Jan 14

Today’s News 14th January 2016

  • Massive Explosions Rock Jakarta In Apparent Suicide Bombings; Gunfire, Casualties Reported

    Two months after the Paris explosions of November 13, it appears that terrorism has struck again, this time in Indonesia’s capital, Jakarta where moments ago, at least six bomb explosions, gunfire and casualties were reported, with at least one of the explosions taking place near the local UN office.

    ANTARA NEWS REPORTS SIX EXPLOSIONS IN CENTRAL JAKARTA

    JAKARTA POLICE SUSPECTS BOMB AT TRAFFIC POLICE POST: METRO TV

    JAKARTA POLICE, GUNMEN CONTINUES SHOOTING: METRO TV

    As of this moment, the explosions appear to be yet another suicide bomber-driven terrorist attack, and we suspect it is only a matter of time before ISIS takes credit.

    The local stocks have reacted dramatically:

    A live feed of the event is available below:

  • This Is What The Powerball Ticket Line Looked Like In Nevada

    Seven years ago, America was promised hope and change. The change never came, but at least there is still hope, and it comes in the form of a voluntary tax known as the Powerball lottery. The only problem: it happens to be everyone else’s hope too, and to even get a chance to buy a ticket, one has to wait in lines such as this one on the California-Nevada border.

  • Hong Kong Dollar De-Pegging Risk Spikes As Yuan Slides, China Stocks Drop To 2-Year Lows

    Update:

    • SHANGHAI COMPOSITE INDEX FALLS 20% BELOW DECEMBER HIGH

     

    To 2-Year Lows…

     

    Offshore Yuan is being dumped again…

     

    And The Hong Kong Dollar is under sever pressure within its peg band…

     

    As De-Pegging risk expectations ramp up…

     

    As we detailked earlier,following last night's notable weakness in Chinese stocks (now down 15-25% year-to-date) and today's plunge in US markets, Offshore Yuan has begun to tumble lower once again ahead of today's Yuan fix. Having slapped short Yuan speculators with a dire liquidity withdrawal, it appears traders are seeing through the "over-invoicing" bullshit of last night's trade data and outflows appear to have restarted. Equities across AsiaPac are tumbling despite PBOC injecting a massive CNY160bn of liquidity (and modestly strengthening the Yuan fix), as safe-haven flows push 10Y China bonds to 2.70% – a record low.

    Chinese bonds just hit a record low yield…

    • *CHINA 10-YEAR BOND YIELD DROPS 3 BPS TO RECORD 2.70%

     

    Offshore Yuan is selling off again…

     

    And Chinese equities are a bloodbath in 2016…

     

    And tonight's open is not helping…

    • *MSCI ASIA PACIFIC INDEX EXTENDS LOSS TO 2.3%
    • *FTSE CHINA A50 JANUARY FUTURES FALL 1.7% IN SINGAPORE
    • *SHANGHAI COMPOSITE FALLS BELOW AUGUST CLOSING LOW

    But China "flu" appears to be spreading as carry trade unwinds spread to JPY…

    Japanese stocks are plunging – NKY down 700 points from its US session highs…

     

    To its weakest since Oct 2014…

     

    Get back to work Mr. Kuroda!!!

     

    Charts: Bloomberg

  • How China Almost Ran Out Of Physical Dollars

    On Tuesday, we weren’t surprised to learn that some banks in Shanghai and Beijing were apparently running short of physical dollar bills.

    According to Ming Pao, Shanghai residents were lined up at local banks in a frantic effort to sell RMB for USD amid China’s ongoing yuan deval.

    “Some banks in China’s Beijing, Shanghai and Shenzhen ran short of dollar bills for cash withdrawal amid increasing demand for the currency,” 21st Century Business Herald added, citing a reporter’s investigation which showed that “BOC, CCB, and China Merchants Bank in the listed cities are requiring an appointment at least 2 days in advance for >$5,000 purchases.” The appointment “could take as long as 1 week at some branches,” the paper said.

    Why the panic? Because, in the simplest possible terms, no one has any idea what Beijing’s target is for the yuan.

    In fact, no one even knows if the PBoC has a target at all or if China is simply flying by the seat of its pants managing the glidepath on an ad hoc, daily basis depending on how wide the onshore/offshore spread is (a proxy for the pressure on the currency).

    One thing seems certain though: a much bigger “adjustment” will be necessary if China hopes to stabilize its economy by propping up exports. As Deutsche Bank noted last week, if global currencies continue to slide against the dollar, the yuan will need to fall if China hopes to keep its new trade-weighted RMB index from rising.

    As long as the deval continues in a kind of fits and starts fashion, the capital flight will continue. That is, the only way to stabilize the situation is to allow the market to decide where the yuan should trade once and for all, a painful option in the short run, but a move that would keep the country’s capital account from dying a slow death by a thousand paper cuts. As Morgan Stanley puts it, “the capital accoount [currently] dominates the current account.”

    Now, as the turmoil continues (temporarily “better” trade data notwithstanding), WSJ is out with an account of how China is rapidly running out of physical dollars. “At major lender Industrial & Commercial Bank of China Ltd., one banker said the number of people wanting to change yuan for dollars has increased significantly during the past three weeks—a period during which the Chinese currency has declined about 2%,” WSJ begins. “During the weekend, ICBC received an urgent notification from China’s central bank warning of a dollar shortage, he said.”

    ICBC customers are now subject to the same kind of waiting period described earlier this week by 21st Century Business Herald. The bank is now requiring a four day advance notice on FX exchanges presumably in an effort to manage the flows and ensure the cash is available.

    Chinese are only allowed to exchange $50,000 per year (although between the various “Mr. Chens” and end-arounds like the UnionPay ruse there are plenty of ways to circumvent the captial controls) and WSJ suggests the selling pressure may be particularly acute now because everyone is starting with a clean slate for 2016. “Since China’s strict capital controls limit Chinese consumers to purchasing $50,000 worth of U.S. dollars each calendar year, January is also when they can start buying again with a fresh quota,” The Journal continues, before quoting Harry Hou “who works in the financial industry in Shanghai, [where] he, his wife and parents bought their limit of $200,000 last year, and started buying dollars again through China Merchants Bank’s online service as soon as the New Year kicked in.” 

    “This year’s biggest market risk is not going to be [stocks] but the yuan. The government has let the yuan fall in the past, allowing it to weaken to 8 yuan from 5 yuan against the dollar in the 1990s,” Hou said.

    And while Chinese authorities are doing their best to control the flow by cracking down on quota abusers and asking banks to make lists of those suspected of skirting the rules, the only way to stop the bleeding is to convince the market that the deval has nearly run its course. That won’t be easy, especially with the onshore/offshore spread blowing out, persistently lower nightly fixings, and a trade-weighted RMB that’s still substantially elevated from a historical perspective.

    In fact, Chinese are so convinced that there’s more downside to come that exporters are executing a daily arb. “James Mao, who runs a Shanghai-based company that exports biochemical materials from China to the U.S., says he is asking Chinese suppliers to wait for a few days to get paid, since he thinks he can get more yuan for those dollars later,” The Journal explains. “Exporters are required to sell the foreign currency they obtain from trade to the central bank, but there are no rules on when the transaction needs to be done. So far this month, Mr. Mao says he pocketed an extra $2,000 by waiting longer to convert his dollars to yuan.”

    Remember China, if the banks run out of dollars or if you find yourself having to wait a week for your greenbacks, there’s always Bitcoin.

    And there’s always Chen.

  • If You Don't Agree With Obama You Are "Peddling Fiction"

    Submitted by Simon Black via SovereignMan.com,

    If you’re not watching it purely for the entertainment value, sitting through a State of the Union speech ranks somewhere between a colonoscopy and a root canal.

    Every year I opt for the former (entertainment value, not colonoscopy).

    But because I live overseas, one of the added entertainment benefits is that I’m surrounded by foreigners who are seeing this highly ritualistic propaganda for the first time.

    The absurdity starts almost immediately.

    The Sergeant-at-Arms introduces the President of the United States, and he receives a massive, five minute standing ovation as he walks across the water to the podium.

    The applause finally dies down briefly, until, immediately after, the Speaker of the House formally introduces the President. And then the applause begins anew.

    Try explaining that to a foreigner who’s never seen it before.

    Foreigner: “Why is everyone clapping again for the President as if they weren’t just clapping for him 30 seconds ago?”

    Me: “Because that’s just the way they do it.”

    Foreigner: “But why?”

    Me: “… ummm… because they’re all trained monkeys?”

    But it is at this point that the real propaganda begins, where the President of the United States tells his fellow Americans that they are prosperous and free.

    He cited, for example, the 14 million jobs created since he took office.

    Of course he failed to mention the more than $8 trillion in debt (77% increase) that has been accumulated since he was inaugurated seven years ago.

    If the President truly wants to take credit as the job creator-in-chief, the basic math works out to be nearly $600,000 in government debt for every single job created.

    Zerohedge showed yesterday, in fact, that while debt in the US has increased 77% over the last seven years, GDP has only increased by 13%.

    Now, you’d think that for each additional dollar the US government was spending and indebting future generations, there would be at least $1 in GDP growth.

    Ideally you’d get more than $1 in GDP growth. Duh. Businesses have to do this every single day.

    If I borrow $10 million to buy and develop agricultural farmland, obviously the net effect once I’m finished should result in a property that’s worth MORE than $10 million.

    But that’s not how it works when governments spend money. It took them $3.71 of debt to buy just $1 of GDP growth.

    Yes, the overall result may show that the economy is technically bigger than it was in 2009.

    But this ratio is completely screwed up, and it is not indicative of “the strongest, most durable economy in the world.”

    In the meantime, there have never been more pages of laws, rules, and regulations ever in the history of the United States than there are today, January 13, 2016.

    Just this morning, in fact, the federal government published another 369 pages of regulations. Tomorrow there will be even more.

    Should you find yourself out of compliance with any of them, the government can summarily deprive you of your freedom, your property, and even your family.

    And it can do so administratively, without a fair and speedy trial in front of an impartial judge and a jury of your peers.

    This is not what freedom and prosperity are all about.

    President Obama is undeniably upbeat about America. And he’s right, there are a lot of amazing people doing great things in the US.

    The United States is a wonderful country. It’s clean. Modern. Reasonably safe. Standard of living is very high.

    But decades of insane regulation, government debt, and astonishingly destructive monetary policy have resulted in a society where it is now easier to consume than produce.

    Prosperity is not complicated. People figured out thousands of years ago that if you wanted to do well, you had to produce more than you consumed.

    But the American system is the exact opposite, favoring those who recklessly borrow and spend, rather than those who work hard and responsibly save.

    The President of the United States boldly accused everyone who doesn’t share his view as just making things up.

    In his words, “Anyone claiming that America’s economy is in decline is peddling fiction.”

    This is an extraordinary (and delusional) statement.

    The government’s own numbers show that they are completely insolvent, to the tune of nearly $18 trillion.

    The annual reports for the Social Security trust funds show that they are rapidly running out of money.

    The Federal Reserve’s own balance sheet shows that it is precariously undercapitalized, with net capital less than 1% of total assets.

    The Census Bureau’s data shows that the earnings for middle class Americans are stagnating.

    The Labor Department’s numbers show that the number of Americans who have dropped out of the work force hasn’t been at this level since the Carter administration.

    USDA figures show that the number of food stamp recipients is near an all-time high, simultaneously when the number of homeless children in America is at a record high.

    And all of this, at a time when trust in government is near an all-time low.

    These are all facts, not fiction.

    The only fiction is pretending that this story has a happy ending.

  • Last Bubble Standing

    EM debt bubble… emaciated, FX Carry… crucified, Crude…crushed,  High yield bonds… burst, Chinese equities… blown, Trannies… trounced, Small Caps… slammed, Biotechs… busted, and FANGs finally FUBAR! But there is one big (very big) bubble left in the world that no one is talking about, and a rather large liquidity-busting pin beckons…

    In May 2015 we first explained exactly why China was blowing its equity market bubble. Simply put, with more "equity," companies were better able to refinance/roll (note, no interest in debt reduction or deleveraging) their record-breaking mountain of debt and avoid the systemic collapse that is utterly imminent for just a few more months/years.

    Now that the equity market bubble has burst, Chinese authorities have chased investors into another bubble.

    In October 2015, we warned of the relative risk building in the Chinese corporate bond market.

    As the rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation’s red-hot corporate bond market. They may have just moved from one bubble to another.

    Into Chinese corporate bonds…

     

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

     

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

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

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

    Worse still, it is not just the most creditworthy of Chinese corporate bonds that are at record low yields. As the following shocking decoupling shows, even BBB credits are in an extreme bubble – entirely separate from the reality of their underlying business risk (as indicated by the equity market and equity vol)…

     

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

    Here is Cui:

    Our analysis shows that:

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

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

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

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

     

    And now tonight we get this…

    • *CHINA DEFAULTS LIKELY TO CONTINUE TO BECOME MORE COMMON: FITCH

    Charts: Bloomberg

  • Wednesday Humor: "This Is Why Obama Is Bullish On The Economy"

    … As he points in the right direction. Thanks for the laugh Yahoo.

    h/t @Estimated_0

  • Minimum Wage Misunderstandings: Incompetence Or Dishonesty

    Submitted by Walter E Williams via The Burning Platform blog,

    Michael Hiltzik, a columnist and Los Angeles Times reporter, wrote an article titled “Does a minimum wage raise hurt workers? Economists say: We don’t know.” Uncertain was his conclusion from a poll conducted by the Initiative on Global Markets, at the University of Chicago’s Booth School of Business, of 42 nationally ranked economists on the question of whether raising the federal minimum wage to $15 over the next five years would reduce employment opportunities for low-wage workers.

    The Senate Budget Committee’s blog says, “Top Economists Are Backing Sen. Bernie Sanders on Establishing a $15 an Hour Minimum Wage.” It lists the names of 210 economists who call for increasing the federal minimum wage. The petition starts off, “We, the undersigned professional economists, favor an increase in the federal minimum wage to $15 an hour as of 2020.” The petition ends with this: “In short, raising the federal minimum to $15 an hour by 2020 will be an effective means of improving living standards for low-wage workers and their families and will help stabilize the economy. The costs to other groups in society will be modest and readily absorbed.”

    The people who are harmed by an increase in the minimum wage are low-skilled workers.

    Try this question to economists who argue against the unemployment effect of raising the minimum wage: Is it likely that an employer would find it in his interests to pay a worker $15 an hour when that worker has skills that enable him to produce only $5 worth of value an hour to the employer’s output? Unlike my fellow economists who might argue to the contrary, I would say that most employers would view hiring such a worker as a losing economic proposition, but they might hire him at $5 an hour. Thus, one effect of the minimum wage law is that of discrimination against the employment of low-skilled workers.

    In our society, the least skilled people are youths, who lack the skills, maturity and experience of adults.

    Black youths not only share these handicaps but have attended grossly inferior schools and live in unstable household environments. That means higher minimum wages will have the greatest unemployment effect on youths, particularly black youths.

    A minimum wage not only discriminates against low-skilled workers but also is one of the most effective tools in the arsenal of racists.

    Our nation’s first minimum wage came in the form of the Davis-Bacon Act of 1931, which sets minimum wages on federally financed or assisted construction projects. During the legislative debates, racist intents were obvious. Rep. John Cochran, D-Mo., said he had “received numerous complaints in recent months about Southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.” Rep. Miles Allgood, D-Ala., complained: “That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.” Rep. William Upshaw, D-Ga., complained of the “superabundance or large aggregation of Negro labor.”

    During South Africa’s apartheid era, the secretary of its avowedly racist Building Workers’ Union, Gert Beetge, said, “There is no job reservation left in the building industry, and in the circumstances, I support the rate for the job (minimum wage) as the second-best way of protecting our white artisans.” The South African Economic and Wage Commission of 1925 reported that “while definite exclusion of the Natives from the more remunerative fields of employment by law has not been urged upon us, the same result would follow a certain use of the powers of the Wage Board under the Wage Act of 1925, or of other wage-fixing legislation. The method would be to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed.”

    It is incompetence or dishonesty for my fellow economists to deny these two effects of minimum wages: discrimination against employment of low-skilled labor and the lowering of the cost of racial discrimination.

  • Q4 Will Be The Worst U.S. Earnings Season Since The Third Quarter Of 2009

    Couple of things: first of all, any discussion whether the US market is in a profit (or revenue) recession must stop: the US entered a profit recession in Q3 when it posted two consecutive quarters of earnings declines. This was one quarter after the top-line of the S&P dropped for two consecutive quarters, and as of this moment the US is poised to have 4 consecutive quarters with declining revenues as of the end of 2015.

    Furthermore, as we showed on September 21, when Q4 was still expected to be a far stronger quarter than it ended up being, in the very best case, the US would go for 7 whole quarters without absolute earnings growth (and even longer without top-line growth).

    Then, as always happens, optimism about the current quarter was crushed as we entered the current quarter, and whereas on September 30, 2015, Q4 earnings growth was supposed to be just a fraction negative, or -0.6%, as we have crossed the quarter, the full abyss has revealed itself and according to the latest Factset consensus data as of January 8, the current Q4 EPS drop is now expected to be a whopping -5%. And just to shut up the “it’s all energy” crowd, of the 10 industries in the S&P, only 4 are now expected to post earnings growth and even their growth is rapidly sliding and could well go negative over the next few weeks.

     

    It gets even worse. According to Bloomberg, on a share-weighted basis, S&P 500 profits are expected to have dropped by 7.2% in 4Q, while revenues are expected to fall by 3.1% This would represent the worst U.S. earnings season since 3Q 2009, and a third straight quarter of negative profit growth. It’s no longer simply a recession: as noted above, the Q4 EPS drop follows declines of 3.1% in Q3 and 1.7% in Q2. it is… whatever comes next. 

    As Bloomberg adds, the main driving forces behind drop in U.S. earnings are the rise in the dollar index (thanks Fed) and the drop in average WTI oil prices. However, since more than half of all industries are about to see an EPS decline, one can’t blame either one or the other.

    So while we know what to expect from Q4, a better question may be what is coming next, and according to the penguin brigade, this time will be different, and the hockey stick which was expected originally to take place in Q4 2015 and then Q1 2016 has been pushed back to Q4 2016, when by some miracle, EPS is now expected to grow by just about 15%.

    Good luck.

  • Correlation Or Causation: How The Fed Helped Create The Global Oil Glut (In 1 Simple Chart)

    Correlation or Causation?

     

    h/t DoubleLine

    Easy money by The Fed expanding their balance sheet ENABLED tight oil to be produced 'economically'…

    But the signals this sent to the market became self-fulfilling (thanks to an endless Fed put) further creating record US crude production (as the oil 'gold rush' ensued), forcing a real 'deflating' world to be 'glutted' with ever-increasing output of mal-investment-driven 'expensive' oil…

    of course until that facade of 'boom', busted and crushed the price of the over-produced by 75% (back to 'reality')

    Can you spot the moment The Fed jumped the shark?

     

    So the question is – If The Fed enables mal-investment booms by mandate (or ignorance), will they ever learn from the inevitable busts?

  • Does The U.S. Have A Middle East Strategy Going Forward?

    Submitted by Gregory R. Copley via OilPrice.com,

    Senior-level sources in numerous Middle Eastern governments have privately expressed bewilderment at recent and current U.S. government strategies and policies toward the region.

    But a closer examination of U.S. policies, now almost entirely dictated by the Obama White House, shows no cohesive national goals or policies exist, but rather an ad hoc set of actions and reactions, which are largely dictated either by ideological positions, ignorance, whim, or perceived expedience.

    This is unique in U.S. history.

    In short, the consistent pattern of policies developed over the past century has now been broken up, apart from some of the physical consistencies of legacy military deployments and basing, and by some trade and weapons program commitments. Even there, military deployments have contracted substantially in the past few years, and new U.S. defense systems sales to the region have been lost to suppliers from France, Russia, the People’s Republic of China (PRC), Germany, Pakistan, and others

    In the 18 months until January 2016, the U.S. missed possibly $12- to $15-billion in sales of defense and energy systems in the Middle East, and a range of major new defense acquisitions from non-U.S. suppliers are under consideration by Middle Eastern states. At the same time, some of the U.S.’ major traditional allies in the region — Israel, Egypt, and Saudi Arabia, in particular — have felt compelled, for their own survival, to turn their back on Washington because of a perception of a divergence in values and goals.

    Most U.S. policy officials — especially in Defense — insist that U.S. commitments and strategies in the region have not changed, but the actions and policies dictated directly by the Barack Obama White House, and mirrored at Secretary of State level, have proven antithetical to most states in the greater Middle East, with the exception of Turkey and Qatar. Some regional states, such as Oman, are concerned; others, such as Ethiopia and Djibouti, are now left feeling strategically abandoned.

    The sudden withdrawal of U.S. forces from their deployment at the Ethiopian air base at Arba Minch — from where Reaper UAV sorties were conducted against al-Shabaab in Somalia — was done in September 2015 without forewarning to the Ethiopian Government in Addis Ababa, and kept secret until an Ethiopian website disclosed it in early January 2016. The U.S. had signed a series of multi-year supply agreements with Ethiopian companies to support the base in the weeks leading up to the withdrawal, a firm indication that the decision to vacate Arba Minch was sudden and hastily planned.

    The Arba Minch withdrawal coincided with growing U.S. hostility toward the Government of Djibouti — which is strategically integral to Ethiopia’s fortunes — and the very pointed siding of U.S. Secretary of State John Kerry with Saudi Arabia and the United Arab Emirates against Djibouti. This resulted in Saudi and UAE strong military commitments to Eritrea (to compensate for the loss of their Djibouti basing in the war in Yemen), another blow to Ethiopian security. But it also coincided with the visit by U.S. President Barack Obama to Addis Ababa to talk at the African Union, where he was accorded a very mixed reception based on his insistence on African states accepting his — Obama’s — stance on gay marriage, among other things.

    Significantly, although President Obama’s team was warned against such provocations in advance of his Addis and Nairobi visits, most Obama Administration officials do not understand what they have done to offend some of the nations in the region. Even Kerry’s support for Saudi Arabia and the UAE in the rift with Djibouti did not win their support for Washington, as both states feared that the U.S. now supported Iran rather than the lower Persian Gulf states. The Iranian Government, however, has been under no such illusions, even among those who supported the G5+1 treaty with Iran to end some of Iranian nuclear weapons programs in exchange for lifting economic sanctions. They, too, see U.S. support for the Saudi coalition against them in Yemen.

    The net result has been a bonanza for the PRC, and the deal by Djibouti to welcome a PRC naval base in the country was confirmed and cemented when Djibouti President Ismail Omar Guelleh met in South Africa with China’s President Xi Jinping in early December 2015. This was a strategically successful gathering of African leaders with China’s leader within weeks of the Indian summit in New Delhi with African leaders.

    The U.S. has done nothing of consequence to rebuild its position, which means that the strategic framework in the Middle East and Africa will, within a decade, be profoundly different from the beginning of the 21st Century.

  • Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes

    If there was one silver-lining in the oil complex, it was the demand for VLCCs (as huge floating storage facilities or as China scooped up 'cheap' oil to refill their reserves) which drove tanker rates to record highs. Now, as Bloomberg notes so eloquently, it appears the party is over! Daily rates for benchmark Saudi Arabia-Japan VLCC cargoes have crashed 53% year-to-date to $50,955 (as it appears China's record crude imports have ceased).

    In fact the rate crashed 12% today for the 12th straight daily decline from over $100,000 just a month ago…

    China imported a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners.

    China's crude imports last month was equivalent to 7.85 million barrels a day, 6 percent higher than the previous record of 7.4 million in April, Bloomberg calculations show.

    China has exploited a plunge in crude prices by easing rules to allow private refiners, known as teapots, to import crude and by boosting shipments to fill emergency stockpiles. The nation’s overseas purchases may rise to 370 million metric tons this year, surpassing estimated U.S. imports of about 363 million tons, according to Li Li, a research director with ICIS China, an industry researcher.

    But given the crash in tanker rates – and implicitly demand – that "boom" appears to be over.

    Shipbroker analysts blame fewer January cargoes and oil companies using their own vessels for shipment as the main reasons for the dramatic decline. As Bloomberg adds,

    Oil tanker earnings boomed thanks to the very thing that drove down crude prices: an abundance of supply that made ship-fuel cheaper and shipments plentiful. This month, shipbrokers report a slump in spot cargoes from the Middle East.

     

    While they say it would be premature to suggest that has implications for the region’s output, the plunge in rates shows just how sensitive owners are to monthly fluctuations in shipments.

    The good news after all this carnage is that, even before today's plunge, collapsing tanker rates were already pushing economics for floating storage (the carry trade) closer to be proditable.

  • In Latest Embarrassment For Obama, Iran Releases Footage Of Arrest, Apology Of 10 U.S. Sailors

    With just hours to go before Obama’s last State of the Union address, the US president suffered his latest foreign policy fiasco when around noon local time, Iran arrested 10 US sailors in a boat that has allegedly entered deep into Iranian territorial waters.

    Needless to say, there was no mention of this in Obama’s address and the scandal was quietly swept under the rug when the 9 young men and 1 woman were released earlier today, and all questions just why the soldiers were released only well after the SOTU’s conclusion (were they a hostage bargaining chip in case Obama said something out untoward last night regarding Iran) were soundly ignored.

    However, while there may have been some doubt as to Iran’s intentions yesterday, all doubt was eliminated moments ago when Iran’s state broadcaster just released photos not just of the 10 captured soldiers, which were shown earlier, but of their arrest as well as the seizure of the boat and their weapons.

    Here is the just released TV footage, courtesy of Sobhan Hassanvand:

    Here is a video of the US Commander apologizing (via Fox):

    And here are excerpted photos, showing US sailors being treated as common Somali pirates:

     

    Finally, putting Iran’s aggression in context: 


  • Canadians Panic As Food Prices Soar On Collapsing Currency

    It was just yesterday when we documented the continuing slide in the loonie, which is suffering mightily in the face of oil’s inexorable decline.

    As regular readers are no doubt acutely aware, Canada is struggling through a dramatic economic adjustment, especially in Alberta, the heart of the country’s oil patch. Amid the ongoing crude carnage the province has seen soaring property crime, rising food bank usage and, sadly, elevated suicide rates, as Albertans struggle to comprehend how things up north could have gone south (so to speak) so quickly.

    The plunging loonie “can only serve to worsen the death of the ‘Canadian Dream'” we said on Tuesday.

    As it turns out, we were right.

    The currency’s decline is having a pronounced effect on Canadians’ grocery bills.

     As Bloomberg reminds us, Canada imports around 80% of its fresh fruits and vegetables. When the loonie slides, prices for those goods soar. “With lower-income households tending to spend a larger portion of income on food, this side effect of a soft currency brings them the most acute stress” Bloomberg continues.

    Of course with the layoffs piling up, you can expect more households to fall into the “lower-income” category where they will have to fight to afford things like $3 cucumbers, $8 cauliflower, and $15 Frosted Flakes.

    As Bloomberg notes, James Price, director of Capital Markets Products at Richardson GMP, recently joked during an interview on BloombergTV Canada that “we’re going to be paying a buck a banana pretty soon.”

    Have a look at the following tweets which underscore just how bad it is in Canada’s grocery aisles. And no, its not just Nunavut: it from coast to coast:

    And while some Canadians might think this is a regional phenomenon …

    … folks in the northern parts of the Great White North do have the most cause to cry foul:

    No “Jack Nasty” it’s not The Great Depression, but as we highlighted three weeks ago, it is Canada’s depression and it’s likely to get worse before it gets better. “Last year, fruits and veggies jumped in price between 9.1 and 10.1 per cent, according to an annual report by the Food Institute at the University of Guelph,” CBC said on Tuesday. “The study predicts these foods will continue to increase above inflation this year, by up to 4.5 per cent for some items.”

    If you thought we were being hyperbolic when we suggested that if oil prices don’t rise soon, Canadians may well eat themselves to death, consider the following from Diana Bronson, the executive director of Food Secure Canada: 

    “Lower- and middle-class people — many who can’t find a job that will pay them enough to ensure that they can afford a healthy diet for their families” — also feel the pinch of rising food prices”

     

    “The wrong kind of food is cheap, and the right kind of food is still expensive.”

    In other words, some now fear that the hardest hit parts of the country may experience a spike in obesity rates as Canadians resort to cheap, unhealthy foods. As we put it, “in Alberta it’s ‘feast or famine’ in the most literal sense of the phrase as those who can still afford to buy food will drown their sorrows in cheap lunch meat and off-brand ice cream while the most hard hit members of society are forced to tap increasingly overwhelmed food banks.” 

    And the rub is that there’s really nothing anyone can do about it.

    Were the Bank of Canada to adopt pro-cyclical measures to shore up the loonie, they would risk choking off economic growth just as the crude downturn takes a giant bite out of the economy – no food pun intended.

  • Markets In Freefall: Stocks Extend Worst Ever Start To Year

    Today's business media summarized…

     

    Today's actual market summarized…

     

    Let's start with this – The market has now reduced March rate-hike odds back to pre-December rate-hike levels (at just 35%)…

     

    Two words – Policy… Error…

     

    This remains the worst start to a year… ever…

     

    Across the major US equity markets, it's a bloodbath…

    *RUSSELL 2000 CAPS 22% DROP FROM JUNE RECORD, ENTERS BEAR MARKET

     

    With the Nasdaq about to be the lasty major index to give up its post-QE3 gains…

     

    Year to Date – it's just as ugly…

     

    And since The Fed hiked rates…

     

    VIX term structure inverted but we are a long way from an August-like panic-bottom…

     

    There is at least some rationality resumiong as weak balance sheet stocks underperform strong balance sheet firms…

     

    With selling out of the gate and only a small bounce in the last hour, equity markets carnaged…

     

    FANGs entered a correction…

     

    And FANTAsy stocks were smashed today…

     

    Lots of head-scratching at how this is possible… except for anyone who pays attention to credit markets…

     

    As HYG plunges to its lowest close since July 2009… Today was worst day in 4 weeks

     

    US Energy credit risk is soaring back to near 2008 crisis highs…

    h/t @JavierBlas2

     

    While High yield bonds were crashing, Treasuries were aggressively bid (despite the Inbev issuance), on the verge of flash-crashing a few times after a stronmg 10Y auction…

     

    The USDollar Index ended the day unchanged as early strength was sold – but it remains up on the week… CAD was smashed to new 12 yeasr lows

     

    Gold ansd Silver rallied as Crude and Copper crumbled…

     

    As stocks plunged at the US open so PMs ripped…

     

    As if by magic, WTI's NYMEX close was adjusted very slightly higher to enable a tiny green print… but the trend was clear…

     

    Charts: Bloomberg

    Bonus Chart: Some food for thought…

  • "Very Worrisome Signal For Fed Credibility" – Former Fed President Trolls Federal Reserve

    It’s one thing for a fringe website to mock the Fed (on a daily basis, for the past 7 years), with articles such as this one we posted just before noon today, showing that inflation expectations have once again imploded, less than a month after the Fed’s rate hike was supposed to signal confidence in the economy and a renormalization in inflation:

    Since The Fed hiked rates in December, the market’s inflation expectations have collapsed in yet another clear indication of “policy error.” 5Y5Y Forward inflation swaps have crashed below 2.00% for only the 3rd time in history (Lehman 2008 and September’s Fed Fold were the other two) as despite central banker promises of transitory low-flation, the money is being bet against them as the regime-shift from full-faith to no-faith in Fed support continues.

     

     

    However, when a former Fed president, one who was employed as recently as two weeks ago by the Minneapolis Fed, Narayana Kocherlakota, best known for being the biggest hawk to dove conversion in Fed history, and also being the one person to dare put a negative dot on the Fed’s ever amusing dot plot, suggesting it is time for negative rates does exactly the same, you know that the Fed’s credibility has already run out.

    From Kocherlakota: “Very worrisome signal for Fed credibility as 5 yr 5 yr forward breakevens plumb new lows …”

    Of course, the far more worrisome signal for Fed credibility is not that inflation forwards are plunging, but that one of the Fed’s faithful has now taken to a public forum like Twitter to troll his former co-workers.

    All that it would take now is for Yellen to formally admit the Fed’s credibility is gone and to cut rates first back to zero, and then negative, with a solid dose of QE on top, admitting it was always only about the markets.

  • What Geniuses Come To Believe

    Submitted by Paul Rosenberg via FreemansPerspective.com,

    It recently struck me that the people we think of as “geniuses” tend to arrive, over time, at surprisingly similar sets of conclusions.

    It further struck me that a simple list of such thoughts might be of value to my readers.

    So, here is a list pulled from my quotes file and presented without commentary. Enjoy:

    Albert Einstein

    • Unthinking respect for authority is the greatest enemy of truth.

    • Nothing will end war unless the people themselves refuse to go to war.

    • Never do anything against conscience, even if the state demands it.

    • The world is in greater peril from those who tolerate or encourage evil than from those who actually commit it.

    • Small is the number of them that see with their own eyes and feel with their own hearts.

    Rod Serling

    • The ultimate obscenity is not caring, not doing something about what you feel, not feeling.

    Arthur Schopenhauer

    • We forfeit three-fourths of ourselves in order to be like other people.

    Thomas Jefferson

    • I have sworn upon the altar of god eternal hostility against every form of tyranny over the mind of man.

    • It is error alone which needs the support of government. Truth can stand by itself.

    • I would rather be exposed to the inconveniences attending too much liberty than those attending too small a degree of it.

    Allan Bloom

    • The most successful tyranny is not the one that uses force to assure uniformity but the one that removes the awareness of other possibilities, that makes it seem inconceivable that other ways are viable, that removes the sense that there is an outside.

    John Stuart Mill

    • The only freedom which deserves the name is that of pursuing our own good in our way, so long as we do not attempt to deprive others of theirs or impede their efforts to obtain it.

    Leo Tolstoy

    • The truth is that the State is a conspiracy designed not only to exploit, but above all to corrupt its citizens… Henceforth, I shall never serve any government anywhere.

    Will Durant

    • Above all, the ruling minority sought more and more to transform its forcible mastery into a body of law which, while consolidating that mastery, would afford a welcome security and order to the people, and would recognize the rights of the “subject” sufficiently to win his acceptance of the law and his adherence to the state.

    George Bernard Shaw

    • All government is authoritarian; and the more democratic a government is the more authoritative it is; for with the people behind it, it can push authority further than any Tsar or foreign despot dare do.

    Aldous Huxley

    • So long as men worship the Caesars and Napoleons, Caesars and Napoleons will duly rise and make them miserable.

    • Liberty, as we all know, cannot flourish in a country that is permanently on a war footing, or even a near war footing. Permanent crisis justifies permanent control of everybody and everything by the agencies of central government.

    Richard Feynman

    • Theoretically, planning may be good. But nobody has ever figured out the cause of government stupidity – and until they do (and find the cure), all ideal plans will fall into quicksand.

    Buckminster Fuller

    • Dear reader, traditional human power structures and their reign of darkness are about to be rendered obsolete.

    • If you take all the machinery in the world and dump it in the ocean, within months more than half of all humanity will die and within another six months they’d almost all be gone; if you took all the politicians in the world, put them in a rocket, and sent them to the moon, everyone would get along fine.

    • We are powerfully imprisoned in these Dark Ages simply by the terms in which we have been conditioned to think.

    • Either you’re going to go along with your mind and the truth, or you’re going to yield to fear and custom and conditioned reflexes.

    Erich Fromm

    • The history of mankind up to the present time is primarily the history of idol worship, from primitive idols of clay and wood to the modern idols of the state, the leader, production and consumption – sanctified by the blessing of an idolized God.

    • Obedience to God is also the negation of submission to man.

    • [I]f one has no possibility of acting, one’s thinking kind of becomes empty and stupid.

    • Is there really as much difference as we think between the Aztec human sacrifices to their gods and the modern human sacrifices in war to the idols of nationalism and the sovereign state?

    Charlie Chaplin

    • As for politics, I’m an anarchist. I hate governments and rules and fetters. Can’t stand caged animals. People must be free.

    Carl Jung

    • For in order to turn the individual into a function of the State, his dependence on anything beside the State must be taken from him.

    Ray Bradbury

    • We bombard people with sensation. That substitutes for thinking.

    Abraham Maslow

    • I can certainly say that descriptively healthy human beings do not like to be controlled. They prefer to feel free and to be free.

    Simone Weil

    • The real sin of idolatry is always committed on behalf of something similar to the State.

    • Conscience is deceived by the social.

    • Human history is simply the history of the servitude which makes men – oppressed and oppressors alike – the plaything of the instruments of domination they themselves have manufactured, and thus reduces living humanity to being the chattel of inanimate chattels.

    • What a country calls its vital economic interests are not the things which enable its citizens to live, but the things which enable it to make war.

  • The Aftermath Of US Intervention: What The "Arab Spring" Looks Like 5 Years Later

    If you needed a crash course in how not to conduct foreign policy, you need only take a cursory glance at Washington’s trials and travails in the Mid-East over the last decade.

    On the way to documenting the the carnage unfolding in Libya’s oil crescent last week we said that the country, much like Syria, is a case study in why the West would be better off not intervening in the affairs of sovereign states on the way to bringing about regime change. “Toppling dictators” sounds good in principle, but at the end of the day, it’s nearly impossible to predict what will emerge from the power vacuums the US creates when Washington destabilizes governments.

    Post-Baathist Iraq is rife with sectarian discord, a post-Assad Syria would likely be an even bloodier free-for-all than it already is, and post-Gaddafi Libya is a failed state with two governments each claiming legitimacy. These types of environments are exploitable by extremists eager to capitalize on the chaos by seizing resources and, ultimately, power.

    It’s in that context that we present the following graphic from The Economist which vividly demonstrates the fact that the Arab Spring was but a false dawn and that five years on, we still have but one democracy among a sea of autocracies and failed states.

    By the way, the one “democracy” success story in Tunisia is exceptionally tenuous as evidenced by November’s suicide attack in the capital.

  • JPM's "Gandalf" Quant Is Back With A Startling Warning

    Two days ago we reported that one half of JPM’s Croatian “Duo of Doom”, namely equity strategist Dubravko Lakos-Bujas, became every BTFDer’s worst enemy when he said that the time of BTFDing is over, and a regime change has arrived one in which rallies are to be sold. To wit:

    Our view is that the risk-reward for equities has worsened materially. In contrast to the past 7 years, when we advocated using the dips as buying opportunities, we believe the regime has transitioned to one of selling any rally. Yes, stocks had a rough time most recently, and some of the tactical indicators, such as Bull-Bear at -16 which is at the bottom of its trading range, argue for a short-term respite. Clearly, equities are unlikely to keep falling in a straight line, with periodic rebounds likely. However, we believe that one should be using any bounces as selling opportunities.

     

    We fear that the incoming Q4 reporting season won’t be able to provide much reassurance for stocks. As was the case for a while now, consensus expectations have been managed aggressively into the results. The hurdle rate for Q4 S&P500 EPS has fallen from +5%yoy a few months back to -4%yoy currently. If this were to materialise, it would be the weakest quarter for EPS delivery so far in  the upcycle.

    Today, the other half of the infamous Croatian duo…

     

    … the legendary “Gandalf” (as dubbed first by Bloomberg) quant Marko Kolanovic, who needs no introduction on this website, and whose every prediction starting in late August turned out just as predicted…

    … is out with a new note which will hardly make him any more popular with the permabullish crowd, asks whether “negative  performance in 2015 and January, turmoil in China, and continuing decline in Oil prices make investors wonder if this could be the end of the nearly 7-year bull market.”

    His short answer:

    “The fact that market volatility is on the rise and the Fed is raising interest rates further increases the probability of a Bear Market. The current option-implied probability of a bear market (i.e. ~20% decline this year) is about 25%. While there is no way to predict a bear market, below we look at various scenarios, and estimate that the probability of a bear market may be nearly twice as large.“

    So according to the man whose every market forecast has been so far impeccable, the probability of a bear market: or a 20% or more drop in the S&P500 – is roughly 50%.

    Not good.

    And what will make the permabulls even angrier is his proposed allocation to avoid the bear market:

    In case an equity bear market materializes this year, investors should benefit from increasing allocation to cash or gold. Cash has zero correlation to all risky assets, while Gold has recently exhibited strong negative correlation to risky assets (e.g. -40% to equities).

    * * *

    This is what else he says:

    from Systematic Strategy Flows, Oil Prices and the Risk of an Equity Bear Market

    First, let’s look at relationship between Oil prices and S&P 500. Oil prices recently posted some of the fastest declines on record. Over extended periods of time, Oil and S&P 500 were positively correlated. Figure 4 shows the out/underperformance of Oil relative to the S&P 500 over the past 30 years (trailing 12M relative performance). One can see that that in each of the 10 episodes of large Oil-S&P 500 price divergences, the gap was always closed in a relatively short time period. Significant underperformance of Oil (e.g. >30%) in 8 out of 10 instances resulted in either a decline in the S&P 500 or large Oil rally. In 2 instances, namely shortly after the start of the Gulf Wars in 1991 and 2003, the decline in Oil was a result of overbought conditions immediately prior to these events. One of the largest swings in Oil-S&P 500 performance (comparable to the one over the past year) occurred during the Asia and Russia crisis of 1997/98. The current underperformance of Oil to the S&P 500 is not just one of the largest on the record, but is by far the longest one. Given that divergences of this size closed in 10 out of 10 historical instances, we believe a closing of this gap is very likely.

     

    This can occur either by the S&P 500 falling (e.g. Oil is a predictor of a recession, as in 2008), or by Oil rising (e.g. a reduction of speculative positions, reduction of supply, geopolitical escalation). In any case, we believe that a long Oil and short S&P 500 trade is likely to deliver positive performance in 2016.

     

    A sharp rise in Oil prices could also trigger ‘stagflation’ and lead to an equity bear market. While markets currently estimate the probability of this scenario at less than ~3% (option-implied probability of, for example, Oil doubling and the S&P 500 declining), we think the risk of that scenario is much higher. What could cause a sharp increase in Oil prices? For one, we note that current levels of OPEC production are likely not economically rational or sustainable. For example, to justify an increase in production at a time when prices have declined from $100 to $30, one would need to place triple the production level without further impacting the price.

     

    As geopolitics is likely playing a large role in the Oil price decline, we think it can equally lead to a sharp price reversal. In addition to an agreed production cut, production disruptions are an increasing risk in our view. Recent increases of tension between Saudi Arabia and Iran add to that risk. Parties to a conflict that could independently lead to such disruption include: extremist elements from Saudi Arabia or abroad (e.g. for recent attempt see here), Yemen (for recent attempt see here), Iran, and others. Moreover, high marginal cost producers may drop offline, reducing supply. A doubling of Oil prices may not be a tail event after all (e.g. a significant increase in Oil prices would also be consistent with J.P. Morgan’s current Q4 forecast).

     

    To further assess the likelihood of an equity bear market, we look at historical bull and bear S&P 500 cycles over the past 50 years. We have identified 19 such cycles that alternated in relatively regular periods of time. There were 10 bull markets, lasting on average 4.3 years and delivering ~90% average returns, and 9 bear markets lasting on average 1.1 years and resulting in an average decline of 33%. The current ~205% bull market started in 2009 and is now 6.5 years old. As such, it is one of the longest/largest bull markets. There was only one longer and larger cycle, namely from 1990 to 1998 (that coincidentally ended with the Asia/EM crisis and sharp decline in Oil prices).

     

    The length and return of a bull market is closely related to the size and length of the bear market preceding it (and vice versa). This is shown in the figures below which relate the return during a bear market (horizontal axis) and length of subsequent bull market (Figure 5), and return of the subsequent bull market (Figure 6). In that regard, the current bull market is in-line given the size of the 2008/2009 bear market. In other words, if the bull market was to end now and we are entering a bear market – it would be in-line with historical trends. While this analysis is not proof of an impending bear market, it indicates to us that the chance of entering a bear market this year is probably higher than 25% (currently implied by option markets).

     

     

    Finally, for the end of a bull market, one needs to have equity prices ahead of their fundamental valuations. While valuation of the overall market is not consistent with a stock market bubble, some pockets do show stretched valuation (e.g. the market capitalization of Internet/Software sectors as % of the S&P 500 is not far from tech bubble peaks).

     

    Figure 7 shows the level of the S&P 500 as well as short-term interest rates (Fed funds). Between 1990 and 2010, the Fed was adjusting short-term rates largely in synch with the price performance of the S&P 500. Historically, the Fed increased rates during market rallies and reduced them during market selloffs, in pursuing its dual mandate of maintaining price stability and maximum employment. This trend broke in 2009. As the US equity market took off, the Fed kept rates at zero and added large monetary stimulus over the next 5 years. This coincided with one of the largest and longest bull markets in US history. During this bull market, stock and bond buybacks increased in pace, with the Fed buying ~15% of government bonds outstanding, and corporates buying back about ~10% of stock outstanding, which were a driver of the increased asset prices. A clear break of the trend between Fed Funds and the S&P 500 might imply that either the S&P 500 rallied too far given the weak growth and appropriate Fed stimulus, or that the Fed underestimated the strength of the economy, in which case the stimulus would have contributed to inflating a bubble. In any case, an increase of short-term rates could be a catalyst for a correction, or even the start of a bear market.

     

    In case an equity bear market materializes this year, investors should benefit from increasing allocation to cash or gold. Cash has zero correlation to all risky assets, while Gold has recently exhibited strong negative correlation to risky assets (e.g. -40% to equities). While bonds have historically been an efficient portfolio hedge, we think that bonds are increasingly at risk of becoming positively correlated to equities (e.g. selling of EM reserves, systematic strategies de-levering, or interest rates increasing).

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Jan 13

Today’s News 13th January 2016

  • The Demise Of Dollar Hegemony: Russia Breaks Wall St's Oil-Price Monopoly

    Submitted by William Engdahl via New Eastern Outlook,

    Russia has just taken significant steps that will break the present Wall Street oil price monopoly, at least for a huge part of the world oil market. The move is part of a longer-term strategy of decoupling Russia’s economy and especially its very significant export of oil, from the US dollar, today the Achilles Heel of the Russian economy.

    Later in November the Russian Energy Ministry has announced that it will begin test-trading of a new Russian oil benchmark. While this might sound like small beer to many, it’s huge. If successful, and there is no reason why it won’t be, the Russian crude oil benchmark futures contract traded on Russian exchanges, will price oil in rubles and no longer in US dollars. It is part of a de-dollarization move that Russia, China and a growing number of other countries have quietly begun.

    The setting of an oil benchmark price is at the heart of the method used by major Wall Street banks to control world oil prices. Oil is the world’s largest commodity in dollar terms. Today, the price of Russian crude oil is referenced to what is called the Brent price. The problem is that the Brent field, along with other major North Sea oil fields is in major decline, meaning that Wall Street can use a vanishing benchmark to leverage control over vastly larger oil volumes. The other problem is that the Brent contract is controlled essentially by Wall Street and the derivatives manipulations of banks like Goldman Sachs, Morgan Stanley, JP MorganChase and Citibank.

    The ‘Petrodollar’ demise

    The sale of oil denominated in dollars is essential for the support of the US dollar. In turn, maintaining demand for dollars by world central banks for their currency reserves to back foreign trade of countries like China, Japan or Germany, is essential if the United States dollar is to remain the leading world reserve currency. That status as world’s leading reserve currency is one of two pillars of American hegemony since the end of World War II. The second pillar is world military supremacy.

    US wars financed with others’ dollars

    Because all other nations need to acquire dollars to buy imports of oil and most other commodities, a country such as Russia or China typically invests the trade surplus dollars its companies earn in the form of US government bonds or similar US government securities. The only other candidate large enough, the Euro, since the 2010 Greek crisis, is seen as more risky.

    That leading reserve role of the US dollar, since August 1971 when the dollar broke from gold-backing, has essentially allowed the US Government to run seemingly endless budget deficits without having to worry about rising interest rates, like having a permanent overdraft credit at your bank.

    That in effect has allowed Washington to create a record $18.6 trillion federal debt without major concern. Today the ratio of US government debt to GDP is 111%. In 2001 when George W. Bush took office and before trillions were spent on the Afghan and Iraq “War on Terror,” US debt to GDP was just half, or 55%. The glib expression in Washington is that “debt doesn’t matter,” as the assumption is that the world—Russia, China, Japan, India, Germany–will always buy US debt with their trade surplus dollars. The ability of Washington to hold the lead reserve currency role, a strategic priority for Washington and Wall Street, is vitally tied to how world oil prices are determined.

    In the period up until the end of the 1980’s world oil prices were determined largely by real daily supply and demand. It was the province of oil buyers and oil sellers. Then Goldman Sachs decided to buy the small Wall Street commodity brokerage, J. Aron in the 1980’s. They had their eye set on transforming how oil is traded in world markets.

    It was the advent of “paper oil,” oil traded in futures, contracts independent of delivery of physical crude, easier for the large banks to manipulate based on rumors and derivative market skullduggery, as a handful of Wall Street banks dominated oil futures trades and knew just who held what positions, a convenient insider role that is rarely mentioned in polite company. It was the beginning of transforming oil trading into a casino where Goldman Sachs, Morgan Stanley, JP MorganChase and a few other giant Wall Street banks ran the crap tables.

    In the aftermath of the 1973 rise in the price of OPEC oil by some 400% in a matter of months following the October, 1973 Yom Kippur war, the US Treasury sent a high-level emissary to Riyadh, Saudi Arabia. In 1975 US Treasury Assistant Secretary, Jack F. Bennett, was sent to Saudi Arabia to secure an agreement with the monarchy that Saudi and all OPEC oil will only be traded in US dollars, not Japanese Yen or German Marks or any other. Bennett then went to take a high job at Exxon. The Saudis got major military guarantees and equipment in return and from that point, despite major efforts of oil importing countries, oil to this day is sold on world markets in dollars and the price is set by Wall Street via control of the derivatives or futures exchanges such as Intercontinental Exchange or ICE in London, the NYMEX commodity exchange in New York, or the Dubai Mercantile Exchange which sets the benchmark for Arab crude prices. All are owned by a tight-knit group of Wall Street banks–Goldman Sachs, JP MorganChase, Citigroup and others. At the time Secretary of State Henry Kissinger reportedly stated, “If you control the oil, you control entire nations.” Oil has been at the heart of the Dollar System since 1945.

    Russian benchmark importance

    Today, prices for Russian oil exports are set according to the Brent price in as traded London and New York. With the launch of Russia’s benchmark trading, that is due to change, likely very dramatically. The new contract for Russian crude in rubles, not dollars, will trade on the St. Petersburg International Mercantile Exchange (SPIMEX).

    The Brent benchmark contract are used presently to price not only Russian crude oil. It’s used to set the price for over two-thirds of all internationally traded oil. The problem is that the North Sea production of the Brent blend is declining to the point today only 1 million barrels Brent blend production sets the price for 67% of all international oil traded. The Russian ruble contract could make a major dent in the demand for oil dollars once it is accepted.

    Russia is the world’s largest oil producer, so creation of a Russian oil benchmark independent from the dollar is significant, to put it mildly. In 2013 Russia produced 10.5 million barrels per day, slightly more than Saudi Arabia. Because natural gas is mainly used in Russia, fully 75% of their oil can be exported. Europe is by far Russia’s main oil customer, buying 3.5 million barrels a day or 80% of total Russian oil exports. The Urals Blend, a mixture of Russian oil varieties, is Russia’s main exported oil grade. The main European customers are Germany, the Netherlands and Poland. To put Russia’s benchmark move into perspective, the other large suppliers of crude oil to Europe – Saudi Arabia (890,000 bpd), Nigeria (810,000 bpd), Kazakhstan (580,000 bpd) and Libya (560,000 bpd) – lag far behind Russia. As well, domestic production of crude oil in Europe is declining quickly. Oil output from Europe fell just below 3 Mb/d in 2013, following steady declines in the North Sea which is the basis of the Brent benchmark.

    End to dollar hegemony good for US

    The Russian move to price in rubles its large oil exports to world markets, especially Western Europe, and increasingly to China and Asia via the ESPO pipeline and other routes, on the new Russian oil benchmark in the St. Petersburg International Mercantile Exchange is by no means the only move to lessen dependence of countries on the dollar for oil. Sometime early next year China, the world’s second-largest oil importer, plans to launch its own oil benchmark contract. Like the Russian, China’s benchmark will be denominated not in dollars but in Chinese Yuan. It will be traded on the Shanghai International Energy Exchange.

    Step-by-step, Russia, China and other emerging economies are taking measures to lessen their dependency on the US dollar, to “de-dollarize.” Oil is the world’s largest traded commodity and it is almost entirely priced in dollars. Were that to end, the ability of the US military industrial complex to wage wars without end would be in deep trouble.

    Perhaps that would open some doors to more peaceful ideas such as spending US taxpayer dollars on rebuilding the horrendous deterioration of basic USA economic infrastructure. The American Society of Civil Engineers in 2013 estimated $3.6 trillion of basic infrastructure investment is needed in the United States over the next five years. They report that one out of every 9 bridges in America, more than 70,000 across the country, are deficient. Almost one-third of the major roads in the US are in poor condition. Only 2 of 14 major ports on the eastern seaboard will be able to accommodate the super-sized cargo ships that will soon be coming through the newly expanded Panama Canal. There are more than 14,000 miles of high-speed rail operating around the world, but none in the United States.

    That kind of basic infrastructure spending would be a far more economically beneficial source of real jobs and real tax revenue for the United States than more of John McCain’s endless wars. Investment in infrastructure, as I have noted in previous articles, has a multiplier effect in creating new markets. Infrastructure creates economic efficiencies and tax revenues of some 11 to 1 for every one dollar invested as the economy becomes more efficient.

    A dramatic decline for the role of the dollar as world reserve currency, if coupled with a Russia-styled domestic refocus on rebuilding America’s domestic economy, rather than out-sourcing everything, could go a major way to rebalance a world gone mad with war. Paradoxically, the de-dollarization, by denying Washington the ability to finance future wars by the investment in US Treasury debt from Chinese, Russian and other foreign bond buyers, could be a valuable contribution to genuine world peace. Wouldn’t that be nice for a change?

  • Jews Told Not To Wear The Kippa After Machete Attack At Marseille Synagogue

    Last week, Cologne mayor Henriette Reker received a raucous tongue-lashing on social media after suggesting that it is German women’s collective responsibility to prevent sexual assaults by remaining an “arm’s length” away from would-be assailants.

    Reker’s remarks came as the international media suddenly woke up to the string of sexual assaults that allegedly took place in Cologne’s city center during New Year’s Eve celebrations. The incidents purportedly involved gangs of “Arabs” harassing and groping German women during the festivities.

    Hundreds of such attacks were reported in Germany and elsewhere across the bloc and before you knew it, a scandal was born. Some say authorities have been reluctant to publicize the assaults for fear of triggering a dangerous backlash against the millions of refugees who have fled to Western Europe from the war-torn Mid-East. Indeed, it now appears Sweden knew that these types of attacks were taking place as far back as last summer but between the media and police, failed to publicize the “problem.”

    Reker’s comments – combined with her contention that Germany needs to “explain to people from other cultures that the jolly and frisky attitude during Carnival is not a sign of sexual openness” – seemed to suggest she was at least partially blaming the victims for the attacks. Even is she wasn’t, the idea that it’s incumbent upon women to change their behavior rather than incumbent upon men not to assault them is patently absurd.

    Well, German women aren’t the only ones who are being encouraged by officials to alter their “behavior” in order to avoid becoming victims because as AFP reported earlier today, Jews in Marseille are now being told not to wear the kippa in the streets.

    That piece of advice comes from Zvi Ammar, the head of the Marseille Jews in the wake of an attack on a worshipper at the Marseille synagogue on Monday.

    For those who may have missed it, Binyamin Amsalem, a teacher, was minding his own business yesterday when a teenager waving a machete and allegedly shouting “Allahu Akbar” ran at him. Amsalem defended himself with a copy of the Torah he was carrying and sustained a “light” injury:

    “Not wearing the kippa can save lives and nothing is more important,” Zvi Ammar told La Provence daily. “It really hurts to reach that point but I don’t want anyone to die in Marseille because they have a kippa on their head.”

    “France’s Chief Rabbi Haim Korsia urged Jews in France to continue wearing the kippa and form a ‘united front'”, Reuters notes, adding that “Roger Cukierman, head of the French Jewish organization umbrella group, said not wearing the kippa in public was “a defeatist attitude”.

    So taking this together with Reker’s advice for German women, we suppose the message here is that if you want to avoid being attacked in Europe it’s your responsibility to stay a safe distance away from anyone who looks like they might be prepared to grope you or hack at you with a machete and try your best not to look outwardly religious.

    Or perhaps, just as Reker says Europe needs to “explain” to people from other cultures that sexual assault isn’t acceptable, the bloc also needs to explain that axe murder is equally, if not more repugnant. 

  • Guest Post: 2016 – Year Of The 'Epocalypse'

    Some thoughts on what lies ahead while President Obama jawbones… (grab a glass of wine or bottle)

    Submitted by David Haggith via The Great Recession blog,

    An economic apocalypse upon us. My 2016 economic predictions provide the full explanation as to why 2016 will be the year of the Epocalypse — a word that encompasses the roots “economic, epoch, collapse” and “apocalypse.” I needed a word big enough to describe all that is about to befall the world in 2016. When you see the towering forces that are prevailing against failing global economic architecture and the pit of debt beneath that structure, as laid out here, I think you’ll recognize that the Epocalypse is here, and it is everywhere. The Great Collapse has already begun.

    What follows are the megatrends that will increasingly gang up in the first part of 2016 to stomp the deeply flawed global economy down into its own hole of debt. The economic collapse that is already developing includes the US economy and the US stock market that is now collapsing from the external forces and internal vacuum that I’ve been writing about for a few years here.

     

    Nations deep in the hole

    Fire in the hole. Brazil is already burning and has been declared by Bank of America and others to be in a recession deeper than the Great Depression — its worst since 1901. Brazil is struggling to combat runaway inflation at the same time. That’s is an impossible combination to battle.

    It ain’t Zimbabwe yet, but it’s looking like a place where Mugabe might want to run for president. Only a couple of years ago, Brazil was a nation of rising glory — the shining light of South America, one of the brightest of emerging markets. Now, as the US starts raising interest, its problems will grow worse as its debt, in a time of deep national crisis, is made impossible to manage.

    Japan, Canada, Australia, Venezuela, Russia, Ukraine, Brazil and Greece are just some of the nations officially in recession during 2015. The planet as a whole is in recession, meaning aggregate growth in GDP of all nations, if measured in dollars, has been in reverse for more than two quarters. And the head of the International Monetary Fund predicts that global “growth” will be worse in 2016 than it was in 2015, and 2015 looked pathetic!

    Christine Lagarde, leader of the IMF, said higher interest rates on national debts owed to institutions in the US will increase vulnerability worldwide. It’s long been said that, “As goes the US economy, so goes the world;” but it is equally true to say, “As goes the global economy, so goes the US.” In other words, the US economy is so big and influential that this single economy can move the world (and almost always does); but the global economy is even bigger and, so, can and will move the US. That’s why my 2016 economic predictions state this is the year the world moves the US. There is a rapidly failing, intertwined global economies falling into their own holes of debt, and the US is certainly going to get swept down all of that. Recent interactions between China’s small stock market and the huge US stock market show the US is clearly not immune.

    The Federal Reserve’s rate increase is also generally expected to strengthen the dollar (though that is not certain as the dollar’s strength depends on other factors, t0o). If so, dollar-denominated debt in other nations gets a double whammy of higher interest and higher premiums on currency conversion to make the payments. Lagarde doesn’t see things as looking better after 2016 either due to aging demographics as baby boomers move into retirement and slow down a little. (A good time to invest in artificial hips and knees.) So, there are many reasons global economic collapse is a trend that will prevail throughout 2016.

    It’s already lining up poorly for the US. Both UBS and the Atlanta Fed have placed US GDP growth for 2016 at a likely 0.5%. Dutch Bank cut their predictions of US growth to 0.5% as well. The big boys are rapidly cutting back their expectations. While I think they are wrong because the truth will be much worse, o.5% is still a cloudy forecast for those particular institutions that are typically very conservative in their downgrades.

    These institutions have typically overestimated national growth. They started with 2016 expectations that were over 2%, which they cut back to 1.5%, which they’ve not cut back to 1% all in less time than a year. Their track record says they always overestimate. I form my 2016 economic predictions based on the many trends that will be affecting future data. Thus, you might say the Federal Reserve Bank of Atlanta is a trailing economic indicator.

    I believe that, as data for the last quarter of 2015 comes in, these institutions will be revising their projections for 2016 down even further, just as they did throughout 2015. That said, their figures are already borderline recession numbers.

    I think the US may already be in recession, given that recessions are never declared until six months after they begin (being officially defined by two successive quarters of contraction in GDP). The biggest of my 2016 economic predictions, however, is that the US experiences something far worse than what we normally thing of as a “recession.” Hence, coining the word “epocalypse” to refer to the crash that is just getting started — an economic demolition that will cause the whole world to rebuild its economic structures. This is truly epoch in the sense that it is an extinction-level event economically that will open the world to transition to a new global economy over time. The world you live in is about to change.

     

    Another basis for my 2016 economic predictions is the China Syndrome

    We are seeing it now. Even if China does not meltdown, it is certain beyond anyone’s reasonable doubt that China will slow more in 2016. Even China predicts its economy will slow more, and 2015 was already China’s slowest year in fifteen years. We already know what that slowing caused; so, it doesn’t take any brain wizardry to extrapolate what further slowing in China adds to the global problems just laid out above. Since major companies started going out of business or defaulting in 2015, more that are badly weakened from 2015 will fail to make it through 2016, and nations that have lost in selling resources will lose even more. So, the second of my 2016 economic predictions is that their times all get harder, not better.

    China’s stock market has a lot more crashing to do, as well. Consider that China has frozen its stock market in suspension for half a year now. Meanwhile, its companies are doing worse, and its economy has slowed a little more. That means the ground has moved out from under the suspended market. The economic landscape is now pretty far below where the market remains suspended. So, Beijing is stuck. If it releases the market to be free again, it will certainly crash just to make contact with reality below.

    As I finish up these predictions, the Chinese stock-market crash appears to have abated; but look deeper. Articles are already appearing that say stock prices were supported after a Chinese change in strategy by huge purchases of stock by the Chinese government. The flip side to that kind of rescue is that it simply means the free market is being re-absorbed into the Chinese colossus. Private industry is, again, being socialized.

     

    The oil pit

    Tom Kloza, founder and head of Oil Price Information Service predicted oil prices in 2015 more accurately than anyone, and his predictions for oil prices in 2016 are even more dour. So, the next major trend that my 2016 economic predictions encompasses, as a force that is changing global economics is the continued, long-term crash of oil. (Not just based on Khoza, but on many others, as well as my own sense of what has to happen in oil.)

    Kloza, to stay with the guy who did the best in 2015, predicts West Texas Intermediate will drop all the way to $32 per barrel, and it looks like he’s just about already right. Kloza predicted oil would drop to $35 in 2015, and it did. I said it would drop to $40 and not lower, which it did and held there for a couple of months (so that was a very close call), but eventually it went down further. I was overly optimistic. Kloza expects oil to go back to where it was in 2008.

    To make matters worse, Kloza expects a decoupling of oil and gasoline prices with gas starting to rise due to storage expenses. That means both the oil industry (and all of its backers and suppliers) and consumers lose. So, that’s worse than last. He doesn’t expect oil to stay down all year, however; but it will certainly deepen the wreckage in the first half of 2016.

    My own sense of it is this: With oil storage facilities full to the brim around the world and a promised glut from the Saudis to continue all of next year and Iran possibly coming back online, oil is almost certain to go down more. US companies are already being crushed at the present level. Saudi Arabia has strengthened its ability to hold its position by drastically altering its national budget and implementing new taxes to replace lost oil revenues. That says for certain they plan to be in this fight for the long haul.

    Moreover, Iranian oil is the cheapest oil to extract in the world; so, if they get back into the market, they can try to hurt the Saudis more with even lower prices and still make a profit. Iran and Saudi Arabia, two of the world’s largest oil producers are now practically at war with each other (see that trend below). The US government is determined to see its deal with Iran go through, so we can be fairly certain Iran will re-enter the oil market early this year.

    Saudi Arabia has used oil to keep its populace at peace by not taxing them. Iran will use that leverage against Saudi Arabia by dumping as much cheap oil on the market as it can pump in order to press the Saudis to raise taxes more as they lose more money, thus destabilizing the Saudi government. The Obama administration has already shown itself to be completely non-supporting of the Saudis as an old US ally and to prefer to form a new alliance with Iran. So, there is nothing to stand in Iran’s way, and Iran is dying to pump and sell oil anyway.

    To show you how rapidly the oil market is deteriorating, prices were close to $35/barrel for West Texas Intermediate crude oil when I started working on my 2016 economic predictions, and they almost touched Khoza’s $32 as I finished this up … and Iran hasn’t even entered the market yet. All of the trends in oil are worse for the global economy in 2016 than they were in 2015, and they have already been hugely devastating.

     

    US Industrial Recession also part of my 2016 economic predictions

    Two major manufacturing surveys over the past week have come in well below economists’ expectations — solidly in a manufacturing recession — with new orders also falling below expectations, offering no hope for an improvement in the near future. US manufacturing fell at its fastest pace in six years, and US factory orders have never fallen like they did in 2015 without the US going into recession. November’s reports brought the 13th month of year-on-year decline! And that, according to Zero Hedge, was with a 47% surge in defense spending — the largest defense increase since 9/11.

    The Baltic Dry Index, which tracks the cost of shipping dry goods overseas has reached an all-time low, partly because too many new ships were ordered in recent years but also because so little product is shipping as industry is sinking.

    When manufacturing falls and starts to layoff people, as it did at the end of 2015, then services to those people start to fall. A recession in the service sector, in other words, lags a recession in the manufacturing sector because it is largely a response to falling incomes and rising unemployment to where people cannot afford the services.

    Manufacturing in China and the UK has contracted significantly, as in US big-equipment manufacturers. The eurozone, however, saw manufacturing grow, probably due to the falling value of the euro causing a rise in demand for exports from that zone.

     

    Stocks in bondage

    The top-ten stocks that gave a positive average to a falling US stock market are now also declining with some of them now taking bigger hits than most other stocks. That means the last pillars of the stock market’s support are crumbling. The two biggest — the Big Ace’s, Apple and Amazon — have been pounded hard in the last couple of weeks. Sixty points for Amazon is a pretty hefty plunge. Apple, having become the most valued stock ever, is plummeting even faster.

    Apple has been in decline for roughly half a year as iPhone sales are flagging, and investors seem unwilling to be impressed by other Apple technology like the new Watch or more distant technology like whatever the heck Apple is doing with cars. Google, too, has been entering the car game by taking the driver out of the game. Given how much we text while driving, apparently we have a great desire to drive our telephones because it is now phone companies who are the innovators in the automobile industry. Apple’s iPhone production is anticipated to be cut by as much as 30%; but maybe that will be made up by the new iCar. (Don’t ask.)

    In the meantime, the top ten are descending. When you only have ten secure stocks to move to and then two of those go into retreat, index averages are bound to fall … and fall they have, triggered by China’s all-out, stock-market crash.

    The US market was also artificially inflated by cheap buybacks of company stock, which have been funded by cheap credit made widely available by the Fed’s zero-interest strategy. That stimulus scheme is now unwinding as credit costs start to rise. So, a market that remains flat, in spite of huge buybacks, now will be finding less of that support. It has to settle. One of the primary decisions makers in Fed policy, Richard Fisher, has just said he warned the Fed that the market would go wobbly when policy was reversed because, in his own words, the Fed “front-ran” the US stock market and created a huge asset bubble. He expects a 20% drop, but I think he is way conservative because he doesn’t want to think about his nightmares.

    UBS, Switzerland’s largest bank and one of the largest banks in the world, now says that it expects the S&P 500 to fall by 30% this year. UBS says we are definitely in the final stages of a bull market and adds,

    Last year’s rise in volatility was in our view just the beginning for a dramatic rise in cross-asset volatility over the next few years. (ZeroHedge)

    The Dow Jones Transportation sector has already become a bear market, and it is widely accepted in Dow theory that transportation stocks are leading indicators of the stock market’s direction as they respond more quickly to how the economy is doing overall than other stocks.

    The Russel 2000 index of smaller companies has already fallen 14% since its average is not buoyed by the top ten.

    So, one more major trend I see that will press the entire world and the US toward total economic collapse is the crash of the US stock market, which I have said is already beginning.

     

    The big bond bust

    Only the weakest fall first, as they did in the fall of 2015. The second tier of bond funds will start to fall in 2016. Companies that defaulted in 2015 did so when interest rates were the cheapest they have been in the history of the nation. So, how much more will others fall as interest rates now start rising? It’s just logical. Enough said because it is already happening, so it’s not a future scenario; it is a present scenario that will contribute to the failure of all sides of the US economy, which will add serious downward momentum to the epocalyptic collapse of the entire global economy, making this something the Fed cannot rescue.

     

    Hedge hogs head for the hills

    And not so much Beverley Hills. In crumbling markets, many take refuge in hedge funds. I don’t pretend to understand their mysterious incantations and inner machinations; but celebrated geniuses cast bets against other bets and then, I think, bet that you can’t figure out what they’re up to. The magic that is supposed to come out the other side is that, when something goes down, they go up.

    Well, a lot of somethings seem to be going down, and the hedge funds going down, too. The funds that were supposed to protect you from volatility are dying from volatility in a huge fund flush. The problem for the Hedge Hogs is that their old magic never accounted for new patterns that make no sense where governments like China buy stocks en mass, and where central banks buy their nation’s debt in really, really big chunks (like almost all of it) and where money is free or now, in some countries, you even have to pay someone to hold your money for you.

    Thus, the hogs are having a tough time of things, and many of them have put out their “going out of business sale” signs. More hedge funds boarded up their windows in 2015 than in any year on record. But, then, they haven’t been around long anyway. So, who cares? What’s a billion here and a half a billion there spread across a landscape of economic wreckage, especially when it is mostly the rich who use these things? A lot of what these funds buy is distressed debt, so what did the rich expect?

    Here’s what concerns me and why it enters my economic predictions for 2016: These funds were supposedly managed by the best and brightest … like those people who figured out how to create mortgaged-backed securities — complex organisms made of other microorganisms that most of the buyers didn’t understand at all — even the supposedly smart buyers like banks that make a lot of money.

    So, you have to wonder how smart the smart guys are and whether anyone is paying attention to anything anymore. How much junk is in the system that very few know about because of financial invertebrates? What kind of funny algorithms run the auto-trader market now, making stock trade decisions across nations in nano-seconds that no human being ever sees — decision that were designed in advance by people who read and write in ones and zeros and speak arcane languages like C++ over a cup of Java and who are married at their fingertips to names like Ruby and Perl?

    Can anyone be certain that some algorithm that is making auto-stock decisions for investors while they sleep won’t misfire now that the market is running in reverse where there are no more Fed puts? Most of the toddlers who created today’s robotrading applications never knew the real world where money wasn’t free. Will all their clients wake up some morning to find a soft-coded circuit breaker failed to trip, and the computers of the world got into a bidding war and priced all stocks down to zero?

    You think I’m kidding? A lot of supposedly smart people thought the hedge-fund managers were geniuses, yet those geniuses are being wiped out by the very volatility they were supposed to protect you from! The irony of the virologist who died from a head cold. When will some econovirus, first contrived in the desserts of Afghanistan, hit the robotraders? Will the giants be taken down by a simple virus like complex invaders were taken down in War of the Worlds — bitten by something they can’t even see?

    My point is that we’re right back where we were in 2007 where banks and other major institutions were buying things they didn’t begin to comprehend. Are the big decision makers trusting risk management to software engineers? No surprise to me. I’ve long thought the big CEOs are just good at shaking hands and smiling and drinking overpriced, designer water. Have things become too complex to even identify risk in some cases? Maybe the actual market deciders — the software engineers — are so far out of touch with the real economic world that they’ve forgotten what gravity feels like.

    Well, gravity is here, Baby! So, hold on to your lead socks as we discover how robo-traders work when markets reverse.

     

    Mideast mania

    Iran’s Supreme Leader Ayatollah Ali Khamenei has threatened Saudi Arabia with “divine revenge” over its execution of Shi’ite cleric Nimir al-Nimir. Iran’s Revolutionary Guard made similar statements, promising “harsh revenge” and the “downfall” of the House of Saud.

    Saudi Arabia and Iran — longtime arch foes — support opposite sides of the war in Syria where ISIS, al Qaeda, Russia, Iran, Assad’s government, the US, France, and Turkey are all clustered in active battle. (Ah, what a bouquet of thorns.) The execution of Nimir also complicates relations for Saudi Arabia with Iraq’s Shi’ite-led government, where Saudi Arabia just re-opened an embassy after 25 years of shutdown only to have protestors shouting for its immediate closure following the execution.

    As far as I can see, Obama’s foreign policy of abandoning US allies in the Middle East has opened the doors to extraordinary conflict. The US is involved in more wars than we were under George Bush. Afghanistan continues to haunt us, as pulling out left the job undone. We’re now back to fighting in Iraq because the power vacuum created by Bush left a mess that can’t be cleaned up as other entities stepped in, and pulling out only made it worse. These were risks Obama was warned about from the beginning, should he pull out of Afghanistan and Iraq, not surprises.

    We’re now newly involved in Syria, as if we hadn’t kicked enough hornet nests in that region. Meanwhile, conflict continues to brew between Ukraine and Russia. China is threatening to raise its guns at US planes and boats in the South China Sea. North Korea this week made its first claim to have an H-bomb with “United States” written on it. Iran has admitted to having more long-range missiles than Obama ever knew about, yet the Obama administration seems to be ditching all allies in the Middle East in order to cosy up to Iran. Right or wrong, the US is involved in all of those conflicts, and all of it looks expensive.

    Obama’s foreign policy can be described as looking somewhat like throwing a bowl of meatballs and sticky rice at a wall. I don’t understand what the plan is, but that’s not what concerns me. What concerns me is that Obama doesn’t seem able to explain what the plan is either, and that makes me think he doesn’t know what the plan is. I will admit that he has certainly brought a great deal of change to the world.

    And then we have the Palestinians and Israelis, increasingly in tension that centers on the Temple Mount where the Bible predicts the events of the great apocalypse will happen. Both sides are increasingly less willing to talk to each other. So, this could all go biblical in scale.

    We haven’t been this close to the Middle East becoming a world war since the last World War.

     

    Fed float fled

    The precise timer for my 2015 economic predictions was the Fed’s change in its zero-interest policy. What many people missed with this event now gone by is that a tiny rise in interest was not the issue. Nevertheless, it is a bigger issue than thought. When the Fed only raised its interest target by one-quarter of a percent in December, and just two weeks later the high-yield spread (junk-bond spread) had grown by 2.5%. So, one concern is how much control the Fed has over interest rates as it starts trying to raise them. Do the math in terms of what this widening spread means to companies in the oil industry that are already struggling with their high-yield bonds. They will have to pay that much more if they need to refinance bonds they already cannot pay off.

    The bigger issue to the end of the Fed’s free float is that it transported us back out of Wonderland where bad news was good news for nearly seven years. For years we’ve seen the market go up when economic news was bad. That Mad-Hatter reaction happened because bad economic news meant the Fed would prolong its stimulus, and stimulus was, by far, the biggest game in town. That dynamic ended on December 16. Now we’re back in economic reality where bad news is simply bad news. We’re rightside-up again, and our re-entry into reality happened at a time when there is more bad economic news than I can ever remember.

    The instant move back to being rightside-up is why I predicted December 2016 would be a tiny trigger that would set off the explosives that bring our already crumbling structures down.

     

    The housing hustle hangs over us

    In the face of the Fed’s first looming rate hike, mortgage applications spiked — the rush of last-minute buyers wanting to make their move before interest started climbing. Now, two weeks after the Fed’s raise, mortgage applications have fallen off by a whopping 25%. A seasonal adjustment for bank closures over the holidays, etc., actually makes the figure come out a little worse at 27%. Most of the spike was in refi. Although applications for the purchase of homes has also fallen off 15%, they remained considerably higher than a year ago.

    Housing is NOT actually one of the bases for my 2016 economic predictions. I see no reason for housing to lead our collapse into the Epocalypse. However, will be a following trend that deepens the hole the Epocalypse crashes us into. As jobs fade back and unemployment starts to grow, mortgages will start to fail and housing prices will fall again.

    The large fall of home sales in November was largely because of rising prices (as some areas of the market now reach the peak they had before the Great Recession began) and because of a short supply of homes for sale. This peaking out of the housing market is similar to what we saw in 2007 and 2008 and shows the market is highly prone to topple again, so I don’t expect it to lag long as we now move into the Epocalypse.

    The fact is that the extraordinary home prices at the housing peak in 2007 could only be supported by loose credit. They have only been supported now by loose credit and low interest now, so prices have to start moving down as interest starts moving up, or we have to loosen the terms of credit even more, as we did last time around. Either road leads home to the same collapse.

     

    Student loan crisis also part of my 2016 economic predictions

    Outstanding student loans in the United States now top a trillion dollars. That’s not so outstanding. Nearly $1.2 trillion to come closer. How are people who are barely past the point of being kids going to pay that off? While student loans won’t be the cause of the Epocalypse, they will fail at a greater rate, intensifying band and government financial stress, thereby adding to the falling weight. The Ecocalypse is an economic collapse that happens throughout the world and in all sectors of the economy. It’s total. (But it is also so huge that it will likely take more than a year before its grandeur is truly appreciated.)

     

    Auto-traders are auto-traitors

    I’m speaking here of the financiers and the manufacturers, not the buyers. Auto sales are at a record high (up 15% in 2015), and some look to that as evidence that the US economy is strong. I would say, instead, it is the exception that proves the rule. It is one more part of the problem because that accounting is all baloney, and baloney is why most of the world’s economic experts don’t see any of this coming. They believe their own baloney.

    You have to consider what factors have taken auto sales to these supposedly soaring heights. In part, it’s consumer confidence, which is is a positive tail wind for the economy; but terms of credit on automobiles have been extended out to all-time extremes, too, of seven years on a highly depreciable asset. Down payments have, as they were just before the Great Recession, been minimized, as has interest. Most of all, most of these sales are not sales at all. The industry now leases far more cars than it sells.

    You have to wonder why so many economists are blind to how significant all of that is and to what it means. So blind, in fact, that they point to auto sales as an indicator of a good economy when it is the same mess we saw in the Great Recession. Apparently economists are incapable of learning anything. So, the biggest scare here is how blind it proves the experts are who guide the economy.

    Has anyone forgotten what supported auto sales in the year before the Great Recession? Zero interest, zero down, and zero payments for a year. At the time, I was asking, “What’s their end game? Where do they go from here now that they’ve spent the year giving away one-year leases because people can return all these cars at not loss?

    What we see now is that the automotive industry has doubled down on desperation by adding to that original mess longer-term loans and particularly by moving toward leases and calling them the new auto sales. As recently as 2010 fewer than one in ten auto loans exceeded a six-years term. Now, that is the average loan length.

    It’s dumbfounding to me that people are stupid enough to site autosaves as evidence of a healthy economy when they are built on such precarious terms and are mostly not even true sales. Just as in housing, we have switched from being a nation of auto owners to auto renters. As with housing, I expect a collapse of auto sales because it is built on a rickety foundation, but it will be trailing trend because it depends on a weakening of the consumer base as the economy slides back into recession. However, it will increase the speed and depth of the economic collapse as it joins the forces of the fall.

    Auto sales may not join the parade of panic until late in the year or 2017; but expect automakers within a year of so to end up right back where they were during the worst of the Great Recession … with less hope of a bailout. Oh, my goodness, the sheer stupidity!

    But enough of the cheery news. December sales fell to their lowest in six months, and December is supposed to be a really hot month when dealers close out all their inventory. Sales missed expectations by the most since November … of 2008! And while the year as a whole was up (as measured by counting bits of baloney strung on an abacus), the last half of the year fell more than any year since November … of 2008! Does anyone remember 2008 when automakers went bankrupt-or-bailout? They’re betraying the bailouts we gave them by setting up disaster all over again.

    Sales right now are particularly declining in China where the ratio of inventory to demand hasn’t been higher since the Great Recession. Sales might have hit a top since total car debt in the US right now is 30% higher than it was at its last peak right before … 2008! It has risen from about 600 billion dollars in outstanding debt to over a trillion dollars. Does that really leave any headroom for market expansion? Are you seeing a pattern here?

    All of this debt pressing down, even if it doesn’t go into default, certainly reduces our capability to do other things. It’s quite a load to carry.

     

    Black swans

    These are the events you cannot see coming, unlike the trends above that anyone can see if they take off their rose-colored glasses and look reality straight in its glowing red eyes. So, I’m not saying any of these will happen; whereas, I am saying all of the above are as close to certain as you can ever find in a world filled with chance.

    Cyber attacks on the energy grid or on corporations like that seen against Sony last year or into government computers could happen on a game-changing scale. One such attack on an energy grid just happened in Ukraine over the holidays where a virus was deployed to disconnect substations, causing a blackout; but it was minor. It’s only importance is in showing that the vulnerability is real.

    Sandworm, the organization believed to be responsible is targeting NATO, U.S. academic institutions, and government organizations in Ukraine, Poland and Western Europe. John Hultquist, head of iSIGHT Partner’s, the cyberespionage firm that discovered the virus, said,

    It’s always been the scenario we’ve been worried about for years because it has ramifications across broad sectors…. Operators who have previously targeted American and European sensitive systems look to have actually carried out a successful attack that turned the lights out. (The Washington Post)

    Of course, he has a service to sell, and fear of cyber attacks is a good marketing strategy for cyber espionage companies. On a positive note, Ukraine’s power grid rebounded in less than a day.

    What about internal terrorism as a black swan event? Millions of immigrants are flooding across borders from nations that are steeped in war, and they are being accepted as fast as they choose to come. How is it even remotely possible to screen out terrorists when you don’t have a government you can work with that knows anything about these people? Just recently people with terrorist connections were caught coming across the Mexican border from Afghanistan and Pakistan. Are we foolish enough to believe we actually catch all of them or that terrorists are too stupid to exploit this path of easy entry?

    It’s not politically correct to even question that some of these nice people might be hell-bent on destroying Western civilization. That Xenophobic. But let’s look at Germany. They have taken in over a million immigrants from Syria in less than one year. The culture class is growing rapidly. Citizens have been raped by a few bad people that entered. I know that most of the people are not bad, but when the conveyor is running at full speed, it’s hard to pick off the bad apples. Is it worth risking another few skyscraper collapses in order to help the refugees?

    What about a return of the Grexit. For those old enough to remember Snagglepuss the Cat, will it be “Grexit, stage left, politically eleven?” I still think a breakout of rage is on the near horizon. Between all the social issues from mass-immigration being forced on the citizenry of Europe and all the economic hardship of austerity forced on Greeks by their creditors, I’m thinking peasant revolts and storming of the castles may be seen in Europe in 2016.

     

    US debt problems

    A longer-term question, which may not come to bear this year, so is not one of my 2016 economic predictions, is how long can the US refinance its debt? Reductions in oil use and the plunge in oil prices mean fewer petrol dollars are necessary, so fewer US bonds might be purchased in other countries as a way of converting currencies to dollars and holding the dollars.

    China and Russia have teamed toward turing the yuan into a global currency as part of plan to intentionally move away from buying US dollar-denominated bonds. Russia’s role has been to make it illegal for former Soviet partners to trade in oil using US dollars. Neither wish to support US hegemony in world politics, so they have strong political reasons to damage the US economically and hope to use the yuan toward that end of weakening the US.

    This is, I’m sure, partly why China has also moved toward developing its internal consumer market, rather than focusing on exports. That will make it less dependent on exports to the US. Of course, it only makes good sense for them to make that kind of shift anyway.

    With the Federal Reserve now raising interest rates, the interest on US debt could also go up. I say, could because one mitigating factor here for the US is that it is, as I’ve said in the past, the best looking horse at the glue factory; so money streaming out of all the nations of the earth could try to pour into US bonds. Likewise with money fleeing the US stock market. That caveat is the only reason I’m not sure what will happen this year in terms of the US being able to refinance its debt; but longer term, this is a towering problem that will have a serious day of reckoning. And it could be the biggest black swan of all for 2016.

    The United States’ government is running annually on deficits that are measured in parts of a trillion!

     

    Fundamental flaws in the foundation

    While all of these severe forces will batter the global economy — US economy now fully included — they are not the reason the US economy now enters the Epocalypse. They are the overwhelming trends pressuring the global economy and the US economy, but there are fundamental economic fault lines throughout the US economy that I am banking on as the basis for my predictions.

    The stock markets of the entire world have positioned themselves for years now on the premise that central banks could prevail in getting us out of the Great Recession by printing copious amounts of money and piling debt on debt. I am certain beyond the slightest doubt — and have been since the very beginning of the Great Recession — that you cannot bail yourself out of a debt-caused recession by quadrupling down on debt! It’s insane. Nor can you repair bubbles by inflating them into balloons!

    Since the beginning of the Federal fantasy, I’ve said that the only thing we have done is push the debt further forward until it will become an immovable mountain of debt. We have taken deflated assets and re-inflated them to levels where only ludicrous terms of credit can finance them.

    My running analogy has been that of snowplows, pushing the snow straight ahead, instead of angling their blades to shove it off the side of the road. The general slowing of the entire global economy that you see right now is the sound of all the snowplows grinding to a stop as the mountain of snow finally becomes to big to push.

    We have built all of our markets on debt because that is how central banks created money. Stocks, bonds, houses, automobiles, etc. are all really mountains of debt, not stored assets. And I believe this is the year the grand scheme comes down (though it may take longer than a year to fully unfold, given the sheer scale of the collapse).

    Creating greater debt to solve something we knew was a debt problem in 2008 has been the wrong solution from the beginning. I’ve said all along that it would go forward for quite a long time because you can do a lot of partying when you are not paying for it; and governments have a lot of capacity. That’s why, over all the years of writing this blog, I have not predicted such a big collapse as being imminent (already happening, in fact, but unseen by most) as I am now. It is now the immovable mountain, built up so high above us, that it is going to avalanche down on us.

    So, it is not just that the free money has been invested in stocks and bonds, but that the entire market is positioned on top of a delusion. Once the delusion of recovery begins to break up, the market has enormous repositioning to do in order to line itself up with reality. Now that we are leaving Wonderland where bad news is just bad news, the cracks in the bad structure will show up quickly.

    Banks have continued to be freewheeling throughout this so-called recovery, playing the same games that created the Great Recession. Both the government and the Fed wanted to keep the old dinosaur economy alive because neither has the creativity to envision another way to grow an economy. The Federal Reserve is based on economic expansion through debt because its method of creating new money is through banks issuing loans that give out money that didn’t exist before the loan was made. Both the government and the Federal reserve believe expanding the money supply is what we need to do to goose the economy.

    Currently banks appear to be backed with stronger reserves than they had before the Great Recession, so investors, the media, the public in general and the government and Fed all believe they are in stronger shape. BUT, as stocks crash and bonds go bust, those reserves will evaporate.

     

    What will be the recovery plan?

    The full degree to which the Epocalypse develops will depend on how soon and how strongly the government and the Fed intervene now that things are beginning to fall.

    Bear in mind, though, that few economists or stock analysts are predicting a recession in 2016. Therefore, there is a very good chance of having one. Why, after all, would you listen to the people who predicted a rising market in 2007? (I’m sure glad I took my own advice back then.) By the same token, the Fed gives all appearances of believing in its recovery, so it will be slow to intervene C.ogress clearly can’t work together long enough to come up with a solution and also believes in the Fed’s recovery. The Obama Administration will just look to the same experts it turned to who came out of the Bush Administration.

    How much of the full depth of this collapse you see will depend on how soon intervention happens and what the intervention is; but my snapshot of government’s ability to see what is coming, its creativity and its ability to work together indicates that response will come too slow and too late. They certainly will respond before things get as bad as I’m saying they will if they fall to their full potential, but will they respond before the momentum is more than they can arrest?

    The lack even a hint toward ideas that follow any different course does not give much hope that government or central banks, when they propose a solution, will propose a good one. My prediction is that all of this leads to the presentation of a global solution for a global problem. What stop-gaps governments will take as they try to develop a global solution, I don’t know.

    The economic expansion is in its seventh year, and that is about as long as they usually run. If anyone wants to believe this one can endure longer, they can go right ahead. I’m more than glad to let them make the big, easy money that they think is out there. I’ve already taken shelter because I don’t want to try to squeeze outside the door alongside the rushing masses. As a result, I sleep easy. My money isn’t making any money, but I sleep easy.

  • China Trade Balance Surges As Exports Surprise To The Upside

    Mission Accomplished? It’s a modern monetary miracle – China’s trade surplus surged to CNY382bn (from 434bn), dramaticlaly higher than the expected drop to 338bn thanks to better than expected data for imports and exports. Imports dropped 4.0% (less than the 7.9% drop expected) and the smallest decline since December 2014 but it was exports that “proved” China’s policymakers are large and in charge. For the first time since February 2015, China exports rose year-over-year (by 2.3%) dramatically better than the 4.1% plunge expected.

    Everything is awesome again!!

    So – no need for more policy support… despite earlier comments from officials of export policy support?

    Offshore Yuan is rallying modestly on this news…

     

    Now we look forward to all of China’s trading partners report how their exports also rose this month (leaving some magical off-Earth entity making up the “difference”).

    And finally – not wanting to pour cold water on the celebrations, we note that it is crucial to understand this is the extremely seasonal period leading up to Chinese New Year and is most likely an outlier… but for now, everything is awesome.

  • President Obama's Final State Of The Union Address – Live Feed

    As President Obama prepares to unleash his final State Of The Union speech, The White House has conveniently focused attention on the following six "success stories": The Economy (record low number of men in workforce), The Climate (too hot for retail, too cold for construction), Foreign Policy (bwuahahaha), Health Care (record number of Americans cutting back to afford medical costs), and Social Progress (record high racial tensions, police state, surveillance state,  and record low trust in government). But apart from that, Americans have The Kardashians, iGadgets, record levels of syphillis, and, of course, a record surge in national debt during any President's "reign."

     

    Mission Accomplished President Obama…

    Employment-WorkingAgePop-011116

     

    For the hard of hearing and propaganda-impaired – here is a quick summary of President Obama's 'tenure'

     

    The decline and fall of American Exceptionalism in one simple SOTU Speech reading level chart…

    Most crucially – how exactly will President Obama claim a "victory" of a deal with Iran – safeguarding the world from their nuclear threat – when they are holding 2 vessels and 10 navy crewmen "hostage"?

    The full speech can be read here but why bother: here is the abbreviated word cloud:

    Live Feed (President Obama is due to speak at 9pmET)

     

    If it's too much to bear, here is the ubiquitous drinking game…

     

    As DebateDrinking.com explains, when you hear a word on your selected list of drink words – take a drink*! We recommend something domestic – we are drinking for America after all.

    *We define a drink as a gulp of beer or sip of wine or liquor. Know your limits and please drink responsibly.

    And here is the live score on this drinking game…

     

    Finally, this…

  • China Is The New Japan After All: Here's How To Trade It

    In an odd coincidence, just as we were preparing an article showing how China is becoming increasingly more like Japan and hot to trade this convergence, we happened to glance at the slide that Jeff Gundlach was talking about at that exact same moment during his afternoon presentation, and lo and behold, the “new bond king” was discussing why, among the reasons why “China may not bounce back”, is that China is increasingly becoming a Japanese demographic doppelganger…

    … in a slide that was sourced from, of all places, Zero Hedge.

    So with that reflexive quandary out of the way, we go to the latest presentation by BofA’s Michael Harnett, who among the 6 key investment themes and trades for 2016″ lays out the “Black Dragon” as one of the key ones, and one whose core thesis is that “China, like Japan in the early-1990s, has entered a secular period of significantly slower economic growth, compounded greatly by debt deflation; like Japan in the 1990s, Chinese asset prices, currency, banks (Chart 5) and capital flows will periodically cause severe disruptions to global financial markets, even if China does not itself cause a global recession.”

    In other words, China is Japan, and not just demographically but financially as well.

    This is what else Hartnett said:

    China has de-pegged its currency from the US dollar: history is replete with illustrations of how major FX regime changes cause cross-asset volatility: Britain’s departure from the gold standard (1931), collapse of Bretton Woods system (1971-3), UK ending ERM membership (1992), Asia crisis (1997-8), the Euro (2000-). 

     

    Why

     

    China = Japan: China, like Japan in the early-1990s, has entered a secular period of significantly slower economic growth, compounded greatly by debt deflation; like Japan in the 1990s, Chinese asset prices, currency, banks (Chart 5) and capital flows will periodically cause severe disruptions to global financial markets, even if China does not itself cause a global recession.

     

    Chinese devaluation: a cyclical collapse in export growth, extreme FX devaluations in recent years in Japan, Europe and across Emerging Markets, and capital flight, are all causing an accelerated devaluation of the Chinese yuan; BofAML forecast CNY6.9 and CNH7.0 by 2016 year-end; we see downside risk to these forecasts (n.b. PBoC has spent $200bn in reserves in past two months and yet the extent of private capital outflows means CNY has still fallen).

     

    The great EM devaluation: until there is two-way risk in RMB, there is one-way risk in oil, commodities and EM; once Chinese exports begin to react positively to the cheaper currency, we think a bid is likely to return to Chinese and EM assets; until then, China asset prices are a threat to global asset prices (n.b. Chinese corporate bonds are at multi-year highs despite a credit crunch).

     

    Ok, fine, China is the new Japan. How does one trade it?

    Here are Hartnett’s 5 proposed trades:

    • Long 6-month forward USD/CNH: for exposure to Chinese devaluation.
    • Long 3-month USD vs basket of KRW, TWD, MYR: for exposure to Chinese devaluation.
    • Long India 10-year bond: BofAML Asia strategists argue that weak commodity prices are positive for India; macro backdrop is still favorable for India bonds, inflation outlook benign, and they expect further monetary easing by the RBI (entry: 7.737%).
    • Short M2JP0EXE index: European exporters with EM exposure have sold-off sharply; Japanese exporters have yet to sell-off sharply (Chart 6).

    • Buy KOSPI forward volatility (KOSPI2 Jun-16/Jun-17 forward vol agreement): BofAML derivatives team recommends owning volatility via KOSPI; cheapest globally, high downside beta to global markets; favorable technicals in 2016; good hedge against HSCEI/China downside and/or global recession.

    Then again, perhaps it is a good thing Hartnett said to short the CNH today and not yesterday; if anyone had shorted the currency yesterday when it was soaring hundreds of pips wider only to hit parity hours later, their trading career would be over right about now.

  • Some Chinese Banks Run Out Of Physical Dollars As PBOC Holds Yuan Fix Flat For 4th Day

    Having apparently taken the day off from selling US Treasuries and buying Offshore Yuan (following yesterday's "murderous" short-squeeze"), completing a 40 handle round trip in the "stable" currency year-to-date, PBOC decided to hold Yuan flat for the 4th day but make a statement that they would "give policy support to exports" – in other words devalue more. The unintended consequence of their decision to withdraw liquidity and crush shorts in offshore Yuan is more problematic as it has reportedly left Chinese banks short of dollars at their ATMs (and are delaying withdrawals). Meanwhile, another of China's favorite outlets for capital outflows – Bitcoin – just got stomped.

     

    "Stability" – apart from in money-markets and offshore Yuan…

     

    As Offshore Yuan roundtrips 40 handles…

    So a free-floating curreny as blessed by The IMF will only be allowed to move as The PBOC decides (as opposed to those nasty carry trade speculators):

    • *YUAN EXCHANGE RATE SHOULD BE DETERMINED BY ONSHORE MKT: DAILY
    • *PBOC NEEDS TO LEAD FOREX MARKET EXPECTATION: DAILY COMMENTARY
    • *CHINA SHOULD CONTROL YUAN SUPPLY IN OFFSHORE MARKET: INFO DAILY

    But then this…

    • *CHINA LIKELY TO GIVE POLICY SUPPORT TO EXPORTS THIS YR: DAILY

    Which rougly translated means – pile on into shorts and we are going to devalue until exports pick up.

    Of course the whole world is waiting for China trade data tonight.

    However, it seems someone just stomped on Bitcoin – one of the Chinese favored outlets for capital flows – to show tthat the 'transitory' capital controls can't be worked around

    On heavy volume.

    By way of a reminder, this is what was said last night…

    A jump in the overnight cost for borrowing yuan in Hong Kong is "reflecting further PBOC efforts to stamp out speculation," according to Michael Every, head of financial markets research at Rabobank Group. Hong Kong-based Every told Bloomberg in an interview, following a massive spike in overnight borrowing rates for Offshore Yuan that "a 66% rate is murderous for others being swept up in this who are not speculating."

     

    PBOC advisor Han earlier warned that short selling the yuan "will not succeed," adding that "it is pure imagination that the Chinese yuan will act like a wild horse without any rein." But as Every notes, the unintended consequences could be a problem, "imagine you needed access to CNH for other purposes for a few days," concluding ominously that "in other EM crises we see that central banks usually win a round like this, but lose in the end."

    Sure enough: *SOME BANKS IN BEIJING, SHANGHAI RUN SHORT OF DOLLAR BILLS: 21ST

    Some banks in China’s Beijing, Shanghai and Shenzhen ran short of dollar bills for cash withdrawal amid increasing demand for the currency, 21st Century Business Herald reports, citing reporter’s investigation.

     

    BOC, CCB, China Merchants Bank in these cities require appointment at least 2 days in advance for >$5,000 purchases; appointment could take as long as 1 week at some branches.

    So in their haste to withhold liquidity and spank the spceculators, The PBOC may have just started their very own domestic bank run…

    Coming just 2 days after lines began to form at currency exchanges (as Chinese want Dollars for their Yuan),

    As Ming Pao, the most influential Chinese newspaper in Hong Kong, reports that Shanghai residents are lining up at local banks to sell Yuan for Dollars over fears of even more Yuan devaluation.

    We are sure Ms. Lagarde is produly standing by her decision to allow this "free" currency to be part of the SDR basket.

    But then again – this is what "frozen liquidty" really looks like in China…

     

    Charts: Bloomberg

  • CHaNGe THiS!

    CHANGE THIS

  • How Corrupt Is The US: An Extraordinary Example

    Eric Zuesse, originally posted at strategic-culture.org

    How Corrupt The U.S. Is: An Extraordinary Example

    Incarceration rates don’t necessarily correlate with corruption, but they do reflect the extent to which a given nation’s government is (by means of its laws and its enforcement of those laws) at war against its own population; and, so, technically speaking, it’s supposed to reflect the prevalence of law-breaking within that nation. After all, by definition, people are presumed to be in prison for law-breaking, irrespective of whether the given nation’s laws are just – and, if they’re not just, then this fact reflects even more strongly that the nation itself is corrupt. So, a high incarceration-rate does strongly tend to go along with a nation’s being highly corrupt, in more than merely a technical sense.

