• Putin Is Winning The Final Chess Match With Obama

  Submitted by Ron Holland via PravdaReport.com,

  The world press is filled with violence and sexual attack horror stories about the Islamic refugees escaping from Syria and other war torn countries of the Middle East to Greece and consequently flooding into all areas of Europe. It is actually very easy to travel from Syria to Lebanon and then take the ferry to Turkey and from there to Greece and subsequently the mainland overland to Europe. This is now big business organized like a one-way tour package from the Middle East to Europe.

  Although there obviously are some ISIS fighters and Islamic militants slipping into Europe under cover of the humanitarian crises most are simply Sunni Moslems escaping the poverty, death and destruction of foreign military intervention in the region. Yes the sex crimes are a real problem because the majority of those escaping the region are men looking for work coming from a conservative society to the open societies of Europe.

  Most immigrants enter Europe through the economic basket case of Greece where the economy has already been destroyed by too much government debt, corruption and EU banking excesses so Greece can afford to do little to stem the Islamic refugee tide. While a case can be made that the location of Syria and Lebanon adjacent to Turkey and the ease of transportation to Greek islands just offshore is helping the flow to Europe. Still the organized nature of the operation makes me wonder if this is also an undercover operation designed to create a new mission for NATO at the same time weakening the economy of Europe to further Washington's economic interests today in the Obama Crash of 2016.

  The world is now in recession at best and maybe flirting with a global depression. This means politicians will do what is best for their national political future and the consequences for the national economy, citizens or business future is of little consequence to them. This also suggests that global alliances will mean little when domestic national politicians are fighting for survival.

  Here is how the chess matches have turned out so far in the Putin/Obama competition.

  Chess Match 1 – Consider the pattern of Washington actions against Russia. First Washington supported the overthrow of the legitimate but pro Russian government of Ukraine. The goal was three fold, first to control and cut off Russian gas exports to Europe through Ukraine, second to force Russia to vacate their warm water naval base in Crimea or else act militarily against Ukraine and create the fear of a Russian threat against all of Europe. This would force Europe to depend more on NATO that is an extension of the American military power in Europe. Putin's response was checkmate, as he wisely didn't take the bait and this plan failed to create the desired Russian military threat to strengthen NATO and US leadership in Europe against Russia.

   

  Chess Match 2 – The second attempt was to overthrow Assad allowing ISIS to do the dirty work thus opening up a Qatar gas pipeline to Europe again competing with and ending European dependence on Russian gas. This would have meant curtailing much of the Russian gas profits, taxes and government revenues. Again surprisingly Putin acted to defend Syria and Assad from ISIS and again Putin checkmated Washington.

   

  Chess Match 3 – We are now in the middle of the third chess game between Putin & Obama. This game is the reason for Washington's destruction and desolation of much of the Middle East. Again remember Washington's foreign policy objectives are to control Middle East energy resources and force Russia to stand down against American global hegemony.

  A strong and united NATO is necessary to put pressure on Russia and since the collapse of communism and the perceived Soviet threat to Europe, NATO has had little reason to exist. Well now I would suggest that part of the Islamic threat and massive movement of refugees to Europe is being manipulated and manufactured as a means to recreate a mission for NATO forces in Europe. A strong Washington led NATO will allow the United States to bring more pressure against Russia.

  If I am right here, then what is the checkmate course of action for Russia in Syria and Lebanon? The ultimate solution is for Russia to stop the movement of refugees and Islamic radicals to Europe by forcing ISIS out of Syria and back into Iraq and effectively blocking off the escape routes to Turkey both overland and by ferry.

  This would probably take more than just Syrian troops as it may mean Russian troops on the ground in both countries after military security requests from Syria and Lebanon to halt the exodus and end ISIS occupation of Syria. Security in Syria and Lebanon would help to halt the refugee flow to Europe and Putin and Russia would then get the credit they deserve for this action to protect Europe. This successful outcome would guarantee good relations between the people of Europe and Russia ultimately forcing more European politicians and governments to restore friendly and close relations with Putin's Russia.

  This would be the final checkmate needed to force the Obama Administration to reevaluate Neocon policies in the Middle East. American military actions and occupation have already destroyed much of the prosperity of the region. When this is combined with our earlier attempt to weaken Russia and Iran with lower oil prices not taking into account the growing threat of global recession and depression the problem today only gets worse. Today the Middle East is looking at increased instability and a lower standard of living at a time when Europe is suffering economically and can not absorb the inflow of refugees.

  Finally, take a look at a map of Europe and you will see the 28 members of the European Union and most are in NATO. Then look at the lone country not in the EU or NATO that can still control it's borders and policies and it is the neutral but still independent Switzerland. Neutral Switzerland can be a safe haven for your personal and retirement wealth in the coming global crash and depression.

  Yes Russia and Europe would do well to work together to counter and halt the flood of Middle East refugees to Europe before the current global recession/depression destroys the prosperity of the region. While the refugee threat might have been a reasonable tool or Washington geopolitical tactic to restore NATO and therefore American leadership over Europe under normal economic conditions, the situation is now getting out of control. With today's global economic slowdown and the risk of depression threatening the economy of Europe this tactic borders on economic genocide for Europe and must be countered and restrained for the peace and prosperity of the region. Let us all work together and hope and pray that the Obama Crash of 2016 does not turn into the Obama Global Depression of 2016 because of some poorly timed geopolitical brinkmanship and maneuvering suggested by Washington neocon advisors.

  

  

  

  

  

• John Kerry Can't Understand Why Hezbollah Needs "80,000 Rockets"

  As those who follow Syria’s seemingly intractable civil war are no doubt aware, Washington is a big part of why the conflict is now going into its sixth year.

  What began as a plan to destabilize the Alawite government by “playing on Sunni fears of Iranian influence” (to quote a leaked diplomatic cable from then-Deputy Chief of Mission in Syria William Roebuck) gradually metamorphosed into a overt and at times absurd effort to arm and train a series of rebel groups in an attempt to bring about regime change in Damascus.

  Those efforts have thus far failed, in part because of how poorly the programs were orchestrated and implemented and in part due to Russian and Iranian intervention on behalf of the SAA.

  But even as the US hasn’t succeeded in overthrowing Assad (which, incidentally, may mean that Washington has finally met its Waterloo when it comes to meddling in the affairs of Mid-East politics), America has done an admirable job of exacerbating an already hopeless situation by funneling billions in funding and arms to the mishmash of Sunni rebels battling for control of the country.

  You’ll recall that the US effort to supply Syrian rebels with weapons went full-metal-retard in October when the Pentagon resorted to dropping 50 tons of ammo into the middle of the desert on 112 pallets.

  

  As Vladimir Putin dryly noted at the time, that’s probably not the best idea considering there’s really no way of knowing who is going to pick the arms up.

  On Friday, in a hilarious example of Washington and Riyadh’s penchant for blatant hypocrisy, John Kerry and Saudi foreign minister Adel al-Jubeir told reporters after a meeting with the six-nation Gulf Cooperation Council that they are concerned about Iran’s support for “terror groups” and specifically about Tehran supplying Hezbollah with rockets.

  “The United States remains concerned about some of the activities that Iran is engaged in in other countries,” Kerry said, with a straight face.

  

  “Iran remains the world’s chief sponsor of terrorism,” Jubeir said. “Overall I think the United States is very aware of the danger of Iran’s mischief and nefarious activities… I don’t believe the United States is under any illusion as to what type of government Iran is.”

  It’s difficult to overstate how absolutely ridiculous that is. Jubeir is the top diplomat for a state that just beheaded 47 people not three weeks ago and which has a human rights record so abysmal that it’s become something of a standing joke in foreign policy circles.

  Worse still, the sponsorship of terror isn’t just an explicit foreign policy aim in Riyadh, it’s actually enshrined into the country’s collective psyche via the promotion of Wahhabism. Remember, ISIS and al-Qaeda follow Riyadh’s brand of Islam, not Tehran’s.

  But the real kicker came when Kerry decided to comment on the supply of weapons to Hezbollah through Syria.

  “These are concerns that we share, which is why the arms component, the missile component, the human rights component, the state sponsor of terror component are all part of the continued sanctions of the United States and the agreement,” Kerry remarked before posing the following question: “I mean, Hezbollah has 70-, 80,000 rockets. What do they need that for?”

  Well John, for one thing they are mired in a prolonged war of attrition with the Israelis who possess one of the most efficient militaries on the face of the planet. That conflict had quieted down since 2006 but when the IAF assassinated Samir Qantar late last month, hostilities escalated anew.

  But on top of that, Hezbollah is also fighting to stabilize a country the US and its regional allies thrust into chaos. Thanks to the fact that the US, Saudi Arabia, Turkey, and Qatar are sending weapons to the rebels, Iran has to send weapons to Hezbollah. Why arming Sunni extremists counts as “supporting the democratic resistance” while sending rockets to Hezbollah is “mischievous and nefarious” is a complete mystery.

  Indeed, we might ask Kerry the very same question he’s asking us.

  “I mean come on John, Sunni militants in Syria have thousands of TOWs. What do they need that for?”

  Oh, that’s right.

  They need them to destroy Russian search and rescue helicopters.

  

  

  

  

  

• "But It's Only A Manufacturing Recession, What's The Big Deal" – Here's The Answer

  Despite the services economy starting to turn down towards manufacturing's inevitable recessionary prints, there remains a hope-strewn crowd of status-quo face-savers desperately clinging to the linear-thinking "but manufacturing is only 12% of economic output and thus is no longer a good bellwether for the overall economy" narrative. Here is why they are wrong not to worry…

   

  On the left below, we see the mainstream media's perspective on why a collapse in manufacturing "doesn't matter" and you should buy moar stocks.

  On the right below, we see why it does… especially since the "doesn't matter" narrative is used only to justify buying moar stocks…

  

  h/t @Spruce_gum

   

  Which explains why this is happening!!

  

  Self-destructing The Fed's very own wealth-creation scheme.

  While it is hoped that the economy can continue to expand on the back of the "service" sector alone, history suggests that "manufacturing" continues to play a much more important dynamic that it is given credit for.

  The decline in imports, surging inventories, and weak durable goods all suggest the economy is weaker than headlines, or the financial markets, currently suggest. And in fact, services are starting to follow…

  

   

  Of course, as we previously concluded, while recessions are "needed," public opinion is generally quite simple in regard to recession: upswings are generally welcomed, recessions are to be avoided. The “Austrians” are however at odds with this general consensus — we regard recessions as healthy and necessary. Economic downturns only correct the aberrations and excesses of a boom. The benefits of recessions include:

  • Sclerotic structures in the labor market are broken up and labor costs decline.
  • Productivity and competitiveness increase.
  • Misallocations are corrected and unprofitable investments abandoned, written off, or liquidated.
  • Government mismanagement of the economy is exposed.
  • Investors and entrepreneurs who were taking too great risks suffer losses and prices adjust to reflect consumer preferences.
  • Recessions also allow a restructuring of production processes.

  At the end of the corrective process, the foundation for a renewed upswing is more stable and healthy. We thus see deflationary corrections as a precondition for growth in prosperity that is sustainable in the long term. Ludwig von Mises understood this when he observed:

  The return to monetary stability does not generate a crisis. It only brings to light the malinvestments and other mistakes that were made under the hallucination of the illusory prosperity created by the easy money.

  However, in addition to leading to true temporary hardship for the malinvestment-affected areas of the economy, an economic recession in the near future would represent a harsh loss of face for central bankers. Their controversial monetary policy measures were justified as an appropriate means to nurse the economy back to health. That is, their efforts to end or avoid helpful recessions were claimed to contribute to the eagerly awaited self-sustaining recovery.

  

  

  

  

  

• The Institutionalized Looting Of America

  Submitted by Jesse via Jesse's Cafe Americain blog,

  "Give a small number of people the power to enrich themselves beyond everyone's wildest dreams, a philosophical rationale to explain all the damage they're causing, and they will not stop until they've run the world economy off a cliff."

  Philipp Meyer

   

  "Wall Street is not being made a scapegoat for this crisis: they really did this."

  Michael Lewis

   

  "My daughter asked me when she came home from school, “What’s the financial crisis?” and I said, it’s something that happens every five to seven years."

  Jamie Dimon

   

  "The greatest tragedy would be to accept the refrain that no one could have seen this coming, and thus nothing could have been done. If we accept this notion, it will happen again."

  Financial Crisis Inquiry Commission (2009–2011)

  The US has been in a cycle of bubbles, busts, and crashes since at least 1995, and more likely since Alan Greenspan became the Chairman of the Federal Reserve in August, 1987.

  The cycle is the same, only the depth and duration seems to change in a continuing 'wash and rinse' of the public money and the real economy.

  It has become a machine for transferring income, wealth, ownership, and power to the very top.

  This is not 'the new normal.'   This is financial corruption and the erosion of systemic integrity.

  

   

  Are there any markets that have not been shown to have been systematically manipulated, for years?

  This is just institutionalized looting.

  

  

  

  

  

• Energy Creditors Lucky To Recover 15 Cents On The Dollar In Bankruptcy

  This past Wednesday, we reported that in the latest twist of the energy sector collapse, liquidating oil and gas producers, and specifically their creditors, got a nasty lesson in trough cycle asset values when in one after another bankruptcy “stalking horse” aka 363 auction, they were not only unable to cover the outstanding debt (both secured and unsecured) through asset sales, but barely able to cover a tiny fraction of it.

  “A lot of people got into this business and didn’t really understand the ups and downs of price cycles,” said Becky Roof, a managing director for turnaround and restructuring with the consulting firm AlixPartners. “They’re getting a very bad dose of reality right now.”

  Becky is right as the following bankruptcy liquidation sales tabulated by Bloomberg demonstrate:

  • Dune went belly up owing $144.2 million. Its assets sold for $20 million.
  • In May, American Eagle Energy Corp. filed for bankruptcy with debts of $215 million. Its properties sold for $45 million in October.
  • BPZ Resources Inc. owed $275.2 million. Its assets fetched about $9 million.
  • Endeavour International Corp. went into bankruptcy owing $1.63 billion. The company sold some assets for $9.65 million and handed over the rest to lenders.
  • ERG Resources LLC opened an auction with a minimum bid of $250 million. Response? No takers.

  Then earlier today we learned that as part of its 363 Asset Sale, the 3rd largest bankruptcy of 2015 after Samson Energy and Sabine Oil, that of Quicksilver, the estate was only able to collect $245 million in cash proceeds from BlueStone Natural Resources. With $2.35 billion in debt, Quicksilver was one of the first casualties of the energy bust when it filed on March 17, 2015. Today’s news means that the recovery for its creditors is a paltry 10 cents on every dollar of total debt, most of which will go to partially satisfy secured claims.

  The problem as the chart below shows is that these bankruptcy auctions confirm recoveries on existing debt will be paltry, and based on our limited dataset, average to roughly 15 cents on total debt exposure, which includes both secured and unsecured debt.

  

   

  The good news is that our data set won’t remain limited for long.  Here are several charts from Haynes and Boone showing why all those bankruptcy lawyers and financial advisors who were sitting back twiddling their thumbs for so many years, are now fully back in business.

  First, the cumulative North American E&P bankruptcy filings, with some of the most notable filers for any given month:

  

  Next, the cumulative debt that was gone “under” in the past year: some $17.2 billion:

  

  Finally, the full list of all 2015 bankruptcies as of January 6.

  

  In other words, the energy bankruptcy party is only just starting.

  As a reminder, there are currently over 60 companies accounting for $325 billion in debt which are cash flow negative, a number which is about to surge as oil price hedges expire, unless of course oil manages to soar from here. If only 10% of these companies file in 2016, that would mean a doubling of the total amount of defaulted debt in 2015, and a shock to the entire US banking system which despite what it would like you to believe, it very much exposed to the next big default wave.

  It’s only downhill from there.

  

  

  

  

  

• ObamaTrade Will Cost 448,000 American Jobs, New Study Finds

  Submitted by Derrick Broze via TheAntiMedia.org,

  One of the major purported selling points for the Trans-Pacific Partnership (TPP) is a supposed increase in new jobs as a result of the controversial trade deal. The deal involves 12 nations, including the U.S., Australia, Canada, New Zealand, Japan, Malaysia and more. However, two recent economic reports have contradicted the claims that jobs will increase. They have shown that, more than likely, the deal will lead to a loss of jobs.

  First there was a World Bank report that predicted that TPP would produce negligible boosts to the economies of the U.S., Australia, and Canada. TechDirt writes:

  “So according to the World Bank’s figures, the U.S. will gain an extra 0.04% GDP per year on average, as a result of TPP; Australia an extra 0.07% annually, and Canada a boost of 0.12% per year.”

  This study was followed up by a review from Jerome Capaldo and Alex Izurieta at Tufts University. In a study titled “Trading Down: Unemployment, Inequality and Other Risks of the Trans-Pacific Partnership Agreement,” Capaldo and Izurieta claim their study uses a more realistic model than past analyses. Specifically, the researchers state that their model incorporates effects on employment that were previously excluded from TPP calculations.

  Their study found that economic growth is likely to be limited — and negative — for some countries, including the United States. The researchers also found the TPP would probably lead to increased unemployment and inequality. Capaldo and Izurieta explained:

  “The standard model assumes full employment and invariant income distribution, ruling out the main risks of trade and financial liberalization. Subject to these assumptions, it finds positive effects on growth. An important question, therefore, is how this conclusion changes if those assumptions are dropped.”

  In the paper, the two researchers state that changes in GDP growth are “mostly projected to be negligible.” After using two sets of growth figures, ten-year measurements, and annual averages, they concluded the TPP “appears to only marginally change competitiveness among participating countries. Most gains are therefore obtained at the expense of non-TPP countries.”

  The fact that any gains — however negligible — will come at the cost of non-TPP countries should be a warning to all nations of the world, especially those who do not stand to benefit from the agreement. Concerning predictions of actual job losses or gains, the researchers write, “TPP would lead to employment losses in all countries, with a total of 771,000 lost jobs. The United States would be the hardest hit, with a loss of 448,000 jobs.”

  Finally, the researchers draw harrowing conclusions about the end result of the TPP.

  “Globally, the TPP favors competition on labor costs and remuneration of capital. Depending on the policy choices in non-TPP countries, this may accelerate the global race to the bottom, increasing downward pressure on labor incomes in a quest for ever more elusive trade gains.”

  This latest analysis of TPP job claims is even more dismal than a February 2015 analysis by the Washington Post, which revealed the U.S. government’s numbers on expected job increases from the TPP are not factually correct. The Post’s Fact Checker examined several quotes from government officials, including Secretary of State John Kerry and Secretary of Agriculture Tom Vilsack. Both Kerry and Vilsack claimed the international trade agreement would create 650,000 new jobs. However, these numbers do not take into account income gains and changing wages. According to the government’s own sources, imports and exports would increase by the same amount — resulting in a net number of zero new jobs.

  The TPP has faced criticism for several years, not least because it has been negotiated in secret with overwhelming influence from multinational corporations. In late June 2015, President Obama signed into law the so-called “fast-track” bill, which set the stage for approval of the TPP. “Fast-track” limits Congress’ ability to alter the provisions of the trade deal, and only allows a vote of yes or no. The final terms of the deal were agreed upon in October 2015, and the full text of the agreement was released in November. The earliest Obama can sign the deal is February 4, 2016.

  Following the release of the text of the TPP, journalist James Corbett released an excellent report examining the effects of the proposal. Corbett concludes that the most egregious portions relate to the Investor-State Dispute Settlement (ISDS) Mechanism, intellectual property, and food safety standards.

  According to the report, ISDS will give corporations loopholes to escape accountability and empower international bodies, overriding the national sovereignty of signing nations. Under ISDS, foreign corporations would be allowed to appeal legal decisions to international tribunals, rather than face domestic courts. Critics fear this could lead to a loss of sovereignty and the enrichment of transnational corporations.

  In late 2015, Anti-Media reported the TPP might not be voted on until after the 2016 presidential elections, or possibly into the next presidential term, according to Senate Majority Leader Mitch McConnell.

  In an interview with the Washington Post, McConnell said he does not support the idea of voting on the TPP before the election. “It certainly shouldn’t come before the election. I don’t think so, and I have some serious problems with what I think it is,” he said. “But I think the president would be making a big mistake to try to have that voted on during the election. There’s significant pushback all over the place.”

  “We will continue working with Congressional leaders to pass the Trans-Pacific Partnership as soon as possible next year,” Brandi Hoffine, a White House spokeswoman, told the Post on Thursday. On Friday, White House Press Secretary Josh Earnest told reporters, “Our view is that it is possible for Congress to carefully consider the details of this agreement and to review all the benefits associated with this agreement … without kicking the vote all the way to the lame-duck period.”

  Recently, the Electronic Frontier Foundation also released a report on the dangers of the TPP. EFF writes:

  “Everything in the TPP that increases corporate rights and interests is binding, whereas every provision that is meant to protect the public interest is non-binding and is susceptible to get bulldozed by efforts to protect corporations.”

   

  The EFF’s report offers “a list of communities who were excluded from the TPP deliberation process,” and examples of “the main ways that the TPP’s copyright and digital policy provisions will negatively impact them.”

  These communities include Innovators and Business Owners; Libraries, Archives, and Museums; Students; Impacts on Online Privacy and Digital Security; Website Owners; Gamers; Artists; Journalists and Whistleblowers; Tinkerers and Repairers; Free Software; and Cosplayers and Fans of Anime, Cartoons, or Movies.

  Before the deal was signed, fifteen different organizations issued an open letter asking TPP negotiators to provide public safeguards for copyrighted works. These groups include Australian Digital Alliance, Consumer NZ (New Zealand), Copia Institute (United States), Creative Commons (International), Electronic Frontier Foundation (United States, Australia), Hiperderecho (Peru), Futuristech Info (International), Global Exchange (International), iFixit (International), New Media Rights (United States), ONG Derecho Digitales (Chile), Open Media (Canada), Public Citizen (United States), and Public Knowledge (United States).

  The authors of the letter state copyright restricts important, everyday use of creative works. The groups call on the negotiators to be open to new changes that require participating nations to develop balanced and flexible rules on copyrights. Also highlighted in the letter are four key concerns from the organizations, including retroactive copyright term extension, a ban on circumvention of technology protection measures, “heavy-handed criminal penalties and civil damages,” and trade secret rules that could criminalize investigative journalism and whistleblowers reporting on corporate wrongdoing.

  As the EFF writes, “Despite its earlier promises that the TPP would bring ‘greater balance’ to copyright more than any other recent trade agreement, the most recent leak of the Intellectual Property chapter belies their claims. The U.S. Trade Representative (USTR) has still failed to live up to its word that it would enshrine meaningful public rights to use copyrighted content in this agreement.”

  The TPP is not only facing resistance from electronic privacy groups, but from grassroots activists and concerned professionals around the world. Both the Anglican and Catholic churches of New Zealand have demanded governments be more transparent about the negotiations. Radio NZ reports that bishops from the churches are concerned with the lack of openness. They are worried corporate interests are influencing the agreement while the people are excluded. The churches also called on the New Zealand government to make the draft text of the agreement public.

  Doctors Without Borders released a statement following the conclusion of negotiations:

  “Doctors Without Borders/Médecins Sans Frontières (MSF) expresses its dismay that TPP countries have agreed to United States government and multinational drug company demands that will raise the price of medicines for millions by unnecessarily extending monopolies and further delaying price-lowering generic competition. The big losers in the TPP are patients and treatment providers in developing countries. Although the text has improved over the initial demands, the TPP will still go down in history as the worst trade agreement for access to medicines in developing countries, which will be forced to change their laws to incorporate abusive intellectual property protections for pharmaceutical companies.”

  In early February 2015, doctors and health professionals representing seven countries released a letter warning the TPP will lead to higher medical costs for all nations. The letter, published in the Lancet Medical Journal, states, “Rising medicine costs would disproportionately affect already vulnerable populations.” Those doctors called on the governments involved in the trade deal to publicly release the full text of the agreement. They also demanded an independent analysis of the effects on health and human rights for each nation involved in the deal.

  

  

  

  

  

• How Billionaires Are Investing In 2016: "The Only Winning Move Is Not To Play The Game"

  Ever since 2009, when we first showed how broken the capital markets are first at the micro level, thanks to the pervasive spread of parasitic, frontrunning algos, and then at the macro, as a result of constant, artificial central bank intervention and levitation, we have advised readers that the best option is to simply avoid rigged, manipulated markets altogether. Now, 7 years later, the world’s richest people agree.

  Remember when we warned virtually every single day for the past 7 years that constant central bank and HFTs manipulation will lead to a market so broken nobody will have any faith in price discovery or asset valuation until everything collapses and is rebuilt from scratch? Well, we are delighted to announce that this is now conventional wisdom, and as a result every so-called “prominent investor” is now resistant to putting on fresh positions and expected asset prices to head downward, according to the WSJ.

  In short, they say, the only winning move is not to play the game.

  It’s not just that: according to WSJ reporting from the just concluded symposium of billionaires, prominent investors and other hypocrites in Davos, the consensus is that “the world’s central banks can’t save us anymore.”

  The next WSJ sentence is absolutely epic: “Their mood here was irritated, bordering on affronted, with what they say has been central-bank intervention that has gone on too long.”

  Oh yeah, they had no problem with central bank intervention for 1, 2, 3, 4, 5, or even 6 consecutive years… but seven? Now that’s just absurd!

  The WSJ goes on to vindicate all so-called tinfoil fringe websites by admitting that “from this anecdotal sampling, at least, that has created growing distortions in nearly all asset prices—from stocks to bonds to real estate.“

  But… fundamentals?

  Great job central bankers and other central planners: the one thing you just had to save at any cost, the market, pardon the “market”, even if it meant crushing the middle class, is no longer credible – not even to the smartest people in the room.

  “The trade now is to hold as much cash as possible,” said Nikhil Srinivasan, chief investment officer for Generali, a European insurer with $480 billion in assets. “Equity markets could go down 15% to 20%.“

  Or much more: after all the S&P is only in the vicinity of 1900 instead of 666 thanks to 7 years of central bank intervention. Pull the rug, and you get a 70% collapse.

  Srinivasan said the central banks in the U.S. and Europe have done all that is possible, bringing rates to historic lows, and in Europe weakening the Euro to help sustain exports. Markets need to “stop expecting miracles,” he said, “now it’s time for the fiscal side to do its job.”

  Actually, all central banks have done is delay mean reversion by injection trillions in liquidity which not only did not end up in the economy where it was not requested due to a complete collapse in demand, but simply inflated asset prices to record levels. Now even the wealthiest admit that the day of reckoning is coming.

  The sentiment was the same for Axel Weber, the chairman of UBS AG. He said in a panel at Davos that: “There may be no limit to what the ECB is willing to do but there is a very clear limit to what QE can and will achieve,” he said, referring to the European Central Bank. “The problem is that monetary policy has largely run its course.”

  Which is funny considering the only reason for the market rebound of the past two days was promises and hopes of more stimulus. Monetary policy may have “run its course” but the same billionaires will be delighted to get a few extra final hits before it all comes crashing down.

  Added one other CEO of a major global financial firm: “The sickness is not inflation, it’s the mispricing of assets.”

   

  The realization that Western economies will be growing slowly—and there was little that the central banks may do to aid—put financial executives here in something of a stupor.

   

  The Netherlands, for instance, is experiencing negative interest rates. “We have limited opportunities to lend on the other side” of customer deposits because of those negative yields, said Ralph Hamers, the chairman of Dutch bank ING NV. “The only thing we can do is extend credit we would normally not do, and that leads to an accident waiting to happen.”

   

  For Mr. Hamers and others, a shift in sentiment seemed to be taking hold. Annual growth of the old order—3% to 4% for the U.S. and other Western economies, is far away. Absent structural changes led by governments, there was little reason to be cheered.

  One person who has also been warning about this terminal outcome for years is Elliott Management chief Paul Singer who said that “if central banks double down on their policies of QE, ZIRP and NIRP, it could cause a loss of confidence in central bankers, paper money in general, or one or more currencies, and lead to a collapse in bonds and stock prices.”

  He is, of course, right, and incidentally this “thought scenario” is precisely what will happen because as we have repeatedly said, not a single economy or fiat system in the history of the world has disintegrated from deflation: governments and their central bank owners will always find a way to reflate, even if it means dropping money out of helicopters, even if it means destroying a reserve currency. And, as Venezuela most recently found out the very hard way, in the end, only hard assets remain – assets such as gold, which have preserved their value across the centuries.

  As for these “prominent investors” who were anything but and merely rode the central bank wave for over half a decade, the fun is over.  For him, “we call it the new abnormal and we better get used to it.”

  What a coincidence that even the world’s richest are suddenly using terms first coined on this website all the way back in 2010, almost as if we were right from day one.

  Now, anyone interested in a nice game of chess?

  

  

  

  

  

• The Islamization Of America In 2015 (Part 1)

  Submitted by Soeren Kern via The Gatestone Institute,

  • Representative André Carson (D-Indiana), a convert to Islam, was appointed to the House Permanent Select Committee on Intelligence. Carson has extensive ties to the Muslim Brotherhood.

  • Officials at the Rocky Heights Middle School in Littleton, Colorado, ignited controversy when they told female students to dress according to Sharia law while visiting a mosque during a field trip.

  • Islamic politics "advocates the world's greatest double standard: if you come to our country, we won't let you worship the way you want, we won't let you say what you want to say… However, we have come to your country, therefore we have the right to do whatever we want to do, including kill you if you make us mad." — Former US President Bill Clinton.

  • Fouad ElBayly, an Egyptian-born imam who in 2007 said that Somali-born activist Ayaan Hirsi Ali should receive the death penalty for her criticism of Islam, is now a Department of Justice contractor hired to teach classes to Muslims who are in federal prison. – The Daily Caller

  • "I pledge allegiance to the Flag of the United States of America, and to the Republic for which it stands, one Nation under Allah…." – Arabic rendering of the Pledge of Allegiance, Pine Bush High School, New York.

  • Breitbart News revealed the existence of what is believed to be the first official Sharia law court in the United States, in Irving, Texas. The so-called Islamic Tribunal settles civil disputes among the growing Muslim population.

  The Muslim population of the United States surpassed 3.5 million in 2015, according to demographic projections compiled by the Pew Research Center. In percentage terms, Muslims currently comprise roughly 1% of the US population.

  As in Europe, Islam was an ever-present topic in American newspaper headlines during 2015. Most news items involved terrorism-related issues — including many cases of lone-wolf terrorists — closely followed by articles about Muslim integration and assimilation.

  JANUARY 2015

  January 6. Officials at the Rocky Heights Middle School in Littleton, Colorado, ignited controversy when they told female students to dress according to Sharia law while visiting a mosque during a field trip. Peter Boyles, a radio talk show host in Denver, said: "Public schools are forbidden from holding girls to different standards than boys. They're holding these girls to a different standard, it's a religious reason. Islam dictates many … repressive practices against women…. That's their belief … but don't apply it to public school kids."

  January 7. Hashim Hanif Ibn Abdul-Rasheed, a 41-year-old Muslim armed with two knives taped to his legs, attempted to buy a plane ticket at the Port Columbus International Airport in Columbus, Ohio. Abdul-Rasheed was shot after he lunged at a police officer. Police said his behavior was "consistent with someone who intended to hijack an aircraft."

  January 9. Abdalah Mohamed, a 19-year-old migrant from Kenya, was arrested after he threatened to kill the owner of a Jewish delicatessen in Portland, Oregon. Police said Mohamed entered the store asking for a single cigarette. When the owner replied that he did not sell individual cigarettes, Mohamed reportedly said: "I will blow up your store. I'm going to take care of you, you mother (redacted). I'll call my people to take care of you to shoot you! I will blow up your store in the name of Allah, I will take care of people like you!"

  January 12. ISIS sympathizers hacked the official Twitter account of the US Central Command, the Pentagon division in charge of the Middle East. One tweet sent from CENTCOM's account stated: "American soldiers, we are coming, watch your backs." Another tweet said: "ISIS is already here…. With Allah's permission we are in CENTCOM now."

  January 13. Representative André Carson (D-Indiana), a convert to Islam, was appointed to the House Permanent Select Committee on Intelligence. Carson, who has extensive ties to the Muslim Brotherhood, is the first Muslim to sit on the committee.

  January 14. Christopher Lee Cornell, a 20-year-old convert to Islam, was arrested in Cincinnati, Ohio, for plotting to "wage jihad" by attacking the US Capitol. Cornell and his accomplice, who was actually an FBI informant, planned to detonate pipe bombs and gun down lawmakers. Cornell, whose Muslim name is Raheel Mahrus Ubaydah, had bought two M-15 rifles and 600 rounds of ammunition. He had also posted messages and videos espousing support for ISIS.

  Left: Rep. André Carson (D-Indiana), a convert to Islam, was appointed to the House Permanent Select Committee on Intelligence. Carson has extensive ties to the Muslim Brotherhood. Right: Christopher Lee Cornell, a convert to Islam, was arrested in Cincinnati, Ohio, for plotting to "wage jihad" by attacking the US Capitol. Cornell planned to detonate pipe bombs and gun down lawmakers.

  January 14. Shelton Thomas Bell, a 21-year-old convert to Islam from Jacksonville, Florida, was sentenced to 20 years in federal prison for attempting to provide material support to terrorists. According to court documents, Bell "conspired to train and prepare as a combatant for overseas violent jihad, then travel from Jacksonville to the Middle East for the ultimate purpose of providing the skills to terrorists, including members of Ansar al-Sharia in Yemen."

  As part of his training, Bell conducted a late-night "jihadi training mission" that involved destroying religious statues in a multi-denominational cemetery in Jacksonville. He also uploaded training and recruiting videos onto the Internet, including one in which he makes homemade pipe bombs and another in which he burns an America flag.

  January 15. Carol Swain, a prominent professor of law and political science at Vanderbilt University in Nashville, Tennessee, penned an op-ed in The Tennessean titled, "Charlie Hebdo attacks prove critics were right about Islam." She wrote:

  "What horrendous attack would finally convince us that Islam is not like other religions in the United States, that it poses an absolute danger to us and our children unless it is monitored better than it has been under the Obama administration?

  "More and more members of the PC [politically correct] crowd now acknowledge that Islam has absolutely nothing in common with Christianity…

   

  "It becomes clearer every day that Islam is not just another religion to be accorded the respect given to Christianity, Judaism, Buddhism, Baha'i and other world religions. The Jan. 7 terrorist attack resulting in 12 deaths at the Paris offices of Charlie Hebdo, a satirical magazine that committed the apparently unpardonable sin of lampooning the Prophet Muhammad, once again illustrates that Islam is a dangerous set of beliefs totally incompatible with Western beliefs concerning freedom of speech, freedom of assembly and freedom of association."

  Vanderbilt's Muslim Students Association said Swain's "hurtful, inciting comments" had caused "a great deal of emotional distress and frustration." Swain responded: "Why are today's university students so fragile they need counseling and affirmation whenever they hear something that makes them uncomfortable? Learning how to deal with your emotions is part of growing up."

  January 15. Former US President Bill Clinton, appearing on NBC's Late Night with Seth Meyers, said Islamic politics "advocates the world's greatest double standard: if you come to our country, we won't let you worship the way you want, we won't let you say what you want to say, we won't let you do what you want to do. However, we have come to your country, therefore we have the right to do whatever we want to do, including kill you if you make us mad."

  January 15. Duke University in Durham, North Carolina, canceled its plan to use the gothic bell tower of its chapel for the adhan, an amplified call to prayer for Muslims. The about-face followed criticism from many corners, including from Christian evangelist Franklin Graham, who wrote:

  "As Christianity is being excluded from the public square and followers of Islam are raping, butchering, and beheading Christians, Jews, and anyone who doesn't submit to their Sharia Islamic law, Duke is promoting this in the name of religious pluralism. I call on the donors and alumni to withhold their support from Duke until this policy is reversed."

  January 17. A conference in Garland, Texas, aimed at "defeating Islamophobia," featured several Muslim extremists who advocate the implementation of Sharia law in the United States. The conference, titled, "Stand with the Prophet in Honor and Respect," was billed as "not an event" but the "beginning of a movement. A movement to defend Prophet Muhammad, his person, and his message."

  January 18. The New York Post reported that Muslim groups are pressing the New York Police Department to remove a report about Islamic terrorism from its website. The groundbreaking, 90-page report, titled, "Radicalization in the West: The Homegrown Threat," angers critics who say it promotes "religious profiling" and discrimination against Muslims. Others argue that removing the report would send the message that the NYPD is backing down on its counterterrorism effort in the name of political correctness.

  January 19. Louisiana Governor Bobby Jindal, addressing the London-based Henry Jackson Society, warned that "non-assimilationist Muslims" pose a danger to Europe and the United States. He said:

  "In America we are quite happy to welcome freedom loving people, regardless of religion, who want to abide by our laws allowing for freedom of expression and a host of other democratic freedoms. But we will never allow for any sect of people to set up their own areas where they establish their own set of laws.

   

  "For example, Sharia law is not just different than our law, it's not just a cultural difference, it is oppression and it is wrong. It subjugates women and treats them as property, and it is antithetical to valuing all of human life equally. It is the very definition of oppression. We must stop pretending otherwise.

   

  "I favor robust debate on everything: on religion, on policy, on politics, on everything. It is called freedom. But when debate stops, and when a movement decides that they no longer want to debate their ideas, but rather they want to simply subdue, silence, and kill those who disagree … that is called terrorism, barbarism, and inhuman behavior, and it cannot and must not be tolerated."

  January 20. The US Supreme Court unanimously ruled that Arkansas corrections officials had violated the religious liberty rights of Muslim inmates by forbidding them to grow beards. The case concerned Gregory H. Holt, also known as Abdul Maalik Muhammad, who sought to grow a half-­inch beard.

  January 20. Montana State Senator Janna Taylor introduced Montana Senate Bill 199, which establishes "the primacy of Montana law by prohibiting the application of foreign law when it violates a fundamental right guaranteed by the Montana or United States Constitution." The bill is aimed at restricting the use of Islamic Sharia and other foreign law in the state.

  January 21. The American-Arab Anti-Discrimination Committee (ADC) complained that the movie "American Sniper" was spurring threats against American Muslims. ADC President Samer Khalaf said it did not make sense to call for a boycott of the film, given its box office success: "If we boycott it, it will only cause people to want to see it more."

  January 22. Malak Kazan, a 27-year-old Muslim woman, filed a religious discrimination lawsuit in Detroit, Michigan, accusing the Dearborn Heights Police Department of violating her First Amendment right to religious freedom when she was forced to remove her head scarf, after being arrested for driving with an expired license. Dearborn Heights Police Chief Lee Garvin said:

  "Articles such as hats, caps, hijabs, can contain concealable items that could pose a threat or chance of injury to the cops or to themselves. Our procedure is to have them take the hijab off in the presence of a female. We don't always have enough female officers present in the station. Our number one concern is security of our officers and the prisoners."

  Kazan's lawyer, Amir Makled, disagreed:

  "The main issue here is that my client's constitutional rights, her religious liberties, can't be stripped at the jailhouse door. She has an absolute right to maintain her faith. We hope this cause of action will bring to light a policy that is dated and needs to be amended…. We also hope to get some further diversity training for officers in the city. Hopefully this will be a learning experience for other law enforcement agencies."

  January 23. Addressing the World Economic Forum in Davos, Switzerland, US Secretary of State John Kerry said that Muslims should not be blamed for Islamic terrorism: "The biggest error that we could make would be to blame Muslims collectively for crimes … [that] the overwhelming majority of Muslims oppose."

  January 23. A federal judge in Denver, Colorado gave a four-year prison sentence to Shannon Maureen Conley, a 19-year-old woman who admitted to wanting to become an ISIS bride and join the jihad in the Middle East. Conley is one of the first Americans to be sentenced for conspiracy to support ISIS. Prosecutors hope her sentence has a deterrent effect.

  January 23. Senator Ted Cruz (R-TX) filed legislation to ban American citizens who fight alongside ISIS and other terror groups from returning to the United States. The bill, known as the Expatriate Terrorist Act, seeks to strip those Americans who travel abroad to fight with ISIS of their US citizenship rights.

  January 26. ISIS vowed to behead President Obama and "transform America into a Muslim province."

  January 28. The Natomas Pacific Pathways Prep, a public charter school in Sacramento, California, sponsored an official "Hijab Day" in cooperation with the Council on American-Islamic Relations (CAIR). To concerns about why a public school would be hosting such an event, the school responded with charges that critics were motivated by "hatred" and "bigotry."

  January 28. The US State Department hosted a delegation of Muslim Brotherhood operatives for a meeting about their ongoing efforts to overthrow the government of Egyptian President Abdel Fattah al-Sisi. A few days after the meeting, the Muslim Brotherhood called for "a long, uncompromising jihad" in Egypt.

  January 29. The FBI added a former Northern Virginia taxicab driver to the Most Wanted Terrorists list. Liban Haji Mohamed, 29, a Somali-born naturalized US citizen, is accused of being a recruiter for al-Shabaab, a terrorist organization in Somalia.

  January 30. The Refugee Women's Alliance, one of the largest refugee and immigrant service providers in Seattle, Washington, was forced to close in anticipation of a protest against one of its head teachers, Deepa Bhandaru, who led a discussion about free speech and religious pluralism in the wake of the Charlie Hebdo massacre. A group of Somali immigrants demanded that Bhandaru be fired for showing some of the Hebdo cartoons in her class. Bhandaru, who has received an "excellence in teaching" award from the University of Washington, was placed on paid leave while the agency "investigates" the matter.

  FEBRUARY 2015

  February 2. Darlene Hider, a 32-year-old Muslim-American woman who lives in Dearborn, Michigan, said she was harassed on a Delta Airlines flight because she was wearing an Islamic headscarf: "I felt as if I wanted to defend myself but I couldn't because of the Islamophobia going on." Others, however, said her children were being disruptive.

  The president of the American-Arab Anti-Discrimination Committee, Samer Khalaf, said: "We encourage Delta to take immediate steps to rectify this matter."

  But Hider says she wants more than a simple apology: "I want justice for every woman who wears a scarf and who's Muslim and doesn't have to worry about being on a plane or in a restaurant or a mall, or walking down the street… That is what I'm standing up for and I will not be quiet."

  February 4. The Mississippi House voted 116-1 to pass House Bill 177, which bans use of foreign law. Proponents of the measure want to prevent courts in the state from referring to Sharia law when deliberating cases.

  February 4. The head of the FBI's counterterrorist division, Michael Steinbach, warned that the Islamic State is targeting and recruiting teenage Americans, including females, to carry out terrorist attacks on US soil.

  February 4. A Bloomberg Politics/Des Moines Register Iowa Poll found that 53% of likely Republican caucus participants and 81% of likely Democratic caucus participants said they believe Islam is inherently peaceful. Only 13% of likely Democratic caucus participants said they view Islam as inherently violent, compared with 39% of likely Republican caucus participants.

  February 5. US President Barack Obama, speaking at the National Prayer Breakfast in Washington, DC, attempted to downplay the dangers of Islamic terrorism by creating a false moral equivalence with the Crusades, which occurred 1,000 years ago, in response to Muslim invasions.

  February 5. The Health and Human Services Committee of the South Dakota House of Representatives approved a proposal that would make it a felony to perform female genital mutilation in the state.

  February 5. The Board of Education in Waterbury, Connecticut, announced that all schools in the Waterbury School District would begin honoring two of Islam's most holy days, Eid al-Fitr and Eid al-Adha, by not scheduling tests, field trips or major school events on those days. This is the first decision of its kind in the state of Connecticut.

  February 6. The FBI charged six Bosnian immigrants with terrorist related crimes: Ramiz Zijad Hodzic, 40; his wife, Sedina Unkic Hodzic, 35; and Armin Harcevic, 37, all of St. Louis County, Missouri; as well as Nihad Rosic, 26, of Utica, New York; Mediha Medy Salkicevic, 34 of Schiller Park, Illinois; and Jasminka Ramic, 42, of Rockford, Illinois. All defendants were charged with conspiring to provide material support and resources to terrorists. Ramiz Zijad Hodzic and Nihad Rosic were also charged with conspiring to kill and maim persons in a foreign country. According to the FBI, the defendants raised money and shipped weapons and uniforms and other aid to ISIS fighters in Syria.

  February 6. Army Secretary John McHugh approved awarding the Purple Heart and its civilian counterpart, the Secretary of Defense Medal for the Defense of Freedom, to victims of the November 2009 shooting at Fort Hood, Texas. Thirteen people were killed and more than 30 wounded in the attack by Army Major Nidal Malik Hasan, a psychiatrist whose business card read "SoA" for "Soldier of Allah." The Obama administration had classified the attack as "workplace violence," but Congress redefined what should be considered an attack by a "foreign terrorist organization" for purposes of determining eligibility for the Purple Heart.

  February 9. WFTV Channel 9 television in Orlando, Florida, investigated a school in Seminole County after parents complained that students were learning too much about Islam in a public classroom. One parent became concerned after he spotted a text on his son's phone from a teacher reminding him to complete a prayer rug assignment and study an Islam packet. WFTV found that a textbook included a chapter dedicated to the "Rise of Islam," including prayers and scriptures from the Quran. But the first 100 pages of the book, discussing Judaism and Christianity, were missing. Officials from the school district blamed a manufacturer defect in 68 books that are only a year old.

  February 10. Craig Stephen Hicks, 46, murdered three college students at a condominium complex in Chapel Hill, North Carolina, allegedly over a dispute over a parking space. Muslim groups branded the triple-homicide as a hate crime because the three victims were Muslim.

  February 12. Representatives of several NGOs in Olympia, Washington, called on Representative Larry Haler to apologize for saying in a House Judiciary Committee hearing that the Council on American-Islamic Relations (CAIR) is "basically run by the Muslim Brotherhood and Hamas," with a goal "to overthrow the country." Haler said he has already apologized twice to CAIR for his remarks: "It is unfortunate that these two instances do not satisfy their definition of apology."

  February 13. Reaz Khan, a 51-year-old Pakistani-born naturalized US citizen living in Portland, Oregon, pleaded guilty to providing $2,450 to Ali Jaleel, a terrorist who killed more than 30 people in a May 2009 suicide bombing in Lahore, Pakistan. Prosecutors presented an email in which Jaleel reminded Khan about their shared promise to seek martyrdom in the name of Allah.

  February 14. Terrence Lavaron Thomas, 39, a convert to Islam, stabbed two people at a bus stop in Southfield, a northern suburb of Detroit, Michigan. Police say Thomas asked a group of people if they were Muslim and attacked those who responded 'no' with a three-inch knife. American media outlets, including the Washington Post, were accused of seeking to downplay the Muslim attack on non-Muslims by publishing misleading headlines.

  February 16. State Department spokeswoman Marie Harf, speaking on MSNBC's Hardball, said that the solution to defeating ISIS was "a jobs program." She said: "We need … to go after the root cause that leads people to join these groups, whether it's lack of opportunity for jobs."

  At that point, Harf was interrupted by host Chris Matthews, who pointed out, "There's always going to be poor people. There's always going to be poor Muslims."

  Harf continued to argue that the US should help Muslim countries "build their economies so they can have job opportunities for these people." She added: "If we can help countries work at the root causes of this — what makes these 17-year-old kids pick up an AK-47 instead of trying to start a business?"

  February 17. The White House launched a three-day Summit on Countering Violent Extremism but refused to use the term Islamic extremism. The summit featured Islamists known for preaching anti-Western themes.

  February 17. Al-Hamzah Mohammad Jawad was arrested as he tried to fly out of Detroit Metropolitan Airport in Michigan, to Amman, Joran, on a one-way ticket. According to the FBI, Jawad, who came to the US in 2013 as a refugee from Iraq, was planning to join ISIS in Iraq.

  February 18. Lawmakers in the North Dakota House of Representatives objected to a Muslim delivering the chamber's opening prayer on Ash Wednesday because some members wanted a Christian pastor to give the invocation. The Minnesota chapter of the CAIR called on North Dakota Republican Party leaders to apologize to Dr. Nadim Koleilat. House leader Al Carson said no such apology would be forthcoming.

  February 18. Department of Homeland Security Secretary Jeh Johnson said his job is to "give voice to the plight of Muslims living in this country and the discrimination that they face." He added: "And so I personally have committed to speak out about the situation that very often people in the Muslim community in this country face. The fact that there are 1.6 billion Muslims in the world and the Islamic faith is one about peace and brotherhood."

  February 19. US President Barack Obama said that Americans who criticize Islam are guilty of provoking Islamic terrorists: "When people spew hatred towards others — because of their faith or because they're immigrants — it feeds into terrorist narratives. If entire communities feel they can never become a full part of the society in which they reside, it feeds a cycle of fear and resentment and a sense of injustice upon which extremists prey."

  February 21. The Islamist group al-Shabaab released an online video in which it called for an attack on the Mall of America, a megamall in Bloomington, Minnesota.

  February 23. Sohiel Omar Kabir, 37, and Ralph Deleon, 26, were sentenced to 25 years in federal prison for seeking to join al-Qaeda and training to carry out attacks on Americans in Afghanistan. Deleon is a citizen of the Philippines who lived in Ontario, California. Kabir, is an Afghanistan-born American citizen who lived in Pomona, California, and had relocated to Kabul, but was subsequently arrested by American military personnel in Afghanistan.

  February 23. Abdirahman S. Mohamud, a 23-year-old Somali-born American citizen residing in Columbus, Ohio, was charged with providing "electronic devices to persons engaged in terrorism in the Middle East."

  February 24. Jean Camara, a convert to Islam, filed a lawsuit against Costco, the world's third largest retailer, for religious discrimination. He said he was working as a cashier at a store in Brooklyn, New York, when pork came across the conveyor belt. After Camara told his manager that it is against his religious beliefs to touch either pork or alcohol, he was transferred outside to collecting the shopping carts. After he filed a human rights complaint against the company, he says he was fired for insubordinate conduct.

  February 25. The FBI charged three residents of Brooklyn, New York, with conspiracy to provide material support to ISIS. Akhror Saidakhmetov, a citizen of Kazakhstan, was arrested at John F. Kennedy International Airport, where he was attempting to board a flight to Istanbul, Turkey. Abdurasul Hasanovich Juraboev, a citizen of Uzbekistan, had previously purchased a plane ticket to travel from New York to Istanbul and was scheduled to leave the United States in March. Abror Habibov, a citizen of Uzbekistan, helped fund Saidakhmetov's efforts to join ISIS. According to the FBI, Juraboev offered to kill the President of the United States if ordered to do so by ISIS, and Saidakhmetov expressed his intent to buy a machine gun and shoot police officers and FBI agents if thwarted in his plan to join ISIS in Syria.

  February 25. The US Supreme Court heard the case of Samantha Elauf, a Muslim woman who said the Abercrombie & Fitch clothing store illegally denied her a job because she wears a hijab in keeping with her faith.

  February 26. Abdullahi Mohamud Yusuf, a Somali-American teenager, pleaded guilty in federal court in Minneapolis, Minnesota, of conspiring to support ISIS. Yusuf, 18, was stopped by FBI agents at Minneapolis-St. Paul International Airport in May 2014 as he attempted to leave the US for Turkey.

  February 26. An annual report delivered to the US Senate by the director of National Intelligence, James Clapper, removed Iran and Hezbollah from its list of terrorism threats, after years in which they featured in similar reports.

  February 27. Hundreds of Muslims attended the first ever "Muslim Day" at the Oklahoma state capitol. The event, which was organized by the Oklahoma chapter of the Council on American-Islamic Relations (CAIR).

  MARCH 2015

  March 2. The director of National Intelligence, James Clapper, revealed that about 180 Americans have traveled to Syria to join Islamist militants and around 40 of them have returned to the United States.

  March 3. The city council of Taylor, Michigan, unanimously approved a resolution against Islamophobia. The resolution says the city will "stand against those who preach hate and incite violence." Resident Fred Lyons said he did not feel the resolution was necessary. "I don't see why we need a resolution to say we're against hate. We are," Lyons said. "Anyone who would say you are supporting hate would be asinine." He said he feared the resolution could lead to lawsuits against the city.

  March 3. The Daily Caller revealed that Fouad ElBayly — an Egyptian-born imam who in 2007 said that Somali-born activist Ayaan Hirsi Ali should receive the death penalty for her criticism of Islam — is now a Department of Justice contractor hired to teach classes to provide "leadership and guidance" to Muslims at a federal prison in Maryland.

  March 4. New York Mayor Bill de Blasio announced that public schools in the city would begin observing two Muslim holidays, Eid al-Fitr and Eid al-Adha. The change is the result of nearly a decade of lobbying by Muslim groups. Muslims make up about 10% of the students in New York City public schools.

  March 4. Zaytuna College based in Berkeley, California, became the first Muslim college in the United States to receive accreditation.

  March 4. Minh Quang Pham, a 32-year-old Vietnamese man extradited from the United Kingdom, pleaded not guilty to supporting al-Qaeda in the Arabian Peninsula, receiving military training from the terrorist organization in Yemen, and possessing a firearm intended for use in crimes of violence. Pham, formerly a graphic designer who lived in southeast London, was arrested at Heathrow International Airport when he returned in July 2011 from a six-month trip to Yemen.

  March 4. Abid Naseer, a 28­-year­-old Pakistani man, was convicted in Federal District Court in Brooklyn, New York, of conspiring with al-Qaeda to bomb a shopping center in Manchester, England. Naseer, a graduate of Flushing High School in Queens, was indicted in the US under a law that allows the federal government to pursue terrorism cases even when they occur outside the country; he was extradited to the US in 2013.

  March 6. The Associated Students of the University of New Mexico (ASUNM), the undergraduate student government for UNM, unanimously passed a resolution urging the UNM administration to "publicly state their opposition to Islamophobia." The document, known as Resolution 6S, defines Islamophobia as a "dislike or prejudice against Islam or Muslims, especially as a political force."

  March 10. Diego Chaar, a 24-year-old Brazilian who converted to Islam while in prison, was arrested after stalking the Ohev Shalom synagogue in Miami Beach, Florida, shouting "Allahu Akbar" and threatening to cut off the heads of congregants exiting the synagogue.

  March 12. Raees Alam Qazi, 22, and Sheheryar Alam Qazi, 32, two brothers born in Pakistan — both are naturalized US citizens who spent most of their lives in South Florida — pleaded guilty to federal terrorism charges after admitting they had plotted a terrorist attack on landmarks in New York City. Later, while in custody, they assaulted two deputy US Marshals. The younger brother pleaded guilty to an additional charge of attempting to provide material support to al-Qaeda.

  March 16. Miguel Alejandro Santana Vidriales, 24, of Upland, California, was sentenced to 10 years in prison, and Arifeen David Gojali, 24, of Riverside, was sentenced to five years, for their involvement in a conspiracy to travel to Afghanistan to kill American troops.

  March 16. Adam Dandach, a 21-year-old convert to Islam who also goes by the name Fadi Fadi Dandach, pleaded not guilty to charges that he provided material support and resources to ISIS. He had previously pled not guilty to lying on a passport application. Prosecutors say he obstructed justice when he allegedly asked a website administrator to delete his post history. FBI agents had prevented Dandach from boarding a Delta Airlines flight at John Wayne Airport in Orange Country, California, to Istanbul, Turkey, in July 2014.

  March 16. A United Airlines jet traveling to Denver returned to Washington Dulles International Airport after passengers subdued a man who rushed toward the cockpit yelling "Jihad! Jihad!"

  March 17. Tairod Nathan Webster Pugh, a 47­-year­-old American convert to Islam and Air Force veteran from New Jersey, was charged with trying to join ISIS.

