• Lawrence Wilkerson: "The American 'Empire' Is In Deep, Deep Trouble"

  Former US army colonel and Chief of Staff for Colin Powell, Lawrence Wilkerson unleashed a most prescient speech on the demise of the United States Empire.

  As Naked Capitalism's Yves Smith notes, Wilkerson describes the path of empires in decline and shows how the US is following the classic trajectory. He contends that the US needs to make a transition to being one of many powers and focus more on strategies of international cooperation.

  The video is full of rich historical detail and terrific, if sobering, nuggets, such as:

  "History tells us we’re probably finished.

   

  The rest of of the world is awakening to the fact that the United States is 1) strategically inept and 2) not the power it used to be. And that the trend is to increase that."

  Wilkerson includes in his talk not just the way that the US projects power abroad, but internal symptoms of decline, such as concentration of wealth and power, corruption and the disproportionate role of financial interests.

   

   

  Wilkerson also says the odds of rapid collapse of the US as an empire is much greater is generally recognized. He also includes the issues of climate change and resource constraints, and points out how perverse it is that the Department of Defense is the agency that is taking climate change most seriously. He says that the worst cases scenario projected by scientists is that the world will have enough arable land to support 400 million people.

  Further key excerpts include:

  “Empires at the end concentrate on military force as the be all and end all of power… at the end they use more mercenary based forces than citizen based forces”

   

  “Empires at the end…go ethically and morally bankrupt… they end up with bankers and financiers running the empire, sound familiar?”

   

  “So they [empires] will go out for example, when an attack occurs on them by barbarians that kills 3000 of their citizens, mostly because of their negligence, they will go out and kill 300,000 people and spend 3 trillion dollars in order to counter that threat to the status quo. They will then proceed throughout the world to exacerbate that threat by their own actions, sound familiar?…This is what they [empires] do particularly when they are getting ready to collapse”

   

  “This is what empires in decline do, they can’t even in govern themselves”

   

  Quoting a Chinese man who was a democrat, then a communist (under Mao) then, when he became disenchanted, a poet and writer…”You can sit around a table and talk about politics, about social issues, about anything and you can have a reasonable discussion with a reasonable person. But start talking about the mal-distribution of wealth and you better get your gun” ….”that’s where we are, in Europe and the United States”.

  

  

  

  

  

• Emerging Market Meltdown May Plunge Global Economy Into Recession

  When the Fed effectively telegraphed its new reaction function last month, the FOMC served notice to the world that it was not only acutely aware of what’s going on in emerging markets, but also extremely worried about the possibility that hiking rates could end up triggering something far worse than the “tantrum” that unfolded across EM in 2013.

  The dire scenario facing the world’s emerging economies has by now been well documented.

  In short, slumping commodity prices, depressed raw materials demand from the Chinese growth engine, a slowdown in global trade, and a loss of competitiveness thanks to the yuan devaluation have conspired with a number of idiosyncratic, country-specific political risk factors to wreak havoc on EM FX and put an immense amount of pressure of the accumulated stash of USD-denominated reserves.  

  For the Fed, this presents a serious problem. Hiking rates has the potential to accelerate EM capital outflows and yet not hiking rates does too. That is, a soaring dollar will obviously ratchet up the pressure on EM FX but then again, because the uncertainty the FOMC fosters by continuing to delay liftoff contributes to a gradual capital outflow, not hiking rates endangers EM as well. 

  As we’ve been keen to point out, DM central banks aren’t operating in a vacuum. That is, if a policy “mistake” serves to tip EM over the edge, the crisis will feed back into the world’s advanced economies forcing DM central banks to immediately recant any and all hawkishness. For more evidence of EM fragility and the link between an emerging market meltdown and DM stability, we go to FT:

  Emerging economies risk “leading the world economy into a slump”, with lower growth and a rout in financial markets, according to the latest Brookings Institution-Financial Times tracking index.

   

  Released ahead of the annual meetings of the International Monetary Fund and World Bank in Lima, Peru, the index paints a much more pessimistic outlook than the fund is likely to predict later this week.

   

  According to Eswar Prasad of Brookings, weak economic data across most poorer economies has created “a dangerous combination of divergent growth patterns, deficient demand, and deflationary risks”.

   

  

   

  The Tiger index — Tracking Indices for the Global Economic Recovery — shows how measures of real activity, financial markets and investor confidence compare with their historical averages in the global economy and within each country.

   

  The extreme weakness in the emerging market component of the Tiger growth index shows that data releases have been significantly weaker than their historic averages.

   

  Divergence is almost as important as a new trend highlighted in the index, however, with India emerging as a bright spot and commodity importers such as Brazil and Russia mired in recession.

   

  
  

   

  Because emerging economies are now much more important in the global economy and growth rates are still higher than their developed counterparts, global growth is still hovering around 3 per cent, close to its long-term average.

   

  The concern, according to Mr Prasad is that the slump in emerging economies’ confidence will infect advanced economist in the months ahead.

  Of course the trouble in EM portends a drain in global FX reserves. This is what Deutsche Bank has dubbed the end of the “Great Accumulation” and, all else equal, it’s a drain on global liquidity as exported capital from commodity producers turns negative. Here’s BNP on what the picture looked like in Q2:

  The Q2 2015 COFER (Currency Composition of Foreign Exchange Reserves) report from the IMF contained some key changes. For the first time, the IMF reported the list of 92 countries that are providing reserve allocation data. Importantly China started reporting its FX allocations for the first time, although still on a partial basis, with the goal of increasing the reported portfolio to full coverage of FX reserves over the next two to three years. A full inclusion of China would push the share of allocated to total reserves over 80%, making COFER reserve allocation data much more representative and relevant for analysing EM FX reserve management trends.

   

  
  

   

  On a valuation adjusted basis, we estimate that total foreign exchange reserve holdings declined by USD 107bn in Q2. The IMF no longer reports the split between advanced and emerging economies but it’s very likely that much of this decrease was due to EM FX intervention. 

  In other words, the dynamics that have propped up the global financial system for decades are now unwinding and at a much more fundamental level than what occurred in 2008. Emerging markets are now liquidating their USD cushions and a combination of low commodity prices and hightened political risks threatens to set the world’s most important emerging markets back decades. 

  Importantly, it’s no longer a matter of whether DM central bankers can correct the problem by adopting policies that will serve to boost global demand, but rather if the world’s most vaunted central planners can keep things from completely unraveling and on that note we close with the following from the above cited Eswar Prasad:

  “The impotence of monetary policy in boosting growth and staving off deflationary pressures has become painfully apparent, especially when it is acting in isolation and when a large number of countries are resorting to the same limited playbook.”

  
  

  

  

  

  

  

• And Scene: Ben Bernanke Says More People Should Have Gone To Jail For Causing The Great Recession

  For those who may be unfamiliar – which would mean roughly 90% of the US population who believe the Federal Reserve is a national park – Ben Bernanke was Fed chairman from 2006 until 2014. He is better known as the Fed chairman who never launched a tightening cycle during his tenure. He is best known for not only bailing out Wall Street from the folly of his and his predecessor’s bubble-creating monetary policy and boosting the Fed’s balance sheet to $4.5 trillion, but also for the following selection of quotes:

  10/1/00 – Article published in Foreign Policy Magazine

  A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily.

   

  7/1/05 – Interview on CNBC

  INTERVIEWER: Ben, there’s been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?

  BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it’s important to note that fundamentals are also very strong. We’ve got a growing economy, jobs, incomes. We’ve got very low mortgage rates. We’ve got demographics supporting housing growth. We’ve got restricted supply in some places. So it’s certainly understandable that prices would go up some. I don’t know whether prices are exactly where they should be, but I think it’s fair to say that much of what’s happened is supported by the strength of the economy.

   

  7/1/05 – Interview on CNBC

  INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

  BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.

   

  10/20/05 – Testimony before the Joint Economic Committee, Congress

  House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.

   

  11/15/05 – Confirmation Hearing before Senate Banking Committee

  SEN. SARBANES: Warren Buffet has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?

  BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable… With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well-managed and do not create excessive risk in their institutions.

   

  3/6/07 – At bankers’ conference in Honolulu, Hawaii… as delinquencies in the subprime mortgage sector rise

  The credit risks associated with an affordable-housing portfolio need not be any greater than mortgage portfolios generally.

   

  3/28/07 – Testimony before the Joint Economic Committee, Congress

  Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear…At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

   

  5/17/07 – Remarks before the Federal Reserve Board of Chicago

  …we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.

   

  8/31/07 – Remarks at the Fed Economic Symposium in Jackson Hole

  It is not the responsibility of the Federal Reserve–nor would it be appropriate–to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.

   

  1/10/08 – Response to a Question after Speech in Washington, D.C.

  The Federal Reserve is not currently forecasting a recession.

   

  2/27/08 – Testimony before the Senate Banking Committee

  I expect there will be some failures [among smaller regional banks]… Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.

   

  4/2/08 – New York Times article after the collapse of Bear Stearns

  “In separate comments, Mr. Bernanke went further than he had in the past, suggesting that the Fed would remain aggressive and vigilant to prevent a repetition of a collapse like that of Bear Stearns, though he said he saw no such problems on the horizon.”

   

  6/10/08 – Remarks before a bankers’ conference in Chatham, Massachusetts

  The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so. 

   

  7/16/08 – Testimony before House Financial Services Committee

  [Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing… [However,] the weakness in market confidence is having real effects as their stock prices fall, and it’s difficult for them to raise capital.  

   

  9/24/08 – Response to a question after JEC testimony… during the TARP debate, two weeks before the Fed initiates its liquidity facility for commercial paper markets

  I see the financial markets as already quite fragile. The credit markets aren’t working. Corporations aren’t able to finance themselves through commercial paper. Even if the situation stayed as it did today, that would be a significant drag on the economy.

   

  3/16/09 – Interview on CBS’s 60 Minutes

  It’s absolutely unfair that taxpayer dollars are going to prop up a company (AIG) that made these terrible bets, that was operating out of the sight of regulators. 

   

  5/5/09 – Response to Questioning at Senate Joint Economic Committee Hearing

  The forecast we have is for the economy, in terms of growth, to begin to turn up later this year, but initially not to grow at the rate of potential, which means that unemployment and resource slack will continue to rise into 2010. We think that the unemployment rate will probably peak early in 2010 and then come down relatively slowly after that. Um, currently, we don’t think it’s going to get to 10 percent, we’re somewhere in the 9’s, but clearly, that’s way too high. 

   

  7/21/09 – Testimony before the House Committee on Financial Services

  A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.

  … Or summarized:

  And then earlier this year, when we learned that Bernanke’s memoir titled “The Courage To Act” is coming out, he added another quote:

  “When the economic well-being of their nation demanded a strong and creative response, my colleagues at the Federal Reserve, policymakers and staff alike, mustered the moral courage to do what was necessary, often in the face of bitter criticism and condemnation. I am grateful to all of them.”

  Why do we bring this up?

  Two reasons:

  First, tomorrow Ben Bernanke will be on CNBC’s Squawk Box to promote his book, the same CNBC which from a credible financial channel has metamorphosed into an outlet whose only purpose is to cheerlead the stock market and get as many people invested in the next and final Ponzi as possible. He will also discuss the disastrous state of the post-post-bubble economy and the latest plunge in payrolls.

  Second, today as part of the same book promotion tour (supposedly because nobody wants to pay Bernanke $250,000 to listen to an hour of bullshit now that the Fed no longer has credibility) he had this exchange with the USA Today’s Susan Page:

  Q. Should somebody have gone to jail.

   

  Bernanke: Yeah, yeah I think so. I have objected for a long time – the Department of Justice is responsible for that.

  A quick tangent here: in March 2013 former US Attorney General Eric Holder told Senator Chuck Grassley that the size of some institutions is so big “that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large.”

  Nuf said. Continuing with Bernanke’s answer:

  Bernanke: A lot of [the DOJ’s] efforts have been to indict or threaten to indict financial firms. Now financial firm, of course, is a legal fiction. It’s not a person, you can’t put a financial firm in jail. It would have been my preference to have more investigation of individual actions as obviously everything that went wrong, or was illegal, was done by some individual not by an abstract firm.

  So something like the Federal reserve being an “abstract firm” versus people like Ben Bernanke who were actual individuals?

  The whole thing is 4:20 into the exchange.

   

  We thoroughly agree with Bernanke that more people who were responsible for the biggest economic collapse in history should have gone to jail, starting, of course, with Ben Bernanke himself.

  However, as even Bernanke himself now points out, with the entire judicial and legislative system now a supreme farce, explicitly in the pocket of corporations and Wall Street banks, we aren’t holding our breath. 

  Then again, after the next, and final financial crash – one that wipes out the paper wealth of America – and the one that finally destroys the central-bank/central-planning model, putting an end to Keynesian economics as well as fiat currency, ironically the safest place for people like Bernanke as the revolutionary mob approaches would be, well, jail.

  We doubt the irony of this will be appreciated by Ben.

  

  

  

  

  

• The Perilous Misperception That Central Bankers Have Mitigated Market Risk

  Via Doug Noland's Credit Bubble Bulletin,

  This week provided further evidence that the bursting global Bubble has progressed to a critical juncture, afflicting Core markets and economies. Ominously, few seem aware of the profound ramifications – or even the unfolding hostile market backdrop. Even many of the most sophisticated market operators have been caught off guard. There is, as well, scant indication that Federal Reserve officials appreciate what’s unfolding.

  I was again this week reminded of an overarching theme from Adam Fergusson’s classic, “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar German”: throughout that period’s catastrophic monetary inflation, German central bank officials believed they were responding to outside forces. Somehow they remained oblivious that the trap of disorderly money printing had become the core problem.

  Dr. Williams’ comment, “It's okay to have the party. It’s okay to get the party going…”, would be laughable if it were not so tragic. At this point, let’s hope the true story of this period gets told. I’m trying: monetary policies for almost 30 years now have been disastrous, a harsh reality masked by epic global market Bubbles.

  It’s incredible that confidence in central banking has proved so resilient, though this dynamic no doubt revolves around a single – and circular – dynamic: “whatever it takes” central banking has thus far succeeded in sustaining securities market inflation. And it’s astounding that central bankers at this point are professing “It’s ok to get the party going.” The central bankers’ beloved Party is going to get crashed.

  My mind this week also drifted back to a CBB written weeks after the tragic 9/11/2001 attacks. Shock had hit the markets, confidence and the real economy. Officials were determined to stimulate. I recall writing something to this effect: “If stimulus is deemed necessary, please rely on some deficit spending rather than monkeying with the financial markets. Market intervention/manipulation is such a slippery slope.” Back then no one had any idea how far experimental monetary policy could slide into the dark caverns of the deep unknown. Economic, financial, terror, geopolitical – or whatever unanticipated risk that might arise – all-powerful central bankers had an answer that would make things right.

  I read with keen interest a Q&A with Jim Grant (Grant’s Interest Rate Observer) reproduced at Zero Hedge. Like others, I’m a big fan of Jim’s writing and analysis.

  Question: “So what’s next for the global financial markets?”

   

  Grant Answers: “The mispricing of biotech stocks or corn and soybeans is of no great consequence to financial markets at large. Interest rates are another matter. They are universal prices: They discount future cash flows, calibrate risks and define investment hurdle rates. So interest rates are the traffic signals of a market based economy. Ordinarily, some are amber, some are red and some are green. But since 2008 they have mainly been green.”

  It’s apropos to expand on Grant’s comments. Overnight lending rates and Treasury yields are the pillar for a broad range of rates and market yields – at home as well as abroad. Had the Fed, as in the past, restricted its operations – and market distortions – to Treasury bills, I would be much less apprehensive. If the Fed limited its rate-setting doctrine to responding to real economy variables the world would today be a less unstable place.

  Instead, the Fed over recent decades nurtured securities market inflation and even turned to targeting higher market prices as its prevailing reflationary policy instrument. Importantly, the Fed and central bankers later resorted to the full-fledged manipulation of broad market risk perceptions. This was a game-changer. Essentially no risk was outside the domain of central bankers’ reflationary measures. As such, audacious markets could Party on, gratified that central bankers had relegated hangovers to a thing of the past.

  Key aspects of central bank experimentation over time bolstered global risk assets and, in the end, fomented a historic global financial Bubble. First, by slashing rates all the way to zero, the Federal Reserve and others imposed punitive negative real returns on savers. Part and parcel to the Bernanke Doctrine, rate policies incited unprecedented global flows to equities, corporate bonds and EM bonds and equities. Meanwhile, dollar devaluation spurred historic (“Global Reflation Trade”) speculative excess and leveraging, especially destabilizing for susceptible commodities and EM complexes. Literally Trillions flooded into EM markets and economies, spurring Trillions more of further destabilizing domestic “money” and Credit expansion. Fiasco.

  Over-liquefied global markets were conspicuously unstable. Repetitious Fed (and global central bank) responses to fledgling “Risk Off” Bubble dynamics along the way solidified the perception that “whatever it takes” central banks were prepared to fully backstop global securities markets. The summer of 2012 demonstrated to what extent concerted global policy measures would go in response to nascent financial crisis in Europe. Faith in the central bank market backstop became complete in 2013; a bout of market “Risk Off” had the Fed delaying “lift-off” and Bernanke reassuring markets that the Fed was prepared to “push back against a tightening of financial conditions.” It had essentially regressed to the point where a high-risk Bubble backdrop had central bankers telegraphing their willingness to invoke the “nuclear option” (open-ended QE/“money” printing) to blunt incipient market risk aversion.

  "Moneyness of Risk Assets" has been fundamental to my “global government finance Bubble” thesis. Policy measures transformed risk perceptions throughout the markets, with global financial assets coming to be perceived as highly liquid and safe stores of wealth (money-like). It may have appeared subtle but it was nonetheless revolutionary. Post-mortgage finance Bubble reflationary measures fomented unprecedented global securities markets distortions. Central bank purchases launched Treasury, agency and global sovereign debt prices to the stratosphere. “Money” flooded into global equities funds, pushing stock prices to record highs. The EFT industry exploded to $3.0 TN, matching the bloated hedge fund industry. The global yield chase coupled with over-liquefied markets ensured record corporate debt issuance. The easiest borrowing conditions imaginable stoked stock buybacks, M&A and other financial engineering

  The global financial Bubble evolved to be systemic in nature. So long as global financial conditions remained extraordinarily loose and market prices continued inflating, an expanding global economy appeared to underpin booming securities markets.

  The bullish consensus has been convinced that central bankers saved the world from crisis (the “100-year flood”) and securely placed the world recovery on a solid trajectory. I’m sure they have instead fomented catastrophe. Empirical research quantifies central bank impact on market yields in the basis points. Such research would surely also claim QE has had minimal impact on equities prices. Equities are not seen as overvalued. No one it seems sees comparable excesses to 1999 or 2007.

  I will make an attempt to concisely state my case. Central banks have convinced market participants that they can ensure liquid (and continuous) markets. Markets perceive that the Fed and global central banks have the willingness and capacity to backstop securities markets. While impossible to quantify, these perceptions have become fully embodied in securities markets around the globe. Importantly, central bank assurances and market perceptions of boundless central bank liquidity are today fundamental to booming global derivatives markets.

  Following the 2008 crisis, I expected U.S. and global equities to trade at lower than typical multiples to earnings and revenues. After all, risk premiums would be expected to remain elevated based on recent history. I believed mortgage securities would trade at wider spreads to Treasuries. I thought that, after the market collapse and economic crisis, investors would view corporate debt cautiously. Moreover, I expected counter-party concerns to weigh on derivatives markets for years to come.

  I did not anticipate that do “whatever it takes” central banking would overpower the world. Zero rates for seven years and a $4.5 TN Fed balance sheet weren’t in my thinking – because they certainly weren’t in the Fed’s (recall the 2011 “exit strategy”). A $30 TN Chinese banking system would have seemed way far-fetched. Besides, there were indications that Washington had at least learned the crucial lesson of “too big to fail” and moral hazard.

  In reality, they learned all the wrong lessons. Traditional central banking was turned on its head. Reckless “money” printing was let loose. Foolhardy market manipulation became the norm. The role played by leveraged speculation and derivatives trading in the 2008 market meltdown was disregarded. And somehow “too big to fail” was transposed from goliath financial institutions to gargantuan global securities markets. And it’s now coming home to roost.

  There’s a perilous misperception that central bankers have mitigated market risk. They have instead grossly inflated myriad risks – market, financial, economic, social and geopolitical. As for market risk, Trillions were enticed to global risk markets under false premises and pretense – certainly including specious central bank assurances. And there is the multi-hundreds of Trillions global derivative marketplace that operates under the presumption of liquid and continuous markets. Importantly, central bank manipulation – of market prices and perceptions – fomented the type of excesses that virtually ensures a crisis of confidence.

  Individuals can hedge market risk. The broader marketplace, however, cannot effectively hedge market risk. There is simply no one with the wherewithal to shoulder the market attempting to offload risk. Yet central bankers have convinced the marketplace that do “whatever it takes” includes a promise of market liquidity. And this perception of boundless liquidity has ensured a booming derivatives “insurance” marketplace.

  There’s a crisis scenario that’s not far-fetched at this point. Fear that global policymakers are losing control spurs risk aversion. The sophisticated leveraged players panic as markets turn illiquid. The Trillions-dollar trend-following and performance-chasing Crowd sees things turning south. Worse still, illiquidity hits confidence in the ability of derivative markets to operate orderly. In short order securities liquidations and derivative-related selling completely overwhelm the market.

  It comes back to a momentous flaw in contemporary finance: Markets do not have the capacity to hedge market risk. Indeed, the perception that risks can easily be offloaded through derivative “insurance” has been instrumental in promoting risk-taking. Never have markets carried so much risk. And never have markets been as vulnerable to an abrupt change in perceptions with regard to central banker competence, effectiveness and capabilities.

  A Friday morning Bloomberg (Tracy Alloway) article was appropriately headlined “It’s been a Terrible Week for the Credit Market,” included a series of notable paragraph subtitles: “It started in high yield…”, “Glencore made it worse…”; “Then the quarter ended on a down note…”; “And attention turned to investment grade…”; “The pain intensified…”; “What happens next.” A Friday afternoon Bloomberg (Sridhar Natarajan and Michelle Davis) headline read “Credit Investors Bolt Party as Economy Fears Trump Low Rates.” According to Bloomberg, the average junk bond yield this week surged 40 bps to 8.30%, with Q3 junk bond losses the second-worst quarter going back to 2009. This week also saw investment-grade CDS jump to a more than two-year high.

  It’s worth noting that the markets were (again) at the brink of disorderly in early-Friday trading. “Risk Off” saw stocks under significant pressure. The dollar/yen traded to 118.68, near August panic lows, before rallying back above 120 late in the day. Treasuries were in melt-up mode. And despite bouncing 4.1% off of Friday morning trading lows, bank stocks ended the week down 1.5%. Underperforming ominously, the 3.8% rally from Friday’s lows still left the Securities Broker/Dealers down 3.1% for the week. Earlier in the week, Glencore worries spurred the first serious “counter-party” concerns in awhile.

  October 2 – Reuters (Christopher Condon Craig Torres): “Federal Reserve Vice Chairman Stanley Fischer said he doesn’t see immediate risks of financial bubbles in the U.S., while raising concerns that the central bank’s policy tool kit is limited and untested. ‘Banks are well capitalized and have sizable liquidity buffers, the housing market is not overheated and borrowing by households and businesses has only begun to pick up after years of decline or very slow growth,’ Fischer said… Still, he warned that ‘potential shifts of activity away from more regulated to less regulated institutions could lead to new risks.’ Created a century ago in response to recurring banking crises, the Fed has taken a renewed interest in identifying potential systemic financial threats since the global meltdown of 2008-09…”

  Today’s paramount systemic financial threat is not new. Risk is now high for a disorderly – Party Crashing – “run” on financial markets.  At the minimum, global markets will function poorly as faith in central banking begins to wane.

  

  

  

  

  

• The American 'Recovery' In 1 Chart

  If this is the ‘recovery’ just what will the next recession look like?

   

  

   

  Chart: Bloomberg

  

  

  

  

  

• There Will Be Blood – Part II

  By Chris at www.CapitalistExploits.at

  Following right along from “Letters from a Hedge Fund Manager – Part I”, today we have “part deux” as a follow up for you…

  —————————— 

  Date: 10 December 2014

  Subject: There Will Be Blood – Part II

  Let me be clear: I am no expert on shale wells. I’m not even an “almost” expert in the shale sector. If you called me an idiot when it comes to shale drilling, I wouldn’t argue with you. With that caveat out of the way, I’m going to generalize about the shale sector (anyway).

  In oil and gas, most of the money is spent up front in acquiring the drilling rights and putting the well into production. You then have revenue and hopefully some profit in the period afterwards, as the well produces for you. Unfortunately, shale wells are very different from conventional wells. Shale wells see the vast majority of their total production in the first two years after they are drilled. This means that you have to keep drilling more wells just to stay at a constant level of production. In many ways this is akin to a hamster wheel – except you can never get off – or your production collapses. If you want to grow production, you need to drill even more wells – all of which see significant declines after two years.

  Let me show this by using some data from WPX Energy (WPX: USA):

  

  Basically, in order to keep production roughly constant, they borrowed a bunch of money, spent a bunch of money and lost globs of money in the process – yet production remained constant. Amazingly, this is a $2.5 billion dollar company. Don’t feel bad for WPX. Their numbers aren’t all that different from plenty of other shale companies.

  In essence, since shale wells have a short lifespan of intensive production and they are highly leveraged to the prevailing energy price over this peak production period – particularly since the land acquisition and drilling expenses are already sunk costs. What if you drill a well based on $100 oil and it’s at $60 today? Hope you hedged your production. What about all the money you borrowed to buy future drilling sites that are no longer economic to produce?

  

  Here’s the thing – I have this hunch that, excluding a handful of the best “plays”, much of the shale being drilled was never all that profitable, even when oil was at $100. Given the high initial costs of acquiring land and drilling a well, much of the profitability accounting for a well depends on the shape of the decline curve. Given how young the shale industry is and how imprecise the data can be, I suspect that many of these companies have been aggressive in their assumptions – especially if they need the capital markets to fund their dreams.

  If your well production declines by 70% in the first 24 months, adding 10 weeks to that duration doesn’t sound like much, but it lowers the depletion, depreciation and amortization cost per barrel by almost 10%. More importantly, it dramatically increases the IRR and NPV of each well – which are important benchmarks for lenders. Unfortunately, as an equity investor, good luck trying to determine the actual economics of each well, when you have: misleading data, changing production across the whole company and all sorts of one-time costs lumped in with operating expenses. 

  Instead, a whole bunch of investors seem to have taken comfort in the high single digit yields offered on short dated bonds issued by these shale companies – along with an ingrained belief that oil prices would remain constant or rise. Now with oil prices declining, all sorts of lenders are having a “whoops moment.” In fact, I wonder if the financial system on the verge of having another “WHOOPS! moment”?

  In Part III, we will look at just how much debt is tied to this sector – for starters, it’s not just the high yield debt that is suddenly flashing danger. 

  

  When subprime first got wobbly in 2007, there was a small panic followed by the “all clear” from Wall Street analysts. You literally had a year to prepare for the fallout, before prices followed. Despite a bunch of media coverage on this topic, I don’t think that most people appreciate the true magnitude of what may happen if oil stays at these prices.

  Remember, all of this is very long-term bullish for energy prices. This shakeout will set the stage for the next boom, but first, there will be all sorts of pain experienced in sectors that do not even appear linked to the energy sector. I suspect that this pain, will be the major theme for 2015.

  ——————————

  The collapse in oil prices, leading to massively uneconomic projects being mothballed and those that are economic being “value adjusted”, actually opens up some very interesting opportunities once this all unravels itself like the ball of yarn that it is.

  – Chris 

  PS: If you don’t want to miss the next “There Will Be Blood” writeup then leave your email address here to receive the next letter straight in your inbox.

   

  “The bubble is bursting. And if oil stays where it is, the worst is yet to come.” – Spencer Cutter, Bloomberg Intelligence

  

  

  

  

• Russia Claims ISIS Now On The Ropes As Fighters Desert After 60 Airstrikes In 72 Hours

  One question that’s been asked repeatedly over the past thirteen months is why Washington has been unable to achieve the Pentagon’s stated goal of “degrading and defeating” ISIS despite the fact that the “battle” pits the most advanced air force on the planet against what amounts to a ragtag band of militants running around the desert in basketball shoes. 

  

  Those of a skeptical persuasion have been inclined to suggest that perhaps the US isn’t fully committed to the fight. Explanations for that suggestion range from the mainstream (the White House is loathe to get the US into another Mid-East war) to the “conspiratorial” (the CIA created ISIS and thus doesn’t want to destroy the group due to its value as a strategic asset). 

  The implication in all of this is that a modern army that was truly determined to destroy the group could likely do so in a matter of months if not weeks and so once Russia began flying sorties from Latakia, the world was anxious to see just how long the various rebel groups operating in Syria could hold up under bombardment by the Russian air force. 

  The answer, apparently, is “less than a week.” 

  On Saturday, the Russian Ministry of Defense said it has conducted 60 bombing runs in 72 hours, hitting more than 50 ISIS targets.

  According to the ministry (Facebook page is here), Islamic State fighters are in a state of “panic” and more than 600 have deserted. 

  Here’s what happens when the Russians locate a terrorist “command center”: 

  According to The Kremlin, the structure shown in the video is (or, more appropriately, “was”) “an ISIS hardened command centre near Raqqah.” Su-34s hit it with concrete-piercing BETAB-500s setting off a series of explosions and fires that “completely destroyed the object.”  

  Here’s RT:

  Surgical airstrikes by Russian fighter jets have knocked out a number of Islamic State installations in Syria, including the battle headquarters of a jihadist group near Raqqa, according to the Russian Defense Ministry.

   

  “Over the past 24 hours, Sukhoi Su-34 and Su-24M fighter jets have performed 20 sorties and hit nine Islamic State installations,” Igor Konashenkov, Russia’s Defense Ministry spokesman, reported.

   

  Konashenkov added that yesterday evening Russian aircraft went on six sorties, inflicting strikes on three terrorist installations.

   

  “A bunker-busting BETAB-500 air bomb dropped from a Sukhoi Su-34 bomber near Raqqa has eliminated the command post of one of the terror groups, together with an underground storage facility for explosives and munitions,” the spokesman said.

   

  Commenting on the video filmed by a Russian UAV monitoring the assault near Raqqa, Konashenkov noted, “a powerful explosion inside the bunker indicates it was also used for storing a large quantity of munitions.

   

  “As you can see, a direct hit on the installation resulted in the detonation of explosives and multiple fires. It was completely demolished,” the spokesman said.

  And here’s the Russian Defense Ministry taking a page out of the US Postal Service’s “neither rain, sleet, snow, nor hail” book on the way to serving notice that nothing is going to stop the Russian air force from exterminating Assad’s enemies in Syria:

  Twenty-four hours a day #UAV’s are monitoring the situation in the ISIS activity areas. All the detected targets are effectively engaged day and night in any weather conditions.

  Now obviously one must consider the source here, but Kremlin spin tactics aside, one cannot help but be amazed with the pace at which this is apparently unfolding. If any of the above is even close to accurate, it means that Russia is on schedule to declare victory over ISIS (and everyone else it looks like) in a matter of weeks, which would not only be extremely embarrassing for Washington, but would also effectively prove that the US has never truly embarked on an honest effort to rid Syria of the extremist groups the Western media claims are the scourge of humanity.

  Summed up in 10 priceless seconds…

  

  

  

  

  

• China's President Confirms Practice Of Moving Official Reserve Assets To Other Entities In China

  By Louis Cammarosano of Smaulgld

  • Shanghai Gold Exchange withdrawals were 65.681 tonnes of gold during the week ended September 25, 2015.
  • Total gold withdrawals on the Shanghai Gold Exchange year to date are 1,958 tonnes.
  • Withdrawals on the Shanghai Gold Exchange are running 37.2% higher than last year and 17.88% higher than 2013’s record withdrawals.
  • Hong Kong gold kilobar withdrawals pass 565 tonnes in 2015.
  • Chinese President Xi Jinping admits “some assets in foreign exchanges were transferred from the central bank to domestic banks, enterprises and individuals”

  Shanghai Gold Exchange

  The Shanghai Gold Exchange (SGE) delivered 65.681 tonnes of gold during the week ended September 25,2015. During prior trading week ended September 18 2015, the SGE withdrawals were 63.22 tonnes of gold.

  The two week total of withdrawals is 128.90 tonnes of gold and the year to date total is 1,958 tonnes, for an annualized run rate of approximately 2,650 tonnes.

  Shanghai Gold Exchange vs. Global Mining Production

  Total global gold mining production in 2014 was 2,608* tonnes. The volume of gold withdrawn on the Shanghai Gold Exchange this year is pacing to be about 2,650 tonnes or roughly equivalent to the total global mining production of last year. This leaves little or no mining supply to satisfy global gold demand in India (expected 2015 gold demand of about 1,000 tonnes) and the rest of the world.

  Shanghai Gold Exchange and HongKong Kilo Bar Withdrawls vs. Global Mining Production

  Through September 25 2015, Shanghai Gold Exchange withdrawals are 1958 tonnes and through September 30, 2015 Hong Kong Kilo bar withdrawals (see below) are 565 tons.

  Combined year to date the withdrawals on both exchanges are 2,523 tonnes through the first nine months of 2015. Modest projections could take the combined gold withdrawals from Hong Kong Kilo bars and the Shanghai Gold Exchange to 2,900 tonnes in 2015.

  Shanghai Gold Exchange Withdrawals vs. Comex Deliveries

  In “Silver and Gold Short and Long Positions on Comex” we noted:

  Comex is a place where banks trade gold and silver they don’t have to banks who buy gold and silver they don’t want.

  These following two charts illustrate the point:

  Two Week Withdrawals on the Shanghai Gold Exchange in September 2015 vs. Comex 2014

  

  Withdrawals on the Shanghai Gold Exchange were 137 tonnes during the two week period ended September 18, 2015, compared to just 85 tonnes delivered in all of 2014 on Comex.

  Shangahai Gold Exchange Withdrawals vs Comex Deliveries of Gold 2008-2015

  

  The chart illustrates that paper market vs. physical market natures of the Comex and Shanghai Gold Exchanges.

  China is becoming the center of the Asian gold world. A $16 billion China Gold Fund was announced in May and the Shanghai Gold Exchange continues to establish itself as viable competitor to the gold trading centers in London and Chicago. China’s gold imports, trading and mining production are one of the cornerstones of China’s de-dollarization/Yuan strengthening initiatives that focuses no so much on selling U.S. Treasuries but creating alternative financial systems like the Asian Infrastrucure Investment Bank.

  China is widely believed to be making a play for inclusion in the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs) Program later this year. If China fails to gain inclusion in the SDR, its recent initiatives to strengthen its currency and gain greater acceptance of the Yuan may provide a strong alternative to the IMF regime.

  China Updates its Gold Holdings

  China recently announced their first update to their official gold holdings since 2009. The People’s Bank of China announced that their gold holdings had climbed from 1054 tons to 1658 tons, making China the fifth largest gold holding nation in the world.
  China chose to incude six years worth of gold accumulation (over 600 tons) all in the month of June.

  Last month China reported that they added 19.3 tons (610,000 ounces) of gold to their reserves in July bringing their total to 1,677 tons (53.93 million ounces). Earlier this month the PBOC updated their August gold reserves, indicating that they had added 16 tonnes of gold to their reserves, bringing their total to over 1693 tonnes.

  

  Chinese gold reserves grew by 16 tonnes in August.

  

  China’s recent update to its gold holdings put it in fifth place among gold holding nations.

  Many suspect that China has far more gold than they have reported. Click here for an explanation on where China’s gold might be.

  Chinese President Xi Jinping recently confirmed the practice of moving the People’s Bank of China’s reserve assets to other entities in China: “some assets in foreign exchanges were transferred from the central bank to domestic banks, enterprises and individuals” This might explain where some of China’s gold hoard, that many suspect they posses but have not reported as reserves, may be located.

  * * *

  How does all that gold get to China?

  The Bank of China also recently joined the auction process at the London Bullion Market Association where the price of gold is determined.

  In addition, the Chicago Mercantile Exchange futures contract for Hong Kong Kilobars has experienced withdrawls of an average of more than five tons of gold a day since it began in mid March earlier this year. As of September 30, 2015, over 535 tonnes of gold have been withdrawn pursuant to this program since March 2015 for an annualized run rate over 1,200 tonnes of gold a year.

  COMEX Hong Kong Gold Kilobar Withdrawals Through September 30, 2015

  

  Comex Hong Kong gold kilo bar withdrawals have passed 565 tonnes since March 2015 and passed 18 tonnes on three trading days in September.

  The Bank of China also recently joined the auction process at the London Bullion Market Association where the price of gold is determined.

  China is the world’s largest gold producer:

   

  China is the world’s largest gold producer with mining production over 2,000 tons the past five years. China has mined 228.7 tons of gold during the first six month of 2015.

  Volume of Gold Withdrawals on the Shanghai Gold Exchange

  

  Shanghai Gold Exchange Withdrawals for the week ended September 25, 2015, were over 65 tonnes.

  The volume of withdrawals of gold on the Shanghai Gold Exchange as of September 25, 2015, is running 37.2% higher than 2014 during the same period and 17.9% higher than 2013’s record pace.

  

  Withdrawals of gold as of September 25, 2015, on the Shanghai Gold Exchange are running 37% higher than last year and 18% higher than the record pace set in 2013.

  In addition to the vibrant Shanghai Gold Exchange and increasing world leading gold mining production, China is also the world’s largest gold importer. Here is a chart showing the volumes of gold traded on the Shanghai Gold Exchange vs. gold imported through Hong Kong as of July 2015.

  

  China also imports unreported amounts of gold through Shanghai.

  * * *

  All charts, other than those labeled “Smaulgld”, courtesy of Nick Laird.
  *Gold Mining Production Source:2014 Gold Year Book published by CPM Group. There are various estimates of global gold mining production ranging from 2,600 tons to 3100 metric tons.
  Shanghai Gold Exchange Data source GoldMinerPulse

  

  

  

  

  

• Ron Paul Trounces Trump, Exclaims Election Is Entertainment "Orchestrated By Major Media"

  Former congressman and presidential candidate Ron Paul has unleashed a harsh (but entirely fair) criticism of the current presidential campaign. Talking to RT's Ameera Davis this week, Paul lambasted the media's control of the U.S. electoral process, Donald Trump’s candidacy, and the stock market…

   

   

  "So I think some of this stuff in the presidential campaigns is orchestrated by the major media. It is entertainment. They have competitions going on and on. So I don't put a lot of stock [in the presdential process], this is still pretty early. …

   

  Donald Trump is an authoritarian and he brags about it. "I'm the boss and I tell people what to do."

   

  Well government happens to be a little different than that.

   

  An authoritarian is the opposite of a libertarian. A libertarian wants to release the individuals, get government out of our lives, out of the economy, and out of all these places around the world…"

  

  

  

  

  

• It's The Entrepreneur That Saves An Economy – Not The Fed

  Authored by Mark St.Cyr,

  Once again via a stunningly dismal monthly “jobs” report we were shown just how inept the Federal Reserve is in its ability to deliver a qualitative as well as quantitative resolution to one of its core mandates. Only if you use the “math” now prevalent (as well as rampant) within economics can one look at any part of it and say “the economy is creating jobs” without bursting out in laughter, or, busting out in tears.

  Yet, just when one thinks it couldn’t get any worse, all one needs to hear is an explanation from one of its members as to try to explain such a pitiful report. The reason for so many without jobs? (I’m paraphrasing) “They just don’t want one.” I wish I were making that up, but sadly, that’s their assessment.

  The participation rate hit a low not seen since the late 1970’s with a now whopping 94.6 million out of work. However, if one were to listen to the next in rotation tenured economics professor from _____________ (fill in your Ivy League of choice) you would think the jobs market was strong. After all, “We’re at 5.1% unemployment!” As if this was a number one could use in earnest.

  This number itself has been so adulterated with adjustments even the Fed scuttled it’s policy weighting when they originally implied years back somewhere in the 6’s would make certain for a more hawkish monetary policies. Yet, the 6’s came – and went – and QE came, and stayed well past its “sell by date.”

  The problem that’s taking place right now within the economy is exactly what you get when you take a free market economy and try to impose a command and control blanket over it: you smother it.

  The Ivory Tower academics have no real understanding of what “free” actually entails when it’s expressed through the economy as a whole. The ability to build a better mouse trap, or, solve a previously unsolvable riddle all while charging a price two parties can both bear, profit by, and have satisfaction in the transaction does not, nor ever will take place within a command and control base. Ever.

  Free markets allow for competition to find equilibrium as to provide and deliver a service or good someone will pay a fair price for. And yes, even for such an item such as a stock price.

  Command and control fosters either the “State” to be the only provider, or, a fostered crony capitalism styled arrangement which is nothing more than another iteration of some communist system in prettier buildings wearing better suits. Harsh? Yes. Off point? Hardly. And that’s the problem.

  The great capital formation experiment and enterprise known as Wall Street and its Exchanges, once the envy of the world, has now been transformed into nothing more than a rigged casino where Fed fueled “hot money” front runs orders in ways so egregious to the principal of fair play; walking into “a den of thieves” would be considered a step up.

  Today the entrepreneur is being stifled. Yes, some will point to Silicon Valley and shout “But, but!” however, there too these issues of perversion against the entrepreneur are also made manifest. Unicorns are just that – fictional manifestations claiming to be real to anyone who’ll stay at arm’s length. (i.e., don’t get too close to the books or else!)

  Here again, the reality of a market no longer primed and pumped via QE for their long-awaited IPO will find out the hard way their time for “cashing out” has come and went; further crushing many budding entrepreneurs hopes let alone the employees that took “stock options” in lieu of salary.

  The funds or individual investors that were sold these fictional based realities (i.e., the can’t tun a net profit via GAAP yet via Non-GAAP they’re killing it!) who bought into the fictional hype will abandon and be far more than hesitant to invest in any future IPO’s let alone stocks in general.

  If you think I’m exaggerating just look at Twitter™ or Alibaba™ for clues. For if you missed their original IPO not all that long ago, not too worry. You can buy in now for even less. And it’s just the beginning.

  The real issue here is that some other good ideas that would, or could, help the economy foster business formation, encourage hiring and more will be left to dangle and rot on many a branch for discontent doesn’t take place in a vacuum – it happens throughout all sectors when confusion, disillusionment, as well as apathy sets in via mixed messaging from “central command.”

  You can’t run or start a business when you can’t rely on what the rules or overarching policies going forward will be. (i.e., The cost of money will be whatever we decide today for tomorrow we might change it back) It wreaks havoc throughout the acutely connected fibers of business.

  Businesses don’t stand alone – they depend on each other in differing sectors for supplies, transportation logistics, and so much more. Change a policy haphazardly, or signal a coming change only to not follow through sends ripples and shock-waves down a supply line with unintended as well as unforeseen consequences which can throw some businesses into free fall, and some into out right bankruptcy.

  Business people know and understand this intuitively. Ivory Tower academics, intellectuals, and economists are not only clueless, it’s their wanton indignation of these facts that move their policies beyond destructive right into outright dangerous territory for any free market based economy.

  The only one’s that can benefit from such a business environment are those that gorge and reward themselves via the availability current Fed. policy fosters. And the name for it is: crony capitalism.

  Whether the Fed. wants to admit or not, that’s what their current policy and communication fosters and bolsters which is the antithesis of what the Fed. itself states as its primary objective; for there is no wage growth, no true job creation, no sustainable capital formations, and not stable markets.

  The Fed. is killing the economy – not helping it. And as de facto proof I point to their own measurements of achievement. The markets, the labor participation rate, small business formation, wage growth, and on, and on. It’s all pathetic.

  The Fed’s QE program has adulterated valuations so much it will be a wonder if we ever get back to a more normalized set of business values let alone their valuations and away from this calamity.

  There are entrepreneurs along with CEO’s of companies who are quite literally chomping at the bit to try new or improved innovations – yet don’t dare for either their competitors are being kept alive via cheap money afforded them under current ZIRP policy, or worse, don’t dare hire or spend for who knows if the Fed. will raise out of the blue or announce some new program that runs anathema to basic sound monetary policies.

  You don’t invest in cap-ex or hiring for the long-term if you don’t know what the rules might be tomorrow never-mind next year. Period.

  If you want to see how and why the U.S. economy was the envy of the world along with the how and why everyone on the planet wanted the opportunity to come here and try for themselves. It can easily be done using this simple yet forgotten example or exercise:

  Want an example of crony-capitalism, or, “State” run centrally commanded and controlled? Look no further than any communist or dictatorial country on the planet. What you’ll notice and can’t avoid is this: There are very few if not one sole business or supplier for any given service. The reason? You can’t compete with their favored access to either capital or permitting.

  Want an example of a free market? Although they’re almost a relic, pick up any telephone book and look in the back where the businesses are located or, the Yellow Pages™. Look at how many differing as well as different options are available for any given service. Want your septic tank cleaned? There’s usually 10 or more options with names like “Steve’s” or “Dave’s” or Bill’s” and so forth. Need windows for your house? There’s probably 20 or more of those with assorted names. Many I’ll garner are also closer in proximity (as to your neighborhood) than you ever paid attention to previously. It goes on and on.

  The issue today happens when “Steve, Dan, or Bill” can’t stay in business because “Conglomerate Septic Enterprises” is allowed to not only provide cheaper pricing afforded to it via relying on its stock narrative (i.e., we make Non-GAAP profits sparkle) rather than having to compete using fundamental business practices. (i.e., making a net profit via 1+1=2 math) “Steve, Dan, and Bill” find themselves either forced out or forced into liquidation only to be sucked up at bargain prices by the “conglomerate” which will finance the acquisition with “free money” available only to it and entities like it. And if it all hits the fan and begins rolling down the hill “Conglomerate” will either be “bailed out” or better yet, “bailed out and government-owned.”

  This is just one example of why the economy is mired in quicksand. Entrepreneurs, as well as others are being stymied in what seems a relentless battle against academic theory rather than true business acumen. And the theory that an economy so large, so complex, so diverse as that of the U.S. can be fine tuned, manipulated, and more by some appointed committee that for all intents and purposes never held a position in that economy except for some academic based position is not just maddening – it’s lunacy!

  The Fed needs to stop its meddling. Stop trying to add one more extension to their already over extended Rube Goldberg inspired monetary policies and get the hell out-of-the-way.

  If the Fed is going to do something – do it. If you’re going to say something for clarity – say it – then stop talking. If you’re going to set and announce publicly an objective (such as hitting a specific target value like 6.1 unemployment et al) once it gets hit – do what you stated. Other than that, all the mumbo-jumbo clarifying classifiers for clarity regurgitated one Fed. speaker after another will do nothing more than increase the tension on the economies “parking brake.” Not release it.

  Entrepreneurs can and will find ways as to navigate conditions and produce the much wanted as well as needed business formations that bolster a growing environment for business. However, what they won’t do is put their livelihoods on the line where bankruptcy and more can be around every business day when not only do rules change near daily – but goal posts get pulled up and moved at whim.

  Adherence to timelines and narratives of an imperfect policy are sometimes far more important than tinkering and dabbling daily in some ill-fated quest for policy perfection.

  The Fed keeps approaching the economy from the viewpoint of a “tinkerer.” Maybe a little more of this, or a little less of that here, or there. Maybe just an adjustment here, or there, and sooner or later it will run like a finely tuned machine. It won’t. That’s the job for the entrepreneur – not the Fed. And the more they “tinker” after every misstep or miscalculation; the more their policy and approach would make even Rube Goldberg blush for the complexity to such a straight forward task.

  As I’ve stated many times it’s an open question where both sides have a legitimate argument for the Fed’s original insertion into the markets during the 2008 crisis. However, what is not an open question is their resolve to continue and pump trillions of dollars to incentivize Wall Street’s predator class to find ways of adulterating the capital formation process while forcing savers, retirees, and more to question why every-time they take out their wallet a bulls-eye or laser dot suddenly appears on it from the shadows.

  The markets are beginning to show just how tall and flimsy this house of cards built on QE quicksand has grown. And the coming shifting sands have only just begun with onerous consequences for everyone involved. And this all could have been avoided in my opinion if the Fed. had relinquished its insertion into the markets back years ago and had let the markets rise and fall on their own to find its equilibrium.

  Entrepreneurs and ideas thrive in that type of environment. Exactly what we so desperately need. Yet, instead, all we have is this crony styled, unicorn imagined monstrosity of all that’s unholy to true business principles.

  I’ll finish with one last thought which I’ve been pounding the desk (as well as keyboard) for years to anyone that would listen. However, now I don’t think it needs to be said – it’s coming to fruition in vivid detail I’m afraid sooner as opposed to later which no one will be able to avoid.

  “Markets right themselves with pain… That’s Capitalism.

   

  Back room manipulation to avoid that pain only increases the severity of it down the road.”

  If one cares to see just how much pain might be in the near future, all one needs to do is look at a chart of one’s favorite major index. For it’s not a pretty picture of health by any stretch of the imagination even if viewed through rose-colored glasses.

  The Fed has created a playing field where now even Unicorns are going to come up lame to only limp past greener pastures on their way to IPO heaven and quite possibly – straight to the glue factory.

  

  

  

  

  

• Deutsche Bank Boosts German GDP Forecast Due To "Surge In Immigration"

  Even as the Syrian proxy war is on the verge of breaking out in a full-blown regional war, one involving not only the Saudis but the mastermind behind the entire conflict, Qatar, which is willing to sacrifice millions of innocent civilians just so its gas can finally be sold in Europe, the refugee crisis resulting from the constant instability in the mid-east, fanned by both the US and Russia, is approaching unprecedented proportions for one country: Germany.

  It is Germany which is now expecting up to one and a half million (and likely many more) asylum seekers to arrive in 2015 according to Reuters, up from the 800,000- 1 million expected previously, with the result increasing social unrest not only as a result of the influx of foreigners, but due to the domestic reaction. As reported last weekend, Germany’s domestic intelligence chief warned on Sunday of a radicalisation of Right-wing groups amid a record influx of migrants, as xenophobic rallies and clashes shook several towns at the weekend. President Joachim Gauck meanwhile warned of Germany’s “finite capacity” to absorb refugees, cautioning against more “tensions between newcomers and established residents”.

  Furthermore, the domestic spy chief Maassen said that “what we’re seeing in connection with the refugee crisis is a mobilisation on the street of Right-wing extremists, but also of some Left-wing extremists” who oppose them.” He added, speaking on Deutschlandfunk public radio, that for the past few years his service had witnessed a “radicalisation” and “a greater willingness to use violence” by all extremist groups, including the far right, the anti-fascist far-left and Islamists.

  This explains the dramatic exchange this past weekend when Facebook CEO Mark Zuckerberg and German Chancellor Angela Merkel were caught on a hot mic at the United Nations discussing the removing of certain posts from the prolific site. As Western Journalism chronicled, Merkel brought up the subject of anti-immigrant posts appearing on the German version of Facebook, as the country grapples with how to handle the largest refugee crisis since World War II.

  “We need to do some work.” Zuckerberg says. The German chancellor presses him. “Are you working on this?” she asks in English. “Yeah,” the Facebook CEO responds before the introductory remarks of the lunch meeting cuts off their conversation.

  Reuters reported earlier this month that Facebook intends to cooperate with the German government in eliminating “hate postings” regarding the refugees. Specifically, the social media site will partner with the German Internet watchdog Voluntary Self-Monitoring of Multimedia Service Providers to identify offending posts.