    Out of the world’s 223 countries, the US has the world’s second-highest incarceration rate: 698 per 100,000, just behind #1 Seychelles, with 799 per 100,000. Seychelles doesn’t even have as many as 100,000 people (but only 90,024 – as many people as are in the city of Temple Texas). By contrast, the US has 322,369,319; so, the US is surely the global leader in imprisonment. And, furthermore, #3, St. Kitts and Nevis, with an incarceration-rate of 607 per 100,000, has only 54,961 people (as many people as are in the city of Columbus Indiana). The only other country that might actually be close to the US in imprisoning its own people is North Korea, which could even beat out the US there, but wouldn’t likely beat tiny Seychelles: North Korea is estimated to have «600-800 people incarcerated per 100,000», and a total population of 24,895,000.

    Thus, for imprisonments, the US really does have no close second: it’s the unquestionable global market-leader, for prisons and prisoners.

    And this gets us to the market-leader for prisons within America itself, and to the stunning corruption that stands behind it.

    So, here’s that extraordinary example, and the story behind its corruption, which will provide a close-up view of America’s general corruption, from the top (including the government itself) on down:

    In order to protect the profits of privately run prisons in the US (where «Sixty-two percent of detention beds are administered by private prison corporations», meaning that most US prisoners are being ‘served’ by for-profit corporations in for-profit-run prisons), the US Federal Government is refusing to honor Freedom Of Information Act (FOIA) requests by the Center for Constitutional Rights (CCR), which is trying to find out why people are being imprisoned as illegal immigrants who ought not to be. Wrongly-imprisoned people are a device by which private prison-operating companies keep their prison-beds occupied and thus drawing income from the US government, just like a high occupancy-rate is essential for a hotelier’s profitability. But –unlike in the hotel trade – this coercive bed-occupancy produces more than mere profits; it produces also distressed families, of those individuals who are yanked and unjustifiably imprisoned, families suffering needlessly.

    It turns out that federal laws, passed mainly by the Republicans, but also with votes from corrupt Democrats, require (in H.R.3547) the US government to pay for «a level of not less than 34,000 detention beds» for ‘illegal immigrants.’ (You can see that requirement being cited by the Republican interrogator of an Obama Administration official, Department of Homeland Security, at 1:03:00- in this video, where the Obama official is being criticized for not locking up enough people to meet the law’s requirements.) (Republicans and other conservatives love to punish people, irrespective of justice. To be concerned about justice, as the CCR is, is to be ‘soft on crime’, as Republicans view it. Instead of justice, Republicans seek revenge; thus, for example, Republicans overwhelmingly support torture against ‘terrorist’ suspects; Democrats overwhelmingly oppose it. Torture greatly reduces the trustworthiness of a suspect’s statements, but it always serves as a vent for revenge, even when the suspect actually had nothing to do with terrorism; so, Republicans strongly approve of torture. Similarly, the most-conservative Muslims approve of beheading ‘infidels’. Conservatives everywhere, and in every faith, support harsh punishments; and the US is a conservative country; so, sentences are long, and the conditions are harsh.)

    However, the Obama Administration itself, even as it locks up, on some days, just shy of the legally mandated minimum of 34,000 accused ‘illegal immigrants’ (which shortfall is here drawing the ire of that congressional Republican in the video), is also actively blocking CCR from access to the information about how the government and private corporations set rates for immigration detention beds and facilities. CCR argues that private profits are being given higher priority by the Administration than is the welfare of the public; and, thus, that the General Welfare Clause of the US Constitution is being violated here.

    The Obama Administration says that it won’t release the information, because to do so would «harm corporations competitively».

    CCR claims, and the Obama Administration is opposing their accusation, that «there is essentially no competitive market in government contracts that could be harmed by the release of information, that there should be nothing proprietary about the terms of a government contract, and that the public has a right to understand how Congress funds immigration detention and how that funding is influenced».

    The Obama Administration is arguing that if this same cost-information were being requested concerning any of the 38% of government-run prisons, then the FOIA request would be complied with, but that contracting-out or privatizing that function has freed the government of any such obligation.

    However, CCR is concerned specifically about that profit-motive here – that the revolving door between government service and the private sector might itself be a key part of the explanation for the government’s requiring that at least 34,000 people will be in prison for, or awaiting trial on charges of, ‘illegal immigration’. CCR contends that the only reason why people should be imprisoned in America is that they’ve actually broken laws for which the correct punishment is a prison term. But the position of the US government is contrary: if the beneficiary of someone’s imprisonment is a private corporation, the public shouldn’t necessarily be allowed to know what’s going on, nor why. And, so, that’s the issue here. Does a private corporation’s privacy-right exceed the public’s right-to-know? The government says yes; CCR says no. CCR argues that to privatize is not to immunize: the government has the same obligations to the public, regardless of how it has chosen to carry out its obligations. The Obama Administration argues that a private corporation is private, protected from the public’s scrutiny – and that the corporation’s only obligations are to the government, not to the public; thus, no such FOIA requests will be honored.

    Here’s what’s not in dispute about the case: the man who, in the first Obama Administration, was the head of the US Department of Homeland Security’s Office of Immigration and Customs Enforcement’s Office of Enforcement and Removal Operations, David Venturella, is now the top sales official at GEO Group, which is «the world’s leading provider of correctional detention, and residential treatment services around the globe» – and that’s also the first thing GEO says about itself, on its own «Who We Are» page. And Mr Venturella is now being cited by the Obama Administration as an ‘expert’ in order to deny CCA’s FOIA request.

    As a GEO official, Venturella claims in his 22 December 2015 declaration in the court-case, that, «the winning proposal in almost every Federal procurement competition is awarded to the lowest priced bidder», and that, «the disclosure of GEO’s proprietary bed-day rates and staffing plans would result in substantial competitive financial harm to GEO». He claims that, «Even with access to their larger competitors’ staffing plans, the smaller private companies do not have access to the capital needed to compete to win a large facility». In other words, he pretends that GEO is one of «the smaller private companies». But then he goes on to say (just in case a reader might happen to consider GEO not to be one of «the smaller private companies»): «The second stage would be acrimonious competition between the larger organizations, public and private, that will very likely lead to their withdrawal from the detention market as well, thereby leaving ICE [Immigration and Customs Enforcement] with no viable detention service providers». Venturella assumes here that ICE cannot itself own and operate its prisons. (He doesn’t say why; he merely assumes that it’s the case – perhaps that everything should be privatized, and must be privatized, so ICE shouldn’t run its own prisons.)

    So, that (false) argument is the reason why injustices to defendants in the US immigration system must continue, Venturella, the salesman for GEO (his title is «Senior Vice President»), is here arguing.

    Essentially, the Obama Administration is joining with GEO arguing that the profitability of private prison companies is more important than any injustices that might happen to be caused by Congress’s establishment of an arbitrary fixed and stable minimum number of prisoners every day – and, since the head of the top prison-company is saying that profits would be threatened by adhering to FOIA in this particular matter, the Freedom of Information Act request in this case must be denied.

    The basic argument, in other words, is that privatization is more important than the US Constitution and its General Welfare Clause.

    How close are these contractors to the government?

    Here are five of the seven members of the Board of Directors of GEO:

    One is «Former Director, Federal Bureau of Prisons».

    Another is «Former Under Secretary United States Air Force».

    Another is «Executive Director, National League of Cities».

    Another is «Chairman and CEO of ElectedFace Inc»., which «will connect people to their elected officials in every political district».

    Another is George C Zoley, the company’s Founder and CEO, who is also «America’s Highest Paid ‘Corrections Officer.’»

    In fact, «GEO Group’s revenue in 2012 exceeded $1.4 billion and CMD [Center for Media and Democracy] estimates that 86% of this money came out of the pockets of taxpayers. CMD’s investigation of GEO Group unearthed how the company’s cost-cutting strategies lead to a vicious cycle where lower wages and benefits for workers, high employee turnover, insufficient training, and under-staffing results in poor oversight and mistreatment of detained persons, increased violence, and riots». (If so, then that would add to the misery that’s produced by the improper imprisonments.)

    «According to Nasdaq, major investors in GEO Group include: Vanguard, BlackRock, Scopia Capital (a hedge fund run by Jeremy Mindich and Matt Sirovich) Barclays Global Investors, Bank of New York Mellon, and more. George Zoley, CEO of GEO, is a major stockholder with over 500,000 shares. For more on investors, see Ray Downs, ‘Who’s Getting Rich Off the Prison-Industrial Complex?’ Vice, June 2013».

    Privatization is very profitable. But not for everybody. Only for the well-connected. For everybody else, it’s just more poor and abused workers, and unjustly imprisoned people. But virtually all Republicans, and also the Obama Administration and other corrupt Democrats (and Obama will get his enrichment after he leaves office), think that privatization is necessary – even more necessary than is adherence to the US Constitution, or than a justly ruled nation, and prosperous public.

    This type of government fits with America’s extraordinarily high incarceration rate.

    But a few US officials do whatever they can to reduce the country’s corruption. For example, the «Immigration Detention Bed Quota Timeline» shows that, in September 2015, US Senator Bernie Sanders (who probably is the US federal government’s leading campaigner against corruption) «introduces the Justice is Not for Sale Act of 2015, which seeks to end the bed quota among other criminal justice and immigration detention reforms. The bill is the first effort in the US Senate to eliminate the bed quota. In addition, Reps. Raúl Grijalva (D-AZ), Keith Ellison (D-MN), and Bobby Rush (D-IL) introduce the bill in the US House of Representatives».

    Those are the most progressive members of the US Congress. Arrayed against them are the billions of dollars in political propaganda that cause the number of such progressives to be extremely few in the US government. For that bill to pass in Congress, practically all conservatives would first have to become replaced by progressives, and by other supposed non-conservatives (called ‘liberals’), in Congress. Sanders says that it would require «a political revolution», and he’s correct on that. But that’s the least likely type of «revolution» the US is likely to have. Perhaps Sanders knows this but doesn’t want to shock people, who are too indoctrinated to be able to accept the uncomfortably ugly truth, that things might already be too far gone for that type of «revolution» to be sufficient (even if it were feasible).

  • The International War On Cash

    Submitted by Jeff Thomas via InterntionalMan.com,

    Back in 2008, I began warning of increasing capital controls that we would see in the future, as a component in the decline of Western economies (Western in the broad sense, including Japan, Australia, etc.)

    Along the way, it occurred to me that, at some point, governments might collectively attempt to eliminate paper currency in favour of an electronic currency – transferred from party to party solely through licensed banks. Sound farfetched? Well, maybe, but what if the U.S. and EU agreed on an overall plan, then suggested it to other governments? On the face of it, this smacks of conspiracy theory, yet certainly, all governments would benefit from this control and would be likely to get on board. In fact, it might prove to be the only way out of their present economic problems.

    So, how would it play out? Here’s roughly how I saw Phase I:

    • Link the free movement of cash to terrorism (Create a consciousness that any movement of large sums suggests criminal activity.);
    • Establish upper limits on the amount of money that can be moved without reporting to some government investigatory agency;
    • Periodically lower those limits;
    • Accustom people to making all purchases, however small or large, through a bank card;
    • Create a consciousness that the mere possession of cash is suspect, since it’s no longer “necessary”.

    When I first wrote on the subject, there was considerable criticism as to the possibility that such a programme would ever be attempted, let alone succeed. And, granted, it was so Orwellian that it was understandably seen as a crackpot idea. But since that time, the programme has been developing extremely rapidly. In the last six months alone, it has become so visible that it has even garnered a name – “the War on Cash”.

    References in the media have been made that terrorist groups fund their attacks with cash. Dozens of countries have placed limits on the maximum amount of money that can be moved without reporting. Some, notably France, have already begun lowering their limits. Banks in some countries, notably Sweden, are already treating all cash transactions as suspicious. The previously theoretical Phase I is now well under way.

    This issue has expanded more quickly than I’d anticipated. Clearly, the governments that are forcing it into being are running out of time. There can only be one reason why they’d rush a programme that normally would be given more time for people to accept, and that’s that they see a crash coming before they can get Phase II of the programme underway.

    Although most anyone who’s paying attention recognises that Phase I is in motion, Phase II (as I perceive it) is not yet on the radar, but I believe it will be soon. Phase II will be the second wave of measures and they will be more draconian than Phase I:

    • Create a definitive false flag event that demonstrates how physical cash is the primary means of funding evil acts in the world;
    • Declare a date on which paper currency will become illegal (Until that date, it can be deposited into a bank. After that date, it becomes criminal to possess it.);
    • Once all cash has been deposited in banks, increase negative interest rates;
    • Confiscation of deposits can then be implemented, as desired, by banks (Confiscation of deposits is already legal in Canada, the U.S., and the EU.);
    • Confiscate contents of selected safe deposit boxes;
    • End “voluntary” taxation. All taxation will, in future, be by direct debit;
    • Declare money to be the property of the State that issued it. (The people are allowed to trade in it, but it is not truly theirs. The State therefore can freeze or confiscate the funds in any account, if any crime is “suspected”.).

    In recent months, I’ve warned repeatedly that, since confiscations of deposits will take place, we must assume that banks will additionally raid safe deposit boxes, as stated in the above list. Some banks, beginning with JPMorgan Chase, have placed limits on what forms of wealth can be placed in safe deposit boxes. Since then, Greece has taken this one step further. In future, Greek citizens will be required to declare cash exceeding €15,000, jewellery and precious stones valued at over €30,000 and declare the location of the safe deposit box in which they’re stored.

    The declaration is fraught with difficulties for the depositor, as he bears the obligation to accurately appraise each item. Should authorities disagree with the appraisal of, say, Grandma’s diamond brooch, the depositor would be suspect and may face confiscation.

    State Wealth Control

    Once Phase II is completed, state wealth control will exist. And, again, this prediction will seem at first glance to be Orwellian – a mere fiction. But then, less than a year ago, the War on Cash was regarded by only a few as being even within the realm of possibility, let alone right around the corner. And so it is with Phase II. Now that Phase I is in motion, it’s accepted as an unsettling reality, but Phase II is the obvious sequel.

    If you have cash in a bank, you think of it as your own. This is not the case. It’s wealth that you’ve loaned to the bank. In the future, the bank (with governmental approval) will have the power to decide if and when they will return all, or a part, of that cash to you. They will set the rules as to how that decision will be arrived at and those rules will be changed periodically. Since those rules will be arrived at by the banks (without need for your consent), the outcome will most certainly not be in your favour.

    Those who read this statement might react in one of three ways:

    • “This can’t be happening.”
    • “Okay, it’s happening, but there’s nothing I can do about it. It’s global.”
    • “There must be something I can do to keep from being robbed.”

    The first group will be the largest. They will freeze up, do little or nothing, and become victims.

    The second group may complain and even struggle a bit against these developments, but won’t prepare sufficiently and, ultimately, will also become victims.

    The third group will seek alternatives, and here’s where the light appears at the end of the tunnel. Yes, this effort will be international, but it won’t be fully global. There will be those jurisdictions that, traditionally, have not been willing to fall into line with the world’s foremost powers. They will not wish to go off the same cliff as the others and will take a different tack. They will be the recipients of those people who seek to escape the collapsing system. But, more than ever before, time is limited; the window is clearly closing.

    Escape from Confiscation

    The solution is surprisingly simple, although it will take work and dedication:

    • If you’re a resident of any jurisdiction that’s presently going down this road, move your money to a jurisdiction that has a consistent history for stable government, low (or no) direct taxation, and minimal interference or regulation over wealth;
    • Convert your wealth into those forms of assets that are hardest for rapacious governments to confiscate (foreign-held precious metals and real estate);
    • Create an exit plan for your own physical escape, should it become necessary.

    Editor’s Note: The War on Cash and negative interest rates are radical and insane measures. They are a sign of desperation.

    They are also huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.

    Most people have no idea what really happens when a currency collapses, let alone how to prepare…

    How will you protect your savings in the event of a currency crisis? This just-released video will show you exactly how. Click here to watch it now.

  • Former UK Cop Says Jihadists Are Hiding In Refugee "Jungle" Camp

    Behold!

    France has figured out what to do with all of the empty shipping containers the world no longer needs now that global trade has ground to a halt.

    That’s the “new and improved” refugee camp in Calais where authorities are, to quote Reuters, seeking “to bring some order to the so-called ‘jungle’ camp in sand dunes near the port.”

    As you can see from the above, the encampment was previously made up of shoddy tents and the conditions are deplorable. Variously described as “squalid” and “unsanitary” the “jungle” (that’s actually the camp’s nickname) is home to some 4,000 asylum seekers hoping to reach the UK. Now, the idea is to pack the migrants into the shipping containers.

    “The metal boxes are equipped with bunk beds, heaters and windows, but lack water or sanitary facilities,” Reuters writes, adding that the 1,500 or so refugees who live in the containers will have access to toilets and showers “at an existing facility now reserved for women and children.”

    And while that sounds infinitely better than hanging out in a tent on the ground with no heat, some fear the new facilities are a ruse. The shipping container village is surrounded by a fence with access controlled by handprint technology.”Some of [the refugees] said they were suspicious of this set-up,” Reuters notes, before quoting 25-year-old Abdullah from Iraq, who says “he and his friend Saad plan to stay in their tents despite freezing winter temperatures and frequent rainstorms that turn the sand to mud.”

    “Once you are in there (shelter), they will not let you go out,” he said. Perhaps they’re afraid France plans to load the shipping containers onto a boat bound for Syria.

    In any event, the push to improve Calais comes as at least one former British police terror chief says the camp is being used by jihadists who are “hiding in plain sight.” 

    “During a visit to inspect the area Kevin Hurley said he was concerned the camp was ‘completely un-policed’,” BBC reports. Here’s more:

    Mr Hurley, the former lead on counter-terrorism at the City of London Police and current police and crime commissioner for Surrey, spent several hours in the camp with BBC London’s Inside Out team.

     

    He said he was worried the camp was “a potential hiding space” and that people there could be being exploited by organised criminals.

     

    “If I were a returning jihadi, I would smuggle myself in amongst this group; you would easily get lost,” he said.

     

    Speaking to migrants at the camp, Mr Hurley was told that there were dangerous people staying in the “jungle”.

     

    One migrant said there were people at the camp who were “working for way of Daesh”, although they were not part of the jihadist group.

     

    However, the founder of Care4Calais, a UK charity set up to help migrants staying in the camp, dismissed the claims as “the most ridiculous thing I have ever heard”.

     

    Clare Moseley said: “You would have to be the world’s stupidest terrorist to try and enter Britain as a refugee, because when you come as a refugee you are subject to detailed background checks.”

    Perhaps, but Hurley’s contention is the safer bet. That is, if you say there are terrorists camped out at Calais and no attacks ever occur, no one is going to blame you for being cautious.

    On the other hand, if you call the notion that there are jihadists in the camp “the most ridiculous thing you’ve ever heard,” and an attack is later perpetrated by someone with ties to Calais, well then the public isn’t going to be very sympathetic.

    Below, find an interactive video from BBC that gives you a 360 look at “the jungle” along with a Banksy mural painted at the camp which reminds the world that Steve Jobs was the son of a Syrian refugee.

  • Sorry Warren Buffett: Things Just Went From Bad To Worse For U.S. Railroads

    Back in November 2009, knowing he had both the inside track and the final decision on US energy policy under his crony president Obama, Warren Buffett acquired the 77% of the Burlington Northern (aka BNSF) Railroad he did not own for one simple reason: realizing he could pressure the “progressive president” Obama to curb all pipeline progress, confirmed recently with the terminal failure of TransCanada’s Keystone XL pipeline, Buffett would be ahead of everyone by controlling one of the key actors among “the New US Petroleum Pipelines.” The “pipelines” in question were shown in the following chart from our March 2013 post.

     

    And while Buffett’s strategy worked great for many years, certainly as long as oil was rising and above $100, over the past year, things went downhill fast. Nowhere, was this more visible than in a one year chart of transports, which have crashed over the past several months entering their first bear market since 2008 in late December.

     

    While all transportation components contributed to this plunge, rails were the biggest culprit. To be sure slumping railroad traffic was something we have covered extensively in the past year – together with ocean freight, together with trucks – and most recently covered it on January 3 in “What Rail Traffic Tells Us About The U.S. Economy.” The short answer: bad things.

    But while we were quite concerned about the implications of plunging railroad traffic, others ignored it, claiming as they always do, that “it is only coal, or only oil, or only [insert commodity related factor]”.

    However, a Bank of America report issued on January 6 revealed that the decline in rails was much more widespread than just “it’s only X.” This is what BofA’s Ken Hoexter said in a report titled “Carloads flashing a warning signal; lower 4Q estimates again“

    Longest and deepest carload decline since 2009

     

    We believe rail data may be signaling a warning for the broader economy. Carloads have declined more than 5% in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1% decline, has not occurred since 2009. In looking at carload data going back nearly 30 years, similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009. We exclude the period in 1996 from our analysis, as we consider it anomalous given that it overlapped with harsh winter conditions and was limited to January and early February of that year. Of the remaining instances, all either overlapped with a recession, or preceded a recession by a few quarters. The current period starting in October and continuing through the present has been accompanied by weak ISM results, with the purchasing managers index recently falling to 48.2 in December from 48.6 in November (a reading below 50 suggests contraction), and our proprietary BofAML Truck Shipper Indicator recently falling to its lowest level since 2012.

    Here is a rather troubling finding from BofA: the manufacturing recession has spilled over from purely the industrial sector and into “other, more consumer-oriented segments.” In other words, the service recession is imminent.

    Weakness no longer limited to industrials or coal

     

    For much of 2015, it was easy to dismiss weakness in carloads as being concentrated in industrial segments, and reflective of a secular shift away from coal. More recently, the softness has spread to other, more consumer-oriented segments. Intermodal carloads, which were up +1.0% and +3.6% in 1Q15 and 2Q15, respectively, posted a tepid +0.9% gain in 3Q15 and were down -1.7% in 4Q15. This follows the broader trend in 2015 of carloads accelerating to the downside through the year. Until recently, the difficult comparison year of 2014 was another reason to be dismissive of the decline percentages. Despite soft year-over-year results, absolute carloads remained above the 2010-2013 levels through the first 3 quarters of 2015. However, in 4Q15, volume is at its lowest level since 2010. BofAML Multi-Industrials analyst Andrew Obin recently noted that industrial weakness has not always been coupled with severe GDP declines, despite the high correlation between the two (86% correlation coefficient). However, as non-industrial segments post declining carload volumes, we are increasingly concerned with the breadth of the weakness.

     

    All of the above is very bad news for the US economy of which railroad traffic is just one of the proxies, but isn’t necessarily bad for Warren Buffett’s major gamble on the “new pipelines.”

    This is.

    According to a report in the FT, “the amount of oil hauled on US railways has declined steeply in the past year as refineries swallow more foreign supplies in the face of falling domestic crude output.”

    From a peak in January 2015 to last October, movements of crude by rail declined more than a fifth, the latest data from the US energy department show. Genscape, a research group, said rail deliveries to US Atlantic coast terminals continued to drop to the end of the year and the spot market for crude delivered by rail from North Dakota’s Bakken region “is at a near standstill”.

     

    Once seen as a 19th century relic, moving crude oil by train re-emerged as a hot technology five years ago as surging output from long-neglected shale oil regions overwhelmed pipeline capacity. Investors from oil companies to Wall Street banks clamoured for tank cars, while fiery accidents prompted federal regulators to impose more stringent standards on rolling stock.

    And Buffett was there to provide the needed cars, for a generous fee of course, while doing everything in his power (it’s a lot) to delay implementations of stringent, or even any standards, on “rolling stock.” Here are some highlights of the outcome:

    And so on. However, the following brief blurb in the FT article reveals that the time to pay the Piper has finally arrived.

    Tank cars, once feverishly ordered during the US shale boom, are sitting on sidings. Lessors are obtaining car rents 20-30 per cent below early 2015 — “if you’re lucky enough to keep your car in service”, said James Husband of RailSolutions, a consultancy.

    This means that the rail industry is about to be slammed with a dramatic repricing, one which is only the start and the longer oil prices remain at these depressed levels, the lower the rents will drop (think Baltic Dry but on land), until soon most rails will lose money on every trip and will follow the shale companies into a race to the bottom, where “they make up for its with volume.” After all, those billions in debt interest payments won’t pay themselves, meaning doughnuts for equity holders like folksy uncle Warren.

    Then again, we are confident that in the end, the Avuncular Octogenarian of Omaha will find a way to avoid being on the receiving end of yet another bad decision, courtesy of two things: this…

    … and this.

  • Iran Seizes 2 US Navy Boats, Crewmen For "Illegally Entering Iranian Waters"

    Update: Iran plans to return the crewmen to a ship from the USS Truman carrier strike group on Wednesday.

    So we suppose we can just call the sailors “State of the Union hostages”. The rationale for waiting until tomorrow (i.e. until after Obama’s speech): it’s safer to carry out the exchange in daylight, according to an unnamed US official.

    In short, the Ayatollah has just pulled off one epic publicity stunt. 

    *  *  *

    Tensions were already running high between Tehran and Washington in the wake of Iran’s move to test-fire a next generation surface-to-surface ballistic missile with the range to hit Israel. 

     

    And then the IRGC conducted a live-fire rocket test within 1,500 yards of a US aircraft carrier in the Strait of Hormuz. 

    Now, in a further escalation, Iran has reportedly seized two US Navy ships. 

    • 2 U.S. NAVY BOATS IN IRANIAN CUSTODY, PENTAGON SAYS: AP
    • RHODES SAYS U.S. WORKING ON RETURN OF CREW
    • RHODES SAYS U.S. WORKING TO RESOLV

    But nobody panic, because Iran has promised to return the crew “promptly” and as CNN adds, according to Iran the sailors are safe:

    That appears to contradict a statement from Fars which says the US has “repeated” calls for the crew’s release.

    AP writes that the Pentagon says it briefly lost contact with two small Navy craft in the Persian Gulf on Tuesday but has received assurances from Iran that the crew and vessels will be returned safely and promptly.

    “Riverine command boats or RCBs, are actually Swedish CB-90s and are a type of fast attack craft,” WaPo notes, adding that “in a number of pictures released by the U.S. Navy, the boats are outfitted with a number of light, medium and heavy weapons including .50 caliber heavy machine guns and GAU-19 miniguns.”

    “RCB’s can carry contingents of infantry and special operation forces and are often crewed by sailors in Riverine squadrons, known by some as River Rats,” WaPo continues. “The riverine force came of age in the Vietnam War in what was then known as the Brown Water Navy. In the 1960s and early 1970s boats such as Patrol Boat, River (from ‘Apocalypse Now’ fame) and Swift Boats were the River Rats vessels of choice.”

    Pentagon spokesman Peter Cook tells The Associated Press that the boats were moving between Kuwait and Bahrain when the US lost contact with them.

    Cook says, “We have been in contact with Iran and have received assurances that the crew and the vessels will be returned promptly.”

    The crews, which total 10 Navy sailors, are being held at Farsi Island, a highly restricted island between Bahrain and Kuwait, where Iran has a naval base. US officials are saying it is unclear how the crew members ended up in Iranian waters, though Secretary of State John Kerry has kept phone contact with Iranian officials in Tehran, urging for a release. A senior official told NBC News the Iranians understand a mistake was made and have agreed to a release to come in hours.

    According to AP, an anonymous senior official says Kerry “personally engaged with” Iranian Foreign Minister Javad Zarif to work out a solution almost immediately upon hearing of the development around 12:30 pm EST.

    Josh Earnest, the White House spokesperson, said the sailors will be released “promptly” and ” allowed to continue their journey.”

    The international incident comes on the day President Obama will give his final State of the Union speech of his tenure. Obama’s political opponents are capitalizing on the timing, especially since the International Spectator, citing Iran Revolutionary Guard, reports that “seized US sailors will not be released tonight or before State of the Union address.”

    Senator Tom Cotton (R-Arkansas) told CNN, “senior members of Barack Obama’s administration are apologizing for Iran seizing two US Navy vessels and holding 10 sailors hostage. The White House tonight is a hot bed of cold feet.”

    Presidential candidates Dr. Ben Carson and Jeb Bush have taken to Twitter to criticize Obama’s reaction. Bush called for “no more bargaining” and an immediate return home for the sailors, whereas Carson took a shot at Obama’s “preparing to talk about his so called ‘accomplishments'” in reference to tonight’s national address.

    This marks the second time in as many weeks that the President’s “soft” policy on Iran has come under fire. Following the abovementioned rocket incident GOP lawmakers called for fresh sanctions on Tehran in connection with two ballistic missile launches in October and November. The White House was apparently prepared to announce a new set of measures aimed at around a dozen individuals and companies but at the last minute, the administration backed out. Obama’s cold feet came after President Rouhani ordered the defense ministry to accelerate the country’s ballistic missile program in the event new sanctions were put in place.

    Meanwhile, according to Iran’s version of today’s events, Fars News agency says US sailors picked up by Revolutionary Guard Corps, from hardline camp who are opposed to the nuclear deal. Fars adds that the sailors were detained for illegally and “intentionally” entering Iranian waters even though they knew the area well. Tehran also contends the US ships were having “technical difficulties.” 

    And here is the full Fars statement, google translated:

    According to defense Fars News Agency, Iranian Revolutionary Guards 10 US military with two boats illegally entered Iranian waters in the Persian Gulf had been detained.

     

    According to the information received by the Fars news agency every American boat is equipped with 3 machine guns caliber 50 (one in front and two on the sides of the float).

     

    The two vessels illegally entered and patrolled about 2 km deep inside Iranian waters, and the information recorded on their GPS device and is now in the hands of Iranian Revolutionary Guards.

     

    The military said among the arrested were 9 men and one woman. They carried heavy weapons in their vessels.

     

    US officials repeated calls for the release of prisoners will continue with Tehran.

    So, they are prisoners, and unlike the White House tried to spin it, guests of honor?

    Ironically, earlier we asked:

    We now have the answer: 

  • What Bernie And The Donald Portend

    Submitted by Patrick Buchanan via Buchanan.org,

    Three weeks out from the Iowa caucuses, and clarity emerges.

    Hillary Clinton, the likely Democratic nominee, is in trouble.

    Polls show her slightly ahead of socialist Bernie Sanders in Iowa, but narrowly behind in New Hampshire. And the weekend brought new revelations about yet more classified and secret documents sent over her private email server when she was secretary of state.

    Between now and November, she will be traversing a minefield, with detonations to be decided upon by FBI investigators who may not cherish Clinton and might like to appear in the history books.

    Clinton’s charge about Donald Trump’s alleged “penchant for sexism” brought a counterstrike – her being the “enabler” of Bill Clinton’s long career as a sexual predator – that rendered her mute.

    But with Hillary Clinton having raised the subject, it is almost certain to be reintroduced in the fall, if she is the nominee.

    Then there is the newly recognized reality that Clinton, who ran a terrific comeback race against Barack Obama in 2008, is not the candidate she was. Nor is Bill the imposing surrogate he once was.

    Both are eight years older, and show it. “Low energy” nails it.

    Lastly, Hillary Clinton now has a record to defend as secretary of state, a four-year term in which it is hard to see, looking back, a success.

    Moreover, a defeat by Sanders in Iowa or New Hampshire could prove unraveling, with the press herd tapping out early obits.

    New Hampshire has consequences.

    A Granite State defeat by Sen. Estes Kefauver ended Harry Truman’s bid for re-election in 1952. Lyndon Johnson’s narrow write-in victory over Sen. Eugene McCarthy, 49-42, brought Bobby Kennedy into the race – and LBJ’s withdrawal two weeks later.

    George H. W. Bush’s unimpressive New Hampshire win in 1992 brought Ross Perot in as a third-party candidate two days later, and Bob Dole’s loss in 1996 portended defeat in the general election.

    But if a cloud is forming over the Clinton campaign, the sun continues to shine on The Donald.

    Last July, in a column, “Could Trump Win?” this writer argued that if Trump held his then 20 percent share, he would make the final four and almost surely be in the finals in the GOP nomination race.

    Now, in every national and state poll save Iowa, Trump runs first with more than 30 percent, sometimes touching 40. And, save in New Hampshire, Sen. Ted Cruz runs second to Trump.

    What does the surge for socialist Sanders and the Republican base’s backing of the outsiders Trump and Cruz and collective recoil from the Republican establishment candidates tell us?

    “The times they are a changing,” sang Bob Dylan in 1964.

    Dylan was right about the social, cultural and moral revolution that would hit with Category 5 force when the boomers arrived on campuses that same year.

    A concomitant conservative revolution would dethrone the GOP establishment of Govs. Nelson Rockefeller, George Romney and William Scranton in 1964, and nominate Barry Goldwater.

    Will the Clintons ever be held accountable? Help make sure they are by supporting the Hillary Clinton Investigative Justice Project, an effort targeting the racketeering enterprise known as the Clinton Family Foundation

    Something like that is afoot again. Only, this time, the GOP has a far better shot of capturing the White House than in 1964 or, indeed, than it appeared to have at this point in 1980, The Year of Reagan.

    In June 1964, Goldwater, about to be nominated, was 59 points behind LBJ, 77-18, in the Gallup Poll. On Sept. 1, he was still 36 points behind, 65-29. In mid-October, Barry was still 36 points behind, when some of us concluded that Mr. Conservative just might not make it.

    Yet, in January and February of 1980, Ronald Reagan, during the Iowa Caucuses and New Hampshire Primary, never got closer than 25 points behind President Jimmy Carter, who led Reagan, on March 1, 58-33. Yet, that November, 1980, Reagan won a 44-state landslide.

    Today, according to a new Fox Poll, Trump would beat Clinton by 3 points in the general election, if held now. Another poll shows Trump pulling 20 percent of the Democratic vote.

    What this suggests is that nominating Trump is by no means a guarantee of GOP defeat. But beyond politics, what do the successes of Sanders, Trump and Cruz portend?

    Well, Sanders and Trump both opposed the war in Iraq that the Bush Republicans and Clinton Democrats supported.

    Both Sanders and Trump oppose NAFTA and MFN for China and the free-trade deals that Clinton Democrats and Bush Republicans backed, which have cost us thousands of lost factories, millions of lost jobs and four decades of lost wage increases for Middle America.

    Trump has taken the toughest line on the invasion across the U.S.-Mexican border and against Muslim refugees entering unvetted.

    Immigration, securing the border, fair trade – Trump’s issues are the issues of 2016.

    If a Trump-Clinton race came down to the Keystone State of Pennsylvania, and Trump was for backing our men in blue, gun rights, securing America’s borders, no more NAFTAs and a foreign policy that defends America first, who would you bet on?

  • Meanwhile In Chicago, 120 People Shot In First 10 Days Of 2016

    Even as Obama takes his anti-gun crusade to new highs with every passing week, having recently started dispensing executive orders, the president conveniently continues to ignore the state of affairs in his native Chicago – a city in which guns are banned – yet where the shooting epidemic has never been worse, and is truly emblematic of the “gun problem” America has.

    Judging by the most recent developments, Obama will have nothing to say about Chicago gun violence either during tonight’s state of the union address, or ever for that matter, because recent developments are downright disastrous.

     

    According to the Chicago Tribune, following the seven people shot to death and 30 more wounded during the latest weekend, the total number of shootings in the windy city has risen to 120 in just over a week into the new year, according to police.

    The fatal shootings included two teens killed by a store clerk during a robbery in the Gresham neighborhood on the South Side, and one of three people shot at a party four blocks from Mayor Rahm Emanuel’s home.

    As the Tribune tabulates as of Monday morning, at least 19 people have been killed in gun violence and at least 101 more have been wounded. This is three times higher than compared to the same period one year ago: in the first 10 days of 2015, “only” nine people were killed and another 31 wounded.

    Chicago police spokesman Anthony Guglielmi released a statement blaming most of the violence on “chronic gang conflicts.”

    “Every year Chicago Police recover more illegal guns than officers in any other city, and as more and more illegal guns continue to find their way into our neighborhoods.” 

    So the problem is smuggling of illegal guns, got it. What is the proposed solution?

    “So it is clear we need stronger state and federal gun laws,” Guglielmi said in the statement.

    Because those who illegally procure guns will follow gun purchasing laws, and the only thing preventing them from doing so is not enough laws? One can almost see why Chicago’s gun problem is getting worse by the day.

    The statement continues:

    “So far this year, the majority of the gun violence we’ve seen are a result of chronic gang conflicts driven in part by social media commentary and petty disputes among rival factions. Despite an overall lack of cooperation from gang members, detectives are working aggressively and making optimistic progress in several cases.”

    At least 2,986 people were shot in Chicago in 2015. Many more will be shot – by illegally obtained weapons in a city with unprecedented gun control – in 2016.

    For an interactive summary of the “hot spots” in Chicago, click on the map below.

  • Here's Why Automaker Stocks Are Falling (Despite The Media's Exuberance)

    How can it be that automaker stock prices are tumbling given that auto sales (if one listens to CNBC) are surging, that (if one listens to the CEOs) everything is awesome for automakers, and (if one listens to Phil LeBeau) there is no bubble in auto credit? The answer is simple… (you just don't want to admit it)

     

    Two words – channel-stuffing!

     

    In fact, as IceFarm Capital's Michael Green details, the credit-fueled over-productiuon has historically been disastrous for the global auto sector…

     

    So once again – a mal-investment boom has pulled forward demand (from who knows where) and signalled entirely incorrect production expectations to executives who can only see 1 quarter ahead and the amount of buybacks they must do in order to maintain their own personal wealth.

  • 93% Of American Counties Haven't Recovered From The Recession

    Supposedly, the Fed’s decision to hike rates last month conveyed something about the strength of the US economy. “I think the economy is on the road to recovery,” diminutive Chairwoman Yellen told the the Economic Club of Washington two weeks before liftoff.  “We’re doing well,” she added, for good measure.

    Now first, the idea that we’re “on the road” to recovery is a bit disconcerting in and of itself. After all, it’s not as if the crisis happened last year. We’re talking about recovering from something that happened eight long years ago. If we’re not there yet, one would be forgiven for suggesting that we’re not ever going to get there.

    Second, to the extent the “data” do show something that to the untrained eye might be mistaken for a robust recovery, you have to remember that the statistics can be made to show whatever a bunch of central planners want them to show.

    Take December’s “blockbuster” jobs report for instance. How, you might ask, is it possible that the US can add 292,000 jobs while average hourly wages decline? Simple: the hiring was a veritable minimum wage deluge as well-paying jobs barely budged while temp help soared by 34,400 and waiter and bartenders added another 36,900 to the country’s growing army of Food and Bev workers which now numbers a record 11.3 million. 

    And then there was what we called “the most troubling aspect” of the latest NFP report: the number of multiple job holders soared by 324,000 to 7.738 million, the highest since August 2008. Meanwhile, a record number of retired Americans worked part-time in December which means the elderly are either bored or broke – you guess which.

    So that’s the “robust” labor market. When it comes to GDP it’s all about the cost of socialized medicine as quarter after quarter, all of the “growth” comes from soaring healthcare spending. And then there is of course the infamous “residual seasonality”, a truly ridiculous bit of statistical Tomfoolery that effectively allows the BEA to simply adjust away all of the bad stuff on the way to publishing sanitized, “double adjusted” data.

    But even as the macro picture is hopelessly obscured by the mischievous tinkering of bureaucrats, the county-level data reveals the dismal truth: according to a new study by the National Association of Counties, 93% of America’s counties have not yet recovered from the recession.

    “Overall, the county economies recovered on all four indicators by 2015 still represent only 7 percent of all county economies,” the organization writes. “In contrast, almost 16 percent of county economies had not recovered on any indicator by 2015, mostly in the South and Midwest. States such as Florida, Georgia, Illinois and Mississippi have more than a third of their county economies still reeling from the latest downturn across all economic indicators.” 

    Note where the “good” counties are. As you can see from the map, the counties that have recovered on 3-4 of the indicators NAC measured are predominantly in the modwest and Texas. How long, one might fairly ask, will that last in the face of a prolonged slump in crude prices? 

    It wasn’t all bad news, and Emilia Istrate, the association’s director of research and outreach will fill you in on the rest of the details in the video below, but the bottom line, to quote Istrate is this: “[This] tells you why many Americans don’t feel the good economic numbers they see on TV.”

  • WTI Slides After API Reports Massive Build In Gasoline & Distillate Inventories

    With the seasonally drawdown-prone December completed, we begin seasonally build-prone January with expectations for a 2mm barrel build. However, according to API, both total and Cushing inventory levels tumbled (-3.9mm and 300k respectively). Great news – so why is crude tumbling? Simple – massive builds in end-products again with Gasoline up a massive 7mm barrels and Distillates up 3.6mm barrels. Having ramped off sub-$30 levels aftwr NYMEX closed, and lifted by the Iran-US news, WTI is sliding back rapidly.

    The largest 2-week Gasoline invenrtiory build ever…

     

    And so while algos saw the inventrory draw headlines, real traders know what record-breaking builds in end-product means…

     

    December saw a very flat inventory overall (despite being a seasonally extreme period for drawdowns into year-end tax planning)…

     

    Judging from history, as Bloomberg notes, it should resume as soon as the festive season is over: Stocks have built by 3.2 million barrels on average in January since 1921.

  • You Know Negative Interest Rates Are Bad When…

    Submitted by Simon Black via SovereignMan.com,

    Switzerland is famous for being punctual.

    The trains. The buses. The meticulously crafted, hand polished luxury watches.

    The Swiss are so culturally punctual that they even tend to pay their taxes well in advance of the filing deadline.

    So it was quite a shock to hear this morning that the Swiss canton of Zug is asking its citizens to delay paying their taxes for as long as possible.

    Why? Negative interest rates.

    The cantonal government doesn’t want to take in a pile of cash, only to end up paying the bank interest on all the tax revenue.

    Interest rates in Switzerland are among the lowest in the world; the official policy rate set by the Swiss National Bank is MINUS 0.75%.

    Initially these negative interest rates only apply to banks; minus 0.75% is a wholesale rate pertaining to transactions among banks, and deposits they hold with the central bank.

    But banks aren’t exactly charities.

    So if a bank is paying interest to hold funds with the central bank, eventually they’re going to pass that cost on to the consumer. Even if that consumer is the government.

    According to the Financial Times, the cantonal government of Zug estimates that they will save $2.5 million in negative interest rate charges by delaying tax receipts.

    Just consider the magnitude of this decision: the monetary system has become so screwed up that a local government doesn’t want its citizens to pay taxes early.

    In fairness, it’s not just Switzerland. All across Europe, interest rates are negative.

    In the Euro zone, the main policy rate is only slightly ‘less negative’ at minus 0.3%.

    And many of the bonds issued by European governments also yield negative rates.

    In other words, you have to pay money for the privilege of loaning a bankrupt government your money.

    In Germany, bond yields are negative all the way out to five years. It’s insane.

    Clearly any rational individual is much better off simply holding physical cash, rather than keeping substantial funds in a savings account.

    Cash doesn’t pay any interest. But it doesn’t cost any either.

    It’s pretty sad statement when the 0% you earn from holding physical cash is considered ‘high yield’.

    Of course, governments know this. They realize that no rational person is going to want to keep money in a bank, especially as negative interest rates cascade into consumer banking.

    And that’s a huge reason why there’s such a push to outlaw cash.

    If even a small percentage of depositors decided to close their bank accounts and withdraw all their savings in cash, the banking system would collapse.

    There simply isn’t enough physical cash in the system.

    Plus most banks are so highly leveraged, and they lack the liquidity to honor any meaningful amount of withdrawal requests.

    This is one of the fundamental dangers of negative interest rates.

    Central bankers, in an absurd, desperate attempt to generate inflation, are accomplishing nothing more than destroying the banking system.

    And even when it doesn’t work– even when the numbers prove that their ridiculous goal of increasing inflation isn’t working– they just keep trying the same thing over and over again, making interest rates even MORE negative.

    It’s madness.

    These people have broken the concept of money.

    Money is one of the most important social technologies in the history of the world, almost as important as language.

    Money is supposed to mean something. It is supposed to be the metric by which we measure economic value.

    But they’ve destroyed that. And it’s so obvious now.

    But cutting the price of money (interest rates) so far into negative territory, money has become so worthless that even a government doesn’t want it.

    And in doing so they have created the most absurd problems imaginable.

    It’s pretty clear that this is not a risk free environment.

    And as my colleague Tim Price pointed out yesterday, there is no single solution to protect yourself from the consequences of this madness.

    We discussed last week that holding physical cash is a great option to hedge short-term risks in the banking system.

    (In Switzerland, the highest denomination is the 1,000 Swiss franc note. In Europe, it’s 500 euros. In the US and Canada, it’s $100.)

    But with so many politicians and idiotic economists calling for a ban on cash, plus all the greater risks with fiat currency, physical cash is only part of the answer.

    Clearly precious metals make sense as part of a long-term, balanced approach.

    But owning gold requires a steely-eyed, willful ignorance of the daily fluctuations in its paper price.

    You can’t own gold and fret about it falling $20 in a single day, or 10% in a year.

    Gold is simultaneously a form of money… as well as an insurance policy.

    Trading fiat currency for gold, only hoping to trade the gold back for more fiat currency at a later date, pretty much defeats that purpose.

    But even gold is not a single solution.

    It may also make sense to own shares of a productive business– ideally one that’s recession-proof, has minimal debt, and is managed by competent people of integrity.

    There are plenty of other options out there, and this short list is by no means exhaustive.

    But the larger point is to start thinking in this direction. Look at the obvious risks and determine what makes sense for your situation.

    Most people will unfortunately succumb to the default option– doing nothing and assuming that it’s all going to be OK because the smart guys in government will figure it out.

    But this is pretty dangerous thinking.

    You won’t be worse off for taking sensible steps to protect yourself from undeniable risks.

    But should any serious consequences ever arise from this financial madness, they’ll happen very quickly, and it will be too late to do anything about it.

    And at that time, looking back, it will all seem so obvious.

    * * *

    In fact, the concept of negative rates has become so ubiquitous that BNP Strategist Reiko Tokukatsu has written a book "Negative Rates" which has stunningly become a bestseller in Japan on their failed experience with negative interest rates and directly challenges the economic playbooks adopted by central bankers around the developed world. As Bloomberg reports,

    The book, ranked the top among finance books since it went on sale on Dec. 10, says bond yields lower than inflation pass the debt burden to future generations and impoverish their lives, while keeping zombie companies alive, contradicting the Bank of Japan’s goal of reviving economic growth. The main beneficiary of the monetary easing is the government, which sees interest costs drop and a devaluation of its debt pile.

     

    Tokukatsu is among skeptics of bond-buying stimulus including U.S. hedge fund manager David Einhorn, who said in 2012 that lower rates would cause people to hoard savings rather than consume as their investment returns drop while the cost of commodities surges. The BOJ and monetary authorities across Europe are betting that interest rates below zero will reduce borrowing costs for companies and households, driving demand for loans as well as encouraging investment in higher-yielding assets.

     

    “Textbooks say negative rates are risk free but they are camouflaging the reality that contradicts the theory,” Tokukatsu said in an interview in Tokyo Jan. 6.

     

    “It’s nonsense to strengthen a policy where risk and return don’t match,” said Hidenori Suezawa, an analyst at SMBC Nikko Securities Inc. in Tokyo. “Despite the easing, the 2 percent target wasn’t reached in two years. It raises questions about the necessity of strengthening a policy that carries side effects without results or extending it for three or five more years.”

     

    Japan’s “declining working population and increasing number of pensioners are keeping demand down and helping keep inflation rates low,” said Comely. “QE is not going to deal with that structural issue.”

     

    “The time is right for the BOJ to end quantitative and qualitative easing and taper,” said Tokukatsu at BNP Paribas. “The inflation rate isn’t negative so it isn’t deflation. The 2 percent target is too high but 1 percent is achievable.”

     

    “Monetary easing has lasted too long,” Tokukatsu said. “Japan should lower targets appropriate for a mature economy with a falling potential growth rate.”

    Simply put, Tokukatsu concludes:  “It’s beneficial for the government but it’s financial repression for the people.”

Digest powered by RSS Digest

Jan 12

Today’s News 12th January 2016

  • Open Letter to the Banks

    Jamie Dimon, JP Morgan Chase
    Brian T. Moynihan, Bank of America
    Michael Corbat, Citigroup

    Gentlemen:

    On Friday, I attended a digital money summit at the Consumer Electronics Show. I am writing to you to warn you about the disruption that is about to occur in banking. There are many startups (and larger companies too) that are gunning for you. Perhaps you have watched what Uber has done to the taxi business? Well, these guys are planning the same thing for the banking business.

    Banks used to allow even a child with a $10 deposit to spread his risk across a large portfolio of loans. At the same time, banks made it possible for a corporate borrower to raise $10,000,000 from a large group of depositors. In short, the banking business is investment aggregation and risk management.

    That business cannot be disrupted. The bigger it gets, the more difficult to displace. It’s like eBay, all the depositors come to the bank because that’s where they can earn interest. All the borrowers come, because that’s where they can get the money they need. The bigger the bank gets, at least in a free market under the gold standard, the safer it is for depositors.

    Today, however, you are quite vulnerable to disruption. That’s because you are not really in the banking business any more.

    Over three decades, you have worked with the Federal Reserve to eliminate interest. The end result is that you now offer depositors a return-free risk. Depositors cannot earn interest in a bank account (yes, I know that in the US the yield is technically not zero yet, but it’s getting there). However, a growing number are aware of the risks. For example, you have incalculable exposure to derivatives. You own sovereign debt which the world now knows is not risk-free. In fact, you have a large staff and churn through a lot of activity in order to deliver scant yield to your depositors.

    I can tell you what I observed in the digital money program. People, especially Millennials, now think of banking in terms of features like ATMs, payment clearing, fraud prevention, and point of sale solutions. However, these are just add-on services, not the core of banking. You have abandoned that core, and only the add-ons remain.

    Startups can take these businesses. They have lower costs. They are more focused. They have hip new brands, untainted by the financial crisis and the bailouts. They have developed an array of new technologies. And, of course, they are less regulated (before you think to lobby to impose more regulation on them, think about that taint to your brand).

    You’re in a tight spot. After decades of smoking the drug known as falling interest, you’re now dependent on it. The thought of a return to a 5% yield on the 10-year Treasury is not pleasant. Nevertheless, I urge you to think about it. The alternative is to let the fintech disruptors carve up your retail business.

    Sincerely,
    Keith Weiner, PhD
    The Gold Standard Institute

  • US Equities Tumble As PBOC "Stamps Out" Short Yuan Speculators With "Murderous" Liquidity Squeeze

    China/Hong Kong Money Market stress remains extreme – O/N implied rates spike to 82%, 1w to 38%…

    A jump in the overnight cost for borrowing yuan in Hong Kong is "reflecting further PBOC efforts to stamp out speculation," according to Michael Every, head of financial markets research at Rabobank Group. Hong Kong-based Every told Bloomberg in an interview, following a massive spike in overnight borrowing rates for Offshore Yuan that "a 66% rate is murderous for others being swept up in this who are not speculating."

     

    PBOC advisor Han earlier warned that short selling the yuan "will not succeed," adding that "it is pure imagination that the Chinese yuan will act like a wild horse without any rein." But as Every notes, the unintended consequences could be a problem, "imagine you needed access to CNH for other purposes for a few days," concluding ominously that "in other EM crises we see that central banks usually win a round like this, but lose in the end."

    This move sent CNH ripping higher (as shorts were forced to cover) all the way to parity with CNY…

     

    But once that was complete, Offshore Yuan selling recommenced and that is dragging US equities lower…

     

    As we explaiend earlier, it is now extremely expensive to short the Offshore Yuan – which is exactly what The PBOC appears to have wanted – “It is pure imagination that the Chinese yuan will act like a wild horse without any rein,” said Han, adding that short selling the yuan “will not succeed.”

     

     

    As the gap between spot (squeeze) and forwards widens…

    • *CNH-CNY SPREAD NARROWS BELOW 100 PIPS FOR 1ST TIME SINCE NOV.

    Reuters reports that the offshore yuan (CNH) implied overnight deposit rate has hit a record high at 82%. This is squeezing CNH shorts… big time.

    As a result, the CNY-CNH spread has narrowed

     

    • *OFFSHORE YUAN STRENGTHENS 0.6% TO TRADE AT PARITY WITH ONSHORE

    to patirty

    Despite all the flatness and stability, Chinese stocks are extending losses… *SHANGHAI COMPOSITE FALLS 0.8% TO BELOW 3,000 LEVEL

     

     

    As we detailed earlier, with Chinese equities tumbling in the face of PBOC's liquidity withdrawal (record spike in o/n HIBOR) and short-squeeze of CNH shorts (and carry traders), the sell-side is as confused as a CNBC anhcor at what is good and what is bad. UBS urges investors not to sell while JPM fears a structured-product-driven vicious cycle between EM and Chinese equities. Following a record-breaking surge in offshore Yuan against the USD (12 handles top to bottom) during the US session, selling has resumed into the fix. "Expectations the yuan will depreciate sharply should be seen as ridiculous and humorous," warned one Chinese official (who obviously did not get the memo of the last 3 weeks) as The PBOC injected CNY80bn and decided for the 3rd day in a row to hold the Yuan fix unchanged.

     

    As we begin tonight's "trading", Chinese equities are deep in the red YTD:

    • *SHANGHAI MARGIN DEBT BALANCE DECLINES MOST IN FOUR MONTHS

     

    "Expectations the yuan will depreciate sharply should be seen as ridiculous and humorous," warned one Chinese official (who obviously did not get the memo of the last 3 weeks)…

    • *PBOC TO INJECT 80B YUAN WITH 7-DAY REVERSE REPOS: TRADER
    • *CHINA KEEPS YUAN FIXING LITTLE CHANGED FOR THIRD DAY
    • *SHANGHAI MARGIN DEBT BALANCE DECLINES MOST IN FOUR MONTHS

     

    Offshore Yuan is selling back down a little after an epic day of squeezing…

     

    Meanwhile, away from the actual dynamics of tonight's early moves, mixed messages from a desperate sell-side tonight with UBS proclaiming:

    • INVESTORS SHOULDN'T SELL CHINESE STOCKS AT THESE LEVELS: UBS

    And JPMorgan warning of a vicous cycle of selling between China and EM equities:

    Events in Chinese equity markets feel uncomfortably close to the June-August sell-off.

     

    The Shanghai and Shenzhen indices are down 15% and 20%, respectively, in the first six trading days of 2016. MSCI China, EM and World are down 11%, 9% and 7%, respectively. Onshore investors’ confidence in the local policy is weak. Shorting of H-share futures increased when A-share circuit breakers kicked in. If HSCEI moves below 8000 (spot 8505) then we approach structured product strikes leading to H-share futures selling. To add to the discomfort, the CNH overnight rate spiked to 23% as aggressive PBoC intervention results in a shortage of offshore renminbi. Finally, the market was disappointed that post the record decline in FX reserves, there was no RRR cut.

     

    Simply the market is unsure on policy and is technically weak, driving EM toward our bear case end 2016 target of 720.

    Wondering why we care about China? Here's one reason… US and Chinese stocks are extremely correlated since The Fed slowed and then stopped its money-printing… (and that correlation has increased since August and The Fed's September "fold")

     

    The jawboning started early

    • *YUAN FALL TO STIMULATE CHINA'S EXPORTS: SECURITIES JOURNAL

    which is entirely incorrect…

    And then this:

    • *EXCHANGE RATE NOT DETERMINING FACTOR FOR EXPORTS: SEC. JOURNAL

    Confused?

    And finallyu there is this:

    • *PBOC'S ZHOU ATTENDS BIS MEETING

    In other words – they are starting to coordinate!! Against The Speculators? Or The Fed?

  • The State Of The Nation: A Dictatorship Without Tears

    Submitted by John Whitehead via The Rutherford Institute,

    “There will be, in the next generation or so, a pharmacological method of making people love their servitude, and producing dictatorship without tears, so to speak, producing a kind of painless concentration camp for entire societies, so that people will in fact have their liberties taken away from them, but will rather enjoy it, because they will be distracted from any desire to rebel by propaganda or brainwashing, or brainwashing enhanced by pharmacological methods. And this seems to be the final revolution.” – Aldous Huxley

    There’s a man who contacts me several times a week to disagree with my assessments of the American police state. According to this self-avowed Pollyanna who is tired of hearing “bad news,” the country is doing just fine, the government’s intentions are honorable, anyone in authority should be blindly obeyed, those individuals who are being arrested, shot and imprisoned must have done something to deserve such treatment, and if you have nothing to hide, you shouldn’t care whether the government is spying on you.

    In other words, this man trusts the government with his life, his loved ones and his property, and anyone who doesn’t feel the same should move elsewhere.

    It’s tempting to write this man off as dangerously deluded, treacherously naïve, and clueless to the point of civic incompetence. However, he is not alone in his goose-stepping, comfort-loving, TV-watching, insulated-from-reality devotion to the alternate universe constructed for us by the Corporate State with its government propaganda, pseudo-patriotism and contrived political divisions.

    While only 1 in 5 Americans claim to trust the government to do what is right, the majority of the people are not quite ready to ditch the American experiment in liberty. Or at least they’re not quite ready to ditch the government with which they have been saddled.

    As The Washington Post concludes, “Americans hate government, but they like what it does.” Indeed, kvetching aside, Americans want the government to keep providing institutionalized comforts such as Social Security, public schools, and unemployment benefits, fighting alleged terrorists and illegal immigrants, defending the nation from domestic and foreign threats, and maintaining the national infrastructure. And it doesn’t matter that the government has shown itself to be corrupt, abusive, hostile to citizens who disagree, wasteful and unconcerned about the plight of the average American.

    For the moment, Americans are continuing to play by the government’s rules. Indeed, Americans may not approve the jobs being done by their elected leaders, and they may have little to no access to those same representatives, but they remain committed to the political process, so much so that they are working themselves into a frenzy over the upcoming presidential election, with contributions to the various candidates nearing $500 million.

    Yet as Barack Obama’s tenure in the White House shows, no matter how much hope and change were promised, what we’ve ended up with is not only more of the same, but something worse: an invasive, authoritarian surveillance state armed and ready to eliminate any opposition.

    The state of our nation under Obama has become more bureaucratic, more debt-ridden, more violent, more militarized, more fascist, more lawless, more invasive, more corrupt, more untrustworthy, more mired in war, and more unresponsive to the wishes and needs of the electorate. Most of all, the government, already diabolical and manipulative to the nth degree, has mastered the art of “do what I say and not what I do” hypocrisy.

    For example, the government’s arsenal is growing. While the Obama administration is working to limit the public’s access to guns by pushing for greater gun control, it’s doing little to scale back on the federal government’s growing arsenal of firepower and militarized equipment.

    In fact, it’s not just the Department of Defense that’s in the business of waging war. Government agencies focused largely on domestic matters continue to spend tens of millions of taxpayer dollars to purchase SWAT and military-style equipment such as body armor, riot helmets and shields, cannon launchers and police firearms and ammunition. The Department of Veterans Affairs spent nearly $2 million on riot helmets, defender shields, body armor, a “milo return fire cannon system,” armored mobile shields, Kevlar blankets, tactical gear and equipment for crowd control. The Food and Drug Administration purchased “ballistic vests and carriers.” The Environmental Protection Agency shelled out $200,000 for body armor. And the Smithsonian Institution procured $28,000 worth of body armor for its “zoo police and security officers.”

    The national debt is growing. In fact, it’s almost doubled during Obama’s time in office to nearly $20 trillion. Much of this debt is owed to foreign countries such as China, which have come to exert an undue degree of influence on various aspects of the American economy.

    Meanwhile, almost half of Americans are struggling to save for emergencies and retirement, 43% can’t afford to go more than one month without a paycheck, and 24% have less than $250 in their bank accounts preceding payday.

    On any given night, over half a million people in the U.S. are homeless, and half of them are elderly. In fact, studies indicate that the homeless are aging faster than the general population in the U.S.

    While the U.S. spends more on education than almost any other country, American schools rank 28th in the world, below much poorer countries such as the Czech Republic and Vietnam.

    The American police state’s payroll is expanding. Despite the fact that violent crime is at a 40-year-low, there are more than 1.1 million persons employed on a full-time basis by state and local law enforcement in this country. That doesn’t include the more than 120,000 full-time officers on the federal payroll.

    While crime is falling, the number of laws creating new crimes is growing at an alarming rate. Congress creates, on average, more than 50 new criminal laws each year. This adds up to more than 4,500 federal criminal laws and an even greater number of state laws.

    The prison population is growing at an alarming rate. Owing largely to overcriminalization, the nation’s prison population has quadrupled since 1980 to 2.4 million, which breaks down to more than one out of every 100 American adults behind bars. According to The Washington Post, it costs $21,000 a year to keep someone in a minimum-security federal prison and $33,000 a year for a maximum-security federal prison. Those costs are expected to increase 30 percent by 2020. Translation: while the American taxpayer will be forced to shell out more money for its growing prison population, the private prison industry will be making a hefty profit.

    The nation’s infrastructure—railroads, water pipelines, ports, dams, bridges, airports and roads—is rapidly deteriorating. An estimated $1.7 trillion will be needed by 2020 to improve surface transportation, but with vital funds being siphoned off by the military industrial complex, there’s little relief in sight.

    The expense of those endless wars in Afghanistan and Iraq will cost taxpayers $4 trillion to $6 trillion. That does not include the cost of military occupations and exercises elsewhere around the globe. Unfortunately, that’s money that is not being invested in America, nor is it being used to improve the lives of Americans.

    Government incompetence, corruption and lack of accountability continue to result in the loss of vast amounts of money and weapons. A Reuters investigation revealed $8.5 trillion in “taxpayer money doled out by Congress to the Pentagon since 1996 that has never been accounted for.” Then there was the $500 million in Pentagon weapons, aircraft and equipment (small arms, ammunition, night-vision goggles, patrol boats, vehicles and other supplies) that the U.S. military somehow lost track of.

    Rounding out the bad news, many Americans know little to nothing about their rights and the government. Only 31% can name all three branches of the U.S. government, while one in three says that the Bill of Rights guarantees the right to own your own home, while one in four thinks that it guarantees “equal pay for equal work.” One in 10 Americans (12%) says the Bill of Rights includes the right to own a pet.

    If this brief catalogue of our national woes proves anything at all, it is that the American experiment in liberty has failed, and as political economist Lawrence Hunter warns, it is only a matter of time before people realize it. Writing for Forbes, Hunter notes:

    The greatest fear of America’s Founding Fathers has been realized: The U.S. Constitution has been unable to thwart the corrosive dynamics of majority-rule democracy, which in turn has mangled the Constitution beyond recognition. The real conclusion of the American Experiment is that democracy ultimately undermines liberty and leads to tyranny and oppression by elected leaders and judges, their cronies and unelected bureaucrats.  All of this is done in the name of “the people” and the “general welfare,” of course.  But in fact, democracy oppresses the very demos in whose name it operates, benefiting string-pullers within the Establishment and rewarding the political constituencies they manage by paying off special interests with everyone else’s money forcibly extracted through taxation. The Founding Fathers (especially Washington, Jefferson, Franklin, Adams, Madison, and James Monroe), as well as outside observers of the American Experiment such as Alexis de Tocqueville all feared democracy and dreaded this outcome.  But, they let hope and faith in their ingenious constitutional engineering overcome their fear of the democratic state, only to discover they had replaced one tyranny with another.

    So are there any real, workable solutions to the emerging American police state?

    A second American Revolution will not work. In the first revolution, the colonists were able to dispatch the military occupation and take over the running of the country. However, the Orwellian state is here and it is so pervasive that government agents are watching, curtailing and putting down any resistance before it can get started.

    A violent overthrow of the government will not work. Government agents are armed to the teeth and will easily blow away any insurgency when and if necessary.

    Politics will not help things along. As history has made clear, the new boss is invariably the same as or worse than the old boss—all controlled by a monied, oligarchic elite.

    As I make clear in my book Battlefield America: The War on the American People, there is only one feasible solution left to us short of fleeing the country for parts unknown: grassroots activism that strives to reform the government locally and trickles up.

    Unfortunately, such a solution requires activism, engagement, vigilance, sacrifice, individualism, community-building, nullification and a communal willingness to reject the federal government’s handouts and, when needed, respond with what Martin Luther King Jr. referred to as “militant nonviolent resistance.”

    That means forgoing Monday night football in order to actively voice your concerns at city council meetings, turning off the television and spending an hour reading your local newspaper (if you still have one that reports local news) from front to back, showing your displeasure by picketing in front of government offices, risking your reputation by speaking up and disagreeing with the majority when necessary, refusing to meekly accept whatever the government dictates, reminding government officials—including law enforcement—that they work for you, and working together with your neighbors to present a united front against an overreaching government.

    Unfortunately, we now live in a ubiquitous Orwellian society with all the trappings of Huxley’s A Brave New World. We have become a society of watchers rather than activists who are distracted by even the clumsiest government attempts at sleight-of-hand.

    There are too many Americans who are reasonably content with the status quo and too few Americans willing to tolerate the discomfort of a smaller, more manageable government and a way of life that is less convenient, less entertaining, and less comfortable.

    It well may be that Huxley was right, and that the final revolution is behind us. Certainly, most Americans seem to have learned to love their prison walls and take comfort in a dictatorship without tears.

  • In "Very Unusual" Move, Avenue Capital's Junk Bond Fund Stops Reporting Asset Levels

    A month after we first noted the major redemptions at Avenue Capital Group's credit fund (note this is a different fund from Third Avenue), and just one trading day after CEO Marc Lasry strolled arrogantly on to CNBC and told the public that "I don't think it's a time to panic, I think it's actually a time where you've got opportunities out there," Morningstar reports the Avenue Credit Strategies Fund has failed to report asset levels since about mid-December.

    As we noted first in mid-December…

    What is just as surprising is that among its investments, Lasry does have a mutual fund, in fact two of them – the Avenue Credit Strategies Funds, an open- and close-ended fund, which as we first showed last Friday using the following Morningstar table, are not only among the worst performers year to date, but have tumbled by a whopping 9% in the past three months.

     

     

     

    Fast forward to last night when according to Reuters, Avenue's founder, billionaire Marc Lasry, was forced on Monday to back the junk bond mutual fund hemorrhaging assets at his Avenue Capital Group "as jittery investors exit high-yield bonds amid a market rout."As a result, the size of the fund has been cut by more than half, sliding from $2 billion to just $884 million according to Lipper, roughly the same size where Third Avenue's own high yield fund was when it announced it would liquidate and gate investors.

     

    Despite his defensive posture, Lasry hardly sounded too enthusiastic about the pace of outflows: "I think overall redemptions at some point are going to slow down across the market," Lasry said. "I'm not sure if that will be tomorrow or next week, but people are going to start putting money back into the market at some point."

    And then just last Friday, CEO Lasry ventures on to CNBC to calm the panic and claim all is well as his fund was imploding…

    …despite recent worries, Lasry struck a cautiously optimistic tone on the U.S. economy.

     

     

    "I don't think we're going into a recession, I think it's whether we're growing at 1 or 2 percent," he said. "So the fact that you've got lower GDP, that's fine, but at the end of the day the U.S. economy is doing fine."

     

    In fact, the hedge fund manager said, there are good openings for discerning investors.

     

    "I don't think it's a time to panic, I think it's actually a time where you've got opportunities out there. Invest in solid companies and you'll end up doing pretty well," Lasry said.

     

    The expert investor said he sees "a ton of opportunities" in the energy sector — but not in equities. Instead he said his firm is buying debt that sees a coupon of about 12 percent "while you're getting paid to wait."

     

    He projected that, in the next two to five years, "you're either going to get paid off, or you'll end up owning these companies" as debt is converted into equity.

    We were not the only one to notice Lasry's hypocrisy…

     

    And now, as Reuters reports, in what is clear evidence of a run on his fund,

    A junk bond fund run by billionaire Marc Lasry's Avenue Capital Management, which has experienced heavy investment losses and investor withdrawals, has stopped voluntarily reporting daily asset figures to the mutual fund industry's top two tracking firms.

     

    Research chiefs for Morningstar and Lipper said on Monday they had not received daily asset under management figures from the Avenue Credit Strategies Fund since about mid-December. The fund is not required to report the figures, but not doing so is "very unusual," said Jeff Tjornehoj, head of Americas research for Lipper, a Thomson Reuters unit.

     

    People familiar with the situation said outflows from the Avenue Capital fund had become a distraction after an unrelated junk bond fund in early December imploded. Junk bond investors already were on edge, pulling $3.6 billion from high-yield funds in November, according to Morningstar data.

     

    The Avenue Credit Strategies Fund has lost about 40 percent of its $1.2 billion in assets since the end of October. The fund currently has about $650 million to $700 million in assets, with about 15 percent in cash holdings and less than 5 percent in illiquid investments, according to people familiar with the situation. Avenue Capital was not immediately available to comment.

    And so another one bites the dust and the forced expulsion of assets into an already illqiuid market continues (unless, like Third Avenue, the SEC grants them exemption from providing liquidity to their clients – the moms-and-pops of America – who were forced by Fed repression into these risky assets, only to eat the losses on the way out)

    The only question is whether Lasry, who is a close personal friend of the Clintons – recall Chelsea Clinton launched her "career' by working as an "analyst" at the very same Avenue Capital in the mid-2000s – and who was slated to become US ambassador to France until his ties to a shady poker ring were exposed in 2013, will use his executive privilege and request special treatment by the former, and soon future, first family. 

    If so, that will be the first case of a hedge fund bailout by the presidential family in history, and will make the political farce that are US capital markets even more comical.

  • Record Numbers Of Retired Americans Are Working Part-Time Jobs

    Every other aspect of the US economy may be going to hell in a handbasket, with an acute manufacturing recession starting to spill over into the services sector, but at least the US jobs number is “stellar”, right?

    Wrong.

    We showed one way how the BLS fudges the number higher, when we reported on Friday that of the surge in December jobholders, a whopping 324,000 of these new “jobs” were by multiple jobholders, as in 1 person = 2 (or more) jobs, effectively cutting the job gain in half (or worse). Worse, the total number of jobholders surged to 7.738 million, just shy of an all time high, and the highest since August 2008.

     

    And then there is this.

    According to a Bloomberg report, a record number Americans who are retired (or are collecting Social Security) worked part-time last month.

    In December, a record 2.6 million workers had either reached full retirement or restricted themselves to work-weeks of 34 hours or less due to Social Security income limitations. Individuals can collect Social Security and work with no limit on earnings once they reach full retirement age. However, if they receive Social Security before full retirement age they will lose some of their benefit if they exceed the annual earnings limit. For 2016, this cap is $15,720. The penalty is a $1 deduction in Social Security for every $2 earned above the limit.

     

    What is most disturbing, is that this is the “data” the Fed uses to justify to the world that its decision to hike rates was the right one. Meanwhile, anyone who is not an economist will take on look at the above charts and realize why 7 years ino the “recovery” there has been no wage growth, and why the Fed is shooting itself both in the leg and in the head by hiking at this point.

  • "Neo-Nazis" Attack German Muslim Businesses As Ghost Of 1939 Beckons

    On Saturday, some 1,700 people turned out for a PEGIDA rally in Cologne, where demonstrators protested Chancellor Angela Merkel’s open-door migrant policy in the wake of the sexual assaults that occurred on New Year’s Eve in the city center.

    Ultimately, riot police were called in to disperse the crowds who held signs calling for the expulsion of “Rapefugees” and the ouster of Merkel.

    Subsequently, reports indicated that gangs of “bikers, hooligans, and bouncers” used Facebook to coordinate a migrant “manhunt” that led directly to attacks on a group of Pakistanis in Cologne.

    All of this points to the rapid disintegration of German society in the face of a refugee influx that numbers some 3,000 new asylum seekers per day.

    On Monday, the backlash against Mid-East refugees continued as thousands gathered in Leipzig to protest for and against the city’s local PEGIDA chapter. Here’s Deutsche Welle:

    LEGIDA members took to the streets on Monday to commemorate the first anniversary of the founding of their chapter, as well as to protest against the recent New Year’s Eve sexual assaults in Cologne.

     

    “We are the people” “Resistance!” and “Deport them!” chanted the sign and flag-toting LEGIDA crowd. “Refugees not welcome!” read one sign, showing a silhouette of three men armed with knives pursuing a woman, while another declared “Islam = terror”.

     

    In another area of the city, riots broke out when around hundreds of soccer “hooligans” started rioting in the district of Connewitz. The neighborhood is considered to be the stronghold of the leftist scene in Leipzig.

     

    Rioters allegedly set of pyrotechnics and threw rocks at display windows.

     

    In a tweet following the riot, police reported: “We have arrested around 250 people from the ‘right-wing clientele’ after the riots. The situation is under control.”

    Lutz Bachmann – who nearly Plaxico’d his own cause last year by posting a picture of himself dressed as Hitler on Facebook – reportedly attended the rally. “Well over 2,000 anti-Muslim LEGIDA protestors took to the streets, their ranks swelled by anger over the Cologne attacks,” Reuters writes. “They yelled ‘Merkel needs to go!’ and one carried a sign featuring Merkel wearing a hijab and the words: ‘Merkel, take your Muslims with you and get lost'”. Here are some images from the chaos:

    As Deutsche Welle goes on to note, “anti-LEGIDA protesters formed a ‘chain of lights’ which stretched for 3.5 kilometers (2.2 miles) around the city center [where] ip to 2,800 people took part in the protest against the xenophobic group.”

    “We have to take to the streets so long as people continue to make racist arguments,” Leipzig’s Mayor Burkhard Jung said.

    So once again we see that German society is splintered and the nationalist, right-wing PEGIDA movement is gathering strength. As surreal as it may sound, it now appears that there is a very real chance that Berlin’s open-door migrant policy may actually be the spark that reignites the Reich in Germany. 

    That means that for Merkel, there’s much more at stake here than the political reputation of Europe’s most important politican. The clock is ticking. Dear Iron Chancellor: save your country before 1939 rears its ugly head.

  • "Unprecedented Demand" – US Mint Sells Nearly As Much Gold On First Day Of 2016 As All Of January 2015

    While Chinese residents were lining up in front of banks and currency exchange kiosks, desperate to convert as many of their Yuan into dollars as the government will permit, Americans were likewise busy exchanging their own paper currency, so greatly in demand in China, into gold and silver.

    As Reuters reports, American Eagle silver coin sales jumped on Monday after the U.S. Mint said it set the first weekly allocation of 2016 at 4 million ounces, roughly four times the amount rationed in the last five months of 2015, after a surge in demand. It will not be enough.

    According to the Mint, more than half of the week’s allocation of silver sold on Monday, the first day of 2016 sales, a sign that demand entering 2016 is literally off the charts.

    Putting the silver demand in context, the 2.76 million ounces of silver bullion coins sold today is exactly half of the 5.53 million ounces that sold in all of January 2015.

    Needless to say, if the demand from the first day of the month continues through the end of January, the first month of 2016 will set an all time record in silver sales.

    And gold.

    First-day sales of American Eagle gold bullion coins was also unprecedented, with the 60,000 ounces sold equal to roughly 75% of the 81,000 that sold in the entire month of January 2015.

    As reported previously, the mint ran out of American Eagle silver coins in July because of a “significant” increase in demand as spot silver prices fell to a six-year low. Inventory was replenished in August and sales resumed. But the coins were on weekly allocations of roughly 1 million ounces for the rest of the year because of low supplies.

    This dramatic surge in demand, we noted out at the time, was a shock and a paradox to equity investors and momentum stock chasers, who seek to dump an asset the cheaper it gets, contrary to what has happened with physical metals for the 4th year in a row. It is amazing that at least some investors still act according to the fundamental laws of supply and demand.

    It wasn’t just the US: the unexpected surge in demand put the global silver-coin market in an unprecedented supply squeeze, forcing other mints around the world to ration sales, while U.S. buyers had to look abroad for supplies.

    Should the epic demand for precious metals from the first day of sales persist, we are confident that the Mint will run out of gold and silver within a few days.

  • "Fasten Your Seatbelts" – UBS Warns Of "Record Spikes In Volatility" If This Level Breaks

    Having warned earlier in the week of the potential for a significant crash in US equities and the appeal of owning gold, UBS goes one further in their recent report warning of "record spikes" in volatility should the following levels break…

    Generally, the late September bottom in equities has an absolutely pivotal character for a lot of markets. In Europe, the September low represents the 2009 bull trend. In the Russell-2000 or the MSCI World, it is the neckline of a huge head & shoulder formation and in the S&P-500 it is an obvious double bottom, which would be negated as well as breaking the 32-month moving average.

    Analytically, this moving average has a very good track record in signaling whether the US market is still in a bull market or not. Even the 1987 crash was just a pullback and mean reversion to this moving average, whereas in 2001 and 2008 the break of the 32-month average was confirmation that a real bear market had started.

    So regardless of when we get this signal, a break of the late September low at 1867 in the S&P-500 would be the ultimate confirmation that the US market is also in a real bear market and in this case we would recommend to fasten your seatbelts.

    If we look into the macro world we are obviously living in a world of extremes. We have record debt in the Emerging Market complex, in Europe, in Japan and in the US; with margin debt in the US at record levels, M&A hitting record levels, record ETF holdings in corporate bonds, record auto loans in the US, and the list continues.

    We would be surprised that in this highly leveraged world, in combination with a structural decline in market liquidity, a 7-year cycle decline would just be mild. We think it’s actually just the other way around and in this context we see last year’s rise in volatility as just the start of a period with exceptionally high volatility where we wouldn’t be surprised to see record spikes in volatility over the next 12 to 17 months. So another key call we have for the next 12 to 15 months is to be long volatility.

     

    Particularly with regards to the ongoing bear market in high yields, we think that volatility in equities is too low and this will be one of the key charts for 2016. 

    Last year we argued that we generally see all these divergences as a leading indicator for an important top in global equities. 12 months later we are in the next phase of the global rolling over process, where we see more and more markets having already fallen into a bear market, and where on the other hand we can clearly say that without a new momentum impulse coming from the fundamental world the air for the remaining outperformer markets will get increasingly thin.

    Source: UBS

  • Chicago Schools In "Dramatic Trouble": "They're Looking At A Disaster," Illinois Governor Warns

    Back in September, we noted that Chicago’s schools are in trouble. Deep trouble.

    Amid Illinois’ intractable budget crisis, the city’s public school system opened with a budget shortfall of nearly a half billion dollars.

    Borrowing and trimming the proverbial fat helped close some of the $1.1 billion hole but once the board reached the point where “further cuts would reach deep into the classroom” (to quote system chief Forrest Claypool), the schools asked Springfield to make up the difference which amounts to $480 million.

    The Chicago Public School (CPS) system has nearly 400,000 students and more than 20,000 teachers. Around 1,400 jobs were eliminated in an effort to save money and more layoffs may be just around the corner if Springfield – which is mired in budget gridlock – doesn’t step in.

    One problem is the CPS pension liability. As WSJ noted four months ago, “the district’s pension costs have more than doubled in recent years after the board took a partial ‘holiday’ for three years from paying the amount needed to put the retirement system on a path to long-term solvency.”

    “It is like the board is a desperate gambler at the end of their run,” remarked Jesse Sharkey, vice president of the Chicago Teachers Union.

    Governor Bruce Rauner wants nothing to do with bailing this “desperate” bunch of “gamblers” out. “Let’s be clear Chicago Public Schools are in dramatic trouble,” he said last week. “They’re looking at a disaster somewhere in the next nine months in the Chicago public schools.” As Bloomberg reminds us, “CPS is the only state district that pays for its teachers pensions.”

    Rauner went on to predict that Springfield would be blamed if (or perhaps “when” is the better word) disaster finally strikes: “For them to say ‘hey you owe it to us, it’s Springfield’s fault, pick up our pension liability and let us kick the can in the rest of our pension liability, no, no, not happening.”

    “No, no, no,” and that means it’s back to the bond market for CPS, where investors are set to punish the board for their abysmal financial predicament.

    As Bloomberg goes on to note, the system’s GO debt is trading near its lowest levels since September and the Chicago Tribune’s editorial board isn’t happy about it. “While Springfield yawns, CPS borrows money it shouldn’t, at rates that it (read: that taxpayers) can’t afford,” the Tribune lamented, in a piece written late last week. “The cost of that borrowing now is nosebleed steep: CPS recently agreed to shell out 10 times the interest rate that a healthy district would typically pay its lenders. Ten. Times.”

    Here’s more:

    But CPS won’t stop. The district plans to sell as much as $1.2 billion of debt later this month. The rate CPS pays again will be punishing.

     

    Punishing, that is, to nearly 400,000 school children. Every dollar CPS spends on debt service cannot be spent on classrooms, teachers, books — education.

     

    That is, every dollar that pays back this astonishing level of borrowing, for years on end, won’t go to teaching kids.

     

    The ephemeral Springfield bailout? Prospects for that are as grim as ever.

     

    Gov. Bruce Rauner says he will help CPS if Democrats in the legislature grant some of his demands for political and government reforms that public employees unions oppose.

     

    In the last week, a frustrated Emanuel has accused Rauner of using Chicago schoolchildren as pawns “in a political game in Springfield to get an agenda done that people don’t agree with.”

     

    Chicagoans have heard this accusation from Democratic politicians for months now. But Rauner (you, unlike Madigan and Cullerton, may recall that he won the 2014 election for governor of Illinois) evidently won’t be bullied or bought off. The Democrats in Springfield and, yes, Chicago will have to deal with his demands. They will have to compromise. To the extent any pol uses those children as pawns, everyone in this tragicomedy uses them as pawns. None more, none less.

     

    CPS officials said Friday that layoff notices for central office staffers should start going out by mid-January.

     

    CPS bonds are rated as junk. More downgrades seem likely. Even higher interest rates loom.

     

    Claypool told us last month that he expects “at some point” lenders would stop lending to CPS. “You build such a deep amount of cash debt that you can’t ever pay it back.”

    Right. Which means a taxpayer bailout here is inevitable whether it’s through an outright cash injection from Springfield, higher taxes, or both. As a reminder, Chicagoans are already the most-taxed residents in Illinois.

    “Politicians in City Hall arrogantly assume that Chicagoans will stomach more and more tax hikes,” Illinois Policy writes. “The expectation of higher property taxes to bail out the city’s other pension funds and the nearly bankrupt state of Chicago Public Schools will only make out-migration worse.”

    In other words, Springfield doesn’t want to help (and even if they did, the budget boondoggle would probably constrain Rauner’s ability to help) and taxpayers in Chicago are already grossly overburdened. Meanwhile, CPS is on the brink of being priced out of the bond market.

    With no viable options, the base case is now that described by Chicago Democrat John Cullerton last year: the system will lose 3,000 teachers and will be forced to shorten the academic year. 

  • Rand Paul Rages "The Fed Is Crippling America"

    Authored by Senator Rand Paul and Mark Spitznagel, originally posted at Time.com,

    The country deserves to understand the extent of its balance sheet

    On Jan. 12, Congress is scheduled to vote on the “Audit the Fed” legislation (H.R. 24/S. 264), which, if passed, would bring to an end to the Federal Reserve’s unchecked—and even arguably unconstitutional—power in the financial markets and the economy.

    We aren’t the first to be wary of the powers of central banks. Founding Father Thomas Jefferson viewed the powers of central banks as being contrary to the protections of the Constitution. As Jefferson wrote:

    “I sincerely believe that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

    In a similar vein, the great Austrian economist Ludwig von Mises also recognized that limiting government power in the realm of money was a matter of liberty, not merely economics. Mises explained that

    “the idea of sound money … was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”

    How far we have come as a country that these words from Jefferson and Mises sound so foreign today. Perhaps we have all been blinded by the credit and equity bubbles that surround us. But what better wake-up call to rally support for legislation that would shine a bright light on the government institution that today has created these bubbles, subsidizes small subsets of the population (thus amplifying wealth inequality), and enables endless government debt?

    The Fed was intended to be an apolitical body, a concession to placate the naysayers. But today, the Fed isn’t even shy about entering the political fray: witness Federal Reserve Chair Janet Yellen’s income inequality speech riddled with Democratic talking points during the 2014 elections.

    The Fed is, indeed, a political, oligarchic force, and a key part of what looks and functions like a banking cartel. During the 2007-08 financial crisis, the Fed’s true nature was clear to anyone paying attention. As the Treasury began bailing out the investment banks from the consequences of their profligate risk-taking (and in some cases fraudulent schemes), the Fed moved in tandem, further purchasing the underwater assets of these institutions, as well as actually paying interest to the commercial banks (hemorrhaging from risky loans) for reserves they kept parked at the Fed.

    To be sure, Fed officials came up with opaque jargon to describe such operations, but the stark reality is that the Fed was treating risky assets as good collateral, and in the fall of 2008 began literally paying banks to not make loans to their customers.

    Even today, the recent policy announcement has doubled the rate of this massive implicit taxpayer subsidy to the banks – what they call “interest on reserves.” In the textbook rate-hike case, the Fed sells off assets (or slows the rate of purchases) in order to reduce the supply of reserves. Then, the equilibrium price of borrowing reserves (i.e., fed funds rate) rises. In contrast, now and for the foreseeable future, as indicated by the Fed’s guidance statements, the Fed is raising rates by increasing interest on reserves.

    As of Dec. 17, the Fed is paying 50 basis points on both required and excess reserves. So the Fed, itself, is increasing how much it will pay to “borrow” reserves from the commercial banks. Given the estimated $2.6 trillion in excess reserves, at 50 basis points that means the Fed will be paying commercial banks some $13 billion in annual income. Right now, the Fed is paying the same on required and excess reserves, though that in principle could differ.

    As the Fed keeps raising interest rates through this same mechanism, the amount paid to commercial banks will only mushroom. You can forgive analysts for not discussing this; it was not even mentioned in the Fed’s Dec. 16 announcement.

    As the Fed pays commercial bankers more in interest payments, there is dollar-for-dollar less for the Treasury; in other words, for a given level of federal expenditures, the deficit is that much higher. Therefore, the U.S. taxpayer is subsidizing commercial banks to not make loans to their customers—or rather bribing them to charge their customers higher interest rates on loans. And, the U.S. taxpayer is going deeper into debt to provide this bank subsidy.

    This is but one aspect of the farce that is today’s Fed policy. In addition, we actually don’t know the full extent of or the precise recipients of the Fed’s asset purchases and bailouts as its balance sheet exploded from about $900 billion in August 2008 to almost $4.5 trillion today.

    Now, the Fed has painted itself into a corner. It can’t sell off its bloated balance sheet for fear of crashing the mortgage-backed securities market—and, indirectly, real estate—and it can’t sell off its treasury holdings because that would push up treasury yields and increase the servicing cost of U.S. debt. This is partly the reason the Fed has chosen to raise rates by paying bankers more.

    If treasury yields rise, then the market value of existing treasury securities goes down. The Fed currently holds about $2.5 trillion (all maturities) of treasuries. At the same time, the Fed’s capital is at most $67 billion or so. Given that the Fed is levered to the hilt, if treasury yields go up too much, Fed is bankrupt in an accounting sense.

    Most dangerous of all, global credit and equity markets have been manipulated by central bank policies to levels that are unsustainable and highly crash-prone.

    Clearly, the country needs to understand fully the extent of the Fed’s balance sheet: what it holds and from whom it was acquired, as well as all of the Fed’s other activities and conceivably even more dangerous shenanigans afoot.

    We can’t really know what we don’t know until we look. We owe it to the “swindled futurity” of the next generation to take a long, hard look through a full and independent audit of the Fed.

  • The Cost Of China's "Neutron Bomb" Exploding: $7.7 Trillion And Higher

    On Friday we presented Kyle Bass’ latest interview in which the Texas hedge fund manager explained the reasoning why he thought shorting the Yuan is the “greatest investment opportunity right now.” The crux behind the argument was well-known to Zero Hedge readers, namely China’s peaking credit cycle driven by soaring bad, or non-performing, loans which have so far been swept away, but which courtesy of a $35 trillion financial system are nothing short of a “neutron bomb“, as we first dubbed the embedded risk, waiting to go off. Here is Bass:

    What I think the narrative will swing to by the end of this year if not sooner, is the real issue in China is not simply that profits have peaked. The real issue is the size of their banking system. Do you remember the reason the European countries ended up falling like dominoes during the European crisis was their banking systems became many multiples of their GDP and therefore many, many multiples of their central government revenue. In China, in dollar terms their banking system is almost $35 trillion against a GDP of $10 and their banking system has grown 400% in 8 years with non-performing loans being nonexistent. So what we are going to see next is a credit cycle, and in a credit cycle you see some losses, but if China’s banking system loses 10%, you are going to see them lose $3.5 trillion.

    Today, months after we first covered the breadth of this most disturbing for Chinese bulls topic, the FT caught up with this critical, for China’s financial system, issue and reports that “the downturn in China’s fortunes — particularly across its heartland heavy industry — is already hitting the banks. Annual non-performing loan rates have been doubling annually since 2012. China Merchants Bank, China Everbright and ICBC are seen as among the most troubled.”

    That’s based on official data, which is grotesquely low and completely fabricated. The true NPLs data is well-hidden by everyone from the lowliest bank teller to the Politburo in Beijing, who all know that merely the recognition of the problem would be sufficient to spark if not a full-blown panic then certainly accelerate capital outflows form the nation to an unstoppable degree, especially if the latest estimate which we presented last November from Fitch’s Charlene Chu, of 21% in non-performing loans, is accurate.

    Back to the FT which notes that “China bulls point to the still low level of NPLs — barely 1 per cent at the big lenders, and 1.8 per cent at mid-tier banks this year, according to analyst forecasts. As a gauge, NPLs in Greece have risen to between 30 and 40 per cent amid that country’s crisis” but then adds that “China experts at independent research house Autonomous suggest investors are underestimating a spiralling problem. Across the board, loan losses will rise by $845bn this year, Autonomous predicts. That, they think, will be enough to shrink profits by 6 per cent at big banks.”

    Actually if Fitch is right, the problem is in the trillions, but let’s assume a more modest figure. Here is what the FT says next:

    Some policymakers are privately worried about yet another underestimated issue — whether loan losses, when they materialise, will be recoverable. In western banking markets, so-called loss given default rates can typically range between 30 and 70 per cent. In China, where property accounts for the bulk of collateral used to back loans, LGDs may be far higher. Even if inflated property values do not collapse, collateral values may prove far too optimistic. In China’s nascent property ownership culture, the land on which developments are built is typically state-owned, limiting recovery values.

    Considering that one of the biggest scandals in China in 2014 was the realization (as many had warned previously) that millions of tons of commodities were rehypothecated countless times, and thus “pledged” as collateral to numerous counterparties, and that as a result these same counterparties were unable to make sense of who owns what at one of China’s largest ports, Qingdao, it is probably quite safe to assume that LGDs in China are if not 100% (or more, which is impossible in theoretical terms but in practice is quite possibe, as another curious side effect of unlimited collateral rehypothecation), then as close to it as possible.

    So putting all that together, and using a conservative estimate for NPLs, orders of magnitude below the 21% proposed by Fitch, what is the FT’s estimate of China’s “conservative case” neutron bomb going off in financial terms? Just about $7.7 trillion.

    Investors in China’s banks may well recognise that the lenders cannot be compared with institutions that operate along western lines and will expect hazier disclosures and readier state interference. They are also likely to think that China will not allow its banks to fail. But if analysts, like those at Autonomous are to be believed, China’s banks could require up to $7.7tn of new capital and funding over the next three years. State bailouts could send the government debt to GDP ratio spiralling from 22 per cent to 122 per cent. That kind of shock would be a challenge for any country, even one of China’s vast might.

    Again, this is the conservative NPL case. Now assume 21% NPLs.

  • Meet Manifa (And Other Giant Oil Projects) That Will Add To The Global Oil Glut

    Via GEFIRA,

    World oil consumption is more than 90 million barrels a day. Between 2009 and 2014 oil was traded for about 110 dollars a barrel; now oil is changing hands for 32 dollars a barrel. Roughly a 7-billion-dollar cash flow a day is vanishing from the global market.

    Norway’s sovereign wealth fund that has accumulated a stake of 4.5 billion dollars in Apple over the past years, will turn from an Apple buyer into an Apple seller.

    The China Development Bank (a Chinese policy bank) has poured nearly 50 billion dollars into Venezuela in return for oil, with the country now collapsing under the Chinese debt, having no other choice but to drill for more oil.

    These are just some of the challenges the world is facing in 2016 as oil prices are heading towards 20 dollars a barrel.

    Speculators and manipulators were able to manipulate the oil price to more than 120 dollars a barrel,  with the production cost being roughly between 20 and 80 dollars. With a huge profit margin the world was digging for more and more liquid gold.

    *  *  *

    Kashagan: The $50 Billion Oil Development That Doesn’t Work

    Shell, Total S.A., Exxon Mobil and China National Petroleum Corporation are now stuck with a 50-billion-worth project in the Caspian Sea, called Kashagan. The project is full of problems and delays, but is expected to add 300.000 barrels of oil a day to the global oil glut the coming year.

    The field is developed by the international consortium under the North Caspian Sea Production Sharing Agreement. The Agreement is made up of 7 companies consisting of Eni (16.81%), Royal Dutch Shell (16.81%), Total S.A. (16.81%), ExxonMobil (16.81%), KazMunayGas (16.81%), China National Petroleum Corporation (8.4%), Inpex (7.56%). The initial production is expected to be 90,000 barrels per day (14,000 m3/d). It should reach a production rate of 370,000 barrels per day (59,000 m3/d) Source Wikipedia

     

    Prelude

    2016 will also be the inauguration of Shells Prelude, the world’s first floating liquefied natural gas platform as well as the largest offshore facility ever constructed. We expect the media to give limited coverage to its inauguration.

     

    Prelude FLNG is the world’s first floating liquefied natural gas platform as well as the largest offshore facility ever constructed. Prelude FLNG was approved for funding by Shell in 2011. Analyst estimates in 2013 for the cost of the vessel were between US$10.8 to 12.6 billion. Pressures from an increase in the long-term production capabilities of North American gas fields and increasing Russian export capabilities may reduce the actual profitability of the venture from what was anticipated in 2011. Source Wikipedia

     

    Manifa

    While the media attention was directed to the shale oil boom in the US, the Saudis created a giant offshore oil project called Manifa. With one single project Manifa added 1 million barrels a day to the world oil glut. Manifa will expand its capacity the coming year, adding a further 500 million barrels a day to world markets.

     

    The project is part of the development of the Saudi oilfields, which are expected to see an increase in production to over 12.5 million barrels a day from 11 million barrels a day. The first phase of the project began production in April 2013. The field produced 500,000bpd by July 2013. It will produce 900,000bpd of crude oil once fully completed by the end of 2014. Additionally, there will also be production of 90 million standard cubic feet per day of sour gas, 65,000bpd of gas condensate, and water. Source Offshore Technology

    There are plans to extend the project with a further 500 barrels a day capacity.

    *  *  *

    ZH: With global storage levels at their limit, these massive projects (and their sunk-cost desperation for cash-flow) will add already extreme pressure an over-supplied market in which, as Morgan Stanley notes, "oil has no intrinsic value."

  • Why The Powerball Jackpot Is Nothing But Another Tax On America's Poor

    Now that the Powerball Jackpot has just hit a record $1.4 billion, people, mostly those in the lower and middle classes, are coming out in droves and buying lottery tickets with hopes of striking it rich.

    After all, with $1.4 billion one can even afford enough shares of Apple stock to become a bigger holder than the Swiss National Bank (alterantively, one can buy a whole lot of VXX).

    Naturally, we wish the lucky winner all the (non-diluted) best. There is, however, a small problem here when one steps back from the trees. As ConvergEx’ Nicholas Colas previously explained, “Lotteries essentially target and encourage lower-income individuals into a cycle that directly prevents them from improving their financial status and leverages their desire to escape poverty.  Yes, that’s a bit harsh, and yes, people have the right to make their own decisions.  Even bad ones…  Also, many people tend to significantly overestimate the odds of winning because we tend to assess the likelihood of an event occurring based on how frequently we hear about it happening.  The technical name for this is the Availability Heuristic, which means the more we hear about big winners in the press, the less uncommon a big payday begins to seem.” Call it that, or call it what one wishes, the end result is that the lottery is nothing but society’s perfectly efficient way of, to use a term from the vernacular, keeping the poor man down while dangling hopes and dreams of escaping into the world of the loathsome and oh so very detested “1% ers”. Alas, the probability of the latter happening to “you” is virtually non-existant.

    Full explanation from Convergex’ Nick Colas on how and why Americans are lining up in lines around the block to… pay more taxes.

    What Seems To Be Is Always Better than Nothing

    Summary: American adults spent an average of $251 on lottery tickets.  With a return of 53 cents on the dollar, this means the average person threw away $118 on unsuccessful lotto tickets – not a great investment.  So why are we spending so much?  Well, lotteries are a fun, cheap opportunity to daydream about the possibility of becoming an overnight millionaire (or in this case billionaire), but on the flip side people tend to overestimate the odds of winning.  Lower-income demographics spend a much greater portion of their annual earnings on lottery tickets than do wealthier ones. 

    Since lotteries are state-run, that effectively means that the less affluent pay more in taxes (albeit by choice) than broadly appreciated.  And even winning the lottery doesn’t guarantee financial success.  More than 5% of lottery winners declare bankruptcy within 5 years of taking home the jackpot.  Despite their drawbacks, though, lotteries are no doubt here for the long haul – in states that have lotteries, an average of 11% of their total revenues come from lottery ticket sales, and the number is even as high as 36% in 2 states (West Virginia and Michigan).
     
    Consider the following credit-card-advertisement style sequence of statistics:

    • Lottery ticket sales in the US in 2010:  $59 billion
    • Average spending per person:  $191
    • Average spending per adult:  $251
    • Chance at hitting the jackpot:  (Apparently) priceless.

    I have never bought a lottery ticket and honestly don’t even know how.  And as far as I’m aware, I don’t know anyone who spends north of 200 bucks a year playing the lotto.  The only lottery my friends play is the NYC marathon lottery, where they’re gambling for maybe a 1 in 13 chance to fork over $255 for the privilege of slugging out 26 miles through the city’s streets.  Not quite hitting the jackpot in most people’s minds. 
     
    But someone, somewhere is buying all those tickets.  In Massachusetts, where the lottery is more popular than in any other state, people spend an average of $634 a year on Mega Millions, Powerball and the like.  Delaware comes in at number 2 with $504 spent per person, while Rhode Island ($469), West Virginia ($388) and New York ($357) round out the top 5.  North Dakota brings up the rear with per capita lottery spending of $34.  You can see the full list in the table following the text. 
     
    It’s difficult to pinpoint exactly who is investing so much money in a product that provides poor returns, but numerous studies show that lower-income people spend a much greater proportion of their earnings on lotteries than do wealthier people.  One figure suggests that households making less than $13,000 a year spend a full 9 percent of their income on lotteries.  This of course makes no sense – poor people should be the least willing to waste their hard-earned cash on games with such terrible odds of winning. (http://www.dailyfinance.com/2010/05/31/poor-people-spend-9-of-income-on-…).
     
    Why bother?  Well, one answer is obvious enough and applies to just about everyone who plays.  For a buck (now $2 for Powerball) we have a cheap opportunity to daydream what could happen if we suddenly won millions of dollars.  But lotteries return 53 cents to the dollar.  So why are poor people irrationally buying tickets when the probability of winning is so slim?  One study by a team of Carnegie Mellon University behavioral economists (Haisley, Mostafa and Loewenstein) suggests it isn’t being poor but rather feeling poor that compels people to purchase lotto tickets.
     