  March 18. An effort to mark national Foreign Language Week by reading the Pledge of Allegiance of the United States in Arabic ignited controversy at the Pine Bush High School in New York. Students and parents were angered by the Arabic rendering: "I pledge allegiance to the Flag of the United States of America, and to the Republic for which it stands, one Nation under Allah…."

  March 18. Commissioners in Clark County, Nevada, unanimously approved the establishment of the first Islamic cemetery in the Las Vegas metropolitan area. The private, nonprofit cemetery will be situated on two acres just south of McCarran International Airport.

  March 19. The city council of Irving, Texas, voted to endorse a state bill that would forbid judges from using foreign law in their rulings. The move comes after Breitbart News revealed the existence of what is believed to be the first official Sharia law court in the United States. The so-called Islamic Tribunal, based in Irving, settles civil disputes among the growing Muslim population. Irving Mayor Beth Van Duyne said the tribunal "bypasses American courts" and warned that if basic rights are being violated, "I will not stand idle, and will fight with every fiber of my being against this action."

  March 19. Mohammad Yahya, 39, filed a lawsuit against the Gregg County Jail in Longview, Texas, for violating his right to observe Ramadan. Yahya, who is serving time for wire fraud, said Gregg County jailers refused to honor his right to have his meals provided before 4:45 a.m. and after 8:30 p.m. during Ramadan.

  March 21. ISIS hackers called on their "brothers in America" to kill 100 US service members whose names, addresses and photographs were published online.

  March 25. The US Army charged Sergeant Bowe Bergdahl with desertion and misbehavior before the enemy. Bergdahl, 28, disappeared from his outpost in Afghanistan on June 30, 2009. He has been accused of leaving his patrol base intentionally before he was captured by Taliban insurgents. He spent five years as a captive of the Taliban before he was freed in a prisoner swap that also freed five Taliban leaders from the US military prison at Guantanamo Bay, Cuba.

  March 26. Army National Guard Specialist Hasan Edmonds, 22, a US citizen, was arrested at Chicago Midway International Airport while attempting to fly to Cairo, Egypt, eventually to join ISIS. His cousin, Jonas Edmonds, 29, a US citizen, was arrested without incident at his home in Aurora, Illinois in connection with an alleged plot to carry out an armed attack on a US military facility in northern Illinois.

  

  

  

  

  

• Norway's Biggest Bank Demands Cash Ban

  The war on cash is escalating faster than many had imagined. Having documented the growing calls from the elites and propagandist explanations of the "benefits" to their serfs over the last few years, with China, and The IMF entering the "cashless society" call most recently, International Business Times reports that Norway – suffering from its own economic collapse as oil revenues crash – has joined its Scandi peers Denmark and Sweden in a call to "ban cash."

  By way of background, as we explained previously, What exactly does a “war on cash” mean?

  It means governments are limiting the use of cash and a variety of official-mouthpiece economists are calling for the outright abolition of cash. Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.

  These limits are broadly called “capital controls.”

  Why Now? Why are governments suddenly so keen to ban physical cash?

  The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft. The escape mechanism from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age — that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.

  Forcing Those With Cash To Spend or Gamble Their Cash

  The conventional answer voiced by Mr. Buiter is that recession and credit contraction result from households and enterprises hoarding cash instead of spending it. The solution to recession is thus to force all those stingy cash hoarders to spend their money.

  And the benefits of a cashless society to banks and governments are self-evident:

  1. Every financial transaction can be taxed.

   

  2. Every financial transaction can be charged a fee.

   

  3. Bank runs are eliminated.

   

  In fractional reserve systems such as ours, banks are only required to hold a fraction of their assets in cash. Thus a bank might only have 1 percent of its assets in cash. If customers fear the bank might be insolvent, they crowd the bank and demand their deposits in physical cash. The bank quickly runs out of physical cash and closes its doors, further fueling a panic.

   

  The federal government began insuring deposits after the Great Depression triggered the collapse of hundreds of banks, and that guarantee limited bank runs, as depositors no longer needed to fear a bank closing would mean their money on deposit was lost.

   

  But since people could conceivably sense a disturbance in the Financial Force and decide to turn digital cash into physical cash as a precaution, eliminating physical cash also eliminates the possibility of bank runs, as there will be no form of cash that isn’t controlled by banks.

  So, when the dust has settled who ultimately benefits by this war on cash – government and the central banks, pure and simple.

  Which explains why Norway's biggest bank, DNB, has called for the country to stop using cash which is just the latest move in a country that has been leading the global charge toward electronic money in recent years, with several banks already not offering cash in their branch offices and some industries seeking to cut back on paper currency.

  DNB's proposal suggests eliminating the use of cash would cut down on black market sales and crimes such as money laundering.

   

  “Today, there is approximately 50 billion kroner in circulation and [the country’s central bank] Norges Bank can only account for 40 percent of its use. That means that 60 percent of money usage is outside of any control. We believe that is due to under-the-table money and laundering,” Trond Bentestuen, a DNB executive, told Norwegian website VG, the Local reported.

   

  “There are so many dangers and disadvantages associated with cash, we have concluded that it should be phased out,” he added.

   

  The country has already moved in this direction. Bentestuen estimated that only about 6 percent of Norwegians use cash on a daily basis, with the numbers higher among elderly people.

  Norway’s Ministry of Finance is opposed to the proposal, however, and other critics have raised concerns about privacy issues as well as how the change would affect tourists. Privacy advocates in Norway have expressed worries for years that, without cash, there would be no way for an individual to purchase something without being tracked.

  In 2014, Finans Norge, a financial industry organization in Norway, said the country was on pace to be a cashless society by 2020, Ice News reported. While DNB said its proposal will take time to complete, executives suggested the country start phasing out cash by discontinuing the 1,000 kroner note so it could focus on updating its banking system.

  “Eighty-five percent of our customers say that they never or only very rarely go to the bank. Therefore we think it is a mistake to maintain a very old structure with local branch offices. It is better to follow the customers and improve the offers where the customers are: digital,” Bentestuen said.

   

  In the meantime, DNB and Norway’s second largest bank, Nordea, have already stopped using cash in their branch offices. And the movement toward a goal of no cash has been going on for a while. The Norwegian Hospitality Association pushed to eliminate consumers’ right to pay cash at all stores and restaurants in 2013, The Local reported.

   

  Other countries including Denmark and Sweden have made similar pushes as their populations also rely largely on electronic money.

  If allowed to continue, state wealth control will exist.

  And thus, as we concluded previously, if you can’t withdraw your money as cash, you have two choices: You can deal with negative interest rates…or you can spend your money. Ultimately, that’s what our Keynesian central planners want. They are using negative interest rates and the War on Cash to force you to spend and “stimulate” the economy.

  If you ask us, these radical and insane measures are a sign of desperation.

  The War on Cash and negative interest rates are huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.

  

  

  

  

  

• Austria To Refugees: Learn To Speak German Or Get No Money

  On Friday, we brought you the latest in a series of cartoons and pictographs designed by European authorities to help Mid-East refugees better understand European society.

  Judging from the integration “guides”, migrants are having a hard time coming to terms with quite a few things, but the two main problems appear to be publicly beating women and small children and randomly groping women’s behinds.

  

  European officials have also endeavored to pen lengthy instruction manuals to accompany the visual aids with pointers on everything from where to urinate to how to properly enter a room (hint for refugees: you should not storm through a closed door without knocking).

  All jokes aside, Europe is quickly running out of time to address the worsening migrant crisis. As one unnamed German politician told Reuters earlier this month, “there is a risk that February could start a countdown to the end.”

  “We have passed a tipping point where the influx reduces the capacity of the countries to assimilate or integrate the refugees,” George Soros said this week in Davos, echoing the sentiments of those who sense the death of the euro is at hand. “There is panic,” he added.

  French economy minister Emmanuel Macron, speaking to an audience in Davos, had the following to say about the situation: “We have a few weeks to concretely deliver our options… otherwise you have country-by-country solutions (and that is) the beginning of the dismantling for sure.”

  Yes, “country-by-country solutions”, like those pursued by Hungary’s Viktor Orban who simply build a giant razor wire fence and sprayed tear gas and water at migrants as though they were angry zoo animals trying to claw their way out of their cage.

  Or like a new approach adopted by Austria, where Foreign Minister Sebastian Kurz now says any refugee who refuses to attend “special integration training courses” may not receive social benefits.

  “Those who are not willing to learn German, who do not want to be part of the labor market, who are not ready to attend an integration course, will face social benefits cuts,” Kurz said in Davos, before adding that “it is an absolutely necessary next step.”

  “The migrant inflow should be reduced but those, who do have the right to get asylum, should be integrated into society,” he continued.

  As RT notes, Markus Wallner, the head of Austria’s western Vorarlberg region, concurs. “Here can eventually be no avoidance behavior. Specifically, if someone avoids attending the values training course, [his] social benefits should be reduced,” he said.

  “Eight-hour ‘value and orientation’ training courses aimed at teaching refugees Austrian laws and social norms are a part of the broader integration program developed and agreed by the government and the heads of the Austrian regions on January, 20,” RT goes on to say. “The first courses will start in February [and] will cover the basic values embodied in the country’s constitution, equal rights and equal treatment of men and women as well as other democratic principles.”

  These classes will cost the Austrian government around €5 million.

  Recall that Austria has temporarily suspended Schengen and has become increasingly frustraed with its role as a corridor on the crowded Balkan route to Germany. Tiny Slovenia said that as a result of the Austrian border controls, it too would need to close its border with Croatia in order to avoid a migrant logjam. 

  When it comes to measuring the “success” of Austria’s new migrant training courses, Wallner says check back in three months: “We will see, how it will work in the first quarter [of the year], and can extend the offer if necessary.”

  As for the chances that Austria (or Europe as a whole for that matter) will be able to successfully Westernize millions of Mid-East asylum seekers, Kurz isn’t optimistic. 

  “Let’s not delude ourselves,” he said. “We have an intensive long lasting integration process ahead of us.”

  Yes Frau Merkel, let’s not “delude ouselves.”

  

  

  

  

  

  

• Here Are The 100 Biggest Hedge Funds And Their Favorite Stocks

  Once upon a time, long before central planning, before “smart beta”, and before various attorney generals busted Stevie Cohen’s massive “expert network” insider trading pardon “information arbitrage” gig, hedge funds were spoken about in hushed tones of reverence, with special admiration reserved for their portfolio managers whose egos (and certainly bank accounts) promptly rose to the status of “financial god.”

  Then, slowly at first then very fast, the facade fell off in no small part thanks to central bankers acting as Chief Risk Officers of the “market” and making any correction impossible (and thus eliminating the need to hedge as we first warned in 2011), and hedge funds quickly became the butt of all jokes, especially after 2015 when it was revealed that “alpha” simply meant jumping into a handful of “idea dinner” hedge fund hotel positions with hopes that the slowest greater fool will push up the stock price (with leverage) to mark books that much higher, and collect that elusive “20.”

  Alas it did not work out, and while others were laughing, there were no smiles among LPs and fund investors, and certainly not the hedge fund employees who for yet another year were stiffed despite hopes of retiring after just a few years of “buysiding it.”

  Oh well, maybe 2016 is your year. Good luck. However, as frequent readers know we have long predicted the collapse of the hedge fund industry, along with its $4 trillion or so in (unlevered) AUM for the simple reason that with central banks, there is no need to hedge (and thus the 2 and 20 model is unsustainable), while without hedge funds, there is no possible hedge one can put on to offset the systemic collapse.

  Hence, in some ways, the name of this blog.

  That does not mean, however, that the hedge fund industry will disappear overnight.

  Here, courtesy of Bank of America, here is a list of the 100 top hedge funds in the US and their 100 favorite stock holdings – assuming the status quo continues, expect very substantial asset declines among these 100 when we rerun this analysis in 52 weeks time.

  

   

  Next, here are the top equity positions of the top hedge funds listed above, and all others:

  

   

  Same thing, but broken down by sector:

  

  Finally, here are the core holdings of the 150 hedge funds as of the start of Q4: as recent experience has shown, everyone is happy on the way up – it is the panic on the way down, observed most violently at AGN in recent months, that is what brings a frown to many a hedge funders’ face.

  

  

  

  

  

• 700 Days In No Man's Land – Why They Can't Keep It Up

  Submitted by David Stockman via Contra Corner blog,

  This week brought another reason to get out of the casino, and to sell it short if you can tolerate some volatility.

  On Friday the Japanese stock market ripped 6% higher and the European bourses were up 5% because their respective central bankers emitted some hints of more easing just ahead. Even the US market managed to find green for the week.

  Apparently, the day traders and robo-machines think BTFD still works. But they are going to be sorely disappointed – just as they have been for nearly 700 days running.

  That is, since the S&P 500 crossed the 1870 mark in early March 2014, there have been 35 attempts to rally higher. All of them have failed.
  

  ^SPX data by YCharts

  Like the bloody trenches of World War I, the movement back and forth in “no man’s land” on the chart above has been pointless. At some juncture in the not too distant future, the stock averages are going to break this trading range, and plunge back down to earth.

  In the meantime, you can’t blame the punters for trying. This week they succumbed once again to the BTFD delusion undoubtedly because the “moar money” chorus grew ever louder as Friday approached.

  That baleful refrain was led this time around by no less than the posse of oligarchs and apparatchiks assembled at Davos. Thus, when Mario Draghi, the world’s most ludicrous monetary dunce, let on that there were “no limits” on how much fraudulent credit could be emitted by the ECB’s printing press, he surely spoke a frightening truism.

  Yet the world largest asset gather, Larry Fink, founder of $4.5 trillion BlackRock, gushed with an endorsement of what was pure monetary crack pottery:

  “We’ve seen over the last few years you have to trust in Mario,” Laurence Fink, chief executive officer of BlackRock Inc., said in Davos. “The market should never, as we have seen now, the market should not doubt Mario.”

  That’s right. You can’t make this baloney up. As Jeffery Snider shows in a nearby post, the massive ECB exercise in QE, which has already emitted some $700 billion in printing press airballs, has had no impact at all on its ostensible targets. Namely, the generation of a burst of private borrowing in order to stimulate spending and inflation.

  In fact, European bank lending has been on the flat-line for 7 years and neither the ECB’s massive LTRO of 2012 or the QE explosion during 2015 has changed this trend.

  

   

  That’s because Europe is at “peak debt” and has been so ever since the original single currency borrowing binge peaked in 2008.

  

  Surely, Larry Fink knows that QE has been a failure in Europe, the US and everywhere else it has been tried. To wit, when the household and business sectors are at “peak debt” central bank money printing amounts to pushing credit on a credit string. It does nothing except inflate the value of existing financial assets and provides cheap carry trade funding for speculators.

  That is actually the point, of course. Contemporary central bankers function like a team of monetary wranglers, herding the retail cattle toward the asset gathers. And the latter always and everywhere manage to scalp a fee from investor portfolios being inflated by central bank action. It’s the modus operandi of our regime of bubble finance.

  So the Larry Fink’s of the world have become cynical advocates for monetary policies that any half-wit can see amount to gibberish. Here is what the ECB said a year ago when it launched into it $1.4 trillion QE program:

  The Governing Council took this decision in a situation in which most indicators of actual and expected inflation in the euro area had drifted towards their historical lows. As potential second-round effects on wage and price-setting threatened to adversely affect medium-term price developments, this situation required a forceful monetary policy response.

   

  Asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households. This tends to support investment and consumption, and ultimately contributes to a return of inflation rates towards 2%. [emphasis added]

  Needless to say, the first paragraph above is errant nonsense. The idea that Europe was suffering from a dearth of inflation is essentially Keynesian newspeak. What these monetary cranks were talking about as requiring a “forceful monetary policy response” was the tiny area of relatively benign consumer inflation shown in the circle.

  

  Even then, the 26-year average rate of consumer inflation shown above was 2.1%. By contrast, the slight relief experienced by wage earners and savers in recent months is entirely due to the great oil and commodity deflation now washing through the world economy.

  Yet since the Eurozone produces virtually no fossil energy or industrial raw materials (even most of the coal is produced in Poland which is not in the euro area), it’s a wonderful thing; it results in higher real wages and more real output and wealth.

  In fact, after years of deteriorating terms of trade with the rest of the world due to the China driven commodity bubble, the pendulum is swinging favorably in Europe’s direction. But its self-serving monetary central planners and financial class have managed to turn an unequivocal good  into an entirely contrived problem——as in the specious claim that “potential second-round effects on wage and price-setting threatened to adversely affect medium-term price developments”.

  That is gibberish. So what if stronger real wages and better purchasing power on global commodity markets result in a lower trend of nominal wages and prices in Europe. For 200 years until about 2009, most economists thought that was a very good thing.

  And virtually none of them believed in “inflation targeting”, let alone a magic threshold of 2%. That was the half-baked theory of Ben Bernanke and a small posse of second rate academics like Frederic Mishkin of Columbia Business School, who published indecipherable papers in Ben’s forgettable books.

  Simply put, there is no logic or empirical evidence whatsoever that supports the idea that 2.00% consumer inflation is better for economic growth and improvements in real productivity and living standards than is 1.22% or 0.02% consumer inflation.

  This is just a postulate made-up from wholecloth that justifies massive central bank intrusion in the financial system and constant efforts to falsify and inflate the prices of financial assets. Since the annual Davos confab has increasingly become the equivalent of an asset gatherers ball, it is not surprising that it has become a loud lobby in favor of moar central bank monetary fraud.

  Nor were the BOJ and ECB the only source of renewed hope for monetary ease. Davos based whispers that the Fed’s expected March raise would be taken off the table quickly flooded the canyons of Wall Street. In no time flat the dip buyers were back in force.

  But let me pick out Ray Dalio for special mention in the roll call of shame. The founder of the $200 billion Bridgewater complex of  hedge funds was talking his book like there was no tomorrow on the sidelines at Davos, assuring the world’s punters that QE4 is just around the corner:

  “I think a move to a quantitative easing would bolster psychology,” he told CBBC’s “Squawk Box: at the so-called World Economic Forum at Davos…..This will be a negative for the economy, this market movement. The Fed should remain flexible. It’s shouldn’t be so wedded to a path……. “The risks are asymmetric on the downside, because asset prices are comparatively high at the same time there’s not an ability to ease,” he said. “That asymmetric risk exists all around the world. So every country in the world needs an easier monetary policy.”

  You can listen to the whole interview if you can manage your blood pressure, but it amounts to this. Dalio’s $80 billion “All Weather” portfolio is in deep trouble because his fabled “risk parity trade” is in danger of puking big time.

  So he urges the central banks to plunge into another fit of destructive money printing, and thereby keep tens of millions of ordinary savers and retirees impaled on the economic torture racks of ZIRP. Worse still, without a trace of compunction or embarrassment he urges the retail sheep back to the stock market slaughter for the bald faced reason that he needs to nix the VIX.

  Let me explain. Dalio ended up a billionaire not because he created a lot of economic value added or societal wealth gains as did Bill Gates, Steve Jobs, Sam Walton or even Jeff Bezos. The latter’s stock is way over-valued, but the immense gains he has delivered to tens of millions of consumers cannot be gainsaid.

  By contrast, Dalio did little more than stumble on a Wall Street gambling formula that would be absolutely bogus without the perverted “wealth effects”  policies of today’s Keynesian central bankers. The turbo-charging effect of Wall Street’s fast money traders and robo-machines piling on for the ride only makes Dalio’s rent scalping even more lucrative.

  They call the underlying dynamic “risk-on/risk-off” on bubblevision, but it amounts to this. In a rigged financial market in which stock and bond prices are continuously rising over time owing to systematic falsification of financial asset prices by the central banks, you can make tons of money being long. Yet there is even more megatons of windfall gains to be harvested if you add Dalio’s secret sauce, as I explained in a post a few months ago:

  Indeed, never in all of history have a few ten thousand punters made so many trillions in return for so little economic value added. But what Dalio did in this context was to invent an even more efficient machine to strip-mine the Fed’s monumental largesse.

   

  To wit, Bridgewater’s computers buy more stocks on the “rips”, when equity volatility is falling and prices are rising; and then on the “dips” they rotate funds into more bonds when equity volatility is rising and the herd is retreating to the safe haven of treasuries and other fixed income securities, thereby causing the price of the latter to rise.

   

  In short, there is a payday in every type of short-run financial weather because Bridgewater’s computers are monetary sump pumps; they constantly purge volatility from the portfolio.

  But here’s the thing. The “risk parity trade” could never exist in an honest free market.

   

  You couldn’t create algorithms to safely pump out volatility and milk the market on alternating strokes because the regularity of the waves on which it is based are not natural; they are the handiwork a central bank that has been taken hostage by the casino gamblers.

   

  Nor is “hostage” too strong a word. In the days of Paul Volcker and William McChesney Martin anybody who even speculated about 80 months of ZIRP would have been assigned to the William Jennings Bryan school of monetary crankery.

  The occasion for these musings was the August market swoon, which was triggered by the initial financial shock waves from the fracturing Red Ponzi of China. This caused something to happen which violated the rules generated by the 29-year regime of Bubble Finance inaugurated by Alan Greenspan in October 1987 when the stock market plunged on Black Monday.

  To wit, when stock prices fell by 12% during late August to the 1870 low on the S&P 500, bond prices did not surge owing to risk-off clamoring by the market herd. Accordingly, Bridgewater’s risk party portfolio became swamped with too much volatility on both the bond and equity side of Dalio’s big boat. So the algorithmic sump pumps went into over-time dumping stocks in order to drain the ship.

  Consequently, Bridgewater wiped out its entire profits for the year in a few days during August. This spasmodic stock selling, in turn, pushed the casino’s plain vanilla momo chasers and robo-machines into the drink in the process. Needless to say, the capsizing Big Boats in the casino were soon firing at each other in public, but also lining-up for a full court press at the Eccles Building.

  Here’s the reason. In an honest financial market in which debt is priced by the willingness of savers to forego current use of their money, there could be no “risk parity” trade because the price of stocks and bonds would not be inversely correlated. Indeed, the price of government bonds and blue chips corporates would fluctuate only modestly over time owing to secular changes in the propensity to save, but they would absolutely not vary inversely to the stock average on a short and mid-term basis.

  The graph below, therefore, is a pure product of central bank driven bubble finance. The stock index rose by 11X on a trend basis over the last three decades even as national income (GDP) rose by only 3X. That yawning gap was due to the Fed’s massive financial repression which subsidized the flow of speculative capital into the stock markets.

  At the same time, the yield on the 10-year treasury note dropped from 9% to 2%, meaning that the price of the risk free benchmark bond surged by order of magnitude over the period.

  So risk parity really worked only because in two stroke engine fashion it deftly moved short-term trading positions back and forth along the rising trend lines of the stock and bond markets, while minimizing the setbacks owing to occasional downward price corrections in both markets.

  

  The rub, of course, is that in a classic world of independent economies and central banks, even Dalio’s two stroke engine would not work. That’s because in response to the egregious money printing of the Bubble Finance era—-the Fed’s balance sheet rose from $200 billion to $4.5 trillion or 22X during the last three decades—-the US dollar’s exchange rate would have collapsed, causing a surge of domestic inflation and a 1970s style crash of bond prices.

  So enter the Red Ponzi of China and the linked and derivative mercantilist central banking policies of its EM supply chain and the petro-states which, on the margin, literally fueled the world’s explosive growth between 1992 and 2014

  As it happened, however, in the last few months the long reign of the global money printers has begun to sprout fractures. Over on the other side of the earth in China what had become a 20-year long $4 trillion cumulative “bid” for US treasuries and other DM fixed income securities has gone serious “offers”.

  This will prove to be one of the great financial pivots of history. During the course of their stupendous inflation of China’s $30 trillion Credit Ponzi, the red suzerains of Beijing bought treasuries hand over fist and thereby kept their price rising and the volatility of the world bond market falling.

  To be sure, this wasn’t charity for America’s debt besotted shoppers and governments. It was done in order to peg the RMB exchange rate and thereby keep its mercantilist export machine humming and the people grateful to their beneficent  communist party rulers.

  But at length it became too much of a good thing because every time the Peoples Bank Of China (PBOC) bought Uncle Sam’s debt it similtaneously expanded the internal banking system and supply of RMB credit. Moreover, after Beijing launched its madcap infrastructure building campaign in response to the the 2008 financial crisis the phony construction and investment boom which ensued attracted increasing waves of hot money from abroad, thereby inflating the domestic Chinese economy to a fever pitch.

  In fact, the PBOC was forced to let the RMB slowly rise against the dollar to keep its banking system from becoming a financial runaway. But the steadily rising RMB drastically accelerated the inflow of foreign capital and speculative funds into the Chinese economy, thereby filling the vaults of the PBOC to the brim at more than $4 trillion early this year compared to a few hundred billion at the turn of the century.

  

  But these weren’t monetary reserves in any meaningful or historic sense of the term; they were the fruits of an utterly stupid mercantilist trade policy and the conversion of a naïve old man, and survivor of Mao’s depredations, to the view that communist party power could be better administered from the end of a printing press than from the barrel of a gun.

  But Mr. Deng merely unleashed a Credit Monster that sucked in capital and resources from all over the globe into a domestic whirlpool of digging, building, borrowing, investing and speculation that was inherently unstable and incendiary. It was only a matter of time before this edifice of economic madness began to wobble and sway and to eventually buckle entirely.

  That time came in 2015 – roughly 30 years after Mr. Deng proclaimed it is glorious to be rich. So saying, he did not have a clue that a credit swollen simulacrum of capitalism run by communist apparatchiks was a doomsday machine.

  In any event, what is happening in China now amounts to the end of the risk parity trade. Because China’s state economic prison is not escape proof, it is now experiencing massive, unrelenting capital flight. That means that is will be forced to sell dollar and euro bonds and thereby choke its own banking system and domestic economy.

  As we pointed out in a post earlier this week, China’s faltering industrial economy was more than evident in the 10% decline in freight volume it recorded during 2015 – an outcome its has not experienced since Mr. Deng’s proclamation.

  But this means its oil consumption will soon stop growing, and actually already has once you set aside its purchases for the strategic reserves’, which are now full.

  Needless to say, sinking global oil demand from China and the EM means that oil prices will remain trapped in the $20s and the petro states will be forced to dump growing portions of their $7 trillion in sovereign wealth funds, driving both stock and bond markets lower.

  That’s why Ray Dalio is so very afraid. It is only a matter of time before the risk parity machines and their imitators and confederates trigger a selling crescendo like that of October 1987.

  But this time there can be no central bank rescue. The latter have already shot their wad – expanding their collective balance sheet from $2 trillion in the mid-1990s to $21 trillion today.

  But since the global economy has had its artificial boom and CapEx frenzy already, years of deflationary liquidation and correction lie ahead. Money printing has failed. Any effort by the central banks to double down on another $20 trillion of bond purchases would blow the world’s financial casinos sky high.

  At the end of the day, the asset gathers will profoundly regret what they are clamoring for.

  

  

  

  

  

• Anyone Using New York City Roads After 2:30pm Will Be Arrested

  Congratulations New Yorkers: moments ago not only did your local authorities ban all travel starting at 2:30pm…

  • CUOMO: PORT AUTHORITY ISSUED TRAVEL BAN ON G. WASHINGTON BRIDGE
  • CUOMO: PORT AUTHORITY ISSUED BAN ON LINCOLN, HOLLAND TUNNELS
  • CUOMO: PORT AUTHORITY ISSUED BAN ON BAYONNE, GOETHALS BRIDGES
  • MTA TO SUSPEND LIRR, METRO-NORTH SERVICE AS OF 4PM
  • CUOMO: PORT AUTHORITY ISSUED BAN ON OUTERBRIDGE CROSSING

  … but the local police announced that anyone using New York roads after that time will be arrested on the spot, like the vile criminal filth they are.

  We will begin enforcing the travel ban immediately at 2:30 p.m in #NYC #Blizzard2016

  — NYPD NEWS (@NYPDnews) January 23, 2016

  After 2:30 p.m and you’re on the road, we will arrest you @NYPDChiefofDept says

  — NYPD NEWS (@NYPDnews) January 23, 2016

  “Last year no one got arrested. People made the right decisions. We are looking for that again today,” @NYPDChiefofDept says re: travel ban

  — NYPD NEWS (@NYPDnews) January 23, 2016

  Stay off the road, @NYPDChiefofDept says. We don’t want to have to arrest you. pic.twitter.com/MOUvbuLARy

  — NYPD NEWS (@NYPDnews) January 23, 2016

  

  

  

  

• Calais On Lockdown After 100s Of Migrants Storm UK-Bound Ferry

  Update: 35 ppl arrested, including 24 refugees after storming ferry at Calais port Via @BFMTV

  * * *

  Coinciding with UK's Labor leader Jeremy Corbyn's arrival at the French refugee camps, Sky News reports the port of Calais has been temporarily closed as 100s of migrants stormed on to a ship in the hope of reaching the UK. About 50 migrants are thought to have made their way on to a P&O-operated vessel called Spirit of Britain, and police are at the scene and have reportedly deployed water cannons to break up the crowds of protesters.

  DFDS Seaways tweeted: "The Port of Calais has been temporarily closed due to a migrant invasion, as soon as they are cleared the Port will re-open."

  CALAIS 62 : Des réfugiés ont réussi à pénétrer dans le port. Ils occupent actuellement le navire "Spirit Of Britain" pic.twitter.com/tTau2yZXDn

  — Infos Française (@InfosFrancaise) January 23, 2016

   

  #Calais refugees have accessed the port. They currently occupy the ship "Spirit of Britain" pic.twitter.com/x3aDfoYYO6 https://t.co/c9Yjix7rVm

  — Calais Solidarity (@calaisolidarity) January 23, 2016

  The shut-down follows a protest march in support of the migrants that was reportedly attended by 2,000 people.

  

  

  

  Authorities in France said a group of 500 people illegally forced their way through barriers and police lines, 150 migrants were able to get into the cordoned-off area.

   

  ?URGENT CALAIS 62 :Débordements à Calais. Le port de Calais pris d'assaut par plus de 500 migrants. (@plusde6) pic.twitter.com/8d9Ov2JGli

  — Infos Française (@InfosFrancaise) January 23, 2016

   

  A statement from the Port of Dover said: "The Port of Calais is currently experiencing migrant activity which has caused disruption to ferry services. Therefore services to and from Calais via the Port of Dover are affected."

  

  The latest incident coincides with Jeremy Corybn's visit to the migrant camps in Calais and Dunkirk where thousands of people are sleeping rough – his first foreign trip as Labour leader.

  He said the conditions would be a "disgrace anywhere" – and that thousands of people were living in a "sea of mud".

  

  

  

  

  

  

• The End Is Nigh For The Fed's "Bubble Epoch"

  Submitted by Bill Bonner of Bonner & Partners (annotated by Acting-Man's Pater Tenebrarum),

  Market Mythology

  Twice in the last 15 years, markets have tried to correct the mistakes and excesses of the Bubble Epoch.

   

  

  Business cycle trumps central planning again.

   

  Each time, the Fed came back with even more mistakes and excesses. Trillions in new credit… lower lending rates… easier terms… ZIRP… QE… and the Twist!

   

  

  The gaggle of price-fixers the job of which is to regularly falsify one of the most important price signals in the economy. The idea that the economy can be “improved” by the interventions of a handful of people who have zero practical economic experience and rely on extremely dubious theories to guide their decisions is downright bizarre. Who can possibly believe that this works? It is a huge farce – one that is very dangerous for prosperity and economic progress.

   

  Over the short run, markets respond to myths. Investors are ready to believe almost anything… for a while. But over the long run, there is death and destruction – a reality outside of what we believe.

  No matter how badly investors want asset prices to go up, for example, asset prices don’t always comply.

  The financial media don’t know what to do. Typically, they downplay a bear market as long as they can… explaining the many reasons why the sell-off is “overdone” and why the “bottom” has already been found.

  The Wall Street Journal, for example, tells us that the “market’s panic is incongruent” with economic reality. Yahoo! Finance already sees “signs of capitulation.” It offers advice on “how to trade a bear market,” too.

   

  

  The DJIA and crude oil. Over the past two days they have begun to bounce a little after becoming extremely oversold. Still, the market doesn’t care about anyone’s opinions – it will do whatever it needs to do – click to enlarge.

   

  At the Diary, we don’t believe you should try to “trade a bear market.” Bears are treacherous and unpredictable. Our best advice is to stay out of its way. We don’t know whether it will get uglier now… or further down the road. But sooner or later, markets will retest the myths that support today’s asset prices.

  They will begin by asking questions: Are stocks too expensive? Can investors repay their debt? Is the economy capable of real growth? Can a small bunch of PhD economists with no market or business experience really manage the entire world’s economy?

  As to the first, second, and third questions, we don’t know the answers. But the answer to the fourth is an unhedged, undiluted “no.”

   

  Only Human

  Greenspan, Bernanke, and Yellen are, after all, only human. They respond to myths as much as anyone… maybe more. They’ve spent their entire careers studying the sacred texts of modern economics. Like Talmudic scholars late in life, they aren’t likely to convert to Baptists!

  They say they want inflation at 2%. Not 1%. Not 3%. Two hundred basis points – no more, no less. What theory… what experience… what revelation leads them to think that an economy should have annual price increases of 2%? There is none. It is a modern myth. In reality, prices go up and down on supply and demand. There’s no more reason they should always go up by 2% than down by 2%.

   

  

  The “era of price stability” under the Fed. As you can see, they are real masters at fulfilling their absurd mandate. Their inflation targeting theory is not only completely bereft of theoretical and empirical support, it is in fact plainly contradicted by both theory and the empirical studies that do exist (some of which have been undertaken by the Fed’s own economists!). In short, it is complete hokum – click to enlarge.

   

  The PhDs at the helm of the world’s central banks also believe they can change people’s buying, selling, and investing decisions – for the better – by providing them with false data. We have no doubt the Fed can change behavior. It’s the “for the better” part that troubles us.

  Interest rates by Fed diktat, for example, send completely phony signals, since they disguise the true cost of credit. The theory goes that low interest rates motivate people to borrow and spend. But where’s the evidence? Isn’t there an economic law somewhere that cutting incomes for savers has the opposite effect?

  And there’s more to the story. There’s a reality, as well as a myth. Reality is that resources are limited. Prices tell us what we’ve got to work with. Falsify prices and you get errors of omission and commission. After a while, the system suffers from things it shouldna, oughtna done.

  As Hjalmar Schacht, Germany’s minister of economics in the 1930s, put it: “I don’t want a low rate. I don’t want a high rate. I want a true rate.”

  An honest interest rate tells the truth about how much savings are available and at what price. People still make mistakes; they still get up to some pretty weird stuff. But at least the perverts aren’t handing out candy on the playground.

   

  

  “Old School” economy minister and later central banker, Hjalmar Schacht – not interested in manipulate interest rates.

   

  Greasy Numbers

  Then there’s the “unemployment rate.” The feds look at its figures and tell us the recovery has been a success… because the unemployment rate is back down to about 5%. They are citing as “fact” a statistic so greasy even a witchdoctor would be embarrassed by it.

  In December, for example, the Bureau of Labor statistics announced that 292,000 Americans had found jobs. This was widely regarded as a triumph for the Fed. Many times has Janet Yellen said she feels the pain of the jobless. Naturally, she takes great pride in the current job picture as she has painted it.

   

  

  By the time the final revisions arrive, the numbers won’t be recognizable anymore. The initial release is usually so far removed from reality, one wonders why anyone should be interested in it at all. The main reason why governments gather these statistics is that they give them a reason to meddle with the economy – click to enlarge.

   

  But as you have probably heard by now, only 1 out of every 28 of those new hires can buy you a beer to toast their new-found fortune. The others – 281,000 of them – don’t exist. The feds merely made a “seasonal adjustment.” The jobs were mythical, in other words.

  Mythical facts. Mythical theories. Mythical recovery. Watch out. The market is a myth buster.

  

  

  

  

  

• Bloomberg May Run For President After Becoming "Frustrated" With Race Gone "Haywire"

  If you enjoy the circus, then this presidential campaign is for you.

  In the last nine months, we’ve witnessed the unlikely rise of not one, but two dark horse candidates to the top of the polls and we’ve also had the pleasure of looking on as a dizzying array of GOP candidates engaged in a series of soapbox free-for-all debates that at times devolved into pure comedy.

  Bernie Sanders, a far-left socialist running on a platform that includes such pipe dreams as free college for everyone, has emerged as a real threat Hillary Clinton on the Democratic ticket.

  On the Republican side, Donald Trump has managed to pull off an unlikely transition from the boardroom to the ballot box, on the way to whipping large swaths of the electorate into a nationalistic frenzy.

  Meanwhile, Clinton is under investigation for possibly throwing around state secrets on a private e-mail server and Ted Cruz may not even be eligible to hold office.

  Well just in case things needed to get any more entertaining, it now appears billionaire and former New York City mayor Michael Bloomberg is going to insert himself into the race as an independent candidate.

  “Former New York Mayor Michael Bloomberg is taking early steps toward launching an independent campaign for president, seeing a potential path to the White House amid the rise of Republican Donald Trump and Democrat Bernie Sanders,” AP reports, adding that “the billionaire media executive is said to be concerned by Trump’s lasting hold on the Republican field and is worried about the impact of Sanders’ campaign on Hillary Clinton’s bid for the Democratic nomination.”

  In other words, Bloomberg is afraid that America may well end up having to choose between becoming i) a socialist “paradise” or ii) a nation run by a brazen real estate mogul with absolutely no filter and not much in the way of experience to suggest he’s fit for the job.

  Apparently, Bloomberg will almost definitely run if Bernie Sanders wins the Democratic ticket and either Cruz or Trump prevails on the GOP side. 

  “Mike Bloomberg for president rests on the not-impossible but somewhat unlikely circumstance of either Donald Trump or Ted Cruz versus Bernie Sanders,” said Edward G. Rendell, the former governor of Pennsylvania and a past Democratic National Committee chairman. “If Hillary wins the nomination, Hillary is mainstream enough that Mike would have no chance, and Mike’s not going to go on a suicide mission.”

  Underscoring our assessment of the campaign to date, The New York Times says Bloomberg “has grown more frustrated with what he sees a race gone haywire.”

  “At a dinner party late last fall at the home of Roger C. Altman, an investment banker and former deputy Treasury secretary, Mr. Bloomberg delivered a piquant assessment of Mrs. Clinton as a presidential candidate,” The Times writes, adding that “in the presence of Mr. Altman, a longtime supporter of Mrs. Clinton and her husband Mr. Bloomberg described her as a flawed politician, shadowed by questions about her honesty and the continuing investigation into her email practices as secretary of state.”

  “The fact is Hillary Clinton is behind in Iowa and New Hampshire. That should scare a lot of people — and it does,” one advisor said.

  While commentators are so far divided on the effect a Bloomberg run would have on the Democratic and Republican tickets, one thing is certain: Hillary Clinton has the most to lose. Voters who are fervently pro-Trump or pro-Sanders probably wouldn’t be swayed. However, for voters who prefer a more “mainstream” candidate but who aren’t satisfied with Clinton, Bloomberg might well be a welcome addition to the race.

  “Even a victory by Mrs. Clinton in the Democratic primaries might not preclude a bid by Mr. Bloomberg, his associates said, if he believed she had been gravely weakened by the contest,” The Times continues. Alan Patricof, a financier and longtime donor to the Clintons who is also friendly with Mr. Bloomberg says it would be “a terrible thing for the Democrats” if Bloomberg were to run as an independent. 

  Trump concurs. Bloomberg “would take a lot of votes away from Hillary,” he told ABC last week.

  Here’s a bit more color from AP:

  Bloomberg, one of the richest people in the United States, has previously toyed with presidential runs, but concluded ahead of the 2008 and 2012 campaigns he could not win.

   

  The former mayor is largely a social liberal — he fought for same-sex marriage in New York and is pro-abortion rights — and implemented a number of health reforms in New York City, banning smoking in public places and instituting calorie counts on menus.

   

  He has also become arguably the nation’s most vocal proponent of gun control, using his fortune to bankroll candidates across the country who clash with the National Rifle Association.

   

  But liberals have found fault with his cozy ties to Wall Street and his unquestioned support for the New York Police Department, which drove down crime during his tenure but engaged in tactics that a federal judge later ruled discriminated against minorities.

  And from The Times:

  Mr. Bloomberg, 73, has already taken concrete steps toward a possible campaign, and has indicated to friends and allies that he would be willing to spend at least $1 billion of his fortune on it, according to people briefed on his deliberations who spoke on the condition of anonymity because they were not authorized to discuss his plans. He has set a deadline for making a final decision in early March, the latest point at which advisers believe Mr. Bloomberg could enter the race and still qualify to appear as an independent candidate on the ballot in all 50 states.

   

  Mr. Bloomberg would face daunting and perhaps insurmountable obstacles in a presidential campaign: No independent candidate has ever been elected to the White House, and Mr. Bloomberg’s close Wall Street ties and liberal social views, including his strong support for abortion rights and gun control, could repel voters on the left and right.

  As for how Trump would react if Bloomberg does indeed put his name in the hat, the GOP frontrunner says the former mayor is “a great guy” and a “friend.” 

  Check back in March to see how quickly that rhetoric dries up if Bloomberg becomes the second billionaire vying for America’s top elected office.

  *  *  *

  Apparently, Bloomberg is already polling fifth… 

  Bloomberg at 5% to win, ahead of Christie, Bush. On Predictit pic.twitter.com/rQZwlPmqhC

  — Mike Zaccardi, CMT (@MikeZaccardi) January 23, 2016

  

  

  

  

  

• Confident Trump Says "Could Shoot Somebody" & Still Win

  Did Donald Trump just jump the shark with his extreme comments? While the correlation between the un-PC-ness of The Donald's comments and his poll success is high, his latest statement may be too much for some…

  "I could stand in the middle of 5th Avenue and shoot somebody and I wouldn't lose voters," Trump said at a campaign rally in Iowa.

   

   

   

  While he may well be correct in his statement, we suspect the mainstream media will have a field day with this one as the Iowa and New Hampshire caucuses loom.

  

  We suspect though that the Brits will certainly ban him from entry if he did.

   

   

  Of course, as we detailed previously, Trump's success is not as much his doing as a symptom of growing dissatisfaction in America. In Chronicles, in 1996, Francis, a paleoconservative and proud son of the South, wrote:

  “[S]ooner or later, as the globalist elites seek to drag the country into conflicts and global commitments, preside over the economic pastoralization of the United States, manage the delegitimization of our own culture, and the dispossession of our people, and disregard or diminish our national interest and national sovereignty, a nationalist reaction is almost inevitable and will probably assume populist form when it arrives. The sooner it comes, the better.”

  What we saw through a glass darkly then, we now see face to face.

  Is not Trump the personification of the populist-nationalist revolt Francis predicted?

   

  

  And no matter what, Trump is not the last of the populist-nationalists.

  Given his success, other Republicans will emulate him. Already, other candidates are incorporating his message. The day Francis predicted was coming appears to have arrived.

  

  

  

  

  

• Square Holes And Currency Pegs

  Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

  When David Bowie died, everybody, in what they wrote and said, seemed to feel they owned him, and owned his death, even if they hadn’t thought about him, or listened to him, for years. In the same vein, though the Automatic Earth has been talking about deflation (for 8 years, it’s our anniversary today) and the looming China Ponzi disaster for a long time, now that these things actually play out, everybody talks as if they own the story, and present it as new (because, for one thing, well, after all for them it is new…).

  And that’s alright, it’s how people live, and function, they always have, and no-one’s going to change that. It’s just that for me, I’ve been wondering a little about what to write lately, because I’ve already written the deflation and China stories, many times, before most others tuned into them. But still, it’s strange to now, as markets start plunging, read things like ‘Deflation is Here’, as if deflation is something new on the block.

  Deflation has been playing out for years. Central bank largesse has largely kept it at bay in the public eye, but that now seems over. Debt deflation is inevitable when -debt- bubbles burst, and when these bubbles are large enough, there’s nothing that can stop the process, not even miracle growth. But you’re not going to understand this if and when you look only at falling prices as the main sign of deflation; they’re merely a small part of the process, and a lagging one at that.

  A much better indicator of deflation is the velocity of money, the speed at which ‘consumers’ spend money. And velocity has been going down for years. That’s where and how you notice deflation, when combined with the money and credit supply. Which have soared in most places, but were no match for a much faster declining velocity. People have much less money to spend. Which shouldn’t be a surprise if, just to name an example, new US jobs pay 23% less than the ones they’re -supposedly- replacing.

  

  As I said a few weeks ago, it’s probably only fitting, given its pivotal role in our economies and societies, that it’s oil that’s leading the way down. Other commodities are not far behind, because demand for -and spending on- them has been plummeting too, as overproduction and overinvestment, especially in China, do the rest.

  However you look at present global debt, percentage wise, or in absolute numbers, you name it, there’s never been anything like it. We outdid ourselves by so much we don’t have the rational or probably even subconscious ability to oversee what we’ve done. We live in the world’s biggest bubble ever by a margin of god only knows how much. And that bubble will deflate. It is already doing just that.

  The next steps in the debt deflation process will of necessity be chaotic. A substantial part of that chaos is bound to emerge from denial, and the reluctance to accept reality. Which often rise from a poor understanding of the processes taking place. It certainly looks as if there’s lots of that in China, where both the working principles of financial markets and the grip authorities -can- have on them, seem to be met with a huge dose of incomprehension.

  Mind you, given the levels of comprehension vs outright ‘theoretical religion’ among leading western politicians and economists, the ones who most often rise to decision-making positions in governments and financial institutions, we have nothing on China when it comes to truth and denial.

  From all that follows what will be the next leg down in the ‘magnificent slump’: the awfully messy demise of currency pegs.

  In a short explainer for the uninitiated, allow me to steal a few words from Investopedia: “There are two types of currency exchange rates—floating and fixed, still in existence. Major currencies, such as the Japanese yen, euro, and the US dollar, are floating currencies—their values change according to how the currency is being traded on forex markets. Fixed currencies, on the other hand, derive value by being fixed (or pegged) to another currency.”

  While there are more currency pegs in the world today than we should care to mention -there are dozens-, it seems fair to say that in today’s deflationary environment, practically all are under siege. Most African currencies are pegged to the euro, and they do have to wonder how smart that is going forward. Still, the main, and immediate, problems seem to arise in pegs to the US dollar (with one interesting exception: the Swiss franc – more in a bit).

  Most oil producing Gulf nations are pegged to the greenback. So is Hong Kong. And, for all intents and purposes, so is China, though you have to wonder what a peg truly is if you change it on a daily basis. China is on its way to a peg vs a basket of currencies, but that seriously interferes with its stated intention to become a reserve currency -of sorts-. If your currency can’t stand on its own two feet, i.e. float, you’re per definition weak.

  China’s vice president Li Yuanchao said this week in Davos that Beijing has no plans to devalue the yuan, i.e. to cut the peg to the dollar. Then again, he also stated that “central command” would ‘look after’ stock market investors. Put the two statements together and you have to wonder what the one on the yuan (couldn’t help myself there) is worth.

  The first “link in the chain” that appears vulnerable is the Hong Kong dollar, which is stuck between China and the US, and unlike the yuan still has a solid dollar peg, but, obviously, also has a strong link to the yuan. The issue is that if China continues on its current course of daily small yuan devaluations, the difference with the HKD will grow so large that ever more investments and savings will move to Hong Kong, despite a maze of laws designed to keep just that from happening.

  And that is the overall danger to currency pegs as they still exist in today’s rapidly changing global financial world: all economies are falling, but some are falling -much- faster than others.

  Not so long ago, the World Bank called on Saudi Arabia to defend its USD peg with its FX reserves. It even looked as if they meant it. But Saudi Arabia has no choice but to deplete those reserves to prevent other nasty things from happening that are much more important than a currency peg. Like social chaos.

  It’s somewhat wonderfully ironic that the main most recent experience with abandoning a peg comes from a source that faced -and now feels- the exact opposite of what nations like Saudi Arabia and China do. That is, it became too costly and risky for Switzerland to keep its franc pegged (or ‘capped’, to be precise) to the euro any longer a year ago, because of upward, not downward pressure.

  Since then, the euro went from 1.20 franc to 1.09 or thereabouts, which perhaps doesn’t look all that crazy, and many ‘experts’ seek to downplay the effects of the move, but it’s still estimated to have cost the Swiss some $25 billion. For comparison, the US has 40 times as many people as Switzerland’s 8 million, so the per capita bill would be close to $1 trillion stateside. That wouldn’t have added to Yellen’s popularity. Currency pegs and caps can be expensive hobbies.

  And that’s why the Saudis and Chinese are so anxious about letting go of their pegs. That and pride. In their cases, their respective currencies wouldn’t, like the franc, rise versus the one they’re pegged to, they would instead lose a lot of value. And in the fake markets we live in today, where price discovery has long since been left behind, there’s no telling how much. Well, unless they seek to keep control, but then it would be just a matter of time until they need to rinse and repeat.

  Even if it seems obvious to make a particular move, and if everybody knows you really should, showing what can be perceived as real weakness could be a killer when everything else around you is manipulated to the bone.

  Still, neither Beijing nor Riyadh stand a chance in a frozen-over hell, to ultimately NOT sharply devalue their currencies or just simply let go of their pegs. Simply because China’s economy is falling to pieces, and the Saudi’s dependence on oil prices is dragging it into a financial gutter. Just look at what falling prices had done to the riyal vs non-pegged oil producer currencies by October 2015, when Brent was still at $45:

  

  The Saudis could have been paid for their oil in a currency worth perhaps twice as much as their own, the one their domestic economy runs on. That’s overly simplistic, because the Saudi tie to the USD runs far and deep, but that doesn’t make it untrue.

  What will bring down the Chinese and Saudi pegs, along with a long list of other pegs, is, how appropriately, the very same markets they’ve been relying on to NOT function. The bets against Hong Kong’s ability to maintain its USD peg have already started, and China is next, along with the House of Saud (the latter two just take more fire-power). Which of course is exactly why they speak their soothing ‘confident’ words. Words that are today interpreted as the very sign of weakness they’re meant to circumvent.

  What worked for George Soros in his bet vs the Bank of England and the pound sterling in 1992, will work again unless these countries are ahead of the game and swallow their pride and -ultimately- smaller losses.

  Granted, so much will have to be recalibrated if the yuan devalues by 50% or so, and the riyal does something similar (it’s very hard to see either not happening), that it will take some serious time before everyone knows where they -and others- stand. And since volatility tends to feed on itself once there’s enough of it, it seems to make sense that governments would seek control. But that doesn’t mean they -can- actually have any.

  Today’s major currency pegs are remnants of a land of long ago lore; they have no place in this world. They are financial misfits who’ve been allowed to persist only because central banks and governments have been able to distort markets for as long as they have. But that ability is not infinite, and it’s in nobody’s longer term interest that it would be.

  Not even those that now seem to profit most from it. We will end up with societies that function no better for the ridiculous Davos elites than they do for the bottom rung. But no elite will ever see that, let alone admit it voluntarily.

  Deflation and foreign exchange chaos. There’s your future. As for stocks and oil, who’s left to buy any? Not the consumer who’s 70% of US and perhaps 60% of EU GDP, they’re maxed out on private debt. So why would investors put their money in either? And if they don’t, where do you see prices go?

  Even more importantly, deflation makes a lot of money, and even much more virtual money, vanish into overnight thin air. That’s what everyone is running into when all these currencies, China, Saudi, Gulf states et al, are forced to recalibrate. $17 trillion disappeared from global equities markets in the past 6 months.

  How much vanished from the value of ‘official’ oil reserves? How much from iron ore and aluminum? How much do all the world’s behemoth corporations and banks and commodity-exporting countries have their resource ‘wealth’ on their books for in their sunny creative accounting models? And how much of that is just thin hot air too?

  We’re about to find out.

  

  

  

  

  

• Why Are There No Stock Buyers? Goldman Has Five Answers

  Unlike Goldman’s cross asset strategists, whose six Top Trade recommendations for 2016 have gotten destroyed three weeks into the year, with half of them already stopped out as we showed yesterday, the bank’s chief equity strategist David Kostin has been notably more accurate in his predictions, with his conservative 2015 year end target of 2000 on the S&P almost exactly where the stock market ended.

  Since then stocks have taken a sharp leg lower, with the S&P dropping as much as 15% from its all time high, half the average post-war recession drawdown.

  Which has forced Goldman’s clients to ask some very simple questions, starting with: “just what is going on”, and more importantly “what does the market know that they don’t:

  Despite the generally positive US economic data, the sudden fall in asset prices has investors focused on the potential for a US recession. Clients understandably point to the stock market as a cause for concern, and wonder what the market has come to know in early 2016 that they do not.

  Kostin responds:

  A long few weeks ago, at the end of 2015, client conversations centered on the limited set of opportunities in an expensive stock market. With the median S&P 500 stock trading at a forward P/E of 17x – ranking in the 94th historical percentile – clients were reluctant to add exposure to equities, but almost universally expressed a desire to buy the market 10% lower.

  So where are the buyers? According to Goldman’s clients these are the 5 biggest risks facing anyone will to BTFD:

  1. who is brave enough to catch a proverbial falling knife?;
  2. US industrial activity is contracting and the consumer will soon follow, dragging the broad economy into recession;
  3. the plunge in crude increases financial stress on Energy firms, and will lead to further cuts in capex and a profit downturn across many industries;
  4. China’s economy is slowing and the RMB will soon be devalued, exporting deflation and prompting the Fed to halt its tightening path, unsettling investors; and
  5. share prices need to fall further to offer an attractive risk-adjusted return given heightened economic and market risks.

  According to Kostin the biggest risks remain energy and China, where Goldman’s own GDP ‘estimator’ shows just 4.5% growth, 230 bps below the official number…

  Energy and China have been the two sources of negative macro news in 2016. Most visibly, WTI crude plummeted by 20% to below $30/barrel from $37 at the start of the year as global equities tumbled and Treasury yields dipped below 2%. Crude oil has now declined by 31% in 12 months and trades 70% below its local peak of $107 in mid-2014.

   

  

   

  In China, the government reported 4Q GDP growth of 6.8%. However, during the same time period our China CAI (Current Activity Indicator) expanded at an average of just 4.5%, 230 bp slower than the official measure. Earlier this week our December CAI reading suggested China economic growth has decelerated to just 4.2%.

  … even as the US economy has stubbornly refused to enter an all out recession (despite the clear manufacturing contraction):

  In contrast, our MAP index of US economic surprises stands at roughly the same level as in early December when the S&P 500 stood at 2100. Broadly speaking, the industrial side of the US economy has continued to disappoint, with the ISM manufacturing index falling for six consecutive months to its current level of 48.2. Meanwhile, employment and services data have signaled economic health, with job creation averaging 284k during the past three months, lifting the full-year 2015 total to 2.7 million. Personal income is growing and consumer sentiment remains healthy. Although it has declined from mid-2015 highs, the ISM nonmanufacturing index remains deep in expansion territory at 55.3. Our economists expect US GDP growth will accelerate from its tortoise-like pace of around 1% in 4Q as headwinds from the inventory cycle, financial conditions, and oil prices fade.

  So what does Goldman expect will happen in the coming year?

  We continue to believe that a US recession is unlikely in 2016 and that the S&P 500 will rise to 2100 by year-end. Our economists expect that US GDP will grow at 2% this year as the Fed hikes rates four times. They estimate that risks to the US economy from a further slowdown in China are limited, and that the negative effects of lower oil prices will be offset by benefits to the consumer (see Global Economics Analyst, Jan. 15, 2016).

