• Government Corruption Tops List of Americans’ Fears

  Time reports:

  Corruption of government officials is currently Americans’ number one fear, according to a recent survey by researchers at Chapman University.

   

  The researchers asked a random sample of 1,541 adults to rate the level of fear for 88 different fear options across a variety of domains (like crime and natural disasters). Based on their findings, here were the top 10 fears for 2015:

  • Corruption of government officials (58.0%)
  • Cyber-terrorism (44.8%)
  • Corporate tracking of personal information (44.6%)
  • Terrorist attacks (44.4%)
  • Government tracking of personal information (41.4%)
  • Bio-warfare (40.9%)
  • Identity theft (39.6%)
  • Economic collapse (39.2%)
  • Running out of money in the future (37.4%)
  • Credit card fraud (36.9%)

  Last month, Gallup found that 75% of Americans said they believe corruption is widespread in the government (up from 66% percent in 2009).

  Also last month, Gallup found that a record low 38% of Americans trust the government to handle domestic problems. And half of Americans think that the government is an immediate threat to us.

  We at Washington’s Blog are non-partisan and non-dogmatic. We don’t believe that government is inherently good or inherently bad.  We instead believe that each government has to be analyzed to determine its degree of honesty or corruption.

  Unfortunately, it is T-H-O-R-O-U-G-H-L-Y documented  that systemic corruption has destroyed America … as admitted by politicians on both sides of the political aisle.

  (Sadly, America is not alone … governments worldwide are sliding down into mud pits of corruption.)

  Postscript:  Mainstream politicians and media are trying to browbeat Americans into trusting our government more. For example, Time Magazine tries to make fun of Americans who don’t trust the government … by comparing them to people who believe in  aliens and the paranormal.

  Likewise, Obama frequently chides Americans for distrusting their government.

  But we Americans don’t trust our government because our government has repeatedly demonstrated through its actions that it is corrupt and untrustworthy.

  

  

  

  

• Hilsenrath 'No Rate Hikes In 2015' Hint Sparks Buying Panic In EM FX And Japanese Stocks

  Between the plunging market-implied rate-hike probabilities and Fed-Whsiperer Jon Hilsenrath's WSJ piece this evening strongly hinting at no hikes in 2015, the 'relief' rally in Asian FX (and Japanese stocks) is – in a word – insane. If the world's central banks mandates are "price stability" in whatever format they believe that to manifest, they have well and truly failed. The Won has jumped most since 2011, Ringgit and Rupiah are soaring over 2%, and Nikkei 225 is up over 400 points from the US session close…

  The rate-hike odds are collapsing…

  

   

  And as WSJ's Hilsenrath notes, confirming the market's bias…

  The chances of a Federal Reserve interest-rate increase in 2015 are diminishing amid new signs of anemic economic activity, a disappointing development for central bank officials who have been hoping to move this year after a prolonged period of easy-money policies.

   

  Lackluster readings on consumer spending, inflation and jobs have virtually eliminated the chances of a move this month. Already, two Fed governors expressed doubts this week about whether the timing will be right this year, and the recent trove of data hasn’t reassured top officials about the economic outlook.

  Sparking panic buying in Nikkei 225…

  

   

  But EM FX is soaring against the USD…

  

   

  As the following chaos shows…

  • *KOREAN WON SET FOR BIGGEST GAIN VS DOLLAR SINCE NOV. 2011

  

   

  We would note though that the USD weakness is starting to stall out any BoJ-hope-strewn JPY weakness which supports the world's equity markets…

  

   

  Between the pace of hot money flows and illiquidity, the yo-yo-ing "markets" are as fragile as anything we have seen since Lehman.

   

  Charts: Bloomberg

  

  

  

  

  

• Meet Allen Dulles: The "Psychopath" Who Created America's Modern Shadow Government

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Allen Dulles, the CIA director under presidents Eisenhower and Kennedy, the younger brother of Secretary of State John Foster Dulles, and the architect of a secretive national security apparatus that functioned as essentially an autonomous branch of government. Talbot offers a portrait of a black-and-white Cold War-era world full of spy games and nuclear brinkmanship, in which everyone is either a good guy or a bad guy. Dulles—who deceived American elected leaders and overthrew foreign ones, who backed ex-Nazis and thwarted left-leaning democrats—falls firmly in the latter camp.

   

  But what I was really trying to do was a biography on the American power elite from World War II up to the 60s. That was the key period when the national security state was constructed in this country, and where it begins to overshadow American democracy. It’s almost like Game of Thrones to me, where you have the dynastic struggles between these power groups within the American system for control of the country and the world…

   

  Absolutely. The surveillance state that Snowden and others have exposed is very much a legacy of the Dulles past. I think Dulles would have been delighted by how technology and other developments have allowed the American security state to go much further than he went. He had to build a team of cutthroats and assassins on the ground to go around eliminating the people he wanted to eliminate, who he felt were in the way of American interests. He called them communists. We call them terrorists today. And of course the most controversial part of my book, I’m sure, will be the end, where I say there was blowback from that. Because that killing machine in some way was brought back home.

   

  – From the Mother Jones article: You Think the NSA Is Bad? Meet Former CIA Director Allen Dulles

  Many of you will be intimately familiar with the name Allen Dulles. Younger readers, of my generation or below, will be far less so. It is precisely because the youth of this nation remain so ignorant of the nefarious characters in America’s past, that David Talbot’s recently published book, The Devil’s Chessboard: Allen Dulles, the CIA, and the Rise of America’s Secret Government, is so incredibly important.

  Mr. Talbot has been recently conducting invaluable interviews about the book with various media organizations. One of the best I’ve seen is with Mother Jones. Here’s some of what he had to say about America’s longest serving CIA director:

  But what I was really trying to do was a biography on the American power elite from World War II up to the 60s. That was the key period when the national security state was constructed in this country, and where it begins to overshadow American democracy. It’s almost like Game of Thrones to me, where you have the dynastic struggles between these power groups within the American system for control of the country and the world.

   

  I focused on those elements that I thought were important to understanding him. I thought other books covered that ground fairly well before me. But what they left out was the interesting nuances and shadow aspects of Dulles’s biography. I think that you can make a case, although I didn’t explicitly say this in the book, for Allen Dulles being a psychopath.

   

  They’ve done studies of people in power, and they all have to be, to some extent, on the spectrum. You have to be unfeeling to a certain extent to send people to their death in war and take the kind of actions that men and women in power routinely have to take. But with Dulles, I think he went to the next step. His own wife and mistress called him “the Shark.” His favorite word was whether you were “useful” to him or not. And this went for people he was sleeping with or people he was manipulating in espionage or so on. He was the kind of man that could cold-bloodedly, again and again, send people to their death, including people he was familiar with and supposedly fond of.

   

  There’s a thread there between people like Dulles up through Dick Cheney and [Donald] Rumsfeld—who was sitting at Dulles’s knee at one point. I was fascinated to find that correspondence between a young Congressman Rumsfeld and Allen Dulles, who he was looking to for wisdom and guidance as a young politician.

   

  Absolutely. The surveillance state that Snowden and others have exposed is very much a legacy of the Dulles past. I think Dulles would have been delighted by how technology and other developments have allowed the American security state to go much further than he went. He had to build a team of cutthroats and assassins on the ground to go around eliminating the people he wanted to eliminate, who he felt were in the way of American interests. He called them communists. We call them terrorists today. And of course the most controversial part of my book, I’m sure, will be the end, where I say there was blowback from that. Because that killing machine in some way was brought back home.

  How about Dulles’ role in the assassination of JFK? Talbot pulls no punches here either…

  To me it’s one of the greatest examples of media incompetence and negligence in American history. I even confronted Ben Bradlee about this, who was probably JFK’s closest friend in the Washington press corps and wrote a book all about JFK and their close friendship. “Why didn’t you, with your investigative resources, try to get [to] the bottom of it?” You should read what he says in Brothers, but basically it came down to, “Well, I thought it would ruin my career.”

   

  I think I have studied this about as much as anyone in my generation at this point, and my final conclusion after 50 years was we have to go there, we have to look at the fact that there’s a wealth of circumstantial evidence that says not only was there, at the highest level, CIA involvement. Probably in the assassination cover-up. But beyond the CIA, because the CIA wouldn’t have acted on its own.

  But the CIA are good guys now. Or so the propagandized American public believes…

  Now check out David’s interview with Amy Goodman of Democracy Now:

  

  

  

  

  

• America #1? 36 Facts That Prove That The United States Is An 'Exceptional' Nation

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

  Is the United States an “exceptional” nation?  Well, the facts show that we are, but not for the reasons that you may think.  Now that it is election season, we have all sorts of politicians running around proclaiming that America is the greatest nation on the entire planet.  And just this week, Warren Buffett stated that “America’s great now — it’s never been greater“.  But is it actually true?  Is the United States still a great nation? 

  I would submit that the numbers suggest otherwise.  I love America, and in my opinion there is not much hope for us until we are willing to admit to ourselves just how far we have fallen.  The following are 36 facts that prove that the United States is an “exceptional” nation…

  #1 According to a brand new report that was just released by the Organization for Economic Cooperation and Development, the United States has the fattest population in the entire industrialized world by a wide margin.

  #2 That same report from the OECD also found that we are number one in child obesity.  In fact, at 38 percent our rate of childhood obesity is even higher than our overall rate of obesity.

  #3 According to USA Today, the obesity rate in the United States has more than doubled over the past 25 years.

  #4 The Washington Post has reported that Americans spend an average of 293 minutes a day watching television, which is the most in the world by a wide margin.   And as I have discussed previously, more than 90 percent of the “programming” that we absorb is created by just 6 enormously powerful media corporations.

  #5 One study found that the average American spends more than 10 hours a day using some sort of electronic device.

  #6 By the time an American child reaches the age of 18, that child will have seen approximately 40,000 murders on television.

  #7 The average young American will spend 10,000 hours playing video games before the age of 21.

  #8 Out of 22 countries studied by the Educational Testing Service, Americans were dead last in tech proficiency, dead last in numeracy and only two countries performed worse than us when it came to literacy proficiency.

  #9 In more than half of all U.S. states, the highest paid public employee in the state is a football coach.

  #10 The percentage of wealth owned by middle class adults is lower in North America than it is anywhere else in the world.

  #11 Almost half of all Americans (47 percent) do not put a single penny out of their paychecks into savings.

  #12 It turns out that Americans are very good at locking people away in prison.  At 716 per 100,000 members of the population, the United States has the highest incarceration rate on the entire planet by a very wide margin.

  #13 Approximately one-fourth of the entire global prison population is in the United States.

  #14 In 2014, police in the United States killed 1,100 people.  During that same year, police in Canada killed 14 people, police in China killed 12 people and police in Germany didn’t kill anyone at all.

  #15 One recently published study found that one out of every six young Americans has stolen something during the past year.

  #16 There are more car thefts in the United States than anywhere else in the world by far.

  #17 According to Fox News, approximately 70 percent of married men in the United States admit to having cheated on their wives.

  #18 Americans spend far more on health care than anyone else in the world, and yet we only rank 26th in life expectancy and our entire health care system has been transformed into a giant money making scam.

  #19 According to a study conducted by the Mayo Clinic, nearly 70 percent of all Americans are on at least one prescription drug, and an astounding 20 percent of all Americans are on at least five prescription drugs.

  #20 According to the U.S. Department of Agriculture, 31 percent of all food in the United States gets wasted.  In case you were wondering, that amounts to approximately 133 billion pounds of food a year.

  #21 In 2013, women earned 60 percent of all bachelor’s degrees that were awarded that year in the United States.

  #22 A survey conducted by the Barna Group discovered that 77 percent of Christian men in America in the 18 to 30-year-old age bracket view pornography at least monthly.

  #23 There are more than 4 million adult websites on the Internet, and they get more traffic than Netflix, Amazon and Twitter combined.

  #24 70 percent of Americans do not “feel engaged or inspired at their jobs”.

  #25 When LBJ’s “War on Poverty” began, less than 10 percent of all U.S. children were growing up in single parent households.  Today, that number has skyrocketed to 33 percent.

  #26 In 1950, less than 5 percent of all babies in America were born to unmarried parents.  Today, that number is over 40 percent.

  #27 According to the Centers for Disease Control and Prevention, there are 20 million new cases of sexually-transmitted disease in the United States each year.

  #28 Today, the United States has the highest STD infection rate in the entire industrialized world.

  #29 According to a survey that was just released within the last 30 days, only 29 percent of Americans want to cut off federal funding for Planned Parenthood even after all of the shocking undercover videos that were released this year.

  #30 America has the highest rate of illegal drug use on the entire planet.

  #31 Doctors in the United States write more than 250 million prescriptions for antidepressants each year.

  #32 One survey of 50-year-old men in the U.S. found that only 12 percent of them said that they were “very happy”.

  #33 Every single year, the United States has the largest trade deficit in the entire world by a very wide margin.  But most Americans still don’t seem concerned that thousands of businesses and millions of good jobs have been leaving our country.

  #34 As you read this article, there are 102.6 million working age Americans that do not have a job.

  #35 We are supposed to have a government “of the people, by the people, for the people”, but only 25 percent of all Americans know how long U.S. Senators are elected for (6 years), and only 20 percent of all Americans know how many U.S. senators there are in total.

  #36 On average, we have been stealing more than 100 million dollars from future generations of Americans every single hour of every single day since Barack Obama entered the White House.

  

  

  

  

  

• China's Other Big Problem: 35 Applicants For One White Collar Job

  Over a year ago, the world’s most influential and central-banker spawning FDIC-backed hedge fund, Goldman Sachs, proudly revealed that despite 6 consecutive years of revelations of bank rigging, manipulation, fraud, bailout, crime and so on, there was no other job that the world’s most ambitious young people wanted to do more:

  As an investment bank, our main asset is our people and the advice and solutions that they provide to our clients. Great people build great relationships. And, we are fortunate to have a diverse group of young people from around the world who continue to view Goldman Sachs as a great place to begin and sustain their careers. For our latest analyst class, more than 43,000 candidates applied for 1,900 positions. We accepted about four percent of those applicants and of those receiving offers, more than 80 percent accepted.

  Or, as Lloyd Blankfein would proudly calculate, 23 applicants for every job opening.

  According to that logic, if working at Goldman is about as prestigious as it gets, then we know a job – based on unprecedented demand – that is even more prestigious: your average white-collar job in China, for which there were a record 35 application in the third quarter.

  Indeed, in the world’s most populous communist country where jobs used to be guaranteed – by definition – to anyone, in any walk of life, it has suddenly become next to impossible to progress up the career ladder, something which will result in great social angst and instability in the coming years.

  According to China Daily, competition for white-collar jobs became fiercer in the third quarter, with more than 35 job seekers contending for the same position on average. This is a jump from 26 and 29 in the first and second quarters this year, a Chinese human resources website said on Tuesday.

  The Daily cites Zhaopin.com’s third-quarter jobs report for white-collar workers, which  showed that demand for talent was shrinking with the slowdown of China’s economic growth. At the same time, more such workers were considering changing jobs, leading to more competition among job hunters, especially those in Northeast China and in second-tier cites.

  In Zhaopin’s competition index for major cities, Shenyang and Dalian, both in Liaoning province, and Changchun, Jilin province – all in Northeast China – ranked first, fourth and eighth.

  Zhu Hongyan, chief career consultant for the website, said that “the changing economic structure affects certain traditional careers. The need for professionals in certain fields declined, and some even disappeared.” Hongyan added that “Workers in these industries are forced to seek career opportunities in other ones, increasing competition in the market for job seekers.”

   

  Moreover, second-tier cities such as Chengdu, Sichuan province, Suzhou, Jiangsu province, Xi’an, Shaanxi province, and Tianjin are all among the top 10 cities with the most competitive job market.

   

  Beijing ranked ninth, while Shanghai ranked 18th.

   

  Zhu, the career consultant, said the trend of white collar workers shifting their jobs to fast-developing second-or third-tier cities has become more prominent because of the high pressures of working and living in larger cities, deteriorating environments and restrictions on cars and housing.

   

  “Regional preferential policies have helped second-and third-tier cities attract overflow industries and companies from the overcrowded metropolises, which have their own restrictions such as limited land and other resources,” Zhu said.

  “However, second-and third-tier cities do not have the same mature economic structure and industries as the metropolises,” added Zhu. “So not all job seekers can find satisfactory jobs.”

  And with 35 applicants for any one job, that is precisely what is happening.

  Worse, due to surging labor market competition and the drop of vacant positions for which there is demands – usually at the best paid positions in the labor chain – wages are about to tumble as employers realize they can pay anything they want: after all if someone quits, there are 34 other workers happy to replace him.

  This has two major impllcations:

  • first, with wages set to drop, yet another source of deflation is about to be unveiled;
  • second, as China’s economic collapse leads to increasingly less job opening , it inevitably means that social tensions and violence are set to rise in a country which see the migration of tens of millions of people from the heartland to the coastal cities.

  Finally, all those conflicting forecasts in 2011 that China may or may not hit wage parity with the US some time in 2016, well – we now know the answer: China may have reached its Lewis point, but now that the economy is on its way to a crash landing, it has solidly gone into reverse.

  (for those asking what China’s first problem is, well there are many to choose from, but if given just one option, we would repeat what we said last night when we reported that “CLSA Just Stumbled On The Neutron Bomb In China’s Banking System” – the country’s trillion in non-performing loans which nobody is talking about just yet).

  

  

  

  

  

• Market Cycles And Collisions In A Non-Linear World

  Submitted by Keith Dicker of IceCap Asset Management, October 2015 letter to Clients

  Newsflash

  Newsflash # 1: A few short weeks ago, Canada’s self-proclaimed biggest and best bank told clients: “much of the negative news from Europe is firmly rooted in the past” and that there is “more potential for upside for markets.”

  Result: European Stocks subsequently declined -13.5%

  Newsflash # 2: America’s biggest and best bank bragged: “global developed market equities should remain attractive”.

  Result: Global Stocks subsequently declined -11.3%

  Newsflash # 3: Britain’s biggest and best bank was all squiffy over markets, proclaiming: “Economic growth is gaining momentum” and “overall, we continue to prefer risk assets such as equities, high yield credit and EM debt.”

  Result: Global stocks subsequently declined -11.3%, High Yield Bonds subsequently declined -4.7%, and Emerging Market Debt subsequently declined -3.2%

  By now, most people are once again painfully aware that stocks, high yield bonds and emerging market bonds can actually go down as well as up. For stock investors, it has been a brutal 5 weeks with most markets dropping -10% or more.

  As a reminder, a -10% decline needs a +11.1% rebound to get back to where you started. Or from a more serious perspective, a -50% decline needs a +100% rebound to get back to where you started.

  The reason we share these very simple and obvious mathematical facts is due to the following intelligent investment insight: avoiding and limiting downside losses is a crucial aspect of investment management.

  Yet, as you can see from the market wisdom from the biggest Canadian, American and British banks – they completely ignore this very simple rule of investing.

  Instead, millions of investors are constantly bombarded with the seemingly innocuous market wisdoms:

  1. Buy the dip
  2. Invest for the long term
  3. Know your time horizon
  4. Invest regularly 

  And in our opinion, this is a real shame – a very, real shame. There certainly are times when these are words of wisdom. But, there are also times when they are not.

  By now, clients, non-clients, and peers are all familiar with our big view of the World. Our experience, perspective and research continues to conclude that global financial markets, the global economy and government fiscal balances are all converging to make everyone’s investment experience very different than that painted by the very big banks.

  Yet, the big banks continue to shamefully respond as if all is well. Considering the fact that central banks have kept interest rates at 0% for 7 years and the global economy continues to decline is the clearest of clear messages that the financial World isn’t quite right.

  And if that isn’t clear enough, just know that now many countries have begun to implement NEGATIVE interest rates to help stimulate their economies.

  Yet, we rarely read or hear any of these facts from the big banks. This of course can mean several things – none of which are complimentary:

  1 – the big banks feel the average investor isn’t intelligent enough to understand what is happening

  2 – the big banks cannot articulate the true state of the money World to their millions of clients

  3 – the big banks truly believe all is well, and that the World will always see a few bumps every now and then.

  As we all know, investment managers will ALWAYS make a few wrong decisions – it’s inevitable. Managing other people’s wealth can be a stressful responsibility. The good times are awesome. The bad times, not so much.

  However, if anyone has any aspirations to be an investment manager – this is THE most perfect time to realise your dream.

  Let us explain why.

  As of today, 100,000s of investment professionals around the World are following the age-old adage of buy and hold, buy the dip, stocks always outperform bonds, and never invest in currencies.

  Just steer the course and you’ll be fine, just fine.

  Unless of course, the ship you are in doesn’t have a rudder, a mast, a jib, a boom, a tiller or a keel. In truth, these ships are not really investment managers at all, instead they are asset gatherers.

  The difference being is that real investment managers are very focused on making investment decisions to preserve your capital during volatile times, while growing your capital during the good times.

  Asset gatherers on the other hand, are very focused on winning new clients and receiving new money to manage – after all, investment management IS a business.

  At these firms, the focus is on marketing and sales. They razzle and dazzle you with very nice commercials, brochures and presentations, as well as a splendid array of investment options.

  Yet, if you open your eyes and ears just enough, you’ll notice the difference and it mainly starts with investing for the long-term, buy and hold, and invest regularly – sadly, it ends the same way as well.

  In other words – investors hear the same old story, time and time again. This would be perfectly acceptable IF we lived in a linear World.

  The problem of course is that we DO NOT live in a linear World.

  While it is human nature to think and expect along linear lines, our World just doesn’t work that way. Instead, everything moves in cycles, some short and shallow, while other cycles are long and deep.

  What we are experiencing today is the likely turning point in a very long cycle of borrowing, borrowing and then borrowing some more.

  The capacity to borrow has reached the limit for many, yet our governments and central banks are desperate to keep the party going. Yes, despite foggy heads, tired legs and full bellies; governments and central banks continue to pour more drinks, dish out more food, all while playing even louder music.

  In some ways, the real question to ask your mutual fund sales person is whether the party has ended or is it just getting started?

  The real difference between the investment managers and asset gatherers is in their ability to truly understand market conditions, identify the key driving points, reposition your strategies and then to easily communicate the entire process.

  Let’s be honest here – the calm sailing and the good times ended in March 2000. That was the end of the most beautiful simultaneous bull market in both stocks and bonds ever known to mankind.

  For 18 stunning years prior to March 2000, financial markets everywhere, charmed everyone into believing that life as an investment manager was as difficult as a sail into a gentle, onshore breeze.

  And considering markets produced an average annual return of +15%, how could anyone not be happy?

  This was the way life should be.

  However, since March 2000, stocks plummeted -50%, then soared +100%, then crashed -56%, only to zoom +215%.

  So since March 2000, 16 years of buying the dip, investing for the long-term, knowing your time horizon, diversifying your portfolio, and investing regularly netted you a handsome annual return of +2%.

  This wasn’t the way life should be.

  So which is it? Do you expect stocks to always perform like they did from 1982 to 2000? Or, do you expect stocks to perform like they did from 2000 to 2015?

  Judging by their investment commentary, the big banks obviously believe in the 80-90s era. In reality however, the big banks believe in gathering your assets, and investing for the long-term, buying the dip…

  Collision Time

  Make no doubt about it – our economy and our debt loads have created a very uncomfortable environment for those in governments and central banks.

  Over the years, individuals, companies and governments of all kinds have borrowed to their hearts content. Subsequently, all of this borrowing gushed new money into our economies and swirled around, around and around.

  The good times became so great, they turned awesome.

  Politicians promised a chicken in every pot – yet, by borrowing and borrowing they delivered entire farms to their voters.

  Companies promised steady hours with steady pay – yet they delivered more jobs, more pay and more pensions.

  Not to be outdone, individuals goosed the system too, and enjoyed golden eggs year after year after year.

  It happened during the hippy-days of the 60s, and during the disco-days of the 70s. Of course, bumps also happened during the metal-days of the 80s and then again during the grunge-days of the 90s. Then American Idol took over and all was lost – well, all except the ineffective vision of our leading central bankers and government treasuries.

  While some people began their careers in the 1970s, even more started their investment careers in the 1980s; with more still in the 1990s and 2000s.

  Worse still, many of today’s investment young guns started their careers after the 2008 crisis.

  We share this perspective because every market expert today draws upon their years of wisdom to make very important investment decisions for you, your family and your pension plans.

  This would be great if everyone lived to be 300 years old and shared this much longer, and much richer experience with the World.

  Instead, our minds are trapped within a very narrow place in time which limits our ability to think and see things from a much broader and clearer perspective.

  Today, we have 3 enormously important market drivers steam rolling towards each other and when they collide, the distortions will be leave everyone dazed, confused, asking questions – and demanding answers.

  Sadly, the answers will be completely unsatisfying entirely due to an industry focused on linear thinking and obsessed with gathering assets. Fortunately, the key to understanding why the World has reached a precarious point in time is actually quite easy to achieve – just shed your mind of your tunnel visions and linear thinking, and open it to a World that is crystal clear.

  For starters, knowing and accepting that every market, every economy, and every society is interconnected will allow you to understand the events that are unfolding around us.

  Next, ignore the drivel from the talking heads and asset gathering machines. Then, know that every single time our World has experienced an economic bump, our governments and centrals always responded by:

  1) Borrowing more money to spend on special projects

  2) Cutting interest rates to make it cheaper for individuals and companies to borrow

  The result of 1) and 2) would be more money pumped into our economies which would inevitably help us recover from the little bumps.

  This happened like clock work in the 60s, 70s, 80s, 90s, and 2000s. Unfortunately, this clock has suddenly become broken. Yes, broken clocks are correct twice a day, but right now our global financial World is over 11 figurative hours away from that effusive goal.

  Over 60 years of borrowing and 35 years of cutting interest rates has left us with the mess we have today:

  1) Excessive debt loads for practically EVERY country

  2) ZERO and NEGATIVE interest rates

  Collision Time

  Linear thinkers not only see these as two separate market dynamics, but they also view it as two markets factors within every single, separate country and market.

  To proclaim that Greece doesn’t matter is tunnel vision.

  To believe China is an economic miracle is gullible.

  To conclude that lower interest rates and money printing will create a better World is pretty weak.

  Instead, we’ll show you how to liberate your mind and see the World as one continuous flowing market, where capital, ideas and innovation always seeks safety and avoids excessive risks and losses.

  We cannot stop what is coming, however if you escape the traps caused by linear thinking, the opportunity for your own personal schadenfreude is right around the corner.

  And it all starts with a collision:

  

   

  Here comes the recession

  Recently someone told us that if everyone simply acted with more optimism, then all of this gloom and doom would disappear.

  In one way, this is 100% correct. Positive thinking is great for a positive economy which leads to positive everything – more jobs, more bonuses, more raises, and more spending, and then rinse and repeat.

  Yet, all of this optimism can only carry an economy so far. Eventually mathematics take over, and soon thereafter one realises positive thinking doesn’t automatically give you a new job with more bonus, more raises which creates more spending.

  It’s funny how the loss of a bonus, or worse still, the loss of a job really affects the ole’ optimism gene by affecting it with something very different – pessimism.

  Suddenly, that vacation in Europe becomes a stay-cation. That new dream kitchen remains a distant dream. And the weekly eat-outs, turn into home pizza night (not that there’s anything wrong with home pizza night).

  As you can see, eventually mathematics always trumps optimism and pessimism too for that matter. Unfortunately, today’s market cycle – has the World sliding downwards and not upwards. Eventually the day will come when the opposite is happening, but we have to slump into the financial valley first – that’s just the way it works.

  * * *

  Continue reading in the full letter below:

   

  
  

  

  

  

  

  

• What Has Generated Alpha This Year?

  It only makes sense in this "good news is bad news" market that the best outperformance this year has been achieved by being ultimately contrarian and fading the crowd. As BofAML warns, 2015 is another year of position-driven alpha as selling the 10 most-overweight stocks held by active managers and buying the 10 most-underweight stocks crated a stunning 17 percentage point spread this year…

   

  

   

  BofAML sees risk this positioning trade continues.

  Consultants may be helping to perpetuate it, given they have honed in active share as a key metric for fund managers, which has forced managers into a crowded subset of similar holdings (typically smaller, more idiosyncratic stocks).
   

  

  

  

  

  

• World's Largest Leveraged ETF Halts Orders, Citing "Liquidity Constraints"

  First The Bank of Japan destroyed the Japanese bond market, and then, back in May we warned that The Bank of Japan had 'broken' the stock market. Now, it appears the all too obvious consequences of being the sole provider of buying power in an antirely false market are coming home to roost as Nomura reports the "temporary suspension" of new orders for 3 leveraged ETFs – the largest in the world – citing "liquidity of the underlying Nikkei 225 futures market."

  

  Source: Nomura

  As Bloomberg reported previously on Nomura's funds,

  Money is being shredded at an unprecedented rate in a souped-up exchange-traded fund tied to Japan’s most famous stock index.

   

  Since mid-August, investors have poured a record $4.5 billion into the Next Funds Nikkei 225 Leveraged Index ETF, a security designed to rise or fall twice as fast as its namesake equity gauge. That’s too bad, considering that twice the Nikkei 225 Stock Average’s loss over that period comes out to about 21 percent.

   

  So fast have the country’s individual investors been plowing money into the fund that even as a fifth was lopped off its price, its market value more than doubled. It’s the largest security of its kind in the world, and is now big enough to affect the whole stock market as overseers rush to buy and sell securities to meet its price target, according to BNP Paribas Investment Partners Ltd.

   

  “They are taking up a larger proportion of the market,” said Tony Glover, head of the investment management department at BNP Paribas Investment Partners Japan in Tokyo. “Volatile markets are not great news with increasingly wider intraday swings. The funds are a big factor causing this.”

   

  The ETF has become more popular with traders than even Toyota Motor Corp., Japan’s biggest company. Average turnover for the ETF was about 250 billion yen ($2.1 billion) a day over the past two months, triple that of Toyota.

  *  *  *

  Who could have seen this coming? Well we did… numerous times…and here is the explanation…

  Two months ago, in “ETF Issuers Quietly Prepare For Meltdown With Billions In Emergency Liquidity,” we outlined the rather disconcerting circumstances that have led some large fund managers to quietly line up emergency liquidity facilities that can be tapped in the event of a sudden retail exodus from bond funds.

   

  "The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown. Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show," Reuters reported at the time, in a story we suspect did not get the attention it deserved.

   

  At a base level, these precautionary measures are the result of the interplay between central bank policy and the unintended consequences of the post-crisis regulatory regime. ZIRP creates a hunt a for yield and simultaneously incentivizes companies (especially cash strapped companies) to tap the bond market while borrowing costs remain artificially suppressed. Clearly, this is a self-fulfilling prophecy. The longer rates on risk free assets remain near, at, or even below zero, the more demand there is for new corporate issuance (the rationale being that at least corporate credit offers some semblance of yield). More demand means rates on corporate credit are driven still lower, and once yields on high grade issues get close to the lower limit, yield-starved investors are then herded into HY.

   

  All of this supply in the primary market comes at a time when liquidity in the secondary market for corporate credit is non-existent thanks to the shrinking dealer books that resulted from the government’s (maybe) well-meaning attempt to crack down on prop trading. The result: a crowded theatre with a tiny exit.

   

  This situation has been exacerbated by the proliferation of bond ETFs which have allowed retail investors to pile into corners of the fixed income world where they might not belong.

  All of the above can be summarized as follows.

  "MF assets too large versus dealer inventories" (via Citi)…

  

  … clear evidence of "structural damage in corporate bond trading liquidity" (via JP Morgan)…

  

  … and the rapid growth of bond funds in the post-crisis world (via BIS)…

  

  So given the above, the question is this: if something were to spook the market – a rate hike cycle for instance, or an October revolver raid on HY energy names, or an exogenous geopolitical shock – causing an exodus from these funds, what would happen to prices if fund managers were suddenly forced to transact in size in an illiquid secondary market in order to meet redemptions?

  "Nothing good", is the answer. 

  The solution is to avoid selling the underlying bonds – even when investors are selling their shares in the funds.

  But how is this possible? 

  To a certain extent, outflows in one fund can be offset by inflows to another. These "diversifiable flows" are one happy byproduct of the great ETF proliferation. Here's a refresher on how this works courtesy of Barclays.

  *  *  *

  Portfolio Products Replace Dealer Inventory

  While diversifiable flows limit the risks to portfolio managers in principle, the reality of the high yield market is more complicated. Managers have specific views on tenor, callability, sectors, covenants, and, most importantly, individual credits, such that actually finding buyers for specific bonds can be quite difficult. In the pre-crisis period, dealers ran large inventories that effectively facilitated the netting of flows across funds (Figure 1). A fund with an outflow would sell bonds into the dealer community, and funds with outflows would buy bonds out of the dealer inventory. When inventory is large, the fact that the specific bonds bought and sold did not match was largely irrelevant. Funds with outflows could sell the bonds of their choice, and the funds with inflows could pick investments from the large variety of inventory held by dealers.

  

  The matching problem has become more acute as dealer inventories have declined. Even funds can net flows in principle, dealers are much less willing to warehouse bonds, and are much more likely to buy only when they believe they can quickly offload the risk. Under this scenario, the fact that flows can theoretically be netted is of little practical use to fund managers – actually netting individual bonds is extremely difficult, particularly in the short time frame required by funds offering daily liquidity to end investors.

  This is where portfolio products come in. Investors can use portfolio products to fund outflows/invest inflows immediately and execute the necessary single-name bond trades over time as liquidity in the underlying bond market allows (Figure 2). In this scenario, funds with inflows and outflows simply exchange portfolio products, sidestepping the immediate need to trade single-name corporate bonds.

  

  *  *  *

  Ok great, so ETFs provide a kind of "phantom" liquidity if you will. There are two problems with this:

  • It only works when flows are diversifiable. Once flows become unidirectional, it all goes out the window.
  • It makes the underlying markets even more illiquid.

  Here's how we put it last month in "How Fund Managers Use ETF Phantom Liquidity To Avert A Meltdown"

  In other words, if I'm a fund manager, the idea that ETFs provide liquidity rests on the assumption that when I experience outflows, someone else will be experiencing inflows and thus I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another way: I am depending on new money coming into the market to fund redemptions from previous investors who are exiting the market, all so that I can avoid liquidating assets that are declining in value and that I believe will be difficult to sell. There's a term for that kind of business. It's called a ponzi scheme and just like all other ponzi schemes, when the new money dries up (so, for example, when HY bond ETF flows are all headed in the wrong direction), the only way to meet redemptions is to get what I can for the assets I have and when the market for those assets is thin (as the secondary market for corporate credit most certainly is), I may incur substantial losses. 

   

  Note also that the more often ETFs are used as a way of avoiding the underlying bond market, the more illiquid that market becomes, making the situation still more precarious in the event of a panic.

  So what is a fund manager to do?

  This is where we come full circle to the emergency liquidity lines mentioned at the outset. In order to avoid tapping the underlying illiquid bond market in a situation where flows are unidirectional, fund managers may instead pay out redemptions in borrowed cash.

   

  This is, to quote Citi's Matt King, "creative destruction destroyed."

   

  Only worse.

   

   

  That is, this represents the willful delay of a long overdue episode of creative destruction layered atop another delay of the much needed Schumpeterian endgame. Stripping out the metaphysics and philosophy references, that can be translated as follows: this strategy is yet another example of delaying the inevitable. If fund managers are forced to tap these liquidity lines it likely means investors have found a reason to sell en masse and if that reason turns out to be something that permanently impairs the value of the underlying bonds (as opposed to a transitory, irrational panic) then all the funds are doing by borrowing to meet redemptions is employing leverage to stave off the recognition of losses, which is ironically the same thing (in principle anyway) that the companies whose bonds they’re holding have done to stay in business. It’s a delay-and-pray scheme designed to avoid selling the debt of companies whose similar delay-and-pray schemes have run their course.

  In closing, it's important to note that no fund manager in the world will be able to line up enough emergency liquidity protection to avoid tapping the corporate credit market in the event of panic selling in the increasingly crowded market for bond funds. 

  In other words, when the exodus comes, the illiquidity that's been chasing markets for the better part of seven years will finally catch up, and at that point, all bets are officially off.

  *  *  *

  At the end of the day, one is reminded of what Howard Marks' recently said about ETFs: 

  "[They] can't be more liquid than the underlying and we know the underlying can be quite illiquid."

  We are about to get the real-life answer to Howard Marks' more critical question: "What happens when ETF Holders all sell at once?"

  

  

  

  

  

• Paul Craig Roberts On The MH-17 Report: "Only An Idiot Would Believe It"

  Submitted by Paul Craig Roberts,

  When I read that the report on the downing of the Malaysian airliner over Ukraine was being
  put in the hands of the Dutch, I knew that there would be no investigation and no attention to the facts.

  And there wasn’t.

  I did not intend to write about the report, because Washington’s propaganda has already succeeded, at least in the Western world, in its purpose of laying the blame on Russia. However, the misrepresentation of the Dutch report by Western media, such as NPR, is so outrageous as to make the media the story and not the report.

  For example, I just heard NPR’s Moscow correspondent, Corey Flintoff, say that the missile that hit the airliner was fired by Ukrainian separatists who lack the technical ability to operate the system. Therefore, the missile had to have been fired by a Russian.

  There is nothing in the Dutch report whatsoever that leads to this conclusion. Flintoff either is incompetent or lying or he is expressing his view and not the report’s conclusion.

  The only conclusion that the report reaches is one that we already knew: if a Buk missile brought down the airliner, it was a Russian-made missile. The Dutch report does not say who fired it.

  Indeed, the report places no blame on Russia, but it does place blame on Ukraine for not closing the airspace over the war area. Attorneys have stated in response to the report that families of those killed and the Malaysian airline itself are likely to file lawsuits against Ukraine for negligence.

  Of course, there was nothing of this in Flintoff’s report.

  As I wrote at the time of the airliner’s destruction, the Western media already had “the-Russians-did-it” story ready the moment the airliner was reported to be shot down. This story was very useful to Washington in hardening its European vassal states into sanctions against Russia, as there was some dissent. What Washington has never explained and the Western media has never asked is: What motive did separatists and Russia have to shoot down a Malaysian airliner?

  None whatsoever. The Russian government would never allow such a thing. Putin would have immediately strung up those responsible.

  Washington’s story makes no sense whatsoever. Only an idiot could believe it.

  What motive did Washington have? Many. The demonization of Russia made it impossible for European governments to resist or abandon the economic sanctions that Washington is using to break economic and political relationships between Europe and Russia.

  The Russian manufacturer of the Buk missile has proven that if a Buk missile was used, it was an old version that exists only in the Ukraine military. For some years the Russian military has been equipped with a replacement version that has a different signature in its destructive impact. The damage to the Malaysian airliner is inconsistent with the destructive force of the Buk missile in Russian service. The reports were given to the Dutch, but no effort was made to replicate and verify the validity of the tests conducted by the manufacturer of the missile. Indeed, the Dutch report does not even consider whether the airliner was downed by Ukrainian fighter jets. The report is as useless as the 9/11 Commission’s report.

  Don’t expect any acknowledgement of this by the Western media, a collection of people who lie for a living.

  The reason that the West has no future is that the West has no media, only propagandists for government and corporate agendas and apologists for their crimes. Every day the bought-and-paid-for-media sustains The Matrix that makes Western peoples politically impotent.

  The Western media has no independence. An editor of a major German newspaper has written a book, a best-seller published in Germany, in which he states that not only he himself served the CIA as a reliable purveyor of Washington’s lies, but that every significant journalist in Europe does so also.

  Obviously, his book has not been translated and published in America.

  NPR, like all of Western media, has lost its integrity. NPR claims to be reader-supported. In fact, it is supported by corporations. Pay attention to the ads: “NPR is supported by xyz corporation working to sell you this or that product or service.”

  The George W. Bush regime destroyed NPR by appointing two Republican female ideologues to oversee NPR’s public function. The two Republicans succeeded in making job security, not reporting integrity, the motive of NPR journalists.

  As a person who worked with President Reagan to end the Cold War and associated nuclear threat, I am dismayed that the Western media has failed life on earth by resurrecting the prospect of nuclear armageddon.

  

  

  

  

  

• OPeRaTioN OaTMeaL…

  

  

  

  

  

• Whose FX Reserves Suffered The Most During The "China Tantrum"? Goldman Has The Answer

  In the four or so weeks after the August 11 China deval, all anyone wanted to talk about was FX reserves. 

  What most didn’t immediately realize was that China’s new FX regime would, in the short-term anyway, end up leaving less of a role for the market in determining the yuan’s exchange rate not more. This is because – and we’re fond of quoting BNP’s Mole Hau on this – “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix.” Because the market ultimately expects a much larger devaluation, the persistent pressure on the yuan caused the PBoC to have to intervene in the onshore and eventually, the offshore spot markets. That meant liquidating reserves. The sheer pace of the drawdown caught the world’s attention as suddenly, everyone woke up to what we began discussing last November when it became clear that the Saudi’s move to kill the petrodollar would lead directly to reserve liquidation across EM as commodity currencies and exporters were set to suffer from crude’s collapse. 

  Of course the yuan deval was especially bad news for emerging Asia where economies that were already suffering from slowing Chinese demand and slumping commodities were suddenly forced to grapple with a loss of export competitiveness as well. 

  Before you knew it, it was an all-out Eastern USD reserve liquidation party, leading some to ask what effect the drawdowns would ultimately have on UST yields because all else equal, FX reserve selling is just QE in reverse. As we noted on any number of occasions, this could have the effect of amplifying what would otherwise be a merely “symbolic” 25 bps Fed hike. That is, if the Fed hikes and triggers more EM outflows, well then they’ll be more USD paper selling (i.e. a loss of global liquidity) as FX managers move to support their currencies. 

  Against this backdrop, we bring you the following from Goldman who has endeavored to tally up currency intervention as a percentage of reserve money in Asia during what they’re calling the “China tantrum”. Note the rather scary looking figure for Malaysia, where it’s not just financial and economic conditions that threaten to tip the country into crisis, but a political scandal as well that has quickly mushroomed into a series of investigations across the globe that could ultimately cost PM Najib his career and legacy.

