• Get Rid of ISIS Using This 'One Weird Trick'

  Submitted by Dan Sanchez via DanSanchez.me,

  You’ve seen those internet ads that offer “one weird trick” for eliminating belly fat or boosting testosterone, right? Well, here’s one weird trick for getting rid of ISIS and boosting our security from terrorism. The “trick” is non-intervention. And it is only weird in the sense that it is so uncommon in this age of war. Nonetheless, it works.

  And it will work against ISIS because it was intervention that propelled its rise and it is intervention that sustains it. Non-intervention would eliminate ISIS by simply withholding its fuel and withdrawing its props.

  The “one weird trick” has three easy steps. These steps are only “easy” for Westerners, because they basically amount to us refraining from constantly fucking things up. Once we get out of their way, the hard work will be done by locals, which is as it should be.

  Step 1: The West should stop supporting the jihadist-led Syrian insurgency and stop supporting the regional allies (Turkey, Saudi Arabia, etc) that are also supporting it. With the flow of weapons and money cut off, rebels will defect and the ground forces of the secular Syrian regime that the U.S. has been idiotically trying to overthrow will be able to push ISIS and Syrian Al Qaeda out of Syria.

   

  Step 2: The U.S. should stop supporting the sectarian Shi’ite government in Iraq. Only when that flow of weapons and money is also halted will Baghdad be forced to compromise with the Iraqi Sunnis they have been brutally persecuting for a decade. And only then will the Sunni tribes feel they can afford to turn against ISIS again, as they did in 2006. This will give the terrorists fleeing Syria nowhere to run.

   

  Step 3: The West should stop directly bombing Syria and Iraq. Such attacks inevitably massacre civilians, and thereby only strengthen ISIS. Civil society is thus weakened and less capable of resisting the hardened extremists. Plus, more Muslim youth are thus radicalized by atrocity and more susceptible to extremist recruitment.

  More American boots, European bombs, Turkish guns, and Saudi money will only feed the fire that fuels ISIS and make our cities more vulnerable to terrorist attacks. Just stop constantly subsidizing and contributing to the war and chaos that ISIS thrives on. That alone can starve and weaken that death cult enough for the non-psychotic elements of Syria and Iraq to unite and finally destroy it.

  We have tolerated and enabled our governments’ bloody misadventures long enough. Get the West out of the Middle East, now.

  

  

  

  

  

• It Begins: Desperate Finland Set To Unleash Helicopter Money Drop To All Citizens

  With Citi's chief economist proclaiming "only helicopter money can save the world now," and the Bank of England pre-empting paradropping money concerns, it appears that Australia's largest investment bank's forecast that money-drops were 12-18 months away was too conservative.

  Over the last few months, in a prime example of currency failure and euro-defenders' narratives, Finland has been sliding deeper into depression. Almost 7 years into the the current global expansion, Finland's GDP is 6pc below its previous peak. As The Telegraph reports, this is a deeper and more protracted slump than the post-Soviet crash of the early 1990s, or the Great Depression of the 1930s. And so, having tried it all, Finnish authorities are preparing to unleash "helicopter money" to save their nation by giving every citizen a tax-free payout of around $900 each month!

  Just over two years ago, when the world was deciding who would be Bernanke Fed Chair replacement, Larry Summers or Janet Yellen (how ironic that Larry Summers did not get the nod just because a bunch of progressive economists thought he would not be dovish enough) we wrote about a different problem: with the end of QE3 upcoming and with the inevitable failure of the economy to reignite (again), we warned that there remains one option after (when not if) QE fails to stimulate growth: helicopter money.

  While QE may be ending, it certainly does not mean that the Fed is halting its effort to "boost" the economy. In fact… the end of QE may well be simply a redirection, whereby the broken monetary pathway, one which uses banks as intermediaries to stimulate inflation (supposedly a failure according to the economist mainstream), i.e., "second-round effects", is bypassed entirely and replaced with Plan Z, aka "Helicopter Money" mentioned previously as an all too real monetary policy option by none other than Milton Friedman and one Ben Bernanke. This is also known as the nuclear option.

  Today Finland needs the nuclear option. As The Telegraph explained, nobody can accuse Finland of being spendthrift, or undisciplined, or technologically backward, or corrupt, or captive of an entrenched oligarchy, the sort of accusations levelled against the Greco-Latins.

  The country's public debt is 62pc of GDP, lower than in Germany. Finland has long been held up as the EMU poster child of austerity, grit, and super-flexibility, the one member of the periphery that supposedly did its homework before joining monetary union and could therefore roll with the punches.

   

  

   

  Finland tops the EU in the World Economic Forum’s index of global competitiveness. It comes 1st in the entire world for primary schools, higher education and training, innovation, property rights, intellectual property protection, its legal framework and reliability, anti-monopoly policies, university R&D links, availability of latest technologies, as well as scientists and engineers.

   

  Its near-perfect profile demolishes the central claim of the German finance ministry – through its mouthpiece in Brussels – that countries get into bad trouble in EMU only if they drag their feet on reform and spend too much.

   

  The country has obviously been hit by a series of asymmetric shocks: the collapse of its hi-tech champion Nokia, the slump in forestry and commodity prices, and the recession in Russia.

   

  The relevant point is that it cannot now defend itself. Finland is trapped by a fixed exchange rate and by the fiscal straightjacket of the Stability Pact, a lawyers' construct that was never intended for such circumstances. The Pact is being enforced anyway because rules are rules and because leaders in the Teutonic bloc have an idee fixee that moral hazard will run rampant if any country in the EMU core sets a bad example.

   

  Finland's output shrank a further 0.6pc in the third quarter and the country's three-year long recession is turning into a fourth year. Industrial orders fell 31pc in September. "It's spooky," said Pasi Sorjonen from Nordea.

  Finland is digging itself into an ever deeper hole. The International Monetary Fund warned this week against austerity overkill and “pro-cyclical” cuts before the economy is strong enough to take it.

  The IMF spoke softly but the message was clear. Finland should not even be thinking of a “front-loaded” fiscal contraction or slashing investment at a time when its output gap is 3.2pc of GDP.

   

  The Finnish authorities admitted in their reply to the IMF's Article IV report that they had no choice because they had to comply with the Stability Pact. This is what European policy-making has come to.

   

  Some in Finland were quick to throw stones at Greece during the debt crisis, seemingly unaware at the time that they too lived in a glass house. Their own story is not really that different from the EMU disasters that unfolded in the South.

   

   

  

   

  Interest rates were too low for Finland’s needs during the commodity boom, causing the economy to overheat. Unit labour costs spiralled up 20pc from 2006 onwards, leaving the country high and dry when the music stopped. Public debt was low but private debt was high (somewhat like Spain and Ireland). The crisis hit later merely because the commodity bubble did not burst until 2012.

   

  Sweden was able to navigate similar shocks by letting its currency take the strain at key moments over the last decade. Swedish GDP is now 8pc above its pre-Lehman level.

   

  

   

  The divergence between Finland and Sweden is staggering for two Nordic economies with so much in common, and it has rekindled Finland’s dormant anti-euro movement.

  And that 'political' crisis may have been just the kick the authorities needed to unleash the nuclear money drop option, as The Telegraph continues,

  Authorities in Finland are considering giving every citizen a tax-free payout of €800 ($900) each month.

   

  Under proposals being draw up by the Finnish Social Insurance Institution (Kela), this national basic income would replace all other benefit payments, and would be paid to all adults regardless of whether or not they receive any other income.

   

  Unemployment in Finland is currently at record levels, and the basic income is intended to encourage more people back to work. At present, many unemployed people would be worse off if they took on low-paid temporary jobs due to loss of welfare payments.

   

  Detractors caution that a basic income would remove people's incentive to work and lead to higher unemployment. Those in favour point to previous experiments where a basic income has been successfully trialed.

   

  …

   

  Finnish Prime Minister Juha Sipilä supports the idea, saying: “For me, a basic income means simplifying the social security system.”

   

  The basic income will cost Finland roughly €46.7 billion per year if fully implemented. Kela's proposals are due to be submitted in November 2016.

  That's around 20% of GDP annually… and while politicians will claim it is temporary, these 'initiatives' never are – just ask Japan!

  *  *  *

  As we previously detailed, 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.

   

  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”?

  Simply put, The Keynesian Endgame is here… as  the only way to avoid secular stagnation (which, for the uninitiated, is just another complicated-sounding, economist buzzword for the more colloquial “everything grinds to a halt”) is for central bankers to call in the Krugman Kraken and go full-Keynes.

  Rather than buying assets, central banks drop money on the street. Or even better, in a more modern and civilised fashion, credit our bank accounts! That, after all, may be more effective than buying assets, and would not imply the same transfer of wealth as previous or current forms of QE. Indeed, ‘helicopter money’ can be seen as permanent QE, where the central bank commits to making the increase in the monetary base permanent.

   

  Again, crediting accounts does not guarantee that money will be spent – in contrast to monetary financing where the newly created cash can be used for fiscal spending. And in many cases, such policy would actually imply fiscal policy, as most central banks cannot conduct helicopter money operations on their own.

   

  …

   

  So again, the thing to realize here is that this has moved well beyond the theoretical and it's not entirely clear that most people understand how completely absurd this has become (and this isn't necessarily a specific critique of SocGen by the way, it's just an honest look at what's going on). At the risk of violating every semblance of capital market analysis decorum, allow us to just say that this is pure, unadulterated insanity. There's not even any humor in it anymore.

   

  You cannot simply print a piece of paper, sell it to yourself, and then use the virtual pieces of paper you just printed to buy your piece of paper to stimulate the economy. There's no credibility in that whatsoever, and we don't mean that in the somewhat academic language that everyone is now employing on the way to criticizing the Fed, the ECB, and the BoJ.

  And it will end only one way…

  The monetizing of state debt by the central bank is the engine of helicopter money. When the central state issues $1 trillion in bonds and drops the money into household bank accounts, the central bank buys the new bonds and promptly buries them in the bank's balance sheet as an asset.

   

  The Japanese model is to lower interest rates to the point that the cost of issuing new sovereign debt is reduced to near-zero. Until, of course, the sovereign debt piles up into a mountain so vast that servicing the interest absorbs 40+% of all tax revenues.

   

  But the downsides of helicopter money are never mentioned, of course. Like QE (i.e. monetary stimulus), fiscal stimulus (helicopter money) will be sold as a temporary measure that quickly become permanent, as the economy will crater the moment it is withdrawn.

  The temporary relief turns out to be, well, heroin, and the Cold Turkey withdrawal, full-blown depression.

   

  

  

  

  

  

• "Don't Believe The Hope" – When Forward Guidance Becomes Forward Mis-Direction

  Submitted by Joseph Calhoun via Alhambra Investment Partners, 

  When a problem comes along

  You must whip it

   Before the cream sets out too long
  You must whip it

  When something’s goin’ wrong

  You must whip it – Devo

  Did anyone get the license plate of the truck that hit the bulls last Thursday? If not, maybe you managed to catch a glimpse of it when it backed over the bears on Friday. I have it on good authority the driver was an Italian by the name of Mario Draghi. Mario’s German buddies managed to sober him up for a press conference Thursday but by Friday he was in New York and back on the sauce. Meanwhile, Janet Yellen spent the week explaining why she was going to take the ladle out of the punchbowl before Santa gets down the chimney. By the end of the week, traders were getting whiplash treatment and stocks were right back where they started.

  The market came into last week positioned for a big new dollop of monetary easing from the ECB. With the Fed poised to hike and the ECB ready to ease, the obvious trade was short Euros and long US dollars, most often in the form of US Treasuries but with a few FANG stocks and a call on the DAX thrown in for good measure. After last month’s meeting Draghi hinted that more easing was on the way and traders took him at his word. One wonders, with the benefit of hindsight, why he wasn’t questioned more about why he didn’t just ease at that last meeting. It seems obvious now that he wasn’t having any luck convincing the rest of the ECB to go along with his punchbowl spiking ways. And by the rest of the ECB, I mean the Germans who have an innate bias against anything that might turn into too much fun.

  So, when Draghi offered up his weak tea of slightly more negative interest rates and a six month extension of QE, all those short Euro/long Dollar trades suddenly looked rather crowded, foolish and not such a sure thing after all. And just like that, with visions of their already reduced bonuses dancing in their heads, traders started buying Euros, selling Treasuries and basically getting the heck out, price be damned. By the end of the day, the Euro was up four handles from 105 to 109, Treasuries were sucking for air and the Dow was down 250 points because…well just because.

  As Friday dawned all awaited the November employment report to gauge whether the FOMC would still be in a hiking mood come December 16th. Earlier in the week, the manufacturing ISM posted at 48.6 – sub 50 means the manufacturing sector is contracting – and combined with some dovish cooing from a couple of FOMC members had people wondering if the Fed would really get off zero this month. The employment report was typical of the series lately, posting an as expected or so 211k; not great, not bad but nothing that the labor market watching Yellen would fret about. That wasn’t enough for more than a mild rebound until Draghi’s speech to the Economic Club of New York. He averred that, “no doubt” the ECB would step up stimulus if needed. He didn’t define “needed” but stock traders didn’t wait for clarification. I guess, more accurately, the algorithms that do all the trading today didn’t wait for clarification. Who or whatever heard Draghi’s monetary dog whistle knew what it meant or what they wanted or hoped it to mean and stood on the buy button all afternoon.

  After all the central banker drama was complete the Dow had traversed a nearly 500 point range to end up less than 50 points from where it started. Which seems quite appropriate since there wasn’t much change in the fundamental backdrop of the markets. That ISM report earlier in the week did nothing but confirm what we all knew already. The manufacturing/industrial side of the US economy is weakening. That trend isn’t news to us and hopefully not to the FOMC but the ISM’s predictive track record isn’t that great and it was unlikely to change Yellen’s mind.

  The other data released last week did nothing to change the trends that have persisted all year. The auto sector reported another gangbuster month. The service sector continued to expand. Manufacturing data was weak. Imports and exports continued to contract and employment was positive but uninspiring. There was no change in the economic outlook for Europe either where a nascent cyclical recovery likely has little to do with the ECB’s actions, past, present or future.

  The market volatility last week was a byproduct of the open mouth policies of the world’s central banks. Forward guidance, intended to make monetary policy predictable and markets less volatile, creates confusion. Traders hang on every word, position themselves accordingly and get whipsawed when reality doesn’t align with expectations. Investors don’t know whether they should pay attention or not. The idea that monetary policy should be predictable was always based on a false premise. Forward guidance only works if central banks can predict the future course of the economy. Absent a working crystal ball, forward guidance adds to the considerable uncertainty that is inherent in all markets.

  As hard as it is sometimes, investors need to tune out the central bankers. Concentrate on the indicators that have provided accurate guidance in the past. As stated above the ISM isn’t one of those and while it does provide some extra information it isn’t anything on which to base investment or monetary policy. There are instances of recessions starting with the ISM above the 50 level that divides expansion and contraction. There are also plenty of instances of readings below 50 being nothing more than transitory noise. Having said that, a reading below 49 such as we got last week, has led to, about 1/3 of the time, a recession in short order. So, one shouldn’t ignore it but context is important.

  Of more importance is the developing credit crunch. It is notable I think that junk bonds did not join the stock rally Friday. Credit spreads did narrow a bit last week as Treasuries took a hit on the ECB disappointment but the trend is still wider. More meaningful, I think, is that the damage in credit markets has spread well beyond the energy sector. S&P reported $180 billion of distressed junk bonds from 228 companies in November and a distress ratio of 20.1%, the highest since 2009. (Distressed bonds’ yield 1000 basis points than comparable Treasuries.) The oil and gas sector represents just 37% of the total. Metals and mining is second and together those two sectors represent 53% of the total. Restaurants, media, technology, chemicals, consumer products and financials make up the rest of the top 8. As I said, it isn’t just energy.

  We can see the stress in dividends as well. Dividend cuts in November were 50% oil and mining, 23% finance, 18% manufacturing and 9% shipping. That’s a pretty diverse group affected not just by falling oil prices but global economic weakness.

  The Fed seems set on hiking rates this month and there are good arguments in favor of doing so. But we shouldn’t pretend that there will be no cost, no economic or market consequence for doing so. Market liquidity has already waned starting with the taper tantrum and continuing through the actual tapering and end of QE. Believe what you want but markets have spoken; the tightening cycle started long ago and the first rate hike is just the latest move. It seems inconsequential, a mere 25 basis points, but then the last hike in the last tightening cycle, in the fall of 2006, was only a quarter point too. Not only that but we have no idea how effective the Fed’s plan for hiking rates will be. We have to assume that if they are successful in raising the Fed Funds rate that it will reduce liquidity further. How much is anyone’s guess.

  As we approach the Fed meeting expect markets to get more volatile. While the odds favor a move, it isn’t a sure thing until it is actually done. We found out last week what happens when forward guidance turns out to be forward misdirection. All those traders who thought they had a sure thing, who assumed that Draghi wouldn’t dare disappoint the market, got whipped. Whipped good.

  *  *  *
  ZH: Just remember what happened the last time The Fed hiked into a recession… We are talking of course, about the infamous RRR-hike of 1936-1937, which took place smack in the middle of the Great Recession. Here is what happened then, as we described previously in June.

  [No episode is more comparable to what is about to happen] than what happened in the US in 1937, smack in the middle of the Great Depression. This is the only time in US history which is analogous to what the Fed will attempt to do, and not only because short rates collapsed to zero between 1929-36 but because the Fed’s balance sheet jumped from 5% to 20% of GDP to offset the Great Depression.

  Just like now.

  Then, briefly, the economy started to improve superficially, just like now, and as a result the Fed tightened in a series of three steps between Aug’36 & May’37, doubling reserve requirements from $3bn to $6bn, causing 3-month rates to jump from 0.1% in Dec’36 to 0.7% in April’37.

  

  Here is a detailed narrative of precisely what happened from a recent Bridgewater note:

  The first tightening in August 1936 did not hurt stock prices or the economy, as is typical.

   

  The tightening of monetary policy was intensified by currency devaluations by France and Switzerland, which chose not to move in lock-step with the US tightening. The demand for dollars increased. By late 1936, the President and other policy makers became increasingly concerned by gold inflows (which allowed faster money and credit growth).

   

  The economy remained strong going into early 1937. The stock market was still rising, industrial production remained strong, and inflation had ticked up to around 5%. The second tightening came in March of 1937 and the third one came in May. While neither the Fed nor the Treasury anticipated that the increase in required reserves combined with the sterilization program would push rates higher, the tighter money and reduced liquidity led to a sell-off in bonds, a rise in the short rate, and a sell-off in stocks. Following the second increase in reserves in March 1937, both the short-term rate and the bond yield spiked.

   

  Stocks also fell that month nearly 10%. They bottomed a year later, in March of 1938, declining more than 50%!

  Or, as Bank of America summarizes it: "The Fed exit strategy completely failed as the money supply immediately contracted; Fed tightening in H1’37 was followed in H2’37 by a severe recession and a 49% collapse in the Dow Jones."

  

  As can be seen on the above, in 1938, the stock market began to recover some. However, despite the easing stocks didn't fully regain their 1937 highs until the end of the war nearly a decade later.

  It needed a world war for that.

  But wait, the Fed hiked only to ease? That's right: in response to the second increase in reserves that March, Treasury Secretary Morgenthau was furious and argued that the Fed should offset the "panic" through open market operations to make net purchases of bonds. Also known now as QE. He ordered the Treasury into the market to purchase bonds itself.

  

  

  

  

  

• A Beleaguered Wal-Mart Sues A Broke Puerto Rico For "Astonishing" Tax Hike

  It’s always amusing when unforeseen circumstances conspire to bring two previously disparate stories together in one hilarious boondoggle. 

  As regular readers are no doubt aware, Puerto Rico is broke. “Let us be clear: We have no cash left,” governor Alejandro Garcia Padilla told Congress last week, after the commonwealth used an absurd revenue clawback end-around to avoid defaulting on some $345 million in debt that came due on Tuesday. 

  The island owes another $300 million on January 1st and what might this week’s payment so important was that of the $354 million coming due, around $273 million was GO debt, and defaulting on that would mean a cascade of ugly litigation. 

  Of course the use of the clawback – which effectively allows the island to divert revenue earmarked for other bonds to GO debt repayments – is a bit like Greece tapping its IMF reserves to pay the IMF. That is, there’s a palpable sense of desperation here and the situation is going to get immeasurably worse without some manner of federal intervention. 

  Ok, so that’s Puerto Rico. 

  Regular readers are also no doubt aware that Wal-Mart has gotten itself into trouble this year after bowing to calls for increased wages for its lowest-paid employees. Those wage hikes (which are set to cost the retailer around $1.5 billion over two years) pinched margins, prompting the company to tighten the screws on suppliers with a series of measures that culminated in Wal-Mart demanding that its vendors pass on any savings they might have derived from the yuan deval. 

  The company also learned that when you hike wages for some employees but not others, the wage hierarchy gets thrown out of whack prompting workers higher up the ladder to either quit, or demand more money to restore the compensation pecking order. 

  Unable to cope and unable to squeeze anything else out of the supply chain without triggering a veritable vendor mutiny, Wal-Mart was forced to cut hours and then, to cut jobs at the Bentonville office. 

  It all fell apart in October when the retailer slashed its guidance, triggering a harrowing decline in the stock. 

  Well don’t look now, but a beleaguered Wal-Mart is suing a beleaguered Puerto Rico after the latter’s attempt to lift government revenue by raising taxes pushed the company’s tax burden in the commonwealth to nearly 92% of net income.

  As Bloomberg reports, “Puerto Rico’s Act 72-2015 increases to 6.5 percent from 2 percent the tax on goods imported from offshore affiliates to local companies with gross revenues of more than $2.75 billion.” 

  Wal-Mart “biggest private employer and hands over more sales tax to the island government than any other business,” Bloomberg continues, before noting that the company is “asking a federal judge to declare the new measure unconstitutional and block its enforcement.”

  “The new levy raised the estimated cumulative income tax on Wal-Mart Puerto Rico Inc. to an astonishing and unsustainable 91.5% of its net income!”, the company exclaimed, in a complaint filed Friday in San Juan.

  We’re sure they’ll be any number of amusing anecdotes to report once this case gets going, but for now we’ll simply close by saying that if you work at a Wal-Mart in Puerto Rico, you probably shouldn’t expect much in the way of wage gains from this point forward because apparently, the island is so broke that it now needs the company to turn over nearly all of its profits in order to make sure you have public services.

  

  

  

  

  

• What Polarized Politics Teaches Us About Stock Market Uncertainty

  Excerpted from Ben Hunt's Epsilon Theory blog,

  It’s important to respect the power of econometric models. It’s important to work with econometric models. But I don’t care who you are … whether you’re the leader of the world’s largest central bank or you’re the CIO of an enormous pension fund or you’re the world’s most successful financial advisor … it’s a terrible mistake to trust econometric models. But we all do, because we’ve been convinced by modeling’s henchman, The Central Tendency.

  What is the The Central Tendency? It’s the overwhelmingly widespread and enticing idea that there’s a single-peaked probability distribution associated with everything in life, and that more often than not it looks just like this:

  

  It’s our acceptance of The Central Tendency as The Way The World Works that transforms our healthy respect for econometric modeling into an unhealthy trust in econometric modeling. It’s what creates our unhealthy trust in projections of asset price returns. It’s what creates our unhealthy trust in projections of monetary policy impact.

  It also creates an unhealthy trust in the mainstream tools we use to project risk and reward in our investment portfolios.

  I’m not saying that The Central Tendency is wrong. I’m saying that it is (much) less useful in a world that is polarized by massive debt and the political efforts required to maintain that debt. I’m saying that it is (much) less useful in a market system where exchanges have been transformed into for-profit data centers and liquidity is provided by machines programmed to turn off when profit margins are uncertain.

  Polarized Politics

  The world is awash in debt, with debt/GDP levels back to 1930 levels and far higher than 2007 levels prior to the Great Recession. What’s different today in 2015 as compared to the beginning of the Great Recession, however, is that governments rather than banks are now the largest owners (and creators!) of that debt.

  Governments have more tools and time than corporations, households, or financial institutions when it comes to managing debt loads, but the tools they use to kick the can down the road always result in a more polarized electorate. Why? Because the tools of status quo debt maintenance, particularly as they inflate financial asset prices and perpetuate financial leverage, always exacerbate income and wealth inequality. I’m not saying that’s a good thing or a bad thing. I’m not saying that some alternative debt resolution path like austerity or loss assignment would be more or less injurious to income and wealth equality. I’m just observing that whether you’re talking about the 1930s or the 2010s, whether you’re talking about the US, Europe, or China, greater income and wealth inequality driven by government debt maintenance policy simply IS. 

  Greater income and wealth inequality reverberates throughout a society in every possible way, but most obviously in polarization of electorate preferences and party structure. Below is a visual representation of increased polarization in the US electorate, courtesy of the Pew Research Center. Other Western nations are worse, many much worse, and no nation is immune.

  

  There’s one inevitable consequence of significant political polarization: the center does not hold. Our expectation that The Central Tendency carries the day will fail, and this failure will occur at all levels of political organization, from your local school board to a congressional caucus to a national political party to the overall electorate. Political outcomes will always surprise in a polarized world, either surprisingly to the left or surprisingly to the right. And all too often, I might add, it’s a surprising outcome pushed by the illiberal left or the illiberal right.

  The failure of The Central Tendency occurs in markets, as well.

   

  Below is a chart of 3-month forward VIX expectations in December 2012, as the Fiscal Cliff crisis reared its ugly head, as calculated by Credit Suisse based on open option positions. If you calculated the average expectations of the market (the go-to move of all econometric models based on The Central Tendency), you’d predict a future VIX price of 19 or so.

   

  

   

  But that’s actually the least likely price outcome! The Fiscal Cliff outcome might be a policy surprise of government shutdown, resulting in a market bearish equilibrium (high VIX). Or it might be a policy surprise of government cooperation, resulting in a market bullish equilibrium (low VIX).

   

  But I can promise you that there was no possible outcome of the political game of Chicken between the White House and the Republican congressional caucus that would have resulted in a market “meh” equilibrium and a VIX of 19.

  If you want to read more about the Epsilon Theory perspective on polarized politics and the use of game theory to understand this dynamic, read “Inherent Vice”, “1914 Is the New Black”, and “The New TVA”.

  

  

  

  

  

• Iraq May Seek "Direct Military Intervention From Russia" To Expel Turkish Troops

  Turkey just can’t seem to help itself when it comes to escalations in the Mid-East. 

  First, Erdogan intentionally reignited the conflict between Ankara and the PKK in an effort to scare the public into nullifying a democratic election outcome. Then, the Turks shot down a Russian warplane near the Syrian border. Finally, in what very well might be an effort to protect Islamic State oil smuggling routes, Erdogan sent 150 troops and two dozen tanks to Bashiqa, just northeast of Mosul in a move that has infuriated Baghdad. 

  We discussed the troop deployment at length on Saturday in “Did Turkey Just Invade Iraq To Protect Erdogan’s ISIS Oil Smuggling Routes?,” and you’re encouraged to review the analysis in its entirety, but here was our conclusion:

  The backlash underscores the fact that Iraq does not want help from NATO when it comes to fighting ISIS. Iraqis generally believe the US is in bed with Islamic State and you can bet that Russia and Iran will be keen on advising Baghdad to be exceptionally assertive when it comes to expelling a highly suspicious Turkish presence near Najma. 

  You’re reminded that Iran wields considerable influence both politically and militarily in Iraq. The Iraqi military has proven largely ineffective at defending the country against the ISIS advance and so, the Quds-backed Shiite militias including the Badr Organisation, Asaib Ahl al-Haq and Kataib Hezbollah have stepped in to fill the void (see our full account here).

  Of course that means that the Ayatollah looms large in Iraq and when it comes to loyalty, both the militias and a number of Iraqi lawmakers pledge allegiance to Tehran and more specifically to Qassem Soleimani. The point is this: Iran is not going to stand idly by and let America and Turkey put more boots on the ground in Iraq which is why just hours after Ash Carter announced that The Pentagon is set to send in more US SpecOps, Kataib Hezbollah threatened to hunt them down and kill them. Not coincidentally, PM Haider al-Abadi rejected a larger US troop presence just moments later. 

  Now, Abadi has given Turkey 48 hours to get its troops out of Iraq or else.

  Or else what?, you might ask. Well, or else Baghdad will appeal to the UN Security Council where Russia and China would likely support the Iraqi cause.

  But that’s a little too meek of a solution for some Iraqi politicians including Hakim al-Zamili, the head of Iraq’s parliamentary committee on security and defense who said on Sunday that Iraq “may soon ask Russia for direct military intervention in response to the Turkish invasion and the violation of Iraqi sovereignty.”

  “Iraq has the ability to repel these forces and drive them out of Iraqi territory. We could also request Russia to intervene militarily in Iraq in response to Turkish violation of Iraqi sovereignty,” he told Al-Araby al-Jadeed. 

  Well guess what? Hakim al-Zamili is a somebody.

  He was arrested in 2007 by Iraqi and American troops while holding a high ranking office in the Health Ministry. Zamili was charged with sending millions of dollars to Shiite militants who subsequently kidnapped and killed Iraqi civilians. Sunni civilians. More specifically, the US suspected Zamili “of using his position to run a rogue unit of the Mahdi Army, the Shiite militia that claims loyalty to the cleric Moktada al-Sadr,” The New York Times reported at the time, adding that he was accused of “flooding the Health Ministry’s payroll with militants, embezzling American money meant to pay for Iraq’s overworked medical system and using Health Ministry ‘facilities and services for sectarian kidnapping and murder.”

  Here’s an interesting account from NPR ca. 2010, after parliamentary elections: 

  At Friday prayers yesterday in Baghdad’s Sadr City slum, one man in a gray suit seemed to attract as much attention as the preachers speaking over the P.A.

   

  After a sermon that praised both armed and political resistance to the occupation of Iraq, many from the crowd of thousands rushed up to the front to congratulate Hakim al-Zamili, who appears to have won a resounding mandate as a member of parliament from Baghdad.

   

  Though a celebrity here in Sadr City, many Iraqis call him a war criminal. Zamili was the deputy health minister during the ramp-up to Iraq’s civil war, and he’s accused of turning the ministry’s guards into a Shia death squad, kidnapping and killing hundreds of Sunnis. Another ministry official who denounced Zamili disappeared and is presumed dead.

   

  After being arrested and held over a year by the Americans, an Iraqi court acquitted Zamili after a brief trial.

   

  “If I were really involved in those crimes, the courts would have convicted me,” Zamili said. 

  Right.

  Anyway, the point is that as we’ve been saying for months, Shiite politicians along with Iran-backed militias now control Iraq, which has essentially been reduced to a colony of Tehran.

  There will be no unilateral decisions on the part of the US or Turkey to place troops in the country without pushback from Baghdad and everyone involved knows that when Baghdad pushes back, it means Iran disapproves.

  As Zamili’s warning makes clear, Iraq (and thereby Iran) won’t be shy about calling in the big guns from Moscow when they feel the situation demands it – and the militas won’t be shy about targeting the “invaders.”

  “Turkish interests in Iraq will now be a legitimate target because of Turkey’s assault on Iraqi territories,” Kata’ib Sayyid al-Shuhada, one of the Shia militias of the Popular Mobilisation said in a statement. Similarly, Harakat al-Nujaba called Turkey “a terrorist state.” You’re reminded that these groups have a reputation for fearing no one other that Khamenei himself. Not the US, not Turkey, not ISIS, no one:

  

  We close with what Zamili said after the establishment of the Baghdad-based joint intelligence cell comprising officials from Iran, Russia, Syria, and Iraq: 

  “The idea is to formalize the relationship with Iran, Russia and Syria. We wanted a full-blown military alliance.”

  *  *  *

  Bonus color from ISW:

  The recent deployment into northern Iraq differs from past deployments in three ways. First, Turkey does not appear to have undertaken the action in order to contain the PKK directly, as there is no significant PKK activity in or around Bashiqa. The base is also located too far from other priority territory for the PKK, including Sinjar west of Mosul, to be used as an effective staging point for future operations against the PKK. Second, the Turkish battalion, deployed to an area within the Disputed Internal Boundaries (DIBs) – areas that have substantial Kurdish populations but remain outside of Iraqi Kurdistan. Turkey likely intends to support Barzani and the KDP in securing control over the DIBs while also positioning its own forces to better influence what forces participate in the future operation to recapture Mosul, formerly an ethnically diverse city including Arabs, Kurds, and Turkmen. Third, the Turkish deployment came only four days after Defense Secretary Ashton Carter announced that additional U.S. Special Operations Forces (SOF) would deploy to Iraq to conduct raids and intelligence-gathering in Iraq and Syria, an announcement that generated denunciations from the Shi’a political parties and threats of no-confidence votes against the Prime Minister, forcing PM Abadi to reject publicly the presence of foreign ground troops in Iraq. The Turkish troops thus deployed at a particularly sensitive time. 

  Turkey also maintains close connections with key players in northern Iraq. Turkey has cooperated with Kurdistan Regional President Masoud Barzani since 2013, particularly over crude oil exports through the Kirkuk-Ceyhan pipeline. Barzani and Turkey share a mutual distrust of the PKK, and the KDP currently competes with the PKK for control over Sinjar district. Turkey also possesses close relations with former Ninewa Province governor Atheel al-Nujaifi, who maintains a camp of former local police and Arab fighters in Bashiqa called the “National Mobilization.” Turkish support was essential for Atheel al-Nujaifi’s elevation to the Ninewa governorship in 2009. Finally, Turkey has close relations Osama al-Nujaifi, Atheel’s brother and the leader of the Sunni Etihad bloc in the Council of Representatives (CoR). Turkey will likely leverage these connections in order to secure greater control over what armed and political actors participate in operations to recapture Mosul. In particular, Turkey will likely support the Nujaifis over Sunni Arabs with whom Turkey has not cultivated relations.

  Turkey’s deployment of troops sparked strong rejection from the full spectrum of Iraqi political actors. Iraqi Prime Minister Haidar al-Abadi and Iraqi President Fuad Masoum strongly condemned the deployment as a violation of Iraqi sovereignty and demanded that Turkey conduct an immediate withdrawal. All major Shi’a parties denounced the deployment as a violation of Iraqi sovereignty, with a leading Sadrist official calling for Iraqi airstrikes on the Turkish force if it did not depart the country. Another pro-Maliki CoR member suggesting that “a Russian force” could intervene to expel the Turkish battalion.

  The U.S. will not likely press Turkey on the issue, as anonymous U.S. defense sources merely indicated that the U.S. was “aware” of Turkey’s intentions. Iranian proxy militias, however, could challenge Turkey elsewhere in the country. Iran likely ordered Iranian proxy militias to kidnap 18 Turkish construction workers on September 2 in order to pressure Turkey into ordering Turkish-backed rebels to cooperate with a ceasefire around the besieged Shi’a majority towns of Fu’ah and Kifriya in northern Syria. The kidnappings provided sufficient leverage against Turkey and the kidnapped workers were released after Syrian rebels enacted a local ceasefire. Iran could pursue similar actions against Turkish assets in Baghdad or in southern Iraq.

  This situation may escalate further if Iran views the deployment as threatening its vital strategic objectives in Iraq or Syria. Iran rejects any foreign forces other than their own on Iraqi soil and backs the Patriotic Union of Kurdistan (PUK), Barzani’s rival in Iraqi Kurdish politics trying to contest his control over the Kurdistan regional presidency. Iranian proxies also recently sparred violently with the Peshmerga in Tuz Khurmato in eastern Salah al-Din proxies on November 12.

  Shi’a parties will use the episode to pressure PM Abadi to strongly reject foreign intervention, particularly if reports that Turkey and Barzani signed an agreement to establish a permanent Turkish base in Bashiqa are correct. These calls could complicate U.S. plans to additional Special Operations Forces (SOF) to Iraq to as a “specialized expeditionary targeting force” that will conduct raids and intelligence-gathering in Iraq and Syria.

  

  

  

  

  

• BIS Warns The Fed Rate Hike May Unleash The Biggest Dollar Margin Call In History

  Over the past several months, one of the biggest conundrums stumping the financial community has been the record negative swap spread which we profiled first in September,  and which as Goldman most recently concluded, “has been driven by funding and balance sheet strains, especially since August.”

  

   

  Today, in its latest quarterly report, the Bank of International Settlement focused precisely on this latest market dislocation.  According to the central banks’ central bank, “recent quarters have witnessed unusual price relationships in fixed income markets. US dollar swap spreads (ie the difference between the rate on the fixed leg of a swap and the corresponding Treasury yield) have turned negative, moving in the opposite direction from euro swap spreads (Graph A, left-hand panel).”

  Given that counterparties in derivatives markets, typically banks, are less creditworthy than the government, swap rates are normally higher than Treasury yields because of the additional risk premium. Hence, the negative spreads point to a possible dislocation. One set of factors relates to supply and demand conditions in interest rate swap and Treasury bond markets. In the swap markets, forces that can compress swap rates include credit enhancements in swaps, hedging demand from corporate bond issuers, and investors seeking to lock in longer durations (eg insurers and pension funds) by securing fixed rates via swaps.

   

  In cash markets, in turn, upward pressures on yields stemmed from the recent sales of US Treasury securities by EME reserve managers. The market impact of these Treasury bond sales may have been amplified by a second set of factors that curb arbitrage and impede smooth market functioning. First, the capacity of dealers’ balance sheets to absorb rising inventory may have been overwhelmed by the amount of US Treasury bonds reaching the secondary market in the third quarter (Graph A, centre panel), causing dealers to bid market yields above the corresponding swap rates. Second, balance sheet constraints may have made it more costly for intermediaries to engage in the speculative arbitrage needed to restore a positive swap spread. Such arbitrage is sensitive to balance sheet costs because it requires leverage, with a long Treasury position funded in the repo market.

  Meanwhile, while US swap spreads hit record negative levels, in Europe the market tensions have been of a different nature:

  Ten-year swap spreads started to widen in early 2015, around the time when the Swiss National Bank abandoned its currency peg, then increased further over subsequent months (Graph A, left-hand panel). While past episodes of widening swap spreads can be attributed to credit risk in the banking sector, the most recent developments may have more to do with hedging by institutional investors. While swap rates also fell (Graph A, right-hand panel), the swap spread widened, indicating that cash market yields fell by even more. One possible explanation is that, as yields fall amid expectations of ECB asset  purchases, institutional investors with long-duration liabilities, such as insurers and pension funds, would have been under pressure to extend their asset portfolio duration by purchasing additional longer-dated bonds, possibly compressing market yields below the swap rates.

  

  And with cash markets rapidly depleting of physical inventory as a result of central bank monetization, investors have had to rely on derivatives markets, especially swaptions.

  In addition to extending portfolio duration by purchasing longer-dated bonds or entering a long-term interest rate swap as a fixed rate receiver, investors may also hedge the risk of steeply falling yields by purchasing options to enter a swap contract at a future date (swaptions). Hence, swaptions tend to become more expensive in times of stress and when investors rush to hedge duration risk.

   

  As 10-year swap rates were compressed in early 2015, the cost of such options written on euro swap rates rose by a factor of three by 20 April 2015 (Graph B, left-hand panel). Steeply rising euro rate hedging costs preceded the actual correction in yields, which started rebounding around the weekend of 18 April culminating in the so-called bund tantrum. This suggests that this year’s turbulence in fixed income markets may have had its origins in derivatives and hedging activity, with reduced market depth in cash markets exacerbating the spillover.

  Why is there reduced market depth in cash markets? Simple: because of central banks intervention and soaking up of securities. So what the BIS is effectively saying is that as a result of central bank activity, investors have been forced to transact increasingly in the derivative arena as a result of which events like the Bund flash smash from April led to major market losses for those long Bund duration in either cash or derivative markets. Since then, volatility in European government bond markets has persisted culminating with the surge in yields this past Thursday in the aftermath of the ECB’s dramatic and extensively discussed here previously “disappointment.”

  The BIS’ conclusion:

  Such volatile movements in euro area interest rate derivatives markets raise questions about smooth pricing responses in the face of possibly transient order imbalances. Of question is liquidity in hedging markets and the capacity of traditional options writers, such as banks, to provide adequate counterparty services to institutional hedgers. Looking back at the events of late April, the rise in demand to receive fixed rate payments via swaps by institutional hedgers may have run into a lack of counterparties willing to receive floating (pay fixed) rates amid sharply falling market yields. The emergence of one-sided hedging demand pressures can be gleaned from the skew in swaption pricing (Graph B, centre and right-hand panels). The skew observed for euro rates approaching the bund tantrum resembled the developments in US dollar rates in December 2008, when US pension funds rushed to hedge interest rate risk via swaptions as market yields tumbled.

  

  But while the swap dislocation in the bond market can be attributed to anything from market illiquidity, to a shortage of cash market product, to lack of willing counterparties, to HFTs, and ultimately, to encroaching central bank intervention – something we have been warnings about since 2012 – perhaps an even more important question to emerge when observing broken swap markets are recent development in FX basis swaps.

  Recall our coverage of one particular and very prominent dislocation in the space, one which we covered first in March and then again in October when we noted that the “Global Dollar Funding Shortage Intesifies To Worst Level Since 2012“.