   

  Our S&P 500 EPS estimate of $117 assumes US GDP growth of 2%. Every 100 bp shift in GDP growth impacts EPS by $5 per share. Our 2016 EPS growth forecast is 11%. However, EPS growth for S&P 500 ex-Energy will equal only 5% (see page 24 for EPS growth by sector).

   

  The downdraft in equities YTD clearly reveals that investors believe a recession is more likely than we expect. The S&P 500 P/E has contracted by 6%. Cyclicals have underperformed Defensives by 422 bp YTD, as Telecom Services, Utilities, and Consumer Staples have led the market. Fed funds futures are pricing just over one hike in 2016.

   

  Of course, prolonged market weakness in itself has the potential to weigh on growth, providing another example of financial market reflexivity. Even if the correction in equity prices was unwarranted based on economic fundamentals, the sell-off may become a self-fulfilling prophecy if lower share prices and increased volatility weigh on consumer spending and corporate investment.

  Will Goldman be right, and will the US economy bounce back despite a hard landing in China, despite SWFs liquidating assets (up to $4 trillion in total), despite a new round of European bank tremors, despite increasing anti-austerity tensions in Europe’s periphery, and despite headwinds from a tightening Fed? Not even Kostin knows the answer, which is why he provides to scenarios how to trade the US: one assuming a recession, and assuming no recession.

  For investors who do not expect a US recession, the current S&P 500 correction provides a buying opportunity. At the start of the year we forecast the index would rise by just 3% in 2016. Following the correction the prospective price return is now 10% (total return of 12% with dividends).

   

  For investors concerned about a recession in 2016, our recommended strategies of strong balance sheets and domestic sales exposure should deliver relative outperformance even in the event of an economic downturn. These qualities have outperformed recently, with long/short basket trades returning 131 bp and 413 bp YTD, respectively. We believe these strategies should continue to generate strong returns given the trends of relative US economic strength, a rising US dollar, high corporate leverage, and oil-exacerbated credit market weakness.

   

  

  And just like that, Goldman’s clients are once again happy.

  

  

  

  

  

  

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• Mitch McConnell Moves To Grant The President Unlimited War Powers With No Expiration Date

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  The essential act of war is destruction, not necessarily of human lives, but of the products of human labour. War is a way of shattering to pieces, or pouring into the stratosphere, or sinking in the depths of the sea, materials which might otherwise be used to make the masses too comfortable, and hence, in the long run, too intelligent.

   

  – From George Orwell’s, 1984

  This morning, I came across an extremely important story with tremendous long-term negative implications for freedom in these United States. It relates to the fact that the always shady Senate Majority Leader Mitch McConnell is moving to fast track an Authorization of Military Force (AUMF) for the President that would allow for unrestricted warfare against ISIS. There would be no time or geographic restrictions on this authorization. Rather than being a favor to President Obama, this is primarily a means to ensure that whoever takes control in 2017 receives a blank check for unrestrained militarism with no expiration date. This is terrifying.

  Before I get into the issue at hand, some background is necessary. Many legal scholars, and indeed, even many members of Congress have admitted that Obama’s war against ISIS is illegal and unconstitutional. One of the best articles I’ve read on why this is the case, was published in the New York Times in 2014, which I covered in the post, Obama’s ISIS War is Not Only Illegal, it Makes George W. Bush Look Like a Constitutional Scholar. Here are a few excerpts:

  President Obama’s declaration of war against the terrorist group known as the Islamic State in Iraq and Syria marks a decisive break in the American constitutional tradition. Nothing attempted by his predecessor, George W. Bush, remotely compares in imperial hubris.

   

  Mr. Bush gained explicit congressional consent for his invasions of Afghanistan and Iraq. In contrast, the Obama administration has not even published a legal opinion attempting to justify the president’s assertion of unilateral war-making authority. This is because no serious opinion can be written.

   

  This became clear when White House officials briefed reporters before Mr. Obama’s speech to the nation on Wednesday evening. They said a war against ISIS was justified by Congress’s authorization of force against Al Qaeda after the Sept. 11, 2001, attacks, and that no new approval was needed.

   

  But the 2001 authorization for the use of military force does not apply here. That resolution — scaled back from what Mr. Bush initially wanted — extended only to nations and organizations that “planned, authorized, committed or aided” the 9/11 attacks.

   

  Not only was ISIS created long after 2001, but Al Qaeda publicly disavowed it earlier this year. It is Al Qaeda’s competitor, not its affiliate.

   

  Mr. Obama may rightly be frustrated by gridlock in Washington, but his assault on the rule of law is a devastating setback for our constitutional order. His refusal even to ask the Justice Department to provide a formal legal pretext for the war on ISIS is astonishing.

  It’s been almost two years since that Op-ed was written, and Obama is still carrying out his illegal war on ISIS with barely a peep from our incredibly corrupt and useless Congress. Indeed, the only thing Congress is scheming to do is to ensure the next President receives a blank check for perpetual war.

  From the National Journal:

  Sen­ate Ma­jor­ity Lead­er Mitch Mc­Con­nell offered mem­bers a snow-week­end sur­prise late Wed­nes­day night: Quietly tee­ing up a po­ten­tial de­bate on the leg­al un­der­pin­ning for the fight against IS­IS.

   

  After months of wor­ry­ing that such a res­ol­u­tion—known as an au­thor­iz­a­tion for the use of mil­it­ary force—would tie the next pres­id­ent’s hands, Mc­Con­nell’s move to fast-track the meas­ure sur­prised even his top deputy, Sen­ate Ma­jor­ity Whip John Cornyn, who was un­aware that Mc­Con­nell had set up the au­thor­iz­a­tion.

   

  The AUMF put for­ward by Mc­Con­nell would not re­strict the pres­id­ent’s use of ground troops, nor have any lim­its re­lated to time or geo­graphy. Nor would it touch on the is­sue of what to do with the 2001 AUMF, which the Obama ad­min­is­tra­tion has used to at­tack IS­IS des­pite that au­thor­iz­a­tion’s in­struc­tions to use force against those who planned the 9/11 ter­ror­ist at­tacks. By con­trast, the leg­al au­thor­ity put for­ward by the ad­min­is­tra­tion last Feb­ru­ary wouldn’t au­thor­ize “en­dur­ing of­fens­ive ground com­bat op­er­a­tions” and would have ended three years after en­act­ment, un­less reau­thor­ized.

  Read that over and over and over until you get how incredibly dangerous it is.

  Don Stew­art, Mc­Con­nell’s spokes­man, said Thursday in an email that the new AUMF “is not the one the [p]res­id­ent asked for” and “not one that would tie the [p]res­id­ent’s hands.”

  Exactly. It’s not the one the President asked for, it’s far more aggressive and dangerous.

  Stew­art ad­ded that the pro­cess Mc­Con­nell used to set up the AUMF, known as “Rule XIV,” merely sets up the au­thor­iz­a­tion for a fu­ture vote, but does not put it on the cal­en­dar—mean­ing a vote could come at any time, or not at all. The res­ol­u­tion already has four Re­pub­lic­an co­spon­sors: Sens. Lind­sey Gra­ham, Daniel Coats, Joni Ernst, and Or­rin Hatch.

  If war monger Lindsey Graham is a co-sponsor you know for sure it’s an unmitigated disaster for liberty.

  Sen­ate For­eign Re­la­tions Chair­man Bob Cork­er said that there is still a “wide di­versity” of opin­ions on the is­sue. Some Demo­crats were crit­ic­al of even the pres­id­ent’s own draft AUMF, warn­ing that they’d need ad­di­tion­al re­stric­tions from the ad­min­is­tra­tion on troop levels and geo­graph­ic bound­ar­ies be­fore they could sup­port any au­thor­iz­a­tion. Re­pub­lic­ans, mean­while, wor­ried deeply about re­strict­ing the pres­id­ent as this ad­min­is­tra­tion, and the next one, work to com­bat IS­IS.

   

  “This is the right thing,” said Gra­ham, a co­spon­sor on the new AUMF res­ol­u­tion. “This is the right in­fra­struc­ture to have.”

   

  “If our Demo­crat­ic friends don’t want to give this pres­id­ent and oth­er pres­id­ents the abil­ity to go after IS­IS without lim­it­a­tion to geo­graphy, time and means—be on the re­cord,” he added.

  Indeed, I’d like to see every member of Congress go on the record as to the issue of perpetual war to fight an enemy created by our government’s own foreign policy and our “allies'” funding and armaments.

  Kaine said that al­though he and the vast ma­jor­ity of Con­gress sup­port com­batting IS­IS, he dis­agrees with the ad­min­is­tra­tion that the pres­id­ent is with­in his au­thor­ity to do so. “I be­lieve the war is il­leg­al,” Kaine said Thursday. “I don’t think there’s a leg­al jus­ti­fic­a­tion for it. And I think the greatest danger we end up do­ing is al­low­ing the pres­id­ent to wage a war without Con­gress weigh­ing in.”

   

  Cornyn, who in Decem­ber said that Re­pub­lic­ans would not present an AUMF of their own un­til the pres­id­ent out­lined a strategy, said that he non­ethe­less wel­comed de­bate on the is­sue.

   

  “I don’t think we should be afraid of that de­bate, but we need a co­her­ent strategy from the pres­id­ent which we still don’t have and we also don’t need to tie the hands of the next pres­id­ent by re­strict­ing what the pres­id­ent can do,” Cornyn said.

  Sorry, but wasn’t the entire idea of a legislative branch to precisely restrict what the President can do. Congress is purely ceremonial at this point. What an utter embarrassment.

  

  

  

  

  

• Is This The Hillary Clinton "Smoking Gun"?

  By Anthony DeChristopher, originally posted on The Hill

  The smoking gun?

  Special Access Programs (SAP) is a game changer.  It is now undeniably clear that the results of the FBI investigation will be the end of one of two things:  Hillary’s bid for the White House or the legitimacy of the FBI—at least when it comes to prosecuting cases on the mishandling of classified material.

  In 2006, a Special Forces Operational Detachment Alpha (ODA) from my company was deployed to Afghanistan.  Theirs was a particular mission that differed from the combat missions the typical ODAs were conducting at that time.  Everyone on that team maintained a Top Secret Sensitive and Compartmented Information (TS/SCI) clearance and was “read-on” to their special program.  A few months into their deployment, their Intelligence Sergeant lost a thumb-drive that possessed classified information.  A week later the thumb drive was found for sale at a local bazaar.

  In response to the events, Col. Ken Allard (ret.) stated, “You've got a situation in which the U.S. is going to be forced to change an awful lot of its operational techniques."

  Beyond the compromise of classified information, a lot did change.  New protocols for the handling of classified material were established, and the transportation of classified material on thumb drives was strictly forbidden.  The knee jerk reaction even went as far as to disable USB ports on our work computers—in case we forgot.

  Since then I’ve deployed to several locations where, at times, we operated in small teams with only non-secure cellphones with which to communicate.  We often found ourselves with a lot of information that needed to be sent up in reports, but due to the nature of our mission we were forced to sit on it for a few days until we were able to type it up and send it through a secure medium.  I’d be lying if I said we didn’t concoct elaborate plans with “foolproof” ways to communicate the information over non-secure channels, but in the end, no one was willing to take the risk of our “fail-safes” failing.

  As more information from Hillary Clinton’s server has been made available, it is clear that the contents of the server contained Imagery Intelligence (IMINT), Human Intelligence (HUMINT), and Signal Intelligence (SIGINT).  Understanding that much of the information has been retroactively classified, there are a few facts that are tough to grasp—at least from the perspective of an intelligence practitioner. 

  First, when imagery that is classified SECRET//NOFORN (no foreign national) is viewed, regardless of the absence of classification markings, it is distinctly evident. Second, any documents that contain or reference HUMINT is always classified SECRET, and if specific names of sources or handlers are mentioned, they are at a minimum SECRET//NOFORN.  Third, SIGINT is always classified at the TS level.  It’s not uncommon for some SI to be downgraded and shared over SECRET mediums, however, it is highly unlikely that a Secretary of State would receive downgraded intelligence.  Finally, SAP intelligence has been discovered on Clinton’s private server, and many are now calling this the smoking gun.  SAP is a specialized management system of additional security controls designed to protect SAR or Special Access Required.  SAR has to do with extremely perishable operational methods and capabilities, and only selected individuals who are “read on” or “indoctrinated” are permitted access to these programs.  The mishandling of SAP can cause catastrophic damage to current collection methods, techniques and personnel. 

  In other words, if you have worked with classified material for more than a day, it seems highly implausible that someone could receive any of the aforementioned over an un-secure medium without alarm bells sounding.  However, reading about a Special Access Program on an unclassified device would make anyone even remotely familiar with intelligence mess their pantsuit.

  With more damming information being released almost weekly now, it’s interesting that during last Sunday’s Democratic debate, Clinton resoundingly stated: “No one is too big for jail.”  Although the context was referencing bank CEOs and Hedge fund managers, the obvious correlation left many scratching their heads and wondering—did Hillary Clinton just say, “I dare you” to the FBI?”

  

  

  

  

  

• Are You A Sexually Frustrated Rapefugee In Germany? This Cartoon's For You

  Last week, we brought you two cartoons designed by European authorities to help “teach” Mid-East refugees what sort of behavior is acceptable at public venues.

  The first was a flyer created in Austria that Switzerland intends to distribute ahead of the upcoming Lucerne carnival. The leaflet outlines a number of acceptable behaviors such as shaking hands and mediating arguments while making it clear with giant red Xs that flying into a blind rage and open-hand slapping women and children isn’t something that’s generally tolerated in polite society.

  

  The second was a highly amusing cartoon strip given to refugees “who may have never swum in a public pool before.” As you can see, frowned upon behavior includes pushing women into the pool, drowning others, springing from the side of the pool onto a screaming blonde, and of course, creeping up behind women and touching their behinds.

  

  All of this comes as Europeans are rapidly losing their patience with politicians who have supported the resettlement of the millions of asylum seekers who have inundated the bloc from the war-torn Mid-East. A series of sexual assaults by men of “Arab origin” on New Year’s Eve quickly became a bloc-wide scandal and earlier this month, one small German town banned adult male refugees from the public pool.

  Now, with Angela Merkel’s support falling faster than Chinese stocks the morning after a tripped market circuit breaker, Germany has released a new integration safety guide for refugees called “Germany and its People.” Highlights are below.

  According to the presentation, the first thing you want to do if you’re a migrant is to avoid looking shady, which means making eye contact when you meet people.

  

  You should also dress up in a suit and go around shaking hands and telling people your name.

  

  You’re also reminded that being homosexual isn’t punishable by death in Germany.

  

  And that street brawls are discouraged.

  

  And no, it’s still not ok to beat small children.

  

  Finally, there’s the obligatory nod to unwelcome behind grabbing.

  

  In case that isn’t helpful enough, there’s also a guidebook which provides a series of helpful pointers for refugees looking to blend into Western European society. Here are some excerpts:

  • Welcome to Germany! This guide will provide you with information about the country you now find yourself in. It has been designed in response to common questions asked by refugees.
  • You should knock on the door before you go in.
  • Urinating in public can be an offense. Public toilets (WCs) are available in most places. WCs usually have toilet paper, but not a bidet. It is perfectly OK to throw toilet paper into the toilet. Don’t throw it into the waste bin. 
  • So you are free to believe whatever you like, but you are also expected to accept that other people may believe in another God or nothing at all.
  • It is common for couples of the same or different sex to show affection in public. This includes holding hands and sometimes kissing or cuddling in public. This is accepted and acceptable behavior. This should just be ignored.
  • Staring at other people is considered impolite.
  • If a person tells you to leave them alone, you should leave them alone immediately.
  • It is perfectly OK not to drink alcohol and many Germans do not drink any alcohol at all either. If you are offered an alcoholic drink, you can always say “nein, danke” if you don’t want it.

  Check back in six months to find out whether Germany’s efforts to acclimate its 1.1 million (and counting) new inhabitants have been successful.

  In the mean time, one Twitter user was kind enough to make his own cartoon series depicting things Westerners should avoid doing when visiting the Mid-East:

  I liked the European guides for refugees so I made a similar guide for how the West should behave in the Middle East pic.twitter.com/1R1VOITwaT

  — Karl Sharro (@KarlreMarks) January 19, 2016

  

  

  

  

• If You Don't Conform To The Crowd Now – You're A "Radical"

  Submitted by Simon Black via SovereignMan.com,

  In 2014, the Journal of Neuroscience published the results of a unique study that probed deep into human emotion.

  Two Dutch scientists had conducted an experiment in which they exposed test subjects to a wide range of scenarios to evoke some of the most primal human emotions– joy, anger, etc.

  Subjects were hooked up to an electro-encephalogram (EEG) in order to quantitatively measure their brains’ cognitive response to powerful emotions.

  And the results were pretty conclusive: the most powerful emotional experience, as measured by the sheer volume of human brain activity and neurological reaction, was humiliation.

  This really explains a lot when you think about it.

  Deep down we human beings are social creatures. We seek acceptance from the group.

  It’s why conformity is so much easier than standing apart from the crowd, even when the crowd makes absolutely no sense.

  And those who don’t conform and think independently are labeled radicals.

  Our financial system is a great example of this.

  They’ve spiked the punch bowl with so many lies. Home prices always go up. The debt doesn’t matter because we owe it to ourselves. We can always print more money.

  None of this nonsense is true. But the financial establishment tells us so. Big media repeats it over and over again. Eventually hundreds of millions of people believe it.

  And anyone who dares question the sanctity of this system is labeled a radical.

  (This goes for just about everything now. Eerily, governments are now branding people who disagree with the state as radicals.)

  This is total BS.

  You’re not a radical because the federal government’s own balance sheet shows that they are hopelessly insolvent to the tune of negative $17.7 trillion.

   

  You’re not a radical because the US Federal Reserve’s balance sheet shows that, on a mark to market basis, they too are insolvent.

   

  You’re not a radical because the balance sheet of the FDIC shows that they don’t maintain the minimum amount of capital as required by law to adequately insure the banking system.

   

  You’re not a radical because the financial statements of some of the largest banks in the country show that they only keep a tiny percentage of your savings on reserve, and park the rest of your money in some foolish investment fad, or loan it to a bankrupt government.

   

  You’re not a radical because the annual reports of the largest trust funds in the US retirement system show that they are either pitifully underfunded, or entirely out of cash.

   

  You’re not a radical because you think that, maybe just maybe, there might be negative consequences at some point down the road from all of this insanity…

   

  … that, maybe just maybe, when nearly every major component of the financial system is either highly illiquid or completely insolvent, that there could possibly be trouble down the road.

   

  Most of all, you’re not a radical because you have a Plan B.

  It hardly seems outlandish to look at objective, publicly available data and think “wow, this entire banking system is built on a house of cards…” and then to actually do something about it.

  There are so many options.

  You might look abroad to hold a portion of your savings where the banks are extremely liquid and well capitalized, located in a jurisdiction with minimal debt.

  Or you might simply consider holding some physical cash, or a mix between physical cash and precious metals.

  These aren’t radical ideas. It’s sensible to take astute, rational steps to protect yourself from the consequences of such obvious risks.

  

  

  

  

  

• The World’s Most Famous Case Of Hyperinflation (Part 2)

  For the first infographic in this series, which summarizes the circumstances leading up to hyperinflation in Germany in 1921-1924, it can be found here: Hyperinflation (Part 1 of 2)

   

  

  Courtesy of: The Money Project

   

  Slippery Slope

  “Inflation took the basic law-and-order principles of loyalty and trust to the extreme.” Martin Geyer, Historian.

   

  “As things stand, the only way to finance the cost of fighting the war is to shift the burden into the future through loans.” Karl Helfferich, an economist in 1915.

   

  “There is a point at which printing money affects purchasing power by causing inflation.” Eduard Bernstein, socialist in 1918.

  In the two years past World War I, the German government added to the monetary base of the Papiermark by printing money. Economic historian Carl-Ludwig Holtfrerich said that the “lubricant of inflation” helped breathe new life into the private sector.

  The mark was trading for a low value against the dollar, sterling and the French franc and this helped to boost exports. Industrial output increased by 20% a year, unemployment fell to below 1 percent in 1922, and real wages rose significantly.

  Then, suddenly this “lubricant” turned into a slippery slope: at its most severe, the monthly rate of inflation reached 3.25 billion percent, equivalent to prices doubling every 49 hours.

  When did the “lubricant” of inflation turn into a toxic hyperinflationary spiral?

  The ultimate trigger for German hyperinflation was the loss of trust in the government’s policy and debt. Foreign markets refused to buy German debt or Papiermarks, the exchange rate depreciated, and the rate of inflation accelerated.

  The Effects

  Hyperinflation in Germany left millions of hard-working savers with nothing left.

  Over the course of months, what was enough money to start a stable retirement fund was no longer enough to buy even a loaf of bread.

  Who was affected?

  • The middle class – or Mittelstand – saw the value of their cash savings wiped out before their eyes.
  • Wealth was transferred from general public to the government, which issued the money.
  • Borrowers gained at the expense of lenders.
  • Renters gained at the expense of property owners (In Germany’s case, rent ceilings did not keep pace with general price levels)
  • The efficiency of the economy suffered, as people preferred to barter.
  • People preferred to hold onto hard assets (commodities, gold, land) rather than paper money, which continually lost value.

  Stories of Hyperinflation

  During the peak of hyperinflation, workers were often paid twice a day. Workers would shop at midday to make sure their money didn’t lose more value. People burned paper bills in the stove, as they were cheaper than wood or other fuel.

  Here some of the stories of ordinary Germans during the world’s most famous case of hyperinflation.

  • “The price of tram rides and beef, theater tickets and school, newspapers and haircuts, sugar and bacon, is going up every week,” Eugeni Xammar, a journalist, wrote in February 1923. “As a result no one knows how long their money will last, and people are living in constant fear, thinking of nothing but eating and drinking, buying and selling.”
  • A man who drank two cups of coffee at 5,000 marks each was presented with a bill for 14,000 marks. When he asked about the large bill, he was told he should have ordered the coffees at the same time because the price had gone up in between cups.
  • A young couple took a few hundred million marks to the theater box office hoping to see a show, but discovered it wasn’t nearly enough. Tickets were now a billion marks each.
  • Historian Golo Mann wrote: “The effect of the devaluation of the German currency was like that of a second revolution, the first being the war and its immediate aftermath,” he concluded. Mann said deep-seated faith was being destroyed and replaced by fear and cynicism. “What was there to trust, who could you rely on if such were even possible?” he asked.

  Even Worse Cases of Hyperinflation

  While the German hyperinflation from 1921-1924 is the most known – it was not the worst episode in history.

  In mid-1946, prices in Hungary doubled every fifteen hours, giving an inflation rate of 41.9 quintillion percent. By July 1946, the 1931 gold pengõ was worth 130 trillion paper pengõs.

  Peak Inflation Rates:

  • Germany (1923): 3.5 billion percent
  • Zimbabwe (2008): 79.6 billion percent
  • Hungary (1946): 41.9 quintillion percent

  Hyperinflation has been surprisingly common in the 20th century, happening many dozens of times throughout the world. It continues to happen even today in countries such as Venezuela.

  What would become of Germany after its bout of hyperinflation?

  A young man named Adolf Hitler began to grow angry that innocent Germans were starving…

  “We are opposed to swarms of Americans and other foreigners raising prices throughout Germany while millions of Germans are starving because of the increased prices. We are equally opposed to German profiteers and we are demanding that all be imprisoned.” – Adolf Hitler, 1923, Chicago Tribune

  

  

  

  

  

• "If You're Not Confused, You Don't Understand Things Very Well"

  Submitted by Vitaliy Katsenelson via ContrarianEdge.com,

  How Investors Should Deal With The Overwhelming Problem Of Understanding The World Economy

  “What the —- do I do now?” This was the actual subject line of an e-mail I received that really summed up most of the correspondence I got in response to an article I published last summer.

  To be fair, I painted a fairly negative macro picture of the world, throwing around a lot of fancy words, like “fragile” and “constrained system.” I guess I finally figured out the three keys to successful storytelling: One, never say more than is necessary; two, leave the audience wanting more; and three …

  Well, never mind No. 3, but here is more. Before I go further, if you believe the global economy is doing great and stocks are cheap, stop reading now; this column is not for you. I promise to write one for you at some point when stocks are cheap and the global economy is breathing well on its own — I just don’t know when that will be. But if you believe that stocks are expensive — even after the recent sell-off — and that a global economic time bomb is ticking because of unprecedented intervention by governments and central banks, then keep reading.

  Today, after the stock market has gone straight up for five years, investors are faced with two extremes: Go into cash and wait for the market crash or a correction and then go all in at the bottom, or else ride this bull with both feet in the stirrups, but try to jump off before it rolls over on you, no matter how quickly that happens.

  Of course, both options are really nonoptions. Tops and bottoms are only obvious in the rearview mirror. You may feel you can time the market, but I honestly don’t know anyone who has done it more than once and turned it into a process. Psychology — those little gears spinning but not quite meshing in your so-called mind — will drive you insane.

  It is incredibly difficult to sit on cash while everyone around you is making money. After all, no one knows how much energy this steroid-maddened bull has left in him. This is not a naturally raised farm animal but a by-product of a Frankenstein-like experiment by the Fed. This cyclical market (note: not secular; short-term, not long-term) may end tomorrow or in five years.

  Riding this bull is difficult because if you believe the market is overvalued and if you own a lot of overpriced stocks, then you are just hoping that greater fools will keep hopping on the bull, driving stock prices higher. More important, you have to believe that you are smarter than the other fools and will be able to hop off before them (very few manage this). Good luck with that — after all, the one looking for a greater fool will eventually find that fool by looking in the mirror.

  As I wrote in an article last spring, “As an investor you want to pay serious attention to ‘climate change’ — significant shifts in the global economy that can impact your portfolio.”

  There are plenty of climate-changing risks around us — starting with the prospect of higher, maybe even much higher, interest rates — which might be triggered in any number of ways: the Fed withdrawing quantitative easing, the Fed losing control of interest rates and seeing them rise without its permission, Japanese debt blowing up.

  Then we have the mother of all bubbles: the Chinese overconsumption of natural and financial resources bubble. Of course, Europe is relatively calm right now, but its structural problems are far from fixed. One way or another, the confluence of these factors will likely lead to slower economic growth and lower stock prices.

  So “what the —-” is our strategy? Read on to find out.

  I’ll explain what we’re doing with our portfolio, but first let me tell you a story. When I was a sophomore in college, I was taking five or six classes and had a full-time job and a full-time (more like overtime) girlfriend. I was approaching finals, I had to study for lots of tests and turn in assignments, and to make matters worse, I had procrastinated until the last minute.

  I felt overwhelmed and paralyzed. I whined to my father about my predicament. His answer was simple: Break up my big problems into smaller ones and then figure out how to tackle each of those separately. It worked. I listed every assignment and exam, prioritizing them by due date and importance. Suddenly, my problems, which together looked insurmountable, one by one started to look conquerable. I endured a few sleepless nights, but I turned in every assignment, studied for every test and got decent grades.

  Investors need to break up the seemingly overwhelming problem of understanding the global economy and markets into a series of small ones, and that is exactly what we do with our research. The appreciation or depreciation of any stock (or stock market) can be explained mathematically by two variables: earnings and price-earnings ratio.

  We take all the financial-climate-changing risks — rising interest rates, Japanese debt, the Chinese bubble, European structural problems — and analyze the impact they have on the Es and P/Es of every stock in our portfolio and any candidate we are considering.

  Let me walk you through some practical applications of how we tackle climate-changing risks at my firm.

  When China eventually blows up, companies that have exposure to hard commodities, directly or indirectly (think Caterpillar), will see their sales, margins and earnings severely impaired. Their P/Es will deflate as well, as the commodity supercycle that started in the early 2000s comes to an end.

  Countries that export a lot of hard commodities to China will feel the aftershock of the Chinese bubble bursting. The obvious ones are the ABCs: Australia, Brazil and Canada. However, if China takes oil prices down with it, then Russia and the Middle East petroleum-exporting mono-economies that have little to offer but oil will suffer. Local and foreign banks that have exposure to those countries and companies that derive significant profits from those markets will likely see their earnings pressured. (German automakers that sell lots of cars to China are a good example.)

  Japan is the most indebted first-world nation, but it borrows at rates that would make you think it was the least indebted country. As this party ends, we’ll probably see skyrocketing interest rates in Japan, a depreciating yen, significant Japanese inflation and, most likely, higher interest rates globally. Japan may end up being a wake-up call for debt investors.

  The depreciating yen will further stress the Japan-China relationship as it undermines the Chinese low-cost advantage. So paradoxically, on top of inflation, Japan brings a risk of deflation as well. If you own companies that make trinkets, their earnings will be under assault.

  Fixed-income investors running from Japanese bonds may find a temporary refuge in U.S. paper (driving our yields lower, at least at first) and in U.S. stocks. But it is hard to look at the future and not bet on significantly higher inflation and rising interest rates down the road.

  A side note: Economic instability will likely lead to political instability. We are already seeing some manifestations of this in Russia. Waltzing into Ukraine is Vladimir Putin’s way of redirecting attention from the gradually faltering Russian economy to another shiny object — Ukraine. Just imagine how stable Russia and the Middle East will be if the recent decline in oil prices continues much further. Defense industry stocks may prove to be a good hedge against future global economic weakness.

  Inflation and higher interest rates are two different risks, but both cause eventual deflation of P/Es. The impact on high-P/E stocks will be the most pronounced. I am generalizing, but high-P/E growth stocks are trading on expectations of future earnings that are years and years away. Those future earnings brought to the present (discounted) are a lot more valuable in a near-zero interest rate environment than when interest rates are high.

  Think of high-P/E stocks as long-duration bonds: They get slaughtered when interest rates rise (yes, long-term bonds are not a place to be either). If you are paying for growth, you want to be really sure it comes, because that earnings growth will have to overcome eventual P/E compression.

  Higher interest rates will have a significant linear impact on stocks that became bond substitutes. High-quality stocks that were bought indiscriminately for their dividend yield will go through substantial P/E compression. These stocks are purchased today out of desperation. Desperate people are not rational, and the herd mentality runs away with itself. When the herd heads for the exits, you don’t want to be standing in the doorway.

  Real estate investment trusts (REITs) and master limited partnerships (MLPs) have a double-linear relationship with interest rates: Their P/Es were inflated because of an insatiable thirst for yield, and their earnings were inflated by low borrowing costs. These companies’ balance sheets consume a lot of debt, and though many of them were able to lock in low borrowing costs for a while, they can’t do so forever. Their earnings will be at risk.

  As I write this, I keep thinking about Berkshire Hathaway vice chairman Charlie Munger’s remark at the company’s annual meeting in 2013, commenting on the then-current state of the global economy: “If you’re not confused, you don’t understand things very well.” A year later the state of the world is no clearer. This confusion Munger talked about means that we have very little clarity about the future and that as an investor you should position your portfolio for very different future economies. Inflation? Deflation? Maybe both? Or maybe deflation first and inflation second?

  I keep coming back to Japan because it is further along in this experiment than the rest of the world. The Japanese real estate bubble burst, the government leveraged up as the corporate sector deleveraged, interest rates fell to near zero, and the economy stagnated for two decades. Now debt servicing requires a quarter of Japan’s tax receipts, while its interest rates are likely a small fraction of what they are going to be in the future; thus Japan is on the brink of massive inflation.

  The U.S. could be on a similar trajectory. Let me explain why.

  Government deleveraging follows one of three paths. The most blatant option is outright default, but because the U.S. borrows in its own currency, that will never happen here. (However, in Europe, where individual countries gave the keys to the printing press to the collective, the answer is less clear.) The second choice, austerity, is destimulating and deflationary to the economy in the short run and is unlikely to happen to any significant degree because cost-cutting will cost politicians their jobs. Last, we have the only true weapon government can and will use to deleverage: printing money. Money printing cheapens a currency — in other words, it brings on inflation.

  In case of either inflation or deflation, you want to own companies that have pricing power — it will protect their earnings. Those companies will be able to pass higher costs to their customers during a time of inflation and maintain their prices during deflation.

  On the one hand, inflation benefits companies with leveraged balance sheets because they’ll be paying off debt with inflated (cheaper) dollars. However, that benefit is offset by the likely higher interest rates these companies will have to pay on newly issued debt. Leverage is extremely dangerous during deflation because debt creates another fixed cost. Costs don’t shrink as fast as nominal revenues, so earnings decline. Therefore, unless your crystal ball is very clear and you have 100 percent certainty that inflation lies ahead, I’d err on the side of owning underleveraged companies rather than ones with significant debt.

  A lot of growth that happened since 2000 has taken place at the expense of government balance sheets. It is borrowed, unsustainable growth that will have to be repaid through higher interest rates and rising tax rates, which in turn will work as growth decelerators.

  This will have several consequences: First, it’s another reason for P/Es to shrink. Second, a lot of companies that are making their forecasts with normal GDP growth as the base for their revenue and earnings projections will likely be disappointed. And last, investors will need to look for companies whose revenues march to their own drummers and are not significantly linked to the health of the global or local economy.

  The definition of “dogma” by irrefutable Wikipedia is “a principle or set of principles laid down by an authority as incontrovertibly true.” On the surface this is the most dogmatic columns I have ever written, but that was not my intention. I just laid out an analytical framework, a checklist against which we stress test stocks in our portfolio.

  Despite my speaking ill of MLPs, we own an MLP. But unlike its comrades, it has a sustainable yield north of 10 percent and, more important, very little debt. Even if economic growth slows down or interest rates go up, the stock will still be undervalued — in other words, it has a significant margin of safety even if the future is less pleasant than the present.

  There are five final bits of advice with which I want to leave you: First, step out of your comfort zone and expand your fishing pool to include companies outside the U.S. That will allow you to increase the quality of your portfolio without sacrificing growth characteristics or valuation. It will also provide currency diversification as an added bonus.

  Second, disintermediate your buy and sell decisions. The difficulty of investing in an expensive market that is making new highs is that you’ll be selling stocks that hit your price targets. (If you don’t, you should.) Of course, selling stocks comes with a gift — cash. As this gift keeps on giving, your cash balance starts building up and creates pressure to buy. As parents tell their teenage kids, you don’t want to be pressured into decisions. In an overvalued market you don’t want to be pressured to buy; if you do, you’ll be making compromises and end up owning stocks that you’ll eventually regret.

  Margin of safety, margin of safety, margin of safety — those are my last three bits of advice. In an environment in which the future of Es and P/Es is uncertain, you want to cure some of that uncertainty by demanding an extra margin of safety from stocks in your portfolio.

   

  

  

  

  

  

• This Interactive Graphic Reveals China's Massive Anti-Corruption Campaign

  Since taking office in 2013, Xi Jinping has been on a mission to root out corruption among the ranks of the Communist Party.

  Xi, whose efforts have affected both high-ranking officials and those lower on the totem pole, is keen on re-establishing party discipline. Policies handed down from on high often lose their teeth while filtering down through the sprawling party ranks. As The Atlantic put it last year, Xi wants to correct that by “reforming [China’s] very political culture.”

  The problem is “made more urgent by a slowing economy,” an economy which desperately needs to be reformed. “Reform, however, requires the ability to enact policy,” The Atlantic flatly adds. “That in turn necessitates bureaucrats who follow the central government’s orders.”

  Xi’s anti-corruption campaign has ensnared scores of officials from the prominent (the “tigers”) to the obscure (the “flies”), and as Foreign Policy wrote on Thursday, “the CCDI [just] released a communiqué promising to maintain ‘unabated forces and unchanging rhythm’ in pursuing the goal of a China where, as Xi put it, officials are ‘unable and unwilling to engage in corruption.’”

  Some 1,500 officials have seen their cases publicly announced. All 1,500 are represented in the following excellent interactive graphic from ChinaFile called “Catching Tigers and Flies.”

  We can only hope ChinaFile will create a similar tool for Beijing’s sweeping effort to arrest short sellers and market “manipulators.”

  Some facts about the graphic

  • Of the 1,460 felled, the vast majority are officials at the local and provincial level. Officials can be sorted among the fields of mining, petroleum, law and law enforcement, media, military, real estate, and rail. But there are also sizeable groups in the fields of higher education (78) and public security (36, including former oil czar and head of internal security Zhou Yongkang and the recently sentenced vice-minister for security Li Dongsheng). One hundred seventy-five of those in the database worked for state-owned enterprises.

  • Like Chinese officialdom itself, the database skews heavily male, with only 69 women in total. Just three women, in a pool of 146, are so-called tigers, those whose rank is above or equivalent to that of deputy provincial or deputy ministerial level officials.

  • According to data provided by ChinaFile but not yet searchable in the tool above, penalties are harsh, particularly given that most violations are economic (albeit egregious). Two hundred thirty-two individuals have been sentenced under criminal law; of those, 198 have been condemned to at least ten years’ imprisonment. Fifty of those have been sentenced for life (or handed a suspended death sentence, which generally becomes a life sentence), and eight are slated for execution.

  • To date, the sentenced individuals in the database, just 232 people, are collectively responsible for having embezzled, stolen, or taken as gifts nearly $1 billion. Figures are pulled from sentencing documents, often easily accessible in official media or on Chinese court websites.

  • Sentencing documents often include other lurid details. Yang Yueguo, a relatively minor official in the southern province of Yunnan, purchased $30,000 worth of jade jewelry using public funds. Quan Xiaohui, a municipal official in the central province of Henan, kept three mistresses. And Yan Yongxi, who once presided over Beijing’s rural Mentougou district, tried to hide his embezzled funds in his mistress’ gardening company. In all, the database includes some 67 individuals for whom adultery was listed as an element of their discipline violations.

  • Geographically, the cases are spread throughout China; but certain provinces, including Guangdong, Henan, and Shanxi — the stronghold of former president Hu Jintao’s former top aide, Ling Jihua — have seen the highest number targeted, second only Beijing. Fujian and Zhejiang, both provinces Xi once led, appear to have been dealt a lighter hand.

  • So far in 2016, the CCDI has announced 17 new investigations, including probes into several local officials, the head of the “clean and honest governance” unit of the prominent Fosun group, whose billionaire chairman was recently detained for questioning, and a deputy director of the Beijing office in charge of Taiwan affairs, whose investigation was announced just days after Taiwan elected a new President whose party favors greater independence from the mainland

  

  

  

  

  

• Until Today, I Assumed Putin’s Russia Killed Litvinenko … Then I Looked for Myself

  I’ve always assumed that Putin’s KGB (now called the FSB) killed Alexander Litvinenko.

  But today’s announcement by the British that Putin “probably” approved Litvinenko’s murder made me curious enough to take a look for myself.

  Initially, Litvinenko was poisoned with radioactive polonium as he sipped tea in an upscale London hotel. The report makes it sound like only Russia had access to polonium, but it’s actually available online to anyone.

  Antiwar notes:

  If the Russians wanted to off Litvinenko, why would they poison him with a substance that left a radioactive trail traceable from Germany to Heathrow airport – and, in the process, contaminating scores of hotel rooms, offices, planes, restaurants, and homes?  Why not just put a bullet through his head? It makes no sense.

   

  But then conspiracy theories don’t have to make sense: they just have to take certain assumptions all the way to their implausible conclusions. If one starts with the premise that Putin and the Russians are a Satanic force capable of anything, and incompetent to boot, then it’s all perfectly “logical” – in the Bizarro World, at any rate.

   

  The idea that Litvinenko was a dangerous opponent of the Russian government who had to be killed because he posed a credible threat to the existence of the regime is laughable: practically no one inside Russia knew anything about him, and as for his crackpot “truther” theories about how Putin was behind every terrorist attack ever carried out within Russia’s borders – to assert that they had any credence outside of the Western media echo chamber is a joke.

   

  ***

   

  The meat of the matter – the real “evidence” – is hidden behind a veil of secrecy. Lord Owen’s inquiry was for the most part conducted in secret closed  hearings, with testimony given by anonymous witnesses, and this is central to the “evidence” that is supposed to convict Kovtun, Lugovoy, and the Russian government. Lord Owen, explains it this way:

   

  “Put very shortly, the closed evidence consists of evidence that is relevant to the Inquiry, but which has been assessed as being too sensitive to put into the public domain. The assessment that the material is sufficiently sensitive to warrant being treated as closed evidence in these proceedings has been made not by me, but by the Home Secretary. She has given effect to this decision by issuing a number of Restriction Notices, which is a procedure specified in section 19 of the Inquiries Act 2005. The Restriction Notices themselves, although not, of course, the sensitive documents appended to them, are public documents. They have been published on the Inquiry website and are also to be found at Appendix 7 to this Report.”

   

  In other words, the “evidence” is not for us ordinary mortals to see. We just have to take His Lordship’s word for it that the Russian government embarked on an improbable assassination mission against a marginal figure that reads like something Ian Fleming might have written under a pseudonym.

  So who killed Litvinenko ?

  Well, Mario Scaramella met with Litvinenko during the meal when Litvinenko was poisoned. Scaramella didn’t eat or drink a thing during the lunch, and then himself came down with a mild case of polonium poisoning.

  La Republica (one of Italy’s largest newspapers)  wrote in 2006 (English translation) that Scaramella was a bad guy who may have worked with the CIA:

  Mario Scaramella is suspected of arms trafficking. Earlier this year, the public prosecutor of Naples has written for this offense to the docket and, soon after, had to stop the investigation. [He was convicted in Italy for selling arms (original Italian).]

   

  ***

   

  Sources found to be very credible by the prosecutor recalled that investigators suspected that Scaramella was actually in close relationship, if not actually working for, the CIA and that his ECPP could be a front company of the agency’s Langley.

  Antiwar notes:

  As I pointed out here:

   

  “Litvinenko was an employee of exiled Russian billionaire Boris Berezovsky – whose ill-gotten empire included a Russian syndicate of car-dealerships that had more than a nodding acquaintance with the Chechen Mafia – but was being slowly cut out of the money pipeline. Big-hearted Boris, who had initially put him on the payroll as anti-Putin propagandist, was evidently getting sick of him, and the out-of-work “dissident” was reportedly desperate for money. Litvinenko had several “ business meetings ” with Lugovoi in the months prior to his death, and, according to this report , he hatched a blackmail scheme targeting several well-known Russian tycoons and government officials.”

   

  Indeed, Litvinenko, in the months before his death, had targeted several well-known members of the Russian Mafia with his blackmail scheme. That they would take umbrage at this is hardly shocking.

  Alternatively, Litvinenko may actually have accidentally poisoned himself.  Antiwar again:

  Furthermore, there are indications that Litvinenko was engaged in the smuggling of nuclear materials. That he wound up being contaminated by the goods he was peddling on the black market seems far more credible than the cock-and-bull story about a vast Russian plot originating in the Kremlin,. Apparently Lord Owen has never heard of Occam’s Razor.

  

  

  

  

• The "Potentially Epic" Winter Blizzard As Seen From Space

  On Wednesday we noted with some amusement that the “historic” winter blizzard that’s set to slam the east coast had been upgraded to a “potentially epic winter blockbuster.”

  The best thing about “potentially epic winter blockbusters” is that they pave the way for “potentially epic” weather scapegoating from the BES, who last year learned that the American public (not to mention the market) is apparently fine accepting double-adjusted GDP data.

  With the weather punditry’s hyperbole knob turned all the way up to eleven, the BEA has all the PR cover it needs to whip out triple seasonal adjustments and “calculate” that Q1 GDP did not really contract but when you melt the snow on a pro forma, “non-GAAP” basis, GDP likely grew by some $50 billion or more.

  Well as the storm rolls in and promises to blanket the northeast in two feet of economic activity crushing snow and ice, we get a look at the “potentially epic” system from space and it’s, well, epic.

  

  

  As for all of the retailers who just three months ago blamed abysmal performance on warm weather, they’ll now be completely free to reverse course and pin any upcoming comps misses on the “winter blockbuster” shown above.

  Due to the impending snow storm some of our stores will be closed. Please call your local store before heading out. #jonas

  — The Vitamin Shoppe (@VitaminShoppe) January 22, 2016

  Please note that our M Street, Shaw, and Buckhead stores will be closed for the remainder of the day due to the storm!

  — Warby Parker (@WarbyParker) January 22, 2016

  As of right now our stores will be closed tomorrow due to the storm! We will keep you updated today of we close early.

  — Fat Jacks BBQ Philly (@FatJacksbbqblvd) January 22, 2016

  Winter Storm Warning:
  Due to Inclement weather the Asheville and Biltmore Park CityMac stores will be closed. Be safe and enjoy the snow!

  — CityMac (@CityMacTweets) January 22, 2016

  Please note:

  Due to the impending snow storm, all stores will be closing at 1 pm today Jan. 22 and will be closed tomorrow Saturday Jan. 23

  — Cabinet Discounters (@CabinetDiscntrs) January 22, 2016

  As you can see, everyone from “Fat Jack” to cabinet discounters are closing up shop ahead of the blizzard. 

  Meanwhile, panicked shoppers have turned grocery stores into a bad day in Caracas:

  The snow has started, and the milk shelves are empty in DC pic.twitter.com/kinKiLpaIa

  — Jamie Dupree (@jamiedupree) January 22, 2016

  Grocery store shelves are empty as mid-Atlantic residents brace for heavy snow, ice: https://t.co/PediOQjLsw pic.twitter.com/mNyHFGEJNy

  — FB Newswire (@fbnewswire) January 22, 2016

  We have 1/2 inch of snow and shelves are empty! 2-3 feet predicted for VA on Friday, but it’s snowing now. #snowshop pic.twitter.com/zIAgUvM9Mv

  — beckyblanton (@beckyblanton) January 21, 2016

  A solid inch of snow and empty grocery shelves in preparation for this weekend’s blizzard. #OldTown @capitalweather pic.twitter.com/ZrCymy07WT

  — Lisa Bosley (@bosley_lisa) January 21, 2016

  Want salad with your snow? Too bad! Empty shelves at L and 5th Downtown DC. #blizzard2016 @OhMyGOFF @nbcwashington pic.twitter.com/X8Nfs3ZHbm

  — Rob Long (@rivanlo) January 22, 2016

  Nicolas Maduro would be proud.

  

  

  

  

• Is The Spectre Of Trump Haunting Davos?

  Submitted by Patrick Buchanan via Buchanan.org,

  The lights are burning late in Davos tonight.

  At the World Economic Forum, keynoter Joe Biden warned global elites that the unraveling of the middle class in America and Europe has provided “fertile terrain for reactionary politicians, demagogues peddling xenophobia, anti-immigration, nationalist, isolationist views.”

  Evidence of a nationalist backlash, said Biden, may be seen in the third parties arising across Europe, and in the U.S. primaries.

  But set aside Joe’s slurs — demagogues, xenophobia.

  Who really belongs in the dock here? Who caused this crisis of political legitimacy now gripping the nations of the West?

  Was it Donald Trump, who gives voice to the anger of those who believe themselves to have been betrayed? Or the elites who betrayed them?

  Can that crowd at Davos not understand that it is despised because it is seen as having subordinated the interests of the nations and people in whose name it presumes to speak, to advance an agenda that serves, first and foremost, its own naked self-interest?

  The political and economic elites of Davos have grow rich, fat and powerful by setting aside patriotism and sacrificing their countries on the altars of globalization and a New World Order.

  No more astute essay has been written this political season than that of Michael Brendan Dougherty in “This Week,” where he describes how, 20 years ago, my late friend Sam Francis predicted it all.

  In Chronicles, in 1996, Francis, a paleoconservative and proud son of the South, wrote:

  “[S]ooner or later, as the globalist elites seek to drag the country into conflicts and global commitments, preside over the economic pastoralization of the United States, manage the delegitimization of our own culture, and the dispossession of our people, and disregard or diminish our national interest and national sovereignty, a nationalist reaction is almost inevitable and will probably assume populist form when it arrives. The sooner it comes, the better.”

  What we saw through a glass darkly then, we now see face to face.

  Is not Trump the personification of the populist-nationalist revolt Francis predicted?

  And was it not presidents and Congresses of both parties who mired us in wars in Afghanistan, Iraq, Libya, Syria and Yemen, and negotiated the trade deals that have gutted American industry?

  The bleeding of factories and manufacturing jobs abroad has produced the demoralization and decline of our middle class, along with the wage stagnation and shrinking participation in the labor force.

  Is Trump responsible for that? Is Socialist Bernie Sanders, who voted against all those trade deals?

  If not, who did this to us?

  Was it not the Bush Republicans and Clinton Democrats?

  Americans never supported mass immigration.

  It was against their will that scores of millions, here legally and illegally, almost all from Third World countries, whose masses have never been fully assimilated into any western nation, have poured into the USA.

  Who voted for that?

  Religious, racial, cultural diversity has put an end to the “bad” old America we grew up in, as we evolve into the “universal nation” of Ben Wattenberg, who once rhapsodized, “The non-Europeanization of America is heartening news of an almost transcendental quality.”

  James Burnham, the ex-Trotskyite and Cold War geostrategist whose work Francis admired, called liberalism “the ideology of Western suicide.”

  If the West embraces, internalizes and operates on the principles of liberalism, Burnham wrote, the West with meet an early death.

  Among the dogmas of liberalism is the unproven assumption that peoples of all nationalities, tribes, cultures, creeds can coexist happily in nations, especially in a “creedal” nation like the USA, which has no ethnic core but rather is built upon ideas.

  A corollary is that “diversity,” a new America and new Europe where all nations are multiracial, multiethnic, multicultural and multilingual, is the future of the west and the model for mankind.

  Yet, large and growing minorities in every country of Europe, and now in America, believe that not only is this proposition absurd, the end result could be national suicide.

  And when one considers the millions who are flocking to Trump and Sanders, it is hard to believe that the establishments of the two parties, even if they defeat these challengers, can return to same old interventionist, trade, immigration and war policies.

  For Trump is not the last of the populist-nationalists.

  Given his success, other Republicans will emulate him. Already, other candidates are incorporating his message. The day Francis predicted was coming appears to have arrived.

  Angela Merkel may have been Time’s Person of the Year in 2016, but she will be lucky to survive in office in 2017, if she does not stop the invasion from Africa and the Middle East.

  Yet Joe Biden’s dismissal that it is reactionaries who oppose what the progressives of Davos believe is not entirely wrong. For as Georges Bernanos wrote, when Europe was caught between Bolshevism and fascism:

  To be a reactionary means simply to be alive, because only a corpse does not react any more — against the maggots teeming on it.

  

  

  

  

  

• "Is The Bottom In?" – BofA Answers The Question Everyone Is Asking

  On Wednesday, as the Dow Jones plunged by over 550 points and the S&P dropped by 15% from its all time highs seen last summer, many speculated – most notably Tom DeMark – that the relentless selloff had finally hit an “interim low”, and was due for a rebound as much as 8%. Events since then have so far validated this forecast. 

  However the one question on everyone’s lips, is whether aside from a “interim low”, was Wednesday’s flush the market’s lows for the foreseeable future, and certainly for the first quarter.

  Bank of America responds.

  According to its strategist Michael Hartnett, while the January lows may indeed be in for the following reasons…

  Breadth Rule in “buy” territory (95% of mkts <200 & 50dma); FMS cash jumped to 5.4% in Jan (3rd highest since 2009); uber-crowded trades of long peripheral Euro-area debt, long Euro-area banks, long NKY, long FANG (FB, AMZN, NFLX, GOOG) spanked; capitulation in “Illiquid” yield plays (EMB, HY, MLPs); massive outperformance (6.8% YTD) of “long duration, short risk” CTA’s (Chart 2).

  

   

  ….the Q1 lows are not in. Here’s why:

  • Jan Fund Manage Survey shows investors still OW stocks
  •  China/EM/oil/commodity “event” yet to create “entry point” into distressed assets
  • long US$ trade yet to be unwound via a short-end collapse/Fed priced-out
  • GWIM not yet in risk-off mode (Chart 3)

    

  • SWF’s have plenty to unwind (AUM $7.2tn of which $4.4tn is in oil producing nations).

  As a reminder, there are just 6 trading days left in January, which means both DeMark and Hartnett may be spot on in the “bottom is in” for January forecast; it is after January that things get ugly again.

  But it was Hartnett’s conclusion that is most damning:

  Positioning jerkily, reluctantly adjusting to 2016 bear market & profit recession:

  • note 10-year rolling loss from commodities (-3.5%) currently worst since 1938
  • EM currencies trading 15% below their 2009 lows
  • yield on US HY bonds up from 4.9% to 9.8% in the past 18 months
  • equal-weighted US stock index down 25% from recent highs
  • 1638 global stocks (2/3 of the MSCI ACWI) down >20% from their peak
  • global profits (MSCI ACWI) currently falling 8.0% YoY.

   

  Price action shows policy impotence & Quantitative Failure:

  • since Japan expanded ETF purchases Dec 18th the Yen is +2.9%, Nikkei -16.6%
  • since ECB cut rates Dec 3rd the Euro is -1.1%, Euro Stoxx 600 -11.6%
  • and since Fed hiked on Dec 16th the S&P is -9.4%
  • 2yr yields are -18bps, 10yr yields -29bps.

  Lacking true Positioning shake-out, lacking catalysts for Profit turnaround & lacking visible Policy panic, we remain “sellers into strength” of risk assets

  Summarizing BofA’s chief investment strategist: enjoy the relief rally, it won’t last.

  

  

  

  

  

• Attention Finally Turns To Saudi Arabia's "Secret" US Treasury Holdings

  In November of 2014, we announced the quiet death of the petrodollar.

  The system which underwrote decades of dollar dominance and kept a perpetual bid under USD assets met an untimely demise when the Saudis moved to bankrupt the US shale complex by deliberately suppressing oil prices.

  The implications, we said, would be far-reaching.

  For years, oil producing nations plowed their USD crude proceeds into USTs and other dollar assets in a virtuous loop both for the currency and for the nation that printed it. The “Great Accumulation” (as Deutsche Bank calls it) of USD FX reserves ended for good in early 2015 but no one noticed until China began to liquidate mountains of US paper in an attempt to manage a runaway devaluation effort.

  

  By the start of September, all anyone wanted to talk about was the depletion of EM FX war chests as the world suddenly came to understand that the selling of FX reserves amounts to QE in reverse and might therefore serve to tighten global monetary conditions, drive up yields on core paper, and sap liquidity as traditional net exporters of capital suddenly stopped buying amid slumping commodity prices and the yuan fiasco. Some wondered if the reserve drawdowns would cause the Fed to delay liftoff as the FOMC would effectively be tightening into a tightening.

  Against this backdrop we said that the most important chart in the world may well be one that depicts the combined FX reserves of Saudi Arabia and China.

  

  Now that Saudi Arabia’s oil price gambit has backfired on the way to blowing a hole in the kingdom’s budget that amounted to 16% of GDP last year, the market is speculating that Riyadh’s vast SAMA reserves could disappear altogether – especially considering the added cost of funding the war in Yemen and maintaining the riyal peg.

  

  As it stands, the Saudis have around $630 billion parked at SAMA. That’s the third-largest rainy day fund on the planet.

  

  How long the reserves will last given the myriad headwinds facing the kingdom is an open question, but here’s a useful graphic from BofAML which endeavors to show how long Riyadh can hold out under various assumptions about oil prices and borrowing:

  

  What’s interesting about Saudi Arabia’s UST reserves is that no one knows how “vast” they actually are.

  For one thing, SAMA is a sovereign wealth fund, which means we can’t just look at the headline number and make assumptions about US paper because the fund’s holdings aren’t homogeneous.

  But there’s more to the ambiguity than that. “It’s a secret of the vast U.S. Treasury market, a holdover from an age of oil shortages and mighty petrodollars,” Bloomberg writes of Saudi Arabia’s US Treasury holdings. Put simply: there’s no way for the market to assess the impact of the SAMA drawdown because the composition of the portfolio is a state secret of both Saudi Arabia and the US.