  *  *  *

  From Goldman

  When the mini-devaluation of the RMB surprised us and markets in early August, we argued strongly that this was a one-off adjustment that did not signal the beginning of a devaluation cycle. Markets disagreed and risk assets sold off hard in the weeks that followed. Asian FX was not spared amid the sell-off, with RMB proxies such as the MYR hit especially hard. There is always a challenge in reading price action in the moment, given that many Asian central banks use their official foreign exchange reserves to stabilize exchange rates. These actions are usually not known until months afterwards, when data on spot reserves and forward books become available. In this Global Markets Daily, we compile the full picture for Asian central bank intervention during what we are calling the ‘China tantrum’, the period from June to August when SHCOMP was already selling off. We compare the magnitude of reserve drawdowns to the ‘taper tantrum’, the period from June to August 2013.

  Many Asian central banks intervene not just in spot foreign exchange markets, but also in forward markets. Typically, these transactions consist of a spot/forward foreign exchange swap that results in the central bank having a forward USD asset. This kind of intervention leaves the central bank balance sheet unaffected and thus amounts to sterilized intervention. Many Asian central banks rely heavily on this kind of intervention, so it is important to factor this into the overall intervention picture. We look at the FX-valuation-adjusted decline in spot reserves between end-May and end-August (using the COFER data to adjust for valuation effects) plus the change in forward books over this period. We scale this proxy for official intervention by reserve money at the end of May, which helps control for differences in size across countries. After all, a $1bn drop in reserves is a different story for China compared with Malaysia.

  Relative to reserve money, foreign exchange intervention was most pronounced for Malaysia (43%), followed by Thailand (17%), Singapore (16%), South Korea (15%) and Indonesia (10%). Despite the seemingly large drop in China’s official reserves, this works out to be only 4% of reserve money, underscoring our view that developments there are more benign than meets the eye. Coupled with FX moves, these numbers paint a picture where depreciation pressure was most pronounced for Malaysia. With the exception of Malaysia, these reserve losses are comparable to 2013 when the ‘taper tantrum’ put depreciation pressure on currencies in the region.

  

  

  

  

  

• Moral Hazard, "Supernormal" VIX Swings, And Why August 2015 Was Just An Appetizer

  Excerpted from Artemis Capital Management letter to investors,

  True knowledge is not what you know but certainty in what you do not. Volatility is simply about putting a price on that. Drawing from the famous quote by Donald Rumsfeld, former US Secretary of Defense(20), the trader of volatility must be able to identify “known unknowns” and “unknown unknowns” while simultaneously making a market in both. Modern volatility markets know that the global economy is facing deflation… but they also know that global central banks will be right there to respond to any crisis. The single most important “unknown unknown” today is any random event that may unexpectedly cause global central banks to withdraw their stated support of markets.

  Moral hazard has contributed to a significant build up in short and leveraged volatility creating a shadow ‘volatility gamma’ that reinforces the current trend in volatility direction. Rising volatility is followed by more rising volatility and vice versa. Volatility is crushed whenever a central bank responds to crisis and thereafter leverage is re-applied in even greater amounts in a cycle of moral hazard. The pattern is creating a pro-cyclical monster of short volatility that, if left unchecked will contribute to a repeat of the May 2010 Flash Crash or 1987 Black Monday Crash.  August 2015 was just an appetizer.

  In 2012 Artemis coined the term “Bull Market in Fear” to explain a regime of volatility defined by investor's willingness to pay almost anything to shield their portfolios from the next deflationary crash. Between 2013 and October 2014 we experienced a “Bear Market in Fear” defined by a rising short volatility complex and low risk premiums for selling variance. Ever since last fall, we have entered into one last dangerous phase in the volatility cycle. Forward volatility markets no longer fade volatility out of denial; they fade volatility out of the prospect of central bank support.

  This is a new era of hyper-moral hazard whereby a central bank reaction function is fully priced into option markets. Volatility markets do not believe central banks will let us fail. 

  For evidence, consider that the VIX futures markets faded the August VIX spike by the greatest margin in history.  The graph below shows the ratio of the VIX to the market’s one-month forward expectation of the VIX. The higher the ratio the greater the market’s confidence in volatility mean reversion. August 2015 dwarfed all other crises in mean reversion expectation including October 2008, May 2010, and August 2011. The entire VIX market was essentially one large leveraged bet that central banks would respond to the crisis… and it paid off! What if it didn’t?

  

  The VIX is experiencing epileptic seizures including erratic and violent outbursts up and down at the most frequent pace in history as new sources of structural short convexity interact with interventionist policy responses to crisis. The VIX has registered a quantifiable ‘supernormal’ (five standard deviation +) move up or down every three months over the last two years. 

  In July-August 2015 alone, we experienced the single largest multi-day drawup and drawdown in the history of the VIX index. Artemis ranks consecutive drawups and drawdowns (trough-to-peak or peak-to-trough) in volatility and models them as a power law distribution.  The distributions of a wide variety of physical, biological, and human phenomena closely follow this form. Examples include earthquakes, deaths in war and terrorism, populations of cities, solar flares, word frequencies in language, movie box office receipts, and asset price movements.  When you logarithmically rank the event magnitude of these natural and human phenomena the majority of observations will align linearly along the x-axis as a power-law function (see white line below). Violations of the power-law function are supernormal events because their results contain a degree of reflexivity that exceeds the exponential growth function. Examples of supernormal violations in power laws across other phenomena include death counts in WWII ranked among all wars, box office receipts of the movie Titanic, the Titanic disaster itself, the 9.2 Magnitude 1960 Chilean Earthquake, the population of Tokyo, the 1987 Black Monday Crash, and the 9/11 terror attack in NYC. Three of the top ten supernormal VIX increases and four of the top eight supernormal VIX decreases have occurred in the last year alone! The top eight ranked drawdown collapses in VIX have all occurred during the post-2012 monetary regime. Power-law violations in VIX to the downside and upside are now happening with regularity!

  

  Volatility markets are demonstrating deep uncertainty in the very nature of uncertainty itself. The schizophrenic behavior of volatility is a deep warning sign for policy makers that something is not right. Implied Volatility-of-the VIX (“CBOE VVIX”) reached the highest levels in history on August 24th, 2015. The volatility-of-VIX rose higher than levels achieved even during the 2008 financial crisis, 2010 Flash Crash, and 2011-debt downgrade crisis.

  Many will point to structural considerations as a driver including the proliferation of VIX exchange traded products and the new spot-VIX calculation methodology. While these are important factors, they are only part of the story.

  To understand why the volatility of volatility reached new highs we have to engage in deep meta-thinking about our reaction to change. Volatility provides exposure to our collective insecurity towards an unknowable future. Likewise, to short volatility is to express personal confidence in the status quo of market affairs despite a broader fear of change. To go long volatility is to express fear that change is coming.

  Volatility-of-volatility is simply the war between these two different modes of perception… shifting perceptions in the nature of uncertainty itself. If uncertainty is rising so should the VIX… but there is a very different type of uncertainty to evaluate … the uncertainty that central banks will intervene.  When global central banks seek to defend the status quo and mean reversion it becomes increasingly difficult to accurately gauge the probability of change in markets.  Volatility markets are now gaming central banks in addition to fundamental economic and technical conditions. If we are unclear from one moment to the next whether radical change or the status quo will prevail than volatility-of-volatility should logically rise. 

  

  Volatility mean reversion has been an abnormally profitable bet during the regime of pre-emptive strikes on financial risk. Following each tail event in volatility, we are experiencing another tail event in the magnitude of volatility declines. Central banks refuse to let volatility remain elevated and are quick to react to any crisis.

  Between August and September 2015 the VIX collapsed faster than ever before following a spike to 40 (see red line below) due to another massive stimulus response by central banks.  China cuts rates, devalued the Yuan, and purchased an estimated $263bn of equity (9.2% of freely traded shares) to artificially prop-up their stock market before a nationalistic military parade. Following China, the ECB expanded their QE program.  The graph below demonstrates the historic decline in volatility by showing the average, high, and low trajectory paths of the VIX the ensuing fifteen days following every implied volatility spike to 40.

  

  Likewise, the area chart below graphs the forward probability distribution of S&P 100 implied volatility (VXO) following a breach of the 35 barrier in spot-vol.

  

  As expected, implied volatility exhibits an exceptionally positively skewed distribution following a ‘risk-off’ event, but notice how the current trajectory of VXO lies on the far left of the distribution. Central banks refuse to let volatility remain elevated but this is creating a new set of shadow risks…Global central banking has artificially incentivized bets on mean reversion.

  

  

  

  

  

• Fastenal CEO: "The Industrial Environment Is In A Recession – I Don’t Care What Anybody Says!"

  You know things might not be going particularly well when you’ve had three CEOs in the space of nine months, and that’s exactly what’s happened at nuts and bolts maker Fastenal which named current CFO Daniel Florness to the top spot on Tuesday.

  The move came after the company reported meager top and bottom line results for Q3 this week. 

  It’s not very difficult to understand why the company’s business has come under pressure. The slump in crude prices has put an enormous strain on its energy-related operations. Here’s some color from Credit Suisse who notes that in September, Fastenal saw its first Y/Y sales decline since 2009:

  Not surprising, FAST indicated the industrial outlook has deteriorated in particular during the month of September. In fact, September, was the first month since 2009 in which FAST experienced y/y declines. Along with the stronger dollar, FAST noted continued oil and gas headwinds, and heavy manufacturing. By geography, Texas took a step down and FAST noted slowing growth in Canada. Of FAST’s top 100 customers, 44 saw top line declines. Of the 44, 32 were negative by more than 10% and 17 were negative by more than 25%. FAST does not expect to see any improvement for the next several quarters and believes the industrial environment is in a recession.

  Now hilariously, Credit Suisse somehow managed to take that strikingly bad assessment and turn it into this title: “SteadFAST In the Face of Adversity.” But hey, it’s the sellside so it’s not like they were going to tell you to sell it. 

  Anyway, what struck us was the rhetoric on the call, especially the retort from new CEO Daniel Florness when William Blair analyst Ryan Merkel (no relation to any “pure hearted” German “lion mothers”) made the mistake of calling the current environment “non-recessionary”:

  Merkel: Then just lastly, Fastenal growing zero percent here in September and in a non-recessionary environment, it’s pretty surprising, I think, for a lot of us. But if we just step back and we think about quantifying some of the headwinds, and I don’t want to put words in your mouth but it seems to me, oil and gas customers are probably down, what, 30% this year. It might be a 3% headwind to sales. And then what about exports? I’ve got to think that’s an even bigger impact, but you tell me – and we’ve also got FX as a one-point headwind.

   

  Florness: Yeah, a couple things. First off, the premise of the question, I would argue that anybody selling into the industrial market is not selling into a non-recessionary environment. We are–

   

  Merkel: I agree. I agree with you there.

   

  Florness: The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month. 

   

  Right now in the third quarter, 44 of our top 100 customers are negative. We have not lost any business with that group. They are negative in their spend. In some cases, they are negative because their business is very negative and they are somewhat negative with us. 

   

  Of that 44 that were negative, 32 of them were negative more than 10%. Of that 44 that’s negative, 17 of them were negative more than 25%. That’s a sign of a recessionary environment.

  So, two very simple, yet very critical takeaways:

  • the industrial sector is in a recession,
  • whatever you do, do not suggest to Dan Florness that Fastenal’s lackluster performance is related to anything other than the pitiable condition of the US economy

  

  

  

  

  

• Russia Sends Its Only Aircraft Carrier To Syria, Signals It Is Just Getting Started

  As should be abundantly clear by now, The Kremlinis adopting a “slightly” different strategy when it comes to combatting terror in the Mid-East than that adopted by the US and its Western and regional allies. 

  The strategy of the US and its allies seems to go something like this: 1) covertly arm and train groups who you know might ultimately become terrorists because arming and training these groups may be a way to destabilize unfriendly regimes, 2) wait for blowback, 3) launch serious effort to combat terror if unfriendly regime has been “successfully” replaced by puppet government, or launch half-hearted effort to combat terror if situation still fluid and regime still clings to power. 

  Obviously, that strategy is prone to all types of problems, and sensing that the US and its allies might have finally met their foreign policy blunder Waterloo in Syria, Russia decided to call everyone’s bluff by launching a real war on terror. Of course, this war conveniently restores the regime of one of Moscow’s allies, but in the end the result is the same: anyone who is a terrorist and who is also fighting Assad in Syria is in for big trouble because Russia is using this is as an opportunity to reassert itself on the world stage and also to fire up a long-dormant military juggernaut. 

  Now, on the heels of hundreds of airstrikes accompanied by dramatic video footage as well as cruise missile attacks launched from Russian warships in the Caspian, The Kremlin is sending its lone heavy aircraft carrier into the fight. This is only the ship’s sixth deployment in history. 

   Here’s more from Flashnord (Google translated):

  Heavy aircraft carrier (heavy aircraft), “Admiral Kuznetsov” is Russia’s only aircraft carrier, the weekend will go from Murmansk to the shores of Syria, said FlashNord source in the Northern Fleet command.

   

  “The cruiser dock repair completed until the end of the week go to the coast of Syria, where he joined the operation to destroy the group” Islamic State “,” – a spokesman said.

   

  According to him, from May to August this year was held aircraft carrier dock repair 82 Shipyard in Roslyakovo (Murmansk region). Then, on a regular docked in Murmansk, he walked up to the restoration of full combat readiness.

   

  Since September 30, Russia carries out air operations in Syria with the aim of destroying the objects of the “Islamic state.”

  Here are some images:

  

  

  

  Here’s a bit of color via Reuters from earlier this year. Notably, the Kuznetsov isn’t known for being in particularly great working order which probably makes the chances of some kind of accident that much greater:

  When the Soviet Union launched Kuznetsov in 1985, it was a major technical accomplishment for the then-superpower. Moscow began assembling Varyag, a sister ship of Kuznetsov, around the same time. It also started work on a true full-size carrier, as big as anything the United States builds.

   

  But the Soviet Union’s collapse in 1991 abruptly halted the carrier program.

   

  Russia was left with Kuznetsov as its sole flattop and, deprived of funds and Ukraine’s assistance, has struggled to keep the vessel in working condition. Since the ship was commissioned into frontline service in the early 1990s, Kuznetsov has deployed just five times. Each deployment, lasting between three and six months, saw the flattop sail from its home port in northern Russia around Europe and into the Mediterranean as a show of force and to demonstrate support for Russia’s allies in the region, including Syria.

  

  

  

  

• "A Generation In Crisis" – The World Needs 5 Million Jobs/Month To Stymie Youth Extremism

  For over 3 years we have pointed out that the surging youth unemployment was Europe's (if not the world's) scariest chart, because the last thing Europe needs is a discontented, disenfranchised, and devoid of hope youth roving the streets with nothing to do, easily susceptible to extremist and xenophobic tendencies: after all, it must be "someone's" fault that there are no job opportunities for anyone. Well, as Bloomberg reports, The World Bank has an unsettling message for young people around the globe: unless we create 5 million jobs a month, the situation is going to get worse.

  As The World Bank notes, Unemployment in any form is a drag on an economy and society.

  It undercuts productivity, spending, and investment, stunting national growth. It contributes to inequality and spurs social tension. Joblessness and inactivity and the failure to tap into the economic aspirations and resources of young people carry an even higher price.

   

  As prospects dwindle, many face social exclusion, or see their emotional, mental, or physical health deteriorate.

   

  …

   

  Young people account for roughly 40 percent of the world’s unemployed and are up to four times more likely to be unemployed than adults.

   

  …

   

  When young people are not fully participating in the labor force or are NEETs, governments forgo tax revenue and incur the cost of social safety nets, unemployment benefits and insurances, and lost  roductivity. Businesses risk losing a generation of consumers. Social costs are ever mounting as well. The Arab Spring and subsequent youth-led uprisings in many countries, along with the rise of economic insurgency and youth extremism, demand that we explore the links between economic participation, inequality, and community security, crime, and national fragility through a lens focused on youth. What we see is a generation in economic crisis.

   

  Over the next decade, a billion more young people will enter the job market—and only 40 percent are expected to be able to enter jobs that currently exist. The global economy will need to create 600 million jobs over the next 10 years: that’s 5 million jobs each month simply to keep employment rates constant.

  In other words, even with that 'growth' we are going nowhere!!

  

   

  As Bloomberg reports,

  The youngest workers have been hit hardest by the financial crisis and the global recession of the last decade because they often held the temporary jobs, which offer less protection. The youth unemployment rate is projected to be 13.1 percent in 2015, compared with 4.5 percent for adults, according to the ILO.

   

  Global employers are looking not only for technical and academic skills, but also such qualities as being open, responsible or organized, …Young workers are often either overqualified or underqualified for their jobs, it said.

   

  "In emerging economies that are progressively more service-based, employers find a workforce population that lacks necessary skills," the report said. "Elsewhere, the problem is that many of the unemployed are highly educated but the market demands different competencies or more technical or vocational skills."

   

  At stake is the well-being of the entire global economy. Without an income, millions of young people slump into poverty. By delaying their entry into the workforce or accepting low-paying jobs, many limit their lifetime earning potential. When young people don't work, governments don't get the tax revenue and businesses fail to gain customers.

   

  "Social costs are ever mounting as well," the report said, citing youth-led uprisings in many Arab countries and the rise of economic insurgency and youth extremism. "What we see is a generation in economic crisis."

  *  *  *

  Full World Bank Report below…

  Toward Solutions for Youth Employment Full

  

  

  

  

  

• A Third Of All Containers Shipped From Long Beach Port Are Empty

  In the past several months, it has been virtually impossible to make any sense of the conflicting trends involving US and global trade. On one hand, there is global trade, which as we have covered since the spring, has been in a state of consistent decline. Some example of this:

  • World Trade Slumps By Most Since Financial Crisis
  • Something Just Snapped: Container Freight Rates From Asia To Europe Crash 23% In One Week
  • Global Trade In Freefall: Container Freight Rates From Asia To Europe Crash 60% In Three Weeks
  • South Korea Exports Crash Most Since 2009

  And of course China’s terrible trade data for the past 5 months, which has seen the longest stretch of import declines since the financial crisis.

  In short: only an economist, either a tenured one or one employed by CNBC, is unable to see that the world is sinking into a global trade recession, with a economic one soon to follow.

  Where things get more complicated, however, is when looking at the US. Here, macro data throughout the summer had suggested more or less smooth sailing in the trade space, and it was only a week ago that the facade started to crack, following the ugly advance trade report, when as we reported there was a “16% Surge In August Trade Deficit; Imports Jump As Exports Drop.”

  But what really confused us, and others, was the “micro” reports from the ground. Take the following article from Bloomberg in September, in which we read that “Record Long Beach Port Traffic Shows Strength in U.S. Demand.” Some more details:

  The Port of Long Beach — which is poised to overtake neighboring Los Angeles next year to become the No. 1 shipping gateway in the country — had a record month in July, with cargo volume up 18 percent from July 2014. Figures being released later this month will show unprecedented traffic again in August, and early signs in September are “very very encouraging,” Jon Slangerup, the Long Beach port’s chief executive officer, said in an interview at Bloomberg’s offices in New York last week.

   

  Overall, the two ports are handling 4 percent more cargo this year than last, Slangerup said. With consumers showing no letup, he predicted a record year for Long Beach in 2015, taking out pre-recession highs set in 2007. West Coast ports are poised to regain share lost earlier in the year, when backlogs led clients to divert cargo to East Coast destinations like Savannah, Georgia, he said.

  The article’s punchline:

  “When you look at the macros, you look at unemployment, consumer confidence, savings, available discretionary spending, all of those numbers suggest that we have more to spend,” Slangerup said. “The economy here is super strong relative to the rest of the world, and the strongest I’ve seen it in a very long time.”

  As it turns out, the economy was neither “super strong”, nor was “unemployment, consumer confidence, savings, or available discretionary spending” suggesting that we have more to spend. In fact just the opposite, because thanks to the WSJ we can now reconcile the seeming discrepancy between slowing macro and booming micro, at least as manifested by “record” west coast port traffic.

  According to the WSJ, “shipments of empty containers out of the U.S. are surging this year, highlighting the impact the economic slowdown in China is having on U.S. exporters. The U.S. imports more from China than it sends back, but certain American industries—including those that supply scrap metal and wastepaper—feed China’s industrial production.”

  The magnitude of the shipping container “contagion” is stunning: in September, the Port of Long Beach handled a near record 197,076 outbound empty boxes. “They accounted for nearly a third of all containers that moved through the port last month. September was the eighth straight month in which empty containers leaving Long Beach outnumbered those loaded with exports.“

  As the chart below shows, the situation at LA and Long Beach is so dire, the amount of empty container has surpassed the 2008 crisis period, and is about to take out the all time highs from the peak of the 2006 credit bubble:

  

   

  And here is the “record” West Coast port traffic in all its unglory: as noted above, empty containers now amount to a third of all West Coast port traffic in the US.

  

   

  What is an empty container? The WSJ explains that after under normal conditions, containers filled with consumer goods are delivered to the U.S. and unloaded, they return to export hubs. There, they typically are stuffed with American agricultural products, certain high-end consumer goods and large volumes of the heavy, bulk refuse that is recycled through China’s factories into products or packaging.

  Not any more:

  Last month, however, Long Beach and the Port of Oakland both reported double-digit gains in exports of empty containers. So far this year, empties at the two ports are up more than 20% from a year earlier.

  A big reason for the collapse in trade is the strong dollar: the empties are shipping out at a faster rate at many U.S. ports, particularly those closely tied to trade with China, while shipments of containers loaded with goods are declining as exporters find it tougher to make foreign sales. That’s at least partly because the strong dollar makes American goods more expensive.

  The problem is spreading:

  Outbound empties have mounted this year at other big gateways, too. In August, the Port of Los Angeles, the country’s largest single container port, handled more than 225,000 empty outbound containers, counted in twenty-foot equivalent units, a standard maritime industry measure. That was 21% more than a year earlier. The Port Authority of New York and New Jersey expanded its empty-container exports nearly 31.5% in the first eight months of this year, and empties outnumbered loaded container exports over that time.

  Suddenly the discrepancy between the ugly macro data and the

  Dollar-based or not, the end result is the same – global trade channels are rapidly slowing down.

  And it is not just empty containers that are being shipped out: overall containerized exports are also tumbling: “Long Beach’s containerized exports were down 8.2% this year through September, while Oakland’s volume of outbound loaded containers fell 12.7% from a year earlier in the January-September period.”

  This data certainly puts that “record” Long Beach port traffic in a different perspective. Others admit the same:

  “This is a thermometer,” said Jock O’Connell, an international-trade economist at Beacon Economics. “The thing to worry about is if the trade imbalance starts to widen.”

  It is starting to widen: the U.S. trade gap has expanded sharply in recent months as exports have slipped, growing 15.6% in August to a seasonally adjusted $48.3 billion, according to the Commerce Department. U.S. exports fell 2% in the month to their lowest level since October 2012.

  And as a reminder, net trade feeds directly into GDP, so the next time an idiot tells you that there are no direct linkages or contagion choke points between China and the US, feel free to take them to the Long Beach and show them the thousands of empty boxes whose contents one can label  simply as “recession”.

  There is, however, a silver lining: if the containers remain empty, and once the US slides back into depression, they can always be used for housing, just like now in San Francisco’s unicorn bubble mania.

  

  

  

  

  

• "China Has No Reason To Rush To The Frontlines": Beijing Denies Syria "Rumors"

  In the weeks since Moscow joined the fight in Syria, in the process lending Iran’s ground troops a rather powerful hand in the form of airstrikes by the Russian air force juggernaut, there have been two questions on everyone’s mind, i) how would Washington respond?, and ii) will China get involved? 

  As for the first question, the US has responded in the only way they could given the situation the West and its allies got themselves into: with a confused message about how the US can’t accept Russia’s invite to coordinate efforts because somehow Moscow’s involvement is going to create more terrorism. 

  With regard to the China, early reports indicated that Beijing was indeed considering some manner of military “support.” For instance, late last month the pro-Assad Al-Masdar news said the following:

  On Tuesday morning, a Chinese naval vessel reportedly traveled through Egypt’s Suez Canal to enter the Mediterranean Sea; its destination was not confirmed.

   

  However, according to a senior officer in the Syrian Arab Army (SAA) that is stationed inside the Syrian coastal city of Latakia, Chinese military personnel and aerial assets are scheduled to arrive in the coming weeks (6 weeks) to the port-city of Tartous – he could not provide any more detail.

  Three days later, Pravda reported that “according to Russian Senator Igor Morozov, Beijing has taken decision to take part in combating IS and sent its vessels to the Syrian coast.”

  “It is known, that China has joined our military operation in Syria, the Chinese cruiser has already entered the Mediterranean, aircraft carrier follows it,” Morozov allegedly said.

  Needless to say, if China were to join Russia and Iran in support of Assad in military operations against anti-regime elements, it would be a further embarrassment for Washington which is keen to pretend that it can counter what’s been pitched as military aggression on Beijing’s part in the South China. That is, were China to go into Syria while the US stood by and watched, it would send a message to Washington’s regional allies in the South Pacific that other than promising to send some ships to sail around the Spratlys, there’s really not much the Pentagon can or at least is willing, to do.

  But China is well aware that a dying hegemon is still a hegemon and while Beijing has made great strides over the past several years in terms of raising its presence on the world stage, simply invading Syria at the drop of a hat is a move that seems a bit too crass for Xi Jinping given his recent trip to the US and desire to promote social stability at home.

  Predictably, the Chinese are now out denying the Syria “rumors”. Here’s Reuters:

  China said on Wednesday it had no plans to send military ships to Syria to fight with Russian forces after reports in overseas media that it was planning to do so.

   

  Chinese media has picked up Russian and Middle Eastern news reports that China would fight alongside Russia in

   

  Syria, and that China’s sole aircraft carrier, the Liaoning, could participate too.

   

  Chinese media has also described these reports as speculative nonsense.

   

  Foreign Ministry spokeswoman Hua Chunying, when asked if China had or would send forces to Syria, told a daily news briefing that she had also noticed the reports.

   

  “I can tell you that as for China’s warships, for example the Liaoning, whether it has gone to join, for this issue, as far as I know, there is no such plan. At this time the Liaoning is in a phase of carrying out technical training and military exercises.”

   

  The Global Times, an influential tabloid run by the ruling Communist Party’s official People’s Daily, said in an editorial on Wednesday it was “unfounded rumour” that China would interfere militarily in Syria.

   

  “It’s not China that brought chaos to Syria, and China has no reason to rush to the frontlines and play a confrontational role,” it said.

  Remember, China has voted with Russia on the Security Council when it comes to Syria and there is no question which side Beijing supports. 

  Also, note that while the Politburo’s mouthpiece may have dismissed the reports as “speculative nonsense”, the other language there isn’t quite as committal and as we saw in Yemen, the PLA occasionally shows up out of the blue in surprising places. Besides Yemen, we’ve seen a plethora of examples this year of the PLA navy actively seeking to showcase China’s maritime prowess including a pass by the Alaska coast, the planned deployment of a nuclear sub, and of course the creation of 3,000 acres of new sovereign territory in the Spratlys. As brazen as it most certainly would be, another great way to make a splash (no pun intended), would be to send an aircraft carrier to Syria. 

  We’ll leave you with the following headline from Interfax:

  • CSTO, Iran, China agree on joint counteraction to ISIL

  *  *  *

  Maybe they’ll just send the girls from Fiery Cross…

  

  

  

  

  

  

• Oct 15 – US 10-year yields fall below 2% amid weak economic data

  EMOTION MOVING MARKETS NOW: 35/100 FEAR

  PREVIOUS CLOSE: 38/100 FEAR

  ONE WEEK AGO: 37/100 FEAR 
  ONE MONTH AGO: 13/100 EXTREME FEAR

  ONE YEAR AGO: 2/100 EXTREME FEAR

  Put and Call Options: FEAR During the last five trading days, volume in put options has lagged volume in call options by 27.55% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 18.03. This is a neutral reading and indicates that market risks appear low.

  Stock Price Strength: FEAR The CBOE Volatility Index (VIX) is at 18.03. This is a neutral reading and indicates that market risks appear low.

   

  PIVOT POINTS

  EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY 
  

  S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)

  EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)

  CRUDE OIL (CL) | GOLD (GC) | 10 YR T NOTE | 2 YR T  NOTE | 5 YR T NOTE | 30 YR TREASURY BOND| SOYBEANS | CORN

   

  MEME OF THE DAY – WHEN DR. T SPEAKS…

   

  UNUSUAL ACTIVITY

  VXX OCT WEEKLY4 21.5 CALLS7K+ @$.58

  LOCK NOV 8 PUT Activity on the BID side

  LULU NOV 55 CALL Activity 2500 block @$1.20 on offer

  EDGE SC 13D Filed by NEW LEAF Ventures .. 8.2%

  TROX .. SC 13G Filed by Putnam Investments .. 13.2%

  More Unusual Activity…

  HEADLINES

   

  PBOC dismisses talk its engaging in QE –Sec Journal

  Fed’s Beige Book: Economic activity continued to expand modestly

  Atlanta Fed GDPNow Tracker: 0.9% (prev. 1.0%)

  US CBO: Extraordinary measures seen lasting until H1 of Nov

  US House Bill raising debt ceiling possible before Boehner retirement –Rtrs

  US 10-year yields fall below 2% amid weak economic data

  Walmart: Our profits are going to fall next year

  Bank of America Swings to 3rd-Quarter Profit

  Wells Fargo Profit Edges Up for Quarter

   

  GOVERNMENTS/CENTRAL BANKS

  Fed’s Beige Book: Economic activity continued to expand modestly

  Atlanta Fed GDPNow Tracker: 0.9% (prev. 1.0%)

  Fed rake hike bets disappear further into 2016 –FT

  US House Bill raising debt ceiling possible before Boehner retirement –aide cited by Rtrs

  US CBO: Extraordinary measures seen lasting until H1 of Nov, debt limit may need to be increased earlier or later –BBG

  COMMENT: What a vanishing Fed hike means for the ECB, BoJ –FT

  PBOC dismisses talk its engaging in QE

  Germany cuts 2015 GDP forecast to 1.7% vs 1.8% prev –ForexLive

  UK FCA issues warning against unauthorized FX firm SMP Forex –ForexLive

  Japan’s Amari says it’s too soon to be speaking about new stimulus –ForexLive

  FIXED INCOME

  US 10-year yields fall below 2% amid weak economic data –CNBC

  Bonds rally as US consumers have sluggish September –FT

  UBS Sees Sovereign Assets Shrinking by $1.2 Trillion –BBG

  NY Fed Blog: Dealers play important role in the intertemporal intermediation of Treasury supply

  FX

  USD: Pain for dollar bulls as US retail sales underwhelm –FT

  EUR, JPY: EUR, JPY strengthen vs USD after Fed’s beige book –ForexLive

  GBP: Pound boosted by strong jobs data –BBC

  SGD: Singapore Central Bank Eases Policy by Adjusting Currency Band –BBG

  ENERGY/COMMODITIES

  CRUDE: Oil down again; global glut worry offsets US output drop –Rtrs

  METALS: Gold rises to 3 month high –cnbc

  EQUITIES

  EARNINGS: Walmart: Our profits are going to fall next year –BI

  EARNINGS: Bank of America Swings to 3rd-Quarter Profit –NYT

  EARNINGS: Wells Fargo Profit Edges Up for Quarter –NYT

  EARNINGS: BlackRock Reports Lower Profit as Assets, Fees Drop –WSJ

  EARNINGS: Delta Beats Profit Estimates With Boost From Falling Fuel –BBG

  BANKS: US authorities examine Goldman Sachs role in 1MDB transactions –WSJ

  BANKS: Moody’s: 5 US regional banks’ credit pressured by low oil and gas prices; outlook negative

  BANKS: M&A boom still a bright spot for US banks –FT

  BANKS: UK banks may need billions of pounds in added capital –Sky

  TECH: Twitter names ex-Google executive Kordestani chairman –Rtrs

  Acquisitions bring Canon’s 5 trln-yen sales target back into view –Rtrs

  CONS DISC: PriceLine agrees to room-booking deal with TripAdvisor –Rtrs

  M&A: US yearbook maker Jostens sold for $1.5bn –FT

   

  JOBS: France asks Air France to drop job cut plans –BBG

  

  

  

  

  

• The "Other" Shoe About To Drop

  A long way down…

   

  

   

  Source: Investors.com

  

  

  

  

  

Digest powered by RSS Digest

• Democratic Debate Post Mortem (In 1 Poignant Image)

  Sanders by a landslide…

  In the Polls..

  Drudge…

  

  CNN…

  

   

  In Searches…

  .@BernieSanders leads @HillaryClinton in @google search interest since the start of the #DemDebate pic.twitter.com/VmJzL3eNwK

  — Google Politics (@googlepolitics) October 14, 2015

   

  And On Twitter…

  Who’s gained the most Twitter followers since #DemDebate started: · Sanders: 28,446 · Clinton: 10,474 · O’Malley: 3,762 · Webb: 2,612

  — Dan Diamond (@ddiamond) October 14, 2015

   

  Who’s gained more Twitter followers during the #DemDebate, by percentage? · Sanders: +4.0% · Clinton: +0.2%

  — Dan Diamond (@ddiamond) October 14, 2015

  *  *  *

  So to sum up…It's lonely sometimes…

  

   

  As an alibi? https://t.co/4NvufALDeu

  — zerohedge (@zerohedge) October 14, 2015

   

  *  *  *

  Some key excerpts…

  Jane Wells summed up one exchange perfectly as Hillary's alleged law-breaking was conveniently swept under the carpet…

  Line of the night from Sanders: "The American people are sick and tired of your damn emails." Oh, really…

  — janewells (@janewells) October 14, 2015

  And the second line of the night: "Secretary Clinton do you want to respond?" "no."

  — janewells (@janewells) October 14, 2015

  And Benghazi won the early rounds…

  #debatedrinkinggame leaders: Benghazi- 5? 1%-5 billionaires/wealthy-4 working/avg American-4 and late add: Quagmire-4

  — janewells (@janewells) October 14, 2015

  But Wall Street "won" overall…

  Theme of the night: "Wall St"said about 12 times at least. "Billionaires" – 7, "working people" – 7, "1%" – 6.

  — janewells (@janewells) October 14, 2015

  Hillary and her average-American-ness…

  

  “I’m just an ordinary citizen who didn’t take a position on Keystone until I took a position on Keystone.” pic.twitter.com/l2k24PVF72

  — Dan Diamond (@ddiamond) October 14, 2015

  On College education affordability (and pretty much everything else)…

  "You get free debt and you get free debt and you get free debt"

  — zerohedge (@zerohedge) October 14, 2015

  

  

  

  

  

• Gold Jumps As China Devalues Yuan By Most In 2 Months, "Boosts Reforms" Of Corporate Bond Bubble

  AsiaPac stocks are extending losses in early trading asit appears our fears about the Chinese coporate bond market bubble are also on the minds of Chinese regulators as they look to "boost reforms." After the PBOC has fixed the Yuan stronger for 8 straight days, the onshore and offshore Yuan has weakened appreciably in the last 24 hours and PBOC has devalued Yuan by 177pips  – the biggest in 2 months (as PBOC researchers push to "speed up Yuan internationalization" and implicitly inclusion in the SDR basket).

   

  Gold jumped on the Yuan devaluation…

  

   

  AsiaPac stocks are lower again…

  

  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 0.5% TO 3,400
  • *MSCI ASIA PACIFIC INDEX DROPS 1.4%, EXTENDING DECLINE

  As fears rise of a bubble in Chinese corporate bonds…

  

  Reform it!

  • *CHINA TO BOOST CORPORATE BOND MARKET REFORM: 21ST HERALD

  Good luck, as Commerzbank's Zhou concludes…

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

  *  *  *

  The Yuan has been 'fixed' stronger for 8 straight days… but tonight PBOC devalues Yuan by 177pips – the most in 2 months

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3408 AGAINST U.S. DOLLAR
  • *CHINA WEAKENS YUAN FIXING MOST SINCE AUG. 13

  

  And PBOC reseeacrhers are pushing for rapid internationalization of Yuan (and inclusion in the SDR basket)… beginning their paper with the rather USD reserve Currency Status challenging statement:

  World History tells us that economic power is necessarily financial power, only to become the financial powerhouse before it can become an economic power.

  China must speed up yuan internationalization to develop the finance industry, PBOC research bureau head Lu Lei writes in People’s Daily.

  • The yuan needs to be included in the SDR basket, Lu writes
  • China’s current financial structure is dominated by indirect financing and doesn’t make enough sense, Lu writes
  • China should further improve stock market and increase the proportion of equity financing, Lu writes

  Financial power is the inevitable direction of sustainable development of economic power

  Charts: Bloomberg

  

  

  

  

  

• What You're Supposed To Think Vs What You Think

  Authored by Jon Rappoport,

  I could trace my 30 years of investigative reporting as one long project emanating from what people are supposed to think.

  What they’re supposed to think about nuclear weapons, pesticides, medical drugs, vaccines, presidential elections, major media, the CIA, US foreign policy, mega-corporations, brain research, collectivism, surveillance, psychiatry, immigration…

  In each case, there are a set of messages broadcast to the population. These messages are projected to replace what people would think on their own, if left to their own devices.

  And in many cases, these messages have the same underlying theme: feel unlimited sympathy.

  Feel unlimited sympathy or else.

  In the area of immigration, for example, people are supposed to welcome endless numbers of refugees to their shores and cities and towns.

  If they don’t put out the welcome sign, they’re evil, they’re cold, they’re “capitalists,” they’re unloving, they’re cruel, inhumane.

  They’re immune to proper feelings of guilt and shame.

  There is also an interesting guilty “we” attached to the issue. “We” invaded other countries, “we” bombed populations, imposed devastating economic sanctions, launched corporate takeovers—and therefore “we” should now open our doors to these refugees.

  The government didn’t do these things. The State didn’t do these things. “We” did.

  “We” is a very, very popular collectivist concept. It assigns massive guilt, while somehow exonerating the political leaders of the collective.

  “We” is a great cheese glob that envelops all of us. “We” is a metaphysical construct that replaces “I.” There is no “I.”

  Therefore, what some “deluded individual” might think and decide and determine on his own—which could very well run counter to the “we”—is irrelevant.

  When it’s time to undertake wars on a grand scale, there is a George Bush who announces what the “we” wants. And when it’s time for the guilt and the sympathy and the bleeding heart, there is an Obama who announces what the “we” wants.

  In general, the “we” is there to convince the individual that he is useless and powerless against the advancing cheese glob. He need not bother thinking what he really thinks, because it would make zero difference. Much better to become part of the “huddled mass,” waiting for instructions on how best to serve humanity.

  Logic, rational consideration, the ability to analyze a line of thought and find flaws and gaps and deceptions? An outmoded concept that doesn’t apply to the “we.”

  You see, the “we” is something quite different. It proceeds by a) committed aggression or b) endless sympathy, depending on what is called for by our leaders.

  It moves like inexorable lava slowly leaking away from a volcano. The glob.

  It needs no individual intelligence. Making distinctions is unnecessary.

  And, one thinks, perhaps the solution to this wretched state of affairs is finding a different “we” to belong to. That will solve the whole problem.

  But the underlying solution, as formidable as it may seem, is: dismantle the whole “we.” Expose it for what it is. And reinstate the individual and what he does think, as opposed to what he should think.

  The cheese glob, the lava glob, the advancing fungus is the false construct. It was put there and massaged and stimulated to engage the individual and make him think he was excessively “privileged.” He was an outsider who couldn’t see the need and the joy of “belonging.”

  He was behaving like a criminal, even a terrorist. He was detracting from the power and the warmth and the humanity of the collective hearth.

  What most people take to be Reality is actually invented for the “we.”

  And to take all this a step further, Reality is meant to distract the individual from discovering the depth of his own power, which is to say, creative power.

  Every organized religion, every State, every so-called spiritual system and philosophy is built to derail the individual in this way.

  After all, Reality points to itself. Reality says, “Look at this. Look at me. Understand me. This is what you need to focus on. This is all there is.”

  And so it seems the main attribute of the individual is “perceiving what is.” Perceiving Reality.

  However, detaching one’s self from that prescription reveals another opportunity, vast in its possibilities:

  The ability to analyze the “we” and its many messages and discover what they are and how they are designed—and the capacity to imagine and invent new independent realities without end.

  The scope and range of what the individual can do, in this regard, is limited only by: what he can imagine.

  The psyop of all psyops seeks to bury this fact.

  

  

  

  

  

• "Mommy, Am I Gonna Die?": Cop Aims For Dog, Shoots 4 Year Old, After Injured Mom Calls 911

  To Protect and Serve? When Whitehill resident Andrea accidentally cut her arm on glass, her sister frantically called 911, "I need a paramedic." Columbus Police Officer Jon Thomas responded to the house where he pulled out his gun and shot toward the family's dog (which he claims ran toward him), missed, and hit Andrea's four-year-old daughter Ava in the leg, shattering her bone.

  As The Columbus Dispatch reports, Andrea also revealed that the cop never apologized or asked if Ava was okay and immediately left after shooting her.

  A Columbus police officer accidentally wounded a 4-year-old girl in Whitehall on Friday when he fired at a charging dog, police said.

   

  A neighbor and the girl’s uncle identified her as Ava Ellis, who was taken to Nationwide Children’s Hospital, where police said she was in stable condition.

   

  The officer was at a house in the 4100 block of Chandler Drive investigating a hit-and-run case about 3:10 p.m., Columbus police spokeswoman Denise Alex-Bouzounis said.

   

  As the officer was walking from the home to his patrol car, a woman a few houses away called out to him, saying her sister and the girl’s mother, Andrea Ellis, had cut herself.

   

  The officer was at the doorway when a dog charged at him, Alex-Bouzounis said.

   

  The officer fired once, missing the animal but striking the girl in the right leg. It was unclear whether the girl was hit directly or by a ricochet. The officer has not been identified.