  This is how JPM explained most recently the phenomenon which can simply be ascribed to a global dollar funding shortage:

  “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.“

  The BIS also touched on this topic in its quarterly review, when it picked up the “policy divergence” torch from JPM and describing the ongoing USD funding shortage as follows:

  The increased likelihood of policy divergence between the US, the euro area and other major currency areas also rippled through global US dollar funding markets. Historically, cross-currency basis swap spreads – a measure of tensions in global funding markets – were virtually zero, consistent with the absence of arbitrage opportunities. Since 2008, the basis has widened repeatedly in favour of the US dollar lender, ie there is a higher cost for borrowing in dollars than in other currencies even after hedging the corresponding foreign exchange risk – conventionally recorded on a negative basis (Graph 5, left-hand panel). As such, negative basis swap spreads indicate the absence of arbitrageurs to meet heightened demand for US dollar liquidity.

  Visually:

  

  To be sure, our readers were aware of this implication of diverging monetary policy. However, thanks to the BIS, we now can add a quantitative dimension to what until recently what mostly a qualitative problem: i.e., how much is the dollar shortage as implied by the near record negative USDJPY currency basis swap spreads.

  The US dollar premium in FX swap markets widened substantially – in particular vis-à-vis the Japanese yen – after the odds of Fed tightening reached 70%. At the end of November, the basis swap spread of the Japanese yen versus the US dollar was minus 90 basis points, possibly reflecting in part the more than $300 billion US dollar funding gap at Japanese banks.

  The BIS does its best not to sound the alarm at this stunning observation:

  While funding continued to be available, such a large negative basis indicates potential market dislocations. And this may call into question how smoothly US dollar funding conditions will adjust in the event of an increase in US onshore interest rates. Similar pricing anomalies have also emerged in interest rate swap markets recently, raising related concerns.

  Indeed, once the Fed does hike rates as it now seems almost certain it will do in 10 days time, we will find out just how profound the USD funding shortage truly is. Readers may recall that in 2009 we cited a BIS report which said that “were all liabilities to non-banks treated as short-term funding, the upper-bound estimate [of the dollar short] would be $6.5 trillion”.

  

   

  This time around, as a result of the dramatic increase in USD-funded debt around the globe in the past 5 years, it will certainly be far greater.

  And, as a further reminder, the last time a global USD margin call was launched with the failure of Lehman, the Fed had to unleash an unprecedented global bailout by way of virtually limitless swap lines opened with every central bank that has a shortfall in USD exposure.

  

   

  As a result, our only question for the upcoming Fed rate hike is how long it will take before the Fed, shortly after increasing rates by a modest 25 bps to “prove” to itself if not so much anyone else that the US economy is fine, will be forced to mainline trillions of dollars around the globe via swap lines for the second time in a row as the world experiences the biggest USD margin call in history.

  

  

  

  

  

• An Open Letter Calling For The Resignation Of Saudi-Sympathizing Politicians

  Submitted by SM Gibson via TheAntiMedia.org,

  Whether you are Nobel Peace Prize recipient Barack Obama or unabashed warmonger John McCain, if you hold a federally elected office in the United States and are calling for more military action in the Middle East without first addressing the crimes against humanity carried out by Saudi Arabia, you are a fraud and should resign – effective immediately.

  I don’t mean resign next week or later today. I mean now. Stop what you’re doing, write out a letter (or get a staff member to write one for you), and give a press conference. I don’t care how you do it — just resign. Don’t put your name on the ballot for another term in Congress, don’t seek higher office, and certainly don’t run for president. Stop the charade. You do not represent your constituents. You are a disgrace. Resign.

  Why do you glorify spending our tax dollars on establishing a military presence in Syria and Iraq for your stated purpose of obliterating ISIS – a group of ‘radical Muslims’ who barbarically behead human beings — all while the Kingdom of Saudi Arabia (KSA) has been responsible for at least 152 public beheadings of their own since January 1, 2015? If you don’t consider a nation that sentences a man to decapitation for writing love poems (which Saudi Arabia recently did) to be “radical,” then you are deranged. Why do one group’s human rights violations warrant swift military action while another group that commits the same transgressions is heralded as an ally?

  How stupid do you think “we the people” are?

  The world can see you smiling through your scowl as we become wise to the fact that you are using the instability created by ISIS as an excuse to overthrow Assad.

  You may retort that President Obama has repeatedly stated there will be no boots on the ground in Syria (even though there have been) — and how dare I claim that ISIS is being used as a tool for American interests? Aside from the 44th president’s words not being worth much, Obama has advanced the U.S. government’s policy to train and arm “moderate” Syrian rebels in the region — while simultaneously launching airstrikes on their behalf. You and I both know this practice has undeniably resulted in the perpetual arming and strengthening of ISIS. And since it is no secret that the U.S. wants Bashar al-Assad out of power as the leader of Syria, it is glaringly obvious you are willing to tolerate a few radical jihadis running amok over in the Middle East as long as your interests are served as a result of their presence. Although we can agree Assad is a dictator who has committed many ruthless acts of his own, we both know this is not why you wish for him to be ousted, nor is it a legitimate reason to overthrow the Syrian government.

  If any of you truly cared about ending atrocity and oppression, you would be speaking out against the vicious Saudi regime. Instead, you welcomed King Salman with open arms in September when he and his entourage rented out all 222 rooms of the elegant and costly Georgetown Four Seasons during an official state visit to meet with President Obama at the White House. You allowed the Pentagon to honor King Abdullah at the time of his passing in January, when the DoD sponsored an essay contest as a “tribute to the life and leadership” of the brutal monarch. Instead, you stay quiet as Saudi Arabia is elected to chair the UN Human Rights Council (a decision beyond ludicrous). Instead, you remain silent as the U.S. State Department approves the sale of $1.3 billion worth of air-to-ground munitions, such as laser-guided bombs and “general purpose” bombs, to the kingdom just last month — not to mention the $90 billion worth of Saudi arms sales you approved between 2010 and 2015.

  What is Saudi Arabia doing with the legions of weapons you are supplying to them? They are using them on civilians. Of the 5,700 people killed in Yemen by Saudi-led forces since March 26, over 2,500 have been civilians, including 830 women and children, according to the United Nations.

  In October, KSA threatened its own citizens with the death penalty for spreading ‘rumors’ about the government on social media. The kingdom also recently sentenced multiple activists to death by crucifixion for protesting — including 20-year-old Ali Mohammed al-Nimr, who was 17 at the time of his arrest.

  Also, you know how you have used “9/11″ as an excuse to carry out every single one of your constitutional shredding whims over the past 14 years? You are aware the government says 15 of the 19 hijackers on 9/11 were Saudi nationals, right? Your response? Invade Iraq — a country that had nothing to do with the attacks. Meanwhile, the Saudi royal family enjoyed a day out on the farm with George W. Bush at his Crawford, Texas ranch.

  You have also helped block the release of 28 redacted pages from a congressional intelligence report said to contain damning information implicating Saudi complicity in the attacks on 9/11. And of course, you use the tired line of “national security” to keep those pages suppressed . . . because 9/11, of course. Can you see the irony here?

  Republicans, you love to find reasons to scold the president, but I have never once heard one of you criticize him for accepting around $1.35 million in gifts from the kingdom in 2014. That’s probably because you would have taken it, too.

  How about the front-running Democratic nominee for president of the United States, Hillary Clinton? You, too, are someone who has benefitted greatly from a relationship with Saudi Arabia.

  According to Mother Jones:

  “In 2011, the State Department cleared an enormous arms deal: Led by Boeing, a consortium of American defense contractors would deliver $29 billion worth of advanced fighter jets to Saudi Arabia, despite concerns over the kingdom’s troublesome human rights record. In the years before Hillary Clinton became secretary of state, Saudi Arabia had contributed $10 million to the Clinton Foundation, and just two months before the jet deal was finalized, Boeing donated $900,000 to the Clinton Foundation.”

  Although you don’t currently hold office, Hillary, you should hold yourself accountable (yeah, fat chance) and drop out of the race. And you should do it today.

  We both know the Saudi Arabian Embassy keeps Tony Podesta, the brother of Hillary Clinton’s campaign chairman, on retainer. Podesta is head of one of the largest Republican Super PACs in the U.S. and chairs a law firm with deep ties to the Obama administration. Ignacio Sanchez, one of Jeb Bush’s top fundraisers, also lobbies on behalf of the Saudi Kingdom. But you don’t see a conflict of interest, I’m sure.

  During King Salman’s visit in September, the Kingdom helped sponsor lavish galas at Washington’s Ritz Carlton and the Andrew Mellon Auditorium. These affairs were attended by chief executives of Lockheed Martin and General Electric, as well as the chairman of Marriott International. Do you see a problem, yet? At all?

  How about Qorvis, the PR firm that has openly worked for the Saudis since, ironically, a few months after 9/11. They must do something for the $7 million they received from the Saudi government between April and September of this year alone. How much influence does that purchase? The $2,000 Qorvis paid to former Republican congressman Mark Kennedy for a speaking engagement is nothing compared to what is spent to garner airtime on cable news networks — something Saudi officials have been doing more and more regularly.

  Politicians who hypocritically align themselves with figures as merciless as those they publicly rebuke have shown themselves to be untrustworthy. They should represent no one. Working alongside the Saudis while bombing other countries for similar actions demonstrates your shameful willingness to go along with whatever self-serving agenda is presented to you. You were for sale but now have sold, and the time has arrived for you to pay up.

  Should you continue your flagrant support of Saudi Arabia by way of foreign aid and weapons sales, you are no longer to be trusted to hold an elected position of influence. You should therefore resign, effective immediately.

  The question is: Is your allegiance to the people of the United States, or are you beholden to another kingdom?

  A petition has been started requesting the resignation of every single federally elected U.S.official continuing to support the brutal Saudi regime. You can add your name in support here.

  

  

  

  

  

• Previewing Obama's 8:00 PM Speech On Gun Control

  Two days ago we reported that in the aftermath of the San Bernardino mass shooting, two democrats had emerged with diametrically opposing proposals how to respond to the resurgent threat of domestic terrorism: one, a Sheriff in an uptown New York state county proposed that all handgun owners who are licensed to carry, should “PLEASE DO SO” in order to prevent future terrorist incidents; while another, New York City mayor de Blasio urged the city’s pension funds to divest their holdings in stocks of US gunmakers.

  As we concluded then, “these two dramatically opposing reactions to the same “terrorist” event, which one can claim the US brought on itself with the CIA’s creation of the Islamic State as a clandestine method to overthrow Syria’s president al Assad, and by two people who are both democrats, shows just how ridiculous the gun control debate is set to become in the coming days.”

  But more importantly, we said that at this point, “if we had to forecast the final outcome, we would say that just as we accurately predicted the terrorist events in Paris two months earlier, so this time the “terrorist attacks” together with comprehensive 24/7 TV coverage, in the US will get worse and worse until one of two things happen, if not both: the NSA will see all of its surveillance powers reinstated legally in the coming months, while the US will see increasingly more escalating “attacks” until ultimately Obama’s crackdown on gun sales and possession hits its breaking point and the president’s gun confiscation mandate is finally executed. We hope we are wrong.”

  Not even 24 hours later the New York Times confirmed that the push for gun control is about to take a major leg higher with its first front-page Op-Ed since 1920 in which it called to “End the Gun Epidemic in America.”

  Parallel to that, the NSA went on a “passive-aggressive” marketing campaign yesterday when the AP reported that the U.S. government‘s ability to review and analyze five years’ worth of telephone records for the married couple blamed in the deadly shootings in California lapsed just four days earlier when the National Security Agency’s controversial mass surveillance program was formally shut down.

  As the AP added, under a court order, those historical calling records at the NSA are now off-limits to agents running the FBI terrorism investigation even with a warrant.  Instead, under the new USA Freedom Act, authorities were able to obtain roughly two years’ worth of calling records directly from the phone companies of the married couple blamed in the attack. The period covered the entire time that the wife, Tashfeen Malik, lived in the United States, although her husband, Syed Farook, had been here much longer. She moved from Pakistan to the U.S. in July 2014 and married Farook the following month. He was born in Chicago in 1987 and raised in southern California.

  And while FBI Director James Comey declined to say Friday whether the NSA program’s shutdown affected the government’s terrorism investigation in California, the implications was clear: if the American people want “safety from terrorism”, they better say goodbye to privacy, and restore the NSA in the process.

  We are confident that this will happen one way or another, and that quite soon even though the most token of inquiry would reveal that the NSA’s entire premise is nothing but a lie:

  No mention from AP that the carriers also retain call records, often for more than 5 years, https://t.co/9ysYoayi1C pic.twitter.com/vwGETqXDaf

  — Christopher Soghoian (@csoghoian) December 5, 2015

  However, the biggest validation of our prediction for a major escalation in Obama’s crackdown against gun sales and ownership came from Obama himself which last night announced that Obama would hold an impromptu address to the nation at 8:00 pm on the “threat of terrorism and keeping the American people safe.” Translation: another surge in gun sales is imminent as fears of gun confiscation rise to unprecedented heights.

  Tomorrow at 8pm ET, @POTUS will address the nation on the threat of terrorism and keeping the American people safe ? https://t.co/b68B45RuKg

  — The White House (@WhiteHouse) December 5, 2015

  What will Obama say?  In an appearance on NBC’s “Meet the Press,” Attorney General Loretta Lynch gave advance hints about the remarks President Barack Obama will make when he speaks to the country Sunday evening about the recent terrorist attack in San Bernardino.

  “What you’re going to hear from him is a discussion about what government is doing to ensure all of our highest priority — the protection of the American people,” the attorney general said.

  She also said that he’ll speak on the actions the United States has taken to keep the homeland safe since the attacks in Paris last month. But there will be an element of politics to the speech. President Obama will do more than just call for calm, he will ask “Congress to review measures and take action.”

  Lynch’s staff later confirmed that the president will specifically call on Congress to review certain gun control measures.

  And since Congress has long ago given up on taking action in a world in which the Fed’s Chairman/woman is expected to “get to work“, it will again be up to an Obama executive order to restore peace to the land by continuing his crusade against the Second amendment.

  In short, the latest steps in Obama’s crusade to disarm the US and make even legal purchases of guns as difficult as possible, even though limiting the legal means of purchasing guns will have absolutely no impact on gun violence in the US – for the perpetual case study, see Chicago. That, however, does not mean that Obama won’t try or succeed.

  That said, while the content of Obama’s speech may now be well known, what will likely be the entertainment highlight of the night is not Obama as much as the man who remains the biggest “Republican” contender for the role of Obama’s successor: Donald Trump, who has promised to heckle Obama’s entire speech even before it begins.

  I will be live-tweeting President Obama’s prime-time speech tonight starting at 7:50 P.M. (Eastern).Will he finally state the real problems?

  — Donald J. Trump (@realDonaldTrump) December 6, 2015

  

  

  

  

  

• Turkey Detains Russian Ships In Black Sea, Blasts Moscow For Brandishing Rocket Launcher In Strait

  Exactly a week ago, we warned that Turkey does have one trump card when it comes to dealing with an angry Russian bear that’s hell bent on making life miserable for Ankara in the wake of Erdogan’s brazen move to shoot down a Russian Su-24 near the Syrian border. Turkey, we explained, could move to close the Bosphorus Strait, cutting one of Moscow’s key supply lines to Latakia. 

  We went on to explain, that such a move would probably be illegal based on the 1936 Montreux Convention, but as Sputnik noted, “in times of war, the passage of warships shall be left entirely to the discretion of the Turkish government.” 

  Obviously, Turkey and Russia haven’t formally declared war on one another, but the plane “incident” marked the first time a NATO member has engaged a Russian or Soviet aircraft in more than six decades and given the gravity of that escalation, one would hardly put it past Erdogan to start interfering with Moscow’s warships, especially if it means delaying their arrival in Syria where the Russians are on the verge of restoring an Assad government that’s Turkey despises. 

  Well sure enough, the tit-for-tat mutual escalation that’s ensued since the Su-24 crash has spilled over into the maritime arena with Moscow and Ankara detaining each other’s ships. 

  After five Turkish vessels were held at the port of Novorossiysk for “inspections,” Turkey retaliated on Friday by holding four Russian ships at the Black Sea port of Samsun. The following table reveals a hilarious list of the Russian vessels’ alleged infractions which apparently include fire safety violations, pollution prevention violations, and problems with “life saving appliances.”:

  

  One of the vessels – the cargo ship Crystal – has yet to be released. 

  “Six ships with a Russian flag were checked at Samsun Port on Dec. 5. The ships were found to be in compliance with Port State Control (PSC) rules, a series of international standards that all ships are required to meet, but some problems were subsequently detected in four of the ships,” Hurriyet says, adding that “three of the ships consequently met the requirements and were permitted to leave, but the remaining vessel has not yet been permitted to depart.” 

  The Crystal apparently lacks the “required documents.”

  Obviously, Russia and Turkey are engaged in a bit of petty mutual escalation here, but it’s worth noting that Samsun isn’t far from the Bosphorus: 

  

  And while Turkey now appears content to harrass Russian cargo vessels, one shouldn’t discount the possibility that Erodgan will look to do something more provocative now that it looks like the UN will ultimately be dragged into the ISIS oil smuggling debate. 

  Indeed, Moscow seems to be taking the Bosphorus issue quite seriously because as Hurriyet reported just hours ago, when the Russian warship Caesar Kunikov made its way through the strait on Saturday, a Russian soldier stood on deck with a shoulder ground-to-air missile at the ready. 

  

  Turkish Foreign Minister Mevlut Cavusoglu’s response: “For a Russian soldier to display a rocket launcher or something similar while passing on a Russian warship is a provocation. If we perceive a threatening situation, we will give the necessary response.”” Indeed.

  And meanwhile, three NATO warships have dropped anchor off Istanbul’s Sarayburnu coast: Portugal’s F-334 NRP Francisco de Almeida, Spain’s F-105 ESPS Blaz de Lezo, and Canada’s FFG-338 HMCS Winnipeg.

  

  

  

  

  Source: Bosphorus Naval News

  

  

  

  

  

• Extreme Gold Positioning Grows As Hedge Funds Add To Record Shorts

  With an all time high of 293 ounces of paper per ounce of registered physical gold…

  

   

  …it appears hedge funds continue to ignore systemic risk and surging physical demand, following the trend lower in paper gold prices by adding to already record short positions in gold last week. With the speculative world near-record long the USDollar and record short gold, how much longer can the status quo boat can remain upright with so many on the same side.

  

   

  The normal market position is for speculators, such as hedge funds, to be net long, averaging about 110,000 contracts. But as GoldMoney details,

  Only twice since the Commitment of Traders disaggregated data has been made available has this condition not been true: last July and today. The market's sentiment is indeed at an extreme, making the paper markets vulnerable to a sharp correction of trend. The problem, as with all bubbles, is that we know this must end soon and violently, but we don't know at what level prices will revert.

   

  Meanwhile, demand for physical metal notches up on every markdown. The reason this can occur and prices still fall is that there is a large body of above-ground stock in vaults to draw down. However, the stock in western vaults has been depleted by accelerating Asian demand, far in excess of the sum of mine production and scrap. Since 2011, the Chinese public alone have taken delivery of 8,645 tonnes of gold, during which time annual demand has more than doubled.

   

  It is important to note that Asian buyers are savers, rather than investors. This distinction is crucial: a saver invests for the long-term and is only interested in value. Investors nowadays are interested in a shorter time horizon, are generally unconcerned with value, and will only buy into a rising trend.

  Furthermore, as Acting-Man.com's Pater Tenebrarum explains, even while gold’s fundamental price according to Keith Weiner’s calculations (in which he compares spot to futures prices) stands some $140 above the current market price (as of the end of last week), futures market speculators have turned more bearish on gold than at any time in the past 13 years.

   

  

  When there is great unanimity among traders about a market’s direction, they are very often going to be proved wrong – at least in the short to medium term (i.e., over time periods lasting from weeks to months). The caveat is that even more pronounced positioning extremes have occurred in a few short time periods during the 1980s and the 1990s, and there is obviously no law that says this cannot happen again.

   

  

  Last week, the smallest net speculative long position since January of 2002 was reported (this chart shows the net hedger position, which is the inverse of the net speculative position) – click to enlarge.

   

  However, it is still quite noteworthy that speculators as a group are more bearish on gold today than they were at the lows of its 20 year long secular bear market in 1999-2000. This definitely means one thing: once a rally does get underway, there is going to be a lot of fuel to support it as this extreme in pessimism unwinds. Gold stocks meanwhile continue to diverge positively from gold and silver, just as they have exhibited persistent negative divergences near the 2011 – 2012 highs.

  Here are a few more charts illustrating the current situation; first different ways of charting the net positions of speculators and hedgers:

   

  

  Net speculator and hedger positions, as well as open interest in bar chart form – click to enlarge.

   

  The next chart shows the very same thing, but trader positions are further dehomogenized, with small and large speculators as well as hedgers shown separately in a line chart. Open interest is charted as a line as well. Open interest in COMEX gold futures is actually historically quite large at the moment.

   

  

  Gold futures market positioning dehomogenized further – click to enlarge.

   

  The Bullish Consensus Compared to the 1999-2000 Lows

  Sentimentrader has created the so-called Optimism Index, or Optix for short, which is an average of the most popular and well-known sentiment surveys and positioning data. From the web site’s description of the indicator:

  “To calculate this gauge of public opinion, we have created an index based on many of the established surveys currently in existence, some of which are noted below, along with other measures of sentiment, such as from the options and futures markets. The combination of that data is the foundation of the Optimism Index, or Optix.

   

  No matter what population the survey monitors, it tends to correlate very highly with all the other populations. People tend to think alike, and it’s rare to see any of the surveys diverge too far from all the others. The correlations among them are very high, and have been consistently so for many years.

   

  Like most sentiment data, this one is a contrary indicator. When optimism becomes too high, we should look for prices to stall out or decline; when it is too low, we should look for rallies.

   

  When the Optix moves above the red dotted line in the chart, it means that compared to other readings, we’re seeing a statistically extreme value. The bands are based on the past few years of trading, but you also want to look at the absolute level – if it’s at 90%, then there’s no question we’re seeing an historic level of bullish opinion. Watch for readings above 80% (or especially 90%) to spot those dangerous times when the public is overly enthusiastic about a commodity.

   

  Conversely, when the Optix moves below the green dotted line, then the public is too pessimistic about the commodity’s prospects for further gains compared to their opinion over the past year. Looking for absolute readings under 20% (or especially 10%) can lead to good longer-term buying opportunities.”

   

  

  The Gold Optix readings since mid 2013 are among the lowest in history. On average they are far more extreme than those recorded at the secular bear market lows in 1999-2000. The most recent reading showing bullish consensus of a mere 14% is only 6 points above the all time low recorded in late 1997 and lower than any of the readings of the 1999-2000 period (the absolute low in that time period was seen in late February 2001 and stood at 16%) – click to enlarge.

   

  As you can see, the recent period has been one of quite persistent and extreme pessimism. Since sentiment is largely a function of price movements, one must of course not overestimate its meaningfulness. However, one thing is certain: rare and noteworthy extremes tend to at least have short to medium term significance. Once a long string of extreme readings has been recorded, the probability that they will prove to be of long term importance rises strongly.

  This is especially so given the fact that gold is currently approaching an important technical support area in the $1,040 to $1,050 region (the March 2008 high). Moreover, there are actually many parallels to the 1999-2000 period, most notable among them a rising stock market combined with ever greater weakness in junk bonds, a tightening Fed and concomitant dollar strength, and a flattening yield curve.

   

  

  The flattening yield curve, illustrated by the ratio between 10 and 2 year treasury note yields. In the short term, this flattening is actually quite bearish for gold, but at the same time it is actually long term bullish. This is so because it will ultimately trip up the echo boom and the economic recovery (such as it is), and bring about a reversal of the Fed’s current monetary policy stance – click to enlarge.

   

  The next chart shows what has happened in terms of Fed policy and the dollar in 1999-2000 compared to 2014-2015. This may be helpful in terms of providing a potential road-map:

   

  

  Fed policy, the dollar and gold in 1999-2000 vs. 2014-2015 – click to enlarge.

   

  Conclusion: As we have pointed out on previous occasions, it is time for both traders and investors to pay very close attention to this market. What could turn out to be a major opportunity is slowly but surely taking shape.

  *  *  *

  After this week's shake-out of USD longs courtesy of Draghi, one wonders if the gold squeeze is about to begin?

  

  

  

  

  

• ISIS Makes Major Move In Yemen, Assassinates Aden's Governor After Executing Two Dozen Houthis

  One point we’ve been keen on driving home as the war in Syria intensifies is that while the sheer number of combatants and the overt involvement of at least seven world powers certainly means that among the many conflicts raging in the Mid-East, the war in Syria is the fight that matters most for the non-Arab world, it’s important not to miss the forest for the trees.

  That is, it’s critical to see the bigger picture here, and that entails understanding how Syria is related to the conflicts raging in Iraq, Yemen, and to a lesser extent, Afghanistan. Iran is determined to expand its regional influence. Tehran is the power broker in Iraq, Syria, and Lebanon and it’s no coincidence that the Houthis in Yemen are backed by the Iranians and neither is it a coincidence that Iran is rumored to be funneling weapons and money to its old enemy the Taliban in Afghanistan. This is about checking the spread of Sunni extremism and, concurrently, curtailing and diminishing Saudi influence. While Iran and the Taliban make for strange bedfellows (the militants are, after all, Sunni extremists), Tehran is determined to check the spread of Islamic State and with the IRGC, Hezbollah, and the Quds-controlled Shiite militias already fighting ISIS on two fronts (Syria and Iraq), the Ayatollah isn’t particularly thrilled about the prospect of an expanded ISIS presence on its eastern border. Supporting the Taliban in Afghanistan (with whom Iran nearly went to war in 1998), should help to check ISIS gains in the country and has the added benefit of keeping the US off guard which itself speaks to how quickly alliances can change as it was just 12 years ago that Iran assisted the US in picking Taliban and al-Qaeda targets (read more here).

  As for ISIS, the official line is that everyone is an enemy. The Taliban are led by “illiterate warlords,” al-Qaeda are “a bunch of donkeys”, the Houthis are heretics as are the Iranians, the Saudis are just plain in the way in Yemen, and everyone else is an infidel. Of course there’s no telling what the group’s leadership really thinks given the support they undoubtedly receive from any number of states governed by “nonbelievers,” but we’ll leave that aside for now. 

  Ok, so why are we telling you this? Because on Sunday, ISIS killed the governor of the Yemeni port city of Aden in what amounts to the group’s most brazen attack in the country to date. As WSJ reports, “in a statement distributed on social media and translated by the extremist-tracking SITE Intelligence Group, an Aden-based branch of Islamic State claimed responsibility for a suicide car bomb that killed governor Jaafar Saad and several of his guards as his convoy traveled through the city.”

  

  

  Sunday’s explosion could be heard about 10 km (seven miles) away,” Reuters reports. “Medics said the body of Saad and the others who were killed were burned beyond recognition.”

  In a statement ISIS said it detonated a car packed with explosives as Saad’s convoy drove by. The group promised more operations against “the heads of apostasy in Yemen”. Here’s the statement:

  

  Recall that Aden was a major battleground during the spring and it was also the site of China’s first naval rescue operation involving foreign nationals. The Houthis nearly took control of the city earlier this year after driving President Abed Rabbo Mansour Hadi out of the country, but a summer offensive by the Saudi-led, UAE- and Qatar- assisted coalition drove the rebels back. Now, the coalition wants to retake San’a. 

  As WSJ goes on to note, “Mr. Saad, a major general in Yemen’s army, was a prominent figure among pro-Saudi forces in Aden before his appointment as governor in October.” Here’s a bit more color: 

  Islamic State and al Qaeda in the Arabian Peninsula, or AQAP, have both exploited the instability to carry out attacks and make territorial gains.

   

  Numerous Islamic State branches have sprouted since the Saudi campaign began. Twin attacks by Islamic State militants on Houthi mosques in San’a killed more than 140 people in March.

   

  Islamic State attacks have targeted the Houthis and the Saudi coalition, both of which the group considers enemies.

  This comes just days after Wilayat Aden Abyan (you can identify the origin of ISIS videos by whatever comes after the word “Wilayat” in the introduction that always precedes the clip) released a video depicting the execution of around two dozen Houthis.

  We’ll spare you the footage, but here are some screenshots that should give you a decent idea of the fate that befell the men.

  

  

  

  

  

  What this suggests is that ISIS is now set to expand its influence in Yemen. Remember, the country’s proxy war is really no different in character to what’s going on in Syria. The distinction is that in Yemen, Iran is fighting via proxy while the Saudis and Qatar are there in person while in Syria, Iran has boots on the ground while the Saudis and Qatar are fighting via proxies.

  Of course one of Riyadh and Doha’s proxies in the Syrian conflict is ISIS, and as mentioned above, the group is now targeting the Saudi coalition’s support base in Aden which would seem to indicate – and this is a colorful metaphor we’ve used before – that this is but another example of Frankenstein breaking out of the lab and attacking its creators. Whether or not an expanded ISIS presence in Yemen will benefit the Saudi cause largely depends on whether the Houthis become Islamic State’s main target in the country, or whether they intend to wage a protracted war against pro-Hadi forces.

  Given the sectarian divide, we’re inclined to believe that the Houthis will get the worst of this and that’s just fine with Riyadh and Doha as anything that weakens Iran’s proxies helps to restore Hadi by default.

  And you never know, it could be that much like the cost of destabilizing Assad involves the loss of civilian lives in places like Paris and in the skies over the Sinai Peninsula, the cost of having one more anti-Houthi force on the ground in Yemen is that occasionally a few pro-Hadi government officials end up vaporized in a car bombing, because at the end of the day, covertly supporting groups like ISIS and al-Qaeda (who of course are also operating in Yemen) is a bit like raising tigers as pets – you can foster quite a bit of loyalty over time, but there’s always a chance they might kill you.

  

  

  

  

• France's Far-Right Party Leads Regional Elections With Unprecedented 30%-Plus Of Votes

  As we warned last week, Europe is about to change forever, and sure enough, Marine Le Pen's National Front party is on course for a historic result in regional elections on Sunday, winning more than 30 per cent of the vote and leading the country’s two mainstream parties. Our words from the day after the Paris attacks, when Le Pen called for "eradication" of Muslims and demanded the nation "re-arm itself," seem extraordinarlity prophetic now "if there is one 'winner' from last night's terrible events in Paris, it is France's anti-EU, anti-immigration far-right wing Front Nationale party leader Marine Le Pen."

   

  As Bloomberg headlines show, exit polls have FN in a significant lead…

  • *NATIONAL FRONT LEADS FRENCH REGIONAL VOTE, IPSOS SAYS
  • *FRANCE'S NATIONAL FRONT TAKES 30.8% OF NATIONAL VOTE: IFOP
  • *FRANCE'S REPUBLICANS TAKE 27.2% OF NATIONAL VOTE: IFOP
  • *FRANCE'S SOCIALIST PARTY TAKES 22.7% OF NATIONAL VOTE: IFOP

  Le Pen is over the moon…

  "Vive la République française ! Et vive la France !" #régionales2015

  — Marine Le Pen (@MLP_officiel) December 6, 2015

         As The FT reports,   in the first test of public opinion since the November 13 terrorist attacks, Marine Le Pen’s anti-immigration party looked set to notch up its best result since it was founded in 1972…

  President François Hollande’s Socialists and leftwing allies had just 22.3 per cent of the vote while former president Nicolas Sarkozy’s centre-right bloc had 26.4 per cent, according to the preliminary figures.

   

  Victory in at least one of France’s 13 regions – definitive results will only be known after next Sunday’s second-round vote – would be a first for the FN, helping to build momentum as it looks to the 2017 presidential contest.

   

  Opinion polls before the vote suggested the party could come top in as many as six of France’s 13 regions in Sunday’s first round.

   

  The election, to be completed in a second round next Sunday, will decide the make-up of regional governments, which have power over issues such as local transport, airports, ports and some schools.

  The result provides a sense of the national political mood barely 18 months before the presidential election.

  “Taking control of even a single region in these elections would be an unprecedented achievement,” said James Shields, professor of French politics at Aston University.

  “This is the first test of public political opinion since the terrorist attacks of 13 November. It’s also the last opportunity to gauge the standing of political parties and potential candidates some 16 months before the critical presidential elections of 2017.

  “Though essentially about regional governance, these elections are important as a barometer of the political climate in France as we begin to near the end of President Hollande’s term of office.”

  Mr Hollande, whose Socialist party holds 12 of the 13 regions, has seen his popularity rise from record lows since the attacks… but Le Pen's success will force an uncomfortable alliance…

  *  *  *

  Founded by Jean-Marie Le Pen in 1972, the FN has long been associated with anti-Semitism. As recently as April this year, Mr Le Pen, father of Marine, sparked a family feud as he defended a past comment that Nazi gas chambers were “a detail” of history.

  But Ms Le Pen, the party’s leader since 2011, has tried to “detoxify” the FN’s image and to bring it more into the mainstream. As part of that process, she has started to push other policies such as abandoning the euro in favour of the franc and giving the state an even bigger role as a promoter — and protector — of national industry. Those ideas have gone down well in a country where economic growth has remained sluggish in recent years, and where unemployment is at record highs. The FN’s popularity has soared in the north of the country, an industrial region particularly affected by France’s economic plight.

  As is clear below…

  

  Le Pen leads among France's top politicians…

  

   

  And she is gaining further…

  #France tonight. Dark blue = FN, light blue = "Republicans" (traditional right), rose = Socialists. pic.twitter.com/5L40vFoW3i

  — Mathieu von Rohr (@mathieuvonrohr) December 6, 2015

  

  

  

  

  

• Central Banks Continue To Rule Equity And Commodity Markets

  Submitted by Leonard Brecken via OilPrice.com,

  First, let’s review 2015 to see what could occur in 2016. What was most noteworthy was the continuation of investor focus on central bank interventions vs. fundamentals across all asset classes. That focus has continued since the 2008 crisis and if anything has gotten worse.

  The overall theme as a result has been: long high-risk, high-beta such as technology/biotech and short commodities, which accelerated beginning last year when the Fed signaled its desire to raise rates and refrain from more QE, as it allowed the EU and Japan to take lead on QE.

  The so-called China “crisis” last summer ended like every other crisis – largely seen as a day trading event that quickly became ignored as focus shifted back to what central bank polices will be. Chinese authorities basically strong armed markets from collapsing by imposing trading restrictions.

  Buy the dip theme continued to be the favored course despite deteriorating macroeconomics as U.S. retail spending, manufacturing, trade and capital expenditures all markedly slowed, as did the overall U.S. GDP and global GDP for that matter.

  Markets started the year expecting 3 percent GDP in the 2nd half of 2015 but are now likely to end below 2 percent, yet financial markets are near highs mostly driven by large cap names (FANG – Facebook, Amazon, Netflix, Google—45X P/E combined!).

  Credit markets largely deteriorated as well, especially in high-yield, which declined some 20 percent on an average. Access to credit became increasingly hard to come by for the energy sector as banks tightened their policies. The energy sector saw a 50 percent decline in debt issuance throughout Q3.

  We also sensed that private equity also got tighter due to the ongoing fiasco at SunEdison, which witnessed a 90 percent plunge in its share price. Investors finally realized that their debt/equity at 600 percent was unsustainable and questioned their ability to sell projects off to private equity to finance its business.

  Surprisingly enough, this event was largely ignored in the clean energy-biased media while energy default risk was all the rage. In energy we witnessed what looks like the start of an inventory and overall production decline, although the contraction has stalled a bit due to some seasonal factors.

  Demand remained at five-year highs despite focus on absolute inventory levels. OPEC added to the existing supply pressure by adding over 1 million barrels per day (mb/d) since mid-2014, and the pending return of Iran to global oil markets following the nuclear deal also raises supply questions.

  All of which translated to NYMEX futures net positions of front month remaining net-short and bearish as ever. Oil prices as a result continued to decline but hold above $40, eclipsing the longest period (even as compared to the 1986 crisis) on length of time for price recovery.

  The main driver on the price pressure comes from currency markets, as the dollar was under pressure in the first half of 2015, but recently rallied because of more QE from the EU and an expected rate hike from the Fed. The oil price plunge and the USD have tracked pretty closely (inversely) since June 2014.

  Recent terrorism events and geopolitical conflicts being largely ignored as markets rallied further on expectations of more QE in the Euro zone. All of this translated into a third quarter of 2015 where earnings slowed and revenue growth slowed even more. Some of the air in the technology/biotechnology bubbles was let out in part tied to slowing EPS and the attention brought to drug price increases and the VRX scandal.

  At this moment, the dollar appears to be poised to move higher despite weakening U.S. economic performance, not because it should, but because the Fed desires it and will continue to play the rate hike card threat. We don’t foresee a change in the macro trade of long beta and short commodities with that in mind. Goldman Sachs’ chief equity strategist agreed in a recent CNBC appearance, despite valuations being in the 96 percent valuation range historically.

  *  *  *

  So take more risk right? The recent inclusion of the Yuan in the IMF basket of currencies in 2016 should incrementally add to dollar selling. However, how many times have we seen fundamentals ignored and asset prices move in the opposite direction because of central bank policy? A lot! So don’t bet on it.

  Investors who still pay attention to fundamentals are largely sitting at the sidelines as reflected in lower market volume. Incremental volumes are from money center banks, algos and short sellers, and as a result we have a market driven by central bank interventions with asset prices becoming more and more distorted.

  One relationship I repeatedly cite in measuring this distortion is the relationship between NASDAQ and oil prices, which have NEVER diverged before by this much in the stock market’s history.

  

  If this doesn’t tell you what’s afoot I don’t know what does. I maintain it’s not a coincidence that this distortion is occurring and it’s born out of central bank policies vs fundamentals. My view is that the Fed is intentionally keeping the dollar strong (for a host of reasons) in part to depress commodities in lieu of more conventional QE.

  And it’s fairly clear the Fed will raise rates despite the fundamentals dictating otherwise to reinforce that view of a strong dollar policy, even though there is pressure on corporate earnings.

  In sum, the Fed has shifted from propping up Wall Street the last 7 years to propping up Main Street. QE has largely increased income disparity as the 1 percent have seen their wealth increase via asset price appreciation while Main Street suffered through inflation, decreasing wages, lower discretionary income and largely lower paying jobs in the service sector. Going into an election year do you think this shift is some coincidence?

  2016 will likely bring more back door means to prop up flailing U.S. economy through higher fiscal spending, student loan forbearance or some gimmick to reduce bank reserve requirements, all with an eye on maintaining the dollar status quo.

  Essentially what is going on is an attempt by the Fed to have their cake and eat it too by declaring victory, raising rates 0.25 percent, and maintaining all the benefits associated with lower commodity prices for Main Street as the U.S. dollar remains strong.

  I don’t foresee anything other than a complete reversal in Fed policy or an OPEC cut to derail these trends.

  Despite massaged economic statistics (overstating growth while under stating inflation) in 2016, U.S. GDP growth will likely remain slow. That will likely keep commodity prices depressed through the election cycle. In energy, I expect the U.S. supply/demand imbalance to improve dramatically. Every investor knows, whether they want to admit it or not, $40 Oil and $2.20 won’t produce free cash flow for E&P companies, especially when hedges will roll off in 2016.

  As a side note: Chesapeake Energy recently admitted that in 2012 54 percent of projects weren’t cash flow positive, so clearly this cannot be sustained. If WTI remains under $50 U.S. oil production will decline by between 5 and 10 percent as E&P companies see the effects of depletion, hedges rolling off, debt funding drying up, and highly profitable projects become increasingly scarce.

  By spring 2016 I fully expect a wave of defaults leading to a period of consolidation by oil majors and private equity. I don’t believe that this will lead to a Lehman like credit crisis when defaults begin. But it will constrain production, leading to a draw down in U.S. inventories and add to slower growth as it did in 2015. Whether that gets realized is another matter as the EIA/IEA continues to underestimate demand and over-estimate supply while OPEC continues to pump above its quotas.

  Until pro-growth, low taxation and less regulation policy changes are enacted, I don’t foresee any changes to central bank policy nor the unsustainable market divergences and asset price distortions.

  Expect more media propaganda on how great the economy is while the reality is another story. Early signs are that retail sales this holiday season are poor. Nobody can predict when reality will set in and equity markets revert back to pre QE levels in 2008/09. The longer this charade continues, the lower equity markets will eventually go, and in the short-term so will commodities. Then the super cycle in commodities will begin anew. Much this will hinge on next fall’s election cycle.

  

  

  

  

  

• University President Urges Students: Carry Weapons On Campus, "End Those Muslims"

  In an age of uncontrollable political correctness and micro-aggression across America's colleges, one university has taken a different tack this week. Speaking to an estimated 10,000 strong campus community, Liberty University President Jerry Falwell Jr. urged students, staff and faculty at his Christian school to get a permit to carry a concealed weapon on campus, so that "we could end those Muslims before they walked in." Students reportedly erupted into applause at the call to arms.