  “As a matter of policy, the Treasury has never disclosed the holdings of Saudi Arabia, long a key ally in the volatile Middle East, and instead groups it with 14 other mostly OPEC nations including Kuwait, the United Arab Emirates and Nigeria,” Bloomberg goes on to note, adding that the rules are different for almost everyone else. Although Saudi Arabia’s “secret” is protected by “an unusual blackout by the U.S. Treasury Department,” for more than a hundred other countries, from China to the Vatican, the Treasury provides a detailed breakdown of how much U.S. debt each holds.”

  For his part, Edwin Truman (the former Treasury assistant secretary for international affairs during the late 1990s) doesn’t get it. “It’s mind-boggling they haven’t undone it,” he says, incredulous. “The Treasury didn’t want to offend OPEC [but] it’s hard to justify this special treatment at this point.”

  So who does know how much US paper the Saudis are sitting on? Well, the Saudis of course, “a handful of Treasury officials,” and some bureaucrats at the Fed, Bloomberg says, noting that “for everyone else, it’s a guessing game.”

  Yes, a “guessing game,” and one that may have profound consequences for markets and for geopolitics.

  With Iranian supply set to flood an already overflowing oil market, Saudi Arabia’s finances are likely to deteriorate further. Especially if the conflict in Yemen continues to fester and the kingdom refuses to cede the riyal peg. That means that unless the Saudis are prepared to take on more debt (and the kingdom’s debt to GDP is already set to rise to 33% by 2020 from just 2% at the end of 2014), they’re going to be selling something from SAMA and the market has no way of knowing what ahead of time.

  Politically all of this comes at an especially critical juncture. The US is pushing to reduce its dependence on foreign (read: Saudi) oil and Washington’s rapprochement with Tehran has ruffled more than a few feathers in Riyadh. 

  “Events in recent months, from President Barack Obama’s landmark nuclear deal with Iran to Saudi Arabia’s execution of a prominent Shiite cleric who challenged the royal family, underscore just how sensitive U.S.-Saudi relations have become, [but] whatever the political considerations, some analysts speculate Saudi Arabia may actually be trying to hold onto its Treasuries as part of a strategy to bulk up on dollar assets amid the deepening turmoil in global financial markets,” Bloomberg goes on to say. Here’s more:

  “You need dollars if you’re an oil producer, you want to make sure you have dollars on your balance sheet,” said Sebastien Galy, Deutsche Bank’s director of foreign-exchange strategy, who suggests SAMA could be raising cash by liquidating riskier investments such as stocks, real estate and private equity. Holding dollars also makes sense as a hedge against the plummeting price of oil, which is priced in the U.S. currency.

   

  Figures from SAMA suggest the kingdom might be reallocating some of its reserves into short-term, liquid assets to help the finance ministry meet budget commitments and defend its 30-year-old currency peg of 3.75 riyals to the dollar.

   

  The central bank has increased foreign currencies and deposits held abroad by 7 percent in the first 11 months of 2015, while at the same time reducing foreign securities, consisting of equities and longer-term debt, by 20 percent.

   

  
  

  If the Saudis are avoiding selling US paper for as long as they can, one wonders what it is they’re selling instead to boost cash and deposits. As we noted last week, sovereign wealth funds are set to liquidate $75 billion in equities in 2016, an outflow which may or may not be covered by “dumb” money inflows from the retail crowd. 

  In any event, those hoping for an end to the “legacy” policy of keeping Saudi Arabia’s UST holdings shrouded in secrecy shouldn’t hold their breath. “They’ll want to deal with it sooner or later,” the abovementioned Edwin Truman says.

  We’ll close with a simple question: who would be the new patron saint of the US Treasury Department in the event the Saudis drawdown all of their reserves and decide to diversify away from USD assets once the tide turns for crude, red ink turns to black, and the kingdom once again becomes a net exporter of capital? Put differently, who will monetize the US deficit if relations between Washington and Riyadh hit the skids over Iran? It damn sure won’t be China, where authorities are selling USTs by the hundreds of billions.

  

  

  

  

  

• The Secret Behind The Next Global Crash

  Submitted by Pepe Escobar, Op-ed via SputnikNews.com,

  The World Economic Forum in Davos is submerged by a tsunami of denials, and even non-denial denials, stating there won’t be a follow-up to the Crash of 2008.

  Yet there will be. And the stage is already set for it.

  Selected Persian Gulf traders, and that includes Westerners working in the Gulf confirm that Saudi Arabia is unloading at least $1 trillion in securities and crashing global markets under orders from the Masters of the Universe – those above the lame presidency of Barack Obama.

   

  

  Those were the days when the House of Saud would as much as flirt with such an idea to have all their assets frozen. Yet now they are acting under orders. And more is to come; according to crack Persian Gulf traders Saudi Western security investments may amount to as much as $8 trillion, and Abu Dhabi’s as $4 trillion.

  In Abu Dhabi everything was broken into compartments, so no one could figure it out, except brokers and traders who would know each supervisor of a compartment of investments. And for the House of Saud, predictably, denial is an iron rule. 

  This massive securities dump has been occasionally corporate media, but the figures are grossly underestimated. The full information simply won’t filter because the Masters of the Universe have vetoed it. 

  There has been a huge increase in the Saudi and Abu Dhabi dump since the start of 2016. A Persian Gulf source says the Saudi strategy “will demolish the markets.” Another referred to a case of “maggots eating the carcass in the dark”; one just had to look at the rout in Wall Street, across Europe and in Hong Kong and Tokyo on Wednesday.

  So it’s already happening. And a crucial subplot may be, in the short to medium term, no less than the collapse of the eurozone.

  The Crash of 2016?

  So a case could be made of a panicked House of Saud being instrumentalized to crash a great deal of the global economy. Cui bono? 

  

   

   

  Moscow and Tehran are very much on it. The logic behind crashing markets, creating a recession and a depression – from the point of view of the Masters of the Universe above the lame duck President of the United States — is to engineer a major slow down, cripple buying patterns, decrease oil and natural gas consumption, and point Russia on a road to ruin. Besides, the ultra low oil price also translates into a sort of ersatz sanction on Iran.

  Still, Iranian oil about to reach the market will be around an extra 500,000 barrels a day by mid-year, plus a surplus stored in tankers in the Persian Gulf. This oil can and will be absorbed, as demand is rising (in the US, for instance, by 1.9 million barrels a day in 2015) while supply is falling.

  Surging demand and falling production will reverse the oil crash by July. Moreover, China’s oil imports recently surged 9.3% at 7.85 million barrels a day, discrediting the hegemonic narrative of a collapse of China's economy – or of China being responsible for the current market blues.

  So, as I outlined here, oil should turn around soon. Goldman Sachs concurs. That gives the Masters of the Universe a short window of opportunity enabling the Saudis to dump massive amounts of securities in the markets.

  The House of Saud may need the money badly, considering their budget on red alert. But dumping their securities is also clearly self-destructive. They simply cannot sell $8 trillion. The House of Saud is actually destroying the balance of their wealth. As much as Western hagiography tries to paint Riyadh as a responsible player, the fact is scores of Saudi princes are horrified at the destruction of the wealth of the kingdom through this slow motion harakiri.

  Would there be a Plan B? Yes. Warrior prince Mohammed bin Sultan – who’s actually running the show in Riyadh – should be on the first flight to Moscow to engineer a common strategy. Yet that won’t happen.

  

   

   

  And as far as China – Saudi Arabia’s top oil importer — is concerned, Xi Jinping has just been to Riyadh; Aramco and Sinopec signed a strategic partnership; but the strategic partnership that really matters, considering the future of One Belt, One Road, is actually Beijing-Tehran.

  The massive Saudi dumping of securities ties in with the Saudi oil price war. In the current, extremely volatile situation oil is down, stocks are down and oil stocks are down. Still the House of Saud has not understood that the Masters of the Universe are getting them to destroy themselves many times over, including flooding the oil market with their shut-in capacity. And all that to fatally wound Russia, Iran and… Saudi Arabia itself.

  Only a Pawn in Their Game

  Meanwhile, Riyadh is rife with rumors there will be a coup against King Salman – virtually demented and confined to a room in his palace in Riyadh. There are two possible scenarios in play:

  1) King Salman, 80, abdicates in favor of his son, notorious arrogant/ignorant troublemaker Warrior Prince Mohammed bin Salman, 30, currently deputy crown prince and defense minister and the second in the line of succession but de facto running the show in Riyadh. This could happen anytime soon. As an extra bonus, current Oil Minister Ali al-Naimi, not a royal, would be replaced by Abdulaziz bin Salman, another son of the king.

   

  2) A palace coup. Salman – and his troublemaker son – are out of the picture, replaced by Ahmed bin Abdulaziz (who was a previous Minister of the Interior), or Prince Mohammed bin Nayef (the current Minister of the Interior and Crown Prince.)

  Whatever scenario prevails, the British MI6 is intimately aware of the whole pantomime. And the German BND might be. Everyone remembers the BND memo at the end of 2015 that depicted Deputy Crown Prince Mohammed bin Salman as a “political gambler” who is destabilizing the Arab world through proxy wars in Yemen and Syria.

  Saudi sources — for obvious reasons insisting on anonymity — stress that as much as 80% of the House of Saud favors a coup.

  Yet the question is whether a House reshuffle would change their slow motion hara-kiri. The categorical imperative remains; the Masters of the Universe are ready to bring the whole world down in a major recession basically to strangle Russia. The House of Saud is just a pawn in this vicious game.

   

  

  

  

  

  

• Why The Oil Price Crash Is Killing The NHL

  Submitted by Julianne Geiger via OilPrice.com,

  With oil prices dipping below $30 and dire forecasts for the already-low Canadian dollar, the National Hockey League (NHL) is taking a hit that would normally lead to a mass exodus of players to Russia – if the ruble wasn’t tanking as well.

  The NHL’s revenue depends on the Canadian dollar, which in turn is on the downward slide thanks to the plummeting oil prices. As NHL revenues decline, player salaries go down, and roster cuts go up.

  From a profit standpoint, Canadian teams will be hardest hit, and the worst is yet to come if predictions are anything to go by.

  The Canadian dollar, or the ‘loonie’, has already slipped below 70 cents on the U.S. dollar for the first time since 2003. And according to MacQuarie—which also had the presence of mind to forecast the dip in the Canadian dollar last fall—the currency is expected to drop to 59 cents on the US dollar by the end of 2016.

  This would be an all-time low. The last time it even came close was in 2002, when it hit 61.79 cents on the U.S. dollar.

  Yesterday, the Bank of Canada revealed its interest rate decision. While it was expected to cut rates to 0.25 percent, and possibly to 0 percent later this year, it kept them at 0.5 percent. This marked a bit of a vote of confidence in the loonie, which responded up half a cent to 68.89 cents on the U.S. dollar. But within an hour, it was back down to 68.63, finishing the day at 69.03.

  Oil is at the heart of this problem, as a large part of Canada’s U.S. dollar income comes from energy industry exports, mostly crude oil. Almost always, when oil falls, the Canadian position against the dollar does the same. The growth of oil sands had previously put the loonie in a good position, but those massive oil sands projects are struggling to stay alive right now—at best.

  What does it have to do with hockey? Well, everything.

  The NHL is comprised of 30 teams, with players from 20 different countries. Some 50 percent of these players are Canadian. Seven of the 30 NHL teams are in Canada, while 23 are in the U.S.

  Canadian teams take in Canadian dollars through ticket sales, but they pay out the bulk of their expenses—salaries and tons of travel—in U.S. dollars.

  While the NHL is headquartered in New York City, it originated in Quebec, and the ‘national’ part of this acronym is Canadian in more ways than one.

  The players are paid in U.S. dollars now, but the NHL Canadian franchises receive most of their income in local currency. With a dipping Canadian dollar, this means the teams take a huge hit when they have to pay salaries in U.S. dollars, along with all the travel expenses.

  Since 2005, the NHL has capped player salaries based on the league’s revenue. If league revenue takes a hit—and if Macquarie’s predictions come true for this year—the NHL could be looking at a significant salary cut.

  The cap was initially set because the league failed to reach a salary bargaining agreement with the players, which led to the cancellation of the entire 2004-2005 season.

  It is important to note that not all NHL teams spend at their limit, so some teams and players will be affected more than others.

  Should predictions ring true, history offers us a sneak preview of what may be to come for the NHL.

  In the 2004-2005 lockout—when we didn’t have NHL hockey for an entire year—there was a mass exodus of players to Europe. Some 400 players—more than half of the league total—hopped transatlantic flights with their sticks to play for European leagues. A 2012 lockout, though shorter, also saw players pack up and leave.

  This time around, with the Canadian dollar at its lowest point since 2003 thanks to the oil price crunch, the teams may even be happy to see them go.

  During the 2012 lockout, some 30 NHL players moved to Russia to play for the Kontinental Hockey League (KHL). Russia could be a key hockey beneficiary again, should the NHL lower the salary cap.

  Or maybe not. Players might not find things much better. The Russian ruble is tanking as well, along with the price of oil and sanctions. Owners say they are broke. Players say they aren’t being paid.

  It’s crisis everywhere for hockey, which is as dependent on oil as it is on sticks and pucks.

  

  

  

  

  

• Here Are The Best And Worst Things About A Trump Presidency, According To Americans

  As we head into the Iowa caucus, Americans are getting serious about the 2016 race for the White House.

  After an extremely painful series of debates that pitted a dizzying array of GOP candidates against one another in a kind of soapbox free-for-all, the Republican field has for all intents and purposes been narrowed to two candidates: Ted Cruz and Donald Trump.

  Trump’s meteoric rise to the top of the polls represents something of a coup for a system that has for years been dominated by an entrenched political aristocracy. The rise of Trump (and of Bernie Sanders for that matter) seems to suggest that America has become fed up with business as usual inside the Beltway.

  Voters, it would seem, are ready for real (as opposed to Obama-brand) “change” and regardless of what you think about Trump or Sanders, it’s fairly clear that both would run administrations that look nothing like what the country is used to.

  And while we know that Trump has managed to secure an almost religious following in part by whipping voters into a veritable frenzy, we do not yet know what, specifically, voters see in brazen billionaire beyond the rather amorphous “Make America Great Again” campaign slogan.

  Here to shed some light on the subject is Gallup, who conducted research to discover what Americans think would be the best and worst things about a Trump presidency. Here are the results from a survey conducted January 6-10, which asked a nationally representative sample of Americans to analyze the Donald’s character:

  

  

  From Gallup:

  Asked to name the best or most positive thing about a possible Donald Trump presidency if he were to be elected in 2016, Americans most commonly volunteer his business background, policies on immigration and honesty — that he says what he feels. Other positives mentioned by at least 5% of Americans are his confidence — that he doesn’t back down — and that he would improve the economy. More than four in 10 cannot name anything positive about a potential Trump presidency.

   

  Americans are much more likely to mention potentially negative aspects of a Trump presidency than to mention positive aspects — only 8% say “nothing” when asked about the downsides of such a presidency, with another 9% not having an opinion.

  The list of possible negatives that would be associated with a Trump presidency are most focused on his personality and style. Americans say Trump as president would be too outspoken and impulsive, as well as arrogant, offensive and rude, ill-tempered and hot-headed, and “stupid and idiotic.” Others mention that he lacks experience, is racist and discriminates against minorities, and that he would embarrass the U.S. and lose the respect of other nations.

   

  

  

  

  

  

• The Recession As Seen In Houston, Texas

  The Texas recession is only in its early innings, but we were pleasantly surprised to learn, courtesy of a reader, that it may not be as severe as some expect thanks to good samaritans such Houston-based Gramercy Cleaners on Richmond avenue whose compassion with the imploding energy sector is manifesting itself in service discounts.

  

  When the shale crisis spills over to the banking sector, will we see New York cleaners likewise discounting services to laid off investment bankers? Somehow we doubt it.

  

  

  

  

  

• Central Banks Have "Over-Promised" What Can Actually Be Delivered

  Via Scotiabank's Guy Haselmann,

  Markets need to retreat from dependency on central bank stimulus which they falsely believe provides the magical elixir that fixes all economic and financial market woes.

  At some point during the past few years, central bank stimulus has gone from a net benefit to a source of financial market ailments.  Investors who have rightly arrived at this conclusion have shifted from dip buyers in risk assets to sellers of up-ticks (see January 6th note ‘Down Side Up’).

  With only limited tools, central bank ‘aspirin’ can only treat symptoms rather than root causes.  Monetary policy stimulus healed some pain, but it is not a cure, nor is it able to concoct one.  Moreover, too much ‘aspirin’ can produce undesirable side-effects.

  There is plenty of evidence to suggest that central banks have over-promised what can actually be delivered. Certainly growth and inflation have under-shot expectations and forecasts every year since QE1 began in 2008.  The stated and suggested words of “doing whatever it takes” now look more problematic for financial markets than do the benefits they may or may not be providing economies. The Fed hike in December was likely the result of the FOMC’s assessment that this ‘cost versus benefit equation’ had indeed tilted.

  Market volatility in 2016 is a function of this action (reversal).  The one-way quasi-coordination of global central banks from 2009 to 2014 has fractured, which in turn has fueled two-way trading and the resulting market volatility.  While some central banks (e.g. ECB and BoJ) continue to ease rates, the central banks of the following countries have all hiked rates in the past few quarters: US, Brazil, Peru, Chile, Colombia, South Africa, Philippines, Paraguay, Iceland, and Paraguay, to name a few.

  A few years ago, FOMC members stated that they were “the only game in town” and “did not want to look as if we were not doing enough”.  FOMC members believed that help had to come from somewhere, as the political polarization in Washington was clear to everyone. Unfortunately, the ‘temporary relief’ has hidden the aggregating costs that mount under financial repression, market speculation, and debt issuance.

  Most would agree that the primary cause of the financial crisis in 2008 was excessive debt levels.  Yet today, public and private debt levels have risen to all-time highs of 185% of GDP in emerging markets and above 275% of GDP in OECD countries; over 35 percentage points above 2007 levels.   

  Keeping rates below the ‘Wicksellian natural rate’ (i.e., too low for too long) has allowed too much debt to accumulate, stolen growth from the future, harmed pensions and other savers, and subsidized over-capacity.  The former Chief Economist for the BIS William White wrote in a recent note that in an attempt to prevent an Irving Fisher-type of debt-deflation spiral, the Fed may have increased the odds of one.

  Aggressive central bank responses and the asymmetric bias toward easy money resulted from an urgency to address low prices and maintain growth.  It is possible that low prices over the last three decades were simply the result of globalization, and of China and Eastern Europe entering the global economy.  If this statement is more true than not, then central banks have over-reacted.

  In addition, many critics have postulated that the Fed has contributed to increased income inequality by inflating assets prices. The wealthiest have certainly benefited the most. Debt issuance proceeds being used for share buybacks accentuated the impact.  Perhaps, if the long-term unemployed received government sponsored new training or education, then structural unemployment would be lower. In the meantime, rising inequality is partially responsible for anti-establishment sentiment visible in political polls.

  In doing the heavy lifting for elected officials, the Fed has enabled fiscal stalemate and political polarization.  These same officials will likely blame the Fed as more troubles become exposed. Wild markets are certainly a circumstance of Fed policy.  It is a current financial market problem that risks turning into an economic one. The answers and cures going forward should, therefore, not be provided by monetary officials.

  Chair Yellen, during her testimony on February 10th, should re-focus the market’s attention away from dependency on global central bank stimulus as the cure-all, and alternatively use her testimony to argue that fiscal policy should play a larger role. Without clearer visibility on the economy, taxes, health care costs, and regulation, easy money will not flow into the capital spending that is necessary to increase aggregate demand and stabilize markets.

  Nurse:  “Doctor the man you’ve just treated collapsed on the front steps.  What should I do?”

   

  Doctor:  “Turn him around so it looks like he was just arriving!”

  

  

  

  

  

• "Worst Start To Year Since 2008" But Stocks Bounce On Crude Squeeze, Central Bank Hopes

  There's always hope…

   

  Summing the week up perfectly…

  Something gotta stick… pic.twitter.com/19pzRhdaGw

  — Chicagostock (@Chicagostock) January 22, 2016

  As a reminder, this is still the 2nd worst start to a year ever…

  

  • *MSCI ALL-COUNTRY WORLD INDEX CLIMBS 2.6%, MOST SINCE JUNE 2012

  And yet propagandists are proclaiming victory?

  

   

  Of course it was all about Crude's recovery… From the $27.56 lows on Wednesday, WTI March crude oil futures contract is up nearly 20% in just over 48 hours…

  

   

  Meanwhile the chaos unfolding in the Oil ETF/ETN Complex continues…

  

   

  Enabling a v-shaped recovery in stocks…

  

   

  With all major indices closing green for the week…

  

   

  2016 still ugly…

  

   

  AAPL soared 5.2% today alone!! Running stops above the last week's highs…

  

   

  HYG V-Shaped recovery…

  

   

  Not everybody was loving it – Treasuries were bid despite today's euphoria…

  

   

  On the week, Treasury yields v-shape recovered back to slightly higher with the belly underperforming… Bonds undergo The Batman Pattern!!!

  

   

  Today's weakness in JPY and and EUR (following moar ECB and BOJ blather from Davos) left The USD Index notably higher on the week…

  

  • *RUBLE RISES 5.9% TO CLOSE AT 78.024 PER DOLLAR

   

  Leaving The USD Index at 8 week highs…

  

   

  And despite the USD strength, all commodities closed the week green with crude's epic meltup making it the outperformer…

  

   

  Charts: Bloomberg

  

  

  

  

• Weekend Reading: The Bear Awakens

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  Of the last several weeks, I have suggested that markets are oversold and that a bounce was likely. However, such a reflexive bounce should be used to sell into as it is now becoming clearer the markets have changed their trend from positive to negative. As I discussed earlier this week:

  “The concept of the full-market cycle is critically important to understand considering the markets have very likely broken the bullish trend that began in 2009. Take a look at the first chart below.”

  

  “This “weekly” chart of the S&P 500 shows the bullish trends which were clearly defined during their advances in the late 1990’s, 2003-2007 and 2009-present. Each of these bullish advances, despite ongoing bullish calls to the contrary, ended rather badly with extremely similar circumstances: technical breakdowns, weakening economics, and deteriorating earnings.

   

  As I have shown in the chart above, when the markets broke the bullish trends (blue dashed lines), the subsequent bear market occurred rather rapidly. The conversion from the bull market to the bear market was marked by a breakdown in prices and the issuance of a very long-term “sell signal” as noted in the bottom of the chart.

   

  We can look at this same analysis a little differently and see much of the same evidence.”

  

  “The chart above shows something I discussed last week: ‘Markets crash when they’re oversold.’”

  The inability for the markets to muster a rally from currently extremely oversold short-term conditions suggests market dynamics have indeed changed from a “buy the dip” to “sell the rally” mentality.

  This weekend’s reading list is a collection of articles on the current state of the market. Is this just a correction within a bullish tend? Or, is this the beginning of the long awaited bear?

  ---

  1) 7 Reasons Not To Be A Bear by Jeff Reeves via MarketWatch

  • Jobs
  • Housing
  • Oil
  • Insulation From China
  • Valuations
  • US Dollar
  • The Long Term

  But Also Read:  Growth Fears Grip The Market by Robert Johnson via Morningstar

  2) Charts To Retain Ones Sanity by Scott Grannis via Calafia Beach Pundit

  “Financial markets are once again swooning as oil prices collapse, stoking fears of another global financial crisis. Without trying to minimize the angst we all feel, I offer here some charts which are useful for retaining one’s sanity, along with some commentary.”

  

  But Also Read: US Economy Slip-Sliding Away by Pater Tenebrarum via Acting Man Blog

  Also Read: The Case For Chaos & Equity Bottoms by Anna-Louise Jackson via Bloomberg

  3) The Deeper Causes Of The Market Rout by Mohamed El-Erian via Bloomberg

  “To shed light on one of the worst starts to a new year for global stock markets, some analysts are turning to macroeconomic explanations, such as China’s economic slowdown and its uncharacteristic policy slips. Others prefer to focus on the cascading influence of unhinged markets, such as oil. Yet neither explanation is sufficiently comprehensive; and each fails to account for major changes in liquidity and volatility.”

  But Also Read: Art Cashin – “This Is What You Get Before A Crisis” by Christoph Gisiger via Zero Hedge

  And: 7 Numbers To Put The Market Madness Into Perspective by Paul Lim via Time

  4) Who Let The Bulls Out? by Paul La Monica via CNN Money

  “Deutsche Bank chief equity strategist David Bianco defended stocks in a report Tuesday called ‘Gotta swing when you see it.’ He must be eager for spring training to start.

  Bianco wrote, ‘We are not panicked by this correction because we understand it. It’s driven by a profit recession centered at certain industries caused by factors that we’ve long flagged as risks.’

   

  In other words, nobody should be surprised that the dramatic plunge in oil prices is bad news for the bottom lines of energy and industrial companies.

  Bianco added that ‘this correction has overly punished other sectors and now we’re ready to take advantage of it.’  And he said the next 5% move in the S&P 500 is likely ‘to be up and soon.'”

  Also Read: Stocks Could Fall 5000 Points by Brett Arends via MarketWatch

  Further Read: Ray Dalio On Asymmetric Risk by Tyler Durden via Zero Hedge

   

  Watch: Stocks Have Much Further To Fall

   

  5) Will The Fed Rescue The Market by Anthony Mirhaydari via Fiscal Times

  “It’s far from assured the Fed will ride to the rescue of investors this time.

  On Friday, San Francisco Fed President John Williams said he doesn’t see signs that asset values are depressed or below normal and cited the strong dollar as more of a concern than low commodity prices. He defended the December rate hike decision — and he added that the Fed has met its full employment mandate, believes the labor market will continue to strengthen this year and that inflation should return to policymakers’ 2 percent target over the next couple of years.

   

  We’ll know more when the Fed holds its next policy meeting on January 26 and 27. We’ll find out this week if the bloodbath continues.”

  

  But Also Read: The Bright Side To Stock Rout by John Kimelman via Barron’s

  And: Time To Be A Contrarian? by John Plender via FT.com

  ---

  MUST READS

  • 8 Investing Myths by Bob Seawright via Above The Market
  • The 50/30/20 Rule Of Markets by Ivaylo Inanov via Ivanhoff Capital
  • Don’t Believe Strong Jobs Numbers by Editorial Staff via Investors.com
  • Things I’m Pretty Sure About by Morgan Housel via Motley Fool
  • Asset Allocation 2.0 by Richard Bernstein via Advisor Perspectives
  • A Perfect Storm by David Stockman via Contra Corner
  • Why Is Oil Plummeting by Karl Russell via NYT
  • The Dead Hand Of Debt by Buttonwood via The Economist
  • Why Politicians Are Ignorant About Economics by John Stossel via Fox News
  • An Imminent Likelihood Of Recession by John Hussman via Hussman Funds
  • Is It Time To Buy Stocks? No. by Jesse Felder via The Felder Report
  • Stock Correction Sets Lowly Record by Dana Lyons via Tumblr
  • Market Macro Myths -Debt, Deficits & Delusions by James Montier via GMO

  ---

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

  

  

  

  

  

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• The Right To Tell The Government To Go To Hell (In An Age Of Bullies, Censors, And Compliants)

  Submitted by John Whitehead via The Rutherford Institute,

  “If liberty means anything at all, it means the right to tell people what they do not want to hear.”? George Orwell

  Free speech is not for the faint of heart.

  Nor is it for those who are easily offended, readily intimidated or who need everything wrapped in a neat and tidy bow. Free speech is often messy, foul-mouthed, obscene, intolerant, undignified, insensitive, cantankerous, bawdy and volatile.

  While free speech can also be tender, tolerant, soft-spoken, sensitive and sweet, it is free speech’s hot-blooded alter ego—the wretched, brutal, beastly Mr. Hyde to its restrained, dignified and civil Dr. Jekyll—that tests the limits of our so-called egalitarian commitment to its broad-minded principles.

  Unfortunately, our appreciation for a robust freedom of speech has worn thin over the years.

  Many Americans have become fearfully polite, careful to avoid offense, and largely unwilling to be labeled intolerant, hateful, closed-minded or any of the other toxic labels that carry a badge of shame today. We’ve come to prize civility over freedom. Most of all, too many Americans, held hostage by their screen devices and the talking heads on television, have lost the ability to think critically.

  Societies that cherish free speech relish open debates and controversy and, in turn, produce a robust citizenry who will stand against authoritarian government. Indeed, oppressive regimes of the past have understood the value of closed-mouthed, closed-minded citizens and the power inherent in controlling speech and, thus, controlling how a people view their society and government.

  We in the United States have a government with a ravenous appetite for power and a seeming desire to turn the two-way dialogue that is our constitutional republic into a one-way dictatorship. Emboldened by phrases such as “hate crimes,” “bullying,” “extremism” and “microaggressions,” the government is whittling away at free speech, confining it to carefully constructed “free speech zones,” criminalizing it when it skates too close to challenging the status quo, shaming it when it butts up against politically correct ideals, and muzzling it when it appears dangerous.

  Free speech is no longer free.

  Nor is free speech still considered an inalienable right or an essential liberty, even by those government entities entrusted with protecting it.

  We’ve entered into an egotistical, insulated, narcissistic era in which free speech has become regulated speech: to be celebrated when it reflects the values of the majority and tolerated otherwise, unless it moves so far beyond our political, religious and socio-economic comfort zones as to be rendered dangerous and unacceptable.

  Consider some of the kinds of speech being targeted for censorship or outright elimination.

  Offensive, politically incorrect and “unsafe” speech: Disguised as tolerance, civility and love, political correctness has resulted in the chilling of free speech and the demonizing of viewpoints that run counter to the cultural elite. Consequently, college campuses have become hotbeds of student-led censorship, trigger warnings, microaggressions, and “red light” speech policies targeting anything that might cause someone to feel uncomfortable, unsafe or offended.

   

  Bullying, intimidating speech: Warning that “school bullies become tomorrow’s hate crimes defendants,” the Justice Department has led the way in urging schools to curtail bullying, going so far as to classify “teasing” as a form of “bullying,” and “rude” or “hurtful” “text messages” as “cyberbullying.”

   

  Hateful speech: Hate speech—speech that attacks a person or group on the basis of attributes such as gender, ethnic origin, religion, race, disability, or sexual orientation—is the primary candidate for online censorship. Corporate internet giants Google, Twitter and Facebook are in the process of determining what kinds of speech will be permitted online and what will be deleted.

   

  Dangerous, anti-government speech: As part of its newly unveiled war on “extremism,” the Obama administration is partnering with the tech industry to establish a task force to counter online “propaganda” by terrorists hoping to recruit support or plan attacks. In this way, anyone who criticizes the government online is considered an extremist and will have their content reported to government agencies for further investigation or deleted.

  The upshot of all of this editing, parsing, banning and silencing is the emergence of a new language, what George Orwell referred to as Newspeak, which places the power to control language in the hands of the totalitarian state. Under such a system, language becomes a weapon to change the way people think by changing the words they use. The end result is control.

  In totalitarian regimes—a.k.a. police states—where conformity and compliance are enforced at the end of a loaded gun, the government dictates what words can and cannot be used. In countries where the police state hides behind a benevolent mask and disguises itself as tolerance, the citizens censor themselves, policing their words and thoughts to conform to the dictates of the mass mind lest they find themselves ostracized or placed under surveillance.

  Even when the motives behind this rigidly calibrated reorientation of societal language appear well-intentioned—discouraging racism, condemning violence, denouncing discrimination and hatred—inevitably, the end result is the same: intolerance, indoctrination and infantilism.

  Thus, while on paper, we are technically still free to speak, in reality, we are only as free to speak as a government official or corporate censor may allow.

  The U.S. Supreme Court has long been the referee in the tug-of-war over the nation’s tolerance for free speech and other expressive activities protected by the First Amendment. Yet as I point out in my book Battlefield America: The War on the American People, the Supreme Court’s role as arbiter of justice in these disputes is undergoing a sea change. Except in cases where it has no vested interest, the Court has begun to advocate for the government’s outsized interests, ruling in favor of the government in matters of war, national security, commerce and speech. When asked to choose between the rule of law and government supremacy, this Court tends to side with the government.

  In the 225 years since the First Amendment to the U.S. Constitution was adopted, the rights detailed in that amendment—which assures the American people of the right to speak freely, worship freely, peaceably assemble, petition the government for a redress of grievances, and have a free press—have certainly taken a beating, but none more so than the right to free speech.

  Nowhere in the First Amendment does it permit the government to limit speech in order to avoid causing offense, hurting someone’s feelings, safeguarding government secrets, protecting government officials, insulating judges from undue influence, discouraging bullying, penalizing hateful ideas and actions, eliminating terrorism, combatting prejudice and intolerance, and the like.

  Unfortunately, in the war being waged between free speech purists who believe that free speech is an inalienable right and those who believe that free speech should be regulated, the censors are winning. Free speech zones, bubble zones, trespass zones, anti-bullying legislation, zero tolerance policies, hate crime laws and a host of other legalistic maladies dreamed up by politicians and prosecutors have conspired to corrode our core freedoms.

  If we no longer have the right to tell a Census Worker to get off our property, if we no longer have the right to tell a police officer to get a search warrant before they dare to walk through our door, if we no longer have the right to stand in front of the Supreme Court wearing a protest sign or approach an elected representative to share our views, if we no longer have the right to voice our opinions in public—no matter how misogynistic, hateful, prejudiced, intolerant, misguided or politically incorrect they might be—then we do not have free speech.

  What we have instead is regulated, controlled speech, and that’s a whole other ballgame.

  Just as surveillance has been shown to “stifle and smother dissent, keeping a populace cowed by fear,” government censorship gives rise to self-censorship, breeds compliance, makes independent thought all but impossible, and ultimately foments a seething discontent that has no outlet but violence.

  The First Amendment is a steam valve. It allows people to speak their minds, air their grievances and contribute to a larger dialogue that hopefully results in a more just world. When there is no steam valve—when there is no one to hear what the people have to say—frustration builds, anger grows and people become more volatile and desperate to force a conversation.

  The problem as I see it is that we’ve lost faith in the average citizen to do the right thing. We’ve allowed ourselves to be persuaded that we need someone else to think and speak for us. The result is a society in which we’ve stopped debating among ourselves, stopped thinking for ourselves, and stopped believing that we can fix our own problems and resolve our own differences.

  In short, we have reduced ourselves to a largely silent, passive populace, content to watch and not do. In this way, we have become our worst enemy. As U.S. Supreme Court Justice Louis Brandeis once warned, a silent, inert citizenry is the greatest menace to freedom.

  Brandeis provided a well-reasoned argument against government censorship in his concurring opinion in Whitney v. California (1927). It’s not a lengthy read, but here it is boiled down to ten basic truths:

  1. The purpose of government is to make men free to develop their faculties, i.e., THINK.

   

  2. The freedom to think as you will and to speak as you think are essential to the discovery and spread of political truth.

   

  3. Without free speech and assembly, discussion would be futile

   

  4. The greatest menace to freedom is a silent people.

   

  5. Public discussion is a political duty, and should be a fundamental principle of the American government.

   

  6. Order cannot be secured through censorship.

   

  7. Fear breeds repression; repression breeds hate; and hate menaces stable government.

   

  8. The power of reason as applied through public discussion is always superior to silence coerced by law.

   

  9. Free speech and assembly were guaranteed in order to guard against the occasional tyrannies of governing majorities.

   

  10. To justify suppression of free speech, there must be reasonable ground (a clear and present danger) to believe that the danger apprehended is imminent, and that the evil to be prevented is a serious one.

  Perhaps the most important point that Brandeis made is that freedom requires courage. “Those who won our independence by revolution were not cowards,” he wrote. “They did not fear political change. They did not exalt order at the cost of liberty.” Rather, they were “courageous, self-reliant men, with confidence in the power of free and fearless reasoning applied through the processes of popular government.”

  In other words, the founders did not fear the power of speech. Rather, they embraced it, knowing all too well that a nation without a hearty tolerance for free speech, no matter how provocative, insensitive or dangerous, will be easy prey for a police state where only government speech is allowed.

  What the police state wants is a nation of sheep that will docilely march in lockstep with its dictates. What early Americans envisioned was a nation of individualists who knew exactly when to tell the government to go to hell.

  

  

  

  

  

• Front Loaded: China, Volatility, and Debt Deflation

  Below are some excerpts from our latest macro note, “Front Loaded: China, Volatility, and Debt Deflation.” The full report with the charts and footnotes is on www.kbra.com.  The key question raised by the comment is this: Do Chair Yellen and the other members of the Federal Open Market Committee actually believe that there is a positive trade-off between the “benefits” of QE and zero rates and the carnage now unfolding in the global capital markets?  

  The downside of the social engineering experiment by Ben Bernanke & Janet Yellen is measured in the trillions of dollars, but the benefits seem to be few.  Indeed, the only segment of global society that seems to benefit from zero rates and “large scale asset purchases,” to paraphrase Chairman Bernanke, are debtors.  

  So was this whole exercise with zero rates and purchases of trillions of dollars worth of Treasury and agency securities simply a delaying tactic to avoid deflation and debt liquidation?  The FOMC says that QE and ZIRP are all about restoring jobs and growth, but when you examine the situation carefully, it seems hard avoid the conclusion that the Fed’s actions were really about managing a world that is drowning in a sea of uncollectible debt. 

  Chris

  Front Loaded: China, Volatility, and Debt Deflation

  Kroll Bond Rating Agency

  January 21, 2016

   

  Summary

  Kroll Bond Rating Agency (KBRA) believes that the secular shift of asset allocations away from high-yield and leveraged credit, and into more secure government and investment grade credits, will result in lower interest rates as the year progresses – even as the Federal Open Market Committee (FOMC) talks about raising interest rates in its policy guidance. 

  Increased market volatility results from changes in expectations for global growth and come at the end of Fed bond market market intervention, euphmestically called “quantitative easing.” The credit bubbles in sectors like energy and commodities created during the period of FOMC market intervention must now necesssarily be unwound. 

  Watching the benchmark 10-year Treasury trade through 2% yield confirms KBRA’s earlier judgement that the bias with respect to market interest rates will remain negative for some time to come – regardless of what the FOMC may say or attempt to do in terms of increasing the cost of short-term funding. Ironically, KBRA believes that short-term benchmark interest rates will remain under downward pressure even as credit spreads widen and the process of remediating distressed credits moves forward. 

  Discussion

  When financial markets began the New Year 2016, comfortable assumptions about financial stability were dashed by strong selling pressure coming from the Chinese equity markets. This outflow by domestic Chinese investors somehow caused a cascade of selling throughout global equity markets. Many analysts have concluded that worries about forward growth prospects in China are the cause of the selling pressure, but we believe that rising debt levels and central bank manipulation of financial markets are also significant drivers of renewed market volatility. 

  The Fed and other central banks have pursued a policy of purchasing hundreds of billions of dollars’ worth of debt securities, action meant to change investor preferences and, indirectly, result in higher growth and employment. KBRA believes that the end of debt purchases by the FOMC, not only selling in China’s equity markets, is now the chief source of instability in the global financial markets, especially given that most other central banks are easing policy as the Fed attempts to tighten. 

  The conclusion of Fed securities purchases over a year ago essentially marked the start of a tightening process that has coincided with a sharp decline in demand for commodities and has seen an equally sharp selloff in the high yield debt sector. Former Dallas Fed President, Richard Fisher, describes how the FOMC “front loaded” a rally in financial markets starting in 2009, but now says that the global economy must go through a “digestive period” of lower growth. Fisher specifically opines that one should not blame the equity market selloff on China and that market distortions caused by the Fed are to blame for recent market volatility.

  Of note, the just-released 2010 minutes of the FOMC reveal that former Chairman Ben Bernanke unsuccessfully sought to get a consensus to accurately describe QE, namely as “large scale asset purchases.”  Mass purchases of assets, it should be recalled, are fiscal activities that traditionally required Congressional authorization. For example, the government purchase of gold in the 1930s was funded by the Reconstruction Finance Corporation, an executive branch agency created by President Herbert Hoover. 

  The market intervention conducted by the Bernanke and Yellen Feds exceeds the scope of past practice by western central banks, which have become de facto fiscal agencies funded not via the debt markets but by investing moribund bank reserves on deposit with the central bank. Significantly, the real economy has not responded to the Fed’s social engineering experiment. Indeed, since 2013 economic growth has gradually slowed so that as 2016 begins the world economy seems on the brink of entering a recession. Many economists, joined by the International Monetary Fund and Atlanta Fed, have lowered forward growth estimates for 2016 and beyond.

  To read the rest of the KBRA research note, go to:

  https://www.krollbondratings.com/show_report/3640

  
  

  

  

  

  

• The Fragile Forty & How The World Lost $17 Trillion In 6 Months

  It's official. More than 50% of the "wealth" effect created from the 2011 lows to the 2015 highs has been destroyed (despite the world's central banks going into money-printing overdrive over that period). Almost $17 trillion of equity market capitalization has evaporated in just over 6 months with over 40 global stock indices in bear markets…

  

   

  As Bloomberg adds,

  The U.K. was the latest market to fall 20 percent from its peak, while India is less than 1 percent away from crossing the threshold that traders describe as the onset of bear market. Nineteen countries with $30 trillion have declined between 10 percent and 20 percent, thereby entering a so-called correction, according to data compiled by Bloomberg from the 63 biggest markets on Wednesday.

   

  

   

  Emerging nations bore the brunt of the meltdown, accounting for two out of every three bear markets. Slowing Chinese growth, the 24 percent slump in oil this year and currency volatility have driven developing-nation stocks to the worst start to a year on record.

   

  Among equity indexes that are on the cusp of entering bear territory are Australia, India and the Czech Republic, each having fallen about 19 percent from their rally highs. New Zealand and Hungary are putting up the best resistance to the turmoil, limiting their losses to less than 7 percent.

  So just before you (Jim Cramer et al.) demand the central banks do more, just remember what reality looks like – will you use any centrally-planned rally to buy moar or sell into as the smoke and mirrors of yet another bubble is exposed with the business cycle inevitably beating the rigging…

  

  

  

  

  

  

• A Simple Warning

  Via KesslerCompanies.com,

  We like to consider the longest time periods available to find reliable historical trends in data series. Of these, the price/earnings ratio (p/e ratio) of the S&P 500 index is instructive to study. Major bull markets in equities tend to start from heavily disfavored markets; those with earnings multiples (p/e ratios) in the single digits. In a sense, investors have to give up hope in the stock market before it can regain popularity. In the chart below, you will see that price/earnings ratios around 6 or 7 have preceded long equity bull markets.

  Yet, for all the upheaval in the markets over the last 16 years, the US stock market has not yet fallen to single digit p/e ratios. The S&P 500 p/e ratio is currently about 16 and it has been 33 years since the index last traded with p/e below ten. We maintain that this will likely fall this low before the downside of the credit cycle is finished. With earnings now, a single digit p/e would imply an S&P 500 below 1109; a whopping 40% below current levels.

  

   

  It is important to note that these are glacial processes and we aren't predicting this to happen on any particular schedule, but markets in 2016 have returned to a sense of fear and we just want to remind readers that there is a lot of space between 1870 and 1100 in the S&P 500.

  

  

  

  

  

• Soros Reveals He Is Short The S&P 500: Warns China Will Have A Hard-Landing, Says "Fed Hike Was A Mistake"

  There’s been no shortage of commentary from market heavyweights this week thanks to the World Economic Forum in Davos, but for anyone who hasn’t yet gotten their fill of billionaire talking heads, George Soros gave a sweeping interview to Bloomberg TV on Thursday, touching on everything from China to Fed policy to Vladimir Putin to Europe’s worsening refugee crisis.

  As for China, Soros says he “expects a hard landing,” a contention we won’t argue with considering said hard landing probably arrived a year ago. “A hard landing is practically unavoidable,” he said. “I’m not expecting it, I’m observing it. China can manage it. It has resources and greater latitude in policies, with $3 trillion in reserves.” $3 trillion in reserves which, we might add, are rapidly evaporating. 

  As for the Fed, Soros is on the policy mistake bandwagon, saying Yellen may have mistimed liftoff. That echoes sentiments voiced by Marc Faber among other prominent investors and speaks to what we’ve been saying since September, namely that December’s hike might go down as the worst-timed rate hike in history. “The investor said he would be surprised if the Federal Reserve raised interest rates again after hiking them in December for the first time in almost a decade,” Bloomberg writes. He, like Ray Dalio, says the FOMC is more likely to cut than hike going forward.

  Draghi, Soros thinks, will ease further. No surprise there. This morning we got a bit of dovish jawboning out of the former Goldmanite and it seems likely that the ECB will move again in March given the rather dour outlook for inflation across the euro.

  And speaking of inflation (or a lack thereof), Soros warns that deflation has indeed arrived and China, along with falling oil prices and raw materials, are the root causes.

  He also voiced concern over the bloc’s refugee crisis and says he’s worried about the political fate of Angela Merkel. The EU, he contends, is falling apart.

  Commenting on Vladimir Putin, the billionaire says the Russian President is operating from a position of weakness and thus has to act erratically and take “big risks.”

  But the most important point – for markets anyway – came when Soros revealed that he is short the S&P, and long TSYs which again recalls Marc Faber’s take on what’s likely to work during a year in which the US slides into recession. Here was the reaction in equities:

  

  Finally, speaking about the outlook for global growth, Soros says that although he “sees the light at the end of the tunnel,” he “just doesn’t know how to get there.”

  Neither do we.

  Trade accordingly.

  

  

  

  

  

• New Drone Footage Shows Utter Devastation In Syria's Third Largest City

  Since the war in Syria entered a new phase in late September with the entry of the Russian air force, we’ve brought you quite a bit of footage depicting the desolation wrought by five years of bloody combat between government forces and the mishmash of rebels battling for control of the country (see here and here).

  As Bashar al-Assad put it in an interview with Die Presse, “much of Syria’s infrastructure is destroyed.”

  And it isn’t just the infrastructure. Syria has also lost quite a bit of its cultural heritage. For example, the ancient ruins at Palmyra have been partially, well, ruined by Islamic State.

  Although we’re quite sure readers are well aware of just how bad things truly are in Syria thanks in no small part to the US-backed effort to bring about regime change in Damascus, it never hurts to remind the public of just how “successful” Washington’s Mid-East foreign policy is and on that note, we bring you the following drone footage of Homs, Syria’s third-largest city.

  

  

  

  

• Billionaire Blackstone CEO Trolls American Public – Doesn't Get Why People Are Angry

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  DAVOS MAN: “A soulless man, technocratic, nationless and cultureless, severed from reality. The modern economics that undergirded Davos capitalism is equally soulless, a managerial capitalism that reduces economics to mathematics and separates it from human action and human creativity.”

   

  – From the post: “For the Sake of Capitalism, Pepper Spray Davos”

  I’ve written several posts examining the dangerous cluelessness inherent throughout the ranks of the oligarch class over the past several years. One of my earliest and most viral pieces was published two years ago and titled, An Open Letter to Sam Zell: Why Your Statements are Delusional and Dangerous. That article was a response to the billionaire’s appearance of CNBC during which he instructed the less financially fortunate to “emulate the 1%,” as if their destitution was a result of personal shortcomings as opposed to egregious structural flaws inherent in the rigged, crony, oligarch-controlled Banana Republic economy billionaires such as himself helped mold. Here’s an excerpt:

  Individuals, social classes, even cultures and nation-states develop storylines and so-called “myths” about themselves and how they fit into the bigger picture of current events and human history. We all see ourselves and whatever group(s) with which we identify within a particular social, political and economic context. This is obvious, yet it is much more difficult to look at your owns myths and question them. It is far easier to look at other groups’ myths and heap criticism on them. That is basically all you do.

   

  You think everyone that has issues with you oligarchs and how the 0.01% is destroying our economy and society is simply envious because you assume they think like you do. Certainly, if you were poor you would be envious of the the rich. You’ve made that clear. However, that is not the primary motivation of the anger and resentment swelling up from the underclasses.

   

  Your misdiagnosis of the root cause of the current dissent in America is a result of your obliviousness to the actual concerns of the 99%. A group about which you speak with such certainty, yet certainly know almost nothing about. In fact, my website is dedicated to highlighting all of the destructive trends happening in this nation today. From record high food stamp participation, to declining real wages and the reality that young people need to take on so much debt they become indentured serfs from the moment they enter the workforce. From a loss of 4th Amendment rights due to illegal NSA spying, to the militarization of the police force. From oligarch immunity from serious financial crimes that average citizens would be thrown in jail for life for, to trillion dollar bailouts with zero strings attached for the financial community. From the over-prosecution of some of our bravest citizens such as Aaron Swartz, Barrett Brown and Private Manning to a fraudulent two-party sham political system entirely controlled by your socio-economic class.

  In that article, I outlined many of the reasons people are angry and why they should be angry. In fact, I’ve published hundreds of articles every year since early 2012 detailing exactly why the country is in such dire straights. It’s not just me of course, tens of thousands of people across the globe have been doing it for far longer and to much larger audiences. The reason billionaires are incapable of comprehending what’s going on is because doing so would contradict the life-stories they tell themselves about themselves. Make no mistake about it, billionaires think of themselves as truly exceptional people. Privately, they likely muse that their mere presence on earth is nothing short of a glorious gift to humanity from the heavens. These people are deluded, secluded and emotionally stunted in more ways than you could possibly imagine. They have zero capacity for self-reflection.

  In our modern world, our culture has become convinced that extreme wealth and power are something to admire, when history shows us time and time again that “the people” must always remain vigilant against the centralization of precisely those two things. Naturally, the people who are centralizing the wealth and power for themselves don’t see the problem with wealth and power centralization. Neither does much of the fawning, inept, and soulless media.

  The latest example of oligarch disconnectedness comes, quite appropriately, from Davos. So here’s the quote from Steven Schwartzman, billionaire CEO of private equity giant Blackstone:

  “I find the whole thing astonishing and what’s remarkable is the amount of anger whether it’s on the Republican side or the Democratic side,” the Wall Street mogul said at the World Economic Forum in Davos. “Bernie Sanders, to me, is almost more stunning than some of what’s going on in the Republican side. How is that happening, why is that happening?”

  Forbes goes on to accurately note that:

  America is the richest and most unequal nation in the world — at least when you look at the wealth in 55 of the more conventionally developed countries. Median income has largely fallen behind economic growth as corporations continue to retain a bigger share of the benefits, turning into a reverse of what is usually claimed as the danger of income redistribution.

   

  But whether there are long term changes coming or not of their own accord is immaterial in this case. People in the U.S. don’t tend to think that way. What many perceive now is a basic economic unfairness. They work hard, play by the rules as they’ve learned them, and keep getting further behind. The debt funding for college and large purchases seems to be never ending for large portions of the populace, which cements in a sense of unending inequality.

   

  In a way, Bernie Sanders and the Tea Party are different expressions of the same phenomenon. People disagree over the causes and the proper fixes, but they can find common ground in the sense that things are wrong, that power and wealth are too concentrated, and that most of the country will be left holding the bag when things blow up. That the biggest banks got bailed out of an economic downturn largely of their own creation while the promised help for homeowners largely never materialized didn’t help.

   

  Of course people are angry. It’s one thing to face problems but another to face incompetent greed and manipulation. Unless people climb out of their ivory towers and recognize what is happening on the ground, there will be pain and suffering for all to pay. It’s happened time and again in the past. What makes anyone think that our age is somehow immune?

  David Sirota at the International Business Times adds:

  On the eve of the conference, the nonprofit group Oxfam released a report showing that the richest 62 people on the planet now own more wealth than half the world’s population. In the United States, recent data from Pew Research shows the average American’s median household worth has stagnated, as the median household worth of upper-class Americans increased 7 percent. Schwarzman, though, expressed surprise that people are enraged.

  Yes, you read that right. 62 people own more than 3.5 billion of the earth’s inhabitants. Nothing to see here, move along serfs.

  Of course, as I’ve maintained time and time again, this sort of aggregation of wealth only happens in rigged economies. It’s as if the entire Western world has become that Third World oil dictatorship where three guys have billions while the rest of the population eats dirt. I’m sure those dictators also see wonderful, admirable people when they fawn over themselves in the mirror, just as Steven Schwartzman undoubtably does.

   

  Which brings me to my final point: Blackstone. It’s not like Steven Schwartzman is Steve Jobs or Henry Ford, revolutionary entrepreneurs who made their fortunes changing the world and bringing innovative products to people. In fact, you could very easily make the argument that Schwartzman has made much of his fortune by bringing misery to people, or if we want to be generous, hyper rent-seeking from the destruction of the American middle class. Need some proof? Check out the following:

  Leaked Documents Show How Blackstone Fleeces Taxpayers via Public Pension Funds

  A Closer Look at the Decrepit World of Wall Street Rental Homes

  America Meet Your New Slumlord: Wall Street

  Poll Time: Which group presents a greater danger to world peace and prosperity?

  — Michael Krieger (@LibertyBlitz) January 20, 2016

  

  

  

  

  

• Chinese Stocks Face Derivatives-Driven Trigger Of Doom

  Despite the collapse in Chinese stocks, Bloomberg reports annual sales of Chinese equity-linked structured notes across AsiaPac rose to a record (prompting Korea's financial regulator to warn investors in August that their holdings had become too concentrated in notes tied to the China H-Shares index). When banks sell the structured products to investors, they take on an exposure that's similar to purchasing a put option on the index… which needs to be hedged via index futures; and if BofAML is right, Chinese stocks in Hong Kong are poised for a fresh wave of selling now that HSCEI has crossed 8,000 as banks are forced to hedge.

  As Bloomberg details,

  [The selling pressure] is because the benchmark Hang Seng China Enterprises Index is approaching a level that forces investment banks to pare back their bullish futures positions, according to William Chan, the head of Asia Pacific equity derivatives research at BofA’s Merrill Lynch unit in Hong Kong. The trades, tied to banks’ issuance of structured products, are likely to start unwinding when the index falls through 8,000, a level it briefly breached on Wednesday. The gauge dropped 1 percent to 7,932.24 at 1:05 p.m. local time on Thursday.

   

  Banks have purchased futures on the gauge of so-called H shares to hedge exposure to structured products that they’ve sold to clients, according to Chan. Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions to maintain the effectiveness of their hedges, he said. Additional pressure points may also come at lower levels, Chan said.

   

  “As the market goes lower from here, the downward move may accelerate,” he said. “There will be a large amount of hedging in futures which dealers need to unwind.”

  And it appears that has already begun as not only did stocks accelerate through the "pin" level of 8,000 but Chinese 'VIX' has surged as banks look for alternative ways to hedge their implied positions…

  

  When banks sell the structured products to investors, they take on an exposure that’s similar to purchasing a put option on the index, Chan said.

  To hedge against the possibility of a rally, the banks buy Hang Seng China index futures. If the stock gauge falls below knock-in levels for the structured products — the price at which investors begin to lose their principal — the sensitivity of the bank’s position to index swings gets smaller, and banks respond by selling futures to reduce their hedge.

   

  "There will certainly be a build-up of pin risk at given strikes," said Andrew Scott, head of flow strategy and solutions for Asia Pacific at Societe Generale SA in Hong Kong. "But it is clearly very difficult to accurately identify specific key market trigger levels with a great deal of confidence."

  Still, if Chan’s scenario plays out, the market could soon come under pressure. A notional $13.6 billion of structured products linked to the H-share measure will get knocked in between levels of 7,000 and 8,000 on the index, and $16.8 billion between 6,000 and 7,000, he said.

  

   

  It was clear that is what happened yesterday, but how many more are to follow?