    By influencing participants’ perceptions of their relative wealth, the researchers found that people who felt poor bought almost two times as many lottery tickets as those who were made to feel more affluent.  Here’s how they did it:

    • Participants were asked to complete a survey that included an item on annual income.  One group was asked to provide its income on a scale that began at “less than $100,000” and went up from there in increments of $100,000.  It was designed so that most respondents would be in the lowest category and therefore feel poor. 
    • The other group, made to feel subjectively wealthier, was asked to report income on a scale that began with “less than $10,000” and increased in $10,000 increments.  Therefore most participants were in a middle or upper tier.
    • All participants were paid $5 for participating in the survey and given the chance to buy up to 5 $1 scratch-off lottery tickets.  The group who felt wealthier bought 0.67 tickets on average, compared with 1.27 tickets for the group who felt poor.

    Lotteries essentially target and encourage lower-income individuals into a cycle that directly prevents them from improving their financial status and leverages their desire to escape poverty.  Yes, that’s a bit harsh, and yes, people have the right to make their own decisions.  Even bad ones…  Also, many people tend to significantly overestimate the odds of winning because we tend to assess the likelihood of an event occurring based on how frequently we hear about it happening.  The technical name for this is the Availability Heuristic, which means the more we hear about big winners in the press, the less uncommon a big payday begins to seem.   
     
    Not that hitting the jackpot is guaranteed to substantially improve the winner’s life.  Economists at the University of Kentucky, University of Pittsburgh and Vanderbilt University collected data from 35,000 lottery winners of up to $150,000 in Florida’s Fantasy 5 lottery from 1993 to 2002.  Their findings are as follows:

    • More than 1,900 winners declared bankruptcy within 5 years, implying that 1% of Florida lottery players (both winners and losers) go bankrupt in any given year, which is about twice the rate for the broader population.
    • “Big” lottery winners, those awarded between $50,000 and $150,000 were half as likely as smaller winners to go bankrupt within 2 years of their win, however equally likely to go bankrupt 3 to 5 years after.
    • 5.5% of lottery winners declared bankruptcy within 5 years of bringing home the jackpot.
    • The average award for the big winners was $65,000 – more than enough to pay off the $49,000 in unsecured debt of the most financially distressed winners.

    Lottery players tend to have below-average incomes, so they are probably less accustomed to budgeting when they receive a windfall.  There’s also a psychological term called Mental Accounting that explains how people might treat their winnings less cautiously than money they’ve worked for.  Money has come into their possession through luck, which similar to bonus payments, often induces an urge to purchase unnecessary items.
     
    But whether you think state lotteries are awful or great, there’s another word for them: essential.  In both West Virginia and Michigan, for example, lottery sales accounted for 36% of total state revenues in fiscal year 2010, and on average state with lotteries take in 11% of total revenues in the form of lotto ticket sales.  We’ve included the full list in a table following the text.  There are still 7 states that don’t have their own lottery systems, so the national average would be lower. 
     
    A couple of closing thoughts on what this all means:

    • Don’t make investment decisions when you are feeling poor.  The study we cited earlier clearly shows that you are likely to buy more “lottery tickets” (think of that as a metaphor for any long shot investment) when you feel less affluent than those around you.
    • Lower income individuals likely pay more in “Taxes” than most economic commentators realize.  Assuming that the 80/20 rule applies to lottery participation, the bulk of that $59 billion in annual receipts likely comes from 20-25 million less affluent households.  That would be about $47 billion from this demographic, or roughly $2,400 per household.  Yes, I get the notion that this money is handed over in the hope of a payoff.  An ill-advised and mathematically unlikely hope, as it turns out.  But does that mean it doesn’t count as a societal contribution?
    • Maybe the U.S. needs a national lottery.  Yes, these games don’t necessarily encourage the best financial planning among the less affluent.  But there is no denying that playing the lottery is entirely voluntary.  There are probably some anti-gaming factions in government who wouldn’t like this approach, to be sure.  But there’s also no doubt that the Federal budget could use the money.  And, hey, you never know…

  • The (Uncensored) 2016 State Of The Union

    Submitted by Lance Roberts via RealInvestmentAdvice.com,

    Tomorrow night, the President Obama will deliver his final annual “State Of The Union” address. Just recently, the President gave a preview of his upcoming speech from the White House.

    While Obama promises to frame his speech around the “things we need to do over the years to come,” he will use his bully pulpit to focus on his record of achievements (especially those related to the environment and trade) and push for further restrictions on gun ownership.

    With the 2016 Presidential Election fast approaching, this is one of the final chances the White House will have to give a boost to the Democratic voters following the beating they took in the 2012 mid-term elections. The message sent then, even by traditionally Democratic states which elected conservative representatives, was of a broad loss of faith in “hope and change.”

    For the Democratic party, it is imperative to regain those votes. It is from this priority that the President will paint a decisively positive economic picture during his upcoming speech. He hopes that by pointing to a falling unemployment rates, economic growth and higher confidence levels; it will give voters a sense of confidence in the President’s accomplishments.

    The question is whether the majority of the voting public will agree with the President’s message?

    Before the President takes to the podium with his bullish optimism, he might want to consider the following charts.

    Government Debt

    Since 2009, Government debt has surged by $7.75 Trillion and by the end of the next budget cycle will approach $20 Trillion in total. The problem is that during the current Presidential term, real economic growth has risen by just $2.08 Trillion. However, even this number is inaccurate as the current government debt levels do not include other liabilities of the government such as social security and other social welfare programs.

    Debt-vs-EconomicGrowth-011116

    The following chart quantifies it a bit better when you look at cumulative increases in debt and real, inflation adjusted, GDP.

    Debt-GDP-GrowthRatio-011116

    Yes, the economy is growing, however, that growth has come at a huge cost of a debt burden that will be amplified if borrowing costs rise with increases in interest rates. Furthermore, considering that President Obama admonished the previous administration’s increase in debt, the explosion in the amount of debt required to generate economic growth (currently $3.71) is unsustainable longer term.

     

    Employment

    The President will address the recent employment report and point to a 5.0% unemployment rate as evidence that the economy “is back.” While the current Bureau of Labor Statistics employment reports do currently show the unemployment rate at 5.0%, that number is obfuscated by the more than 93 million workers that are currently not counted as part of the labor force.

    As I have discussed many times previously, when it comes to economic strength it is full-time labor that leads to household formation and higher consumption.

    Furthermore, the rate of employment must be faster than the rate of population growth, otherwise, you are just treading water. The chart below shows the amount of full-time labor as a ratio of the working age population.

    Employment-FullTime-Pop-President-011116

    Currently, 49.23% of the population is employed full-time which is a rate lower than when the President entered office. Furthermore, as noted above, the employment ratios are deceiving when you realize that the population has grown faster than employment leaving a rising number of individuals no longer counted as part of the labor force.

    Employment-PopGrowth-Jobs-011116

    NILF-President-011116

    Importantly, when the employment-to-population ratio or the labor-force participation rate is discussed, the plunging levels in these ratios are often dismissed simply as a function of the “baby boomers” heading into retirement. However, if we factor out those individuals by only looking at the employee-to-population ratio of 16-54 aged individuals as a percent of that age group the picture fails to improve.

    Employment-WorkingAgePop-011116

    While the unemployment rate has certainly plunged to just 5.0%, one would be hard pressed to find 95.0% of the population that “wants to work,” actually working.

    Personal Incomes

    The annual rate of change in personal incomes has been on a decline since the turn of the century.  This is a function of both the structural shift in employment (higher productivity = less employment and lower wage growth) and the drive to increase corporate profitability in the midst of weaker consumption.

    The chart below shows the disparity between corporate profits and employment and wages.

    Wages-Profits-Ratios-011116

    While corporate profitability has surged since the financial crisis, those profits have come at the expense of employees. Since 2009, wages for “non-supervisory employees,” which is roughly 80% of the current workforce has been on a steady decline.

    Wage-Growth-NonSupervisory-011116

    The problem with this, of course, is that the real cost of living continues to rise.

    Government Assistance

    Of course, the issue of declining incomes and rising “income inequality” is really best shown by the level of social benefits as a percentage of disposable incomes today. Today, roughly 1-in-3 households receive some form of government assistance.

    Government-Asst-DPI-011116

    It is here that the President will be most challenged in presenting his “economic” story. While he will point to rising asset prices, improved headline employment numbers and economic growth as reasons to be “optimistic,” with almost 80% of the country living roughly paycheck-to-paycheck it will be a hard argument to win.

    Housing

    When it comes to the economy, it is home ownership that is the reflection of economic well-being. Since 2009, the government has poured trillions of taxpayer dollars into the housing market to try and increase activity. The effect of those injections has been marginal to say the least.

    Housing-TotalActivity-Index-011116

    However, as I stated above, it is ultimately household formation that leads to higher levels of consumption and stronger economic growth. The current recovery, as shown by the chart below, was NOT driven by individuals buying homes to live in, but rather speculators buying homes, primarily for cash, and turning them into rentals. With homeownership currently near its lowest levels since the early 1980’s, it does not suggest a resurgent economy is in the making.

    Home-Ownership-011116

    Economic Prosperity

    However, it is the economic prosperity of an individual that truly determines how they will vote at the polls. A recent Fed Reserve survey of consumer finances shows the real disconnect between Wall Street and Main Street economics.

    4-Panel-Prosperity-011215

    With net worth, incomes, financial assets and business equity ownership at levels substantially below where they were when the President took office, it is not surprising that the Administration is focused on trying to justify their record.

    While the data, as reported by government agencies, has been massaged, tweaked, and recalibrated to provide more optimistic output, it is hard to fudge the economic standards by which the majority of the country lives with. Like a game of “Civilization,” the recent mid-term elections sent a pretty clear message that the “serfs” are not happy in the “kingdom.”

    Defining The State Of The Union

    While the President will do his best to put a positive spin on the current economic environment, and the success of his policies, when he gives his “State of the Union” address, it would be worth remembering whom he is actually addressing.

    It is also worth considering that much of this is likely the reason that Donald Trump is surging in Conservative polling.

    As with all things – it is the lens from which you view the world that defines what you see. For Wall Street, things could not be better. For Main Street, most everything could be better. The President has a lot of “convincing” to do if he expects to change voter’s attitudes between now and the 2016 Presidential election.

  • What Makes The World Go Around (In 2 Uncomfortably Truthful Charts)

    It’s not the economy (or fundamentals), stupid – It’s The Fed!

     

    So we had a rate-hike, and…surprise – markets puked

    Source: NorthmanTrader.com


    Still think anything other than The Fed matters?

    The S&P 500 has just caught back down almost perfectly to The Fed’s balance-sheet-implied level…

     

    With 2016 rate-hike odds collapsing, how long before rate-cut odds start to soar? Or will The Fed do the ultimate to destroy credibility – hike rates (strong growth) at the same time as QE4 (support bonds at the long-end… what a joke)?

    Bonus Chart: What did you think would happen?

    Source: @Not_Jim_Cramer

  • The China Syndrome: The Coming Global Financial Meltdown

    Submitted by Charles Hugh-Smith via OfTwoMinds blog,

    All the phantom wealth piled up in China's boost phase is now melting down, and the China Syndrome will trigger a meltdown in global phantom assets.


    The 1979 film The China Syndrome took its name from the darkly humorous notion that a nuclear reactor meltdown in the U.S. would burn straight through the Earth to China.
    (wikipedia: The China Syndrome)

    In today's world, the financial meltdown in China has burned straight through the global financial system to the U.S. financial markets. The mainstream financial media is delighted to promote the many links between the U.S. and Chinese economies when the two economies are feeding each other's expansion in a tightly coupled virtuous cycle.

    But once China's slowdown starts impacting the American economy, the mainstream financial media trundles out the usual pundit suspects to declare that the U.S. and Chinese economies are decoupled, so a meltdown in China will have little impact on America–and vice versa.

    The rationalizations for this decoupling are many–and specious. Exports are actually only 10% of China's economy, we're assured, so any slowdown in China will be modest and of little relevance to the U.S. economy.

    Various experts also assure us that China's vast stash of foreign reserves and U.S. Treasuries will enable it to quickly smooth over any spot of bother in its currency (RMB/yuan) resulting from capital flight out of China.

    None of these rationalizations change the fact that China is integral to the global financial markets, and so its slowdown and capital flight are toppling carry trade and other risk-off financial dominoes.

    China is tightly coupled to the U.S. and global economies via capital flows and supply/demand. It's important to understand that demand drives profits on the margins: of ten sales, the first nine sales just cover production and overhead costs; only the last sale generates substantial profits.

    China has provided marginal demand in everything from iron to oil to machine tools. Now that China's demand is faltering, global demand is weakening and profits are collapsing because China provided the critical marginal demand that fueled immense profits.

    This decline in marginal demand is crushing commodity-based economies and triggering recessions as profits, sales and wages all decline.

    The tidal wave of cash flooding out of China has provided marginal demand for high-priced real estate in Europe and the U.S. From London flats to Chateaux in France to single family homes in Vancouver B.C. and Southern California, trillions of yuan have escaped China and flowed into pricey real estate, pushing prices into the stratosphere.

    Now that trillions of yuan of phantom wealth are disappearing in China, those immense capital flows into Western assets are drying up. A staggering percentage of China's household wealth is tied up in illiquid and overvalued real estate. The wealth that is yet to be lost as China's markets transmit the reality that the fuel of financialization has been consumed and the resulting losses will be in the trillions of dollars, not yuan.

    The fundamental context is that China's economy has traced out an S-Curve–as have previous fast-developing nations such as Japan and South Korea.

    The S-Curve can be likened to a rocket's trajectory: first, there's an ignition phase, as the fuel of financialization and untapped productive capacity is ignited.

    The boost phase may last for several decades as credit-fueled production and consumption expand:

    In the boost phase, investors and leaders can do no wrong. The high growth rate of credit and production overwhelms all other factors, as the virtuous cycle of expanding profits and production increases wages which then support further expansion of credit and consumption which then supports more production, and so on.

    But then the fuel of financialization is consumed, and the previously fast-growing economy coasts on momentum. Depending on how much leverage, corruption and wealth has piled up in the boost phase, this phase may last a few years. This is the top of the S-Curve.

    As the economy weakens, the momentum is to the downside. Everything that worked in the boost phase–every investor and leader was a genius and could do no wrong–reverses: nothing works any more. Investors lose every bet and leaders' efforts to reverse the decline are ham-handed failures.

    This decline is inevitable in fast-expanding economies that play fast and loose with credit/debt and leverage. All the phantom wealth piled up in China's boost phase is now melting down, and the China Syndrome will trigger a meltdown in global phantom assets.

  • "Panic Is Building" BofA Admits; Asks "How Bad Could This Get?"

    Just one month ago, Bank of America’s equity strategist Savita Subramanian told Barrons to stay the course and to expect a 2,200 year end target on the S&P based on a year end 125 EPS forecast and an implied 17.6x forward multiple. Incidentally her 2015 year end S&P500 forecast was an identical 2,200.

    It appears that much has changed with the market’s “fundamentals” in the month that followed, because in a note released earlier today, the same Savita, when commenting on the “Worst start ever” to a new year by equity markets, is far less concerned with market upside as she is with analyzing the worst case scenarios.

    Here is her take on “How bad could this get?“

    The risk of a full-blown bear market remains low without a recession, which our economists continue to see as unlikely. The S&P identifies 13 bear markets since 1928, of which 10 have coincided with US recessions. The exceptions were 1961, 1966 and 1987, which (precisely because they did not occur alongside recessions) were relatively short-lived, followed by swift recoveries. In fact, the average 12-month returns from these peaks was -12%, suggesting we would only be a few percentage lower by spring. We advise against panic-selling, and still believe that we have yet to see the highs for this cycle. Our signal checklist (page 2) provides a framework for how the S&P 500 looks today relative to prior market peaks.

     

    While Savita forgets to mention that in none of the prior historical occasions was the Fed “half-pregnant” with a $4.5 trillion balance sheet at a time of tightening conditions, she does correctly note that the current environment is hardly a “supportive backdrop for profits.” Specifically she notes that the weak stock market performance comes in the context of:

    • slowing US and global economic growth (US 4Q GDP tracking 1%)
    • collapsing commodity prices (oil prices averaged -42% y/y in 4Q)
    • renewed fears about China (Shanghai Composite -38% since last June)
    • heightened geopolitical tensions (Middle East, North Korea, etc.)
    • the first transition to Fed policy tightening in a decade.

    Her conclusion is that “these factors have created a difficult backdrop for corporate profitability, and we forecast 4Q EPS growth of -1% y/y (consensus: -4%).”

    Actually, according to Factset, Q4 EPS consensus has now tumbled to -5.3% and dropping by about 1% every 2 or so weeks. More on that in a later post.

    So is BofA’s conclusion to ignore JPM’s “sell any rally” call and BTFD? Not anymore, although while BofA does admit that “panic is building” (suggesting this “sets the stage for a rally”), it also says there is one key ingredient missing: growth.

    Near-term caution is warranted, but don’t panic sell

     

    In our framework, there are three key drivers of stock returns: valuation, sentiment and growth. But in the near term, sentiment and growth matter most. Panic is building, most likely setting the stage for a rally, but the missing ingredient here is growth. With analysts cutting estimates at an accelerating rate, increasing China risks and no apparent floor for oil prices, we remain cautious on our near term outlook for stocks.

    But not cautious enough to change the year end target of 2,200?

  • In Latest Escalation, Oregon Militia Tears Down Government Fence, Demands Freedom For Ranchers

    Last week, Ammon Bundy met Harney County Sheriff David Ward on the side of Lava Bed Road near Highway 78.

    Ward was attempting to negotiate a peaceful end to the protracted standoff that began two Saturdays ago when Bundy and a handful of armed militiamen “seized” a remote bird sanctuary in Oregon.

    Bundy and his followers decided to occupy the federal building as a show of solidarity with Dwight Hammond and his son Steven who were sent back to jail last week in connection with fires they set back in 2001 and 2006.

    Bundy’s militia – who now call themselves the “Citizens for Constitutional Freedom” – say they are standing up for state’s rights in a kind of ad hoc, haphazard rekindling of the Sagebrush Rebellion.

    Following the meeting with Ward, Bundy said he felt like the group’s demands were being ignored. The Sheriff agreed. “I don’t feel like they think they’re getting enough attention yet,” Ward remarked.

    Subsequently, armed members of the Pacific Patriots Network showed up at the refuge before being asked to leave by Bundy. That visit prompted a meeting between the group and the FBI.

    Now, in the latest escalation, Bundy is tearing down a government fence and replacing it with a gate in a move the group says will give local ranchers access to federal land. Here’s the incredibly dramatic footage:

    Earlier today, Bundy insisted that the men will not be leaving the federal building until the Hammonds are set free.

    So, there you have it. The first federal property has been destroyed and Bundy has doubled down on the Hammond freedom demands. 

    Perhaps this latest publicity stunt will prompt authorities to end the 10-day siege although we imagine Bundy will soon be forced to do something a bit more dramatic if he wants to recapture the interest of an American public whose attention span is two days at best.

  • Despite TurmOIL Stocks Stage Furious Last-Hour Comeback

    The Fed's apparent new communication policy (as the rest of the world's markets and policy-makers try to force its hand)…

     

    This has never happened before (even with the panic buying)… The S&P 500 is down 6.5% year-to-date – that is officially the worst start to a year ever…

     

    The gaping truth of The Fed policy error is now being exposed in tumbling rate-hike odds… March odds down to 36.8% (from over 55% a week ago)

     

    As Bonds & Bullion dramatically outperform stocks post-FOMC…

    *  *  *

    On the day, it was ridiculous – here are futures to show the swings…

     

    And in cash – the panic-buying melt-up faded into the very last few minutes…

     

    Dow screams 200 points higher in minutes… just because…

     

    All Yen all the time… (as stocks decoupled from oil)

     

    It appears Stocks (algos) were playing catch up to the China-selling-based higher Treasury yields…

    NOTE: This could have been a disaster for Risk-Parity funds (Bonds and Stocks down hard) – beware the "bullishness" of China selling Treasuries

     

    Before the epic melt-up buying panic, The Nasdaq is down 8 days in a row – has not had one green day in 2016 – this is the longest losing streak since May 2012…

     

    Credit wasn't buying the ramp…

     

    Plenty of momentum stocks have been crushed in recent days but Gunmakers appear to be suffering as The Obama administration admits its done all it can…

     

    Financial stocks have collapsed (the worst start to a year ever for XLF) – just as we said they would – to their less exuberant credit market levels…

     

    Most worrying is the spike in the TED Spread – a topic we have been warning about for 2 months – and its implications of systemic risk concerns….

     

    As Citi and Goldman are seeing their credit risk surge the most…

     

    Treasury yields rose on the day – as China selling to support Yuan trumped any safety bid from carry unwinds…

     

    FX markets were very active overnight in Asia and even the majors were swinging violkently as The USD Index rose 0.4% on the day… CAD plunged to new lows as crude tumbled…

     

    With Offshore Yuan surging by the most on record…

     

    With the CNH-CNY almost inverted…

     

     

    Commodites were all lower as Yuan and USD rallied (but crude and copper were worst)

     

    With WTI Crude collapsing to a $30 handle – its lowest in 12 years following weak China data and MS report…

     

    And Copper crushed back under $2 as hopes for further China stimulus are rebuked…

     

    Charts: Bloomberg

    Bonus Chart: Oddly causative correlation of the day… (why oil dumped, and Yuan pumped)…

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Jan 11

Today’s News 11th January 2016

  • Silver Flash in the Pan, Report 10 Jan, 2016

    by Keith Weiner

     

    No doubt, many people were excited on Thursday to see a spike in the silver price. The big news almost seemed like it would be a spike in the silver price. We were not quite so exuberant, tweeting (follow us on Twitter @Monetary_Metals):

    “What happened to silver supply and demand fundamentals this morning?!”

    We expected it to be a teaser for today’s Report. However, the silver market took back the entire price move, and more, in about 13 hours. Here is a close-up, showing Thursday morning (Arizona time) through Friday around noon.

                  The Silver Price Spike
    silver price spike

    On a light note, last week we encouraged readers not to necessarily expect a price move just because we make or reiterate a price call. Our headline even mentioned Murphy’s Law. So it is of course that the price of gold jumped +$43 this week.

    The price of silver gained only 9 cents, so the gold-silver ratio moved up sharply to over 79. Another call we have been making is for a rising ratio.

    So what did happen in silver fundamentals on Thursday? Or indeed the whole week for both metals? Read on for the only true look at the supply and demand of gold and silver…

    But first, here’s the graph of the metals’ prices.

                  The Prices of Gold and Silver
    gold

    We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.

    One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

    Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.

    With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

    Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio jumped up this week. 

    The Ratio of the Gold Price to the Silver Price
    ratio

    For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

    Here is the gold graph.

                  The Gold Basis and Cobasis and the Dollar Price
    gold

    The tracking between the red and green lines is uncanny! Red is our scarcity indicator. Green is the price of the dollar in gold (which is the inverse of the price of gold in dollars). So what does this mean?

    It means the more that the dollar goes down (i.e. the price of gold goes up), the less scarce gold becomes in the market. Higher prices are discouraging buyers and encouraging sellers. And by buyers and sellers here, we mean of metal.

    This is normal, though not especially a sign of an imminent skyrocketing of the gold price.

    Our calculated fundamental price of gold is up about ten bucks this week. In other words, it’s stable even in the face of a significant price move. Also normal (assuming it’s a reasonable indicator). The fundamental is over $150 above the market.

    Now let’s look at silver.

    The Silver Basis and Cobasis and the Dollar Price
    silver

    It should be immediately apparent that conditions in the silver are different. Despite a strong dollar (i.e. low price of silver, measured in dollars) silver became a bit less scarce.

    We don’t show a close-up of the silver basis and cobasis around the move on Thu-Fri. But we can just say that the price move was accompanied by the opposite cobasis move. It was speculators trying to front-run the market, and ending up only front-running themselves.

    The fundamental price for silver fell again this week, though by less than a dime. We consider silver to be within the margin of error from its fair price at the moment.

    This means the fundamental price of the gold-silver ratio went up again. We will look at this in more depth, in our Outlook 2016. Stay tuned!

     

    © 2016 Monetary Metals

  • "Neoconned"

    Authored by Paul Craig Roberts,

    The Proof Is In: The US Government Is The Most Complete Criminal Organization In Human History

    Unique among the countries on earth, the US government insists that its laws and dictates take precedence over the sovereignty of nations. Washington asserts the power of US courts over foreign nationals and claims extra-territorial jurisdiction of US courts over foreign activities of which Washington or American interest groups disapprove. Perhaps the worst results of Washington’s disregard for the sovereignty of countries is the power Washington has exercised over foreign nationals solely on the basis of terrorism charges devoid of any evidence.

    Consider a few examples…

    Washington first forced the Swiss government to violate its own banking laws. Then Washington forced Switzerland to repeal its bank secrecy laws. Allegedly, Switzerland is a democracy, but the country’s laws are determined in Washington by people not elected by the Swiss to represent them.

     

    Consider the “soccer scandal” that Washington concocted, apparently for the purpose of embarrassing Russia. The soccer organization’s home is Switzerland, but this did not stop Washington from sending FBI agents into Switzerland to arrest Swiss citizens. Try to imagine Switzerland sending Swiss federal agents into the US to arrest Americans.

     

    Consider the $9 billion fine that Washington imposed on a French bank for failure to fully comply with Washington’s sanctions against Iran. This assertion of Washington’s control over a foreign financial institution is even more audaciously illegal in view of the fact that the sanctions Washington imposed on Iran and requires other sovereign countries to obey are themselves strictly illegal. Indeed, in this case we have a case of triple illegality as the sanctions were imposed on the basis of concocted and fabricated charges that were lies.

     

    Or consider that Washington asserted its authority over the contract between a French shipbuilder and the Russian government and forced the French company to violate a contract at the expense of billions of dollars to the French company and a large number of jobs to the French economy. This was a part of Washington teaching the Russians a lesson for not following Washington’s orders in Crimea.

    Try to imagine a world in which every country asserted the extra-territoriality of its law. The planet would be in permanent chaos with world GDP expended in legal and military battles.

    Neoconned Washington claims that as History chose America to exercise its hegemony over the world, no other law is relevant. Only Washington’s will counts. Law itself is not even needed as Washington often substitutes orders for laws as when Richard Armitage, Deputy Secretary of State (an unelected position) told the President of Pakistan to do as he is told or “we will bomb you into the stone age.” 

    Try to imagine the Presidents of Russia or China giving such an order to a sovereign nation.

    In fact, Washington did bomb large areas of Pakistan, murdering thousands of women, children, and village elders. Washington’s justification was the assertion of the extra-territoriality of US military actions in other countries with which Washington is not at war.

    As horrendous as all of this is, the worst of Washington’s crimes against other peoples is when Washington kidnaps citizens of other countries and renditions them to Guantanamo in Cuba or to secret dungeons in criminal states such as Egypt and Poland to be held and tortured in violation both of US law and international law. These egregious crimes prove beyond any doubt that the US government is the worst criminal enterprise that has ever existed on Earth.

    When the criminal neoconservative George W. Bush regime launched its illegal invasion of Afghanistan, the criminal regime in Washington desperately needed “terrorists” in order to provide a justification for an illegal invasion that constitutes a war crime under international law. However, there were not any terrorists. So Washington dropped leaflets over warlord territories offering thousands in dollars in bounty money for “terrorists.” The warlords responded to the opportunity and captured every unprotected person and sold them to the Americans for the bounty.

    The only evidence that the “terrorists” were terrorists is that the innocent people were sold to the Americans by warlords as “terrorists.”

    Yesterday Fayez Mohammed Ahmed Al-Kandari was released after 14 years of torture by “freedom and democracy America.” The United States military officer, Col. Barry Wingard, who represented Al-Kandari said that “there simply is no evidence other than he is a Muslim in Afghanistan at the wrong time, other than double and triple hearsay statements, something I have never seen as justification for incarceration.” Much less, said Col. Wingard, was there cause for a litany of multi-year torture in an effort to force a confession to the alleged offenses.

    Do not expect the Western prostitute media to report these facts to you. To find out, you must go to RT or to Stephen Lendman.

    The presstitute Western media are part of Washington’s criminal operation.

  • Here Comes The Yuantervention

    Somebody had to do something…

     

    Offshore Yuan ripped 14 handles stronger after early weakness on PBOC’s “stable” fix…

     

    And Chinese stocks lifted elegantly back to unchanged to prove its not fundamentals…

     

    Just “psychological panic.”

    Panic at paying 64x valuations perhaps?

     

  • Noble Group's "Margin Call" Part II: The Enron Moment

    “Our balance sheet – the strongest in recent history – represents a significant advantage as we continue to identify high value growth opportunities across the products and geographies we operate in. Maintaining our investment grade rating with the international rating agencies is a vital part of this strategy.”

          – Noble Group 2014 Annual Report, p. 27

          * * * * *

    “Moody’s Investors Service has downgraded Noble Group Limited’s senior unsecured bond ratings to Ba1 from Baa3 and the provisional rating on its senior unsecured MTN program to (P)Ba1 from (P)Baa3.”

          – Moody’s, December 29, 2015

          * * * * *

    “Noble Group Downgraded To ‘BB+’ On Weakened Liquidity; Notes Lowered To ‘BB’; Ratings Still On CreditWatch Negative”

         – Standard & Poors, January 7, 2016

     

    Noble’s “Margin Call” Part II – The Enron Moment

    By Simon Jacques

    The story of Noble is worth writing a book, mostly of how not to run your business. 

    If they are in this mess, it is a in large part because the management was comprised predominantly of traders who were predisposed to defending their books.

    Noble has been desperately trying to revive their image by hiring former Goldman, JP. Morgan, Trafigura executives etc. By doing so they were looking for a form of credibility collateral.

    It didn’t work well for the new employees as they rapidly found out that they inherited from the liabiliaties of one decade of Noble’s poor decision making of the hard-core asset guys like William J. Randall and ex-Goldman Sach banker Yusuf Alireza.

    In the part II of this analysis we will review the gap between the liquidity headroom and the debt maturity profile of the trader and explain how Noble Group will have its Enron moment.

    The fatal mistake that Noble Group did was to deliberately mislead the market about their financial performance using accounting devices.

    During last November, Noble Group’s chief financial officer Robert van der Zalm has stepped down from his position after taking a leave of absence for “health reasons”.

    Two months later,  Moody’s downgraded Noble Group.

    In a very awaited decision, Standard & Poor’s has finally lowered Noble Group’s to junk, placing Asia’s largest commodity trader on watch for further possible as the rating agency remains skeptical about the liquidity headroom of the trader.

    According to Noble Group, on September 30th 2015, the company had  $15.5bn banking facilities and $1.669B in RMI (ready marketable inventories).

    • $11.1bn of these $15.5bn banking facilities is uncommitted and are contingent on ability of maintaining investment-grade rating in the future.
    • Noble claims to have $900M of cash and 1.669B$ in RMI (ready and marketable inventories).
    • Their 1.669B$ in RMI have claims on related- party notes that are under collateralized by their commodity merchant activity and therefore should be excluded from their liquidity headroom.
    • Noble Group currently uses $3.4B of borrowing facilities that are uncommitted.

    Noble Group is left with only 1B$ of unutilized committed borrowing facilities and $900M of cash ready available to meet $2.966B of debt scheduled in the next 12 months.

    Source: Noble Group MD&A Q-3 2015

    Moreover, Noble Group counts on the completion of the Noble Agri stake divesture to reap $750M, a transaction which may not be completed by February 2016.

    Adding the 1B$ of unused uncommitted borrowing facilities plus the $750M of Noble Agri and the $900M of cash that Noble claims to have, Noble is still short by $316M.

    With the S&P downgrade, the total collateral margin call on Noble Group could be as much as $3.4B, banking facilities that are uncommitted and contingent on the ability of maintaining their investment-grade rating.

    Noble will have its Enron Moment.

    Enron’s bankruptcy occurred on November 2001 and was triggered by S&P’s downgrade of its debt below investment grade, activating a call provision in some loan indentures with principal amounts totaling $4 billion, cash and liquidity that suddenly Enron didn’t have.

    After the quick sale of Noble Agri, Noble’s core business remains its coal & energy – two very depressed commodities for the foreseeable future, and with no cash-flows to pay its debt and a sudden tightening of the credit, the trader is a cancer patient on the forward curve.

  • Germany Erupts Into Chaos As Protesters Declare "Rapefugees Not Welcome"

    Anger over a wave of sexual assaults that occurred across the EU on New Year’s Eve reached a boiling point in Germany on Saturday when some 1,700 people attended a rally organized by the anti-Muslim PEGIDA movement.

    PEGIDA, which nearly fizzled early last year, gained in popularity as hundreds of thousands of Mid-East asylum seekers responded to Angela Merkel’s open-door refugee policy by flooding across Germany’s borders. Initially, many Germans met the the migrants with hugs and gifts, but as the months wore on, sentiment gradually soured and attendance at PEGIDA rallies once again spiked with as many as 20,000 people showing up for an October demonstration.

    Seeking to capitalize off the assaults that were allegedly perpetrated by groups of marauding Arab refugees in Cologne, PEGIDA took to the streets this weekend and predictably, clashes with riot police ensued.

    “Demonstrators, some of whom bore tattoos with far-right symbols such as a skull in a German soldier’s helmet, had chanted ‘Merkel must go’ and ‘this is the march of the national resistance’”, Reuters writes. Another banner read: “Rapefugees not welcome.”

    Ultimately, police rolled out the water cannons to disperse the crowd, which authorities say was at least partially comprised of “known hooligans” – whatever that means.

    Some protesters hurled firecrackers and bottles at officers and in a testament to just how divided the country has become, dozens of counter demonstrators massed to protest the PEGIDA protest. Here’s a short clip which depicts the chaos:

    The rallies came as Merkel signaled the German government may soon move to deport offenders. “The right to asylum can be lost if someone is convicted, on probation or jailed,” Merkel said following a meeting of the CDU’s top brass. “Merkel’s remarks on Saturday were in stark contrast to her earlier optimism about the influx to Germany, which has taken in far more migrants than any other European country,” Reuters remarked.

    As we wrote on Saturday, “how TIME’s person of the year responds may ultimately determine how the world remembers one of the most indelible and revered politicians in European history.”

    Indeed, some among the crowd openly called for the Iron Chancellor’s head (figuratively speaking). “Merkel has become a danger to our country. Merkel must go,” a speaker told the crowd which, as Reuters goes on to note, “loudly echoed the call, expressing their anger at Germany’s 1.1-million-strong migrant influx last year.” 

    “These women who fell victim will have to live with it for a long time. I feel like my freedom has been robbed,” one mother of four said.

    The anger was just as palpable on the opposite side as many Germans see PEGIDA’s growing support as a dangerous blast from the country’s troubled past. Some 1,300 leftist demonstrators from the counter-protest shouted “Nazis raus!” (Nazis out!), while holding signs that read “There is nothing right about Nazi propaganda,” and “Fascism is not an opinion, it is a crime”.

    “We are there to tell them to shut up. It is unacceptable for PEGIDA to exploit this horrible sexual violence perpetrated here on New Year’s day and to spread their racist nonsense,” one counter-protester said.

    Meanwhile, in an eerie twist of fate, the seven decade ban on publication of Mein Kampf expired this month in Germany. Although anyone is now techinically free to publish Hitler’s manifesto, the definitive edition will be a 2,000 page annotated volume published by the Institute for Contemporary History in Munich. 

    Ronald Lauder, president of the World Jewish Congress, says it “‘would be best to leave ‘Mein Kampf’ where it belongs: the poison cabinet of history.'” “‘Unlike other works that truly deserve to be republished as annotated editions, ‘Mein Kampf’ does not,'” he adds. ICH director Andreas Wirsching said the following of the new edition in an interview with Deutsche Welle:

    Our edition is particularly aimed at historical researchers. It can’t be denied that Hitler’s “Mein Kampf” is certainly an important historical document. The book is a source for information on his life, his thinking and most importantly, the history of National Socialism as a whole, and therefore it’s meant for research purposes.

     

    But I’m certain that with this edition’s styling, we will reach an even wider audience due to the great interest in this topic. The commentaries are in part brief academic annotations, and we have added a detailed index to easily access the content. Public interest in this topic is so vast, and so we hope that maybe a few non-experts will also take a look at our edition.

    While we can’t say for sure whether the buyers are “non-experts,” some people are indeed “taking a look.” As The Daily Mail reports, the new edition “was an instant sellout when it hit bookstores in Germany for the first time since the Second World War.” Like a unicorn tech IPO, the launch was oversubscribed as there were nearly four times as many orders as available copies. “More than 15,000 advance orders were placed, despite the initial print of 4,000 copies,” The Mail continues, adding that “one copy [was] even put up for resale on Amazon.de for €9,999.99.

    And so, it would appear that PEGIDA leader Lutz Bachmann was indeed correct last year when he posted the following picture of himself on Facebook with the caption “He’s back.”

  • Oregon Standoff: Isolated Event Or Sign Of Things To Come?

    Submitted by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

    The nation's attention turned to Oregon this week when a group calling itself Citizens for Constitutional Freedom seized control of part of a federal wildlife refuge. The citizens were protesting the harsh sentences given to members of the Hammond ranching family. The Hammonds were accused of allowing fires set on their property to spread onto federal land.

    The Hammonds were prosecuted under a federal terrorism statute. This may seem odd, but many prosecutors are stretching the definition of terrorism in order to, as was the case here, apply the mandatory minimum sentences or otherwise violate defendants’ constitutional rights. The first judge to hear the case refused to grant the government’s sentencing request, saying his conscience was shocked by the thought of applying the mandatory minimums to the Hammonds. Fortunately for the government, it was able to appeal the decision to judges whose consciences were not shocked by draconian sentences.

    Sadly, but not surprisingly, some progressives who normally support civil liberties have called for the government to use deadly force to end the occupation at the refuge. These progressives are the mirror image of conservatives who (properly) attack gun control and the PATRIOT Act as tyrannical, yet support the use of police-state tactics against unpopular groups such as Muslims.

    Even some libertarians have joined the attacks on the ranchers. These libertarians say ranchers like the Hammonds are “corporate welfare queens” because they graze their cattle on federal lands. However, since the federal government is the largest landholder in many western states, the ranchers may not have other viable alternatives. As the Oregon standoff shows, ranchers hardly have the same type of cozy relationship with the government that is enjoyed by true corporate welfare queens like military contractors and big banks. Many ranchers actually want control of federally-held land returned to the states or sold to private owners.

    Situations like the one in Oregon could become commonplace as the continued failure of Keynesian economics and militaristic foreign policy is used to justify expanding government power. These new power grabs will increase the threats to our personal and economic security. The resulting chaos will cause many more Americans to resist government policies, with some even turning to violence, while the burden of government regulations and taxes will lead to a growing black market. The government will respond by becoming even more authoritarian, which will lead to further unrest.

    Fortunately, we still have time to reverse course. The Internet makes it easier than ever to spark the ideas of liberty and grow the liberty movement. Spreading the truth and making sure we can care for ourselves and our families in the event of an economic collapse must be our priorities.

    We must help more progressives understand that allowing the government to run the economy not only leads to authoritarianism, it impoverishes the lower classes and enriches the elites. We must also show conservatives that militarism abroad inevitably leads to tyranny at home. We also need to continue exposing how the Federal Reserve feeds the welfare-warfare state while increasing economic instability and income inequality. This week’s Senate vote on Audit the Fed is important to our efforts to help the American people learn the full truth about our monetary system.

    One thing my years in Washington taught me is that most politicians are followers, not leaders. Therefore we should not waste time and resources trying to educate politicians. Politicians will not support individual liberty and limited government unless and until they are forced to do so by the people.

  • Fed's Williams: "We Got It Wrong"

    In late 2014 and early 2015, we tried to warn anyone who cared to listen time and time and time again that crashing crude prices are unambiguously bad for the economy and the market, contrary to what every Keynesian hack, tenured economist, Larry Kudlow and, naturally, central banker repeated – like a broken – record day after day: that the glorious benefits of the “gas savings tax cut” would unveil themselves any minute now, and unleash a new golden ago economic prosperity and push the US economy into 3%+ growth.

    Indeed, it was less than a year ago, on January 30 2015, when St. Louis Fed president Jim Bullard told Bloomberg TV that the oil price drop is unambiguously positive for the US.

    It wasn’t, and the predicted spending surge never happened. 

    However, while that outcome was not surprising at all, what we were shocked by is that on Friday, following a speech to the California Bankers Association in Santa Barbara, during the subsequent Q&A, San Fran Fed president John Williams actually admitted the truth.

    The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy. It turned out the world had changed; the US has a lot of jobs connected to the oil industry.

    And there you have it: these are the people micromanaging not only the S&P500 but the US, and thus, the global economy – by implication they have to be the smartest people not only in the room, but in the world. As it turns out, they are about as clueless as it gets because the single biggest alleged positive driver of the US economy, as defined by the Fed, ended up being the single biggest drag to the economy, as a “doom and gloomish conspiracy blog” repeatedly said, and as the Fed subsequently admitted.

    At this point we would have been the first to give Williams, and the Fed, props for admitting what in retrospect amounts to an epic mistake, and perhaps cheer a Fed which has changed its mind as the facts changed… and then we listened a little further into the interview only to find that not only has the Fed not learned anything at all, but is now openly lying to justify its mistake. To wit:

    I would argue that we are seeing [the benefits of lower oil]. We are seeing them where we would expect to see them: consumer spending has been growing faster than you would otherwise expect.

    Actually John, no, you are not seeing consumer spending growing faster at all; you are seeing consumer spending collapse as a cursory 5 second check at your very own St. Louis Fed chart depository will reveal:

    But the absolute cherry on top proving once and for all just how clueless the Fed remains despite its alleged epiphany, was Wiliams “conclusion” that consumers will finally change their behavior because having expected the gas drop to be temporary, now that gas prices have been low for “over a year” when responding to surveys, US consumers now expect oil to remain here, and as a result will splurge. So what Williams is saying is… short every energy company and prepare for mass defaults because oil will not rebound contrary to what the equity market is discounting.

    We can’t wait for Williams to explain in January 2017 how he was wrong – again – that a tsunami of energy defaults would be “unambiguously good” for the US economy.

    Full audio recording below.

  • The EU Bail-In Directive: Dark Clouds Are Gathering

    Submitted by Pater Tenebrarum via Acting-Man.com,

    Portugal’s Rickety Banking System

    After the unseemly bankruptcy of the Espirito Santo Group and the associated bank, then Portugal’s second biggest (likely a result of not praying enough, see: “Big Portuguese Bank Gets Into Trouble” and “Fears Over Banco Espirito Santo Escalate” for the gory details), Portugal’s state-run deposit insurance fund basically ran out of money.

    It turns out that Europe’s new Bank Recovery and Resolution Directive (BRRD for short) came just in time for Portugal. At the end of 2015, another Portuguese bank bit the dust, the country’s seventh largest lender by assets, Banif. Portugal’s government once again decided to bail the bank out, but with strings attached. Subordinated bondholders and shareholders were essentially wiped out, which is as it should be.

     

    Banif, weekly

    Banif SA, weekly. Although this is hard to see on this linear chart, the stock rose by 40% today, to €0.002. Shareholders are allegedly planning to throw a wild party in Lisbon over the weekend (we were unable to confirm this rumor) – click to enlarge.

    Senior bondholders and depositors were spared however, with Portugal’s overburdened taxpayers once again footing the bill. According to the FT:

    Portugal has agreed a €2.2bn state rescue for Banco International do Funchal (Banif), splitting the Madeira-based lender into “good” and “bad” banks and selling its healthy assets to Spain’s Santander for €150m in the country’s second bank bailout in less than 18 months.

     

    António Costa, Portugal’s new socialist prime minister, said the bailout would involve “a high cost for taxpayers” but had the advantage of being “a definitive solution”. Branches would open normally on Monday, he said. The rescue, which “bails in” shareholders and subordinated creditors, follows the €4.9bn bailout in August last year of Banco Espírito Santo, once Portugal’s largest listed bank, whose healthy assets, split off into Novo Banco, remain unsold.

     

    In a statement late on Sunday night, the Bank of Portugal said the rescue of Banif would involve “total public support” estimated at €2.25bn to cover “future contingencies”, of which €1.76bn would come directly from the state and €489m from a bank resolution fund, to which all banks contribute. The bailout protects depositors and senior creditors and ensures that Banif’s operations, transferred to Santander Totta, the Spanish group’s Portuguese subsidiary, will continue to “function normally”, the central bank said.

     

    Shareholders and subordinated creditors would be left in Banif, retaining “a very restricted group of assets” that are to be liquidated, the Bank of Portugal said. “Problematic assets” would be transferred to a special asset management vehicle. The rescue partly mirrors the 2014 bailout of BES, which was split into “good” and “bad” banks after its profits were hit by exposure to the heavily indebted Espírito Santo family business empire.

     

    Banif is Portugal’s seventh largest lender with total assets valued at €12.8bn in June, equivalent to about 7 per cent of Portugal’s gross domestic product, and deposits totalling €6.3bn. The bank is the dominant lender in the Portuguese islands of Madeira and the Azores, where it accounts for more than 30 per cent of total deposits.”

    (emphasis added)

    Since no deposits were wiped out as a result of the bail-out, Portugal’s money supply won’t be affected. However, Banif’s downfall is a reminder that Portugal’s banking system remains quite rickety. We dimly remember someone saying that the bail-out of BES would be the last such problem. Evidently it wasn’t.

    Still, there is nothing overly unusual here – the socialist prime minister decided that it would be better to spare senior bondholders and depositors and let taxpayers eat the losses, but at least it was decided to bail someone in. However, what happened next was a lot less benign.

    Governments Trying to Subvert the Law

    The first euro area government that has tried to subvert the law governing the relations between creditors and borrowers was that of Austria. It was recently ignominiously stopped from doing so by the country’s Constitutional Court, which declared the so-called “Hypo Alpe Adria Special Law” unconstitutional.

    What the government tried to do in this case was to stiff certain classes of creditors in spite of the fact that their bonds had been guaranteed by the now essentially insolvent province of Carinthia. As one can easily imagine, this decision didn’t go down well with the affected creditors and they sued the government. Austria’s Constitutional Court rightly concluded that the government had attempted to subvert essential legal principles and repealed the law in its entirety.

    Specifically, the court cited in its ruling that reversing the guarantees to bondholders was in conflict with the constitution, that the law represented an unacceptable breach of property rights and that it treated creditors holding guarantees unfairly by dividing them into different classes, in spite of the fact that they should be treated pari passu.

    As deeply embarrassing as this ruling was for Austria’s government, the attendant sighs of relief of bondholders could be heard across Europe. By desperately trying to avert a bankruptcy of the province of Carinthia (an event for which no legal provisions exist!), the government had created a huge question mark over government debt guarantees all over Europe. If one government could get away with suspending them by legislative fiat, couldn’t all of them expected to do so if push came to shove?

     

    the-headquarters-of-nationalised-hypo-alpe-adria-is-pictured-in-klagenfurt

    The fancy HQ of the former Hypo Alpe Adria Group (now known as “Heta Asset Resolution”, which isn’t merely a “bad bank” but easily the “worst bank” ever) in Klagenfurt, Carinthia.

    As a first test of the BRRD, the HAA special law turned out to be a costly failure. The cost cannot simply be measured in terms of the additional amounts the country’s taxpayers are now forced to fork over – the real cost is hidden, and comes in the form of lost trust. As the FT noted at the time:

    “Germany’s VOeB association of public banks said that the law would have led to incalculable costs by undermining investor confidence in Austria. The country now faced “the considerable task of winning back the lost trust of national and international investors — which could be regarded as a Herculean task”, said Liane Buchholz, the VOeB’s managing director.”

    Giving it Another Try in Portugal

    But we know governments. We have already seen the lengths to which assorted Greek governments and the government of Argentina have gone in recent years to stiff their creditors. More recently, Ukraine got in on the act as well. So given the fact that the banking system, governments and central banks are engaged in a complex three-card Monte designed to fund welfare/warfare statism by issuing mountains of unsound and unpayable debt that “backs” an equally fast growing mountain of irredeemable “money”, we knew it would only be a question of time before someone tried to pull the same stunt again.

    Who better suited for this task than Portugal’s new socialist government? Remember the bailout of BES and the creation of a “good bank” and a “bad bank”? Take a gander at the following chart from Bloomberg:

     

    Good bank, bad bank

    Five senior BES bonds that had hitherto been assigned to the “good bank” are reassigned overnight, without warning, to the “bad bank”. Bondholders lost 80% of their money between the evening of December 29 and the morning of December 30 – click to enlarge.

    As Bloomberg notes, this is “setting a dangerous precedent” – indeed, it is not much different from the precedent almost set by Austria’s government. Here is the problem in a nutshell: the government, or rather the ECB, suddenly “discovered” – and this shouldn’t really surprise anyone – that the financial hole that has been torn into BES is actually gaping a lot wider than had been hitherto assumed. According to Bloomberg, this caused Portugal’s government to opt for instant expropriation – a new year’s surprise present for BES bondholders, so to speak:

    “If you owned any of those five bonds on Tuesday, you were owed money by Novo Banco, the good bank. On Wednesday, you were told that your bonds had been transferred to BES, the bad bank. The Portuguese central bank selected five of Novo Banco’s 52 senior bonds, worth about 1.95 billion euros ($2.1 billion), and reassigned them — thus backfilling a 1.4 billion-euro hole in the “good” bank’s balance sheet that had been revealed in November by the European Central Bank’s stress tests of the institution.”

    The core problem with this decision should be glaringly obvious: once again, the government is arbitrarily picking winners and losers. Senior bondholders are no longer treated pari passu – certain types of bonds suddenly seem to confer different property rights than others – in spite of the fact that all these bonds are part of the class of “senior bank bonds”.

    There is in principle absolutely nothing wrong with bailing in bondholders – in fact, this is precisely the way to go. However, the essential principle that creditors holding instruments of the same seniority have to be treated equally is something the bond markets of the whole world are relying on. Without this principle, what point is there in creating different levels of seniority, which are attended by different levels of risk and hence involve different costs and rewards?

    One wonders of course on what grounds precisely these five bond issues were selected and not any of the others. That’s simple, actually – as Bloomberg explains:

    “It seems likely that Portugal’s choice of bonds wasn’t completely arbitrary; the documentation for the selected securities says they are governed by Portuguese law, rather than U.K. or U.S. law.” 

    In short, the government already knows it would lose its case in London and New York courts – because, naturally, the bondholders are preparing to sue. So it has picked bonds the covenants of which are governed by Portuguese law, in the hope that the courts in Lisbon will be sympathetic to acts of selective expropriation by the Portuguese government.

    As Bloomberg remarks, the consequences of this decision are nigh incalculable – and bank bondholders across Europe are likely to once again hold their collective breath:

    “Portugal isn’t the only country refurbishing its banking industry. Germany’s savings banks will need to bolster their capital in the coming months under the new EU rules, and the fourfold increase in bad loans held by Italy’s banks since 2008 means the central bank there has some housecleaning of its own to do. Consolidation — in the form of forced intermingling of stronger and weaker banks — is likely in both countries. Investors who own debt issued by German or Italian banks will no doubt reflect carefully on what just happened in Portugal.”  

    (emphasis added)

    If we were holding any of these bonds, we’d shoot first and ask questions later. Surely if ever there was a time to get out of Dodge, this is it.

    Conclusion

    In principle, the BRRD, or “bail-in directive” as it is also known, is quite a good idea. The fact that lending money to fractionally reserved banks or even merely depositing it with them, involves risks needed to be firmly reestablished. One simply cannot expect that banks and their creditors will be bailed out by taxpayers at every opportunity. Besides, the admission that there are risks in banking that have hitherto been glossed over or have even been lied about was long overdue. However, Europe’s governments are now likely to find out that the current monetary system with its fractionally reserved banks is actually incompatible with this admission, so to speak.

    By arbitrarily meting out unequal treatment to similar classes of creditors, they are unwittingly hastening this process of recognition. In that sense, we actually welcome the Portuguese government’s attempt to stiff certain BES bondholders (although we still regard the case as such as plainly illegal and contemptible). It will now become even more difficult to keep assorted banking zombies on artificial life support. A lot of unsound credit is likely to be liquidated faster than had been expected to date. Artificial credit expansion is going to become even harder to implement. Unfortunately none of this is going to keep governments from trying to confiscate as much wealth as possible in a doomed attempt to keep the unworkable system of “third way” socialist regulatory statism going.

    In this context, we want to leave you with a few quotes by Ludwig von Mises, which go to the heart of matter and some of which we are convinced will once again turn out to be prophetic – especially the ones that proclaim that the so-called “mixed economy” is just as certain to fail as the communist economies were. (from: Bureaucracy, The Anti-Capitalistic Mentality, Human Action, Planned Chaos and Planning for Freedom).

     

    Mises

    “Sorry boys and girls, you will have to choose. You can either have capitalism, freedom, prosperity and personal responsibility,or you can have socialism, tyranny, poverty and ‘security’. You cannot have both.”

    “The Welfare State is merely a method for transforming the market economy step by step into socialism.”

    “An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.”

    “The issue is always the same: the government or the market. There is no third solution.”

    “Capitalism and socialism are two distinct patterns of social organization. Private control of the means of production and public control are contradictory notions and not merely contrary notions. There is no such thing as a mixed economy, a system that would stand midway between capitalism and socialism.”

    “Contrary to a popular fallacy there is no middle way, no third system possible as a pattern of a permanent social order. The citizens must choose between capitalism and socialism.”

    (emphasis added)

    Amen.

  • Shared Sacrifice? 1 In 3 Americans Slash Staples Spending To 'Afford' Obamacare

    Health insurers are in panic mode as the Obama administration, ever eager maximize coverage optics for Obamacare, has, as The NY Times reports, allowed large numbers of people to sign up for insurance after the deadlines in the last two years, destabilizing insurance markets and driving up premiums. This surge in costs, from unintended consequences, has left 1 in 5 Americans with health insurance is having problems paying medical bills; and, as a new poll finds, more than one in three Americans, or 35 percent, said they were unable to pay for basic necessities such as food, heat, and housing because of medical bill problems…

    Among people with health insurance, one in five (20%) working-age Americans report having problems paying medical bills in the past year that often cause serious financial challenges and changes in employment and lifestyle, finds a comprehensive new Kaiser Family Foundation/New York Times survey. As expected, the situation is even worse among people who are uninsured: half (53%) face problems with medical bills, bringing the overall total to 26 percent.

     

    While insurance can protect people from problem medical bills, the survey suggests that those with employer coverage or other insurance suffer similar consequences as the uninsured once such problems occur. Among those facing problems with medical bills, almost identical shares of the insured (44%) and uninsured (45%) say the bills had a major impact on their families.

     

    People with insurance who face problem medical bills also report a wide range of consequences and sacrifices during the past year as a result, including delaying vacations or major household purchases (77%), spending less on food, clothing and basic household items (75%), using up most or all their savings (63%), taking an extra job or working more hours (42%), increasing their credit card debt (38%), borrowing money from family or friends (37%), changing their living situation (14%), and seeking the aid of a charity (11%). These shares generally are as large as or larger than the shares among uninsured people with problem medical bills.

     

     

    Overall, 62 percent of those who had medical bill problems say the bills were incurred by someone who had health coverage at the time (most often through an employer). Of those who were insured when the bills were incurred, three-quarters  (75%) say that the amount they had to pay for their insurance copays, deductibles, or coinsurance was more than they could afford.

    And it is not about to get better any time soon, as The NY Times reports, it appears the liberal-leaning establishment will never learn the real "unintended consequences" of tinkering central-planning…

    The administration has created more than 30 “special enrollment” categories and sent emails to millions of Americans last year urging them to see if they might be able to sign up after the annual open enrollment deadline. But, insurers and state officials said, the federal government did little to verify whether late arrivals were eligible.

     

    That has allowed people to wait until they become ill or need medical services to sign up, driving up costs broadly, insurers have told federal health officials.

     

    “Individuals enrolled through special enrollment periods are utilizing up to 55 percent more services than their open enrollment counterparts” who sign up in the regular period, the Blue Cross and Blue Shield Association, whose local member companies operate in every state, told the administration.

    Of course, Enroll America, a nonprofit group with close ties to the Obama administration, said the government “should not tighten eligibility or verification standards in ways that could place an undue burden on consumers.”

    Because – "it's fair…" – though The Iron Lady had it right…

  • MacroStrategy Explains Why Most Stocks Have Already "Crossed The Rubicon"

    As we have reported on numerous prior occasions, the biggest marginal buyer of stocks in both 2014 and 2015 (and forecast to remain in 2016), are corporations themselves, using debt-funded buybacks to push their stocks to record highs, allowing the smart money to sell in record amounts.

     

    But what happens when companies are so levered that they can’t possibly afford to issue any more debt, virtually all of which has been used to repurchase stocks, as we have shown before…

    … especially in a time when yields on Investment Grade bonds are rising courtesy of the first Fed rate hike in nearly a decade, and when cash flows are sliding faster with every passing year?

    For another version of the answer we have provided many times before, we go to MacroStrategy’s Julien Garran, who informs us that as credit & returns deteriorate, an increasing number of stocks are crossing the “Rubicon.” By Rubicon he means the “cut-off point where corporates can no longer justify gearing up to do buybacks. In 2013, 60% of my sample could justify buybacks. Since then, US corporates have raised debt by US$1.1trn and bought back US$1.1trn of stock. But now, with debt levels & costs up, and returns down, only 35% make the grade.” That, in his view is also the key to the narrowing breadth in the market. His conclusion: breadth is now set to narrow to the point where the whole market turns down in 2016.

    Some more details on Crossing the Rubicon:

    Why does breadth decline? In my view, corporates’ ability to gear-up and buy-back stock is critical to the story.

     

    From the start of 2014, US corporates covered their entire capex budgets from internal funds. They then raised US$1.1trn of debt to do US$1.1trn of corporate buybacks (Data from the Fed’s Z1 report & Factset).

     

    The combination of rising debt, deteriorating returns and a rising cost of debt means that, increasingly, corporate’s debt levels  threaten their credit ratings, or their marginal cost of debt deteriorates relative to their cashflow yields. Both threaten their ability to gear up to buy back stock. And both threaten the value of their equity.

     

    As more companies cross the Rubicon out of the buyback zone, the bid for their equity shrivels. The key to trading the topping process is to sell the sectors which will see their margin cost of debt rise above the free cashflow from new business. Clearly the extractive industries, the utilities, and several industrial and retail companies have already crossed the line. I think that the leveraged buyout firms in the US are likely the next to go, as their cost of funding continues to blow out.

     

    To show the process, I have taken 50 S&P companies from 10 sectors (excluding financials). I’ve put them in a matrix with net debt/EBITDA on the horizontal axis and the free cashflow yield less the cost of debt on the vertical axis. The zone to the left and above the red line show the prime opportunities for gearing up for buybacks. That’s because free cashflow yields are well above the current marginal cost of debt, and net debt to EBITDA is contained. The zone to the right & below the red line shows stocks that will struggle to gear up for buybacks – either because their cost of debt is up to or above their free-cashflow yields, or because the net debt to EBITDA is too high.

     

    For the 2013 financial year, 60% of stocks in my sample were in good shape to gear-up for buybacks.

     

    By the end of 2015, just 35% of the sample were in good shape to do buybacks.

     

    I estimate that the liquidity shortfall will expand further in 2016, to US$750bn. Against that backdrop, I expect more pressure on credit, returns & growth, more corporates will cross the Rubicon. And as that continues I expect that buyback activity will fade further, and the net bid for equities will likely evaporate.

    The conclusion:

    My recommendations are; Short US indices, long the US$, long gold & gold equities & short the leveraged buyout sector in the US.

    So is 2016 the year it all falls apart? Stay tuned for the follow up comments from Garran because if he is right, the answer is a resounding yes.

  • This Is What Gold Does In A Currency Crisis, China Edition

    Submitted by John Rubino via DollarCollapse.com,

    As China’s leaders figure out that pegging the yuan to the dollar while quintupling their debt in five years was a colossal mistake, they are, apparently, concluding that the only way out is a sudden, sharp currency devaluation. As Reuters reports...

    China's central bank is under increasing pressure from policy advisers to let the yuan currency fall quickly and sharply, by as much as 10-15 percent, as its recent gradual softening is thought to be doing more harm than good.

     

    The People's Bank of China (PBOC) has spent billions of dollars buying yuan over recent months to defend the exchange rate, but has failed to stabilize market sentiment. The currency has steadily lost another 2.6 percent against the U.S. dollar even after the bank sprung a surprise devaluation of nearly 2 percent in August.

     

    That gradual, managed depreciation makes the yuan a one-way bet for investors who see the currency weaken even as the central bank intervenes to prop it up.

     

    Policy insiders are now calling for a quick and sharp yuan depreciation, backed by tighter capital controls to curb speculation and the flight of money out of the country.

     

    "We should let the yuan have a considerable depreciation, but we should have a bottom line; it cannot create a big impact on the economy and the financial system, and big panic in the capital market," an influential government economist told Reuters, suggesting the yuan be allowed to depreciate by 10-15 percent over an unspecified timeframe.

     

    Letting the yuan fall sharply and quickly could help cushion many of China's debt-laden companies as the government pursues far-reaching structural reforms. Beijing is keen to restructure industry through "supply side" reform, especially reducing industrial over-capacity, but fears the corporate sector is too weak to handle that.

    [ZH:However, one needs to ask whether that is the goal for China… after all – Exports have been rising with a stronger Yuan?

    Or maybe it is as we previously noted – policy…

    Finally, the real purpose of the PBOC's exercise in FX management today was, just like in August, to fire a warning shot at the Fed's rate-hiking plans. Only this time the warning shot is far, far louder.

     

    In September the Fed postponed its rate hike as a result of China's devaluation. Will it do the same again next week? Because if China is about to unleash a 15% deval of the CNY against the entire world, expect a flood of Chinese FX reserves as the PBOC tries to control the glidepath of its currency, and avoid an all out collapse driven by soaring capital outflows.

    In other words, we are now right back where we were in mid-August, just before the bottom fell out of the market.]

    "The biggest risk in China is not really the economy," said Qian Wang, senior Asia economist for Vanguard Investments Hong Kong. "The real risk is, number one; the policy uncertainty, and number two; the currency. China is walking on eggshells."

    *  *  *

    Chinese citizens, meanwhile, are anxiously awaiting tomorrow’s market open while mentally repeating the same three lines:

    • Sure am glad I bought that gold last year.
    • Wish I’d bought more gold last year.
    • Wonder what I’ll have to pay for gold next week…

    Here’s what that looks like in graphical form:

     

    If China does spring a 15% devaluation on the already-wound-too-tight leveraged speculating community, the impact should be, well, amusing for sure, but otherwise a little hard to predict. About the only thing that can be said with near-certainty is that the above chart will have to be updated with much higher left and right axes.

  • China Contagion Spills Over To Hong Kong Banks As HIBOR Explodes To Record High, Stocks Tumble

    Chinese stocks are trading at the lows of the day after Overnight HIBOR rates (Hong Kong's interbank borrowing rate) exploded a stunning 939bps to a record high 13.4%. It is clear that banks are utterly desperate for liquidity and/or are extremely concerned about one another's counterparty risk. This has dragged HSCEI down 5% (to its lowest since Oct 2011).

    Something just snapped…

     

    Evidently the pressure between On- and Off-shore Yuan was too much for banks to bear…

     

    Smashing Hang Seng China Enterprise Index down 5% to its lowest since October 2011

     

    Chinese Default/Devaluation risk just jumpe dback above 120bps (highest since August collapse)

    As we explained earlier, as Asian markets opened (ahead of the Yuan fix), they were in turmoil with FX markets crashing (JPY rallying as carry trades unwound), equity markets tumbling (Dow, Nikkei, and China A50), commodity carnage (crude and copper carnage) as Gold and bonds were bid. With offshore Yuan sliding ahead of the fix (and Onshore Yuan 3 handles cheap to Friday's fix), CFETS RMB Index dropping below 100 for the first time, and following Friday's 'token' stability, The PBOC decided to hold Yuan Fix practically unchanged for the second day. USDJPY and equity markets jumped on the news, then quickly faded.

     

    We have seen this "stability" before…

     

    Asian stocks collapse to lowest since October 2011…

     

    Chinese media is pushing rumors of rate cuts and urging people that they do not need USD (despite the lines we noted earlier) demanding theyhave more patience… (via People's Daily)

    More patience is needed for the Chinese economy which is in a transition period, as it transfers from old to new economic growth drivers while also facing a backdrop of a slowing global economy, the People's Daily reports citing academics. It would be too opinionated to judge that the Chinese economy would suffer a hard landing based on short-term fluctuations as many factors have had an impact on the yuan's recent depreciation and the stock market's falls.

     

    "The fundamentals of many economic crises is the psychological panic problem, and we need to take good care of the market and foster new drivers; conclusions on the Chinese economy can't be made in a rush based on the short-term or partial changes," said Zhang Tiegang, professor at the Central University of Finance and Economics.

    Yeah – all psychological.

    Offshore Yuan was tumbling before the Fix…

     

    As were Chinese stocks:

    • *FTSE CHINA A50 JANUARY FUTURES SLIDE 3%

    Of course, The Keynesian have a solution for all this…

    • *STIGLITZ: RECENT CHINA MARKET VOLATILITY ISN'T CATACLYSMIC
    • *STIGLITZ: CHINA NEEDS DEMAND BOOST TO AVOID DEEPER DOWNTURN

    It's that simple eh?!

    The reaction to PBOC "stability" is not good:

    • *MSCI ASIA PACIFIC EX-JAPAN INDEX DROPS 1.7%, EXTENDING LOSS
    • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.7% TO 3,131.85

    And Dow futures jumped 80 point and then dumped 100…

     

    Chinese stocks are tumbling…

     

    And ChiNext is now down over 21% YTD…

     

    *  *  *

    As we detailed earlier, markets were turmoiling into the China Fix…

    China ripples may be turning into tsunamis. As FX markets creep open, something serious must have snapped. The South African Rand just crashed 10% – the biggest single-day drop since Lehman – to new record lows. At the same time, carry trades are being unwound en masse, smashing USDJPY down to 116.75 (strongest Yen in a year). Somebody do something!!!

     

    The South African Rand crashed 10% to a record low against the USD of 17.9169. This 10% collapse is the largest on record outside of the immediate post-Lehman move…

     

    Don't forget – As goes the South African Rand, so goes The World?

     

    Korean Won plunges to its lowest since July 2010…

     

    And Yen is surging…

     

    Smashing Nikkei futures down over 500 points from Japan's close….

     

    As USDJPY tumbles so US Equity markets are slumping…

     

    And crude is carnaging…

     

    Copper flash-crashed at the open and is now retesting…

     

    It appears people were expecting some Chinese intervention over the weekend… and so far have been disappointed.

    For now, Gold is bid as a safe haven…

     

    Charts: Bloomberg

  • PRePare YouRSeLVeS…

    PREPARE

  • The Other (More Worrisome) "H" Bomb

    Presented with no comment…

     

     

    Source: Townhall.com

  • The Biggest (And Possibly Most Terrifying) Company You've Never Heard Of

    Submitted by AnonWatcher via TheAntiMedia.org,

    Serco. Chances are you’ve never heard of the company. If you have heard of the company, chances are you misunderstand the shear enormity of the global company and their contracts.

    From transport to air traffic control, getting your license in Canada, to running all 7 immigration detention centers in Australia, private prisons in the UK, military base presence, running nuclear arsenals, and running all state schools in Bradford, Serco, somewhere, has played a part in moving, educating, or detaining people.

    serco

    New contracts awarded to Serco include a Saudi Railway Company, further air traffic control in the US and also IT support services for various European agencies. You can read more on their future projects below.

     

    Serco HY15 Results SEA 11 August 2015

     

     

    A Very Brief History

    Serco’s history began in 1929 as a UK subsidiary, RCA Services Limited to support the cinema industry.

    In the 1960s the company made a leap into military contracts to maintain the UK Air Force base Ballistic Missile Early Warning System. From there, the company continues to grow.

    Now trading as Serco Group, 2015 trading as of August 11 2015, maintained a revenue of £3.5 billion, and an underlying trading profit of £90 million. The data was presented at JPMorgan in London.

    In 2013 Serco was considered a potential risk, and became a representation of the dangers of outsourcing. The U.K. government developed contingency plans in case Serco went bankrupt. When the concerns came to light, Serco faced bans (along with G4S, another outsourcing contractor) from further bidding on new U.K. government work for six months. It wasn’t until Rupert Soames OBE – Sir Winston Churchill’s grandson – took on the job as Serco’s Chief Executive in 2014, that Serco turned a new corner of profit growth.

    Serco Today

    Serco today is one of the biggest global companies to exist. They have contracts with:

    Alliant – the vehicle for IT services across the Federal IT market;

     

    National Security Personnel System (NSPS) – For “(NSPS) training and facilitating services throughout the Department of Defense (DoD) and agencies that needs NSPS training and implementation services;”

     

    Seaport – The NAVSEA SEAPORT Multiple Award contract focuses on “engineering, technical, and programmatic support services for the Warfare Centers.” This is inclusive of Homeland Security and Force Protection, Strategic Weapons Systems, and multiple warfare systems.

     

    CIP-SP3 Services and Solutions (Cost $20 Billion, expiration date 2022) – biomedical-related IT services with the National Institutes of Health (NIH) with the main objective focused on Biomedical Research and Health Sciences extending to information systems throughout the federal government. Also implementation in several key areas of Biomedical Sciences including legislation and critical infrastructure protection.

    The few contracts listed above are among the vast array of transport, detention center and private prison contracts.

    Serco, the biggest company you’ve never heard of:

  • Meanwhile In Shanghai Residents Form Lines To Sell Yuan, Buy Dollars

    On Thursday, as the world was focusing on the collapsing Chinese exchange rate, we noted that in a more troubling development, in December Chinese FX reserves declined by a record $108 billion, bringing the total drop for 2015 to over half a trillion, and the cumulative decline since Chinese reserves starting dropping in mid-2014 to just shy of $1 trillion.

     

    But why if China has been so keen on devaluing its currency – at least since the formal start of the devaluation on August 11 – was it selling so many USD-denominated assets? The answer: because if the PBOC did not step in and halt the decline (by liquidating reserves) the drop would have been even greater, suggesting that the capital outflow from China is orders of magnitude worse than either Beijing, or Chinese analysts would like to admit.

    One thing is certain: there is much more depreciation to go. As we reminded readers yesterday, one month ago we predicted at least another 15% in CNY devaluation, something Bloomberg agreed with over the weekend. And as China devalues more, it will face even more outflows: at least $670 billion which will drastically cut the country’s pile of FX reserves at the worst possible time – just as China’s banks are forced to begin recognizing the huge pile of non-performing loans as a result of a tsunami of pent up corporate defaults mostly in the commodity sector.

    All that assume a continuation of the smooth devaluation seen since the August 11 shocker.

    As SocGen points in a note today, “press reports at the end of last week suggested that senior policy advisors would like to see a sharp one-off depreciation of the CNY. The theory is that once such a move had been accomplished, the domestic capital outflows, that are putting additional pressure on China’s financial system and draining the FX reserve, would stop. The same policy advisors, however, recognise the dangers of such a strategy. First, domestic savers may not believe a “one-and-done” strategy, risking further capital outflows. Second, China’s political standing in the G20 group could well suffer as a result, which is important point to the current administration. Finally, the potential disruption to financial stability outside China, and with the risk of an Asian currency war, would ultimately feedback negatively to China.

    The first point is one we broadly mocked back in August when one after another PBOC speaker swore that the devaluation is over. We were correct in pointing out that it had only just begun.As such it is logical why the local population no longer believes a single word uttered by officials.

    Which brings us to another key point by SocGen:

    While China is willing to spend some of its FX reserves to manage the pace of currency depreciation, we believe that the authorities would step in with further capital controls should this be deemed necessary rather than risk an accelerated run down of reserves. Already last week saw some further tightening of the existing rules; Chinese citizens are still allowed to convert $50,000 annually (resetting on January 1), but a maximum daily limit of $5,000 has now been set unless an in-person appointment is made, in which case the cap is $10,000 and with a maximum of three meetings permitted per week. The irony is that expectations of further tightening of capital controls could add to outflow pressure.

    Bingo.

    Because as Ming Pao, the most influential Chinese newspaper in Hong Kong, reports that Shanghai residents are lining up at local banks to sell Yuan for Dollars over fears of even more Yuan devaluation.

    The good news: there may be lines, but they aren’t long. Which is good: the last time we say long lines was in December 2014 when the ruble imploded and the local population was rushing to exchange their rapidly devaluing pieces of paper into dollars or hard assets.

     

    More on the current sentiment on the ground in China, google translated from Ming Pao, according to which to avoid long lines forming, China Merchants Bank is urging people to seek personal appointments or be limited in how much they can convert:

    China Merchants Bank yesterday to purchase foreign exchange business can be seen in public not long lines, but bank employees significantly increased the number refers to the earlier exchange, cash dollar now the best appointments, but she said that did not change in swap lines. Mainland exchange regulations limit $ 50,000 per day for a year, to be exchanged for cash the same day, the maximum limit of $ 10,000.

     

    Not helping matters was a comment by Chen Xuebin, Professor in the Institute for financial studies at Fudan University, in which he said that based on past experience, the currency devaluation may cause a short-term panic effect. The silver lining: during last year’s 6% depreciation, there were no bank runs, so he is not too worried this time either.

    This time may be different, as SocGen points out:

    To our minds, the most significant change on China since the equity market first crashed last summer is the perception that the Chinese administration holds much less control over the economy and financial system than what was previously perceived. Part of this is the natural consequence of reform, and not least in the financial sector. Less than apt communication and somewhat confusing policy initiatives have unhelpful, to say the least. This does not mean, however, that the administration is without control.

    That is certainly the case, and over the next several weeks and months we will find out just how much, or little, control China’s administration still has left.

  • ISIS Attacks On Libyan Oil Facilities Visible from Space

    Submitted by Charles Kennedy of OilPrice.com

    ISIS militants in Libya continue to attack key oil infrastructure in the country.

    The two large oil export terminals at Es Sider and Ras Lanuf came under ISIS attacks on January 4-6. Some oil storage tanks exploded after suffering damage from machine gun fire.

    NASA just published some shocking photos that clearly show the smoke plumes from the oil storage tanks are visible by satellite. The smoke blew east and northeast, blanketing Libya’s Mediterranean Coast. News reports suggest that at least five oil storage tanks are burning, each thought to have the capacity to hold 420,000 to 460,000 barrels of oil. Four of them are located at Es Sider and one at Ras Lanuf.

    A spokesperson for the National Oil Company in Libya said that seven storage tanks were burning.

    The attacks came as the oil company issued a “cry for help” on its website, calling on the Libyan people “of this homeland to hurry to rescue what is left from our resources before it is too late.”

    Libya’s rival governing factions have taken steps to patch up their differences, signing a UN-backed power-sharing agreement in December. The attacks from ISIS threaten to inflict lasting damage on the heart of Libya’s economy: its oil infrastructure.

    Take a look at the stunning NASA images below: 

    *  *  *

    For the full backstory on ISIS and Libya’s oil infrastructure, see here

  • It Begins: FXCM Doubles Yuan Margins, Warns Of Market "Disruption And Highly Illiquid Conditions"

    The last time FX brokers, still hurting from the Swiss National Bank’s revaluation shocker from last January which forced brand names such as FXCM to seek an urgent bailout, scramble to hike margins was in late June just ahead of the Greek “event risk” weekend, when  numerous brokers either hiked margins on EUR positions or went to “close only” mode due to “uncertainty surrounding the Greek debt negotiations… that could lead to high volatility on the market.”

    So, barely one week into the new year, one which has seen the stock market suffer its worst ever first week of trading, some FX brokers are not taking chances, and in the aftermath of the aggressive plunge in the Yuan (one we warned about a month ago), have decided to minimize client stop-out risk by hiking margins.

    Case in point, here is FXCM with a just released warning about upcoming “highly illiquid conditions” leading to a doubling in Yuan margins:

    Dear Client,

     

    We believe there is a chance of disruption and highly illiquid conditions in the forex market during the coming weeks (and/or months). Please be aware that market gaps tend to occur over the weekend – that is, currencies trade at prices considerably distant from previous levels.

     

    *IMPORTANT UPDATE*  

     

    Margin requirements will double on the USD/CNH pair after market close on January 15, 2016. See a Complete List of New Margin Requirements

     

    Please review your account to ensure that you have enough available margin to support any new positions. You may deposit additional funds at www.myfxcm.com or close positions as needed.

    Follows the traditional disclaime which FXCM itself probably should have taken to heart one year ago when after the SNB’s de-pegging the firm suffered tremendous losses:

    Remember that forex trading can result in losses that could exceed your deposited funds and therefore may not be suitable for everyone, so please ensure that you fully understand the high level of risk involved.

    The paradox here is that pre-emptive, if correct, warnings such as this one, tend to quickly become self-fulfilling prophecies as other brokers immediately follow suit and likewise increase margin requirements, which helps mitigate total loss potential but just as quickly soaks up liquidity from the market, leading to an even more fragmented market, prone to sudden, and quite dramatic moves.

    The full list of FXCM margin increases is shown below; expect every other FX brokerage to promptly jump on the bandwagon.

  • If The High-Yield Bond Market Is "Fixed", Explain This…?

    Remember a week ago when every TV anchor, pundit, asset-gatherer, and commission-taker stormed onto mainstream media and proclaimed the credit market collapse "fixed" because prices had 'stabilized' over the holiday period "proving that 3rd Avenue was a one off" and this dip was a buying opportunity? Yeah, well that was all complete crap… as Investment-Grade cost of funding hits a 3-year high, HY bond spreads blew out to cycle wides, 'triple-hooks' soared to their worst levels in almost 7 years, and credit protection costs rose by the most in years.

    "Stabilized" (during the Christmas break) was the new "everything is awesome"… but now…

    High Yield Bond ETFs are dumping…

     

    The cost of high-yield credit protection is soaring…

     

    Equity prices are starting to catch down to that reality…

     

    As is the cost of equity risk protection (VIX following August's "wait what" reality-wake-up call path)…

     

    And that means trouble for the only pillar of non-economic stock buying left… Investment-Grade credit risk just hit 3-year highs crushing the economics of any debt-funded shareholder-friendly activities…

     

    And finally, where it all started – CCC 'triple-hooks' credit spreads have re-spiked to cycle wides…

     

    But apart from that – yeah, credit is "fixed."

Digest powered by RSS Digest

Jan 10

Today’s News 10th January 2016

  • China Goes Full Keynesian-tard: Demolishes Never-Used Just-Built Skyscraper

    "Growth" meet "mal-investment boom-bust" In a perfect example of the smoke-and-mirror-ness of China's credit-fueled expansion, a 27-storey high-rise building which was completed on November 15th 2015 was just demolished, "having been left unused for too long."

    As China People's Daily reports,

    Directional blasting demolition of a high-rise building was completed successfully at 7 a.m. on November 15, 2015 in Xi'an, in northwestern China's Shaanxi province.

     

     

    The building was 118 meters high (27 floors) with a total construction area of over 37000 square meters.

     

     

    Having been left unused for too long, the building could not be brought back into use so local government decided to demolish it.

     

     

    It is reported to be the highest building that has ever been demolished in China.

    *  *  *

    The silver-lining – now workers can clean up the mess, dig a bigger hole… and fill that in – all in the name of Keynesian "growth."

  • Saturday Humor: Kim Jong-Un Watches North Korean Submarine Launch Missile

    With North and South Korea “on the brink of war” following Pyongyang’s “successful” H-bomb test and the resumption of anti-Kim propaganda broadcasts across the DMZ, the young Supreme Leader is keen on demonstrating his country’s military prowess.

    Below, find a video which purports to show a fedora-donning Kim watching a North Korean submarine launch a missile. To truly appreciate why this may be the most epic 28-second clip ever recorded, make sure to watch it with the sound turned up.

    By the way, Friday was Kim’s birthday.

  • How The Feds Got All That Western Land (and Why It's A Problem)

    Submitted by Ryan McMaken via The Mises Institute,

    Government owned and subsidized lands in the American West have been a source of conflict among competing interest groups since the 19th century. Since the very beginning of white settlement, lands have been used by the federal government as part of a political scheme to subsidize and reward certain groups while punishing others. 

    The current standoff between ranchers and federal officials in Oregon is simply the latest chapter in a long contentious and sometimes bloody history of groups competing for control over government-owned lands in the West, and by ensuring that lands continue to be allocated by political means rather than through the market, government ownership of lands simply perpetuates conflict in the region. 

    The Origins of Government Ownership in the West 

    Why is it that so much land is controlled by the federal government in Western states in contrast to the rest of the county? 

    The troubles initially began with the Louisiana Purchase which established the federal government as the direct administrator of immense amounts of non-state land. However, the ideological justification for permanent federal ownership really began to gain influence by the late 19th century as many Americans, including influential economists of the time, began to adopt ideologies that saw centralized government as necessary for regulating the economy. We see these ideological leanings in the creation of the Interstate Commerce Commission in 1887 which was initially created to regulate the railroads. Over time, the ICC became the inspiration for a host of other federal regulatory agencies that began to appear by the early 20th century. 

    As with the railroads, land in the west began to be seen as a "public resource" that required federal regulation as well. 

    But ideology was just one factor. The widespread nature of federal lands can also be attributed to mere administrative, historical, and geographic accidents that led to an expansion of federal land ownership well beyond what anyone had expected. 

    First of all was the fact of Indian settlement on Western lands. It may strike many as hard to believe, but the treatment of the Indian tribes west of the Mississippi was actually more restrained than it had been in Eastern states. 

    In earlier generations, for example, Indian settlements were completely destroyed with all the inhabitants killed or forcibly removed to locations west of the Mississippi. In other words, the tribes of the east were more completely decimated than were many tribes further West. 

    Much of this is due to the fact that whites populated the West more slowly and in smaller numbers than in, say, the Great Lakes area, but some of it is also due to the fact that the tribes often received better treatment from federal troops than they did from the ad hoc local militias they encountered in the Eastern states. 

    This is why Kit Carson saw his U.S. Army work in forcing Indians onto reservations as a "humanitarian" mission. Based on experiences in the east (and in early West Coast settlements), Carson surmised that the Indian tribes of the west would be completely destroyed if left to the "mercy" of locally based militias.   

    Over time — and contrary to past efforts of this sort — the removal of the tribes to reservations came to be dominated by the federal government. With this came what were effectively federally owned reservations. Legally, the reservations were sovereign lands guaranteed by the law of treaties. But the reality of US military domination meant the lands were really federal lands. 

    The Overrated Homestead Act 

    At the same time the federal government was moving the tribes onto reservations, it was attempting to encourage settlement by whites on those same lands. This was important to the federal government for  military reasons. It was important to the federal government that whites with an allegiance to the US settle the lands instead of, say, Canadians or Mexicans, and it was important toward making sure that the Indians did not attempt to re-settle the land. 

    The Homestead program was also a clever welfare scheme that provided nearly-free land to new settlers who were paying nowhere near what the cost of acquiring the land had actually been. The taxpayers back East had already covered much of the immense cost of Indian removal and infrastructure construction. The new homesteaders paid but a small fraction of this cost. But from the federal government's perspective, it was worth it since the cheap land meant pro-American settlers were keeping others out. 

    The homestead act is often romanticized and praised by free-market types, but it should not be. The Homestead program was, ultimately, a federal land redistribution scheme, and it worked about as well as anyone skeptical of federal competence might expect. It also further expanded the role of the federal government.

    Homesteading, as defined by federal law, worked relatively well in places like eastern Kansas or in the eastern Dakotas where it still rained enough to allow for crops without irrigation. 

    Further west — west of the 100th meridian — things were much drier, and the small acreage plots dictated by the Homestead Act made very little sense. Not surprisingly, Congress had written laws without bothering to check to see if they made any sense in light of geographic realities. 

    With so little water out west, and with fragile ecosystems that could not support anywhere near the agricultural population density that the Homestead Act envisioned, conflicts quickly arose over resources. Devastating boom-bust cycles like the Great Dakota Boom took shape in which new settlers flooded new lands only to find that they could not make a living on such small plots and with so little water. The lands were later abandoned. 

    In the wake of these new realities came rampant fraud in which large wealthy interests bent or broke the law to acquire large swaths of land that had been intended for small-scale settlement. Water rights became frequent bones of contention, and all the while, federal intervention became the tool of competing special interests who used federal power to gain lands and water rights for themselves. 

    The Spread of "Public" Lands 

    As it became clear that it was impossible to impose the eastern settlement model on the west, politicians and activists continued to cling to the idea that land ownership should still consist of only small parcels, even when such a plan made no sense at all in arid lands with sparse grass. 

    As a Plan B, the feds began to encourage the use of "open range" and the idea of public lands in which large numbers of small landowners would share water and grazing resources. 

    Eventually, neither the government nor the settlers wanted these lands to be privatized. Each interest group — homesteaders, ranchers, and water owners — wanted the lands to continue to be public since each group assumed it would be able to use its own political power to gain de facto use and control of the lands.

    Thus, today, we are living with the results of this system throughout the west. Federally-owned lands continue because interest groups would rather battle for control of the lands through political means than allow the lands to be privatized and pass outside the control of special interests. Meanwhile, the public in general tolerates this state of affairs because so many view markets as damaging to both the environment and ordinary citizens. For all its faults, they reason, federal ownership of the land must be less bad that private or even local-government ownership. 

    Eastern Oregon as Microcosm 

    In the current controversy over public lands in eastern Oregon, we're witnessing just another conflict between interest groups over how federal lands should be used, and the history of land politics in eastern Oregon tends to mirror the West overall. 

    In eastern Oregon as elsewhere, an important step in giving the Federal government a larger role in the local economy was in turning reservation lands into "public" lands for use by whites. 

    William N. Grigg has recently explored how conflicts between ranchers and Piute Indians in eastern Oregon led to demands by the ranchers for a larger federal role in the area. And, when the Piute Indians were finally forced out of Oregon, this paved the way for more federal control over lands in the region as what were once Indian lands became federally managed "public lands."

    But the drive among interest groups to control federal lands extends well beyond conflicts with Indians. Throughout the West  in the late 19th century, cattle ranchers were engaged in regular feuds with sheep herders and farmers over who could use and control federal lands. Oregon was no different. 

    In her book Forest Dreams, Forest Nightmares, Nancy Langston looks at how conflict among competing groups vying for control of the land in eastern Oregon led to ranchers calling for more federal involvement. Following the expulsion of the Piutes, the public lands quickly began to be overgrazed both on old Indian lands and in other public lands as well. 

    According to Langston, "law and custom specified that the range was supposed to be open to all, and not the exclusive property of the wealthy. Grass in the mountains was free and belonged to those who got their first: the Enclosures Act of 1873 stated to t no one could legally fence public domain."

    As is typical with any "commons," the resources in public lands were immediately strained to the point of making the land unusable. This then led to violence as each group attempted to exclude all other groups from the land. Langston explains: 

    Tensions finally spilled over into cattle and sheep wars throughout eastern oregon. In Union county, cattle owners formed a group called the Sheep Shooters Association. They ran advertisements in the La Grande Gazette identifying certain cattle ranges where sheepherders were advised not to cross recognizable boundaries … they also announced they would be placing lethal saltpeter mixed with stock salt in certain hotly contested range areas. Jon Skovline wrote that "Andy Sullivan, who ran horses on the flats below the Campbell Brothers, homestead burned out several night corrals built by itinerant sheep owners along what is now called Burnt Corral Creek. It is very likely that Sullivan also burned the accompanying tented camps of the herders. Lew McCarty was shot by unknown assailants." Thousands of sheep were also killed in grant county where feelings were strongest because summer range was in shortest supply.

    Meanwhile, homesteaders attempted to drive away cattle ranchers when they "fenced the creek bottoms to cut off the water supply from the large stockmen…Bitter feuds resulted." 

    Violent fueds between sheep herders and cattle ranchers continued for years until, by 1903, Langston writes, " local sheepmen as well as cattlemen were ready for regulation, even though [the sheepmen] feared the government would rule in favor of cattle over sheep … Ranchers were ready for an end to the disputes and  increasingly welcomed government intervention." 

    The "Sheep Wars," as they are known today, were hardly unique to eastern Oregon, nor were the range wars between homesteading farmers and cattle ranchers.

    For the most part, the cattle ranchers, through more effective use of fear and intimidation, won these political conflicts, and throughout the first half of the 20th century, the "Cattlemen's Associations" dominated state legislatures and the land use bureaucracies that regulated land use throughout the West. They've even passed laws making it illegal to criticize cattle ranchers. 

    In a familiar story of regulatory capture in which the regulated interest group actually controls the regulators, the cattle industry has long shaped debate over the use of public lands for grazing purposes. 

    Since the 1960s, however, the cattlemen have been increasingly eclipsed by other interests including environmentalists and urban residents looking for expanded access to water. The EPA has assumed an expanding role in managing federal lands and neighboring areas, and with it comes greater regulation on ranchers and on land use in general. Environmentalists are relishing their relatively newfound power, and ranchers don't like it when they're unable to exercise the same amount of influence to which they have been historically accustomed.

    It is this new ideological and political conflict that is fueling today's battles between federal land agencies and ranchers. 

    However, it should be remembered that, generally speaking, ranchers who use federal lands have never been opposed to the existence of federal lands. After all, federal subsidization of water projects and federal control of watersheds has furnished ranchers with cheap water for years, at the expense of taxpayers and urban dwellers. In dry and high-altitude areas especially, cattle are reliant on alfalfa crops and on other non-forage feed, which means their need for water is immense. 

    Why We Need Decentralization Now 

    If we wish to defuse national conflicts over land use, the only answer is to decentralize the land itself. It should be no concern of people in Washington, DC — 3,000 miles away  — as to how a handful of ranchers want to use a tiny corner of land in rural Oregon. Similarly, taxpayers in, say, Ohio (a net taxpayer state) should not be paying to mitigate the effects of overgrazing by ranchers in Oregon, or to build their water projects. 

    There are, of course, many legal and constitutional obstacles to decentralizing land ownership, but the political obstacles are numerous as well. For example, many ranchers oppose ending federal ownership of grazing lands because it would likely mean an increase in grazing fees. 

    Moreover, federal rules mean ranchers can often maintain their federal leases indefinitely without having to worry about prices ever being driven up by competitors. 

    Were grazing lands to be taken over by states or localities — or privatized — ranchers would have to compete with other ranchers, outdoor-recreation proprietors, and conservationist billionaires on the open market. Ranchers may quickly find that their formerly cozy grazing arrangements are now unaffordable. For many ranchers, a federal bird in hand is still better than two private-sector birds in the bush. 

    At the same time, environmentalists want perpetual federal control because they are convinced that any decentralization or privatization would mean that lands will be taken over by rapacious ranchers and miners. 

    But would they?  

    It is not at all clear that markets or local governments would prefer that land be used for agricultural purposes as opposed to other purposes. For example, were Rocky Mountain National Park to become a locally-controlled park or state park, there is, realistically speaking, zero chance that it would be handed over to ranchers or miners. The park is far too valuable to the local economy as part of the recreation and tourism industries. To turn the park into  range land would devastate the economies of the local communities, many of which contain wealthy and influential voters. 

    But, say that the park were broken up into parcels and sold to a  number of private owners. (We're in the realm of pure fantasy at this point.) It would make little sense to use the land for mining or ranching even in this case. Given the infrastructure in place and the relative closeness to a major metropolitan area, the lands in and around the Park are likely far more lucrative for recreational purposes than for mining or ranching. 

    So, when we ask the question of "if it's privatized/decentralized, won't those people take over the land?"  The answer is: "It depends." 

    Yes, some remote or otherwise unattractive areas will lend themselves to ranching and strip mining, and some areas (especially those less remote from where people live) will lend themselves to being preserved as parks and recreational facilities. The lands in the American west are incredibly diverse and different areas will be ideal for different purposes. 

    And, in an age of growing eco-tourism and outdoor recreation, there's a lot more to the west than ranching and mining. 

    But let us never forget that were it not for federal infrastructure such as dams, military bases, and federal highways, the West would have far fewer people and much less development than it does today. As has been demonstrated by numerous scholars of the West — especially Gerald Nash in his economic history of the West, The Federal Landscape — the development of the West has been largely dependent on federal spending — and we're talking about spending far above and beyond the initial federal efforts that cleared out the original inhabitants and laid down the first intercontinental railroad. The modern West as we know it today is a result of immense federal spending done during the Depression and the Cold War. 

    Likewise, it has been the federal government that has created the billion-dollar mega-dams, dumped plutonium into the ground, and failed miserably at fire suppression. The footprint of the federal government is everywhere in the west, and it could very well be that in a world with a smaller federal government, the West would look very different indeed. 

    The Democracy of the Marketplace 

    Ultimately, however, its the democracy of the marketplace that is best suited to determine how lands should be used in the west. 

    The perennial conflicts in the West over land seizures by environmentalists, regulatory battles, micromanagement, and overgrazing all illustrate how much of a failure the federal land ownership scheme has been. 

    With control over such immense resources, the far away federal government does not respond to local needs or local demand, but to national interest groups. 

    If we truly wish to democratize the use of land in the west, we would privatize it, or at the very least make it responsive to local populations instead of national interests. It is the marketplace, and not politics, that truly reflects the desires and needs of the people who wish to use lands and reward or punish those who own it. 

    In his book Bureaucracy, Ludwig von Mises long ago explained how it is the consumers who decide how economic inputs (such as land) are to be used:

    The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old purveyors. With them nothing counts more than their own satisfaction. They bother neither about the vested interests of capitalists nor about the fate of the workers who lose their jobs if as consumers they no longer buy what they used to buy. 

    In the absence of bailouts, subsidies, and government protections, only those who use the land in a way that benefits others will be rewarded accordingly, at the expense of their competitors. 

    What will land use in the West look like for the next 100 years? Will it be just another century of unaccountable federal bureaucrats picking winners and losers? Or will the democracy of the marketplace be permitted and thus allow the people who use the land and depend upon it to have a say? 

     

  • Visualizing The Most Valuable Substances By Weight

    While gold is undoubtedly one of the most traded substances on earth, it also happens to be one of the most valuable substances by weight. Although prices fluctuate, one gram of gold will cost you on average around $35. This got us thinking about how much other primarily naturally occurring substances out there cost.

    This new infographic, via ValueWalk, explores how much you would pay for a gram of everything from saffron, widely recognised as the world’s most expensive spice, to platinum and rhodium. While the market for these goods can’t match the sizeable gold market, whose depth and liquidity is unparalleled, the trading prices of these substances can widely surpass that of gold; though like gold, the prices of these substances are subject to fluctuations.

    BullionVault.com's infographic below shows just how much a gram of Iranian Beluga caviar would set you back, and how much you should expect to pay for the radioactive chemical plutonium.

    click on image for huge legible version.

  • The Looming Recession & The Muted Delight Of Janet Yellen's Epic Failure

    Submitted by MN Gordon via EconomicPrism.com,

    One week down.  Fifty-one more to go.  No doubt, this has been a wild start to the New Year.  We expect many more to follow.

    For example, on Monday, Chinese investors overloaded the Shanghai Stock Exchange.  An abundance of traders hit the sell button in unison and nearly shorted out the sell side circuit.  By early afternoon the breakers had tripped to prevent a full market meltdown.  Here are the particulars, as reported by Bloomberg…

    “The worst-ever start to a year for Chinese shares triggered a trading halt in more than $7 trillion of equities, futures and options, putting the nation’s new market circuit breakers to the test on their first day.

     

    “Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7 percent.  An earlier 15-minute suspension at the 5 percent level failed to stop the retreat, with shares extending losses as soon as the market re-opened.”

    Data showing Chinese manufacturing contracted for a fifth straight month was cited as having prompting the mass selloff.   Yet then, wouldn’t you know it, on Thursday Chinese traders fried the system again.  Circuit breakers were triggered for the second time this week.  Trading was again halted for the rest of the day.

    Reality and the Fed’s Portrayal of Reality

    Here in the U.S. stocks tripped over themselves all week too.  From market open on Monday to close on Thursday, the DOW dropped 891 points.  By our back of the napkin calculation that comes out to a loss of over 5 percent.  Like in China, U.S. manufacturing data reported on Monday may – or may not – have had something to do with it.

    “The U.S. economy’s manufacturing sector contracted further in December, according to an industry report released on Monday,” reported CNBC.  “The Institute for Supply Management (ISM) said its index of national factory activity fell to 48.2 from 48.6 the month before.”  An ISM reading below 50 indicates contraction.

    However, it wasn’t just manufacturing that started off 2016 with a bad report.  According to the Department of Commerce, construction spending during November 2015 dropped 0.4 percent.  This amounted to the biggest drop in construction spending since June 2014.

    Then, on Wednesday, the Commerce Department reported that both U.S. imports and exports ran aground.  Specifically, exports fell 0.9 percent and imports fell 1.7 percent.   What to make of it?

    The popular theme for the economy portrayed by the Fed is that economic activity is expanding and that the economy is sound.  San Francisco Fed President John Williams thinks the economy currently has strong fundamentals and a really strong trajectory.  He anticipated there being three to five rate hikes this year.  Williams also forecasts 2.25 percent growth.

    His counterpart, Cleveland Fed President Lorretta Mester, expects the U.S. economy will grow by 2.5 to 2.75 percent.  She also thinks we’re in “very good shape” because of “very aggressive monetary policy actions” that were taken.

    The Muted Delight of the Forthcoming Recession

    Perhaps weak manufacturing, construction, and trade data are mere outliers.  Maybe the Fed can see beyond the fog to clearly capture the big picture.  Or maybe the Fed has lost its marbles.  Their outlook doesn’t jive with that of the regular working stiff.  Nor does it mesh with the outlook of Deutsche Bank economists.

    "Deutsche Bank economists on Tuesday reduced their forecast on U.S. economic growth in the fourth quarter of 2015 and first quarter of 2016 due to recent disappointing data on trade, construction spending and manufacturing activity.

     

    They said in a research note they pared their view on domestic gross product in the last three months of last year by 1 percentage point to 0.5 percent, which they added "still might be too high in light of what could be much larger inventory liquidation than what we have assumed."

    Obviously, GDP can’t go much below 0.5 percent before it goes negative.  Hence, if 0.5 percent is too high, there’s a chance the U.S. economy is close to, or already in recession.

    Of course, we won’t know for sure until after the fact.  Technically speaking, a recession requires two consecutive quarters of negative economic growth.  Thus the economy must be in recession for at least six months before it can be formally declared a recession.

    One of the many delights in life is watching a public figure step up to the plate, pound their chest, let out a bellow, and fail spectacularly.  In this regard, we may be witnessing an epic fail by Fed Chair Janet Yellen.  For she may be hiking rates at the very moment the economy’s entering recession.

    Unfortunately, in this instance, the delight is muted by the destruction being heaved upon the broad populace.

  • Texas Governor Calls For Constitutional Convention To "Wrest Power" From Obama

    When it comes to Texas’ relationship with the Federal government, the word “rocky” comes to mind. And nobody embodies said rockiness better than Texas governor Greg Abbott, who recently made headlines after announcing that irrelevant of D.C.’s demands, Texas would refuse to accept any Syrian refugees.

    This followed his announcement earlier this summer 2015 when fears over nebulous Federal intentions with operation “Jade Helm” were running high, that “to address concerns that Texas citizens and to ensure that Texas communities remain safe, secure, and informed about military procedures occurring in their vicinity, I am directing the state guard to monitor Operation Jade Helm 15.”

