the end but not at the end. To place it at  the end, would emphasize, instead of de-emphasize, the given point: it’s not the professional way to bury news. Knowledge of how to bury news is important for the managers of any ‘news’ medium, because such knowledge is essential in order to make the medium achieve the objectives of the medium’s owner, the propagandistic function, which is the main reason why wealthy people buy major ‘news’ media, and why major corporations chose to advertise in (and thereby subsidize) these media (which increases that given ‘news’ media-owner’s income). 

  As to why the managers (including editors) of El Pais wanted their ‘reporter’ to misrepresent Moon as being opposed to Catalan independence, the reason is that the owners of El Pais are opposed to Catalan independence. It’s not only in the editorials. With very few exceptions, a newspaper’s editorials and its ‘news’ reporting are slanted the same way. However, sometimes, for particular reasons, the editorial position is instead slanted the opposite way from the ‘news’ ‘reporting.’ Public relations, or PRopaganda, is a science, not for amateurs. And a major function of management is to apply that science so as to maximize value for the medium’s owners. It’s like any business, but the press is also part of the business of government: moulding the public’s opinions so as to serve the needs of the aristocracy that owns the vast majority of the nation’s wealth. The idea of ‘the free press’ is itself PRopaganda. In reality, the press is far from free.

  Anyway, Ban ki-Moon took a rare courageous position here: what he said was correct, though it’s virtually unmentionable in the West. For example: how widely is this news-report being published? It was submitted to virtually all national news-media in the U.S. and several other Western countries. You can google the headline, “Ban Ki Moon Condemns the American Stand on Syria, Endorses Putin’s” to find out how many (and which ones) are actually publishing it.

  *  *  *

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

   

  

  

  

  

  

• JPM Quants: The Catalyst For The October Rally Is Over; "All 4 Sectors Are Currently Long Equities"

  When it comes to predicting the market’s turbulent swings over the late summer, JPM’s quant team has been absolutely phenomenal, with virtually every single call being absolutely spot on. We previously documented the best exampled as follows:

  • August 21, just before the Black Monday flash crash: “Why The Market Is Crashing Into The Close: JPM Explains“
  • August 27: “JPM Head Quant Warns Second Market Crash May Be Imminent: Violent Selling Could Return On Thursday“
  • September 3, before the next leg lower in stocks: “Home JPM Head Quant Is Back With New Warning: “Only Half The Selling Is Done; Expect More Downside“”

  But it was his final call, that from the end of September, that may have been the most monumental. We flagged it on September 24 as follows: “Bears Beware, JPM’s Head Quant Just Flipped To Bullish: “The Technical Buying Begins” and we noted that, according to JPM’s calculations, quants are about to unleash a major buying spree.

  This is what happened after:

  

   

  JPM was right. Again.

  Where do we stand now? Here is the latest from JPM’s quant wizards:

  Since September 29th, balanced mutual funds has been the best performing sector among the above four sectors returning almost 7%. They are followed by risk parity funds which are up by 3% and Discretionary Macro hedge funds which are up by 1%. CTAs are the worst performing sector returning a negative 2%. In other words, among the four sectors, CTAs are the ones suffering the most due to their short equity exposure, while balance mutual funds benefited the most from the equity rally due to high equity exposure. How high are these equity exposures currently?

   

  Figure 2 shows the 21-day rolling betas to equities for balanced mutual funds.

   

  

   

  This beta started rising sharply in mid September and by mid October it had surpassed the previous high for the year seen last June. The equity beta of balanced mutual funds currently stands at a very high level by historical standards, creating vulnerability for equity markets in the near term. Similar to balanced mutual funds, risk parity funds appear to have also  increased their equity exposure sharply over the past month and their equity beta returned to levels last seen in early August (Figure 3).

   

  

   

  The behavior of Discretionary Macro hedge funds and CTAs has been different. While Discretionary Macro hedge funds appear to have also raised their equity exposure over the past month, the rise was much less pronounced than that of either balanced mutual funds or risk parity funds. Their equity beta currently stands at a modest positive level and well below that of early August. CTAs, which had adopted a short position in equities from the beginning of August already, had increased their shorts in September and early October. But they appear to have capitulated in the middle of October, by not only cutting their equity shorts, but reversing and moving to a long position instead. This is shown more clearly in Figure 5 which shows both the 21-day and 10-day rolling equity beta of CTAs. The 10-day beta is a better reflection of the behavior of CTAs over the most recent couple of weeks, as it is not affected by observations during the first half of the month. This 10-day rolling equity beta shows an abrupt shift from a short to a long position in equities around the mid of the month. Indeed, while CTAs had suffered a loss of around 4% in the first two weeks of the month, they made a profit of 1% during the second half.

  Putting it all together:

  In all, while balanced mutual funds and risk parity funds are the ones which appear to have triggered the equity rally since the end of September, the rally was amplified at around mid October by CTA capitulation. The reversal of CTAs equity exposure from a short to a long position means that all four sectors, CTAs, Discretionary Macro hedge funds, risk parity funds and multi-asset or balanced mutual funds, are currently long equities. 

  In other words, the catalyst that unleashed the torrid October rally which culminated with the biggest point gain in the S&P500 in history, is now over. As for retail…

  Retail investors appear to have had little participation in October’s equity rally with the exception of the end of the month, i.e. the week ending October 28th when their equity fund buying was more significant.

  The two key points: the forced technical buying at the end of September, correctly predicted by JPM, is now gone, as “all four sectors, CTAs, Discretionary Macro hedge funds, risk parity funds and multi-asset or balanced mutual funds, are currently long equities.” This means that either the corporate buybacks go into overdrive and soak up the excess risk exposure which the technical buyers have on their books, or retail investors do.

  If neither happens, expect another downside volatile month, especially if the market realizes that – as we reported earlier this morning – even the Fed’s own forecasting model now suggests slack in the economy is gone and the time to hike rates in December has arrived.

  

  

  

  

  

  

• "The Output Gap Appears Closed" – The Fed's Model Just Confirmed A December Rate Hike

  Back on July 24, as we first wrote then, the 2 Year bond yield suddenly tumbled just before noon…

  

   

  … when it was discovered that “accidentally” the Fed released its confidential, policy-driving economic projections, alongside its public forecasts, as calculated by the Federal Reserve’s FRB/US computer model.

  These were far more dovish than most, at the time, expected and certainly far worse than the Fed’s public computer model data indicated. To wit: “While superficially, and as expected, the Fed is assuming a 1.26% fed funds rate in one year, suggesting about 3-4 rate hikes until then, with the first one according to the leaked documents taking place in Q3, the overall strength of the economy is well weaker, and thus more dovish, than many of the permabulls had expected.”

  This led to a sharp repricing of both short-term rates and inflation expectations. Four months later we find that, at least one, the Fed’s model was right, ironically this happened when it had predicted a slowdown.

  As a reminder, approximately every three months, Federal Reserve Board staff update and publish on the Board’s website a package of computer code of the Board staff’s FRB/US model of the U.S. economy, including a set of illustrative economic projections based only on publicly available information.

  On June 29, an updated package of code was posted that inadvertently included three files containing staff economic forecasts that are confidential FOMC information. Two files contained charts of the staff’s projections for economic variables such as the unemployment rate, the core inflation rate, and gross domestic product growth as well as the staff’s assumption for the path of the federal funds rate target selected by the FOMC. Another file contained computer code used to generate a table displaying staff economic projections.

  Three months after the July 24th fiasco, this Friday afternoon the Fed released an updated set of FRB/US outputs which this time may have precipitated the late day selloff as the results showed a vastly different picture than the one revealed in July. The model also may explain the unexpectedly hawkish tone in the Fed’s October statement.

  In short: the model validated concerns that the Fed may hike rates in December because the Fed’s take, at least as modeled under Excel, is that the “slack in the US economy has substantively disappeared.” This is shown in the chart below which shows the dramatic divergence between the last and most recent FRB/US forecast on the US output gap.

  

  To explain the chart above, Bloomberg cites Barclays’ chief US economist Michael Gapen (who previously worked at the Fed) who pored through the Fed model data, “the output gap appears closed. This means further progress would lead to resource scarcity and potential upward pressure on inflation in the medium term.”

  Gapen said that may explain why U.S. central bankers signaled this week that they will consider the first interest-rate increase since 2006 at their next meeting, on Dec. 15-16. Finally, “the model assumes that the Federal Open Market Committee raises the benchmark lending rate in late 2015.”  

  Which leaves the one and only FOMC meeting left this year: that on December 15-16.

  Some more details from the Barclays note:

  According to the bank, “the updated output is consistent with near-term liftoff of the fed funds rate, with a risk toward a later liftoff should further softness in inflation manifest. The model now shows much less assumed cyclical slack in the economy and has a softer path of inflation, highlighting the FOMC’s current dilemma as the two parts of their objective move in opposite directions.”

  Barclays ran the FRB/IS model using the most recent data, and had the following additional take-aways:

  Figure 1: The fed funds rate:  FRB/US now assumes that the FOMC increases the fed funds rate in late 2015. We see this lift off as consistent with a December rate hike. Of note, FRB/US, like all other state space or DSGE models of the economy, calls for an immediate and rapid liftoff of policy rates. This immediate lift off has been a feature of FRB/US output since late 2014. The models see most variables as close to their long-run levels and hence the model calls for a return of interest rates to their long-run level (in other words, models do not take into account latent headwinds such as financial frictions or credit constraints in the economy).

  Of note, all variables in the model must converge to long-run levels imposed by staff. At least in the assumptions used for this public version of FRB/US, the staff sees the long-run level of the funds rate at 3.5%, down 25bp from their previous release. This estimate is still higher than our belief (3.0 to 3.25%) but has gradually converged toward our estimate. The staff’s current assumption is down from the 4% level assumed by the Board as recently as late last year.

  Figure 1: Funds path consistent with December

  

  Figure 2:  The unemployment rate:  The staff moved the long-run level of the unemployment rate (NAIRU) lower in the October 30 release of the model. At 4.9%, NAIRU is two-tenths lower than in the previous version of the model. The lower level of NAIRU is consistent with the views of the committee as expressed in the SEP. The SEP shows the long-run level of the unemployment rate at 4.9%. With unemployment currently at 5.1%, FRB/US assumes very little change in the unemployment rate over time. This view is quite different than ours. We forecast ongoing declines in the unemployment rate and see it reaching 4.3% by end 2016.

  Not shown in the output of the model, the stability of the unemployment rate implies either an increase in the LFPR (labor force participation rate) or a sharp slowing in employment growth. According to our estimates holding LFPR constant, the level of employment growth that keeps the unemployment rate constant is 76k per month. Alternatively, an increase in LFPR of about 0.7pp would allow NAIRU to stabilize with employment growth near its recent average.

  Figure 2: NAIRU pushed down to 4.9%

  

  Figure 3: Core PCE inflation: The updated path for core PCE inflation closely matches our current forecast. In our forecast, the stabilization in oil prices should lead headline inflation to rebound early next year, but we look for recent dollar appreciation and ongoing declines in Chinese producer prices to lead to a moderation in tradable goods inflation through mid-2016. The release of September PCE inflation this morning is consistent with this view, as the sharp drag from goods prices (-3.2% y/y) led to an unchanged year-on-year rate of core inflation at 1.3%. The FRB/US model agrees and shows the firming in core inflation as giving way to a modest softening through mid-2016. As shown in Figure 3, the October 30 path shows a shallower path from Q1 16 through Q4 17 than the previous FRB/US update.

  Figure 3: PCE inflation slightly lower

  

  Figure 4: Real GDP growth: The October 30 update for FRBUS also shows a slower growth profile after this year and a lower long-run potential growth rate. As shown in Figure 4, the updated path has y/y rates of economic growth gradually slowing from 2.5% in Q1 16 to 2.1% in 2020. Based on FOMC communications, including minutes to recent FOMC meetings, we believe the shallower growth path likely reflects greater assumed dollar appreciation. In addition, the long-run growth rate is two-tenths lower than the previous FRB/US update (2.1% now versus 2.3% previously). Since this growth rate at the end of the horizon is imposed by staff, we interpret this as suggesting staff has likely reduced its estimate of potential growth, as did FOMC participants in the September forecast round.

  Our view of potential growth is more pessimistic at about 1.5%, but our estimate is weighted heavily to current trends and is not equivalent to the Fed’s long-run estimate. Board staff have likely assumed that productivity growth, which has been much slower in the post-recession environment, rebounds over time as headwinds to the US economy dissipate. We do not discount this possibility, but leave this as an open question for the data to resolve over time.

  Figure 4: Real GDP growth slows after this year

  

  And the most important chart: The output gap:  Board staff now see the output gap as closing by Q1 2016. To achieve this closing especially given their mark down of real GDP growth, they sharply lowered their estimate of potential growth in 2015. This change likely has policy implications as it indicates a staff view that there is no longer substantive slack in the US economy.

  Figure 5: Potential output slashed to close output gap despite slower growth profile

  

  * * *

  Finally, just in case someone is skeptical that any of the above computer simulations just “might” be wrong, here is an example of the code that gives the Fed a better understanding of reality than reality itself.

  

  As it turns out, everyone does live in the Matrix. The Fed’s “model” matrix that is, which at least to the Fed is far more important than the “reality” some 99% of the US population live in, those who never benefited from the Fed’s generous injection of $3 trilion in bank reserves.

  

  

  

  

  

• Stocks, Symmetry, & A Significant Threat To The Global Economy

  Submitted by NorthmanTrader.com,

  If you been following our technical chart segment you have seen the evolution of one particular chart: That of the daily $SPX. The rejection of price on Friday, after yet another push higher, occurred at the level of an arch that we have been observing unfold over the past year. Now there is no technical pattern called the “arch”, but one cannot deny that since September 2014 price rejections have taken place along very specific points that now offer stunning symmetry.

  It is not only the arch here which has proved superbly precise, but the confluences of price rejections are incredible.

  Consider:

  September 2014: 2019.25 September 2015: 2020.32

  December 2014: 2093.55  October 2015: 2094.32:

  Coincidence? Hardly:

  

  One can’t help but wonder if all of January – July 2015 was simply the building of a giant head.

  Consider also that the MACD is at its most extended since the year 2000 top and the RSI actually made a lower high versus the December 2014 2093.55 peak. Also of note is that the $SPX is the furthest disconnected from its 50MA to the upside in years.

  Taking these facts into consideration, especially in context of the weekly and monthly charts we’ve been highlighting, the potential for a giant heads and shoulders pattern remains fully in play.

  What will break the pattern? Likely a decisive and confirmed close above 2094 on a weekly basis and/or new highs.

  What will confirm the pattern? New lows and a break of the lower neckline.

  The target? Depending on how you define the neckline (were it to break) it invites a visit back to 2007 highs. Yes the pattern is indeed this large:

  

  That would be a drop of over 25%. A very steep correction into 2016 and something that central banks are clearly desperate to avoid. Central banks, as academia, know the truth:

  “It is unclear whether the sell-off is over or has slightly paused; in the latter case we could be headed for a potentially very serious equity slump by historic standards,” economists Adam Slater and Melanie Rama said in their report. “A sharp correction in global equity prices would pose a significant threat to the global economy. By reducing wealth, Oxford’s economic models suggest a 15 percent drop in the MSCI could cut the level of world gross domestic product by as much as 0.7 percent after two years. A 30 percent shock would knock off as much as 1.5 percent.”

  Central banks can’t afford a big correction to take place as it goes counter to their mandate, a stable growing economy, hence they interfere every single time a correction of size is about to unfold. And any threat to the global economy must be prevented. So it’s no accident that we have seen all price expansion since $SPX 2020 in October come on the heels of Mario Draghi hinting at additional QE coming in December and the PBOC cutting rates just a day later. Now that fiscal year end mark-ups are over for many funds buyers have to prove how committed they are to driving markets higher.

  Price will ultimately confirm how this will play out, but altogether this $SPX chart is an amazing construct of symmetry and, as a fan of structures and symmetry, it certainly has my attention. I can’t recall ever seeing such a precise structure.

  

  

  

  

  

• Iraq Turns On America: “Iraqi People Have Started To Feel That The US Isn't Serious About Fighting ISIS"

  If you frequent these pages, you’re well aware of why the US decided to release helmet cam footage of a raid on an ISIS prison in the northern Iraqi town of Huwija. 

  Put simply, Baghdad has had just about enough of Washington’s “strategy” for fighting terror in the country and when PM Haider al-Abadi said he would welcome Russian airstrikes, the US panicked. Rather than try to recount the story by paraphrasing ourselves, we’ll simply include our most succinct summary of what exactly is going on in Iraq, originally published here:

  Perhaps the most astounding thing about recent events in the Mid-East is the extent to which outcomes that seem far-fetched one week become reality the next. 

   

  This dynamic began back in June when Iran’s most powerful general vowed to “surprise the world” with his next move in Syria. Just weeks later, he was in Moscow (in violation of a UN travel ban) hatching a plan with Putin to launch an all-out invasion on behalf of Assad on the way to forcibly enacting a dramatic shift in the Mid-East balance of power. Before the West had a chance to react, Moscow was establishing an air base at Latakia. 

   

  As all of this unfolded we began to suggest that it would be only a matter of time before Russian airstrikes began in Iraq.

   

  The setup, we contended, was just too perfect. Iran controls both the military and politics in the country and so, we speculated that The Kremlin would get a warm welcome if Putin decided to launch an air campaign against ISIS targets across Syria’s eastern border. 

   

  Sure enough, Baghdad moved to establish an intelligence cell with Russia, Syria, and Iran in September and when PM Haider al-Abadi said he would welcome Russian airstrikes, it was clear that the US was about to be booted out of the country it “liberated” more than a decade ago. 

   

  Subsequently, Joint Chiefs of Staff Gen. Joe Dunford traveled to Baghdad and gave Abadi an ultimatum: “…it’s either us or the Russians.”

   

  Well, despite Dunford’s contention that Abadi promised not to enlist Moscow’s help, just days later Iraq gave Moscow the green light to strike ISIS convoys fleeing Syria. 

   

  A desperate Washington then attempted to prove that the US could still be effective at fighting terrorism by sending 30 Delta Force soldiers into battle with the Peshmerga on a prison raid mission in the Northern Iraqi town of Huwija. Conveniently, one American soldier apparently had a GoPro strapped to his helmet and the footage was almost immediately leaked to Western media. 

  Washington apparently assumed that the successful raid would be enough to restore the faith because the Pentagon immediately began to formulate a “plan” to send Apache gunships and their crews to Baghdad. In what has to be considered one of the more embarrassing moments in a string of setbacks for America’s Mid-East “strategy,” Baghdad flat out told the US “thanks, but no thanks”: 

  “This is an Iraqi affair and the government did not ask the U.S. Department of Defense to be involved in direct operations,” spokesman Sa’ad al-Hadithi told NBC News. “We have enough soldiers on the ground.”

  The White House kind of brushed that off and moved on to talking about spec ops in Syria, but the implication is that if the US plans on getting more heavily involved in combat operations in Iraq, Washington will have to do so through Erbil, not through Baghdad. 

  This all comes on the heels of a push by Iraqi forces and Iran-backed militias to retake a key oil refinery at Baiji from Islamic State. That battle underscored the extent to which Tehran essentially controls the Iraqi army (not to mention Iraqi politics). Consider the following brief excert from The NY Times: 

  “A spokesman for Shiite militias said that several thousand Shiite militiamen were fighting in and near Baiji, which is more than the estimated number of Iraqi soldiers also fighting there.” 

  As regular readers know, this is no conspiracy theory. It’s common knowledge among those who study the region that Iran’s militias are more powerful than the Iraqi regulars and the Quds Force essentially controls the political process in Baghdad. You can read more about this here, here, and here.

  This creates a rather tenuous situation for Washington. The US must maintain a kind of loose alliance with the Shiite militias in Iraq lest the Pentagon should be forced to explain to the public why America doesn’t support groups that are very effectively fighting ISIS. But there are two problems with that: i) it’s not entirely clear that the US wants to rid Iraq and Syria of ISIS and you can bet the IRGC is whispering that in the ears of every Shiite politician in Baghdad, and ii) these very same Shiite militias are fighting the Assad regime at Aleppo where the US is supplying anti-tank weapons to Sunni extremists. 

  Well, just as the Western public is beginning to realize that something rather fishy is going on in Syria, Iraqis are throwing in the towel on the US “effort” to rid the country of Islamic State fighters. Here’s WSJ with more on how the locals feel in the wake of the assault on the Baiji refinery:

  A big victory over Islamic State here provided fresh ammunition for the many Iraqi Shiites who prefer Iran as a battlefield partner over the U.S., despite indications that Washington could soon intensify its battle against the extremist militants.

   

  Shiite militias and politicians backed by Iran have claimed much of the credit for the Iraqi recapture a little over a week ago of the city and oil refinery of Beiji, about 130 miles north of Baghdad. Militia fighters danced and posed for pictures on tanks and armored cars near the bombed-out shell of the massive refinery there, Iraq’s largest.

   

  Powerful Iraqi politicians and militia leaders have cited the yearlong operation to retake the city as evidence that Iraqis can combat Islamic State alone—or with help only of the Iran-backed militias. Some are now lobbying Prime Minister Haider al-Abadi to rely less on the U.S.-led coalition battling Islamic State and more on the PMF.

   

  “Iraqi people in general, not only us, have started to feel that the Americans are not serious at all about the fight against Islamic State,” said Moeen Al- Kadhimi, a spokesman for the Iran-backed Badr Corps militia. “Every victory that the PMF does without the help of the Americans is a big embarrassment for the Americans.”

  For those who might have missed it, here are images from the fight which depict Iran’s proxy armies on the scene at Baiji:

  

  

  

  

  

  

  Of course rather than simply take the high road and consent that regardless of who was ultimately responsible for taking back the refinery, it was a step in the right direction, Washington has decided to deride Iran’s militias for absolutely no reason at all. Back to WSJ: 

  U.S. officers say the Iran-backed proxy militias known as Popular Mobilization Forces, or PMF, played only a supporting role. The bulk of the fighting was by Iraqi federal police and elite counterterrorism units trained by the U.S., the American officers said.

  
  

  “It’s easy to say after the fact that ‘we did this,’ ” said Maj. Michael Filanowski, an officer for the Combined Joint Task Force, which organizes operations of the U.S.-led coalition. “But if you look at the sequence of events, it was Iraqi security forces that did the assault operations.”

   

  He called the militias a “hold force,” meaning they secured the territory after it fell to the Iraqi forces.

  So let’s just be clear. Either, i) the US is so petty that the Pentagon is willing to argue over who played a larger role in retaking Iraq’s largest oil refinery from ISIS, or ii) Washington is actually angry that ISIS was defeated and is thus lashing out at Tehran. 

  Whatever the case, it’s too late. The game is up for the US in Iraq:

  On Monday, Ali Adeeb, head of the State of Law bloc that controls the ruling coalition in parliament, called on Iraq’s government to prevent the U.S. from launching further ground operations like the prison raid.

  
  

  Meanwhile, pro-Iranian Iraqi politicians are pointing to a grinding U.S.-led effort to retake Ramadi, the capital of Anbar province about 65 miles west of the capital, as evidence the U.S. isn’t doing enough to defeat Islamic State.

  
  

  For some Shiite politicians, Ramadi and Beiji epitomize the diverging fortunes of U.S. and Iran in Iraq.

  
  

  “The two operations in those two cities represent the competition between the U.S.-led coalition and the newly formed alliance among Russia, Iran and Iraq,” said Hakim al-Zamili, a prominent Shiite politician and head of the security and defense committee in parliament.

  
  

  The battlefield succic State, said Patrick Martin, an Iraq analyst at the Washington-based Institute for the Study of War.

  [Reports”] in Beiji will also make it harder for the prime minister to refuse entreaties for more support from Russia in the fight against Islam

  “Russia and Iran have very similar objectives in that they both want to eject U.S. influence from Iraq,” said Mr. Martin. “Any success that the militias have bolsters that goal.”

  There are two critical takeaways here. First (and we’ve said this repeatedly) these are the very same Shiite militias battling US-backed Sunni fighters in Syria. Second, this is but another example of Washington siding with Sunni extremists over Tehran. This is a replay of what happened in the wake of 9/11 when Iran sought to help the US target the Taliban and al-Qaeda only to see The White House place Tehran in its “Axis Of Evil.” Here again, we have Sunni militants terrorizing both Syria and Iraq and instead of working with the Iranians to oust those extremists, Washington is busy downplaying their successes and supporting the proxy armies of Saudi Arabia and Qatar even as those proxy armies behead Westerners and burn Jordanian pilots alive.

  This is a travesty and an absolute farce.

  The US is on the wrong side of history here and it’s too late to correct it.