  After the hot mic fiasco, Facebook promptly issued the following statement:

  “We are committed to working closely with the German government on this important issue,” Facebook spokeswoman Debbie Frost said via e-mail to BloombergBusiness. “We think the best solutions to dealing with people who make racist and xenophobic comments can be found when service providers, government and civil society all work together to address this common challenge.”

  So as the German refugee crisis has now dragged down not only Merkel, whose popularity rating just tumbled to a four year low “reflecting growing concern over the influx of hundreds of thousands of refugees into Germany, a poll showed on Thursday”, but has exposed “free speech” advocate Facebook as merely another government propaganda pawn, Germany has been scrambling to find some silver lining on this scandal.

  It did just that on Friday, when the bank with the greatest amount of notional derivatives in Europe and the world, Deutsche Bank, raised its German 2016 GDP forecast “because the heavy influx of migrants would increase consumption as much as half a percentage point.”

  In other words, the more the immigrants, the greater the GDP boost according to the world’s riskiest bank.

  According to Reuters, German gross domestic product is now forecast to come in at 1.9 percent in 2016 compared with 1.7 percent in previous forecasts, the bank said in a research note published on Friday.

  “Although the external and the financial environment have deteriorated we have lifted our 2016 GDP call,” Deutsche Bank said.

  “Drivers are stronger real consumption growth due to lower oil prices/stronger EUR and the surge in immigration,” analysts wrote, adding they expected the boost in consumption to be evenly split between private and public.

  As a reminder this analysis was written when “only” 800,000 refugees were expected to enter Germany.  Now that the number is nearly double, does that mean that German GDP is set to surpass 3%, or perhaps even 4%? Maybe Germany just found the answer to economic collapse domestically: just start a war abroad and accept the destroyed nation’s population.

  But before unleashing another round of Keynesian mocking and ridicule, perhaps this was the goal all along: “At the time of arrival, the average age of the immigrants is 23.3 years old – much younger than the domestic population, which averages 44.5 years, the bank said. Germany has long struggled to deal with its aging population, with government and industry saying immigration was needed to counter the looming demographic squeeze.”

  Well, what better way to provide a demographic boost to an aging population than to accept millions of refuges as a result of a conflict that ultimately benefits nobody more than Europe (if and when the Qatar gas pipeline is finally completed). Now if only Japan were to accept a few million Syrian refugees too, suddenly the demographic implosion of the entire developed world would become a thing of the past.

  

  

  

  

  

• Here Come The Money Helicopters!

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

  $10 Trillion Goes to Money Heaven

  We interrupt our series on what to do if you have no money to bring you an update on those who are losing it. (You can catch up on Parts I and II of that series here and here.)

  What was the best place for your money so far in 2015? Cash! Compared to cash, almost everything is down. We are headed for the worst quarter for stocks since 2011, says the lead story in today’s Financial Times.

  Global stock markets have lost $10 trillion of their value over the last three months. What? Where did all that paper wealth go? The old-timers say it went to “money heaven.”

   

  

  One fine morning in money heaven….will it ever rain down again? Of course, no money has actually disappeared. Only make-believe values have.

  We’re not so sure. But we stop. We stare. We look at it as we would at a corpse. What happened to its life force? Where did it go? Why is it no longer there? We have no answer. But looking at a stock market sell-off is like standing over an open coffin: We are in awe at the power of the gods to take as well as to give.

  They ask no one’s permission. They follow their own playbook (which they never reveal to mortals). And they are as much a law unto themselves as the NSA. But what’s $10 trillion that never actually existed anyway? Easy come, easy go, right?

  Well… yes… and no. It’s usually a pleasure to welcome a baby, but a funeral can be painful. And every one of those dollars – now headed for heaven or hell – will be missed by someone.

  On Wednesday, the Dow rose 154 points to 16,049. That left the stock market overvalued by about 8,000 points. At least, that is the assessment of billionaire investor and Wall Street legend Carl Icahn. The current price-earnings ratio for the Dow is 15, he says, and “half of that is bulls**t.”

   

  

  The ½ bulls**t index, daily – click to enlarge.

   

  “Money talks and bulls**t walks,” is the old expression. And sometimes the bulls**t walks out the door… taking the money with it. That is what has been happening in this quarter. And not only in the U.S. The biggest losses have been suffered abroad. Japan, for example, deserves special notice.

   

  Our Trade of the Decade Sours

  As you might remember, our “Trade of the Decade” was to sell Japanese government bonds (JGBs) and buy Japanese stocks. After a quarter-century of a bear market, we figured Japanese investors were sure to catch a break. And Japanese bonds had been so overbought for so long, the market in JGBs was bound to run into trouble.

  This trade looked pretty good a few weeks ago. Japanese stocks were up almost 20% this year alone in dollar terms. That was largely thanks to Prime Minister Shinz? Abe’s plan to devalue the yen… one of his so-called Three Arrows. But like all macroeconomic engineering by public officials, the plan soon revealed itself as just more bulls**t.

   

  

  Tripping over a lack of third arrows – the Nikkei Index – click to enlarge.

   

  Instead of stimulating the economy, Abe’s first two arrows – monetary and fiscal easing – struck vital organs, draining away what little life was left. Japan is now on the verge of a technical recession. Its economy shrank in the second quarter. And it’s on the verge of repeating the trick in the quarter just ending.

  In fact, so disappointing were the results that Abe forgot his third arrow – structural reform – and instead picked up a new quiver with the usual assortment of crooked and twisted policy claptrap.

  But the bulls**t walked out the door anyway, with Japanese stocks giving up all this year’s gains. Japan’s economy is shrinking. And deflation came back to life the day after Abe proclaimed it dead.

   

  

  Abe’s economics textbook – it’s not working, so maybe they should do more of it?

  Cartoon by Li Feng

   

  And now cometh Etsuro Honda, a special advisor to Mr. Abe and often described as an “architect” of Abenomics. Mr. Honda says it may be premature to say Japan is in recession. Instead, he describes the economy as “static.”

  In yesterday’s interview with the Financial Times, Honda took no blame for the slowdown, even though he, as much as any living human being, is clearly responsible for it. Instead, he proposes to go “full retard,” with even more imbecilic policies.

   

  

  Japan has a nigh endless supply of insane Keynesians doing the same thing over and over and over again – here is one more, Etsuro Honda. His proposal? Let’s go full retard. Doesn’t he know that no matter what you do, you should never go full retard?

   

  QE for the People

  This, we fear, is not just a freaky sideshow. It is more like the coming attractions. Japan has led the world for the last three decades – first with an unsustainable bubble economy in the 1980s… then with a meltdown… followed by a long on-again-off-again recession.

  The Japanese feds tried every trick in the book to revive the economy – except for the one that would have worked. The government borrowed and spent (as a percentage of the economy) more than any nation had ever done. And it invented ZIRP and QE as policy tools.

  But now it’s become “urgent,” says Honda, to do more. Hasn’t he done enough already? you may ask. But no… He now proposes more QQE (for “qualitative and quantitative easing”). What grotesquerie lies ahead?

  Our mouth hangs open. What is this strange beast slouching towards the Eccles Building (the headquarters of the U.S. Fed)…waiting to be born? The idea behind Japan’s quantitative easing was to INCREASE the quantity of money in the system so as to DECREASE the quality of each unit.

  It was expressly meant to devalue the yen so that consumers would want to get rid of their currency faster. QQE makes no sense… even in the perverse terms of modern central bank meddling.

   

  

  Here is how the money will come back from its hideout in money heaven – via helicopter! Look how happy the peasants are!

  Illustration via adamsmith.org

   

  But wait. There’s more. Honda says it will be accompanied by a “supplementary budget, focusing on the real income shortage of mid- and low-income households.”

  Right now, this proposed extra spending is being funded out of taxes. But support is growing around the world for such spending to be funded by “People’s QE.” The idea behind “People’s QE” is that central banks would directly fund government spending… and even inject money directly into household bank accounts, if need be. And the idea is catching on.

  Already the European Central Bank is buying bonds of the European Investment Bank, an E.U. institution that finances infrastructure projects. And the new leader of Britain’s Labor Party, Jeremy Corbyn, is backing a British version of this scheme.

  Ah-ha! That’s the monster coming to towns and villages near you! Call it “overt monetary financing.” Call it “money from helicopters.” Call in “insane.” But it won’t be unpopular. Who will protest when the feds begin handing our money to “mid- and low-income households”?

  We wait. We watch. We wonder how the Japanese will attempt to bring back to life the economy they have worked so hard to kill. And now, all over the world, central planners, bankers, and politicians are watching too. “Where goest the Bank of Japan, there too I shall go,” they tell themselves.

  Stay tuned…

   

  Somewhere in a dungeon in Tokyo, a crack team of Abe’s economic advisors is working around the clock on a secret project that will save us all!

  

  

  

  

  

• Hanging By A Thread

  Via NorthmanTrader.com,

  The poker game continues as markets finished the week right back in range. Bulls got a magic save on Friday following bad news as both NFP and factory orders came in far below expectations. None of these misses were predicted by either economists or the Fed. Confidence inspiring? Not so much. Yet is bad news good news again? QE4 coming? The fact is bears couldn’t keep price below 1900 $SPX (a key level we had discussed in Technical Charts) and once the level held again it was panic buying on strong volume.

  So we’re back in range and both bulls and bears still have to prove their cases. Traders love this environment as it provides plenty of opportunity for outsized gains, but the risks to charts are mounting and frankly markets are hanging by a thread and need a major technical rescue soon.

  Let’s walk through some key charts:

  Daily $SPX: Back in range, potential for a double bottom, MACD cross, but declining MAs with major resistance ahead:

  

  The 50MA is declining steeply and is currently sitting at 2002 and at the top of the daily Bollinger band. Ironically this level represents major confluence with the monthly 20MA. We have been watching the monthly chart and it alone is the chart that should scare the living daylights out of every bull as it has now crossed its key MAs. The historical record is clear:

  

  The message of this chart remains: Unless $SPX breaks above the monthly 20 MA price may move lower. A lot lower.

  And it’s not only the monthly $SPX that illustrates how thin this thread is. Look at all these monthly charts:

  

  

  

  

  The message is uniform: They are all barely hanging above key support levels a break of which will invite significant more downside.

  More concerning for bulls: Friday’s rally occurred despite a further breakdown in $HYG:

  

  This divergence is especially notable given the larger context:

  

  So someone is lying it seems and next week will likely shed more light on the truth here.

  What do bulls have going for them?

  Well, for one, the house clearing has been awe inspiring as outlined by the record shift in the Ryder bull/bear asset ratio and hence the boat may lean too far the other way and this alone may help explain the rally on Friday:

  

  And of course rallies in October can be formidable, especially if lows come early. Some examples from recent years:

  2003:

  

  2006:

  

  2010:

  

  2011:

  

  Notice a pattern? Now none of these examples are guarantors that this October will play the same way and plenty of sell off examples for October exist, but it shows a structural history that suggests at least the possibility of a major rally. And who can forget the big rally in October 2014 following the almost 10% correction then?

  As the Ryder chart above shows lots of folks have dumped stocks, not only the Saudis. Hence performance anxiety going into year end may be the next big thing and this may create a FOMO chase. While Wall Street has cut its year end targets these targets are still a lot higher than here. So a lot of people have a lot to prove. Earnings are beginning next week and may shed a light on how justified the deep cuts in earnings expectations have been. But remember: It’s the reaction that matters.

  So bottom line: What we said last week is still very much true with now some additional qualifications:

  Bears:  You now need to break $SPX 1900 & the neckline and STAY broken below October 2014 lows (that’s about 130 handles lower from here).

  Bulls: You absolutely need an October magic show and get back above the daily 200MA (currently 2063) and the monthly 20MA (currently 2003) or the jig is up for a long time to come.

  Got a trade plan?

  

  

  

  

  

• How The World Views Obama's "ISIS Strategy"

  JV?

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Portugal's Ruling Coalition Prevails As Country Votes In What Amounts To Austerity Referendum

   

  The results from Portugal’s elections are beginning to trickle in and according to exit polls, Coelho’s coalition has prevailed. Via Bloomberg:

  • Ruling coalition of Prime Minister Pedro Passos Coelho wins 38%-43% of vote and 108-116 seats, RTP TV station exit poll indicates
  • Opposition Socialists win 30%-35% of vote and 80-88 seats: RTP exit poll
  • Exit polls by TV stations SIC, TVI also indicate ruling coalition won election

  Full preivew

  Perhaps the most important thing to understand about Greece’s protracted bailout negotiations with creditors is that for the troika (which has since been rebranded the “quadriga”), it wasn’t just about whether or not Athens could table a credible plan to set Greece on a path to fiscal sustainability.

  In fact, the idea that Greece ever had any hope of turning the tide and avoiding a future wherein Athens is forever relegated to the status of “German debt colony” is in many respects laughable, which speaks to the fact that what the IMF, Brussels, and Berlin really wanted to do in the course of their negotiations with Alexis Tsipras and Yanis Varoufakis was send a message to Spain and Portugal ahead of elections that threatening to disprove the notion of the euro’s indissolubility is not a viable strategy when it comes to securing bargaining power. 

  German Finance Minister Wolfgang Schaeuble’s victory over Greece in Brussels and the subsequent abandonment of the Greek referendum “no” vote by Tsipras served notice that the troika is willing to effectively subvert the democratic process in order to uphold German values when it comes to fiscal rectitude. 

  On Sunday, we got the first test of Europeans’ collective tolerance for German economic hegemony when Portugal headed to the polls in what amounts to a referendum on austerity although in reality, it’s not clear that voters truly have much of a choice. Here’s WSJ:

  Portuguese voters cast ballots Sunday in an election to determine whether Prime Minister Pedro Passos Coelho, who oversaw a bailout program that averted bankruptcy but imposed harsh austerity on the country, will keep his job or relinquish it to his Socialist rival.

   

  The governing center-right coalition—which joins Mr. Passos Coelho’s Social Democratic Party with the smaller Democratic and Social Center Party—was slightly ahead of the Socialist party, led by former Lisbon Mayor Antonio Costa, in pre-election polls.

   

  Both major candidates promised to abide by the eurozone’s standards of financial discipline. But neither was expected to gain a majority of parliament’s 230 seats, and that would leave Portugal with a minority government struggling to sustain an economic recovery.

   

  After taking office in 2011, Mr. Passos Coelho raised taxes and cut public-sector salaries and spending in education and health to meet budget targets set by international lenders under the €78 billion ($87 billion) rescue. The measures drove down the budget deficit from close to 10% of gross domestic product to about 3% estimated for this year, but hurt the prime minister’s popularity.

   

  Until late August, polls gave the Socialists a slight lead over Mr. Passos Coelho’s coalition. But as undecided voters made up their minds in the campaign’s closing weeks, surveys indicated that sentiment was swinging the other way.

   

  Mr. Passos Coelho’s campaign preached a consistent message of improvement since Portugal’s exit from the bailout program in May 2014. The jobless rate has fallen from a peak of 17% to close to 12%, and gross domestic product is expected to grow 1.6% this year. The prime minister reminded voters that the Socialists had been forced to seek the bailout after leading Portugal to the brink of insolvency four years ago.

  Of course the recent inclusion of the Novo Banco bailout in Portugal’s budget nearly doubled the country’s deficit, raising questions about the veracity of the “improvement” in the Lisbon’s finances.

  Here’s Pedro Magalhães, a researcher at the Institute of Social Sciences of the University of Lisbon on why, much like voters in Greece’s latest elections, the Portuguese electorate has been left to “choose” between parties who intend to deliver more of the same despite the apparent differences in their campaign promises:

  The government parties are getting clobbered, but a modest economic recovery seems to have prevented their core support from being fundamentally undermined. They had a chance that other parties in Europe that led austerity drives did not (think the Socialists of PASOK in Greece): a cohesive parliamentary majority, a somewhat better and more tolerantly designed adjustment program (with less terrible starting conditions, of course), some of the harshest measures blocked by the Constitutional Court (arguably with positive economic effects), and quantitative easing from the ECB at the right time to allow them to have something to show for in terms of recovery by the end of the term.

   

  True, the Socialists too have evaded the fate of other parties that were punished earlier over the Great Depression in Europe (think the Spanish center-left PSOE, today still below their already disastrous 2011 result).

   

  However, they seem unable to fulfill what seemed to be their potential. To be fair, they did try to work on the economic competence problem, preparing an arguably serious economic policy platform, with the help of definitely serious people.

   

  But here’s what may be the problem with “policy platforms” in Portugal these days. Austerity may have taught something to the electorates of the peripheral European countries: As Armingeon and Baccaro argue, although “democracy means that citizens choose among policy options, either directly or through their representatives,” “in the case of the sovereign debt crisis, however, there is no real choice either for country governments or for their citizens” (p. 256).

   

  If the room to maneuver for parties in any government in a small and peripheral economy like Portugal’s is constrained, and if the real decisions are made in Brussels or Berlin, why would voters care about parties’ “policy platforms”? It’s visible performance, the recent past, and the fear of returning to the worst part of it, which seem to matter for voters. And there, things work as badly – and in some respects perhaps even worse – for the Socialists than they do for the Portuguese center-right.

  And here’s Deutsche Bank’s election preview:

  Portugal is due to hold its first post-bailout election on Sunday 4 October. The ruling centre-right coalition of PSD and CDS-PP had lagged the opposition Socialists (PS) for most of the last three years. However, this has turned around over the summer.  

   

  In September the formal coalition (PAF) of PSD and CDS-PP has been achieving 35-40% of the popular vote in most polls, giving it a lead of around 5% on PS. This is still short of the slightly over 40% likely required to achieve an outright majority in parliament but given the uncertainty of the polls and the large share of undecided voters, neither a centre-right absolute majority nor a better performance by the PS can be ruled out.  

   

  A majority centre-right government would be the most market friendly outcome in ensuring policy continuity and political stability. However, other possible scenarios – minority centre-right government, grand coalition, Socialist government – need not be major negatives.  

   

  The policy differences between the two mainstream parties are relatively small and both accept Portugal’s existing European commitments. Short-term political uncertainty could ensue post-election but this should be manageable given the sovereign’s solid financing position. The more dangerous, although in our view unlikely, outcome is that a very politically unstable government emerges, which struggles to achieve policy progress.  

   

  The weekend’s election stands apart from other periphery political risk events given the high likelihood of policy continuation regardless of the political outcome. As a result, from a markets perspective we do not believe these elections warrant an additional risk premium, although there could be some shorter term volatility in the unlikely scenario that a government cannot quickly be formed.  

   

  Looking past the election, we maintain our constructive view on PGBs. From a fundamental perspective we find Portugal the most attractive periphery while the potential for additional ECB QE along with a 2016 upgrade to investment grade should also support PGBs into the New Year. 

  Finally, here’s Citi’s take:

  Portuguese Elections: A Mainstream Political Battle

  Portuguese electors are also voting on October 4 to elect 230 representatives for the Assembly of the Republic. The Portuguese elections are not creating the same concern as those in Greece or Spain, given the lack of anti-establishment movements (like Podemos or Syriza) and the similarity in policy agenda of the two mainstream parties. Yet the outcome remains uncertain. The latest polls suggest a close race between the incumbent centre-right coalition, formed by the Social Democratic Party (PSD) and the People’s Party (CDS-PP), and the main opposition Socialist Party (PS). The socialists’ lead has been eroding steadily, from 7pp in Oct-2014 to 1pp in Mar-2015, standing within the margin of error on average in the latest polls (see Figure 9). The latest poll by Aximage (conducted in early-Sep) projects support for the centre-right coalition at 38.9% (up from 37.8% in a survey by the same agency conducted in July), and standing well above the 33.3% support estimated for the socialists (down from 38% in July). Support for other political formations in opposition has remained broadly stable in recent months, just below 10% for the Democratic Unitarian Coalition (CDU) and 5% for the Left Bloc (BE).

   

  At present it is highly unlikely that one of the two main political forces could gather enough share of the vote to secure an outright majority in Parliament. The Portuguese President Aníbal Cavaco Silva has noted on various occasions that the upcoming elections should produce a “stable and durable” government with a reliable majority. The PSD leader and current PM Passos Coelho also hinted at the possibility of finding a potential coalition agreement with socialists, arguing that party interests should not overshadow the national interest. We note that both parties have advocated continued fiscal consolidation (although with PS calling for a slightly higher fiscal deficit trajectory) and adherence to creditors’ post-bailout requirements. 

  
  

  Our baseline is for the incumbent centre-right coalition to remain the largest group in Parliament, with support (either in a formal coalition or externally) from the socialist PS. We see little room for a potential alliance between PS and the other smaller left-wing parties which are likely to enter parliament (CDU and BE), reflecting key ideological differences — in particular given their objective of Eurozone exit as well as for demands for sovereign debt restructuring (both of which PS opposes). We expect that support for the incumbent government could rise further in the run-up to the elections. Overall we see little chance that such an administration could remain compliant with the fiscal consolidation path (envisaging exiting the Excessive Deficit Procedure in 2015) agreed with Brussels as well as regaining meaningful momentum on structural reform approval/implementation.

  

  

  

  

  

• A Worrying Set Of Signals

  Authored by Gavekal's Pierre Gave via Jhn Mauldin's Outside The Box,

  Regular readers will know that we keep a battery of indicators to gauge, among other things, economic activity, inflationary pressure, risk appetite and asset valuations. Most of the time this dashboard offers mixed messages, which is not hugely helpful to the investment process. Yet from time to time, the data pack points unambiguously in a single direction and experience tells us that such confluences are worth watching. We are today at such a point, and the worry is that each indicator is flashing red.

  Growth: The three main indices of global growth have fallen into negative territory: (i) the Q-indicator (a diffusion index of leading indicators), (ii) our diffusion index of OECD leading indicators, and (iii) our index of economically-sensitive market prices. Also Charles’s US recession indicator is sitting right on a key threshold (see charts for all these indicators in the web version).

   

  Inflation: Our main P-indicator is at a maximum negative with the diffusion index of US CPI components seemingly in the process of rolling-over; this puts it in negative territory for the first time this year.

   

  Risk appetite: The Gavekal velocity indicator is negative which is not surprising given weak market sentiment in recent weeks. What worries us more is the widening of interest rate spreads—at the long-end of the curve, the spread between US corporate bonds rated Baa and treasuries is at its widest since 2009; at the short-end, the TED spread is back at levels seen at the height of the eurozone crisis in 2012, while the Libor-OIS spread is at a post-2008 high. Moreover, all momentum indicators for the main equity markets are at maximum negative, which has not been seen since the 2013 “taper tantrum”.

  These weak readings are especially concerning, as in recent years, it has been the second half of the year when both the market and growth has picked up. We see three main explanations for these ill tidings:

  1) Bottoming out: If our indicators are all near a maximum negative, surely the bottom must be in view? The contrarian in us wants to believe that a sentiment shift is around the corner. After all, most risk-assets are oversold and markets would be cheered by confirmation that the US economy remains on track, China is not hitting the wall and the renminbi devaluation was a one-off move. If this occurs, then a strong counter-trend rally should ramp up in time for Christmas.

   

  2) Traditional indicators becoming irrelevant: Perhaps we should no longer pay much attention to fundamental indicators. After all, most are geared towards an industrial economy rather than the modern service sector, which has become the main growth driver. In the US, industrial production represents less than 10% of output, while in China, the investment slowdown is structural in nature. The funny thing is that employment numbers everywhere seem to be coming in better than expected. In this view of things, either major economies are experiencing a huge drop in labor productivity, or our indicators need a major refresh (see Long Live US Productivity!).

   

  3) Central banks out of ammunition: The most worrying explanation for the simultaneous decline in our indicators is that air is gushing out of the monetary balloon. After more than six years of near zero interest rates, asset prices have seen huge rises, but investment in productive assets remains scarce. Instead, leverage has run up across the globe. According to the Bank for International Settlements’ recently released quarterly review, developed economies have seen total debt (state and private) rise to 265% of GDP, compared to 229% in 2007. In emerging economies, that ratio is 167% of GDP, compared to 117% in 2007 (over the period China’s debt has risen from 153 to 235% of GDP). The problem with such big debt piles is that it is hard to raise interest rates without derailing growth. Perhaps it is not surprising that in recent weeks the Federal Reserve has backed away from hiking rates, the European Central Bank has recommitted itself to easing and central banks in both Norway and Taiwan made surprise rate cuts. But if rates cannot be raised after six-years of rising asset prices and normalizing growth, when is a good time? And if central banks are prevented from reloading their ammunition, what will they deploy the next time the world economy hits the skids?

  Hence we have two benign interpretations and one depressing one. Being optimists at heart, we want to believe that a combination of the first two options will play out. If so, then investors should be positioned for a counter-trend rally, at least in the short-term. Yet we are unsettled by the market’s muted response to the Fed’s dovish message. That would indicate that investors are leaning towards the third option. Hence, we prefer to stay protected and for now are not making a bold grab for falling knifes. At the very least, we seek more confirmation on the direction of travel.

  So the question is –

  How To Position For A US Recession

  By Charles Gave

  Since the end of last year I have been worried about an “unexpected” slowdown, or even recession, in the world’s developed economies (see Towards An OECD Recession In 2015). In order to monitor the situation on a daily basis, I built a new indicator of US economic activity which contains 17 components ranging from lumber prices and high-yield bond spreads to the inventory-to-sales ratio. It was necessary to construct such an indicator because six years of extreme monetary policy in the US (and other developed markets) has stripped “traditional” cyclical economic data of any real meaning (see Gauging The Chances Of A US Recession).

  Understanding this diffusion index is straightforward. When the reading is positive, investors have little to worry about and should treat “dips” as a buying opportunity. When the reading is negative a US recession is a possibility. Should the reading fall below – 5 then it is time to get worried – on each occasion since 1981 that the indicator recorded such a level a US recession followed in fairly short order. At this point, my advice would generally be to buy the defensive team with a focus on long-dated US bonds as a hedge. This is certainly not a time to buy equities on dips.

  Today my indicator reads – 5 which points to a contraction in the US, and more generally the OECD. Such an outcome contrasts sharply with official US GDP data, which remains fairly strong. Pierre explored this discrepancy in yesterday’s Daily (see A Worrying Set Of Signals), so my point today is to offer specific portfolio construction advice in the event of a developed market contraction. My assumption in this note is simply that the US economy continues to slow. Hence, the aim is to outline an “anti-fragile” portfolio which will resist whatever brickbats are hurled at it.

  During periods when the US economy has slowed, especially if it was “unexpected” by official economists, then equities have usually taken a beating while bonds have done well. For this reason, the chart below shows the S&P 500 divided by the price of a 30-year zero-coupon treasury.

  

  A few results are immediately clear:

  • Equities should be owned when the indicator is positive.
  • Bonds should be held when the indicator is negative.
  • The ratio of equities to bonds (blue line) has since 1981 bottomed at about 50 on at least six occasions. Hence, even in periods when fundamentals were not favorable to equities (2003 and 2012) the indicator identified stock market investment as a decent bet. ?Today the ratio between the S&P 500 and long-dated US zeros stands at 75. This suggests that shares will become a buy in the coming months if they underperform bonds by a chunky 33%. The condition could also be met if US equities remain unchanged, but 30-year treasury yields decline from their current 3% to about 2%. Alternatively, shares could fall sharply, or some combination in between. ?Notwithstanding the continued relative strength of headline US economic data, I would note that the OECD leading indicator for the US is negative on a YoY basis, while regional indicators continue to crater. The key investment conclusion from my recession indicator is that equity positions, which face risks from worsening economic fundamentals, should be hedged using bonds or upping the cash component.

  

  

  

  

  

• Gundlach Explains Why The Market Hasn't Crashed Yet: "People Are Holding And Hoping"

  One week ago, after Carl Icahn joined the legion of doomsayers launched in mid-September by none other than the former “balls to the wall” bull David Tepper, we wondered who would be next:

  But what does Tepper think? ICAHN SAYS ‘IN MY MIND, IT IS TIME TO BE CAUTIOUS ABOUT THE U.S. STOCK MARKETS’

  — zerohedge (@zerohedge) July 10, 2014

  On Friday we got the answer, when none other than the ascendant “Bond King”, Jeff Gundlach, whose Doubleline Capital just recorded its 20th consecutive month of inflows (contrasting with 29 straight months of outflows for former bond Goliath Pimco) became the latest to join the dark side when shortly after an abysmal payrolls report, he warned that the U.S. equity market as well as other risk markets including high-yield “junk” bonds face another round of selling pressure.

  While perhaps not as dire in his outlook as Icahn, Gundlach explained why far from the correction being over, the market still has a long way to go. He told Reuters that “the reason the markets aren’t going lower is people are holding and hoping,” Gundlach told Reuters in a telephone interview that “the market bottoms out when people are selling and sold out – not when they are holding and hoping. I don’t think you’ve seen real selling in risk assets broadly. Markets need buying to go up and they need volume to go up. They can fall just on gravity.”

  So after taking a its biggest step lower since 2011 in the past month, why has the selling in the S&P500 stalled? Because, well, hope may not be a strategy but now with the Fed’s credibility rapidly evaporating, it is all investors have, or as Gundlach puts it: “The reason the markets aren’t going lower is people are holding and hoping.” Incidentally, there is a reason why hope is not a strategy: in the end, it always fails.
  

  It’s not just stocks that Gundlach is bearish on: he is also not a big fan of junk bonds. “I’ll think about buying when it stops going down every single day.”

  And speaking of the implosion in junk bonds, JPM confirmed as much on Friday when it looked at the latest ICI quarterly worldwide data for Q2’15 which showed that HY ETFs,  which have increased sharply their dominance in the HY space over the past five years, just experienced their largest drawdown ever over the past few months. Since May 2015, 16% (or $6,6bn) of the AUM of HY ETFs was redeemed, which is 1.4x larger than the previous major drawdown of July 2014.

  

  In other words, while investors may be terrified of wholesale sales in stocks just yet over fears such selling will launch a feedback loops where selling begets even more selling, they have no such qualms about junk bonds, which on Friday continued their selloff despite the biggest equity short-squeeze on record.

  What does this mean for the big picture?

  Back to Gundlach again, whose Los Angeles-based DoubleLine was overseeing $81 billion in assets under management as of the end of the third quarter, said: “Clearly what’s happening is people are waking up to the idea that global growth is not what they thought it was.”

  Gundlach’s damning observation on the current state of the world would make him a worth entrant into the “conspiracy theory tinfoil blog hall of fame”: “People are acting like everything is great. Junk bonds are at a four-year low. Emerging markets are at a six-year low and commodities are at a multi-year low – same level as in 1995 … GDP is not growing at a nominal basis.”

  Even International Monetary Fund Managing Director Christine Lagarde affirmed this, Gundlach said: “You talk about an important moment – when somebody who is traditionally a cheerleader for a bright future says, ‘I have to downgrade my global growth forecast,’ as Lagarde did.”

  It gets worse: Gundlach, who has maintained since May that the Federal Reserve will not raise rates at all this year, said the environment feels similar to 2007’s, when a financial crisis was brewing.

  “People want them (Fed officials) to increase because they think it is a signal that everything is secretly OK. If the Fed raises rates, that means everything is OK. But it is the other way around. If the Fed raises rates against this backdrop, it just makes things worse.”

  Gundlach’s closing observation: “There’s going to be another wave down in risk assets and it’s happening globally.”

  Adding it all up: Tepper, Icahn and now Gundlach; not to mention a brutalized hedge fund world which just saw its worst 2 month stretch since Lehman. Oh yes, and Yellen who also several months ago said stocks are overvalued.

  Aside from that, just BTFD, because some central bank, somewhere, will surely come to your rescue…

  

  

  

  

  

• Saudi Arabia Forces The UN To Drop Humanitarian Inquiry Into Yemen Atrocities

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  The following would be funny, if it weren’t so incredibly sad. The United Nations’ spiral into clownish insignificance continues unabated.

  

   

  From the New York Times:

  GENEVA — In a U-turn at the United Nations Human Rights Council, Western governments dropped plans Wednesday for an international inquiry into human rights violations by all parties in the war in Yemen that has killed thousands of civilians in the last six months.

   

  The change of direction came as the Netherlands withdrew the draft of a resolution it had prepared with support from a group of mainly Western countries that instructed the United Nations high commissioner for human rights to send experts to Yemen to investigate the conduct of the war.

   

  That proposal was a follow-up to recommendations by the commissioner, Zeid Ra’ad al-Hussein, who detailed in a report this month the heavy civilian loss of life inflicted not only by the relentless airstrikes of the military coalition led by Saudi Arabia but also by the indiscriminate shelling carried out by Houthi rebels. 

   

  But in the face of stiff resistance from Saudi Arabia and its coalition partners, and to the dismay of human rights groups, Western governments have accepted a resolution based on a Saudi text that lacks any reference to an independent, international inquiry. 

   

  “The result is a lost opportunity for the council and a huge victory for Saudi Arabia, protecting it from scrutiny over laws of war violations which will probably continue to be committed in Yemen,” said Philippe Dam, deputy director of Human Rights Watch in Geneva.

   

  To the consternation of human rights groups, the consensus approach coincides with evidence of sharply rising civilian casualties in Yemen. Mr. Hussein’s spokesman reported on Tuesday that the number of known civilian casualties since late March had risen to more than 7,217, including 2,355 people killed.

   

  The civilian toll from airstrikes was “starkly underlined” by report s that more than 130 people had been killed at a wedding party in Taiz, the spokesman, Rupert Colville, said. The United Nations was trying to confirm what had happened, he said.Mr. Dam of Human Rights Watch was disappointed.

   

  “This was the time to put the parties to this conflict under scrutiny for human rights violations,” he said. “Human Rights Council members have failed to send a clear message to Saudi Arabia and to the Houthis that they have to change the conduct of hostilities.”

  Well yeah, what did you expect to happen after the UN named Saudi Arabia to head its human rights panel?

  

  

  

  

  

• ReDLiNe…

  .

   

  Those who align themselves with despotic regimes, routinely bomb wedding parties and hospitals and purport to engage in “nation building” by means of havoc and human misery

  are hardly in a position to lecture the rest of the world on human rights violations, the evils of despotism and the morality of war…

  

  

  

  

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• The Media-Opoly: Cancelled, From Saturday Night, It's Conspiracy Theory Rock!

  A day after we ran “Meet Your “Independent” Media, America“, in which we showed how prime time entertainment like 60 Minutes is strategically and voluntarily “planted” with propaganda trolls and “concerns” thus crushing any “unbiased” credibility mainstream US media may have, we dug into the archives to bring you “Conspiracy Theory Rock.”

  This cartoon created by SNL cartoonist Robert Smigel in 1998 ran once in a “TV Funhouse” segment, and has been since removed from all subsequent airings of the Saturday Night Live episodes. As a reminder, 90% of US media is currently controlled by 6 corporations: General Electric, News Corp., Disney, Viacom, Time Warner and CBS…

  

  

  … whose shareholders vastly overlap.

  Michaels claimed the edit was done because it “wasn’t funny.”

  Well, it’s funny now because for once the propaganda facade of the mainstream media cracked from within, and the result was this critique of corporate media ownership, including then NBC’s ownership by General Electric/Westinghouse, and how only the stuff the owners deem appropriate is distributed for general consumption.

  We doubt the current parent of NBC (and CNBC), Comcast, would play it either.

  

  

  

  

• Inside A Mid-East Coup: A Closer Look At The Russia-Iran Power Play

  Earlier today, we ventured to characterize the breakdown of Washington’s strategy in Syria as the worst US foreign policy blunder since Vietnam. 

  To be sure, that’s a bold claim, but it’s supported by the sheer number of missteps, bad outcomes, and outright absurdities that have developed in the Mid-East as a result of the effort to oust Bashar al-Assad. 

  At the most basic level, the support provided by Washington, Riyadh, and Doha for the various Sunni extremist groups battling for control of Syria has created a humanitarian crisis of epic proportions. Hundreds of thousands of people are dead and millions are displaced. As tragic as the situation already is, the conditions are ripe for it to get even worse if the move by Brussels to force recalcitrant EU countries into accepting a migrant quota system they are opposed to ends up triggering a dangerous bout of xenophobia in the Balkans.

  Washington’s move to train and arm the Syrian opposition has of course also led directly to the creation of a group of black flag-waving jihadists that have taken the term “extremists” to a whole new level on the way to producing a series of slickly-produced videos depicting the murder of Westerners. This same group is now stomping around between Syria and Iraq wreaking havoc on civilians and committing acts so heinous that even al-Qaeda has condemned them.

  Of course the outright chaos the West has managed to create in Syria has now come full circle, providing Iran and Russia with a unique opportunity to tip the scales and seize power in the Mid-East. 

  What’s important to understand here, is that this isn’t confined to Syria.

  That is, Iran isn’t content to preserve its supply line with Hezbollah and Russia isn’t content to play spoiler to the US by propping up Assad. There’s something far more meaningful going on here and it can be readily observed in Iraq.

  For years, Iran exercised its influence in Iraq via various Shiite militias controlled by Quds commander Qasem Soleimani. Now, it looks as though the deal struck between Tehran and Moscow in July included a power play designed to gradually muscle the US out of the way in Baghdad. The first concrete evidence of this came late last month when Iraq announced an intelligence sharing agreement with Russia and Syria but the story goes far deeper than that. Consider the following from The Washington Institute:

  On September 21, the Wall Street Journal reported that forces under the command of Iran, Russia, and Bashar al-Assad were coordinating efforts to secure the Syrian regime. As Moscow sends advanced aircraft, armored vehicles, and more, Iran’s Iraqi Shiite proxies have simultaneously stepped up their recruitment and deployment for the Syria war. Since July, their Syria-focused online campaigns have jumped significantly (see chart), morphing from infrequent mentions in late 2014/early 2015 to a full-fledged recruitment program involving a number of newer Iranian-backed groups. These Shiite fighters are now spread across Syria, primarily in the western part of the country, launching operations from the suburbs of Damascus to Idlib.

   

  

   

  Following the June 2014 seizure of Mosul and much of northern Iraq by the so-called Islamic State/ISIS, a group called Kataib al-Imam Ali (KIA) announced its creation. Formed by Iranian-controlled splinter elements from Muqtada al-Sadr’s Mahdi Army, KIA is probably best known for its fierce battlefield reputation and particularly gory videos featuring severed heads and men being cooked above open flames.

   

  When compared to other organizations, KIA’s Syria-focused recruitment and propaganda campaign has been the largest. Using messages issued via its offices, billboards, and social media, the group has actively recruited new members, especially around Najaf, Iraq. These efforts began with online imagery connecting its fighters with Sayyeda Zainab, an important Shiite shrine near Damascus. Other posts have announced that Jaafar al-Bindawi, the militia’s former head of training and logistics, would be leading the deployment in Syria, while Ali Nizam would serve as the new logistical director for Syrian affairs.

   

  While this effort marks the group’s first publicized deployments to Syria, KIA is no newcomer to the war. Prior to its formal creation, and with Iranian assistance, elements of the militia were very active in Syria beginning in 2013. Alaa Hilayl, one of the group’s heavily glorified “martyrs” and leader of its submilitia Kataib Malik al-Ashtar, was one of the first Shiite commanders to publicly announce combat operations in the Aleppo area in spring 2013.

   

  Meanwhile, Harakat Hezbollah al-Nujaba (HHN, a.k.a. “The Hezbollah Movement of the Outstanding,” or simply Harakat al-Nujaba) has been the other main Iraqi Shiite player in Syria recruitment, and its background is similar to KIA’s. HHN emerged from Iranian-controlled Sadrist splinter group Asaib Ahl al-Haq (AAH) in 2013 and is led by that group’s cofounder, Sheikh Akram Kaabi.

   

  Internet-based propaganda and recruitment materials (mainly through social media) often serve as harbingers of larger moves by Iran’s Iraqi Shiite proxies. This summer, these groups began to disseminate a collection of professionally produced imagery in a highly organized manner, all aimed at raising awareness of the Syria fight and calling for new recruits.

   

  Previously, in fall 2014, the Iranian-backed Iraqi Shiite group Kataib Sayyid al-Shuhada (KSS) instituted a sporadic Internet recruitment program. The group’s fighters were primarily deployed for a failed campaign on Syria’s southern front that lasted into early 2015. Meanwhile, HHN initiated its own limited recruitment program from December to April. Both programs demonstrated that Iraqi Shiites would once again play a major role in Syria (see PolicyWatch 2430, “Iraqi Shiite Foreign Fighters on the Rise Again in Syria”). Yet these moves were only the tip of the iceberg.

   

  While May and June were relatively quiet on this front, Iraqi Shiite recruitment for Syria quickly began to rise in July and spiked in August. September saw slightly decreased recruitment and propaganda posts online, but the traffic was still sizable enough to be regarded as a continuation of the Syria program.

   

  According to fighters who promoted recruitment material or were sent to Syria in late July, training for the deployment often lasted around thirty days and took place in Lebanon or Iran. Considering that most training regimens for Shiite fighters heading to Syria have lasted between two and six weeks (depending on specialization), Iran likely timed the uptick in deployments to best demonstrate unity of arms with Russia and Assad. Specifically, the main spike in recruitment activity began in earnest on July 3, the first reports of experienced KIA fighters deploying to Syria emerged on July 20, and Qasem Soleimani — commander of Iran’s elite Qods Force — met with Russian officials on July 24.

  And here’s a map from ISW which “depicts confirmed locations of Iranian Revolutionary Guard Corps (IRGC) commanders in Iraq between October 2014 and October 2015.” ISW continues: “orange markers indicate where IRGC personnel were spotted in an area witnessing active military operations [and] asterisks indicate a Soleimani sighting”:

  

  In short, what’s happened here is that once Tehran secured the support of the Russian air force juggernaut, the IRGC diverted its Iraqi militias to Syria, where they will now join Hezbollah and ensure that Putin’s airstrikes are bolstered when needed by effective ground support. 

  The announcement this week by Baghdad that Iraq would welcome Russian airstrikes against ISIS indicates that once Moscow and Tehran have restored Assad and stabilized Syria, the joint air and ground campaign will move to Iraq, a strategic shift that will complete what we have characterized as an outright Mid-East coup. 

  If this thesis materializes, it will mean that the West’s attempt to destabilize the Assad regime has not only failed, but has in fact opened the door for Iran to seize control of the Mid-East and for Russia to reestablish itself as a global superpower capable of bringing its influence to bear on any nation at any time. 

  It’s your move Washington, and the stakes couldn’t possibly be higher…

  

  

  

  

• Will The Failure Of Central Banking Lead To Global Bloodshed: The French Revolution Case Study

  Submitted by Michael Lebowitz of 720 Global

  Shorting the Federal Reserve – Part Deux

  The sequence of events leading up the French Revolution are likely unfamiliar to most. Yet money printing and a debauched French currency played no small part in those events. As a sequel to “Shorting the Federal Reserve”, 720 Global aims to provide an historical example of excessive money printing which lead to financial crisis, and ultimately the revolution of a major sovereign nation. More than a history lesson, this article effectively illustrates the road on which the U.S. and many other nations currently travel. The story relayed in this article is not a forecast for what may happen but a simple reminder of what has repeatedly happened in the past.

  As you read, notice the story lines the French politicians used to persuade the opposition and justify money printing. Note the similarities to the rationales used by central bankers and neo?Keynesians today. Then, as now, it is promoted as a cure for economic ills with manageable consequences and where failure to generate a sustainable recovery are thought to be a failure of not having acted boldly enough.

  Our gratitude to the late Andrew D. White, on whose work we relied heavily. The exquisite account of France circa the 1780?1790’s was well documented in his paper entitled “Fiat Money Inflation in France” published in?1896. Any unattributed quotes were taken from his paper.

  Before The Presses Rolled

  During the 1700’s France accumulated significant debts under the reigns of King Louis XV and King Louis XVI. The combination of wars, significant financial support of America in the Revolutionary War, and lavish government spending were key drivers of the deficit. Through the latter part of the century, numerous financial reforms were enacted to stem the problem, but none were successful. On a few occasions, politicians supporting fiscal austerity resigned or were fired because belt tightening was not popular and the King certainly didn’t want a revolution on his hands. For example, in 1776 newly anointed Finance Minister Jacques Necker believed France was much better off by taking large loans from other countries instead of increasing taxes as his recently fired predecessor argued. Necker was ultimately replaced 7 years later when it was discovered France had heavy debt loads, unsustainable deficits, and no means to pay it back.

  By the late 1780’s, the gravity of France’s fiscal deficit was becoming severe. Widespread concerns helped the General Assembly introduce spending cuts and tax increases. They were somewhat effective but the deficit was very slow to decrease. The problem, however, was the citizens were tired of the economic stagnation that resulted from belt tightening. The medicine of austerity was working but the leaders didn’t have the patience to rule over a stagnant economy for much longer. The following quote from White sums up the situation well:

  “Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but these involved patience and self?denial, and, thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues; and France was not then one of these few”.

  By 1789, commoners, politicians and royalty alike continuously voiced their impatience with the weak economy. This led to the notion that printing money could revive the economy. The idea gained popularity and was widely discussed in public meetings, informal clubs and even the National Assembly. In early 1790, detailed discussions within the Assembly on money printing became more frequent. Within a few short months, chatter and rumor of printing money snowballed into a plan. The quickly evolving proposal was to confiscate church land, which represented more than a quarter of France’s acreage to “back” newly printed Assignats (the word assignat is derived from the Latin word assignatum – something appointed or assigned).

  This was a stark departure from the silver and gold backed Livre, the currency of France at the time. Assembly debate was lively, with strong opinions on both sides of the issue. Those against it understood that printing fiat money failed miserably many times in the past. In fact, the John Law/Mississippi bubble crisis of 1720 was caused by an over issue of paper money. That crisis caused, in White’s words, “the most frightful catastrophe France had then experienced”. History was on the side of those opposed to the new plan.

  Those in favor looked beyond history and believed this time would be different. They believed the amount of money printed could be controlled and ultimately pulled back if necessary. It was also argued new money would encourage people to spend and economic activity would surely pick up. Another popular argument was France would benefit by selling the confiscated lands to its people and these funds would help pay off its debts. In addition, land ownership by the masses strengthened French patriotism.

  The debate was won by those in favor of printing. As we have seen many times before and after this event, hope and greed won out over logic, common sense and most importantly, history. Per White? “But the current toward paper money had become irresistible. It was constantly urged, and with a great show of force, that if any nation could safely issue it, France was now that nation; that she was fully warned by her severe experience under John Law; that she was now a constitutional government, controlled by an enlightened, patriotic people,??not, as in the days of the former issues of paper money, an absolute monarchy controlled by politicians and adventurers; that she was able to secure every livre of her paper money by a virtual mortgage on a landed domain vastly greater in value than the entire issue; that, with men like Bailly, Mirabeau and Necker at her head, she could not commit the financial mistakes and crimes from which France had suffered under John Law, the Regent Duke of Orleans and Cardinal Dubois”. This time was different in their collective minds!

  April 1790

  The final decree was passed and 400 million Assignats, backed by confiscated church property, were issued. The notes were quickly put into circulation and “engraved in the best style of the art”, as shown below.

  

  As one might suspect the church decried the action, but the large majority of French were in favor. The press and assemblymen extolled the virtues of this new money. They spoke and wrote of future prosperity and an end to the economic oppression. They thought they found a cure for their economic ills.

  Upon the issuance of the new money, economic activity picked up almost immediately. As expected, the money allowed for a portion of the national debt to be paid off as well. Confidence and trade expanded. The summer of 1790 proved to be an economic boom time for France.

  Fall 1790

  The good times were limited. By October, economic activity was back in decline and with it came a renewed call for more money printing. Per White? “The old remedy immediately and naturally recurred to the minds of men. Throughout the country began a cry for another issue of paper”. The deliberations regarding money printing were rekindled with many of the same arguments on both sides of the debate re?hashed. A new argument for those in favor of printing was simply that the original 400 million Assignats was not enough.

  While those favoring money printing acknowledged the dangers of their actions, they were also dismissive about them at the same time. These Assemblymen believed if a little medicine appeared to work with no side effects why not take more. Debate this time around was easier for the pro?printing consortium. Of note was a well?respected elder statesman of the Assembly and national hero named Gabriel Riqueti, Comte de Mirabeau (Mirabeau). During the first round of debates, Mirabeau was strongly against the issuance of the new currency. In fact he said the following: “A nursery of tyranny, corruption and delusion; a veritable debauch of authority in delirium” in regards to paper money. He even called the issuance of money “a loan to an armed robber”.

  While Mirabeau clearly understood the effects of printing money, he was now swayed by the arguments of a stronger economy. He also appreciated the benefits of making a large class of landholders for the first time. Mirabeau reversed his opinion and joined the ranks of those believing France could control the inflationary side effects. He now argued for one more issue of Assignats. As a precautionary measure he insisted that as soon as paper became abundant, self?governing laws of economics would ensure the money was retired. Mirabeau went as far  as recommending the new amount of printed money should be enough to pay down the entire debt of France ? 2,400 million!

  The naysayers warned of the ills of the proposed second printing. Of note was Necker. If you recall he was partially responsible for the debt buildup that led to France’s problems. Necker “predicted terrible evils” and offered other means to accomplish economic growth. His opinions were not popular and Necker was “spurned as a man of the past” by the Assembly and ultimately left France forever. A powerful pamphlet, written by Du Pont de Nemours was popular amongst the nays and was read to the Assembly. It declared that doubling the money supply would “simply increase prices, disturb values, alarm capital, diminish legitimate enterprise, and so decreases the demand for both products and for labor. The only persons to be helped by it are the rich who have large debts to pay”.

  The arguments of Neckar and Du Pont de Nemours fell on deaf ears. Those in favor rebutted with comments that printing more money was “the only means to insure happiness, glory and liberty to the French nation”. They took the prior debate a step further and now theorized that the gold and silver Livres would be undesirable as Assignats would be the only currency people demanded.

  On the 29th of September 1790, a bill authorizing the issuance of 800 million Assignats was passed. The bill also decreed that when Assignats were paid back to the government for land they should be burned. This added measure was thought of as a way to ensure the newly printed money was not inflationary.

  White commented: “France was now fully committed to a policy of inflation; and, if there had been any question of this before, all doubts were removed” he went on discussing how “exceedingly difficult it is stopping a nation once in the full tide of a depreciating currency”.

  It turns out the money returned to the government wasn’t burned but was re?issued in smaller denominations. Within a short period 160 million was paid to the government for lands and was reissued “under the pleas of necessity”.

  June 1791

  Nine months after the second issue of 800 million Assignats, and another cycle of good economic activity followed by bad, pressure grew for more money printing. With little fanfare or debate, a new issue of 600 million was issued. With it, once again came “solemn pledges to keep down the amount in circulation”.

  This experience, like the previous two, was followed by a brief period of optimism that quickly faded. With each successive printing came currency depreciation and higher prices. Despite the beliefs of those in favor of printing, hoarding of gold and silver backed coins was occurring. The French people were watching their paper money lose value and becoming more interested in preserving their wealth. The coins were in limited supply while paper money was being printed with increasing frequency. In their minds, gold and silver offered the stability that  paper money was rapidly losing.

  “Still another troublesome fact began to now appear. Though paper money had increased in amount, prosperity had steadily diminished. In spite of all the paper issues, commercial activity grew more and more spasmodic. Enterprise was chilled and business became more and more  stagnant”.

  With each new issue came increased trade and a stronger economy. The problem was the activity wasn’t based on anything but new money. As such, it had very little staying power and the positive benefits quickly eroded. Businesses were handcuffed. They found it hard to make any decisions in fear the currency would continue to drop in value. Prices continued to rise. Speculation and hoarding were becoming the primary drivers of the economy. “Commerce was dead; betting took its place”. With higher prices, employees were laid off as merchants struggled to cover increasing costs.