  “It just blows my mind when I see that the President of the United States [says] that the answer to circumstances like that is more gun control,” he said. 

  As AP reports, Liberty University President Jerry Falwell Jr. urged students, staff and faculty at his Christian school to get a permit to carry a concealed weapon on campus to counter any copycat attack like the deadly rampage in California just days ago.

  "Let's teach them a lesson if they ever show up here," Falwell told an estimated 10,000 of the campus community at convocation Friday in Lynchburg. While Falwell's call to arms was applauded, his remarks also seemed to target Muslims.

   

  "I've always thought if more good people had concealed carry permits, then we could end those Muslims before they walked in .," Falwell said. The final words of his statement could not be clearly heard on a videotape of the remarks.

   

  However, Falwell told The Associated Press on Saturday he was specifically referring to Syed Farook and Tashfeen Malik, the husband and wife who shot and killed 14 people at a holiday party in San Bernardino on Wednesday.

   

  Falwell also said he believed the campus needed to be prepared in the face of the increasing frequency of mass killings. He cited, for example, the 2007 massacre of 32 people at Virginia Tech, the deadliest mass shooting in modern U.S. history, and less than 100 miles southwest of Liberty.

   

  "What if just one of those students or one of those faculty members had a concealed permit and was carrying a weapon when the shooter walked into Virginia Tech? Countless lives could have been saved," he said.

  Falwell's remarks generated a sharp rebuke from Virginia Gov. Terry McAuliffe, who called the comments "reckless."

  "My administration is committed to making Virginia an open and welcoming Commonwealth, while also ensuring the safety of all of our citizens," McAuliffe said in a statement issued late Saturday. "Mr. Falwell's rash and repugnant comments detract from both of those crucial goals."

  But Falwell's message is apparently being heeded. He said more than 100 people had asked Liberty police about a free class to obtain a permit to carry a concealed weapon.

  *  *  *

  Liberty University, an evangelical school in Lynchburg, Va., has a reputation as a conservative college; and as a reminder, Falwell is the son of the late Moral Majority founder Jerry Falwell, who infamously blamed the 9/11 terrorist attacks on abortionists and homosexuals.

  

  

  

  

  

• Why Some Are Questioning The Zuckerberg Charity Story

  Authored by Mark St.Cyr,

  This week not only did social media come a buzz, so too did the main stream when it was announced Mark Zuckerberg and his wife were marking the occasion of the birth of their child by starting a philanthropic organization named in their child’s honor. They also declared they pledged to give 99% of their Facebook™ shares (worth some $45 Billion) to help fund its mission. Yet, one little item or detail seemed not to go unnoticed by some (which I am of this crowd.) Rather, it stood out like a sore thumb. That detail was: rather than what is typically structured as a nonprofit (i.e., what one expects to see and is traditionally administered when charity is involved) this “Initiative” was structured as an LLC. i.e., Can be used for both profit and maybe more importantly – political influence.

  Here is a quote from the Facebook post they wrote to help illustrate their intentions. It was this passage which both caught my eye, as well as made me think deeper as to just what didn’t sit squarely in my mind at first take. To wit:

  “The Chan Zuckerberg Initiative is structured as an LLC rather than a traditional foundation. This enables us to pursue our mission by funding non-profit organizations, making private investments and participating in policy debates — in each case with the goal of generating a positive impact in areas of great need. Any net profits from investments will also be used to advance this mission.”

  The line “making private investments and participating in policy debates” sounds innocuous enough. However, most (if not all) of those who spend their every waking moment glued to social media wondering if they too can keep up to this weeks misanthropic escapades of the Kardashian’s are the first to take to Facebook and any other social media outlet and bash, excoriate, and what ever else can be thrown around to pummel any Wall Street Billionaire or for that matter Billionaires in general from influencing public policy. Unless you’re deemed “their Billionaire.” Then have at it; as hard, as messy, and/or dirty as you like. Blindfolds will be supplied freely to blind-eyes everywhere.

  Do not let this point be lost. If one thinks for a nanosecond people with enormous wealth don’t factor such things into any form of estate planning as well as everyday living planning – I have some ocean front property here in Kentucky you can have at a discount.

  Why do I say such a thing? Well, I’ll use one of the most overused examples of “Look it’s not like I’m trying to skirt something I’m actually glad to pay” known to the wealthy as to show “Hey, I’m just one of you with a bigger bank balance by golly, gee whiz.” Again, from the same post as above, to wit:

  “By using an LLC instead of a traditional foundation, we receive no tax benefit from transferring our shares to the Chan Zuckerberg Initiative, but we gain flexibility to execute our mission more effectively. In fact, if we transferred our shares to a traditional foundation, then we would have received an immediate tax benefit, but by using an LLC we do not. And just like everyone else, we will pay capital gains taxes when our shares are sold by the LLC.”

  And there’s that inference again that I pointed out in the first that made me think deeper. Or, as some might say, “Made me go hmmm.” That inference? “…but we gain flexibility to execute our mission more effectively.” I’ll construe: in a world that is driven by politics and political donations – I bet it does. And will.

  Again, let me remind you, this is all conjecture on my part. However, like I stated earlier, I’m not the only (although one of the few) that feels there’s more to all this than what’s been bandied about by the main stream media et al.

  Two examples of such “heart-fullness” voiced were the immediate comparisons to the philanthropy of both Warren Buffett and Bill Gates. Many of the observations posited by the media was how Mark (I’m using the personal’s only for ease) has seen the value in sharing ones wealth and all the good it can do, and wants to do the same. It’s a fair point. However, I’ll posit there are a few other additional points no one likes to point out. Yet, that doesn’t mean they aren’t there.

  Let’s take Warren for one. What’s lost on the general public (as well as many others) is the obvious double standard of how he is both viewed as well as reported on in the press. He too is giving all his fortune away. Makes for great press and keeps him in that almost blinding limelight of ole “Uncle Warren” when he’s doing or making any type of investment or doling out advice. He gives political causes great sound bites or quote lines similar to “I need to pay more taxes!” and more. Yet…

  When it comes to those taxes on lower wage earners or the outright cost of employing people who need to pay them. It’s a far different tune. All that you saw reported nearly ad nausea during that period was what seemed like a video loop stuck on continuous play. That or footage of him playing the ukulele surrounded by the Fruit Of The Loom™ ensemble belting out tunes at his investor meeting. What you didn’t see reported anywhere (for there was no warning as per the story) was a complete Fruit Of The Loom factory that had been the mainstay of an area in Kentucky for decades: closed and all its textile operations sent to Honduras leaving hundreds unemployed. Good jobs at good wages. Only not here, that’s too expensive. There now in Honduras.

  Another example would be how you never see ole “Uncle Warren” demonized for the sin of all sins: being connected with fossil fuels. e.g., Oil.

  Koch Brothers and a pipeline? Vilified as a scourge or pariah on the Earth. (I’m not taking a side nor endorsing one side or the other. I’m simply pointing out a demonstrable difference as viewed via the light of the media and reports – nothing more. Use you’re own insight as to ascertain any meaning or not) Warren’s investment into the trains which carry that same oil that seemed to derail weekly for a time causing environmental catastrophes? If his name was mentioned is was at a whispers breath. If that. But hey – He’s giving away all his Billions – He’s one of the good guy’s. Not some greedy capitalist. Right?

  Then there’s Bill Gates as of late. Again, his foundation may be doing great work. Yet then again, it doesn’t hurt to make sure you profess as loud and as much as possible: “Hey, I’m giving everything away, don’t think or call me some greedy capitalist.” i.e., Hey, go after those people’s money – not mine. I’m one of you! See!!”

  It has been reported that he’s publicly stated to have taken all his philanthropy cues from Warren for they have been very close friends for years now. But Gates has done something even more head scratching than even Buffett. Lately Gates has publicly stated that it’s going to take both socialism and climate change advocates favorite tax (e.g., a carbon tax) to solve the ills of the world. Calling the private sector “inept.”

  Nothing like self inoculating oneself with the right combo of political antibodies once one’s made their wealth via capitalism. Especially if one wants to keep both its use, as well as their new-found media persona intact. Kills two birds with one stone is all I’ll say. Almost like going for a political flu shot and receiving a double dose on the house. Again, all conjecture on my part, however, does one think for a moment Bill would say such things when he was developing privately what Microsoft™ was able to do for the public sector at large? That’s a decision for you to ponder and come to your own conclusions.

  Which brings us back to Zuck and his latest philanthropic proclamation. As Gates learned and emulated Warren with his own brand of philanthropy. So too must Mark be watching and learning also. I may be critical of Zuck on many differing issues , but what I would never imply is that he is not a shrewd businessman. He’s demonstrated that in spades. Which by the way is exactly the basis for why as I stated at the beginning I’m not quite buying what’s being sold.

  I also believe it is exactly for these reasons one should look for clues as to what might be on the horizon in other ways. For this could portend or, be a precursor that those “storm clouds” myself and a few others have been sighting are indeed becoming more obvious to Silicon Valley than many will let on. Here’s my reasoning…

  You know the one thing Mark Zuckerberg with all his Billions can’t do today without causing a media sensation throughout Wall Street? Hint: Sell.

  Let me express it this way: How would you think it would look to analysts, the financial media, stockholders, et al if Zuck announced he too decided to sell a Billion $dollars worth of stock when only weeks ago it was reported Mark Andreessen sold out nearly all (73%) his holdings in Facebook? This coming on the heels of the August 24th historic plunge in the markets. Think it would be seen in a “favorable” light? Neither do I.

  You know what else an observant business Silicon Valley person might contemplate?

  If we were in fact at the edge of a bubble in the Valley – how would one be able to sell at the top without bringing on some negative feedback loop in their stock price? After all, if history is any guide part of the problem for many during the dot-com burst was they never sold at the top. Many rode it all the way down to oblivion, and only a choice few (like Gates) made it through.

  However, Bill had an operating system that was needed regardless of the economy’s state. Mark only has an operating platform that needs to sell ads. And if ads go dry – so too does your stock value and personal wealth. See AOL™ for clues.

  With this newly formed “Initiative” any selling is now wrapped into a wonderful meme of “We’re not selling to profit. (or preserve) It’s for charity. And we’ve stated openly we were going to do just that. So, nothing to see here, please move along, thanks so much.”

  Are you beginning to see why something seemed “more than what meets the eye” at first blush?

  You know what else might be on the horizon that I’m more than sure will be brought up if things do begin to turn sour in the Valley? Mark’s near unrestricted power of authority to make acquisitions.

  Right now he doesn’t need Board approval to spend. He’s been very shrewd in keeping that ability solely within his own purview. However, as I’ve written many times previous, “You’ll know everything in the Valley has changed once you see Wall Street calling for that oversight.” I believe that ship has already began to sail and will be coming much sooner than later if we have more hiccups like the one’s we saw in Aug. or if Facebook shares begin going the wrong way.

  Yet, you know where that privilege will probably remain, unfettered, as well as with more influencing authority? Hint: “Initiative.”

  Look, I’m fully aware this is a lot of conjecture, as well as speculation and more on my part. I’m also of the belief that there is truly some real intention to do good with one’s wealth. Especially once one has a child for it really does change perspective on everything you never would contemplate until. That said, I’m also of fact and well aware that there is nothing wrong with capitalizing on events no matter how they present themselves in manners, and ways, as to promote or protect one’s wealth. As well as image.

  What caught my eye was, again – the structure. e.g. LLC. It was once you ask a few question and ponder “why” while looking at the event horizon that only a very few of us are stating or trying to bring attention as it nears does one look closer at what might also be driving the reasoning behind such announcements.

  Yes, it may be a wonderful vehicle for charity in the name of his daughter. And – it might also be a tell-tale vehicle for those willing to look as the first sign of a vehicle trying to “get-out-of-Dodge” before or, as fast as time will allow without causing others to panic first clogging the exits leaving themselves stuck. After all, what’s one to think about the “eyeball for ads” business when one of the other undisputed “eyeball” counted sights Yahoo™ is openly contemplating this weekend if it should sell its internet business?

  Remember, also, this year is the first year that the once Holy Grail of “IPO’s to the promised land” have been mired in quicksand. (Just look at Square™ and Match™ for the latest clues) Funny how things like this happen when there’s no longer QE to fuel it. That, and the Federal Reserve has all but declared without question that a rate hike will in fact take place (unless they don’t) nearly forsaking corporate profits to $Dollar denominated purgatory.

  Again this exercise could all be for naught and there may be nothing to ponder or, extrapolate. And Mark, Bill, and Warren may indeed have no ulterior motives to their philanthropic activities other than what they’ve stated. And that’s fine with me. Yet, there’s two sayings I’ve lived by most of my adult business life that have served me well. The first comes from Andrew Carnegie, “I no longer listen to what men say – I watch what they do.” The second I learned on my own after being blindsided by someone I thought was a friend, “It’s not what people do too you that’s the problem. It’s the way you have to treat everybody coming after that’s the problem.”

  If you think the Carnegie quote is just some antiquated insight that no longer fits today’s circumstances or maybe can’t see how the second could apply to the circumstances of today. Need I remind you of another person who had philanthropy at the core of their decisions of just “doing good” where his actions were to be taken beyond reproach? Lance Armstrong.

  Questioning is a prudent exercise regardless of the individual. Especially when they’ve proclaimed politics is going to be one of their predominate activities. For if it’s a business – I don’t have to buy or participate. When it’s political – I might not have a choice.

  Charitable or not.

  

  

  

  

  

• Putin Accuses US Of ISIS Oil Coverup

  Last Wednesday, the Russian MoD delivered a lengthy presentation which contained compelling visual evidence of a connection between Islamic State’s illegal and highly profitable trade in stolen Iraqi and Syrian crude and Turkey. Here are some highlights:

  After loading up with oil, a truck convoy in east Syria heads toward Turkey in direction Al-Qamishli:

  

  

  

  

  October 18: in the Drer-ez-zor region a satellite imagte reveals 1772 oil trucks:

  

  

  

  November 14: in the Tavan and Zaho regions, in the zone where coalition forces are active, one can see a gathering of oil trucks:

  

  November 28: in the region Kara-Choh on the territory of an oil refinery one can see 50 oil trucks:

  

  

  The routes of alleged oil smuggling from Syria and Iraq to Turkey:

  

  A substantial part from east Syria enter a refinery in Batman, Turkey (100km from the Syria border):

  

  The slide show, hosted by Deputy Minister of Defence Anatoly Antonov, featured photos of oil trucks, videos of airstrikes and maps detailing the trafficking of stolen oil. It was the latest PR snafu for Erdogan who is struggling to convince Turkey’s allies that The Kremlin’s accusations are unfounded and that Ankara isn’t set to put NATO in an awkward position by effectively instigating a shooting war with Russia. 

  Washington came to Erdogan’s defense in the aftermath of Moscow’s claims as State Department spokesman Mark Toner said the US is confident that Ankara “is not complicit in Islamic State oil smuggling.” Russia seemed to take that denial in stride, but after US special envoy and coordinator for international energy affairs, Amos Hochstein, said on Friday that the amount of oil smuggled into Turkey from Syria is “of no significance from a volume perspective”, Moscow appears to have had enough. 

  On Saturday, Russia accused the US of participating in a cover-up. “Our colleagues from the State Department and the Pentagon have confirmed that the photo-proof, which we presented at a briefing [on December 2], of the origin and destination of the stolen oil, coming from the areas controlled by the terrorists, is authentic. However, the US claim that they ‘don’t see the border crossings with tanker trucks crossing the border,’ raises a smile, if only, because the photos are still images,”  Major General Igor Konashenkov, a Defense Ministry spokesman said. “We advise the American side to have a look at how the tanker trucks not only drive through checkpoints at the Turkish border, but pass through them without even stopping.”

  As RT notes, an unnamed US State Department official confirmed to Reuters on Friday that the Russian photos of thousands of oil tanker trucks in Syria were authentic [but] stressed that he hasn’t seen “the imagery of the border crossing with trucks crossing the border, and that’s because [the US doesn’t] believe it exists.”

  Well, here it is:

  “The declarations of the Pentagon and the State Department seem like a theatre of the absurd,” the MoD added, before noting that Washington should “watch the videos taken by its (own) drones which have recently been three times as numerous over the Turkey-Syria border and above the oil zones”. That, by the way, is an attempt to mock Washington for increasing the number of drones monitoring the situation while failing to actually conduct strikes. Earlier this week, Russia said that despite Washington’s claims, the US and its partners are actually not bombing ISIS oil infrastructure or convoys.

  In case the above isn’t clear enough, here’s more from the Russian MoD’s Facebook: “When US officials say they don’t see how the terrorists’ oil is smuggled to Turkey… it smells badly of a desire to cover up these acts.”

  We have on any number of occasions suggested that Washington has avoided striking ISIS oil convoys in an effort to ensure that the group retains the funding it needs to continue to destabilize Syria and the Assad government (see here for instance) and in order to preserve amicable relations with Ankara which appears to benefit from the trafficking of illegal crude both from Kurdistan and Islamic State.

  And so, Russia once again turns the screws on the West in an effort to expose what at this point looks to be a coordinated effort to facilitate the funding of international terrorism via the establishment and maintenance of smuggling routes for some 50,000 b/d of oil looted from fields in eastern Syria and northern Iraq. If the US is indeed complicit in this, it might be time to cut ties with Erdogan because Moscow is on the PR warpath and it’s just a matter of time before the smoking gun emerges.

  

  

  

  

  

• Why To Fred Hickey These Are The "Last Gasps Of A Dying Bull Market (And Economy)"

  Once upon a time, the “Tech Strategist” Fred Hickey used to be part of Barron’s Roundtable. Alas, the famed newsletter writer, who accurately predicted the bursting of the 2000 and 2007 bubbles, was deemed too bearish and was cut from the magazine whose hyperbolic covers have long been used as contrarian inflection point signal by the markets.

  How bearish? As the following excerpt from his latest excellent monthly newsletter titled “Last Gasps of a Dying Bull Market (and economy)” reveals, the answer is “about as bearish as Hickey has ever been.”

  * * *

  Last Gasps of a Dying Bull Market (and economy)

  Deteriorating market breadth and herding into an ever-narrower number of stocks is classic market top behavior. Currently, there are many other warning signs that are also being ignored. The merger mania (prior tops occurred in 2000 and 2007), the stock buyback frenzy (after the record amount of buybacks in 2007 buybacks were less than one-sixth of that level at the bottom in 2009), the year-over-year declines in corporate sales (-4% in Q3 and down every quarter this year) and falling earnings for the entire S&P 500 index, the plunges this year in the high-yield (junk bond) and leveraged loan markets, the topping and rolling over (the unwind) of the massive (record) level of stock margin debt… and I could go on.

  It was very lonely as a bear at the tops in 2000 and 2007. I was just a teenager in 1972 so I was not an active investor, but just a few days prior to the early 1973 January top, Barron ‘s featured a story titled: “Not a Bear Among Them.” By “them” Barron ‘s meant institutional investors. I do vividly remember my Dad listening to the stock market wrap-ups on the kitchen radio nearly every night in 1973-74. It seemed to me back then that the stock market only went in one direction — and that was DOWN.

  The global economy is in disarray. It’s the legacy of the central planners at the central banks. China’s economy has been rapidly slowing despite all sorts of attempts by the government to prop it up (including extreme actions to hold up stocks). China’s economic slowdown has cratered commodity prices to multi-year lows and helped drive oil down to around $40 a barrel.

  All the “commodity country” economies (and others) that relied on exports to China are suffering. Brazil is now in a deep recession. Last month Taiwan officially entered recession driven by double-digit declines (for five consecutive months) in exports. Also last month Japan officially reentered recession. Canada and South Korea’s governments recently cut forecasts for economic growth. Despite the lift from an extremely weak euro, Germany’s Federal Statistical Office reported last month that the economy slowed in Q3 due to weak exports and slack corporate investment. The German slowdown led a slide in the overall eurozone economy in Q3 per data from the European Union’s statistics agency. The recent immigration and terrorist problems make matters worse. Tourism will suffer. ECB President Mario Draghi is expected to react later this week by providing even more QE (money printing) and driving interest rates to even deeper negative levels (unprecedented).

  Here in the U.S., the economy appears relatively healthier only because the rest of the world is so awful. That has driven the U.S. dollar skyward (DXY index over 100), hurting tourism and multinational companies exporting goods and services overseas. Last month the U.S. Agriculture Department forecast that U.S. farm incomes will plummet 38% this year to $56 billion – the lowest level since 2002. Yesterday’s ISM (Institute for Supply Management) manufacturing index for November fell into contraction territory at 48.6, the lowest reading since the 2009 recession. Economists expected a reading over 50. Industrial production fell in October from September. It was the ninth month-to-month drop in the ten months of the year.

  Ports around the country have been reporting declining exports and imports all year. Last month the nation’s busiest port (Los Angeles) reported that loaded exports were down 15% for the year and empty container volumes in October were up 13% year-over-year. Empty containers are shipped overseas to be sent back to the U.S. filled with goods. The Cass Freight Index (primarily measures truck and rail shipments) dropped 5% in October from September and 5% year-over-year. Last month trade researcher Zepol Corp. reported that for the first time in at least a decade, imports in both September and October (the peak shipping season) at each of the three busiest U.S. seaports fell. They didn’t just fall. They dropped by more than 10% between August and October. The three ports handle over 50% of the goods entering the U.S. by sea.

  With freight shipments slowing, carriers are cutting way back on capacity additions. According to the Railway Supply Institute, North American railcar orders plunged 83% year-over-year in the third quarter, the biggest drop in at least 27 years. ACT Research reported last month that trucking companies ordered 44% fewer large trucks year-over-year in October. The causes of this are falling industrial production and lower consumer demand, which has led to an unwanted buildup in inventories. American Trucking Association (ATA) chief economist Bob Costello recently said (in an ATA statement): “I remain concerned about the high level of inventories throughout the supply chain.” The gap between wholesale inventories and wholesale sales (as reported by the U.S. Census Bureau) is greater than what was seen prior to the 2009 recession.

  Despite plunging gasoline prices (below $2 a gallon in some places), sales reports from most of the major U.S. retailers have been soft for several months. The latest round of reports released last month continued the trend. Target, Macy’s. Dick’s Sporting Goods, Best Buy, Nordstrom, Kohl’s, Tiffany (in other word, the gamut) and many more reported disappointing sales results. A Nordstrom exec on the conference call: “All we can tell you is, in our business, we saw a slowdown. And it was across the board.” Wal-Mart’s existing store sales grew 1.5% in its latest quarter, but profits fell 11% due to higher costs. Macy’s and Kohl’s spoke of excess merchandise inventories at the end of their quarters that needed to be cleared. Dick’s inventories jumped 13.1% from a year earlier while sales grew just 7.6% in the quarter.

  Last week the Wall Street Journal wrote a story titled: “Retailers Ring Alarm Bells for the Holiday Season.” Two weeks earlier the Journal’s story was: “Retailers’ Full Shelves May Force Holiday Discounts.” Yesterday, the Atlanta Fed reported that its GDPNow model is forecasting just 1.4% seasonally adjusted annual GDP growth in Q4, down from the prior 1.8% forecast. Part of the reason for the Q4 slowdown is the anticipated hit to growth coming from the necessary inventory reductions.

  There are pockets of strength in the economy, namely auto sales and housing. However, auto sales appear to be peaking out at just above the 18 million annual unit mark (extremely easy credit can only take the industry so far). In general, the majority of U.S. consumers are being squeezed by a combination of higher expenses and stagnant (or lower) real incomes. Due to rapidly rising rents (renters are paying the highest percentage of their income on rent ever per Zillow), high levels of consumer debt (record auto and student loans outstanding), and for many (including my family), sharply higher (record) healthcare costs (see chart below sourced from Meridian Macro Research); it doesn’t matter if there are lots of low-paying healthcare and service industry (hamburger flipping) jobs available. The U.S. consumer is under siege.

  

  The Final Straw?

  When the Fed was printing money (quantitative easing) in 2008-2014, the Fed itself described QE as the equivalent of monetary easing. Therefore, stopping quantitative easing (more than $1 trillion annually at its peak) as the Fed did late last year is tightening even though Wall Streeters are loath to admit it. As the result of this tightening, we’ve watched the broad stock markets slowly break down all year and the economy steadily weaken.

  The Fed should have raised rates from the emergency zero-bound level long ago. However, since the economy never reached “escape velocity” as the Fed expected (all of the Fed’s forecasts have been wrong), they never got up the gumption to pull the trigger, despite leading people on that they were about to do it – over and over again. In 2015 there’s one last Fed meeting (December 15-16) remaining and next year there will be a presidential election, so in order to save face, it appears the Fed will try to pull off one tiny, quarter point rate hike and talk as dovishly as possible in order to minimize the damage. But remember, this is tightening on top of the prior tightening in an aging, though wretched, seven-year “recovery,” that’s worsening by the day.

  Moreover, as noted earlier, the stock market is giving every indication that it’s about to collapse. Looks like bad timing to me. The Wall Street Journal’s Jon Hilsenrath issued the following warning two months ago: “In the seven years since the world’s central banks responded to the financial crisis by slashing interest rates, more than a dozen banks in the advanced world have tried to raise them again. All have been force to retreat.” Assuming they can pull it off, the Fed will rescind this hike too — but not before there’s a lot of damage to the stock market.

  

  

  

  

  

• Jordanian Man Screaming He "Wants To Join Allah" Tries To Open Lufthansa Airplane Cabin Door In Mid Flight

  Last week, the US experienced what is now widely reported to be the worst terrorism-driven mass killing in the US since 9/11; yesterday terrorism allegedly spread to London which had so far been insulated from any Islamic State-related events; just one thing was missing to push the global panic envelope to the “September 11 flashback” redzone in a month that started with the mass murder of dozens of people in Paris and has gotten progressively worse since: airplane terrorism. 

  Moments ago we may have gotten just that after a report that a Lufthansa crew and passengers overpowered a Jordanian man with a US passport, who tried to open the cabin door on a Frankfurt-Belgrade flight on Sunday, while screaming that he wished to join Allah along with all the passengers, according to Serbian TV RTS.

  However, as AFP adds, the man was promptly overpowered by crew and passengers with the German carrier insisting the safety of the plane had not been threatened. The airplane proceeded to land safely at 12:45pm local time.

  

  More from AFP:

  “A passenger got up and tried to do something at the door, but was stopped by crew members and other passengers,” said airline spokesman Andreas Bartels.

   

  “The passenger was then restrained for the remainder of the flight in his seat and handed over to the authorities in Belgrade,” he said.

   

  “It was a normal door, which of course cannot be opened in-flight… it was not the cockpit door,” he said. “The safety of the flight was not jeopardised and the flight landed safely in Belgrade”.

   

  Bartels declined to provide information on the identity of the passenger or his nationality, or what he said during the incident.

  Serbian state-run television provided more details on the passenger, reporting that police had arrested a Jordanian man after he tried to forced his way into the cockpit of the Lufthansa flight. The Serb press said the Jordanian was called Laken and had a US passport. He had cried out that he wished to join Allah along with all the passengers, RTS said.

  The man had suddenly got up during the flight, banged on the cockpit door and demanded to be allowed to enter, threatening to open one of the plane’s doors while it was flying over Austria, Serbia’s RTS television reported.

   

  He was overpowered by flight crew and members of a Serb handball team who subdued him until the flight landed in Belgrade where he was arrested, the report said.

  RTS adds that the coach of the Vojvodina handball team, Nikola Markovic said that during the incident on the plane there was no panic. Google translated:

  “We are all from the back of the plane saw that something was happening, but we thought that because of the extraordinary situation in each plane has someone from the security services. Nothing spectacular happened everything was all right. Most of us did not have information about what was happening, “Markovic said.

   

  According to him, the flight attendant accompanied by two players took the man who caused an accident in business class, and there they sat down with him, without any difficult situation.

   

  “After 15 minutes I called one of my players and he told me what happened. Most of the passengers did not even know what happened on the plane, until they found out later what had happened. The flight was calm, do not panic, all are well “Markovic said.

   

  The plane landed safely when the other passengers learned about the incident after they were announced to the police.

  Luckily, this time there were no consequences, however expect in light of this event, airline security checks to return to post-September 11 levels, especially if as we expect, tonight’s 8pm impromptu Obama statement seeking to “reassure the nervous nation“, achieves precisely the opposite.

  

  

  

  

  

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• Cuomo Sends Investigators After Blackout Forces Shutdown Of Nuclear Reactor Near NYC

  Almost 2 years after being fined for falsifying safety records, and 7 months after a transformer exploded at the Indian Point Nuclear Reactor (just 30 miles from midtown Manhattan), Entergy – the plant's operator – has 'safely' shutdown the Unit 2 reactor due to a major outage cut power  to several control rods. Despite the company's reports that no radioactivity was released to the environment, NY Governor Cuomo has sent investigators to the site to 'monitor' the situation.

  As AP reports, officials say one of the Indian Point nuclear power plant's reactors in suburban New York has been shut down because several control rods lost power.

  Plant owner Entergy says control room operators safely shut down the Indian Point 2 reactor around 5:30 p.m. Saturday. The reactor's designed to make a safe shutdown if the control rods lose electricity.

   

  Gov. Andrew Cuomo says the company reports no radiation was released into the environment. State Department of Public Service workers are headed to the plant in Buchanan, about 30 miles north of midtown Manhattan.

   

  The Indian Point 3 reactor is running. Together, the two reactors supply about one-quarter of the power used in New York City and Westchester County.

   

  Indian Point 3 was shut down in July after a water pump problem.

  But despite the company operating the site reports that there was no radioactivity released from the reactor Unit 2.

  Statement from Governoir Cuomo:

   

  "Earlier tonight, the Unit 2 reactor at the Indian Point Nuclear Facility was forced to shut down due to a reported power loss to several control rods. The company reports that there was no radioactivity released to the environment. I have directed the Department of Public Service to investigate and monitor the situation and a team is currently en route to Indian Point to begin its work."

  .@Indian_Point spokesman says control room operators shut down unit 2 reactor 5:30 p.m. Cause being investigated. pic.twitter.com/489AfosiJi

  — James Nani (@JamesNani845) December 6, 2015

  

  *  *  *

  As a reminder, Indian Point is just 38 miles north of New York City, and produces some 25 percent of New York City’s and Westchester’s electricity. The combined power generated by the two units amounts to over 2000 megawatts. The facility employs some 1,600 people.

  The two current reactors, Indian Point 2 and 3 (Indian Point 1 was shutdown in 1974) are four-loop Westinghouse pressurized water reactors both of similar design. Units 2 and 3 were completed in 1974 and 1976, respectively.

   

  

  The plant has been a subject of controversy due to its proximity to NYC. Several environmental groups have been calling for Indian Point’s permanent shutdown for years. It also has a history of transformer accidents and various leaks, including a 2012 explosion in the main transformer that spilled oil into the river and caused Entergy to pay a fine of a $1.2 million.

  

  

  

  

  

• "We" Don't Really Know What's Happening

  Submitted by Paul Rosenberg via FreeMansPerspective.com,

  "If you don't read a newspaper every day, you are uninformed. If you do, you are misinformed." – Mark Twain

   

  "Wars start because diplomats lie to reporters, then believe what they read in the newspaper." – Unknown

  We Don't Really Know What's Happening… And, believe it or not, this is rather good news. I’ll explain.

  We all like to know what’s happening in the world, and for good reason… understanding our surroundings is essential to survival. We instinctively seek information… we need information. There is, however, a problem that we face:

  No matter how much “news” you consume, you won’t really know what’s going on in the world.

  We can’t know, because ‘the news’ is half illusion, provided by government-dependent corporations that are paid to keep you watching and to keep you joined to the status quo.

  Granted, they are quite good at providing pictures from disaster areas, but when it comes to explaining why the disaster happened, they mislead almost every time. Yes, some truth makes its way through the news machine, but most of it is wrapped in layers of manipulation. If, for example, you watch the news feeds all day, you’ll find a good deal of truth, but you’ll find it amongst a pile of half-truths. Do you really have enough time to analyze them all?

  One Piece of Truth

  The truth about public reporting comes out from time to time, but usually well after the fact. So, here’s one piece of truth that’s worth remembering:

  For those who don’t recall the 1970s, Daniel Ellsberg was a man who worked as an analyst at the RAND Corp., moved from there to the Pentagon, spent two years in Vietnam working for the State Department, and then went back to RAND. He is the man who leaked the Pentagon Papers in 1971. These were the documents that revealed that three US presidential administrations had been plainly, knowingly, and openly lying to the public.

  Here’s what Ellsberg thought the New York Times was good for:

  … to see what the rubes and the yokels are thinking about and what they think is going on and what they think the policy is….

  Later, in 1998, he said this in an interview:

  The public is lied to every day by the president, by his spokespeople, by his officers. If you can’t handle the thought that the president lies to the public for all kinds of reasons, you couldn’t stay in the government at that level….

  And here’s what Michael Deaver, a top aide to President Ronald Reagan, said about the press:

  The media I’ve had a lot to do with is lazy. We fed them and they ate it every day.

  That’s the truth about news, my friends. The newspapers are where the yokels get informed, presidents flatly lie, and legislatures are massively corrupt. The TV stations recycle opinions from the leading newspapers. And Internet news sites primarily recycle TV and newspaper stories.

  Yes, some truth does slide through, but it looks almost the same as the other stuff. The only places we get anything close to refined truth is on a few Internet sites… and many of them have a particular axe to grind.

  And the Internet news sites that really dig through the pile are in jeopardy. The Internet is being funneled into Google, Facebook, and a few other friends of the state. If things continue as they’ve been going, the independents will be cut off soon enough, under the guise of copyright or some such.

  Sad to say, we shouldn’t accept the news as true. In my personal experience, I’ve been close enough to a few news stories to know the truth, and the networks got it wrong every time.

  More Truth

  This is what William Colby, former director of the CIA, is quoted as saying in Derailing Democracy: The America the Media Don’t Want You to See:

  The Central Intelligence Agency owns everyone of any significance in the major media.

  Now, since people have disputed that quotation, let’s back it up: Please consider Operation Mockingbird.

  Beginning in 1948, a CIA agent named Frank Wisner started gathering journalists and broadcasters… and started using them to ‘inform’ the public. The operation soon got so elaborate that other agents called it “Wisner’s Wurlitzer.” (Wurlitzer being the brand of organ that was played in churches.) In other words, Wisner played the media like a musical instrument.

  While the real situation is more complex than this short description, rest assured that every major news organization in every major country is manipulated by intelligence groups. Where do you think they get all those “unnamed sources”?

  If you were an intel operator, wouldn’t you do precisely that? You’d be considered derelict not to. So, you can rely upon this fact. And see here for a minor example.

  And So…

  I could continue listing facts, but there’s no real point. The crucial thing is to accept the truth:

  The news is worked over before it reaches us.

  We do know some facts, of course, and a generation from now we may learn nearly the whole truth about some of these events, but only if we wait and then go out of our way to find it.

  The good news in all of this comes when we accept the facts and stop running our brains on bad information. Yes, it would be nice to know what’s really going on, but we don’t, and there isn’t much we can do about it. So, it’s time to stop treating the news seriously.

  So long as the guv-megacorp-intel structure remains, it will enforce our ignorance. That’s what such organizations do, by their very nature. To expect differently is like expecting a dog to sprout wings and fly.

  But once we accept that fact, we stop being spun around by the talking heads and their handlers.

  After that, we can find truth in books and in other serious publications.

  So, I suggest that you start ignoring the news. Rather, use all that time and energy to start building the kind of world you’d like to live in.

  

  

  

  

  

  

• Putin Accuses US Of ISIS Oil Coverup

  Last Wednesday, the Russian MoD delivered a lengthy presentation which contained compelling visual evidence of a connection between Islamic State’s illegal and highly profitable trade in stolen Iraqi and Syrian crude and Turkey. Here are some highlights:

  After loading up with oil, a truck convoy in east Syria heads toward Turkey in direction Al-Qamishli:

  

  

  

  

  October 18: in the Drer-ez-zor region a satellite imagte reveals 1772 oil trucks:

  

  

  

  November 14: in the Tavan and Zaho regions, in the zone where coalition forces are active, one can see a gathering of oil trucks:

  

  November 28: in the region Kara-Choh on the territory of an oil refinery one can see 50 oil trucks:

  

  

  The routes of alleged oil smuggling from Syria and Iraq to Turkey:

  

  A substantial part from east Syria enter a refinery in Batman, Turkey (100km from the Syria border):

  

  The slide show, hosted by Deputy Minister of Defence Anatoly Antonov, featured photos of oil trucks, videos of airstrikes and maps detailing the trafficking of stolen oil. It was the latest PR snafu for Erdogan who is struggling to convince Turkey’s allies that The Kremlin’s accusations are unfounded and that Ankara isn’t set to put NATO in an awkward position by effectively instigating a shooting war with Russia. 

  Washington came to Erdogan’s defense in the aftermath of Moscow’s claims as State Department spokesman Mark Toner said the US is confident that Ankara “is not complicit in Islamic State oil smuggling.” Russia seemed to take that denial in stride, but after US special envoy and coordinator for international energy affairs, Amos Hochstein, said on Friday that the amount of oil smuggled into Turkey from Syria is “of no significance from a volume perspective”, Moscow appears to have had enough. 

  On Saturday, Russia accused the US of participating in a cover-up. “Our colleagues from the State Department and the Pentagon have confirmed that the photo-proof, which we presented at a briefing [on December 2], of the origin and destination of the stolen oil, coming from the areas controlled by the terrorists, is authentic. However, the US claim that they ‘don’t see the border crossings with tanker trucks crossing the border,’ raises a smile, if only, because the photos are still images,”  Major General Igor Konashenkov, a Defense Ministry spokesman said. “We advise the American side to have a look at how the tanker trucks not only drive through checkpoints at the Turkish border, but pass through them without even stopping.”

  As RT notes, an unnamed US State Department official confirmed to Reuters on Friday that the Russian photos of thousands of oil tanker trucks in Syria were authentic [but] stressed that he hasn’t seen “the imagery of the border crossing with trucks crossing the border, and that’s because [the US doesn’t] believe it exists.”

  Well, here it is:

  “The declarations of the Pentagon and the State Department seem like a theatre of the absurd,” the MoD added, before noting that Washington should “watch the videos taken by its (own) drones which have recently been three times as numerous over the Turkey-Syria border and above the oil zones”. That, by the way, is an attempt to mock Washington for increasing the number of drones monitoring the situation while failing to actually conduct strikes. Earlier this week, Russia said that despite Washington’s claims, the US and its partners are actually not bombing ISIS oil infrastructure or convoys.

  In case the above isn’t clear enough, here’s more from the Russian MoD’s Facebook: “When US officials say they don’t see how the terrorists’ oil is smuggled to Turkey… it smells badly of a desire to cover up these acts.”

  We have on any number of occasions suggested that Washington has avoided striking ISIS oil convoys in an effort to ensure that the group retains the funding it needs to continue to destabilize Syria and the Assad government (see here for instance) and in order to preserve amicable relations with Ankara which appears to benefit from the trafficking of illegal crude both from Kurdistan and Islamic State.

  And so, Russia once again turns the screws on the West in an effort to expose what at this point looks to be a coordinated effort to facilitate the funding of international terrorism via the establishment and maintenance of smuggling routes for some 50,000 b/d of oil looted from fields in eastern Syria and northern Iraq. If the US is indeed complicit in this, it might be time to cut ties with Erdogan because Moscow is on the PR warpath and it’s just a matter of time before the smoking gun emerges.

  

  

  

  

  

• America's 'New' Bill Of "Wrongs"

  Via Oquities,

  THE BILL OF WRONGS

  Amendment I

  Congress shall make laws respecting an establishment of religion, and may constrain the free exercise thereof; and limiting free speech and the press; and suppressing the right of the people to assemble, and to discourage the people from petitioning the Government for a redress of grievances.

  Amendment II

  A well armed Constabulary, being necessary to the subjugation of a spirit of freedom, the privilege of the people to keep and bear Arms, shall be infringed and modified.

  Amendment III

  The people shall be required to compensate the Government for the cost of goods and services provided to non-citizens, and the Government may extract and disburse such in a manner to be prescribed politically.

  Amendment IV

  The right of the Government to inspect the people in their persons, houses, and effects, and if necessary without their knowledge, shall not be violated, and Warrants shall issue in secret courts without due process or support by Oath or affirmation, execution of which shall be broad and at the discetion of authorities.

  Amendment V

  Any person shall be held to answer for a capital, or otherwise infamous crime, without due process of law; and any person shall be subject to prosecution by any level of Government, simultaneously or consecutively, to be put in jeopardy of life or limb for the same offense more than once if necessary; and be compelled to submit biological samples for any criminal case in order to be a witness against himself, and may be deprived of life, liberty, or property, without due process of law; and private property shall be taken for public use, without just compensation.

  Amendment VI

  In all criminal prosecutions, the accused may be held for lengthy periods before a trial, and tried by a jury generally unfamiliar with law in the State and district wherein the crime shall have been committed, with the nature and cause of the accusation to be obscured as the Government deems necessary; with the use of Government negotiated witness arrangements that may benefit the accusers and/or prosecuting attorneys; and to have qualified Assistance of Counsel for his defense based on ability to pay.