  Neighbors say the officer walked back to his patrol car after the shooting.

  “He seemed a little disoriented, like he was really bothered,” said Norman Jones, who called the police after hearing the shot. Columbus and Whitehall police arrived at the scene shortly afterward.

   

  “Mommy, am I gonna die?” four-year-old Ava Ellis asked her mother.

  The family created a Facebook page for Ava.

  

   

  As Salon reports, her mother Andrea wrote her account of the incident in a post. She names the police officer who shot her child, Jonathan Thomas, and says that, as soon as he saw the dog, who was eight to 10 feet away from him, he fired — in the direction of her eight-year-old niece and Ava.

  Officer Thomas claimed that the dog charged at him, but Andrea’s sister Brandie denies this, and says the pet was in the house when he shot at it.

   

  Andrea also revealed that the cop never apologized or asked if the four-year-old was okay and immediately left after shooting her. Neighbors have corroborated this account. Ava’s mother wrote:

   

  “Officer Thomas then told my sister to stop yelling at him and walked back to his vehicle. Officer Thomas never said sorry, never said it was an accident, never said that he called for help or was going to call for help, never asked if Ava was ok, and never asked if he could check on Ava. Officer Thomas went back to his vehicle and started to pull away. My neighbors have even verified that he started pulling away before any help was there. Officer Thomas shot Ava and left knowing he shot Ava and not knowing the condition she was in.”

  The young girl was taken to a nearby hospital, and is in stable condition. The Inquisitr reported that Ava started school in a wheelchair, and may walk with a limp for the rest of her life… and will likely forever mistrust the police…

   

  

  

  

  

  

• It Begins – Managed High Yield Bond Fund Liquidates After 17 Years

  Since inception in June 1998, UBS' Managed High Yield Plus Fund survived through the dot-com (and Telco) collapse and the post-Lehman credit carnage but, based on the press release today, has been felled by the current credit cycle's crash. After 3 years of trading at an increasingly large discount to NAV, and plunging to its worst levels since the peak of the financial crisis, the board of the Fund has approved a proposal to liquidate the Fund. While timing is unclear, this is the worst case for an increasingly fragile cash bond market as BWICs galore are set to hit with "liquidty thin to zero."

   

  Having survived 17 years…

  

   

  It's Over… (as The Fund Statement reads):

  Managed High Yield Plus Fund Inc. (the "Fund") (NYSE:HYF) announced today that the Board of Directors (the “Board”) of the Fund has approved a proposal to liquidate the Fund in 2016, subject to shareholder approval.

   

  After careful deliberation and a thorough review of the available alternatives, and based upon the recommendation of UBS Global Asset Management (Americas) Inc. (“UBS AM”), the Fund’s manager, the Board has determined that liquidation and dissolution of the Fund is in the best interests of the Fund. A proposed plan of liquidation will be submitted for the approval of the Fund’s shareholders at a special shareholders meeting of the Fund, which will be scheduled to be held in April 2016. If the shareholders approve the proposed plan, the liquidation and dissolution of the Fund will take place as soon as reasonably practicable, but in no event later than December 31, 2016 (absent unforeseen circumstances).

   

  Further information regarding the liquidation proposal, including the plan of liquidation, will be included in the proxy materials that will be mailed to the Fund’s shareholders in advance of the shareholders meeting.

  *  *  *

  This is a nightmare for the corporate credit market, where, as we noted previously "liquidity is thin to zero."…

  …discussing illiquid corporate credit markets is easier if you find yourself among polite company. You see, the lack of liquidity in the secondary market for corporate bonds is a somewhat benign discussion because although it unquestionably stems from a noxious combination of regulatory incompetence and irresponsible monetary policy, myopic corporate management teams and the BTFD crowd, not to mention ETF issuers, have also played an outsized role, so there’s no need to lay the blame entirely on the masters of the universe who occupy the Eccles Building and on the "liquidity providing" HFT crowd that’s found regulatory capture to be just as easy as frontrunning.

   

  But while explanations for the absence of liquidity vary from market to market, the response is becoming increasingly homogenous. Put simply: market participants are simply moving away from cash markets and into derivatives. Where market depth has disappeared, it’s become increasingly difficult to transact in size without having an outsized effect on prices. This means that for big players – fund managers, for instance – selling into ever thinner secondary markets is a dangerous proposition. And not just for the manager, but for market prices in general.

  In Treasury markets, traders have turned to futures to mitigate illiquidty… 

  

  …while corporate bond fund managers utilize ETFs and other portfolio products to avoid trading the underlying assets…

  

  

  With the stage thus set, Bloomberg has more on the move to smaller trades and cash market substitutes:

  Sometimes less is more. At least according to investment managers trying to navigate Europe’s credit markets.

   

  TwentyFour Asset Management capped a bond fund to new investors at 750 million pounds ($1.2 billion) and JPMorgan Asset Management, which is marketing a 128 million-pound fund, said smaller investments are more flexible in a sell-off. Other managers are also limiting the size of their trades and using derivatives to avoid getting trapped in positions.

   

  It’s become more difficult to buy and sell securities as Greece’s financial crisis curbs risk taking and dealers scale back trading activity to meet regulations introduced since the financial crisis. The Bank for International Settlements warned of a "liquidity illusion" in June because bond holdings are becoming concentrated in the hands of fund managers as banks pull back.

   

  "Liquidity is generally poor in corporate bond markets and in the U.K. market it’s thin to zero," said Mike Parsons, head of U.K. fund sales at JPMorgan Asset Management in London. "You don’t want to be in a gigantic fund where there’s potential for a lot of investors rushing for the exit at the same time. Smaller funds are more nimble."

   

  "Without enough strong liquidity, it’s hard to execute bond trades in sufficient size or price to move portfolio risk around quickly or cheaply," he said. "The bigger the position, the harder it is to find enough liquidity to sell it or buy it."

   

  Liquidity in credit markets has dropped about 90 percent since 2006, according to Royal Bank of Scotland Group Plc. That’s because dealers are using less of their own money to trade as new regulation makes it less profitable.

   

  Euro-denominated corporate bonds got an average of 5.3 dealer quotes per trade last week, up from 4.5 recorded in January and compared with a peak of 8.8 in 2009, according to Morgan Stanley data. That’s based on dealer prices compiled by Markit Group Ltd. for bonds in its iBoxx indexes.

   

  Liquidity is especially bad in the U.K. corporate bond market, which is being abandoned by companies looking to take advantage of lower borrowing costs in euros and investors seeking securities that are easier to buy and sell.

   

  NN Investment Partners said it seeks to manage difficult trading conditions by diversifying positions and capping trade size. The Netherlands-based asset manager avoids owning large concentrations of a single bond and uses derivatives such as credit-default swaps or futures that are easier to buy and sell, said Hans van Zwol, a portfolio manager.

   

  "We really want to stay away from positions we can’t get out of," he said.

  The conundrum here is that the more reluctant market participants are to venture into increasingly illiquid cash markets, the more illiquid those markets become.

  And here are the fund's largest holdings…

  

   

  *  *  *

  Of course, this should not be a total surprise, in light of the near-record up/downgrade ratio…

  Credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis, and measures of debt relative to cash flow are rising.

   

  

   

  Standard & Poor’s Ratings Services downgraded U.S. companies 297 times in the first nine months of the year, the most downgrades since 2009, compared with just 172 upgrades.

  Deteriorating fundamentals…

  U.S. companies have increased borrowing to levels exceeding those just before the financial crisis, as firms pursue big acquisitions and seek to boost stock prices by buying back shares. According to one metric, the ratio of debt to earnings before interest, taxes, depreciation and amortization for companies that carry investment-grade ratings, meaning triple-B-minus or above, was 2.29 times in the second quarter. That’s higher than the 1.91 times in June 2007, just before the crisis, according to figures from Morgan Stanley.

  “We’re seeing more widespread weakness across more industry sectors in the U.S.,” Ms. Vazza said. “It’s become broader than just the commodity story.”

   

  “The metrics that you measure health and credit by have peaked a while ago,” said Sivan Mahadevan, head of credit strategy at Morgan Stanley. “They are beginning to deteriorate.”

  *  *  *

  And as we noted earlier, the credit cycle has well and truly rolled over…

  

   

  And no lesser market veteran than Art Cashin is concerned, What are the signals you are looking for to stay on top in such a market?

   I continue to monitor the high yield market and see where that goes. The high yield market has been of some concern of the last several weeks. If that begins to show appreciable weakness than I would think the caution flags stay up.

  

   

  Charts: Bloomberg

  

  

  

  

  

• 'Socialist' Sanders Vs 'Crony' Clinton: First Democratic Debate Begins – Live Feed

  Admittedly it's not Mayweather-Pacquiao, but Las Vegas is buzzing ahead of tonight's rumble-in-the-jungle between Bernie and The Battle-axe. While Joe Biden remains the most notable absentee (or will he?) there are three other 'debaters' to carry water and towels for Hillary and Bernie as they drag one another left-er and left-er and more populist-er. In the pre-fight Sanders has lobbed some awkward Iraq War questions at 'hawkish' Hillary but as Clinton's 2008 campaign manager notes, "she's rolled out Latinos for Hillary, Women for Hillary, and met the leadership of Black Lives Matter; she has checked a lot of boxes walking into this debate."

  It's not different this time..

  

  And it's getting worse…

  

   

  Search interest shows them neck and neck…

  

  *  *  *

  This seemed to sum up the pre-show rather well…

  "@StreckerJosh: The Hillary love fest on CNN is ridiculous. I feel bad for the other candidates…especially the non-criminal ones."

  — Donald J. Trump (@realDonaldTrump) October 14, 2015

  *  *  *

   

  Live Feed (via CNN)… (click image below for link – if embed unavailable)

  

   

  USA Today offers six things to watch for during the debate…

  

  Hillary Clinton speaks in Council Bluffs, Iowa, on Oct. 7, 2015. (Nati Harnik, AP)

  1. Steam from the Hillary grilling

  If the CNN debate moderators treat this as their chance to grill Clinton on live TV instead of carrying out an actual debate where other candidates are allotted plenty of time to make their case, “Democrats will likely be frustrated,” said Pat Rynard, a former Democratic campaign staffer from Iowa.

  

  Vice President Biden in the Oval Office on Oct. 7, 2015. (Mark Wilson, Getty Images)

  2. The Biden shadow

  Even if he’s not on the stage, “Joe is a real part of the debate,” said Democrat Patty Judge, a former Iowa lieutenant governor.

  “Sadly,” added Rynard, “in terms of the media narrative, nothing in the debate may matter if Biden announces his intentions the next day and wipes out all the coverage. Hopefully that doesn’t happen, but it’s near when Biden has to make a decision for ballot purposes.”

  

  Sen. Bernie Sanders speaks during a campaign event on Oct. 9, 2015, in Tucson, Ariz.
  (Rick Scuteri, AP)

  3. Sanders’ fidelity to fixed talking points

  The liberal messenger could miss an opportunity if he expounds only a dry, policy-heavy message, Democrats said.

  “He really refuses to deviate much from his economic inequality shtick on the campaign trail — which, to be fair, is a very powerful message that has gotten him far,” said Rynard, who writes about presidential politics on the website Iowa Starting Line. “(But) debates tend to favor interaction and candidates quick on their toes who can give punchy responses.”

  

  Hillary Clinton and Bernie Sanders. (AP)

  4. Two debates in one

  One debate will likely be a policy contest between Clinton and Sanders, both of whom have declined to stray into personal attacks, observers said.

  “She will continue to move herself to the left in order to appeal to undecideds and to those who are leaning to Sanders but not firmly in his camp,” Judge said of Clinton. “She will also try to continue to distance herself from the Obama administration to give herself room to take on Biden if he gets into the race.”

  The second debate could feature hard swings from the low-polling contenders, especially O’Malley, who has gotten increasingly personal in drawing contrasts with Clinton.

  Watch for gun control, trade, banks and foreign policy to take center stage, said Michael Cheney, a professor of communication and economics at the University of Illinois at Springfield.

  

  Martin O’Malley talks on stage during the New Hampshire Democratic Party State Convention on Sept. 19, 2015 in Manchester. (Scott Eisen, Getty Images)

  5. O’Malley’s moment?

  Many Democrats worry that Sanders’ “socialist” label and Clinton’s struggles with her email controversy would badly hinder them in the general election, Rynard said.

  O’Malley has run a serious campaign and impressed Democrats who go see him. But he barely attracts national media coverage, and many voters haven’t noticed him yet.

  Cutter said: “This is the last best chance for Martin O’Malley.”

  O’Malley needs to pull votes from Sanders, she said. “If he doesn’t distinguish himself as the person more likely to achieve results for a progressive agenda, rather than just a protest,” Cutter said, “then he’s out.”

  

  Democratic presidential candidates Jim Webb and Lincoln Chafee. (Getty Images)

  6. The invisible Democrats

  It’s now or never for Webb and Chafee, neither of whom do any real campaigning, Rynard said.

  “At this point, they’re just taking up space,” he said.

  Democrats said they’re hesitant to take either candidate seriously when even low-polling GOP candidates such as Rick Santorum, Bobby Jindal and Lindsey Graham throw energy into reaching out to early state voters.

  But debates are fertile ground for earning a bump in the polls, strategists noted.

  “The best debaters,” Sefl said, “are those who don’t look like they rehearsed their one-liners thousands of times, and who know how to demonstrate command of the issues without being the annoying kid from class who always raised their hand to every question.”

   

  *  *  *

  Spot The Difference…

  

   

  We suspect this debate will be a little "drier" than The Trump Show, so here is a Drinking Game to make it a little more enjoyable…

  

   

  And for the kids and non-drinkers…

  

   

  Of course – as we noted earlier – the biggest 'donkey' in the room is…

  

  

  

  

  

  

• CLSA Just Stumbled On The Neutron Bomb In China's Banking System

  Two weeks ago, using Macquarie data, we found something disturbing at China’s micro level: not only are a quarter of Chinese firms with debt unable to cover their annual interest expense currently…

  

   

  …. but when just looking at the commodity sector, roughly half of all companies are in the same dire straits, as a result of the collapse in commodity prices which translates into a drop off in cash flow which makes just the annual all-in cash interest payment impossible .

  

   

  Over the weekend, Hong-Kong based CLSA decided to take this micro-level data and look at it from the top-down. What it found was stunning.

  According to CLSA estimates, Chinese banks’ bad debts ratio could be as high 8.1% a whopping 6 times higher than the official 1.5% NPL level reported by China’s banking regulator!

  

  As Reuters reports, the estimate is based on analysis of outstanding debts for more than 2700 A-share companies (ex-financials) and their ability to repay loans. Or in other words, if one backs into the true bad debt, not the number given for window dressing purposes by Chinese “regulators”, based on collapsing cash flows, what one gets is a NPL that is nearly 10% of all outstanding Chinese debt.

  Reuters has some more details on the methodology:

  • Two consecutive years of a co’s interest coverage (EBITDA/interest expense) below 1x or losses for two successive years qualifies for debts to be treated as “bad” in CLSA’s analysis.
  • By these measures, wholesale & retail and manufacturing sectors boast the highest implied NPLs at 21.1% and 15.8% respectively, taking into account total debt
  • While China’s real estate sector has been the most aggressive in adding debt, profitability at developers in tier-1 cities has held up well, muting the overall NPLs for the sector
  • Developers in tier-2 and tier-3 cities, however, show high implied NPLs
  • As bad debts rise, burden falls on PBOC to ensure sufficient liquidity so that Chinese banks can gradually absorb the credit costs, CLSA says.

  Yes, the PBOC’s burden most certainly rises, and what a burden it is: here’s why.

  The chart below shows the history of total Chinese bank assets: as of the latest official data, the number is roughly $30 trillion.

  

  If one very conservatively assumes that loans are about half of the total asset base (realistically 60-70%), and applies an 8% NPL to this number instead of the official 1.5% NPL estimate, the capital shortfall is a staggering $1 trillion.

  In other words, while China has been injecting incremental liquidity into the system and stubbornly getting no results for it leading experts everywhere to wonder just where all this money is going, the real reason for the lack of a credit impulse is that banks have been quietly soaking up the funds not to lend them out, but to plug a gargantuan, $1 trillion, solvency shortfall which amounts to 10% of China’s GDP!

  

  

  

  

  

• The Fukushima Wasteland: "Terrifying" Drone Footage Of Japan's Abandoned Nuclear Exclusion Zone

  While the world has had decades of opportunities to observe nature slowly reclaiming the consequences of human civilization, particularly at the site of the original nuclear disaster, Chernobyl, there has been far less media coverage for obvious reasons, of that other nuclear disaster, Fukushima, where as we reported last night, one year after giving up on its “ice wall” idea Tepco has renewed the strategy of encasing the radioactive sarcophagus in an ice wall.

  It was not precisely clear why this time the idea is expected to work after it was nixed last summer.

  What is clear is that something has to be done, because as renewed interest in the aftermath of the results of the 2011 disaster once again builds ahead of the 2020 Tokyo Olympics, the public is realizing just how vast the Japanese wasteland truly is.

  And capturing just that, is this eerie drone overflight of the Fukushima graveyard shown in the clip below:

   

  For those curious for more, here, courtesy of photographer Arkadiusz Podniesinski who donned protective gear to visit the “terrifying” – in his words – ghost towns of Futaba, Namie and Tomioka last month, we get an up close an personal photo essay of this generation’s Chernobyl.

  This is what he found: supermarket aisles strewn with packets. A school blackboard covered with notes for an unfinished lesson. Cars tangled with weeds in an unending traffic jam.

  These are eerie pictures from inside the 20km exclusion zone around Fukushima nuclear plant, courtesy of Guardian.

   

  

  The photographer, Arkadiusz Podniesinski, stands on one of the main streets of Futaba. The writing above him says: “Nuclear energy is the energy of a bright future.”

   

  

  A street that has been taken over by nature. Four years after the catastrophe – which drove 160,000 people from their homes – much of the region is still too dangerous to enter.

   

  

  The KFC Colonel and mannequins left standing in a supermarket.  “Here time has stood still, as if the accident happened yesterday,” says Podniesinski of the most-contaminated areas.

   

  

  An aerial photograph of abandoned vehicles.

   

  

  An aerial photograph of dump sites, taken by a drone. Contaminated radioactive topsoil from the fields has been bagged for removal and there have been efforts to clean deeper layers. To save space, the soil is stacked in layers.

   

  

  A restaurant table with crockery left behind by guests. The huge task of decontaminating the area, site of the worst nuclear disaster since Chernobyl in 1986, continues. Thousands of workers move from street to street through villages, spraying and scrubbing the walls and roofs of houses.

   

  

  Car bumpers overgrown with weeds. Some of the people Podniesinski spoke to doubt the official line that the area will be safe again in 30 years. “They are worried that the radioactive waste will be there for ever,” he says.

   

  

  A classroom on the first floor in a school. There is still a mark below the blackboard showing the level of the tsunami wave. On the blackboard are words written by former residents, schoolchildren and workers in an attempt to keep up the morale of all of the victims, including “We can do it, Fukushima!”

  

  

  

  

• Is Washington Actually Trying To Start World War III?

  Submitted by Michael Snyder via The Economic Collapse blog,

  Why has Barack Obama airdropped 50 tons of ammunition into areas that “moderate rebels” in Syria supposedly control?  This is essentially the equivalent of poking the Russians directly in the eyes.  Much of this ammunition will end up in the hands of those that the Russians are attempting to bomb into oblivion, and so to Russia it appears that we are attempting to make their job much harder.  And of course the truth is that there aren’t really any “moderate rebels” in Syria at all.  Nearly all of the groups that are fighting are made up primarily of radical jihadists and/or hired mercenaries. 

  Personally, I don’t see anyone over there that you could call “the good guys”.  At the end of the day, the U.S. supports just about anyone that wants to get rid of the Assad regime, and the Russians are working very hard to keep Assad in power.  Just like the civil war in Ukraine, the conflict in Syria is in great danger of being transformed into a proxy war between the United States and Russia, and many fear that these conflicts could eventually be setting the stage for World War III.

  The ferocity of Russian airstrikes in Syria has surprised observers all over the planet, and over the past couple of days these airstrikes have been extended to include some new areas…

  Russian Air Forces have extended the range of their airstrikes on Islamic State positions in Syria to four provinces, focusing primarily on demolishing fortified installations and eliminating supply bases and the terrorists’ infrastructure.

   

  Over the last 24 hours Russian aircraft have attacked terrorist positions in the Hama, Idlib, Latakia and Raqqa provinces of Syria. In total, 64 sorties targeted 63 Islamic State installations, among them 53 fortified zones, 7 arms depots, 4 training camps and a command post.

  When I read reports like this, I am deeply troubled.  The Obama administration claims that it has been bombing ISIS positions in Syria for over a year.  So why in the world do these targets still exist?

  Was the U.S. military incapable of finding these installations?

  That doesn’t seem likely.

  So why weren’t they destroyed long ago?

  Did the Obama administration not want them destroyed for some reason?

  What seems abundantly clear is that the Russians are doing what the Obama administration was either unwilling or unable to do.  There is now mass panic among ISIS fighters, and thousands of them are fleeing the country…

  An estimated 3,000 Islamic State fighters as well as militants from other extremist groups have fled Syria for Jordan fearing a renewed offensive by the Syrian army in addition to Russian airstrikes, a military official has told RIA news agency.

   

  “At least 3,000 militants from Islamic State (IS, formerly ISIS/ISIL), al-Nusra and Jaish al-Yarmouk have fled to Jordan. They are afraid of the Syrian army having stepped up activities on all fronts and of Russian airstrikes,” the RIA source said.

  The mainstream media in the United States is not talking much about this, are they?

  But the U.S. media is reporting on this latest airdrop of ammunition to rebel groups in Syria.  For example, the following comes from CNN…

  U.S. military cargo planes gave 50 tons of ammunition to rebel groups overnight in northern Syria, using an air drop of 112 pallets as the first step in the Obama Administration’s urgent effort to find new ways to support those groups.

   

  Details of the air mission over Syria were confirmed by a U.S. official not authorized to speak publicly because the details have not yet been formally announced.

   

  C-17s, accompanied by fighter escort aircraft, dropped small arms ammunition and other items like hand grenades in Hasakah province in northern Syria to a coalition of rebels groups vetted by the US, known as the Syrian Arab Coalition.

  If you were the Russians, how would you feel about this?

  I know how I would feel.

  And just as Joe Biden has previously admitted, the “moderate middle” in Syria simply does not exist.  The following is an extended excerpt from a piece that was originally written by investigative journalist Nafeez Ahmed…

  The first Russian airstrikes hit the rebel-held town of Talbisah north of Homs City, home to al-Qaeda’s official Syrian arm, Jabhat al-Nusra, and the pro-al-Qaeda Ahrar al-Sham, among other local rebel groups. Both al-Nusra and the Islamic State have claimed responsibility for vehicle-borne IEDs (VBIEDs) in Homs City, which is 12 kilometers south of Talbisah.

   

  The Institute for the Study of War (ISW) reports that as part of “US and Turkish efforts to establish an ISIS ‘free zone’ in the northern Aleppo countryside,” al-Nusra “withdrew from the border and reportedly reinforced positions in this rebel-held pocket north of Homs city”.

   

  In other words, the US and Turkey are actively sponsoring “moderate” Syrian rebels in the form of al-Qaeda, which Washington DC-based risk analysis firm Valen Globals forecasts will be “a bigger threat to global security” than IS in coming years.

   

  Last October, Vice President Joe Biden conceded that there is “no moderate middle” among the Syrian opposition. Turkey and the Gulf powers armed and funded “anyone who would fight against Assad,” including “al-Nusra,” “al-Qaeda in Iraq (AQI),” and the “extremist elements of jihadis who were coming from other parts of the world”.

   

  In other words, the CIA-backed rebels targeted by Russia are not moderates. They represent the same melting pot of al-Qaeda affiliated networks that spawned the Islamic State in the first place.

  It has been well documented that many of these so-called “moderate rebel groups” in Syria have fought alongside ISIS and have sold weapons to them.  So this false dichotomy that Barack Obama keeps trying to sell us on is just a giant fraud.  The following comes from a recent Infowars report…

  In September, 2014 a commander with the FSA admitted cooperating with ISIS and the al-Nusra Front.

   

  “We are collaborating with the Islamic State and the Nusra Front by attacking the Syrian Army’s gatherings in … Qalamoun,” Bassel Idriss said. “Let’s face it: The Nusra Front is the biggest power present right now in Qalamoun and we as FSA would collaborate on any mission they launch as long as it coincides with our values.”

   

  In July of 2014 a report in Stars and Stripes documented how the 1,000 strong Dawud Brigade, which had previously fought alongside the FSA against al-Assad, had defected in its entirety to join ISIS.

   

  The same month factions within the FSA — including Ahl Al Athar and Ibin al-Qa’im — pledged services to the Islamic State.

   

  Members of the Islamic State claim to cooperate with the FSA and buy weapons provided by the U.S.

   

  “We are buying weapons from the FSA. We bought 200 anti-aircraft missiles and Koncourse anti tank weapons,” ISIS member Abu Atheer told al-Jazeera. “We have good relations with our brothers in the FSA. For us, the infidels are those who cooperate with the West to fight Islam.”

  U.S. anti-tank weapons are playing a critical role in the Syrian conflict.  As reported by the Washington Post, U.S.-made anti-tank missiles are being used by the rebels to destroy lots of Russian-made tanks that are being used by the Syrian army…

  So successful have they been in driving rebel gains in northwestern Syria that rebels call the missile the “Assad Tamer,” a play on the word Assad, which means lion. And in recent days they have been used with great success to slow the Russian-backed offensive aimed at recapturing ground from the rebels.

   

  Since Wednesday, when Syrian troops launched their first offensive backed by the might of Russia’s military, dozens of videos have been posted on YouTube showing rebels firing the U.S.-made missiles at Russian-made tanks and armored vehicles belonging to the Syrian army. Appearing as twirling balls of light, they zigzag across the Syrian countryside until they find and blast their target in a ball of flame.

  Like I said earlier, this is looking more and more like a proxy war between the United States and Russia.

  Could that be what Obama actually wants?

  *  *  *

  Obama is poking China in the eyes lately too.  CNN is reporting that U.S. warships may soon be sailing into territorial waters around the Spratly Islands.  These are islands that the Chinese government claims ownership over, but the U.S. government disputes that claim, and Obama seems determined to flex his muscles in the area…

  The United States (US) may soon deploy war ships near China’s artificial islands in the South China Sea.

   

  It wants to send a message that it does not recognize China’s territorial claims over the area.

   

  This is according to a Financial Times report quoting a senior U.S. official who said its ships will sail within 12-nautical-mile zones that China claims as its territory around the Spratly Islands within the next two weeks.

  If Obama sends warships into that area, there is a very real chance that they could get shot at.  According to  Newsweek, the Chinese are saying that they will not permit U.S. ships to violate those territorial waters under any circumstances…

  “We will never allow any country to violate China’s territorial waters and airspace in the Spratly Islands, in the name of protecting freedom of navigation and overflight,” Foreign Ministry spokeswoman Hua Chunying said in response to a question about possible U.S. patrols. “We urge the related parties not to take any provocative actions, and genuinely take a responsible stance on regional peace and stability.”

  Such exchanges appear to be moving China and the U.S. toward a much feared, yet long expected, military confrontation. Just as unsettling, both sides seem confident they can prevail.

  Over the past couple of years our relations with China have really gone downhill very rapidly, and if the trading relationship between the two largest economies on the planet breaks down, that would have massive implications for the entire global economy.

  In addition to everything above, the civil war in Ukraine continues to rage on.  The United States funded, equipped, trained and organized the forces that violently overthrew the democratically-elected government in Ukraine, and then once those thugs (which actually included some neo-Nazis) took power, the Obama administration immediately recognized them as the legitimate government of Ukraine.

  The Russians were absolutely infuriated by this, and they have been providing soldiers, equipment and supplies to the rebel groups that are fighting back against this new government.  Of course the Russians deny that they are doing this, but it is exceedingly obvious that they are.

  The rebel groups that the Russians have been backing have been doing very well and have been steadily taking ground, and this is not how the power brokers in D.C. envisioned things playing out in Ukraine.  So in a desperate attempt to shift the momentum of the conflict, a bill is going through Congress that would provide “lethal military aid” to the government in Kiev.  Initially the bill would have provided 200 million dollars in lethal aid, but now it has been upped to 300 million dollars.  There are some that believe that the final figure will be significantly higher.

  Once this bill gets passed, it will be an extremely important event.  For the Russians, it will mean crossing a red line that never should have been crossed.  You see, the truth is that Ukraine is Russia’s most important neighbor.  Just imagine how we would feel if the Russians helped overthrow Canada’s government and then start feeding weapons to the new pro-Russian government that they helped install.  That is exactly how the Russians view our meddling in Ukraine.

  Earlier this year, I wrote an article in which I discussed an opinion poll that showed that 81 percent of all Russians now view the United States negatively, and only 13 percent of Russians have a positive view of this nation.  Not even during the height of the Cold War were the numbers that bad.

  The stage is being set for World War III, but most Americans are completely and totally oblivious to all of this because they are so wrapped up in their own little worlds.

  Most Americans still seem to assume that the Russians and the Chinese are our “friends” and that any type of conflict between major global powers is impossible.

  Well, the truth is that conflict has already begun in Ukraine and Syria, and tensions are rising with each passing day.

  It won’t happen next week or next month, but we are on the road to World War III.

  

  

  

  

  

• ON To WaSHiNGToN…

  

  

  

  

  

• HSBC Is Now "Highly Risk Averse" Amid Growth Worries, Loss Of Central Bank Put

  Earlier today, we brought you one graphic from HSBC which shows that based on at least one metric, the world is already in recession:

  

  That graph is part of a larger thesis HSBC has developed about how a confluence of circumstances have conspired to make asset allocation a somewhat vexing task. The so called “tricky trinity” is comprised of the following three factors:

  • Global growth is decelerating
  • The absence of a policy put
  • Risk premia offers a limited buffer 

  These are all ideas that we have of course discussed at great length. 

  As for decelerating global growth, here’s what we said earlier:

  …the entire world seems to be decelerating in tandem with China’s hard landing (which most recently manifested itself in another negative imports print). 

   

  For evidence of this, one might look to the WTO, whose chief economist Robert Koopman recently opined that “it’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing.” And then there’s the OECD, which recently slashed its global growth forecasts. The ADB joined the party as well, citing China, soft commodity prices, and a strong dollar on the way to cutting its regional outlook. Even Citi has jumped on the bandwagon with Willem Buiter calling for better than even odds of a worldwide downturn.

  And here is HSBC: 

  At this point we find few investors that believe growth is likely to accelerate. Rather, consensus growth expectations have moderated significantly in recent months. Our leading indicators found a peak in June and have since declined gradually. As we pointed out in our most recent publication, the downturn has been fairly broad-based with peaking or past peak cyclical data in all regions and most types of data. Only consumer data continues to improve. However, given the broad-based decline in other data we doubt that consumers are going to be able to withstand this cyclical story.

  The global PMI story is similar and we can now see that the manufacturing sector numbers have fallen to a 26-month low, which has resulted in a deterioration of the service sector as well. That said, global PMI was still at an expansionary 52.8 in September. Growth on this metric is low but still positive. In effect, September data verifies the slowdown that our leading indicators started to highlight in July. While the current decline in manufacturing data is clearly in the minds of many investors, the slowdown in the service sector PMI is a cause for concern. That said, if our leading indicators are correct, we are unlikely to see a stabilisation of global growth numbers over the coming 3-6 months. This presents global asset markets with a significant growth problem at the time of fairly limited risk premia in US equity markets, for example. 

   

  
  

  On the absence of a policy put, the message is simple: central banks have lost credibility, but the market is still largely dependent on QE. The BoJ and the ECB will eventually have trouble finding enough supply to purchase, which means that they will have literally monetized everything that isn’t tied down and yet still, both the eurozone and Japan are mired in deflation. We’ve seen the same dynamic unfold in Sweden where, for the first time, QE actually broke and just three months later, the Riksbank is being forced to look at purchasing muni bonds just to avoid the possibility that the scarcity of collateral created by central bank purchases doesn’t end up causing things (yields, the SEK) to move in the “wrong” direction (i.e. higher). And of course there’s the Fed, which is stuck in the impossible position of accidentally accelerating EM capital outflows whether it hikes or whether it holds. In a market that’s still largely hooked on stimulus, it is not good when central planners run out of options, creditbility, and lose the narrative all at the same time. And that is exactly what’s happening now. 

  Back we go to HSBC:

  Clearly, in this slow growth outlook it is easy to rely on central banks to provide an economic put. However, as our eurozone economics and fixed income strategy team highlighted in The ECB & QE: Constraints will test credibility from 22 September 2015, there are constraints on what the ECB can do. The chief limitations are negative yields and the relative lack of Bunds in a capital key driven QE program. Most notably, it is worth highlighting that such constraints limit the ability of the ECB to defend a weak EUR or to reignite growth and inflation expectations.

  The ECB, however, isn’t the only central bank that faces constraints to its unconventional monetary policy program. Investors continually question the limits of the BoJ’s JPY80trn asset purchase program whilst giving the benefit of the doubt. At present the BoJ owns 30% of JGBs outstanding but at the current run rate that would reach 50% by December 2018. How long can the BoJ keep buying 100% of the government’s new deficit issuance? The BoJ will have to do this to meet its asset purchase target in 2015. At the same time, it is not clear who will sell to the BoJ going forward as the GPIF is close to being done with its rebalancing, whilst life insurers and megabanks are limited in their ability to reduce JGB dependence due to ALM and regulatory considerations. 

  As we look at the success of QE it appears that the marginal benefit of further monetary policy is constrained. As this prospect starts to affect consumers and corporates alike, their belief in economic fortunes starts to become more volatile. This behavioural effect on global growth is not fully priced into financial markets, in our view. If anything, the distribution of future economic outcomes is becoming more extreme. 

  Finally, on risk premia:

  Monetary policy in the post crisis period has been like one giant blanket that has kept investors sheltered from the stiff breeze of structural stagnation. This blanket has also encouraged investors to move further and further into riskier assets. In effect, risk premia has slowly been pushed down. The eurozone crisis and now the EM crisis highlight that depressed risk premia are unlikely to unravel in a slow and gradual manner. Rather, once risk premia reach unsustainable levels, then only one proverbial straw will break the camel’s back. At the moment, EM assets are in the maelstrom of this unravelling.

  There, ladies and gentlemen, is the “tricky trinity” and in a nutshell, the takeaway is fairly simple, so we’ll just leave you with the bank’s conclusion: 

  Going into year-end and looking at the financial landscape for 2016, we cannot help but remain highly risk averse.

  So sell it all we suppose. Or don’t. 

  

  

  

  

  

• How To Create A Gun-Free America In 5 'Easy' Steps

  Submitted by Austin Bragg via Reason.com,

  Want to create a gun-free America in 5 easy steps?

  Here's all there is to it:

  Step 1: Elect. For a gun-free America, the first thing you'll need is two-thirds of Congress. So elect a minimum of 67 Senators and 290 Representatives who are on your side.

  Step 2: Propose. Then, have them vote to propose an amendment to the Constitution which repeals Second Amendment gun rights for all Americans.

  Step 3: Ratify. Then convince the legislators of 38 states to ratify that change.

  At this point, the Second Amendment is history, but you've done nothing to decrease gun violence. All you've done is remove the barrier for Congress to act.

  Step 4: Legislate. You need to enact "common sense" reform.

  You can try to do what Australia did and…ban all guns? That's not at all what they did, but whatever, fuck it. Go big or go home, right?

  It will have to be passed by Congress and signed by the president.  

  Great! The law is passed and guns are now illegal.  The only thing left to do is…

  Step 5: Enforce. Guns won't just disappear because you passed a law. You need to confiscate some 350 million guns scattered among 330 Million Americans.

  Sure, you can try a buy-back program like Australia, but like Australia that will still leave behind anywhere from 60 percent to 80 percent of privately owned firearms.

  The rest you have to take.

  You'll need the police, the FBI, the ATF or the National Guard—all known for their nuanced approach to potentially dangerous situations—to go door-to-door, through 3.8 million square miles of this country and take guns, by force, from thousands, if not, millions of well-armed individuals. Many of whom would rather start a civil war than acquiesce.

  So inevitably gun violence, which is currently at a historic low, will skyrocket.

  But that is how you get a gun-free America in five easy steps.

  (For more in that vein, read this piece by Charles C.W. Cooke of National Review.)

  

  

  

  

  

• Russia Releases New Airstrike Videos, Says "Most" ISIS Ammo, Heavy Vehicles Destroyed

  Don’t be deceived, there are always two sides (or more) to every propaganda war and as we’ve been careful to mention on the way to critiquing US foreign policy in Syria, just because what Washington says about the war is so completely absurd as to warp the mind, that doesn’t thereby mean that everything which comes out of The Kremlin’s spin team should be taken as gospel. So when you see the steady stream of Russian Defense Ministry videos that purport to show the destruction of an ISIS stronghold or weapons cache which supposedly has some strategic significance, you should take it with a grain of salt. 

  Having dispensed with the customary disclaimer, we’ll move swiftly to say that although it might not be easy to tell what, Russia is certainly blowing up something in Syria and the videos – especially when viewed in light of how inept they make the US air force look by comparison – are always worth a look. 

  Below, we present the latest videos from Russia’s airstrikes in Syria. One interesting thing to note is that this is Moscow claiming to have destroyed a large portion of ISIS’ ammo right around the time the US paradropped 50 tons of ammo to the “Free Syrian Army.” Time for another caveat: correlation does not equal causation. 

  Without further ado:

  And here’s RT with a bit of color on what you’re supposedly watching there:

  Islamic State militants have lost “most” of their ammunition, heavy vehicles and equipment in Russian airstrikes, the Defense Ministry said Tuesday. At least 86 ISIS targets were hit during 88 sorties in the last 24 hours.

   

  Sukhoi Su-24M and Su-34 bombers, together with Su-25SM ground support aircrafts targeted Islamic State (IS, formerly ISIS/ISIL) sites in the provinces of Raqqah, Hama, Idlib, Latakia and Aleppo, according to the ministry. The jets hit command posts, ammunition and armament depots, military vehicles, plants producing explosives, field camps and bases.

   

  Su-24M bombers also targeted an IS field headquarters near the city of Anadan in the province of Aleppo from which the terrorists coordinated their activities. There was an ammunition depot at the site, the ministry said. 

   

  One more IS field post was destroyed near the city of al-Bab in Aleppo Province.

  #SYRIA Russian air strikes resulted in elimination of the most part of #ISIS ammunition, heavy vehicles and equipment

  — ?????????? ?????? (@mod_russia) October 13, 2015

  We’ll close with a quote from… well… from who else?

  “[Western countries] say we are bombing false targets. On Sunday US air forces targeted a power station and a transformer in Aleppo. Why did they do it? Whom did they punish? What was the sense? That is unclear,” Russian President Vladimir Putin said on Tuesday.

  

  

  

  

• What Keeps Neil Howe Up At Night: An Interview With The Author Of "The Fourth Turning"

  “Underproduction, undercapacity, deflation, currency wars, demographics, falling birth rates” – those are the biggest fears which Fourth Turning author, and head of Saeculum Research Neil Howe, lays out in this interview excerpt courtesy of RealVision TV.

  While Howe goes on an interesting tangent on the one topic that will surely be absent from all presidential debates, namely the fact that migration into the US is “actually in huge decline“, and that the largest immigrant group into the US is Asian (after all someone has to buy those luxury NYC condos), what is more interesting are Howe’s parallels of the current economic situation to the Great Depression: “whole areas of the world no longer having a global superpower, no longer having global institutions that enforce orders so you have these huge areas of failed states and power vacuums and regional authoritarian governments – that’s exactly what people saw in the 1930s and we’re seeing it now in Russia, China, Iran doing whatever they want.”

  He continues:

  “Another interesting economic parallel is the crisis of overvaluation: in the 1930s it was the gold standard, for southern Europe it’s the Euro, and for China they have a fixed rate regime that they’re attending to too little too late. It’s the nature of an authoritarian regime to always to do too little and too late. Everyone is too timid to tell the person in power “this is what you need to do.” I think China faces an absolute choice between a huge devaluation to restimulate its economy, because becoming competitive I think the carry trade is going to go and I think even domestic savings are going to flee. If they don’t do that they have very few options left at this point. They have $3.5 trillion of reserves – you’ll be amazed how quickly that goes. So that’s another parallel.

  Of course no Howe interview would be complete without some observations on generational shifts:

  “And then there are some fascinating cultural parallels with the 1930s. Another thing that was true in the 1930s was that after the early 30s you saw a continuous decline in the crime rate. Crime began falling over the the course of the 30s: substance abuse, alcohol abuse began to fall, and this is true with Millennials today. And I tell people that Millennials are responsible today for the most dramatic and rabid decline in youth violence in American history. This is why so many young people are moving to cities, because they are safe again.”

  Will this trend reverse if and when the economy stumbles, as the full parallels to the sad conclusion of the 1930s play out?

  The answer is unclear, but for a fascinating, broad and unconventional perspective on where the economy is headed from one of the cult non-establishment figures, watch the full interview on RealVision’s website.

  Raoul Pal has generously given Zero Hedge readers an exclusive weekly trial so both the full Howe, and all the other fascinating interviews in RealVision’s database can be watched in their entirety. To do so, please click here and use the “zerohedge” trial code, at which point the full Howe interview can be seen via this link.

  Here is the excerpt with Neil Howe excerpt :

  

  

  

  

  

• Oct 14 – Ex-Fed's Fisher: "FOMC has egg on its face"

  EMOTION MOVING MARKETS NOW: 38/100 FEAR

  PREVIOUS CLOSE: 44/100 FEAR

  ONE WEEK AGO: 30/100 FEAR 
  ONE MONTH AGO: 14/100 EXTREME FEAR

  ONE YEAR AGO: 0/100 EXTREME FEAR

  Put and Call Options: FEAR During the last five trading days, volume in put options has lagged volume in call options by 26.86% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 17.67. This is a neutral reading and indicates that market risks appear low.