  

  

  

  

  

• The Next "Significant Risk For The S&P 500" – Kolanovic Reveals "The Macro Momentum Bubble"

  Yesterday when we presented Tom DeMark’s latest technical forecast, which anticipates a 5-8% bounce in risk before the next leg lower in equities, we said to “look for the next few days to see if DeMark still has his magic” adding that “we, on the other hand, would rather wait for “Gandalf” Kolanovic’ next take.”

  We didn’t have long to wait: moments ago JPM’s head quant, whose uncanny track record of predicting every major market inflection point has been duly documented here, laid out his latest thoughts on the negative feedback loop that is “becoming a significant risk for the S&P 500” but also showed what he thinks is an odd divergence between various asset classes, to wit: “as some assets are near the top and others near the bottom of their historical ranges, we are obviously not experiencing an asset bubble of all risky assets, but rather a bubble in relative performance: we call it a Macro-Momentum bubble.“

  His warning: beware the bursting of the macro-momentum bubble.

  Here is the latest warning from the man whose every single caution so far has played out virtually as predicted:

  Macro Momentum Bubble

   

  In our report last week, we argued that the chance of a bear market is much higher than the market expectation at the time (our estimate ~50% vs. options implying ~25%) and recommended increasing allocations to gold and cash. Over the past week, S&P 500 took another leg lower—and now we believe the market prices a ~50% probability of a bear market. While systematic strategies de-levered more than 2/3 of their exposure (as compared to August/September), market sentiment remains bleak, and there is no obvious catalyst to drive market higher. Short option positions increase market volatility and intraday market moves. The large S&P 500 intraday selloff yesterday was likely driven by gamma hedging (there’s a large put-call gamma imbalance of $25bn per 1%). As we wrote in our report last week, significant short gamma positions are in the 1950-1800 range, and decline below 1800 (on account of put-spreads, where clients are short lower strike puts). As the market fell close to 1800 yesterday, declining gamma near 1800 could have contributed to the sharp intraday reversal.

  That was then, and played out just as Kolanovic predicted: here is the latest warning:

  At this point we think that the negative feedback loop between market performance, volatility and the real economy (wealth effect) is becoming a significant risk for the S&P 500. To stabilize equities one would need a strong catalyst such as the Fed turning significantly more dovish (or even launching another round of easing). This could put the dollar rally into reverse, stabilize commodity prices and put a floor under the S&P 500. The S&P 500 selloff may also be the catalyst for a momentum– value convergence, which we advocated in our 2016 Outlook (e.g., Oil – Equity convergence).

   

  Going into 2016, many investors were wondering if the monetary easing over the past 7 years inflated a bubble in risky asset prices. The answer to this question depends on which risky asset one looks at. In fact, while some assets are near their peaks of historical price and valuation levels, others are near their lows. Since the last bear market 7 years ago, the S&P 500 is up ~200% and still near  all-time high levels. The US Dollar Index (DXY) is also at its highest point in 15 years (since the tech bubble). On the other hand, a large number of risky assets are in the opposite situation: Emerging Market equities, EM Currencies, Commodities are currently trading below levels during great recession of 2008/2009. This unprecedented divergence (more than ~3 standard deviations) is shown in the figure below (also see our 2016 Outlook). Figure 1 shows price of several Momentum assets (S&P 500, S&P 500 Low Volatility Index, S&P 500 Software Index), and Value Assets (EM Currencies – JPM EM FX Index, MSCI Latin America Equities and Commodities – BCOM Index). The left Figure below illustrates that since the onset of the 2008 crisis, the price of Momentum assets increased to 500%, 600%, or even 700% as expressed in units of Commodity prices (BCOM Index, and we observe a similar appreciation in units of EM FX or EM Equities). In summary, as some assets are near the top and others near the bottom of their historical ranges, we are obviously not experiencing an asset bubble of all risky assets, but rather a bubble in relative performance: we call it a Macro-Momentum bubble.

  

  Why do we have this bubble?

  Every asset trend starts with fundamental developments. As the US was the first to get out of the global financial crises of 2008-2011 (with Europe and Asia lagging), US assets such as the S&P 500 and USD started outperforming international assets. Divergence between Central Bank policies triggered the USD rally, cross-regional capital flows, and put pressure on EM economies, Commodity prices and Commodity related Developed Market Equity sectors. However, we think that fundamentals were only one of the drivers, and that structural reasons played an equally important (or bigger) role in the creation of this relative performance bubble. These structural drivers are listed and explained below.

   

  Diagram above right shows a hypothetical performance of 2 assets: one with positive momentum and another asset whose price declined below some long-term valuation level. As the price of the trending asset increases, its volatility declines. Similarly, the volatility of the ‘value’ asset increases as the price moves lower. Based on this pattern, most risk models would increase the weight of  the trending asset and decrease the weight of the value asset, reinforcing the divergence. Many systematic strategies (such as CTAs, Risk Parity/Vol Target, Low-vol Risk factor portfolios) would do the same. The positive feedback between inflows and low volatility eventually increases the crash risk for trending assets.

   

  We think S&P 500 momentum turning negative this year (after a 6-year rally) may be the first step of the mean reversion we expect to play out later this year. Mean reversion would lead to the outperformance of Emerging Market stocks, Commodities, Gold, and the Energy Sector, and relative underperformance of Momentum assets such as USD, S&P 500 Low Volatility and Momentum portfolios, and likely the S&P 500 itself.

   

  Below we list and explain several structural factors that led to Macro-Momentum bubble:

   

  Explicit Trend Following Strategies: Assets in strategies that explicitly follow price momentum experienced double digit growth over the past few years, and currently stand at over $350bn. This includes CTAs, but also in-house managed pension assets, dealers’ structured products, etc.

   

  Implicit Trend Following Strategies: Many systematic strategies bias towards momentum assets. Historically, assets with strong trends exhibit lower volatility and lower correlation to other assets, and are over-weighted in risk budgeting frameworks such as Risk Parity and Volatility Control. In addition, Low Volatility/Smart Beta strategies often overlap with Momentum investing. Over the past year we saw a significant increase in these assets, with the asset base likely topping $1Tr.

   

  Macro HF bets are aligned with Momentum bets: Over the past years, many popular macro trades (long USD, short Oil and Gold, long DM and short EM equities) are closely aligned with simple trend following signals. The more recent trades betting on HY defaults or breakdowns in EM currency pegs, also align with recent price momentum (USD up, Oil down, etc.)

   

  Volatility based risk management: Many risk management tools refer to historical covariances to determine asset allocation. This approach prefers momentum assets (that have lower volatility and average correlation) over value assets.

   

  Decrease of active assets and increase of passive assets: Active equity managers tend to have a value bias, while capitalization based passive indices tend to have a momentum bias (e.g., they increase the weight of stocks that outperform). The shift from active (e.g., seen from persistent mutual fund outflows) to passive assets (particularly ETFs) may have contributed to the underperformance of value and outperformance of momentum in equity long-short portfolios.

   

  Higher cost of capital for Value assets: Value trades require more capital than Momentum. Given higher volatility, value assets tie up more risk capital for longer periods of time (momentum tends to work on shorter time horizons, and value/reversion on longer time horizons).

   

  Lower liquidity of Value assets: Value assets, being more volatile than momentum assets are also less liquid. Since financial crisis, both investors and market makers are averse to hold and provide liquidity of less liquid assets.

  So now we know that we have not one massive bubble, but a bubble of small asset-class divergences, all thanks to the Fed. What to do? As a reminder, here is how JPM’s will trade this: use transitory bounces to liquidate risk positions, and stay in either cash or gold until better buying opportunities present themselves.

  Unless, of course, Yellen launches QE4, in which case all bets are off.

  

  

  

  

  

• "Dip Buying Is Officially Dead"

  Back in November, JPM prophetically warned that “The long period of indiscriminately buying any dip might be coming to an end.” Today it’s official, and from the same JPM, in its closing day trading note we read that “dip buying is officially dead and stocks (esp. US ones) are no longer impressed by promises of central bank largess.”

  From Adam Crisafulli’s LookBack at the Market

  Market update – dip buying is officially dead and stocks (esp. US ones) are no longer impressed by promises of central bank largess. The reason the SPX has only witnessed insipid rally attempts during this weeks-long swoon is the absence of robust dip-buying.

   

  In years past (when multiples were lower and Corporate America and the US economy were earlier in their recovery process) investors were confident in the SPX rebounding to fresh highs following any material dip and that helped keep sell-offs rare and brief. However, w/the economic and profit cycle advanced and multiples full that reservoir of dip buying doesn’t exist and rallies are now being looked at as opportunities to fade (and not something to be chased). This isn’t to mean the fundamental backdrop is nearly as bad as the YTD sell-off signals – economic data is holding up OK and (perhaps more importantly) the tone from CEOs (both on CQ4 earnings calls and during Davos interviews) is a lot better than both the present market and media narrative would suggest.

   

  However, the current multiple/estimate framework is a formidable one and w/$120 and 16x considered “best case” scenarios its going to be hard for the SPX to lift much above the low/mid-1900 range (1950 is less than 5% from present levels, not compelling enough to fuel a wave of broad buying). As far as central banks are concerned it isn’t that they’ve “lost control” or are “powerless” – the world’s big CBs (FOMC, ECB, BOJ, BOE, and PBOC) remain extraordinarily accommodative and the fundamental landscape would be much worse w/o their actions. However, the relationship between accommodation and sentiment isn’t linear and the likely next CB steps are either too incremental to impress (mild adjustments from the ECB w/the Fed and BOE only staying on hold for longer) or structurally damaging as the limits of policy get hit (this is the case w/the BOJ and to a less extent the ECB as Eurozone bank investors grow nervous about deposit rates being brought deeper into negative territory).

   

  The present debate is unnecessarily binary – just b/c the SPX isn’t about to sprint to fresh highs doesn’t mean a bear market, recession, or 2008-like environment is imminent. At the Wed lows (1812 on the SPX cash) conditions had become very oversold, sentiment was extremely bearish, and the unrelenting YTD selling was growing tired – all this, coupled w/a handful of OK earnings (XLNX, VZ, etc), a bounce in oil/energy equities (thanks to the inventory, some spurious OPEC emergency meeting noise, and KMI’s earnings), and the CB rhetoric (markets don’t respond to CB words like they did but that doesn’t mean a Draghi press conf. can’t help a deeply oversold market to bounce) helped engineer a (pretty tepid) rally. Flows didn’t spike Thurs and buying for the most part is hesitant (a mix of covering and faster-money “renting”) w/people keeping a close eye on the exit. It seems like this recent rebound should be able to persist for more than 24 hours (there  isn’t as much urgent heavy selling left, as was evident mid-day Thurs when a sell-off attempt faltered) but the low/mid-1900s will  remain a formidable ceiling (and the inability of banks to find any support, despite putting up solid numbers overall, is a negative omen).

  So if BTFD is dead then… STFR?

  

  

  

  

  

• "What Planet Are We Living On?"

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  One follow up point to yesterday’s missive about why the economy seems to be converging in recession rather than full and blossoming recovery: There must be something said about the manner of redistribution in this “cycle” as different from all others. In other words, the Fed has been attempting greater and greater redistribution efforts via monetary interference ever since Solow and Samuelson predicted their disastrous “exploitable” Phillips Curve. At least in 1961 the Fed was as much a captured article of Treasury’s orbit, but after Greenspan (or Volcker, we don’t really know) moved to interest rate targeting (and eurodollar denial) the intent has been quite evident.

  We can measure such things in raw, absolute terms, as the FOMC targeted a low of 3% for federal funds by September 1992. And while ostensibly in recovery, the economy experienced its first “jobless” version (just ask Bush Sr.) during the whole of the low-rate regime. The next cycle, after recognizing just the contours of a grand monetary shift, Greenspan by June 2003 had federal funds targeted at 1%; (not) coincidentally that was another and more prolonged “jobless recovery.” We have now not just ZIRP but much more than that the jobless nature of the economy this time is in a class by itself far removed even from those prior two.

  

  The things that have happened over the past eight plus years (the first “emergency” rate cut was September 2007; since that initial moment of “stimulus” we have anyway received the worst recession and then the worst recovery of any cycle dating to the 1930’s and it isn’t even close) would have in 2006 seemed so far beyond radical as to have been plain absurd. Redistribution predicated upon the increasingly bizarre begins to describe our economic deficiency quite well, I think; including the growing unease about having another recession without ever finding recovery from the last great one.

  To appreciate that point in all its “glory”, we need only look to Japan yet again where, if orthodox economists survive this one still with any influence at all, we find our future. Japan has pioneered the absurd, but we mustn’t think we are all that far away from this (thanks to L Bower for pointing it out):

  The Bank of Japan’s purchase of corporate debt at negative yields for the first time adds to distortions in Japan’s bond markets and raises risks for investors and banks, according to Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA.

   

  The central bank bought corporate bonds in market operations at minus 0.03 percent on Wednesday, according to data from the central bank. While the BOJ has purchased company notes at zero interest in the past, it’s the first time for it to buy the debt at negative levels, according to data compiled by Bloomberg.

  What planet are we living on? It is, at least, truly the death of money both as an economic tool and even the living, historical concept. Again, if we think that only something for or from Japan, ask yourself what a Yellen might do if 2016 turns out the way it is shaping up. Our future is continuously bleak as central bankers cling with religious devotion to increasingly absurd redistribution schemes, or to fix the error – them.

  

  

  

  

  

• "China Is Not Contained" Credit Market Screams

  We have seen this pattern before, and it did not end well. While the most mainstream indications of China's "stability" are droned on about as indicating some level of control (i.e. Yuan volatility suppression), the fact is that no matter how hard China tries to centrally plan the entire world, segments of the credit market are screaming "uncontained."

  First, China was forced to inject the most liquidity in three years… and it's still not helping support risk…

  

   

  The last time China supressed FX volatility, in the desperate hopes of holding the balloon underwater long enough for everything to be fine, China's sovereign CDS market was screaming that devaluation was coming… and it did – and large. Now, we see the same pressures building…

  

   

  And finally, despite record amounts of liquidity being spewed into China's financial markets, China's largest bank – ICBC – is seeing its credit risk explode…

  

   

  Do these pictures look like China is "contained" as Bernanke and Dalio believe?

  

  

  

  

  

• Someone Is Trying To Corner The Copper Market

  It may not be as sexy as gold and silver, but sometimes even doctor copper needs a little squeeze and corner love as well, and according to Bloomberg, that is precisely what someone is trying to do.

  One company whose identity is unknown, is “hoarding as much as half the copper available in warehouses tracked by the London Metal Exchange.”

  However, unlike the famous cornering of silver by the Hunts in 1980 which sent the price soaring if only briefly, in this case the unknown manipulator is trying to push the price of the physical lower. By taking control of half the available copper, the trader can help drive up the fees associated with rolling forward a short position, making it tougher for speculators to keep their bearish, explains Bloomberg.

  Indeed, as shown in the chart below, this week the borrowing cost jumped to the highest in three years, almost as if someone is desperately trying to punish the shorts in a strategy very comparable to what Shkreli did with KBIO, when he bought up 70% of the outstanding stock and then made removed his shares from the borrowable pool, forcing a massive short squeeze.

  

   

  In its disclaimer warning, Bloomberg writes that the episode, which caught traders by surprise “is one example of the perils of trading on the London Metal Exchange, where contracts are physically settled and speculators can end up paying dearly if they leave their bets without an offsetting position. Money managers are holding a net-short position on the LME, with prices down 23 percent in the past year and no sign of a recovery in Chinese demand.”

  Meanwhile, market participants are quietly moving to the sidelines ahead of what may be some serious copper price swings:

  “A big trader is probably trying to squeeze the market,” said Gianclaudio Torlizzi, the managing director of T-Commodity srl, a Milan-based consultancy.“It’s an indication the supply side in copper is tightening.”

  Bloomberg adds that yesterday was the third Wednesday of the month, when many traders settle their commitments. To renew a short position, traders have to buy back metal while selling it forward. The tom-next spread, a measure of how much the process costs over one day, jumped as high as $30 a metric ton on Tuesday, the highest since May 2012.

  The declining amounts of physical copper mean that liquidity in the metal is evaporating, resulting in violent, sharp price swings. The amount of metal available in warehouses has dropped more than 40 percent since August, making it costly to roll shorts.

  

  So who is trying to corner the plunging in price metal? According to Bloomberg, the suspect who controls a large portion of the copper is an unidentified company. “Two firms held 40 to 49 percent of copper inventories and short-dated positions, according to Jan. 19 exchange data that shows holdings as a proportion of available stockpiles. While the LME provides data on the approximate size of large positions, it doesn’t disclose who is behind them.”

  One wonders if perhaps the question is not which company is behind the cornering, but rather which country.

  Still, no matter who is behind this attempt to artificially push copper prices higher – which may explain the recent industrial metal strength – one can’t help but wonder how it plays out, because there is hardly a “cornering” episode in history that does not end in tears.

  And certainly not in copper, where cornering attempts are nothing new, but perhaps few instances of manipulation are quite as infamous as that of “Mr. Copper” Yasuo Hamanaka.  For those who are unfamiliar, here is a brief recap of what happened in the mid-1990’s.

  The Copper King: An Empire Built On Manipulation

  The commodities market has grown in importance since the 1990s, with more investors, traders and merchants buying futures, hedging positions, speculating and generally getting the most out of the complex financial instruments that make up the commodities market. With all the activity, people dependent on futures to remove risk have raised concerns over large speculators manipulating the markets. In this article we’ll look to the past for one of the biggest cases of market manipulation in commodities and what it meant to the future of futures.

  The 5%

  There is still a sense of mystery surrounding Yasuo Hamanaka, a.k.a. Mr. Copper, and the magnitude of his losses with the Japanese trading company Sumitomo. From his perch at the head of Sumitomo’s metal-trading division, Hamanaka controlled 5% of the world’s copper supply. This sounds like a small amount, since 95% was being held in other hands. Copper, however, is an illiquid commodity that cannot be easily transferred around the world to meet shortages. For example, a rise in copper prices due to a shortage in the U.S. will not be immediately canceled out by shipments from countries with an excess of copper. This is because moving copper from storage to delivery to storage costs money, and those costs can cancel out the price differences. The challenges in shuffling copper around the world and the fact that even the biggest players only hold a small percentage of the market made Hamanaka’s 5% very significant.

  The Setup

  Sumitomo owned large amounts of physical copper, copper sitting in warehouses and factories, as well as holding numerous futures contracts. Hamanaka used Sumitomo’s size and large cash reserves to both corner and squeeze the market via the London Metal Exchange (LME). As the world’s biggest metal exchange, the LME copper price essentially dictated the world copper price. Hamanaka kept this price artificially high for nearly a decade leading up to 1995, thus getting premium profits on the sale of Sumitomo’s physical assets.

  Beyond the sale of its copper, Sumitomo benefited in the form of commission on other copper transactions it handled, because the commissions are calculated as a percentage of the value of the commodity being sold, delivered, etc. The artificially high price netted the company larger commissions on all of its copper transactions.

  Smashing the Shorts

  Hamanaka’s manipulation was common knowledge among many speculators and hedge funds, along with the fact that he was long in both physical holdings and futures in copper. Whenever someone tried to short Hamanaka, however, he kept pouring cash into his positions, outlasting the shorts simply by having deeper pockets. Hamanaka’s long cash positions forced anyone shorting copper to deliver the goods or close out their position at a premium.

  He was helped greatly by the fact that, unlike the U.S., the LME had no mandatory position reporting and no statistics showing open interest. Basically, traders knew the price was too high, but they had no exact figures on how much Hamanaka controlled and how much money he had in reserve. In the end, most cut their losses and let Hamanaka have his way.

  Mr. Copper’s Fall

  Nothing lasts forever, and it was no different for Hamanaka’s corner on the copper market. The market conditions changed in 1995, in no small part thanks to the resurgence of mining in China. The price of copper was already significantly higher than it should have been, but an increase in the supply put more pressure on the market for a correction. Sumitomo had made good money on its manipulation, but the company was left in a bind because it still was long on copper when it was heading for a big drop.

  Worse yet, shortening its position – that is, hedging with shorts – would simply make its significant long positions lose money faster, as it would be playing against itself. While Hamanaka was struggling over how to get out with most of the ill-gotten gains intact, the LME and Commodity Futures Trading Commission (CFTC) began looking into the worldwide copper-market manipulation.

  Denial

  Sumitomo responded to the probe by “transferring” Hamanaka out of his trading post. The removal of Mr. Copper was enough to bring the shorts on in earnest. Copper plunged, and Sumitomo announced that it had lost over $1.8 billion, and the losses could go as high as $5 billion, as the long positions were settled in a poor market. They also claimed Hamanaka was a rogue trader and his actions were completely unknown to management. Hamanaka was charged with forging his supervisor’s signatures on a form and was convicted.

  Sumitomo’s reputation was tarnished, because many people believed that the company couldn’t have been ignorant of Hamanaka’s hold on the copper market, especially as it profited from it for years. Traders argued that Sumitomo must have known, as it funneled more money to Hamanaka every time speculators tried to shake his price.

  Fallout

  Sumitomo responded to the allegations by implicating JPMorgan Chase and Merrill Lynch. Sumitomo blamed the two banks for keeping the scheme going by granting loans to Hamanaka through structures like futures derivatives. All of the corporations entered litigation with one another, and all were found guilty to some extent. This fact hurt Morgan’s case on a similar charge related to the Enron scandal and the energy-trading business Mahonia Ltd. Hamanaka, for his part, served the sentence without comment.

  

  

  

  

  

• Guest Post: Sarah Palin Is Making Sense (Really!)

  Authored by Jon Schwarz, originally posted at The Intercept,

  While the New York Times ridiculed Sarah Palin’s speech endorsing Donald Trump yesterday as “mystifying,” a big portion of it was a non-mysterious, coherent attack on big money politics. It’s worth reading that whole portion:

  [Trump] is beholden to no one but we the people. …

   

  Trump, what he’s been able to do, which is really ticking people off, which I’m glad about, he’s going rogue left and right, man. That’s why he’s doing so well. …

   

  The permanent political class has been doing the bidding of their campaign donor class and that’s why you see that the borders are kept open. For them, for their cheap labor that they want to come in. That’s why they’ve been bloating budgets. It’s for crony capitalists to be able to suck off of them. It’s why we see these lousy trade deals that gut our industry for special interests elsewhere.

   

  We need someone new, who has the power, and is in the position to bust up that establishment. …

   

  His candidacy, which is a movement. It’s a force. It’s a strategy. It proves, as long as the politicos, they get to keep their titles and their perks and their media ratings. They don’t really care who wins elections. …

   

  And the proof of this? Look what’s happening today. Our own GOP machine, the establishment, they who would assemble the political landscape, they’re attacking their own frontrunner. …

   

  We, you, a diverse dynamic, needed support base that they would attack. And now, some of them even whispering, they’re ready to throw in for Hillary over Trump because they can’t afford to see the status quo go. Otherwise, they won’t be able to be slurping off the gravy train that’s been feeding them all these years. They don’t want that to end.

  Trump himself has repeatedly condemned politicians’ servitude toward their big donors.

  During the first GOP debate last August in Cleveland, he declared, “I was a businessman. I give to everybody. When they call, I give. And do you know what? When I need something from them two years later, three years later, I call them, they are there for me. And that’s a broken system.”

  Palin and Trump may or may not believe what they’re saying. As Laura Friedenbach, press secretary of the campaign finance reform organization Every Voice, points out, “Every single Republican presidential candidate, including Donald Trump, has so far failed to offer” any concrete plan to reduce the influence of money in politics.

  However, they’re responding to a genuine passion among Republicans. A 2015 New York Times poll found that 80 percent of Republicans believe “money has too much influence” in political campaigns, and 81 percent feel the campaign finance system needs either “fundamental changes” or must be completely rebuilt. A recent survey by Democracy Corps found that 66 percent of likely Republican voters support a program of public matching funds for small donors. Among Republican candidates such a program would be an enormous boon to Ben Carson and Ted Cruz (and less so to Trump, since his campaign is almost completely self-financed).

  Palin did, however, inaccurately differentiate the Democratic and Republican establishments, claiming that Democratic powerbrokers would never “come after their frontrunner and her supporters … because they don’t eat their own. They don’t self-destruct.” In fact, the Democratic party elite has previously attempted to destroy its own presidential candidate, most notoriously in 1972 when new primary rules allowed George McGovern to capture the nomination; as a Richard J. Daley ward heeler predicted that fall, McGovern was “gonna lose because we’re gonna make sure he’s gonna lose.” And if Bernie Sanders genuinely threatens Hillary Clinton, Democratic establishment attacks on him as a “socialist” with “wackadoodle” ideas will surely intensify, for exactly the reason Palin identified: “They can’t afford to see the status quo go.”

  

  

  

  

  

• "Most Of Us Ended Up At Office Depot": Thousands Of Angry Students "Flood" Government With Demands For Debt Relief

  Last summer, Corinthian Colleges closed its doors amid government scrutiny of for-profit colleges.

  The school – which had been the recipient of some $1.5 billion in annual federal aid funding – was variously accused of employing deceptive marketing practices, falsifying job placement records, and lying about graduation rates.

  As we noted when the doors were shut, for-profit students won’t have a particularly easy time transferring their credits (meaning they would have to start over at another school if they wanted to complete their degrees). That means that when a government mandated closure leaves them out in the cold, they’ll likely seek to take advantage of their ‘right’ to have their debt discharged.

  Sure enough, the government quickly found itself scrambling to respond after Secretary of Education Arne Duncan received a group request from 78,000 former Corinthian students requesting loan forgiveness in late May. Essentially, the law says students can have their debt expunged in the event they’ve been defrauded. In cases like Corinthian, where the government itself has effectively accused the school of fraud, it’s difficult to deny students’ claims.

  We immediately suggested that in the wake of the Corinthian affair, many more of the nation’s heavily indebted students and former students would seek to have their loans forgiven as well. Here’s what we said in May:

  The real question now is whether continued pressure on for-profit colleges will result in further closures and more petitions from hundreds of thousands of students with tens of billions of loans they now know can be legally discharged. Note that we have not used the term “canceled”, because as we like to remind readers, liabilities are never “canceled”, they are simply written off by the person for whom they are an asset.

  Fast forward nine months and sure enough, “thousands” of students are “flooding the government” with appeals to have their student loans discharged on the grounds they were the victims of fraud.

  “In the past six months, more than 7,500 borrowers owing $164 million have applied to have their student debt expunged under an obscure federal law that had been applied only in three instances before last year,” WSJ wrote on Wednesday. “The law forgives debt for borrowers who prove their schools used illegal tactics to recruit them, such as by lying about their graduates’ earnings.” Here’s more:

  The U.S. Education Department has already agreed to cancel nearly $28 million of that debt for 1,300 former students of Corinthian Colleges—the for-profit chain that liquidated in bankruptcy last year. The department has indicated that many more will likely get forgiveness.

   

  The sudden surge in claims has flummoxed the Education Department, which says the 1994 forgiveness program is overly vague. The law doesn’t specify, for example, what proof is needed to demonstrate a school committed fraud.

  And that’s a problem. Because the law is short on specifics, US taxpayers are theoretically on the hook for every student who feels aggrieved at not being able to secure gainful employment in a field related to what they studied in college. “The program could prove to be one of the few lifelines for hundreds of thousands of Americans buried in student debt after attending disreputable schools that failed to land them a decent job,” WSJ continues. 

  Of course “disreputable schools” aren’t to blame for every jobless graduate.

  As we’ve shown on countless occasions using countless metrics, the “robust” US labor market is anything but, and has been reduced to a kind bartender creation machine. That deplorable state of affairs is the result of America’s rapid transformation from a middle class utopia buoyed by breadwinner jobs in sectors like manufacturing to a kind of modern day fuedal system wherein the peasantry slaves away in the service sector so the robber barons can enjoy conveniences like $6 lattes. “Andrew Kelly of the American Enterprise Institute, a conservative think tank, said there is a danger that the program will become overly broad, encompassing not just instances of outright fraud, but also cases in which borrowers simply regret taking out the debt because they can’t find a job, through no fault of the colleges,” WSJ adds, underscoring our point.

  Because the government didn’t take the time to spell out what counts as “fraud,” taxpayers may effectively end up subsidizing the “strong” US jobs market by bailing out every student who can’t find gainful employment in an economy which, if you believe the BLS, is adding nearly 300,000 positions a month. 

  Imagine the shock when the US public suddenly realizes that bailing out jobless students isn’t compatible with the “robust” labor market rhetoric. Here’s a bit more from The Journal:

  The surge in applications reflects the growing savvy of student activists, who discovered the law last year after it had largely sat dormant for two decades. Education Department officials say the agency failed to draft rules after the law was passed in the early 1990s and lacked the urgency to do so because it had only received five applications—three of them granted—before last year.

   

  The clamoring for forgiveness represents the fallout of a college-enrollment boom—driven by a surge in students attending for-profit colleges—that caused student debt to nearly triple in the past decade to $1.2 trillion, New York Federal Reserve figures show. Seven million Americans have defaulted, government data show.

   

  So far, almost all of the borrowers applying for forgiveness under the 1994 program attended for-profit schools.

   

  Three-quarters went to Corinthian-owned institutions, while hundreds of others attended the Art Institutes, owned by Education ManagementCorp.; and ITT Technical Institutes, owned by ITT Educational Services Inc. All three have been the subject of federal investigations into illegal recruiting tactics in recent years.

   

  “I feel robbed of my life,” wrote one student who said she owes $114,000 in federal student debt—most of it in her mother’s name—for her time at a branch of the Art Institutes chain of for-profit schools. “Even after paying my student loans on time and in full every month for over seven years, I’ve barely made a dent.”

   

  Syd Andrade’s story is emblematic. He said in an interview that during his high-school senior year, he received a call from an Art Institutes recruiter promising “great facilities, great teachers, use of industry-standard software” for a game-art design program.

   

  
  

   

  Mr. Andrade, who graduated from the company’s Tampa, Fla., location, said the classes used outdated software and were taught by an instructor who knew less than the students. “Most of the time spent in her classes were us teaching her,” he said. “It was a group effort of everyone trying to learn together.”

  So while the phenomenon is for now confined to the shady for-profit arena, don’t kid yourself into thinking that there aren’t student activist groups at large state schools pondering how they can take advantage of the law as well. In short, it’s just a matter of time before the “thousands” of appeals flooding the Department of Education turn into tens and hundreds of thousands as recent graduates suddenly discover the harsh realities of America’s waiter and bartender economy.

  

  At the end of the day, there’s $1.2 trillion in student debt that needs paying down and students simply aren’t finding the type of jobs they need to service their liabilities. That means you, dear taxpayer, will shoulder the burden of wiping the slate clean for millions of disgruntled students who were literally sold a lie not only about the quality of the education they would receive, but about the well being of the American dream itself.

  On that note, we close with a quote from the abovementioned Syd Andrade:

  “They promised us to get jobs in the field, and most of us ended up at Office Depot,” he said.

  

  

  

  

  

• Recession Signs – 2008 & Now

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  Warning Signs Of A Recession

  In late 2007, I was giving a presentation to a group of about 300 investors discussing the warning signs of an impending recessionary period in the economy. At that time, of course, it was near “blasphemy” to speak of such ills as there was “no recession in sight.”

  Then, in December of that year, I penned that we were either in, or about to be in, the worst recession since the “Great Depression.” That warning too was ignored as then Fed Chairman Ben Bernanke stated that it was a “Goldilocks Economy.” The rest, as they say, is history.

  I was reminded of this as I was reading an article by Myles Udland, via Business Insider, entitled “The US economy is nowhere near a recession.” 

  It is an interesting thought. However, the problem for most analysts/economists is that they tend to view economic data as a stagnant data point without respect for either the trend of the data or for the possibility of future negative revisions. As shown in the chart below, this is why it SEEMS the financial markets lead economic recessions.

  

  However, in reality, they are more coincident in nature. It is just that it takes roughly 6-12 months before the economic data is negatively revised to show the start of the recession. For example, the recession that started in 2007 was not known until a year later when the data had been revised enough to allow the NBER to make its official call.

  The market decline beginning this year is likely an early warning of further economic weakness ahead. I have warned for some time now that the economic cycle was exceedingly long given the underlying weakness of the growth and that eventually, without support from monetary policy, would likely give way. The following charts are the same ones I viewed in 2007, updated through the most recent data periods, which suggested the economy was approaching a recessionary state. While not all are in negative territory yet, they are all headed in that direction.

  

  

  

  

  

  

  Is the economy “nowhere near recession?” Maybe. Maybe not. But the charts above look extremely similar to where we were at this point in late 2007 and early 2008.

  Could this time be “different?” Sure. But historically speaking, it never has been.

  The Topping Process Completes

  For the last several months I have repeatedly discussed the topping process in the markets and warned against dismissing the current market action lightly. To wit:

  “Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions.

  The chart below is an example of asymmetric bubbles.

  

  The pattern of bubbles is interesting because it changes the argument from a fundamental view to a technical view. Prices reflect the psychology of the market which can create a feedback loop between the markets and fundamentals.

  This pattern of bubbles can be clearly seen at every bull market peak in history.”

  Take a look at the graphic above, and the one below. See any similarities?

  

  As you will notice, the previous two bull-market cycles ended when the topping process ended by breaking the rising support levels (red line). The confirmation of the onset of the “bear market” was marked by a failed rally back to the previous rising support level. Currently, that has not occurred as of yet.

  The next chart is another variation of the above showing the break-down of the rising bullish trend in the market.  In all cases, investors were given minor opportunities to reduce equity risk in portfolios well before the onset of the bear market decline. 

  

  I have been asked repeatedly as of late whether or not the markets will provide a similar “relief rally” to allow for escape. The answer is “yes.” However, as in the past, those relief rallies tend to be short-lived and don’t get investors “back to where they were previously.”

  The risk to the downside has risen markedly in recent weeks as the technical, fundamental and economic deterioration escalates. This is not a time to be complacent with your investments.

  “One & Done Yellen” And The Rise Of QE4.

  Back in December, when Janet Yellen announced the first hike in the Fed Funds rate in eleven years from .25% to .50%, the general mainstream consensus was “not to worry.”  It was believed that a rate hike by the Fed would have little impact on equities given the strong economic recovery at hand. Well, that was what was believed anyway as even Ms. Yellen herself suggested the “odds were good” the economy would have ended up overshooting the Fed’s employment, growth and inflation goals had rates remained at low levels.

  The problem for Ms. Yellen appears to have a been a gross misreading of the economic “tea leaves.” With economic growth weak, the tightening of monetary policy had a more negative impact on the markets and economy than most expected. As I wrote previously:

  “Looking back through history, the evidence is quite compelling that from the time the first rate hike is induced into the system, it has started the countdown to the next recession. However, the timing between the first rate hike and the next recession is dependent on the level of economic growth at that time.

   

  When looking at historical time frames, one must not look at averages of all rate hikes but rather what happened when a rate hiking campaign began from similar economic growth levels. Looking back in history we can only identify TWO previous times when the Fed began tightening monetary policy when economic growth rates were at 2% or less.

   

  (There is a vast difference in timing for the economy to slide into recession from 6%, 4%, and 2% annual growth rates.)”

  

  “With economic growth currently running at THE LOWEST average growth rate in American history, the time frame between the first rate and next recession will not be long.”

  Given the reality that increases in interest rates is a monetary policy action that by its nature slows economic growth and quells inflation by raising borrowing costs, the only real issue is the timing.

  With the markets appearing to have entered into a more severe correction mode, there is little ability for Ms. Yellen to raise interest rates any further. In fact, I would venture to guess that the rate hike in December was likely the only one we will see this year. Secondly, we are likely closer to the Federal Reserve beginning to drop “hints” about further accommodative actions (QE) if conditions continue to deteriorate.

  It is important to remember that in 2010, when Ben Bernanke launched the second round of QE, the Fed added a third mandate of boosting asset prices to their roster of full employment and price stability. The reasoning was simple – create an artificial wealth effect encouraging consumer confidence and boosting consumption. It worked to some degree by pulling forward future consumption but failed to spark self-sustaining organic economic growth.

  With market pricing deteriorating sharply since the beginning of the year, it will not take long for consumer confidence to slip putting further downward pressure on already weak economic growth. With Ms. Yellen already well aware she is caught in a “liquidity trap,” there would be little surprise, just as we saw in 2010, 2011 and 2013, for the Fed to implement another QE program in hopes of keeping consumer confidence alive.

  

  The issue is at some point, just as China is discovering now with failure of their monetary policy tools to stem the bursting of their financial bubble, the same will happen in the U.S. With the Fed unable to raise rates to reload that particular policy tool, a failure of QE to stabilize the markets could be deeply problematic.

  Just some things to think about.

  

  

  

  

  

• Venezuela Hits "Point of No Return" – 2016 Bankruptcy Is "Difficult To Avoid" According To Barclays

  In November 2014, just after OPEC officially died with the 2014 Thanksgiving massacre which was the first oil-crushing catalyst that has led to crude’s relentless decline since Saudi Arabia officially broke off with the rest of the cartel, sending the black gold to a price of around $28 per barrel, we revealed who the first oil-exporting casualty of the crude carnage would be: the Latin American socialist paradise that is Venezuela.

  Back then we said that the best way to bet on the OPEC cartel collapse, and the inevitable death of said socialist paradise as we know it, was to buy Venezuela CDS. Sure enough, anyone who has done so has generated massive returns since then.

  

  More importantly, the wait for the long-overdue credit event is coming to an end.

  As Barclays’ Alejandro Arreaza notes, Venezuela has officially reached the “point of no return” and writes that “the economic emergency decree and any measures that the government could take at this point may be too late. After two years of inaction and the recent decline in oil prices, a credit event in 2016 is becoming increasingly difficult to avoid, in our view.”

  Here is why Barclays thinks that the first OPEC default is now just a matter of time:

  Point of No Return

  • The economic emergency decree and any measures that the government could take at this point may be too late. After two years of inaction and the recent decline in oil prices, a credit event in 2016 is becoming increasingly difficult to avoid, in our view.
  • The figures released by the BCV show that foreign currency assets had reached USD35.5bn by the end of Q3 2015; however, we believe that they could have dropped further in Q4, to USD27.6bn, which is lower than our previous estimate of USD33bn.
  • Considering current oil prices, any reasonable additional import cuts may be insufficient to cover the financing gap, in our view. At the oil price that the futures curve is pricing in (USD/b32), the government would need to use more than 90% of oil exports to make debt payments if we include market, bilateral, commercial, and Chinese Fund obligations.
  • The authorities keep reiterating their willingness to pay. However, their position seems to indicate a lack of appreciation of the magnitude and roots of the critical situation that the Venezuelan economy is facing, which may increase the risk of a disorderly credit event.
  • The government could still make the February payment using its available assets; however, they are insufficient to finance the gap of nearly USD30bn that Venezuela could face in 2016, considering our commodities team’s estimate of Brent at USD/b37, which is above what the oil future curve is pricing in (USD/b 32).
  • Inaction has been costly for Venezuela. Although GDP growth figures were better than expected, they confirm that the country is in a severe recession, with an accumulated contraction of approximately 16% in the past two years, and considering the contraction that we expect in 2016, the country could lose almost one quarter of its GDP.
  • Inflation had reached 141.5% by the end of Q3 2015, but is likely to have continued to accelerate in Q4, possibly exceeding 200% as we expected, showing the effects of monetization of the fiscal deficit.

  Some more details, first on the lack of disposable assets to face the oil price collapse

  After more than a year without publishing official data for the main economic indicators, the Central Bank of Venezuela (BCV) finally released the figures. The results are mixed. While activity indicators suggest that the economy’s contraction could have been smaller than we and the consensus expected, the external sector posted worse-than-expected results. The combination of lower-than-expected exports and higher-than-expected imports led to a larger-than-expected current account deficit. To finance this deficit, the public sector has been forced to liquidate more assets, which, in our view, leaves it with less than it would need to finance the deficit that it faces for 2016.

   

  There have been important methodological changes in the way the official data are presented. In the case of the balance of payments, there is a reclassification of transactions that had previously been reported as capital outflows and seem to have been moved to imports of either goods or services. As a result, previous years’ current account balances have changed significantly (as a reference, the 2012 current account declined from USD11bn to just USD2.6bn). We believe that was mainly due to public sector trade transactions such as the “services” provided by Cuba under the energy agreements or imports of military equipment and capital goods from Russia, which previously were not considered imports. In addition, the exports show a balance for 2014/15 that is lower than PDVSA oil export figures suggest (circa 6% lower). A possible explanation for this could be that BCV figures are showing net exports, discounting crude imports. In the prices figures, there are important changes in weights of the different CPI components, particularly those that have increased the most (food). On several occasions, we contrasted official Venezuelan figures with other sources of information, but we have not found large inconsistencies. The differences have been explained mainly by accounting methods – for example, in oil exports, the type of crudes and products that are considered. Nonetheless, in the past, the market has been skeptical about the credibility of the official information, and these changes without a clear explanation increase the concerns.

   

  

   

  BCV figures suggest that the government’s FX allocations to the private sector through the different mechanism (CENCOEX, SICAD, SIMADI) covered around half of the total private sector imports of goods and services. This could be an important factor when oil prices recover because it could give the government additional room, cutting FX allocations with a less than proportional effect in terms of imports. However, considering current oil prices, any reasonable import cut seems likely to be insufficient to cover the financing gap. Public sector external assets would have to decline below what we consider minimum operational levels. At the oil price that the futures curve is pricing in (USD/b32), the government would need to use more than 90% of the oil exports to make debt payments if we include market, bilateral, commercial, and Chinese Fund obligations (Figure 3). After two years of inaction, with depleting external assets and the recent decline in oil prices, a credit event in 2016 may be becoming hard to avoid, in our view.

  In other words, a default is coming in 2016, which may explain Maduro’s increasingly more panicked pleas to OPEC to cut production, pleas which fall on deaf ears.

  Who is to blame for the country’s imminent bankruptcy? Well, the government of course, although in all honesty Maduro’s regime has not dony anything different from every other “developed” regime in the past 6 years, which instead of undertaking difficult fiscal reform and structural changes, merely kicked the can hoping things would get better.

  They didn’t, and now Venezuela has to pay the piper.

  Inaction has been costly

  In addition to the weaker external position of the country, the rest of the economic indicators show a strong deterioration. The government has avoided an orthodox adjustment and has preferred to implement quantitative restrictions. The results indicate that the authorities’ inaction in tackling the large distortions in the economy has been costly for the country. Although GDP growth figures were better than expected, they confirmed that Venezuela is in a severe recession. GDP fell 4.5% in the first three-quarters of the year, but considering its trend and tightening of controls by the government, the whole-year contraction could have been 5.8%, with an accumulated contraction of approximately 16% in the past two years, and considering the contraction expected in 2016, it could lose almost one quarter of its GDP.

   

  

   

  Inflation had reached 141.5% by the end of Q3 2015, but it is likely to have continued to accelerate in Q4, possibly exceeding 200% as we expect, showing the effects of monetization of the fiscal deficit.

   

  Although these inflation figures are historical, we believe they underestimate real inflation. In fact, since June 2014, the central bank has modified the method used to calculate the inflation rate, changing the weights of different goods and services that make up the consumer price index. Curiously, the new weighting system reduced the effect on general inflation of some groups such as food, alcoholic beverages, restaurants, and hotels, characterized by a higher inflation rate than the average, and increased the weights of rents and telecommunications groups, characterized by lower inflation rates associated with strict price controls or a heavy market share by state companies.

   

  As a consequence of these reforms, the official inflation rate was 68.5% in 2014, instead of 76% using the previous method. In 2015, the gap from using the different methods is even larger. Consider the inflation number on a year-on-year basis for all sectors, inflation would have been187.9% instead of 141.5%. For the first nine months of 2015, using the new weights, the BCV indicated that inflation reached 108.7%, but with the old weights, inflation would have been at 144.1%. Following this trend, we expect that the official inflation rate could close 2015 at 210.4%, more than double the highest rate in Venezuelan history, but using the previous weights, inflation could have been 290.7%. Such high inflation has a strong detrimental effect not only on real salaries, but also on income distribution, as the lowest income part of the population tends to have fewer alternatives to protect against inflation. This could  increase social and political risks, making the current equilibrium increasingly unstable.

  Translation: first default, then revolution.

  

  Which is good news for those who buy CDS. Our only hope for those who have held so far is that the counterparty you will have to novate with will still be around once the sparks fly, because once this first OPEC member goes bankrupt, things will start moving very fast.

  Finally, for all those who are praying for an oil bounce, your day may be near, because nothing will send the price of crude soaring quite as fast as one entire OPEC nation suddenly entering a death spiral of chaos.

  

  

  

  

  

• "Is That It?"- Global Jawbone & Crude Pump Fails To Ignite Equity Exuberance

  BoJ Jawboning, ECB jawboning, PBOC rumors, and an artificial ETN-driven crude ramp… and we end up with this?

  

   

  And despite the largest liquidty injection in 3 years, Chinese stcoks tumbled…

  

   

  Seems like the central planners are losing their grip…

  The Short Squeeze-driven rally is over – "Most Shorted" stocks extended their squeeze from yesterday thanks to Draghi into the European close and then everything started to fade…

  

   

  Stocks managed to hold yesterday's bounce gains but traded in a very rangebound (admittdly wide) manner all day…

  

   

  But were unable to hold green for the week…

  

   

  As a reminder for 2016, things are still ugly…

  

   

  Credit was not buying the bounce in the afternoon…

  

   

  Much of today's strength was on the basis of crude's surge (despite surging inventories, rising production, and dropping demand), but Energy credit markets were not impressed…

  

   

  And somethinmg is seriously broken in the oil ETF complex…

  

   

  VIX futures (barely) broke its closing backwardation streak (Front month vs 2nd month)- which is what VIX ETPs are focused on…

  

   

  Making it the 8th longest streak in history…

  

   

  And the 3rd longest streak of spot-front-second month backwardation in history (h/t @RussellRhoads)

  

   

  Lots of talk today that everything is awesome and the lows are in and that none of this is systemic… so why is bank counterparty risk soaring?

  

   

  Treasury Yields continued their see-saw pattern ending the day steeper (30Y +5bps, 2Y unch) and 10Y pushed back above 2.00%

  

   

  FX markets were volatile, as Draghi's jawboning spiked the USD (dumped EUR), but that was entirely unwound the close leaving USD Index just in the green for the week..Commodity currecies rallied notably…

  

   

  Draghi impotence exposed…

  

   

  Commodities were very mixed with PMs flat as crude and copper gained…

  

   

  Crude was crazy today… but we suspect this was pure algos, runing stops to Iran…(and roll-related chaos on the ETN complex)

  

   

  Charts: Bloomberg

  

  

  

  

• The Birth Of The PetroYuan (In 2 Pictures)

  Give me that!!

  

   

  It belongs to the Chinese now!

  

  h/t @FedPorn

  As we previously detailed,  two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony. 

  In November 2014, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:

  Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar's reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

   

  

   

  The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, "developed world" status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements.

  Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nations drained liquidity from financial markets for the first time in nearly two decades:

  

  By Goldman’s estimates, a new oil price “equilibrium” (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018. The implications, BofAML notes, are far reaching: "…the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed's exit strategy.”

  Shifting to the idea of yuan hegemony, China is aggressively pushing its Silk Road Fund and Asian Infrastructure Investment Bank.

  The $40 billion Silk Road Fund is backed by China’s FX reserves, the Export-Import Bank of China, and China Development Bank and seeks to increase ROIC for Chinese SOEs by investing in infrastructure projects across the developing world, while the $50 billion AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. China will push for the yuan to play a prominent role in the settlement of AIIB transactions and may look to establish special reserves in both the AIIB and Silk Road fund to issue yuan-denominated loans.

  Back in early November, SWIFT data showed that 15 new countries had joined a list of nations settling more than 10% of their trade deals with China in yuan. "This is a good sign for [yuan] adoption rates and internationalisation. In particular, Canada's [yuan] usage for payments, which has increased greatly over this period, is very interesting since we have not seen strong adoption of the [yuan] from North America to date,” Astrid Thorsen, Swift's head of business intelligence said.

  Earlier that month, China and Russia indicated that going forward, more trade between the two countries would be settled in yuan. From Reuters, last November:

  Russia and China intend to increase the amount of trade settled in the yuan, President Vladimir Putin said in remarks that would be welcomed by Chinese authorities who want the currency to be used more widely around the world.

   

  Spurred on by their often testy relations with the United States, Russia and China have long advocated reducing the role of the dollar in international trade.

   

  Curtailing the dollar's influence fits well with China's ambitions to increase the influence of the yuan and eventually turn it into a global reserve currency. With 32 percent of its $4 trillion foreign exchange reserves invested in U.S. government debt, China wants to curb investment risks in dollar.

   

  The quest to limit the dollar’s dominance became more urgent for Moscow this year when U.S. and European governments imposed sanctions on Russia over its support for separatist rebels in Ukraine.

  "As part of our cooperation with this country (China), we intend to use national currencies in mutual transactions.The initial deals for rouble and yuan are taking place. I want to note that we are ready to expand these opportunities in (our) energy resources trade," Putin said at the time, suggesting that going forward, Russia may look to settle sales of oil in yuan. 

  Sure enough, Gazprom has confirmed that since the beginning of the year, all oil sales to China have been settled in renminbi. From FT:

  Russia’s third-largest oil producer, is now settling all of its crude sales to China in renminbi, in the most clear sign yet that western sanctions have driven an increase in the use of the Chinese currency by Russian companies.

   

  Russian executives have talked up the possibility of a shift from the US dollar to renminbi as the Kremlin launched a “pivot to Asia” foreign policy partly in response to the western sanctions against Moscow over its intervention in Ukraine, but until now there has been little clarity over how much trade is being settled in the Chinese currency.

   

  Gazprom Neft, the oil arm of state gas giant Gazprom, said on Friday that since the start of 2015 it had been selling in renminbi all of its oil for export down the East Siberia Pacific Ocean pipeline to China.

   

  Russian companies’ crude exports were largely settled in dollars until the summer of last year, when the US and Europe imposed sanctions on the Russian energy sector over the Ukraine crisis…

   

  Gazprom Neft responded more rapidly than most, with Alexander Dyukov, chief executive, announcing in April last year that the company had secured agreement from 95 per cent of its customers to settle transactions in euros rather than dollars, should the need to do so arise.

   

  Mr Dyukov later said the company had started selling oil for export in roubles and renminbi, but he did not specify whether the sales were significant in scale.

   

  According to Gazprom Neft’s first-quarter results issued last month, the East Siberian Pacific Ocean pipeline accounted for 37.2 per cent of the company’s crude oil exports of 1.6m tonnes in the three months to March 31.

  With that, the "PetroYuan" has officially been born and while FT notes that "other Russian energy groups have been more reluctant to drop the dollar for settlement of oil sales," the fact that Russian producers are now openly considering a shift at the same time that officials in the US and Europe are openly discussing stepped up economic sanctions suggests renminbi settlements may become more commonplace going forward.

  To understand why and to what extent this is significant in the current environment, consider the following from WSJ:

  Officials of the Organization of the Petroleum Exporting Countries, which declined to cut oil production last year, reasoned that maintaining high production levels would protect market share in crucial importing nations.;

   

  But Chinese customs data released Friday show that China’s crude imports from some big OPEC nations have plummeted, while imports from Russia surged 36% in 2014. Meanwhile, imports from Saudi Arabia fell 8% and those from Venezuela dropped 11%.

   

  

   

  To summarize: Western economic sanctions on Russia have pushed domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman's projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly-created infrastructure funds in renminbi.

  Putting it all together, the PetroYuan represents the intersection of a dying petrodollar and an ascendant renminbi.

   

  

  

  

  

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• Stocks, Crude Tumble As Offshore Yuan Sinks To Day Session Lows

  From the close of the US day session, offshore Yuan began to weaken and despite the largest liquidity injection in 3 years, has tumbled almost 200 pips from the dead-cat-bounce highs, testing the lows once again. This in turn has weighed on crude and dropped Dow futures 140 points off the after-hours highs…

  As Yuan tumbled so Crude and stocks lurched lower…

  

   

   

  We have seen this pattern before… this morning…

  

   

  What happens next?

  

  

  

  

• The U.S. Is At The Center Of The Global Economic Meltdown

  Submitted by Brandon Smith via Alt-Market.com,

  While the economic implosion progresses this year, there will be considerable misdirection and disinformation as to the true nature of what is taking place. As I have outlined in the past, the masses were so ill informed by the mainstream media during the Great Depression that most people had no idea they were actually in the midst of an “official” depression until years after it began. The chorus of economic journalists of the day made sure to argue consistently that recovery was “right around the corner.” Our current depression has been no different, but something is about to change.

  Unlike the Great Depression, social crisis will eventually eclipse economic crisis in the U.S. That is to say, our society today is so unequipped to deal with a financial collapse that the event will inevitably trigger cultural upheaval and violent internal conflict. In the 1930s, nearly 50% of the American population was rural. Farmers made up 21% of the labor force. Today, only 20% of the population is rural. Less than 2% work in farming and agriculture. That’s a rather dramatic shift from a more independent and knowledgeable land-utilizing society to a far more helpless and hapless consumer-based system.

  What’s the bottom line? About 80% of the current population in the U.S. is more than likely inexperienced in any meaningful form of food production and self-reliance.

  The rationale for lying to the public is certainly there. Economic and political officials could argue that to reveal the truth of our fiscal situation would result in utter panic and immediate social breakdown. When 80% of the citizenry is completely unprepared for a decline in the mainstream grid, a loss of savings through falling equities and a loss of buying power through currency destruction, their first response to such dangers would be predictably uncivilized.

  Of course, the powers-that-be are not really interested in protecting the American people from themselves. They are interested only in positioning their own finances and resources in the most advantageous investments while using our loss and fear to extract more centralization, more control and more consent. Thus, the hiding of economic decline is enacted because the decline itself is useful to the elites.

  And just to be clear for those who buy into the propaganda, the U.S. is indeed in a speedy decline.

  In 'Lies You Will Hear As The Economic Collapse Progresses', published in summer of last year, I predicted that “Chinese contagion” would be used as the scapegoat for the downturn in order to hide the true source: American wealth destruction. Today, as the Dow and other markets plummet and oil markets tank due to falling demand and glut inventories, all we seem to hear from the mainstream talking heads and the people who parrot them in various forums is that the U.S. is the “only stable economy by comparison” and the rest of the world (mainly China) is a poison to our otherwise exemplary financial health. This is delusional fiction.

  The U.S. is the No. 1 consumer market in the world with a 29% overall share and a 21% share in energy usage, despite having only 5 percent of the world’s total population. If there is a global slowdown in consumption, manufacturing, exports and imports, then the first place to look should be America.

  Trucking freight in the U.S. is in steep decline, with freight companies pointing to a “glut in inventories” and a fall in demand as the culprit.

  Morgan Stanley’s freight transportation update indicates a collapse in freight demand worse than that seen during 2009.

  The Baltic Dry Index, a measure of global freight rates and thus a measure of global demand for shipping of raw materials, has collapsed to even more dismal historic lows. Hucksters in the mainstream continue to push the lie that the fall in the BDI is due to an “overabundance of new ships.” However, the CEO of A.P. Moeller-Maersk, the world’s largest shipping line, put that nonsense to rest when he admitted in November that “global growth is slowing down” and “[t]rade is currently significantly weaker than it normally would be under the growth forecasts we see.”

  Maersk ties the decline in global shipping to a FALL IN DEMAND, not an increase in shipping fleets.

