• 5 Questions For Bernie Sanders Supporters

  Authored by Derrick Broze, originally posted Op-Ed at TheAntiMedia.org,

  I have five simple questions for supporters of Senator Bernie Sanders’ presidential campaign. Before I get to them, I find it necessary to preface this with a plea for logic and respectful communication. I am going to be critical of Bernie, and I need you to listen, remain calm, take in the information, and answer honestly.

  I ask that you refrain from calling me a shill, a Republican agent, or anything of that sort. I also ask that before you write me off as “another corporate media shill,” you take a moment to consider that I have praised Bernie when he was in the right (see here and here). I have also called him out in the areas where he needs work.

  Personally, I am slightly frightened by the online interactions I have witnessed from those who #FeelTheBern. There seems to be a tendency to dismiss anyone who criticizes Bernie as either a Donald Trump supporter or simply an idiot. I can only speak for myself and say that neither of those accusations are true. This hysteria around Sanders is reminiscent of Obama’s supporters, who were quick to attack detractors pointing out that “Hope and Change” was quickly turning into more of the same.

  And now on to the questions. Each of them relates to Sanders’ own comments about his potential presidency. I ask that you respond to each comment individually and think about what exactly you are looking for when you say you want to vote for a president.

  If you are seeking more freedom and prosperity, ask yourself if that is what you will get by voting for any of the current candidates. If you are seeking to reclaim the moral high ground the United States may have once had, ask yourself if these policies will do just that. Please, please stand by your principles and do not allow the Corporate-State powers to pull the wool over your eyes.

  Question 1. Would Bernie’s tax on Wall Street speculation work?

  Bernie Sanders has said that he would tax Wall Street speculation and use the funding to pay for his “free” public college tuition program. A fact check by the Associated Press reported that “Sanders’ plan would cover tuition and fees at public universities – a $70 billion annual expense with the federal government picking up two-thirds of that tab by taxing trading in the financial markets.”

  “Students would still be on the hook for room and board costs that average $9,804, according to the College Board,” the AP added.

  But would this Wall Street speculation tax actually achieve the desired outcome? Donald J. Boudreaux, Professor of Economics at George Mason University, does not believe the plan can work. Boudreaux recently wrote:

  “If such speculation is as economically destructive as Mr. Sanders regularly proclaims it to be, the tax on speculation should be set high enough to drastically reduce it.  But if – as Mr. Sanders presumably wishes – speculation is drastically reduced, very little will remain of it to be taxed and, thus, such a tax will not generate enough revenue to pay for Mr. Sanders’s scheme of making all public colleges and universities ‘tuition-free.’”

  If a speculation tax is a successful deterrent, there will likely be a decrease in speculation and therefore, very little funds to appropriate for a college tuition fund. Can Bernie’s Wall Street speculation tax work?

  Question 2. Do you support an increase in payroll tax for all Americans to fund Bernie’s minimum wage and healthcare plans? Do you believe Bernie’s plans will only tax the 1%?
  Bernie Sanders recently appeared on This Week with George Stephanopoulos to discuss his plans for his presidency. Stephanopoulos asked Sanders about his plans to tax the wealthiest Americans. Here is a segment of the transcript:

  Stephanopoulos: But to pay for all of your programs, you’re going to have to do more than tax the top 1 percent. How far below the top 1 percent are you going to go with tax hikes?

  Sanders: It is not true that we have to go much further.

  Stephanopoulos:  Tax hikes below the top 1 percent? No tax hikes below the top 1 percent?

  Sanders: I didn’t say that. I think if you’re looking about guaranteeing paid family and medical leave, which virtually every other major country has, so that when a mom gives birth, she doesn’t have to go back to work in two weeks, or there’s an illness in a family, dad or mom can stay home with the kids. That will require a small increase in the payroll tax.

  Stephanopoulos: That’s going to hit everybody.

  Sanders: That would hit every — yes, it would.

  Bernie Sanders was also quizzed on his plans on a recent episode of “Real Time with Bill Maher”:

  “So you’re saying we can pay for all of this without raising taxes on anybody but the 1 percent?” Maher asked.
  “We may have to go down a little bit lower than that — but not much lower,” Sanders replied.

  Do you trust Sanders when he says the payroll tax will be “small” and that he will only raise taxes on the 1% (or a little bit lower)?

  Question 3. Do you support Bernie’s comments on Edward Snowden?

  Sanders has openly spoke against the NSA’s massive surveillance programs but stands with the rest of the presidential candidates in his belief  that Snowden should face some type of punishment. At the first Democratic presidential debate, Bernie was asked about his position on Edward Snowden. Sanders said he believes Snowden “played a very important role in educating the American people” — but he broke the law. “I think there should be a penalty to that,” he said. “But I think that education should be taken into consideration before the sentencing.”

  I know some Bernie supporters may feel these comments provide some hope for Snowden to receive a fair trial, but the truth is that Snowden could not possibly face anything resembling a fair trial in the U.S. Simply look at the prosecution (and persecution) of Chelsea Manning, Barrett Brown, Jeffrey Sterling, and John Kiriakou to see the way whistleblowers are treated in the land of the free. Snowden should be welcomed home as a hero and the masterminds of the NSA’s spying programs should be the ones facing penalties.

  Question 4. Do you support Bernie’s stance on Israel and Saudi Arabia? Both of these nations are responsible for atrocious human rights violations (here and here). Saudi Arabia is also accused of funding the 9/11 attacks. Despite this, the majority of politicians — including Bernie — continue to support these nations.

  Last summer, as Israeli soldiers deliberately targeted hospitals in Operative Protective Edge, Sanders joined the rest of the U.S. Senate by unanimously voting to support Israel’s actions and supporting “the State of Israel as it defends itself against unprovoked rocket attacks from the Hamas terrorist organization.”

  Mint Press News recently reported on Sanders’ Israel stance:

  “Yet when it comes to more recent statements, journalists describe Sanders as difficult to pin down on foreign policy issues, including Israel. Josh Nathan-Kazis, writing in June for Forward, noted that ‘a search of the Congressional Record reveals very few statements about Israel by Sanders on the floor of the House or the Senate,’ but ‘in February 2015, Sanders was the first Senator to announce that he would skip Israeli Prime Minister Benjamin Netanyahu’s speech to a joint session of Congress.’”

  Nathan-Kazis reports that Sanders does have limited ties to AIPAC, the pro-Israel lobbying group that’s trying to drive the U.S. to war with Iran:

  “In Vermont, a small group of AIPAC-linked Jewish activists do have Sanders’ ear on Israel-related matters. Yoram Samets, a Burlington businessman and a member of AIPAC’s national council, said that he has been in touch with Sanders for the past decade, but that Sanders does not sign any AIPAC-backed letters. His Vermont colleague Senator Patrick Leahy does not, either.”

  Though it appears Sanders keeps his distance from Israeli radicals like Netanyahu, his silence on the matter and support of Operation Protective Edge reveals his true stance.

  Sanders also recently spoke about Saudi Arabia while taping a PBS show at the University of Virginia. Sanders’ said the nation with untold amounts of blood dripping off its hands should “get their hands dirty” and take a bigger role in the war against ISIS. Why would someone interested in ending the wars demand that a nation known for blatant human rights violations “get their hands dirty” and support more war? Saudi Arabia killed dozens of civilians in a single airstrike over a wedding in Yemen last month, yet Sanders still believes they should lead the assault on the Islamic State.

  Should we expect President Sanders to continue supporting these nations?

  Question 5. Do you support Bernie’s plan to continue the drone program? According to documents released by a new whistleblower, during one five-month period of drone operations, nearly 90 percent of the people killed in airstrikes were not the intended targets.

  Senator Bernie Sanders recently said he would continue Obama’s disastrous drone program, which has resulted in the deaths of innocent people across the Middle East. In late August, Truthdig reported that Bernie Sanders told George Stephanopoulos he would continue the program.

  “I think we have to use drones very, very selectively and effectively. That has not always been the case.” Sanders said. “What you can argue is that there are times and places where drone attacks have been effective. … There are times and places where they have been absolutely countereffective and have caused more problems than they have solved. When you kill innocent people, the end result is that people in the region become anti-American who otherwise would not have been.”

  Sanders is absolutely right that killing innocent people fosters anti-American sentiment around the world (this makes his push for the civilian-killing Saudi military’s involvement in the fight against ISIS all the more puzzling). In 2014, the journal Dynamics of Asymmetric Conflict released two papers discussing the use of drones by the military and found an increasing number of Americans are against the use of drones on suspected terrorists in foreign countries. One paper notes that if drones continue to receive negative publicity within the United States and abroad, they may become “politically impractical.” The second paper asks whether drones are actually increasing the power of anti-U.S. protesters by gaining sympathy with the civilian population.

  According to the Bureau of Investigative Journalism, the CIA carried out 27 drone strikes in Pakistan during 2013, as well as 38 in Yemen — including the now infamous attack on December 12, 2013 that killed 15 people at a wedding. TBIJ estimates there have been over 2,400 deaths since Obama took over the drones. Since official numbers are not recorded, it is difficult to know exactly how many civilians have been killed under the U.S. drone program. However, Senator Lindsey Graham has estimated that 4,700 people have been killed.

  These numbers seem to line up with what the newest whistleblower has stated: “Anyone caught in the vicinity is guilty by association,” the whistleblower told The Intercept. When “a drone strike kills more than one person, there is no guarantee that those persons deserved their fate.”

  The whistleblower also stated that the program uses a phone number or email address to locate targets and is very unreliable. The source told The Intercept that drone bombings are carried out based on these phone numbers or emails and might not result in the death of the intended target.

  Many are quick to say that we are keeping American soldiers safe by using drone warfare, but we are learning that this war is not being fought with accurate intelligence or oversight. With all of this information readily available, how can Bernie Sanders continue to support this drone program?

  *  *  *

  These are my five questions for supporters of Senator Bernie Sanders’ presidential campaign. I hope some of you made it this far and were willing to read and respond with respect and honesty. It is important to recognize that there is a growing number of Americans who no longer buy into the two-party system and do not trust anyone running within those parties. Rather than voting for a new leader every four years, these radicals focus on creating solutions built on voluntary association and mutual aid rather than government force. Remember, not everyone is an idiot, a Republican, or an apathetic sheeple. Some of us simply disagree with Bernie’s economics and solutions.

  Personally, I recommend each of you begin researching agorism and seeking solutions outside of the ballot box.

  

  

  

  

  

• Individualism Vs Sacrificial Collectivism

  Submitted by Richard Ebeling via EpicTimes.com,

  Free, competitive markets have been the engine for both freedom and prosperity. In addition, free market capitalism is morally based on the principle of individual rights to life, liberty and honestly acquired property, in which all social relationships require the voluntary and mutual consent of the participants.

  Private property rights are central to the free society. The most fundamental private property right is the right of each person to own himself – his mind, his body, his peaceful actions, and the fruits of his efforts either on his own or in interaction with others.

  The opposite of owning yourself is slavery. Under a slave system some individuals assert the right to own and control the actions of others under the threat or use of force. The slave lives and works for and obeys the commands of another human being with violence the ultimate instrument of control.

  Slavery in All Forms is the Opposite of Freedom

  For the friend of freedom, it does not matter whether the slave-master is one private individual on his own, or a private group or gang imposing their coercive rule on a number of others in society. Nor does it matter if the group is a political collective that imposes its will on another segment of the society based upon a “democratic” decision-making process.

  Regardless of the institutional circumstance and situation under which one person is made to live and work (completely or partly) for another, it remains a total or partial restraint on the individual’s right to live his own life as he sees fit for the purposes that he considers of value and of importance so he may give meaning and possible happiness to his existence.

  Critics of this “individualistic” understanding of freedom and its opposite often brand such a perspective as “selfish” or “egotistical.” If to say that an individual should be treated and respected as an end in himself and not the compelled pawn or a tool to serve the ends of another is selfish or egotistical, then the very definition of liberty – if liberty is to mean anything – cannot be separated from the person’s right to be self-oriented.

  

  Collectivist Confusions and Misconceptions

  There is no collective mind, or body, or purpose. The fact is, the world is comprised only of individuals. What often causes confusions and misconceptions is that individuals are born into families, grow up in communities, and live their lives in arenas of societal interaction and association.

  And due to this many of the beliefs, values, and purposes we hold as individuals have been taken as our own from the surrounding people, groups, and communities of others with whom we have grown into adulthood.

  We find ourselves holding many of the same beliefs, values and purposes as many of the others around us. They are the commonly shared and taken-for-granted ideas, ideals, attitudes, and presumptions about “the way things work” and how things are or supposed to be.

  Yet, nonetheless, unless and until those beliefs, values and purposes become accepted and motivating for each and every individual influenced by them, they have no effect or power over him.

  These beliefs, values and purposes seem to be outside and independent of ourselves, with a seeming life and reality of their own; an transcendent entity of some sort that defines who and what we are, and outside of which our individual life seems to have neither existence nor meaningful orientation.

  Philosophers have referred to this as the “fallacy of misplaced concreteness.” To assign physical or some other objective reality to an idea or concept that is used to categorize or classify a series of beliefs, attitudes, or other characteristics that a group of individuals are postulated as possessing in common and which are then is used to define who and what those individuals are, and outside of which those people have no real existence.

  Soviet Collectivism and Social Class-Based Sacrifice

  If this seems rather abstract or amorphous, the seeming reality of such a transcendent collective entity into which we are born and live out our lives, and for which we are expected to serve and sacrifice has been used as the basis for some of the most manipulative and brutal ideologies of our times.

  Marxian socialism conjured up the image of everyone in society divided into “social classes” defined by whether they privately owned the means or production or sold their labor services to those private owners. It was insisted that these two “classes” of people were in irreconcilable antagonism and conflict with each other over the control and use of the land, resources and capital equipment without which needed and desired goods and services cannot be produced.

  In this Marxian world, the property-owning capitalists were the exploiters of the workers, who were deprived of part of what they produced. The Marxian socialists portrayed the human condition under capitalism as a great morality play between the exploited and the exploiters.

  By definition, anyone in the other “social class” was an inescapable “enemy” of everyone one in your own social class. The Marxian ideologues leading the socialist revolutions of the twentieth century often viewed themselves as, or at least took on the public mantle of appearing to be, secular prophets bearing sword and fire to cleanse the world of the exploiters denying “social justice” to the greater part of humanity.

  To cleanse the world not only were tens of millions condemned to death through execution, torture, slave labor, or starvation, but also all members of the righteous “workers’ class” had the obligation to live, work and obey the revolutionary leaders claiming to speak for the good of “humanity” as a whole.

  To not do so, to not sacrifice, work, and live for the socialist collective was a sign that one was a “wrecker,” an “enemy of the people,” or an agent of the “class enemies” trying to undermine or destroy the great socialist revolutionary cause. (See my article, “The Human Cost of Socialism in Power.”)

  

  Nazi Collectivism and Race-Based Sacrifice

  The other great and destructive twentieth century manifestation of this fallacy of misplaced concreteness was the racial ideology of the National Socialist (Nazi) movement in Germany. Human identity as a biological and social being was determined by one’s genetic make-up, with the defining characteristic of who and what you were being based on “the blood” that flowed in your veins.

  Nazism was an outgrowth of the eugenics movement that asserted that what a person is, was dictated by their genetic make-up. But this was not only a matter of the physical characteristics that one inherited from one’s ancestors through one’s parents. No, it was claimed that genetics also was a, if not “the,” defining basis of personality and behavioral proclivities.

  Thus, whether one was prone to be a murderer or a malcontent or a moocher on others could be predicted by one’s biological ancestry. Thus, the “sins” of the father and the mother could be predicted to fall upon the children through genetic transmission. The conclusion was that the spreading of the “bad seed” to future generations could be contained through compulsory sterilization and through managed sexual bleeding to create a biologically and socially superior human type. (See my article, “The Nazi Connection.”)

  Hitler and the National Socialists defined “the Germans” as the superior and “master” race in physical, mental and social characteristics; they then proceeded to classify all other “races” in descending order of “purity.” Of course, the “Jews” were placed at the lowest level, as sub-humans portrayed as vermin and rats threatening to biologically and socially undermine and destroy German genetic superiority through interbreeding and social penetration of German society.

  In the name of racial purity and protection, all those that the National Socialists classified as “Jews” had to be eliminated. Both German and Jew was defined and identified by pseudo-biological characteristics – the shape of one’s nose, the slope and size of one’s forehead or earlobes, the religion of one’s ancestors as indication of one’s genetic inheritance, and one’s attitude and allegiance and loyalty to the Nazi ideology.

  Six million Jews, three million Poles, half a million Gypsies, over ten million Russians and Ukrainians and Byelorussians, were sacrificed at the altar of Nazi racial collectivism. Plus hundreds of thousands of others who fell under Nazi control during the war.

  But neither were racially pure Germans exempt from the commanded sacrifice. As the Second World War was reaching its end in Europe in April 1945, Hitler said to Albert Speer, his favorite prewar architect and wartime Minister of Munitions, that if the Germans lost the war they will have failed their “fuhrer,” and had shown their racial inferiority in comparison to the victor to the East (the Russians); the German people will have forfeited their right to exist and should perish in the rubble and ashes of the aftermath of the war.

  If Soviet collectivism is estimated to have required the sacrifice of upwards of 68 million lives to build the “bright future” of Marxian socialism, and if Nazi collectivism imposed the sacrifice of as many as 25 million lives in the name of pursuing a racially pure, German-dominated Europe, we continue to see the effects of the fallacy of misplaced concreteness in our contemporary world today.

  

  Islamic Collectivism and Faith-Based Sacrifice

  The world has been seeing the return of violent religious fanaticism in the form of Islamic extremism. It has been captured in the imagery from the Middle East in the form of the Islamic State, though it is certainly not confined to this one variation of religious collectivism.

  Are you Muslim or are you not? Do you follow the asserted correct reading of the Koran, or not? Are you willing to kill and die in pursuit of the earthly fulfillment of God’s will and purpose?

  All non-believers are to be either converted or threatened with death in a multiple of cruel and brutal forms – thrown off a rooftop, beheaded on social media, burned alive in a cage, or shot in acts of mass execution with the victims thrown into rivers until the water runs red. Or forced into slavery for compulsory labor and/or sexual abuse.

  And if you are a “believer” it has to be the right belief system of ideas, practices, and rituals within the Islamic faith, otherwise one is condemned to the same fate as the infidel, the non-believer.

  The Islamic collectivism of religious sacrifice requires not only the non-believer to forfeit his life if he does not accept, believe and follow the “true” faith, the believer must rigidly limit his life to the practice and performance of all that is expected and demanded from a member of the community of Islam.

  The individual has no right to live, act, or believe other than what the voices who claim to speak for God declare to be the path to righteousness in this life and after. The individual’s mind and body have no existence outside of the prescriptions of Islamic dogma; one is a human cog in the cosmic wheel of God’s purpose as God’s voices on earth dictate your place in the greater and higher cause of the “pure” faith.

  In all of these variations on the collectivist theme, the individual is considered “selfish” or “egotistical” if he refuses to accept and act within the confines of the group identity that others conceptually impose on the world and to which he is demanded and commanded to conform under threat of punishment for refusing to sacrifice for a purpose or cause not of his own making or acceptance.

  Individualism the Enemy of All Forms of Collectivism

  This is why all forms of collectivism – philosophical, religious, political, or economic – reject and condemn all philosophies of political and economic individualism. Philosophical individualism argues that “society” – any formed and continued association of people for shared or mutually advantageous purposes – does not exist and does not have a reality independent of, or separate from, the individual human beings who comprise the participants in these associative relationships.

  Political individualism insists that nations and states do not have an existence independent from or superior to the individuals who may be members of a particular nation-state. The purpose of the political authority is to secure and protect each individual’s right to his life, liberty and honestly acquired property (i.e., property acquired through peaceful production and voluntary exchange).

  Government’s purpose is not to make the individual a slave or a sacrificial animal to some declared “higher cause,” because there are no higher causes separate from the purposes, values and goals that individuals choose for themselves and non-violently pursues through their actions and interactions with others.

  Economic individualism emphasizes that production, work, and creative and innovative entrepreneurial discovery are the results of individual effort and imagination. The “nation,” the “society,” does not produce, work or create. Individual human beings do these things and they do not happen separate from these individual actions and activities.

  Economic individualism explains that order and coordination of the actions of multitudes of tens of millions of people do not required government central command or regulatory dictation or direction. From the time of Adam Smith, economic individualists have shown that a system of individual rights, voluntary exchange, and associative interdependence through division of labor – what Adam Smith called a “system of natural liberty” – brings about self-interested incentives and opportunities for individuals to mutually improve their own lives through a network of trades and transactions that rebounds to the benefit of all, without the imposed and compulsory political hand of governmental control.

  Philosophical, political and economic individualism, rightly understood, is the ethical and practical bulwark against collectivism and its demands for compulsory sacrifice for imaginary “higher goods” or “greater causes” that justify the denial or reduction of human freedom to the limits of what the collectivist controllers permit.

  The philosophy of individualism is the foundation of a free society; it is the basis of a community of men that does not require or demand the sacrifice or enslavement of some for the one-sided benefits of others. Individualism is the premise of a morality for mankind that recognizes and respects the liberty and dignity of every human being. It is the ethical philosophy of freedom.

   

  

  

  

  

  

• Overstock Holds 3 Months Of Food, $10 Million In Gold For Employees In Preparation For The Next Collapse

  Overstock CEO Patrick Byrne’s crusade against naked short sellers in particular, and Wall Street and the Federal Reserve in general, has long been known and thoroughly documented (most recently with his push to use blockchain technology to revolutionize the multi-trillion repo market).

  But little did we know that Overstock’s Chairman Jonathan Johnson is as vocal an opponent of the fiat system, and Wall Street’s tendency to create bubble after bubble, if not more than Byrne himself.  That, and that his company actually puts its money where its gold-backed money is and in preparation for the next upcoming crash, has taken unprecedented steps to prepare for what comes next.

  One week ago Johnson, who is also candidate for Utah governor, spoke at the United Precious Metals Association, or UPMA, which we first profiled a month ago, and which takes advantage of Utah’s special status allowing the it to use gold as legal tender, offering gold and silver-backed accounts. As a reminder, the UPMA takes Federal Reserve Notes (or paper dollars) which it then translates into golden dollars (or silver). The golden dollars are based off the $50 one ounce gold coins produced by the Treasury of The United States. They are legal tender under the law and are protected as such.

  What did Johnson tell the UPMA? Here are some choice quotes:

  We are not big fans of Wall Street and we don’t trust them. We foresaw the financial crisis, we fought against the financial crisis that happened in 2008; we don’t trust the banks still and we foresee that with QE3, and QE4 and QE n that at some point there is going to be another significant financial crisis.

   

  So what do we do as a business so that we would be prepared when that happens. One thing that we do that is fairly unique: we have about $10 million in gold, mostly the small button-sized coins, that we keep outside of the banking system. We expect that when there is a financial crisis there will be a banking holiday. I don’t know if it will be 2 days, or 2 weeks, or 2 months. We have $10 million in gold and silver in denominations small enough that we can use for payroll. We want to be able to keep our employees paid, safe and our site up and running during a financial crisis.

   

  We also happen to have three months of food supply for every employee that we can live on.

  The contents of the rest of his speech are largely familiar to advocates of sound money: fiat paper has no value, solid gold – as both a currency and an asset – has tremendous value but is difficult to transport (and since a systemic collapse would certainly involve gold confiscation, portability would be an issue); gold-backed money may be the best option, and so on.

  We are confident the echo-chamber of worthless econohacks and macrotourists, the same ones who were absolutely certain the great financial crisis will never happen, will be quick to mock “prepper” Johnson and Wall Street pariah Overstock. And they have every right to do so. We only hope that after the next crash, with central banks all in and when calls for another global bailout hit a fever pitch, that all those pundits who made fun of the Johnsons of the world, will keep their damn mouth shut.

  

  

  

  

  

• Things Fall Apart

  Originally posted at EconomicNoise.com,

  “Things fall apart” is an apt sub-title for historians to apply to the first half of the 21st century. The phrase properly describes the collapse of the domestic and foreign policy of the United States. Further, it also is appropriate to describe the happenings in Europe, the Middle East and Asia.

  

  Things fall apart describes the economy of every developed nation and the balance of power that the world has known since the end of World War II.

  The powers that be have lost control. After almost a century of playing the Wizard of Oz, the curtain is disintegrating. Institutions to ensure control, stability and prosperity are failing. People and markets were not to be trusted and most of these institutions were established to protect against such freedom. Bureaucrats, central planners and big governments were to be the answers for a better world.

  The damage of nearly a century of this nonsense is suddenly becoming evident. Things fall apart is characterized by institutions that no longer are trusted or believed in. Few institutions are seen to work and when they do they are increasingly seen as favoring the elites at the expense of the masses. No institution is under greater scrutiny as the cloak of wisdom is being destroyed by the hard facts of reality is that of central banking, the corner piece of socialism even at the height of the Thatcher–Reagan movement back toward markets. The Daily Bell writes about the US Federal Reserve, although other central banks are incurring similar doubts and distrust:

  Things Fall Apart Around Janet Yellen

  By Daily Bell Staff – October 16, 2015

  

   

  Fed policymakers downplay divisions on U.S. rate hike … Federal Reserve policymakers are not as divided as it may appear and are generally operating under the same framework for determining when to raise interest rates, one Fed official said on Thursday, while another said the differences of opinion reflect the countervailing economic data. Many Fed watchers are exasperated by the mixed messages from the U.S. central bank in recent weeks. Fed Chair Janet Yellen and other officials have said they expect a rate hike will be needed by the end of this year, but two Fed governors this week urged caution. – Reuters

   

  Dominant Social Theme: Everything is OK. Janet Yellen is OK. The Fed is OK. Inflation is OK. The data is OK. It’s OK, man!

   

  Free-Market Analysis: But maybe it’s not … Of course the mainstream media – as represented above by Reuters – is going to emphasize the normalcy of the process. There should be no doubt that the Federal Reserve has weathered worse crises and as soon as the numbers prove out one way or another, Fed officials will figure out the next move.

   

  On the other hand, maybe, just maybe, we are seeing the final days of the Fed as a credible institution. Often in autocratic societies, power centers become dysfunctional long before they are retired or crumble into dust and blow away. This is part of how a society dies – when the people abandon the institutions in which they are supposed to believe.

   

  So the Fed’s quandary is a serious one. Nobody is going to shut the place down, certainly not right away, but once credibility has leaked away what’s left? Big buildings, gilt furniture … and a dying mythology that adherents have abandoned.

   

  This is the Fed’s REAL danger. Its painfully-won credibility – the product of a vast, intergenerational campaign of intimidation, bribery and misinformation – is beginning to crumble in earnest. It is harder and harder to insist with any seriousness that a few good, gray men in expensive surroundings can figure out the direction and value of money for a US$15 trillion economy.

   

  They will keep insisting, of course. Mainstream mouthpieces like Reuters will quote higher-up Fed officials with the seriousness one associates with oracular statements from the Pantheon of the Gods. See here:

   

  New York Fed President William Dudley, who repeated his view that a rate hike was likely by year’s end … downplayed the differences that existed among officials. “At the end of the day people are exaggerating” the divisions, Dudley said in response to a question after a panel presentation in Washington on Thursday. “We are all pretty much on the same page.”

   

  In fact, Dudley can’t seem to keep track of his own statements. CNBC recently featured an article with the headline, “Fed’s Dudley: The economy may be slowing.” The article quoted Dudley as admitting that recent data suggest the economy is slowing – and certainly this conclusion would lead one to surmise that rate hikes are off the table, at least for this year.

   

  The same article mentioned a Fed report claiming that US labor markets were “tightening.” One wonders if the data was collected before or after Walmart announced hundreds of layoffs at its Arkansas headquarters.

   

  Perhaps iconoclastic, libertarian trend-follower Gerald Celente has a more accurate perspective on the Fed. In an article posted at LewRockwell.com and entitled, “Is the Fed Lying, or Not Telling The Truth?” Celente points out that the “expectation on the Street, based on the Fed’s bullish growth, inflation and equity market forecasts, was for the first round of interest rate hikes to begin by mid 2015.”

   

  He then goes on to observe, “The Fed was wrong. The Street was wrong.”

   

  And Celente does us the favor of unwrapping what just happened in mid-September when the Fed blinked once again.

   

  Faced with plunging commodity prices, plummeting currencies, battered equity markets and a global deflationary cycle, the FOMC, concerned that China’s economy was slowing and the global economy risked falling into recession, did not raise interest rates.

   

  But just one week later the story changed. The reason not to raise rates was no longer the reason. Instead, a rate hike was on the near horizon.

   

  Fed Chairwoman Janet Yellen, speaking at the University of Massachusetts, signaled that the Fed may raise rates before year’s end, because inflation was set to rise and the Fed “is monitoring developments abroad, but we do not anticipate the effects of these recent developments to have a significant effect.”

   

  It doesn’t end here. On October 8, FOMC minutes were released and showed clearly that the committee was “deeply concerned” over volatile market indexes. “Over the intermeeting period, the concerns about global economic growth and turbulence in financial markets led to greater uncertainty among market participants about the likely timing of the start of normalization of the stance of U.S. monetary policy,” the minutes stated.

   

  Celente has encapsulated the credibility problem that the Fed faces. Central bank officials were quite certain that rates would be raised in 2015. But the year is almost over and the Fed hasn’t acted. When rates remained static, after the September meeting, Fed officials let it be known that the Chinese market meltdown had stayed their hands.

   

  A week later, Yellen was once more stating that a rate hike loomed. Meanwhile, FOMC minutes explain that the prospect of a rate hike spooked officials who anticipated that even a minuscule hike could lead to considerable market “turbulence.”

   

  After summarizing all this, Gerald Celente writes the following:

   

  Is the Fed afraid to do anything considering the possible implications of raising rates at a time of “concerns about global economic growth and turbulence in financial markets,” thus the mixed messages? Or is this just another round of Fed ineptness?

   

  Celente then answers his questions by suggesting that Fed officials really do not know what to do. And perhaps due to this miasma of doubt, Celente is sticking to his forecast for a “major equity market correction by year’s end.”

   

  Our conclusion would be a bit broader than Gerald Celente’s. Regardless of what the Fed does or doesn’t do, and regardless of the reasons for it, the ineptness that the Fed is showing is incredibly damaging to the institution. Policymakers are giving virtually contradictory statements and as Celente has shown us, even the justifications for Fed actions change from week to week.

   

  Recently we wrote the Fed’s dithering may be purposeful. The idea is to act paralyzed while the market sells off piecemeal, allowing the Fed eventually to raise rates without a market “event.” But even this speculation doesn’t take the Fed off the proverbial hook. People are going to be angry regardless, as this upcoming recession – really a continuation of the 2008-2009 slump – is simply too much to bear.

   

  The dotcom disaster of 2001, the subprime bubble that ate the world’s economy only seven years later and now a further looming “recession” that comes on the heels of a Great Recession that never dissipated is a concatenation of disasters that will undermine the Fed in ways that the enemies of central banks have never been able to do in the modern era.

  People don’t necessarily believe what they read, but they do trust their own eyes, ears and bellies. Whether the Fed hikes or doesn’t hike at this point is almost immaterial. The plot itself has been mislaid and the ramifications will haunt the Fed as its reputation unravels.

   

  This is serious business. Without speculating on the “whys,” one can certainly anticipate that a crisis of confidence in the monetary system will create uncertainty about the dollar and about the sustainability of Western economies generally.

   

  This is not to say that markets will inevitably crack asunder. There may be several more boom years as central banks do everything they can to raise the averages and sustain the appearance of prosperity. But at some point, a creeping crisis of confidence will begin to destroy what’s left of middle-class wealth and prosperity in ways central bankers can’t counteract because they will be seen as primary instigators of the problem.

   

  

  

  

  

  

• The Fed's Inconvenient Truth (In 1 Hope-Crushing Chart)

  Year after year, economic growth collapses from “hope” to “nope.”

  
  

  

   

  The question we are surprised everyone is not asking is, after 6 years of experimental extreme monetary policy that is utterly failing to create anything like escape velocity, isn’t The Fed’s inconvenient truth that they are impotent (as opposed to omnipotent) at anything other than financial asset inflation and the transitory mirage of wealth creation?

   

  Charts: Bloomberg

  

  

  

  

  

• Putting China's "6.9% GDP Growth" In Context

  By Michael Lebowtiz of 720Global

  Mirage

  In our latest article, “China Growth – Miracle or Mirage” published October 20, 2015, we questioned whether China’s perfectly forecasted and uniquely steady economic growth is a mirage. On Friday morning, following Chinese Premiere Li’s comment that growth was still in a “reasonable range”, China’s central bank (PBoC) proceeded to cut interest rates as well as the required deposit reserve ratio for major banks. The language of the Premier and the actions of the PBoC are contradictory. Their actions in conjunction with their words offer even more evidence to believe reported growth is a mirage and the correct answer to the question.

  This postscript offers a series of facts and recent economic data to lend further context toward determining whether China’s growth is, in fact, a miracle or a mirage. Before viewing the statistics below take a moment to consider the following: If China’s economy is in fact
  humming along at a “reasonable” 6.9% pace, then what is the logic and motivation behind aggressively easier monetary policy? Put another way, what don’t we know about the Chinese economy?

  Central Bank Actions

  • 1yr Benchmark Lending Rate: Since November 2014 China has cut their 1 year interest rate 6 times. Over this period the rate has been lowered from 5.60% to 4.35%
  • Required Deposit Reserve Ratio for Major Banks (determines amount of leverage banks can take and therefore the amount of loans they can make): Since February 2015 China has lowered it 4 times from 19.50% to 17.50%.
  • Renminbi: Since August China devalued their currency 2.8%

  Economic Statistics

  • China export trade: -8.8% year to date
  • China import trade: -17.6% year to date
  • China imports from Australia: -27.3% year over year
  • Industrial output crude steel: -3% year to date
  • Cement output: -3.2% year over year
  • Industrial output electricity: -3.1% year over year
  • China Manufacturing Purchasing Managers Index: 49.8 (below 50 is contractionary)
  • China Services Purchasing Managers Index: 50.5 (below 50 is contractionary)
  • Railway freight volume: -17.34% year over year
  • Electricity total energy consumption: -.20% year over year
  • Consumer price index (CPI): +1.6% year over year
  • Producer price index (PPI): -5.9% year over year, 43 consecutive months of declines
  • China hot rolled steel price index: -35.5% year to date
  • Fixed asset investment: +10.3% (averaged +23% 2009-2014)
  • Retail sales: +10.9% the slowest growth in 11 years
  • Shanghai Stock Exchange Composite Index: -30% since June

  Are these actions and statistics consistent with a country thought to be growing at 6.90% annually?

  

  

  

  

• "Colonel" Sanders' Communist Fried Chicken – It's Finger-Flippin' Good

  Free stuff? While Bernie is sincere about "helping people," as Ben Garrison notes, it's the middle class and poor will pay for it. 

   

  

   

  There's no such thing as a free lunch, but real freedom is worth preserving.

   

  Source: Ben Garrison

  

  

  

  

  

• Is America The Greatest Country In The World?

  Submitted by Simon Black via SovereignMan.com,

  I’m in New Haven today to attend the funeral of Irwin Schiff, who unfortunately passed away last weekend.

  If you’ve never heard of Irwin, he was one of the original “tax protestors”.

  He believed not only that paying federal income was unconstitutional, but actually went so far as to stop paying tax altogether.

  And he spent years of his life in prison as a result.

  Now, you may not agree with his philosophy or its legal basis.

  But I hope we can agree that keeping an 87-year old terminally ill cancer patient handcuffed to a hospital bed for failing to file taxes is a disgusting reflection of modern America.

  The fact that failing to file taxes is even a criminal matter at all in the Land of the Free is truly bizarre.

  In civilized countries, tax matters are precisely that– civil. They don’t throw people in prison with violent felons over something so trivial.

  But this has become the way of so many things in the Land of the Free.

  Aside from the most obscure violation of the US federal tax code, which goes on for thousands of pages, you can go to jail for violating any number of federal regulations, the sum of which could fill an entire football stadium.

  And that’s precisely the problem with this place.

  You see, I think the United States really is wonderful… with a huge caveat.

  America has some of the nicest malls in the world. There are so many quality brands and luxurious shops. The restaurants are fantastic with speedy, efficient service.

  You can buy the nicest cars models and live in big McMansions. All the latest technological gadgetry is available for sale at the big box retailer down the street.

  Street corners are dotted with gourmet coffee shops or convenient drug stores. And there are thousands of programs to watch on television at any given moment.

  Yes, the United States is one of the greatest places in the world… to be a consumer.

  If you want to shop, spend, and consume, the US is pretty damn near #1 in the world.

  But if you want to build. If you want to create. If you want to be a producer in the United States… it’s a whole different story.

  Just think about what it takes to start a business these days– there are permits, licenses, and regulations to follow, most of which you have probably never even heard of.

  Every single business day the federal government publishes hundreds of pages of new rules and regulations in what’s called the Federal Register.

  Today’s edition alone is a massive 815 pages.

  On Monday there will be several hundred pages more. And Tuesday. Wednesday. Etc. It never stops.

  Many of these rules come with severe penalties as well.

  Months ago we discovered that the Commerce Department was threatening people with a $25,000 fine and potential litigation simply for not filling out a survey.

  And on top of everything else are all the rules you have to deal with regarding employees, taxes, and now Obamacare.

  Oh, and that’s just at the Federal level. State and local governments add their own burdensome requirements as well.

  No one is immune. They even chase away little girls who dare to operate a lemonade stand without a permit. It’s unbelievable.

  And young people who try to become productive by going to university graduate with $30,000+ in debt that they’ll spend the next fifteen years paying down.

  Then there’s the additional hassle of dealing with the financial system; just getting a bank account open for a new business is now a major challenge.

  Banks force small businesses to jump through all sorts of ridiculous hoops to prove that they’re not money launderers, just for the privilege of depositing their money to earn 0% interest.

  What’s really ironic is that a consumer can walk into a bank and easily obtain a loan to buy a new car, or even a television.

  But you have basically no chance of obtaining a loan to start a new business or invest in a great company.

  These are all symptoms of the same problem. If you want to spend, borrow, and consume, America is fantastic.

  But if you want to save, invest, and produce, America is becoming more challenging every year.

  The Universal Law of Prosperity is very simple: produce MORE than you consume. And it applies equally to people, governments, and entire economies.

  In the US, and most of the West, everything in the system is designed for the exact opposite– rewarding consumption at the expense of production.

  And this is a massive problem that’s causing a major decline.

  Sure, you might have accumulated more ‘stuff’. But every year the West is less wealthy, and less free.

  Here’s the bad news: Your government can’t fix this. They’re a huge part of the reason this problem exists in the first place.

  And you can’t fix this yourself either. There is no grassroots campaign, no ‘get out the vote’ movement to get your nation back on track.

  But what you can do is take care of yourself. Make sure that, if this trend continues, you’re not going to be a victim of other people’s stupidity.

  Produce more than you consume. Safeguard your purchasing power. Protect what you’ve worked for. Diversify abroad. Invest wisely. Have a Plan B.

  In short, you can’t fix your country, or your government. Especially if the system is designed to make you less wealthy and less free.

  Because if you really want to be able to change something for the better, just make sure that no matter what happens, you’re always going to be in a position of strength.

  

  

  

  

  

• Fuku-zilla? Japan's TEPCO Discovers "Living Creature" Inside Nuclear Reactor

  After sending robots into the Fukushima nuclear reactor (and seeing them mysteriously die), perhaps this is the reason why Japanese officials have decided to re-start the building of a huge ice-wall for 'containment'. As Fukushima Diary reports, TEPCO’s camera caught a possible aquatic living creature in retained coolant water of Reactor 3.

   

  The following images are from the inside of PCV 3 (Primary Containment Vessel of Reactor 3). In their previous investigation, 1 Sv/h was detected above the water surface. Yellow-ish sediment was observed accumulating in the water as well.

  The possible living creature is recorded from approx. 0:19 of the video. It looks like aquatic microbe, which is independently swimming unlike other substances.

   

  The following GIF was edited by Fukushima Diary. It contains the zoomed (200% and 300%) parts to capture the creature more closely.
   

  *  *  *

  It may not look like much but with radiation flooding through its seemingly impervious body, who knows what happens next?

  

  

  

  

  

  

• Systemic Fragility & The Fed's "Hobson's Choice"

  Submitted by Doug Noland via The Credit Bubble Bulletin,

  More than two months have passed since the August “flash crash.” Fragilities illuminated during that bout of market turmoil still reverberate. Sure, global markets have rallied back strongly. Bullish news, analysis and sentiment have followed suit, as they do. The poor bears have again been bullied into submission, as the punchy bulls have somehow become further emboldened. The optimists are even more deeply convinced of U.S., Chinese and global resilience (the 2008 crisis “100-year flood” view). Fears of China, EM and global tumult were way overblown, they now contend. As anticipated, global officials remain in full control. All is rosy again, except for the fact that global central bankers behave as if they’re utterly terrified of something.

  The way I see it, underlying system fragility has become so acute that central bankers are convinced that they must now forcefully (“shock and awe,” “beat expectations,” etc.) react to any fledgling market “risk off” dynamic. Risk aversion and de-leveraging must not gather momentum. If fragilities are not thwarted early, they could easily unfold into something difficult to control. Such an outcome would risk a break in market confidence that central banks have everything well under control – faith that is now fully embedded in the pricing and structure for tens of Trillions of securities and hundreds of Trillions of associated derivatives – everywhere. With options at this point limited, the so-called “risk management” approach dictates that central banks err on the side of using their limited armaments forcibly and preemptively.

  With today’s extraordinary global backdrop in mind, I’m this week noting a few definitions of “Hobson’s Choice”:

  “An apparently free choice that actually offers no alternative.” (The American Heritage Dictionary of Idioms)

   

  “A situation in which it seems that you can choose between different things or actions, but there is really only one thing that you can take or do.” (Cambridge Idioms Dictionary)

   

  “No choice at all, take it or leave it.” (Endangered Phrases by Steven D. Price)

  There are subtleties in these definitions, just as there are subtleties in financial Bubbles. Importantly, over time Bubbles embody a degree of risk where they stealthily begin to dictate ongoing monetary accommodation. These days, global market Bubbles have reached the point where their message to central bankers is direct and unmistakable: “No choice at all, take it or leave it.” “Keep expanding monetary stimulus or it all comes crashing down – and that’s you Yellen, Draghi, Kuroda, PBOC – all of you…”

  As Ben Bernanke’s book tour lingers on, there are comments to add to the debate. From an interview with the Financial Times’ Martin Wolf:

  Wolf: “… We have to recognise that neither he nor the Fed expected the meltdown. Does the blame for these mistakes lie in pre-crisis monetary policy, particularly the targeting of inflation, with which he is closely associated? Had interest rates not been kept too low for too long in the early 2000s?”

   

  Bernanke: “The first part of a response is to ask whether monetary policy was, in fact, a major contributor to the housing bubble and all that happened. Serious studies that look at it don’t find that to be the case. People such as Bob Shiller [a Nobel laureate currently serving as a Sterling professor of economics at Yale University], who has a lot of credibility on this topic, says that: it wasn’t monetary policy at all; it came from a mania, a psychological phenomenon, that took off from the tech boom and moved into housing.”

   Mortgage Credit almost doubled in six years. Home prices inflated dramatically throughout much of the country, with prices about doubling in key markets (i.e. California). Egregious lending excess was conspicuous. Speculative excesses throughout ABS, MBS, GSE debt securities and mortgage-related derivates (i.e. CDOs) were only slightly less conspicuous.

  Why did the Fed fail to impose some monetary restraint (recall that Fed funds remained below 2% for several years of double-digit annual mortgage Credit growth)? Because they had (once again) badly missed their timing. A Bernanke-inspired policy course was determined to see reflationary measures gain robust momentum. The Fed believed that the benefits of prolonging aggressive accommodation greatly outweighed minimal risks (CPI and inflation expectations were contained!). Meanwhile, mortgage finance Bubble excess reached a scale where the Fed would not risk the un-reflationary consequences of piercing the Bubble. Financial and economic vulnerability were too acute for our central bank to take such institutional risk.

  Then, one might ask, why exactly had the Fed been so unwilling earlier in the cycle to restrain obviously overheating mortgage and housing marketplaces? This is a critical yet somehow completely neglected issue. Well, it’s because the Federal Reserve had specifically targeted mortgage Credit growth and housing inflation as the reflationary drivers for the post-technology Bubble recovery. Though apparently lost in history, manipulating mortgage Credit and housing markets were the primary (Bernanke’s “helicopter money”) mechanism for the Fed’s war against deflation risk.

  The Bubble was of the Fed’s making, and our central bank lost control. It became a Hobson’s Choice issue in the eyes of the Fed, and they fully accommodated the Bubble. Historical revisionism seeks to portray Bernanke as the hero that saved the world.

  These days, the Fed and global central bankers face a similar yet much more precarious Bubble Dynamic: The Fed specifically targeted higher securities market prices as its prevailing post-mortgage finance Bubble (“helicopter money”) reflationary mechanism. This ensured that the Fed would again be unwilling to impose any monetary restraint before it would then become too risky to remove accommodation (Einstein’s definition of insanity?). In concert, global central bankers now aggressively accommodate financial Bubbles.

  Global markets have the Yellen Fed petrified of even a little 25 bps baby-step nudge up from zero rates. Despite booming bond market Bubbles, a huge rise in stock prices, generally loose financial conditions and expanding economic recovery, the Draghi ECB Thursday signaled additional monetary stimulus would be forthcoming (above the current $60bn monthly QE and near-zero rates). Global markets were overjoyed. In the face of much trumpeted financial and economic stabilization, booming corporate debt markets and significant ongoing Credit growth, Chinese officials moved Friday to again cut lending rates and reserve ratios. Markets were more overjoyed.

  The halcyon days have returned. Powered by strong earnings from heavyweights Amazon, Microsoft and Google, the Nasdaq 100 (NDX) surged 4.2% this week. The NDX has now rallied 22% off August lows to within about a percent of all-time highs. The S&P500 gained 2.1% this week, closing just a couple percent below record highs. Bloomberg headline: “Junk Bond ETFs Break Monthly Flow Record With a Week to Spare.” And to be clear, that’s an inflow record.

  Friday morning from Bloomberg: “$100 Billion Rally Coming in Google, Microsoft, Amazon Shares.” Tech Bubble 2.0 is raging, fueled by the loosest financial conditions imaginable – spurred along by speculative market dynamics and a global industry arms race arguably on a much grander scale than that of the late-nineties. Friday evening from the New York Times: “America’s Heartland Feels a Chill From Collapsing Commodity Prices.” The impact from the faltering global Bubble is spreading. Fed Bubble accommodation ensured incredible wealth has been freely lavished upon Silicon Valley, exacerbating the issue of “the haves and have nots” locally, regionally, nationally and internationally.

  It’s certainly worth noting that market strength continues to narrow. The broader market this week badly lagged tech – especially big tech. In a financial management world desperate for relative performance, Fed-induced market rallies compel market participants to jump aboard the big outperformers. It’s exciting – dangerous late-cycle financial market dynamics.

  There is as well a powerful real economy dynamic at work. For the most part, the bull vs. bear argument has the economy either rather robust or on the cusp of recession. Most importantly, the U.S. economy is badly imbalanced. Segments and sectors are absolutely booming. Monetary policy is recklessly loose, with cheap liquidity apparently to fuel excess until Bubbles have finally run their course. Meanwhile, vast swaths of the economy suffer from structural stagnation, the aftermath of previous boom/bust episodes. Here, monetary accommodation has little impact. And this stagnation plays a major role in seemingly benign aggregate consumer inflation and economic output data.

  Yet when it comes monetary stimulus fueling Bubbles and exacerbating structural imbalances, the U.S. is overshadowed by China. Spurred by a surge in state-directed bank lending, total Credit (“total social financing”) jumped back over $200bn in September. There are also indications that post-stock market Bubble reflationary measures have pushed China’s corporate debt Bubble to only more precarious excess. While many contend that the Chinese economy, markets and currency have stabilized, I see it much more in terms of ongoing unsustainable Credit excess.

  Chinese officials missed their timing for reining in Bubble excess by years. It’s now a Hobson’s Choice of throwing everything at the faltering boom. Brief thoughts: The Chinese will need a couple Trillion (in U.S. dollars) of new Credit over the next year, then the year after and so on. Throwing enormous amounts of new Credit at a terribly maladjusted system will ensure epic maladjustment and a Credit Time Bomb. Normally, such dynamics ensure significant currency debasement. I would think in terms of a Credit and Currency Peg Time Bomb.

  October 18 – Financial Times (Gabriel Wildau): “It seems a long time ago that China was piling up foreign exchange reserves at a record pace as economists fretted about global imbalances from Beijing gobbling up US Treasury bonds. Now investors are wondering how long China’s dwindling forex reserves — down to $3.5tn from a peak of $4tn in June 2014 — can hold out. Capital is flowing out of China at a record pace and the central bank is drawing down reserves to support the renminbi after its recent dramatic fall. A lack of clarity over how China calculates its reserves and how much is readily available to deploy at short notice has intensified these concerns. As growth slows and bad debt rises, investors have viewed China’s massive forex pile… as the ultimate guarantor of financial stability. The prospect that reserves could be quickly exhausted raises doubts about the government’s ability to ward off crisis. It also limits the central bank’s ability to continue foreign exchange intervention, which may have cost as much as $200bn in August alone.”

  Thus far, markets have been incredibly tolerant of erratic Chinese policymaking. “We don’t care how you do it, just stabilize your markets and economy.” But at the end of the day, I see a lack of trust weighing on the Chinese currency. China’s Hobson’s Choice: aggressively inflate Credit or not. And this will put the currency at risk – the currency peg at risk. Currency controls, state-directed currency manipulation and derivatives to mask “capital” flight only increase the risk of financial accidents. Commodities and developed sovereign debt markets seem to confirm that China is not out of the woods.

  FT’s Wolf: “I ask him whether he is confident that the improvement in the resilience of the banks is adequate. ‘It’s a fool’s game to predict that everything is going to be fine, because either it is fine, in which case nobody remembers your prediction, or something happens, and then …’ They remember your prediction, I interject. Bernanke continues: ‘My mentor, Dale Jorgenson [of Harvard], used to say — and Larry Summers used to say this, too — that, ‘If you never miss a plane, you’re spending too much time in airports.’ If you absolutely rule out any possibility of any kind of financial crisis, then probably you’re reducing risk too much, in terms of the growth and innovation in the economy.’”

  Miss your plane and you reschedule a later flight. And the issue is certainly not ruling out “any possibility of any kind of financial crisis.” By now we should recognize that failed experimental monetary management was the leading culprit in the so-called “worst financial crisis since the Great Depression.” So what’s at risk today from much more egregious monetary experimentation? With runaway Bubbles at risk or faltering around the globe, central bankers are left with a choice of pushing ever forward with monetary inflation and market manipulation – or coming clean. Clearly they believe they have no choice at all.

  

  

  

  

  

• Here's What Happens When Central Banks Go Broke

  On Friday, in “Is Mario Draghi About To Go Full-Kuroda? RBS Says ECB Could Buy Stocks,” we took a closer look at what the ECB’s options are when it comes to implementing further easing measures come December. 

  As a reminder, Mario Draghi telegraphed either another depo rate cut, an expansion of PSPP, or both at Thursday’s ECB presser and now the market is keen to analyze the situation and determine not only what Goldman’s man in Europe is most likely to announce, but what the implications of his announcement are likely to be. 

  To be sure, further cuts to the depo rate will simply trigger a chain reaction whereby the Riksbank and the SNB will be forced to respond in kind, lest they should lose ground in the global currency war on the way to seeing their inflation targets threatened. This raises the spectre that NIRP may soon come to household deposits, something which, despite the proliferation of negative rates, hasn’t yet occurred. 

  As for the expansion of PSPP, we looked at a variety of options courtesy of RBS’ Alberto Gallo who notes that Draghi could end up buying corporate bonds, munis, equities, and even individual bank loans before it’s over. Here’s how we summed it up yesterday:

  In the end, all that will happen is the EMU’s neighbors will be forced further into NIRP and the ECB will end up with a nightmarish balance sheet full of stocks, corporate credit, munis, and God only knows what kind of loans purchased from banks, and all of which will have been bought at or near the top. That sets up the possibility that central banks could end up being forced to operate from a negative equity position. In other words: it sets up the possibility that they’ll technically go broke. 

  There’s been no shortage of coverage over the past several years regarding the idea that central banks can effectively go bankrupt.

  There are plenty of commentators who say that’s nonsense because after all, they control the printing press. Of course that argument suffers from the same defect as the argument that providing fiscal stimulus to an economy that isn’t acting the way you want it to is as simple as printing one liability (a government bond) and buying it from yourself with another liability you also print (fiat money). The common thread is this: if it were that simple, then we wouldn’t be having the conversation in the first place.

  If a central bank ends up in a negative equity position because the “assets” it purchased at nosebleed valuations decline in value, there are very real consequences both in terms of the ability to effectively conduct policy and in terms of optics. For more, we go back to RBS’ Alberto Gallo.

  *  *  *

  Via RBS

  What is the endgame of QE? Central bank balance sheets larger than GDP, potential losses or even negative equity capital. Large balance sheets can expose central banks to heavy losses. The SNB, for example, lost CHF52bn or 60% of equity in the first six months of the year, given unfavourable FX movements and price drops in its bond/equity holdings. As we discuss below, there are also other central banks that have accumulated losses and gone into negative equity in the past, including Chile, Czech Republic, Costa Rica and Jamaica. In theory, central banks can take losses and live with negative equity, as suggested by the SNB’s Vice Chairman Thomas Jordan in 2011. The example of the Czech Republic below also shows that central banks can sometimes grow out from negative equity through investment returns, over long periods of time. However, as suggested by the ECB, negative capital can limit central banks’ independence. A BIS paper also argues that significant losses could undermine their credibility, which has already been declining. 

  A history of central bank losses: towards the limits of balance sheet powers Central Banks could operate with negative net worth, but at the risk of affecting “the credibility of […] monetary policy” according to the ECB. The Chilean and Czech Central Bank are examples of central banks which have operated with negative net worth for a prolonged period (almost continuously since 1982, for Chile). However, while the Czech Central Bank has reduced their negative net worth due to good equity investments, Chile’s central bank has received two recapitalisations from the government since 1982. This dependence on the government brings into question the independence of central banks. The ECB have also previously said that negative net worth would “affect the credibility of the Eurosystem’s monetary policy”. 

  Negative capital could hinder central banks’ ability to meet their monetary targets. The central bank of Costa Rica suffered from losses for almost 20 consecutive years, leading it to a negative capital balance at the end of 2000. In fear of its balance sheet sustainability, the central bank chose not to lower their target rate of inflation. Jamaica is another example. Estimates show that in 1991 it had a negative net equity of USD 1.5bn. Large losses limited the policy instruments at the bank’s disposal. As a result, the country entered a stage of hyperinflation where CPI exceeded 80%. 

  Concerns about potential losses could also limit central banks’ policy flexibility. According to an IMF working paper, the market questioned whether Japan’s central bank could continue their purchases of government debt due to the risk of incurring substantial capital losses. According to the paper, because of these concerns, the monetary policy did not have the desired effect and failed to bring interest rates down to the desired levels. In January 2015, the SNB surprised markets by ending its Euro-buying programme because of concerns with Euro devaluation. But this change in monetary policy, which caused the Swiss Franc to strengthen, has also hurt Swiss exports (-3.8% YoY in September). 

  

  *  *  * 

  So, far from being some trivial problem that can be fixed by pressing “print”, central banks operating from a negative equity position face the possibility of i) losing their independence as they have to be recapitalized at the behest of the government, ii) being forced into policy decisions (or, perhaps more appropriately “in”decisions) that they might not otherwise make, and iii) losing the ability to control the narrative, thus heightening market concerns about the loss of omnipotence (or, in Haruhiko Kuroda’s words, a failure to believe in Peter Pan).

  Also bear in mind that the more focus there is on central banks, the more scrutinized their balance sheets will be. Of course one cannot mark an equity portfolio “held to maturity”, which begs the question of what happens when central banks that have bought stocks begin to incur losses. Will they simply print more money to buy more stocks in order to prop up their portfolios in a never-ending loop? 

  In any event, what the above underscores is that in short order we may move beyond the merely theoretical idea that central banks have “lost credibility” with market participants into a world where there is demonstrable, quantitative evidence that the emperors have no clothes.

  

  

  

  

  

• Another Government Ponzi Scheme Starts To Crack – Do You Depend On It?

  Submitted by Nick Giamburino of International Man

  Another Government Ponzi Scheme Starts to Crack – Do You Depend on It?

  Government employees get to do a lot of things that would land an ordinary citizen in prison.