  Stock Price Strength: FEAR The number of stocks hitting 52-week lows exceeds the number hitting highs and is at the lower end of its range, indicating fear.

   

  PIVOT POINTS

  EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY 
  

  S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)

  EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)

  CRUDE OIL (CL) | GOLD (GC) | 10 YR T NOTE | 2 YR T  NOTE | 5 YR T NOTE | 30 YR TREASURY BOND | SOYBEANS | CORN

   

  MEME OF THE DAY – WHEN DR. T SPEAKS…

   

  UNUSUAL ACTIVITY

  VXX OCT WEEKLY4 21.5 CALLS7K+ @$.58

  LOCK NOV 8 PUT Activity on the BID side

  LULU NOV 55 CALL Activity 2500 block @$1.20 on offer

  EDGE SC 13D Filed by NEW LEAF Ventures .. 8.2%

  TROX .. SC 13G Filed by Putnam Investments .. 13.2%

  More Unusual Activity…

  HEADLINES

   

  Fed’s Bullard: Liftoff is appropriate despite challenges

  Fed’s Tarullo: US Rate hike likely not appropriate

  Ex-Fed’s Fisher: FOMC has egg on its face

  Fed Discount Rate Mins: 8 votes to hike rate to 1% (vs 5 in July)

  NY Fed: Consumers See Lower Inflation, Spending Growth –BBG

  US NFIB Small Business Optimism Sep: 96.1 (est 95.5; prev 95.9)

  ECB’s Mersch: Near-term inflation may continue to hover near zero

  BoE new boy Vlieghe says weak inflation may delay rate rise

  BoE’s McCafferty: Downside pressures in prices seen as transitory

  Venezuela: Opec technical meeting to be held 21/Oct in Vienna; non-opec members Brazil, Russia, Norway among invitees

   

  GOVERNMENTS/CENTRAL BANKS

  Fed’s Bullard: Liftoff is appropriate despite challenges –ForexLive

  Ex-Fed’s Fisher: FOMC has egg on its face –CNBC

  Fed’s Tarullo: Rate hike likely not appropriate –CNBC

  NY Fed: Consumers See Lower Inflation, Spending Growth –BBG

  Fed Discount Rate Mins: 8 votes to hike rate to 1% (vs 5 in July)

  Fed Discount Rate Mins: 3 voted to hold discount rate at 0.75%

  Fed Discount Rate Mins: Minneapolis again voted to cut discount rate to 0.5%

  ECB’s Mersch: Near-term inflation may continue to hover near zero –Rtrs

  BoE new boy Vlieghe says weak inflation may delay rate rise –MW

  BOE’s McCafferty wants rates at a level that they can cut again –ForexLive

  BoE’s McCafferty: Downside pressures in prices seen as transitory –FXstreet

  FIXED INCOME

  Prices rise on growth fears, bets on later Fed rate hike –Rtrs

  Treasuries Wilder Than Ever as Ultrafast Bond Traders Rise Up –BBG

  Italian-German Bond Yield Spread Narrows to Least Since April –BBG

  China picks London for renminbi debt issue –Eftee

  Putin: IMF should provide additional $3 bln loan to Ukraine to repay its debt to Russia –TASS

  FX

  USD: Dollar bulls vexed by Federal Reserve rate outlook –FT

  COMMODITY FX: Weak Chinese data bogs down commodity FX –ET

  CNY: PBoC fixed yuan higher for an 8th straight day –FT

  GBP: Deflation takes pound down after M&A lift –FT

  ENERGY/COMMODITIES

  Venezuela: Opec technical meeting to be held 21/Oct in Vienna; non-opec members Brazil, Russia, Norway among invitees

  WTI futures settle 0.9% lower at $46.66 per barrel

  CRUDE: IEA: Oil market glut will persist through 2016 as demand growth slows –FT

  METALS: Copper Prices Fall After Weaker-Than-Expected Chinese Import Data –WSJ

  EXCHANGES: China’s largest commodities exchange to build intl platform –FT

  USDA: NZ milk production seen declining –BBG

  EIA Drilling Productivity Report for October

  EQUITIES

  EARNINGS: J&J got slammed by the strong dollar again –BI

  EARNINGS: J&J plans to buy back shares up to $10bn –Yahoo

  M&A: GE to sell $30 bln specialty finance business to Wells Fargo –Rtrs

  M&A: Diageo to announce sale of wines unit –Sky

  M&A: EMC to pay Dell $2 billion as breakup fee in go-shop period –Yahoo

  LEGAL: SEC Prepares Civil Charges Against Mondelez in Cadbury Probe –WSJ

  AUTOS: Volkswagen announces ?750m spending cuts to fund product revamp –Guradian

  AUTOS: VW gloom hits German economic sentiment –FT

  PRIVATISATION: UK government sells ?591m stake in Royal Mail –FT

  TECH: Twitter Slashing Costs With Workforce Layoffs –Sky

  TECH: Bloomberg: U.S. Wants To End Apple E-Book Antitrust Monitoring –Nasdaq

  BANKS: Citi dials down risky block trading amid market turmoil –Rtrs

  EMERGING MARKETS

   

  Economists gloomier on Brazil’s inflation outlook –FT

   

  

  

  

  

  

• 'America The Herd' Is Ever At Odds With 'America The Civilization'

  Submitted by Dan Sanchez via DanSanchez.me,

  “Make America Great Again” is the slogan for Donald Trump’s phenomenally popular presidential campaign.

  

   

  With it, Trump has tapped a deep well of frustration among American conservatives about the direction of the country under President Barack Obama.

  This longing for lost greatness especially concerns American foreign policy (although upon close examination Trump’s actual statements are less hawkish than those of his Republican rivals).

  Conservatives are sick of America looking weak on the world stage. They sense that Obama has transmitted his own lack of virility to the nation as a whole. 

  Many blame the spectacular and gruesome rise of ISIS on Obama for having pulled out of Iraq. The bad guys are on the rise, because our leader wasn’t “man enough” to stay and stand up to them. As the great George Carlin said:

  “This whole country has a manhood problem. Big manhood problem in the USA. You can tell from the language we use; language always gives you away. What did we do wrong in Vietnam? We pulled out! Not a very manly thing to do is it?”

  Masculine Trump promises to be different. Oh sure, he wouldn’t have invaded Iraq in the first place. But if he had inherited the occupation, he wouldn’t have pulled out until he had taken all of the country’s oil. A “real man” doesn’t leave until he gets what he wants.

  And now, so this narrative goes, Obama has “yielded,” on behalf of America, to both Cuba and Iran. Trump, who presents himself as a masterful business negotiator, sneered at Obama’s nuclear deal with Iran as, “one of the weakest contracts I’ve seen of any kind.”

  But perhaps most emasculating of all is Obama’s feeble showing next to the famously tough Russian president Vladimir Putin. Virile Vlad has taken Obama’s lunch money time and again.

  Putin frustrated Obama’s plan to launch an air war on Syria by calling Secretary of State John Kerry’s bluff over a chemical weapons deal with the Syrian regime.

  Putin countered the Washington-backed coup in Ukraine by swiftly annexing its Crimean province without firing a shot.

  And now, in a blitzkrieg campaign, Putin seems to be smashing in a matter of days the ISIS menace that Obama declared war on eight months ago.

  

  Many Americans look at Putin with a mix of fear, hate, and envy. They wish they had a leader like him, and hope Trump will fill that role. Trump himself has predicted that as president he will get along with his Russian counterpart, because Putin will respect him (perhaps as a fellow alpha male). In contrast, Trump added, Putin, “has absolutely no respect for President Obama. Zero.”

  It is conceivable that Obama feels he has something to prove as a spindly former community organizer, and that is why he has been susceptible to be pressured into foreign interventions by the neocons (like Victoria Nuland of the Ukraine debacle) and liberal interventionists (like Hillary Clinton, Susan Rice, and Samantha Power of the Libya debacle) in his administration (especially the above female ones), as well as his steely-eyed generals (like Stanley McChrystal and David Petraeus of the Afghan Surge debacle).

  And perhaps Obama’s non-martial inclinations have curbed his commitments to these foreign misadventures, preventing them from being quite as grandly calamitous as Bush’s, while at the same time making him look timorous and indecisive.

  It may be tempting to think that Trump is comfortable enough in his own masculinity to not start fights he can’t finish, and that this is why he strays from the GOP script on Iraq, Syria, and Russia.

  But ultimately it is a waste of time to pore over what candidates say on the hustings. Politicians are generally inveterate liars and manipulators whose policies in office rarely match their rhetoric, and often don’t even resemble it.

  What is important is why the rhetoric is successful: why it resonates with the public and what that says about the spirit of the times, which is what actually limits or enables the rapacity of government.

  What exactly are conservatives longing for when they clamor to Make America Great Again? What do they even mean by “America”?

  *****

  It could be any of three senses, each of which was expounded by the great American journalist Randolph Bourne in his 1918 essay “The State.”

  They could mean America the Country. According to Bourne, when speaking of country or nation:

  “We think vaguely of a loose population spreading over a certain geographical portion of the earth’s surface, speaking a common language, and living in a homogeneous civilization. Our idea of Country concerns itself with the non-political aspects of a people, its ways of living, its personal traits, its literature and art, its characteristic attitudes toward life.”

  Or they could mean America the State. According to Bourne:

  “The State is the country acting as a political unit, it is the group acting as a repository of force, determiner of law, arbiter of justice.”

  It is important to note that Bourne’s idea of the State is distinct from his idea of government, which is:

  “…the machinery by which the nation, organized as a State, carries out its State functions. Government is a framework of the administration of laws, and the carrying out of the public force. (…) That the State is a mystical conception is something that must never be forgotten. Its glamor and its significance linger behind the framework of Government and direct its activities.”

  And in wartime, the State eclipses all else, as the alarmed populace amalgamates into a herd, huddling and stampeding in unison under the guiding rod of government-as-shepherd:

  “Wartime brings the ideal of the State out into very clear relief, and reveals attitudes and tendencies that were hidden. (…) For war is essentially the health of the State. The ideal of the State is that within its territory its power and influence should be universal. (…) And it is precisely in war that the urgency for union seems greatest, and the necessity for universality seems most unquestioned. The State is the organization of the herd to act offensively or defensively against another herd similarly organized. The more terrifying the occasion for defense, the closer will become the organization and the more coercive the influence upon each member of the herd.”

  Bourne noticed a key problem for clearly thinking about these matters:

  “The patriot loses all sense of the distinction between State, nation, and government.”

  As a result, these terms have become thoroughly confused.

  The terms “patriotism” and “nationalism” as used by today’s arch-conservatives refer to attitudes that used to be called “jingoism.” So, what is today called “country” in the sense of “patriotism” and “nation” in the sense of “nationalism” is actually what Bourne referred to as “the State.”

  What is today called “the State” Bourne instead called “government.”

  And what Bourne meant by “country” and “nation” is a concept so neglected today, that it doesn’t really have its own name at all.

  It will clarify things if we adopt our own set of labels for Bourne's rigorous concepts: one that doesn’t confusingly contradict current usage as Bourne’s does, but also doesn’t have the deceptive Orwellian qualities of standard modern parlance.

  Our meaning should be unmistakable if we speak of America the Civilization, America the Herd, and America the Regime.

  Those who display the “Make America Great Again” injunction on baseball caps and bumper stickers are specifically hoping for a particular prospective government official to fulfill it. So, they are clearly not saying “Make the American Civilization Great Again.”

  Yet they are also saying far more than “Make the American Regime Great Again.” They are not merely concerned with the glory of the Federal government.

  What Trump’s supporters desperately want is to Make the American Herd Great Again. And by “Great,” they mean big, imposing, mighty, and fearsome.

  In a time of sparse grazing (that is, a deep economic recession), they are irrationally alarmed at perceived economic inroads being made by the Mexican and Chinese Herds.

  And in a time of military and diplomatic humiliation (see above), they are irrationally terrified that the Russian, Chinese, and Muslim Herds may someday supplant or even overrun them.

  They want their Herd’s military stampede to be irresistible and earthshakingly awesome again, and its huddle (immigration and trade barriers, the national security state, etc.) to be impenetrable and intimidatingly forbidding. And they are looking to Trump to restore these herd characteristics as the new strongman shepherd.

  This is why Trump’s vaunted masculinity is so important. His fans want their shepherd to have a firm hand, like a stern but protecting father.

  As Bourne explained:

  “There is, of course, in the feeling towards the State a large element of pure filial mysticism. The sense of insecurity, the desire for protection, sends one’s desire back to the father and mother, with whom is associated the earliest feelings of protection. It is not for nothing that one’s State is still thought of as Father or Motherland, that one’s relation towards it is conceived in terms of family affection.”

  And this is especially true in times of war such as ours. Bourne added that the wartime State’s…

  “… chief value is the opportunity it gives for this regression to infantile attitudes. In your reaction to an imagined attack on your country or an insult to its government, you draw closer to the herd for protection, you conform in word and deed, and you act together. And you fix your adoring gaze upon the State, with a truly filial look, as upon the Father of the flock, the quasi-personal symbol of the strength of the herd, and the leader and determinant of your definite action and ideas.”

  But in order for this filial piety toward the Herd to really take hold, there usually needs to be a figurehead with a face, a name, and a personality to function as a devotional focal point: a father-figure embodiment of the Herd itself. This was the function of Big Brother in George Orwell’s Nineteen Eighty-Four. And this is the function of Trump in his supporters’ dreams of an American Herd made great again.

  If America’s spooked-herd mindset continues to intensify, it could even turn the populist demagogue Trump into Nationalist America’s answer to Nationalist Italy’s Benito Mussolini: our “Il Douche” to their “Il Duce.”

  *****

  Conservatives need to snap out of their fight-or-flight response, take a moment to step out of the fevered haze of election season, and realize that there is no need or good reason to seek provision and protection in a Herd. (Class warrior leftists are also guilty of this in their own way.)

  The shepherds they bleat for don’t tend to their flocks for the sake of the protection and provision of the sheep, but for the sake of their own wool and mutton. And such regime herdsmen are the ones who set herds against each other in order to divide and rule.

  And protection and provision cannot be sustainably achieved through the bestial means of swarming and stampeding over outsiders. The “biological competition” (as Ludwig von Mises called it) of tribalism and warfare (both military and economic) is a zero-sum game. And it ultimately only endangers and impoverishes all by breaking down the positive-sum division of labor (social competition and cooperation), which is the rational and characteristically human means of attaining protection and provision.

  As Mises taught, civilization is based on the division of labor, which in turn depends on respect for individual property rights (including self-ownership): in a word, justice.

  The more that justice reigns, the more intensified and productive will be the division of labor, and the more the populace will be civilized: i.e., economically integrated, prosperous, and peaceful.

  Justice (liberty and property) is what makes a civilization great. And civilization is what makes a populace rich and safe. In short, being good is what makes a people truly great.

  Being good means peaceful and voluntary exchange, both commercial and cultural, to the enrichment of all, both material and spiritual.

  Being good means not making enemies throughout the world by bombing, starving, and subjugating potential fellow members of the ecumenical market society and excusing it as “foreign policy,” “global strategy,” and “collateral damage.”

  Being good means not pretending to have a partial claim over every single piece of private or “public” property under your government’s illegitimate jurisdiction, such that you can exclude others from it based on them being born under a different illegitimate jurisdiction.

  And as the left needs to realize, being good also means not raiding the coffers of other socio-economic “classes” simply because they have more than you, and excusing it as “addressing wealth inequality.”

  In other words, being good means acting like decent human beings, and not like a ravenous, paranoid, amoral Herd.

  America the Herd is ever at odds with America the Civilization. It is America the Herd that is keeping America the Civilization from feeling and being prosperous and safe. For too long, we have let our rulers ride us roughshod, using us to trample the economy and global tranquility with its economic and military interventions.

  *****

  Apocalyptic Islamophobes like to speak of a “Clash of Civilizations,” but that is a contradiction in terms. Civilization is a concept of natural, unforced harmony. It is Herds that clash, not Civilizations. Civilizational commonalities may determine who is considered in the fold. But it is the Herd dynamic that hurls the throngs against each other.

  And such clashes damage civilization in two senses. Civilization is degraded domestically, as the heterogenous dance of individuals yields the stage to the homogenous march of the horde.

  And civilization between the two peoples is shattered as well.

  There are many nested levels of civilization. Within the American civilization, there are distinctive sub-civilizations. The Midwest, the Northeast, the South, etc, each have their own recognizable subcultures and trading networks, even though they are also to some extent integrated with the broader American culture and trading network.

  All these civilizations are, in turn, integrated with a broader Western civilization. And Western civilization has certain cultural affinities and (especially) economic relationships with virtually all the rest of the world as well.

  So, no matter how distinctive two sets of people are, military and economic warfare between them breaks the bonds of civilization that culturally and materially enrich them both.

  *****

  Next time someone accuses you of “hating America” for denouncing beastly policies and the tribalism that endorses and enables such savagery, tell them, “I love America the Civilization, which is why I despise America the Herd. For you, it seems to be the other way around.”

  Make America good again, and the kinds of greatness actually worth having will naturally follow.

  

  

  

  

  

• Bond Market Breaking Bad – Credit Downgrades Highest Since 2009

  Despite The Fed's best efforts to crush the business cycle, the crucial credit-cycle has reared its ugly head as releveraging firms (gotta fund those buybacks) and deflationary pressures (liabilities fixed, assets tumble) have led to a surging market cost of capital.

  As WSJ reports, softening U.S. corporate fundamentals have been largely overlooked but the markets for riskier debt have become snarled with rising downgrades and an increase in U.S. corporate defaults indicate “some cracks on the surface” of the domestic-growth outlook. In fact, in the latest quarter, the ratio of upgrades-to-downgrades is its weakest since the peak of the financial crisis in 2009.

  Falling profits and increased borrowing at U.S. companies are rattling debt markets, a sign the six-year-long economic recovery could be under threat.

   

  Credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis, and measures of debt relative to cash flow are rising.

   

  

   

  Standard & Poor’s Ratings Services downgraded U.S. companies 297 times in the first nine months of the year, the most downgrades since 2009, compared with just 172 upgrades.

   

  Meanwhile, the trailing 12-month default rate on lower-rated U.S. corporate bonds was 2.5% in September, up from 1.4% in July of last year, according to S&P.

   

  Analysts expect profits at large companies to decline for a second straight quarter for the first time since 2009.

  

   

  U.S. companies have increased borrowing to levels exceeding those just before the financial crisis, as firms pursue big acquisitions and seek to boost stock prices by buying back shares. According to one metric, the ratio of debt to earnings before interest, taxes, depreciation and amortization for companies that carry investment-grade ratings, meaning triple-B-minus or above, was 2.29 times in the second quarter. That’s higher than the 1.91 times in June 2007, just before the crisis, according to figures from Morgan Stanley.

  “We’re seeing more widespread weakness across more industry sectors in the U.S.,” Ms. Vazza said. “It’s become broader than just the commodity story.”

   

  “The metrics that you measure health and credit by have peaked a while ago,” said Sivan Mahadevan, head of credit strategy at Morgan Stanley. “They are beginning to deteriorate.”

  *  *  *

  You Are Here…

  

  

  

  

  

  

• JPMorgan Misses Across The Board On Disappointing Earnings, Outlook; Stealthy Deleveraging Continues

  Maybe we now know why JPM decided to release results after market close instead of, as it always does, before the open: simply said, the results were lousy top to bottom, the company resorted to its old income-generating “gimmicks”, it charged off far less in risk loans than many expected it would, and its outlook while hardly as bad as it was a quarter ago, was once again  dour.

  First, the summary results, in which JPM saw $23.5 billion in non-GAAP net revenues, because yes, JPM has a pre-GAAP “reported revenue” item which was even lower at $22.8 billion… 

  

  … missing consensus by $500 million, down $1 billion or 6.4% from a year ago.

  

   

  While the Net Income at first sight seemed to be a beat, printing at $1.68, this was entirely due to addbacks and tax benefits, which amounts to a 31 cent boost to the bottom line, while for the first time, JPM decided to admit that reserve releases are nothing but a gimmick, and broke out the contribution to EPS, which added another $0.05 to the bottom line.

  

   

  There were two surprises here: first, JPM’s legal headaches continue, and the firm spent another $1.3 billion on legal fees during the quarter – one assumes to put the finishing touches on the currency rigging settlement. Also, as noted above, instead of taking a credit charge, i.e., increasing reserve releases, JPM resorted to this age-old gimmick, and boosted its book “profit” by $450 million thanks to loan loss reserve releases, the most yet in 2015; ironically this comes as a time when JPM competitors such as Jefferies are taking huge charge offs on existing debt. It appears JPM is merely doing what Jefferies did for quarters, and is hoping the market rebounds enough for it to not have to mark its trading book to market.

  

  While the release of reserves helped JPM in this quarter, unless the economy picks up substantially next quarter, JPM’s EPS will be hammered not only from the top line, but also from the long-overdue rebuilding of its reserves which will have to come sooner or later.

  Completing the big picture, was something rather troubling we first noticed last quarter: JPM’s aggressive push to deleverage its balance sheet, by unwinding billions in deposits. Indeed, as the bank admits, it has now shrunk its balance sheet by a whopping $156 billion in 2015, driven by a massive reduction in “non-operating deposits” of over $150 billion. Perhaps the US does not need NIRP: it appears banks like JPM are simply saying not to deposits.

  

   

  Then stepping away from the bank, and looking just at JPM’s most important division, its Investment Bank, there were no major surprises there: Fixed Income Revenue crashed by $854 million Y/Y to $2.933 billion, which however was in line with sellside expectations. The silver lining: equity markets revenue of $1.4 billion posted a modest improvement of $173 million from Q3 2014.

  This is how JPM explained it:

  • Fixed Income Markets of $2.9B, down 11% YoY, excluding business simplification
  • Equity Markets of $1.4B, up 9% YoY, driven by strong performance across derivatives and cash

  The punchline:

  • Firm loans-to-deposits ratio of 64%, up 8% since year-end

  This was up to 61% last quarter, and is indicatively of the end of QE as the fed no longer pumps the company full of deposits without a matching loan increase.

  

  Perhaps the most interesting thing about this slide was JPM’s admission at the very end that it had suffered $232 million in credit costs “reflecting higher reserves driven by Oil & Gas.” Considering this was a decline from the $299MM cost from a year ago, one wonders just how (in)sufficient this will be if and when the oil rebound once again fizzles.

  Curiously, despite the most recent tumble in yields, JPM was happy to reported that after NIM rose by 2 bps last quarter, in Q3, “Firm NIM is up 7bps QoQ largely driven by positive mix impact of lower cash balances and higher loan balances.”

  Finally, the outlook: while hardly as dour as last quarter when as a reminder JPM said “for 3Q15, expect business simplification to generate YoY negative variance in Markets revenue of 9%, with an associated reduction in expense”, this time the revenue guidance cut is only 2%. We expect this number to prove insufficient if the current market volatility continues.

  JPM also said to “Expect 4Q15 YoY core loan growth to continue at 15%+/-.” So a 30% swing from top to bottom.

  

   

  Here is the full outlook for what was a quarter JPM would be happy to forget

  

  

  

  

  

• Is This 2000, 2007 Or 2011?

  Submitted by Lance Roberts via STA Wealth Management,

  In last week's update, I discussed the short-term oversold condition that existed at that time. To wit:

  "As you can see, the markets did retest the late August lows, and when combined with the very oversold conditions, led to a frantic "short covering" rally back to previous resistance. It is worth noting that the recent market action is very similar to that of the August decline and initial rebound as well.

   

  Of course, the question that must be answered is whether we have seen the end of the current correction or is this just another "reflexive rally" that will fail?"

  The chart below is updated through yesterday's close.

  

  Currently, the bulls have clearly been in charge of the market. The question is for "how long?"

  While last week's FOMC minutes gave the "bulls" some confidence that the Federal Reserve is not removing its accommodative policy, it was the massive amount of short-interest (people betting on markets to fall) that provided the fuel. 

  

  The chart above, from ZeroHedge, shows the massive jump in short-interest that has to be covered as stock prices rise. When players are "short the market," bullish reversals in prices force traders to close out their positions by "buying" into the market. This fuels additional buying, which pushes prices higher, which forces more players to close out their short positions. This cycle continues until the "fuel" is exhausted. This is why market rebounds tend to be extremely sharp and fast, but also fade just as quickly.

  For a visualization think about the "Whoosh Bottle" where an air/gas mixture is fairly inert until ignited by a catalyst. (Vine by @scienceporn)

  That mixture of oversold market conditions, combined with a sharp rise in "short interest" in the market, was the perfect accelerant waiting on a match.  That match was the Fed failing to hike rates and a lack of China in the headlines. 

  However, there is a big difference between a fundamentally based "bull market" advance and a short-covering rally in a "bear market" cycle. While it is too early to say that we are indeed in a bear market, there are many indications such is indeed the case as I discussed yesterday in "4 Warnings."  

  • Profit margins have had a 60bp decline.
  • Margin debt has fallen below its moving average.
  • Valuations have started to contract.
  • Economic measures have fallen sharply.

  Add to those fundamental arguments the technical deterioration of momentum and relative strength in the market and a more worrisome picture emerges. 

  

  Importantly, despite many of the mainstream calls for a continued bull market, it is worth noting that historically the negative alignment of both the fundamental warnings and technical indicators have only occurred at the onset of more protracted bear market declines.

  Could this time be different? It's possible, particularly if the Federal Reserve once again intervenes with more liquidity driven monetary policy. However, such action by the Federal Reserve seems unlikely as they are focused on "tightening" monetary policy by hiking interest rates, rather than "loosening" it with additional liquidity. Of course, another sharp decline in the market that erodes consumer confidence will likely quickly change their stance. 

  Is This 2000, 2007 or 2011?

  One of the primary arguments by the more "bullish" media is that the current setup is much like that of 2011 following the "debt ceiling" debate and global economic slowdown caused by the Tsunami in Japan. 

  While there are certainly some similarities, such as the weakness being spread from China and a market selloff, there are some marked differences. 

  From a fundamental standpoint the Federal Reserve, along with the ECB, were actively engaged in pushing support for the financial markets globally. This is not the case today, as stated above.

  Furthermore, the economy was "saved" in Q3 and Q4 of 2011 by the warmest winter in 65 years that allowed for continued manufacturing and production during a period when inclement weather is generally a concern. This also coincided with the "reboot" in Japan which allowed for "pent up" demand to be filled. As we once again face an extremely cold winter period, as we saw in the last two, the outcome fundamentally is far different. 

  From a technical backdrop, there is a striking difference as well. In 2011, asset prices plunged on fears of a "debt default" coupled with the lack of liquidity following the end of QE 2. However, price momentum and the relative strength of the underlying market internals remained bullishly biased. 

  

  Currently, the technical deterioration is more aligned with the previous bear market cycle as "sell signals" have been registered for only the third time since the turn of the century. With only one "sell signal" not registered, the moving average crossover, there is a minor "hope" for the bulls at this juncture. However, given the steepness of the decent it is likely that signal will be registered in the weeks ahead if the "bulls" are unable to gain solid footing and push markets to new highs fairly quickly. 

  No matter how you want to view the market, it is hard to make the case that this is simply just a correction within an ongoing bull market cycle. As I quoted in yesterday's post (Edward Harrison):

  "We are now in the seventh year of a cyclical recovery and bull market. Shares have tripled in that time frame. I would say this means we are much closer to the end of the business cycle than the beginning.

   

  To me, the pre-conditions for this profits recession speak to downside risk, both for risk assets and for the real economy. None of the data speaks to recession in the real economy right now. We are seeing a slowing of job growth and likely of trend economic growth as well. But with a profits recession hitting, the potential for further downside is high."

  That view, combined with the fundamental and technical backdrop that is more aligned with historical bear market cycles, suggests that excessive risk taking currently is ill-advised. If the backdrop changes to a conducive environment, then that view will change accordingly. For now, it remains prudent to use rallies to reduce risk. Remember, it is always easier to get back into the market once the path higher is clear. Conversely, it is harder, and a bit pointless, to keep using rallies simply to make up previous losses. Getting "back to even" is simply not a viable long-term investment strategy.

   

  

  

  

  

  

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• The Rise of the Sharing Economy

  Everyday I hear new stories of friends and family offering
  rides through Uber, renting out rooms in their home on AirBnB, Uber or selling product on Framestr. while it’s a fairly new way of making money, it’s here to stay. There are obvious changes in consumer practices and
  an opportunity for new market entrants to support a sharing economy in Canada.

  Why is this happening? It’s pretty clear that Canadians have
  become stretched. Debt-to-income hovers at record levels, contract positions
  have increased (at the detriment of full-time work), and housing becomes as unaffordable
  as ever.

  According to a study conducted by PWC, the sharing industry itself is projected
  to rake in $15 billion of revenue in 2015, compares to $240 billion for traditional rental services, and $335 billion by 2025.

  Such “collaborative consumption” is a good thing for several reasons. Owners are able to leverage what was previously an unused asset, in some cases, even a liability. According to Airbnb, “The typical Airbnb host in
  Montreal earns $280 a month, renting out their home 52 nights per year.” Even
  more pronounced are the benefits to the city, “Airbnb activity contributed
  $55-million to the Montreal economy over 12 months ending last March 2014.”
  Research illustrates that travellers using the service stay longer in the city
  and spend more money than typical visitors as they roam well past the city
  centre.

  However, regulators and traditional service sector
  businesses are struggling to adapt to the new economy. For example, should
  room-renters be subject to hotel taxes? In Amsterdam, officials previously used
  Airbnb
  listings to track down unlicensed hotels. In some American cities,
  peer-to-peer taxi services, such as Uber and Lyft, have been banned after
  lobbying by traditional taxi firms. The danger is that although some rules need
  to be updated to protect consumers from harm, incumbents will try to destroy
  competition. People who rent out rooms should pay tax, of course, but they
  should not be regulated like a Ritz-Carlton hotel. The lighter rules that
  typically govern bed-and-breakfasts are more than adequate.

  In addition to regulation, there are also complex insurance issues at stake.
  Take the case of Tawfiqul Alam, an UberX driver in Toronto, who was T-boned by
  a re-right runner while transporting a passenger. The accident sent both him
  and his passenger to the hospital and his vehicle was totaled. The real shock
  came after; Alam’s claim through his personal insurance company was invalid
  because the vehicle was being used for commercial use.

  According to Isaac Zisckind, a Toronto personal injury lawyer at Diamond & Diamond, personal auto insurance
  policies don’t cover drivers who are transporting passengers for commercial
  purposes. Taxi drivers are required to get a special kind of commercial
  insurance that is significantly more expensive than personal insurance, but the
  vast majority of UberX drivers — Zisckind estimates 95 per cent — don’t have
  any coverage beyond their personal insurance.

  Like any new disruptive technology, there are growing pains.
  It’s hard to imagine where we’d be as a society if we consistently derailed new
  technologies created by greater connectivity around the world.

  However, the sharing economy is the latest example of the
  internet’s value to consumers and it’s hear to stay. Canadians are forced to become more efficient with their assets to make ends meet and the sharing economy will play a large part. This emerging model is
  growing up and is a large enough force for regulators and companies to take
  notice. That is a sign of its immense potential. Start sharing.

  

  

  

  

• 8 Cities That Have Replaced Columbus Day With Indigenous Peoples Day

  Submitted by Claire Bernish via TheAntiMedia.org,

  As tensions boil on the international stage, eight U.S. cities in two months abolished a federal holiday that has long insulted and infuriated the indigenous population and many others — Columbus Day — but that’s not all. These eight cities (including three just last week) then replaced much-maligned October 12 “holiday” with one long overdue: Indigenous Peoples Day.

  Here’s the rundown of U.S. cities that decided a brutal imperialist might not be an appropriate figure to celebrate:

  1. Albuquerque, New Mexico

  In an official declaration of the transformation of the second Monday in October to Indigenous Peoples Day, the city made “an effort to reveal a more accurate historical record of the ‘discovery’ of the United States of America” by recognizing “the occupation of New Mexico’s homelands for the building of our City.” This year, Albuquerque is encouraging businesses and individuals to “reflect upon the ongoing struggles” of the indigenous population “and to celebrate the thriving culture and value” of their societal contributions.

  2. Lawrence, Kansas

  Haskell University students — representing 151 tribal nations — have been trying since September for implementation of Indigenous Peoples Day. Their endeavor finally paid off on October 6th at a City Commission meeting, where Mayor Mike Amyx announced that in order to observe “that the city of Lawrence was built upon the homelands of the Kansa and Osage people” and that “Indigenous peoples’ intellectual, spiritual, and deep cultural contribution has enhanced the character of the City of Lawrence.”

  Haskell Indian Nations University’s Student Senate President Christopher Sindone called the transformation a move toward unity. Expressing surprise, he said, “For them to pass something like this, as a city, from being at Haskell, that’s 180 years of resiliency by Native Americans recognized.”

  3. Portland, Oregon

  Portland City Council last week announced an outcome tribal leaders had pursued for over six decades: Instead of Columbus Day, by a declaration, October 12, 2015 will be Indigenous Peoples Day. In an interview with local station KOIN-6, tribal chairman of the Confederated Tribes of Grand Ronde, Reyn Leno, said of the largely symbolic declaration:

  “We’ve been here for hundreds of thousands of years, and we’ve been shy about telling our story. I think that has led the public to have a lot of interest in what we do. We’ve been working hard to tell our story and the story of all Native Americans, and this is just one more movement toward getting that accomplished. You can pour all your concrete and lay all your gravel and blacktop, but these are still the lands that our people walked.”

  4. St. Paul, Minnesota

  In August, St. Paul City Council passed a resolution intended to “reaffirm the commitment to promote the well-being and growth of St. Paul’s American Indian and Indigenous community” by celebrating Indigenous Peoples Day instead of Columbus Day on the traditionally designated second Monday in October.

  With language similar to other cities’ resolutions of the holiday, city officials recognize that St. Paul was built “on the homelands of the Dakota people” and that “indigenous nations have lived upon this land since time immemorial.”

  5. Bexar County, Texas

  On Tuesday last week, the Bexar County Commissioners Court resolved to designate October 12th as Indigenous Peoples Day — a move to be inclusive of Native American history that recently helped the San Antonio Missions garner UNESCO World Heritage status.

  City Councilman Ray Saldaña and indigenous advocate Antonio Diaz are now collaborating on a council consideration request to formally bring the same measure before San Antonio City Council.

  6. Anadarko, Oklahoma

  “The city of Anadarko strongly supports the proposition that Indigenous Peoples Day shall be an opportunity to celebrate the thriving cultures and values of the Indigenous Peoples of our region,” stated Mayor Kyle Eastwood in a mid-September meeting in Anadarko City Hall’s council chambers. Apache, Choctaw, Delaware, Wichita, and affiliated tribe members and leaders attended the reading of the full proclamation to replace Columbus Day with Indigenous Peoples Day — a proposal originally brought by Chamber of Commerce Executive Director and Choctaw Nation member, David Scott.

  “We are only able to learn from our past when we learn the facts,” said Eastwood. “I hope this step will be the beginning of our learning from history when it comes to the role indigenous peoples played and still play in the creation of this wonderful country.”

  He added this was an opportunity to put past differences aside because “Anadarko does best when we work together.”

  7. Olympia, Washington

  Replacing that contentious federal holiday’s spot on October’s second Monday, Indigenous Peoples Day will henceforth be celebrated by the City of Olympia, answering a request filed in October last year. An August 17th rally at Heritage Park saw member representation from the Squaxin, Nisqually, Quileute, and Quinault Nations deliver speeches and join in traditional songs to an audience of nearly 150 people standing in support of the measure.

  Mayor Stephen Buxbaum’s proclamation, read by Mayor Pro Tem Nathaniel James, in part noted the city’s responsibility to “oppose the systemic racism toward Indigenous People in the United States, which perpetuates poverty and income inequality, and exacerbates disproportionate health, education, and social stability.”

  Indigenous Peoples Day is meant to celebrate the contributions of the Squaxin, Nisqually, Quinault, Puyallup, Chehalis, Suquamish, and Duwamish tribal nations and their influence on the city.

  The City of Olympia does not recognize or celebrate Columbus Day.

  8. Alpena, Michigan

  At the beginning of September, Alpena Mayor Matt Waligora proclaimed October 12th would be called Indigenous Peoples Day to facilitate a productive relationship based on mutual respect and trust between the city, the Saginaw Chippewa Tribe, and all indigenous people in the region.   

  The proclamation was to be read during the celebration of the cultural and societal contributions of the area’s indigenous peoples, taking place over what is traditionally Columbus Day weekend, October 9th through the 12th.

  *  *  *

  These eight cities follow Minneapolis and Seattle in creating official recognition for Indigenous Peoples Day. Oklahoma City attempted to pass a similar measure unsuccessfully in September, but plan to try again on October 13th — the day after Columbus Day.

  *  *  *
  Meanwhile, in Detroit, someone took an ax to the forehead of a Christopher Columbus bust (with fake blood spilling out).

  

  

  

  

  

  

• AsiaPac Stocks Tumble After Chinese Trade Data Signals Growing Global Growth Scare

  After an initial knee-jerk reaction (perhaps on better-than-expected exports – signalling perhaps the devaluation 'worked), AsiaPac stocks are tumbling rapidly as the 11th monthly decline in imports (down a stunning 17.7% YoY in Yuan terms) signaling significant domestic weakness (and thus a larger drag on global growth).

  

  As Bloomberg reports,

  China’s imports extended the longest losing streak in six years, underscoring the headwinds to global growth from a rebalancing in the world’s second-largest economy and declining commodity prices.

   

  Imports plunged 17.7 percent in yuan terms in September, widening from a 14.3 percent decrease in August and an 11th straight decline. Overseas shipments fell 1.1 percent in September in yuan terms, the customs administration said Tuesday, compared with a 6.1 percent drop in August. The trade surplus was 376.2 billion yuan ($59.4 billion).

   

  

   

  The import slide reflects the pressure China’s economic slowdown is having on global growth and this year’s plunge in commodity prices. On the export side, signs of stabilization suggest improved external demand and offers the first indication that the People’s Bank of China’s surprise devaluation of the yuan in August is giving a boost to competitiveness.

   

  "Import growth remained sluggish, suggesting weakening domestic demand, particularly investment demand," said Yang Zhao, China economist at Nomura Holdings Inc. in Hong Kong. "We maintain our view that GDP growth will decline to 6.7 percent in the third quarter.”

  Of course, policymakers are out with more promises…

  • *DJ China Customs Spokesman: Weaker Yuan to Help Boost Exports

  Which we are sill sound an awful lot like currency manipulation to The US Congress.

  

  

  

  

  

• Inspired By Game Of Thrones, TEPCO Resumes Building "Ice Wall" Around Fukushima

  14 Months after abandoning the "Game of Thrones"-esque frozen-water-wall containment plan for Fukushima, Bloomberg reports that TEPCO expects to begin freezing a soil barrier by the end of the year to stop a torrent of water entering the wrecked Fukushima nuclear facility, moving a step closer to fulfilling a promise the Japanese government made to the international community more than two years ago. Officials noted, rather uninspiringly, the frozen wall, along with other measures, "should be able to resolve the contaminated water issues before the Olympic games."

   

  When they unveiled this "Pacific-Rim-like' 1.4km long ice-wall a year ago, we snarkily wished them luck, questioning their sanity. Of course, we got a hint when TEPCO admitted that "we have yet to form an ice plug because we can’t get the temperature low enough to freeze the water."

  

   

  At the time, there was no Plan B – though we noted that 'wasting' JPY 32 billion on the project so far was likely helping GDP.

  But now Plan B appears to be the same as failed Plan A… (as Bloomberg reports)

  “In the last half-year we have made significant progress in water treatment,” Akira Ono, chief of the Fukushima Dai-Ichi plant, said Friday during a tour of the facility north of Tokyo. The frozen wall, along with other measures, “should be able to resolve the contaminated water issues before the Olympic games.”

   

  Solving the water management problems would be a major milestone, but Tokyo Electric is still faced with a number of challenges at the site. The company must still remove highly radioactive debris from inside three wrecked reactors, a task for which no applicable technology exists. The entire facility must eventually be dismantled.

   

  Currently, about 300 metric tons of water flow into the reactor building daily from the nearby hills. Tepco, as the nation’s biggest utility is called, has struggled to decommission the reactors while also grappling with the buildup of contaminated water.

   

  Even four years after the meltdown and despite promises from policymakers, water management remains one of Tepco’s biggest challenges in coping with the fallout of Japan’s worst nuclear disaster.

   

  The purpose of the ice wall — a barrier of soil 30 meters (98 feet) deep and 1,500 meters long which is frozen to -30 Celsius (-22 Fahrenheit) — is to prevent groundwater from flooding reactor basements and becoming contaminated.

   

  …

   

  “It is a very important issue for the public, and good water management is needed for Tepco to restore the public’s trust.”

   

  The proposed ice wall has never been done on such a scale, and there could be operational issues due to the complicated nature of the project, according to Lake Barrett, former head of the U.S. Department of Energy’s Office of Civilian Nuclear Waste Management.

  *  *  *

  Prime Minister Shinzo Abe promised in 2013 that the government would take the lead in resolving the water management issues at the Fukushima site ahead of the 2020 Tokyo Olympics. Two years later, hundreds of tons of water continue to pour into the reactor building, while tainted water at other parts of the site overflows into the ocean.

  

  

  

  

  

• Paul Craig Roberts: A Decisive Shift In The Power Balance Has Occurred

  Submitted by Paul Craig Roberts,

  The world is beginning to realize that a seachange in world affairs occured on September 28 when President Putin of Russia stated in his UN speech that Russia can no longer tolerate Washington’s vicious, stupid, and failed policies that have unleashed chaos, which is engulfing the Middle East and now Europe.

  Two days later, Russia took over the military situation in Syria and began the destruction of the Islamic State forces.