  The only ones truly benefiting were manufacturers producing goods for foreign countries and the stock brokers. The rapidly declining value of their currency attracted orders from other countries that were now able to purchase French goods very cheaply. Those businesses and consumers that relied on goods from outside the country were battered by higher prices. With the increased money supply and economic uncertainty the “ordinary motives for savings and care diminished”. Speculation increased significantly. While some stock investors in the urban regions were exploiting the condition, the onus fell on the working man. Inflation, weakening currency and lack of jobs was damaging to a large majority of Frenchmen.

  The economic conditions also brought on more crime and increased instances of bribery of government officials. Conditions were described by White as “the decay of a true sense of national pride”.

  December 1791

  A new issue of 300 million more Assignats was ordered to be printed. With that decree it was also ordered that a previous limit on the total amount to be printed be repudiated. By this point it was estimated the value of their currency was cut in half and inflation was rampant.

  April?July 1792

  Another 600 million Assignats were printed. The presses rolled on and after a few more printings it was estimated a total of 3,500 million Assignats now existed. The issuances continued through 1792 and 1793.

  “The consequences of these over issues now began to be more painfully evident to the people at large. Articles of common consumption became enormously dear and prices were constantly rising. Orators in the Legislative Assembly, clubs, local meetings and elsewhere now endeavored to enlighten people by assigning every reason for this depreciation save the true one. They declaimed against the corruption of the ministry, the want of patriotism among the Moderates, the intrigues of the emigrant nobles, the hard?heartedness of the rich, the monopolizing  spirit of the merchants, the perversity of the shopkeepers, ???each and all of these as causes of the difficulty”.

  French Revolution

  Throughout 1792 and 1793 there were instances of mobs demanding basic necessities such as bread, sugar and coffee. Peaceful demonstrations turned violent and plundering of the local shops was commonplace. The French Revolution was born.

  Money printing was not the sole cause of the revolution, but it certainly helped light the fuse. In all fairness, the French people were demanding the same liberties they helped America fight for. The idea of a Monarchy was fading and those supporting democratic principles were leading the charge. In hindsight, money printing was a last ditch effort to create prosperity and keep the Revolution at bay. Poverty and despair spread through France. Malnutrition and hunger due to lost employment and inflation fed the Revolution. In 1792 a republic was proclaimed and in the following year King Louis XVI was sent to the guillotines. 

  Conclusion

  The story retold in this article echoes that of other nations before and after it. The language, promises, and ultimately the excuses used by the politicians are a familiar refrain. There is nothing new with money printing or “quantitative easing” as modern day central bankers call it. Despite the passing of over 200 years and substantial development in the world, plus ça change (the more that changes, the more it is the same thing).

  As stressed in part 1 of this series “Shorting the Federal Reserve”, gold has a long history serving as a tool of wealth preservation. After numerous financial crises caused by the debasement of currencies have modern day economists and central bankers finally figured out how to print money with no consequences? Despite our wishes to the contrary, every action still has an equal and opposite reaction (consequence). The investment pundits who see nothing wrong with the actions of the world central banks regard holding gold as ridiculous. We consider an allocation to gold as a matter of prudence given what we have seen and expect to see from central bankers desperate to maintain status quo.

  Hopefully after reading this and “Shorting the Federal Reserve” you will understand a little protection may go a long way in what may not be as clear cut an economic future as some would lead us to believe.

  

  

  

  

  

• Global Dollar Funding Shortage Intesifies To Worst Level Since 2012

  The last time we observed one of our long-standing favorite topics (first discussed in early 2009), namely the global USD-shortage which manifests itself in times of stress when the USD surges against all foreign currencies and forces even the BIS and IMF to notice, was in March of this year, when we explained that “unlike the last time, when the global USD funding shortage was entirely the doing of commercial banks, this time it is the central banks’ own actions that have led to this global currency funding mismatch – a mismatch that unlike 2008, and 2011, can not be simply resolved by further central bank intervention which happen to be precisely the reason for the mismatch in the first place.”

  Furthermore JPM conveniently noted that “given the absence of a banking crisis currently, what is causing negative basis? The answer is monetary policy divergence. The ECB’s and BoJ’s QE coupled with a chorus of rate cuts across DM and EM central banks has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections and rate cuts raising the supply of euro and other currency funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis.”

  To which we rhetorically added: “who would have ever thought that a stingy Fed could be sowing the seeds of the next financial crisis (don’t answer that rhetorical question).”

  All this was happening when the market was relentlessly soaring to all time highs, completely oblivious of this dramatic dollar shortage, which just a few months later would manifest itself quite violently first in the Chinese devaluation and sale of Treasurys, and then in the unprecedented capital outflow from emerging markets as the great petrodollar trade – just as we warned in November of 2014 – went into reverse. In fact, there are very few now who do not admit the Fed is responsible for both the current cycle of soaring volatility, or what may be a market crash (as DB just warned) should the Fed not take measures to stimulate “inflation expectations” (read: more easing).

  In any event, since March we have received numerous requests for follow-up of where said funding shortage is now. So here are the latest observations on the current level of the global dollar funding shortage as measured by the Dollar fx basis, courtesy of JPM:

  The dollar fx basis declined further over the past two months. The 5-year dollar fx basis weighted across six DM currencies declined to a new  low for the year and the lowest level since the summer of 2012 during the euro debt crisis.

  In other words: the USD funding shortage is even worse than it was when we looked at it in March, it still is a function of conflicting central bank liquidity flows, and while not as bad as it was at its all time worst levels in late 2011, it is slowly but surely getting there with every passing week that the Fed does not ease monetary conditions. 

  A brief history of the three key periods of global USD-funding shortfalls:

  • The first episode immediately after the Lehman bankruptcy coincided with a US banking crisis that quickly became a global banking crisis via cross border linkages. Financial globalization meant that Japanese banks had accumulated a large amount of dollar assets during the 1980s and 1990s. Similarly European banks accumulating a large amount of dollar assets during 2000s created structural US dollar funding needs. The Lehman crisis made both European and Japanese banks less creditworthy in dollar funding markets and they had to pay a premium to convert euro or yen funding into dollar funding as they were unable to access dollar funding markets directly.
  • The second episode of very negative dollar basis took place during the Euro debt crisis. The sovereign crisis created a banking crisis making Euro area banks less worthy from a counterparty/credit risk point of view in dollar funding markets. As dollar funding markets including fx swap markets dried up, these funding needs took the form of an acute dollar shortage. European banks and companies that had dollar assets to fund had to pay a hefty premium in fx swap markets to convert their euro funding into dollar funding. Those European banks and companies that were unable to do so, were forced to liquidate dollar assets such as dollar denominated bonds and loans to reduce their need for dollar funding
  • The third phase of very negative dollar basis started at the end of last year. Monetary policy divergence has for sure played a role during the end of 2014 and the beginning of this year. The ECB’s and BoJ’s QE has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections raising the supply of euro and yen funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis. And we did see these funding imbalances in cross border corporate issuance.

  More from JPM:

  Similar to the beginning of this year, the decline in the dollar fx basis is raising questions regarding shortage in dollar funding. This is because the fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and an even more negative basis currently points to more intense shortage of USD funding relative to the beginning of the year.

   

  Figure 5 shows that the current negativity of the dollar fx basis represents the third major episode since the Lehman crisis. Before the Lehman crisis the fx basis was remarkably stable hovering around zero as funding markets were well balanced. After the Lehman crisis, funding markets experienced persistent imbalances with an almost structural shortage of dollar funding.

  The conclusion:

  In all, continued monetary policy divergence between the US and the rest of the world as well as retrenchment of EM corporates from dollar funding markets are sustaining an imbalance in funding markets making it likely that the current episode of dollar funding shortage will persist.

  What does this mean in simple terms? Think back to what David Tepper said several weeks ago on CNBC when, contrary to popular opinion, he admitted he was bearish on risk assets mostly as a result of the “reserve streams” going in two different ways. This is precisely what the dollar shortage as quantified by the negative dollar basis is telling us: the policy divergence between the “tight” Fed and the ultra loose ECB and BOJ is starting to reach extreme levels, and will likely continue until the basis blows out to its theoretical limit of -50bps as set by the Fed-ECB swap line.

  At that point either the Fed will be forced to admit it was beaten by the market, and either cut rates (to negative) while perhaps unleashing even more QE to offset the monetary imbalance with the rest of the world, or it will once again engage in even more swap lines with foreign central banks as the dollar funding shortage moves beyond simply synthetic and into an actual shortage of USD “bills” all in electronic credit format of course, because as we further explained last week, it is simply impossible to satisfy all global USD-denominated claims.

  

  

  

  

  

• Manifesto – The Values of Value Investing

  

  I rarely share letters we write to IMA’s clients, but I decided to share this “Value Investor’s Manifesto” I wrote for our clients in July. It should be a helpful tool to frame recent volatility in an appropriate perspective. It’s just eight pages long, but it’s probably one of the most important pieces of writing I have done in a long, long time. Here is the first part, the introduction.

  Manifesto

  By Vitaliy Katsenelson, CFA

  Part One: Introduction

  The relationship between a client and a money manager is like a marriage: even if you’re married to the right person, it’s just a matter of time before your relationship will hit hard times that test the strength of your marriage. After all, life is not linear, it’s full of ups and downs. The downs will ultimately test a couple’s commitment to one another.

  Just like life, stock returns are anything but linear. Over the last one hundred-plus years, stocks returned about 11% a year on average. But if you were to look at stock market returns on an annual basis, they were usually anything but 11%. This 11% average is the culmination of a very combustible mixture of numbers that individually bear very little resemblance to the average they result in.

  Side effects of nonlinearity of stock behavior clearly show up in investor returns. The financial services market research firm DALBAR studied historical returns of mutual funds and actual (realized) returns of investors who invested in those mutual funds. DALBAR’s findings were stunning. For decades fund investors had significantly underperformed the mutual funds they invested in, not by a percent or two but by a mile, capturing only a small fraction of the returns of those mutual funds.

  For a civilian (nonprofessional) investor, understanding the investment process of a fund manager is usually difficult. Often, performance is the only thing investors can judge objectively, so recent performance overshadows all other metrics. Investors compare the most recent returns of their favorite new mutual fund versus the returns of the one they’re holding. If the new mutual fund has done better recently, they’ll sell the old one and buy the new one. This often results in buying high and selling low.

  Any money manager, whether he is managing separate accounts or a mutual fund, will go through stretches where he looks smarter or dumber than he really is, though his IQ hasn’t actually changed.

  When we look smarter than we are, we’re not worried about what clients think of us (though we try to temper their expectations of our future brilliance). At that point our biggest concern is our own self-perception: we don’t want success to go to our heads and result in overconfidence.

  On the flip side, it’s just a matter of time before we look dumber than we are, and that’s when our relationship with a client gets tested. Especially if it’s a very new relationship and the client hasn’t had a chance to experience our brilliance.

  Historically, value investing (owning undervalued companies) has done significantly better than other strategies. Paradoxically, the reason it has done well in the long run is because it did not work consistently in the short run. If something works consistently (key word), everybody piles into it and it stops working.

  These aforementioned cycles of temporary brilliance and dumbness are not just common to us mere mortals. Even Warren Buffett’s Berkshire Hathaway goes through them. As just one example, in 1999, when the stock market went up 21% Berkshire Hathawaystock declined 19%. In 1999 the financial press was writing obituaries for Buffett’s investment prowess.

  Suddenly, in 1999 Buffett’s IQ was lagging the market by 40%. At the time investors were infatuated with internet stocks that were not making money but that were supposed to have a bright future. Investors were selling unsexy “old economy” stocks that Buffett owned to buy the “new economy” ones.

  If at the end of 1999, you were to sell Berkshire Hathaway and buy the S&P 500 instead, you would have done the easy thing, but it would have been a large (though very common) mistake. Over the next three years Berkshire Hathaway gained over 30% while the S&P declined over 40%. During the year 1999 Buffett’s IQ did not change much; in fact the (book) value of businesses Berkshire Hathaway owned went up by 0.5% that year. But in 1999 the market’s attention was somewhere else and it chose to price Berkshire Hathaway 19% lower.

  Where are we going with this? We look at the relationship with our clients as a partnership. For this partnership to work we need to communicate on the same wavelength. In this letter we would like to establish this common wavelength.

  Part Two: The Values of Value Investing 

  To read part TWO of this manifesto, titled the “Values of Value Investing” follow this link or this http://ima?usa.com/receive-manifesto/

  Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books have been translated into eight languages.  Forbes called him – the new Benjamin Graham.   

  To receive Vitaliy’s future articles by email  click here.

  

  

  

  

• Who Owns Your Presidential Candidate?

  By Jake Anderson of Antimedia

  It’s a new era of American politics. With regard to campaign finance, the Citizens United Supreme Court ruling — and the arguably worse McCutcheon v. FEC ruling — opened the doors to unrestricted corporate funding of our national elections.

  The primary mechanism in place facilitating this flood of private money is the super PAC. You’ve probably heard of super PACs and how they’ve essentially taken over the role traditionally filled by individual campaign donors in Political Action Committees (PACs). But super PACs aren’t the end of it. There are puppet political non-profits, business associations, and now, single-candidate “dark money” outfits that, as of September 21, have already raised $25.1 million —  five times the amount spent by this time in the 2012 election cycle.

  Small, private donors still exist, of course. Their campaign contributions are still capped at about $5,000 per individual, making them the tip of the iceberg in political campaign spending. Enter super PACs and single-candidate committees, who, because of the aforementioned SCOTUS rulings, have the ability to slither in between campaign finance laws and flood our elections with unlimited corporate money. The “dark money” 501(c) groups, sometimes known as “social welfare” organizations, are particularly insidious because, unlike super PACs, they are not required to disclose their donors to the public. Since they are legally viewed as a type of business, they don’t have to disclose disbursements until the IRS requires it. This means there is essentially a network of politically advantageous winks and nods, whereby candidates receive unlimited parallel spending from an interconnected syndicate of super PACs, non-profits, and business associations.

  Of the 20 biggest spenders, only one is openly committed to a liberal viewpoint, which gives conservatives an advantage. That said, while Democrats have questioned the legality of “dark money” groups, they have not discounted the possibility of utilizing this tactic in addition to super PACs, which must legally disclose the source of their funds within a few weeks (though several groups have found loopholes allowing them to wait up to 7 weeks).  

  Needless to say, this is an election in which most of the candidates are seeking support from wealthy donors instead of the citizens they are supposed to be representing.

  Despite the arguably undemocratic, obfuscating nature of our nation’s campaign finance laws and the blatant corporatist agenda mandated by the Supreme Court, let’s attempt to break down the major sources of political spending so far in the 2016 presidential election. You may be surprised to find out who is donating money to your candidate — and how that contribution may affect future policy positions.

  JEB BUSH

  The one-time prospective GOP front-runner has taken a beating in recent polls, with many politicos saying extreme factions of the conservative party aren’t happy with his more centrist attitudes toward gay marriage, immigration, and abortion rights. But the big establishment money still has his back.

  Corporate and other Special Interest donors (top 5):

  • Goldman Sachs ($161,100)
  • Neuberger Berman LLC ($65,800)
  • Bank of America ($43,750
  • Citigroup Inc ($41,500)
  • Tenet Healthcare ($35,900)

  Super PAC/“Dark Money”:

  The Right to Rise super PAC supports Jeb Bush and has raised over $100 million. As of mid-September, the group planned to spend $24 million on television ads in Iowa, New Hampshire, and South Carolina. According to the Florida Center for Investigative Reporting, the primary donor list for Jeb Bush’s super PAC includes various spheres of influence:

  “Texas oil men, New York investment bankers, Miami healthcare company owners, and three former ambassadors — two of whom served under Bush’s brother, former President George W. Bush — gave 25 contributions of $1 million each. Mike Fernandez, the Cuban-American billionaire founder of Coral Gables-based MBF Healthcare Partners, gave $3 million, the largest contribution to Right to Rise.”

  Other wealthy members of the PAC include:

  • “Hushang Ansary, Iran’s ambassador to the United States from 1967 to 1969. He serves as a trustee of the George W. Bush Library. Ansary and his wife Shahla became U.S. citizens in the 1980s.

  • Richard Kinder, chairman and chief executive of oil and gas pipeline company Kinder Morgan. His net worth is $10 billion. Kinder’s wife Nancy also contributed $1 million to Right to Rise.

  • Alfred Hoffman, U.S. ambassador to Portugal from 2005 to 2007. He founded Florida-based real estate company WCI Communities.

  • Nextera Energy, the publicly traded parent company of Florida Power & Light, which provides electrical service to nearly half of the state. Last year, Nextera reported more than $15 billion in revenue.

  • Julian Robertson Jr., New York hedge fund manager whose net worth is $3.4 billion. He made his fortune investing in golf resorts and vineyards in New Zealand.”

  Jeb Bush, total raised so far: over $114 million

  HILLARY CLINTON  

  In her career as a politician, Hillary Clinton’s top donors have been Citigroup Inc., Goldman Sachs, DLA Piper, JPMorgan Chase & Co, and Morgan Stanley. Many say such alliances irrevocably endear her to said institutions, rendering her incapable of reigning in financial corruption on Wall Street.

  Her 2016 donors are slightly different, but really very much the same.

  Corporate and other Special Interest donors (top 5):

  • Morgan & Morgan ($274,767)
  • Sullivan & Cromwell ($148,100)
  • Akin, Gump et al ($125,598)
  • Yale University ($95,434)
  • Latham & Watkins ($94,580)

  Note: Morgan Stanley, Time Warner, JPMorgan Chase & Co and others are high on the list as well.

  It is also important to point out that the lobbying and law firm Akin, Gump, Strauss, Hauer & Feld, which employees many of Hillary’s lobbying “bundlers,” took donations from two of the biggest private prison contractors, Corrections Corporation of America and Geo Group, with fees totaling almost $300,000.

  Super PAC/”Dark Money”:

  Priorities USA Action is the super PAC supporting Hillary Clinton in the 2016 election. So far, the group has raised $25 million in only three months. Predictably, hardline progressives stringently object to Clinton using the wealthy billionaires of Priorities to raise money, but supporters say there is really no choice if she is to compete with the Republicans in a general election.

  The most notable Priorities super PAC donors are George Soros and Steven Spielberg, but the list includes 31 individual donors who contributed over $200k each.

  It’s fair to point out that Hillary Clinton recently made headlines by embracing a tactic to publically reveal big corporate donors. Whether this is political posturing or not, I will leave to the reader. According to the Los Angeles Times:

  “Companies like Google Inc. — and even Shell Oil — touting environmental awareness have been exposed supporting shadowy organizations skeptical of climate change.”

  Hillary Clinton, total raised so far: over $45 million

  CHRIS CHRISTIE

  Chris Christie, the two-term governor of New Jersey, is currently polling at 1%, but that has not stopped him from garnering the support of super PAC America Leads, which has raised $11 million with the support of 137 contributors, several of them billionaires. The PAC recently released its donor list. Politico describes what is perhaps the most noteworthy entry:

  “Winecup-Gamble Inc., a Nevada ranch owned by former Reebok CEO Paul Fireman, gave the group $1 million. Fireman, who lives outside Boston, plans a massive, $4.6 billion casino in Jersey City if state voters approve a constitutional amendment to allow gambling outside of Atlantic City.”

  Other America Leads donors include:

  • Las Vegas casino mogul Stephen Wynn
  • Hedge fund manager Steve Cohen and his wife Alexandra, who contributed a combined $2 million
  • Quicken Loans chairman Daniel Gilbert gave $750,000.
  • Home Depot founder Ken Langone gave $250,000
  • Anheuser-Busch heir August Busch ponied up $100,000.
  • Hewlett-Packard CEO Meg Whitman donated $100,000.
  • Wrestling mogul Linda McMahon gave $250,000.
  • George Harms Construction gave $25,000 (and it’s worth noting this company acquired more than $100 million in New Jersey state agency contracts in 2014)
  • Ferreira Construction gave $100,000 (also worth pointing out the $34 million this company received from the New Jersey Turnpike Authority, also in 2014)
  • Public Service Enterprise Group gave $250,000.

  Chris Christie, total raised so far: over $11 million

  BERNIE SANDERS

  Bernie Sanders entered the race as a democratic socialist dark horse but has quickly earned the feverish admiration of a wide spectrum of both progressive leftists and centrists, many of whom applaud his stated goal of taking on big banks and crony capitalism to fight for the middle class. Others see him as the unfortunate sequel to Obama, someone with grandiose reformist ideas who lacks the mettle and fearlessness truly necessary to stand up to the military-industrial complex and machinations of the Deep State.

  One point concerning Bernie Sanders can’t be denied: his campaign financing is leagues above the others in terms of ethical sourcing. Sanders has refused super PAC money and continues to reiterate he will not use a super PAC or any shady billionaire money for the 2016 election. His full list of of regular PAC and individual donors, most of which is labor union money, is listed below, courtesy of OpenSecrets.org:

  Machinists/Aerospace Workers Union	$105,000
  Teamsters Union	$93,700
  National Education Assn	$89,242
  United Auto Workers	$79,750
  United Food & Commercial Workers Union	$72,500
  Communications Workers of America	$68,000
  Laborers Union	$64,000
  Carpenters & Joiners Union	$62,000
  National Assn of Letter Carriers	$61,000
  American Assn for Justice	$60,500
  American Fedn of St/Cnty/Munic Employees	$58,198
  Intl Brotherhood of Electrical Workers	$53,100
  United Transportation Union	$48,500
  Sheet Metal Workers Union	$47,000
  Operating Engineers Union	$46,100
  Service Employees International Union	$44,014
  UNITE HERE	$42,875
  United Steelworkers	$41,750
  American Postal Workers Union	$37,700
  American Federation of Teachers	$36,112

  A report from October 1st shows that Bernie Sanders has nearly matched Hillary Clinton’s 3rd quarter campaign donations without using a super PAC.

  Bernie Sanders, total funds raised so far: $26 million

  JOHN KASICH

  In a normal election cycle, John Kasich, the Governor of Ohio, might be polling higher than 5%. He is more of a centrist candidate that appeals to the base and has actual experience governing. Rumors persist that he may be tapped for VP on the eventual GOP nominee’s ticket, but so far Kasich maintains he isn’t interested in that.

  Corporate and other Special Interest donors:

  His donor list has been called a “who’s who of prominent Ohio political donors.” This list includes:

  “Abigail Wexner, philanthropist and wife to Les Wexner, founder of The Limited; John P. McConnell, the chief executive officer of Worthington Industries and majority owner of the Columbus Blue Jackets; and John and Ann Wolfe, former owner of The Dispatch.”

  Another interesting Kasich PAC donor is a Montana company called MMWP12 LLC. This company contributed $500,000 and is connected to Mark Kvamme, who spearheaded JobsOhio, the private, non-profit group whose goal was to create jobs in the Kasich-run state of Ohio.

  Super PAC/”Dark Money”:

  John Kasich’s super PAC is called New Day For America. The group has drawn contributions from 166 donors, totaling $11 million so far, over half of which is from Ohio.

  According to Politico, the major names on this list include:

  • “Wendt Family Trust, Schottenstein Management Company and Tom Rastin, an Ohio-based Republican donor who donated to then-Pennsylvania governor Tom Corbett’s re-election campaign in the 2014 cycle.

  • Floyd Kvamme (Mark Kvamme’s father), the retired venture capitalist, who donated $100,000

  • Philip Geier Jr. of the Geier Group, who donated $500,000 and is a member of New Day for America’s board

  • Jim Dicke, a big player in the Ohio Republican Party and the chairman emeritus of the Crown Equipment Corp. Dicke donated $250,000.”

  Kasich also has a separate PAC called New Day For America Independent.

  John Kasich, total funds raised: over $11,730,730

  CARLY FIORINA

  Former Hewlett-Packard CEO Carly Fiorina’s unexpected ascension as a viable GOP candidate was buoyed by three primary factors: her neoconservative war hawk ideology; her vociferous stance against Planned Parenthood, which appeals to the GOP’s dominant right wing base; and her secretary-to-CEO personal life story.

  Corporate and other Special Interest donors (top 5):

  • LISI Inc – $12,400
  • Renaissance Technologies – $10,800
  • Western Care Construction – $10,800
  • Echo Pacific Construction – $10,400
  • Wilson, Sonsini et al – $8,100

  Super PAC/”Dark Money”:

  Perhaps as a result of her history as an executive of HP, Carly Fiorina’s super PAC, Carly For America, is full of deep-pocketed Silicon Valley donors. This includes:

  • Venture capitalist Tom Perkins – $25,000
  • Former Intel CEO Paul Otellini – $5,000
  • Former CEO of Univision, Jerry Perenchio, who donated a whopping $1.6 million
  • Former head of World Wrestling Entertainment and Connecticut Senate candidate Linda McMahon – $10,000
  • Palo Alto-based physicist Charles Munger – $100,000
  • Robert Day, who founded the Los Angeles asset management firm TCW – $100,000

  The most mysterious donation, one that is actually being investigated by the FEC, concerns a $500,000 contribution from one of Ted Cruz’s super PACs, Keep the Promise 1. It is currently unknown why this donation was made.

  Carly Fiorina, total funds raised so far: over $1.6 million

  MARCO RUBIO

  Marco Rubio, the junior United States senator from Florida, is another potential dark horse in this race because he appeals to the right wing of the Republican base while still striking Reaganesque tones during the debates. In fact, many pundits have noted the eerie similarities between Rubio and 2000 GOP candidate George W. Bush. Others have pointed out that Rubio’s Cuban American ethnicity could help Republicans win much-needed Latino votes.

  Corporate and other Special Interest donors (top 5):

  • Goldman Sachs – $65,830
  • Steward Health Care – $49,400
  • Titan Farms – $23,200
  • Florida Crystals – $21,700
  • Oracle Corp – $21,600

  Super PAC/”Dark Money”:

  According to the latest filings, the Marco Rubio super PAC, Conservative Solutions PAC, has drawn in $16 million, doubling the funds earned from his private donors. Over 75% of this money came from just four donors:

  • Norman Braman, a longtime friend of Rubio who happens to be a billionaire auto dealer and former owner of the Philadelphia Eagles. Braman has been called Rubio’s “secret weapon” because he despises Jeb Bush and says he will spend anywhere from $10 to $25 million on Rubio’s campaign
  • Lawrence J. Ellison, the chairman of Oracle Corp who has donated $3 million
  • Philanthropist Laura Perlmutter (wife to Isaac Perlmutter, the billionaire CEO of Marvel Entertainment) donated $2 million
  • Besilu Stables, a horse racing company in Miami, donated $2.5 million

  The Rubio campaign is also the beneficiary of a considerable amount of “dark money.” The source is a 501(c)(4) nonprofit called Conservative Solutions Project, which has raised an additional $15.8 million. The nonprofit, which, of course, is not required to disclose its donors, launched a massive ad campaign attacking President Obama’s Iran deal.

  Marco Rubio, total funds raised so far: over $31.9 million

  DONALD TRUMP

  Donald Trump has stated repeatedly that he will self-finance his campaign and will not accept any special interest donations. His net worth is heavily contested, but Forbes estimates it is approximately $4.5 billion. Trump claims he will spend up to $100 million of his own money on the 2016 presidential election.

  While the legacy of Trump as a self-made financial titan has catapulted him to an iconic status, Alternet.org posted an article debunking much of this fictitious fanfare. The article traces the roots of a $40-$200 million inheritance Trump received from his father, money that was bilked from governmental financing programs during the Great Depression; Trump parlayed that money into a series of businesses that went bankrupt, skirting SEC regulations and taking advantage of every tax loophole available in order to build his empire.

  Donald Trump, total funds raised so far: $100 million (amount he pledged to his own campaign)

  TED CRUZ

  Ted Cruz is the junior U.S. Senator from Texas who made a name for himself by reading Green Eggs and Ham on the Senate floor as part of a symbolic filibuster of Obama’s Affordable Healthcare Act. He was also one of the 47 signatories of a letter sent to Iran stating that President Obama lacked the authority to negotiate with Ayatollah Khomenei.

  More recently, he has led a weak coalition of congressmen aiming to shut down the federal government for the second time in as many years. His objective — and one of his major campaign platforms, in addition to repealing Obamacare and the Iran Deal — is to defund Planned Parenthood.

  Corporate and other Special Interest donors (top 5):

  Woodforest National Bank	$75,200
  Morgan Lewis LLP	$68,850
  Gibson, Dunn & Crutcher	$52,950
  Pachulski, Stang et al	$41,000
  Jennmar Corp	$40,850

  Super PAC/”Dark Money”:

  Ted Cruz’s campaign actually has four super PACs, all funded by Robert Mercer, a Long Island hedge fund magnate and climate change denier. Combined, they raised $31 million in the first four weeks of his campaign. Contributors to these super PACs include:

  • Koch brothers’ political network, 97% of which came from a single contribution from Robert Mercer himself
  • Billionaires Farris and Dan Wilks, who generated most of their wealth from the West Texas fracking boom –  donated $15 million

  Ted Cruz, total funds raised so far: over $31 million

  BEN CARSON

  Ben Carson, the retired John Hopkins neurosurgeon, was dead in the water a few weeks ago, but his numbers saw an unlikely bounce after the second debate. While Carson put his foot in his mouth when he suggested the U.S. marines were unprepared for combat, he startled many by suggesting that had George W. Bush sworn off petroleum in the wake of 9/11, taking bold diplomatic action over military strikes, the nation may have averted the incredibly costly war on terror. With his poll numbers rising, many pundits now wonder whether he could be tapped as VP.

  Corporate and other Special Interest donors (top 5):

  Coca-Cola Co	$21,850
  West Coast Venture Capital	$21,600
  Trailiner Corp	$10,800
  Ankom Technology	$10,400
  Jea Senior Living	$10,000

  Super PAC/”Dark Money”:

  Like Ted Cruz, Ben Carson has more than one super PAC. One Vote, a super PAC led by Republican strategist Andy Yates, and Run Ben Run. Even before Carson decided to run, the National Draft Ben Carson for President Committee raised $13.5 million. Reports have surfaced that there is tumult and discord between the two primary super PACs, but as long as the money keeps pouring in, Carson doesn’t seem to be phased. Recently, he doubled down on anti-Muslim rhetoric, which seems to have bumped his fundraising figures even higher, bringing him to $20 million this quarter.

  Very little information has been released about the bigger disbursements stemming from Carson’s super PACs. But interestingly, despite the big money pouring in, Carson has flourished with small donors. In fact, “eighty-four percent [of Carson’s donors] wrote checks for less than $500.”

  Ben Carson, total funds raised so far: over $20 million

  MIKE HUCKABEE

  The former governor of Arkansas’ private donors are relatively small and unremarkable. His super PAC, Pursuing America’s Greatness, has received only two primary donations. In fact, almost all the money contributed to the super PAC came from one man: Ronald Cameron of Little Rock, Arkansas, the poultry magnate who donated $3 million. Notably, Cameron, who runs agribusiness giant Mountaire Corporation, which earned $1.22 billion in 2009, has been listed as a major contributor to the Koch Brothers political network.

  Other contributions include $500,000 from Sharon Herschend of Herschend Family Entertainment and $50,000 each from real estate investor Jon K. Gibson and Cary Maguire, president of Maguire Oil.

  Mike Huckabee, total funds raised so far: over $3 million

  RAND PAUL

  According to one insider, libertarian-leaning, low-polling Rand Paul could soon be dropping out of the race. Paul’s super PAC America’s Liberty PAC has received most of its money from only two donors:

  • George Macricostas, CEO of RagingWire, a data center operator – $1.1 million
  • Libertarian donor Jeffrey Yass, leader of trading firm Susquehanna International Group – $1 million

  Rand Paul, total funds raised so far: $3.1 million

  As you can see, the 2016 presidential election is, for the most part, an all-out corporate donor war. It’s important to remember that many of these totals are likely not current, as campaigns strategically withhold donation amounts. We also don’t know the full extent of “dark money” stemming from nonprofits and business associations. What we do know is that this will be the most expensive election in history. The Koch brothers alone have a budget of $889 million. When added to the spending expected from the Democrats and Republicans, we’re looking at a possible price tag of $5 billion.

  If you have information on any significant campaign funds not included in this article, please email us or leave a comment.

  

  

  

  

• The Unwind Of QE Means The "S&P Should Be Trading At Half Of Its Value", Deutsche Bank Warns

  In his latest weekly note, DB’s derivatives analyst Alekandar Kocic focuses on the interplay between US inflation expectations and US equities, and points out something curious, and very much spot on:

  Policy response to the crisis post-2008 consisted of unprecedented injection of liquidity, transfer of risk from private to public balance sheet, and reduction of volatility from its toxic levels. The net result was near-zero rate levels and collapse of volatility across the board, while different market sectors developed high degrees of coordination. The last effect has been an indirect result of the central banks’ flows and the distortions they introduced in the bond market. In this environment other markets acted as a complement to rates (through which monetary policy was transmitted) and crowding out there pushed investors to articulate their views elsewhere. Their participation was a function of amount of liquidity injection. As a consequence everything was trading off of US inflation expectations as the main expression of the QE effects.

  That was the case for the first 5 years of “unconventional policy” until some time in 2013. Then something snapped. Kocic continues:

  With deflation as the main risk tackled by monetary policy, its success or failure was gauged by the ability to reflate the economy. Inflation expectations and breakevens were therefore signals for risk-on or risk-off trade. In fact, most market sectors, from FX to EM equities, were trading in high coordination with breakevens. Taper tantrum was the end of these correlations and a beginning of dispersion across different assets. In effect, it was the unwind of the “QE” trade, its first phase. While most other assets, like credit spreads, EM equities or different currencies, do not have a logical connection with US breakevens, US equities do. The dispersion between these assets and breakevens was an expected consequence of policy unwind. However, for US equities this unwind distorted their “natural” correlation with inflation. Persistence of these dislocations is just a manifestation of to what extent QE has been an important driver of post-2008 markets.

  Which brings us to the punchline:

  Since 2013, stocks rallied while disinflationary pressures were reinforced by a strong USD, low commodity prices and a decline in global demand. If pre-2013 coordination between the two is taken as a reference, then based on current stock prices breakevens should trade about 1.5% wider. This means the Fed should be hiking because inflation is above target. Alternatively, given the current level of inflation, S&P should be trading at half of its value.

  Wait, the S&P should be trading at 900… or even less? Yes, according to the following Deutsche Bank chart:

  

  Only one question remains: which breaks first – do inflation expectations surge higher, soaring by some 150 bps to justify equity valuations, or do equities crash?

  Is reconciliation likely – and, if so, in which direction? Are we returning to the pre-crisis world, or we are in a completely new regime?

  The answer will come from none other than the Fed and by now, even Janet Yellen knows that one word out of place, one signal to the market that the QE-inflation trade will converge with stocks crashing instead of inflation rising (which, unless the Fed launched QE4, NIRP of even helicopter money now appears inevitable), and some $10 trillion in market cap could evaporate overnight.

  Is it any wonder that Yellen is exhibiting “health issues” during her speeches: the realization that the fate of the biggest stock market bubble lies on your shoulders would make anyone “dehydrated.”

  In retrospect, Ben Bernanke knew exactly what he was doing when he got out of Dodge just as the endgame was set to begin.

  

  

  

  

  

• "How Will The Public Receive News Of More QE, NIRP, Cash Bans And Capital Controls?"

  Submitted by Eugen Bohm-Bawerk 

  The Fed unsurprisingly chickened out from the much touted September hike. International conditions and a disapproval from Mr. Market was enough to unnerve an increasingly bewildered FOMC board.

  Less well known is the fact that the FOMC gave a strong, and unexpected, signal to the Pavlovian world of central bank front runners. Dovish hold as the enlightend call it. It is all about managing expectations – see Goebbelnomics where we said:

  As the Keynesian revolution was merged with the models of Robert Lucas, it eventually morphed into something called neoclassical economic thought. The general gist was that economic agents can be tricked into changing their behaviour through surprises in monetary policy, which yes, has somewhat miraculously become the mainstay of central bank economists… … the academic transition led to the “economics of money shifting to economics of psychology”.

  With this in mind it seem untenable that the radical change in the dot-plots is due to a rogue, independent minded FOMC member. On the contrary, everything coming out of the Federal Reserve is well coordinated and is there to signal to the rest of the world where the Fed would like speculators to place their bets, or in this case, should not put their money.

  

  With the probability of the Federal Reserve’s funds rate going negative in 2016 suddenly much higher, the one way bet on a stronger dollar (and hence emerging market crash) is put into question. Investors will thus think twice before sending their money into the dollar from now on. This is obviously a desperate move from the FOMC in a futile attempt to stem the emerging market capital exodus.

  As the chart below shows, large movements in the dollar coincide with emerging market bubbles and busts. The FOMC, wrongly, believes the strong dollar causes the bust, but in reality it is just a symptom of massive capital misallocations unable to service their debt and a consequent retrenchment in the Eurodollar leverage and velocity. Insisting on maintaining the unsustainable capital flows will only make the inevitable bust that must larger.

  In other words, by adding international developments to the FOMC action function the health of the Eurodollar has become the de facto guiding target for the Fed. The Global Central Bank has officially been born.

  

  It also tells investors, especially Wall Street banks with USD2.2 trillion held in a depository account at the Federal Reserve, that they should not necessarily expect to receive 25 basis points on their excess reserves for ever. Some of these banks were undoubtedly looking forward to the day the FOMC was forced to raise the rate on excessive reserves (IOER) because it  would create even more scarce “capital” for the banks to play around with. In addition, those same reserves the Fed is paying banks to hold are part of an intricate  re-hypothecated collateralised financial chain, helping to prop up risk throughout the investable world. We touched upon this in Corporate Foie Gras.  

  To banks, excess reserves are a highly valuable commodity. It receives an income (the IOER) as an immobile cash pile at the Fed and can simultaneously be used to trade ever rising markets.

  However, the recipient of such collateral will use the very same collateral for their funding needs (re-hypothecation), creating long collateral chains dependent on the excessive reserves staying put.

  However, if the cost of keeping  reserves increases it will at some point be better to use the money directly – id est. withdrawing the money from the Fed. Note, the original holder of these deposits only benefits from the IOER and the first link in the collateralised chain. If the interest received  go negative (and markets drop) it is easy to see that the cost of maintaining excess reserves will easily outweigh the benefits. The holder will thus refrain from keeping reserves at the Fed. This will in turn break the collateralised re-hypothecated chain, which will lead to widespread deflation (just as the QE’s wreaked havoc with the shadow banking system) and a general market sell-off through a fall in collateral velocity and leverage.

  In the latest update on depository institutions Federal Reserve deposit holdings we may just have gotten a taste of what to expect. Banks withdrew an unprecedented USD405bn in one week; incidentally a week when the S&P500 lost more than 6 per cent. Hardly a coincidence.

  

  So why would the FOMC risk so much by signalling NIRP when they could just keep interest rates unchanged and leave it at that? First of all, we don’t think they have a clue on what is going on behind the most obvious  – the thing that is seen to use an expresson from Bastiat. The perception of central bank omnipotence may be a thing on Wall Street, but we don’t buy it.

  Secondly, as mentioned above, they want to stem the strong dollar movement (which is just another way of saying propping up a crumbling Eurodollar).

  Third, and this is where we think the Fed is going with this, they need to make sure there is a bid on TSYs as the global vendor funding machine is currently in reverse. Emerging markets and commodity producers have become net sellers of TSYs on a 12mth rolling basis and if the Eurodollar deflates further from here this selling will only intensify.

  Imagine what would happen to “risk” if the all the banks, pension- hedge- and mutual funds would sell stocks and corporate bonds to buy TSYs in a deflationary down spiral. Rosengren’s Ternary Mandate would obviously not be met according to standard.

  

  To assure a TSY bid, NIRP, or the possibility of NIRP, should induce banks to reallocate their excessive reserves to the treasury market; especially if there were a chance the Fed may lure them in with hints of both QE4 and NIRP.

  In Europe something very similar happened. When the ECB lowered the deposit rate to zero banks moved funds from the deposit account to the current account to avoid the added cost of using the overnight deposit account, but then slowly moved money out of the ECB system and into sovereign bonds.

  

  The striking similarity between Greek bond yields and excess liquidity within the euro bloc clearly suggest banks started to front run the ECB by buying sovereign bonds as the cost of holding excess reserves rose and the lure of buying sovereign bonds increased due to hints of ECB QE.

  

  Greek yields are obviously affected by the dire political situation and negotiations with the quadriga and can make massive moves on the whims of European politicians. However, investor front running the ECB with the use of excess reserves is clearly shown in other markets too, such as the Bunds, Oats and BTPs thus substantiating our argument. 

  

  The European experience with NIRP is exactly what the Fed is looking for. Releasing excess reserves to buy the TSYs being sold by panicking emerging markets. In addition, the mere mentioning of NIRP could actually deter further dollar strength.

  The fact that the re-hypothecated collateral chains that currently holds up risk will break and become highly deflationary and that the dollar strengthens because of a crumbling Eurodollar and not some perceived strength in the US economy will be lost on our money masters.

  We believe the US will be in recession before the end of 2016 and then things will be really interesting. How will the public receive news of more QE, NIRP, forward guidance, cash bans and capital control in a time when faith in central bank omnipotence disappears?

  Ceterum censeo Federal Reserve esse delendam

  

  

  

  

  

• Physical Cash Poses a HUGE Problem For Central Banks

  More and more institutions are trying to make it harder for you to move your money into cash.

   

  Globally, over $5 trillion in debt currently have negative yields in nominal terms, meaning the bond literally has a negative yield when it trades. In the simplest of terms this means that investors are PAYING to own these bonds.

   

  Bonds are not unique in this regard. Switzerland, Denmark and other countries are now charging deposits at their banks. In France and Italy, you are not allowed to make cash transactions above €1,000.

   

  This sounds laughable to most people, but it is a reality in Europe… and in the US, in some regions. Louisiana has made it illegal to purchase second hand goods using cash.

   

  This is just the beginning. The War on Cash will be spreading in the coming weeks.

  The reasoning is simple. Most large financial entities are insolvent. As a result, if a significant amount of digital money is converted into actual physical cash, the firm would very quickly implode.

   

  This is precisely what happened in 2008…

   

  When the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash. Indeed, the actual “thing” that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.

   

  A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).

   

  This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.

   

  To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.

   

  When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.

   

  None of these issues have been resolved. The big banks remain as leveraged as ever and at risk of implosion should a significant percentage of capital get pulled into physical cash.

   

  European banks as a whole are leveraged at 26 to 1. In simple terms, this means they have just €1 in capital for every €26 in assets (bought via borrowed money).

   

  This is why whenever things get messy in Europe, the ECB and EU begin implementing capital controls.

   

  Consider what recently happened in Greece. Depositors began to flee the banks in droves, so they declared a bank holiday. This holiday included safe deposit boxes… so all the bullion or physical cash Greeks had stashed there remained locked up… just like the “digital” money in their savings accounts.

   

  Again, it was impossible to get cash out of the banks… even cash that technically wasn’t “in the system” anymore but sitting in safe deposit banks.

   

  The US financial system isn’t any better. Indeed, the vast majority of it is in digital money. Actual currency is just a little over $1.36 trillion. Bank accounts are $10 trillion. Stocks are $20 trillion and Bonds are $38 trillion.

   

  And at the top of the heap are the derivatives markets, which are over $220 TRILLION.

   

  If you think the banks aren’t terrified of what this market could do to them, consider that JP Morgan managed to get Congress to put the US taxpayer on the hook for it derivatives trades.

   

  Mind you, this is the same bank that is now refusing to let clients store cash in safe deposit boxes.

   

  This is just the tip of the iceberg. As anyone can tell you, it’s all but impossible to move large amounts of money into cash in the US. Even the large banks will routinely ask you for 24 hours notice if you need $10,000 or more in cash. These are banks will TRLLLIONS of dollars worth of assets on their books.

   

  This is just the beginning.

   

  Indeed, we've uncovered a secret document outlining how the Fed plans to incinerate savings.

   

  We detail this paper and outline three investment strategies you can implement

  right now to protect your capital from the Fed's sinister plan in our Special Report

  Survive the Fed's War on Cash.

   

  We are making 1,000 copies available for FREE the general public.

   

  To pick up yours, swing by….

  http://www.phoenixcapitalmarketing.com/cash.html

   

  Best Regards

  Phoenix Capital Research

   

   

   

   

  

  

  

  

• China Trolls Obama, Says "Routine" Mass Shootings Expose Failure Of U.S. Politics

  We already noted that it has been a bad 24 hours for US foreign policy, when hours after the US blamed Russia of targeting civilians, it was the US itself which bombed a hospital in Afghanistan, killing 9 Doctors without Borders staffers, 3 children and other innocent bystanders.

  The president got the brunt of it during yesterday’s press conference, when he got a very targeted question from Reuters’ White House reporter Julia Edwards who asked Obama point blank “how do you respond to critics who say Putin is outsmarting you, that he took a measure of you in Ukraine and he felt he could get away with it?”

  The exchange can be seen 41:30 into the clip below:

  Obama’s meandering response:

  Yes, I’ve heard it all before.  (Laughter.) I’ve got to say I’m always struck by the degree to which not just critics but I think people buy this narrative.

   

  Let’s think about this.  So when I came into office seven and a half years ago, America had precipitated the worst financial crisis in history, dragged the entire world into a massive recession.  We were involved in two wars with almost no coalition support.  U.S. — world opinion about the United States was at a nadir — we were just barely above Russia at that time, and I think potentially slightly below China’s.  And we were shedding 800,000 jobs a month, and so on and so forth. 

   

  And today, we’re the strongest large advanced economy in the world — probably one of the few bright spots in the world economy.  Our approval ratings have gone up.  We are more active on more international issues and forge international responses to everything from Ebola to countering ISIL. 

   

  Meanwhile, Mr. Putin comes into office at a time when the economy had been growing and they were trying to pivot to a more diversified economy, and as a consequence of these brilliant moves, their economy is contracting 4 percent this year.  They are isolated in the world community, subject to sanctions that are not just applied by us but by what used to be some of their closest trading partners.  Their main allies in the Middle East were Libya and Syria — Mr. Gaddafi and Mr. Assad — and those countries are falling apart.  And he’s now just had to send in troops and aircraft in order to prop up this regime, at the risk of alienating the entire Sunni world. 

   

  So what was the question again?  (Laughter.)

  Laughter indeed, but yes: Obama really needed a reminder what the question was as he completely failed to answer it. He did try to pivot back modestly toward the end of the near-800 word response saying the following…

  we’re not going to make Syria into a proxy war between the United States and Russia.  That would be bad strategy on our part.  This is a battle between Russia, Iran, and Assad against the overwhelming majority of the Syrian people.  Our battle is with ISIL, and our battle is with the entire international community to resolve the conflict in a way that can end the bloodshed and end the refugee crisis, and allow people to be at home, work, grow food, shelter their children, send those kids to school.  That’s the side we’re on.

   

  This is not some superpower chessboard contest.  And anybody who frames it in that way isn’t paying very close attention to what’s been happening on the chessboard.

  … actually a superpower chessboard contest is precisely what this is, and while Obama can argue whether or not Putin is outsmarting him, someone else on the global chessboard is smelling blood. That someone is China, and this time China, which as we profiled before is aligning itself not with the US but with Russia in the Syria proxy war – because that’s precisely what it is – targeted not the US foreign policy failures, but Obama’s domestic problems, namely the “routine” series of mass shootings taking place in the US which according to an Op-Ed in China’s premier media outlet, Xinhia, “exposes failure of US politics.”

  Here is the full Op-Ed posted by Xinhua’s editors:

  Obama’s “routine” on mass shooting exposes failure of U.S. politics

   

  The Americans were startled once again when tragic news break out about the deadly campus shooting in Oregon on Thursday.

   

  However, the United States is “the only advanced country on earth that sees these kinds of mass shootings every few months,” just like President Barack Obama has painfully acknowledged.

   

  Obama, angry and frustrated, criticized that the nation’s response to mass shootings has become “routine,” from press coverage, to his own comments, to the fruitless debate over gun control.

   

  It is obvious that the country has grown “numb” to mass shootings like Thursday’s incident in Oregon, where a 20-year-old gunman killed at least nine people at a community college.

   

  There have been 296 shootings so far this year in the United States, claiming more than 370 innocent lives, and it was the 15th time Obama has pleaded for gun control legislation since taking office in 2009.

   

  How come a country as powerful as the United States has been unable to stop this kind of brutal attacks against innocent civilians?

   

  The problem is deeply rooted in the country’s political system, where bipartisan politics and interest groups exert huge influence, to the point that security of the American people have to give way to political correctness and corporate interests.

   

  Opinion polls have repeatedly shown that an overwhelming majority of Americans favor stricter gun control rules, yet no legislation on that front can be expected in the near future.

   

  Even the Newtown massacre in 2012 that killed 20 children and six adults failed to break the impasse in Washington over gun control.

   

  The biggest surprise to the world in the wake of Oregon shooting is that there was no surprise for such cold-blooded murders to happen again and again in the United States.

   

  Defects in the U.S. political system have not only caused inaction, but also panic that alarmed the world, as an imminent government shutdown resulting from political wrestle on the Capitol Hill last month posed danger to both the U.S. economy and the world market.

   

  The recurrent mass shootings in the United States deserve real reflection and pondering, since those innocent lives cannot be lost in vain.

  Yes, China – that paragon of human rights – is openly mocking the US for its own domestic policy failings. Because in the grand chessgame which Obama refuses to acknowledge, it is not so much what China says, but that it says it in the first place – something which confirms the elephant in the room, and yet which few are willing to discuss: US standing in the international arena, especially through the lens of the “other” superpowers, has rarely sunk this low.

  And if Obama’s “non-chess” competitors don’t respect him, how can the US president hope to impose the national interests of those whose interests he truly represents – as even China openly points out – namely US corporations and Wall Street companies, on the global arena?

  

  

  

  

  

• Furious Auto Workers Demand More Than "Hot Dogs And Hamburgers" As US Car Sales Soar

  If you’re a mega corporation, one of the most annoying things about employees is that they expect to be paid for their work and as if that’s not enough, they also tend to draw a parallel between the performance of the company and what their labor is worth. 

  Fortunately, the combination of ZIRP-assisted, EPS-inflating buybacks and the relative powerlessness of the American worker has served to preserve the divide between corporate management and everyday employees, but every once in awhile, beleaguered laborers start to get the idea that they’re entitled to a greater share of what they effectively create and that translates directly into calls for higher wages. 

  This situation is exacerbated when the peasantry gets together in the form of organized labor which unfairly seeks to deprive management of its capitalistic right to keep almost all of the profits from the widgets their employees produce. 

  Given the above, it comes as no surprise that the subprime loan-assisted boom in auto sales has auto workers asking for a larger piece of the pie. Here’s WSJ:

  Automobiles flew off dealer lots last month at the fastest pace in 10 years, but the good times are stirring tension between U.S. auto makers and their unionized workers that threatens to undercut the industry’s rebound.

   

  United Auto Workers union members at Fiat Chrysler Automobiles NV this week rejected for the first time in three decades a tentative agreement as inadequate, and Ford Motor Co. faces a walkout at a big truck factory as soon as Sunday.

   

  As buyers flood dealer lots, snapping up pricey pickups and sport-utility vehicles that deliver fat profits to General Motors Co., Ford and Fiat Chrysler, factory workers are demanding an end to the concessions that put the U.S. industry back on its feet after near collapse seven years ago.

   

  “We got a catered meal of hot dogs and hamburgers as our thanks while others, I’m sure, got big bonuses,” said Phil Reiter, a 44-year-old union member referring to a recent production milestone at Fiat Chrysler’s Toledo, Ohio, Jeep factory. That plant on Tuesday rejected a UAW supported contract by a more than 4-to-1 ratio.