    Prior to this, Abbott was again in the news back in June when he signed a bill into law that would allow Texas to build a gold and silver bullion depository, which would allow Texas to repatriate $1 billion worth of bullion from the New York Fed to the new facility once completed.

    In short: the Federal government and the state of Texas have been on collision course of many months, one which culminated on Friday when Abbott called for a Constitutional Convention of states, spearheaded by Texas, and which would amend the U.S. Constitution to wrest power from a federal government “run amok.”

    To achieve that, Abbott proposed nine amendments to “restore the Rule of Law and return the Constitution to its intended purpose.”

    “If we are going to fight for, protect and hand on to the next generation, the freedom that [President] Reagan spoke of … then we have to take the lead to restore the rule of law in America,” Abbott said, cited by the Dallas News, during a speech at the Texas Public Policy Foundation’s Policy Orientation that drew raucous applause from the conservative audience. He said he will ask lawmakers to pass a bill authorizing Texas to join other states calling for a Convention of States.

    According to the Hill, Abbott said that “the increasingly frequent departures from Constitutional principles are destroying the Rule of Law foundation on which this country was built,” said Abbott in a statement. We are succumbing to the caprice of man that our Founders fought to escape. The cure to these problems will not come from Washington D.C. Instead, the states must lead the way.”

    Along with the speech, Abbott released a nearly 70-page plan – part American civics lesson, part anti-Obama diatribe – detailing nine proposed constitutional amendments that he said “would unravel the federal government’s decades-long power grab and restore authority over economic regulation and other matters to the states.”

    “The irony for our generation is that the threat to our Republic doesn’t come just from foreign enemies, it comes, in part, from our very own leaders,” Abbott said in a speech that took aim at President Obama, Congress and the judicial branch.

    Abbott’s nine proposed amendments are:

    • Prohibit congress from regulating activity that occurs wholly within one state.
    • Require Congress to balance its budget.
    • Prohibit administrative agencies from creating federal law.
    • Prohibit administrative agencies from pre-empting state law.
    • Allow a two-thirds majority of the states to override a U.S. Supreme Court decision.
    • Require a seven-justice super-majority vote for U.S. Supreme Court decisions that invalidate a democratically enacted law
    • Restore the balance of power between the federal and state governments by limiting the former to the powers expressly delegated to it in the Constitution.
    • Give state officials the power to sue in federal court when federal officials overstep their bounds.
    • Allow a two-thirds majority of the states to override a federal law or regulation.

    For those unfamiliar, a Constitutional Convention is one of two ways that the U.S. Constitution can be amended, and it’s described in Article V. One way is that Congress can propose amendments approved by two-thirds of the members of both chambers. The other method allows two-thirds of the state legislatures to call for a convention to propose amendments. Republicans backing the idea are confident that because they control state government in a majority of states, their ideas would prevail.

    In both cases, the amendments become effective only if ratified by three-fourths of the states. Indicatively, of the 27 times the Constitution has been amended, none was generated by a constitutional convention.

    Abbott is not the first to propose a convention: the idea has been gaining traction among some among conservative Republicans, comes just as the GOP presidential candidates begin to make forays into Texas ahead of the March primary election. The state, with 155 delegates up for grabs, will certainly be a key player in the party’s nominating process.

    Earlier this week presidential contender Marco Rubio published a piece in USA Today endorsing the idea of a convention to amend the Constitution and restore limited government. In April, 27 active petitions had been filed with Congress seeking a convention to amend the constitution to require that Congress adopt a balanced budget.

    Congress would be forced to act once 34 states joined the effort. So far, Cruz hasn’t endorsed the idea.

    A convention, Abbott wrote, would force the federal government to “take the Constitution seriously again… The only true downside comes from doing nothing and allowing the federal government to continue ignoring the very document that created it,” Abbott wrote.

    To be sure many conservatives agree with Abbott’s posture that the only way to limit the powers of the Federal government is to resuscitate state power .

    Of course, whereas Republicans are seeking to limit the role and power of government, Democrats demand just the opposite, and were quick to denounce Abbott’s plan Friday, saying the governor has misplaced priorities.

    “America added 292,000 new jobs in December. But under Abbott, Texas fell to sixth in job creation, remains the uninsured capitol of the nation, wages and incomes remain far too low for hardworking families, our neighborhood schools are still underfunded, and college education is slipping out of reach,” Texas Democratic Party Deputy Executive Director Manny Garcia said in a statement. “Texas families deserve serious solutions, not Tea Party nonsense.”

    What Manny Garcia did not add is that while oil was above $100, Texas was the state that had generated the most jobs under the Obama administration, and if it hadn’t been for the Kerry-Saudi Arabia secret meetings which put into play the collapse in the price of oil, meant to cripple Russia but crushing US shale instead, Texas would continue to create record numbers of jobs.

    However, since this is high politics, facts be damned, and the American Civil Liberties Union of Texas issued a statement with similar sentiment. “Governor Abbott, as Texans, we prefer the Framers’ plan. Don’t mess with the Constitution,” said Terri Burke, executive director of the ACLU of Texas.

    A small but vocal Republican minority has also opined against the idea of a constitutional convention: last year, House legislators filed measures calling for such a convention. Texas senator Craig Estes unleashed a screed against the proposal when it came before the Senate State Affairs Committee in May. He compared the idea to “a petulant teenager who’s lost a few basketball games and plans to burn down the gymnasium.”

    “The constitution has served us well for over 200 years. The problem is not the constitution,” Estes said, adding that the solution is to elect more conservative lawmakers. “Slap a bumper sticker for Ted Cruz on your car and get after it and knock yourself out.”

    Estes went on to promise a filibuster if the measure came to the Senate floor.

    Whether Abbott’s proposal will gain steam and ultimately succeed is unknown, but it is virtually certain that the more the Obama administration governs via executive orders and other means to bypass the Legislative and short circuit the US government, the more powerful the grass-roots response at the state level will be, until eventually there is enough anger at the dysfunctional U.S. government at the 34 required states to do precisely as the Texan wants… that, or Trump is voted into the Oval Office as a protest against everything that is broken with the current political status quo.

  • Clinton Email Hints that Oil an Gold Were Behind Regime Change In Libya

    On New Year’s Eve, 3,000 emails from Hillary Clinton’s private email server were released.

    One of them confirms – an email dated April 2, 2011 to Clinton from her close confidante Sidney Blumenthal – that:

    Qaddafi’s government holds 143 tons of gold, and a similar amount in silver.

     

    ***

     

    This gold was accumulated prior to the current rebellion and was intended to be used to establish a pan-African currency based on the Libyan golden Dinar. This plan was designed to provide the Francophone African Countries with an alternative to the French. franc (CFA).

     

    (Source Comment [This is in the original declassified email, and is not a comment added by us]: According to knowledgeable individuals this quantity of gold and silver is valued at more than $7 billion. French intelligence officers discovered this plan shortly after the current rebellion began, and this was one of the factors that influenced President Nicolas Sarkozy’s decision to commit France to the attack on Libya. According to these individuals Sarkozy’s plans are driven by the following issues:

     

    1. A desire to gain a greater share of Libya oil production,
    2. Increase French influence in North Africa,
    3. Improve his internal political situation in France,
    4. Provide the French military with an opportunity to reassert its position in the world,
    5. Address the concern of his advisors over Qaddafi’s long term plans to supplant France as the dominant power in Francophone Africa)

    This may confirm what some of us have been saying for years.

    The REAL Reason Sunni Governments Like Saudi Arabia Are At War Against the Shias

    While the Sunnis and Shias have been competing for more than a thousand years, they have largely co-existed peacefully until recently.

    Why are they involved in an open war across multiple countries now?

    Much of modern geopolitics is driven by hydrocarbons … i.e. oil and gas.

    Is this true of the Sunnis-Shia war?

    Yes, the U.S. and its allies are backing the Sunnis against the Shias … in order to wage war for oil.

    And it turns out that the lion’s share of oil in the Middle East happens to be located in Shia countries … and in the Shia-minority sections of Sunni-majority countries.

    Specifically, as Jon Schwartz reports this week at the Intercept:

    Much of the conflict can be explained by a fascinating map created by M.R. Izady, a cartographer and adjunct master professor at the U.S. Air Force Special Operations School/Joint Special Operations University in Florida.

     

    What the map shows is that, due to a peculiar correlation of religious history and anaerobic decomposition of plankton, almost all the Persian Gulf’s fossil fuels are located underneath Shiites. This is true even in Sunni Saudi Arabia, where the major oil fields are in the Eastern Province, which has a majority Shiite population.

     

    As a result, one of the Saudi royal family’s deepest fears is that one day Saudi Shiites will secede, with their oil, and ally with Shiite Iran.

     

    This fear has only grown since the 2003 U.S. invasion of Iraq overturned Saddam Hussein’s minority Sunni regime, and empowered the pro-Iranian Shiite majority. Nimr himself said in 2009 that Saudi Shiites would call for secession if the Saudi government didn’t improve its treatment of them.

    shia-oil-cropped-2

    The map shows religious populations in the Middle East and proven developed oil and gas reserves. Click to view the full map of the wider region. The dark green areas are predominantly Shiite; light green predominantly Sunni; and purple predominantly Wahhabi/Salafi, a branch of Sunnis. The black and red areas represent oil and gas deposits, respectively.

     

    Source: Dr. Michael Izady at Columbia University, Gulf2000, New York

    As Izady’s map so strikingly demonstrates, essentially all of the Saudi oil wealth is located in a small sliver of its territory whose occupants are predominantly Shiite. (Nimr, for instance, lived in Awamiyya, in the heart of the Saudi oil region just northwest of Bahrain.) If this section of eastern Saudi Arabia were to break away, the Saudi royals would just be some broke 80-year-olds with nothing left but a lot of beard dye and Viagra prescriptions.

     

    Nimr’s execution can be partly explained by the Saudis’ desperation to stamp out any sign of independent thinking among the country’s Shiites.

     

    The same tension explains why Saudi Arabia helped Bahrain, an oil-rich, majority-Shiite country ruled by a Sunni monarchy, crush its version of the Arab Spring in 2011.

     

    Similar calculations were behind George H.W. Bush’s decision to stand by while Saddam Hussein used chemical weapons in 1991 to put down an insurrection by Iraqi Shiites at the end of the Gulf War. As New York Times columnist Thomas Friedman explained at the time, Saddam had “held Iraq together, much to the satisfaction of the American allies Turkey and Saudi Arabia.”

    So the Sunni Gulf monarchies in Saudi Arabia, Bahrain, Oman, the United Arab Emirates, Qatar and Kuwait are single-mindedly going after Iran and the Shia world – because the Shias are sitting on the oil and gas resources – and doing everything they can to start a Sunni-Shia war across the entire MENA area (Middle East and North Africa) in order to “justify” a resource grab.

  • Gold In 2016: "Economic Power Is Shifting"

    Submitted by Alasdair Macleod via GoldMoney.com,

    Advance signs of a global slump in economic activity emerged in 2015.

    Furthermore, the dollar's strength, coupled with widening credit spreads confirms a global tendency for dollar-denominated debt to contract. These developments typically precede an economic and financial crisis that could manifest itself in 2016, partially confirmed by the disappointing performance of equity markets. If so, demand for physical gold can be expected to escalate rapidly as a financial crisis unfolds.

    Introduction

    Gold has now been in a bear market since September 2011. Major central banks in the advanced economies have implemented policies that have covertly suppressed the gold price, while they have overtly inflated asset prices. This has led to valuation extremes in all asset markets, including gold, that would never be seen in free markets backed with sound money. We can be certain that today's unprecedented build-up of price distortions will be corrected eventually by market forces, probably in the coming months. The commencement of a crisis has already been evidenced by the collapse in energy and industrial-commodity prices, causing major problems for nations and international companies with US dollar obligations and suddenly finding they lack the revenue to service them. The scale of commodity-related losses is not generally understood, but cannot be ignored for much longer.

    The rapid expansion of central bank balance sheets since the Lehman crisis is the ultimate phase of a process that can be traced back to at least the 1980s. Starting in London, US and European banks at that time took control of securities markets. Since then, they have increasingly directed bank credit at the expansion of those securities markets, principally through the development of over-the-counter (OTC) derivatives, but also by dominating bond and equity markets, and regulated derivatives.

    The expansion of bank credit aimed towards financial activities has had the triple effect of inflating financial assets, suppressing commodity prices below where they would otherwise be, and enhancing international demand for the US dollar as the main pricing currency. The result has been an unprecedented peace-time expansion of global debt, while confidence in the reserve currency has been maintained. However, there are indications that this period of expansion is now at an end. According to the Bank for International Settlements' statistical releases, the gross value of bank-held derivatives has been contracting since 2013. Notional amounts of outstanding OTC contracts peaked at end-2013 at $711 trillion, and by June 2015 had declined to $553 trillion.

    This is an important point, because an unseen bubble at the heart of the financial system is deflating with unknown consequences. When bubbles deflate, and here we are talking about one in the hundreds of trillions, bad debts are usually exposed. Even though much of the reduction in outstanding OTC derivatives is due to consolidation of positions following the Frank Dodd Act, much of it is not.

    When free markets reassert themselves, and they always do, the disruption promises to be substantial. We appear to be in the early stages of this event.

    Dollar and European dangers

    As noted above, the rising value of the dollar measured against commodities is a major problem. In the short-term the dollar is extremely over-bought against record levels of commodity short positions. Most notable is the dollar price of oil, with West Texas Intermediate having fallen from $105 in June 2013 to $32 today. While much of the fall can be attributed to lower demand from a slowing global economy, some of it is undoubtedly due to the strength of the dollar itself. Bad and potential bad debts, many commodity-related and denominated in dollars, are a global issue, and the US banks are trying to control their international loan exposure. Consequently, international borrowers with dollar-denominated debt are being forced to sell down local currencies to buy dollars in order to cover their dollar obligations. The problem has been aggravated further by speculators bidding up the dollar against these distressed buyers.

    The dollar's overvaluation is also supported by the belief that the US economy is healthy and performing relatively well. With official unemployment down to 5%, demand for domestic credit, while patchy, is basically sound and growing at a moderate pace. However, nominal GDP growth is entirely due to monetary stimulus being not yet offset by lagging price inflation, and is not the well-founded economic recovery generally supposed. But for dollar bulls, the apparent strength of the US economy is another reason to believe the dollar will remain strong, given the prospect of a rising interest rate trend. There are considerable dangers to this bullish view for the dollar, not least the degree to which it is already discounted in current prices.

    A second global problem is the financial and economic condition of the Eurozone. 2015 saw the Greek crisis deferred, but for 2016 we have the prospect of trouble from Spain and Portugal, with government debt as a percentage of GDP estimated at 100% and 130% respectively. In the Spanish general election in December an anti-austerity combination of the left-wing Podemas and PSOE political parties won 159 seats against the ruling party's 123. Negotiations are now underway, but it looks like an anti-austerity coalition will form the next government. Greece was difficult enough, but Spain is many times greater in terms of its economic impact and the amount of government debt involved. Also, Portugal, whose economy is about the same size as that of Greece, had its general election in October, and the ruling party lost its overall majority, suggesting that anti-austerity pressures will increase in Lisbon as well. And Greece has not gone away.

    Greece in 2015 was the warm-up act for what's ahead in the Eurozone. Meanwhile, €3 trillion of government bonds in Europe now trade with negative yields, an unprecedented situation, which illustrates how overvalued European government bonds in general have become, particularly when taking into account the parlous condition of some major governments' finances. The Eurozone banks are also financially precarious, having an average Tier 1 capital ratio to tangible assets of 5.1%, dropping to 4.1% when off-balance sheet items are included. Furthermore, the netting off of credit default swaps permitted under new Basel Committee rules has allowed the banks to conceal their true loan risk. The combination of European banks gaming the system, average core balance sheet leverage (including off-balance sheet obligations) of 24:1, and their balance sheets laden with wildly overvalued government bonds, has the makings of a crisis in search of a trigger.

    A European banking crisis could escalate very rapidly if and when it starts, and would be an event beyond the direct control of an alarmingly undercapitalised ECB. The initial effect might be to drive the dollar higher in the foreign exchanges, particularly against the euro, and instigate a further markdown of commodity prices, as markets try to discount the economic implications of a systemic problem in the Eurozone. If an event such as this occurs, it would be impossible to limit it to a single geographical area. The major central banks would be forced into a coordinated rescue programme, involving a major expansion of all their balance sheets, on top of the post-Lehman crisis expansion.

    Once initial uncertainties are out of the way, the prospect of escalating systemic risk should be very positive for gold, which is the only certain hedge against these events. To determine the potential for the gold price, its current value should be assessed by looking at the long-run inflation of fiat dollars relative to the increase of above-ground gold stocks, and adjusting the dollar price of gold accordingly.

    FMQ and gold

    The fiat money quantity represents the total fiat money that has been produced by the US banking system. It includes fiat currency not in circulation, being mainly bank reserves sitting on the Fed's balance sheet. The chart below shows the monthly accumulation of US dollar FMQ since 1959.

    gold 2016 1

    Following the Lehman crisis, the dollar-price of gold fell initially before recovering and gaining all-time highs in September 2011. With the benefit of hindsight, we can surmise that the immediate effect of the Lehman crisis was to trigger a flight into the dollar, before it became evident that the Fed's actions aimed at stabilising the financial sector were succeeding at the expense of monetary inflation. This also provides an explanation as to why, in order to maintain confidence in the dollar, the gold price had to be subsequently suppressed. Judging by all the circumstantial evidence following the Cyprus crisis, the most notable suppression exercise was in April 2013, and close study of market actions and volumes reveals that other less dramatic price suppressions have from time to time also taken place.

    Given this experience, it would be wrong to rule out another attempt by the western central banks to suppress the price of gold in the event of a crisis. However, it is becoming clear that they can only suppress the price through the paper markets, given the relative scarcity of physical bullion in western central bank vaults, and the reluctance of individual central banks to compromise their bullion holdings any further. These short-term uncertainties cannot be quantified, but we can have a clear idea as to gold's current true value, expressed in US dollars. This is the subject of our next chart.

    gold 2016 2

    The chart shows the price of gold deflated by both the increase in FMQ over the years and by the expansion of above-ground gold stocks, since the price was fixed at $35 in 1934 by President Roosevelt. Adjusted by these two factors, gold at end-December 2015 was priced at the equivalent of $3.25 in 1934 dollars, less than 10% of the 1934 price. The only occasion the adjusted price has been lower was in 1971, just months before the Nixon shock, when the Bretton Woods system finally collapsed. The adjusted price stood at $3.13 in March that year.

    The next chart shows the same price adjustments applied to the gold price, this time from August 2008, when the Lehman crisis broke and the nominal gold price was $918.

    gold 2016 3

    The adjusted price, reflecting the expansion of both the FMQ and above-ground gold stocks, now stands at $402, a decline of 56% in real terms since Lehman.

    On value considerations, we can therefore conclude the following:
    • Gold is cheaper than it has ever been against the world's reserve currency, with the single exception of the time when it was so under-priced that the US Government was forced to scrap its peg at $35 and abandon the Bretton Woods Agreement.
    • Compared with the situation at the time of the Lehman crisis, gold is significantly cheaper today, which is wholly at odds with the continuing systemic risk to fiat currencies from undercapitalised banks, unprepared for the prospect of markets normalising.

    Many contemporary financial analysts would argue that gold is not relevant to these issues, because gold is no longer money. This line of reasoning ignores the fact that ordinary people in the west do not get this message and are accumulating gold coins and small bullion bars at increasing rates. And more importantly, economic power is shifting from countries where this Keynesian view is prevalent to countries where it is not. The next section looks at the geostrategic implications of the shift in the ownership and pricing of gold from west to east.

    China, India and the rest of Asia

    China and India, together with all the other countries in mainland Asia, have been draining the west's vaults of above-ground gold stocks for far longer than most people in western capital markets realise. China first delegated the management of gold policy to the Peoples Bank by regulations adopted in 1983, in a move that followed the post-Mao reforms of 1979/82. The intention behind these regulations was for the state to acquire substantial amounts of gold, to develop gold mining, and to control all processing and refining activities. At that time the west was doing its best to suppress gold in order to enhance the credibility of paper currencies, by releasing large quantities of vaulted bullion through leasing and outright sales. This is why the timing is important: it was an opportunity for China, with its one-billion plus population in the throes of rapid economic reform, to diversify growing foreign currency surpluses, in the same way as the Arab nations did earlier and contemporaneously between 1973-1990 following the oil price boom.

    When China set up the Shanghai Gold Exchange in 2002 and encouraged its private sector to accumulate gold, the state had obviously acquired enough bullion for its own strategic purposes. We cannot know how much the state has actually accumulated, or indeed to what extent the gold she has mined has been taken into state ownership since, but the amount is likely to be very substantial. We do know that gross deliveries into public hands since 2002, satisfied mainly by imports from western vaults, exceed 11,000 tonnes to date. It is therefore quite possible that China and its citizens now have more gold than all the other central banks put together, given that some official gold is currently leased by western central banks and some has been secretly sold to suppress the price.

    The monthly statements about China's gold reserve additions are therefore meaningless. However, Russia is now accumulating official reserves as well, and the Indian state is trying to acquire her citizen's gold by stealth, having been frozen out of the market through lack of supply. The bulk of Asia is, or will be, bound together through the Shanghai Cooperation Organisation, an economic partnership dominated by China and Russia, encompassing more than half the world's population, and which accepts physical gold as the ultimate form of money. And what clearly emerged in 2015 is that the dominant trade currency in this bloc will unquestionably be the Chinese yuan, the currency of the country that has now cornered the world's physical gold market.

    The future for the world's money is rapidly developing, as will become increasingly apparent in 2016. The era of dollar supremacy is coming to an end, no doubt hastened by the Fed's ultimately destructive monetary policies. The threat to the dollar's primacy is also a threat to the other great paper currencies: the euro, the yen and sterling. Whether or not these fail before, with or after the dollar, is only a matter for timing. China must have foreseen this possible outcome, otherwise she would not have embarked on a policy of accumulating gold as long ago as 1983, invested substantial resources into gold mining and refining, actively encouraged her citizens to own it, and is today promoting use of her currency for global trade and the pricing of gold.

    Western market observers seem to be unaware of how advanced China's currency policy is today. Instead, they expect a full-blown credit crisis, the result of the credit expansion of recent years being undermined by a rapidly slowing economy. Furthermore, they argue that Chinese labour costs have increased and require a much lower yuan exchange rate to become competitive again. Based on western-style macroeconomic analysis, they naturally conclude that China will require a substantial currency devaluation to contain these problems.

    While it is a mistake to gloss over the considerable economic difficulties, this analysis is flawed on two counts. Firstly, the state owns the banks, so a credit crisis stops with the debtors. And secondly, under the thirteenth five-year plan, China is embarking on a redirection of economic resources from being the cheap manufacturer for the rest of the world to serving its growing middle class and developing trans-Asian infrastructure. China's unemployment rate is estimated to be about 5%, so workers employed on current production lines will need to be redeployed, if the state's economic strategy is to progress. A substantial devaluation is therefore counterproductive, though the central bank does move the yuan's peg against the dollar from time to time.

    The purpose behind China's accumulation of gold can only be to eventually make the yuan a reliable store of value. China will need to see a higher gold price in yuan, probably at a time dictated by external events, which she will patiently await. This is why, having developed the Shanghai Gold Exchange into the world's most important physical gold market, China plans to price gold in yuan, with the objective that the yuan-gold peg will eventually supersede yuan-dollar peg.

    We will surely end 2016 with a wider appreciation that the dollar is no longer king, and that the future for money lies in Asia, the yuan, and gold.

    Conclusion

    In the near-term, paper gold is extremely oversold, reflecting the expression of western establishment sentiment in the paper markets. Futures and forward markets are short of paper gold to an extraordinary degree. Whether or not this leaves open the possibility of further falls in the dollar price of gold in the next few months is a moot point. More importantly, on longer-term considerations, gold has not been this undervalued since the events leading to the collapse of the Bretton Woods agreement. If current events lead to a systemic crisis in western capital markets in 2016, which given the global slump in economic activity looks increasingly likely, a further expansion of central bank balance sheets on top of the post-Lehman expansion seems certain. If this happens, it is unlikely the purchasing power of the dollar and the other major currencies will remain at current levels. And if the dollar loses purchasing-power, price inflation will rise along with nominal interest rates, and a wider debt liquidation in western capital markets becomes a real possibility.

    China and her SCO partners have taken steps to be protected from this outcome and have cornered the gold market. A wise person should take note and think seriously about the implications.

    Enjoy 2016.

  • Caught On Tape: Iran Conducts Live-Fire Rocket Drill Next To US Carrier

    Late last month, amid heightened tensions between Washington and Tehran, Iran conducted a live-fire exercise in the Strait of Hormuz in close proximity to the USS Harry Truman, one of Ash Carter’s fleet of aircraft carriers.

    The US called the incident a “provocation” as the rockets landed a mere 1,500 yards from two US ships.

    “Firing weapons so close to passing coalition ships and commercial traffic within an internationally recognized maritime traffic lane is unsafe, unprofessional, and inconsistent with international maritime law,” US CentCom said, in a statement.

    The brazen move infuriated US lawmakers opposed to the Iran nuclear accord. John McCain for instance, accused The White House of “turning a blind eye to Iranian saber rattling for fear Iran will walk away from the nuclear deal.”

    The maritime mishap came amid (loud) calls for fresh sanctions against Tehran in connection with Iran’s test of a next gen surface-to-surface ballistic missile (the Emad).

    On Saturday, the US released footage of the Iranian rocket drill in a conveniently-timed move that coincides with a historic spat between Tehran and Washington’s allies in Riyadh. The video is below.

  • What The Charts Say: "US Stocks Are In Riskiest Position In Seven Years"

    Via John Murphy,

    MAJOR STOCK INDEXES ENTER CORRECTION TERRITORY… After suffering the worst start to a new year in history, the U.S. stock market has entered correction territory which is defined by a drop of 10% from its old high. The charts pretty much speak for themselves. All three major stock indexes fell to three month lows in heavy trading. The next downside target is the two lows formed in August and late September.

    What the indexes do from there will determine whether the current downturn is just a correction or something more serious. Unfortunately, some portions of the market have already broken those support levels.

    SMALL AND MIDCAPS BREAK SUPPORT… Relative weakness in small and midsize stocks gave early warnings in December that the yearend rally was mainly a large cap affair and too narrow to continue. That situation has gotten a lot worse since then. Charts 4 and 5 show the Russell 2000 Small Cap and the S&P 400 Mid Cap indexes falling below their 2015 lows. That puts them at the lowest level since October 2014.
     

    That's another important test for them and the rest of the market.  

    TRANSPORTS ENTER BEAR MARKET TERRITORY… Chart 6 shows the Dow Jones Transportation Average falling to the lowest level in two years. It has lost -25% from its late 2014 high which puts it into bear market territory. What's surprising is that the transports haven't gotten any help from plunging energy prices. That may carry bad news for Dow Theorists who link the direction of the transports with the Dow Industrials.

    It may carry good news for the Dow Utilities, however, which are showing more resilience. Chart 7 shows the Dow Utilities holding up a lot better than everything else.

    It was the only market sector to register a gain during the week. Its relative strength line (top of chart) is rising as well. Since utilities are considered bond proxies, their relative strength large reflects the recent rotation out of stocks and into bonds.

    BOND/STOCK RATIO FAVORS BONDS… As usually happens when stocks fall, bond prices are rising. That's especially true of longer-dated Treasury bonds. The green line in Chart 8 is a ratio of the 7-10 Year Treasury Bond ishares divided by the S&P 500 SPDRs. The ratio spiked last August when stocks tumbled.

    The ratio has spiked again to the highest level in three months. Bond prices are also benefitting from the deflationary impact from falling commodity prices. Two other assets attracting safe haven buying are gold and the Japanese yen. Some measures of foreign stocks (both developed and emerging) have already fallen to 52-week lows. That doesn't bode well for U.S. stocks which are now in the riskiest position since the bull market started seven years ago.

  • Explaining American Men's 'Electile' Dysfunction In 1 Serious Chart

    Did we just cross “the tipping point” for faith in the American dream?

     

     

    Having fallen consistently from almost 90% particpation in the labor force in 1948 to just 68.5% in 2015, it appears that crossing below the 70% participation rate has pushed American men to their limit of faith in career politicians.

  • Newsflash From The December 'Jobs' Report – The US Economy Is Dead In The Water

    Submitted by David Stockman via Contra Corner blog,

    Here’s a newsflash that CNBC didn’t mention. According to the BLS, the US economy generated a miniscule 11,000 jobs in the month of December.

    Yet notwithstanding the fact that almost nobody works outside any more, the BLS fiction writers added 281,000 to their headline number to cover the “seasonal adjustment.” This is done on the apparent truism that December is generally colder than November and that workers get holiday vacations.

    Of course, this December was much warmer, not colder, than average.  And that’s not the only deviation from normal seasonal trends.

    The Christmas selling season this year, for example, was absolutely not comparable to the ghosts of Christmas past. Bricks and mortar retail is in turmoil and in secular decline due to Amazon and its e-commerce ilk, and this trend is accelerating by the year.

    So too, energy and export based sectors have been thrown for a loop in the last few months by a surging dollar and collapsing commodity prices. Likewise, construction activity has been so weak in this cycle—-and for the good reason that both commercial and residential stock is vastly overbuilt owing to two decades of cheap credit—–that its not remotely comparable to historic patterns.

    Never mind. The BLS always adds the same big dollop of jobs to the December establishment survey come hell or high water. In fact, the seasonal adjustment has averaged 320,000 for the last 12 years!

    For crying out loud, folks, every December is different—–and not just because of the vagaries of the weather. Capitalism is about incessant change and reallocation of economic activity and resources. And now the globalized ebbs and flows of economic activity have only accentuated the rate and intensity of these adjustments.

    Yet the statistical wizards at the BLS think they can approximate a seasonal adjustment factor for December that at +/- 300k amounts to just 0.2% of the currently reported 144.2 million establishment survey jobs, and an even smaller fraction of the potential adult work force which is at least 165 million.

    But that’s a pretentious stab in the dark. The December seasonal adjustment (SA) could just as easily be 0.3% of the job base or 0.1%, depending upon the specific point in the business cycle and structural trends roiling the economy.

    Indeed, these brackets alone would vary the headline SA number by 150k to 450k. The fact that the seasonal adjustment factor for December has oscillated tightly around 300,000 for the last 12 years proves only one thing—–namely, that the bureaucrats at the BLS have chosen to invent the same guesstimate year after year; its not science, its political fiction.

    The fact is, the seasonal adjustment factors are about the closest thing there is to pure noise among all the dubious “incoming” data that the Fed and Wall Street obsess over.

    Here’s a better take on the matter. We are now in the 78th month since the June 2009 recession bottom, and are reaching the point where this so-called business cycle expansion is getting very long in the tooth by all historical standards.

    Historical Length of Recoveries - Click to enlarge

    Historical Length of Recoveries

    So what happened to the non-seasonally adjusted (NSA) job count in December at similar points late in the course of prior cycles? Well, in December 1999 about 140,000 jobs were added and in December 2007 there was a NSA gain of 212,000. This time we got the magnificent sum of 11,000, and by the way, last year was only 6,000.

    The real news flash in the December “jobs” report, therefore, is that even by the lights of the BLS’ rickety, archaic and virtually worthless establishment survey, the domestic economy is dead in the water. We are not on the verge of “escape velocity”, as our foolish monetary politburo keeps insisting; the US economy is actually knocking on the door of recession.

    And that’s why the retail sheep have been led to the slaughter once again in the Wall Street casino. The cats who run it have embraced the nonfarm payroll report as the primo macroeconomic indicator because they know that it drastically lags the real drivers of main street activity and has an abysmal record of forecasting turns in the macroeconomic cycle.

    Stated differently, these fictional monthly SA jobs numbers are extremely useful to the Wall Street sell side. They keep the rubes hitting the “buy” button until the fast money can slowly dump its holdings and get out of Dodge; or even pivot and reload to the short side.

    That’s right. We are not talking tin foil hats here. It is plain as day that the BLS’ seasonal adjustments are a completely stupid waste of time. During the winter season especially, it might as well just use a random numbers generator.

    Indeed, here’s what the Steve Liesman’s of the world never tell you—–undoubtedly because they don’t know. Fully two-thirds or 200,000 of the 300,000 December seasonal adjustment is in the construction sector!

    So the whole December SA is essentially a weather proxy designed to adjust a survey taken during the middle week of the first month of winter. Could weather fluctuations impact the number of construction workers on the job by a mere 2% (150,000) around the week of December 15?

    Well, yes it could. And that means we really don’t know whether 292,000 “jobs” were created in December or whether it was only 142,000.

    Once again, loose the SA noise in the construction sector job count.  This category alone accounted for 45,000 of the headline gain, but that was owing to the fact that the 6.538 million figure reported for the construction category was flattered by a 196,000 seasonal adjustment.

    Instead, look at the non-seasonally adjusted (NSA) number compared to the same point in the cycle from prior history. Thus, at the December 2006 peak the number of construction jobs was 7.585 million, meaning we are still down by 1.1 million jobs or 15% from the prior cycle high.

    And in December 2000, there were actually 6.7 million construction jobs. That is, we have not yet returned to the cyclically comparable level that prevailed at the turn of the century.

    In short, the December jobs report was not evidence of a “strong” economy. It was just another emission from the government’s SA noise factory that obscures the actual state of the main street economy.

    So here’s the real truth. Construction jobs are breadwinner jobs. The average annualized pay rate for the category is $57,000, but the US economy is not actually generating new construction jobs any longer.

    What’s happening is that the BLS is simply reporting “born again” jobs and thereby enabling the Keynesian chorus to claim “progress” and “strength”, and for its Wall Street section to blather about “blow-out numbers”. Indeed, the latter has embraced the Keynesian model lock, stock and barrel precisely because its so useful in the stock peddling business.

    The Keynesian model is about deltas, not levels. For reasons we will amplify below that’s almost always misleading in the context of monetary central planning and the bubble finance cycles that flow from it.

    In fact, the only valid measure of economic strength and the main stream economy’s capacity to support sustainable profit growth and higher stock prices is the change in levels over time at cyclically comparable points.

    That gets us to the larger story embedded in the above observations about the construction sector jobs series. Namely, just as there have been no trend gains in the level of construction jobs since the turn of the century, the same is true of the much wider swath of what we have called “breadwinner jobs”.

    These jobs in construction, energy and minerals, manufacturing, FIRE, the white collar professions, business management, information technology and trade/distribution account for 50% of all nonfarm payroll slots, pay upwards of $50,000 per year on average and account for more than 66% of total wage and salary disbursements.

    Yet the December 2015 number of breadwinner jobs was still 1.1 million jobs below that posted for the first month of this century!

    Breadwinner Economy Jobs - Click to enlarge

    Needless to say, that’s not “strength”. It’s actually a profound indictment of the archaic convention embedded in the monthly employment report that counts job slots, not the variable gigs and hours on which employment in the contemporary US economy is actually based.

    Indeed, all the Jobs Friday hoopla is based on your grandfather’s BLS survey, which arose at a time when everyone punched the clock at the Ford factory 40-50 hours per week, including overtime. By contrast, now the greeters and cash register operators at Wal-Mart are computer-scheduled in 15 minute increments.

    Since average pay for the bartenders and waiters category is less than $20,000 on an annualized basis owing to an average of 26 hours per week and $13/hour pay rates, you need 2.5 of these gigs to get the equivalent of one breadwinner job. Yet on Jobs Friday its all one job, one vote.

    So what is actually happening beneath the surface is a great swap out. The very highest productivity jobs in goods production are disappearing on a trend basis; the monthly deltas reported so breathlessly on bubble vision actually embody purely “born again” employment slots that represent the partial recovery of jobs lost during each crash of the Fed’s serial financial bubbles.

    But the cyclically adjusted trend is down, not up. It represents economic weakness and reduced capacity to generate productivity, income and profits, not strength.

    In fact, not withstanding the “blow-out” December numbers, the US economy still has 11% fewer jobs in goods production—-mining, energy, manufacturing and construction—–than it did at the December 2007 cyclical peak, and 21% fewer than at the turn of the century.

    Goods Producing Economy -Click to enlarge

    By contrast, what is being swapped in are what we have called Part-Time Economy jobs, where there have been modest cyclically comparable gains in job levels during the past 15 years. Needless to say, however, the average annualized pay rate in this category is less than $20,000.

    Part Time Economy Jobs - Click to enlarge

    But even these trend level gains are heavily concentrated in the lowest quality quadrant. That is, in what we have called the “Bread and Circuses Economy”—–bartenders, waiters, bellhops, maids, parking attendants, hot dog vendors and the like.

    The fact is, this category accounts for full 70%, or 1.8 million, of the 2.59 million gain in Part Time Economy jobs since the pre-recession peak in December 2007.

    Bread and Circuses Economy - Click to enlarge

    Another factor obscured by the BLS’ archaic job slot counting convention is the root wealth and productivity contribution of the job count at any point in time. Generally, private sector jobs financed by consumers add to wealth and productivity at varying degrees, depending on the sector.

    By contrast, taxpayer financed jobs—–directly through government outlays or indirectly through heavy tax subsidies and preferences—–do not add to wealth, and, not to put too fine a point on it, may well subtract from it. And that gets us to the HES Complex (health, education and social services).

    This is the fastest growing job category since the turn of the century, yet it now depends upon more than $2 trillion per year of Medicare, Medicaid and other government health spending—–plus another $250 billion or so of tax expenditures for employer health plans and tax credits for education.

    HES Complex - Click to enlarge

    Yes, it can be argued that a some part of the current 32.6 million jobs in the HES Complex add to long-run productivity via education and health status improvement of the working age population. But that point does not get you too far if you recognize the abject and worsening failure of public education in the US and the gross inefficiency of our third-party payment dominated health care system.

    Far more relevant is this fact. For the entirety of this century there has been only a 3.7%  net gain in even the gross number of job slots in the US economy outside of the HES Complex, and that measurement includes the Part Time Economy and its Bread and Circuses subset.

    Stated differently, on a trend level basis, the US economy has only generated 21,000 jobs per month over the last 15 years that were not funded by the public fisc, and therefore indirectly by the $10 trillion gain in public sector debts since the turn of the century.

    Nonfarm Payrolls Less HES Complex - - Click to enlarge

    So whatever is embedded in the BLS payroll count, don’t call it recovery, strength or progress. Instead, call it a propaganda cloud that serves the interests of Wall Street and the monetary central planners, alike.

    Here’s the thing. You can not sell stock if you tell customers that a recession is coming and earnings are going to be heading sharply in a southerly direction. So Wall Street never does.

    By the spring of 2008, for example, after the subprime mortgage implosion was already well underway, Countrywide Financial had already failed, AIG was hitting the rocks, Bear Stearns was gone, and housing sales and starts were sliding rapidly from their towering peaks, the Wall Street consensus ex-items hockey stick still pointed to S&P earnings of $115 per share.

    As it happened, the actual result was $15 per share. And the homegamers who stayed in the market on that assurance were treated, instead, to a bloodbath in which they lost trillions in the 401k and brokerage accounts.

    Likewise, the monetary central planners at the Fed and their economist cheerleaders have never forecast a recession. That’s because they embrace the cardinal Keynesian Error, which holds that private capitalism is inherently unstable and prone to extreme cyclical swings—-even a tendency toward depressionary black holes.

    So they assume that their policy tools and maneuvers are not only doing gods work of keeping private capitalism on the straight and narrow. Indeed, the arrogant and foolish professor from Princeton, Ben Bernanke, called it The Great Moderation in March 2004 just as the greatest bubble and bust in modern history was working up a head of steam.

    Notwithstanding the thumping repudiation of that conceit which occurred during the great financial crisis and recession, the predicate remains that this time is different. To wit, the monetary central planners now have it right and will steer the US economy deftly to the nirvana of permanent Full Employment, world without end.

  • Global Central Banks Are Facing a Crisis Larger Than 2008… And With Little to No Fire Power Left!

    There is talk of another 2008 hitting the markets.

     

    However, what’s coming will not be another 2008. It will be worse than 2008.

     

    There are several reasons for this.

     

    Firstly, today, there is over $20 trillion more debt in the financial system than there was in 2008. If 2008 was a debt bubble that needed to burst; today the bubble is even larger.

     

    Secondly, Central Bankers have already employed both ZIRP and NIRP for years. In 2008, we had only just begun to experience ZIRP in the West and NIRP was still considered a “nuclear option” that bordered on insanity.

     

    Today both ZIRP and NIRP are commonplace. Indeed, the EU has cut rates into NIRP three times in the last 18 months. The world has watched as these actions have barely resulted in an uptick in the EU’s inflation.

     

     

    Central Bankers have also employed Quantitative Easing, another “nuclear option” that had yet to be unleashed back in 2008 (the Fed launched the first QE program in December 2008).

     

    To date, global Central Banks have printed over $14 trillion in new money to buy bonds via QE. Even banking systems in which the legality of QE was questionable, such as the EU, have launched QE programs that are €1 trillion or larger.

     

    These programs have been massive in scope. In Japan, a single QE program equal to 25% of GDP was launched in April 2013. Japanese GDP growth barely moved higher before once again rolling over.  Even an expansion of this already incredible monetary policy in October 2014 failed to ignite significant growth for Japan’s economy.

     

     

    Finally, today, Central Bank balance sheets are already bloated to the point of being larger than even some of the larger countries’ economies.

     

    The Fed’s balance sheet is over $4.5 trillion, larger than the economy of Germany and just smaller than the economy of Japan. The ECB’s balance sheet is €2.7 trillion, larger than the economies of France or Brazil.  The Bank of Japan’s balance sheet is over $3 trillion, larger than the economy of the UK.

     

    And on and on.

     

    With Central Bank balance sheets so massive already, the marginal effect of more expansion, (even via massive new QE programs) will be much less than it was in 2008. In 2008, Central Bank balance sheets had ample room to grow. Today, investors have already seen what a 200% or 300% expansion of a Central Bank’s balance sheet can buy.

     

    In short, Central Banks are in far worse shape than they were in 2008 to deal with another crisis. And that’s too bad, because the coming crisis will be significantly larger than that of 2008 (again there is over $20 trillion MORE debt in the system than there was then).

     

    Smart investors are preparing now.

     

    We just published a 21-page investment report titled Stock Market Crash Survival Guide.

     

    In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

     

    We are giving away just 1,000 copies for FREE to the public.

     

    To pick up yours, swing by:

    https://www.phoenixcapitalmarketing.com/stockmarketcrash.html

     

    Best Regards

     

    Graham Summers

    Chief Market Strategist

    Phoenix Capital Research

     

     

     

     

     

     

  • Angry Bond Insurers Sue Puerto Rico Over "Clawback" Boondoggle

    On December 1, Puerto Rico governor Alejandro Garcia Padilla was staring down a $354 million debt payment he couldn’t make.

    If the commonwealth defaulted on the GO portion, a cascade of messy litigation would follow and the island’s reputation with creditors would suffer irreparable harm.

    That afternoon, on the heels of a visit to Capitol Hill where the governor attempted to explain to Congress why Puerto Rico should be allowed to take advantage of bankruptcy laws, the island made the payment, avoiding default.

    Padilla “found” the money by using what we called an “absurd” revenue clawback mechanism.

    Essentially, Puerto Rico diverted money earmarked for non-GO creditors and used it to pay the island’s GO bonds. As you can imagine, the bond insurers for the debt involved in the clawback were not happy. Ambac, for instance, called the clawback “illegal” and claimed that Padilla actually began siphoning funds well before the December 1 payment, a charge the governor denied.

    On January 1, Puerto Rico defaulted on some $36 million in Prifa bonds.

    Now, Ambac, along with  Assured Guaranty, are suing. “Insurance companies that guarantee Puerto Rico municipal debt filed a lawsuit challenging the commonwealth’s decision to divert revenue designated for some bonds to pay other creditors,” Bloomberg reports, adding that the monolines “said the clawback of revenue pledged to bond issues violates the U.S. Constitution by interfering with debt-holders’ contractual rights.” Here’s more:

    The suit filed in U.S. District Court in Puerto Rico seeks to have the clawback declared unlawful and asks the court to issue an injunction against implementation, according to a statement.

     

    “The commonwealth has committed itself to a ‘scorched earth’ strategy of blaming its fiscal and structural problems on lenders, Congress and others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws,” Nader Tavakoli, chief executive officer of Ambac, said in the statement late Thursday.

     


     

    The insurers are the first to sue over the diversion. They claim a clawback can only be implemented if the commonwealth’s funds are insufficient to cover general-obligation debt service. Puerto Rico estimates approximately $9 billion of available resources in the fiscal year ending June 30, 2016, which vastly exceeds debt service on the public debt of approximately $1.85 billion, according to Ambac.

    So, while bondholders may have little in the way of recourse, the monolines are taking this lying down and that means a protracted battle among stakeholders for limited cash is about to ensue. “The lawsuit is an opening salvo in what could be a long and expensive court fight over Puerto Rico’s efforts to restructure its debt,” Reuters wrote on Friday. “They also said Puerto Rico is wrongfully using clawbacks to fund government services, and is diverting bondholders’ collateral in violation of the Takings and Due Process clauses of the U.S. constitution.”

    In other words, the insurers don’t think Padilla should have the option of choosing to provide public services over paying creditors. We predicted as much back in Novermber when we said the following:

    Ultimately, the decision will be between paying bondholders and ensuring that the government can continue to provide public services, and just as Greece prioritized pensions over IMF payments last summer, Padilla isn’t likely to sacrifice the public interest at the altar of the island’s creditors.

    The lawsuit comes just weeks after MBIA and Assured Guaranty struck a deal with the commonwealth to restructure $8.2 billion in PREPA debt.

    That agreement marked the largest ever muni restructuring and raised questions as to Padilla’s contention that bankruptcy is the only way for the island to efficiently get out of trouble. Padilla contends that restructuring the rest of Puerto Rico’s debt will be far more difficult. “The vast number of creditors with differing interests across all issuing entities would result in negotiations that are lengthy, costly and chaotic. Access to legal, broad restructuring authority would allow us to undertake these in an orderly manner,” he said last month.

    PREPA isn’t subject to the clawback, but the Prifa default has Assured Guaranty on edge. “These actions stand in contrast to the consensual agreement that we and other creditors recently reached with Puerto Rico’s electric utility, Prepa,” Dominic Frederico, Assured Guaranty’s president and chief executive officer, said in a statement Thursday.

    As you can see, this is about to get very messy, very quickly and the angrier the monolines get, the more difficult it will be for the island to restructure its obligations (recall that it was the insurers who held up the PREPA deal).

    But don’t worry, the holiday bonuses aren’t in jeopardy – yet.

    *  *  *

    Full Ambac statement

    Ambac Financial Group, Inc. (Nasdaq:AMBC) (“Ambac”), a holding company whose subsidiaries, including Ambac Assurance Corporation (“Ambac Assurance”), provide financial guarantees and other financial services, today announced that Ambac Assurance has filed a lawsuit to protect its rights against the illegal clawback of certain revenue by the Commonwealth of Puerto Rico.  The Complaint for Declaratory and Injunctive Relief was filed in U.S. District Court, District of Puerto Rico, with co-plaintiffs Assured Guaranty Corp. and Assured Guaranty Municipal Corp.

    In December 2015, the Commonwealth of Puerto Rico announced that it would clawback revenues pledged to other bonds to fund obligations to its general obligation (“GO”) bonds.  Although the Commonwealth of Puerto Rico, under its constitution, has the right to clawback certain revenues to service its GO bond payments, that right is subject to important preconditions.  One key precondition is that the revenues can only be clawed back if no other revenues or moneys are available to pay the GO bond payments. For fiscal year 2016, the Commonwealth forecasts approximately $9.0 billion of available resources, which vastly exceeds debt service on the public debt of approximately $1.85 billion.

    The targeted clawback revenues include those of Puerto Rico Highways and Transportation Authority (“HTA”), the Puerto Rico Convention Center District Authority (“PRCCDA”) and the Puerto Rico Infrastructure Financing Authority (“PRIFA”).  The implementation of the clawback contributed to the government’s default on January 1, 2016 on $36 million of interest on PRIFA bonds, and will eventually cause a default on HTA and PRCCDA bonds. Ambac Assurance satisfied its obligation to make timely payment on approximately $10 million of claims related to PRIFA bonds it insures.

    Commenting on today’s announcement, Nader Tavakoli, President and Chief Executive Officer of Ambac said, “Over the last several months, we have attempted to engage the Commonwealth in consensual conversations toward finding amicable solutions for their asserted liquidity issues, only to be rebuffed.  Instead the Commonwealth has committed itself to a ‘scorched earth’ strategy of blaming its fiscal and structural problems on lenders, Congressand others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws.  Serious issues have been raised by the Governor himself as to whether the Commonwealth historically misrepresented its financial condition to fool the very lenders it now seeks to punish.”

    Mr. Tavakoli continued, “Most recently, the Commonwealth unlawfully diverted tax revenues collected by the U.S. government, which are collected for the specific purpose of supporting PRIFA bonds, in order to finance the government’s general accounts.  We remain hopeful that the Commonwealth will abandon these illegal tactics, and turn instead toward good faith negotiations aimed at solutions instead of confrontation.  While we are optimistic that the government of Puerto Rico will begin to act responsibly, at this time we have no choice but to protect our stakeholders through judicial recourse.”

    *  *  *

  • The Bankers' India Gold Grab: An Update

    Submitted by Jeff Nielsen via SprottMoney.com,

    In previous commentaries , readers were warned that Western bankers were once again targeting the gold market of India with more of their fiendish plans. This time, they convinced (bribed?) India’s new, corrupt government – the Modi regime – into orchestrating a scheme to steal the gold from its own people.

    The nexus of this scam was what was announced as “the gold deposit scheme.” Even the Conspirators themselves were unable to come up with a name to make this naked fraud sound legitimate. The fraud itself is simple, indeed utterly simplistic.

    Indians “deposit” their gold into the clutches of their thieving government and are paid (paper) “interest” on those deposits. The fact that this was a naked fraud was immediately apparent. As the bankers tell us all the time, “gold generates no income.” How could India’s government pay the interest on the gold coins/bars/jewelry sitting in its vault supposedly held in trust for its depositors?

    There was no immediate answer to that question, because there could be no (legitimate) answer to the question. Indeed, in legitimate bullion storage arrangements, depositors pay a fee to have their bullion safely stored for them, because while the gold generates no income, the costs of storing such gold are significantly greater than zero.

    Finally, reluctantly, the Conspirators made explicit what was already totally obvious:

    The deposited gold will be auctioned off from time to time to meet domestic demand for jewellery and coins. [emphasis mine]

    The scam was now completely exposed.

    a) Indians “deposit” their gold.

    b) Indians receive (paper) “interest” on their gold while their deposited gold is sold off.

    c) Indians end up with the paper interest – and no gold.

     

    d) India’s jewellers and coin-makers then sell the gold they purchased at these auctions back to the same Chumps who originally deposited that gold.

    In the eyes of Western bankers, it was the perfect “scheme” – hence their label for the plan. In the eyes of any sane, rational, human being, it was/is the most naked, clumsy fraud that one could possibly imagine. But the corporate media assured us there was considerable enthusiasm amongst India’s population for this scam.

    With enormous media and government fanfare, the “scheme” was officially launched at the beginning of November. However, these same media and government mouthpieces were much, much quieter a couple of weeks later when they released details on the initial response to this obvious fraud.

    A gold deposit scheme launched amid fanfare by Indian Prime Minister Narendra Modi two weeks ago has so far attracted only 400 grammes, an industry official said on Thursday, out of a national hoard estimated at 20,000 tonnes.

    For those readers still less-than-comfortable with the metric system, let’s convert these numbers to the Imperial system of measurement. In two weeks, out of a population of more than one billion people, holding an estimated 40 million pounds of gold, the Conspirators only managed to net roughly one pound of gold from their intended victims.

    Expressing these results in percentage terms, the Conspirators managed to steal less than 0.000002% of India’s privately held gold. At that rate, it would take India’s government (and the bankers) more than one million years to steal all of India’s gold.

    The thieves were not daunted, at least not publicly. The media offered assorted excuses for the “slow” initial response to the scam. India’s government immediately added new inducements for the scam and pledged a “high-level meeting” to plot even more changes.

    Last week, the government announced several steps to make the scheme more attractive for consumers, including measures such as eliminating capital gains and income taxes on the interest earned. The meeting on Tuesday is expected to focus on incentives for banks.

    “Capital gains and income taxes”? Indians are having their gold stolen from them. They receive paper interest equal to a fraction of the value of that gold in return. And the media/government liars have the audacity to call this interest a “gain” or “income”? How magnanimous of India’s government to announce that it wouldn’t tax those “profits.”

    With these new inducements in place, the Conspirators sat back and waited for the gold to start flowing into their vaults. Two weeks later, we got our next update :

    The scheme has only attracted about one kilogramme [two pounds] in a month, prompting the government to nudge temples through banks to hand over their treasures …

    First we get news that the thieves managed to net another, whole pound of gold during the second half of the month, and were still on-pace to steal all of India’s gold in 1,000,000+ years. Then the language (and imagery) descends to surreal comedy.

    We’re now told that India’s government sees “temple gold” as its best/easiest target for stealing. But then we’re told that India’s government isn’t going to approach the temples directly, despite its boasts of what a “great opportunity” the gold-deposit scam represented. Instead, we’re told that India’s government plans on sending in bankers to “nudge” the temples to “hand over their treasures.” Why?

    Once upon a time, those individuals who could liberate the most wealth from institutions in the least amount of time were known as “bank robbers.” But those days are ancient history. This is the 21 st century, or as the corporate media likes to call it, all the time, “the New Normal.”

    In the New Normal , the world’s premier wealth liberators are no longer bank robbers but rather bank er robbers. These wealth liberators of the 21 st century make the bank robbers of the 19 th and 20th century appear as nothing but rank amateurs.

    Observe. First a banker (and bank) is given custody of (someone else’s) financial assets in order to “manage” those assets. Then, a blink of an eye later, the bank/banker proudly proclaims that the bank now owns those assets. The bankers call this method of wealth liberation “a bail-in.”

    However, in this case, India’s new government was not calling upon its friends, the bankers, to engage in any direct wealth liberation. Rather, they were being sent in to engage in persuasion. Presumably the “bankers” assigned to that task had names like Butch and Knuckles, and instead of carrying briefcases, they were brandishing “implements of persuasion.”

    A mere three days after India’s government sent in the bankers, the following announcement appeared:

    Mumbai’s Siddhivinayak temple to deposit 40 kg of gold in monetization scheme

    Here’s what is interesting about that announcement. First of all, the bankers had already invested many years of time and effort looking for some means to “gather” some of the thousands of tonnes of gold held by India’s temples – and failed. Meanwhile, just three days earlier, we had been told the following.

    But Mumbai’s Shree Siddhivinayak temple, which is devoted to the Hindu elephant god Ganesha, said it remained unconvinced about the benefits.

    What could have been said to (or done to) the leaders of this temple in order to get them to suddenly reverse themselves after years of resisting all efforts by the bankers to “gather” their gold? Only Butch and Knuckles can answer that question – but they probably won’t.

    The strategy in strong-arming at least one of India’s temples out of a small portion of its gold is obvious. “Look!” hiss the bankers, “Your religious leaders are giving us their gold. That means that it must be a good idea.” Including the 40 kg of gold liberated from the Shree Siddhivinayak temple, this brings the total haul in the gold-deposit scam to 41 kg to date. Put in different terms, the total amount stolen has now risen from 0.000002% of the gold of India’s people all the way to 0.00008%.

    Will the scheme by the One Bank and India’s government to steal some/most/all of the 20,000 tonnes of privately held gold in India be successful? If so, Butch and Knuckles will have to engage in a lot more persuading.

  • It Begins: FXCM Doubles Yuan Margins, Warns Of Market "Disruption And Highly Illiquid Conditions"

    The last time FX brokers, still hurting from the Swiss National Bank’s revaluation shocker from last January which forced brand names such as FXCM to seek an urgent bailout, scramble to hike margins was in late June just ahead of the Greek “event risk” weekend, when  numerous brokers either hiked margins on EUR positions or went to “close only” mode due to “uncertainty surrounding the Greek debt negotiations… that could lead to high volatility on the market.”

    So, barely one week into the new year, one which has seen the stock market suffer its worst ever first week of trading, some FX brokers are not taking chances, and in the aftermath of the aggressive plunge in the Yuan (one we warned about a month ago), have decided to minimize client stop-out risk by hiking margins.

    Case in point, here is FXCM with a just released warning about upcoming “highly illiquid conditions” leading to a doubling in Yuan margins:

    Dear Client,

     

    We believe there is a chance of disruption and highly illiquid conditions in the forex market during the coming weeks (and/or months). Please be aware that market gaps tend to occur over the weekend – that is, currencies trade at prices considerably distant from previous levels.

     

    *IMPORTANT UPDATE*  

     

    Margin requirements will double on the USD/CNH pair after market close on January 15, 2016. See a Complete List of New Margin Requirements

     

    Please review your account to ensure that you have enough available margin to support any new positions. You may deposit additional funds at www.myfxcm.com or close positions as needed.

    Follows the traditional disclaime which FXCM itself probably should have taken to heart one year ago when after the SNB’s de-pegging the firm suffered tremendous losses:

    Remember that forex trading can result in losses that could exceed your deposited funds and therefore may not be suitable for everyone, so please ensure that you fully understand the high level of risk involved.

    The paradox here is that pre-emptive, if correct, warnings such as this one, tend to quickly become self-fulfilling prophecies as other brokers immediately follow suit and likewise increase margin requirements, which helps mitigate total loss potential but just as quickly soaks up liquidity from the market, leading to an even more fragmented market, prone to sudden, and quite dramatic moves.

    The full list of FXCM margin increases is shown below; expect every other FX brokerage to promptly jump on the bandwagon.

  • One Map That Explains The Dangerous Saudi-Iranian Conflict

    Submitted by Jon Schwartz via The Intercept,

    The Kingdom of Saudi Arabia executed Shiite Muslim cleric Nimr al-Nimr on Saturday. Hours later, Iranian protestors set fire to the Saudi embassy in Tehran. On Sunday, the Saudi government, which considers itself the guardian of Sunni Islam, cut diplomatic ties with Iran, which is a Shiite Muslim theocracy.

    To explain what’s going on, the New York Times provided a primer on the difference between Sunni and Shiite Islam, informing us that “a schism emerged after the death of the Prophet Muhammad in 632” — i.e., 1,383 years ago.

    But to the degree that the current crisis has anything to do with religion, it’s much less about whether Abu Bakr or Ali was Muhammad’s rightful successor and much more about who’s going to control something more concrete right now: oil.

    In fact, much of the conflict can be explained by a fascinating map created by M.R. Izady, a cartographer and adjunct master professor at the U.S. Air Force Special Operations School/Joint Special Operations University in Florida.

    What the map shows is that, due to a peculiar correlation of religious history and anaerobic decomposition of plankton, almost all the Persian Gulf’s fossil fuels are located underneath Shiites. This is true even in Sunni Saudi Arabia, where the major oil fields are in the Eastern Province, which has a majority Shiite population.

    As a result, one of the Saudi royal family’s deepest fears is that one day Saudi Shiites will secede, with their oil, and ally with Shiite Iran.

    This fear has only grown since the 2003 U.S. invasion of Iraq overturned Saddam Hussein’s minority Sunni regime, and empowered the pro-Iranian Shiite majority. Nimr himself said in 2009 that Saudi Shiites would call for secession if the Saudi government didn’t improve its treatment of them.

    shia-oil-cropped-2

    The map shows religious populations in the Middle East and proven developed oil and gas reserves. Click to view the full map of the wider region. The dark green areas are predominantly Shiite; light green predominantly Sunni; and purple predominantly Wahhabi/Salafi, a branch of Sunnis. The black and red areas represent oil and gas deposits, respectively.

    Source: Dr. Michael Izady at Columbia University, Gulf2000, New York

    As Izady’s map so strikingly demonstrates, essentially all of the Saudi oil wealth is located in a small sliver of its territory whose occupants are predominantly Shiite. (Nimr, for instance, lived in Awamiyya, in the heart of the Saudi oil region just northwest of Bahrain.) If this section of eastern Saudi Arabia were to break away, the Saudi royals would just be some broke 80-year-olds with nothing left but a lot of beard dye and Viagra prescriptions.

    Nimr’s execution can be partly explained by the Saudis’ desperation to stamp out any sign of independent thinking among the country’s Shiites.

    The same tension explains why Saudi Arabia helped Bahrain, an oil-rich, majority-Shiite country ruled by a Sunni monarchy, crush its version of the Arab Spring in 2011.

    Similar calculations were behind George H.W. Bush’s decision to stand by while Saddam Hussein used chemical weapons in 1991 to put down an insurrection by Iraqi Shiites at the end of the Gulf War. As New York Times columnist Thomas Friedman explained at the time, Saddam had “held Iraq together, much to the satisfaction of the American allies Turkey and Saudi Arabia.”

    Of course, it’s too simple to say that everything happening between Saudis and Iranians can be traced back to oil. Disdain and even hate for Shiites seem to be part of the DNA of Saudi Arabia’s peculiarly sectarian and belligerent version of Islam. In 1802, 136 years before oil was discovered in Saudi Arabia, the ideological predecessors to the modern Saudi state sacked Karbala, a city now in present-day Iraq and holy to Shiites. The attackers massacred thousands and plundered the tomb of Husayn ibn Ali, one of the most important figures in Shiite Islam.

    Without fossil fuels, however, this sectarianism toward Shiites would likely be less intense today. And it would definitely be less well-financed. Winston Churchill once described Iran’s oil – which the U.K. was busy stealing at the time — as “a prize from fairyland far beyond our brightest hopes.”

    Churchill was right, but didn’t realize that this was the kind of fairytale whose treasures carry a terrible curse.

  • North, South Korea "At The Brink Of War" As Loudspeaker Dispute Spirals Out Of Control (Again)

    Back in August, the Korean Peninsula nearly plunged back into war when Kim Jong-Un reached his limit with the anti-North propaganda being blasted across the DMZ by loudspeakers installed by the South.

    For those who missed it, or for anyone in need of a refresher, here’s our account of what happened:

    North Korea’s Kim Jong-un – the world’s sabre rattler par excellence – doesn’t like to stray too far from the spotlight when it comes to global conflict, which is why we weren’t terribly surprised when, a few days ago, the pariah state threatened to invade the US mainland and use “weapons unknown to the world.”

     

    Of course a lot of what goes on inside the country is “unknown to the world”, much as the world is largely “unknown” to North Koreans and that’s just fine with Kim, whose regime depends on a combination of propaganda and censorship to keep the populace transfixed in a perpetual state of hypnotic hero worship. Of course the West and its allies – and now even China – have a tendency to dismiss Kim’s threats as the ravings of a delusional child, which is why occasionally, Pyongyang will actually fire a missile into the ocean or execute a member of the military top brass with an anti-aircraft gun just to remind everyone that the regime isn’t totally bluffing.

     

    Given Pyongyang’s propensity for lobbing bombastic threats that, were they to emanate from virtually any other government on the planet would be met with a sharp rebuke, it’s something of a miracle that sour relations between Kim and US ally South Korea haven’t already produced an armed conflict. That may be about to change because as Bloomberg reports, the “maiming” of two South Korean soldiers along the DMZ and subsequent “blaring of propaganda through loudspeakers” by the South culminated in the exchange of artillery fire, marking the worst escalation between the two countries in five years.

    In short, the South blamed the North for planting mines that injured soldiers and in response, persisted in the broadcasting of propaganda. Subsequently, The North threatened to “blow up” the speakers and eventually took a pot shot at one. Next came the artillery exchange and shortly thereafter, Kim declared a state of war. 

    Tensions eventually eased in what Kim hailed as a kind of diplomatic victory for Pyongyang.

    Fast forward four months and the North was busy conducting its fourth nuclear test. As we documented on Wednesday, Pyongyang “successfully” tested what it swears was an H-bomb on Tuesday, drawing universal condemnation from virtually every country on the planet. The North needs an H-bomb, Pyongyang explained, because the US “is a gang of cruel robbers.”

    Well, in the wake of the nuke test, the South resumed its propaganda broadcasts across the DMZ. The loudspeakers were fired back up on Friday just a day after reports indicated that South Korea is in talks with the US for the deployment of strategic weapons to the Peninsula. The broadcasts “are likely to infuriate” Kim, Reuters wrote.

    Sure enough, the North now says the resumption of the broadcasts (which Pyongyang considers to be an “act of war”) have brought the two countries to “the brink of war.” Here’s AP with the absurd details:

    North Korea warned of war as South Korea on Saturday continued blasting anti-Pyongyang propaganda across the rivals’ tense border in retaliation for the North’s purported fourth nuclear test.

     

    North Korean propaganda is filled with threats of violence, but the country is also extremely sensitive to criticism of its authoritarian leadership, which Seoul resumed in its cross-border broadcasts on Friday for the first time in nearly five months. Pyongyang says the broadcasts are tantamount to an act of war. When South Korea briefly resumed propaganda broadcasts in August after an 11-year break, Seoul says the two Koreas exchanged artillery fire.

     

    Speaking to a massive crowd at Pyongyang’s Kim Il Sung Square, a top ruling party official said the broadcasts, along with talks between Washington and Seoul on the possibility of deploying in the South advanced U.S. warplanes capable of delivering nuclear bombs, have pushed the Korean Peninsula “toward the brink of war.”

     

    Pyongyang’s rivals are “jealous” of the North’s successful hydrogen bomb test, Workers’ Party Secretary Kim Ki Nam said in comments broadcast on state TV late Friday.

     

    South Korean troops, near about 10 sites where loudspeakers started blaring propaganda Friday, were on the highest alert, but have yet to detect any unusual movement from the North Korean military along the border, an official from Seoul’s Defense Ministry, who refused to be named, citing office rules, said Saturday.

     

    The South’s Yonhap news agency said Seoul had deployed missiles, artillery and other weapons systems near the border to swiftly deal with any possible North Korean provocation, but the ministry did not confirm the reports.

     

    Officials say broadcasts from the South’s loudspeakers can travel about 10 kilometers (6 miles) during the day and 24 kilometers (15 miles) at night. That reaches many of the huge force of North Korean soldiers stationed near the border and also residents in border towns such as Kaesong, where the Koreas jointly operate an industrial park that has been a valuable cash source for the impoverished North.

     

    Seoul also planned to use mobile speakers to broadcast from a small South Korean island just a few kilometers (miles) away from North Korean shores.

     

    While the South’s broadcasts also include news and pop music, much of the programming challenges North Korea’s government more directly.

     

    “We hope that our fellow Koreans in the North will be able to live in (a) society that doesn’t invade individual lives as soon as possible,” a female presenter said in parts of the broadcast that officials revealed to South Korean media. “Countries run by dictatorships even try to control human instincts.”

    And here’s an image which purports to depict two South Korean soldiers fine tuning the speakers:

    Although we’re quite sure the humor inherent in the above isn’t lost on readers, we’d be remiss not to highlight the fact that this is just about the most irksome thing someone could do to a man like Kim.

    The Supreme Leader is desperate to defend the legitimacy of his government and to preserve the legacy of his father and grandfather. That means keeping the public in a perpetual state of awe and conveying an air of divine authority, unshakable will, and absolute power. The fact that the South sets up loudspeakers on his border and blasts a mishmash of South Korean pop music and anti-Pyongyang agitprop loud enough to be heard 15 miles away is just about the most irritating slap in the face imaginable for the young leader. 

    Adding insult to injury: Friday was Kim’s birthday.

    But just because Kim likely knows he can’t realistically challenge the South militarily without provoking big brother in Washington doesn’t mean an “accident” across the DMZ couldn’t inadvertently bring the two countries to blows. And all over some speakers…

  • Americans' Positive Perception Of NRA Soars As Obama Escalates Gun-Control Agenda

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    When pollsters asked people three decades ago how they felt about the National Rifle Association, 27% said they strongly supported the gun lobby. By last month, that share had grown 38%, an 11-point increase. Meanwhile, the share that didn’t side with the NRA declined.

     

    By an 8-point, registered voters in the Journal/NBC survey last month said they were more concerned that the government would go too far in restricting gun rights than that it fail to do enough to regulate access to firearms. When adults were asked the same question in 1995, the greater fear was that access to firearms was too widespread.

     

    In July polling, the Journal/NBC survey found that 43% of the public had a positive image of the NRA and 32% a negative one—a more favorable view than the public held of the Supreme Court or either political party. By a 15-point margin, political independents, also viewed the NRA more positively than negatively.

     

    – From the Wall Street Journal article: Rising Support for NRA Stymies Obama

    Love guns or hate guns, one thing is becoming perfectly clear. The American public’s perception of guns and the NRA is moving in the exact opposite direction of Barack Obama’s message and agenda.

    To hear Obama speak, you’d think the NRA is simply using boatloads of money and propaganda to thwart the impassioned gun control desires of the American public. In reality, nothing could be further from the truth. First, let’s take a look at some powerful charts from the Wall Street Journal.

     

    Screen Shot 2016-01-08 at 11.14.57 AM

    As you can clearly see, the numbers regarding NRA support have virtually flipped over the past thirty years. This is also consistent with a recent ABC News poll which showed for the first time that a majority of American are against an assault weapons ban. From the post, A Majority of Americans Oppose “Assault Weapons Ban” – Highest Number on Record:

    A majority of Americans oppose banning assault weapons for the first time in more than 20 years of ABC News/Washington Post polls, with the public expressing vast doubt that the authorities can prevent “lone wolf” terrorist attacks and a substantial sense that armed citizens can help.

     

    Indeed, while the division is a close one, Americans by 47-42 percent think that encouraging more people to carry guns legally is a better response to terrorism than enacting stricter gun control laws. Divisions across groups are vast, underscoring the nation’s gulf on gun issues.

    Now here’s another chart from the same Wall Street Journal article, which is even more compelling.

    Screen Shot 2016-01-08 at 10.34.53 AM

    Although Democrats hate the NRA (the same group that supports Hillary for President despite admitting she’s untrustworthy), Independents show strong support. Why is this important? Because according to a recent Gallup poll, a record 43% of Americans identify as Independents.

    From Gallup:

    PRINCETON, N.J. — An average 43% of Americans identified politically as independents in 2014, establishing a new high in Gallup telephone poll trends back to 1988. In terms of national identification with the two major parties, Democrats continued to hold a modest edge over Republicans, 30% to 26%.

     

    Since 2008, the percentage of political independents — those who identify as such before their leanings to the two major parties are taken into account — has steadily climbed from 35% to the current 43%, exceeding 40% each of the last four years. Prior to 2011, the high in independent identification was 39% in 1995 and 1999.

     

    The recent rise in political independence has come at the expense of both parties, but more among Democrats than among Republicans. Over the last six years, Democratic identification has fallen from 36% — the highest in the last 25 years — to 30%. Meanwhile, Republican identification is down from 28% in 2008 to 26% last year.

    Now here’s the chart. There’s a well defined bull market in Independent-identifying Americans:

    Screen Shot 2016-01-08 at 10.58.42 AM

    Finally, let’s end this post with some excerpts from the Wall Street Journal article from which the previously highlighted charts were pulled:

    When pollsters asked people three decades ago how they felt about the National Rifle Association, 27% said they strongly supported the gun lobby. By last month, that share had grown 38%, an 11-point increase. Meanwhile, the share that didn’t side with the NRA declined.

     

    That is just one measure of the challenge that has forced President Barack Obama to sidestep Congress and put in place new gun regulations through executive action. Mr. Obama knows through hard experience that lawmakers have little appetite for passing tougher gun laws. Polling shows that skepticism is rooted among the broader public, as well.

    So there you go. King Obama sees political trends he doesn’t like, knows that Congress can’t do anything about it because the public doesn’t want it to, so he does it by himself by executive decree.

    As I noted on Twitter the other day:

    Now back to the WSJ:

     

    By an 8-point, registered voters in the Journal/NBC survey last month said they were more concerned that the government would go too far in restricting gun rights than that it fail to do enough to regulate access to firearms. When adults were asked the same question in 1995, the greater fear was that access to firearms was too widespread. 

     

    But as Mr. Obama seeks any small patch of common ground, one of the most powerful forces he must deal with is skepticism of any new laws—even the widely backed expansion of background checks. A majority in Gallup polling said background checks would have little or no effect in reducing mass shootings. And a majority believed the country would be safer if more people carried concealed weapons—a finding in tune with the NRA’s contention that “the only thing that stops a bad guy with a gun is a good guy with a gun.’’

     

    While support for the NRA skews Republican, it is not exclusively Republican. Some 41% of political independents rate themselves as highly supportive of the gun lobby, more than twice the share that doesn’t support the group, December’s Wall Street Journal/NBC News survey found.

     

    In July polling, the Journal/NBC survey found that 43% of the public had a positive image of the NRA and 32% a negative one—a more favorable view than the public held of the Supreme Court or either political party. By a 15-point margin, political independents, also viewed the NRA more positively than negatively.

     

    “The gun lobby may be holding Congress hostage right now, but they cannot hold America hostage,’’ Mr. Obama said in announcing his new gun regulations. But in going up against the NRA, he is working against a force that is not only powerful but popular among many in the country.

    Substitute “the American public” for “the gun lobby,” and you’ll find out what’s really irking King Barry.

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Jan 09

Today’s News 9th January 2016

  • Taiwan Election: How a DPP Win Would Tick Off China

     

    By EconMatters

    Taiwan will elect a new president and parliament on January 16. The current President Ma Ying-jeou, from the Nationalist party (Kuomintang, KMT, led by Chiang kai-shek before his demise in 1975), will complete his second term in May. During the eight years President Ma has been in power, he has focused on improving relations with China, and achieved the most cordial terms since the end of the Chinese civil war in 1949. But since Ma cannot run again after serving the maximum of two terms, there are three fresh presidential candidates ducking it out in Taiwan.

    Candidate #1: Tsai Ing-wen, the Chairperson of the Democratic Progressive Party (DPP)

     

    Tsai has a master’s degree from Cornell Law, and a PhD in Law from the London School of Economics. So far, she was top of the last opinion poll at 45.2% last Tuesday before a polling blackout begins ahead of the Jan. 16 elections. Tsai previously served as DPP chair from 2008 to 2012 and is no stranger to a presidential campaign. She was the DPP’s presidential candidate in 2012 before losing to Ma Ying-jeou.

     

    Candidate #2: Eric Chu from the Nationalist party (KMT)

     

     

    Chu is the chairman of KMT and the current mayor of New Taipei with a master’s degree in Fiance and a PhD in Accounting from New York University. Chu declared his candidacy very late (in October, about 3 month before the election) to replace Hung Hsiu-chu at the last minute.

    This unusual debacle came as the KMT party miscalculated thinking it would be better off with a female candidate to run against the more popular female candidate Tsai Ing-wen from the Democratic Progressive Party (DPP). Unfortunately, Hung Hsiu-chu does not have the support base like Tsai and had been unpopular with voters, trailing badly in opinion polls. This last minute switch of candidate looks bad for the KMT party but also increases the odds of a complete loss in the presidential and general election.

     

    Candidate #3: James Soong from the People’s First Party (PFP)

     

     

    Soong has a Phd in political science from Georgetown University and is the founder and chairman of the PFP, part of the the KMT-led Pan-Blue Coalition. Soong was a KMT senior official before he left the party to run as an independent in the 2000 presidential election. Many has blamed Soong’s departure splitting the votes supporting KMT which resulted in KMT’s defeat in the 2000 election. He ran again in 2004 as Vice President to Lien Chan. The pair lost narrowly to the Chen Shui-bian from DPP seeking a second term. Now 73, Soong is at it again dividing the KMT’s support and sympathetic base. Not that it makes much of a difference as both KMT candidates fell miserably in the poll behind the DPP’s Tsai.

     

     

    DPP’s Scandalous Legacy 

    The liberal DPP had its shot at running Taiwan. Chen Shui-bian, the party’s former Chairman, won both the 2000 and 2004 presidential elections. During his two terms, the popularity of Chen and DPP sharply dropped due to alleged corruption within his administration. Chen was later convicted, along with his wife, on two bribery charges and was sentenced to 19 years in Taipei Prison. Tsai Ing-wen, the DPP current presidential candidate, is one of the very few highly educated DPP members and has been credited with picking up the pieces restoring DPP’s credibility and image after Chen’s scandal.

    DPP & Taiwan’s Legislative Violence

    DPP has a tendency of resorting to violence and many times exhibited traits of a mob group. Taiwan has mostly DPP to thank for the headlines and Youtube gone viral on “legislative violence” over the past decade. Below is the infamous picture back in 2006 when the then ruling party DPP deputy Wang Shu-hui chewed up a proposal to halt voting on opening direct transport links with Mainland China. Here is how Reuters describes the aftermath:

    Wang later spat out the document and tore it up after opposition lawmakers failed to get her to cough it up by pulling her hair. During the melee, another DPP woman legislator, Chuang Ho-tzu, spat at an opposition colleague.

    Taiwan rulling party DPP deputy chews up a porposal to halt voting in Parliarment in 2006

     

     

     

    “Violence Is Normal in a Democratic Society”

    Tsai Ing-wen was dubbed by Time magazine cover as the one that could “lead the Only Chinese democracy”. However, during a lecture at Harvard University in 2011, when asked about why DPP seems to use violence as a tool to gain political power, Tsai’s reply won a round of applause and laughter when she said “Your definition of violence in a democratic society, that seems to be normal when you speak louder.” (Youtube here, English starts at 0:49).

    I don’t think I need to waste more writing on how DPP has gone above and beyond simply “speaking louder”, and Tsai of all people knows it, which I think is why she dodged and made light of the question. That actually makes me queasy as she seems to endorse handling conflicts in a country bumpking style.

    DPP’s liberal view has gained a grassroot massive support base in the youth, farming and working class, which is evidenced by Tsai’s overwhelming lead in the poll. Nevertheless, political views aside, judging from DPP’s conflict resolution skill, I personally has much reservation about how DPP could bring more progress and achieve true democracy as many seem to believe.

     

     

    Status Quo with China?

    DPP has long held the position of pro-independence regarding Taiwan’s status and wanted to sever all ties (historic, cultural, economic, etc.) with Mainland China. But this time around, DPP and Tsai is signaling a more pragmatic approach. “We want to maintain the status quo. We want to maintain the current democratic way of life,” says Joseph Wu, Tsai’s No. 2 and the DPP secretary.

    Based on DPP’s history, I have serious doubt DPP would be contend with “status quo” regarding the cross-Taiwan-Strait relationship with China achieved by the KMT and Ma Ying-jeou.

    Will DPP Cross China’s Bottom Line?

    Even though Taiwan has its own military, foreign diplomacy and government services, Mainland China sees it as nothing more than a renegade province, and has threatened many times to overtake the island by force. China’s stance has softened quite a bit in recent years partly due to President Ma’s effort; however, an independent Taiwan remains the final “bottom line” not to be trifled with.  

     

    Taiwan president Ma Ying-jeou (left) and China’s president Xi Jinping (right) shaking hands on Nov. 7, 2015 in Singapore

     

    Between the KMT and DPP, China would rather deal with the KMT. Leaders in China actually have as much to lose as the KMT with an unprecedented win by the liberal DPP. To show support to the KMT and also send a message to DPP, president Xi Jinping of China met with president Ma Ying-jeou of Taiwan in Singapore in November, 2015 (aka 2015 Xi-Ma Meeting, although Taiwan calls it Ma-Xi Meeting). This is the first time the leaders of China and Taiwan met in more than six decades, and Singapore was chosen as a neutral ground.

     

    Bad Economy Keeps Idle Hands Busy

    China has its own economic problems and authorities recently had to make a move to stablize currency, buy share, suspend circuit-breaker. Meanwhile, Taiwan’s export-oriented economy is currently in recession sharing the pain from China marred by near-zero growth, stagnant wages and rising prices. There’s also the looming threat of an energy shortage, low domestic investment and overdependence on China, according to a new report by the the US-China Economic and Security Review Commission.

    Tsai is now regarded as a virtual shoe-in to win in the 2016 presidential election while DPP is expected to sweep the majority in the parliarment as well. This suggests Taiwan could revert back to a one-party political system with its own social and economic implications.

    Needless to say, things will also get ever more complicated and tricky between China and Taiwan. The sucess of both administrations depends on how their economic policies could turn things around for the Chinese people in Mainland China and Taiwan. So perhaps neither would have much time and energy to make good on their previous political rhetoric.

  • Chinese Immigrant Turned Citizen Defies Obama Gun Grab: "I Will Never Be A Slave Again"

    Submitted by Mac Slavo via SHTFPlan.com,

     

    President Obama knows that the American people have not embraced his radical, leftist gun control agenda.

    That’s why he took to the stage at a town hall spectacle hosted by CNN’s Anderson Cooper in attempt to defend his unconstitutional executive actions for stealth gun control, and try to convince Americans once and for all that he is not enacting some kind of gun grabbing conspiracy.

    But his “common sense” policies – made law under the force of executive order – and his crocodile tears for exploited victims of gun violence are not going to shift pubic opinion.

    There is clearly a line in the sand, and a bold Chinese immigrant, who became an American citizen by choice, is the latest to remind the government what it shall not infringe.

    Lily Tang Williams happens to be the state chair of the Colorado Libertarian Party and has made a splash with her January 5th Facebook post, which has now received thousands of comments and shares. Williams vows to defy all government attempts at disarmament, citing the authoritarian abuses of China, her native country.

    She declares, “I will always stand with my AR, no matter what my President signs with his pen.”

    Lily Tang Williams posted this on her Facebook account with the above picture of her holding a rifle against the backdrop of an American flag:

    If you believe more gun control by your government is going to save lives, you are being naïve. The champion of all the mass killings in this world is always a tyrannical government.

     

    Where I came from, China had killed thousands of the students by its own government during the massacre of Tian An Men square in 1989. I surely wish my fellow Chinese citizens back then had guns like this one I am holding in the picture.

     

    I am a Chinese immigrant and an American citizen by choice. I once was a slave before and I will never be one again.

     

    I will always stand with my AR, no matter what my President signs with his pen.

     

    #stopguncontrol #tyranny #tiananmenmassacre #lily4liberty

    Posted by Lily4Liberty on Tuesday, January 5, 2016

     

    Live free, or die standing on your feet.

    Lily Tang Williams has actually lived as a slave under an oppressive government, and like other immigrants who came to the U.S. fleeing such conditions, she is appalled at seeing the same pattern come home to America.

    But it isn’t over yet.

    By the look of determination in this freedom fighters’ eyes, the resistance won’t soon die, and government will still face an intense fight if it intends to completely eradicate freedom.

    Despite decades of indoctrination and mass media propaganda, millions and millions of Americans are still aware of what this country was founded upon, and what principles it stands for.

    And. They. Will. Never. Give. Up. Their. Guns. Period.

  • The Death Of The Canadian Oil Dream, A Firsthand Account

    We’ve spent quite a bit of time over the past 12 months documenting the trainwreck that is Alberta’s economy.

    Most recently, we brought you “This Is Canada’s Depression: Surging Crime, Soaring Suicides, Overwhelmed Food Banks” and “For Canadian Repo Men, Business Has Never Been Better“, but you can review the story in its entirety by revisiting the following posts:

    In short, Alberta is at the center of Canada’s oil patch and has suffered mightily in the wake of crude’s seemingly inexorable decline.

    Going into last year, Alberta expected its economy to grow at a nearly 3% clip. That forecast was reduced to 0.6% in March and further to -0.6% in the latest fiscal update. Oil and gas investment has fallen by a third while rig activity has been cut in half.

    The fallout is dramatic. Food bank usage in Alberta is up sharply and so, unfortunately, is property crime in places like Calgary where vacancy rates in the downtown area are at their highest levels since 2010. Suicide rates are on the rise as well while the outlook for unemployment continues to darken with each passing month of “lower for longer” oil prices.

    Below, find excerpts from an excellent account of the malaise penned by Jason ‎Markusoff who writes about Alberta, lives in Calgary, and has spent 12 years reporting for the city’s largest newspapers.

    *  *  *

    From “The Death Of The Alberta Dream,” by Jason Markusoff as originally published at Macleans

    Late last year, Brandon MacKay listed his Kawasaki dirt bike for sale on Kijiji, the online classifieds site. It was the only treat the 25-year-old had given himself in three years living in Fort McMurray. The rest he’d spent on supporting and visiting his wife and kids in Pictou County, N.S. But in crafting the ad for the bike—$4,400 or best offer—MacKay did what any sales agent would advise against: he revealed his desperation to sell. “I lost my job and am in need of money for my wife and kids for Christmas.”

    Energy companies are preparing for a grim 2016. Analysts predict budgets will get slashed further, and that more energy firms may have to cut staff, having already laid off thousands. Ongoing oil sands construction projects will continue to wind down with little to replace them, hitting both the residential and commercial real estate sectors hard. For instance, in nearly one-sixth of all the office space in downtown Calgary, the fluorescent lights now shine on empty cubicles, and it’s forecast to get worse. Reports of the symptoms pop up almost daily: more insolvencies, more business for moving trucks and repo crews, even a noticeable uptick in suicides. The Calgary Stampede itself has been forced to lay off staff, as its offseason event bookings dried up. In November, the Alberta unemployment rate came within one-tenth of a percentage point of the national average, the closest it’s been since 1989. Those trend lines are expected to cross over next year, making it more clear to Canadian job-seekers that the Alberta dream is in decline.

    The rest of the country isn’t immune from those ominous grinding sounds coming from Canada’s longtime economic engine. Canadian GDP dipped into recession territory in the first half of 2015 on the oil shock, and though the country managed a rebound in the third quarter, Alberta’s troubles—as well as slumps in other oil-rich provinces like Saskatchewan and Newfoundland—have left a gaping wound. The energy sector had long driven Canada’s trade surplus, papering over weakness elsewhere while soaking up large numbers of unemployed and underemployed people from regions like the Maritimes and hard-hit southwestern Ontario.

    But even average growth seems a ways off, as troubles keep filtering through the province. In Alberta’s southeast, Medicine Hat drew international acclaim in the spring of 2015 after it became the first city in Canada to eliminate homelessness, having pursued an ambitious five-year agenda to put people into subsidized housing within 10 days of them landing in emergency shelters. After so much progress, Medicine Hat’s Salvation Army shelter is back to averaging 17 clients a night, up about one-third since 2014—too many to promptly find them all affordable housing. Local demand for donated clothing and household items also rose by more than a quarter over the last year, says manager Murray Jaster. But donations slumped too, and he had to reduce staff.

    To Jaster’s point, there is much his province used to have that now seems gone. Most noticeable is Alberta’s eroding status as the Promised Land for so many Canadians from other parts of the country. Over the last decade, net interprovincial migration by 18- to 44-year-olds, the key working demographic, swelled Alberta’s population by 200,000, according to a report by a rather envious Business Council of British Columbia. (That province netted fewer than 40,000 over that stretch, while all other provinces were net losers.) The momentum has shifted. While 1,200 more Canadians still moved to the province than left it during the third quarter of 2015, that was the smallest gain since 2010—when the province was recovering from the 2009 oil price collapse—and less than half the average of the last 50 years.

    “Seeing that there’s no real light at the end of the tunnel right now, more [companies] are turning to job cuts,” says Wendy Giuffre, the president of Wendy Ellen, a human resources consultancy. “It seems that there’s another wave right now. I think people were kind of hopeful things were going to pick up sooner, but it’s not looking too promising.”

    Statistics Canada’s payroll survey shows Alberta shed 63,500 jobs over the year leading up to October. That doesn’t account for lost potential—the Canadian Association of Petroleum Producers estimates 40,000 jobs that were expected to be created never materialized.

    It’s no secret that Alberta’s economy is closely linked to the peaks and craters of oil prices—nominal GDP (not adjusted for inflation) swings in tandem with crude prices. It’s why Fort McMurray is like a wounded beast these days. MacKay’s neighbour got laid off this fall. “I watched the bank come and take his truck,” he recalls—it was that or not feed the kids. Home prices in November were 20 per cent below last year’s average, with even townhouses and duplexes losing $100,000 in value. According to reports, a number of people who used to regularly donate to the city’s food bank have become clients.

    What happens in the oil fields directly affects one of Canada’s largest business cores. Elevator trips to Beaver’s small ninth-floor Calgary office have gotten lonelier. Nearly one-third of the office space in the 32-storey highrise is listed for lease or sublease. The asking rate to rent downtown Calgary’s “Class A” office space is down nearly 42 per cent from last year, the result of “a complete lack of demand,” according to a report by real estate advisers Jones Lang Lasalle. 

    The hollowing out of Calgary offices has decimated the corporate lunch crowd. Regulars who would come to Jalapeno’s Mexican Grill three times a week now visit once, or not at all, owner Doug Hernandez says. “We’re not making any money; we’re just floating right now,” he says. “The problem would be when I’m not wearing my lifejacket anymore. Then I’d drown.” 

    Much more in the full article here

  • Raoul Pal Explains What Indicators He Looks At To Decide If The Next Crisis Has Arrived

    Two months ago, RealVision’s Raoul Pal brought our readers an interview excerpt with “The Fourth Turning” author Neil Howe in which the author and current head of Saeculum Research explained “what keeps him up at night.”

    Today, we bring our readers another RealVision excerpt of a reflexive “interview” in which Pal himself is in the hot seat, and is challenged by Ken Monahan to lay out the market shifts he expects in 2016. In the full interview Raoul goes into detail on the indicators he will be watching throughout 2016 that will suggest that a liquidity crisis is imminent. He emphasizes that if this scenario occurs, most people are in investments that “they should absolutely not be in.”

    One such metric closely followed by Pal is the ISM. This is what he says:

    The ISM to me is the global guide to the business cycle. I think that [with the ISM below 50] we have a 65% chance or probability of a recession. We’ve seen that the cycle peaked back in 2011. It troughs at some point. The cycle always does this. We look back at the probabilities. We have a reasonable chance of a recession. Again, I don’t deal in certainties. It’s not like it’s definitely going to happen.

     

    … the probability is now that we crossed 50, that over due course, the business cycle will continue lower, and therefore we should see the ISM coming through 47 which is the recession level – maybe much lower than that depending on the severity of the recession. So that would mean that the year on year rate of change of the S&P would be negative.

     

    … if I’m right and the ISM, for example, gets down to 47, 45 then you’d start to see the year on year rate of change on the S&P at -10%

    A way of visualizing Pal’s point comes courtesy of BofA, which shows that once the ISM drops below 45, it virtually always results in a recession, with just two false positives: in 1951 and 1968.

    And then there is another indicator which Pal watches, one which we have been warning about since early 2014 when it first started to slide because it is the most important leading indicator into any global recession, namely trade – for the simple reason that while central banks can print  asset prices, “they can’t print trade.”

    The ISM is my basic framework, you then need to further increase the probability of success of what you’re trying to do. So what you look at, for example, is all the other economic indicators around what’s happening in the global economy. For example, if I look at exports – global exports. Global exports around the world are the second lowest levels since 1958. There’s something going on that the world is slowing down. Some of it is dollar translation effect. And the other is volume loss. So there’s something going on that wasn’t going on in 2012.

    Yes, something is indeed going on, and after years of ignoring it because it was masked by the “wealth effect” of central bank manipulation, the markets are starting to realize it. Pal then touches on all the other deteriorating economic data points we have covered over the past year.

    Then we look at other things like freight shipments. We look at retail sales. We look at industrial production. Once you start putting all the data series together many of them are at levels – durable goods – that are only seen in recessions.

    Correct, and yet the question is: why does Janet Yellen ignore it and continue to push on with the “recovery” narrative, because ultimately is all about the “narrative” to boost confidence:

    Its the Fed’s job to say things are good because it’s about expectations management. Whether we like it or not it’s a behavioral economics world and I’m realizing that more and more that you need to look at how behavior and incentive schemes are done. Soshe has to say that. She’s not going to say, “Oh, my God, the economy is looking terrible” until she has to because then you flip around the expectations.

    Of course, with every passing day, the moment when Yellen will say the “economic is looking terrible” draws closer, and with it brings not only a return to ZIRP, and then NIRP, but also presents the question: will the Fed do another round of QE, or will it finally proceed to what Bernane said back in 2002 was the endgame all along: helicopter money. Or non-helicopter money is on the latter.

    There is more in the Raoul Pal interview excerpt can be watched below, and much more in the full hour-long interview. Furthermore, Raoul Pal has again 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.

  • "Death To Saudi Arabia": Thousands Of Iranians Pour Into The Streets In Anti-Saudi Protests

    It’s now been nearly a week since Saudi Arabia set the Muslim world on fire (both figuratively and literally) by executing prominent Shiite cleric Nimr al-Nimr.

    The Sheikh was a leading figure in the 2011 anti-government protests staged in the kingdom’s Eastern Province and when the House of Saud moved to silence a dissident voice once in for all last Saturday, demonstrators poured into the streets from Bahrain to Pakistan to decry the execution.

    For the Saudis, Nimr is a “terrorist,” but for the Shiite community he has now become a symbol of the oppression embodied by the Sunni Gulf monarchies. For those interested in a bit of background, here are some excerpts from The Atlantic:

    The State Department cable added Nimr was gaining popularity among young people. His stature grew in spring 2009, after Shia pilgrims clashed with security forces in Medina over access to holy sites; Nimr denounced the security forces, but then was forced to go into hiding to avoid arrest. By January 2010, the State Department reported in another cable that Nimr had returned home and was living under something like house arrest. The diplomat, who wrote that cable, judged that Nimr had overestimated his sway, gone too big, and as a result had lost his influence. A neighbor said that the government “chose not to pursue him further out of concern they would elevate his status.”

     

    The government changed its ignore-them-and-they’ll-go-away stance on Shia rabble-rousers once the Arab Spring began. In Bahrain, Shia protests threatened the stability of the regime, and the Sunni regimes of Saudi Arabia and the United Arab Emirates sent troops to help quell uprisings. But protests also spread from Bahrain into the kingdom. Nimr preached forcefully against the regime, and was rare in speaking up both in favor of the domestic protests and those in Bahrain.

     

    In another 2011 speech, Nimr said, “From the day I was born and to this day, I’ve never felt safe or secure in this country. We are not loyal to other countries or authorities, nor are we loyal to this country. What is this country? The regime that oppresses me? The regime that steals my money, sheds my blood, and violates my honor?”

     

    That was all too much for the regime, and in 2012 it moved to arrest him. But during his apprehension, police claimed they came under fire. Nimr was shot in the leg. He was charged with sedition and various terrorism-related crimes.

    In the six days since his death, Saudi Arabia and its allies have been busy cutting all ties (both diplomatic and commercial) with Iran. “Enough is enough”, was the message from Riyadh after protesters firebombed the Saudi embassy in Tehran last Saturday.

    Now, with tensions running higher than ever, the feud threatens to derail a fragile peace “process” in Syria on the way to plunging the region into an all-out sectarian shooting war.

    Each side accuses the other of being a state sponsor of terror and each side blames the other for fomenting sectarian discord. Needless to say, it’s difficult to look past the fact that Saudi Arabia’s promotion of Wahhabism is almost unquestionably to blame for the rise of extremist elements throughout the Islamic World. At the very least, Riyadh’s contention that Iran promotes sectarian strife is an egregious case of the pot calling the kettle black.

    In any event, Iranians are in no mood to forgive and forget. “Iranians held mass protests on Friday across the Islamic Republic, angered by Saudi Arabia’s execution of a Shiite cleric that has enflamed regional tensions between the Mideast rivals,” AP reports, adding that “after Friday prayers in Tehran, thousands of worshippers joined the rally, carrying pictures of al-Nimr and chanting “Death to Al Saud,” referencing the kingdom’s royal family.” They also chanted “down with the US” and “death to Israel.”

    Below, find the visuals which underscore the fact that the sense of outrage is palpable – to say the least.

  • Why Is North Korea Our Problem?

    Submitted by Patrick Buchanan via Buchanan.org,

    For Xi Jinping, it has been a rough week.

    Panicked flight from China’s currency twice caused a plunge of 7 percent in her stock market, forcing a suspension of trading.

    Kim Jong Un, the megalomaniac who runs North Korea, ignored Xi’s warning and set off a fourth nuclear bomb. While probably not a hydrogen bomb as claimed, it was the largest blast ever in Korea.

    And if Pyongyang continues building and testing nuclear bombs, Beijing is going to wake up one day and find that its neighbors, South Korea and Japan, have also acquired nuclear weapons as deterrents to North Korea.

    And should Japan and South Korea do so, Taiwan, Vietnam and Manila, all bullied by Beijing, may also be in the market for nukes.

    Hence, if Beijing refuses to cooperate to de-nuclearize North Korea, she could find herself, a decade hence, surrounded by nuclear weapons states, from Russia to India and from Pakistan to Japan.

    Still, this testing of a bomb by North Korea, coupled with the bellicosity of Kim Jong Un, should cause us to take a hard look at our own war guarantees to Asia that date back to John Foster Dulles.

    At the end of the Korean War in July 1953, South Korea was devastated, unable to defend herself without the U.S. Navy and Air Force and scores of thousands of U.S. troops.

    So, America negotiated a mutual security treaty.

    But today, South Korea has 50 million people, twice that of the North, the world’s 13th largest economy, 40 times the size of North Korea’s, and access to the most modern U.S. weapons.

    In 2015, Seoul ran a trade surplus of almost $30 billion with the United States, a sum almost equal to North Korea’s entire GDP.

    Why, then, are 25,000 U.S. troops still in South Korea?

    Why are they in the DMZ, ensuring that Americans are among the first to die in any Second Korean War?

    Given the proximity of the huge North Korean Army, with its thousands of missiles and artillery pieces, only 35 miles from Seoul, any invasion would have to be met almost immediately with U.S.-fired atomic weapons.

    But with North Korea possessing a nuclear arsenal estimated at 8 to 12 weapons and growing, a question arises: Why should the U.S. engage in a nuclear exchange with North Korea, over South Korea?

    Why should a treaty that dates back 60 years commit us, in perpetuity, to back South Korea in a war from the first shot with Pyongyang, when that war could swiftly escalate to nuclear?

    How does this comport with U.S. national interests?

    In 1877, Lord Salisbury, commenting on Great Britain’s stance on the Eastern Question, noted that “the commonest error in politics is sticking to the carcass of dead policies.”

    Is this not true today of America’s Asian alliances?

    North Korea’s tests of atomic weapons and development of land-based and submarine-launched missiles should cause us to reconsider strategic commitments that date back to the 1950s.

    President Nixon, ahead of his time, understood this.

    As he began the drawdown of U.S. forces in Vietnam in 1969, he declared in Guam that while America would meet her treaty obligations, henceforth, Asian nations should provide the ground troops to defend themselves. Gen. MacArthur had told President Kennedy, before Vietnam, not to put U.S. foot soldiers onto the Asian mainland.

    Now that we have entered a post-post Cold War era, where many Asian nations possess the actual or potential military power to defend themselves, something like a new Nixon Doctrine is worth considering.

    Take all of the major territorial quarrels between China and its neighbors — the dispute with India over Aksai Chin and Arunachal Pradesh, the dispute with Japan over the Senkaku Islands, with Vietnam over the Paracels, with the Philippines over the Spratlys.