  Perhaps among Obama’s advisors there are a few who are not drowning in hubris and can understand this seachange. Sputnik news reports that some high-level security advisors to Obama have advised him to withdraw US military forces from Syria and give up his plan to overthrow Assad. They advised Obama to cooperate with Russia in order to stop the refugee flow that is overwhelming Washington’s vassals in Europe. The influx of unwanted peoples is making Europeans aware of the high cost of enabling US foreign policy. Advisors have told Obama that the idiocy of the neoconservatives’ policies threaten Washington’s empire in Europe.

  But Washington’s impulsive use of power is a danger to America and to the world. Arrogant Washington politicians and crazed neoconservatives are screaming that the US must shoot down Russian aircraft that are operating against the US-supplied forces that have brought death and destruction to Syria, unleashing millions of refugees on Europe, in Washington’s effort to overthrow the Syrian government.

   

  Even my former CSIS colleague, Zbigniew Brzezinski, normally a sensible if sometimes misguided person, has written in the Financial Times that Washington should deliver an ultimatum to Russia to “cease and desist from military actions that directly affect American assets.” By “American assets,” Brzezinski means the jihadist forces that Washington has sicced on Syria.

   

  Brzezinski’s claim that “Russia must work with, not against, the US in Syria” is false. The fact of the matter is that “the US must work with, not against Russia in Syria,” as Russia controls the situation, is in accordance with international law, and is doing the right thing.

   

  Ash Carter, the US Secretary for War, repeats Brzezinski’s demand. He declared that Washington is not prepared to cooperate with Russia’s “tragically flawed” and “mistaken strategy” that frustrates Washington’s illegal attempt to overthrow the Syrian government with military violence.

   

  Washington’s position is that only Washington decides and that Washington intends to unleash yet more chaos on the world in the hope that it reaches Russia.

   

  I guess no one in hubristic and arrogant Washington was listening when Putin said in his UN speech on September 28: “We can no longer tolerate the state of affairs in the world.”

   

  The intolerable state of affairs is the chaos that Washington has brought to the Middle East, chaos that threatens to expand into all countries with Muslim populations, and chaos from which millions of refugees are flooding into Europe.

   

  Not satisfied with threatening Russia with war, Washington is preparing to send US Navy ships inside the 12-nautical-mile territorial limit of islands created by China’s land reclamation project. The Navy Times reports that three Pentagon officials have said on background that “approval of the mission is imminent.”

   

  So here we have the US government gratuitously and provocatively threatening two nuclear powers. The Washington warmongers try to pretend that land reclamation is “an act of regional aggression” and that Washington is just upholding international law by protecting “freedom of navigation.”

   

  By “freedom of navigation,” Washington means Washington’s ability to control all sea lanes. After all of Washington’s violations of international law and war crimes during the last 14 years, Washington’s claim to be protecting international law is hilarious.

   

  Lt. Gen. Michael Flynn, a former director of the US Defense Intelligence Agency, the Pentagon’s intelligence organization, said that Washington needs to understand that “Russia also has foreign policy; Russia also has a national security strategy” and stop crossing Russia’s “red lines.”  Gen. Flynn thus joins with Patrick J. Buchanan as two voices of sense and sensibility in Washington. Together they stand against the arrogance and hubris that will destroy us.

  Several commentators, such as Mike Whitney and Stephen Lendman, have concluded, correctly, that there is nothing that Washington can do about Russian actions against the Islamic State. The neoconservatives’ plan for a UN no-fly zone over Syria in order to push out the Russians is a pipedream. No such resolution will come out of the UN. Indeed, the Russians have already established a de facto no-fly zone.

  Putin, without issuing any verbal threats or engaging in any name-calling, has decisively shifted the power balance, and the world knows it.

  Washington’s response consists of name-calling, bluster and more lies, some of which is echoed by some of Washington’s ever more doubtful vassals. The only effect is to demonstrate Washington’s impotence.

  If Obama has any sense, he will dismiss from his government the neoconservative morons who have squandered Washington’s power, and he will focus instead on holding on to Europe by working with Russia to destroy, rather than to sponsor, the terrorism in the Middle East that is overwhelming Europe with refugees.

  If Obama cannot admit a mistake, the United States will continue to lose credibility and prestige around the world.

  

  

  

  

  

• "Now Is Not The Time To Raise Rates" China Demands The Fed Live Up To Its "Global Responsibilities"

  With all eyes on China's Trade Data (due out shortly), propagandists aplenty are out en masse to explain a) China's slowing economy is a "healthy rebalancing" (in other words, please do not pull your capital, or this will get very serious), b) The Fed should not raise rates (or we will bury them in Treasury selling and force QE4), and c) Credit demand is extremely weak (in other words, no matter what supply is jammed down the banks' throats, it won't reach the real economy).

   

  The PBOC fixed the Yuan massively stronger (+0.28% – the most since Nov 2014)

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3231 AGAINST U.S. DOLLAR
  • *CHINA STRENGTHENS YUAN FIXING MOST SINCE NOV. 2014

  

   

  and injects more liquidty:

  • *PBOC TO INJECT 40B YUAN WITH 7-DAY REVERSE REPOS: TRADER

  After 8 straight days of stronger fixes, On- and Off-shore Yuan is trading back at 2-month highs (having retraced most of the August devaluation) and notably erased all of the spread between the two rates…

  

   

  Technicians note that CNY has broken below the 50DMA and retraced 50% of the August rally, targeting 6.30 as the next support….

  

   

  The USD is notably stronger (against Asian FX) once again as Asia opens

  

  *  *  *

  As Reuters reports, The Fed just got its marching orders from China…

  Now is not the right time for the United States to raise interest rates, given the global economic situation, China's Finance Minister Lou Jiwei said in an interview published in the China Business News on Monday.

   

  Speaking on the sidelines of the annual meeting of the World Bank and International Monetary Fund in Lima, Lou said developed economies were to blame for the global economic malaise because their slow recoveries were not creating enough demand.

   

  "The United States isn't at the point of raising interest rates yet and under its global responsibilities it can't raise rates," Lou was quoted as saying.

   

  The finance minister said the United States "should assume global responsibilities" because of the dollar's status as a global currency.

  But for those hoping (and praying) for moar stimulus from China to save the world, think again. As Bloomberg reports, while the QE-esque CAR program announced overnight may free up some lending "room" – there is no end-demand at anything but off-market rates (as the Chinese reach peak debt saturation like the rest of the developed world.

  PBOC Academic Warns of Falling Borrowing Demand in Real Economy

   

  Some manufacturers in China are cutting capacity and reducing borrowing demand amid increasing downward pressure in economy, Wang Yong, a professor at the People’s Bank of China’s Zhengzhou training school, writes in Securities Times.

   

  Weak demand in credit market has “severely” affected lendings and some banks are forced to reduce credit lines

   

  Policies should work on both credit supply and demand

   

  Chinese central bank’s expansion in re-lending program could increase commercial banks’ lending ability

   

  Regulators need to build confidence in cos. to boost investment and borrowing demands

  Despite The PBOC demanding yesterday that "China's market correction is nearly over" which was 'confirmed' by panic-manipulation in Chinese stocks yesterday…

  

   

  But are sliding modestly in the pre-open…

  • *FTSE CHINA A50 INDEX FUTURES FALL 0.2% IN SINGAPORE
  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 0.3% TO 3,420

  Earnings expectations continue to collapse…

  

   

  As SCMP reports, as the authorities on the mainland moved to project confidence in the country's economy and stock markets, investors yesterday picked up on the positive stance and bought shares to move the markets more than 3 per cent higher.

  Hopes are high for more official measures to boost the country's economy after the Communist Party said it would be holding a key meeting from October 26 to 29 to map out the 13th five-year plan.

   

  …

   

  A Politburo statement said the plenum would develop a strategy for building a well-off society and set the direction for the nation's socioeconomic development.

   

  …

   

  But analysts said the mini rally would not be sustained without significant policy support in the new five-year plan.

   

  "Personally, I do not see much room for further growth in the share market," said Eric Wu, an analyst in Shanghai. "It is crucial to see if this meeting will break through the reform strategies laid out since the plenum in 2012."

   

  …

   

  "We need to see a more detailed ownership reform plan for the state-owned enterprises, or a tax-reduction plan for emerging industries. If neither of the two catalysts comes into being after the party plenum, the current rebound will be small in size and unsustainable," the note said.

  ut all the excitement and re-promises from the leadership has done nothing but drive the bloody chinese to relever!!

  • *SHANGHAI MARGIN DEBT BALANCE RISES TO ONE-MONTH HIGH
  • Balance rose 3%, biggest gain since Dec. 8

  

   

  And finally, just in case you were still believing the mainstream media mantra that "China doesn't matter" – it does!!

  

   

  On a side note, Aussie miners are taking it on the chin again (just a shame their rugby team didn't last weekend)

  

   

  Charts: JPMorgan and Bloomberg

  

  

  

  

  

• The Fingerpointing Begins: House Armed Services Chairman Slams Obama's Syria Policy

  Yesterday we showed the full transcript of Barack Obama’s surreal, confrontational, stuttering 60 Minutes interview, specifically the part dealing with the US foreign policy fiasco in Syria, and by implication, with Vladimir Putin.

  For those who missed it, please watch it here. Below we have transcribed the key section which is must read for anyone curious what it looks like when the president of a formerly undisputed superpower of a unipolar world, is clutching at straws (or as far left website Vox put it, delivering “sick burns“), and in this case, clutching at the place where the teleprompter stood for advice on how to make Putin appear to be the loser in two conflicts which have either expanded Russia’s geographic territory or have boosted Russian sphere of influence by orders of magnitude in the middle ease.

  Steve Kroft: A year ago when we did this interview, there was some saber-rattling between the United States and Russia on the Ukrainian border. Now it’s also going on in Syria. You said a year ago that the United States– America leads. We’re the indispensible nation. Mr. Putin seems to be challenging that leadership.

   

  President Barack Obama: In what way? Let– let’s think about this– let– let–

   

  Steve Kroft: Well, he’s moved troops into Syria, for one. He’s got people on the ground. Two, the Russians are conducting military operations in the Middle East for the first time since World War II–

   

  President Barack Obama: So that’s–

   

  Steve Kroft: —bombing the people– that we are supporting.

   

  President Barack Obama: So that’s leading, Steve? Let me ask you this question. When I came into office, Ukraine was governed by a corrupt ruler who was a stooge of Mr. Putin. Syria was Russia’s only ally in the region. And today, rather than being able to count on their support and maintain the base they had in Syria, which they’ve had for a long time, Mr. Putin now is devoting his own troops, his own military, just to barely hold together by a thread his sole ally.

  And in Ukraine–

   

  Steve Kroft: He’s challenging your leadership, Mr. President. He’s challenging your leadership–

   

  President Barack Obama: Well Steve, I got to tell you, if you think that running your economy into the ground and having to send troops in in order to prop up your only ally is leadership, then we’ve got a different definition of leadership. My definition of leadership would be leading on climate change, an international accord that potentially we’ll get in Paris. My definition of leadership is mobilizing the entire world community to make sure that Iran doesn’t get a nuclear weapon. And with respect to the Middle East, we’ve got a 60-country coalition that isn’t suddenly lining up around Russia’s strategy. To the contrary, they are arguing that, in fact, that strategy will not work.

   

  Steve Kroft: My point is– was not that he was leading, my point is that he was challenging your leadership. And he has very much involved himself in the situation. Can you imagine anything happening in Syria of any significance at all without the Russians now being involved in it and having a part of it?

   

  President Barack Obama: But that was true before. Keep in mind that for the last five years, the Russians have provided arms, provided financing, as have the Iranians, as has Hezbollah.

   

  Steve Kroft: But they haven’t been bombing and they haven’t had troops on the ground–

   

  President Barack Obama: And the fact that they had to do this is not an indication of strength, it’s an indication that their strategy did not work.

   

  Steve Kroft: You don’t think–

   

  President Barack Obama: You don’t think that Mr. Putin would’ve preferred having Mr. Assad be able to solve this problem without him having to send a bunch of pilots and money that they don’t have?

   

  Steve Kroft: Did you know he was going to do all this when you met with him in New York?

   

  President Barack Obama: Well, we had seen– we had pretty good intelligence. We watch–

   

  Steve Kroft: So you knew he was planning to do it.

   

  President Barack Obama: We knew that he was planning to provide the military assistance that Assad was needing because they were nervous about a potential imminent collapse of the regime.

   

  Steve Kroft: You say he’s doing this out of weakness. There is a perception in the Middle East among our adversaries, certainly and even among some of our allies that the United States is in retreat, that we pulled our troops out of Iraq and ISIS has moved in and taken over much of that territory. The situation in Afghanistan is very precarious and the Taliban is on the march again. And ISIS controls a large part of Syria.

   

  President Barack Obama: I think it’s fair to say, Steve, that if–

   

  Steve Kroft: It’s– they– let me just finish the thought. They say your–

   

  President Barack Obama: You’re–

   

  Steve Kroft: —they say you’re projecting a weakness, not a strength–

   

  President Barack Obama: –you’re saying “they,” but you’re not citing too many folks.

  While there’s much more humiliation piled upon embarrassment for the president (or as a ranked democrat put it previously, handing over Syria to Putin on a silver platter is “letting him hang himself”) we’ll stop there and instead cite one highly placed “folk” who in the aftermath of Obama’s gruesome performance, decided to provide Russian media with just the soundbites they will need to make Putin’s triumph complete, when the Chairman of the House Armed Services, Mac Thornberry, slammed the Obama administration’s policy on Syria in an interview published Monday. 

  Thornberry called the White House’s recently canceled $500 million program to train and equip 5,400 Syrian rebels “a complete failure”, The Hill reports, and said the president has not yet presented any plan that has any signs of making a difference in the region. 

  “As a matter of fact, it’s going the other way,” he told the Times Record News. “As time goes on, the options for Syria get worse and worse. I think it’s getting harder and harder to see a way forward here.”

  Furthermore, as we have repeatedly warned, the chairman is concerned about Russian airstrikes in Syria to shore up Syrian President Bashar Assad and the possibility of an accident escalating into something bigger, the paper reported.

  He said Russia’s involvement in the conflict would only worsen sectarian fighting in the region.  “It is only going to inflame the Sunni versus Shia aspects of this conflict and may drive some of the Sunni countries to ratchet it up,” he said.

   

  But the peak in embarrassment came with Thornberry told the paper that he could not recall anytime during his 20 years in Congress where Russia or any other country told the U.S. when and where American forces could fly in another country.

  There  is always a first time for everything, and just in case Mac didn’t read our article from Friday, the same week as Russia telling the US where to fly, China told the US not only are US warships not welcome next to the disputed islands in the South China Sea, but that China will not tolerate any provocations on its territorial waters. 

  Perhaps the only left way for Obama to save face will be to start World War III? Just think of the upside in the S&P – all those broken Keynesian windows…
   

  

  

  

  

  

• Meet The Ghostly Iranian Spymaster Running Every Mid-East Proxy War: "He Is Everywhere But Nowhere"

  Everyone likes a good ghost story every now and again and as it turns out, at the other end of the rabbit hole that is Syria’s bloody civil war, you come face to face with a shadowy Iranian general the mere mention of whom is enough to send chills down the spines of intelligence operatives the world over.

  Earlier in September, conservative talk show host Hugh Hewitt had an awkward exchange with Donald Trump on air:

  Hewitt: Are you familiar with Gen. Soleimani?

  Trump: Yes, but go ahead, give me a little, go ahead, tell me.

  Hewitt: He runs the Quds Forces.

  Trump: Yes, okay, right.

  Hewitt: Do you expect his behavior..

  Trump: The Kurds.. have been horribly mistreated by us.

  Hewitt: No, not the Kurds, the Quds Forces, the Iranian Revolutionary Guard Quds Forces.

  Trump: Yes, yes.

  Hewitt: The bad guys.

  Trump: Right.

  Here’s how The New Yorker describes Hewitt’s “bad guys”: “The force is the sharp instrument of Iranian foreign policy, roughly analogous to a combined C.I.A. and Special Forces.”

  Their commander is Gen. Qassem Soleimani and if you believe the legend, he is a spy among spies – a general among generals – a kind of ghost story that intelligence agents might tell their kids around a campfire.

  Weeks ago, we began to suggest that it was Soleimani who orchestrated the Russian-Iranian incursion in Syria. That now looks to have been the case as we explained in “Mid-East Coup: As Russia Pounds Militant Targets, Iran Readies Ground Invasions.” But before we delve further into the General’s role in Syria, we’ll first give you a taste of the backround story behind a man who many Iranians look upon with near religious reverence.

  There are competing accounts regarding Soleimaini’s birthplace. Consider the following from the American Enterprise Institute: 

  “According to the US Department of State, Suleimani was born in the city of Qom on March 11, 1957. Persian-language sources contest this claim, identifying the village of Rabord in Kerman Province in south-eastern Iran as Suleimani’s place of birth[9]–which has significant implications for understanding Suleimani. Qom’s population is centered around religion, including theologians and seminary students from all over the world, along with pilgrims and those who make their living from the pilgrimage industry. In contrast, the mountain village of Rabord in remote Kerman–closer to the Afghan border–has a tribal structure, which would have prepared Suleimani for operating in tribal societies such as those in Afghanistan and Iraq.” 

  Keep that last bolded passage in mind. 

  When Soleimani was a child, he and a relative left home to earn money for their fathers who they feared would be arrested in connection with money their families owed to the Shah. Soleimani worked menial jobs until 1979 when, after the Shah was overthrown by Ayatollah Ruhollah Khomeini, he joined the newly-created Revolutionary Guard. When Saddam invaded Iran, Soleimani was sent to the frontlines as a water boy (literally) and ended up staying there until the end of the war. Here are a few excerpts from The New Yorker’s account:

  Suleimani earned a reputation for bravery and élan, especially as a result of reconnaissance missions he undertook behind Iraqi lines. He returned from several missions bearing a goat, which his soldiers slaughtered and grilled. “Even the Iraqis, our enemy, admired him for this,” a former Revolutionary Guard officer who defected to the United States told me. On Iraqi radio, Suleimani became known as “the goat thief.” In recognition of his effectiveness, Alfoneh said, he was put in charge of a brigade from Kerman, with men from the gyms where he lifted weights.

   

  The Iranian Army was badly overmatched, and its commanders resorted to crude and costly tactics. In “human wave” assaults, they sent thousands of young men directly into the Iraqi lines, often to clear minefields, and soldiers died at a precipitous rate. Suleimani seemed distressed by the loss of life. Before sending his men into battle, he would embrace each one and bid him goodbye; in speeches, he praised martyred soldiers and begged their forgiveness for not being martyred himself. When Suleimani’s superiors announced plans to attack the Faw Peninsula, he dismissed them as wasteful and foolhardy. The former Revolutionary Guard officer recalled seeing Suleimani in 1985, after a battle in which his brigade had suffered many dead and wounded. He was sitting alone in a corner of a tent. “He was very silent, thinking about the people he’d lost,” the officer said.

  Iran, bitter at the West’s role in helping Saddam during the war (yes, that’s right, the US has been using the same flawed Mid-East foreign policy for decades wherein the only thing that matters is expediency, leading directly a disastrous brand of geopolitical myopia) but having come away with a lesson in the futility of open warfare, set out (again in The New Yorker’s words) to “build the capacity to wage asymmetrical warfare—attacking stronger powers indirectly, outside of Iran.” The Quds Force was born.

  You can read more details of Soleimani’s exploits in the articles cited and linked above including how he battled the Taliban on the Afghan border, but for brevity’s sake, suffice to say he became the Quds commander in 1998. From then on, he capitalized on various opportunities to build the alliances that Tehran needed in order to ensure that the regional balance of power didn’t tip too far in the direction of Riyadh and the Sunnis. In one famous case, he allegedly tried to orchestrate the assassination of the Saudi ambassador in a Washington DC restaurant. From Wikileaks:

  Designated today pursuant to Executive Order (E.O.) 13224 for acting for or on behalf of the IRGC-QF were: Manssor Arbabsiar, a naturalized U.S. citizen holding both Iranian and U.S. passports who acted on behalf of the IRGC-QF to pursue the failed plot to assassinate the Saudi ambassador; IRGC-QF commander Qasem Soleimani.

  He also coordinated heavily with the US in the wake of 9/11 before Bush’s “axis of evil” comment soured the relationship at which point the General purportedly began sponsoring attacks on US troops. He formed stronger relations with Hezbollah and developed powerful Shiite militias in Iraq on the way to becoming what one former Iraqi official described as “the most powerful man in the country, without question.” He is even feared by the Peshmerga, who aren’t exactly known for cowardice. Sound far fetched? Consider the following short clip: 

  Don’t forget that Russia and Syria just recently sealed an intelligence sharing deal which is almost invariably the precursor to Russian bombing raids in support of Iraq’s Shiite militias as they battle ISIS.

  And as for who’s arming the Shiite Houthis in Yemen against the Saudis: you guessed it, Soleimani.

  As for Syria, he has quite simply been running the show for years. As one American official told The New Yorker two years ago, “he’s running the war [in Syria] himself.” Here’s an excerpt from a 2009 secret diplomatic cable (again, via Wikileaks):

  The public showcasing of these three visits  contrasted with the secrecy with which Iranian Revolutionary  Guard Commander/al-Quds Force Ghassem Soleimani conducted  his.  Reportedly accompanying Jalili, Soleimani returned to  Damascus after a long absence, perhaps a reflection of  lingering tensions between Iran and Syria that erupted after  the February 2008 assassination of Hizballah military  strategist Imad Mugniyah in the Syrian capital.  Al Hayat  Bureau Chief Ibrahim Hamidi (strictly protect) spoke very reluctantly about Soleimani’s presence in Damascus, saying  only that “he was here,” and “when he visits, it’s usually  significant.” 

  The problem, in Soleimani’s own words, is that “the Syrian Army is useless!” And so in light of that rather blunt assessment, the General appears to have gotten fed up with SAA incompetence leading directly to the following:

  Back in June, the commander of Iran’s Quds Force, Qasem Soleimaini, visited a town north of Latakia on the frontlines of Syria’s protracted civil war. Following that visit, he promised that Tehran and Damascus were set to unveil a new strategy that would “surprise the world.” 

   

  Just a little over a month later, Soleimani – in violation of a UN travel ban – visited Russia and held meetings with The Kremlin. The Pentagon now says those meetings were “very important” in accelerating the timetable for Russia’s involvement in Syria. The General allegedly made another visit to Moscow in September.

  Here is Reuters with more color on what exactly took place when Soleimani flew to Moscow:

  At a meeting in Moscow in July, a top Iranian general unfurled a map of Syria to explain to his Russian hosts how a series of defeats for President Bashar al-Assad could be turned into victory – with Russia’s help.

   

  Major General Qassem Soleimani’s visit to Moscow was the first step in planning for a Russian military intervention that has reshaped the Syrian war and forged a new Iranian-Russian alliance in support of Assad.

   

  As Russian warplanes bomb rebels from above, the arrival of Iranian special forces for ground operations underscores several months of planning between Assad’s two most important allies, driven by panic at rapid insurgent gains.

   

  Senior regional sources say Soleimani has already been overseeing ground operations against insurgents in Syria and is now at the heart of planning for the new Russian- and Iranian-backed offensive.

   

  That expands his regional role as the battlefield commander who has also steered the fight in neighboring Iraq by Iranian-backed Shi’ite militia against Islamic State.

   

  His Moscow meeting outlined the deteriorating situation in Syria, where rebel advances toward the coast were posing a danger to the heartland of Assad’s Alawite sect, where Russia maintains its only Mediterranean naval base in Tartous.

   

  “Soleimani put the map of Syria on the table. The Russians were very alarmed, and felt matters were in steep decline and that there were real dangers to the regime. The Iranians assured them there is still the possibility to reclaim the initiative,” a senior regional official said. “At that time, Soleimani played a role in assuring them that we haven’t lost all the cards.”

   

  Three senior officials in the region say Soleimani’s July trip was preceded by high-level Russian-Iranian contacts that produced political agreement on the need to pump in new support for Assad as his losses accelerated.

   

  The decision for a joint Iranian-Russian military effort in Syria was taken at a meeting between Russia’s foreign minister and Khamenei a few months ago, said a senior official of a country in the region, involved in security matters.

   

  “Soleimani, assigned by Khamenei to run the Iranian side of the operation, traveled to Moscow to discuss details. And he also traveled to Syria several times since then,” the official said.

   

  The Russian government says its Syria deployment came as the result of a formal request from Assad, who himself laid out the problems facing the Syrian military in stark terms in July, saying it faced a manpower problem.

   

  Khamenei also sent a senior envoy to Moscow to meet President Vladimir Putin, another senior regional official said. “Putin told him ‘Okay we will intervene. Send Qassem Soleimani’. 

  And the rest, as they say, is history in Syria.

  That, in brief, is the story of Iran’s spymaster general who not only controls Iraqi politics and serves as the supreme commander for the country’s various Shiite militias, but who is also the puppet master for the Houthis and Hezbollah. Now, he’s orchestrated Russian air support for Iran’s ally in Damascus. 

  Everything laid out above would obviously be intriguing enough on its own but consider one last excerpt, this one from BBC:

  Switch on the television in Iran these days and it won’t be long before you see General Qasem Soleimani.

  The once reclusive head of the Revolutionary Guards’ elite Quds Force has emerged from a lifetime in the shadows directing covert operations abroad, to achieve almost celebrity status in Iran.

   

  The man who, until a couple of years ago most Iranians would not have recognised on the street, is now the subject of documentaries, news reports and even pop songs.

   

  One music video widely shared in Iran was made by Shia militia fighters in Iraq. It shows soldiers spray-painting the general’s portrait on a wall and parading in front of it while stirring music plays in the background.

   

  Inside Iran a campaign has started among conservative bloggers for Gen Soleimani to go into politics. They have dubbed him Iran’s most honest and least corrupt politician and are calling for him to put his uniform aside and stand for president in 2017.

  Is Soleimani set to make a play for the Iranian presidency? And if so, what comes next? That is, what use is the Ayatollah in the face of the most revered general in the country who all at once embodies everything the Supreme Leader stands for while also possessing a steely resolve and measured (or maybe “calculated” is the better word) approach to diplomacy? Finally, what happens if the man who, in the West anyway, is generally considered to be the number one agent for state sponsored terror becomes president shortly after the nuclear deal?

  Perhaps this is simply an example of a decorated war verteran around which a legend has grown that bears no resemblance to reality. 

  Or perhaps – just perhaps – there’s something bigger going on and between all of the Moscow versus Washington, East Vs. West, Cold War 2.0 headlines everyone simply missed it. And if there is a bigger picture here, will we even get to see it play out, or will Soleimani simply recede back into the shadows to run the show from behind the curtain?

  And on that note, we close with one quote, and one clip…

  A senior US official in 2011: “He is indeed like Keyser Soze. He is everywhere, but nowhere.”

  

  

  

  

  

• "We've Never Seen Anything Like This" – Dumbfounded Central Bankers Brace For "Rolling Series Of Crises"

  One of the most important things to grasp about the Fed’s September (in)decision is that the FOMC had no viable options when it came to emerging markets. 

  The combination of low commodity prices, falling demand, slumping global trade, a decelerating China, and the yuan devaluation have all served to accelerate capital outflows for EM and there’s certainly an argument to be made for the contention that a Fed hike and a subsequent spike in the dollar would be just about the last thing EM needs when it comes to stopping the bleeding. 

  That said, there’s another line of argumentation which says the Fed missed its window to hike long ago and so now, all they’re doing in the Eccles Building is fostering continued uncertainty which is also causing capital to flow out of EM. 

  In the simplest terms possible: no one really has any idea whether it’s best to rip the band-aid off or not, and adding to the confusion is the fact that the Fed has now telegraphed its own uncertainty by explicitly acknowledging the reflexivity problem, meaning EMs (and everyone else for that matter) are desperately trying to figure out how to incorporate themselves into their own outlook for what the Fed may or may not do. 

  Here’s how one former Treasury economist framed the latter argument:

  ”Short-end rates move higher as the Fed gets closer to hiking, and that causes the dollar to strengthen, and that causes global funding stresses. They are creating the conditions that are causing the external environment to be weak, and then they say they can’t hike because of those same conditions that they have created.” 

  Obviously this is an impossible quagmire. There’s no way out and the decision is just going to get more difficult with each passing FOMC meeting. It’s made all the more convoluted by the fact that not hiking sends a negative message about the US economy, thus imperiling domestic risk assets but hiking could send EM over the edge … or maybe not… or who knows. 

  The wording there is no accident. It’s literally that indeterminate.

  That’s the problem facing the world’s EM central bankers and as you can see from the following, everyone is simply dumbfounded. 

  Via The New York Times:

  After a week of discussions [in Lima], bankers and policy makers agreed that stemming the rush of investments from emerging markets was one of the most important challenges facing the global economy. But there was little agreement on how to actually do that.

   

  On official panels, in closed-room sessions and over drinks in Lima restaurants, market participants struggled to come to grips with the persistent flows of money escaping emerging-market stocks and bonds in search of safer investment shores.

   

  “We have never seen something like this,” said Hung Tran, a senior executive at the Institute of International Finance, a trade group for global banks. Mr. Tran said that he was expecting net outflows from emerging markets to be around $800 billion for this year and next — by far the largest amount since institutions began investing in these markets in the late 1980s.

   

  The fear is that these numbers could increase substantially, especially if China’s currency weakens further. That could result in a rolling series of emerging-market crises.

   

  At the root of the debate has been whether the Federal Reserve’s decision last month to hold interest rates near zero has increased investor confidence in emerging markets or hurt it.

   

  Those on the front lines of the outflows of funds from the emerging markets — central bankers in countries like Brazil, Turkey, Malaysia and Mexico — are beginning to say that the Fed’s decision to hold back has actually made their job more difficult. That is because instead of staying put, or making new investments, investors are rushing out all the faster, spooked that the Fed has larger fears about China and other emerging markets.

   

  “I heard time and again this week from governors of emerging-market central banks that it’s not the hike itself that worries them,” said Jacob A. Frenkel, the chairman of J.P. Morgan Chase International and the former head of Israel’s central bank. “It’s how much and when it occurs.”

   

  “Delaying an increase in rates only increases volatility and uncertainty in emerging markets,” said David Fernandez, a currency and bond specialist at Barclays in Singapore. “Emerging markets will continue to see outflows.”

  As indicated above, there’s really no telling if these bankers’ assessments are correct. That is, it could very well be that when the hike actually comes – even if it’s a paltry and largely “symbolic” 25 bps – the resultant “tantrum” (so to speak) will be far worse than the what would have occurred if the Fed had just remained on hold and left everyone in suspense. But again, we won’t know until it’s too late. 

  Meanwhile, it’s important to remember that the fundamentals are awful across EM and at the end of the day, that’s the problem. The obsession with the Fed is unhealthy for any number of reasons, but when you’ve got a commodity space that’s in freefall, declining global growth and trade, and acute political crises that include a civil war in one key market (Turkey) and an intractable legislative stalemate in another (Brazil), it’s not entirely clear that even if the Fed were to somehow get everything just right going forward that the picture would materially change for the world’s emerging economies.

  

  

  

  

  

• US Paradrops 50 Tons Of Ammo To Syrian Rebels

  As we noted over the weekend, the US has now thrown in the towel on the ill-fated (and that’s putting it lightly) strategy of training Syrian fighters and sending them into battle only to be captured and killed by other Syrian fighters who the US also trained. 

  The Pentagon’s effort to recruit 5,400 properly “vetted” anti-ISIS rebels by the end of the year ended in tears when the entire world laughed until it cried after word got out that only “four or five” of these fighters were actually still around. The rest are apparently either captured, killed, lost in the desert, or fighting for someone else. 

  This has cost the US taxpayer somewhere in the neighborhood of $40 million over the last six months.

  Because this latest program was such a public embarrassment, the Pentagon had to come up with a new idea to assist Syria’s “freedom fighters” now that they are fleeing under bombardment by the Russian air force only to be cut down by Hezbollah.

  The newest plan: helicopter ammo. No, really. The US has now resorted to dropping “tons” of ammo into the middle of nowhere and hoping the “right” people find it. 

  No, really. 

  Here’s CNN:

  U.S. military cargo planes gave 50 tons of ammunition to rebel groups overnight in northern Syria, using an air drop of 112 pallets as the first step in the Obama Administration’s urgent effort to find new ways to support those groups.

   

  Details of the air mission over Syria were confirmed by a U.S. official not authorized to speak publicly because the details have not yet been formally announced.

   

  C-17s, accompanied by fighter escort aircraft, dropped small arms ammunition and other items like hand grenades in Hasakah province in northern Syria to a coalition of rebels groups vetted by the US, known as the Syrian Arab Coalition.

  And here’s a bit more color from GOP mouthpiece Fox News:

  The ammunition originally was intended for the U.S. military’s “train and equip” mission, the official said. But that program was canceled last week. 

   

  “So now we are more focused on the ‘E’ [equip] part of the T&E [train & equip],” said the official, who described equipping Syrian Arabs as the focus of the new strategy against ISIS. 

   

  The Defense Department announced Friday that it was overhauling the mission to aid Syrian rebel fighters. After the program fell far short of its goals for recruiting and training Syrian fighters, the DOD said it would focus instead on providing “equipment packages and weapons to a select group of vetted leaders and their units so that over time they can make a concerted push into territory still controlled by ISIL.” 

   

  The shift also comes as Russia continues to launch airstrikes in Syria, causing tension with the U.S. amid suspicions Moscow is only trying to prop up Bashar Assad. 

   

  Col. Steve Warren, spokesman for the U.S.-led anti-ISIS coalition, confirmed that coalition forces conducted the airdrop on Sunday. 

   

  “The aircraft delivery includes small arms ammunition to resupply counter-ISIL ground forces so that they can continue operations against ISIL. All aircraft exited the drop area safely,” he said in a statement. All pallets successfully were recovered by friendly forces, a U.S. official said.

  Yes, “friendly forces.”

  Just let the hilarity of that sink in.

  The US just paradropped 50 tons of ammo on pallets into the most dangerous place on the face of the planet with no way of ensuring that it falls into the “right” hands (it goes without saying that the term “right” is meaningless there). Meanwhile, the Russians are dropping bombs on the same extremists who are set to receive the guns the US is dropping. 

  Of course if it does somehow fall into the “wrong” hands, it wouldn’t be the first time (see Mosul and recall the $500 billion worth of weapons Washington “misplaced” in Yemen) and as we said a few days ago, this is at least great news for the military-industrial complex. It means more “terrorist attacks” on U.S. “friends and allies”, and perhaps even on U.S. soil – all courtesy of the US government supplying the weapons – are imminent.

  

  

  

  

  

• The Monetary Policy Dead-End

  Submitted by Christopher Dembik via SaxoBank,

  The Federal Reserve’s September status quo proved how difficult it is for central bankers to bring an end to the emergency measures they adopted in the aftermath of the 2007 crisis. Fed chief Janet Yellen’s hesitations and the market turmoil since August seem to validate that it is impossible to stop the accommodative monetary policy, unless you accept that doing so would trigger a new global crisis.
   
  Markets have been used to living in a protracted low rate environment, which led to a $57 trillion increase in public and private debt between 2008 and 2015. The surge of public debt represents almost half of this growth. It is the result of the fiscal stimulus and rescue measures taken to save the global banking system. In most advanced countries, household debt has also increased, except in the US where the financial situation of households has improved due to the default on real estate loans.
   
  The Fed is aware that raising interest rates too fast and too high could have the same effect as pressing the nuclear button. The whole system could collapse and it cannot be taken for granted that the central banks would be able to extinguish the fire this time. Their strike force has weakened because their balance sheets are exposed to market fluctuations and their credibility was seriously damaged because the measure they have taken have failed to strengthen the economy.
   
  The comeback of financial excesses
   
  The same mistakes that led to the financial crisis are now happening again worldwide. Access to credit, hardened for some time, is softening, leading to over-indebtedness and speculative bubbles. In the United States, first-time buyers can get loans covering the equivalent of  97% of their purchase. In the UK, the housing market moves the same way thanks to a first-purchase aid programme launched in 2012. It met such success that first-time buyers now account for half of real estate loans, a proportion not seen since 2000.
   
  David Cameron’s ambition to make the United Kingdom a country of owners is about to be achieved. An easier access to credit, particularly for first-time buyers, was systematically the political answer to favour the forgotten ones of globalisation.
   
  During the past 20 years, only two parts of the world’s population have seen their income grow: the Chinese and the top 1%. At the opposite end of the spectrum, the middle and working classes in western countries, as well as the poorer, have benefited sparsely from the economic spinoffs of the increasing commercial exchanges and trade restrictions removals.
   
  Their stagnating incomes urged them to borrow at attractive rates to maintain their living standards which, until now, allowed social peace. Nevertheless, this patch found by the political authorities is illusive. Should even a slight rise occur in interest rates, the most fragile households will prove unable to make their loan repayments, with consequent negative effects on demand and economic activity.
   
  Increasing income inequality
   
  Even if European GDP rises at 2% per year in the next few years, leading to a decrease of the unemployment rate, this growth would be nothing but a flash in the pan as the financial system hasn’t actually been drained and no serious anti-inequality fight has started. We live in the middle of a huge speculative bubble, possibly bigger than in 2007 because of the rise of shadow banking and quantitative easing by central banks.
   
  We can credit economist Thomas Piketty for picking on the figure of the rentier, as John Maynard Keynes did decades before, but his long-term analysis forgets the misdistribution of incomes, despite the fact that this element is enough to explain the last crisis and the one we are leaning towards.
   
  The 1914-1950 period enabled an unprecedented decrease of income inequality, but that movement was then brutally stopped. The wage differential between those who have access to knowledge and technology and those whose instruction is insufficient for highly qualified jobs is increasing and will increase with the digitalisation and robotisation of the economy. This increasing income inequality explains why demand, a traditional supporting factor in the advanced economies, is no longer sufficient to restart growth.
   
  There is no readymade solution available to impulse a better wealth distribution. Everyone knows that keeping interest rates low longer is not the solution. It prepares the ground for a new financial crisis. From this perspective, we certainly have to get used to the idea that capitalism will suffer more and more frequent upheavals, given the fact that households are not ready to accept a reduction of their consumption and that politicians are reluctant to focus on the core issues.

  

  

  

  

  

• Dennis "Every Futures Broker's Best Friend" Gartman Does It Again (Again)

  While we haven’t heard the term “churn ’em and burn ’em” for a while, we can only assume that world-renowned newsletter-writer Dennis Gartman is long futures brokers (in commission terms) as in the space of just 3 trading days he has flip-flopped (once again) from “the most bullish I’ve been” to “you have to fade the oil market here” with WTI trading at almost the exact same price level. If you listen carefully, even CNBC’s Melissa Lee is starting to get the joke…

  October 7th 1226ET… “This Is The Most Bullish I’ve Been On Crude”

   

  October 12th 1700ET… “Fade The Crude Oil Market”

   

  Or in more visual terms…

  

   

  A glimpse at the following images is all one needs to know…

  

   

  Chart: Bloomberg

  

  

  

  

• Thousands Of Angry Unpaid Chinese Workers Protest Shocking Bankruptcy Of Major Telecom Supplier

  When two weeks ago we reported what may have been the biggest layoff announcement in China’s current economic turmoil, after the second largest coal company Longmay Group announced it would lay off 100,000 – or about 40% of its entire workforce – while dramatic, the news did not shock too many. After all, China’s commodity fiasco (as a reminder, as we first reported, at current commodity prices more than half of Chinese companies do not generate enough cash flow to even cover their interest expense) is known to most and as such rationalization of this kind are only just starting: it is not exactly clear how China will deal with millions of suddenly unemployed workers, but it will only cross that bridge when it comes to it.

  Far more disturbing was today’s news from China’s prosperous, and far more high-tech, city of Shenzhen, and specifically major telecom supplier Fu Chang Electronic Technology Co. (also known as Fosunny), which supplies parts to domestic telecommunication giants such as Huawei Technologies Co and ZTE Corp. as well as international telecom companies like Vodafone and AT&T.

  The company made headlines last week after reports that it had told clients it was planning to list on the stock exchange. The news couldn’t have been more wrong because on Thursday, instead of going public, the company announced it would be going dark, when it issued a statement saying it was ceasing operations due to liquidity problems resulting from legal and debt issues.

  Even more surprising is that Fu Chang wouldn’t be the first – Fosunny is the third supplier of plastic parts to the telecom industry to go bankrupt in the past month, the Global Times said.

  The immediate outcome of the announcement, according to IBtimes, was that thousands of factory workers and suppliers staged protests outside the company’s Shenzhen office, where China Business News showed pictures of a line of police in helmets confronting a group of protesters.

  The Global Times says that protests started after the Thursday announcement and continued through the weekend, with thousands of people gathered outside the company in the Longgang District of Shenzhen, demanding compensation, according to Chen Li, whose company supplied packaging materials for Fu Chang.  Chen told the Global Times on Sunday that the impact on his company may be severe.

  “It might even lead to liquidity problems for our company and we might end up going out of business,” he said, adding that Fu Chang owes his company 2.51 million yuan ($395,600).

  Fu Chang owes banks 190 million yuan in debt and suppliers 270 million yuan, and it is two months behind on pay for its employees, the National Business Daily reported on Friday. The newspaper also said the shutdown would affect more than 3,800 employees and more than 300 suppliers. 

  In a troubling sign for China’s supposedly thriving telecom sector, Global Times cited experts as saying such firms “have seen their profit margins squeezed by rising labor costs in southern China, and a slowdown in both international and domestic demand. China’s smartphone sales contracted in the first half of this year, for the first time since 2009, while the country’s overall exports fell more than 8 percent in August, and more than 4 percent in September, compared to last year.”

  Labor experts told International Business Times recently that factory workers’ wages have risen in southern Guangdong province in particular, not least because the new generation of better-educated rural migrant workers — the mainstay of China’s labor force over recent decades — is less willing to do mindless production line work. As a result, Guangdong has seen some of its lower value-added companies close, and others move out to cheaper parts of Southeast Asia or inland parts of China.