  For example, it’s legal for them to threaten and commit offensive, rather than defensive, violence. They can take property from others without their consent. They spy on anyone’s email and bank accounts whenever they please. They go into trillions of dollars in debt and then stick the unborn with the bill. They counterfeit the currency. They lie with misleading statistics and use accounting wizardry no business could get away. And this just scratches the surface…

  The U.S. government also gets to run a special type of Ponzi scheme.

  According to the Merriam-Webster dictionary a Ponzi scheme is:

  [A]n investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.

  In the private sector, people who run Ponzi schemes are rightly punished for their fraud. But when the government runs a Ponzi scheme, something very different happens.

  It’s no secret that the Social Security system is effectively one giant Ponzi scheme.

  Actually, I think it’s worse. That’s because the government uses force and the threat of force to coerce people into it. People don’t have the option to opt out. They either pay the tax for Social Security or someone with a gun will show up sooner or later. I imagine Bernie Madoff’s firm would have lasted a lot longer had he been able to operate this way.

  This whole practice is particularly egregious for young people. They have no chance at collecting the future benefits the government has promised to them. But they’re hardly the only people that are going to be disappointed in the system, which will eventually break down.

  There are simply too many people cashing out at the top and not enough people paying in… even with the government’s coercion. That’s a function of demographics, but also the economic reality in which there are fewer people with quality jobs for the government to sink its fangs into. I expect both of those trends to increase and strain the system.

  Actually, it’s already starting to happen.

  Recently, the government announced that there would be no Social Security benefit increase next year. That’s only happened twice before in the past 40 years.

  You see, the government links Social Security benefit increases to their own measure of inflation. If the government says “no inflation” then there are no benefit increases. It’s like letting a student grade his own paper.

  So it’s no surprise that the official definition of inflation is not reflective of the real increases in the costs of living most people feel.

  Medical care costs are skyrocketing. Rent and food prices are reaching record highs in many areas. Electricity and utility costs are soaring. Taxes, of course, are going nowhere but up.

  But the government says there’s no shred of inflation. In actuality, it amounts to a stealth decrease in benefits.

  One reason for this is that they constantly change the way they calculate inflation so as to understate it. Free market analysts have long documented this sham. If you take a global view, it’s easy to see that fudging official inflation statistics is standard operating procedure for most governments.

  Incidentally, governments and the financial media don’t even understand what inflation is in the first place.

  To them, inflation means an increase in prices. But that is not at all how the word was originally used. Inflation initially meant an increase in the supply of money and nothing else. Rising prices were a consequent of inflation, not inflation itself.

  It’s not being overly fussy to insist on the word’s proper usage. It’s actually an important distinction. The perversion of its usage has only helped proponents of big government. To use “inflation” to mean a rise in prices confuses cause and effect. More importantly, it also deflects attention away from the real source of the problem…central bank money printing.

  And that problem shows no signs of abating. In fact, I think the opposite is the case. The money printing is just getting started.

  At least this is what we should prudently expect as long as the U.S. government needs to finance its astronomical spending, fueled by welfare and warfare policies.

  As long as the government spends money, it will find some way to make you pay for it – either through direct taxation, money printing, or debt (which represents deferred taxation/money printing).

  It’s as simple as that.

  

  

  

  

  

• Haunting Drone Footage Captures Syrian Destruction In Stunning High-Def

  There’s one silver lining to Europe’s worsening migrant crisis: it ensures that the human toll from Syria’s protracted civil war doesn’t get lost in the fog of Russian battlefield glory. 

  Regardless of your stance on whether the EU should be receptive to the millions of asylum seekers fleeing the war-torn Mid-East, the simple fact is that if you remain in Syria, you are risking your life on a daily basis, caught in the crossfire between a bewildering array of state actors, rebel groups, and proxy armies, all with competing agendas. 

  Now that Russia and Iran have taken control of the situation (and that’s not an effort to parrot some pro-Kremlin propaganda line, it’s just a realistic assessment of the facts), it’s tempting to focus squarely on the near daily videos of Moscow’s warplanes decimating targets and on the various social media depictions of Iranian generals rallying Shiite fighters ahead of what’s been billed as the “promised” battle for Aleppo.

  In other words, one could be forgiven for being swept up in the glory of the battle while forgetting that the entire debacle (which the US and its regional allies facilitated) has cost the country both its population and its cultural heritage as both have been destroyed by nearly five years of war. 

  With that in mind, we bring you two haunting videos produced by frontline journalists from Rossiya 24 news channel.

  They are at once breathtaking and tragic (they’re set to music, but you can always mute that) and serve to underscore just how devastating this conflict has ultimately been.

  In the same vein, we close with a few searing images from Aleppo ca. 2012:

  

  

  

  

  

  

  

  

• America – In Search Of A Cause?

  Submitted by Patrick Buchanan via Buchanan.org,

  “If the Cold War is over, what’s the point of being an American?” said Rabbit Angstrom, the protagonist of the John Updike novels.

  A haunting remark, since, for 40 years, America was largely united on the proposition that our survival depended upon our victory over communism in the Cold War.

  We had a cause then. By and large, we stood together through the crises in the first decades of that Cold War — the Berlin blockade, Stalin’s atom bomb and the fall of China to Mao, the Korean War, the Hungarian revolution, the Cuban missile crisis, and on into Vietnam.

  We accepted the conscription of our young men. We accepted wars in Asia, and, if need be, in Europe, to check the Soviet Empire.

  Vietnam sundered that unity.

  By 1967, the Gene McCarthy-Robert Kennedy wing of the Democratic Party had broken with the Cold War consensus. “We have gotten over our inordinate fear of communism,” said Jimmy Carter.

  The Reagan Republicans and George H. W. Bush would pick up the torch and lead the nation to victory in the last decade of that Cold War that had been a defining cause of the American nation.

  But when it was over in 1990, America was suddenly at a loss for a new cause to live for, fight for and, if need be, see its sons die for.

  Bush 1, after leading a coalition that drove Saddam Hussein out of Kuwait, declared that America’s cause would be the building of a “New World Order.” But few Americans bought in.

  Sixteen months after his victory parade up Constitution Avenue, after Bush had reached 90 percent approval, 62 percent of his country’s electorate voted to replace him with Bill Clinton or Ross Perot.

  Clinton pursued liberal interventionism in the Balkans, leading to 78 days of bombing Serbia, and he regretted not intervening in Rwanda to halt the genocide.

  George W. Bush promised a “humble” foreign policy. But 9/11 put an end to that. After driving the Taliban from power and Osama Bin Laden out of Afghanistan, he declared that America’s new goal was preventing an “axis of evil” — Iraq, Iran, North Korea — from acquiring nuclear weapons. Then, Bush marched us up to Baghdad.

  The wars in Afghanistan and Iraq lasted years longer and cost far more in blood and treasure than Bush had anticipated.

  At the peak of his prestige, like Pope Urban II, Bush declared a global crusade for democracy.

  This ended like many of the crusades. Democratic elections were won by Hezbollah in Lebanon, Hamas in Gaza and, after the Arab Spring, the Muslim Brotherhood in Egypt.

  Barack Obama promised to end the Bush wars and bring the troops home. And he was rewarded with two terms by a country that has shown minimal enthusiasm for more wars in the Middle East.

  Obama is now openly mocking the McCainiacs.

  “Right now, if I was taking the advice of some of the members of Congress who holler all the time, we’d be in, like, seven wars right now,” he told a group of veterans and Gold Star mothers of slain U.S. soldiers.

  This reluctance to begin wars or intervene in wars — be it in Syria, Iraq, Iran, Ukraine — seems to comport with the wishes of the country. And this new reality raises serious questions.

  What is America’s cause today? What is our mission in the world? For what end, other than defending our citizens, vital interests and crucial allies, would we be willing to send a great army to fight — as we did in Korea, Vietnam, Kuwait, Iraq and Afghanistan?

  Are all the global causes of Bush I, Clinton, Bush II over?

  Where is the coherence, the consistency, of U.S. policy in the Middle East that should cause us to draw red lines, and fight if they are crossed?

  If our belief in democracy demands the ouster of the dictator Assad in Damascus, how can we ally with the theocratic monarchy in Riyadh, the Sunni king sitting atop a Shiite majority in Bahrain, and the Egyptian general on his throne in Cairo, who took power in a military coup against a democratically elected Muslim government?

  Other than supporting Israel, maintaining access to Gulf oil and resisting ISIS and al-Qaida, upon what do Americans agree?

  Henry Kissinger seeks a restoration of the crumbling strategic architecture. Neocons and interventionist liberals want to confront Russia and Iran. Reluctant interventionists like Obama, Donald Trump and Bernie Sanders think we should stay out of other wars there.

  “When a people is divided within itself about the conduct of its foreign relations, it is unable to agree on the determination of its true interests,” wrote Walter Lippmann at the climax of World War II:

  “Thus, its course in foreign policy depends, in Hamilton’s words, not on reflection and choice but on accident and force.”

  America is a nation divided, not only upon the means we should use to attain our ends in the world, but upon the ends themselves.

   

  

  

  

  

  

• The Three Things Goldman's Clients Were Most Worried About This Week

  Following the perfectly expected intervention of not one but two central banks last week, which came at just the right time to crush the last of the “weak hand” shorts (recall three weeks ago we reported that the NYSE Short Interest had hit the highest level since Lehman, when we said that a likely outcome is that “either a central bank intervenes, or a massive forced buy-in event occurs, and unleashes the mother of all short squeezes, sending the S&P500 to new all time highs”) the market extended on its best rally since 2011.

  However, the majority of the hedge fund community barely noticed this twofer of central bank generosity.

  The reason for this is that not only is the “smartest money in the room” suffering its worst year since 2011 (more on this later) even as the S&P500 finally went green for the year, but this is the week when public attention finally turned to what until recently had been one of the biggest hedge fund hotel darlings, aggressive pharma rollup Valeant. The attention was not good, and as insinuations of massive fraud spread, the stock cratered.

  The result: according to Goldman’s chief equity strategist, David Kostin (who recently lowered his year end S&P price target to 2000 or 75 below its Friday closing price, and who expects the S&P will trade at 2075 in 12 months time) the fate of Valeant was one of the three biggest concerns on Goldman’s (mostly hedge fund) clients’ minds for the past week.

  The other two: buybacks and Q3 results.

  Here is Kostin explaining why the market surge on the back of more central bank intervention may have been a Pyrrhic victory for those who were supposed to benefit the most from the recent rally: the hedge fund community which “unfortunately” owns roughly 22% of Valeant’s shares.

  From Goldman’s Kostin:

  Reflexivity in action: A case study in specialty pharma; total cash return outperforms

  This week’s 35% plunge in Valeant Pharmaceuticals (VRX) represents a classic example of reflexive behavior in financial markets as
  described by George Soros in The Alchemy of Finance. Eight Health Care stocks including ENDP (-18%) and AGN (-3%) are in our
  Hedge Fund VIP basket (GSTHHVIP) that was flat this week compared with a 2% rise in the S&P 500. Stocks with high cash returns to
  shareholders via dividends and buybacks (GSTHCASH) matched the market, rising by 2%. We welcome 24 new constituents into our
  rebalanced high cash return basket that has a P/E of 14.6x vs. 17.0x for median S&P 500 stock with twice the cash yield (10% vs. 5%).

  Three topics dominated our client discussions this week: (1) Hedge fund performance in the wake of the collapse in Valeant Pharmaceuticals (VRX) during the past five days and bear market in biotechnology stocks during last three months (Nasdaq Biotech Index is 21% below its July peak); (2) cash return to shareholders, especially buyback activity; and (3) 3Q results.

  The recursive relationship that George Soros memorably described in The Alchemy of Finance: Reading the Mind of the Market (1987) was in full evidence this week as VRX shares plunged by 35%. In the case of the equity market, reflexivity comes into play when some mechanism is triggered and participants’ bias shifts. Simply put, the so-called fundamentals that are supposed to determine market prices no longer matter. Instead, “market prices play a different role: They do not merely reflect the so-called fundamentals; they themselves become one of the fundamentals which shape the evolution of prices. This recursive relationship renders the evolution of prices indeterminate and the so-called equilibrium price irrelevant.” The classic example is equity leveraging in an M&A roll-up where the temporary overvaluation of shares is converted into high EPS growth which expands the P/E ratio and allows shares to be issued at inflated multiples to fund more acquisitions.

  

  Reflexivity changes the structure of future events and is significant in cases where the starting point is far from equilibrium. Our Specialty Pharmaceuticals equity research analyst Gary Nachman authored a report this week that looks at the disarray within the sector given new uncertainties and fears that have entered the narrative (see Framing the debate after a challenging day in spec pharma, October 22, 2015).

  Hedge funds are important to VRX and VRX is important to many hedge funds. First, hedge funds own roughly 22% of the firm’s shares, so investor sentiment and perceptions matter. Second, our Hedge Fund Trend Monitor indicates that 7% of fundamental hedge funds own shares in VRX with 5% owning it as a top 10 position. In those cases the average weight is 10% of the portfolio! Netflix (NFLX) and Kraft Heinz (KHC) are the only other stocks in our Hedge Fund VIP basket (GSTHHVIP) where funds owning the shares hold them with a double-digit average long portfolio weight.

  Allergan (AGN) ranks at the top of the list of stocks that “matter most” to long/short hedge fund performance. Shares fell by 3% this week. Fully 14% of all hedge funds own some AGN shares and 10% of funds have it as a top 10 position in which case the average weight is 6% of their long portfolio. Another specialty pharma firm in our basket, Endo International (ENDP), fell by 18% this week. However, a few important hedge fund holdings rallied this week including GM (+8%) AAPL (+7%), and Priceline (+2%) Our hedge fund VIP basket was flat this week versus a 2% rise in S&P 500.

  Companies seeking to return cash to shareholders have two choices: buybacks and dividends. Investors have clearly expressed their  preference in 2015 and the pattern has been consistent for decades: They prefer both! A portfolio of firms with high combined buyback and dividend yields has outperformed baskets of stocks emphasizing either one of the approaches.

  S&P 500 buyback announcements have jumped by 50% vs. last year to $521 billion. Examples include AAPL and GE ($50 billion each), WMT ($20 billion), and GOOGL ($5 billion). Nearly 25% of annual buybacks occur during November and December just after firms report 3Q results. History reveals that high total cash return stocks typically outperform when the buyback window is open. Most firms can repurchase shares starting in November.

  
  

  In an income-starved world, firms are also returning cash via dividends: 249 S&P 500 firms have raised their payouts YTD with a median hike of 10%. Dividends have comprised 70% of the annualized total return for US stocks since 1975 and 55% of the annualized return since 2000.

  Our sector-neutral basket of 50 stocks with the highest trailing 12 month total cash return yield has outperformed the S&P 500 YTD by
  almost 100 bp (3.4% vs. 2.5%). In contrast, firms with the highest buyback yield alone lagged the market by more than 250 bp (-0.3% vs. 2.5%). We continue to recommend our total cash return basket (GSTHCASH).

  We have re-balanced our high total cash return to shareholders basket. With 24 new companies, our 50-stock sector-neutral basket has a trailing 12-month total yield of 10.2% vs. 4.7% for the median S&P 500 stock. But the basket has a median P/E of 14.6x versus 17.0x for the median S&P 500 firm.

  New firms in our basket include LOW, NAVI, ABBV, PFE, CTAS, and LLL. We have also re-balanced our buyback basket composed of stocks with the highest trailing 12-month repurchase yields (GSTHREPO). Our 50-stock sector-neutral basket has 25 new constituents including NAVI, GILD, and MON. The median firm in the basket has a trailing 12-month buyback yield of 8.3% versus 2.5% for the S&P 500. See Exhibits 5-6 for constituents.

  We are 35% through 3Q earnings season and results have been mixed. Energy and Materials firms have generally disappointed while consumerfacing companies have posted better results.

  

  

  

  

  

• Has The Market Trend Shifted From Bull To Bear?

  Submitted by Brian Pretti via PeakProsperity.com,

  Emotions are running high for the investment community in the wake of recent market volatility. Up until August, we had been in the third longest period in market history without a 10% correction. Since then, stock indices sold off hard, only to bounce once again over the past two weeks of trading.

  As you’d guess, the generic punditry has been out in full force.  A good number of very well respected technicians are not mincing words: We've entered a bear market.  No equivocation.

  On the other side of the equation are plenty proclaiming a successful retest of the lows has been made, and now away we go.  Earnings will be better next year. No recession in sight. Just another dip to be bought, right?

  And certainly the truth is….No one knows. Especially in today’s world where global central banks can concoct further QE/monetary schemes at the drop of a hat.  Let’s face it, at this point the global central banks are all in. In fact, beyond all in. Without question, the US Fed knows that if equities fall, they lose the high end consumer. (Wal-Mart shoppers have already long been lost) 

  I thought in this discussion I’d run through a number of indicators I've been watching that will hopefully help answer the key question – was the recent market turbulence a sign of a short-term correction, or something larger?  We know there's no single Holy Grail metric in this wonderful world, but I tend to think of indicators as mosaic pieces.  If we can get enough pieces in the right place, we have a good shot at actually deciphering the “picture” of what is to come.  And for that, we can only really rely on historical experience.  

  At The Margin

  A number of months back, in fact just prior to the recent correction, I wrote a piece about US margin debt.  It had just climbed above $500 billion for the first time in history.  The conclusion of that article was that today’s margin debt acceleration would be tomorrow’s price volatility.  Nothing in that article about timing at all.  But as we stand here today, I believe watching margin debt levels dead ahead will be very helpful.

  The history of margin debt in graphical form is what you see below.

  

  Not surprisingly, historical equity market peaks of significance have been accompanied by cycle peaks in margin debt levels.  The chart above is clear.  What has been most helpful in the past is to watch for divergences between margin debt levels and price.  At the prior two equity market peaks in 2000 and 2007, price actually went to a new high temporarily, while margin debt levels diverged and continued falling.  In hindsight, this was a key tell-tale top of cycle divergence.

  As we stand here today, margin debt levels have begun to decline from their summer-time peak.  Admittedly, the data is only current through August at this point and a contraction in margin debt for August should be no surprise at all.  But here is what I believe will be helpful ahead: if this is simply a correction in an ongoing bull market, then we should expect margin debt levels to again accelerate and move to new highs.  Why?  Because that is the exact fingerprint history of margin debt and equity market cycles.  I do not expect margin debt to contract meaningfully (20%) unless this is truly a new bear trend.  And we will not see a true move downwards in margin debt until after we see a few claw marks.  So watching for new highs that would corroborate further upside becomes one important watch-point of the moment in my book. 

  The chart below is a close up look at the last three years.  For now, margin debt levels in the US peaked in April.  Keep your eyes on these levels in the months ahead.  If margin debt cannot make it back to its highs, we need to consider this a cycle top in the equity market:

  

  Oh Behave!!

  One thing I've been watching for is a change in market behavior in response to central bank commentary.  And we've been finally seeing a bit of that from time to time in recent months (last 2 days not withstanding). 

  As you are fully aware, the Fed again declined to raise interest rates at their meeting last month, making it now 60 Fed meetings in a row since 2009 that the Fed has passed on raising rates.  Over the 2009 to present cycle, the financial markets have responded very positively in post-Fed meeting environments where the Fed has either voted to print money or voted to keep short term interest rates near 0%.  Not this time.  Markets swooned in the immediate aftermath of the decision on the again seemingly-positive news of no rate hikes.  Why?

  Although we are clearly not fully there yet, we need to think about the possibility that investors are now seeing the Fed (and really all global central bankers) as trapped.  Trapped in the web of intended and unintended consequences of their actions.  As I have argued over the past year, the Fed’s greatest single risk is being caught at the zero bound (zero percent interest rates) when the next US/global recession hits.  With declining global growth evident as of late, this is a heightened concern and that specific risk is growing.  Is this what the markets are becoming more sensitive to?

  Behavior does not change overnight.  And certainly the rally back from the end of September lows has been impressive.  But it has also been accompanied by chatter about a potential QE4 or NIRP stateside (neither of which I believe is in the cards any time soon).  Moreover, with the release of the FOMC meeting minutes a few weeks back, the Fed admits in their own words they are scared of “volatility.”  (Translation?  A down equity market.)  So in one sense investors know full well they have the Fed cornered.  Throw a tantrum and they will change intentions/actions on a dime.  And now the Fed even admits it!

  But when will continued zero rates or “threats” (Draghi) of expanded QE simply no longer be good enough?  I think this is one of the key “tipping points” to watch for.  I think we are edging our way toward that right now. But slowly, and not in linear fashion.

  It's clear in recent weeks that for many companies, quarterly revenues and earnings growth is a struggle.  In fact, for a good number, deterioration has been ongoing for years now.  Caterpillar not only missed again (huge surprise, right?), but has now reported 34 consecutive months of declining world sales.  In it's latest report, the company announced 10,000 to be laid off over the next few years. And Caterpillar is not alone.

  IBM reported its lowest revenues in 13 years at $19.3B.  For perspective, literally three years ago in 3Q 2012 that number was in excess of $29B.  The year-over-year decline in revenues (not earnings, revenues) was 13.9%.  In comparison, IBM never even dipped this low on rate-of-change revenue contraction during the “Great Recession”.  Good thing they’ve levered up their balance sheet to buyback shares! (After all, it's the shareholders who “own” the balance sheet and the executives who have the options.) The number of revenue and earnings missing in the current quarter so far, has been more than noticeable.

  Walmart indeed made the gallant gesture of raising wages for their employees.  And the move cost them dearly, as they just announced a 12% reduction in earnings guidance for next year.  Remember, this is one of the largest retailers on planet Earth, accounting for 10% of total retail sales in the US.  Suppliers will be squeezed and squeezed hard.  More fallout will come in quarters ahead, and be certain, Walmart will react with massive cost controls.

  On the bright side of the earnings equation, we’ve also seen a new wrinkle in a number of cases.  Biogen announced very respectable numbers and growth.  But simultaneous with the “good news” is another type of news – they are laying off 11% of the work force globally.  Microsoft “crushed” the numbers….and also crushed another 1,000 employees into the unemployment line.  The issue being: even companies reporting strong numbers are letting folks go during supposedly "good" times.  Why would management teams be doing this?

  I could go on and on about many more examples, but the issue is the revenue and earnings stagnancy to deterioration is increasingly noticeable and the management commentary has backed this up. 

  What seems apparent is that, for a good number of companies, weakness has accelerated during the prior quarter.  Could it be the stumbling of the “symbol” of the economy, the stock market, that has prompted such an immediate response?  I wish I knew the answer, but for a while now I have been of the opinion that central bankers are scared to death that if equities start failing, so will the domestic/global economy.  They know full well that it is the high end of the wealth demographic that is doing the yeoman’s work in holding up the economy broadly.  If they lose the equity market?  They lose the high end consumer.  And, let’s face it, there's no middle class left below to pick up the ball.  Stagnant wage growth, 0% return on savings, and rising costs of living have squeezed it dry..

  So in one sense, it all comes back to equities.  The central bankers are totally beholden and scared.  It’s no wonder Mario Draghi “promises” the ECB will discuss lower rates and perhaps further ease.  I fully expect to see more in the way of similar action from the PBOC and BOJ.  The central banks are all in at this point. There is no turning back. They will continue this course right up to it predictable and inevitable destruction.

  Warning Signals

  So, I believe one of the key signals of the coming cycle change will be not only tracking data point anecdotes such as margin debt levels, but also the behavioral characteristics of the investment community.  Can investors continue to indefinitely “dance” to the words and actions of central bankers, after 7 full years of those same words and actions having produced nothing of substance in terms of reinvigorating the global economy?  Or will the focus shift to the increasingly visible slumping of the global economy and corporate revenues? So far the dancing continues, but the tune is getting old…

  We all remember the words Chuck Prince (former CEO of Citi) wished he’d never uttered in 2007.  “The music is still playing, so we’re still dancing.”  For now, investors are still dancing to the music of central bankers globally.  If this behavioral shift I'm looking for actually takes place, prices should react as Citi’s stock price did the day Mr. Prince found out the music had actually stopped. That is to say, plunge violently.

  Bottom line: equity markets have not priced a meaningful slowdown in global corporate earnings.  They are still pricing in central banker commentary…..for now.  History teaches us that equity turbulence accompanied by meaningful economic softness often marks the turn from a secular bull market in to a bear market.

  In Part 2: Why The Next Market Drop Will Likely Be 30-40% we look further into the alarm bells of caution the underlying economic data and technical analysis are now sounding. The messages of the moment are: 1) pay attention, this is absolutely no time for complacency, 2) if the charts do not revert back to technical health, do not be afraid to look like an idiot and be “too” conservative with capital, 3) market tops usually frustrate both the bulls and the bears…until they don’t. After that point, everyone is running for the same exit. One that few can make it out of in time.

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

   

  

  

  

  

  

• Russia Takes Over The Mid-East: Moscow Gets Green Light For Strikes In Iraq, Sets Up Alliance With Jordan

  Once it became clear that Moscow and Tehran had jointly planned the incursion in Syria with Russia promising full air support and Iran pledging ground troops from Hezbollah, its various Shiite militias, and the IRGC, we immediately suggested that Iraq was next on the agenda after the Assad regime is restored. 

  For those unfamiliar with the situation on the ground, we encourage you to read “Who Really Controls Iraq? Inside Iran’s Powerful Proxy Armies,” in which we outline the extent to which Tehran effectively controls both the Iraqi military and the politicians in Baghdad.

  The US allows this because i) there’s really not much Washington can do about it, and ii) even if there was, it would mean first trying to root out Iranian influence on the political process and second attempting to separate the Shiite militias from the Iraqi regulars, which would only serve to weaken the country’s ability to resist Sunni extremists like ISIS. The other important thing to understand about Iran’s proxy armies in Iraq is that they are the very same militias fighting alongside the Russians in Syria (we mean “very same” in the most literal sense possible as they were called over the border by Quds commander Qassem Soleimani himself). This means they are Washington’s allies in Iraq but as soon as they cross the border into Syria, they become the targets of US-supported and supplied rebels battling at Aleppo. Obviously, that makes absolutely no sense and is emblematic of just how schizophrenic Washington’s Mid-East strategy has become. It’s also worth noting that these are the same Shiite militias who, with Tehran’s blessing, attacked US troops in Iraq after George Bush destroyed the US-Iran post-9/11 alliance by putting the country in his infamous “Axis Of Evil” (see here for more). 

  Here’s a picture that should give you an idea about why Iran’s proxy armies have proven particularly effective at bullying the ISIS bully, so to speak:

  

  Meanwhile, flying missions over Iraq is the logical next step for The Kremlin in Russia’s bid to supplant the US as Mid-East superpower puppet master. One would be hard pressed to come up with a more humiliating scenario for Washington than for the US to be effectively kicked out of the country it “liberated” over a decade ago by Vladimir Putin on the excuse that try as they may (or may “not”, depending on how prone you are to conspiracy theories), the Americans are apparently not very good at fighting terror. 

  Just like in Syria, Russian airstrikes would be supported by Iran-backed fighters on the ground, and thanks to the IRGC’s grip over Iraqi politics, Moscow would find Baghdad very receptive to Russia’s presence in the country. 

  The US knows all of this of course and in an effort to get out ahead of the situation, Washington sent Gen. Joseph Dunford (chairman of the Joint Chiefs of Staff) to Iraq this week to issue what can only be described as a petulant, childish ultimatum to PM Haider al-Abadi. “It’s either us, or the Russians,” Abadi was told, although not specifically in those terms. Here’s what Dunford actually said: 

  “I said it would make it very difficult for us to be able to provide the kind of support you need if the Russians were here conducting operations as well. We can’t conduct operations if the Russians were operating in Iraq right now.”

  

  (Iraqi PM Haider al-Abadi)

  Although the PM purportedly pledged not to request Russian assistance, anyone who’s followed the story knows Dunford’s trip was far too little, far too late.

  ISIS has been running amok in Iraq for more than a year and the US appears powerless to stop them. As we noted, there are several theories as to why Washington is so intent on keeping Moscow out. The common sense theory that requires no conspiratorial ruminations says that the US is desperate to avoid ceding Baghdad to Russia and the Pentagon knows that with Iran already effectively in control of the army and the government, Russia would find a very receptive military and political environment. For those inclined to think that in addition to any initial support (i.e. funding and training prior to the official formation of ISIS), the US is still supporting Islamic State, well then the worry for Washington is that Russia simply wipes them out.

  Whatever the case, Iraq has apparently had just about enough of it and indeed, one of the reasons Dunford made the trip was that last week, Abadi said he would “welcome Russian airstrikes.” Throw in the brand new intelligence sharing center in Baghdad jointly staffed by Russia, Iran, and Syria and it’s pretty clear that despite what Abadi might have told Dunford to reassure the Pentagon, the “red” coats (if you will) are indeed coming. 

  Sure enough, according to Turkey’s state run Anadolu Agency, Russia has now received permission from Iraq to target ISIS convoys coming from Syria. Here’s more: 

  The Iraqi government authorized Russia to target Daesh convoys coming from Syria, a senior Iraqi official said.

   

  The authorization for Russia to target Daesh inside Iraq comes amid security coordination between Iraq, Russia, Iran and Syria.

   

  Hakem al-Zamli, chief of the Iraqi parliament’s security and defense committee, told Anadolu Agency on Friday that the measure contributed to weakening Daesh by cutting off its supply routes.

  That will be just the beginning. We assume the whole “convoys from Syria” language is an effort on Baghdad’s part to make it sound like this isn’t a green light for Russia to take over the skies above Iraq but one certainly wonders how Washington intends to respond given that Abadi just told Dunford Iraq wouldn’t allow this to happen. 

  And that’s not all. 

  Russia has now created yet another intelligence sharing cell in the Mid-East, this time in Jordan as Moscow and Amman are set to work together to rout ISIS. Here’s RT:

  Russia and Jordan agreed to create a coordination center in Amman, which will be used by the two countries to share information on the counter-terrorism operations, Russian Foreign Minister Sergey Lavrov said.

   

  Russia is already in touch with Iran, Iraq and Syria through a Baghdad-based center used for the same purpose. 

   

  Lavrov said Jordan would play a positive part in finding a political solution to the Syrian conflict through negotiations between Damascus and opposition forces, an outcome that Russia itself is pursuing. 

   

  “Under an agreement between His Majesty King Abdullah II and Russia’s President Vladimir Putin, the militaries of the two countries have agreed to coordinate their actions, including military aircraft missions over the Syrian territory,”Lavrov said. His Jordanian counterpart Nasser Judeh said the center would serve as an efficient communication tool for the militaries of the two nations.

  As you might recall, Jordan’s King Abdullah wasn’t exactly pleased after ISIS released a video showing a Jordanian pilot being burned alive. Here’s the visual message he sent to the group after the video surfaced:

  

  Once again, it’s important to understand that this is all made possible by the fact that the US, Saudi Arabia, Qatar, and Turkey decided to use extremist groups as their weapon of choice to destabilize Assad. That gives Moscow all the political and PR cover it needs to not only make a pure power play in Syria, but to establish closer diplomatic and political ties in Iraq and now Jordan. Thanks to the fact that the Western media has held up ISIS as the devil incarnate, The Kremlin has a foolproof cover story for what is quite clearly becoming a sweeping attempt to establish Russian influence across the region. 

  Finally, don’t forget that with each move Russia makes towards replacing the US as Mid-East superpower puppet master, Iran gets that much closer to supplanting Saudi Arabia as regional power broker. The Kremlin’s alliance with Jordan plays right into that dynamic as the Moscow-Tehran nexus is literally encircling Riyadh, Doha, and the UAE…

  

  

  

  

  

• The Inflation Lie

  By EconMatters

   

  

   

   

  Inflation Over Estimated?

   

  I was watching a little of the ECB press conference after their policy meeting and a reporter asked why inflation is such a bad thing for Europe and European consumers. Mario Draghi gave a canned response, but the real interesting moment came when an individual sitting to his left on the ECB panel opened his mike up and wanted to speak about inflation. I thought this was a little odd, and it became stranger by the moment. He really went out of his way to point out some obscure economic study that showed that US inflation was overestimated, and that actually US inflation was actually negative according to this recent study.

   

  

  Central Bankers & Research Objectivity

   

  

  The first question is what does US Inflation have to do with the ECB`s decision to add more stimulus to the European economy, and what does it have to do with European inflation?

   

  I guess the inference is that even in the US where the economy is the relative strongest house on the block so to speak, that there is even underlying deflation in the world`s strongest performing economy.

   

  But is sure seemed to point out that Central Bankers are not objective data driven, independent academics seeking the truth regarding economics, but rather have a goal ahead of time, and look for any type of data to support said agenda.

   

  Most of the studies actually show that inflation is underreported and this is the first time I have come across someone citing the opposite conclusion regarding inflation reporting.

   

  

  Gas Savings Eaten Up Fast by Increasing Healthcare, Food & Housing Expenses

   

  

  This is rather intuitive as well, energy and commodities have collapsed due to the oversupply of these markets, but really that is the one area which makes the overall inflation numbers appear lower than most feel in their everyday living experiences.

   

  For example, the cost of renting or home ownership has been rising steadily the past 16 months, and will continue to do so over the projected near term future. Healthcare costs continue to rise each year despite a nationalized healthcare plan. Even those lucky enough to have great company backed healthcare plans are paying higher deductibles and more out of pocket health expenses each year. Education and tuition costs continue to rise above the average rate of inflation. Entertainment expenses from movies, eating out, cable and internet fees, mobile phone plans, gym memberships, and travel accommodations are all experiencing inflationary pressures. Automobile prices sure aren`t deflationary as anyone who has purchased a new car recently realizes. Shoot even HOA fees are rising year after year! And those pesky real estate taxes sure seem to go up well above the stated rate of 2% inflation that is the Fed`s desired target rate. Ironic isn`t it that if inflation could only hit that 2% mark they would be raising interest rates in a heartbeat. Like when it was well over 2% 16 months ago, and the Federal Reserve not only wasn`t raising rates, but was still buying bonds each month via QE 3?

   

  

  Deflation is not a problem anywhere in the world

   

  It is pretty obvious to anyone with a little common sense and operates a household budget that deflation is not a problem here in the United States or anywhere in the world. This is all Central Bank nonsense used to justify an agenda regarding monetary policy. It is also abundantantly clear that the real inflation rate is much higher than that reported by the official governmental data sets. That in fact these reporting tools substantially underrepresent the real level of inflation in the economy. This is what I refer to as part and parcel of the Inflation lie.

   

  

  Government Spending & Debt Monetization

   

  Inflation and all the Central Bank rhetoric is used as a tool to manipulate policy towards an agenda, and all the official government tracking reports have a role in promoting the company line, which at its core is spend beyond your means, and kick the can down the road by monetizing the debt, robbing consumers of purchasing power along the way in a never ending currency devaluation scheme. This is also why the debt ceiling needs to be raised every year, and the US has doubled the national debt over the last 8 years. If you keep a healthy dose of inflation, let us call it the real inflation rate in the economy, the overall debt is less as a percentage of GDP, Tax Revenue, and overall Production Output – thus the debt has been monetized. At least this is the Central Bank and government strategy to dealing with out of control government spending far in excess of tax receipts taken in. Borrow, rack up huge deficits, print more money, devalue the currency, create inflation in the money supply, and make the borrowed money less onerous than it otherwise would appear with a lower rate of inflation. This is why Central Banks are so obsessed with inflation, the entire scheme falls apart and fast if the debt cannot be monetized or lessened as a percent of its original value through currency devaluation via the printing presses.

   

  

  Debt Monetization Scheme a Delicate Juggling Act

   

  

  This is the big Inflation Lie, Inflation doesn`t hurt consumers; it is a needed tool to monetize the debt and keep the whole deficit spending scheme going for as long as possible. The theory is sort of like the expansion of the Universe. If Central Bankers can inflate the money supply without inflation going nuclear on them, and keep diluting the currency without Zimbabwe like repercussions, then the size of the national debt is as manageable as 20 Trillion can be in a relative sense.

   

  

  But it is a dicey game in juggling of account variables and the slightest unbalanced move of any of these account balance variables and the entire deficit financing scheme implodes or blows up on itself. It is terribly unsound financial engineering, and a looming disaster that at best is kicked down the road a little further. My calculations are that the government liabilities hitting around 2018 are just the variable that makes this whole financial engineering scheme face some serious here and now addressing. But it can be any variable in this complex financial engineering equation that can go out of control. Inflation as reported over 4%, interest rates rising significantly, Real Deflation, Economic Recession, Credit Rating Downgrade, Spending at a rate exponentially more than currency devaluation of Monetary Policy, Central Bank Credibility and Confidence, and a full-blown Currency Crisis to name just some of the possible variables that could blow up in the face of this financial engineering experiment.

   

  

  Deflation, Demonizing, Central Bankers & the Power of Language to Manipulate

   

  Now you know why Central Bankers try so hard to demonize deflation, well we have never had real deflation in my lifetime, it is the reason that cars that used to cost $5,000 now cost $50,000. But more specifically Central Bankers know that the official Inflation reporting tools are built to underrepresent inflation in the economy, and anything trending below their fake targets is a problem for them because government spending continues exponently and unabated, and without elevated inflation the debt cannot be monetized and kicked down the road a few more years – which is the agenda. And really the whole purpose for their existence in government service. This is why Central Bankers will look for any semblance of deflationary pressures, albeit some obscure economic study in the United States, any excuse possible to ramp up the old printing presses at full speed ahead come what may! This is the big Inflation Lie purposefully put forward by Central Bankers to continue the charade that is modern financial engineering.

   

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• A RiSiNG FaRCe: SPeRM MaN…

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• How To Stamp Out Cultural Marxism In A Single Generation

  Submitted by Brandon Smith via Alt-Market.com,

  There are very few legitimate cultural divisions in the world. Most of them are arbitrarily created, not only by political and financial elites, but also by the useful idiots and mindless acolytes infesting the sullied halls of academia.

  It is perhaps no mistake that cultural Marxists in the form of "social justice warriors", PC busybodies and feminists tend to create artificial divisions between people and “classes” while attacking and homogenizing very real and natural divisions between individuals based on biological reality and inherent genetic and psychological ability. This is what cultural Marxists do: divide and conquer or homogenize and conquer, whatever the situation happens to call for.

  They do this most commonly by designated arbitrary "victim status" to various classes, thus dividing them from each other based on how "oppressed" they supposedly are.  The less statistically prominent a particular group is (less represented in a job field, media, education, population, etc.) in any western society based on their color, ethnicity, sexual orientation, gender, etc., generally the more victim group status is afforded to them by social justice gatekeepers.  Whites and males (straight males) are of course far at the bottom of their list of people who have reason to complain and we are repeatedly targeted by SJW organizations and web mobs as purveyors of some absurd theory called "the patriarchy".

  Although cultural marxism does indeed target every individual and harm every individual in the long run, my list of personal solutions outlined in this article will be directed in large part at the categories of people most attacked by the social justice cult today.

  I do not write often about PC cultism and social justice because the movement is only a symptom of a greater problem, namely the problem of collectivism. The only true and concrete social (group) division is the division between collectivists and individualists: between those who believe the individual should be subservient to the group mind and those who believe the group is meaningless without the individual mind.

  I have already spoken on the root dangers and logical inconsistencies of the social justice cult in articles such as ‘The Twisted Motives Behind Political Correctness' and 'The Future Costs Of Politically Correct Cultism.'

  There are many intelligent commentators on the Web who have consistently demolished the PC mob with reason and logic, and I leave that battle to them. In this article I would like to continue my examination but with the goal of presenting some real and tangible solutions. And like most solutions to most problems, it is the individual who is required to draw the line in the sand and change the way he approaches the realm of cultural Marxism. It is not up to groups, organizations or governments.

  First, let’s be clear, cultural Marxism has already done most of the damage it can possibly do to our way of life. And by damage, I mean the end of long-standing foundational pillars of society that provide stability and prosperity, including traditional marriage (not government-licensed marriage), family, gender “roles,” etc. (which cultural Marxists openly boast about tearing down).

  In Western nations male suicide rates are way up. Women’s proclaimed levels of happiness and contentment are way down, despite the fact that they have had wage equality for decades (yes, the wage gap is a perpetually pontificated Lochness monster-sized myth that was debunked years ago by economists like Thomas Sowell), despite the fact that they have surpassed men in educational participation and despite the fact that they have total control over family planning.

   

  Marriage rates are at historic lows since the 1970s and the rise of social justice activism. Of course, the argument is often presented that economic decline has more to do with this than cultural Marxism. However, setting aside the rising tide of men who fear being bled dry through divorce settlements based on double standards, the West’s economic decline (and thus marriage decline) can be correlated to the increase in overt debt spending. And debt spending is driven directly by socialist legislation, entitlement programs and social welfare addiction, more so even than it can be correlated to military spending.

  Therefore, cultural Marxism and its vicious attempts to forcefully “harmonize” wealth through taxation and welfare have indeed caused the very economic conditions by which marriage is made untenable and families are made unstable.

  While women become more and more unhappy, men and masculinity are essentially demonized by cultural Marxists (mainly feminists) as “toxic.” This propaganda campaign has been so successful that men in many first world nations are beginning to pursue, for all intents and purposes, an asexual lifestyle safer from collectivist intrusions and judgments.

  As if the psychological browbeating were not enough, the chemistry of the male body is also being warped by estrogen-imitating chemicals present in industrial products, plastics and soy-based foods. A decline in normal levels of male testosterone and an ever increasing hormonal feminization of younger generations of men and boys is becoming prevalent.

  Indirect chemical influences aren’t the only threat. Direct drugging of boys (with far greater frequency than girls) with psychotropics in order to subdue their natural tendencies towards physicality and frenetic activity is epidemic in public schools, all with the goal of making boys behave more like girls.

  Finally, the erasure of free speech and thought is always the holy grail of cultural Marxists; but this is not always done through government power — at least not right away. Social justice cultists rely more on collective pressure and public shaming tactics to engineer an environment in which people feel compelled to self-censor rather than deal with the hailstorm of witch hunters and wagging fingers.

  Cultural Marxists do use government force to police what they consider thought crimes, but usually in an incremental manner. One day, it’s the use of government to demand associations, as with a Christian-owned cake business being forced to work for another party that feels entitled to a gay wedding cake. Another day, it might be a public school being forced to allow boys dressed as girls in the girls’ bathroom or locker room. Another day, it might be the implementation of lowered standards and quotas to force businesses to hire people with victim-group status, even if they are unqualified for the job.

  All of these actions impede upon the individual freedoms and privacy rights of others, all under the guise of “equality.” And because cultural Marxists need to constantly observe ever greater modes of oppression and inequality in order to justify their existence, the impositions on individual liberty will never end. Today, people may argue that such violations are “minor” and not to be concerned over. It is happening to strangers or distant neighbors, not to them; so why should they care? Liberty movement champions know full well why this thinking is idiotic; the trampling of one person’s individual liberties is the trampling of ALL people’s individual liberties. Totalitarianism is a virus that feeds on one person to the next until everyone is on the menu.

  It is not enough anymore to simply continue pointing out the insanity of political correctness; we must also take useful steps toward reversing the destruction already wrought.

  And so, here are my solutions, which must be enacted by individuals in their daily lives regardless of the potential backlash. Do you have leftist leaning friends or family members? It doesn’t matter. Are you employed in a workplace crawling with social justice ideologues? Stop seeing them as part of the equation because they do not matter. Worried about losing a relationship if you make a stand? Say good riddance. This is what must be done by free thinkers if they are to counter and reverse the collectivist nightmare of cultural Marxism.

  Feel no shame: Social justice relies on shaming tactics, usually by slandering an opponent with a label that does not really apply to him, in order to control his arguments and behavior. If you don’t care about being called a bigot, a racist, a sexist, a misogynist, a homophobe, etc., then there is not really much that they can do to you.

   

  Do not self-censor: This does not mean you should go out of your way to be antagonistic or act like an ass, but the thought police have power only if you give power to them. Say what you want to say when you want to say it, and do it with a smile. Let the PC police froth and scream until they have an aneurism. Cultural Marxists are generally weaklings. They avoid physical confrontation like they avoid logic, so why fear them?

   

  Realize there is no such thing as white privilege or male privilege: In reality, there is only institutionalized “privilege” for victim-status groups. There is no privilege for whites, males, white males or straight white males. When confronted with such claims, demand to see proof of such privilege. Invariably, you will get a long list of first world problems and complaints backed by nothing but easily debunked talking points and misrepresented statistics. People should not feel guilty for being born the way they are, and this includes us “white male devils.”

   

  Demand facts to back claims: Cultural Marxists tend to argue on the basis of opinion rather than fact. Present facts to counter their claims, and demand facts and evidence in return. Opinions are irrelevant if the person is not willing to present supporting facts when asked.

   

  Do not play the game of "unconscious bias": If social justice cultists can't counter your position with facts or logic, they will invariably turn to the old standby that you are limited in your insight because you have not lived in the shoes of a – (insert victim group here).  I agree.  In fact, I would point out that this reality of limited perception also applies to THEM as well.  They have not lived in my shoes, therefore they are in no position to claim I enjoy "privilege" while they do not.  This is why facts and evidence are so important, and why anecdotal evidence and personal feelings are irrelevant where cultural Marxism is concerned.

   

  Let cultural Marxists know their fears and feelings do not matter: No one is entitled to have teir feelings addressed by others. And, a person’s fears are ultimately unimportant. Whether the issue is the nonexistent “rape culture” or the contempt cultural Marxists feel over private gun ownership, their irrational fears are not our concern. Why should any individual relinquish his liberties in the name of placating frightened nobodies?

   

  Demand that society respect your inherent individual rights: Collectivism’s ultimate propaganda message is that there is no such thing as inherent rights or liberties and that all rights are arbitrary and subject to the whims of the group or the state. This is false. I have written extensively in the past on inherent rights, inborn psychological contents and natural law, referencing diverse luminaries, scientists and thinkers, including Thomas Aquinas, Carl Gustave Jung, Steven Pinker, etc., and I welcome readers to study my many articles on individualism.  Freedom is an inborn conception with universally understood aspects. Period. No group or collective is more important than individual liberty. No artificial society has preeminence over the individuals within that society. As long as a person is not directly impeding the life, liberty, prosperity and privacy of another person, he should be left alone.

   

  Maintain your rights; they do not hurt other people: PC cultists will invariably argue that every person, whether he knows it or not, is indirectly harming others with his attitude, his beliefs, his refusal to associate, even his very breathing.  "We live in a society", they say, "and everything we do affects everyone else…".  Don’t take such accusations seriously; these people do not understand how freedom works.

   

  Say, for instance, hypothetically, that I refuse to bake a gay wedding cake for a couple and I am accused of violating their rights in the name of preserving my own. I would immediately point out that no one is entitled to a gay wedding cake, baked by me or anyone else and I have every right to choose my associations based on whatever criteria I see fit. Now, a corrupt government entity may claim I do not have that right. But the fact is I do, and no one — not even government — can force me to bake a cake if I don’t want to. Also, I would point out that the gay couple in question has every right in a free society to bake their OWN damn cake or open their own cake shop to compete with mine. This is how freedom works. It is not based on collective entitlement; it is based on personal responsibility.

   

  Refuse to deny the scientific fact of biological gender: Gender is first and foremost a genetic imperative. Society does not determine gender roles; nature does. A man who chops up his body and takes hormone pills to look like a woman is not and will never be a woman. A woman who tapes down her breasts and gets a short haircut will never be a man. There is no such thing as “transgendered” people. No amount of social justice or wishful thinking will ever allow them to reverse their genetic proclivities. Their psychological and sexual leanings do not change their inborn biological reality.

   

  By extension, we should refuse to play along with this nonsense. I will never refer to a man in a wig and dress as a “woman.” I will never refer to a woman with identity issues as “transgendered.” They are what nature made them, and we should not police our pronouns just to falsely reassure them that they can deny nature.

   

  Deny the illusion of Utopian equality: There is no such thing as pure equality.  Society is not a homogeneous entity, it is an abstraction built around a group of unique individuals.  Individuals can be naturally gifted, or naturally challenged.  But there will always be some people who are more apt towards success than others.

   

  I have no problem whatsoever with the idea of equality of opportunity, which is exactly what we have in this country (except in the world of elitist finance which is purely driven by nepotism).  I do have a problem with the lie of universal equality through engineered means.

   

  Standards of success should not be lowered in order to accommodate the least skilled people to facilitate artificial parity.  For example, I constantly hear the argument that more people with victim group status should be given greater representation in positions of influence and regard within our culture, from science and engineering, to media, to business CEO's, to politics, etc.  The key word here is "given", rather than "earned".  There is nothing wrong with one group of people excelling in a field more than another group, and there is nothing wrong with inequality when it comes to individual achievement.  We must begin refusing to reward people for mediocrity and punishing success simply because the winners are not part of a designated victim group.

   

  If you are a man, embrace your role: I am a man and cannot claim to know what specific solutions women should take to counter cultural Marxism. I would love to read an article written on the subject by a woman in the Liberty Movement.  I will say that men in particular have a considerable task ahead in terms of their personal endeavors if they hope to repair the destruction of social justice.

   

  For thousands of years, men have been the primary industrial force behind human progress. Today, they are relegated to cubicles and customer service, to video games and Web fantasies, to drug addictions and a lack of responsibility. If we have any chance of undoing the damage of cultural Marxism, modern men must take on their original roles as producers, inventors, entrepreneurs, protectors, builders and warriors once again. They should do this for their own benefit, and not for the validation of others.

   

  You don’t have to prove to anyone you do "manly things", just go out and do them. Most importantly, become dangerous. Men are meant to be dangerous beings. That does not mean we are meant to be indiscriminately violent (just as women aren’t meant to be indiscriminately violent), but we are supposed to be threatening to those who would threaten us. Modern society has NOT removed the need for masculinity and I believe people will begin realizing this the more our culture sinks into economic despair. Train in martial arts, learn tactical firearms handling, go hunting and don’t take lip from people. In my opinion, every man should know how to kill things, even if he never plans on using those abilities.

   

  Home-school your children: It’s simple, if you don’t want your kids propagandized, if you truly want them to be free from collectivist conditioning, then you will make the sacrifice and extract them from public schooling. With the introduction of Common Core into U.S. schools in particular, there is no other recourse but home schooling to prevent the brainwashing of cultural Marxism. If you do not do this, you are relying on the hope that your children will escape with their critical thinking abilities intact. Some do, and some don’t. Others turn into mindless social justice zombies. You can give them an advantage by removing them from a poisonous environment, and that is what matters.

  The insane lie that cultural Marxists seem to have conned themselves and others into believing is that their “activism” is somehow anti-establishment. In fact, social justice is constantly coddled and supported by the establishment. From politicians to judges to media pundits to the blogosphere, the overwhelming majority of people in positions of traditional power (even in supposedly conservative circles) have been more than happy to become the enforcers of the social justice warrior agenda, an agenda representing a minuscule portion of the public. There is no establishment for the PC army to fight; the establishment bias works vastly more in favor of their ideology than any other. Cultural Marxists ARE the establishment.

  

  

  

  

  

• Japan's PM Demands "Bold Proposals" For Raising The Country's Birth-Rate

  With a birth-rate at record-lows and death-rate at record-highs, Japanese PM Shinzo Abe unveiled a new set of 'arrows' a few weeks ago to 'fix' the demographic disaster the nation faces. At the time, Abe was long of "bold proposals" but short of actual policies to encourage the nation to make more babies (despite dwindling interest in sex). As Bloomberg reports, here are a number of options that Abe's new minister for demographics Kato could introduce to slow the downward spiral of population…

  With the population aging rapidly…

  

   

  And interest in sex and reproduction dwindling…

  

   

   

  Prime Minister Shinzo Abe has ordered his new minister for demographic issues to come up with “bold proposals” for raising Japan’s birthrate. His aim: Stem a slide in the labor force to drive production and fund the retirement of the country’s elderly. As Bloomberg reports, the working-age population in Asia’s second-biggest economy could shrink as much as 40 percent in the next 45 years, while the number of elderly balloons in a country with one of the world’s longest life expectancies.

  

   

  Abe last month made arresting the decline a priority, announcing a new economic plan that calls for stabilizing the population at 100 million in half a century from 127 million now.

   

  Here are some measures Abe’s new minister Katsunobu Kato, a father-of-four, could introduce to slow the downward spiral.

   

  Immigration

  Less than 2 percent of the population are non-Japanese, compared with about 13 percent in the U.S. and Germany. Economists have called for increased immigration, and about half the respondents to an April poll in the Asahi newspaper agreed.

   

  Abe last month rejected the idea of accepting more foreigners, saying he would first seek bolster the fertility rate, and entice women and the elderly into the workforce. Last year, he said foreigners were needed as housekeepers to allow more Japanese women to work outside the home, but details of a pilot program are yet to be decided.

   

  Kindergartens
  Abe has repeatedly pledged to reduce to zero the number of children waiting for daycare places from the current 23,167. But despite a rapid expansion of facilities, waiting lists swelled this year for the first time in half a decade after the government loosened restrictions on families qualified to use the service.

   

  Elderly Care
  Abe has promised to also cut to zero the number of people forced to give up work to care for aging relatives. About 260,000 people were being cared for at home while awaiting a space in a senior facility as of March last year; and with baby boomers — those born between 1947 and 1949 — set to hit 75 in under a decade, many of their children could be forced to drop paid work to care for them.

   

  While subsidies for the nation’s understaffed nursing homes were cut this year, Chief Cabinet Secretary Yoshihide Suga hinted this week that more money could be made available in an extra spending package.

   

  Removing Tax Breaks
  Spouses of employees don’t have to pay pension premiums and get tax breaks if they earn less than 1.3 million yen (or about $10,800) a year.

   

  The system has been blamed for compelling women to accept poorly paid, part-time positions or stay out of the work force completely. While Abe has called for the establishment of a more neutral tax system, opposition including from within his coalition partner Komeito means this is unlikely to be included in tax plans for the next financial year.

   

  Equal Treatment
  Japan’s lifetime employment system is still in place, but only for a shrinking share of the workforce as about 40 percent of the workforce are employed on an hourly or contract basis. Pay is low for these — mostly female — workers and they often don’t receive benefits such as paid maternity leave, making it harder to start a family.

   

  Kathy Matsui, chief Japan equity strategist at Goldman Sachs Group Inc., last year said Japan’s economy could grow nearly 13 percent if the percentage of women in work equaled that of men. She called for more flexible working practices and equal treatment of full-time and part-time workers.

   

  Decentralization
  Women in Tokyo give birth to fewer children per head than those in any other part of Japan — the capital’s average of 1.15 compares with about 1.6 in the southwest. Abe wants to bolster this figure to 1.8.

   

  Former cabinet minister Keiji Furuya advocates policies to reverse the drift from rural areas to Tokyo, including tax breaks for corporations who move their headquarters out of the capital. Proponents of the plan say it would help counter some of the difficulties of raising children in Tokyo, such as cramped housing, long commutes and a lack of support from a extended family nearby.

  *  *  *

  That is all well and good, but remember what Kato is up against…

  To examine Japanese attitudes toward sex, the Japan Family Planning Association interviewed 3,000 subjects, both male and female, about their sex lives. The group found that 49.3 percent of participants (48.3 percent of men, 50.1 percent of women) had not had sex in the past month. 21.3 percent of married men said they were too tired after work (versus 17.8 percent of women). Of men, 15.7 percent answered that they were no longer interested, after having children. 23.8 percent of women said sex was “bothersome.”

   

  There are a number of diagnoses for this aversion to the bedroom. Morinaga Takuro, an economic analyst and TV personality, believes this has something to do with attractiveness. He has suggested a “handsome tax”: “If we impose a handsome tax on men who look good to correct the injustice only slightly, then it will become easier for ugly men to find love, and the number of people getting married will increase.”

  In a nation where sales of adult diapers in Japan exceeded those of baby diapers, it’s an urgent national problem: there isn’t enough procreation.

  *  *  *

  And then there is this!!!!

  

  Love and Sex with Robots conference cancelled in Malaysia

  The Love and Sex with Robots conference due to be held in Malaysia has been cancelled by police for being "illegal".

   

  The annual event, which was supposed to go ahead on 16 November, was called "ridiculous" by police chief Tan Sri Khalid Abu Bakar.

   

  There was "nothing scientific about having sex with machines," he said.

   

  An apology has since been posted on the event organiser's website, loveandsexwithrobots.org.

   

  It said the cancellation was because of "circumstances beyond our control.

   

  "The conference will definitely not be held anywhere in Malaysia.

   

  "We deeply apologise to any person or any authority which has felt offence in any way," a statement said.