    In none of these quarrels and conflicts does there seem to be any vital U.S. national interest so imperiled that we should risk a clash with a nuclear power like Beijing.

    Once, there was a time when Hitler, Stalin, Mussolini and Tojo ruled almost all of Eurasia. And another time when a monolithic Sino-Soviet Communist bloc ruled from the Elbe to the Pacific.

    As those times are long gone, is it not time for an exhaustive review of the alliances we have entered into and the war guarantees we have issued, to fight for nations and interests other than our own?

    Under NATO, we are committed to go to war against a nuclear-armed Russia on behalf of 27 nations, including tiny Estonia.

    One understood the necessity to defend West Germany and keep the Red Army on the other side of the Elbe, but when did Estonia’s independence become so critical to U.S. security that we would fight a nuclear-armed Russia rather than lose it?

    Indeed, how many of the dozens of U.S. war guarantees we have outstanding would we honor by going to war if they were called?

  • China's Largest Bank Is Mystery Buyer Of Massive 1,500 Ton Gold Vault In London

    Back in June 2013, when Deutsche Bank opened a gold vault in Singapore which could hold up to 200 metric tons, the German bank was euphoric about the prospects for storing physical gold: “Gold has traditionally been stored in London, Zurich and New York, but there is a serious shift in dynamics going on as the global financial crisis continues to evolve,” Mark Smallwood, Deutsche Asset & Wealth Management’s head of wealth planning in the Asia-Pacific region, told The Wall Street Journal.

    This is what the outside, and inside, of the state of the art Singapore vault looked like:

     

    Mark was correct and thanks to the ongoing decline in gold prices, Chinese and Indian demand for the metal, the physical metal that is, not its various paper manifestations, has risen to record levels. Alas, one thing Mark did not know is that in early 2014, a German regulator would reveal that “precious metals manipulation was worse than the Libor scandal” and as a result the largest German bank (and largest bank in the world by notional derivative exposure) – which has been probed and found guilty for rigging virtually every market, including gold – would quietly liquidate its entire physical precious metals trading group.

    Which meant that Deutsche Bank’s Singapore gold vaul, was about to be sold.

    But while the sale of DB’s Singapore gold vault was to be expected with China’s ravenous apetite for warehousing physical gold around the Pacific Rim, what may have escape popular attention is that Deutsche Bank’s even more massive, and even newer, gold vault in London was also “on the block” as of December 2014 when we reported that Deutsche Bank is “open to offers for its London-based gold vault following the closure of its physical precious metals business.” As Reuters noted: “If the right offer came along, then the bank would sell the London vault,” one source close to the situation said. 

    Most curiously, the bank’s London gold vault only became operational in June of 2014, more than two years after launching the project. It can store some 1,500 tonnes of gold and was built and managed by British security services company G4S.

    As Reuters further noted, with other banks withdrawing from the commodities business to cut costs and reduce their regulatory burden, it might be difficult for Deutsche Bank to find buyers amongst its nearest peers. However, one possible buyer is general LBMA-member, Chinese bank ICBC, which we said at the end of 2014, was trying to build a presence in London.

    In any case, the list of potential buyers for DB’s brand new vault lease remained a mystery, and perhaps our revelation of the exact location of this vault, something potential buyers tend not to appreciate especially when said vault will house up to 1,500 tons of gold, or over $50 billion worth of “inventory”, may have dissuaded some. As a reminder, the “secret” location of the Deutsche Bank vault, which as revealed in the G4S building application, is located in the Park Royal complex, and specifically at the 291 Abbey Road, London NW10 7SA location.

    As it turns out, one persistent buyer failed to be dissuaded.

    According to Reuters, as was rumored one year ago, China’s largest bank – and in fact the world’s largest bank – by assets, ICBC Standard Bank, is buying the lease on Deutsche Bank’s London gold and silver vault, enlarging its footprint in the city’s bullion market, four industry sources close to the companies told Reuters.

    China’s ICBC, which took a controlling stake in Standard Bank’s London-based Global Markets business last year, has also applied to become a clearing member of the London gold and silver over-the-counter business.

    From Reuters:

    The Chinese and South African lender is aiming to fill the gap left by Western banks, which are retreating from commodities to cut costs and reduce regulatory burden. “They (ICBC Standard Bank) have taken on the lease for the vault,” the first source said.

     

    Currently, five banks – JP Morgan, HSBC, Bank of Nova Scotia, Barclays and UBS – settle daily bullion transactions between dealers, amounting to more than $5 trillion worth of metal each year in the London over-the-counter market.

     

    These banks are shareholders of the London Precious Metals Clearing (LPMCL) company. They will decide whether to accept or reject ICBC Standard Bank’s application within the next few months. The LPMCL declined to comment.

     

    “They are applying for clearing membership at the moment, but that’s still subject to a vote, which has not taken place yet,” the source said.

    Should the vote go in its favor, ICBC will be ready with what may be one of the largest gold vaults in London, if not the world, to park local gold which will then be promptly shipped over to the mainland to be dealt with as seen fit. Unless, of course, the vault is there for the reverse migration: to house quietly escaping Chinese gold as part of the local oligarchy’s attempts to circumvent China’s capital controls, a task so far accomplished relatively painless with bitcoin.

    Only time will tell.

    What is perhaps most surprising is how cheaply ICBC acquired the massive gold vault: “The figure that was initially talked about may have been around $4 million, but it’s way lower now,” a second source said, without disclosing the figure paid for the vault.

    So what does “way less” than $4 million buy you nowadays? Here is the answer, courtesy of Google Maps:

     

    Finally, for those curious, here is precisely where the brand new gold vault of the world’s biggest bank will be located.

  • Americans Can't Wait To Get Out Of These Five States

    A low cost of living, no sales tax, and beautiful scenery (oh, naked bike rides, more strip clubs per capita than any other US city, and legalized weed) means Oregon is the "top moving destination" for Americans for the third year running, according to United Van Lines, with 69% of moves inbound. But, which states are Americans leaving in droves?

    Americans continue to pack up and head West and South, according to new data from United Van Lines.

    Oregon is the most popular moving destination of 2015 with 69 percent of moves to and from the state being inbound. The state has continued to climb the ranks, increasing inbound migration by 10 percent over the past six years. New to the 2015 top inbound list is another Pacific West state, Washington, which came in at No. 10 with 56 percent inbound moves.

    Moving In – The top inbound states of 2015 were:

    1. Oregon
    2. South Carolina
    3. Vermont
    4. Idaho
    5. North Carolina
    6. Florida
    7. Nevada
    8. District of Columbia
    9. Texas
    10. Washington

    The Northeast continues to experience a moving deficit with New Jersey (67 percent outbound) and New York (65 percent) making the list of top outbound states for the fourth consecutive year. Two other states in the region — Connecticut (63 percent) and Massachusetts (57 percent) — also joined the top outbound list this year. The exception to this trend is Vermont (62 percent inbound), which moved up two spots on the list of top inbound states to No. 3.

    Moving Out – The top outbound states for 2015 were:

    1. New Jersey
    2. New York
    3. Illinois
    4. Connecticut
    5. Ohio
    6. Kansas
    7. Massachusetts
    8. West Virginia
    9. Mississippi
    10. Maryland

    Simply put, Americans are moving from heavily-regulated, bureaucratic, high cost-of-living states to more affordable states.

    This year's data from United Van Lines…

     

    And the interactive version from the last 39 years…

     

    Finally, as The Daily Signal concludes,

    Moving patterns show how important cost of living is to American families.

     

    With perfect weather and a booming, high-tech economy, California ought to be the #1 destination. Instead, more moving trucks are leaving the state than entering.

  • Market Massacre: Worst Ever First Week Of Trading

    What better analogy than this…

     

    This was the worst first week of the year for US equities… ever!

    Dow… (even worse than 2008)

     

    S&P…

     

    Europe was a disaster…

     

    And epic for China…

     

    And while only Trannies are in a bear market (down 20%) in the US, these 7 developed world markets are already there…(h/t SocGen's Andrew Laphthorne)

     

    *  *  *

    So let's look at the week in stocks…

    It was all looking so awesome last night…

     

    Futures show the swings better (with China weakness as an early week driver and US as late-week driver)…

     

    Small Caps and Trannies are down around 7% this week, S&P best but still down over 5% (and down 6 of the last 7 days)

    • S&P down 5.3% – worst week since Black Monday
    • Dow Industrials down 5.6% – worst week since Black Monday
    • Small Caps down 6.9% – worst week since Nov 2011 – Russell 2000 lowest close since since Oct 2014
    • Dow Transports down 7.1% – worst week since Sept 2011 – lowest close since Nov 2013

    The Dow is down 1400 points in a week (from 17,660 to 16,250)

     

    Utes managed to end the week unchanged but Homebuilders collapsed… Financials and Materials were next worst…

    • Financials down 6.6% – worst week since May 2012
    • Materials down 7.4% – worst week since Sept 2011
    • Homebuilders down 8.6% – worst since Aug 2011

    VIX broke back above 25… (VIX up 60% in 2 weeks – biggest jump since Black Monday)

     

    What did Janet do? Post Fed rate-hike – S&P down 6.5%, Gold up 3%, 30Y Bonds up 1.6%

     

     

    Stocks are about half-way there…

     

    Since the end of QE3, Trannies are down 20% and only Nasdaq is holding any gains…

     

    The FANTAsy stocks are all red since the end of 2015 (with TSLA and AMZN worst)…

     

    Energy Stocks finally woke up to reality in the credit underlying commodity…

     

    US financials have started to plunge back to credit/yield curve reality…

     

    With MS and GS back below Tangible Book Value for first time in 2 years…

     

     

     

    Away from stocks…

     

    Treasury Yields tumbled, closing at their low yields of the year with the belly of the curve outperforming… 10Y yields dropped 14bps this week – the biggest drop in 3 months.

     

    FX markets were volatile but by the end The Dollar Index closed unchanged (against the majors)…

     

    But the USDollar surged 1.5% against Asian FX – its best week in 5 months… (Asian FX is its weakest since April 2009 against the USD)

     

    But AUDJPY – probably the world's most-levered carry trades – collapsed 6.7% this week!! It's worst week since May 2010…

     

    Commodities were very mixed this week…

     

    Gold rallied 4% this week – its best 'first week of the year' since 2008… (best week in 5 months) – breaking 2 key technical levels…

     

    Crude down 5 days in a row touching a $32 handle at the lows… biggest weekly drop since Nov 2014

    In Summary – Sell The Dips!

    See you all Sunday night!

    Charts: Bloomberg

    Bonus Chart: Investors seeking safety are greatly rotating from Triple AAA stocks to Gold stocks (h/t SocGen's Andrew Laphthorne)

     

  • Islamic Radicalism: A Consequence Of Petro-Imperialism

    Submitted by Nauman Sadiq

    Islamic radicalism, a consequence of Petro-imperialism:

    In its July 2013 report [1] the European Parliament identified the Wahhabi-Salafi roots of global terrorism, but the report conveniently absolved the Western powers of their culpability and chose to overlook the role played by the Western powers in nurturing Islamic extremism and jihadism during the Cold War against the erstwhile Soviet Union. The pivotal role played by the Wahhabi-Salafi ideology in radicalizing Muslims all over the world is an established fact as mentioned in the EU report; this Wahhabi-Salafi ideology is generously sponsored by Saudi Arabia and the Gulf-based Arab petro-monarchies since the 1973 oil embargo when the price of oil quadrupled and the contribution of the Arab sheikhs towards the “spiritual well-being” of the Muslims all over the world magnified proportionally; however, the Arab despots are in turn propped up by the Western powers since the Cold War; thus syllogistically speaking, the root cause of Islamic radicalism is the neocolonial powers’ manipulation of the socio-political life of the Arabs specifically and the Muslims generally in order to appropriate their energy resources in the context of an energy-starved industrialized world. This is the principal thesis of this write-up which I will discuss in detail in the following paragraphs.

    Prologue:

    Peaceful or not, Islam is only a religion just like any other cosmopolitan religion whether it’s Christianity, Buddhism or Hinduism. Instead of taking an ‘essentialist’ approach, which lays emphasis on ‘essences,’ we need to look at the evolution of social phenomena in its proper historical context. For instance: to assert that human beings are evil by ‘nature’ is an essentialist approach; it overlooks the role played by ‘nurture’ in grooming human beings. Human beings are only ‘intelligent’ by nature, but they are neither good nor evil by nature; whatever they are, whether good or evil, is the outcome of their nurture or upbringing. Similarly, to pronounce that Islam is a retrogressive or violent religion is an ‘essentialist’ approach; it overlooks how Islam and the Quranic verses are interpreted by its followers depending on the subject’s socio-cultural context. For example: the Western expat Muslims who are brought up in the West and who have imbibed the Western values would interpret a Quranic verse in a liberal fashion; an urban middle class Muslim of the Muslim-majority countries would interpret the same verse rather conservatively; and a rural-tribal Muslim who has been indoctrinated by the radical clerics would find meanings in it which could be extreme. It is all about culture rather than religion or scriptures per se.

    Moreover, I said that Islam is only a religion just like any other religion. But certain reductive neo-liberals blame the religion, as an institution and ideology for all that is wrong with the world. I have not read much history since I am only a humble student of international politics; that’s why I don’t know what the Crusades and the Spanish Inquisition were all about? Although, I have a gut feeling that those were also political conflicts which are presented to us in a religious garb. However, I am certain that all the conflicts of the 20th and 21st centuries were either nationalist (tribal) conflicts; or they had economics and power as their goals. Examples: First and Second World Wars; Korea and Vietnam wars; Afghanistan and Iraq wars; and Libya and Syria wars.

    When the neo-liberals commit the fallacy of blaming religion as a root factor in the contemporary national and international politics, I am not sure which ancient global order they conjure up in their minds, the Holy Roman Empire perhaps? Religion may have been a paramount factor in the ancient times, if at all, but the contemporary politics is all about economics and power: the Western corporations rule the world and politics and diplomacy is all about protecting the trade and energy interests of the Corporate Empire. Thus, the root of all evil in the contemporary politics is capitalism, not religion, which has been reduced to a secondary role and at times to complete irrelevance especially in the liberal and secular Western societies.

    More to the point, when the neo-liberals blame religion for all that is wrong with the world, they are actually engaging in a peculiar kind of juvenile thinking: a child mistakenly assumes that the world can only be seen from his eyes; and that all the people think exactly like he does. He does not understands that the outlooks and worldviews and the preferences and priorities of the people could be very different depending on their upbringing, circumstances and stations in life. You are not supposed to put yourself in another person’s shoes because sizes vary; you are supposed to put that other person in his own shoes, keeping in view his upbringing and mindset and then prescribe a viable future course of action for his individual and social well-being.

    As we know that politics is a collective exercise for creating an ideal social matrix in which individuals and their families can live peacefully and happily, and in which they can maximally actualize their innate potentials. The first priority of the liberals, especially the privileged liberal elite of the developing countries, seems to be to create a liberal society in the developing countries in which they and their families can feel at home. I don’t have anything against a liberal society, especially if looked at from a feminist, inclusive and egalitarian angle, but the ground reality of the developing world is very different from the reality of the developed world. The first and foremost preference of the developing world isn’t social liberalization; it is reducing poverty, ensuring equitable distribution of wealth and economic growth. Liberal ethos and values, important as they are, can wait; our first preference ought to be to create a fair and egalitarian social and economic order on a national and international level, only then can our interests and priorities converge on a single and common goal.

    If the liberals are willing to compromise on the foremost goal of equitable distribution of wealth, then the heavens won’t fall if they could show a little flexibility and maturity on the subject of the enforcement of liberal values too, which affects them on a personal level, more than anything. The socialist liberals of ‘60s and ‘70s at least made sense when they promoted liberalism along with the promise of radical redistribution of wealth. But the neo-liberals of 21st century are a breed apart who shrug off abject poverty and gross inequality of wealth in the developing nations as a secondary preference and espouse liberal values as their first and foremost priority.

    The mainspring of Islamic extremism:

    If we look at the evolution of Islamic religion and culture throughout the 20th and 21st centuries, it hasn’t been natural. Some deleterious mutations have occurred somewhere which have negatively impacted the Islamic societies all over the world. Social selection (or social conditioning) plays the same role in the social sciences which the natural selection plays in the biological sciences: it selects the traits, norms and values which are most beneficial to the host culture. Seen from this angle, social diversity is a desirable quality for social progress; because when diverse customs and value-systems compete with each other, the culture retains the beneficial customs and values and discards the deleterious traditions and habits. A decentralized and unorganized religion, like Sufi Islam, engenders diverse strains of beliefs and thoughts which compete with one another in gaining social acceptance and currency. A heavily centralized and tightly organized religion, on the other hand, depends more on authority and dogma than value and utility. A centralized religion is also more ossified and less adaptive to change compared to a decentralized religion.

    The Shia Muslims have their Imams and Marjahs (religious authorities) but it is generally assumed about the Sunni Islam that it discourages the authority of the clergy. In this sense, Sunni Islam is closer to Protestantism theoretically, because it promotes an individual and personal interpretation of scriptures and religion. It might be true about the educated Sunni Muslims but on a popular level of the masses of the Third World Islamic countries, the House of Saud plays the same role in Islam that the Pope plays in Catholicism. By virtue of their physical possession of the holy places of Islam – Mecca and Medina – they are the de facto Caliphs of Islam. The title of the Saudi King, Khadim-ul-Haramain-al-Shareefain (Servant of the House of God), makes him the vice-regent of God on Earth. And the title of the Caliph of Islam is not limited to a nation-state, he wields enormous influence throughout the Commonwealth of Islam: that is, the Muslim Ummah.

    Islam is regarded as the fastest growing religion of the 20th and 21st centuries. There are two factors responsible for this atavistic phenomena of Islamic resurgence: firstly, unlike Christianity which is more idealistic, Islam is a more practical religion, it does not demands from its followers to give up worldly pleasures but only to regulate them; and secondly, Islam as a religion and ideology has the world’s richest financiers. After the 1973 collective Arab oil embargo against the West, the price of oil quadrupled; the Arabs petro-sheikhs now have so much money that they don’t know where to spend it? This is the reason why we see an exponential growth in Islamic charities and madrassahs all over the world and especially in the Islamic world. Although the Arab sheikhs of the oil-rich Saudi Arabia, Qatar, Kuwait and some emirates of UAE generally sponsor the Wahhabi-Salafi brand of Islam but the difference between the numerous sects of Sunni Islam is more nominal than substantive. The charities and madrassahs belonging to all the Sunni sects get generous funding from the Gulf states as well as the private Gulf-based donors.

    After sufficiently bringing home the fact that Islam as a religion isn’t different from other cosmopolitan religions in regard to any intrinsic feature and that the only factor which differentiates Islam from other mainstream religions is the abundant energy resources in the Muslim-majority countries of the Persian Gulf and the Middle East and North Africa (MENA) region; and the effect of those resources and the global players’ manipulation of the socio-political life of the inhabitants of those regions to exploit their resources culminated in the emergence of the phenomena of Petro-Islamic extremism and violent Takfiri-Jihadism, our next task is to examine the symbiotic relationship between the illegitimate Gulf rulers and the neo-colonial powers.

    The global neocolonial political and economic order:

    Before we get to the crux of the matter, however, let us first cursorily discuss that why is it impossible to bring about a major fundamental change: political, social or economic, on a national level under the existing international political and economic dispensation? As we know that the Western so-called liberal-democracies could be liberal, however, they are anything but democracies; in fact, the right term for the Western system of government is plutocratic oligarchies. They are ruled by the super-rich corporations whose wealth is measured in hundreds of billions of dollars, far more than the total GDPs of many developing nations; and the status of those multinational corporations as dominant players in their national and international politics gets an official imprimatur when the Western governments endorse the Congressional lobbying practice of the so-called ‘special interest’ groups, which is a euphemism for ‘business interests.’

    Moreover, since the Western governments are nothing but the mouthpieces of their business interests on the international political and economic forums, therefore, any national or international entity which hinders or opposes the agenda of the aforesaid business interests is either coerced into accepting their demands or gets sidelined. In 2013 the Manmohan Singh’s government of India had certain objections to further opening up to the Western businesses; the Business Roundtable which is an informal congregation of major US businesses and which together holds a net wealth of $6 trillion (6000 billion) held a meeting with the representatives of the Indian government and made them an offer which they couldn’t refuse. The developing economies, like India, are always hungry for the Foreign Direct Investment (FDI) to grow further, and that investment comes mostly from the Western corporations.

    When the Business Roundtables or the Paris-based International Chamber of Commerce (ICC) form pressure groups and engage in ‘collective bargaining’ activities, the nascent and fragile developing economies don’t have a choice but to toe their line. State ‘sovereignty’ that the sovereign nation-states are at liberty to pursue an independent policy, especially an economic and trade policy, is a myth. Just like the ruling elites of the developing countries who have a stranglehold and a monopoly over domestic politics; similarly the neo-colonial powers and their multinational corporations control the international politics and the global economic order. Any state who dares to transgress becomes an international pariah like Castro’s Cuba, Mugabe’s Zimbabwe or North Korea; and more recently Iran, which had been cut off from the global economic system, because of its supposed nuclear aspirations. Good for Iran that it has one of the largest oil and gas resources, otherwise it would have been insolvent by now; such is the power of global financial system especially the banking sector, and the significance of petro-dollar because the global oil transactions are pegged in the US dollars all over the world, and all the major oil bourses are also located in the Western world.

    There is an essential precondition in the European Union’s charter of union according to which the under-developed countries of Europe who joined the EU allowed free movement of goods (free trade) only on the reciprocal precondition that the developed countries would allow the free movement of labor. What’s obvious in this condition is the fact that the free trade only benefits the countries which have a strong manufacturing base, and the free movement of workers only favors the under-developed countries where labor is cheap. Now when the international financial institutions, like the IMF and WTO, promote free trade by exhorting the developing countries all over the world to reduce tariffs and subsidies without the reciprocal free movement of labor, whose interests do such institutions try to protect? Obviously, such global financial institutions espouse the interests of their biggest donors by shares, i.e. the developed countries.
     
    Some market fundamentalists who irrationally believe in the laissez-faire capitalism try to justify this unfair practice by positing Schumpeter’s theory of ‘creative destruction’ that the free trade between unequal trade partners leads to the destruction of the host country’s existing economic order and a subsequent reconfiguration gives birth to a better economic order. Whenever one comes up with gross absurdities such as these, they should always make it contingent on the principle of reciprocity: that is, if free trade is beneficial for the nascent industrial base of the underdeveloped countries, then the free movement of labor is equally beneficial for the labor force of the developed countries. The policy-makers of the developing countries must not fall prey to such deceptive reasoning, instead they must devise a policy which suits their national interest. But the trouble is that the governments of the Third world are dependent on the global loan sharks, such as IMF and World Bank, that’s why they cannot adopt an independent economic and trade policy.
     
    From the end of the Second World War to the beginning of the 21st century the neo-colonial powers have brazenly exploited the Third world’s resources and labor, but after China’s accession to the World Trade Organization in 2001 things changed a little. Behind the “Iron Curtain” of international isolation, China successfully built its manufacturing base by imparting vocational and technical education to its disciplined workforce and by building an industrial and transport infrastructure. It didn’t allow any imports until 2001, but after entering the WTO it opened up its import-export policy on a reciprocal basis; and since the labor in China is much cheaper than its Western counterparts, therefore, it now has a comparative advantage over Western bloc which China has exploited in its national interest.
     
    Asking the neo-colonial powers to act in the interests of the developing world is incredibly naïve. It’s like asking the factory-owners to act in the interest of their factory-workers on altruistic grounds. This is not the way forward, the factory-workers must strengthen their own labor unions and claim what’s rightfully theirs. The developing countries must form regional blocs and settle things among themselves. If a country takes interest in the affairs of its regional neighbor; like if India takes interest in the affairs of Pakistan, or if Pakistan is wary of the happenings in Afghanistan and Iran, their concerns are understandable. But what “vital strategic interests” does the US has in the Middle East where 35,000 of its troops are currently stationed, ten thousand kilometers away from its geographical borders? ‘Humanitarian imperialism’ is merely a charade, it’s the trade and energy-interests of the corporate empire which are ‘vitally’ important to the neo-colonial powers.

    Cold War and the birth of Islamic Jihad:

    The Western powers’ collusion and conflicted relationship with the Islamic jihadists (aka moderate rebels) in Syria isn’t the only instance of its kind. The Western powers always leave such pernicious relationships deliberately ambiguous in order to fill the gaps in their self-serving diplomacy and also for the sake of “plausible deniability.” Throughout the late ‘70s and ‘80s during the Cold War, they used the jihadists as proxies in their war against the Soviets. The Cold War was a war between the Global Capitalist bloc and the Global Communist bloc for global domination. The Communists used their proxies the Viet Congs to liberate Vietnam from the imperialist hegemony. The Global Capitalist bloc had no answer to the cleverly executed asymmetric warfare.

    Moreover, the Communist bloc had a moral advantage over the Capitalist bloc: that is, the mass appeal of the egalitarian and revolutionary Marxist and Maoist ideologies. Using their: “Working men and women of all the countries, unite!” rhetoric, the Communists could have instigated an uprising anywhere in the world; but how could the Capitalists retaliate, through “the trickle-down economics” and “the American way of life” rhetoric? The Western policy-makers faced quite a dilemma, but then their Machiavellian strategists, capitalizing on the regional grassroots religious sentiment, came up with an equally robust antidote: that is, the Islamic Jihad.

    During the Soviet-Afghan conflict from 1979 to 1988 between the Global Capitalist bloc and the Global Communist alliance, Saudi Arabia and the Gulf Arab petro-monarchies took the side of the former; because the USSR and the Central Asian states produce more energy and consume less of it; thus they are net exporters of energy; while the Global Capitalist bloc is a net importer of energy. It suits the economic interests of the Gulf Cooperation Council (GCC) countries to maintain and strengthen a supplier-consumer relationship with the Capitalist bloc. Now the BRICS are equally hungry for the Middle Eastern energy but it’s a recent development; during the Cold War an alliance with the Western countries suited the economic interests of the Gulf Arab petro-monarchies. Hence, the Communists were pronounced as Kafirs (infidels) and the Western capitalist bloc as Ahl-e-Kitaab (People of the Book) by the Salafi preachers of the Gulf Arab states.

    All the celebrity terrorists, whose names we now hear in the mainstream media every day, were the products of the Soviet-Afghan war: like Osama bin Laden, Ayman al Zawahiri, the Haqqanis, the Taliban, the Hekmatyars etc. But that war wasn’t limited only to Afghanistan; the NATO-GCC alliance of the Cold War had funded, trained and armed the Islamic Jihadists all over the Middle East region; we hear the names of Jihadists operating in the regions as far afield as Uzbekistan and North Caucasus. In his 1998 interview [2], the National Security Adviser to President Carter, Zbigniew Brzezinski, had confessed that the President signed the directive for secret aid to the Afghan Mujahideen in July 1979 while the Soviet Army invaded Afghanistan in December 1979. Here is a poignant excerpt from his interview:

    Question: “And neither do you regret having supported the Islamic Jihadis, having given arms and advice to future terrorists?”

    Brzezinski: “What is most important to the history of the world? The Taliban or the collapse of the Soviet empire? Some stirred-up Moslems or the liberation of Central Europe and the end of the cold war?”

    Despite the crass insensitivity, you got to give credit to Zbigniew Brzezinski that at least he had the guts to speak the unembellished truth. The hypocritical Western policy makers of today, on the other hand, say one thing in public and do the opposite on the ground. However, keep in mind that the aforementioned interview was recorded in 1998. After the WTC tragedy in 2001, no Western policy-maker can now dare to be as blunt and honest as Brzezinski.

    The Anglo-Wahhabi alliance:

    All the recent wars and conflicts aside, the unholy alliance between the Anglo-Americans and the Wahhabi-Salafis of the Gulf petro-monarchies, which I call “the Anglo-Wahhabi alliance,” is much older. The British stirred up uprising in Arabia by instigating the Sharifs of Mecca to rebel against the Ottoman rule during the First World War. After the Ottoman Empire collapsed, the British Empire backed King Abdul Aziz (Ibn-e-Saud) in his struggle against the Sharifs of Mecca; because the latter were demanding too much of a price for their loyalty: that is, the unification of the whole of Arabia under their suzerainty. King Abdul Aziz defeated the Sharifs and united his dominions into the Kingdom of Saudi Arabia in 1932 with the support of the British. However, by then the tide of British Imperialism was subsiding and the Americans inherited the former possessions and the rights and liabilities of the British Empire.

    At the end of the Second World War on 14 February 1945, President Franklin D. Roosevelt held a historic meeting with King Abdul Aziz at Great Bitter Lake in the Suez canal onboard USS Quincy, and laid the foundations of an enduring Anglo-Wahhabi friendship which persists to this day; despite many ebbs and flows and some testing times especially in the wake of 9/11 tragedy when 15 out of 19 hijackers of the 9/11 plot turned out to be Saudi citizens. During the course of that momentous Great Bitter Lake meeting, among other things, it was decided to set up the United States Military Training Mission (USMTM) to Saudi Arabia to “train, advise and assist” the Saudi Arabian Armed Forces.

    Aside from USMTM, the US-based Vinnell Corporation, which is a private military company based in the US and a subsidiary of the Northrop Grumman, used over a thousand Vietnam war veterans to train and equip the 125,000 strong Saudi Arabian National Guards (SANG) which is not under the authority of the Saudi Ministry of Defense and which acts as the Praetorian Guards of the House of Saud. The relationship which existed between the Arab American Oil Company (ARAMCO) and the House of Saud is no secret. Moreover, the Critical Infrastructure Protection Force, whose strength is numbered in tens of thousands, is also being trained and equipped by the US to guard the critical Saudi oil infrastructure along its eastern Persian Gulf coast where 90% Saudi oil reserves are located. Furthermore, the US has numerous air bases and missile defense systems currently operating in the Persian Gulf states and also a naval base in Bahrain where the Fifth Fleet of the US Navy is based.

    The point that I am trying to make is that left to their own resources, the Persian Gulf’s petro-monarchies lack the manpower, the military technology and the moral authority to rule over the forcefully suppressed and disenfranchised Arab masses, not only the Arab masses but also the South Asian and African immigrants of the Gulf Arab states. One-third of Saudi Arabian population is comprised of immigrants; similarly, more than 75% of UAE’s population is also comprised of immigrants from Pakistan, Bangladesh, India and Sri Lanka; and all the other Gulf monarchies also have a similar proportion of the immigrants from the developing countries; moreover, unlike the immigrants in the Western countries who hold the citizenship status, the Gulf’s immigrants have lived there for decades and sometimes for generations, and they are still regarded as unentitled foreigners.

    Petroimperialism and the Western energy interests:

    A legitimate question arises in the mind of a curious reader , however, that why do the Western powers support the Gulf’s petro-monarchies, knowing fully well that they are the ones responsible for nurturing the Takfiri-Jihadi ideology all over the Islamic world; does that not runs counter to their professed goal of eliminating Islamic extremism and terrorism? When you ask this question, you get two very different and contradictory responses depending on who you are talking to. If you ask this question from a Western policy-maker or a diplomat that why do you support the Gulf’s despots? He replies that it’s because we have vital strategic interests in the Middle East and North Africa region; by which he means abundant oil and natural gas reserves and also the fact that the Arab Sheikhs have made substantial investments in the Western economies at a time of global recession and the outsourcing of most of manufacturing to China. Thus, the Western policy-makers’ defense is predicated on self-interest, i.e. the Western national interests.

    When you ask the same question, however, from the constituents of the Western liberalism that what is the Western policy in the Middle East region? The constituents’ response is quite the opposite, they don’t think that the Western powers control the Middle East, or the global politics and economics in general, for their trade and energy interests; they believe that the motives of the Western powers are more altruistic than selfish. The constituents of the Western liberalism mistakenly believe in the counterfactual concepts of humanitarian and liberal interventionism and the responsibility to protect.

    Coming back to the question, why do the Western powers prop up the Middle Eastern dictators knowing fully well that they are the ones responsible for nurturing Islamic jihadism and is it possible that in some future point in time they will withdraw their support? It is highly unlikely at least in the foreseeable future. The Western powers have become so dependent on the Arab petro-dollars that they would rather fight the Arab tyrants’ wars for them against their regional rivals. Presently, there are two regional powers vying for dominance in the Middle East: Saudi Arabia and Iran. The Syrian civil war is basically a Sunni Jihad against the Shi’a Resistance axis. The Shi’a alliance is comprised of Iran and Syria, the latter is ruled by an Alawi (Shi’a) regime, even though the majority of Syria’s population is Sunni Muslims and the Alawites constitute only 12% of the population. Lebanon-based Hezbollah (which is also Shi’a) is an integral part of the Shi’a Resistance axis. And recently the Nouri al Maliki and Haider al Abadi administrations in Iraq, which also has a Shi’a majority, have formed a tenuous alliance with Iran.

    Moreover, Saudi Arabia has long-standing grievances against Iran’s meddling in the Middle Eastern affairs, especially the latter’s support to the Palestinian cause, the Houthis in Yemen, the Bahraini Shi’as and more importantly the significant and restive Shi’a minority in the Eastern Province of Saudi Arabia where 90% of Saudi oil reserves are located along the Persian Gulf’s coast. On top of that Saudi Arabia also has grievances against the US for toppling the Sunni Saddam regime in Iraq in 2003 which had formed a bulwark against the Khomeini influence in the Middle East because of Saddam’s military prowess. Furthermore, in the wake of political movements for enfranchisement during the Arab Spring of 2011, Saudi Arabia took advantage of the opportunity and militarized the peaceful and democratic protests in Syria with the help of its Sunni allies: the Gulf monarchies of Qatar, UAE, Kuwait and Jordan and Turkey (all Sunnis) against the Shi’a regime of Bashar al Assad.

    However, why did the Western powers preferred to join this Sunni alliance against the Shi’a Resistance axis? It’s because the Assad regime has a history of hostility towards the West; it had also formed a close working relationship with the erstwhile Soviet Union and it still hosts a Russian naval facility at Tartus; and its proxy in Lebanon, Hezbollah, has emerged over the years as the single biggest threat to the Israel’s regional security. On the other hand, all the aforementioned Sunni states have always been the steadfast allies of the Western powers along with Israel; don’t get misled by the public posturing, all the aforementioned Sunni states along with the Western support are in the same boat in the Syrian civil war as Israel.

    Hypothetically speaking, had the Western powers not joined the ignoble Syrian Jihad which has claimed 250,000 lives so far and made millions of Syrians refugees, what could have been an appropriate course of action to force the Gulf monarchies, Turkey and Jordan, not to engage in fomenting trouble in Syria? This is a question of will, if there is will there are always numerous ways to deal with the problem. However, after what has happened in Afghanistan, Iraq, Libya and Syria only a naïve neoliberal will prescribe a Western military intervention anywhere in the world. But if military intervention is off the table, is there a viable alternative to enforce justice and to force the states to follow moral principles in international politics? Yes there is.

    The crippling “third party” economic sanctions on Iran in the last few years may not have accomplished much, but those sanctions have brought to the fore the enormous power which the Western financial institutions and the petro-dollar as a global reserve currency wields over the global financial system. We must bear in mind that the Iranian nuclear negotiations were as much about Iran’s nuclear program as they were about its ballistic missile program, which is a much bigger “conventional threat” to the Gulf’s petro-monarchies just across the Persian Gulf. Despite the sanctions being unfair, Iran felt the heat so much that it remained engaged in the negotiations throughout the last few years, and finally the issue was amicably settled in the form of the Iran nuclear deal in April 2015. However, such was the crippling effect of those “third party” sanctions on the Iranian economy that had it not been for Iran’s enormous oil and gas reserves, and some Russian, Chinese and Turkish help in illicitly buying Iranian oil, it could have defaulted due to those sanctions.

    All I am trying to suggest is, that there are ways to arm-twist the Gulf’s petro-monarchies to implement democratic reforms and to refrain from sponsoring the Takfiri-Jihadist terror groups all over the Islamic world, provided that we have just and upright international arbiters. However, there is a caveat: Iran is only a single oil-rich state which has 160 billion barrels of proven crude oil reserves and around 4 million barrels per day (mbpd) production. On the other hand, the Persian Gulf’s petro-monarchies are actually three oil-rich states: Saudi Arabia with its 265 billion barrels of proven reserves and 10 mbpd of daily crude oil production; and UAE and Kuwait with 200 billion barrels (100 billion barrels each) of proven reserves and 6 mbpd of daily crude oil production; together their share amounts to 465 billion barrels, almost one-third of the world’s 1477 billion barrels of total proven crude oil reserves; and if we add Qatar to the equation, which isn’t oil-rich, as such, but has substantial natural gas reserves, it must take a morally very very upright arbiter to sanction all of them.

    Therefore, though sanctioning the Gulf petro-monarchies sounds like a good idea on paper, but bear in mind that the relationship between the Gulf’s petro-monarchies and the industrialized world is that of a consumer-supplier relationship: the Gulf Arab states are the suppliers of energy and the industrialized world is its consumer, therefore, the Western powers cannot sanction their energy-suppliers and largest investors, if anything, the Gulf’s petro-monarchies have in the past “sanctioned” the Western powers by imposing an oil embargo in 1973 after the Arab-Israel war. The 1973 Arab oil embargo against the West had lasted only for a short span of six months but it had such a profound effect on the psyche and the subsequent strategy of the Western powers that after the embargo the price of crude oil in the international market quadrupled; the US imposed a ban on the export of indigenously produced crude oil outside the US’ borders which is still in place; and the US started keeping a strategic oil reserve amounting to two months of fuel supply for its total energy needs for the military purposes that includes jet fuel for its aircrafts and petrol and diesel for the armored personnel carriers, battle tanks and naval vessels.

    Recently, some very upbeat rumors about “the Shale Revolution” [3] have been circulating the mainstream media. However, the Shale revolution is primarily a natural gas revolution: it has increased the ‘probable-recoverable’ resources of natural gas by 30%. The ‘shale oil’ on the other hand, refers to two very different kinds of energy resource: one, the solid kerogen, though substantial resources of kerogen have been found in the US’ Green River formations, but the cost of extracting liquid crude from solid kerogen is so high that it is economically unviable for at least another 100 years; two, the tight oil which is blocked by the shale, it is a viable energy resource, but the reserves are so limited, around 4 billion barrels in Texas and North Dakota, that it will run out in a few years.

    Although, the Canadian oil sands and the Venezuelan heavy crude are environmentally polluting energy resources but economically they are viable sources of crude oil. More than the size of the oil reserves, however, it is also about the per barrel extraction cost, which determines the profits for the multinational oil companies and in that regard the Persian Gulf’s crude oil is the most profitable. Moreover, regarding the US’ supposed energy independence after the so-called “Shale Revolution,” the US produced 11 million barrels per day (bpd) of crude oil in the first quarter of 2014; that is, more than Saudi Arabia and Russia’s output, each of which produces around 10 million bpd, but the US still imported 7.5 million bpd during the same period of time; that is, more than the oil imports of France and Britain put together. More than the total volume of oil production, the volume which an oil-producing country exports determines its place in the “hierarchy of petroleum” and the Gulf’s petro-monarchies constitute the top tier of that pyramid.

    Conclusion:

    It is generally believed that political Islam is the precursor of Islamic extremism and Jihadism, however, there are two distinct and separate types of political Islam: the despotic political Islam of the Gulf variety and the democratic political Islam of the Turkish and the Muslim Brotherhood variety. The latter Islamist organization never ruled over Egypt except for a brief year long stint, it would be unwise to draw any conclusions from such a brief period of time in history. The Turkish variety of political Islam, the oft-quoted ‘Turkish model,’ however, is worth emulating all over the Islamic world. I do understand that political Islam in all its forms and manifestations is an anathema to the liberals, but it is the ground reality of the Islamic world. The liberal dictatorships no matter how benevolent they may be, had never worked in the past, and they will meet the same fate in the future.

    The mainspring of Islamic extremism and militancy isn’t the moderate and democratic political Islam, because why would people turn to violence when they can exercise their right to choose their rulers? The mainspring of Islamic militancy is the despotic and militant political Islam of the Gulf variety. The Western powers are fully aware of this fact, then why do they choose to support the same forces that have nurtured jihadism and terrorism when their ostensible and professed goal is to eliminate Islamic extremism and militancy? It is because it has been a firm policy-principle of the Western powers to promote ‘stability’ in the Middle East rather than representative democracy. They are fully cognizant of the ground reality that the mainstream Muslim sentiment is firmly against any Western military presence and interference in the Middle East region. Additionally, the Western policy-makers also prefer to deal with small groups of Middle Eastern ‘strongmen’ rather than cultivating a complex and uncertain relationship on a popular level, certainly a myopic approach which is the hallmark of the so-called ‘pragmatic’ politicians and strategists.

    Sources and links:

    [1] European parliament identifies Wahhabi and Salafi roots of global terrorism:
    http://www.dawn.com/news/1029713

    [2] How Jimmy Carter and I started the Mujahideen? Zbigniew Brzezinski:
    http://www.counterpunch.org/1998/01/15/how-jimmy-carter-and-i-started-the-mujahideen/

    [3] Difference between shale oil and tight oil:
    http://www.theoildrum.com/node/9753

    About the author:

    Nauman Sadiq is an Islamabad-based attorney, blogger and geopolitical analyst who has a particular interest in the politics of Af-Pak and MENA regions, energy wars and Petro-imperialism.

  • Cultural Marxism Explained In 7 Minutes

    Submitted by Joseph Salerno via The Mises Institute,

    This is an excellent short video explaining the source and nature of Cultural Marxist movements like political correctness, modern feminism, pansexualism, multiculturalism, "whiteness studies," etc. 

     

    For an in-depth critique of the thinkers whose writings shaped Cultural Marxism, see Fools, Frauds and Firebrands:  Thinkers of the New Left by the eminent British philosopher Roger Scruton.  Scruton brilliantly exposes the pretensions, obscurities, and inanities of Sartre, Foucault, Galbraith, Marcuse, Lukacs, Habermas, Adorno, Rawls, Dworkin and others of their ilk.

    The book is not just a philosophical tract but a work in critical political economy and contains one of the most penetrating discussions of the Marxist labor theory of value that I have ever read.

  • Stunning Photos From China's Creepiest Modern Ghost Town

    Welcome to the most ironically-named city in China. A would-be utopia, rapidly constructed for a population of one million (that failed to materialize), the futuristic city of Ordos, which takes its name from ordo, the Mongolian word for crowd and the root for the English word 'horde', has been almost totally abandoned. The stunning landscape left behind in the following images is both disturbing and confirming of China's epic mal-investment boom…

    Via Artnet News

    The images, taken by Shanghai-based photographer Raphael Olivier and shared at Creative Boom, depict a strange modern ghost town. The city, in the Inner Mongolia region, was constructed under the old "if you build it, they will come" motto, but the teeming masses have never made their way to Ordos.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    The city includes dormant schools, sports complexes, hospitals, convention centers, and other major facilities, all completed between 2005 and 2010. The Chinese building boom has seen many new cities become overnight metropolises, but Ordos City failed to replicate that success.

    "The city is now a surreal landscape of empty streets, decaying monuments, abandoned buildings and half-finished housing projects," writes Olivier. "It is more than anywhere the symbol of the Chinese Dream with all its challenges and contradictions, an Orwellian vision of a bright future caught up by a less flamboyant reality."

    Raphael Olivier, Ordos, Inner Mongolia, the Ordos Museum.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia, the Ordos Museum.
    Photo: Raphael Olivier.

    The city's most fantastical structures include the Ordos Museum, designed by China's MAD Archictects, which resembles a tiled metal blob overlooking the Gobi Desert.

    Like the rest of the city, the museum was apparently built without much forethought: "As for the gallery spaces, we didn't know what kind of exhibitions they would hold, so they are designed to be flexible," the architecture firm told ArchDaily.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    "This plaza is now a favorite amongst the locals who gather their families and friends to explore, play or lounge in the pleasant landscape," wrote de zeen magazine upon Ordos's completion in 2011, in a rather premature judgment.

    Based on reports from intrepid photojournalists and travelers, including the Bohemian Blog, the city's residents (reportedly just 20,000 souls, or two percent of the total capacity) largely consist of construction crews, maintenance workers, and random employees.

    See more of Olivier's photos of Ordos below:

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia.
    Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia, the Ordos mosque.<br> Photo: Raphael Olivier.

    Raphael Olivier, Ordos, Inner Mongolia, the Ordos mosque.
    Photo: Raphael Olivier.

     

    We have nothing to add… except one chart…

     

     

    This is what happens when the central planners get drunk on their own hopium-laced Kool-Aid.

     

    Images: Artnet News

  • 2016 Theme #5: The Systemic Failure of High Finance

    Submitted by Charles Hugh-Smith of OfTwoMinds blog,

    This week I am addressing themes I see playing out in 2016.

    A number of systemic, structural forces are intersecting in 2016. One is the failure of high finance to fix the global economy's systemic problems.

    The operative conceit of the past 7 years has been that high finance can fix whatever's broken in the world's economies. According to this narrative, all the world needed to boost "growth," employment and profits was lower interest rates, more liquidity, reverse repos and some other fancy financial footwork.

    Once all this high finance generated more borrowing by debt-serfs, property developers, students, corporations buying back their shares and financiers skimming billions from asset bubbles, systemic problems would be dissolved or mitigated.

    Cheap credit, asset bubbles and immense profiteering by financiers would heal all wounds and make everything better for everyone, even those at the bottom layer of the economy.

    Unfortunately, this isn't true. High finance and cheap credit have intensified structural problems such as rising inequality, not resolved them.

    The implicit promise of the neoliberal project is that liberalizing private-sector markets and credit will magically grease the processes of growth and widespread prosperity.

    When economies have the right systems in place–decentralized, somewhat free markets, an entrepreneurial spirit, many unmet needs, idle productive capacity and a credit-starved real economy–freeing up static markets and credit can unleash the productive capacity of the bottom level of the economy.

    But in economies dominated by state/private monopolies and cartels, neoliberalism simply funnels the profits of financialization to the few at the expense of the many, and at the cost of heightened instability and insecurity.

    Making more credit available for student loans didn't fix America's broken higher education system–it only tightened the grip of the higher education cartel and turned another generation of students into debt-serfs.

    Loosening mortgage standards and lowering interest rates didn't turn America into an "ownership society"–it turned it into a boom-and-bust speculative society with many more losers than winners in the neoliberal/high finance speculative casino.

    The essence of neoliberal high finance is the vast majority of gamers in the casino lose security and wealth, while the House (the state and the banks) skim the resulting profits. Main Street has found its security stripped away (sorry, Bucko, no yield on savings now; you have to belly up and place a high-risk bet at a gaming table to keep what you had before) in exchange for the potential of outsized profits.

    But alas, the games are rigged; the financiers have first access to the Federal Reserve's nearly free money, and insiders profit from stock buybacks and other financial gaming that generates monumental profits but zero goods and services.

    If debt had grown in parallel with GDP and inflation, total credit market debt in the U.S. would be around $20+ trillion rather than $59 trillion. The difference is speculative excess, manifested in asset bubbles and staggering amounts of debt.

    The casino's losers get the debt, the winners skim the profits.

    The only possible output of this system is rising income and wealth inequality:

    Cheap credit doesn't reverse the elimination of jobs via automation–it accelerates that process by making capital machinery and software cheaper than labor and labor overhead.

    Cheap credit and high finance don't fix what's broken in our democracy–they have greased the skids to what we have now–"democracy" for the highest bidder by giving financiers and corporations the means to stripmine productive assets and use the gargantuan profits to buy political favors.

    High finance isn't the cure–it's the disease.

    *  *  *

    My book on the emerging economy is now available as a audiobook: Get a Job, Build a Real Career and Defy a Bewildering Economy (Audible.com).

    My new book is #7 in Amazon's Kindle ebooks > Business & Money > International Economics: A Radically Beneficial World: Automation, Technology and Creating Jobs for All. The Kindle edition is $$9.95 and the print edition is currently discounted to $21.60.

     

  • This Is The $3.5 Trillion "Neutron Bomb" That Keeps Kyle Bass Up At Night

    Earlier today, CNBC invited Kyle Bass, the man who correctly predicted and profited from the subprime collapse, to discuss what he thought was the biggest threat to the global financial system.

    Here is the highlight of what he said:

    What I think the narrative will swing to by the end of this year if not sooner, is the real issue in China is not simply that profits have peaked. The real issue is the size of their banking system. Do you remember the reason the European countries ended up falling like dominoes during the European crisis was their banking systems became many multiples of their GDP and therefore many, many multiples of their central government revenue. In China, in dollar terms their banking system is almost $35 trillion against a GDP of $10 and their banking system has grown 400% in 8 years with non-performing loans being nonexistent. So what we are going to see next is a credit cycle, and in a credit cycle you see some losses, but if China’s banking system loses 10%, you are going to see them lose $3.5 trillion. 

    He then puts this number in the context of China’s “massive” foreign reserves:

    What’s the magic number in their FX reserve pile today? When you look at banking system assets divided by their foreign exchange reserves, China is 7x, it’s one of the worst in the world. I think people are mypoically focused on a giant number of reserves, of $3 trillion or thereabouts, and no one is really paying attention to the size of the system and what’s about to happen.

    Actually that’s not true: we first pointed this out more than 2 years ago, when we showed “How China’s Stunning $15 Trillion In New Liquidity Blew Bernanke’s QE Out Of The Water.”

     

    A few weeks later we followed up with another stunning chart showing “How In Five Short Years, China Humiliated The World’s Central Banks.” However, we do agree fully with Bass that virtually nobody else is paying attention to this epic question of scale, especially as it relates to another topic we have been covering for the past two years: China’s soaring, and dramatically underreported non-performing loans.

    More on that in a second, but first a quick reminder that as we also reported over the weekend, for Kyle Bass, “The Greatest Investment Opportunity Right Now” is to short the Chinese currency: a trade which just in the past week has generated tremendous returns (using the embedded FX leverage), and which we are confident will continue to be very profitable, especially since as we first said in August, days before China’s devaluation, the only thing that could save China’s economy from an even harder landing, is to rapidly devalue their currency. China did just that, and has been doing that ever since.

    Earlier today, even Goldman – with a huge delay – finally came to see things correctly, when it said that:

    “We are adjusting our USDCNY forecast weaker, to 7.00 on a 12-month horizon (our twelve-month forecast was 6.60 previously) and 7.30 by end-2017 (from 6.80 previously). Though markets have been moving quickly, and today’s lower USDCNY fixing suggests the possibility that policymakers may want to stabilize expectations for the CNY, this puts us back on the weak side of market pricing over a twelve-month horizon, consistent with our view that 2016 will be a year of continued “bumpy deceleration” and significant policy easing in the Chinese economy, and that the potential for greater CNY depreciation remains a large source of uncertainty.”

    So going back to Kyle Bass’ thesis, it a relatively simple one: China has been avoiding a credit, or non-performing loan cycle, and fabricating the data, but the time has run out.

    “China many years ago attached its currency to the dollar: they hitched their wagon to our star very smartly because back then our goal was to depreciate our dollar through inflation. So we issued debt to the rest of the world to depreciate the dollar. And so now the real problem is China has hitched their wagon to our star, and their currency has effectively appreciated about 60% versus the rest of the world since 2005 and it’s killing them… China’s effective exchange rate moving up versus the rest of the world made their goods and services a little bit more expensive each year and now that labor arbitrage is gone. And if that labor arbitrage is gone, and the banking system has expanded 400% in 7 years without a nonperforming loan cycle, my view is we are going to see a non-performing loan cycle.”

    So what exactly is this non-performing loan cycle that Kyle Bass is referring to, and where does he get a $3 trillion potential loan loss – a quantum step in admission of economic failure which we first dubbed China’s neutron bomb” in October 2015 – number?

    Luckily, we explained all of this two months ago when we showed how “China’s Banking Sector Is Sitting On A $3 Trillion Neutron Bomb.” For those who missed it, here is the explanation behind what could be the best trade of the next 12-18 months (the best trade of 2015 incidentally was to be long Glencore CDS, as we suggested in 2014) according to Kyle Bass:

    * * *

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

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

    Source: Fitch

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

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

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

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

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

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

     

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

     

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

     

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

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

     

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

     

     

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

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

     

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

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

     

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

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

     

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

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

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

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

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

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

  • Doctors Urge California Residents "Leave Now…While You Can" As Gas Leak Fears Grow

    Submitted by Claire Bernish via TheAntiMedia.org,

    California Governor Jerry Brown finally declared a state of emergency on Wednesday, concerning the ongoing, currently unstoppable methane gas leak spewing from Aliso Canyon that has created a nightmare for residents of Porter Ranch.

    “I will tell you, this goes well beyond Porter Ranch. We’ve had complaints from as far as Chatsworth, Northridge, and Granada Hills,” emphasized Los Angeles City Councilman Mitchell Englander during a Porter Ranch town hall meeting on December 28. “Apparently this plume of toxic chemicals and whatever it might be, doesn’t know zip codes […] This is the equivalent of the BP oil spill on land, in a populated community.”

    Aliso Canyon sits less than two and a half miles from Porter Ranch and less than 30 miles from the city of Los Angeles — the second most populous city in the United States — whose outlying total statistical area includes nearly 18 million residents, as of 2013.

    Brown has been widely criticized for lack of decisive action on the leak, which is erupting from its underground storage area with all the force “of a volcano.” Under Wednesday’s declaration, “all state agencies will utilize state personnel, equipment, and facilities to ensure a continuous and thorough state response to this incident.”

    Porter Ranch residents have been evacuating the area for some time, though SoCalGas’ rather maladroit handling of the relocation procedure has been a nightmare — and the cause for a mounting number of lawsuits, including one from the L.A. city attorney’s office.

    Los Angeles City Attorney Mike Feuer filed a civil lawsuit last month concerning the massive methane leak’s impact on area residents’ health and damage to the environment — which alleged failure by SoCalGas to prevent the leak and further exacerbation of “the effects of that failure by allowing acute odor and health problems faced by the community to persist for more than a month, to say nothing about the indefinite time it will persist into the future.”

    Pediatrician Dr. Richard Kang gave an ominous warning during the Porter Ranch meeting, saying, “Unfortunately, the only real way to get away from the symptoms is… you have to relocate — you have to get away from the environment.” Health complaints include severe headaches, nosebleeds, respiratory issues including increasing cases of asthma, and a number of other issues.

    SoCalGas, in the meantime, stated they were “providing air filters for people’s homes,” but though “the odor added to the leaking gas can cause symptoms for some, the gas is not toxic and county health officials have said the leak does not pose a long-term health risk.”

    But, as the Los Angeles Daily News reported on December 25, “Los Angeles County health officials said prolonged exposure to trace chemicals, some of which are known carcinogens, can cause long-term health effects.” Nevertheless, they also “cautioned that levels examined so far here are not believed to be associated with long-term health problems.”

    “The gas company says, ‘This is just the smell you’re reacting to, it’s just temporary, it’s not a problem, it’s not serious’ — these people aren’t stupid,” said attorney Rex Paris. “How could somebody possibly say that? We have children whose noses are bleeding every day, we have people who suffer from chronic headaches [and] are nauseous every, single day. How does that not become a serious issue? Why are they saying something nobody here believes? […] They’re trying to convince everybody that it’s all in our heads. It’s a trick.”

    In fact, as Erin Brockovich pointed out, “no one really knows the long-term side effects of benzene and radon, the carcinogens that are commonly found in natural gas.”

    Additionally, area house pets seem particularly vulnerable — possibly acting the part of unwitting canaries — as veterinarian Dr. David Smith described in the town hall meeting. Noting he has seen dozens of sickened animals, Smith said, “I’ve seen dogs, cats, birds, pocket pets… the primary symptoms I’ve seen are gastrointestinal vomiting […]These are not things you should be inhaling.” He added, “We have seen dermatological issues as well, some very unusual bacterial infections in dogs,” including one case in which a dog had such an infection on its face, and “the client developed almost the exact same kind of symptoms soon after that […] their physician thinks it’s related [to exposure from the gas leak] and so I tend to think these correlations are real.”

    Though the declaration of emergency states “the Division of Oil, Gas, and Geothermal Resources shall continue its prohibition against Southern California Gas Company injecting any gas into the Aliso Canyon Storage Facility,” it does not make that moratorium dependent on stoppage of the leak; rather, only “until a comprehensive review, utilizing independent experts […] is completed.”

    Physician Dr. Brooks Michaels, addressing the town hall meeting, gave the sternest advice to those still in the area surrounding the unprecedented leak:

    “If you have a chance to leave, if you’re able to leave… if you have a chance to relocate, do it now. I’m telling you, it’s really critical.”

    Understandably, Brown’s state of emergency seems almost too little, too late for many.

    You can watch the Porter Ranch town hall meeting here:

  • Weekend Reading: Breaking Markets

    Submitted by Lance Roberts via RealInvestmentAdvice.com,

    AAA-Weekend-Reading-Breaking-Markets

    This week has certainly been interesting with the Dow Jones Industrial Average having the worst start to a year…well…ever. Even more interesting is the culprit was primarily the collapse of financial markets in China.

    Why is that interesting? Because it is exactly the issue that I wrote about during the summer of 2015:

    “And this last week, we saw what happens when things go ‘inevitably wrong.’

     

    The perils of margin debt should not be readily dismissed. For a real time example of financial market leverage and consequences, one needs to look no further than the Shangai Index in China. That market is in a complete collapse as plunging prices are forcing investors to sell shares. While the Chinese government has injected liquidity, suspended trading in almost half of the listed equities and encouraged pension funds to buy securities, these actions have done little to stem the decline as investors ‘panic sell’ in a rush to safety. That collapse, if history is any guide, is likely not done as shown in the chart below.”

    China-SP500-010706

    “Also, notice the correlation between peaks in the Shanghai Index and the S&P 500.

     

    While no single indicator should be relied upon as a measure to manage a portfolio, it should be well understood by now that leverage is a ‘double-edged sword.’ While rising leverage provides the additional liquidity to drive stock prices higher on the way up, it also cuts deeply as prices fall.”

    This weekend’s reading list is a collection of analysis as to the potential impact of China. Is history set to repeat itself? And, most importantly as discussed in yesterday’s post, investors may have witnessed the “ringing of the bell” for the end of the bull market that begin in 2009. While it is too early to know for certain, things are getting much more interesting. It is time to start paying attention to the risks.

    1) Debt Signals Problems For Markets by Lisa Abramowicz via Bloomberg

    “Thanks in large part to a circuit-breaking selloff in China, stocks are already digging a hole at the start of the new year. Savvy traders know to avoid making big decisions based on a day or two of equity market histrionics, lest they look like chickens with their heads chopped off rather than skilled prognosticators. They rely on more dependable barometers to determine the longer-term direction, and what they see right now could be a big cause for concern.

     

    One of the best current indicators is dollar-denominated investment-grade debt, which has been tracking U.S. stocks much more closely than high-yield bonds. High-grade bonds remained fairly steady throughout 2015’s market roller coaster, even as stocks bounced around in a rather fruitless attempt to find direction and riskier corporate debt suffered some of its biggest declines on record.”

    But Also Read: China’s Market Won’t Be Halted Anymore by Myles Udland via Business Insider

     

    2) Markets Aren’t Cooperating With Fed Rate Hike by Jeffrey Snider via Alhambra Partners

    “When the FOMC voted on December 16 to raise rates, they did so with reservations, some expressed publicly, that maybe they didn’t really have the ability to do it. There is a reason that we refer to money markets in the plural, since there are, as the “s” at the end indicates, more than one. At one point in financial history, they all worked very well together, though the manner in which that harmony developed appears entirely lost on policymakers. They just assumed and continued to do so; they still do today, though with much less certainty attached.

     

    In the little more than two weeks since the FOMC’s move, money markets have not behaved.”

    But Also Read: Federal Reserve Is Giant Weapon With No Ammo Left by Myles Udland via Business Insider

    Opposing View: Fed’s Lacker Suggest 4-More Hikes In 2016 by Jason Lange via Reuters

     

    3) 5 Facts About The Market Sell-Off by Mohamed El-Erian via Bloomberg

    “Here are the five things to know about the implications of the sell-off for 2016 and beyond:

    1. Geopolitics

    2. Risk Taking

    3. Liquidity – Fed vs. Everyone Else

    4. Global Economy

    5. Future Policy Decisions”

    But Also Read: Brace For A Rare Recession In Profits by Matt Egan via CNN Money

    VIEWS & OPINIONS ON THE CORRECTION

    MUST READS

    “Some people are never too old to find new ways to lose money.” – Anon

  • 2016's "How To Make A Fortune" Cookie

    Anyone for Chinese?

     

     

    Source: Townhall.com

  • "The Entire Risk Paradigm Is Shifting" – Stocks Join Global 'Reality' Adjustments

    Submitted by Jeffrey Snider via Alhambra Investment Partners,

    The focus on China as if their problems were only Chinese is highly misplaced, though you can understand the appeal of the excuse. This sentiment was expressed over and over today (just as it was in August):

    Do we all live in China now? Investors could be excused for thinking that, given that arcane indicators such as a Chinese manufacturing index and the value of the Chinese yuan are inducing nauseating drops in the U.S. stock market. And the surprise halt to trading in the latest Chinese session, a mere 30 minutes after markets opened, has thrown U.S. and European markets into a tailspin.

     

    Last we checked, however, the Dow Jones and S&P 500 indexes were composed of U.S. companies that might do some business in China, but still earn the vast majority of their revenue elsewhere. And elsewhere, economic fundamentals are looking way better than the gloomy start to this year’s trading would suggest.

    This is one of those forest and trees moments that get caught up on the surface of anachronistic thinking. Even if all that were true, the fact that China is an export economy having trouble finding any sustained and sufficient demand for its industrial capacity is a direct reflection upon global “demand”; which still includes the same business climate that US companies derive their revenue and earnings from.

    But it never really is so much about business today as it is risks for business tomorrow. In raw terms, if Chinese firms and its economy can so struggle in this environment it stands to reason to at least contemplate why that might be – and how that might directly reflect on domestic considerations. Further, as noted earlier, risk perceptions have changed as the FOMC is no longer given blanket faith to declare whatever sky color they wish. Stocks really haven’t had much success, overall, in a year and a half; a pause that itself should register as complimentary to the Chinese struggles.

    The S&P 500 is down just over 7 percent from its May high, but the average stock in the larger S&P 1500 was down 24 percent from its high as of yesterday’s close, according to new research from Bespoke Investment Group. A bear market is defined as a decline of 20 percent or more, meaning the average stock has already reached that threshold.

    As Bespoke points out, the pain in stocks is not just energy-related shares. Small caps are among the hardest hit (the S&P 600 small cap is down an astounding 28% from its high!) as well as consumer discretionary stocks; the very sorts of economically-sensitive issues that should be leading the market if this was just China as China. Instead, they suggest China is, again, finding difficulty in no small part because of intensifying US struggles. That much has been obvious from trade figures which declare in no uncertain terms the great and ongoing lack of US “demand.”

    From that visible contradiction, the entire risk paradigm is shifting more so than it already has. Commodities and “money” more broadly are winning the argument, so to speak, having declared long ago greater downside risks. Now that those are becoming rapidly the actual baseline, even for stocks, what is taking place in China is the connected realignment of monetary condition in that frightening direction. Stocks are finding more downside volatility because stock investors are being forced to recognize in truly comprehensive fashion that there is an actual and sizable downside.

    ABOOK Jan 2016 Dollar HYG GSG SP500

    This is increasingly taking on the proportions of a global reset. As such, the “dollar” stands right in the middle of it as both messenger and agent. You cannot separate China from the whole as China isn’t really the problem but rather the most visible symptom of it. If there were a full recovery as the FOMC claims in moving against the possibility of overheating, financial firms would be at the front of that greedily taking up the mantle of raw financial opportunity. They did so in times past, usually in direct relation to the QE’s – and were only burned for their trouble. There is no recovery opportunity, which is why they have been retreating in “money” in really precipitous fashion.

    It is the very mechanism of discounting. The fact that stocks may also be participating is a very important indication of how much that has penetrated into broad and systemic perceptions. China matters, but not so much just for China. The US may look lackluster (to some, a narrowing minority) by comparison to the direction of China’s economy, but that really doesn’t tell us as much about tomorrow as is repeatedly claimed. A chronically ill economy is highly susceptible not to catching fire and taking off, but rather to converging with all the very real disasters already spreading globally – the risk that money markets are increasingly discounting and carrying out. Financial markets are obviously more and more worried that memories of lackluster will be all that there was of the QE-driven cycle.

  • Auto Sales Are About To Choke: Increase In Non-Revolving Credit Is Smallest In 4 Years

    Moments ago, the Fed released the latest, November, consumer credit data: it was not good. Rising by just $13.95 trillion, it was a big miss to the $18.5 trillion expected, and below the $15.6 billion downward revised increase in October. In fact, three months after the historic surge in September to the highest print in the revised series, total consumer credit has tumbled to the lowest since January.

     

    But the big problem was not in the total data, but in one of the two key component data sets.

    Recall that a few days ago we noted something very disturbing for US auto makers: for all the hoopla around the auto sales number, US domestic car sales had actually dropped to a 6 month low, missing estimates by the most since 2008.

     

    What was just as disturbing was that “plans to buy an auto” had tumbled the most since January of 2013.

     

    Lacking the most recent credit data, we did not know what may have caused this dramatic slowdown in auto purchasing, and intentions. Now that we have the data, we also have the answer, because while revolving consumer credit rose at a respectable pace of $5.7 billion in November, it was that all important “other” series, non-revolving credit – the source of funds for student and auto loans – where there was a dramatic slowdown.

    As the chart below shows, after rising by $15.5 billion in the month before, and a near-record $22 billion in September, the November increase in nonrevolving credit was a paltry $8.3 billion – this was the smallest monthly increase in this most important for US car makers data, since February of 2012!

     

    Suddenly both the slowdown in December car sales, and the collapse in buying intentions makes all the sense in the world: US consumer may have just had their fill of auto-related loans, and without these to fund future purchases, even on the most relaxed terms in auto loan history, the pace of current and future purchases will collapse.

    And, as we showed earlier today, this collapse in auto loan issuance could not have come at a worse possible time: the chart below shows that the motor vehicle inventory-to-sale ratio is now the highest since August 2008:

     

    As we said this morning, “the channel-stuffed “see how well we are doing” smoke and mirrors of credit-fueled malinvestment has hit a wall and yet the automakers – afraid to signal any chink in that armor – kept producing.”

    And now we know why nobody was buying: suddenly the car loan issuance pipeline has been shut half way.

    The conclusion: unless there is a surge in non-revolving debt in December and the coming months, the cheap debt-funded US auto renaissance is officially over. As for the follow up question, whether this was caused by a revulsion toward more debt, then the rate hike in 2015 which was immediate passed through to borrowers, will make sure that what is currently a half-shut credit pipeline, will slam shut in the coming months and choke the only sector in the US manufacturing economy that was still relatively vibrant.

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Jan 08

Today’s News 8th January 2016

  • Internal War Is Now On The Horizon For America

    Submitted by Brandon Smith via Alt-Market.com,

    If internationalists were to get their way fully with the world and future historians write their analysis from a globalist perspective of the defunct American nation, they will probably say simply that our collapse was brought about by our own incompetence – that we were our own worst enemy. Yes, they would treat America as a cliché. They will of course leave out the destructive influences and engineered disasters of elitists, that would just complicate the narrative.

    My hope is that we do not prove these future historians correct, and that they won’t have an opportunity to exist. My work has always been designed to help ensure that resistance thrives, but also that it is pursued in the most intelligent manner possible.

    As I write this, China’s stock market has crashed 7% and was shut down by Chinese authorities who are once again initiating outright intervention to stem the tide. U.S. markets are quickly tracking lower. Oil is plummeting.

    Relations between Saudi Arabia and Iran have turned ugly, with Iranian protesters overtaking the Saudi embassy and both sides vowing vengeance. Many Americans won’t care much about this because they think it has nothing to do with them. They don’t realize that Saudi Arabia has already publicly suggested a depeg from the U.S. dollar, effectively ending the decades-long relationship between the greenback and oil. The Iranian event and U.S. ties to both nations only make the fall of the dollar’s petro-status more likely in the near term.  With the U.S. in the middle, "taking a side" will be a demand.  I believe the U.S. government will NOT take a side, and this will elicit a furious response from Saudi Arabia (a currency depeg).

    The Obama Administration has just made introductory announcements on new gun control measures through executive order.  These announcements were rather light on details and heavy on crocodile tears.  Their vagueness is clearly deliberate.  Psychological evaluations, redefining who is a lawful firearms dealer, "expanding" background checks; all of these measures could be interpreted broadly to mean almost anything.  We will probably know more in the coming weeks.

    And in Oregon over the weekend, Ammon Bundy and friends lured hundreds of protesters under false pretenses using the Hammond family tragedy as a vehicle to then initiate a takeover of federal buildings that have no strategic or symbolic value, boxing themselves into a static position and proclaiming themselves to be the “tip of the spear” in the fight against corrupt government. In the meantime, anyone who questions the validity of this idea or the logic behind the “plan” is immediately labeled a coward and “keyboard warrior” by their supporters.  Emotionally manipulative arguments abound because there are no tactically rational arguments to be made, which tells me that the plan was doomed before it was implemented.

    As I wrote in my article “Oregon standoff a terrible plan that we might be stuck with,” some people (not many but some) in the liberty movement are desperately clamoring for a fight; and they don’t care if the circumstances are intelligently executed or idiotically executed. They only care if it kicks off.

    I openly supported and aided the efforts at Bundy Ranch because the ranchers were defending their home from clear federal aggression. The Feds were direct invaders in that scenario. In Oregon, protesters are being perceived as the invaders, not the defenders — and all launched in the name of the Hammond family, who asked them NOT to artificially create a standoff. The two scenarios are polar opposites, and Oregon will end in a very different fashion.

    I would just like to note that the Founding Fathers were smart enough to avoid deliberately trapping themselves in static positions on land that had no strategic or symbolic importance while inviting the British to "come and get them".  Again, there are right ways and wrong ways to fight tyranny.  Simply being willing to fight is not enough.

    Now, if Americans are going to create standoff situations that could result in civil war they should do it over draconian gun control measures such as the use of classified government watch lists as grounds for denial of 2nd Amendment rights, rather than using a family who did not want armed support to begin with as a means to an end.

    Keep in mind that watch lists are entirely arbitrary. There is no due process involved whatsoever, meaning you or I could walk into a gun store one day only to have our 4473 form denied because some bureaucrat in an office in D.C. decided we said something he doesn’t like and belong on a naughty list.  The changing of gun dealer laws could be used to erase gun shows and private sales of firearms as well.

    A standoff scenario based on these issues would be a much more practical concept than what is taking place in Oregon.

    As our situation in this country becomes more precarious, there are going to be far more flashpoints than anyone will be able to keep track of. It is inevitable that a fight between corrupt elements of the U.S. government and regular people will erupt. I and other analysts have been warning people about this for years. I have been educating people on their preparedness options and tactical resources. I have been promoting community preparedness teams in my work with Oath Keepers and helping to organize such teams in my own part of the country. I even designed the first working thermal evasion suit available to civilians to give people half a chance against advanced weaponry.  I have no illusions that a peaceful solution exists.  I know that there is no such solution at this point in the game.  But when the fighting starts, I also know that those who navigate the storm intelligently rather than allowing their emotions to get the best of them are more likely to survive and succeed.

    I cannot say how quickly a crisis will develop. But, I can outline some of the many pitfalls you are going to come across as this storm rises.

    False Leadership And Irrational Leadership

    You are going to stumble across numerous gung ho activists and even politicians who will claim they have the one and only solution, that they are the real “tip of the spear.” First, if you feel compelled to seek out leaders on the mere basis that they have offered to lead you, then you need to do some soul searching. Become your own leader first. And then, if you meet someone with an excellent plan and a principled motive, give him the time of day, but don’t jump blindly into any situation.

    If his plan seems poorly thought out, don’t follow him. If his agenda revolves around his own ego and a desire for personal glory, don’t follow him. If he focuses completely on the Obama administration and ignores the complicity of Republican leadership, don’t follow him. If all he talks about are the evils of the federal government but he ignores the puppet strings that lead to international banks and globalist organizations, don’t follow him. If he refuses to allow his initiatives to be questioned or discussed in a reasonable way, do not follow him. If he acts as if his ideas are sacrosanct and questions your “patriotism” when you do not immediately jump on the bandwagon, do not follow him.  Remember, it is the job of this leadership to CONVINCE YOU of the legitimacy of their plan if they are seeking your support.  The burden of evidence is on them.  It is not your job to support them blindly just because you want to avoid being called a "sunshine patriot".

    To summarize, if you are going to follow someone, know him well first, and make sure his planning is solid.

    Hotheads And Imbeciles

    I’ve found that there are two very frustrating extremes within the liberty movement: the people who embrace pacifism and who refuse to even consider the possibility of a violent conflict and self-defense, and the people who have delusions of being the next George Washington and are ready to dive headlong into any violent confrontation without thinking because they want to cement their own legacy. Neither of these groups seems to be able to treat each event as unique: some events requiring a diplomatic approach and some of them requiring the violence of action.

    The pacifists are annoying, but they mostly hurt themselves in their lack of preparedness and a warrior’s mindset. The hotheads are the real problem. If you are only looking for a fight, then one will certainly find you; but any moron can trigger a standoff with the Feds. The point is to be able to make a move that matters in the long run. Hotheads cannot think beyond themselves and their immediate needs. They are like mosquitoes mindlessly hunting for blood. Strategic planning is impossible for them and they will destroy allies in the process of their pursuits.

    I hate to say it, but there is a distinct possibility that our current generation of freedom advocates and freedom fighters may not live to see the future we are working toward. That better world built on liberty, individualism and voluntary community is something our children will thrive in, not us. If you are not fighting with a long term strategy in mind, then you have missed the entire point.

    Factions And Tribes

    Humans in crisis events tend to become more tribal in their associations in order to survive, and this is not necessarily a bad thing. I would rather live in a tribal world than under centralized corrupt government or global government any day. That said, if a “tribe” or faction does not respect the rights of the individual or uses unprovoked violence to achieve its goals, then it is no better than any other tyranny. Never trade safety for tyranny, regardless of the difficulties ahead.

    The upside is tyrants of small tribes are easier to deal with than tyrants of large nations. They are no more bulletproof than anyone else, and they don’t have the resources to prevent reprisal if they hurt the wrong people.

    Expect that families, neighborhoods, towns, churches, gangs and activist groups will rally around each other as a way to provide security. If you do not already have friends and family on board with your way of thinking, you will be isolated, making survival far more difficult if a breakdown does occur.

    Governments Will Not Disappear

    I can think of very few scenarios in history in which a crisis or collapse immediately facilitated the fall of the government in power. Rather, the government usually morphs into something else, something more dangerous. In fact, crisis is often the prime excuse used by corrupt officials to rationalize greater controls on the population. This in turn acts as a catalyst for more rebellion, which in turn acts as a vindication of the government’s tyranny.

    Does this mean people should not rebel against tyranny? No, it means that we have to fight smart and retain the moral high ground at all times. We must act in a way that exposes the true nature of corrupt government, rather than giving them more ammunition to shoot us down with in the public eye. Above all, if we fight we must fight TO WIN.  This means not deliberately searching for an Alamo.  Martyrs are ultimately useless in this kind of war because if we lose, no one will remember them anyway. Glory seekers and self-proclaimed prophets will only lead people to disaster.

    Develop a tactical mindset because the future will require tactical minds. Maintain your principles no matter the threats ahead. Retain your humanity. But also, when the fight begins, fight with the intention of victory. Choose your ground wisely.

  • Martin Shkreli Secures Bail With $45 Million E*Trade Account, Demands Respect From Wu-Tang Clan

    “I bought the most expensive album in the history of mankind and fucking RZA is talking shit behind my back and online in plain sight. If I hand you $2 million, fucking show me some respect.”

    That’s a quote from the incomparable Martin Shkreli who is upset with the Wu-Tang Clan from whom he purchased a one-of-a-kind double disc for $2 million last year.

    RZA, the group’s frontman if not its most famous member, found himself in a bit of an awkward scenario when news of the sale hit the wires.

    When the deal was done, Shkreli had not yet become a household name. In other words, it wasn’t apparent to RZA that the soon-to-be proud owner of the one and only copy of “Once Upon A Time In Shaolin” would soon become public enemy number one in America on the way to being arrested for fraud.

    “I met him, we had a brief lunch, and he did mention his love of hip-hop,” RZA said in the interview with Bloomberg. “I didn’t get a chance to read him.”

    In the wake of the Daraprim fiasco which saw Shkreli raise the price of a drug he acquired from $13.50 to $750 a pill, Wu-Tang decided to donate “a significant portion” of the proceeds to charity. 

    Even as RZA isn’t particularly enamored with Shkreli’s drug pricing practices, the producer says he doesn’t regret doing the deal. “He bought it, he can do what he wants,” RZA told Bloomberg TV’s John Heilemann.”The beautiful thing about art, from my standpoint, is that it has no discrimination. What we’ve done is historical, and you can’t remove that.”

    No, you can’t, and neither can you “remove” the bad taste Shkreli’s Daraprim price hike left in America’s mouth which is why when it came time to set bail, no one was in a forgiving mood. The price of (temporary) freedom for America’s “most hated man”: $5 million.

    Unfortunately, the bail bondsman didn’t accept Wu-Tang albums as collateral and so, Shkreli put up his E*Trade account instead. The account’s value is said to be $45 million. 

    “Martin Shkreli put up his $45 million E*Trade account to secure $5 million bail after federal authorities arrested him on fraud charges last month,” Bloomberg reports. “Shkreli was ordered to disclose how that bond is secured and prosecutors filed papers Thursday stating Shkreli has a brokerage account worth eight figures,” NY Daily News adds. “E*Trade has been ordered to notify prosecutors if the balance of the brokerage account dips below $5 million — which would jeopardize the bail bond and Shkreli’s freedom.”

    We wonder if Martin, like the E*Trade-ing Joe Campbell whose short position in KBIO blew up when Shkreli acquired more than half of the float back in November, will start a GoFundMe page in the event his collapsing holdings leave him a few million short on the bail bond.

    *  *  *

    RZA talks Shkreli and Trump with Bloomberg Business

  • 2016: Oil Limits & The End Of The Debt Supercycle

    Submitted by Gail Tverberg via Our Finite World blog,

    What is ahead for 2016? Most people don’t realize how tightly the following are linked:

    1. Growth in debt
    2. Growth in the economy
    3. Growth in cheap-to-extract energy supplies
    4. Inflation in the cost of producing commodities
    5. Growth in asset prices, such as the price of shares of stock and of farmland
    6. Growth in wages of non-elite workers
    7. Population growth

    It looks to me as though this linkage is about to cause a very substantial disruption to the economy, as oil limits, as well as other energy limits, cause a rapid shift from the benevolent version of the economic supercycle to the portion of the economic supercycle reflecting contraction. Many people have talked about Peak Oil, the Limits to Growth, and the Debt Supercycle without realizing that the underlying problem is really the same–the fact the we are reaching the limits of a finite world.

    There are actually a number of different kinds of limits to a finite world, all leading toward the rising cost of commodity production. I will discuss these in more detail later. In the past, the contraction phase of the supercycle seems to have been caused primarily by too high population relative to resources. This time, depleting fossil fuels–particularly oil–plays a major role. Other limits contributing to the end of the current debt supercycle include rising pollution and depletion of resources other than fossil fuels.

    The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults. These problems are the opposite of what many expect, namely oil shortages and high prices. This strange situation exists because the economy is a networked system. Feedback loops in a networked system don’t necessarily work in the way people expect.

    I expect that the particular problem we are likely to reach in 2016 is limits to oil storage. This may happen at different times for crude oil and the various types of refined products. As storage fills, prices can be expected to drop to a very low level–less than $10 per barrel for crude oil, and correspondingly low prices for the various types of oil products, such as gasoline, diesel, and asphalt. We can then expect to face a problem with debt defaults, failing banks, and failing governments (especially of oil exporters).

    The idea of a bounce back to new higher oil prices seems exceedingly unlikely, in part because of the huge overhang of supply in storage, which owners will want to sell, keeping supply high for a long time. Furthermore, the underlying cause of the problem is the failure of wages of non-elite workers to rise rapidly enough to keep up with the rising cost of commodity production, particularly oil production. Because of falling inflation-adjusted wages, non-elite workers are becoming increasingly unable to afford the output of the economic system. As non-elite workers cut back on their purchases of goods, the economy tends to contract rather than expand. Efficiencies of scale are lost, and debt becomes increasingly difficult to repay with interest.  The whole system tends to collapse.

    How the Economic Growth Supercycle Works, in an Ideal Situation

    In an ideal situation, growth in debt tends to stimulate the economy. The availability of debt makes the purchase of high-priced goods such as factories, homes, cars, and trucks more affordable. All of these high-priced goods require the use of commodities, including energy products and metals. Thus, growing debt tends to add to the demand for commodities, and helps keep their prices higher than the cost of production, making it profitable to produce these commodities. The availability of profits encourages the extraction of an ever-greater quantity of energy supplies and other commodities.

    The growing quantity of energy supplies made possible by this profitability can be used to leverage human labor to an ever-greater extent, so that workers become increasingly productive. For example, energy supplies help build roads, trucks, and machines used in factories, making workers more productive. As a result, wages tend to rise, reflecting the greater productivity of workers in the context of these new investments. Businesses find that demand for their goods and services grows because of the growing wages of workers, and governments find that they can collect increasing tax revenue. The arrangement of repaying debt with interest tends to work well in this situation. GDP grows sufficiently rapidly that the ratio of debt to GDP stays relatively flat.

    Over time, the cost of commodity production tends to rise for several reasons:

    1. Population tends to grow over time, so the quantity of agricultural land available per person tends to fall. Higher-priced techniques (such as irrigation, better seeds, fertilizer, pesticides, herbicides) are required to increase production per acre. Similarly, rising population gives rise to a need to produce fresh water using increasingly high-priced techniques, such as desalination.
    2. Businesses tend to extract the least expensive fuels such as oil, coal, natural gas, and uranium first. They later move on to more expensive to extract fuels, when the less-expensive fuels are depleted. For example, Figure 1 shows the sharp increase in the cost of oil extraction that took place about 1999.
      Figure 1. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is "Compound Annual Growth Rate."

      Figure 1. Figure by Steve Kopits of Westwood Douglas showing the trend in per-barrel capital expenditures for oil exploration and production. CAGR is “Compound Annual Growth Rate.”

    3. Pollution tends to become an increasing problem because the least polluting commodity sources are used first. When mitigations such as substituting renewables for fossil fuels are used, they tend to be more expensive than the products they are replacing. The leads to the higher cost of final products.
    4. Overuse of resources other than fuels becomes a problem, leading to problems such as the higher cost of producing metals, deforestation, depleted fish stocks, and eroded topsoil. Some workarounds are available, but these tend to add costs as well.

    As long as the cost of commodity production is rising only slowly, its increasing cost is benevolent. This increase in cost adds to inflation in the price of goods and helps inflate away prior debt, so that debt is easier to pay. It also leads to asset inflation, making the use of debt seem to be a worthwhile approach to finance future economic growth, including the growth of energy supplies. The whole system seems to work as an economic growth pump, with the rising wages of non-elite workers pushing the growth pump along.

    The Big “Oops” Comes when the Price of Commodities Starts Rising Faster than Wages of Non-Elite Workers

    Clearly the wages of non-elite workers need to be rising faster than commodity prices in order to push the economic growth pump along. The economic pump effect is lost when the wages of non-elite workers start falling, relative to the price of commodities. This tends to happen when the cost of commodity production begins rising rapidly, as it did for oil after 1999 (Figure 1).

    The loss of the economic pump effect occurs because the rising cost of oil (or electricity, or food, or other energy products) forces workers to cut back on discretionary expenditures. This is what happened in the 2003 to 2008 period as oil prices spiked and other energy prices rose sharply. (See my article Oil Supply Limits and the Continuing Financial Crisis.) Non-elite workers found it increasingly difficult to afford expensive products such as homes, cars, and washing machines. Housing prices dropped. Debt growth slowed, leading to a sharp drop in oil prices and other commodity prices.

    Figure 2. World oil supply and prices based on EIA data.

    Figure 2. World oil supply and prices based on EIA data.

    It was somewhat possible to “fix” low oil prices through the use of Quantitative Easing (QE) and the growth of debt at very low interest rates, after 2008. In fact, these very low interest rates are what encouraged the very rapid growth in the production of US crude oil, natural gas liquids, and biofuels.

    Now, debt is reaching limits. Both the US and China have (in a sense) “taken their foot off the economic debt accelerator.” It doesn’t seem to make sense to encourage more use of debt, because recent very low interest rates have encouraged unwise investments. In China, more factories and homes have been built than the market can absorb. In the US, oil “liquids” production rose faster than it could be absorbed by the world market when prices were over $100 per barrel. This led to the big price drop. If it were possible to produce the additional oil for a very low price, say $20 per barrel, the world economy could probably absorb it. Such a low selling price doesn’t really “work” because of the high cost of production.

    Debt is important because it can help an economy grow, as long as the total amount of debt does not become unmanageable. Thus, for a time, growing debt can offset the adverse impact of the rising cost of energy products. We know that oil prices began to rise sharply in the 1970s, and in fact other energy prices rose as well.

    Figure 4. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

    Figure 3. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

    Looking at debt growth, we find that it rose rapidly, starting about the time oil prices started spiking. Former Director of the Office of Management and Budget, David Stockman, talks about “The Distastrous 40-Year Debt Supercycle,” which he believes is now ending.

    Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

    Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

    In recent years, we have been reaching a situation where commodity prices have been rising faster than the wages of non-elite workers. Jobs that are available tend to be low-paid service jobs. Young people find it necessary to stay in school longer. They also find it necessary to delay marriage and postpone buying a car and home. All of these issues contribute to the falling wages of non-elite workers. Some of these individuals are, in fact, getting zero wages, because they are in school longer. Individuals who retire or voluntarily leave the work force further add to the problem of wages no longer rising sufficiently to afford the output of the system.

    The US government has recently decided to raise interest rates. This further reduces the buying power of non-elite workers. We have a situation where the “economic growth pump,” created through the use of a rising quantity of cheap energy products plus rising debt, is disappearing. While homes, cars, and vacation travel are available, an increasing share of the population cannot afford them. This tends to lead to a situation where commodity prices fall below the cost of production for a wide range of types of commodities, making the production of commodities unprofitable. In such a situation, a person expects companies to cut back on production. Many defaults may occur.

    China has acted as a major growth pump for the world for the last 15 years, since it joined the World Trade Organization in 2001. China’s growth is now slowing, and can be expected to slow further. Its growth was financed by a huge increase in debt. Paying back this debt is likely to be a problem.

    Figure 5. Author's illustration of problem we are now encountering.

    Figure 5. Author’s illustration of problem we are now encountering.

    Thus, we seem to be coming to the contraction portion of the debt supercycle. This is frightening, because if debt is contracting, asset prices (such as stock prices and the price of land) are likely to fall. Banks are likely to fail, unless they can transfer their problems to others–owners of the bank or even those with bank deposits. Governments will be affected as well, because it will become more expensive to borrow money, and because it becomes more difficult to obtain revenue through taxation. Many governments may fail as well for that reason.

    The U. S. Oil Storage Problem

    Oil prices began falling in the middle of 2014, so we might expect oil storage problems to start about that time, but this is not exactly the case. Supplies of US crude oil in storage didn’t start rising until about the end of 2014.

    Figure 6. US crude oil in storage, excluding SPR, based on EIA data.

    Figure 6. US crude oil in storage, excluding Strategic Petroleum Reserve, based on EIA data.

    Once crude oil supplies started rising rapidly, they increased by about 90 million barrels between December 2014 and April 2015. After April 2015, supplies dipped again, suggesting that there is some seasonality to the growing crude oil supply. The most “dangerous” time for rapidly rising amounts added to storage would seem to be between December 31 and April 30. According to the EIA, maximum crude oil storage is 551 million barrels of crude oil (considering all storage facilities). Adding another 90 million barrels of oil (similar to the run-up between Dec. 2014 and April 2015) would put the total over the 551 million barrel crude oil capacity.

    Cushing, Oklahoma, is the largest storage area for crude oil. According to the EIA, maximum working storage for the facility is 73 million barrels. Oil storage at Cushing since oil prices started declining is shown in Figure 7.

    Figure 7. Crude oil stored at Cushing between June 27, 2014, and June 1, 2016. based on EIA data.

    Figure 7. Quantity of crude oil stored at Cushing between June 27, 2014, and June 1, 2016, based on EIA data.

    Clearly the same kind of run up in oil storage that occurred between December and April one year ago cannot all be stored at Cushing, if maximum working capacity is only 73 million barrels, and the amount currently in storage is 64 million barrels.

    Another way of storing oil is as finished products. Here, the run-up in storage began earlier (starting in mid-2014) and stabilized at about 65 million barrels per day above the prior year, by January 2015.  Clearly, if companies can do some pre-planning, they would prefer not to refine products for which there is little market. They would rather store unneeded oil as crude, rather than as refined products.

    Figure 7. Total Oil Products in Storage, based on EIA data.

    Figure 8. Total Oil Products in Storage, based on EIA data.

    EIA indicates that the total capacity for oil products is 1,549 million barrels. Thus, in theory, the amount of oil products stored can be increased by as much as 700 million barrels, assuming that the products needing to be stored and the locations where storage are available match up exactly. In practice, the amount of additional storage available is probably quite a bit less than 700 million barrels because of mismatch problems.

    In theory, if companies can be persuaded to refine more products than they can sell, the amount of products that can be stored can rise significantly. Even in this case, the amount of storage is not unlimited. Even if the full 700 million barrels of storage for crude oil products is available, this corresponds to less than one million barrels a day for two years, or two million barrels a day for one year. Thus, products storage could easily be filled as well, if demand remains low.

    At this point, we don’t have the mismatch between oil production and consumption fixed. In fact, both Iraq and Iran would like to increase their production, adding to the production/consumption mismatch. China’s economy seems to be stalling, keeping its oil consumption from rising as quickly as in the past, and further adding to the supply/demand mismatch problem. Figure 9 shows an approximation to our mismatch problem. As far as I can tell, the problem is still getting worse, not better.

    Figure 1. Total liquids oil production and consumption, based on a combination of BP and EIA data.

    Figure 9. Total liquids oil production and consumption, based on a combination of BP and EIA data.

    There has been a lot of talk about the United States reducing its production, but the impact so far has been small, based on data from EIA’s International Energy Statistics and its December 2015 Monthly Energy Review.

    Figure 10. US quarterly oil liquids production data, based on EIA data.

    Figure 10. US quarterly oil liquids production data, based on EIA’s International Energy Statistics and Monthly Energy Review.

    Based on information through November from EIA’s Monthly Energy Review, total liquids production for the US for the year 2015 will be over 800,000 barrels per day higher than it was for 2014. This increase is likely greater than the increase in production by either Saudi Arabia or Iraq. Perhaps in 2016, oil production of the US will start decreasing, but so far, increases in biofuels and natural gas liquids are partly offsetting recent reductions in crude oil production. Also, even when companies are forced into bankruptcy, oil production does not necessarily stop because of the potential value of the oil to new owners.

    Figure 11 shows that very high stocks of oil were a problem, way back in the 1920s. There were other similarities to today’s problems as well, including a deflating debt bubble and low commodity prices. Thus, we should not be too surprised by high oil stocks now, when oil prices are low.

    Figure 2. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure produced by EIA. Figure by EIA.

    Figure 11. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure by EIA.

    Many people overlook the problems today because the US economy tends to be doing better than that of the rest of the world. The oil storage problem is really a world problem, however, reflecting a combination of low demand growth (caused by low wage growth and lack of debt growth, as the world economy hits limits) continuing supply growth (related to very low interest rates making all kinds of investment appear profitable and new production from Iraq and, in the near future, Iran). Storage on ships is increasingly being filled up and storage in Western Europe is 97% filled. Thus, the US is quite likely to see a growing need for oil storage in the year ahead, partly because there are few other places to put the oil, and partly because the gap between supply and demand has not yet been fixed.

    What is Ahead for 2016?

    1. Problems with a slowing world economy are likely to become more pronounced, as China’s growth problems continue, and as other commodity-producing countries such as Brazil, South Africa, and Australia experience recession. There may be rapid shifts in currencies, as countries attempt to devalue their currencies, to try to gain an advantage in world markets. Saudi Arabia may decide to devalue its currency, to get more benefit from the oil it sells.
    2. Oil storage seems likely to become a problem sometime in 2016. In fact, if the run-up in oil supply is heavily front-ended to the December to April period, similar to what happened a year ago, lack of crude oil storage space could become a problem within the next three months. Oil prices could fall to $10 or below. We know that for natural gas and electricity, prices often fall below zero when the ability of the system to absorb more supply disappears. It is not clear the oil prices can fall below zero, but they can certainly fall very low. Even if we can somehow manage to escape the problem of running out of crude oil storage capacity in 2016, we could encounter storage problems of some type in 2017 or 2018.
    3. Falling oil prices are likely to cause numerous problems. One is debt defaults, both for oil companies and for companies making products used by the oil industry. Another is layoffs in the oil industry. Another problem is negative inflation rates, making debt harder to repay. Still another issue is falling asset prices, such as stock prices and prices of land used to produce commodities. Part of the reason for the fall in price has to do with the falling price of the commodities produced. Also, sovereign wealth funds will need to sell securities, to have money to keep their economies going. The sale of these securities will put downward pressure on stock and bond prices.
    4. Debt defaults are likely to cause major problems in 2016. As noted in the introduction, we seem to be approaching the unwinding of a debt supercycle. We can expect one company after another to fail because of low commodity prices. The problems of these failing companies can be expected to spread to the economy as a whole. Failing companies will lay off workers, reducing the quantity of wages available to buy goods made with commodities. Debt will not be fully repaid, causing problems for banks, insurance companies, and pension funds. Even electricity companies may be affected, if their suppliers go bankrupt and their customers become less able to pay their bills.
    5. Governments of some oil exporters may collapse or be overthrown, if prices fall to a low level. The resulting disruption of oil exports may be welcomed, if storage is becoming an increased problem.
    6. It is not clear that the complete unwind will take place in 2016, but a major piece of this unwind could take place in 2016, especially if crude oil storage fills up, pushing oil prices to less than $10 per barrel.
    7. Whether or not oil storage fills up, oil prices are likely to remain very low, as the result of rising supply, barely rising demand, and no one willing to take steps to try to fix the problem. Everyone seems to think that someone else (Saudi Arabia?) can or should fix the problem. In fact, the problem is too large for Saudi Arabia to fix. The United States could in theory fix the current oil supply problem by taxing its own oil production at a confiscatory tax rate, but this seems exceedingly unlikely. Closing existing oil production before it is forced to close would guarantee future dependency on oil imports. A more likely approach would be to tax imported oil, to keep the amount imported down to a manageable level. This approach would likely cause the ire of oil exporters.
    8. The many problems of 2016 (including rapid moves in currencies, falling commodity prices, and loan defaults) are likely to cause large payouts of derivatives, potentially leading to the bankruptcies of financial institutions, as they did in 2008. To prevent such bankruptcies, most governments plan to move as much of the losses related to derivatives and debt defaults to private parties as possible. It is possible that this approach will lead to depositors losing what appear to be insured bank deposits. At first, any such losses will likely be limited to amounts in excess of FDIC insurance limits. As the crisis spreads, losses could spread to other deposits. Deposits of employers may be affected as well, leading to difficulty in paying employees.
    9. All in all, 2016 looks likely to be a much worse year than 2008 from a financial perspective. The problems will look similar to those that might have happened in 2008, but didn’t thanks to government intervention. This time, governments appear to be mostly out of approaches to fix the problems.
    10. Two years ago, I put together the chart shown as Figure 12. It shows the production of all energy products declining rapidly after 2015. I see no reason why this forecast should be changed. Once the debt supercycle starts its contraction phase, we can expect a major reduction in both the demand and supply of all kinds of energy products.
    Figure 4. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

    Figure 12. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

    Conclusion

    We are certainly entering a worrying period. We have not really understood how the economy works, so we have tended to assume we could fix one or another part of the problem. The underlying problem seems to be a problem of physics. The economy is a dissipative structure, a type of self-organizing system that forms in thermodynamically open systems. As such, it requires energy to grow. Ultimately, diminishing returns with respect to human labor–what some of us would call falling inflation-adjusted wages of non-elite workers–tends to bring economies down. Thus all economies have finite lifetimes, just as humans, animals, plants, and hurricanes do. We are in the unfortunate position of observing the end of our economy’s lifetime.

    Most energy research to date has focused on the Second Law of Thermodynamics. While this is a contributing problem, this is really not the proximate cause of the impending collapse. The Second Law of Thermodynamics operates in thermodynamically closed systems, which is not precisely the issue here.

    We know that historically collapses have tended to take many years. This collapse may take place more rapidly because today’s economy is dependent on international supply chains, electricity, and liquid fuels–things that previous economies were not dependent on.

  • "The Jihadists Will Attack Europe": Leaked Phone Call Shows Gaddafi Warned Tony Blair Of Terror Attacks

    On Wednesday, we took a close look at the battle for Libya’s oil.

    Libya, much like Syria, is a case study in why the West would be better off not intervening in the affairs of sovereign states on the way to bringing about regime change. “Toppling dictators” sounds good in principle, but at the end of the day, it’s nearly impossible to predict what will emerge from the power vacuums the US creates when Washington destabilizes governments.

    Post-Baathist Iraq is rife with sectarian discord, a post-Assad Syria would likely be an even bloodier free-for-all than it already is, and post-Gaddafi Libya is a failed state with two governments each claiming legitimacy. These types of environments are exploitable by extremists eager to capitalize on the chaos by seizing resources and, ultimately, power.

    Just today for instance, nearly 50 people were killed in Libya when a truck bomb hit a police training center where recruits were holding a morning meeting. “Mayor Miftah Hamadi said the truck bomb detonated as around 400 recruits were gathering in the early morning at the police center in Zliten, a coastal town between the capital Tripoli and the port of Misrata,” Reuters reports, adding that “the Zliten blast was the worst since an attack in February last year when three car bombs hit the eastern city of Qubbah, killing 40 people in what officials described as a revenge attack for Egyptian air strikes on Islamist militant targets.”

    “It was horrific, the explosion was so loud it was heard from miles away,” Hamadi told Reuters by phone. “All the victims were young, and all about to start their lives.”

    The blast was the deadliest since Gaddafi’s ouster and comes as militants loyal to Ibrahim Jadhran battle ISIS for control of key oil fields and ports. Islamic State’s presence in Libya has grown and the group may be looking to supplement oil income lost to Russian airstrikes in Syria with sales of Libyan crude.

    Who could have seen all of this – including the Paris attacks – coming, you ask? Well, Muammar Gaddafi for one.

    According to The Telegraph, Gaddafi warned Tony Blair that jihadists would one day attack Europe in the event his government fell. “Gaddafi’s dire prediction was made in two desperate telephone calls with Mr Blair on February 25, 2011 – as civil war was engulfing Libya,” The Telegraph writes. “In the first call at 11:15am, Gaddafi said: “They [jihadists] want to control the Mediterranean and then they will attack Europe.” Here’s more:

    In a second call made a little over four hours later, Gaddafi told Mr Blair: “I will have to arm the people and get ready for a fight. Libyan people will die, damage will be on the Med, Europe and the whole world. These armed groups are using the situation [in Libya] as a justification – and we shall fight them.”