  Amendment VII

  In Suits at common law, the well provisioned litigant shall have numerous opportunites to appeal, and litigants may be compelled to utilize non-judicial forums as compelled by extra-judicial organizations to settle disputes.

  Amendment VIII

  Bail may encompass a variety of fees including, but not limited to, charges for self internment and monitoring, re-education and counseling; and private prisons may determine if and when sentencing is extended without show of cause in a court of law.

  Amendment IX

  The enumeration in the Constitution, of certain rights, shall reflect the Government's ability to diminish or expand, as necessary, the rights of the people.

  Amendment X

  The powers not delegated to the States by the Constitution, or to the people, are reserved to the United States.  

  

  

  

  

• Whistleblower Warned Turkey Would Attack A Russian Jet

  Society needs whistleblowers. They serve as a check on corruption and governmental overreach and in the private sector, they are often the only thing that stands between unbridled corporate greed and the otherwise clueless masses. 

  As Edward Snowden demonstrated, even the most “developed” of nations need checks on government and that goes double in places like Turkey, where an autocracy is masquerading as a largely developed democracy. 

  Despite the fact that Erdogan has managed to create an environment in which the press and the police are afraid to pursue the truth for fear of brutal reprisals from Ankara, there’s one Turkish citizen who stands against the suppression of free speech: Fuat Avni. 

  Fuat Avni is a pseudonym used by an anonymous government whistleblower. He has more than 2.3 million followers on Twitter (so, half as many as Donald Trump).

  

  Here are two excerpts from an interview Vocativ conducted with Fuat Avni last year: 

  Vocativ: Is there a reason why you chose the name Fuat Avni?

   

  FA: I did not open the account with this name initially. I used different names. But I did not want any other person to be hurt because of what I wrote, so I changed user names frequently. Fuat Avni means “a helping heart.” I thought it to be suitable and I continued with it.

   

  Vocativ: Do you alone control the Twitter account? 

   

  FA: There is no team behind it, only me. I don’t need to get any information from anyone because for years I have been working at in sensitive positions within the AKP [Turkey’s ruling party]. Because of my position, I have information about people at critical points. The reports and information come to my desk as well. It is ridiculous to think that an insider gets information from an outsider. Only I and Allah know who Fuat Avni is.

   

  Well, on Sunday, October 11, Fuat Avnil tweeted something interesting. 

  18. Seçimden çok korkan Yezid, iç sava? ç?karman?n yan?s?ra Rus jetlerini dü?ürüp ülkeyi fiilen sava?a sokmay? bile dü?ünüyor.

  — fuatavni (@fuatavni_f) October 11, 2015

  That, allegedly, is the tweet that foretold Ankara’s move to shoot down a Russian Su-24 near the Syrian border late last month in the first incident of a NATO member engaging a Russian or Soviet aircraft in more than six decades.

  The prediction didn’t go unnoticed. 

  Late last month, Russia’s sharp-tongued, US foreign policy critic extraordinaire Maria Zakharova cited the Fuat Avnil tweet in accusing Turkey of purposefully downing the Russian warplane. Here’s Today’s Zaman (whose editor in chief just resigned under legal pressure from Erdogan):

  In comments on Turkey’s recent downing of a Russian jet over violation of its airspace, a spokesperson from the Russian Foreign Ministry has recalled that famous Turkish Twitter whistleblower claimed back in October that the Turkish government was planning to down a Russian jet to remain in power.

   

  At a press conference on Wednesday, Russian Foreign Ministry spokesperson Maria Zakharova claimed that Turkey “purposefully” downed the Russian Su-24 at the Turkish-Syrian border on Tuesday and said the “unprecedented” incident will have serious repercussions.  

   

  She also quoted statements of Turkish Twitter whistleblower Fuat Avni who claimed in October that the Justice and Development Party (AK Party) government and President Recep Tayyip Erdo?an were  planning to down a Russian jet to bring Turkey to brink of war with Russia to ultimately keep its power. “This is very interesting,” Zakharova said.

   

  
  

  Yes, it is “very interesting” that Turkey’s most famous whistleblower and anonymous Twitter personality should predict such a dramatic event more than a month ahead of time. As Zaman goes on to note, “Fuat Avni’s identity is unknown and has prompted wide speculation, but the account has previously revealed numerous details that would appear to indicate that the user is close to or inside the government and the account has attracted a large following.”

  Fuat Avni also predicted the widespread crackdown on the media ahead of of November’s elections. The government also attempted to have his account blocked in October after he tweeted information about Bilal Erdogan’s finances (again, from Today’s Zaman):

  Fuat Avni said in a series of tweets on Oct. 4: “In Italy, Bilal will manage accounts in Switzerland and other countries. Bilal has billions of dollars to manage.” Claiming that Bilal flew to Italy on Sept. 27 and plans to remain there for a while, with family members possibly joining him later, Fuat Avni wrote: “They are planning to keep Bilal in Italy until the [Nov. 1] election. They will decide whether or not he will come back depending on the situation after the election.” The whistleblower said there is a plan in place for President Erdogan and his family to flee a possible trial on corruption charges if necessary after Nov. 1 and that Foreign Minister Feridun Sinirlioglu is organizing the plan.

   

  After Fuat Avni’s claims were reported by media outlets, Bilal Erdogan’s lawyer filed a complaint against Fuat Avni’s Twitter account, asking for a court to block access to it on the grounds that the tweets breach his rights. In a decision on Oct. 6, the ?stanbul 7th Penal Court of Peace decided to demand that Twitter block access to the account in Turkey, but the popular social media website has refused to implement the court decision.

  As you can see, this is a serious thorn in the side of the Erodgan regime and in case the implications of the above aren’t clear enough, we’ll close with a quote from Istanbul-based Cihan News – which is controlled by Zaman owner Feza Publications – ca. October 12: 

  Avni, who claims to be among Erdogan’s inner circle, says the president of Turkey has seen the latest polls in the run-up to the snap election in November, and is convinced that the Justice and Development Party (AK Party) cannot regain a single-party majority. 

   

  Avni purports that Erdogan is even thinking of declaring war on Russia and taking advantage of the de facto situation, consolidating his grip on power. 

  

  

  

  

  

• "Hollow Markets"

  Excerpted from Ben Hunt's Epsilon Theory blog,

  Whatever shocks emanate from polarized politics, their market impact today is significantly greater than even 10 years ago. That’s because we have evolved a profoundly non-robust liquidity provision system, where trading volumes look fine on the surface and appear to function perfectly well in ordinary times, but collapse utterly under duress. Even in the ordinary times, healthy trading volumes are more appearance than reality, as once you strip out all of the faux trades (HFT machines trading with other HFT machines for rebates, ETF arbitrage, etc.) and positioning trades (algo-driven rebalancing of systematic strategies and portfolio overlays), there’s precious little investment happening today.

  Here’s how I think we got into this difficult state of affairs:

   First, Dodd-Frank regulation makes it prohibitively expensive for bulge bracket bank trading desks to maintain a trading “inventory” of stocks and bonds and directional exposures of any sort for any length of time. Just as Amazon measures itself on the basis of how little inventory it has to maintain for how little a span of time, so do modern trading desks. There is soooo little risk-taking or prop desk trading at the big banks these days, which of course was an explicit goal of Dodd-Frank, but the unintended consequence is that a major trading counterparty and liquidity provider when markets get squirrelly has been taken out into the street and shot.

   

  Second, the deregulation and privatization of market exchanges, combined with modern networking technologies, has created an opportunity for technology companies to provide trading liquidity on a purely voluntary basis. To be clear, I’m not suggesting that liquidity was provided on an involuntary basis in the past or that the old-fashioned humans manning the old-fashioned order book at the old-fashioned exchanges were motivated by anything other than greed. As Don Barzini would say, “after all, we are not Communists”. But there is a massive and systemically vital difference between the business model and liquidity provision regime (to use a good political science word) of humans operating within a narrowly defined, publicly repeatable game with forced participation and of machines operating within a broadly defined, privately unrepeatable game with unforced participation.

  Whatever the root causes, modern market liquidity (like beauty) is only skin deep. And because liquidity is only skin deep, whenever a policy shock hits (say, the Swiss National Bank unpegs the Swiss franc from the euro) or whenever there’s a technology “glitch” (say, when a new Sungard program misfires and the VIX can’t be priced for 10 minutes) everything falls apart, particularly the models that we commonly use to calculate portfolio risk.

  For example, here’s a compilation of recent impossible market events across different asset classes and geographies (hat tip to the Barclays derivatives team)… impossible in the sense that, per the Central Tendency on which standard deviation risk modeling is based, these events shouldn’t occur together over a million years of market activity, much less the past 4 years.   
  

  Source: Barclays, November 2015.

  So just to recap… these market dislocations DID occur, and yet we continue to use the risk models that say these dislocations cannot possibly occur. Huh? And before you say, “well, I’m a long term investor, not a trader, so these temporary market liquidity failures don’t really affect me”, ask yourself this: do you use a trader’s tools, like stop-loss orders? do you use a trader’s securities, like ETFs? If you answered yes to either question, then you can call yourself a long term investor all you like, but you’ve got more than a little trader in you. And a trader who doesn’t pay attention to the modern realities of market structure and liquidity provision is not long for this world.

  If you want to read more about the Epsilon Theory perspective on hollow markets and the use of game theory to understand this dynamic, read “Season of the Glitch”, “Ghost in the Machine”, and “Hollow Men, Hollow Markets, Hollow World”.

  

  

  

  

  

• IceCap Asks If It Can It Get Any Worse In The Search For Yield? (And Answers: "You Bet")

  From IceCap Asset Management

  Can it get any worse?

  In the 1980s, term deposit investors routinely earned 15% and higher on their guaranteed savings. Yes, with inflation running sky high the real return was much lower. Yet, savers were accustomed to some pretty nice nominal returns.

  The 1990s rolled around, and so too did interest rates. In fact interest rates rolled right on down to the 7.5% range. Suddenly all term deposit investors were receiving 50% less than they did a short 10 years earlier. In other words – these savers effectively took a 50% cut in their investment income. Still, 7.5% was better than nothing.

  Then came the 2000s. And when considering the number of zero’s, it is rather ironic in that by 2010, term deposit investors were earning pretty close to 0%, or nothing to be exact.

  So, in a very short 30 years the world’s central banks have completely destroyed any chance for savers to earn anything on a safe, bank deposit.

  Can it get any worse? You betcha it can, and it already has.

  

   

  If central banks are able to cure the economic world, then cutting interest rates from 15% in the 1980s to 7.50% in the 1990s would have cured all economic ills. Instead the world witnessed:

  • 1987 crash
  • Savings & Loans crash
  • Mexican Peso crash
  • Asian currency crash
  • Long-term Capital Management crash And, if central banks are able to cure the economic world, then cutting interest rates from 7.50% in the 1990s to 3.50% in the 2000s would have cured all economic ills. Instead the world witnessed:
  • Tech market crash
  • Housing market crash
  • Portugal, Ireland, Italy, Greece, Spain government crash

  Despite this brutal record, onward they march. Today, central banks have cut interest rates to 0% and today we are witnessing:

  • Declining global growth
  • investors and savers searching the world for income

  We’ve discussed the lack of global growth before. Nothing has changed – the world continues to suffer from any acceleration in economic growth, and this is despite 0% interest rates. Investors and workers everywhere around the world need to grasp this all important fact.

  Which brings us back to understanding interest rates and predicting where they are headed.

  But first, we ask you to really think about the second point above: – investors and savers searching the world for income.

  When central banks set the price of money (setting interest rates), they do this from the perspective of the BUYER of money – not the SELLER of money. This is the key point in understanding interest rates.

  Central banks believe that reducing the cost of money will encourage and incentivize people and companies to BUY money. And when they BUY money, they will then spend the money which will create economic growth.

  This makes sense on paper and it is what universities, governments and Goldman Sachs have been telling everyone for over 30 years – therefore it MUST be true.

  But it isn’t.

  If going from 15% to 7.5% created growth, and then going from 7.5% to 3.5% created growth, then surely going from 3.5% to 0% should definitely create growth.

  That’s what both logic and linear thinking tells you.

  Now, this is the point where the main street advisors and banks stammer that things ARE improving. They whip out numerous charts and data points showing year-over-year improvements in employment, housing, real income, consumer sentiment, PE Ratios and credit spreads.

  Yes, things MUST be getting better.

  But, if things really are getting better, why have central banks all over the world continued to lower interest rates?

  And worse still – why are many lowering interest rates straight through the illogical level of 0%?

  Yes, today practically all of Europe have journeyed through this once fictional barrier and have now established NEGATIVE interest rates.

  While central bankers cannot change the direction of the global economy, they can certainly identify when things are not quite going as well as it is hope for.

  While central banks are hoping their 0% and now NEGATIVE% interest rates will stimulate a recovery; savers, and term deposit investors are hoping for something very different – a source of interest or income greater than 0%.

  Recall that the price of money has 2 sides: those who are buying money and those who are selling money.

  While central banks are hoping their 0% interest rate policies will encourage people and companies to buy money, they have simultaneously crushed the hopes of everyone who is selling money.

  Yes, instead of earning 3.5%, 7.5% or 15% on their savings as they did decades before, today savers everywhere have to either accept 0% on their money or do something different, very different.

  And in many ways, these “very different” things are creating trouble.

  Most term deposit investors are risk-averse. They cannot tolerate losses. They want safety of capital and the ability to earn interest on their savings.

  By creating 0% interest rates, central banks have thrown these savers to the wolves of wall street. And once savers enter the wolves’ den, only bad things can happen.

  And in the investment world, this means doing things you wouldn’t ordinarily do – such as investing in markets you have historically avoided.

  For example just 2 short years ago, Canadians searching for more investment income were told to invest in Energy and Pipeline stocks. These companies paid out 8% in dividends and savers were told these companies were strong, their dividends were strong and the price of oil was strong.

  Instead, the price of oil collapsed 60% which caused many of these companies to cut their dividends and the stocks fell over 40%:

  -40% loss for conservative investors

  

  Another favourite investment strategy for income seeking savers has been High Yield Bonds. We’ve been told that bonds are always safe, and that there’s nothing to worry about. So load up and enjoy the 7%.

  Interest payments and forever forget about 0% term deposits. Considering this group of investments has declined -3% over the last year, we wonder just how forgetful these investors really are.

  We should ask the following:

  • Why are savers investing in energy stocks and high yield bonds?
  • When central banks reduced interest rates to 0%, they effectively forced savers to become the very thing they tried to avoid – aggressive investors.

  Of course, the investment industry has to accept some of the blame as well. We see countless brochures, commercials and pop-up ads screaming at people to Search for Yield.

  Yes, these investment companies are suddenly claiming to being experts in identifying stocks and bonds from around the world that pay a nice, and sleep easy dividend.

  As investment managers ourselves, we can tell you with absolute certainty there are no free-investment meals in the world. If global interest rates are at 0%, it means every other dividend and interest rate significantly above 0% carries certain degrees of risk.

  And if you want to know the next “income seeking” strategy that will produce significant losses for investors, look no further than emerging market bonds.

  More in the full note below (link)

  

  

  

  

• Dozens Of Global Stock Markets Are Already Crashing: "Not Seen Numbers Like These Since 2008"

  As SHTFPlan.com's Mac Slavo notes,

  The system is beyond the point where it is merely showing stresses and fractures. Things are now falling apart and there may well be no way of putting them back together again.

   

  The media will continue to claim everything is fine, until the day of panic and reckoning when it will suddenly be the ‘next Greece’ or ‘2008 all over again’… but worse.

  27 Major Global Stocks Markets That Have Already Crashed By Double Digit Percentages In 2015

  (via The Economic Collapse blog's Michael Snider)

  Anyone that tries to tell you that a global financial crisis is not happening is not being honest with you.  Right now, there are 27 major global stock markets that have declined by double digit percentages from their peaks earlier this year.  And this is truly a global phenomenon – we have seen stock market crashes in Asia, Europe, South America, Africa and the Middle East.  But because U.S. stocks are only down less than a thousand points from the peak earlier this year, most Americans seem to think that everything is just fine.

  The truth, of course, is that everything is not fine.  We are witnessing a pattern similar to what we saw back in 2008.  Back then, Chinese stocks and other major stock markets started crashing first, and then U.S. stocks followed later.

  But when you step back and look at what has been happening globally, a much more ominous picture emerges.  I spent much of the afternoon looking at stock market charts for the largest economies all over the globe.  What I discovered was financial carnage that was much worse than I anticipated.

  It turns out that there are at least 27 major global stock markets that have fallen by more than 10 percent from peaks that were set earlier this year. As you can see, many of these stock market declines have been quite impressive…

  1. China: down more than 30 percent

  2. Saudi Arabia: down 26 percent

  3. Germany: down about 13 percent

  4. United Kingdom: down close to 12 percent

  5. Spain: down 15 percent

  6. Brazil: down more than 22 percent (13,000 points overall)

  7. Malaysia: down 17 percent

  8. Turkey: down 16 percent

  9. India: down close to 12 percent

  10. Chile: down 11 percent

  11. Columbia: down about 30 percent

  12. Peru: down more than 40 percent

  13. Bulgaria: down more than 20 percent

  14. Greece: down more than 30 percent

  15. Poland: down about 19 percent

  16. Malaysia: down 10 percent

  17. Egypt: down 32 percent

  18. Indonesia: down 18 percent

  19. Canada: down 12 percent

  20. Ukraine: down 45 percent

  21. Morocco: down 13 percent

  22. Ghana: down 17 percent

  23. Kenya: down 27 percent

  24. Australia: down 13 percent

  25. Nigeria: down more than 30 percent

  26. Taiwan: down 15 percent

  27. Thailand: down 20 percent

  We have not seen numbers like these since 2008, and trillions of dollars of stock market wealth has been wiped out globally.  So the “nothing is happening” crowd is simply dead wrong.  Stocks are already crashing all over the planet. 

  [ZH: In fact 47 of the world's 93 largest stock indices are down over 10% year-to-date…]

  

   

  In fact 30 nations are down over 20% Year-to-date…

  

   

  Just because the big U.S. stock market crash has not happened quite yet does not mean that a major global financial crisis is not happening.

  But do you know what is crashing here in this country?

  Junk bonds.

  At this point, yields on the riskiest junk bonds have risen to levels that we have not seen since the last financial crisis.  As I have discussed repeatedly, yields on junk bonds spiked dramatically just before the stock market crash of 2008, and now it is happening again…

  

  This is precisely the kind of behavior that we would expect to see if a major U.S. stock market crash was imminent.  Personally, I watch the junk bond market very, very closely because it is such a key leading indicator.  And according to Jeffrey Snider, it appears that “something” is starting to cause junk bonds to sell off at an alarming pace…

  There isn’t much as far as confirmation, but it increasingly appears as if “something” just hit the triple hooks (CCC) in the junk bond bubble. At least as far as one view of it, Bank of America ML’s CCC implied yield, there was a huge selloff that brought the yield to a new cycle high (low in price) above even the 2011 crisis peak.

  But just like in 2008, a lot of people will not heed the warnings because they don’t have the patience to watch long-term trends play out.

  We live in a society where we expect constant instant gratification.  We have instant coffee, video on demand and 48 hour news cycles.  If something does not happen immediately, most of us quickly lose patience.

  For months, I have been warning that conditions were perfect for another major global financial crisis, and since that time events have been unfolding in textbook fashion.

  And as you can see from the numbers above, we have already entered a new global financial crisis.  If you tried to tell someone in China, Brazil or Saudi Arabia that a financial crisis was not happening, they would just laugh at you.  We need to start learning that the world doesn’t revolve around the United States.

  Of course the U.S. is heading for tremendous difficulties as well.  This is something that I covered yesterday.  All of the fundamental economic numbers are absolutely screaming “recession”, and yet most of the “experts” are still forecasting good things for the coming year.

  Those that do not learn from history are doomed to repeat it.  None of the problems that caused the crisis the last time around have been fixed, and most of our “leaders” seem blind to what is happening at this moment even though the exact same patterns that played out in 2008 are playing out once again right in front of our eyes.

  

   

  If you have been waiting for the next global financial crisis, you can stop, because it is already here.

  As we move toward the end of 2015, let us hope for the best, but let us also get prepared for the worst.

  

  

  

  

  

• The Rise Of The Politics Of Fear

  "In the past, politicians promised to create a better world. They had different ways of achieving this but their power and authority came from the optimstic visions they offered their people. Those dreams failed. Today, people have lost faith in ideologies. Increasingly politicians are seen simply as mannequins. But now they have discovered a new role that restores that power and authority. Instead of delivering dreams… politicians promise to protect us… for life."

  As DailyMotion notes, The Power of Nightmares, subtitled The Rise of the Politics of Fear, is a BBC documentary film series, written and produced by Adam Curtis. Its three one-hour parts consist mostly of a montage of archive footage with Curtis's narration. The series was first broadcast in the United Kingdom in late 2004 and has subsequently been broadcast in multiple countries and shown in several film festivals, including the 2005 Cannes Film Festival.

  The films compare the rise of the Neo-Conservative movement in the United States and the radical Islamist movement, making comparisons on their origins and claiming similarities between the two.

   

  More controversially, it argues that the threat of radical Islamism as a massive, sinister organised force of destruction, specifically in the form of al-Qaeda, is a myth perpetrated by politicians in many countries – and particularly American Neo-Conservatives – in an attempt to unite and inspire their people following the failure of earlier, more utopian ideologies.

  11 years later and this 'strategy' has escalated.. and has never been more crucial to comprehend.

  Part 1…
  

  Part 2…
  

  Part 3…
  

  h/t ILLILLILLI

  

  

  

  

  

• The Inside Story Why The ECB Decided "The Markets Needed To Be Disappointed" And How It All Fell Apart

  On Wednesday morning, less than 24 hours before the historic, and grossly disappointing ECB announcement, one which sent the EUR soaring the most since the Fed’s announcement of QE1, we warned that Mario Draghi may underdeliver, although in doing so he would face the risk of appearing quite weak before the ECB’s governing council where in recent months the schism between European doves and hawks has grown to epic proportions.

  As MNI noted, “Thursday’s meeting will not only be key for the euro area’s economic outlook but also decisive for the nature of Draghi’s presidency as he starts the second half of his tenure. If he gets his way without sparking a revolt, it hard to conceive a situation in which Draghi won’t prevail” to which we add that this is “correct, but the moment ECB decision-making devolves into a pissing contest, Europe has a big problem.”

  After all if Europe’s monetary politics become nothing but a contest of egos, a tragic endgame is all but assured. We concluded by saying that “the question is whether Draghi will listen to logic and reason, or if he will continue his campaign to isolate the Hawks on the ECB governing council and in the process make Europe’s monetary situation unfixable. If Draghi does relent, the EURUSD can soar as high as 1.09 tomorrow according to some estimates.”

  The next day not only was the warning of underdelivery prescient as Draghi did not prevail, but the EURUSD did soar as high as 1.09 as the ECB unveiled a “stunning” package which left Goldman’s FX strategist reeling .

  But just as we were almost ready to congratulate Draghi on “relenting” and acting rationally, we read a Reuters piece which explains that not only did Draghi not relent from his endless confrontation with the ECB governing council, he actually lost. This is what Reuters just reported:

  One source with direct knowledge of the situation interpreted Draghi’s public stance ahead of the meeting as trying to pressure the Governing Council to take bigger action.

   

  “Draghi raised expectations too high, on purpose, and attempted to paint the Governing Council into a corner,” the source said. “This was problematic and he was criticized for this by several governors in private.”

  He failed, and in doing so may have emboldened the Weidmann-led hawks at the ECB whose opposition to Draghi’s ultra-easy policies has been duly noted.

  How did they win?

  Reuters says that “unlike last year, when opponents of quantitative easing made their stance public before the decision, the hawks mostly worked behind the scenes. Opponents worked to curtail proposals coming out of the ECB’s committees that prepared the decisions, ensuring that some of the more radical measures expected by market players never made it onto the table.”

  The huge market disappointment took place following weeks of public statement by Draghi which convinced traders that the Italian would unleash something short of a neutron bomb, and as a result markets also expected a 25 percent increase in monthly asset purchases and possibly even a deeper rate cut. More radical options under discussion included the purchase of corporate debt or a split deposit rate that would punish banks parking too much cash with the central bank, sources told Reuters earlier.

  None of that happened.

  Reuters then explains that the smaller than expected move is seen by some as a disappointment for Draghi, who has established a track record for promising and delivering big, as he did with his July 2012 pledge to “do whatever it takes” to preserve the euro and pushing through bigger than expected QE earlier this year.

  “Like the Fed earlier this year the ECB has now managed to confuse markets and the public. From now on, markets will treat hints dropped by ECB president Mario Draghi and some of his colleagues with much more scepticism than before,” brokerage Berenberg said.

  Here, however, is where the narrative breaks:

  “the European Central Bank President and his chief economist Peter Praet stoked expectations with dovish speeches in the weeks before the meeting but the ECB’s Governing Council concluded that markets needed to be disappointed this time because the economic outlook has improved and new inflation forecasts were not as bad as feared, the sources said.”

  Now that, unfortunately, makes zero sense because as we reported, the very next day the US stock market had its biggest one day gain entirely due to Draghi appearance in New York, where he reassured the market that there is no need at all to be disappointed, when he said that “QE there to stay”, could be “calibrated” if needed and the ECB can use “further tools” if needed as there is “no limit” to the “size of the ECB’s balance sheet.”

  What happened next was a tremendous surge in the S&P which soared to pre-ECB drop levels, even as the EUR, which is at least in theory the monetary policy transmission mechanism did almost nothing.

  

   

  Ironically, the market’s first reaction was of course correct: yes, Draghi may have resumed his jawboning as the market breathed a sigh of relief, but what will actually happen if the Fed does hike on December 16 without a major increase in ECB liquidity, is that as much as $800 billion in liquidity will be soaked up by the Fed’s 25bps rate hike as calculated previously. The impact of a move which is the equivalent of unwinding one and a third of QE2 overnight, will certainly have dramatic consequences on risk prices unless there is a more than offsetting injection of liquidity elsewhere.

  Finally, confirming that Reuters’ attempt to smooth Draghi’s mistake is nothing but an urgently hashed out fiction meant to goalseek the deeply flawed conclusion to a broken narrative, is what Draghi said during yesterday’s Q&A.

  Recall that as we reported previously, Mervyn King asked Draghi if “today’s speech deliberately designed to try offset some of the reaction yesterday?” to which Draghi responsed shockingly honestly: “Not really… well, of course.“

   

  Here is what really happened: the ECB tried to engineer a modest market selloff because the “market needed to be disappointed“, coupled with a modest rise in the EUR to give the Fed some rate-hike breathing room. Instead, since everyone was positioned exactly the same – wrong – way, the dramatic overreaction in stocks and FX forced Draghi to not only panic but to publicly come out and admit that the only purpose of his Friday speech was to offset the damage from his failure to defeat the opposition at the governing council and to send markets surging. Which they promptly did. 

  And while the markets rejoiced at this latest verbal intervention, the question is now that Draghi has challenged the governing council and lost, and furthermore, once again relented to markets, how will the hawks on the council react to any future demands by Draghi to push the S&P even higher? Lastly, if Berenberg is wrong and the ECB has lost a major portion of its credibility, how will Draghi jawbone next time when not even “whatever it takes” is sufficient any more?

  

  

  

  

  

• JPMorgan Warns Of "Eye-Catching" 76% Probability Of Recession

  Just days ago Citi pronounced, much to the chagrin of the status-quo-hugging Fed faithful, that given the turn in corporate profits (and concerns over margin sustainability) that the chance of a recession in the US had risen to 65% (and on that basis had a bearish outlook for US equities). Now, as other major sell-side shops jump on the equity un-bullish narrative, JPMorgan's Michael Feroli warns that in the past, a low unemployment rate, rising compensation, falling margins, and elevated durables investment have historically signaled an elevated risk that an expansion is nearing its end… and puts the probability of a US recession within 3 years at 76%. Of course, you do not need to worry, because Janet Yellen said this is not true (though failed to provide here reasoning).

   

  As Citi recently noted the cumulative probability of a recession in the next year rises to 65%.

  

  In the US our chief concern is margin sustainability. Corporate profits as a share of GDP have been at all-time highs, which is just another way of saying the rewards to labour have been at all-time lows. But change may be afoot in the form of modest labour market tightening in the US.

   

  

   

  It is too soon to see this show up in core (ex Fins, Energy and Materials) margins in the US but that may be where things go. Modest nominal wage acceleration combined with global disinflation (price taking by US firms) and lack of productivity growth may mean margins come under pressure from labour costs.

  And now, JPMorgan's Mike Feroli raises a red flag warning that:

  Our longer-run indicators, however, continue to suggest an elevated risk that the expansion is nearing its end, and our preferred model now puts the probability of recession within three years at an eye-catching 76%.

  As he details…

  We recently developed two sets of models for assessing the risk that the next recession will start within given horizons. One was focused on high-frequency indicators and aimed to measure the probability of a recession starting within six months. The other aimed to capture longer-run cycle indicators that suggest an elevated background risk of the expansion ending within horizons of one to five years.

   

  Table 1 updates our models’ assessments of the probability of recession beginning within six months from our recent note. When we first wrote, only manufacturing sentiment was signaling an above-average probability of imminent recession. But recent weakening in the Richmond Fed services survey and the ISM nonmanufacturing index have now pushed the nonmanufacturing sentiment probability up somewhat as well. Nonetheless, estimates that combine signals from multiple indicators continue to predict little overall recession risk, and we conclude that the chance of a recession beginning within sixmonths is 5% or less.

   

  

   

  In our work on longer-term risks, we found that a low unemployment rate, rising compensation, falling margins, and elevated durables investment have historically signaled an elevated risk that an expansion is nearing its end.

   

  Figure 8 shows that probabilities of recession within 1, 2, and 3 years predicted by models based on these four variables have recently moved up to 23%, 48%, and 76%, respectively.

   

  

   

  Although all four variables have moved in the direction of increased risk in recent years, the particularly sharp moves in predicted recession probabilities since mid-2014 have been driven most prominently by our measure of the decline in margins (which we define as the decline in the 4-quarter moving average of nonfinancial corporate net operating surplus as a percent of net value added, as a fraction of its peak in the current expansion). Figure 9 shows the history of this variable over the postwar sample period. Indeed, on most (but not all) of the occasions when this variable fell to its current level, a recession began within a few years. Although continued expansion remains our baseline forecast, we will more carefully investigate the risks of recession emanating from the corporate sector.

   

  

  *  *  *

  So first Citi, and now JPMorgan warn that there is a significant and growing chance that the US economy contracts next year? According to Janet Yellen, who was asked precisely this question during her hearing in Congress today, there is no risk: according to her, she doesn't see the recession risk as "anything close" to 65%. She did not provide a number which she thought is more appropriate.

  She also said that the FOMC would only raise rates as long as policy makers think U.S. will "enjoy at least some above-trend growth" that would result in improving labor market.. 

  Her conclusion: if the rate hike results in "unintended consequences" the Fed can always just lower rates. Which incidentally is precisely what the Fed did in last 1936 when it, too, erroneously decided the economy was strong enough to sustain a tightening of financial conditions…

  

  … only to cut immediately. The collateral damage? The Dow Jones plunged 50% the next year…

  

  … and unleashed a severe recession in the second half of 1937, followed a few year later by the start of World War II.

  This time is not different.

  

  

  

  

  

• The San Bernardino Massacre: Perceptions, Propaganda, And Blowback

  Submitted by Justin Raimondo via AntiWar.com,

  The reaction to the San Bernardino shooting in which 14 people were killed and several more wounded is a textbook case of confirmation bias. The first reactions came from the liberal wing of the Twittersphere, heavily represented by “mainstream” journalists, who immediately took the incident to be a classic “mass shooting” of the Sandy Hook-Columbine variety, and it didn’t take long for the finger-wagging to begin. At once pro-gun control and anti-religious, the meme went out into cyberspace: “thoughts and prayers” aren’t enough, we need to crack down on gun ownership in this country. The front page of the New York Daily News expressed the left-liberal party line: “GOD ISN’T FIXING THIS: As latest batch of innocent Americans are left lying in pools of blood, cowards who could truly end gun scourge continue to hide behind meaningless platitudes.”

  As it turned out, however, the guns used by Syed Farook and Tashveen Malik, the two perpetrators, were bought legally – and their weaponry consisted of a lot more than mere guns. The editors of the Daily News didn’t wait for the facts because they didn’t care about the facts. They just wanted to make a point – one which turned out to be not only wrong but also completely beside the point.

  In the same city, in the offices of a very similar – if ideologically opposite – tabloid, the editors of the New York Post were jumping the gun in an entirely different direction. As the ethnicity and religious affiliation of the attackers came out, they ran with a simple two-word headline: “MUSLIM KILLERS,” with a modifying qualifier: “Terror eyed as couple slaughters 14 in Calif.” As more information came out, however, the editors pulled back, and the final edition was quite different: “MURDER MISSION,” read the headline, with a neutral supplementary: “Shooters slaughter 14 in Calif.” These two editions were published hours after the incident, and only a few hours apart – a testament to the dangers of jumping to conclusions.

  
   

  This reversal is explained by the subsequent release of yet more information about the perpetrators: Syed Farook worked at the San Bernardino Department of Public Health, which had rented a room at the facility where the massacre took place. The event was a holiday party, which Farook attended, but left early after a reported altercation of some kind. He returned with Malik, his wife, armed to the teeth, and the slaughter commenced.

  These facts would appear to point in a different direction entirely from the scenario painted by the Post’s initial edition, and so the imagery conjured by the new headline went from that of the rampaging “Muslim Killers” to the “Murder Mission” of what appeared to be a case of workplace violence.

  That’s what I thought around midnight last night, when I tweeted my tentative opinion that the workplace violence scenario seemed to be the most likely. My main reason was the nature of the target: why, I asked, would terrorists choose the Christmas party of the San Bernardino Public Health Department as the latest object of their wrath? In addition, reports of a dispute at the event involving Farook seemed to indicate that scenario: he got angry, came back, and started shooting. There were also reports of “turmoil” inside the department where he worked; several people had left amid rumors of disputes with management, and the fact that Farooq and his accomplice were targeting a very specific group of people – and not, say, a military facility, or even a soft target like a mall – seemed to corroborate this conclusion.

  However, as more facts came out, this explanation began to make less sense. To begin with, a bomb – actually, three bombs taped together – had been left behind at the scene of the shooting. The bomb was linked to a device found in Farook’s rental car – rented three days prior – that was very similar to the jury-rigged remote-controlled IEDs recommended by al-Qaeda’s Inspire magazine, which detailed how to make an explosive device with readily available materials. We don’t yet know why the bomb failed to go off,.

  Although reports that the couple came into the venue wearing body armor and Go-Pro body cameras turned out to be false, they were wearing “tactical” clothing, i.e. vests that enabled them to carry large amounts of ammunition. And indeed they were carrying huge amounts, enough to let them reload on the scene, and continue firing up to seventy-five rounds for over 30 seconds. This accounts for the large number of casualties.

  Furthermore, the discovery of twelve “pipe-bomb type” devices, hundreds of tools for making more, and “thousands” of rounds of ammunition in the Redlands home rented by Farooq and his wife eliminates the workplace violence scenario. This was, in effect, a bomb-making factory, and neighbors indicate that a number of people were involved: packages were received throughout the day, and activity was observed into the night. One of these neighbors claims they were ready to contact law enforcement but hesitated to do so for fear of being accused of “racial profiling.” Both Farooq and his bride were of Pakistani extraction.

  Two factors indicating that this was indeed a terrorist cell carrying out a pre-planned operation, and not a disgruntled employee intent on revenge against his co-workers, are plain enough: 1) The couple dropped off their child at a relative’s house the day before the attack, claiming to have a doctor’s appointment, and 2) The tactics utilized in the shooting of the victims and the gunfight with the police — which included throwing a fake pipe bomb out of their car as the cops pursued them – are evidence of some kind of military training. Such training could have occurred during Farooq’s trips to Saudi Arabia and Pakistan.

  And we are beginning to hear evidence of international contacts with “more than one” terrorist suspect under surveillance by law enforcement. All that’s missing – as of this writing – is a claim of responsibility by some overseas terrorist outfit.

  Yet questions remain: again, the target – a holiday party in a small city – hardly seems like the sort ISIS or al-Qaeda would zero in on. Clearly the couple were planning on a much larger operation, but this plan was changed by something that triggered Farooq to act sooner. And we still don’t have the whole picture: there could conceivably be some new information that could alter our whole perception of what motivated Farooq and Malik.

  Which brings me to my point: our perception of the facts is shaped – and altered – by our preconceptions. In short, people believe what they want to believe – and the facts be damned. In this case, major media organizations didn’t wait for the facts to come in before they pronounced judgment. They simply rushed into print with what were little more than editorials, bereft of any responsibility to their readers or the truth.

  This is why those who proclaim that bias is inherent in all journalism, and that there’s no such thing as objective reporting, are dangerously wrong. Yes, we’re all human; yes, everyone has opinions. But some people wait for the facts to come in before giving vent to those opinions, while others don’t bother with such niceties.

  The reality, as I see it, and given what we know now, is this: San Bernardino was an act of terrorism that may or may not have been directed from overseas. The implications of that are very grave for those of us who oppose our crazed foreign policy of perpetual war, and the relentless assault on our civil liberties on the home front.

  The pressure to “destroy them over there before they strike us over here” is going to increase a hundred-fold. The advocates of universal surveillance are going to be empowered as never before. That these tactics haven’t worked in the past – and, indeed, have backfired badly – won’t deter the usual suspects from insisting that war and repression are the answers to the problem of terrorism.

  Our answer to the War Party must be that their strategy has failed: the terrorists couldn’t recruit anyone if we weren’t over there bombing what remains of their cities and seeking to impose our will on a populace that will never accept our domination, no matter how many soldiers we send and bombing sorties we launch.

  As for the authoritarians who want to use incidents like the San Bernardino attack as a pretext to abolish the Constitution and institute a regime of total surveillance and outright repression: where was their vaunted surveillance system in this case? We didn’t detect this plot – and perhaps that’s because watching everyone, and collecting everyone’s information, blinds us to the real villains hiding in our midst. Then again, perhaps ferreting out villains isn’t the real purpose of government spying.

  After the 9/11 attacks, the nation was swept by a wave of war hysteria, and concern for basic civil liberties went right out the window: we will doubtless experience a similar phenomenon in the days and months to come. Yet we are confident that when the history of our era is written, the advocates of peace and liberty will be vindicated, while the War Party will be discredited and disdained by future generations. We must live in the future, in a sense, in order to fight for the future – if there is to be one, that is.

  

  

  

  

  

• "Terrorist" With Machete In London Subway Slashes Man's Throat Screaming "This Is For Syria"

  Less than a week after the San Bernardino shooting, the ghost of ISIS terrorism has finally landed in London, where moments ago news broke that a man wileding a machete screamed “this is for Syria” before slashing a person’s throat at London’s Leytonstone subway station, and attacking up to three people.

  The following video of the incident was released on Twitter hours ago, and shows a large pool of blood spattered across the ticket hall before the alleged knifeman is Tasered by a Met Police officer.

   

  Part 2 ???? Wats goin on mate pic.twitter.com/dgnlsI1sow

  — #UnoMyStyle (@BigTobzsf) December 5, 2015

   

  The Express released the following pictures of what it has dubbed the “Syria revenge” stabbing:

  BREAKING: First pics of #Leytonstone ‘Syria revenge’ stabbing: https://t.co/4QI4Xjz9W3 pic.twitter.com/X49LCvQCge

  — Daily Express (@Daily_Express) December 5, 2015

  

  

   

  As the Telegraph reports, police were called to Leytonstone station after reports of a stabbing in the ticket hall on Saturday at around 7pm. The alleged assailant was promptly tasered by police at the scene.

  Terrified passengers, some with children, can be seen running across the east London Tube station away from the scene.

  For the rest of today, no service btn Liverpool St and Woodford / Newbury Park due to a police investigation. Severe delays on rest of line.

  — Central line (@centralline) December 5, 2015

  As recounted by the Guardian, one person, who claims to have witnessed the attack, took to social media to reveal details of the horror.

  Laurynas Godvisa said: “So as I was going to Leytonstone station was dressed to go to Christmas dinner with people from work.

  “As I walked down I just saw a lot of people running but I ignored it and kept walking to get my train, but suddenly what I saw I couldn’t believe my eyes and what I saw was a guy with a knife and a dead guy on the floor.

  “I was so scared I ran for my life. After good 10-15 police came and got the guy and arrested him.

  “And as he was coming out this is what he said: ‘This is what happens when you f*** with mother Syria all of your blood will be spilled’.”

  A Met Police spokesman confirmed the incident saying that “Police were called at 19:06hrs on Saturday, 5 December, to reports of a stabbing at Leytonstone underground station. The male suspect was reportedly threatening other people with a knife.

  “Met officers attended the scene. A man was arrested at 19:14hrs and taken to an east London police station where he remains in custody. A Taser was discharged by one of the Met officers.”