  And while “a catered meal of hot dogs and hamburgers” should clearly be enough, these greedy assembly line workers still want more, which of course means that the auto industry needs to simply stop hiring them:

  On Thursday, the UAW confirmed that 65% of its Fiat Chrysler members spurned Fiat Chrysler’s offer, the first time in more than 30 years a proposed bargaining deal was voted down. The decision is a blow to the UAW, which has tried to reverse a persistent decline in union auto jobs by accepting concessions.

  Obviously, we’ve employed a bit of sarcasm in our presentation here, but the simple fact is that no matter what side of the organized labor debate you fall on, the situation depicted in the following graphic simply isn’t sustainable…

  

  …but we imagine that in today’s jobs market, workers’ complaints may fall on largely deaf ears because after all, manufacturing jobs clearly aren’t important when it comes to sustaining America’s feudal “robust” economic recovery:

   

  

   

  

  

  

  

  

  

• Stock Market Reaches Key Post-Crash Milestone

  By Dana Lyons, partner at J. Lyons Fund Management

  Stock Market Reaches Key Post-Crash Milestone

  The average retest period following crashes similar to that in August have bottomed an average of 27 days after the crash…that would be Friday .

  On September 4, we posted a chart showing the path of the S&P 500 following other “crashes” since 1950 that were similar to that which occurred at the end of August. Our goal was to lay out a general road map for how the index might behave in the weeks following the initial August 25 low. Specifically, we looked at drops in the S&P 500 of at least 10% within 10 days.

  As it turns out, we identified 11 prior unique crash occurrences. Among the 11, 2 of them – July 1974 and September 2008 – continued to cascade lower, nearly unabated, for several more months. The other 9 resulted in an initial low in relatively short order. Here is the chart from that September 4 post:

  

  What general takeaways did the chart present us? Here are a few noteworthy items that we wrote in the prior post:

  • Of the 9, there was just 1 “V-Bottom” – September 2001 – that was never subject to a retest.
  • The other 8 all went on to test the initial low at some point.
  • 5 of the 9 eventually dropped below the initial low, if only marginally.
  • The quickest retest/bottom process came after the March 2001 decline and lasted just 9 days.
  • The longest bottoming process – following the July 2002 crash – lasted 55 days.
  • ****The average bottoming process lasted 27 days (which would equate to October 2 in our present situation).****
  • The median bounce between the initial low and the end of the bottoming process was +10%. That would equate to 2056 in our current circumstances.
  • The majority of the crashes (5) came after significant damage had already been done, i.e., the S&P 500 was anywhere from -7% to -25% below its 52-week high when the crash began.
  • The other 4 (1987, 1998, 2000 and 2011) began from within 2.6% of the S&P 500?s 52-week high. The recent crash started at just -1.25% below the 52-week high.

  Our conclusion from that piece was this:

  This examination would loosely suggest that the current bottoming process (assuming we are in one) may possibly persist for another month, with a possible higher bounce along the way before a possible retest of the August 25 lows.

  Obviously we don’t like to feign certainty when dealing with markets, only probabilities and possibilities. Well, flash ahead to Friday and we see that the path of the S&P 500 has fairly closely followed the path of “possibilities” suggested by the prior post-crash events, i.e., a rally followed by a retest. Whether the retest of the past few days will be successful (i.e., hold) or not is obviously yet to be determined.

  Related to that point, you will notice the significance of Friday, October 2, as it pertains to the asterisked bullet listed above. That is, the previous post-crash instances took an average of 27 days following the crash before they bottomed for good (as defined by “leading to a sustained multi-month rally”). 27 days following the August 25 crash low is Friday. We do not in any way expect that the current post-crash pattern will conform precisely to the average or median or any of the previous post-crash periods specifically. However, it does seem to be as good a time as any to update the chart to check on the S&P 500?s progress and its correlation to prior events. As mentioned above, it has followed the general path fairly closely.

  

  Friday obviously cannot be THE low since it doesn’t appear that prices will eclipse the low from Tuesday by the end of the day. However, if Tuesday was the low (not a guarantee), it did occur in close proximity to the 27-day average of prior events. More importantly, the path of the S&P 500 has followed the general post-crash path that we laid out a month ago.

  Again, whether or not the market has put in a post-crash bottom is yet to be determined. But we can see by this study that examining past patterns and price behavior attached to specific circumstances can be instructive of the reaction that prices may undergo in similar circumstances in the future. This is likely due to human nature. No matter what era one is dealing with, people will respond to various stimuli in a consistent and somewhat predictable fashion. And while we will never be able to predict price action with absolute precision, this kind of study can aid us in managing the probabilities in various situations. It certainly has aided us over the past month.

  

  

  

  

  

• Russia Claims ISIS Now On The Ropes As Fighters Desert After 60 Airstrikes In 72 Hours

  One question that’s been asked repeatedly over the past thirteen months is why Washington has been unable to achieve the Pentagon’s stated goal of “degrading and defeating” ISIS despite the fact that the “battle” pits the most advanced air force on the planet against what amounts to a ragtag band of militants running around the desert in basketball shoes. 

  

  Those of a skeptical persuasion have been inclined to suggest that perhaps the US isn’t fully committed to the fight. Explanations for that suggestion range from the mainstream (the White House is loathe to get the US into another Mid-East war) to the “conspiratorial” (the CIA created ISIS and thus doesn’t want to destroy the group due to its value as a strategic asset). 

  The implication in all of this is that a modern army that was truly determined to destroy the group could likely do so in a matter of months if not weeks and so once Russia began flying sorties from Latakia, the world was anxious to see just how long the various rebel groups operating in Syria could hold up under bombardment by the Russian air force. 

  The answer, apparently, is “less than a week.” 

  On Saturday, the Russian Ministry of Defense said it has conducted 60 bombing runs in 72 hours, hitting more than 50 ISIS targets.

  According to the ministry (Facebook page is here), Islamic State fighters are in a state of “panic” and more than 600 have deserted. 

  Here’s what happens when the Russians locate a terrorist “command center”: 

  According to The Kremlin, the structure shown in the video is (or, more appropriately, “was”) “an ISIS hardened command centre near Raqqah.” Su-34s hit it with concrete-piercing BETAB-500s setting off a series of explosions and fires that “completely destroyed the object.”  

  Here’s RT:

  Surgical airstrikes by Russian fighter jets have knocked out a number of Islamic State installations in Syria, including the battle headquarters of a jihadist group near Raqqa, according to the Russian Defense Ministry.

   

  “Over the past 24 hours, Sukhoi Su-34 and Su-24M fighter jets have performed 20 sorties and hit nine Islamic State installations,” Igor Konashenkov, Russia’s Defense Ministry spokesman, reported.

   

  Konashenkov added that yesterday evening Russian aircraft went on six sorties, inflicting strikes on three terrorist installations.

   

  “A bunker-busting BETAB-500 air bomb dropped from a Sukhoi Su-34 bomber near Raqqa has eliminated the command post of one of the terror groups, together with an underground storage facility for explosives and munitions,” the spokesman said.

   

  Commenting on the video filmed by a Russian UAV monitoring the assault near Raqqa, Konashenkov noted, “a powerful explosion inside the bunker indicates it was also used for storing a large quantity of munitions.

   

  “As you can see, a direct hit on the installation resulted in the detonation of explosives and multiple fires. It was completely demolished,” the spokesman said.

  And here’s the Russian Defense Ministry taking a page out of the US Postal Service’s “neither rain, sleet, snow, nor hail” book on the way to serving notice that nothing is going to stop the Russian air force from exterminating Assad’s enemies in Syria:

  Twenty-four hours a day #UAV’s are monitoring the situation in the ISIS activity areas. All the detected targets are effectively engaged day and night in any weather conditions.

  Now obviously one must consider the source here, but Kremlin spin tactics aside, one cannot help but be amazed with the pace at which this is apparently unfolding. If any of the above is even close to accurate, it means that Russia is on schedule to declare victory over ISIS (and everyone else it looks like) in a matter of weeks, which would not only be extremely embarrassing for Washington, but would also effectively prove that the US has never truly embarked on an honest effort to rid Syria of the extremist groups the Western media claims are the scourge of humanity.

  Summed up in 10 priceless seconds…

  

  

  

  

  

• Guest Post: "Nothing But Cattle In An Industrial Processing Facility"

  Submitted by Hardscrabble Farmer, courtesy of The Burning Platform

  There is a growing divide in the country and day by day it grows deeper and more irrevocable. All around us we see the signs, if we look for them, of decay and collapse built into the very system itself.

  If you reward indolence, it will become the norm, if we practice wholesale slaughter from the womb to a foreign wedding party others will take the cue. If we celebrate slatterns and degenerates and ridicule the wholesome and traditional we will wind up with more of one and less of another.

  The further an organism lives from it’s natural state, the more adaptable the organism will become to that which is unnatural.

  Yesterday an older farmer came to pick up his cow from my farm. She had been a guest of ours for several days to be bred by my bull and when he arrived I asked him to pull his trailer to the lower trail beside the stream and open the rear door. I explained that I would be opening a gate from one pasture and leading the animals to another, that his animals- the cow and her young heifer- would follow at the rear of the herd and when he saw them approach he would simply close the pasture gate behind them and allow them to load back in his trailer. The cattle dogs watched my every move, excited to work and anxious for their opportunity to show off to my friend. I called out to the cows- mooing to them from the trailhead- and they quickly assembled at the gate, mooing in return.

  I opened the gate, placing my hands with palms extended behind me and walked them along the trail towards the upper field. The dogs, without instruction, took up places at the right and left of the herd, keeping a close eye on the calves. When the last calves passed through the gates the dogs trotted alongside them without a sound and followed them the length of the passage. My friend stood by his trailer watching for his animals and as my herd moved into the upper pasture they spread out and put their heads down to the grass walking slowly uphill.

  The calves, younger and full of energy shot ahead past his animals and sprinted through the gate to catch up with their mothers on the green field and like clockwork his two cows passed the edge of his trailer and made a sharp right and climbed into the trailer without a hitch. The dogs came in for a pat and a couple of “good dogs!”, panting happily.

  He shut the door behind them and looked at me with a rare smile on his face, genuine and slightly surprised.

  Any cow in it’s natural state, well fed, not stressed, kept on pasture rather than in confinement and handled with respect are trouble free. They thrive. They get along. They breed easily, deliver strong calves, put on muscle with ease, and are generally a pleasure to be around. Human beings share a very similar set of needs and requirements as most domesticated livestock- domesticated livestock being a creation of humans, adapted to human use and care throughout the centuries and to human habits and behaviors.

  In progressive farming- yes, that’s what industrial agriculture calls itself- animals are kept in confinement, fed diets that contain little or no grass in order to fatten them quickly not with protein rich muscle but with tallow. They are pumped full of antibiotics- not to keep sickness at bay but to kill the digestive microbes in their guts so that each pound of feed is more readily converted to a pound of fat. They stand not in fields of grass but in knee deep paddocks filled with manure. They are moved about not by family farmers who have known them since birth, respectfully and with ease, but by hirelings who shout and push them and use taser like devices to shock them into compliance from on overcrowded paddock to another, filled with fear, their bodies flooded by hormones before slaughter.

  How do we fail to make the connection? How do we not see that the further we drift from what we were meant to be and to do as human beings the more we become disoriented, obese, dysfunctional, angry, depressed, violent or passive in the extreme. These responses are the natural outcome of unnatural circumstances and we should be in no way surprised that the more we extol and promote such systems the more often we will see such behaviors. It isn’t surprising, it doesn’t require any in depth studies or introspection beyond the obvious.

  We are a product of our time and place. We live in a dystopian future that makes Brave New World look positively mundane in comparison. Mass shootings are the natural outcome of a society that mentally shackles its population while pumping it full of psychotropic drugs and violent imagery. It tells us to turn away from bullying while it dumps payloads of high explosives on hospitals and schools. It tells us to empathize with women while objectifying them via pornography and then denies young adult males the benefits of a loving wife and family unless he meets an impossible standard or forces him in direct competition with females both academically and in the workplace, putting off family formation until such a time as a woman is near menopause.

  I could go on but you get the picture.

  What is happening is- in my opinion- is engineered. You couldn’t do more if you personally placed the gun in the young man’s hand and gave him a lawful order to kill everyone in that school- and ironically is that not what we do to our drone pilots, only in different locations?

  We are being led, deliberately and inexorably to the abattoir. The only question is, are you willing to submit?

  

  

  

  

  

• "Everyone Is Doing It": How Carmakers Manipulate Emissions Test Results

  With Germany’s largest company by revenue, Volkswagen, deep in damage recovery mode, and the market still unable to decide just how systemic and profound the fallout will be from the emissions scandal which has already cost the job of VW’s CEO and which according to some will impact the GDP of Hungary and the Czech republic as much as -1.5%, many are still trying to determine not if but how many other companies – whether “clean diesel” focused or otherwise – will be impacted by the crackdown on emissions fraud.

  We don’t know the answer suffice to speculate that it will be “many” for one simpler reason: there are dozens of ways to manipulate emissions tests in both the lab and on the road, and with the temptation to “reduce” emissions all too great for management teams laser-focused on boosting profit margins, one can be certain that in this particular case not only is there more than one cockroach, there are dozens.

  The chart below from Transport and Environment shows some of the traditional ways in which carmakers manipulate CO2 emissions tests to make their cars appear more efficient:

  

   

  Worse, according to a follow-up report, it is only a matter of time before far more widespread crackdowns take place within the auto industry where emissions fraud now appears as systemic as that of the global banking sector.

  As reported earlier this week, the gap between official test results for CO2 emissions/fuel economy and real-world performance has increased to 40% on average in 2014 from 8% in 2001, according to T&E’s 2015 Mind the Gap report, which analyses on-the-road fuel consumption by motorists and highlights the abuses by carmakers of the current tests and the failure of EU regulators to close loopholes. T&E said the gap has become a chasm and, without action, will likely grow to 50% on average by 2020.

  By exploiting loopholes in the test procedure (including known differences between real-world driving and lab simulations) conventional cars can emit up to 40-45% more CO2 emissions on the road than what is measured in the lab. But the average gap between test results and real-world driving is more than 50% for some models. Mercedes cars have an average gap between test and real-world performance of 48% and their new A, C and E class models have a difference of over 50%. The BMW 5 series and Peugeot 308 are just below 50%. The causes of these big deviations have to be clarified as soon as possible.

   

  Greg Archer, clean vehicles manager at T&E, said: “Like the air pollution test, the European system of testing cars to measure fuel economy and CO2 emissions is utterly discredited. The Volkswagen scandal was just the tip of the iceberg and what lies beneath is widespread abuse by carmakers of testing rules enabling cars to swallow more than 50% more fuel than is claimed.”

   

  Greg Archer concluded: “This widening gap casts more doubt on how carmakers trick their customers in Europe to produce much better fuel efficiency in tests than can be achieved on the road. The only solution is a comprehensive investigation into both air pollution and fuel economy tests and all car manufacturers to identify whether unfair and illegal practices, like defeat devices, may be in use. There must also be a comprehensive overhaul of the testing system.”

  Who are the biggest European culprits.

  

  The cost: distorted laboratory tests cost a typical motorist €450 a year in additional fuel costs compared to what carmakers’ marketing materials claim, the report finds.

  Now multiply that by tens of millions of cars and you get a sense of the potential industry liability, especially since can be absolutely certain Europe’s US carmaking peers are just as guilty of emissions manipulation.

  Finally, to paraphrase Dr. House, everybody lies.

  

  

  

  

  

• I MiSS BoeHNeR…

  

  

  

  

  

• Airstrikes By U.S. Ally Have Killed 500 Children Since March

  By SM Gibson of Antimedia

  One of the United States’ strongest allies is currently inflicting as much carnage as any other nation in the world. Instead of being vilified for their part in a staggering amount of human rights atrocities, the critics go mute and the bloodshed is rewarded. The news regarding Saudi Arabia this week is too abundant to include in any one headline.

  According to UNICEF, the ongoing attacks by a U.S.-backed, Saudi Arabian-led coalition in Yemen have resulted in the deaths of at least 505 children since March 26, 2015. Another 710 have been left injured, and 1.7 million are at risk of malnutrition. As Daniel Johnson with the U.N. pointed out, the grievous numbers are equivalent to eight children killed or maimed in Yemen every day for six months.

  On Monday, a missile from a Saudi-led airstrike struck a Yemeni wedding reception in the village of Al-Wahijah, located near the Red Sea. The explosion resulted in 131 deaths, and the incident is being labeled as one of the deadliest attacks on civilians during the six-month conflict.

  In total, there have been 7,217 civilian casualties, including 2,355 killed and 4,862 wounded in the six months since the fighting began, according to the United Nations.

  Despite these statistics, the Minister for Foreign Affairs of Saudi Arabia — while addressing the United Nations General Assembly on Thursday evening — had the audacity to scold the international community’s inability to end the bloodshed in Syria. Abdel Ahmed Al-Jubeir hypocritically stated that the world has been “unable to save the Syrian people from the killing machine that is being operated by Bashar al-Assad.”

  It gets worse.

  Last month, it was announced that Saudi Arabia would head the U.N. Human Rights Council (yes, you read that correctly) — a decision that mirrors unfathomable satire. According to cables released by Wikileaks, Saudi Arabia — along with their despicable human rights record — originally made their way on to the council under very questionable circumstances in 2013. The cables allege that a vote-trading deal was made in secret between Britain and Saudi Arabia to ensure both countries were elected to the council.

  Days prior to the announcement that Saudi Arabia would head the UNHRC, the Saudi regime released their decision to deny the final appeal of 20-year-old Ali Mohammed al-Nimr. Aged 17 at the time of his arrest, the pro-democracy activist will be executed for taking part in an anti-government protest in 2012. Despite pleas from human rights organizations around the globe, it has been ruled that the young man will be put to death by way of crucifixion any day now.

  Even the U.N. has called for the Saudis to halt the execution. Yes, the same U.N. whose Human Rights Council they now head.

  So far in 2015, Saudi Arabia has executed at least 134 people, according to Amnesty International — most of those by beheading.

  “It is scandalous that the UN chose a country that has beheaded more people this year than ISIS to be head of a key human rights panel,” said UN Watch executive director Hillel Neuer. “Petro-dollars and politics have trumped human rights.”

  A number of U.S. politicians have recently been asked to weigh-in on Saudi Arabia and their obvious penchant for barbarity by journalist Lee Fang, from The Intercept.

  “They may be bombing civilians, which is actually not true,” Senator John McCain said when asked about civilian casualties in Yemen.

  “Civilians aren’t dying?” Fang asked.

  “No, they’re not,” the senator replied. “Oh, I’m sure civilians die in war. Not nearly as many as the Houthis have executed.”

  Fang also approached Sen. Chris Coons, (D-Del) and asked him to comment on the Saudi-led airstrikes in Yemen.

  “As the co-founder of the Human Rights Caucus in the Senate, I do think we need to pay attention to human rights all over the world, regardless of where human rights violations arise,” Coons said.

  When the Fang pressed the senator to elaborate on Saudi Arabia specifically, Coons immediately ended the conversation.

  “Coons ignored me and continued walking into the building, even though a staff member accompanying him had just informed the senator that he had “plenty of time” before his speech. The staff member offered to exchange contact information for a lengthier comment later. I emailed and did not hear back,” according to Fang.

  In case you are left pondering why you hear corporate news outlets harp on about the incivilities of numerous Middle Eastern nations ad nauseum (while the brutalities carried out by Saudi Arabia are never uttered), it is worth mentioning — coincidental or not — that the 2nd largest stockholder in Fox News (21st Century Fox) is a man by the name of Prince Alwaleed Bin Talal. The prince, who just so happens to be a member of the Saudi royal family, is also a prominent stockholder in Citigroup and Twitter.

  

  

  

  

  

• The Largest US Foreign Policy Blunder Since Vietnam Is Complete: Iran Readies Massive Syrian Ground Invasion

  On Thursday, in “Mid-East Coup: As Russia Pounds Militant Targets, Iran Readies Ground Invasions While Saudis Panic”, we attempted to cut through all of the Western and Russian media propaganda on the way to describing what Moscow’s involvement in Syria actually portends for the global balance of power. Here are a few excerpts that summarize what’s taking shape in the Middle East:

  Putin looks to have viewed this as the ultimate geopolitical win-win. That is, Russia gets to i) expand its influence in the Middle East in defiance of Washington and its allies, a move that also helps to protect Russian energy interests and preserves the Mediterranean port at Tartus, and ii) support its allies in Tehran and Damascus thus preserving the counterbalance to the US-Saudi-Qatar alliance. 

   

  Meanwhile, Iran gets to enjoy the support of the Russian military juggernaut on the way to protecting the delicate regional nexus that is the source of Tehran’s Mid-East influence. It is absolutely critical for Iran to keep Assad in power, as the loss of Syria to the West would effectively cut the supply line between Iran and Hezbollah.

   

  It would be difficult to overstate the significance of what appears to be going on here. This is nothing short of a Middle Eastern coup, as Iran looks to displace Saudi Arabia as the regional power broker and as Russia looks to supplant the US as the superpower puppet master. 

  In short, the Pentagon’s contention that Russia and Iran have formed a Mid-East “nexus” isn’t akin to the Bush administration’s hollow, largely bogus attempt to demonize America’s foreign policy critics in the eyes of the public by identifying an “axis of evil.” Rather, the Pentagon’s assessment was an attempt to come to grips with a very real effort on the part of Moscow and Tehran to tip the scales in the Mid-East away from Riyadh and Washington.

  Solidifying the Assad regime in Syria serves to shore up Hezbollah and presents Tehran with an opportunity to assert itself in the name of combatting terror. The latter point there is critical. The West has long contended that Iran is the world’s foremost state sponsor of terror, and the Pentagon has variously accused the Quds Force of orchestrating attacks on US soldiers in Iraq after cooperation between Washington and Tehran broke down in the wake of Bush’s “axis of evil” comment.

  Indeed, Iran was accused of masterminding a plot to kill the Saudi ambassador at a Washington DC restaurant in 2011.

  Now, the tables have turned. It is the US, Saudi Arabia, and Qatar who stand accused of sponsoring Sunni extremists and it is Iran, and specifically the Revolutionary Guard, that gets to play hero.

  Of course this would be largely impossible without Moscow’s stamp of superpower approval. The optics around the P5+1 nuclear deal were making it difficult for Tehran to be too public in its efforts to bolster Assad. That doesn’t mean Tehran’s support for the regime in Syria hasn’t been well documented for years, it simply means that Iran needed to observe some semblance of caution, lest its role in Syria should end up torpedoing the nuclear negotiations. Now that Moscow is officially involved, that caution is no longer obligatory and Iran is now moving to support Russian airstrikes with an outright ground incursion (just as we’ve been saying for weeks). Here’s WSJ:

  Iran is expanding its already sizable role in Syria’s multisided war in the wake of Russia’s airstrikes, despite the risk of antagonizing the U.S. and its Persian Gulf allies who want to push aside President Bashar al-Assad.

   

  Politicians in the region close to Tehran as well as analysts who have been closely following its role in Syria say a decision has been made, in close coordination with the Russians and the Assad regime, to increase the number of fighters on the ground through Iran’s network of local and foreign proxies.

  The support also could involve more Iranian commanders, military advisers and expert fighters usually assigned to these units, these people said.

   

  Wiam Wahhab, a former Lebanese minister allied to Iran and Mr. Assad, stressed that Iran wouldn’t be dispatching troops in the conventional sense. Instead, they were likely to be officers and advisers from the Islamic Revolutionary Guard Corps, or IRGC, he said.

   

  “I know there is a major battle upon us and everything needed for this battle will be made available,” said Mr. Wahhab, who has some members from his own political party fighting in Syria alongside the regime. “There is a plan to carry out offensive operations in more than one spot.”

   

  Experts believe Iran has some 7,000 IRGC members and Iranian paramilitary volunteers operating in Syria already.

   

  Separate from the regular army, the IRGC was founded in the aftermath of the 1979 revolution as an ideological “people’s army” reporting directly to the supreme leader, Iran’s top decision maker.

   

  The more than 100,000-strong force controls a vast military, economic and security power structure in Iran and is in charge of proxies across the region. Its paramilitary organization, the Basij, was the lead force in the crackdown on pro-democracy demonstrators in 2009.

   

  Since late 2012 Iran has played a lead role in organizing, training and funding local pro-regime militias in Syria, many of them members of Mr. Assad’s Alawite minority, a branch of Shiite Islam. Experts believe they number between 150,000 and 190,000—possibly more than what remains of Syria’s conventional army.

   

  What’s more, some experts estimate 20,000 Shiite foreign fighters are on the ground, backed by both Shiite Iran and its main proxy in the region, the Lebanese Shiite militia Hezbollah.

   

  About 5,000 of them are new arrivals from Iraq in July and August alone, said Phillip Smyth, a researcher at the University of Maryland. He said this figure was compiled through his own contacts with some of these fighters, flight data between Baghdad and Damascus as well as social media postings. “It looks like it was timed out to coincide with the Russian move,” Mr. Smyth said.

  Yes, it certainly does “look like” that, and it wasn’t hard to see this coming. Here’s another excerpt from our recent analysis:

  Back in June, the commander of Iran’s Quds Force, Qasem Soleimaini, visited a town north of Latakia on the frontlines of Syria’s protracted civil war. Following that visit, he promised that Tehran and Damascus were set to unveil a new strategy that would “surprise the world.” 

   

  Just a little over a month later, Soleimani – in violation of a UN travel ban – visited Russia and held meetings with The Kremlin.

  Make no mistake, this is shaping up to be the most spectacular US foreign policy debacle since Vietnam – and we don’t think that’s an exaggeration. 

  The US, in conjunction with Saudi Arabia and Qatar, attempted to train and support Sunni extremists to overthrow the Assad regime. Some of those Sunni extremists ended up going crazy and declaring a Medeival caliphate putting the Pentagon and Langley in the hilarious position of being forced to classify al-Qaeda as “moderate.” The situation spun out of control leading to hundreds of thousands of civilian deaths and when Washington finally decided to try and find real “moderates” to help contain the Frankenstein monster the CIA had created in ISIS (there were of course numerous other CIA efforts to arm and train anti-Assad fighters, see below for the fate of the most “successful” of those groups), the effort ended up being a complete embarrassment that culminated with the admission that only “four or five” remained and just days after that admission, those “four or five” were car jacked by al-Qaeda in what was perhaps the most under-reported piece of foreign policy comedy in history.

  Meanwhile, Iran sensed an epic opportunity to capitalize on Washington’s incompetence. Tehran then sent its most powerful general to Russia where a pitch was made to upend the Mid-East balance of power. The Kremlin loved the idea because after all, Moscow is stinging from Western economic sanctions and Vladimir Putin is keen on showing the West that, in the wake of the controversy surrounding the annexation of Crimea and the conflict in eastern Ukraine, Russia isn’t set to back down. Thanks to the fact that the US chose extremists as its weapon of choice in Syria, Russia gets to frame its involvement as a “war on terror” and thanks to Russia’s involvement, Iran gets to safely broadcast its military support for Assad just weeks after the nuclear deal was struck. Now, Russian airstrikes have debilitated the only group of CIA-backed fighters that had actually proven to be somewhat effective and Iran and Hezbollah are preparing a massive ground invasion under cover of Russian air support. Worse still, the entire on-the-ground effort is being coordinated by the Iranian general who is public enemy number one in Western intelligence circles and he’s effectively operating at the behest of Putin, the man that Western media paints as the most dangerous person on the planet. 

  As incompetent as the US has proven to be throughout the entire debacle, it’s still difficult to imagine that Washington, Riyadh, London, Doha, and Jerusalem are going to take this laying down and on that note, we close with our assessment from Thursday:

  If Russia ends up bolstering Iran’s position in Syria (by expanding Hezbollah’s influence and capabilities) and if the Russian air force effectively takes control of Iraq thus allowing Iran to exert a greater influence over the government in Baghdad, the fragile balance of power that has existed in the region will be turned on its head and in the event this plays out, one should not expect Washington, Riyadh, Jerusalem, and London to simply go gentle into that good night.

  

  

  

  

  

• Dollar Bulls Bends,but Will They Break?

  The unexpectedly poor September US jobs data weakened the greenback’s technical tone, as questions about the underlying strength of the world’s largest economy, and the implications for the Fed’s take-off, intensify.   The economic data the US is scheduled to release in the week ahead are not of sufficient heft to alter the pessimism that was spurred, but not caused, by the jobs data.  Recall that earlier in the week, the US reported it new flash reading on merchandise trade.  The unexpectedly large deficit caused the Atlanta Fed’s GDPNow to halve its estimate for Q3 growth to 0.9%.  

   

  No fewer than five Fed officials will speak next week and the FOMC minutes from its September meeting will be released.  The former will give an opportunity to both hawks and doves to provide their economic assessments in light of the recent economic developments.  The latter will provide some color on 1) how close the decision was to defer lift-off; 2) how confident they were that rates could still go up this year; and 3) which particular global developments are especially worrisome for the conduct of monetary policy.    

   

  The dollar’s recovery after initially selling off on the data surprise mitigated some the technical damage that had been inflicted earlier.  The Dollar Index held above the 61.8% retracement objective of the rally from the September 18 lows, which is found near 95.10.  The trend line connecting the August 24 and September 18 low came in near 94.75 (corresponds to the lower Bollinger Band) before the weekend (and almost 95.20 at the end of next week).  A break of that trendline could spur a move toward the critical 94.00 area.  The RSI is pointing lower, and the MACDs are poised to turn lower.  On the upside, a move back above 96.00 would lift the tone while the 96.50-96.70 area has to be retaken to put the bulls back in control. 

   

  The euro was rose from the lower end of its range to the upper end by the US jobs data.  It stalled at the upper end of its two-week range near $1.1330.  This area corresponds to the downtrend line drawn off the August 24 spike high (~$1.1715) and the September 18 high (~$1.1460). A break of this trendline would likely signal a move toward $1.1400 initially.  The $1.1475 area, however, key. A convincing break could spur a move to the August 24 high, if not a bit higher.   The RSI has turned higher, and the MACDs are poised to do the same.   On the downside, a loss of the $1.1180 neutralizes the technical condition.  

   

  Since late-August the dollar has been tracing out a large symmetrical triangle pattern against the yen. About three-quarters of the time, this pattern is a continuation pattern.  In the current context, this means a downside break for the dollar.  The other point that needs to be made is that this pattern is subject to false breaks.  And that is precisely what has happened on the past two Friday’s.  On September 25, the dollar broke to the upside on an intraday basis only to close back within the triangle pattern.  This past Friday, the employment shock saw the dollar break to the downside only to recovery back within it. The parameters of the pattern begin the new week around JPY120.75 and JPY119.40.  At the end of next week, they are close to JPY120.60 and JPY119.60.   

   

  The sideways trading has neutralized the technical indicators we use.  We do recognize that the triangle pattern can be resolved by neither breaking higher or lower, but continuing to move sideways through the apex of the pattern.  We often experience the yen as a rangebound currency, and when it looks like it is trending, it is moving from one range to another.  In this scenario, the price after the US jobs data reaffirmed the importance of the JPY118.60 support area.  

   

  Sterling closed September with its second nine-session losing streak since August 24. The miniscule gain on October 1 was extended the next day, spurred by the US jobs report.  It stalled in front of the week’s highs in the $1.5240-$1.5260 area.  The RSI and MACDs favor additional gains, but sterling’s inability to sustain a move above $1.52 casts doubts on the bullish technical case.   The key to the upside is the $1.5320-$1.5330 area, which corresponds to a retracement objective and the 20-day moving average.   The Bank of England meets next week; McCafferty was probably unsuccessful in getting others to join his call for an immediate hike.  

   

  The Australian dollar gained about 0.25% against the US dollar last week.  It failed to capitalize on a relatively favorable string of domestic data including an uptick in the manufacturing PMI, home sales, and retail sales.   The technical indicators are not generating strong signals presently.    The break of the $0.6980-$0.7085 range signals the direction of the next cent or so.  The Reserve Bank of Australia meets.  There is no urgency for it to act.  

   

  The technical tone of the Canadian dollar is superior to the Australian dollar.  It held on to its post-US jobs data gains to post a 1.0% advance against the US dollar over the past week.  The US dollar’s pre-weekend losses carried it to the CAD1.3185 area, which corresponds to the 61.8% retracement of the last leg up for the greenback that began on September 18 and ended with new 11-year highs on September 29.  

   

  A trendline connecting the June 18 low (~CAD1.2130) and the September 18 low (~CAD1.3015) comes in near CAD1.3140 at the start of next week.  It rises toward CAD1.3205 by the end of the week.  A break this trendline suggests a move toward CAD1.3000. On the upside, a move back above CAD1.3250-CAD1.3270 points to the end of the Canadian dollar recovery.  

   

  The November light sweet crude oil futures contract continues to carve out a descending triangle pattern.  The top is formed by connecting the highs from August 31 (~$50.05) and September 17 (~$48.05).  The bottom of the triangle is flat in the $43.60-70 area.  It broke to the top side on an intraday basis on October 1.  It was sustained on a closing basis, and the contract returned to the low end after the poor US jobs data that raised concerns about demand.   The strong close before the weekend, amid news of an additional decline in rigs, suggests a retest on the top of the triangle is likely in the days ahead.  The $46.50 area may draw prices.  

   

  The US 10-year yield fell to 1.90% after the employment data disappointment.  This matches the low from August 24.  The technical indicators warn of the risk of lower yields still but we suspect the data in the week ahead will not provide the justification for a new leg lower.  Initially, we see potential back into the 2.05%-2.08% area.  A test on the more important 2.15% area may require more important data, and/or stronger gains in equities.    

   

  The S&P 500 posted an outside up day before the weekend.  It traded on both sides of the previous day’s range and closed above the high (~1927).  It strengthens the technical significance of the 1871 low seen earlier last week.  We warned last week that a break of 1900 would yield 1870. This objective was met, seemingly exhausting the immediate selling pressure.  The next targets on the upside are in the 1963 area.  Overcoming them would lift the tone and begin healing some of the technical damage inflicted in recent weeks.  

   

   

  Observations based on speculative positioning in the futures market: 

   

  1.  There were three significant gross position adjustments by speculators in the CFTC reporting week ending September 29.  Another 10.2k short yen contracts were covering, leaving 61.8k contracts, the lowest since May.  Speculative positioning in the Mexican peso accounts for the other two significant adjustments.   Essentially the longs switched to shorts.  The gross long position was cut by a third of 16.4k contracts (leaving 31.3k), and the gross short position rose by 15.7k contracts (to 75.7k).  

   

  2.  To the extent there was an overall pattern, it was the trimming of gross long positions.  There were two exceptions.  The gross long sterling position increased by 4.8k contracts to 49.8k.  The gross long Australian dollar position rose by 1.9k contracts to 44.6k.  The gross short position adjustment was evenly mixed among the eight currency futures we track.  

   

  3.  The rise in the gross long sterling position was overwhelmed by the 8.1k contract increase in the gross short position.  This was sufficient to turn the net position back to the short side (-2k contracts) after one week net long.  

   

  4. The net 10-year US Treasury futures position (among speculators) switched to the long side for the first time since late-August.  It now stands at 22.5k contracts after having been short a net 8.5k the previous reporting week.  It is a function of 458.6k gross long contracts, which rose 10% of 44.7k contracts in the latest period.  The gross short position rose by 13.7k contracts to 436.1k.  

   

  5.  Speculators took liquidated 7.7k contracts of oil futures, leaving the bulls with 481.5k contracts. The bears left their position unchanged with 229.8k short contracts.  The net position then reflects the gross long adjustment, falling 7.7k contracts to 251.7k.  

  

  

  

  

  

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• A Mosaic Of Facts – Media Weapons Of Mass Delusion

  Can you tell truth from lies in mass media? RT’s Miguel Francis-Santiago delves deep to try to understand the intricacies of information war. He meets media experts and puts together the Mosaic of Facts, showing how public opinion is manipulated, not just over the Ukrainian Crisis but throughout the world.

   

  Trailer…

   

  Full Documentary…

   

  Hopefully it will get more people in the mainstream to wake up to the extremely dangerous situation which has developed in the mainstream media, which more than any single factor is leading the world to war.

  

  

  

  

• "It's Revolting" French School Probed After Marking Non-Pork-Eaters With Yellow Tags

  Amid the migrant crisis in Europe, and the Czechs pulling people off trains and writing on their arms, a French municipality launched a probe into an Auxerre elementary school’s use of yellow tags to identify students who do not eat pork. "It's revolting. It brings back memories of dark times," noted one member of the Auxerre town council, but the mayor’s office said it was "an isolated, clumsy and unfortunate initiative."

  As Haaretz reports,

  The city of Auxerre, located 105 miles southeast of Paris, opened the investigation on Friday after parents complained to local media about the school’s initiative, in which neck strings bearing red and yellow plastic discs were placed on pupils ahead of lunchtime at the school cafeteria.

   

  The pupils wore the tags for one day before the faculty was instructed to stop using them.

   

  Malika Ounes, a conservative member of the Auxerre city council, told the news website Creusot-Infos.com: “It’s revolting. It brings back memories of dark times,” in reference to the requirement in Nazi-occupied France that Jews wear yellow stars on their clothes.

   

  Among the pupils instructed to wear the tags were Muslims and vegetarians. Reports in French media did not mention any Jewish pupils.

  Some parents also complained about the tags, whose use Mayor Guy Perez of the Socialist Party termed “unfortunate.”

  But other parents said they were the result of good intentions.

  One Muslim mother of two boys attending the school, identified by the RTL broadcaster only as Sonia, said: “The yellow tag doesn’t even correspond with the yellow star. I don’t think there’s a scandal here, just an error that doesn’t require all this rebuke.”

   

  Christian Sautier, director of communications in the mayor’s office, said it was “an isolated, clumsy and unfortunate initiative” that lasted only one day. He stressed the decision to use these tags was taken by canteen staff without informing local authorities, who ended it immediately.

  *  *  *

  The debate on the availability in public schools of pork-free dishes is a divisive issue in France, where rightist parties and other politicians advocating strict separation between religion and state see it as proof of a creeping influence on the public sphere, mostly by Muslims immigrants.

  

  

  

  

  

• Australia Is "Going Down Under": "The Bubble Is About To Burst", RBS Warns

  Thanks to a variety of idiosyncratic political crises and country-specific stumbling blocks, Brazil, Turkey, Malaysia, and to a lesser extent Russia, have received the lion’s share of coverage when it comes to assessing the EM damage wrought by the comically bad combination of slumping commodities prices, depressed Chinese demand, slowing global trade, and a “surprise” yuan devaluation. 

  Put simply, the intractable political stalemate in Brazil, the civil war in Turkey, the 1MDB scandal in Malaysia (and the fact that the country was at the center of the 1998 meltdown), and the hit Russia has taken from depressed crude prices mean that if you want to pen a story about emerging market chaos, those four countries have plenty to offer in terms of going beyond the generic “falling commodities + a decelerating China = bad news for EM” narrative. 

  But just because other vulnerable countries aren’t beset with ethnic violence and/or street protests doesn’t mean they too aren’t facing crises due to falling commodity prices and the slowdown of the Chinese growth machine. 

  One such country is Australia, which in some respects is an emerging market dressed up like a developed economy, and which of course has suffered mightily from the commodities carnage and China’s transition away from an investment-led growth model. 

  Out with a fresh look at the risks facing Australia is RBS’ Alberto Gallo. Notable excerpts are presented below.

  *  *  *

  From RBS

  Australia has become a commodity focused economy, with an increasing exposure to China. For the past decades, Australia has been buoyed by the rapid Chinese expansion, which outpaced the rest of the world. Australia benefited from China’s strong demand for commodities given its investment-led growth model. China is Australia’s top export destination and 59% of those exports are in iron-ore. But as China struggles to manage its ongoing credit crunch and continues its shift to consumption-led growth Australia’s economy is likely to be hurt by lower demand for commodities. 

  

  The economy is slowing due to external headwinds. Last quarter, Australian GDP grew at just 0.2% QoQ, its lowest level in the last three years (and below the market consensus of 0.4%). According to the Australian Bureau of Statistics (ABS) the growth rate was driven by higher domestic demand, while lower exports and a declining mining industry continue to present headwinds. Mining’s gross value-added to GDP fell by – 0.3% QoQ in Q2. Despite Reserve Bank of Australia (RBA) governor, Glenn Stevens, citing lower growth as potentially a “feature of the post financial crisis world” meaning that “potential growth is a bit lower”, Australia’s slowing economy is more than just a victim of the post financial crisis world, in our view. Rising unemployment coupled with soaring house prices and vulnerabilities in the commodity and construction sectors are all cause for concern. 

  Unemployment is rising, and could increase further, given the high proportion of employment in the vulnerable mining and construction sectors. Unemployment is at 6.2%, just shy of the ten year high of 6.3%. Although the number itself is not worryingly high, unemployment has been rising for the last three years, and is likely to continue in our view. Mining and commodity sectors employ 4.5% of the workforce. With lower demand for commodities from China, unemployment in these sectors could rise. Also, unemployment may rise in the construction sector (8.9% of workforce) given vulnerabilities in the housing market, as we explain below.

  

  There are domestic headwinds, too. The housing market is vulnerable, with overvalued properties and over-levered households. House prices in Australia have risen by 22% in the last three years (according to the Australian Residential Property Price Index), with property prices in Sydney overtaking those in London. House prices have risen faster than both disposable income and inflation in recent years, with the gap between growth in house prices and household income closing by over 40% in the last three years.

  

  If unemployment continues to rise, due to losses in mining and construction, the house price bubble could pop. Rising unemployment in the mining industry, due to its exposure to a slowing China, will create risks in the property market; house prices are likely to fall as the newly unemployed could be forced to sell.

  The RBA has less dry powder now. The central bank has cut rates twice this year, from 2.25% in March to 2% now. As the domestic economy slows, accommodative policy is needed to encourage investment, particularly in non-mining sectors, to boost growth and create jobs. However, with rates already at 2%, there is much less headroom for monetary easing to offset a downturn in Australia.

  The worst is yet to come, in our view.

  *  *  *

  So summarizing in the simplest possible terms: slowing demand for commodities leads to rising unemployment which means trouble for overleveraged households and that’s bad news for the country’s housing bubble. Meanwhile, the RBA is running out of ammo. 

  If ever there were a bearish narrative that’s easy to grasp, surely that’s it.

  Of course thanks to the ascension of Malcolm Turnbull, Australia may have a secret weapon…

  

  

  

  

  

  

• Central Banks' Secrecy & Silence On Gold Storage Arrangements

  Submitted by Ronan Manly via BullionStar.com,

  Whereas some central banks have become more forthcoming on where they claim their official gold reserves are stored (see my recent blog post ‘Central bank gold at the Bank of England‘), many of the world’s central banks remain secretive in this regard, with some central bank staff saying that they are not allowed to provide this information, and some central banks just ignoring the question when asked.

  In the ‘Central bank gold at the Bank of England’ article, I said that “A number of central banks refuse to confirm the location of their gold reserves. I will document this in a future posting.” As promised, this blog post explains what I meant by the above statement.

  Some of those central banks may have made it into the Bank of England storage list if they had been more transparent in providing gold storage information. However, since they weren’t transparent, these banks make it into the alternative ‘non-cooperative’ list. One subset of this list is central banks, which to be fair to them, did actually respond and said that they cannot divulge gold storage information. The other subset is central banks which didn’t reply at all when I asked them about their official gold storage location details.

  The below list, although not complete, highlights 7 central banks and 1 official sector financial institution (the BIS), which, when asked where do they store their gold reserves, responded with various similar phrases saying that they could not provide this information. Between them, these 7 central banks claim to hold 1,500 tonnes of gold. Adding in the BIS which represents another 900 tonnes, in total that’s 2,400 tonnes of gold where the central banks in charge of that gold will not provide any information as to its whereabouts. Much of this 2,400 tonnes is no doubt stored (at least in name) at the FRBNY and the Bank of England, with some stored in the home countries of some of the central banks.

  I have included the 8 responses below, but have deleted any references to individuals’ names or email addresses:

  Bank of Japan: 765.2 tonnes of gold

  

   

  Bank for International Settlements (BIS): > 900 tonnes of gold

  • BIS manages 443 tonnes of gold under custody for central banks
  • BIS owns 108 tonnes of gold itself
  • BIS manages 356 tonnes of gold deposits from central banks
  • BIS has 47 tonnes of gold swaps outstanding

  

   

   

  Spain: 281.6 tonnes of gold

  

   

   

  South Africa: 125.2 tonnes of gold

  

   

   

  Thailand: 152.4 tonnes of gold

  

   

   

  Singapore: 127.4 tonnes of gold

  

   

   

  Malaysia: 37.9 tonnes of gold

  

   

   

  Paraguay: 8.2 tonnes of gold

  

  …which translates into English as …..”That information is classified and cannot be disclosed. I hope you understand“.

   

  ‘No Answer’ central banks

  I also emailed some central banks which didn’t respond to the question, ‘where are your gold reserves stored?’. They may not have responded for various reasons, including the emails may not have reached the relevant people who would normally be responsible for such matters. These banks account for another 500+ tonnes of gold reserves. Again, some of this gold is probably at the Bank of England, such as, some of Jordan’s and Kuwait’s gold, due to historical ties with the Bank of England.

  • Banque du Liban (Lebanon): 286.8 tonnes  (said to be in Lebanon and FRB New York)
  • National Bank of Kazakhstan: 208.1 tonnes
  • Central Bank of Kuwait: 79 tonnes
  • Central Bank of Jordan: 34.2 tonnes
  • Bank Al-Maghrib (Morocco): 22.1 tonnes
  • National Bank of Cambodia: 12.4 tonnes

  BIS – Transparency in name only

  The following slide, from a 2007 Bank for International Settlements presentation, shows how ridiculous the claims of central banks are when they use the meme that they are transparent and accountable, when in fact, they are nothing of the sort.

  The BIS’ response above on the gold storage question, i.e. “the information that you have requested is not made publicly available” makes a mockery of its own claims in the below slide that central banks are required to be transparent and accountable.

  The only ‘gold’ that the BIS is willing to discuss is its pie-in-the-sky corporate-speak ‘Golden Triangle’ of central bank Autonomy complimented by Transparency and Accountability when it states:

   – TRANSPARENCY – important for holding central bank to account

  – ACCOUNTABILITY – crucial counterpart of autonomy in an open society, makes transparency more credible

   (I added the 2 red arrows to the slide to highlight these points)

  

   

  Conclusion: Finland’s change of heart

  The fact that staff of some central banks won’t discuss that bank’s gold storage arrangements is no doubt an internal rule, or a storage depository rule, or some such nonsense. The nonsensical nature of their non-cooperation and evasion is highlighted by the below about-turn from the Bank of Finland, when in January 2013 it childishly told me that “We are not allowed to tell the exact depository, town or country“, and then 9 months later in October 2013, the powers-that-be at the gold depositories gave the go-ahead, for the Bank of Finland then spilled the beans, squealing that its gold was stored at a cornucopia of the usual suspects, namely, the Bank of England, the Federal Reserve Bank of New York, the Swiss National Bank, and smaller amounts at the Swedish Riksbank and the Bank of Finland.

  Given that the Bank of England, the Federal Reserve Bank of New York, and the Swiss National Bank all agreed to the Bank of Finland’s request in 2013 to publish the individual storage locations of its gold, and given that the vaults of these 3 banks store the vast majority of internationally stored central bank gold, therefore it also makes a mockery of central banks which persists in claiming that they cannot divulge information on the storage of their own gold, which in most cases is supposedly spread between the very same 3 sets of vaults.

  And after the Bank of Finland press release, which most Finns and most of the world probably didn’t even see, Helsinki and the world continued about its business as before. The point being that the storage locations of central banks’ gold reserves is not that big of a deal. Its only the central banks that make it into a big deal with their secrecy….unless of course, they are hiding something bigger, and the gold is not even where its supposed to be.

  Bank of Finland – 31 January 2013

  

   

  Bank of Finland – 25 October 2013

  

  

  

  

  

  

• Why The US Running Out Of Cash In 4 Weeks Is Good News

  Over the past several weeks, Americans (not to mention the market) were forced to grapple with the latest example of congressional infighting and outright legislative gridlock as US lawmakers narrowly averted a government shutdown in the wake of House Speaker John Boehner’s surprise resignation.

  Now, the debt ceiling battle looms ahead of Boehner’s October 30 exit and according to Treasury Secretary Jack Lew, the US will run out of money to pay its bills far sooner than originally expected – November 5, to be exact. Here’s WSJ:

  The government will run out of money to pay its bills sooner than previously thought, forcing Republican lawmakers who are already scrambling to elect new leaders to immediately confront a series of unpopular fiscal deadlines.

   

  Treasury Secretary Jacob Lew said the government would be left with just $30 billion cash on or around Nov. 5. Government outlays can be twice that level on certain weekdays, underscoring the need to raise the federal borrowing limit, Mr. Lew said in a letter late Thursday to House Speaker John Boehner (R., Ohio).

   

  “Without sufficient cash, it would be impossible for the United States of America to meet all of its obligations for the first time in our history,” Mr. Lew said in the letter.

   

  The new debt-ceiling deadline falls less than a week after Mr. Boehner will leave Congress, putting pressure on him—and an incoming Republican leadership team—to pass legislation raising the limit before that transition. Some congressional estimates had indicated the government could get by without action until December. Traders and Wall Street analysts are watching the timeline closely due to the turbulence that hits financial markets as debt-limit deadlines approach.

  And so, the stage is once again set for GOP lawmakers to use the debt ceiling as a negotiating tool in an effort to extract concessions from the White House while the rest of the world looks on incredulous at the spectacle the US creates when its lawmakers effectively blackmail themselves by threatening to force the nation into default in order to secure a bit more bargaining power.

  Of course this never ends well and only serves to i) undermine Washington’s credibility with the rest of the world, ii) increase market volatility as investors can never completely rule out the possibility that this time around, someone might actually make good on their threats, triggering a technical default somewhere, and iii) further destroy the government’s credibility in the eyes of voters to whom the entire thing appears completely absurd. Note that the latter point there speaks to why Donald Trump is polling so well in the GOP primaries – the electorate is simply fed up with lawmakers’ inability to do what they were elected to do (i.e. legislate). 

  In the end, the result will likely be the same as it always is. Some last minute can kick will ensure that the US doesn’t default and the debt limit will be raised to a number that’s even more meaningless than it is now, ensuring that America remains on track to eventually compete with Japan for world’s worst debt-to-central government revenue ratio.

  And as if the whole thing weren’t ridiculous enough as it is, consider this bit of counterintuitive silliness: the fact that the timetable for an unprecedented US default has just been moved up by a month is actually good news this time around because it means that the negotiations will likely be presided over by Boehner as opposed to his successor and because Boehner will be out the door at the end of October anyway, he’ll be free to negotiate in good faith. 

  In any event, we suppose it’s best to just give the last word to Goldman since they’re probably the ones who will end up making the final decision anyway.

  From Goldman

  USA:  Earlier Debt Limit Deadline Might Lower Risk of Disruptions

  BOTTOM LINE: Treasury Secretary Lew has notified Congress that the debt limit will need to be raised by November 5, earlier than expected. This increases the probability that it will be voted on before Speaker Boehner leaves office on October 30, which would reduce the risk of a disruptive last-minute increase in the limit.

  MAIN POINTS:

  1. In a letter to congressional leaders, Treasury Secretary Lew has indicated that the debt limit will need to be raised by November 5. This is slightly earlier than the mid-November deadline that we had recently estimated and is due, according to the Treasury, to a combination of slightly weaker-than-expected estimated taxes in September and higher-than-expected obligations associated with certain trust funds.