  It is troubling (not so much for the business cycle which demands it but for China’s increasing lack of centralized control) that what was once taboo, namely Chinese corporations defaulting, has now become a practically daily occurrence.

  It is even more troubling that China’s cash flow weakness appears to have spread far more rapidly and broadly than even we anticipated, and is impacting industries which most had though would be immune from a hardish landing, if only in the beginning.

  But where it is most troubling, is that what recently became the largest market for Apple’s iPhones suddenly appears to be stuttering. And while the Fed can pretend all it wants that there are no substantial and direct connections between China and the US (just don’t tell that to Bravo TV’s Millon Dollar Listing which while thoroughly fake would absolutely not exist without Chinese buyers), if and when the world’s largest company by market cap admits just how bad the Chinese reality is, not even the US government secretly buying up all of AAPL’s excess inventory (remember: Apple is the NSA’s best friend) will save the gargantuan gadget maker which simply can not exist in a world where the marginal consumer, whether in Boston or Beijing, has tapped out.

  

  

  

  

  

• Obama Won't Back Down After Chinese Threat, Sends U.S. Warships To Contested Islands In "Matter Of Days"

  On Friday, we reported the latest provocation in what has truly become a very dangerous, if largely pointless, staring contest between Beijing and Washington over China’s reclamation of land in The South China Sea. 

  Responding to suggestions that the US was set to sail warships around the islands Beijing has constructed atop reefs in the Spratlys, China served noticed that it would “never allow any country to violate China’s territorial waters and airspace in the Spratly Islands, in the name of protecting freedom of navigation and overflight.” This was simply a formalized version of the more concise phrasing the PLA navy used when they instructed the pilots flying a US spy plane to “Go now!” when it ventured too close to Fiery Cross earlier this year. 

  It’s not immediately clear what China intends to do with the islands and further, it’s not entirely clear why anyone should necessarily care if Beijing wants to build “sand castles” in the middle of the ocean, but then again, for America’s regional allies the land reclamation efforts look a lot an attempt to build a series of military outposts by creating sovereign territory where there was none thereby effectively redrawing maritime boundaries and so, big brother in Washington is set to step in in order to protect vital shipping lanes. 

  Of course having already said that the navy plans to sail ships into the waters around the islands, the US can ill-afford to allow China’s “we won’t tolerate that” pronouncement to deter the Pentagon because the optics around that would be terrible at a time when the world is already questioning the strength and resolve of the US military. So the ships will indeed sail. Here’s WSJ:

  The U.S. determination to challenge China with patrols near Chinese-built islands in the South China Sea will test Xi Jinping’s recent pledge that Beijing doesn’t intend to “militarize” the islands, an announcement that took U.S. officials by surprise.

   

  The Chinese leader made the commitment during a news conference with President Barack Obama at the White House late last month, though he left it unclear how the pledge would affect China’s activities in the disputed area of the South China Sea.

   

  If Mr. Xi’s goal was to discourage the U.S. from conducting patrols near the artificial islands, he doesn’t appear to have succeeded. After months of debate in the U.S. government, there is now a consensus that the U.S. Navy should send ships or aircraft within 12 nautical miles of the artificial islands to challenge China’s territorial claims there, according to people familiar with internal discussions.

   

  
  

   

  A U.S. official confirmed Sunday that a decision had been made to conduct such patrols but said it was unclear when that might happen or where exactly. “It’s just a matter of time when it happens,” the official said. Another U.S. official indicated that the operation could come within days.

   

  The question now is whether China will respond to such operations by reining in its plans to develop the islands or backing away from the commitment not to militarize them, pointing to the U.S. patrols as a provocation.

  Anyone who knows anything about how China generally prefers to respond in situations like these knows that Beijing will almost certainly call any US naval presence a “provocation” and they’ll be exactly right. After all, there’s something rather ironic about claiming that China is in the process of militarizing the South China Sea and then deciding that the best way to de-escalate the situation is to sail warships to the area. Here’s WSJ again:

  The Pacific Fleet has been ready to conduct “freedom of navigation operations,” or Fonops, around China’s artificial islands for months after being asked to draw up options by U.S. Defense Secretary Ash Carter earlier this year. The decision to begin the patrols appears to have been delayed to avoid disrupting the summit, people familiar with internal discussions say.

   

  “A U.S. Fonop gives China an opportunity to assert that the United States is the country ‘militarizing’ the South China Sea and, if China chooses, such a Fonop provides a rationale for China to further militarize or develop the features it occupies,” said Taylor Fravel, an expert on the Chinese military at the Massachusetts Institute of Technology.

  So in reality, the real question is this: now that Russia has moved to effectively reclaim the Mid-East from US influence, and now that China is in the process of using its island building efforts to establish what we’ve called a kind of Sino-Monroe Doctrine, how long will it be before someone actually challenges the US military by shooting down a plane in the desert or firing on a ship in the Spratlys just to test Washington’s resolve?

  * * *

  Finally here again, as a reminder, are the satellite images which demonstrate the extent to which Beijing is “changing the landscape”, so to speak, in the South China Sea.

  Subi:

  

  

  Fiery Cross:

  

  

  Mischief: 

  

  

  

  

  

  

  

• Democracy Uber Alles (But Only When It Goes Our Way)

  Submitted by Tibor Machan via Acting-Man.com,

  Democracy – but only when it goes your way!

  Over the years of watching the democratic process I’ve noticed something important.  People tend to reject democracy, indeed, fight it tooth and nail, when it doesn’t go their way.  But when it does, well, it is the tops.

  Consider the case of California’s Proposition 187.  Then governor Gray Davis of California was maneuvering to essentially gut this referendum, one that won with over 60% of the votes.  So let us recognize that the leader of the Democratic Party in California has no problem rejecting what the majority of the people want when he and his friends believe that the people are wrong.

   

  

  Former California governor Gray Davis, a typical representative of the cronyism prevalent in the US merchant State. What eventually tripped him up wasn’t his attempt to gut prop. 187 by legal maneuvering, but his perceived poor performance during California’s energy crisis. Many of his energy advisors were the very speculators who benefited the most from the crisis. It was one affront too many. Davis was the first member of California’s ruling caste to fall prey to a recall, after 117 previous recall attempts throughout California’s history had failed, and only the 2^nd politician in US history to suffer this ignominious fate. During the boom of the 1990s, Davis had greatly expanded government spending, landing California with a near $35 bn. deficit when the bust inevitably struck.

  Now if you believe in democracy regarding the handling of certain problems in society, whether people actually have signed up for that process, you will go along with the verdict regardless of whether you like the outcome.  That is a principled defense of democracy.

  During all the health (Obama) care reform debates it is liberal Democrats who said, repeatedly, that their demand for a government supervised health care system merely expresses the will of the public and thus has ample legitimacy behind it.

  That is why there is so much polling, too, by the media — it is widely believed that if “the people” want something, then it is OK. What, then, makes for a good law for champions of democracy is whether the majority wants it to be enacted.  (One reason that most Democrats used to oppose a balanced budget amendment is that they believe it would place undue obstacles before the will of the people.  Surely if they people want to go into debt [read: if that’s what the majority wants], we ought all to comply and go into debt.)

   

  

  A couple of well-known affordable health-care act zingers. #Grubered is a well-known scandal (see “Dr. Gruber, wie geht’s dir?” and “#Grubered” for the highly amusing details) which was however at least marked by a truly candid assessment on the part of the good doctor/government advisor, who described the obfuscation tactics and the reliance on the “stupidity of the American voter” that were so instrumental in passing the law. What is perhaps less well known is that Ms. Pelosi channeled mid 1930s and mid 1940s satirists and cartoonists when she made her infamous remark about having to “pass the law so that you can find out what’s in it” – more on this below this post.

   

  The people — the public interest, the general will, the greatest satisfaction of the greatest number, the will of the people, etc. — have been the objects of adoration of the leading lights of the Democratic Party.  Until the people no longer like what Democrats want, that is.

  Consider prop 187.  The people of California wanted it.  But the Democrats did not.  Some years back they did want to make people in business stop hiring illegal aliens, so they enacted legislation and claimed, again, that they impose such restrictions and delegate such police powers as this requires on businesses because, well, the people demand it.

  But if you keep fighting the outcome, via law suits and such, you testify to your dismissal of democracy in favor of something else — say, judicial intervention, some kind of higher law that democracy must not abridge, whatever.

  Not that there is that much wrong with judicial intervention, as far as I can tell.  After all, the US Supreme Court interferes often when Congress or some other political body acts in defiance of the US Constitution, thus testifying to the conviction that there are some things that are way beyond the reach of the democratic process.

  And few folks think it would be OK to, say, vote the Mooney church out of existence or to vote to shut down the New York Times.  That is because the US Constitution protects church and press from democratic meddling, no matter how eager the majority of the people are to meddle.

   

  Leaving Matters to Popular Vote – When Convenient

  One of the mainstays of the liberal democrats, mainly members of the Democratic Party of the United States of America, has been that in most matters we should leave decisions up to a vote.

  We should vote on whether smoking is to be allowed in restaurants, how much money is too much when given to political candidates, whether zoning ordinances are to be enacted, how high taxes should be, how to run public schools, and so forth and so on.

  Not OK by me, of course, but notice that it isn’t OK even by those who champion the “democracy uber alles” theme.  The process seems to be kosher only until things don’t quite go the liberal democratic way.

  The flack over Proposition 187 was a wonderful case in point.  Just how hypocritical can you get!  Be a fervent supporter of people power except when people do not like what you like.  Then suddenly people power sucks.

  I guess California’s majority will have to pick and choose some other issue on which to unite in order to fend off the duplicitous legalism of liberal Democrats.  I am sure there will be no problem with voting away private property rights, voting for massive government intervention in practically any area of human life, voting for extensive government regulation of business, medicine, and so on.

   

  

  Frederic Bastiat had the right idea about socialist statism and the associated legalism. Generally speaking one could state that statism gives you “laws”, but not justice. To the extent that State power expands, the power of society is diminished.

   

  But if there is a successful vote to rid the community of the expanding tyranny of government, the liberal democrats suddenly aren’t democrats any more.

  It just goes to show you.  In their hearts of hearts most democrats are never really democrats at all but merely opportunists who make use of the power of the majority over the minority’s rights.  But should the majority not wish to go along with this plan, well down with democracy — it is the enemy of higher principles in which democrats believe only sporadically, however.

  *  *  *

  Addendum by PT:

  As noted above, Ms. Pelosi, presumably unwittingly, channeled satirists and cartoonists of the 1930s and 1940s. In a joke appearing in the August 14, 1937 issue of the New Yorker, an anonymous author wrote (hat tip to Ben Zimmer of the Language Log):

  “The wages-and-hours bill has become so complicated that it is a mystery to everybody in Washington. Congress will have to pass it to find out how it works.”

   

  

  Copy of the actual “Of All Things” joke as it appeared in the New Yorker, Aug 14, 1937

   

  The joke made a reappearance in a “Grin and Bear It” cartoon by George Lichty in the Mar. 12, 1947 issue of the Los Angeles Times:

   

  

  “I admit this new bill is too complicated to understand….we’ll just have to pass it to fin out how it works!” – the “senate committee on new legislation” in action.

  The problem is that Ms. Pelosi didn’t intend to make a joke. There is actually a serious background to the joke – as George Madison once said:

  “It will be of little avail to the people that the laws are made by men of their own choice if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood.”

  Unfortunately the entire body of law is these days “so voluminous it cannot be read” and “so incoherent it cannot be understood” – characteristically, not even by those passing the laws. One suspects this is by design, as it is the easiest way to make sure that a potential criminal is made out of everybody (sometimes, as in Dennis Hastert’s case, this can lead to poetic justice being delivered).

  

  

  

  

  

• Cyberwars Escalate With US NSA As "Crown Creators Of Cyberespionage"

  Those who follow the constant barrage of geopolitical headline hockey might have noticed that this has been the year of the cyberattack. 

  As we’re fond of chronicling, what started with an alleged attempt on the part of Kim Jong Un to sabotage a James Franco and Seth Rogen premier and what took a turn for complete absurdity when Penn State claimed Chinese hacker spies had taken control of the engineering department, turned rather serious with the OPM breach, the scope of which is still not fully understood. 

  The incessant cyber espionage talk along with the creation (by Washington) of a kind of cyber “axis of evil” that of course includes all of the usual suspects including China, Russia, North Korea, and Iran, has led directly to discussions of how to effectively conduct cyber warfare. The Pentagon laid out a somewhat vague strategy earlier this year and now WSJ has more on what’s being billed as a “digital arms race”: 

  A series of successful computer attacks carried out by the U.S. and others has kicked off a frantic and destabilizing digital arms race, with dozens of countries amassing stockpiles of malicious code. The programs range from the most elementary, such as typo-ridden emails asking for a password, to software that takes orders from a rotating list of Twitterhandles.

   

  The proliferation of these weapons has spread so widely that the U.S. and China—longtime cyber adversaries—brokered a limited agreement last month not to conduct certain types of cyberattacks against each other, such as intrusions that steal corporate information and then pass it along to domestic companies. Cyberattacks that steal government secrets, however, remain fair game.

   

  In total, at least 29 countries have formal military or intelligence units dedicated to offensive hacking efforts, according to a Wall Street Journal compilation of government records and interviews with U.S. and foreign officials.

   

  Some 50 countries have bought off-the-shelf hacking software that can be used for domestic and international surveillance. The U.S. has among the most-advanced operations.

   

  In the nuclear arms race, “the acronym was MAD—mutually assured destruction—which kept everything nice and tidy,” said Matthijs Veenendaal, a researcher at the NATO Cooperative Cyber Defence Centre of Excellence, a research group in Estonia. “Here you have the same acronym, but it’s ‘mutually assured doubt,’ because you can never be sure what the attack will be.”

   

  Governments have used computer attacks to mine and steal information, erase computers, disable bank networks and—in one extreme case—destroy nuclear centrifuges.

   

  Nation states have also looked into using cyberweapons to knock out electrical grids, disable domestic airline networks, jam Internet connectivity, erase money from bank accounts and confuse radar systems, experts believe.

  Amusingly, WSJ got a shot in at the Assad government because after all, now that anti-regime forces are on the run, it’s all hands on deck with the Western media propaganda campaign:

  “It’s not like developing an air force,” in terms of cost and expertise, said Michael Schmitt, a professor at the U.S. Naval War College and part of an international group studying how international law relates to cyberwarfare. “You don’t need to have your own cyberforce to have a very robust and very scary offensive capability.”

   

  For example, hackers aligned with the Syrian government have spied into the computers of rebel militias, stolen tactical information and then used the stolen intelligence in the ongoing and bloody battle, according to several researchers, including FireEye Inc.

  Then there is the obligatory shot at the Russians:

  Russian hackers have targeted diplomatic and political data, burrowing inside unclassified networks at the Pentagon, State Department and White House, also using emails laced with malware, according to security researchers and U.S. officials.

   

  They have stolen President Barack Obama’s daily schedule and diplomatic correspondence sent across the State Department’s unclassified network, according to people briefed on the investigation. A Russian government spokesman in April denied Russia’s involvement.

   

  “Russia has never waged cyberwarfare against anyone,” Andrey Akulchev, a spokesman for the Russian Embassy in Washington, said in a written statement Friday. “Russia believes that the cybersphere should be used exclusively for peaceful purposes.”

  And finally, there’s a reference to the hilarious incident documented here earlier this year wherein Obama spied on Netanyahu only to discover that Netanyahu was spying on Obama:

  Even Israel, a U.S. ally, was linked to hacking tools found on the computers of European hotels used for America’s diplomatic talks with Iran, according to the analysis of the spyware by a top cybersecurity firm. Israeli officials have denied spying on the U.S.

  Here’s an inforgraphic that shows which countries employ which specific types of cyber sabotage:

  

  But the good news, as WSJ cheerfully reminds us, is that “many cybersecurity experts consider the U.S. government to have the most advanced operations [and the NSA to be] the crown creator of cyberespionage.”

  Which is great. Unless it’s you they’re spying on…

  

  

  

  

  

• Oct 13th – Fed's Evans's expects 3 hikes by end of 2016

  EMOTION MOVING MARKETS NOW: 44/100 FEAR

  PREVIOUS CLOSE: 44/100 FEAR

  ONE WEEK AGO: 32/100 FEAR 
  ONE MONTH AGO: 14/100 EXTREME FEAR

  ONE YEAR AGO: 1/100 EXTREME FEAR

  Put and Call Options: NEUTRAL During the last five trading days, volume in put options has lagged volume in call options by 29.76% as investors make bullish bets in their portfolios. This is a lower level of put buying than has been the norm during the last two years and is a neutral indication.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 16.17. This is a neutral reading and indicates that market risks appear low.

  Stock Price Strength: FEAR The number of stocks hitting 52-week lows exceeds the number hitting highs and is at the lower end of its range, indicating fear.

   

  PIVOT POINTS

  EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY 
  

  S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)

  EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)

  CRUDE OIL (CL) | GOLD (GC) | 10 YR T NOTE | 2 YR T  NOTE | 5 YR T NOTE | 30 YR TREASURY BOND| SOYBEANS | CORN

   

  MEME OF THE DAY – NO HIKE! TOLD YOU FOOL!

   

  UNUSUAL ACTIVITY

  MCK OCT 190 CALLS 2k+ @$1.66-1.70

  CI OCT 140 Call Activity 1500 @ 0.40 on the offer

  RIT 10% Owner P    4,860  A  $ 12.6705   P    16,700  A  $ 12.8423

  FXCM .. SC 13G .. Franklin Resources .. 13.5%

  NSR .. SC13G Filed .. William Blair Investment Management, LLC .. 11.38%

  More Unusual Activity…

  HEADLINES

   

  S&P sees 2015 U.S. growth at 2.5%, 2016 at 2.8%, and 2017 at 2.7%

  S&P sees U.S. Q3 15 CPI at -0.2%, +0.5% in Q4, +2% in Q1 and Q2

  Fed’s Evans’s expects 3 hikes by end of 2016

  Fed’s Lockhart repeats: Appropriate to hike in 2015, but Fed data-dependent

  Fed’s Fischer says central bank ‘cautious’ about next rate hike

  US NABE Outlook Survey: Expect 2.5% to 2.8% Growth Though 2016

  PBOC’s Yi: China’s Stock-Market Correction Almost Over

  PBOC to let commercial banks use loan assets as collateral

  ECB’s Coeure Says Too Early To Decide On More Stimulus

  ECB’s Vasiliauskas: For the Moment, No Need to Fine-Tune QE

  BoC Poloz: BoC examining ties between financial stability and monpol

  BOE Weale Optimistic Western European Productivity To Rebound

  Opec: Oil Market To Rebalance As US Supply Hit

  Vix tumbles in longest losing streak since ’09

  AB InBev raises bid for SABMiller to $103bn

  Dell agrees $67bn EMC takeover

  Italy plans EUR2.2bn rescue of three small banks

   

  GOVERNMENTS/CENTRAL BANKS

  Fed’s Evans’s expects 3 hikes by end of 2016 –ForexLive

  Fed’s Lockhart repeats: Appropriate to hike in 2015, but Fed data-dependent –Rtrs

  Fed’s Fischer says central bank ‘cautious’ about next rate hike –MW

  S&P sees 2015 U.S. growth at 2.5%, 2016 at 2.8%, and 2017 at 2.7%

  S&P sees U.S. Q3 15 CPI at -0.2%, +0.5% in Q4, +2% in Q1 and Q2

  US NABE Outlook Survey: Expect 2.5% to 2.8% Growth Though 2016 –MNI

  ECB’s Coeure Says Too Early To Decide On More Stimulus –CNBC

  ECB’s Vasiliauskas: For the Moment, No Need to Fine-Tune QE –WSJ

  EU: Spain’s Budget Plans Would Break Spending Rules –WSJ

  BoC Poloz: BoC examining ties between financial stability and monpol –Rtrs

  BOE Weale Optimistic Western European Productivity To Rebound –MNI

  UK draws up plan of key demands to stay in EU –Tele

  HSBC sees BOE hiking rates by 0.5% in 2016 –ForexLive

  U.K. Europe Minister Casts Doubt on Late-2017 Referendum Date –BBG

  Riksbank’s Floden: Not certain that inflation will rose as forecast –DI via BBG

  FIXED INCOME

  Bonds biding time for Fed interest rate hike –FT

  Dell to add $50bn in debt to acquire EMC –BBG

  FX

  USD: Fed keeps US dollar on the defensive –Rtrs

  GBP: Pound Gains Versus Dollar as Traders Await Signs From BOE, Data –BBG

  EUR: Euro Approaches 1.14 vs the dollar –WSJ

  AUD: Aussie rises for ninth day on commodities rebound –Age

  COMMODITY FX: Resurgent commodity prices push dollar down –Livemint

  ENERGY/COMMODITIES

  CRUDE: WTI futures settle 5.1% lower at $47.10 per barrel

  CRUDE: Brent futures settle 5.3% lower at $49.86 per barrel

  CRUDE: Opec: Oil Market To Rebalance As US Supply Hit –FT

  CRUDE: Kuwait Oil Minister Says No Calls Within OPEC For Policy Change –CNBC

  METALS: Rio Tinto won’t follow Glencore in cutting copper output –Australian

  METALS: Chile Mining Minister: Not enough copper output cuts to balance the market –BBG

  NATGAS: Natural Gas Prices Rise on Colder Forecasts –WSJ

  NATGAS: Gazprom Restarts Gas Deliveries to Ukraine –WSJ

  EQUITIES

  VOL: Vix tumbles in longest losing streak since ’09 –FT

  M&A: Dell agrees $67bn EMC takeover –BBC

  M&A: AB InBev raises bid for SABMiller to $103bn –FT

  M&A: SABMiller’s fourth largest investor rejects AB InBev offer –Rtrs

  M&A: GE nears deal to sell over $30 billion of loans to Wells Fargo –Rtrs

  M&A: Allianz sells vending machine operator Selecta to KKR –Rtrs

  C&E: Oil Price Slide Puts a Lid on Gains in Other Sectors –WSJ

  BANKS: Barclays Close To Naming Jenkins Successor –Sky

  BANKS: Italy plans EUR2.2bn rescue of three small banks –Rtrs

  BANKS: Three groups bid for $20 bln book of ex-Northern Rock loans –Rtrs

  BANKS: DB plans Abbey Life sale to focus on core biz –WSJ

  AUTOS: Volkswagen has announced the recall of 1,950 diesel vehicles in China –Sky

  AUTOS: S&P Downgrades Volkswagen?s Credit Rating –WSJ

  PHARMA: Eli Lilly and China’s Innovent Expand Partnership –WSJ

  PHARMA: Fitch Affirms Roche at ‘AA’; Outlook Stable

  Twitter Slides After Report of Potential Layoffs

  CON DISC: Tobacco Firms Tried to ‘Delay and Derail’ UK Plain Packaging Law –WSJ

  TECH: Facebook launches new advert gizmo –Rtrs

  EMERGING MARKETS

  PBOC’s Yi: China’s Stock-Market Correction Almost Over –MW

  PBOC to let commercial banks use loan assets as collateral as a way to boost lending –WSJ

  Chinese FinMin Lou Says US Shouldn’t Raise Rates Yet –MW

  Fitch Affirms Roche At ‘AA’; Outlook Stable

  

  

  

  

  

• Leaving The Eye Of The Hurricane

  Submitted by Jeff Thomas via InternationalMan.com,

  In the early 2000’s, there were those economists and investors who believed that the U.S. was headed for an economic fall – that the repeal of the Glass-Steagall Act in 1999 would allow the financial institutions to enter into widespread reckless loan practices that would lead to a housing crash. And that that crash would lead to a stock market crash that would herald in The Great Unravelling – The Greater Depression.

  Most of us who made these predictions hypothesized that the initial collapse would be significant, but not severe – that the governments of the world would come to the rescue with bailout programmes that would stave off the symptoms of the problem, but would do nothing to cure the disease itself – that of massive debt.

  We suggested that there would be a false recovery, resulting in the easing of symptoms. There would be repeated claims by both governments and the media that “recovery is nigh.” However, underneath all the folderol, the disease would worsen considerably, eventually reaching the point at which the patient (the economy) could not be saved. At some point, public confidence in the leaders’ abilities to resuscitate the body would fade. This would be triggered by some event or events, such as a crash in the stock or bond market, a dumping of debt back into the U.S. by creditor nations, debt default by Greece or some other nation, commodity price spikes, backlash from sanctioned nations, the imposition of protective tariffs – any one of a dozen possible triggers would do the trick. From that point on, each of the other triggers would eventually occur, as toppling dominoes, fulfilling the prediction of Depression.

  Only in this latter period would the dreaded “D-word” be acknowledged by the governments and media.

  Most prognosticators (myself included) went on the general assumption that the initial collapse would last two to three years and that the following “suspension” period of bailouts and other attempts to paper over the problem might last another three years or so. During this period, conditions would not be good, but they would be better than the conditions during the initial crash and far better than the conditions that would follow the suspension period. Not surprisingly, many of us came to refer to this period as “the eye of the hurricane,” an apt term, as the eye of a hurricane is a period of relative calm after the first onslaught of the storm and just prior to the inevitable and often more devastating second half.

  The second half of the economic storm will prove to be far more devastating than the first, since the fact that its onset will mean that the governments of the world have already thrown everything they have at the problem and will be out of ammunition in the second half.

  In a sense, we could suggest that governments have done a good job in staving off the inevitable, since the eye of the hurricane has lasted more than five years (longer than most of us had expected). Unfortunately, the level of debt created in the attempt to postpone the inevitable assured that every month of postponement meant that the eventual crash would be that much worse, and that the recovery would be that much more prolonged.

  But, if the assumption is correct that there will be a second, more devastating, half of the storm, when will it be? Well, an actual date would be impossible to predict with accuracy, but we can look at the possible triggers and ask ourselves if we’re getting closer. Recently, we’ve observed a very near miss on debt default by Greece. We’ve witnessed a crash in the Chinese stock market, coupled with several downgradings of the yuan, causing a significant drop in the U.S. stock market. Further, although it hasn’t received the media attention it should receive, China has been dumping U.S. Treasuries back into the U.S. in a significant way. One prominent candidate in the U.S. presidential elections is calling for the imposition of protective tariffs and has received cheers from voters for his “courageous” position. (The reader might study the Smoot-Hawley Tariff Act of 1930 if he is uncertain of just how disastrous protective tariffs can prove to be.)

  Readers of this column will already be aware of what may be heading their way, economically, politically, and socially, as we once again enter the hurricane. (Others may check the International Man archive to learn more.)

  In past generations, when folks observed warning signs of an approaching storm, they would often ask Grandpa if his arthritis was giving him trouble, as any dramatic change in barometer pressure is both an irritation to arthritis and a warning of dramatic change in weather.

  Today, in questioning whether we’re reaching the far side of the hurricane, we might do much the same. There are a number of old-timers out there who have tracked economic trends for decades. Those who have developed a reputation for successful prediction tend to go as much by “feel” as by analysis.

  For several months, in communicating with the economic “Grandpas” around the world, the reaction I’ve received from them has been as though they’re all sitting in their rockers on the same porch together. Every one of them is saying the same thing – “It’s really beginning to ‘feel’ close. The first major event could happen anytime now.”

  But, rather than be alarmist, it can also be said that the magicians who run the world’s governments may yet come up with another delay or two. The question for the reader is whether he wishes to put off dealing with the coming hurricane until it’s on his doorstep or whether he’d rather be prepared when the time comes. As it is, the palm fronds are blowing and Grandpa’s joints are getting stiff.

  This might be a good time to get the lawn furniture in and to close up the shutters.

  For those who wish to be the least impacted by the hurricane, this would be the time to (if possible) prepare an overseas bolthole, move funds away from any jurisdiction that’s likely to confiscate or impose capital controls, and move investments out of stocks and bonds and into real estate in a jurisdiction that’s at lesser risk, and into precious metals – to be stored in a jurisdiction where the government has a reputation for low taxation and non-invasiveness into private wealth.

  The coming storm promises to be the largest of our lifetime. We shall all be affected by it. A few will profit from it. Some will be mildly negatively impacted; most will be hit hard, due to being unprepared.

  Those who choose to distance themselves (and their wealth – however large or small) geographically from the centre of the hurricane will fare best.

  

  

  

  

  

• The Dummy's Guide To The Syrian Conflict

  Russia’s intervention has made the complex pattern of alliances and enmities in Syria still more intricate. As The Guardian notes, the Assad regime and its local opponents are backed to differing degrees and in different configurations by military powers from near and far, so here is your cocktail-party-napkin-sized guide to who supports/opposes whom in Syria.

  Consider it the Middle East’s own “dot plot”

   

  

   

  All “dots” subject to change.

  Source: The Guardian

  

  

  

  

  

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• America Has REPEATEDLY Committed War Crimes By Bombing Civilians

  The U.S. criticized Russia for killing civilians in Syria.

  But just last week, the U.S. intentionally bombed one of the only hospitals in Northeastern Afghanistan (run by Nobel prize-winner Doctors Without Borders), killing hundreds.  This occurred 3 months after U.S.-backed Afghani special forces raided and threatened the hospital, and after the hospital had repeatedly given its gps coordinates to the U.S. military … and repeatedly called saying they were under attack.

  And the Washington Post notes that incendiary bombs may have been used:

  The AC-130U plane, circling above in the dark, raked the medical compound with bursts of cannon fire, potentially even using high explosive incendiary munitions, for more than an hour. The assault left at least 22 people dead, some of them burned to death.

  It’s a war crime to bomb a hospital without giving adequate warning so patients can leave:

  

  This is not the first time the U.S. has bombed civilian targets:

  • In 1969 and 1970, the U.S. bombed several hospitals and a Red Cross facility in Cambodia

  • On February 13, 1991, the U.S. purposefully targeted an air raid shelter near the Baghdad airport with two 2,000-pound laser-guided bombs, which punched through 10 feet of concrete and killed at least 408 Iraqi civilians.

  • On April 23, 1999, NATO intentionally bombed a Serbian television station, killing 16.   President Clinton said of the bombing: “Our military leaders at NATO believe … that the Serb television is an essential instrument of Mr. Milosevic’s command and control. … It is not, in a conventional sense, therefore, a media outlet. That was a decision they made, and I did not reverse it.” U.S. envoy Richard Holbrooke said right after the attack that it was “an enormously important and, I think, positive development.” Amnesty International noted it was “a deliberate attack on a civilian object and as such constitutes a war crime.”

  • On October 16, 2001, the U.S. attacked the complex housing the International Committee of the Red Cross in Kabul, Afghanistan. After detailed discussions between the U.S. and the Red Cross about the location of all of its installations in the country, the U.S. bombed the same complex again two weeks later. The second attack destroyed warehouses clearly marked with the Red Cross emblem containing tons of food and supplies for hungry refugees

  • On November 13, 2001, the U.S. bombed the Al Jazeera television bureau in Kabul.

  • On April 8, 2003, the U.S. bombed the Al Jazeera bureau in Baghdad, killing a reporter. The British home secretary at the time subsequently revealed that – a few weeks before the attack – he had urged Prime Minister Tony Blair to bomb Al Jazeera’s transmitter in Baghdad.

  • Also on April 8, 2003, a U.S. tank fired a shell at the 15th floor of the Palestine Hotel, where most foreign journalists were then staying. Two reporters were killed.  The Committee to Protect Journalists found that the attack “was avoidable”

  The U.S. has also carried out numerous war crimes by killing civilians with drone strikes. This includes “double tap” strikes which target rescuers attempting to save those injured by drone strikes, and “signature strikes” that kill people whose identities aren’t even known, based on metadata on their phones or their proximity to war zones.

  And the U.S. has committed a slew of other war crimes, including:

  • Carrying out terrorism … literally

  • A widespread torture program specifically aimed at producing false confessions to justify the war

  • Chemical weapons attacks against civilians (which greatly increased the rate of birth defects)

  • The use of depleted uranium, which can cause cancer and birth defects for decades (see this, this, this, this, this and this)

  • The Pentagon sent one of the main US creators of the death squads in El Salvador into Iraq to set up paramilitary death squads and torture centers

  None of this is intended to excuse any civilian casualties inflicted by Russia.   But America should not throw stones in glass houses …

  

  

  

  

• The Menace Of Egalitarianism

  Submitted by Llewellyn H. Rockwell Jr, via The Mises Institute,

  This talk was delivered at the Dallas-Ft. Worth Mises Circle, “Against PC,” on October 3, 2015.

  A sharp Martian visiting Earth would make two observations about the United States — one true, the other only superficially so.

  On the basis of its ceaseless exercises in self-congratulation, the US appears to him to be a place where free thought is encouraged, and in which man makes war against all the fetters on his mind that reactionary forces had once placed there. That is the superficial truth.

   

  The real truth, which our Martian would discover after watching how Americans actually behave, is that the range of opinions that citizens may entertain is rather more narrow than it at first appears. There are, he will soon discover, certain ideas and positions all Americans are supposed to believe in and salute. Near the top of the list is equality, an idea for which we are never given a precise definition, but to which everyone is expected to genuflect.

  A libertarian is perfectly at peace with the universal phenomenon of human difference. He does not wish it away, he does not shake his fist at it, he does not pretend not to notice it. It affords him another opportunity to marvel at a miracle of the market: its ability to incorporate just about anyone into the division of labor.

  Indeed the division of labor is based on human difference. Each of us finds that niche that suits our natural talents best, and by specializing in that particular thing we can most effectively serve our fellow man. Our fellow man, likewise, specializes in what he is best suited for, and we in turn benefit from the fruits of his specialized knowledge and skill.

  And according to Ricardo’s law of comparative advantage, which Mises generalized into his law of association, even if one person is better than another at absolutely everything, the less able person can still flourish in a free market. For instance, even if the greatest, most successful entrepreneur you can think of is a better office cleaner than anyone else in town, and is likewise a better secretary than all the other secretaries in town, it would make no sense for him to clean his own office or type all of his own correspondence. His time is so much better spent in the market niche in which he excels that it would be preposterous for him to waste his time on these things. In fact, anyone looking to hire him as an office cleaner would have to pay him millions of dollars to compensate for drawing him away from the extremely remunerative work he would otherwise be doing. So even an average office cleaner is vastly more competitive in the office cleaning market than our fictional entrepreneur, since the average office cleaner can charge, say, $15 per hour instead of the $15,000 our entrepreneur, mindful of opportunity cost, would have to charge.

  So there is a place for everyone in the market economy. And what’s more, since the market economy rewards those who are able to produce goods at affordable prices for a mass market, it is precisely the average person to whom captains of industry are all but forced to cater. This is an arrangement to celebrate, not deplore.

  This is not how the egalitarians see it, of course, and here I turn to the work of that great anti-egalitarian, Murray N. Rothbard. Murray dealt with the subject of equality in part in his great essay “Freedom, Inequality, Primitivism, and the Division of Labor,” but really took it head on in “Egalitarianism as a Revolt Against Nature,” which serves as the title chapter of his wonderful book. It is from Murray that my own comments today take their inspiration.

  The current devotion to equality is not of ancient provenance, as Murray pointed out:

  The current veneration of equality is, indeed, a very recent notion in the history of human thought. Among philosophers or prominent thinkers the idea scarcely existed before the mid-eighteenth century; if mentioned, it was only as the object of horror or ridicule. The profoundly anti-human and violently coercive nature of egalitarianism was made clear in the influential classical myth of Procrustes, who “forced passing travellers to lie down on a bed, and if they were too long for the bed he lopped off those parts of their bodies which protruded, while racking out the legs of the ones who were too short.”

  What are we to understand by the word equality? The answer is, we don’t really know. Its proponents make precious little effort to disclose to us precisely what they have in mind. All we know is that we’d better believe it.

  It is precisely this lack of clarity that makes the idea of equality so advantageous for the state. No one is entirely sure what the principle of equality commits him to. And keeping up with its ever-changing demands is more difficult still. What were two obviously different things yesterday can become precisely equal today, and you’d better believe they are equal if you don’t want your reputation destroyed and your career ruined.

  This was the heart of the celebrated dispute between the neoconservative Harry Jaffa and the paleoconservative M.E. Bradford, carried out in the pages of Modern Age in the 1970s. Equality is a concept that cannot and will not be kept restrained or nailed down. Bradford tried in vain to make Jaffa understand that Equality with a capital E was a recipe for permanent revolution.

  Now, do egalitarians mean we are committed to the proposition that anyone is potentially an astrophysicist, as long as he is raised in the proper environment? Maybe, maybe not. Some of them certainly do believe such a thing, though. In 1930, the Encyclopaedia of the Social Sciences claimed that “at birth human infants, regardless of their heredity, are as equal as Fords.” Ludwig von Mises, by contrast, held that “the fact that men are born unequal in regard to physical and mental capabilities cannot be argued away. Some surpass their fellow men in health and vigor, in brain and aptitudes, in energy and resolution and are therefore better fitted for the pursuit of earthly affairs than the rest of mankind.” Did Mises commit a hate crime there, by the standards of the egalitarians? Again, we don’t really know.

  Then there’s “equality of opportunity,” but even this common conservative slogan is fraught with problems. The obvious retort is that in order to have true equality of opportunity, sweeping government intervention is necessary. For how can someone in a poor household with indifferent parents seriously be said to have “equality of opportunity” with the children of wealthy parents who are deeply engaged in their lives?

  Then there is equality in a cultural sense, whereby everyone is expected to ratify everyone else’s personal choices. The cultural egalitarians don’t really mean that, of course: none of them demand that people who dislike Christians sit down and learn Scholastic theology in order to understand them better. And here we discover something important about the whole egalitarian program: it’s not really about equality. It’s about some people exercising power over others.

  At the University of Tennessee this fall, the Office for Diversity and Inclusion explained that traditional English pronouns, being oppressive to people who do not identify with the gender they were “assigned at birth,” ought to be replaced with something new. The diversity office recommends, as replacements for she, her, hers, and he, him, his, the following: ze [pronounced zhee], hir [here], hirs [heres]; ze [zhee], zir [zhere], zirs [zheres]; and xe [zhee], xem [zhem], xyr [zhere]. When approaching people for the first time, students were told, we should say something like, “Nice to meet you. What pronouns should I use?”

  When the whole world burst out laughing at this proposal, the university was at pains to assure everyone that these were just suggestions. Of course, what are not suggestions are the thoughts all right-thinking people are expected to have about moral questions that have been decided for us by our media and political classes.

  Another aspect of equality that’s been in the news in recent years is, of course, income inequality. We are told how terrible it is that some people should have so much more than others, but rarely if ever are we told how much (if any) extra wealth the egalitarian society would allow the better-off to have, or the non-arbitrary basis on which such a judgment could be rendered.

  John Rawls was possibly the most influential political philosopher of the twentieth century, and he advanced a famous defense of egalitarianism in his book A Theory of Justice that attempted to answer this question (among others). If I may summarize his argument in brief, he claimed that we would choose an egalitarian society if, as we contemplated the rules of society we’d want to live under, we had no idea what our own position in that society would be. If we didn’t know if we would be male or female, rich or poor, or talented or untalented, we would hedge our bets by advocating a society in which everyone was as equal as possible. That way, should we be unlucky and enter the world without talents, or a member of a despised minority, or saddled with any other disability, we could still be assured that of a comfortable if not luxurious existence.

  Rawls was willing to allow some degree of inequality, but only if its effect was to help the poor. In other words, doctors could be allowed to earn more money than other people if that financial incentive made them more likely to become doctors in the first place. If incomes were equalized, people would be less likely to go to the trouble of becoming doctors, and the poor would be deprived of medical care. So inequality could be allowed, but only on egalitarian grounds, not because people have the right to acquire and enjoy property without fear of expropriation.

  Since no one in his right mind accepts full-blown egalitarianism, Rawls was bound to run into trouble. That trouble came in the form of his attempts to deal with equality between countries. Even the most dedicated egalitarian living in the First World doesn’t seriously favor an equalization of wealth between countries. College professors who teach the moral superiority of egalitarianism during the day want their wine and cheese parties at night.

  So Rawls came up with a strained and unpersuasive argument that although inequality between persons was outrageous and could be justified only on the basis of whether it helped the poorest, inequality between countries was quite all right. He then proceeded to give reasons that inequality between countries was quite all right, even though these were the exact reasons he had said inequality between individuals was unacceptable.

  Even if egalitarianism could be defended philosophically, there is the small matter of implementing it in the real world. Just one reason the egalitarian dream cannot be realized involves what Robert Nozick called the Wilt Chamberlain problem; James Otteson has called something like it the “day two problem.” In Chamberlain’s heyday, everyone enjoyed watching him play basketball. People gladly paid to watch him play. But suppose we begin with an equal distribution of wealth, and then everyone rushes out to watch Chamberlain play basketball. Many thousands of people willingly hand over a portion of their money to Chamberlain, who now becomes much wealthier than everyone else.

  In other words, the pattern of wealth distribution is disturbed as soon as anyone engages in any exchange at all. Are we to cancel the results of all these exchanges and return everyone’s money to the original owners? Is Chamberlain to be deprived of the money people freely chose to gave him in exchange for the entertainment he provided?

  But the reason the state holds up equality as a moral ideal is precisely that it is unattainable. We may forever strive for it, but we can never reach it. What ideology could be better, from the state’s point of view? The state can portray itself as the indispensable agent of justice, while at the same time drawing ever more power and resources to itself — over education, employment, wealth redistribution, and practically any area of social life or the economy you can name — in the course of pursuing the unattainable egalitarian program. “Equality cannot be imagined outside of tyranny,” said Montalembert. It was, he said, “nothing but the canonization of envy, [and it] was never anything but a mask which could not become reality without the abolition of all merit and virtue.”

  In the course of working toward equality, the state expands its power at the expense of other forms of human association, including the family itself. The family has always been the primary obstacle to the egalitarian program. The very fact that parents differ in their knowledge, skill levels, and devotion to their offspring means that children in no two households can ever be raised “equally.”