  “Officers from British Transport Police are now dealing with the incident at the scene. We are aware of one man having sustained serious stab injuries. We await details of any other injuries.”

  Horrific scenes at Leytonstone station. 1 confirmed stabbing however rumours are 2 people have been stabbed. pic.twitter.com/xNRawShOxw

  — Khayam (@khayamcreates) December 5, 2015

   

  So far there is little news on the condition of the victim of the attack: one victim is in a serious condition with multiple stab wounds and it is believed up to two others may also have been injured.

  A spokeswoman from London Ambulance Service said: “We were called at 7:09pm to reports of an assault at Leytonstone underground station We sent a number of resources to the including our joint response unit, an incident response officer, an ambulance crew and London’s Air Ambulance to the scene. We treated a man for stab wounds. He was taken as a priority to hospital escorted by the doctor from London’s Air Ambulance.”

  And while it is only a matter of time before a “terrorist” link is found in this latest attack meant to put another western country on edge and to justify the UK’s recent launch of air strikes against ISIS, we wonder if there will be a front page op-ed in a leading liberal UK newspaper tomorrow demanding that all machetes be henceforth banned even as local TV crews stream live from the home of the alleged terrorist.

  * * *

  Update: as expected, the “terrorist” link was just been revealed with Sky News reported that the subway incident is already being treated as an act of terrorism:

  Update – Metropolitan police confirm Counter Terrorism Command now investigating stabbing incident at Leytonstone underground station

  — Sky News Newsdesk (@SkyNewsBreak) December 5, 2015

  

  

  

  

  

• 'Bankrupt' Mortgage Lenders Unveil The Zero-Money-Down "Friends-And-Family" Mortgage

  Ripping straight from the pages of the "those who failed to learn from history are doomed… period" book of centrally-planned desperation to maintain American Dream 'wealth' by unsustainably levitating home prices, the government's bankruptcy mortgage guarantors have just announced "HomeReady Mortgages." These so-called 'enhanced affordable lending products – provided by the US taxpayer – enable 97%-plus Loan-to-Value loans to borrowers based not on their income (which is too low) but on "non-borrowers" like extended family or children! "Whatever it takes" to maintain the illusion of normalcy and hand out more money just reached peak Einsteinian insanity.

   

  In its latest 'offering' letter for HomeReady Mortgages, Fannie Mae offers what it calls 'innovative underwriting flexibility'…

  • Offers an innovative new feature that supports extended family households: will consider income from a non-borrower household member as a compensating factor in DU to allow for a debt-to-income (DTI) ratio >45% to 50%.
  • Allows non-occupant borrowers, such as a parent.
  • Permits rental income from an accessory dwelling unit (such as a basement apartment).
  • Allows boarder income (updated guidelines provide documentation flexibility).

  In other words, as KARE11 tries to defend…

  "It could be a credit problem, it could be an income problem, it could be an employment history problem, it could be a debt-ratio problem. There are a number of things that can affect a person's situation," said Chris O'Connell, a licensed mortgage loan officer with Nations Reliable Lending in Edina.

   

  Mortgage giant Fannie Mae recognizes these hardships, and in response will soon offer a new kind of mortgage with new rules designed to add flexibility for borrowers.

   

  "They've recognized that households have changed and our guidelines need to change with it," said O'Connell.

   

  HomeReady will consider incomes from others planning to live in the house without being a borrower on the loan.

   

  This means, if you live with parents, siblings, working children or maybe a roommate, as long as they make 30 percent of the household income, Fannie will include their money to help you qualify for a loan.

   

  These are being called "non-borrowers" by Fannie. 

  Non-borrower backed mortgages!!??

  Also, non-occupants of the home can add further income to the mortgage. Perhaps parents living elsewhere but willing to help pay the loan.

   

  "The typical household has changed now. It's not the household we used to know 20 years ago because there's a lot of extended family. Parents are living with the family, children are staying home longer, and it allows you to consider their income too," said Tousley.

  But it gets even better… If you don't have the down-payment (of 3% or less of the home's value) then there is a solution for you too…

  Flexible sources of funds can be used for  the down payment and closing costs with no  minimum contribution required from the  borrower’s own funds

   

  Gifts, grants, Community Seconds®, and cash-on-hand permitted as a source of funds for down payment and closing costs.

  And what is a "Community Second" we hear you cry? Well…

  An alternative financing option for low- and moderate-income households under which an investor purchases a first mortgage that has a subsidized second mortgage behind it. The second mortgage may be issued by a state, county, or local housing agency, foundation, or nonprofit organization. Payment on the second mortgage is often deferred and carries a very low interest rate (or no interest rate at all).

   

  Part of the debt may be forgiven incrementally for each year the buyer remains in the home.

  So, to sum up – if you don't have any savings, the government will give you some to use as a down-payment (which as long as you stay poor will be forgiven over time).. and then the government will allow you to borrow 97% of the value of the home on the basis not of your income and ability to pay but of any rag-tag bunch of friends, family, or pets you can gather under your 'new' roof… and all subsidized by the good 'ol US Taxpayer… for your own good.

  And why are they doing this? Aside from the obvious desperation to keep home prices higher via unsustainable demand? Simple… because it's fair… it is everyone's right – no matter how poor, how uncreditworthy, how under-employed, how much of a drag on the rest of society, or how ignorant – to leverage themselves (at the US taxpayer's dime) at 30-40 to 1 into record high US home prices… as they explain themselves…

  (Aligned with Fannie Mae’s regulatory housing goals and may help lenders meet applicable Community Reinvestment Act goals)

  So do not claim when this all goes utterly pear-shaped that this was not the government's doing… it was! and is!

  *  *  *

  To torture an analogy to death, give a nation just enough 'rope' and it will drown itself in generational debt servitude… or perhaps that was/is the plan all along… certainly makes it 'easy' to vote for the party with all the handouts?

  

  

  

  

  

• 326,000 Native-Born Americans Lost Their Job In November: Why This Remains The Most Important Jobs Chart

  Friday’s release of a “just right” jobs report, in which the US economy reportedly added 211,000 jobs, more than the 200,000 expected, solidified its position as the “most important” one in recent years, after it was broadly interpreted by economists as the sufficient condition for the Fed to hike rates on December 16, 7 years to the day after the same Fed cut rates to zero.

  As such, if indeed the Fed does hike, over the next several quarters, the US labor data will take a secondary place in terms of importance unless, of course, it plummets in which case the Fed will be forced to quickly undo its tightening policy and go back to ZIRP if not NIRP and more QE.

  However, even as the Fed’s “data (in)dependent” monetary policy takes on secondary relevance as we enter 2016, one aspect of the US jobs market is certain to take on an unprecedented importance.

  We first laid out what that is three months ago when we said that “the one chart that matters more than ever, has little to nothing to do with the Fed’s monetary policy, but everything to do with the November 2016 presidential elections in which the topic of immigration, both legal and illegal, is shaping up to be the most rancorous, contentious and divisive.”

  We were talking about the chart showing the cumulative addition of foreign-born and native-born workers added to US payrolls according to the BLS since December 2007, i.e., since the start of the recession/Second Great Depression.

  Curiously, it is precisely this data that got absolutely no mention following yesterday’s job report, about which the fawning mainstream media only noted, in passing, one negative aspect to the report: the fact that 319,000 part-time jobs for economic reasons were added in November. However, with Trump and his anti-immigration campaign having just taken the biggest lead in the republican primary race, we are confident that the chart shown below will soon be recognizable to economic and political pundits everywhere.

  And here is why we are confident this particular data should have been prominently noted by all experts when dissecting yesterday’s job report: according to the BLS’ Household Survey, while 375,000 foreign-born workers found jobs in November, a whopping 326,000 native-born Americans lost theirs.

  

   

  How does this data look like over the long-run: presenting, the cumulative number of job gains by foreign born workers since December 2007. At 25.5 million, it is the highest in the series.

  

   

  If only the chart for native-born workers was anything remotely as buoyant.

  

   

  And here, as we have shown previously, is the most important jobs chart for 2016: since December 2007 the US economy added just 747,000 native-born workers (a number which tumbled as much as 8 million during the depths of the crisis), compared to a 260% greater increase in foreign-born workers, to just under 2.7 million.

  

  

  We are confident that one can make the case that there are considerations on both the labor demand-side (whether US employers have a natural tendency to hire foreign-born workers is open to debate) as well as on the supply-side: it may be easier to obtain wage-equivalent welfare compensation for native-born Americans than for their foreign-born peers, forcing the latter group to be much more engaged and active in finding a wage-paying job.

  However, the underlying economics of this trend are largely irrelevant: as the presidential primary race hits a crescendo all that will matter is the soundbite that over the past 8 years, 2.7 million foreign-born Americans have found a job compared to only 747,000 native-born. The result is a combustible mess that will lead to serious fireworks during each and every subsequent GOP primary debate, especially if Trump remains solidly in the lead.

  

  

  

  

  

• Will 2017 Be The Year Of The EM Corporate Debt Crisis?

  Back in October we brought you “Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can’t Pay The Interest On Their Debt,” in which we highlighted a report from Macquarie that contained the following rather disconcerting data point: “…more than half of the cumulative debt in the Chinese commodity sector was EBIT-uncovered in 2014.” 

  That’s right, “more than half,” and before you say “well, it is commodities and it is China after all,” consider that for 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.” So, nearly a quarter. 

  In November, we revisited the idea (presented in these pages more than 18 months ago), that China may have reached its dreaded Minksy Moment, as Chinese corporates are set to take out some CNY7.6 trillion in new loans this year just to pay interest on their existing borrowings. As Morgan Stanley put it last year, China looks to be reaching “the point at which Ponzi and speculative borrowers are no longer able to roll over their debts or borrow additional capital to make interest payments.” You know what happens next, and we’re already seeing it as the number of onshore defaults accelerates. 

  

  This is part of a wider discussion about EM corporate debt in a world where EM FX has plunged and investor confidence in the space is rapidly deteriorating in the face of low commodity prices, a strong USD, a looming Fed hike, and a series of idiosyncratic political risk factors playing out from Brasilia to Ankara to Kuala Lumpur.

  With that in mind, Deutsche Bank is out with a new special report on EM debt which has quite a bit of useful color on exactly where things stand for corporate borrowers across a variety of emerging economies. 

  “Demands for EM debt are on a declining trend, as the outlook for both portfolio flows into EM economies and funds flows into EM debt funds remain lackluster due to slow growth, worse credit fundamentals, and expected rise in US yields,” Deutsche begins, adding that “EM corporates need to cope with continued rise in leverage and eroding cash buffers.” 

  Private capital outflows were negative this year for the first time since the crisis. “Even during the peak of the crisis in 2008, EM outflows were a small fraction of the losses we expect in 2015,” Deutsche notes.

  

  Next, Deutsche moves to consider the corporate debt picture, where most of the EM re-leveraging has been concentrated. Specifically, “while EM government debt levels have only moderately increased over the past few years, non- financial EM corporate debt has seen a dramatic rise [jumping] from a level of around 60% of GDP in 2008 to the current level of close to 90% of GDP.” 

  

  Here’s where it gets interesting. Although Deutsche (repeatedly) describes the situation as “benign”, it’s pretty clear that the trend in EBITDA coverage is moving in the wrong direction – and fast for LatAm HY and CEEMA investment grade:

  

  “Interest coverage has been declining among EM corporates due to lower growth and weaker commodity prices [but] EM corporates’ solvency is unlikely to be challenged as an asset class in 2016, in our view,” Deutsche says, cheerfully. Well that’s good – Deutsche Bank doesn’t think the entire EM corporate sector is likely to become insolvent in the next twelve months. See? There’s always a silver lining if you just look for it. 

  However, when we look out to 2017, the outlook worsens. In short, the space will benefit from a sharp drop in USD-denominated debt maturities in 2016, but that reverses course the following year:

  

  After a rather rosy assessment of the outlook for next year, here’s what Deutsche says about 2017:

  The liquidity picture for EM corporates in 2017 looks less appealing, due to a 38% yoy increase in USD bond maturities (to USD122bn) and lingering uncertainty on commodity prices (an important component of the corporate sectors’ cash flow) and FX (a headwind for domestic-oriented players). A further depletion in cash buffers and reduced appetite for certain portions of the EM corporate universe may lead to increased refinancing stress in 2017 – especially if inflationary pressures build and domestic liquidity conditions also have to be tightened. 

  When Deutsche looks at what the bank says is a representative sample of corporate borrowers across LatAm and Ceemea, they find that only 14% of the sample is “in danger” based on net debt-to-EBITDA and cash-to-short term debt. However, when the bank uses 9%+ bond yields as a proxy for “oh shit,” it turns out that a whopping 27% of the LatAm sample is in trouble. Specifically, Brazil has some $89 billion in USD bonds trading above 9% (a large chunk is Petrobras paper). Here’s the full breakdown: Petrobras (USD37bn), USD20bn of industrials, USD15bn of banks (mostly subordinated), USD6bn of rigs, USD3bn of royalty-backed bonds and USD8bn of other sectors.

  So ultimately, this is a question of where EM goes from here and as we’ve said on any number of occasions, the answer to that question is likely “nowhere good.” Turkey is at war with the PKK and is about to be at war with Russia while Erdogan is busy establishing what amounts to a police state. Brazil has descended into a depression while the government is coming apart at the seams. No one knows if China will be able to keep it together in the midst of a currency conundrum, a collapsing economy, an acute overcapacity problem, lingering equity market volatility, and a looming credit crisis. Malaysia has its own political battles still to fight, and to top it all off, the Fed is about to hike which will invariably put further pressure on EM FX and accelerate outflows. Meanwhile, the outlook for commodities is nothing short of grim.

  So it’s difficult to see how the picture improves for a universe of EM corporates that’s 50% more leveraged today than in 2008 and is likely to have more trouble servicing debt going forward especially if the dollar soars post-liftoff.

  Throw in the fact that global growth and trade are likely to be stuck in the doldrums for the foreseeable future and China may not be the only major EM to have a Minsky Moment over the next three to five years.

  

  

  

  

  

• Did Turkey Just Invade Iraq To Protect Erdogan's ISIS Oil Smuggling Routes?

  On Friday, Turkey sent troops into Iraq.

  Here’s a video of the deployment shared on social media:

  Contrary to what you might have read, there’s really nothing unusual about that. 

  As you may recall, Turkey’s military entered Iraq back in September in hot pursuit of PKK “terrorists” Ankara claimed had fled over the border. And that was just par for the proverbial course.  Here’s what we said at the time: 

  In early 2008, Turkish soldiers entered Iraq in a similar effort to eradicate the PKK. “Operation Sun”, as the incursion was called, was conducted with Washington’s blessing for the most part. “Washington described the PKK as a ‘common enemy’, and only urged Ankara to keep its incursion short and closely focused,” BBC noted at the time, adding that “the positions of the UN and EU have been similar, suggesting a degree of sympathy with Turkey’s cause.”

   

  And then there was “Operation Steel” in 1995. And “Operation Hammer” in 1997.” And “Operation Dawn.” And the aplty named “Operation Northern Iraq.” 

   

  You get the idea. 

   

  So while history doesn’t repeat itself, it damn sure rhymes and here we are again watching as the Turkish military crosses the Iraqi border as though it’s not even there chasing “terrorists” up into the mountains.

  What’s different this time around, is that this isn’t a Kurd-chasing mission.

  In fact, if you believe the official line, it’s the exact opposite. Turkey has apparently had some 90 troops on the ground in Bashiqa “for two years” on a mission to “train” the Peshmerga. The new troops – around 150 personnel supported by two dozen tanks- will “take over the mission,” according to Hurriyet. “Turkey will have a permanent military base in the Bashiqa region of Mosul as the Turkish forces in the region training the Peshmerga forces have been reinforced,” the daily continues, adding that “the deal regarding the base was signed between Kurdistan Regional Government (KRG) President Massoud Barzani and Turkish Foreign Minister Feridun Sinirlioglu, during the latter’s visit to northern Iraq on Nov. 4.” 

  

  Ok, so what’s important to remember here is that although Erdogan is no “fan-o’-Kurds”, Ankara is friendly with the KRG and indeed, Barzani’s 632,000 b/d oil operation (which, you’re reminded, runs independent of SOMO, much to Baghdad’s chagrin) depends heavily on a pipeline that runs from Iraq to Ceyhan. Over the summer, the PKK attacked the pipeline costing the KRG some $250 million in lost revenue. As Rudaw noted at the time, that amounts to an entire month’s worth of salaries for the Peshmerga and other security forces, underscoring the extent to which oil sales via Turkey are crucial to the government in Erbil.

  

  You might also remember from “ISIS Oil Trade Full Frontal: “Raqqa’s Rockefellers”, Bilal Erdogan, KRG Crude, And The Israel Connection,” that there seems to be some commingling going on when it comes to Turkish and ISIS crude. Technically, both are “illegal” and because the 45,000 or so barrels per day that ISIS pumps are so inconsequential in the large scheme of things, it’s easy for Islamic State crude to get “lost” in the shuffle once it gets to Turkey which works out great for those involved in the smuggling operation (as an aside, Russia has identified what Moscow says are other ISIS oil smuggling routes but we’ll focus on northern Iraq for now).

  You might notice that there’s a certian irony to this whole thing as it relates to the KRG. What the Al-Araby al-Jadeed report (cited in the article linked above) suggests is that the Kurds in Iraq are to some extent complicit in the entire operation which is amusing because it’s the sale of undocumented Kurdish crude that allegedly funds the Peshmerga’s fight against Islamic State. As with every other dynamic in the region, the entire thing is impossibly convoluted. 

  With that in mind, consider where these Turkish troops (who, again, are supposed to be “training” the Peshmerga) are located. 

  

  So they’re right next to Mosul and right between the Kurds and ISIS and, most importantly of all, right on what Al-Araby al-Jadeed claims is the smuggling route for illegal ISIS crude into Turkey from Iraq.

  The star on the map is Zakho. Araby al-Jadeed, citing an unnamed Kurdish security officials, employees at the Ibrahim Khalil border crossing between Turkey and Iraqi Kurdistan, and an official at one of three oil companies that deal in IS-smuggled oil, says that once Islamic State oil “is extracted and loaded, the oil tankers leave Nineveh province and head north to the city of Zakho, 88km north of Mosul [and] after IS oil lorries arrive in Zakho – normally 70 to 100 of them at a time – they are met by oil smuggling mafias, a mix of Syrian and Iraqi Kurds, in addition to some Turks and Iranians.”

  

  Araby al-Jadeed’s story takes a turn for the fantastic after that, but the point is that it seems extraordinarily convenient that just as Russia is making an all-out effort to expose Turkey’s role in financing Islamic State’s lucrative oil operation and also to destroy ISIS oil convoys in Syria, that Ankara would dispatch troops and two dozen tanks to the exact place in Iraq where some reports suggest the heart of ISIS’ Iraqi oil operation lies. 

  For his part, Iraqi PM Haider al-Abadi has called for Turkey to “immediately” withdraw its troops. He also calls Ankara’s incursion a “violation of sovereignty.” Here’s the full statement:

  It has been confirmed to us that Turkish troops numbering around one regiment armoured with tanks and artillery entered the Iraqi territory, and specifically the province of Nineveh claim that they are training Iraqi groups without the request or authorization from the Iraqi federal authorities and this is considered a serious breach of Iraqi sovereignty and does not conform with the good neighbourly relations between Iraq and Turkey.

   

  The Iraqi authorities call on Turkey to respect good neighbourly relations and to withdraw immediately from the Iraqi territory.

  That would seem to indicate that Baghdad has never approved the “training mission” that Ankara claims has been going on east of Mosul for two years.

  Furthermore, this underscores the fact that Iraq does not want help from NATO when it comes to fighting ISIS. As we reported last week, Iraqis generally believe the US is in bed with Islamic State and you can bet that Russia and Iran will be keen on advising Baghdad to be exceptionally assertive when it comes to expelling a highly suspicious Turkish presence near Najma. 

  Ultimately, this is yet another escalation from Erdogan and the timing, location, and vague explanation raise all sorts of questions about what exactly those 150 troops and 25 tanks are doing but you can be sure that if Baghdad rebukes Washington and green lights Russian recon and airstrikes in Iraq, we’ll find out soon enough.

  

  

  

  

• Broken Commodities Continue To Crush Investors

  Via Dana Lyons' Tumblr,

  Since breaking key support 1 year ago, commodities have continued to drop, setting a 13-year low today.

  This post is not one that is going to spotlight a current potential investment opportunity. In fact, it actually shines the spotlight on a development we highlighted over a year ago. And no, it is not a “told-you-so” or a back-slapper of a post. Consider it more of A) an update and B) a public service announcement.

  On October 30, 2014, we posted a piece entitled “It’s Make Or Break Time For Commodities”. In the post, we included a chart (as always) that detailed what we deemed to be a major area of support for the Thomson Reuters CoreCommodity CRB Index (CRB) around 266. It was so major that we suggested it was a “make or break” spot for the key commodity index. Specifically, a “make” could produce a “substantial and durable” bounce and even potentially usher in “a resumption of the post-2001 commodity bull market”. On the other hand, a “break” would “open the index up to further (perhaps significant) weakness” and maybe even “cast a doubt on the likelihood of resuming the commodity bull market any time soon.”

  Here is that chart from over a year ago:

  

   

  Just a few weeks later, the CRB registered a “break”, dropping below that key support level – and it has not looked back since. The break did indeed produce “further (perhaps significant) weakness” as the CRB would lose 25% of its value in just 2 months. Furthermore, the index has continued to drop for another full year which has definitively “cast a doubt on the likelihood of resuming the commodity bull market any time soon”

  Here is the update as of today:

  

   

  We actually expanded the chart back another 9 years to include the post-1999 UP trendline that just happened to intersect the 2 lines of support in the original chart. As you can see, the CRB closed at a new 13-year low today, around 180. The index has now lost one third of its value since violating the “make or break” level that we highlighted over a year ago.

  Now, again, this post is not meant to pat ourselves on the back. In fact, it is more about identifying the point at which we would know we are wrong. If you read the post from last October, you’ll see that we actually saw ample evidence to support a bounce in the CRB from that key level. However, we also recognized that, should such a bounce not materialize and the CRB fail to hold that key level, then the index was likely broken.

  While our strategy is almost always to buy “relative strength”, i.e., things that are in strong uptrends, there are times when we will take stabs at mean-reversion, knife-catching type plays. However, we will only attempt such trades at what we consider to be major, longer-term support levels. That 266 level in the CRB would have been one of those levels.

  That said, in the event that that major level was broken to the downside, we knew it would be time to cut bait on the trade and move on. In our view, that is an important lesson to keep in mind. It is OK to attempt to catch a falling knife at a level you deem to be of utmost significance on the chart. If you are wrong, at least you know where to cut your losses and move on. At worst, you come away with one small knife cut.

  The worst thing you can do is to continuously attempt to catch the falling knife. When something is in free-fall, realize that it is normally for a good reason. Trends tend to persist so expect that something that is plummeting to continue to plummet. Just remember that there will be just 1 bottom. In the event of a multi-year collapse in a security or commodity, etc., the odds of picking the “bottom” day out of possibly hundreds of possibilities are slim. If you repeatedly try, the odds are all you will come away with are a multitude of knife holes in your hands – and your portfolio.

  Take the CRB, for example. Since breaking that key level a year ago, the index has made no less than 51 new 52-week lows. If you’ve been trying to catch the knife that whole time, your portfolio looks like swiss cheese right now. By the way, if you think that’s far-fetched because commodities sentiment was not too bad until just recently, think again. Remember that we wrote in our post last year that commodities were already despised then. They have undergone over a year of declines since then and they are still dropping.

  The point is, if you are going to attempt to catch a proverbial falling knife on a chart, at least do so only at a point you deem to be a “make or break” type level. Whether or not you can likely accurately identify a “make or break” level is another matter. The point is that, should that level fail, like it did on the CRB Index a year ago, you know the security is broken and it is time to walk away.

  *  *  *

  More from Dana Lyons, JLFMI and My401kPro.

  

  

  

  

  

• How Gun Laws 'Work' In Reality

  Uncivil disobedience…

   

  

   

  Source: Investors.com

  

  

  

  

  

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• Nothing To Fear But The Fearful Themselves

  Submitted by Dan Sanchez via DanSanchez.me,

  When I first learned of the recent attacks in Paris, a chill went down my spine. “No,” I thought, “This is all happening too fast.”

  I was terrified. I was not terrorized, mind you. What happened in Paris was tragic, of course. But I was not so ignorant and innumerate as to think the kind of violence it represented was a statistically significant direct threat to myself and my loved ones. I was fully cognizant that, even with the recent uptick in terror attacks, the probability of my family ever being caught up in one was vanishingly minuscule. I am more likely to be felled by a deer or a bolt of lightning than by a jihadist’s Kalashnikov.

  What terrified me was the response of all the people who are incapable of such a proportional perspective: those who saw the news from France and panicked, thinking “I’m next!” As distant as it was, the Paris attacks unleashed in America a surge of fear and of calls for greater police powers, as well as an attendant wave of anti-Muslim hate and war lust.

  And as sophisticated and urbane as the French are reputed to be, they too let irrational terror wash over them. And under its sway, they permitted the State to run rampant over life and liberty. The public attitude was distilled by a young French citizen whose message to her government was, “Do whatever you want, but keep me safe.” With this mandate, France escalated its pointless and terrorist-breeding bombing of civilian-filled Syrian towns. And at home, as Truth in Media reported:

  “…the French government declared a state of emergency based on a rarely used 1955 law that allows the state to conduct warrant-less searches of private property, impose curfews, restrict public gatherings and movements of people, confiscate weapons at will and take over the press.”

  As always, the statist public perversely responded to terrorism drawn upon their heads by their government’s foreign militancy by sanctioning more such militancy. And it perversely rewarded that government for its abject failure to prevent the attacks with more resources, powers, and responsibility.

  On top of arrest sweeps and threatening to close mosques, the French government’s emergency powers were invoked to place activists under house arrest in order to squelch completely unrelated protests. This demonstrated vividly that war is indeed the health of the State, and war-spawned terrorist attacks are like an adrenaline shot for domestic tyranny.

  When I saw these responses, it fully sank in just how surrounded my family and I are by human livestock and just how acutely dangerous that position is. I realized that, when an attack of that scale and shock-value again happens on American soil, the pack-minded multitudes all around me will deafeningly bay for war. And the herd-minded hundreds of millions will stampede to the State for security, bleating to please, please be shorn of their remaining liberties.

  I am not terrified of the terrorists; i.e., I am not, myself, terrorized. Rather, I am terrified of the terrorized; terrified of the bovine masses who are so easily manipulated by terrorists, governments, and the terror-amplifying media into allowing our country to slip toward totalitarianism and total war.

  Now the result of that could be a statistically significant threat to myself and my family. Under an omnipotent government with permanent emergency powers, there would be a significant likelihood of my nephew being drafted to help occupy a foreign country; my daughter going hungry thanks to wartime economic planning; or myself being imprisoned or shot as a dissident.

  Yet I have drawn solace from the fact that libertarians like myself are not alone in pushing back against the terrorized Right. Following the Paris attacks, many excellent articles from the political Left were published wisely warning the West not to answer indiscriminate violence in kind. Such a terror-driven response is exactly what the terrorists want, in order to polarize and sharpen a “clash of civilizations.”

  And then yesterday’s San Bernardino attack happened.

  Before the fact that the alleged shooters were Muslim emerged, the Left began jumping all over it as yet another in a long series of mass shootings by whites that demonstrated the urgent need for more gun control.

  Two weeks earlier, these same progressives were calmly counseling the public to not be terrorized into giving their government more power to bomb, register, and persecute Muslims. Now they themselves were trying to terrorize the public into giving their government more power to disarm, register, and persecute gun owners.

  They point out that you are more likely to be killed by a white, homegrown terrorist than a Muslim one. That may be true, but both of those fates are still far less likely than your odds of being crushed by furniture (or being killed by a cop, for that matter). Neither of these exaggerated threats are any justification for incurring the great and underestimated dangers involved in granting government sweeping new powers.

  Progressives, who rightly support Black Lives Matter, are pining for more gun laws, while the already existing gun possession laws are one of the chief pretexts cops and courts use to brutalize and incarcerate blacks.

  And the same progressives who rightly warn of potential fascism under the divisive demagoguery of Donald Trump, want to give the institution that Trump may come to control greater power to register and disarm the public. They ignore or deny the fact that the mass human roundups we associate with such regimes are only practicable given broad civilian disarmament. And broad civilian disarmament, in turn, is only practicable given broad gun registration. For example, the German Jews and liberals were easily liquidated by the Nazis, thanks to the Weimar Republic’s gun registration laws. Do you really want every single Mexican and Muslim in America disarmed or easily disarm-able under “Chancellor” Trump?

  After San Bernardino, I am just as terrified of the terrorized and terrorizing Left as I am of the terrorized and terrorizing Right. I more fully realize that the latter can only do its worst if enabled by the former. The Left sets us up for the Right to knock us down. Call it the Weimar/Third Reich one-two punch.

  I do not irrationally and disproportionately fear Muslim bomb-wielding jihadists or white, gun-toting nutcases. But I rationally and proportionately fear those who do, and the regimes such terror empowers. History demonstrates that governments are capable of mass murder and enslavement far beyond what rogue militants can muster. Industrial-scale terrorists are the ones who wear ties, chevrons, and badges. But such terrorists are a powerless few without the supine acquiescence of the terrorized many. There is nothing to fear but the fearful themselves.

  Paris and San Bernardino taught me that my family is trapped amid a herd, completely surrounded by cattle-minded millions who can be spooked into large-scale stampedes with small-scale crimes. And there is literally no way out, because virtually the entire world is afflicted with one form of collectivist statism or another. Therefore, the only way to prevent my loved ones from being trampled is by helping as many people as I can to break the spell of terror that turns civilized men and women into rampaging beasts.

  That is why I am writing this essay: to implore you, the reader, to snap out of that spell if you have not already, and to help others do the same. Stop swallowing the overblown scaremongering of the government and its corporate media cronies. Stop letting them use hysteria over small menaces to drive you into the arms of tyranny, which is the greatest menace of all. Overthrow the reign of terror the State has installed over your mind. Else the days ahead may be terrible indeed.

   

  

  

  

  

  

• Prominent Turkish Media Figure Resigns Citing Legal Battle With Erdogan

  Last week, Turkey’s NATO-backed, Washington-approved autocrat Recep Tayyip Erdogan took another step towards ensuring that the concept of a free press doesn’t exist in Turkey when Can Dundar, editor in chief of Cumhuriyet, and Erdem Gul, the newspaper’s capital correspondent were arrested on charges of spying and aiding a terrorist organization.

  

  When you hear “aiding a terrorist organization”, you might think the men had, say, provided weapons to extremists or perhaps assisted in the smuggling of illegal oil from which the most prominent terrorist organization on the planet derives up to a billion dollar per year in revenue.

  But no, that’s what the Turkish government does. As for the reporters, their crime was exposing the fact that Ankara was sending weapons to militants in Syria via trucks manned by Turkish intelligence agents. For those who missed it, here’s the video proof:

  Of course that was hardly the first time Erdogan has cracked down on the press. Back in September, in a move dubbed “unsubstantiated, outrageous and bizarre” by Amnesty International, Turkey arrested three Vice News journalists (two British citizens and an Iraqi) for allegedly “engaging in terror activity” on behalf of ISIS. That was just the latest example of Ankara using the NATO-backed ISIS offensive as an excuse to eradicate pro-Kurdish sentiment. According to The New York Times (and according to common sense) the reporters’ only real “crime” was “covering the conflict between Kurdish separatists and the Turkish state.” 

  And there are countless other examples. 

  Well, in the latest press casualty brought to you by America’s despotic ally in Ankara, Today’s Zaman Editor-in-Chief Bulent Kenes, a journalist who has been at the helm of Turkey’s best-selling English-language daily since it was launched in 2007, has resigned citing an ongoing legal battle with Erdogan. Here’s the full post from TZ: 

  Kenes said on Thursday that he cannot perform his job as the editor-in-chief of Today’s Zaman due to a series of criminal and civil lawsuits government officials have launched against him as part of the campaign of pressure on the independent media in Turkey. He has already been convicted in one defamation case and is facing many others that observers have said are nothing but intimidation and persecution of independent and critical journalists in Turkey.

   

  He also said he wanted to spend more time with his family and pay more attention to his health.

   

  “As the founding editor-in-chief of the Today’s Zaman, I have sincerely tried to fulfill my job to the best of my ability, maintained the paper’s integrity and tried to resist all kinds of pressure from the government as much as I could,” Kenes said. He wished success for his colleagues at the daily, which he said has been a leading brand name in telling Turkey’s story abroad, and thanked the readers of the daily for their valuable support for him over the years.

   

  
  

   

  Kene? was arrested by the ?stanbul 7th Criminal Court of Peace on Oct. 10 and remained behind bars until his release pending trial was ordered on Oct. 14. The charges against the journalist concern 14 tweets that allegedly insult President Recep Tayyip Erdogan. He has already been convicted of insulting the president in a Twitter post and was handed a suspended prison sentence of 21 months earlier this year. However, Kenes did not even mention the president’s name in his tweet and this sentence has attracted worldwide condemnation.

   

  Kenes is facing the prospect of up to eight years and two months in prison on charges of “insulting” Erdogan in a series of tweets and statements that he has said were simply the expression of a critical opinion. He has also been hit by dozens of other pending cases launched against him by Erdogan, Prime Minister Ahmet Davutoglu and other government officials.

  So the takeaway from this travesty (well, other than to reiterate that the US should not be supporting this despot) is that you don’t “insult Erodgan” on Twitter. Especially if you happen to live in Turkey. Although amusingly, you might be able to get away with comparing the President to Gollum (from Lord of the Rings) because as it turns out, Turkish judges aren’t Tolkein fans and on that note, we close with the following from The Guardian:

  The trial of a Turkish man accused of insulting the president, Recep Tayyip Erdogan, by comparing him to Gollum has been adjourned so that a group of experts can study JRR Tolkein’s Lord of the Rings character, Turkish media has reported.

   

  Bilgin Ciftci was fired from his job at Turkey’s public health service in October after sharing images comparing Erdo?an’s facial expressions to those of Gollum.

   

  According to a report in the daily newspaper Today’s Zaman, a court in Ayd?n has adjourned Ciftci’s trial as the chief judge had not seen the Lord of the Rings films. The court-appointed experts have reportedly been asked to determine whether the comparison is indeed an insult.

   

  
  

  

  

  

  

  

• Do You Really Want to Raise Money From a Venture Capitalist?

  By Chris at www.CapitalistExploits.at

  When I was much younger everyone, myself included, wanted to be a hedge fund manager. And who could blame us. After seeing the kind of houses these folks lived in, any sensible bloke with aspirations of ditching the 30-year old Fiat for a Porsche wanted a hedge fund of their very own. They clearly brought only wonderful things to those who had one… except maybe Raj Rajaratnam.

  A near mythical status was attributed to these God-like people, hedge fund managers that is. Even the excessively rotund, cabbage-faced geek, with the hygiene of a garbage bag would find himself swarming with girls should he let it slip that he indeed manages a hedge fund.

  Today a similar status seems to have descended like a blanket of fog over venture capitalists. Like the aforementioned hedge fund managers, they’re largely misunderstood. Fog does that. It makes things… well, foggy.

  A conversation I had with a couple of entrepreneurs shows the thickness of the fog.

  The conversation went something like this:

  Me: So how are you financing this?

  Founder: We’ve raised some family and friends money a few months ago and now we’re looking for VC money.

  Me: Why VC money? Why not angel money? (this is a very early stage company which is nowhere near being ready for VC capital)

  Founder: Well VCs have a lot more money than angels, and we don’t want to waste our time with angels. We’re going straight to the top.

  Me: The top of what?

  Founder: Well VCs are it really. They’ve at the top. I mean they’ve got to where they’ve got to by being really good. No, we need VC money.

  Me: Really? What do you believe they’re going to bring you that angels can’t?Founder: The expertise we get from VCs is going to help us a lot.

  Me: Really, how do you figure that?

  Founder: Well, VCs have more money, they have more contacts and they can get us strategic relationships.

  Me: So you’re expecting them to be quite active in your business?

  Founder: Yes.

  This sort of thinking is complete horseshit and I told the founder so.

  Companies have different capital requirements during their life-cycle, but as I mentioned last week, it is an entrepreneur’s job to identify the most efficient and attractive source of capital at any given point in the company’s life-cycle.

  The gentleman mentioned above had an extremely early stage business. Just a few months old, and not much more than an idea. What he needs is pre-seed capital which almost never comes from VCs as the amounts in question are very small, often only a few hundred thousand dollars. He would have been better off sourcing angel money for two reasons:

  1. His business was not yet mature enough to take to VC money, and
  2. He needed additional help in his company on the skill side. This would most likely be easier for him to get from an interested angel investor who could join the board, than it would be from a VC fund.

  The problem, I realised, that this entrepreneur faced, was that he didn’t understand the nature of what venture capital was, and had lumped venture capital together with anything related to private funding.

  The trouble is if you don’t understand the person you’re trying to raise money from you land up wasting both parties time.

  And furthermore, when the time does come and your business is at the stage where it needs to secure venture capital you can pretty much write off the VC you pitched earlier; he’s already had a bad experience with you since he realised you never did your homework before talking to him.

  I’ve always felt that the relationship between entrepreneurs and investors is or should be that of a partnership. Those funding your business are partners in your business and as such you should educate yourself about who they are, what their motivations are and what they can and cannot bring to the table.

  Who, Then, Are Venture Capitalists?

  Perhaps let’s look at the structure of a typical VC fund as this will shine some light on the subject.

  What takes place is that a bunch of smart, and sometimes not so smart guys, and sometimes gals, get together and form a company with the objective to get filthy stinking rich and they intend to do this by investing in exciting early stage ventures.

  These guys are called the General Partners (GPs) and in order to leverage what they’re doing, they take in partners who wish to co-invest. These partners are passive and called Limited Partners (LPs) and they are usually charged 2% of capital and 20% of the carried interest, which in the industry is commonly known as 2:20.

  

  The more money the GPs can raise from Limited Partners the better for them. More capital means more fees and returns. For example, a VC fund with $1 million under management that generates a 2x return will only earn the GP 20% of $1 million or $200,000.

  On the other hand, a GP with $100 million who earns only 6% will earn $1.2 million or 20% of the $6 million, not to mention the 2% of fees, which on a $100 million fund amount to $2 million. Assets under management (AUM) are therefore super important to VCs.

  What Does This Mean to You As a Founder Looking to Raise VC Money?

  It means that your company should be large enough to be investable and it means that as an entrepreneur you need to understand who you’re talking to.

  As an entrepreneur, right NOW may very well be THE best time to raise money because there are those who are throwing it out like a lolly scramble at a 5-year-old’s birthday party.

  

  All that said, VCs are going to protect themselves. They understand they are investing in a risky asset class and will limit those risks as much as is possible. They’re going to demand liquidation preferences, maybe even 2x, and they’re going to take board seats.

  Realise also that VCs, evil as they may look, are not their own boss. They answer to the LPs, and if they answer to their LPs and you take their money, you now do as well. Oh, and remember, LPs are often made up of pension funds, endowment funds, funds of funds and the like. As such LPs tend to know about as much about your business as they do about the city of Ouagadougou… not so much.

  What do LPs want?

  Exits.

  If LPs want exits it means your investor want exits. Now that sounds a bit like stating the obvious but realise that one of the biggest risks behind venture capital is the lack of liquidity and there will be a push for liquidity whether you the founder like it or not.

  Everyone wants to eventually see liquidity. This is why companies will IPO even if it means, like in the recent case of Square, the valuation is lowered.

  Case Study

  Consider for a moment some of the VCs in Square who got in at the Series E financing. Many invested with a 1.3x ratchet. Some elected to waive the ratchet and they’re staring at losses as a result, but many did not. It’s the VCs who are making money and the difference comes out of, you guessed it, founders’ pockets.

   As an entrepreneur it’s important to know this early on when you’re taking VC money. Maybe you’re OK with that and you still walk away very rich, and maybe you don’t. It all depends on how much dilution you’ve already taken on and how much you can still take, and the size of the opportunity you’re hunting and how you execute on that.

  Accretive dilution is fine and everyone is happy to see it, but as you can see VCs cover the downside and that means that someone has to pay for that protection. That someone will be staring you in the face every morning as you brush your teeth.

  Now Jack Dorsey is still the largest shareholder owning over 24% of Square and we won’t be crying for him. Remember, this is one of the success stories.

  What is important to understand is that as a founder it’s entirely possible to end up in a situation where your interests are no longer aligned with those of your shareholders.

  It can happen where your VCs want that trade sale, or IPO, and you as a founder don’t. Maybe you’ve incurred too much dilution and a trade sale or IPO at the market price, based on your equity, means that VCs with a 2x liquidation preference make money, and you, after working 100-hour workweeks, losing your marriage and friends, after mortgaging your home, end up with nothing. Yep. Nada. Zilcho. It happens. I’d rather it didn’t happen to you.