  2. This earlier deadline raises the probability that the House will vote to raise the debt limit prior to the time Speaker Boehner steps down on October 30. If so, this would reduce the risk of a disruptive debate on the issue, because Speaker Boehner is more likely than his successor, in our view, to allow a “clean” debt limit increase without the debate over extraneous issues that have delayed enactment until shortly before the deadline in the past.

  3. By contrast, this reduces the probability that the debt limit would be dealt with as part of a broader fiscal negotiation that also includes the extension of spending authority past the current December 11 expiration. Such a scenario would presumably involve negotiations over spending levels and other matters that could create significant uncertainty in the period leading up to the deadline, similar to the experience in the summer of 2011.

  4. That said, the path forward for increasing the debt limit is still uncertain. There has been no indication yet from congressional leaders on how they plan to proceed with increasing the debt limit in light of the new deadline. However, we recently noted the possibility that legislation to extend the Highway Bill, which expires October 29, could be a vehicle for other items, including the debt limit, and today’s announcement makes that a bit more likely, in our view.

  

  

  

  

  

• The Mind Of Mr. Putin (America's Non-Interventionist Foreign Policy Tradition Exposed)

  Submitted by Patrick Buchanan via LewRockwell.com,

  So Vladimir Putin in his U.N. address summarized his indictment of a U.S. foreign policy that has produced a series of disasters in the Middle East (that we did not need the Russian leader to describe for us).

  Fourteen years after we invaded Afghanistan, Afghan troops are once again fighting Taliban forces for control of Kunduz. Only 10,000 U.S. troops still in that ravaged country prevent the Taliban’s triumphal return to power.

  A dozen years after George W. Bush invaded Iraq, ISIS occupies its second city, Mosul, controls its largest province, Anbar, and holds Anbar’s capital, Ramadi, as Baghdad turns away from us — to Tehran.

  The cost to Iraqis of their “liberation”? A hundred thousand dead, half a million widows and fatherless children, millions gone from the country and, still, unending war.

  How has Libya fared since we “liberated” that land? A failed state, it is torn apart by a civil war between an Islamist “Libya Dawn” in Tripoli and a Tobruk regime backed by Egypt’s dictator.

  Then there is Yemen. Since March, when Houthi rebels chased a Saudi sock puppet from power, Riyadh, backed by U.S. ordinance and intel, has been bombing that poorest of nations in the Arab world.

  Five thousand are dead and 25,000 wounded since March. And as the 25 million Yemeni depend on imports for food, which have been largely cut off, what is happening is described by one U.N. official as a “humanitarian catastrophe.”

  “Yemen after five months looks like Syria after five years,” said the international head of the Red Cross on his return.

  On Monday, the wedding party of a Houthi fighter was struck by air-launched missiles with 130 guests dead. Did we help to produce that?

  What does Putin see as the ideological root of these disasters?

  “After the end of the Cold War, a single center of domination emerged in the world, and then those who found themselves at the top of the pyramid were tempted to think they were strong and exceptional, they knew better.”

  Then, adopting policies “based on self-conceit and belief in one’s exceptionality and impunity,” this “single center of domination,” the United States, began to export “so-called democratic” revolutions.

  How did it all turn out? Says Putin:

  “An aggressive foreign interference has resulted in a brazen destruction of national institutions. … Instead of the triumph of democracy and progress, we got violence, poverty and social disaster.

   

  Nobody cares a bit about human rights, including the right to life.”

  Is Putin wrong in his depiction of what happened to the Middle East after we plunged in? Or does his summary of what American interventions have wrought echo the warnings made against them for years by American dissenters?

  Putin concept of “state sovereignty” is this: “We are all different, and we should respect that. No one has to conform to a single development model that someone has once and for all recognized as the right one.”

  The Soviet Union tried that way, said Putin, and failed. Now the Americans are trying the same thing, and they will reach the same end.

  Unlike most U.N. speeches, Putin’s merits study. For he not only identifies the U.S. mindset that helped to produce the new world disorder, he identifies a primary cause of the emerging second Cold War.

  To Putin, the West’s exploitation of its Cold War victory to move NATO onto Russia’s doorstep caused the visceral Russian recoil. The U.S.-backed coup in Ukraine that overthrew the elected pro-Russian government led straight to the violent reaction in the pro-Russian Donbas.

  What Putin seems to be saying to us is this:

  If America’s elites continue to assert their right to intervene in the internal affairs of nations, to make them conform to a U.S. ideal of what is a good society and legitimate government, then we are headed for endless conflict. And, one day, this will inevitably result in war, as more and more nations resist America’s moral imperialism.

  Nations have a right to be themselves, Putin is saying.

  They have the right to reflect in their institutions their own histories, beliefs, values and traditions, even if that results in what Americans regard as illiberal democracies or authoritarian capitalism or even Muslim theocracies.

  There was a time, not so long ago, when Americans had no problem with this, when Americans accepted a diversity of regimes abroad. Indeed, a belief in nonintervention abroad was once the very cornerstone of American foreign policy.

  Wednesday and Thursday, Putin’s forces in Syria bombed the camps of U.S.-backed rebels seeking to overthrow Assad. Putin is sending a signal: Russia is willing to ride the escalator up to a collision with the United States to prevent us and our Sunni Arab and Turkish allies from dumping over Assad, which could bring ISIS to power in Damascus.

  Perhaps it is time to climb down off our ideological high horse and start respecting the vital interests of other sovereign nations, even as we protect and defend our own.

  

  

  

  

  

• Meet Seth Carpenter – Janet Yellen's Choice Of "Fed Leak" Scapegoat

  With the "above the law" Federal Reserve coming under increasing pressure to answer a Senate investigation's questions about the 2012 "leak", it appears the proximity of the probe to Janet Yellen, has forced The Fed to 'fess up and throw someone under the bus. Meet Seth Carpenter, a nominee for assistant Treasury secretary for financial markets…

  As The Wall Street Journal reports, probes into the 2012 leak of sensitive Federal Reserve policy information are widening further, with a Senate committee scrutinizing a former Fed official nominated for a position in the Obama administration.

  The Senate Finance Committee has been looking into whether the official, a Treasury Department nominee who worked as a top Fed economist at the time of the leak, relayed market-sensitive information from the Fed to policy research firm Medley Global Advisors, which in turn shared the details with its Wall Street clients, according to people familiar with the matter.

   

  …

   

  The Senate committee is looking into whether Seth Carpenter, a nominee for assistant Treasury secretary for financial markets, played a role in the 2012 leak. The panel is charged with approving nominees to senior-level positions at the Treasury Department.

   

  

   

  A person familiar with the matter said Thursday Mr. Carpenter has told the Treasury Department he never had any contact with anyone at Medley. The person added that even before the nomination, both the Treasury and the White House looked into whether Mr. Carpenter was involved, including reviewing the findings of the Fed’s inspector general, and found no evidence linking him to the leak.

   

  Mr. Carpenter didn’t respond to a request for comment on Thursday. Spokesmen for the Fed and White House declined to comment on the Senate inquiry.

  The Fed conducted its own investigation in late 2012 and early 2013 that found a “few” Fed staffers had contact with Medley, according to a memo summarizing the investigation, but it didn’t identify the people. The Fed has said it was unable to determine who provided information to Medley. Mr. Carpenter hasn't been accused of being the source of the leak.

  The spokeswoman wouldn’t say if the committee’s review of the leak has stalled Mr. Carpenter’s nomination. It has been more than a year since Mr. Obama tapped Mr. Carpenter for the position, and the committee has yet to schedule a hearing on the nomination.

   

  Mr. Carpenter “is going through the same bipartisan nomination process as every nominee referred to the Finance Committee,” said spokeswoman Julia Lawless.

  *  *  *

  Whether or not Mr Carpenter is guilty, we wish him luck.

  What better scapegoat… Republicans get to claim the scalp of an Obama nominee; and The Fed gets to point to lower level staff – not Janet – as the problem and will, we are sure, begin to firm up internal controls over sensitive information.

  

  

  

  

  

• Meet Oregon School Shooter Chris Harper-Mercer: "You're Going To See God In Just About One Second"

  Sadly, the post-mass-shooting killer profile has become something of a media tradition in the US of late as a string of violence that includes the execution of nine African American churchgoers in Charleston and the on-air murder of a TV reporter has delivered a shock to the collective psyche of Americans and served notice that tragedies like those that occurred at Columbine, Virginia Tech, and Sandy Hook may well become commonplace going forward. 

  The latest “incident” in the mass shooting tradition came on Thursday when someone described only as “a 20-year-old man” went on a rampage at Umpqua Community College in Oregon. According to some eyewitness accounts, the shooter demanded that victims “stand up and state their religion” before summarily executing them. 

  On Friday, the first details are beginning to emerge about the identity of the shooter. Here’s Reuters with more:

  The man killed by police on Thursday after he fatally shot nine people at a community college in southern Oregon was a nervy 26-year-old who lived close to the campus and described himself as shy, according to neighbors, media and online reports.

   

  A law enforcement source said multiple agencies had identified the shooter as Chris Harper-Mercer. Online directories list a man of that name as having lived in Torrance, California, before moving to Winchester, Oregon.

   

  The killer used four guns, including a type of assault rifle, in the classroom attack, CNN said. Seven people were also wounded at the Umpqua Community College in Roseburg, a timber town of about 20,000 people that adjoins Winchester.

   

  A photo posted on a MySpace profile belonging to someone named Chris Harper-Mercer, from Torrance, showed a young man with a shaved head, dark-rimmed glasses and a serious expression. He was holding a long-barreled gun.

   

  A neighbor next door to the Winchester building said Thursday night he recognized online photos of Harper-Mercer as being his neighbor.

   

  In an Internet posting on the Spiritual Passions dating and social networking site, a user posted a picture that appears to be Harper-Mercer under the user name IRONCROSS45, a handle Harper-Mercer used as his email.

   

  He described himself on the site as a 26-year-old, mixed-race “man looking for a woman.” He said he was “not religious, but spiritual,” and was a “teetotaler” living with his parents and a conservative Republican. Socially, he said, he was “shy at first” and “better in small groups.” He described himself as “always dieting” and looking for “the yin to my yang.”

  And here’s further color from The New York Times:

  Chris Harper Mercer, the man identified as the gunman in the deadly rampage at Umpqua Community College in Roseburg, Ore., on Thursday, was a withdrawn young man who neighbors said wore the same outfit every day — combat boots, green Army pants and a white T-shirt — and was close to his mother, who fiercely protected him.

  Neighbors in Winchester, Ore., and Torrance, Calif., where Mr. Mercer, 26, lived with his mother, Laurel Harper, remember a reclusive and seemingly fragile young man with a shaved head and dark glasses who seemed to recoil from social interaction.

   

  “He always seemed anxious,” said Rosario Lucumi, 51, who rode the same bus in Torrance as Mr. Mercer when she went to work. She said she believed he took it to El Camino College. “He always had earphones in, listening to music.”

   

  “He and his mother were really close,” said Ms. Lucumi, who estimated that Mr. Mercer and his mother, who shared a small one-bedroom apartment in Torrance, lived there for less than a year. “They were always together.”

   

  Bryan Clay, 18, said he once asked Mr. Mercer why he wore “a military get-up” every day.

   

  “He kind of just didn’t want of talk about it” and changed the subject, Mr. Clay said.

   

  “He didn’t say anything about himself,” he added.

   

  Mr. Mercer appeared to have sought community on the Internet. A picture of him holding a rifle appeared on a MySpace page with a post expressing a deep interest in the Irish Republican Army. It included footage from the conflict in Northern Ireland set to “The Men Behind the Wire,” an Irish republican song, and several pictures of gunmen in black balaclavas. Another picture showed the front page of An Phoblacht, the party newspaper of Sinn Fein, the former political wing of the I.R.A.

  
  

   

  A picture of Mr. Mercer also appeared on a long-dormant dating website profile registered in Los Angeles. On it, he described himself as an “introvert” with a dislike for “organized religion.”

  Here are the images from Mercer’s MySpace page…

  

  …here is the above mentioned “Spiritual Passions” profile…

  

  …and here is a review penned by someone with the same username (IRONCROSS45) after purchasing Nazi attire:

  

  According to reports, Mercer’s professed “dislike for organized religion” led him to “target” Christians, although the chilling details presented below may simply indicate that Mercer was attempting to terrorize his victims before killing them. Via CNN:

  The gunman who opened fire at Oregon’s Umpqua Community College singled out Christians, according to the father of a wounded student.

   

  Before going into spinal surgery, Anastasia Boylan told her father the gunman entered her classroom firing.

   

  “I’ve been waiting to do this for years,” the gunman told the professor teaching the class. He shot him point blank, Boylan recounted.

   

  Others were hit too, she told her family.

   

  Everyone in the classroom dropped to the ground.

   

  The gunman, while reloading his handgun, ordered the students to stand up and asked if they were Christians, Boylan told her family.

   

  “And they would stand up and he said, ‘Good, because you’re a Christian, you’re going to see God in just about one second,'” Boylan’s father, Stacy, told CNN, relaying her account.

   

  “And then he shot and killed them.”

  Mercer’s blog posts, which were penned under the name “lithium_love” have apparently been removed (see here) but here are some excerpts via CNN and via another blogger who copied the entries before they were taken down. The first two paragraphs reference Virginia shooter Vester Flanagan:

  I have noticed that so many people like him are all alone and unknown, yet when they spill a little blood, the whole world knows who they are. A man who was known by no one, is now known by everyone. His face splashed across every screen, his name across the lips of every person on the planet, all in the course of one day. Seems the more people you kill, the more you’re in the limelight.

   

  And I have to say, anyone who knew him could have seen this coming. People like him have nothing left to live for, and the only thing left to do is lash out at a society that has abandoned them.

   

  I just read about the houston cop shooting. Figured I’d post this since the response to my previous blog post on vester flanagan was so interesting. On the houston shooting it was reported that the suspect was influenced by black lives matter protests/movement. Although I don’t know if thats true, with all the issues about police and blacks/protestors in the news the past couple of years, it certainly seems like someone would be inspired to take action. With the constant chants of anti police rhetoric this was bound to happen. I don’t disagree that police brutality and excessive use of force is a problem, but killing an officer that never did anything to you is not the answer.

   

  This whole event seems similar to the one in new york earlier this year where that guy killed those two cops sitting in a parked car. The inflammatory rhetoric on both sides, whether warranted or not will only continue to agitate the situation and events such as these will happen more and more. These are just my thoughts on the matter. Will continue to post more blogs on related subjects, as well any interesting thoughts I may have.

  We’ll leave it to readers to draw their own conclusions as to what this says about race relations in America, religion, the copy cat effect, and the outright disintegration of society. We close by noting that sadly, we doubt this is the last time we’ll find ourselves profiling someone who carries out a mass shooting and we leave you with the following rather unnerving bit from The New York Times piece excerpted above:

  In the offline world, Mr. Mercer’s mother sought to protect him from all manner of neighborhood annoyances, former neighbors in Torrance said, from loud children and barking dogs to household pests. Once, neighbors said, she went door-to-door with a petition to get the landlord to exterminate cockroaches in her apartment, saying they bothered her son.

   

  “She said, ‘My son is dealing with some mental issues, and the roaches are really irritating him,’ ” Julia Winstead, 55, said. 

  

  

  

  

• The Reality Behind The Numbers In China's Boom-Bust Economy

  Submitted by Yonathan Amselem via The Mises Institute,

  Last year, the world was stunned by an IMF report which found the Chinese economy larger and more productive than that of the United States, both in terms of raw GDP and purchasing power parity (PPP). The Chinese people created more goods and had more purchasing power with which to obtain them — a classic sign of prosperity. At the same time, the Shanghai Stock Exchange Composite more than doubled in value since October of 2014. This explosion in growth was accompanied by a post-recession construction boom that rivals anything the world has ever seen. In fact, in the three years from 2011 – 2013, the Chinese economy consumed more cement than the United States had in the entire twentieth century. Across the political spectrum, the narrative for the last fifteen years has been that of a rising Chinese hyperpower to rival American economic and cultural influence around the globe. China’s state-led “red capitalism” was a model to be admired and even emulated.

  Yet, here we sit in 2015 watching the Chinese stock market fall apart despite the Chinese central bank’s desperate efforts to create liquidity through government-backed loans and bonds. Since mid-June, Chinese equities have fallen by more than 30 percent despite massive state purchases of small and mid-sized company shares by China’s Security Finance Corporation.

  But this series of events should have surprised nobody. China’s colossal stock market boom was not the result of any increase in the real value or productivity of the underlying assets. Rather, the boom was fueled primarily by a cascade of debt pouring out of the Chinese central bank.

  China’s Real Estate Bubble

  Like the soaring Chinese stock exchange, the unprecedented construction boom was financed largely by artificially cheap credit offered by the Chinese central bank. New apartment buildings, roads, suburbs, irrigation and sewage systems, parks, and commercial centers were built not by private creditors and entrepreneurs marshaling limited resources in order to satisfy consumer demands. They were built by a cozy network of central bank officials, politicians, and well-connected private corporations.

  Nearly seventy million luxury apartments remain empty. These projects created an epidemic of “ghost cities” in which cities built for millions are inhabited by a few thousand. At the turn of the century, the Chinese economy had outstanding debt of $1 trillion. Only fifteen years and several ghost cities later that debt has ballooned to an unbelievable $25 trillion. What we’re experiencing in the Chinese markets are the death throes of an economy that capital markets have realized is simply not productive enough to service that kind of debt.

  GDP and Other Crude Economic Metrics are Misleading

  GDP is meant to represent the collective value of all transactions within a certain boundary. This metric provides very little useful or accurate information about the actual quality of life in a country. GDP is artificially inflated by imputations such as the added “value” of a house owner not having to pay rent. GDP also includes government spending — such as when a government department purchases new computers. This transaction merely redirected labor and raw materials that would have otherwise been used to directly satisfy consumer demands with better or additional products. Government spending is not just “neutral,” it is actively destructive. Government purchases and sales do not operate with the same rules that other actors in the market are subject to. Thus when we look at GDP numbers from a country drunk on spending newly printed money on projects completely devoid of market signals, we should not place too much faith in them.

  The IMF report and those who took it seriously relied heavily on GDP calculations when arriving at their astounding conclusions about China’s growth. To compare the Chinese and American economies using a crude metric like GDP is like trying to gauge the athleticism of an individual by how much sweat comes out of his pores. When one economy can produce companies like Google, Boeing, Costco, and General Electric while another builds empty homes, what meaningful information could an unsophisticated metric like GDP tell us? Much to the chagrin of Keynesians, not all spending is created equal.

  Not long ago, we were haunted, not by the specter of this “red capitalism,” but by the communism of the Soviet Union. Some fifty years ago, mainstream economists blabbered tirelessly about the rising Soviet powerhouse. According to popular wisdom, the managed Soviet economy did not have the inefficiency and economic drag inherent in the “random” and “chaotic” American capitalist economy that sent some into mansions and others into bankruptcy. The widely-read Economics: An Introductory Analysis by Nobel-prize winning economist, Paul Samuelson predicted that Soviet GDP was nearly half that of the United States, but by 1984 (and surely by 1997), the strength of the Soviet economy would surpass that of the United States.

  The Soviet Union crumbled. When experts rely on crude metrics we should not be surprised when experts are wrong.

  The US Federal Reserve orchestrated an artificial boom from 2001 to 2007 through artificially low interest rates and has resumed doing so once again. Entrepreneurs operating under faulty market signals created by the Federal Reserve malinvested hundreds of billions of dollars into capital intensive projects primarily in the housing sector. We paid for our boom with millions of destroyed jobs, wasted labor, and wasted resources. The Chinese Central Bank learned nothing from the Fed’s catastrophic experiment. They will reap the same rewards.

   

  

  

  

  

  

• Presenting A First-Hand Look Inside Russia's Forward Operating Base In Syria

  When the first reports began to trickle in regarding a possible Russian military buildup at Bashar al-Assad’s seaside stronghold at Latakia, the scramble to “prove” that forces from Moscow had indeed arrived in Syria led directly to a string of conflicting reports and grainy satellite images purporting to detail the scope of Russia’s involvement. 

  As the weeks went by, and as rumors of a Russian presence were confirmed by The Kremlin, the world became even more fascinated by the idea that Moscow has officially launched an air war in a foreign country. Indeed, Russia’s overt involvement on behalf of the Assad regime marks a change of strategy for Putin, who has been careful to dispel accusations that his forces are directly involved in the fighting in eastern Ukraine. 

  Now that Russia has officially commenced combat operations, Moscow is wasting no time showing off its new staging ground. For those curious to know what a Russian forward operating base in a Middle Eastern warzone looks like, we present the following clip from RT:

  

  

  

  

  

• Foreign Policy In 140 Characters Or Less: US Ambassador Tweets Warning To Russia

  For anyone who might still be confused as to what the official position of the US and its allies is with regard to Russian military operations in Syria, you’re in luck because Washington – in conjunction with Berlin, Paris, London, Doha, Ankara, and of course Riyadh – is now tweeting out foreign policy. 

  We present the following from the US ambassador to the UN with no further comment other than to note that we are glad to see that countries who most certainly are not currently conducting any kind of overt or covert military operations in Syria are standing tall in the face of Russian “aggression”…

  We call on #Russia to immediately cease attacks on Syrian oppo & civilians & to focus on ISIL pic.twitter.com/61zw3h9qd7

  — Samantha Power (@AmbassadorPower) October 2, 2015

  

  

  

  

  

• The Farce Is Complete: Stocks Soar Most In 4 Years As US Job Market Disintegrates

  We suspect more than a few traders will need this tonight…

  First things first, we have this…

  Chinese stocks (trading in US) rose 6.5% today – the biggest day since May 2010:

  

   

  And this  -Today saw an epic squeeze of shorts – "most shorted" surged 5% off the opening lows which is the largest swing we could find on record

  

   

  And finally this: Today was the biggest intraday reversal higher in The Dow since 2011

  

   

  Thanks to this…

  spoofer in eMini using a order size of 584 $ES_F $SPY

  — Eric Scott Hunsader (@nanexllc) October 2, 2015

  With cash indices all ramped into green for the day:

  

   

  But there was only one thing driving US equities today… USDJPY, which got the momo going:

  

   

  So 120 will be used to launch the 3:30pm ramp

  — zerohedge (@zerohedge) October 2, 2015

  SPX would already be above 2000 if payrolls were negative

  — zerohedge (@zerohedge) October 2, 2015

  And a collapse in VIX finished it off:

  

   

  And US equities (except Small Caps) were ramped all the way into the green for the week, even Trannies

  

   

  But credit was not buying it at the end:

  

   

  Away from the silliness in stocks, everything else was 'silly' too:

  Treasuries soared at the payrolls print with yields collapsing and flattening across the curve… before Europe closed and the Treasury selling was unleashed…

  

   

  But remained lower on the week:

  

   

  The USD was crushed lower after payrolls but bid back to the moon alice after Europe closed:

  

   

  Commodities were very mixed on the week but industrials soared later in the day after precious metals exploded on payrolls data:

  

   

  But Silver (up 6%) was the big winner from Payrolls:

  

   

  And here is crude on the week… testing and failing at the week's close…ramping today onthe rig count dcline after tumbling after payrolls

  

   

  The bottom line – The Pure-Play QE Trade is back on… but be careful what you wish for because of reflexivity…

  Rate Hike Odds vs. What Determines Rate Hike Odds pic.twitter.com/qjOsJoJMx3

  — Not Jim Cramer (@Not_Jim_Cramer) October 2, 2015

  Charts: Bloomberg

   

  

  

  

  

• Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can't Pay The Interest On Their Debt

  Earlier today, Macquarie released a must-read report titled “Further deterioration in China’s corporate debt coverage”, in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with “uncovered debt”, or those which can’t even cover a full year of interest expense with profit.

  The report’s centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x.

  As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the “percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample.”

  

  To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in “uncovered debt” companies) of cash flows, was generally known.

  What wasn’t known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector.

  We now know, and the answer is truly terrifying.

  Macquarie lays it out in just three charts.

  First, it shows the “debt-coverage” curve for commodity companies as of 2007. One will note that not only is there virtually no commodity sector debt to discuss, at not even CNY1 trillion in debt, but virtually every company could comfortably cover their interest expense with existing cash flow: only 4 companies – all in the cement sector – had “uncovered debt” 8 years ago.

  

  Fast forward to 2013 when things get bad, as about a third of all corporations are now unable to cover their annual interest expense, even as the total addressable corporate debt has soared to CNY4 trillion for just the commodity sector.

  

  And then in 2014, everything just falls apart. Quote Macquarie, “more than half of the cumulative debt in this sector was EBIT-uncovered in 2014, and all sub-sectors have their share in the uncovered part, particularly for base metals (the big gray bar on the right stands for Chalco), coal, and steel.”

  Compared with the situation in 2013, while almost all sub-sectors did worse in 2014, but things appear to have worsened faster for coal companies as more red bars have moved beyond the 100% critical level for EBIT-coverage.

  It means that last year about CNY2 trillion in debt was in danger of imminent default.

  

  The situation since than has dramatically deteriorated.

  So are we now? Macquarie again: “Given the slumps in metal and coal prices so far this year, it’s quite likely the curve will have deteriorated further for commodity firms this year, with total debt getting better in the meantime.“

  In other words, it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can’t even generate the cash to pay down the interest on their debt, let alone fund repayments.

  We fully expect this to be the source of the next market freakout: when the punditry turns its attention away from macro China, which has more than enough problems to begin with, and starts to focus on the cash flow devastation in China at the micro, or corporate, level.

  

  

  

  

• Weekend Reading: Capacious Cognitions

  Submitted by Lance Roberts via STA Wealth Management,

  This past week saw the markets retest its lows. So far, those lows have held for now but the deterioration in market internals suggests that the danger is not over as of yet. As I stated earlier this week:

  "As you will notice, the reflexive rally, and subsequent failure, have tracked the original predictions very closely up to the point.

   

  With the market once again very oversold on a short-term basis, it is likely that the markets could manage a weak rally attempt over the next few days. The good news is that such an attempt will provide individuals another opportunity to reduce portfolio risk accordingly."

  

  "While the mainstream analysis remains quite bullish on the underpinnings of the market, the ongoing deterioration of market internals and fundamentals suggests something more pervasive. The chart below shows the previous post-financial crisis corrections following the end of Central Bank interventions."

  

  "As you will note, each correction was contained within a Fibonacci correction band of either 38.2% or 61.8%. It was at these correction points that the Federal Reserve responded with some form of monetary intervention or support."

  With the Federal Reserve still hinting at raising interest rates, but trapped by weak economic growth, will the next big move by the Fed be another form of monetary accommodation instead? Or, are the underlying dynamics of the economy and market really strong enough to shake off the recent weakness and continue its bullish ascent? 

  This weekend's reading list covers a variety of views on the markets and other related issues to stimulate your thinking processes. What is critically important is to have a logical and disciplined game plan for dealing with your investments. "Hoping to get back to even" has never been a successful investment strategy. 

  ---

  THE LIST

  1) Is 1700 For The SPX Still On Target by Avi Gilbert via MarketWatch

  “I also want to address the 2011 correction, to which I see many referring as the "copy" of what we are forming right now. First, the 2011 correction wave was a 2nd wave, and this is a 4th wave. The theory of alternation suggests that they should take different forms, so I am not going to expect that we will be working from the same playbook as 2011.

   

  Second, it seems as though many market participants have been referring to this market fractal as to what will happen in our current market scenario. Well, when a large segment of the market maintains the same perspective, it is quite rare to see that perspective play out. So, for that reason, I think that the market is either going to break down sooner than I expect, which is not called for in the 2011 fractal, or, more in line with my primary perspective, we go back over the high made on the day of the Fed announcement before we drop to lower lows, which is also not in line with the 2011 fractal.”

  Read Also: Ending The Markets' Short-Term Obsession by Mohammed El-Erian via Bloomberg View

   

  2) Investors Haven't Been This Bearish In 15 Years by Mark Hulbert via MarketWatch

  “Bearishness has reached an extreme not seen at least since the top of the Internet bubble in early 2000.

   

  Yet this is a bullish omen, according to the inverse logic of contrarian analysis: Extreme levels of bearishness indicate that there is a very robust "wall of worry" for the market to climb.”

   

  Read Also: 5 Things To Do BEFORE Your Portfolio Crumbles by Peter Hodson via Financial Post

  But Also Read: What Could Stop This Bear Market by Anthony Mirhaydari via The Fiscal Times

   

  3) This Is When Bonds Go Boom! by Wolf Richter via Naked Capitalism

  “This chart from LCD HY Weekly shows the distress ratio of leveraged loans as measured by S&P Capital IQ LCD (blue line) and of junk bonds as measured by BofA Merrill Lynch (red line) which depicts reality in an even harsher light than Standard and Poor's. Leveraged loans are generally secured and hold up better in a bankruptcy than bonds. But distress levels of both have recently begun to spike.

   

  These yields that are rising to distressed levels drive up the spread between corporate bond yields and US Treasury yields. The spread is a measure of perceived risk. It had dropped to ludicrously low levels. This wasn't a function of risk somehow disappearing from Planet Earth. It was a function of the Fed's beating investors into submission with its zero-interest-rate policy so that they would eliminate risk as a factor being priced into their calculus. Now risk is re-inserting itself into the calculus.”

  

  Read Also: Are Credit Markets Signaling More Pain? by Fil Zucchi via See It Market

   

  4) Carl Ichan: Market Is Way Overpriced by Carl Icahn via Zero Hedge

   

  "God knows where this is going. It's very dangerous and could be disastrous," said Icahn, who has been a consistent critic of the Fed for keeping its benchmark interest rate close to zero since late 2008.

   

  Icahn said he felt compelled to raise red flags about the state of the financial markets because he believes if more big investors had warned about subprime mortgage market in 2007, the United States might have avoided the crisis that strangled the economy the following year.

   

  In a video entitled "Danger Ahead" and released on Tuesday, Icahn said the Fed's rate policy had enabled U.S. chief executives – many of whom he describes as "nice but mediocre guys" – to pursue "financial engineering" that he said has exacerbated an already wide gap between rich and poor in America."

  Read Also: Today's Market Looks A Lot Like 2000 and 2007 by Alex Rosenberg via CNBC

   

  5) New Sign Of A Market Bubble? by Michael Hiltzik via LA Times

  "At a press briefing last week, Mike Wilson, an executive of Morgan Stanley's wealth management arm, cautioned that 'Consumers are feeling pretty good, and they are starting to spend money again, and they're starting to do dumb things. They're starting to borrow money, they're starting to maybe buy that house they shouldn't or that car they shouldn't.'

   

  That's amusing, because Morgan Stanley has been aggressively hawking non-purpose loans: its total securities-based loans totaled $38 billion at the end of 2014, a 70% increase over two years earlier according to an analysis by Paul Meyer of the Securities Litigation and Consulting Group.

   

  The firm's pitch to clients is entitled 'Invest in Your Dreams.' Among those dreams it puts in its clients' heads: 'The restaurant you've always wanted to open. That advanced degree you finally have time for. The perfect house that won't be on the market long. A 1963 Ferrari GTO, just because.'"

  (Note: Morgan Stanley is pitching "margin loans" at a time when margin debt is still near record highs. We saw similar behavior at the peak of the last two bull markets.)

  

  Read Also: Goldman Sachs Cuts Outlook For Market by Sam Ro via Business Insider

  ---

  Other Reading

  • The Buffet Valuation Indicator Levitates by Doug Short via Advisor Perspectives
  • Valuations Tend To Mean-Invert by John Hussman via Hussman Funds
  • Thoughts On Negative Rates via Philosophical Economics
  • Selling Is The Easy Part by Ben Carlson via Wealth Of Common Sense
  • Say Goodbye To The 4% Rule For Retirement by Roger Nusbaum via Advisor Perspectives
  • Slumping Manufacturing Doesn't Matter? by Jeffrey Snider via Alhambra Partners
  • S&P Predicts ECB Will Boost QE By 120% by Tyler Durden via Zerohedge

  ---

  “Risk taking is necessary for large success, it is also necessary for failure.” – Nasim Taleb

  Have a great weekend.

  

  

  

  

  

• Meet Your "Independent" Media, America

  All you need to know about the “independent”, “objective” and “impartial” US media.

  

  h/t @LibertyBlitz

  

  

  

  

• "They're Hopping Mad In The US And Saudi Arabia": Russian Strikes In Syria Spark Epic Western Media Propaganda Blitz

  We are now two days into Russia’s air campaign against anti-regime forces in Syria and both Moscow and the West are rushing to spin the narrative.

  The frantic attempt from both sides to shape public opinion has been truly amazing to behold and the sheer amount of coverage speaks to what we said on Thursday about just how important the conflict really is for the Mid-East balance of power.

  For the US, portraying Russian airstrikes as supportive of a murderous regime and as an imminent threat to civilians is key, as it allows Washington to explain away the fact that the US and its allies haven’t coordinated their efforts with Moscow. Take the following from CNN for instance, who reports that Russia has made a “strategic blunder” and that by opening an air campaign, Russia risks raising the spectre of the Soviet-Afghan war in the minds of potential jihadists who will supposedly rush into Syria to join the fight:

  There is no ambiguity now about Russia’s current tactics in Syria — they are seeking to take over the airspace in the region and be the agenda-setting force on the ground, several senior administration officials told CNN.

   

  “Yesterday’s demarche to the U.S. by Russian officials in Baghdad was clear in its intent,” one senior administration official said. “Make sure you don’t have anyone around ISIS targets and get out of the air.”

   

  And while U.S. officials have no plans to cede Russia any ground, they also said it appears that Russian President Vladimir Putin made a dramatic chess move that the Russians have not thought through — one official even called it a “strategic blunder.”

   

  Had the Russians been clear that they are providing support in Syria to prevent Syrian President Bashar al-Assad regime’s collapse — a scenario that would benefit ISIS — they might have gotten some credit on the world stage.

   

  But their very first strikes in the region hit CIA-backed anti-Assad rebel forces, Arizona Republican John McCain, chairman of the Senate Armed Services Committee, said Thursday on CNN’s “New Day.”

   

  And U.S. officials note that every bomb against a non-ISIS Sunni target puts them more in bed with Iran and Hezbollah, which are Shiite. U.S. allies in the Persian Gulf warn that this could set off a huge sectarian conflict and that the deeper the Russians get into this, the harder officials believe it will be to get a diplomatic process with the Saudis and others restarted.

   

  “It is going to be hugely tempting for the Saudis to start financing their guys again,” another senior administration official said. “Syria will be a magnet for every jihadi, who will rush to fight the Russians, just like they did in Afghanistan. The problem is while this will cause problems for the Russians, it will also mean trouble for the Gulf, when the jihadists come home.”

   

  “The Russians can’t be stupid,” another senior administration official said. “This is going to be wildly expensive. And they can’t hold out long. They know in the end there is no future for the guy (Assad) because the whole reason they had to come in is because Assad and his forces were extremely vulnerable. So we are hoping they will come to their senses, stabilize the situation and then we can agree on the Assad piece.”

  Now obviously, there are too many absurd statements there to count, but note (again) that Russia has never hid its support for Assad. When Charlie Rose told Putin on national US television that some people believe Russia is in Syria to help Assad, Putin said, quote, “well, you’re right.” On top of that, it’s glaringly obvious to anyone who knows anything about the global balance of power that Russia is there to support Assad and it’s ridiculous for anyone to suggest that Putin isn’t aware of the fact that by supporting the regime, Russia falls squarely on the side of Iran and Hezbollah. It’s also glaringly obvious that ISIS isn’t the only extremist group fighting for control of the country and the notion that the US has now finally managed to identify the “good guys” in Syria after failing to get it right for four years and that now evil Russia is deliberately targeting those good guys simply because they’re the good guys is laughable to the point that one wonders if CNN and others pushed back on being compelled to spin it that way. Additionally, it’s a little late for the US to be concerned about someone inadvertently creating a theatre that in the minds of jihadis will serve as the stage for humanity’s final battle. If Washington was worried about that they might have avoided getting involved in Syria in the first place and they definitely would have avoided training the soldiers who would go on to join the very group that’s perpetuating that idea.

  And then here’s WSJ:

  The White House challenged Russia’s claim that the airstrikes were targeting Islamic State militants, saying Thursday that Moscow was carrying out “indiscriminate military operations” in areas where the group isn’t operating. A White House official also dismissed the possibility that Russia had inadvertently bombed non-Islamic State areas. U.S. officials say the Russian military bombed one area primarily held by rebels backed by the Central Intelligence Agency and allied spy services.

   

  Contrary to claims by the Russian Ministry of Defense, none of the areas that were hit have a known Islamic State presence. At least two of the rebel factions attacked by the Russians—Tajamu Al-Ezzeh and the Central Division—have received weapons including advanced antitank missiles and funding from the U.S. and its allies, according to rebel leaders.

   

  The arc that the Russian airstrikes followed begins around the town of Jisr al-Shughour in northern Idlib province near the Turkish border and adjacent to an agricultural area known as the Ghab Plain. It cuts through the central Syrian cities of Hama and Homs and ends at the Lebanese border.

   

  

  
  

  Alawites—the regime’s base of support—are concentrated west of the arc in an area that includes Latakia province.

   

  Everything east is dominated by the country’s Sunni majority, to which most of those fighting the regime belong.

   

  A series of tit-for-tat massacres during the more than four-year conflict have solidified this sectarian fault line.

  Yes, the “sectarian fault line” has been solidified and that is a hallmark of Western intervention in the Mid-East. Syria is no different. 

  And BBC:

  Members of the US-led coalition against Islamic State have called on Russia to cease air strikes they say are hitting the Syrian opposition and civilians.

   

  In a joint statement on Friday, the US, UK, Turkey and other coalition members said Russian strikes would “only fuel more extremism”.

  And best of all there’s Al-Jazeera (which is of course owned by Qatar), who takes it up another notch by suggesting that Russia is now intentionally killing civilians:

  Russia accused of striking civilian targets in Syria

   

  Activists say warplanes are targeting civilians in areas under control of Western-backed rebels, a claim Russia denies.

  For their part, Bloomberg did the American public a favor by laying out the real story, albeit in an article that carries the title “US, Allies Demand Russia Stop Attacks On Syrian Opposition“:

  Russian forces are targeting only Islamic State, al-Qaeda affiliated Nusra Front and other terrorist groups, Foreign Minister Sergei Lavrov said Thursday in New York. The Free Syrian Army, a U.S-backed rebel group, was not among the targets and it should have a role in the political process in Syria, he added.

   

  “The goal is terrorism,” he said. “And we are not supporting anyone against their own people.”

  Assad’s government has been fighting alongside Iranian reinforcements to secure a corridor from the coastal province of Latakia, home to Assad’s Alawite minority, stretching to the capital Damascus, according to Reva Bhalla, vice president for analysis at Stratfor, a geopolitical intelligence and advisory firm based in Austin, Texas. The government has accused Qatar and Saudi Arabia of backing “terror groups,” and dismissed the criticism.

   

  “They’re hopping mad in Saudi Arabia, the U.S. And Qatar because of their defeat and the victory of Russia and Syria and the unraveling of the fact that the U.S. and its allies are not serious about fighting” Islamic State, Syrian lawmaker Sharif Shehadeh said by phone from Damascus. “Those who claim to be concerned about the Syrian people are the ones slaughtering the Syrian people through the terrorists.”

  There you go. That last passage pretty much says it all. 

  Meanwhile, the Russian propaganda machine is also in high gear as The Kremlin is jumping at the opportunity to portray Putin as the man who saved the world when no one else was willing to. Here’s Bloomberg again:

  Vladimir Putin may have caught the U.S. and its allies off guard by striking Syria, but his propaganda machine was ready.

   

  “A hundred dead terrorists,” a news presenter on Russia’s No. 2 network announced early Thursday, just hours after the bombing of what Putin has called “evil-doers” began. She then cut to a correspondent in Syria who lauded the precision of the strikes as aerial footage of the attacks supplied by the Defense Ministry aired.

   

  Over on Channel 1, the most-watched station, a parade of politicians, analysts and religious leaders — both Christian and Muslim — rolled by justifying the use of force on both legal and moral grounds. 

   

  “This is more than just military strikes against Islamic State,” said the editor of National Defense magazine, Igor Korotchenko, after parliament unanimously authorized the use of force. “We are protecting the values of humanity and taking a stand against the most extreme forms of obscurantism and terror.”

  What’s amusing there is that as overstated as it is, that narrative is actually closer to the truth than what’s being fed to the public by the Western media. 

  In any event, the important thing here is to cut through all of this and extract the bits that help to tell the story of what’s actually taking place in Syria. As we detailed on Thursday, this is effectively a Mid-East coup by Russia and Iran wherein Tehran will replace Riyadh as the regional power broker and Moscow will supplant Washington as the superpower puppet master. And on that note, we close with another excerpt from the WSJ piece cited above:

  Iran’s Foreign Ministry welcomed Russia’s military intervention in Syria on Thursday, saying it was the right step to fight terrorism and a move toward bringing stability to the region.

   

  “Fighting terrorism effectively requires a strong and serious will and has to be based on cooperation with the governments of Iraq and Syria,” Marzieh Afkham, spokeswoman for the ministry, said according to Iranian media reports.

   

  Ibrahim al-Amin, a Lebanese commentator and newspaper editor close to Hezbollah and Iran, said Moscow essentially provided a green light for a counteroffensive against rebels across the political spectrum.

   

  “From our side, we can no longer ignore the decision of the axis of resistance, backed by Russia, to not only prevent Assad’s fall but to also weaken all his foes. All his foes without any distinction,” wrote Mr. Amin in the Lebanese daily Al-Akhbar on Thursday.

   

  “We must benefit from Russian support to launch tough and decisive battles in several places in Syria,” he added.

   

  Before the latest Russian intervention, Iran played a pivotal role propping-up pro-regime militias made up largely of Alawites and Shiites. It has orchestrated thousands of Shiite fighters mainly from Lebanon and Iraq with Hezbollah being in the lead.

   

  But thousands of rebels regrouped in several enclaves north of Homs, in towns like al-Rastan and Talbiseh. Russian jets hit both civilian and military targets in these two towns and five surrounding villages, said Rashid al-Hourani, a Syrian army officer from the area who defected to the rebels in 2012.

   

  He said the airstrikes were followed with a barrage of artillery fire from several nearby positions where pro-regime Alawite and Shiite militias, including an Iran-backed group known as the Ridha Brigade, have been massing over the past few days.

  

  

  

  

  

• The Slippery Slope Of Denial

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  The ISM Manufacturing PMI was “unexpectedly” weak yet again in September. Continuing the theme spelled out by the regional manufacturing surveys (the Fed’s and the Chicago BBI), economic momentum has clearly stalled right where the “dollar” said it would. The pattern is blindingly obvious, with a huge slowdown to start the year (coincident to the first “dollar” disruptions including crude oil prices), a pause around May/June (with the “dollar” much quieter after the March FOMC) and then a pickup in August and now more dramatic deceleration in September (after the July start to the latest “run”).

  At just 50.2, the headline ISM estimate was the lowest since May 2013. New orders fell sharply from 51.7 in August (which was a multi-year low) to just 50.1. While most fixate on the assumed 50 level as an actual dividing line between growth and contraction, these sentiment surveys aren’t nearly that precise and at most offer relative interpretations about the economic direction, trends and the perhaps even the strength of those directions and trends.

  

  With such ugly numbers everywhere, the mainstream is rushing to reassure:

  The September numbers are the latest in a string of mixed reports for U.S. factories. The ISM index shows manufacturing activity has expanded for 33 straight months, though the pace has slowed markedly from last summer when it touched 58.1.

   

  Other gauges have been weaker, with the Federal Reserve’s measure of manufacturing output down in August and a recent Commerce Department report showing a drop in exports of autos and consumer goods.

  There was absolutely nothing “mixed” about factory reports in September unless you succumb to the allure of the false precision; everything is trending down and more importantly being rather quick about it. But even that is not purportedly anything to be concerned about because economists are certain that the problem lies only elsewhere:

  The figures showed export demand matched the weakest since July 2012 as economies from China to the euro area struggle to improve. While resilient spending by U.S. consumers is helping underpin manufacturing, the stronger dollar is making it more expensive for foreign buyers to purchase made-in-America merchandise.

  As if taken directly from Janet Yellen’s September press conference, particularly where she made a point of emphasizing the “strong” US economy (before reciting all the evidence that denies any such qualification), we are led to believe if not for that dollar the economy, manufacturing with it, would be booming.

  By all actual counts, if there is a resiliency being shown by US consumers and the consumer economy it has a particularly peculiar way of hiding itself. If the word “strong” was applicable beyond the simple fact it is repeated over and over by economists, consumer spending would show it somewhere. Instead, examining the catalog of consumer indications demonstrates quite the opposite. Starting with retail sales, where August counted still among the worst of the entire series, there is far, far more recession than resilience. Worse, retail sales figures across-the-board in August were more of the early-2015 variety of weakness than the less alarm of the middle of the year, following, too, the “dollar’s” path.

  

  The mainstream “strong” narrative really falls apart, however, exactly where economists and the media suggest it shouldn’t. If the dollar were truly the sole animating factor in the shocking manufacturing decline, meaning overseas weakness exclusively, then how are we supposed to reconcile imports? In other words, if this was simply the dollar making US exports “more expensive”, as is repeated blindly, and overseas economies alone in their distress, why isn’t the “strong” US consumer buying anything and everything from foreign producers? If the dollar makes exports difficult, the opposite is presumably true for imports where US consumers are flush with at least the unemployment rate.

  The export figures for July (the latest update) do follow that exchange rate suggestion. Exports collapsed yet again, down a stunning 7% for the second time in the last three months of the release. Export declines didn’t reach that level in the Great Recession until December 2008, but whereas that was a singular impulse, in 2015 exports so far have contracted steadily at or near that rate.

  

  So if the dollar exchange is the problem, combined with foreign economic deficiencies, then imports are surely surging or at the very least growing at a “strong” and steady rate.

  

  Imports from both Europe and China were flat in July, while imports from Japan, where the yen had been “devalued” a second time, dropped 6% after falling 5.5% in June. US demand seems to be shrinking at the same exact time foreign economies are stalling and plunging. That may just be a damned statistical oddity, or, more simply, the global economy is uniformly dropping with the US as a full part of that decline (“dollar”, after all).

  

  In fact, by count of even the seasonally-adjusted figures, imports are following exports a little too closely to believe that the looming (or formed) global recession is portionable or discretely separated.  The harmony between them strongly suggests instead a uniformity that can only be caused by a singular (financial) force.

  

  US consumer demand is strong, except everywhere you look to actually find it. Instead, what I think those who actually believe the mainstream narrative mean to proclaim is that there should be strong consumer demand given derivative assumptions about the Establishment Survey and unemployment rate. That is why we have been handed this cascading progression of downplaying each stage. Therefore, the only significance of these diminishing expectations is that they are clearly diminishing; and the acceleration of that deterioration might be extrapolated from the increasing intensity and quality of the nonsense meant to deny it.

  As noted yesterday, this is already well-descended the slippery slope of denial, plus one more rung:

  1. Dollar doesn’t matter, indicates strong economy relative to the world
  2. Dollar matters for oil, but lower oil prices mean stronger consumer
  3. Manufacturing slump doesn’t matter, only temporary
  4. Manufacturing declines are consumer spending, but only a small part
  5. Manufacturing declines are becoming serious, but only from overseas
  6. …

  

  

  

  

• "They Just Don't Want A Job" – The Fed's Grotesque "Explanation" Why 94.6 Million Are Out Of The Labor Force

  In a note seeking to “explain” why the US labor participation rate just crashed to a nearly 40 year low earlier today as another half a million Americans decided to exit the labor force bringing the total to 94.6 million people…

  

  

  … this is what the Atlanta Fed has to say about the most dramatic aberration to the US labor force in history: “Generally speaking, people in the 25–54 age group are the most likely to participate in the labor market. These so-called prime-age individuals are less likely to be making retirement decisions than older individuals and less likely to be enrolled in schooling or training than younger individuals.”

  This is actually spot on; it is also the only thing the Atlanta Fed does get right in its entire taxpayer-funded “analysis.”

  However, as the chart below shows, when it comes to participation rates within the age cohort, while the 25-54 group should be stable and/or rising to indicate economic strength while the 55-69 participation rate dropping due to so-called accelerated retirement of baby booners, we see precisely the opposite. The Fed, to its credit, admits this: “participation among the prime-age group declined considerably between 2008 and 2013.”

  

   

  And this is where the wheels fall off the Atlanta Fed narative. Because the regional Fed’s very next sentence shows why the world is doomed when you task economists to centrally-plan it:

  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.

  And there you have it: there are nearly 100 million working-age Americans who could be in the labor force, but are not “mostly” because they don’t want a job.

  Nothing about the lack of job demand as mega corporations continue to lay workers off in droves instead of hiring, instead using every last dollar of free cash flow to buyback their own stock to boost executive compensation instead of growing their company and hire more workers.

  Nothing about the collapse in small business formation – that driver of 80% of US employment – as firm exit rates are now greater than firm entry rates

  Nothing about the inability to get a job in a world in which the rest of
  the global is lapping the US in educational and labor skills.

  Nothing about the US economy never having left the post-2008 depression where $4.5 trillion in Fed credit was created just to boost the S&P to all time highs and never making it to the actual economy (until the helicopters finally start paradropping of course)

  Nothing about millions of aging, 55 and over, Americans refusing to retire or quit their job simply because they have no return on their savings to fall back on thank to the Fed’s ZIRP, thus keeping the labor pipeline clogged and preventing younger Americans from getting promoted and achieving better paying jobs.

  Nothing about a Millennial generation encumbered with $1 trillion in debt, that is so terrified of its job prospects and having to pay down its debt, it choose instead to keep rolling and piling on to this debt by remaining in college indefinitely

  Nothing about the perverted incentive structure of a welfare state that makes it more attractive to collect generous government handouts which end up punishing hard work.

  None of that.

  You see, it is because Americans “mostly don’t want a job.”

  

  And these are the pompous academic “intellectuals” who are supposed to micromanage the US economy. But how can they fix the biggest problem facing the US economy when they fail to even accurately diagnose what the problem is?

  Which, incidentally, is why the same old Fed tools will be used and abused in hopes of kicking the can down a few more months at at time, be it QE 4, 5, 100, or ever more negative rates, both of which are coming.

  How long will this continue? Now that is a very simple question: it will continue until the dollar loses its reserve status, just like the pound before it, and the livre before that, and the guilder before that, and so on.

  

  

  

  

  

  

• US Foreign Policy Explained (In 1 Cartoon)

  Presented without comment…

   

  

   

  Source: Townhall.com

  

  

  

  

  

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• If You Work Here, Quit Before You Are Fired: The 20 Largest US Layoff Announcements Of 2015

  Earlier today, in the latest laughable attempt to boost confidence in a clearly recessionary economy, the BLS reported that a paltry 277,000 Americans had sought unemployment benefits. Why laughable? Because at the very same time, Challenger Gray which actually tracks layoff notices and announcements, released its own data which starkly contradicted the US department of labor.

  As a reminder, what Challenger found was that the third quarter ended with a surge in job cuts, as U.S.-based employers announced plans to shed 58,877 in September, a 43 percent increase from the previous month.

  Worse, while one wouldn’t know it by looking at Dept of Labor data, some 205,759 job cuts were announced in the third quarter, making it the largest job-cut quarter since the third quarter of 2009, when planned layoffs totaled 240,233.