  Robert Nisbet, the Columbia University sociologist, openly wondered if Rawls would be honest enough to admit that his system, if followed to its logical conclusion, had to lead to the abolition of the family. “I have always found treatment of the family to be an excellent indicator of the degree of zeal and authoritarianism, overt or latent, in a moral philosopher or political theorist,” Nisbet said. He identified two traditions of thought in Western history. One he traced from Plato to Rousseau, that identified the family as a wicked barrier to the realization of true virtue and justice. The other, which viewed the family as a central ingredient in both liberty and order, he followed from Aristotle through Burke and Tocqueville.

  Rawls himself appeared to admit that the logic of his argument tended in the direction of the Plato/Rousseau strain of thought, though he ultimately — and unpersuasively — drew back. Here are Rawls’s own words:

  It seems that when fair opportunity (as it has been defined) is satisfied, the family will lead to unequal chances between individuals. Is the family to be abolished then? Taken by itself and given a certain primacy, the idea of equal opportunity inclines in this direction. But within the context of the theory of justice as a whole there is much less urgency to take this course.

  Nisbet took little comfort in Rawls’s pathetic assurances. Can Rawls, he wondered,

  long neglect the family, given its demonstrable relation to inequality? Rousseau was bold and consistent where Rawls is diffident. If the young are to be brought up in the bosom of equality, “early accustomed to regard their own individuality only in its relation to the body of the State, to be aware, so to speak, of their own existence merely as part of that of the State,” then they must be saved from what Rousseau refers to as “the intelligence and prejudices of fathers.”

  The obsession with equality, in short, undermines every indicator of health we might look for in a civilization. It involves a madness so complete that although it flirts with the destruction of the family, it never stops to consider whether this conclusion might mean the whole line of thought may have been deranged to begin with. It leads to the destruction of standards — scholarly, cultural, and behavioral. It is based on assertion rather than evidence, and it attempts to gain ground not through rational argument but by intimidating opponents into silence. There is nothing honorable or admirable about any aspect of the egalitarian program.

  Murray noted that pointing out the lunacy of egalitarianism was a good start, but not nearly enough. We need to show that the so-called struggle for equality is in fact all about state power, not helping the downtrodden. He wrote:

  To mount an effective response to the reigning egalitarianism of our age, therefore, it is necessary but scarcely sufficient to demonstrate the absurdity, the anti-scientific nature, the self-contradictory nature, of the egalitarian doctrine, as well as the disastrous consequences of the egalitarian program. All this is well and good. But it misses the essential nature of, as well as the most effective rebuttal to, the egalitarian program: to expose it as a mask for the drive to power of the now ruling left-liberal intellectual and media elites. Since these elites are also the hitherto unchallenged opinion-molding class in society, their rule cannot be dislodged until the oppressed public, instinctively but inchoately opposed to these elites, are shown the true nature of the increasingly hated forces who are ruling over them. To use the phrases of the New Left of the late 1960s, the ruling elite must be “demystified,” “delegitimated,” and “desanctified.” Nothing can advance their desanctification more than the public realization of the true nature of their egalitarian slogans.

  The only Rothbardian word missing from that stirring conclusion is one of Murray’s favorites: “de-bamboozle.” It is that, above all, that needs to be done. The Mises Institute has accomplished many things over the years: advancing scholarship through our academic conferences and scholarly journals, educating students in the economics of the Austrian school, and reaching out to the public to give them a free education worth vastly more than what many people spend six figures for. But put it all together, and it amounts to perhaps the greatest de-bamboozling effort of all time. Once you understand the economics of the Austrian school and the philosophy of liberty in the tradition of Rothbard, you never look at anything — not the state, the media, the central bank, the political class, nothing — the same way again.

  Help us carry on our great de-bamboozling mission, as we devise more and more programs and outreach to the public, and provide a new generation of brilliant young scholars with the tools they need to resist and defy a regime that would intimidate us into silence. Their way is violence, envy, and destruction. Ours is peace, liberty, and creation. With your help, we can tear down the state’s benign facade, which has bamboozled so many, and reveal for all to see that the only winner in the state’s crusades is the state itself.

  

  

  

  

  

• Obama Defends The Failure Of His Syria Policy Before A Beligerent 60 Minutes

  Yesterday, in a comprehensive takedown of Obama’s handling of the second Syrian proxy war in three years (which is not over yet), we summarized events as follows: “The Tragic Ending To Obama’s Bay Of Pigs: CIA Hands Over Syria To Russia.”

  The facts, which are largely undisputed, confirm this: having achieved no progress “against ISIS”, the stated goal of US intervention in Syria, and no progress in kicking Assad out of office and starting the Qatar has pipeline to Europe, the real goal of US intervention in Syria, the top democrat on the House Intelligence Committee, Adam Schiff, said that Obama “is debating the merits of taking further action or whether they are better off letting Putin hang himself.”

  By “hanging himself”, the democrat meant handing Syria over to the Kremlin on a silver platter aafter just a few short weeks of Russian military intervention in Syria which has crushed US supply routes to ISIS and other CIA-sponsored rebel groups, and once again –  just like in 2013 – put a premature end to US attempts to overthrow yet another head of state.

  Fast forward to today when in what may have been the most awkward 60 Minutes interview for Obama before the US nation, Steve Kroft asked Obama about Trump, about Hillary, but it was Obama’s take on the US loss in (and of) Syria and the Russian gains there, and everywhere else, that demonstrated two things.

  The first is just how marginalized the US has suddenly become in the global arena, with an impotent and insolvent Europe behind its back for moral if no other support, opposing a suddenly ascendant Russian axis in the middle-east, one which has China’s backing, especially in the aftermath of the quite demonstrative US implementation of the TPP which is meant first and foremost to offset China’s rising trade influence in the region.

  The second is the extent of Obama’s delusion, or perhaps it was merely his spin relying on the naivete of the US public when it comes to foreign affairs, about the abovementioned snubbing of a superpower that until recently nobody dared to challenge unilaterally in the global arena.

  The full exchange is presented below. We still can’t decide if Kroft’s at times near-aggressive belligerence toward the president was actually genuine, or as revealed previously especially in the case of the 2011 60 Minutes interview of Julian Assange, the host was directly instructed by the administration on how to approach the topics at hand, and to make Obama squirm on purpose, so as to make the loss more palatable to the people of America.

  * * *

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  Steve Kroft: The last time we talked was this time last year, and the situation in Syria and Iraq had begun to worsen vis-à-vis ISIS. You had just unveiled a plan to provide air support for troops in Iraq, and also some air strikes in Syria, and the training and equipping of a moderate Syrian force. You said that this would degrade and eventually destroy ISIS.

  President Barack Obama: Over time.

  Steve Kroft: Over time. It’s been a year, and–

  President Barack Obama: I didn’t say it was going to be done in a year.

  Steve Kroft: No. But you said…

  President Barack Obama: There’s a question in here somewhere.

  Steve Kroft: There’s a question in here. I mean, if you look at the situation and you’re looking for progress, it’s not easy to find. You could make the argument that the only thing that’s changed really is the death toll, which has continued to escalate, and the number of refugees fleeing Syria into Europe.

  President Barack Obama: Syria has been a difficult problem for the entire world community and, obviously, most importantly, for the people of Syria themselves that have been devastated by this civil war, caught between a brutal dictator who drops barrel bombs on his own population, and thinks that him clinging to power is more important than the fate of his country. And a barbaric, ruthless organization in ISIL and some of the al Qaeda affiliates that are operating inside of Syria. And what we’ve been able to do is to stall ISIL’s momentum to take away some of the key land that they were holding, to push back, particularly in Iraq against some population centers that they threatened. And, in Syria, we’ve been able to disrupt a number of their operations. But what we have not been able to do so far, and I’m the first to acknowledge this, is to change the dynamic inside of Syria and the goal here has been to find a way in which we can help moderate opposition on the ground, but we’ve never been under any illusion that militarily we ourselves can solve the problem inside of Syria.

  Steve Kroft: I want us to take some of these things one by one. You mentioned an awful lot of things. One, the situation with ISIS, you’ve managed to achieve a stalemate. So what’s going to happen to ISIS?

  President Barack Obama: Well, over time–

  Steve Kroft: I mean, they have to be– somebody has to take them on. I mean, what’s going on right now is not working. I mean, they are still occupying big chunks of Iraq. They’re still occupying a good chunk of Syria. Who’s going to get rid of them?

  President Barack Obama: Over time, the community of nations will all get rid of them, and we will be leading getting rid of them. But we are not going to be able to get rid of them unless there is an environment inside of Syria and in portions of Iraq in which local populations, local Sunni populations, are working in a concerted way with us to get rid of them.

  Steve Kroft: You have been talking about the moderate opposition in Syria. It seems very hard to identify. And you talked about the frustrations of trying to find some and train them. You got a half a billion dollars from Congress to train and equip 5,000, and at the end, according to the commander CENTCOM, you got 50 people, most of whom are dead or deserted. He said four or five left?

  President Barack Obama: Steve, this is why I’ve been skeptical from the get go about the notion that we were going to effectively create this proxy army inside of Syria. My goal has been to try to test the proposition, can we be able to train and equip a moderate opposition that’s willing to fight ISIL? And what we’ve learned is that as long as Assad remains in power, it is very difficult to get those folks to focus their attention on ISIL.

  Steve Kroft: If you were skeptical of the program to find and identify, train and equip moderate Syrians, why did you go through the program?

  President Barack Obama: Well, because part of what we have to do here, Steve, is to try different things. Because we also have partners on the ground that are invested and interested in seeing some sort of resolution to this problem. And–

  Steve Kroft: And they wanted you to do it.

  President Barack Obama: Well, no. That’s not what I said. I think it is important for us to make sure that we explore all the various options that are available.

  Steve Kroft: I know you don’t want to talk about this.

  President Barack Obama: No, I’m happy to talk about it.

  Steve Kroft: I want to talk about the– this program, because it would seem to show, I mean, if you expect 5,000 and you get five, it shows that somebody someplace along the line did not– made– you know, some sort of a serious miscalculation.

  President Barack Obama: You know, the– the– Steve, let me just say this.

  Steve Kroft: It’s an embarrassment.

  President Barack Obama: Look, there’s no doubt that it did not work. And, one of the challenges that I’ve had throughout this heartbreaking situation inside of Syria is, is that– you’ll have people insist that, you know, all you have to do is send in a few– you know, truckloads full of arms and people are ready to fight. And then, when you start a train-and-equip program and it doesn’t work, then people say, “Well, why didn’t it work?” Or, “If it had just started three months earlier it would’ve worked.”

  Steve Kroft: But you said yourself you never believed in this.

  President Barack Obama: Well– but Steve, what I have also said is, is that surprisingly enough it turns out that in a situation that is as volatile and with as many players as there are inside of Syria, there aren’t any silver bullets. And this is precisely why I’ve been very clear that America’s priorities has to be number one, keeping the American people safe. Number two, we are prepared to work both diplomatically and where we can to support moderate opposition that can help convince the Russians and Iranians to put pressure on Assad for a transition. But that what we are not going to do is to try to reinsert ourselves in a military campaign inside of Syria. Let’s take the situation in Afghanistan, which I suspect you’ll ask about. But I wanted to use this as an example.

  Steve Kroft: All right. I feel like I’m being filibustered, Mr. President.

  President Barack Obama: No, no, no, no, no. Steve, I think if you want to roll back the tape, you’ve been giving me long questions and statements, and now I’m responding to ’em. So let’s– so– if you ask me big, open-ended questions, expect big, open-ended answers. Let’s take the example of Afghanistan. We’ve been there 13 years now close to 13 years. And it’s still hard in Afghanistan. Today, after all the investments we have there, and we still have thousands of troops there. So the notion that after a year in Syria, a country where the existing government hasn’t invited us in, but is actively keeping us out, that somehow we would be able to solve this quickly– is–

  Steve Kroft: We didn’t say quickly.

  President Barack Obama: –is– is– is an illusion. And– and–

  Steve Kroft: Nobody’s expecting that, Mr. President.

  President Barack Obama: Well, the– no, I understand, but what I’m– the simple point I’m making, Steve, is that the solution that we’re going to have inside of Syria is ultimately going to depend not on the United States putting in a bunch of troops there, resolving the underlying crisis is going to be something that requires ultimately the key players there to recognize that there has to be a transition to new government. And, in the absence of that, it’s not going to work.

  Steve Kroft: One of the key players now is Russia.

  President Barack Obama: Yeah.

  Steve Kroft: A year ago when we did this interview, there was some saber-rattling between the United States and Russia on the Ukrainian border. Now it’s also going on in Syria. You said a year ago that the United States– America leads. We’re the indispensible nation. Mr. Putin seems to be challenging that leadership.

  President Barack Obama: In what way? Let– let’s think about this– let– let–

  Steve Kroft: Well, he’s moved troops into Syria, for one. He’s got people on the ground. Two, the Russians are conducting military operations in the Middle East for the first time since World War II–

  President Barack Obama: So that’s–

  Steve Kroft: —bombing the people– that we are supporting.

  President Barack Obama: So that’s leading, Steve? Let me ask you this question. When I came into office, Ukraine was governed by a corrupt ruler who was a stooge of Mr. Putin. Syria was Russia’s only ally in the region. And today, rather than being able to count on their support and maintain the base they had in Syria, which they’ve had for a long time, Mr. Putin now is devoting his own troops, his own military, just to barely hold together by a thread his sole ally. And in Ukraine–

  Steve Kroft: He’s challenging your leadership, Mr. President. He’s challenging your leadership–

  President Barack Obama: Well Steve, I got to tell you, if you think that running your economy into the ground and having to send troops in in order to prop up your only ally is leadership, then we’ve got a different definition of leadership. My definition of leadership would be leading on climate change, an international accord that potentially we’ll get in Paris. My definition of leadership is mobilizing the entire world community to make sure that Iran doesn’t get a nuclear weapon. And with respect to the Middle East, we’ve got a 60-country coalition that isn’t suddenly lining up around Russia’s strategy. To the contrary, they are arguing that, in fact, that strategy will not work.

  Steve Kroft: My point is– was not that he was leading, my point is that he was challenging your leadership. And he has very much involved himself in the situation. Can you imagine anything happening in Syria of any significance at all without the Russians now being involved in it and having a part of it?

  President Barack Obama: But that was true before. Keep in mind that for the last five years, the Russians have provided arms, provided financing, as have the Iranians, as has Hezbollah.

  Steve Kroft: But they haven’t been bombing and they haven’t had troops on the ground–

  President Barack Obama: And the fact that they had to do this is not an indication of strength, it’s an indication that their strategy did not work.

  Steve Kroft: You don’t think–

  President Barack Obama: You don’t think that Mr. Putin would’ve preferred having Mr. Assad be able to solve this problem without him having to send a bunch of pilots and money that they don’t have?

  Steve Kroft: Did you know he was going to do all this when you met with him in New York?

  President Barack Obama: Well, we had seen– we had pretty good intelligence. We watch–

  Steve Kroft: So you knew he was planning to do it.

  President Barack Obama: We knew that he was planning to provide the military assistance that Assad was needing because they were nervous about a potential imminent collapse of the regime.

  Steve Kroft: You say he’s doing this out of weakness. There is a perception in the Middle East among our adversaries, certainly and even among some of our allies that the United States is in retreat, that we pulled our troops out of Iraq and ISIS has moved in and taken over much of that territory. The situation in Afghanistan is very precarious and the Taliban is on the march again. And ISIS controls a large part of Syria.

  President Barack Obama: I think it’s fair to say, Steve, that if–

  Steve Kroft: It’s– they– let me just finish the thought. They say your–

  President Barack Obama: You’re–

  Steve Kroft: —they say you’re projecting a weakness, not a strength–

  President Barack Obama: –you’re saying “they,” but you’re not citing too many folks. But here–

  Steve Kroft: No, I’ll cite– I’ll cite if you want me, too.

  President Barack Obama: –here– yes. Here–

  Steve Kroft: I’d say the Saudis. I’d say the Israelis. I’d say a lot of our friends in the Middle East. I’d say everybody in the Republican party. Well, you want me to keep going?

  President Barack Obama: Yeah. The– the– if you are– if you’re citing the Republican party, I think it’s fair to say that there is nothing I’ve done right over the last seven and a half years. And I think that’s right. It– and– I also think what is true is that these are the same folks who were making an argument for us to go into Iraq and who, in some cases, still have difficulty acknowledging that it was a mistake. And Steve, I guarantee you that there are factions inside of the Middle East, and I guess factions inside the Republican party who think that we should send endless numbers of troops into the Middle East, that the only measure of strength is us sending back several hundred thousand troops, that we are going to impose a peace, police the region, and– that the fact that we might have more deaths of U.S. troops, thousands of troops killed, thousands of troops injured, spend another trillion dollars, they would have no problem with that. There are people who would like to see us do that. And unless we do that, they’ll suggest we’re in retreat.

  Steve Kroft: They’ll say you’re throwing in the towel–

  President Barack Obama: No. Steve, we have an enormous presence in the Middle East. We have bases and we have aircraft carriers. And our pilots are flying through those skies. And we are currently supporting Iraq as it tries to continue to build up its forces. But the problem that I think a lot of these critics never answered is what’s in the interest of the United States of America and at what point do we say that, “Here are the things we can do well to protect America. But here are the things that we also have to do in order to make sure that America leads and America is strong and stays number one.” And if in fact the only measure is for us to send another 100,000 or 200,000 troops into Syria or back into Iraq, or perhaps into Libya, or perhaps into Yemen, and our goal somehow is that we are now going to be, not just the police, but the governors of this region. That would be a bad strategy Steve. And I think that if we make that mistake again, then shame on us.

  * * *

  And just like that the US foray in Syria is unofficially over.

  The sad thing is that for all the fake posturing by both Kroft and Obama, the US may still very well make this mistake and send 100,000 or 200,000 troops under the leadership of the Nobel Peace Prize winner, especially if our assessment of what the US withdrawal from the middle-east means for the upcoming dramatic shift in the regional balance of power.

  * * *

  The rest of the interview is primarily focused on domestic affairs, i.e., Trump, Hillary’s emails and Biden’s latest presidential run, which for the purpose of this post or the opinions coming from a lame duck president, are irrelevant.

  At the end of the interview, Kroft asks Obama if he’s glad he can’t run for president again. Obama says he feels a mixture of satisfaction at what he’s accomplished and a desire to still do more.

  Kroft then asks him: “Do you think if you ran again, could run again, and did run again, you would be elected?”

  “Yes,” says Obama, without missing a beat.

  Judging by the “changing” IQ landscape in the US over the past eight years, the golfer-in-chief well be right.

  Because just as the Obama was saying this, the following tweet hit the tape:

  After nearly 5 hours at Torrey Pines in La Jolla, CA., Pres Obama has departed the golf course.

  — Mark Knoller (@markknoller) October 12, 2015

  Somewhere Putin is laughing.

  

  

  

  

  

• Ruble, Lira, & Ringgit Tumble On USD, Yuan Gains As PBOC States "China Correction Nearly Over"

  After surging stronger for 2 weeks, EM FX is starting to lose ground in early Asia trading following Fischer's comments Friday. The biggest losers so far are Turkish Lira, Russian Ruble, and Malaysian Ringgit which has dropped over 1% in early Asia trading – its biggest drop in a month. China expanded its regulatory crackdown to 11 more firms for "illegal stock operations" – i.e. selling – bringing the total to 41 firms. The PBOC Deputy Governor tells anyone who will listen that "China's market correction is nearly over," following the IMF annual meetings – "China's economy is basically stable" – and Chinese stocks are modestly higher in the pre-open (with Dow futures -40pts). Yuan at 2mo highs after strengthening 7 days in a row.

   

   

  After a couple of weeks of serious strength, EM FX is leaking back lower against the USD…

  

   

  With Lira, Ruble, and Ringgit the biggest losers for now…

  • *RINGGIT FALLS 1.1% TO 4.1795 PER DOLLAR
  • The dollar reasserted itself, snapping an eight-day rally in Australia’s currency after Federal Reserve Vice Chairman Stanley Fischer joined the chorus touting a potential U.S. interest-rate hike by year end. Australian stocks fell with U.S. index futures following the best week for global equities since 2011.

  

   

  *  *  *

  Exceited by comments on China "managing:" to avoid a hard landing dureing discussions at The IMF's annual meeting

  The Chinese regulatory crackdown begins again…

  CHINA CSRC HOLDS HEARING FOR ILLEGAL STOCK OPERATIONS: XINHUA

   

  China Securities Regulatory Commission (CSRC) has held a two-day hearing for 11 illegal cases of reducing share holding.

   

  It was the first time that the CSRC dealt with cases involving such amount of illegal share-holding reductions in one hearing.

   

  The regulator asked big shareholders of public companies not to sell shares in an effort to keep the market stable in the past months.

   

  Altogether 41 such cases had been investigated, and the 11 cases at the hearing on Friday and Saturday were suspected of similar operations, the commission said.

   

  All the persons concerned admitted the facts at the hearing, but requested less punishment, claiming their operations tended to lower financial cost and made no impacts to the stock market, while they had carried out timely remedial measures.

  Margin debt rises again…

  • *SHANGHAI MARGIN DEBT BALANCE REBOUNDS FOR SECOND DAY

  And stocks are modestly bid in the pre-open…

  • *FTSE CHINA A50 OCTOBER FUTURES RISE 1% IN SINGAPORE
  • PBoC Dep Gov: China’s Market Correction Nearly Over — RTRS
  • *NDRC OFFICIAL LIU HE SAYS CHINA ECONOMY BASICALLY STABLE

  

   

  And with the Yuan at 2-month highs, PBOC fixes the Yuan stronger for the 7th day in a row….

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3406 AGAINST U.S. DOLLAR

  

   

  A top Chinese central banker said a “persistent” weakening of the yuan would be inconsistent with the fundamentals of the world’s second-biggest economy, and the country is committed to making its currency regime more flexible and market based.

   

  “As wide-ranging structural reforms are being carried out, the Chinese economy will become more balanced and sustainable,” People’s Bank of China Deputy Governor Yi Gang said Friday in a statement at the IMF annual meetings in Lima. Reforms to make the yuan more market-determined will make its exchange rate more flexible, “floating around the equilibrium level in both directions.”

  *  *  *

  Charts: Bloomberg

  

  

  

  

  

• Moscow Demands Britain Explain "Green Light To Shoot Down Russian Jets"

  The chances of escalation from a proxy war to outright war just went to 11 on the Spinal Tap amplifier of sabre-rattling. A day after British and NATO pilots were reportedly given the green light to take drastic action against Russian fighter jets if they come under threat during missions over Iraq, Interfax reports that the Russian Defense Ministry has demanded clarification. Senior defence sources say it is just a matter of time before our fighters are involved in a deadly confrontation with Russian jets.

  The Chinese, it appears, are wholeheartedly behind Putin's efforts, judging by the following puff-piece from Xinhua (unofficially China's government mouthpiece)…

  Russia's recent military intervention in the Syrian war in the form of airstrikes and missile attacks aimed both at supporting the government of President Bashar Al-Assad in combatting the Islamic State (IS) has reaped initial gains.

   

  Russia's bombing campaign in Syria, which began on Sept. 30, has strengthened the Syrian government, laying the foundation for a dialogue with all countries concerned to come up with solutions that could drag Syria out of the internal conflict that has lasted for more than four years.

   

  According to Russia Today, Russia started its bombing campaign in Syria with a goal to provide air support to the government troops in fighting various terrorist groups, primarily the IS.

   

  Russian air strikes hit 55 Islamic State group targets in Syria in the past 24 hours, the defense ministry said Saturday, as Moscow ramped up its military campaign in the war-torn country.

   

  Russia's air force has attacked a total of 112 targets since the start of the military actions.

   

  On Thursday, Syrian government troops launched large-scale ground offensives under the cover of Russia's repeated air strikes. At the same time, Russia launched 26 cruise missiles from the Caspian Sea and destroyed 11 IS targets.

   

  Syrian political analyst Osama Dannura said Russia's involvement in the Syrian conflict has upset the initial planning of Western powers that have their minds bent on toppling the Assad government.

   

  The West's strategic shortcomings were demonstrated by the disastrous 500 million-U.S.-dollar program to train and arm moderate rebels, which generated only a handful of fighters, many of whom surrendered or were captured almost immediately. The scheme was finally scrapped on Friday.

   

  The reason why the U.S.-coalition has failed to deal a blow to the IS, according to Syrian political analyst Maher Ihsan, is a lack of offensives by ground troops. Besides, while attacking the IS, the United States is also offering the opposition rebels assistance including weapons, most of which end up into the hands of IS fighters.

   

  In an interview with Iranian television broadcast on Sunday, al-Assad said a campaign of Western and Arab airstrikes against IS targets in Iraq and Syria has been counterproductive and terrorism has spread in terms of both territory and new recruits.

   

  Around 40 percent of the IS infrastructure in Syria has been destroyed in just one week, Syria's Ambassador to Russia Riad Haddad said on Wednesday.

  But the huge escalation in British and NATO rhetoric towards Russia – green-lighting direct conflict – has made the situation dramatically more dangerous…

  British and Nato pilots have been told to take the drastic action if they are fired on by Vladimir Putin's air force during missions over Iraq.

   

  The move comes after British ministers warned Russia had made the situation in the Middle East "much more dangerous".

   

  Senior defence sources say it is just a matter of time before our fighters are involved in a deadly confrontation with Russian jets.

   

  One source said: "We need to protect our pilots but at the same time we're taking a step closer to war. It will only take one plane to be shot down in an air-to-air battle and the whole landscape will change. "

   

  RAF pilots have been told to avoid contact with Russian jets at all costs and both US and British mission control teams will do their best to keep them apart.

   

  But the pilots have been warned they must be prepared to fire on Russian jets if their lives depend on it.

   

  One source said: "No one knows what the Russians will do next. We do not know how they will respond if they come into contact with a Western jet.

   

  "When planes are flying at supersonic speeds the airspace gets crowded very quickly. There could be a collision or a Russian pilot might be mistakenly shot down. "

  And then, as Reuters reports,

  Russia has asked the British defense attache in Moscow to clarify media reports that British pilots had been given permission to attack Russian jets if they are fired on whilst flying sorties over Iraq, Interfax news agency reported on Sunday.

   

  The British attache said he would submit an official response in the near future, RIA news agency reported.

  *  *  *

  One wonders just how far US, NATO "leadership" are willing to go to 'expose' Putin's evil intent? Especially in light of China's official mouthpiece (Xinhua News) reporting the following…

  "The Russians have shown a naval capacity that was not expected," said Thomas Gomart, head of the French Institute for Foreign Relations, adding that Russia is "challenging the West's aerial supremacy."

   

  Moscow offered on Tuesday to resume talks with Washington to avoid any misunderstanding concerning its airstrike operation, as well as to discuss ways to avoid conflicts between the United States and Russian warplanes over Syria.

   

  Washington also said on Saturday that it would resume talks with Moscow to avoid accidents in the skies over the war-torn country.

  

  

  

  

  

• "Maybe It's Not The Guns… Maybe It's The People Holding The Guns"

  Submitted by Mac Slavo via SHTFPlan.com,

  If the only gun violence statistics you see are disseminated by the mainstream media or left-wing anti-Second Amendment groups, then in all likelihood you are horrified by America’s murder culture.

  But what if what we’re being sold as truth is merely a means to achieve an agenda focused on seeing the American people totally disarmed?

  In the following must-see video report from Truth Revolt, host Bill Whittle shows  the reality of America’s per capita murder rates.

  Though we understand that a cranial rectal inversion may be their immediate response for fear of admitting the truth, we strongly encourage you to share this with those who may not have the full picture:

  “Maybe It’s Not the Guns… Maybe It’s the People Holding the Guns”

  In a recent article Dr. Ignatius Piazza from the Front Sight Firearms Training Institute examines the reasons behind the push against personal firearm ownership in America and why anti-gun proponents like President Barack Obama refuse to address other deadly issues that cause far more deaths than guns:

  Guns are not responsible for the 10 deaths at Umpqua College yesterday any more than cars are responsible for the 395 deaths over Labor Day weekend. That’s right, 395 men, women and children were killed over Labor Day in car accidents.

   

  Why didn’t Obama hold a press conference the day after Labor Day, expressing, his grief and anger over the senseless killing of nearly 400 people on our highways during Labor Day Weekend?

   

  Why didn’t Obama ask the American people to do something by pressuring their elected representatives to change our laws?

   

  Why didn’t Obama take a swipe at the car manufacturers and car dealers for building and selling cars to the American people knowing full well that EVERY YEAR, over 32,000 people are killed in car accidents? Yes, 32,000 EVERY YEAR.

   

  Why didn’t Obama plead with the American people to make a change and pressure Congress to pass laws that forbid the sale and consumption of alcohol, recreational drugs, and pharmaceutical drugs, all of which dramatically contribute to 87 highway deaths PER DAY?

   

  Why didn’t Obama sign an Executive Order forever banning Labor Day. After all it would save nearly 400 people EVERY YEAR.

   

  WHY? Because banning the manufacture and sale of automobiles, or alcohol, or recreational and pharmaceutical drugs, or getting rid of all the national holidays, does not fit in his Socialist agenda to disarm the American public so he doesn’t give a shit about the 32,000 innocent lives that are lost EVERY YEAR on our highways.

   

  Full Report: Show your anti-gun neighbor this… #1 With a Bullet

  It should be obvious that guns are not the problem. As Ignatius Piazza and Bill Whittle note, it’s the people holding the guns that are the problem.

  Banning firearms or imposing unreasonable restrictions not only goes against the spirit and letter of Constitutional Law, but increases the odds that innocent Americans will become targets of violent criminals like we have seen in “gun-free” cities such as Detroit and Chicago.

  We realize that if you are a left-leaning gun grabber you could argue that we are merely throwing out Republican and Libertarian talking points, so don’t take our word for it.

  Maybe the warnings from this little known author and Statesman will convince you:

  “Laws that forbid the carrying of arms…disarm only those who are neither inclined nor determined to commit crimes. Such laws make things worse for the assaulted and better for the assailants; they serve rather to encourage than prevent homicides, for an unarmed man may be attacked with greater confidence than an armed one.”

   

  Thomas Jefferson

  We’ll be happy to give up our guns… just as soon as former New York’ Mayor Michael Bloomberg, Chicago Mayor Rahm Emanuel and President Barack Obama remove their ARMED security details.*

  Lead by example, right?

  

  (*Note: This statement was made in jest. We don’t plan on giving up our guns even if the President and aforementioned Mayors were to give up their armed security details.)

  

  

  

  

  

• What The "Real F**king News" Would Look Like

  Tired of the same old government-directed, politically-correct mainstream media diatribe of ‘everything is awesome’, good-guy-bad-guy, “this is what to think” news? Well this angry ‘reporter’ exposes what the real news would sound like.

   

  Note: Jonathan Pie is a satirist

  

  

  

  

  

• Fed Quietly Revises Total US Debt From 330% To 350% Of GDP, After "Discovering" Another $2.7 Trillion In Debt

  Everyone has seen the chart of “Total Credit Market Instruments“, which as of its most recent update on March 31, 2015, was just over $59 trillion, or 330% of US GDP.

  

   

  For those who have not seen it, as well as for those who are familiar with this chart, take a long look, because this is the last update of this particular data series, pulled straight from the Fed’s Z.1 Flow of Funds (section L.1), you will ever see.

  So did the Fed spontaneously terminate the reporting of what until the second quarter’s update of the Flow of Funds, was the most comprehensive official summary of Household, Financial, Corporate and Government debt in existence? And if so why?

  Many Fed watchers assumed that this is precisely what happened, and indeed, searching high and low for the infamous L.1 Section revealed nothing.

  We can only assume that the vocal outcry that emerged in the aftermath of the Fed’s release of its Q2 Flow of Funds statement missing this most critical of data sets on September 18, was so loud that three weeks later, this past Friday on October 9, the Fed released an official follow up explanation what exactly happened.

  Here is what happened to the missing so very critical data series, straight from the horse’s mouth:

  Q: In the September 18, 2015 release of the Z.1 Financial Accounts of the United States, some tables in the summary section on credit market instruments seem to have disappeared. What happened to these tables and where can I find the equivalent data series?

   

  With the September 18, 2015 Z.1 release, the classic presentation of the instrument category “credit market instruments” has been discontinued and replaced with two new instrument categories, “debt securities” and “loans”.  Reporting debt securities and loans separately brings the Financial Accounts more in line with the international standards for national accounts. The debt securities instrument includes open market paper, Treasury securities, agency- and GSE-backed securities, municipal securities, and corporate and foreign bonds. The new loans instrument includes depository loans not elsewhere classified, other loans and advances, mortgages, and consumer credit. Together, debt securities plus loans include all of the financial assets or liabilities previously included in credit market instruments. While the underlying instrument categories that make up the sum of debt securities and loans are the same as those in old “credit market instruments” concept, changes to a few of these categories make the new sum of debt securities and loans larger than in previous publications. 

   

  This change has had three major impacts on the table structure of the publication: (1) summary tables focusing on “credit market instruments” have been eliminated; (2) remaining summary tables have been renumbered; and (3) new instrument tables for debt securities (tables F.208 and L.208) and loans (tables F.214 and L.214) have been created.

  That’s the “what”, as for the why, note what the Fed said above: “the new sum of debt securities and loans larger than in previous publications.” Which means that not only did the Fed stop reporting a consolidated total debt series, it admits that the actual debt was higher. Some $2.7 trillion higher.

  Oops.

  Here is the Fed’s mea culpa on that particular topic:

  Q: Why is the level of total debt outstanding in the September 18, 2015 release of the Z.1 Financial Accounts of the United States so much higher than it was in the previous Z.1 release?

   

  Total debt outstanding was revised upwards due to methodology changes to both Treasury securities and security credit. Total debt outstanding is now the sum of two new instrument categories: debt securities (table L.208) and loans (table L.214). The aggregate of these instrument categories was previously called credit market instruments.

   

  Treasury securities, part of the debt securities instrument category, now include nonmarketable Treasury securities held by federal government defined benefit retirement plans (FL343061145). The inclusion of federal government defined benefit retirement plans resulted in an upward revision to the level of federal government debt of about $1.408 trillion for 2014:Q4. See the published FEDS Note “Federal Government Defined Benefit Retirement Plans” for more details http://www.federalreserve.gov/econresdata/notes/feds-notes/2015/federal-….

   

  In the domestic financial sector, borrowing previously classified as security credit liabilities (see release highlights) are now included as part of loans for the securities brokers and dealers sector. These are: (1) U.S.-chartered depository institutions loans for purchasing or carrying securities (FL763067003); (2) foreign banking offices in the U.S. loans for purchasing or carrying securities (FL753067003); and (3) Households and nonprofit organizations cash accounts at brokers and dealers (FL153067005). The revision to broker dealer debt for 2014:Q4 was roughly $962 billion.

   

  Similarly, borrowing previously classified as security credit liabilities of the household sector are now classified as loan liabilities. Margin accounts at brokers and dealers (FL663067003) are now included in the household sector’s other loans and advances instrument category. This change resulted in an upward revision of $370 billion to the outstanding amount of household sector loans for 2014:Q4.

  The bottom line:

  The total revision to the level of debt outstanding (debt securities plus loans) due to these methodology changes is approximately $2.74 trillion 2014:Q4. 

  And so the Fed has managed to kill two birds with one stone: it no longer provides a simple, one-stop-shop way to reconcile the total US credit stock, and it quietly boosted total US consolidated credit by $2.7 trillion to $62.1 trillion as of June 30, 2015.

  Luckily, for those who still care about such trivial memorandum items as “data” – made up as it may be – and would like to keep track of total US credit exposure, now better known as total debt and total loans, they can simply add up the two line items, with debt (found here) and loans (found here).

  This is how the old and new data look like: as noted, the consolidated total has risen by $2.7 trillion as of March 31, the last time the Fed reported the “old” series, and is currently a total of $62.1 trillion.

  

   

  Not surprisingly, with GDP not revised higher, it means that the two most important data sets for the US economy, total debt (or credit) however defined, and total GDP, now look as follows:

  

   

  The end result is that the ratio of Consolidated Credit to GDP, has quietly risen from 330% to 350%, without anyone in the broader public saying a word and without any of the official institutions, so seemingly concerned about the total stock of global debt, even noticing. And why should they: the S&P500 is back over 2000 so all is well.

  

  

  

  

  

  

• Japanese Firms Admit Abenomics Failed, Government Now "Left Trying To Redistribute Wealth"

  Do not believe in official statistics, Japanese retailers seem to be saying, as they cut earnings forecasts and warn of lackluster consumer spending, a key growth engine for Japan at a time when exports and factory output are stalling. Despite government statistics claining a 2.9% rise in household spending, Reuters reports Japanese retailers exclaimed "Consumer spending has ground to a halt," as Japan heads for a quintuple dip recession. Amid falling wages and higher costs, on apparel maker warned "shoppers are tightening their purse strings."

  Abenomics is not working…

  

   

  "Consumer spending has ground to a halt," said Noritoshi Murata, president of Seven & i Holdings (3382.T). "There are a lot of concerns about the global economy and not many positives for consumption. Weak spending could continue into the second half of the fiscal year."

   

  Seven & i, which operates Japan's ubiquitous 7-Eleven convenience stores, on Oct. 8 trimmed its full-year profit forecast by 1.6 percent to 367 billion yen ($3.05 billion) and cut its revenue forecast by 3.9 percent to 6.15 trillion yen, triggering a fall in its shares in Tokyo.

  As Reuters reports, shortly after Abe took office late in 2012, the wealthy cashed in on a stock rally and went shopping. Unions got the pay increases they asked for, and companies started raising retail prices.

  Since then, the monetary and fiscal measures taken by Abe to rekindle Japan's economy have delivered uneven results.

   

  A sales tax hike last year to 8 percent from 5 percent helped tip the economy into a brief recession.

   

  Now, the world's third-largest economy is at risk of falling into its fourth recession in the past five years as exports, factory output and consumer spending stumble.

   

  Abe had a bold agenda of ending deflation and knocking down the barriers to growth, but many economists say the requisite policies never really materialized.

   

  Some economists worry consumer spending is now stuck in a prolonged period of very low growth.

  The main problem is wages are not rising fast enough to keep pace with rising food prices, and consumers are starting to cut back on other goods…

  Real wages, adjusted for inflation, rose 0.5 percent in July from a year earlier. That was the first gain in 27 months. But wage growth subsequently slowed to 0.2 percent in August, and summer bonuses fell from last year, government data shows.

   

  Another problem is more and more workers are getting stuck in jobs with low pay. Part-time and irregular workers comprised a record 37.4 percent of the workforce last year, according to the National Tax Bureau. Irregular workers earn on average less than half of what regular full-time workers earn, tax data show.

  The third problem is the government plans to raise the nationwide sales tax again, to 10 percent in 2017 from 8 percent, and households are already changing their behavior.

  And now the retail sector is adapting to a return to more subdued household spending.

  "Some companies are starting to realize they've actually driven away some customers by raising retail prices," said Norio Miyagawa, senior economist at Mizuho Securities.

   

  "The government's initial growth strategy did not really expand the pie. Now the government is simply left trying to redistribute wealth."

  As we noted previously, the cultish fervor remains though among the mainstream media…

  From all that you might ask yourself why would the BoJ need more QQE when its own argument put forth suggests exactly the opposite. Such contradictions are scarcely the exceptions, as the entire idea is itself at odds with itself. Apparently the only true economic danger in Japan, as elsewhere, is not the actual economy (which is always terrific or just about to be) but the evil, dreaded “deflationary mindsight.” So the BoJ upped its ante in case Japanese people start thinking unhappily about what QQE might not be able to do with, apparently, no real basis for them to actually think that way. Thus is the treasure of monetarism as it applies “forward guidance” and the Krugman version of “credibly promise to be irresponsible” as if nobody should notice anything but the intended happy ending. It really is the monetary equivalent of “the beatings will continue until morale improves.”

  

  

  

  

  

• The Mindless Stupidity Of Negative Interest Rates

  Submitted by Lee Adler via The Wall Street Examiner,

  Here we are in the midst of The Great Stagnation Middle Class Elimination and some central bankers and mainstream economists are promoting negative interest rates. One economist was quoted in a Marketwatch piece by Greg Robb as saying,

  “…pushing rates into negative territory works in many ways just like a regular decline in interest rates that we’re all used to.”

  OK. That’s false. We know exactly what negative interest rates do since Europe has made a fine case study of it. They don’t work just like a “regular decline in interest rates.” I mean not that a “regular decline in interest rates,” does what economists think it does, but that’s another story. The issue here is how negative interest rates work.

  Negative interest rate proponents ignore the basic tenets of double entry accounting.

  Because there are two sides to a bank balance sheet, negative interest rates are the mirror image of positive rates. The move to negative rates imposes new costs on the banks, unlike low positive rates or ZIRP which reduce bank costs.

  The greater the negative interest rate, the higher the cost imposed, which is the same as a central bank raising interest rates when they are positive. When the Fed lowers a positive interest rate, it lowers the bank’s cost. But when there are trillions in excess reserves held by the banks as deposits at the Fed and the Fed lowers the interest rate to below zero, that becomes a cost to the banking system which it cannot avoid, except by using those cash assets to pay down debt.

  So the banks in Europe did exactly what I said they would do in mid 2014 when the ECB announced negative deposit rates. It’s exactly what any person with common sense would do, and therefore knew the banks would do. Those with the ability to do so pay off loans, which extinguishes deposits, thereby getting rid of the added cost. As opposed to stimulating growth, the European banking system shrinks. As opposed to encouraging borrowing and spending and economic growth, the policy encouraged deleveraging.

  We know that it is categorically false the negative rates are working in Europe. But facts have a way of eluding mainstream economists and central bankers.

  I wrote about this and also did a video on it in mid 2014 when the ECB went to the negative deposit rate. I showed that it would result in shrinkage of the ECB balance sheet because it would be an incentive for the banks to pay off their existing loans from the ECB in order to extinguish the offsetting reserve deposit. That is exactly what happened, both when the policy was first known immediately before it took effect, and ever since.