     

     

    Mr Blair had made two calls to Gaddafi to try to negotiate the dictator’s departure from Tripoli as civil war engulfed the nation. Three weeks later, a Nato-led coaltion that included Britain, began bombing raids that led to the overthrow of Gaddafi. The dictator was finally deposed in August and murdered by a mob in October.

     

     

    This is what Gaddafi got for his trouble:

    So much for this:

    You’ll recall that Bashar al-Assad also warned Europe that destabilizing governments was a recipe for disaster. “We said, don’t take what is happening in Syria lightly,” Assad said, in the wake of the Paris attacks.

    “Unfortunately, European officials did not listen,” he added.

  • Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking

    From Russell Napier of ERI-C

    It’s Not a Pet, It’s a Falcon: How the decline of the RMB destroys belief in central banking and a successful reflation

    Turning and turning in the widening gyre
    The falcon cannot hear the falconer;
    Things fall apart; the centre cannot hold;

          – The Second Coming- W.B. Yeats

    First catch your falcon, as the formidable Mrs Beeton might have said if she was in need of a method of catching her main course (see Mrs Beeton’s Book of Household Management 1861- ‘Recipe for Jugged Hare’).

    Having caught your wild falcon, you can now begin the training process. You are attempting to impose your will upon a creature that, in its wild state, catches, kills and devours other birds. This is creative destruction in its rawest form as those acts of savagery provide the fuel to keep our falcon flying. Taming such wild forces is not easy, whether they be birds of prey or the desires, wishes, greed and fear of millions of people determining prices through their supply and also their demand.

    Let’s get some advice from the field of falconry for our central bankers, and the other handmaidens of state control, as they seek to impose their wishes on the will and acts of millions-

    ‘Falconry is a great sport, but there is a lot of time involved. You will want to have enough time to train your bird. If you don’t have the time, or the willingness, then you might as well not do it at all. If you are one of those people who is not patient, falconry may not be for you. You should not take up falconry if you want the falcon as a pet, or something to show off. Falcons can’t just be put in the closet when you are done with them. It takes time and commitment, but the reward in the end is worth it.’

    (Source: WikiHow- How to Train Your Falcon)

    A ‘great sport’ indeed, given the alternative sports open to government officials! Well, they have demonstrated that they have the time and they seem to have been born with the willingness, or at least picked it up pretty early in life. Patience just comes with the territory when you work for the government— there really isn’t much of an alternative. However, they do seem to have a problem when it comes to realizing that there is not much point in turning this wild thing, that exists to efficiently convert its kill into energy and life, into a pet ‘in the closet’.

    The attempt to train the wild forces of supply and demand by the authorities has really ramped up since 2009. Just four trading days into 2016 the widening of the gyre makes it very obvious that they have failed to create a pet to do their bidding. The wild forces of supply and demand have sought to deliver deflation, at least since 2008, but the falconer has demanded the lift-off of inflation. In the first four trading days of January 2016 it has become even clearer that gravity wins and this bird will not fly.

    Throughout 2015, in four quarterly reports for subscribers, this analyst explained that, no matter where you and might stand, this lever of nominal interest rates is simply insufficient to pivot the world into inflation. Those reports focused on what you should buy given that failure. The rest of this Fortnightly looks at the investment consequences of this failure and what investors should do when ‘the centre cannot hold’.

    The key failure of control is in China because that failure will overwhelm other seeming successes. In 2012 this analyst labelled one chart “the most important chart in the world”. It was a chart of China’s foreign exchange reserves. It showed how they were declining and The Solid Ground postulated that this would produce a decline in real economic activity in China and higher real interest rates in the developed world. The result of these two forces would be deflation, despite the amount of wind puffed below the wings of the global economy in the form of QE.

    Of course, no sooner had this report been issued than China’s grand falconer got to work by borrowing hundreds of billions of USD through its so-called commercial banking system! The alchemical process through which this mandated capital inflow supported the exchange rate while permitting money creation in China stabilized the global economy- for a while.

    However, by 2014 it was ever more difficult to borrow more money than the people of China were desperate to export and the market began to win. Since then foreign reserves have been falling and the grand falconer has tried to support the exchange rate while simultaneously easing monetary policy to boost economic growth. I’m no falconer but isn’t this akin to trying to get a bird to fly while tying back its wings?

    Some investors, well paid to believe six impossible things before breakfast, did not question the ability of the grand Chinese falconer to fly a falcon with tethered wings.

    They changed their minds briefly as the bird plummeted earthwards in August 2015 but still the belief in the ability to reflate the economy and simultaneously support an overvalued exchange rate continued. In January 2016 this particular falcon, let’s call it the people’s falcon, was more ‘falling with attitude’ than flying.

    This bird does not fly and if this bird does not fly the centre does not hold. A major devaluation of the RMB is just beginning and the faith in all the falconers will wane as deflation comes to the world almost seven years after the falconers first fanned the winds of QE supposed to levitate everything.

    The failure to inflate is the failure to destroy debts to the benefit of equity. Investors should be underweight equity. Of course, the decline in corporate cash-flows, associated with deflation, is bad for interest cover and the price of corporate bonds. Some emerging markets (subscribers see Why Deflation Means Default 1Q 2015) will fail to repay their heavy foreign currency debt burdens. This is dreadful news for those running open-ended funds crammed full of illiquid credit instruments- some have closed and more will follow. The Solid Ground pointed out in 4Q last year that the US$34trn open-ended fund business is simply unfit for purpose in a world of waning liquidity. While this dreadful combination leads to a credit crunch that starts in the bond market it must inevitably also impact negatively upon banking systems. Banks, already de facto utilities for the financing of government, are very vulnerable to attack from thousands of bright kids in the fintech industry. Add to their structural demise the risk of credit quality issues and the growing fear of bail-ins by their bond holders (as subscribers know BRRD will be a huge Eurozone story in 2016) and this could get very messy.

    If doctors swear each year to ‘first do no harm’, investors should begin 2016 by reciting ‘first own no banks’.

    Investors who buy the bonds of governments that ultimately control the money-creation process should have an almost zero risk of not receiving their payments of principal and interest. These certain and fixed payments will grow in purchasing power during a deflation and thus their price will be bid up. This analyst remains sceptical as to whether this description of a fiat currency system applies to all those countries currently in the Eurozone.

    ‘Whatever it takes’ may ultimately be constitutionally impossible and the ECB may not be prepared to print sufficient Euros to ensure that every government of the Eurozone makes all payment of principal and interest. If that reality dawns then yield spreads widen in the Eurozone and ultimately your interest and principal may not be repaid in Euros.

    For those investors who have to be in equities, North Asia is the only game in town. They, in the form of China, Japan and probably also South Korea, will win the currency wars. Their success in winning this game triggers the scale of deflation that generates the global credit crunch that is virtually inevitable as deflation takes hold. These jurisdictions may be somewhat alien to sound capital allocation, but they keep that capital humming at high rates of capacity, via devaluations, while more market-orientated systems see their assets under-utilized. This analyst prefers Japan (subscribers see Caught in a Trap 2Q 2015) where some shift to more efficient capital allocation is under way, but even the structurally anaemic corporate capital of China is likely to be bid up as the RMB declines in response to further and further economic stimulus- increasingly possible as the exchange rate is allowed to find its own level. This analyst has never invested in a Chinese equity as he is not sure that Chinese management know what equity is but bright stockpickers can find management in China that does. Hedging all North Asian currency exposure is essential.

    If you had not noticed, 2016 has begun with gold and the USD rising simultaneously. This is different and important. This is very positive for gold and very bad for the world.

    The rise of both together may signal that we have just entered that period when this inert non-yielding substance is preferred to those assets that promise a yield but where the scale of future payments is subject to considerable doubt. Also positive for gold, the advent of deflation, following the failure of the easy reflationary solutions promised by non-elected central bankers, will enfranchise aggressive acts of reflation by our elected representatives. When the tough get going then the going will really get tough- at least if you’re an owner of capital.

    Any political fiat, when monetary fiat fails, will be tantamount, in some way or other, to an attempt to directly control the allocation of capital/savings. History shows that this commences a giant game of hide-and-seek, and while gold may shine brightly it is also moved freely in briefcases and is easily hidden. Paper assets are easily tracked, discovered, conscripted and ultimately denuded in value. For gold to rise while the USD also rises signals that investors are beginning to see through the terrible burden on the price of the shiny stuff from ever-rising real rates of interest extant since 2011. Real rates have further to rise but a few more days of a strong USD and a strong gold price means gold has probably entered a bull market that should last for decades rather than years; its value boosted initially by its ability to avoid conscription, but underpinned by the authorities’ mass mobilization of resources to ultimately generate inflation.

    From 2009-2015 investors were well paid, at least in the developed world, to believe the most impossible of the six things before breakfast: that central bankers can subvert the desires, wishes, greed and fear of millions of people who set prices every day through their actions.

    You now have two choices: keep believing the most impossible thing, or accept that the wild force that establishes market prices has not been tamed. It’s not a pet, it’s a falcon and ‘The falcon cannot hear the falconer’. The ‘people’s falcon’ may be the first to enter ‘a widening gyre’ but it won’t be the only wild force that refuses to be tamed in 2016.

  • Here We Go Again: Chinese Stocks Plunge, Give Up Early Gains Despite Yuan Fix Unchanged

    Update: *SHANGHAI COMPOSITE INDEX FALLS 2.04%(AFTER BEING UP 3.2%)

     

    And CSI Futures are tumbling…

     

    Not a pretty week…

     

    Shifting notavkly from the opening color that we detailed earlier..

    With all eyes on Chinese FX and equity markets, following the worst start to a year for US (and Chinese) stocks in history, PBOC decided (after 7 straight days of devaluation and 7% devaluation since August) to halt the run and increase Yuan fix by a paltry 0.01% to 6.5636 (notably below yesterday's 6.5939 CNY close). Offshore Yuan is strengthening and US equity markets are jumping. Chinese equity markets (now theoretically unhampered by their circuit-breaker panic switch) are far less impressed.

     

    PBOC fixes the Yuan a tiny bit stronger…

     

    Offshore Yuan roller-coastered through the US session as Reuters headlines sparked selling pressure after some Treasury-selling/Yuan-tervention…but is rallying on the not bad news…

     

    Onshore-Offshore spread has tumbled to 900pips from over 1500…

     

    Asian stocks are set for their worst week since 2011 with some notable names in big trouble:

    • *NOBLE GROUP TUMBLES 10%, EXTENDING LOSS, AFTER S&P DOWNGRADE

    While China ETFs trading in US markets signal notable weakness to come for an-"limited" Chinese stock market…

     

    Chinese stocks look set for a positive open:

    • *CHINA SHANGHAI COMPOSITE SET TO OPEN UP 2.2% TO 3,194.63
    • *CHINA'S CSI 300 INDEX SET TO OPEN UP 2.4% TO 3,371.87
    • *FTSE CHINA A50 INDEX RISES 2.17%

    And Dow Futures love it… for now…

     

    Some context:

     

    So no news is good news for now…

    Charts: Bloomberg

  • Natural Gas Prices Signaling Oil Bottom for Investors

    By EconMatters

      
    Natural Gas Prices Bottomed

     

    Everyone is trying to figure when the oil markets will bottom. Well lost in all the crazy action in markets globally is the nice resurgence off the bottom for natural gas prices. Natural Gas prices have essentially gone from $1.68 per MMBtu to $2.40 per MMBtu rather rapidly in the midst of a mild winter so far. The reason is that all those rig reductions are starting to affect the production of the commodity, less natural gas is coming to market relative to expectations.
     

     

      
    The Lag Effect

     

     

    The lag effect in all those rig declines is starting to show up in the natural gas production numbers, and although the cut in oil rigs hasn`t shown up yet in oil production in a meaningful way, it is just around the corner over the next three months by my calculation. We should start to experience some meaningful U.S. Oil Production cuts by late March and early April which will solidify the fact that the oil market had long sense bottomed in January of this year.

     

    Rigs
    		    
     
    Fri, January 01, 2016
    Change from
     
    last week
    last year
    Oil rigs
    536
    -0.37%
    -63.83%
    Natural gas rigs
    162
    0.00%
    -50.61%
    Miscellaneous
    0
    0.00%
    -100.00%

     

     

     

    Rig numbers by type
    		    
     
    Fri, January 01, 2016
    Change from
     
    last week
    last year
    Vertical
    89
    3.49%
    -70.33%
    Horizontal
    549
    -0.90%
    -58.91%
    Directional
    60
    0.00%
    -65.71%
    Source: Baker Hughes Inc.

     

     

     

    Working gas in underground storage
     
    Stocks
    billion cubic feet (bcf)
    		  
    Region
    2016-01-01
    2015-12-25
    change
    		  
    East
    857
    876
    -19
    		  
    Midwest
    983
    1,025
    -42
    		  
    Mountain
    185
    195
    -10
    		  
    Pacific
    381
    382
    -1
    		  
    South Central
    1,347
    1,340
    7
    		  
    Total
    3,643
    3,756
    -113
    		  
    Source: U.S. Energy Information Administration

     

     

     

    Market Investment

     

     

    By the time everyone realizes that the oil market has bottomed it is too late to make the real good, easy money off the bottom, just like in natural gas prices. You have to be willing to step in and take the risk that prices haven`t bottomed. You basically are getting paid to buy when everyone else is selling the market, in essence, blood in the streets is the market analogy. We accurately called the bottom in natural gas prices, we will see how close we are in the oil markets. But we know that any investment right now in the oil market where one can stay in the trade, and not be liquidated for any reason, i.e., bankruptcy risk in insolvent company – is going to make money over a two year time frame. Moreover, the reward will far and above exceed the risk involved, and the performance of said trade will greatly outperform the overall market returns of most other asset alternatives.

    © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

  • It's Official: Bitcoin Was The Top Performing Currency Of 2015

    For most investors, the major story of 2015 was the expectation and eventual fulfillment of a rate hike, signalling the start of tightening monetary policy in the United States. This policy is divergent to those of other major central banks, and this has translated into considerable strength and momentum for the U.S. dollar.

    Using the benchmark of the U.S. Dollar Index, a comparison against a basket of major currencies, the dollar gained 8.3% throughout the year.

    Despite this strength, the best performing currency in 2015 was not the dollar. In fact, the top currency of 2015 is likely to be considered the furthest thing from the greenback.

    Bitcoin, a digital and decentralized cryptocurrency, staged a late comeback in 2015 to overtake the dollar by a whopping 35% by the end of the year.

    Courtesy of: The Money Project

     

    Bitcoin is no stranger to extremes. During the year it came into the mainstream in 2013, Bitcoin gained 5,429% to easily surpass all other currencies in gains. However, the following year it would become a dog, losing -56% of its value to become the world’s worst performing currency in 2014.

    The second best performing major currency, relative to the USD, was the Israeli shekel. It gained 0.3% throughout the year, and the Japanese yen (0%) and Swiss franc (0%) were close behind, finishing on par with how they started the year.

    The world’s worst performing currencies are from countries that were battered by commodities or geopolitical strife.

    Ukraine’s hryvnia fell -33.8% in the aftermath of Crimea. Brazil’s real (-30.5%), the Canadian dollar (-15.9%), Russian ruble (-20.8%), and South African rand (-26.7%) all lost significant value in the purging of global commodities. Gold finished the year down -10%, and silver at -11%.

    And as China devaluation accelerates, Bitcoin has been surging since the start of the year…

  • What China Has To Look Forward To When It Opens In A Few Hours

    It’s all up to China tonight, and if early ETF indications are correct, today’s US equity bloodbath is about to spill over right back into Chinese markets again, only this time without the benefit of circuit breakers making it an early close for local traders if they manage to push the market down 7% in 29 minutes.

    Moments ago, on Bloomberg TV, Bill Gross said China’s stock markets are likely to drop 5-6% on Friday: “Based upon the ETF in the United States, China is predicted to be down 5 percent or 6 percent…but China is an artificial market.  All global markets are artificially based and to the extent that we have a catharsis, I think, depends upon central banks basically giving up in terms of what they do.  I don’t think that’s going to happen.”

    Gross is referring to the following ETF:

     

    Indeed, it appears that the US is far more bearish on what will happen in China tonight relative to the local futures market:

    Incidentally, when asked whether the market turmoil will cause Chair Yellen to say the rate hike is done, Gross said: “I don’t think she’ll say that. They’ve been on this track of raising interest rates for so long that she’s not going to come out with one or done. She may come out there — someone may come out – Fischer perhaps – will come out and acknowledge the fact that global markets and that global financial conditions are an important consideration in terms of future policy. But I don’t think they’re going to divulge that they are not raising interest rates for times as Stan Fischer said a few days ago.”

    In other words, central banks to the rescue. Meanwhile…

    Angry clients besiege Chinese brokerages

    Back in China, which has had non-functioning markets on two of the past four days, should the market rout persist, the already angry local “traders”, most of whom are undereducated and margined to the hilt, will likely snap.

    According to Bloomberg, after yesterday’s farce, angry clients besieged a brokerage as China’s market crashed and was halted.

    “We cannot go home. We are dealing with a flood of angry phone calls from clients complaining about the market plunge and the circuit-breaker system,” says Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. Wei added that “we are also feeling at a loss and confused today as we didn’t quite figure out what was going on.”

    Wei also says that Huaxi management “has asked us to placate clients and guide them to cut holdings rationally if they do margin trading.”

    Sorry, but when clients have not only lost a year’s worth of income in minutes but on top of that can’t liquidate the remainder, no amount of placating will work.

    Wei then explained what even the Chinese regulator realized after the first few days of experimenting with the new circuit breaker: “the circuit-breaker mechanism actually fuels declines and that goes against the regulator’s goal of stabilizing the market.” It remains to be seen if removing the circuit breaker, a device by definition meant to stabilize markets, will lead to calmer markets. Maybe for the first few minutes, but then all bets are off.

    “The new rule on major shareholders’ stock sales isn’t going to work to prevent the market from falling. It’s restricting sales and the CSRC cannot do things like banning them from selling forever. It’ll be a tough day again tomorrow.“

    The circuit breaker has been removed, but we feel it will be just as tough tomorrow, or rather, when China opens in a few hours.

    In the US, traders are “too old for this”

    It’s not just Chinese traders. According to another Bloomberg report, US traders “can’t afford to sleep” during what is becoming a nightly rout, starting just around 8:30pm Eastern. 

    With China’s stock market in disarray, American investors are finding out just how long their day can last — before they even get to work.

    “This morning when I rolled over in my bed at 4 a.m. to check the markets and saw what happened in China and in U.S. futures I thought, ‘Oh, here we go,’” said Howard Ward, who oversees $42.7 billion as the chief investment officer of growth equities at Gamco Investors Inc. “I’m getting too old for this.”

    It’s a cowboy market

    “If it’s somebody who really doesn’t know a lot about China, this is kind of scary. They say, ‘Oh my god, their market can drop 7 percent,’” said Nick Sargen, who helps manage $46.2 billion as chief economist and senior investment adviser for Fort Washington Investment Advisors Inc. “The reason I can be more calm about it is that I follow that market, I can say, listen it’s a cowboy market.”

    Bloomberg concludes by saying that “night owls have been rewarded for at least a year as China’s influence moved action in U.S. stocks to hours when exchanges were closed. In 2015, shares in the S&P 500 swung more during off hours than their small-cap brethren for the first time in at least 15 years.” 

    So far this year, the only privilege night owls have had is to watch as China loses control of its market on half the trading days so far.

    * * *

    So what happens tonight? Keep an eye on the Yuan fixing around 8 pm: if the USDCNY sees another substantial jump (i.e., Yuan decline) from last night’s 5 year low rate of 6.5646, this could suggest further turbulence and as all self-fulfilling prophecies go, unleash another pukefest which not even the circuit breaker adjustment will fix. It will also mean that unless the Chinese plunge protection team aka the “National Team” throws everything it has at the stock market, the Shanghai Composite could fall first 5%, then 7%, and then not stop but simply keep falling until someone finally does step in.

    In short: it will all be about a central bank rescue again.

    But for now either go load up on coffee, or take a nap. It will be a long night.

  • "We Came, We Saw, He Died" – Revisiting The Incredible Disaster That Is Libya

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    In retrospect, Obama’s intervention in Libya was an abject failure, judged even by its own standards. Libya has not only failed to evolve into a democracy; it has devolved into a failed state. Violent deaths and other human rights abuses have increased severalfold. Rather than helping the United States combat terrorism, as Qaddafi did during his last decade in power, Libya now serves as a safe haven for militias affiliated with both al Qaeda and the Islamic State of Iraq and al-Sham (ISIS). The Libya intervention has harmed other U.S. interests as well: undermining nuclear nonproliferation, chilling Russian cooperation at the UN, and fueling Syria’s civil war.?

     

    As bad as Libya’s human rights situation was under Qaddafi, it has gotten worse since NATO ousted him. Immediately after taking power, the rebels perpetrated scores of reprisal killings, in addition to torturing, beating, and arbitrarily detaining thousands of suspected Qaddafi supporters. The rebels also expelled 30,000 mostly black residents from the town of Tawergha and burned or looted their homes and shops, on the grounds that some of them supposedly had been mercenaries. Six months after the war, Human Rights Watch declared that the abuses “appear to be so widespread and systematic that they may amount to crimes against humanity.”?

     

    As a consequence of such pervasive violence, the UN estimates that roughly 400,000 Libyans have fled their homes, a quarter of whom have left the country altogether. ?

     

    – From the post: The Forgotten War – Understanding the Incredible Debacle Left Behind by NATO in Libya

    Shortly after the NATO-led war which ousted Libyan leader Muammar el-Qaddafi, then Secretary of State Hillary Clinton ebulliently boasted with a characteristic sociopathic giddiness, the following on network television:

    Indeed, from Iraq to Libya, and indeed across the entire planet, the U.S. government has an uncanny ability to take an already bad geopolitical situation and turn it into a complete and total chaotic humanitarian disaster. It’d be one thing if the woman in the above video clip had been disgraced and forced into exile in Chappaqua, but the disturbing reality is she will most likely be promoted to the next President of these United States.

    In order to fully appreciate what a clueless homicidal maniac she is, let’s reexamine the unmitigated nightmare that is Libya. A nightmare that Clinton and her interviewer laughed uncontrollably about creating.

    From Reuters:

    At least 47 people were killed on Thursday when Libya’s worst bomb attack since the fall of Muammar Gaddafi hit a police training center as hundreds of recruits gathered for a morning meeting.

     

    No group immediately claimed the attack in the town of Zliten, but suicide blasts and car bombings have increased in Libya as Islamist militants have taken advantage of the North African country’s chaos to expand their presence.

     

    Since a NATO-backed revolt ousted Gaddafi, Libya has slipped deeper into turmoil with two rival governments and a range of armed factions locked in a struggle for control of the OPEC state and its oil wealth.

     

    In the chaos, Islamic State militants have grown in strength, taking over the city of Sirte and launching attacks on oilfields. Islamic State fighters this week attacked two major oil export terminals.

     

    Western powers are pushing Libya’s factions to back a U.N.-brokered national unity government to join forces against Islamic State militants, but the agreement faces major resistance from several factions on the ground.

     

    For more than a year, an armed faction called Libya Dawn has controlled Tripoli, setting up its own self-declared government, reinstating the former parliament and forcing the recognized government to operate in the east of the country.

     

    Western officials say forming a united government would be the first step in Libya seeking international help to fight against Islamic State, including training for a new army and possible air strikes against militant targets.

    But hey…

    Screen Shot 2015-04-09 at 12.09.13 PM

    Finally, if you want to understand just how long the war against Syria has been in the works (before ISIS became a huge problem), let’s revisit the following 2011 tweet by “Crazy” John McCain:

    And you wonder why the world is in the state it’s in…

    For related articles, see:

    The Forgotten War – Understanding the Incredible Debacle Left Behind by NATO in Libya

    Tunisian Terror Attack Suspects Trained in U.S. “Liberated” Libya

    Incredible Tweets from John McCain on Libya and Syria from 2009 and 2011

    How the Clinton Foundation Paid Sidney Blumenthal $10K per Month as He Gave Horrible Libya Advice to the State Dept.

  • Bloodbath

    You know it's bad when…

    But, but, but… Fed… FANGs… Decoupled… Services… Netflix… Unicorns… Cramer…

     

    The day started badly (as China devaluation stress crushed carry trades and sucked liquidity out of the world, slamming USDJPY, US stocks, bond yields, credit, crude, and copper lower)…no late-day rally today!

     

    *CANADA STOCKS ENTER BEAR MARKET AFTER 20% DROP FROM SEPT. 2014

     

    All that hope as China lifted its circuit-breaker rule and crude briefly rallied… but stocks carnaged back to overnight lows late in the day… Another bounce into the European close then SELL MORTIMER SELL into NYMEX close

     

    Since the start of December, it's ugly…

     

    The NASDAQ is rapidly losing its post-QE3-End gains…

     

    "Policy Error" Much?

     

    "No Brainer" is down 28% from its highs…*APPLE CLOSES AT $96.45; FIRST CLOSE BELOW $100 SINCE OCT. 2014

     

    FANTAsy stocks tumbled deep into the red for the year (yes even NFLX!!) Facebook, Amazon, Netflix, Tesla, and Alphabet… all red…

     

    Financials caught down to credit…But just keep talking up NIM and their "no brainer"-ness

     

    VIX pushed above 25…

     

    VIX term structure inverted…

     

    Credit suggests more to come..

     

    Stocks are "getting there"…

     

    Catching down to breadth…

     

    Away from the excitement of stocks…

    Treasury yields tumbled further (some selling pressure as CNH defense suggested China selling)…

     

    The USD Index tumbled back into the red for the week as JPY strength continued…

     

    USDJPY closes at 11 month lows…

     

    Commodities split between growth and safety as PMs rallied and crude, copper crumbled…

     

    as Gold and Silver Surged…

     

    Charts: Bloomberg

    Bonus Chart: What did you think would happen?

  • Slovak PM Closes The Door To Refugees: "We Don't Want What Happened In Germany To Happen Here"

    Earlier today, Slovak Prime Minister Robert Fico formally stood up to the Brussels supergovernment juggernaut and said his government will not allow Muslims to create “a compact community,” adding that integrating refugees is impossible.

    Slovakia has a tiny Muslim community of several thousand.

    Fico’s government filed a legal challenge last month to a mandatory plan by the European Union to distribute migrants among members of the bloc.

    Fico said Thursday his government sees what he calls a “clear link” between the waves of refugees and the Paris attacks and the sexual assaults and robberies during the New Year’s Eve festivities in Germany.

    He says: “We don’t want what happened in Germany to happen here.”

    Fico says “the idea of multicultural Europe has failed” and that “the migrants cannot be integrated, it’s simply impossible.”

    * * *

    After the past week’s events in Cologne, we wonder if there is anyone left in Germany who disagrees.

  • Why The U.S. Can't Be Called A "Swing Producer"

    Submitted by Arthur Berman via OilPrice.com,

    Daniel Yergin and other experts say that U.S. tight oil is the swing oil producer of the world.

    They are wrong. It is preposterous to say that the world’s largest oil importer is also its swing producer.

    There are two types of oil producers in the world: those who have the will and the means to affect market prices, and those who react to them. In other words, the swing producer and everyone else.

    A swing producer must meet the following criteria:

    • A swing producer must be a net exporter of oil.
    • A swing producer must have enough daily production, spare capacity and reserves to influence market prices by balancing supply and demand through increasing or decreasing output.
    • A swing producer must be able to act authoritatively and quickly to increase or decrease output.
    • In the real world, a swing producer is a euphemism for a cartel. No single producer has enough oil leverage to balance the market and influence prices by itself. That includes Saudi Arabia, Russia, and the United States, the top 3 producers in the world. Obviously, it also includes U.S. tight oil.
    • A swing producer must have low production costs and have the financial reserves to withstand reduced cash flow when restricting or increasing supply is necessary to balance the market.

    So, let’s go down the list for OPEC and U.S. tight oil.

    OPEC’s net exports for 2014 were 23 million barrels per day (mmbpd) (Figure 1). U.S. net exports were -7 mmbpd. In other words, the U.S. is a net importer of crude oil. A net importer of oil cannot be a swing producer.

    Figure 1. OPEC and U.S. 2014 net crude oil exports.
    Source: OPEC & Labyrinth Consulting Services, Inc.

    (Click image to enlarge)

    This will not be substantially changed by the repeal of the crude oil export ban because U.S. consumption of crude oil (16.3mmbpd) exceeds domestic production (9.2 mmbpd) by 7.1 mmbpd. If exports of tight oil increase, imports will have to increase by an equal amount to meet demand.

    That should be enough to end the discussion about whether U.S. tight oil is a swing producer but I will finish going through the list.

    OPEC exists because none of its members alone meet the criteria needed to balance the market and affect prices. OPEC produces 31.4 mmbpd of the crude oil + condensate (47 percent of world production). It has approximately 1.5 million barrels per day (mmbpd) of spare capacity, and it has 72 percent (1220 billion barrels of oil) of the world’s proven reserves (Figure 2). The members of the cartel represent countries whose leaders have the authority to cut or increase oil production at will. Saudi Arabia alone has about $660 billion in cash reserves. Its production costs are less than $10 per barrel.

    Figure 2. Comparison of OPEC and U.S. tight oil production, spare capacity and reserves.

    Source: EIA, Drilling Info & Labyrinth Consulting Services, Inc.

    (Click image to enlarge)

    U.S. tight oil accounts for less than 5 percent of the world’s production of crude oil + condensate (3.7 mmbpd). It has approximately 0.23 mmbpd of spare capacity and less than 1 percent of the world’s proven reserves (13 billion barrels of oil). U.S. tight oil producers do not and cannot act together. Tight oil producers spend twice as much money as they make, and have up to 5 times more debt than annual revenue. Its production costs are $65-$70 per barrel.

    U.S. tight oil is on life-support at $35 per barrel oil prices.

    OPEC is a swing producer. U.S. tight oil is not.

    Truth vs. Confirmation Bias

    In April 2015, Yergin told CNBC, “What does it mean when you say the U.S. is the new swing producer? It’s much easier to swing down than swing up.”

    What he meant was that over-production of U.S. tight oil helped cause the global price of oil to collapse in 2014, to swing down. It had nothing to do with really being the swing producer.

    That was a few days before CERA Week, the pricey annual love-fest that Yergin’s company IHS throws in Houston for the oil and gas industry to feel good about itself. It was a clever-sounding trailer to publicize the $7,000-per-ticket event.

    Later, in June 2015, Yergin told the Wall Street Journal that “now the U.S. is a swing producer, albeit an inadvertent swing producer as it didn’t set out to take that role.”

    A swing producer cannot be inadvertent. A swing producer deliberately increases or decreases its production to balance the market, whether for short-term price advantage, or for demand stimulation and long-term price advantage and market-share.

    Either Yergin doesn’t understand what a swing producer is or his swing-producer comments were manipulative and meant to support some agenda.

    Many Americans want to believe that the U.S. is nearly energy independent and a major geopolitical force in the world because of oil and gas production from shale. They would like to stick America’s thumb in OPEC’s eye.

    Yergin said the U.S. was the new swing producer. What was heard was that America had made OPEC impotent. It was repeated enough by the press and other supposed experts that its truth was confirmed because people want to believe it–even though it is untrue.

    Confirmation bias is the tendency to find support for our preconceptions. It may make us feel good but it is a poor basis for decisions. Investors beware.

  • For Commodities, This Is The Next Great Depression

    While the “sell in 1973, and go away” plan had worked out for some in the commodity space, the destruction of the last decade has only one historical comparison… the middle of The Great Depression.

    The 10-year rolling annualized return for commodities is -5.1% – the lowest since 1938…

     

    During the same period Stocks are up 7.3% annualized, Bonds 6.6%, and Cash unchanged. Dip-buying opportunity? Maybe.

    UBS thinks so: Tactically we can see a bounce in Q1 before the capitulation starts

    Tactically, in September 2015, we actually expected a more significant oversold bounce in commodities from last year’s late September risk bottom into ideally early Q2 2016 before we anticipated more weakness into later 2016. So far, the bounce failed since particularly in the energy complex we saw further weakness into December and the metals have been actually just trading sideways. Nonetheless, according to our Q1 US dollar pullback call, we still see the chance for another rebound attempt in commodities into later Q1, and if so the move can be significant (short covering). Such a rebound would however not change our underlying cyclical roadmap for commodities, and this means that any rebound in Q1 should be limited in price and time before we expect another and potential final capitulation wave to start into H2 2016, where we expect the CCI index to minimum test its 2008 low at 350 to worst case 320.

    Commodities… on the way into a multi-year buying opportunity

    All in all we are sticking to our last year’s projection and strategy call that commodities are on the way into an important H2 2016/early2017 cyclical bottom. What is missing in our view is the final act in this first bear market. With our expectation to see a final US dollar overshooting into H2 2016, we obviously also see the risk of a final undershooting and capitulation in commodities and related themes into later 2016. Crude oil, and as long as we do not see a break of the 2014 bear trend, we see minimum a test of its 2008 low at around $32 to worst case undershoot to $28 before starting a significant recovery cycle into 2017. For copper we are still more cautious since so far the bear cycle was still relatively mild versus other commodities. In this context, and after a Q1 rebound, we see copper as one of the candidates where we could see a bigger undershooting towards 1.70 to worst case see a test of the 2008 bottom at around 1.20.

     

    On the macro side, another breakdown in commodity prices in later 2016 would very likely trigger a significant spike in cross-asset volatility. It would suggest minimum the speculation about selective defaults in the commodity area and a potential meltdown scenario in high yields, which would very likely filter through into Emerging Market debt. So on the one hand such a scenario would suggest another deflationary impulse on the macro side.

     

    However, with expecting crude oil and other commodities moving into a major cycle bottom (even if a basing process would take a longer time into 2017), and taking into account the historically low basis of commodity prices as well as the base effect in inflation, a 2016/2017 deflationary impulse could be the final deflationary impulse before starting a bigger comeback of inflation towards the end of the decade.

     

    So although tactically, we cannot rule out a volatile basing process in commodities into 2017, at the end of the day we see commodities from a late 2016/early 2017 bottom starting a multi-year bear market rally into the end of the decade before resuming its underlying secular bear into the first half of the next decade. For investors, this would open a time window of 2 to 3 years, where we can see a very significant and sharp bull cycle in commodity prices, and this scenario would obviously also have far reaching consequences for Emerging Markets, where we should see a big comeback starting.

    But stocks and bonds are not exactly doing great either…

  • Perth Mint Silver Coins Sales Surge 56%, Gold Sales Drop 16% In 2015

    Perth Mint Silver Coins Sales Surge 56%, Gold Sales Drop 16% In 2015

    The Perth Mint’s annual silver coins sales surged 56%, while gold sales fell 16% in 2015, as silver stackers continued to accumulate silver coins and bars and the new silver nugget or kangaroo coin (1 oz and 5 oz) saw very high levels of demand.

    Silver_Kangaroo

    The Perth Mint’s gold sales rose in December from the prior month, but annual sales slid by nearly a fifth in 2015. Gold sales in December rose to 40,096 ounces from 31,664 ounces in November, the mint said on its website on Wednesday as reported by Reuters.

    While gold sales  rose in December from the prior month, but annual gold sales slid by nearly a fifth in 2015. Sales slid 16 percent for the year, after dropping by a third in 2014.

     

    perth_mint
    Note: Sales figures in ounces. Gold sales include coins and minted bars. Silver figures include only coins as the mint does not issue silver minted bars.

    The Perth Mint’s silver sales in December eased to 1.08 million ounces from 1.15 million ounces in the previous month.

    For the year, they surged about 56 percent to 11.8 million ounces. The mint sold a record 3.5 million ounces of silver in September alone on strong demand after the launch of the new silver coins and as prices fell to multi-year lows.

    Bullion buyers continue to accumulate and see silver at $14 per ounce as great value vis a vis gold ($1,100 per ounce), stocks and many other investments.

    Follow GoldCore on Twitter, Facebook, LinkedIn

  • Perfect Storm!?

    Submitted by John Rubino via DollarCollapse.com,

    One of the (many) fascinating things about this latest global financial crisis is that there’s no single catalyst. Unlike 2008 when the carnage could be traced back to US subprime housing, or 2000 when tech stocks crashed and pulled down everything else, this time around a whole bunch of seemingly-unrelated things are unraveling all at once.

    China’s mal-investment binge is crashing global commodities, an overvalued dollar is crushing emerging markets (most recently forcing China to devalue), the pan-Islamic war has suddenly gone from simmer to boil, grossly-overvalued equities pretty much everywhere are getting a long-overdue correction, developed-world political systems are being upended as voters lose faith in mainstream parties to deal with inequality, corporate power, entitlements, immigration, really pretty much everything. For one amusing/amazing example of the latter problem, consider Germany’s response to the mobs of men that suddenly materialized and began molesting women: Cologne mayor slammed after telling German women to keep would-be rapists at arm’s length.

    Why do causes matter at times like this? Because where previous crises were “solved” with a relatively simple dose of hyper-easy money, it’s not clear that today’s diverse array of emerging threats can be addressed in the same way. Interest rates, for instance, were high by current standards at the beginning of past crises, which gave central banks plenty of leeway to comfort the afflicted with big rate cut announcements. Today rates are near zero in most places and negative in many. Cutting from here would be an experiment to put it mildly, with myriad possible unintended consequences including a flight to cash that empties banks of deposits and a destabilizing spike in wealth inequality as negative interest rates support asset prices for the already-rich while driving down incomes for savers and retirees.

    And with debt now $57 trillion higher worldwide than in 2008, it’s not at all clear that another borrowing binge will be greeted with enthusiasm by the world’s bond markets, currency traders or entrepreneurs. Here’s that now-famous chart from McKinsey:

    Global debt McKinsey

    Easier money will have no effect on the supply/demand imbalance in the oil market, which is still growing. The likely result: Sharply lower prices in the year ahead, leading to a wave of defaults for trillions of dollars of energy-related junk bonds and derivatives.

    As for stock prices, in the previous two crises equities plunged almost overnight to levels that made buying reasonable for the remaining smart money. Today, virtually every major equity index remains high by historical standards, so the necessary crash is still to come — and will add to global turmoil as it unfolds.

    The upshot? It really is different this time, in a very bad way. And this fact is just now dawning on millions of leveraged speculators, mutual fund and pension fund managers, individual investors and central bank managers. Right this minute virtually all of them are staring at screens, scrolling over to the sell button, hesitating, pulling up Bloomberg screens showing how much they’ve lost in the past few days, calling analysts who last year convinced them to load up on Apple and Facebook, getting no answer, going back to Bloomberg and then fondling the sell button some more. Think of it as financial collapse OCD.

    What happens next? At some point — today or next week or next month, but probably pretty soon — the dam will break. Everyone will hit “sell” at the same time and find out that those liquid markets they’d come to see as normal have disappeared and yesterday’s prices are meaningless fantasy. The exits will slam shut and — as in China last night where the markets closed a quarter-hour into the trading session — the whole world will be stuck with the positions they created back when markets were liquid and central banks were omnipotent and government bonds were risk-free and Amazon was going to $2,000.

    And one thought will appear in all those minds: Why didn’t I load up on gold when I had the chance?

  • Pizza And Assault Rifles: Inside The Occupied Oregon Wildlife Refuge

    When last we checked in on Ammon Bundy and his band of “patriots”, Harney County Sheriff David Ward was getting fed up with the group’s occupation of the Malheur National Wildlife Refuge.

    “It is time for you to leave our community, go home to your families, and end this peacefully,” Ward said on Tuesday.

    But Ammon Bundy and the handful of armed militiamen holed up at the remote, snowy federal outpost have no such plans. The “Citizens for Constitutional Freedom” (as they now call themselves) are in it for the long haul and have pledged, at various times since “seizing” the office last Saturday, to remain in the building “for years.”

    While it’s not entirely clear what Bundy wants, the group’s professed goal is to “”restore the rights to people so they can use the land and resources.” Here’s a bit of helpful color from Terry Andersen, the William A. Dunn Distinguished Senior Fellow at the Property and Environment Research Center and the John and Jean DeNault Senior Fellow at the Hoover Institution (from a New York Times op-ed):

    Their goal harkens back the “Sagebrush Rebellion” of the 1970s, though their tactics are more draconian. Then the rebels called for more local control of federal lands, if not outright transfer of title to those lands to the states, and such solutions are still worth considering.

     

    The impetus for the Oregon occupation is the imprisonment of a father and son for setting fire to federal lands to control invasive species moving to private lands and to help prevent wildfires, a huge land management problem in the West.

     

    Living in the mountains south of Bozeman, Mont., I feel their pain because every summer I fight spotted knapweed, an invasive plant spread from my national forest neighbors, and I fear that wildfire will spread from the unmanaged federal land.

     

    The second cause is “multiple conflicts over multiple uses.” At the time of the Sagebrush Rebellion the list of multiple uses that federal land agencies were to manage was huge. It is growing exponentially.

     

    Western ranchers, loggers, farmers and, yes, even government bureaucrats with their feet on the ground could provide the stewardship sought by the rebels in Oregon. Now that armed confrontation has brought attention to their cause, we need to consider policies that will devolve management to lower levels of government and get the incentives right for encouraging environmental and fiscal responsibility

    And here’s a bit more from Salon:

    The Bundys have been up in arms about where their cattle can and can’t roam, and their father, Cliven, owes more than $1 million in grazing fees. And the Hammonds are being punished for setting fire to public land. If you live in some other part of the country—in, say, a bustling East Coast city—what do ranching restrictions and arson have to do with you? The short answer: The land use regulations that the occupiers of the Malheur Refuge are fighting go far beyond where cattle can roam. How we use our land determines what comes out of it in the form of extracted resources, which then affects so much else, from what kind of air we breathe to how many earthquakes we experience–not to mention our changing climate. It would not be a stretch to say that caring about land use means caring about the fate of our planet.

     

    In his “Wilderness Letter,” Wallace Stegner wrote that we need to preserve wilderness “even if we never once in ten years set foot in it.” Wild lands, according to Stegner, are important “simply as an idea.” But land use is about much more than what land we preserve as wilderness, or even what land we set aside for recreation and enjoyment. While wilderness is indeed valuable, there is plenty of non-wilderness public land whose fate matters just as much.

     

    The Sagebrush Rebels argue that this federal land should’ve belonged to the states to begin with, according to a clause under the Doctrine of the Equality of States, which says new states enter the union “on an equal footing with the original States in all respects whatever.” Several Western states were required to disclaim their sovereignty over unappropriated lands when they became states, and the Sagebrush Rebels have never gotten over it. This is why they continue to demand the “return” of federal land to the states—though that would necessitate the land once having belonged to the states, and it never really did.

    Ok, so Bundy, like his father, has become something of a folk hero among states’ rights advocates and he’s essentially hijacked the Hammond brush fire case and transformed it into a justification for the armed occupation of a federal building. 

    Of course it’s probably occurred to Bundy – if not to every member of the Citizens for Constitutional Freedom – that the US government couldn’t legislate its way out of a wet paper bag let alone fruitfully revisit a grand debate on land use and state’s rights. That is, Washington is mired in partisan bickering that’s created the worst Congressional gridlock in recent memory which means that even if someone cared to address Bundy’s concerns, they couldn’t. 

    But Bundy is apparently ready to wait around in the woods until something happens. “There is a time to go home. We recognize that. We don’t feel it’s quite time yet,” he said on Wednesday. “We feel like we need to make sure that the Hammonds are out of prison, or well on their way. We need to make sure that there is some teeth in these land transfers, and also that those who have committed crimes … those are exposed as well.”

    In the meantime, Reuters got an inside look at life inside occupied bird sanctuary. Here are some excerpts from their account:

    The doorknob rattled. Two of the men occupying a federal biologist’s office in a stand-off over land rights hopped from their chairs and swung rifles toward the locked door.

     

    There was no knock – the established procedure for gaining entry to the nerve center of the siege mounted by brothers Ammon and Ryan Bundy at this eastern Oregon nature center.

     

    The Bundys’ body guard stood in silent alert but heard no voices from the snowy darkness outside.

     

    “Should we approach the door or not?” Ryan asked, creeping toward a window.

     

    On Tuesday, for the first time, they allowed two reporters to join them inside their refuge for a night marked by long discussions and moments of hair-trigger tension.

     

    As the two Reuters’ reporters arrived just after nightfall, the occupiers were moving into a state of high alert. The groups’ head of security, a man known as Buddha, had been out of touch since driving off-site hours earlier. Amid efforts to locate him, the Bundys talked at length about what had brought them into this wilderness–and what it would take for them to leave.

     

    “When we can say, ‘OK, now we can go home,’ would be when the people of Harney County are secure enough and confident enough that they can continue to manage their own land and their own rights and resources without our aid, ” Ryan Bundy said. “And we intend to turn this facility into a facility that will aid that process.”

     

    The brothers have taken over the cozy and cluttered office of Linda Sue Beck, a biologist and civil servant they have come to view as a symbol the federal government. They said they would allow Beck to come to gather her personal belongings. But they don’t want her to return to work.

     

    “She’s not here working for the people,” declared Ryan Bundy, the more outspoken of the brothers. “She’s not benefitting America. She’s part of what’s destroying America.”

    Yes, Linda is “part of what’s destroying America.” Behold, the face of government oppression:

    And while we doubt that Linda will be stopping by to “gather her personal belongings,” Bundy says the group is expecting visitors soon. On Tuesday Bundy said that based on information he received from an unnamed source, the FBI has obtained five arrest warrants, and is “gathering their equipment and their goons” at a local high school. “They were planning on coming in and raiding the refuge,” he added. 

    As Reuters goes on to note, there are times when the group questions themselves. “When is it enough to put yourself and other people’s lives on the line? Is it justified? Maybe in the end we’ll look at each other and say, ‘What are we doing?’” 

    Yes, “maybe.” But until then, many of the men suggest that if push comes to shove, they’re prepared to die for Bundy and his cause. On that note, we’ll close with a quote from Wes Kjar, a 31-year-old oil rig worker who’s convinced the FBI is set to storm the building:

    “I’m not saying I want to die. I want to surrender. But I want to surrender on the right terms.”

     

     

     

    The full clip is below:

  • Aliso Canyon's Historic Gas Leak Puts Sempra Energy In "Uncharted Regulatory Territory"

    Sempra Energy may be entering uncharted regulatory and technical territory with the massive and uncontained Aliso Canyon gas leak, according to Bloomberg Intelligence, as the company and its regulators simply cannot find historical leaks of this magnitude. Sempra’s Southern California Gas Co. is drilling a relief well but has warned that capping the well could take two months which has prompted massive evacuations in the area, the instigation of a no-fly zone, and now Governor Brown's declaration of a state of emergency to protect residents.

    Governor Brown's statement (excerpted here):

    Given the prolonged and continuing duration of the Aliso Canyon gas leak and at the request of residents and local officials, Governor Edmund G. Brown Jr. today issued a proclamation that declares the situation an emergency and details the administration's ongoing efforts to help stop the leak. The order also directs further action to protect public health and safety, ensure accountability and strengthen oversight of gas storage facilities.

     

    Earlier this week, Governor Brown met with Porter Ranch residents and toured the Aliso Canyon Natural Gas Storage Facility, including the site of the leak and one of the relief wells.

     

    Today's proclamation builds on months of regulatory and oversight actions from seven state agencies mobilized to protect public health, oversee Southern California Gas Company's actions to stop the leak, track methane emissions, ensure worker safety, safeguard energy reliability and address any other problems stemming from the leak.

    Sempra’s Southern California Gas Co. is drilling a relief well that it expects will stop the gas from escaping from the well located in the Aliso Canyon storage facility, the fourth-largest underground field in the U.S. The utility has said capping the well could take two months.

    Through Dec. 31, Sempra has spent about $50 million on addressing the leak and environmental and community impacts, including the temporary relocation of residents, according to a regulatory filing Thursday. Sempra also said it has made seven unsuccessful attempts to plug the leak by pumping fluids down the well shaft and that it may face fines and penalties as a result of the incident.

    However, as TheAntiMedia.org's Dave Smith reports, scientists and engineers are finding it difficult to contain the largest natural gas leak ever recorded – since late October, an estimated 73,000 tons of methane, a highly flammable gas 25 times more potent as a greenhouse gas than carbon dioxide, has escaped from an energy facility in Aliso Canyon, California; and there is no immediate end in sight.

    According to Anne Silva, spokesperson for the Southern California Gas Company or SoCalGas the company that owns the facility, since the base of the well sits 8,000 feet underground, efforts to stop the flow of gas by pumping fluids directly down the well have not yet been successful. Therefore, the company is now constructing a relief well that will connect to the leaking well.

     

    In a letter to the community affected by the leak, which came after Governor Brown directed DOGGR and CPUC to launch investigations into the cause of the leak and whether any violations have taken place, CEO Dennis Arriola said:

    “We are making good progress on drilling a relief well to stop the leak and are on schedule to complete it by late-February to late-March. The relief well will intercept the leaking well at more than 8,000 feet below ground and the operation is continuing around the clock, 24 hours, 7 days a week. As of December 19, we have drilled about 3,300 feet and are in our second of five phases of the drilling process. Once the relief well intercepts the leaking well, we will pump fluids and cement into the bottom of the well to stop the flow of gas and permanently seal it.”

    The Environmental Defense Fund recently released footage of the leak that shows climate-damaging methane gases escaping from a massive natural gas leak at a storage facility in California’s Aliso Canyon, with the San Fernando Valley pictured in the background. The giant methane plumes were made visible by a specialized infrared camera operated by an Earthworks ITC-certified thermographer.

    “What you can’t see is easy to ignore. That’s why communities that suffer from pollution from oil and gas development are often dismissed by industry and regulators. Making invisible pollution visible shows the world what people in Porter Ranch have been living with every day for months,”conservation organization Earthworks spokesman Alan Septoff said.

    California officials have confirmed the rupture is venting gas at a rate of up to 110,000 pounds per hour – more than 150 million pounds of methane has been poured into the atmosphere so far; officials fear pollutants released in the accident could have long-term consequences far beyond the region. The counter below estimates in real time just how much pollution is being emitted from the environmental disaster.

    The 20-year warming impact is said to exceed that of all the state’s oil refineries combined, or of burning 300 million gallons of gasoline. The EDF states:

    Methane – the main component of natural gas – is a powerful short-term climate forcer, with over 80 times the warming power of carbon dioxide in the first 20 years after it is released. Methane is estimated to be leaking out of the Aliso Canyon site at a rate of about 62 million standard cubic feet, per day. That’s the same short-term greenhouse gas impact as the emissions from 7 million cars.

    Tim O’Connor, the California climate director for the Environment Defense Fund, told Mashable the leak is dumping the equivalent of eight or nine coal plants worth of methane into the atmosphere. He told The Washington Post, “It’s one of the biggest leaks we’ve ever seen reported. It is coming out with force, in incredible volumes. And it is absolutely uncontained.”

     

     

    The Los Angeles Unified School District has agreed to relocate nearly 1,900 students from schools near the leak, citing disruption from absenteeism and several visits to the health office. SoCalGas has placed 2,258 families in temporary housing, while 111 others staying with family or friends are being compensated. More than 3,000 others are in the process of being relocated.

    *  *  *

    So far, 25 complaints, many of which seek class action status, compensatory and punitive damages and attorneys’ fees, have been filed, Sempra said. State and local authorities are investigating.

    “Our focus remains on quickly and safely stopping the leak and minimizing the impact to our neighbors in Porter Ranch,” Dennis Arriola, president and chief executive officer of Southern California Gas, said in an e-mailed statement.

    This week Brown met with Porter Ranch residents and toured the Aliso Canyon facility on the north rim of the San Fernando Valley. His office said the emergency regulations would include daily inspections of gas storage well heads and regular testing of safety equipment.

    Brown’s emergency order "will bring the additional resources and focus we need — to get people back into their homes, restore confidence in the safety of this community, and begin rebuilding quality of life in the neighborhoods affected by the gas leak,” Los Angeles Mayor Eric Garcetti said in a statement. Garcetti said he asked Brown to make the declaration.

    Brown also directed the California Public Utilities Commission, which regulates Sempra’s Southern California Gas, to ensure that the company covers costs related to the leak while protecting customers. The utility is paying to temporarily relocate residents.

  • This Is The Dow's Worst Start To The Year… Ever

    What did the Fed do?!

     

     

    Worst. Ever! Sounds like a great buying opportunity, right?

Digest powered by RSS Digest

Jan 07

Today’s News 7th January 2016

  • "Markets In Turmoil" As Europe Opens

    With Chinese trading halted mere minutes into its day-session on the back "insane" moves as one Asian manager exclaimed, the rest of the world's markets have borne the brunt of hedging, unwind, selling pressure.

     

    Dow Futures are down 300 points from After-Hours highs…

     

    Crude has crashed back to a $32 handle…

     

    The dollar is weaker as JPY and EUR surge…

    And Gold has jumped back above $1100…

     

    Time for some jawboning Mr. Draghi.. and what about you Kuroda-san? Get back to work!! Unless the rest of the world is 'ganging up' on The Fed, pressuring the US stock market until Yellen folds and unleashes QE4?

  • TransCanada Sues Obama Administration; Says Keystone Pipeline Rejection Was Unconstitutional

    On November 6, Obama was delighted to take his place in the pantheon of progressive, liberal Warren Buffett apparatchiks when he proudly announced that the Keystone XL pipeline, which had been delayed for years, had finally been rejected.

     

    Exactly two months later, Obama’s “mission accomplished” banner has just led to a big slap on the face of the former constitutional expert, and could carry a multi-billion dollar chage after late this afternoon, TransCanada filed a lawsuit in Federal court in Houston, suing the U.S. government and claiming the Obama acted unconstitutionally when he rejected the Keystone XL, while also seeking $15 billion alleging the pipeline denial was “arbitrary and unjustified.”

    The company’s lawsuit in federal court in Houston does not seek legal damages but wants the permit denial invalidated and seeks a ruling that no future president can block construction.

    According to Reuters, in filing the NAFTA claim, TransCanada said it “had every reason to expect its application would be granted” as it had met the same criteria the U.S. State Department used when approving other similar cross-border pipelines.

    “Presumably they have a case that there are damages, as they were led to believe that if they did these things they’d get it across the line, but they weren’t able to,” said portfolio manager Ryan Bushell at Leon Frazer & Associates in Toronto, whose firm owns more than a million shares in TransCanada.

     

    “I’d imagine that this is more than a PR move and they believe they have a real case.”

    If so that would be big trouble for not only Obama, who will have to find a lot of NSA dirt on a Texas federal judge, but also for Warren Buffett, whose intervention in Obama’s “decision-making process” on halting TransCanada will surely be divulged during the discovery process, revealing the crony capitalist who stood to benefit the most.

    The White House referred requests for comment to the U.S. State Department. The State Department did not immediately respond to requests for comment. 

    Not surprisingly, Canada is staying far away from this one, In Ottawa, a spokesman for the Canadian foreign ministry said the government “has no role in this dispute.” Since October, Canada has been run by Justin Trudeau’s Liberals, who backed the pipeline but not as vociferously as the former ruling Conservatives.

    TransCanada said it will also take an after-tax write down of C$2.5 billion ($1.78 billion) to C$2.9 billion in the fourth quarter after the permit denial.

    The environmentalists, despite winning the first round, are suddenly concerned:

    “The suit is a reminder that we shouldn’t be signing new trade agreements like the Trans Pacific Partnership that allow corporations to sue governments that try and keep fossil fuels in the ground,” said Jason Kowalski, policy director of environmental group 350.org which opposed the pipeline.

    TransCanada called the rejection “a symbolic gesture” aimed at burnishing the Obama administration’s leadership on climate change in the eyes of the international community.

    It was, of course, right. But more importantly, the rejection was a means to promote Warren Buffett’s “alternative” oil pipelines, the railways, which in 2015 had their worst safety year on record, with countless flaming BNSF derailments, which, oddly enough, the White House had little to say about.

  • Paul Craig Roberts: The Rule Of Law No Longer Exists In Western Civilization

    Authored by Paul Craig Roberts,

    My work documenting how the law was lost began about a quarter of a century ago. A close friend and distinguished attorney, Dean Booth, first brought to my attention the erosion of the legal principles on which rests the rule of law in the United States. My columns on the subject got the attention of an educational institution that invited me to give a lecture on the subject. Subsequently, I was invited to give a lecture on “How The Law Was Lost” at the Benjamin Cardozo School of Law in New York City.

    The work coalesced into a book, The Tyranny Of Good Intentions, coauthored with my research associate, Lawrence M. Stratton, published in 2000, with an expanded edition published in 2008. We were able to demonstrate that Sir Thomas More’s warning about prosecutors and courts disregarding law in order to more easily convict undesirables and criminals has had the result of turning law away from being a shield of the people and making it into a weapon in the hands of government. That is what we witness in the saga of the Hammonds, long-time ranchers in the Harney Basin of Oregon.

    With the intervention of Ammon Bundy, another rancher who suffered illegal persecution by the Bureau of Land Management but stood them off with help from armed militia, and his supporters, the BLM’s decades long persecution of the innocent Hammonds might have come to a crisis before you read this.

    Bundy and militiamen, whose count varies from 15 to 150 in the presstitute media, have seized an Oregon office of the BLM as American liberty’s protest against the frame-up of the Hammonds on false charges. As I write the Oregon National Guard and FBI are on the way.

    The militiamen have said that they are prepared to die for principles, and the rule of law is one of them. Of course, the presstitute media is making the militiamen into the lawbreakers—and even calling them terrorists—and not the federal government’s illegal prosecution of the Hammonds, whose crime was their refusal to sell their ranch to the government to be included in the Masher National Wildlife Refuge.

    If there are only 15 militiamen, there is a good chance that they will all be killed, but if there are 150 armed militiamen prepared for a shootout, the outcome could be different.

    I cannot attest to the accuracy of this report of the situation (the resources required to verify the information in this account of how the government escalated a “crisis” out of the refusal of a family to bend is beyond the resources of this website) – However, the story fits perfectly with everything Lawrence Stratton and I learned over the years that we prepared our book on how the law was lost. This account of the persecution of the Hammonds is the way government behaves when government has broken free of the rule of law.

    I can attest with full confidence that the United States no longer has a rule of law. The USA is a lawless country. By that I do not mean what conservative Republicans mean, which is, if I understand them, that racial minorities violate law with something close to impunity.

    What I mean is that only the mega-banks and the One Percent have legal protection, and that is because these people control the government. For everyone else law is a weapon in the hands of the government to be used against the American people.

    The fact that the shield of law no longer exists for American citizens is why, according to US Department of Justice statistics, only 4 percent of federal felonies ever go to trial. Almost the entirety of federal felonies are settled by coerced plea bargains that force defendants to admit to crimes that they did not commit in order to avoid “expanded indictments” that, if presented to the typical stupid, trusting, gullible American “jury of their peers,” would lock them away for hundreds of years.

    American justice is a joke. It does not exist. You can see this in the American prison population. “Freedom and Democracy” America not only has the largest percentage of its population in prison than any country on the planet, but also the largest number of prisoners.

    If you consider that “authoritarian” China has four times the population of the United States but fewer prisoners, you understand that “authoritarian” China has a more protective rule of law than the United States.

    Compared to “freedom and democracy America,” Russia has hardly anyone in prison. Yet, Washington and its media whores have defined the President of Russia as “the new Hitler.”

    The only thing we can conclude from the facts is that the United States Government and those ignorant fools who worship it are evil incarnate.

    Out of evil comes dictatorship. The White House Fool, at best a two-bit punk, has decided that he doesn’t like the Second Amendment to the US Constitution any more than he likes any of the other constitutional protections of US citizens. He is looking for dictatorial methods, that is, unlegislated executive orders, to overturn the Second Amendment. He has the corrupt US Department of Justice, a criminal organization, looking for ways for the dictator to overturn both Congressional legislation and Supreme Court rulings.

    The media whores have fallen in line with the would-be dictator. All we hear is “gun violence.” If only Karl Marx were still with us. He would ridicule those who turn inanimate objects into purposeful actors. It is extraordinary that the American left-wing thinks that guns, not people, kill people.

    The position of the “progressive left-wing” in the United States is perplexing. Here are Americans, immersed into a police state, as are the Hammonds, and the progressive left-wing wants to disarm the population.

    Whatever this “progressive left-wing opposition” is, it has nothing in common with revolutionaries. The American left-wing is totally irrevelant, a defeated force that sold out and no longer represents the people or the truth.

    Even more astonishing, judging by comments on RT’s report on the situation and the readers comments, all RT and American blacks want to know is where is the National Guard in Oregon? Why isn’t it called out against the White militia protests as it was called out against the Black Ferguson protests?

    If protesting the murder of a young black American by Ferguson police is not legitimate and the protesters are “terrorists,” why aren’t the Oregon protestors terrorists for trying to protect jailbirds from their “lawful sentence”? This is the wrong question.

    It really is discouraging that the American black community is unable to understand that if any American can be dispossessed, all Americans can be dispossessed.

    It is also discouraging that RT decided to play the race card instead of comprehending that law is no longer a shield of the American people but is a weapon in the hands of Washington.

    Why doesn’t RT at least listen to the President of Russia, who states repeatedly that America and the West are lawless.

    Putin is correct. America and its vassals are lawless. No one is safe from the government.

  • Cologne Mayor Slammed For Telling German Women It Is Their Responsibility To Keep Rapists At "Arm's Length"

    Earlier today, we brought you an eyewitness account of the melee that unfolded in Cologne, Germany on New Year’s Eve.

    Allegedly, hundreds of 18-35 year-old males “of Arab and North African origin” robbed and sexually assaulted women gathered in the city center. Assaults were also reported in Hamburg and Stuttgart. Authorities are attempting to discern if there’s a connection.

    Ivan Jurcevic, a hotel club bouncer who was on the job (literally) in Cologne when the trouble started, had the following to say in a video posted to social media: “These people that we welcomed just three months ago with teddy bears and water bottles … started shooting at the cathedral dome and started shooting at police. Well seasoned police officers then confessed to me that they never saw something like this in their entire lives. They called it a ‘civil war like situation.'”

    Here’s an account from a woman who claims to have been a victim of an assualt:

    “The men surrounded us and started to grab our behinds and touch our crotches. They touched us everywhere. I wanted to take my friend and leave. I turned around, and in that moment, someone grabbed my bag.”

    That is of course the last thing Angela Merkel wants to hear. The Chancellor is struggling to convince Germans that Berlin’s open-door policy for Mid-East asylum seekers isn’t set to tear the country’s social fabric apart at the seams.

    For some, the events that unfolded on New Year’s Eve validate concerns about the risk Germany is running by bringing 1.1 million migrants into a country with a population of just 82 million. “Mrs Merkel, is Germany ‘colorful and cosmopolitan’ enough for you after the wave of crimes and sexual attacks?,” AfD party leader Frauke Petry tweeted.

    “Ms Merkel where are you? What do you say? This scares us!,” read a sign held by one of hundreds of protesters who gathered in the city center in Cologne on Tuesday.

    For her part, Cologne mayor Henriette Reker called the attacks “unbelievable and intolerable” but then suggested that the victims should have acted different to avoid getting themselves into trouble. She also seemed to suggest that perhaps those responsible for the attacks were simply unaware of Germany’s cultural norms.

    Now, Reker is drawing sharp criticism for her contention that women in Germany should adopt a “code of conduct” as a kind of rapist repellent.

    “In her first public appearance since the incident, Reker instructed women on how they could protect themselves,” Huffington Post writes “The proposed code of conduct included telling women to stay in groups, not be separated, always try and keep their distance and always stay an arms length away from strangers.”

    “There’s always the possibility of keeping a certain distance of more than an arm’s length – that is to say to make sure yourself you don’t look to be too close to people who are not known to you, and to whom you don’t have a trusting relationship,” she said. “Women would also be smart not to go and embrace everyone that you meet and who seems to be nice. Such offers could be misunderstood, and that is something every woman and every girl should protect herself from,” Reker continued, digging herself an even deeper hole.”

    She also advised women to not be in a celebratory mood.

    Needless to say, the comments created a veritable firestorm on social media. 

    German Justice Minister Heiko Maas was note amused: “I don’t think much of the how-to-behave tips for women such as #anarm’slength. It is not women who are responsible, but the perpetrators,” he wrote, in a tweet.

    Later, Reker would say that the media made it appear as though she was confining her prevention suggestions to women when in fact, she also had advice for would-be assailants. To wit: “We need to explain to people from other cultures that the jolly and frisky attitude during our Carnival is not a sign of sexual openness.”

    You’d be forgiven for suggesting that perhaps some German politicians are going out of their way to avoid applying negative stereotypes to migrants. 

    In any event, Germany’s “jolly and frisky” attitude toward refugees is disappearing quicker than a handbag in Cologne on New Year’s Eve and one wonders how long it will ultimately be before the public simply revolts against a government they feel is powerless to protect their property, person, and borders.

  • Enough Already! It's Time To Send The Despicable House Of Saud To The Dustbin Of History

    Submitted by David Stockman via Contra Corner,

    The recent column by Pat Buchanan could not be more spot on. It slices through the misbegotten assumption that Saudi Arabia is our ally and that the safety and security of the citizens of Lincoln NE, Spokane WA and Springfield MA have anything to do with the religious and political machinations of Riyadh and its conflicts with Iran and the rest of the Shiite world.

    Nor is this only a recent development. In fact, for more than four decades Washington’s middle eastern policy has been dead wrong and increasingly counter-productive and destructive. The crisis provoked this past weekend by the 30-year old hot-headed Saudi prince, who is son of the King and heir to the throne, only clarified what has long been true.

    That is, Washington’s Mideast policy is predicated on the assumption that the answer to high oil prices and energy security is deployment of the Fifth Fleet to the Persian Gulf. And that an associated alliance with one of the most corrupt, despotic, avaricious and benighted tyrannies in the modern world is the lynch pin to regional stability and US national security.

    Nothing could be further from the truth. The House of Saud is a scourge on mankind that would have been eliminated decades ago, save for Imperial Washington’s deplorable coddling and massive transfer of arms and political support.

    At the same time, the answer to high oil prices is high oil prices. Could anything not be more obvious than today when crude oil is hovering around $35 per barrel notwithstanding a near state of war in the Persian Gulf?

    Here’s the thing. The planet was endowed by the geologic ages with a massive trove of stored energy in the form of buried hydrocarbons; and it is showered daily by even more energy in the form of the solar, tidal and wind systems which shroud the earth.

    The only issue is price, the shape and slope of the supply curve and the rate at which technological progress and human ingenuity drives down the real cost of extraction and conversion.

    On top of that, the vast resilient forces of the free market have silently, steadily and dramatically improved the energy efficiency of the US economy.

    As shown in the long term chart below, energy consumption per dollar of GDP is only about 40% of the level which obtained when Washington’s politicians first started running around like Chicken Little, claiming that the energy sky was falling at the time of the so-called 1973 oil crisis.

    U.S. Energy Intensity, Thousand BTU per Dollar of GDP*

    Driven by the supply and demand curves of the ordinary processes of economic markets over the last four decades, therefore, the constant dollar price of oil has gone absolutely nowhere. The threat of high oil prices has been a giant myth all along.

    The red line in the chart below expresses the world crude oil price in March 2015 dollars of purchasing power. At today’s $35 per barrel it is only marginally higher than it was in 1971 before Nixon slammed shut the gold window and inaugurated four decades of central bank fueled monetary inflation.

    Inflation Adjusted Oil Price Chart

    The truth is, the long era of the so-called oil crisis never happened. It was only a convenient Washington invention that was used to justify statist regulation and subsidization of energy domestically and interventionist political and military policies abroad.

    Back in the late 1970s as a member of the House Energy Committee I argued that the solution to high oil prices was the free market; and that if politicians really wanted to cushion the purely short-term economic blow of a Persian Gulf supply interruption the easy and efficient answer was not aircraft carriers, price controls and alternative energy subsidies, but the Texas and Louisiana salt domes that could be easily filled as a strategic petroleum reserve (called SPRO).

    During the Reagan era we unleashed the energy pricing mechanisms from the bipartisan regime of price and allocation controls which had arisen in the 1970s and began a determined campaign to fill the SPRO. Thirty-five years later we have a full SPRO and a domestic and world economy that is chock-a-block with cheap energy because the pricing mechanism has done its job.

    In fact, OPEC is dead as a doornail, and the real truth has now come out. Namely, there never was a real oil cartel. It was just the House of Saud playing rope-a-dope with Washington, and its national oil company trying to do exactly what every other global oil major does.

    That is, invest and produce at rates which are calculated to maximize the present value of its underground reserves.  And that includes producing upwards of 10 million barrels per day at present, even as the real price of oil has relapsed to 50 year ago levels.

    What this also means is that Imperial Washington’s pro-Saudi foreign policy is a vestigial relic of the supreme economic ignorance that Henry Kissinger and his successors at the State Department and in the national security apparatus brought to the table decade after decade.

    Had they understood the energy pricing mechanism and  the logic of SPRO, the Fifth Fleet would never have been deployed to the Persian Gulf. There also never would have been any Washington intervention in the petty 1990 squabble between Saddam Hussein and the Emir of Kuwait over directional drilling in the Rumaila oilfield that straddled their historically artificial borders.

    Nor would there have been any “crusader” boots trampling the allegedly sacred lands of Arabia or subsequent conversion of Bin-Laden’s fanatical Sunni mujahedeen, which the CIA had trained and armed in Afghanistan, to the al-Qaeda terrorists who perpetrated 9/11.

    Needless to say, the massive US “shock and awe” invasion thereafter which destroyed the tenuous Sunni-Shiite-Kurd coexistence under the Baathist secularism of Saddam Hussein would not have happened, either. Nor would the neocon war mongers have ever become such a dominant force in Imperial Washington and led it to the supreme insanity of regime change in Libya, Syria, Yemen and beyond.

    In short, the massive blowback and episodic eruptions of jihadist terrorism in Europe and even America that plague the world today would not have occurred save for the foolish policy of Fifth Fleet based energy policy.

    Still, there is an even more deleterious consequence of the Kissinger Error. Namely, it has allowed the House of Saud, along with Bibi Netanyahu’s political machine, to egregiously mis-define the sectarian and tribal conflicts which rage in today’s middle-east.

    The fact is, there is no such thing as generic Islamic terrorism. The overwhelming share of the world’s 1.3 billion or so Sunni Muslims are not remotely interested in Jihaddism.

    Likewise, the 200 million adherents of the Shiite Muslim confession are not terrorists in any religious or ideological sense. There are about 60 million Shiite in India and Pakistan and their quarrel, if any, is rooted in antagonisms with Hindu-India, not the West or the US.

    Similarly, the 80 million Shiite domiciled in Iran, southern Iraq, southern Lebanon and the Alawite communities of Syria have been host to sporadic terrorist tactics. But these occurred overwhelmingly in response to efforts by outside powers to occupy Shiite communities and lands.

    That is certainly the case with the 20-year Israeli occupation of southern Lebanon, which gave rise to Hezbollah defense forces. It is also true of the Shiite uprisings in Baghdad and southern Iraq, which gave rise to the various militias that opposed the US occupation.

    Moreover, post-1979 Iran has never invaded anyone, nor have the Shiite communities of northern Yemen, who are now being bombarded by Saudi pilots driving US supplied war planes and drones.

    In short, there has never been a Shiite-based ideological or religious attack on the West. The anti-Americanism of the Iranian theocracy is simply a form of crude patriotism that arose out of Washington’s support for the brutal and larcenous regime of the Shah—–and which was reinforced during Iraq’s US aided invasion of Iran during the 1980s.

    By contrast, the real jihadi terrorism in the contemporary world arose almost exclusively from the barbaric fundamentalism of the Sunni-Wahhabi branch of Islam, which is home-based in Saudi Arabia.

    Yet this benighted form of medieval religious fanaticism survives only because the Saudi regime enforces it by the sword of its legal system; showers its domestic clergy with the bounty of its oil earnings; and exports hundreds of millions to jihadists in Syria, Iraq, Libya, Turkey, Iran, Egypt  and numerous other hot spots in the greater middle east.

    At the end of the day, the House of Saud is also the ultimate inspiration and financial benefactor of the Islamic State, as well. Had it not provided billions in weapons and aid to the Syrian rebels over the last five years, there would be no civil war in Syria today, nor would ISIS have been able to occupy the dusty, impoverished towns and villages of the Upper Euphrates Valley where it has established its blood-thirsty caliphate.

    So this weekend’s execution of a Saudi Shiite cleric who never owned a gun or incited anything other than peaceful protest among the downtrodden Shiite communities of eastern Arabia is truly the final straw. It was a deliberate provocation by a reprehensible regime that has so thoroughly corrupted the War Party that it even managed to have Washington shill for its preposterous appointment to head of the UN Commission on Human Rights!

    During the last several decades Washington has financed more than $100 billion of arms sales to the House of Saud. Accordingly, there is one simple way to clean the slate in the middle east and put an eventual end to Wahhabi Jihaddism.

    That is, cut off arms sales entirely to the Saudi military, which would be grounded within months due to lack of spare parts and support services. Indeed, the mere announcement would send several thousand Saudi princes and their families scurrying for their 747s and escape to Switzerland, London, New York and other fleshpots of the West.

    After an abdication by the House of Saud, the Wahhabi clerics would not long survive, and Iran and its Shiite Crescent allies, including Russia, would make short work of the ISIS caliphate.

    And whatever government emerged on the Arabian peninsula, one thing is certain. It would need to produce all the oil it can, but at least the proceeds at even today’s $35 per barrel price would have a decent chance of benefiting the nation’s 30 million citizens rather than the unspeakable opulence and decadence of a few thousand princes.

    That actually happened in Iran when the mullahs – as religiously rigid and backwards as they might be – overthrew the megalomaniacal tyrant who sat on the Peacock Throne.

    It’s time that the House of Saud found its way into the dustbin of history, as well.

  • Options Traders See Yuan Collapse Continuing In "Dangerous Situation For Policy-Makers"

    Surely, The PBOC will step in at some point and save the collapsing currency? Nope – not if options traders (and Kyle Bass) are to be believed. The odds of the yuan breaking beyond 7 to the greenback by the end of March more than doubled to 12% (from 5.8% at the start of December). Ironically, Bloomberg reports only 1 of 39 analyst predicts Yuan to trade beyond 7 by the end of 2016. The market's extremely strong conviction, and apparent PBOC loss of control is "a dangerous situation for policy-makers" according to one Asian economist.

    As Kyle Bass noted,

    "Given our views on credit contraction in Asia, and in China in particular, let's say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there's one thing that is going to happen: China is going to have to dramatically devalue its currency."

    And as Bloomberg reports, the options market agrees – signaling that the yuan’s slide to a five-year low has plenty of room to run.

    Contract prices indicate a 79 percent probability that the currency will weaken this year and 33 percent odds that it will drop beyond 7 per dollar, a level last seen in 2008, according to Bloomberg calculations. That’s up from 15 percent at the start of December and comes as the central bank shows signs of reining in its support for the exchange rate in the face of rising intervention costs and sliding exports.

     

    “We’ve seen explosive growth in demand for options betting the yuan will weaken as clients seek protection against further depreciation," said Frank Zhang, Shanghai-based head of foreign-exchange trading at China Merchants Bank Co., which trades yuan options. "The situation won’t get better until market sentiment stabilizes in the spot market, which isn’t going to happen in the next few months."

    The odds of the yuan breaking beyond 7 to the greenback by the end of March jumped to 11 percent from 5.8 percent.

    The notional value of outstanding put options carrying the right to sell the yuan at exchange rates of 7 or higher has climbed to $142 billion from $120 billion, Depository Trust & Clearing Corp. data show.

    Despite the market's sentiment, economists remain less convinced…

    Only one out of 39 analysts in a Bloomberg survey predicted a slide to 7 per dollar in 2016.

     

     

    The median estimate is for a 0.6 percent retreat to 6.6. Goldman Sachs Group Inc. said this week that it sees “limited” room for further depreciation as slumping energy prices will help boost China’s current-account surplus and offset capital outflows.

    The People’s Bank of China has been burning through its foreign-exchange reserves to prop up the yuan, with the stockpile recording its first-ever annual decline last year, as the central bank sold dollars both in the onshore and offshore markets. But since The IMF 'enabled' Chinese currency wars, support has been less obvious and the yuan has become a “one-way bet, and the market has figured out that it’s a one-way bet,” Richard Jerram, chief economist at Bank of Singapore, said at a press briefing in Hong Kong on Wednesday.

     

     

    He concludes:

    “It’s a dangerous situation for policy makers.”

    China is due to report foreign-currency reserves on Thursday, with the median estimate in a Bloomberg survey predicting a $23 billion decline in December.

  • Here We Go Again: China Halts Trading For The Entire Day After Another 7% Crash
    *CHINA STOCKS HALTED FOR REST OF DAY AFTER CSI 300 TUMBLES 7%

     

     

     

     

    Happy New Year…

     

    Crude crashes to a $32 Handle…

     

    Gold just surged to $1100…

     

    The entire Chinese stock market has been halted on half the trading days in 2016

     

    The punishment will continue until The Fed unleashes QE4!!

    *  *  *

    *CHINA STOCK SLUMP TRIGGERS TRADING HALT AS CSI 300 FALLS 5%

     

    US Equity markets are tumbling…

     

    And USDJPY is in free-fall…

     

    Someone just stepped into support the Offshore Yuan…

     

    As we detailed earlier:

    Following the collapse of offshore Yuan to 5 year lows and decompression to record spreads to onshore Yuan, The PBOC has stepped in and dramatically devalued the Yuan fix by 0.5% to 6.5646. This is the biggest devaluation since the August collapse. Offshore Yuan has erased what modest bounce gains it achieved intraday and is heading significantly lower once again. Dow futures are down 100 points on the news.

    PBOC fixes Yuan at its weakest since March 2011… with the biggest devaluation since August

     

    And Offshore Yuan collapses…

     

    This all has a worrisome sense of deja vu all over again… We have seen this pattern of money flow chaos before… Outflows surge from China, send liquidity needs spiking, which bleeds over into Saudi stress (petrodollar?), causing unwinds in major equity markets (thanks to deleveraging of carry trades) in China and then US stocks…

    Chinese stocks are opening down hard:

    • *SHANGHAI COMPOSITE INDEX FALLS 4.01%
    • *SHANGHAI COMPOSITE EXTENDS DROP TO 10% BELOW DECEMBER HIGH
    • *HANG SENG CHINA ENTERPRISES INDEX FALLS 3.03%
    • *CHINA CSI 300 INDEX FALLS 4.05%

     

     

    Hold your breath. Dow futures plunged 100 points on the news…

  • 2016 Theme #3: The Rise Of Independent (Non-State) Crypto-Currencies

    Submitted by Charles Hugh-Smith of OfTwoMinds blog,

    This week I am addressing themes I see playing out in 2016.

    A number of systemic, structural forces are intersecting in 2016. One is the rise of non-state, non-central-bank-issued crypto-currencies.

    We all know money is created and distributed by governments and central banks. The reason is simple: control the money and you control everything.

    The invention of the blockchain and crypto-currencies such as Bitcoin have opened the door to non-state, non-central-bank currencies–money that is global and independent of any state or central bank, or indeed, any bank, as crypto-currencies are structurally peer-to-peer, meaning they don't require a bank to function: people can exchange crypto-currencies to pay for goods and services without a bank acting as a clearinghouse for all these transactions.

    This doesn't just open the possibility of escaping the debt-serfdom of central and private banks–it opens the door to an entire global economy that's free of the inequality and concentration of wealth and power that is the only possible output of central bank created and distributed money.

    Max Keiser and Stacy Herbert and I discuss these possibilities in The Keiser Report: Radically Beneficial World (25:43)…

     

    Recall that central bank money is borrowed into existence, which means interest must be paid until the money is extinguished by the payment of debt.

    In effect, today's wars, bread and circuses, etc. will be paid for in perpetuity by our kids, grandkids and their kids. This is debt-serfdom. The only possible output of borrowing money into existence is debt-serfdom.

    Debt jubilees, no matter how well-intended, simply maintain the system of bank-issued money and debt-serfdom: dialing back the debt load from impossible to bearable does nothing but continue financial feudalism.

    Just printing money and distributing it to the unemployed and working poor (known as QE for the people) also doesn't change anything structurally: printing money without increasing the production of goods and services just means the flood of new money will chase the existing pool of goods and services, generating runaway inflation (see Zimbabwe, Venezuela, et al.)

    The Keynesian Cargo Cult's fetish is "demand"–meaning the "demand" created by having money in your pocket. The Keynesian Cargo Cult wrongly assumes that this "demand" will magically generate more goods and services.

    If this were true, then there would be no inflation when governments such as Zimbabwe print money with abandon: this new "demand" would magically generate more goods and services.

    But this Keynesian assumption is flat-out wrong. In reality, printing and distributing money does not guarantee a corresponding expansion of productive goods and services. The "magic" is misleading fantasy; the actual mechanism is much more complex than mere "demand."

    The second fatal flaw in the Keynesian Cargo Cult's "solution" of printing and distributing "free money" is the money ends up funding worthless or even destructive uses: bridges to nowhere, ghost cities, needless MRI tests, worthless college degrees, and so on, in essentially limitless mal-investment and waste.

    I propose instead that new crypto-currency money only be created when goods and services that are scarce in real-world communities are produced. I call this CLIME: the Community Labor Integrated Money Economy, and I describe how it works in my book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.

    This is the unsustainable world of bank/state issued money: crushing debt loads across the globe. This is debt-serfdom on a planetary scale.

    Debt serfdom is no longer the only option – A Radically Beneficial World beckons.

     

  • Gallup Explains Trump: "A Staggering 75% Of Americans Believe In Widespread Government Corruption"

    Back in July, when the HuffPo was covering Donald Trump’s campaign in its “Entertainment Section” (they are not laughing now), and when not a single political pundit thought Trump had any chance of winning the GOP primary (now most of them do), we said that “Donald Trump’s Soaring Popularity “Is The Country’s Collective Middle Finger To Washington.”

    Here is what we said:

    Donald Trump’s ascendance as the early GOP front-runner is symbolic of a greater global trend: growing pushback against institutional political and economic power.

     

    To many centrist politicians and mainstream political observers, Donald Trump is a boastful, insensitive egomaniac spouting populist rhetoric. Whether such a characterization is true is not worthy of debate, which may explain why the rantings of enraged career political pundits have no impact on Mr. Trump’s popularity among Republican voters in Iowa, New Hampshire, and across America. It seems no amount of ink or air time spent tarring and feathering Trump’s reputation sticks; in fact it seems to help Teflon Don in the polls, where he leads a crowded field of career politicians.

     

    Donald Trump is a threat not only to the nattering nabobs in the press corps and the Republican Party. His day in the sun may be symbolic of a broader dynamic: the declining power held by historically powerful institutions. Ask yourself if Trump’s campaign is making a mockery of the political process or exposing the mockery that the political process has become. A not-insignificant percentage of Americans away from the coasts, are looking past his utter lack of decorum and political savvy to hitch their wagons to his outrage.

    Six months later, virtually everyone recognizes and admits that this is the case: a vote for Trump is not “a vote for Trump”, it is a vote against the broken, corrupt, crony-capitalist model.

    Which explains why increasingly more are terrified he just may win.

    But what explains America’s revulsion with the existing system? The answer comes from the latest Gallup article: “Explaining Trump: Widespread Government Corruption” in which it finds that once the silent majority of the population can identify the object of their distrust and anger – in this case Congress and the political status quo – and once they can subsequently identify an object that represents its opposite, the latter object’s distance to the Oval Office becomes considerably shorter.

    From Gallup:

    Explaining Trump: Widespread Government Corruption

    It’s been fashionable to make jokes about Congress’ historically low approval ratings, unbelievable incompetence in the government and now, unfortunately, the perception of widespread government corruption. Pundits and talk-radio hosts have a field day with this. So do late-night comics.

    It’s not funny anymore.

    A staggering 75% of the American public believe corruption is “widespread” in the U.S. government. Not incompetence, but corruption. This alarming figure has held steady since 2010, up from 66% in 2009.

    This sense of corruption probably contributes to much of the extreme anxiety and unrest we see today – including protests, lower voter turnout and increased interest in guns.

    Guns — a symbol of freedom from government tyranny to many people — are now a key voting issue. A quarter of U.S. voters say the presidential candidate they vote for must share their view on guns.

    Protests are growing in cities and campuses all around the country. Students and citizens generally have lost faith in their national institutions — the biggest and most powerful of which is, of course, the federal government.

    The last presidential election had an estimated 5 million fewer voters than turned out in 2008, and the 2014 midterm elections saw the lowest turnout in 72 years (36.3%). At alarming levels, citizens — when invited to participate directly in their own democracy — are taking a pass and staying home. Or taking their frustrations to the streets.

    The perception that there’s widespread corruption in the national government could be a symptom of citizen disengagement and anger. Or it could be a cause — we don’t know. But it’s very possible this is a big, dark cloud that hangs over this country’s progress. And it might be fueling the rise of an unlikely, non-traditional leading Republican candidate for the presidency, Donald Trump.

    To make matters worse, that dark cloud appears to be hanging over the growth of small business, which is where virtually all new GDP growth and good jobs originate. Simply put, startups and shootups (small businesses that grow larger) have been in a death spiral. The U.S. Census Bureau reported that the total number of business startups and business closures per year crossed for the first time in 2008.

    And the economy isn’t growing nearly fast enough — it’s been running at an average rate of 2% since the 2008 financial collapse and the Great Recession. Just to compare, following the recession of 1981-1982, GDP grew for six years at 4.5% — one of our greatest economic eras in history.

    Jobs haven’t come back. According to the U.S. Bureau of Labor Statistics, the percentage of the total adult population that has a full-time job has been hovering around 48% since 2010 — the lowest full-time employment level since 1983. This is why the middle class has been dangerously shrinking.

    You don’t have to connect too many dots to conclude that if a government has an alarmingly high appearance of widespread corruption — and that same government creates regulations that businesses cite as a leading barrier to growth — then entrepreneurs might be reluctant to stick their necks out to start a business. Or to boom the businesses they already have.

    Why would they start or boom a business if they think a corrupt government is creating rules and regulations that don’t serve their interests — but rather rules that serve the interests of corrupt officials, corrupt politicians, corrupt insiders and corrupt special interest groups?

    Any wonder why so many Americans want a candidate who’s outside of that system?

  • Macy's Massacre: Thousands Fired; Guidance Slashed (Again); Weather Blamed

    It was less than two months ago when we brought to you the “Macy’s Massacre“: on November 11, the stock of the iconic retailer crashed 13% and its CDS soared after Macy’s announced a trifecta of weak data, reporting a miss on Q3 sales which came at $5.87 billion below the $6.1 billion expected, down from the $6.2 billion, as well as a plunge in comparable store sales which tumbled by 3.9%, far worse than the expected drop of -0.4%, and nearly three times as bad as the 1.4% drop a year ago.

    Cash flow plunged: cash provided by operating activities was $278 million in the first three quarters of 2015, compared with $841 million in the first three quarters of 2014.

    Finally, M also slashed its full year same store guidance down from flat to -1.8% to -2.2% with sales projected to drop -2.7% to -3.1%, compared to a previous guidance of -1%, as contrary to the propaganda, the discretionary spending of the US consumer is bad and getting worse by the day.

    Fast forward to today when the massacre is back with a vengeance, after the company not only reported yet another cut in its guidance, but also announced it would be laying off another boatload of retailers, demonstrating just how strong the “service” economy truly is.

    First, Macy’s said that its comparable sales on an owned plus licensed basis declined by 4.7% percent in the months of November and December 2015 combined, compared with the same period last year. This compares to previous, already poor guidance, of -2% to -3%. The weather was, of course, blamed.

    “The holiday selling season was challenging, as experienced throughout 2015 by much of the retailing industry. In the November/December period, we were particularly disadvantaged by the historically warm weather in northern climate zones where both Macy’s and Bloomingdale’s are especially well-represented. About 80 percent of our company’s year-over-year declines in comparable sales can be attributed to shortfalls in cold-weather goods such as coats, sweaters, boots, hats, gloves and scarves. We also continued to feel the impact of lower spending by international tourists as the value of the dollar remained strong,” said Terry J. Lundgren, Macy’s, Inc. chairman and chief executive officer.

    Compare this to Macy’s 8-K from precisely two years ago, and try not to laugh too hard:

    “poor January sales were due to the unusually harsh winter weather across much of the country. Once warm spring weather arrives and our full assortment of fresh spring merchandise is in place, we believe customers will return to a more normalized pattern of shopping.”

    So much for the comedy, now back to the tragedy for shareholders, as the company admits not even “harsh cold weather” can save it as it slashes earnings guidance…

    Macy’s, Inc. is not expecting a major change in sales trend in January and expects a comparable sales decline on an owned plus licensed basis in the fourth quarter of 2015 to approximate the 4.7 percent decline in November/December (from previous guidance of down between 2 percent and 3 percent for the fourth quarter). This calculates to guidance for comparable sales on an owned plus licensed basis in the full-year 2015 to decline by approximately 2.7 percent (from previous guidance of down 1.8 percent to 2.2 percent).

     

    Earnings per diluted share for the full-year 2015 now are expected in the range of $3.85 to $3.90, excluding expenses related to cost efficiencies announced today and asset impairment charges associated primarily with spring 2016 store closings. This compares with previous guidance in the range of $4.20 to $4.30. Updated annual guidance calculates to guidance for fourth quarter earnings of $2.18 to $2.23 per diluted share, excluding charges associated with cost efficiencies and store closings. This compares with previous guidance for earnings per diluted share of $2.54 to $2.64 in the fourth quarter. Earnings guidance for 2015 includes an expected $250 million gain on the sale of real estate in downtown Brooklyn.

    … and a tragedy for its employees, many of whom are about to be fired.

    Macy’s, Inc. today announced a series of cost-efficiency and process improvement measures to be implemented beginning in early 2016 that will reduce SG&A expense by approximately $400 million while still investing in growth strategies, particularly in omnichannel capabilities at Macy’s and Bloomingdale’s. The actions represent progress toward the company’s previously stated goal of re-attaining over time an EBITDA rate as a percent of sales of 14 percent.

    To address the need for greater efficiency and productivity, among the changes being implemented by Macy’s, Inc. in early 2016 are:

    • Adjusting staffing levels at each Macy’s and Bloomingdale’s store in line with current sales volume to increase productivity and improve efficiency. An average of three to four positions will be affected in each of Macy’s and Bloomingdale’s approximately 770 going-forward stores (out of an average workforce of approximately 150 associates in each store), for a total of about 3,000 affected associates nationwide. Roughly 50 percent of affected store associates are expected to be placed in other positions.
    • Implementing a voluntary separation opportunity for about 165 senior executives in Macy’s and Bloomingdale’s central stores, office and support functions who meet certain age and service requirements and chose to leave the company beginning in spring 2016. Approximately 35 percent of these executive positions will not be replaced.
    • Reducing an additional 600 positions in back-office organizations by eliminating tasks, simplifying processes and combining positions, with about 150 of these associates reassigned to other positions.

    Luckily, the US service economy is so very strong as Macy’s results confirm, or otherwise someone might get the idea that the “manufacturing recession is not contained.”

  • Brazil's Olympic Stadium Goes Dark Over Unpaid $250,000 Electric Bill

    Three weeks ago, in “‘Dark’” Days Ahead: Main Power Supplier For Brazil Olympic Games Pulls Out”, we brought you the latest humiliation out of Latin America’s EM darling gone bust.

    To be sure, there were already a number of concerns about the upcoming Olympic games in Rio. For instance, last summer we learned that thanks to a lack of sanitation infrastructure, Olympic athletes are almost certain to come into contact with disease-causing viruses in the water. As AP reported, these viruses in some tests “measured up to 1.7 million times the level of what would be considered hazardous on a Southern California beach.”

    Meanwhile, Brazil’s worsening budget crisis means the government is no longer willing (or able) to foot the bill for costs in excess of the Rio organizers’ budget. In other words: organizers can only spend what they estimate they’ll take in from sponsorships, ticket sales, and a grant from the International Olympic Committee.

    Unfortunately, the games are already some $520 million over budget, which means cutbacks will be necessary.

    First on the list: amenities in Olympic Village where athletes will be forced to pay for their own air conditioning and where televisions will not come standard in rooms.

    As if all of the above weren’t embarrassing enough, a major supplier of power reportedly backed out of the event last month, suggesting that in addition to unsanitary conditions and no air conditioning, athletes could well run out of energy – literally.

    As Reuters reported, “longtime Olympic power provider Aggreko has pulled out of a tender to supply generators for the games in Rio de Janeiro next year, dealing a major blow to organizers rushing to secure an energy source for the world’s largest sporting event.” Here’s what we said:

    More worrisome is that “the temporary power contract guarantees a stable and secure energy supply for international broadcasters.”

     

    Interruptions in coverage mean lost ad impressions and if advertisers and sponsors become concerned that Brazil will ultimately be unable to deliver, they could begin to rethink their commitment.

     

    Additionally, one has to wonder how long it will be before fans begin to rethink their plans to attend.

     

    After all, no one wants to go to an opening ceremony where the only light is the Olympic torch.

    Well believe it or not, the track and field stadium for this year’s games went dark on Monday due to unpaid utility bills. “In a statement, the city hall said Botafogo soccer club has been responsible for the utility bills since May 2015,” AP reports. “But the club told the AP in a statement that the city government owed it money to pay water and electricity bills.”

    “We have to find out who is responsible for the debt,” the club said.

    Yes, “we have to find out,” because the bill is a quarter of a million dollars. “The Brazilian website Globo Esporte, which is connected to the newspaper O Globo, said the unpaid bills totalled 1 million reals ($250,000),” AP continues, noting that apparently, the lights have been out since last week while the water was cut off last month. 

    “[The stadium] is the home ground of Botafogo football, which was previously responsible for the costs of running the stadium,” Sky News says. “But this month the club returned management of the arena to Brazil’s government while preparations got under way for the Olympics.”

    AP goes on to document the pitiable plight of the games’ organizers, many of whom are now unpaid volunteers who, in addition to not receiving a wage for their efforts, are actually forced to pay for their own accommodations while in Rio. 

    So not only has the provider of auxiliary power pulled out of a tender for the games, the host city is now refusing to pay the light bill for a key facility. We wonder how long it will be before Brazil “pulls the plug” (so to speak), on the whole thing.

  • ISIS – The Case For Non-Intervention

    Submitted by Roger Barris via Acting-Man.com,

    Happy Armchair Warriors

    The recent terrorist attacks in Paris and San Bernardino, California, have thrown the debate about ISIS into overdrive, particularly among the presidential candidates.  Several strands have emerged from these discussions, but I think that their taxonomy is not often clearly laid out.  I would therefore like to try to do this.

     

    This undated image posted by the Raqqa Media Center, a Syrian opposition group, on Monday, June 30, 2014, which has been verified and is consistent with other AP reporting, shows fighters from the al-Qaida linked Islamic State of Iraq and the Levant (ISIL) during a parade in Raqqa, Syria. Militants from an al-Qaida splinter group held a military parade in their stronghold in northeastern Syria, displaying U.S.-made Humvees, heavy machine guns, and missiles captured from the Iraqi army for the first time since taking over large parts of the Iraq-Syria border. (AP Photo/Raqqa Media Center)

    IS military parade in Mosul

    I think that there are three inter-related strands to the discussion, which I summarize below:

    • Military action against ISIS in Syria and Iraq
    • Protecting the border (including the related issue of profiling)
    • Data privacy

    Today, I would like to discuss the case for military action against ISIS.

    The argument here is that, in order for the world to defend itself against terrorism, ISIS must be defeated in its homeland.  ISIS must be denied territory.  This position is supported by, among the major Republican candidates, Jeb Bush, Marco Rubio and Chris Christie.

    Less clear are the positions of Donald Trump and Ted Cruz, who are both reluctant to engage in further foreign interventions, but who also make belligerent noises about ISIS.  The only candidate who is consistently and unambiguously against military escalation is Rand Paul.

    The undercard of the Republican debates, however, features the most aggressive proponent of escalation, Senator Lindsey Graham.  Graham is the only candidate in either party proposing “boots on the ground.”  He has recently reiterated this stand in an editorial in The Wall Street Journal entitled “How to Defeat ISIS Now – Not ‘Ultimately.’”

     

    john-mccain-lindsey-graham

    John McCain and Lindsay Graham: the happy warriors

    He wrote the article with his Senate colleague, and fellow happy warrior, John McCain.  Since they are such vocal advocates of escalation, let’s use their article as the standard bearer for the position. As the title implies, Senators McCain and Graham presume that defeating ISIS should be a goal of American foreign policy, a goal that they clearly link to the fight against terrorism:

    In his address on national television Sunday night, President Obama insisted that he has a strategy to destroy…ISIS.  But what Americans see instead is an incremental, reactionary, indirect approach that assumes that time is on our side.  It is not.  The danger is growing nearer: from attacks in Paris and Beirut, to the bombing of a Russian airliner, to the Islamic State-inspired shooting in San Bernardino, Calif.

    The Senators implicitly claim that only by defeating ISIS in its heartland can we protect ourselves in San Bernardino.  They apparently don’t feel that this linkage requires justification, just treating it as a self-evident truth.  But it is far from obvious that ISIS’ control of territory materially increases its willingness and ability to commit the type of attacks that we have recently seen in Paris and San Bernardino.

     

    IS

    Territory controlled by the Islamic State in Syria and Iraq as of late 2015 – click to enlarge.

     

    Interventionist Arguments

    I have seen three arguments put forth by the proponents of attacks on ISIS:

    • ISIS’ prestige is enormously enhanced by its occupation of territory and its declaration of a caliphate.  Among other things, it is a demonstration to the devout that God is on their side.  This is an essential recruiting tool for the movement.
    • ISIS uses its controlled territory to plot assaults – “Apocalyptic terrorists cannot be allowed to have sanctuary in ungoverned spaces, from which to plan attacks against the West,” to use the wording of the Senators – and train attackers.
    • ISIS uses the financial resources arising from its territory – taxes and natural resources, such as oil – to further its terrorist activities.

    These are the arguments for why ISIS must be defeated militarily in order to weaken its ability to commit acts of terror.  But there is a forth element required to make the argument complete, as  even the Senators admit.  The fourth element is that ISIS must be replaced with stable regimes that can and will permanently repress the group or any of its successors.

    Let’s examine each of these four elements in turn.

    To my mind, the validity of the first step comes down to the following question: Which is the more effective recruiting tool for ISIS, (a) the prestige of declaring and holding a caliphate or (b) the ability to point to bombs falling on Muslim brothers?  Although I cannot, fortunately, put myself in the mind of an Islamic terrorist, I don’t think that there is any doubt that (b) wins.

    It is obvious that the terrorist attacks are “blowback” against military action against ISIS.  This is clearly seen in the bombing of the Russian plane, which was only targeted after Russia commenced military action in Syria.  The terrorists in Paris were reported to have shouted references to Syria and Iraq during their spree.

     

    syria-in-ruins-16

    Syria lies in ruins – nearly every bomb dropped in the region drives more recruits into the arms of extremist groups like IS

    A recent terrorist knifing in London also involved the attacker shouting references to Syria.  I think that only the deliberately obtuse could deny that blowback anger makes a better recruiting poster than territorial occupation.