  We have nothing to add…

  

  

  

  

  

• Superyacht Getaway Subs And Luxury Bomb Shelters: The Elite Are The Most Paranoid Preppers Of All

  Submitted by Michael Snyder via The Economic Collapse blog,

  When it comes to “prepping”, many among the elite take things to an entirely different level.  As you will see below, the elite are willing to pay big money for cutting edge home security measures, luxury bomb shelters and superyacht getaway submarines. Some of the things that the elite are demanding for their own protection go beyond even what we would see in a James Bond film, and serving the prepping needs of the elite has become a multi-billion dollar business.  Meanwhile, the media outlets that the elite own continue to mock the rest of us for getting prepared.  All the time we see headlines like this one that appeared in a major American news source: “Preppers: Meet the paranoid Americans awaiting the apocalypse“.  Well, if we are paranoid for setting aside some extra food and supplies for the future, what does that make the people that you will read about in this article?

  The elite live in a world that is completely different from the world that you and I live in.  In wealthy enclaves of major global cities such as London, elitists are willing to shell out massive amounts of money to ensure that everyone else is kept out.  The following comes from an article that was just published a few hours ago by the London Evening Standard entitled “The paranoid world of London’s super-rich: DNA-laced security mist and superyacht getaway submarines“…

  Business is booming because billionaires are a paranoid bunch. Take one who recently moved to Mayfair. ‘He wanted everything, from protection from cyber hacking through to physical intrusion and kidnapping,’ says Bond Gunning. ‘We ended up installing fingerprint-activated locks for family members and programmable keys for staff that limit the time they are allowed into the property and the rooms they are able to enter and exit.

   

  ‘Inside and outside we installed 24-hour monitored CCTV cameras that are so hi-tech they can tell the difference between a dog, cat and a person. In the garden there are thermal-imaging cameras that can detect heat sources in the undergrowth. One thing intruders can’t hide is the heat of their bodies.

   

  ‘Should an intruder evade the cameras or ignore the warnings they automatically broadcast, the property itself is protected by bulletproof glass and alarm sensors in all rooms. There is a bullet, gas and bombproof panic or safe room, with its own food and water, medical supplies and communications, and an impregnable supply of fresh air. Just in case the family cannot make it there in time, key rooms are sealed by reinforced shutters.’

  But for many elitists, those kinds of extreme security measures are simply not enough.  That is why sales of “luxury doomsday shelters” are absolutely soaring.  If “the end of the world” arrives unexpectedly, high net worth individuals want to know that there will be somewhere for them and their families to go.  The following is an excerpt from an article about one such facility located in Indiana…

  As we roll down US Highway 41 in Terre Haute, Indiana , my guide insists I give him my iPhone. Then he tosses me a satin blindfold. The terms of our trip were clear—I wasn’t to know where we were going or how we got there.That’s because we’re on our way to the undisclosed location of an underground bunker designed to survive the end of the world, whatever form that apocalypse takes.

   

  When I remove my blindfold, I am standing in a grassy clearing looking at a boxy concrete structure that serves as the entrance to a Cold War–era government communications facility gutted and reborn as Vivos Indiana. This is the Ritz Carlton of doomsday shelters, a hideout where residents can wait out a nuclear winter or a zombie apocalypse in luxury and style while the rest of humanity melts and disintegrates. The living area has 12-and-a-half-foot ceilings, sumptuous black leather couches, wall art featuring cheerful Parisian street scenes, towering faux ferns, and plush carpets. Faith Hill croons from a large-screen TV set in front of three rows of comfy beige reclining chairs. The cupboards are stocked with 60 varieties of freeze-dried and canned foodstuffs; an evening meal might include spaghetti aglio e olio topped with skillet fried steak chunks, a fresh tomato-and-zucchini salad fresh from the hydroponic garden, and decadent turtle brownies. An eight-by-nine bedroom is designed for four people (there are larger units for six) and comes with double-queen bunks clothed in 600-thread-count ivory sheets and duvet covers worthy of a four-star hotel, a comparison highlighted on the Vivos website.

  That sounds lovely.

  But normal people like us cannot afford something like that.  It will only be the elite that will be able to afford to hole up in underground bunkers while the world above descends into madness.

  Other elitists will be taking off in their superyachts and heading out into the open ocean when things really start falling to pieces.  And if their superyachts are threatened, some of them even have “getaway subs”.  Here is more from the Evening Standard…

  The ultimate vehicle of choice is no longer an armoured limousine or a private jet. They’re so Noughties. If you want bragging rights these days, you need your own submarine, which floats out of a sub-sea compartment in your superyacht. ‘It’s a toy, but if the worst happened, it could also be an escape route,’ says one prominent London tycoon with a weakness for Monaco-berthed superyachts — provided they have military-grade radar jammers and missile and torpedo defences.

  So exactly why are so many among the elite so concerned about their own security these days?

  Why are so many of them going to such extraordinary lengths to prepare for worst case scenarios?

  Do they know something that the rest of us do not?

  In a previous article, I included a quote from an article in the Mirror that was published earlier this year entitled “Panicked super rich buying boltholes with private airstrips to escape if poor rise up“…

  Robert Johnson, president of the Institute of New Economic Thinking, told people at the World Economic Forum in Davos that many hedge fund managers were already planning their escapes.

   

  He said: “I know hedge fund managers all over the world who are buying airstrips and farms in places like New Zealand because they think they need a getaway.”

  The next time that someone criticizes you for prepping, just point out what the elite are doing.

  Clearly, many of them are deeply concerned that something may be coming.

  So are you preparing?

  

  

  

  

  

• "The International Buyer Has Been Absent" Unsold Hamptons' Mansions Pile-Up As Bubble Bursts

  Just a few months ago, Hamptons 2nd home-hunting was an elitist's dream. Home sales were surging (highest sicne 2007's peak) even as home prices soared (in the face of bad weather and economic angst). But that has all changed. As Bloomberg reports, sales of luxury homes in the are have tumbled 16% YoY in Q3, prices have plunged 18% YoY, and inventories are surging (up 34%). The reason is simple, as one realtor notes, "the international buyer has been absent."

   

  Mid-Summer, The Wall Street Journal could not be more excited about the bubble in Hamptons' homes…

  As the peak spring season for home sales begins, the market across the region is showing considerable strength, especially in the Hamptons, with its deep pool of affluent summer-home buyers.

   

  Despite frequent winter storms that snowed in many Hamptons properties on the eastern end of Long Island, the number of sales from January through March was the highest during any first quarter since 2007—during the last real-estate boom, market reports show.

  

   

  But, it's all changed… (as Bloomberg reports)

  New Yorkers who want to buy a high-end retreat in the Hamptons have plenty of options to choose from.

   

  Sales of luxury homes in the area, known for its beachside mansions attracting financiers and celebrities, tumbled 16 percent in the third quarter from a year earlier to 52 transactions, according to a report Thursday from appraiser Miller Samuel Inc. and brokerage Douglas Elliman. The inventory of such properties — defined as the top 10 percent of the market by price — climbed 34 percent to 292.

   

  Wealthy buyers on Long Island’s East End are taking a pause after several years of heated sales, leading prices to fall as more houses come to the market. The median price of Hamptons deals completed at the luxury level dropped 18 percent from a year earlier to $5.3 million, in contrast to an increase for lower-cost homes.

   

  “People who had the cash, they came out and bought the last couple of years so they’ve kind of leveled off,” Dottie Herman, chief executive officer of Douglas Elliman, said in an interview. “They’re still here, but the demand has just gotten flatter.”

   

  With many Hamptons luxury buyers employed by the financial industry, the sales drop may have been tied to declines in global markets, said Ernest Cervi, a senior vice president at brokerage Corcoran Group who oversees Hamptons sales. The Standard & Poor’s 500 Index sank 6.9 percent in the quarter, the worst performance in four years, while currencies and commodities also slid.

   

  “There was a lot of turmoil on the financial markets around the world and that might have stopped people from pulling the trigger,” Cervi said. “The international buyer has been absent.”

  *   *   *

  Who could have seen that coming? A bubble in luxury real estate driven by 1%-er equity gains and a desperate outflow of capital from various "growth" countries around the world suddenly collapses when stocks stumble and those nations introduce capital controls.

  

  

  

  

  

• Hillary Clinton Pretends to Be Progressive: She's Actually Conservative

  Submitted by Eric Zuesse,

  The contrast between Hillary Clinton’s stated positions and her actual record, is stark.

  The record shows that she actually supports international trade treaties that allow the participating countries to allow international corporations to murder labor union organizers to keep wages down. Her financial backers include many of the controlling stockholders in corporations that shift jobs overseas to lower-wage nations so as to boost their stock-profits and executive compensation (those executives are paid largely by stock options in the companies they run — the more the stock rises, the bigger their pay); and portions of those takes by the top executives and other top owners of international corporations end up in the political campaign chests of conservative U.S. politicians such as of Barack Obama, Hillary Clinton and virtually all Republicans — i.e., of corrupt or otherwise conservative politicians. But this article will deal only with Hillary Clinton.

  She also supports international trade treaties — such as Obama’s proposed TPP with Pacific countries and TTIP with Atlantic countries — that will cripple participating countries’ ability to regulate the safety of products, such as drugs, food-contamination, water-contamination, auto-safety, the environment, etc. However, her campaign rhetoric lies disfavoring such treaties, even more blatantly than Barack Obama’s rhetoric against NAFTA did, when he was running against her, in 2008.

  THE TRADE DEALS

  On National Public Radio’s Morning Edition, on Thursday October 22nd, David Axelrod, who is one of President Obama’s chief advisors inside the White House, explained Hillary's switch, from verbally supporting, to verbally opposing, President Obama’s proposed trade deals. The interviewer noted that, "Hillary Clinton had previously spoken in favor of the Pacific trade deal [TPP], then once the details were out she said she was against it.” Axelrod asserted, to explain what happened: "I actually think her switch of positions on trade was as much a response to Biden as it was to Sanders. She knew that the Vice President was very much tied to the President’s policy and would have to be, and she wanted to head him off at the pass particularly with organized labor.” That separation of herself from Obama’s proposed trade deals effectively killed Biden’s opportunity to win the support of labor union leaders who don’t believe that a self-declared “socialist” such as Bernie Sanders is even electable in the United States. Biden had been hoping to wedge into the Democratic primaries as being the “centrist” Democrat who could pull lots of supporters away from both Clinton and Sanders.

  The reason why organized labor is opposed to Obama’s trade deals is that (as will be shown) the deals would allow all participating countries to allow international corporations to hire hitmen to murder labor union organizers so as to keep wages down. U.S. workers would then be competing internationally against workers whose rights to participate in labor unions are merely nominal, not authentic. That, in turn, would accelerate the shrinkage of labor unions in the United States; and this would even further benefit the big campaign-contributors. (Obama and Clinton actually support this, though it reduces the labor-union base of the Democratic Party. The electorate are split between a ‘liberal’ party that wants unions to be weak, versus a conservative party that wants them to be dead.)

  President Obama’s Trade Representative, his longtime personal friend Michael Froman, organized and largely wrote Obama's proposed trade treaties: TPP, TTIP, and TISA. Froman told the AFL-CIO and U.S. Senators that when countries such as Colombia systematically murder labor-union organizers, it’s no violation of workers’ rights — nothing that’s of any concern to the U.S. regarding this country's international trade policies or the enforcement of them. On April 22nd, Huffington Post, one of the few U.S. news media to report honestly on these treaties, bannered "AFL-CIO's Trumka: USTR Told Us Murder Isn't A Violation,” and reported that, "Defenders of the White House push for sweeping trade deals argue they include tough enforcement of labor standards. But a top union leader scoffed at such claims Tuesday, revealing that [Obama] administration officials have said privately that they don’t consider even the killings of labor organizers to be violations of those pacts.”

  In other words: This is and will be the low level of the playing-field that U.S. workers will be competing against in TPP etc., just as it is already, in the far-smaller existing NAFTA (which Hillary had helped to pass in Congress). "Trumka said that even after the Obama administration crafted an agreement to tighten labor protections four years ago, some 105 labor organizers have been killed, and more than 1,300 have been threatened with death.” The Obama Administration is ignoring the tightened regulations that it itself managed to get nominally implemented on paper. "Pressed for details about Trumka’s assertion that murder doesn’t count as a violation of labor rules, Thea Lee, the AFL-CIO deputy chief of staff, told HuffPost that USTR officials said in at least two meetings where she was present that killing and brutalizing organizers would not be considered interfering with labor rights under the terms of the trade measures.” Furthermore: “'We documented five or six murders of Guatemalan trade unionists that the government had failed to effectively investigate or prosecute,' Lee said. 'The USTR told us that the murders of trade unionists or violence against trade unionists was not a violation of the labor chapter.’” That U.S. Trade Representative, Michael Froman, is the same person Obama has negotiating with foreign governments, and with international corporations, both Obama's TPP, and his TTIP.

  Any country in TPP, TTIP, or TISA, that introduces worker-protection regulations which are beyond this abysmally low level, will then be fined by corporate panels, and those fines will become income to the companies whose ‘rights’ (such as to murder labor-organizers) have been violated, under the terms of the given treaty: TPP, TTIP, and TISA.

  And that’s just one example of the type of sovereignty (in this instance over workers’ rights) that is being, essentially, ceded to panels controlled by international corporations, under these 'trade’ deals. They’re actually about a lot more than just tariffs etc.; they’re about sovereignty — switching sovereignty to international corporations.

  As the UN’s top official on such matters has said, TTP & TTIP will produce "a dystopian future in which corporations and not democratically elected governments call the shots."

  Here was Hillary Clinton’s past record on NAFTA, her own husband’s trade deal, which was almost as bad as are the ones that Obama is now trying to pass — and Obama’s will cover vastly more nations:

  During the 2008 Presidential campaign, an Obama flyer that Hillary was complaining about, quoted Newsday’s characterization of Hillary’s NAFTA view in 2006: “Clinton thinks NAFTA has been a boon to the economy.” Hillary was claiming that this was a lie. Many in the press blindly supported her accusation against Obama here, because “a boon” was Newsday’s phrase, not hers. However, it was she, and not Obama, who was actually lying: Her 2003 Living History (p. 182) really did brag about her husband’s having passed NAFTA, and she said there: “Creating a free trade zone in North America — the largest free trade zone in the world — would expand U.S. exports, create jobs and ensure that our country was reaping the benefits, not the burdens, of globalization.” This was one of, supposedly, her proudest achievements, which were (p. 231) “Bill’s successes on the budget, the Brady bill and NAFTA.” But Hillary was now demanding that Obama apologise for his flyer’s having said: “Only Barack Obama fought NAFTA and other bad trade deals.”

  If you want to get insight into the reality of both Barack Obama and Hillary Clinton, just click here and examine that 8 February 2008 flyer from the Barack Obama for President campaign, during Obama’s Democratic Party Presidential primaries phase, when both candidates were deceiving Democrats, but only Hillary Clinton was provably and clearly lying  to them. Here are the details:

  Obama’s flyer said: “Of the two candidates in the race, only Barack Obama has been a consistent opponent of NAFTA and other bad trade deals. [Chicago Tribune, 2/29/04]” But, actually, back in 2004, Obama had had nothing to do with NAFTA, except campaign-rhetoric against it in his campaign at that time, to become the Democratic nominee to win the open U.S. Senate seat for Illinois, and his main opponent at that time was Daniel Hynes, the son of a former Mayor Daley machine Democratic Ward Committeeman, Thomas Hynes. This was mere rhetoric from candidate Obama.

  As for Hillary’s record on NAFTA, it was (unlike Obama’s) more  than merely rhetorical, and both her rhetoric and her actions had actually supported NAFTA, before NAFTA became so unpopular among Democrats that she had to become merely rhetorically against it. On 20 March 2008, the day after Hillary finally released her schedule during her White House years, The Nation’s John Nichols blogged “Clinton Lie Kills Her Credibility on Trade Policy,” and he said: “Now that we know from the 11,000 pages of Clinton White House documents released this week that [the] former First Lady was an ardent advocate for NAFTA; … now that we know she was in the thick of the maneuvering to block the efforts of labor, farm, environmental and human rights groups to get a better agreement; … now that we know from official records of her time as First Lady that Clinton was the featured speaker at a closed-door session where 120 women opinion leaders were hectored to pressure their congressional representatives to approve NAFTA; now that we know from ABC News reporting on the session that ‘her remarks were totally pro-NAFTA’ and that ‘there was no equivocation for her support for NAFTA at the time’; … what should we make of Clinton’s campaign claim that she was never comfortable with the militant free-trade agenda that has cost the United States hundreds of thousands of union jobs?”

  On 24 March 2008, ABC’s Jennifer Parker, headlined a blogpost “From the Fact Check Desk: The Clinton Campaign Misrepresents Clinton NAFTA Meeting,” and she reported: “I have now talked to three former Clinton Administration officials whom I trust who tell me that then-First Lady Hillary Clinton opposed the idea of introducing NAFTA before health care, but expressed no reservations in public or private about the substance of NAFTA. Yet the Clinton campaign continues to propagate this myth that she fought NAFTA.” Hillary continued this lie about herself, even after it had been repeatedly and soundly exposed to be a lie. Her behavior in this regard was reminiscent of George W. Bush’s statements on WMD in Iraq, and on many other issues.

  OTHER ISSUES

  Hillary Clinton favored the coup that overthrew the progressive democratically elected President of Honduras on 28 June 2009. And she favored the coup that overthrew the democratically elected (but like all of Ukraine’s Presidents) corrupt President of Ukraine in February 2014. And she favors fracking. (And see more of that here.) And she favors the Keystone XL pipeline. (And see more of that here.) (And here.) And she condemns proposals for a single-payer health-insurance system such as in Canada, and European countries, or else via universal access to Medicare, and she vigorously supports healthcare-as-a-privilege that’s based on ability-to-pay. But her rhetoric, especially after the challenge from Bernie Sanders, is opposite her actions and her long public record on those and many other key issues.

  The only issues where her record has been progressive in her actions, and not merely in her words, are ones where the beneficiaries are ethnic, gender, racial, or other label-groups among the general public, whose votes are crucial in order to be able to compete at all  in Democratic Party primaries — plus, of course, gun-control. However, she has done nothing to oppose the interests of her major campaign donors, no matter how contrary they are to those label-groups.  (A more recent version of that, is my "Hillary Veers Left, to Head Off Sanders.” And a link there will bring you directly to today’s campaign-finance results.) Those support-groups can intelligently rely upon her to favor their positions on their specific issues, in practice, and not merely in words. In turn, those liberal actions by her will antagonize Republicans, so that her Presidency, if she wins, will be very much like Obama’s has been, no matter how far to the right she (like Obama himself) actually rules. The “center” will just keep moving farther to the right (no matter whether the American public keep moving toward the left). The same trends that have been clear ever since George W. Bush came into office will continue, in the same directions. Hillary’s husband started some of these trends himself, such as when he introduced NAFTA and when he ended FDR’s Glass-Steagall Act and deregulated derivatives.

  CONCLUSION

  For a candidate such as Hillary Clinton, a rational voter will ignore her merely-stated positions, and will instead examine, and rely solely upon, her actual record. There are a few successful politicians who are honest with the public, and not merely with donors; but, unfortunately, she isn’t one of them. Consequently, all of the pundits’ talk about such things as “Bernie moving her to the left” is only about her pretense, not at all about her reality. Her reality is what will be in the Oval Office, if she wins.

  Reality is only what a politician does  in office, not about mere rhetoric. Even when rhetoric is great, such as it was with Abraham Lincoln, it has relied upon honesty in order to be able to be so. Lying rhetoric tends simply to be forgotten by historians. It shouldn’t be, even if this requires us to remember some very bad rhetoric. Lies can be very important, no matter how bad the rhetoric might happen to be. History should deal with what’s important. So should voters.

  *  *  *

  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.

   

  

  

  

  

  

• How The U.S. Government "Covers Up" 72% Inflation Before Your Very Eyes

  Dear Bureau of Labor Statistics: please pay careful attention to this case study of how your CPI “inflation” gauge, hedonically, seasonally-adjusted or otherwise, is completely inaccurate, and how what you record as 0% inflation is really 72%.

  As Consumerist points out, for the latest example of “stealth inflation” we go to Sodastream, where as part of a redesign of its proprietary line of flavoring syrups which “cost the same” the actual bottle contents are now not only smaller but also diluted.

  “How much smaller? The old version made 50 servings of flavored drink, and the new versions make only 29. Why 29? Why not 30? Such are the mysteries of the Grocery Shrink Ray.”

  Consumerist shows that “the new bottles are somehow taller even though they’re smaller. On the positive side, they no longer look like petite laundry detergent bottles.”

  

  

  Furthermore, while the number of servings is down to 2/3 of the original amount, the bottle size isn’t that much smaller. That’s because the measuring cap is now bigger, and each serving uses more syrup. “The worst part is that they just diluted it with more water so the ‘new improved’ ones LOOK like they are the same size,” reader Erik complained to us. “They are 440ml instead of the old 500. EVIL! Free the bubbles! Stop this shrink ray occupation of my favorite soda!”

  

  The old versions are still available on SodaStream’s site for now, as “Classics,” but readers report that they only find the shrunken version in brick-and-mortar store.

  Consumerist’ conclusion: “maybe SodaStream made this change because they know that the product still looks reasonably priced next to its new competitor, the Keurig Kold. Maybe.”

  Actually, why SodeStream did this is irrelevant: we are confident the decision to shrink and dilute the product was the result of simple concerns about maximizing profit margins.

  What is far more troubling is that for the Bureau of Labor Statistics, both the “old” and the “new” product costs the same, or $5.99, hence there is no inflation… until one does the actual math.

  Presenting the “old“, Dr. Pete soda mix, the one which is no longer available in bricks-and-mortar outlets, which costs $5.99 and which makes 50 servings per bottle.

  

   

  And here is the new one: available everywhere for “the same price as the old one” but with one small difference – it makes only 29 servings per bottle.

  

   

  The math:

  • Cost per serving “old” style: $0.1198
  • Cost per serving “new” style: $0.2066

  Nominal inflation: 72.4%
  

  Worse, there is not even an attempt to make the “new” product “hedonically” better, or for that matter different in any way – it is just smaller, and massively diluted.

  And it just so happens that nobody in the Bureau of Labor Statistics noticed this oldest trick in the book, and why month after month the BLS reports core CPI that is negligible, and why said “lack of inflation” allows the Fed to continue its zero-interest rate policy for 7 consecutive years in a row.
  

  

  

  

  

  

• Meet "Stunningly Catastrophic" Patricia, The World's Strongest Storm Ever Is About To Hit Mexico

  "Stunning, historic, mind-boggling, and catastrophic" is how Weather Underground's Jeff Masters sums up Hurricane Patricia, which intensified to an incredible-strength Category 5 storm with 200 mph winds overnight as it approaches the Mexican coast. As The NY Times reports, The World Meteorological Organization warned that the hurricane’s strength was comparable to that of Typhoon Haiyan, which caused devastation in the Philippines in 2013, and so Mexico has declared a state of emergency for Puerto Vallarta (with officials warning that storm surges could cause waves of up to 39 feet) as she is forecast to hit the coast between 6 and 10pm ET.

  As Weather Undergound reports,

  At 2:46 am EDT October 23, 2015 an Air Force hurricane hunter aircraft measured a central pressure of 880 mb in Patricia, making it the most intense hurricane ever observed in the Western Hemisphere. The aircraft measured surface winds of 200 mph, which are the highest reliably-measured surface winds on record for a tropical cyclone, anywhere on the Earth. The previous strongest Eastern Pacific hurricane was Hurricane Linda of 1997, with a pressure of 902 mb (estimated from satellite imagery.)

   

  

   

  Patricia the fastest-intensifying Western Hemisphere hurricane on record

   

  Patricia's central pressure dropped an astonishing 100 mb in 24 hours, making it the fastest-intensifying hurricane ever observed in the Western Hemisphere. Patricia's pressure at 5 am EDT Thursday, October 22, 2015 was 980 mb, and was 880 mb at 5 am EDT Friday. The previous record was a drop of 97 mb in 24 hours for Hurricane Wilma of 2005 (between 1200 UTC 18 October – 1200 UTC 19 October), according to the official NHC report for the storm.

   

  

   

  Patricia's intensification rate was very close to the WMO-recognized world record for fasting-intensifying tropical cyclone: 100 millibars in just under 24 hours by Super Typhoon Forrest in the Northwest Pacific in 1983.

  Patricia's 200 mph sustained winds make it the 3rd strongest tropical cyclone in world history (by 1-minute averaged wind speed.)

  Officially, here are the strongest tropical cyclones in world history, according to the Joint Typhoon Warning Center and the National Hurricane Center (using 1-minute averaged sustained winds):

  • Super Typhoon Nancy (1961), 215 mph winds, 882 mb. Made landfall as a Cat 2 in Japan, killing 191 people.
  • Super Typhoon Violet (1961), 205 mph winds, 886 mb pressure. Made landfall in Japan as a tropical storm, killing 2 people.
  • Super Typhoon Ida (1958), 200 mph winds, 877 mb pressure. Made landfall as a Cat 1 in Japan, killing 1269 people.
  • Super Typhoon Haiyan (2013), 195 mph winds, 895 mb pressure. Made landfall in the Philippines at peak strength.
  • Super Typhoon Kit (1966), 195 mph winds, 880 mb. Did not make landfall.
  • Super Typhoon Sally (1964), 195 mph winds, 895 mb. Made landfall as a Cat 4 in the Philippines.

  However, it is now recognized (Black 1992) that the maximum sustained winds estimated for typhoons during the 1940s to 1960s were too strong.

  Some Mexican regions are at dire risk...

  Hurricane #Patricia, the strongest storm on record in the E. Pacific, is bound for Mexico! https://t.co/ouR20nJ6Xp pic.twitter.com/lCj3aQG7RO

  — Elliot Abrams (@accuElliot) October 23, 2015

  The city of Puerto Vallarta and some of Mexico’s most popular resorts are in the path of the storm. Flooding and landslides are expected near coastal areas…

   

  Satellite loops early Friday afternoon showed that Patricia’s cloud tops had begun to warm, indicating weakening, and with wind shear now a moderate 10 – 20 knots and interaction with land beginning to occur, Patricia will likely weaken to 155 – 175 mph winds by landfall. The storm's expected turn toward the northeast has begun, and the storm is beginning to accelerate toward the coast of the Mexican state of Colima.

  Regardless of northern motion per last advisory #Patricia jogging northeast now. Getting concerned about Manzanillo pic.twitter.com/qkDniGXM7Q

  — Jim Cantore (@JimCantore) October 23, 2015

  At particular risk is the city of Manzaillo, a regional center that straddles the back of a bay spanning several miles. On its current track, it apperas that Patricia could make landfall sometime between 6:00 and 10:00 pm EDT just to the northwest of Manzanillo–a trajectory that raises the odds of a catastrophic storm surge in or near Manzanillo. Patricia’s strongest winds are confined to a relatively small area, with hurricane-force winds only spanning a range of 30 miles from Patricia’s center. Category 5 winds of 156+ mph cover an area 15 miles across. Wherever those winds are focused, we can expect gigantic waves atop a devastating surge.

  An unnamed 1959 hurricane–the deadliest in Northeast Pacific history, with an estimated 1800 direct and indirect fatalities–struck near Manzanillo on October 27…

  As the storm approached, posts on Instagram showed people trying to leave Puerto Vallarta. One user posted a photograph of a message from a nearby resort that warned people to return home for their safety. “If this is not possible, please wait for further instructions for a possible evacuation,” the notice read.

  In the United States, only three Category 5 storms that made landfall have been recorded, Mr. Feltgen said: a 1935 hurricane that killed more than 400 people; Hurricane Camille, which hit Mississippi and killed 244 people in 1969; and Hurricane Andrew, which hit Florida in 1992, killing at least 10 people there and three in the Bahamas.

  But Hurricane Patricia is “uncharted territory,” as The Weather Channel's Jim Cantore summed it up ominously…

  Historic #Patricia God help these people in its path. pic.twitter.com/hLgDM3Xsz1

  — Jim Cantore (@JimCantore) October 23, 2015

    As Bloomberg concludes,   

  “We can’t underestimate the magnitude of this phenomenon,” Roberto Ramirez, chief of Mexico’s National Water Commission, said in a message streamed on the Internet Friday, urging residents to take precautions or evacuate. “A Category 5 hurricane could lift cars, destroy houses that aren’t built with steel, rebar and cement, and sweep people away.”

  

  

  

  

  

• We Now Have An ETA When The Biggest Bond Bubble In The World Will Burst

  Together with Greece briefly soaring to prominence over the summer (only to fade into perpetual obscurity in its new role as Germany’s certified Mediterranean colony), the biggest event of this past summer – before the EM capital flow/Fed non-rate hike fiasco – was the rapid boom and spectacular bust of China’s equity market, which culminated not only in arrest of sellers, but in the hiking of futures margins so high that nobody actually trades in China any more.

  However, China’s equity bubble was just the beginning. As we showed in “If You Thought China’s Equity Bubble Was Scary…” even after the Shanghai Composite crashed in the fall, Chinese bonds spreads continued plunging oblivious of everything that was taking place in the stock market.

  

   

  This historic bond bubble is paradoxical for the simple reason that China’s credit fundamentals have never been worse, and as we further showed, as a result of the ongoing collapse in commodity prices (which today’s Chinese rate and RRR-cut will have absolutely no impact on), more than half of commodity companies can’t generate the cash required to even pay their interest, a number which drops to “only” a quarter when expanded to all industries.

  

   

  “The equity rout merely reflects worries about China’s economy, while a bond market crash would mean the worries have become a reality as corporate debts go unpaid,” said Xia Le, the chief economist for Asia at Banco Bilbao. “A Chinese credit collapse would also likely spark a more significant selloff in emerging-market assets.”

  “Global investors are looking for signs of a collapse in China, which itself could increase the chances of a crash… This game can’t go on forever.”

  They will find it soon, because while China may have managed to once again kick the can on its most recent default when state-owned SinoSteel failed to pay due principal and interest this Tuesday only to get a quasi-government bailout, every incremental bail out merely forces even more cash misallocation and even more foolish “investments” into this high risk asset class as investors ignore any concerns about fundamentals, assuming instead that the government will always bail them out.

  The problem with that is that as BofA’s David Cui notes today, China’s bond market is the epitome of a “potential source of financial instability.”

  Here is Cui:

  Our analysis shows that:

  1. the bond market is clearly not pricing default risk properly;
  2. the bond market has taken a few SME bond defaults in stride and seems to be counting on bail-outs of the few SOE bonds that are reportedly facing default risk; and
  3. leverage in the bond market is rapidly building up.

  But most importantly, Bank of America has now given a time frame in which China’s bond market will blow up, resulting in far more dire consequences that the equity bubble bursting this summer.

  On the current trajectory, we doubt the market can stay stable beyond a few quarters, especially if some SOE and/or LGFV bonds indeed default. 

  Why it will be far more dire? Because as of this moment China has between $25 and $30 trillion notional in financial and non-financial corporate credit (in China, where everything is government backstopper, there isn’t really much of a difference), about 5 times greater than the market cap of Chinese stocks (and orders of magnitude greater than their actual float), and 3 times greater than China’s official GDP, which also makes it the biggest bond bubble in the world, even bigger than the US Treasury market.

  

  Here is the full explanation why BofA expects some time around next summer is when the biggest bond bubble in history finally explodes:

  The rumble of distant drums

  When a developer can issue a 5y bond at 3bp lower than 5y quasi-sovereign CDB bond’s yield, the market appears grossly mispricing risks in our view. Credit spreads of LGFV, corp. and enterprise bonds are all at or close to five-year lows at the moment.

  

  Investors are chasing yield, due to rapid money expansion (M2 at 13.1% in Sept vs. 6.2% nominal GDP growth in 3Q). AUM of bond and money market mutual funds expanded by Rmb1.6tr Jan-Sept and by Rmb1.3tr alone since July after the A-share correction vs. Rmb44.1tr bond outstanding as of Sept.

  

  This is in addition to those inflows from the wealth management products and private funds.

  Leverage is also rapidly escalating. Bond repo balance rose by Rmb1.9tr from Aug 12 to Oct 21 (Rmb4.4tr to Rmb6.3tr, Chart below).

  

  Banks use repos to manage short term liquidity; investors, to subscribe to IPOs, and lately, to buy more bonds. We suspect that bond buying has been the primary driver of the growth in repos since July given rising excess reserves at the banks and the weak stock market. Structured bond funds, often providing 4-10x leverage to lower-tranche investors, is another concern. But its size appears small at this stage.

  

  Moral hazard is playing a key role – there is no official default so far in the bond market other than some small SME bonds. Credit spreads narrowed on most occasions when major bond default threats surfaced, suggesting that most investors probably counted on bail-outs (Chart 5-7). Meanwhile, about 2/3 of repos are on less than 7-day term.

  

  

   

  Finally, to answer the question on everyone’s mind – here is the full list of most likely upcoming Chinese debt default cases. When the bubble bursts, these names will be the first to blow up.

  

  

  

  

  

  

  

• Reflections On Venezuela's "Economic Miracle"

  Submitted by Andrew Syrios via The Mises Institute,

  Back in 2013, Salon took a quick break from criticizing a caricature of libertarianism to let David Sirota write an embarrassing article praising socialism in what turns out to be a fantastic case study in both the dangers of socialist economics and of course, speaking too soon.

  The article was titled “Hugo Chavez’s Economic Miracle” and it was certainly not the only one of its kind to come out at the time. It may seem like twenty-twenty hindsight to criticize such foolishness, but it might be instructive as well. However, looking at Venezuela now as compared to the country Sirota saw in 2013 and thought provided an economic alternative to American capitalism (a truly free market was never discussed) serves as a good example of what Nicolás Cachanosky calls “the bait-and-switch behind economic populism.” Or namely, that government policies focused highly on consumption and lowly on investment will show good economic signs at the beginning, only to be followed by an inevitable decline and likely disaster.

  Sirota’s article at least begins by lamenting Chavez’s rather poor record on civil rights (like shutting down a TV station that was critical of him) and noting “a boom in violent crime.” This may somehow be an understatement as Venezuela ranks second in the world in murders per capita at a terrifying rate of 53.7 per 100,000 citizens annually! (So much for socialism alleviating crime.) He finally does arrive at his case for this “economic miracle” that Venezuela was experiencing under Chavez (which, I should note, makes up only one paragraph of his entire article),

  …according to data compiled by the UK Guardian, Chavez’s first decade in office saw Venezuelan GDP more than double and both infant mortality and unemployment almost halved. Then there is a remarkable graph from the World Bank that shows that under Chavez’s brand of socialism, poverty in Venezuela plummeted (the same Guardian data reports that its “extreme poverty” rate fell from 23.4 percent in 1999 to 8.5 percent just a decade later). In all, that left the country with the third lowest poverty rate in Latin America.

  How much of this was due to Venezuela being an oil-rich nation is debatable. But it’s also very much worth observing that these positive (and underreported) trends existed throughout Latin America, including in countries such as Colombia that have moved in the opposite direction economically. According to the World Bank, Between 2005 and 2013, Colombia’s poverty rate (as opposed to extreme poverty) fell from 45 percent to 30.6 percent, Peru’s fell from 55.6 percent to 23.9 percent, Uruguay’s from 32.5 percent to 11.5 percent, Paraguay’s from 38.6 percent to 23.9 percent, and Ecuador’s from 42.2 percent to 25.6 percent. Venezuela, for its part, fell 43.7 percent to 25.4 percent, which seems to be about average. The same could be said for GDP and Venezuela’s infant mortality rate also only ranks in the middle of the pack.

  And of course, all of this was prior to Venezuela’s recent economic crisis.

  The fall in the price of oil has certainly harmed Venezuela, but then again, the rise in oil prices during the last decade certainly contributed to its “economic miracle.” However, Venezuela’s problems were starting to become apparent before the drop in oil prices. Back in October of 2014, just before the price of oil sank, Venezuela ran a 17 percent budget deficit and was dealing with a variety of shortages. Furthermore, while every major oil exporter has been hurt by the low oil prices, they have all weathered the storm much better than Venezuela.

  It appears that the drop in gas prices simply exacerbated, and more accurately, exposed the problems caused by Chavez’s (and his successor Nicolás Maduro’s) extreme populist policies. As Nicolás Cachanosky notes in his review of Rudiger Dornbusch and Sebastián Edwards work on Latin American populism, regimes that follow such policies go through four economic phases. In stage I,

  The populist diagnosis of what is wrong with an economy is confirmed during the first years of the new government. Macroeconomic policy shows good results like growing GDP, a reduction in unemployment, increase in real wages, etc. Because of output gaps, imports paid with central bank reserves, and regulations (maximum prices coupled with subsidies to the firms), inflation is mostly under control.

  This is the stage Venezuela was in when Salon saw fit to publish Sirota’s article in 2013.

  But then comes Stage II when “bottleneck effects start to appear” and “the underground economy starts to increase as the fiscal deficit worsens …” In Stage III, “Shortage problems become significant, inflation accelerates, and because the nominal exchange rate did not keep pace with inflation, there is an outflow of capital (reserves).”

  This is exactly what’s happening in Venezuela today. Venezuela’s projected inflation for 2015 is a whopping 64 percent! The country with the second highest rate in South America is Argentina at 10.9 percent. The CIA Factbook lists Venezuela’s budget deficit at 29.4 percent and Moody’s downgraded Venezuela’s credit rating to the lowest rating possible for a country not in default. And there is serious talk of that coming to pass as well.

  The government has instituted price controls to fight inflation and predictably, massive shortages have forced Venezuelans to turn to the black market for ordinary daily goods such as milk and toilet paper.

  Venezuela’s unemployment rate shot up from 5.5 to 7.9 percent in January of 2015 and is likely to rise further. Even as it stands now, it is the third highest rate on the South American continent (excluding Central America). And as one would expect, poverty has started to rise again as well.

  After Stage III comes Stage IV, which Cachanosky describes as follows,

  A new government is swept into office and is forced to engage in “orthodox” adjustments, possibly under the supervision of the IMF or an international organization that provides the funds required to go through policy reforms. Because capital has been consumed and destroyed, real wages fall to levels even lower than those that existed at the beginning of the populist government’s election. The “orthodox” government is then responsible for picking up the pieces and covering the costs of failed policies left from the previous populist regime.

  Whether it comes to that is still yet to be seen. But what this economic crisis does highlight is that short-term success should never be taken as proof of a long-term solution. And this is particularly true when it comes to quasi-socialist and extreme populist governments. In the long-run, countries that follow these policies have a consistent track record, which is basically the same as what we’re witnessing now in Venezuela.

  We’ll have to see if Salon writes a follow up.

   

  

  

  

  

  

• The GOP's Nightmare Is Coming True: With Jeb Out Of Cash, Insiders Say Trump Nomination Almost Certain

  Three months ago we revealed what was the GOP’s biggest nightmare: Donald Trump dominating the polls, which he did from the first days in the GOP presidential primary.

  

   

  Since then, Trump’s ascent has only gotten steeper, forcing one after another political “expert”, talking head and pundit (it is unclear if the Huffington Post still covers Trump in its Entertainment section) to throw in the towel, and admit they have no idea how to read the American public.

  Things only got worse for the GOP faithful when it was revealed that the man who was considered a frontrunner for the primary post, Jeb Bush, now appears to have run out of money. Earlier today Politico reported that Jeb Bush ordered across-the-board pay cuts to his struggling presidential campaign and warned staff that job functions would change.

  On a Friday conference call, top officials said resources would shift heavily to ballot access and voter contact. One person on the Friday morning staff call said they were left with the impression that “very few people will be left in Miami.” Although campaign officials insisted they’re still in strong shape, the moves — combined with Bush’s stagnant poll numbers, despite millions having been spent by his Right to Rise super PAC on television ads over the last month — suggest otherwise.

  The reason for what may be a surprising and premature end to Jeb’s campaign: his fundraisers have given up. According to the WSJ reports, “the family’s vaunted financial network is mostly disengaged and splintered—and his campaign stock is falling.“

  The one-time front-runner for the Republican presidential nomination is roughly tied for third place among GOP contenders in campaign cash and has fallen to fourth or fifth place in national polls, including the latest Wall Street Journal/NBC News survey. His crowds are modest. He failed to dominate in either of the GOP debates, and million-dollar ad buys in Iowa and New Hampshire have barely moved the needle on his support in the early-contest states.

   

  “Jeb’s just blended into the second tier of the Republican pack,” said Doug Corn, an Ohio-based financial adviser and top fundraiser for George W. Bush who hasn’t donated to a candidate this year. “When you run for president, you have to be very charismatic, you have to articulate extremely well and you have to show unbelievable amounts of passion.”

  But while Jeb may be lacking in charisma, there is one candidates who oozes it.

  

  And with Trump seemingly able to absorb any and everything the media will throw at him, and actually thrives on it, and his teflon popularity rising week after week, not only have the naysayers given up, but far more importantly, the odds that Donald Trump wins the Republican presidential nomination are going up. Actually, make that soaring.

  According to Politico, 81% of Republican insiders say the likelihood that Trump becomes their party’s nominee is more today than it was a month ago, and 79 percent of Democrats said the same. That’s according to the Politico caucus – a weekly bipartisan survey of top strategists, operatives and activists in the early-voting states of Iowa, New Hampshire, South Carolina and Nevada.

  Some, such as this bitter, livid Iowa Republican, appear to have moved on beyond the anger and bargaining stage, and reached acceptance. “I can’t even describe the lunacy of him as our nominee. But reason has not applied to date in this race, and my hopes are fleeting that it will ever surface.” Lamented the Iowa Republican, who like all participants was granted anonymity in order to speak freely. If he thinks reason died in the race, he should come see what is going on in the so-called “markets”…

  Others pile on:

  “Predictions of his demise keep not coming true,” said a New Hampshire Republican.

  “Donald Trump being the GOP nominee is now within the realm of possibility,” asserted a South Carolina Republican.

  “Maybe, just maybe, Trump wins an early contest or two. That will trigger a much stronger Stop Trump movement,” a New Hampshire Republican said. “The party will nominate Bob Dole — in 2016 —before it will nominate Trump. And a Trump nomination would result in a third candidate emerging.”

  “The summer of Trump has lasted longer than conventional wisdom suggested it would,” a South Carolina Republican said. “It’s going to take a sustained, multi-pronged paid media effort to educate voters that Trump is not a conservative and has flip-flopped on practically every issue. Major donors are quickly getting to the place where they are ready to fund such an effort.” That’s odd, because many say the same (but inverse) about Hillary: she is not a progressive but is in fact a conservative – perhaps this is the first presidential election in which a Democrat pretends to be a Republican and vice versa.

  “Numbers are numbers and you have to give them credence. I remain skeptical that he has the ability to turn people out, come primary day, but I [have] been wrong about this campaign every step of the way so far“, added a New Hampshire Republican, who like all participants responded via an online survey.

  Yes, yes, we get it – everyone hates Trump, everyone was certain he would be crushed by now, and everyone was wrong precisely for those reasons.

  And just as it was cool to bash Trump three months ago, suddenly it has become all too hip to predict his success: it is amusing how “experts” have become the laughing stock themselves, exposed as nothing more than clueless windsocks .

  To be sure, not everyone is a hater:

  • “I think he’s now mounting a serious campaign,” a South Carolina Republican said. “His stump speech had matured and even though the novelty of his candidacy is wearing off, his straight talk is appealing to people who are so sick of being lied to by the political class.”
  • Another Iowa Republican agreed, saying, “The more time that goes by that he continues to lead — the more likely it is he wins. That simple. Also, comparatively, he is building a real campaign. More so than many others.”
  • “Not sure why anyone should be so surprised that Trump’s campaign is getting so serious in terms of infrastructure build-out,” a New Hampshire Democrat said. “Trump may be a jerk, but he is an extremely successful jerk. He has the means and the smarts to compete everywhere — and he is not slowing down.”

  Politico continues:

  Twenty-two percent of Caucus Republicans said Trump has a 50-50 shot at becoming the Republican nominee; the same percentage said he has a 30 percent chance. The rest of the respondents were divided, with the majority saying his odds are still less than 50 percent. But more than 8-in-10 GOP respondents said those are better odds than they gave Trump a month ago.

   

  The results are notable because they represent a big shift in the thinking of POLITICO Caucus insiders, who this summer were deeply skeptical of Trump’s staying power.

   

  “Trump will be among 3-4 finalists well into April; of that there is no doubt,” an Iowa Republican said.

  But the punchline comes from this insider:

  “I think he’s now mounting a serious campaign,” a South Carolina Republican said. “His stump speech had matured and even though the novelty of his candidacy is wearing off, his straight talk is appealing to people who are so sick of being lied to by the political class.”

  And that is how the biggest Republican nightmare is coming true, because the bolded is all that really matters: if Trump can appeal to the silent, but vast majority – and so far he is doing just that – that is wholeheartedly sick of the fake left-right divide which has made a mockery of representative government and is pandering only to select special interests who have hijacked the US government in the past century, not only is the Trump’s nomination “looking more likely” but so is the Trump presidency.

  

  

  

  

  

• Weekend Reading: Compelling Intellection

  Submitted by Lance Roberts via STA Wealth Management,

  Wednesday, October 21st, marked the date in the future that Martin McFly visited in the second "Back To The Future" film. One thing is for certain, if the Cubs win the World Series, the internet will likely melt.

  

  While the futuristic edition of the "USA TODAY" predicted many things, such as the first female President and the rise of "Slamball," it didn't mention the state of the economy and financial markets. 

  So, without the benefit of a "futuristic paper" on which to make our bets, we must make decisions on the basis of the information we have today. Importantly, as always, we must separate "fact" from "fiction," while setting our emotional biases aside.

  As an investor, it is always important to remember that being "right," but early, is the same as being wrong. But of course, "timing is everything." 

  ---

  THE LIST

  1) The Trouble With Financial Bubbles by Howard Davies via Project Syndicate

  “Bubble-pricking may indeed choke off growth unnecessarily – and at high social cost. But there is a counter-argument. Economists at the Bank for International Settlements (BIS) have maintained that the costs of the crisis were so large, and the cleanup so long, that we should surely now look for ways to act pre-emptively when we again see a dangerous build-up of liquidity and credit.

   

  Hence the fierce (albeit arcane and polite) dispute between the two sides at the International Monetary Fund's recent meeting in Lima, Peru. For the literary-minded, it was reminiscent of Jonathan Swift's Gulliver's Travels. Gulliver finds himself caught in a war between two tribes, one of which believes that a boiled egg should always be opened at the narrow end, while the other is fervent in its view that a spoon fits better into the bigger, rounded end."

  Read Also: 3 Reasons Stock Market Corrections Are Inevitable by Sean Williams via Motley Fool

  Also Read: The Calm Before The Stock Market Storm by Joe Calhoun via Alhambra Partners

   

  2) The 401k Crisis Is Getting Worse by Carol Hymowitz via Bloomberg

  “Even as people live longer and must save more for old age than prior generations, most can not depend on any help from employers. Almost half of U.S. workers didn't have a company-sponsored retirement plan in 2013, compared with 39 percent in 1999, according to an analysis of Census Bureau data.

   

  Those most vulnerable include both millennials at startups and managers in their 40s and 50s who've gone from corporate jobs with benefits to small businesses without them. Some 58 percent of the 68 million wage-and-salary workers without a company-sponsored retirement plan in 2013 worked for a business with fewer than 100 employees, according to the Employee Benefit Research Institute.

   

  "The current 401(k) system was designed for a workplace that doesn't exist for most people: lifetime careers at big corporations that offer benefits," says Teresa Ghilarducci, an economist at the New School who researches retirement policies. "Saving consistently — which you need to do for just a modest retirement income — isn't remotely likely."

  

  Read Also: 51% Of American Workers Make Less Than $30k by Michael Snyder via End Of American Dream

  But Also Read: How Screwed Is America's Middle Class by Chris Matthews via Fortune

   

  3) Why Many Investors Keep Fooling Themselves by Jason Zweig via WSJ

  “What are we smoking, and when will we stop?

   

  A nationwide survey last year found that investors expect the U.S. stock market to return an annual average of 13.7% over the next 10 years.

   

  We all should be so lucky. Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points.

   

  So, in order to earn 6% for clients after inflation, fees and taxes, these financial planners will somehow have to pick investments that generate 11% or 13% a year before costs. Where will they find such huge gains? Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%."

  Read Also: 7 Ways Your Brain Makes You Poor by Sam Ro via Business Insider

  But Also Read: You Don't Need A Recession For A Bear Market by Eric Parnell via Seeking Alpha

   

  4) The Fed & The Great Depression Myth by John Tamny via Real Clear Markets

  "There is a great deal to criticize the Federal Reserve about. Countless books have been written for just that purpose. My next book will argue that while the Fed's power is vastly overstated, it's surely perilous to the economy's health on its worst days, while superfluous on its best.

   

  So while the Fed is regularly being blamed for everything from inflation to acne, one of the seemingly more common and "credible" assertions is that the Fed somehow caused the Great Depression. This is one of those comical myths that just won't die."

  Read Also: The Fed Is Stuck by Jeffrey Bartash via MarketWatch

  But Also Read: I Don't Trust The Phillips Curve by Matt Phillips via Quartz

   

  5) 8 Biggest Question On Investors' Minds by Nicholas Colas via ZeroHedge

  "When we get a chance to leave the bubble of the New York financial world, we grab on and hold tight. Today we spoke on a panel in Atlanta for SunTrust Investment Services where we got to hear the real world opinions of scores of advisors and, by extension, their clients.

   

  Top of mind issues included "When is the Fed going to increase interest rates", "what does the election next year mean for stocks", "where are oil prices going", "what's the outlook for equities over the next decade" and "what could go wrong right now".

   

  The upshot of the discussions was clear: the bull case for U.S. stocks seems clearest but no one thinks there is any easy money to be made from current levels. Our message was to embrace the bearish case, but use upcoming volatility as a buying opportunity for the next bull market. This one, we think, is on its last, faltering legs and the hyenas are circling. Other panelists were more optimistic, so read on for the complete story."

  Read Also: Get Used To It, Low Rates Are Here To Stay by Noah Smith via Bloomberg

  Read Also: Rebellion At The Fed by Matt O'brien via Washington Post

  ---

  Other Reading

  • Stocks Aren't Overvalued? by Jesse Felder via The Felder Report
  • Faber's Monthly Compendium Of Insights by Meb Faber via Faber Research
  • QE Vs. Negative Rates by Tyler Durden via ZeroHedge
  • 5 Bad Reasons To Raise Rates by Paul Kasriel via Advisor Perspectives
  • Hitting The Limit Of "Whatever It Takes" by Karen Ward via WSJ
  • Oil Glut Getting Worse, Not Better by Matt Smith via OilPrice.com
  • Beware The Red Swan by David Stockman via David Stockman's Contra Corner
  • Most Important Charts In The World by Myles Udland via Business Insider

  ---

  “October is a particularly dangerous month to speculate in stocks. Followed by July, January, September, April, November, May, March, June, December, August, and February.” – Mark Twain

  Have a great weekend.

  

  

  

  

  

• Majority Of Americans Believe US Would Be Safer If More People Carried Guns

  When 26-year old Chris Harper Mercer opened fire at an Oregon community college earlier this month killing 9 people, the gun control debate was once again thrust into the national spotlight just a little over a month after Vester Flanagan gunned down a reporter on live television and just three months after 9 worshippers were fatally shot at an African American church in downtown Charleston. 

  The arguments are always the same on both sides. On the one hand there are those who contend that easy access to firearms and the very existence of the Second Amendment are to blame for the violence. On the other side are those who say that mental health is the problem and that in fact, the world would be a safer place if more people had concealed carry permits (i.e. if more people were carrying around guns in public). 

  As is always the case, the truth is probably somewhere in the middle, but from a kind of mutually assured destruction/ deterrence perspective, there does seem to be some merit to the idea that one responsible citizen with a handgun might well be able to make a difference in scenarios like that which played out at Umpqua Community College. That’s not to say that the best thing to do is turn the entire country into the Wild West where disputes are solved at ten paces in the middle of a dusty street at high noon, only that it’s a lot easier to stop someone who is determined to shoot innocent people if you have a gun yourself. 

  Against this backdrop, we bring you the following from Gallup whose most recent poll shows that the majority of Americans think the country would be safer if more people carried firearms after passing a criminal background check and training course. Here’s more:

  A majority of Americans, 56%, believe that if more Americans carried concealed weapons after passing a criminal background check and training course, the country would be safer.

   

  

   

  These results are from Gallup’s annual Crime poll conducted Oct. 7-11. In the wake of mass shootings at schools and other public places, some have argued that the shootings could have been stopped if any of the victims had carried weapons. Others argue that having more citizens carrying weapons can lead to more violence and accidental shooting.

   

  

   

  Among key subgroups, Democrats and those with postgraduate education are least likely to believe that more concealed weapons would make the U.S. safer. Republicans and gun owners are most likely to say it would make the nation safer. Younger Americans are more likely to choose the “safer” option than those aged 30 and above.

   

  The seemingly continuous incidence of mass shootings in the U.S. in recent years underscores the need for a focus on what can be done to prevent such tragic events in the future. Previous Gallup research has shown that Americans believe a failure of the mental health system to identify individuals who are a danger to others and easy access to guns are more to blame for mass shootings than other causes tested.

   

  Gallup’s most recent poll on gun control shows that a majority of Americans favor stricter gun sale laws in this country. At the same time, however, less than half of Americans believe that one such stricter law — universal background checks — would prevent mass shootings. In fact, a majority say that if more Americans carried concealed weapons after passing background checks and training, the nation would be safer.

  From a sociological perspective, the interesting thing here is that the spirit of the Second Amendment to a certain extent harkens back to citizens’ right (indeed, their civic duty) to resist injustice in the event government becomes oppressive. Now, the social fabric of the US has apparently been stretched to the point that citizens need to exercise their Constitutional right to bear arms just to keep from getting shot in math class or at the movie theatre.  

  We’ll leave it to readers to determine what that says about where society is headed going forward. 

  

  

  

  

• Crude Crashes & Stocks Soar As Global Central Bankers Hit Panic Button

  Distraction time….because quite frankly buying into this central bank-driven mania confirms most investors are from another planet bereft of common sense…

   

  From the China rate cut, stocks spiked then retraced it all before a mysterious buyer of first resort lift everything back to the highs of the day (to 'prove' everything is awesome)…

  

   

  But Nasdaq was soaring on the back of GOOG, AMZN, FB, and MSFT…

  

   

  AMZN, MSFT, GOOG – bwuahahaha

  

   

  On the day, Nasdaq was the biggest winner with Trannies lagging but everything higher…

  

   

  On the week, Nasdaq was again the big winner as Small Caps scrmabled back to the unchanged line (and S&P back to unch year-to-date)

  

   

  The cash Nasdaq Composite closed above 5000 for the first time since 8/18. Dow & S&P closed above its 200DMA, And The S&P 500 Tech sector closed at its highest since September 2000… (the 5% gain this week is the biggest since Dec 2011)…

  

   

  VIX notably decoupled from stocks today…

  

   

  And more clearly over the last 2 days… VIX is unchanged from 1230ET yesterday, while the S&P is up 30 points since then…

  

   

  Of course – it wasn't just US equities. Japanese stocks were insane – NKY rose over 1100 points this week tick for tick with USDJPY's surge…

  

   

  Treasury yields rose in sympathy with equity exuberance today with the belly underperforming the long-end on the week(decoupling today after China)

  

   

  But TSYs and stocks remain decoupled on the week…

  

   

  The US Dollar soared against the majors this week… (the best week in 4 months to 3-month highs) – the last 2 days are the biggest rise in The USD Index since Oct 2011

  

   

  And had its best wek against Asian FX in a month.. (amid very significant volatility)

  

   

  Commodities all lost ground on the week against the stronger USD – Gold's worst week in the last 6, Silver's worst in the last 8, but crude was wost… not exactly the picture of rate-cut driven growth expectations…

  

   

  Gold was waterfalled after spiking on China rate cut news…

  

   

  This was Crude's worst week in 3 months… (down 10% in the last 2 weeks)

  

   

  *  *  *

  Finally, all regions saw rate-hike timing rise (extend) with Europe now assuming no rate hike for at least 3 years!!

  

   

  Charts: Bloomberg

  Bonus Chart: And Here's Why You Were Buying This Week!!!

  S&P 500 Forward EPS Estimate falls for 6th consecutive week, 13 week ROC turns negative pic.twitter.com/sEoqGYwan3

  — Not Jim Cramer (@Not_Jim_Cramer) October 23, 2015

  

  

  

  

• Why The Chinese Rate Cut Will Do Nothing To Slow China's Economic Decline

  Submitted by Bryce Coward via Gavekal Capital blog,

  Today the Peoples Bank of China cut the benchmark interest rate by .25% and lowered banks’ reserve requirements by .5%. The measure is supposed to spur growth and make life a little easier on debt-ridden Chinese companies. In the immediate term it may give a slight boost to the economy, but there is no chance this measure, or others like it, will keep the Chinese economy from slowing much further in the years ahead. Let us explain…

  The continued and dramatic slowing of the Chinese economy in the years ahead is baked in the cake. For the last decade Chinese growth has been fueled by investment in infrastructure (AKA fixed capital formation).