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• The Pretend War: Why Bombing ISIS Won't Solve The Problem

  Authored by Andrew J. Bacevich, originally posted at The Spectator,

  Not so long ago, David Cameron declared that he was not some "naive neocon who thinks you can drop democracy out of an aeroplane at 40,000 feet." Just a few weeks after making that speech, Cameron authorised UK forces to join in the bombing of Libya – where the outcome reaffirmed this essential lesson.

  This week Cameron asked his parliament to share his ‘firm conviction’ that bombing Raqqa, the Syrian headquarters of the Islamic State, has become ‘imperative’… and they did.

  At first glance, the case for doing so appears compelling. The atrocities in Paris certainly warrant a response. With François Hollande having declared his intention to ‘lead a war which will be pitiless’, other western nations can hardly sit on their hands; as with 9/11 and 7/7, the moment calls for solidarity. And since the RAF is already targeting Isis in Iraq, why not extend the operation to the other side of the elided border? What could be easier?

  But it’s harder to establish what expanding the existing bombing campaign further will actually accomplish. Is Britain engaged in what deserves to be called a war, a term that implies politically purposeful military action? Or is the Cameron government — and the Hollande government as well — merely venting its anger, and thereby concealing the absence of clear-eyed political purpose?

  Britain and France each once claimed a place among the world’s great military powers. Whether either nation today retains the will (or the capacity) to undertake a ‘pitiless’ war — presumably suggesting a decisive outcome at the far end — is doubtful. The greater risk is that, by confusing war with punishment, they exacerbate the regional disorder to which previous western military interventions have contributed.

  Even without Britain doing its bit, plenty of others are willing to drop bombs on Isis on either side of the Iraq-Syria frontier. With token assistance from Bahrain, Jordan, Saudi Arabia and Turkey, US forces have thus far flown some 57,000 sorties while completing 8,300 air strikes. United States Central Command keeps a running scorecard: 129 Isis tanks destroyed, 670 staging areas and 5,000 fighting positions plastered, and (in a newish development) 260 oil infrastructure facilities struck, with the numbers updated from one day to the next. The campaign that the Americans call Operation Inherent Resolve has been under way now for 17 months. It seems unlikely to end anytime soon.

  In Westminster or the Elysée, the Pentagon’s carefully tabulated statistics are unlikely to garner much official attention, and for good reason. All these numbers make a rather depressing point: with plenty of sorties flown, munitions expended and targets hit, the results achieved, even when supplemented with commando raids, training missions and the generous distribution of arms to local forces, amount in sum to little more than military piddling. In the United States, the evident ineffectiveness of the air campaign has triggered calls for outright invasion. Pundits of a bellicose stripe, most of whom got the Iraq war of 2003 wrong, insist that a mere 10,000 or 20,000 ground troops — 50,000 tops! — will make short work of the Islamic State as a fighting force. Victory guaranteed. No sweat.

  And who knows? Notwithstanding their record of dubious military prognostications, the proponents of invade-and-occupy just might be right — in the short term. The West can evict Isis from Raqqa if it really wants to. But as we have seen in other recent conflicts, the real problems are likely to present themselves the day after victory. What then? Once in, how will we get out? Competition rather than collaboration describes relations between many of the countries opposing Isis. As Barack Obama pointed out this week, there are now two coalitions converging over Syria: a US-led one, and a Russia-led one that includes Iran. Looking for complications? With Turkey this week having shot down a Russian fighter jet — the first time a Nato member has downed a Kremlin military aircraft for half a century — the subsequent war of words between Turkey’s President Recep Tayyip Erdogan and Vladimir Putin gives the world a glimpse into how all this could spin out of control.

  The threat posed by terrorism is merely symptomatic of larger underlying problems. Crush Isis, whether by bombing or employing boots on the ground, and those problems will still persist. A new Isis, under a different name but probably flying the same banner, will appear in its place, much as Isis itself emerged from the ashes of al-Qaeda in Iraq.

  Does the West possess the wherewithal to sustain another long war? Only if the allies wage that war exclusively from the air. The British army is now the smallest it has been since the 19th century, Cameron’s government having reduced it by 20 per cent since coming to power. The French army today numbers just over 100,000. London and Paris inevitably look to the United States as the pre-eminent member of the western alliance to take up the slack (the US still spends almost twice as much on defence as all other Nato members put together). But apart from Obama’s evident reluctance to close out his presidency by embarking upon a new war, advocates of a major ground offensive against Isis should note that the United States army is also shrinking. It’s also considerably worn out by the trials of the past dozen or more years. Those who cheer from the bleachers may be eager for action. Those likely to be sent to fight, not to mention citizens who actually care about the wellbeing of their soldiers, may feel less keen.

  The fact is that Britain, France, the United States and the other allies face a perplexing strategic conundrum. Collectively, they find themselves locked in a protracted conflict with Islamic radicalism — of which Isis is but one manifestation. Prospects for negotiating an end to that conflict anytime soon appear to be nil. Alas, so too do prospects of winning it.

  In this conflict, the West as a whole appears to enjoy the advantage of clear-cut military superiority. By almost any measure, we are stronger than our adversaries. Our arsenals are bigger, our weapons more sophisticated, our generals better educated in the art of war, our fighters better trained at waging it.

  Yet time and again the actual deployment of our ostensibly superior military might has produced results other than those intended or anticipated. Even where armed intervention has achieved a semblance of tactical success — the ousting of some unsavoury dictator, for example — it has yielded neither reconciliation nor willing submission nor even sullen compliance. Instead, intervention typically serves to aggravate, inciting further resistance. Rather than putting out the fires of radicalism, we end up feeding them.

  Although the comparison may strike some as historically imprecise, the present moment bears at least passing resemblance to the last occasion when British and French leaders got all worked up about taking on obstreperous Arabs. Back in 1956, the specific circumstances differed, of course. Then, the problem attracting the ire of British and French policymakers was the Arab nationalism of Gamal Abdel Nasser, who in seizing the Suez canal had committed a seemingly unpardonable offence. And the issue was preserving imperial privilege, not curbing terrorism. But then, as today, in both London and Paris, an emotional thirst for revenge overrode sober calculation.

  The vicious Isis attacks in Paris represent another unpardonable offence. Through war, Cameron and Hollande seek to avenge the innocents who were killed and wounded. But as the humiliating outcome of the Suez war reminds us, there are some problems to which war is an unsuitable response.

  Across much of the greater Middle East today, we confront one such problem. For western governments to reflexively visit further violence on that region represents not a policy but an abdication of policy. It’s past time to think differently.

  *  *  *

  As an afterthought, we were reminded that while Hilary Benn voted for war this week, his father had a very different perspective…

  

  

  

  

  

• For Citi, This Is The "Greatest Event Risk" For Markets In 2016

  There’s quite a bit of talk these days about what’s “priced in” and what’s not. 

  The market, for instance, had “priced in” an expansion (not just an extension) of PSPP and a 20bps cut from Mario Draghi this week and as it turns out, the market was wrong, leading the likes of Goldman to go the mea culpa route (“we badly misread this meeting”). 

  But while everyone is keen on trading the rumor and trying to get out ahead of central bankers, no one seems interested in pricing in the myriad geopolitical risk factors that loom large on the horizon going into 2016. 

  Perhaps the market feels as though when it comes to capital markets, nothing short of a nuclear holocaust will be sufficient to trump central bankers hell bent on keeping the party going. Or perhaps investors simply don’t understand the gravity of the innumerable risk factors at play, but whatever the case, savvy market participants keen on “getting it right”, so to speak, might be wise to start pricing in some risk other than that which stems from the possibility that a central planner might not lean quite as dovish as everyone wants them to at the next policy meeting.

  To be sure, the implications of pricing in geopolitical risk need not necessarily lead one to a bearish conclusion. A war time boost might be just what the US economy needs to finally get back to trend (lord knows the MIC would love it) from a growth perspective, and one has to think that no matter how long OPEC keeps flooding the market, crude might well spike in the event NATO decides to shoot down another Russian plane in Syria or vice versa. 

  And we cannot forget about epochal political shifts in key emerging economies (e.g. Brazil, Turkey, and Malaysia), EU periphery hot spots (e.g. Spain and Portugal), and in America (where anti-establishment candidates are capitalizing on voters’ disgust for politics as usual inside the Beltway).

  Of course the Janet Yellens, Mario Draghis, and Haruhiko Kurodas of the world will likely still dominate when it comes to explaining why markets behave the way they do on a daily basis, but recognizing the importance of analyzing geopolitics in the course of evaluating the outlook for markets is nonetheless critical.

  Recognizing this, Citi is out with some new commentary that’s worth a read for those who understand that there’s more to developing a prudent, long-term view of where asset prices are heading than parsing what a PhD economist mutters at a press conference – or at least there should be.

  *  *  *

  From Citi

  In our view, investors should be prepared for the convergence of rising “Old” geopolitical risks with “New” socio-economic risks, creating more destabilizing byproducts in the process. Such outcomes are already in evidence with the burgeoning refugee crisis and the spike in terrorist activity, symptoms of profound foreign policy failures and shortcomings in global governance in controlling their escalation. Together, these rising risks may form a toxic brew that exceeds the capacity of central bank liquidity to mask them. 

  In the year ahead, geopolitical risks likely pose the greatest potential to disrupt markets in terms of event risk. But failure to address new socio-economic risks, such as income inequality and youth unemployment, runs the arguably much greater risk of undermining the functioning of the global system, creating a negative feedback loop. There is also the potential for geopolitical risks to intersect with economic fragility in the event of a downturn, amplifying both.

  

  The November terrorist attacks in Paris took place in a year that saw a significant uptick in the nature and the extent of the risk of terrorism, mainly at the hands of ISIS. In our view, the Paris attacks mark a turning point with global implications. In a tactical sense, the attacks marked a new stage in ISIS approach, being a series of coordinated attacks, perhaps centrally-planned, and, crucially, outside of ISIS’s field of operations (the self-proclaimed “Caliphate”) where it has sought to establish its parallel state and expand its territorial reach. It remains to be seen whether the group has the capacity to launch other attacks in developed market capital cities. 

  Terrorism is not a new risk, but overall, levels of violent conflict are at a post-Cold War high according to the Uppsala Conflict Data Program, which tracks three types: armed conflicts between states, between non-state groups, and civilian massacres. 36 ISIS’ shift away from the symbolic soft targets of Al Qaeda’s “spectaculars” to mass shooting incidents in capital cities, focusing on fairly undistinguished targets, will be difficult to combat. With the flow of foreign fighters to and from Syria continuing, the desire to maintain open borders has never seemed under greater threat in the post-Cold War era. 

  For 2016, Fewer Systemically-Significant Elections: US, Taiwan and Brexit Referendum in Focus 

  There are — perhaps mercifully — relatively few systemically-significant political signposts with the potential to influence global markets in 2016. The most impactful include US presidential elections in November and the UK referendum on EU membership (due by end-2017). Taiwanese general elections and South Korean parliamentary elections will also take place, with Taiwan especially closely-watched given the country’s relationship to China. Other government collapses and/or snap elections may also emerge of course where governments fall under pressure, with Venezuela bearing close watching. 

  Instead of the usual focus on election-watching, it may be that the political significance of 2016 will not be about election results this year, but in how economic and political conditions will influence the coming constellation of systemically significant elections in France and Germany in 2017 and the context for scheduled leadership transitions in China and Russia (see Figure 57)

  

  US Elections — Anti-Establishment Republican Candidates in the Lead, But For How Long? Will the US Have its First Female President? Anti-establishment candidates Donald Trump and Ben Carson continue to dominate polls for the Republican nomination, with sustained popularity for surprise Democratic challenger Bernie Sanders, a self-declared Socialist in a country where the term is typically regarded as a political insult. Candidate after candidate has made blunders that would, under other circumstances, have cost them US public support. This time, Americans seem to be rewarding candidates who depart from the usual political script. With just under a year to go, the US political establishment and markets have not been overly concerned, with most treating the race as rather colorful political theatre, but we suspect that will soon change. 

  Could the UK Vote to Leave the EU? Rising Brexit — and UK Breakup — Risk Could the UK vote to leave the European Union? Once no more than a tail risk, in our view Brexit risk is on the rise, with perhaps a 20-30% probability. The pro-EU lead has fallen in recent months to roughly 3 percentage points. Could Brexit really happen? It is far from impossible — we consider Brexit risk to be one of the top global political risks; if it transpires, it would likely prompt a wider unravelling within Europe. 

  The Refugee Crisis and EU Political Risk: Welcome Refugees, Goodbye Merkel? European policymakers are struggling to resolve the refugee and migration crisis, which follows in the wake of a list of challenges, from the Greek debt crisis, the Russia-Ukraine conflict and the broader challenge of reforming the Eurozone and EU architecture, and is emerging as a significant source of political risk. In addition to influencing election outcomes, the refugee crisis will test cohesion between EU member states, requiring burden-sharing on a topic much more unpopular with their voters than bailouts: immigration. The potential for the refugee and migration crisis to destabilize the EU could eventually overshadow Grexit (in any case a lower risk for 2016 than in previous years). Could it also be the undoing of the European politician who has done the most to help resolve it?

  Geopolitical Outlook: The Syria Conflict Enters its Fifth Year, and What Will Follow the End of Sanctions in Iran? As the Syria conflict enters its fifth year, Europe’s political imperative to stem the flow of refugees and Russia’s expanded military intervention in Syria are altering the regional political calculus, forcing Washington’s hand as the US enters an election year. The Obama Administration’s recent decision to send approximately 50 “special advisors” highlights the degree to which the security situation in Afghanistan, Iraq and now Syria have all worsened, compelling President Obama, who came to power promising to extricate US forces from these conflicts, to revisit the US stance. What will be the impact of these moves: will the conflict expand, or could the refugee crisis and Paris attacks provide the impetus for cooperation that will pull the Syria conflict out of its downward spiral — and potentially lead to a rapprochement between Russia and the West? Although diplomatic differences have narrowed encouragingly, it is difficult to envision a durable political solution emerging soon. The recent Turkish-Russia military incident underscores the risk of so many actors, with often competing interests, operating in an increasingly crowded military theatre.

  A key regional wildcard will be impact of the end of (much of) the sanctions regime against Iran, a rare recent example of a diplomatic breakthrough, and one fraught with controversy. Can the Iran deal withstand rigorous inspections, opposition from Iranian hardliners, and the potential for regime change in Washington? How will Tehran exert influence in the region, and how will other regional players, from Riyadh to Jerusalem, interact with it?

  

  

  

  

  

• Why The Liberal Media Hate Trump

  Submitted by Patrick Buchanan via Buchanan.org,

  In the feudal era there were the “three estates” – the clergy, the nobility and the commons. The first and second were eradicated in Robespierre’s Revolution.

  But in the 18th and 19th century, Edmund Burke and Thomas Carlyle identified what the latter called a “stupendous Fourth Estate.”

  Wrote William Thackeray: “Of the Corporation of the Goosequill — of the Press … of the fourth estate. … There she is — the great engine — she never sleeps. She has her ambassadors in every quarter of the world — her courtiers upon every road. Her officers march along with armies, and her envoys walk into statesmen’s cabinets.”

  The fourth estate, the press, the disciples of Voltaire, had replaced the clergy it had dethroned as the new arbiters of morality and rectitude.

  Today the press decides what words are permissible and what thoughts are acceptable. The press conducts the inquisitions where heretics are blacklisted and excommunicated from the company of decent men, while others are forgiven if they recant their heresies.

  With the rise of network television and its vast audience, the fourth estate reached apogee in the 1960s and 1970s, playing lead roles in elevating JFK and breaking Lyndon Johnson and Richard Nixon.

  Yet before he went down, Nixon inflicted deep and enduring wounds upon the fourth estate.

  When the national press and its auxiliaries sought to break his Vietnam War policy in 1969, Nixon called on the “great silent majority” to stand by him and dispatched Vice President Spiro Agnew to launch a counter-strike on network prejudice and power.

  A huge majority rallied to Nixon and Agnew, exposing how far out of touch with America our Lords Spiritual and Lords Temporal had become.

  Nixon, the man most hated by the elites in the postwar era, save Joe McCarthy, who also detested and battled the press, then ran up a 49-state landslide against the candidate of the media and counter-culture, George McGovern. Media bitterness knew no bounds.

  And with Watergate, the press extracted its pound of flesh. By August 1974, it had reached a new apex of national prestige.

  In “The Making of the President 1972,“ Teddy White described the power the “adversary press” had acquired over America’s public life.

  “The power of the press in America is a primordial one. It sets the agenda of public discussion, and this sweeping political power is unrestrained by any law. It determines what people will talk and think about — an authority that in other nations is reserved for tyrants, priests, parties and mandarins.”

  Nixon and Agnew were attacked for not understanding the First Amendment freedom of the press.

  But all they were doing was using their First Amendment freedom of speech to raise doubts about the objectivity, reliability and truthfulness of the adversary press.

  Since those days, conservatives have attacked the mainstream media attacking them. And four decades of this endless warfare has stripped the press of its pious pretense to neutrality.

  Millions now regard the media as ideologues who are masquerading as journalists and use press privileges and power to pursue agendas not dissimilar to those of the candidates and parties they oppose.

  Even before Nixon and Agnew, conservatives believed this.

  At the Goldwater convention at the Cow Palace in 1964 when ex-President Eisenhower mentioned “sensation-seeking columnists and commentators,” to his amazement, the hall exploded.

  Enter The Donald.

  His popularity is traceable to the fact that he rejects the moral authority of the media, breaks their commandments, and mocks their condemnations. His contempt for the norms of Political Correctness is daily on display.

  And that large slice of America that detests a media whose public approval now rivals that of Congress, relishes this defiance. The last thing these folks want Trump to do is to apologize to the press.

  And the media have played right into Trump’s hand.

  They constantly denounce him as grossly insensitive for what he has said about women, Mexicans, Muslims, McCain and a reporter with a disability. Such crimes against decency, says the press, disqualify Trump as a candidate for president.

  Yet, when they demand he apologize, Trump doubles down. And when they demand that Republicans repudiate him, the GOP base replies:

  “Who are you to tell us whom we may nominate? You are not friends. You are not going to vote for us. And the names you call Trump – bigot, racist, xenophobe, sexist – are the names you call us, nothing but cuss words that a corrupt establishment uses on those it most detests.”

  What the Trump campaign reveals is that, to populists and Republicans, the political establishment and its media arm are looked upon the way the commons and peasantry of 1789 looked upon the ancien regime and the king’s courtiers at Versailles.

  Yet, now that the fourth estate is as discredited as the clergy in 1789, the larger problem is that there is no arbiter of truth, morality and decency left whom we all respect. Like 4th-century Romans, we barely agree on what those terms mean anymore.

  

  

  

  

  

• Correlation May Not Equal Causation, But This Divergence Looks Like Bad News

  For about three weeks, beginning on August 11, just about all anyone wanted to talk about were EM FX reserves.  

  The conversation starter was of course China’s “surprise” yuan devaluation which, contrary to the official narrative, did not in fact give more of a role to the market in determining the exchange rate. In fact, the PBoC’s hand became even heavier. As BNP so eloquently put it, “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term.” A reduced role for the market meant an increased role for Beijing and that, in turn, meant liquidating FX reserves to control the spot.

  Well about a week into the new FX regime, everyone began to take a look at just how much in US paper China was burning and suddenly, the world woke up to what we’d been saying for months, namely that not only was the pace of China’s UST liquidation set to increase going forward, but in fact Beijing had been a seller of USD assets for quite some time. 

  Subsequently, the market came to understand what we first began to discuss in our November 2014 classic, “How The Petrodollar Quietly Died, And Nobody Noticed”: between slumping commodity prices, FX pain, and, as of August, the China deval, the “great accumulation” (as Deutsche Bank would later call it) was over. EM had begun liquidating their UST warchests and ultimately, every analyst on the street as well as every mainstream financial media outlet would end up documenting exactly what we had been saying for the better part of a year: when EM liquidates its reserves, it’s QE in reverse and thus amounts to a drain on global liquidity as commodity producers cease to be net exporters of capital. 

  All of this figured heavily in the Fed’s decision to adopt the “clean relent” in September but because the market has a short memory, the global EM FX reserve liquidation story has been largely forgotten even as commodity prices remain in the doldrums and even as a laundry list of idiosyncratic factors are still weighing on the world’s most important emerging economies from Brasilia to Ankara to Beijing to Kuala Lumpur.

  Bear in mind that just as QE floods the market with liquidity, the liquidation of EM FX reserves sucks liquidity out and thus should exert a tightening effect even as DM central banks (minus the Fed) struggle to meet market expectations for easing. There are obviously a number of mitigating factors here, but the point is that the conditions which prompted EM to liquidate their reserves have not changed and indeed, things could get materially worse depending on how things shape up in Brazil and Turkey and depending on the trajectory of the Chinese economy (SDR-induced inflows or no, there’s still a hard landing and capital is still flowing the wrong way). 

  Against this backdrop we present the following two graphics from Credit Suisse who looks at the relationship between FX reserves and, i) global equities, and ii) global growth. While the bank’s opinion is that “the problem is GEM growth not FX reserves,” and while they caution that correlation “does not establish causation,” the graphics speak for themselves.

  Take a look at the divergence and draw your own conclusions about where we’re headed:

  

  
  

  

  

  

  

  

• Democratic New York State Sheriff Urges Citizens To Carry Guns In Mass Shooting Aftermath

  Slowly but surely America is losing it.

  In the aftermath of the San Bernardino mass shooting, which according to the FBI is now being treated as a terrorist attack, and since ISIS is at least indirectly related makes it the biggest terrorist attack on US soil since Sept. 11, the suggestions, proposals, if not outright threats on how to respond, show just how schizophrenic US society is becoming when it comes to this most sensitive of social issues: gun violence.

  Case in point, yesterday afternoon, a sheriff from New York State’s Ulster Country, Paul Van Blarcum, asked residents in his county to carry their legal guns in the wake of a mass shooting in California that has reignited a national conversation about gun control.

  

  
  

  “In light of recent events that have occurred in the United States and around the world I want to encourage citizens of Ulster County who are licensed to carry a firearm to PLEASE DO SO,” Ulster County Sheriff Paul J. Van Blarcum wrote on Facebook Thursday. “I urge you to responsibly take advantage of your legal right to carry a firearm.”

  

   

  According to NBC, Van Blarcum’s Facebook post, which also urged active duty and retired officers to carry guns “whenever you leave your house,” had been shared more than 28,000 times by Friday afternoon. The post also drew more than 3,000 comments.

  His appeal is addressed to a very small set of people: only about 10,000 people in Ulster County are licensed to carry handguns, Van Blarcum told the AP. That’s about 5 percent of the more than 180,000 people. Which means if terrorism does strike in this otherwise sleepy country 100 miles north of New York City, it would the obligation of each gun-carrying citizen to protect 19 of their peers.

  As could be expected, the responses ranged on both sides of the spectrum with extreme opinions prevailing: some posters thanked the sheriff, saying his message would help keep the county safe. Others said more firearms would only lead to more violence. “There were more positive comments than negative, but the negative ones are very adamant,” Van Blarcum told The Associated Press. 

  What is most surprising is that Van Blacrum is, according to the AP, a democrat. In other words, he can’t be blamed of being just another gun crazy republican, hell bent on forming his own militia.

  “I’m not trying to drum up a militia of any sort,” Van Blarcum said, according to NBC New York. “It’s just a reminder that if you want to, you have a right to carry it. It might come in handy. It’s better to have it than not have it. We’re partners with the public in crime prevention.”

  Ironically, Blarcum’s post came as many, especially fellow democrat President Barack Obama, are calling for stricter gun control measures following the recent string of high-profile shootings. “We’re going to have to, I think, search ourselves as a society to make sure that we take some basic steps that make it harder — not impossible — but harder for individuals to get access to weapons,” Obama said Thursday.

  What is strange is that two ideologically similar people can have two such diametrically opposing opinions on how to deal with the threat of imported terrorism.

  However, what is beyond debate and is demonstratively factual, is that as we showed earlier today, ever since Obama’s election, gun sales have soared, mostly over concerns that the president, who has been very forthright with his anti-gun agenda, could make selling of weapons illegal with an unexpected executive order at any moment.

  

   

  What we also showed, is that over the past 20 years, the murder rate in the US has steadily declined even as total new gun sales have risen. While correlation does not equal causation, in this particular case the case can be made that it is Van Blacrum whose response is fundamentally right.

  

   

  However, where things get truly deranged, is that just 100 miles south of this update county, another democrat, this time NYC mayor Bill de Blasio is taking on gun makers directly, in a way he hopes to really make them hurt, by forcing New York pension funds to sell their shares.

  According to the NYT, New York City Mayor Bill de Blasio urged the city’s pension funds on Friday to divest their holdings in stocks of gun makers after this week’s mass shooting in San Bernardino, California. This has precedent: two of the funds in the city’s $155 billion pension system dropped their holdings in gun manufacturers such as Smith & Wesson Holding Corp and Sturm Ruger & Co Inc after the Sandy Hook school shooting in 2012. This time de Blasio is targeting everyone.

  Those two funds were the New York City Employees Retirement System and the New York City Teachers Retirement System. Funds for the city’s police and fire departments and the city’s board of education have not divested.

   

  “I call on all government pension funds in New York City and across the country to divest immediately from funds that include assault weapon manufacturers,” de Blasio said in a statement. De Blasio also appealed to private investors to dump gun stocks and funds that invest in them.

  This is what happens when punitive socialism meets capital markets: “the mayor urged the city comptroller “to divest as soon as possible if no verifiable assurance is given that assault weapons will not be sold to civilians.” The comptroller’s office, which oversees the funds, said it was down to the mayor to present detailed plans to pension fund board members. “We look forward to receiving that proposal,” said John McKay, a spokesman for the comptroller. “Gun violence is a real and constant threat to our children, families and communities.”

  Ironically, NY pension investments in gun makers across the three funds amounted to a paltry $2.1 million, as of Sept. 30 – in other words selling their stakes would maybe impact the stock price by 1 cent or so.

  These two dramatically opposing reactions to the same “terrorist” event, which one can claim the US brought on itself with the CIA’s creation of the Islamic State as a clandestine method to overthrow Syria’s president al Assad, and by two people who are both democrats, shows just how ridiculous the gun control debate is set to become in the coming days.

  At this point, if we had to forecast the final outcome, we would say that just as we accurately predicted the terrorist events in Paris two months earlier, so this time the “terrorist attacks” together with comprehensive 24/7 TV coverage, in the US will get worse and worse until one of two things happen, if not both: the NSA will see all of its surveillance powers reinstated legally in the coming months, while the US will see increasingly more escalating “attacks” until ultimately Obama’s crackdown on gun sales and possession hits its breaking point and the president’s gun confiscation mandate is finally executed. We hope we are wrong.

  

  

  

  

  

• Indian Government Shifts Focus to Temple Stash After Failing To Get Citizens' Gold

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  The scheme has only attracted about one kilogram in a month, prompting the government to nudge temples through banks to hand over their treasures, the sources said, but at least one temple said it was still unconvinced by the plan.

   

  “Convincing retail consumers is not an easy task, it takes time,” said a senior official with a state bank, who declined to be named. “We’re planning now to focus on institutions like temples.”

   

  A finance ministry official said if banks fail to win over temples, the government could intervene directly by talking to the temples as it is looking for a big boost to the scheme to keep both imports and the current account deficit under control.

   

  – From the Reuters article: India Targets Temple Gold Hoard to Rescue Monetization Plan

  The Indian government has been trying to get its citizenry to relinquish its gold to the bankers for a very long time. I’ve covered this saga periodically over the past several years, most recently in last month’s post, A Warning to Indian Citizens – Your Government Wants Your Gold. Here’s an excerpt:

  India’s prime minister on Thursday unveiled three state-backed plans to try to tap the stockpiles of the precious metal to trim physical demand and reduce imports by providing people with alternative avenues for investment. At an event in New Delhi, Modi announced the formal start of a gold-deposit plan, a sovereign-bond program linked to the metal’s price and introduction of locally minted coins, some bearing the face of Mahatma Gandhi.

   

  Under the gold-deposit plan, investors can deposit a minimum of 30 grams with banks to earn interest, and at maturity either redeem the gold or cash, according to a government statement in June. Banks holding the bullion will be free to sell or lend the gold to jewelers, thereby boosting supply. The planned sovereign-bond issue will be open to investors from Thursday up to Nov. 20, the Reserve Bank of India said on Nov. 3.

  So how is the scheme working out thus far? Not well. Not well at all.

  Reuters reports:

  India is trying to persuade rich temples to deposit some of their gold hoards with banks to revive a plan to recycle tonnes of the precious metal and cut gold imports, sources said.

   

  The scheme has only attracted about one kilogramme in a month, prompting the government to nudge temples through banks to hand over their treasures, the sources said, but at least one temple said it was still unconvinced by the plan.

   

  In a bid to reduce the economically crippling imports, Prime Minister Narendra Modi launched the much-publicised scheme to tap a pool of more than 20,000 tonnes of gold lying idle in homes and temples.

   

  "Convincing retail consumers is not an easy task, it takes time,” said a senior official with a state bank, who declined to be named. “We’re planning now to focus on institutions like temples.”

   

  But Mumbai’s two-century-old Shree Siddhivinayak temple, which is devoted to the Hindu elephant-headed god Ganesha, said it remained unconvinced about the benefits.

   

  Modi wants temples to deposit some of this with banks, in return for interest and cash at redemption. The government would melt the gold and loan it to jewelers.

   

  A finance ministry official said if banks fail to win over temples, the government could intervene directly by talking to the temples as it is looking for a big boost to the scheme to keep both imports and the current account deficit under control.

  Well sure. As is standard operating procedure with government, if voluntarism fails, use coercion.

  Despite offering slightly better interest rates than past schemes, the government is finding it difficult to break families’ attachment to their jewellery. Gold is used mainly as wedding gifts, religious donations and as an investment.

  “After melting, banks will deduct impurity that will cut the net weight,” said Narendra Murari Rane, chairman of the trust for the Siddhivinayak temple.

   

  The temple, which has 160 kg of gold and is partly plated in the precious metal, is nevertheless examining the scheme.

   

  The Tirupati temple in Andhra Pradesh state will hold a meeting soon to consider participating, an official said.

  You’ve been warned.

  *  *  *

  For prior articles on this topic, see:

  A Warning to Indian Citizens – Your Government Wants Your Gold

  India’s Central Bank Will Sell Gold on the Market in Exchange for Gold at the Bank of England

  The Times of India: “Almost Every Passenger on a Flight from Dubai to Calicut Was Found Carrying 1kg of Gold”

  Gold Smuggling Increases 7x in India and Surpasses Illegal Drug Trade

  Indian Temples Fight Back Against Government Gold Grabbing Plot

  

  

  

  

  

• Caught On Tape: Russia Destroys ISIS Oil Transport Cars, Al-Qaeda Training Camp

  From a reputational perspective, this was a decisively bad week for Turkey. In the immediate aftermath of Ankara’s brazen move to shoot down a Russian Su-24 near the Syrian border, Vladimir Putin accused the country of being complicit in the funding on ISIS. 

  Those allegations stung, especially in light of the fact that Putin delivered the accusations while sitting right next to Jordan’s King Abdullah. What Turkey didn’t know, however, was that The Kremlin fully intended to launch an all-out PR campaign to implicate Erdogan and his family in the funding of international terrorism.

  In a dramatic presentation delivered on Wednesday, the Russian MoD outlined the supply routes ISIS uses to smuggle its stolen crude and as it turns out, all roads literally lead to Turkey. This is of course broadly consistent with our assessment of the situation as outlined in the following four pieces: 

  • The Most Important Question About ISIS That Nobody Is Asking
  • Meet The Man Who Funds ISIS: Bilal Erdogan, The Son Of Turkey’s President
  • How Turkey Exports ISIS Oil To The World: The Scientific Evidence
  • ISIS Oil Trade Full Frontal: “Raqqa’s Rockefellers”, Bilal Erdogan, KRG Crude, And The Israel Connection

  This all comes on the heels of Russian airstrikes on ISIS oil convoys which Moscow claims provoked Ankara to engage The Kremlin’s warplane late last month. 

  Well, if you thought Russia was set to let up on destroying Islamic State oil trucks and crude infrastructure, or on bombing ISIL and al-Nusra (both of which are supported by Turkey, Saudi Arabia, and Qatar) you can think again, because as the following clips show, Moscow is now hell bent on proving a point to the financiers of Sunni extremism. 

  A strike on an “automobile column transporting oil products” in Aleppo:

  Russian bombers, meet al-Nusra training camp:

  

  

  

  

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• No, Bank Bailouts HAVEN’T Ended

  

   

  CNN headlines, “Fed Ends ‘Too Big to Fail’ Lending to Collapsing Banks”.

  Sounds good …

  But CNN quickly backtracks:

  “There are still loopholes that the Fed could exploit to provide another back-door bailout to giant financial institutions,” [Congresswoman Elizabeth] Warren, a Democrat, told CNNMoney.

   

  ***

   

  It’s important to note that the new rule allows the Fed to judge by its own measures whether a firm qualifies for its emergency aid.

   

  The idea is the Fed can still lend to banks during times of emergency, but the bank must be able to pay it back. Yet the true health of a bank in turmoil can be very difficult to assess.

   

  “It’s very hard to judge in real time whether a firm is insolvent or just having liquidity problems because it becomes impossible to price assets,” says Paul Ashworth, chief U.S. economist at Capital Economics, a research firm.

   

  That’s why Warren wants clearer guidelines.

   

  “It’s up to Congress to close those loopholes and ensure that Fed emergency lending is limited to protecting the economy and not to saving a few favored banks,” Warren says.

   

  ***

   

  The Fed performs “stress tests” on banks to see how they perform in a mock financial crisis scenario. It’s also forced banks to increase the amount of cash they have stashed away to weather the next rainy day.

  As we reported in 2009, the stress tests are a sham:

  • Time Magazine called the previous stress tests a “confidence game” and Geithner a “con man” for running them deceptively

  • Paul Krugman called the stress tests a mere “self-esteem class” for banks that no bank would be allowed to fail

  • Nouriel Roubini said the stress tests “fail the basic criterion of a reality check”

  • William K. Black called them “a complete sham”

  • FDIC head Sheila Bair didn’t believe they were credible

  • The stress tests were a P.R. stunt devised by the banks themselves

  • The government has more or less admitted that the stress tests were meaningless (see this and this)

  We noted in 2011 that the the heads of the Federal Reserve and Treasury Department lied about the health of the big banks in pitching bailouts to Congress and the American people:

  The big banks were all insolvent during the 1980s.

   

  And they all became insolvent again in 2008. See this and this.

   

  The bailouts were certainly rammed down our throats under false pretenses.

   

  But here’s the more important point. Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not. They were insolvent.

   

  Tim Geithner falsely stated that the banks passed some time of an objective stress test but they did not. They were insolvent.

  In addition, the $700 billion 2008 bailout was just one aspect of the government’s ongoing bailouts of the too big to fail banks.  A leading banking analyst says that the giant banks are receiving $780 billion dollars each and every year through various types of hidden bailouts.

  In other words, the “end”  of the type of bailout discussed by CNN doesn’t touch the other massive, ongoing bailouts of the big banks.

  Moreover, the powers-that-be may be setting us up for “bail-ins”, where banks simply grab our deposit money and use it to plug the holes in their balance sheets.

  The bottom line:  Beneath the headlines, the truth is that the financial reform legislation has NOT really ended the bailouts … and things are only getting worse.

  

  

  

  

• 11 "Alarm Bells" That Show The Global Economic Crisis Is Getting Deeper

  Submitted by Michael Snyder via The Economic Collapse blog,

  Economic activity is slowing down all over the planet, and a whole host of signs are indicating that we are essentially exactly where we were just prior to the great stock market crash of 2008.  Yesterday, I explained that the economies of Japan, Brazil, Canada and Russia are all in recession.  Today, I am mainly going to focus on the United States.  We are seeing so many things happen right now that we have not seen since 2008 and 2009. 

  In so many ways, it is almost as if we are watching an eerie replay of what happened the last time around, and yet most of the “experts” still appear to be oblivious to what is going on.  If you were to make up a checklist of all of the things that you would expect to see just before a major stock market crash, virtually all of them are happening right now.  The following are 11 critical indicators that are absolutely screaming that the global economic crisis is getting deeper…

  #1 On Tuesday, the price of oil closed below 40 dollars a barrel.  Back in 2008, the price of oil crashed below 40 dollars a barrel just before the stock market collapsed, and now it has happened again.

  

   

  #2 The price of copper has plunged all the way down to $2.04.  The last time it was this low was just before the stock market crash of 2008.

  

   

  #3 The Business Roundtable’s forecast for business investment in 2016 has dropped to the lowest level that we have seen since the last recession.

  

   

  #4 Corporate debt defaults have risen to the highest level that we have seen since the last recession.  This is a huge problem because corporate debt in the U.S. has approximately doubled since just before the last financial crisis.

  

   

  #5 The Bloomberg U.S. economic surprise index is more negative right now than it was at any point during the last recession.

  

   

  #6 Credit card data that was just released shows that holiday sales have gone negative for the first time since the last recession.

  

   

  #7 As I mentioned yesterday, U.S. manufacturing is contracting at the fastest pace that we have seen since the last recession.

  

   

  #8 The velocity of money in the United States has dropped to the lowest level ever recorded.  Not even during the depths of the last recession was it ever this low.

  

   

  #9 In 2008, commodity prices crashed just before the stock market did, and late last month the Bloomberg Commodity Index hit a 16 year low.

  

   

  #10 In the past, stocks have tended to crash about 12-18 months after a peak in corporate profit margins.  At this point, we are 15 months after the most recent peak.

  

   

  #11 If you look back at 2008, you will see that junk bonds crashed horribly. 

  

  Why this is important is because junk bonds started crashing before stocks did, and right now they have dropped to the lowest point that they have been since the last financial crisis.

  

  Bonus Alarm #12: The US Services economy is weakening in its usual lagged way to manufacturing. This is a problem as the narrative has been that Services will save the economy even as manufacturing collapses.

  

   

  If just one or two of these indicators were flashing red, that would be bad enough.

  The fact that all of them seem to be saying the exact same thing tells us that big trouble is ahead.

  And I am not the only one saying this.  Just today, a Reuters article discussed the fact that Citigroup analysts are projecting that there is a 65 percent chance that the U.S. economy will plunge into recession in 2016…

  The outlook for the global economy next year is darkening, with a U.S. recession and China becoming the first major emerging market to slash interest rates to zero both potential scenarios, according to Citi.

   

  As the U.S. economy enters its seventh year of expansion following the 2008-09 crisis, the probability of recession will reach 65 percent, Citi’s rates strategists wrote in their 2016 outlook published late on Tuesday. A rapid flattening of the bond yield curve towards inversion would be an key warning sign.

  Personally, I am convinced that we are already in a recession.  There is a lag in the official numbers, so often we don’t know that we are officially in one until it is well underway.  For example, we now know that a recession started in early 2008, but in the summer of 2008 Ben Bernanke and our top politicians were still insisting that there was not going to be a recession.  They were denying what was actually happening right in front of their eyes, and the same thing is happening now.

  And of course if the government was actually using honest numbers, we would all be talking about the recession that never seems to end.  According to John Williams of shadowstats.com, honest numbers would show that the U.S. economy has continually been in recession since 2005.

  But just like in 2008, the “experts” at the Federal Reserve are assuring all of us that everything is going to be just fine.  In fact, Janet Yellen is convinced that things are so rosy that she seems quite confident that the Fed will raise interest rates in December…

  Federal Reserve Chair Janet Yellen signaled Wednesday that the Fed is all but certain to raise interest rates this month for the first time in nearly a decade, saying that gains in the economy and labor market have met the central bank’s goals.

   

  Her comments at the Economic Club of Washington amount to the strongest indication the Fed has provided so far that it will take action at a December 15-16 meeting.

  This is the exact same kind of mistake that the Federal Reserve made back in the late 1930s.  They thought that the U.S. economy was finally recovering, and so interest rates were raised.  That turned out to be a tragic mistake.

  

   

  But this time around, any mistake that the Fed makes will have global consequences.  The rising U.S. dollar is already crippling emerging markets all around the globe, and an interest rate hike will just push the U.S. dollar even higher.  For much more on this, please see my previous article entitled “The U.S. Dollar Has Already Caused A Global Recession And Now The Fed Is Going To Make It Worse“.

  Many people are waiting for “the big crash”, but the truth is that almost everything has crashed already.

  • Oil has crashed.
  • Commodities have crashed.
  • Gold and silver have crashed.
  • Junk bonds have crashed.
  • Chinese stocks have crashed.
  • Dozens of other stock markets around the world have already crashed.

  But the “big event” that many are waiting for is the crash of U.S. stocks.  And just like in 2008, it is inevitable that a U.S. stock crash will follow all of the other crashes that I just mentioned.

  Sometimes I get criticized for issuing these kinds of alarms.  But just think of how many people could have been helped if they would have known that the financial crisis of 2008 was going to happen ahead of time.

  The exact same patterns that we experienced back then are playing out once again right in front of our eyes, and the more people that we can warn in advance the better.