  

  

  

  

  

• "Social Expenditures" In the US Are Higher Than All Other OECD Countries, Except France

  Submitted by Ryan McMaken via The Mises Institute,

  According to the Organization of Economic Cooperation and Development (OECD), "social expenditures" are expenditures that occur with the purpose of redistributing resources from one group to another, in order to benefit a lower-income or presumably disadvantaged population.

  Social Security in the US is one example, and would be considered a "public expenditure" because it involves direct spending by a government agency.

  However, governmental bodies in the US and elsewhere also employ a wide array of mandates and tax-based benefits and incentives to carry out social policy. This distinguishes the US in particular from most European countries that rely more on cash benefits or non-cash benefits administered directly by governments.

  But governments are not limited to direct benefits. Governments may also employ "tax breaks for social purposes" (TBSPs) including tax credits for child care, and tax breaks for health-care related spending. 

  Furthermore, in the United States —  more so than in other countries — governments create tax incentives and mandates that lead to high levels of "private social expenditure." The OECD defines these private expenditures as expenditures that are designed to redistribute wealth, but are not administered directly by government agencies:

  Mandatory private social expenditure: social support stipulated by legislation but operated through the private sector , e. g. direct sickness payments by employers to their absent employees as legislated by public authorities, or benefits accruing from mandatory contributions to private insurance funds.

  Voluntary private social expenditure: benefits accruing from privately operated programmes that involve the redistribution of resources across households and include benefits provided by NGOs, and benefit accruing from tax advantaged individual plans and collective (often employment – related ) support arrangements , such as for example, pensions, childcare support, and, in the US, employment – related health plans 

  The focus on direct government spending, however, creates the impression that the US does not engage in the business of redistributing wealth to the degree of other OECD-type countries. But this is not the case. When we consider tax incentives, benefits, and mandates, the picture is very different.

  When just measuring direct government spending as a percentage of GDP,  the US ranks fairly low. Note however, that even in this case, the US ranks above both Australia and Canada, two countries that are rarely accused of being excessively capitalist:

  

  Direct social spending by government constitutes 18.6 percent of GDP in the US. In Australia, the total is 16.9 percent, and in Canada, it is 16.3 percent. France tops the list with 29.4 percent. 

  But this just captures spending by government entities. When we look at other types of spending that result from tax incentives and mandates, things look different.

  Once tax breaks for social purposes (TBSPs) are included, the US begins to look much more similar to its European counterparts. By this measure, the US falls in the middle, with more net social spending (as a percentage of GDP) than New Zealand, Norway, Luxembourg, Australia, and Canada:

   

  

  By this measure, social spending constitutes  20.1 percent in the US, compared to 17.4 percent in Australia and 15.3 percent in Canada. Luxembourg is 18.0 percent and Norway is 18.1 percent. France, again, tops the list with 27.9 percent.

  These tax breaks have the effect of encouraging "private" social expenditures as well, including health care spending (for example).

  Once these "private" sources of social spending are included, we find that the US spends the most by far. We should note also that these figures, from 2011, predate the enactment of "Obamacare," and do not reflect what will likely entail far greater amounts of private social social expenditure on health care.

  In this measure, private social spending comes in at 10.1 percent which is almost twice as much as the next big private spender, the Netherlands, at 5.2 percent. The United Kingdom comes in third at 4.8 percent:

   

  

   
  So, once we take this into account, we get what the OECD calls "net total social expenditure." It is, of course, deceptive to ignore social expenditures that take a form other than cash transfers and transactions with government agencies. After all, numerous countries other than the US employ legislation (including tax law) to incentivize or mandate social spending with the specific purpose of providing benefits or advantages to certain households.

  The resulting analysis looks like this:

  

  In the US, net total social expenditures amount to 28.7 percent of GDP. Only France shows a higher rate than this with 31.2 percent. Belgium comes in third at 27.4 percent.

  Conclusions

  There are a few things we can learn from this analysis. First of all, it is important to note that the US does not redistribute resources any less than other countries. Like most other "developed" countries, the US employs a wide variety of public policies to benefit certain groups and income levels.

  Additionally, when taken together, the expenditures that result from these public policies are sizable, and even exceed nearly all other countries measured.

  Left-wing pundits and scholars who wish to portray the US as a kind of hyper-capitalist social-Darwinist system conveniently focus on direct cash transfers and social spending by government agencies while ignoring other sources of social expenditures. At the same time, conservatives and right wing pundits, for different reasons, often attempt to portray the US government as a regime that engages in less redistribution of wealth than other states. Both groups are mistaken.

  Whether or not the policies employed in the US have had the effect preferred by advocates of more social spending is a separate matter from the amount spent overall. We cannot honestly say that the US is some sort of outlier when the US clearly engages in social expenditures in proportions that rival multiple states in Western and Northern Europe.

  Nor should we ignore the fact that the the redistributive policies employed by the US lead to just as many distortions to the economy as does the direct social spending favored by European governments. Tax breaks for homeowners, for example, create incentives for buying homes which distorts real estate markets while increasing the relative tax burden on renters. Tax incentives that encourage more spending on health care drive up health care prices. And so on. And of course, the US employs a wide variety of direct spending and subsidy schemes that create distortions of their own, including Social Security, Medicaid, "Section 8," and others.

  Ultimately, we are forced to conclude that redistributive social spending in the US is indeed different from many other countries. But the overall magnitude is actually greater (both proportionally and in absolute terms) in the US than in almost all other countries measured. One can argue that the way that the wealth is redistributed through public policy in the US is "wrong" or "suboptimal." But, to argue that there is less redistribution as a result of public policy in the US than elsewhere is simply wrong.

  

  

  

  

  

• $20 Trillion In Government Bonds Yield Under 1%: The Stunning Facts How We Got There

  Last week we wrote that in the latest bout of European NIRP panic, “Over Half Of European 2-Year Bonds Trade At Record Negative Yields” with Italy now paid to issue debt, with a follow-up in which even very serious banks are now looking at the Eurozone’s record €2.6 trillion in negative-yielding debt, and finding that the lower yields drop, the greater the savings rates across the continent…

  

  … suggesting a “policy failure” as even more cash ends up inert on bank balance sheets instead of being spent on either the economy or asset price inflation.

  And while the €2.6 trillion number noted above is massive, and as we showed last week is a record for the amount of debt trading under negative rates in Europe…

  

   

  … here are some shocking statistics on how we got there, and which we all take for granted, courtesy of BofA:

  • There have been 606 global rate cuts since LEH
  • $12.4 trillion of central bank asset purchases (QE) since Bear Stearns
  • The Fed is operating a zero rate policy for the longest period ever (even exceeding the WW2 Aug’37-Sep’42 zero rate period)
  • European central banks operating negative rate policies (Swiss policy rate currently -0.75%; Sweden’s policy rate currently -0.35
  • Just this month, the PBoC cut rates, the ECB confirmed QE2, Sweden announced additional QE, and the BoJ promised additional easing if necessary “without hesitation”
  • $6.3 trillion global government bonds currently yielding <0%
  • $20.0 trillion global government bonds currently yielding <1%

  But wait, there’s more in describing what BofA says is the most immense and long-lasting monetary stimulus, i.e., bubble,  in history:

  • For every 1 job created in the US this decade, US corporations have spent $296,000 on stock buybacks
  • An investment of $100 in a portfolio of global stocks & bonds (60:40) since the onset of QE1 would now be worth $205; in contrast, a wage of $100 has risen to just $114 over the same period
  • US prime (“CBD”) office real estate has appreciated 168% this decade; in contrast, the value of US residential property across America has risen just 16% (see Chart 5)

  

  • For every $100 US venture capital & private equity funds raised Jan 1st 2010 they are now raising $275; in contrast, for every $100 of US mortgage credit extended and accepted at the beginning of this decade, just $61 was extended and accepted in June 2015 (see Chart 6 – a big reason the US consumer remains so moribund)

  

  • In 2014 London accounted for 26% of the value of all housing sales in England, despite accounting for just 1% of the land area

  And so on.

  What can end this wholesale lunacy which only economists fail to grasp for what it is: the biggest global asset bubble in the history of humanity, leading to a monetary ice age across the world’s economies (as the velocity of money drops to zero or goes negative) which as Albert Edwards so aptly predicted years ago, is the natural counter to asset price hyperinflation? Alas, with all central banks now clearly all-in on the last and final attempt to reflate the world’s $200+ trillion in debt (a default is not an option as it would wipe out tens of trillions in “legacy” equity wealth) expect many more exponential charts in the coming months before the inevitable admission of “policy failure” by central planners which, if past is prologue, will come during the sound of guns.

  

  

  

  

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• The Empty Bus

  From the Slope of Hope: With all the grousing and grumbling I do here, I thought I’d change my tone and write up a genuinely positive, optimistic post. This has to do with what I think will be a tectonic shift over the next twenty years: transportation.

  As dull as that sounds, I think the changes that take place in how we get people (or cargo) from point “A” to point “B” are going to be more profound that Amazon, Facebook, and the iPhone put together. My insight, if you want to be generous enough to call it that, is spawned from a couple of (as is typical for me – – negative) observations I make on a periodic basis.

  The first observation is one I make almost daily: in spite of the relative wealth of the San Francisco peninsula, there are buses all over the place. Some of them are the fabled “white buses” that tote highly-paid twenty-somethings from Google and Facebook back to their residences in San Francisco. But most of them are the large (and sometimes double-length) VTA buses that drive all over the Santa Clara valley, and there is one thing I notice about virtually every one of them: they’re empty or near-empty. As they rumble by, I typically see two or three people sitting in a bus that holds 50 to 100 people.

  

  The other observation I have is that the people driving these buses are really, really, really overpaid. Many of them make six figures. One fellow mentioned in this article was clearing almost $200,000. For driving a bus. This is about as close to “unskilled labor’ as I can imagine. It’s mindless, boring work. And very, very lucrative. (Thank you, civic employee unions!)

  I find inefficiency to be offensive, and just about every aspect of bus systems is offensive to me. Just off the top of my head:

  1. The empty seats are a screaming declaration of inefficiency. To have these huge, gas-guzzling, polluting monstrosities with a quantity of people that could fit into a VW Beetle is preposterous.
  2. The bloated salaries (union-driven, surely) are also wildly out of step with the skill set required.
  3. The passengers themselves have to somehow make their way to the closest bus stop they can find for departure, where in an ideal world I’m sure they’d prefer being driven directly from home, work, or wherever they happen to be.
  4. The destinations are also approximate, because wherever the bus is taking people is surely not quite where they really want to go. As with boarding, the passenger has to figure out the least-bad place to get off the bus so they can make their way to their actual destination.
  5. Even the bus stops themselves are wasteful, because, in the future I am envisioning, they simply wouldn’t exist. That space could be used for something else – – or be simply empty. To say nothing of the huge parking lots where they store all the buses at night.

  In short, it’s a huge waste of space, energy, time, and money. I cringe every time I see one of these things rumble by with hardly anyone on board.

  

  So what’s going to get better? I think (or hope, at least) a far better world would be one in which small, self-driving cars were deployed all across the nation, and these would be at the beck and call or the same people that are presently riding buses.

  First, let me give you a picture for your mind: here in Palo Alto, we see Google self-driving cars constantly. These have been retrofitted normal vehicles, but recently, the actual Google cars (not modified production cars, but honest-to-God all-Google cars) have been zipping around. They look like this:

  

  Cute, isn’t it?

  So imagine a working-class person needs to get to their job somewhere. They request the car from their mobile phone, and in about five minutes, the vehicle above pulls up in front of their apartment building. They get in the (driverless) car and are taken to work in the most efficient way possible. There’s no waiting and very little walking. For the passenger, it’s a profoundly better experience.

  Well, that sounds all lovely, but who is going to pay for this convenience? Well, hold on a second. Just think of the costs that are being expended right now on the inferior system in place. There are the aforementioned huge salaries, and with nearly 700,000 bus drivers in the United States alone, the human expense is enormous.

  There are the buses, of course, and all the attendant costs, such as fuel, insurance, replacement parts, repair, and the replacement of worn-out buses. I daresay if you added up all the expenses related to toting individuals from place to place via the bus system and divided it by the number of passenger-miles, you’d get a higher figure than the one you’d get with the “one person/one car” idea I’m offering above.

  Now this sort of thing doesn’t happen overnight. It’s going to take decades. But the technological leap forward of self-driving vehicles is, I believe, going to utterly alter the economic landscape for decades to come, not only with human transportation, but even more broadly with cargo. All the twenty-somethings today that are adding sillier and sillier features to all these social media web sites will be in far more useful occupations in the future as they weed out the grotesque inefficiencies present in worldwide transportation.

  This sounds bone dry, I realize, but I think it’s going to be a very big deal. Google is quite smart to be changing themselves to “Alphabet” and getting into new areas like this, because I think it’s ultimately going to assure they are the largest company on the planet.

  As for what those hundreds of thousands of unemployed bus drivers are going to do with their lives? Or the 3.5 million truck drivers? No clue. That’s going to be just as big a challenge, but I seriously have no idea what the answer could be.

  

  

  

  

• Analyst Warns Of Turbulence: "Geopolitical Dislocations Could Result In Key Resource Supplies Disappearing"

  Submitted by Mac Slavo via SHTFPlan.com,

  Some of the world’s biggest investors have been taking significant positions in the commodity resource sector as of late, most notably in gold. With geopolitical tension and fear of economic breakdown reaching a near boiling point, it’s not difficult to see why. Instability pervades the entire system, encompassing everything from financial markets to social safety nets. And while it is easy to ignore the seriousness of current events because stock markets remain at record highs and mainstream pundits continue to toe the recovery line, the fact is that an unexpected and seemingly minor event could well send the entire world into a tailspin.

  According to analyst John Kaiser, this is exactly what we need to be concerned with. In a candid interview with Future Money Trends Kaiser explains just how political dislocations could result in supply lines to critical commodities like food, copper, zinc and gold being cut – even without a major war – should the United States, Russia and China continue to bump heads.

  
  (Watch at Future Money Trends or Youtube)

  Forget about the big, giant macro-economic increases in overall global GDP, but instead let’s look at the turbulence we’re starting to see where China is asserting itself in the South China Sea area… where Putin is eyeing its lost colonies in Europe and Central Asia and thinking maybe we should re-establish the Soviet empire… where we see instability in the middle east.

   

  Then you also realize that a lot of metal comes from China… a lot of metal comes from Russia. And if we end up in a shoving match where, say, the United States pushes back in the South China Sea… and Chinese generals get all up in arms and we end up with an incident… well what happens if China suddenly has sanctions going against it… or something similar, that Russia goes beyond messing in the Ukraine and starts taking out Latvia or Estonia?

   

  All of a sudden we have not so much nickel coming from Russia anymore… and similar in China.. Tungsten, 85% of it comes from China… graphite, 85% of it comes from China… 40% of the world’s zinc comes from China.

   

  These types of geopolitical dislocations… they could result in supply simply disappearing.

   

  And because the rest of the world is still using the same volume of copper and nickel as before, that’s where you can see price spikes.

  As we know, much of our critical supply chain is dependent on China. Likewise, Russia supplies necessary industrial metals. One misstep here, whether in the South China Sea, Ukraine or the middle east and we could very well see massive price spikes for commodity resources across the board.

  This instability, as John Kaiser notes, could lead to a collective rush of risk capital into safe haven assets, including gold:

  Gold is also supposed to respond to geo-political stresses. When you recall in 1980, yes we had inflation. But also part of the problem in 1980 was that the United States appeared to be losing it… we had the Tehran hostage crisis… we had the Soviet Union expanding itself in Afghanistan… the perception was that the United States was losing its dominant role.

   

  …

   

  If we ended up in a situation of anxiety about… are China, Russia and the United States about to square off? Is the world going to embark on a war footing?

  We could see anxiety about this spike [gold] higher.

  The similarities within this context is that the perception of the United States today compared to 1980 is that we are, indeed, losing our dominant role as the world’s leading economic and military superpower.

  Couple that with geopolitical tensions and economic upheaval around the world, and it’s not hard to see why resource investments into core commodities like food, gold, and industrial metals could spike significantly in the near future.

  

  

  

  

  

• Fed Admits "Something's Going On Here That We Maybe Don't Understand"

  In a somewhat shocking admission of its own un-omnipotence, or perhaps more of a C.Y.A. moment for the inevitable mean-reversion to reality, Reuters reports that San Francisco Fed President John Williams said Friday that low neutral interest rates are a warning sign of possible changes in the U.S. economy that the central bank does not fully understand. With Japan having been there for decades, and the rest of the developed world there for 6 years…

  

   

  Suddenly, just weeks away from what The Fed would like the market to believe is the first rate hike in almost a decade, Williams decides now it is the time to admit the central planners might be missing a factor (and carefully demands better fiscal policy)… (as Reuters reports)

  "I see this as more of a warning, a red flag that there's something going on here that isn't in the models, that we maybe don't understand as well as we think, and we should dig down deep deeper and try to figure this out better," said San Francisco Federal Reserve President John Williams on Friday pointing out that low neutral interest rates are a warning sign of possible changes in the U.S. economy that the central bank does not fully understand.

  Williams, who is a voting member of the Fed's policy-setting panel through the end of the year, has said the central bank should begin to raise interest rates soon but thereafter go at a gradual pace; ironically adding that the low neutral interest rate had "pretty significant" implications for monetary policy, and put more focus on fiscal policy as a response.

  "If we could come up with better fiscal policy, find a way to have the economy grow faster or have a stronger natural rate of interest, then that takes the pressure off of us to try to come up with other ways to do it, like through a large balance sheet or having a higher inflation target," Williams said. "It also means we don't have to turn to quantitative easing and other policies as much."

  As we noted previously, depending on the importance of the credit channel, the Federal Reserve, by pegging the short term rate at zero, have essentially removed one recessionary market mechanism that used to efficiently clear excesses within the financial system.

  While stability obsessed Keynesians on a quest to the permanent boom regard this as a positive development, the rest of us obviously understand that false stability breeds instability.

   

  It is clear to us that the FOMC in its quest to maintain stability is breeding instability and that previous attempts at the same failed miserably with dire consequences for society. We are sure it is only a matter for time before it happens again.

  And thus, Williams' warning now seems oddly-timed at best, and cover-your-ass tactics at worst perhaps "the matter of time" is about to bite once again…

  

  

  

  

  

  

• Another Black Swan? Turkey Holds Snap Elections Amid NATO-Backed Civil War

  There’s a potential black swan event taking place in Turkey on Sunday and no one seems to care. That is, the media isn’t devoting nearly enough coverage to Turkish elections considering the impact the outcome will invariably have on the situation in Syria, on the fate of the lira, and on the Pentagon’s strategy with regard to embedding spec ops with the YPG.

  As a reminder, Turkey held elections back in June and the outcome did not please President Recep Tayyip Erdogan.

  AKP lost its absolute majority in parliament thanks in no small part to a relatively strong showing by the pro-Kurdish HDP and that meant that Erdogan couldn’t move forward with plans to consolidate his power by amending the constitution. Well, if you know anything about Erdogan, you know that he isn’t exactly the type to take these kinds of things lying down, and so, he decided to trade NATO access to Incirlik for Western acquiescence to a crackdown on the PKK.

  Of course that’s not how it was pitched to the media.

  The official line was that after a suicide bombing in Suruc claimed by ISIS, Ankara decided it was time to go after Islamic State. Not to put too fine a point on it, but that’s a joke. The PKK and many other observers have long contended that Turkey is complicit in allowing money, guns, and personnel to flow across the border into Syria so that ISIS can continue to destabilize the Assad regime which Ankara opposes. In other words, Erdogan has no interest whatsoever in fighting ISIS. What he does have an interest in is starting a new war with the PKK in order to convince voters that the security situation in Turkey is such that only a dictator can get the situation under control – that’s the whole gambit.

  So what Erdogan did was this: he obstructed the coalition building process in the wake of June’s elections, started a civil war in order to try and convince voters that supporting HDP was a mistake, then called for new elections in November which he hopes will restore AKP’s absolute majority and allow him to change the constitution. It’s deplorable to the point of absurdity (especially given the recent suicide attack in Ankara) and underscores the extent to which ISIS has now become a catch-all smokescreen that can be cited whenever a government wants to do something that would otherwise come across as insane. 

  So that’s the backdrop for Sunday’s elections in Turkey. Here’s a bit of color from Barclays which is useful from a technical perspective, but please remember that this is all about the push and pull between Erdogan and a powerful Kurdish militia. In other words: attempts to analyze this rationally will everywhere and always miss the point but we would note that Barclays does a nice job of taking into account the realities of the situation on the ground and indeed, the bank’s analysts believe the market is mispricing the risk of a geopolitical mishap.

  *  *  *

  From Barclays

  Four months after the June parliamentary elections and the party negotiations failed to produce a new government, Turks are asked to go to the polls again this Sunday (1 November). Market pricing in recent weeks suggests investor optimism that these elections will lead to a swift formation of a new government, possibly in the form of an AKP-CHP coalition.

  We are less sure about such an outcome: the polls do not suggest any significant change in the allocation of votes, nor do we see meaningful changes in party leaders’ attitudes that would imply a greater probability of building a coalition government. In fact, in our view, the political backdrop has become increasingly polarised and fractious.We therefore think the market could become nervous in the absence of signals of tangible progress on coalition talks in a relatively short time, especially given the upcoming Moody’s review on 4 December. 

  The likelihood of a third election is higher than market expectations, in our view. In particular, the probability of a third election would be re-priced higher if the AKP manages to increase its share of the vote in November (ie, towards 43%). In the event of a third election, we see significant risk of a negative rating action, particularly from Moody’s.

  

  The polarisation in Turkey has deepened further, across political and ethnic lines, as a result of the renewed terror attacks, inflamed political rhetoric and negative repercussions of the Syria issue domestically (particularly among Kurds). The tragic bombing attack in Ankara, which was the worst terror event in the history of the country, not only showed the extent of the polarisation but also highlights equally important problems besetting Turkey. The first is the idea of, ‘adaptive reality’; whereby different factions have moulded events to reach a different perceived reality. A related concept is that of ‘alienation of other’, whereby existing divisions are further deepened by the creation of an environment of mistrust and recrimination.

  

  The act of “alienation of other” is not something new to Turkey, and has been widely used by political parties at times to consolidate voter base. The side-effects can be toxic and long-lasting, however. It not only makes facilitation of dialogue between political parties nearly impossible (eg, MHP’s isolation of HDP as a party) but can also spread to the general population. A recent example to this was when fans of the national football team protested the moment of silence for the victims of Ankara bombings during Turkey’s football match in Konya, a stronghold for the AKP. There is also evidence of a growing perception among opposition groups that the government has failed to ensure appropriate security during opposition rallies.

  * * *

  Right. The government has no desire to de-escalate here. This is all about convincing the populace that supporting the Kurds leads to an increased incidence of terrorist attacks. 

  But to be clear, no one believes this anymore. This is just as much of an international joke as the idea that Washington, Riyadh, and Doha want to “fight terrorism.” 

  But bear in mind, the results aren’t in question. That is, as Barclays suggests, Erdogan is going to simply undermine the coalition building process on the way to calling for snap elections until he eventually wins. Sadly, this willing usurpation of the democratic process will continue until the President eventually gets his way and the lira will likely collapse until at some point, voters simply give up on democracy and give Erdogan his majority back. 

  Additionally, it’s important to note that this election comes just hours before the US intends to deploy spec ops with Kurdish forces in Syria. As we discussed earlier today, Washington intends to support those toops with sorties flown from Incirlik. If Erodgan doesn’t get the outcome he wants on Sunday and he believes the PKK is responsible, Ankara could begin to re-evaluate its partnership with Washington…

  

  

  

  

  

• HaPPY HoRRoRWeeN 2015

  

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• Crude Supertanker Rates Collapse As VLCC 'Traffic' To China Lowest In 13 Months

  A few days ago we warned, confirming Goldman Sachs' earlier analysis that the world was running out of space to store crude distillate products, that China was running out of storage space for crude oil as it dramatically ramped up its Strategic Petroleum Reserve 'buy low' plan. While the brightest indicator at the time was "about 4 million barrels of crude oil stranded in two tankers off an eastern port for nearly two months," this week, the dial went to 11 on the oil-demand-fear-o-meter, as Bloomberg reports supertankers sailing to Chinese ports plunged to its lowest in 13 months, sending the daily rate for shipping crashing. The marginal demand-er of last resort just left the market.

   

  As a reminder, this is what Goldman said: "the build in Atlantic distillate inventories this year has been large, following near-record refinery utilization in both the US and Europe, only modest demand growth, especially relative to gasoline, and increased imports from the East on refinery expansion and rising Chinese exports."

  As a result, and despite a cold winter in both Europe and the US last year, European and US distillate storage utilization is reaching historically elevated levels, driving a sharp weakening in heating oil and gasoil time spreads.