   

  In an effort to sustain a high level of growth massive and unprecedented investment in fixed capital was carried out and fixed investment has now become close to 50% of the Chinese economy.

   

  On the flip side, consumption as a percent of GDP has shrunk from about 46% of GDP to only 38% of GDP. Most emerging market countries run with fixed investment of around 30-35% of GDP and with consumption accounting for about 40-50% of GDP – exactly the opposite dynamic of the Chinese economy.  China has run into a ceiling in terms of the percent of the economy accounted for by fixed investment and now fixed investment must shrink to levels more appropriate for China’s stage of economic development.

   

  This necessarily implies a slowing of the Chinese economy from what the government says is near 7% to something closer to 2-4%, and that is in the optimistic scenario in which consumption growth picks up the pace to mitigate the slowdown in investment.

  This is why cuts in rates mean practically nothing for China’s long-term economic prospects. In the short-term rate cuts may postpone corporate bankruptcies by allowing companies to refinance debt at lower rates. Rate cuts may also make housing more affordable, on the margin. But these are cyclical boosts that act as tailwinds to China’s economic train.

  

   

  No amount of wind, save a hurricane, is going to keep the train from slowing.

  As a reminder, it has not been working…

  

  

  

  

  

  

• Three Chinese Warships To Dock In Florida Port

  At a time when the US and China are practically at arms over the artificial islands in the South China Seas, with the US sending warships on location to patrol (despite White House Spokesman Josh Earnest saying on Oct. 8 that U.S. warships “should not provoke significant reaction from the Chinese”) and a stunned China responding “What On Earth Makes Them Think We Will Tolerate This“, the last thing we thought we would see right now was three Chinese warships about to port in Florida’s Naval Station Mayport.

  And yet according to USNI that is precisely what is about to happen: citing US Navy officials, USNI reports that he three ships about to dock in the US are the Type 052C Luyang II-class guided-missile destroyer Jinan (152), the Type 054A Jiangkai II-class guided-missile frigate Yiyang (548) and the Type 903 Fuchi-class fleet oiler Qiandao Hu (886).

  

  Type 52 Luyang II guided missile destroyer Jinan

  “Three vessels are on an around-the-world deployment and will conduct the goodwill visit after completing port calls in Europe,” read a statement from Navy Region Southeast. “The amphibious assault ship USS Iwo Jima (LHD-7) will serve as the host ship. In Mayport, sailors from both navies will participate in sporting events and interact during ship tours.”

  The close navy encounters go both ways: yesterday, a collection of about two dozen U.S. naval officers paid a visit to the Chinese aircraft carrier Liaoning in China, according to Chinese state controlled press and confirmed by the Navy.

  U.S. officials would not elaborate if there would be an at-sea training component to the visit slated to run from Nov. 3rd to the 7th.

  What makes the visit particularly awkward is that, as Navy officials stressed, the visit was planned months in advance and comes just as Washington and Beijing are at loggerheads over territorial possessions in the South China Sea.

  It is also notable, that in addition to the Mayport visit, China has sent the flotilla to first ever port visits in the Baltic Sea in ports like Stolkholm, Sweden and Helsinki, Finland as part of the world tour. Perhaps it is just part of China’s due diligence.

  Some US Congressmen are not too happy about the Chinese visit: “While the U.S. has been fervently cultivating military-to-military exchanges, China’s behavior at sea has not tracked with its rhetoric of a ‘peaceful rise’,” read a Thursday statement from Rep. Randy Forbes, from the chair of the House Armed Services Subcommittee on Seapower and Projection Forces, to USNI News.

  “Engagement like the upcoming Chinese visit to Mayport should not be done purely for engagement’s sake, and I hope that in addition to increased transparency, we start to see China moderate its other destabilizing activities.”

  However, the most interesting news is that according to the US Naval Institute, despite much posturing, the Obama administration has not yet dispatched ship toward China, and instead has been merely weighing for weeks whether or not it will send a freedom of navigation mission within 12 nautical miles — the internationally recognized maritime border — of features in the Spratly and Paracel China has reclaimed from the sea.

  It would appear that Obama was once again all talk and once China threatened to call the U.S. bluff and warned it would use force, the US desire for confrontation promptly evaporated.

  

  

  

  

  

• Is Russia The King Of Arctic Oil By Default?

  Submitted by Colin Chilcoat via OilPrice.com,

  To be king implies preeminence, or lasting rule. In the Arctic, such oil and gas supremacy is still little more than a dream. That dream remains alive in Russia however, and the nation – through an unmatched stubbornness and a decidedly timid field of competitors – is making a strong bid for the throne.

  A cursory search of ‘Arctic’ and ‘oil’ elicits little in the way of positivity. Certainly, Shell’s failure in the Chukchi Sea is notable. Combined with the Obama administration’s waffling distaste for future offshore Arctic development, it marks what should be a period of relative dormancy in U.S. waters. Still, it’s not indicative of the sector globally, which is seeing progress, albeit at a glacial pace.

  The shining example of such development to date is Gazprom Neft’s Prirazlomnaya platform. Located nearly 40 miles offshore in the Pechora Sea, the rig is the world’s first Arctic oil project involving a stationary platform – though the general concept itself has been employed before (see: BP’s Northstar Island).

  Gazprom Neft began production at the Prirazlomnoye field in 2013 and reached commercial figures last year, with a total output of roughly 5,000 barrels per day (bpd). With production well number two (of 19) now online, output should reach somewhere between 10,000-15,000 bpd by year’s end.

  To be fair, several important tests lie ahead for Prirazlomnaya and Russia’s Arctic shelf development in general. Chief among them is rapidly addressing its import dependence – one of the primary targets of U.S. and EU sanctions. No more than 10 percent of the equipment applied at the Prirazlomnaya installation is believed to be Russian-made, and this level of disparity is commonplace at both Russia’s onshore and offshore fields.

  Attention, domestic and international, has been given to the courting of China, India, and other backers – both financial and technological – but all eyes should be on the Russian solution, which will seek to demonstrate its efficacy by 2020.

  At the Prirazlomnoye field, the Russian institute Omskneftekhimproekt has begun work on the modernization of the rig’s drilling installations, technological equipment, and safety and telecommunications systems. The primary objectives are to boost production capacity (to ~120,000 bpd) toward 2020 and lay the building blocks for the future development of Russian-sourced platforms.

  The work by Omskneftekhimproekt mirrors that of several institutes, companies, and universities across the country, rallying around the call for import substitution. However, just how much can actually be accomplished is the billion dollar question.

  As Russia moves from ideas to concrete mechanisms (read: any forced Russification of the upstream oil and gas industry), the country’s traditionally poor institutions and penchant for corruption will not be easily circumvented – not to mention the stark technical realities of reducing import dependence some 70 percent.

  In the meantime – technology be damned – Russia continues to actively and ambitiously position itself across its Arctic geography. The holder of some 58 percent of the entire region’s hydrocarbon resources, Russia has several notable projects in the pipeline.

  Gazprom Neft’s Novy Port, Bashneft and Lukoil’s Trebs and Titov, as well as Gazprom Neft and Novatek’s Severenergia are three of the most promising Arctic onshore greenfield projects currently under development. Crude deliveries from Novy Port have already hit the European market, and together the three projects could produce as much as 400,000 bpd by the end of the decade.

  The Dolginskoye, Messoyakha, and Russkoye fields are further from realization, though they’re demonstrative of both Russia’s relatively prolific Arctic movements, and its sheer productive capacity.

  In the medium-term, competition will be light: arctic crude production in Alaska has slipped noticeably and will continue to decline through 2040; activity in Canada’s Beaufort Sea appears dead in the water; and years of exploratory drilling in Greenland have not yielded a single development project.

  Eni’s Goliat project in the Norwegian Arctic, which is set to come on stream pending final approval from Norwegian authorities, is the lone bright spot for the other four major littoral nations. It differs significantly from Prirazlomnaya, but at its peak, Goliat should deliver 100,000 bpd from its floating perch high in Norway’s “manageable” Barents Sea.

  To be sure, no one can yet claim supremacy over Arctic oil, but, for the time being, Russia remains its king by default.

  

  

  

  

  

• Is Mario Draghi About To Go Full-Kuroda? RBS Says ECB Could Buy Stocks

  At Thursday’s presser, Mario Draghi telegraphed more easing from the ECB come December. 

  This wasn’t exactly a surprise. In fact, some observers had expected Draghi to expand PSPP at the September meeting and although the market was disappointed in that regard, the ECB did raise the issue limit from 25% to 33% effectively giving themselves more dry powder. 

  The question now, is what exactly the ECB will announce. That is, will Draghi cut the depo rate further into negative territory thus setting off a chain reaction for the Riksbank and the SNB and thus raising the spectre of NIRP for retail depositors? 

  How long into 2017 will PSPP be extended? 

  Given the scarcity of purchasable paper, will the ECB expand the universe of eligible assets and if so, will Draghi go full-Kuroda knowing full well that you never, ever go full-Kuroda? 

  All good questions, and ones we suspect many a sellside strategist will attempt to answer in the weeks ahead. For his part, RBS’ Alberto Gallo is out with a rundown of the ECB’s options and not only are non-financial corporate bonds on the list (something we predicted months ago), but so are (gasp) stocks, suggesting that the ECB may soon embark on a Japan-style effort to corner the equity market along with the government bond market. 

  First, Gallo notes the ECB’s mention of the SNB (another central bank which, like Japan, is sitting on a hundred billion dollar equity book): 

  Yesterday the ECB prepared the ground for more easing in December, as we expected. What was surprising was the post-meeting Q&A, which went into more detail on the possibilities for easing, and even made a direct comparison with the Swiss National Bank – currently the central bank with the largest balance sheet as % of GDP (90%) in developed markets.

   

  
  

  Next, RBS suggests that we should take the ECB quite literally when they say that they are “open to a whole menu of monetary policy instruments”:

  All options considered means non-financial credit, wholesale loans, subsovereigns, and even equities. We have already outlined that expanding purchases to other types of credit could theoretically double the pool of the ECB’s purchasable bonds, to almost €19tn. 

   

  Adding more utilities or state-backed corporates is a logical step, but it is not going to give the ECB much further room. The ECB could decide to go further into the pool of € non-financial corporate bonds (€893bn) rated BBB and above, including € bonds from non-Eurozone issuers (€687bn excluding non-Eurozone issuers). 

   

  

   

  Adding equities would be particularly aggressive, offering a further €7tn of purchasable assets.

  Then there’s the possibility of buying muni bonds:

  Sub-sovereign bonds are another option, adding €336bn of local government bonds to the pool of assets. Sub-sovereign bonds account for around 3% of Eurozone GDP (this is small compared with the US, where municipal bonds are 21% of GDP).

  And finally, in what might be looked upon as an even more outlandish move than buying equities, the ECB could simply buy individual personal loans from banks because apparently, doing so indirectly via ABS purchases hasn’t worked:

  One incentive for the ECB to launch the ABS purchase programme last year was likely to encourage securitisation, helping banks to deconsolidate their balance sheets and unlock new lending. But securitisation issuance hasn’t picked up (see SIFMA data). This is partly due to the lack of harmonisation of national-level rules, the harsh capital treatment even for simple securitisations and the lack of government support (no guarantees to mezzanine tranches, even though the ECB can now buy guaranteed mezzanine tranches through ABSPP). Given the stagnant developments in the securitisation market, the ECB could instead start to buy loans directly to better target easing at the real economy. There are practical hurdles to loan purchases – illiquidity, lack of transparency, long settlement periods. 

  Yes, “practical hurdles” like “illiquidity, lack of transparency, long settlement periods” … and let’s not forget “the public perception that the Gods must be crazy”, which is precisely what people would think once they learned that a developed market central bank had begun buying individual borrowers’ car loans from banks.

  Just how large could this program ultimately get, you ask? Well, you’re in the pee wee league if you’re a central bank and your balance sheet doesn’t sum to a respectable percentage of GDP and on that measure, the ECB has a long way to go:

  The SNB has a balance sheet equivalent to 90% of GDP, the highest amongst major developed economies (see chart above). Taken that as a theoretical ceiling, the ECB could further expand its balance sheet by another 70% of GDP, i.e. over three times what they have done so far.

  Of course none of this is going to work. As we’ve seen in Japan, you can monetize assets until the cows come home (indeed, until you break the market), but virtually all of the evidence from the global, post-crisis experiment in unconventional monetary policy suggests that you will have i) little to no effect on inflation expectations, and ii) a muted effect at best on aggregate demand. In fact, one would think that the ECB would have learned something from the fact that they’ve been buying bonds since early March and the bloc is now back in deflation. 

  In the end, all that will happen is the EMU’s neighbors will be forced further into NIRP and the ECB will end up with a nightmarish balance sheet full of stocks, corporate credit, munis, and God only knows what kind of loans purchased from banks, and all of which will have been bought at or near the top. As Gallo notes, “the larger the balance sheet and the riskier the assets a central bank buys, the higher the potential for losses”.

   Indeed, and that sets up the possibility that central banks could end up being forced to operate from a negative equity position. In other words: it sets up the possibility that they’ll technically go broke. As for what happens next, we’ll leave that for another post.

  

  

  

  

  

  

• DOJ Closes Lois Lerner Investigation Without Charges

  Confirming once again that the U.S. has full devolved into a total banana republic, moments ago CNN reported that the US Department of “Justice” is closing its two-year investigation into whether the IRS improperly targeted tea party and other conservative groups. There will be no charges against former IRS official Lois Lerner or anyone else at the agency, the Justice Department said in a letter.

  The DOJ’s finding:

  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.”

   

  “We found no evidence that any IRS official acted based on political, discriminatory, corrupt, or other inappropriate motives that would support a criminal prosecution,” Assistant Attorney General Peter Kadzik said in the letter. “We also found no evidence that any official involved in the handling of tax-exempt applications or IRS leadership attempted to obstruct justice. Based on the evidence developed in this investigation and the recommendation of experienced career prosecutors and supervising attorneys at the department, we are closing our investigation and will not seek any criminal charges.”

  They must have searched real hard, especially once they found all those deleted lost emails.

  CNN adds that the IRS mishandled the processing of tax-exempt applications in a manner that disproportionately impacted applicants affiliated with the tea party and similar groups, leaving the appearance that the IRS’s conduct was motivated by political, discriminatory, corrupt, or other inappropriate motive.

  So now we know that in addition to insider traders working for SAC, targeting conservatives is, according to the DOJ, also not a crime.

  What is a crime? Blowing the whistle on the Big Brother state, where every single electronic communication among US citizens is processed and recorded in perpetuity.

  Now that is nothing short of treason.

  And now back to your regularly scheduled market meltup which at this point may last forever: after all, it is only a matter of time before the DO”J” pulls a page out of the Chinese playbook and decides that selling any stock is also a criminal offense punishable with years of hard time.

  

  

  

  

  

• 3 Questions They Should Have Asked Hillary About Benghazi, But Didn't (And Never Will)

  Submitted by Jake Anderson via TheAntiMedia.org,

  The circus is back in town in Washington D.C. (actually, it’s part of a permanent residency), as a congressional panel spent Thursday peppering presidential candidate Hillary Clinton with questions about her role in the Benghazi consulate attack. The attack left four Americans dead, including Ambassador Chris Stevens, and has been the subject of political scandal ever since, with Republicans claiming then-Secretary of State Clinton didn’t do enough to sufficiently fortify the security detail of the consulate.

  It’s pure political theater, but sadly, no one on this congressional panel will ask the real questions to which Americans deserve answers. And this is because the real scandal presents questions that can’t be asked, because the answers indict the entire U.S. government.

  What was our true geopolitical motive in Libya?

  At its core, the 2011 NATO-backed rebels’ deposal of Libya’s dictator, Muammar Gaddafi, involved United States foreign policy interests. As with other recent military actions in the Middle East, it is part of a deep and blood-soaked history of coups that includes no less than 35 countries.

  Soon after 9/11, former General Wesley Clark was informed about a memo outlining how the U.S. government planned to “take out” seven countries in five years. Those countries included Iraq, Libya, Syria, Lebanon, Somalia, Sudan, and Iran.

  According to many reports, this plan had been in the works since the 1990s, when the neoconservative think tank, Project For A New American Century — which was presided over by stalwart war profiteers Dick Cheney, Donald Rumsfeld, Paul Wolfowitz, Richard Perle, and others — drew up plans for an all-out invasion of Iraq as early as 1998. This plan included comprehensive military actions throughout the Middle East, as described by General Clark.

  The overthrow of Libya’s secular-Arab nationalist regime was very much a part of this geopolitical coup, a predicate of which was protecting the petrodollar (which is a term used to describe the world’s dominant reserve currency, the U.S. dollar, which is based on petroleum exports) and establishing a permanent occupying force in the Middle East. When Gaddafi announced in 2009 that he planned to nationalize the country’s oil reserves, he may have sealed his fate.

  So, the question for then-Secretary of State Hillary Clinton would be something like this: do you still support the administration’s decision to arm the terrorist group Al Qaeda (remember them?) in order to topple Gaddafi, destabilize the government, and allow the U.S. to install a puppet regime amenable to economic imperialism? The answer would not be politically expedient.

  What was the role of Ambassador Stevens in supplying arms to Syria?

  A wide variety of news sources have now confirmed the CIA was indeed running an arms smuggling team in Benghazi at the time the consulate was attacked. Pulitzer-prize winning investigative reporter Seymour Hersh, among others, dug up more of the facts about what was really going on Libya and why the matter is controversial for all the wrong reasons:

  “A highly classified annex to the report, not made public, described a secret agreement reached in early 2012 between the Obama and Erdo?an administrations. It pertained to the rat line. By the terms of the agreement, funding came from Turkey, as well as Saudi Arabia and Qatar; the CIA, with the support of MI6, was responsible for getting arms from Gaddafi’s arsenals into Syria.”

  So our question to Clinton would be: how would you characterize Ambassador Steven’s role in the rat line that was running guns to Syrian rebels through Libya?

  Did we topple Gaddafi because he was rejecting the petrodollar and threatening to adopt a gold-based currency?

  As mentioned above, the toppling of Libya’s dictator was directly related to protecting the power of the petrodollar in the Middle East. According to Anthony Wile, prior to his ousting, Gaddafi had made no secrets about introducing a gold dinar, “a single African currency made from gold, a true sharing of the wealth.”

  Gaddafi possessed about 144 tons of gold and believed this gold dinar would prove to be a major financial asset as a national currency. In an interview with RT, Wile said:

  “If Gaddafi had an intent to try to re-price his oil or whatever else the country was selling on the global market and accept something else as a currency or maybe launch a gold dinar currency, any move such as that would certainly not be welcomed by the power elite today, who are responsible for controlling the world’s central banks. … So yes, that would certainly be something that would cause his immediate dismissal and the need for other reasons to be brought forward from moving him from power.

   

  “The central banking Ponzi scheme requires an ever-increasing base of demand and the immediate silencing of those who would threaten its existence. Perhaps that is what the hurry is in removing Gaddafi in particular and those who might have been sympathetic to his monetary idea.”

  There is plenty of precedence for such a military-backed silencing. Many analysts believe Saddam Hussein’s intent to trade Iraqi oil in Euros instead of the dollar was the final straw before the U.S. invasion of Iraq.

  In Gaddafi’s case, his overthrow may have protected our petroleum-based currency from a gold dinar alternative, but it has plunged North Africa into chaos and allowed Islamist militias to gain control over Tripoli.

  So our final question to Madam Secretary Clinton (and it’s a doozy): approximately how many innocent civilians have died protecting the petrodollar?

  

  

  

  

  

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• What If They Started A War And Everyone Came?

  Submitted by Peter Van Buren via TomDispatch.com,

  What if the U.S. had not invaded Iraq in 2003? How would things be different in the Middle East today? Was Iraq, in the words of presidential candidate Bernie Sanders, the "worst foreign policy blunder" in American history? Let's take a big-picture tour of the Middle East and try to answer those questions. But first, a request: after each paragraph that follows, could you make sure to add the question “What could possibly go wrong?”

  Let the History Begin

  In March 2003, when the Bush administration launched its invasion of Iraq, the region, though simmering as ever, looked like this: Libya was stable, ruled by the same strongman for 42 years; in Egypt, Hosni Mubarak had been in power since 1983; Syria had been run by the Assad family since 1971; Saddam Hussein had essentially been in charge of Iraq since 1969, formally becoming president in 1979; the Turks and Kurds had an uneasy but functional ceasefire; and Yemen was quiet enough, other than the terror attack on the USS Cole in 2000. Relations between the U.S. and most of these nations were so warm that Washington was routinely rendering “terrorists” to their dungeons for some outsourced torture.

  Soon after March 2003, when U.S. troops invaded Iraq, neighboring Iran faced two American armies at the peak of their strength. To the east, the U.S. military had effectively destroyed the Taliban and significantly weakened al-Qaeda, both enemies of Iran, but had replaced them as an occupying force. To the west, Iran's decades-old enemy, Saddam, was gone, but similarly replaced by another massive occupying force. From this position of weakness, Iran’s leaders, no doubt terrified that the Americans would pour across its borders, sought real diplomatic rapprochement with Washington for the first time since 1979. The Iranian efforts were rebuffed by the Bush administration.

  The Precipitating Event

  Nailing down causation is a tricky thing. But like the June 1914 assassination of Archduke Franz Ferdinand that kicked off the Great War, the one to end all others, America's 2003 invasion was what novelists refer to as “the precipitating event,” the thing that may not actively cause every plot twist to come, but that certainly sets them in motion.

  There hadn’t been such an upset in the balance of power in the Middle East since, well, World War I, when Great Britain and France secretly reached the Sykes-Picot Agreement, which, among other things, divided up most of the Arab lands that had been under the rule of the Ottoman Empire. Because the national boundaries created then did not respect on-the-ground tribal, political, ethnic, and religious realities, they could be said to have set the stage for much that was to come.

  Now, fast forward to 2003, as the Middle East we had come to know began to unravel. Those U.S. troops had rolled into Baghdad only to find themselves standing there, slack-jawed, gazing at the chaos. Now, fast forward one more time to 2015 and let the grand tour of the unraveling begin!

  The Sick Men of the Middle East: It’s easy enough to hustle through three countries in the region in various states of decay before heading into the heart of the chaos: Libya is a failed state, bleeding mayhem into northern Africa; Egypt failed its Arab Spring test and relies on the United States to support its anti-democratic (as well as anti-Islamic fundamentalist) militarized government; and Yemen is a disastrously failed state, now the scene of a proxy war between U.S.-backed Saudi Arabia and Iranian-backed Houthi rebels (with a thriving al-Qaeda outfit and a small but growing arm of the Islamic State [ISIS] thrown into the bargain).

  Iraq: Obama is now the fourth American president in a row to have ordered the bombing of Iraq and his successor will almost certainly be the fifth. If ever a post-Vietnam American adventure deserved to inherit the moniker of quagmire, Iraq is it.

  And here’s the saddest part of the tale: the forces loosed there in 2003 have yet to reach their natural end point. Your money should be on the Shias, but imagining that there is only one Shia horse to bet on means missing just how broad the field really is. What passes for a Shia “government” in Baghdad today is a collection of interest groups, each with its own militia. Having replaced the old strongman prime minister, Nouri al-Maliki, with a weak one, Haider al-Abadi, and with ISIS chased from the gates of Baghdad, each Shia faction is now free to jockey for position. The full impact of the cleaving of Iraq has yet to be felt. At some point expect a civil war inside a civil war.

  Iran: If there is any unifying authority left in Iraq, it is Iran. After the initial 2003 blitzkrieg, the Bush administration’s version of neocolonial management in Iraq resulted in the rise of Sunni insurgents, Shia militias, and an influx of determined foreign fighters. Tehran rushed into the power vacuum, and, in 2011, in an agreement brokered by the departing Bush administration and carried out by President Obama, the Americans ran for the exits. The Iranians stayed. Now, they have entered an odd-couple marriage with the U.S. against what Washington pretends is a common foe — ISIS — but which the Iranians and their allies in Baghdad see as a war against the Sunnis in general. At this point, Washington has all but ceded Iraq to the new Persian Empire; everyone is just waiting for the paperwork to clear.

  The Iranians continue to meddle in Syria as well, supporting Bashar al-Assad. Under Russian air cover, Iran is increasing its troop presence there, too. According to a recent report, Tehran is sending 2,000 troops to Syria, along with 5,000 Iraqi and Afghan Shia fighters. Perhaps they’re already calling it “the Surge” in Farsi.

  The Kurds: The idea of creating a “Kurdistan” was crossed off the post-World War I “to do” list. The 1920 Treaty of Sèvres at first left an opening for a referendum on whether the Kurds wanted to remain part of what remained of the Ottoman Empire or become independent. Problem one: the referendum did not include plans for the Kurds in what became Syria and Iraq. Problem two: the referendum never happened, a victim of the so-called Turkish War of Independence. The result: some 20 million angry Kurds scattered across parts of modern Iran, Iraq, Turkey, and Syria.

  That American invasion of 2003, however, opened the way for the Kurds to form a virtual independent statelet, a confederacy if you will, even if still confined within Iraq's borders. At the time, the Kurds were labeled America's only true friends in Iraq and rewarded with many weapons and much looking the other way, even as Bush administration officials blathered on about the goal of a united Iraq.

  In 2014, the Kurds benefited from U.S. power a second time. Desperate for someone to fight ISIS after Iraq's American-trained army turned tail (and before the Iranians and the Shia militias entered the fight in significant force), the Obama administration once again began sending arms and equipment to the Kurds while flying close air support for their militia, the peshmerga. The Kurds responded by fighting well, at least in what they considered the Kurdish part of Iraq. However, their interest in getting involved in the greater Sunni-Shia civil war was minimal. In a good turn for them, the U.S. military helped Kurdish forces move into northern Syria, right along the Turkish border. While fighting ISIS, the Kurds also began retaking territory they traditionally considered their own. They may yet be the true winners in all this, unless Turkey stands in their way.

  Turkey: Relations between the Turks and the Kurds have never been rosy, both inside Turkey and along the Iraqi-Turkish border.

  Inside Turkey, the primary Kurdish group calling for an independent state is the Kurdistan Workers party (also known as the PKK). Its first insurgency ran from 1984 until 1999, when the PKK declared a unilateral cease-fire. The armed conflict broke out again in 2004, ending in a ceasefire in 2013, which was, in turn, broken recently. Over the years, the Turkish military also carried out repeated ground incursions and artillery strikes against the PKK inside Iraq.

  As for ISIS, the Turks long had a kind of one-way “open-door policy” on their border with Syria, allowing Islamic State fighters and foreign volunteers to transit into that country. ISIS also brokered significant amounts of black market oil in Turkey to fund itself, perhaps with the tacit support, or at least the willful ignorance, of the Turkish authorities. While the Turks claimed to see ISIS as an anti-Assad force, some felt Turkey's generous stance toward the movement reflected the government’s preference for having anything but an expanded Kurdish presence on its border. In June of this year, Turkish President Recep Erdogan went as far as to say that he would "never allow the establishment of a Kurdish state in northern Syria."

  In light of all that, it’s hardly surprising that early Obama administration efforts to draw Turkey into the fight against ISIS were unsuccessful. Things changed in August 2015, when a supposedly anti-ISIS cooperation deal was reached with Washington. The Turks agreed to allow the Americans to fly strike missions from two air bases in Turkey against ISIS in Syria. However, there appeared to be an unpublicized quid pro quo: the U.S. would turn a blind eye to Turkish military action against its allies the Kurds. On the same day that Turkey announced that it would fight the Islamic State in earnest, it also began an air campaign against the PKK.

  Washington, for its part, claimed that it had been “tricked” by the wily Turks, while adding, “We fully respect our ally Turkey’s right to self-defense.” In the process, the Kurds found themselves supported by the U.S. in the struggle with ISIS, even as they were being thrown to the (Turkish) wolves. There is a Kurdish expression suggesting that Kurds have “no friends but the mountains.” Should they ever achieve a trans-border Kurdistan, they will certainly have earned it.

  Syria: Through a series of events almost impossible to sort out, having essentially supported the Arab Spring nowhere else, the Obama administration chose to do so in Syria, attempting to use it to turn President Bashar al-Assad out of office. In the process, the Obama administration found itself ever deeper in a conflict it couldn’t control and eternally in search of that unicorn, the moderate Syrian rebel who could be trained to push Assad out without allowing Islamic fundamentalists in. Meanwhile, al-Qaeda spin-offs, including the Islamic State, found haven in the dissolving borderlands between Iraq and Syria, and in that country’s Sunni heartlands.

  An indecisive Barack Obama allowed America's involvement in Syria to ebb and flow. In September 2013, on the verge of a massive strike against the forces of the Assad regime, Obama suddenly punted the decision to Congress, which, of course, proved capable of deciding nothing at all. In November 2013, again on the verge of attacking Syria, the president allowed himself to be talked down after a gaffe by Secretary of State John Kerry opened the door to Russian diplomatic intercession. In September 2014, in a relatively sudden reversal, Obama launched a war against ISIS in Syria, which has proved at best indecisive.

  Russia: That brings us to Vladimir Putin, the Syrian game-changer of the moment. In September, the Russian president sent a small but powerful military force into a neglected airfield in Latakia, Syria. With “fighting ISIS” little more than their cover story, the Russians are now serving as Assad's air force, as well as his chief weapons supplier and possible source of “volunteer” soldiers. 

  The thing that matters most, however, is those Russian planes. They have essentially been given a guarantee of immunity to being shot down by the more powerful U.S. Air Force presence in the region (as Washington has nothing to gain and much to worry about when it comes to entering into open conflict with the Russians). That allows them near-impunity to strike when and where they wish in support of whom they wish. It also negates any chance of the U.S. setting up a no-fly zone in parts of Syria.

  The Russians have little incentive to depart, given the free pass handed them by the Obama administration. Meanwhile, the Russian military is growing closer to the Iranians with whom they share common cause in Syria, and also the Shia government in Baghdad, which may soon invite them to join the fight there against ISIS. One can almost hear Putin chortling. He may not, in fact, be the most skilled strategist in the world, but he’s certainly the luckiest. When someone hands you the keys, you take the car.

  World War I

  As in imperial Europe in the period leading up to the First World War, the collapse of an entire order in the Middle East is in process, while forces long held in check are being released. In response, the former superpowers of the Cold War era have once again mobilized, at least modestly, even though both are fearful of a spark that could push them into direct conflict. Each has entangling regional relationships that could easily exacerbate the fight: Russia with Syria, the U.S. with Saudi Arabia and Israel, plus NATO obligations to Turkey. (The Russians have already probed Turkish airspace and the Turks recently shot down a drone coyly labeled of “unknown origin.”)

  Imagine a scenario that pulls any of those allies deeper into the mess: some Iranian move in Syria, which prompts a response by Israel in the Golan Heights, which prompts a Russian move in relation to Turkey, which prompts a call to NATO for help… you get the picture. Or imagine another scenario: with nearly every candidate running for president in the United States growling about the chance to confront Putin, what would happen if the Russians accidentally shot down an American plane? Could Obama resist calls for retaliation?

  As before World War I, the risk of setting something in motion that can't be stopped does exist.

  What Is This All About Again?

  What if the U.S. hadn't invaded Iraq in 2003? Things would undoubtedly be very different in the Middle East today. America's war in Afghanistan was unlikely to have been a big enough spark to set off the range of changes Iraq let loose. There were only some 10,000 America soldiers in Afghanistan in 2003 (5,200 in 2002) and there had not been any Abu Ghraib-like indiscriminate torture, no equivalent to the scorched earth policy in the Iraqi city of Fallujah, nothing to spark a trans-border Sunni-Shia-Kurd struggle, no room for Iran to meddle. The Americans were killing Muslims in Afghanistan, but they were not killing Arabs, and they were not occupying Arab lands.

  The invasion of Iraq, however, did happen. Now, some 12 years later, the most troubling thing about the current war in the Middle East, from an American perspective, is that no one here really knows why the country is still fighting. The commonly stated reason — “defeat ISIS” — is hardly either convincing or self-explanatory. Defeat ISIS why?

  The best Washington can come up with are the same vague threats of terrorism against the homeland that have fueled its disastrous wars since 9/11. The White House can stipulate that Assad is a bad guy and that the ISIS crew are really, really bad guys, but bad guys are hardly in short supply, including in countries the U.S. supports. In reality, the U.S. has few clear goals in the region, but is escalating anyway.

  Whatever world order the U.S. may be fighting for in the Middle East, it seems at least an empire or two out of date. Washington refuses to admit to itself that the ideas of Islamic fundamentalism resonate with vast numbers of people. At this point, even as U.S. TOW missiles are becoming as ubiquitous as iPads in the region, American military power can only delay changes, not stop them. Unless a rebalancing of power that would likely favor some version of Islamic fundamentalism takes hold and creates some measure of stability in the Middle East, count on one thing: the U.S. will be fighting the sons of ISIS years from now.

  Back to World War I. The last time Russia and the U.S. both had a powerful presence in the Middle East, the fate of their proxies in the 1973 Yom Kippur War almost brought on a nuclear exchange. No one is predicting a world war or a nuclear war from the mess in Syria. However, like those final days before the Great War, one finds a lot of pieces in play inside a tinderbox.

  Now, all together: What could possibly go wrong?

  

  

  

  

  

• More Bad News For Millennials, Who Face "Great Depression" In Retirement

  Americans in their 20s and 30s are facing a retirement crisis that could plunge them back into the Great Depression, Blackstone President and COO Tony James said Wednesday. Appearing on CNBC's Squawk Box, James exclaimed "Social Security alone cannot provide enough for these people to retain their standard of living in retirement, and if we don't do something, we're going to have tens of millions of poor people and poverty rates not seen since the Great Depression." According to James, the solution is simple – government-imposed mandatory savings through a Guaranteed Retirement Account which employers are mandated to match (whose assets would be managed by?).

   

  Blackstone COO James explains…

   

  As CNBC details, the solution is to help young people save more by mandating savings through a Guaranteed Retirement Account system, he said.

  Right now, young people cannot save enough on their own because they face stagnant incomes and heavy student-debt burdens.

   

  The Guaranteed Retirement Account was proposed by labor economist Teresa Ghilarducci in 2007 as a solution to the problem of retirement shortfalls that inevitably arise when contributions are voluntary.

   

  A GSA system would require workers to make recurring retirement contributions, which would be deducted from paychecks. Employers would be mandated to match the contribution, and the federal government would administer the plan through the Social Security Administration.

   

  Ghilarducci has proposed a mandatory 5 percent contribution, but James said a 3 percent requirement rolled into GRAs could outperform retirement savings vehicles like IRAs and 401(k)s.

   

  He noted that a 401(k) typically earns 3 to 4 percent, while a pension plan yields 7 to 8 percent. The average American pension plan has a 25 percent allocation to alternative investments — including real estate, private equity and hedge funds — with the remainder invested in markets, he said.

   

  "The trick is to have these accounts invested like pension plans, so the money compounds over decades at 7 to 8 percent, not at 3 to 4," he said.

   

  A 25-year-old who earns 3 to 4 percent per year would retire with $75,000, not nearly enough to annuitize and live on, James said. A 7-percent-per-year investment would yield $200,000 at retirement, he said.

  Under the plan James is proposing, the government would offer a 2 percent guarantee on GRAs.

  "The key to it is taking that capital, setting up the Guaranteed Retirement Accounts and investing it well for the very long term," he said. "We have to do that and we have to do that professionally."

  And of course, who will that "professional" be? Why we assume Blackstone of course… And of course, with cash being banned by the time they retire, spending from a government-mandated savings account will be entirely free of oversight, we are sure.

   

  Except, 2 things – Millennials don't trust financial service providers OR The Government…

  

   

  While Blackstone claims Millennials will retire into a Great Depression without his and the government's help, it is student loans that are Millennials' biggest concerns…

  

  

  

  

  

  

• US Dollar Dumped Against Asian FX As Releveraging Chinese Send Margin-Debt To 6-Week Highs

  Chinese stocks are not as exuberant as European, Japanese (which are rolling over), and US markets at the open as they cling to unchanged for the day and week (despite margin debt rising to a six-week high). The main event in AsiaPac trading appears to be a huge re-entry into the EUR-ANY-EM-FX carry trade as The USDollar gets pummeled against Asian FX (despite EUR weakness). PBOC weakened the Yuan fix by the most in 8 days to its lowest in 2 weeks.

   

  Japanese stocks soared during the US session but are fading at the open…

  

   

  Chinese stocks flat in the pre-open…

  

   

  Even as Margin Debt hits a 6-week high…

  

   

  As The Dollar gets pummeled against Asian FX…

  

   

  and PBOC weakens the Yuan Fix…

  

   

  With Offshore Yuan pushing to 1-month lows…

  

   

  Finally, it's almost as if China never shook up the world's carry trading malarkey… only Chinese stocks are still feeling the pain…

  

   

   

  Charts: Bloomberg

  

  

  

  

  

• New FBI Report Debunks Mythical "War On Police"

  Submitted by Carey Wedler via TheAntiMedia.org,

  Throughout the United States, Americans believe there is a “war on police.” A recent survey found 58% of Americans agree with this sentiment. A new, privately-funded billboard campaign hijacks the “Black Lives Matter” moniker to read “Blue Lives Matter,” highlighting powerful pushback from law enforcement sympathizers against activists.

  The FBI’s 2014 report, Law Enforcement Officers Killed and Assaulted (LEOKA), released this week, appears to support the notion that police officers are in danger and unduly targeted. The number of officers killed by individuals committing “felonious acts” jumped from 27 in 2013 to 51 last year, and police apologists are all but guaranteed to point to this increase as proof their concerns are justified. A deeper examination of the data, however, reveals that police are not only safe, but still running rampant in their liberal use of violence against the citizens they allegedly serve.

  In 2013, the FBI reported that 27 police officers were killed in the line of duty. By 2014, according to the new data, that number rose to 51. While this seems like a sharp uptick — in fact, it nearly doubled — the comparison on its own is misleading. Out of 536,119 officers included in the FBI’s 2014 analysis, .0095 percent  of the force was killed on the job — less than one percent.  While this represents an increase from the .005 percent of officers killed on the job in 2013 — the safest year for police in decades — neither figure signals an unrelenting assault on police officers.

  As the Washington Post explained:

  “[W]hen police advocates say that 2014 saw an 80+ percent increase in homicides of cops over 2013, remember a few things: First, 2013 wasn’t just an all-time low, it was an all-time low by a significant margin. Second, the 2013 figure was so low that even a small increase will look large when expressed as a percentage. Third, the figure for the following year, 2014, (51 officers killed) was essentially consistent with the average for the previous five years (50 killed), and still lower than any five-year average going back to 1960. Fourth, again, 2015 is on pace (35 killings) to be lower than any year but 2013.”

  The nature of the officers’ deaths also provides insight into the “war on police”. Though the total number of officers murdered did increase from 27 to 51 from 2013 to 2014, the two biggest jumps came when officers were responding to disturbance calls or making traffic stops. In 2013, the number of officers killed during disturbance calls jumped from four to eleven, while traffic stop deaths increased from two to nine. In contrast, the number of ambushes on police officers — premeditated actions intended to hurt the officers — only increased by two, from five to seven. While this is nothing to celebrate, it actually constitutes a drop in the proportion of officers killed by ambush — the most intentional way to kill, or ‘wage war against’ — a cop. In 2013, 18.5% of all felonious deaths were a result of an ambush . In 2014, 13.7% of cops who died were ambushed.

  Perhaps most revealing, however, is the FBI’s data on officers “assaulted” on the job. The FBI lists a startling figure for 2014:

  Of 536,119 officers included in the report, 48,315 were assaulted. With 9% of all officers having been “assaulted,” on the job, it seems impossible to deny a concerted attack against law enforcement. However, that rate is lower than the previous year (9.3%). Further, the data becomes much less daunting when considering officers who were assaulted and injured as a result of the attack. In 2014, 13,654 officers reported sustained injuries from assault: just 2.5% of the entire force. This is also a small drop from the previous year, which saw 14,565 of 533,895 total officers injured (2.7%). This is an injury rate lower than that of construction workers, who clock in at 3.8%. Further, these figures do not take into account instances where officers claimed they were assaulted but in reality were not. There seems to be great potential for this discrepancy, especially since the FBI notes that “assailants used personal weapons (hands, fists, feet, etc.) in 79.9 percent of the incidents.”

  Interestingly, in both cases of assault and murder, the majority of assailants were white. In 2014, of 54 perpetrators, 42 were Caucasian while only 12 were African American. Two were Native American, one was Asian/Pacific Islander, and two were unknown. In 2013, 15 of 28 alleged killers were white — more than half. The government’s own data on attackers refutes another common, media driven falsehood: that rabid Black Lives Matter activists are spurring attacks against police.

  Regardless of the facts the FBI itself released this week, one overarching factor should be cause enough to silence those who lament a war on police: every single year, the FBI constructs its meticulous LEOKA report from thousands of police departments around the country, crafting dozens of charts and tables to break down and detail the manner in which officers died (full report here). There is currently no such system in place for regular civilians killed by police, though one community database places the total at 1,108 for 2014.

  In spite this dearth of information on who the government kills, the federal government only took action this month to attempt to record police shootings and deaths caused by officers — even though this problem has crippled communities, especially minority for years, if not decades. In contrast, despite the ongoing, intensive reporting by the FBI on police deaths, President Obama signed the “Blue Alert” law earlier this year to provide for even further calculation and analysis of threats and assaults to law enforcement. There is still no official total on the number of civilians killed by police.

  While many outlets in the media propagate the narrative that police officers are under attack, the government’s own data speaks for itself. Though loud voices may decry police accountability activists and millions of Americans concerned about police overreach, the FBI’s report only further justifies their outrage.

  

  

  

  

  

• This Is What Happens After Three Years Of Negative Interest Rates

  It may seem extraordinary that in the aftermath of the infamous Kocherlakota “dots” the Fed is actively contemplating negative interest rates, but some may have forgotten that Europe has had NIRP since last June. In fact, the reason for today’s global risk-on rally, was Draghi’s hint – remember: Draghi did absolutely nothing, just suggested he may do more –  that in addition to extending the ECB’s QE program, the ECB may cut its deposit rate, already at -0.20%, to -0.30% or more.

  But when it comes to negative rates, the ECB is merely a late adopter. For the real pioneer one has to look further north in Denmark, where the central bank first adopted negative rates in the middle of 2012 to defend the krone’s peg to the Euro. And, as documented here before, Denmark cut rates not once, not twice, but three times in early 2015 in anticipation of the EUR collapse, pushing its interest rate to a record negative -0.75%.

  Denmark’s descent into NIRPdom is shown in the Bloomberg chart below.

  

   

  So what happens after 3 years of NIRP?

  Well, according to Bloomberg, you get the mother of all housing bubbles, one which makes even China blush:

  “Property prices in Copenhagen have risen 40-60 percent since the middle of 2012, when the central bank first resorted to negative interest rates to defend the krone’s peg to the euro.”

  This should come as no surprise: recall that there are documented cases where Danish borrowers are paid to take on debt and buy houses as we explained in January in “In Denmark You Are Now Paid To Take Out A Mortgage“, so between rewarding debtors and punishing savers, this outcome is hardly shocking. Yet it is the negative rates that have made this unprecedented surge in home prices feel relatively benign on broader price levels, since the source of housing funds is not savings but cash, usually cash belonging to the bank.

  What is disturbing is that Denmark is reflating a gargantuan housing bubble less than 7 years since its last housing bubble popped:

  Denmark’s most recent housing bubble burst in 2008, with the subsequent price slide rivaling that seen in the U.S. subprime crisis. Thanks to generous welfare benefits, Danish households suffered only negligible foreclosure rates, unlike their U.S. counterparts.

  Some are starting to warn that the central bank’s primary strategy at keep the currency at bay is backfiring:

  The Danish regulator this month warned Danske Bank against pursuing a growth strategy in Sweden as the housing market there shows signs of imbalances. Price developments are now “highly distressing,” Klas Danielsson, the chief executive officer of Sweden’s state mortgage bank, SBAB, said on Thursday.

  He is not alone: “Denmark’s biggest mortgage bank says there’s a “real risk” Copenhagen is heading into a property bubble.” Though a collapse isn’t imminent, “the danger signals” mean that apartment prices in the Scandinavian city “could reach an unsustainable level relatively fast should the current pace of price gains continue,” said Joachim Borg Kristensen, a housing economist at Nykredit.

  Yes, after a 60% increase in 3 years, that is a safe assessment.

  However, following today’s tumble in the EUR, it is even safer to assume that Danish rates are about to go even more negative as the central bank scramble to defend its currency from even hotter money, and even more inflation. It also means that home prices are going to soar even more.

  “Given the current prospects of urbanization, as well as the outlook for the economy and interest rates, housing prices look set to continue rising,” Kristensen said. But that will probably happen at a “slower pace than has been the case thus far.”

  No, it won’t: PFA, Denmark’s biggest commercial pension fund, said on Thursday it will invest as much as 4 billion kroner ($607 million) in the country’s property market. It plans to treat the investment much like its bond portfolio, according to an e-mailed note. PFA is returning to the market after selling most of its property portfolio in 2006.

  We may not have economic tenure at Harvard but even we know what will happen to property prices in this scenario.

  And while the US may have had problems reflating its own housing bubble, Denmark has already achieved just that:

  “The hefty growth in both prices and sales of building projects is a worry because it could be driven by an anticipation of continued housing price gains,” Kristensen said. “The question is whether potential home buyers have exaggerated expectations when it comes to future price developments.”

  Finally, while we have no doubts how this latest housing bubble will end (in tears, for those wondering), one thing we find truly entertaining is Denmark’s inflation rate: as the following chart shows, the officially reported inflation in the northern European nation is a whopping… 0.5%

  

  So let’s get this straight: Copenhagen home prices rising at 12% per year (or more) and yet the Danish central bank is operating on the assumption that headline inflation is half of 1%?

  In retrospect, is it any wonder that when using such clearly ridiculous “data” on which to base decisions that have taken us beyond the zero-bound and into the Twilight Zone of monetary policy, that the world is now living inside the biggest asset bubble ever inflated…

  
  

  

  

  

  

  

• Why Europe Is About To Plunge Further Into The NIRP Twilight Zone, And What It Means For Depositors

  In some respects, today’s ECB presser was a snoozer. Reporters asked the same old questions (some of which we’ve been asking for years) and, more importantly, there were no glitter attacks.

  Our ears did perk up however, when Mario Draghi admitted that, unlike the governing council’s last meeting, cutting the depo rate further into negative territory was indeed discussed. 

  This is significant for a number of reasons. At the general level, it shows that DM central bankers are ready and willing to plunge the world further into the Keynesian Twilight Zone. As we outlined last month, this means the Riksbank and the SNB are now on watch. If the ECB cuts again, the Riksbank will be forced to act as well and as Barclays recently opined, the SNB may be compelled to go nuclear on depositors, as removing the negative rate exemption for domestic banks would force them to pass along the “cost” to customers: 

  “In contrast, a cut in the ECB’s deposit rate further into negative territory likely would have a significant impact on the EURCHF exchange rate and provoke a more immediate response from the SNB. Indeed, we expect that a cut in the ECB’s deposit rate may have a greater effect on EURCHF than on other EUR crosses. Switzerland applies its negative deposit rate to only a fraction of reserves, currently about 1/3rd of sight deposits by our calculation. In contrast, negative deposit rates apply to all reserves held at the ECB, Riksbank and Denmark’s Nationalbank. Consequently, a cut to the ECB’s deposit rate likely has a larger impact both on the economy and on the exchange rate than a proportionate cut by the SNB. An SNB response to an ECB deposit rate cut could take one of two forms: 1) a further cut in its deposit rate and CHF Libor target range; or 2) the ‘nuclear’ option, removing all exemptions from the negative deposit rate. We think the latter is more likely and would have major implications for EURCHF.” Most retail (private) depositors at domestic Swiss banks still do not face negative interest rates, but we would expect that to change if the SNB removed exemptions of domestic banks on sight deposits at the SNB. A removal of domestic banks’ exemption from negative deposit rates likely would force Swiss banks to pass on negative deposit rates as it would increase the proportion of assets charged negative rates to over 20%.

  This is an important concept not only for what it says about the never-ending, tit-for-tat, beggar- thy-neighbor monetary policies that now pervade developed markets, but also for the degree to which it explains why NIRP has not yet led to a sharp increase in the demand for physical banknotes. Put simply: depositors haven’t yet felt the effects of the monetary insanity engendered by the global currency wars. 

  Deutsche Bank’s Abhishek Singhania and Oliver Harvey have taken a close look at the proliferation of NIRP at the Riksbank, the SNB, the Nationalbank, and the ECB on the way to positing that not only is zero not the lower bound, but in fact no one has hit the lower limit for rates as of yet. 

  First, there’s the obvious problem with negative rates. Namely, depositors will just take it to the mattresses (so to speak): 

  The main concern with further cuts to policy rates is the problem of the zero lower bound. In academic literature, the challenge for central banks operating near or at zero interest rates is that it is technically unfeasible to impose interest rates on cash. Depositors charged at negative rates can simply exchange electronic reserves into paper currency.

  Of course because fractional reserve banking is nothing more than a giant ponzi scheme wherein banks are perpetually borrowing short to lend long, instituting a rate negative enough to trigger a run on deposits would have the exact opposite effect from what central banks intended. That is, banks would be forced to sell assets to meet the outflows: 

  As well as losing control over monetary policy, central banks would see financial conditions tighten as banks were forced to sell assets to meet depositor withdrawals. In extremis, the effect could be compared to a bank-run preceding capital controls or large scale currency devaluation. However, due to the more incremental nature of the impact of negative rates (e.g. 25bp charge on deposit holdings rather than a multi percent devaluation), interest rates would need to be slashed deeply negative for depositor withdrawals to resemble much more than a jog.

  Obviously, if rates go negative enough to trigger a run that (literally) breaks the banks, then the lower limit will definitively have been reached, but at that point it will be too late. Back to Deutsche Bank:

  So far, the experiences of the four European economies under negative interest rates, including the Eurozone, suggest that this theoretical constraint has not been reached. The demand for coins and notes has ticked up slightly in recent months, but remains at fairly muted levels. 

   

  

   

  Why the lower bound constraint has yet to be reached, and how much more room there is to maneuver, is obviously crucial for the ECB and the three other central banks imposing negative rates. The main reason is that banks have not passed on negative policy rates to depositors. In none of the four economies are household deposit rates in negative territory, either for outstanding balances or new business. Why have negative nominal rates not passed through to depositors? 

   

  

  Banks are of course hesitant to charge depositors for deposits for fear of damaging relationships. Or, in Deutsche Bank’s more condescending parlance, “banks are very reluctant to pass on negative rates to households [because] retail depositors [are] least likely to understand the wider monetary policy context behind such a decision.” Right, they aren’t likely to understand why they should have to pay the bank to lend out their money at a spread that nets the bank a profit and the reason they aren’t likely to understand it is because, frankly, it makes absolutely no sense. 

  But the bank has to preserve its margins. With long-end rates falling on the asset side thanks to unconventional monetary policy, you either have to pass that along by reducing the rate you pay on your liabilities (i.e. deposits) or else your margins are going to get pinched – unless you find some other way to make up the difference, that is. 

  The indirect cost of negative rates for banks is through margins. In theory, as unconventional monetary policy pushes down yields on the asset side of the balance sheet, banks need to cut rates on the liability side to preserve margins. As banks are reluctant to cut deposit rates into negative territory for the reasons above, their net interest margin may suffer. 

  Right. So what’s the solution if it’s not passing along NIRP to depositors? 

  The SNB have noted that the consequence of introducing negative rates earlier this year was rising, not falling, mortgage rates as banks sought to protect falling liability margins by raising long-end rates. In a similar vein, Danish banks appeared to raise administration fees on new mortgages after rates first turned negative back in 2012. An analysis of long-end mortgage rates offered by banks across Sweden, Denmark and Switzerland suggests that at the long-end, rates have actually risen since the introduction of negative interest rates.

  Got that? NIRP is paradoxically causing mortgage rates to rise because banks fear a depositor backlash from negative rates. So, this is yet another example of the unintended consequences of unconventional monetary policy.

  We saw something akin to this in Sweden back in July when the Riksbank had sucked up so much high quality collateral via QE that the liquidity premium demanded by investors ended up pushing yields on 10-year govies higher in what amounted to the exact opposite of what the central bank intended. 

  Note once again that there’s no end to this. If the ECB cuts the depo rate further, then other NIRP countries will have to respond. If they don’t, their currencies will soar, threatening inflation targets. Case in point, from this morning:

  

  This means going deeper into NIRP, which, in light of the above, means rising borrowing costs right up until the breaking point when the hit to margins can no longer be offset. At that juncture, NIRP will have to be passed on to depositors lest NIM should simply flatline.

  What happens next is anyone’s guess but if depositors revolt and begin asking for their money back, banks’ maturity mismatched business model means there are only three available options, i) sell assets to meet withdrawals, ii) institute capital controls, or iii) ban cash. Welcome to the future.

  

  

  

  

  

• ECB Putting Federal Reserve in a Bad Spot

  By EconMatters

   

  

   

  ECB Policy Press Conference

   

  I was watching a little of the ECB policy press conference this morning and there were a lot of thoughts that came out of that event which I may write about at a later date. However after the ultra-dovish ECB decision to signal to financial markets that they are going to add more stimulus in December with more bond buying in order to weaken the Euro currency, the US Dollar is back up to the 96.30 area on the DX, and financial markets haven`t really thought about the implications of this move by the US Dollar.

   

  Believe it or not: The Fed actually wants to raise rates now just to save face!

   

  Reading between the lines the Fed wants to raise rates in December to get back the ounce of credibility they once had as they have reiterated their intention of raising rates this year, and with the financial market once again ‘healed’ they are going to sneak in a 25 basis point rate hike, (maybe a lame 10 basis point rate hike if they completely wimp out on the rate hike) just to keep their original word of raising rates in 2015.

   

  Thanks A lot ECB, You just made the Fed`s job twice as hard

   

  

  The problem is with the ECB slamming the Euro trying to purposefully weaken the currency the US Dollar is already back to levels that were causing emerging markets to freak out, and the Fed to lose their nerve to raise rates in September which they had done a good job building in market expectations for a rate hike.

   

  The market sold off for the first time on a dovish Federal Reserve Meeting, and Fed members took notice of that and immediately tried to reassure markets that they were still committed to raising rates in 2015. I actually think the Federal Reserve is going to try and sneak in a rate hike, and this is a mistake right now given what the ECB is going to do in December at its policy meeting with regard to adding even more stimulus.

   

  

  Two Wrongs Cancel each other out right?

   

  The Fed is going to ‘rectify their wrong’ of the last meeting and raise rates and lose twice with regard to disappointing market expectations, and the US Dollar Index will jump back above 98, and I expect a sizable market selloff as the Dollar continues to strengthen as the Forex markets get hit with a double whammy of a Dovish ECB Meeting and a Hawkish Federal Reserve Meeting this December. And given year end positioning the Federal Reserve couldn`t pick a worse time to raise rates. Hopefully they will just make another stupid excuse, and avoid raising rates – the lesser of the two evils. But given they have become a complete joke with their forecasts regarding hiking rates, saving face is probably more important for them right now. Therefore, Wall Street and financial markets are probably going to get screwed on this one, and end up taking one for the team!

   

  Buy Some VIX Futures for December for Portfolio Protection

   

  Expect a totally surprised market when the Federal Reserve raises rates at its December policy meeting. The financial markets are as about as far from ‘pricing in’ of any rate hike for the December Meeting as they could be and frankly, the marker reaction will be fun to watch this December. And I really can`t blame this one on them as the Federal Reserve has gotten just plain loopy at this point. And listening to the ECB panel trying to justify more stimulus of bond buying in their herculean fight to save ‘low’ inflation from damaging European citizens was just pure comedy beyond a Monty Python skit. And at this point it is almost becoming a requirement for Central Bankers to just be plain Dodgy, Comical, Squirming in their Seats, Stupid, In Denial, Blatant Liars who look like Meth Abusers being questioned at the Press Conferences like a criminal in an interrogation room at the police station – even they don`t believe their own ‘shit’ these days that comes out of their mouths.

   

  Poor Mario Draghi: He didn`t look well

   

  A piece of advice for Mario Draghi just speak the truth, the ECB wants to weaken the Euro to boost exports by making them more competitive in trade, and they want to monetize the debt by trying to raise inflation because all of Europe`s Debt to GDP Ratios are a severe threat to European Solvency – the relativity game in both cases!

   

  At least with this answer I would  trust your competence as someone capable of holding such a position – although I don`t agree that QE and Debt Monetization actually is sound policy as it becomes self-defeating in promoting inefficient allocation of capital, and is in the end deflationary over the long haul.

   

  But when the reporter asked Draghi about why is low inflation such a bad thing for European consumers, and the panel trots out the argument of consumers delaying purchases crap, Draghi and company just come across as loopy, antiquated Meth induced pathologically untrustworthy and incompetent liars. Not the quality of individuals that should be in charge of monetary policy for the ECB!