  So according to one data set people are filing for unemployment insurance near the lowest pace in history, according to the other, in the just concluded quarter, we just witnessed the most terminations in 6 years.

  Judging by the economy’s latest trajectory…

  

  … we think we know who is telling the truth, and who is desperate to avoid the reality of the wreckovery.

  So for those eager to push aside the endless government propaganda and concerned about the rapidly deteriorating economy, here is a list of the Top 20 biggest private-sector job cut announcements of 2015.

  We previously profiled the top one, that of Hewlett Packard, as dictated entirely by rising stock-buyback considerations. The same can be said about many of the other corporations, where as long as shareholders continue placing their own immediate interests over the long-term interests of the underlying business viability, none of these companies are safe to work for.

  Our advice: for anyone who is still employed at any of the following corporations, if you can find a job elsewhere (because the “recovery” and all), do it before you too become a seasonally-adjusted pink-slip.

  

  

  

  

  

  

• Russia Is Destabilizing Syria… According To The People Currently Destabilizing Syria

  By Don Shay of Antimedia

  Russia is destabilizing Syria — according to those destabilizing Syria.

  In a move many consider to be an act of bitter defiance to the West, the Russian government appears to have significantly increased its military aid to the Syrian regime. This support hinges largely on the provision of providing advanced weaponry — such as tanks and artillery — training Syrian soldiers to use those weapons systems, and Russian-led airstrikesagainst ISIS. Unsurprisingly, Western media pundits and officials (and their devoted followers) are expressing renewed outrage over Russia’s involvement in the Syrian conflict — at the same time, excluding pertinent background information on Russia’s historical roots in the region.

  Russia’s support for Syria dates back to 1946, when Russia helped consolidate Syria’s independence. The two countries mutually came to a diplomatic and military agreement in the form of a non-aggression pact, which was enacted on April 20, 1950. In this pact, Russia promised support to the newly-created Syria by helping to develop its military and by providing tactical support. Essentially, Russia and Syria have been cooperating for decades both militarily and economically, with Russia maintaining a naval base on the Syrian Mediterranean.

  Regardless of history, it matters little if global consensus opinion supports Russia. The reality is that the war in Syria has no positive outcomes for the people living there. If Assad is removed from power, it is likely the country will fall completely into the hands of ISIS and other terror groups — much like what occurred in Libya and Iraq. The United States’ prospects in the region seem dismal to anyone with a track record of our earlier interventions. If the U.S. placed more emphasis on diplomacy and less emphasis on arming belligerents, however, a political solution to the Syrian conflict would be much more of a possibility.

  A primary criticism of Russia’s relationship with Syria is that arming Assad is an attempt to prolong the conflict and destroy the nation. U.S. pundits point fingers at Russia as if its allegiance with Syria is a new development without understanding the historical intricacies of the Russian-Syrian relationship. In contrast, many individuals complaining about Russia’s role in “destabilizing Syria” and “prolonging the conflict” do not apply the same scrutiny to the United States’ new-found interest in the country.

  It is no secret the United States has armed, trained, and financed the Syrian rebels for nearly the entire duration of the conflict. Does this implicate the United States in prolonging the conflict? U.S.-backed fighters have consistently defected to ISIS and Al-Qaeda, transferring their battle experience and weaponry to virulent terrorist groups. When Al-Qaeda violently occupies villages and towns and ISIS fighters send scores of refugees fleeing for their lives, should the U.S. policy that caused such a catastrophe be questioned?

  Critics concerned by what Russia is accused of doing — destabilizing Syria and prolonging the conflict— should be equally opposed to U.S. intervention in that country. U.S. intervention in Syria, much like U.S. intervention elsewhere, has culminated in unprecedented destabilization and blowback. However, most people — as George Orwell understood — have a lopsided view of history, as they ignore and almost refuse to come to terms with the atrocities their own state commits, and by that logic, ignore the detrimental role the United States has played in Syria.

  The tragedy of the current crisis in Syria is not that hundreds of thousands of people have died or that millions more have become refugees. What makes the death and suffering of so many Syrians tragic is that their pain and grief achieved nothing. It seems there will be no silver lining around the bottomless and ever-expanding pit of war and death in Syria.

  One of the best solutions for a peaceful Syria hinges on the United States completely withdrawing from the region and the U.N. strengthening, instead of impeding, democratic movements that usher in a peaceful transition from chaos to stability. Calling for U.S. intervention in this region is simply perpetuating decades-old Russian-American animosity expressed through what could be considered a proxy war between terrorists on both sides of the political spectrum in Syria. This will only hurt innocent civilians by causing death and destruction — and by extension, promoting continued massive movements of refugees.

  

  

  

  

  

• 72-Year-Old "Mad Dog" Wakabayashi Warns "Reversals Will Be Massive In Scope"

  The infamously named "Mad Dog," 72-year-old former trader Eishi Wakabayashi, who previously called JPY's tops in 1995 and 2011 is out with some dire forecasts.

  Wakabayashi, a former foreign-exchange dealer who built a reputation for long-term chart-based market analysis, predicted the yen’s surge to a then all-time high in April 1995 and also foresaw the end of the strong yen era by early 2012. He joined Bank of Tokyo, now Bank of Tokyo-Mitsubishi UFJ Ltd., in 1966, and earned the nickname “mad dog” for his aggressive trading style.

  As Bloomberg reports, Eishi says the yen has already passed its low and may strengthen to 100 per dollar next year as the Bank of Japan’s unprecedented stimulus is failing to revive the economy…

  “The dollar is destined to decline against the yen because it’s been supported forcibly,” meaning the Japanese currency’s 2015 low of 125.86 was an excessive depreciation, Wakabayashi said in a Sept. 25 interview in Tokyo.  “The quantitative easing worked only psychologically on asset prices, weakening the yen and lifting stocks while failing to boost inflation. That’s become clear and we will see the repercussion from these shock therapies.”

   

  …

   

  Reversals will be massive in scope, possibly driving down the Nikkei 225 Stock Average toward 10,000 from about 17,500 now and the yen will strengthen beyond 100 per dollar next year, he said.

   

  

   

  The world has been in a deflationary cycle since the collapse of Lehman Brothers Holdings Inc., evidenced by the euro, crude oil and a gauge of average commodities futures prices all peaking out in 2008, while risk-asset prices are merely buoyed by aggressive global monetary easing, Wakabayashi said.

   

  As the accommodative policy has failed to end global deflation and artificially inflated risk-asset values are running out of steam, the dollar’s strength is reminiscent of the yen’s appreciation that hurt the Japanese economy during decades of price declines, he said.

   

  “The U.S. will have to eventually resort to a weak dollar policy as deflation deepens,” Wakabayashi said.

  We leave it to "Mad Dog" to sum up…

  “It’s obvious the U.S. is headed for deep deflation, hurt by the strong dollar,” said Wakabayashi, 72. “The Fed raising rates in this environment is not only ridiculous but harmful. U.S. stocks are plunging, not because of the prospect of a Fed rate hike, but to prevent it.”

  

  

  

  

  

• Humans Are No Longer The Apex Predator In Capital Markets (But We Act As If We Are)

  Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

  I’m a good poker player. I know that everyone says that about themselves, so you’ll just have to take my word for it. I’m also a good stock picker, which again is something that everyone says about themselves. At least on this point I’ve got a track record from a prior life to make the case. But I don’t consider myself to be a great poker player or a great stock picker. Why not? Because I get bored with the interminable and rigorous discipline that being a great poker player or a great stock picker requires. And I bet you do, too.

  To be clear, it’s not the actual work of poker playing or stock picking that I find boring. I could happily spend every waking moment turning over a new set of cards or researching a new company. And it’s certainly not boring to make a bet, either on a hand or a stock. What’s boring is NOT making a bet on a hand or a stock. What’s boring is folding hand after hand or passing on stock after stock because you know it’s the right thing to do. The investment process that makes a great poker player or a great stock picker isn’t the research or the analysis, even though that’s what gets a lot of the attention. Nor is it the willingness to make a big bet when you believe the table or the market or the world has given you a rare combination of edge and odds, even though that’s what gets even more of the attention. No, what makes for greatness as a stock picker is the discipline to act appropriately on whatever the market is giving you, particularly when you’re being dealt one low conviction hand after another. The hardest thing in the world for talented people is to ignore our mental “shriek of unused capacities”, to use Saul Bellow’s phrase, and to avoid turning a low edge and odds opportunity into an unreasonably high conviction bet simply because we want it so badly and have analyzed the situation so smartly. In both poker and investing, we brutally overestimate the edge and odds associated with merely ordinary opportunities once we’ve been forced by circumstances to sit on our hands for a while.

  As David Foster Wallace puts it so well, “the really interesting question is why dullness proves to be such a powerful impediment to attention.” Why do we increasingly suffer from a “terror of silence” where we use electronic information devices to fill the void? Why are most of you reading this note with at least one TV screen showing CNBC or Bloomberg within easy viewing distance? How many of us are bored to tears with the Fed’s Hamlet act on raising rates, and yet have been staring at this debate for so long that we have convinced ourselves that we have a meaningful view on what will transpire, even though it’s a decision where we have zero investing edge and unknowable risk/reward odds. I’m raising my hand as I re-read this sentence.

  The biggest challenge of our investing lives is not finding ways to process more information, or even finding ways to process information more effectively. Our biggest challenge is finding the courage to focus on what matters, to admit that more or quicker information will not help our investment decisions, to recognize that our investment discipline suffers mightily at the hands of the impediment of dullness. Because let’s be honest… the Golden Age of the Central Banker is a really, really dull time for a stock-picking investor. I’m not saying that the markets themselves are dull or that market price action is boring. On the contrary, this joint is jumping. I’m saying that stock pickers are being dealt one dull, low conviction hand after another by global Central Banks, even though they’re forced to sit inside a glitzy casino with lots of lights and sounds and exciting gambling action happening all around them. We have little edge in a Reg-FD public market. We have at best unknowable odds and at worst a negatively skewed risk/reward asymmetry in a market where policy shocks abound. And yet we find ways to convince ourselves that we have both edge and odds, making the same concentrated equity bets we made back in happier times when idiosyncratic company fundamentals and catalysts were actually attached to a company’s stock price. Builders build. Drillers drill. Stock pickers pick stocks. We can’t help ourselves, even if the deck is stacked against us here in the only game in town.

  Investment discipline suffers under the weight of dullness and low conviction in at least four distinct ways here in the Golden Age of the Central Banker.

  First, just as there’s a winner on every poker hand that you sit out, there’s a winner every day in the markets regardless of whether or not you are participating. The business risk of sitting out too many hands weighs heavily on most of us in the asset management or financial advisory worlds. We can talk about maintaining our investment discipline all we like, but the truth is that all of us, in the immortal words of Bob Dylan, gotta serve somebody. If we’re not telling our investors or our board or our CIO that we have high conviction investment ideas … well, they’re going to find someone else who WILL tell them what they want to hear. And for those lucky few of you reading this note blessed with access to more or less permanent capital, I’ll just say that the conversations we have with ourselves tend to be even more pressuring than the conversations we have with others. No one forces me to “make a play” when I have a middle pair and a so-so kicker, but I’ve somehow convinced myself that I can take down a pot just because I’ve been playing tight for the past hour. No one forced Stanley Druckenmiller – one of the truly great investors of our era – to top-tick the NASDAQ bubble when he bought $6 billion worth of Internet stocks in March 2000. Why did he do it?

  So, I’ll never forget it. January of 2000 I go into Soros’s office and I say I’m selling all the tech stocks, selling everything. This is crazy at 104 times earnings. This is nuts. Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two gun slingers. They didn’t have enough money to really hurt the fund, but they started making 3 percent a day and I’m out. It is driving me nuts. I mean their little account is like up 50 percent on the year. I think Quantum was up seven. It’s just sitting there.

   

  So like around March I could feel it coming. I just … I had to play. I couldn’t help myself. And three times during the same week I pick up a phone but don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So maybe I learned not to do it again, but I already knew that.

  If living in the NASDAQ bubble can make Stan Druckenmiller convince himself that stocks trading at >100x earnings were a high conviction play only a few months after selling out of them entirely, what chance do we mere mortals have in not succumbing to 6-plus years of the most accommodative monetary policy in the history of man?

  Second, every facet of the financial services industry is trying to convince you to play more hands, and we are biologically hard-wired to respond. I don’t have a good answer to Wallace’s question about why we all fear the silence and all feel compelled to fill the void with electronically delivered “information”, but I am certain that the business models of the Big Boy information providers all depend on Flow. So you can count on the “information” that we constantly and willingly beam into our brains being geared to convince us to join the casino fun. My favorite character in the wonderful movie “Up” is Dug the dog, who despite his advanced technological tools is a prisoner of his own biology whenever he hears the signal “Squirrel!”. We are all Dug the dog.
   

  

  Third, Central Bankers have intentionally sown confusion in our ranks. Like the barkers on CNBC and the sell-side, the Fed and the ECB and the BOJ and the PBOC are determined to force us into riskier investment decisions than we would otherwise choose to make. This is the entire point of extraordinary monetary policy over the past 6 years! All of it. All of the LSAPs, all of the TLTROs, all of the exercises in “Communication Policy” … all of it has been designed with one single purpose in mind: to punish investors who choose to sit on their hands and reward investors who make a bet, all for the laudable goal of preventing a deflationary equilibrium. And as a result we have the most mistrusted bull market in history, a bull market where traditional investment discipline was punished rather than rewarded, and where any investor who hasn’t been totally hornswoggled by Fed communication policy is now rightly worried about having the policy rug pulled out from underneath his feet.

  Or to make this point from a slightly different perspective, while there is confusion between the concepts of investing and allocation in the best of times, there is an intentional conflation of the two notions here in the Golden Age of the Central Banker. The Fed wants to turn investors into allocators, and they’ve largely succeeded. That is, the Fed doesn’t care about your picking one stock over another stock or one sector over another sector or one company over another company. They just want to push you out on the risk curve, which for the vast majority of investors just means buying stocks. Any stock. All stocks. This is why the quality bias that most investors have – preferring solid management, strong balance sheets, and good cash flow generation to their opposites – has been largely immaterial as an investment factor (if not an outright drag on investment returns) over the past 6 years. If the King is flooding the town with easy credit, the deadbeat tailor will do relatively better than the thrifty mason every time. But try telling a true-believer that quality is just an investment factor, no more (and no less) privileged than any other investment factor. Honestly, I’ll get 50 unsubscribe emails just for writing this down.

  Fourth, our small-number brains are good local data relativists, not effective cross-temporal or global data evaluators. Okay, that’s a mouthful. Translation: the human brain has evolved over millions of years and human society has been trained for tens of thousands of years to make sense of highly localized data patterns. Humans are excellent at prioritizing the risks and opportunities that they are paying attention to at any moment in time, and excellent at allocating their behavioral budget accordingly. It’s why we’re really good at driving cars or, in primate days of yore, surviving on the Serengeti plains. But if asked to compare the risks and rewards of a current decision opportunity with the risks and rewards of a decision opportunity last year (much less 10 years ago), or if asked to compare the opportunity we’ve been evaluating for months with something less familiar, we are utterly flummoxed. It’s not that we can’t remember or think on our feet, but there is an overwhelming attention and recency bias in human decision-making. That’s fine so long as we share the market with other humans, much less fine when we share the market with machine intelligences that excel at the information processing tasks we consistently flub. Whether it’s trading or investing, humans are no longer the apex predator in capital markets, but we act as if we are.

  So what’s an investor to do?

  I can sum it up in one deceptively simple sentence: You take what the market gives you.

  It’s deceptively simple because it implies a totally different perspective on markets than most investors (or allocators, frankly) bring to bear. It means approaching markets from a position of humility, i.e. risk tolerance, rather than from a position of hubris, i.e. return expectations. It’s all well and good to tell your financial advisor or your board or yourself that you’re “targeting an 8% return.” That’s great. I understand that’s your desire. But the market couldn’t care less what your desire might be. I think it’s so important to stop focusing on our “expectations” of the market, as if it were some unruly teenager that needs to get its act together and start doing what it’s told. It’s madness to anthropomorphize the market and believe that we can control it or predict its behavior. Instead, we need to focus on what we CAN control and what we CAN predict, which is our own reaction to what a stochastically-dominated social system like the market is going to throw at us over time. Tell me what your risk tolerance is. Tell me what path you’re comfortable walking. Then we can talk about the uncorrelated stepping stone strategies that will make up that path to get you where you want to go. Then we can talk about sticking to the path, which far more often means keeping risk in the portfolio than taking it out. Then we can talk about adaptively allocating between the stepping stone strategies as the risk they generate today differs from the risk they generated in the past. Maybe you’ll get lucky and one of the strategies will crush it, like US equities did in 2013. Excellent! But aren’t we wise enough to distinguish allocation luck from investment skill? I keep asking myself that rhetorical question, but I’m never quite happy with the answer.

  You know, there’s this mythology around poker tournaments that the path to success is a succession of all-in bets where you “read” your opponent and make some seemingly brilliant bluff or call. I’m sure this mythology is driven by the way in which poker tournaments are televised, where viewers see a succession of exactly this sort of dramatic moment, complete with commentary attributing deep strategic thoughts to every action. What nonsense. The goal of great poker players is NEVER to go all-in. Going all-in is a failure of risk management, not a success. I’m exaggerating when it comes to poker, because the nice thing about poker tournaments is that there’s always another one. But I’m not exaggerating when it comes to investing. There’s only one Nest Egg (“Lost In America” is by far my favorite Albert Brooks movie), and thinking about investing and allocation through the lens of risk tolerance rather than return expectations is the best way I know to grow and keep that Nest Egg.

  Taking What The Market Gives You has specific implications for each of the four ways in which the Golden Age of the Central Banker weakens investor discipline.

  1) For the business risk associated with maintaining a stock-picking discipline and sitting out an equity market that you just don’t trust … it means taking complementary non-correlated strategies into your portfolio, as well as strategies that have positive expected returns but can make money when equities go down (like trend-following strategies or government bonds). It rarely means going to cash. (For more, see “It’s Not About the Nail”)

   

  2) For the constant exhortations from the financial media and the sell-side to try a new game at the market casino … it means taking what you know. It means taking what you know the market is giving you because you have direct experience with it, not taking what other people are telling you that the market is giving you. Here’s my test: if I hear a pitch for a stock or a strategy and I find myself looking around the room (either literally or metaphorically) to see how other people are reacting to the pitch, then I know that I’m being sucked into the Common Knowledge Game. I know that I’m at risk of playing a hand I shouldn’t. (For more, see “Wherefore Art Thou, Marcus Welby?”)

   

  3) For the communication policy of the Fed and the soul-crushing power of a risk-free rate that pays absolutely nothing … it means taking stocks that get as close as possible to real-world economic growth and real-world cash flows in order to minimize the confounding influence of Central Bankers and the game-playing that surrounds them. There’s nowhere to hide completely, as the volatility virus that started with the end of global monetary policy coordination in the summer of 2014 will eventually spread everywhere, but there’s no better place to ride out the storm than getting close to actual cash flows of companies that are determined to return those cash flows to investors. (For more, see “Suddenly Last Summer”)

   

  4) For the transformation of the market jungle into a machine-dominated ecosystem … it means either adopting the same market perspective as a machine intelligence through systematic asset allocation strategies, or it means focusing on niche areas of the market where useful fundamental information is not yet aggregated for the machines. In either case, it means leaving behind the quaint notion that you can do fundamental analysis on large cap public companies and somehow gain an edge or identify attractive odds. (For more, see “One MILLION Dollars”)

  One final point, and it’s one that seems particularly apropos after watching some bloodbaths in certain stocks and sectors over the past week or two. Investor discipline isn’t only the virtue of great investors when it comes to buying stocks. It’s also the virtue of great investors when it comes to selling stocks. I started Epsilon Theory a little more than two years ago in the midst of a grand bull market that I saw as driven by Narrative and policy rather than a self-sustaining recovery in the real economy. For about a year, I got widespread pushback on that notion. Today, it seems that everyone is a believer in the Narrative of Central Bank Omnipotence. What I find most interesting, though, is that not only is belief in this specific Narrative widespread, but so is belief in the Epsilon Theory meta-Narrative … the Narrative that it is, in fact, Narratives that drive market outcomes of all sorts. My hope, and at this point it’s only a hope, is that this understanding of the power of Narratives will inoculate a critical mass of investors and allocators from this scourge. Because the same stories and Narratives and low conviction hands that shook us out of our investment discipline on the way up will attack us even more ferociously on the way down.

  

  

  

  

  

• Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can't Pay The Interest On Their Debt

  Earlier today, Macquarie released a must-read report titled “Further deterioration in China’s corporate debt coverage”, in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with “uncovered debt”, or those which can’t even cover a full year of interest expense with profit.

  The report’s centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x.

  As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the “percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample.”

  

  To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in “uncovered debt” companies) of cash flows, was generally known.

  What wasn’t known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector.

  We now know, and the answer is truly terrifying.

  Macquarie lays it out in just three charts.

  First, it shows the “debt-coverage” curve for commodity companies as of 2007. One will note that not only is there virtually no commodity sector debt to discuss, at not even CNY1 trillion in debt, but virtually every company could comfortably cover their interest expense with existing cash flow: only 4 companies – all in the cement sector – had “uncovered debt” 8 years ago.

  

  Fast forward to 2013 when things get bad, as about a third of all corporations are now unable to cover their annual interest expense, even as the total addressable corporate debt has soared to CNY4 trillion for just the commodity sector.

  

  And then in 2014, everything just falls apart. Quote Macquarie, “more than half of the cumulative debt in this sector was EBIT-uncovered in 2014, and all sub-sectors have their share in the uncovered part, particularly for base metals (the big gray bar on the right stands for Chalco), coal, and steel.”

  Compared with the situation in 2013, while almost all sub-sectors did worse in 2014, but things appear to have worsened faster for coal companies as more red bars have moved beyond the 100% critical level for EBIT-coverage.

  It means that last year about CNY2 trillion in debt was in danger of imminent default.

  

  The situation since than has dramatically deteriorated.

  So are we now? Macquarie again: “Given the slumps in metal and coal prices so far this year, it’s quite likely the curve will have deteriorated further for commodity firms this year, with total debt getting better in the meantime.“

  In other words, it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can’t even generate the cash to pay down the interest on their debt, let alone fund repayments.

  We fully expect this to be the source of the next market freakout: when the punditry turns its attention away from macro China, which has more than enough problems to begin with, and starts to focus on the cash flow devastation in China at the micro, or corporate, level.

  

  

  

  

• Drug Shortages, Price Gouging, And Our Broken Health Care System

  Submitted by Michael Accad via The Mises Institute,

  The shaming campaign that followed last week’s news of two generic drug prices somersaulting into the stratosphere after being acquired by private companies is not too surprising. The idea that a drug which cost $13.50 one day can cost $750 the next, seemingly on the whim of greedy Wall Street investors and pharma start-ups, is fodder for the outrage machine.

  But what the outrage machine does not realize is the extent to which the generic healthcare supplies are constantly on the brink of shortage.

  Every week I get a “drug shortage report” by email from my hospital. It lists the various items in short supply. Some drugs (for the most part generic ones) may even be absent from the shelves. And every week, the email also reminds me that there is a national shortage of normal saline.

  

  Normal saline, for heaven’s sake!

  What’s going on? Is our productive capacity in such a shamble that we can’t have the wherewithal to mix sterile salt and water and put it into a bag? Let’s go back to the basics.

  Remember that in order for any product to be available in a sustainable way, there must be a supplier willing to make it and a buyer willing to pay for it at the price the supplier expects. Multiple buyers bid the price up, multiple suppliers bid it down.

  It seems that for something as commodified as normal saline, making plenty of it should not be too much of a problem. After all, there is no shortage of #2 pencils, even if the profit margin on pencils is minuscule.

  Welcome to our glorious world of regulated health economics.

  On the buyer side, you have hospital administrators which have been trained to operate under the reality of fixed payments and onerous oversights. Every expense is a cost that cannot be passed on to the ultimate “consumer” of the good. Therefore, the lower the price of supplies, the better.

   

  On the supply side, the regulatory apparatus overseeing the making of medical products is not known for its flexibility. The last thing bureaucrats want is any intimation that they are not tough enough on bugs and safety. Manufacturers must follow rules which have no regard for market realities and for how much the intended customer will be willing to spend for the product. For something like normal saline, profit margins become dangerously thin and may even be negative.

  In such an environment, the tendency is for consolidation and bureaucratization. Manufacturers with disappearing profit margins merge. Indeed, we are left with a handful of mega-suppliers of hospital commodities. Purchasers also consolidate into large hospital chains or pool their buying resources into purchasing cooperatives.

  These impersonal buyers and sellers, who are further and further removed from the ultimate use of the product, bundle purchases of commodities in large bulks. Normal saline is now bought and sold as a package deal with all sorts of other sundries, like toilet paper, tooth paste, and plastic tubs.

  With the bundling of commodities, the system is prone to miscalculate supply and demand predictions. Demand predictions cannot be made with great accuracy because of the more centralized nature of the enterprise. And if a mismatch were to occur, no one would be held accountable. “There’s a shortage!” administrators on either side would say fatalistically.

  Now, if we’re teetering on the brink of a shortage with something as widely needed and as easily produced as normal saline, it’s only to be expected that we would face actual shortages of generic drugs for rare diseases.

  For the drug maker, the regulatory costs are unchangeable, whether the drug is used by many or by few. At the other end of the transaction, buyers are third-party payers whose interests and willingness to pay do not reflect the needs of the ultimate consumer. Producing generic drugs in such conditions offers no great hope of sustainability.

  Under normal circumstances, if the economics of a product are such that it cannot be manufactured in the country except at a loss, an extremely effective safety valve is provided by the importation market. Lower foreign manufacturing costs can ensure an additional source of supply for the good.

  Not so in healthcare, not so.

  Our wise legislators, encouraged by the pharmaceutical industry and supported by the entrenched regulatory bureaucracy, have decided that importing medications from the outside is a big no-no. “It wouldn’t be safe!” they claim.

  Not safe when we can produce plenty, perhaps. But safer than an actual shortage? Ergo, an opportunity for the “price gouger” about whom we should also add a few words.

  First of all, to the extent that some patients are able to obtain access to the treatment after the price hike, the price gouger provides at least a modicum of service. In her absence, there may be no drug available at all.

   

  Second, “price gouging” is a loose term that has no real economic meaning. There is no particular price increase that defines it. Nowhere in the press will we find what the “break-even” price might be for making cycloserine or pyrimethamine, to inform us of the magnitude of the expected profit.

   

  As a matter a fact, the break-even price of any product can only be guesstimated, and the only one effectively willing to make that guess is the entrepreneur who engages and risks her assets. We must keep in mind that every entrepreneurial activity, however obnoxious it may seem to us, involves incommensurable risk or uncertainty.

   

  It is not in the realm of the impossible, for example, that a price gouger could find himself losing money, even with a 5,000 percent initial price increase: under such conditions, patients and doctors may figure out alternative modes of treatment with existing drugs or (a happy outcome!), deregulation could allow the importation of these drugs from outside, thus evaporating the expected profit.

   

  Third, to the extent that she wakes us up from our stupor, the price-gouger serves as a very effective signaling mechanism, telling us of a gaping unmet need she has managed to find a temporary solution for — however unpleasant and expensive her pill may be to swallow. She thus necessarily invites competitors to follow suit, or prompt us to re-examine the particular economic and regulatory environment that has fostered the shortage in question.

  In a certain sense, then, the character assassination directed at the price gouger is akin to shooting the messenger pointing to the brokenness of our healthcare system. Perhaps it is to that system that the shaming should be directed.

  And we may wish to do that fast. Normal saline could be the next vital supply to dry up.

   

  

  

  

  

  

• Oregon Community College Shooter Asked Victims To "State Their Religion" Before Executing Them

  Update: Details are trickling in about the latest mass shooting in the US and at least some reports indicate that the tragedy might have been tied to religion.

  Here’s a bit of color from The Oregonian:

  The shooter at Umpqua Community College on Thursday asked people to state their religion and then started firing, one student said.

   

  Kortney Moore, an 18-year-old, told the News Review she was sitting in her writing class when a bullet blasted through the window. She saw her teacher shot in the head then noticed that the shooter was in the classroom.

   

  Moore said the shooter told people to get on the ground. He then asked people to stand up and state their religion but started firing anywhere. She was on the ground next to people who’d been shot.

  And here’s USA Today:

  One student, Kortney Moore, 18, told News Review-Today that she was in her writing class in Snyder Hall when a single shot came through a window.

   

  Moore said she saw her teacher get shot in the head, apparently after the gunman came into the classroom. At that point, Moore told the newspaper, the shooter ordered everyone to get on the ground. The shooter then asked people to stand up and state their religion and then started firing, Moore said..

   

  A witness at the scene in Roseburg said the male shooter was shot by police and was acting alone, according The Register-Guard  of Eugene. The report could not be immediately confirmed.

  Finally, here’s The New York Times:

  A 20-year-old man went on a shooting rampage at a community college in Roseburg, Ore., on Thursday, killing multiple victims and injuring at least 20. Officials said the gunman died after an exchange of gunfire with the police.

  Accounts of how many people were dead varied, with officials in the office of the Oregon attorney general, Ellen F. Rosenblum, putting the number at 13.

   

  “We are just heartbroken here in Oregon that an act of this magnitude has occurred in our state,” Ms. Rosenblum told MSNBC. She cautioned that the situation was still developing.

   

  A student, Brady Winder, 23, who moved to Roseburg from Portland three weeks ago, said he was in a room in Snyder Hall adjacent to where at least one shooting took place.

   

  “I heard at least nine shots,” he said.

   

  “There’s a door connecting our classroom to that classroom, and my teacher was going to knock on the door,” Mr. Winder said. “But she called out, `Is everybody O.K.?’ and then we heard a bunch more shots. We all froze for about half a second.”

   

  “We heard people screaming next door,” he said. “And then everybody took off. People were hopping over desks, knocking things over.”

  The tragedy is the latest in a string of violence that most recently included the murder of a Virgina TV reporter and cameraman on air and which just months ago saw nine people killed at an African American church in Chareleston, South Carolina. 

  *  *  *

  Update: the shooter has been killed following a firefight with sheriff deputies:

  LATEST: Gunman in Umpqua Community College shooting killed in firefight with sheriff’s deputies https://t.co/YBlzoOIuuc #UCCShooting

  — NBC News (@NBCNews) October 1, 2015

  BREAKING: Oregon Gov. Kate Brown says gunman in mass shooting at college was 20-year-old male.

  — The Associated Press (@AP) October 1, 2015

  MORE: Shooter in #UCCShooting was 20-year-old male, says Oregon governor https://t.co/YOBbW312BS – @CBSNLive pic.twitter.com/24QaiPYkwr

  — CBS News (@CBSNews) October 1, 2015

   

  * * *

  Moments ago, following a lull in reports of US mass killings, the newswires lit up with reports of the latest “active shooter” incident this time on the campus of Umpqua Community College in Oregon, where according to KATU 2 News, 14 people were killed and at least 20 injured in what is still a developing situation.

  The Oregonian reports:

  A shooter has been reported at Umpqua Community College, according to the Douglas County Fire District’s Twitter account. It’s unclear how many wounded or if the shooting is still ongoing at the Roseburg campus.  Sgt. Dwes Hutson, a Douglas County Sheriff’s Office spokesman, says officers responded around 10:40 a.m. to reports of a shooting at the College. Huston could not confirm if anyone was injured.

  The LA Times adds that the injured include a woman who was shot in the chest, said Chris Boice, a Douglas County commissioner. The shooting began within the last 30 minutes at Umpqua Community College. 

  The good news: the shooter is “down and in custody,” Boice said.

  
  

  MORE: Sheriff’s office tells CBS News threat is over at Umpqua Community College https://t.co/PwXThs4WO2 pic.twitter.com/JMorBEU6DQ

  — CBS News (@CBSNews) October 1, 2015

  More details:

  Oregon State Police confirm 15 dead in #UCCShooting. #LiveOnK2

  — KATU News (@KATUNews) October 1, 2015

  #BREAKING: UPDATE: Oregon State Police say 15 confirmed dead in mass shooting at Oregon’s Umpqua Community College in Roseburg. — @KATUNews

  — Tim Williams (@realtimwilliams) October 1, 2015

  #BREAKING: Oregon State Police say at least 10 killed people, 20 others injured in shooting at Oregon’s Umpqua Community College in Roseburg

  — Tim Williams (@realtimwilliams) October 1, 2015

  Police: Preliminary reports indicate 10 killed, 20 others injured in shooting at Oregon’s Umpqua Community College. https://t.co/k2gnvMc29u

  — CNN Breaking News (@cnnbrk) October 1, 2015

  Active shooter reported at Umpqua Community College. One person reported shot.

  — Ian Campbell (@MrCampbell17) October 1, 2015

  Shots fired on UCC campus. Lock down and do not come to campus until further notice.

  — John Blackwood (@jblackwooducc) October 1, 2015

  Scanner reporting approx 20 are wounded #UCCShooting

  — Ian Campbell (@MrCampbell17) October 1, 2015

  Multiple ambulances driving very fast AWAY from #UCCShooting

  — Ian Campbell (@MrCampbell17) October 1, 2015

  Authorities still unsure of whether the suspect has been apprehended at #UCCShooting

  — Ian Campbell (@MrCampbell17) October 1, 2015

  * * *
  And then this:

  A student tweets about shooting at her Oregon community college, and TV producers ask if she can call them right now pic.twitter.com/41Tn9Mc5Tf

  — Matthew Haag (@matthewhaag) October 1, 2015

  

  

  

  

• US Mint Sees Record Silver Sales In Q3 As Physical Demand "Is Absolutely Through The Roof"

  Having recently pointed out the surging premiums for physical gold and silver relative to the 'paper' prices spewed forth by the mainstream media, it will likely come as no surprise that, as Reuters reports, "silver [coin] demand is absolutely through the roof," according to the Perth Mint. Confirming the demand side is the U.S. Mint sold 14.26 million ounces of American Eagle silver coins in the third quarter, the highest on records going back to 1986. Dealers and mints trace the supply squeeze to a burst of buying by mom-and-pop investors in the United States, who scrambled to scoop up coins they considered to be at bargain levels after spot silver prices in early July sank to six-year lows.

   

  As Reuters reports,

  The global silver-coin market is in the grips of an unprecedented supply squeeze, forcing some mints to ration sales and step up overtime while sending U.S. buyers racing abroad to fulfill a sudden surge in demand.

   

  The U.S. Mint began setting weekly sales quotas for its flagship American Eagle silver coins in July because it can't meet demand, and the Canadian mint followed suit after record monthly sales in July. In Australia, the Perth Mint sold a record of more than 2.5 million ounces of silver this month, nearly four times more than in August, and has begun rationing supply of a new line of coins this month, a mint official said.

   

  "Silver [coin] demand is absolutely through the roof," said Neil Vance, wholesale manager at the Perth Mint.  "There seems to be a bit of frenzy as people think there is a shortage of silver. But in fact it is a (crunch in) manufacturing capacity."

   

  While demand has risen in response to the slump in spot prices to $14.33 an ounce in late July and its subsequent drop to fresh six-year lows below $14 an ounce in August, mint officials also said they were caught out by the sudden interest in coins. In July, the U.S. mint halted sales for almost three weeks after running out of "blanks", which are used to make coins.

  The spread between silver and gold, a closely watched gauge for the precious metals markets, has risen to its highest in the third quarter since a brief silver frenzy following the financial crisis. Silver coins typically outsell gold anyway because they cost less, but the wide spread meant the silver price is 76 times cheaper than gold, making it even more appealing than usual to investors.

  The U.S. Mint sold 14.26 million ounces of American Eagle silver coins in the third quarter, the highest on records going back to 1986. The Canadian mint has been limiting sales of its silver Maple Leaf coins since July after record monthly sales that month, an official told Reuters. Sales were at all-time highs in August and September.

  With North American mints overwhelmed by orders, investors and collectors were forced to look overseas for increasingly scarce supplies, triggering a domino effect in Europe and Asia.

  "We can only get a fraction of what we could sell," said Terry Hanlon, president of Dillon Gage, one of the world's biggest precious metals dealers, based in Addison, Texas.

   

  Hanlon said he has seen premiums for coins, which are paid on top of the spot price for physical delivery, surge to about $4 to $5 per coin in wholesale deals, compared with $2.30 in June.

   

  

  For now, however, coin dealers are riding the wave.

  Bullion dealers around the globe who typically offer next-day delivery are now taking silver coin orders several weeks out.

   

  "I don't expect things to get better until next year," said Gregor Gregersen, founder and director of retailer Silver Bullion based in Singapore.

  

  

  

  

  

• "There Are Five Times More Claims On Dollars As Dollars In Existence" – Why This Matters

  Submitted by Paul Brodsky of Macro Allocation

  
  

  According to the Fed, there is about $60 trillion of US Dollar credit (claims for US dollars):

  

   

  Also according to the Fed, there are about $12 trillion US dollars:

  

   

  So, the data show plainly there are five times as many claims for US dollars as US dollars in existence. Does this matter to investors?

  Well, yes, it matters a lot. Not only is there not enough money to repay outstanding debt; the widening gap between credit and money is making it more difficult to service the debt and more difficult for nominal US GDP to grow through further credit extension and debt assumption. Remember, only a dollar can service and repay dollar-denominated debt. Principal and interest payments cannot be made with widgets or labor, only dollars.

  This means that future demand and output growth generated through more credit issuance and debt assumption is self-defeating. In fact, it adds to the problem. Credit-generated growth is not growth in real (inflation-adjusted) terms because rising GDP, which engenders an increase in money, is also accompanied by a larger increase in claims on that money. Why larger? Because debt comes with interest.

  By definition then, debt compounds while real growth does not. In fact, economies naturally economize because innovation and competition tend to drive prices lower. This natural deflation works against debt service and repayment that needs perpetual inflation.

  As we know, for thirty years beginning in the early 1980s the Fed helped the US and global economies grow consistently more or less by reducing interest rates, which gave consumers of goods, services and assets incentive to take on more debt. Following the inevitable debt crisis in 2008, the Fed had to reduce the overnight interest rate it targets to zero percent.

  As we also know, to keep the economy growing from there, the Fed then had to begin creating money, which it did through quantitative easing (QE). It bought assets directly from the money center banks it deals with (primary dealers), and paid for them with the newly created money. At the same time, the Fed paid these banks – and continues to pay them – interest on the money they created for them (Interest on Excess Reserves). This provides a disincentive for banks to lend to the public, which is how the Fed is trying to control US growth and inflation today.

  The long and the short of this discussion is that either the Fed and other central banks overseeing highly leveraged economies must inflate their money stocks and get the new money into the hands of debtors, or inflate their money stocks and get the new money to creditors. The former would make systemic debt service and repayment easier. The latter would keep creditors solvent when debtors inevitably default. The economic impact of getting new money in the hands of debtors would be significant inflation. The economic impact of creating more bank reserves would be significant economic austerity (a full-blown depression). Why? Because debtors would be increasingly starved of the ability to service and repay debt.

  Impact on Assets

  Investors might ask themselves how two pools of dollar-denominated assets can be valued collectively at $38 trillion ($19 trillion each for US Treasuries and US equities), when there is only $12 trillion in existence? Not only does this gross imbalance not include the market value of other assets, like other bonds and real estate; it also does not include the value of the US private capital stock, such as inventory, resources, enterprises, and collectibles. (Economists might want to think about this too.)

  In short, the value of dollar-denominated assets is not supported by the money with which it is ostensibly valued. This has not been a problem historically because the proportion of un-reserved credit has been low relative to asset values and cash flow. As we are seeing today, however, it is becoming a significant problem because balance sheets are already highly levered and zero-bound interest rates chokes off the incentive to refinance asset prices higher.

  If the total value of US denominated assets is, say, $100 trillion, and the US dollar money stock is somewhere around $12 trillion, then the inescapable implication is that the market’s expects either: a) $88 trillion more US dollars will be created in the future to fund the purchase of the gross asset pool at current valuations; b) there has to be a decline in the nominal value of aggregate assets, or; c) both.

  Obviously there never has to be a full exchange of assets for money because there will always be asset holders wishing to keep their assets. But that is not the point. The issue is that there is a significant rate of inflation embedded in the currency (clearly higher than 2% targeted by the Fed), and/or a significant rate of deflation embedded in assets.

  What forces the issue? Production, or the lack thereof. If/when the value of asset prices exceed the value of production by an amount that disincentives production, GDP will contract.

  Warren Buffet is famous for considering the total market capitalization of US equities against GDP. While this Market Cap-to-GDP ratio provides a clue as to how easy or difficult it may be at any point in time for public companies to generate higher revenues and earnings relative to past equity markets, it does not consider the dynamic driving demand for goods and services in the broader economy.

  In other words, it does not consider what actually drives GDP. The presumption is that nominal GDP will always grow. This is not necessarily a bad assumption (in fact it is a reasonable one for reasons we will discuss next week), but it does not consider how the pursuit of nominal growth in today’s macro environment will actually reduce real growth and real ROI.

  It is that easy. We think there will continue to be an inflationary deleveraging in the US and across the world, and ultimately significant widespread inflation. More on this next week.

  Mr. Buffet and most investors have not had to be concerned during the secular leveraging phase with output contraction in real terms, and so they have not had to be concerned with negative real ROIs. Looking forward, we think it is becoming increasingly obvious that wealth and alpha will be created by allocating capital to assets in which price and real value are closely aligned.

  Un-levered assets should outperform levered assets. Businesses that sell to less levered consumers should outperform businesses that sell to levered consumers; and so on.

  

  

  

  

• Wall Street Banks Admit They Rigged CDS Prices Too

  Back in June, we noted that a group of investors which included hedge funds, pension funds, university endowments, and others were looking to push forward with a lawsuit that alleged Wall Street had conspired to limit competition in the CDS market. 

  Of course the whole case was based on what amounts to tautological reasoning. 

  That is, everyone knows that Markit effectively monopolized the CDS market and because Markit was owned by Wall Street, it was self evident that big banks both monopolized and manipulated the market. 

  Amusingly, one of the firms that plaintiffs alleged was kept out of the credit default swap market as a result of Wall Street’s absolute stranglehold was Citadel. As we joked a few months back, this meant that by conspiring to keep the Fed’s plunge protection team shut out in 2008, Markit and Wall Street robbed the world of the chance to see what happens when VIX 90 meets HFT, meets CDS market making.

  In any event, earlier this month, the Street agreed to settle for nearly $2 billion and today we learn that none other than JP Morgan – whose offshore, taxpayer sponsored hedge fund at CIO seems to have quite a bit of trouble trading CDX without losing billions – is set to bear the brunt of the pain. Here’s Bloomberg: 

  JPMorgan Chase & Co. is set to pay almost a third of a $1.86 billion settlement to resolve accusations that a dozen big banks conspired to limit competition in the credit-default swaps market, according to people briefed on terms of the deal.

   

  JPMorgan is paying $595 million, with the lender’s portion of the accord largely based on the plaintiffs’ measure of market share, said the people, who asked not to be identified because the firms haven’t disclosed how they’re splitting costs. The settlement also enacts reforms making it easier for electronic-trading platforms to enter the CDS market, according to a statement Thursday from the attorneys for the plaintiffs, which include the Los Angeles County Employees Retirement Association.

   

  Morgan Stanley, Barclays Plc and Goldman Sachs Group Inc. are paying about $230 million, $175 million and $164 million, respectively, the people said. Plaintiffs’ lawyersdisclosed the approximate size of the settlement in Manhattan federal court last month, saying they were still ironing out details. They updated the total in Thursday’s statement.

   

  The accord averts a trial following years of litigation by hedge funds, pension funds, university endowments, small banks and other investors, who sued as a group. They alleged that global banks — along with Markit Group Ltd., a market-information provider in which the banks owned stakes — conspired to control the information about the multitrillion-dollar credit-default swap market in violation of U.S. antitrust laws.

  So yes, even the marks for the financial weapons of mass destruction that helped to destroy the financial universe were (and probably still are) manipulated, meaning that you can’t even bet against something without falling victim to big bank rigging. 

  Whether or not allowing other players (like Citadel) to enter the market will ultimately be a positive or a negative is anyone’s guess, but the bottom line is that at the end of the day, there wasn’t anything Wall Street didn’t control.

  Here is a system that ultimately allows banks to control the pricing for the instruments they use to bet against securities that they themselves create. This is just part and parcel of a never-ending paper wealth creation machine which generates billions in fiat money profits without creating anything in the way of tangible value and before it’s all over, this financialization of the US economy will likely end up bringing the world to its knees unless someone, somewhere puts a stop to the madness. 

  

  

  

  

  

• HFTs Have Devolved To Two-Bit Criminals Straight Out Of "Office Space"

  Back in October 2011, Zero Hedge was first to point out something previously unknown: a small, then-unheard of firm, managed to upstage none other than Goldman Sachs when it comes to total weekly program trading volume on the NYSE.

  Since then Latour, an affiliate of Tower Trading, has emerged as one of the pre-eminent HFT powerhouses in NYC. As we subsequently learned, Tower Research – which is run by Mark Gorton of LimeWire fame – is a member of the upstart Modern Markets Initiative, a lobby firm whose stated purpose is focused on “demonstrating the benefits of algorithmic or quantitative trading, often referred to as high-frequency trading, in today’s modern markets.”

  It has failed to do that.

  Instead, it has demonstrated, twice in the span of one year, that HFTs are nothing but two-bit, small-time criminals, intent on breaking all the rules, frontrunning clients, and otherwise abusing market ethics and norms.

  In short: HFTs rig markets constantly, and what’s worse: they are now getting so behind the curve, the SEC is catching them in the act on an almost daily basis.

  Which brings us back to Latour and September 2014, when one year ago the SEC – in its first enforcement action against a high-frequency trading firm – charged Latour Trading for using faulty calculations in complex trading strategies that let it buy and sell stocks without holding enough capital. The firm at times accounted for 9% of all U.S. stock trading, according to the SEC’s order.

  As the WSJ reminds us, Latour, which didn’t admit or deny wrongdoing, agreed to pay $16 million to settle the case, the largest penalty for a violation of the so-called net capital rule, the SEC said.

  The net capital rule provides various methodologies that broker-dealers need to follow to make sure they are adequately taking account of the risk they are exposed to from their market activities. Latour routinely violated those requirements from 2010 through 2011, the SEC said.

  Latour said it had “fully remediated the problems described in the Commission order, and we are pleased to put them behind us.”

  It was so pleased in fact, that it couldn’t wait to get busted for more manipulation.

  Fast forward to yesterday when the same Latour  was found to have violated even more SEC rules – in this case the Market Access Rule and Regulation National Market System – over a nearly four-year period in which Latour sent millions of non-compliant orders to U.S. exchanges.  According to the order:

  • Latour shared portions of its electronic trading infrastructure with its parent company, Tower Research.  Some Tower Research employees could change the computer code without Latour’s knowledge or approval.  Latour’s procedures to prevent such changes from having unintended effects on Latour’s trading proved inadequate.
  • In June 2011, Tower Research made a coding change that introduced an error into the shared infrastructure and, as a result, Latour sent millions of orders to exchanges that did not comply with the requirements of Regulation NMS.  Some of these orders were executed, which led to Latour receiving gross trading profits and also rebates paid by stock exchanges.
  • Latour lacked “direct and exclusive control” over its financial and regulatory risk management controls as required by the SEC’s Market Access Rule and did not have adequate post-trade surveillance tools to detect its non-compliant trades.
  • After learning of the error, Latour corrected many of the issues by October 2012 and addressed the rest by August 2014.

  Some more details:

  According to the SEC’s order, from October 2010 through August 2014, Latour sent approximately 12.6 million orders for more than 4.6 billion shares that did not comply with the requirements of Regulation NMS.  The orders at issue were intermarket sweep orders (ISOs), which trading centers may immediately execute at prices that might otherwise appear to violate Rule 611 of Regulation NMS.  Rule 611 generally requires trades to be executed at the best available displayed price, but trading centers may execute ISOs immediately based on the ISO router’s obligation to send additional orders to execute against any better-priced displayed quotations.  Chiefly because of the coding problem, Latour’s ISOs did not meet the requirements and caused more than 1.1 million trade-throughs (trades executed at a price worse than the best available price) and more 1.7 million locked or crossed markets (when the national best bid equals or exceeds the national best offer).   Latour also sent non-compliant ISOs as a result of incorrectly relying on information about orders that Latour had previously sent.  In addition to violations of the Market Access Rule, the SEC’s order also finds that Latour violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Reg NMS.

  How much money did Latour make? 

  “Latour sent nearly 12.6 million non-compliant ISOs between October 2010 and August 2014. These non-compliant ISOs caused approximately 1.1 million trade-throughs and 1.7 million locked or crossed protected quotations. Latour received $2,784,875 in gross trading profits and exchange rebates from its non-compliant ISOs.”

  So the “error” resulted in a magical $2.8 million in profits. Of course, this is only on the rigging that the SEC did catch. One can imagine how many millions in other profits Latour extracted by rigging the market and flaunting regulations, using illegal strategies that the SEC has no clue about. We doubt we will find out.

  To summarize: mysteriously and “erroneously” a change in the company’s  code was made, which the firm lacked “direct and exclusive control” over, and which was non-compliant with Reg NMS requirements, yet which mysteriously ended up generating “gross trading profits and rebates by stock exchanges” amounting to $2.8 million.

  Where have we seen this?

  Oh yes.

   

  And that’s what the secret sauce behind the HFT “wizards” that dominate the market has devolved to: a B-grade movie about two-bit crooks.

  * * *

  Oh, what was Latour’s penalty for getting caught rigging markets twice in one year? The answer: $8 million (following another $14 million settlement a year ago).

  Not a single algorithm, or 21-year-old math PhD, was perp walked.

  

  

  

  

  

• Apple, Amazon, Tesla and the Changing Dynamics of the Car Industry

  Writing is a very weird experience for me. Sometimes it feels almost like an act of divine intervention. Not because of the divinity of it, but because of the intervention part. It’s almost as if I were a conduit for a guy (at least I hope it’s a guy) inside my head trying to communicate with my readers. I sit down to write, and letters spill into words and then into sentences, and then I see these new ideas and find myself thinking, “Wow, I wish I’d thought of this!”

  After I submitted my previous column, on the financial innovation taking place at Apple, I learned that Sprint, T-Mobile and now Verizon are all fighting to best one another’s iPhone offers. What is really amazing about the situation is that no matter how this war among wireless carriers plays out, there will be one clear winner — Apple. And in the end, the carriers will be collective losers — they’ll be killing their margins to out-subsidize one another. They will be spending millions of dollars on advertising to get customers to come to their stores to buy — yes, Apple iPhones. If consumers choose Apple’s iPhone Upgrade Program instead of the carriers’, then Apple will win even bigger (as I argued in that column). In the meantime, 2015 will likely mark the year that AT&T’s and Verizon’s U.S. wireless service businesses went from growth to stagnation.

  Another observation about Apple: Its brand extends far beyond technology and coolness. Over the years, the company has accumulated incredible goodwill with consumers. There is only one other company that comes to mind that has generated a similar amount of affection: Amazon.com. Amazon made shopping online easy, its customer service is impeccable, and it is transparent with consumers about pricing. After all, it allows other merchants to sell their merchandise through its website. Amazon will even ship it for them.

  Consumers’ trust in Amazon’s pricing is so great that most people don’t even bother with comparison shopping anymore; they skip Google (which is not good news for Google, by the way) and go directly to Amazon. I recently found myself willing to pay a few dollars more on Amazon than on a competitor’s website because I knew that if I needed to return the product, the process would be seamless. That goodwill turns Apple and Amazon into “platforms” (a very trendy word on Wall Street now), allowing them to launch a wide variety of new products.