  

  

  

  

  

• "But It's Just A 0.25% Rate Hike, What's The Big Deal?" – Here Is The Stunning Answer

  After today’s market plunge, the result of what even Goldman admitted may have been a major policy error by the ECB, suddenly the Fed’s determination to hike rates in two weeks lies reeling on the ropes. After all, what the ECB did was an implicit tightening of reverse QE1 proportions  (it is no accident that the EURUSD is soaring as much as it did in March 2009 when the Fed unleashed QE).

  But assuming the Fed is still intent on hiking at all costs, and does just that in two weeks time, a question many are asking is where will General Collateral repo trade in case the Fed does decided to push rates higher by 0.25%: after all the Reverse Repo-IOER corridor is the most important component of the Fed’s rate hike strategy, one which better work or otherwise the Fed will be helpless to raise rates with some $3 trillion in excess liquidity sloshing around, and what little credibility it has will be gone for good.

  And much more importantly, what are the liquidity implications from such a move.

  For the answer we go to the repo market expert, Wedbush’s E.D. Skyrm. Here are his thoughts:

  Where will General Collateral trade when the fed funds target range is moved 25 basis points higher to .25% to .50%? In the most simple method, GC has averaged about .15% for the past month, which implies a GC rate around .40% after the Fed move.

   

  

   

  However, given the unprecedented amount of liquidity in the financial system, there’s a belief the Fed will have problems moving overnight rates higher.

   

  We have two quantifiable events over the past few years where the Fed moved Repo rates higher or lower: quarter-end and the QE programs. Given there are so many moving parts, consider these to be very rough estimates: Beginning in 2015, when funding pressure began each quarter-end, the market, on average, took approximately $255B additional collateral from the Fed and, on average, GC rates averaged 20.5 basis points higher.

   

  In 2013 on my website, I calculated that QE2 moved Repo rates, on average, 2.7 basis points for every $100B in QE. So, one very rough estimate moved GC 8 basis points and the other 2.7 basis points per hundred billion. In order to move GC 25 basis points higher, in a very rough estimate, the Fed needs to drain between $310B and $800B in liquidity.

  If readers didn’t just have an “oops” moment, please reread the last bolded sentence until they do, because it explains precisely what the market is missing about the Fed’s rate hike cycle: according to Skyrm’s calculations, to push rates by a paltry 25 bps, the smallest possible increment, what the Fed will have to do is drain up to a whopping $800 billion in liquidity!

  Putting that in context, QE2 – which pushed the S&P higher from November 2010 until June 2011 – was “only” $600 billion.

  In other words, to “prove” to itself that it is in control and the economy is viable, the Fed will effectively conduct, via reverse repo, an overnight QE2…. only in reverse.

  For those who think this will have a positive, or even neutral, impact on risk assets, we have several bridges located in Brooklyn that we are looking to offload at 150% of par. Please send your BWICs to the usual address.

  

  

  

  

  

• Money Is Becoming Unmanageable

  Submitted by John Rubino via DollarCollapse.com,

  Some of the money managers who made names (and billions of dollars) for themselves in the past decade are suddenly failing:

  Hedge Funds Brace for Redemptions

   

  (Bloomberg) – When BlueCrest Capital Management told investors Tuesday it would no longer oversee money for outsiders, one thing founder Michael Platt didn’t mention was that clients had already pulled billions of dollars this year.

   

  Platt, who cited client demands and pressure on fees as a reason for his decision, isn’t alone in feeling the heat from investors. Firms including Och-Ziff Capital Management Group LLC and Mason Capital Management have seen cash flee this year, and others such as Fortress Investment Group LLC’s macro funds business shut down after redemptions and losses.

   

  Hedge fund investors are losing patience even with marquee firms as many of them struggle this year, especially those that offer macro strategies or stock funds heavily weighted to rising shares. Some managers have lost money for two years running, while others such as David Einhorn’s Greenlight Capital are suffering declines that rival their worst year. After the weakest third-quarter inflows in six years, the industry could see outflows in the fourth quarter, said investors and bankers who watch the ebb and flow of hedge fund assets.

   

  “The fourth quarter will be flat and possibly negative,” said Peter Laurelli, head of research at Evestment Alliance, which tracks hedge fund investments.

   

  Among the most prominent losers in the second half is Bill Ackman, whose Pershing Square Capital Management is down more than 17 percent in 2015 through November. The firm has been hurt by its investment in Valeant Pharmaceuticals International Inc., whose shares have slumped 31 percent this year amid scrutiny over drug prices.

   

  Einhorn’s Greenlight Capital has declined 21 percent this year, as positions such as SunEdison Inc., Consol Energy Inc. and Micron Technology Inc soured. Einhorn’s worst annual loss was in 2008, when his fund fell 23 percent.

   

  Others firms have been losing money for more than a year. Mason Capital, an event-driven fund based in New York, was down about 20 percent from the start of 2014 through this year’s third quarter, according to investors. Assets fell to about $5.6 billion from about $9 billion at the end of last year.

   

  Fortress Investment Group LLC said in October it was closing its $2.3 billion macro business run by Michael Novogratz after posting losses for almost two years. Earlier that month, Bain Capital decided to shutter its Absolute Return Capital fund after more than three years of declines.

   

  At BlueCrest, assets have shrunk by more than 40 percent this year to $7.9 billion, mostly from withdrawals after years of lackluster returns in what was once its biggest fund. New Jersey’s public pension plan decided to pull $284 million from one international fund as of June 30, citing “disappointing” returns just over a year after adding to its investment.

  Why are the worlds’ most successful investors having so much trouble lately? The short answer is that the markets they used to understand have been replaced by something very different. Consider:

  Starting in the late 1990s, every crisis with even a hint of systemic import – which would have provided information for market participants about what not to do – has been short-circuited with easy money, lower interest rates and directed bail-outs. Where a properly-functioning financial market would have signaled banks and leveraged speculators to ease up on the risk taking, the “Greenspan put” said “do whatever you want, we’ll fix it if you fail.” The result was a massive increase in leverage across the board, to the point where virtually every government and many corporations and individuals now carry unprecedented amounts of debt.

   

  While the world was leveraging itself to the hilt, governments and big banks were manipulating virtually every major market for, respectively, political gain and trading profits. The list of indexes and instruments that are or have been messed with include LIBOR, long and short-term sovereign interest rates, blue chip equities, gold, developed world currencies, emerging market currencies, mortgage backed bonds and various kinds of swap contracts. In each of these (and many other) sectors, fundamentals no longer matter, leaving investors with no tea leaves worth reading.

   

  Last but not least, financial crises lead to geopolitical turmoil. With the Middle East engulfed in end-to-end war, the US butting heads with Russia and China in, respectively, Syria and the South China Sea, and Europe being swamped by millions of Middle Eastern refugees and the rise of anti-euro political parties, market price signals, to the extent they exist at all, are being drowned out by geopolitical noise, which is another way of saying that political risk now trumps economic/financial fundamentals.

  In this new, post-market world, money managers can’t separate signal from noise and end up on the wrong end of wild swings in commodities, currencies and interest rates. And now their clients are figuring this out.

  

  

  

  

  

• Auto Loan Madness Continues As US Car Buyers Take On Record Debt, Lunatic Financing Terms

  Way back in June, we noted that auto sales had reached 10-year highs on record credit, record loan terms, and record ignorance. We based that assessment on the following set of Q1 data from Experian: 

  • Average loan term for new cars is now 67 months — a record.
  • Average loan term for used cars is now 62 months — a record.
  • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
  • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
  • The average amount financed for a new vehicle was $28,711 — a record.
  • The average payment for new vehicles was $488 — a record.
  • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

  In short, the “renaissance” in US auto sales is being driven (no pun intended) by increasingly risky underwriting practices and this is leading directly to the securitization of shoddier and shoddier collateral pools in a return to the “originate to sell” model that drove the housing bubble over a cliff in 2008.

  As Comptroller of the Currency Thomas Curry recently put it, “what’s happening in the auto loan market reminds me of what happened in mortgage-backed securities in the run-up to the crisis.” 

  Of course you can count on Experian and its incomparable senior director of automotive finance Melinda Zabritski (who never saw a subprime loan with ridiculous terms she didn’t like) to let you know that as dangerous as this dynamic most certainly is, everything will be fine. 

  On Wednesday, Experian released data for Q3 and well, let’s just say that the trend we’ve observed and documented over the past two quarters is still intact. 

  First, the percentage of new and used vehicles with financing rose to 86.6% and 55.3%, respectively. The trend is readily apparent: 

  

  Next, the number of leased vehicles as a percentage of the total continues to rise: 

  

  The percentage of subprime and nonprime in the leasing category rose meaningfully Y/Y:

  

  And the average credit score on loans for new vehicles just hit its lowest level since before the crash:

  

  While the average amount financed is up across the board:

  

  As are average payments:

  

  And loan terms:

  

  “As the price for a new or used vehicle continues to rise, leasing has become a more viable financing option for consumers looking to maintain an affordable monthly payment,” the aforementioned Melinda Zabritski said on Wednesday.

  Well yes Melinda, leasing has become a “more viable financing option” for people who otherwise couldn’t afford a car as has acquiescing to the extension of loan terms. On the lender side of the equation, continuing to feed Wall Street’s securitization machine means constantly expanding the finite pool of eligible borrowers and that means lower underwriting standards. 

  What’s incredible here is that Experian should be shouting about this from the rooftops and instead they’re making up excuses for why it isn’t a disaster waiting to happen. Auto loan ABS supply is set to rise by a quarter this year to around $125 billion and keeping that party going means making more loans. For those who missed it, here’s a look at the latest data from the NY Fed on originations by FICO:

  

  See a problem there? 

  Of course the bigger question for the US economy is this: what happens when this bubble bursts just as auto inventories hit their highest levels relative to sales since 2009?

   

  

  

  

  

• General Wesley Clark: ISIS Serves Interests Of US Allies Turkey And Saudi Arabia

  Submitted by Claire Bernish via TheAntiMedia.org,

  "Let’s be very clear: ISIS is not just a terrorist organization; it is a Sunni terrorist organization. That means it blocks and targets Shi’a. And that means it’s serving the interests of Turkey and Saudi Arabia – even as it poses a threat to them." – Retired Gen. Wesley Clark

  Former NATO Supreme Allied Commander General and retired U.S. General Wesley Clark revealed in an interview with CNN that the Islamic State (Daesh, ISIS) remains geostrategically imperative to Sunni nations, Turkey and Saudi Arabia, as they clamor for strategic power over Shi’a nations, Syria, Iraq, and Iran. He explained that “neither Turkey nor Saudi Arabia want an Iran-Iraq-Syria-Lebanon ‘bridge’ that isolates Turkey, and cuts Saudi Arabia off.”

  When asked by the CNN host if Russian President Vladimir Putin’s suggestion that Turkey was “aiding ISIS” had any validity, he responded:

  “All along there’s always been the idea that Turkey was supporting ISIS in some way. We know they’ve funneled people going through Turkey to ISIS. Someone’s buying that oil that ISIS is selling; it’s going through somewhere – it looks to me like it’s probably going through Turkey – but the Turks haven’t acknowledged that.”

  After explaining this virtual gateway for the Islamic State’s oil, Clark was quick to emphasize that Putin’s allegations about Turkey’s support for terrorist organization, ISIS, aren’t without their own hypocrisy. Russia, of course, has been upholding President Bashar al-Assad’s administration in Syria against rebel groups backed by the U.S. — despite continuing denials by U.S. officials that that particular theater is its primary interest in the region.

  He said, “Putin would like to dirty Turkey by saying it’s supporting terrorists, but the truth is that he’s supporting terrorists. I mean, the tactics used by the Assad regime have been terror tactics. They’re dropping barrel bombs on innocent civilians.”

  Clark concludes the interview with a statement that encapsulates growing sentiment of many Westerners who’ve grown war-weary with such geopolitical wrangling overseas:

  “There’s no good guy in this – this is a power struggle for the future of the Middle East.”

  

  

  

  

  

• Off-Balance Volume

  “Buying” versus “selling” volume has diverged dramatically in the last few weeks creating a dangerous sense of pre-Black-Monday deja-vu.

   

  We’ve seen this before.. very recently…

  

   

  Bigger picture, since the end of QE3, this pattern of divergence has been building…

  

   

  Is an imminent market crash just what The Fed needs to avoid making the same mistake it made in 1937…

   

  h/t @Not_Jim_Cramer

  Charts: Bloomberg

  

  

  

  

  

• 3 Things: Expected Returns, Returns, & Net Returns

  Submitted by Lance Roberts via STA Wealth Management,

  What Drives Returns

  John Coumarianos, via MarketWatch, penned a very interesting note recently with respect to the view that it is just "volatility" is driving prices.

  "The great economist John Maynard Keynes once said: 'Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.'

   

  Few recent writings display this phenomenon better than a blog post by Josh Brown, aka The Reformed Broker, the title of his well-read (usually deservedly so) website.

   

  Brown's post, cleverly titled "Why the stock market has to go down," incorrectly asserts that volatility is ultimately what rewards stock investors who have the ability to withstand it.

   

  This is the standard talk that most advisers give their clients. It comes from the academic 'efficient markets' or 'random walk' school of thought. And it is totally wrong.

   

  The truth is that the stock market doesn't owe you anything, no matter how volatile it is and no matter how long you wait."

  This is absolutely true. What drives stock prices (long-term) is the value of what you pay today for a future share of the company's earnings in the future. Simply put – "it's valuation, stupid." As John aptly points out:

  "Stocks are not magical pieces of paper that automatically deliver gut-wrenching volatility over the short run and superior returns over the long run. In fact, we've just had a six-year period with 15%-plus annualized returns and little volatility, but also a 15-year period of lousy (less than 5% annualized) returns.

  It's not just volatility; it's valuation.

   

  Instead of magical lottery tickets that automatically and necessarily reward those who wait, stocks are ownership units of businesses. That's banal, I know, but everyone seems to forget it. And it means equity returns depend on how much you pay for their future profits, not on how much price volatility you can endure."

  

  "And stocks are not so efficiently priced that they are always poised to deliver satisfying returns even over a decade or more, as we've just witnessed for 15 years. A glance at future 10-year real returns based on the starting Shiller PE (price relative to past 10 years' average, inflation-adjusted earnings) in the chart above tells the story. Buying high locks in low returns and vice versa.

   

  Generally, if you pay a lot for profits, you'll lock in lousy returns for a long time."

  Volatility is simply the short-term dynamics of "fear" and "greed" at play. However, in the long-term as stated it is simply valuation. As I showed earlier this week in "4 Warnings And Why You Should Pay Attention" I discussed valuation specifically stating:

  "Valuations are a very poor market timing device for short-term investors. However, from a long-term investment perspective, valuations mean a great deal as it relates to expected returns. Chris Brightman at Research Affiliates recently noted this exact point.

   

  'As a long-term investor, we experience short-term price volatility as opportunity, and high prices as risk.'

   

  With earnings growth deteriorating, and valuation expansion having ceased, the risk of high-prices has risen sharply."

  

   

  Nothing But "Net"

  One of the biggest myths perpetrated by Wall Street on investors is showing individuals the following chart and telling them over the "long-term" the stock market has generated a 10% annualized total return.

  

  The statement is not entirely false. Since 1900, stock market appreciation plus dividends have provided investors with an AVERAGE return of 10% per year. Historically, 4%, or 40% of the total return, came from dividends alone. The other 60% came from capital appreciation that averaged 6% and equated to the long-term growth rate of the economy.

  However, there are several fallacies with the notion that the markets long-term will compound 10% annually.

  1) The market does not return 10% every year. There are many years where market returns have been sharply higher and significantly lower.

   

  2) The analysis does not include the real world effects of inflation, taxes, fees and other expenses that subtract from total returns over the long-term.

   

  3) You don't have 145 years to invest and save.

  The chart below shows what happens to a $1000 investment from 1871 to present including the effects of inflation, taxes, and fees. (Assumptions: I have used a 15% tax rate on years the portfolio advanced in value, CPI as the benchmark for inflation and a 1% annual expense ratio. In reality, all of these assumptions are quite likely on the low side.)

  

  As you can see, there is a dramatic difference in outcomes over the long-term.

  From 1871 to present the total nominal return was 9.07% versus just 6.86% on a "real" basis. While the percentages may not seem like much, over such a long period the ending value of the original $1000 investment was lower by an astounding $260 million dollars.

  Importantly, the return that investors receive from the financial markets is more dependent on "WHEN" you begin investing as noted above. 

   

  Too Optimistic

  Following on with the point above, with valuations currently at the second highest level on record, forward returns are very likely going to be substantially lower for an extended period. Yet, listen to the media, and the majority of the bullish analysts, and they are still suggesting that markets should compound at 8% annually going forward as recently stated by BofA:

  "Based on current valuations, a regression analysis suggests compounded annual returns of 8% over the next 10 years with a 90% confidence interval of 4-12% (Table 2). While this is below the average returns of 10% over the last 50 years, asset allocation is a zero-sum game. Against a backdrop of slow growth and shrinking liquidity, 8% is compelling in our view. With a 2% dividend yield, we think the S&P 500 will reach 3500 over the next 10 years, implying annual price returns of 6% per year."

  However, there are two main problems with that statement:

  1) The Markets Have NEVER Returned 8-10% EVERY SINGLE Year.

  Annualized rates of return and real rates of return are VASTLY different things. The destruction of capital during market downturns destroys years of previous capital appreciation. Furthermore, while the markets have indeed AVERAGED an 8% return over the last 115 years, you will NOT LIVE LONG ENOUGH to receive the same.

  The chart below shows the real return of capital over time versus what was promised.

  

  The shortfall in REAL returns is a very REAL PROBLEM for people planning their retirement.

  2) Net, Net, Net Returns Are Even Worse

  Okay, for a moment let's just assume the Wall Street "world of fantasy" actually does exist and you can somehow achieve a stagnant rate of return over the next 10-years.

  As discussed above, the "other" problem with the analysis is that it excludes the effects of fees, taxes, and inflation. Here is another way to look at it. Let's start with the fantastical idea of 8% annualized rates of return.

  8% – Inflation (historically 3%) – Taxes (roughly 1.5%) – Fees (avg. 1%) = 3.5%

  Wait? What?

  Hold on…it gets worse. Let's look forward rather than backward.

  Let's assume that you started planning your retirement at the turn of the century (this gives us 15 years plus 15 years forward for a total of 30 years)

  Based on current valuation levels future expected returns from stocks will be roughly 2% (which is what it has been for the last 15 years as well – which means the math works.)

  Let's also assume that inflation remains constant at the current average of 1.5% and include taxes and fees.

  2% – Inflation (1.5%) – Taxes (1.5%) – Fees (1%) = -2.0%

  A negative rate of real NET, NET return over the next 15 years is a very real problem. If I just held cash, I would, in theory, be better off.

  However, this is why capital preservation and portfolio management is so critically important going forward.

  There is no doubt that another major market reversion is coming. The only question is the timing of such an event which will wipe out the majority of the gains accrued during the first half of the current full market cycle. Assuming that you agree with that statement, here is the question:

  "If you were offered cash for your portfolio today, would you sell it?"

  This is the "dilemma" that all investors face today – including me.

  Just something to think about.

  

  

  

  

  

• Markets In Turmoil – Bonds, Stocks, & Dollar Dumbstruck After Disappointing Draghi & Dire Data

  Draghi has one message for everyone today…

   

  US equities had their worst day since September 28th…

  

   

  US Treasuries were a bloodbath…

  

   

  European equities were an even bigger bloodbath…

  

   

  As DAX gave back all its Paris gains… (down over 500 points and back below 10,700)

  

   

  As European bonds utterly crashed… (Bunds seen here across the curve were massive percentage moves)

  

   

  All driven by The 3 'D's…

  • Domestic Terrorism hinted at… and the use of the word 'radicalized' spooked a number of markets
  • Draghi Disappointed – grossly over-promised and under-delivered, trapped in a corner of QE limitations and admitt8ing it failed.
  • Dire Data – US macro plunged to its lowest level in 6 months… (bonds seem to get it)… with durable goods, factory orders, and ISM Services all crushing The Fed's narrative.

  

   

  *  *  *

  On the day, Trannies were worst but broadly speaking, the entire equity market dumped in a highly correlated manner… (notthe bounce into the EU Close then dump)

  

   

  FANGs are not helping…

  

   

  Futures show it's been quite a week and now all major indices are red post-Russia-Turkey…

  

   

  After Europe closed, stocks kept falling…

  

   

  Some notable breaks:

  • All major US equity indices are now negative year-to-date (aside from NASDAQ)
  • S&P 500 broke below its 200DMA (also got close to it 50DMA before bouncing)
  • Dow broke below its 200DMA
  • Small Caps (Russell 2000) broke below its 100DMA
  • Trannies broke below all technical support to 2 month lows

  Biotechs plunged  from the 100DMA to break the 50DMA…

  

   

  Commentators were confused why Energy stocks dropped while oil rose… this is why – they had decoupled from raw reality a month ago…

  

   

  VIX soared over 3 handles – almost touching 20 and breaking above its 50, 100, and 200DMA… This was thebiggest percentage rise in VIX since Black Monday

  

   

  Treasuries were a disaster, extending losses after Europe closed…

  

   

  Credit markets have been crushed with the junkiest junk now at 6 year high yields…

  

   

  The USD Index crashed 2.25% – its biggest single-day drop since March 2009…. (having hit 12 year highs yesterday) Put another way – today's lack of ECB action had the same effect on the USD as The Fed's unleashing of QE in 2009!

  

   

  Led by Swissy and EUR strength…

  

   

  Gold is now the week's biggest gainer in the commodity space (crude the loser) as the entire space picked up on USD weakness…

  

   

  Crude's been volatile heading into tomorrow…

  

   

  Charts: Bloomberg

  

  

  

  

• How Bull Markets End

  Submitted by Jared "The 10th Man" Dillian via MauldinEconomics.com,

  Many people think that they ring a bell at the top of a bull market. Ding-a-ling-a-ling.

  That is indeed often the case. The bell was rung in 2000 at the top of the dot-com bubble—I like to think it was 3Com spinning off Palm that broke its back.

  But sometimes there is no bell, no catalyst, no story to tell. A bull market becomes a bear market, and it happens just like that.

  Silicon Valley has been in a food fight for about three years now. Everyone knows it’s going to end, except for the folks in Silicon Valley. These guys are funny. I met a few of them in the last cycle. They really thought it was going to go on forever.

  There are now 145 unicorn companies (private companies with a valuation of $1 billion or more), with a total combined valuation of $506 billion.

  We are watching the top happen right before our eyes.

  Square

  If you were paying attention a couple of weeks ago, you might have read the news about a company called Square going public. Jack Dorsey is the CEO of Square. He is also the CEO of Twitter. I think of this sometimes whenever I complain that I’m too busy.

  Square got a round of financing in 2014 at a $6 billion valuation, and now it’s a public company. If you pull up SQ on Yahoo! Finance, you will see that the market cap is $4 billion.

  As Square was making the rounds in the roadshow, investors decided they didn’t want to overpay just to make the mezzanine round investors rich. So there wasn’t much demand for Square at a $6 billion market cap. It eventually went public at a $3 billion market cap, or $9/share. (The deal performed well in the aftermarket, at least. The stock is trading at $12.)

  No catalyst. No bell ringing. The price simply got too high, and people pulled back. But you know what this means. If one deal can trade below private valuations, they can all trade below private valuations.

  On to the next data point…

  Fidelity

  You may not know this, but Fidelity owns shares of private companies in some of its funds (like Contrafund). Fidelity has to figure out how to value these things.

  In general, venture capital firms have to mark their investments to “market,” whatever that means. To do this, they use the services of third party valuation firms. Those valuation guesses are probably subject to mood or opinion, and as you can imagine, there are a lot of bad guesses. The valuations don’t mean much—if you’re an LP (limited partner), at the end of the day, you care about cash in and cash out. But mark-to-market creates some interesting short-term incentives.

  As for Fidelity, they also have to mark things to market, and they also use valuation firms. But valuation firm A that Sequoia is using is different than valuation firm B that Fidelity is using. And Fidelity perhaps wants its valuation firm to be more conservative.

  So Fidelity has been marking its private investments to market at levels that are below the most recent funding rounds. This puts the VCs in a bit of a pickle. Do they copy Fidelity or do they press on with their own, higher valuations in the face of dissenting opinions?

  None of this makes people very bullish on startups.

  Uber

  Uber is the biggest unicorn of all, with a $50 billion valuation. Side note: they don’t make any money.

  Uber is trying to raise another billion—at a $70 billion valuation.

  Now, the only reason you would invest in Uber at a $70 billion valuation is if you thought they would go public at $80 billion or more. But looking at what happened to Square, that will almost definitely not happen.

  And why would you pay $70 billion for Uber when Fidelity is going to mark it in your mush? Another great question.

  I don’t think anyone is in the mood to pay $70 billion for Uber. Uber is stuck. They will have to go public or take a down round if they really need the cash.

  And this, folks, is how bear markets start.

  Brainstorming Session

  So let’s do some brainstorming on what this could mean if it really were the end of the line for Silicon Valley (at least in the medium term).

  • Since tech has been going up while energy/mining has been going down, could this trend reverse?
  • Could value start to outperform growth? (If I’m not mistaken, it already is.)
  • Could large cap start to outperform small cap? (Boy, is it ever.)
  • If you lived in the Bay Area, would you want to sell your house and rent?
  • As new tech is in the process of topping, have you seen what old tech has been doing? Check out the chart of Microsoft, at 15-year highs:

  

  For full disclosure, I started calling the top (or at least asking hard questions) on Silicon Valley about a year and a half ago. But I think most dedicated observers saw what happened with the Square IPO and said, “Yep, that might be the top.”

  The other thing I’ve learned is that even when people recognize the top, they vastly underestimate how bad the pain is going to be on the downside. “Oh, it’ll just be a quick correction.” Never is.

  One last riposte: Anyone who invested at these valuations will richly deserve what’s coming to them. Those prices were cuckoo.

  

  

  

  

  

• In Addition To Swimming In Feces, Olympians Will Have To Pay For AC In Brazil

  In late July we said Brazil was sliding into a depression.

  We based that assessment, in part anyway, on the following graphic from Goldman:

  

  It would only take the bank four months to agree with our summary of their own analysis (Alberto Ramos called it a “depression” on Tuesday after a decidedly abysmal GDP print). 

  Accompanying our depression call was the following assessment of Brazil’s preparations for the upcoming Olympic games in Rio: 

  The Brazilian economy hit its metaphorical, and literal, bottom earlier today when AP reported that, with the Brazil Olympics of 2016 just about 1 year away,“athletes in next year’s Summer Olympics here will be swimming and boating in waters so contaminated with human feces that they risk becoming violently ill and unable to compete in the games.” 

   

  In other words, competitors in Brazil’s olympic games will be swimming in shit.

  Brazil was, and still is, literally up shit creek without a paddle. 

  Well as you might have surmised based on the release of a series of economic data so bad that analysts are having trouble coming up with new ways to describe the situation, the outlook for next year’s summer games hasn’t improved. In fact, things have worsened materially to the point that now, athletes will be asked to pay for their own air conditioning. 

  As Bloomberg reports, “following a new round of cost-cutting by the Rio 2016 organizers, athletes will be asked to pay for the air conditioning in their dorm rooms, stadium backdrops will be stripped to their bare essentials, and fancy cars and gourmet food for VIPs are out.”

  
  

  In short, organizers can no longer depend on the government (and who knows what the government will look like by the time the games commence) to fund cost overruns. That means spending only as much as Brazil expects to take in from sponsorships, ticket sales, and a grant from the International Olympic Committee. 

  Apparently, the games were already some $520 million over budget. The government was supposed to cover that (and more) but obviously that’s out of the question given Brazil’s worsening fiscal crisis. “By the time the Games begin, the committee plans to have 500 fewer paid staff than the 5,000 it originally expected,” Bloomberg notes, adding that “the deepest cuts will probably come from operational areas like catering, transportation and cleaning services.”

  As for the athletes, well obviously they’re a bit concerned. 

  “The world wants to tune in and watch the world’s greatest athletes compete at the absolute highest level,” Nick Symmonds, a two-time Olympic runner said. “If you don’t provide them with good food, a good place to sleep and comfortable temperature, they won’t be able to recover and bring the A-plus product that the world is demanding. To cut the budget on athletes’ hospitality and comfort, that’s just going to cheapen the games.”

  Brazil has also abandoned a plan to put TVs in Olympic Village rooms. 

  Meanwhile, there was no respite on Thursday from still more abysmal economic data. Industrial production contracted by 0.7% M/M in October (-11.2% Y/Y). That’s the fifth consecutive monthly decline. “The industrial sector (which has been reducing headcount at an increasingly fast pace) contracted 0.9% in 2014 and is expected to contract at a much higher rate in 2015 as it continues to face strong headwinds from high levels of inventories, record low confidence indicators, a high and rising tax burden, rising energy costs, and weak external demand (particularly from Argentina for durable goods),” Goldman writes.

  

  

  Oh, and for anyone still holding out hope that the central bank might throw caution to the wind – pass through inflation be damned – and cut to save the economy, well, you probably shouldn’t read the Copom minutes. Here’s one passage from Goldman that pretty much sums it up: “Specifically, the Copom is now committed to adopt the necessary measures to keep inflation under the 6.50% upper limit of the inflation target band by end-2016, and to make inflation converge to the 4.50% target in 2017. Hence, based purely on a strict interpretation of the new guidance, the probability of a rate hike at the January meeting rose significantly.”

  There is, however, a silver lining. Rich NBA players will not be affected by the Olympic cutbacks (via Bloomberg): 

  Others worry that the cuts will further underscore the chasm between athletes from wealthy countries and those from poorer ones. (Already some top athletes, including the NBA players who join the USA Basketball squad, choose luxury hotels over accommodations in the Olympic Village.) Those who can afford extra for air conditioning or who travel with laptops or iPads will have it; others may not.

  
  

  

  

  

  

  

• California Terror Attack PROVES Mass Spying Doesn’t Keep Us Safe

  Top security experts agree that mass surveillance is ineffective … and actually makes us MORE vulnerable to terrorism.

  For example, the former head of the NSA’s global intelligence gathering operations – Bill Binney – explained to Washington’s Blog that the mass surveillance INTERFERES with the government’s ability to catch bad guys, and that the government failed to stop 9/11, the Boston Bombing, the Texas shootings and other terror attacks is because it was overwhelmed with data from mass surveillance on Americans.
   

  Binney told Washington’s Blog:

  A good deal of the failure is, in my opinion, due to bulk data. So, I am calling all these attacks a result of “Data bulk failure.” Too much data and too many people for the 10-20 thousand analysts to follow. Simple as that. Especially when they make word match pulls (like Google) and get dumps of data selected from close to 4 billion people.

   

  This is the same problem NSA had before 9/11. They had data that could have prevented 9/11 but did not know they had it in their data bases. This back then when the bulk collection was not going on. Now the problem is orders of magnitude greater. Result, it’s harder to succeed.

   

  Expect more of the same from our deluded government that thinks more data improves possibilities of success. All this bulk data collection and storage does give law enforcement a great capability to retroactively analyze anyone they want. But, of course,that data cannot be used in court since it was not acquired with a warrant.

   
  Binney also told us:

  I always like to point to the obvious. Look at what is happening in France and Belgium after the attack in Paris. They are going after targeted individuals, who they knew were related to the killers before the attack. And, it’s working!!! So, this is what I have been saying they should do all along.

   

  Do a targeted selection of data from the communications based on known people and their attributes and you can succeed (as now in France and Belgium) instead of the bulk collection on everyone which buries them in data and they fail. After the attack and people die, they do the right thing. This should make it obvious what route to take.

  The same is true in California … As CNN notes:

  Syed Rizwan Farook — who along with his wife, Tashfeen Malik, carried out the  San Bernardino shooting massacre — apparently was radicalized and in touch with people being investigated by the FBI for international terrorism, law enforcement officials said Thursday.

  After the Paris terror attack, the New York Times correctly pointed out in a scathing editorial that mass surveillance won’t help to prevent terrorism:

  As one French counterterrorism expert and former defense official said, this shows that “our intelligence is actually pretty good, but our ability to act on it is limited by the sheer numbers.” In other words, the problem in this case was not a lack of data, but a failure to act on information authorities already had.

   

  In fact, indiscriminate bulk data sweeps have not been useful. In the more than two years since the N.S.A.’s data collection programs became known to the public, the intelligence community has failed to show that the phone program has thwarted a terrorist attack. Yet for years intelligence officials and members of Congress repeatedly misled the public by claiming that it was effective.

  Binney and other high-level NSA whistleblowers noted last year:

  On December 26, for example, The Wall Street Journal published a lengthy front-page article, quoting NSA’s former Senior Technical Director William Binney (undersigned) and former chief of NSA’s SIGINT Automation Research Center Edward Loomis (undersigned) warning that NSA is drowning in useless data lacking adequate privacy provisions, to the point where it cannot conduct effective terrorist-related surveillance and analysis.

   

  A recently disclosed internal NSA briefing document corroborates the drowning, with the embarrassing admission, in bureaucratize, that NSA collection has been “outpacing” NSA’s ability to ingest, process, and store data – let alone analyze the take.

  Indeed, the pro-spying NSA chief and NSA technicians admitted that the NSA was drowning in too much data 3 months BEFORE 9/11:

  In an interview, Air Force Lt. Gen. Michael Hayden, the NSA’s director … suggested that access isn’t the problem. Rather, he said, the sheer volume and variety of today’s communications means “there’s simply too much out there, and it’s too hard to understand.”

   

  ***

   

  “What we got was a blast of digital bits, like a fire hydrant spraying you in the face,” says one former NSA technician with knowledge of the project. “It was the classic needle-in-the-haystack pursuit, except here the haystack starts out huge and grows by the second,” the former technician says. NSA’s computers simply weren’t equipped to sort through so much data flying at them so fast.

  And see this.

  If more traditional anti-terror efforts had been used, these terror plots would have been stopped.

  So why does the NSA collect so much information if it admits that it’s drowning in info?

  Here are a few hints.

  Postscript: Sadly, our government is not serious about stopping terrorism.

  

  

  

  

• Potential OPEC Cut? It Depends On Non-OPEC Nations Now

  Submitted by Matt Smith via OilPrice.com,

  Eighty-five years after the birth of French filmmaker Jean-Luc Godard, and the crude complex is acting suitably surreal today. As expected, rhetoric is ratcheting up out of Vienna ahead of tomorrow’s OPEC meeting, with the crude market shaken up like a snowglobe.

  Today’s quote of the day is from an unnamed delegate in Vienna, who has summed up the situation pretty much perfectly: ‘In order for there to be a cut in production non-OPEC must participate, Iraq has to participate and the Iran output picture has to be clear’, the delegate said.

  Hence the reason why no cut will be forthcoming; Saudi says it is willing to cut production if its cartel cohorts – Iraq, Iran, et al – are willing to do so, as well as key non-OPEC producers such as Russia and Mexico. This is because Saudi knows full well these nations are unwilling to cut production – we have already been told us as much by them.

  From one OPEC-focused tidbit to another, and Saudi Arabia has announced its OSP (official selling price) for January, further discounting Arab Light into Asia by $1.40 a barrel (versus the Oman/Dubai average), 10 cents more than December’s discount. It also cut its January Arab Light OSP to the US by $0.30 a barrel, but raised it to Northwest Europe by $0.50.

  As our #ClipperData show below, the U.S. has imported just over one million barrels per day from Saudi Arabia this year, of which Arab Light is basically half of that volume. Imports from Saudi are averaging 20% less in 2015 than last year, although Arab Light imports have dropped at a lesser pace. Nonetheless, as US production slows and Saudi OSPs are cut, more oil has found its way to US shores in recent months:

   

  Saudi Arabia crude imports to US (source: ClipperData, Datamyne)

  Another interesting OPEC-related tidbit comes in the form of drilling activity. Oil rigs are being idled across Latin American nations such as Columbia and Mexico, where 57% and 42% of rigs have been idled this year, respectively. In Venezuela, however, the rig count is rising, up 19% this year, as the OPEC member tries to slow a decline in production:

  

  In terms of overnight economic data, we have seen the China Caixin services PMI come in well below consensus (53.1), but still showing expansion (at 51.2). For an economy which is shifting away from being driven by industry and exports, and towards being driven by domestic demand, we need to see the service sector picking up the slack as industrial production continues to slow.

  The rippling effect of a slowing Chinese economy continues to cripple Brazil, as it is their largest trade partner. Industrial production year-over-year in Brazil has dropped to -11.2% in October, the lowest level since May 2009 (think: belly of the Great Recession).

  

  Brazil industrial production, YoY % (source: investing.com)

  From one sign of worry to another, the Eurozone services PMI also came in weaker than expected, as did retail sales (negative for a second consecutive month). Meanwhile, the European Central Bank has pushed the deposit facility rate (aka, bank rates for overnight deposits) further into negative territory to -0.30% in an effort to stoke inflation, while extending quantitative easing for another six months – keeping purchases at 60 billion euros per month through until March 2017.

  Mr. Market has responded emphatically to this announcement, and the euro is rallying like an absolute mad thing, in a bad-is-good kind-of-way. Correspondingly, the crude complex is being propelled higher as the US dollar softens; there are plenty more shakes left in the tail for today’s crude price action it would seem.

  

  

  

  

  

• Meet Syed Farook And Tashfeen Malik, The Husband And Wife San Bernardino Shooters

  “Was there a link to terror?” 

  That’s the question Americans are asking themselves the morning after a husband and wife opened fire with assault rifles killing 14 and wounding 21 at a San Bernardino County employee holiday party. 

  The shooters, Syed Rizwan Farook, 28, and Tashfeen Malik, 27, left their young child with Farook’s mother in nearby Redlands on Wednesday morning before dressing in “assault clothing,” and crashing the party (literally). A subsequent shootout with authorities left both suspects dead. The couple used a DPMS model and a Smith & Wesson M&P 15 along with two handguns, a llama and a Smith & Wesson. The rifles, two .223s, are capable of piercing bulletproof vests. The weapons were purchased legally.

  Here’s what we know about Farook and Malik so far. 

  Farook, whose family was originally from Pakistan, was born in America and was employed as an environmental health specialist for San Bernardino County. He did what health specialists do: inspect restaurants and other facilities for health violations.

  

  Reuters was able to obtain some on-the-ground intelligence from a SusAnn Chapman, who’s described as “a cashier and waitress at China Doll Fast Food.” Apparently, Farook inspected the China Doll earlier this year. “He was real quiet,” Chapman said. “He checked the food and said he was here because somebody complained. … He looked completely normal.” 

  Ok, not helpful.

  However, some clues as to what might (and we emphasize “might”) be going on here emerge when we take a closer look at Malik. According to Hussam Ayloush, executive director of the Los Angeles chapter of the Council on American-Islamic Relations who, like SusAnn, spoke to Reuters, Malik “was believed to be from Pakistan and had lived in Saudi Arabia before coming to the United States.” 

  “Farook traveled to Saudi Arabia earlier this year and returned with a wife,” AP reports, citing co-worker Patrick Baccari, who said Farook “was gone for about a month in the spring, and when he returned word got around [he’d] had been married.” His new wife was described as “a pharmacist.” 

  Now clearly there are no smoking guns there, but it’s worth noting that when it comes to radicalization, no one does it quite like the Saudis. But as we read further, AP uncovers the smoking gun: “Several months ago Farook grew out his beard.” There you go – excessive beard action. The terrorist hallmark. 

  

  All sarcasm aside, AP goes on to say that according to coworkers, Farook was “a devout Muslim,” and according to a profile posted on the dating site iMilap, Farook enjoyed “reading religious books and target practice with younger sister and friends.”

  

  A separate profile on Dubaimatrimonial.com (which describes itself as the “first and only legal marriage service provider in the UAE), shows Farook identifying himself as a Sunni:

  

  Although we would urge caution when it comes to drawing conclusions around the sectarian divide, we’d be remiss if we didn’t note that ISIS, al-Qaeda, and many of the other groups the public generally identifies with extremism, are Sunni. Saudi Arabia (where Farook allegedly found his wife) promotes puritanical Wahhabism. 

  In the wake of the tragedy, Muzammil Siddiqi, religious director of The Islamic Society of Orange County, reminded Americans that Islam is not synonymous with terror: “Please do not implicate Islam or Muslims. Our faith is against this kind of behaviour.”

  Here’s Patrick Baccari’s (quoted above) account of the shooting, again, via AP:

  Baccari, who was sitting at the same table as Farook, said employees at the holiday party were taking a break before snapping group photos when Farook suddenly disappeared, leaving a jacket draped over his chair. Baccari stepped out to the bathroom when he heard explosions.

   

  “I’m getting pelted by shrapnel coming through the walls,” he said. “We hit the ground.”

   

  The shooting lasted about five minutes, he said, and when he looked in the mirror he realized he was bleeding. He was hit by fragments in the body, face and arms.

   

  “If I hadn’t been in the bathroom, I’d probably be laying dead on the floor,” he said.