   

  Low Standards for Central Bankers: Isn`t there Performance Review for this crowd?

   

  I think we should have the same standard that we have for Physicists, one can postulate all kinds of theoretical ideas, but when they fail in the experimental phase, they become set aside and replaced by better ideas that actually work in practical application in the field. Voodoo Economics of the last 25 years has failed, time to start promoting some economic ideas that actually work in the field. You know economic ideas that do a better job of more efficiently allocating capital to more productive purposes, as opposed to having large amounts of financial resources stuck as reserves in central banks and yield chasing electronic markets accumulating miniscule yields instead of promoting actual long term project growth for the world.

  

  

  

  

• US Issues Childish Ultimatum To Iraq: "It's Either Us, Or The Russians"

  At this point, it’s become difficult to keep track of the myriad embarrassments Washington has suffered since the start of Russian airstrikes in Syria. 

  There’s the Russian Defense Ministry’s daily video series depicting strikes on “terrorist” targets which makes the US look incredibly inept given how little “coalition” bombing runs have accomplished over the course of more than a year. 

  There’s Iran’s overt involvement on the ground which is a slap in the face for Washington as it comes just a two months after the conclusion of the nuclear deal. 

  And let’s not forget about the fact that thanks to the terribly convoluted strategy Washington has attempted to implement whereby the US will i) provide behind the scenes support for Sunni extremist groups in Syria, ii) provide public support for Iran-backed Shiite militias fighting Sunni extremists in Iraq, iii) send weapons to Syrian rebels who are fighting the very same Shiite militias at Aleppo, America is literally trying to say that if you’re a Sunni extremist, you’re a friend if you’re in Syria but an enemy in Iraq and if you’re a Shiite militia, you’re a friend in Iraq but an enemy in Syria. 

  Through it all, we’ve said that the ultimate humiliation would be for Russia to essentially kick the US out of Iraq. Make no mistake, the conditions are ripe for Moscow to simply muscle Washington out of the way in the country the US claims it “liberated” a little over a decade ago.

  There are two main reasons why it will be easy for the Russians to move in, i) Baghdad sees that Moscow is serious about bombing ISIS and the US, for whatever reason, isn’t and ii) Iran essentially controls the Iraqi army and Iraqi politics.

  In short, this would simply be a sequel to the Russian-Iranian military operation in Syria and the logistics are already in place as Iran’s militias have been battling Sunni extremists in Iraq for years alongside the Iraqi regulars. The newly established intelligence sharing cell set up in Baghdad and jointly staffed by Russia, Syria, Iran, and Iraq is a precursor to what one Iraqi official hopes will be a “full-blown military alliance.” 

  Needless to say, the US understands all of the above and the last straw apparently came with Iraqi PM Haider al-Abadi said he would welcome Russian airstrikes. This week, Marine Gen. Joseph Dunford, chairman of the Joint Chiefs of Staff, showed up in Iraq to evaluate the situation and in what can only be described as a childish display, told al-Abadi that Iraq would have to choose between the US and Russia when it comes to countering ISIS. Here’s CBS (because to fully appreciate the pettiness, you have to hear it from the Western media):

  The U.S. has told Iraq’s leaders they must choose between ongoing American support in the battle against militants of the Islamic State of Iraq and Syria (ISIS) and asking the Russians to intervene instead.

   

  Marine Gen. Joseph Dunford, chairman of the Joint Chiefs of Staff, said Tuesday that the Iraqis had promised they would not request any Russian airstrikes or support for the fight against ISIS.

   

  Shortly after leaving Baghdad, Dunford told reporters traveling with him that he had laid out a choice when he met with Iraqi Prime Minister Haider al-Abadi and Defense Minister Khaled al-Obeidi earlier Tuesday.

   

  “I said it would make it very difficult for us to be able to provide the kind of support you need if the Russians were here conducting operations as well,” Dunford said. “We can’t conduct operations if the Russians were operating in Iraq right now.”

   

  He said there was “angst” in the U.S. when reports surfaced that al-Abadi had said he would welcome Russian airstrikes in Iraq. The U.S., Dunford said, “can’t have a relationship right now with Russia in the context of Iraq.”

   

  The choice given to Abadi in Iraq by Dunford on Tuesday is a clear indication that the U.S. is not willing to compete with Russia for airspace over two neighboring countries deeply intertwined in the same convoluted war.

   

  The U.S. and Russia put into practice new rules on Tuesday designed to minimize the risk of air collisions between military aircraft over Syria.

   

  Reuters reports that the U.S. ultimatum to Iraq puts Abadi in a difficult position, as his own country’s ruling political alliance and some powerful Shiite groups have been pushing him to request Russian air support.

   

  The news agency said a proposal to request Russian strikes had been put to Abadi last week, but that he was yet to respond.

   

  “Abadi told the meeting parties that it wasn’t the right time to include the Russians in the fight because that would only complicate the situation with the Americans and could have undesired consequences even on long-term future relations with America,” Reuters quoted a senior Shiite politician close to Abadi as saying.

  In other words…

  

  So once again, it looks as though the US is in panic mode and is willing to pull out all the stops in a desperate attempt to keep the Russians from bombing ISIS in Iraq. 

  There are several theories as to why Washington is so intent on keeping Moscow out. The common sense theory that requires no conspiratorial ruminations says that the US is desperate to avoid ceding Baghdad to Russia and the Pentagon knows that with Iran already effectively in control of the army and the government, Russia would find a very receptive military and political environment in Iraq. 

  For those inclined to think that in addition to any initial support (i.e. funding and training prior to the official formation of ISIS), the US is still supporting Islamic State, well then the worry for Washington is that Russia simply wipes them out. 

  Whatever the case, the story is ultimately the same in Iraq as it is in Syria. The US knows that Russia is effective at decimating opposition forces and for whatever reason, Washington is not keen on being a part of it. In Iraq, that unwillingness has now manifested itself in a childish ultimatum from the Pentagon to Baghdad.

  Draw your own conclusions.

  

  

  

  

  

• THiS MaP IS THe TeRRiToRY…

  

  

  

  

  

• Yellen & Kuroda Live In A "Fantasy Fiat World Divorced From Actual Business Conduct"

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  There must be a universal speech template included in the monetary textbook that is shared among the various central banks. On September 28, 2015, Haruhiko Kuroda, Governor of the Bank of Japan, delivered a speech that wasn’t just similar to the press conference Janet Yellen had endured only a week or so before, it was a close enough replica that if stripped of geographic references would have made it impossible to determine who was giving the speech. Kuroda did as Yellen did, making a specific point to emphasize how “robust” the Japanese economy was showing itself in 2015 before trying his best to explain away all the ways in which it was not.

  Saying, “First, domestic private demand has continued to be robust” Kuroda then listed factors that were only slightly related to “domestic demand.” Rather than find specific economic accounts performing as he suggested, the Governor was instead reliant on surveys. “Firms’ positive fixed investment stance could be confirmed by various survey results.”

  For Japanese households, Kuroda followed as his American counterparts by leading with the declining unemployment rate, assuming its validity and meaningfulness, and then trying to explain why household spending (demand) wasn’t following all that.

  In terms of household spending, private consumption is somewhat sluggish recently, reflecting bad weather in the April-June quarter. Nevertheless, as the employment and income situation has continued with its steady improvement and consumer sentiment is on an improving trend, private consumption seems to have remained resilient on the whole.

  Consumer “demand” remains “robust” except that it is easily distracted by Japanese weather (obviously not the same storms and snow apparently afflicting the US in the quarter before) and can only charitably be described as “resilient.” As nice as all that may sound, couched carefully as always improving, it doesn’t quite explain the steady and growing chorus expecting and now demanding still more QQE.

  Some of that is surely the “unexpected” detour of Japan’s export sector. As in the US, the Bank of Japan is blaming these unspecified “overseas” factors for the deviation in what was supposed to be building export momentum (though, it needs to be pointed out, the Bank of Japan makes no distinction about nominal growth due to the yen, leaving much illusory gains as if they were actual volume advances).

  Exports had increased for three quarters in a row since the July-September quarter of 2014, but have recently been more or less flat, due mainly to the effects of the slowdown in emerging economies (Chart 5). They are expected to remain more or less flat for the time being, but after that, they are likely to increase moderately, supported by the correction of the appreciation of the yen to date as emerging economies move out of their deceleration phase.

  He says exports were growing, but by any realistic account that was only yen-induced. Last August at Jackson Hole, Kuroda sounded exactly the same, which should be quite alarming given that he clearly never saw the “overseas” problem developing and he still has to project “global growth” as nearly all that is left of QQE now.

  Mr. Kuroda said that one reason for his optimism was an expectation that Japan’s exports would finally start to increase in coming months. One of the mysteries of the past year been [sic] the continued weakness in Japan’s exports, despite the sharp drop in the value of the yen, which lowers the price of Japanese goods on global markets.

   

  “The world economy is recovering and increasing its growth,” Mr. Kuroda said, pointing to estimates of faster growth from bodies such as the International Monetary Fund and World Bank. “Given this good prospect of the world economy we expect Japan’s exports gradually to catch up.”

  Japan’s trade problem has instead only continued, as “this good prospect of the world economy” is nowhere to be found and leaving exports never quite matching or living up to the yen’s pathway. Exports only gained 0.6% in September while imports collapsed 11.1%; so much for internal “demand.” A good proportion of that decline was due to the 23% drop in imports from Australia, continuing a string of such heavy contraction dating back to March. Against that resource and raw material view, Japan’s imports from China still grew 1.1% in September, despite the yen, as offshoring of production continues to haunt the Japanese economy.

  

  That is a factor that Kuroda, belatedly, acknowledged in his speech but if only to suggest, at least in his mind, that such an impoverishing trend may be coming to an end (without expanding on why and for what reason other than a curious view on the currency). While never suggesting his own QQE as heavily responsible, he at least seems familiar with reality here.

  What is worth noting is that, as the excessive appreciation of the yen is corrected, Japanese firms — which had been prioritizing foreign investment — seem to be increasing their domestic investment. This is a big change. On the back of a marked improving trend in corporate profits and the effects of monetary easing, business fixed investment is projected to continue increasing moderately.

  It seems as if he is quite alone in that assessment, as the trade data from the past few months suggests the opposite. Not only does internal Japanese “demand” appear far less than robust, there isn’t much to suggest a shift in Japanese offshoring; though I am absolutely sure he could produce any number of “surveys” that indicate as much. All that was left from his speech was to acknowledge the “transitory” nature of Japan’s CPI, which he dutifully recited as a part of that “global growth” expectation.

  It isn’t often that a central banker is directly rebuked so firmly and immediately, but that is where we are as they attempt to hold the line on an optimistic future that careens further and further from reach.

  Japan’s annual export growth slowed to a crawl in September as shrinking sales to China hurt the volume of shipments, raising fears that weak overseas demand may have pushed the economy into recession.

  Ministry of Finance data showed exports rose just 0.6 percent in the year to September, against a 3.4 percent gain expected by economists in a Reuters poll.

  That was the slowest growth since August last year, following the prior month’s 3.1 percent gain. The weak yen helped increase the value of exports, but volume fell 3.9 percent, the third straight month recording an annual decline. [emphasis added]

  In what can only be a further slap to the optimism about QE of any kind, the slowdown in the current quarter is not limited to Japan’s exports alone, extending into business investment which is why the whispers of renewed recession for Japan have only grown louder and gained more and more confirmation. This idea of QQE, as it is with just QE, amounts to thinking fantasy as reality. Kuroda talks about export growth, but he is at great pains to avoid distinguishing nominal levels. Companies, even export companies, may have more yen in profit and revenue, but are actually doing, building and shipping less for it. That is an economic gain in the fantasy of a fiat world divorced from actual business conduct.

  Exports to the United States, a major buyer of Japanese products, rose 10.4 percent in September, led by shipments of cars. In volume terms, however, U.S.-bound exports fell 4.7 percent.

   

  

  None of this should be a surprise given that yen interference and financialism on the scale of QQE amount to attempts at negative redistribution. Given what the Japanese have been subjected to in the past two and a half years of QQE, it is nearly criminal to suggest they need only more of it. None of it has worked as promised and stated, so what might have changed? Absolutely nothing except the arrangement of qualifiers and excuses that litter the same shared central bank speech delivered over and over of late. Kuroda says “robust”, Yellen proclaims “strong”, and both only confirm they live not of this world’s economy.

  

  

  

  

  

• Treasury Warns Of "Humanitarian Crisis" In Puerto Rico If Congress Does Not Agree To Bailout

  “Puerto Rico is not Greece“… but it increasingly looks like it will be in a few weeks, thanks to US taxpayers who are about to foot the bill for yet another creditor bailout.

  As we reported last night, creditors of the insolvent commonwealth, hoping to get a bailout and the highest possible return on their bond investment courtesy of the US taxpayer, have been pushing to portray the fiscal situation in Puerto Rico as beyond repair, hoping to force the administration and Congress to act. As The NY Times reported, on Wednesday, Puerto Rico took the unusual step of announcing that talks over restructuring about $750 million of the island’s debt had broken off, a move that some creditors saw as posturing to Washington for help.

  Then, all day today, Puerto Rico’s leadership, realizing its interests are suddenly alligned with those of its creditors as a bailout is in everyone’s best interest, took the rhetoric up a notch when the island’s Governor Alejandro Garcia Padilla said in written testimony for Senate Energy Committee that Puerto Rico will have negative cash balance of $29.8 million in November 2015, and then added that the Puerto Rico Government Development Bank may be unable to make its $355 million debt service. “These GDB bonds are supported by a guarantee from the Commonwealth, and the GDB, which faces its own liquidity crisis, is not expected to be able to make the payment on its own based on current information.”

  Others quickly chimed in: Puerto Rico Senate President Eduardo Bhatia said he would be in favor of “including everything” in a broad, comprehensive restructuring of the debt.

  In short: bail us out now or face the consequences of a domino effect of defaults which puts not only the creditors, but the island itself, in dire straits.

  The gambit is working. As we reported yesterday citing Bloomberg, “Obama is pressing for Congress to give Puerto Rico sweeping powers to reduce its $73 billion debt burden through bankruptcy, escalating administration involvement as the Caribbean island’s access to cash dries up.”

  Puerto Rico would be provided with a form of bankruptcy protection not now available to American territories. Administration officials also called for lawmakers on Wednesday to increase health-care funding for Puerto Rico, extend tax credits to the poor and put independent oversight in place to monitor the government’s budget.

  While Republican opposition to a broad bailout has been the base case, even that has been melting away in recent days: Bloomberg adds that the Republican leadership would be willing to grant Puerto Rico access to the bankruptcy courts only on a limited basis, and only with strings attached like the imposition of a federal “control board” to oversee the island’s finances.

  Control boards have been used in cases of severe municipal distress to take the power to spend public money out of the hands of elected officials. They do not generally have the powers that bankruptcy judges do to abrogate contracts, such as labor contracts and promises to repay debt.

  Or largely a technicality, one which would make Puerto Rico a comp to Greece, a “sovereign state” which is now de facto controlled out of Frankfurt and Brussels. Only in the case of Puerto Rico it would be the US taxpayers that are on the hook.

  So with the framework for the bailout largely in place, there is just one thing missing: the trigger that will push the last holdouts to agree.

  Luckily one already exist: the same one used to force the bailout of the banking system in 2008: an appeal to emotions, and a threat of dire consequences, unless a few conflicted parties get their way.

  This is precisely what happened today when as Reuters reports Treasury Secretary counselor Antonio Weiss warned that Puerto Rico faces a humanitarian crisis without federal action, as he appealed to Congress to help the debt-ridden U.S. territory, in comments to a Senate committee hearing on Thursday.

  In other words, bail out Puerto Rico or watch the island go up in a cloud or violent riots. But please, whatever you do, don’t call it a bailout:  “Weiss said that without action by Congress, Puerto Rico’s crisis would escalate and reiterated that the Obama administration’s policies were “not a bailout” for the island.“

  Which, naturally, is the spin that the holdout Republicans should use to justify their action before their voters: bail Puerto Rico out… just don’t call it a bailout.

  The rest is already known: he repeated the key points of a plan released by the Treasury on Wednesday, saying Congress should provide tools for Puerto Rico to restructure its liabilities, increase Medicaid support and boost economic growth through tax credits. Again: it’s “not a bailout.”

  A key element of Treasury’s proposal is its endorsement of extending bankruptcy protections not only to Puerto Rico’s public agencies, but to the island’s government itself – a notion championed by some Puerto Rican leaders but seen as too radical to be politically practical.

   

  Cities, towns and municipal agencies can file for under the U.S. Chapter 9 bankruptcy code, while states cannot. Puerto Rico is exempt from Chapter 9 because it is a commonwealth. 

  And just in case it was lost, here it is again: “Bankruptcy is not a bailout,” Weiss said, according to testimony released ahead of his remarks. “Allowing Puerto Rico to resolve its liabilities under the supervision of a bankruptcy court involves no federal financial assistance whatsoever. Instead, bankruptcy requires shared sacrifice from both Puerto Rico and its creditors.”

  What he forgot to add is that with both Puerto Rico and its creditors being made whole on their bonds, and getting a backstop from the government, nothing will change, and the only sacrifice, very much unshared, will be by the usual patsy – US taxpayers.

  

  

  

  

  

• Presenting America's New Debt Ceiling: $19,600,000,000,000

  Even as the bond market has been rather concerned about another possible debt ceiling showdown as we showed before, and which earlier today prompted the Treasury to announce the purposefully dramatic step of postponing the auction of 2 Year Notes next week, the reality is that one way or another, with an equity-driven wake up call for the GOP or without, the debt ceiling will be raised.

  The only question is how much.

  As a reminder, the reason why the total US debt held by the public hasn’t budged from $18.1 trillion since March 16, 2015 is because that is when the last debt ceiling limit was hit. In the seven month since, the US Treasury has been cruising along on emergency cash measures, even as the total debt – if only for reporting purposes – has not budged (in reality it has grown by about half a trillion).

  It will budge very soon, because no matter what the outcome of the upcoming week of debt ceiling negotiations, one thing is certain: the US has to be able to borrow more in order to survive.

  And as The Hill reported, when one gets beyond the traditional posturing, the outcome will be the following:

  The House is expected as early as Friday to vote on a conservative debt-limit proposal even though chances are slim that the plan can pass the Senate. 

   

  Speaker John Boehner (R-Ohio) told the GOP conference on Wednesday that he is expecting a vote on the Republican Study Committee (RSC) plan that would raise the debt limit to $19.6 trillion from $18.1 trillion and would run through March 2017.

  Who will be the Republican to submit the unpopular measure? Most likely the outgoing speaker John Boehner, who will seal his tenure with this final act:  “With only two weeks to go, the pressure is on the House to pass a measure that raises the nation’s $18 trillion debt ceiling amid a search for the next Speaker.”

  Yes, the republicans will pretend to demand concessions, such as a balanced budet and other “sound money” conditions…

  The proposal would require a House vote on a balanced-budget amendment by Dec. 31, would implement a short-term freeze on federal regulations through July 1, 2017, and would compel the House to remain in session without a break if spending bills aren’t done by Sept. 1.

  … but they won’t get them because the corporations pulling the strings of every D.C. politicians are the biggest beneficiaries from US debt-funded largesse, especially if one throws in the occasional contained or not so contained war.

  This means another victory for the Demorats who have required a “clean” debt raise. This is precisely what they will get, and why it will have to take place under John Boehner as Paul Ryan would surely tarnish his reputation with the Freedom Caucus if his first act is one seen as submission to the left.

  Which means that the only certain outcome from the melodramatic debt ceiling fight over the next several days, is the following: the US is about to have a brand spanking new debt ceiling, one that should last it until March of 2017: $19,600,000,000,000.

  If the chart below looks increasingly exponential, that is not a coincidence.
  

  

  
  

  

  

  

  

  

• Paul Ryan Seals Republican Support, Declares Bid For House Speaker

  One week ago he said he has no interest in the Speaker position, but so much can change in one week. Moments ago Paul Ryan sent out a letter to the GOP announcing he would run for speaker of the house. And since he had previously said said he would only enter the speaker’s race if he could lock up support from three wings of the fractious party, in the space of just 3 days this week, he appears to have done just that.

  Letter below:

  

  And with that the question over who the next house speaker will be is answered.

  The only outstanding question now is how Ryan will handle the debt ceiling issue, which, however, as we said earlier is just a formality at this point, and the expansion of the U.S. debt ceiling target to $19.6 trillion is merely a matter of days.

  

  

  

  

  

• Back From The Future: A Presidential Address At The End Of The Fourth Turning

  Submitted by Jimski via The Burning Platform blog,

  Presidential Address to the Nation
  President Pro Tem
  Former Secretary of Education

  My fellow Americans

  I speak to you today from the historic heart of our republic in Washington DC. The last year has seen such pain and misery for our country but at last we see and end to the conflict that has devastated not only America but the whole world. With the Accord signed by the new and old governments we will see a draw down in combat and in mass destruction readiness across the globe. The world has seen pain like no other time in history. Cities Lay in ruin and the people of the world cry out for peace. Peace is now at hand.

  The first nine months of combat saw a replay of the second world war in which men and machine fought across the globe. More resources we consumed or destroyed in that time then all the worlds wars in history. Tank battles and sea battles and men in trenches fighting for what they believed was right.

  We know now just how wrong everybody was.

  When the war finally came to American shores it unleashed more death than every single war in American history. The targeting of 8 American cities resulted in the destruction of 7 of them. Our people continue to die due to the radiological affects of these weapons. We will take a long time to heal but we will heal. 3 of the cities will be decontaminated and rebuilt. We are planning to isolate and quarantine the other 4 cities as not viable for reconstruction at this time. It is triage plain and simple.

  What we do know from the missile that targeted Washington and was shot down is that 4 enemies took part in the plot. Evidence shows that the Nuclear material was supplied by North Korea and the missile technology came from Iran. The ships used to launch the attack was funded and flagged by Saudi Arabia through many fake companies. The personnel who built the weapons and pushed the buttons were a cross section of radical Islamic Jihad’s from 21 different countries. Even American citizens were involved.

  I state that again, even American citizens were involved.

  The broad selection of people who carried out this attack all had one thing in common. A religion of Death and Hatred fundamentally incompatible with modern life on this planet. That is why Mecca is now a crater in the desert. The 3 missiles used 1 from the United States 1 from China and 1 from Russia will leave for all time a monument and a warning to the peoples of the world that hate will bring hate and death. The other 7 cities of the world we struck were destroyed because of irrefutable evidence of complicity in the attack. You unleashed this hell. We delivered it back.

  The bombs were not the only thing that caused destruction and death in our country. It seems we did a good job of that ourselves. In the 93 days since the attack more Americans were killed from riots and shortages than from the weapons. The systems that deliver food and energy stopped. Instead of banding together to help one another we turned on our neighbors with fist and knife and gun. We forgot what it means to be Americans. We forgot what it means to belong to a community. And most idiotically we took out our collective anger on those most able to help us through these times.

  Reports across the country all tell the same story. Murder of local officials and looting on a countrywide scale. The people most targeted seem to be a small group of Americans called Preppers. These people through religious tenant or just good old common sense had prepared for a situation like this but local populations rose up with anger. They thought that because someone prepared for the worst they must have had something to do with the attack. Tens of Thousands were murdered by mobs. The very citizens needed to rebuild are almost gone. And we did this.
  America did it to its self.

  We set up a system of Government that was broken to begin with. It allowed men in high places to loot the treasury. It allowed men in high places to grow a constituency that was beholden to the Government itself though entitlements and outright bribery. We had a population who’s sole purpose was to keep those in power IN POWER. A population of voters who lived to consume and yet never to produce. This was the downfall of the republic. An outside enemy surly struck us well but not unto death. That we did to ourselves.

  Hindsight is for the most part 20-20 and in the clarity of history we see the architects of the war. We surely had well meaning people who agreed to the redistribution of wealth due to a need to help others but as we dissect that last 20 years we see a trend and it is horrific in its nature. We see now the programs to help others were just a way to pilfer from the public treasury. Banks and corporations stole money from America for the sole purpose of a few more decimal points on a ledger. What did it get them? It is all toilet paper now. Sure some got away. You will not get far. We know who you are. We have the records. As one of my last executive orders I have dispatched special forces across the world with orders to kill on sight everyone one of you bastards that brought us to this point.

  Is this legal? We are so past legal I do not care anymore. You have destroyed our country. We are going to drag you down with us.

  This is why we are now a fractured county. We have 4 different people claiming to be the president of 3 different sections of what was the United States of America. I am the only cabinet member in the chain of succession laid out in the Presidential Succession Act of 1947.This leaves me with the title president but for the most part I am the President of Washington DC and what little Military that is left and did not mutiny. That is why I make the following pronouncement:

  I hereby call for a new continental congress to form a new government. Our founders of the old Government knew this would be a possibility, nay probability. We shall gather together and write out a new constitution. A constitution that will hopefully prevent this from ever happening again. And yet as a think on it man being a flawed being perhaps we can never get it right. Perhaps we are doomed to replay generational the mistakes of the old.

  The following statement statement is for the rest of the world:

  We are done with you. Yes we wronged you but we were driven by vain men who harmed us as well as you. Even the interventions across the globe were nothing more than a way to loot the treasury. In the guise of democracy and freedom we brought war and death. We are sorry. I am sorry.

  But we will not be picked over like a dead animal. We are alive and we are able to protect ourselves. We are at this moment recalling every combat unit, every embassy, every American citizen who wants to rebuild the nation and build a future. You will do well to remember that our farmers at one point fed our country and almost 20% of the rest of the world. We still have our agricultural roots although they are buried deep. We will uncover and once again feed a billion people but we will need time. We will need friends. We reach out to those who offer true friendship as we rebuild.

  To those of you who may plot more attacks on our country. At this point you risk the total annihilation of our species. If you truly want to see what a wounded America is capable of. I will push the damn button.

  

  

  

  

  

• Too Big To Kick

  T-12 days till US default…

   

  

   

  Source: Ben Garrison

  

  

  

  

  

• China's Red Capitalism Is The New Black Swan

  Submitted by David Stockman via Contra Corner blog,

  The proverbial peddlers of Florida swampland can now move over. They can’t hold a candle to the red suzerains of Beijing.

  The latter had drawn a line in the sand at 7.0% GDP growth. Conveniently enough, the “consensus” estimate of so-called street economists was pegged at 6.8% for Q3, thereby giving authorities one thin decimal point through which to thread a “beat” at 6.9%.

  By golly they did it!

  Even then, China’s Ministry of Truth had to fiddle down the GDP deflator to negative 0.5% (for the second time this year) in order to hit the bulls eye. And that’s exactly the point.

  No real world $10 trillion economy plagued with all of the turmoil evident in China’s whipsawing trade data or its volatile real estate development sector or its faltering rust belt and commodity-based industries can possibly deliver absolutely stable GDP numbers to the exact decimal point quarter after quarter.

  In fact, the odds that these reports represent anything other than goal-seeked propaganda are so overwhelmingly high that they perforce raise another more important question.  Why does Wall Street and its servile financial press not issue a loud collective guffaw when they are released?

  But no, the Wall Street Journal took it all very seriously, noting both the “beat” and China’s claim that the “miss” wasn’t a miss at all:

  The better-than-expected result—a Wall Street Journal survey of 13 economists forecast a median 6.8% gain—is likely to renew debate over the accuracy of China’s growth statistics…….Speaking at an event to promote entrepreneurism in Beijing on Monday, Premier Li Keqiang said “even though it was 6.9%, it is still a growth rate of around 7%.”

  Right. China’s #2 communist boss is out promoting the “enterprenurial spirit” while emitting central planning propaganda to the decimal point.

  You might find the irony exceptionally rich, but there is a larger message. Namely, the true size of China’s economy is unknowable to the nearest trillion or even several trillions. But that does not prevent most of Wall Street from taking seriously each and every word of China’s self-evidently clueless statist rulers spouting growth rates to the decimal point.

  In truth, Wall Street has become so intellectually addled from its addiction to central bank enabled gambling that it no longer has a clue about what really matters. That’s why the next crash will come as an even greater surprise than the Lehman meltdown, and will be far more brutal and uncontainable, as well.

  Yet the evidence that a China-led crash is on its way is hiding in plain sight. And what is being blithely ignored is not merely the blatant inconsistencies in its economic numbers—–such as the fact that electricity consumption has grown at only a 1.3% rate over the past year——or that its commerce with the outside world has shrunk drastically, with imports down by 23% and exports off by 3-6% in recent months.

  Instead, the evidence that China is a slow-motion trainwreck lies in the very consistency of its Beijing-cooked numbers. Apparently, no one has told its credit-happy rulers that printing precise amounts of new GDP quarter after quarter by issuing credit at double the rate of nominal income growth will eventually result in the mother of all deflationary collapses.

  Stated differently, if the pattern of debt versus GDP shown below is pursued long enough, the world’s greatest open air construction site will fall silent. Everything which can be built will have been delivered; any cash flow which can be encumbered with more debt will have been levered-up; any pretense that financial institutions are solvent will have given way too soaring defaults; and the Wall Street delusion that the primitive central planners of red capitalism had a iron grip on China’s runaway expansion will have been revealed as a snare and delusion.

  Accordingly, the only thing that really counted in yesterday’s release was that credit is still growing at nearly 12% or at 2X the 6.2% gain in nominal GDP. And as is also evident in the chart, this massive and aberrational debt versus income gap has been underway as far back as the eye can see.

  Indeed, its goes all the way back to Mr. Deng’s moment of enlightenment 25 years ago. That’s when he discovered a printing press in the basement of the PBOC and concluded that communist party power might better be preserved by running these presses red hot than by Mao’s failed dictum that power descends from the white hot barrel of a gun.

  In any event, why in the world would anyone in their right mind think this crucial chart can be extended toward the right axis much longer. Assume 10 more years of 12% credit growth, for example, and China will have $90 trillion of total debt or 50% more than the already staggering amount carried by the US economy.

  At the same time and given that China’s nominal GDP growth is descending in Gartman fashion from the upper left to the lower right, assume the very best outcome for nominal income. That is, posit that somehow China manages to achieve ten more years of this quarters’ 6% nominal growth. So doing, you get a mere $17 trillion of GDP.

  Everywhere and always, however, a 5X total leverage ratio on an economy is a recipe for crushing deflation. In fact, it has never happened before in modern times except for Japan after 1990; and Japan at least had some semblance of functioning markets separate from the state and the rule of commercial law, contracts and bankruptcy.

  By contrast, when China fully plunges into its inexorable deflationary spiral the rulers of red capitalism will have no choice except to resort to Mao’s preferred instruments of rule—–paddy wagons and machine guns—-in order to quell an outraged citizenry. After all, Mr. Deng told China’s newly ascendant capitalists that it is glorious to be rich, but did not explain that printing press prosperity ultimately results in a crack-up boom.

  Stated differently, the recent 18-month rise and then overnight collapse of $5 trillion of phony market cap in the Chinese stock market gave rise to utter panic and mindless expediency in Beijing, including a de facto bailout of billionaires. China’s red rulers apparently feared that the 90 million angry stock market speculators would be no match for its 70 million party cadres——especially since most of the latter were foremost among the former.

  Yet what will happen when China’s hideously inflated real estate and land values succumb to the deflationary wringer?  And hideous is not too strong a word: in many urban areas housing prices have reached 15-30X the median income.

  Well, there are 65 million drastically over-priced, empty apartments in China because its rulers told speculators and the rising middle class that housing prices could never fall——that they were the next best thing to a piggy bank. Accordingly, the last phase of China’s madcap construction boom is likely to be a manic spurt of prison building to accommodate the millions of irate citizens who are destined to experience China’s turbo-charged version of 1929.

  

  The other number number in the Q3 release that has been drastically misinterpreted is the reported 10.6% growth of fixed asset investment. Needless to say, this was described as “disappointing” when it is actually a screaming symptom of China’s terminally deformed economy. If it had any hope of avoiding a crash landing, fixed investment in its fantastically overbuilt public facilities and industrial capacity would be sharply negative, not still growing in double digits.

  Owing to the cardinal error embodied in Wall Street’s self-serving rendition of Keynesian economics, however, China’s fatal dependence on erecting economic white elephants and what amount to public pyramids in the form of unused airports, train stations, highways and bridges, is given hardly a passing nod. That’s because it is assumed that some way or another China will make the transition to a services and consumption based economy just like the good old shop-till-they-drop US of A.

  Let’s see. When China finally stops its borrowing binge, these putative shoppers will need to finance their purchases out of current incomes. Yet is not the overwhelming share of household income in China currently earned from the supply chain for fixed asset investment and construction and from the export of cheap goods to already saturated and debt-besotted DM markets?

  Just consider the fantastical reality that China’s 2 billion ton cement industry produced more in three years than did the US industry during the entire 20th century. When they finally stop building roads, apartments and factories, therefore, it is not just the cement kilns which will shutdown, but a whole network of gravel haulers, chemical plants, cement truck fleets, construction equipment suppliers, work site service vendors and much more reaching deep into the interstices of China’s hothouse economy.

  Likewise, when rebar and other construction steel demand collapses and the rest of the world throws up barriers to China’s surging steel exports, as it surely will and is already doing, the ricochet effects on China massively overbuilt 1.1 billion ton steel industry will be far-reaching. The incomes of coal barons and blast furnaces workers alike have already taken a pasting, and the downward spiral is just getting started.

  And wait until China’s newly minted auto dealer lots become backed-up with unsold cars as far as the eye can see. Then its 25 million unit auto industry will tumble into a depression unlike anything since 1929 when Detroit’s production plunged from 6 million cars/year to less than 2 million.

  All of those suddenly unemployed auto, steel, rubber, glass, upholstery etc. workers did, in fact, economically “drop”. But it wasn’t from an excess of shopping!

  In short, the affliction of Keynesian economics brought many ills to the modern world, but repeal of Say’s Law was not among them. You can have a one-time credit party, but when it inevitably ends, consumption spending defaults to that which can be financed from current incomes. Consumption is the consequence of production and income, not its cause.

  Yet crack-up booms eventually destroy the bloated and unsustainable incomes generated in the raw materials, capital goods and consumer durables sectors during the boom phase. Accordingly, even the red suzerains of Beijing can not get from here to there. The phantom incomes that resulted from paving nearly half of the Asian continent occupied by 20% of the world’s population must inevitably shrink, meaning that China’s consumption and service spending will falter, too.

  Stated differently, China’s red capitalism is the new black swan. There is nothing rational, stable or sustainable about it. Moreover, the consequence of its pending collapse will be literally earth shattering.

  That’s because in recent years it has accounted for a lot more than the one-third of global GDP growth conventionally cited. The latter is just a measure of border-to-border economic statistics.

  But the second and third order effects are equally large. From the bowels of Australia’s iron ore mines to the top of Dubai’s pointless 100 story office towers, the entire warp and woof of the global economy has been distorted and bloated by the central bank money printing spree of the last two decades, led by the red credit machines of Beijing. Everywhere economies have succumbed to over-building, over-consumption, over-financialization and endless dangerous, unstable speculation.

  So forget the cleanest dirty shirt meme or the preposterous Wall Street nostrum that the US economy has been “decoupled” from the rest of the world. That’s unadulterated hogwash, and its means that the stock market and risk assets are heading for a thundering crash.

  After the fact, of course, Wall Street will discover that the world economy was unexpectedly taken down when the suzerains of Beijing were unable to perpetuate the Red Ponzi.

  But just like last time during the mortgage and housing meltdown it was starring them in the face all along.  Here is what happened to the home ATM piggy-bank that fueled the Greenspan Boom and that gave rise to the Wall Street illusion that consumption spending is the motor force of economic life.

  From a peak mortgage equity withdrawal rate (MEW) at 9% of DPI or nearly $1 trillion per year prior to the crisis, MEW has been negative ever since. That is, it has subtracted from consumption, not added. Not one in one hundred Wall Street economists could have correctly projected this chart in 2007 when they were slobbering about the goldilocks economy.

  

   

  Needless to say, when it comes to the wounded elephant in the room this time around—-the tottering edifice of the Red Ponzi——they are still slobbering.

  

  

  

  

  

• Putin Just Warned Global War Is Increasingly More Likely: Here's Why

  Vladimir Putin is basking in Russia’s triumphant return to the world stage. 

  What began with a land grab in Crimea and escalated with support for the separatists at Donetsk, culminated in Moscow’s dramatic entry into Syria’s protracted civil war.

  To be sure, the deplorable (not to mention comically absurd) strategy adopted by the US and its regional allies in Syria set Putin up for success. The situation was highly exploitable by anyone that’s strategically minded and thanks to the convoluted set of alliances Washington has built with groups that later turned out to be extremists, Moscow gets to achieve its regional ambitions while simultaneously fighting terrorism. Meanwhile, Washington, Riyadh, Ankara, and Doha are left to look on helplessly as their Sunni extremist proxy armies are devastated by the Russian air force. The Kremlin knows there’s little chance that the West and its allies will step in to directly support the rebels – the optics around that would quickly turn into a PR nightmare. 

  All of this has provided the perfect backdrop for Putin to begin what’s amounted to a lecture tour on how to conduct foreign policy.

  Soundbites have ranged from very serious commentary on why the West should not employ extremists to bring about regime change to comical jabs at the US and its allies who the Russian President last week accused of having “oatmeal brains” when it comes to Mid-East policy. 

  Speaking today at the International Valdai Discussion Club’s 12th annual meeting in Sochi, Putin delivered a sweeping critique of military strategy and foreign policy touching on everything from the erroneous labeling of some extremists as “moderates” to the futility of nuclear war. 

  “Why play with words dividing terrorists into moderate and not moderate. What’s the difference?,” Putin asked, adding that “success in fighting terrorists cannot be reached if using some of them as a battering ram to overthrow disliked regimes [because] it’s just an illusion that they can be dealt with [later], removed from power and somehow negotiated with.” 

  “I’d like to stress once again that [Russia’s operation in Syria] is completely legitimate, and its only aim is to aid in establishing peace,” Putin said of Moscow’s Mid-East strategy. And while he’s probably telling the truth there, it’s only by default. That is, peace in Syria likely means the restoration of Assad (it’s difficult to imagine how else the country can be stabilized in the short-term), and because that aligns with Russia’s interests, The Kremlin is seeking to promote peace – it’s more a tautology than it is a comment on Putin’s desire for goodwill towards men. 

  And then there’s Iran and its nascent nuclear program. Putin accused the US of illegitimately seeking to play nuclear police officer, a point on which he is unquestionably correct: The “hypothetical nuclear threat from Iran is a myth. The US was just trying to destroy the strategical balance, [and] not to just dominate, but be able to dictate its will to everyone – not only geopolitical opponents, but also allies.”

  Speaking of nukes, Putin also warned that some nuclear powers seem to believe that there’s a way to take the “mutually” out of “mutually assured destruction.”

  That is, Putin warned against the dangers of thinking it’s possible to “win” a nuclear war. Commenting on US anti-missile shields in Europe and on the idea of MAD, Putin said the following:

  “We had the right to expect that work on development of US missile defense system would stop. But nothing like it happened, and it continues. This is a very dangerous scenario, harmful for all, including the United States itself.  The deterrent of nuclear weapons has started to lose its value, and some have even got the illusion that a real victory of one of the sides can be achieved in a global conflict, without irreversible consequences for the winner itself – if there is a winner at all.”

  In short, Putin is suggesting that the world may have gone crazy. The implication is that the US believes it not only has the capacity to win a war against the nations Washington habitually places on its various lists of “bad guys” (i.e. Russia, Iran, and China), but that Washington believes America can win without incurring consequences that are commensurate with the damage the US inflicts on its enemies. That, Putin believes, is a dangerous miscalculation and one that could end up endangering US citizens. 

  So once again, this is Putin setting the narrative and jumping at every opportunity to portray Russia as a nation that’s not content to “lead from behind” (as so many have recently accused the US of doing). And once again, his assessment seems remarkably sober in a world that does indeed seem to have lost its collective mind. 

  Full speech (translated) below.

  

  

  

  

  

• What Your High School Chemistry Teacher Never Taught You About Gold

  Submitted by Simon Black via SovereignMan.com,

  One of the more unfortunate developments in human civilization over the last century is the devolution of money.

  In fact, the word ‘money’ has now become synonymous with those funny pieces of paper that are conjured out of thin air by unelected central bankers.

  Or even more ridiculous, ‘money’ has become the electronic representation of that paper.

  Think about your bank account balance; it’s not like the bank has all that paper currency sitting in its vault.

  The ‘money’ in your account doesn’t even really exist. There’s just enough of a thin layer of confidence in the system (at the moment) that this is a widely accepted practice.

  It seems rather strange when you think about it. Though for thousands of years, early civilizations had some pretty wild ideas about money.

  There are examples from history of our ancestors using everything from animals skins, to salt, to giant stones, as their form of ‘money’.

  Though I suppose these weren’t any more ridiculous than our version of money– pieces of paper that don’t even really exist, controlled by unelected central bankers.

  Of course, over the last 5,000 years, there was at least one form of money that did make sense. And it stuck. I’m talking, of course, about gold.

  It’s no accident that gold has become the most consistent form of money in world history.

  The metal is uniquely suited to serve as currency, not only amongst precious metals, but compared against nearly everything else on the planet.

  You can see for yourself by taking a look at the periodic table of elements, the scientist’s catalog of everything the world has to offer.

  Many of the entries on the periodic table are immediately disqualified. Many elements are radioactive. Others are gasses that would be impossible to transport.

  Still others are colorless, and hence indistinguishable from air.

  Taking these out eliminates most of the list, and you’re left with just a few dozen metals.

  Most of these, however, like copper or iron, can be easily eliminated as well. They’re simply too common. And a form of money is useless if its in too much abundance… a lesson that modern central bankers have completely forgotten.

  Others (like cesium) are highly reactive and explode on contact with water, or at least corrode easily.

  Clearly a currency that kills its holder, or can’t even maintain its physical state without debasing itself, is rather useless.

  Even silver, which nearly passes every single test falters at the last point, because it tarnishes slightly in reaction to sulfur in the air.

  So out of all the elements we’re left with just one that’s just right: gold.

  Gold is inert and non-reactive. It’s stable. It holds its form over the long-term. It’s malleable and easily divisible. And it’s rare. But not too rare.

  Judging by its chemical properties, it’s no accident that gold became the most widely-used currency in history.

  Of course, defenders of the paper money concept call gold a “barbarous relic”, suggesting that it has no place in modern civilization.

  (Curiously, paper is also relic from long ago, dating back to the 2nd century AD in China. . .)

  Yes it’s true that gold is a very old concept. But so is the wheel. Language. Arithmetic. And many other ideas passed down from the ages.

  Just because something is ancient doesn’t mean it’s not RIGHT.

  Empires rise and fall. Governments and central bankers come and go. Paper currencies lose their dominance.

  But gold lasts.

  And if you hold a long-term view, and believe that the path to prosperity is not paved in debt and money printing it makes sense to consider holding at least a small portion of your savings in the metal.

   

  

  

  

  

  

• In "Manifest Waste Of Time," Portugal Reappoints PM In Defiance Of Anti-Euro Left Coalition

  As those who followed our coverage of Greece’s protracted negotiations with creditors are no doubt aware, Berlin’s effort to tighten the screws on Alexis Tsipras and Yanis Varoufakis was just as much about sending a message to the rest of the EU periphery as it was about putting Greece on some kind of “sustainable” path to recovery. 

  Greece is going to be a German debt colony for decades to come and everyone knew that going in.

  The real risk was always that Spain, Portugal, and perhaps Italy would get the “wrong” idea about whether it’s possible to essentially threaten to expose the euro as dissoluble on the way to gaining leverage in debt negotiations with Brussels and the IMF.

  

  In other words, it seemed at times as though Greece was betting that the notion of the EMU as an unbreakable bond between member countries would ultimately prove to be so important, that the troika would bend over backwards to avoid Grexit.

  Of course it didn’t quite work out that way and the Greek people had their referendum “no” vote sold down the river by Tsipras.

  When it comes to Greece, Brussels and the IMF achieved what they set out to accomplish as soon as Syriza came to power in January: namely, they were successful in subverting the democratic process by using the purse string to turn Tsipras into a pandering technocrat and to gut Syriza of its more “radical” members like Panagiotis Lafazanis.

  The troika had hoped that Greece’s horrific experience during negotiations and the subsequent outcome which saw a beleaguered Tsipras reduced to a shadow of his former revolutionary self would be enough to deter leftists in other periphery countries from attempting to go down the Syriza route by shunning austerity and pushing for debt relief. As we put it a few months ago, the real question is whether or not the ATM lines, empty shelves, and gas station queues in Greece have had their intended psychological effect on Spanish (and Portuguese) voters. In other words, the question is whether the troika has succeeded in undercutting the democratic process outside of Greece by indirectly strong-arming the electorate. 

  Well, sorry Brussels, but it looks like Athens may have opened Pandora’s Box. On the heels of inconclusive elections held earlier this month, Portugal’s Socialist leader Antonio Costa is ready to align with the Communists and with Left Bloc to form a government in defiance of the Right-wing coalition. Here’s The Telegraph with more:

  Antonio Costa, Portugal’s Socialist leader and son of a Goan poet, has refused to go along with further pay cuts for public workers, or to submit tamely to a Right-wing coalition under the thumb of the now-departed EU-IMF ‘Troika’.

   

  Against all assumptions, he has suspended his party’s historic feud with Portugal’s Communists and combined in a triple alliance with the Left Bloc. The trio have demanded the right to govern the country, and together they have an absolute majority in the Portuguese parliament

   

  The country’s president has the constitutional power to reappoint the old guard – and may in fact do so over coming days – but this would leave the country ungovernable and would be a dangerous demarche in a young Democracy, with memories of the Salazar dictatorship still relatively fresh.

   

  “The majority of the Portuguese people did not vote for the incumbent coalition. They want a change,” said Miriam Costa from Lisbon University.

   

  Joseph Daul, head of conservative bloc in the European Parliament, warned that Portugal now faces six months of chaos, and risks going the way of Greece.

   

  Mr Costa’s hard-Left allies both favour a return to the escudo. Each concluded that Greece’s tortured acrobatics under Alexis Tspiras show beyond doubt that it is impossible to run a sovereign economic policy within the constraints of the single currency.

   

  The Communist leader, Jeronimo de Sousa, has called for a “dissolution of monetary union” for the good of everybody before it does any more damage to the productive base of the European economy.

   

  His party is demanding a 50pc write-off of Portugal’s public debt and a 75pc cut in interest payments, and aims to tear up the EU’s Lisbon Treaty and the Fiscal Compact. It wants to nationalize the banks, reverse the privatisation of the transport system, energy, and telephones, and take over the “commanding heights of the economy”.

   

  Catarina Martins, the Left Bloc’s chief, is more nuanced but says that if the Portuguese people have to choose between “dignity and the euro”, then dignity should prevail. “Any government that refuses to obey Wolfgang Schauble must be prepared to see the European Central Bank close down its banks,” she said.

  And more from FT:

  The appointment of a government led by the Socialist Party (PS) would represent a marked shift from the centre-right government that steered Portugal through a punishing bailout in collaboration with international lenders, to a leftwing alliance determined to roll back austerity.

   

  “Europe is watching and is very concerned,” said Mujtaba Rahman, head of European analysis at the risk consultancy Eurasia Group. “Having just stabilised Greece and heavily distracted by migrants, the last thing Europe needs is a renewed crisis in the south.”

   

  Mr Passos Coelho’s Forward Portugal alliance (PAF) won 38.6 per cent, the largest share of the vote, in the October 4 election, but lost its outright majority in parliament. This means a minority centre-right government could be brought down by the combined votes of left-of-centre parties.

   

  No government on the left or right could hope to survive without support from the PS, which won 32.3 per cent, leaving Mr Passos Coelho nine seats short of an overall majority in the 230-seat parliament.

   

  But talks, encouraged by the president, between Mr Costa and Mr Passos Coelho on PS support for a minority centre-right government have collapsed.

  In other words, this is the absolute worst case scenario for Berlin and Brussels and indeed this is precisely what the troika was trying to deter by adopting a hardline approach during the fraught negotiations with Greece. 

  Who could have seen this coming, you ask? Well, here’s what we said in July:

  In this way, while the outcome of the Greek situation is currently unknown, it has also become moot, because at this very moment, politicians from leftist movements in the periphery are drafting memos demanding that the IMF evaluate their own debt sustainability. Or rather unsustainability.

  And here’s our assessment from way back in May: 

  Perhaps it’s time for Greeks to ask themselves if this is the kind of “European” partner they want to bind their fate to: a partner that will do everything in its power to subvert a democratically elected government, even if, or rather especially if, it means a wholesale “bail-in” for Greek depositors, who may lose as much as 70 cents on every euro.

   

  After Greece is done soul searching, the people of Spain, Italy, Portugal and Ireland should ask the same question, because if we have a Grexit in two weeks, then these countries are next and indeed, Portugal’s Socialist Party is pledging to implement a “reverse policy” as it relates to austerity and relations with the Troika.

  So the takeaway from the above is that allowing the Left coalition to form a government risks throwing the entire EMU back into crisis mode, but attempting to restore the political status quo by decree means setting everyone up for a prolonged period of indeterminacy.

  Obviously that’s a lose-lose for Silva, but as of Thursday evening, a decision has been made. In what is bad news for anyone who hoped Portugal wouldn’t end up mired in an intractable political stalemate, President Anibal Cavaco Silva has appointed Pedro Passos Coelho to serve another term as PM.

  That’s bound to make the situation worse given everything noted above about the relationship between Costa and Coelho. As Communist leader Jerónimo de Sousa said earlier this week, appointing Coelho as prime minister would be “a manifest waste of time”.

  So here again, just like in Brazil and Turkey, we’re set to see political turmoil take center stage, and the EU will be forced to stand by and hope that Portugal remains “in the fold” so to speak when it comes to austerity and the outward appearance of fiscal rectitude. 

  Oh, and if you’re looking for someone who apparently did not think it was possible that the Left might end up banning together to make a serious political power play in Portugal, see below…

  

  

  

  

  

  

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• Endocrine-Disrupting Chemicals Are Making Us Fat and Giving Us Diabetes

  We documented in 2012 that that toxic chemicals in our food, water and air our causing an epidemic of obesity … even in 6 month old infants.

  No matter how lazy and gluttonous adults may have become recently, 6-month-olds can’t be lazy … they can’t even walk, let alone go to the gym.   And 6-month-olds can’t “binge” … Gerber doesn’t make corn dogs or milk chocolate truffles fried in beer batter.

  And we documented in 2012 that the same thing is being observed in animals … hardly your stereotypical couch potatoes.

  A study published last month in the journal Obesity Research & Clinical Practice found that it’s harder for adults today to maintain the same weight – even at the same levels of food intake and exercise – as adults in the 1980s. (As reported by the Atlantic and the Independent.)

  And last month, the prestigious Endocrine Society reinforced the argument that endocrine-disrupting chemicals are making us fat.

  As Medical Xpress reports:

  Emerging evidence ties endocrine-disrupting chemical exposure to two of the biggest public health threats facing society – diabetes and obesity, according to the executive summary of an upcoming Scientific Statement issued today by the Endocrine Society.

   

  ***

   

  The statement builds upon the Society’s groundbreaking 2009 report, which examined the state of scientific evidence on endocrine-disrupting chemicals (EDCs) and the risks posed to human health.

   

  ***

   

  The chemicals are so common that nearly every person on Earth has been exposed to one or more. An economic analysis published in The Journal of Clinical Endocrinology and Metabolism in March estimated that EDC exposure likely costs the European Union €157 billion ($209 billion) a year in actual health care expenses and lost earning potential.

   

  “The evidence is more definitive than ever before – EDCs disrupt hormones in a manner that harms human health,” said Andrea C. Gore, Professor and Vacek Chair of Pharmacology at the University of Texas at Austin and chair of the task force that developed the statement. “Hundreds of studies are pointing to the same conclusion, whether they are long-term epidemiological studies in human, basic research in animals and cells, or research into groups of people with known occupational exposure to specific chemicals.”

   

  ***

   

  Animal studies found that exposure to even tiny amounts of EDCs during the prenatal period can trigger obesity later in life. Similarly, animal studies found that some EDCs directly target beta and alpha cells in the pancreas, fat cells, and liver cells. This can lead to insulin resistance and an overabundance of the hormone insulin in the body – risk factors for Type 2 diabetes.

   

  Epidemiological studies of EDC exposure in humans also point to an association with obesity and diabetes, although the research design did not allow scientists to determine causality. The research offers insights into factors driving the rising rates of obesity and diabetes. About 35 percent of American adults are obese, and more than 29 million Americans have diabetes, according to the Society’s Endocrine Facts and Figures report.

   

  

  

  

  

• Obama Unveils Roadmap To 'Bailout' Puerto Rico: "New" Bankruptcy Rules & Federal Fiscal Oversight

  America is not Greece, but judging from the Obama administration's just-unveiled plans to bailout Puerto Rico's disastrous debt situation, the American territory may have to sacrifice a little more sovereignty to get some relief. Obama is pressing for Congress to give Puerto Rico (PR) sweeping powers to reduce its $73 billion debt burden through a form of bankruptcy protection not now available to American territories and will also ask lawmakers to establish an independent body to monitor the island’s fiscal affairs (a la Troika). While the proposals likely face an uphill battle in Congress, as NYTimes reports, both Democrats and Republicans are under pressure to respond because Puerto Ricans are flooding the US, particularly in central Florida, and are becoming an increasingly important voting block in the 2016 presidential race.

  Puerto Rico is teetering under debt amassed from years of borrowing as the economy failed to grow and residents left for the U.S. mainland. Governor Alejandro Garcia Padilla is seeking to persuade investors to accept less than they’re owed, saying tax increases and spending cuts alone won’t be sufficient to eliminate the government’s budget shortfalls.

  

  Creditors say that the island’s government has been seeking to portray the fiscal situation in Puerto Rico as beyond repair, hoping to force the administration and Congress to act. As The NY Times reports, on Wednesday, Puerto Rico took the unusual step of announcing that talks over restructuring about $750 milllion of the island’s debt had broken off, a move that some creditors saw as posturing to Washington for help.

  It appears to have worked… (as Bloomberg details)

  President Barack Obama is pressing for Congress to give Puerto Rico sweeping powers to reduce its $73 billion debt burden through bankruptcy, escalating administration involvement as the Caribbean island’s access to cash dries up.

   

  Puerto Rico would be provided with a form of bankruptcy protection not now available to American territories. Administration officials also called for lawmakers on Wednesday to increase health-care funding for Puerto Rico, extend tax credits to the poor and put independent oversight in place to monitor the government’s budget.

  The details of the proposals are sparse as yet, but as The NY Times adds, there is some willingness, particularly among top Senate Republicans, to work out a compromise on the bankruptcy issue, according to a person briefed on the matter.

  But the Republican leadership would be willing to grant Puerto Rico access to the bankruptcy courts only on a limited basis, and only with strings attached like the imposition of a federal “control board” to oversee the island’s finances.

   

  Control boards have been used in cases of severe municipal distress to take the power to spend public money out of the hands of elected officials. They do not generally have the powers that bankruptcy judges do to abrogate contracts, such as labor contracts and promises to repay debt.

  But any such move faces political headwinds…

  These changes “are going to be extremely hard to get through both the U.S. Congress and the Puerto Rican legislature,” said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics. “This is a Congress that gets almost nothing done. So to expect them to get something controversial done at the request of the administration right before an election is difficult.

  Though, there is a chance…

  Both Democrats and Republicans are under pressure to respond to the Puerto Rico crisis. Largely because of the island’s economic problems, Puerto Ricans are flooding the United States, particuarly in central Florida, and are becoming an increasingly important voting block in the 2016 presidential race.

  According to Bloomberg, Treasury Secretary Jacob J. Lew, National Economic Council Director Jeff Zients, and Health and Human Services Secretary Sylvia Mathews Burwell said the steps are needed to revive Puerto Rico’s economy.

  “The decade-long recession has taken its toll on Puerto Rico’s finances, its economy, and its people,” officials said in the statement. “To reward work and break this vicious cycle, Congress should enact proven, bipartisan tools for stimulating growth and rewarding work to people living in Puerto Rico.”

   

  The situation in Puerto Rico “risks turning into a humanitarian crisis as early as this winter,” one senior administration official said, speaking on condition of anonymity because the person was not authorized to speak publicly.
   

  But, it is not just politicians that will be hard pressed to pass the bailout…

  The proposal is likely to meet resistance from many investors in the municipal bond market according to Brandon Barford, a partner at Beacon Policy Advisors LLC in Washington and a former Senate Banking Committee staffer.

   

  “Including ‘super Chapter 9,’ significant new social spending, and demands for respecting Puerto Rican public sector pensions when mainland pension funds would register losses from restructuring are all a bridge too far,” Barford said.