  When Apple comes out with the Apple car, rumored to be due in 2019, it will be able to grab a disproportionately large market share from the General Motors of the world because of that deep well of goodwill.

  By the time my youngest child, Mia Sarah, who is almost two, learns to drive, internal combustion engines will likely be a relic consigned to museums (just like Ford’s Model T). I had an “aha!” moment when I recently visited a Tesla store and saw its cars’ power train. It looks just like a skateboard — it basically consists of a flat slab of metal (which houses the battery), four wheels and an electric engine the size of a large watermelon. That’s it — the Tesla has only 18 moving parts. I don’t know how many moving parts an internal combustion engine (ICE) car has, but it must be hundreds if not thousands. Interestingly, ICE cars also have more electronics than a Tesla.

  Wall Street is going gaga over the stocks of dealerships (especially after Warren Buffett’s Berkshire Hathaway bought Van Tuyl Group) and car makers. I am in the minority, but I think that party will come to an end. Just like Tesla, Apple is not going to be using a dealership model to sell its cars. It would not want the Apple car buying experience to be tainted by a sleazy car salesman. Just as with the iPhone, the company will want to have complete control of the buying experience.

  If both Tesla and Apple bypass the dealership model, the GMs of the world will be at an even larger competitive disadvantage. They will have to abandon the dealership model too. Yes, I know, selling cars directly to consumers is not legal in many states, but if the U.S. Constitution could be amended 27 times, the law on car sales (which is an artifact of the Great Depression) can be amended as well.

  The traditional dealership model is unlikely to survive anyway, as its economics dramatically degrade in the electric-car world. A car that has very few moving parts and minimal electronics has few things to break; and consequently, electric cars will need less servicing — throttling the dealerships’ most important profit center.

  The baby boomer generation romanticizes cars. Most boomers can recite the horsepower and other engine specs of every car they have ever owned. For the tail end of Gen X (my generation) and Millennials, a car is an interruption betweenFacebook and Twitter. We know the brand of speakers in our car, but if asked would have to google its horsepower. We feel little romanticism for our cars and have much higher brand loyalty to Apple and Google than to GM or Ford.

  What is also amazing about electric cars is that they aren’t that much different from smartphones. Smartphone prices have declined significantly over the years because their components became ubiquitous and commoditized. With the exception of spark plugs and tires, most components of a GM car will be different from the ones you’ll find in a Ford. The opportunity for scaled manufacturing and so commoditization is very limited in the auto industry.

  The simplicity of electric cars and the declining ambition of Tesla, Apple and whoever else enters that space to be known as a “car” company will likely lead to commoditization of components and thus lower prices. Tesla today is more a software and battery company than a car company. (As we recently discovered, Volkswagen is a lot more of a “software” company than we thought.)

  Think back eight years ago to the day when Apple introduced the iPhone. No one suspected that it (and the smartphones that followed) would enable a service likeUber, which is busy putting cabdrivers worldwide out of business. The unforeseen consequences of the advent of electric cars will reverberate much farther than the demise of dealerships and significant shifts in market share in the auto industry.

  Gasoline can only be made from oil. (Yes, there is ethanol, but the economics of ethanol in the U.S. are problematic.) Sources of electricity are diverse — natural gas, coal, nuclear, solar, wind, hydro, oil (and I’m sure I’m forgetting something). Seventy percent of oil goes into cars and trucks. Just imagine for a second the shifts in global political alliances if oil lost its luster. The U.S. might forget how to spell “Saudi Arabia,” and the Middle East might start looking very different.

  Apple may find its 2019 date for the Apple car to be a bit optimistic, but nevertheless, its entrance into the auto industry will likely be successful and very disruptive. After all, it has the much-needed software know-how to design a car (it is already working with car companies on CarPlay, the iPhone-centered car infotainment system), it boasts a global network of stores, it has a deep well of goodwill with a billion fans globally, it possesses unlimited resources ($150 billion of net cash, and it generates $50 billion of free cash flows a year), and its imagination has not been damaged by decades of producing cars with internal combustion engines.

  Let me stress that last point. There is a very good reason why Nokia, which at one time was the dominant cellphone manufacturer, failed to compete with Apple’s iPhone. It had too much institutional knowledge. It had hundreds of engineers who tried to add IQ to a dumb phone. They were attempting to convert Symbian, a dumb phone operating system, into a smart phone operating system. Despite Apple showing Nokia how the smartphone should look, they couldn’t see their product as a smartphone but rather just as the next iteration of a dumb phone.

  General Motors’ answer to Tesla was not any different from Nokia’s response to the iPhone. GM came out with the Chevy Volt, which was really one of its internal combustion engine cars with an electric engine dumped in. Unless an ICE car company creates a silo unit isolated from the rest of the operation, it will be very difficult if not impossible to get engineers who have designed ICE vehicles all their lives to suddenly change the paradigm of their thinking and turn into electric-car engineers.

  This article was originally published on Institutional Investor .  Read Vitaliy’s II articles here.  

  Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books have been translated into eight languages.  Forbes called him – the new Benjamin Graham.   

  To receive Vitaliy’s future articles by email  click here.

  

  

  

  

• The Looming Medicaid Time-Bomb

  Submitted by Robert Romano via NetRightDaily.com,

  From 1985 through 2011, an average 11.7 percent of seniors were enrolled in Medicaid, primarily for long-term nursing home or home and community care, according to data compiled by the Centers for Medicare and Medicaid Services (CMS) and the Bureau of Labor Statistics.

  Keep that stat in mind, because if it remains true, as the Baby Boomers progress through old age, by 2030, as many as 8.7 million seniors could be enrolled in the program, up from 4.6 million today, an Americans for Limited Government analysis of the data reveals. By 2035, that figure could rise to about 9.3 million.

  And it will drive the costs of the program to the moon, particularly the costs for long-term nursing home and home care targeted at elderly and the physically disabled, which stood at $88.85 billion in 2013. Why?

  As the Urban Institute’s Melissa Favreault noted at the Department of Health and Human Services Assistant Secretary for Planning and Evaluation Long-Term Care Financing Colloquium on July 30, “We project that formal long-term services and supports use and costs will roughly track the growth in the aged population.”

  That is not good news, particularly considering the older age population wave now underway.

  By 2035, the number of seniors will have increased 66 percent to 79.2 million, the U.S. Census Bureau projects. 66 percent.

  As jaw-dropping as that is, in the meantime the population of those aged 15-64 will have barely increased 6.65 percent to 232.9 million.
  

  So, how will revenues ever keep up with costs if comparatively fewer Americans will be of working age as a percent of the overall population — for the rest of the century? We’re already running deficits and the answer is, they won’t.

  Consider, since 1995, the number of older Americans enrolled in Medicaid has only increased on a net basis by 11.6 percent. And yet, the costs for Medicaid nursing home expenditures are up 75 percent.

  If the above ratio holds, the annual tab for long-term care could be as high as half-trillion dollars. And that does not take into account non-seniors who will also be taking advantage of Medicaid.

  The explosion of long-term care costs for seniors will be true whether or not Medicaid expansion under the health care law is ever repealed, since qualifying for Medicaid as a senior predates the law’s enactment in 2010.

  Seniors constitute most of the costs for those long-term services, about 63 percent, CMS data from 2010 reveals. That includes about 71 percent of nursing home expenditures. As the number of Americans 65 years and older using the program doubles over the next 20 years, that figure should begin rising, along with seniors’ share of overall Medicaid spending.

  This puts states in particular in a rather alarming situation. The hundreds of billions that will be spent through Medicaid on long-term care for seniors will be in addition to the hundreds of billions more spent on non-seniors.

  Seniors only accounted for 6.7 percent of the 63.7 million Medicaid beneficiaries in 2010, and yet, made up almost a full quarter of benefits paid — $82.6 billion out of its $311 billion budget.

  And now, with Medicaid expansion, by 2024 alone, the Congressional Budget Office estimates there could be as many as 93 million Americans enrolled in the program as a whole.

  This will get out of control rapidly.

  To a certain extent, the health care law attempts to anticipate some of these challenges and included several financing schemes to boost funding for long-term care for the states. Whether their provision was sufficient, and if it was, whether they are sustainable when the money will have to be borrowed remains very much in question.

  Much of these schemes attempt to control the costs by replacing senior nursing home care to home care, probably on the presumption that there will not be enough beds and non-institutional care is hopefully cheaper. But even there, there are cost concerns.

  A new rule by the Department of Labor enforcing the Fair Labor Standards Act lifted exemptions to the Act that had previously excluded home care workers from minimum wage and overtime pay guarantees. Under the new regime, once the rule takes effect, the costs of home care will necessarily increase — and precisely at the time when demand for those services is about to skyrocket.

  Between the demographic time bomb about to go off – that is, the growth of the elderly population far exceeding the growth of the working age population by several orders of magnitude – and then the weak economy, the huge expansion of entitlements under the health care law, and the dramatic increases of the costs of those entitlements, including for labor, what could possibly go wrong?

  You do the math. And afterward, if you can figure a way out of this mess, please send a note to Congress. Because they probably have no clue what to do. Repealing the health care law’s Medicaid expansion for non-seniors is just the tip of the iceberg.

  

  

  

  

  

• Obama Delivers Statement On Today's Community College Mass Shooting

  The President speaks live about the mass shooting that wreaked havoc at an Oregon community college on Thursday:

  

  

  

  

  

• Oct 2 – Fed's Lacker: Rate Rise In October Possible

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 17/100 EXTREME FEAR

  PREVIOUS CLOSE: 21/100 EXTREME FEAR

  ONE WEEK AGO: 22/100 EXTREME FEAR

  ONE MONTH AGO: 9/100 EXTREME FEAR

  ONE YEAR AGO: 7/100 EXTREME FEAR 

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 16.72% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 22.55. This is a neutral reading and indicates that market risks appear low.

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

   

  PIVOT POINTS

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

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

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

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

   

  MEME OF THE DAY – BEIJING AFTER VOLKSWAGEN

   

  UNUSUAL ACTIVITY

  APPS Director purchase 127K @ 1.57

  JOY Director purchase 12,200  A  $ 14.77  , 4,346  A  $ 14.8 , 2,854  A  $ 14.81  , 2,265  A  $ 14.82 , 2,435  A  $ 14.83

  Z NOV 30 Puts @ 4.70 on the offer 1600 contracts

  MU Jan 5 Put Activity @ 0.18 on the offer

  BDSI NOV 6 Calls on the offer @ 0.80 1800+

  More Unusual Activity…

  HEADLINES

   

  Markit US Manufacturing PMI Sep F: 53.1 (est 53; prev 53)

  Fed’s Lacker: Rate rise in October possible

  Fed’s Williams: Repeats calls for hike sometime later this year

  Atlanta Fed GDPNow (Q3): 0.9% (prev 1.8%)

  ECB’s Weidmann: ECB should follow steady course

  ESM’s Regling: Greece should not expect big debt writedown

  EG’s Dijsselbloem sees no delay to the Greek aid program

  Spanish PM Rajoy: General election will be on December 20th

  BoJ Official: Little Immediate Need For Additional Stimulus

  EIA Natural Gas Storage Change Sep 25: 98 (est. 100, prev. 106)

  Teva Pharmaceuticals To Buy Rimsa For Approx. $2.3bln

  US auto sales soar, but Volkswagen down

  GM to cut $5.5bln in costs from 2015-2018

  Amazon to Ban Sale of Apple, Google Video-Streaming Devices

   

  GOVERNMENTS/CENTRAL BANKS

  Fed’s Lacker: Rate rise in October possible – WSJ

  Fed’s Williams: Repeats calls for hike sometime later this year – StreetInsider

  Atlanta Fed GDPNow (Q3): 0.9% (prev 1.8%)

  ECB’s Weidmann: ECB should follow steady course – Der Spiegel

  ECB’s Jazbec: No Need To Adjust QE Programme At The Moment – Fiscal Times

  ECB’s Nouy: Global Financial Conditions Remain Volatile In Some Respects – Economic Times

  ESM’s Regling: Greece should not expect big debt writedown – FT

  Eurogroup chief Dijsselbloem sees no delay to the Greek aid program – BBG

  Eurogroup will discuss low interest rate environment – ForexLive

  Snr German Govt Official: Germany expects debate about US rate hike at IMF meeting – Rtrs

  Spanish PM Rajoy: General election will be on December 20th – Rtrs

  Moody’s: EU’s budget management and strong member support underpin credit strength

  SNB Zurbrugg: CHF is particularly overvalued, will continue to intervene as required

  BoJ Official: Little Immediate Need For Additional Stimulus Seen – BBG

  FIXED INCOME

  US Treasuries fluctuated in afternoon trading – BBG

  Spain’s Yields At Four-Month Low After Nation Sells Debt – BBG

  FX

  EUR: EUR/USD hovering near 1.1200, on pre NFP mode – FXStreet

  CAD: USD/CAD recovery capped by 1.3280 – FXStreet

  USD: Dollar slips lower vs. rivals after downbeat U.S. data – Investing.com

  USD: Heads Dollar Wins, Tails It Rises: It’s All Good for Greenback – BBG

  GBP: Sterling’s bright plumage begins to fade – FT

  Currencies Trading Needs Further Cleanup, Regulators Say – WSJ

  COMMODITIES/ENERGY

  U.S. crude inches down as inventory build, Iran deal remain in focus – Investing.com

  Gold futures settle with a loss after a volatile day – MktWatch

  Copper Drops Most in a Week as U.S. Manufacturing Stagnates

  Natural Gas Trading at Seasonal Low from Heavy Surpluses – WSJ

  EIA Natural Gas Storage Change Sep 25: 98 (est. 100, prev. 106)

  EQUITIES

  Wall St dip led by utilities, factory activity slows – MktWatch

  FTSE outperforms Europe but Wall Street fall trims gain – Yahoo

  M&A: Teva Pharmaceuticals To Buy Rimsa For Approx. $2.3bln – FastFT

  M&A: EU regulators query Ball’s proposed Rexam takeover – MktWatch

  M&A: Vivendi has boosted Telecom Italia stake to around 19% from 15.5% – Sources on Rtrs

  AUTOS: US auto sales soar, but Volkswagen down – USA Today

  AUTOS: VW seeks to boost finances to meet emission scandal costs – Rtrs

  AUTOS: GM to cut $5.5bln in costs from 2015-2018 – Seattle Times

  BANKS: JPMorgan Said Mulling $18bln Loans Bid to Rival Goldman – BBG

  BANKS: Bank of England says might raise top-up capital buffer for banks – Rtrs

  TECH: Amazon to Ban Sale of Apple, Google Video-Streaming Devices – BBG

  TECH: Toshiba may axe TV & PC workers, seek partner for nuclear operations-CEO

  ENERGY: Repsol To Cut 6% Workforce Over Next 3 Yrs: Europa Press – ABC

  CONS GOODS: ConAgra to cut 1,500 jobs – MktWatch

  EMERGING MARKETS

  Russia launches fresh strikes in Syria – BBC

   

  World Bank Pres: Shared Prosperity: Equal Opportunity for All

  

  

  

  

  

• These Dramatic Before And After Images Of Syria Demonstrate "Success" Of US Foreign Policy

  One narrative that’s parroted constantly when the US moves to bring about regime change in the Mid-East is that it’s necessary for the good of the people. 

  Typically, the citizenry is characterized as suffering under the brutal oppression of an autocratic regime which is sometimes accused of committing crimes against humanity in order to maintain an iron grip on power and ensure that the seeds of democracy cannot grow.

  Of course this narrative is never wholly true and is rarely even partially so. 

  More often than not, the US has ulterior motives for covertly usurping Mid-East strongmen and the overarching goal is almost always to achieve some narrow geopolitical end.

  This isn’t so much one fringe blog’s opinion as it is a dubious foreign policy tradition for Washington and indeed, it’s almost always readily observable in hindsight. 

  For those who need proof of this, we present the following before and after images of night-time light emissions in Syria:

  

  

  Source: The Economist

  

  

  

  

• Deflation Warning: The Next Wave

  Submitted by Chris Martenson via PeakProsperity.com,

  The signs of deflation are now flashing all over the globe. In our estimation, the possibility of an associated financial crisis is now dangerously high over the next few months.

  As we’ve been saying for a while, our preferred model for how things are going to unfold follows the Ka-Poom! Theory as put out by Erik Janszen of iTulip.com.

  That theory states that this epic debt bubble will ultimately burst first by deflation (the "Ka!") before then exploding (the "Poom!") in hyperinflation due to additional massive money printing efforts by frightened global central bankers acting in unison.

  First an inwards collapse, then an outwards explosion. Ka-Poom!

  We’ve been tracking the deflationary impulse for a while, and declared deflation the winner back in July of this year.

  A Failed Strategy

  What exactly do we mean by deflation?  Back in 2008 the central banks of the developed world, as well as China, had a choice:

  1. admit that prior policies geared towards encouraging borrowing at a faster rate than income growth were a horrible idea, or
  2. double down and push those failed policies even harder

  As we all know, they chose option #2. And so here we are, just 8 years later, with nearly $60 trillion in new debt piled on top of the prior mountain — while GDP grew by only $12 trillion over the same time period:

  

  (Source)

  [Note:  Global nominal GDP is projected to be $68.6 trillion in 2015, virtually unchanged from 2013]

  In other words, instead of saying to ourselves: Hmmm…. it was probably a terrible idea to pile up debt at 2x the rate of income growth, what the world did instead was to double down on that terrible idea and pile on more debt at 5x the rate(!) of nominal GDP growth.

  Talk about not learning from your past mistakes….

  At any rate, what all of that money printing, lower interest rates and new debt creation did was force capital over the globe to look for some place to go. Absent any really good and creative ideas, that money primarily chased yield. It piled into risk assets like stocks and junk bonds, often in bubble-like fashion (meaning, in haste), and without proper due diligence.

  The only way the central bank “strategy” (and we use that word very loosely) could have worked was if very rapid economic growth emerged to justify the accumulated levels of debt, comprised of both old and new borrowing. Central banks were indeed hoping such growth would materialize and lesson the burden of servicing the interest on all that debt.

  But that growth, quite predictably (as forecasted by us among many others), did not emerge.

  Perhaps Japan’s experience should have tipped the central bankers off as to why not.  For several decades now, Japan has served as a warning: too much debt is the malady, not the cure.

  So here we are.  What are we to make of it all?  It's our view that the financial markets are important to monitor because they will signal to us when sentiment has shifted, and let us know in advance that events will unfold at a faster pace.

  Judging from the market action over the past month, we think that shift has happened. And we're increasingly concerned that this next ‘correction’ could be pretty rough for a lot of folks.

  Bright Red Warning Lights

  The global economy is downshifting fast, and there are lots of flashing red warning lights indicating as much.

  Doug Noland has captured the emerging market pain caused by the hot money that is now flooding out of those territories, as well as provided a great explanation of the bubble dynamics in play:

  The Federal Reserve is flailing and global currency markets are in disarray. Notably, the Brazilian real dropped more than 10% in five sessions, before Thursday’s sharp recovery reversed much of the week’s loss. This week the Colombian peso dropped 3.0%, and the Chilean peso fell 3.1%. The Mexican peso dropped 1.9%.

   

  The Malaysian ringgit sank 4.5% for the week, with the South Korean won down 2.7% and the Indonesia rupiah losing 2.2%. The Singapore dollar fell 1.8%. The South African rand sank 4.4% and the Turkish lira fell 1.4%.

   

  Notably, market dislocation was not limited to EM. The Norwegian krone was hit for 4.4%, and the Swedish krona lost 2.0%. The British pound declined 2.3%. The Australian dollar also lost 2.3%.

   

  The global Bubble is bursting – hence financial conditions are tightening. Bubbles never provide a convenient time to tighten monetary policy. Best practices would require central bankers to tighten early before Bubble Dynamics take firm hold. Central bankers instead nurture and accommodate Bubble excess. It ensures a policy dead end.

   

  As the unfolding EM crisis gathered further momentum this week, the transmission mechanism to the U.S. has begun to clearly show itself. While “full retreat” may be a little too strong at this point, the global leveraged speculating community is backpedaling. Biotech stocks suffered double-digit losses this week, as a significant Bubble deflates in earnest. It’s also worth noting that the broader market underperformed.

  (Source)

  What does it mean when we see currencies in retreat across the globe?  It means that the hot, speculator money is rushing out of weaker economies and back towards the stronger center.  This is consistent with a liquidity crisis, one where all the borrowed money used to spark all those heady asset gains and falling yields on the way out do the exact opposite on the way back.

  And Doug is exactly right – there’s never a good time to pop a bubble.  So the central bankers just sit, paralyzed, afraid to even raise rates by a token amount for fear that the daisy-chain of global bubbles will burst as a result. They needn’t fear: the bubbles will burst no matter what the Fed, et al., does.

  A credit default swap (CDS) is a bit of insurance you can buy if you own a bond and are worried that the issuer may default on it.  In a stable climate, the cost of that insurance (measured in percentage points above the stated yield on that debt) is pretty flat. It's usually close to the yield of the bond in question.

  So you might have to pay 1% to 2% (i.e. 100 to 200 basis points) above the yield on, say a Brazilian ten year bond, to insure it against a default.  As things begin to break down and become less certain, that cost will rise.

  Now take a look at this chart of recent emerging market CDS 'spreads':

  

  (Source)

  See those CDS ‘spreads’ blowing out to the upside? That’s the sort of thing I was tracking in 2008 that gave me a clear, early warning that things were about to fall apart.  While these levels are not (yet) flashing the same level of danger that we are seeing in the CDS paper for Glencore (which is almost certain to go bankrupt now), or for US shale drillers (tons of bankruptcies coming there, too), these are pretty serious warning signs to see in sovereign debt.

  Why would the sovereign debt of Russia, Turkey, Brazil, and Malaysia be spiking right now?  Because the hot money is flooding out of those countries. There's now an elevated risk that they may default on their bonds in the future.

  These emerging market countries are being squeezed from every direction. But the worst pain is being experience by those that borrowed heavily in dollars (or other stable currencies).  From the WSJ (Sept 29), we see the magnitude of the predicament for companies located in EM nations:

  Developing-country firms quadrupled their borrowing from around $4 trillion in 2004 to well over $18 trillion last year, with China accounting for a major share.

  Now, prospects in industrializing economies are weakening fast even as the U.S. Federal Reserve is getting set to raise interest rates for the first time in nearly a decade, a move that will raise borrowing costs around the world.

   

  The burden of 26% larger average corporate debt ratios and higher interest rates come as commodity prices plummet, a staple export for many emerging-market economies.

   

  Compounding problems, many firms borrowed heavily in dollars. As the greenback surges against the value of local currency revenues, it makes repaying those loans increasingly difficult.

  (Source)

  So the afflicted countries are going to see vastly weaker exports, plunging currencies, and their local corporations unable to pay off dollar-denominated loans — on borrowing that ballooned from $4 trillion in 2004 to over $18 trillion just 11 years later.  It’s an amazing statistic, one of many fostered by a cluster of central banks that know everything about blowing bubbles but nothing about ending them.

  The punch line from the above article is this: “That massive debt build-up means it is “vital” for authorities to be increasingly vigilant, especially to threats to systemically important companies and the firms they have links to, including banks and other financial firms, the IMF said.”

  Decoded, that means that $18 trillion is a big number. If even a small portion of that goes into default, it could easily drag down whole swaths of the developed world’s financial corporate structure.  A systemic crisis that would begin on the edge but rapidly spread to the center.

  Well, based on the DDBAX ETF which holds bonds priced in local currencies, we can get a sense of the pain those EM companies are feeling which have dollar denominated loans, but conduct business in their local currency:

  

  Ouch!  Based on the above chart, the past year has been painful indeed for those emerging market corporations and governments. No sign of a bottom yet either.

  Not So Fast There….

  One so-called ‘bright spot’ in the world economy is the US, which supposedly is doing better than everyone else.  As you know, I consider US GDP statistics to be nearly useless because of all the statistical tricks and gimmicks that are now deployed (such as now counting ‘intangibles’ to go along with Owner Occupied Rent which records the price value of people not paying themselves rent, etc.,) to make things look better than they are.

  So I’m having trouble believing that the US economy is doing well when our major trading partner to the south is struggling so much due to a huge drop drop in exports:

  Mexico factory exports slump by most in over 6-1/2 years in Aug

  Sept 25, 2015

   

  (Reuters) – Mexico's factory-made exports slumped in August by the most in more than 6-1/2 years after uneven growth in the first half of 2015, data showed on Friday, while consumer imports rose.

   

  Manufactured exports sank 7.2 percent in August compared with July, falling back after two months of gains, the national statistics agency said in a statement. It was the biggest month-on-month drop since December 2008, data showed.

   

  Mexico exports mostly manufactured goods like cars and televisions and about three-quarters are sent to the United States.

  (Source)

  It’s hard to imagine that the US economy is doing fine when a major trading partner who exports 75% of its finished product to the US is experiencing a deep export slump.

  But it’s not just Mexico that's seeing a big decline in export activity:

  For the first seven months of 2015, U.S. exports dropped 5.6% to $895.7 billion. The value of South Korean exports shrank a revised 14.9% in August from a year earlier, the sharpest fall in six years, as shipments to China dropped. Chinese imports in August fell 13.8% in dollar terms from a year earlier, after an 8.1% decrease in July.

  (Source – WSJ)

  If this keeps up, 2015 will see the worst global trade performance since…wait for it…2008.  For the US, 2015 will be the first year that exports have declined since the financial crisis.  Ditto for a number of other countries.

  Beyond exports, the surveys of US manufacturing and service sector activity are also flashing recession warning signs.  In fact, the manufacturing survey has only been this low in the past during prior recessions. Maybe this time is different?

  

  

  (Source)

  On the plus side for the US: reasonably robust housing activity, low initial claims for unemployment, and growing income and expenditures. But the data for some of these is suspect (nearly 100 million working-age adults are not counted in the workforce), and in other areas, not robust enough to hang too many hopes on.

  Add it all up, and there are a number of signs that not only is the US economy is far from robust, it may even be teetering on the verge of a recession. But the global economic landscape is decidedly tilted towards contraction, not expansion.

  Why is all this important?  Because seeing these signs early enough gives us a better chance to mentally, financially, and physically prepare for the next shock.  The press does a very good job of constantly painting everything in a rosy light, and that’s fine, but it’s not very helpful if it also misleads.

  Lots of people are woefully unprepared for what’s coming next. For many it will be a shock.  Not because they couldn’t see it coming years in advance and made their own mental and financial adjustments on their own terms, but because they wouldn’t.  Preferring to avoid an unpleasant truth they put it out of sight and out of mind, hoping that somehow things would work out in their favor.

  In Part 2: From Deflation To Hyperinflation, we detail out the likeliest progression of the unfolding deflationary rout and the inevitable tsunami of money printing that the central banks will respond with, unleashing the final hyperinflationary chapter.

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

   

  

  

  

  

  

• In Latest Sign Of EM Chaos, Turkey's FX Reserves Fall Below Key Threshold Ahead Of Pivotal Elections

  One of the key things to understand about the veritable meltdown that’s unfolded across emerging markets is that there’s more to the story than the headline risk factors. 

  That is, while the list of proximate causes that includes a decelerating China, collapsing commodity prices, and uncertainty over when or even if the Fed will hike goes a long way towards explaining the carnage that’s unfolded across EM, each country has its own set of unique circumstances to grapple with. Indeed, the idiosyncratic political risks playing out across emerging economies have taken center stage as Brazil attempts to navigate congressional gridlock, Malaysia struggles with the 1MDB scandal, and Turkey faces new elections in November.

  While there’s no question that the political situation in Brazil is particularly troubling, it would be difficult to imagine a more precarious scenario than that which exists in Turkey, where President Recep Tayyip Erdogan has managed to subvert the democratic process by starting a civil war, and thanks to the strategic significance of Incirlik, the effort is co-sponsored by the US and NATO.

  Of course extreme political uncertainty, a bloody civil war, and an unfolding proxy war just across the border do not inspire much confidence, which helps to explain the fact that Turkey’s FX reserves have now fallen below $100 billion for the first time since 2012:

  

  And here’s an updated look at the lira which is in the midst of a rather epic decline (which threatens to destabilize inflation) thanks to everything noted above combined with a central bank that either i) doesn’t understand the gravity of the situation, or ii) is loathe to hike rates going into the election:

  

  If you think it’s bad now, just wait until November. If AKP doesn’t secure an absolute majority there’s no telling how Erdogan will react and if Ankara moves to nullify yet another democratic election by intentionally stirring up the PKK, you can expect outright chaos. We close by noting that data out today shows Turkey’s manufacturing PMI fell for a second straight month in September and we also think it’s worth highlighting the following excerpt from The Guardian which provides a bit of insight into what’s in store going forward if Erdogan doesn’t get his way:

  Ahmet Hakan, a columnist for Turkey’s leading secular Hürriyet newspaper and a presenter on broadcaster CNN Turk, was followed home from the television station by four men in a black car late on Wednesday, before being assaulted near his residence, according to the Hürriyet editor-in-chief, Sedat Ergin.

   

  “We see that it was an organised, planned attack,” Ergin was quoted as saying. Hakan was treated for a broken nose and ribs, the newspaper said.

   

  The attack comes just weeks after prosecutors launched an investigation into the paper’s owner, Do?an Media Group, for alleged “terrorism propaganda“.

  

  

  

  

  

• It's One Indivisible System: Empire, The State, Financialization, & Crony Capitalism

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  The great irony is what's unsustainable melts into thin air no matter how many people want it to keep going.

  Disagreement is part of discourse, and pursuing differing views of the best way forward is the heart of democracy. Disagreement is abundant, democracy is scarce, despite claims to the contrary.

  If you think you can surgically extract Empire from the American System, force the State to serve the working/middle classes, end the stripmining of financialization, limit crony capitalism/regulatory capture and get Big Money out of politics–go ahead and do so. I'm not standing in your way–go for it.

  But while you pursue your good governance, populist, Left/ Right /Socialist/ Libertarian, etc. reforms, please understand the system is indivisible: the Deep State, the Imperial Project (hegemony and power projection), the State, finance in all its tenacled control mechanisms (greetings, debt-serfs and student-loan-serfs), crony capitalism /regulatory capture, money buying political influence, media propaganda passing as "news", and the evisceration of democracy (something untoward could happen if the serfs could overthrow the Power Elite at the ballot box–can't let that happen)–it's all one system.

  Should any one organ be ripped from the body, the entire body dies. The entire system defends each subsystem as integral as a matter of survival. As a result, the naive notion that big money can be excised with only positive consequences is false: restoring democracy places the entire system at risk of implosion.

  No more bread and circuses, no more Social Security checks, no more state employee pensions–it all melts into air if any subsystem stops doing its job.

  The system is interdependent. Each subsystem needs the others to function. I drew up a chart of the major components (but by no means all) of the system:

  

  The system is a machine in which each gear serves the whole. So go ahead and try to "reform" the system by extracting whatever gear you don't approve of: the Deep State components, the Security State organs, the Federal Reserve, cartels/monopolies enforced by the State, the suppression of democracy, crony capitalism, whatever.

  The machine will resist your "reform" to the death because should you succeed, the machine will implode. Take out the financialization gear and the financial system collapses.

  So go ahead and reform to your heart's content. Go ahead and believe the system is reformable, if it makes you feel better. Vote for Bernie or The Donald or whomever. Go ahead and disagree with me. Prove me wrong. Prove the State really, really, really wants to serve the working/middle class rather than the Empire that it is. Pursue your Left/ Right/ Socialist/ Libertarian fantasies of righting the Imperial Project by ripping the gears out of the very center of the machine.

  It doesn't work that way. We can't remove the gears we find distasteful. Either the machine grinds on and we get our share of the swag–bread and circuses, corporate welfare, State jobs and pensions, Medicaid and Medicare, and all the rest of the immense swag of hegemony and the Imperial Project–or the system implodes and all the swag melts into air.

  The great irony is what's unsustainable melts into thin air no matter how many people want it to keep going.

  But go ahead and disagree. It's your right, by golly. Go ahead and try to "reform" the system and see how far you get.

  

  

  

  

  

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• Syria: “Not a Proxy War. It’s One Step Closer”

  Russia started bombing jihadi bases in Syria today.

  Given that the the U.S. and its allies are largely responsible for creating ISIS, and that U.S., Turkey and Israel have all been acting as ISIS’ air force – they are not taking too kindly to Russia’s actions.

  This Wall Street Journal headline sums up the absurdity of the situation:  “Russian Airstrike in Syria Targeted CIA-Backed Rebels, U.S. Officials Say.”

  We noted years ago that a proxy war is raging in Syria … but things are getting even more over-heated.

  Political risk expert Ian Bremmer sums up the situation:

  Russian forces will be striking Assad enemies, some of whom are directly supported by the US and its allies. That’s not a proxy war. It’s one step closer.

  What could possibly go wrong?

  

  

  

  

• ONe PaiN IN THe ISIS…

  

  

  

  

  

• State Makes It Legal To Shoot Cops In Self-Defense If They Violate Your Rights

  Submitted by M. David via TheAntiMedia.org,

  Is it ever legal to shoot cops? A growing number of states are passing laws that say that yes, in fact, sometimes it is well within a citizen’s rights to shoot a police officer.

  Other states have already ruled in favor of citizens shooting police officers in self-defense, (even hip-hop legend Tupac walked after shooting two cops in self-defense) now, in the state of Indiana, if a police officer initiates aggression without cause in someone’s home, violence can be used against them in self-defense – including using lethal force.

  The new law was drafted to “recognize the unique character of a citizen’s home and to ensure that a citizen feels secure in his or her own home against unlawful intrusion by another individual or a public servant.”

  This should hardly be seen as profound. In the past, self-defense was viewed as a human right. The Bill of Rights does not grant rights to the citizenry of the United States, it recognizes natural rights. One of those rights — a veritable law of Nature — is the right to resist.

  No matter what one does, or takes from you, nothing can stop the innate right to follow our natural impulses of resistance. That does not mean all will exercise that right. But the right itself is natural, primordial, inborn.

  The new amendment in Indian recognizes this. It makes it clear that badges do not grant special rights to break into someone’s house and commit acts of violent aggression. If they do, the resident has the right to resist those illegal actions and defend themselves.

  The Free Thought Project notes that many police officers “have already begun to fear monger the passage of this bill,” saying “If I pull over a car and I walk up to it and the guy shoots me, he’s going to say, ‘Well, he was trying to illegally enter my property.’”

  This fear mongering comes from Joseph Hubbard, 40, the president of Jeffersonville Fraternal Order of Police Lodge 100, who asserts “somebody is going get away with killing a cop because of this law.”

  In spite of these statements, here’s what the law actually states:

  (i) A person is justified in using reasonable force against a public servant if the person reasonably believes the force is necessary to:

  • (1) protect the person or a third person from what the person reasonably believes to be the imminent use of unlawful force;
  • (2) prevent or terminate the public servant’s unlawful entry of or attack on the person’s dwelling, curtilage, or occupied motor vehicle; or
  • (3) prevent or terminate the public servant’s unlawful trespass on or criminal interference with property lawfully in the person’s possession, lawfully in possession of a member of the person’s immediate family, or belonging to a person whose property the person has authority to protect

  What do you think about this law? Would you like to see more states adopt laws like this, or is this a recipe for disaster?

  

  

  

  

  

• Futures Soar After Chinese Composite PMI Drops To Lowest On Record

  Chinese markets may be closed for the next week due to a national holiday but China’s goalseeked manufacturing survey(s), which were the most anticipated data points of the evening, came right on schedule (or rather, were leaked just ahead of schedule). And they certainly did not disappoint in their disappointment.

  First, it was the official NBS September PMI, which at 49.8 was the smallest possible fraction above both the previous and expected, both of which were 49.7. The number was leaked about 6 minutes before the official statement, and while the leaked print which all humans were aware of well before the official release time at 9pm Eastern, had no impact on markets, it was the flashing red headline which confirmed the leak and which was read by machine-reading algos everywhere, that sent the E-mini spasming higher.

  But while the official “data” was bad, and confirmed the economy remains in contraction, the Caixin – aka the new HSBC – Markit PMIs were absolutely atrocious.

  We bring you… the HSBC Manufacturing print, which dropped from 47.3 to 47.2, and which according to Caixin was the lowest print since March 2009.

  

  From the report:

  A key factor weighing on the headline index was a sharper contraction of manufacturing output in September. According to panellists,
  worsening business conditions and subdued client demand had led firms to cut their production schedules. Weaker customer demand was highlighted by a further fall in total new orders placed at Chinese goods producers in September. Furthermore, the rate of reduction was the steepest seen for just over three years. Data suggested that the faster decline in total new business partly stemmed from a sharper fall in new export work. The latest survey showed new orders from abroad declined at the quickest rate since March 2009.

  The job market continued to be a disaster:

  Reflective of lower workloads, manufacturing companies cut their staff numbers again in September. Moreover, the latest reduction in employment was the fastest seen in 80 months. Meanwhile, reduced production capacity led to an increased amount of unfinished work, though the pace of backlog accumulation was only slight.

  And then there’s deflation: 

  Manufacturing companies noted a further steep decline in average cost burdens during September. Furthermore, the rate of deflation was the sharpest seen since April. Reports from panellists mentioned that lower raw material prices, particularly for oil-related products, had cut overall input costs. Increased competition for new work led manufacturing companies to generally pass on their savings to clients, as highlighted by a solid decline in output charges.
  

  Summarizing the finding:  Production cut at quickest rate since March 2009; Total new orders contract at sharper rate amid steeper downturn in new export business; Worst deflation since April; job shedding accelerates to 80-month record, and so on.
  

  At the same time, the Service PMI was also released which at 50.5, was a drop of 1 point from the 51.5 in August, and was the lowest since July 2014, with the prices charged index in full deflationary collapse, tumbling from 51.4 to 48.5, the lowest since June 2012, with the outstanding business index was the lowest since last November. In short: another disaster.

  And it was the combination of the two indices that told the full story: at 48.0, the Caixin Composite index dropped from 48.8, down from 52.3 a year ago and was the lowest print on record.

  So with another month of atrocious manufacturing and service survey data released what do futures do? Why they soar of course, with the ES now up nearly 20 points from its overnight lows, and touching on 1920.

  

  Why? Who knows – futs would have likely soared if the data was good, but wild guess here, because the Chinese economy is in such a dire state of uncontrollable freefall, someone, somewhere has to print more and make the rich even richer.

  

  

  

  

  

• New Patch for U.S. Troops Fighting ISIS… Looks Like ISIS Logo

  Submitted by Mac Slavo of SHTFplan.com

  New Patch for U.S. Troops Fighting ISIS… Looks Like ISIS Logo

  
  

  Believe it or not, American soldiers fighting against ISIS in Syria and Iraq will actually be wearing the emblem of ISIS – the infamous crossed-swords logo. Well, almost.

  Controversy has stirred because many think the patch looks too much like our boys are fighting for the enemy… just another sign of confusion about the counterproductive Obama-led war against the notorious and shamefully exploitative jihadist army.

  The Military Times noted that:

  “A combat patch worn by U.S. soldiers who served in Iraq on the mission against Islamic State is drawing flak from service members and veterans who say the patch — with its palm wreath, stars and crossed scimitars — looks like something the enemy would wear.”

  Site like JihadWatch are arguing that the:

  “new U.S. Army patch for fight against the Islamic State closely resembles Muslim Brotherhood logo.”

  While the Islamic State is using barbaric tactics to remake the Middle East closer to its own vision of a Caliphate, the United States and its allies also seek to remake the Middle East, and use the  specter of terrorism to aid in regime change in Syria and elsewhere.

  The triangulation and cross-purposes are both confusing and aggravating to many Americans.

  According to USA Today:

  Soldiers in Iraq will soon have a new shoulder sleeve patch to signify their service in the fight against the Islamic State.

  All told, there are about 3,335 troops in the region training Iraqi troops, providing security and conducing bombing missions on Islamic State targets in Iraq and neighboring Syria.

   

  The Army’s patch features crossed scimitars, a palm wreath and stars. The scimitars, short swords with curved blades, are meant to symbolize the twin goals of the U.S.-led coalition: to defeat the Islamic State, also referred to as ISIL, and to restore stability in the region, according to Army documents.

  Arguably the “twin goals” of Operation Inherent Resolve – better known as the fight against ISIS / ISIL – is fitting with the War on Terrorism in general which always, like a double sword, cut both ways. Symbolically, the double sword cuts both ways, and plays of opposite goals, and embraces conflict, which creates chaos, and begs for a savior and a solution.

  But the U.S. has, in fact, created and breathed life into the TV villain known as ISIS. From. the. beginning.

  The naked hypocrisy of the U.S. effort to fight ISIS is that the West has been building up and unleashing terrorism upon the Middle East region in order to facilitate chaos and regime change – and give the United States a pretext for stationing troops there, funding budget and spewing rhetoric across the media.

  President Bashar al-Assad himself recently called out the United States and other Western allies for actually fostering terrorism – and providing arms, funding, training and soldiers for ISIS and other groups. Assad stated bluntly:

  But as for Western cooperation with the al-Nusra Front, this is reality, because we know that Turkey supports al-Nusra and ISIS by providing them with arms, money and terrorist volunteers. And it is well-known that Turkey has close relations with the West. Erdogan and Davutoglu cannot make a single move without coordinating first with the United States and other Western countries.

   

  Al-Nusra and ISIS operate with such a force in the region under Western cover, because Western states have always believed that terrorism is a card they can pull from their pocket and use from time to time. Now, they want to use al-Nusra just against ISIS, maybe because ISIS is out of control one way or another. But that doesn’t mean they want to eradicate ISIS. Had they wanted to do so, they would have been able to do that.

  Meanwhile, Putin put in a “call” at the global poker table, vowing to take on ISIS and defend Assad with its own fighter jets, tanks and military equipment.

  In a taunting and vexing spin on the United States’ own mission in the Middle East, Putin invited the West to join hands and eradicate ISIS once and for all, as SHTF recently reported.

  Moscow, realizing that instead of undertaking an earnest effort to fight terror in Syria, the US had simply adopted a containment strategy for ISIS while holding the group up to the public as the boogeyman par excellence, publicly invited Washington to join Russia in a once-and-for-all push to wipe Islamic State from the face of the earth.

   

  Of course The Kremlin knew the US wanted no such thing until Assad was gone, but by extending the invitation, Putin had literally called Washington’s bluff, forcing The White House to either admit that this isn’t about ISIS at all, or else join Russia in fighting them. The genius of that move is that if Washington does indeed coordinate its efforts to fight ISIS with Moscow, the US will be fighting to stabilize the very regime it sought to oust. 

  But Putin won’t be holding his breath. Neither should we.

  Should we view the patch as a U.S. “resolve” to stop ISIS, or as part of the “inherent” contradiction that serves the larger purpose of terrorism and U.S. foreign policy at the expense of U.S. troops, U.S. taxpayer money and U.S. sovereignty?

  And is WWIII near when the U.S. and Russia lock heads so pointedly as they are right now? And who is the real enemy?

  

  

  

  

  

• Overheard At The Pentagon: "Right Now, We Are Putin's Prison Bitch"

  Those who frequent these pages are well aware of what’s happened to Washington’s strategy in Syria over the past several weeks. Russia’s dramatic move to enter the fray has left the US trapped, as the West attempts to hang on to a narrative that’s no longer convincing even to a largely ignorant public. 

  Now, the only thing left to do is either stand down and let Moscow do as it pleases in support of the Assad regime, or else get on board and acquiesce to the inevitable. 

  Or, summed up in simpler terms…

  Overheard at the Pentagon: “Right now, we are Putin’s prison bitch.”

  — Nancy Youssef, ????? (@nancyayoussef) September 30, 2015

  

  

  

  

  

  

• A Desperate China Caps Card Withdrawals In Frantic Attempt To Stem Outflows

  Earlier this month we documented Beijing’s mad dash to tighten up capital controls in China in order to stem outflows in the wake of the PBoC’s move to transition towards a new FX regime. 

  Put simply, expectations that a (much) deeper devaluation is on the horizon coupled with China’s efforts to manage the fallout from those expectations by liquidating hundreds of billions in FX reserves to support the onshore and offshore spots have understandably put authorities on edge, leading directly to efforts to stop the bleeding.

  As we put it a few weeks ago, “while China may succeed in maintaining an orderly pace of FX depreciation, if the local population is concerned it will lose substantial purchasing power in the coming months and years, it will accelerate the capital flight from the country, forcing even greater reserve liquidation as the government finds itself defending not only the capital but also the current account, not to mention the sheer capital flight panic resulting from the crashing stock market.”

  Of course one of the more straightforward ways of circumventing China’s official capital controls has been by “abusing” UnionPay cards. Roughly speaking, the process works like this (via Reuters):

  Growing numbers of Chinese are using the country’s state-backed bankcards to illegally spirit billions of dollars abroad, a Reuters examination has found.

   

  This underground money is flowing across the border into the gambling hub of Macau, a former Portuguese colony that like Hong Kong is an autonomous region of China. And the conduit for the cash is the Chinese government-supported payment card network, China UnionPay.

   

  In a warren of gritty streets around Macau’s ritzy casino resorts, hundreds of neon-lit jewellery, watch and pawn shops are doing a brisk business giving mainland Chinese customers cash by allowing them to use UnionPay cards to make fake purchases – a way of evading China’s strict currency-export controls.

   

  On a recent day at the Choi Seng Jewellery and Watches company, a middle-aged woman strode to the counter past dusty shelves of watches. She handed the clerk her UnionPay card and received HK$300,000 ($50,000) in cash. She signed a credit card receipt describing the transaction as a “general sale”, stuffed the cash into her handbag and strolled over to the Ponte 16 casino next door.

   

  The withdrawal far exceeded the daily limit of 20,000 yuan, or $3,200, in cash that individual Chinese can legally move out of the mainland. “Don’t worry,” said a store clerk when asked about the legality of the transaction. “Everyone does this.”

  Yes, “everyone does this,” but not for long because now that the yuan deval debacle has served to accelerate the capital outflows, Beijing is set to double down on efforts to curb the degree to which capital controls are openly subverted and as WSJ reports, China is has now “put a new annual cap on overseas cash withdrawals using UnionPay.” Here’s more:

  China has capped the amount of money Chinese holders of bank and credit cards can withdraw outside the country, in its latest effort to discourage people from moving badly needed capital offshore.

   

  China’s foreign-exchange regulator put a new annual cap on overseas cash withdrawals using China UnionPay Co. bank cards, a UnionPay official said on Tuesday. Under the new rules, UnionPay cardholders can withdraw up to 50,000 yuan ($7,854) overseas during the last three months of this year, and the amount will be capped at 100,000 yuan for all of next year, the official said.

   

  State-run UnionPay has a virtual monopoly on processing card transactions in China, meaning the limits extend to nearly all Chinese bank- and credit-card holders. It wasn’t clear when the new cap was issued.

   

  The new cap is in addition to an existing 10,000 yuan daily withdrawal limit, part of China’s curbs on how much money can flow across its borders.

   

  The move by China’s State Administration of Foreign Exchange is the latest by Beijing to scrutinize capital outflows.

   

  The People’s Bank of China, the country’s central bank, said earlier this month that its foreign-exchange reserves fell by $93.9 billion, the biggest monthly drop ever, after it surprised the market on Aug. 11 with its decision to devalue the yuan by around 2%.

  Will this help to reverse the momentum? No, probably not. 

  The problem here – and this is something that quite a few people are still struggling to understand – is that Beijing has telegraphed a much larger devaluation, which means the pressure on the yuan will likely continue.

  So yes, as difficult as this is to come to terms with, this is a scenario where China played the deval card and is looking to ever-so-gradually move from a 3% deval to an export-boosting double-digit deval, but in the meantime, Beijing must manage the pace, which means supporting the yuan via direct interventions. The trick, however, is going to be pulling this off without triggering a disastrous outflow of capital, and we’ll leave it to readers to determine if the measures outlined above are likely to do anything meaningful to stem the flow. 

  

  

  

  

  

• Is This The Scariest Chart In America This Week?

  Either, a) BLS payrolls data is entirely ‘made-up’, or b) US jobs are being created in some other regions than the six major Fed surveys. Either way, this chart will strike fear into the heart of Janet Yellen as she ‘hopes” for some cover for her rate-hike… before the whole house of cards collapses…

   

  

   

  Are we about to see the negative payroll print that confirms a) No Fed rate-hike, and b) No Recovery?

  h/t @Not_Jim_Cramer

  

  

  

  

  

• This Is What £500 In Rent Gets You In London

  While it is painfully obvious that London property prices (and now rents) are in an atmospheric bubble, it appears the policy-makers choose to ignore the reality for the average Brit in favor of 'wealth' creation for the few.

  As @Alex_Lomax tweets… "I have literally just been shown a bed under the stairs for £500 a month… F You London!"

  

  

  

   

  The ad was posted on site London2let and reads:

  One single furnished room available.

   

  We are looking for a friendly, open-minded and outgoing person to join our houseshare in a great period house in Clapham.

   

  We're a good bunch and like to chill out a lot together – not really looking for somebody that just wants to stay in their room. Room comes with a bed.

   

  Bills to be shared – approx £60 per month each. Easy access to local tube stations.

  As Alex explains, the room lacked any utilities, but did come with a carton of Daz on the floor and coats hanging from hooks.

  I didn't even stay long enough to check if there was a mattress, and the landlord seemed absolutely serious.

   

  I asked him if he was joking and he seemed shocked I'd even asked.

   

  I took the pics secretly when he was making himself a cup of coffee, the cupboard was right next to the kitchen.

   

  I expected a normal single room, definitely not this. I left as quickly as I could.

  

  

  

  

  

• This Is How Russia Handles Terrorists: Moscow Releases Video Of Syria Strikes

  Now that Russia has officially begun conducting airstrikes on anti-regime forces operating in Syria, commentators, pundits, and analysts around the world will be keen to compare and contrast the results of Moscow’s efforts with the year-old US-led air campaign against ISIS targets in Syria and Iraq. 

  Clearly, Russia has a very real incentive to ensure that its airstrikes are effective.

  Preserving the global balance of power means preserving the Assad regime and, by extension, ensuring that Iran maintains its regional influence.

  On the other hand, the US and its regional allies actually have an incentive to ensure that their airstrikes are minimally effective. That is, for the US, Saudi Arabia, and Qatar, the idea is not to kill Frankenstein, but rather to ensure that he doesn’t escape the lab. 

  As we documented earlier today, Russia wasted no time launching strikes against anti-regime targets once the country’s lawmakers gave the official go-ahead and the West wasted no time accusing Russia of breaking protocol by targeting “modetrate” Syrian rebels (like al-Qeada) that aren’t aligned with ISIS.

  It’s against that backdrop that we present the following footage released by the Russain Ministry of Defense which depicts the opening salvo in The Kremlin’s battle against terrorism in the Middle East (note the vehicle traveling towards the compound at a particularly inopportune time towards the end).

  And predictably, Western media reports regarding civilian casualties and Russia’s alleged targeting of “moderate” rebels (as opposed to ISIS) were countered by Moscow’s sharp-tongued spokeswoman and US foreign policy critic extraordinaire Maria Zakharova.

  Via RT:

  Russia has struck eight Islamic State (ISIS/ISIL) targets in Syria, the country’s Defense Ministry said, adding that “civilian infrastructure” was avoided during the operations.

   

  “Today, Russian aerospace force jets delivered pinpoint strikes on eight ISIS terror group targets in Syria. In total, 20 flights were made,” spokesperson for the Russian Defense Ministry, Igor Konashenkov, said. 