  This point is driven home when one examines the real-time MarineTraffic map, which tracks all cargo ships around the world. For the past few weeks, the map has remained almost completely inactive with the vast majority of the world’s cargo ships sitting idle in port, not traveling across oceans to deliver goods. The reality is, global demand has fallen down a black hole, and the U.S. is at the top of the list in terms of crashing consumer markets.

  To drive the point home even further, the U.S. is by far the world’s largest petroleum consumer. Therefore, any sizable collapse in global oil demand would have to be predicated in large part on a fall in American consumption. Oil inventories are now overflowing, indicating an unheard-of crash in energy use and purchasing.

  U.S. petroleum consumption was actually lower in 2014 than it was in 1997 and 25% lower than earlier projections predicted. A large part of this reduction in gas use has been attributed to fewer vehicle miles traveled. Though oil markets have seen massive price cuts, the lack of demand continued through 2015.

  This collapse in consumption is reflected partially in newly adjusted 4th quarter GDP forecasts by the Federal Reserve, which are now slashed down to 0.7%.  And remember, Fed and government calculate GDP stats by counting government spending of taxpayer money as "production" or "commerce".  They also count parasitic programs like Obamacare towards GDP as well.  If one were to remove government spending of taxpayer funds from the equation, real GDP would be far in the negative.  That is to say, if the fake numbers are this bad, then the real numbers must be horrendous.

  And finally, let’s talk about Wal-Mart. There is a good reason why mainstream pundits are attempting to marginalize Wal-Mart’s sudden announcement of 269 store closures, 154 of them within the U.S. with at least 10,000 employees being laid off. Admitting weakness in Wal-Mart means admitting weakness in the U.S. economy, and they don’t want to do that.

  Wal-Mart is America’s largest retailer and largest employer. In 2014, Wal-Mart announced a sweeping plan to essentially crush neighborhood grocery markets with its Wal-Mart Express stores, building hundreds within months. Today, those Wal-Mart Express stores are being shut down in droves, along with some supercenters. Their top business model lasted around a year before it was abandoned.

  Some in the mainstream argue that this is not necessarily a sign of economic decline because Wal-Mart claims it will be building 200 to 240 new stores worldwide by 2017. This is interesting to me because Wal-Mart just suffered its steepest stock drop in 27 years on reports that projected sales will fall by 6% to 12% for the next two years.

  It would seem to me highly unlikely that Wal-Mart would close 154 stores in the U.S. (269 stores worldwide) and then open 240 other stores during a projected steep crash in sales that caused the worst stock trend in the company’s history. I think it far more likely that Wal-Mart executives are attempting to appease shareholders with expansion promises they do not plan to keep.

  I am going to call it here and now and predict that most of these store sites will never see construction and that Wal-Mart will continue to make cuts, either with store closings, employee layoffs or both.

  As the above data indicates, global demand is disintegrating; and the U.S. is a core driver.

  The best way to sweep all these negative indicators under the rug is to fabricate some grand idea of outside threats and fiscal dominoes. It is much easier for Americans to believe our country is being battered from without rather than destroyed from within.

  Does China have considerable fiscal issues including debt bubble issues? Absolutely. Is this a catalyst for global collapse? No. China’s problems are many but if there is a first “domino” in the chain, then the U.S. economy claims that distinction.

  China is the largest exporter in the world, not the largest consumer. If anything, a crash in China’s economy is only a REFLECTION of an underlying collapse in U.S. demand for Chinese goods (among others). That is to say, the mainstream dullards have it backward; a crash in China is a herald of a larger collapse in U.S. markets. A crash in China is a symptom of the greater fiscal disease in America. The U.S. is the primary cause; it is not the victim of Chinese contagion. And the crisis in the U.S. will ultimately be far worse by comparison.

  I wrote in 'What Fresh Horror Awaits The Economy After Fed Rate Hike?', published before Christmas:

  "Market turmoil is a guarantee given the fact that banks and corporations have been utterly reliant on near-zero interest rates and free overnight lending from the Fed. They have been using these no-cost and low-cost loans primarily for stock buybacks, purchasing back their own stocks and reducing the number of shares on the market, thereby artificially elevating the value of the remaining shares and driving up the market as a whole. Now that near-zero lending is over, these banks and corporations will not be able to afford constant overnight borrowing, and the buybacks will cease. Thus, stock markets will crash in the near term.

   

  This process has already begun with increased volatility leading up to and after the Fed rate hike. Watch for far more erratic stock movements (300 to 500 points or more) up and down taking place more frequently, with the overall trend leading down into the 15,000-point range for the Dow in the first two quarters of 2016. Extraordinary but short lived positive increases in the markets will occur at times (Christmas and New Year’s tend to result in positive rallies), but shock rallies are just as much a sign of volatility and instability as shock crashes."

  Markets moved immediately into crash territory after the new year began. This was an easy prediction to make and one that I have been reiterating for months — just as the timing of the Fed rate hike was an easy prediction to make, based on the Fed’s history of deliberately increasing instability through bad policy as the economy moves into deflationary spirals. The Fed did it during the Great Depression and is doing it again today.

  It is no coincidence that global markets began to tank after the first Fed rate hike; no-cost overnight lending to banks and corporations was the key to maintaining equities in a relatively static position.  As the U.S. loses momentum, the world loses momentum.  As the Fed ends outright stimulation and manipulation, the house of cards falls.

  I have said it many times and I’ll say it yet again: If you think the Fed’s motivation is to prolong or protect the U.S. economy and currency, then you will never understand why it takes the policy actions it does. If you understand and accept the fact that the Fed is a saboteur working carefully and incrementally toward the destruction of the U.S. to make way for a new globally centralized system, everything falls into place.

  To summarize, the U.S. economy as we know it is not slated to survive the next few years. Read my article 'The Economic Endgame Explained' for more in-depth information on why a collapse is being engineered and what the openly admitted goal is, including the referenced 1988 article from The Economist titled “Get Ready A World Currency In 2018,” which outlines the plan for a reduction of the dollar and the U.S. system in order to make way for a global basket reserve currency (Special Drawing Rights).

  It is astonishingly foolish to assume that even though the U.S. has held the title of king of global consumption share for decades, that our economy is somehow not a primary faulty part in the sputtering global economic engine.  Economies are falling because demand is falling.   Demand is falling because Americans are not buying.  Americans are not buying because Americans are broke. Americans are broke because central bank policy has created an environment of wealth destruction. This wealth destruction in the U.S. has been ongoing, but only now is it becoming truly visible.  The volatility we see in developing nations is paltry compared to the financial chaos we now face.  Anyone who attempts to dismiss the dangers of a U.S. breakdown or the threat to the unprepared public is either an idiot, or they are trying to divert and distract you from reality. The coming months will undoubtedly verify this.

  

  

  

  

  

• For Emerging Markets, It Is Now Worse Than The Asian Financial Crisis

  "It’s Black Wednesday for emerging markets," one strategist warned and Thursday is not looking any better, as SocGen's Berg warns "The rout in emerging markets could continue for some time, especially as the major global central banks have exhausted their ammunition in recent years, making it unlikely that they will rescue global markets this time around." In fact, as Bloomberg reports, this year's EM turmoil is already worse than in the same period in 1998's Asian financial crisis (and EM FX is even worse).

  The MSCI Emerging Markets Index dropped 3 percent to 692.76, the lowest close since May 2009.

  More than $2 trillion has been wiped out from the value of developing-nation equities this year as the MSCI Emerging Markets Index slid 13 percent, the worst start to a year since data began in 1988. As Bloomberg reports, The drop has exceeded the 7.9 percent decline in the gauge in the same period in 1998 during the Asian financial crisis and the drop in 2009 amid the global financial crisis.

  

  “We are now in the correction territory,” Don Townswick, director of equity products at Conning Inc. Indian stocks are on the cusp of a bear market, potentially joining the three out of every four major emerging stock markets that have fallen 20 percent from peaks.

  But it's not just stocks, EM FX markets are collapsing as traders are betting that it’s become too expensive for policy makers to continue defending exchange rates after investors and companies pulled $735 billion out of developing nations last year, according to the Institute of International Finance.

  

   

  “With some losses already booked this year in their portfolios, investors will avoid risk as much as possible," said Attila Vajda, managing director at Singapore-based advisory firm Project Asia Research & Consulting Pte. “Investors remain more pessimistic with the global outlook."

  And finally EM debt is tumbling.
  The premium investors demand to hold emerging-market debt over U.S. Treasuries widened nine basis points to 481, according to JPMorgan Chase & Co. indexes.

  

   

  Which is why EM central bankers such as Mexico;s Carstens are begging for moar QE…

  Central banks in emerging markets could follow counterparts in the developed world and become “market makers of last resort”, using unconventional monetary policies to try and stimulate their flatlining economies, according to Mexico’s central bank chief.

   

  “Emerging markets need to be ready for a potentially severe shock,” Mr Carstens told the Financial Times. “The adjustment could be violent and policymakers need to be ready for it.”

   

  Policymakers and economists have warned that heavy selling of EM stocks and bonds by international investors since the middle of last year threatens to provoke a credit crunch that would make it hard for EM companies to service their debts.

   

  Many EM companies have filled up on cheap credit over the past decade, after a commodities boom and ultra-loose monetary policies led by the US Federal Reserve resulted in very low borrowing costs. As investors pull out, those costs are set to soar.

   

  Mr Carstens said the required policy response from EM central bankers would stop short of outright “quantitative easing” or QE — the large-scale buying of financial assets undertaken by the Fed and other developed market central banks.

   

  But it would include exchanging high risk, long-dated assets held by investors for less risky, shorter-dated central bank and government liabilities.

  So Operation Twist? If it were to happen, maybe this time they will use the break to delever?

  

  

  

  

  

• Guest Post: How Hitler Came To Power

  Submitted by 'Thinker' via The Burning Platform blog,

  Hitler came to power for a number of documented reasons, some of which are rational, others of which are emotional. Either way, the world continues to question how a vicious madman could rise to power in Germany during this time, most of all the German people who, to this day, will do almost anything to prevent another authoritarian movement.

  Though I believe that is being used today against them as a bigger authoritarian movement gains hold (migrant fundamentalism), the German people seem to be either blind to a new definition of totalitarianism or are so terrified of it happening again in Germany that they are incapable of resisting it.

  Following WWI, the following issues remained from the 1920s or were present at the time:

  Long-term bitterness

  Deep anger about the First World War and the Treaty of Versailles created an underlying bitterness to which Hitler’s viciousness and expansionism appealed, so they gave him support.

  Today, we have deep-seated anger at a number of things: government over-reach, the broken rule of law, inequality, crony capitalism, lack of meaningful representation from elected officials, degenerated race relations… we all know the many things that have created the seething undercurrent in this country.

  Ineffective Constitution

  Weaknesses in the German Constitution crippled the government. In fact, there were many people in Germany who wanted a return to dictatorship. When the crisis came in 1929–1933 – there was no one who was prepared or able to fight to stop Hitler.

  Here in the U.S., we have a growing number of people who promote / want socialism, or expect the government to take a more authoritarian approach. Our Constitution is in shambles after the actions of the past few Presidents, with many questioning whether it really stands for something any more. When the rule of law fails, that’s a sure sign that we are facing a constitutional crisis. We even have a governor (TX) calling for a Constitutional Convention to restore states’ rights… I’d say that fits, as well.

  Money

  The financial support of wealthy businessmen gave Hitler the money to run his propaganda and election campaigns.

  Banks, MIC companies, foreign governments, shadowy billionaires pulling strings, TPTB… always been this way, always will be, with very few exceptions throughout history.

  Propaganda

  Nazi propaganda persuaded the German masses to believe that the Jews were to blame and that Hitler was their last hope.

  Plenty of this to go around on both sides… Muslims are the problem, illegal immigrants, black people / white people, China, you name it. There’s a LOT of finger-pointing and tribalism going on now, and one guy standing up and saying he’s going to fix everything.

  Promises to fix everything

  Hitler promised everybody something, so they supported him.

  No one’s doing that just yet — promising something to everyone — but we’re not far off. Trump is saying things people want to hear, which is the power behind his meteoric rise. He’s claiming he’s going to get blacks voting for him, he’s going to get women voting for him… like most of the politicians we need to worry about the most, he’s broadening his appeal in order to achieve what he wants to do. But is it good for everyone? Will he really do it? Once someone like that is elected, they tend to do whatever they want, no matter what they’ve said in the past. Just look at our current fiasco-in-charge.

  Attacks on other parties

  The Stormtroopers attacked Jews and people who opposed Hitler. Many opponents kept quiet simply because they were scared of being murdered – and, if they were, the judges simply let the Stormtroopers go free.

  We’re not here yet, though one could say the current Administration has this one nailed. The IRS is used to target opposition, the NSA can take down anyone they want to, police forces around the nation already act above the law and get away with it. It wouldn’t take much for a REAL authoritarian to take advantage of the stage that’s been set. Which is why it’s so important to get past the “it’s only against blacks / conservatives / immigrants” mentality. Remember the Hangman.

  Personal Qualities

  Hitler was a brilliant speaker, and his eyes had a peculiar power over people. He was a good organizer and politician. He was a driven, unstable man, who believed that he had been called by God to become dictator of Germany and rule the world. This kept him going when other people might have given up. His self-belief persuaded people to believe in him.

  Driven, organized, belief that only he can fix things, grandiose statements of making the country “great” again… signs that we should tread very, very carefully.

  Economic Depression

  After the Wall Street Crash of 1929, the US called in its loans to Germany, and the German economy collapsed. The number of unemployed grew; people starved on the streets. In the crisis, people wanted someone to blame, and looked to extreme solutions – Hitler offered them both, and Nazi success in the elections grew.

  We don’t have people literally starving, though more are below poverty level than when the War of Poverty started. Instead, we have people “starving” from societal, family and community breakdown. People want someone to blame and they’re looking for extreme solutions — Trump on one hand / Hillary or Sanders on the other. Either way, we lose.

  “Those who cannot remember the past are condemned to repeat it.” — Santayana, The Life of Reason, 1905

  

  

  

  

  

• Tom DeMark: "Today Is An Interim Low" Followed By A 5-8% Rebound, Then Another Selloff; China To Fall Further

  There are not many technicians that Steve Cohen has on speed dial, but Tom DeMark, whose indicators grace the default graphs of many Bloomberg terminals around the globe, is one of them. One reason may be DeMark’s recent track record, having called a “Sell” on November 3 which was close to the all time high in the S&P, shortly after which US indices tumbled leading to the worst start of the year in history hitting DeMark’s targets well ahead of time.

  Earlier today, just as global stocks entered a bear market, DeMark spoke with Bloomberg TV, and may have been one of the catalysts for today’s violent surge off the lows just as the Dow Jones was crashing by over 550 points, when he said that “today may have been an interim low” highlighting that the intensity of the decline is comparable to the plunge in November 2008 and August 2011, both of which were followed by reflex rallies of 5-8%, roughly the same as what he expects now:

  We think it could be a pretty good rally off that low; We’re going to have a two-step affair: a low today, maybe tomorrow and then we rally and people take a deep breath. After we see that rally, maybe anywhere from a week and a half to three weeks, we decline again and I think that’s coincident with the Shanghai Composite and the Hang Seng Index declining.

  Incidentally, he said this just around noon when stocks were at their lows, so he did not have the benefit of hindsight from the market close. However, this good news for US stocks if only in the short-term, will not be shared by their Asian peers: DeMark discussed the Hong Kong and Chinese market, and sees those as continuing their fall:

  We are pretty confident the next level on the HSCEI is below 7,500. We think what we’re going to see in the HSCEI is four consecutive, maybe five, lower closes and that should bottom that market. We should get down below 7,500 and the Shanghai Composite we should still get down to objective which is about 2,500-2,600.

  DeMark then reveals why at this point a central bank intervention, which gratifying in the very near term, would be the worst possible outcome for a stable, long-term rally in stocks:

  Markets bottom when the last seller has sold and markets top when the last buyer has bought. We are looking for a bottom that’s a secondary bottom where you make one bottom, you rally, make a lower low and the internals of the market show that there’s strength and at the same time when we make that low there’s a low of negative news: we don’t want to see positive news from the government; we don’t want to see positive news from central banks. That interferes with the rhythm of the market.

  Finally since this was a typical soundbity finTV interview in which the anchors always have to know what, if anything, the interviewee is buying, we found DeMark’s answer to be wonderfully laconic:

  If I were a long-term buyer, I’d wait. Today we got -2,500 net declines in the NYSE. We’ll rally, we’ll make a lower low, and maybe we do -1,500 for a few days which would be a divergence and indicates that we are probably at a bottom. We could recover 40% of the decline subsequent then to that but we do have a lot of damage done to the market long-term.

  The interview took place just after noon, which may explain why the Steve Cohens of the world bought today’s massive dip and sent some of the most shorted stocks soaring in an epic closing dash for trash.

  What happens next? DeMark could well be right, however his call for a rebound has been consensus for the past few days, and ironically the reason for today’s sharp decline may have been that everyone was expecting stocks to jump which may explain why they did precisely the opposite.

  In any event, look for the next few days to see if DeMark still has his magic. We, on the other hand, would rather wait for “Gandalf” Kolanovic’ next take.

  Full interview below:

  

  

  

  

  

• PBOC Injects Massive $60 Billion Liquidity – Most In 3 Years; China Stocks, Yuan Drop

  Offshore Yuan is sliding lower after its "US equity market saving" surge during the day session as PBOC fixes Yuan stable for the 10th day in a row. Despite the smoke and mirrors of stability however, they injected a colossal 400 billion Yuan into the financial system – the most in 3 years.

  Offshore Yuan is sliding…

  

   

  PBOC holds Yuan Fix stable for the 10th day with a very small weakening:

  • *CHINA SETS YUAN REFERENCE RATE AT 6.5585 AGAINST U.S. DOLLAR

  

   

  But injected a godzilla-size 400bn Yuan of liquidity

  • *PBOC TO INJECT 110B YUAN WITH 7-DAY REVERSE REPOS: TRADER
  • *PBOC TO INJECT 290B YUAN WITH 28-DAY REVERSE REPOS: TRADER

  This is not normal new year liquidty injection at all…

  • *PBOC INJECTS MOST CASH IN THREE YEARS IN OPEN-MARKET OPERATIONS

  

   

  Something is breaking and PBOC is desperate to fill the hole with centrally planned reverse repo.

  And equity markets are not bouncing like the rest opf AsiaPac:

  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1.2% TO 3,136.38
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.4% TO 2,934.39

  

  

  

  

  

  

• We Know How This Ends – Part 2

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  Part 1 is HERE.

  In March 1969, while Buba was busy in the quicksand of its swaps and forward dollar interventions, Netherlands Bank (the Dutch central bank) had instructed commercial banks in Holland to pull back funds from the eurodollar market in order to bring up their liquidity positions which had dwindled dangerously during this increasing currency chaos.  At the start of April that year, the Swiss National Bank (Swiss central bank) was suddenly refusing its own banks dollar swaps in order that they would have to unwind foreign funds positions in the eurodollar market.  The Bank of Italy (the Italian central bank) had ordered some Italian banks to repatriate $800 million by the end of the second quarter of 1969.  It also raised the premium on forward lire at which it offered dollar swaps to 4% from 2%, discouraging Italian banks from engaging in covered eurodollar placements.

  The “rising dollar” of 1969 had somehow become anathema to global banking liquidity even in local terms.

  The FOMC, which had perhaps the best vantage point with which to view the unfolding events, documented the whole affair though stubbornly and maddeningly refusing to understand it all in greater context of radical paradigm banking and money alterations.  In other words, the FOMC meeting MOD’s for 1968 and 1969 give you an almost exact window into what was occurring as it occurred, but then, during the discussions that followed, degenerating into confusion and mystification as these economists struggled to only frame everything in their own traditional monetary understanding – a religious-like tendency that we can also appreciate very well at this moment.

  At the April 1969 FOMC meeting, Charles A. Coombs, Special Manager of the System Open Market Account, reported that the bank liquidity issue then seemingly focused on Germany was indeed replicated in far more countries.

  Mr. Coombs reported that the other main recent development in the European exchange markets had been the actions taken by the various continental central banks to defend their domestic liquidity and credit situations from the strains generated by the sharp rise in U.S. bank borrowings from the Euro-dollar market.

  European central banks, in particular, were nearly apoplectic about US banks’ sudden and incessant presence as eurodollar borrowers. Prior to 1968, eurodollars were largely a European affair, that Merchant’s bankers market to achieve global trade finance and settlement.  Rising consumer inflation starting in 1965 had the effect in domestic money markets of increasing interest rates then under the control of Regulation Q.  Ostensibly a systemic protection arrangement put in place in the 1930’s to avoid another Great Depression, Regulation Q limited what banks could pay on deposits.  By the middle of 1968, nearly all money market rates had hit their ceilings; eurodollar markets had no ceilings.

  Large time deposits particularly of corporate, non-bank accounts started shifting in 1968 and playing a large role in provoking and amplifying the global currency crisis that year.  Large banks in New York responded to the loss of primarily CD’s by simply bidding for funds in eurodollars (or exchanging them by bookkeeping alone, as Milton Friedman pointed out contemporarily) and booking those liabilities instead as borrowings from their foreign subsidiaries operating in eurodollar markets. The scale here was also massive; foreign subs booking eurodollar liabilities on behalf of their domestic head offices had added $3 billion during January and February 1969 alone.

  The more US banks were “forced” to bid in eurodollars to escape the liability and deposit strangle of Regulation Q, the more illiquidity spread throughout the rest of the exchange markets, particularly eurodollars and eurocurrency.  As the FOMC discussion in April 1969 pointed out then, “U.S. banks were willing to pay almost any rate for marginal additions to their resources, but that the actions of U.S. banks at their margins were tending to force upward the general levels of rates in European money markets.”  There was a direct link between eurodollars and the domestic money conditions in the countries most exposed or participatory in eurodollars.

  And it wasn’t just eurodollars, either.  The loss of time deposit liabilities had struck smaller reserve city banks domestically. These banks, unlike the global NYC banks, however, could not bid in eurodollars to re-obtain this funding.  Instead, there was a massive increase in “borrowed reserves”, both federal funds and the Discount Window.  From the February 1969 FOMC MOD:

  These funds were then channeled through the Euro-dollar market to the largest banks, with an actual basic reserve surplus developing in New York City banks last week and a record level of borrowing by country banks. These twin developments had the result of taking some of the pressure off the Federal funds market as the most aggressive bidders had less urgent needs and country banks made greater use of the discount window. This in turn helps explain last week’s anomaly of the highest level of net borrowed reserves in 16 years and a relatively comfortable Federal funds market.

  The domestic, as well as international, banking system was becoming fully functional on a wholesale level of action and activity (and, as you can appreciate, it greatly favors the biggest NYC and London banks).   But while there might be some domestic redistribution through NYC bank “excess reserves” into federal funds, for foreign liquidity arrangements there was no such recycling pass-through possible. Thus, “tightening” in eurodollars was directly translatable:

  He [Mr. Bodner, AVP of FRBNY] noted that rising Euro-dollar rates tend initially to push up the forward exchange rates for other currencies. In recent weeks, however, when the German Federal Bank had been supplying forward marks relatively cheaply there had been large outflows from Germany into Euro-dollars and fairly significant increases in German domestic interest rates. Swiss rates, too, had risen.

  And Denmark, Holland, Japan and any number of other eurodollar-connected places. While Mr. Bodner was ascribing these processes to the short-term, “tend initially”, what the events of 1969 would demonstrate conclusively was that the disruption left a lasting, scarring impact upon global finance (and then, as the recession developed, global economy). The “rising dollar” had major influence on what were thought completely separate financial systems – an assumption that persisted even though central banks had been actively participating and entangling their own banking systems (as Bundesbank belatedly admitted) within it all for years by then.

  

  Throughout the whole of 1969, the FOMC remained as if this was all some minor nuisance for foreigners to settle out amongst themselves.  Though the Fed had sent representatives to the conference in Bonn in November 1968, there was absolutely no urgency even though central bank after central bank succumbed to the “rising dollar.”  From the April 1969 MOD:

  In addition to domestic considerations, there is the impact of Euro-dollar takings on foreign money and exchange markets mentioned by Mr. Coombs. He suggests careful watching and contingency planning. This raises serious questions about the need for policy tools that could be used on short notice should there arise an urgent need to reduce the strains in the Euro-dollar market. Fortunately, we don’t have to reach a conclusion today. [emphasis added]

  But it wasn’t just quantity issues that were affecting almost everything in the global regime during the dying days of Bretton Woods; in fact, the innovation here in qualitative terms and repurposing was perhaps far more important. It certainly was a contributing factor toward the eventual dissolution of gold exchange, but these transformations in money and banking would rule the next forty-five years and set us up to do this all over again:

  The impact of monetary restraint on reserve aggregates and on bank deposits and credit is amply reflected in the written reports. It is also amply reflected in the ingenuity of banks in trying to avoid the constraints of Regulation Q. In addition to a still more intensive use of the Euro-dollar market, there has been increasing evidence of the exploration or use of other devices–such as the introduction of “documented discount notes,” sales of assets to foreign branches, sales of commercial paper by a subsidiary or by a bank holding company, as well as various forms of link financing. While these devices are probably not yet large in volume, they are casting increasing doubt on the validity of the regular bank credit statistics that we follow.

  And:

  He [FOMC Board Member Charles Scanlon] had no strong feeling regarding the establishment of reserve requirements against Euro-dollars except to question whether that device would be totally effective. He had been impressed by the ingenuity of people engaged in the Euro-dollar market who had already worked out various methods of escaping the constraints of a possible imposition of reserve requirements–including the use of brokers and repurchase agreements on Euro-dollars.

  “Escaping constraints” was not a feature of hard money, as that was entirely the point of hard money. Not only were repurchase agreements becoming more common as a domestic workaround of Regulations Q and D, they were also becoming more prevalent upon eurodollars where more swaps and forwards than “covered” participation of global banks existed.  In other words, not only would there be, as there increasingly had been, no hard money there wouldn’t even be money.  The dollar was becoming the full “dollar” and that meant a systemic shift due to massive imbalance that was unanswerable under the paradigm in operation at that time – not just Bretton Woods but in many ways the economic and monetary theories that then prevailed.  Rather than restore a hard money anchor economists instead simply continued the progression because they saw themselves now free and “flexible” to control it all more closely.

  It was, obviously, a disaster right from the start as we have been made to live their errors in repetition.  By 1980, Keynesianism in general was being totally repudiated but rather than fade into history it just merged with the technocratic principles that had been adopted by central banks thinking they could more easily wield their own influence under this “floating” monstrosity; monetarism and Keynesianism became all one big mess.  Thus, the precursor to the degradation of the serial asset bubbles of the 21^st century was refashioned as some kind of monetarist, central planning Golden Age – the Great “Moderation.”

  But this new floating and intangible eurodollar system was itself inherently unstable once it surpassed some threshold of intrusiveness.  That seems to have been in 1995 when eurodollars were shifted from payment system accounting for largely global trade to encompass an entirely parallel offshore banking system.  There were continuous indications that this was a terribly inefficient and just plain bad idea (starting almost right away with the Asian flu/LTCM) but it would continue on anyway until August 2007.  Since then, just like 1961, the world has been infected with almost continuous instability attaining more and more the properties and desperation that looks to be a symmetrical bookend of 1968-69.

  

  The only difference relevant in this overriding conception is that the eurodollar in 1969 was ready to break free of the shackles of hard money.  Its very existence owed to the fact that central banks were repeating the same processes that they had experimented with in the 1920’s and thus felt that they had learned from those mistakes (they didn’t; blaming gold the whole time when economists, deep down, care little for gold so much as power and control).  The eurodollar imbalance of 1969, which led to the great interruption of the 1970’s, was a faction, the majority faction, of banking following along the lines of monetary flexibility; in short, economists thought they would be replacing gold with themselves when even in 1969 it should have been readily apparent that banks were replacing gold with their own designs.

  One final note, a haunting warning that was echoed in 1979 (itself an echo of 1964) and seemingly destined to be unheeded and thus the source of our great repetition.  If we are doomed to repeat history, it is because the self-selected “best and brightest” are more enamored with their own credentials than their abilities as critical thinkers in a truly enlightened, scientific discipline.  Mr. Coombs’ words from April 1969 would find application in August 2007, again in August 2011 and in increasing regularity since June 2014 and this renewed “rising dollar.”

  European central banks remained apprehensive, however, that a serious crunch in the Euro-dollar market might suddenly develop if intensified U.S. and European competition for Euro-dollars suddenly revealed some vulnerable positions. The situation could be particularly serious because the Euro-dollar market had become an increasingly important source of financing for industrial and commercial enterprises not only in Europe but in the whole world. One bankruptcy could attract a lot of attention, and if it led the European commercial banks that had been supplying funds to the market to reassess the credit risks they faced, the result might be a sudden scramble for liquidity. The chances of such a development were enhanced by the fact that no central bank had formal responsibility for the behavior of the Euro-dollar market; what had been accomplished in that connection had been done through informal central bank cooperation.

  As noted through this whole discussion, that “informal central bank cooperation” doesn’t really amount to anything.  That lesson could be applied to the Bundesbank “selling dollars” in 1969, the PBOC “selling UST’s” in 2015 or the worthless, useless Federal Reserve RRP in 2016.  They really don’t know what they are doing, they never have and it truly doesn’t matter fixed or floating.  Adjust accordingly because we know how this ends; we’ve already seen it.

  

  

  

  

  

• Canada's "Other" Problem: Record High Household Debt

  Earlier today, the Bank of Canada surprised some market participants by failing to cut rates.

  True, the loonie was plunging and another rate cut might very well have accelerated the decline, further eroding the purchasing power of Canadians who are already struggling to keep up with the inexorable rise in food prices, but there are other, more pressing concerns.

  Like the fact that some analysts say the CAD should shoulder even more of the burden as Canada struggles to adjust to a world of sub-$30 crude. In short, if Stephen Poloz could manage to drive the loonie lower, the CAD-denominated price of WCS might stand a chance of remaining above the marginal cost of production. Barring that, the shut-ins will start and that means even more job losses in Canada’s oil patch, which shed some 100,000 total positions in 2015.

  Alas, Poloz elected to stay put, characterizing the current state of monetary policy as “appropriate.”

  We’re reasonably sure that assessment won’t hold once the layoffs pick up and as we noted earlier, the longer Poloz waits, the larger the next cut will ultimately have to be, which means that if the BOC waits too long, Poloz may have to rethink his contention that the effective lower bound is -0.50%.

  While there are a laundry list of concerns when it comes to assessing the state of the Canadian economy and the impact of either higher rates (the loonie is supported but growth is further choked off) or lower rates (the economy gets a boost but consumer spending is stifled as Canadians watch their purchasing power evaporate), perhaps the most important thing to remember is that Canada is now the most leveraged country in the G7.

  According to a new report from the Parliamentary Budget Officer (PBO) the household debt-to-income ratio is now a whopping 171% which means, for anyone who is confused, “that for every $100 in disposable income, households had debt obligations of $171.”

  

  That’s the highest level in a quarter century and it means that when it comes to household leverage, no other advanced economy does it like Canada:

  

  That would be bad enough in a favorable economic environment with a benign outlook for rates, but it’s a veritable nightmare when the economy is sliding headlong into recession and central planners are hell bent on trying to normalize policy some time in the next five or so years.

  Put simply, the more debt you have, the higher the cost of servicing your obligations and just about the last thing a grossly overleveraged economy needs is a wave of job losses and a severe economic downturn. Brazil is facing a similar dynamic. 

  “Since 1991, household debt has increased each quarter, on average, by almost 7 per cent on a year-over-year basis, with the sharpest acceleration occurring over 2002 to 2008,” the PBO says in the report. “In the third quarter of 2015, household debt amounted to $1.9 trillion.”

  

  “On its own, however, the debt-to-income ratio provides a limited measure of the financial vulnerability of households,” the report continues, adding that “what matters more for financial vulnerability is not so much the level of the debt relative to income, but rather the capacity of households to meet their debt service obligations.”

  Correct, and on that measure, things have only been worse on one other occasion: during the crisis.

   

  As Canada’s depression worsens, expect overburdened households to simply fold up under the pressure. That’s when the dominos start to fall in earnest as a cascade of foreclosures bursts the nation’s housing bubble once and for all and as the world discovers how exposed Canada’s banks are to the country’s levered up families. “Concerns about financial vulnerability are particularly prominent in the current context given the recent economic weakness and the expectation that interest rates will rise in the coming years from their historically-low levels,” the report concludes.

  Of course if rates don’t rise, that’s probably even worse news for Canadian households because it will mean that the country is still mired in recession. 

  We close with two passages, the first from Finance Canada’s Update of Economic and Fiscal Projections and the second from the Bank of Canada’s Financial System Review.

  Canadian household debt levels also remain elevated relative to historical norms. While this is not a risk in and of itself, it does limit the contribution that consumption and residential investment can make to growth. Moreover, if there were a negative external shock to the economy, this could trigger deleveraging among those households holding higher levels of debt, leading to a commensurate impact on consumption and residential investment.

   

  Household vulnerabilities could be exacerbated by a severe recession that is accompanied by a widespread and prolonged rise in unemployment. This could reduce the ability of households to service their debt and cause serious and broad-based declines in house prices.

  

  

  

  

  

• War On Cash Escalates: China Readies Digital Currency, IMF Says "Extremely Beneficial"

  Remember when Bitcoin and its digital currency cohorts were slammed by authorities and written off by the elite as worthless? Well now, as the war on cash escalates, officials from The IMF to China are seeing the opportunity to control the world's money through virtual (cash-less) currencies. Just as we warned most recently here, state wealth control is the goal and, as Bloomberg reports, The PBOC is targeting an early rollout of China's own digital currency to "boost control of money" and none other than The IMF's Christine Lagarde added that "virtual currencies are extremely beneficial."

  By way of background, as we explained previously, What exactly does a “war on cash” mean?

  It means governments are limiting the use of cash and a variety of official-mouthpiece economists are calling for the outright abolition of cash. Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.

  These limits are broadly called “capital controls.”

  Why Now?

  Why are governments suddenly so keen to ban physical cash?

  The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft. The escape mechanism from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age — that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.

  Forcing Those With Cash To Spend or Gamble Their Cash

  Negative interest rates (and fees on cash, which are equivalently punitive to savers) raise another question: why are governments suddenly obsessed with forcing owners of cash to either spend it or gamble it in the financial-market casinos?

  The conventional answer voiced by Mr. Buiter is that recession and credit contraction result from households and enterprises hoarding cash instead of spending it. The solution to recession is thus to force all those stingy cash hoarders to spend their money.

  *  *  *

  And so now we see China pushing for the early unleashing its own virtual currency, as Bloomberg reports

  Issuance of digital currency can help reduce costs, curb crimes and money laundry, facilitate transactions and boost central bank’s control on money supply and circulation, PBOC says in statement on website after concluding a seminar today.

   

  PBOC has asked its research team, which was set up in 2014, to study application scenarios for digital currency and strive for an early rollout.

  PBOC Statement:

  People's Bank of China digital currency seminar held in Beijing. From the People's Bank, Citibank and Deloitte digital currency expert, respectively, on the overall framework of digital currency currency evolving national digital currency, encryption currency issued by the State and other topics of discussion and exchange. People's Bank of China Governor Zhou Xiaochuan attended the meeting, the People's Bank of China Deputy Governor Chair Fan Yifei. Relevant research institutions, major financial institutions and advisory bodies of experts attended the meeting.

   

  The meeting pointed out that with the development of information technology and mobile Internet, cloud computing Trusted controlled, secure storage terminal evolution, block chain technology worldwide payment undergone tremendous changes, the development of digital currency is central Bank of currency and monetary policy has brought new opportunities and challenges. The People's Bank attaches great importance from 2014 to set up a special research team, and in early 2015 to further enrich the power of digital distribution and business operations monetary framework, the key technology of digital currency, digital currency issued and outstanding environment, digital currency legal issues facing the impact of digital currency on economic and financial system, the relationship between money and private legal digital distribution of digital currency, digital currency issuance of international experience conducted in-depth research, has achieved initial results.

   

  The meeting held that China's current economy under the new norm, explore the central bank issued digital currency has a positive practical significance and far-reaching historical significance. It can reduce the traditional distribution of digital currency note issue, the high cost of circulation, improve convenience and transparency of economic transactions and reduce money laundering, tax evasion and other criminal acts to enhance the central bank's money supply and currency in circulation control, better support economic and social development, the full realization of inclusive finance help. Future, digital currency issuance, circulation system also helps build our new financial infrastructure construction, further improve China's payment system, improve payment and settlement efficiency, promote economic quality and efficiency upgrades.

   

  The meeting urged the People's Bank of digital currency research team to actively absorb the important results and practical experience of digital currency research at home and abroad, continue to advance on the basis of preliminary work to establish a more effective organizational guarantee mechanism, to further clarify the strategic objectives of the central bank issued digital currency and do key technologies, multi-scene digital currency research applications for the early introduction of digital currency issued by the central bank. Design of digital currency should be based on economic, convenience and safety principles, and ensure the application of low-cost digital currency, wide coverage, digital currency payment instruments with other seamlessly, enhance the applicability and vitality of digital currency.

   

  The People's Bank in advancing digital currency research work with relevant international agencies, Internet companies to establish a communication link with the domestic and foreign financial institutions, traditional card-based payment institutions were widely discussed. At home and abroad to participate in discussions of attention to this work, and related research on expert theory, practice and exploration and development path with the people in the banking system conducted in-depth exchanges.

  Which was raidly followed by yet another belessing from The IMF:

  • *IMF’S LAGARDE SAYS VIRTUAL CURRENCIES ARE EXTREMELY BENEFICIAL
  • *VIRTUAL CURRENCIES ALSO COULD BE DESTABILIZING: LAGARDE

  The International Monetary Fund extolled the potential benefits of virtual currencies and said they warrant a more nuanced regulatory approach, at a time when the future of bitcoin, the most well-known example, is in doubt.

  “Virtual currencies and their underlying technologies can provide faster and cheaper financial services, and can become a powerful tool for deepening financial inclusion in the developing world,” IMF Managing Director Christine Lagarde said in a statement Wednesday to accompany the report.

   

  "The challenge will be how to reap all these benefits and at the same time prevent illegal uses, such as money laundering, terror financing, fraud and even circumvention of capital controls.”

  *  *  *

  However, as we detailed previously. there are three enormous flaws in this thinking.

  One is that households and businesses have cash to hoard. The reality is the bottom 90 percent of households have less income now than they did fifteen years ago, which means their spending has declined not from hoarding but from declining income.

   

   

  While corporate America has basked in the glory of sharply rising profits, small business has not prospered in the same fashion. Indeed, by some measures, small business has been in a six-year recession.

   

   

  The bottom 90 percent has less income and faces higher living expenses, so only the top slice of households has any substantial cash. This top slice may see few safe opportunities to invest their savings, so they choose to keep their savings in cash rather than gamble it in a rigged casino (i.e., the stock market).

   

  The second flaw is that hoarding cash is the only rational, prudent response in an era of financial repression and economic insecurity. What central banks are demanding — that we spend every penny of our earnings rather than save some for investments we control or emergencies — is counter to our best interests.

   

  This leads to the third flaw: capital — which begins its life as savings — is the foundation of capitalism. If you attack savings as a scourge, you are attacking capitalism and upward mobility, for only those who save capital can invest it to build wealth. By attacking cash, the central banks and governments are attacking capital and upward mobility.

   

  Those who already own the majority of productive assets are able to borrow essentially unlimited sums at near-zero interest rates, which they can use to buy more productive assets. Everyone else — the bottom 99.5 percent — is reduced to consumer-serfdom: you are not supposed to accumulate productive capital, you are supposed to spend every penny you earn on interest payments, goods, and services.

  This inversion of capitalism dooms an economy to all the ills we are experiencing in abundance: rising income inequality, reduced opportunities for entrepreneurship, rising debt burdens, and a short-term perspective that voids the longer-term planning required to build sustainable productivity and wealth.

  Benefits To Banks and the Government of Eliminating Physical Cash

  The benefits to banks and governments by eliminating cash are self-evident:

  1.  Every financial transaction can be taxed.
  2.  Every financial transaction can be charged a fee.
  3.  Bank runs are eliminated.

  In fractional reserve systems such as ours, banks are only required to hold a fraction of their assets in cash. Thus a bank might only have 1 percent of its assets in cash. If customers fear the bank might be insolvent, they crowd the bank and demand their deposits in physical cash. The bank quickly runs out of physical cash and closes its doors, further fueling a panic.

   

  The federal government began insuring deposits after the Great Depression triggered the collapse of hundreds of banks, and that guarantee limited bank runs, as depositors no longer needed to fear a bank closing would mean their money on deposit was lost.

   

  But since people could conceivably sense a disturbance in the Financial Force and decide to turn digital cash into physical cash as a precaution, eliminating physical cash also eliminates the possibility of bank runs, as there will be no form of cash that isn’t controlled by banks.

  So, when the dust has settled who ultimately benefits by this war on cash – government and the central banks, pure and simple.

  

  

  

  

  

• David Morgan: We Are On The Precipice

  Submitted by Adam Taggart via PeakProsperity.com,

  Precious metals guru David Morgan returns to address the great threat to the global financial/monetary system from derivative risk. He sees the world at an unprecedented moment in history where the interconnected nature of the global economy makes all players vulnerable to the mind-boggling volume of outstanding derivatives, which makes the sum of all world equity + debt look tiny in comparison (if you haven't seen it yet, look at this visual from The Money Project):

  I want to give a very clear example that comes from gaming theory and I think this is a very concise and easy way for most people to understand our derivative risk exposure .

   

  There are all kinds of gambling programs out there but one of the simplest ones before any computers was: you are at the roulette table (or you could be wherever, but roulette serves as the best analogy), and you bet a dollar on black and you lose. Then the next bet, you bet $2.00 and you lose. And then the next bet, you bet $4 and you lose. And the next bet, you bet $8 and you lose. The idea is that you keep betting on black, and eventually that's going to come up and you're going to win on the roulette table. The problem with that is this. You start to bet 2 4 8 16 32 64 128 256 and on and on, and what you are doing is you are betting $256. For what? To win a dollar. That is what you are doing. And that, Chris, I think is the best example I can give to the listeners about what we are doing in these derivatives.

   

  This is based on simplified "delta hedging" which is fairly easy to understand. But now you've got these mathematicians out there writing these derivatives that make the example I just gave you look like child’s play. That's literally a fact. And these things are so interdependent and there is so much counter-party risk — that is, of course the biggest, issue — If you win the bet in the derivatives market, what happens if the counter party can’t pay you? That's what happened in 2008. People still don’t realize how close we were to the edge at that point because banks were not trusting each other or each other’s paper. So they weren’t trusting their counter-party. What happened was the Fed came in and said: Well, Bank A you don’t trust Bank Bs paper; Bank B you don’t trust Bank As paper — here's what we are going to do: I’ll take your paper. The Fed is taking these worthless mortgages and saying: We'll settle in T-bills. You like those things, don’t you? The answer is: Of course. What is better than a T-bill?

   

  So then they settled out and, of course, this is where this whole expansion of the Fed’s balance sheet has taken place over the past several years. Everybody is happy because you have paper you can trust. But what happens when you don’t trust government paper? And Chris, that is really what is happening now. If you look at the foreign markets ,what has been going on is they basically have been dumping the dollar. The exchange stabilization fund has come in and sopped it up so it's not transparent to the markets unless you really know how to dig deep.

   

  We are, in my view, in a place where the world has never been. We are on the precipice of a situation that is global in scope and  — for all practical purposes — is going to effect almost everybody on the planet. 

  In this podcast, Chris and David also discuss the upcoming Solutions Conference in Las Vegas on February 22, where they will both be featured presenters. Those looking for more information about attending that conference can find it by clicking here.

  Click the play button below to listen to Chris' interview with David Morgan (49m:51s)

  

  

  

  

  

• Why Oil Under $30 Is A Major Problem

  Submitted by Gail Tverberg via Our Finite World blog,

  A person often reads that low oil prices–for example, $30 per barrel oil prices–will stimulate the economy, and the economy will soon bounce back. What is wrong with this story? A lot of things, as I see it:

  1. Oil producers can’t really produce oil for $30 per barrel.

  A few countries can get oil out of the ground for $30 per barrel. Figure 1 gives an approximation to technical extraction costs for various countries. Even on this basis, there aren’t many countries extracting oil for under $30 per barrel–only Saudi Arabia, Iran, and Iraq. We wouldn’t have much crude oil if only these countries produced oil.

  

  Figure 1. Global breakeven prices (considering only technical extraction costs) versus production. Source: Alliance Bernstein, October 2014

  2. Oil producers really need prices that are higher than the technical extraction costs shown in Figure 1, making the situation even worse.

  Oil can only be extracted within a broader system. Companies need to pay taxes. These can be very high. Including these costs has historically brought total costs for many OPEC countries to over $100 per barrel.

  Independent oil companies in non-OPEC countries also have costs other than technical extraction costs, including taxes and dividends to stockholders. Also, if companies are to avoid borrowing a huge amount of money, they need to have higher prices than simply the technical extraction costs. If they need to borrow, interest costs need to be considered as well.

  3. When oil prices drop very low, producers generally don’t stop producing.

  There are built-in delays in the oil production system. It takes several years to put a new oil extraction project in place. If companies have been working on a project, they generally won’t stop just because prices happen to be low. One reason for continuing on a project is the existence of debt that must be repaid with interest, whether or not the project continues.

  Also, once an oil well is drilled, it can continue to produce for several years. Ongoing costs after the initial drilling are generally very low. These previously drilled wells will generally be kept operating, regardless of the current selling price for oil. In theory, these wells can be stopped and restarted, but the costs involved tend to deter this action.

  Oil exporters will continue to drill new wells because their governments badly need tax revenue from oil sales to fund government programs. These countries tend to have low extraction costs; nearly the entire difference between the market price of oil and the price required to operate the oil company ends up being paid in taxes. Thus, there is an incentive to raise production to help generate additional tax revenue, if prices drop. This is the issue for Saudi Arabia and many other OPEC nations.

  Very often, oil companies will purchase derivative contracts that protect themselves from the impact of a drop in market prices for a specified time period (typically a year or two). These companies will tend to ignore price drops for as long as these contracts are in place.

  There is also the issue of employee retention. In a sense, a company’s greatest assets are its employees. Once these employees are lost, it will be hard to hire and retrain new employees. So employees are kept on as long as possible.

  The US keeps raising its biofuel mandate, regardless of the price of oil. No one stops to realize that in the current over-supplied situation, the mandate adds to low price pressures.

  One brake on the system should be the financial pain induced by low oil prices, but this braking effect doesn’t necessarily happen quickly. Oil exporters often have sovereign wealth funds that they can tap to offset low tax revenue. Because of the availability of these funds, some exporters can continue to finance governmental services for two or more years, even with very low oil prices.

  Defaults on loans to oil companies should also act as a brake on the system. We know that during the Great Recession, regulators allowed commercial real estate loans to be extended, even when property valuations fell, thus keeping the problem hidden. There is a temptation for regulators to allow similar leniency regarding oil company loans. If this happens, the “braking effect” on the system is reduced, allowing the default problem to grow until it becomes very large and can no longer be hidden.

  4. Oil demand doesn’t increase very rapidly after prices drop from a high level.

  People often think that going from a low price to a high price is the opposite of going from a high price to a low price, in terms of the effect on the economy. This is not really the case.

  4a. When oil prices rise from a low price to a high price, this generally means that production has been inadequate, with only the production that could be obtained at the prior lower price. The price must rise to a higher level in order to encourage additional production.

  The reason that the cost of oil production tends to rise is because the cheapest-to-extract oil is removed first. Oil producers must thus keep adding production that is ever-more expensive for one reason or another: harder to reach location, more advanced technology, or needing additional steps that require additional human labor and more physical resources. Growing efficiencies can somewhat offset this trend, but the overall trend in the cost of oil production has been sharply upward since about 1999.

  The rising price of oil has an adverse impact on affordability. The usual pattern is that after a rise in the price of oil, economies of oil importing nations go into recession. This happens because workers’ wages do not rise at the same time as oil prices. As a result, workers find that they cannot buy as many discretionary items and must cut back. These cutbacks in purchases create problems for businesses, because businesses generally have high fixed costs including mortgages and other debt payments. If these businesses are to continue to operate, they are forced to cut costs in one way or another. Cost reduction occurs in many ways, including reducing wages for workers, layoffs, automation, and outsourcing of manufacturing to cheaper locations.

  For both employers and employees, the impact of these rapid changes often feels like a rug has been pulled out from under foot. It is very unpleasant and disconcerting.

  4b. When prices fall, the situation that occurs is not the opposite of 4a. Employers find that thanks to lower oil prices, their costs are a little lower. Very often, they will try to keep some of these savings as higher profits. Governments may choose to raise tax rates on oil products when oil prices fall, because consumers will be less sensitive to such a change than otherwise would be the case. Businesses have no motivation to give up cost-saving techniques they have adopted, such as automation or outsourcing to a cheaper location.

  Few businesses will construct new factories with the expectation that low oil prices will be available for a long time, because they realize that low prices are only temporary. They know that if oil prices don’t go back up in a fairly short period of time (months or a few years), the quantity of oil available is likely to drop precipitously. If sufficient oil is to be available in the future, oil prices will need to be high enough to cover the true cost of production. Thus, current low prices are at most a temporary benefit–something like the eye of a hurricane.

  Since the impact of low prices is only temporary, businesses will want to adopt only changes that can take place quickly and can be easily reversed. A restaurant or bar might add more waiters and waitresses. A car sales business might add a few more salesmen because car sales might be better. A factory making cars might schedule more shifts of workers, so as to keep the number of cars produced very high. Airlines might add more flights, if they can do so without purchasing additional planes.

  Because of these issues, the jobs that are added to the economy are likely to be mostly in the service sector. The shift toward outsourcing to lower-cost countries and automation can be expected to continue. Citizens will get some benefit from the lower oil prices, but not as much as if governments and businesses weren’t first in line to get their share of the savings. The benefit to citizens will be much less than if all of the people who were laid off in the last recession got their jobs back.

  5. The sharp drop in oil prices in the last 18 months has little to do with the cost of production. 

  Instead, recent oil prices represent an attempt by the market to find a balance between supply and demand. Since supply doesn’t come down quickly in response to lower prices, and demand doesn’t rise quickly in response to lower prices, prices can drop very low–far below the cost of production.

  As noted in Section 4, high oil prices tend to be recessionary. The primary way of offsetting recessionary forces is by directly or indirectly adding debt at low interest rates. With this increased debt, more homes and factories can be built, and more cars can be purchased. The economy can be forced to act in a more “normal” manner because the low interest rates and the additional debt in some sense counteract the adverse impact of high oil prices.

  

  Figure 2. World oil supply and prices based on EIA data.

  Oil prices dropped very low in 2008, as a result of the recessionary influences that take place when oil prices are high. It was only with the benefit of considerable debt-based stimulation that oil prices were gradually pumped back up to the $100+ per barrel level. This stimulation included US deficit spending, Quantitative Easing (QE) starting in December 2008, and a considerable increase in debt by the Chinese.

  Commodity prices tend to be very volatile because we use such large quantities of them and because storage is quite limited. Supply and demand have to balance almost exactly, or prices spike higher or lower. We are now back to an “out of balance” situation, similar to where we were in late 2008. Our options for fixing the situation are more limited this time. Interest rates are already very low, and governments generally feel that they have as much debt as they can safely handle.

  6. One contributing factor to today’s low oil prices is a drop-off in the stimulus efforts of 2008.

  As noted in Section 4, high oil prices tend to be recessionary. As noted in Section 5, this recessionary impact can, at least to some extent, be offset by stimulus in the form of increased debt and lower interest rates. Unfortunately, this stimulus has tended to have adverse consequences. It encouraged overbuilding of both homes and factories in China. It encouraged a speculative rise in asset prices. It encouraged investments in enterprises of questionable profitability, including many investments in oil from US shale formations.

  In response to these problems, the amount of stimulus is being reduced. The US discontinued its QE program and cut back its deficit spending. It even began raising interest rates in December 2015. China is also cutting back on the quantity of new debt it is adding.

  Unfortunately, without the high level of past stimulus, it is difficult for the world economy to grow rapidly enough to keep the prices of all commodities, including oil, high. This is a major contributing factor to current low prices.

  7. The danger with very low oil prices is that we will lose the energy products upon which our economy depends.

  There are a number of different ways that oil production can be lost if low oil prices continue for an extended period.

  In oil exporting countries, there can be revolutions and political unrest leading to a loss of oil production.

  In almost any country, there can be a sharp reduction in production because oil companies cannot obtain debt financing to pay for more services. In some cases, companies may go bankrupt, and the new owners may choose not to extract oil at low prices.

  There can also be systemwide financial problems that indirectly lead to much lower oil production. For example, if banks cannot be depended upon for payroll services, or to guarantee payment for international shipments, such problems would affect all oil companies, not just ones in financial difficulty.

  Oil is not unique in its problems. Coal and natural gas are also experiencing low prices. They could experience disruptions indirectly because of continued low prices.

  8. The economy cannot get along without an adequate supply of oil and other fossil fuel products. 

  We often read articles in the press that seem to suggest that the economy could get along without fossil fuels. For example, the impression is given that renewables are “just around the corner,” and their existence will eliminate the need for fossil fuels. Unfortunately, at this point in time, we are nowhere being able to get along without fossil fuels.

  Food is grown and transported using oil products. Roads are made and maintained using oil and other energy products. Oil is our single largest energy product.

  Experience over a very long period shows a close tie between energy use and GDP growth (Figure 3). Nearly all technology is made using fossil fuel products, so even energy growth ascribed to technology improvements could be considered to be available to a significant extent because of fossil fuels.

  

  Figure 3. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends from 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by the author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

  While renewables are being added, they still represent only a tiny share of the world’s energy consumption.

  

  Figure 4. World energy consumption by part of the world, based on BP Statistical Review of World Energy 2015.

  Thus, we are nowhere near a point where the world economy could continue to function without an adequate supply of oil, coal and natural gas.

  9. Many people believe that oil prices will bounce back up again, and everything will be fine. This seems unlikely. 

  The growing cost of oil extraction that we have been encountering in the last 15 years represents one form of diminishing returns. Once the cost of making energy products becomes high, an economy is permanently handicapped. Prices higher than those maintained in the 2011-2014 period are really needed if extraction is to continue and grow. Unfortunately, such high prices tend to be recessionary. As a result, high prices tend to push demand down. When demand falls too low, prices tend to fall very low.

  There are several ways to improve demand for commodities, and thus raise prices again. These include (a) increasing wages of non-elite workers (b) increasing the proportion of the population with jobs, and (c) increasing the amount of debt. None of these are moving in the “right” direction.

  Joseph Tainter in The Collapse of Complex Societies points out that once diminishing returns set in, the response is more “complexity” to solve these problems. Government programs become more important, and taxes are often higher. Education of elite workers becomes more important. Businesses become larger. This increased complexity leads to more of the output of the economy being funneled to sectors of the economy other than the wages of non-elite workers. Because there are so many of these non-elite workers, their lack of buying power adversely affects demand for goods that use commodities, such as homes, cars, and motorcycles.¹

  Another force tending to hold down demand is a smaller proportion of the population in the labor force. There are many factors contributing to this: Young people are in school longer. The bulge of workers born after World War II is now reaching retirement age. Lagging wages make it increasingly difficult for young parents to afford childcare so that both can work.

  As noted in Section 5, debt growth is no longer rising as rapidly as in the past. In fact, we are seeing the beginning of interest rate increases.