  Finally, there is the unintended consequences…

  Federal law allows for cities, counties, special districts and the like to seek bankruptcy protection if their states agree, but the states themselves are excluded. There are concerns that if Puerto Rico gains access to bankruptcy, fiscally troubled states like Illinois might try to follow suit.

  *  *  *
  So the bottom line is that Puerto Rico is Greece… laws will be changed to enable the proligate spending of the past to be bruched under the carpet, and Federal oversight of fiscal affairs (i.e. all government in a nation whose finances are so dire) will be handled by an 'independent' body (just like Troika) and that will enable Puerto Rico to borrow more (likely from the US taxpayer via some subsidized router) to fund what officials call "growth initiatives."
  Because:

  “The situation in Puerto Rico is urgent,” one administration official said. “Without economic growth there is no path out.”

  So the same as the rest of the world then?!

  *  *  *

  But for now, we celebrate, President Obama will save the day…

  

  

  

  

  

  

• Guest Post: The Nazification Of America Is Almost Complete

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

  Once upon a time America fought a great war to rid the world of the Nazis, but now we have become just like them.  In fact, I would venture to say that the Nazification of the United States is pretty much complete.

  As you will see below, we have a heavily socialized economy where tax rates are out of control and lots of freebies are given out just like the Nazis did.  And just like the Nazis, our society has become highly militarized and our government has become increasingly obsessed with watching, tracking, monitoring and controlling the general population.  But more than anything else, all of the pageantry and beauty in our society masks an evil which has grown to a level that is almost unspeakable.  The other day, my wife and I were watching some footage of the beautiful parades and celebrations that were held in Germany before World War II, and they certainly were very impressive.  But under the surface, a great evil was growing.  Just because something happens behind closed doors does not make it okay, and just like the Nazis, our society is about to learn an exceedingly painful lesson in that regard.

  Let’s start out by talking about the economy.  Most people tend to regard the Nazis as “far right”, but the truth is that they were socialists.  By heavily taxing and spending, the Nazis were able to temporarily restore economic prosperity after the great economic crisis that occurred under the Weimar Republic, and this helped fuel their wild popularity.  The following comes from Wikipedia…

  In the midst of the Great Depression, the Nazis restored economic stability and ended mass unemployment using heavy military spending and a mixed economy. Extensive public works were undertaken, including the construction of Autobahns (high speed highways). The return to economic stability boosted the regime’s popularity.

  Just like the Democrats of today, most people don’t consider the Nazis to have been socialists, but that is precisely what they were.  I think that former game show host Chuck Woolery nailed it with some of his recent public statements…

  Chuck Woolery, perhaps best known for being the host of the show “Love Connection” from 1982-94, also frequently takes to Twitter to express political viewpoints. In a recent series of tweets Woolery, 74, offered his opinion on politics, the size of government, and the political nature of the Nazi party:

   

  “Nazi is described as a right wing organization, Yet their were Socialists [sic]. They were left. But Chuck. But My BUTT.”

   

  “National Socialist German Workers’ Party. Nazi Party. Hitler. Need I go on?”

   

  “Maybe better. Democrats don’t value the country. They value the power of Government. There is a difference ya know.”

  I knew there was a reason why I always liked that guy.

  Just like Barack Obama and the Democrats, the Nazis loved to give out free stuff.  Kitty Werthmann was a child in Austria at the time the Nazis took over, and her description of the freebies the Nazis were handing out sounds very much like what the Democrats want to do today…

  Newlyweds immediately received a $1,000 loan from the government to establish a household. We had big programs for families. All day care and education were free. High schools were taken over by the government and college tuition was subsidized. Everyone was entitled to free handouts, such as food stamps, clothing, and housing.

  I like free stuff too, but in the end someone always has to pay for all of that free stuff.  According to Kitty Werthmann, “our tax rates went up to 80% of our income“, and in America we are moving in the same direction.

  In the United States today, when you add up all federal taxes, all state taxes, all local taxes, all property taxes and all sales taxes, there are some Americans that actually pay more than 50 percent of their incomes in taxes.

  Somehow we still have the audacity to claim that we are not socialists even though that is exactly what we have become.

  And the Germans had their own version of Obamacare too.  The following is more eyewitness testimony from Kitty Werthmann…

  Before Hitler, we had very good medical care. Many American doctors trained at the University of Vienna . After Hitler, health care was socialized, free for everyone. Doctors were salaried by the government. The problem was, since it was free, the people were going to the doctors for everything. When the good doctor arrived at his office at 8 a.m., 40 people were already waiting and, at the same time, the hospitals were full. If you needed elective surgery, you had to wait a year or two for your turn. There was no money for research as it was poured into socialized medicine. Research at the medical schools literally stopped, so the best doctors left Austria and emigrated to other countries.

  There is no way that you can get around it.  The Nazis were never on “the far right”.  The were always leftists, and they always hated capitalsim.  National Socialist theologian Gregor Strasser once made the following statement…

  We National Socialists are enemies, deadly enemies, of the present capitalist system with its exploitation of the economically weak … and we are resolved under all circumstances to destroy this system.

  Not even Barack Obama or Bernie Sanders would make such an extreme statement today.

  And like the Nazis, our society has become highly militarized.

  Just prior to World War II, the Germans probably had the most powerful military on the entire planet, and they loved to use that military to push other countries around.  They stunned the entire world when they swept through Poland, and the lightning speed with which they defeated France changed the way war is waged forever.

  But just like the leftists in our own nation, the Nazis definitely did not want the general population to be armed.  Kitty Werthmann remembers very well what happened in Austria under the Nazis…

  Next came gun registration. People were getting injured by guns. Hitler said that the real way to catch criminals (we still had a few) was by matching serial numbers on guns. Most citizens were law abiding and dutifully marched to the police station to register their firearms. Not long after-wards, the police said that it was best for everyone to turn in their guns. The authorities already knew who had them, so it was futile not to comply voluntarily.

  And just like the leftists of today, the Germans were extremely suspicious of individual liberty and freedom.  The secret police were everywhere, and anyone that was even suspected of anti-government activity was monitored very closely.

  Sadly, we are becoming just like the Nazis in this regard, only now we have the technological capability to take things so much farther.  Government control freaks are systematically watching us, tracking us, recording our phone calls and monitoring our emails.  It has gotten so bad that even 64 percent of all reporters believe that the government is spying on them.  We spy on our enemies, we spy on our friends (just ask the French and the Germans about this) and we even spy on the little old lady down the street.

  We have been sold the lie that we have to give up our privacy and our liberty in exchange for security.

  It is the same lie that the Nazis told.

  But perhaps our greatest similarity to the Nazi regime of the 1930s is our lust for blood.

  What the Nazis did behind closed doors was so horrific that it is hard to even speak about it.  Once the Holocaust was revealed, the world should have never allowed crimes against humanity like that to ever happen again.

  But they are happening.

  They are happening behind closed doors in America today, and most Americans are perfectly okay with this.

  In this country, millions of babies are being systematically murdered and their organs are being harvested.  Those organs are then sold off to the highest bidder and they are ultimately used in extremely bizarre scientific experiments.

  In recent months these crimes have been put on display for all the world to see, and yet the American people have not responded with outrage.  In fact, only 29 percent of Americans even want to cut off the hundreds of millions of dollars that Planned Parenthood is getting from the federal government every year.

  Do you know what that 29 percent figure tells me?

  It tells me that America is done.

  America is finished.

  And it turns out that Hitler was actually a huge fan of the founder of Planned Parenthood, Margaret Sanger.  As I have written about previously, it was Sanger that once said the following…

  “The most merciful thing that a family does to one of its infant members is to kill it.”

  Hitler echoed this sentiment when he penned the following in Mein Kampf…

  “The demand that defective people be prevented from propagating equally defective offspring. . . represents the most humane act of mankind.”

  Of course those on the left are going to get very upset by all of this, and I am sure that some of them will leave some very nasty comments following this article.

  But the truth is the truth.

  And it isn’t just Democrats – most Republicans in Congress are in the exact same boat too.

  If we don’t want to be like the Nazis, we should stop acting like them, and that includes not pushing Christianity out of every area of public life.  The following information was uncovered by author Bruce Walker, the author of “The Swastika Against the Cross: The Nazi War on Christianity“…

  The Nazi tract Gott und Volk was distributed in 1941, and it describes the life cycle of German youth in the future, who would:  “With parties and gifts the youth will be led painlessly from one faith to the other and will grow up without ever having heard of the Sermon on the Mount or the Golden Rule, to say nothing of the Ten Commandments… The education of the youth is to be confined primarily by the teacher, the officer, and the leaders of the party.  The priests will die out.  They have estranged the youth from the Volk.  Into their places will step the leaders.  Not deputies of God.  But anyway the best Germans.  And how shall we train our children?  Thus, as though they had never heard of Christianity!”

  Our nation is falling apart because we have rejected the values and the principles that were handed down to us by our forefathers.

  We have embraced the same lies that the Nazis embraced, and if we don’t turn around we will experience a similar fate.

  I think that the following excerpt from a recent RT editorial sums things up pretty well…

  The United States is in decline. While not all major shocks to the system will be devastating, when the right one comes along, the outcome may be dramatic.

   

  Not all explosives are the same. We all know you have to be careful with dynamite. Best to handle it gently and not smoke while you’re around it.

   

  Semtex is different. You can drop it. You can throw it. You can put it in the fire. Nothing will happen. Nothing until you put the right detonator in it, that is.

   

  To me, the US – and most of the supposedly free West – increasingly looks like a truck being systematically filled with Semtex.

   

  But it’s easy to counter cries of alarm with the fact that the truck is stable – because it’s true: you can hurl more boxes into the back without any real danger. Absent the right detonator, it is no more dangerous than a truckload of mayonnaise.

  But add the right detonator and you’re just one click away from complete devastation.

  Absent a major crisis, the United States may be able to keep going down this same road for a few years more.

  But I wouldn’t count on it.

  We have willingly chosen to tear down and destroy everything that our forefathers built, and we were convinced that we had a better way.

  Now decades of incredibly foolish decisions are starting to catch up with us, and yet we still persist in our stubbornness.

  So where do we go from here?

  What will the fate of America be?

  

  

  

  

  

• NASA Warns: 99% Chance Of At Least A 5.0 Quake Hitting LA Within 30 Months

  If scientists at NASA’s Jet Propulsion Laboratory in Pasadena are correct, a moderately-sized earthquake is expected within the next two-and-a-half years.

  As CBS LA reports, JPL experts predict a possible 5.0 magnitude quake in Los Angeles, but say it very well could be stronger.

  JPL geophysicist Dr. Andrea Donnellan, along with seven other scientists, has been using radar and GPS to measure Southern California’s chances for a sizable earthquake, and has made a sobering hypothesis about another big one.

   

  “When the La Habra earthquake happened, it was relieving some of that stress, and it actually shook some of the upper sediments in the LA basin and moved those a little bit more,” Dr. Donellan said.

   

  However, according to Dr. Donnellan, those strains remain, with enough power to produce an even larger quake in the same epicenter in La Habra.

   

  “There’s enough energy stored to produce about a magnitude 6.1 to 6.3 earthquake,” Dr. Donnellan described.

  The new NASA-led analysis of a moderate magnitude 5.1 earthquake that shook Greater Los Angeles in 2014 finds that the earthquake deformed Earth's crust across a broad region encompassing the northern Los Angeles Basin and northern Orange County. As Fox LA adds rather ominously,

   The shallow ground movements observed from this earthquake likely reflect strain accumulated on deeper faults, which remain locked and may be capable of producing future earthquakes.

   

  "The earthquake faults in this region are part of a system of faults," said Donnellan. "They can move together in an earthquake and produce measurable surface deformation, even during moderate magnitude earthquakes. This fault system accommodates the ongoing shortening of Earth's crust in the northern Los Angeles region.

   

   

  

   

  Tectonic motion across the Los Angeles region is distributed on an intricate network of horizontally and vertically moving faults that eventually release accumulated strain in the form of earthquakes, such as the destructive 1994 magnitude-6.7 Northridge earthquake.

   

  Donnellan said a future earthquake to release the accumulated strain on these faults could occur on any one or several of these fault structures, which may not have been mapped at the surface. "Identifying specific fault structures most likely to be responsible for future earthquakes for this system of many active faults is often very difficult," she said.

  *  *  *

  Seismologists at the US Geological Survey have questioned that probability, suggesting it may in fact be slightly lower, stating: “…the accepted random chance of a (magnitude five) or greater in this area in three years is 85 percent, independent of the analysis in this paper.”

  USGS uses different methods from radar and GPS, such as fault maps and models, to develop their results.

  Regardless of the discrepancy in percentage, scientists agree that the probability of at least a moderate-sized earthquake in Los Angeles over the next three years is high.

  “We all need to be prepared. That’s not new for LA.”

  

  

  

  

  

• What Will Mario Draghi Announce Tomorrow: Here Is What Wall Street Thinks

  Tomorrow morning Mario Draghi is widely expected to if not announce an extension, or expansion, of the ECB’s QE program, than to at least jawbone sufficiently, and push the EURUSD lower from its recently anchored level in the 1.10-1.20 range. But what are the specifics of Draghi’s announcement: will he merely expand the monetization limit per security, as he did in early September, will he increase the universe of eligibile securities, or will he simply extend the maturity of the non-open ended QE from September 2016 to some indefinite date?

  It is unclear: the one thing we do know with certainty is what Draghi has said before he will never do, which is to buy gold.

  As to what he may do, there are many opinions. The following list, courtesy of Bloomberg, summarizes what the sellside universe believes Draghi will unveil in just under 12 hours:

  • Most banks expect ECB to ease policy further, probably as early as Dec. and in the form of a QE extension, according to analysts.
  • At this week’s press conference to be held in Malta, Draghi is expected to use dovish rhetoric, which may push EUR lower at least temporarily, while leaving monetary policy on hold
  • Further deposit-rate cut seen as most powerful tool to weaken EUR, even as economists assign low odds for this to be announced before yr end as it may require a worsening of euro-zone financial conditions
  • Expectations for more easing increased after ECB’s Nowotny said Oct. 15 that both headline and core CPI are ‘clearly’ missing central bank’s target, although the GC member said on Oct. 18 policy makers may not extend QE any time soon
  • Survey conducted by Bloomberg show economists expect ECB to step up QE by Jan. 2016. Below are more details of such expectations, based on published research and interviews:

  BARCLAYS (team incl. Nikolaos Sgouropoulos, Cagdas Aksu)

  • WHEN: Expect announcement of QE time extension in Dec. when ECB updates 4Q 2015 staff economic forecasts
  • HOW: ECB has 2 main options to provide more accommodation; first, making QE more expansive; second, introducing possibility of deposit rate cut more openly, or delivering it
  • First option more likely at this stage; the easiest way would be to lengthen end-date from Sept. 2016 by 6-9 months to 1Q-2Q 2017; this is already expected by mkt
  • IS A DEPOSIT RATE CUT LIKELY: Don’t rule it out but remains unlikely for next two meetings; a likely trigger for rate cut would be further material appreciation of EUR, possibly related to more signs that Fed will stay on hold for longer
  • EXPECTATIONS FOR OCT. 22: Continuation of dovish rhetoric
  • ’’We think that it is just a matter of time until the ECB decides to drive EUR/USD lower’’

  CREDIT SUISSE (team incl. Christel Aranda-Hassel)

  • WHEN: More ECB monetary policy accommodation is in pipeline, probably in Dec.; EUR is key trigger for more action; if it trades above 1.15/USD and toward 1.20 in run-up to Thursday’s meeting, we would bring baseline Dec. QE extension forward to Oct. meeting
  • HOW: Baseline scenario is that ECB will state that QE is extended to March 2017 or beyond
  • IS A DEPOSIT RATE CUT LIKELY: Cutting the deposit rate further and/or increasing purchased amount would require a more significant deterioration in CPI outlook
  • EXPECTATIONS FOR OCT. 22: Below and up to EUR/USD 1.15 in run-up to Thursday’s meeting, expect no action from ECB and a very dovish press conference, which leaves the door wide open for action in Dec.

  GOLDMAN SACHS (Dirk Schumacher)

  • WHEN: ECB may ease further at Dec. or Jan. meetings
  • HOW: By extending purchase program until mid-2017, with a tapering from Jan. 2017 onward
  • IS A DEPOSIT RATE CUT LIKELY: A sharp appreciation of EUR may prompt a further reduction in deposit rate; not base case scenario
  • EXPECTATIONS FOR OCT. 22: On hold, Draghi to adopt a strongly dovish undertone: MORE
  • ’’Coming policy meetings are pivotal if the ECB wants to re-establish its credibility. It is decision time for the ECB’’ strategists incl. Robin Brooks say in client note

  BOFAML (team incl. Gilles Moec, Athanasios Vamvakidis)

  • WHEN: Pushes central case for QE2 from Oct. to Dec.: MORE
  • HOW: By Dec. ECB would probably need to deliver not only an extension beyond Sept. 2016 but also an expansion with “delta” in purchases possibly being directed toward corporate bonds
  • IS A DEPOSIT RATE CUT LIKELY: Don’t expect it; it would be a surprise for mkt as very little is priced in and Draghi said that deposit rate has reached its floor; an even lower rate may complicate QE implementation
  • EXPECTATIONS FOR OCT. 22: It remains a “live” meeting; communication could be complicated for Draghi; if he comes out too hawkish, there is a risk that euro exchange rate could go through a knee-jerk leap
  • ’’We think the more the ECB waits, the more it will have to do to convince the market it can deliver on its price stability objective’’

  UNICREDIT (team incl. Marco Valli)

  • WHEN: More easing may be announced in first months of 2016, March at latest: MORE
  • HOW: Expect ECB to boost QE by another EU300b-400B after Sept. 2016
  • IS A DEPOSIT RATE CUT LIKELY: Think QE2 is much more likely than a deposit rate cut
  • EXPECTATIONS FOR OCT. 22: Expect no action and dovish rhetoric, mainly intended to stem EUR appreciating trend
  • ’’It seems that a EUR/USD at 1.15-1.20 may represent a sort of pain threshold. This implies that dovish rhetoric is very likely to continue and, possibly, intensify this week’’

  BNP PARIBAS (team incl. Ken Wattret)

  • WHEN: Dec. is the most likely timing of a move, in tandem with review of ECB’s staff macroeconomic projections
  • HOW: Expect an extension of ECB’s asset-purchase program beyond Sept. 2016; also expect monthly volume of purchases to be increased by EU10b
  • IS A DEPOSIT RATE CUT LIKELY: It would come into play if changes to asset-purchase program fail to have desired effect on euro-area conditions: MORE
  • EXPECTATIONS FOR OCT. 22: Press conference should leave the door ajar for a lower deposit rate, as ECB aims to lean against tightening of financial and monetary condition
  • ’’We would not rule out a surprise policy change as soon as this week. We put the chances at around 40%’’

  HSBC (Fabio Balboni)

  • WHEN: Expect program to be formally expanded in Dec.
  • HOW: By dropping the reference to Sept. 2016 and making it effectively open-ended
  • IS A DEPOSIT RATE CUT LIKELY: Unlikely as it would be in contradiction with policy of balance-sheet expansion
  • EXPECTATIONS FOR OCT. 22: Expect ECB to forcefully reiterate commitment to expand program if necessary without delivering any actual change
  • ’’We won’t have a formal expansion of the size of monthly purchases for now. Otherwise, as the constraints become apparent, the ECB might face considerable credibility problems if inflation doesn’t revert quickly’’

  DEUTSCHE BANK (Mark Wall, Marco Stringa)

  • WHEN: ECB to act further in Dec.; changed call Oct. 2 saying that further QE is no longer just a risk: MORE
  • HOW: Expects a 6-month flexible extension of QE
  • IS A DEPOSIT RATE CUT LIKELY: QE extension is more likely than a deposit rate cut
  • EXPECTATIONS FOR OCT. 22: Council will likely sound increasingly dovish, but is unlikely to take concrete action in absence of negative shocks
  • ’’A depo cut would need to be designed to incentivize lending to SMEs to be effective. Otherwise it might not compensate for the cost of the policy U-turn’’

  CREDIT AGRICOLE (Valentin Marinov)

  • WHEN: ECB may ease further in 1Q 2016
  • HOW: By extending duration of asset purchases beyond Sept. 2016, initially; also expect ECB to leave door open for increase in amount of monthly buying
  • IS A DEPOSIT RATE CUT LIKELY: Depo rate cut not part of Credit Agricole economists’ base case, though wouldn’t rule out another decrease to boost impact of any additional QE measures
  • EXPECTATIONS FOR OCT. 22: On hold; ECB to downgrade economic outlook and signal QE would be extended beyond Sept. 2016; investors should watch for hints from Draghi that additional easing will be occurring before long
  • ’’We expect the ECB to extend QE in 1Q 2016 and this should help reinstate the negative relationship between EUR and QE’’

  NOMURA (Nick Matthews)

  • WHEN: ECB may ease further by March 2016 meeting, at the latest; whether policy makers act at Dec. meeting, or at least signal that further action may come in 1Q 2016, may be a close call given international developments and stronger EUR
  • HOW: By extending asset purchases to end-March 2017 or beyond
  • IS A DEPOSIT RATE CUT LIKELY: Don’t expect a depo rate cut to be part of ECB’s next round of easing
  • EXPECTATIONS FOR OCT. 22: On hold; expect ECB to sound dovish and emphasize willingness and ability to act, if warranted; also see continued signal that focus for next round of easing remains on flexibility of asset-purchase program

  CITIGROUP (team incl. Guillaume Menuet)

  • WHEN: Baseline for Dec. meeting
  • HOW: Expect ECB to announce that it intends to extend or expand pace of asset purchases; an extension is the slightly more likely option
  • IS A DEPOSIT RATE CUT LIKELY: Not baseline; some unexpected EUR appreciation together with more evidence of EM mkts slowdown would likely prompt a re-think about whether -20bp deposit rate is really the lower bound
  • EXPECTATIONS FOR OCT. 22: ECB will likely conclude that more time is necessary before announcing further policy easing
  • ’’Increasing the size of the public-sector purchase program on Oct. 22 remains a possibility for GC, but the hurdle seems higher’’

  MORGAN STANLEY (team incl. Elga Bartsch, Hans Redeker)

  • WHEN: If updated ECB forecasts in Dec. show there are renewed downside risks to CPI, ECB could act further
  • HOW: If ECB acts, expect combination of a reduction in depo rate and faster pace of purchases to be more effective than a simple extension of program; it also might be easier to agree on than an extension of purchase program well beyond Sept. 2016 for some of the hawkish members
  • IS A DEPOSIT RATE CUT LIKELY: Attach a probability of 1 in 3 to ECB acting this wk
  • If ECB was to embark on concrete policy actions, it would probably up pace of QE above EU60b/month, add to overall size of QE program beyond EU1.14t, and consider a reduction in deposit rate to widen the pool of eligible assets ECB can buy at shorter maturities
  • Say a 10bps ECB deposit rate cut is likely to be the most effective measure to limit the scope for EUR appreciation: MORE
  • EXPECTATIONS FOR OCT. 22:On hold, stressing its determination to act, if needed; expect ECB to open the door further to possible policy action at Dec.

  RBC (Timo Del Carpio, Peter Schaffrik)

  • WHEN: Dec.
  • HOW: Expect either a 6-mo. extension or even a rolling 6-mo. extension until further notice
  • IS A DEPOSIT RATE CUT LIKELY: EUR short end has become rich on the back of rate cut “fantasies”; if there’s any mention of “all options being open” would propel the market substantially higher and the short end even richer
  • EXPECTATIONS FOR OCT. 22: On hold; the lack of a conclusive message from economic data mean policy bias to stay ’waiting and seeing’; MORE

  RBS (Giles Gale, Michael Michaelides)

  • WHEN: Expect QE to be both extended, possibly to March 2017, and accelerated to EU90b per month at the Dec. meeting
  • HOW: By extending beyond Sept. 2016 and increasing the monthly pace to EU90b
  • IS A DEPOSIT RATE CUT LIKELY: Not RBS’s base case
  • EXPECTATIONS FOR OCT. 22: This meeting isn’t live for more action; GC members have been categorical as can be expected that extension isn’t yet on the table

  JPMORGAN (Gianluca Salford, Fabio Bassi)

  • WHEN: Most likely dates for further stimulus are Dec. this year and Jan. 2016
  • HOW: The bulk of any additional stimulus will have to come from an increase in govt bond purchases with main bottleneck coming from the low stock of German bonds; doubt ECB will be in a position to deliver more than an increase of the monthly pace to EU70b-EU80b and extension to Dec. 2016 or March 2017
  • IS A DEPOSIT RATE CUT LIKELY: It will be very difficult for ECB to deliver a rate cut after having delivered and maintained over past year a consistent message in which policy rates are at the floor lvls
  • EXPECTATIONS FOR OCT. 22: Expect Draghi to keep his options open

  SUNRISE (Gianluca Ziglio)

  • WHEN: Best case for an extension is March
  • HOW: ECB may go for an extension; expanding size very unlikely as ECB will already find it hard to do EU60b/month at year-end
  • IS A DEPOSIT RATE CUT LIKELY: No as have said they are done on rates
  • EXPECTATIONS FOR OCT. 22: Don’t expect much from ECB until year-end as bank needs to see how end of year/Jan. base effects on energy inflation play out early next year

  UBS (Reinhard Cluse)

  • WHEN: Don’t expect any change to QE, even in Dec.; base case is ECB will run QE in its current form or EU60b/month until Sept. 2016, followed by some form of tapering
  • IS A DEPOSIT RATE CUT LIKELY: No. When they cut last year, Draghi said it is at the lower bound, a sentiment Coeure repeated more recently so any cut would come at cost of ECB credibility
  • EXPECTATIONS FOR OCT. 22: Not adding new stimulus may disappoint some mkt participants, making it important the ECB carefully calibrates its message; expect Draghi to leave door open for more accommodation in Dec.

  IHS GLOBAL INSIGHT (Howard Archer)

  • WHEN: Most likely ECB will extend QE, possibly in Dec.; if 3Q GDP growth holds up relatively well, may wait until New Year
  • HOW: Any further ECB action would be most likely through increasing and/or extending QE
  • IS A DEPOSIT RATE CUT LIKELY: Draghi has repeatedly stated that interest rates have reached their lower bound
  • EXPECTATIONS FOR OCT. 22: Draghi will deliver a dovish message, saying ECB is focused on downside risks to euro zone inflation and growth

  ABN AMRO (Hyung-Ja de Zeeuw, Nick Kounis)

  • WHEN: Expect announcement of extended and larger ECB QE before yr-end
  • HOW: Will extend QE beyond Sept. 2016, increase monthly purchases to EU80b vs EU60b; list of eligible assets will be broadened to include more utilities: MORE
  • IS A DEPOSIT RATE CUT LIKELY: Don’t think that a deposit rate cut will be the ECB’s first port of call, but we think it is certainly an option at a later stage
  • EXPECTATIONS FOR OCT. 22: We could get a clearer idea of future ECB action

  * * *

  Clearly, nobody really has any idea what is about to happen tomorrow, yet one thing which is far more critical than any of the opinions voiced above, is that just like the Fed, the ECB too is trapped. On one hand, it is suffering a collapse in inflationary expectations, seen not only via the tumbling 5Y5Y, but through real 10Y yields.

  

  On the other hand, as the chart below shows, if the ECB announces an extension until September 2017, which is virtually guaranteed, the ECB will soon approach the limit of monetizable debt, especially in Germany, Portugal and Finland, as well as Slovakia and Slovenia, that the ECB can monetize without adversely impairing even further the already scarce liquidity of Europe’s bond market.

  

  

  

  

  

  

• China Calms Fears, Says "Stock Plunge Is Normal Correction" As Panic-Buying Resumes On Japanese Open

  After last night's bloodbathery in China, analysts and officials are out en masse to ensure a newly re-leveraged Chinese investors that the "stock plunge is a normal correction." Disappointingly, Chinese stocks are barely bouncing at the open, which is not what we can say for Japan, where the mysterious uneconomic panic-buyer-of-first-resort appeared once again and smashed the Nikkei 225 200 points higher at the open (after weakness in the US).

   

  Japanese stocks meltup to catch up with USDJPY at the open, but are fading back…

  

   

  And after last night's carnage in China…

  

   

  Analysts are anxiously reeassuring everyone… (as Bloomberg reports),

  Investors shouldn’t be too pessimistic about market outlook as Wed.’s tumble was “normal correction” from previous strong run, analysts Luo Wenbo and Zeng Yan at Zhongtai Securities said in report.

   

  Some investors sold shares ahead of next week’s Party plenary session on concern gains were excessive, causing “herd effect” on Wed., report said

   

  Room for further downside is limited as liquidity is still adequate, reform motivation is strong and market sentiment has gradually picked up: report

  PBOC fixed the Yuan modestly weaker but the Offshore-Onshore spreads remains near 1 month wides…

  

   

  In addition, China’s central bank added funds to the banking system using six-month loans to keep borrowing costs down as a slowdown in the world’s second-largest economy spurs capital outflows.

  The People’s Bank of China supplied 105.5 billion yuan ($16.6 billion) to 11 commercial lenders on Wednesday using the Medium-term Lending Facility, according to a statement posted on its official microblog. The rate was 3.35 percent, the same as for similar-term funds injected in August.

  And The USDollar is slipping against Asian FX…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Capital Is Still Flowing Out Of China, Here's How Beijing Is Hiding It

  Earlier this month, we asked if the market was being deceived about the pace of capital outflows in China. 

  Our concerns came on the heels of a rally in EM FX and other assets that may have been fueled by a “better-than-expected” read on China’s reserve drawdown in September. The figure came in at “just” $43 billion, which of course made no sense because on one measure, outflows totaled more than that by the middle of the month. 

  This is important because as we outlined three weeks after the deval, the monthly read on China’s FX reserves has to a certain extent become the new risk on/off trigger for the market which means that if the data is unreliable or otherwise opaque, then investors will be operating with bad information. That is, what we really want to know is how much pressure there is in terms of capital outflows, and to the extent that China’s official FX reserve data doesn’t capture that, the data isn’t a useful indicator of where EM is headed on a more general level.

  As Goldman began to discuss in September, Chinese banks appear to be absorbing some of the outflows using their own books. Here’s how they explained the situation last week: 

  Given possible PBOC balance sheet management (e.g., short-term transactions and agreements between with banks, e.g., forward transactions, FX entrusted loan drawdown or repayment), we interpret the FX reserves data with caution, as it might not give a complete picture of the FX flow situation. The large gap between today’s data and the other PBOC data for September suggests that banks might have used their own spot FX positions to help meet some of the outflow demand, although banks’ overall FX positions might still have been squared with the PBOC via forward agreements.

  In short, our argument has been that much like the NBS will obscure any weakness below 7% in China’s GDP data, the PBoC will do “whatever it takes” (central bank pun fully intended) to make sure that the market doesn’t get wind of the fact that there’s still a tremendous amount of pressure in terms of capital outflows.

  Now, the word is apparently out. Here’s Bloomberg:

  The People’s Bank of China and local lenders increased their holdings in onshore forwards to $67.9 billion in August, positions that would boost China’s currency against the dollar. The amount is five times more than the average in the first seven months, PBOC data show. The positions are part of a three-stage process to support the currency without immediately draining reserves, according to China Merchants Bank Co. and Goldman Sachs Group Inc.

   

  Standard central-bank intervention to support a currency generally involves selling dollars and buying the home tender. In this case, China’s large state banks borrowed dollars in the swap market, sold the U.S. currency in the cash spot market and used forward contracts with the central bank to hedge those positions.

   

  “If you can intervene without actually diminishing your reserves, it’s somehow viewed as better,” said Steven Englander, global head of Group-of-10 foreign exchange-strategy in New York at Citigroup Inc. Such central-bank activity “may not look quite as dramatic as the sale of reserves, and they may prefer that optically,” he said.

   

  

   

  Using derivatives for intervention had the benefit of delaying any decline in the PBOC’s $3.5 trillion trove of foreign-exchange reserves, helping calm investors rattled by an economic slowdown and a slumping stock market. It was also faster as the monetary authority’s managers didn’t have to liquidate assets such as U.S. Treasuries to raise the dollars needed for direct yuan purchases.

   

  Major Chinese banks borrowed dollars in the onshore swap market in late August and September, and then undertook “heavy dollar selling” in the spot market, said Frank Zhang, head of foreign-exchange trading at Shenzhen-based China Merchants Bank. 

  The PBOC then came in to offset, or “square”, the positions with the banks, essentially taking on their trades onto its own balance sheet, according to Goldman Sachs.

   

  On a practical level, buying yuan forwards means the PBOC wouldn’t drain yuan liquidity out of the system as it would otherwise by buying its own currency in the spot market. Policy makers cut interest rates and the reserve-requirement ratio in August, partly to replenish the funds drained during intervention.

   

  “If you have a transaction that settles down the road, the actual liquidity impact in the short term may not be as dramatic,” said Citigroup’s Englander. “Down the road you can’t avoid it.”

  In the simplest possible terms (although really, this isn’t that complex a transaction to begin with), they’re just kicking the can in an effort to control the optics around the deval, which would be fine if everyone realized what’s going on, but rest assured they do not, because no matter how many Bloomberg or WSJ articles are published on the subject, the market (or the machines) will still read the headline figures and make a snap judgement about the extent to which the pressure on the yuan has mitigated. 

  At the end of the day, the takeaway is simply this: the narrative around Chinese capital outflows is extraordinarily important right now, and indeed, it’s influencing the Fed’s reaction function. Even as Beijing doesn’t necessarily want the Fed to raise rates, the PBoC doesn’t want to lose complete control of the narrative either, which is why you can expect to see more efforts on China’s part to mitigate near-term FX reserve burn, even if it means stacking the deck against the yuan down the road. And really, who can blame them? The entire world is involved in the largest can-kicking experiment of all time, so why should China’s central bank be any different?

  

  

  

  

  

• Did Paul Volcker 'Save' A System That Was Simply Not Worth Saving?

  Submitted by Bill Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),

  Disappearing Growth

  Investors are regaining their calm. A few weeks ago, it looked as though the end of the world had begun. We are talking, of course, about the world in which credit, stocks, and central bank reputations only go up.

   

  

  Fated to eventually become a house of ill repute: the Mariner Eccles building (Fed board HQ)

  Photo credit: AgnosticPreachersKid

  But after a big fright in August, investors recovered their relaxed madness. They concluded that there was nothing to worry about. They may be right. You never know. But our guess is that the end of the world has already begun… and they just can’t face it.

   

  

  The SPX, monthly – a proxy for the seemingly never-ending asset bubble. What if the end of the party is already here and people have just not noticed yet? – click to enlarge.

   

  Since the end of World War II, credit has been expanding in the U.S. At first, it was a healthy expansion. Young, middle-class families took out mortgages and ran up bills on “charge cards,” such as Diners Club and American Express.

  Then, in the late 1950s, came the first credit cards. This was accompanied by large increases in consumer credit. Until the 1970s, all was well, because wages were rising, too. And with so much new technology coming online, people believed their wages could only increase.

  Debt was no problem – neither for the nation nor for households. We would “grow our way out of it.” But a strange – and as yet not fully understood – new trend began in the 1970s. After accounting for inflation, incomes for most Americans dramatically tapered off.

   

  

  Total credit market debt, federal debt and GDP – a non-problem on its way to becoming an intractable problem … – click to enlarge.

   

  The economy was slowing, too, after taking the effects of inflation into account. At first, this was thought to be temporary – a fluke, perhaps caused by the 1973 oil crisis. But the trend toward lower economic growth continued. Decade after decade, the trend in GDP growth was down. In most parts of the U.S., GDP per person peaked in the 1970s or 1980s.

  Remarkably, the average American working man earns less today than he did a half century ago (again, accounting for changes in consumer price inflation). That is not the same as saying that a person with a good job earns less today than he did in the 1960s.

  According to Census Bureau figures, the average inflation-adjusted wage for Americans in the top 5% of earners is up by more than 75% since 1967. Women earn a lot more, too.

  But good jobs have become scarce. The labor participation rates – the number of people who have jobs or are looking for jobs as a percentage of the people who are of working age – is at its lowest level since 1977.

   

  

  Labor force participation rate – at its lowest level since 1977. Something is clearly amiss – click to enlarge.

   

  Debt Goes Sour

  But although economic growth and most people’s incomes slipped, debt (the flip side of credit) kept growing. This was Stage II – the unhealthy phase of the credit expansion. No longer backed by broad-based wage increases, debt was expanding beyond the capacity of the economy – and borrowers – to repay it.

  Now we were asking for trouble. You may be wondering how this was possible. Why would lenders extend credit to people who couldn’t pay back? The answer: The fix was in.

  In 1971, President Nixon dramatically transformed the global monetary system. Under the previous Bretton Woods system, the dollar was backed by gold. And the major global currencies traded at fixed rates to the dollar… and by extension to gold.

  This meant a nation couldn’t get too far into debt… especially when it came to its trading partners. Trade surplus nations – which amassed dollars in return for net exports to the U.S. – could ask to redeem their dollars in gold. This caused gold to leave the overspending nation and flow to the creditor nation.

  That’s how the U.S. got so much gold in the first place. France and Britain spent more than they could afford on World War I. The U.S. sold them food, weapons, and fuel… and demanded gold in repayment. But by the 1960s, the shoe was on the other foot.

  The U.S. started spending money on both “guns and butter” – a Great Society at home and a war in Vietnam. Much of the spending to fund the war in Vietnam ended up as dollars in the hands of Vietnamese branches of French banks.

  French president de Gaulle warns of the dollar-centric monetary system that was leading to enormous debt growth and would one day lead to an uncontrollable crisis. He started coming for his gold shortly thereafter, ultimately exposing the fact that dollars were no longer fully backed by gold.

   

  And when, in 1965, president Charles de Gaulle sent the French navy across the Atlantic to pick up $150 million worth of gold in exchange for dollars, it was greeted like a long-lost relative at the reading of the will.

  Finally, with gold being airlifted from Fort Knox to meet foreign demands for payment, rather than honor Washington’s promise to convert dollars to gold, Nixon panicked and defaulted. Henceforth, anyone holding dollars was on his own …

  Nixon announces that the US will default on the gold exchange standard by “temporarily” suspending gold convertibility, while raising tariffs concurrently. Essentially he was telling a whole bunch of lies in the process, while proudly parading his appalling economic ignorance. This was called the “Nixon shock”. We’re not sure if people were more shocked about the lies or the ignorance, but surely many people must have wondered if it was April 1 instead of early August.

   

  “Tall Paul” Takes Over

  It all would have gone bad very fast. By April 1980, the annual rate of consumer price inflation was running at almost 15%. Gold soared as high as $800 an ounce. It looked as though Nixon’s new fiat money system would go off the rails soon – as all previous experiments with paper money had.

  Instead, in 1979, President Carter appointed Paul Volcker as Fed chairman. Volcker stepped in front of the runaway train and commanded it to halt. And it did. By January 1981, “Tall Paul” jacked up the federal funds rate – the key lending rate in the economy – not to 2%… or 4%… or even 8%. He set it at 19% – and placed the train squarely on the tracks again.

  We remember the howls of discontent. Volcker was “stifling the economy,” said the politicians. He was “killing jobs,” said the newspapers. He was causing “the worst downturn since the Great Depression,” said the economists. But Volcker didn’t budge. And when Ronald Reagan entered the White House in 1981, he backed Volcker.

   

  

  Paul Volcker applied tough medicine for about two years, but by the time he became Fed chairman, US true money supply growth had already been declining sharply for two years running. In other words, the main driver of price inflation was already in retreat when he entered the scene. Later, in 1982, he produced the biggest one year surge in the broad money supply aggregate TMS-2 that had been seen since the war, a feat never again repeated. While he fended off assorted yammering politicians in the first two years of his chairmanship, it is a good bet this was actually a mock battle to pull the wool over the eyes of the hoi-polloi. We won’t be able to shake his firmly cemented reputation as an “inflation fighter”, but it is not nearly as deserved as is commonly assumed. Plus, as Bill Bonner notes below, in the best case he saved a system simply not worth saving.

  Photo credit: John Duricka / AP

   

  Volcker announced his intention to squeeze inflation out of the system soon after he became Fed chairman. Bonds – which do well when inflation is low – should have rallied. Investors should have raced to lock in roughly 10% yield available on the 10-year Treasury note. Instead, bonds price fell… and bond yields rose.

  Then, as now, people were not aware – or were not willing to believe – that a major change had occurred. It wasn’t until 1982 that the bond market turned; finally, investors realized that it was a new world. Volcker saved the system. Bond yields – and interest rates – have been coming down ever since.

  Too bad he didn’t save a better system. Not many men can resist the appeal of free money. Americans proved they were no better at it than others. Falling interest rates and the paper dollar gave them a way to impoverish themselves – by spending money they hadn’t earned.

  They took the opportunity offered to them. They borrowed and spent… and drove the entire world forward at a furious pace. But now that stage is over.

   

  

  The “stability” of the “scientific monetary policy” in one stark image.

  Investors only realized in late 1981/early 1982 that the era of rising CPI inflation had ended – a reaction delayed by nearly two years. Something similar could well be happening now – an era is ending, they just don’t know it yet – click to enlarge.

  

  

  

  

  

• From Russia With Love: Assad Unexpectedly Visits Putin In Moscow

  On Tuesday, we noted how absurd it is for Saudi foreign minister Adel al-Jubeir to suggest that it will be “difficult” for Iran to play a part in “resolving” Syria’s years-old civil war. Here’s how we put it yesterday:

  It’s rather strange for the Saudis to make statements like “it will be difficult for Iran to play a role in finding a solution to the conflict.” We hate to be the bearers of bad news, but Iran is already playing a role in finding a “solution” – they’re summarily wiping out the groups funded by the Saudis on the way to restoring the regime. If anyone is going to have a “difficult” time playing a part, it’s the Saudis. 

  That same logic applies to the US and any of Washington and Riyadh’s regional allies.

  With each passing day, the opportunity for the West and the Sunni axis to have some say in Syria’s political future slips away. As we’ve said on a number of occasions, Russia isn’t going to risk the lives of her troops and spend who knows how many tens if not hundreds of millions of dollars only to have the West dictate the terms of any political “transition” which may or may not take place once the smoke has cleared. 

  Indeed, several Western powers and some of the regional backers of the Sunni extremist groups battling the regime have already admitted that Assad may have to remain in power during a “transitional” period. 

  Now that Iranian ground troops are poised to take Aleppo in what amounts to a final push to restore Assad’s grip over the country, The Kremlin is already looking at how to go about shaping the country’s political future as Assad traveled to Moscow in what the media says is his first foreign visit since the start of the civil war. At a meeting with Putin, the two leaders discussed the “political process” and reviewed the progress in the fight against “international terrorists.” Here’s Bloomberg with more:

  Syrian President Bashar al-Assad held talks in Moscow with President Vladimir Putin on Tuesday in his first known foreign visit since the civil war erupted in 2011, underscoring the growing Russian role in the four-year conflict.

   

  Almost a month into a Russian bombing campaign in support of Assad’s forces, Putin told the Syrian leader during the unannounced visit to the Kremlin that “there have been some major positive results in this fight” against the “international terrorists” battling government forces, according to a transcript released by Russia’s government.

   

  Ending the crisis requires “a political process with the participation of all political forces, ethnic and religious groups,” Putin said in comments shown on Russian state television on Wednesday. Assad, thanking Russia for its assistance, said the fight against “terrorism” is the “obstacle against any true political steps that could be taken on the ground.”

   

  Sami Nader, head of the Beirut-based Levant Institute for Strategic Affairs, said the trip to Moscow was Assad’s first foreign visit since the Syrian conflict began with an uprising against the regime in Damascus, and pointed to future Russian strategy ahead of any peace talks.

   

  It’s “Russia’s way of saying he is in our pocket, he is our asset and we will decide whether to keep him,” Nader said. “This is for sure a preparation for a deal and one more attempt by the Russians to embolden their bargaining position.”

  And so, just as we said from the beginning, Moscow’s move to muscle the West out of the way militarily has led directly to Russia hijacking the political negotiations as well.

  In short: Washington and its regional allies will be allowed to participate in a discussion with The Kremlin, but that’s as far as it goes. Russia will decide Syria’s political future in consultation with Iran and given the strategic importance for Tehran of ensuring that there’s a “friendly” government operating in Damascus, you can bet that whatever the solution ends up being, Washington, Riyadh, Ankara, and Doha will most assuredly not like it. 

  To the victor go the spoils.

  For now, we’ll close with one quote from Sergei Karaganov, dean of the Faculty of World Economy and International Affairs at Moscow’s Higher School of Economics, and one amusing picture which we’ll leave it to readers to caption (note the ear-to-ear grins). 

  “The message to the world is that Russia solves problems and you don’t. If you want to solve problems, work with us.” 

   

  
  

  

  

  

  

  

• Goldman Is Getting Nervous: "There Are Significant Risks To Our Forecast For Gold Price Weakness"

  When it comes to assets, economists, Wall Street, and central planners love them all… except one: gold. Forget about Bernanke’s hilarious sworn testimony that gold has “value only due to tradition”, and recall Mario Draghi’s QE announcement in December 2014 when asked what sorts of assets should be included in QE, his response: “we discussed all assets BUT gold.”

  Well of course the ECB will never buy gold – by its very nature, the precious metal stands for everything the legacy insolvent regime patched together with the superglue of money printing central-bankers, hates: prudent use of money and leverage, living within one’s means, and most importantly, saving not spending. Gold applied to the current regime where the world is drowning in about 3.5 times more debt than GDP would mean wiping out trillions in equity value that should not exist.

  It also makes impossible such monstrous abortions as $1 quadrillion in global derivatives which, like a house of cards, is only as strong as the weakest counterparty, and is why central banks around the globe have gone all in on the Greenspan/Bernanke/Yellen/Draghi put, and will never allow another major bank to fail again.

  Ironically, while the “very serious”, if laughable and totally discredited people, take every opportunity to bash gold, they are quietly buying up all the physical gold they can find, whether it is in London (where the local vaults are practically empty), or in Beijing or Bombay, which are the largest natural sources of demand for physical gold.

  Lately these same “serious” people are starting to get nervous, because while most other “commodities” have seen their prices plummet in the biggest crash since Lehman, gold just went green for the year. And the last thing the financial system, already teetering on the edge of global recession, can handle is another massive momentum wave out of “intangible” assets and into very real gold, like what happened in 2010 and 2011 before the BIS ended gold’s meteoric rise in September 2011.

  Enter Goldman, which moments ago admitted that while its “base case is still for higher US real interest rates, lower gold”, it may be wrong adding that “while our base case remains for higher US real rates and lower gold prices, there are significant risks that our forecast for gold price weakness is pushed out, should the Fed surprise us and remain on hold in December.”

  From Goldman’s Max Layton

  Gold has rallied by almost 8% since its July lows, leaving the price flat over the 2015 calendar year to date, which represents substantial outperformance relative to most other commodity prices (see chart below). Indeed, prices are near our forecast as we expected only a gradual decline in prices in 2015 (please see Central banks stall a more bearish gold outlook, published January 25, 2015).

   

  

   

   

  The rebound in the gold price was associated with a strong pickup in comex net speculative positioning (Exhibit 7). In July, August and early September, the net speculative long position build was associated with short covering of comex speculative positions, but more recently the rise in net speculative positioning has been associated with both new gold long positions and further short covering (Exhibit 8).

   

  

  Actually, no. The biggest reason for the recent surge in gold is a direct consequence of the Fed losing credibility, and confirming yet again that the market calls all the shots, even it means debasing the dollar and sacrificing the reserve currency. In other words, it means that the more Yellen avoids renormalizing monetary policy – and since she is trapped, even the most modest rate hike will lead to an immediate rate cut and/or QE, just like in the Japan experience from August 2000, the higher gold will rise.

  Goldman admits as much:

  Looking ahead, our economists continue to expect a 25 basis point rate hike at the December FOMC meeting, and for a further 100 basis points of rate increases during 2016. The Fed leadership has signaled that such a move is likely if the economy and markets evolve broadly as expected, and our economists’ forecast is similar to theirs. However, they are only about 60% confident. Most of the uncertainty relates to the possibility that the economic and market environment – or in a broad sense, “the data” – will be worse than the FOMC’s (and our) expectations.

   

  The low market-implied probability of a December hike of only 30%-40% probably reflects a mixture of concerns about the data (which we find reasonable) and a belief among some market participants that the FOMC will find an “excuse” to stay on hold even if the economy does fine (which we find unreasonable). The low market-implied probability is not a problem now, but Fed officials will need to find a way to move it much higher by the time of the meeting if they really do want to hike.

   

  The Fed’s rationale for wanting to start the normalization process is straightforward. In their view, labor market slack has diminished substantially, the link between slack and inflation is stronger than widely believed, and the funds rate is far below the longer-term equilibrium rate, so they need to get started well before the economy is back to normal.

  Goldman also finally admits that 7 years after it started, central-planning is not going quite as planned, with the biggest “risk” being another major move higher in the price of gold:

  While our base case remains for higher US real rates and lower gold prices, there are significant risks that our forecast for gold price weakness is pushed out, should the Fed surprise us and remain on hold in December.

  So in light of all this information, what does the TBTF hedge fund with the FDIC backstop want you to do? Why sell it to Goldman of course!

  Indeed, notwithstanding the fact that the “new normal” equilibrium in interest rates remains uncertain, a plausible range of scenarios all imply lower gold prices. Overall, our forecasts are unchanged, however we roll our forecasts along the existing price forecast path, such that our 3/6/12-month forecasts are $1,100/oz, $1,050/oz, and $1,000/oz, respectively.

  Right – so Goldman, which has been almost as wrong about its “economic recovery” forecasts as the Fed, not only is confident that “this time” it will get it right, but that gold will plunge even though in the sentence right before it the central banker-spawning hedge fund admits there as “significant risks” that its gold forecast will be “pushed out”… which is economist talk for “wrong.”

  And just in case Goldman is wrong, it would love to rid you of any barbaric relic you may currently have. So run, sell it all now, before it plummets to $1,000 or lower in the coming months. You won’t even have to look far for a willing seller: Goldman will buy all you have to sell.

  

  

  

  

  

• Martin Armstrong Explains How To Create A Fairer System

  Submitted by Martin Armstrong via ArmstrongEconomics.com,

  This is the problem with taxation. Major public corporations can move their tax domicile offshore to avoid taxes legally. The average person cannot move his labor offshore to lower his taxes, which is a disadvantage we must address with tax reform. VAT is far worse than a sales tax. Every person in the chain must collect and file paperwork. It must require three times the number of people to administer such a system compared to a point of sales tax collection.

  But that issue aside, there should be ABSOLUTELY NO income taxes whatsoever. That not only eliminates government having to track everything, but it also eliminates the whole movement of capital solely for tax purposes. This is unfair, for the average person cannot send their labor offshore to avoid taxation without moving. Even then, that would only get an American the first $100,000 tax-free; after that, it would be subjected to U.S. income tax.

  The Founding Fathers of the United States revolted over taxation without representation. We are back to that now, for we are being taxed to pay interest to service debts from the last two generations. We had no right to vote on that spending, which took place before we were born. This is not a democratic process.

  There should be ONLY a retail sales tax EXCLUSIVELY for local government.

  Federal government should be prohibited from imposing ANY tax and it should be barred from borrowing money. The local tax will naturally be checked by the free market, for if they keep raising taxes, businesses will move to the next town and there goes the jobs. This will help to restrain government on a more practical level.

  Moreover, there should be NO PUBLIC SCHOOLS. All schools should be private for then there will be no mismanagement, crazy pension failures, or tax hikes to line their pockets. Schools should be by voucher and run by private industry just like Catholic schools, which were always known for having better education in the States.

  It is the teachers and their unions who have ruined society, as taxes are imposed on property and people cannot afford to retire in their home where they raised a family. They are forced to sell because they cannot afford taxes that never stop and only rise. PROPERTY TAXES must also be abolished.

  *  *  *

  Our problem is the total mismanagement of government. They promise and award themselves all sorts of perks, which reduces the quality of life for everyone else. We must look at the cause and that is the seriously flawed design of the financial-economic-governmental system.

  

  

  

  

  

• Can Trump Be Stopped?

  Submitted by Patrick Buchanan via Buchanan.org,

  Three months ago, this writer sent out a column entitled, “Could Trump Win?” meaning the Republican nomination.

  Today even the Trump deniers concede the possibility.

  And the emerging question has become: “Can Trump be stopped? And if so, where, and by whom?”

  Consider the catbird seat in which The Donald sits.

  An average of national polls puts him around 30 percent, trailed by Dr. Ben Carson with about 20 percent. No other GOP candidate gets double digits.

  Trump is leading Carson in Iowa, running first in New Hampshire, crushing the field in Nevada and South Carolina. These are the first four contests. In Florida, Trump’s support exceeds that of ex-Governor Jeb Bush and Sen. Marco Rubio combined.

  If these polls don’t turn around, big time, Trump is the nominee.

  And with Thanksgiving a month off, then the Christmas season, New Year’s, college football playoffs and NFL playoffs, the interest of the nation will drift away, again and again, from politics.

  Voting begins Feb. 1 in Iowa. Super Bowl Sunday is Feb. 7. And the New Hampshire primary will likely be on Tuesday, Feb. 9.

  We are only three months out, and Trump still holds the high cards.

  After months of speeches and TV appearances, he is a far more disciplined campaigner and communicator. In a year when a huge slice of the nation is disgusted with political correctness, wants to dethrone the establishment, wipe the slate clean and begin anew with someone fresh, Trump is in the pole position.

  His issues — secure the border, send illegal immigrants back, renegotiate rotten trade deals that shipped our jobs abroad — are more in tune with the national mood than pro-amnesty, Obamatrade or NAFTA.

  Wall Street Journal conservatism is in a bear market.

  Trump says he will talk to Vladimir Putin, enforce the nuclear deal with Iran, not tear it up on Inauguration Day, and keep U.S. troops out of Syria. And South Korea should pay more of the freight and provide more of the troops for its own defense.

  A nationalist, and a reluctant interventionist, if U.S. interests are not imperiled, Trump offers a dramatic contrast to the neocons and Hillary Clinton, the probable Democratic nominee. She not only voted for the Iraq war Trump opposed, but she helped launch the Libyan war.

  The lights are burning late tonight in the suites of the establishment tonight. For not since Sen. Barry Goldwater won the California primary in 1964 have their prospects appeared so grim.

  Can Trump be stopped?

  Absent some killer gaffe or explosive revelation, he will have to be stopped in Iowa or New Hampshire. A rival will have to emerge by then, strong enough and resourced enough to beat him by March.

  The first hurdle for the establishment in taking down Trump is Carson. In every national poll, he is second. He’s sitting on the votes the establishment candidate will need to overtake Trump.

  Iowa is the ideal terrain for a religious-social conservative to upset Trump, as Mike Huckabee showed in 2008 and Rick Santorum in 2012.

  But Carson has preempted part of the Evangelical and social conservative vote. Moreover, Sen. Ted Cruz, an anti-establishment man, is working Iowa and has the forensic abilities to rally social conservatives.

  Should Trump fall, and his estate go to probate, Cruz’s claim would seem superior to that of any establishment favorite.

  Indeed, for an establishment-backed candidate — a Jeb Bush, Marco Rubio, John Kasich, Chris Christie, Bobby Jindal — to win Iowa, he must break out of the single-digit pack soon, fend off Cruz, strip Carson of part of his following, then overtake Trump. A tall order.

  Yet, the battle to consolidate establishment support has begun. And despite his name, family associations, size of his Super PAC, Jeb has lost ground to Marco Rubio. Look to Marco to emerge as the establishment’s last best hope to take down Trump.

  But if Trump wins in Iowa, he wins in New Hampshire.

  The Iowa Caucuses then, the first contest, may well be decisive. If not stopped there, Trump may be unstoppable. Yet, as it is a caucus state where voters stick around for hours before voting, organization, intensity and endless labor can pay off big against a front-runner.

  In Iowa, for example, Ronald Reagan was defeated by George H. W. Bush in 1980. Vice President Bush was defeated by Bob Dole and Pat Robertson in 1988. Reagan and Bush I needed and managed comeback victories in New Hampshire. One cannot lose Iowa and New Hampshire.

  Thus, today’s task for the Republican establishment.

  Between now and March, they must settle on a candidate, hope his rivals get out of the race, defeat Trump in one of the first two contests, or effect his defeat by someone like Carson, then pray Trump will collapse like a house of cards.

  The improbabilities of accomplishing this grow by the week, and will soon start looking, increasingly, like an impossibility – absent the kind of celestial intervention that marked the career of the late Calvin Coolidge.

  

  

  

  

  

• Saudi Arabia Will Be Broke In 5 Years, IMF Predicts

  As crazy as it sounds, the Saudis are going broke.