   

  

   

  Such high distillate storage utilization has two precedents, leading in both cases to storage capacity running out in the springs of 1998 and 2009, pushing runs and crude oil prices and timespreads sharply lower. This raises the question of whether today’s oil market oversupply can rebalance simply through financial stress – prices remaining near their current low level through 2016 – or if operational stress – breaching storage capacity constraints and forcing prices below cash costs like in 1998 and 2009 – is ineluctable.

  And then something very unexpected happened: the world quietly hit a tipping point when, according to Reuters, China ran out of space to store oil.

  In a report explaining why "oil cargoes bought for state reserve stranded at China port" Reuters notes that "about 4 million barrels of crude oil bought by a Chinese state trader for the country's strategic reserves have been stranded in two tankers off an eastern port for nearly two months due to a lack of storage, two trade sources said."

  And now, as Bloomberg reports,

  VLCCs sailing to Chinese ports at lowest since Sept. 19, 2014, according to ship tracking data compiled by Bloomberg.

   

  As China began its Strategic Petroleum Reserve build in Oct 2014: 89 VLCCs inbound for China…

   

  

   

  and after ramping up its buying (and VLCC traffic and thus tanker rates),  just 59 ships are now signalling Chinese ports, down by 13 from week earlier…

  

  And this has sent the daily VLCC rate from Mideast Gulf to East Asia crashing to less than half this year’s recent peak…

  

   

  And just like that China has, if only for the time being, run out of storage facilities. As we concluded previously,

  How long until this translates into an actual drop in oil purchases, and even more importantly, how long until the U.S. itself finds itself in a comparable "overflow" bottleneck, leading to the next, and sharpest yet, drop in oil prices?

  Charts: Bloomberg

  

  

  

  

  

• Congresswoman Calls US Effort To Oust Assad "Illegal," Accuses CIA Of Backing Terroists

  One point we’ve been particularly keen on driving home since the beginning of Russian airstrikes in Syria is that The Kremlin’s move to step in on behalf of Bashar al-Assad along with Vladimir Putin’s open “invitation” to Washington with regard to joining forces in the fight against terrorism effectively let the cat out of the proverbial bag. 

  That is, it simply wasn’t possible for the US to explain why the Pentagon refused to partner with the Russians without admitting that i) the government views Assad, Russia, and Iran as a greater threat than ISIS, and ii) Washington and its regional allies don’t necessarily want to see Sunni extremism wiped out in Syria and Iraq.

  Admitting either one of those points would be devastating from a PR perspective. No amount of Russophobic propaganda and/or looped video clips of the Ayatollah ranting against the US would be enough to convince the public that Moscow and Tehran are a greater threat than the black flag-waving jihadists beheading Westerners and burning Jordanian pilots alive in Hollywood-esque video clips, and so, The White House has been forced to scramble around in a desperate attempt to salvage the narrative. 

  Well, it hasn’t worked.

  With each passing week, more and more people are beginning to ask the kinds of questions the Pentagon and CIA most assuredly do not want to answer and now,  US Congresswoman Tulsi Gabbard is out calling Washington’s effort to oust Assad both “counterproductive” and “illegal.” In the following priceless video clip, Gabbard accuses the CIA of arming the very same terrorists who The White House insists are “our sworn enemy” and all but tells the American public that the government is lying to them and may end up inadvertently starting “World War III.” 

  Enjoy:

  For more on how Russia and Iran’s efforts in Syria have cornered the US from a foreign policy perspective, see “ISIS In ‘Retreat’ As Russia Destroys 32 Targets While Putin Trolls Obama As ‘Weak With No Strategy‘”

  

  

  

  

  

• Mario Draghi Admits Global QE Has Failed: "The Slowdown Is Probably Not Temporary"

  Undoubtedly, the most amusing this about the prospect of more easing from the ECB (as telegraphed by Mario Draghi last week) and the BoJ (where Haruhiko Kuroda just jeopardized his status as monetary madman par excellence by failing to expand stimulus) is that both Europe and Japan both recently slid back into deflation despite trillions in central bank asset purchases. 

  In other words, the market expects both Draghi and Kuroda to double- and triple- down on policies that clearly aren’t working when it comes to altering inflation expectations and/or boosting aggregate demand. Indeed, both Goldman and BofAML said as much last week. For those who missed it, here’s Goldman’s take

  The subdued and increasingly persistent inflation dynamics that have prevailed in recent years may have eroded central banks’ best line of defence in the face of adverse disinflationary shocks. The energy-price-driven decline in Euro area inflation from 2012 to 2015 has thrown this possibility into even sharper relief.

   

  By embarking on unprecedented balance sheet operations and forward guidance, central banks in Europe have sought to ring-fence domestic inflation expectations and signal their intention to maintain monetary conditions easy for a protracted period of time. Mario Draghi himself described the ECB’s asset purchase programme as a way of ensuring that very low (and, at times, negative) inflation does not lead wage- and price-setters to adjust their behaviour to a perceived lower steady-state rate of inflation. However, judging from market-based implied measures of longer-term inflation expectations, the effectiveness of the ECB’s announcements has proved limited so far.

  Or, visually:

  

  Meanwhile, many critics have accused the ECB of adopting policies that work at cross purposes with Berlin’s insistence on fiscal rectitude. That is, the more Draghi’s PSPP drives down borrowing costs, the less effective the “market” is at pricing risk which in turn means investors aren’t able to punish governments for budgetary blunders. In other words, Spain, Portugal, and Italy shouldn’t be able to borrow for nothing based on the fundamentals, but thanks to the ECB they can – so why implement reforms? 

  And so, ahead of what might fairly be described as one of the most highly anticipated ECB decisions in history, everyone’s favorite Goldmanite gave an interview to Alessandro Merli and Roberto Napoletano. The transcript can be found on the ECB’s website, but we’ve included some notable excerpts below. 

  Perhaps the most interesting passage comes at the outset with Draghi essentially admitting that global QE has demonstrably failed:

  The conditions in the economies of the rest of the world have undoubtedly proved weaker compared with a few months ago, in particular in the emerging economies, with the exception of India. Global growth forecasts have been revised downwards. This slowdown is probably not temporary. To illustrate the importance of emerging markets, it is recalled that they are worth 60% of gross world product and that, since 2000, they have accounted for three-quarters of world growth. Half of euro area exports go to these markets. The risks are therefore certainly on the downside for both inflation and growth, also because of the potential slowdown in the United States, the causes of which we need to understand fully. The crisis led to a sharp drop in incomes. It is up to us to push them up again.

  So, a couple of things there. First, we agree that the “slowdown is probably not temporary.” Indeed, as we’ve documented extensively, we’ve likely entered a period of lackluster global growth and trade, and there’s every reason to believe this is structural and endemic, as opposed to fleeting and cyclical. Second, the last bolded passage there speaks volumes about what’s wrong with the current central planner “strategy.” No, Mario Draghi, it’s not “up to you” to push up incomes. It’s “up t you” to get out of the way and the market figure this out. Central planners had their chance to boost wage growth and they failed – miserably. 

  Here’s Draghi on the effect oil prices are likely to have on inflation expectations going forward:

  As far as the next few months are concerned, the most relevant factor will be the price of energy. We expect inflation to remain close to zero, and maybe even to turn negative, at least until the start of 2016.

  Of course what Draghi doesn’t say is that ZIRP is a contributor. That is, when you ensure that capital markets remain wide open, uneconomic producers continue to dig, drill, and pump and that contributes to lower prices and thus, to a deflationary impulse. 

  And here’s Draghi explaining that the idea of the “lower bound” is becoming antiquated thanks to Europe’s descent into NIRP: 

  Now we have one more year of experience in this area: we have seen that the money markets adapted in a completely calm and smooth way to the new interest rate that we set a year ago; other countries have lowered their rate to much more negative levels than ours. The lower bound of the interest rate on deposits is a technical constraint and, as such, may be changed in line with circumstances.

  Again, it’s all about what Darghi doesn’t say. The reason NIRP is still doable is because it hasn’t yet been passed on to household deposits:

  

  Here’s a bit from Draghi on inflating away massive debt piles…

  Low inflation has two effects. The first one is negative because it makes debt reduction more difficult. The second one is positive because it lowers interest rates on the debt itself. The path on which fiscal policy has to move is narrow, but it’s the only one available: on the one hand ensuring debt sustainability and on the other maintaining growth. If interest rate savings are used for current spending the risk increases that the debt becomes unsustainable when interest rates go up. Ideally, the savings are instead spent on public investments whose rates of return permit repayment of the interest when it rises.

  And finally, here’s how the ECB chief explains away the idea that central bank stimulus is incompatible with fiscal retrenchment: 

  Structural reforms and low interest rates complement each other: carrying out structural reforms means paying a price now in order to obtain a benefit tomorrow; low interest rates substantially reduce the price that has to be paid today. There is, if anything, a relationship of complementarity. There are also other more specific reasons: low interest rates ensure that investment, the benefits from investment and from employment, materialise more quickly. Structural reforms reduce uncertainty regarding macroeconomic and microeconomic prospects. Therefore, it is the opposite, rather than seeing an increase in moral hazard, I see a relationship of complementarity, of incentive.

  Sure. So what Draghi wants you to believe is that the EU periphery is committed to budgetary discipline and all the ECB is doing by artificially suppressing borrowing costs is making the transition to fiscal responsibility less painful. Here’s proof of how well that strategy is working:

  

  But none of this matters. DM central bankers are all-in on this; that is, there’s no turning back. Just as night follows day, the ECB will ease further which will lead directly to more easing from the Riksbank and the SNB. Similarly, the BoJ will likely end up attempting to further monopolize the Japanese ETF market and may ultimately move into individual stocks in an insane attempt to control corporate management teams and mandate the wage hikes that Abenomics has so far failed to produce. 

  That said, both the ECB and the BoJ are running out of monetizable assets which makes us and others wonder whether they will not become gun shy, having realized that they’ve finally bumped up against the limits of Keynesian insanity. 

  Whatever the case, just note that while Mario Draghi is quite adept at playing emotionless bureaucrat (unless a twenty-something is throwing glitter at him), it seems clear that DM central bankers are now beginning to question their own omnipotence and as Kuroda will tell you, “the moment you doubt whether you can fly, you cease to be able to do it forever.”

  

  

  

  

  

• Should America Fight For The Spratlys?

  Submitted by Fred Reed via AntiWar.com,

  It appears that Washington, ever a seething cauldron of bright ideas, is looking for a shooting war with China, or perhaps trying to make the Chinese kowtow and back down, the pretext being some rocks in the Pacific in which the United States cannot possibly have a vital national interest. Or, really, any interest. And if the Chinese do not back down?

  Years back I went aboard the USS Vincennes, CG-49, a Tico class Aegis boat, then the leading edge of naval technology. It was a magnificent ship, fast, powered by a pair of airliner turbines, and carrying the SPY-1 phased-array radar, very high-tech for its time. The CIC was dark and air-conditioned, glowing with huge screens – impressive for then – displaying all manner of information on targets in the air. Below were Standard missiles, then on a sort of chain drive but in later ships using the Vertical Launch System. It was, as they say in Laredo, Muy Star Wars. (The Vincennes was the ship that later shot down the Iranian airliner.)

  

  The Vincennes. The boxy thing up front is the radar. It is not hardened.

  Being something of a technophile, I took all of this in with admiration, but I thought – what if it gets hit? As a kid in my preteens I had read about the battleships of WWII, the Carolinas but in particular the Iowa class, fast, brutal ships with sixteen-inch belt armor and turrets that an asteroid would bounce off of. The assumption was that ships were going to get hit. They were built to survive and continue fighting.

  By contrast, the Vincennes was thin-skinned, hulled with aluminum instead of steel, and the radar, crucial to combat, looked perilously fragile. A single hit with anything serious, or perhaps even a cal .50, but certainly by anything resembling a GAU-8, and she would be hors de combat until refitted.

  One hit.

  

  The Iowa, BB-61. I went aboard her at Norfolk at the Navy’s invitation. It altered my appreciation of guns. I came away thinking that if you can’t crawl into it, it isn’t really a gun. And solid: There is a reason why no battleship was sunk after Pearl Harbor.

  I also knew well that the Navy played Red Team-Blue Team war games in which our own submarines – then chiefly 688s – tried to “sink” the surface fleet. The idea was that if the sub could get into firing position, it would send up a green flare. The subs were then running if memory serves the Mk 48 ADCAP torpedo, a wicked wire-guided thing with a long range. Sailors told me that invariably the subs “sank” the surface force.

  When I mentioned this at CHINFO, the Navy’s PR operation in the Pentagon, flacks told me that the potential bad guys only had piddling diesel-electric subs, far inferior to our nukey boats, and couldn’t get near the fleet in open seas. Yes, no, maybe, and then. It sounded like happy talk to me. In WWII, diesel-electrics certainly got in range of surface ships, perhaps the most famous example being when Archer Fish sank Shinano.

  I do not know a great deal about the Chinese Navy, having been out of that loop for years. I do know that the Chinese are smart, and that they have optimized their forces specifically to take out carrier battle groups near their territory. They do not try to match the US ship-for-ship in the kind of war America wants to fight. They would lose fast, and they know it. The key is to swarm the fleet with cruise missiles arriving all at once, accompanied perhaps by large numbers of aircraft. Would this work? I don’t know, but that is certainly the way I would bet.

  

  DF-21D anti-ship (read: anti-carrier) missile. This is not the place for detail, but China has anti-ship ballistic missiles designed to kill carriers, and is working on others, hypersonic glide vehicles, that are not real interceptible. I do not know how well they work. If I were a carrier, I would make a point of not finding out.

  The Navy has not been in a war for seventy years. It has sat off various shores and launched aircraft, but the fleet has not been engaged. Over decades of inaction, complacency sets in. Unfortunately, wars regularly turn out to be otherwise than expected. Further, the American military’s standard approach to a war is to underestimate the enemy (there is probably a manual on this).

  Yet further, great emotional and financial capital resides in a carrier-battle group, one of the most impressive achievements of the human race. (I mean this: the technology, organization, and competence involved in, say, night flight ops are…”astonishing” is too feeble a word.)

  This assures reluctance to question the fleet’s effectiveness in the face of changing conditions. Such as high-Mach, stealthed, maneuvering, sea-skimming cruise missiles. Or terminally guided anti-ship ballistic missiles. America is accustomed to fighting enemies who can’t fight back. This may not include the Chinese.

  There is also the fact that the American military simply doesn’t matter, which reduces concern with whether it can fight and who it can fight. It doesn’t defend the US, since there is nothing to defend it against. (What country has the remotest possibility of invading America?) So the military is used for what are essentially hobbyist wars, keeping Israel happy, providing markets for the arms companies, and for social engineering: we have girl crews who would be a disaster at damage control, but we assume that there will never be any damage to control.

  Uh…yeah. The evidence is that these ships are fragile:

  

  The carrier Forrestal, 1967. A single Zuni missile was fired accidentally. A huge fire ensued, bombs cooked off, 134 men were killed, and the ship was devastated, out of service for a very long time. One five-inch missile. Something to think about.

  

  USS Stark, 1987. Hit by two Exocet missiles fired by an Iraqi Mirage.

  What would happen if in a shooting war the Chinese crippled the American fleet? Washington is rampant with large egos, especially that of John McCain, the senator from PTSD. If it were discovered that China could disable the Navy, many other countries might conclude that they could do it too. They most certainly would think of this. Washington could not accept the discovery: Fear of the carriers is a large element in Washington’s intimidation of the world. To save face, the US would be tempted to go nuclear, or seriously bomb China proper, with unforeseeable results.

  The Air Force and Navy could hurt China badly by conventional means, yes, for example by cutting off oil from the Mideast, or destroying the Three Gorges dam. For a variety of reasons this would be playing with fire. The economic results of any of these bright ideas would be godawful.

  

  USS Cole, 2000. Blown up by suicide guys in a small boat.

  Washington seems not to realize that it wields far less military power than it thinks it does, and that the power it does wield is ever less useful than before. As a land power, it is very weak, being unable to defeat Russia, China, or peasants armed with rifles and RPGs. Air power has regularly proved indecisive.

  If Washington somehow won a naval war with China, so what? It would provide the satisfactions of vanity, but China’s danger to the US imperium lies in increasing economic power and commercial expansion through Asia, where it holds the high cards: it is there, Washington isn’t. Grrr-bowwow-woofery in the far Pacific, even if successful, is not going to stop China’s commercial expansion, and a defeat would end the credibility of the Navy forever.

  As I say, Washington is full of bright ideas.

  

  

  

  

  

• After The Novelty Of McDonalds' All-Day Breakfast Wears Off

  They appear to have resorted to a ‘new’ dollar menu item…

   

  

   

  h/t @ianbremmer

  

  

  

  

  

• The Quick "Bull" Vs "Bear" Case In 8 Charts

  “What happens next?” Everyone wants to know the answer, but nobody has it (if they do, they are lying).

  Still, one attempt at framing the narrative, comes from BofA’s Savita Subramanian. Here is the 30,000 foot cliff notes version of the two sides of the story.

  First, the bear case, or as BofA calls it “an economic shock derails a fragile economy.”

  Concern over global growth has become more wide-spread, as suggested by the charts below. We believe that outside of an exogenous geopolitical event, an economic shock would most likely be tied to credit, where signs of stress are building the most.

  • Growth expectations have come down over the past 12 months, per the Global Fund Manager Survey
  • More investors are starting to believe we’re in the “late cycle”
  • There are signs of stress in the high yield market, with distress ratio increasing recently
  • More companies in the S&P 500 are projected to lose money than those with negative EPS 12M ago.

  

   

  And here is the “4 chart summary” of the bull case, which as usually expected, is “more aligned” with BofA’s economists’ current outlook (which does not foresee a recession any time in the coming decade), where they see stable to improving growth in developed markets. This requires that China’s economy does not collapse. But much of the uncertainty may be reflected is asset process, and we see several reasons to remain positive.

  • Valuations are still below average – see Chart 2 for the normalized P/E
  • Short interest has risen over time and is at the highest levels since 2008
  • Investors are underweight the US by a net 10% (per the Global FMS)
  • Sentiment is still bearish, with our Sell Side Indicator in “Buy” territory (see Chart 12) and cash levels at mutual funds also generating a “Buy” signal per the Global FMS.

  

  A more detailed version of the above to follow tomorrow.

  

  

  

  

• Halloween Surprise: How Will The US Banks Plug Their $120B Capital Shortfall? Trick Or Treat?

  

   

  Source: searchglobalnews.wordpress.com

  The Federal Reserve had a nasty surprise for the financial markets right before the Halloween weekend (the perfect timing to sweep something under the carpet and hoping the markets will have forgotten about it by Monday). At 8PM on Friday night (again, perfect timing, the Fed made sure all Bloomberg terminals were switched off and the average Wall Street trader was already spending his salary in a fancy Manhattan bar), a statement was issued, confirming the major banks in the USA would need an additional capital injection of $120B to secure the safety of the financial system and to get rid of the capital shortfall.

  The governors of the Federal Reserve have confirmed and approved a draft version of the proposal, and it will now be made available for public comments. The remarkable part of the proposal is the fact the council of governors is proposing to fill the gap by raising additional debt, instead of issuing new shares to increase the equity level on the banks’ balance sheets.

  

  Source: opengov.com

  The six major banks will be hit by this new proposal, and it’s widely expected JP Morgan and Citigroup will have the hardest task to comply with the Fed’s requirements. So okay, if the $120B could be covered by new (probably subordinated) debt issues, the damage could be limited to the banks just paying a few billions in interest expenses per year. Nothing to lose your sleep over.

  However, what’s really disturbing here is that these same banks, 6 years after the global financial crisis, are still facing shortcomings on the balance sheet front. Despite the government and the Federal Reserve claiming that the ‘crisis is over’ and the American economy is ‘healthy again’, apparently the banks would still have difficulties to deal with any decent-sized economic crisis.

  

  But wait, that’s not all. On Friday, the European Central Bank also announced the results of a review of the situation of the Greek banks in the Euro-system. Apparently, there still is a huge hole in the Greek financial sector (surprise, surprise), and the Greek banks would need an additional capital injection of in excess of $15B , just to survive any adverse economic scenario in the country.

  

  Source: politico.com

  And this will very likely prove to be a much tougher challenge for these banks as the combined market capitalization of the four largest banks in Greece is less than $5B. Oops. Do you see the problem here?

  It will be close to impossible to inject another $15B in those 4 Greek banks without a complete nationalization or at least absorption by a larger entity. And okay, yes, approximately $25B of Greece’s next rescue package is earmarked to be used to support the banks, but that’s only kicking the can further down the road.

  Let it be clear. We are NOT out of the danger zone yet, and with a shortfall of $120B at the six largest banks in the USA and a $15B shortfall in Greece (roughly 3 times the market capitalization of the four largest Greek banks COMBINED), the situation actually looks pretty bad. There’s no way the Federal Reserve could maintain its position that ‘everything is going great in the USA’.

  >>> Read our Latest Gold Report!

  Secular Investor offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies are transformed into the Gold & Silver Report and the Commodity Report.

  Follow us on Facebook @SecularInvestor [NEW] and Twitter @SecularInvest

  

  

  

  

  

• Mainstream Media Looks In The Mirror

  Could Not Be Clearer…

   

  

   

  Source: Investors.com

  

  

  

  

  

• Blatant Gold/Silver Manipulation Reflects The Complete Corruption Of The U.S. System

  Submitted by Dave Kranzler via Investment Research Dynamics,

  The morning of the FOMC announcement on Wednesday (Oct 28) gold was up $14 overnight, close to $1080 and the cartel’s dreaded 200 day moving average.  The “premise” was that the market was expecting another rate hike deferral.

  A friend called me that morning and I told him to not get excited because when the FOMC policy decision hits the tape, they will annihilate gold and push the S&P 500 up toward 2100.   I was only 10 pts off on the S&P call, as the S&P 500 closed at 2090, up an absurd 24 points.  

  

   

  Gold was taken to the cleaners:

  

   

  What’s incredible is not one mainstream media analyst or reporter questions this market action. If the premise behind the gold sell-off was a “hawkish” FOMC statement and the threat of a rate hike in December (yawn), then the exact same premise should have cause a big sell-off in stocks. Since when does the threat of tighter monetary policy not hit the stock market?

  Just to recount the play-by-play in gold, the moment the FOMC announcement hit the tape, the Comex computer system was bombarded with sell orders. At this point in the trading day, the ONLY gold/silver market open is the Comex computer Globex system. In the first 30 minutes 29.6k contracts were unloaded – 2.6 million paper ounces. In the entire hour after the announcement 50.5k contracts were unloaded – 5.1 million ounces. Note that the Comex is showing around 200k ounces to be available for delivery.

  The blatant, unfettered manipulation and intervention in the gold and silver market is sponsored by the Fed and the U.S. Treasury, executed by the big bullion banks and fully endorsed by the CFTC.

  Dan Norcini vomited up a theory that the hit on Wednesday was a product of long side (hedge fund) liquidation.  That view proved to be utter scatological regurgitation from an analyst who’s analysis and views have gone completely off the rails.  As it turns out, open interest increased by over 4,000 contracts on Wednesday.  So much for that “long liquidation” idiocy.

  The manipulation of the gold and silver market is a nothing but a product of complete systemic corruption.  The only way that the Fed and the politicians can claim that the economy is “fine” and QE “worked” is to make sure that the one piece of obvious evidence which would say otherwise is kept highly restrained.

  I’ve told colleagues for years that the only way the elitists will let the Comex default, causing gold and silver to launch in price toward Pluto, is when they know they can no longer support their fraud.

  If I’m wrong, how else to do you explain the fact that the front-running candidate to be the next President of the United States is openly a criminal and traitor who should be devoting her entire resource base toward defending herself from being throw in jail forever?  This person, by the way, issues a statement today giving the U.S. economy an “A.”

  On a positive note, I do believe that this country is in its 9th inning and there will be no extra innings in this game.   Gold and silver do appear to be back in an uptrend, with a lot of pressure from the part of the world that demands physical delivery.

  

  

  

  

  

• Goldman's 4 Word Summary Of Q3 Earnings Season: "Adequate Earnings, Dismal Sales"

  Haven’t bothered to check in on the third quarter earnings season (which at this rate will mark the first two back-to-back quarters of earnings declines since 2009, aka an earnings recession)? Then here is the 4 word summary from Goldman Sachs: “adequate earnings, dismal sales.“

  With results from 341 companies (77% of total market cap) in hand, the 3Q reporting season thus far can be summed up as simply as “adequate earnings, dismal sales.” Earnings have been in line with history, with 48% of firms surprising on the bottom line (above the historical average of 46%), for an average EPS surprise of 4% versus the historical average of 5%. On the other hand, sales results have been disappointing, a function of slowing economic growth and a stronger dollar. Just 21% of companies beat consensus revenue estimates by more than one standard deviation, well below the 10-year average of 32%. Excluding Energy, 49% of companies has surprised on EPS, while 20% has surprised on the top line.