  When we add to these problems the slowdown in growth in the Chinese economy and the new oil that Iran will be adding to the world oil supply, it is hard to see how the oil imbalance will be fixed in any reasonable time period. Instead, the imbalance seems likely to remain at a high level, or even get worse. With limited storage available, prices will tend to continue to fall.

  10. The rapid run up in US oil production after 2008 has been a significant contributor to the mismatch between oil supply and demand that has taken place since mid-2014.  

  Without US production, world oil production (broadly defined, including biofuels and natural gas liquids) is close to flat.

  

  Figure 5. Total liquids oil production for the world as a whole and for the world excluding the US, based on EIA International Petroleum Monthly data.

  Viewed separately, US oil production has risen very rapidly. Total production rose by about six million barrels per day between 2008 and 2015.

  

  Figure 6. US Liquids production, based on EIA data (International Petroleum Monthly, through June 2015; supplemented by December Monthly Energy Review for most recent data).

  US oil supply was able to rise very rapidly partly because QE led to the availability of debt at very low interest rates. In addition, investors found yields on debt so low that they purchased almost any equity investment that appeared to have a chance of long-term value. The combination of these factors, plus the belief that oil prices would always increase because extraction costs tend to rise over time, funneled large amounts of investment funds into the liquid fuels sector.

  As a result, US oil production (broadly defined), increased rapidly, increasing nearly 1.0 million barrels per day in 2012, 1.2 million barrels per day in 2013, 1.7 million barrels per day in 2014. The final numbers are not in, but it looks like US oil production will still increase by another 700,000 barrels a day in 2015. The 700,000 extra barrels of oil added by the US in 2015 is likely greater than the amount added by either Saudi Arabia or Iraq.

  World oil consumption does not increase rapidly when oil prices are high. World oil consumption increased by 871,000 barrels a day in 2012, 1,397,000 barrels a day in 2013, and 843,000 barrels a day in 2014, according to BP. Thus, in 2014, the US by itself added approximately twice as much oil production as the increase in world oil demand. This mismatch likely contributed to collapsing oil prices in 2014.

  Given the apparent role of the US in creating the mismatch between oil supply and demand, it shouldn’t be too surprising that Saudi Arabia is unwilling to try to fix the problem.

  Conclusion

  Things aren’t working out the way we had hoped. We can’t seem to get oil supply and demand in balance. If prices are high, oil companies can extract a lot of oil, but consumers can’t afford the products that use it, such as homes and cars; if oil prices are low, oil companies try to continue to extract oil, but soon develop financial problems.

  Complicating the problem is the economy’s continued need for stimulus in order to keep the prices of oil and other commodities high enough to encourage production. Stimulus seems to takes the form of ever-rising debt at ever-lower interest rates. Such a program isn’t sustainable, partly because it leads to mal-investment and partly because it leads to a debt bubble that is subject to collapse.

  Stimulus seems to be needed because of today’s high extraction cost for oil. If the cost of extraction were still very low, this stimulus wouldn’t be needed because products made using oil would be more affordable.

  Decision makers thought that peak oil could be fixed simply by producing more oil and more oil substitutes. It is becoming increasingly clear that the problem is more complicated than this. We need to find a way to make the whole system operate correctly. We need to produce exactly the correct amount of oil that buyers can afford. Prices need to be high enough for oil producers, but not too high for purchasers of goods using oil. The amount of debt should not spiral out of control. There doesn’t seem to be a way to produce the desired outcome, now that oil extraction costs are high.

  Rigidities built into the oil price-supply system (as described in Sections 3 and 4) tend to hide problems, letting them grow bigger and bigger. This is why we could suddenly find ourselves with a major financial problem that few have anticipated.

  Unfortunately, what we are facing now is a predicament, rather than a problem. There is quite likely no good solution. This is a worry.

  

  

  

  

  

• 7 Striking Images From Deadly Taliban Attack On Pakistani University

  On December 16, 2014, seven gunmen from the Pakistan Taliban stormed the Army Public School in Peshawar, Pakistan.

  The shooters murdered 144 people, walking desk to desk and executing children aged 12 to 16. “Our men attacked the school and killed children of army personnel – not civilians,” TTP leader Maulana Fazlullah said, as though that somehow justified the massacre. “They asked about their identity before killing them [and] these people will always be our target and we will kill them in the streets, markets, everywhere,” he added.

  A little over a year later, Pakistani students were once again targeted by militants in a tragic attack that left dozens dead on Wednesday in Khyber Pakhtunkhwa province, a mere 25 miles from the site of the Army Public School attack.

  

  “The militants, using the cover of thick, wintry fog, scaled the walls of the Bacha Khan University in Charsadda on Wednesday morning before entering buildings and opening fire on students and teachers in classrooms and hostels,” Reuters writes, recounting the horrific details.

  “They came from behind and there was a big commotion,” one student told local media. “We were told by teachers to leave immediately,” he said. “Some people hid in bathrooms.”

  In the wake of the chaos, senior Pakistani Taliban commander Umar Mansoor (who some say was the mastermind behind the 2014 attack) claimed responsibility for Wednesday’s assault, saying the school is a “government institution that supports the army.”

  Later, an official spokesperson for the Taliban denied the group’s senior leadership was involved. “Youth who are studying in non-military institutions, we consider them as builders of the future nation and we consider their safety and protection our duty,” a statement from official Taliban spokesman Muhammad Khorasani reads. “We strongly condemn the attack on Bacha Khan University in Charsadda and disown the attack, saying this is not according to Shariah.”

  So a bit of militant miscommunication it would appear.

  Whether or not this was an officially sanctioned attack or not is immaterial because as you can see from the indelible images shown below, Pakistani students are the furthest thing from “safe and protected,” to quote Khorasani.

  This, apparently, is the type of “security” that billions in US taxpayer funded anti-terror aid buys for Pakistani citizens:

  

  

  

  

  

  

  

  

  

  

  

• The "Historic" Winter Blizard Was Just Upgraded To A "Potentially Epic Winter Blockbuster"

  Yesterday some readers were offended when we dubbed the upcoming winter storm set to slam the Northeastern United States and impact up to 50 million people, in roughly 48 hours as “potentially historic” – a phrase created not by us, but by the WaPo’s meteorologists.

  Still, what’s the big deal, the purists will say, pointing out that snow in January is not exactly a shocking event. We fully agree, however we would like to remind readers that “snow in the winter”, especially when coupled with, gasp, cold weather, is precisely what the US Bureau of Economic Analysis used as justification ot arbitrarily push Q1 GDP in both 2014 and 2015 higher by nearly 1% as a result of “incremental” seasonal adjustments after the fact, the explanation being that the cold weather and the snow resulting from a handful of blizards ended up crushing the US economy.

  Of course, as we explained on numerous occasions in the past, the dramatic slowdown of the US economy in 2014 and 2015 had nothing to do with the weather and everything to do with the bursting of the Chinese housing bubble first in late 2013 and then of its shadow banking bubble in late 2014, two events whose reveberation around the globe slammed the US economy into an acute, if brief, contraction.

  As such the only reason why any weather events are notable, is to observe whether the BEA once again uses the weather as a scapegoat for the third year in a row, to justify a collapse in GDP to zero, or negative even though just one month ago retailers were complaining about their lack of revenue growth and collapse in profits as a result of warm weather.

  Which brings us back to the upcoming winter storm where the hyperbole factor just went up a notch, this time courtesy the Weather Undereground’s Bob Henson, who has decided that merely “historic” is too cut and dry, and has instead dubbed the imminent climatic phenomenon not only “potentially epic” but a “winter blockbuster” to boot.

  Which is just the soundbite cover the US BEA needs to whip out triple seasonal adjustments and “calculate” that Q1 GDP did not really contract but when you melt the snow on a pro forma, “non-GAAP” basis, GDP likely grew by some $50 billion more.

  Here is what, according to yet another weather forecaster, is in store for the Northeast courtesy of The Wunderground:

  Mid-Atlantic Braces for Potentially Epic Blizzard

  For an event still several days out, computer models were in remarkable agreement late Tuesday on what could be one of the greatest snowstorms in decades for the region around Washington, D.C. It’s difficult to convey what the models are projecting without appearing to sensationalize the event, but here goes: there is every indication that snow totals on the order of two feet are quite possible across parts of the greater D.C./Baltimore area, with the potential for almost as much in Philadelphia and perhaps a foot toward New York City. Anything over 20” at Washington National Airport would be the greatest snowfall for D.C.’s official reporting station in almost a century (see below).

  Although it’s too soon to get too precise about exact amounts and locations, confidence is uncommonly high for a high-impact event in the mid-Atlantic. The 0Z Wednesday run of the GFS doubled down on the prognosis, with projected snowfall amounts exceeding 30” within commuting distance of the district (see Figure 1). As a group, the ensemble members with this GFS run weren’t quite as bullish, but as noted by Capital Weather Gang, the ensemble average still projects a widespread 20” or more over much of the D.C. area. At this writing, the 0Z operational run of the ECMWF model was just coming in, and it appeared just as compelling as the GFS output below in terms of a potential record-breaking storm for the D.C. area.

  

  Figure 1. Snowfall totals generated by the 0Z Wednesday operational run of the GFS model for the period from 0Z Wednesday (7:00 pm EST Tuesday) to 0Z Monday (7:00 pm EST Sunday). Amounts are calculated by assuming a 10:1 ratio of snow to melted water; the actual ratio can vary significantly from place to place within a storm. Keep in mind that forecasters rely on the output from a wide range of models and their trends over time before making specific snowfall predictions. Image credit: Levi Cowan, tropicaltidbits.com.

  The making of a winter blockbuster

  The impetus for the storm is an upper-level impulse that was moving into the Pacific Northwest late Tuesday. The jet-stream energy will sweep across the mid-South on Thursday into Friday, helping produce a quick shot of snow and ice for parts of Arkansas, Kentucky, and Tennessee. Snow could begin as soon as midday Friday ahead of this impulse over the D.C. area. Then, as the jet-stream energy carves out a powerhouse upper low, a surface cyclone should intensify on Saturday off the Virginia coast–a prime location for big mid-Atlantic snowstorms. In classic fashion, the low-level cyclone will funnel warm, moist air from the tropical Atlantic into the region, with the air mass cooling and generating snow as it rises.

  The storm’s expected evolution is “textbook,” said NOAA’s Paul Kocin in an NWS forecast discussion on Tuesday. Kocin would know: he literally wrote the book on the subject with NWS director Louis Uccellini, the classic two-volume ”Northeast Snowstorms”.

  There are many failure modes for big mid-Atlantic snowstorms. For example, warm air wrapping around the surface cyclone can turn the snow to rain or sleet, or a dry slot can develop south of the surface low–and of course, the location of key features can shift. At least for the time being, the model depictions are threading the needle around these frequent storm-killers, keeping alive the possibility of a once-in-a-generation event for at least some areas. Snow could fall more or less continuously for an unusually long span of 36 hours or more, heightening the chance of big accumulations.

  A serious flood threat for the mid-Atlantic coast

  There is more than snow in the works with this storm. The ferocious dynamics at play during the storm’s height could produce winds of 40-50 mph or more, which would lead to blizzard conditions and huge drifts. On top of that, strong onshore winds may produce waves up to 20 feet and major coastal flooding, especially from New Jersey to the Delmarva Peninsula. The full moon on Saturday will only add to the risk of significant flood impacts. In addition, sea-surface temperatures running 5 – 7°F above average should keep the offshore surface air relatively warm, allowing strong winds aloft to mix to the surface more readily than usual for a midwinter nor’easter, as noted by the NWS/Philadelphia office in a weather discussion on Tuesday night. The risk of damaging coastal flooding will need to be watched with the same vigilance as the potential for crippling snowfall just inland.

  

  Figure 2. D.C.’s top 1-, 2-, and 3-day winter storms, plotted by total snow amount and year. Image credit: NWS/Baltimore-Washington.

  What are D.C.’s biggest storms on record?

  Among the largest East Coast cities, models are suggesting that Washington has the best shot at a potential record storm. Only one storm since D.C. records began in 1884 has managed to rack up more than 20”, whereas Baltimore has had eight such storms and Dulles four. See the statistics page put together by NWS/Baltimore-Washington for more details.

  Top five D.C. snowstorms over periods of up to 3 days

  28” (Jan. 27-29, 1922)
  20” (Feb. 12-14, 1899)
  18.7” (Feb. 18-19, 1979)
  17.8 (Feb. 5-6, 2010)
  17.1” (Jan. 6-8, 1996)

  As this storm approaches, the NWS/Baltimore-Washington office will provide experimental snowfall guidance in the form of maps and tables with detailed probabilities of exceeding various snow-amount thresholds. We can expect to see more of this type of guidance in the future; although it offers a lot of detail to parse, it provides a much richer guide to both the high- and low-end possibilities. For a reliable source of frequently updated, hyper-local coverage, you can’t beat Capital Weather Gang. Though it’s too soon to know exactly how this storm will behave, it’s not too soon to begin common-sense preparations if you’re anywhere in or near the target area.

  Jeff and I will have a post Wednesday evening on the NASA/NOAA climate report for 2015, and I’ll have more on the looming East Coast storm on Thursday.

  Beautiful cold air advection clouds off east coast today thanks 2 strong NW winds. Winds will shift b4 nor’easter. pic.twitter.com/Jj0SToQiFk

  — Kathryn Prociv (@KathrynProciv) January 19, 2016

  

  

  

  

  

• ISIS Cuts Fighters' Pay By 50%, Cites "Exceptional Circumstances"

  As anyone who holds a “non-supervisory” job in America’s double-adjusted “recovery” is acutely aware, wage growth is missing in action in the US.

  Your boss may have gotten a raise, but you probably didn’t and if the number of multiple job holders is any indication, America’s rapid transformation from middle class utopia to feudal system is likely to continue unabated for the foreseeable future.

  Of course it’s not just Americans who are forced to deal with economic realities like the soaring cost of housing on wages that never rise.

  There’s the Japanese for instance, who have discovered that all of Abe’s “arrows” have failed to hit their mark.

  And then there’s ISIS, whose cash flow has been constrained thanks to hundreds of airstrikes against its oil infrastructure carried out by a determined Vladimir Putin.

  According to a translation of a document posted by Middle East Forum research fellow Aymenn Jawad Al-Tamimi, Islamic State just cut its fighters’ pay in half citing “exceptional circumstances.” The original document and full translation is below.

  *  *  *

  Lowering of salaries for fighters by 50%

  

  Islamic State

  Bayt Mal al-Muslimeen

  Wilayat al-Raqqa

  Decision no.: n/a

  Month of Safr 1437 AH [c. November-December 2015]

  In the name of God, the Compassionate, the Merciful

  God Almighty has said: “Go forth, lightly or heavily armed. And wage jihad with your wealth and souls in the path of God. That is best for you if you know” (al-Tawba 41) [Qur’an 9:41]. And on the authority of Anas (may God be pleased with him): that the Prophet (SAWS) said: “Wage jihad against the mushrikeen with your wealth, souls & tongues”- Musnad Ahmad: Musnad Anas Malek (11798).

  Jihad of wealth has been mentioned with jihad of soul in the Qur’an in ten cases, and in nine of those cases jihad of wealth has been presented beforehand over jihad of the soul, and only in one case has jihad of the soul been presented beforehand over jihad of wealth. And on the authority of Omar bin al-Khattab (may God be pleased with him): “The Messenger of God (SAWS) ordered us to give charity and that coincided with the time I had some wealth. So I said: ‘Today I will outdo Abu Bakr, if ever I have outdone him.’ So I came with half of my wealth, and so the Messenger of God (SAWS) said: ‘What have you left for your family?’ I said: ‘The same amount.’ And Abu Bakr came with all he had, so he said: ‘Oh Abu Bakr, what have you left for your family?’ He said: ‘I have left for them God and His Messenger.’ I said: ‘By God, I can never outdo him in anything.'” (muttafiq alayhi).

  So on account of the exceptional circumstances the Islamic State is facing, it has been decided to reduce the salaries that are paid to all mujahideen by half, and it is not allowed for anyone to be exempted from this decision, whatever his position. Let it be known that work will continue to distribute provisions twice every month as usual.

  And God is the guarantor of success.

  *  *  *

  It’s curious that no “salary” cuts were necessary during the 14 months the US spent “degrading and destroying” the group but are suddenly needed just three months into Russia’s bombing campaign.

  

  

  

  

  

• Is China's "National Team" Now Bailing Out US Markets?

  Many people wondered what the trigger for today’s massive short-squeeze was.

   

  

   

  We may have found the answer. Right as the “Most Shorted” stocks started to soar, someone decided to buy offshore Yuan with both hands and feet (yes in the middle of the US day session).

   

  

   

  This held up until the NY close… and now offshore Yuan is fading back fast.

  

   

  So did China’s “National Team” step in to save the world today?

  

  

  

  

  

• Dumpster-Diving Massive-Short-Squeeze Rescues Stocks From 2014 Ebola Lows

  Bob Pisani nailed it today "I'm agnostic about whether to buy or sell today… but I'm not selling"…

  A rollercoater of a day…

  S&P500 Heatmap for today. pic.twitter.com/Ff2jWVoY89

  — Large Void (@largevoid) January 20, 2016

  Neverthelesss, the World entered a bear market today…

  • *MSCI'S ALL-COUNTRY WORLD INDEX EXTENDS DROP TO 20% FROM RECORD

  It would appear the business cycle trumps central planning after all:

  

   

  Then a huge Short-Squeeze ramped us higher in the afternoon…

  

   

  Which was briefly stymied by a denial from China – *CHINA OFFICIAL VOWS NO MASSIVE STIMULUS TO SUPPORT GROWTH: WSJ until USDJPY took over control and ramped US equities massively higher…

  

   

  Some context: Dow futures fell 820 points in 26 hours then suddenly soared 450 points in 3 hours

  

   

  As The S&P bounced off 2014's Ebola Lows…

  

   

  A reminder from August 2015 -Losses have been cut in half after the opening collapse as a mysterious buyer in massive size lifts The Dow 600 points off its lows, cutting losses in half for now…

  

   

  VIX hit 32 before beiong slammed to drive the S&P back above August's closing lows… but that failed…

  

   

  This left Small Caps green but everything else ended back in the red…

  

   

  Futures show the real volatility this week – today's ramp in Nasdaq goit us back to green for the week….

  

   

  Investors flight-to-safety'd into GPRO, FIT, and TWTR

  

   

  Treasury yields bounced as stocks did but nothing like the level of idiocy…

  

   

  The USD Index rallied as stocks soared in the afternoon as JPY was slammed…

  

   

  Interestingly, it was a sudden bid for offshore Yuan that sparked the rally in US equities… (through JPY carry)

  

   

  Commodities were crazy…

  

   

  Here's oil for the week…

  

   

  Charts: Bloomberg

  

  

  

  

• Fantasy? North Korea's "Hangover-Free Alcohol" Or America's "Consequence-Free Debt"

  Submitted by Simon Black via SovereignMan.com,

  If you believe the official propaganda, no other nation in the history of the world has advanced the cause of humanity more than North Korea.

  According to the North Korean Ministry of Truth, their great nation has cured cancer, ebola, AIDS, SARS, MERS, and much more.

  Now they’re saving the world again, this time having invented an extra-strength adult beverage that won’t leave you feeling like a train wreck in the morning.

  It’s hangover-free alcohol. Perhaps next they’ll invent Calorie-free chocolate.

  Clearly this is an idiotic fantasy.

  Alcohol has chemical properties which have a severe physiological impact on the human body when consumed in excess.

  If you drink too much alcohol, there are consequences. Both short-term and long-term. Simple.

  Yet the North Korean government is deceiving an entire nation of devout followers that they have invented a cure-all panacea.

  Drink as much as you want and don’t worry about the consequences!

  Now, we can poke fun at North Koreans’ gullibility.

  But frankly I don’t find the idea of ‘hangover-free alcohol’ any dumber or less deceptive than the idea of ‘consequence-free debt’. Or the idea that you can print your way to prosperity.

  North Koreans may be delusional enough to believe their government. But so are most Westerners.

  People in the ‘advanced’ world believe crazy fantasies all the time.

  We’re told that the national debt doesn’t matter, nor does it make the nation poorer, because “we owe it to ourselves.” (Nobel Prize winner Paul Krugman, 9 February 2015)

   

  It’s as if the federal government being unable to pay the debts it owes to Social Security recipients, or to bank depositors in the US, is somehow less ‘bad’ than stiffing China.

   

  We’re told “the State of our Union is strong” (Barack Obama, last week).

   

  Yet trust in government is near an all-time low, wealth inequality is extreme, the Middle Class is no longer the clear majority in America, and the national debt is at an all-time high of nearly $19 trillion.

   

  We’re told that “Medicare and Social Security are not in crisis” (Barack Obama, 13 July 2015).

   

  Yet the annual report from the Treasury Secretary of the United States tells us that one of the programs’ major trust funds is completely out of cash, and the rest are running out.

   

  We’re told that running huge budget deficits don’t matter because “the government can print more money.” (Paul Krugman, 31 January 2013)

   

  … because apparently there are absolutely zero consequences when the Federal Reserve conjures money out of thin air.

   

  Except that there are consequences. Every dollar the Fed prints weakens its balance sheet and pushes it into insolvency.

   

  In fact, the Fed’s own weekly financial report shows that its level of capital is a pitifully small 0.8% of its total assets. In other words, the Fed has almost zero margin of safety.

   

  And on a mark to market basis, the Fed is already insolvent.

   

  Yet the Federal Reserve claimed in a November 2014 white paper that its own insolvency “would not create serious problems,” as if decades of wild partying with their printing presses would be consequence free.

  Western newspapers are certainly having a chuckle today at North Korea with headlines making fun of the hangover-free alcohol hoax.

  But just imagine the fun they’d have if Kim Jong-un announced to the world that he had invented ‘consequence-free debt’ or a perpetual money printing machine.

  Western media would have a field day with such propaganda, arrogant and clueless that this is already our own reality.

  Hangover-free alcohol is pretty silly.

  But in the West, we believe the biggest lies of all… that you don’t actually have to do anything, that your nation can simply print and borrow its way to prosperity until the end of time.

  All lies eventually collapse, and reality settles in.

  Given the panic in global financial markets just in the first few weeks of 2016, that reality may be quickly approaching.

  

  

  

  

  

• Oil Slides After API Reports Another Large Crude, Gasoline Inventory Build

  With December's seasonal shenanigans out of the way, and following 2 record-breaking weekly builds in gasoline stocks, with expectations of a 2.3mm barrel build API reported a large 4.6mm inventory build (double expectations) . Cushing inventories built 63k, rising for the 12th week in a row. Gasoline stocks rose once again (+4.7mm) and Distillates also (+1.5mm).

  December is over…

  

   

  Following crude's v-shaped recovery today, API's huge build sent WTI back lower…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Tying It All Together: Rifle Lost During "Fast And Furious" Found In El Chapo's Hideout

  Just when we thought the surreal story surrounding Mexican drug lord Joaquin “El Chapo” Guzman’s second capture couldn’t get any more bizarre, it does just that, but in an oddly satisfying way, one which ties the soon to be incarcerated criminal south of the border with a criminal located right inside Washington D.C., one who however will never be punished. According to the Hill, a .50-caliber rifle recovered from El Chapo’s hideout was one of the firearms lost by the U.S. government’s gun-smuggling operation Fast and Furious.

  

  Agents from the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) checked serial numbers of weapons recovered after the raid earlier this month on the Los Mochis house where Guzman was staying. They traced one of two rifles back to the ATF program, according to Fox News.

  Federal officials are investigating how many weapons seized from the house originated in the U.S., sources told Fox News. The report noted that ATF agents lost track of 1,400 of the roughly 2,000 weapons it allowed suspects to buy in Arizona with the intent of tracking them.

  As the Hill ads, thirty-four of the weapons sold through Fast and Furious were .50-caliber rifles, sources told the news outlet, which reported that Guzman placed guards on hilltops to shoot down helicopters. So somehow the fallout from Eric Holder’s Fast and Furious ended up arming none other than Mexico’s most wanted criminal.

  The botched Fast and Furious operation was intended to track straw purchasers of firearms, but ATF officials lost track of the guns. One of the guns was later tied to the shooting death of a Border Patrol agent in Arizona and multiple other weapons were linked to crimes.

   

  The program sparked a major fight between congressional Republicans and the administration during President Obama’s first term.

  Then-Attorney General Eric Holder was held in contempt of Congress for refusing to turn over records about the program. A federal judge ruled this week that Obama cannot use executive privilege to keep the records from Congress.

  We doubt that will change anything, however, and the man who pegged the phrase “too big to prosecute” will continue walking free, because after all it is one thing to go after criminals in Mexico, when it comes to the former US Attorney General, in the height of irony, justice is always loopholed.

  

  

  

  

  

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• People Trust Search Engines More than Traditional Media for News

  U.S. public relations firm Edelman polled 33,000 people in 28 countries, and found that people trust search engine results more than any other media:

  

  QZ redid the graphic to make it easier to read:

  

  Edelman also argues that search engines and the Internet have turned traditional power structures – and the sources of influence – on their head:

  This sounds good … but remember that the NSA and its British counter-part the GCHQ MASSIVELY manipulate the web – including making some websites artificially popular and others less so – to spread their influence and promote their agendas.

  And everyone obtains different search engine results … even if they run the exact same search.  For example, Google gathers information across all of its platforms, and personalizes search engine results based upon what you’ve looked for in past searches.

  So search engine results are not totally objective … they are based upon our past expressions of interest.

  And some even question whether the search engine companies themselves are really as neutral as they claim.  We express no opinion on that topic, other than to note it.

  

  

  

  

• The Bull Market in Stocks May Be Done

  by Keith Weiner

   

  It has come to my attention that, perhaps, the great stock bull market is done. To most people, a bull market is good, and its end is bad. After all, a rising market signifies a healthy economy. Investors are making money. And it seems to prove that the free market is validated, able to deliver miracles despite Obamacare. Share prices are connected to business productivity, aren’t they?

  In a free market they are, of course. However—and this cannot be said too often—we don’t have a free market. We have monetary policy. This is how our central planners try to stimulate us. They create a wealth effect.

  Whenever you come across a metaphor like wealth effect, I encourage you to ask what is actually happening. Obviously, the government can’t create wealth by decree Something else has to be happening. Let’s look at that.

  The term wealth effect is interesting. There are many other effects, such as the placebo effect and the cheerleader effect. In each effect, something manipulates your judgement. The placebo effect convinces you that you feel better. The cheerleader effect convinces you that a girl is prettier. And the wealth effect convinces you that you’re richer. They’re all just illusions.

  The medical journals talk about why placebos do that, and the psychology journals analyze the cheerleaders. Our concern is to understand the wealth effect—not by the magical thinking offered by many so called economists—but through monetary science.

  Mechanically, the wealth effect is a simple process. One, the Fed drives up the price of bonds. Two, investors begin to find bonds too pricey, so they switch out of bonds. Three, they buy stocks and real estate, the main alternatives to bonds. Four, stock and real estate owners feel richer. After all, their net worth is rising much faster than the cost of living. The wealth effect exploits the common assumption that your real wealth is your net worth divided by the cost of living. Five, people spend. If your wealth went from $150,000 to $250,000, you can spend part of the $100,000 profit, the reward of having invested wisely. All asset owners are empowered to spend.

  We’re painting a picture here, not of creating wealth, but spending it. The wealth effect is not about production, but consumption. To use my favorite farm analogy, the wealth-effected farmer is not operating his farm to grow crops. He’s just eating his seed corn.

  It works, because your purchasing power is increasing. The price of corn isn’t going up (quite the opposite, it’s down 55 percent since 2012). But the assets you can swap for corn have risen significantly (stocks are up 28 percent over the same time period). The same house that could be traded for 2 years’ worth of corn, can now be swapped for maybe four. The same stock whose liquidation would pay for corn for a year, will pay for groceries for about three now. So people indulge themselves, and spend some of their gains.

  Unfortunately, this is no real gain. The iron law of economics is that you must produce first, in order to consume. The Fed produces nothing when it drives up the price of your assets, and neither do you by simply holding them in the meantime.

  The wealth effect, in reality, is a process of consuming precious capital, previously accumulated by hard working people who consumed less than they produced. Their savings now enable a whole class of people who consume more than they produce.

  Fed monetary policy induces this consumption, by altering the purchasing power of assets. In other words, the ratio of asset prices to consumer prices is distorted. The more this playing field tilts, the more everyone runs downhill to the endless party.

  Well, it seems endless while it lasts. And now it may be coming to its inevitable end.

  Please take no shadenfreude—pleasure from someone else’s pain. For the sake of our civilization, we had better stop consuming the capital base on which it’s built.

  The end of the wealth effect is a good thing.

  

  

  

  

• Stocks, Commodities, & Bond Yields Are Collapsing

  10Y Treasury Yields are plunging back below 2.00% (lowest in 3 months), WTI crude front-month (March) has just tumbled to a $28 handle, and Dow futures are now down over 500 points from this morning's exuberant stimulus hope highs…

  Crude has collaped back below $29…

  

   

  Stocks are in free-fall…

  

   

  And 30Y bonds are soaring (10Y yield below 2.00%)

  

   

  What's wrong with this picture?

  

   

  With all major US equity indices in correction post-rate-hike…

  

   

  Black Monday, Turnaround Tuesday, WTF Wednesday!!

  

  

  

  

  

• Clinton Vs. Sanders – What Does Google Say… And The Facts

  With stunning polls showing Bernie Sanders with a 60% to 33% lead over Hillary Clinton in New Hampshire…

  The new poll, mostly conducted before Sunday night’s debate, found Sanders’ support has grown by 10 points since a late-November/early December CNN/WMUR poll, which found Sanders holding 50% to Clinton’s 40%.

  As Liberty Blitizkrieg’s Mike Krieger notes, the following “suggested searches” from Google pretty much sums up how the general public feels about the two leading candidates for the Democratic nomination…

   

  

   

  And here are the facts, as dissected by Politifact:

  

   

  Democrats choose wisely.

  

  

  

  

  

• The 21st Century: An Era Of Fraud

  Submitted by Paul Craig Roberts,

  In the last years of the 20th century fraud entered US foreign policy in a new way.  On false pretenses Washington dismantled Yugoslavia and Serbia in order to advance an undeclared agenda.  In the 21st century this fraud multiplied many times. Afghanistan, Iraq, Somalia, and Libya were destroyed, and Iran and Syria would also have been destroyed if the President of Russia had not prevented it.  Washington is also behind the current destruction of Yemen, and Washington has enabled and financed the Israeli destruction of Palestine.  Additionally, Washington operated militarily within Pakistan without declaring war, murdering many women, children, and village elders under the guise of “combating terrorism.”  Washington’s war crimes rival those of any country in history.

  I have documented these crimes in my columns and books (Clarity Press). Anyone who still believes in the purity of Washington’s foreign policy is a lost soul.

  Russia and China now have a strategic alliance that is too strong for Washington. Russia and China will prevent Washington from further encroachments on their security and national interests. Those countries important to Russia and China will be protected by the alliance.  As the world wakes up and sees the evil that the West represents, more countries will seek the protection of Russia and China. 

  America is also failing on the economic front.  My columns and my book, The Failure of Laissez Faire Capitalism, which has been published in English, Chinese, Korean, Czech, and German, have shown how Washington has stood aside, indeed cheering it on, while the short-term profit interests of management, shareholders, and Wall Street eviscerated the American economy, sending manufacturing jobs, business know-how, and technology, along with professional tradeable skill jobs, to China, India, and other countries, leaving America with such a hollowed out economy that the median family income has been falling for years. Today 50% of 25 year-old Americans are living with their parents or grandparents because they cannot find employment sufficient to sustain an independent existance.  This brutal fact is covered up by the presstitute US media, a source of fantasy stories of America’s economic recovery.

  The facts of our existence are so different from what is reported that I am astonished. As a former professor of economics, Wall Street Journal editor and Assistant Secretary of the Treasury for Economic Policy, I am astonished at the corruption that rules in the financial sector, the Treasury, the financial regulatory agencies, and the Federal Reserve.  In my day, there would have been indictments and prison sentences of bankers and high government officials. 

  In America today there are no free financial markets.  All the markets are rigged by the Federal Reserve and the Treasury. The regulatory agencies, controlled by those the agencies are supposed to regulate, turn a blind eye, and even if they did not, they are helpless to enforce any law, because private interests are more powerful than the law.

  Even the government’s statistical agencies have been corrupted. Inflation measures have been concocted in order to understate inflation. This lie not only saves Washington from paying Social Security cost-of-living adjustments and frees the money for more wars, but also by understating inflation, the government can create real GDP growth by counting inflation as real growth, just as the government creates 5% unemployment by not counting any discouraged workers who have looked for jobs until they can no longer afford the cost of looking and give up.  The official unemployment rate is 5%, but no one can find a job.  How can the unemployment rate be 5% when half of 25-year olds are living with relatives because they cannot afford an independent existence?  As John Williams (shadowfacts) reports, the unemployment rate that includes those Americans who have given up looking for a job because there are no jobs to be found is 23%.

  The Federal Reserve, a tool of a small handful of banks, has succeeded in creating the illusion of an economic recovery since June, 2009, by printing trillions of dollars that found their way not into the economy but into the prices of financial assets.  Artificially booming stock and bond markets are the presstitute financial media’s “proof” of a booming economy.  

  The handful of learned people that America has left, and it is only a small handful, understand that there has been no recovery from the previous recession and that a new downturn is upon us.  John Williams has pointed out that US industrial production, when properly adjusted for inflation, has never recovered its 2008 level, much less its 2000 peak, and has again turned down.

  The American consumer is exhausted, overwhelmed by debt and lack of income growth. The entire economic policy of America is focused on saving a handful of NY banks, not on saving the American economy. 

  Economists and other Wall Street shills will dismiss the decline in industrial production as America is now a service economy. Economists pretend that these are high-tech services of the New Economy, but in fact waitresses, bartenders, part time retail clerks, and ambulatory health care services have replaced manufacturing and engineering jobs at a fraction of the pay, thus collapsing effective aggregate demand in the US. On occasions when neoliberal economists recognize problems, they blame them on China.

  It is unclear that the US economy can be revived. To revive the US economy would require the re-regulation of the financial system and the recall of the jobs and US GDP that offshoring gave to foreign countries. It would require, as Michael Hudson demonstrates in his new book, Killing the Host, a revolution in tax policy that would prevent the financial sector from extracting economic surplus and capitalizing it in debt obligations paying interest to the financial sector. 

  The US government, controlled as it is by corrupt economic interests, would never permit policies that impinged on executive bonuses and Wall Street profits.  Today US capitalism makes its money by selling out the American economy and the people dependent upon it. 

  In “freedom and democracy” America, the government and the economy serve interests totally removed from the interests of the American people. The sellout of the American people is protected by a huge canopy of propaganda provided by free market economists and financial presstitutes paid to lie for their living. 

  When America fails, so will Washington’s vassal states in Europe, Canada, Australia, and Japan.  Unless Washington destroys the world in nuclear war, the world will be remade, and the corrupt and dissolute West will be an insignificant part of the new world.

  

  

  

  

  

• What Keeps Bank Of America's Junk Bond Analyst Up At Night

  From BofA’s Michael Contopoulos

  You don’t need a recession

  Over the last several weeks much has been made of the near-term risks of recession. Some have argued that the widening in high yield is suggestive of an economy that is ready to roll over and with the manufacturing sector already reeling and China growth concerns growing, we think the fears are well justified. However, given we are not economists we ask whether a recession is a necessary backdrop for further weakness in high yield. In our view, the answer is no.

  Consider that between March 1998 and December 2000 our high yield index widened from 283bp to 916bp during a period of US economic growth that averaged 4.2%. Furthermore, as growth slowed to just 1.1% over the next 8 quarters, high yield averaged about 873bp during that time. In other words, the widening in high yield occurred in the lead up to economic weakness, not during. Defaults and the economic cycle, however, seem much more aligned; the 12-month default rate leading into the end of 1998, 1999 and 2000 was 3.4%, 6.3% and 6.4% respectively. It wasn’t until 2001, after spreads had blown out, that default rates increased to double digits.

  As we look at the index in more detail, we see that the non-commodity portion of high yield today compares favorably to the ex-Telecom index in early 2000. Although this portion of high yield eventually widened to 1000bp, the bulk of the selloff occurred before US growth slowed meaningfully. Should non-commodity spreads today go to levels we saw non-Telecom go in late 2000, we could see as much as 100bp of widening before reaching a temporary peak. Coupled with a couple points of loss due to default, and it’s not difficult to envision another year of negative total returns without a contraction in GDP or a spike to double digit default rates.

  

   

  What keeps us up at night, however, is a situation where history is little indicator of what’s to come. Although there is no doubt that we do not need to have a recession in 2016 to experience further high yield weakness, we are concerned that this cycle could prove to be not only different, but more severe than past cycles. The economic slowdown earlier this century was a modest one and was associated with a Fed that had significant policy tools. Should a slowdown today be swifter and deeper, more akin to 2008 than 2002, we are concerned about the ability of the central bank to create enough monetary stimulus to stem a crisis.

  

  

  

  

  

• When Correlation Is Causation – The Most Important Chart In The World If You're A Realtor In London Or NYC

  If ever there was any doubts about the narrative of freedom-seeking China capital outflows driving the irrationally exuberant prices of homes in some of the world's largest cities to record highs, the following two charts will extinguish them entirely. As China continues to strengthen (as quietly as possible) its capital controls to slow the leak of money from the devaluing currency nation, and US authorities clamp-down on the anonymity of cash-only transactions, realtors in NYC, Miami, and London better hope that correlation is not causation.

  Over three years ago, in August 2012, we described how while US regulators and authorities were cracking down on such "illegal" banks as Standard Chartered and HSBC, they were allowing the non-corporate shielded entities, the actual individuals who benefited from the bank crimes, slip through the cracks simply by allowing them to park billions of ill-gotten gains in US real estate:

  When it comes to the true elephant in the room, which is not foreign and is fully domestic, they continue to ignore events such as this one just described by the Wall Street Journal: "A Florida home that originally listed for $60 million has sold for $47 million, a record for a single-family house in Miami-Dade County. The home, in Indian Creek Village, had been on the market since early 2011, when construction was still being completed. The asking price was reduced to $52 million this year." And the punchline: "The identity of the buyer, a foreigner who purchased the home in the name of a U.S.-based limited-liability company, couldn't be learned."

   

  In other words a foreigner who may or may not have engaged in massive criminal activity and/or dealt with Iran, Afghanistan, or any other bogeyman du jour at some point in their past, and is using US real estate merely as a money-laundering front perhaps? Sadly, we will never know. Why? As explained before, it is all thanks to the National Association of Realtors – those wonderful people who bring you the existing home sales update every month (with a documented upward bias every single time) – which just so happens is the only organization that actively lobbied for and received an exemption from AML regulation compliance. In other words, unlike HSBC, the NAR is untouchable, even if it were to sell a triplex to Ahmedinejad on West 57th street.

  If after skimming the above, as we detailed recently, readers are still confused what the reason is for the luxury segment of the US housing market continuing to rise in price and hit record highs, even as all other segments of the quadruplicate US housing market as explained here languish, the explanation was very simple (and explained most recently back in October): the "hot money" belonging to Chinese and all other global oligarchs would be laundered by parking into the new "Swiss bank account" that U.S. real estate has become.

  Still not convinced? Here are the two most important charts in the world if you are a realtor in NYC or London…

  London home prices have soared on the back of this illicit capital outflow desperate for hard non-Yuan assets to bury itself in (within property rights protecting nations)

  

   

  And even more so in New York City homes…

  

   

  Where cash sales have been soaring…

  

   

  However, as we detailed here, just like Swiss bank accounts lost all their anonymity shortly after the Global Financial Crisis, and led to massive fund outflows from Switzerland (and ironically, into luxury US real estate), so after many years of us explaining how the ultra luxury segment of the US real estate market was being used as a money laundry vehicle, the US government has finally decided to crack down on these "secret" buyers.

  As the NYT reports, "concerned about illicit money flowing into luxury real estate, the Treasury Department said Wednesday that it would begin identifying and tracking secret buyers of high-end properties."

  The initiative will start in two of the nation’s major destinations for global wealth: Manhattan and Miami-Dade County. It will shine a light on the darkest corner of the real estate market: all-cash purchases made by shell companies that often shield purchasers’ identities.

   

  

   

  It is the first time the federal government has required real estate companies to disclose names behind all-cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers.

  The logic behind the move is clear: "this initiative is part of a broader federal effort to increase the focus on money laundering in real estate. Treasury and federal law enforcement officials said they were putting greater resources into investigating luxury real estate sales that involve shell companies like limited liability companies, often known as L.L.C.s; partnerships; and other entities."

  …  a top Treasury official, Jennifer Shasky Calvery, said her agency had seen instances in which multimillion-dollar homes were being used as safe deposit boxes for ill-gotten gains, in transactions made more opaque by the use of anonymous shell companies.

   

  “We are concerned about the possibility that dirty money is being put into luxury real estate,” said Ms. Calvery, the director of the Financial Crimes Enforcement Network, the Treasury unit running the initiative. “We think some of the bigger risk is around the least transparent transactions.”

  Our only question is what took so long?

  What happens next remains to be seen, but now that the buyer anonymity of luxury real estate buyers is gone, and with it the opportunity to launder illegal money in the US, much to the chagrin of the NAR, we would expect a substantial drop in both demand and prices for the one segment that has so far been the most stable support of the entire U.S. housing market.

  

  

  

  

  

• Shanghai Opens Below 3,000 As Animal Spirits Leave The Building: Longest Margin Debt Drop In 6 Months

  Traders who may have napped through the earlier oil slide below $28 finally woke up just in time for the China open to find that while there was little excitement on the currency front following a Yuan fixing, which at 6.5578 was practially unchanged from yesterday's midpoint of 6.5596…

  

   

  …the Shanghai composite – following yesterday's torrid, manipulated last hour surge – opened 0.5% lower, sliding back below the 3,000 level which was breached last week for the first time since last summer.

  

   

  More troubling for China's market manipulators is that they will very quickly and aggressively need to get involved today if they wish to prop up the market, now that the animal spirits are officially gone.

  Below is a chart of the Chinese stock market "animal spirits" leaving the building. 

  

  According to Bloomberg, the outstanding balance of Shanghai margin debt dropped for 13th consecutive day on Tuesday, the longest since July 9. Balance fell 0.1%, or 610m yuan, to 583.4b yuan or the lowest level since October 9. This was the longest losing streak in 6 months as the public now leave the market bubble in droves.

  Elsewhere in related securities, while the onshore Yuan is peaceful, there was less peace for its offshore cousin, where the USD/CNH 12-month forwards tumbled following selling by Asia-based leveraged accounts, and trigger stop-losses through the 2,900 area.  PBOC intervention time? Perhaps, but it's early.

  

   

  Also troubling was the Bloomberg note that after the PBOC broke the Hong Kong interbank market by crushing all available FX liquidity in order to manipulate the CNH higher, now the offshore spillover appears to have spilled right back into China as follows:

  • CHINA'S OVERNIGHT REPURCHASE RATE JUMPS TO NINE-MONTH HIGH

  At this point it is practically impossible to track all the Chinese market breakages, which like connected vessels appear at the most random of places, and the moment one hole is patched up, another immediately takes its place.

  Finally, for those interested in the Hong Kong market, the Hang Seng Index slid 1.6% to 19,325.56 at the open, resuming declines after snapping a three-day losing streak yday, with losses led by energy companies such as Sinopec -3.6% and PetroChina -3.3% which were among the biggest drops on HSI.

  However perhaps most crucially, the Hong Kong Dollar is systematically collapsing towards the weak-end of its USD-peg band…

  

   

  And crude is unable to sustain any bounces…

  

  

  

  

  

  

• Washington Unveils Investigation Into "Russian Meddling" In The EU

  Submitted by Danielle Ryan, op-ed via RT.com,

  News broke last Saturday evening that the United States is to conduct a “major investigation” into how the Kremlin is “infiltrating political parties in Europe” amid “mounting concerns” of a new Cold War.

  The exclusive, which was published by the UK’s Telegraph newspaper, revealed that James Clapper, the US Director of National Intelligence has been instructed by Congress to begin the major review into Russia’s “clandestine” funding of EU parties over the last decade.

  Hypocritical? Oh, let us count the ways…

  “Moscow-backed destabilization” of Europe

  First, to get a sense of the motives behind this investigation, look no further than the wording used to justify it. The Russians have been “fostering agitation against NATO missile defense” and attempting to “exploit European disunity” on the subject.

  That’s right everyone, the way to deal with European “disunity” over NATO, is not to address the root causes — it’s to start investigating how the Russians might be exploiting it. In a roundabout way, that makes sense as a temporary distraction. But realistically, Washington may be giving the Russians a bit too much credit. This so-called “Moscow-backed destabilization” should be the least of their worries. In actual fact, there are plenty of reasons for Europeans to have grown naturally disillusioned with the military bloc all on their own: a massive refugee crisis, the threat of the Schengen agreement crumbling before their eyes, terrorism paying more frequent visits to Europe’s foremost cities — not to mention growing concerns over potential repeats of the mass sexual assaults seen in Cologne on New Year’s Eve.

  In other words, years of NATO interventionism have stirred up a toxic political cocktail and dropped it off on Europe’s doorstep — and that, frankly, has very little to do with Russia.

  Look who cares — and who doesn’t

  Young as it is, the investigation into the Kremlin’s “meddling” has already scored some big fans.

  “Finally waking up to the problem,” tweeted Bill Browder along with a link to the Telegraph story. Banker-turned-activist Browder was convicted of a massive tax fraud scheme in Russia (and has subsequently turned into somewhat of a hero in the Western media, despite the emergence of holes in his story and his interesting preference for speaking to an adoring press rather than under oath).

  Anders Aslund, senior fellow at the Atlantic Council also tweeted the story. Aslund’s tweets are interesting, to say the least. In November, he suggested on the platform that the “broader implication” of a Reuter’s investigation into the identity of Putin’s daughters meant that one of those alleged daughters, Ekaterina Tikhonova, would be a “successor” to her father, thus renewing a Russian “monarchy”.

  And such good news deserves to be tweeted thrice, seems to have been the thinking for Jacek Saryusz-Wolski, Polish MEP and Vice President of the European People’s Party.

  On the other hand, a lot of the reader reaction on the story was quite different. One Twitter user posted the link and asked: “When do we investigate US meddling, globally?” while one noted “several levels of irony” in the news, and another warned that merely talking about ending NATO in Europe could soon earn you the honor of being labeled part of a “Moscow-backed destabilization program”. On Facebook, the comment on the story which received the most ‘likes’ simply said: “Please investigate US meddling in Europe first.”

   

  If you talk about ending NATO, you could soon be called being part of a "Moscow-backed destabilisation" program https://t.co/LQlBcBniWq

  — Tilo Jung (@TiloJung) January 17, 2016

   

  It’s only democracy if you agree with us

  How, pray tell, would Washington and Brussels react if tomorrow Moscow announced a ‘massive investigation’ into alleged US-funding of opposition figures and parties in Russia — an investigation designed purely to stigmatize the opposition and paint them as foreign agents. Oh wait; we already know how they would react. They would scream blue murder about Putin’s ‘punitive’ and ‘authoritarian’ regime that seeks to silence dissidents and opposition figures. The headlines practically write themselves.

  The message is clear and the double standard could not be more obvious: Decades of US influence in the EU is inherently good and acceptable, while any modicum of Russian influence is awful and must be stamped out. In Europe, democracy is only democracy when pro-EU, pro-NATO parties win elections — but it’s “destabilization” and undermining “political cohesion” when anti-establishment parties and politicians gain traction.

  Neo-McCarthyism kicked up a notch

  Why the EU can’t conduct this investigation itself is not made clear in the Telegraph piece, but one could venture a guess that it’s because what’s happening here has little to do with EU interests. It’s US intelligence — with permission from Brussels — nosing around in the European democratic process in an effort to identify and weed out parties and political figures that hurt Washington’s interests. Sounds a bit like what they’re accusing the Russians of doing, only worse.

  But why should we be surprised? Something similar has already happened within the media and academia. Journalists, analysts and historians who have attempted to rationalize or explain Russia’s actions from Ukraine to Syria have been labeled agents of the Kremlin and have been pushed to the fringes for having the audacity to go against the accepted consensus. This investigation in large part will simply be an extension of that blossoming neo-McCarthyism. We’re just moving on from individual journalists and politicians to stigmatizing entire political parties.

  Already in the UK, Labour leader Jeremy Corbyn, for the sin of suggesting he would not use nuclear weapons and his reluctance to dive head-first into conflict with Russia, has already been labeled ‘Comrade Corbyn’ by the Daily Mail, while his director of communications, acclaimed journalist Seumas Milne, has been branded a ‘Stalinist’ by Politico.  

  RT gets name-checked again

  What would a story about an investigation into Russian meddling in Europe be without a mention of Russia Today? Analysts have noted that RT, the “Kremlin-controlled television channel, which operates in Britain” (gasp) gave “very positive and extensive” coverage to Corbyn during his leadership campaign. This naturally is cited as part of the Kremlin’s nefarious campaign of influence in the UK elections. No mention is made, however, of the brutal anti-Corbyn campaign waged by the majority of the UK establishment media for months in the run up to his election. In this context, the fact that RT gave Corbyn some positive attention is hardly earth-shattering stuff.

  But again, we’ve come smack-bang into another case of hypocritical nonsense. Western media treats the Russian opposition like it’s the Second Coming of Jesus — and yet we’re all supposed to get our pants in a twist over Russian media taking an interest in anti-NATO candidates in Europe? In Western capitals, the red carpet is rolled out for anyone with a Russian passport and something remotely anti-Putin to say. Criminal background? No matter. History of racist comments? Don’t worry about it. Fan of museum orgies? It’s all good. Like to set historic buildings on fire? Go ahead; you’re an ‘artist’.

  Europe’s crisis of leadership

  The Telegraph story hasn’t been covered widely since it broke at the weekend, but rest assured of the coming onslaught – and remember that the analysts overjoyed by the prospect of another excuse to divert all blame east, are the same ones that never bothered to worry about the decades-long US-backed destabilization of the Middle East, which, it’s fair to say, is proving to be a far bigger problem for Europe than Putin and RT.

  Europe is going through a crisis of leadership — and the current crew steering the ship are still blind to the fact that their passengers are beginning to look longingly out at the waves wondering whether it might not be better to just jump overboard and see what happens. In Britain, the threat of a ‘Brexit’ looms as a very real possibility. Poland’s newly-elected nationalist government doesn’t appear ready to play ball with Brussels. Spain has elected a ‘hung’ parliament. Far right and far left movements are gaining ground in Germany and France. Greece is barely holding on and a question mark remains hanging over the future of the euro.

  But the real problem is obviously Putin’s meddling. Yeah, let’s just go with that.

   

  

  

  

  

  

• "What To Own In An Equity Death Spiral"

  Just one month ago, BofA’s excited head equity strategist Savita Subramanian told Barron‘s that storm clouds would disperse and that the S&P would close out 2016 at 2,200, incidentally the same level as her year ago forecast for where 2015 would close. Fast forward to today and things are far less euphoric.

  This is what Savita writes in a note released overnight:

  Correction or bear market? The S&P 500 is in correction territory, the Russell 2000 and almost 80% of regional stock indices are in bear markets. The average S&P 500 stock is in a bear market – down more than 25% from its 52-week high. Stocks are down a lot. Let’s move on.

  Ok moving on.

  Let’s focus just on energy, where things are a disaster: “Energy is in a profits recession but Energy stock prices have fallen by more than the market falls during a recession (-44% vs. -40%), the Energy recession has lasted twice as long as a typical recession, and Energy earnings have seen 2x the cut that the S&P 500 typically sees (-65% vs. -29%).”

  What about the economy?

  Same story for the economy: should we care whether or not the NBER will one day deem this slowdown an official recession, if PMIs suggest that manufacturing sectors have been in a recession in the three biggest economies (China, US, India) and Energy has been in a profit recession that has lasted twice as long as a typical economic recession.

  Yes, we probably should care, because it takes us to the next question Savita tries to answer: “Are we at a bottom?” Her answer: “Near-term model suggests caution”

  The earnings revision ratio, which has historically been a predictor of market returns over the next 1-2 months, has been falling since July and currently sits at a nine-month low. Short term investors might want to wait for signs of stabilization in this framework.

   

  

  Subramanian then points out what we showed yesterday, namely that sentiment right now is about as bearish as it has been in the past decade, with the least number of AAII bulls since 2005. She confirms this, saying “sentiment is already bearish”

  Global investors are significantly underweight US equities (Exhibit 1) according to our BofAML Global Fund Manager Survey. The most recent survey (in December) also suggests cash levels were raised to 5.2% ahead of the recent sell-off, in “Buy” territory according to their trading rule (Exhibit 2). And our Sell Side Indicator suggests that strategists are as bearish today as they were in March of 2009, recommending investors allocate just 53% to equities, below the long-term benchmark weighting of 60-65%, and at the threshold of a contrarian “Buy” signal (Chart 4). And short interest, another measure of positioning, despite declining in the last three months, remains at its highest levels since 2009.

   

  

  In theory, as an otherwise dour JPM said yesterday, and virtually all chartists agree, this means a rebound is imminent. However, a bigger question beyond merely the technicals is whather we are now entering a bear market, which would blow up all technical models. Savita’s answer:

  Are we entering a bear market? Bear markets in context

   

  The S&P identifies 13 bear markets since 1928, of which 10 have coincided with US recessions (Chart 5). The exceptions were 1961, 1966 and 1987, which precisely because they did not occur alongside recessions, were relatively short-lived and followed by swift recoveries. The market declined ~30% on average during these three bear markets, vs. ~40% on average during the remaining bear markets which coincided with recessions. S&P EPS has historically fallen 30% on average during recessions since 1929 or 20% on average during recessions since 1960.

   

  The general rule of thumb is that the stock market leads the economy by 1-2 quarters, and on average, the market peak has historically peaked 7-8 months before a recession. But the range has been remarkably wide, from the peak of the market coinciding with the start of the recession to as early as 2.5 years before the start of the recession (1948).

   

  

  Curiously, a bear market without a recession may offer little solace, because as BofA calculates, “in bear markets without recessions (1961, 1966, 1987), returns in the subsequent twelve months after the market peak were -12%. If we assume the S&P 500 peaked at May 2015 highs, this would imply today’s levels for May 2016.”

  

  What do markets imply are recession odds? According to the S&P the odds have soared to 50%, but accordint to rates the probability is “only” 18%:

  

  Of course, whether and when the NBER will acknowledge the US has entered into a recession, only time will tell.

  * * *

  Which brings us to the core topic of this post: BofA’s response to “What To Own In An Equity Death Spiral”?

  According to BofA, first pick large, high quality, cash-rich companies:

  Large caps over small caps

  Leverage for large cap stocks remains below average, while small-cap leverage is at all-time highs (and also above-average even when excluding Energy and Materials).

   

  

  Second, pick “liquidity over leverage”

  S&P 500 companies with high yield debt have traded at a premium to those with investment grade debt for over two decades, but this has recently begun to reverse, with investment grade stocks trading at a slight premium for the first time since 1994. Cash-rich companies have also traded at a discount to levered companies post-crisis, but we expect them to re-rate as credit sensitivity is penalized and cash becomes a positive as opposed to a drag on earnings.

   

  

  Finally, choose “High quality over low quality“

  Volatility may be here to stay, and high quality stocks typically outperform low quality stocks in volatile environments. And high quality stocks have traded at a discount to low quality stocks—which have been buoyed by fiscal and monetary stimulus—since the Tech Bubble, but are starting to re-rate. We expect this normalization in multiples to continue, and believe high quality stocks will eventually trade at a premium.