  Of course you wouldn’t know it if you read the account of King Salman’s latest visit to Washington which included booking the entire DC Four Seasons and procuring a veritable fleet of Mercedes S-Class sedans.

  

  You’d also be inclined to think that everything is fine if you simply looked at SAMA holdings (i.e. FX reserves) which still total nearly $700 billion. 

  

  The problem however, is the outlook. 

  Fighting wars costs money and so does bribing the citizenry to ensure you don’t get some kind of Arab Spring-type uprising. When you endeavor to artificially suppress the price of the export that is the source for your wealth and international prestige (all in an epic attempt to bankrupt the competition and secure geopolitical “ancillary benefits”) you don’t do yourself any favors from a financial perspective and now, the Saudis are staring down a massive budget deficit and a current account that’s in the red for the first time in ages.

  So while things may look on the up and up from an FX reserve perspective (even as the cushion is at its lowest level since 2013) and while the kingdom has plenty of capacity to borrow with a debt-to-GDP ratio of just a little over 2%, things are about to get ugly very quickly going forward and if Riyadh decides to plunge headlong into Syria’s civil war, it will only get worse. Note that while debt levels are likely to stay low relative to a world where countries like Japan are borrowing so much that the number of decimal places won’t even fit into a title, going from basically 0% to ~16% of GDP in the space of just 24 months isn’t exactly a good sign:

  

  The situation is in fact so dire that the Saudis have begun delaying payments to contractors in an effort to preserve cash. 

  On Wednesday, the IMF is out with a new report on the economic outlook for the Mid-East and the picture for the Saudis is not pretty. In short, Riyadh will burn through its cushion in less than 5 years under current conditions. Here’s more: 

  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.

  

  

  

  

• Undermining Property Rights In San Francisco

  Submitted by Pater Tenebrarum via Acting-Man.com,

  Expanding the Regulatory State with the “Anti Airbnb Measure”

  The best thing one can say about “Proposition F” is that it will be up to voters to decide on its adoption. However, it actually shouldn’t be up to them, because it concerns an issue that is really none of their business.

  Here is what it is about in a nutshell: as noted in this article, if the proposition is adopted, “you will be able to do anything in your bedroom, except rent it” (sic). Meaning, if one has a spare bedroom one occasionally rents out to travelers via Airbnb, one will in future no longer be able to do so – by law.

   

  

  San Francisco: a nice place, but housing and rental prices have become unaffordable for many people

  Photo credit: Alex Zyuzikov

  In short, other people will now decide what one can or cannot do with one’s own property. Given that this particular use of property doesn’t infringe on anyone else’s property rights in the slightest, there should not even be a debate over whether it should or shouldn’t be “allowed”.

  So what is behind this push to make life difficult for Airbnb, countless tourists and countless people who make a little money on the side with the help of Airbnb? In all likelihood it is a well-connected established business lobby. The main suspects are hotel owners, whose businesses are under threat from Airbnb’s competition.

  What makes this case especially bizarre are the utterly transparent lies used to argue in favor of adopting the measure, in combination with San Francisco’s terrible housing reality. Note that the interests that are actually behind the proposition are craftily hiding behind the “little guy” (whom they are about to trample on). As an aside, it should be seen as a huge red flag that Dianne Feinstein is all for it as well.

   

  

  Consumers love it: Airbnb

   

  According to the article linked above:

  “The measure would impose additional restrictions on short-term rentals. Supporters can claim to be the little guys because the deep-pocketed opposition — headlined by the home-sharing technology platform Airbnb — has $8 million to bury the less than $400,000 raised by the “yes” campaign, according to proponent Dale Carlson. Prop F does have high-profile supporters, notably Sen. Dianne Feinstein, but when the other side outspends you by a 20-1 ratio, you can call yourself the underdog.

   

  The No on F folks also stand for the little guy (or gal) who rents out a guest room to make ends meet. San Francisco Supervisor Scott Wiener says he opposes the measure because more and more of his constituents rely on Airbnb. Many are women, often older women, who are “house poor” and presently could not afford to buy the homes they bought years ago. They don’t want to take on a full-time roommate; they also enjoy the energy young travelers bring with them. “The one thing they have is that spare bedroom,” Wiener told the San Francisco Chronicle’s editorial board last month. If Prop F is approved, “they are going to get thrown under the bus.”

   

  The “yes” folks have a populist message. Former San Francisco City Attorney Louise Renne put it this way: “The short-term rentals, in my view, are reducing the housing stock.” Tourists don’t belong in residential neighborhoods, the “yes” side adds. Speculators are buying properties so that they can cash in by setting up pseudo-hotels that aren’t up to code. Something must be done.

   

  The “yes” side’s remedy, however, threatens to cut into the income of middle-class residents — people like architect Kepa Askenasy, who told me last year she was “just trying to survive in this beautiful city and do it in a way that’s positive for everybody.” Because City Hall adopted legislation championed by former Supervisor David Chiu, she registered with the city and pays the 14 percent hotel tax. Airbnb now pays about $1 million each month in taxes. Askenasy is proud that the San Francisco startup also threw in some $25 million that would have been levied as taxes if the Chiu legislation had taken effect earlier. Now, she said Thursday, critics should give the new rules time to work.

   

  What really frosts Askenasy is that a small group of city big shots wants to cut into her side business on the grounds that there is not enough affordable housing. City Hall failed to ensure there would be more homes for working residents. Large-scale developers did not build those homes. Somehow the proponents of Prop F are blaming the sharing economy — that is, entrepreneurial San Franciscans — for a housing shortage.”

  (emphasis added)

  As noted above, this “housing shortage” argument cannot be called anything but a brazen, transparent lie. Given house prices and rental prices in San Francisco, there can be only one reason for the housing shortage: over-regulation that is keeping the housing stock too small. One wonders moreover, if spare bedrooms can no longer be legally rented out, how exactly is this going to increase the housing stock?

  We were unable to find out what the proponents of the measure have in mind in this context. Perhaps the “city big shots” plan to have them confiscated, so they can decide who should stay there? After all, the property rights of their owners will already be violated, so surely they can be violated some more.

  Given that regulations are undoubtedly co-responsible for the fact that housing in SF has become unaffordable for average people (the Fed’s insane monetary policy is admittedly the chief culprit), how are even more regulations going to do the trick? Regarding the affordability of housing in SF, we are not exaggerating one bit: consider this story of a software engineer who is living in the streets in a rusty van because SF rents are simply out of this world.

   

  

  Median San Francisco home prices compared to California and nation-wide prices (by Paragon Real Estate) : a bubble for the history books.

   

  Apart from the fact that the proposition is an attempt to restrict the property rights of people and their ability to earn an additional income that they actually rely on and need in many cases, the point about tourism shouldn’t be neglected either. No back-pack tourists can possibly afford to stay in this hyper-expensive burg without the help of services like Airbnb. As the article notes:

  Keith Freedman rents out a spare bedroom and a Murphy bed in his apartment’s living room. He told me, “Most of the guests I get couldn’t afford to come to San Francisco and stay in a hotel.” Gag Airbnb and San Francisco becomes a town for well-heeled tourists only. If Prop F is approved, big government will dictate what people cannot do in their own bedroom – rent it out.

  (emphasis added)

   

  Conclusion

  We have ceased to live in a free market economy a long time ago. The only sector of the economy that has managed to remain relatively free in many ways is the technology sector, because it innovates so rapidly that it tends to stay a step or two ahead of politicians and the oligarchies giving them their orders. They simply cannot catch up quickly enough with regulating all these innovations to death.

  Lately technology has begun to invade the turf of a number of established service businesses, such as banking (think Bitcoin, and now Bitgold as well), taxi services (Uber) and hospitality services (Airbnb). This provides us all with a reminder of how free market capitalism is actually supposed to work. In the market economy, no successful entrepreneur can rest on his laurels. He can be deposed from his exalted position at anytime by a start-up competitor offering a better or cheaper (or both) product to consumers.

  Should horse breeders and buggy whip manufacturers have been protected from the motor car? Should the inept US Post Office have been protected from the evils of email and instant messaging? The answer to such questions seems obvious enough. Why should an exception be made for taxis and hotels?

  Note here that such measures as a rule see nominally “capitalist” cronies and assorted socialists/collectivists happily working together: the former because they want to use the State to preserve their income by force, the latter because they want to stop economic progress, as they hope this will increase the number of State-dependents voting for them.

  Do not fall for their snake oil.

   

  

  Unfortunately a great many people don’t understand that asking the government for “help” is simply going to invite more of the same.

  

  

  

  

  

• ISIS, Al-Qaeda Contemplate Syrian Militant Merger Amid Russian Advance: Kremlin

  If you’re looking to close on an M&A deal, now might be the time to do it before the cost of capital starts to rise. Sure, “liftoff” might have been delayed by a month (or 12) but you have to do your due diligence and make sure there are enough synergies to make it worth everyone’s time and effort.

  Critically, you’d hate to miss an opportunity to strike a potentially accretive deal while capital markets are still favorable, especially if you’ve recently found yourself in a compromising position vis-a-vis competitors. 

  We suppose the above helps to explain why, according to the Russian Defense Ministry, ISIS and al-Qaeda are contemplating a merger in the face of, how shall we say, “new entrants” in the race for Syrian market share. 

  Here’s more from RT:

  The Russian Defense Ministry said on Wednesday its intelligence had overheard Islamic State commanders talking to Al-Nusra Front about uniting forces against the Syrian Army.

  And that’s just fine with Moscow because unlike Washington, Riyadh, and Doha, The Kremlin is an equal opportunity extremist eliminator. Here’s the latest on Russia’s airstrikes: 

  In the course of the last 24 hours, aircraft of the Russian air group in the Syrian Arab Republic have performed 46 combat sorties engaging 83 terrorist facilities in the Hama, Idlib, Damascus, Aleppo and Deir ez-Zor provinces.

   

  Near Aleppo, a facility of the Jabhat al-Nusra terrorist grouping with workshop for manufacturing of radio-controlled bombs as well as a depot with explosives were destroyed.

   

  After a pinpoint strike with guided air bombs and further detonation of explosives, the facility and 2 trucks, which had delivered tens of tons of explosives, were destroyed.

   

  Near Khan Shaykhun settlement located in the al-Ghab plain, a large field camp of the Jabhat al-Nusra grouping was detected by the air reconnaissance. An airstrike conducted by a Su-25 attack aircraft eliminated the terrorist object with all its facilities: accommodation and training areas of militants, as well as depots, automobile vehicles.

   

  In the Idlib province, a command-surveillance centre of the ISIS militants located on the Seryatel mountain was uncovered by reconnaissance UAVs. It used to carry out the control over the illegal armed groups at the battlefield as well as fire adjustment for mortar crews of militants. A strike of a Su-24M bomber aircraft hit the target.

  Yes, “it used to”, but not anymore. Here are the visuals.

  The question we have is this: will Washington (and the US media) still classify al-Nusra as “moderate” if they ally themselves with ISIS in the battle against the Russian “infidels?” And further, to the extent Riyadh and Doha (and perhaps Ankara) may be aiding al-Nusra, will that assistance continue in the event the group pulls off a militant merger with Islamic State?

  Of course perhaps the most critical question of all is this: if al-Nusra and ISIS merge, how many people will be laid off after the deal?

  And further, is the job market in Langley, Virginia robust enough to accommodate the new job seekers? 

  

  

  

  

  

• Truth Is Being Suppressed By The Tools Of Money

  Excerpted from Artemis Capital Management letter to investors,

  Dorothy Thompson once said “peace is not the absence of conflict”. Never forget there is a form of peace and stability reinforced by a foundation of underlying volatility. Game theorists call this the paradox of the Prisoner’s Dilemma, and it describes a dangerously fragile equilibrium achieved only through brutal competition. The Prisoner’s Dilemma is the most important paradigm for understanding shadow risk in modern financial markets at the pinnacle of a multi-generational debt cycle unparalleled in the history of finance.

  In their masterwork tapestry entitled “Allegory of the Prisoner’s Dilemma” the artists Diaz Hope and Roth visually depict a great tower of civilization that rests upon a bedrock of human cooperation and competition across history. The artists force us to confront the fact that after 10,000 years of human civilization we are now at a cross-roads. Today we have the highest living standards in human history that co-exist with an ability to destroy our planet ecologically and ourselves through nuclear war. We are in the greatest period of stability with the largest probabilistic tail risk ever.

  

  The majority of Americans have lived their entire lives without ever experiencing a direct war and this is, by all accounts, rare in the history of humankind. Does this mean we are safe from the risk of devastating conflict on our own soil?

  In 1961, at the height of the Cold War, a B-52 bomber carrying two Mark 39 thermonuclear bombs accidentally crashed in rural North Carolina. A low technology voltage switch was the only thing that prevented a 4-megaton nuclear bomb with 250 times the yield of the bomb dropped on Hiroshima from detonating on American soil. In addition to killing everyone within the vicinity of the blast, the winds would have carried radioactive fallout over Washington D.C., Baltimore, Philadelphia, and New York City. It is not inconceivable to imagine that, at the height of cold war, a weapon of that magnitude exploding randomly on the eastern seaboard would have triggered immediate accidental retaliation against the Soviets resulting in full scale Armageddon and the end of humankind as we know it. This is just one of many nuclear accidents during the cold war.

  Peace has a dark side. Peace can exist due to hidden conflict in the Prisoner’s Dilemma.

  Global Capitalism is trapped in its own Prisoner’s Dilemma; fourty four years after the end of the Bretton Woods System global central banks have manipulated the cost of risk in a competition of devaluation leading to a dangerous build up in debt and leverage, lower risk premiums, income disparity, and greater probability of tail events on both sides of the return distribution. Truth is being suppressed by the tools of money. Market behavior has now fully adapted to the expectation of pre-emptive central bank action to crisis creating a dangerous self-reflexivity and moral hazard. Volatility markets are warped in this new reality routinely exhibiting schizophrenic behavior. The tremendous growth of the short volatility complex across all assets, combined with self-reflexive investment strategies, are creating a dangerous ‘shadow convexity’ that will fuel the next hyper-crash.

  Central banks in the US, Europe, Japan, and China now own substantial portions of their own bond or equity markets.  We are nearing the end of a thirty year “monetary super-cycle” that created a “debt super-cycle”, a giant tower of babel in the capitalist system. As markets now fully price the expectation of central bank control we are now only one voltage switch away from the razors edge of risk.  Do not fool yourself – peace is not the absence of conflict – peace can exist on the very edge of volatility. 

  The middle class is unknowingly trapped in the Prisoner’s Dilemma and this is perhaps our greatest non-linear risk as a nation. America is built on the promise of upward mobility but that promise is increasingly becoming a lie.  Wealth inequality is at the highest level in 100 years and close to levels last achieved before the 1928 crash that led to the Great Depression.

  

  Today the top 0.1% of households now control an equivalent amount of the wealth as the bottom 90%. Since 1973, real family income for the top 1 percent has grown over 150% while incomes for the lowest 20% of earners has remained stagnant. The median household income adjusted for inflation in 2011 was just below its level from 1989 and $4,000 lower than in the year 2000.

  The illusion of a middle class prosperity has been sustained via low interest rates, consumer debt, and globalization.  Instead of helping the problem, accommodative monetary policy has accelerated this pace of income inequality in the US.

  

  “Economic inequality has long been of interest within the Federal Reserve System” said Janet Yellen during a April 2015 speech. Yellen has repeatedly argued that accommodative monetary policy reduces income inequality by lowering unemployment. While it is true that unemployment has declined, her conclusion assumes that lower wealth inequality and lower unemployment are correlated in some kind of linear fashion. In reality, the wealth gap peaked the year before the Great Depression started when the country was close to full employment and the joblessness rate was only 2.08%. The point is that full employment with extreme income disparity can and often does co-exist. If we measure the average income in a hypothetical village of 100 people, 99 of which have minimum wage jobs, the last of which is Warren Buffett, who employs the rest, you have income disparity and full employment. To this extent, Yellen’s argument that lowering unemployment somehow decreases the wealth gap is illogical. During Yellen’s September 17th, 2015 press conference she alludes to a mysterious academic paper that somehow proves otherwise, but I looked everywhere and couldn’t find that paper. I do have a non-academic paper entitled “Common Sense” that takes a very different view.

  Yellen’s treatment of the wealth gap problem is an example of mistakenly linearizing a non-linear problem. The Bernanke-Yellen Fed has achieved a linear decline in unemployment via exponential growth in the monetary base. When asset prices increase in a non-linear fashion the top 1% of wealthy families that own real estate, stocks, bonds, and have access to low rates will benefit disproportionately. When the middle class earns a dollar, they spend that dollar on goods and services that reach the real economy. When the top 1% earns a dollar that money is likely to be reinvested in assets.

  As a result, we have seen non-linear inflation in asset prices but no significant inflation in real wages or core CPI. With no wage inflation, global central banks are inclined to continue their rotation of devaluation further exacerbating this mad cycle and encouraging an even greater income gap and vast political risk. The policies of the Fed have simply exchanged nonlinear expansion of the wealth gap in exchange for a linear decline in the unemployment rate.

  What is clear is that Janet Yellen would make a terrible derivatives trader because she just does not seem to understand that you cannot hedge a nonlinear risk with the linear benefit. The current monetary experiment, left unchecked, will inevitably threaten the very fabric of our democracy. 

  

  The global economy is suffering from a cancer of debt-deflation, income inequality, and low growth. Instead of treating the root cause, policy makers have treated the symptom of asset price declines. Whenever the patient feels weak an increasing amount of policy drugs are required to maintain the illusion of stability to the point where the patient is addicted to the painkillers.

  In all instances, policy intervention has generated a short-term market fix at the expense of addressing the longer-term fundamental problems.

   

  The Federal Reserve has expanded its balance sheet $4.5 trillion to create middle class jobs but instead has incentivized asset bubbles and the highest wealth concentration since before the Great Depression.  The European Central Bank and Bank of Japan are pursuing quantitative easing to drive up asset prices rather than addressing the core issues of structural reform and weak demographics that are causing their deflation. European institutions rely on last minute ‘bail-outs’ and quantitative easing to avoid debt default while ignoring the necessary fiscal and philosophical integration required to make a unified Europe a success. China is struggling to shift from an export driven economy to a consumption driven economy despite decelerating growth, total debt growing four times faster than GDP, and the valuation of the Shanghai Composite at levels comparable to 2007.

   

  How does spending an estimated 10% of GDP, including $263 billion in direct stock market intervention, coupled with cheap real estate loans to build ghost cities, fundamentally address any of China’s real problems?

  The root cause of the cancer is never confronted and as a result, the fundamental health of the patient does not improve. Neither the doctors nor the patient wish to face the reality that difficult and painful therapy is needed to destroy the cancerous leverage in the system. The inevitable result of this denial will be the death of the patient.

  

  

  

  

  

• Who Really Controls Iraq? Inside Iran's Powerful Proxy Armies

  When social media began to light up with pictures of Quds Force commander Qassem Soleimani rallying Shiite militiamen and Hezbollah soldiers ahead of Russia and Iran’s joint effort to retake the city of Aleppo, some wondered where all of these fighters came from. After all, even though the IRGC has now all but admitted it sent soldiers to Syria for the offensive, it wasn’t as if the entire Iranian army marched in overnight and if you believe the reports from the frontlines, the ground force marching on Syria’s largest city looks quite a bit different from the depleted SAA which was all but decimated just two months ago. 

  Those who have frequented these pages lately know exactly where those troops came from. Some are Hezbollah fighters and the rest were ordered to the Syrian frontlines from Iraq by Soleimani himself. We predicted this would happen months ago and now that the social media selfies are beginning to show up, everyone now seems to be gradually discovering the plan we outlined in “Mid-East Coup: As Russia Pounds Militant Targets, Iran Readies Ground Invasions While Saudis Panic.” Here’s WaPo for instance:

  Maj. Gen. Qasem Soleimani, the leader of Iran’s elite Quds forces and the public face of Iran’s military intervention in the region, has ordered thousands of Shiite militiamen into Syria for an operation to recapture Aleppo, according to officials from three Iraqi militias.The militiamen are to join Iranian troops and forces from Hezbollah, the Iranian-backed Lebanese Shiite militia, the officials said. The Iraqi Shiite militia Kitaeb Hezbollah has sent around 1,000 fighters from Iraq, one said.

   

  The Lebanese group Hezbollah and the Quds Force, which is part of the Iranian Revolutionary Guard Corps, have also sent reinforcements, he said. Last week, a U.S. defense official said hundreds of Iranian troops were near the city in preparation for an offensive.

   

  “It’s not a secret. We are all fighting against the same enemy,” said Saidi.

   

  His militia released a photo of Soleimani, the Quds Force commander, with its fighters near Aleppo on one of its social media accounts last week.

   

  “The operation is an extension for our operations in Iraq because it’s the same enemy, and when we hit them there it means that it will get results in Iraqi lands,” the Kitaeb official said. Soleimani “specifically requested they go there for the launch of the operation for Aleppo,” he said.

  But this is more than some general calling in favors from fanatical Khamenei followers operating across the border.

  The Shiite militias called to the fight in Syria control Iraq.

  Literally. 

  Take for instance the recent battle to recapture the Baiji refinery from ISIS. Although badly damaged, the site has both strategic and symbolic significance and even as the victory was claimed by the Iraqi army, there were more Shiite militiamen fighting than Iraqi regulars. Here’s The New York 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. 

  Tehran’s control of the militias mirrors Iran’s influence on Iraqi politics. Although PM Haider al-Abadi certainly wouldn’t put it in these terms, Iraq is now for all intents and purposes a large Iranian colony, an ironic twist of fate given Saddam’s invasion of Iran 35 years ago. 

  We bring all of this up because Tehran’s influence in Iraq will be one of the key issues going forward once Russia and Iran retake Western Syria for Assad. Once the regime’s key strongholds are secured, it seems very likely that Russia will begin bombarding ISIS positions in the East while Iran’s Shiite militias will simply drive Islamic State out of Syria and right over the border into Iraq where fighters from the very same militias will be waiting with weapons at the ready. ISIS will, in effect, be encircled. 

  It’s with all of that in mind that we bring you the following excerpts from a new Reuters feature report entitled “Power failure in Iraq as militias outgun state.” 

  Iraqi Prime Minister Haider al-Abadi, a Shi’ite, came to office just over a year ago backed by both the United States and Iran. He promised to rebuild the fragmented country he inherited from his predecessor, Nuri al-Maliki, who was widely accused of fueling sectarian divisions. Since then, though, even more power has shifted from the government to the militia leaders.

   

  Those leaders are friendly with Abadi. But the most influential describe themselves as loyal not only to Iraq but also to Iran’s supreme leader, Ayatollah Ali Khamenei. Three big militias – Amiri’s Badr Organisation, Asaib Ahl al-Haq and Kataib Hezbollah – use the Iranian Shi’ite cleric’s image on either their posters or websites. Badr officials describe their relationship with Iran as good for Iraq’s national interests.

   

  Initially, Abadi had little choice but to lean on the Shi’ite paramilitary forces. They grew in power after Sunni extremist group Islamic State captured large parts of northern Iraq in June last year and Iraq’s top Shi’ite cleric, Grand Ayatollah Ali al-Sistani, called for volunteers to fight Islamic State, which soon declared a caliphate straddling the border with neighbouring Syria.

   

  As the Shi’ite militias’ popularity surged, Abadi publicly lamented the lack of Western support. He made plain his desperate desire for help earlier this month after Iran and Russia opened offensives against the group in Syria. The prime minister said he would welcome Russian air strikes in Iraq as well. Abadi is looking not just to hurt Islamic State but to bolster his own position in Iraq.

   

  The Shi’ite militias, which dominate most frontlines, say they support the government and pose no threat to Iraq’s minority Sunni sect. The Popular Mobilisation Committee, or Hashid Shaabi, as the militias are collectively known, belongs “to the Iraqi government,” said Naim al-Aboudi, a spokesman for the Asaib Ahl al-Haq militia. “The Hashid doesn’t represent a sect. It represents all Iraqis.”

   

  But the militias make no secret of their independence from Baghdad. Militia leader Amiri warned in a televised interview last month that if the Shi’ite groups did not approve of U.S. military operations in Iraq, “We can go to Abadi and the government and … pressure them: ‘Either you will do this, or we will do that.’” Amiri did not specify what action his group would take.

   

  Abadi took office facing many challenges. He inherited a military that had all but collapsed. Three months before he became prime minister, Islamic State overran the army in Mosul, the largest city in the north. At its height, the militant group, which has used rape as a weapon of terror and executed Iraqi Shi’ites and Christians, controlled nearly a third of Iraq.

   

  Early on, Abadi struggled to work out what was left of the army and federal police. “There wasn’t really a good picture of how many soldiers, how many police he really had, and who the hell is really on the rolls,” said Lieutenant

  General Mick Bednarek, the senior U.S. military officer in Iraq from 2013 until July. Bednarek said Abadi and his defence minister worked hard on the issue and by November last year recognised the military was “ill prepared and lacking in leadership.”

   

  Abadi also turned to the militias for support. “He doesn’t like it,” said Bednarek, who retired in late August. “But he has to, because Iraqi security forces can’t do it alone.”

   

  The Hashid Shaabi now commands more than 100,000 fighters. On paper, it receives over $1 billion from Iraq’s state budget. Two Iraqi officials said the militias get additional funding from other sources, including Iran, religious clerics and political figures, but declined to give details. U.S. military officials believe large amounts of funding come from Iran.

   

  The Shi’ite militias have also made inroads within the government security apparatus.

   

  The Fifth Iraqi Army Division now reports to the militias’ chain of command, not to the military’s, according to several U.S. and coalition military officials. The division rarely communicates with the Defence Ministry’s joint operation command, from which Abadi and senior Iraqi officers monitor the war, the officials said.

   

  Iraqi security officers, Iraqi politicians and U.S. and Western military officers say the Interior Ministry has become another militia domain. The ministry came under the influence of Shi’ite militias previously, in 2005, and was accused of running death squads.

   

  Today it is run by Mohammed Ghabban, a senior member of the Badr militia. Badr fighters fought alongside Iranian soldiers in the 1980-1988 Iran-Iraq war. 

  One of the most important things to understand about this is that the US largely supports (in public at least) the Shiite militias fighting ISIS in Iraq. After all, to not support them publicly would be to support ISIS publicly and as we’ve seen, the US is hell bent on keeping up the charade that Washington hasn’t and isn’t providing aid to extremists. 

  Indeed, these are the same Shiite militias who dropped off an Abrams tank in the Green Zone for service last week. 

  And so you can begin to see just how absurd the situation is. The US is now supplying anti-tank weapons and other munitions to the rebels fighting in Aleppo and those weapons are being used to kill these very same Shiite militiamen who are driving US tanks, fighting alongside the Iraqi army, and indirectly receiving US assistance just across the border in Iraq.

  So thanks to Washington’s twisted foreign policy, they are friends on one side of the Syria-Iraq border and mortal enemies on the other.

  Of course they’re fighting ISIS in both countries. So what accounts for the Pentagon’s schizophrenia you ask? Simple: Bashar al-Assad doesn’t run Iraq. 

  We leave it to readers to speculate on what will happen once Assad is restored and ISIS vanquished. That is, Iran’s Shiite militias pretty much are the Iraqi military and they also effectively control the government, so once there’s no longer an excuse (i.e. ISIS) for the US to stick around, we wonder whether Washington will be content to simply cede the country it “liberated” to the Ayatollah. 

  Here are some recent images of the Shiite militias the Quds Force controls in Iraq:

  

  

  

  

  

  

  

  

  

  

  

• VRX a sign of collapse of the greed bubble

  Companies used to build things.  Not because they were noble, but because they had no other choice.  Selling snake oil simply wasn’t possible on a large scale, for a long time; in the previous economy.  Now, like during the dot com boom, all you need is a phone, a website, and a power point machine.  Actual sales, or an actual product, it’s so 80’s.

  Today shares for VRX “Valeant” Pharmaceuticals was haled 4 TIMES:

  Valeant is using “a network of phantom captive pharmacies” connected to Philidor, with the same management and phone numbers, to create false sales and avoid auditor scrutiny, Citron alleged in its report.

  Valeant has released a statement responding to the allegations, noting that Philidor provides back-end services to and shares a call center with the “phantom” pharmacies such as R&O Pharmacy that Citron referenced. Shipments to pharmacies in Philidor’s network are not recorded in the company’s revenue, and inventory at these pharmacies is not included in consolidated inventory balance, according to the statement.

  But the good news for investors, this will make a monumental class action lawsuit, which are already starting to pile up from leading firms.  But this begs the question, are the markets going to be unwound in court?  Will the final trade be in a courtroom – not on a trading floor?

  How many more VRX are out there – hiding just under the noses of honest investors, in plain sight?  

  Or, is it the rules of the stock market, that ‘force’ companies to behave in such a way, in order to keep their past investors afloat?  

  Words such as “Enron style accounting” and the “Pharmaceutical Enron” are not an encouraging sign of stability:

  Valeant Pharmaceuticals has been crushed by investors after short-selling research-firm Citron called it the “pharmaceutical Enron.”

  The stock fell 39% before Valeant called Citron’s claims “erroneous.” That stopped the bleeding, but the stock still fell 19% to close the day at around $118 per share. Just two months ago, the stock was trading above $250.

  Citron alleged Valeant improperly benefited from a business relationship with Philidor, a pharmacy that distributes drugs for specialty pharmacies. Citron says Valeant filed fake invoices with Philidor to make its revenue appear greater than it is. Valeant is Philidor’s only customer, Citron points out.

   

  In a release Wednesday, Valeant said that Philidor is a legitimate distribution network through which Valeant sells some of its products.

  At least if the stock market is moving to the courtroom, we can still trade Forex!

  And yes – of course there are companies that build things – but their stock is selling for much greater times than it should be, due to their use of free QE money and Goldman derivatives.

  

  

  

  

• QE vs Negative Rates: A Cost-Benefit Analysis Of The Monetary Twilight Zone

  The world may be at (or near) ZIRP, and in many cases mostly in Europe, NIRP, but that does not mean rates can not go any lower. In fact, the topic of “absolute zero”, or what is the very lowest interest rate central banks can go to, either outright via negative rates or synthetically via asset monetization, is the topic of the latest note by DB’s Abhishek Singhania titled “In search of absolute zero: why ZIRP central banks can still cut rates.”

  In the past month the Fed finally confirmed what we said in January, namely that it is only a matter of time before NIRP crosses the Atlantic and lands in the Marriner Eccles building, the one section in the report we found most interesting is DB’s comparison of the cost-benefit between QE and negative rates.

  And since either NIRP, or QE, or most likely both, are about to cross the Atlantic and make landfall in the US before the Fed
  is forced to launch the monetary helicopter, those who want to know what is
  really coming – no, not rate hikes – are urged to read this.

  Negative rates versus QE, a cost benefit analysis

  If there is more room for policymakers to cut rates further into negative territory, what are the pros and cons versus other monetary policies?

  1. Financial stability risks: Where an economy is highly leveraged or financial conditions loose, there may be an advantage to pursuing negative rates over asset purchases, at least in the short term. Asset purchases are designed to push down term premia and hence borrowing costs for the real economy. As we have seen, negative rates could actually help to reduce leverage by encouraging banks to raise borrowing costs. On the other hand, if central banks were to commit to keep rates negative for long periods, expectations of negative rates could become embedded and result in lower long term yields resulting in similar financial stability concerns.

  2. Assets available for unconventional QE: Further cuts to deposit rates may be more attractive where an economy does not have enough assets to sustain a large-scale asset purchase program. In the case of Sweden, for example, the Riksbank asset purchase program will have bought 20% of outstanding Swedish government bonds by the end of the year. Switzerland’s outstanding stock of government debt is even smaller. This is particularly problematic where buying other assets would have unwanted side-effects, such as the Riksbank buying covered bonds and exacerbating housing market risks.

  In the Eurozone, despite the concerns voiced by some ECB members over liquidity in Eurozone government bond markets, the ECB has much more room on a relative basis to extend its asset purchase program. At the very least the ECB can extend the current purchase programme by 12 months to Sep-17 without expanding the range of eligible assets or changing other parameters of the programme10.

  A related but different concern would be where central bank balance sheets have become sufficiently large for them to become concerned about capital losses. This is only a theoretical constraint, as a central bank could in practice operate with negative capital. In the case of Switzerland, however, concern over losses arising from a large balance sheet played an important role in the decision to abandon the open ended FX intervention.

  3. FX or credit conditions channel. Negative rates have tended to be a highly effective tool for weakening currencies. Short-end rates are more correlated to currency movements than long-end rates, likely because FX investors tend to fund positions using overnight or short-end rates rather than further down the curve (chart 31).

  

   

  Negative rates have also proved to be more effective that outright currency intervention. The contrasting experiences of Switzerland  and Denmark serve to underline this point. SNB’s approach of targeting the size rather than price of reserves failed to alleviate pressure on the EUR/CHF floor. It was only until the SNB finally cut rates into deeply negative territory that pressure on the Swiss franc has relented, and the currency has begun to depreciate. By contrast, the Nationalbank was able to effectively defend the peg between the Danish krone and euro by aggressively cutting rates at the same time as currency intervention.

  

   

  Negative rates appear to be much less effective in relaxing credit conditions in the overall economy. As we have noted, the experience of the four economies under negative rates suggests that borrowing costs may actually rise, not fall, for households once negative rates are implemented. Moreover, insofar as markets do not expect negative rates to be permanent, pass-through into assets with longer maturities may be limited.

  Finally, as Praet has argued, the impact of asset purchases in reducing term premium and via the portfolio rebalancing channel is likely to be maximized when the central bank has reached a lower bound11. In the absence of a floor on front-end rates and the potential for further rate cuts the scope for potential capital gains on fixed rate assets reduces the incentive for investors to move further out along the maturity and credit spectrum.

  4. Fragmentation: In the Eurozone case, deeply negative rates in combination with an active expansion of the ECB balance sheet may be additionally problematic. The excess reserves created via asset purchases are likely to flow back to banks in the core countries. This would imply that the burden of negative rates will be excessively borne by banks in the core countries. Making the deposit rates more negative would not necessarily incentivize banks in core countries to lend to banks in periphery as the opportunity cost for these banks will be the difference between market rates and the deposit facility rate rather than the absolute level of negative rates. This spread is already minimal and likely to get even smaller as excess liquidity increases.

  * * *

  In retrospect, when we said that NIRP is the functional equivalent of the the “Monetary Twilight Zone”, we were right: not only is there no getting out, but once you are in absolutely nothing makes sense any more. Good luck to anyone who still believes that “fundamentals” matter when making financial decisions.

  

  

  

  

  

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• Who on Wall Street is Now Eating the Oil & Gas Losses?

  Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter

  Banks, when reporting earnings, are saying a few choice things about their oil-and-gas loans, which boil down to this: it’s bloody out there in the oil patch, but we made our money and rolled off the risks to others who’re now eating most of the losses.

  On Monday, it was Zions Bancorp. Its oil-and-gas loans deteriorated further, it reported. More were non-performing and were charged-off. There’d be even more credit downgrades. By the end of September, 15.7% of them were considered “classified loans,” with clear signs of stress, up from 11.3% in the prior quarter. These classified energy loans pushed the total classified loans to $1.32 billion.

  But energy loans fell by $86 million in the quarter and “further attrition in this portfolio is likely over the next several quarters,” Zions reported. Since the oil bust got going, Zions, like other banks, has been trying to unload its oil-and-gas exposure.

  Wells Fargo announced that it set aside more cash to absorb defaults from the “deterioration in the energy sector.” Bank of America figured it would have to set aside an additional 15% of its energy portfolio, which makes up only a small portion of its total loan book. JPMorgan added $160 million – a minuscule amount for a giant bank – to its loan-loss reserves last quarter, based on the now standard expectation that “oil prices will remain low for longer.”

  Banks have been sloughing off the risk: They lent money to scrappy junk-rated companies that powered the shale revolution. These loans were backed by oil and gas reserves. Once a borrower reached the limit of the revolving line of credit, the bank pushed the company to issue bonds to pay off the line of credit. The company could then draw again on its line of credit. When it reached the limit, it would issue more bonds and pay off its line of credit….

  Banks made money coming and going.

  They made money from interest income and fees, including underwriting fees for the bond offerings. It performed miracles for years. It funded the permanently cash-flow negative shale revolution. It loaded up oil-and-gas companies with debt.

  While bank loans were secured, many of the bonds were unsecured. Thus, banks elegantly rolled off the risks to bondholders, and made money doing so. And when it all blew up, the shrapnel slashed bondholders to the bone. Banks are only getting scratched.

  Then late last year and early this year, the hottest energy trade of the century took off. Hedge funds and private equity firms raised new money and started buying junk-rated energy bonds for cents on the dollar and they lent new money at higher rates to desperate companies that were staring bankruptcy in the face. It became a multi-billion-dollar frenzy.

  They hoped that the price of oil would recover by early summer and that these cheap bonds would make the “smart money” a fortune and confirm once and for all that it was truly the “smart money.” Then oil re-crashed.

  And this trade has become blood-soaked.

  The Wall Street Journal lined up some of the PE firms and hedge funds, based on “investor documents” or on what “people familiar with the matter said”:

  Magnetar Capital, with $14 billion under management, sports an energy fund that is down 12% this year through September on “billions of dollars” it had invested in struggling oil-and-gas companies. But optimism reigns. It recovered a little in October and plans to plow more money into energy.

  Stephen Schwarzman, CEO of Blackstone which bought a minority stake in Magnetar this year but otherwise seems to have stayed away from the energy junk-debt frenzy, offered these words last week (earnings call transcript via Seeking Alpha):

  “And people have put money out in the first six months of this year…. Wow, I mean, people got crushed, they really got destroyed. And part of what you do with your businesses is you don’t do things where you think there is real risk.”

  Brigade Capital Management, which sunk $16 billion into junk-rated energy companies, is “having its worst stretch since 2008.” It fell over 7% this summer and is in the hole for the year. But it remained gung-ho about energy investments. The Journal:

  In an investor letter, the firm lamented that companies were falling “despite no credit-specific news” and said its traders were buying more of some hard-hit energy companies.

  King Street Capital Management, with $21 billion under management, followed a similar strategy, losing money five months in a row, and is on track “for the first annual loss in its 20-year history.”

  Phoenix Investment Adviser with $1.2 billion under managed has posted losses in 11 months of the past 12, as its largest fund plunged 24% through August, much of it from exposure to decomposing bonds of Goodrich Petroleum.

  “The whole market was totally flooded,” Phoenix founder Jeffrey Peskind told the Journal. But he saw the oil-and-gas fiasco as an “‘unbelievable potential buying opportunity,’ given the overall strength of the US economy.”

  “A lot of hot money chased into what we believe are insolvent companies at best,” Paul Twitchell, partner at hedge fund Whitebox Advisors, told the Journal. “Bonds getting really cheap doesn’t mean they are a good buy.”

  After the bloodletting investors had to go through, they’re not very excited about buying oil-and-gas junk bonds at the moment. In the third quarter, energy junk bond issuance fell to the lowest level since 2011, according Dealogic. And so far in October, none were issued.

  And banks are going through their twice-a-year process of redetermining the value of their collateral, namely oil-and-gas reserves. Based on the lower prices, and thus lower values of reserves, banks are expected to cut borrowing bases another notch or two this month.

  Thus, funding is drying up, just when the companies need new money the most, not only to operate, but also to service outstanding debts. So the bloodletting – some of it in bankruptcy court – will get worse.

  But fresh money is already lining up again.

  They’re trying to profit from the blood in the street. Blackstone raised almost $5 billion for a new energy fund and is waiting to pounce. Carlyle is trying to raise $2.5 billion for its new energy fund. Someday someone will get the timing right and come out ahead.

  Meanwhile, when push comes to shove, as it has many times this year, it comes down to collateral. Banks and others with loans or securities backed by good collateral will have losses that are easily digestible. But those with lesser or no protections, including the “smart money” that plowed a fortune into risks that the smart banks had sloughed off, will see more billions go up in smoke.

  Next year is going to be brutal, explained the CEO of oil-field services giant Schlumberger. But then, there are dreams of “a potential spike in oil prices.” Read… The Dismal Thing Schlumberger Just Said about US Oil

  

  

  

  

• Things Are Getting Scary: Global Police, Precrime, & The War On Domestic "Extremists"

  Submitted by John Whitehead via The Rutherford Institute,

  • Are you afraid that the government is plotting to confiscate your firearms?

  • Do you believe the economy is about to collapse and the government will soon declare martial law?

  • Do you display an unusual number of political and/or ideological bumper stickers on your car?

  If you answered yes to any of the above questions, you may be an anti-government extremist (a.k.a. domestic terrorist) in the eyes of the police.

  As such, you are now viewed as a greater threat to America than ISIS or al Qaeda.

  Let that sink in a moment.

  If you believe in and exercise your rights under the Constitution (namely, your right to speak freely, worship freely, associate with like-minded individuals who share your political views, criticize the government, own a weapon, demand a warrant before being questioned or searched, or any other activity viewed as potentially anti-government, racist, bigoted, anarchic or sovereign), you have just been promoted to the top of the government’s terrorism watch list.

  I assure you I’m not making this stuff up.

  Police agencies now believe the “main terrorist threat in the United States is not from violent Muslim extremists, but from right-wing extremists.”

  A New York Times editorial backs up these findings:

  Law enforcement agencies around the country are training their officers to recognize signs of anti-government extremism and to exercise caution during routine traffic stops, criminal investigations and other interactions with potential extremists. “The threat is real,” says the handout from one training program sponsored by the Department of Justice. Since 2000, the handout notes, 25 law enforcement officers have been killed by right-wing extremists, who share a “fear that government will confiscate firearms” and a “belief in the approaching collapse of government and the economy.”

  So what is the government doing about these so-called terrorists?

  The government is going to war.

  Again.

  Only this time, it has declared war against so-called American “extremists.”

  After decades spent waging costly, deadly and ineffective military campaigns overseas in pursuit of elusive ISIS and al Qaeda operatives and terror cells (including the recent “accidental” bombing of a Doctors Without Borders hospital in Afghanistan that left 22 patients and medical staff dead), the Obama administration has announced a campaign to focus its terror-fighting forces inwards.

  Under the guise of fighting violent extremism “in all of its forms and manifestations” in cities and communities across the world, the Obama administration has agreed to partner with the United Nations to take part in its Strong Cities Network program. Funded by the State Department through 2016, after which “charities are expected to take over funding,” the cities included in the global network include New York City, Atlanta, Denver, Minneapolis, Paris, London, Montreal, Beirut and Oslo.

  Working with the UN, the federal government will train local police agencies across America in how to identify, fight and prevent extremism, as well as address intolerance within their communities, using all of the resources at their disposal.

  What this program is really all about, however, is community policing on a global scale.

  Community policing, which relies on a “broken windows” theory of policing, calls for police to engage with the community in order to prevent local crime by interrupting or preventing minor offenses before they could snowball into bigger, more serious and perhaps violent crime. The problem with the broken windows approach is that it has led to zero tolerance policing and stop-and-frisk practices among other harsh police tactics.

  When applied to the Strong Cities Network program, the objective is ostensibly to prevent violent extremism by targeting its source: racism, bigotry, hatred, intolerance, etc.

  In other words, police—acting ostensibly as extensions of the United Nations—will identify, monitor and deter individuals who exhibit, express or engage in anything that could be construed as extremist.

  Consider how Attorney General Loretta Lynch describes the initiative:

  As residents and experts in their communities, local leaders are often best positioned to pinpoint sources of unrest and discord; best equipped to identify signs of potential danger; and best able to recognize and accommodate community cultures, traditions, sensitivities, and customs.  By creating a series of partnerships that draws on the knowledge and expertise of our local officials, we can create a more effective response to this virulent threat.

  Translation: U.S. police agencies are embarking on an effort to identify and manage potential extremist “threats,” violent or otherwise, before they can become actual threats. (If you want a foretaste of how “extreme” things could get in the U.S.: new anti-terrorism measures in the U.K. require that extremists be treated like pedophiles and banned from working with youngsters and vulnerable people.)

  The government’s war on extremists, of which the Strong Cities program is a part, is being sold to Americans in much the same way that the USA Patriot Act was sold to Americans: as a means of combatting terrorists who seek to destroy America.

  For instance, making the case for the government’s war on domestic extremism, the Obama administration has suggested that it may require greater legal powers to combat violent attacks by lone wolves (such as “people motivated by racial and religious hatred and anti-government views” who “communicate their hatred over the Internet and through social media”).

  Enter the government’s newest employee: a domestic terrorism czar.

  However, as we now know, the USA Patriot Act was used as a front to advance the surveillance state, allowing the government to establish a far-reaching domestic spying program that has turned every American citizen into a criminal suspect.

  Similarly, the concern with the government’s anti-extremism program is that it will, in many cases, be utilized to render otherwise lawful, nonviolent activities as potentially extremist.

  Keep in mind that the government agencies involved in ferreting out American “extremists” will carry out their objectives—to identify and deter potential extremists—in concert with fusion centers (of which there are 78 nationwide, with partners in the private sector and globally), data collection agencies, behavioral scientists, corporations, social media, and community organizers and by relying on cutting-edge technology for surveillance, facial recognition, predictive policing, biometrics, and behavioral epigenetics (in which life experiences alter one’s genetic makeup).

  This is pre-crime on an ideological scale and it’s been a long time coming.

  For example, in 2009, the Department of Homeland Security (DHS) released two reports, one on “Rightwing Extremism,” which broadly defines rightwing extremists as individuals and groups “that are mainly antigovernment, rejecting federal authority in favor of state or local authority, or rejecting government authority entirely,” and one on “Leftwing Extremism,” which labeled environmental and animal rights activist groups as extremists.

  Incredibly, both reports use the words terrorist and extremist interchangeably.

  That same year, the DHS launched Operation Vigilant Eagle, which calls for surveillance of military veterans returning from Iraq and Afghanistan, characterizing them as extremists and potential domestic terrorist threats because they may be “disgruntled, disillusioned or suffering from the psychological effects of war.”

  These reports indicate that for the government, anyone seen as opposing the government—whether they’re Left, Right or somewhere in between—can be labeled an extremist.

  Fast forward a few years, and you have the National Defense Authorization Act (NDAA), which President Obama has continually re-upped, that allows the military to take you out of your home, lock you up with no access to friends, family or the courts if you’re seen as an extremist.

  Now connect the dots, from the 2009 Extremism reports to the NDAA and the UN’s Strong Cities Network with its globalized police forces, the National Security Agency’s far-reaching surveillance networks, and fusion centers that collect and share surveillance data between local, state and federal police agencies.

  Add in tens of thousands of armed, surveillance drones that will soon blanket American skies, facial recognition technology that will identify and track you wherever you go and whatever you do. And then to complete the circle, toss in the real-time crime centers being deployed in cities across the country, which will be attempting to “predict” crimes and identify criminals before they happen based on widespread surveillance, complex mathematical algorithms and prognostication programs.

  Hopefully you’re getting the picture, which is how easy it is for the government to identify, label and target individuals as “extremist.”

  We’re living in a scary world.

  Unless we can put the brakes on this dramatic expansion and globalization of the government’s powers, we’re not going to recognize this country 20 years from now.

  Frankly, as I make clear in my book Battlefield America: The War on the American People, the landscape has already shifted dramatically from what it was like 10 or 20 years ago. It’s taken less than a generation for our freedoms to be eroded and the police state structure to be erected, expanded and entrenched.

  Rest assured that the government will not save us from the chains of the police state. The UN’s Strong Cities Network program will not save us. The next occupant of the White House will not save us. For that matter, anarchy and violent revolution will not save us.

  If there is to be any hope of freeing ourselves, it rests—as it always has—at the local level, with you and your fellow citizens taking part in grassroots activism, which takes a trickle-up approach to governmental reform by implementing change at the local level.

  Attend local city council meetings, speak up at town hall meetings, organize protests and letter-writing campaigns, employ “militant nonviolent resistance” and civil disobedience, which Martin Luther King Jr. used to great effect through the use of sit-ins, boycotts and marches.

  And then, while you’re at it, urge your local governments to nullify everything the federal government does that is illegitimate, egregious or blatantly unconstitutional.

  If this sounds anti-government or extremist, perhaps it is, in much the same way that King himself was considered anti-government and extremist. Recognizing that “freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed,” King’s tactics—while nonviolent—were extreme by the standards of his day. 

  As King noted in his 1963 “Letter from Birmingham City Jail”:

  [A]s I continued to think about the matter I gradually gained a bit of satisfaction from being considered an extremist. Was not Jesus an extremist in love—“Love your enemies, bless them that curse you, pray for them that despitefully use you.” Was not Abraham Lincoln an extremist—“This nation cannot survive half slave and half free.” Was not Thomas Jefferson an extremist—“We hold these truths to be self-evident, that all men are created equal.” So the question is not whether we will be extremist but what kind of extremist will we be. Will we be extremists for hate or will we be extremists for love?

  So how do you not only push back against the police state’s bureaucracy, corruption and cruelty but also launch a counterrevolution aimed at reclaiming control over the government using nonviolent means?

  Take a cue from King.

  

  

  

  

  

• Professor Compares Law-Abiding Gun-Owners To Slaveholders, Calls For Them To Be Shot

  Submitted by Alex Thomas via Intellihub.com,

  In what will go down as one of the most disgusting, hate filled articles ever published on the hard left clickbait rag Salon.com, an author and liberal college professor has written a piece that calls for all gun owners to be shot. 

  No, you did not read that incorrectly and this is not hyperbole.

  The article, written by Coppin State University teacher D. Watkins, not only calls for all gun owners to be shot but also ridiculously compares them to slaveholders while claiming that there is no legitimate reason to own a weapon.

  Starting out the article with the writers dreams of charging five thousand dollars per bullet, Watkins then makes his position on gun ownership in America startlingly clear. (emphasis mine)

  Rock was definitely on point, $5000 bullets would be great but I’d take it a step further––I believe that being shot should be requirement for gun ownership in America. It’s very simple. You need to have gun, like taking selfies with pistols, can’t live with out it? Then take a bullet and you will be granted the right to purchase the firearm of your choice.

   

  If we could successfully implement this rule, I guarantee the mass shootings will stop. Watching cable news now in days makes me physically ill.

   

  Week in and week out we are forced to learn about another coward, who can’t stand to deal with the same rejection that most of us face–– so they strap themselves with guns and then cock and spray at innocent people. Heartbroken survivors and family member images go viral, as our elected officials remain clueless.

  He then goes on to attack the usual right wing boogeyman (Carson and Trump) before making yet another patently false statement that shows his complete ignorance on the actual facts of gun ownership. Watkins, like so many other clueless authoritarian liberals, simply does not understand gun ownership and its connection to freedom and liberty. (emphasis mine)

  Bullets are extremely hot and they hurt. I saw them paralyze, cut through faces, pierce children and take life. I have friends, relatives and loved ones be gunned down. Guns break apart families and ruin lives.

   

  Other than giving a coward the heart to stand tall, what’s the positive part of gun ownership? Other than the people in rural areas who use them to hunt for food, I have only seen them destroy, both in the suburbs and in our inner cities.

  Watkins only sees them destroy so the millions and millions of other American citizens who do not share his opinion should be shot!? It’s almost as if Watkins has decided to lift the veil and publish a piece chock full of the actual thoughts that liberal authoritarians share with each other on a regular basis.

  Not wanting to have his call for all gun owners to be shot to be the only unbelievably messed up thing in his hate piece, Watkins then compares all gun owners to slaveholders in a transparent attempt to label those he disagrees with as racists. (a tried and true tactic of the authoritarian left) (emphasis mine)

  Gun praisers are just like the people who were in favor of slavery back in the day – the elite, lazy and ignorant who weren’t being beaten, raped or in the field doing the work, so they were perfectly okay with involuntary servitude, which is a problem and why I think gun owners need to feel more– -they need a taste of the other side.

  Got that gun owners. You are elitists, you are lazy, you are ignorant, and most of all you are like a slaveholder for owning those terrible firearms!

  In case the reader thought that they may had just misread what the author meant in the beginning of the article, Watkins closes by reiterating his belief that all gun owners should be shot. (emphasis again mine)

  So if you love guns, if they make you feel safe, if you hold and cuddle with them at night, then you need to be shot. You need to feel a bullet rip through your flesh, and if you survive and enjoy the feeling­­––then the right to bear arms will be all yours.

  Ironically, this hate piece was published by a news outlet that routinely labels anyone that they disagree with as dangerous, violent racists. Apparently they are not worried about calling for millions of Americans to be shot just as long as those Americans are on the other side of the political isle.

  The above quoted piece is a perfect example of how gun control advocates really feel about millions of America gun owners and should be a wake up call to anyone still on the fence over whether or not gun control fanatics are just calling for “common sense” reform rather than full-scale confiscation and attacks on actual gun owners.

  It is also important to note that the call for gun owners to be shot is possibly tied directly to the recent promotion of Australian style gun control by the mainstream media. Australia initiated a massive mandatory buyback program (also known as confiscation by government force) after a mass shooting and one can imagine Americans would not be so keen to turn in their weapons if a similar law were passed in this country.

  Attempting to implement this type of gun control in the United States is an obvious recipe for civil war and gun owners who refuse to go along with the confiscation would be subject to violence at the hands of the government. (see all gun owners being shot)

  But hey, we are all just crazy right wing extremists for worrying about gun control, even as the media calls for mass confiscation and gun owners across the country to be shot.

  

  

  

  

  

• Furious Germans Stage Massive Anti-Islam Protest: "The Concentration Camps Are Unfortunately Out Of Action"

  Over the past several months, we’ve warned repeatedly that Europe’s escalating migrant crisis threatens to set off a dangerous bout of scapegoating xenophobia. 

  Germany’s open door policy to asylum seekers has effectively been forced on other countries by decree, a move which could very well engender intense and possibly dangerous feelings of nationalism among citizens who disagree with Berlin’s approach to the crisis. We’ve already seen Hungary resort to razor wire fences, water cannons, and tear gas to keep migrants out and Budapest’s move to close its border with Croatia and Serbia has set off a Balkan border battle wherein no one can quite figure out the most efficient way to get the refugees to Germany without allowing their countries to be used as migrant superhighways. 

  Meanwhile, German Chancellor Angela Merkel is beginning to feel the heat at home. Recall the following from AFP: 

  Germany’s Angela Merkel is used to owning the room when she speaks to her party faithful, but the mood turned hostile when she defended her open-door refugee policy this week.

   

  In a heated atmosphere, some of the 1,000-odd members at the meeting warned of a “national disaster” and demanded shuttering the borders as Germany expects up to one million migrants this year.

   

  “Stop the refugee chaos — save German culture + values — dethrone Merkel,” read a banner at the congress late Wednesday in the eastern state of Saxony, the home base for the anti-foreigner PEGIDA movement.

  As Reuters notes, PEGIDA (which stands for Patriotic Europeans Against the Islamization of the West,) almost “fizzled out” earlier this year when the group’s leader Lutz Bachmann posted the following picture of himself on Facebook with the caption “He’s Back”:

  

  Now, thanks to the refugee crisis, PEGIDA is apparently “back” as well, as attendance at the group’s Monday night “gatherings” swells amid the influx of Syrian asylum seekers. Here’s Reuters:

  The German anti-Islam movement PEGIDA staged its biggest rally in months on Monday, sparked into fresh life on its first anniversary by anger at the government’s decision to take in hundreds of thousands of migrants from the Middle East.

   

  But it has swelled again as Germany implements Chancellor Angela Merkel’s decision to accept a tide of refugees that could exceed a million this year, as she argues that Germany can not only cope but, with its aging population, will benefit in the long term.

   

  Police declined to estimate the number of protesters but media put it at 15-20,000, somewhat below a peak of around 25,000 in January. Around 14,000 counter-demonstrators urged people to welcome refugees rather than whip up opposition.

   

  PEGIDA supporters waved the national flag and carried posters bearing slogans such as “Hell comes with fake refugees” and “Every people should have its country, not every people a piece of Germany”.

   

  Gathering outside Dresden’s historic opera house, the Semperoper, PEGIDA supporters chanted “Deport! Deport!” and “Merkel must go!”.

   

  “We’re just normal people who are scared of what’s coming,” said 37-year-old Patrick, a car mechanic. “As a German citizen who pays taxes, you feel like you’re being taken for a ride.”

  And Bachmann was there on Monday, not dressed as Hitler. Here’s what he had to say to the crowd which reportedly handed him bouquets of flowers:

  “Politicians attack and defame us and the lowest tricks are used to keep our mouths shut. We are threatened with death, there are attacks on our vehicles and houses and we are dragged through the mud, but we are still here … And we will triumph!”

   

  
  

  While it’s not entirely clear what “triumph” means in this context, you can get a clue or two by simply taking a look at the following homemade sign which showed up at last Monday’s rally in Dresden:

  

  More from Deutsche Welle:

  The anti-“Islamization” movement PEGIDA marked its first birthday with a significant resurgence – and what many observers saw as a new radicalization. The new influx of refugees over the summer and a significant backlash against Merkel’s decision to open the borders to Syrians has apparently given the racist elements in the PEGIDA movement new confidence.