  If companies beat on earnings do they also beat on revenues?

  Stocks delivering positive sales surprises have been more likely to surprise on earnings, but a top-line shortfall has not necessarily led to a bottom-line miss. 21% of firms has posted positive 3Q sales surprises, while 14% of stocks beat on both the top and bottom line, meaning firms that beat on sales were also likely to beat on earnings (see Exhibit 1). Stocks surprising on both the top and bottom-line include AMZN, JNPR, NOC. Interestingly, 71% of companies that beat on earnings either negatively surprised on revenue, or reported sales results in-line with expectations, suggesting that margins have surprised to the upside thus far.

   

  

  So as corporate teams seek to push margins even higher in the coming quarters, there will be even more layoffs in the coming quarters, and even more disappointing employment numbers… which is great news for a “lower for longer” addicted market.

  What is the cause of the ongoing revenue slowdown, aside from lack of capital investment of course? The strong dollar is the biggest culprit, a dollar which keeps getting stronger.

  FX headwinds and a slowing US economy have caused positive and negative revenue surprises to diverge significantly from historical averages. Through the first 22 days of 3Q earnings season, only 21% of companies has positively surprised on revenue, nearly 12 percentage points below the 10-year average at this point in the earnings season. Around one third of S&P 500 companies have disappointed on revenue, significantly above the 21% average (see Exhibit 2).

   

  

   

  Historically, as positive sales surprises become scarce, investors are more likely to reward beats on the top line (see Exhibit 3). This trend has been evident during 3Q reporting season. 73% of companies surprising on revenue outperformed the S&P 500 the day following the announcement, the second best hit-rate in the past decade. 3Q sales for NKE, which was aided by surprisingly strong revenue growth in China, beat consensus expectations and subsequently outperformed the S&P 500 by nearly 900 bp during the following day. In contrast, companies surprising on earnings have outperformed the market 64% of the time.

   

  

  For those wondering if the weak top line number means a slowing economy, the answer is yes.

  Disappointing sales results reflect below-average 3Q economic growth. GDP growth equaled just 1.5% in 3Q. Solid growth from  consumer-facing sectors was offset by a drag from inventories. While real personal consumption expenditures increased by 3.2%, inventory accumulation subtracted 1.4 percentage points from growth.

  It’s not bad news for all though: the biggest companies will survive and will likely get even bigger.

  Company results thus far suggest the largest S&P 500 companies have weathered the challenging growth environment better than their smaller counterparts. 58% of S&P 500 market cap has positively surprised on earnings versus an equal-weighted average of 48%, implying better-thanexpected results from larger companies. In fact, 66% of the 50 largest companies in the S&P 500 has beat earnings expectations versus 45% for the remainder of the index. 32% of the 50 largest companies beat on sales versus 19% for the remainder of the S&P 500 (See Exhibit 4).

   

  

  … something the market has noticed and rewarded.

  Better-than-expected earnings results for larger companies have coincided with large-cap outperformance. As measured via the Russell 1000 versus the Russell 2000, large-cap stocks have outperformed small-cap stocks by 257 bp since the end of 3Q. Looking beneath the surface, Consumer Discretionary and Health Care sectors in the Russell 1000 have crushed the Russell 2000 sector indexes, both by more than 400 bp.

  

  Finally here is the full sector and industry performance broken down in various periods:

  

   

  * * *

  Finally, this is where Goldman sees the S&P trading in 1 year: “We expect the S&P 500 will likely trade at 2075 in 12 months (-0.7%).“

  

  

  

  

• The Power Of Fear & The Gullibility Of The Masses

  Submitted by Jim Quinn via The Burning Platform blog,

  “We know now that in the early years of the twentieth century this world was being watched closely by intelligences greater than man’s and yet as mortal as his own. We know now that as human beings busied themselves about their various concerns they were scrutinized and studied, perhaps almost as narrowly as a man with a microscope might scrutinize the transient creatures that swarm and multiply in a drop of water. With infinite complacence men went to and fro over the earth about their little affairs … In the thirty-ninth year of the twentieth century came the great disillusionment. It was near the end of October. Business was better. The war scare was over. More men were back at work. Sales were picking up.” – Opening monologue of  War of the Worlds broadcast – October 30,1938

  

  It was 77 years ago this week that Orson Welles struck terror into the hearts of Americans with his live radio broadcast of the HG Wells classic War of the Worlds. The broadcast began at 8:00 pm on Mischief Night 1938. As I was searching for anything of interest to watch the other night on the 600 cable stations available 24/7, I stumbled across a PBS program about Welles’ famous broadcast.

   

  As I watched the program, I was struck by how this episode during the last Fourth Turning and how people react to events is so similar to how people are reacting during the current Fourth Turning. History may not repeat exactly, but it certainly rhymes.

  It was the ninth year of the Fourth Turning. The Great Depression was still in progress. After a few years of a faux recovery (stock market up 400% from the 1932 low to its 1937 high) for the few, with the majority still suffering, another violent leg down struck in 1938. GDP collapsed, unemployment spiked  back towards 20%, and the stock market crashed by 50%. The hodgepodge of New Deal make work programs and Federal Reserve machinations failed miserably to lift the country out of its doldrums. Sound familiar? The average American household had not seen their lives improve and now the foreboding threat of war hung over their heads.

  The national hysteria over a play about the ridiculously impossible plot of Martians attacking Grover’s Mill, New Jersey seems crazy without the benefit of context. The nation was already on edge. They had just suffered another economic blow to their solar plexus, and now the drumbeats of war in Europe were growing louder. Welles’ biographer Frank Brady described the mindset of the nation:

  “For the entire month prior to ‘The War of the Worlds’, radio had kept the American public alert to the ominous happenings throughout the world. The Munich crisis was at its height. … For the first time in history, the public could tune into their radios every night and hear, boot by boot, accusation by accusation, threat by threat, the rumblings that seemed inevitably leading to a world war.”

  Studies discovered that fewer than one-third of frightened listeners understood the invaders to be aliens; most thought they were listening to reports of a German invasion or a natural catastrophe. The public allowed their emotions to overcome their rational mind. Playing upon people’s fears becomes easier when they are emotionally susceptible and beaten down from years of bad news. Even though it was specifically stated the show was a work of fiction, the mental state of the country was so panicked, people believed something bad was on the verge of happening and allowed themselves to believe.

  

  Much of the credit for the realism of the broadcast goes to Welles, a brilliant showman, who went on to create one of the greatest movies ever made just three years later – Citizen Kane. Welles thought the script was dull, just a day or two before the broadcast.  He stressed the importance of inserting news flashes and eyewitness accounts into the script to create a sense of urgency and excitement. The nation had gotten used to breaking news bulletins during the Munich Crisis.

  Another important issue was the fact the Mercury Theater on the Air was a radio show without commercial interruptions, adding to the program’s realism. The entire episode lasted 90 minutes and at the end of the play Welles assumed his role as host and told listeners the broadcast was a Halloween concoction: the equivalent, he said, “of dressing up in a sheet, jumping out of a bush and saying, ‘Boo!'” Despite the announcements before and after the show, the outrage and calls for Orson Welles’ head were deafening.

  What struck me while watching the PBS retrospective were the similarities between then and now. The gullibility of the masses, the power of fear, the overreaction by the media, busy bodies calling for the government to do something, and the effectiveness of propaganda are all commonalities between that Fourth Turning and today’s Fourth Turning.

  Evidently some listeners heard only a portion of the broadcast because they had been tuned into the Edgar Bergen Show and switched to CBS radio after the play had begun. Some of these people were overcome with fear as  the tension and anxiety prior to World War II led them to mistake it for a genuine news broadcast. Thousands of those people rushed to share the false reports with others, or called CBS, newspapers, or the police to ask if the broadcast was real. The telephone switchboards were overcome with volume and policeman overstepped their authority and entered the CBS studios to try and stop the show mid-broadcast. Evidently, the authorities weren’t big fans of the First Amendment or Fourth Amendment in 1938 either.

  Retrospective analysis has found the hysteria was not as widespread as purported by the mainstream media. The fact the play was performed in NYC, the media capital of the world, and the fictional attack was occurring in New Jersey provided much more publicity to the event. In reality, most of the dupes who were gullible enough to believe that Martians were actually attacking were old people and women. The timeline of the show should have revealed its falsehood to any critical thinking person, as the military somehow was mobilized and defeated within a 30 minute window.

  It seems our society will always have a large swath of people who will believe anything they are told by the media or the government. Our government run public education system now matriculates millions of functionally illiterate zombie like creatures into society, who can be easily manipulated and controlled through the use of  mass media and false propaganda. Those who constitute the invisible government behind the Deep State duly noted the psychological power of fear during this episode in history.

  The master of propaganda during that age even noted the impact on the American public. Adolf Hitler referenced the broadcast in a speech in Munich on November 8, 1938. Welles later remarked that Hitler cited the effect of the broadcast on the American public as evidence of “the corrupt condition and decadent state of affairs in democracy”. It likely confirmed his belief the democratic countries of the world would not have the guts to stand up to a man willing to wage all out war. He invaded Poland less than one year later, initiating the bloodiest war in history.

  Fear is a potent emotion to manipulate by the ruling class among a populace incapable or unwilling to think for themselves. The men behind the curtain, after decades of perfecting the psychological methods of molding the opinions, tastes, and ideas of the masses, believe they can control society through the use of fear. In 1938 Americans feared Germans, economic hardship, war, and evidently Martian invasions. Today they are taught to fear phantom Muslim terrorists, Russians, Chinese, Iranians, gun owners, anyone who questions government overreach, and anyone who disagrees with the social justice warrior agenda. The father of Propaganda, Edward Bernays, portrayed it succinctly in 1928:

  “In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons…who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind.”

  As I watched the despicable display of yellow journalism by the pathetic excuses for journalists during the CNBC presidential debate the other night, I was reminded of the PBS show and how the press completely blew the War of the Worlds broadcast out of proportion to its actual impact. Within three weeks, newspapers had published at least 12,500 articles about the broadcast and its impact, although the story dropped off the front pages after a few days. It was essentially a tempest in a teapot that has lived on for decades because the press created the outrage and fear.

  This is no different than what happens on a daily and weekly basis today. The mainstream media attempts to work the masses into a frenzy over a meaningless debt ceiling “showdown”, the latest hurricane or snowstorm, the latest fake terrorist warning, the collapse of Greece, the imminent acquisition of a nuclear bomb by Iran, the invasion of the Ukraine by Russia, or whatever sensationalist storyline that will get them ratings and strike the necessary fear into the hearts of the masses.

  Every looming threat is relegated to the back pages of the legacy media rags a few days later. The degraded faux journalists prefer to distract the willfully ignorant masses with the latest Kardashian/Lamar Odom/Caitlyn Jenner reality TV episode, Oscar fashion shows, professional sports, how to get rich in the stock market infomercials, and how you can have the perfect body segments on one of the dozens of faux news shows.

  What I found fascinating in the PBS episode is the never ending calls from busy bodies, control freaks, and lovers of government coercion to do something about everything they don’t like. In the days following the broadcast, there was widespread outrage in the media. The program’s news-bulletin format was described as deceptive by some newspapers and public figures, leading to an outcry against the perpetrators of the broadcast and calls for regulation by the Federal Communications Commission. How dare Orson Welles broadcast a play, described beforehand as a work of fiction, in a creative, exciting, and realistic manner. Do you see any similarities to calls for the FCC to control the internet, where anti-establishment websites dare to speak the truth?

  There will always be a sociopathic segment of the population who want control over everything and everyone. They want bigger government, more laws, more regulations, more restrictions, more taxes and more control over your life. The 1930’s marked a huge turning point for this country, with the majority supporting the New Deal and government intervening deeply into our everyday lives. Today, the government, in the control of bankers, crony corporate interests, billionaires, and captured political hacks, has smothered our freedoms, liberties, entrepreneurial spirit, intellectual debate, and ability to change the system from within.

  Shortly after the Welles broadcast, the nation came together and endured seven years of shared sacrifice, with the young men of the country fighting and dying on continents and islands far from our shores in a struggle against aggression. Today, I feel the aggression is coming from within. It’s our own government and the men who control it who are the real enemy. The coming struggle during this Fourth Turning is more likely to be American versus American. A prominent figure from the last Fourth Turning saw into the future decades ago, and he was right.

  “I am concerned for the security of our great Nation; not so much because of any treat from without, but because of the insidious forces working from within.” ? Douglas MacArthur

  

  

  

  

  

• First Images Of Russian Passenger Jet Crash Site Emerge

  Earlier today, ISIS claimed responsibility for the downing of a commercial airliner over the the Sinai Peninsula.

  The crash killed all 224 people on board. 

  Islamic State described the passengers as “crusaders” and “praised God” for their deaths:

  Breaking: Downing of Russian airplane, killing of more than 220 Russian crusaders on board.

   

  Soldiers of the Caliphate were able to bring down a Russian plane above Sinai Province with at least 220 Russian crusaders aboard.

   

  They were all killed, praise be to God. O Russians, you and your allies take note that you are not safe in Muslims lands or their skies.

   

  The killing of dozens daily in Syria with bombs from your planes will bring woe to you. Just as you are killing others, you too will be killed, God willing.

  Although analysts have disputed the idea that ISIS could have brought down the plane from the ground, if the video circulated online is authentic, then someone knew exactly when to start filming and that, in and of itself, seems to suggest that this was premeditated. Then again, reports indicate that even IS Sinai claim the video is fake. 

  Whatever the case, tragedy struck in the skies above Egypt today and below, find the first images and footage from the crash site.

  

  

  

  

  As we noted earlier, the question now is whether Russia will expand its Mid-East operations and commence airstrikes in Egypt because one thing is clear: if the Russian population had any qualms about continuing the campaign against “terrorists”, they were just eliminated in perpetuity.

  As for figuring out exactly what went wrong with the Airbus A321 that crashed this morning, don’t worry, John Kerry will soon get to the bottom of things: 

  “Secretary Kerry spoke to Foreign Minister Lavrov today to express the United States’ deepest condolences to the families and friends of those killed in the crash in Egypt of Kogalymavia Flight 9268. Secretary Kerry also offered to provide US assistance, if needed.”

  

  

  

  

• Did The PBOC Just Exacerbate China's Credit & Currency Peg Time Bomb?

  Submitted by Doug Noland via Credit Bubble Bulletin,

  October 30 – BloombergView (By Matthew A. Winkler): “Ignore China’s Bears: There's a bull running right past China bears, and it’s leading the world’s second-largest economy in a transition from resource-based manufacturing to domestic-driven services such as health care, insurance and technology. Just when the stock market began its summer-long swoon, investors showed growing confidence in the new economy — and they abandoned their holdings in the old economy. These preferences follow Premier Li Keqiang's directive earlier in the year at the National People's Congress to ‘strengthen the service sector and strategic emerging industries.’”

  Bubbles always feed – and feed off of – good stories. Major Bubbles are replete with great fantasy. Even as China’s Bubble falters, the recent “risk on” global market surge has inspired an optimism reawakening. August has become a distant memory.

  In the big picture, the “global government finance Bubble – the Granddaddy of all Bubbles” is underpinned by faith that enlightened global policymakers (i.e. central bankers and Chinese officials) have developed the skills and policy tools to stabilize markets, economies and financial systems. And, indeed, zero rates, open-ended QE and boundless market backstops create a “great story”. Astute Chinese officials dictating markets, lending, system Credit expansion and economic “transformation” throughout a now enormous Chinese economy is truly incredible narrative. Reminiscent of U.S. market sentiment in Bubble years 1999 and 2007, “What’s not to like?”

  Never have a couple of my favorite adages seemed more pertinent: “Bubbles go to unimaginable extremes – then double!” “Things always turn wild at the end.” Well, the “moneyness of Credit” (transforming increasingly risky mortgage Credit into perceived safe and liquid GSE debt, MBS and derivatives) was instrumental the fateful extension of the mortgage finance Bubble cycle. At the same time, Central banks and central governments clearly have much greater capacity (compared to the agencies and “Wall Street finance”) to propagate monetary inflation (print “money”). Most importantly, this government “money” and the willingness to print unlimited quantities to buttress global securities markets now underpin securities markets on a global basis (“Moneyness of Risk Assets”). And unprecedented securities market wealth underpins the structurally impaired global economy.

  China has been a focal point of my “global government finance Bubble” thesis. Unprecedented 2009 stimulus measures were instrumental in post-crisis global reflation. Importantly, China – and developing economies more generally – had attained strong inflationary biases heading into the 2008/09 crisis. Accordingly, the rapid Credit system and economic responses to stimulus measures had the developing world embracing their newfound role of global recovery “locomotive”. I contend that the associated “global reflation trade” was one of history’s great speculative episodes. I have posited that the bursting of this Bubble (commodities and EM currencies) marks a historical inflection point for the global government finance Bubble. I find it remarkable that this analysis remains so extremely detached from conventional thinking.

  Conventional analysis revels in seemingly great stories. As an analyst of Bubbles, I methodically contemplate a fundamental question: Is the underlying finance driving the boom sound and sustainable? Over the past 25 years, I’ve pondered this puzzle on too many occasions to count – about market, asset and economic Bubbles – at home and abroad. Arguably, it’s been 25 years of progressively destabilizing global Monetary Disorder. Looking today at the U.S., Europe, Japan and EM – I strongly believe the underlying finance driving the lackluster boom is hopelessly unsound. I as well appreciate that today’s acute monetary instability remains inconspicuous to most analysts.

  As a macro analyst, I view China as the global Bubble’s focal point – the weak link yet, at the same time, the key marginal source of Bubble finance. In the short term, China’s ability to stabilize its stock market, incite lending and reestablish their currency peg have been instrumental in the resurgent global “risk on” backdrop. At the same time, I’m confident that the underlying finance driving this historic Bubble is unsound. This will remain a most critical issue.

  I have argued that the global government finance Bubble elevated “too big to fail” from large financial institutions to encompass global risk markets more generally. Importantly, so-called “moral hazard” and associated risk misperceptions evolved into a global phenomenon. And nowhere has this dynamic had more far-reaching consequences than in China. Underpinned by faith that China’s policymakers will backstop system liabilities (i.e. deposits, intra-bank lending, etc.), Chinese banking assets (loans and such) have inflated to double the size of the U.S. banking system. China’s corporate debt market has ballooned to an incredible 160% of GDP (double the U.S.!), again on the view of central government backstops. Then there’s the multi-Trillion (and still growing) “shadow banking” sector, possible only because investors in so-called “wealth management” products and other high-yielding instruments believe the government will safeguard against loss.

  International investors/speculators have been willing to disregard a lot in China. Corruption has been almost systemic. The historic scope of malinvestment is rather conspicuous. China is in the midst of a historic apartment construction and lending Bubble. There’s a strong case to be made that the amount of Chinese high-risk lending is unprecedented in financial history. The massive Chinese banking system is today vulnerable from the consequences of extremely unsound lending to households, corporations and local governments. Chinese lenders are also likely on the hook for hundreds of billions of loans provided to finance China’s global commodities buying binge.

  Throughout the now protracted boom, perceptions have held that Chinese officials have things under control. And with a massive trove of international reserves, the Chinese have been perceived to possess ample resources for stimulus as well as banking system recapitalization, as necessary. Erratic Chinese policy moves were widely assailed this summer. And while down $500 billion over recent months, China’s $3.5 TN of reserves have been sufficient to underpin general confidence (once Chinese officials convinced the marketplace that they would stabilize their currency).

  Last week’s CBB succumbed to the too colorful language “Credit and Currency Peg Time Bomb.” China’s policy course appears to focus on two facets: to stabilize the yuan versus the dollar and to resuscitate Credit expansion. For better than two decades, similar policy courses were followed by myriad EM policymakers in hopes of sustaining financial and economic booms. Many cases ended in abject failure – often spectacularly. Why? Because when officials resort to such measures to sustain faltering Bubbles it generally works to only exacerbate systemic fragilities. For one, late-stage reflationary measures compound Credit system vulnerability while compounding structural impairment to the real economy. Secondly, central bank and banking system Credit-bolstering measures create liquidity that invariably feeds destabilizing “capital” and “hot money” outflows.

  As the globe’s leading superpower and master of the world’s reserve currency, the U.S. has experienced quite contrasting dynamics (to EM). The U.S. financial system has enjoyed the freedom to aggressively expand Credit, with “capital” and “hot money” outflows invariably (and effortlessly) “recycled” right back into U.S. financial assets. With U.S. corporations, households and financial institutions borrowing almost exclusively in dollars, the Fed has enjoyed extraordinary flexibility when it comes to monetary inflation. Post-tech Bubble reflationary policies and dollar devaluation did not risk an EM-style asset/liability currency mismatch. Moreover, post-mortgage finance Bubble QE-amplified liquidity outflows were largely absorbed by China and EM central banks as they accumulated international reserve holdings (flows conveniently recycled back into Treasury and agency securities).

  Importantly, faith in the dollar as the unrivaled global reserve currency underpinned confidence in Federal Reserve Credit – while the unfettered inflation of Fed Credit underpinned confidence in the U.S. securities markets and financial system right along with the American economy. It’s worth noting also that the juggernaut German economy has provided considerable flexibility to the ECB and euro currency and Credit management. Unique attributes have also thus far afforded the Bank of Japan phenomenal stimulus and devaluation latitude without inciting a crisis of confidence in the yen or Japanese financial assets. Overall, faith in central bank Credit has inflicted immeasurable damage.

  Conventional thinking holds that China’s currency is on the verge of “reserve” status. It is believed that Chinese officials will enjoy similar dynamics and policy flexibility as the U.S., Europe and Japan. The “Credit and Currency Peg Time Bomb” thesis rests upon the view that China is not a leading “developed” economy, but rather one massive “developing”-economy Credit and economic Bubble. I could be wrong on this. But the issue “Developing or Developed?” has profound ramifications for China’s future, as well as for global finance, the international economy and geopolitics more generally.

  China presents the façade of a highly advanced, high-tech “developed” economy. But in terms of corruption, reckless lending and state-directed uneconomic investment – China is “developing” at its core. In terms of corporate governance – it’s “developing”. Extreme wealth disparities? Right, “developing.” The government’s obtrusive role in finance and in the real economy, on full display over recent months, is pure “developing.” In short, China simply doesn’t have the history, capitalistic institutional structures or governance to function as a grounded and well-developed market economy. They were moving in the right direction before fatefully losing control of finance.

  I really hope China pulls out of this Bubble period without calamity. But I fear they are locked in a precarious policy course of perpetual Credit excess – a progressively unsound Credit boom destined for a crisis of confidence. They face constant “capital” outflow pressures – from both domestic-based and international sources. Wealthy Chinese will continue to try to get “money” (and their families) out of the country, as international investors and speculators flee an increasingly chaotic backdrop. How enormous is the Chinese speculative “carry trade” playing high-yielding Chinese debt instruments?

  I used “time bomb” terminology because throwing previously inconceivable quantities of new Chinese Credit atop “Terminal Phase” excess ensures exponential growth in systemic risk. Ironically, the huge reserve holdings – perceived to support systemic stability – actually ensure excesses are allowed to run unchecked to catastrophic extremes. I expect “capital” flight will continue to deplete reserve holdings. Markets will fret covert activities employed to support the yuan and bolster reserves. At some point, the markets will contrast the rising mountain of problem and suspect loans (and bonds) to the dwindling stock of reserves – and turn jittery. At some point there will be plenty to worry about in the Chinese banking system and corporate debt markets.

  I expect the downside of this historic Credit cycle to come with negative currency ramifications. Reminiscent of the nineties SE Asian Bubbles, Chinese officials are keen to postpone the day of reckoning. Rather than more gradual and less disruptive currency devaluation, determination to cling to reflationary policies coupled with a pegged currency regime ensures a major currency dislocation becomes part of a disruptive general crisis in confidence.

  At the end of the day, the massive unabated inflation of government finance – the unprecedented issuance of sovereign debt and central bank Credit – ensures a crisis of confidence in the underlying value of this “money.” Unfettered “money” in the hands of politicians and contemporary central bankers is risky business. Confidence in EM finance has waned, although an ebb and flow has seen sentiment improve over recent weeks. Optimism’s revival has much to do with perceptions of China’s stabilization. Count me skeptical that confidence in China is anything more than skin deep. “Developing or Developed?” How long will they enjoy the flexibility of unfettered Credit and a currency tied to the dollar?