   

  

  * * *

  Putting all this together, here is the answer: BofA screens for companies that fufill the following criteria:

  • Market cap > $10bn
  • S&P quality rank of B+ or better
  • Net Debt (Cash) to Market Cap < index median of 16%
  • Total Cash to Market Cap > index median of 5%
  • S&P Long-Term Credit Rating is Investment Grade
  • Underowned by active managers (relative weight <1.0 in latest fund holdings)

  The result:

  

  

  

  

  

  

• We Know How This Ends – Part 1

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  The finance ministers and representatives of central banks from the world’s ten largest “capitalist” economies gathered in Bonn, West Germany on November 20, 1968. The global financial system was then enthralled by a third major currency crisis of the past year or so and there was great angst and disagreement as to what to do about it. While sterling had become something of a recurring devaluation tendency and francs perpetually, it seemed, in disarray, this time it was the Deutsche mark that was the great object of conjecture and anger. What happened at that meeting, a discussion that lasted thirty-two hours, depends upon which source material you choose to dissect it. From the point of view of the Germans, it was a convivial exchange of ideas from among partners; the Americans and British, a sometimes testy and perhaps heated debate about clearly divergent merits; the French were just outraged.

  The communique issued at the end of the “conference” only said, “The ministers and governors had a comprehensive and thorough exchange of views on the basic problems of balance-of-payments disequilibria and on the recent speculative capital movements.” In reality, none of them truly cared about the former except as may be controlled by the latter. These “speculative capital movements” became the target of focused energy which would not restore balance and stability but ultimately see the end of the global monetary system.

  Some background is needed before jumping into West Germany’s financial energy. The gold exchange standard under the Bretton Woods framework had appeared to have lasted as far as this monetary conference, but it had ended in practicality long before. In the late 1950’s, central banks, the Federal Reserve primary among them, had rendered gold especially and increasingly irrelevant in settling the world’s trade finance.

  It took almost a decade, but Bretton Woods was mostly gone by 1968 when gold started trading at a two-tiered price. In reality, functionally, Bretton Woods ended not long after October 20, 1960, in the formation of what would become known as the London Gold Pool – a consortium of government and central bank allocations that would actively supply gold when needed to “hold” its price and enforce the official price. By the standards of Bretton Woods, to have a foreign pool established in order to maintain the convertibility of the dollar alone was breaking the rules.

   

  That fact occurred almost immediately after gold flirted with $40. In fact, on October 27, 1960, the Bank of England was called upon to work closely with the Fed to supply gold in an attempt to calm that market (though there is little paper trail, you know there were gold swaps flying the Atlantic from that point). It was the initial formation of the Gold Pool, and had some success in at least keeping further “devaluation” from rapidly destabilizing global affairs, financial and economic.

  The Gold Pool invoked but temporary calm and obviously failed. By 1967, sterling “had” to be devalued once more (from $2.80 to $2.40) and it kicked off an age that was fomented by chronic instability, or what we now call the Great Inflation. For the Gold Pool, the imbalance had grown so large that it was forced to cease operations in March 1968, having sold a massive, almost unthinkable $3 billion in gold in just the four months prior to its end – $400 million on March 14, 1968, alone (it bears emphasizing that these were just huge amounts even though in today’s inflationary context they seem quite quaint; and that is the point of comparison and devaluation where once $1 billion meant something but today we need trillions to merit any attention at all, but how we got to that point is a story nobody seems to appreciate in its relevant comprehensiveness). Of the $3 billion, the United States official reserves accounted for $2.2 billion, or an 18% drop. From that point forward, gold would trade on a two-tiered basis; the official exchange rates would be maintained but there would also be a separate price for the private market.

  If you were a European bank in early 1968 and had accumulated dollars, there wasn’t really much you could do with them without bearing currency and inflationary risk. The Bretton Woods system had been designed, intentionally, to be funneled through official channels, as that was what economists wanted (proclaiming their own enlightenment the key to fomenting permanent stability; markets = mess). Thus, any bank holding dollars wishing to exchange them at the official rate had to turn them over to their national central bank for payment in local currency. But that wasn’t as straightforward as it sounded, either.

  In truth, with gold no longer providing a satisfactory monetary anchor anywhere, banks proficient in global finance found themselves increasingly devoted to currency “speculation.” It had been a specialist trade dating back to the late 1950’s, but this Merchant’s Bank market, as it was first known, began to marry fund flows including those plying interest rate differentials and inflation risks among the world’s great currencies. Central banks, too, were active in this Merchant’s market finding it often a means to express monetary policy without having to resort to drastic and direct action.

  The object of desire in November 1968 among the world’s “great” economic policymakers was to get Bundesbank to support the mark. It had shown far too great a tendency toward devaluation even though Germany had become a standard of stability in both economic and financial terms. At first, Germany had refused the offer but, as disorder rose, before long Buba had acted.

  In the last two weeks of December 1968, Buba delivered some $400 million to the “market” and an additional $850 million in the first week of January in both spot and swap operations. Over the next two weeks, Bundesbank had grossed up its operations to a total of $650 million in spot exchange and an enormous $1.05 billion in swaps. By the end of January, the operations in support of the mark against the dollar had reached $2 billion.

  The February 4, 1968, FOMC meeting Memorandum of Discussion (the MOD, a detailed summary in lieu of verbatim transcripts) tells us what happened next:

  The drain on German reserves had actually reached the point at which they were running low on cash and were becoming concerned about the continuation of the losses. Consequently, the German Federal Bank raised its rates on swaps to make them less attractive to the commercial banks, and at the same time it permitted the spot rate to fall well below par. [emphasis added]

  Even though Germany’s reserves were counted as 33.7 billion Deutsche marks worth of deposit account balances with the world’s other central banks and commercial banks, physical currency and Federal gold holdings, barely one full cycle of intervention had run to its limit. Consequently, Bundesbank was forced to shorten up its maturities even while still intervening supposedly against the dollar. By March, as that original batch of swaps and forwards started to mature, Buba was still intervening heavily in forex but getting nowhere for the trouble. For the month, the German Federal Bank had issued another $1 billion in currency swaps and sold another $250 million dollars in spot interventions, but the reserve position of West Germany hadn’t changed. The maturing swaps had delivered back to Buba an almost equivalent amount of dollars, “sterilizing” the whole regime.

  The effort was doomed from the start by its very nature. It was nothing more than an attempt to buy time so that whatever imbalance causing general stress and disorder could by itself dissipate. That was the Keynesian handbook even at that time, to focus only upon the short run so that a steady state may once more present itself with but that minimal boost. Except in early 1969 the imbalance was more than a minor disturbance, it was a general and serialized decay.

  It only got worse from that point on since reserves under these circumstances of swaps and forward liabilities are never what they seem to be (because accounting, as policy, is taken from only the short run perspective). Just six months later, in September 1969, the Bundesbank had no choice but to allow the D-mark temporarily float; a month later, it was officially revalued from $0.25 to $0.273. In other words, despite the gigantic impression left by impressive-sounding numbers and the arcane and complex programs meant to present them in conclusive fashion, the German central bank was helpless to withstand what was already transforming the global financial landscape. Worse, the fact that the world’s other economies had come crawling to Bonn to try to force Buba’s hand to do it in the first place was no position of strength but rather another indication they were just as powerless if not more so.

  The Bundesbank’s monthly report from December 1969 makes this very plain, despite all that it had done (and other central banks) over the prior year.

  The domestic money market has in fact been tighter than ever in the last few weeks. Money-market rates reached unprecedented heights, both in absolute terms (day-to-day money on 4 December, the last day before the advance rate was raised, stood at 8 ¾ to 9%) and in relation to the advance rate, which, exceptionally, was substantially exceeded at times by the day-to-day money rate. The decisive factor behind this strain was the massive exodus of foreign exchange, which was partly due to the fact that funds placed in Germany before the revaluation flowed out again and partly to the fact that the other external transactions also ran large deficits.

  It was the “other” that was most troubling. Because of the float and revaluation, Bundesbank’s reserves had fallen by 16 billion D-marks, an amount so large that it reveals the nature of what was taking place. This was no convoy of armored trucks moving huge piles of cash across international borders, it was exchange accounts and liability settling among the modern currency regimes. What was different about 1968 and 1969 was how far that new system had penetrated. Again, Buba’s December 1969 report:

  In contrast to the situation during the preceding period of speculative money inflows into Germany, when the banks considerably stepped up their monetary investment abroad with the concurrence and at times the active assistance of the Bundesbank, the efflux of foreign exchange between the end of September and early December came solely out of central money reserves; indeed, there were calls on the reserves over and above this, as the banks continued to export funds even after the revaluation.

  In other words, currency intervention is always a losing proposition because it amounts to handing your own banking system the tools for your undoing. This was very much unexpected and had not been the case historically. What changed? Bundesbank was supposedly delivering dollars in support of the mark, and further getting German banks to aid in the effort (by handing out preferential swap rates), but where were all those dollars going? It is typically believed they were loosed upon the “market” in some generic and nonspecific conception, but forex of this kind in the late 1960’s was more and more concentrated in that Merchant’s market – the EURODOLLAR market.

  With these money exports – and with their capital exports, which were also at a very high level – the banks exploited the interest differential between Germany and the Euro-money market or the Euro-capital market. However, prior to revaluation, the capital exports ultimately did not affect the banks’ liquidity position since the latter were, so to speak, only re-exporting speculative inflows. Now, though, the capital exports made additional inroads into the banks’ liquidity cushions, which were already depleted by the reflux of foreign funds referred to above.

  We would recognize this last paragraph in today’s terms as the “dollar short.”

  In fact, you can practically exchange Germany for China and 2015(16) for 1968(69) in all of the above, leaving an eerie and thus tragic near replay of everything. That includes, relevant to our current Chinese fixation, the fact that swaps, over the intermediate term, are your ultimate enemy. However, the mark example in 1969 was not unique, as it was also the case for many, many other global currency connections just as yuan is but the most visible example of currency degradation now (real, ruble, lira, rand, etc.). The eurodollar had suddenly become not just a manner in which global trade could be accounted and settled but rather, owing to its “short” and therefore lack of actual convertibility, a central mechanism of global monetary conditions for which there was no control.

  Part 2 Tomorrow

  

  

  

  

  

• And You Thought QE Was Over: The Fed Will Monetize Half Of This Year's U.S. Treasury Issuance

  The Fed may have officially tapered QE at the end of 2014 but that doesn’t mean it is done buying Treasuries: since the Fed never ended rolling over maturing paper, it means that it will remain indefinitely active in the open market. And while there were no sizable maturities from the Fed’s various QEs to date (only $474 million in 2014 and $3.5 billion in 2015) that will change dramatically this year, when Brian Sack’s team will have to purchase about $216 billion to replace matured TSYs. According to JPM calculations, this represents half the net new government debt that will be issued over the next 12 months.

  The amounts rise from there: $194 billion comes due in 2017, about $373 billion in 2018 and $329 billion in 2019 for a grand total of $1.1 trillion over the next four years as shown in the following Bloomberg chart:

  

   

  The Fed’s intervention in the Treasury market is well known: here is a brief Bloomberg summary of where we’ve been and where we are going:

  The Fed is the biggest holder of the government’s debt. Its $2.5 trillion hoard, amassed in a bid to support the economy after the financial crisis, is more of a focus for some investors than the trajectory of interest rates. From this month through 2019, about $1.1 trillion of Treasuries in the portfolio are set to mature.

  Even though the Fed’s holdings of Treasurys won’t rise and remain flat at about $2.5 trillion, the Fed’s reinvestment mandate means a return to active POMO which also means that there will remain a backstop net buyer for 1 of every 2 bonds issued by the US government.

  Clearly this is bullish for bond bulls (one can stop wondering why year after year Goldman is so bearish on TSYs every year with its 3.00% yield target and is so eager to buy everything its clients have to sell) for whom “the Fed’s signals that it will roll over the obligations have been another reason to doubt the consensus forecast that yields will rise in 2016. If officials had chosen to stop funneling that money into new debt, the government would likely have to boost borrowing in the market by roughly an equivalent amount this year, potentially pushing up Treasury yields.”

  Hypotheticals aside, the Fed’s indirect monetization of debt has led to the Fed being the owner of about 30% of all 10-Year equivalents currently, further leading to dramatic notional scarcities among CUSIPs that were most actively purchased by the open markets desk, usually in the form of Off The Run paper, which meant that the Fed has far less On The Turn to lend to Treasury shorts in repo, leading to major “special” prints in the repo market manifesting by near-fail, or -3.00%, levels when one wishes to borrow any given Treasury.

  However, as Bloomberg explains, as the Fed will rolls over maturing Treasuries, it will add new On The Run issues to its balance sheet. Since Operation Twist, the Fed has had less of those sought-after securities to lend out in a daily program it has to ease shortages in the market. As a result, these Treasuries have frequently commanded a premium in the repo market — leading more trades to go uncompleted, or ‘fail,’ in bond parlance.

  If the Fed’s stock of those Treasuries grows, the central bank should be better able to alleviate the shortages through its SOMA Securities Lending program, said Joseph Abate, a money-market strategist in New York at Barclays Plc, a primary dealer.

   

  It will become “easier for people to access the securities they need to cover any shorts in the on-the-runs and, correspondingly, the level of fails should fall,” Abate said. “The more difficult it is to cover a short, the less liquidity there is in the market.”

   

  Dealers say bond trading has become more difficult as regulator-imposed risk limits make it costlier for banks to transact in all types of debt. While Treasuries remain one of the most liquid global markets, failing trades rose this month to about 2.5 percent of average daily volume, from about 1 percent before Twist, according to Barclays. The dollar amount of uncompleted Treasuries trades reached the highest since 2011 last month, Fed data show.

  The topic of soaring repo “fails” was covered recently, and is shown in the chart below: a direct function of the Fed’s encroachment in the open market.

  

  Then there is the question of remitting interest payments back to the Treasury, about as close to directly funding the US government as it gets (with the exception of course of the Fed directly paying $19 billion to fund the Highway Bill: that was undisputed direct funding of the US government by the banks that make up the Federal Reserve system). According to Bloomberg, if the Fed had opted not to reinvest this year, the Treasury would have had to make up for the lost funding with additional debt sales that might have boosted 10-year yields by 0.08-0.12 percentage point, according to Priya Misra at TD Securities LLC.

  One wonders just how much more debt the Treasury will have to issue and how much higher yields will go up by if the Fed ever does unwind its balance sheet?

  It also leads to another question: why did the Fed decide to begin the “normalization” process by hiking rates first instead of first removing the truly unorthodox support for asset classes, namely unwinding its balance sheet, or at least stopping the reinvestment of maturing bonds. The answer: because the Fed’s rate hike is a farce, further compounded by the fact that the Fed Funds rate on December 31, the only day it actually matters for bank balance sheet purposes, was well below the Fed’s 25bps floor.

  But that’s a topic for another post.

  For now, we leave it to Mark MacQueen, co-founder of Sage Advisory Services Ltd., which manages $12 billion in Austin, Texas, to explain precisely why those who are long assets could care less about nominal rate hikes but are terrified of the Fed’s actual balance sheet unwind: “The Fed tightening gave us little worry, but the unwind of the balance sheet gives us major worries. The Fed is keenly aware that the balance sheet has a much greater impact on the overall yield levels in the markets going forward than raising rates.”

  And there’s your answer why the Fed is hiking instead of winding down its gargantuan $4.5 trillion balance sheet: it might actually achieve the intended effect.

  

  

  

  

  

• Crude Oil Slides Below $28, Lowest Since 2003, Dragging US Equity Futures Lower

  Traders had some hope that they could take at least a brief nap ahead of the China open before all risk hell broke loose in the latest evening session, however either some liquidating algo or the Iranian oil trading desk had different plans, and moments ago WTI dipped below $28 per barrel, sliding as low as $27.92, doing so only for the first time since 2003, a new 12 year low.

  

  The plunge in the highly correlated asset promptly dragged not only the USDJPY carry pair but also the E-Mini well lower, with ES sliding as low at 1861 moments ago before recouping some of the losses.

  

  And now we turn our attention to the China open, and for the real pandemonium to begin.

  

  

  

  

  

• Borderland Homicides Show Mexico's Gun Control Has Failed

  Submitted by Ryan McMaken via The Mises Institute,

  We often  hear about homicide rates in Mexico and how they are among the highest in the world. While that is true for some parts of Mexico, much of Mexico — where nearly 80 percent of the population lives — has much lower rates than what are often quoted in the media.

  Most of the high-homicide areas in Mexico are found along the US border, and to a certain extent reflect the work of drug cartels working to keep drug trafficking channels open to the US.

  And yet, right across the border in the US, homicide rates are remarkable low. In fact, homicide rates along the US side of the border are significantly below the US average.

  Why is this?

  Homicide Rates in Mexico, By State

  First, to get a better understanding of these phenomena, let's look at homicide rates in Mexico by state. 

  While not as decentralized as the US, Mexico has a weak federal system like the United States with 31 states and one federal district (somewhat like the District of Columbia) that is Mexico City.

   

  Using OECD data (for 2013), I mapped the Mexican states by homicide rate: 

   

   

  

  Source: OECD, map by Ryan McMaken

   

  Clearly, homicides are not evenly distributed across Mexico, and some areas are lopsidedly affected. Those familiar with the Mexican Drug War will note that this pattern does indeed appear to reflect trends in cartel activity and the Drug War. Here is map to help you identify each state:

   

  

  Source: Mexconnect

   

  Most Mexicans live in states with homicide rates well below those found among the ten states with the worst rates. Indeed, the total population living outside these areas constitutes nearly 80 percent of Mexico's 117 million people (as of the 2010 census). Population is concentrated around Mexico State, Pueblo State, and other states in the southern and eastern parts of the country. However, even in these parts of the country, homicide rates remains well above the US average.

   

  Also of note is the fact that the states with the lowest percentages of indigenous Mexican populations also tend to have the highest homicide rates. Note, for example, that among heavily indigenous states in the far south and in the Yucatan, homicide rates are quie low by national standards. Chihuahua, by contrast, which historically has tended to have the largest population of non indigenous (i.e., "white") Mexicans (proportionally speaking) has the highest homicide rate.

   

  And finally, we note that northern Mexico, including the high-homicide states discussed here, tend to have higher per capital income levels than the rest of the country.

   

  The old assumptions about how the poor and non-whites cause higher homicide rates require a closer look in the case of Mexico.

   

  Big Differences on Different Sides of the Border

   

  Let's now turn our attention to the problematic north.

   

  It's not an accident that some of the highest homicide rates are found along the border. Mexican drug cartels have an incentive to ensure they maintain control of drug supplies moving norther to where the demand is (in the United States.)

   

  However, those drugs still need to be moved on the northern side of the border. So, do homicide rates continue onto the northern side? It turns out they don't. Using the same color coding (and the same data source) as the homicide map above, the border states (two states deep) on both sides look like this:

  

  Source: OECD. Map by Ryan McMaken

   

  On the other hand, Chihuahua and Texas are very big places. Perhaps if we take a more detailed look at the counties right on the border, we'll get a better feel for how things look at the border.

   

  Thanks to Omar Garcia Ponce and Hannah Postel at the Center for Global Development, the work's already been done for me. Here is a map of the border at the county/municipality level: 

  

   

  Source: Center for Global Development

   

  The general scenario remains the same.  In fact, the borderland on the US side of the border have fewer homicides than the US overall.  The authors note: 

  The map [above] illustrates the striking disparity between homicide rates on each side of the border. In 2012 (the most recent year available for all locations), Mexican border municipalities experienced 34.5 murders for every 100,000 people.  By contrast, the homicide rate in US border counties was only 1.4, far below the US national average (4.7), and a tiny fraction of that experienced by their Southern neighbors.

  While almost half of the Mexican municipalities along the border experienced more than 40 murders per 100,000 people in 2012 (176 in Tamaulipas’ Ciudad Mier), the highest homicide rate in the US border counties was 12.9 (Yuma, AZ). The next most violent county experienced only 5.4 murders per 100,000 people. Notably, some of the safest locations in the United States are contiguous to many of the most dangerous places in Mexico. Most striking is the contrast between Ciudad Juárez and El Paso, two large cities that constitute a binational metropolitan area. Once called “the murder capital of the world,” Mexico’s Ciudad Juárez is only 300 feet from El Paso, “America’s safest city.” In 2012, Ciudad Juárez had 58 homicides per 100,000 people, while El Paso experienced fewer than one (0.6).

  So why is there such an immense difference here? 

   

  Restrictive Gun Laws in Mexico

   

  The pre-packaged retort to this phenomena often repeated in the media is that the US causes the high homicide rates in Mexico by exporting guns to Mexico. We're told that criminals go into the US, buy guns legally in Texas (for example) and then sell the guns illegally to cartels in Mexico.

   

  Dave Kopel has shown that this claim isn't true. But, even if it were true, it wouldn't explain much by itself since we're left asking ourselves why criminals don' just do the same thing to the same homicidal effect in the United States. If it's so fruitful for violent criminals to buy guns in the US and sell them to organized crime rings, why aren't those criminals doing the same thing in the US?

   

  Well, the answer is the criminals probably are are well armed in the US, and have a lot of guns just like criminals in Mexico do. The difference in actual crimes carried out, however, likely lies in the fact that law abiding Mexicans have been disarmed, while law abiding Americans have not.

   

  Gun laws are very restrictive in Mexico, as The Atlantic notes: 

  Mexico can hardly be described as a heavily armed society. With around 2.5 million registered gun owners and at least 13 million more illegal arms in circulation, the country has a ratio of just 15 guns for every 100 people, well below the global average. Unlike in the U.S., civilian possession in Mexico is considered a privilege, not a right and is tightly regulated under federal law since the 1970s. Extensive background checks are required of all purchasers, and there are heavy penalties and even imprisonment for non-compliance. Astonishingly, there is just one legal gun shop in the country, compared to more than 54,000 federally licensed firearm dealers and thousands of pawnshops and gun shows scattered across the U.S.

  In other words, in Mexico, there is an immense asymmetry in gun ownership between violent criminals and law-abiding citizens. Criminals have abundant access to the means of violent coercion, and the will to use it. Ordinary citizens, on the other hand, have, practically speaking, no access. Meanwhile, local officials can be bought by the criminals, which means that private citizens will then find themselves facing two heavily armed groups who are free to behave maliciously toward the general population with little fear of reprisals.

   

  The Atlantic author notes that in Mexico, there are about 15 guns per 100 persons, which is likely referencing the data released by the Small Arms Survey. The same survey estimates that, by contrast, there are from 88 to 100 guns per 100  persons in the United States. The US far outpaces even gun-friendly Switzerland which has about 45 guns per 100 persons. 

  In response to this lopsided situation that favors the cartels, some Mexicans have formed their own militia groups, but these are considered only quasi-legal, and they are certainly rare compared to the number of armed cartel members.

   

  In the US, by contrast, violent criminals can guess that a not-insignificant percentage of Americans are armed on the street, and far more are armed in the home.

   

  Possible Other Factors

   

  Now, I'm not going to claim that gun control is the only factor at play here. Deeply ingrained issues related to government corruption, and the chaotic effect of the Drug War are clearly important factors.  However, the differences between Northern Mexico and Southern Texas or Southern Arizona are not as immense as some might think. For example, in Chihuahua, across the river from El Paso, the people share a nearly identical geography, and a very similar ethnic makeup. Even economically, northern Mexico is closer to the US than is southern Mexico, while a majority of Chihuahuans are of European descent. And, of course, it would be risible to suggest that the US is free of political corruption. However, all of these issues are exacerbated by the fact that the Mexican's state's stringent gun controls greatly enhance the coercive power of cartels and government agents at the expense of ordinary citizens. 

  And there is no denying that when one crosses the border from Chihuahua to Texas, some of the biggest differences one encounters are legal and political in nature.

   

  Among these differences is the fact that south of the border only government agents and criminals are allowed meaningful access to firearms, while norther of the border, criminals and ordinary citizens share similar levels of access.

   

  What we are witnessing in northern Mexico then, is a tragic mixture of failed Drug War policies mixed with a government refusal to allow Mexicans to arm themselves. Yes, there are many factors at work. Take out some of them — whether drug war, ethnic conflict, or poverty — and the situation would likely be improved.

   

  But, when we add gun control into the mix, things are far worse than these ever need have been. Moreover, if one's position is that the fault lies with poverty and corruption, then the pro-gun-control position is nothing more than the position that the same regime responsible for this corruption and poverty should be granted even more absolute power over the population it abuses.

   

  It is instructive that, on the northern side of the border, meanwhile, there is still a drug war, there is a lot of ethnic diversity, and the US border areas have some of the highest poverty rates in the United States. And yet, homicide rates are far, far below what they are on the southern side. Indeed, right along the border, they're among the lowest rates we see anywhere in the world.

   

  What About the Canada-US Border?

   

  Do we see similar issues along the Canadian-US border?

   

  As I noted in this article, American states near the northern US border tend to have low homicide rates with states like Idaho, Oregon, New Hampshire, and Maine reporting remarkably low homicide rates that are similar too or even lower than Canadian homicide rates.

   

  Using the same color coding as the previous maps (and the same data source), we see that, with the exception of Michigan (i.e., Detroit) the US-Canada border is marked by homicide rates all below 5 per 100,000:

   

  

  Source: OECD. Map by Ryan McMaken

   

  Of course, the situation in the Canadian border is immensely different from the situation on the Mexican border in terms of ethnicity, income levels, and climate. Crossing the northern border, however, brings nowhere near the sorts of changes in crime that are encountered on the southern side.

   

  Nevertheless, part of this might be attributed to the fact that Canada is far more gun-friendly than Mexico. There is certainly more than one gun store in Canada (to say the least), and it is estimated by the Small Arms Survey that Canada has twice as many guns per capita as Mexico, with 30 per 100 persons.

   

  Mexican Politicians (and American Politicians) Blame Everyone Else

   

  While it refuses to admit the abject failure of its gun control program, the Mexican state instead attempts to shift the blame to Americans and has attempted to impose international gun control measures on the US.

   

  For Mexican politicians, it's easier to shift the blame than to recognize the fact that neighboring Americans right across the border enjoy far lower homicide rates along side relatively easy access to firearms. (Even California looks like a gun-owner's paradise compared to Mexico.)

   

  The Mexican state (and many Mexicans) are unfortunately impervious to these facts, and, many Mexicans still believe that Mexicans will be safer if the Mexican regime tightens its grip even more on firearms, in spite of the spectacular failure of gun control in that country. 

   

  

  

  

  

  

• Hedge Fund Which Predicted The Subprime Crisis Expects Massive Yuan Devaluation In 2016

  Earlier this month, even before China unleashed the end phase of its latest currency devaluation which since forced the PBOC to enforce even more capital controls to avoid accelerating capital outflows, Kyle Bass revealed that his best investment idea for 2016 was to short the Chinese currency:

  “Given our views on credit contraction in Asia, and in China in particular, let’s say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there’s one thing that is going to happen: China is going to have to dramatically devalue its currency…. “We are not short Chinese equities, but we are very invested in the Chinese currency: we think we are going to see a pretty material devaluation; we think it’s going to be in the next 12-18 months.”

  He did not specify exactly what he means by “pretty material devaluation” however according to our own December calculations, an indicative number is likely in the 10-15% ballpark.

  

  Today, another Texas-based hedge fund manager who just like Kyle Bass correctly predicted, and profited from, the subprime crisis, Corriente Advisors’ Mark Hart, has not only reiterated Kyle Bass CNY devaluation call, but has gone as far as quantifying by how much the Chinese currency will have to fall. Cited by Bloomberg, Hart has said that “China should weaken its currency by more than 50 percent this year.“

  Hart believes that the Chinese crawling devaluation is an error as it carries with its the latent threat of much more devaluation in the future, thus encouraging even more outflows, which in turn forces China to sell even more reserves, which destabilizes the economy even further, forcing even more devaluation and so on.

  Instead, a one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. He adds that China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength.

  Incidentally, this is precisely what Ex-PBOC adviser Yi Yongding says yesterday China should do, as quoted by the 21st Century Herald, adding that the PBOC’s forex reform in Aug. 2015, known as “crawling peg” by foreign investment banks, has many flaws and should be abandoned. Accoding to Yi, the scheme won’t be able to break mid- or long-term depreciation expectations because those are decided by fundamentals, even if they are misinterpreted. His conclusion is a widely accepted one by now, namely that China may not have better choice but to strengthen control over capital flows to stabilize financial market.

  Back to Hart who says that “there wouldn’t be anything underhanded about a sharp devaluation. Why should China be forced to suffer deflationary effects of defending its currency when everyone else isn’t?”

  In other words, why peel the bandaid one millimeter at a time when China should just rip it off in one motion?

  Here’s a reason why: or rather over 20 trillion reasons, which is how much in dollar equivalent deposits Chinese savers have parker at their local banks. If those depositors realize that their net purchasing power for foreign goods and services has suddenly lost 50%, in the words case, there would be riots in China, and in the best case an unprecedented capital outflow. Which is also why China has been so unwilling to do the “bandaid” approach.

  As Bloomberg adds, Hart, whose prescription clashes with consensus forecasts for the yuan and recent comments from senior government officials, said China would be justified in weakening the currency after central banks in Europe and Japan fueled declines in their exchange rates to stoke economic growth in recent years. Such a move would likely come as a surprise to global investors, who were rattled by a drop of less than 3 percent in the yuan last August.

  

  “They’re trying to drive a car with one foot on the brake,” said Hart, who estimates the People’s Bank of China spent more than $100 billion supporting the yuan in onshore and offshore markets during the first 12 days of January. “If China were to devalue to a level that wasn’t actually a true equilibrium they will get run over pretty quickly, they will blow through FX reserves, and then they will lose face because they’ll be forced to devalue.”

  There is another implication from a sharp devaluation: a world in which not even the IMF can deny any longer that a full blown currency war has broken out. Bloomberg adds more:

  While a one-off drop in the yuan could ease selling pressure on the currency and support exports, it would also entail risks for China and the rest of the world. Chinese borrowers have amassed $1.5 trillion of foreign-currency debt, according to an official estimate at the end of September, which would become instantly harder to repay after a sharp decline in the yuan.

   

  A devaluation could also fan fears of a global currency war — a risk that Mexico’s finance minister cited earlier this month — and spur the U.S. Federal Reserve to backtrack on plans to raise interest rates, according to Hart.

  For now, Chinese policy makers have signaled there are no plans for a big drop in the yuan. Premier Li Keqiang on Friday pledged a “stable” exchange rate and said the nation has no intention of stimulating exports through a competitive devaluation. Bets against the currency will fail and calls for a large depreciation are “ridiculous” as policy makers are determined to ensure stability, Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs, said last week in New York.

  However, while in August 2015 China did engage a modest one-off devaluation, there is a precedent for a far sharper devaluation. The currency slid 33 percent at the start of 1994 as authorities unified official and market exchange rates, and the yuan has stayed stronger than that level ever since March of that year. That decision was a “wild success,” helping to set the stage for years of economic growth and foreign-exchange inflows, said Hart, who founded his hedge fund in 2001.

  While a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position, according to Hart. He said the country could explain the move by saying it would put the yuan at a level more reflective of market forces and allow the currency to catch up with declines in international peers.

  It would also most likely unleash another global currency crisis, first among the Emerging Nations, and then among their Developed peers, as country after country scrambled to implement comparable currency destruction as China, in order to preserve their relative share in dwindling global trade, where the shortest way to boost one’s exports has over the past 7 years, been a very simple one: destroy your currency faster than your exporting competitors.  

  The reality, however, is that Hart is correct, and China will have to pick one option: either a sharp devaluation, or failing that, debt defaults: the current course of gradual CNY debasement will only results in an acceleration in capital outflows until ultimately China’s $3 trillion rainy day fund is whittled away to nothing (and as a reminder, according to some estimate just a little over $1 trillion in it is actually liquid assets).

  Hart is not alone in predicting a massive Yuan devaluation: Carlyle Group’s Emerging Sovereign Group in New York and Omni Partners in London are also positioned for a retreat in the currency. Crispin Odey, who runs Odey Asset Management, said in September that the yuan should fall by at least 30 percent.

  Finally, this is how Hart is trading the upcoming devaluation: Hart said he’s wagering against the currency with put options, contracts that provide the right to sell at a specific price within a set period. Bets on a sharp devaluation aren’t common among his hedge fund peers, who only recently started to wager on a gradual depreciation, Hart said. 

  “It strikes me as odd that the world would assume that China wouldn’t pursue same the same type of monetary policies” that led to weaker exchange rates in other nations, Hart said. “They’re between a rock and a hard place.”

  Which is 100% correct, and is also why the market is finally starting to pay attention to the China in the bull store, after years of stubbornly ignoring it.

  

  

  

  

  

• How Elon Musk Stole My Car

  Submitted by Marty via Atlantic.net,

  This was my personal experience with Tesla Motors. I’m a fan of what Tesla Motors is trying to accomplish, and hope they get their issues worked out.

  With a new baby on the way, I was in the market for a new vehicle.  I scheduled a test-drive with Tesla Motors (Tesla) in mid-November, and was on the fence about purchasing a Tesla. I had some questions which I emailed my test-drive consultant, but didn’t receive any response and I wasn’t particularly in love with the car, so I let it go.

  A few weeks later, I was talking to a friend of mine who had just leased a Tesla. I explained my experience, and how I felt the price of the car was too high for what it is. While Tesla doesn’t offer discount cars, he explained there is a way to pay less. Tesla has what are referred to as “inventory cars”. These are cars used for test drives, showrooms, as well as loaners. They do have mileage, you have to take them “as is”, and there is no custom configuration. But, if you can find one to your liking you can get a pretty big discount.  He recommended I speak with his Owner Advisor, Kevin, and he connected me with him.

  Tesla doesn’t have a traditional dealership network; it is pioneering the luxury electric vehicle (EV) segment, and pioneering selling cars without traditional dealerships. That means it operates its service centers, and showrooms itself. By unifying this process it should give a better experience to it customers. Kevin, the Owner Advisor (salesperson) I was referred to, is based out of Tesla HQ in Palo Alto, California.

  After working with Kevin for a few weeks, I was able to find a car that met my needs in Pasadena, California. On December 24, I placed my order with Kevin by paying $4,000 as a deposit. Kevin assured me that this secured the vehicle for me, and that it was marked as sold and unavailable for anyone else to sell. I followed up with him the next week, and he said they were just trying to find a carrier to ship the car to Florida, and I should begin working with my Delivery Specialists.

   

  

  (Above, the confirmation screen with VIN of the Tesla Model S Elon Musk is driving)

  Tesla has Delivery Orientation Specialists and Delivery Experience Specialists who work to help you through the process of getting the car. In my case, it was Caroline and Chelsea. Caroline explained to me that typically it takes a week to get the car, but because it was late in the year it might take up to two weeks, with the latest delivery date being Jan 8. She also explained that there was no way to get the car by the end of 2015. This made sense, because as a public company, Tesla was striving to meet its delivery commitments to its shareholders. By prioritizing deliveries of cars that could actually be delivered before the end of 2015, they could meet their quotas, and then deliver cars (like mine) early in 2016. Because I wanted to support Tesla, I didn’t think much of anything when I didn’t hear from anyone from that point on.

  The week of what I thought would be my expected delivery, my electrician was calling to schedule the installation of my additional power receptacle in my garage. We had agreed to do it once I got the car. I began calling my local Tesla location and choosing the “New Vehicle Delivery” option, but it would only ring and go to a voicemail that hadn’t been set up. I called repeatedly and no one would answer. Frustrated, I called and chose the “sales” option and spoke with an representative there that took my message and assured me someone would call me back.  Still, I got no calls back. Since the car was coming by January 8, I was starting to get concerned. I had to coordinate the car, the power installation, disposing of my old car in a sequence of events that I couldn’t start until I knew when I would get the car.

  By Wednesday, I was emailing my delivery specialist and calling. I didn’t know what was going on. By Thursday I was showing people at work how they don’t answer the phone or respond to my email. I was very concerned that I was paying over $100k for a car, and if this was the new sales process how terrible would the service be? Should I just cancel? How could I cancel if no one would even talk or communicate with me? Was there a problem in transit? Basically, I was stuck and frustrated, plus I had already paid for a deposit which covered the non-refundable transportation cost.

  Exasperated, I called the local Tesla dealer again. This time, no one answered and my call was transferred to Tesla HQ. The representative asked for the 6-six digits of my vehicle VIN. Tesla offers a “my Tesla” portion of their site that new buyers login in to, to sign electronic paperwork, upload copies of driver’s licenses as well as proof of insurance. In addition, it shows a model of the car and some advice on how to power it. Most importantly, after you make your initial payment, the reservation number for your car is replaced with a VIN (Vehicle Identification Number) which signifies the specific car which is allocated to you. This is done shortly after you send in your initial payment. Therefore, I was able to provide my VIN information to the Tesla representative, who promised me Kevin my original Owner Advisor would call me back.

  On the evening of January 7, the day before I was to receive my car, Kevin called me to explain he had a call in with the Office of the CEO at Tesla and was working with his team in Tesla to resolve a problem that had come up — their CEO, Elon Musk, had taken my car and was using it as his personal vehicle to test a new version of autopilot. Even worse, he said he could see all the calls I had made into the Orlando delivery center this past week, and no one was taking my calls because no one knew what to do.

  Tesla logs every in-bound call to their centers, and stores all of this in a national database. This is most likely tied into a CRM (Customer Relationship Management) system, to provide better service. So, for example, Kevin in California saw detailed records of all my attempts to connect with someone in Orlando.  Since no one knew what to do, they were deliberately avoiding taking my calls or communicating with me.

  I was floored. Not only because my car had been taken by their CEO, not only that no one bothered to reach out or communicate with me, but they were actively trying to avoid me.  I called and reached Kevin again on the evening of Jan 8. He explained my original car was so aftermarket at this point there was no way I would get it. Kevin began suggesting a different car that didn’t match what I was looking for, then suggested another car for $20k more.

  Frustrated, I called Tesla HQ to complain, and requested to speak to someone in the Office of CEO. The person answering wanted to know why, so I explained the situation and was transferred to a Ms. Kloskey (sp?). As was typical with Tesla, not only did she not answer, her voicemail was full so I couldn’t leave a message. I hung up and called back, and reached a representative who I explained my situation to, and requested escalation to someone who could make things right. The representative took my message, and said he would forward it to the appropriate person.

  I received a call back from Kevin, who explained he had gotten the memo that I called. Once again, I couldn’t penetrate Tesla’s screening system to find someone who cared, empathized, or treated me like a human. I could only speak with Kevin who was unhappy that they didn’t give me the right experience.

  Tesla has a strange way of communicating with customers I think is best described as customer service vaporware. That is, they spend more time trying to create the illusion of customer service, rather than actually providing it. There is no mechanism for them to get feedback, as I tried to provide, so its difficult to see how they can improve if they don’t know where they are going wrong.

  Tesla is pioneering two things at once, (a) a luxury full-EV segment for passenger vehicles, and (b) bypassing the traditional dealer network and selling directly to consumers. Since I never got my car, I can’t speak to (a). But, because (b) is so horribly broken, I don’t think (a) can succeed. My concern is if Tesla fails the experiment of directly selling cars to consumers may be considered a failure, when in reality it was tremendous missteps on Teslas part that caused it to not work. Right now, Tesla ships low volumes of cars to early adopters and ardent enthusiasts who will overlook the organizations short-comings. But I think launching a higher volume (Model 3) sedan later this year with their current organization will be watching a slow-motion train wreck.

  Thought questions for Tesla:

  • Why was Elon Musk (CEO of the company) allowed to take a car that was marked in their system as sold?
  • When Tesla employees became aware of what happened, why didn’t they reach out to me? How did no one involved think of the customer?
  • Even worse, why did Tesla employees actively work to avoid my calls and email?
  • If Tesla is logging interactions with their customers (like phone-calls) to a national database, why didn’t they notice that someone was calling in and only getting voicemail. Shouldn’t this be a red-flag, or shouldn’t someone at Telsa HQ be reaching out to find out why/whats going on/why someone keeps calling so often?
  • The only person who communicated with me (in the end) was Kevin. At no point did he ever apologize or ask how to make things right. He only communicated he was disappointed and not the experience Tesla wanted to provide. (He did apologize for “handing this incorrectly”, but I think this was in regards to my requesting my money back). What is the escalation policy here?
  • I tried three times to communicate with Tesla HQ, the first on their post test-drive e-mail form which they automatically send. I wrote constructive criticism and didn’t get any follow up. As detailed in my experience here, I called the Tesla HQ twice and was unable to reach anyone that cared or could help me.

  In the end, I cancelled my order and Tesla agreed to refund my money. If a tech-savvy $100k car buyer can have this experience, what hope is there for this organization to go mainstream? Tesla is a publicly traded company that loses money. So, strictly speaking, it doesn’t need customers as long as it can fund its losses via Wall Street. In my experience, its a hobby masquerading as a company, and it can probably run as a hobbyist organization for some time. But, at some point, customers will matter, they always do. Hopefully, if this posts reaches the right people in Tesla it will serve as a wake-up call to right their ways before its too late.

  In 21 years as a founder/CEO of my own company, dealing with Tesla has been the most bizarre and strange experience I’ve had interacting with another organization.

  Note: There were many other errors, selling me a Ludicrous upgrade which didn’t apply to my car, Tesla endorsed electricians not familiar with Tesla, dual charger availability issues, etc. My experience regarding these issues may have been affected by their employees trying to avoid me.

  

  

  

  

  

• U.S. Ally Turkey Arrests Academics For The Crime Of Signing A Peace Petition

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  A senior Western official familiar with a large cache of intelligence obtained this summer told the Guardian that “direct dealings between Turkish officials and ranking ISIS members was now ‘undeniable.’”

   

  ISIS, in other words, is state-sponsored?—?indeed, sponsored by purportedly Western-friendly regimes in the Muslim world, who are integral to the anti-ISIS coalition. Which then begs the question as to why Hollande and other Western leaders expressing their determination to “destroy” ISIS using all means necessary, would prefer to avoid the most significant factor of all: the material infrastructure of ISIS’ emergence in the context of ongoing Gulf and Turkish state support for Islamist militancy in the region.

   

  There are many explanations, but one perhaps stands out: the West’s abject dependence on terror-toting Muslim regimes, largely to maintain access to Middle East, Mediterranean and Central Asian oil and gas resources.

   

  – From the post: So Who’s Really Sponsoring ISIS? Turkey, Saudi Arabia, and Other U.S. “Allies”

  There’s been a lot going on lately, so I wouldn’t be surprised if you missed the latest drama from of U.S. ally, and sometimes ISIS/al-Qaeda supporter Turkey.

  Recently, a peace petition circled the globe calling on the Turkish government to end fighting against Kurdish militants in the country’s southeast, which has reportedly led to thousands of civilian deaths. By January 15th, 2,000 Turkish academics had signed the petition, which was too much for authoritarian president Recep Tayyip Erdo?an to handle. He not only publicly denounced the entire affair, he went ahead and started arresting people.

  Nature reports:

  Hundreds of Turkish academics are waiting to find out whether they will be prosecuted or sacked for spreading “terrorist propaganda”, after they signed a petition calling for violence to end in Turkey’s southeast, where government forces have been fighting Kurdish separatists.

   

  After the petition provoked a furious response from Turkey’s president Recep Tayyip Erdo?an, several universities in the country have begun investigations into signatories among their faculty — which could lead to their dismissal if accusations of unlawful political agitation hold up. On 15 January, police arrested and later released 27 academics, according to local media reports, including economists, physicians and scientists.

   

  “We are accused of defamation of the state and of terrorist propaganda,” says Zeynep K?v?lc?m, a law professor at Istanbul University, who has signed the petition and said she knew of several arrests. “We are all waiting for the police,” she told Nature on 15 January.

   

  Turkey’s government has previously clamped down on scientists and students who question its policies, imprisoned scientists charged with terrorism offenses, and restricted the freedom of funding agencies and scientific academies. But the number of arrests and investigations makes the current episode one of the larger Turkish attacks on freedom of expression in recent years, prompting outrage among human-rights advocates.

   

  By 15 January, almost 2,000 Turkish academics from 90 or so universities had signed a petition — launched a week earlier — that called on the Turkish government to end the fighting against Kurdish militants. Thousands of civilians have been killed in the longstanding conflict, which flared up again last July after a ceasefire collapsed.

   

  In an 12 January speech (made in the wake of terrorist attacks in Istanbul) Erdo?an accused signatories of spreading and supporting Kurdish terrorist propaganda and undermining Turkey’s national security. “I call upon all our institutions: everyone who benefits from this state but is now an enemy of the state must be punished without further delay,” he said.

   

  In response, the Turkish Higher Education Board (YÖK) and public prosecutors in several Turkish university cities launched investigations against academics who signed the petition. And several Turkish universities launched their own investigations into signatories at their institutions; some of them, including Abdullah Gül University in Kayseri, have asked signatories to resign. The rector of that university, ?hsan Sabuncuo?lu, has not responded to Nature’s e-mail requests for comment.

  The drama doesn’t end in Turkey. Both the U.S. ambassador to Turkey and Noam Chomsky are involved. As relates to the U.S ambassador, let’s turn to Al-Monitor:

  Melih Gokcek has been the mayor of the Turkish capital, Ankara, since 1994. He is known as a flamboyant and loquacious member of the Justice and Development Party (AKP) and is quite active on social media. He appears on television frequently and has over 3 million followers on Twitter. He frequently engages pundits and colleagues into virtual duels.

   

  The mood changed quickly when the US Embassy posted a brief message indicating the ambassador’s support for freedom of expression for academics who signed a petition titled “We do not want to be partners to the crime,” which asked the Turkish government to find a way for peace in the southeast. As Al-Monitor’s Cengiz Candar has written, the government sees the petition as supporting terrorism. Consequently, the academics were targeted on multiple fronts, with some being detained or suspended. The social pressure against them was not limited to traditional virtual attacks. It also involved marking office doors of academics who signed the petition, and even publicizing their home addresses, the religious affiliation of their spouses and occupations of their parents.

   

  Bass’ statement read: “Expressions of concerns about violence do not equal support for terrorism.” Bass said that while the United States “may not agree with the opinions expressed by those academics,” he emphasized US support for freedom of expression, regardless of the contents of the petition.

   

  Yet, what might seem to many a simple generic document from the US Embassy was branded as a direct attack on the government by the mayor. Gokcek shared 10 consecutive tweets on Jan. 15 directly addressing Bass. His tweets received hundreds of retweets and promptly became a trending topic in Turkey. The news that Gokcek declared Bass persona non grata made the headlines in national media outlets.

   

  In his Twitter feed, Gokcek said, “Bass is incapable of comprehending what he reads. Those shady academics are saying there is a massacre against the armed terrorists. Dear Bass, in the US, the police shoot citizens like pears for simply not putting up their hands.” “And you guys call this [method] security? In our country, heavily armed terrorists are attacking the police and soldiers. You tell us to accept it in the name of democracy. Well, we cannot.” Gokcek then shared some photos of the PKK’s devastating attacks, with collapsed buildings and a few YouTube videos displaying PKK violence. He wrote: “Bass, apologize to Turkey. Take a look at these [videos and photos] where PKK killed babies yesterday. Perhaps your blind eyes will see. You are the wrong choice for Turkey. I think you should go back to your country. Another ambassador who knows us should take your place.” Gokcek concluded by stating that Turkish officials are trying to bring US-Turkey relations to their best level, while Bass is personally damaging the relationship. He recommended that Bass should at least know when to remain silent, and “not back these academics who support murderers.”

  Well then.

  Now on to Chomsky, who was one of the non-Turkish academics to sign the petition. The Guardian reports:

  The leftwing US academic Noam Chomsky has hit back at Recep Tayyip Erdo?anafter the Turkish president accused him of ignorance and sympathizing with terrorists.

   

  Hours after Tuesday’s bomb attack on a tourist area of Istanbul, Erdo?an delivered a sneering criticism of Chomsky and “so-called intellectuals” who had signed a letter calling on Turkey to end the “deliberate massacre” of Kurdish people in the south east of the country, 

  Chomsky came back with the perfect response:

  Turkey blamed Isis [for the attack on Istanbul], which Erdo?an has been aiding in many ways, while also supporting the al-Nusra Front, which is hardly different. He then launched a tirade against those who condemn his crimes against Kurds – who happen to be the main ground force opposing Isis in both Syria and Iraq. Is there any need for further comment?

  Game. Set. Match.

  

  

  

  

  

• Dutch Politician: Male Refugees Are "Testosterone Bombs," Must Be Locked Up To Save Women From "Sexual Jihad"

  Earlier today, we brought you footage from riots that took place on Monday in the Netherlands.

  When the town of Heesch attempted to hold a meeting to discuss the prospect of placing some 500 refugees, around 1,000 demonstrators arrived to storm town hall. “The atmosphere turned nasty”, to quote AFP, and ultimately, police were forced to use “extra powers” to disperse the crowd.

  The riots came just hours after far-right Dutch politician Geert Wilders aired a new campaign spot for his Freedom Party.

  “Wilders’s views have already proved controversial,” AFP reminds us. “He is expected to go on trial in March for inciting racial hatred after pledging in local elections that he would ensure there will be ‘fewer Moroccans’ in the country.” Here’s the clip:

  But trial or no trial, Moroccans or no Moroccans, Wilders’s party is expected to put up its best ever showing in the next parliamentary elections, due in 2017. Were elections held today, polls show The Freedom Party would grab some 36 seats in the 150-seat Lower House.

  Needless to say, the party’s cause has gotten a boost from the wave of sexual assaults that occurred across Europe on New Year’s Eve.

  Not one to let a good crisis go to waste, Wilders’s new video finds the PVV leader calling on European officials to “lock up” male refugees in asylum centers in ordert to save the bloc’s women from “Islamic testosterone bombs.” 

  “We have seen what they are capable of,” Wilders continues, “it’s sexual terrorism, a sexual jihad.” 

  Fortunately, Wilders has a “solution”: “I propose we lock the male asylum seekers up in the asylum centers.”

  

  

  

  

  

• Canada Set To Unleash Negative Rates As Oil Patch Dies, Depression Deepens

  This Wednesday, the Bank of Canada has a decision to make.

  Canada’s oil “dream” is dying thanks to the inexorable slide in crude prices and as the IEA made clear earlier today, the pain is set to persist for the foreseeable future as the world “drowns in oversupply.”

  “Lower for longer” has hit the country’s oil patch hard. We’ve spent quite a bit of time documenting the plight of Alberta, where job cuts tied to crude’s slide have led directly to rising suicide rates, soaring property crime, and increased food bank usage (not to mention booming business for repo men).

  

  Adding insult to injury for Canadians is the plunging loonie. Because the country imports most of its fresh fruits and vegetables, the weak currency has triggered a sharp increase in the price of many items in the grocery aisle as documented in a hilarious series of tweets by incredulous Canadian shoppers.

  The question for the Bank of Canada is this: is the risk of an even weaker loonie worth taking if a rate cut has the potential to head off the myriad risks facing the economy?

  We’ll find out what the BOC thinks tomorrow, but in the meantime, analysts have weighed in. JP Morgan’s Daniel Hui says CAD needs to fall further lest producers should simply close up shop. “[W]ith West Canada Select (WCS) now sitting just a dollar above the average per-barrel operational cost of $20 (Canadian), the risk is that any further decline will cause a whole new host of spillovers including potential shutdown and retrenchment of energy extraction and exports (with its attendant growth and balance of payment effects) or the potential of highly leveraged companies running operational losses, and the more contagious financial impact that might have in Canada, with broader spillovers.”

  None of those outcomes are particularly palatable. If the loonie continues to plunge however, it would act as a kind of shock absorber (producers’ costs are predominantly in CAD terms whereas the crude they sell is obviously denominated in USD), keeping CAD-denominated prices above the marginal cost of production.

  

  “One of the few scenarios that would keep bitumen producers above marginal cost amid a further decline in global energy prices, is for CAD to depreciate substantially and at a much higher beta to oil price than has been the case in the past 18 months,” Hui adds, driving the point home.

  But this is a Catch-22. The BOC can cut and drive the loonie even lower thus allowing zombie producers to keep pumping and thus prevent still more oil patch job losses, but a falling CAD may have undesirable knock-on effects, like reduced consumer spending, for instance. Additionally, if uneconomic producers keep drilling and pumping, they’re just digging their own grave by contributing to an already oversupplied global market.

  In short: there’s no “right” answer. “Economists are united in one view, that new plunges in oil prices, in the Canadian dollar, and weaker global financial conditions, make the Bank of Canada’s policy interest rate decision Wednesday a very close call,” MNI writes.

  “We now are looking for a rate cut next week,” Bank of Montreal Chief Economist Douglas Porter told Market News. “We believe that the balance of weight has slightly tipped in favor of them going” for a rate cut, he added, pointing out that the market is pricing in a 50-50 chance of a BOC action this week.

  

  Royal Bank of Canada assistant chief economist Paul Ferley, doesn’t agree. “We think that Governor (Stephen) Poloz will maintain his confidence that growth in exports will counter weakening business investment and he will hold the rate steady,” he says.

  Perhaps, but as we noted early last month, the BOC has already hinted that Europe’s not-so-grand experiment in the Keynesian Twilight Zone known as NIRP may be about to cross the pond. “The effective lower bound for policy rates is around -0.5%,” governor Stephen Poloz said in December, setting the stage for negative rates in Canada.

  For their part, IceCap Asset Management says NIRP is a virtual certainty for the BOC. Here’s IceCap’s straightforward, bullet point roadmap for Canadian monetary policy:

  1. Canadian economy to be in recession in 2016

  2. Bank of Canada will be at 0% interest rates in 2016

  3. Bank of Canada will be at NEGATIVE interest rates in later 2016

  4. Bank of Canada will be PRINTING MONEY in later 2016

  Ahead of Wednesday’s decision, Barclays is out with a preview and sure enough, NIRP makes a cameo.

  “The BoC would need to cut at least 50bp this year to partially counteract the continued slide in crude oil prices,” the bank begins, adding that although the price of Western Canadian Select (WCS) has fallen by half since the publication of the BoC’s last Monetary Policy Report, “this has been only partially offset by the 8% nominal multilateral depreciation of the CAD.”

  

  To fully offset the effect on GDP, Barclays says “the BoC would need to cut policy rates by at least 50bp in 2016.”

  Yes, by “at least” 50bps, and that’s assuming oil prices don’t plunge further.

  Of course 50bps puts the BOC at zero, so when Barclays says “at least”, they mean NIRP is likely on the way. To wit:

  The central bank has room to act even if rates hit zero. A 50bp cut in 2016 would bring the overnight rate to zero. The experience of countries like Switzerland, Sweden, Denmark and the euro area has taught central banks that zero is not the lower bound. The BoC estimates that the effective lower bound for Canada could be around -50bp, giving room for further cuts if needed. Without the immediate worry of hitting the effective lower bound, the central bank might be more willing to ease sooner rather than later.

   

  

  There you have it. Of course it’s difficult to see how 100bps of theoretical policy flexibility will be enough to keep the shut-ins from starting in the oil patch especially considering there’s only a CAD1 cushion above the marginal cost of production and considering the outlook for oil prices is particularly bleak now that 500,000 b/d of new Iranian supply are coming to market. 

  As for what the BOC does in the event Poloz hits the lower bound of -0.50% and the loonie still needs to weaken to offset the ill effects of declining crude, we’ll leave you with one indelible image that should serve as a harbinger of what’s to come…