   

  “As a result, arms and fuel depots and military equipment were hit. ISIS coordination centers in the mountains were totally destroyed,” he added.

   

  Konashenkov said that all the flights took place after air surveillance and careful verification of the data provided by the Syrian military. He stressed that Russian jets did not target any civilian infrastructure and avoided these territories.

   

  “Russian jets did not use weapons on civilian infrastructure or in its vicinity,” he said.

   

  Reuters reported that Russia targeted opposition rebel groups in Homs province instead of Islamic State forces. The agency cited Syrian opposition chief Khaled Khoja, who put the death toll of the bombardment at 36 civilians.

   

  “Russia is intending not to fight ISIL [Islamic State], but to prolong the life of [Syrian President Bashar] Assad,” Khoja said.

   

  Similar claims were made by the BBC, Fox News, Al Jazeera and numerous other news outlets.

   

  Moscow harshly criticized the reports, labeling them an information war.

   

  “Russia didn’t even begin its operation against Islamic State… Russia’s Foreign Minister Sergey Lavrov didn’t even utter his first words at the UN Security Council, but numerous reports already emerged in the media that civilians are dying as a result of the Russian operation and that it’s aimed at democratic forces in the country (Syria),” Maria Zakharova, Foreign Ministry spokeswoman, told media.

   

  
  

   

  “It’s all an information attack, a war, of which we’ve heard so many times,” she added.

   

  Zakharova also said that she was amazed by the scale and speed of what she called “info injections” into social networks such as “photos of alleged victims” that appeared on the web as soon as the Russian operation began.

   

  “What can I say? We all know perfectly how such pictures are made,” she said, remembering a Hollywood flick ‘Wag the Dog,’ which described the US media reporting on a fake war in Albania.

  For those who missed it, see here for our assessment of the Western media’s take on the first round of Russian airstrikes (and by the way we, like Maria, were surprised at how quickly the propaganda machine kicked into high gear). Here is the bottom line:

  The bottom line going forward is that the US and its regional and European allies are going to have to decide whether they want to be on the right side of history here or not, and as we’ve been careful to explain, no one is arguing that Bashar al-Assad is the most benevolent leader in the history of statecraft but it has now gotten to the point where Western media outlets are describing al-Qaeda as “moderate” in a last ditch effort to explain away Washington’s unwillingness to join Russia in stabilizing Syria. This is a foreign policy mistake of epic proportions on the part of the US and the sooner the West concedes that and moves to correct it by admitting that none of the groups the CIA, the Pentagon, and Washington’s Mid-East allies have trained and supported represent a viable alternative to the Assad regime, the sooner Syria will cease to be the chessboard du jour for a global proxy war that’s left hundreds of thousands of innocent people dead.

  

  

  

  

• The Coming Corporate "Crime Wave"

  Submitted by William L Anderson via The Mises Institute,

  In a recent appearance before Congress, Deputy Attorney General Sally Quillian Yates declared that the US Department of Justice is going to ratchet up its prosecution of individuals employed in corporations as part of a larger push against “white collar crime.” There is no doubt that such prosecutions will be very popular to a large section of voters, given that presidential candidates like Bernie Sanders, Hillary Clinton, and Martin O’Malley, along with Massachusetts Senator Elizabeth Warren pretty much have declared that nearly all American businesses are part of a massive criminal conspiracy that must be brought down by federal authorities.

  Within the next year, we should expect to see mid-level business and finance executives doing “perp walks” in front of the news media, as federal prosecutors will charge them with various “economic crimes” in hopes that they will implicate their superiors. All of us by now know the drill and in a time of anemic economic growth complete with business failures, it won’t be hard to find scapegoats.

  Everyone Is “Guilty”

  When famed civil liberties attorney Harvey Silverglate published his now-famous book, Three Felonies a Day, it caused quite a stir. Going through a number of very disturbing cases, Silverglate made clear that if federal prosecutors want to target an individual, it is very easy to fashion criminal charges against them.

  To prove his point, he noted how the federal prosecutors in New York when Rudy Giuliani was US Attorney for the Southern District of New York regularly played a game in which they would see if various celebrities and others, including Mother Theresa, had broken federal criminal law. The result, unfortunately, was that for each person no matter how good his or her public character, a federal statue existed that would place them in prison.

  Being that Giuliani’s prosecutors — and Giuliani himself — regularly committed felonies by selectively leaking grand jury information to favored journalists in order to damage the ability of accused people to defend themselves. He also did it to stoke the fires of the anti-business mobs, and these prosecutors were quite familiar with how to fashion the ever-malleable federal statutes to turn ordinary acts into crimes. During the 1980s, when Giuliani was at DOJ, the New York office engaged in a massive show of force against Wall Street firms and other business enterprises in large part to enhance the coming political careers of Giuliani and others who worked under him, and to appease the anti-business Democrats and Republicans who were anxious to declare to roll back what they called the “Decade of Greed.”

  Is a New Wave of Crackdowns Coming?

  Federal prosecution of business figures tend to come in waves. During the Great Depression, prosecutors tried to claim criminal behavior by businessmen was responsible for the lengthy economic downturn. During the 1980s, Wall Street rivals of Michael Milken and others who challenged the established financial firms were the quiet-but-effective engine of prosecution, combining their political connections with Giuliani’s ambition to nearly destroy the alternative capital funding machine that was overturning the corporate status quo with new startups and shakeups of existing firms.

  Because Milken had become wealthy through his financial dealings, he became the symbol of “greed” by the Democratic Left, which at that time was facing a loss of influence during the Ronald Reagan years and was desperate to regain its former status of America’s “conscience.” Going after Milken mollified both the Left and the Republican establishment on Wall Street, as the “old money” firms were happy to see Giuliani eliminate the competition.

  After the spectacular failure of Enron and other firms that depended upon Alan Greenspan’s Federal Reserve System policies of easy money, policies that ended in the Tech Bubble meltdown in 2000 and 2001, the George W. Bush administration went after people like Ken Lay and Jeffrey Skilling of Enron and others who had high-profile CEO jobs. In the lynch-mob atmosphere that inevitably follows the bust cycle of Fed-induced business cycles, it was not hard to convince Americans that the corporate bankruptcies and the subsequent recession were the handiwork of criminal executives.

  I have written about federal criminal law and its abuses for more than a decade and have not changed my viewpoint. No matter how often writers and activists expose the consequences of expanding federal criminal law, the law expands anyway. People are elected to Congress on platforms of “being tough on crime,” and large crowds heartily approve when Bernie Sanders and Elizabeth Warren call for more business executives to be thrown into prison for unspecified “crimes.” (They demand the Beria approach. Beria, who was the head of the original KGB, famously stated: “You bring me the man, I'll find you the crime.”)

  A Winning Political Strategy

  The current public mood is ugly, and perhaps for good reason. Although the official rates of unemployment are relatively low, statistics clearly show that huge numbers of potentially-employable people have left the job market altogether because they know that finding meaningful employment is highly unlikely. We know that in percentage terms, labor participation in the workplace is at near-record lows. We also know that, economically speaking, the economy is stagnating and that individuals continue to be squeezed as real pay fails to keep up with creeping-but-real inflation. In short, people are angry, and they want someone to pay.

  Many angry people have found a political home with candidates like Sanders and Donald Trump, both of whom speak to voter frustrations and who also find perfect scapegoats for vengeful Americans. Bernie Sanders blames businesses and entrepreneurs for “greed,” while Trump blames immigrants. Economically speaking, neither Sanders nor Trump is correct, but it doesn’t matter; angry voters don’t want facts, they want scalps.

  Ever since sociologist Edwin Sutherland during the 1930s came up with the term, “white collar crime,” politicians and the media have claimed that businesses often are little more than criminal enterprises. Certainly the current political climate reflects that sentiment and more. Furthermore, politicians are appealing to voters with proposals that would destroy capital formation, criminalize much of entrepreneurship, and make it much more difficult for business firms to engage in normal activities.

  In a recent campaign speech, Democratic hopeful Hillary Clinton declared, “We’re going to go back to enforcing labor laws. I’m going to make sure that some employers go to jail for wage theft and all the other abuses that they engage in.” Few candidates of either party are willing to stand up for businesses and entrepreneurs, and as the campaign rhetoric becomes more inflammatory, federal prosecutors are going to find it increasingly easier to charge business owners and employers for law “violations” that might be called “criminal” even if they never were intentional, according to law professor John Baker.

  Selective and Politically-Motivated Prosecution

  Because there are so many business owners and executives, and because federal prosecutors cannot go after everyone, it will be a crapshoot as to whom prosecutors select for “the treatment.” For the most part, those targeted will not have political connections (such as many Wall Street executives), nor will they be people involved in “green energy” ventures, such as those businesses tied to people like Al Gore.

  When people think of so-called business crimes, they think of embezzlement, firms falsifying information, tax evasion, or to engage in fraud while performing services under contract with the government. For example, say that Ajax Company is supposed to build tanks for the US Army and is paid on a cost-plus basis. The company then bills the army for a number of tanks it did not build or for phantom services, with the company CEO and his mistress putting the fraudulently-obtained money in a Swiss bank account.

  This certainly would fall under anyone’s fraud statute, and if the government were to prosecute just those kinds of cases, few people would object. However, government fraud statutes are incredibly malleable and can apply to conduct that would seem to be legal. In an article I wrote for Regulation six years ago, I point out Enron’s practice of placing “non-earning assets” into “special purpose entities” was legal and also was made known to Enron stockholders, yet federal prosecutors decided to include those actions under the umbrella of “Honest Services Fraud.”

  Prosecutors wanted jurors to believe that even though Enron’s activities met federal laws and regulations, nonetheless the company undertook those actions in order to present the company to stockholders and others in a false light, making the company’s financial condition seem better than it really was. Thus, it was left to the jurors to determine whether or not this action truly was a violation of the law, even though the original act did fall within the letter of federal statutes and regulations.

  One can see immediately where there is a problem. Under most state laws governing crime, there often is no doubt that an actual crime was committed. The question is not whether someone broke the law, but rather who broke it, the defendant or someone else.

  Federal Law Is Ambiguous Enough to Allow Prosecution of Nearly Anyone

  In the federal system, however, jurors often are asked to decide whether or not someone actually broke the law and, thus, broke federal statutes. Jurors, who usually have no legal training, then are asked to determine whether or not a highly-complex deed that they may not understand was a legal violation, and more often than not, if jurors don’t understand it, or if they deem the defendants to be less-than-savory, they will vote guilty as a default position.

  Furthermore, federal prosecutors have such leeway that they are able to pile on numerous charges that might be based from a single endeavor, thus creating a situation for defendants in which they either can chance going to prison for decades (and federal prosecutors almost always win at trial) or plead guilty. (I have a well-known friend who was charged with “Honest Services Fraud,” because the US attorney believed that the fees he negotiated with his clients were higher than they should have been. The prosecutor did not allege that he had defrauded his clients per se, since he charged the clients the fees upon which both parties agreed, but that because the fees were higher than fees other lobbyists charged their clients, then they simply had to be illegal. So, according to federal prosecutors, one can negotiate fees in daylight with all parties agreeing and still be breaking the law.)

  Federal prosecutors also are notorious for appealing to the prejudices of juries. When the late Ken Lay and Jeffrey Skilling were on trial in Houston, Texas, prosecutors appealed to the fact that when Enron collapsed, a lot of people lost money. (That Skilling and Lay also lost most of their income and wealth in the same collapse apparently was irrelevant, and prosecutors claimed that any act of Lay and Skilling diversifying their own personal financial portfolios — although both men held most of their wealth in Enron stock — was an attempt to knowingly bail out of a sinking ship.) Because the trial judge also was openly hostile to the defendants, prosecutors pretty much were able to do and say what they wanted without fear of legal repercussions.

  Rudy Giuliani once noted with amusement that people charged with “white-collar crime” were more likely to “roll over” than were hardened criminals. Part of the reason is that most people, and especially business owners and executives who do try to obey the law, are horrified at the prospect of being charged criminally and going to prison. Because federal prosecutors can easily fashion charges that often defy defense, it is not hard to understand why business people plead guilty.

  If Barack Obama and US Attorney Loretta Lynch decide to target business people, prosecutors will find plenty of targets. Because violation of regulations can be rolled into the “fraud” and “conspiracy” statutes — even if the violations were unintentional or the “targets” were unaware of their existence — it is not hard to find subjects to prosecute. Being charged in such conditions is more like “winning” an “unlucky lottery” than engaging in actual criminal behavior.

  That turning the business community into a wreckage of criminal charges will have long-term effects on the willingness of entrepreneurs to risk their own assets will be no deterrent to people like Obama and Lynch. Neither of them have a minute of business experience, and they truly believe that businesses themselves probably at best are unethical entities or at worst caverns of criminality, so they most likely believe they are doing Americans a favor by throwing more people into prison. One only can feel sympathy for people and their families who at the present time have no idea that someone from the US Department of Justice is planning to wreck their lives over at worst what might be a legal technicality.

   

  

  

  

  

  

• Oct 1 – Fed's Dudley: Will Make Sure QE Withdrawal Won't Roil Markets

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 24/100 EXTREME FEAR

  PREVIOUS CLOSE: 12/100 EXTREME FEAR

  ONE WEEK AGO: 31/100 FEAR

  ONE MONTH AGO: 14/100 EXTREME FEAR

  ONE YEAR AGO: 12/100 EXTREME FEAR 

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 14.57% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 24.50. This is a neutral reading and indicates that market risks appear low.

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

   

  PIVOT POINTS

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

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

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

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

   

  MEME OF THE DAY – BEIJING AFTER VOLKSWAGEN

   

  UNUSUAL ACTIVITY

  APPS Director purchase 127K @ 1.57

  JOY Director purchase 12,200  A  $ 14.77  , 4,346  A  $ 14.8 , 2,854  A  $ 14.81  , 2,265  A  $ 14.82 , 2,435  A  $ 14.83

  Z NOV 30 Puts @ 4.70 on the offer 1600 contracts

  MU Jan 5 Put Activity @ 0.18 on the offer

  BDSI NOV 6 Calls on the offer @ 0.80 1800+

  More Unusual Activity…

  HEADLINES

   

  Senate passes bill that would keep government open

  IMF’s Lagarde: Global growth likely weak this year

  Fed’s Dudley: Will make sure QE withdrawal won’t roil markets

  S&P sees ECB doubling QE

  China Reports First Official FX Reserve Data to IMF

  US DOE US Crude Inventory (WoW) Sep-25: 3955K

  EIA: US Crude Oil Production Rose 94,000bpd In July

  China’s gold reserves rise to 54.45m fine troy oz

  US Corn, Soybean Prices Drop as Domestic Stockpiles Rise

  Jack Dorsey to Be Named Permanent Twitter CEO

  China Premier Li: Economy Remains In Reasonable Range

  Russia launches air strikes in Syria

   

  GOVERNMENTS/CENTRAL BANKS

  Senate passes bill that would keep government open –~MW

  IMF’s Lagarde: Global growth likely weak this year, modest acceleration in 2016 –CNBC

  IMF cuts Australia growth projections for 2015 and 2016 to 2.4% and 2.9% respectively – IMF

  Fed’s Dudley: Will make sure QE withdrawal won’t roil markets – ForexLive

  Fed’s Dudley: Open to adjusting bond market rules to improve liquidity – CNBC

  ECB’s Weidmann: EU should have clear rules for sovereign debt — ForexLive

  ECB’s Hansson sees ‘moderate’ inflation in Eurozone – ForexLive

  S&P sees ECB doubling QE – Rtrs

  Brexit risk ‘not priced in’ Morgan Stanley warns – FT

  BOJ announces October bond purchase programme – Forex Live

  Japanese public pension fund likely saw July-September loss –Nikkei

  Riksbank’s Skingsley: Riksbank Has No Target For The Krona – BBG

  FIXED INCOME

  Treasury Investors See Quarterly Gains as Risk-Off Wagers Reign – BBG

  Southern European bond yields fall as election risks fade – Rtrs

  BoE’s GBP1.41 Bln 7-15 Year Gilt Buy-Back Receives Offer/Cover Ratio Of 2.12 (Pre 2.36)

  Glencore bonds still trade as junk despite bounce – FT

  FX

  USD: Dollar Strengthens Over Third Quarter – WSJ

  USD: Dollar remains broadly higher – Investing.com

  EUR: Euro lower as Eurozone falls back into deflation – Investing.com

  GBP: Cable Steady at 5-Mth Low as Fed Leads Hike Race – WBP

  JPY: Buck Dwells Around Break-Even – WBP

  China Reports First Official FX Reserve Data to IMF – BBG

  HKMA intervenes again to sell HK$ 12bln to maintain trading band –ForexLive

  ENERGY/COMMODITIES

  Brent oil up on Syria worry; U.S. crude down on supply build – Rtrs

  Oil finishes the quarter with a 24% loss – MktWatch

  Gold falls 1.5% on month, loses 4.8% on quarter – MktWatch

  Copper Prices Surge on Supply Disruptions in Chile, Peru – WSJ

  US DOE US Crude Inventory (WoW) Sep-25: 3955K (est. -250K, prev. -1925K)

  US DOE US Distillate Inventory (WoW) Sep-25: -267K (est. -900K, prev. -2088K)

  US DOE Cushing Inventory (WoW) Sep-25: -1068K (est. -350K, prev. -462K)

  US DOE US Gasoline Inventory (WoW) Sep-25: 3254K (est. -750K, prev. 1369K)

  EIA: US Crude Oil Production Rose 94,000bpd In July To 9.358mln bpd – FastFT

  World Bank: Oil prices likely to stay volatile – FXstreet

  China’s gold reserves rise to 54.45m fine troy oz vs 53.93m prev – ForexLive

  Steel prices sink to 11.5-year lows – FT

  Australian Govt: Iron ore price has bottomed –ForexLive

  US Corn, Soybean Prices Drop as Domestic Stockpiles Rise – WSJ

  EQUITIES

  U.S. Stocks Advance, Shaving Worst Quarterly Rout in Four Years – BBG

  Torrid quarter ends with broad rebound for European stocks – FT

  FTSE 100 rebounds as Sainsbury’s lifts profit outlook – BBC

  Carl Icahn says ‘joyride’ for stock market is over – MktWatch

  AUTOS: Volkswagen may avoid environmental criminal charges – MktWatch

  AUTOS: German prosecutors consider Audi probe – FT

  M&A: Axel Springer purchases Thrillist Media Group stake – DL

  M&A: Rio Tinto Agrees to Sell Coal Mine Stake for $606 Million –NYT

  M&A: M&T Bank Gets Fed Nod to Buy Hudson City – WSJ

  INDUSTRIALS: Airbus A320neo test aircraft suffers engine damage – MktWatch

  TECH: Sources: Jack Dorsey to Be Named Permanent Twitter CEO – Re/Code

  TECH: China’s Tsinghua to buy Western Digital stake in U.S. tech push – Rtrs

  TECH: Synaptics Said to Shun $110-a-Share Bid From China Investor – BBG

  EMERGING MARKETS

  China Premier Li: Economy Remains In Reasonable Range – CCTV

  China Premier Li: Main Econ. Targets Can Be Achieved – CCTV

  Russia launches air strikes in Syria – FT

  World Bank Downgrades Russia’s Economic Outlook – WSJ

  RBI’s Rajan says India is ready for a Fed rate hike sooner rather than later – Forex Live

   

  Fitch: Emerging Market Vulnerability Weighing on Global Growth Outlook

  

  

  

  

  

• Propaganda War Begins: Russia's Syria Strikes Targeted US-Backed "Moderate" Rebels, West Says

  With the US having officially lost control of the narrative in Syria now that The Kremlin has called Washington’s bluff on the battle to eradicate ISIS and eliminate the Sunni extremist elements that threaten to wrest control of Syria from President Bashar al-Assad, the only remaining question after Russian lawmakers officially cleared the way for airstrikes was how long it would be before the Western media began shouting about Russian warplanes bombing targets that aren’t affiliated with ISIS.

  As we reported earlier today, Moscow wasted no time in launching its first round of air raids.

  

  In turn, the West wasted no time in contending that Russia is targeting areas that aren’t known to be strategically significant for ISIS. Here’s a look at two headlines which do a nice job of summarizing all of the rhetoric which you’re about to hear emanating ceaselessly from every corner of the Western world in the coming days and weeks:

  • U.S. IS CONCERNED RUSSIA’S INTENT IS PROTECTING ASSAD: KERRY
  • U.S. HAS ‘GRAVE CONCERNS’ IF RUSSIA STRIKES OUTSIDE ISIL AREAS

  And here’s WSJ with a sneak peek at the new narrative which Washington will be working hard to refine:

  Russian President Vladimir Putin inserted his country directly into Syria’s war Wednesday, as Russian forces launched their first airstrikes against what Moscow said were Islamic State targets in the Middle Eastern nation.

   

  But Western leaders raised doubts about whether Russia really intended to take the fight to Islamic State, or merely broaden the Syrian regime’s offensive against a wide range of other opponents.

   

  For the U.S., the Russian strikes add new questions about the role of Russian forces in Syria. “While we would welcome a constructive role by Russia in this effort, today’s [meeting in Baghdad] hardly seems indicative of that sort of role and will in no way alter our operations,” a U.S. official said.

   

  Warplanes targeted Islamic State military hardware and weapons stores, a spokesman for Russia’s Ministry of Defense told official news agencies hours after Russian lawmakers approved a request by Mr. Putin to allow the use of force abroad.

   

  Framing the attacks as part of a fight against terrorism, Mr. Putin said that Russia will support the Syrian army from the air, without any ground operations, for the duration of the Syrian offensive.

   

  “The only real way to fight international terrorism…is to act pre-emptively. and not wait till they [terrorists] come to our home,” Mr. Putin said in televised comments. He called for antiterror cooperation with other states through the Russian coordination center in Baghdad.

   

  The official Syrian Arab News Agency reported Wednesday that Russian airstrikes hit areas under Islamic State control in Homs and Hama provinces, including the cities of Al Rastan and Talbiseh, near the town of Salamiyah, and the villages of al-Za’faran, al-Humr Hills, Eidoun, Salamiyah and Deir Fol. The strikes had successfully targeted Islamic State, SANA said, without elaborating.

   

  But with the exception of the area east of the town of Salamiyah in Hama province, none of the areas listed by the Syrian regime have a known presence of Islamic State fighters. They are largely dominated by relatively moderate rebel factions and Islamist groups like Ahrar al-Sham and the al Qaeda affiliate the Nusra Front.

  Yes, “relatively moderate rebel factions like al-Qaeda” (check the above, WSJ actually said that) which in July kidnapped the commander and deputy commander of the Pentagon’s ragtag group of US-trained rebels that was supposed to number in the thousands by now but has been reduced to just “four or five” men and which was humiliated last Friday when the remaining fighters were forced to surrender their pickup trucks and ammo to al-Nusra in order to “secure safe passage” to who knows where.

  Considering that, and considering the “solid” relationship the US has always maintained with al-Qaeda, it sure would be a shame if a few al-Nusra operatives wound up as collateral damage in Russia’s air campaign. 

  Then there’s The Telegraph with an epic attempt to spin the news with a single headline: “Putin defies West as Russia bomb ‘Syrian rebel targets instead of Isil‘”.

  Meanwhile, France – who recently went full-propaganda by using “self defense” to justify its newly launched Syrian bombing campaign – is out expressing its consternation about which groups Russia is bombing. Via Reuters:

  France said it was “curious” that Russian air strikes in Syria on Wednesday had not targeted Islamic State militants and a diplomatic source added that Moscow’s action appeared aimed at supporting President Bashar al-Assad against other opposition groups in the country’s civil war.

   

  The diplomatic source said it was in line with Russia’s stance since 2012 that until there was a viable alternative to Assad, Moscow would not drop its support for him in the war that began in 2011 after a government crackdown on anti-Assad protests.

   

  “Russian forces struck Syria and curiously didn’t hit Islamic State,” Defence Minister Jean-Yves Le Drian told lawmakers.

   

  A French diplomatic source said the strikes, which seemed to have been carried out near Homs, an area crucial to Assad’s control of western Syria. 

   

  “It is not Daesh (Islamic State) that they are targeting, but probably opposition groups, which confirms that they are more in support of Bashar’s regime than in fighting Daesh,” the source said, speaking on condition of anonymity.

   

  “We shall see what they do with their other strikes,” the source said.

  And then Germany (which, much to Moscow’s chagrin, recently announced it’s set to receive a shipment of new US nukes) jumped on the bandwagon. Via Bloomberg:

  German Foreign Minister Frank-Walter Steinmeier says Russia needs to explain its aims in carrying out airstrikes in Syria. 

   

  “In this highly charged situation in Syria there’s a big risk that there will be further misunderstandings between the partners, all of whom are needed to calm the situation”

   

  “I hope that this isn’t slamming shut all the doors that were laboriously opened in recent days, including in talks between President Obama and President Putin”

   

  “Only coordinated action can lead to a solution. Military action along won’t help us overcome the Syrian crisis. We have to get into a political process. We need the neighbors, Russia, the U.S., and we in Europe can be helpful, too.”

  There are two things to note here. First, there isn’t anything “curious” about this and Vladimir Putin has made no secret of his intent to keep the Assad regime from falling. Indeed, it’s not clear what else Putin could do besides invite Charlie Rose for a two hour interview and explain three separate times that Moscow intends to support Assad. Second, Germany’s suggestion that Russia is “slamming shut all the doors to cooperation” is ridiculous to the point of absurdity. As the events that have unfolded over the past several weeks have made abundantly clear, it is the West that has slammed the door shut on Russia when it comes to cooperating to fight ISIS and the reason for Washington’s trepidation stems directly from i) wanting to oust Assad at all costs even if it means allowing the extremists operating in Syria to remain active until the regime falls, and ii) the fact that no matter what line The White House trots out to the public, the US views the Russia-Iran “nexus” as far more dangerous to America’s geopolitical ambitions than ISIS and therefore, allying with Washington’s two fiercest foreign policy critics simply isn’t an option even if such an alliance would swiftly eradicate Islamic State. 

  And of course the narrative wouldn’t be complete without some on-the-ground Skype “intelligence”. Here’s Reuters:

  Russian air strikes in northwest Syria which Moscow said targeted Islamic State fighters hit a rebel group supported by Western opponents of President Bashar al-Assad on Wednesday, wounding eight, the group’s commander said.

   

  He said the fighters were hit in the countryside of Hama province, where the group has a headquarters.

   

  “The northern countryside of Hama has no presence of ISIS at all and is under the control of the Free Syrian Army,” Major Jamil al-Saleh, who defected from the Syrian army in 2012, told Reuters via Skype.

   

  Saleh said his group had been supplied with advanced anti-tank missiles by foreign powers opposed to Assad.

  The Homs area is crucial to President Bashar al-Assad’s control of western Syria. Insurgent control of that area would bisect the Assad-held west, separating Damascus from the coastal cities of Latakia and Tartous, where Russia operates a naval facility.

   

  “In the early morning this aircraft conducted air strikes in Latamneh city. One targeted a civilian area, and the other targeted al-Izza,” Saleh said, referring to his group which he said were set up around two years ago and has 1,500 fighters.

   

  He declined to give further details on the exact location of the strike but said the bombs hit a cave which the group used as a headquarters and was near the front line with the regime in northern Hama countryside.

   

  “Each strike had 8-10 missiles and there were two strikes so there is no way it was an accident,” he added.

  No, it probably was not an accident, but what the Western powers want you to believe is that because they steadfastly refuse to acknowledge what’s going on even when it is patiently explained to them by The Kremlin, then anything that happens is thereby a mystery. 

  The bottom line going forward is that the US and its regional and European allies are going to have to decide whether they want to be on the right side of history here or not, and as we’ve been careful to explain, no one is arguing that Bashar al-Assad is the most benevolent leader in the history of statecraft but it has now gotten to the point where Western media outlets are describing al-Qaeda as “moderate” in a last ditch effort to explain away Washington’s unwillingness to join Russia in stabilizing Syria. This is a foreign policy mistake of epic proportions on the part of the US and the sooner the West concedes that and moves to correct it by admitting that none of the groups the CIA, the Pentagon, and Washington’s Mid-East allies have trained and supported represent a viable alternative to the Assad regime, the sooner Syria will cease to be the chessboard du jour for a global proxy war that’s left hundreds of thousands of innocent people dead.

  

  

  

  

• Becoming China: From Shale Malinvestment Boom To "We Are Overbuilt" Bust

  Nothing highlighted a malinvestment-driven "if we build it they will come" boom (and subsequence complete bust) better than China's so-called "ghost cities." But now, thanks to The Fed's "lower for longer" enabling of every and any zombie company in the world, many previous oil-boomtowns across Texas and North Dakota are facing a real-estate crisis. As Bloomberg reports, the former bustling "man-camps" of towns like Williston, ND are now desolate with hundreds of skeletons or wood & cement as predictions that fracking would sustain production and a robust tax base for decades have failed completely.

  

   

  Chain saws and staple guns echo across a $40 million residential complex under construction in Williston, North Dakota, a few miles from almost-empty camps once filled with oil workers. As Bloomberg reports, after struggling to house thousands of migrant roughnecks during the boom, the state faces a new real-estate crisis: The frenzied drilling that made it No. 1 in personal-income growth and job creation for five consecutive years hasn’t lasted long enough to support the oil-fueled building explosion.

  Civic leaders and developers say many new units were already in the pipeline, and they anticipate another influx of workers when oil prices rise again. But for now, hundreds of dwellings approved during the heady days are rising, skeletons of wood and cement surrounded by rolling grasslands, with too few residents who can afford them.

   

  “We are overbuilt,” said Dan Kalil, a commissioner in Williams County in the heart of the Bakken, a 360-million-year-old shale bed, during a break from cutting flax on his farm. “I am concerned about having hundreds of $200-a-month apartments in the future.”

   

  The surge began in 2006, when rising oil prices made widespread hydraulic fracturing economically feasible. The process forces water, sand and chemicals down a well to crack rock and release the crude. Predictions were that fracking would sustain production and a robust tax base for decades.

   

  Laborers descended on the state, many landing in temporary settlements of recreational vehicles, shacks and even chicken coops. Energy companies put up some workers in so-called man camps. In 2011, Williams County commissioners approved 12,000 beds, says Michael Sizemore, the county building official.

  Everyone levered up on this "no-brainer"…

  The camps were supposed to be an interim solution until subdivision and apartment complexes could be built.

   

  Civic leaders across the Bakken charged into overdrive, processing hundreds of permits and borrowing tens of millions of dollars to pay for new water and sewer systems. Williston has issued $226 million of debt since January 2011; about $144 million is outstanding. Watford City issued $2.34 million of debt; about $2.1 million is outstanding.

  and many remain delusional…

  "We didn’t build temporary housing on purpose because we viewed North Dakota as a long-term play," said Israel Weinberger, a principal at Coltown Properties, which invests in multi-family real-estate developments.

   

  "We think the local production of oil is here to stay. Yes, prices have dropped, but it’s a commodity and commodities fluctuate. There is always a risk."

  Fracking’s success has created another glut…

  As the migrant workers leave, their castoffs pile up in scrap yards such as TJ’s Autobody & Salvage outside Alexander, about 25 miles (40 kilometers) south of Williston. More than 400 discarded vehicles crowd its lot, including souped-up pickup trucks and an RV with rotting potatoes and a dead mouse in the sink.

   

  

   

  “I wake up and RVs are in my driveway,” said owner Tom Novak. “It’s insane; there are empty campers everywhere.”

  But they are still building…

  With the region’s drilling-rig count at a six-year low of 74 and roughnecks coping with cuts in overtime and per-diem pay, the vacancy rates in Williams County man camps are as high as 70 percent. Meanwhile the average occupancy rate of new units in Williston was 65 percent in August, even as 1,347 apartments are under construction or have been approved there.

   

  Officials in Watford City about 45 miles away have issued 1,824 permits for apartments, duplexes and homes in the past 18 months after only three houses were built between 1980 and 2000. They are in limbo, worried about filling the units.

   

  “This lag time is driving me nuts,” said Brent Sanford, Watford City’s mayor, during a recent tour of construction sites with names such as Emerald Ridge Estates and Pheasant Ridge. “I’m now hearing words like, ‘This isn’t sustainable.”’

  Hope remains that the oil workers will stay and wait it out… but reality is showing that is false hope…

  Housing experts say this goal may be illusory because oil roughnecks typically return to their home state when a boom is over.

   

  “People who think they can convince these workers to live in apartments or suburban households are not understanding the nature of this economy,” said Bill Caraher, an associate professor at the University of North Dakota in Grand Forks who has studied housing in the oil patch.

   

  That’s true for Daniel Krohn, who pays $650 a month for a space in the Rakken Arrow RV Park. A plywood lean-to that blocks the north wind is cobbled onto his mobile home, the only one with a mailbox in the 86-space lot, which is half empty.

   

  Krohn, who installed piping on gravel pads where oil and gas is processed, came to Watford City in 2012 from Wisconsin with his wife, Angela; they had a daughter after the move. Now he’s unemployed and considering moving back home to a house with a $450 monthly mortgage.

   

  “I can’t afford $1,000 or more for a one-bedroom and still feed my family,” he said. “I’m ready to go.”

  *  *  *
  To The Fed – Well done… your tinkering has once again crushed the American Dream for another generation and enabled yet another inevitable bust after an entirely unsustainable boom where 'wealth' creation was nothing but transitory.

  

  

  

  

  

• Want To Hear A Joke?

  Overheard (allegedly) at The UN…

   

  

   

  Source: Investors.com

  

  

  

  

  

• It's Time To Get Your Gold Out Of The U.S.

  Submitted by Ted Baumann via TheSovereignInvestor.com,

  Most of us remember cowboy movies in which a lonesome desperado acquires a sack of gold coins that everyone else wants. It’s a thankless task that typically doesn’t end well.

  I vividly recall the final scene from Sergio Leone’s The Good, the Bad and the Ugly, in which a long rifle shot from Blondie (Clint Eastwood) severs the hangman’s noose holding Tuco (Eli Wallach), sending him face-first into a pile of gold coins. It’s still memorable even after I learned it was filmed in the Spanish plateau region of Burgos, not the U.S. Southwest.

  Besides reminding us that gold has always been a much sought-after commodity, The Good, the Bad and the Ugly’s multinational production process illustrates another key principle of the modern economy: People move around a lot when they’re making money.

  And that creates the perfect opportunity for governments to get their greedy hands on your gold.

  Traveling With Gold

  Let’s start with a review of U.S. rules regarding the importation and exportation of gold bullion, whether in bar or coin form:

  There is no duty on gold coins, medals or bullion but these items must be declared to a Customs and Border Protection (CBP) Officer. Please note a FinCEN 105 form must be completed at the time of entry for monetary instruments over $10,000. This includes currency, i.e. gold coins, valued over $10,000. The FinCEN definition of currency: The coin and paper money of the United States or any other country that is (1) designated as legal tender and that (2) circulates and (3) is customarily accepted as a medium of exchange in the country of issuance.

  Note the specific definition of “currency” here. These rules only apply to gold coins that can be used as currency. Taking collectible (numismatic) coins out of the U.S. requires that you submit Electronic Export Information (EEI) to the Census Bureau, ostensibly to help compile U.S. export and trade statistics. This form is actually required for any exported commodity, including gold, with a value exceeding $2,500. There are similar rules regarding jewelry.

  Global Gold Crackdown?

  Most foreign countries have similar regulations concerning the import and export of gold bullion and collectible coins. These regulations tend to track U.S. rules closely, and generally, as long as people follow them, there isn’t much friction over international travel with precious metals.

  Recently, however, I’ve been hearing reports that some foreign countries are starting to ask more questions, and require more searches, when someone declares that they are transporting gold or other precious-metal coins. For example, some countries in Latin America — including financial basket-case Argentina — are reportedly quite interested in any unusual coins you’re carrying — even if they’re under the limits and therefore not declarable. Seeing them in an X-ray of your bag may be enough to trigger a search and interrogation.

  Then there are increasing reports that many banks around the world are beginning to amend their contracts to prevent clients from storing currency and precious metals in safe-deposit boxes, or stating that they will not be responsible for them if they are kept there. For example, Chase Bank recently started a pilot program to this effect in Cleveland, prior to rolling it out nationally.

  What’s going on? My guess is that the U.S. and other governments are starting to put in place the elements of a capital controls system. We already know that the Foreign Account Tax Compliance Act (FATCA) is building the infrastructure for capital controls in banking. That leaves cash and precious metals as the two remaining methods to transport value physically. Transporting large amounts of cash is already heavily regulated, leaving one more — gold and other precious metals. It’s not paranoid at all to think that the U.S. government is quietly working with other customs agencies to increase “awareness” of the gold-movement “problem.”

  The Only Problem Is Government

  Of course, traveling with gold is a “problem” made by governments. If they behaved responsibly, let economic processes take their course instead of propping up big banks, and treated their citizens with respect, there would be no problem at all.

  If you plan to carry any gold or silver currency or collectible coins out of the U.S. — why bring them back in? — my advice is to contact the nearest office of the U.S. Customs and Border Protection Agency and explain what you plan to do.  Ask them to explain in writing how you can conform to the law. You can show the written response if questioned by CBP agents, who may not know the rules. Also keep handy any customs paperwork from other countries, as well as a proof of purchase or bill of sale.

  

   

  Remember, traveling with gold isn’t illegal. There’s no reason to end up like Tuco, who just wanted to get away with his gold.

  

  

  

  

  

• 80% Of All New Home Buyers In Irvine Are Chinese

  When RealtyTrac released its latest home sales report, “which shows single family home and condo sales through August were on pace for an eight-year high nationwide and in 110 out of 204” it was something else that caught our eye. According to RealtyTrac president Daren Blomquist, “the continued strength in sales volume across a wide spectrum of markets in August indicates that shockwaves from recent global stock market instability have not weakened the housing recovery and in fact there is evidence that the instability has fueled more demand for U.S. real estate.”

  Which was to be expected: as we have said for the past 4 years, one of the three pillars supporting US housing, or at least the very high end, is the money laundering of offshore hot money in the US, where courtesy of the NAR’s exemption from anti-money laundering provisions, wealthy foreigners can park any amount of cash in US housing without any questions asked. In August this was particularly acute because as Blomquist adds, “cash sales share was more pronounced in markets that have traditionally been magnets for foreign cash buyers, including Boston, Las Vegas, San Francisco, Seattle and New York.”

  

   

  And here was the stunner in question: “We are seeing more globalization as Southern California has become a destination for international buyers,” said Mark Hughes, chief operating officer with First Team Real Estate, covering the Southern California market. “Eighty percent of new construction in Irvine last year was sold to Chinese buyers. International buyers are driving home prices up and sometimes out of reach for many local residents.“

  You read that right, a whopping 80% of all new housing in Irvine was bought by Chinese.

  Which prompted some follow up reading. This is what we found:

  • California is the most popular U.S. destination for Chinese real estate buyers, according to Juwai.com, a Hong Kong-based property search engine.
  • Chinese bought 32% of homes sold to foreign buyers in California, double the share sold to Canadians, according to an April 2014 survey by the California Association of Realtors. About 70 percent of international buyers pay cash, the survey showed.
  • Buyers from Greater China, including people from Hong Kong and Taiwan, spent $22 billion on U.S. homes in the first quarter of 2014, up 72 percent from the same period in 2013 and more than any other nationality, the National Association of Realtors said yesterday in its annual report on foreign home purchases. That’s 24 cents of every dollar spent by international homebuyers, according to the survey of 3,547 real estate agents.
  • “A lot of people are trying to hedge against a generally bearish outlook for the Chinese economy,” Hanemann said in a telephone interview. “Buying real estate overseas has been in the past limited to a relatively small group of wealthy individuals and sometimes government officials. But it’s become a much bigger trend, involving affluent middle-class people.”
  • Affluent being the key word: Chinese buyers paid a median of $523,148 per transaction, compared with a U.S. median price of $199,575 for existing-home sales. While Canadians bought more houses than the Chinese, they spent less — a median of $212,500 per residence, for a total of $13.8 billion.

  To be sure, the Chinese influx was felt particularly during 2014 when the first reverberations of the burst Chinese housing bubble were felt, and forced many to look to the US for parking capital for safety:  “The uncertainties in China’s domestic market are contributing to a higher rate of growth in Chinese interest in U.S. property,” Andrew Taylor, co-chief executive officer of Juwai.com, said in an e-mail. “That interest began accelerating in the second quarter of 2014, in part because of China’s property slowdown.”

  It remains to be seen if the recent modest uptick in Chinese housing transactions, if not prices, will lead to a capital reallocation by Chinese buyers out of California and back into China.  But in the meantime, Chinese buyers have made numerous domestic housing markets inaccessible to average Amercians:

  • Buyers from China are driving up prices and fueling new construction in Southern California areas such as Arcadia, a city of about 57,500 people with top-rated schools, a large Chinese immigrant community and an array of Chinese restaurants and markets.

    The median home price in Arcadia’s 91006 ZIP code was $1.28 million in mid-2014, up 18.5 percent from a year earlier, according to research firm DataQuick.

  • “About 90 percent of my buyers are from China,” said Peggy Fong Chen, a broker with Re/Max Holdings Inc., who sold 80 homes in Arcadia last year. “They want new construction. They want two levels. In China, it is considered a mansion if it has two levels.”
  • More than three out of four buyers pay cash, said Chen, a native of Hong Kong who’s been selling real estate for 10 years. At least 20 percent are absentee owners who don’t have long-term visas yet. Many purchase houses for their children to attend high school or college, she said.
  • Buyers from China and Asian-Americans purchased about 80 percent of the 47 houses sold at Tri Pointe Homes Inc.’s Arcadia at Stonegate community in Irvine, about 40 miles southeast of Los Angeles, according to Tom Mitchell, president of the Irvine-based builder.
  • Almost half of the buyers paid cash for houses in the development, at prices starting at $1.16 million, he said. The company has been surprised by how word travels among overseas buyers. “A Chinese national bought one of our houses at Arcadia in Irvine after reading about it on a blog,” Tri Pointe CEO Doug Bauer said in a telephone interview. “It was a Chinese blog. We couldn’t even read it.”

  Which brings us to the key issue: uncontrolled Chinese money laundering which is the primary reason for this capital exodus, and billions in Chinese “hot money” bidding up luxury US real estate into the stratosphere. We have discussed it extensively before, and here is bloomberg:

  Some wealthy Chinese have come up with ways to evade the yearly $50,000 per-person limit on taking money out of the country so they can buy U.S. real estate, Yu said. Methods include laundering money through Macau casinos and cooking the books of import-export companies, he said.

   

  “A lot of people over-invoice export proceeds, so they can park some money outside,” Ha Jiming, chief investment strategist for Goldman Sachs Group Inc.’s China investment management division, said at a Los Angeles conference in April.

  Putting a bottom line on the capital outflows, according to the NAR, sales of U.S. houses to long-term foreign residents and non-resident buyers accounted for about 7 percent of the $1.2 trillion of existing-home transactions in just the first quarter of 2014.

  So realistically, call it 10%, which means that mostly all cash foreign buyers are responsible for about $500 billion in US real estate all cash investment every year, of which anywhere between a third and a half is Chinese.

  And there is your massive Chinese capital outflows in a nutshell, which incidentally is also the biggest threat facing China’s economy now that it has begun devaluing its currency and yet is desperate to avoid the capital flight from its economy.

  Which makes us wonder: if asked what presidents Xi and Obama really discussed in private last week, a safe bet is it wasn’t computer hacking, nor artificial islands in the South China Sea, but how the US plans to curb the outflow of hot Chinese money into US real estate.

  Which is a problem for the US, because thanks to Chinese capital flows, it means half a trillion dollars in capital flow right into the US economy via real estate every year. Call it 3% of GDP, roughly what the US growth rate should be. Xi is angry that this capital is leaving his economy; Obama is delighted.

  How will this very critical issue be resolved remains to be seen but as we will note in a follow up post, China is already taking very aggressive steps to finally limit and halt altogether the epic money laundering that is sucking China’s economy dry and is leading to such dramatic outcomes as 80% of all buyers in a major US metro-area being Chinese.

  

  

  

  

  

• Saudi Arabia Seizes Iranian Ship "Laden With Missile Launchers, Anti-Tank Weapons"

  With Syria making national headlines on a daily basis, it’s easy to forget about the Middle East’s other proxy war raging in Yemen. 

  For months, a Saudi-led coalition has been battling Iran-backed militants for control of the country which was effectively wrested from Mansour Hadi earlier this year when the Sauid-backed President was forced to flee to Riyadh as the Houthis advanced on Aden. 

  Sadly, Yemen has since descended into chaos, an embarrassment for the Obama administration which just a little over a year ago held the country up as an example of Washington’s successful counterterrorism efforts (no mention was made of the alleged covert cooperation between the government of Hadi’s predecessor Ali Abdullah Saleh and AQAP). 

  Between the Saudis, the UAE, and Qatar, the coalition has managed to push the Houthis back, but the human and cultural toll has been high. Riyadh and the Houthis routinely play headline hockey in an effort to play up or play down the number of civilian casualties that result from Saudi bombing runs and Sana’a, a UNESCO world heritage site, is gradually being decimated as coalition forces fight to take back the city. Last Thursday, a shoe bomber and an accomplice detonated themselves in a Shia mosque where the Houthis go to pray. The attack was claimed by Islamic State which is of course notable because this is the very same Islamic State that is fighting to destabilize Bashar al-Assad who, like the Houthis, is backed by Tehran. Iran-backed Shiite militias are also fighting ISIS in Iraq, an effort which is now set to benefit from cooperation with the Russian and Syrian armies. 

  The takeaway here is that Yemen, like Syria and Iraq, is a theatre for the regional and global proxy wars that have pitted the US, Saudi Arabia, Qatar, and to a lesser extent Washington’s European allies against a “nexus” comprised of Russia, Iran, Syria, and China with the latter having thus far only asserted itself via its Security Council veto. 

  What’s particularly interesting about this is the extent to which the traditional Western conception of who the “good guys” are and who the “bad guys” are has been turned on its head of late.

  That is, Russia’s willingness to confront ISIS in a straightforward way (as opposed to through the use of various proxy armies who in many cases end up defecting and becoming extremists themselves) as well as the realization that the man once billed as the world’s number one state sponsor of terror, Qasem Soleimani, is seemingly far more interested in preserving the Mid-East BOP by using Iran’s Quds Force to combat Sunni extremism in Syria and Iraq than he is in facilitating attacks on the US and its allies, have left the world to question whether it is in fact the West that’s been the proximate cause of the turmoil in the region.

  It’s with all of this in mind that we bring you the following story from WSJ who reports that on Saturday, the Saudis stopped an Iranian boat bound for Yemen that was “laden with missile launchers and anti-tank weapons, including firing guiding systems.” Here’s more:

  A Saudi Arabia-led military coalition that has been fighting Iran-supported rebels in Yemen said Wednesday that it had stopped an Iranian boat carrying arms to the war-torn country.

   

  The boat carried 14 Iranians and was laden with missile launchers and anti-tank weapons, the coalition said in a statement, including firing guiding systems.

   

  It was seized around 1pm local time Saturday, Sept. 26 in the Arabian Sea, about 150 miles southeast of the Omani port of Salalah. Oman shares a border with Yemen.

   

  
  

   

  The coalition said the boat is registered under the name Jan Mohammed Hut, an Iranian citizen. The vessel had a license from Iranian authorities to fish in those waters, the coalition said.

   

  Saudi Arabia has been fighting Iran-supported Shiite Houthi rebels in Yemen since March, in a bid to restore exiled President AbedRabbo Mansour Hadi to power.

   

  Politically Iran supports the Houthis, but denies supplying them with weapons.

   

  There was no immediate response on Wednesday from Iran.

   

  Saturday’s incident is the latest seizure of boats allegedly carrying Iranian arms bound for Yemen.

   

  The U.S. Navy and Yemeni coast guard detained a vessel called the Jihan as it sailed from Iran into Yemeni territorial waters in 2013, according to a United Nations report. The boat was loaded with rockets, plastic explosives and other munitions a U.N. panel traced back to Iran.

   

  It was unclear whether the arms were bound for Yemen or for the Houthis, although the ship’s crew was Yemeni and the shipment was arranged by a Yemeni businessman, the U.N. panel said.

  The reason this is important is that it helps to provide context for the various conflicts unfolding throughout the Middle East.

  The key thing to understand here is that the fighting in Yemen, Syria, and Iraq is all related and it all comes back to the existing balance of power as delineated above.

  Russia’s official arrival on the scene in Syria means that Moscow is now prepared to defend this balance of power overtly, marking a step up from the dynamic that existed previously wherein, as exemplified by the story excerpted above, the powers that oppose the West were content with the “covert” support they could provide to their various proxy armies.

  In short, now that Moscow has let the genie out of the bottle, it may not be long before both sides ditch the charade altogether, leading directly to a scenario that sees three proxy wars metamorphose into one outright armed conflict between the West and the Russia-Iran “nexus.” 

  

  

  

  

  

• The Model X Debut

  Early in 2013, I did a laudatory review of the Tesla Model S (at which time, if I had any sense, I would have loaded up on the then-$40 stock), and I continue to believe it is the best car I’ve ever had. Around the same time, I put $5,000 down to reserve my spot for the Tesla X SUV. This product has been delayed for a long, long time, but Elon Musk promised it would start shipping in “Q3 2015”. I cynically predicted he’d probably roll out one vehicle on September 30th, and I wasn’t too far off: he rolled it out the day before. That is, last night.

  I got an invitation to the event, which was held at the Tesla Factory. It’s been many, many years since I’ve been to anything resembling a product intro, so I decided to go. I drove over the Dumbarton Bridge to Fremont, and I joined a fairly large crowd of other people who had also received invitations.

  

  So we waited……….and waited………..and it got dark……

  

  Then they finally let us in and, happily, there were unlimited free cocktails. I could get used to this!

  

  And then, once again, we waited………and waited……….and it was obvious that, as with the Model X, things were “delayed.”

  

  The event was supposed to start at 7;30, and it was getting close to 9. I was alone, but listening to other conversations, it was apparent to me people were running out of things to say to one another.

  

  At long last, they let us into the room where the big event would be. At about 9 p.m., the loudspeaker announced “Mr. Elon Musk”, and he strolled on stage. I’ve got to tell you, he’s not the most fluid speaker on the planet, which surprised me. It seems I’m not the only one with this opinion.

  

  He walked the audience through the car’s safety features, its rapid acceleration, its automatically-opening doors, and the air control. He proudly stated that the air filtration was so good, measurement equipment literally could not detect any pollen, bacteria, or viruses inside the vehicle. It is literally as clean as a hospital operating room, and in “Bio Weapon Defense System” mode (yes, I’m serious), you could literally just hop in your car and survive a terrorist attack.

  

  The lengthy delay for the speech was somewhat irksome (although the free drinks helped pass the time), but some luminaries were pretty peeved.

  

  Here’s a (not great quality) video I made for Musk demonstrating the car’s gimmicky gull-wings when parked between two other vehicles.

  

  There’s no doubt that the Model X will be selling swiftly for a while, since there are already tens of thousands of people committed to doing so. The one and only topic Musk didn’t mention in his presentation was price (and no one bothered asking, since I guess this was a solidly upper-middle-class-or-above crowd) but there’s a finite number of people willing to spend six figures on a vehicle which, while spiffy, isn’t exactly gorgeous aesthetically, and it isn’t particularly large, either (I think the “SUV” moniker is stretching it a bit; it’s more like a somewhat bloated Model S).

  I think Tesla’s product delays and high product prices are going to catch up with it, so I put on a small short position today. I’m looking forward to getting my X when it finally ships in a few months, but I don’t think this is the game-changer that the Model S was in 2012.