  

  

  

  

  

• Greek Bad Debt Rises Above 50% For The First Time, ECB Admits

  It was almost exactly one year ago, on October 26, 2014, when the ECB concluded its latest European Stress Test. As had been pre-leaked, some 25 banks failed it, although the central bank promptly added that just €9.5 billion in net capital shortfall had been identified. What was more surprising is that to the ECB, the Greek banks – Alpha Bank, Eurobank Ergasias, National Bank of Greece, and PiraeusBank had entered Schrodinger bailout territory: they had both failed and passed the test at the same time. To wit:

  These banks have a shortfall on a static balance sheet projection, but will have dynamic balance sheet projections (which have been performed alongside the static balance sheet assessment as restructuring plans were agreed with DG-COMP after 1 January 2014) taken into account in determining their final capital requirements. Under the dynamic balance sheet assumption, these banks have no or practically no shortfall taking into account net capital already raised.

  Got that? According to the ECB, last October Greek banks may have failed the stress test, but under “dynamic conditions” they passed it. What this meant was unclear at the time, although as we explained this was nothing more than an attempt to boost confidence in Europe’s banking sector. This was the key quote from the ECB’s Vítor Constâncio: “This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth.”

  It didn’t.

  Eight months later when it became very clear what the ECB meant in practical terms, when the entire Greek financial system found itself in cardiac arrest as a result of increasing hostilities between the Greek government which was on the verge of severing its ties with Europe and an ECB backstop, and only €90 billion in Emergency Liquidity Assistance from the ECB – which also was this close from being withdrawn forcing Greece to implement draconian capital controls – prevent the total collapse of the Greek financial system which now, it is clear to everyone, has become a hostage of European “goodwill.”

  Fast forward to today, when the ECB repeated its annual exercise in confidence-boosting futility, when it released the results of its latest stress test focusing on Greek banks, i.e., the “AGGREGATE REPORT ON THE GREEK COMPREHENSIVE ASSESSMENT 2015“

  This is what the ECB said in its executive summary:

  The exercise is based on updated macroeconomic data and scenarios that reflect the changed market environment in Greece and has resulted in aggregate AQR-adjustments of €9.2 billion to participating banks’ asset carrying value. Overall, the assessment has identified capital needs totalling, post AQR, €4.4 billion in the base scenario and €14.4 billion in the adverse scenario.

   

  Covering the shortfalls by raising capital would then result in the creation of prudential buffers in the four Greek banks, which will facilitate their capacity to address potential adverse macroeconomic shocks in the short and medium term and their capacity to improve the resilience of their balance sheet, keeping an adequate level of solvency.

   

  Banks have to propose remedial actions (capital plans) in order to cover the entire shortfall (€14.4 billion), out of which a minimum of € 4.4 billion (corresponding to the AQR plus baseline shortfall) is expected to be covered by private means.

  The tabulated capital shortfall results for the same 4 banks which a year ago “dynamically” passed the ECB’s “stress test” with flying colors, but failed it in every possible way this time around, were as follows:

  

  Bloomberg’s take:

  Greece’s four main banks must raise 14.4 billion euros ($15.9 billion) in fresh capital, after a review by the European Central Bank, as investors and taxpayers face the cost of repairing the damage resulting from six months of wrangling between the country’s government and its creditors.

   

  The asset-quality review resulted in valuation adjustments of 9.2 billion euros at National Bank of Greece SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AE, the Frankfurt-based ECB said in a statement Saturday. In the stress tests, the banks’ capital gap amounted to 14.4 billion euros under a simulated crisis, and 4.4 billion euros under the baseline scenario. The four banks will have to submit recapitalization plans to the ECB’s supervisory arm by Nov. 6.

   

  

   

  National Bank of Greece, the country’s biggest bank by assets, has a total capital shortfall of 4.6 billion euros, of which 1.6 billion euros arises from the baseline scenario. Piraeus has the biggest shortfall of all the lenders, having to raise 2.2 billion euros under the baseline scenario, and 4.9 billion euros in total. Alpha Bank only needs to raise 263 million euros under the baseline scenario, of a total shortfall of 2.7 billion euros. Eurobank has the lowest aggregate shortfall, totaling 2.2 billion euros, of which 339 million euros corresponds to the baseline scenario.

  There was no commentary on the “odd” twist how in the span of one year, the same banks which last October were deemed stable and “dynamically” not needing any bailouts, not only had to implement capital controls to avoid a terminal deposit outflow, but now need to raise at least €14 billion.

  None of this contradictory confusion is surprising, and neither was the reason for today’s stress test: it is just the latest desperate attempt to restore confidence in a country’s banking sector, a country which still has and will have capital controls for a long time, and to give depositors the confidence that keeping their cash with the local insolvent banks is safe.

  The European Commission said in a statement that it is “encouraged” by the results, while Eurobank said that it targets maximum participation of high quality private funds in its capital increase. Alpha Bank said in a filing to the stock exchange that the result “demonstrates resilience,” despite “higher hurdle rates and the repayment of 940 million euros of state preference shares in 2014, which further improved the quality of capital.”

  As Reuters further writes, today’s result was merely another optical exercise in putting lipstick on the Greek bank pig:

  The fact, however, that the declared capital hole is smaller than the 25 billion euros earmarked to help banks in the country’s bailout may encourage investors such as hedge funds to buy shares.

   

  Germany’s Deputy Finance Minister Jens Spahn said attracting investors would reduce the support needed from the euro zone’s rescue scheme, the European Stability Mechanism.

  The ECM, which is the source of funds for the third Greek bailout, also promptly chimed in: “the comprehensive assessment conducted by European Central Bank on Greek lenders shows that ESM-backed loan program to Greece is adequately funded to accommodate additional capital needs in these banks, a spokesman for ESM says in an e-mail to Bloomberg. He added that the ECB stress test EU14.4b shortfall is “well within” EU25b buffer earmarked by ESM for Greek bank recapitalizations. After approval by euro-area member states, EU10b, which have already been mobilized and sitting in segregated account managed by the ESM, will be made available quickly to Greece.

  He ended on a hopeful note: “with sufficient private-sector participation, the remaining EU15b won’t be needed.”

  Well, a year ago Greeks were told there was nothing to fear and that no new capital was needed. This was a lie. Today we learn that, as expected, billions are needed… but less than the €25 billion set aside over the summer for the Greek bank bailout, so this is great news: after all it’s “better than expected.”

  Alas, this is just the latest lie, and one year from today, we can be certain that tens of billions more in new capital will be required.

  The reason: the biggest surprise from today’s stress test results was not in the capital shortfall measures, which will be promptly adjusted once again when the next Greek systemic crisis arrives – as it will because despite all the talk, absolutely nothing has changed either since last October or since the third Greek bailout. The surprise was the ECB’s admissions that the biggest problem not only for Greece, but all of Europe, the relentless surge in bad debt, continues without stopping.

  Recall what we said in July, when noting that Greek Non-Performing Loans had risen to €100 billion.

  Data from banks show that repayments declined to between 20 and 50 percent of performing loans, creating the conditions for a major increase in bad loans. This trend is in line with the estimates of the Bank of Greece, according to which NPLs amounted to 40 percent of the total at the end of 2014, with the likelihood they will grow further in the first half of the year.

   

  As a reference point, there is a little over €210 billion in total Greek loans, both performing and non-performing, currently and about €120 billion in deposits. There is also about €90 billion in Emergency Liquidity Assistance from the ECB.

   

  The total amount of bad loans (those which have remained unserviced for at least 90 days) has reached 100 billion euros, and the BoG data show that 70 percent of the loans that have entered payment programs remain nonperforming.

   

  This is a major problem for the Greek Banks but even more so for The ECB as there is not much it can do to ‘control’ NPLs and given provisions for bad loans are a mere EUR40bn – there is a big hole here that no one is accounting for.

   

  

  And since, this unprecedented and ongoing increase in NPLs is really all that matters, the only relevant data point from today’s ECB exercise was the following as cited by Reuters: “As controls on cash withdrawals have squeezed the economy, loans at risk of non-payment have increased by 7 billion euros to 107 billion euros.“

  The punchline: following yet another tortured admission of just how ugly Greek balance sheets are, the ECB has confirms what we knew months ago, namely that more than  half of all Greek loans are now nonperforming, and that as much as 57% of the loans made by Piraeus Bank the bank which fared worst, are at risk with the other Greek banks not much better off.

  What happens next?

  As expected, the Greek parliament did not waste any time to approve legislation outlining the process of recapitalising the country’s banks, which it did earlier today. According to the FT, “the bill states that bank rescue fund HFSF will have full voting rights on any shares it acquires from banks in exchange for providing state aid. Under the bill the bank rescue fund will have a more active role, assessing bank managements.

  The exact mix of shares and contingent convertible bonds the HFSF will buy from banks in exchange for any fresh funds it will provide will be decided by the cabinet.

   

  The capital hole has emerged chiefly due to the rising number of Greeks unable or unwilling to repay their debt.

  And therein lies the rub, because in the span of three months, Greek NPLs have risen from 47.6% of total to 51%: an increase of just over 1% in bad debt every month.

  Which means that whether or not the latest attempt to boost confidence by the ECB, ESM, and the Greek parliament succeeds is moot. Yes, a few hedge funds may invest funds alongside the ESM, but in the end, as the NPLs keep rising and as long as Greek debtors refuse – or simply are unable – to pay their debt or interest, the next Greek crisis is inevitable.

  The biggest wildcard is whether or not the Greek population will accept this latest promise of stability in its banking sector at face value: a banking sector which since July is operating under draconian capital controls. Granted, we should point out that in the past two months the deposit outflow from banks has stopped, and even reversed modestly adding about €900 million in deposits in the past two months, although that is mostly due to the inability of households and corporations to withdraw any sizable amount of funds.

  

  The real answer whether Greek banks have been “saved” will wait until the shape of the final bank recapitalization takes place, even as NPLs continue to mount. Remember: Greek lenders are currently kept afloat only by the ECB’s ELA but there is a rush to get the recapitalization finished. If it is not done by the end of the year, new European Union rules mean large depositors such as companies may have to take a hit in their accounts.

  If the proposed recap is insufficient – and it will be since under the surface the Greek economy continues to collapse and NPLs continue to mount – and a bank bail-in of depositors takes place (a bail-in which took place immediately in the case of Cyprus back in 2013 when Russian oligarch savings were “sacrificed” to bail out the local insolvent banking system), the next leg in the Greek bank crisis will promptly unveil itself, only this time Greece will have some 200% in debt/GDP to show for its most recent, third, bailout.

  Finally, the real question is: having read all of the above, dear Greek readers, will you hand over what little cash you have stuffed in your mattress to your friendly, neighborhood, soon to be recapitalized bank?

  Source: ECB, Bank of Greece

  

  

  

  

  

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• Shantytown, Stockton, California, USA

  I made a visit to Stockton, California the other day and came across a jarring sight: an actual shantytown, here in America.

  

  ^{(Click on images for a larger view.  Note: all images are Creative Commons (CC BY-NC-SA 4.0) Attribution-NonCommercial-ShareAlike 4.0 International by chumbawamba@zerohedge)}

  This is at the corner of S Grant Street and E Worth Street.  To give some geolocational context, this is the start of the neighborhood literally next door to the shantytown:

  

  Here’s more of the shantytown, which is sprawled out over several acres, with lots of empty space in between each hovel (for now at least…plenty of room for development!)  The first photo is around the corner from the part shown above as viewed from S Stanislaus Street.  The second is a few hundred feet away as seen from E Hazelton Avenue:

     

  You’ll recall that the City of Stockton declared bankruptcy in 2013.  I’ve had business in Stockton since about 2009, primarily around the dead center of the downtown, and the place is definitely depressed.  A lot of small businesses in and around the downtown are closed.  A small general store that I patronized to make photocopies one day wasn’t there when I needed copies made a few months later.  It’s hard to even find a convenience or liquor store to get something as simple as a soda.  The only place I see doing a bustling business is the county courthouse, and the surrounding legal firms and notaries.  I think Stockton will eventually recover, as there are a lot of good real estate deals to be had, and they’ve made some infrastructure investments and improvements (primarily in prettying up the downtown harbor area with a nice cinema and shops) but any real recovery is probably not going to come until private money starts to flow in to re-develop this old, large and very interesting city.  But what do I know.  It might just get worse and stay a shithole for decades, like Detroit.

  After I got back home I did a search and found this report on a local Fox News affiliate (includes video of the shantytown) from July 10 of this year.  It includes this quote:

  “People don’t get moved out they’ll sort of set up shop for awhile,” Jon Mendelson, the Associate Director with Central Valley Housing told FOX40. The Central Valley Housing Organization said a lack of shelters and support programs may be contributing to these semi-permanent communities.

   

  “Well the tents and shantytowns are certainly not a permanent solution,” Mendelson claimed.

   

  The organization said a more viable option would be to provide housing and rehabilitation programs.

   

  “It includes just basic life skills and support that a lot of folks on the streets don’t have right now,” Mendelson told us.

  They want to teach these people “basic life skills”?  I’d say the ability to assemble your own shelter (if crude) is a basic life skill.  These people don’t need social services, they need a fucking revolution in government, as do we all.  The Banksters that have commandeered our government created this fucking disgrace.

  I’ve traveled a fair bit to various parts of the world and have seen shantytowns in the Middle East and central and South America, so it’s not like I haven’t witnessed something like this before.  But when I accidentally came across this shantytown right here in America–the ostensibly “greatest nation on earth”–it was a disconcerting sight.  I know we had tent cities form at the peak of the last crisis a few years ago, but this is a straight up shantytown: destitute people making shelters with whatever garbage they can find.  As an aside, it should come as no surprise that the streets around this area are filled with hookers, drug dealers, and all manner of shady characters.

  A big part of this, I’m sure, is the lack of affordable housing anywhere.  These people are just at the last rung of the housing ladder.  Housing prices in California (for both sales and rentals) are at all time highs.  It’s ridiculous.  I see shacks in the part of the SF Bay Area where I live renting for $500+/mo.

  A big component of this price inflation in housing we have now is the result of unchecked American consumption throughout the 2000s.  Sow and reap.  Follow me now: the Fed made credit cheap, everyone partook of the credit binge buffet and bought enormous loads of shit like new cars, boats, vacation homes, etc.  All this shit (or major components of) was manufactured in China.  Americans sent gobs of money to China which, in return, sent back gobs of cheap products and raw materials.  So Americans became shit rich but money poor, and the Chinese (the connected ones at least) became nigger rich.  Now, these newly rich Chinese with more dollars than they know what to do with, trying to keep them from the clutches of the Chinese government (understandably so), are coming to America with their piles of dollars, and what are they doing with them?  Investing in American real estate.  Paying cash for million dollar houses, bidding them up 50-100% over asking price.  So as a result we have $2 million shacks for sale in Palo Alto, and shantytowns in Stockton.

  I saw this coming years ago.  Jim Willie talked about a “Chinese colonization” in his newsletters, and that’s exactly what is happening.  I don’t believe it’s a concerted strategical move by China (though it could be) but rather the result of an organic move of capital naturally fleeing a despotically greedy regime.  Whatever the case, the fact remains the Chinese are taking over California real estate (and I believe single-handedly propping up Tesla), and pricing natives (like me) out of the market, and at the lower end of the spectrum the result of this inflation is shantytowns.  Oh well, this is still (if vaguely) a capitalist system.  I don’t complain, I just wait for the next down cycle (I believe we’re peaking now), and will take advantage of Chinese dumping their formerly very desirable California properties for whatever they can get, just like the Japanese had to do in the early 90s after they bought up the USA with all their imported dollars (acquired selling cheap shit to the USA from the 70s through the 80s) and forgot or were just too ignorant to understand that things work in cycles: what goes up shall eventually come down.  History doesn’t always repeat, but it rhymes, so I’ll be a patient boy and wait in the shadows for the next trough.

  In the meantime, I expect to see this shantytown expand.  Perhaps some cash rich Chinese will come in and buy up the best plots.

  I am Chumbawamba.

  

  

  

  

  

• The Constitution's Big Lie

  Submitted by Antonius Aquinas via AntoniasAquinas.com,

  One of the greatest hoaxes ever perpetrated upon Americans at the time of its telling and which is still trumpeted to this very day is the notion that the U.S. Constitution contains within its framework mechanisms which limit its power. The “separation of powers,” where power is distributed among the three branches – legislative, executive, judicial – is supposedly the primary check on the federal government’s aggrandizement.

  This sacred held tenet of American political history has once again been disproved.

  Last Friday (October 23), the Attorney General’s office announced that it was “closing our investigation and will not seek any criminal charges” against former Internal Revenue Service’s director of Exempt Organizations, Lois Lerner, or, for that matter, anyone else from the agency over whether they improperly targeted Tea Party members, populists, or any other groups, which voiced anti-government sentiments or views.

  The Department of Justice statement read:

  The probe found ‘substantial evidence of mismanagement, poor judgment and institutional inertia leading to the belief by many tax-exempt applicants that the IRS targeted them based on their political viewpoints. But poor management is not a crime.’ (My emphasis)

  Incredibly, it added:

  We found no evidence that any IRS official acted based on political, discriminatory, corrupt, or other inappropriate motives that would support a criminal prosecution.

  That the DOJ will take no action against one of its rogue departments demonstrates the utter lawlessness and totalitarian nature of the federal government. The DOJ’s refusal to punish documented wrongdoing by the nation’s tax collection agency shows the blatant hypocrisy of Obummer, who promised that his presidency would be one of “transparency.”

  It can be safely assumed that Congress will not follow up on the matter, as Darrell Issa (R-Ca.), who chaired a committee to investigate the bureau’s wrong doings, admitted that its crimes may never be known. The DOJ and Issa’s responses are quite predictable once the nature of the federal government and, for that matter, all governments are understood.

  Basic political theory has shown that any state is extremely reluctant to police itself or reform unless threatened with destruction, take over, or dismemberment (secession). The Constitution has given to the federal government monopoly power where its taxing and judicial authority are supreme. It will not relinquish such a hold nor will it seek to minimize such power until it is faced with one of these threats.

  While it was called a federated system at the time of its enactment and ever since by its apologists, the reality of the matter is quite different. As the Constitution explicitly states in Art. VI, Sect. 2, the central government is “the supreme law of the land.” The individual states are inferior and mere appendages to the national government – ultimate control rests in Washington.

  In fact, it was the Constitution’s opponents, the much derided Antifederalists, who were the true champions of a decentralized system of government while their more celebrated opponents such as Madison, Hamilton and Jay wanted an omnipotent national state.

  Thus, in the American context, the only method for those oppressed by the federal government is to either threaten or actually go through with secession. Attempts to alter its dictatorial rule through the ballot box or public protests are futile. While there will naturally be outrage at letting the IRS off the hook, focus and anger must be redirected away from participation within the current political system to that of fundamental change.

  Congress’ refusal to prosecute an executive bureau that has deliberately used (and is still using) state power to oppress and harass opponents of the Obama regime demonstrates the bankruptcy of the idea that separation of power limits tyranny. Federal power and the corresponding tyranny and corruption which it has bred has never been countered by the checks and balances and separation of powers of the supposed “federal republic” created a little over two centuries ago.

  Until the “big lie” of the Constitution is realized, agencies like the IRS will continue to target and tyrannize anti-government organizations, groups, and individuals. The Constitution provides no real mechanism for the redress of grievances from the subjects which it rules. Only when the breakup of the federal Union has taken place, will American liberties and freedoms be secured.

  

  

  

  

  

• Dear Janet, Seriously!!

  The Fed's confidence trick this week was, once again, the Keyser Soze gambit (via Beaudelaire)-  "convincing the world of Yellen's hawkishness, when no such character trait exists." However, unlike the movies, stocks and FX markets have already seen through the con, leaving Fed Funds futures alone to believe the hype. As we noted previously, "The Fed Can't Raise Rates, But Must Pretend It Will," repeating its pre-meeting hawkishness to dovishness swing time and again in a "Groundhog Day" meets "Waiting For Godot"-like manner. Time is running out Janet, tick tock…

   

  This is what we are to believe a "data-dependent" Federal Reserve is thinking…

  

  Source: @Not_Jim_Cramer

  And for now, Fed Funds Futures are falling for it…

  

   

  But the broad equity markets aren't…

  

   

  Nor are Financials…

  

   

  And nor is The Dollar…

  

   

  Because, as we noted previously, the market (and The Fed) know perfectly well that raising short-term rates would be like taking away the punch bowl just as the party gets going. As rates rise, the economy’s production and employment structure couldn’t be upheld. Neither could inflated bond, equity, and housing prices. If the economy slows down, let alone falls back into recession, the Fed’s fiat money pipe dream would run into serious trouble.

  This is the reason why the Fed would like to keep rates at the current suppressed levels. A delicate obstacle to such a policy remains, though: If savers and investors expect that interest rates will remain at rock bottom forever, they would presumably turn their backs on the credit market. The ensuing decline in the supply of credit would spell trouble for the fiat money system.

  To prevent this from happening, the Fed must achieve two things.

  First, it needs to uphold the expectation in financial markets that current low interest rates will be increased again at some point in the future. If savers and investors buy this story, they will hold onto their bank deposits, money market funds, bonds, and other fixed income products despite minuscule yields.

   

  Second, the Fed must succeed in continuing to postpone rate hikes into the future without breaking peoples’ expectation that rates will rise at some point. It has to send out the message that rates will be increased at, say, the forthcoming FOMC meeting. But, as the meeting approaches, the Fed would have to repeat its trickery, pushing the possible date for a rate hike still further out.

  If the Fed gets away with this “Waiting for Godot” strategy, savings will keep flowing into credit markets. Borrowers can refinance their maturing debt with new loans and also increase total borrowing at suppressed interest rates. The economy’s debt load can continue to build up, with the day of reckoning being postponed for yet again.

  However, there is the famous saying: “You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time.” What if savers and investors eventually become aware that the Fed will not bring interest rates back to “normal” but keep them at basically zero, or even push them into negative territory?

  If a rush for the credit market exit would set in, it would be upon the Fed to fill debtors’ funding gap in order to prevent the fiat system from collapsing. The central bank would have to monetize outstanding and newly originated debt on a grand scale, sending downward the purchasing power of the US dollar — and with it many other fiat currencies around the world.

  The “Waiting for Godot” strategy does not rule out that the Fed might, at some stage, nudge upward short-term borrowing costs. However, any rate action should be minor and rather short-lived (like they were in Japan), and it wouldn’t bring interest rates back to “normal.” The underlying logic of the fiat money system simply wouldn’t admit it.

  

  

  

  

  

• Offshoring The Economy: Why The US Is On The Road To The Third World

  Submitted by Paul Craig Roberts,

  On January 6, 2004, Senator Charles Schumer and I challenged the erroneous idea that jobs offshoring was free trade in a New York Times op-ed. Our article so astounded economists that within a few days Schumer and I were summoned to a Brookings Institution conference in Washington, DC, to explain our heresy. In the nationally televised conference, I declared that the consequence of jobs offshoring would be that the US would be a Third World country in 20 years.

  That was 11 years ago, and the US is on course to descend to Third World status before the remaining nine years of my prediction have expired.

  The evidence is everywhere.

  In September the US Bureau of the Census released its report on US household income by quintile. Every quintile, as well as the top 5%, has experienced a decline in real household income since their peaks. The bottom quintile (lower 20 percent) has had a 17.1% decline in real income from the 1999 peak (from $14,092 to $11,676). The 4th quintile has had a 10.8% fall in real income since 2000 (from $34,863 to $31,087). The middle quintile has had a 6.9% decline in real income since 2000 (from $58,058 to $54,041). The 2nd quintile has had a 2.8% fall in real income since 2007 (from $90,331 to $87,834). The top quintile has had a decline in real income since 2006 of 1.7% (from $197,466 to $194,053). The top 5% has experienced a 4.8% reduction in real income since 2006 (from $349,215 to $332,347). Only the top One Percent or less (mainly the 0.1%) has experienced growth in income and wealth.

  The Census Bureau uses official measures of inflation to arrive at real income. These measures are understated. If more accurate measures of inflation are used (such as those available from shadowstats.com), the declines in real household income are larger and have been declining for a longer period. Some measures show real median annual household income below levels of the late 1960s and early 1970s.

  Note that these declines have occurred during an alleged six-year economic recovery from 2009 to the current time, and during a period when the labor force was shrinking due to a sustained decline in the labor force participation rate. On April 3, 2015 the US Bureau of Labor Statistics announced that 93,175,000 Americans of working age are not in the work force, a historical record. Normally, an economic recovery is marked by a rise in the labor force participation rate. John Williams reports that when discouraged workers are included among the measure of the unemployed, the US unemployment rate is currently 23%, not the 5.2% reported figure.

  In a recently released report, the Social Security Administration provides annual income data on an individual basis. Are you ready for this?

  In 2014 38% of all American workers made less than $20,000; 51% made less than $30,000; 63% made less than $40,000; and 72% made less than $50,000.

  The scarcity of jobs and the low pay are direct consequences of jobs offshoring. Under pressure from “shareholder advocates” (Wall Street) and large retailers, US manufacturing companies moved their manufacturing abroad to countries where the rock bottom price of labor results in a rise in corporate profits, executive “performance bonuses,” and stock prices.