    I am equally unconvinced of the validity of the second element.  The San Bernardino terrorists, for example, were “inspired” by ISIS, but never trained nor plotted from this area.   Certain of the Paris terrorists had trained or fought in Syria, but I can’t see that this was essential to the attacks they committed.

    The reality is that these are low-tech assaults upon soft targets.  The idea that the attackers require an ungoverned sanctuary to carry out their plotting or training is nonsense.  Almost any suburban living room would serve.

     

    San Bern

    San Bernardino attackers Syed Farook and Tashfeen Malik – quite possibly inspired by ISIS, but they certainly didn’t need the self-anointed Caliphate to commit the attack. Islamist fundamentalist ideology cannot be eradicated militarily.

     

    The third argument – the financial one – is probably the strongest, but even this one fails to compel.  I repeat, these attacks are low tech assaults upon soft targets which do not require a great deal of financial support.  The San Bernardino attackers, for example, were able to fund themselves, with a little help from an online “P2P” lender .

    The attacks in France were more expensive, but even they would not have required anywhere near the financial resources of an ISIS.   Although ISIS requires state-like revenues to support its military actions, this is not true of its terrorism.

     

    The Failure of Nation-Building

    But it is with the last element that the proponents of military action against ISIS really fail to make their case.  Our experience in Afghanistan and Iraq – both places where we defeated our enemies militarily, as the proponents of military action against ISIS somehow forget – shows that we cannot win the war against ISIS unless we can also win the peace.

    Otherwise, our enemies will simply melt away, waiting for the inevitable slackening of our resolve to re-emerge, just as the Taliban have done in Afghanistan and just as the Sunni supporters of Saddam Hussein did in Iraq (before becoming, among other things, ISIS).

    Senators McCain and Graham acknowledge this in their article, which contains quotes such as:

    Iraqis must win the peace, but Americans have a major stake in their success, and a unique role to play in helping them.  The only way to do so is to be present.

    And:

    At the same time, Islamic State’s ability to spread is directly related to the collapse of political order.  Unless America does more to help these countries make the transition to just and inclusive governments, Islamic State will find havens to pursue its evil ends.

    And finally:

    So the U.S. should lead an effort to assemble a multinational force…[to] destroy Islamic State in Syria.  Such a force could also help to keep the peace in a post-Assad Syria, as was done in Bosnia and Kosovo.  Here, too, if the West wins the war and leaves, it should not be surprised if violence and extremism return.

    In other words, what the happy warriors have to offer is the same old “nation building” mantra that the neoconservatives have been chanting forever, combined with an apparent willingness to garrison these regions in perpetuity.

    And right on cue they have defaulted to Bosnia and Kosovo as the lone alleged success story for this strategy, which is in fact no success at all and where we have recently been treated to Kosovan parliamentary debates featuring tear gas attacks from the opposition, as proof of the vibrant democracy we have fostered.

    Kosovo

    Parliamentary debate, Kosovo-style: tear-gassed by the opposition.

     

    But probably the most amazing thing about the article is the total lack of proportionality.  Although tragic, the 14 deaths and 22 injuries in San Bernardino would have been, in the Detroit of my youth, about an average tally for a hot summer weekend.  Yet in response to this, Senators McCain and Graham want us to embark on a Pax Americana which has been shown to work exactly nowhere.

    Looking at this, it is hard to resist the notion that they are spoiling for a fight and since they can’t claim that ISIS is developing weapons of mass destruction, San Bernardino will have to do.

     

    Dubious Logic

    Although Senators McCain and Graham would lead us into a massive overreaction, this should not be interpreted as an endorsement of the current policy of the Obama administration (and, by extension, the proposed policy of Hillary Clinton, which is basically the same with a “no-fly zone” added to show that she is more butch than her former boss).

    Obama’s policy uses enough military action to expose us to “blowback” attacks and keep the ISIS recruiters busy, yet is insufficient to actually achieve military victory.  From the standpoint of the America’s interests, this is not as barmy as the proposals from the happy warriors, but it isn’t much better.

    It should be noted that American politicians are not the only ones pursuing this dubious logic.  Russia’s Vladimir Putin and the UK’s David Cameron have also decided that the best way to fight terrorism is to put their countries in harm’s way for more of it.

    Even Francois Hollande, on behalf of a country not known for its martial appetite, has joined in.  It is hard to see this as anything but the deplorable universal tendency for politicians to need to do something, no matter how misguided.

     

    bomb something

    The UK government’s reaction to the Paris Attacks

     

    Conclusion – We Have no Dog in this Fight

    I continue to believe, as I stated way back in September 2013, that we don’t have a dog in this fight.  San Bernardino doesn’t change the calculation.  ISIS will eventually collapse under its own homicidal and parasitical weight, probably with the help of one or more of its neighbors, whose inactivity and divisiveness we currently underwrite.

    Then ISIS will be replaced by something better…or worse…it is impossible to know in this region.  In the interim, we and our European friends should focus our efforts on isolating ourselves from the madness.  And we certainly should not go out of our way to draw further fire.

  • Sell In 1973, And Go Away

    Returns from being long the commodity super-cycle have evaporated in the last 18 months… to 42 year lows…

     

     

    h/t Sean Corrigan (@TrueSinews)

  • Guns Don't Cause Suicide

    Submitted by Ryan McMaken via The Mises Institute,

    Homicide rates in the United States have been declining for 20 years as the number of privately-held guns in the US has increased substantially.

    In some states, such as New Hampshire and Oregon, which have very weak gun laws, homicide rates are remarkably low, and these states are among the safest places on earth.

    As homicide rates have declined, however, and gun-related homicides with them, gun-control advocates have attempted to create a new category of "gun violence" by blaming suicides on access to guns.

    Most "Gun Violence" Is Suicide 

    Note this recent article from The Washington Post which casts suicide as indistinguishable from homicide, and goes on to point out that there were as many firearm related deaths in 2014 as there were deaths that resulted from automobile accidents.

    The article rightly notes that thanks to medical science and safety features on automobiles, deaths from car accidents have gone into steep decline in recent years. The article then notes that suicides have been increasing over the same period, but then attempts to connect this rise with access to firearms.

    The article never explicitly says that suicides are indistinguishable from homicides, of course — since any rational person can see a large and obvious distinction —  but it does imply the two are more  or less the same by classifying both firearm-related suicides and firearm-related homicides as "gun violence."

    Employing the usual lazy methods of mainstream journalists, The Post fails to provide hard numbers or to direct links to sources, so I'll do it for you:

    To come up with this new category of "gun violence" The Post combines the CDC's statistics of firearm suicides (a total of 21,175 in 2013) to the total of gun homicides (a total of 11,201 in 2013). Then it compares this total to the number of accidental automobile deaths, which was 33,804 in 2014. (The article claims there is new 2014 data from the CDC showing more gun deaths than automobile deaths, but the CDC web site has not been updated to reflect this.)

     

    So, overall, as of 2013, there were 32,376 gun deaths and 33,804 automobile deaths. (During that same period, about one-third of automobile deaths were alcohol-related.)

     

    So, yes, according to the CDC, the number of gun-related deaths and the number of automobile deaths are similar — but only if suicides are included.

    Contained in all of this, however, is the implied conclusion that were it not for such easy access to guns, the suicide rate in the US would be lower. This is of course pure speculation, and rather baseless speculation at that.

    More Guns, Less Suicide Than Much of Europe

    Certainly, if we compare the US to other countries, we have no reason to believe that suicides in the US are unusually common. Indeed, the US is very unremarkable in terms of suicide rates. Deborah Azrael at the Harvard Youth Violence Prevention Center has said "cut it however you want: in places where exposure to guns is higher, more people die of suicide." But, for anyone who can do arithmetic and make simple comparisons, this claim is easily shown to be bunk: 

    Source. (OECD Data.)

    The US comes in between gun-restrictive countries Sweden and Austria, and, of course, has a suicide rates far below that of Japan which is often held up as a paradise of gun-free non-violence. Korea, where privately-owned guns are nearly non-existent, has one of the worst suicide rates in the world. The US also has a suicide rate about equal to Switzerland, which in spite of its reputation as being a country of gun-toters, is estimated to have less than half as many guns per capita as the United States.

    Nevertheless, lumping suicides in with homicides is a key component of anti-gun propaganda. The Brady campaign, for example, does not employ homicide rates in its state-by-state analysis. If it did, it would find that the states with the least amount of gun control often have the lowest homicide rates. Instead, Brady relies on "gun violence" rates, which allows it to count states with rock-bottom homicide rates, like Idaho and Vermont, as states with lots of "gun violence." (In the US, altitude appears to correlate more with suicide than gun ownership.)

    This is a tricky sleight of hand maneuver, of course, since, when we're talking public policy, what people fear are homicides, not suicides.  Even Noah Smith, the Austrian-economics-hating, left-of-center finance blogger admits that classifying suicides as "gun violence" is stretching things a bit:

    With accidental gun deaths steady at around 500-600 per year, the bulk of those 32,000 "gun deaths" are suicides…In fact, murder by gun has been falling steadily since the early 1990s. Some of that is due to improvements in emergency medicine, but most is a result of the overall decline in violent crime that America has enjoyed over the last two decades. The fact that overall gun deaths has risen since 2000, despite the fall in murders, suggests that increased gun suicide has accounted for more than 100% of the increase in gun deaths. Obviously, suicide is a tragedy, and I don't want to minimize it. But people aren't panicking over suicide, they're panicking over murder, and gun-related murder is on the way down.

    (By the way, in 2013, accidental deaths by firearms was 505 (according to the CDC). That's out of a total of over 130,000 accidental deaths in a country of 300 million people. In other words, the accidental gun-deaths total is extremely small.)
     
    Won't Somebody Think of the Children? 

    But what about little Johnny? Maybe he won't commit suicide if there are fewer guns around.

    First of all, in regards to teenage suicide, we know that the United States is unremarkable in this measure as well.  In the 15-19 age group, suicides are less common in the US than in 14 OECD countries (plus Russia):

    Moreover, according to the CDC, intentional self harm (suicide) using a firearms is less likely in the lower age groups than suicide by some other means. In the 15-24 age group, for example, more suicides happen by means of something other than a firearm (6.1 per 100,000) than by firearm (5 per 100,000). This is true for all the younger age groups, and we only find that firearms suicides become more common than non-firearm suicides in the 55-64 age group or above.

    And yet, we never hear of "rope violence" or "carbon monoxide violence" or "prescription drug violence" when other methods are used for suicide.

    More alarming for parents should be the fact that deaths by prescription painkillers alone (whether suicide or accidental) totaled 16,000 in 2013.  If we include drug overdoses in general, the total balloons to 46,000 deaths (suicide and accidental) which means that government-controlled or prohibited substances account for more than twice as many deaths as gun suicides, and more than four times as many compared to gun homicides.

    Moreover, it is hotly debated as to whether or not anti-depressants might actually increase the likelihood of suicide. There are only a handful of studies on the matter, and they tend to contradict each other.

    Given the lack of knowledge over the causes of suicide, perhaps it might make more sense to take a look at why people commit suicide than to fixate on the methods people might use. This appears to be especially obvious given that lack of access to a gun clearly does not prevent the very high suicide rates in Japan and Korea.

    But, when it comes to preventing fatalities, only gun ownership is to be a topic of a "national debate."

    When a driver recently mowed down diners with her car on the Las Vegas strip, there was no call for a "national debate" over licensing of drivers. And certainly, there is no call for a "national debate" over the prevalence of deadly prescription painkillers in millions of American homes.

    Pro-Suicide, Anti-Gun

    Even more illogical is the fact that many advocates of gun control who pretend to be greatly concerned over suicide, actually applaud suicide in other contexts, and in some cases, those who claim to be advocating for fewer suicides via their opposition to guns, simultaneously will advocate for more suicide in the form of "assisted suicide" and euthanasia laws.

    When Brittany Maynard opted to kill herself rather than suffer from brain cancer, she was treated as a hero by many on the left, and "assisted suicide" has long been a project of the left, which seeks to make suicide easier. We also often hear about how "progressive" Belgium is, where the elderly and children are encouraged to embrace euthanasia.

    So, for the pro-suicide, anti-gun party, they should stop pretending to be concerned about suicide, but should instead admit that they merely object to the means of attaining it. They simply want people to die by some other method. That's fair enough, and if adults wish to contract with someone else to poison themselves, that's not the state's business. Indeed, if there are people who would prefer suicide using a third party instead of a gun, it is not legitimate for the state to prevent that. At the same time, let's stop pretending that people who applaud Brittany Maynard while decrying suicide as "gun violence" are interested in suicide prevention. They're not.

     

  • "We The People Are Pissed": New Poll Finds Whites And Republicans Are Angriest Americans

    If Donald Trump’s poll numbers tell us anything, it’s that Americans are angry.

    Angry with what they perceive to be government ineptitude, angry with the economy, angry with US foreign policy, angry with just about everything.

    The palpable sense of rage has manifested itself in support for dark horse presidential candidates like Donald Trump and Bernie Sanders and is also apparent in “incidents” like that which occurred on Saturday when armed militiamen seized a remote government building in Oregon.

    Just how mad are Americans? Very, according to a new poll conducted by Esquire, SurveyMonkey, and NBC News. Here’s the preface from Esquire:

    WE THE PEOPLE ARE PISSED. THE BODY POLITIC IS BURNING UP. AND THE ANGER THAT COURSES THROUGH OUR HEADLINES AND NEWS FEEDS—ABOUT INJUSTICE AND INEQUALITY, ABOUT MARGINALIZATION AND DISENFRANCHISEMENT, ABOUT WHAT THEY ARE DOING TO US—SHOWS NO SIGN OF ABATING. ESQUIRE TEAMED UP WITH NBC NEWS TO SURVEY 3,000 AMERICANS ABOUT WHO’S ANGRIEST, WHAT’S MAKING THEM ANGRY, AND WHO’S TO BLAME.

     


    LET’S BEGIN WITH THE BIG REVEALS: Half of all Americans are angrier today than they were a year ago. White Americans are the angriest of all. And black Americans are more optimistic about the future of the country and the existence of the American dream. There are depths and dimensions, dark corners and subtle contours to our national mood, and setting aside the issue of who actually has a right to be angry and about what—these pages are neutral territory; everyone is allowed their beef—we found three main factors shaping American rage: expectations, empathy, and experience.

    Below, find some of the highlights which include the fact that when it comes to being “pissed”, no one is angrier than white people and Republicans. “Overall, 49 percent of Americans said they find themselves feeling angrier now about current events than they were one year ago,” NBC writes. “Whites are the angriest, with 54 percent saying they have grown more outraged over the past year [while] sixty-one percent of Republicans say current events irk them more today than a year ago, compared to 42 percent of Democrats.”

    Full poll

  • Spot The Most Manipulated Market In The World

    One of these bubbles is not like the others, one of these bubbles just doesn’t belong… and yet still “officials” and talking-heads proclaim it cheap…

     

     

    Still think that China’s stock market is “stable” at these levels?

     

    Source: Bloomberg

  • That`s the Bottom in the Oil Market

    By EconMatters
     

     

      
    Clear Out Weak Hands in the Market

     

    On Wednesday the oil market sold off to $33.77 on large product`s builds, China`s devaluation of its currency, and a substantial selloff in equities. Sure Oil can go a dollar below this low, but for all intents and purposes this is the bottom in the oil selloff that was predicted for the start of the year. This move down was as predictable a move as there is in financial markets, and we called this down move to start the year with a piece we issued in December.

     

      
    500k Futures Contracts Traded on Wednesday

     

    It took over 500k in futures contracts just to push oil futures below $34 a barrel on Wednesday, and trust me it wasn`t an easy task for those involved in the pushdown. They now are stuck with being far too short the market at a level they don`t even like being stuck short. At a time when US Production is about to drop off a cliff, and the Middle East is a ticking time bomb that is about to blow up any day now. Look for a major short squeeze in the oil market over the next month as the ramifications of $34 oil play out in the market.

     

      
    Earning`s Season

     

    This entire move in equities and oil was already preplanned at the beginning of the year. Read our the market is a game piece as this was just about cleaning out the weak hands before the start of the earning`s season to make a whole bunch more money for the first quarter. Shoot the Shanghai Composite Index was up over 2% on the devaluation of the currency, yeah they took it really bad! Please this is the same old crap the players played in August, and at the end of the third quarter, and voila the market was suddenly fixed right in October just in time for Earning`s season. It’s all a game, learn how the game is played and the profits will follow my friends!

     

      
    Market Call on Record

    This is a short piece just to get our market calling for an essential bottom in the oil market in for the record. You may now go long the oil market in your preferred instrument. Just stay away from companies that are going to go bankrupt, but in buying something like the USO oil futures ETF, you will definitely have a positive expected return over the next six months to a year going forward.

    © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

  • Read The Powerful Saudi Terrorism Article Censored By Al-Jazeera

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    On December 3rd, a month before Saudi Arabia carried out it largest mass execution since 1980 — subsequently setting the region on fire — Arjun Sethi wrote an article for Al-Jazeera titled: Saudi Arabia Uses Terrorism As An Excuse for Human Rights Abuses. According to Cora Currier at the Intercept:

    Al Jazeera’s headquarters in Qatar appear to have blocked the article outside of the United States because it is critical of an ally of Qatar.

    Naturally, this makes you want to drop everything and read it. So here are some excerpts courtesy of the Intercept:

    Reports emerged last week that Saudi Arabia intends to imminently execute more than 50 people on a single day for alleged terrorist crimes. 

     

    All the convictions were obtained through unfair trials marred by human and civil rights violations, including in some cases torture, forced confessions and lack of access to counsel. Each defendant was tried before the Specialized Criminal Court, a counterterrorism tribunal controlled by the Ministry of Interior that has few procedural safeguards and is often used to persecute political dissidents. Lawyers are generally prohibited from counseling their clients during interrogation and have limited participatory rights at trial. Prosecutors aren’t even required to disclose the charges and relevant evidence to defendants. 

     

    The problems aren’t just procedural. Saudi law criminalizes dissent and the expression of fundamental civil rights. Under an anti-terrorism law passed in 2014, for example, individuals may be executed for vague acts such as participating in or inciting protests, “contact or correspondence with any groups … or individuals hostile to the kingdom” or “calling for atheist thought.” 

     

    One of the defendants, Ali al-Nimr, was convicted of crimes such as “breaking allegiance with the ruler” and “going out to a number of marches, demonstrations and gathering against the state and repeating some chants against the state.” For these offenses, he has been sentenced to beheading and crucifixion, with his beheaded body to be put on public display as a warning to others. 

     

    Because of these procedural and legal abominations, the planned executions for these Shia activists must not proceed. They should be retried in public proceedings and afforded due process protections consistent with international law, which includes a ban on the death penalty for anyone under the age of 18. 

     

    This deafening silence is not lost on Saudi Arabia and has emboldened its impunity. In the wake of the Arab uprisings, the kingdom’s brutal campaign against its Shia minority and political opposition has deepened. Shias have limited access to government employment and public education, few rights under the criminal justice system and diminished religious rights. Those who protest this discrimination face arbitrary trial and the prospect of execution for terrorism. Consider that Saudi Arabia has not carried out a mass execution for terrorism-related offenses since 1980, a year after an armed group occupied the Grand Mosque of Mecca. 

     

    Despite its appalling human rights record, Saudi Arabia was awarded a seat on the U.N. Human Rights Council last year and this summer was selected to oversee an influential committee within the council that appoints officials to report on country-specific and thematic human rights challenges. Unsurprisingly, Saudi Arabia has used its newfound power to thwart an international inquiry into allegations that it committed war crimes in Yemen.

     

    So that’s a great example of how Saudi Arabia blocks the truth within the region. Now let’s look at how it mobilizes its U.S. mercenaries to spew propaganda across mainstream media. From the Intercept:

    Saudi Arabia’s well-funded public relations apparatus moved quickly after Saturday’s explosive execution of Shiite political dissident Nimr Al-Nimr to shape how the news is covered in the United States.

    The Saudi side of the story is getting a particularly effective boost in the American media through pundits who are quoted justifying the execution, in many cases without a mention of their funding or close affiliation with the Saudi Arabian government.

     

    A Politico article about the rising tensions between Saudi Arabia and Iran by Nahal Toosi, for instance, quoted only three sources: the State Department, which provided a muted response to the executions; the Saudi government; and Fahad Nazer, identified as a “political analyst with JTG Inc.” Nazer defended the executions, saying that they served as a “message … aimed at Saudi Arabia’s own militants regardless of their sect.”

     

    What Politico did not reveal was that Nazer is himself a former political analyst at the Saudi Embassy in Washington. He is currently a non-resident fellow at the Arab Gulf States Institute in Washington, a think tank formed last year that discloses that it is fully funded by the Saudi Embassy and the United Arab Emirates.

     

    The Washington Post quoted consultant Theodore Karasik of Gulf State Analytics as saying that the executions were a “powerful message that Saudi Arabia is intent on standing up to its regional rival.” Karasik is a columnist at Al Arabiya, an English-language news organization based in the UAE and owned by Middle East Broadcasting Center, a private news conglomerate that has long been financially backed by members of the Saudi royal family. Its current chairman is Sheikh Waleed bin Ibrahim, a billionaire Saudi businessman whose brother in law was the late King Fahd. (Al Arabiya‘s coverage of the crisis is almost comically pro-Saudi, featuring headlines like “Storming embassies.. Iranian speciality.”)

     

    The U.S. government is obviously not  eager to alienate a government that President Obama has wooed with warm words and over $90 billion in arms sales. The diplomatic offensive by Saudi-financed flacks and media has provided some space for it to provide a muted response to the execution.

    Yes, you read that right. $90 billion. Make sense considering Saudi Arabia is now the world’s biggest arms importer.

  • Stocks Plunge To 3-Month Lows Amid Crude Carnage, Chinese Currency Collapse

    Ok to summarize – China has lost control of its currency (whether intentionally or not) and that is forcing carry unwinds en masse; North Korea tests a nuke; European inflation disappoints; US services economy collapses (follows manufacturing's lead and another pillar of hope is destroyed); Crude crashes to fresh decade plus lows; The Fed offers nothing in the way of hope for growth (or puts); Bernanke says not to expect Fed to save stocks; World Bank cuts global growth outlook… But apart from that, everything is awesome!!!

     

    Before we start, this happened!! Bloodbath in Yuan (offshore Yuan near record lows)…

     

    On the day, a wild ride… with the ubiquitous closing ramp

     

    Deja Deja Vu all over again…

     

    On the week – year-to-date – it appears bad news is bad news – let's just hope China doesn't open tonight eh?

     

    Note that evwerything but Nasdaq is red since the end of QE3…

     

    Post-FOMC, everything was chaotic… Gold flat, bonds up and stocks rescued…

     

    We do note the VIX-manipulation to move stocks around…

     

    Stocks are catching down to their breadth-based reality…

     

    And it's looking a lot like August again…

     

    Energy stocks plunged back to reality… who could have seen that coming?

     

    Financials are catchiung down to credit again…

     

    FANTAsy stocks were mostly lower but NFLX was ripped higher as CEO Reid Hadtings spewed some more bullshit… #netflixeverywhere – seriously!!

     

    AAPL had a mysterious massive buyer as it broke $100…

     

    Treaaury yields plunged with 7Y back under 2% and 30Y back under 3%… on the week 2s30s is now 6bps flatter

     

    The USD slipped lower after FOMC Minutes but is brioadly flat for 2 days (and up on the week)…as AUD collapses and JPY surges…

     

    Crude was clubbed, copper limped lower but PMS rallied further…

     

    Carnage…

     

    WTI Crude crashes to its lowest level since Dec 08's lows at $32.40…

     

    Charts: Bloomberg

    Bonus Chart: We have seen this pattern of money flow chaos before… Outflows surge from China, send liquidity needs spiking, which bleeds over into Saudi stress (petrodollar?), causing unwinds in major equity markets (thanks to deleveraging of carry trades) in China and then US stocks…

Digest powered by RSS Digest

Jan 06

Today’s News 6th January 2016

  • KiM JoNG BooM!

    KIM JONG BOOM

  • How Corrupt Is the American Government?

    Government corruption has become rampant:

    • Senior SEC employees spent up to 8 hours a day surfing porn sites instead of cracking down on financial crimes
    • NSA spies pass around homemade sexual videos and pictures they’ve collected from spying on the American people
    • Investigators from the Treasury’s Office of the Inspector General found that some of the regulator’s employees surfed erotic websites, hired prostitutes and accepted gifts from bank executives … instead of actually working to help the economy
    • The Minerals Management Service – the regulator charged with overseeing BP and other oil companies to ensure that oil spills don’t occur – was riddled with “a culture of substance abuse and promiscuity”, which included “sex with industry contacts”
    • Agents for the Drug Enforcement Agency had dozens of sex parties with prostitutes hired by the drug cartels they were supposed to stop (they also received money, gifts and weapons from drug cartel members)
    • The former chief accountant for the SEC says that Bernanke and Paulson broke the law and should be prosecuted
    • The government knew about mortgage fraud a long time ago. For example, the FBI warned of an “epidemic” of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this. For example, the Federal Reserve turned its cheek and allowed massive fraud, and the SEC has repeatedly ignored accounting fraud (a whistleblower also “gift-wrapped and delivered” the Madoff scandal to the SEC, but they refused to take action). Indeed, Alan Greenspan took the position that fraud could never happen
    • Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy when they were not. The Treasury Secretary also falsely told Congress that the bailouts would be used to dispose of toxic assets … but then used the money for something else entirely
    • The American government’s top official in charge of the bank bailouts wrote, “Americans should lose faith in their government. They should deplore the captured politicians and regulators who distributed tax dollars to the banks without insisting that they be accountable. The American people should be revolted by a financial system that rewards failure and protects those who drove it to the point of collapse and will undoubtedly do so again.”
    • Congress has exempted itself from the healthcare rules it insists everyone else follow
    • Law enforcement also grabs massive amounts of people’s cash, cars and property … even when people aren’t CHARGED with – let alone convicted of – any crime
    • Private prisons are huge profit-making centers for giant companies, and private prison corporations obtain quotas from the government, where the government guarantees a certain number of prisoners at any given time
    • The government covered up the health risks to New Orleans residents associated with polluted water from hurricane Katrina, and FEMA covered up the cancer risk from the toxic trailers which it provided to refugees of the hurricane. The Centers for Disease Control – the lead agency tasked with addressing disease in America – covered up lead poisoning in children in the Washington, D.C. area (the Centers for Disease Control has also been outed as receiving industry funding)
    • In response to new studies showing the substantial dangers of genetically modified foods, the government passed legislation more or less PUSHING IT onto our plates
    • Government scientists originally pushed fluoridation of water as “safe and effective” because fluoride is a major byproduct of making nuclear weapons … and the government ordered them to downplay the risks of fluoride exposure in order to prevent massive lawsuits by those suffering injury from poisoning
    • The Bush White House worked hard to smear CIA officers, bloggers and anyone else who criticized the Iraq war
    • The FBI smeared top scientists who pointed out the numerous holes in its anthrax case. Indeed, the head of the FBI’s investigation agrees that corruption was rampant
    • Warmongers in the U.S. government knowingly and intentionally lied us into a war of aggression in Iraq. The former head of the Joint Chiefs of Staff – the highest ranking military officer in the United States – said that the Iraq war was “based on a series of lies”. The same is true in Libya, Syria and other wars. Indeed, the U.S. has often launched or proposed launching wars based upon FALSE PREMISES
    • When the American government got caught assassinating innocent civilians, it changed its definition of “enemy combatants” to include all young men – between the ages of say 15 and 35 – who happen to be in battle zones. When it got busted killing kids with drones, it changed the definition again to include kids as “enemy combatants”
    • The government treats journalists who report on government corruption as CRIMINALS OR TERRORISTS. And it goes to great lengths to smear them. For example, when USA Today reporters busted the Pentagon for illegally targeting Americans with propaganda, the Pentagon launched a SMEAR CAMPAIGN against the reporters. But  journalists who act as mere cheerleaders for the government who never criticize are protected and rewarded

    The biggest companies own the D.C. politicians. Indeed, the head of the economics department at George Mason University has pointed out that it is unfair to call politicians “prostitutes”. They are in fact pimps … selling out the American people for a price.

    Government regulators have become so corrupted and “captured” by those they regulate that Americans know that the cop is on the take. Institutional corruption is killing people’s trust in our government and our institutions.

    Neither the Democratic or Republican parties represent the interests of the American people. Elections have become nothing but scripted beauty contests, with both parties ignoring the desires of their own bases.

    Indeed, America is no longer a democracy or republic … it’s officially an oligarchy. And the allowance of unlimited campaign spending allows the oligarchs to purchase politicians more directly than ever.

    No wonder polls show that the American people say that the system is so thoroughly corrupt that government corruption is now Americans’ number one fear.

    And politicians from both sides of the aisle say that corruption has destroyed America. And see this.

    Moreover, there are two systems of justice in America … one for the big banks and other fatcats … and one for everyone else. Indeed, Americans have .

    Big Corporations Are Also Thoroughly Corrupt

    But the private sector is no better … for example, the big banks have literally turned into criminal syndicates engaged in systemic fraud.

    Wall Street and giant corporations are literally manipulating every single market.

    And the big corporations are cutting corners to make an extra penny … wreaking havoc with their carelessness. For example:

    • U.S. military contractors have pocketed huge sums of money earmarked for humanitarian and reconstruction aid. And see this (whistleblowers alerted the government about the looting of Iraq reconstruction funds, but nothing was done)
    • There is systemic corruption among drug companies, scientific journals, university medical departments, and medical groups which set the criteria for diagnosis and treatment

    (Further examples here, here, here, here and here.)

    We’ve Forgotten the Lessons of History

    The real problem is that we need to learn a little history:

    • We’ve known for thousands of years that – when criminals are not punished – crime spreads
    • We’ve known for centuries that powerful people – unless held to account – will get together and steal from everyone else

    Beyond Partisan Politics

    Conservatives and liberals tend to blame our country’s problems on different factors … but they are all connected.

    The real problem is the malignant, symbiotic relationship between big corporations and big government.

  • Global Corporate Debt is Coming Unglued

    Standard & Poor’s slashed the credit ratings of 112 corporations around the globe to default (D) or selective default (SD) in 2015, according to S&P Capital IQ Global Credit. The highest number of global defaults since nightmare-year 2009, when a previously unthinkable 268 companies defaulted, and not far behind the second highest default tally of 125, in 2008.

    The oil & gas sector led with 29 defaulters (26% of the total). Metals, mining, and steel followed with 17 defaulters (15% of the total). The consumer products sector and the bank sectors tied for the third place, each with 13 defaulters (12% of the total).

    So where are the defaulters? In Russia and Brazil? The economies of both countries have been ravaged by deep recessions and other problems. They rank high on the list but the country with most of the defaulters is… the US.

    In total, 66 defaulters were US issuers, up 100% from 33 in 2014, and the highest since 2009. US defaulters accounted for 59% of the global total. Some of this dominant share of defaulters can be attributed to the size of the US economy and the enormous size of its credit market. But the US is also the epicenter of oil & gas defaults, with contagion now spreading to other sectors.

    An indication of what’s coming in 2016 is the Standard & Poor’s Distress Ratio. It’s the proportion of junk-rated bonds with yields that exceed Treasury yields by at least 10% (option-adjusted spread). And this Distress Ratio soared in December to 24.5%, up from around 5% in 2014. There are now 437 bond issues tangled up in the ratio:

    US-SP-Distress-ratio-2013-2015

    Of those 437 bond issues in the Distress Ratio, 127 have been issued by oil & gas companies. The metals, mining, and steel sector has 71 bond issues in the ratio. The remaining 239 issues are spread over other sectors. And a number of these distressed issuers will default down the line. So defaults in the US are likely to get even uglier in 2016.

    Emerging Markets were in second place with 25 defaulters, up from 15 in 2014 and the highest since 2009, according to S&P Capital IQ Global Credit, “owing largely to a credit spillover effect of the increasingly unfavorable geopolitical climate in Brazil and Russia.” Brazil sported eight defaulters, and Russia seven, thus occupying the second and third country-rank behind the US.

    In Europe, where QE and negative yields are raging, S&P downgraded 16 issuers to default, up 167% from 2014, despite the current monetary policies that should make defaults virtually impossible. The remaining 5 defaulters were spread over other developed nations (Australia, Canada, Japan, and New Zealand):

    Global-corporate-defaults-2004-2015

    There are different reasons companies can be downgraded to D or SD. Of the 112 defaulters, 36 (or 32% of the total) undertook “distressed debt exchanges,” a favorite extortion method in the US oil & gas sector, whereby the company tells investors to swap existing bonds for new bonds with a huge haircut, or risk an even worse fate in bankruptcy court. This tool is becoming increasingly popular: in 2015, 32% of defaults were distressed debt exchanges, up from 23% in 2014.

    Another 32 defaulters failed to make interest or principal payments, while 22 filed for bankruptcy. Among the remaining defaulters, 11 were the result of regulatory interventions.

    Standard & Poor’s global “weakest links” – companies on the lower end of the junk-bond spectrum most in danger of defaulting – reached 195 in December, the highest since March 2010 (when there were 203), representing $234 billion in rated debt, with oil & gas in first place and financial institutions (!) in second place:

    Drops in oil prices affected the profitability of oil and gas companies, where spreads have widened considerably. This spread expansion has had a spillover effect upon the broader range of speculative-grade rated firms, where spreads have widened considerably leading to increased default risk.

    What’s next in the US? Standard & Poor’s upgraded 18 companies with total debt of $49 billion, but downgraded 60 companies with a breath-taking total debt of $1.3 trillion (with a T).

    So 2015 ended on an ugly note. But there is still no crisis of any kind. Yes, the price of commodities has collapsed, but money is still nearly free for high-grade borrowers. Numerous governments and corporations can borrow at negative yields, thus getting paid to borrow, a central-bank engineered absurdity. And many more can borrow below the rate of inflation – i.e. for free. And yet, defaults are surging.

    And it’s just the beginning.

    The non-dollar world has piled on nearly $10 trillion in dollar-denominated debt, betting that the dollar would never rise, and that US interest rates would stay low. But the dollar has soared and US interest rates are rising. The last time this happened was 1997. It triggered massive currency outflows from those countries and all kinds of crises, including the big one at the time, the Asian Financial Crisis, according to the economists at National Bank of Canada, who added, “It would be foolish to rule out a similar if not a more devastating outcome.” Read… What Will Knock the Dollar off its Perch?

  • "Presidentialism" Not Serving American Politics Well

    Authored by Ben Tanosborn,

    Here we are heralding the entrance of a new year with myriad problems confronting us; some problems appearing as daily spoken realities – those principally dealing with the economy, war and terrorism; others, subliminally present, silenced by national choice – such as bigotry, an ever-expanding income-wealth inequality and the prospect of a world without US economic and military hegemony.  The subliminal topics appearing as taboo, where neither government nor most of us dare go or openly discuss.  We are ushering 2016 as yet another presidential election year where once again our once reliable presidential system is demonstrating its incapacity to reach political consensus in a diverse nation where the preponderance of voters is no longer centrist “across the board” as in generations past.  

    Results from Spain’s December 20 general election brought both reality and questions which had been accosting me from my early days of inquiry about politics to my current cynicism which defines the idea of democracy, and self-governance, as just a placebo prescribed by those elites who alternatively rule over us in this United States.

    I go back to my teen years when I first questioned which system of government, within the context of democracy, would probably be best: Parliamentarism or Presidentialism. And I recall choosing one over the other depending on my political feelings at that time.  Now, after years of swinging back and forth, I am about to reach the conclusion, this time permanently, without the residue of reservations that I had in the past, that at least in this 21st Century America, Presidentialism is not serving us well; and that, braiding it with our insufferable two-party, money-lubricated, political machine has placed us among the worst governed major nations on earth – something which our false pride and concomitant ignorance refuse to acknowledge time and again.  Pride and ignorance which have nurtured cancerous instincts in conflict with world peace and brotherhood through militarism, bigotry, jingoism, and a shameful enjoyment of our “empire-feel”; perhaps a great outcome for the ruling elites of the nation but a sorry aftermath for a commoner citizenry which has been profoundly deceived.

    A most interesting new approach to American politics has resulted for me from Spain’s recent elections, something which can only happen, or be invited to happen, under Parliamentarism.  Instead of the customary two major political forces that usually vie for absolute power, the People’s Party or Partido Popular (PP) – most often tagged as center-right in the right-left political spectrum, and the Socialist Workers’ Party or Partido Socialista Obrero Español (PSOE) – center-left deceivingly misnamed by appropriating the terms workers and socialist, there were two other major political parties of new vintage sculpted from recent popular movements sprouting from both the left and a “modified center”: We Can (Podemos) and Citizens-Party (Ciudadanos).

    In the past, much in the fashion of Republicans and Democrats in the US, PSOE and PP alternated holding the reins of power – notwithstanding the required coalitions in two nationalistic (separatist) regions: the autonomous communities of Catalonia and the Basque Country.  In a political patronage-prone culture such as Spain, this system of spoils under the two-party yoke has always kept the level of economic corruption high; but as austerity measures were imposed to cope with the most recent world recession, citizen-democracy became invigorated, thus the advent of two new political formations, Podemos and Ciudadanos, for the most part carved from the membership in the two “now-is-my-turn” ruling parties.

    Now, after the vote of the 73 percent turnout has been counted, there are not just two but four political forces vying for power, where coalition-consensus will win the day for a new government to emerge: PP with 29 percent of the popular vote and 123 (35%) seats in the Cortes; PSOE, tallying 22 percent and 90 (26%) seats; Podemos gathering 21 and 69 (20%) seats; Ciudadanos with 14 percent and 40(11%) seats; and multiple other parties together garnering the other 14 percent of the popular vote and the remaining 28 seats in the 350-member Cortes.  Under a parliamentary system where no winner takes it all, Spain will have to reach political compromise and stability in a democratic consensus government.  Something expected to happen, accommodating the sound of all major voices.

    These four political forces in Spain bring to mind that our presidential system of winner-take-all will be trying to squeeze in perhaps more than half dozen socio-political forces in the United States, all without coalition or compromise, under the umbrellas held by our “faithful and reliable” Tweedledee and Tweedledum political parties.

    Evangelicals, Tea-partiers, Progressives, Libertarians, Ghettofied Blacks, Unionized Labor, and other groups will be tapped and lured by the career politicians in the two parties to receive their financial support and vote, in most instances without political voice… only the prospect that their vote will bring about a government that will provide “the lesser of two evils,” a proposition that the American electorate has, erroneously, accepted as a political act of faith.

    Our system of Presidentialism may have served us well in the past but its rigidity in the political process denies the multiple voices that need to be heard in a democracy, nor offers the required tools for political compromise.  Sadly… here we are, stepping into 2016 with the possible political prospect of having to elect as chief executive of this nation either a lady with questionable trust-credentials or a boisterous charlatan.

    May the Almighty have mercy on us in 2016!

  • North Korea Confirms It Conducted "Successful Hydrogen Bomb Test" As "Act Of Self-Defense" Against US

    North Korea has confirmed that it has "successfully tested a hydrogen bomb." The test was "an act of self-defense" against threats like the US.

     

    This is the 3rd test during Obama's administration…

     

     

    As we detailed earlier…

    A 5.1-magnitude earthquake detected near North Korea’s nuclear test site appears to have been artificial, according to South Korea’s meteorological service, raising the prospect the isolated regime tested a nuclear device. As Bloomberg reports, the "earthquake" follows North Korea’s threat in September that it is ready to use atomic weapons against the U.S. at any time and that its main nuclear facility was fully operational. The Pentagon is reportedly "looking into" the quake reports.

    Coincidence?

    As AP reports,

    South Korean officials detected an "artificial earthquake" near North Korea's main nuclear test site Wednesday, a strong indication that nuclear-armed Pyongyang had conducted its fourth atomic test. North Korea said it planned an "important announcement" later Wednesday.

     

    A confirmed test would mark another big step toward Pyongyang's goal of building a warhead that can be mounted on a missile capable of reaching the U.S. mainland.

     

    The U.S. Geological Survey measured the magnitude of the seismic activity at 5.1 on its website. An official from the Korea Metrological Administration, South Korea's weather agency, said it believed the earthquake was caused artificially based on their analysis of the seismic waves and that it originated 49 kilometers (30 miles) north of Kilju, the northeastern area where North Korea's main nuclear test site is located. The country conducted all three previous atomic detonations there.

     

    South Korean government officials couldn't immediately confirm whether a nuclear blast or natural earthquake had taken place.

     

    North Korea conducted its third nuclear test in February 2013.

     

    Another test would further North Korea's international isolation by prompting a push for new, tougher sanctions at the United Nations and worsening Pyongyang's already bad ties with Washington and its neighbors.

     

    Pyongyang is thought to have a handful of crude nuclear weapons. The United States and its allies worry about North Korean nuclear tests because each new blast brings the country closer to perfecting its nuclear arsenal.

     

    Since the elevation of young leader Kim Jong Un in 2011, North Korea has ramped up angry rhetoric against the leaders of allies Washington and Seoul and the U.S.-South Korean annual military drills it considers invasion preparation.

    *  *  *

    South Korea is responding:

    “We are checking whether this is indeed a nuclear test or something else,” said a spokesman of the South’s Defense Ministry, who spoke on customary condition of anonymity.

    • *S. KOREA TO CONVENE NATIONAL SECURITY MEETING AT 12PM: YONHAP
    • *BOK TO HOLD MEETING AT 2 P.M. LOCAL TIME TO DISCUSS N. KOREA

    *  *  *

    It appears Kim has had enough playing second geopolitical pain-in-the-ass fiddle to Syria so decided to get back in the headlines.

    Ironic really after Kim Jong-Un's "fabulous" year.

     

    Various twitter sources report that North Korea is due to make an "important announcement" at 2230ET.

  • Visualizing How The Global Economy Played Out In 2015

    Many people start a new year with renewed optimism. However, "New Year, Same Problems" is the meme of 2016… and recent trading has dashed some of that optimistic 'This time it's different' hope.

     

     

    Courtesy of: Visual Capitalist

     

    NEW YEAR, SAME PROBLEMS

    Most investors and central bankers find themselves between a rock and a hard place to start 2016.

    The Federal Reserve finally raised rates in December, but mainly in the interest of preserving credibility.

    While unemployment itself has looked good enough and there has been some wage growth, the labor force participation is at 62.5%, which is essentially its lowest mark since 1977. Meanwhile, the stock market has been volatile, junk bonds have been hammered, and manufacturing contracted in December at the fastest pace in the U.S. in more than six years.

    Most major central banks still have rates close to zero, which gives little policy ammunition for any additional stimulus. The flipside of these record-low rates has been soaring (or extremely bubbly) asset prices that have failed to trickle down to Main Street.

    A slowing China and general oversupply has led to slumping commodity prices.

    Oil has been hammered down to its lowest price since 2003. Copper is trading at $2/lb, which is comparable to its price during the Financial Crisis. These low input prices, in theory, are great for consumers and manufacturers. In reality, however, they usually mean that economic growth is grinding to a halt.

    It’s hard to say where markets will turn in 2016, but for now it will continue to be much of the same volatility until the picture becomes clearer.

    Original graphic by: The Straits Times

  • Central Bank Money Printing – The Rotten Philosophy That Lies Beneath

    Submitted by Richard Ebeling via The Future of Freedom Foundation,

    If advocates of freedom were to make up a list of New Year’s resolutions for 2016, one of the most important items should be ending government’s monopoly control over money. In a free society, people in the marketplace should decide what they wish to use as money, not the government.

    For more than two hundred years, practically all of even the most free market advocates have assumed that money and banking were different from other types of goods and markets. From Adam Smith to Milton Friedman, the presumption has been that competitive markets and free consumer choice are far better than government control and planning – except in the realm of money and financial intermediation.

    This belief has been taken to the extreme over the last one hundred years, during which governments have claimed virtually absolute and unlimited authority over national monetary systems through the institution of paper money.

    At least before the First World War (1914-1918) the general consensus among economists, many political leaders, and the vast majority of the citizenry was that governments could not be completely trusted with management of the monetary system. Abuse of the monetary printing press would always be too tempting for demagogues, special interest groups, and shortsighted politicians looking for easy ways to fund their way to power, privilege, and political advantage.

    The Gold Standard and the Monetary “Rules of the Game”

    Thus, before 1914 the national currencies of practically all the major countries of what used to be called the “civilized world” were anchored to market-based commodities, either gold or silver. This was meant to place money outside the immediate and arbitrary manipulation of governments. Any increase in gold or silver money required private individuals to find it profitable to prospect for it in various parts of the world; mine it out of the ground and transport it to where it might be refined into usable forms; and then mint part of any new supplies into coins and bullion, with the rest made into various commercial and industrial products demanded on the market.

    The paper currencies controlled by governments and their central banks were supposed to be issued only as claims to – as money substitutes for – quantities of the real gold or silver money deposited by members of the society in banks for safekeeping and the convenience of everyday business in the marketplace.

    Government central banks were meant to see that the society’s medium of exchange was properly assayed and minted, and to monitor and police private banks and itself to make sure that the “rules” of the gold (or silver) standard were properly followed.

    Bank notes were to be issued or deposit accounts increased in the banking system as a whole only when there had been net additions to the quantity of the commodity money within the economy. Any withdrawals of the commodity money from the banking system was to be matched by a decrease in the total quantity of bank notes in circulation and in deposit accounts payable in money.

    Did government’s always play by these “rules”? Unfortunately, the answer is, “No.” But, by and large, in the half-century or so before the beginning of the First World War, governments and their central banks managed their national currencies with surprising restraint.

    If we look for a reason for this restraint, a leading one was that for a good part of this earlier era the predominant set of ideas was that of political and economic liberalism. But we need to remember that at that time “liberalism” meant an advocacy and defense of individual liberty, secure private property rights, free markets, free trade, and limited government constitutional under impartial rule of law.

    But, nonetheless, these national currencies were government-managed paper monies linked to gold or silver by history and tradition, and more or less left fairly free of direct and abusive political manipulation, due to the prevailing political philosophy of the time that considered governments as protectors of individuals’ rights to their lives, liberty and honestly acquired property.

    Political Paternalism and Monetary Central Planning

    However, in the decades leading up to the First World War the political trends began to change. New ideals and ideologies started to appear and gained increasing hold over people’s minds. The core conception was a growing belief in the necessity for and the good that could come from political paternalism. Government’s were not simply to be impartial “umpires” who enforced the rule of law and protected people and their property from violence and fraud. No, government was to intervene into the social and economic affairs of men, to regulate markets, redistribute wealth, and pursue visions of national greatness and collective welfare.

    This meant a change in the political philosophy behind the government’s control of the monetary system, as well. In the decades after the First World War, in the 1920s, 1930s, and 1940s, the government monetary managers increasingly became monetary central planners. The central bankers were to manipulate the supply of money and credit in the economy to achieve various goals: stabilize the price level; maintain full employment; peg or change foreign exchange rates; lower or raise interest rates to influence the amount and the types of investments undertaken by private borrowers and investors; and, whenever and however necessary, increase the quantity of money to fund government deficits needed by politicians and interest groups to feed their insatiable appetite for power, privilege and political plunder.

    The triumph of Keynesian Economics in the post-World War II period resulted in a near monopoly of academic and public policy advocates who argued that private enterprise was inherently unstable and frequently unfair, and could only be allowed to exist and function in a wider environment of dominating government control. The consequence was a government constantly increasing in size, scope, and pervasive supervision and intrusion into every corner of personal, social, and economic life.

    Big Government, Big Spending and the Monetary Printing Press

    But big governments cost big sums of money. About a hundred years ago in America, in 1913, all levels of government combined – Federal, state, and local – absorbed only around eight percent of the nation’s income and output. Today, all levels of government seize nearly fifty percent of all that is earned and produced in the United States. That cost of government is even more if we add the financial burdens imposed on private enterprise to comply with the strangling spider’s web of regulations and controls imposed on businessmen going about their business.

    During the seven years of the Obama Administration, the Federal government has accumulated over eight trillion dollars in additional debt. About at the same time, the Federal Reserve – America’s central bank – had created around four trillion dollars of new money in the banking system. In other words, the Federal Reserve has, in fact, produced out of thin air a sum of new money equal to fifty percent of all the Federal government has borrowed during this period.

    The economics textbooks usually sanitize this type of process with a sterile terminology that calls it, “monetizing the debt.” An earlier generation of economists and critics of political paternalism used to call this process paper money inflation and debauchery of the currency: the diluting of the value of the money in people’s pockets through monetary depreciation and currency devaluation.

    Political Demagogy, Fiscal Burdens and the Danger of Inflation

    As a result of the growth of the modern welfare state, America and the other major Western countries of the world have become, in the words of the late Nobel Prize-winning economist, James Buchanan, perpetual democracies in deficit, funded in total or in good part by, now, trillions of dollars created by government monetary monopolies – the central banks.

    Today, we are reaping the whirlwind of decades of political paternalism and monetary central planning. Nations like Greece have been at the edge of financial bankruptcy and debt default. And countries like the United States, which are woven tightly with networks of special interest groups living off the redistributed plunder of other more productive members of society, seem to regularly lurch from one fiscal crisis to another. The current politics of redistributive paternalism seems to offer little way to stop the worsening avalanche of massive annual deficits and mounting national debt.

    The demagogues and political tricksters harangue about “soaking the rich” to fund the unfunded “entitlements” of social security and Medicare through the rest of the 21st century. They demand that “big business” pay for the government’s misguided economic policies and to cover the costs of other parts of the welfare state.

    The politicians of plunder have also taken recourse to that last refuge of every political scoundrel: a call to “patriotism.” It is your duty as a “good citizen” to pay an increasingly higher and higher “fair share” in taxes; to cooperatively be subservient and obedient to the demands and needs of government; and to sacrifice your freedom and the fruits of your own hard-earned honest labor for “the national interest” and “the common good.”

    It is worth remembering that those in the political arena who claim to know what is in “the national interest” and for “the common good” are the same ones who also assert the right to compel you to conform to their vision of a “just” and “fair” America, regardless of much you may honestly disagree or desire to peacefully go your own way.

    A central tool for governments to maintain their authority in society and their control over people’s lives is the ability to make the citizenry accept and use their monopoly medium of exchange. This is a lynchpin in the government’s ability to transfer the people’s wealth and privately produced output to satisfy the “needs” of government spending.

    It makes each and every citizen an existing and potential victim of government abuse of the monetary printing press, since paper currencies are no longer in anyway linked to or limited by a market-based supply of a real commodity such as gold or silver. We should not presume that runaway hyperinflations and the accompanying destruction of a society’s medium of exchange only occur in places like 1920s Germany or contemporary African nations like Zimbabwe. That, “it can’t happen here.” It can happen anywhere.

    The Bankruptcy of the Welfare State and Redistributive Dependency

    The fact is, the modern welfare state is bankrupt. It is bankrupt ideologically; no one really any longer believes that the Interventionist- Redistributive State will bring mankind material happiness or social harmony. Everyone knows that it is nothing more than a vast and corrupt political machine through which, as Frederic Bastiat said long ago, everyone tries to live at everyone else’s expense.

    In the process, the productive capacity of the society slowly grinds to a halt, as more and more people turn from productive self-responsibility to redistributive dependency. It also generates a mental attitude and a political presumption of legitimacy to that redistributive dependence that pervades each and every income group and social category throughout the nation.

    Most opinion polls show that a fairly sizable majority of the American people think that government is too big, spends too much, and taxes far too excessively. But once the questions turn to “specifics” of cutting particular government programs, it is soon seen how the tentacles of the welfare state reach into virtually everyone’s pocket.

    It is not only that government taxes people in varying amounts to feed the redistributive process. It is also the case that there are few people in the land who do not have some type of money, program, or benefit put into their pockets by government. Most people cannot imagine living without their government redistributive “fix.” And, admittedly, breaking people’s addiction to their government benefits, subsidies, protections, and special favors would and will involve serious withdrawal pains.

    This also means that the welfare state is rapidly reaching financial bankruptcy, as well. Neither taxation nor borrowing of private savings can or will be able to cover all the costs of current and future government spending under existing interventionist and redistributive legislation and regulation.

    The government may very well, therefore, use its most important financial resource to keep moving the wheels of political spending. They may more and more turn the handle of the monetary printing press, and they may turn it faster and faster.

    Hyperinflations and Opting Out of Government Monopoly Money

    Time after time, history has demonstrated that when serious price inflations move into disastrous hyperinflations, people first discount and then abandon the government’s monopoly money. They shift into alternative currencies of choice that they consider more stable, more predictable, and more wealth and income preserving that the increasingly worthless pieces of paper money that their own government spews out in increasing quantities.

    Now such a monetary disaster is not preordained. It is not written in some “big book” in the sky. Governments and societies have in the past pulled back and stopped short of following a path leading to social and economic ruin. America, too, may yet slow down or bring to a halt the political course it is currently traveling. The future is unpredictable and trends have changed many times in the past.

    But . . . forewarned is forearmed. So how might any of us be able to shelter ourselves from the possible coming fiscal and monetary storms? Central to such precautionary actions is to hedge against the possible radical depreciation and or even destruction of the government’s currency.

    To the extent that one sees such a danger and has the financial wherewithal to “plan ahead,” individuals should be legally allowed to opt-out of the government’s monopoly money. In other words, every American should be free from the government’s power to compel its citizens to use and accept in trade and in settlement of debts its own monopoly money.

    We should not be lulled into a false sense of currency security due to the low rate of price inflation as measured by the Consumer’s Price Index, or the declared fears of “price deflation” mostly resulting from the steep declines in some important commodity prices such as the cost of a barrel of crude oil. These things, in the right circumstances, can turn around faster than is often imagined.

    F. A. Hayek and Choice in Currency

    Everyone should be free to choose the currency or commodity they wish to hold and use as a medium of exchange without legal restriction, penalty, or political prejudice.

    Monetary freedom would not only give every citizen a legal right to protect and secure his income, wealth and market transactions from abusive mismanagement of the government’s monopoly monetary printing press. It could also serve as a check on the degree of such government abuse.

    A little more than forty years ago, in September 1975, Austrian economist and Nobel Laureate, Friedrich A. Hayek, delivered a lecture on, Choice in Currency: A Way to Stop Inflation, in Lausanne, Switzerland, and said:

    There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence. Nor could there be a stronger inducement to governments to ensure the stability of their money than the knowledge that, so long as they kept the supply below the demand for it, that demand would tend to grow. Therefore, let us deprive governments (or their monetary authorities) of all power to protect their money against competition: if they can no longer conceal that their money is becoming bad, they will have to restrict the issue.

     

    Make it merely legal and people will be very quick indeed to refuse to use the national currency once it depreciates noticeably, and they will make their dealings in a currency they trust.

     

    The upshot would probably be that the currencies of those countries trusted to pursue a responsible monetary policy would tend to displace gradually those of a less reliable character. The reputation of financial righteousness would become a jealously guarded asset of all issuers of money, since they would know that even the slightest deviation from the path of honesty would reduce the demand for their product.

    Taking away from the government its power of compelling the citizenry to accept money that it monopolistically controls and abuses may serve as an important legal and economic change to force the government and those who live at its spending trough to face the reality of the welfare state’s ideological and fiscal bankruptcy before it is too late to avert a complete collapse of the society.

    Choice in currency may be a valuable avenue for helping to restore the American tradition and practice of individual rights, free markets, and limited government under the rule of law. And it can be an important legacy for our children and grandchildren, so they may, hopefully, live out their lives in more liberty for the remainder of the twenty-first century.

     

  • Dow Futures Plunge 170 Points After Yuan Crashes To 5-Year Lows As PBOC Loses Control

    Dow futures are down over 170 points from the cash close, testing the lows of the day following carnage in the Chinese currency markets. Despite the biggest drop in onshore Yuan since August devaluation, Offshore Yuan has collapsed to its lowest since September 2010. What is more worrisome (or positive for Kyle Bass) is that the spread between onshore and offshore Yuan has blown out to 1250 pips – a record – indicating dramatic outflows and/or expectations of further devaluation to come.

    Yuan is in free-fall… Offshore Yuan is down over 400 pips from intraday highs, testing 6.6800

     

    CNH-CNY spread is now over 1320 pips – as it appears The PBOC is losing control.

    And although Chinese stocks are "stable" thanks to some National Team play…

     

    US equity futures are tumbling off the bounce close, trading back near the day's lows…

     

    It appears Kyle Bass was right:

    "Given our views on credit contraction in Asia, and in China in particular, let's say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there's one thing that is going to happen: China is going to have to dramatically devalue its currency."

    And it is – sanctioned by The IMF…

     

    Charts: Bloomberg

  • China Set To Establish No-Fly Zone Over Islands After Successful Test Flight

    When last we checked in on the dispute over Beijing’s land reclamation efforts in the South China Sea, several dozen protesters from the Philippines were camped out on Pagasa island in a demonstration aimed at raising awareness of what they say is an illegal occupation of the Spratlys.

    To let China tell it, it’s the other way around.

    That is, the Filipino troop presence in the archipelago represents an illegal occupation of territory that belongs to Beijing and China would be well within its rights to forcibly expel the occupying army.

    The entire dispute centers around China’s construction of some 3,000 acres of new sovereign territory atop reefs in disputed waters. Although other countries have undertaken similar efforts, Beijing’s project is by far the most ambitious and Washington’s regional allies fear China is attempting to build what amount to a series of forward military operating bases in the Spratlys. The argument over the new islands reached a crescendo in October when the US sent a warship to the region in what Washington called a “freedom of navigation” exercise but what was, in reality, a show of force.

    For those unfamiliar with the history here, the alarm bells didn’t start ringing in earnest until April, when satellite images showed China was building a runway on Fiery Cross reef. The 10,000 foot airstrip is long enough to accommodate fighter jets and surveillance aircraft and has been variously described as “a game changer” and an effort to “vastly expand China’s zone of competition with the US.” Here’s a look at the runway in question when it was one-third complete:

    On Saturday, Beijing tested the runway for the first time, a move which drew sharp criticism from the islands various claimants. Vietnam, for instance, has filed a formal diplomatic complaint. 

    “China’s first landing of a plane on one of its new island runways in the South China Sea shows Beijing’s facilities in the disputed region are being completed on schedule and military flights will inevitably follow,” Reuters writes, adding that “China’s increasing military presence in the disputed sea could effectively lead to a Beijing-controlled air defence zone, ratcheting up tensions with other claimants and with the United States in one of the world’s most volatile areas.” Here’s more:

    Vietnam said the plane landed on Jan 2 and launched a formal diplomatic protest, while Philippines Foreign Ministry spokesman Charles Jose said Manila was planning to do the same. Both have claims to the area that overlap with China.

     

    “That’s the fear, that China will be able take control of the South China Sea and it will affect the freedom of navigation and freedom of overflight,” Jose told reporters.

     

    In Washington, State Department spokesman John Kirby said China’s landing of the plane “raises tensions and threatens regional stability.”

     

    Senator John McCain, the chairman of the influential U.S. Senate Armed Services Committee, criticised the Obama administration for delaying further “freedom of navigation” patrols within 12 nautical miles of the islands built by China.

     

    China has been building runways on the artificial islands for over a year, and the plane’s landing was not a surprise.

     

    The runway at the Fiery Cross Reef is 3,000 metres (10,000 feet) long and is one of three China was constructing on artificial islands built up from seven reefs and atolls in the Spratlys archipelago.

     

    The runways would be long enough to handle long-range bombers and transport craft as well as China’s best jet fighters, giving them a presence deep into the maritime heart of Southeast Asia that they have lacked until now.

     

    The airfield on Fiery Cross Reef will serve to “significantly” cut travel time between the Spratly islands and mainland China, the official Xinhua news agency reported, citing a top engineer from the transport ministry.

     

    Foreign ministry spokeswoman Hua Chunying said at the weekend that the test flight was intended to check whether the runway met civilian aviation standards and fell “completely within China’s sovereignty”.

     

    Asked about McCain’s remarks on Tuesday, she said: “We hope the U.S. can take an objective and fair attitude, and not make statements that confuse the situation and are harmful to regional peace and stability,” she said.

    Right. So once again, both sides are accusing the other of jeopardizing “regional peace and stability.” And while Beijing insists the airstrip is being tested for civilian purposes, analysts say it’s just a matter of time before fighter jets touch down on Fiery Cross. “The next step will be, once they’ve tested it with several flights, they will bring down some of their fighter air power – SU-27s and SU-33’s – and they will station them there permanently,” Leszek Buszynski, a visiting fellow at the Australian National University’s Strategic and Defence Studies Centre says. “That’s what they’re likely to do.”

    After that, China will effectively establish a no-fly zone according to Ian Storey, a South China Sea expert at Singapore’s ISEAS Yusof Ishak Institute. “As these facilities become operational, Chinese warnings to both military and civilian aircraft will become routine,” Storey said. “These events are a precursor to an ADIZ, or an undeclared but de facto ADIZ, and one has to expect tensions to rise,” he says.

    If that’s the case then the ball is now back in Obama and Abe’s court. Pressure will now mount for the US and Japan to take concrete steps to deter China from effectively seizing control of key shipping lanes through which some $5 trillion in global trade passes each year. How far Washington is willing to go to beat back Xi’s ambitious maritime powerplay is as yet unclear, but if the past is any guide, you can expect The White House to err on the side of cowardice caution.

  • Will Mideast Allies Drag Us Into War?

    Submitted by Patrick Buchanan via Buchanan.org,

    The New Year’s execution by Saudi Arabia of the Shiite cleric Sheikh Nimr Baqir al-Nimr was a deliberate provocation.

    Its first purpose: Signal the new ruthlessness and resolve of the Saudi monarchy where the power behind the throne is the octogenarian King Salman’s son, the 30-year-old Defense Minister Mohammed bin Salman.

     

    Second, crystallize, widen and deepen a national-religious divide between Sunni and Shiite, Arab and Persian, Riyadh and Tehran.

     

    Third, rupture the rapprochement between Iran and the United States and abort the Iranian nuclear deal.

    The provocation succeeded in its near-term goal. An Iranian mob gutted and burned the Saudi embassy, causing diplomats to flee, and Riyadh to sever diplomatic ties.

    From Baghdad to Bahrain, Shiites protested the execution of a cleric who, while a severe critic of Saudi despotism and a champion of Shiite rights, was not convicted of inciting revolution or terror.

    In America, the reaction has been divided.

    The Wall Street Journal rushed, sword in hand, to the side of the Saudi royals: “The U.S. should make clear to Iran and Russia that it will defend the Kingdom from Iranian attempts to destabilize or invade.”

     

    The Washington Post was disgusted. In an editorial, “A Reckless Regime,” it called the execution risky, ruthless and unjustified.

    Yet there is a lesson here.

    Like every regime in the Middle East, the Saudis look out for their own national interests first. And their goals here are to first force us to choose between them and Iran, and then to conscript U.S. power on their side in the coming wars of the Middle East.

    Thus the Saudis went AWOL from the battle against ISIS and al-Qaida in Iraq and Syria. Yet they persuaded us to help them crush the Houthi rebels in Yemen, though the Houthis never attacked us and would have exterminated al-Qaida.

    Now that a Saudi coalition has driven the Houthis back toward their northern basecamp, ISIS and al-Qaida have moved into some of the vacated terrain. What kind of victory is that — for us?

    In the economic realm, also, the Saudis are doing us no favors.

    While Riyadh is keeping up oil production and steadily bringing down the world price on which Iranian and Russian prosperity hangs, the Saudis are also crippling the U.S. fracking industry they fear.

    The Turks, too, look out for number one. The Turkish shoot-down of that Russian fighter-bomber, which may have intruded into its airspace for 17 seconds, was both a case in point and a dangerous and provocative act.

    Had Vladimir Putin chosen to respond militarily against Turkey, a NATO ally, his justified retaliation could have produced demands from Ankara for the United States to come to its defense against Russia.

    A military clash with our former Cold War adversary, which half a dozen U.S. presidents skillfully avoided, might well have been at hand.

    These incidents raise some long-dormant but overdue questions.

    What exactly is our vital interest in a permanent military alliance that obligates us to go to war on behalf of an autocratic ally as erratic and rash as Turkey’s Tayyip Recep Erdogan?

    Do U.S.-Turkish interests really coincide today?

    While Turkey’s half-million-man army could easily seal the Syrian border and keep ISIS fighters from entering or leaving, it has failed to do so. Instead, Turkey is using its army to crush the Kurdish PKK and threaten the Syrian Kurds who are helping us battle ISIS.

    In Syria’s civil war — with the army of Bashar Assad battling ISIS and al-Qaida — it is Russia and Iran and even Hezbollah that seem to be more allies of the moment than the Turks, Saudis or Gulf Arabs.

    “We have no permanent allies … no permanent enemies … only permanent interests” is a loose translation of the dictum of the 19th century British Prime Minister Lord Palmerston.

    Turkey’s shoot-down of a Russian jet and the Saudi execution of a revered Shiite cleric, who threatened no one in prison, should cause the United States to undertake a cost-benefit analysis of the alliances and war guarantees we have outstanding, many of them dating back half a century.

    Do all, do any, still serve U.S. vital national interests?

    In the Middle East, where the crucial Western interest is oil, and every nation — Saudi Arabia, Iran, Iraq, Libya — has to sell it to survive — no nation should be able drag us into a war not of our own choosing.

    In cases where we share a common enemy, we should follow the wise counsel of the Founding Fathers and entrust our security, if need be, to “temporary,” but not “permanent” or “entangling alliances.”

    Moreover, given the myriad religious, national and tribal divisions between the nations of the Middle East, and within many of them, we should continue in the footsteps of our fathers, who kept us out of such wars when they bedeviled the European continent of the 19th century.

    This hubristic Saudi blunder should be a wake-up call for us all.

  • Keynesian Economics 101 (In 4 'Simple' Lessons)

    Since Keynesian economics has reined supreme among mainstream economists for decades, you might want to know some of the basics.

     

    Keynesian Economics 101 Lesson 1

     

    Keynesian Economics 101 Lesson 2

     

    Keynesian Economics 101 Lesson 3

     

    Keynesian Economics 101 Lesson 4

     

    If this is confusing to you though, don’t worry about it! There are people in charge who have it all under control.

    Source: The Austrian Insider

  • Is The US Criminalizing Free-Speech?

    Submitted by Judith Bergman via The Gatestone Institute,

    • Is this House Resolution a prelude? Has Attorney General Lynch seen the potential for someone lifting her "mantle of anti-Muslim rhetoric"? And what is "anti-Muslim rhetoric" exactly? Criticizing Islam? Debating Mohammed? Discussing whether ISIS is a true manifestation of Islam? Who decides the definition of "hate speech" against Muslims?

    • Of all 1,149 anti-religious hate crimes reported in the United States in 2014, only 16.1% were directed against Muslims, according to the FBI. By contrast, over half of all anti-religious hate crimes were directed against Jews – 56.8%.

    • Why this lopsided, discriminatory House Resolution in favor of a religious group that statistically needs it the least?

    • Are the Attorney General and the eighty-two House Democrats out to destroy the First Amendment and introduce censorship? A House Resolution could be reintroduced later as binding legislation.

    Eighty-two leading Democrats have cosponsored a House Resolution (H.Res. 569) "Condemning violence, bigotry, and hateful rhetoric towards Muslims in the United States".

    The Resolution was introduced in the House of Representatives by Democrat Donald S. Beyer (Virginia) on December 17, 2015 — a mere 15 days after Tashfeen Malik and Syed Farook gunned down 14 innocent Americans and wounded 23 in an ISIS-inspired terror attack at a Christmas party in San Bernardino, California.

    The House Resolution states, "the victims of anti-Muslim hate crimes and rhetoric have faced physical, verbal, and emotional abuse because they were Muslim or believed to be Muslim," and the House of Representatives "expresses its condolences for the victims of anti-Muslim hate crimes."

    What victims? Of all 1,149 anti-religious hate crimes reported in the United States in 2014, only 16.1% were directed against Muslims, according to the FBI. By contrast, over half of all anti-religious hate crimes were directed against Jews – 56.8%. The fewest, 8.6% of anti-religious hate crimes, were directed against Christians (Protestants and Catholics).

    The Resolution goes on to denounce "…in the strongest terms the increase of hate speech, intimidation, violence, vandalism, arson, and other hate crimes targeted against mosques, Muslims, or those perceived to be Muslim."

    The House Resolution singles out Muslims in the United States as an especially vulnerable religious group that needs special protection to the extent that the Resolution "urges local and Federal law enforcement authorities to work to prevent hate crimes; and to prosecute to the fullest extent of the law those perpetrators of hate crimes."

    The reason for the introduction of this House Resolution at this point in time makes more sense if seen in conjunction with statements made by Attorney General Loretta Lynch on December 3, at a dinner celebrating the 10th anniversary of the Muslim Advocates — an organization that, according to its own website, has "powerful connections in Congress and the White House" and ensures that, "the concerns of American Muslims are heard by leaders at the highest levels of government." Muslim Advocates goes on to say, "As a watchdog of justice, we use the courts to bring to task those who threaten the rights of American Muslims."

    At the dinner, Attorney General Lynch stated that she is concerned about an

    "incredibly disturbing rise of anti-Muslim rhetoric… The fear that you have just mentioned is in fact my greatest fear as a prosecutor, as someone who is sworn to the protection of all of the American people, which is that the rhetoric will be accompanied by acts of violence. Now obviously, this is a country that is based on free speech, but when it edges towards violence, when we see the potential for someone lifting that mantle of anti-Muslim rhetoric — or, as we saw after 9/11, violence directed at individuals who may not even be Muslims but perceived to be Muslims, and they will suffer just as much — when we see that we will take action."

    Is this House Resolution a prelude to the Attorney General taking that action? Has she seen the potential for someone lifting her "mantle of anti-Muslim rhetoric"? And what is "anti-Muslim rhetoric" exactly? Criticizing Islam? Debating Mohammed? Discussing whether ISIS is a true manifestation of Islam? Who decides the definition of what is considered hate speech against Muslims?

    Are the Attorney General and the eighty-two House Democrats out to destroy the First Amendment and introduce censorship?

    U.S. Attorney General Loretta Lynch (left) said on December 3, "[W]hen we see the potential for someone lifting that mantle of anti-Muslim rhetoric… when we see that we will take action."

    A House Resolution could be reintroduced later as binding legislation. Americans should be deeply concerned about this. The part of the House Resolution that should most concern Americans is the urging of "local and Federal law enforcement authorities to work to prevent hate crimes; and to prosecute to the fullest extent of the law those perpetrators of hate crimes."

    What is a hate crime in this context? The law already prohibits violence and threats of violence, and law enforcement authorities are supposed to prosecute those — intimidation, destruction, damage, vandalism, simple and aggravated assault. However, as this resolution includes "bigotry" and "hateful rhetoric" in its title, Americans should worry that it is those that the House Resolution is really alluding to, when it urges law enforcement authorities to prevent and prosecute hate crimes.

    Why would the House of Representatives find it necessary to make such redundant statements, if not in order to redefine the concept of a hate crime?

    Notably, no similar House Resolution has appeared condemning the much higher percentage of hate crimes against Jews — over three times as many as against Muslims. As long as the House is going down the road of condemning hate crimes, why does it not even mention once the much more widespread hate crimes that American Jews are experiencing? Why does it not mention the hate crimes against Christians, which after all are only 7.5% percent fewer than those against Muslims? Why this lopsided, discriminatory House Resolution in favor of a religious group that statistically needs it the least?

    The House Resolution is unsettlingly similar to the UN Human Rights Commission's Resolution 16/18, which is an attempt to establish Islamic "blasphemy laws," making criticism of religion a criminal offense. The UNHRC Resolution would apply internationally (non-binding as of yet, except, presumably, for the countries that want it to be binding), and infractions would be punishable by law. In some Islamic countries, at the moment, the punishment is death — a sentence often handed down in trials that use questionable jurisprudence. Last year alone, a Saudi court sentenced a blogger, Raif Badawi to 1,000 lashes ("lashed very severely," the court order read) and ten years in jail. Outside of any courts, in 2015 alone, in Bangladesh, four secular bloggers on four separate occasions were hacked to death by people who apparently did not agree with what they said.

    The UNHRC Resolution, originally known as "Defamation of Islam," was changed in later versions — it would seem for broader marketability — to "Defamation of Religions."

    Long sought by the 57-member Organization of Islamic Cooperation, UNHRC Resolution 16/18 was co-sponsored by the United States, along with Pakistan. During a series of closed-door meetings over at least three years, it was spearheaded by Secretary of State Hillary Clinton.

    "At the invitation of Secretary of State Hillary Clinton," begins the document of the US Mission in Geneva, "representatives of 26 governments and four international organizations met in Washington, D.C. on December 12-14, 2011 to discuss the implementation of United Nations Human Rights Council Resolution (UNHRC) 16/18 on 'Combating Intolerance, Negative Stereotyping and Stigmatization of, and Discrimination, Incitement to Violence and Violence Against, Persons Based on Religion or Belief.'"

    UNHRC Resolution 16/18, also known as the "Istanbul Process" (where the original meeting on the topic took place), is an Orwellian document that claims to protect freedom of religion, while attempting to criminalize internationally anything that might be considered "incitement to violence." The late PLO Chairman Yasser Arafat used to tell his people, "I don't have to tell you what to do. You know what to do." Each word could be in Pat the Bunny. Would Arafat's statement be considered incitement to violence?

    UNHRC Resolution 16/18 was passed on March 24, 2011, without a vote.

    According to the journalist Abigail Esman, writing in Forbes:

    Resolution 16/18 seeks to limit speech that is viewed as "discriminatory" or which involves the "defamation of religion" – specifically that which can be viewed as "incitement to imminent violence… [T]his latest version, which includes the "incitement to imminent violence" phrase – that is, which criminalizes speech which incites violence against others on the basis of religion, race, or national origin – has succeeded in winning US approval – despite the fact that it (indirectly) places limitations as well on speech considered "blasphemous."

    In answer to a reproof — from the U.S Department of State, no less — Esman wrote, "By agreeing to criminalize 'incitement to violence' and to use all means at its disposal to prevent and to punish such actions, the US has – however unwittingly – enabled the OIC to use the measure against us – and other members of the free world."

    Many extremist Muslims, however, seem to have no problem criticizing other religions, as well as other Muslims. Some "criticize" Christians, as we have witnessed, by slitting their throats, or by burning or drowning them alive. Many extremist Muslims also seem to have no problem criticizing Jews – starting with calling them descendants of apes and pigs (Surah 5. Al-Maida, Ayah 60). Some Muslims write that all Jews should be killed:

    the Islamic Resistance Movement aspires to the realisation of Allah's promise, no matter how long that should take. The Prophet, Allah bless him and grant him salvation, has said: "The Day of Judgement will not come about until Moslems fight the Jews (killing the Jews), when the Jew will hide behind stones and trees. The stones and trees will say O Moslems, O Abdulla, there is a Jew behind me, come and kill him. Only the Gharkad tree, (evidently a certain kind of tree) would not do that because it is one of the trees of the Jews." (related by al-Bukhari and Moslem).

    One therefore cannot help wondering — and one should wonder – to what extent H.Res. 569 is the "nose of the camel under the tent."

    As of now, H.Res. 569 has been referred to the House Committee on the Judiciary. Americans had better hope that the House Committee will see it for what it is: An attempt to destroy the First Amendment, shield Islam from criticism, and bring "Death to Free Speech."

  • Meet The "Trader" Who Earns $30K "On A Bad Month" Working Just One Hour A Day

    On Sunday, July 12, 2015, 21-year old Elijah Oyefeso had a bad morning.

    Somehow, he managed to crash his blue Bentley Continental into his metallic gold Lamborghini Gallardo.

    Before:

    After: 

    But for Oyefeso, the crash was of no consequence. “Life goes on,” he said, laughing off the accident. 

    Why was a wreck involving nearly a half million in luxury cars no big deal for Oyefeso, you ask? Because this college dropout makes between £70,000 £80,000 on a “good month” trading stocks just one hour a day – or so he claims. According to the Daily Mail, Oyefeso “started by using his student loan” which he apparently pyramided into a small fortune. His Instagram profile reads: “MY NAME IS ELIJAH, & BEFORE I TURNED 20 I BOUGHT A LAMBO/BENTLEY WHICH REALLY PISSED ME OFF CUS I WAS TOO BROKE TO BUY A JET,” a riff on a now famous line from the big screen adaptation of Jordan Belfort’s story. 


    In addition to luxury cars, Oyefeso has a thing for fine watches and flashing his wealth on social media. Have a look, for instance, at the following image which depicts a Rolex, some money, and, somewhat inexplicably, a Wing Stop to-go cup:

    With a bit of hard work and dedication, you too can have a $20,000 watch, a roll of 20s, and carryout from Wing Stop: “If you work hard you don’t need to look at the price tag, you just get it,” Oyefeso boasts. Here’s more: 

    Elijah went to the University of Buckingham to study business management but put his student loan to good use. 

     

    He said: ‘I used my student loan during university and I thought “I could actually do this”.

     

    Elijah dropped out of university and started investing in the stock market with the cash sum. Within nine months, he claimed he was making tens of thousands of pounds.

     

    He claims his income on a ‘bad month’ will be between £20,000 and £30,000, while it can be over £40,000 more on a good month. 

     

    Elijah, who featured in Channel 4’s Rich Kids Go Shopping on Channel 4, was filmed as he traded online, making £1,000 in just 15 minutes.

     

    ‘I’ve been trading for three years, I know when to stop,’ he said. 

     

    The most he’s lost in one go is nearly £10,000. ‘When you lose it, you get back up. If you lose 12 times, you get back up 12 times.

     

    ‘You want to leave a name when you’re gone. Think about JP Morgan, the assets are worth 2.6 trillion. So that’s a lot.’

     

    Elijah, who listens to classical music while trading, said: ‘There’s a saying, you are who you chill with. I chill with people who have half a million in the bank.

     

    ‘Earning £20 to £30,000 a month, in my world that’s not good. It motivates you to do more.’

     

    Elijah also has a collection of expensive watches, ranging from a Rolex to a Cartier watch costing £21,000 which he has only worn a couple of times.  

     

    But he loves his watch collection, he said: ‘You’ve got to treat them like princesses.’

     

    He’s even given them names, calling one watch Michelle and another Aaliyah after the singer.

    There you have it. The American dream, only across the pond in the UK. Take out a student loan, invest in stocks, and ride the central bank put on your way to social media fame and fortune. But trading isn’t Oyefeso’s only source of income. As the Mail goes on to document, “he set up DCT Training Group to help others to get into trading, but after a free trial of five days he charges £107 a month for his expertise.”

    Every new member gets a big shout out on Oyefeso’s Twitter account. Here’s a representative tweet:

    What does DCT do you ask? Well, let’s ask them. Here’s a bit of info from the official webpage: 

    The benefits of options trading include low capital investment to get started and no leverage on your investment. Meaning if you invested £10 on a trade you could only lose £10 and your balance could never end up in the negative. It allows high rewards with fast returns. We don’t have to sit around waiting for weeks to see a return on our investment as returns can be made in a matter of minutes. Everything is a controlled risk as you set the investment amount and duration. 

     

    We provide real time signals to new traders who do not necessarily hold the experience or skills to analyse markets for themselves or use technical indicators to predict the movement direction on an asset. These signals are sent out to notify them on when we spot a potentially profitable trade. Signals are calculated indications produced from our own technical analysis of the current markets and will guide you on the start time of the trade, expiry time, and the execution range. 

    • We send around 10 signals throughout the day. Return rates are usually around 70 – 85% profit back on successful trades. We advise spreading your investment by putting a small % of your balance on each trade. 
    • Trading signals simplify everything for you and enables you to place educated trades within a few minutes. You simply set the trade and wait for the expiry time. Hassle free and no waiting around or having to keep an eye on the markets. 
    • We average around 7/8 successful trades out of 10 on a consistent basis.

    Basically, for £107 a month, Oyefeso will send you 10 options tips per day out of which “7-8” will be “successful.” 

    As anyone who’s ever traded options knows, that’s a virtual impossibilty. The idea that DTC bats .800 on 10 options trade ideas each and every trading day is borderline absurd and it’s also worth noting that Oyefeso isn’t exactly being transparent when he tells clients “your balance could never end up in the negative.” An amateur could, for instance, forget to close an in-the-money position at expiry and get assigned. That wouldn’t put someone “in the negative” per se (you’d be “in the positive” by definition), but coming up with the cash to buy 100 share lots of expensive stocks might not be what some of Oyefeso’s clients bargained for. Also, successfully trading options requires the careful and vigilant management of volatile positions. It’s not exactly a job that lends itself to working “one hour” per day.

    In addition to equity options, Oyefeso is apparently an expert in commodities and FX. “We produce signals for all major markets (commodities, indices, stocks and forex) the right asset, predetermined time period and direction for a profitable trade,” DCT’s web site says. We assume he’s 70-80% accurate on those calls as well.

    We imagine there are plenty of “traders” out there who would enjoy living a lifestyle of Cartiers, Bentleys, and Wing Stop, especially if all you have to do is follow Oyefeso’s “alerts”. The question is how he and the legions of CB put-surfing, 17-year old hedge fund managers will fare on days like August 24, when everything falls apart in a harrowing bout of flash crashing madness during which not even the “all weather” Ray Dalios of the world manage to make money. Actually that’s not the question. The question is whether Oyefeso is for real, or whether sometime in the not-so-distant future, we’ll discover that the old adage “if something sounds too good to be true, it probably is,” applies to 21-year old college dropouts driving golden Lamborghinis…

  • The Shale Defaults Begin Here: Banks Quietly Shrink These 25 Companies' Credit Facilities

    Everyone knows that at $35/barrel oil, virtually every US shale company is cash flow negative and is therefore burning through cash and other forms of liquidity such as bank revolvers and term loans, just as everyone knows that should oil remain at these prices, the US shale sector is facing an avalanche of defaults.

    What is less known is who will be the next round of companies to default.

    One good place to get an answer is to find which companies’ bankers are quietly tightening the liquidity noose (because they don’t want to be stuck holding worthless assets in bankruptcy or for whatever other reason), by quietly reducing the borrowing base on existing credit facilities.

    It is these companies which find themselves inside this toxic feedback loop of declining liquidity, which forces them to utilize assets even faster, thus even further shrinking the borrowing base against which their banks have lent them money, that will be at the forefront of the epic bankruptcy wave that is waiting to be unleashed across the US, leading to tens of billions of defaults junk bonds over the next 12-18 months.

    So, without further ado here are 25 deeply distressed companies, whose banks we found have quietly shrunk the borrowing base of their credit facilities anywhere from 6% in the case of Black Ridge Oil and Gas to a whopping 51% for soon to be insolvent New Source Energy Partners.

    Source: Bloomberg

  • Here's The Ultra-Clever Way That The Chinese Are Circumventing Capital Controls

    Submitted by Simon Black via SovereignMan.com,

    Well, it happened again.

    China’s stock market plunged, sending more than half a trillion dollars to money heaven.

    What a surprise, it turns out that a massive credit bubble is actually unsustainable and will eventually burst. Shocker.

    And just like what happened last year when Chinese stocks tanked, the government is stepping in to centrally plan the stock market recovery.

    Last year we saw some of the most extraordinary tactics; China’s government jailed short-sellers (i.e. people who bet on stocks declining), and they even encouraged their citizens to BORROW money against their homes to buy stocks.

    But no centrally planned bailout is complete without the cherry on top– capital controls.

    Capital controls are like a bear trap for your savings. They’re what governments impose when they want to hold your money hostage.

    In Europe, for example, governments have propped up failing banking systems by imposing withdrawal restrictions, preventing people from taking out too much of their own money.

    The ultimate example of this was the Cyprus bank freeze back in 2013, when the government locked an entire nation out of their bank accounts.

    (This is one of the most important reasons why a critical component of any Plan B is to hold some savings offshore at a well-capitalized foreign bank in a jurisdiction with minimal debt.)

    The ongoing war on cash is another form of capital controls.

    Governments and economists around the world are increasingly calling for outright bans on physical cash, claiming that only criminals and terrorists need to use cash.

    In reality, though, banning cash forces people to keep their money inside the banking system.

    And in Europe in particular, the banking system is in pitiful condition—highly illiquid, poorly capitalized, and now starting to pass on negative interest rates to customers.

    (This is a big reason why it makes sense to hold some physical cash—another important part of a Plan B. More on this later in the week.)

    Perhaps most commonly, governments impose capital controls to prop up a failing currency, preventing people from taking money out of the country, or conducting any foreign exchange.

    This has long been one of the dominant forms of capital controls in China.

    Last year amid China’s ongoing financial crisis, the government there tightened some forms of capital controls (curiously while loosening others).

    Chinese citizens now have strict limitations on the amount of money they can withdraw while traveling abroad, plus restrictions on how much money they can transfer overseas.

    But for any Chinese citizen with savings right now, it’s pretty obvious what’s happening. And they want to get their money out of the country.

    Chinese have an inherent distrust of government. They don’t sing pointless songs about their freedom.

    Chinese people know that they’re not free. And they know they need to take steps to do something about it before they get wiped out.

    But it raises a difficult question– how do you get money out of the country when the government has imposed strict capital controls?

    With a little creativity, there’s always a way.

    Bitcoin has been a popular alternative in China because people can easily cross borders with vast sums of money encrypted inside their mobile phones.

    But there’s a new tactic that Chinese are using now: domains.

    Yes, those domains. As in Internet “.com” domains.

    The domain business used to be a thriving industry. No doubt, people made huge sums of money in the great “.com land grab” more than a decade ago.

    But all the good domain names have been gobbled up, which means that domains can now be very expensive.

    Facebook bought FB.com for $8.5 million five years ago. Sex.com sold for $14 million in 2014. 360.com sold for $17 million last year.

    It’s not unusual for a domain to sell for millions… and a five or six figure price tag is nothing.

    (When I started my bank last year, I found that any .com domain with the word “bank” in it cost anywhere from $10,000 to $350,000. Unbelievable.)

    So it’s safe to say that most of the easy money has already been made in buying and selling .com domains.

    But… Chinese aren’t looking to make money. They’re not buying domains as investments– they’re using domains to TRANSPORT money.

    Think about it– if you have $50,000 that you really need to get out of China, you can buy an expensive domain today.

    Naturally there are no restrictions (for now) on buying a .com domain. So the sale goes through without any problems.

    But domains are international. Almost anyone in the world can buy or sell a .com domain.

    So later, you travel overseas, open a foreign bank account, then sell your domain to someone else.

    The proceeds of that sale get paid to your new bank account abroad. And, presto! You’ve just moved a lot of money overseas, completely circumventing capital controls.

    Naturally there are some costs involved, including some brokerage fees for buying/selling the domain.

    But for Chinese citizens whose alternative is to let their savings remain trapped within a failing system, they’ll gladly pay a few percent to move their money abroad.

    I find this an incredibly clever solution. It’s the digital equivalent of moving money using rare coins and collectibles.

    A lot of folks may be surprised to find that many rare coins can cost thousands, tens of thousands, even millions of dollars.

    You can buy a rare coin and transport vast sums of wealth across a border with nothing more than an old nickel in your pocket.

    Domains are an even more elegant solution because it doesn’t even exist in the physical world.

    It just goes to show that no matter how destructive a government gets, no matter how desperate their measures, there are always ways to defeat them.

  • Caption Contest: "Make America Great Again" Edition

    “Making America great again” one convert at a time…

  • Nomi Prins' Financial Road Map For 2016: "The Potential For Chaotic Fluctuations Is Greater Than Ever"

    Authored by Nomi Prins, author of "All The Presidents' Bankers", via NomiPrins.com,

    We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever. 

    The butterfly effect – the flutter of a wing in one part of the planet altering the course of seemingly unrelated events in another part – is on center stage. There is much information to process. So, I’d like to share with you – not my financial predictions for 2016 exactly – – but some of the items that I will be examining from a geographical, political and financial perspective as the year unfolds.

    1) Central Banks: Artisans of Money

    Since the Fed raised (hiked is too strong a word) rates by 25 basis points on December 16th, the Dow has dropped by about 3.5%. Indicating a mix of fear of decisive movements and a market awareness deficit regarding the impact of its actions, the Federal Reserve hedged its own rate rise announcement, noting that its "stance of monetary policy remains accommodative after this increase.”

    These words seem fairly clear: there won’t be many, if any, hikes to come in 2016 unless economies markedly improve (which they won’t, or the words would be much more definitive.) Still, Janet Yellen did manage to alleviate some stress over the Fed's inaction on rate rises during the past 7 years, by invoking the slighted action possible with respect to rates. 

    Projections are past reactions here. The Fed, to save face more than anything or to “appear” conclusive, raised the Fed Funds rate (the rate US banks charge each other to borrow excess reserves, of which about $2.5 billion are with the Fed anyway), to .25-.50% from 0-.25%. And yet, the effective rate stood within the old Fed target range, or at an average of .20% on December 31 for various reasons, the timing of which was not lost on the Fed. It was at .35% or so on the first day of 2016. The Fed’s rate move was tepid, and it’s possible the Fed moves rates up another 25 or 50 basis points over 2016, but less likely more than that and more likely it engages in heightened currency swap activities with other central banks as a way to “manage” rates and exchange rates regardless.

    Meanwhile, most other central banks (Brazil being an extreme counter example) remain in easing mode or mirror mode to the Fed. It’s likely that more creative QE measures amongst the elite central banks will pop up if liquidity, markets or commodities head southward. Less powerful central banks will attempt to respond to the needs of their local economies while balancing the strains imposed upon them by the elite central banks.

    2) Global Stock Markets

    They say that behavior on the first day of the year is indicative of behavior in the year to come. If so, the first trading day doesn’t bode well for the rest. Turmoil began anew with Asian stock markets crumbling at the start of 2016. In China, the Shanghai Composite hit two circuit breakers and China further weakened the yuan.

    Yes, there’s the prevailing growth-decline story, a relic of 2015 “popular opinion”, being served as a reason for the drop. But also, restrictions on short selling by local Chinese companies are expiring. Just as in last August, China will have to balance imposing fresh sell restrictions with market forces pushing the yuan down.

    The People’s Bank of China will likely inject more liquidity through further reserve requirement reductions and rate cuts to counter balance losses. The demise in stock values is not simply due to slower growth, but to high debt burdens and speculative foreign capital outflows; the story of China as a quick bet is no longer as hot as it was when China opened its markets to more foreign investors in mid-2014, since which volumes and volatility increased. It will be interesting to see if China responds with more capital controls or less, and how its  “long-game” of global investments plays out.

    Blood shed followed Asian into European markets. Subsequently, the Dow dropped by about 1.6% unleashing its worst start to a year since the financial crisis began. Last year's theme to me was volatility rising; this year is about markets falling, even core ones. This is both a reaction to global and local economic weakness, and speculative capital pondering definitive new stomping grounds, hence thinner and more dispersed volumes will be moving markets.

    3) Global Debt and Defaults

    As of November 2015, Standard & Poor’s tallied the number of global companies that defaulted at 99, a figure only exceeded by that of 222 in 2009. Debt loads now present greater dangers. Not only did companies (and governments, of course) pile on debt during this zero interest rate bonanza period; but currency values also declined relative to the dollar, making interest payments more expensive on a local basis.

    If the dollar remains comparatively strong or local economies weaken by an amount equivalent to any dollar weakening, more defaults are likely in 2016. In addition, the proportion of junk bonds relative to investment grade bonds grew from 40% to 50% since the financial crisis, making the likelihood of defaults that much greater. Plus, the increase in foreign, especially dollar, denominated debt in emerging markets will continue to hurt those countries from a sovereign downgrade and a corporate downgrade to default basis.

    I expect sovereign downgrades to increase this year in tandem with corporate downgrades and defaults. Also, as corporate defaults or default probabilities increase, so does corporate fraud discovery. This will be a year of global corporate scandals.

    In the US about 60% of 2015 defaults were in the oil and gas industry, but if oil prices stay low or drop further, more will come. Related industries will also be impacted. In mid-December, Fitch released its leveraged loan default forecast of the TTM (Trailing Twelve Month index) predicting a 2.5% rise in default rates for 2016, or $24 billion in global defaults. That’s an almost 50% increase in default volume over 2015, and more than the total over the 2011-2013 period. Besides higher energy sector defaults, the retail sector could see more defaults, as consumers lose out and curtail spending.

    4) Brazil and Argentina

    Brazil is a basket case on multiple levels with nothing to indicate 2016 will be anything but messier than 2015. Even the upcoming Olympics there have reeked of scandal in the lead up to the summer games.

    Brazilian corporations have already sold $10 billion in assets to scrape together cash in 2015, a drop in the bucket to what’s needed. Brazil’s main company, Petrobras, is mired in scandal, its bond and share prices took massive hits last year as it got downgraded to junk, and a feeding frenzy between US, Europe and China for any of its assets on the cheap won’t be enough to alter the downward trajectory of Brazilian’s economy. In fact, it will just make recovery harder as core resources will be effectively outsourced.

    Fitch downgraded seven Brazilian sub nationals to junk, with more downgrades to come. Brazil itself was downgraded to junk by S&P with no positive outlook from anywhere for 2016. Falling revenues plus higher financial costs due to higher debt burdens will accentuate trouble. In addition, pension funds are going to be increasingly underfunded, which will enhance local population and political unrest, as unemployment increases, too.

    Though Brazil will have the toughest time relative to neighboring countries, Argentina, will not be having a walk in the park under its new government either. The new centrist government removed currency capital controls in a desperate bid to attract capital. This resulted in crushing the Argentinean Peso (a.k.a. “Marci’s devaluation”) and will only invite further speculative and political volatility into the country. It could get ugly.

    5) The Dollar and Gold

    Despite what will be a year of continued pathways to trade and currency arrangements amongst countries trying to distance themselves from the US dollar, the fact that much of the world is careening toward global Depression will keep the dollar higher than it deserves to be. It will remain the comparative currency of choice, as long as central banks continue to fabricate liquidity in place of government revenues from productive growth.

    Outside the US, most central banks (except Brazil which has a massive inflation problem) have maintained policies of rate reduction, lower reserve requirements, and other forms of QE or currency swap activities. As in 2015, the dollar will be a benefactor, despite problems facing the US economy and its general mismanagement of monetary policy. But the US dollar index and the dollar itself might exhibit more volatility to the downside this year, straying from its high levels more frequently than during 2015.

    Last year, given the enhanced volatility in various markets, I expected gold to rise during the summer as a safe haven choice, which it did, but it also ended the year lower in US dollar terms. Because the US dollar preserved its strength, the dollar price of gold fell during the year – yet not by as much as other commodities, like oil.

    I take that as a sign of gold finding some sort of a floor relative to the US dollar, with the possibility of more upside than downside for 2016, though in similar volatility bands to the US dollar. Gold relative to the Euro was just slightly down for 2015, relative to the approximate 10% decline in value relative to the US dollar. Considering the home currency is important when examining gold price behavior.

    Also, it’s important to note that investing in gold requires a longer time horizon – months and years, rather than weeks and months – and should be done through physical gold, coins or allocated bars depending on disposable investment thresholds, not paper gold. 

    In addition, as I mentioned last year, routinely extracting cash from bank accounts and keeping it in safe non-bank locations, remains a smart defensive play for 2016.

    6) The People’s Economies

    As companies default and economies suffer, industries will inevitably shed jobs this year around the world. The Fed’s publicly expressed optimism about employment figures and the headline figure decrease in US unemployment will be met with the realities of companies cutting jobs to pay the debts they took on during the ZIRP years and due to decreased demand.

    Unemployment is already rising in many emerging countries, and it will be important to note what happens in Europe and Japan, as well as the US in that regard.  This Recession 3.0 (or ongoing Depression) could fuel further artisanal money practices that might again be good for the markets and banks, but not for real economies or jobs lost through reactive corporate actions.  

    7) Oil

    With Saudi Arabia and Iran pissed off at each other in a round of tit-for-tat power positioning, it’s unlikely either OPEC heavy weight will reduce oil production, this while tankers worldwide remain laden with their loads and rigs are quiet. Tankers off the coast of Long Beach in California for instance, that used to come in and unload, remain in stalling patterns away from the shoreline, waiting for better prices. This means tankers are making money on storage, but also that extra oil supplies are hovering off shore, and even if prices rise, release of that supply would have a dampening consequence on prices.

    Oil futures have been a generally highly speculated product, so I’ve never believed that simple supply and demand ratios drive the price of spot oil as it relates to the futures price of oil. Only in this case, not only is there oversupply and weakening demand, but speculators are playing to the short side as well. That combination seems destined to keep oil prices low, or push them lower in the near future, but should be closely watched.

    Meanwhile, signs of knock on problems are growing. In China, for instance, shipyards are struggling because global rig customers don’t need their rig model orders fulfilled.  

    8) Europe

    While Greece faces more blood-from-a-stone extortion tactics and none of the Troika get why austerity measures don't actually produce local revenues at high enough levels to pay expensive debts to foreign investors and multinational entities, other parts of Europe aren’t looking much better for 2016. Spain is facing political unrest, Italy, despite exhibiting a tenuous recovery of sorts, still has a major unemployment problem, and the Bank of Portugal lowered its growth estimates – for the next two years.

    Mario Draghi, European Central Bank (ECB) head decided to extend Euro-QE to March 2017 from September 2016, having had the markets punish his less enthusiastic verbiages about QE late last year, because he has no other game. The Euro will thus likely continue to drop in value against the dollar, negative interest rates will prevail, and potential bail ins will appear if this extra dose of QE doesn’t keep the wheels, big banks and core markets of Europe properly greased.

    9) Mexico

    The Mexican Peso closed near record lows vs. the dollar for 2015. Much of the Peso’s weakness was attributed to low oil prices and Mexico’s dependence on its oil sector, but the Peso was already depreciating before oil prices dropped. If the US dollar remains comparatively high OR if oil prices continue to remain low or drop, the Peso is likely to do the same.

    When I was in Mexico a few years ago, addressing the Senate on the dangers of foreign bank concentration, there were protests throughout Mexico City on everything from teachers’ pay to the opening of Pemex, Mexico’s main oil company to foreign players. The government’s promise then was that foreign firms would provide capital to Mexico as well as industry expertise that would translate to revenues. Oil prices were hedged then at 74 dollars per barrel. With oil prices at half of that, many of those hedges are coming off this year and that will cause additional pain to the industry and Pemex.

    That said, though Mexico will feel the global Depression pain this year as a major player, it is still set to have a much better year than Brazil on every level; from a higher stock market to a higher currency valuation relative to the US dollar to lower inflation to lower unemployment to a better balance of trade with the US than Brazil will have with China. Plus, it has far less obvious inbred corporate-government corruption.

    10) Elections and Media Coverage

    It’s been a minute since the last debate or late night show fly-by from any Presidential hopeful, but this is the year of the US election. I look forward to continuing to post my monthly wrap on TomDispatch as the Democratic and Republican nominees emerge. I will be taking stock of the most expensive election in not just US history, but in the history of the World. Look for more on the numbers behind the politics later this month.

    From a financial standpoint, this election has low impact on flows of capital. Given the platforms of everyone in reasonable contention (with the exception of Bernie Sanders’ platform), no one will actually touch excessive speculation, concentration risk in the banking or other critical sectors like healthcare, or meaningfully examine the global role of artisanal central bank policy, particularly as emanating from the Fed. 