   

  Police put the attendance at Monday’s PEGIDA rally at between 15,000 and 20,000 people, with an equal number of counterdemonstrators, making this the largest turnout since the movement’s previous high point in February. But there was also a new aggression in the crowds: a Saxony police statement said the two sides threw “objects and fireworks” at one another, and said there were several attacks on officers themselves, who deployed pepper spray.

   

  The media’s attention was particularly drawn to a 25-minute speech by the German-Turkish writer Akif Pirincci, otherwise known for a cat-based crime fiction series and a libertarian blog called “The Axis of Good,” which has often been accused of racism.

   

  Pirincci’s extraordinary and occasionally vulgar ramble, all read from notes, included references to refugees as “invaders,” politicians as “gauleiters against their own people,” Muslims “who pump infidels with their Muslim juice” and a threat that Germany would become a “Muslim garbage dump.”

   

  After the crowd responded with shouts of “resistance, resistance,” Pirincci said, “Of course there are other alternatives – but the concentration camps are unfortunately out of action at the moment.” 

  You read that correctly, the man who stood up in front of 10-15,000 people and delivered a 25-minute rant complete with the suggestion that Germany should fire back up the concentration camps writes cat detective novels in his spare time…

  

  In any event, this is precisely what we meant when we said that feelings of intense nationalism could well lead directly to dangerous bouts of scapegoating xenophobia, and don’t expect anyone at a PEGIDA rally to be persuaded by the argument that the influx of Syrian refugees may help Germany overcome the economic hurdles it will soon face from challenging demographic shifts.

  We’ll leave you with a quote from Hungary’s Viktor Orban and some visuals from Monday’s rally.

  “Spiritually, Islam was never part of Europe. It’s the rulebook of another world.” 

   

  

  

  

   

  First chant by the protesters: “Merkel muss weg” (“Merkel has to go”) pic.twitter.com/Td5uor5As7

  — Thomas Sparrow (@Thomas_Sparrow) October 19, 2015

  “Money for our children instead of money for your asylum seekers”. #Pegida. We hear what looks like a few fireworks pic.twitter.com/HXpkR54djG

  — Thomas Sparrow (@Thomas_Sparrow) October 19, 2015

  And more:

  

  

  

  

  

  

  

  

• Hillary Would Be The "Most Disliked" President Ever

  With Joe Biden still undecided, perhaps the following chart will help make up his mind… for, if Hillary (with all her populist platitudes and elitist sponsorship) were to become Queen President, she will be the most unliked (least favorable) in recent history…

  

   

  Ironically, there is only one ‘contender’ who ranks lower…

  

   

  Source: Bloomberg

  

  

  

  

  

• Europe Secretly Starts Imposing TTIP Despite the Public’s Overwhelming Opposition

  Submitted by investigative historian 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.

  Europe Secretly Starts Imposing TTIP Despite the Public’s Overwhelming Opposition

  The terms of Obama’s proposed TPP ‘trade’ treaty with Asian countries won’t be made public until the treaty has already been in force for at least four years. The terms of Obama’s proposed TISA (Trade In Services Agreement) with 52 nations won’t be made public until the treaty has already been in force for at least five years. Obama’s proposed TTIP treaty with European countries has been so successfully hidden, that even the number of years it will be kept from the public isn’t yet known. Hello, international fascism — all in secret, until too late for the public to do anything.

  But in Europe, things are being rushed, just in case secrecy breaks and the treaty fails to pass. The European Union is already secretly imposing provisions from the secret Transatlantic Trade and Investment Partnership (TTIP) treaty, even before anyone has signed it, and even before it has been formally approved in any nation. This was revealed over the last weekend in two places:

  On the night of October 17th, Phillip Inman of the online version of the Guardian bannered (in an article that the Guardian  declined to publish in its printed edition), “Prospect of TTIP already undermining EU food standards, say campaigners,” and he reported that,

  Nick Dearden, director of anti-poverty group Global Justice Now, says the EU’s chief trade counsellor, Damien Levie, has let slip that free trade means undermining current minimum standards agreed by the EU.

  Dearden says that according to a report in the  [subscription-only] newsletter Washington Trade Daily, Levie told a conference held by US free market thinktank the Cato Institute [which is owned by America’s passionately anti-regulatory billionaire oil-investors, the Koch brothers] that genetically modified crops and chemically washed beef carcasses were being allowed into the EU ahead of a deal.

  According to the report, Levie said EU member states “have been stepping up case reviews and approving new genetically modified organisms [GMOs] with five new products approved so far”. …

  Levie … told the Cato Institute conference that neither side wants to reach anything less than a comprehensive economic agreement. He conceded the deal could founder on resistance from the US to include financial services in the deal and Washington’s reluctance to open local and state procurement to bids from EU businesses.

  Previously, information that was made public by wikileaks had made clear that in the negotiations over the TTIP, the U.S. has been the most aggresssive nation pushing for the ability of international corporations to shape national laws — this being the position that’s also favored by the Koch brothers.

  On October 18th, Lauren McCauley at Common Dreams headlined “TTIP Already ‘Rewriting the Rule Book’ for EU Food Standards, New Report Finds,” and stated that a progressive British organization, Global Justice Now, issued a study on October 18th, which noted that:

  US officials successfully used the prospect of TTIP to bully the EU into abandoning plans to ban 31 dangerous pesticides with ingredients that have been shown to cause cancer and infertility.

  A similar fate befell regulations around the treatment of beef with lactic acid. This was banned in Europe because of fears that the procedure was being used to conceal unhygienic  practices. The ban was repealed by MEPs in the European Parliamentary Environment Public Health and Food Safety Committee after EU Commission officials openly suggested TTIP negotiations would be threatened if the ban wasn’t lifted.

  On climate change, the European Fuel Quality Directive which would effectively ban Canadian tar sands oil [the world’s worst oil from a global-warming standpoint] has foundered in the face of strong US-Canadian lobbying around both TTIP and the EU-Canada CETA deal.

  As I reported on 2 February 2014:

  [The proposed] Keystone XL Pipeline wouldn’t contribute to U.S. energy-production, but instead to exports of the global-warming-dirtiest oil, from Canada, to Europe and South America. It would transport Alberta Canada’s tar-sands oil — half of which is owned by the Kochs — south to two Koch-owned refineries near the Texas Gulf Coast for transshipment mainly to Europe. President Obama is thus trying to get Europe to relax its anti-global-warming standards to permit their importation of this oil, which is the world’s absolute worst oil from the global-warming standpoint.

  Furthermore, “Currently, most Canadian tar sands exports are mainly limited to the U.S. Midwest market by a lack of transportation infrastructure.” This fact (the lack of “infrastructure” or transportation facilities to move the oil to the international market) keeps down not only the price the Kochs can get for their oil (since it can’t currently be sold on the international market); it also greatly lowers the sheer volume of it that they can sell (at any price), because the local Midwest oil market is small. Keystone XL would thus also enormously increase the annual sales-volume of this currently deeply landlocked oil.

  Moreover, if this filthy oil isn’t sold out fast, it won’t ever be sold at all; and here is why, as explained by no less than the Oil & Gas Sector Analyst at the world’s largest bank (in terms of assets):

  He says, “Between 60 and 80% of current fossil fuel reserves listed on global markets cannot be burned if we are to limit the rise in global temperature to 2 degrees [Celsius, or 4.5 degrees Fahrenheit],” and that’s the temperature-rise 97% of climatologists endorse as being the cut-off point that mustn’t be exceeded if the climate is to avoid going haywire with soaring heat and destroying the planet’s biosphere as humans have always known it.

  So: U.S. President Obama has been aggressively pushing for the largely-Koch-owned Canadian tar-sands oil to be allowed into European markets in order for that portion of their — and Exxon’s, etc. — oil reserves to be sellable at all, because it otherwise might not be.

  The Koch brothers are generally considered to be the biggest fundraisers for the U.S. Republican Party. On 5 January 2012, the Washington Post headlined, “Koch-backed political coalition, designed to shield donors, raised $400 million in 2012” and Matea Gold reported that, “The resources and the breadth of the organization make it singular in American politics,” and that, “Its funders remain largely unknown.” However, one self-admitted member,

  Jack Schuler, a Chicago health-care entrepreneur, attended one of the Kochs’ donor meetings in Beaver Creek, Colo., several years ago and has contributed about $100,000 a year to their efforts since then. “They came across as guys who are putting a lot of their own money into it,” Schuler said. “They are pretty soft-spoken, not screamers or screechers. They provide the leadership, the staff — without the framework, I wouldn’t do it on my own.”

  A large portion of that $400 million went to Republican Mitt Romney’s campaign against Barack Obama’s re-election bid. Obama supports the Kochs financially, though the Kochs preferred the self-declared Republican candidate.

  Thus, apparently, the Kochs have already won Obama’s success at defeating the EU’s fuel-quality standards, even if the TTIP gets turned down. The EU did it without needing to go all the way to put in place and effectuate the TTIP.

  NOTE: The headline to this article says “Despite the Public’s Overwhelming Opposition,” but the publicly available scientific polling on these secret treaties is also being gamed. Early on, the polls had asked respondents whether they approved of “free trade” or other such vagaries, and the public did. Then the polling just stopped, as if that was that, and Obama’s proposed ‘trade’ deals are popular. But the massive public demonstrations, etcetera, since then, against these treaties, have become increasingly clear that, to the extent people actually come to know about Obama’s proposed ‘trade’ treaties (especially in Europe, which isn’t quite as corrupt as is the U.S. and so fewer people are totally in the dark), they’re strongly opposed, and might even revolt violently if that’s the only way to stop the treaty from being approved. News such as you’re reading here has been submitted to the news-media in all Western countries, but only few publish it. The major advertisers have participated in the committees that drafted these treaties, and probably wouldn’t be pleased if their handiworks were known to the public in time to be blocked from going into effect.

  

  

  

  

  

• Offshore-Onshore Yuan Spread At 1-Month Wides Hinting At Outflows As Japanese Stocks 'Mysteriously' Meltup At The Open

  Since China GDP was unleashed, Offshore Yuan (CNH) has weakened significantly relative to Onshore Yuan (CNY). After over 3 weeks of 'stability' with CNY and CNH on top of each other, it appears selling pressure has reappeared suggesting outflows are on the rise (despite PBOC's best efforts to hide/manage them) which may explain why Treasuries were so relatively weak today. The "will-never-learn" Chinese investors pile in once again extending the period of margin debt increases to the most since the peak of the bubble. AsiaPac stocks are mixed with China flat and Japan higher after a mysterious bidder lifted NKY 200 points instantly at the open. China strengthened the Yuan fix after 5 days of weakness.

   

  Offshore Yuan relative weakness suggest capital outflows are gaining pace once again…

  

   

  as PBOC strengthened the Yuan fix for the first time in 6 days…

  

   

  which may explain why Treasuries sold off so much today (on a relatively quiet equity day).

  

   

  Chinese investors continue to pile into stocks in a leveraged way…

  • *SHANGHAI MARGIN DEBT RISE HITS LONGEST STRETCH IN FOUR MONTHS

  9th day in a row…

  

   

  As Chinese stocks continue limp back towards pre-devaluation levels…

  

   

  Japanese Stocks melted up to the 120 USDJPY tractor beam at the open…

  

   

  And why would Japanese stocks melt-up? Why disastrous trade data of course!!!!

  • Japan Sept. Exports Rise 0.6% Y/y; Est. +3.8%

  

   

  Which can only mean one thing!! More Stimulus, More Devaluatiuon, and More Einsteinian Insanity until it's all over.

  *  *  *

  Oh and with regard China's bond bubble…

  • *PBOC GETS >CNH30B ORDERS FOR CNH5B DIM SUM BOND

  Nope, no bubble there.

   

  Charts: Bloomberg

  

  

  

  

  

• Banks Turn Down Deposits As Stealth NIRP Takes Hold

  Back in February, we noted that NIRP had officially (albeit technically) arrived in the US as JP Morgan announced it was preparing to charge some large institutional customers for deposits. 

  Between the squeeze ZIRP has put on NIM and regulations around so-called “hot money,” banks quite simply do not want certain types of deposits and when trying to talk customers out of putting their money in the bank didn’t work, some financial institutions simply resorted to charging fees.  

  As we discussed months ago, if the cost of funding isn’t zero, banks are no longer interested, which means if the Fed finally does raise short term rates, other sources of funding will be far more attractive. Besides, it’s not as if banks don’t have enough deposits. On the contrary, they’re inundated and deposit to loan ratios have plunged in the post-crisis years. Here’s how we put it earlier this year: So now that the Fed may be finally pushing back on the commercial banks, and telling them that the cost of deposit funding is about to go up, banks themselves are pushing back on the Fed, and signalling that thanks to the trillions in fungible QE liquidity, they don’t care if the Fed hikes rates, as they are now proactively seeking to purge deposits from their balance sheets.

  If you needed still more evidence that what one might call “stealth NIRP” has taken hold in America, consider the following from WSJ:

  U.S. banks are going to new lengths to ward off a surprising threat to their financial health: big cash deposits.

   

  State Street Corp., the Boston bank that manages assets for institutional investors, for the first time has begun charging some customers for large dollar deposits, people familiar with the matter said. J.P. Morgan Chase & Co., the nation’s largest bank by assets, has cut unwanted deposits by more than $150 billion this year, in part by charging fees.

   

  The developments underscore a deepening conflict over cash. Many businesses have large sums on hand and opportunities to profitably invest it appear scarce. But banks don’t want certain kinds of cash either, judging it costly to keep, and some are imposing fees after jawboning customers to move it.

   

  The banks’ actions are driven by profit-crunching low interest rates and regulations adopted since the financial crisis to gird banks against funding disruptions.

   

  The latest fees center on large sums deemed risky by regulators, sometimes dubbed hot-money deposits thought likely to flee during times of crises. Finalized last September and overseen by the Federal Reserve and other regulators, the rule involving the liquidity coverage ratio forces banks to hold high-quality liquid assets, such as central bank reserves and government debt, to cover projected deposit losses over 30 days. Banks must hold reserves of as much as 40% against certain corporate deposits and as much as 100% against some deposits from hedge funds.

  Yes, that’s right, banks are forced to hold either Fed reserves or USTs to guard against the dangers associated with…cash.

  That sounds strange on the surface, but it all comes back to the fact that fractional reserve banking is just one giant ponzi scheme. It’s a confidence game, plain and simple. I, the bank, take your money which I claim you can have back any time you want or need it, and then I go and lend that money out to someone else who might not pay it back for decades, if at all. If you – or, more accurately, a bunch of yous – come beating down the doors all wanting your money back at once, I won’t be able to give it to you because I lent it out to someone else. So the idea is to make banks guard against that possibility by identifying the types of depositors who are likely to come wanting large portions of their money back in a pinch and make financial institutions hold reserves against that funding. 

  Well, if I’m the bank and I’m going to have to hold reserves against your cash and on top of that my NIM is already in the doldrums, plus I’ve got plenty of deposits, plus the cost of deposit funding is about to rise possibly before I can realize any kind of rebound in my margins, why do I want your deposits when I’m already awash with fungible liquidity?

  The answer is: I don’t. 

  Here’s WSJ again:

  The push comes as the globe is awash in cash, reflecting soft economic growth and low interest rates that limit investment. Some asset managers have been increasing the amount of cash they are holding in their portfolios, in part because of an increased focus by the Securities and Exchange Commission on liquidity management in mutual funds.

   

  Domestic deposits at U.S. banks in the second quarter hit $10.59 trillion, up 38% from five years earlier, Federal Deposit Insurance Corp. data show. Loans outstanding at U.S. banks as a share of total deposits tumbled to 71% from 78% in 2010 and 92% in mid-2007, before the financial crisis, the data show.

   

  

  
  

  Jerome Schneider, head of Pacific Investment Management Co.’s short-term and funding desk, which advises corporate and institutional clients, said that as a result of the bank actions, he and his customers have discussed as cash alternatives boosting investments in U.S. Treasury bonds, ultrashort-duration bond funds and money-market funds.

   

  When it comes to cash, Mr. Schneider said, “Clients have been put on warning.”

   

  Banks are struggling to generate returns for investors. A low-interest-rate environment squeezes bank profits by narrowing the spread between the rate they lend at and their borrowing, or funding, cost.

   

  Deposit fees are particularly significant at State Street because its primary business is custodying client assets, including holding cash for clients rather than seeking to lend out those funds, as other banks typically do.

   

  State Street customers earlier were told that fees were possible on accounts whose nonoperational balances had grown, the people familiar with the matter said. There is no minimum deposit size that triggers the fee, which varies and is applied case by case to new and existing clients, the people said.

   

  “The persistence of the current rate environment requires that we take action consistent with prudent financial management with certain accounts that continually maintain significant excessive cash balances,” State Street said in a statement to The Wall Street Journal.

   

  BNY Mellon and Northern Trust haven’t yet begun charging to hold clients’ cash, people familiar with the matter said.

  A Bank of New York spokesman said the bank hasn’t ruled out doing so in the future.

   

  Since last year, Bank of America Corp. has told some institutional clients that they will need to move their deposits or pay to keep them at the bank, people familiar with the matter said.

  And while small depositors are for the time being immune, anyone who has dealt with a TBTF bank in the post-crisis years knows that there are enough fees levied on a variety of services and transactions to take the real return on your savings into negative territory. 

  Of course everything described above represents a kind of de facto NIRP rather than de jure NIRP, but as those who followed last month’s FOMC decision closely are no doubt aware, one dot now suggests that the US is about to take an officially sanctioned trip into the Keynesian Twilight Zone:

  
  

  

  

  

  

  

• Meet The New Generation Of Traders

  Having spent the last 5 years of his trading career "in short option spreads and Biotech," we are sure Tyler McCain and his Fed-fueled ilk are very well equipped to deal with whatever it is that The Fed has in store for the markets next…

  Good luck Tyler.

  

   

  Luckily, Tyler has corrected his initial Bio which showed his spreading options from the nursery…

  

   

  If only Tyler had a math Ph.D, Virtu would hire him on the spot – after all the HFTs are smart and they know that when the scapegoating begins, they will need a few sacrificial lambs besides just the algos to throw at the regulators.

  h/t @zzlangerhans

  

  

  

  

  

• Show Of Hands: Who's Interested In A CDO Backed By A Pool Of Subordinated Community Bank Debt?

  It’s no secret that the global hunt for yield is herding investors into riskier and riskier assets fueling demand not only for traditional HY bonds, but for more esoteric paper as well such as auto- and student-loan backed ABS. 

  This is the inevitable consequence of seven years of ZIRP and now NIRP. With nowhere to run and an ocean of liquidity at their fingertips, investors search out opportunities in corners of the market where they might not normally have dared to tread. 

  Earlier this year, we noted that Goldman was set to resurrect the synthetic CDO with a marketing pitch that included the phrase “bespoke tranche opportunity.” Of course any time Goldman pitches you something as an “opportunity” it’s best to ask: “Yes, but is that for you or for me?” In other words: “Am I about to get muppetized here?”

  But the main draw for Goldman (and others) on these deals is that the underwriting fees are higher. What they’re essentially doing is allowing investors to try their hand at picking individual credits to bet on/against and if you’re good at that sort of thing, there might indeed be a chance for you to pick up a nice CDS premium. But if it turns out you aren’t as good as you thought you were when it comes to judging idiosyncratic credit risk in a dicey environment (see the Valeant case for an example of what can go wrong), well then you could get yourself into trouble. 

  In any event, the longer investors remain mired in ZIRP, the louder the calls will be for the creation of products that offer some semblance of yield. 

  As we said back in February, the Bloomberg piece that announced the Goldman deal was the latest installment in a series of articles that pop up every so often in the financial news media touting the resurgence of structured credit and, more specifically, CDOs. Cue another in this series. Via Bloomberg:

  Joshua Siegel is bringing back one of the most toxic financial vehicles ever devised and arguing that this time it’s going to be different.

   

  His StoneCastle Financial is among the hedge funds that are reviving the collateralized debt obligation, or CDO.

  CDOs stuffed with mortgages and their derivatives caused billions in losses around the world during the 2008 crisis.

   

  The CDO that StoneCastle put together is a little different. 

  Oh, really? How so?

  It’s backed by subordinated debt issued by about 35 community banks, some of them so small they don’t have credit ratings.

  Great. A collateral pool full of subordinated community bank debt. Sounds promising.

  But don’t worry, Siegel has done this before:

  This isn’t the first time Siegel pooled small-bank debt into a structured financial product. At Salomon Smith Barney in the late 1990s, he proposed bundling banks’ trust-preferred securities, a predecessor to subordinated debt, into so-called TruPS CDOs.

   

  The trick to doing it right, according to Siegel, is regional diversification.

   

  In a 2001 research report, Siegel divided the U.S. into five regions and wrote that the geographic diversity of the banks whose TruPS he used — picking debt from different areas — would make the CDOs safer.

  Yes, “geographic diversity would make it safer.” 

  You see this is just a derivative (no pun intended) of the same old argument everyone used to justify the supposed “safety” of anything backed by a mortgage in the lead up to the crisis. The contention is that while individually, the loans in the collateral pool may be crap, and while crap in isolation is just, well… crap, a bunch of crap pooled becomes “investment grade” and is thus “safer.”

  Of course that all fell apart in 2008:

  But banks failed all over the country in the 2008 credit crunch, throwing shade on Siegel’s original theory about regional diversification. Larry Cordell, a vice president at the Federal Reserve Bank of Philadelphia, said that’s because too many banks’ portfolios were concentrated in real estate and mortgages. They weren’t diversified enough, he said. The market for TruPS CDO collapsed. Some investors are still waiting to be repaid.

  But that’s not going to stop Siegel from doing the exact same thing again: 

  TruPS issuance has fallen to zero while publicly traded banks sold $12.3 billion of sub-debt, as it’s called, in 2013, about four times what they issued between 2009 and 2012, according to SNL Financial.

   

  Brett Jefferson, president of Hildene Capital Management in Stamford, Connecticut, said that sub-debt CDOs are simply a retooling of TruPS CDOs.

   

  “It’s a flavor of the old deals,” Siegel said. 

  It sure is, and we won’t blame anyone for whom that flavor has left a bad taste.

  

  

  

  

  

• 5 Corporations Sucking California Dry During The Drought

  Submitted by Jake Anderson via TheAntiMedia.org,

  As most people in the country know by now, California is currently suffering from a severe, record-breaking drought. In fact, it’s the worst drought in 1,200 years. While Governor Jerry Brown recently issued a mandate for people to start conserving water, large corporations use up and waste vastly more water than individuals and small businesses, often in ways that are detrimental to the environment.

  Let’s take a look at five of the most massive corporations in California that are the worst culprits when it comes to wasting water:

  1. Nestle

   

  Nestle, once mainly known for its chocolate bars, is now becoming increasingly notorious for the way it uses up water in its bottled water products. Nestle, of course, has been criticized for using up water in drought-stricken third world countries. However, it is also doing this right at home in California. For example, one of the places where Nestle gets water is on the Morongo Reservation in the Cabazon region of the state. This is an area where groundwater levels of water have been steadily declining in recent years.

   

  2. Harris Ranch

   

  Harris Cattle Ranch is the largest producer of beef in California. At last count, it produced more than 150 million pounds of beef per year. While much of the attention on conserving water is focused on individuals, the fact is that more than 90% of the water used in California is used by agriculture. Cows consume more than twenty times as much water as humans. Crops such as soybeans and corn, which are heavily subsidized by the government, also use up massive amounts of water.

   

  3. Occidental Petroleum

   

  Occidental Petroleum is one of the oil companies in California that use enhanced oil recovery techniques, more commonly known as ‘fracking’. This is a practice that has become increasingly controversial due to potential health risks and suspected fracking-related seismic activity. Fracking also uses up large amounts of water. According to one estimate, a single well may use more than 5 million gallons of water to extract resources. Recent evidence also suggests that fracking companies have dumped waste water into aquifers, which contaminates the water with pollutants such as heavy metals and radiation.

   

  4. California Dairies, Inc.

   

  California Dairies, Inc. is the largest dairy processing cooperative in the state, producing 43% of California’s milk and 9% of the milk of the entire country. Along with beef, dairy production is another practice that uses up incredible amounts of water. It actually takes as much as 30 gallons of water to produce one gallon of milk.

   

  5. Paramount Farming

   

  Paramount Farming is the largest producer in the nation of nuts such as almonds and pistachios. Almond production alone uses up more water than is used by both residents and businesses in Los Angeles and San Francisco combined. Most nuts grown in California are exported to various parts of the world.

  California’s drought is a serious and complex issue. Solving it will take an effort on the part of many people, including individuals, politicians and businesses. When studying this issue, however, it’s important not to ignore the considerably more massive part played by large companies. We have seen what happens on a geopolitical level when vital resources begin to dwindle, and I’m not talking about Frank Herbert’s Dune, which features a planet in which the scarcity of water has made it the most precious of substances. People can help to conserve water in many ways. More importantly, in addition to using less water with everyday tasks, people can pay more attention to what type of products they buy and consume. If you are interested in the macro view of water conservation, consider boycotting the companies and industries listed above.

  

  

  

  

  

• SPaCe BuSH…

  

  

  

  

  

• PM-Elect Of 'US Ally' Canada Wastes No Time: Tells Obama Will Withdraw Fighter Jets From Syria, Iraq

  With the ink still damp on voter slips, newly crowned elected Canadian Prime Minister Justin Trudeau wasted no time in fulfilling the first of his liberal "hope" and "change" promises. As AFP reports, hours after defeating Stephen Harper, Trudeau has told US President Obama that he will withdraw Canadian fighter jets from Syria and Iraq, though giving no timeline. So far, the US response is a mutedly diplomatic but tinged with guilt, "We have stood shoulder to shoulder with Canadian armed forces… in Iraq and Afghanistan," from the US State Department.

  "About an hour ago I spoke with President Obama," Trudeau told a press conference.

   

  While Canada remains "a strong member of the coalition against ISIL," Trudeau said he made clear to the US leader "the commitments I have made around ending the combat mission."

   

  Canada last year deployed CF-18 fighter jets to the region until March 2016, as well as about 70 special forces troops to train Kurds in northern Iraq.

   

  During the campaign, Trudeau pledged to bring home the fighter jets and end its combat mission. But he vowed to keep military trainers in place.

   

  His new Liberal government will be "moving forward with our campaign commitments in a responsible fashion," Trudeau said.

   

  "We want to ensure that the transition is done in an orderly fashion."

  Earlier on Tuesday, as Sputnink News reports, the US State Department addressed questions as to whether or not it was concerned that Canada's new government may not support US foreign policy regarding IS presence in Afghanistan.

  "These are all decisions the Canadian people have to make and Canadian legislators have to make… and their Prime Minister [has to make]," department spokesperson John Kirby told reporters.

   

  "We have stood shoulder to shoulder with Canadian armed forces…in Iraq and Afghanistan," he added.

  *  *  *

  While this move seems like a hope-y and change-y step forward, the lack of timeline leaves plenty of room for the neocons to knock on Trudea's door and shower gifts on an economy floundering on the verge of "Emerging Market" status (as HSBC analysts warned).

  

  

  

  

  

• Then It Was BlackRock, Now It's Blackstone But The Result Will Be The Same

  Whether one calls it the latest glitch in the matrix, or yet another “market peak” indicator, the outcome will be the same.

  First, a flashback to the following October 17, 2006 Bloomberg story when BlackRock together with Tishman, announced it would buy Stuyvesant Town for $5.4 billion:

  Tishman Speyer Properties LP, the owner of New York’s Rockefeller Center, and BlackRock Realty won the auction to buy MetLife Inc.’s Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex, for $5.4 billion.

   

  MetLife, the biggest U.S. life insurer, has been divesting Manhattan property holdings since last year, when it paid $11.8 billion for Citigroup Inc.’s Travelers Life & Annuity insurance business. MetLife sold its namesake building at 200 Park Avenue to closely-held Tishman Speyer in April, 2005, for $1.72 billion.

   

  “This is just a rare, rare opportunity” to buy 80 acres of Manhattan, said Robert White, president of Real Capital Analytics Inc., a New York-based real estate research firm. “Also, we’re in a period where a lot of real estate investors are flush with cash, so billion-dollar deals are not so uncommon anymore.”

   

  The sale may be the biggest real estate transaction in U.S. history, said Steve Murray, editor of Real Trends, a residential real estate communications company. The United States government paid $15 million for the Louisiana Purchase in 1803, the equivalent of $277 million in today’s dollars, according to the historical price calculator measuringworth.com. The median price of new homes in the U.S. was $237,000 in August, up .34 percent from $236,200 a month earlier, according to the U.S. Census bureau. The median price of Manhattan condos rose 1.5 percent to $990,000 in the second quarter from $975,000 in the first, according to Miller Samuel Inc., the biggest Manhattan appraiser.

  Fast forward 4 years to 2010 when Blackrock and Tishman admitted a complete loss on their “rare, rare opportunity” investment:

  The partnership that bought the 80-acre property on the East River announced on Monday that it was turning the keys over to its lenders after it defaulted on its loans and the value of the property fell below $2 billion. Yet in walking away, the partners, Tishman Speyer Properties and BlackRock Realty, have left tenants in limbo and other investors with far bigger losses.

   

  “At the time, it looked like a sound investment,” said Clark McKinley, a spokesman for Calpers, the giant California public employees’ pension fund, which bought a $500 million stake in the property. “When the market tanked, we got caught.”

  And then, today, only it is no longer BlackRock, now it is Blackstone which is again buying Stuy Town for the same amount: $5.3 billion.

  Blackstone, working with Canada’s Ivanhoe Cambridge Inc., will acquire the 80-acre (32-hectare) enclave for about $5.3 billion, the company and city officials said Tuesday. That’s just under the record $5.4 billion that prior owners Tishman Speyer and BlackRock Inc. paid almost nine years ago before walking away from the mortgage in 2010, marking one of the biggest collapses in the last decade’s real estate boom.

   

  Blackstone — which has built itself into the largest U.S. single-family home landlord and is bulking up an apartment business — made its first multifamily purchase in Manhattan in September, leading a venture that acquired 24 buildings for $690 million. Gray said this month that he was bullish on the borough’s rentals because it’s too costly for many residents to buy.

   

  The transaction was formally announced at a press conference Tuesday featuring New York City Mayor Bill de Blasio, Blackstone real estate chief Jon Gray and City Councilman Daniel Garodnick, a lifelong resident of Stuyvesant Town-Peter Cooper Village.

   

  “We can now say to thousands of hard working people, thousands of families in Stuytown: Your future is now secure,” de Blasio said from a courtyard in the complex, flanked by long-time tenants who just learned of the deal. “You can afford your housing for the long haul.”

  Actually no: “The deal includes an agreement that would keep almost half of the more than 11,000 apartments affordable for 20 years.” Which means more than half will suddenly become unaffordable, once Blackstone yanks rents through before the ink on the title deed is even dry.

  As for the obligatory forecast:

  Stuyvesant Town is “so big, it’s so well located, there’s still so much upside in it that someone is still going to make a lot of money if you hang in there,” said Peter Hauspurg, chief executive officer of brokerage Eastern Consolidated, who isn’t involved in the deal.

  Or just call it a “rare, rare opportunity”, again.

  And because this time is not different, we eagerly look forward to 2019 when Blackstone is BlackRocked, and it too, suffers a complete loss on its “rare, rare opportunity” investment.

  

  

  

  

  

• Confusion, Delusions, & Illusions

  Submitted by Jim Quinn via The Burning Platform blog,

  Two recent surveys, along with numerous other studies and data, reveal most American households to be living on the brink of catastrophe, but continuing to act in a reckless and delusionary manner. There have certainly been economic factors beyond the control of average Americans that have resulted in real median household incomes remaining stagnant for the last 36 years. The unholy alliance of mega-corporations, Wall Street and bought off corrupt politicians have gutted the nation of millions of good paying jobs under the guise of globalization, while utilizing debt, derivatives and financial schemes to enrich themselves. The malfeasance of the sociopathic privileged class does not discharge the personal responsibility of citizens for living within their means. A lack of discipline, inability to delay gratification, failure to understand basic mathematical concepts, materialistic envy, absence of critical thinking skills, and a delusionary view of the world have left the majority of Americans broke and in debt.

  The data that captured my attention was how little the average American household has in savings. Roughly 62% of Americans have less than $1,000 in savings and 21% don’t even have a savings account, according to a new survey of more than 5,000 adults conducted this month by Google Consumer Survey for personal finance website GOBankingRates.com. This dreadful data is reinforced by a similar survey of 1,000 adults carried out earlier this year by personal finance site Bankrate.com, which also found that 62% of Americans have no emergency savings for a medical crisis, car repair, or unanticipated household expenditure.

  

   

  The fact is these are not highly unlikely scenarios. They happen every day as part of our routine existence. Everyone gets sick. Every car eventually needs new tires or an engine repair. Every home will need a new hot water heater or roof at some point. It is foolish and short sighted to not expect “unexpected” expenditures. Living in the moment and fulfilling your immediate desires may feel good today, but leaves you susceptible to disaster tomorrow. Gradually building a rainy day fund over time is what adults should do. Only immature children operate with no safety net. Everyone has an excuse for why they end up living on the edge, but the data exposes us to be an infantile nation of spendthrifts incapable of distinguishing between wants and needs. It might be understandable for young adults who are burdened by student loan debt and entry level jobs to have little or no savings, but the data for older Americans is most disturbing.

  It seems 51% of all Generation X adults between the ages of 35 to 54, in the prime earning years of their lives, have ZERO savings, the highest among all age cohorts, with over 20% of them not even having a savings account. This is incomprehensible and reveals an almost juvenile approach to life. Approximately 70% of all 35 to 54 year old households have $1,000 or less in savings. These are people who should have been working for the last 10 to 30 years. To not have put aside more than $1,000 is beyond irresponsible, and the justification of earning no interest on savings is disingenuous as they could have earned 5% up until 2008. This shocking state of affairs can’t only be laid at the feet of the evil bankers and rich corporate titans.

  Every person has to accept personal responsibility for their own life. There is one sure fire way to accumulate savings and that is to spend less than you earn. It sounds simple, but the vast majority of Americans have chosen to live beyond their means by allowing themselves to be lured into debt by the Wall Street debt peddlers and their Madison Avenue media maggots selling dreams to willfully ignorant delusional consumers. Consumer dependent corporations hawking autos, electronics, glittery baubles, fashionable attire, toxic processed sludge disguised as food, and other slave produced Chinese crap, require a vast unlimited supply of easy money debt to keep profits rolling in. And the Federal Reserve has been willing and able to accommodate them.

  Those who control the levers of this perverted economic system utilize Fed easy money, propaganda advertising messages, and the susceptibility of an oblivious populace, suffering from delusions of grandeur, to create generations of debt enslaved hamsters running on the wheel of life. But, we were not forced into this enslavement. Millions have chosen to live lives of quiet desperation in order to keep up with the Joneses. They would rather portray themselves as successful and wealthy, rather than make the necessary sacrifices required to achieve success and wealth. Everyone has the ability to live beneath their means. Millions have made the choice to do so. The chart above shows 10% to 20% of people do have $10,000 or more in savings, including young people. Many are average middle class Americans, not the despised 1%.

  

  It is certainly not easy to accumulate savings in an economy stacked against the working middle class, but it is possible. It requires self-discipline, deferring gratification, patience, budgetary skills, staying employed, and not coveting your neighbors’ possessions. The lack of short-term savings is not an isolated data point. It is representative of a nation of narcissistic live for today ne’er-do-wells who rarely concern themselves with the future or the consequences of their actions. They haven’t been putting all their spare cash into their retirement plans either. When you realize the typical household between the ages of 35 to 54 has less than $10,000 saved for their retirement, the mass delusion becomes clear. How could Boomers, who have worked for 30 to 40 years, and experienced the greatest bull market in history (1981 – 2001) have only $12,000 of retirement savings as they approach retirement?

  

  These are median figures, so half the households have even less retirement savings. It requires decades of living above your means to accumulate such little in savings. The apologists for the non-saving masses often argue Americans were utilizing their homes as a store of wealth to be used in retirement. This is just another false storyline, as the savings poor public used their homes like an ATM machine from 2001 through 2008, extracting hundreds of billions to spend on granite countertops, exotic Caribbean vacations, home theaters, BMWs, Olympic sized pools, bling, and new boobs for mommy. Equity in homes plunged from 60% to below 40% in the space of a few years and has only recovered to 55% after the Fed induced faux housing recovery. There are still millions of homeowners underwater, with the next leg down guaranteed to add millions more.

  

  The millions of American households living on the edge and headed for a poverty stricken old age have a million excuses for why they never saved a dime. These are the same people who will demand the government save them from their own foolishness and irrational life choices. They will demand the rich (anyone who worked hard, saved, and planned for their future) be taxed more, so they don’t have to live with the consequences of their reckless disregard for common sense and self-discipline. These people should have read some Shakespeare in high school, and maybe they wouldn’t be in this predicament.

  “The fault, dear Brutus, is not in our stars, but in ourselves.” – William Shakespeare, Julius Caesar

  We are all responsible for our own lives and our own decisions. It isn’t complicated regarding how to save money. But it is hard. It requires simple math skills like addition, subtraction, multiplication and division – concepts not thought too important in our government controlled educational system. It requires self-control, acting like an adult, and distinguishing between what you want versus what you need. It’s OK to splurge once in a while, but since around 1980, multiple generations have been binge spending in an orgy of debt debauchery unmatched in human history. Since 1980 the U.S. population has gone up by a factor of 1.42, GDP has expanded by a factor of 6.3, and consumer debt has exploded by a factor of 10. The amount of consumer debt per person in 1980 was $9,300. Today, the total is an astounding $65,200 per person, a 700% increase in 35 years. We owe $21 trillion of mortgage, credit card, student loan and other debt to the felonious Wall Street bankers. This nation has gone insane.

  

  “In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule.” – Friedrich Nietzsche

  With a median household income of about $56,000 and median net wages per worker of $29,000 it is fairly easy to grasp the monthly inflow of a middle income household. In Median World, taxes will take about a 16% chunk out of those figures, so the median household ends up with about $4,000 of take home pay per month. If they own a median priced home of $189,000, their monthly mortgage payment would likely be about $850. Add another $200 to $300 per month for property taxes and you are on the hook for $1,100 per month. A median rent figure would be in the same ballpark, unless you live in SF, NYC or a few other overpriced markets. This is where many people go off course, allowing themselves to be lured into more house than they can really afford with low down payments guaranteed by the government, driving the monthly housing burden north of $1,500. McMansion envy has destroyed more lives in the last ten years than any other delusion.

  Food, clothing, utilities, and home upkeep expenses could total $1,500 per month for a family with kids. If one or both parents are stuck with student loan debt, a monthly payment of $200 to $400 would be normal. There isn’t much spare change left to fund their remaining needs, wants and desires. But their neighbors and coworkers are all driving new cars. They can’t be seen driving a used 10 year old clunker. People will think they’re poor. Shallow appearances are all that matter to a vast swath of America. According to Edmunds.com, the average monthly payment on a new vehicle is $479. We can’t have one spouse driving a new car, while the other slums it on public transportation, so two newer cars will add another $900 or so of expenses to the monthly budget.

  Wall Street and the automakers are only too glad to offer those with good credit a 7 year 0% loan, guaranteeing a permanent status of being underwater on your loan until you must have that new model after four years, rolling the underwater loan into the next purchase. The permanent leasers convince themselves they are making a good deal as they sign their lives away every three years without understanding the financial implications of the leases. And then there are the 20% subprime auto buyers who pretend to pay until the repo man shows up in the middle of the night. This delusion of debt is how annual auto sales have soared from 10 million in 2009 to almost 18 million today.

  

  I’m on the road every day and it is mind boggling to see the number of newer $30,000 to $50,000 vehicles cruising the highways and byways of America. Even in the poverty stricken neighborhoods of West Philly, brand new BMWs, Cadillacs, and other $25,000 or more vehicles are parked in front of dilapidated hovels and low income housing complexes. Virtually none of these vehicles are owned outright. Americans are essentially renting their luxury wheels so they can appear successful. The way to become financially successful on a modest income is to buy used cars and drive them for ten or more years. The years of no car payment can be directed into savings. Very few people chose this path. That is why auto loan debt has now exceeded $1 trillion, up 40% since 2010. Wall Street wants you in perpetual debt and millions have bought it hook line and sinker. But at least they appear prosperous to their neighbors, while they’re really in debt up to their eyeballs.

  

  The choice to indulge in driving over-priced ornamental transportation basically leaves the average household with little or no discretionary income at the end of the month. But that doesn’t stop spendthrift nation from becoming addicted to their mobile phones and binge watching reality TV. The average American, who had never heard of a mobile phone in 1990, now can’t go 20 seconds without checking their phone. And they are paying through the nose for the privilege of staying terminally connected. We have smart phones for dumb people. Even welfare recipients without jobs, living in low income housing and dependent on food stamps, somehow find the funds to have a smartphone in their hand 24/7. Maybe directing those funds towards books might give them a better chance of exiting poverty.

  In one survey, 46% of Americans with mobile phones said their monthly bill was $100 or more and 13% said their monthly bill topped $200 per month. The average individual’s cell phone bill was $73 per month last year, a 33% increase since 2009, according to J.D. Power & Associates. When they aren’t texting, tweeting, or facebooking on their iGadgets, they are watching basic cable boob TV at average price of $100 per month, up 39% since 2010. But our connoisseurs of crapola need the NFL Package, HBO, Showtime, Netflix, and on demand porno. Tricked out smart phones and cable packages are not necessities. They are wants. Wasting $200 to $300 per month on narcissistic compulsions is a choice.

  Possibly the largest squandering of resources occurs on a daily basis, as Americans spend money they don’t have on $5 lattes, toxic fast foodstuff, craft beers, and whatever else strikes their fancy. According to the most recent Bureau of Labor Statistics consumer expenditure surveys, the typical household spends $2,625 each year, or around $219 per month, on food away from home. Those in higher income brackets spend the most on restaurants at around $370 per month. Millennials, with the least amount of discretionary funds, view dining out as a social event, and choose fun and frivolity over finances. The concept of brown bagging your lunch for $1 rather than spending $10 at Paneras, or brewing a pot of coffee for 25 cents rather than paying $5 at Starbucks is inconceivable to the live for today credit card cowboys and cowgirls.

  

  Dining out is the ultimate personal choice and a huge factor in the non-existent savings of American households. Over the last two decades Americans have abandoned the frugality of buying food at the grocery store on sale, using coupons in favor of eating out at a hefty premium on a daily basis. The result has been a $10 billion gap in spending between groceries and dining out being obliterated by an army of live for today for tomorrow we can make the minimum payment on our credit card juveniles. Not only has this penchant for satiating their hunger contributed greatly to their lack of savings, but has been financed on their credit cards. That $25 Applebees dinner, financed at 18% interest over the next ten years ends up costing $54. Multiply this foolishness hundreds of times per year over decades and you understand why Boomers have less than $1,000 in savings accounts and $12,000 or less in retirement savings. It’s just math.

  

  The expenditures detailed above don’t include healthcare, entertainment, vacations, government extractions (tolls, fees, fines, taxes) and assorted other miscellaneous wastes of money. It is pretty clear the monthly outflow exceeds the monthly inflow for the majority of Americans. That is why the average household has credit card debt of $7,500 and those carrying a balance pay an average interest rate of 14% on their $16,000 ball and chain. This is on top of an average mortgage obligation of $155,000 and average student loan commitment of $32,000. The Wall Street hucksters are only too happy to help you finance a lifestyle well above your true means. They borrow from the Fed at .25% and charge you 10% to 20% for the use of credit created out of thin air. They always win. The willfully ignorant are thrilled they can now pay their IRS bill, property taxes, utilities, and just about every daily expense with a credit card. They fail to acknowledge the insanity of their chosen lifestyle path.

  I still remember something my sophomore English teacher Mr. McGrath taught the class, based upon the writings of Aristotle. Human beings are rational, sentient, living, corporeal substances. What separates us from animals is our ability to think and act in a rational manner, rather than just on instincts and urges. Based on what has occurred in this country over the last 35 years, I’m starting to question the rational part. It’s almost as if a mental illness has befallen a majority of Americans. The Deep State and their minions on Wall Street and the corporate media certainly attempt to mold and manipulate the minds of the masses, but at the end of the day people are free to disregard those messages and live meaningful lives on their own terms. Even though living above your means has become “normal”, it is only normal in relation to our profoundly abnormal society. Telling people the truth today is meaningless, as they don’t want their illusions destroyed. But destroyed they will be, when this teetering edifice of debt comes crashing down on their heads.

  “The real hopeless victims of mental illness are to be found among those who appear to be most normal. Many of them are normal because they are so well adjusted to our mode of existence, because their human voice has been silenced so early in their lives, that they do not even struggle or suffer or develop symptoms as the neurotic does.” They are normal not in what may be called the absolute sense of the word; they are normal only in relation to a profoundly abnormal society. Their perfect adjustment to that abnormal society is a measure of their mental sickness. These millions of abnormally normal people, living without fuss in a society to which, if they were fully human beings, they ought not to be adjusted.” – Aldous Huxley – Brave New World Revisited

  

  “Sometimes people don’t want to hear the truth because they don’t want their illusions destroyed.” – Friedrich Nietzsche

  

  

  

  

  

• Economists Stunned By "Irrational Consumers" Who Used Gas Savings To Buy More Expensive Gas

  Over the past year, we have repeatedly given the quantitative answer that has stumped so many: where did all those overhyped US “gas savings” go, because they certainly did not go into the broader economy, or toward discretionary purchases, as countless economists had said they would. The answer: more gas.

  Gallup confirmed as much most last week when it reported that Americans’ reported changes in spending have remained stable in most categories of goods and services over the past year – except for gasoline, with 35% reporting they spent more on gasoline in the August-September period.

  Paradoxically, Gallup found the inverse of what had become erroneous conventional wisdom: “not only were Americans not spending more, they are spending less than they did in the past year on discretionary purchases such as retirement investments, leisure activities, clothing, consumer electronics, dining out and travel.”

  But while we knew the quantitative answer, namely that Americans bought more gas with their gas savings, we were missing the qualitative one. Courtesy of the NYT we now learn that not only did consumers not redirect their spending to other discretionary items, but engaged in an act that has stunned economists around the globe: they don’t just buy more gasoline; they bought more expensive gasoline!

  And this is how a product that was essentially a staple good, suddenly provided the satisfaction of a discretionary splurge, even though it is virtually the same just more expensive.

  The NYT explain this observation which is just the latest mockery of macroeconomist models, and once again shows why theory never applies to the real world.

  A new report by the JPMorgan Chase Institute, looking at the impact of lower gas prices on consumer spending, finds the same pattern as earlier studies. The average American would have saved about $41 a month last winter by buying the same gallons and grades. Instead, Americans took home roughly $22 a month. People, in other words, used almost half of the windfall to buy more and fancier gas.

  The refiners will be delighted:

  We know how that extra money was probably spent thanks to a separate 2013 study by the economists Justine Hastings of Brown University and Jesse M. Shapiro of the University of Chicago, who got their hands on detailed accounts of the purchases made by 61,494 households at an unidentified retail chain that also sold gas.

   

  Professors Hastings and Shapiro showed that households adjusted their gas consumption much more sharply in response to changes in gas prices than in response to equivalent changes in overall income. In the fall of 2008, for example, as gas prices fell amid a broad economic collapse, consumers responded as if the decline of gas prices were the more important event, significantly increasing purchases of premium gas.

  And this is where the head of every tenured economist living in their ivory academic tower, and tweaking economic models they themselves created and thus know the goalseeked answer apropri based on their own preset assumptions, explodes.

  This is not rational behavior. Americans spent about 4 percent of pretax income on gas in 2014. One might expect them to spend about the same share of any windfall at the pump — maybe a little more because gas got cheaper. Instead they spent almost half.

   

  Americans, in short, have not been behaving like the characters in economics textbooks.

  Inconceivable: after all academic central planners are in charge of the entire world – what would happen if suddenly it becomes common knowledge that the entire “New Normal” experiment has failed because the lifetime academic hacks inside the Marriner Eccles building don’t realize their theoretical models have zero applicability in the real world?

  At least when it comes to the “premium gas” paradox, there is an explanation:

  Researchers have found that people treat money as earmarked for particular kinds of spending, a tendency behavioral economists call “mental accounting.” If someone is buying rounds at the neighborhood bar, people tend to treat the money they didn’t spend as “beer money,” and sooner or later they tend to spend it disproportionately on beer. As a result, they end up drinking more beer than they had originally intended.

   

  The JPMorgan study compares gas spending between December 2013 and February 2014, when prices averaged $3.31 a gallon, with gas spending by the same people in the same period one year later, when average prices were one dollar lower. The study found that the average American spent $136 per month on gas during the high-price period and $114 per month on gas during the low-price period. While the price of gas fell by roughly 30 percent, spending on gas declined by only 16 percent.

   

  The study, based on the spending patterns of about one million JPMorgan customers, does not track the kind of gas consumers purchased. It shows that people bought more gas as prices fell, and that the increase in consumption is not sufficient to explain the entirety of the increase in spending on gas.

  And perish the thought someone actually saved it, but no fear: the upcoming negative interest rates will surely fix that pesky glitch in the economists’ model. Unless they don’t, and economists end up scratching their heads at even more “irrational” behavior:

  Moreover, this behavior was prevalent: 61 percent of the households made at least one irrational gas purchase. People “treat changes in gasoline prices as equivalent to very large changes in income when deciding which grade of gasoline to purchase,” they wrote.

  At the end of the day, though, the joke is on the consumers themselves: as the FTC notes, for most modern cars “splurging” on premium gas is usually a waste of money. At least the refiners are laughing all the way to the bank, as economists the world over continue to scream that any minute now “irrational” consumers will finally make the spreadsheet’s life easier, and engage in rational behavior.

  

  

  

  

  

• How The Entire Short Volatility ETF Complex Could Be Wiped Out Overnight

  Excerpted from Artemis Capital Management letter to investors,

  Global central banking has artificially incentivized bets on mean reversion resulting in tremendous demand to short volatility.  The growth of short volatility exchange traded products (“ETPs”) since 2012 is nothing short of extraordinary and at the end of August, total short volatility assets exceeded long for only the second time in history. The rise of this short complex is intrinsically linked to the recent schizophrenic behavior of the VIX and adds significant shadow convexity to markets.

  

  Velocity Shares Daily Inverse VIX (“XIV”) is the largest of these short VIX ETPs and has a cult-like following among day traders. Although the product has gained +111% since 2012, when decomposed on a risk-adjusted basis, it basically resembles a 3x levered position in the S&P 500 index with more risk. As the short and leveraged volatility complex becomes more dominant it is contributing to dangerous self-reinforcing feedback loops with unknowable consequences.

  

  Many retail investors simply do not understand that short and leveraged volatility ETPs rebalance non-linearly (see below). To the casual observer it may appear that short and long assets counterbalance one another but this is not the case. For example if the first two VIX futures move 20% higher the short volatility ETP providers must buy an estimated 33% more volatility (vs. 25% for long) to balance that exposure. The first rule of derivatives hedging is that you never hedge a non-linear risk with a linear tool.  The mismatch means a large move in spot-volatility in either direction requires excessive buying or selling pressure whenever short volatility assets are dominant. Therein lies the problem. Falling volatility begets falling volatility and rising volatility begets rising volatility.

  

  The great unknown is that this massive short volatility animal that appears tame given a regular diet of central bank liquidity may turn wild when that liquidity is removed. The wrong ‘risk-off’ event may expose a hidden liquidity gap in the short VIX complex that could unleash a monster. Artemis has attempted to quantify this theoretical liquidity gap by gauging the percentage of VIX open interest and volume required by exchange-traded products for rebalancing.

  

  During recent market stress points such as October 2014 and August 2015 the short and leveraged volatility ETP complex required upward of 40-50% of the total liquidity of VIX futures as measured by average trading volume and open interest. Consider that the largest one day VIX move in history was the +64% jump that occurred on February 27, 2007 when the VIX went from 11.15 to 18.31. This was not even a period of high financial stress! If a similar volatility spike occurred today, given the current size of the short VIX complex, the ETPs by themselves would require an estimated 95% of the liquidity for rebalancing!

  This would drive the price of the VIX futures up further exacerbating the nonlinearity. The VIX futures market may struggle to absorb the demand for long volatility. Dealers seeking to plug the liquidity gap would purchase S&P 500 options and forward variance swaps. The excess buying pressure exerted from the short-volatility complex would then push spot-VIX higher contributing to panic selling in the underlying S&P 500 index and a vicious and self-reinforcing cycle of fear followed by horror.

  The recent bi-polar behavior in spot-VIX empirically supports the theory that a structural weakness now exists in this market by crowding of short volatility players. The shot across the bow for the short volatility complex came during the August 24th correction when SPX futures opened limit down and the CBOE struggled for 30 minutes to calculate the VIX. By the time the VIX level was finally calculated it opened 25 points higher at 53.29, before falling to 28 intra-day, then rebounding to 40.74 by the close, with the S&P 500 index down -3.9%.

  At the time of the crash, the assets in long VIX ETPs outnumbered shorts on a two to one basis however, the complex still required an estimated 25% to 46% of market liquidity between August 21 and 24th.  Markets delivered historic volatility-of-volatility despite relatively mild historical declines in the S&P 500 index.  It is important to understand that markets have experienced much more dramatic oneday losses across history than what occurred in August 2015. For example on August 8th 2011, the market suffered a oneday decline of -6.7%. September to December 2008 experienced ten declines of more than -5%, and on Black Monday 1987, the market fell an incredible -20.5% in one day. During the Black Monday 1987 crash implied volatility in the S&P 100 index more than tripled going from 36.37 to 150.19.

  If the VIX experienced any of these historic moves at current levels of short convexity the entire $2bn+ short volatility ETP complex would likely be wiped out overnight.

  Short volatility sellers ridicule the fact that the prospectus for the iPath Long Volatility ST Index (VXX) clearly states that the ETF has an expected long-term return of zero. They should ask themselves, is it better to know with certainty you are going to go bankrupt slowly, or be completely ignorant of the fact you will go bankrupt suddenly. 

  

  

  

  

  

• Bonds & Stocks Drop Amid Crude Carnage; Bills, Biotechs, & Big-Boy-Toys Battered

  For everyone who rushed to the safety of stocks as T-Bills collapsed on US default fears…

   

  The moment when reality sets in… Stocks suddenly realize that a collapsing T-Bill market is NOT bullish…

  

   

  The last time 1-month yields were in this panic mode, VIX was over 20…

  

  *  *  *

  Trannies love weaker crude prices today… (guess what happens next)

  

   

  and algos did their best to drag stocks back to unch (Nasdaq was ugly – see below)…

  

   

  The last two days have been somewhat crazy in terms of equity futures swings…

  

   

   

  The last few days have been very 'odd' in VIX with gaps and craps everywhere…

  

   

  FANGs FUBAR…

  

   

  Biotechs Brusied…

  

   

  HOG Hammered…

  

   

  Tesla Tanked…

  

   

  "You get a short squeeze, you get a short squeeze… everyone gets a short squeeze"

  

   

  Treasuries were broadly ugly today… with the same selling until Europe closese pattern…

  

   

  As 10Y yield caught up to stocks OPEX-ramp (note we have seen this flush before, right before stocks give way)…

  

   

  The USD dumped and pumped to end the day unchanged against the majors… with JPY weakness pumping up stocks…

  

   

  But the USD held on to gains against Asian FX…

  

   

  Commodities were mixed with precious metals drifting higher (even as the USD gained) while crude tumbled… (of course the post-NYMEX close panic-buying ramp happened)

  

   

  WTI Crude (Dec contract) hit its lowest since October 2nd intrday today…back below $46…and back below the crucial 50DMA

  

   

  And Oil volatility and the underlying ETF are converging…

  

   

  Charts: Bloomberg

  Bonus Chart: In case you needed reminding.. fun-durr-mentals

  Still a divergence on borrowed time pic.twitter.com/KSXIx83PMD

  — Not Jim Cramer (@Not_Jim_Cramer) October 17, 2015

  

  

  

  

• Ferrari Prices IPO At $52 (Upper End Of Range), Raises $893 Million

  With the ticker symbol RACE, what could possibly go wrong?

  With Tesla tanking, what better option that this…

  • *FERRARI RAISES $893 MLN PRICING SHARES IN IPO
  • *FERRARI PRICES 17.18 MLN SHRS AT $52 EACH IN U.S. IPO AT TOP OF RANGE ($48-52)

  There was some talk of a higher price…

  • *FERRARI IPO EXPECTED TO PRICE AS HIGH AS $53/SHR: CNBC

  We just wanted an excuse to post pictures of the cars…