  The departure of well-paid US manufacturing jobs was soon followed by the departure of software engineering, IT, and other professional service jobs.

  Incompetent economic studies by careless economists, such as Michael Porter at Harvard and Matthew Slaughter at Dartmouth, concluded that the gift of vast numbers of US high productivity, high value-added jobs to foreign countries was a great benefit to the US economy.

  In articles and books I challenged this absurd conclusion, and all of the economic evidence proves that I am correct. The promised better jobs that the “New Economy” would create to replace the jobs gifted to foreigners have never appeared. Instead, the economy creates lowly-paid part-time jobs, such as waitresses, bartenders, retail clerks, and ambulatory health care services, while full-time jobs with benefits continue to shrink as a percentage of total jobs.

  These part-time jobs do not provide enough income to form a household. Consequently, as a Federal Reserve study reports, “Nationally, nearly half of 25-year-olds lived with their parents in 2012-2013, up from just over 25% in 1999.”

  When half of 25-year olds cannot form households, the market for houses and home furnishings collapses.

  Finance is the only sector of the US economy that is growing. The financial industry’s share of GDP has risen from less than 4% in 1960 to about 8% today. As Michael Hudson has shown, finance is not a productive activity. It is a looting activity (Killing The Host).

  Moreover, extraordinary financial concentration and reckless risk and debt leverage have made the financial sector a grave threat to the economy.

  The absence of growth in real consumer income means that there is no growth in aggregate demand to drive the economy. Consumer indebtedness limits the ability of consumers to expand their spending with credit. These spending limits on consumers mean that new investment has limited appeal to businesses. The economy simply cannot go anywhere, except down as businesses continue to lower their costs by substituting part-time jobs for full-time jobs and by substituting foreign for domestic workers. Government at every level is over-indebted, and quantitative easing has over-supplied the US currency.

  This is not the end of the story. When manufacturing jobs depart, research, development, design, and innovation follow. An economy that doesn’t make things does not innovate. The entire economy is lost, not merely the supply chains.

  The economic and social infrastructure is collapsing, including the family itself, the rule of law, and the accountability of government.

  When college graduates can’t find employment because their jobs have been offshored or given to foreigners on work visas, the demand for college education declines. To become indebted only to find employment that cannot service student loans becomes a bad economic decision.

  We already have the situation where college and university administrations spend 75% of the university’s budget on themselves, hiring adjuncts to teach the classes for a few thousand dollars. The demand for full time faculty with a career before them has collapsed. When the consequences of putting short-term corporate profits before jobs for Americans fully hit, the demand for university education will collapse and with it American science and technology.

  The collapse of the Soviet Union was the worst thing that ever happened to the United States. The two main consequences of the Soviet collapse have been devastating. One consequence was the rise of the neoconservative hubris of US world hegemony, which has resulted in 14 years of wars that have cost $6 trillion. The other consequence was a change of mind in socialist India and communist China, large countries that responded to “the end of history” by opening their vast under-utilized labor forces to Western capital, which resulted in the American economic decline that this article describes, leaving a struggling economy to bear the enormous war debt.

  It is a reasonable conclusion that a social-political-economic system so incompetently run already is a Third World country.

  

  

  

  

  

  

• Why Do We Have Wars?

  Presented with no comment…

   

  

   

  h/t flash at The Burning Platform

  

  

  

  

  

• Paul Brodsky: "Expect The Unexpected. It Might Be Time To Duck And Cover"

  From Paul Brodsky of Macro-Allocation Inc.

  Shift Happens

  The Economist ran a special report October 3 entitled “The sticky superpower”, a long essay that questioned America’s ongoing status as an effective global economic and monetary hegemon. At times the report was unsparing in describing today’s reality: “the global monetary system is unreformed, unstable and possibly unsustainable” and the world has no “credible lender of last resort”.

  The piece is noteworthy in that the Economist has a reputation for editorial conservativism; not in the libertarian sense, but in a politically centrist sort of way. It encourages a not-so obtrusive form of Keynesian economics, supporting reasonable fiscal, monetary and trade policies conjured, executed and overseen by enlightened authorities. Unlike the far Right, the magazine seems willing to play along with the notion that free market capitalism actually exists, even though the political environments in which our economies produce and distribute resources do not allow broad failure, economic contraction, or price and wage scales to be set by the marketplace. Its center-Right orientation accepts government participation as necessary when “animal spirits” drive the marketplace and capital markets to extremes. The magazine also implicitly abides un-extinguished credit as an acceptable driver of demand, and, by implication, of economic cycles.

  And so one could not read the essay without marveling how far the public conversation has shifted. Suggesting a few short years ago that the global financial architecture might very well fail to overcome compounding leverage, naturally slowing output growth, and conflicting trade incentives was economic blasphemy, radical rantings uttered only on the fringe.

  To be sure, the Economist supports the current regime where nation-state policies guide and support the commercial marketplace and capital markets, and in which sound fiscal, trade and monetary policies are supposed to provide solutions: “What the world needs is an engineer to design smart ways to tame capital flows, a policeman to stop beggar-thy-neighbor policies, a nurse to provide a safety net if things go wrong, and a judge to run the global payments system impartially”. It is a Keynesian call to arms – an S.O.S. – and its provenance is startling.

  The report needed an antagonist to advance the narrative, and used China. It suggested political competition brewing in which the US and China compete to dominate trade and soft power over other national economies, concluding “China will not be a counterbalance to or substitute for America soon”. The report’s main concern: “so what will fill the vacuum?”

  The piece had a curious conclusion; a happy ending possible through the suspension of disbelief. It called for “a fantasy American administration and Congress (that would) act in its own enlightened self-interest…to the benefit of the world.”

  The point of the report seemed to be the need for better manipulation of producer, consumer and investor incentives…and soon. Things are beginning to seem ominous to the political center. It might be time to duck and cover.

  Intermission

  We took the liberty of updating Billy Joel’s “We Didn’t Start the Fire”:

  Billy Clinton, Robert Rubin, Alan Greenspan,
  Vlady Putin, dubya, nine-eleven, off to Tehran…

  Hank Paulson, Countrywide, Bear Stearns, no place to hide,
  Lehman Brothers, all the others, quite a Black Swan…

  Save the bank, Dodd Frank, Gentle Ben, tell us when,
  QE, Obamacare, Vlady Putin’s back again…

  Nukes for Iranians, Janet Yellen has no friends,
  ZIRP, ISIS, buy the dips, Donald Trump in the chips…

  We didn’t start the fire
  Their model’s forecast
  That we’d start to hire…

  Political Shades of Gray

  These days it’s hard to tell the players without a scorecard. Actually, we know the players, but the challenge now is in recognizing which team each player is on. As it stands, Janet Yellen, the Chair of the Fed, is publicly jawboning a rate hike while Christine Lagarde, the Managing Director of the IMF, is warning against one. Meanwhile, Larry Fink, Chairman of the world’s largest asset manager is openly touting interest rate normalization while Larry Summers, the third of three de-activated members of Time magazine’s Committee to Save the World, can’t seem to get enough air time to argue against it. And those are just the progressives.

  Geopolitical alliances are also not as straightforward as they once were. We know Russia’s Crimean annexation triggered broad sanctions by a US-led coalition; however, Russia’s help was instrumental in allowing the West to negotiate the Iranian nuclear agreement. Meanwhile, the US in the process of cozying up to Iran and Russia as it shifts its position on Syria, signaling it will let Bashar al-Assad stay in power. (What will this mean for US relations with Israel or the Kurds?) It seems “the enemy of our enemy is our friend” has evolved into “our enemies are our friends, but being our friends may not be such a prize”.

  Speaking of Syria, the mass emigration of Syrian refugees into Germany has caused major riffs between Angela Merkel’s and one of her staunchest backers, the state of Bavaria, which is suffering from the massive inflow. If you want a friend in Washington (or Berlin), get a dog.

  The relationship between the two largest global economies, the US and China, is also becoming more complicated. The countries directly exchange nearly $600 billion of goods and services annually, and yet China’s construction of potentially militarized islands in the South China Sea endangers America’s absolute hold on global shipping lanes, which has given the US enormous influence not only over materials and energy destined for China, but also over the entire region’s bilateral trade.

  Sino-American relations have been further complicated through China’s successful establishment of the Asian Infrastructure Investment Bank (AIIB). The Bank was formed to give sovereign borrowers an alternative to the World Bank and IMF – US dominated lending organizations that dole out American soft power around the world. The only major nation absent from the AIIB’s founding was the US.

  And what really happened behind the scenes that prompted the sudden opening of diplomatic relations between the US and Cuba this year? We don’t know, but the point is it occurred.

  Clearly, things are changing quickly around the world, as they were destined to at some point. Following the demise of the Soviet empire, the US stood as the world’s only superpower, enjoying almost absolute control over the global monetary system and terms of trade. This unilateralism would eventually have to be challenged and current events seem to suggest that the geopolitical landscape is now experiencing major tremors. They have become so obvious and frequent that the established order (i.e., the Economist) cannot ignore it.

  There is little in the political dimension today that investors can hang their hats on. It would be a mistake to assume that stated positions or even ostensibly bedrock principles are static, whether they are related to geopolitics or trade, fiscal, tax and monetary policies. Warm, fuzzy political blankets we can wrap ourselves in to escape the reality that politics = expedience are gone. We should expect the unexpected.

  Shift Happens

  Eventually, and then all at once, “over time” becomes yesterday. The future becomes the past. Hopes are tested. Expectations are met, or not. Time moves on and only then do we know what we don’t know now.

  Most investors don’t take kindly to change. “The market” chooses to stay in the here and now; each human component vibrant and alert while the whole is passive and inert…like a herd of wildebeests, protected by its mass and collective wisdom that each one of them is statistically safe from lions as long as they stay together.

  In the current investment environment, marked by near zero sovereign interest rates, tight credit spreads, full equity valuations, over-leveraged balance sheets, expedient politicians performing daily volume triage, and policy makers stringing new high wires and walking them without a nets; risk-adjusted opportunity lies in change.

  The Economist’s special report should be taken seriously, if not for its conclusion than for its mere existence. They don’t normally do hyperbole, but they surely did this month.

  Our challenge is to imagine where the wildebeests will be, and our sense is that the herd will migrate over time towards liquidity. With the return on money near zero, we don’t feel intense pressure to pick when it will go there, at least for our MACAW portfolio.

  

  

  

  

  

• Tsipras Blames Western Military Meddling For Syria Crisis: "You Reap What You Sow"

  As anyone who followed Greece’s protracted bailout negotiations with creditors is no doubt aware, Athens had very little in the way of leverage when it came to countering German FinMin Wolfgang Schaeuble at the bargaining table. Try as they might, Alexis Tsipras and Yanis Varoufakis were ultimately unable to use the threat of Grexit to extract concessions from Brussels and the IMF. 

  In hindsight, what’s interesting about the incessant back and forth between Athens, Brussels, and Berlin is that both sides were attempting to use a euro exit to bolster their positions. That is, Germany was attempting to scare Greece with the prospect of a depression in the event the country reverted to the drachma and Greece was attempting to scare Germany by throwing the entire idea of the euro’s indissolubility into question. In the end, Berlin prevailed as the purse string proved mightier than Syriza ideology. 

  But while tacitly threatening to disprove the notion of the euro’s indissolubility proved insufficient as a bargaining chip, one thing that Alexis Tsipras and, before he was banished from the party, Panagiotis Lafazanis, were able to employ somewhat effectively was the idea of a Russian pivot. On a number of occasions, it appeared as though Moscow was ready to come to the aid of the Greeks in defiance of the EU and predictably, the proposed partnership centered around an energy deal. In effect, there were rumors that Gazprom would advance Athens some $5 billion against future revenues from the Greek section of the Turkish Stream pipeline and although that deal never panned out, it was enough to worry Angela Merkel, as the last thing the EU wanted in the midst of the Ukraine crisis was to see Russia effectively annex Greece. 

  Fast forward four months and Greece is on the front lines of Europe’s migrant crisis and while Alexis Tsipras may not be the man he once was thanks to the troika’s deplorable campaign to strip Syriza of everything it stood for in January just to send a message to Spain and Portugal, sometimes the old Tsipras shows up out of the blue to remind the world that the fire hasn’t been completely extinguished. Case in point: on Friday, Tsipras lashed out at Brussels for the bloc’s handling of the migrant crisis but more notably, he also suggested that the West’s military meddling is the root cause of Syria’s prolonged civil war. Here’s AP: 

  Greece’s prime minister lashed out Friday at European “ineptness” in handling the continent’s massive immigration crisis after 31 more people — mostly children — drowned in shipwrecks in the Mediterranean Sea.

   

  “I want to express … my endless grief at the dozens of deaths and the human tragedy playing out in our seas,” he told parliament. “The waves of the Aegean are not just washing up dead refugees, dead children, but (also) the very civilization of Europe.”

   

  “What about the tens of thousands of living children, who are cramming the roads of migration?” he said.

   

  Tsipras blamed the migrant flows on western military interventions in the Middle East, which he said furthered geopolitical interests rather than democracy.

   

  “And now, those who sowed winds are reaping whirlwinds, but these mainly afflict reception countries,” he added.

   

  “I feel ashamed of Europe’s inability to effectively address this human drama, and of the level of debate … where everyone tries to shift responsibility to someone else,” Tsipras said.

  So apparently, there’s at least one European leader who “gets it” when it comes to explaining why hundreds of thousands of people who were living with a repressive regime for decades suddenly decided it was time to flee to Europe.

  That is, it’s not like Syrians didn’t know their government had autocratic tendencies – a couple of hundred thousand people didn’t just wake up one day and say “hey, this guy might be a dictator, let’s leave and settle in Germany.” Rather, the West and its regional allies armed multiple Sunni extremist groups on the way to starting a civil war and now, Europe is discovering what happens when you foment sectarian violence in the Mid-East. 

  Of course it won’t matter. No one listens to Tsipras anymore thanks to the troika’s efforts to subvert democracy in Greece and discredit someone who might otherwise have become an important figure in the world of geopolitics. And so, the charade will continue: first blame the “brutal dictatorship,” then claim the Russians are making it worse.

  

  

  

  

  

• How We Got Here: The Fed Warned Itself In 1979, Then Spent Four Decades Intentionally Avoiding The Topic

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  It bears repeating and re-emphasizing, but had the guts of the actual global financial system been fully appreciated in a timely manner the current state of the global “dollar” would be cause for celebration. It would matter not that the eurodollar is in full and often violent retreat because that is the exact method by which a real recovery would be born; if only there were a reasonable market for money (actual, not ephemeral and pliable) and money dealing in place to absorb the transition. The happenstance of the current state of the “dollar” owes itself to the rededicated financialism of every central bank as if 2008 never happened. Rather than look for an actual solution, views of cyclicality ruled where the panic was judged nothing more than a temporary disruption.

  It is that general outline that accounts for the recovery, lack of. Market forces practically begged for a total re-alignment, especially since the status quo only survived through the greater oligarchy in money of TBTF. The larger banks have only gotten larger and now they have very little competition since there are practically no new banks anymore. Wholesale continues to dominate, amazingly even more so now than pre-crisis which more than suggests the rotten nature of the very antics proclaimed as monetary heroism.

  Except that the wholesale banks themselves no longer want the job of supporting that system. Before 2008, prop trading and spreads were not just favorable but undoubtedly so as any number of unrelated firms suddenly became FICC centric. GE Capital became a leading provider of mortgage warehousing as well as “investing” while formerly uninteresting insurance companies like AIG transformed into both securities dealers and prime purveyors of dark leverage, especially CDS. It was all, of course, artificially inflated by the nature of that time, the Great “Moderation” because the whole system long ago departed basic and operational sense.

  Behind it all was the eurodollar. As I wrote at the outset above, some timely appreciation for it might have saved a whole lot of acute trouble and maybe would have pushed for some real reform (and then a real recovery to follow). What is really frustrating, maybe criminally so, however, is that monetary officials were debating eurodollars not in 2006 but rather 1979. At that early stage, the Fed along with other central banks couldn’t quite make out what it was, how it got there or where it was all going. They were even debating at that time whether a eurodollar was actually “money” at all:

  It has long been recognized that a shift of deposits from a domestic banking system to the corresponding Euromarket (say from the United States to the Euro-dollar market) usually results in a net increase in bank liabilities worldwide. This occurs because reserves held against domestic bank liabilities are not diminished by such a transaction, and there are no reserve requirements on Eurodeposits. Hence, existing reserves support the same amount of domestic liabilities as before the transaction. However, new Euromarket liabilities have been created, and world credit availability has been expanded.

   

  To some critics this observation is true but irrelevant, so long as the monetary authorities seek to reach their ultimate economic objectives by influencing the money supply that best represents money used in transactions (usually M1). On this reasoning, Euromarket expansion does not create money, because all Eurocurrency liabilities are time deposits although frequently of very short maturity. Thus, they must be treated exclusively as investments. They can serve the store of value function of money but cannot act as a medium of exchange.

  In other words, at least parts of the Fed all the way back in 1979 appreciated how Greenspan and Bernanke’s “global savings glut” was a joke. Rather than follow that inquiry to a useful line of policy, monetary officials instead just let it all go into the ether of, from their view, trivial history. But the true disaster lies not just in that intentional ignorance but rather how orthodox economists and policymakers were acutely aware there was “something” amiss about money especially by the 1990’s. Because these dots to connect were so close together the only reasonable conclusion for this discrepancy is ideology alone. Economists were so bent upon creating monetary “rules” by which to control the economy that they refused recognition of something so immense because it would disqualify their very effort.

  And so, the Fed and central banks bent over backwards to avoid the eurodollar, even taking to ridiculous efforts to do so. Not only was Greenspan waddling on in the “global savings glut”, the Fed itself discontinued M3 in 2005 just to avoid the topic altogether. That part has to be considered purposeful negligence, because by that point the eurodollar figures were not unimportant but simply too immense to calculate.

  When M3 was discontinued, the Fed wrote that it, “does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years.” Given the time period, that was a material discrepancy upon reality. It was, after all, Greenspan himself in 1996 (the “irrational exuberance” speech) who first reported that traditional monetary figures like M2 were no longer correlating much to economic expectations. So cutting out M3 by 2005 is nothing but a tangled mess of contradictions that, again, point to nothing but religious-like expedience over proper science.

  It would, as we know now, come back to haunt the world only a few years later:

  But the second part of that official justification should have been something of a warning about all things in the monetary realm. The “costs of collecting” excuse was greeted by Fed critics with more than a hint of derision since it smacked of too much disingenuousness. It seemed like a lame attempt to hide banking gone into overdrive.

   

  The Fed, however, was actually honest here, and that should have been, and should be still, meaningful in the context of monetary engineering and the economy’s paradigm shift in 2008/09. Those two elements of M3, repos and eurodollars, were the epicenter of crisis. The fact that it would have cost the Fed too much to attempt to measure these “money” aggregates shows just how far the banking system strayed from the light of the regulated regime. Yet, as the Fed demonstrated in the first sentence of its official rationale, our central bank had little interest in that monetary/banking arena.

  Nothing has changed in that regard, as global central banks still have little interest in wholesale banking. The reason is just as simple and the same; they haven’t figured out how to incorporate the factor into their “rules.” As it was, nobody had any idea just how far the eurodollar system had expanded and penetrated because they weren’t even looking at it – and we still don’t know (witness now China and the potential for an “Asian dollar”). The BIS in October 2009 came up with a conservative estimate just in the “global dollar short” of at least $2.5 trillion for European banks alone. But that was just the money dealing, as that liquidity support was angling about:

  The outstanding stock of banks’ foreign claims grew from $10 trillion at the beginning of 2000 to $34 trillion by end-2007, a significant expansion even when scaled by global economic activity (Figure 1, left panel). The year-on-year growth in foreign claims approached 30% by mid-2007, up from around 10% in 2001. This acceleration took place during a period of financial innovation, which included the emergence of structured finance, the spread of “universal banking”, which combines commercial and investment banking and proprietary trading activities, and significant growth in the hedge fund industry to which banks offer prime brokerage and other services.

  So while the US central bank was showing and delivering even less appreciation for wholesale banking, the scale was an enormous up-to-30% per year expansion by 2007. I have never worked for a central bank but even an outsider would be easily impressed that a $24 trillion increase in offshore banks’ “foreign claims” should have been not just a part of the monetary setting but perhaps the lone and central focus. That is especially true as the great and massive increase during the ultimate mania (in finance) occurred exactly as the Fed was raising its federal funds target; as with dark leverage, we see now what should have been easily seen then, that the Fed’s traditional mode of operation was wholly and totally obsolete. Monetary policy had not just been reduced, it had been disemboweled and obliterated by an “outside” force. The lack of curiosity, let alone appreciation, is staggering and telling.

  Again, going back to 1979, the FRBNY discussion predicted the exact manner of liquidity crash that followed just more than a quarter-century later:

  One of the traditional responsibilities of any central bank is to act as lender of last resort – to supply funds to a solvent bank or to the banking system generally in an emergency that threatens a sharp contraction of liquidity. This role normally has been framed with respect to commercial banks in the domestic banking system. But the emergence of the extraterritorial Euromarket created ambiguities about which central bank would be responsible for providing lender-of-last-resort support for overseas operations.

   

  No final resolution of those ambiguities has yet been reached, and it is doubtful that central bankers will ever codify their respective roles or lay down conditions for lender-of-last-resort assistance.

  

  Here was the Fed debating in 1979 the very geographic divide in the “dollar” that would condition the full weight of panic by September 2008. Worse, it continues now especially after the events of 2011 and with the amplification of wholesale eurodollar retreat post-June 2014. There is a great deal that disqualifies orthodox economics from the levers of economic power, but this is not close to the top but the very top of that list. When that prescient conjecture was written nearly forty years ago, the eurodollar intrusion had already grown to an estimated 10% of M3 (and that was just, again, what was reported on-the-books).

  Yet, from 10% to wiping out M3 altogether over three decades, the Fed studiously ignored it all. They took greater care in not looking anywhere close in the direction of the eurodollar than they did about their own ridiculous attempts at soft central planning. It could not be, now, anymore asinine than what we have: the Federal Reserve religiously neglecting to incorporate the very case the institution warned itself about four decades ago even though that warning has now been applied in two separate and dangerous episodes (one still to reach its ultimate settled state). There is no analogy or metaphor suitable for this level of carelessness and deliberate stupidity. You might make the argument that it wasn’t clear in 1979 the trajectory of the wholesale direction, but by at least the mid-1990’s there was no longer any doubt. Again, it could only be ideologically-driven blindness that would prevent acknowledgment and appreciation of such obvious shifts and alterations – especially of that magnitude.

  The relevance to today’s discontinuity is as I wrote at the beginning; if the eurodollar decay was occurring in a regime of planned obsolescence and retreat, with a waiting solution ready to take up the slack of the global work eurodollars still, badly, engage, then the cause of financialism would be welcomed toward extinction. Rather than that useful paradigm alteration, however, central banks simply persist as if there has been no wholesale violence at all at any time; leaving the global “dollar” system to again bear the brunt of the obvious and again gaining savagery. After all that has transpired and the great cost in terms of time and bubbles (globally) we remain on Step 1 in the program out of a “lost decade.” We are still fighting to recognize that we have a problem and to plead the obvious about what that exactly is.

  That is why the only answer, in my opinion, will be political. If after all that has taken place in the past forty years (really fifty or sixty) and orthodox economics still denies direct and easy observation then it is equally obvious that it never will (and why that is). “Markets” may still aspire in pieces to central banks as the ultimate guarantor, but that is just the business end of intentional financial illiteracy.

  

  

  

  

  

• Macro Dump, Earnings Slump & Hawkish-Fed Pump Spark 4th Best October For Stocks Since 1929

  Why we rallied… (BTFD short squeeze)

  Because… (the central banks conditioned traders)

  How it will end… (The markets are at 2:00 in this clip)

  *  *  *

  Before we start… This!

  

   

  And this…

  

   

  October – Just For Fun

  Everything is awesome around the world (except Ukraine and Venezuela)…

  

  • This is the 4th biggest October S&P rally since 1929!!

  

  • Best overall month for the S&P since October 2011
  • Nasdaq's best month since September 2010

  In The US, Nasdaq the big winner and Trannies underperformed (weak close today)…

  

   

  With Materials, Energy, and Tech the huge winners…

  

   

  Leaving stocks the most overbought since Nov 2014…

  

   

  And then there's Valeant…

  

   

  The Dow still did not quite make it back to green for 2015… even as The S&P surge back into the green (and Nasdaq nears cycle highs once again)

  

   

  While October was a big month for stocks, it was less exciting across the other asset classes…

  

   

  Treasury yields tumbled initially on poor payrolls.. then yields went nowhere for 3 weeks til The FOMC…

  

   

  The US Dollar managed some modest gains (once again driven by China rate cuts, ECB and FOMC moves)

  

   

  Silver surged over 7% on the month as copper slid over 1% amid China growth concerns. Crude and Gold (after the former's meltup) were equally higher on the month…

  

  *  *  *

  So back to this week…

  The Dow actually closed lower of 4 of the 5 days this week, but the melt-up after The FOMC turned hawkish-er saved stocks for the week..