  So the ECB was forced to institute outright QE to reverse that shrinkage. I then predicted that the banks would use part of the QE not to stimulate lending, but to continue to pay off outstanding ECB credit. That is exactly what has occurred. This is not rocket science. It’s just common sense and paying attention to facts instead of ridiculous economic myths.

  The European banks have been steadily paying down LTRO credit and MRO credit, month in and month out. That cancels out a portion of the growth that would otherwise accrue to the ECB balance sheet from QE. Not that that QE does an iota of good for the European economy—but that’s tangential.

  So what has happened to European bank deposits since the ECB instituted negative rates? They have shrunken. Has one single mainstream economist or proponent of negative rates mentioned that, ever? I suspect not. Because they either don’t know, don’t want to know, or do not understand that if you raise the costs of holding deposits then the deposit holders will get rid of them. And the only way the system as a whole accomplishes that is to pay off loans, using the existing deposits to do so. Sooner or later the hot potato of the negative interest bearing deposit lands in the lap of someone who will do just that–use a deposit to pay off a loan and extinguish the deposit.

  But would it work differently in the US where the banking system cannot escape paying that cost because the Fed issued permanent reserves? Much of the ECB’s balance sheet was in the form of loans that could be voluntarily repaid. Not so with the Fed. It bought assets with newly issued money that instantly became cash assets of the banks, held as reserve accounts at the Fed. The amount of cash in the system is fixed until the Fed decides it isn’t. The cash can move from the reserve account of one bank to that of another. But the Fed’s balance sheet is like the Hotel California. You can never leave.

  The banks can unload their cash on other banks by buying long term assets from them. That gets rid of their reserve deposit at the Fed, but the cash just ends up in the reserve account of the bank that sold the asset. So maybe this starts a buying frenzy that pushes long term rates to zero because the banks will all want to exchange cash assets (reserves) for long term assets. That’s apparently what happened in Europe as the system there shrank. But in the US some banks always end up holding the hot potato–the reserve deposit on which they must pay the cost.

  Then what? Then you, Mr. or Ms. Banker try to recoup the cost. So you charge your depositors to hold deposits. What do they do? Rather than pay the interest on deposits, some pay off loans, extinguishing their deposits. They pay off their credit cards, their auto loans, even their mortgages, because there’s an incentive not to hold deposits. The banks start to shrink, just like today in Europe. As their balance sheets shrink, their cash assets grow as a percentage of assets and the cost of the negative deposit rate on reserves at the Fed grows as a drag on earnings.

  How can anything positive come from this?

  Seriously, has anyone thought this through?

  Can anyone show a clear example connecting the dots to show where negative interest rates have stimulated an economy? Can anyone clearly explain how charging an institution or business to hold deposits is in any way stimulative… not net stimulative, but stimulative AT ALL?

  It defies common sense.

  

  

  

  

  

• There Will Be Blood – Part IV

  By Chris at www.CapitalistExploits.at

  In today’s penultimate piece on shale oil (you can catch up on the previous letters here:Part I, Part II, and Part III), Harris talks about the role of central bankers of the world in the current energy bloodbath. Enjoy!

  ——————————

  Date: 20 January 2015

  Subject: There Will Be Blood – Part IV

  Modern central bankers are from the school of thought where there is always an eloquent academic model to approach each crisis with. Naturally, volatility is their enemy – in a highly leveraged world, volatility usually leads to dislocation and crisis. Central bankers obviously know that the halving of oil’s price in a few short months adds unnecessary volatility to their carefully orchestrated worlds. What they want to do is corner the price of oil within a narrow range, suppress volatility and allow complex derivatives to be built up around it so that they can use financial means to manipulate it.

  Unfortunately, oil doesn’t behave like an interest rate derivative. When there is too much supply, the only way to solve the problem is to destroy supply. When there is too much demand, it is impossible to create supply – or not within the timelines demanded by central bankers. Have the central bankers finally met the first crisis that they cannot solve?

  

  Ever since the great crash of 2008, central banks have learned that the solution to any instability is to print money and lower interest rates. This approach has been used repeatedly, because every crisis has stemmed from either a solvency issue caused by a lack of equity capital or a near-term liquidity constraint at some financial institution. As the oil crisis asserts itself, the central banks may have finally found a crisis that will not respond to their magic elixir of QE. In fact, lending more money to insolvent shale producers will only serve to increase oil supply. To the central banker with a hammer, every problem looks like a nail. This will be one well-oiled nail.

  Over the past six years, investors have been treated to a false sense of security regarding the financial markets – one where they’ve learned to trust that the central banks are there to bail them out. The violence of the move in EUR/CHF shows what happens when everyone expects a central banker to support things, but the support isn’t there. I think this oil crisis will be the first one to really test the central bankers globally. Too much money was lent to too many oil companies and oil producing nations – most of which cannot service this debt, much less pay it off at $45 oil. For once, the central banks have no way to save the situation – it may actually be out of their hands. When investors realize that the central bankers aren’t there…

  

  Get ready for the carnage.

  ——————————

  Next week we’ll have the final piece for you as well as a special subscriber-only report on specific ways to capitalize on the oil and gas carnage. Make sure you’re subscribed here to receive this.

  – Chris

   

  “I’m calling a top in the Narrative of Central Bank Omnipotence because it has, in fact, reached its asymptotic limit of influence and belief.” – Ben Hunt, Chief Risk Officer of Salient Partners

  

  

  

  

• Viral Video Claims To Prove US Support Of ISIS In Iraq

  While Russian warplanes over Syria have been systematically eradicating – and providing supporting video evidence – countless ISIS outposts and command centers over the past two weeks in Islamic State-held territories (even if in the process they may have taken on some of the CIA-supposrted “moderate rebels” whose only purpose was to remove Assad and are now left without US support), many have been wondering just what the US airforce, which over the past year has been engaged in “supporting missions” over the same region, has been doing? After all, shouldn’t US warplanes have been doing for the past year what Putin’s air force has been busy with in the past 14 days?

  One answer, and a rather provocative one as it goes counter to everything that US has publicly claimed, comes courtesy of Hayder al-Khoei, an associate fellow at Chatham House, who notes that “another ‘U.S. supports ISIS’ video is going viral in Iraq.” In the video US “parachutes & supply crates” are seen in the area of Iraq’s Baiji refinery, a site of recurring ISIS incursions and battles. He adds that “Vids like this & others of helos flying above Hashd/ISF positions towards ISIS-held areas reinforce narrative that US supports ISIS in #Iraq.”

  While the videos are clearly unconfirmed, the bigger question is with the US now ending its official support of Syria’s “moderate rebels” in Syria – those who were tasked to “fight ISIS” but were in fact merely arming it while failing in their given task to toppled Assad – will the Pentagon also cease support for its clandestine op, the one which has the US supporting both al Qaeda and ISIS in their pursuit to topple the Syrian leader who has steadfastly refused to allow passage to a Qatari gas pipeline.

  We should know the answer in the coming weeks, because if ISIS – under the constant bombardment of Russia – is suddenly in full retreat from the region and disappears as fast as it has appeared, then the biggest post-mortem question should be: how is it that Russia succeeded in eradicating a terrorist threat which the US was supposedly fighting for over a year, and whether instead of fighting ISIS the Pentagon, and the CIA (which as most know by now created ISIS) weren’t unofficially supporting it?

  The final question: why did Al Qaeda not issue proclamations such as the one below issued hours ago, during the “coalition”-led campaign to eradicate the region of alleged terrorists, and instead had to wait until the Russians showed up before calling in sheer panic for a united front against the aggressor?

  Al-Qaeda commander calls on all #Syria rebels to unify & counter-attack, future bleak if rebels lose initiative to Assad & the Russians. #pt

  — Hayder al-Khoei (@Hayder_alKhoei) October 11, 2015

  

  

  

  

  

• PuTiN OF NeoCoN DiSTuRBia…

  

  

  

  

  

• Saudi Arabia Warns "Rumor-Mongers" On Facebook And Twitter Risk Execution

  Submitted by SM Gibson via TheAntiMedia.org,

  A specific moment from the biopic film, The Doors – starring Val Kilmer – took up residence in my subconscious years ago. In actuality, it’s two lines of slurred dialogue that randomly and subtly float into my thoughts as if they are propelled by hot air into the atmosphere. The scene depicts an inebriated Jim Morrison taunting an audience of unsuspecting concert-goers from a stage in Miami, Florida in 1969. With the sincerity that only a vainglorious sot could conjure, Morrison towers and growls over the crowd of mostly teenagers and bellows out: “Adolf Hitler is alive and well and living in Miami! I f***ed her last night,” and with the following alcohol-fueled breath he concluded the thought: “You’d all eat sh*t, wouldn’t you?”

  Because the plebeians choose to eternally dine at the media’s trough of propaganda, the ramblings of a bloated drunkard are all that make sense after the frustration takes hold. People will believe anything. One man’s lies are another man’s facts.

  The overwhelming rush of bewilderment clouds any intellectual discourse I could bring to the topic of Saudi Arabia. I have exasperated myself on the subject to a manipulated mass of deafened sycophants. Just because the veil is lifted doesn’t mean anyone will look.

  So I will leave you with strictly the facts.

  According to state-run Makkah Newspaper in Saudi Arabia, the wealthy Gulf-nation is threatening its citizens with the death penalty for spreading rumors about the government on social media.

   

  An anonymous source within the Ministry of Justice stated only the worst “rumour-mongers” will be sentenced to death, while lesser offenders of the new policy will be disciplined with flogging, imprisonment, travel bans, house arrest, fines and social media bans.

  Although the source is not mentioned by name, it should not be assumed that details of the column are any less credible. Human rights organization Reprieve reports that Makkah’s allegiance to the Saudi government is such that the claims should be considered legitimate.

  “Although the report does not use a named source, the nature of state-censorship in the Kingdom makes it unlikely that such claims would be made without the consent of the authorities. In addition, the Makkah Newspaper appears to enjoy government support – according to local news reports, it was launched last year by the Governor of Mecca, in the presence of the Minister for Culture and Information,” according to Reprieve.

  The inside source went on to state that social media websites “cause confusion in societies.”

  Maya Foa, director of Reprieve’s death penalty team, said “This looks like yet another heavy-handed attempt to crush dissent in Saudi Arabia, especially among the young.”

  Saudi Arabia, which was recently chosen to head the U.N. Human Rights Council, has already been the subject of staunch criticism by human rights groups around the globe in recent months for various vile rulings and barbaric acts.

  Last month, the oil-rich nation and strong ally of the United States denied the final appeal for 20-year-old Ali Mohammed al-Nimr, who was arrested at age 17 for alleged involvement in anti-government protests. He faces beheading and crucifixion at the hands of the regime, which could be carried out any day.

  UNICEF has also recently reported that a Saudi-led military campaign resulted in the deaths of over 2,300 civilians – including over 500 children – since March 26th of this year.

  The same Saudi government that has inked arms deals with the United States totaling over $95 billion over the past five years is also responsible for at least 134 executions in 2015.

  If free speech in the modern era includes the phrase ‘Give us Tweets or give us death,’ the Saudi royal family is more than content to administer the latter.

  How does the United States still align itself with a kingdom that is a clear perpetrator of countless human rights abuses while at the same time militarily intervening in numerous other countries under the guise of promoting human rights? Even stranger, why have the American people still not acknowledged the blatant hypocrisy of their government?

  

  

  

  

  

• The Tragic Ending To Obama's Bay Of Pigs: CIA Hands Over Syria To Russia

  One week ago, when summarizing the current state of play in Syria, we said that for Obama, “this is shaping up to be the most spectacular US foreign policy debacle since Vietnam.” Yesterday, in tacit confirmation of this assessment, the Obama administration threw in the towel on one of the most contentious programs it has implemented in “fighting ISIS”, when the Defense Department announced it was abandoning the goal of a U.S.-trained Syrian force.

  But this, so far, partial admission of failure only takes care of one part of Obama’s problem: there is the question of the “other” rebels supported by the US, those who are not part of the officially-disclosed public program with the fake goal of fighting ISIS; we are talking, of course, about the nearly 10,000 CIA-supported “other rebels”, or technically mercenaries, whose only task is to take down Assad.

  The same “rebels” whose fate the AP profiles today when it writes that the CIA began a covert operation in 2013 to arm, fund and train a moderate opposition to Assad. Over that time, the CIA has trained an estimated 10,000 fighters, although the number still fighting with so-called moderate forces is unclear.

  The effort was separate from the one run by the military, which trained militants willing to promise to take on IS exclusively. That program was widely considered a failure, and on Friday, the Defense Department announced it was abandoning the goal of a U.S.-trained Syrian force, instead opting to equip established groups to fight IS.

  It is this effort, too, that in the span of just one month Vladimir Putin has managed to render utterly useless, as it is officially “off the books” and thus the US can’t formally support these thousands of “rebel-fighters” whose only real task was to repeat the “success” of Ukraine and overthrow Syria’s legitimate president: something which runs counter to the US image of a dignified democracy not still resorting to 1960s tactics of government overthrow. That, and coupled with Russia and Iran set to take strategic control of Syria in the coming months, the US simply has no toehold any more in the critical mid-eastern nation.

  And so another sad chapter in the CIA’s book of failed government overthrows comes to a close, leaving the “rebels” that the CIA had supported for years, to fend for themselves.

  From AP:

  CIA-backed rebels in Syria, who had begun to put serious pressure on President Bashar Assad’s forces, are now under Russian bombardment with little prospect of rescue by their American patrons, U.S. officials say.

   

  Over the past week, Russia has directed parts of its air campaign against U.S.-funded groups and other moderate opposition in a concerted effort to weaken them, the officials say. The Obama administration has few options to defend those it had secretly armed and trained.

   

  The Russians “know their targets, and they have a sophisticated capacity to understand the battlefield situation,” said Rep. Mike Pompeo, R-Kan., who serves on the House Intelligence Committee and was careful not to confirm a classified program. “They are bombing in locations that are not connected to the Islamic State” group.

  With the US now in damage control mode, the finger pointing begins.

  First, it is only natural that finger will point at Putin – after all he is an easy target:

  U.S. intelligence officials see many factors motivating Russia’s intervention: Moscow’s reasserting its primacy as a great power, propping up Assad and wanting to deal a blow to the United States, which has insisted that Assad must go to end Syria’s civil war.

   

  Russia is also interested in containing IS, an organization that includes thousands of Chechen fighters who may pose a threat to Russia, officials say.

   

  But in the short term, “my conclusion is that the timing of their intervention was driven by Assad really going critical,” said Rep. Jim Himes, D-Conn., also a House Intelligence Committee member.

  Alas, blaming Putin only underscores his latest victory over the US state department, leaving the US diplomatic corps no choice but to blame its own. This is imminent, and many heads will – or should – roll.

  The administration is scrambling to come up with a response to Russia’s moves, but few believe the U.S. can protect its secret rebel allies. The administration has all but ruled out providing CIA-backed groups with surface-to-air missiles that can down aircraft, fearing such weapons would end up in the wrong hands, officials say.

   

  Rep. Adam Schiff, the top Democrat on the committee, says the U.S. should consider establishing a no-fly zone that allows rebels a safe place from which to operate, and shooting down Syrian helicopters that are bombing civilians. He said the U.S. also should provide arms to the Ukrainian government fighting Russian-backed separatists.

   

  A no-fly zone would require the U.S. military to be ready to engage in air battles with the Syrian government, something it is not prepared to do.

  Why? Because it is not the Syrian government that is flying those sorties above Syria, it is Putin, and despite all the posturing, Obama is unwilling to risk World War III just to stop a Qatar gas pipeline to Europe.

  Which means Obama now has just one option: admitting that his latest gamble to overthrow Assad, one which started in 2013 with the fake YouTube clips of “chemical attacks”, and the resultant naval escalation, coupled with the CIA’s training of thousands of local rebels mercenaries, and which escalated with the “appearance” of ISIS in the summer of 2014, is about to end with Obama admitting yet another major political defeat.

  The administration “is debating the merits of taking further action or whether they are better off letting Putin hang himself,” he said, referring to Russian President Vladimir Putin.

  Because somehow handing over control of the Middle East to the Russian-controlled axis – incidentally the topic of another article yesterday in the WSJ “America’s Fading Footprint in the Middle East” – is now spun as a defeat for Putin.

  “Our options are much narrower than they were two weeks ago,” said Sen. Angus King, I-Maine, who serves on the Intelligence and Armed Services committees. “I don’t think there is any simple answer. … Further air involvement has become very problematic because of the Russian engagement.”

  * * *

  And so Putin has once again “won”, or as the administration would prefer to spin it, “has hung himself.”

  Incidentally, this is just the beginning. Now that the U.S. has begun its pivot out of the middle-east, handing it over to Putin as Russia’s latest sphere of influence on a silver platter, there will be staggering consequences for middle-east geopolitics. In out preview of things to come last week, we concluded by laying these out; we will do the same again:

  The US, in conjunction with Saudi Arabia and Qatar, attempted to train and support Sunni extremists to overthrow the Assad regime. Some of those Sunni extremists ended up going crazy and declaring a Medeival caliphate putting the Pentagon and Langley in the hilarious position of being forced to classify al-Qaeda as “moderate.” The situation spun out of control leading to hundreds of thousands of civilian deaths and when Washington finally decided to try and find real “moderates” to help contain the Frankenstein monster the CIA had created in ISIS (there were of course numerous other CIA efforts to arm and train anti-Assad fighters, see below for the fate of the most “successful” of those groups), the effort ended up being a complete embarrassment that culminated with the admission that only “four or five” remained and just days after that admission, those “four or five” were car jacked by al-Qaeda in what was perhaps the most under-reported piece of foreign policy comedy in history.

   

  Meanwhile, Iran sensed an epic opportunity to capitalize on Washington’s incompetence. Tehran then sent its most powerful general to Russia where a pitch was made to upend the Mid-East balance of power. The Kremlin loved the idea because after all, Moscow is stinging from Western economic sanctions and Vladimir Putin is keen on showing the West that, in the wake of the controversy surrounding the annexation of Crimea and the conflict in eastern Ukraine, Russia isn’t set to back down. Thanks to the fact that the US chose extremists as its weapon of choice in Syria, Russia gets to frame its involvement as a “war on terror” and thanks to Russia’s involvement, Iran gets to safely broadcast its military support for Assad just weeks after the nuclear deal was struck. Now, Russian airstrikes have debilitated the only group of CIA-backed fighters that had actually proven to be somewhat effective and Iran and Hezbollah are preparing a massive ground invasion under cover of Russian air support. Worse still, the entire on-the-ground effort is being coordinated by the Iranian general who is public enemy number one in Western intelligence circles and he’s effectively operating at the behest of Putin, the man that Western media paints as the most dangerous person on the planet.

   

  As incompetent as the US has proven to be throughout the entire debacle, it’s still difficult to imagine that Washington, Riyadh, London, Doha, and Jerusalem are going to take this laying down and on that note, we close with our assessment from Thursday:  “If Russia ends up bolstering Iran’s position in Syria (by expanding Hezbollah’s influence and capabilities) and if the Russian air force effectively takes control of Iraq thus allowing Iran to exert a greater influence over the government in Baghdad, the fragile balance of power that has existed in the region will be turned on its head and in the event this plays out, one should not expect Washington, Riyadh, Jerusalem, and London to simply go gentle into that good night.”

  

  Which is not to say that the latest US failure to overthrow a mid-east government was a total failure. As Joshua Landis, a Syria expert at the University of Oklahoma says “probably 60 to 80 percent of the arms that America shoveled in have gone to al-Qaida and its affiliates.”

  Which is at least great news for the military-industrial complex. It means more “terrorist attacks” on U.S. “friends and allies”, and perhaps even on U.S. soil – all courtesy of the US government supplying the weapons – are imminent.

  

  

  

  

  

• The G-30 Group Of Central Bankers Warn They Can "No Longer Save The World"

  In a detailed report by the Group of Thirty, central bankers warned that ZIRP and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures. As Reuters reports, the flow of easy money has inflated asset prices like stocks and housing in many countries but have failed to stimulate economic growth; and with growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies. "Central banks have described their actions as 'buying time' for governments to finally resolve the crisis… But time is wearing on," sending a message of "you're on your own" to governments around the world.

  The G30 begins their report rather pointedly…

  Central banks worked alongside governments to address the unfolding crises during 2007–09, and their actions were a necessary and appropriate crisis management response. But central bank policies alone should not be expected to deliver sustainable economic growth. Such policies must be complemented by other policy measures implemented by governments.

   

  At present, much remains to be done by governments, parliaments, public authorities, and the private sector to tackle policy, economic, and structural weaknesses that originate outside the control or influence of central banks. In order to contribute to sustainable economic growth, the report presumes that all other actors fulfill their responsibilities.

  Roughly translated… central bankers are saying "you are now on your own."

  Central banks alone cannot be relied upon to deliver all the policies necessary to achieve macroeconomic goals. Governments must also act and use the policy-making space provided by conventional and unconventional monetary policy measures. Failure to do so would be a serious error and would risk setting the stage for further economic disturbances and imbalances in the future.

  And the "need to exit" appears to be front and center for The G30 bankers…

  There seems to be an almost unanimous view that monetary policy in the major AMEs will have to be normalized at some point. However, even if views differ about what precisely normal might mean, presumed dates for exit also differ due to different countries being at different points in the business cycle. There is also agreement that a danger exists of exiting too soon, thus aborting a nascent recovery, and also of exiting too late, thus encouraging some combination of higher inflation and other imbalances that could also weigh on recovery.

   

  However, where serious disagreement arises is when it comes to discussing which danger is the greater. Those worried about too early an exit point to the example of the Federal Reserve in 1937. In contrast, those worried about too late an exit point to the inflation that followed the Fed-Treasury Accord in the late 1940s and to the inflationary surge in the early part of the 1970s.

   

  In recent years, distortions in financial markets and the effects on EMEs have also moved much higher up the list of concerns of this latter group.

   

  While reasonable people can disagree on such objective issues, a number of political economy factors seem to make exiting too late the more likely outcome.

   

  First, there is great uncertainty concerning the consequences of tightening.

   

  Second, in some cases it will in fact be clear that tightening will reveal some debts as being unserviceable, and some financial institutions as undercapitalized. Central banks will then be asked to wait until these other sectors have become more robust, which could well take a long time. The danger is that debt levels will rise with the passage of time, strengthening the arguments for still more forbearance—the debt trap discussed above.

   

  Third, debtors will obviously resist the tightening of policy. Since governments are struggling to manage record-high sovereign debt levels, they too will be tempted to put pressure on their central banks to push back tightening as far as possible.

  But delaying an 'exit' has costs…

  Wicksell, Hayek, Koo, Minsky, and others have, over many decades, identified a variety of theoretical concerns arising from the excessive expansion of money and credit during booms. Rising inflation, investment misallocations, balance sheet overhangs, banking sector instability, and volatile international capital flows were all highlighted as threats to future economic stability. Moreover, by 2007 it was evident that these were matters of practical concern as well.

   

  The policies followed by the major central banks since 2008, while contributing to stability in the short run and conceivably avoiding a second great depression, might also have aggravated threats to future stability. These policies have had undesirable macroeconomic side effects both in the AMEs themselves and in EMEs. Admittedly, in the latter case, the policy responses of the EMEs themselves to inflows of foreign capital have also played a contributing role.

   

  "Capital losses would affect many investors, including banks, and the process of extend and pretend for poor loans would have to come to a stop," the G30 report said.

   

  With the consequences of an exit from easy money so unpredictable, the G30 said the risk was of exiting too late for fear of sparking another crisis.

  And so, while 'exit' is seen as urgent, it is unlikely…

  "Faced with uncertainty, the natural default position is the status quo," the G30 said.

  In other words more of the same… and while  The G30 are careful to note the glass-half-full persepctive of the future, their "endgame" scenario of continuing weak (or even weaker) growth  is troubling…

  Should the global economy stay weak, or indeed should it weaken again as financial markets overshoot, we could face the possibility of debt deflation. The almost 40 percent decline in commodity prices since mid-2014 could be a precursor of such a slowdown. In this environment, risk-free rates would stay very low and there would be no exit for monetary policy.

   

  Nevertheless, the current prices of many other financial assets would be revealed as excessive. Capital losses would affect many investors, including banks, and the process of extend and pretend for poor loans would have to come to a stop. In this scenario, for all the political economy arguments presented above, attempts might nevertheless be made to rely on monetary policy to restore demand. However, just as past efforts have failed to gain traction, renewed efforts would likely have a similar outcome. This would be particularly likely if the overhang of debt had worsened in the interval as has indeed happened over the last few years.

   

  In such circumstances, governments would also be faced with chronic revenue shortfalls. This could lead to a worst-case situation where deflation would actually sow the seeds for an uncontrolled inflationary outcome. Governments with both large deficits and large debts must borrow to survive, but worries about debt accumulation might imply an increasing reluctance on the part of the private sector to lend to them at sustainable rates. In that case, recourse to the central bank is inevitable, and hyperinflation often the final result.

  And the side effects of central bank policies during the crisis is still more worrying…

  Central banks see their actions as buying time for governments to address problems that are essentially real, not monetary. However, governments have thus far not reacted as necessary. Recognizing the political difficulties of addressing these underlying problems, they prefer to believe that central bank actions will be sufficient to restore strong, stable, and balanced growth. Thus, they are strongly tempted to forebear in the pursuit of policies that might be more effective. The longer this standoff persists, the more dangerous it becomes as the undesirable side effects of current central bank policies continue to cumulate.

  Which is exactly what Macquarie hinted at… the academics will be the first to note that policy escalation may be required (helicopter money).. and then policy-makers have the ivory tower to lean on when they unleash it.

  *  *  *
  Finally, The G30 admits – it's all an illusion…

  Central bank policies since the outbreak of the crisis have made a crucial contribution to restoring the appearance of financial stability.

   

  Nevertheless, for this appearance to become a reality, underlying problems rooted in very high debt levels must be resolved if global growth is to be more sustainably restored.

  So, the bottom line, reading between the lines of this 80-page report, is that

  Central Bankers know their policies have done (and will do) nothing to promote real economic improvements, are puttingh pressure on governments to do something (anything), admit that is unlikely (because the central bankers have always saved them before), expect extreme policy measures to become the status quo (despite admitting their failure) for fear of any asset weakness, and suggest more measures might be needed (which have led to hyperinflation in the past).

  But apart from that – everything is awesome!!

  *  *  *

  Full G30 Report below…

  

  

  

  

  

• The Failure To Act Responsibly Will Be The Addendum To Bernanke's Memoirs

  Authored by Mark St.Cyr,

  There was a time not all that long ago if someone asked who was The Chair of The Federal Reserve more than likely you’d get a blank stare or, just a shrug. Today, not only can people (people is a relative term as in; people at least trying to pay attention) name the current Chair, they can also name more than two or three current members. e.g. Fisher, Bullard, Evans, and so on.

  This change whether by design or, by happenstance is inconsequential. Either way, what it has done is changed the very fabric, as well as understanding, of how not only the economy is fostered in the U.S. But also – who controls it.

  Long gone is the illusion of: an elected body by the citizenry. Today, it’s become demonstrably self-evident the economy is run by an elected body – by the elected. And the consequences of this change is only now beginning to openly reverberate both in amplitude and frequency with every passing day.

  Currently as I type this former Fed. Chair Ben Bernanke has just wrapped up a week-long tour of financial media frenzy to promote his book, The Courage To Act: A memoir of a crisis and its aftermath (2015 W.W. Norton & Company). Personally I watched a few. Yet, I could only bear the burden so far. So inspired by the title I myself acted, with courage – and changed the channel.

  Listening to the answers to many of the “soft ball” style questions was one thing. Listening to the near sycophantic, vapid, lack of understanding or depth concerning the economy and its relationship as expressed via the capital markets and more by the many that hold themselves out to be “experts?” I just couldn’t take it for more than a few minutes. It was painfully monotonous.

  One point that Mr. Bernanke kept referring to, that for me, in many respects was the underlying issue that demonstrates exactly how far beyond the Fed’s mandate as well as its scope not only within the economy, but (and it’s a very big but) how this insertion has adulterated the capitalistic dynamic known as free markets (i.e., printed money via QE and its other programs as to bolster the financial markets) was this…

  His assertion, as well as his stated defense for such policy actions was (I’m paraphrasing) “He was disappointed with the lack of policy responses from Washington which left the bulk of the heavy lifting solely on the shoulders of the Fed.”

  Well Duh – imagine that. Washington shifting the burden (or setting up the ability to shift blame) to another body or person rather than take the lead themselves. Oh, say it isn’t so!

  I mean truly – are you kidding me? What form of academic genius does it take to realize if the Fed. is willingly inserting itself into the economic structure along with remaining at the Zero bound and a willingness, as well as obligingly printing and injecting TRILLIONS of dollars for years into the very fabric of the financial markets propping them up. Washington doesn’t need (nor probably will) to do a single thing? Even if this “propping up” has more in common with a Potemkin Village analogy than any real example resembling a true recovery. Washington is going to say “Hey, stop propping things up making our lives easier. That’s our territory?” Please spare me.

  Capital formation has now been replaced with nothing more than front-running schemes. And this has only been made possible not by the courage to act – but rather – the failure to act responsibly.

  For years now it’s been clear to anyone who wasn’t some next in rotation “economics expert” in financial media that this juiced up HFT Frankenstein inspired monstrosity borne only to a punch-bowl made available, refilled, and spiked with the monetary equivalent of amphetamines and energy drinks would inevitably turn on its masters. Yet we’re told (now near daily) “They’ve got this!” Sure they do. All this coming from those that couldn’t even see (or anticipate) the obvious responses they would get from Washington.

  Who needs a budget when the Fed. is printing and buying? Who needs to cut costs when the Fed. is (repeat former line here)? Who needs to worry about tax legislation when (again cut and paste last line here)? Who needs to argue if your spending too much on this program or that program if (you guessed, rinse repeat). And you could fill a book let alone an article with far too many more.

  The issue I take with Mr. Bernanke’s stance is one I take with the whole Ivory Tower cabal. It would seem economics is a profession based solely on “The chicken or the egg” quandary. Everything first and foremost must be presented, formulated, and articulated through this prism. There’s never anything such as 1+1=2.

  Here’s a clue to any and all within the Ivory Tower or Ivy League academia using 1+1=2 math.

  When you replace the economic policy stewardship of the body politic with actions that can both mask the health of that economy, as well as benefit its donor class, while simultaneously allowing that body politic to defend and deflect criticism stating “It’s not us – it’s them!” Not only are you not going to get any help, you’re going to get something you thought was only meant to be voiced at the schleps, not the Ivory Ivy class.

  For proof as well as leaving no room for doubt what Mr. Bernanke was allowing the Fed. to morph into. It was here during the following exchange where “courage” turned into something else in my opinion. For it was stated both clearly, publicly, and forcefully in 2012 exactly what was being expected (as well as insinuated to be continued) from Washington. And it seems today Mr. Bernanke is a little mystified, befuddled or, possibly upset with Washington’s lack of response? Please, it couldn’t have been stated any clearer. They demanded – you acted. Period end of story. No several hundred paged book to explain. No chicken or egg quandary. No Einstein inspired formulations with Rube Goldberg styled flow chart needed to explain. It was all done in elementary fashion: They dictated, The Fed. acquiesced, the results are self-evident: A mess. Again, period. End of story.

  As I’ve stated far too many times to count, it’s a purely legitimate argument on both sides with completely reasonable assertions on whether or not the Fed. should have intervened in the ways that it did during the original financial panic and crisis of 2008. Again, there are justifiable reasoning’s on both sides that will (as well as should) be debated for years to come. However, it’s what was allowed as well as fostered and promoted after the original crisis that is not only controversial, but rather – a catastrophe of monetary policy.

  When I think of the courage to act when it comes to monetary policy my mind seems to hearken back to times in history when former Chair holders such as Paul Volker raised interest rates in the face of staggering opposition from Washington. He stayed his course and brought inflation back under control. I also think of William Martin Jr. who like very few others understood the hardest job of the Fed. was to not only remind Wall Street, but to articulate those necessities that a responsible Fed’s primary function also included (I’m paraphrasing) “to take away the punch-bowl just as the party gets going” Again, all to Washington’s chagrin. This is not what we have today.

  All I’ll use as an example to illustrate how the Fed. has captured itself with a seemingly never-ending resolution more in concert with “The Sorcerer’s Apprentice” (Fantasia/Disney) rather than the “Wizard of Oz” (L. Frank Baum/Geo-M.Hill Co.) is the following:

  When the “Great financial crisis” hit the S&P 500™ was bouncing within the 1500 range. After the now referred to “generational low” during the crisis of 666-ish one could as I’ve iterated earlier argue both for, as well as against, the Fed’s insertion with its transfiguration of monetary policy to stabilize the then fragile markets. Again, this debate will go on for decades.

  However; exactly what “courage” took place after that? In other words: once the markets regained within 100 odd points of its previous all time highs. What enabled or emboldened the decision to not only leave the “punch-bowl” out, but rather – to continually refill it to surpass those previous highs just shy of an additional 1000 points?! (i.e., 1400’s in April 2012 to 2100’s Nov. 2014) Let it not be lost this happened in 2012 at precisely the same time period of Mr. Bernanke’s appearance before Congress mentioned above.

  Today this “failure to act responsibly” has led us to witnessing a failed communication strategy initiated by the then former Chair. An economy that is faltering at every level of unadulterated measurement. A political class that is still enabled as well as emboldened to deflect and deter any criticism, as well as responsibility for their own inaction. An ever-growing Emerging Market crisis fostered by years of ZIRP policy, combined with credit markets, as well as money markets beginning to not only show stress, but beginning to buckle with withdrawal symptoms from the “free money” equivalent only to those experienced by a junkie going cold turkey and a whole lot more.

  You can also add to this in the wake of Mr. Bernanke’s exit we now have a Fed. so confused, scared, or reluctant to make the slightest of monetary changes; considerations of international developments, as well as Wall Street unease must now openly be stated. Along with an open admission for the first time in Fed. history (via their Dot Plot) negative interest rates are on the table of discussion. It’s an absolute mess pure and simple. And it’s going to get a whole lot worse – not better in the coming future.

  All one needs for proof between “courage” and “failure” is to look back just a mere 30-ish days ago when it appeared as if the markets were once again going to free-fall if the Fed. dared try to move toward the slightest adjustment in relation to normalizing monetary policy. Once again the markets did a spin-on-a-dime and reversed rallying back towards all time highs not on “economic stability” but rather the realization that the Fed. was not only painted into a corner by its own hands, but also boxed, locked, and handcuffed. The continuation of “free money” as well as the resurgence of QE are once again back on the agenda. You just can’t make this stuff up. It’s maddening.

  The only brilliant move that appears as more of an act of self-preservation as opposed to anything resembling courage or monetary policy was his decision to get the heck out of Dodge and leave the oncoming disaster to anyone foolish enough to accept it.

  After all – you can’t rewrite history as well as reform one’s image if you’re the one that has to clean up the resulting mess in one’s wake. It seems to be working for his own predecessor, he was smart to follow. The ones who may not be so lucky is not only the current Chair, but rather – all of us.

  

  

  

  

  

• Pentagon Will Pay "Condolence" Blood Money To Afghan Hospital Bombing Victims

  Following last weekend’s horrific killing of 22 innocent civilians in an Afghanistan hospital, of whom a majority were physicians belonging to the Doctors Without Borders (MSF) group, at first first the Pentagon denied responsibility for the attack calling the dead “collateral damage” and accusing the Taliban of fighting from the hospital; then after the global media refused to quickly turn the other way, the US blamed Afghans for calling in the strike while a desperate for distractions Pentagon was raging about “civilian casualties” in Syria at the hands of Russian warplanes; then, when this too gambit failed and when the MSF screamed bloody murder, literally, and accused Nobel Peace Prize winner Barack Obama of engaging in a war crime, the US finally admitted it did it.

  And while Obama did apologize to the MSF, and demanded a deeper investigation to “get to the bottom of things” like any alleged peace prize holding war criminal, it is what he did yesterday that showed just how alleged “war criminals” treat collateral damage aka human casualties: as goods whose ultimate value can be expressed in dollar (or rather loans, since as we noted the US has 3.5x more debt than it has GDP).

  According to the WSJ, the Pentagon is offering “condolence payments” to the civilians injured and the families of those killed by a U.S. airstrike that destroyed a hospital near Kunduz, Afghanistan. Because, the thinking probably goes, human lives are like any other commodity and can be measured in reserve notes. However, what is more disturbing is that since the US prints the world’s reserve currency, should Obama proceed to exterminate countless other “collaterally damaged” civilians, all that the US will need to do is print a few more million to wash its – and that of the “free and democratic world” – conscience, and all shall be well in all future cases.

  We say “millions” loosely: in reality we don’t know what the agreed upon payment will be – if any – because the Pentagon didn’t say how much it would pay: it could well be much less. We do wonder, however, just what the actuarial calculation involved is when the US determines the value of a human life, both in Afghanistan and elsewhere, because surely to the Pentagon one Afghanistani life has a vastly different value than the life of civilians in other nations.

  Perhaps the Obama administration should disclose the assumptions used in its death-for-pay.xls model?

  Less controversial was the Pentagon’s announcement on said Saturday that it would also provide funds for repairing the hospital, which has been abandoned, as well as the payments. It is unclear just why it would do this: it is not as if anyone will work in a hospital that the US has declared a bomb zone and which can explode at any given moment for no reason at all aside from some AC-130 gunnery sergeant got an order to shoot it and so he did.

  The WSJ adds that the compensation will be handled through the existing Commanders’ Emergency Response Program in Afghanistan, and if necessary additional authority will be sought from Congress, Pentagon press secretary Peter Cook said in a statement issued Saturday.

  “The Department of Defense believes it is important to address the consequences of the tragic incident that the Doctors Without Borders hospital,” Mr. Cook said.

  By which he now know he meant to spend “blood money” to silence the families of the dead.

  Elsewhere, Doctors Without Borders has called for an independent probe of the incident by the Swiss-based International Humanitarian Fact-Finding Commission, which is made up of diplomats, legal experts, doctors and some former military officials from nine European countries, including Britain and Russia. It was created after the Gulf War in 1991 and has never deployed a fact-finding mission.

  It was unclear just how much the Pentagon would have to spend here to, mostly in the form of bribes, to assure the found “facts” are in line with a narrative that is least damaging to the US war machine.

  

  

  

  

  

• How 'ObamaTrade' Will Drive Up The Cost Of Medicine Worldwide

  Authored by Julia Belluz, originally posted at Vox.com,

  After nearly eight years of negotiations, the United States and 11 other countries have finally reached consensus on the Trans-Pacific Partnership, one of the largest trade deals in a generation that'll involve nearly half the world's GDP.

  The sprawling deal would affect a variety of issues, including tariffs, labor rights, and international investment. But the deal's most controversial provisions are the ones limiting competition in the pharmaceutical industry. According to Doctors Without Borders, "The TPP will still go down in history as the worst trade agreement for access to medicines in developing countries."

  Though the final text of the agreement won't be available for at least another month, here's what we know so far.

  The TPP will drive up costs for some of the most expensive drugs on the market in the poorest countries

  One of the biggest sticking points in the negotiations had to do with data protection for biologic drugs.

  Biologics are treatments made from biological sources, including vaccines, anti-toxins, proteins, and monoclonal antibodies for everything from Ebola to cancer. As the Brookings Institution explains, biologics are much more structurally complex than regular "small-molecule drugs" and are therefore more difficult and expensive to make, costing on average 22 times more than nonbiologic drugs.

  Because of the high prices of these drugs, companies are very interested in developing "biosimilars" – cheaper copies of the original drugs, similar to generic versions of pharmaceuticals. The reason these biosimilars are so cheap is that manufacturers can usually just rely on data from clinical trials submitted by the maker of the original biologic. But, of course, the maker of the original drug doesn't want everyone using its data and making cheap knockoffs.

  So in the United States, there are really protective rules around this: Any maker of a biologic gets 12 years of data exclusivity. The FDA can't approve a similar drug that relies on the original data during this time. (Theoretically, other companies could conduct their own trials to create a biosimilar, but because this is so expensive, it defeats the point.) By contrast, in other countries, there are looser rules – or no rules – around such data exclusivity. Japan offers eight years, for instance. Brunei offers zero.

  As part of the TPP, the United States (and the pharmaceutical lobby) had been pushing to get every country to agree on 12 years of data protection for biologics. The final agreement falls somewhere in between, with a period of data exclusivity from at least five to eight years, according to the New York Times.

  This means the agreement will prevent more affordable biosimilars from entering the market for a longer period of time in places that previously had no bar to entry. And the burden of this provision will be felt by the world's poorest countries, according to Judit Rius Sanjuan, the legal policy adviser for Doctors Without Borders.

  "Peru, Vietnam, Malaysia, and Mexico – they had zero monopoly protection on data for biologics," she said. Now they'll have to wait at least five years before allowing cheaper biosimilars onto the market. "It's a loss for people in developing countries. They'll face higher prices for longer periods of time, and there are many products we need that are biologics."

  The TPP could also delay cheaper, generic versions of drugs

  Meanwhile, every country has systems for granting patents and legal privileges to the first company to invent a drug – a reward for innovation. After these expire, other companies can apply to get their cheaper "generic" copies of these drugs on the market.

  At the moment, it's up to countries to decide whether things like a small change in a drug molecule should warrant a patent extension. But the final TPP creates patent-related obligations in countries that never had them before, explained Rius Sanjuan. To put it simply, this would directly target a country's ability to define its own patent law and put a higher standard on when generics can become available.

  Critics believe these provisions will likely to limit the availability of cheaper generics. "We know from experience that more expansive patent laws end up reducing the availability of generic medicines," said Yale law professor and global health researcher Amy Kapczynski, who wrote about the deal's health impact in the New England Journal of Medicine. "When you start mucking around in the precise ways countries can define your patent laws," she said, "you limit everyone’s policy flexibility."