    Elsewhere, economic stress throughout the globe and a general sense of exasperation and distrust with politicians is putting new leaders in place that are pushing for more austerity or open capital flow programs rather than foundational growth and restrictions on the kind of flows that cause undue harm to local economies. That is a recipe for further economic disaster that will fall most heavily on populations worldwide. 

  • Islamic State's New "Jihadi John" Was Bouncy Castle Salesman, Nirvana Fan, Aspiring Dentist

    Back in November, The Pentagon claimed to have killed Mohammed Emwazi – better known by his stage name “Jihadi John” – in a drone strike near Raqqa.

    Emwazi was infamous for his role in catapulting ISIS into the public’s collective consciousness. Clad in black and brandishing a Bowie knife, the Brit beheaded hostages dressed in bright orange jumpsuits in some of the first Islamic State propaganda videos to garner widespread Western media coverage.

    Late last week, ISIS released a new video featuring a British executioner who has apparently taken up the mantle in Emwazi’s absence. Dubbed the “the new Jihadi John” by the British press, the masked executioner reads the following message to Prime Minister David Cameron, who recently won parliamentary support for British airstrikes on Raqqa:

    This is a message to David Cameron. Oh slave of the White House, oh mule of the Jews. How strange it is that we find ourselves today hearing an insignificant leader like you challenge the might of the Islamic State. How strange it is that the leader of a small island threatens us with a handful of planes. One would have thought you would have learned the lessons of your pathetic master in Washington and his failed campaign against Islamic State.

     


     

    It seems that you, just like your predecessors Blair and Brown, are just as arrogant and foolish. In fact David, you are more of an imbecile. Only an imbecile would dare to wage war against a land where the law of Allah reigns supreme. And where the people live under the justice and security of the Sharia.

     

    Only an imbecile would dare to anger a people who love death the way that you love your life. Oh British Government. Oh people of Britain. Know that today your citizenship are under our feet. And that the Islamic State, our country, is here to stay. And we will continue to wage jihad, break borders and one day invade your land where we will rule by the sharia.

    So who is the “new and improved” Jihadi John, you ask? Apparently he’s British Indian Siddhartha Dhar. Here’s Reuters: 

    The masked militant in an Islamic State video showing the killing of five men accused by the group of being Western spies is believed to be a Londoner known as Sid who once sold inflatable bouncers.

     

    Siddhartha Dhar, who left Britain for Syria while on police bail after his arrest on suspicion of belonging to a banned group and encouraging terrorism, has been identified by media as the spokesman in the militant organization’s latest film.

     

    Dhar, who is also known as Abu Rumaysah, is one of Britain’s most high-profile Islamists and an associate of Anjem Choudary, Britain’s best-known Islamist preacher who is due to go on trial next week accused of terrorism offences.

     

    A convert from Hinduism who lived in east London, Dhar regularly attended protests staged by the now banned organization al-Muhajiroun and had often spoken to the media in support of radical Islamic causes.

     

    Since leaving Britain he gained further attention through online videos in which he exhorted life under Islamic State.

    That’s right ladies and gentlemen, Islamic State’s newest Western executioner was a bouncy castle salesman.

    But that’s not all. Dhar is also “a former Arsenal and Nirvana fan” who “enjoyed drinking, would take girls to his favourite action movies, and dreamed of being an NHS dentist,” according to the Daily Mail. “Dhar’s family say he was a ‘sensitive boy’ who ‘changed’ as a teenager after the death of his father and converted to Islam, shunning TV and music, sleeping on the floor and even telling his mother he couldn’t love her anymore because she is not a Muslim,” DM wrote on Tuesday. “He stopped studying and rented bouncy castles for children’s parties while supporting banned militant group Al-Muhajiroun and running ‘roadshows’ aimed at attracting troubled youngsters in inner-cities.”

    Apparently, Dhar skipped bail in September 2014 and fled Britain for Syria. He announced his arrival in the “caliphate” by posting the following picture on Twitter which depicts his young son holding a pistol:

    “I was in a state of shock,” Dhar’s sister Konika Dhar told BBC. “I believed the audio to resemble, from what I remember, the voice of my brother but having viewed the short clip in detail, I wasn’t entirely convinced which put me at ease.” Here’s a documentary about Dhar and his family shot by Vice News in 2014: 

    The ISIS video in which Dhar appears also features a toddler dressed in fatigues and donning an ISIS headband. Following the execution of five prisoners, the child proclaims that ISIS will “kill the kaffir (unbelievers) over there”.

    “Sunday Dare, a Londoner of Nigerian origin, identified the child as his four-year-old grandson Isa,” Reuters reports. “Dare told British media his daughter, who grew up a devout Christian named Grace before converting to Islam and changing her name to Khadijah, had taken London-born Isa to Syria with her to join Islamic State.” Here’s Sputnik: 

    The child featured in the video has been identified by his grandfather who told Channel 4 news in Britain that he recognized the boy and condemned the footage. Sunday Dare, said: “It’s propaganda; they are just using a small boy. He doesn’t know anything. They are just using him as a shield.”

    His jihadi bride mother had previously posted a picture of her son carrying an AK47 assault rifle 18 months ago, provoking a debate in the British media over whether the image and subsequent identity of her elder child dressed in camouflage clothing should be revealed by the press.

     

    London Mayor Boris Johnson has said the child whose face is featured in almost every British newspaper and online news website, “should be brought back to the UK and taken into care.” 

    Like us, you’re probably struggling to comprehend all of this.

    Bouncey castle salesmen?

    Mothers taking their children to the caliphate to grow up in the Islamic State? 

    Has the whole world gone crazy?

    Then, we remembered an image from an ISIS propaganda video released last summer and suddenly, all of the above made sense:

  • Hong Kong Publishers Reportedly Being Kidnapped By Chinese Authorities, Taken To Mainland

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    A Hong Kong lawmaker said Sunday he believes Chinese security officers kidnapped five publishing company employees who have gone missing in the city, possibly because of a planned book about the former love life of President Xi Jinping.

     

    The five work for a publishing house known for producing books critical of the Chinese government.

     

    The disappearances add to growing unease that freedoms in the semi-autonomous Chinese city are being eroded.

     

    Under Hong Kong’s mini-constitution, it enjoys freedom of speech and Chinese law enforcers have no right to operate in the city.

     

    It is unclear where the men are or how they went missing.

     

    – From the AFP article: Missing Hong Kong Booksellers “Working on Book on Xi’s Love Life”

    For several years now, I’ve periodically observed that China’s increasingly aggressive crackdown on dissent serves as a harbinger of far more difficult times ahead. The thinking goes that if anyone is privy to the severe fragility of the country’s economic situation, it would be Chinese leadership. As such, desperate moves by Chinese leadership should foretell drastically worse economic and social conditions.

    As an example, here’s an excerpt from this summer’s post, Chinese Authorities Arrest Over 100 Human Rights Activists and Lawyers in Desperate Crackdown on Dissent:

    While China doesn’t have any illusion of democracy to begin with, that doesn’t make the situation any less significant. While media attention has been focused on the popping of China’s stock market bubble, what has been far more interesting is the government’s terrified response. It has simply put, entered full on panic mode. Freezing trading in a large percentage of listed equities, and even threatening to arrest so-called “malicious short sellers.”

     

    I have long stated that the situation in China is much more fragile than anyone cares to recognize or admit. I continue to think revolution/regime change in China presents a real risk in the years ahead, and I think the Communist Party is well aware of it. This is precisely why the heavy hammer of government is coming down upon political (and economic) dissent with increased force.

    The scramble to crack down on dissent has become so intense Chinese authorities seem to be now exerting illegal force against residents of Hong Kong. Of course, this story is long in the making, as the massive protests that broke out a little over a year ago known as the “umbrella revolution,” was in fact a protest against Beijing’s moves to ensure that Hong Kong leadership remain loyal puppets to the authorities on the mainland. As the Guardian explained at the time:

    Hong Kong, a former British colony of 7 million people, has been governed under a “one country, two systems” framework since it was handed back to Chinese control in 1997. The principle is simple in theory — Beijing is responsible for the city’s defence and foreign affairs; Hong Kong enjoys limited self-governance and civil liberties, including an independent judiciary and unrestricted press.

     

    Its top political post – that of chief executive – is chosen by a “nominating committee” of 1,200 people, most of them from pro-Beijing elites. Yet when Beijing regained control over the city, it promised that the region would be able to elect its top leader by universal suffrage by 2017. The group guiding the current protests – set up 18 months ago by two professors and a baptist minister under the banner Occupy Central with Love and Peace — threatened to paralyse the city’s central business district if Beijing broke its word.

     

    Nobody knew when, or if, the protest would occur, but in August Beijing passed a reform framework to stipulate universal suffrage on its own terms – only two or three committee-vetted candidates who “love the country” would be allowed to run. Activists considered this the last straw. Students began a class boycott last Monday and, galvanised by a city-wide surge in support, staged a large-scale protest outside of the city government headquarters on Friday night. Occupy Central mobilised on Sunday. The rest is unfolding as you read.

    So the writing has been on the wall for quite some time. Emboldened, it appears Chinese authorities are now simply kidnapping people in Hong Kong they deem to be subversive.

    Bloomberg reports:

    The disappearance of a Hong Kong-based publisher of books critical of China’s Communist Party is fueling concerns that tactics used to limit dissent on the mainland are being exported to the former British colony.

     

    Lee Bo, part owner of Causeway Bay Books, was reported missing Friday by his wife, who said her last contact with him was from a telephone number from Shenzhen, across the mainland border. Hong Kong police have asked their Chinese counterparts about the 65-year-old bookseller, who disappeared from Hong Kong several months after four others related to the store vanished.

     

    Concerns about encroachment on Hong Kong’s freedoms under President Xi Jinping sparked the student-led democracy protests that paralyzed parts of the city for months in 2014. Since coming to power, Xi has embarked on a campaign on the mainland to tighten the party’s grip on power that has included secret detentions and convictions for spreading information deemed dangerous.

     

    “The possible intrusion into Hong Kong by law enforcement agencies in China would shatter the sense of security that is provided by One Country, Two Systems,” said Albert Ho, a lawmaker and chairman of the Hong Kong Alliance in Support of Patriotic Democratic Movements in China, referring to the blueprint for Hong Kong’s autonomy. “If that sense of security is being shattered, then the underlying confidence in ‘One Country, Two Systems’ would be torn apart.”

     

    Lee’s bookstore was popular among tourists from mainland China as a source of salacious books about the country’s elite banned on the mainland. He was last seen leaving a warehouse on Hong Kong island used by the company.

     

    Lee’s wife approached local police on Monday and withdrew a request for help, the South China Morning Post reported, citing a government official it didn’t identify. Taiwan’s Central News Agency also published a handwritten letter said to be faxed from Lee to a bookstore colleague. In it, he said he took his “own way” to China to assist in an investigation that might take some time.

    Yes, of course. Totally normal to leave a warehouse and then disappear to the Chinese mainland in order to “help with an investigation,” without telling your wife first.

    Lee’s case is resonating among Hong Kong’s pro-democracy activists, who seized city streets for almost three months in 2014 after China unveiled a plan to elect the city’s leader from a pool of candidates vetted by Beijing. A video in which Agnes Chow — a member of the pro-democracy student group Scholarism — described Lee’s disappearance as a “white terror incident” has garnered more than 800,000 views.

     

    Xi has been cracking down on dissent in China since he took over as party chief in November 2012, overseeing a more restrictive ideological environment. In the most recent summer, dozens of members of the so-called rights-defense movement were detained over allegations they attempted to manipulate court cases.

     

    Lee’s disappearance came after four of his colleagues vanished within days of each other. Bookstore manager Lam Wing-kei; general manager of the publishing house Lui Bo; and business manager, Cheung Jiping, went missing in October while visiting the mainland, the South China Morning Post reported. Gui Minhai, a co-owner with Lee of the publisher Mighty Current, disappeared from his apartment in Thailand the same month.

     

    The reach of China’s law enforcement agencies has riled authorities in other countries. Australia’s government last year expressed “deep concerns” after China sent two police officers to Melbourne in late 2014 without permission to question a suspected economic fugitive. The Obama administration has requested that China recall agents pursuing Chinese corruption suspects in the U.S., the New York Times reported in August.

    How do you say panic in Mandarin?

    The AFP adds some additional tidbits to the developing story:

    A Hong Kong lawmaker said Sunday he believes Chinese security officers kidnapped five publishing company employees who have gone missing in the city, possibly because of a planned book about the former love life of President Xi Jinping.

     

    The five work for a publishing house known for producing books critical of the Chinese government.

    The disappearances add to growing unease that freedoms in the semi-autonomous Chinese city are being eroded.

     

    Under Hong Kong’s mini-constitution, it enjoys freedom of speech and Chinese law enforcers have no right to operate in the city.

     

    It is unclear where the men are or how they went missing.

     

    Ho said it was “outrageous” for Lee to have disappeared in the city.

     

    “We have a reason to believe he was politically abducted and illegally transferred to the mainland,” he said.

     

    Lee’s wife said Saturday her husband told her he was “assisting in an investigation” in a phone call after he failed to return home for dinner Wedesday.

     

    She reported him missing to police Friday and said the call he made to her was from a number in the neighbouring Chinese city of Shenzhen.

     

    “He said he wouldn’t be back so soon and he was assisting in an investigation,” she said.

     

    Agnes Chow of leading student campaign group Scholarism appealed to the international community for help.

     

    “I hope everyone in the world who believes in universal values of freedom and human rights could stand up,” she said in a Facebook post.

     

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Jan 05

Today’s News 5th January 2016

  • Playing The Government’s Game: When It Comes To Violence, We All Lose

    Submitted by John Whitehead via The Rutherford Institute,

    “When it gets down to having to use violence, then you are playing the system’s game. The establishment will irritate you – pull your beard, flick your face – to make you fight. Because once they’ve got you violent, then they know how to handle you. The only thing they don’t know how to handle is non-violence and humor.”

    – John Lennon

    Yes, the government is corrupt.

    Yes, the system is broken. By broken, I mean it’s “dysfunctional, gridlocked, and, in general, incapable of doing what needs to be done.”

    Yes, the government is out of control and overreaching on almost every front.

    Yes, the government’s excesses—pork barrel spending, endless wars, etc.—are pushing the nation to a breaking point.

    Yes, many Americans are afraid. Who wouldn’t be afraid of an increasingly violent and oppressive federal government?

    Yes, the citizenry has little protection against standing armies (domestic and military), invasive surveillance, marauding SWAT teams, an overwhelming government arsenal of assault vehicles and firepower, and a barrage of laws that criminalize everything from vegetable gardens to lemonade stands.

    Yes, in the eyes of the American surveillance state, “we the people” are little more than suspects and criminals to be monitored, policed, prosecuted and imprisoned. As former law professor John Baker, who has studied the growing problem of overcriminalization, noted, “There is no one in the United States over the age of 18 who cannot be indicted for some federal crime.”

    Yes, the United States of America is not the democracy that is purports to be, but rather an oligarchy ruled by a wealthy corporate elite.

    Yes, politics is a sham. Average Americans have largely lost all of the conventional markers of influencing government, whether through elections, petition, or protest, have no way to impact their government, no way to be heard, and no assurance that their concerns are truly being represented.

    Yes, the Obama administration’s efforts to identify, target and punish “domestic extremists” through the use of surveillance, corporate spies, global police and the Strong Cities network sends a troubling message to all Americans that any opposition to the government—no matter how benign—will be viewed with suspicion and will likely be treated with hostility.

    Yes, we have reached a tipping point. The freedoms we once enjoyed are increasingly being eroded: speech, assembly, association, privacy, etc.

    Yes, something needs to be done about the government’s long train of abuses, power grabs, erosion of private property, and overt acts of tyranny.

    Yes, many Americans, increasingly dissatisfied with the government and its heavy-handed tactics, are tired of being used and abused and are ready to say “enough is enough.”

    No, violence is not the answer.

    A handful of armed protesters are not going to fix what’s broken in the government by forcing a showdown with government agents. In fact, this kind of scenario plays right into the government’s hands by provoking a violent confrontation that allows government officials to sanctimoniously justify their use of surveillance, military weaponry and tactics, and laws criminalizing guns and hate speech in order to target anyone who even vaguely resembles an “anti-government extremist.”

    Take the latest spectacle in Oregon, for example.

    Armed activists led by brothers Ryan and Ammon Bundy have occupied a federal wildlife refuge. The Bundys (infamous for their 2014 standoff with the Bureau of Land Management over grazing rights on federal land in Nevada) are protesting the government’s prosecution of two ranchers, Dwight and Steven Hammond, who have been sentenced to five years in prison for allegedly setting back fires on government-owned land in Oregon. (Mind you, the government owns more than half the land in Oregon.)

    Few conflicts are ever black and white, and this situation involving the Bundys, the Hammonds and the BLM is no exception. Yet the issue is not whether the Hammonds are arsonists as the government claims, or whether the Bundys are anti-government extremists as the government claims, or even whether ranchers should have their access to government-owned lands regulated as the BLM claims.

    No, as I point out in my book Battlefield America: The War on the American People, the larger question at play here is who owns—or controls—the government: is it “we the people” or private corporations?

    Are American citizens shareholders of the government’s vast repositories, or are we merely serfs and tenant farmers in bondage to corporate overlords? Do we have a say in how the government is run, or are we merely on the receiving end of the government’s dictates? What recourse do we have if we don’t approve of the government’s actions?

    Almost every struggle between the citizenry and the government is, at its core, about whether we are masters or slaves in this constantly evolving relationship with the government.

    • Do parents have a right to allow their children to play outside alone, or must they abide by the government’s dictates about how to raise their families?
    • Do activists have a right to freely associate with one another, assemble in public, and voice their opinions publicly or privately, or must they be constrained by what the government and its corporate partners deem to be appropriate?
    • Do residents of a community have to obey whatever a police officer says, lawful or not, or do Americans have a right to resist an unlawful order without getting shot or arrested?

    It doesn’t matter what the issue is – whether it’s a rancher standing his ground over grazing rights, a minister jailed for holding a Bible study in his own home, or a community outraged over police shootings of unarmed citizens – these are the building blocks of a political powder keg.

    Much like the heated protests that arose after the police shootings in Ferguson and Baltimore, there’s a subtext to the Oregon incident that must not be ignored, and it is simply this: America is a pressure cooker with no steam valve, and things are about to blow.

    This is what happens when a parasitical government muzzles the citizenry, fences them in, herds them, brands them, whips them into submission, forces them to ante up the sweat of their brows while giving them little in return, and then provides them with little to no outlet for voicing their discontent.

    As psychologist Erich Fromm recognized in his insightful book, On Civil Disobedience: “If a man can only obey and not disobey, he is a slave; if he can only disobey and not obey, he is a rebel (not a revolutionary). He acts out of anger, disappointment, resentment, yet not in the name of a conviction or a principle.”

    Let me say it again: an armed occupation of a government property only plays right into the government’s hands and increases its power over the citizenry. Yet it speaks to a growing tension over how to bring about meaningful change when dealing with a government that refuses to listen to its citizens.

    This is what happens when people get desperate, when citizens lose hope, and when lawful, nonviolent alternatives appear pointless.

    Whether the parties involved are blameless or not, whether they’re using the wrong tactics or not, whether their agendas are selfless or not, this is the face of a nation undergoing a nervous breakdown on all fronts.

    Now all that remains is a spark, and it need not be a very big one, to set the whole powder keg aflame.

    The government has been anticipating and preparing for such an explosion for years. For example, in 2008, a U.S. Army War College report warned that the military must be prepared for a “violent, strategic dislocation inside the United States,” which could be provoked by “unforeseen economic collapse,” “purposeful domestic resistance,” “pervasive public health emergencies” or “loss of functioning political and legal order”—all related to dissent and protests over America’s economic and political disarray. Consequently, predicted the report, the “widespread civil violence would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security.”

    In 2009, the Department of Homeland Security (DHS) released two reports, one on “Rightwing Extremism,” which broadly defines rightwing extremists as individuals and groups “that are mainly antigovernment, rejecting federal authority in favor of state or local authority, or rejecting government authority entirely,” and one on “Leftwing Extremism,” which labeled environmental and animal rights activist groups as extremists.

    Incredibly, both reports use the words terrorist and extremist interchangeably.

    That same year, the DHS launched Operation Vigilant Eagle, which calls for surveillance of military veterans returning from Iraq and Afghanistan, characterizing them as extremists and potential domestic terrorist threats because they may be “disgruntled, disillusioned or suffering from the psychological effects of war.” These reports indicate that for the government, anyone seen as opposing the government—whether they’re Left, Right or somewhere in between—can be labeled an extremist. Under such a definition, John Lennon, Martin Luther King Jr., Patrick Henry, Thomas Jefferson and Samuel Adams—all of whom protested and passionately spoke out against government practices with which they disagreed—would be prime targets.

    Fast forward a few years, and you have the National Defense Authorization Act (NDAA), which President Obama has continually re-upped, that allows the military to take you out of your home, lock you up with no access to friends, family or the courts if you’re seen as an extremist. Now connect the dots, from the 2009 Extremism reports to the NDAA and the UN’s Strong Cities Network with its globalized police forces, the National Security Agency’s far-reaching surveillance networks, and fusion centers that collect and share surveillance data between local, state and federal police agencies.

    Add in tens of thousands of armed, surveillance drones that will soon blanket American skies, facial recognition technology that will identify and track you wherever you go and whatever you do. And then to complete the circle, toss in the real-time crime centers being deployed in cities across the country, which will be attempting to “predict” crimes and identify criminals before they happen based on widespread surveillance, complex mathematical algorithms and prognostication programs.

    Hopefully you’re getting the picture, which is how easy it is for the government to identify, label and target individuals as “extremist.”

    All that we have been subjected to in recent years—living under the shadow of NSA spying; motorists strip searched and anally probed on the side of the road; innocent Americans spied upon while going about their daily business in schools and stores; homeowners having their doors kicked in by militarized SWAT teams serving routine warrants—illustrates how the government deals with people it views as potential “extremists”: with heavy-handed tactics designed to intimidate the populace into submission and discourage anyone from stepping out of line or challenging the status quo.

    What we’re grappling with is a double standard in what the government metes out to the citizenry, and how the citizenry is supposed to treat the government.

    SWAT teams can crash through our doors without impunity, but if we dare to defend ourselves against unknown government assailants, we’ll be shot or jailed.

    Government agents can confiscate our homes, impound our cars and seize our bank accounts on the slightest suspicion of wrongdoing, but we’ll face jail time and fines for refusing to pay taxes in support of government programs with which we might disagree.

    Government spies can listen in on our phone calls, read our emails and text messages, track our movements, photograph our license plates, and even enter our biometric information into DNA databases, but those who dare to film potential police misconduct will likely get roughed up by the police, arrested, and charged with violating various and sundry crimes.

    This phenomenon is what philosopher Abraham Kaplan referred to as the law of the instrument, which essentially says that to a hammer, everything looks like a nail. In the scenario that has been playing out in recent years, we the citizenry have become the nails to be hammered by the government’s battalion of laws and law enforcers: its police officers, technicians, bureaucrats, spies, snitches, inspectors, accountants, etc.

    This is exactly what those who drafted the U.S. Constitution feared: that laws and law enforcers would be used as tools by a despotic government to wage war against the citizenry.

    That is exactly what we are witnessing today: a war against the American citizenry.

    Is it any wonder then that Americans are starting to resist?

  • "It's Coming To A Head In 2016" – Why Bank of America Thinks The Probability Of A Chinese Crisis Is 100%

    Some sobering words about China’s imminent crisis, not from your friendly neighborhood doom and gloom village drunk, but from BofA’s China strategist David Cui.

    Excerpted from “2016 Year-Ahead: what may trigger financial instability“, a must-read report for anyone interested in learning how China’s epic stock market experiment ends.

    A case for financial instability

    It’s widely accepted that the best leading indicator of financial instability is rapid debt to GDP growth over a period of several years as it’s a strong sign of significant malinvestment. Based on Bank of International Settlement’s (BIS) private debt data and the financial instability episodes identified in “This time is different”, a book by Reinhart & Rogoff, we estimate that once a country grows its private debt to GDP ratio by over 40% within a period of four years, there is a 90% chance that it may run into financial system trouble (Table 1). The disturbance can be in the form of banking sector re-cap (with or without a credit crunch), sharp currency devaluation, high inflation, sovereign debt default or a combination of a few of these (Table 2).

     

    As Chart 1 demonstrates, China’s private debt to GDP ratio rose by 75% between 2009 and 2014 (i.e., since the Rmb4tr stimulus), by far the highest in the world (we suspect a significant portion of the debt growth in HK went to China). At the peak speed, over four years from 2009 to 2012, the ratio in China rose by 49%.

    Other than sovereign debt default, China has experienced all the other forms of financial instability since the open-door reform started in late 1970s, including a sharp currency devaluation in the early 1990s (Chart 3) and hyper-inflation in the late 1980s and early 1990s (Chart 4). China also needed to write-off bad debt and recap its banks every decade or so. Banking sector NPL reached some 40% in the late 1990s and early 2000s and the government had to strip off some 20% of GDP equivalent of bad debt from the banking system between 1999 and 2005.

    When debt problem gets too severe, a country can only solve it by devaluation (via the export channel), inflation (to make local currency debt worth less in real terms), writeoff/re-cap or default. We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem, particularly if the growth continues to be driven by debt-fueled investment in a weak-demand environment. We consider the most likely forms of financial instability that China may experience will be  a combination of RMB devaluation, debt write-off and banking sector re-cap and possibly high inflation. Given the sizeable and unstable shadow banking sector in China and the potential of capital flight, we also think the risk of a credit crunch developing in China is high.

    In our mind, the only uncertainty is timing and potential triggers of such instabilities.

    Why 2016 can be a dangerous year

    Since 2011, there had been a round of debate about the potential of hard landing and financial instability every year in the market. So far, the financial system has held up reasonably well, notwithstanding some periodic short term volatilities. Many view the absence of any severe disturbance as proof of the government’s ability to tame financial sector volatility and believe that the risk of this happening has diminished over time. We disagree. We believe that the government has maintained a superficial stability largely by debt-funded stimulus and an ever-greening of bad debts. These strengthened various implicit guarantees which have been generating destabilizing forces beneath the surface – a classic case of short term stability breeding long term instability. It’s our assessment that the longer this practice drags on, the higher the risk of financial system instability, and the more painful the ultimate fall-out will be.

    Whether the government intended for it or not, we summarize that investors and other market participants have been counting on five government guarantees over the years: 1) the government will prevent a sharp slowdown in GDP growth by running pro-growth macro policies, including fiscal stimulus; 2) up until about two years ago, the government would always appreciate RMB vs. the USD, at least moderately a year; and since then, the government will not allow a sharp devaluation of RMB; 3) since about 2014, the government will always support the A-share market; 4) the government will not allow major debt default; and 5) the government will always hold up the property market because it’s so essential to the financial system and local government income.

    In our view, so far these implicit guarantees have helped to maintain public confidence in the financial system or prevent investors from realizing the risks. However, as stated earlier, they are also creating powerful destabilizing forces. For example, the GDP growth guarantee means that the best strategy for many businesses over the past few years was to keep borrow and expand during any downturn, anticipating government stimulus; the RMB guarantee means that carry-trades designed to arbitrage interest rates and RMB appreciation became prevalent; the A-share market support prompted many investors to use leverage, counting on the government being the buyer of last resort; the no-default guarantee means many investors turned a blind eye to potential default risks (or simply not aware of them) and fund uneconomic projects; the property guarantee drove a significant portion of national savings into one of the most unproductive areas of the economy and the financial system has increasingly become a hostage to the property market via direct lending or through collaterals.

    The problem with this stability-maintaining strategy is that many of the goals are conflicting so maintaining all of them are logically irreconcilable. For example, the government have tried to hold up growth by pumping money into the system – China’s M2 growth has been among the fastest in the world since the global financial crisis (so in our view, debating about whether China should QE or not is beside the point).

    Moreover, if we properly account for local government borrowing, the government as a whole has probably been running fiscal deficit close to 10% of GDP a year over the past few years. With this type of macro policies, it’s difficult to see how RMB can stay stable and how debt growth can be controlled. Another example is that to hold up the A-share market, the government has borrowed from the PBoC and commercial banks. This may crowd out private lending and hurt growth, or accelerate money growth and hurt the RMB.

    It seems to us that the government’s policy options are rapidly narrowing – one only needs to look at how difficult it has been for the government to hold up GDP growth since mid-2014. A slow-down in economic growth is typically a prelude to financial sector instability. Putting it all together, it seems to us that many of these conflicts may come to a head in 2016.

    * * *

    There is much more in the full report, but here is the reco summary:

    We expect the key market theme in 2016 to be financial system instability as a few destabilizing forces seem to be coming to a head. We forecast HSCEI to decline by about 7% to around 9,000 (range for the year: 7,400-12,800), and SHCOMP, by about 27% to around 2,600 (range: 2,200-4,000), by 2016 YE. Our year-end targets had not factored in a credit crunch scenario because the timing of which is difficult to predict. Should it occur, we expect the indices to end below the low bounds, possibly substantially so.

    Just remember: if the Chinese government catches you selling, arrest, or far worse, awaits.

  • The Tragicomedy Of Self-Defeating Monetary Policy

    Submitted by Michael Lebowitz via 720Global.com,

    “It’s self-defeating to use the wrong monetary policy.”  -Ben Bernanke

    • What is productivity?
    • The Federal Reserve’s flawed growth benchmark
    • Excessive monetary policy is crushing productivity
    • The prescription for sustainable, durable growth – productivity

    "Because it is unclear exactly why productivity growth has slowed recently, it is difficult to be confident about what it will do in the future”.  –Bill Dudley June 2015 

    The recent quote from Federal Reserve Bank of New York President and Vice-chairman of the Federal Open Market Committee, Bill Dudley, inspired us to write this article and explain what Mr. Dudley cannot; why productivity, the key driver of economic growth, is not only slowing but on the verge of declining. 

    Bill Dudley and the Federal Reserve (Fed), in their efforts to influence economic growth may have created a speculative and consumption driven environment that is crushing productivity growth. This article explains what productivity is, how productivity has suffered at the hands of poorly benchmarked Fed policies and why those in charge of monetary policy must change their views if America is to economically thrive once again.

    Productivity

    Productivity is a core economic concept which measures the amount of leverage an economy can generate from its 2 primary inputs, labor and capital. Without productivity, economic growth is purely reliant on the 2 inputs. Given the limited nature of both labor and capital, they cannot be depended upon to produce durable economic growth over long periods of time. Leveraging labor and capital, or becoming more productive, is a function of many factors including innovation, education and financial incentives. In “Innovation – Too much, or too little of a good thing?” we discussed why the plethora of new technologies in the marketplace, are not as productive, especially in the long term, as they may appear. True ground breaking innovation involves time, effort and significant capital and ingenuity. Therefore it is imperative to ask, as we do in this article, is the Fed doing their part and providing pro-innovation incentives?

    Labor

    Labor, or human capital, is largely a function of the demographic makeup of an economy and its employees’ skillset and knowledge base. In the short run, increasing labor productivity is difficult. Changes to skills training and education take time to enact and produce a meaningful effect. Similarly, changes in birth rate patterns require decades to influence an economy. Immigration policies are arguably much easier to amend to foster more immediate growth, but the likelihood of pro-immigration policies these days is not probable.

    Within the labor force, the biggest trend affecting current and future economic activity is the so called “silver tsunami”, or the aging of the baby boomers. This cohort of the population, ages 51 to 69 are beginning to retire. As this occurs, they tend to consume less, rely more on financial support from the rest of the population, and withdraw valuable skills and knowledge from the workforce. The outsized number of people in this demographic cohort makes this occurrence more economically damaging than usual. As an example, the old age dependency ratio, which measures the ratio of people aged greater than 65 to the working population ages 18-64, is expected to nearly double by the year 2035 (Census Bureau).

    While the implications of changes in demographics and the workforce composition are numerous, they only require one vital point of emphasis: the significant economic contributions attributable to the baby boomers from the last 30+ years will diminish from here forward. As they contribute less, they will also require a higher allotment of financial support, becoming more dependent on younger workers.

    Capital

    Capital includes natural, man-made and financial resources. Over the past 30+ years, the U.S. economy benefited from significant capital growth, in particular debt. The growth in debt outstanding, a big component of capital, is shown (black line) in the graph below. The increase is stark when compared to the relatively modest level of economic activity that accompanied it (green line). The red arrows highlight the exponential rise in the ratio of debt to economic growth.

    Total Domestic Outstanding Credit vs. U.S. GDP

     

    This divergence in debt and economic growth is a result of many consecutive years of borrowing funds for consumptive purposes and the misallocation of capital, both of which are largely unproductive endeavors. In hindsight we know these actions were unproductive as highlighted by the steadily rising debt to GDP ratio shown above. The graph below tells the same story in a different manner, plotting the amount of debt required to generate $1 of economic growth. 

    Debt Required for Economic Growth

    Productivity

    Since 1980, the long term average growth rate of productivity has stagnated in a range of 0 to 2% annually, a sharp decline from the 30 years following WWII when productivity growth averaged 4%. The most recent productivity report from the San Francisco Federal Reserve shows an annualized decline of .06% versus the prior year. (http://www.frbsf.org/economic-research/indicators-data/total-factor-prod…)

    The graph below plots 10 year average productivity growth (black line) against the ratio of total U.S. credit outstanding to GDP (green line). 

    Debt to GDP Ratio vs 10yr Average Productivity Growth

    Within the graph, note the comparatively weak rate of productivity growth since 1980 and, more importantly, the trend towards zero productivity growth over the last 10 years. Additionally, productivity stagnation started as the debt to GDP ratio started climbing at a faster pace. This graph reinforces the message from the other debt related graphs – over the last 30 years the economy has relied more upon debt growth and less on productivity to generate economic activity.

    Given the finite ability to service capital and aforementioned demographic challenges, future economic growth, if we are to have it, will need to be based largely on gains in productivity as reliance on debt and demographics has largely run its course.

     

    The Fed’s Questionable Growth Target

    Throughout the last 30 years the Fed has become increasingly proactive in incentivizing economic growth towards their target – the potential economic growth rate. Unfortunately, the Fed’s measure of potential growth rate may be flawed leading to harmful consequences.

    To better explain potential growth we quote from an article entitled What Is Potential GDP and Why Does It Matter? Authored by William T. Gavin, Vice President and Economist at the St. Louis Federal Reserve. In the article, Mr. Gavin addresses how the Fed arrives at the potential growth rate as follows: “Instead, they estimate potential GDP by constructing measures of the trend in actual GDP that smooth out business cycle fluctuations”. This concept of relying on prior trends versus future potential is vital to grasp. From the same, article Mr. Gavin further explains: “But why does potential GDP matter? How do we use it? Potential GDP is important because monetary policymakers use the difference between actual and potential GDP—the output gap—to determine whether the economy needs more or less monetary stimulus”.

    Said differently, the decisions on how to employ monetary policy are based on a comparison of historical and current economic growth. This method ignores potential changes in growth factors that may cause GDP to deviate from the past.

    The graph below shows 7 year averages of the Fed’s potential economic growth vs. actual growth to show the simplicity of the Fed’s potential GDP forecast. Not surprisingly forecasted GDP growth for the next 10 years follows the economic growth trend of the last 10 years.

    Potential GDP vs Actual GDP

    Unfortunately, one must understand that potential GDP, as measured by the Fed, is not fully factoring in the limited ability to continue to increase debt loads, the demographic headwinds and the fact that productivity growth could likely be negative in the years ahead. The Fed’s measure of potential economic growth is solely a function of past activity and the different environment that produced it.

    To better explain the problems of following a faulty trend we compare 2 trends based on baseball legend Barry Bonds career statistics. During Bond’s peak playing years from ages 24 to 35 he posted outstanding statistics which likely would have earned him a seat in Cooperstown. Bonds batting average was consistently .300 or above, as seen below, and he averaged 36 home runs per year during those years. Following his peak years, when most players’ performance drops considerably, Bonds somehow got even better. From ages 36 to 40 his batting average and home run production exploded. During this time frame, Bonds averaged 51 home runs per year. This included his 2001 campaign when he hit 73 home runs, topping Mark McGwire’s then 3 year old record of 70 homeruns and shattering what had been the previous record, Roger Maris’ 61 homeruns in 1961.  

    Barry Bonds Batting Average

    As we now know, this incredible feat was not based entirely on his natural potential but was greatly aided by a new factor, steroids. The red and green lines above show 2 potential trend lines that could be used to summarize his performance. The red line represents Bond’s relative consistency during a typical professional players’ peak years. The green line shows the effect that steroids had on boosting performance and extending his career, or the deviation from typical potential. The gap between the trend lines is significant and could easily lead one, unaware of the new factor, to arrive at vastly different conclusions i.e. that Bonds had found some secret to increasing his productivity at a time when the typical player of similar age was declining or retired.   

    Basis for Monetary Policy

    Fortunately, monetary policy is not based off tainted baseball statistics. However, like in the Bonds example, there are new and changing factors in an economy that alter its potential growth rate. By failing to consider these factors and how such factors could alter their benchmark, the Fed runs the severe risk of conducting inappropriate monetary policy.

    The following graph illustrates how an erroneous potential growth rate would greatly change the Fed’s perception. Assume the true annual potential growth rate since 2000 was 0.50% less than the official Fed potential growth rate. Under this reasonable scenario, economic growth as measured by GDP (red) would have exceeded the hypothetical potential growth rate for 4 consecutive years prior to the financial crisis of 2008/09 and again over the last 3 years. When actual growth is above the “true” potential of an economy, the economy is pulling forward consumption from the future. When the future comes consumption needs have already been met and slower growth is inevitable. 

    Potential GDP, Actual GDP and Proxy Potential GDP

    Let us now consider that economic growth has failed to reach the Fed’s measure of potential GDP (blue line) since 2007. This is despite unprecedented stimulus in the form of a zero interest rate policy and the quadrupling of the money supply. One must question whether or not the target is correct. Maybe the so called “new normal” sluggish economic growth is the economy’s real potential and not the higher growth rate of years past. 

    We believe the potential growth rate is less than that which is targeted by the Fed. To what extent, is unclear. The widely followed Taylor Rule supports our analysis, to some degree, as it currently shows a glaring discrepancy between the current Fed Funds rate (.25-.50%) and that prescribed by the rule (2.92%). If the Taylor Rule and our thesis are correct, the potential growth rate of the U.S. economy may be much lower than the Fed thinks, and therefore monetary policy is not just “accommodative”, as described by Chairwoman Janet Yellen, but egregiously excessive.

    The Fed, by chasing an erroneous GDP growth target may have generated economic growth beyond that which would have otherwise been produced by keeping interest rates too low for too long and performing multiple rounds of quantitative easing. These actions increased the Fed’s measure of potential growth, creating a vicious cycle in which they repeatedly over-stimulate to meet an erroneous target. As this continually occurs, the gap between true potential and the Fed’s measure widen, leading to larger and larger policy errors.

     

    Excessive Stimulus is Crushing Productivity

    Worse yet, Fed monetary policy used to promote economic growth relies upon changes in interest rates and money supply to increase debt and drive consumption. Lower interest rates and QE have also spurred a strong preference for speculative investments, such as stocks, real-estate, and junk bonds, at the cost of productivity generating investments. Recent bubbles in technology, real estate, and stock valuations, to name a few, are signs of the speculative fever the Fed’s actions enabled. Low interest rates have also encouraged corporations to use valuable assets or borrowed funds to buy back stock instead of investing in growth-enhancing innovation. Globally, low rates in the U.S. led many investors to borrow in dollars to fund questionable projects over-seas.  In other words, trillions in capital has been misallocated with little benefit to productivity growth. While such actions may have caused one-time increases to GDP, they are neither producing sustainable economic gains nor has the debt incurred been paid down.

    If we are correct and the Fed is overestimating the potential growth rate, then by default they are also applying excessive stimulus to the economy.

     

    Prescription for Real Growth

    There are many reasons productivity growth has stagnated, and the Fed is certainly not solely responsible. Yet Fed officials, as witnessed by Mr. Dudley’s comments, treat productivity as an uncontrollable residual of capital and labor. They would be well-advised to take a different tack and use their enormous power to have a positive effect on productivity. Without productivity growth, economic growth in the future will be extremely limited as capital and labor cannot contribute nearly as much as they have in the past.

    The Fed, along with government, needs to properly incent productivity. The Fed should start this arduous task by removing excessive stimulus which will take the speculative fervor out of markets and allow asset bubbles to deflate. Although painful in the short term, it will allow capital to flow to more economically, productive uses that have been starved of capital. Congress, for their part, should reconsider current Fed mandates and discuss means in which the Fed can incent productivity growth.

    Ingenuity, not debt, made America an economic powerhouse. If we are to resume down that path we need the Fed to end their “self-defeating” policies and in its place we must demand ingenuity from them.

  • Some Canadians May Eat Themselves To Death Unless Oil Prices Rise, Doctor Warns

    Late last month in “This Is Canada’s Depression: Surging Crime, Soaring Suicides, Overwhelmed Food Banks ‘And The Worst Is Yet To Come,’” we took a sweeping look at what is truly pitiable situation in Alberta, the heart of the Canadian oil patch.

    Roughly a third of provincial revenue is derived from “resources” which means that when oil prices collapsed, the territory plunged into recession. Oil and gas investment fell by more than a third in in 2015 and in its latest fiscal update, the government said it fully expects the weakness to carry into 2016.

    Going into December, Canada was expected to lose as many as 100,000 oil and gas sector jobs in 2015. As the following chart from Bloomberg clearly demonstrates, the pain is especially acute in Calgary:

    Needless to say, that kind of economic malaise has very real societal consequences.

    In Alberta for instance, suicides were up 30% through June while violent crime is soaring. Property crime in Calgary, for example, rose nearly 40% during the first quarter.

    Food bank use in the province jumped more than 23% in March (the last month for which there’s data) and repo men say business is booming as Canadians struggle to make car payments amid the downturn.

    Now, some medical professionals warn that the fallout from crude’s historic plunge may well drive Albertans to eat themselves to death. “Alberta’s oil slump could have heavy, and unanticipated health consequences, experts are warning: a jump in obesity rates,” the National Post writes, adding that “the sudden shock of job loss, debt and unemployment can trigger stress-related physiological responses that cause the body to store fat, slow the rate it burns calories and increase cravings for high-fat, calorie-loaded ‘comfort foods.'”

    “As medical professionals, we need to acknowledge that unemployment and the worries that come with it can make our patients susceptible to weight gain,” warns Dr. Arya Sharma, professor and chair of obesity research and management at the University of Alberta. Here’s more from Sharma’s recent blog post entitled “Will Low Oil Prices Lead To An Obesity Spike In Alberta?”:

    According to the Alberta economic dashboard, in October 2015, Alberta’s seasonally adjusted unemployment rate was 6.6%, up from the 4.4% rate a year earlier and from last month’s 6.5% rate. The youth unemployment rate was 11.6%, up from last year’s 9.0% rate, while male unemployment increased precipitously from 3.6% last October to 7.3% this year.

     

    As no one seems to be expecting a rosier future for this industry, it may well be that many who lost their jobs in the wake of mass oil patch

    layoffs, will find the coming months (not to mention the festive season) both economically and emotionally challenging.

     

    According to this report, suicide rates from January to June in Alberta this year are up 30% compared to the same period in 2014.

    One challenge that may escape notice is the fact that this situation may also lead to significant weight gain in those affected.

     

    Depression, anxiety, food insecurity, insomnia and simply being unable to afford healthy food are all important risk factors for weight gain.

    Indeed it is hard to imagine how going from a high-paying job to being unemployed with little immediate hope of recovery will affect families.

    As The Post goes on to note, ” studies show that during the 2008 global financial meltdown families forced to cut back on food spending switched to cheaper, processed foods high in sugar and saturated fats [with] the hardest hit reducing their consumption of fruits and vegetables by as much as 20 per cent.” To add insult to injury, “many in Alberta are losing their jobs just as healthy food becomes even pricier: The dollar’s plunge and California drought led to a sharp rise in the prices of many fruits and vegetables in 2015, and University of Guelph researchers, in their annual Food Price Report, predict prices will increase in 2016 by up to 4.5 per cent — meaning the average household will spend $345 more than in 2015 for the same food, according to a university release.”

    So in Alberta it’s “feast or famine” in the most literal sense of the phrase as those who can still afford to buy food will drown their sorrows in cheap lunch meat and off-brand ice cream while the most hard hit members of society are forced to tap increasingly overwhelmed food banks. 

    “One Australian study found those hit hard in the last global recession had a 20-per-cent higher risk of becoming obese than those who escaped the worst of the slowdown,” The Post recounts before noting that “already, nearly six out of 10 Albertans are overweight or obese.” Here’s the official data from the Health Quality Council of Alberta:

    So quick Saudi Arabia, stop being so obstinate and cut production.

    You’ve already destroyed Alberta’s economy, do you want it to eat itself to death too?

  • After Tumbling At Open, Chinese Stocks Erase All Losses

    It's a miracle…

     

     

    "Someone" stepped in and bid the entire Chinese market higher off its huge opening gap down…

     

    Despite the biggest liquidity injection (CNY130bn) in 4 months, it appears Kyle Bass' top trade remains well on target as Offshore Yuan plunges, underperforming Onshore Yuan despite the largest Fix devaluation in two months. In a word – it's chaos in Chinese markets. The Shanghai Composite looks to be opening down 3% – extending yesterday's losses (beyond the US session's ADR's move). What a mess.

     

    First: PBOC devalues the Yuan fix by the most in 2 months…

     

    Offshore Yuan continues to collapse and remains over 1000 pips cheap to onshore Yuan…

     

    Despite the biggest liquidity injection in 4 months

    The People’s Bank of China will inject 130b yuan into the banking system using 7-day reverse repurchase agreements today, according to two traders at primary dealers required to bid at the auctions.

     

    Amount injected in operation today is most since Sept. 8

    and all of this has left Chinese stocks plunging….

     

    Charts: Bloomberg

  • With A Straight Face, US Government "Finds" Number Of Retiring 20-24 Year-Olds Has Doubled

    Earlier today we reported that when it comes to one of the most important data series that feed directly into the US GDP calculation, namely construction spending, the US government admitted it had literally made up numbers for the past 10 years. The phrase used was “processing error”:

    In the November 2015 press release, monthly and annual estimates for private residential, total private, total residential and total construction spending for January 2005 through October 2015 have been revised to correct a processing error in the tabulation of data on private residential improvement spending.

    A processing error that lasted for 10 years? And one which, mysteriously, ended up boosting both the construction spending “data” in 2015 and, as a result, the GDP?

    Odd coincidence, that.

    But nothing compares to the latest farce released recently by the Bureau of Labor Statistics, the same guys whom we caught fabricating jobs data back in September 2013.

    As everyone knows, one of the biggest question marks surrounding the US labor market is the 95 million of Americans not in the labor force, resulting in the lowest labor force participation rate since the mid-1970s.

     

    The answer to this question is critical because it would explain why despite “5% unemployment”, wages in the US stubbornly refuse to rise 7 years after the recession “ended” even as a record number of Americans aged 55 and over have jobs (mostly of the low-paying variety).

    Of course, the logical explanation is that due to various generous welfare state support nets, due to “disability” and due to $1.3 trillion in student loans, tens of millions of Americans of all ages have found other options: whether to stay in school for decades, to collect various forms of welfare, or simply because millions have given up trying to find a job since the labor market is not anywhere nearly as strong as the government would like to make it appear (especially after a few hundred thousands US workers lose their jobs after the $5 trillion in global M&A “synergies” hits in 2016), and have dropped out of the labor force entirely.

    But, in these trying times, logic does not make sense. So a few months ago, the Atlanta Fed tried to answer this question. Its answer: the labor force is plunging because people simply “don’t want a job.” No really:

    The decrease in labor force participation among prime-age individuals has been driven mostly by the share who say they currently don’t want a job. As of December 2014, prime-age labor force participation was 2.4 percentage points below its prerecession average. Of that, 0.5 percentage point is accounted for by a higher share who indicate they currently want a job; 2 percentage points can be attributed to a higher share who say they currently don’t want a job.

    That “explanation” did not fly with the goalseeking statisticians manning the Arima-X-12 seasonal adjustment vacuum tubes at the BLS, so, as Bloomberg reports, in a new Bureau of Labor Statistics report, these same career economists tired to provide fresh answers to this critical question.

    And here we cross in the twilight zone, because while fabricating numbers is one thing, engaging in absolute lunacy as a form of scientific inquiry is a bridge we did not think even the BLS would dare cross. we were wrong.

    Here’s Bloomberg’s summary of what the bureau found, broadly: Thirty-five percent of the U.S. population wasn’t in the labor force in 2014, up from 31.3 percent a decade earlier. (You’re considered out of the workforce if you don’t have a job and aren’t looking for one. That’s distinct from the official unemployment rate, which tracks those out of work who are actively job hunting.)

    Drilling down into the numbers reveals more about the shifts in the reasons some people forego a paycheck. In all age groups, for instance, more people cited retirement as the reason for being out of the labor force, and it wasn’t just older people.

    So far so good: who knows if this is true or not, but since it is a “scientific” study it probably can be replicated. Unfortunately, not in this case, because here was the punchline:

    For Americans between the ages of 20 and 24, the share of those sidelined over the past decade because they were in school increased, unsurprisingly, during the decade that included the Great Recession. What’s more unusual is that the share of 20- to 24-year-olds who say they’re retired doubled from 2004 to 2014.

     


    At this point we stopped reading for one simple reason: the fact that a “scientific” study can “find” that the number of 20-24 who have retired has doubled, shows that those conducting said experiment were simply said lunatics who had set up their experiment and null hypothesis incorrectly, had asked all the wrong questions, and worst of all, given themselves a “sanity check” and passed with flying colors despite something as glaring as this “finding.”

    What is most troubling is that these are the same economists in charge of “creating” seasonally adjusted, statistically relevant and completely fabricated job number which drive the market month after month. And then, when the bottom falls out of the economy, these same people will at their data and, like with the construction spending numbers, admit it was all a fraud.

    And sadly, this takes place every cycle: goalseeked, smoothed garbage data on the way up, then once the bullshit overflows and reality can no longer mask the underlying lies, everything falls apart, and back to square one we go.

    We can only hope that we are much closer to the end of this particular cycle, of both business and epic stupidity, one in which waiters, bartenders, and minimum-wage salespeople, or rather figments of a statistician’s imagination, are the forefront of the so-called US “recovery.”

  • "Refuse To Compromise", Ron Paul Implores "Purism Is Practical"

    Submitted by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

    Those who advocate ending, instead of reforming, the welfare-warfare state are often accused of being “impractical.” Some of the harshest criticisms come from libertarians who claim that advocates of “purism” forgo opportunities to make real progress toward restoring liberty. These critics fail to grasp the numerous reasons why it is crucial for libertarians to consistently and vigorously advance the purist position.

    First, and most important, those who know the truth have a moral obligation to speak the truth. People who understand the need for drastic changes in foreign, domestic, and, especially, monetary policy should not pretend that a little tinkering will fix our problems. Those who do so are just as guilty of lying to the public as is a promise-breaking politician. Attempting to advance liberty by lying is not just immoral; it is also a flawed strategy that is doomed to fail.

    The inevitable failure of “reforms” that do not eliminate the market distortions caused by government intervention will be used to discredit both the freedom philosophy and its advocates. The result will be increased support for more welfare, more warfare, and more fiat money. Thus, those who avoid discussing the root causes of our problems, not those they smear as impractical purists, are the ones undermining liberty.

    For example, many Obamacare opponents refuse to advocate for true free-market health care. Instead, they propose various forms of “Obamacare lite.” By ceding the premise that government should play a major role in health care, proponents of Obamacare lite strengthen the position of those who say the way to fix Obamacare is by giving government more power. Thus, Obamacare lite supporters are inadvertently advancing the cause of socialized medicine. The only way to ensure that Obamacare is not replaced by something worse is to unapologetically promote true free-market health care.

    This is not to suggest libertarians should reject transitional measures. A gradual transition is the best way to achieve liberty without causing massive social and economic disruptions. However, we must only settle for compromises that actually move us in the right direction. So we should reject a compromise budget that “only” increases spending by 80 percent. In contrast, a budget that actually reduces spending by 20 percent would be a positive step forward.

    Those who advocate a so-called extreme position can often move the center of political debate closer to the pure libertarian position. This can actually increase the likelihood of taking real, if small, steps toward liberty. More importantly, the best way to ensure that we never achieve real liberty is for libertarians to shy away from making the case for the free society.

    Sometimes ideological movements are able to turn yesterday’s “fringe” ideas into today’s “mainstream” position. Just a few years ago it was inconceivable that a significant number of states would legalize medical, and even reactional, marijuana or that a majority of states would have passed laws allowing citizens to openly carry firearms. The success of these issues is not due to sudden changes in public opinion, but to years of hard work by principled advocates and activists.

    The ever-growing number of Americans who are joining the liberty movement are not interested in “reforming” the welfare-warfare state. They also have no interest in “fixing" the Federal Reserve via “rules-based” monetary policy. Instead, this movement is dedicated to auditing, then ending, the Fed and stopping the government from trying to run the economy, run the world, and run our lives. If this movement refuses to compromise its principles, we may succeed in restoring a society of liberty, peace, and prosperity in our lifetimes.

  • Is 2016 The Year Of The Dollar Collapse?

    Submitted by Simon Black via SovereignMan.com,

    On September 4, 1993, President Bill Clinton spoke about the American Dream in a weekly radio address.

    He told his audience that “in America, the idea is that if you work hard and play by the rules, you’ll be rewarded with a good life for yourself and a better chance for your children.”

    That’s what America used to stand for, and indeed much of the Western world. Freedom. Truth. Hard work and fair play. Building a better life.

    But those ideals have all but faded now, displaced by a new normal of war, debt, government surveillance, freedom-killing bureaucracy, and a monetary policy that decimates responsible, hard-working people for the benefit of a tiny elite.

    In his end-of-year commentary in the Washington Post, writer George Will summed up 2015 citing example after example of government overreach and excess–

    • The value of property seized by the US federal government through Civil Asset Forfeiture exceeded the value of property stolen by burglars and thieves
    • Florida police raided a Mahjong game played by four women aged 87 through 95 because they were *gasp* betting with their own money
    • New Jersey police arrested a 72-year old retired schoolteacher for illegally carrying a firearm– a 300-year old flintlock pistol he had purchased from an antique dealer
    • A 9-year old in Florida was threatened with sexual harassment charges for writing love notes to a girl saying that her eyes sparkled like diamonds

    George Will’s list, of course, barely scratched the surface of the tip of the iceberg.

    2015 was the year that the middle class was officially vanquished in the Land of the Free, with its share of the population falling to just 50%.

    US federal debt reached nearly $19 trillion in 2015, an increase of almost $750 billion during the calendar year.

    The US government published over 80,000 pages of new regulations, making it nearly impossible to understand ‘the rules’, let alone play by them.

    2015 also saw the passing of incomprehensibly terrible laws, including the USA Freedom Act, which restored many of the worst parts of the PATRIOT Act that were set to expire.

    Then there was the Cybersecurity Information Sharing Act, passed at the end of the year, which officially turns the Land of the Free into a gigantic information-sharing surveillance state.

    And of course the 2015 spending bill, which as of 3 days ago, allows the US government to strip you of your passport if they believe in their sole discretion that you owe them money.

    These are hardly the actions of a solvent, trustworthy government, or a nation that’s on the right track.

    It doesn’t take a rocket scientist to figure out that this story doesn’t have a happy ending.

    We can pretend that this time is different, that this country is different, that there is some special sauce that allows this government to run massive imbalances forever.

    But deep down we all know the truth… and where this is headed.

    I’ve read no shortage of apocalyptic predictions suggesting that 2016 is the year of the dollar collapse. Or the global economic collapse.

    Or something else that invariably ends in the word ‘collapse.’

    I don’t believe that. First, no one can credibly answer the question “when?”

    Governments have surprised us all with their uncanny ability to kick the can down the road and delay the repercussions of their folly.

    But I don’t really think the question of ‘when’ is relevant.

    Nearly every major western government is insolvent. Entire monetary and financial systems are insolvent.

    Governments have destroyed their own middle classes, giving rise to the greatest wealth gap that has existed since the Great Depression.

    The risks are obvious. And you either stick your head in the sand and ignore them, or you take steps to reduce their impact on your life.

    It’s like anything else – if you live in a wildfire zone, you get fire insurance. And you’ll never be worse off for having good coverage on your home to protect your family.

    Having a Plan B just makes sense, regardless of whether a major disaster occurs in 2016, next year, or never.

    We can’t see the future, we can only see the risks today. Develop a Plan B that addresses those risks, and you’ll never have to worry about the future again.

  • Montel Williams Calls For "Shoot To Kill" In Oregon Showdown; Militiamen Respond They Are "Ready To Fight"

    In the latest development in the ongoing saga of Ammon Bundy’s seizure of a Federal wildlife reuge office in Oregon, the members of the militia said they’re ready to fight, but they won’t say what they would actually do if federal authorities try to remove them by force as reported in the clip below.

     

    However, while we noted the shortcomings in Bundy’s latest standoff last night, what is even more notable is that as Shepard Ambellas of Intellihub points out, Montel Williams he tweeted that the National Guard should be mobilized to “kill” protesters who have currently overtaken the federal building in Burns, Oregon.

    Moreover USA Today has reported that “militia members used the ranchers as a ruse,” in what I and others feel may be the planed catalyst to start a civil war in America.

    Monday, Rick Jervis wrote:

    The Oregon sheriff whose county is at the heart of an anti-government call-to-arms said Sunday the group occupying a national wildlife refuge came to town under false pretenses.

     

    Sheriff David Ward said protesters came to Harney County, in southeastern Oregon, “claiming to be part of militia groups supporting local ranchers.” In reality, he said, “these men had alternative motives to attempt to overthrow the county and federal government in hopes to spark a movement across the United States.”

     

    In a statement issued Sunday afternoon, Ward said he was working with local and federal authorities to resolve the situation as quickly and peacefully as possible.

    Intellihub adds that its staff has identified a few suspicious individuals who claim to stand with the militants which may attempt to provocateur, escalate, the situation further. As we noted last night, this also is a distinct possibility.

    Finally, in an interesting tangent, the WaPo, which admits that there “are gun rights issues, religious overtones, broad strains of anti-government sentiment and even the tactics of the Occupy Wall Street movement” as underlying motives behind the seizure, focuses on “very particular question of how much land the government controls in the state — the same question that animated the dispute with rancher Cliven Bundy in Nevada two years ago — and that helped motivate Bundy’s son Ammon to take a lead role in the Oregon standoff.”

    It then provides several charts, alongside the following analysis, to show this curious aspect of what may be the core motive behind Bundy’s actions. To wit:

    More than half of Oregon is owned by the federal government, with a large percentage of that land owned by the Bureau of Land Management — an agency widely reviled in the West and known by its acronym, BLM. (Ammon Bundy was forced to clarify on Twitter that his use of “BLM” didn’t refer to the Black Lives Matter movement.) Data from the U.S. Geological Survey shows the amount of federal land in the state.

    (This map and the ones below only show areas of 600 or more acres held by the government.)

    The takeover occurred near Malheur Lake, at a building that’s part of the Malheur National Wildlife Refuge. That lake is at the upper center of the BLM’s map of the surrounding area, which shows just how much is controlled by the government. (The original protests over the Hammonds’ sentencing began in Burns, Ore.)

    Part of the issue is that there isn’t much population in the eastern part of the state. Mapping Oregon’s population, you can see Portland and a corridor near the coast, which is about it. The area around the wildlife refuge has almost no population.

    There’s a historic link between population and federal land ownership. In 2012, the Congressional Research Service looked at the history of tensions between the government and the population out West — particularly ranchers and farmers who, like the Hammonds and Bundys, use federal land for grazing and other purposes.

    Early in the history of the country, the government took over land that was then distributed to citizens for farming and economic growth. As the United States expanded westward, the land was increasingly inhospitable, including the Rockies and the deserts of Nevada and Utah. By the end of the 19th century, a new focus was placed on conserving the land, with Yellowstone becoming the first national park in 1872. At that point, very few people lived in the area, as this 1890 Census Bureau map suggests.

    Over the course of the 20th century, the government’s emphasis shifted away from releasing the land to private citizens and toward managing it itself. The passage of 1976’s Federal Land Policy and Management Act made that policy concrete, keeping the land as the property of the government. After the federal government’s shift, there was a push from some in the West, including governors and members of Congress, to shift control from the federal to the state or local government. The Sagebrush Rebellion, as it was known, tapered off during the relative friendly administration of Ronald Reagan.

    The longstanding political and legal dispute was summarized in more depth by the conservative Heritage Foundation, but the Congressional Research Service makes one additional point that’s important to consider.

    “From the earliest days,” the CRS researchers write, “these policy views took on East/West overtones, with easterners more likely to view the lands as national public property, and westerners more likely to view the lands as necessary for local use and development.”

    That’s one reason for the objection from Westerners. The other is that the lock-down on the land came after the East was heavily settled but before the West had been. In the East, land was turned over to farmers. In the West, settled later in the country’s history, there were fewer people to hand it to.

    Compare the Dakotas to Oregon, for example. In 1910, here’s how the population was distributed. Even the Dakotas had pockets of population.

    It’s still sparsely populated.

    But very little of the land is federal.

    On that 1910 map, notice that Nevada has very little population — thanks in part to its landscape being even less hospitable than the Dakotas. Its population is still small, save Reno and Las Vegas.

    The vast majority of the land — including the land around the Bundy ranch — is owned by the government to this day.

    The conclusion: “The fight isn’t new, as the Congressional Research Service report notes. What’s new is the way in which the broader political moment has cross-pollinated with longstanding objections to how the government manages land out West. The takeover in Oregon has its roots in the Sagebrush Rebellion. They way it’s being manifested, though, is as modern as it gets.”

    * * *

    It remains to be seen if the National Guard will take up Montel on his “shoot to kill” advice.

  • Gold: The Unsurance Policy – Love It Or Loathe It

    Grant Williams, Of Things That May You Go Hhhmm, gave the following presentation at Mines & Money in London in early December laying out why he believes the gold price is languishing despite a wealth of what would ordinarily be positive catalysts. Currently, outside those who focus on precious metals, there is an enormous amount of apathy but, we suspect, that apathy will shortly turn to enthusiasm – an enthusiasm which will expose the rift between paper prices set in NY and the structural changes undergone in the physical markets over the last several years. Still, outside of today's small move, for now… Nobody Cares.

     

    Gold: The Unsurance Policy

     

     

    Read more at ttmygh.com

  • This Is A Very Troubling Chart

    The chart below, showing the total number of monthly FBI firearm background checks – a direct proxy for gun purchases in the U.S., needs no commentary.

     

    Here is the same data, on a monthly basis to avoid the seasonal noise. No matter how one looks at it though, the 3.3 million background checks in December was a record high.

     

    Neither of these are the “troubling chart” referenced in the title. This one shown below is, and it comes courtesy of the NYT:

     

    The chart shows that while the soaring gun sales are the effect, the cause is simple: president Obama.

    The same president who tomorrow at 11:40am will finally reveal just what, after many delays, his executive action(s) on gun control will be.

    The concern is that with one more year under Obama’s term, gun sales over the next 12 months are certain to surge to new all time highs as Obama’s crusade to crush the second amendment slowly picks up steam in order to cement his “anti-gun” legacy, and as the population rushes to buy as many as it can before Obama makes such purchases illegal.

    It’s not all bad news though: gun makers could not have asked for a better president, as the following headline just confirmed:

    • SMITH & WESSON SEES 3Q ADJ. EPS 39C-41C, SAW 27C-29C

    As of this moment Smith and Wesson is trading at an all time high.

  • China Day 1: Monumental Destruction

    Submitted by Salil Mehta via Statistical Ideas blog,

    China's Shanghai Composite index was stopped down nearly 7% on the first trading day of the new year.  This is worse than 99.6% of all trading days since the beginning of 2007 (a monstrous era covering the entire market turmoil of the global financial crisis).
     
    To put some risk context behind how poor a ~7% drop is -in relation to the worst losses over different time (not just relative to all daily changes)- we look at a variety of time units.  This is different from the market convolution math discussed previously (here, here).  For example, today’s loss in China is worse than 93% of the worst daily losses per month, since 2007.  We see this in the chart immediately below.  And in the chart further below that, we see today’s loss is worse than 67% of the worst daily losses per year.  Lastly, in that same chart, we show China’s first day loss is worse than even the majority of the worst weekly losses per year!  This conservative measure substantiates that on just a single day, the losses stemming from China has breached most of the worst risk levels that would normally take a complete week to get through. 
     
     
    And we see in the chart above that today's loss in China is worse than the worst daily loss coming out of 100 out of the past 108 months (only the 3 months where the worst daily loss was rounded to 0% have been truncated from the chart above)!  In fact, as shown in the blue portion of the chart, there have only been 4 months since mid-2008, where the worst daily loss that month was worse than today's loss.  Those 2015 months are: January, June, July, and August.
     
     
    We see in the jittery chart above (third column), that today's loss is worse than the worst daily loss coming out of 6 of the past 9 years (hence the 67%).  And in the middle column we see today's loss is worse than the worst weekly loss coming out of 5 of the past 9 years (or the majority)!  This statistic provides a powerful segue with our prequel article on the worst weekly loss distributions.  Finally in the first column we see that today's loss is worse than the worst monthly loss coming out of even 2 of the past 9 years.  
     
    The main takeaways from this article is that market shocks can be quite quick, when they suddenly unravel.  There is no need for markets to follow an observable pattern (therefore casting an omen just for you).  Recall as well that this is just "day 1"!  There are ~20 additional dramatic trading days ahead this month, where anything can precipitously take place.

  • Citigroup Says "It's Too Early To Panic"; Here's Why

    Panic. That is, according to some of the best strategists on Wall Street, the most concise summary of trader sentiment today following a near history rout in the market on the first day of trading of 2016.

    But don’t worry: according to Citi’s Brent Donnelly, “It is too early to panic.”

    Here’s why:

    First is a link from Bloomberg on how the first day of the year does not predict the rest of year.

     

    The chart is mine and shows the 14 times we saw a >1% drop on Day 1 of the year, then what happened on Day 2. Mostly rallies

    And while we are confident that Citi will promptly advise when the right time to panic finally arrives, there is another popular saying: “he who panics first, panics best.”

  • Jailhouse Diary Of A Libor Manipulation Scapegoat

    When last we checked in on Tom Hayes, the “Rain Man” was headed to HM Prison Wandsworth, which Bloomberg describes as “a Victorian fortress south of the Thames known for its poor conditions and violent residents.”

    You’ll recall that Hayes was the unlucky soul who became the scapegoat for the endemic corruption and unbridled greed that transformed the financial world’s most important benchmark into a tool the banks used to generate outsized gains for their own trading books. In other words: Hayes took the fall for the LIBOR scandal, becoming a rare human casualty in a world where white collar, Wall Street criminals almost never pay for their proverbial sins.

    Officially, a jury found Hayes guilty of eight counts of conspiracy. His sentence: 14 years.

    For those wondering what life is like behind bars for the man whose head had to roll so that many more “important” heads would not, we bring you Hayes’ letters from Wandsworth.

    *  *  *

    As originally published by The Daily Mail

    It was over. The guard led me into a room daubed in graffiti, with the faint smell of cigarettes and urine. He allowed me to use the toilet, but it had no door – the days of privacy and dignity were over. A plastic toilet with no seat. I couldn’t really comprehend it.

    I was led to a small holding cell and the door behind me was locked. I could hear banging and shouting from other cells. I curled up on the only thing in the cell, a wooden bench.

    I was then led away by a sympathetic female guard who reassured me. She handcuffed my wrist to hers, and we waited in line for those going to HMP Wandsworth to be searched.

    I figured if I sat with my back against the side of the van, no photographer would be able to get a photo of me. I pushed my back against the wall – they had enough photos; they didn’t need one of me at my lowest ebb. As the van stopped at the junction to turn on to Tooley Street, the cameras flashed through the darkened windows. I scrunched back to keep out of shot.

    The drive through the busy commuter traffic was strange. I looked out of the window at everyone going home, passing familiar places. The guards played Capital Radio; I couldn’t quite comprehend these were sights I wouldn’t see for years. Life outside the van seemed so normal.

    We pulled through the gatehouse at Wandsworth. Vans were stacked up waiting to unload and we sat for about 30 minutes waiting for our turn. Slowly my shock was abating.

    We were ordered off the van. Most on it were on remand and returning for the day. I, on the other hand, was going through induction. A strip-search. My modesty seemed strangely immune. Again it seemed like a dream, followed by an awful grey tracksuit and light blue T-shirt.

    As an entry-level prisoner, I was not allowed my own clothes. Nor was I allowed my prison bag. I was issued with a blue plastic plate, bowl and mug, and a pack of Happy Shopper tea, UHT milk and biscuits.

    It seemed so strange; these were my belongings in a clear plastic HMP bag. I was still wearing my court shoes, which made me look stupid in my tracksuit as we went to E-wing so they could process me. I was given a plate of rice and green beans and an apple. Some induction orderlies [prisoners who work on the induction wing] came to speak to me. They offered advice and some kind words, but I was a fish out of water; all I wanted to do was speak to my wife Sarah, hear her voice, for her to reassure me. I wanted to go home.

    A prison guard in the office let me make a one-minute phone call.

    I struggled not to cry. I told Sarah I was OK; she sounded fine, but we were both staying strong for one another. Then, clutching my cutlery, tea and biscuits and green sheets/pillowcase and orange blanket, I was sent down the hall.

    Because I had been processed I was meant to go to cell E403 (cell No 3 on the fourth floor). I asked a prison officer where I should go and he thought I hadn’t yet been processed. He sent me over the corridor to a holding cell full of Albanians and a heroin addict in withdrawal.

    It was about 7pm and I could hear the Channel 4 News from the TVs along the wing. I sat on the concrete floor knowing my face was on the screens next door. The room was thick with smoke. The addict kicked the steel door repeatedly, demanding attention. Officers ignored him.

    All the sounds of prison that now wash over me as ambient noise seemed so clear. I felt exhausted. A three-month trial, three-and-a-half years of bail. Years of uncertainty, years of fighting were over. At about 10pm, one officer popped his head through the door. Prisoners were coming and going as they were processed and he seemed surprised to see me. ‘Hayes! What are you doing here? You’ve been processed!’

    I clutched my meagre belongings and followed him. I felt like a refugee with my bedding and plastic bags. Then he realised they had paired me with the addict in withdrawal. I waited for 20 minutes while they moved the addict, then they put me and another first-timer in cell E403 together. I took the bottom bunk. The addict had taken the pillow. I made the bed. Fortunately the weather was hot, because the orange blanket was threadbare and offered no insulation at all.

    While my cellmate snored, I stared at the bunk above. My mind was racing and, although I was tired, I couldn’t sleep. During the trial I had taken sleeping tablets, but I didn’t have any now. Not having a watch meant I had no notion of time. Eventually the sun came up and I heard aircraft on the approach to Heathrow. I knew it must be 6am, because nothing lands before then.

    I had been given some milk and oats for breakfast the night before, but we had no kettle or hot water to make porridge. I rang the bell to ask for some hot water.

    The prison officer dismissed me. ‘Wait till we unlock you,’ was the response. We got unlocked at lunch.

    My first exercise time in the austere concrete yard reminded me of the film Midnight Express, as people circled the yard anticlockwise.

    I thought about the lunatic in the film who decided to go the other way and pondered what would happen if I did that. Some guys worked out, others smoked or harassed people for ‘burn’ [tobacco].

    I wandered in circles aimlessly, enjoying the sunshine and natural light.

    I think in my early days I stood out – I probably still do – but certainly some people recognised me from the media coverage. People seemed to labour under the misapprehension that I had made ‘trillions’ for myself. Others didn’t recognise me but, seeing the court shoes, realised I was a recent arrival and inquired whether I had brought a ‘package’ with me.

    Confused and apprehensive, I told them I didn’t have anything with me.

    I later learnt that this refers to drugs inserted in your anus. I was also told that on occasions these will be forcibly removed by other prisoners using a spoon, so I’m lucky that I didn’t have a package.

    As we left the yard, one prisoner covered himself in olive oil and tried to set himself alight – his hydrocarbon knowledge wasn’t the best, I thought.

    During my healthcare visit the nurse offered me a hepatitis B vaccination. I refused on the basis I couldn’t fathom how I could catch a blood-borne virus. Later, after observing various biting incidents, I have now had my three jabs and am vaccinated.

    Just before 5pm, the cell door opened and I was ordered to gather my ‘possessions’ and told I was moving. Although I’m now a veteran mover, at the time I hurriedly gathered the biscuits and UHT milk, my green sheet and orange blanket and, feeling like the refugees from Syria who were all over the TV, I shuffled after the guard, bidding my cellmate a laconic goodbye.

    Looking back now, I feel sorry for my first cellmate. I really chewed his ear off in that first 24 hours; all the hurt and pain poured out as I paced that tiny cell. I barely listened to his problems. Although I can’t recall his name, I’ll be for ever grateful to him for listening and helping me through that first 24 hours.

    Confused, I asked where I was going. ‘To CSU,’ came the response. Me: ‘What’s that?’ Prison officer: ‘Care and segregation unit.’ Me: ‘Why am I going there?’

    At this point, as we made our way down into the basement of E-wing that houses the segregation unit, I felt panicked that I was being taken out of the general population to be held in isolation.

    Prison officer: ‘You are a potential Category A prisoner.’ Me: ‘What? I am the most unlikely Category A prisoner ever!’ Prison officer: ‘You have the means to escape.’ Me: ‘Escape? I’ve been on bail for three years!’ I later discovered I had been put in the CSU for my own protection. Because my case had been so ‘high profile’, it was feared I would be targeted. In fact, I was in the same cell that Max Clifford had been in a few months earlier, E010.

    I couldn’t watch TV. All that sitting and watching TV as a student seemed such a waste of time; now I had all the time, I wanted to do nothing and watch TV, and I couldn’t even turn it on except to try to figure out the time of day (I still had no watch).

    I broke the day into segments. I needed to get from breakfast to lunch, lunch to dinner, dinner to bed, to try to sleep, and I had been prescribed sleeping tablets to get me through the night. Because I was on ACCT [Assessment, Care in Custody and Teamwork, for prisoners considered at risk of suicide or self-harm], the light was turned on every hour to check I was still alive, and would disturb me yet further.

    I don’t blame the prison for that, but I operated in a bizarre dystopia, exhausted in the day, unable to sleep at night.

    I was locked up for roughly 23 hours per day in the segregation unit. Everywhere I went I was accompanied by three officers.

    As I walked on my own round the tiny exercise yard for 30 minutes, three prison officers looked on. I was observing the rank filth of the prison; the yard covered in rubbish thrown from the cells. It was almost as if neither prisoners nor officers really had any respect for the environment in which they lived.

    The cell was covered in graffiti, which I would idly read, trying to imagine all the people who had been in the same cell since 1851 when the prison was built.

    Being let out for any reason was a treat. A shower, collecting “food” from the server, a healthcare appointment – anything for some form of human contact with anyone.

    I knew my mum and Sarah were going to try to visit on Wednesday morning, a reception visit allowed during the first few days. I anxiously watched the clock on the TV, having discovered the radio channel had one. I was becoming anxious. What if they had forgotten me? I was desperate to see them. At 10.15, someone came to fetch me for my visit. I breathed a sigh of relief.

    The hour flew by. I ate chocolate and drank tea from the cafe in the visitor sector and felt a little happier. My wife assessed the centre to see if it would be suitable to bring my year-old son Josh.

    I had never had the chance to say a proper goodbye to him. The morning of the sentence, I had left him as normal at nursery school and had not come home.

    Soon the visit ended. There were tears all round as we said our goodbyes, and Sarah hugged me.

    Even though the August weather was 25C, the basement cells at Wandsworth were freezing. The floor felt like ice. I sat on the bed and wrapped two blankets around me. You can do ten seconds of anything, I thought, so you can do this. Seven years is a lot of ten seconds, though. My fellow occupants of the ‘Seg’ were a noisy collection. Most were there as punishment and spent large amounts of time shouting and kicking the doors. My first cell had been adjacent to one such door-kicker. Now I was in a marginally quieter cell, but I was still woken by kicking at 3am.

    Shouted conversation took place between cells. I stayed quiet and listened. The speakers would be out early next year, I learnt. How I envied them.

    Being in isolation, you become attuned to the slightest sounds as you try to figure out what’s happening on the other side of the door. Footsteps, the clink of keys, the near-constant shouting echoing round the old building.

    Someone from the governing board came to see me on Friday evening. Once again I appealed to him that I wanted some company.

    Governor: ‘OK, but don’t get yourself beaten up.’ Me: ‘We have a mutual interest in that not happening.’ And so my time in CSU ended. I collected my still uneaten biscuits, tea bags and UHT milk (there are no kettles in case inmates throw boiling water at the officers), my bedding and my book and carried them back upstairs.

    I was in cell E432 on the top floor; it was considerably warmer than the basement. My new cellmate arrived on remand for a drug offence. Arrested on Wednesday and unable to shower, he stank. His obesity and the hot weather meant I regretted leaving the CSU. He stripped to his underwear; he was very hairy. He was a big TV fan and knew all the daytime programmes. He watched every soap. I tried to negotiate a slot to watch Channel 4 News between Hollyoaks, EastEnders, Emmerdale, Neighbours and Coronation Street. Instead, we agreed I could watch Newsnight at 10.30. University Challenge was rejected.

    Over the weekend the prison was shortstaffed, so we had no association time [time spent outside the cell] on either Saturday or Sunday. That meant no occasion for my new cellmate to shower. The temperature was high and, at some point, he lay down on my bed. I looked at his huge, sweaty, near-naked body lying on my bedding and felt vaguely sick.

    I was being eaten up inside; those moments of quiet time allowed me to be alone with my thoughts and try to work out how I was going to cope with seven years of incarceration.

    I was learning a bit more about prison life; I witnessed someone getting ‘bent up’ [prison parlance for restrained] by the prison officers. Another officer ordered me back to my cell. When I pointed out that the commotion was taking place directly outside my cell and I had no way of returning to it, he locked me in the shower room with a paedophile killer (who claimed he had written a book that was in the library).

    Because it happened after a weekend with no association time, I needed a shower, but had no toiletries or towel and so was unable to take advantage of this unexpected situation. Instead, I was locked away with a lunatic who engaged me in conversation. The officers forgot about us. After I had banged on the door for 30 minutes, someone passed by and unlocked the door. ‘What are you doing in here?’ they demanded. The irony of being locked in a room by someone else, then asked how we got there, was lost on him.

    The same day saw another prisoner jump on to the netting between the landings. He refused to leave until he had a KFC. It duly arrived and, once he finished it, he came down and was removed to CSU.

    The prison seemed to operate on a reverse incentives system: the worse you behaved, the more you got.

    Monday came and I had now been in prison for one week. As sure as night followed day, it was now time for another cell move. This time over the corridor to E401 – it had a pillow and a kettle! My new cellmate was a nice guy called Tim. We got on well. He had a two-and-a-half-year sentence and was due to be released in February. I felt jealous, but we had plenty to talk about and he was very considerate, listening at length to my frustrations. I had my first communal shower; the facilities were very dirty. I needed to shave. I asked for a razor and some shaving foam and was told, ‘Shaving foam? You’re in prison now. Use soap.’ The prison razor and soap left me with a bad shaving rash.

    I don’t recall much about Tuesday and Wednesday; perhaps my body was coming down from operating on adrenaline. I got to speak to Sarah twice in snatched five-minute conversations. Her visit booking for Thursday hadn’t been dealt with. I felt crushed.

    On Thursday morning, the cell door was unlocked. ‘Hayes, you have three minutes to pack your stuff. You’re going to Nottingham.’ Again I felt crushed. ‘Why Nottingham? So far from my friends and family?’ ‘I don’t know. The decision has been made by the area officer.’ I was on my way out of Wandsworth. I said goodbye to Tim and made my way down to reception. I changed out of the prison tracksuit I had now worn for 11 consecutive days and back into the same clothes I wore to court on August 3. As I left, the reception orderly reassured me. ‘You’ve won the prison lottery,’ he said. ‘People would give their right arm to get there.’

    It gave me some hope, but at that time it just seemed a lot further from Sarah. I got into the prison van alone; I was the only passenger. As we went through the gatehouse at Wandsworth, I contemplated how little time I had spent there. But I was no longer a prison virgin.

    I’m in the Open University room typing this, because my cell is so cold right now. I use my electric toaster to try to heat it up, but I still sit there with about five layers on.

    Last night, some lunatic prisoner in the wing next to mine broke a lot of pipes and flooded everything, so we were locked up with no water, hot or cold, unable to flush the toilet, in the freezing cold. The cell below me engaged in a ‘dirty protest’, smearing faeces everywhere, and smashing up the room, and the cell opposite had someone having a psychotic fit from taking ‘spice’ [synthetic cannabis], banging and shouting.

    I lay on my bed and wondered how I had ended up here.

    I often look at the trees on the other side of the fence from my cell; I’ve become quite the ornithologist. It seems so strange that we live in the same place but they are free, able to come and go from the trees on the ‘free’ side of the fence.

    The wagtails sit on the razor wire and I like to see them choose from all the rubbish thrown from cell windows.

    I’m becoming more immune to prison life now; being strip-searched has lost the embarrassment and indignity I felt at first.

    Drug overdoses and fights are de rigueur, and the monotony of life here takes over.’


  • US Government Discovers 10 Years Of "Processing Errors" In Construction Spending Data Slamming GDP

    Even as increasingly more parts of the economy, especially those with exposure to manufacturing and industrial production, sink into the recessionary quicksand, one sector that was seen as immune from the malaise gripping US manufacturing and was outperforming the overall growth rate of the US economy, was housing, and specifically spending on private and public construction: a direct input into the GDP model.

    That all changed today when the US Census released its latest, November, construction spending data, which not only missed expectations of a 0.6% increase, but tumbled -0.4%, the most since June of 2014, while all the recent changes were mysteriously revised lower.

    And then the source of the mystery was revealed: in the fine print of the release, the government made a rare admission: all the construction spending data for the past 10 years had been “erroneous.”

    In the November 2015 press release, monthly and annual estimates for private residential, total private, total residential and total construction spending for January 2005 through October 2015 have been revised to correct a processing error in the tabulation of data on private residential improvement spending. An Excel file containg all of the revisions can be found here

    The result of the “revision” of the processing error is shown below: every month starting with April and going through October, was “found” to have been a lower increase than according to the previous data. Not only that, but the October print which had been the strongest since May, confounding many data watchers as it did not fit with anecdotal evidence of a dramatic slowdown in energy-related construction, suddenly was barely positive, leading to the November sequential decline, the worst since the -0.7% drop in June of 2014.

     

    And here is the big picture: what it reveals is that while spending data in 2013 was revised substantially higher, it proves what many have known, namely that the economy is now slowing substantially and that what until recently was seen as the strong annual increase in construction spending, namely the 14.3% increase of September 2015, was in fact substantially lower.

    The result is that the October Y/Y% change of 10.5%, and declining, is not only the lowest increase since April, but matches the level first reported in December 2013. In other words, contrary to the previous narrative suggesting construction spending was solid and supporting a growing economy, it has in fact been declining since June!

    And to think of the tons of digital ink spent by “strategists” and experts analyzing construction spending “data” in the past 5 years…

    Sarcasm aside, what this exercise proves – which is clearly meant to lower the goalseeked glideslope of the US economy and make it easier to enter recession – is what many have already said, namely that Yellen clearly missed her window to hike rates with the economy now clearly slowing down, and instead of tightening monetary conditions, Yellen should be easing and preparing to lower rates.

    To be sure, this is not the first time the US government has slashed historical data on a wholesale basis due to “revisions” and “errors” – recall our post from December 2014 “The Housing Recovery Remains Cancelled Due To 6 Months Of Downward Revisions” in which we showed how 6 months of New Home Sales were quietly revised materially and, of course, to the downside.

     

    And since as noted above, this data feeds straight into the GDP “beancounts”, we expect substantial downward revisions of recent historical GDP data, which will once again confirm Yellen’s rate hike error.

    Finally, we now await for even more government data (perhaps payrolls is next) to “unexpectedly” be shown as having substantial historical errors, and be revised, like in the cases above, materially to the downside because it will look silly if the US economy jumps from growth straight into recession with existing “data sets” which reveal that the bulk of what passes for “data” at the US government is simply double and triple-seasonally adjusted GIGO.

  • Late-Day Buying Panic Saves Stocks From Worst Start To January In 84 Years

    Santa Rally…?

     

    An ugly day… just as we predicted

     

    The bloodbath started in China, which was halted early on circuit breakers…

     

    Europe was ugly…

     

    And that dragged US Futures lower, which were not helped by weak manufacturing data, weak construction data, and not helped by overly confident Fed speakers, but shortly before the EU close a hug eblock sucked up all ther liquidity in futures and stalled the selloff. We rallied back to VWAP around 1995 in S&P then faded…

     

    The machines did their best at 1101ET to stall the weakness, which ramped to VWAP before institutional selling started…

     

    Cash indices saw Dow break to a 16,000 handle, S&P under 2,000, and Nasdaq under 5,000…before a late-dat $2-3bn MOC buy order out of nowhere lifted everything…

     

    The moment 330ET hit, VIX was slammed (via rampant buying XIV – inverse VIX ETF) and S&P pumped back above 2000

     

    Financials were worst, Energy best…

     

    FANTAsy stocks all plunged with Tesla and Amazon worst…

     

    But Apple managed to ramp back to green briefly as we supposed its ubiquitous buyback prgram stepped in…

     

    US equities dropped to 3-month lows, catching down to high yield bonds' weakness once again – just as they did in August…

     

    Financials tumbled to 3-month lows, catching down to the yield curve collapse just as they did in August…

     

    Treasury yields dropped all morning but as Europe closed, sellers moved in lifting yields and reducing sme of the early flatness…

     

    The US Dollar index rose on the day against the majors (as European buying beat Asia selling)…

     

    And Asian FX tumbled to fresh 6 year lows against the USD…

     

    Commodities were a mixed bag. Despite USD strengtrh, Gold surged over 1% buit silver was stalled when US growth was questioned and sent crude tumbling…

     

    Crude ended the day lower as record gluts and weak growth trumped any war premium fears…

     

    Charts: Bloomberg

    Bonus Chart:  Just as we warned last week, we have seen this pattern of global pass the illiquidity hot potato contagion before…

     

     

    Bonus Bonus Chart: You know it's a bad day when…

  • Are Governments Running Out of Candy?

    Submitted by Jeff Thomas via InternationalMan.com,

    By now, many readers will have seen the popular American YouTube video by Mark Dice in which he stands on a city sidewalk and offers passers-by a free gift. They may choose between a 10-ounce silver bar or a large Hershey’s candy bar.

    Each taker chooses the candy – most of them with no deliberation. The only taker who seems to hesitate at all soon decides on the candy, as “I don’t have any way to do anything with the silver.” (Behind them is a coin shop. Mister Dice offers to take the silver bar inside if she wishes, but she’s uninterested and takes the candy.)

    A 10-ounce silver bar is presently valued at about $140, the Hershey’s bar at about $2.

    Mister Dice doesn’t comment in the video as to what lesson might be learned from this, but an obvious one would be that Americans (or at least those who reside in his home town of San Diego, California) are prone to prefer instant gratification over something of substantially greater, but delayed value.

    If this is his intent, he’s succeeded well in his light-hearted, but instructive video.

    Since the 1950’s, much of the world has perceived Americans as being on “Easy Street,” and in recent decades, the U.S. government has fuelled American complacency through a consciousness of easy money and entitlement.

    And so, Americans are often perceived by those outside the U.S. as being somewhat insulated, spoiled, naïve, and short-sighted. But, if this is true, Americans certainly aren’t alone. Much the same exists in Europe, Canada, and quite a few other countries that have, over recent decades, followed the American socio-economic model.

    Trouble is, all that easy money and entitlement exists only as long as a source for the “freebies” exists. Unfortunately, the idea that freebies are free is inaccurate. Freebies of any description must be paid for by someone.

    In business, freebies are sometimes provided as “loss-leaders” to attract more business. They therefore become a line item on the monthly balance sheet, a cost-of-doing-business expense. The business hopes to make the loss back through sales generated by the loss-leader.

    But, when governments hand out freebies, no sales will be generated, so the loss will not be recovered. When governments hand out freebies, the cost is paid with tax revenues. And when taxes have been raised to the point that further increases would be difficult without inciting rebellion, governments generally rely on borrowing.

    But, of course, borrowing, too, eventually reaches the point that it has become so great that it cannot be repaid. What then?

    Invariably, economic collapse is the outcome. But, why should this be so? Well, when the tipping point is reached (as in jurisdictions like the EU and U.S., where more than 50% of the public are net recipients and the other 50% must pay for both themselves and the other 50%), there’s no turning back. Those who have been receiving the candy have been told that they’re entitled to it and now they believe it. They will not tolerate the suggestion that the freebies must end, even though no further tax can be reasonably levied; no further funds can be borrowed. Therefore, in every case, the result is systemic collapse, not a gradual tapering off.

    For thousands of years, governments have sought to appease people with freebies. In ancient Rome, a dole of grain and free entertainment (bread and circuses) helped to usher in the decline of the empire. Like all great empires, it collapsed under a weight of debt and mismanagement.

    Much of the world is presently at this tipping point. Governments continue to promise benefits that they know will soon come to an end. If history repeats, they will continue repeating this promise right up until the day when the candy stops being dished out.

    They will then say that no one could have seen this coming.

    Amongst the public who will be the victims, there will be three general groups.

    First will be the Takers, those who have been the recipients who depended upon the freebies the most. They will be the hardest hit, as not only will they lose the freebies, they will have neither the skills nor the imagination to become self-reliant overnight.

     

    The second group will be the Payers, those whose tax dollars paid for the freebies. They will be hard hit, as the system in which they live and operate has broken down, although they will fare better than the Takers. They will have the skills and imagination to rebuild their lives (having previously been productive enough to pay for themselves and others.)

     

    Third will be the Preparers, those who envisioned the inevitability of the collapse of the system. They most certainly will have the skills and imagination to rebuild their lives, but, additionally, they’ll have the means with which to rebuild quickly. They will be the very few who chose the silver bar over the candy and had the wisdom to store the silver in a jurisdiction where it was not likely to be appropriated by a dying empire.

    Much of the world is now running out of candy. The latest version of Bread and Circuses is reaching its inevitable end.

    Replaying the video, we observe Mister Dice offering chocolate or silver. Each Taker looks at him incredulously, then makes the obvious choice, the candy. Each of them gives him a smile. Each is pleased to walk away with the chocolate, but, likely as not, each will have consumed the bar before the day is out and the benefit of the freebie will be short-lived.

    After giving out eight bars, Mister Dice is all out of chocolate and he presumably goes home. He has no candy, but he does have 10 ounces of silver. Perhaps he owns other silver bars as well, stored in a safer jurisdiction.

    Each of us has the opportunity to make a choice as to whether we wish to be Takers, Payers, or Preparers. The choice we make may define our future.

  • For Kyle Bass This Is "The Greatest Investment Opportunity Right Now"

    Over the weekend, when citing from an excerpt of the latest Wall Street Week episode, we revealed what to Kyle Bass was the “best investment for the next 3-5 years”: the energy space. Bass added he was agnostic as to what subsector of energy one should invest in: whether it is infrastructure, pipelines, producers, upstream, downstream, he believes that there are places in the cap structure of each of these where once can put new capital and generate substantial returns. He also added that “the energy rebound, when it happens, will be comparable to the housing rebound post 2009.”

    Coming from the guy who correctly predicted the collapse of housing going into 2009, one should take his prediction seriously, even though as Bass himself admitted, he was early to this trade which led to “one of the worst years in the last ten” for his Hayman Capital. Judging by today’s very modest reaction in the price of oil to a dramatic escalation in the Middle East, the market will need a far more dramatic reduction in supply before it agrees with Bass’ thesis.

    But what about the shorter-term for those who don’t have a 3-5 year investment horizon? Bass discussed that after a question by Gary Kaminsky asking the Texas hedge fund manager “when you look at opportunities as an investor right now, what’s the greatest opportunity?”

    His response:

    “Given our views on credit contraction in Asia, and in China in particular, let’s say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there’s one thing that is going to happen: China is going to have to dramatically devalue its currency.”

    He is quick to note that this is not a trade for everyone: “it’s very tough to invest as a non-professional” very much the way buying CDS on subprme MBS was a trade only for a select few. That said, the trade – which we agree with thoroughly, and have repeatedly said that China has to devalue further, in fact we predicted China’s devaluation just three days before it happened – makes a lot of sense. Bass continues:

    “China many years ago attached its currency to the dollar: they hitched their wagon to our star very smartly because back then our goal was to depreciate our dollar through inflation. So we issued debt to the rest of the world to depreciate the dollar. And so now the real problem is China has hitched their wagon to our star, and their currency has effectively appreciated about 60% versus the rest of the world since 2005 and it’s killing them… China’s effective exchange rate moving up versus the rest of the world made their goods and services a little bit more expensive each year and now that labor arbitrage is gone. And if that labor arbitrage is gone, and the banking system has expanded 400% in 7 years without a nonperforming loan cycle, my view is we are going to see a non-performing loan cycle.”

    We fully agree with this as well: incidentally, China’s NPL time, or “neutron” as we call it, bomb, has been extensively covered on this website in the past for the simple reason that while the official print here is about 1.5% of all bank loans are said to be “bad” or non-performing, the real number is likely around 20%, something which virtually guarantees a financial crisis in China at any given moment (more on that in a latter post). This is our summary on China’s NPL debacle:

    If one very conservatively assumes that loans are about half of the total asset base (realistically 60-70%), and applies an 20% NPL to this number instead of the official 1.5% NPL estimate, the capital shortfall is a staggering $3 trillion. That, as we suggested three weeks ago, may help to explain why round after round of liquidity injections (via RRR cuts, LTROs, and various short- and medium-term financing ops) haven’t done much to boost the credit impulse. In short, banks may be quietly soaking up the funds not to lend them out, but to plug a giant, $3 trillion, solvency shortfall.

    Incidentally, this is precisely what Bank of America just said overnight:

    When debt problem gets too severe, a country can only solve it by devaluation (via the export channel), inflation (to make local currency debt worth less in real terms), writeoff/re-cap or default. We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem, particularly if the growth continues to be driven by debt-fueled investment in a weak-demand environment. We consider the most likely forms of financial instability that China may experience will be a combination of RMB devaluation, debt write-off and banking sector re-cap and possibly high inflation. Given the sizeable and unstable shadow banking sector in China and the potential of capital flight, we also think the risk of a credit crunch developing in China is high. In our mind, the only uncertainty is timing and potential triggers of such instabilities.

    But back to Bass and his best trade idea – he conveniently even puts a time horizon:

    “We are not short Chinese equities, but we are very invested in the Chinese currency: we think we are going to see a pretty material devaluation; we think it’s going to be in the next 12-18 months.”

    Finally, judging by the ongoing collapse in the onshore and offshore Yuans overnight, which saw the currency tumble to fresh 5 year lows…

    … it may be far sooner, especially when considering what Macquarie Capital’s strategist Thierry Wizman said earlier today: “the big drop overnight reflects policymakers’ willingness to allow currency to account for weak data.” He expects the USDCNY to rise ~8% this year.

    The full Kyle Bass interview is below, and the part discussing the best investment opportunity begins 10:40 in.

  • This Just Became The Most Important Map In Geopolitics

    Earlier today, in “Mid-East Melee: Sectarian Showdown Looms As Bahrain Cuts Ties With Iran, UAE Recalls Ambassador,” we brought you the latest from the war-torn Mid-East where a worsening spat between Saudi Arabia and Iran threatens to plunge the region into chaos.

    Make no mistake, things were already out of control. The conflict in Syria has mushroomed into a global proxy war, Iraq is struggling to drive Islamic State from key cities, and Yemen remains mired in war nine months after the Saudis entered the fray to drive back the Houthis and restore the Hadi government.

    Against that backdrop, the region could have done without the events that unfolded over the weekend. By executing prominent Shiite cleric Nimr al-Nimr, Riyadh has infuriated the Shiite community which took to the streets in protest, even going so far as to firebomb the Saudi embassy in Tehran.

    In order to understand the upcoming sectarian strife and in order to fully grasp who belongs to Iran’s sphere of influence and who is loyal to the Saudis, one needs to have a working knowledge of what the Sunni-Shiite split looks like across the region. Because this is set to become the key geopolitical issue in the weeks and months ahead, we thought it an opportune time to present the following map from Goldman which does a nice job of delineating the sectarian split. Note the asterisks which indicate the affiliation of a country’s leadership.

    From Goldman

    Where are the main sectarian and ethnic divides in the Middle East today? Saudi Arabia and Iran, with their large respective Sunni and Shiite majorities, are generally viewed as two major opposing forces in the Middle East. They lie on opposite sides of an abstract and somewhat contentious demarcation known as the Shiite crescent, an area of Shiite influence stretching from Iran through southern Iraq and into parts of Syria and Lebanon. 

    The region’s geopolitical, religious, and sectarian relationships are in reality more dynamic and complex. The conflict in Syria continues to pit anti-government insurgents, including Sunni Islamists, against the Alawite (Shiite) government’s forces and Shiite militias supported by Iran. In Iraq, some Sunnis have felt increasingly disenfranchised under the Shiite-majority government in Baghdad (a relatively new development given Iraq’s long history of Sunni rule). The Islamic State (IS) militant group has exploited this sentiment, particularly in the Sunni-majority areas of northern Iraq. 

    How are the different branches of Islam represented in politics? In some countries, such as Saudi Arabia, the rulers adhere to the same branch of Islam as the majority of their citizens. However, this is not always the case. Despite being predominantly Shiite, Iraqis lived under Sunni rulers for much of history, including under the Ottoman Empire and the Ba’thist regime of Saddam Hussein. (Ba’thists are members of the Arab Socialist Ba’th Party, a political party founded in Syria in the 1940s on platforms of Arab nationalism and anti- colonialism. In Iraq, the Ba’thists governed from 1958 until the fall of Saddam Hussein in 2003.) The Iraqi Ba’thist regime was secular in name but reserved political influence for the Sunni elite. In a break from its long history of Sunni political dominance, Iraq is currently ruled by a Shiite-majority government centered in Baghdad. Conversely, in Sunni-majority Syria, members of the Shiite Alawite sect have controlled the government since 1970. 

    What is the composition of Sunnis and Shiites in the Muslim world today? Sunnis make up the majority of Muslims worldwide – an estimated 85-90%. Sunnis comprise 85% or more of the Muslim populations in Saudi Arabia, Qatar, Jordan, Syria, and the United Arab Emirates, and 70-85% in Kuwait, Pakistan, and Afghanistan. Shiites comprise the majority in Bahrain, Iraq, and Azerbaijan (all 60-65% Shiite), as well as in Iran (90-95%), home of the largest Shiite population. Although the Middle East and North Africa region is overwhelmingly Muslim (93%), it is home to only around 20% of Muslims worldwide. The majority – over 60% – lives in the Asia-Pacific region. 

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