  

   

  And stocks have given all of the fomc gains back…

  

   

  Although today was weak..with an ugly close…

  

   

  Most mind-blowingly, "Most Shorted" was notably weak post-FOMC and stunningly roundtripped to perfectly unchanged on the month – after the massive squeeze post-payrolls…

  

   

  Since The FOMC Statement…Gold is the loser, stocks gave back gains, with only crude higher…

  

   

  Something remains majorly broken in The VIX Complex…

  

   

  Treasury yields pushed on higher this week with the long-end outperforming overall (after yesterday's ugliness which was rumored to be dominated by rate-locks on heavy issuance)…

  

   

  The USDollar drifted lower again today, giving up all of its Hawkish FOMC gains…

  

   

  And it seems US equities are catching on to what FX markets think…

  

   

  Commodities generally drifted lower on the week, apart from crude…

  

   

  Crude ripped higher on the latter half of the week – running stops above last week's highs before fading…

  

   

  Charts: Bloomberg

  

  

  

  

• Obamacare Is A Disaster: Co-Op Insurers Across America Are Collapsing, And Now There Is Fraud

  Two weeks ago we reported that in what at the time was still a rather isolated incident, Colorado’s largest nonprofit health insurer (aka co-op), Colorado HealthOP is abruptly shutting down, forcing 80,000 Coloradans to find a new insurer for 2016.

  At the time, we said that the health insurer had been decertified by the Division of Insurance as an eligible insurance company because the cooperative relied on federal support, and federal authorities announced last month they wouldn’t be able to pay most of what they owed in a program designed to help health insurance co-ops get established.

  In other words, one of the 24 co-ops funded with Federal dollars and created to give more policyholders control over their insurers – especially those who wished to stay away from various corporate offerings, had failed simply because the government was unable to subsidize it: the same government that spends $35 billion in global economic “aid” but can’t support its most important welfare program.

  Fast forward to today, when we learn that another co-op, this time New York’s Health Republic Insurance – the largest of the nonprofit cooperatives created under the Affordable Care Act – is not only shuttering, but was engaging in fraud.

  The fate of Health Republic Insurance was first revealed a month ago when the WSJ reported it would shut down after suffering massive losses “in the latest sign of the financial pressures facing many insurers that participated in the law’s new marketplaces.”

  The insurer lost about $52.7 million in the first six months of this year, on top of a $77.5 million loss in 2014, according to regulatory filings. The move to wind down its operations was made jointly by officials from the federal Centers for Medicare & Medicaid Services; New York’s state insurance exchange, known as New York State of Health; and the New York State Department of Financial Services.

   

  In a statement, Health Republic said it was “deeply disappointed” by the outcome, and pointed to “challenges placed on us by the structure of the CO-OP program.”

   

  Health Republic has about 215,000 members, with about half holding individual plans and half under small-business coverage, a spokesman for the insurer said.

  Today we learn that not only was this largest Co-op insolvent, it had also committed fraud. According to Politico, the collapsing insurance company that is creating headaches for hundreds of thousands of New Yorkers, misled state and federal officials about its finances, and will not be able to remain in business through the end of the year as originally hoped.

  Because incompetence is one thing, but corruption: now that’s real government work, right there.

  The accelerated wind down is clearly a problem: the more than 200,000 customers insured with the co-op will lose their coverage Dec. 1, and must find a new plan by mid-November, according to the state and federal government. Health Republic insures about 20 percent of the state’s individual market.

  As Politico adds, the plan had been for Health Republic to make it through the end of the year. As recently as last week, company officials said there was enough in cash in reserve. But that apparently wasn’t true.

  Health Republic’s finances are “substantially worse than the company previously reported in its filings,” according to the state Department of Financial Services, which oversees insurance in New York, and the Centers for Medicare and Medicaid Services.

  One wonders just how much of the over $100 million “lost” in under two years was due to incompetence, and how much due to pure embezzlement by the co-ops operators. Somehow we doubt we will find the anwer where this taxpayer money has gone.

  This does, however, lead to a more serious question: the implosion of Health Republic is merely the latest in what has become an epidemic of governmental failure. In fact, there are a total of ten co-ops, all of which were created by the Affordable Care Act and seeded with billions in federal funding, that have now failed, leading to questions whether the entire business model underpinning Obamacare is unsustainanble for everyone but a select few corporations.

  For some more thoughts on this disturbing, if perfectly predictable epidemic, we go to Forbes’ Edmund Haislmaier who answers “Why Obamacare Co-Ops are failing at a rate of nearly 50%”

  Cooperative health insurers (or co-ops) created under a federal grant and loan program in the Affordable Care Act seem to be falling like dominoes.

   

  It started in February, when CoOportunity Health, which operated in Iowa and Nebraska, was ordered into liquidation. In July, Louisiana’s insurance department announced it was shuttering that state’s co-op. The following month brought news that Nevada’s co-op would also close. On September 25, New York ordered the shutdown of Health Republic Insurance of New York, which had the largest enrollment of all of the co-ops. Then, within the space of a week in mid-October, the number of failures doubled from four to eight, as state insurance regulators announced that they were closing the co-ops in Kentucky, Tennessee, Colorado, and one of the two in Oregon. Last week came news that South Carolina’s co-op will be closed, followed this week by the announcement that Utah’s co-op is also being shut down.

   

  In sum, of the 24 Obamacare co-ops funded with federal tax dollars, one (Vermont’s) never got approval to sell coverage, a second (CoOportunity) has already been wound down, and nine more will terminate at the end of this year.

   

  So what is behind this, so far, 46 percent failure rate?

   

  To start with, the program was a congressional exercise in not merely reinventing the wheel, but doing a bad job of it.

   

  Far from being a new idea, member-owned insurance companies—called “mutual” insurers—have a long history. For instance, life insurer Northwestern Mutual has been in business for over 150 years. Health insurers organized as mutual companies include, among others, Blue Cross plans in 10 states. Indeed, one of them, Florida Blue, converted into a policyholder-owned mutual company just last year. If having more health insurers owned by their policyholders was the goal, then there was no need for federal government action.

   

  On the other hand, if the goal was to increase competition by stimulating the creation of new health insurers, then the ACA’s co-op program was, like other parts of the legislation, badly designed.

   

  * * *

   

  The program offered federal loans and grants to startup insurers but required that they be non-profits, not have anyone affiliated with an existing health insurer on their boards, and not spend any of their federal funding on marketing.

   

  Co-ops are also subject to another provision of the ACA requiring all health insurers to pay out in claims at least 80 percent of premium revenues, or refund the difference to policyholders. By law, insurers can retain no more than 20 percent , out of which they must fund sales and administrative costs before booking any remainder as free cash. That significantly constrains a non-profit carrier’s ability to accumulate capital needed for growth, as it can’t raise funds through equity or debt offerings.

   

  As if that wasn’t daunting enough, the law also required co-ops to focus “substantially all” of their activities on offering health insurance in the individual and small group markets—just as other provisions of Obamacare were thoroughly disrupting those markets by imposing new rules on insurers and complicated new payment arrangements for many of their customers.

   

  Given all of the foregoing, 10 co-ops failing within two years is less surprising than the fact that 23 of them actually got to market in the first place.

  As we pointed out two weeks ago, following this avalanche of failures, it will merely force even more individuals into plans offered by corporations, who as a result of the failure of their co-op competitors will have even more pricing power and premium hiking leverage.

  Which means that “sticker shockers” such as the one below kindly informing them their health insurance premiums are rising by 60% crushing any desire to splurge modest “gas savings” on discretionary purchases…

  

  … will only get worse, as the premium increase even more with every passing year, as more Co-Ops fail, as more of the publicly-held insurers merge, and as a single-payer system, one which benefits not taxpayers but a select handful of shareholders, becomes the norm.

  Haislmaier’s take: “The bottom line: Obamacare has made health insurance costlier and the business of offering it riskier. To survive in that new world, health insurers need to be cautious, or even pessimistic, and hope that their customers can continue to pay escalating premiums. It’s not a pretty picture.”

  It isn’t but what are customers going to do: after all the “Affordable Care Act” is a tax (one which “boosts” GDP every quarter no less) and you must pay it by law; sadly the Supreme Court forgot that when it makes a service mandatory, corporations can charge any price they want. 

   And that’s precisely what they are doing.

  

  

  

  

  

• First They Jailed The Bankers, Now Every Icelander To Get Paid Back In Bank Sale

  Submitted by Claire Bernish via TheAntiMedia.org,

  First, Iceland jailed its crooked bankers for their direct involvement in the financial crisis of 2008. Now, every Icelander will receive a payout for the sale of one of its three largest banks, Íslandsbanki.

  If Finance Minister Bjarni Benediktsson has his way — and he likely will — Icelanders will be paid kr 30,000 after the government takes over ownership of the bank. Íslandsbanki would be second of the three largest banks under State proprietorship.

  “I am saying that the government take [sic] some decided portion, 5%, and simply hand it over to the people of this country,” he stated.

  Because Icelanders took control of their government, they effectively own the banks. Benediktsson believes this will bring foreign capital into the country and ultimately fuel the economy — which, incidentally, remains the only European nation to recover fully from the 2008 crisis. Iceland even managed to pay its outstanding debt to the IMF in full — in advance of the due date.

  Guðlaugur Þór Þórðarson, Budget Committee vice chairperson, explained the move would facilitate the lifting of capital controls, though he wasn’t convinced State ownership would be the ideal solution. Former Finance Minister Steingrímur J. Sigfússon sided with Þórðarson, telling a radio show, “we shouldn’t lose the banks to the hands of fools” and that Iceland would benefit from a shift in focus to separate “commercial banking from investment banking.”

  Plans haven’t yet been firmly set for when the takeover and subsequent payments to every person in the country will occur, but Iceland’s revolutionary approach to dealing with the international financial meltdown of 2008 certainly deserves every bit of the attention it’s garnered.

  Iceland recently jailed its 26th banker — with 74 years of prison time amongst them — for causing the financial chaos. Meanwhile, U.S. banking criminals were rewarded for their fraud and market manipulation with an enormous bailout at the taxpayer’s expense.

  

  

  

  

  

• China's Communist Party Bans… Golf

  Submitted by Simon Black via SovereignMan.com,

  High up Yuntai mountain in China’s Henan province is a glass bridge that lets tourists walk out across the sky and look down at the lush valley floor over 3,000 feet below.

   

  Glass walkways like this are quite popular across China, stunning visitors with both beauty and the thrill of danger.

   

  Recently, this one cracked. And many tourists took to social media claiming that pieces of glass in the walkway broke away altogether.

   

  The government of course is spinning a different story.

   

  They reported that the glass walkway is completely safe, even though they’ve decided to close the bridge ‘temporarily’.

  This is probably the best metaphor for the entire Chinese economy right now, because the glass is cracking everywhere.

  China’s manufacturing sector has been weak for months, and its industrial sector is completely in the dumps.

  This week the deputy head of the China Iron and Steel Association said that “China’s steel demand has evaporated at unprecedented speed as the nation’s economic growth slowed.”

  There are more signs of contraction all across the economy.

  Most notably, years and years of idiotic capital allocation are beginning to muster serious consequences.

  In an effort to stimulate growth and create employment, China’s national, provincial, and local governments have spent unfathomable amounts of money on useless infrastructure, primarily funded with debt.

  You’ve heard of these infamous bridges to nowhere and empty train stations.

  Now several Chinese companies have started to default on these debts, including two state-owned enterprises.

  The bursting of this debt bubble has already caused major problems in the banking sector (which is a massive 3x the size of China’s economy), as well as in financial markets.

  Chinese stocks saw a major collapse several months ago, and we may see a major crisis in the banking sector very soon.

  Local Chinese with any real savings have been scrambling for months to move their money offshore.

  And this ‘capital flight’ is reaching epic levels. In August alone, $141 billion was sucked out of China. That’s more than the entire GDP of Nevada or Ukraine.

  Sooner or later (probably sooner) the combination of loan defaults and capital flight is going to cause major problems in the Chinese banking sector.

  Chinese banks simply won’t have enough liquidity, or reserve capital, to remain operating.

  I expect we’ll see the mother of all bank bail-ins and withdrawal controls in China.

  But what really gets me is the Chinese government’s Jekyll and Hyde approach to the crisis.

  The Chinese are known for being strategic thinkers. This goes back thousands of years to the days of Sun Tzu. Leaders don’t act haphazardly, they make long-term plans and execute in a disciplined manner.

  But it’s becoming pretty obvious now that the Chinese government is in REACTION mode.

  The stock market crash over the summer wasn’t planned. So they reacted. Poorly, at that.

  In response, they jailed stock speculators, and even did the unimaginable–encouraging citizens to borrow money using their homes as collateral, then invest the loan proceeds in the stock market.

  They promised several times to not devalue the renminbi. But then they did.

  Then in order to stem the debilitating capital flight, they imposed even more severe capital controls and withdrawal restrictions for Chinese citizens traveling overseas.

  But then yesterday in a nod to the IMF, they announced a pilot program to EASE capital controls and allow citizens to directly purchase foreign assets.

  Last week they went on a crazy anti-corruption binge, banning excessive drinking, golf, and even extramarital sex.

  And now, poof, they ended three decades of the One Child Policy.

  None of this makes any sense. There’s no common thread or direction in Chinese policies anymore. No more long-term thinking.

  Now it’s all extremely reactive. The grand plans and strategy have gone out the window, and instead they’re taking it day-by-day, making it up as they go along.

  To me, this is a sign of how bad things really are.

  Their system is based on a bunch of unelected policymakers sitting in a room and making decisions to control one of the largest economies in the world.

  This just doesn’t work.

  As China’s example shows, there are too many moving parts, too many levers to control. And it’s impossible to expect that some committee is going to get it right without eventually faltering.

  But as you can probably realize, it’s not just the Chinese who have engaged this absurd system. Most of the world does it too. In fact, the West invented it.

  The US and Europe have their own unelected committees sitting in rooms making policy decisions that affect the lives and livelihoods of everyone engaged in economic activity.

  And for us to simply sit back and trust them to be smart enough to flawlessly steer the ship is incredibly foolish.

  

  

  

  

  

• IIF Warns Household Wealth Gains Will Disappear Unless Fed Normalizes Rates Soon

  "Easy policy has passed the point of diminishing return and keeping it longer would only increase moral hazard and distort financial markets," exclaims the Institute of International Finance, warning that the gap between the value of Americans' holdings of stocks, bonds and other financial assets and the trend growth rate of the economy is still large and not far off the level that prevailed in 2007 before the financial crisis. "The Fed should start to normalize policy as soon as possible," removing the excess as the 'gap' "typically ends up being narrowed by a correction in the stock market."

  As Bloomberg details, household financial assets have ballooned, far outstripping the growth of the economy since 2013, as the Federal Reserve's ultra-easy monetary policy fuels excesses in the markets…

  That's the message from a measure compiled by the Institute of International Finance (which represents close to 500 banks and financial services companies worldwide) which compares the rise in the value of Americans' holdings of stocks, bonds and other financial assets to the trend growth rate of the economy.

   

  While the gap between the two has narrowed in recent months as the bull market in equities has stalled, it is still large and not far off the level that prevailed in 2007 before the financial crisis.

   

  

   

  Hung Tran, an executive managing director at the institute, said the inflated level of asset prices is one reason the Fed needs to begin raising interest rates from the near-zero levels that have prevailed since 2008.

   

  "The Fed should start to normalize policy as soon as possible—meaning liftoff this year," he said. "Easy policy has passed the point of diminishing return and keeping it longer would only increase moral hazard and distort financial markets."

   

  Under the IIF's measure, a positive financial asset gap suggests that stock and bond prices are overvalued relative to their long-term trends and the underlying growth of the economy. When it is negative, as happened in 2009, it implies that financial assets are undervalued.

   

  When the difference is large and positive—as it is now—it typically ends up being narrowed by a correction in the stock market. Tran said that's what he expects to happen again, although the timing of the price decline is difficult to predict.

  *  *  *
  For now, The Fed appears to have listened (talking hawkish despite the economic turmoil) and has the market starting to believe in December liftoff.

  

   

  Charts: Bloomberg

  

  

  

  

  

• Weekend Reading: Fed Stampedes The Bulls

  Submitted by Lance Roberts via STA Wealth Management,

  What a difference a day can make? Last week the world was consumed with fears of a slowing economy, weak demand and volatile markets. But that was "so last week."

  As I penned this past Tuesday:

  "In a more normal market, I would already be well convinced that the bullish trend had ended, particularly against the backdrop of an earnings recession and weak economic data. But this is by no means a normal market given the ongoing interventions by the Federal Reserve to support asset prices.

   

  It is worth noting that contractions/expansions in the Fed's balance sheet have a very high correlation with subsequent market action as liquidity is pushed into the financial system. As shown in the chart below, the Federal Reserve has already once again began to quietly expand their balance sheet following the recent downturn. Not surprisingly, the market has responded in kind with the recent push higher. My suspicion is that if such minor interventions fail to stabilize the market, a more aggressive posture could be taken."

  

  "Tomorrow, the Fed will announce their latest FOMC rate policy decision. My expectation is that they will once again forgo hiking rates with few changes to their verbiage of their decision. However, any indications that recent economic weakness will push rate hikes further into the future will likely be cheered by the "bulls" pushing the index back towards recent highs."

  That is precisely what happened. Despite continued weak economic data, stocks soared toward market highs as the promise was made that "rates would be lifted in December." 

  The interesting part of this is that "tighter" monetary policy is not good for equities longer term. Furthermore, with economic growth at 2%, there is very little margin of error for the Fed with respect to monetary policy mistakes.

  However, those are just my thoughts.

  This weekend's reading list is a compilation of views, both "bullish" and "bearish" with respect to the Fed's recent rate decision, the markets reaction and the potential of future outcomes. The bulls are cheering, the bears are growling, but for investors the only thing that matters is how to position yourself for what happens next.

  ---

  THE LIST

  1) A Most Confused Critique Of The Fed by Lawrence Summers via Washington Post

  “My friends Mike Spence and Kevin Warsh, writing in the Wall Street Journal on Wednesday, have produced what seems to me the single most confused analysis of U.S. monetary policy that I have read this year. Unless I am missing something — which is certainly possible — they make a variety of assertions that are usually exposed as fallacy in introductory economics classes.

   

  My problem is not with their policy conclusion, though I do not share their highly negative view of quantitative easing (QE). There are many harshly critical analyses of QE, such as those of Martin Feldstein, which are entirely coherent and consistent with the macroeconomics of the last 50 years. My differences are based on judgements about empirical magnitudes and relative risks — not questions of basic logic."

  Read Also: An Unsteady Hand At The Fed by Desmond Lachman via American Enterprise Institute

   

  2) Connecting The Dots by Market Anthropology

  “Outstanding of Fed policy, a major near-term potential catalyst to help instigate a move higher in yields is the hint by Draghi last week of his willingness to advocate a material increase in the ECB's stimulus program. With some now speculating (see Here) – as we comparatively suggested in September (see Here), of more than doubling the initial size; it would follow the Fed's playbook of how they expanded (2X) and built out their own stimulus programs in March 2009.

   

  Our general take on the intermediate-term effects – which have been borne out in the markets since 2009 (*including the ECBs initial salvo this March – Figure 2), is that QE has historically supported yields as investors are shaken out of the safe-haven corners of the government bond market and into more reflationary asset positions that invariably weakens the dollar (Figures 6 & 7).

   

  Moreover, from our perspective – and despite conventional wisdom that sees a weaker euro as the best remedy for what ails Europe, we would argue that a broadly weaker US dollar would have the greatest efficacy in the long-term, as it could reflexively affect inflation expectations worldwide – most notably in emerging markets that the IMF estimates will account for more than 70 percent of global growth through the end of this decade.
  "

  

  Read Also: Dollar Breaks Out As Fed Stands Pat by Michael Kahn via Barron's

   

  3) Four Takeaways From The Fed's Announcement by Mohamed El-Erian via Bloomberg

  “Of critical importance to markets is that a decision to raise interest rates for the first time in almost 10 years is now more of a "live" possibility at the Fed's next policy meeting, in December. In reasserting this policy flexibility and making it explicit, the central bank refrained from providing specifics about the elements that would drive the decision.

   

  The Fed's message conveyed greater unity among its policy-making officials. Only one member of the Federal Open Market Committee — Jeffrey Lacker, the president of the Richmond Fed, dissented. The near unanimity was an important accomplishment by Chair Janet Yellen, especially given the range of views expressed in the weeks leading up to the meeting, including by the usually united governors."

  Read Also: Fed Sets Stage For December Rate Hike by Brian Wesbury via First Trust

   

  4) The Fed Lives In A Flawed Delusional World by John Curdele via New York Post

  "Let me make a prediction now: The Fed won't have another chance to raise rates until seasonal anomalies in government statistics next spring make the economy look better than it really is.

   

  But that's not the real story that came out of the Fed's policy-making meeting this week. This is: The Fed remains delusional.

   

  In its statement, the Fed said the economy was expanding 'at a moderate pace' and 'household spending and business fixed investment has been increasing at solid rates in recent months.'

   

  Solid? That statement stands in contradiction to retail sales reports, consumer spending, durable goods orders, consumer confidence surveys and a raft of other economic data."

  Read Also: Just One Question For Janet Yellen by Tyler Durden via ZeroHedge

  Read Also: 5 Bad Reasons To Raise Rates by Paul Kasriel via Advisor Perspectives

   

  5) Rate Hikers At Fed Running Out Of Ammo by Jeff Cox via CNBC

   

  Read Also: Yellen Has 6 Million Reasons To Wait by Craig Torres via Bloomberg

  ---

  Other Reading

  • Presidential Cycle Flashes Bear Signal? by Mark Hulbert via MarketWatch
  • This Recession Indicator Hit A 6-Year Low by Akin Oyedele via Business Insider
  • A Tale Of Two Recoveries by Jeff Snider via Alhambra Partners
  • Debate – GOP Elevated, CNBC Eviscerated by David Stockman via Stockman's Contra Corner
  • Are Share Buybacks Jeopardizing Future Growth by Tim Koller via McKinsey & Co.
  • Don't Go For The Exacta by Cliff Asness via AQR
  • A Different Perspective On Deviation by Greg Morris via Stockcharts.com
  • Causes Of US Economic Stagnation by John Hussman via Hussman Funds

  ---

  “It wasn't raining when Noah built the ark.” – Howard Ruff

  Have a great weekend.

  

  

  

  

  

• 'Happy' Halloween Kids!

  Trick… No Treat!

   

  

   

  Source: Investors.com

  

  

  

  

  

• MOMO Rules: In A "World Of Disappointments" Trade Like An Idiot, Citi Recommends

  In a “world of disappointments”, where beta is king and where alpha has become a joke (or, now that equity is a risk-free asset and debt is risky, is outright punished) where growth no longer exists, drowning under the weight of $200 trillion in debt, and where value strategies have been all but forgotten replaced instead with “stories” about companies that have no cash flows but just might be “the next big thing” (one day), what should one to do? Why, engage in the most idiotic of strategies: chase momentum.

  At least that is Citi’s recommendation, and – we are very sad to say – in this broken “market”, it works.

  Here is the summary from the note by Citi’s Jonathan Stubbs

  World of disappointments… — The post-GFC world has been consistently disappointing, in terms of growth expectations. Economists and analysts have both consistently lowered GDP and EPS growth expectations at a global level.

   

  …has not stopped equity bull — Despite this backdrop, equity markets have performed strongly over the same period. There has been enough growth to support rising share prices. The growth “hurdle rate” on Planet QE appears to be pretty low.

   

  Disappointments drive momentum bull — This world of disappointment has been responsible for one of the most important equity market themes of the past few years: outperformance of momentum strategies, eg earnings, dividends, estimates.

   

  Favoured Research Quant style — Our research Quant colleagues, Chris Montagu and team, have placed a strong emphasis on the importance of Estimates Momentum over the last few years. It remains one of their preferred Quant styles.

   

  Momentum winning — We show that investors who have run disciplined earnings and dividend momentum strategies over the last 5 years in Europe have performed strongly. Our Research Quant colleagues show the same on a style basis.

   

  Momentum strategies — We show momentum strategies using relative earnings trends and a) P/E relative, b) P/E relative vs 10-year range, c) normalised P/E, d) price/book relative. Insurance, Banks, Autos and Utilities appear in all four. We also show momentum strategies using relative dividend trends and DY relative. Three sectors look attractive on both measures = Media, Insurance and Banks.

   

  Momentum stocks — Stocks with positive earnings momentum and a) low P/E relative = UBS, Unicredit, Daimler, IAG, b) normalised P/E = Peugeot, KPN, Aegon, Total, Aviva, c) low price/book relative = UBS, Intesa Sanpaolo, Veolia, Bouygues. Stocks which score well on positive relative dividend trends and DY above market DY = Next, Lloyds, ING, Allianz.

  * * *

  Missed out on “trading” like an idiot? Don’t worry: the global economy is in a tailspin, so you will have ample opportunity to give your inner idiot access to an E-trade terminal.

  This cycle has disappointed, in terms of growth. But, asset prices, including share prices, have enjoyed super-strong nominal and real returns. Economists and equity analysts have been under-whelmed by (almost) perpetually downgrading GDP growth and EPS growth estimates. But, this has not hampered the post-2009 equity bull market. Disappointments = a lot and often; European equity returns since 2009 lows = 170% (global = 187%).

   

  This world of disappointment has been responsible for one of the most important equity market themes of the past few years — outperformance of momentum strategies, eg earnings, dividends, estimates. Companies, and sectors, which have been able to avoid disappointments (or downgrades) have tended to outperform in the last few years. We have consistently allocated a high weight to momentum within our models, eg we currently have a combined 20% weight to earnings and dividend momentum in our European Sector Attribution Model.

   

  Economists and analysts have tended to over-estimate potential GDP and EPS growth rates since 2009. Both groups have spent most of their time downgrading respective forecasts.

  Well that’s great news right? Maybe not. But this is:

  Despite a backdrop of consistent downgrades to GDP and/or earnings growth forecasts over the last 5 years, equity markets have performed strongly. Growth has been disappointing, consistently so. But, overall, there has also been enough growth to support rising share prices so far in this cycle. As we have previously argued, the growth “hurdle rate” on Planet QE appears to be pretty low.

   

  

   

  Figure 17 and Figure 18 show the performance of a disciplined earnings momentum strategy in Europe, using our own European Forecast Monitor database. At the start of every quarter we “buy” or “sell” stocks based on the 6-month change in their 12- month forward earnings relative to the market. A 6-month change above 8% goes into the long bucket and below -8% goes into the short bucket. We then hold and observe for the following 6-months. Each bar in these charts represents the 6- month relative return of these buckets.

   

  Positive momentum strategies continue to do better than negative momentum ones. We have written much over the years about this. In short, positive momentum stocks tend to have longer duration. Negative momentum stocks have often underperformed in the months leading up to inclusion in the short bucket and can perform better should relative earnings underperformance slow.

  The summary:

  This cycle has disappointed, in terms of growth. But, asset prices, including share prices, have enjoyed super-strong nominal and real returns. This world of disappointment has been responsible for one of the most important equity market themes of the past few years — outperformance of momentum strategies.

   

  Citi’s economists continue to see a world of low/modest/disappointing GDP growth in 2016-17. Additionally, they acknowledge downside risks, primarily from China, to their modest forecasts. If this plays out, then it is likely that momentum strategies will continue to perform well within the equity market. This report looks at where investors should be positioned currently on this basis.

  Why is this a strategy for idiots? Because, as the “heatmap” below shows, all you do is go long the green and short the red and pray it works. Rinse. Repeat.

  

  As we said, a “strategy” for idiots.

  Thank you Ben and Janet for forcing all of us to become idiots if we want to make any money in your “market.”

  

  

  

  

  

• S&P Downgrades Saudi Arabia On Slumping Crude, Ballooning Fiscal Deficit

  Over the course of the last several months, the consequences for Saudi Arabia of deliberately keeping crude prices suppressed in an effort to, i) bankrupt uneconomic producers in the US, and ii) pressure Moscow into giving up Bashar al-Assad have begun to make themselves abundantly clear. 

  Not only has the kingdom been forced into liquidating its SAMA reserves…

  

  … but the pressure from simultaneously maintaining the riyal peg and preserving the standard of living for everyday Saudis has driven Riyadh back into the debt market in an effort to offset some of the pressure on the country’s vast store of USD-denominated petrodollar assets (see second pane below).

  

  Meanwhile, the war in Yemen is also weighing on the budget and now, the Saudis are staring down a fiscal deficit that amounts to some 20% of GDP and the first current account deficit in years.

  

  All of the above have caused to market to lose faith in Riyadh’s ability to keep the situation under control and now, S&P has downgraded the kingdom to AA- negative citing “lower for longer” crude and the attendant ballooning fiscal deficits. 

  *  *  *

  From S&P:

  We expect the Kingdom of Saudi Arabia’s (Saudi Arabia’s) general government fiscal deficit will increase to 16% of GDP in 2015, from 1.5% in 2014, primarily reflecting the sharp drop in oil prices. Hydrocarbons account for about 80% of Saudi Arabia’s fiscal revenues.

  Absent a rebound in oil prices, we now expect general government deficits of 10% of GDP in 2016, 8% in 2017, and 5% in 2018, based on planned fiscal consolidation measures.

  We are therefore lowering our foreign- and local-currency sovereign credit ratings on Saudi Arabia to ‘A+/A-1’ from ‘AA-/A-1+’.

  Standard & Poor’s is converting its issuer credit rating on Saudi Arabia to “unsolicited” following termination by Saudi Arabia of its rating agreement with Standard & Poor’s.

  The outlook remains negative, reflecting the challenge of reversing the marked deterioration in Saudi Arabia’s fiscal balance. We could lower the ratings within the next two years if the government did not achieve a sizable and sustained reduction in the general government deficit or its liquid fiscal financial assets fell below 100% of GDP.

  *  *  *

  Of course this will only get worse should Riyadh decide to launch a sequel to “Operation Decisive Storm” in Syria and indeed, the IMF recently warned that absent higher oil prices, the Saudis could literally go broke in the space of five years:

  Sharply lower oil prices have significantly affected the fiscal prospects of oil exporters across MENA and the CCA.1 The Brent oil price is projected to average $53 a barrel in 2015, down from almost $110 a barrel in the first half of last year. Exporters’ fiscal balances have turned from sizable surpluses to large deficits, with MENA and CCA export revenues dropping by $360 billion and $45 billion, respectively, this year alone.

   

  

   

  For oil exporters, the main policy issue is fiscal adjustment and rebuilding buffers over the medium term. The Brent oil price is projected to recover only modestly to about $66 a barrel by the end of the decade, with MENA and CCA export receipts remaining $345 billion and $30 billion, respectively, below the 2014 level, even in 2020. In the absence of adjustment, fiscal balances will remain in deep deficit in most countries, with public debt ratios rising rapidly (red lines in Figure 4.2). 

   

  

   

  Even under the IMF baseline scenario, however, public debt ratios will continue to rise in many GCC and CCA exporters (blue lines in Figure 4.2). In a number of countries, mediumterm fiscal balances will fall well short of the levels needed to ensure that an adequate portion of the income from exhaustible oil and gas reserves is saved for future generations (Figure 4.3). Bahrain, Oman, and Saudi Arabia have medium-term fiscal gaps of some 15–25 percentage points of non-oil GDP, while conflict-torn Libya has a gap of more than 50 percent of non-oil GDP. 

   

  The large and sustained drop in oil prices has increased fiscal vulnerabilities in MENA and CCA oil-exporting countries. The issue of fiscal space has become critical as oil exporters decide how quickly to adjust their fiscal policies to the new reality of persistently lower oil prices. This box considers several alternative measures of fiscal space. A good starting point is the size of governments’ financial assets—commonly referred to as “fiscal buffers.” In general, countries with larger buffers can afford to maintain fiscal deficits further into the future, so as to reduce the impact of lower oil prices on growth. On current trends, however, all non-GCC MENA oil exporters are already projected to run out of liquid financial assets in the next three years (see Chapter 1). In, contrast, CCA oil exporters have at least 15 years’ worth of available financial savings,1 while GCC countries are split evenly between countries with relatively large buffers (Kuwait, Qatar, and the United Arab Emirates—more than 20 years remaining) and countries with relatively smaller buffers (Bahrain, Oman, and Saudi Arabia—less than five years).

  As a refresher, here’s BofAML’s sensitivity analysis which shows how long Riyadh’s SAMA reserves will last under various scenarios for crude prices and debt issuance:

  

  One important takeaway from the above is that if the Saudis were to burn through their reserves it would represent a nearly $700 billion global liquidity drain as Riyadh dumps its USD-denominated assets. That would amount to a complete reversal of the petrodollar virtuous circle that’s underwritten decades of dollar dominance and which has served to underpin the global economic order for as far back as most market participants can remember. 

  And while it’s by no means a foregone conclusion that oil prices will remain “lower for longer” as the Saudis are to a certain extent the masters of their own destiny in that regard, one thing worth noting is that not only is Iranian supply set to come back online, but Tehran seems determined to supplant Riyadh as regional power broker. Both of those eventualities will have very real consequences for crude prices and thus for the future of The House of Saud.

  So enjoy it while it lasts King Salman…

  

  

  

  

  

  

• Mother Yellen's Little Helper – The Rate-Hike Placebo Effect

  Via ConvergEx's Nicholas Colas,

  Americans are increasingly likely to respond positively to a placebo in a drug trial – more so than other nationalities. That’s the upshot of a recently published academic paper that looked at 84 clinical trials for pain medication done between 1990 and 2013. Over that time, Americans reported an almost 30% incremental reduction in pain symptoms when given a sugar pill or other placebo as compared to a 10% reduction for in non-U.S. studies.  Why the difference? The paper’s authors suggest that drug advertising – only allowed in New Zealand and America – may be giving trial populations more confidence that a drug – any drug – will work.  Also a factor: drug trials are better funded now, and therefore have more participants and go longer.  All that may well spark more confidence in trial participants, even those taking placebos. 

   

  These findings, while bad for drug researchers, does shed some light on our favorite topic: behavioral finance.

   

  Trust and confidence makes placebos work, and those attributes also play a role in the societal effectiveness of central banks. That’s what makes the Fed’s eventual move to higher rates so difficult; even if zero interest rates are more placebo than actual medicine, markets believe they work to support asset prices.

  I keep a mental list of underappreciated scientific developments of the 20^th century, and near the top is the placebo. While you can argue that the roots and herbs of ancient societies were the first faith-based medicines, modern placebo research dates to a relatively recent 1955. That was the year Harvard research Henry Beecher published “The Powerful Placebo” in the Journal of the American Medical Association.  It was essentially a huge “You’re doing it wrong” to the pharmaceutical industry and showed that drug tests needed to be performed against a placebo and dual blind (neither subject nor researcher knows whether they were taking/dispensing a real medicine or a sugar pill). 

  The only problem is that placebos are really stiff competition.  As Beecher noted, many subjects in non-placebo trials reported feeling better even when the drug in question was later found to be totally ineffective.  And over the years, researchers have found ways to make placebos “Work” even better: yellow placebos work great as antidepressants, red pills are “Uppers”, branded pills work better than generics, and a placebo painkiller given 4 times a day performs better when you take only twice daily.   The upshot of all this is that in highly competitive areas like depression medication, drug companies have to spend billions to produce products that beat the placebo. 

  Medical researchers know that the placebo effect has risen over the last 15 years, but one recent paper attributes this to a very specific reason: Americans.  Dr. Jeffrey Mogil and his team at McGill University in Montreal looked at 84 drug trials dedicated to ameliorating pain caused by nerve damage.  Here’s a summary of their findings and working theories:

  Since the mid-1990s, Americans in drug trials to assess pain medication have reported a 30% increase in the efficacy of placebos.  In Non-U.S. studies, that number is closer to 10%. Taken as a whole, therefore, American drug trials explain most of the increase in the global placebo effect.

   

  The researchers at McGill do not have an explanation for this disparity, but suspect the changing scale of U.S. drug trials. We know that placebos tend to work better when patients trust their doctors (Kelley et al 2009). American drug companies have been extending the time involved in drug trials over the last decade as well as increasing their population size, in part to compete against the potentially wide variance of the placebo effect on smaller groups.  As it turns out, large drug trials where researchers get to know the patients well after weeks of contact are exactly the type of environment where placebos can shine.

   

  The other idea forwarded in the press coverage around this study is that the U.S. is one of only two countries (New Zealand is the other) where drug companies can advertise directly to the population at large.  Pharma companies spend just over $4 billion/year on U.S. advertising, mostly on television ad buys.  Some of the study’s authors posit that this has a halo effect on drug companies generally, since Americans are unique in viewing these advertisements.  If called to participate in a drug trial, they may increasingly assume that they are going to get something new, innovative, and (presumably) effective.  Even if it’s just a sugar pill.

  We see the placebo effect as medicine’s version of behavioral economics, that wing of the dismal science that recognizes the fallibility of mankind rather than assuming an economic actor will always behave as the models say they should.  If human psychology played no role in drug testing or medicine, you wouldn’t need a placebo option. If humans behaved like the wealth/utility maximizing animals described in economic models, you wouldn’t need a behavioral part of the discipline to explain why they often don’t.  The truth is human emotion gets in the way of both, so we need placebos and psychologists.

  The central lessons placebos have for medicine is remarkably simple.

  First, the patient/doctor bond plays a large role in the success of a placebo.  We know that from earlier studies and from surveys of doctors (one released two years ago in the U.K) which show they routinely prescribe placebos to their patients.  The doctors mean no harm, and the most often given reason for the practice was to ward off requests for medication inappropriate to the patient’s condition.

   

  Second, as the McGill study seems to show, is that some populations will react to placebos more readily than others. The preconditions seems to be background messaging (all those ads no TV) and large/lengthy trials that encourage confidence among the patients in the company performing the trial as well as the researchers on staff.

  To draw the analogy to economics, try this model on for size:

  • Central bankers around the world are the researchers, looking for effective treatments for slow global growth and sluggish price inflation.
  • The general population are the people engaged in the trials to see which treatments are most useful.

  The American Federal Reserve ran the most successful trial with its Quantitative Easing program.  Asset prices went up, unemployment went down, and we don’t really have to care what parts of those outcomes were caused by the actual medicine of zero interest rates/bond buying versus the placebo effect of trust in Federal Reserve.  Now, the Bank of Japan and the European Central Bank are running the same experiment and hoping for the same outcome.  Whether the actual cure shows up or just the placebo effect is the big question just now. 

  The challenge for the Fed now is that no one is quite sure how much of the “Cure” was medicine and how much was the placebo effect.  The first Fed rate hike will begin to tell the story, whenever that is, especially for equity markets.  It will all come down to how much investors actually trust the Federal Reserve to reduce the dosage of low interest rates and at what speed.  That is where the comparison to medical science is frustratingly inadequate.  Medicine cures, but when it comes to economics there’s always another illness coming around the corner.

  

  

  

  

  

• Tying The Valeant Roll-Up Together: Presenting The Goldman "Missing Link"

  While the Valeant soap opera has had constant, heart-pounding drama for weeks and following yesterday’s report that it allegedly fabricated prescriptions, even an element of career-ending (and prison-time launching) criminality, so far one thing had been missing: an antagonist tied to Goldman Sachs.

  Thanks to a profile by Bloomberg, we are delighted to reveal the “missing link”, one which ties everything together. Its name is Howard Schiller.

  

   

  Schiller was, between December 2011 and June 2015, the CFO of Valeant, and is currently on its board of directors.

  More importantly, prior to joining Valeant, he worked for 24 years at Goldman Sachs as chief operating officer for the Investment Banking Division of Goldman Sachs, responsible for the management and strategy of the business.

  How and why did Schiller end up at Valeant? Jeff Ubben, of the hedge fund ValueAct Capital, helped bring in J. Michael Pearson from McKinsey to run Valeant. Pearson then helped lure Schiller from Goldman Sachs.

  And, as Bloomberg notes, “Goldman Sachs and other banks brought in investors, making many millions in fees in the process.”

  All thanks to the “roll-up” strategy that blossomed and ballooned under Schiller.

  Because much more important than using Valeant as a Wall Street fee piggybank, which in turn resulted in a circular loop whereby virtually every analyst covering the company had a “buy” recommendation as we showed two weeks ago…

  

   

  …. which then pushed its price ever higher, making it even easier to acquire smaller (or larger) companies using the stock as currency, and creating the impression of virtually perpetual growth (simply due to the lack of any purely organic growth comps), and even more important than the company’s current fiasco involving Philidor (which may or may not involve a criminal investigation before too long), was that Valeant was nothing more than a massively indebted serial acquirer, or a “roll-up”, taking advantage of the recent euphoria for specialty pharma exposure, and with Ackman on board, a sterling activist investor to provide his stamp of approval (recall the surge of Weight Watchers stock just because Oprah Winfrey came on board).

  That aggressive roll up strategy was the brainchild of Schiller (and Pearson) which in turn was developed with Wall Street’s help in one massive monetary synergy, whereby everyone profited, as long as the stock kept going up.

  With the price crashing, the entire business model of the Valeant “roll-up” has now come undone.

  So now that the time to count bodies has begun, let’s meet the architect who was the brain behind Valeant aggressive expansion spree.

  Schiller ran Goldman Sachs’ health-care practice until 2009, when he became the chief operating officer of Goldman’s investment bank. The next year, the bank advised Valeant on its breakout purchase of Biovail Corp.

   

  After Schiller arrived at Valeant, in late 2011, the drug company orchestrated some of its most controversial deals. In the process, Valeant enriched its shareholders. Its market value soared from $14 billion to $70 billion during Schiller’s tenure as CFO, as one Wall Street analyst after another placed “buy” on its stock.

  It also enriched Wall Street:

  Under Pearson and Schiller, Valeant became a lucrative client for Wall Street. Goldman Sachs, for instance, was entitled to more than $15 million in fees for the Biovail deal. The firm also earned about $55 million for helping the drug maker raise $9.3 billion in debt and equity financing for the 2013 acquisition of Bausch & Lomb Inc., including its role as sole underwriter of a $2 billion stock sale, regulatory filings show.

  … Goldman at this point, of course, was Schiller’s former employer. Surely there was no conflict of interest there.

  Goldman Sachs Lending Partners served as the lead lender among a group of banks that provided a credit line and term loans to Valeant. Later, the same banking group agreed to raise as much as $8 billion in financing for Valeant’s proposed acquisition of Allergan Inc. Goldman Sachs didn’t participate in that group offering financing and stepped down as the banking group’s administrative agent because it was involved in defending Allergan against the deal.

  We don’t understand: why would that stop the bank that was just fined a whopping $50 million for wilfully and criminally stealing inside information (which helped it make who knows how many billions in profits) from the New York Fed?

  And then, just as abruptly as when Hank Paulson quit Goldman to join the Treasury just so he could cash out of his GS stock tax free, Schiller announced his resignation one short month after Valeant’s failed attempt to acquire Allergan (in collusion with Bill Ackman who made hundreds of millions buying calls on Allergan having material non-public information that a hybrid strategic/financial bid was coming) fell appart after it was outbid by Actavis Plc.

  As Bloomberg observes, “it was an opportune exit.” Under the terms of his departure, he stands to continue vesting in a stock and options package that made up the bulk of his $46 million in pay through 2014, according to company filings.

  It gets better: before stepping down, he sold $24 million of Valeant stock to pay taxes, including a portion when the shares were trading above $200, company filings show.

  Call him lucky, just don’t call him a criminal.

  But while he is no longer CFO, he most certainly has present this past Monday on a conference call in which Valeant defended its relationship with Philidor: “Valeant turned to him, rather than to a company officer, to walk investors through a big part of Valeant’s presentation about its ties to Philidor.”

  Schiller told listeners that Valeant had launched a pilot prescription-fulfillment program through Philidor, and based on its success decided to strengthen its relationship with the specialty pharmacy. Then, last December, Valeant “acquired the option to acquire Philidor,” he said.

  Just four days later, after news broke that Philidor was fabricating prescriptions, that view changed at 5 am this morning when the company announced that “we have lost confidence in Philidor’s ability to continue to operate in a manner that is acceptable to Valeant and the patients and doctors we serve.”

  Call it unlucky, just don’t call it criminal.

  During the Monday call, Umer Raffat, an analyst at Evercore ISI, raised a question on many people’s minds: Why did Schiller leave when he did? “I feel like no one’s satisfied, and I keep getting that question from many investors in many meetings. So, would appreciate all your input there,” Raffat said.

  Schiller reiterated that after two careers over 30 years, he wanted to “do some things on my own.”

  He continued: “The timing was right. And again, just to be absolutely crystal clear, if I had –- and which I’m guessing, it could be an undertone of the question, if I had any concerns whatsoever about Valeant or Mike I would not have stayed on the board. It’s as simple as that.”

   

  Pearson quickly followed up. He said Schiller had called him shortly after the stock-commentary site Citron Research, run by short-seller Andrew Left, sent Valeant’s stock into a tailspin with a report questioning the company’s accounting and its relationship with Philidor, the pharmacy. Pearson has since called for authorities to investigate Citron.

  Good, and when those authorities find nothing wrong with Citron, which merely blew the whistle on a rollup that many others had suspected for years, they can focus all their attention on Valeant.

  For their benefit, here is a quick primer from HBS on the rapid rise and even more rapid collapse of some of the best known (and most infamous), as well as unknown roll-ups yet, and what exactly bursts their bubble:

  The notion behind roll-ups is to take dozens, hundreds, or even thousands of small businesses and combine them into a large one with increased purchasing power, greater brand recognition, lower capital costs, and more effective advertising. But research shows that more than two-thirds of roll-ups have failed to create any value for investors.

   

  We were interested to find that many roll-ups were afflicted by fraud—among them, MCI WorldCom, Philip Services, Westar Energy, and Tyco—but we won’t focus on those in this article because for the most part the lesson is simply, “Don’t do it.” Instead, let’s look at the fortunes of Loewen Group. Based in Canada, it grew quickly by buying up funeral homes in the U.S. and Canada in the 1970s and 1980s. By 1989, Loewen owned 131 funeral homes; it acquired 135 more the next year. Earnings mounted, and analysts were enthusiastic about the company’s prospects given the coming “golden era of death”—the demise of baby boomers.

   

  Yet there wasn’t much to be gained from achieving scale. Loewen could realize some efficiencies in areas like embalming, hearses, and receptionists, but only within fairly small geographic proximities. The heavy regulation of the funeral industry also limited economies of scale: Knowing how to comply with the rules in Biloxi doesn’t help much in Butte. A national brand has little value, because bereaved customers make choices based on referrals or previous experience, and being perceived as a local neighborhood business is actually an advantage. In fact, Loewen often hid its ownership. And it damaged whatever reputation it did have with its methods of shaming the bereaved into buying more expensive products and services (such as naming its low-end casket the “Welfare Casket”).

   

  Nor did increased size improve the company’s cost of capital. Funeral homes are steady, low-risk businesses, so they already borrow at low rates. The cost of acquiring and integrating the homes far outweighed the slight scale gains. What’s more, the increase in the death rate that Loewen had banked on when buying up companies never happened. Fast-forward several years and the company filed for bankruptcy, after rejecting an attractive bid. (Relaunched under the name Alderwoods, Loewen was sold to the same suitor for about a quarter of the previous offer.)

   

  Often roll-ups cannot sustain their fast rate of acquisition. In the beginning, all that matters is growth—buying a company or two or four a month, with all the cultural and operational issues that accompany a takeover. Investors know that profitability is hard to decipher at this point, so they focus on revenue, and executives know that they don’t have to worry about consistent profitability until the roll-up reaches a relatively steady state. Operating costs frequently balloon as a result. Worse, knowing that the company is in buying mode, sellers demand steeper prices. Loewen overpaid for many of its properties. In another case, as Gillett Holdings and others tried to roll up the market for local television stations in the 1980s, the stations began demanding prices equal to 15 times their cash flow. Gillett, which bought 12 stations in 12 months and then acquired a company that owned six more, filed for bankruptcy protection in 1991.

   

  Finally, roll-up strategies often fail to account for tough times, which are inevitable. A roll-up is a financial high-wire act. If companies are purchased with stock, the share price must stay up to keep the acquisitions going. If they’re purchased with cash, debt piles up. All it took to finish off Loewen was a small decline in the death rate. For Gillett, it was an unexpected TV ad slump. When you go into a roll-up, you need to know exactly how big a hit you can withstand. If you’re financing with debt, what will happen if you have a 10%—or 20% or 50%—decline in cash flow for two years? If you’re buying with stock, what if the stock price drops by 50%?

  This is precisely what just happened to junk-rated Valeant (which has leverage of just over 6 times) which – even if found innocent of any Philidor wrongdoing – is essentially finished: the rollup bubble has burst and now it has to show it can be profitable and generate cash.

  Judging by its stock price today, few are hanging around to see if it can.