  Clearly, quite a bit hinges on whether or not this gets tied to radical Islam. If authorities “prove” (or create) a link to extremists, the backlash against Syrian immigrants and against American Muslims more generally, will only grow. 

  Additionally, public support for American boots on Syrian ground will rise as any link to terrorist ideology will invariably be trotted out as “proof” that “lone wolf” or not, attacks have now crossed the pond to reach American soil.

  Of course at the end of the day, two people opening fire with assault rifles on a holiday party seems pretty “terrifying” to us regardless of what inspired the shooters, but remember, crises like these are only “useful” in today’s world if they serve someone’s geopolitical ends so don’t be surprised if the mainstream media soon turns up the San Bernardino equivalent of the forged Syrian passport found in Paris three weeks ago.

  

  

  

  

  

• A Crushed Goldman FX Strategist Speaks: "We Badly Misread This Meeting"

  Of all the mea culpas by the sellside penguin crew, the one post ECB mortem we were expecting above all, was that of Goldman FX strategist Robin Brooks who infamous, perhaps legendarily, opined just yesterday that “it remains the case that downside skew in EUR/$ is modest compared to the run-up to the Jan. 22 meeting. In short, we think risk-reward to short EUR/$ into tomorrow’s meeting remains compelling and we anticipate a 2-3 big figure drop on the day.”

  Well, Goldman was right about the 2-3 figure move… only it wasn’t a drop. Actually make that 4-5 figure move in the wrong direction, in fact the biggest surge in the EUR since the announcement of the Fed’s QE1!

  So after waiting for a few hours, we were delighted to see that Robin is still ok, and sharing more muppet-crushing wisdom. Here is GOldman’s just released note on the ECB’s “shocker” titled “Dry powder, lost credibility.” It is unclear just who lost credibility however.

  From Goldman’s Robin Brooks:

  We badly misread this meeting.

   

  Given the mixed messages from the ECB over QE, starting with the Bund sell-off in May, we had thought there were bigger stakes at play than the usual considerations around growth and inflation. Indeed, we expected President Draghi to deliver a forceful message, in part to fix some of the damage wrought over the summer. But today badly wrong-footed us and, in our view, further damaged the credibility of ECB QE.

   

  As Exhibit 1 shows, the smaller-than-priced deposit cut was relatively minor in the scheme of things, moving EUR/$ higher by about one big figure (from 1.0550 to 1.0650), in line with our view that a 10 bps surprise maps into two big figures. The bigger disappointment came in the press conference, when a smaller-than-expected extension of QE, upward revisions to growth, and a stand-offish message on further deposit cuts took EUR/$ near 1.09.

   

  Our impression from the press conference was that this message was deliberate, so that the Governing Council seems far less willing to ease aggressively than we had expected. At current levels, meaning around 1.09, EUR/$ prices only the 10 bps deposit cut, given that a good part of the decline from 1.13 prior to the Oct. 22 meeting was driven by the hawkish FOMC (Oct. 28) and strong payrolls (Nov. 6). That might be a reason to remain optimistic about further declines in EUR/$, especially with Fed lift-off around the corner. But the stakes for EUR/$ and the ECB are higher.

   

  

   

   

  The big question today raises is whether the ECB is serious about QE. That question also arose over the summer, when the volatility in Bund yields raised questions over whether the ECB is willing to stabilize yields in Europe’s safe haven asset to encourage portfolio shifts into risk assets. Today’s sell-off in Bund yields (Exhibit 2) and the bounce in EUR/$ rivals those seen in April and May and again puts the question of ECB commitment to QE firmly on the table.

   

  From an FX perspective, this matters a great deal, as today’s price action shows. The Euro rallied, driven by declining inflation break-evens and rising nominal yields, i.e., rising real yields. This price action has all the hallmarks of the Yen under Governor Shirakawa, as opposed to Governor Kuroda, raising for us the unpleasant possibility that the idiosyncratic Euro weaker story has been compromised. Even in the unlikely event that today’s disappointment was a mistake, we think it has cost enough credibility that the Euro down story we had envisaged is now less likely to play out. We are placing our forecasts under review.

  * * *

  For those who skiped through all that here is the now traditional one picture summary:

  

  

  

  

  

  

• Did the Bull Market Begun March 2009 Just End?

  For weeks we have been warning not to trust the bounce in stocks.

   

  The most critical item we were concerned with was the fact that the S&P 500, despite its massive bounce, had failed to regain its former trendline.

   

  As we first noted back in early September, Bear Markets do not happen all at once. EVERY time a major top has formed and stocks have taken out their Bull Market trendline, we’ve had a bounce to “kiss” the line before the Bear Market really took hold.

   

  

   

  This is precisely what has happened with the October bounce: stocks rose to “kiss” the former trendline, but failed to reclaim it.
   

  

   

  Having failed to reclaim this line twice, the S&P 500 is now turning sharply down.  The financial media sees this as a reaction to ECB President Mario Draghi’s failure to do “enough” this morning, but the reality is that this was not to be trust, driven primarily by manipulation with little carry through from REAL buy orders.

   

  In the near term stocks could crater to 1900 in short order. However, what happens in the next few days or even weeks is not the real concern.   

   

  The REAL concern pertains to the BIG PICTURE for the markets: the massive monthly rising wedge pattern stocks have been forming since the 2009 bottom.

   

  As you can see in the chart below, the August-September collapse broke this formation. That, in of itself, is not the be all end all. But the fact that stocks have failed to reclaim their former bull market trendline is a MAJOR concern indicating that it is highly likely that the bull market begun March 2009 is OVER.

   

  

   

  If this is the case, the next Crash has already begun. This would put us at the equivalent of where the markets were in late 2007: just before the whole mess came crashing down in 2008.

   

  Smart investors are preparing now. The August-September correction was just a warm up. The REAL drop is coming shortly.

   

  We just published a 21-page investment report titled Stock Market Crash Survival Guide.

   

  In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

   

  We are giving away just 1,000 copies for FREE to the public.

   

  To pick up yours, swing by:

  https://www.phoenixcapitalmarketing.com/stockmarketcrash.html

   

  Best Regards

   

  Graham Summers

  Chief Market Strategist

  Phoenix Capital Research

   

   

   

   

   

   

  

  

  

  

• Dow Futures Dump 450 Points From Pre-Draghi Highs

  From hope to nope…

  From 17,870 highs as investors bought the hope in the early European markets (after weak data affirmed the assumption that Draghi would act). Then… he didn’t… and Dow Futures are hitting 17,410 lows…

  

  

  

  

  

  

• US Aircraft Carrier Harry Truman Is Now In The Mediterranean, Approaching Syria Coast – Full US Naval Map

  Days before the dramatic military escalation between Turkey and Russia, we reported that in order to assure that the Syria proxy war has all the naval support the US-led alliance will need in the coming weeks, both a French and a US aircraft carrier were “steaming” full speed toward the Mediterranean sea, just off the coast of Syria.

  

  As we noted, “the Truman is expected to reach the Persian Gulf before the year’s end. The U.S. has been launching air strikes into Iraq and Syria from aircraft carriers in the Persian Gulf — at least until last month, when the USS Theodore Roosevelt left the area after an extended deployment. The two-month gap is the first in nearly a decade that the U.S. has had no carrier in the region.”

  Specifically, we emphasized the ETA, to wit “Once again, here is the ETA: Carrier Theodore Roosevelt left 5th Fleet in mid-October, leaving that region without a carrier until the Truman CSG gets there, which should be about six weeks, or just around the New Year” and pointed out just how busy the “parking lot” would be when the US aircraft carrier arrived. According to the Navy Times, whom we cited”

  ISIS is not the only challenge that awaits the flotilla, which includes the cruiser Anzio, Carrier Wing Air 7, and destroyers Bulkeley, Gravely and Gonzalez. Russian, Chinese and Iranian marines have established their presence in Syria, and Russian warships from the Black Sea have relocated to the eastern Mediterranean to protect fighter jets conducting airstrikes in support of Syria’s Assad regime. In preparation, the strike group’s Composite Training Unit Exercise focused on adversaries that more closely resembled those of the Cold War.

  We now know that there is also at least one Russian missile cruiser operating off the Syrian coast and providing air cover for Russian jets operating above the country. 

  In other words, the Mediterranean Sea surrounding Syria is getting more crowded by the day.

  And the bottom line is that now that UK (and shortly German) planes are flying above Syria, and “striking ISIS”, having joined jets from the US, Syria, Iran, Turkey, Russia and France, the same is about to happen to the sea next to Syria.

  Which, in our opinion, will also reveal the catalyst for the next, and even more serious, military escalation as one or more ships mysteriously suffer a Gulf of Tonkin incident in a proxy war in which the primary directive so far has clearly been the planting of false flags.

  How long? According to the latest US naval map update from Startfor, the Truman is now off the Libyan coast, rapidly approaching Italy, and we expect is ahead of scheduled year-end ETA to its final destination, a few miles off the Syrian coast.

  

  

  

  

  

  

• Citi Turns Bearish On Stocks On "Richer And Richer" Markets, Sees 65% Recession Probability; Janet Yellen Disagrees

  First it was Goldman, then JPM, then Credit Suisse, and now it is Citi’s turn to turn decidedly downbeat on stocks for next year and just cut its weighing on global equities to neutral. The main reason for Citi’s bearishness, it is the same as the one we noted two months ago, and again last night: margin sustainability, and rather the dramatic drop in corporate profits in recent months.

  

  As a reminder, overnight we pointed out that according to Credit Suisse, “equities peak 12-18 months after a peak in margins” and “we are now 15 months after the peak in margins.”

  

   

  Cue Citi:

  In the US our chief concern is margin sustainability. Corporate profits as a share of GDP have been at all-time highs, which is just another way of saying the rewards to labour have been at all-time lows. But change may be afoot in the form of modest labour market tightening in the US. It is too soon to see this show up in core (ex Fins, Energy and Materials) margins in the US (Figure 13, LHS) but that may be where things go. Modest nominal wage acceleration combined with global disinflation (price taking by US firms) and lack of productivity growth may mean margins come under pressure from labour costs.

  

   

  Citi’s contention – the pendulum is swinging away from Wall Street and back to Main Street:

  US business surveys increasingly seem to be highlighting labour costs as a factor affecting future prices (Figure 14, LHS). Non-labour related costs don’t seem problem for businesses, which stands to reason given commodity price trends. It is also true that 2014/15 optimism regarding sales and margins seems to have waned (Figure 14, RHS), quite materially so in the case of sales.

  

  Alas, one can’t pay workers with expectations of margin increase and goodwill. Whether these “expectations” actually materialize in higher wages remains to be seen, but Citi does not plan to hang around and find out:

  Given the surge back towards the all-time highs in the S&P 500, we think that the best might be over for US equities and that indices might range trade more in 2016. We have downgraded US equities to neutral. This takes our overall equity weighting down to neutral, in many respects an extension of what we’ve been doing for most of this year as richer and richer asset markets, against a global background of economic risks, have made us more cautious.

  As a reminder, Citi’s equities downgrade follows a report by Citi’s rates team according to which the probability of a recession in 2016 has soared to 65%. Here’s why:

  If this were a typical policy cycle after a typical economic cycle, the Fed would have already raised rates 2-3 years ago. Instead, the US recovery is set to enter its seventh year while the European recovery is still embryonic. So in addition to China sneezing, FI markets need to price the longevity of the cycle. There are two approaches.

   

  1. Cycle probabilities

   

  Firstly, a statistical approach is shown in Figure 46 and highlights the cumulative probability of a recession based on data from 1970-14 across US, UK, Germany and Japan. As the U.S. economy enters year seven, the cumulative probability of a recession in the next year rises to 65%.

   

   

   

  2. The economy continues to expand ….

   

  The sub-title above would seem to contradict recession risk – but that is not the case – as an ongoing improvement in unemployment risks recession unless we are to believe in a soft landing. Consider the extrapolation of the U.S. unemployment rate drop on the trend since 2012.

  • That would take the US U-3 unemployment below 4% by end 2016. Unless, there is a soft landing, the market will price both front end hikes but also a major flattening of the curve, to augur higher recession risk. Watch for flat forwards initially and then some inversion quicker than consensus prices.

  How does this stack up in outright rates? The historical record is shown below for Treasury implied 5y5y rates.

  • The median line shows that even against a time trend to account for the secular bond market rally that 5y5y Treasury yields move lower.

  

  So is there a two-thirds chance the US economy contacts next year? According to Janet Yellen, who was asked precisely this question during her hearing in Congress today, there is no risk: according to her, she doesn’t see the recession risk as “anything close” to 65%. She did not provide a number which she thought is more appropriate.

  She also said that the FOMC would only raise rates as long as policy makers think U.S. will “enjoy at least some above-trend growth” that would result in improving labor market.. 

  Her conclusion: if the rate hike results in “unintended consequences” the Fed can always just lower rates. Which incidentally is precisely what the Fed did in last 1936 when it, too, erroneously decided the economy was strong enough to sustain a tightening of financial conditions…

  

  … only to cut immediately. The collateral damage? The Dow Jones plunged 50% the next year…

  

  … and unleashed a severe recession in the second half of 1937, followed a few year later by the start of World War II.

  This time is not different.

  

  

  

  

  

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• Chairman of U.S. House Foreign Affairs Subcommittee: “Either [Turkey] Shouldn’t Be in NATO or We Shouldn’t”

  Congressman Dana Rohrabacher – Chairman of the House Foreign Affairs Subcommittee on Europe, Eurasia, and Emerging Threats – wrote last week:

  Not radical Islam, but the Russians have been portrayed to us as the villains in this chapter of history. Yet our government demonstrates a lack of will, incompetence, or both, in confronting the most monstrous of the radical Islamic marauders now spilling vast quantities of innocent blood in the Middle East – as well as in Africa and France.

   

  When Russia courageously stepped into the breach we should have been applauding its willingness to confront ISIS. Instead, we continue to denigrate Russians as if they were still the Soviet Union and Putin, not Islamic terrorists, our most vicious enemy.

   

  So now we see the travesty of a harsh condemnation of the Russians for introducing air strikes against terrorists who will murder Americans if they get the chance.

   

  Yes, Russia does this to protect Syria’s authoritarian Assad regime, which has close ties to Moscow. So what?

   

  Assad, like Iraq’s Saddam Hussein, is no threat to the United States or the Western world. If Assad is forced out of power he will eventually be replaced by an Islamic terrorist committed to raining down mayhem on Western countries.

   

  Today we witness the spectacle of American decision- makers, in and out of the Obama administration, joining forces with a Turkish regime that grows more supportive of the radical Islamist movement. There is ample evidence of President Erdogan’s complicity in ISIS’s murderous rampage through Syria and Iraq.

   

  Yet, we hold our public rebukes for the Russians, who are battling those terrorists. A Russian plane on an anti-terrorist mission did violate Turkish airspace, just as Turkish planes have strayed into Greek airspace hundreds of times over the last year. This overflight was no threat to Turkey. Still, it was shot down, as was a Russian helicopter on the way to rescue the downed Russian pilot.

   

  Why do Americans feel compelled to kick Russia in the teeth? Russia’s military is attacking an enemy that would do us harm. Why ignore the hostile pro-terrorist maneuvering of Turkish strongman Erdogan?

   

  President Obama is wrong. American politicians who try to sound tough at Russia’s expense in this case are not watching out for the long-term interests of the United States by undermining those fighting our primary enemy, Islamic terrorists.

   

  Russia should be applauded. Instead, it is being castigated for doing what our government is unwilling to do to confront the terrorist offensive now butchering innocent human beings from Africa, to the Middle East, to the streets of Paris.

   

  If being in NATO means protecting Erdogan in this situation, either he shouldn’t be in NATO or we shouldn’t.

  Rohrabacher is actually 100% right on this one …

  Related:

  Turkey Tries to Lure NATO Into War Against Russia

  

  

  

  

• The Fall Of America Signals The Rise Of The New World Order

  Submitted by Brandon Smith via Alt-Market.com,

  “The contemporary quest for world order will require a coherent strategy to establish a concept of order within the various regions and to relate these regional orders to one another.” — Henry Kissinger, “Henry Kissinger On The Assembly Of A New World Order”

   

  “[P]art of people’s concern is just the sense that around the world the old order isn’t holding and we’re not quite yet to where we need to be in terms of a new order that’s based on a different set of principles, that’s based on a sense of common humanity, that’s based on economies that work for all people.” — Barack Obama

   

  “We reiterate our strong commitment to the United Nations (UN) as the foremost multilateral forum entrusted with bringing about hope, peace, order and sustainable development to the world. The UN enjoys universal membership and is at the center of global governance and multilateralism.” — Fifth BRICS Summit Declaration

   

  “We support the reform and improvement of the international monetary system, with a broad-based international reserve currency system providing stability and certainty. We welcome the discussion about the role of the SDR in the existing international monetary system including the composition of SDR’s basket of currencies. We support the IMF to make its surveillance framework more integrated and even-handed.” — Fifth BRICS Summit Declaration

  Here is where many political and economic analysts go terribly wrong in their examination of current global paradigms: They tend to blindly believe the mainstream narrative rather than taking into account conflicting actions and statements by political and financial leaders. Even in the liberty movement, composed of some of the most skeptical and media savvy people on planet Earth, the cancers of assumption and bias often take hold.

  Some liberty proponents are more than happy to believe in particular mainstream dynamics. They are happy to believe, for example, that the growing “conflict” between the East and West is legitimate rather than engineered.

  You can list off quotation after quotation and policy action after policy action proving that Eastern governments, including China and Russia, work hand in hand with globalist institutions like the International Monetary Fund, the Bank of International Settlements, the World Bank and the U.N. toward the goal of global governance and global economic centralization. But these people simply will not listen. They MUST believe that the U.S. is the crowning villain, and that the East is in heroic opposition. They are so desperate for a taste of hope they are ready to consume the poison of false dichotomies.

  The liberty movement is infatuated with the presumption that the U.S. government and the banking elites surrounding it are at the “top” of the new world order pyramid and are “clamoring for survival” as the U.S. economy crumbles under the facade of false government and central banking statistics. How many times have we heard over the past year alone that the Federal Reserve has “backed itself into a corner” or policy directed itself “between a rock and a hard place?”

  I have to laugh at the absurdity of such a viewpoint because central bankers and internationalists have always used economic instability as a means to gain political and social advantage. The consolidation of world banking power alone after the Great Depression is a testament to this fact. And even former Fed Chairman Ben Bernanke has admitted (at least in certain respects) that the Federal Reserve was responsible for that terrible implosion, an implosion that conveniently served the interests of international cartel banks like JPMorgan.

  But the Federal Reserve is no more than an appendage of a greater system; it is NOT the brains of the operation.

  In his book “Tragedy And Hope,” Carroll Quigley, Council on Foreign Relations member and mentor to Bill Clinton, stated:

  "It must not be felt that these heads of the world’s chief central banks were themselves substantive powers in world finance. They were not. Rather, they were the technicians and agents of the dominant investment bankers of their own countries, who had raised them up and were perfectly capable of throwing them down. The substantive financial powers of the world were in the hands of these investment bankers (also called “international” or “merchant” bankers) who remained largely behind the scenes in their own unincorporated private banks. These formed a system of international cooperation and national dominance which was more private, more powerful, and more secret than that of their agents in the central banks."

  In “Ruling The World Of Money,” Harper’s Magazine established what Quigley admitted in “Tragedy And Hope” — that the control of the global economic policy and, by extension, political policy is dominated by a select few elites, namely through the unaccountable institutional framework of the BIS.

  The U.S. and the Federal Reserve are mere tentacles of the great vampire squid that is the new world order. And being a tentacle makes one, to a certain extent, expendable, if the trade will result in even greater centralization of power.

  The delusion that some people within the liberty movement are under is that the fall of America will result in the fall of the new world order. In reality, the fall of America is a necessary step towards the RISE of the new world order. The Rothschild-owned financial magazine The Economist reaffirmed this trend of economic “harmonization” in its 1988 article “Get Ready For A World Currency By 2018,” which described the creation of a global currency called the “Phoenix” over three decades:

  "The phoenix zone would impose tight constraints on national governments. There would be no such thing, for instance, as a national monetary policy. The world phoenix supply would be fixed by a new central bank, descended perhaps from the IMF. The world inflation rate — and hence, within narrow margins, each national inflation rate — would be in its charge. Each country could use taxes and public spending to offset temporary falls in demand, but it would have to borrow rather than print money to finance its budget deficit. With no recourse to the inflation tax, governments and their creditors would be forced to judge their borrowing and lending plans more carefully than they do today. This means a big loss of economic sovereignty, but the trends that make the phoenix so appealing are taking that sovereignty away in any case."

   

  "…The phoenix would probably start as a cocktail of national currencies, just as the Special Drawing Right is today. In time, though, its value against national currencies would cease to matter, because people would choose it for its convenience and the stability of its purchasing power."

  We are now on the cusp of the “prediction” set forth by The Economist over 27 years ago. The BRICS nations, including Vladimir Putin’s Russia, have all consistently called for the formation of a global reserve currency system under the direct control of the IMF and predicated on the basket methodology of the SDR. This new global system, as The Economist suggested, requires the marginalization of existing power structures and the end of sovereign economic control. Governments around the world including the U.S. would be at the fiscal mercy of the new financial high priests through the use of insidious debt based incentives given or withheld at the whim of the IMF.

  China is set to be inducted into the SDR basket in 2015, with specific economic changes to be made by September 2016, a development I have been warning about for years. The "vote" is in and the decision has been finalized.  While some in the mainstream media are playing off the rise of the Yuan as meaningless, IMF head Christine Lagarde presents the shift as a major event, not for China, but for the IMF and the SDR which she proudly refers to as the "currency of currencies".

   

  The addition of China to the SDR, I believe, is the next trigger event for the continuing removal of the dollar as the world reserve currency. The monetary shift may explode with speed if Saudi Arabia follows through with a possible plan to depeg from the dollar, effectively ending the petrodollar status the U.S. has enjoyed for decades.

  This is, of course, the same IMF-controlled SDR system that Putin and the Kremlin have called for, despite the running fantasy that Putin is somehow an opponent of the globalists.

  Putin continues to press the “U.S. as bumbling villain” narrative, while at the same time supporting globalist institutions and the internationalization of economic and political governance. While many people were overly focused on his “calling out” of the U.S. and its involvement in the creation of ISIS in his recent speech at the U.N., they seemed to have completely overlooked his adoration of the United Nations and the development of a global governing body. Putin often speaks at cross purposes just as Barack Obama does — one minute supporting sovereignty and freedom, the next minute calling for global centralization:

  "Russia is ready to work together with its partners to develop the UN further on the basis of a broad consensus, but we consider any attempts to undermine the legitimacy of the United Nations as extremely dangerous. They may result in the collapse of the entire architecture of international relations, and then indeed there will be no rules left except for the rule of force."

   

  "Dear colleagues, ensuring peace and global and regional stability remains a key task for the international community guided by the United Nations. We believe this means creating an equal and indivisible security environment that would not serve a privileged few, but everyone."

  Putin also proclaimed his support for the UN's fight against "climate change", the same climate change which Secretary of State John Kerry argued was a "contributing factor" in the crisis in Syria and the rise of ISIS.  I have written in the past on the fraud of "man made climate change (global warming)" and will not enter that tangent here now, but the point remains that Putin is fully on board with said fraud like all other puppet politicians around the globe:

  "…One more issue that shall affect the future of the entire humankind is climate change. It is in our interest to ensure that the coming UN Climate Change Conference that will take place in Paris in December this year should deliver some feasible results. As part of our national contribution, we plan to limit greenhouse gas emissions to 70–75 percent of the 1990 levels by the year 2030."

   

  "It is indeed a challenge of global proportions. And I am confident that humanity does have the necessary intellectual capacity to respond to it. We need to join our efforts, primarily engaging countries that possess strong research and development capabilities, and have made significant advances in fundamental research. We propose convening a special forum under the auspices of the UN to comprehensively address issues related to the depletion of natural resources, habitat destruction, and climate change. Russia is willing to co-sponsor such a forum."

  one more issue that shall affect the future of the entire humankind is climate change. It is in our interest to ensure that the coming UN Climate Change Conference that will take place in Paris in December this year should deliver some feasible results. As part of our national contribution, we plan to limit greenhouse gas emissions to 70–75 percent of the 1990 levels by the year 2030. – See more at: http://www.russianmission.eu/en/news/president-vladimir-putin-addresses-…

  It is indeed a challenge of global proportions. And I am confident that humanity does have the necessary intellectual capacity to respond to it. We need to join our efforts, primarily engaging countries that possess strong research and development capabilities, and have made significant advances in fundamental research. We propose convening a special forum under the auspices of the UN to comprehensively address issues related to the depletion of natural resources, habitat destruction, and climate change. Russia is willing to co-sponsor such a forum. – See more at: http://www.russianmission.eu/en/news/president-vladimir-putin-addresses-…

  Indeed, it has been Putin’s intention all along to support and defend the internationalist framework while at the same time participating in the theatrical East versus West false paradigm:

  "In the BRICS case we see a whole set of coinciding strategic interests.

   

  First of all, this is the common intention to reform the international monetary and financial system. In the present form it is unjust to the BRICS countries and to new economies in general. We should take a more active part in the IMF and the World Bank’s decision-making system. The international monetary system itself depends a lot on the US dollar, or, to be precise, on the monetary and financial policy of the US authorities. The BRICS countries want to change this."

  The Chinese support the same agenda of an IMF managed economic world:

  The world economic crisis shows the "inherent vulnerabilities and systemic risks in the existing international monetary system," Gov. Zhou Xiaochuan said in an essay released Monday by the bank. He recommended creating a currency made up of a basket of global currencies and controlled by the International Monetary Fund and said it would help "to achieve the objective of safeguarding global economic and financial stability."

  It is rather interesting how the desires of the BRICS seem to directly coincide with the designs of international bankers. This Hegelian dialectic is perhaps the most elaborate public distraction of all time, with the ultimate solution to the artificially engineered problem being a single “multilateral” but centrally dictated world economic system and world government, i.e., the new world order.

  Again, the globalists at the BIS and the IMF require a diminished U.S. dollar, greatly reduced U.S. living standards and a much smaller U.S. geopolitical footprint before they can establish and finalize a single publicly accepted global elitist oligarchy.

  If you cannot understand why it seems that the Federal Reserve and U.S. government appear hell-bent on self-destruction, then perhaps you should consider the facts and motivations at hand. Then, you’ll realize it is THEIR JOB to destroy America, not save America. When you are finally willing to accept this reality, every disastrous development since the inception of the Fed a century ago, as well as all that is about to happen in the next few years, makes perfect sense.

  This is not to say that the ultimate endgame of the new world order will result in victory. But the cold, hard, concrete evidence shows that internationalists do have a plan; they are implementing that plan systematically; and all major governments around the world are participating in that plan. This plan involves the inevitable collapse and reformation of America into a Third World enclave, a goal that is nearly complete, as I will outline in my next article.

  As the U.S. destabilizes, we are not escaping the clutches of the Federal Reserve system, only trading out one totalitarian management model for another. It is absolutely vital that the liberty movement in particular finally and fully embrace this reality. If we do not, then there will truly be no obstacle to such a plan’s success and no end to the tyrannies of the old world or the new world.

  

  

  

  

  

• Did Something Blow Up in Junk?

  Submitted by Jeffrey Snider of Alhambra Investment Partners

  Did Something Blow Up in Junk?

  There isn’t much as far as confirmation, but it increasingly appears as if “something” just hit the triple hooks (CCC) in the junk bond bubble. At least as far as one view of it, Bank of America ML’s CCC implied yield, there was a huge selloff that brought the yield to a new cycle high (low in price) above even the 2011 crisis peak.

  

  Now, this had occurred before on August 13 amidst the growing carnage in the “dollar” run through the PBOC and China. The published rate for that day was just over 16% and a similarly huge jump, but that was quickly revised (no reason given) to actually less than the day before. Further, that pricing revision applied to BofAML’s Master II HY index, as well, which had also been initially published in an explosion that day only to erased quickly after.

  

  This time, the CCC index is by itself in showing “something.” Neither the Master II nor the S&P/LSTA Leveraged Loan 100 are following suit. Whether or not that suggests another pricing problem isn’t clear, but the fact that the CCC index actually surged Monday to 16.61% and was reported again yesterday at 16.60% begins to indicate this was an actual trading outcome. In other words, as junk bonds have been the leading edge to the domestic end of the “dollar” run, this demands close and ongoing scrutiny in light of a potential escalation.  After all, this is just another indication of how advanced the deterioration has become, when the “usual” carnage and selloff is no longer noteworthy, giving way to only the (possibly) spectacular.

  

  

  

  

  

  

• Leaked Memo Reveals EU Plan To Suspend Schengen For Two Years

  Earlier today we reported that in a dramatic and, what to many may seem unfair variation of “carrot and stick” negotiations conducted by European bureaucrats, the EU threatened Greece with indefinite suspension from the Schengen passport-free travel zone unless it overhauls its response to the migration crisis by mid-December, as frustration mounted over Athens’ reluctance to accept outside support.

  The slap on the face of the Greeks was particularly painful because this warnings of an temporary expulsion from the EU happens just days after Turkey not only got a €3 billion check from Europe because it has been far more “amenable” in negotiating the handling of the hundreds of thousands of refugees that exit its borders in direction Europe, but also was promised a fast-track status in negotiations to be considered for EU accession and visa free travel. Ironically, it is also Turkey which is the source of virtually all Greek refugee headaches as the following map shows.

  

   

  We summarized the situation earlier as follows:

  “not only do the Greeks suffer under the weight of 700,000 refugees crossing into its borders from Turkey and headed for a “welcoming Germany” which is no longer welcoming, now they have to suffer the indignity of being ostracized by their own European “equals” who are being remarkably generous with non-EU member Turkey, which may very well be funding ISIS by paying for Islamic State oil and thus perpetuating the refugee crisis, while threatening to relegate Greece into the 4th world, and with visa requirements to get into Europe to boot!”

  However, it appears there is much more to this story than merely a case of vindication against the Greeks.

  As Steve Peers from EU Law Analysis writes, according to a leaked Council memo, Europe’s intention is to put the framework in place for a comprehensive suspension of Schengen for all countries, for a period as long as two years, not just Greece in the process effectively undoing the customs union aspect of the European Union, which also happens to be its backbone.

  The following is Council document 14300/15, dated 1 December 2015. It’s entitled ‘Integrity of the Schengen area‘, and addressed to Coreper (the body consisting of Member States’ representatives to the EU) and the Council – presumably the Justice and Home Affairs ministers meeting Thursday 3 and Friday 4 December.

  The first three parts aren’t exceptional, but part 4 calls for the start of a process to officially allow the reimposition of internal border controls in the Schengen area for up to two years. Legally, this has to be triggered by ‘serious deficiencies’ in the border control of a particular Member State.

   

  This has been reported as a plan to suspend Schengen as regards Greece. But the wording of the document suggests a much broader intention – applying to the whole of Schengen. This intention is clear from the reference to continuing in force the border controls that many Member States have imposed this autumn, which can only be imposed for a maximum period of six months. The purpose of using the ‘serious deficiencies’ clause, instead of the normal clause on suspending Schengen, is clearly to allow a much longer suspension period. It may be that not every internal border would be subject to checks, but the intention seems to be to issue a blank cheque to this effect.

  Document follows:

  INTRODUCTION

  The migratory and refugee crisis has put the application of the Schengen acquis and of the asylum acquis under severe pressure during the last years, with an unprecedented influx of migrants over the last months. In this context, several Member States have temporarily reintroduced border control at their internal borders, with reference to a serious threat to public policy or internal security as provided for by the Schengen Borders Code. Temporary controls at internal borders have also been carried out by a Member State for reasons related to terrorism, following the attacks in Paris on 13 November 2015. In addition, some Member States have taken specific measures to reinforce the control at their external borders.

  In its Conclusions of 9 November 2015 on measures to handle the refugee and migration crisis, the Council has identified a number of measures to implement fully the orientations already agreed by the European Council [1]. These measures address a wide range of issues, including in particular reception capacities, hotspots, relocation, return, readmission, resettlement,  lack of cooperation of migrants, contingency planning, the functioning of the Schengen area, external and internal borders, smuggling in human beings, visa policy, a common information strategy and the use of the Integrated Political Crisis Response (IPCR).

  In the Conclusions adopted on 20 November 2015 on Counter-Terrorism after the Paris terrorist attacks by the Council and Member States meeting within the Council it was agreed to implement reinforced measures for the purpose of fighting terrorism, including strengthening controls at external borders[2].

  Under point 9 of its Conclusions of 9 November 2015, the Council decided “to conduct at the December Justice and Home Affairs Council, on the basis of the 8th bi-annual reporting by the Commission, a thorough debate on the functioning of the Schengen area (1 May 2015 – 31 October 2015) and on the lessons learned from temporary reintroductions of controls at internal borders”.
  In Coreper on 26 November 2015 the Commission indicated, however, that the said 8th bi-annual report would not be ready for the meeting of the JHA Council in December 2015, but would be integrated in the future border package. The Presidency concluded that Ministers would be invited to hold a debate on the functioning of the Schengen area on the basis of a Presidency paper.

  With a view to preparing this debate, the Presidency issued a questionnaire on lessons learned from temporary introductions of controls at internal borders [3]. The Presidency has prepared the present paper in the light of replies from Member States, having in mind also major issues that have been raised during recent months regarding the functioning of the Schengen area, with a focus on border controls.

  ISSUES FOR DISCUSSION

  The Presidency invites the Council to hold a debate on the functioning of the Schengen area and to address in particular the following issues related to internal and external border controls.

  1. Consultations between Member States – Based on the information available to the Presidency, it appears that, in situations where some Member States have applied recently Article 25 of the Schengen Borders Code to reinstate temporarily controls at internal borders, there has not been sufficient prior consultation with other Member States.  The same has been noticed for technical reinforcement of borders between border crossing points, for changes in national policies leading to filter migrants at border crossing points and for organizing the transit of migrants from one border to next.  This has severely hindered the possibility for neighbouring countries to prepare themselves for changes in migratory routes and for all Schengen countries to handle migratory flows in a coherent manner.

  In addition, procedures approved by Coreper in March 2015 for improved information sharing on temporary reintroduction of border controls at internal borders have not been fully respected in all cases.

  The Presidency proposes that:

  • even in emergency situations falling under Article 25 of the Schengen Borders Code and requiring immediate action, a Member State deciding to temporarily reintroduce internal border controls should make all efforts to inform neighbouring Member States sufficiently in advance to allow neighbouring Member States to adjust to the new situation and, where possible, to cooperate to reduce the negative impact of the reintroduction of internal border controls;
  • Member States reconfirm their commitment to fully apply the procedures for improved information sharing on temporary reintroduction of border controls at internal borders agreed in Coreper in March 2015. [4]

  2. Securing external borders – A number of irregular migrants entering the EU, or exiting an EU country to re-enter later in the EU, pass through the so-called “green land borders” (the parts of the land borders between border crossing points). According to Frontex, more than 1,2 million illegal border crossings have been detected at the EU external borders for January – October 2015, an increase of 431% compared with the corresponding period in 2014. In addition, a number of illegal crossings have not been registered. The exact figure is unknown.

  Also in the context of the fight against terrorism, the Council concluded on 20 November 2015 that control at the external borders which are most exposed should be strengthened “in particular by deploying, when the situation so requires, rapid border intervention teams (RABITs) and police officers in order to ensure systematic screening and security checks”.

  In view of the critical situation that the EU is currently confronted with, the Presidency proposes that:

  • considerably more efforts should be made to prevent illegal border crossings (entry and exit) through the external “green land borders” and to ensure that external borders are crossed only at the border crossing points referred to in Article 4, subject to the exceptions in Article 4(2), of the Schengen Borders Code;
  • RABITs are deployed as necessary for that purpose. This is at present  particularly relevant for external land borders in relation to the Western Balkan countries route;
  • A Frontex operation at the northern borders of Greece be deployed without delay to address severe difficulties encountered with neighbouring countries.

  3. Increasing checks regarding illegal migration – Irregular migrants who have entered the Schengen area and have not been registered at their arrival should not be able to stay in that area undetected for long periods of time.

  The Presidency proposes that:

  • the possibilities for checking persons inside the Schengen area, including by the use of relevant databases, are fully exploited to ensure that irregular migrants are detected and registered and their cases processed.

  4. Addressing serious deficiencies in external border controls – Several Member States have recently reintroduced temporarily internal border control pursuant to Articles 23-25 of the Schengen Borders Code. Under these provisions, a Member State may not implement such controls for more than a total period of six months. A prolongation of this situation would require the adoption by the Council, upon a proposal from the Commission, of a recommendation in accordance with Article 26 of the Schengen Borders Code. Such recommendation may be adopted in exceptional circumstances to address a situation where a Schengen evaluation has identified persistent serious deficiencies relating to external border control and the measures referred to in Article 19a of the Schengen Borders Code are not effective. Where in such cases the overall functioning of the area without internal border control is put at risk, and insofar as the exceptional circumstances constitute a serious threat to public policy or internal security within the area without internal border control or within parts thereof, the period for the reintroduction of internal border control may be extended up to a total maximum of two years.

  On this basis, the Presidency:

  • proposes that the Council invites the Commission to consider presenting a proposal as appropriate pursuant to Article 26 of the Schengen Borders Code for a Council recommendation that one or more Member States decide to reintroduce border control at all or at specific parts of their internal borders;
  • considers that, at the same time, all possible measures should be taken aimed at strengthening the normal functioning of the Schengen area, in particular by reinforcing the control of external borders.

  

  

  

  

  

• China Captures Its "Victory Over Smog" With Dramatic Time Lapse Video

  After days of hazardous pollution forced people to wear masks and huddle indoors, residents of Beijing turned their attention to the mayor, Wang Anshun, and his bold vow last year to clear the air. As JapanTimes reports, Wang said, if pollution wasn’t brought under control by 2017, he would cut off his own head and present it to the country’s leadership. So, imagine his relief, when after pollution levels hit 20x WHO's risk limit, a cold front – as caught on tape below –  swept away the choking smog (and saved his neck).

   

   

  The smog surged in northern China on Monday during President Xi Jinping’s visit to Paris, where he vowed to work with U.S. counterpart Barack Obama and other world leaders to stem carbon emissions and fight climate change. The capital raised its pollution alert to orange — the second-highest level — for the first time in 13 months on Sunday, the same day that the Chinese government said it had met pollution-reduction targets for the year.

  Late Tuesday, winds began to flush the smog from the region and, by Wednesday morning, PM2.5 levels in Beijing had plunged to single digits. But the skies couldn’t clear before people began mocking local officials who had so frequently vowed to control the pollution.

  “The mayor has vowed on his own head to control the smog, but we still have to rely on the wind to control it,” Sichuan People’s Radio wrote on its official Weibo account.

  

  

  

  

  

• JeB SaNTa…

  

  

  

  

  

• Here's Why "Philanthropic" Mark Zuckerberg Will Place Facebook Shares In A For-Profit LLC

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Yesterday, all the media hoopla over Mark Zuckerberg’s announcement to “give away” 99% of his Facebook shares to philanthropic causes, came and went in the expected torrent of internet commentary. However, what you might have missed are the specifics around how he decided to safeguard those shares, and how unusual the for-profit LLC structure is for a charity.

  Bloomberg reports:

  The decision by Mark Zuckerberg and his wife, Priscilla Chan, to gradually give away 99 percent of their Facebook fortune is big news not just for the huge sum involved—about $46 billion—but for how the couple chose to achieve their philanthropic goal. Rather than set up a private foundation or charitable trust as Bill and Melinda Gates did, the Chan Zuckerberg Initiative will be structured as a limited liability corporation.

   

  It’s a highly unusual step for a massive philanthropy. “I’ve never seen someone set up an LLC exclusively for a philanthropic purpose before,” says Jane Wales, vice president of philanthropy and society at the Aspen Institute. “Normally they set up a foundation for the tax advantages of doing so.” Here are some significant ways that LLC status will shape what Zuckerberg and Chan do with their wealth.

   

  1. There won’t be limits on lobbying

   

  It seems clear the Chan Zuckerberg Initiative will put money to work in politics. Facebook, in its official description of its founder’s new LLC, noted that “making private investments and participating in policy debates” will be part of the mission. In a public letter Zuckerberg wrote to his newborn daughter, Max, he likewise emphasized an appetite for pushing a policy agenda: “We must participate in policy and advocacy to shape debates.” If the charitable venture had been set up as a traditional tax-exempt foundation—what is called a 501(c)(3)— it wouldn’t have freedom to lobby lawmakers or engage in other political activities. The Internal Revenue Service prohibits tax-exempt groups from “directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.”

  There you go. As many expected, it appears this move is less about charity, and more about ensuring that Zuckerberg, the oligarch, is able to frame U.S. government policy in any way that he, and his billions, so desire.

  It appears Zuckerberg has carefully studied the Warren Buffet playbook.

  

  

  

  

  

• China Services PMI Jumps To 4-Month High (And Drops Near 2015 Lows)

  Just like Chinese Manufacturing, the Services PMI surveys from official sources and Caixin contradict each other. Providng hope for every bull, bear, and greater fool, official government data suggests the services economy is doing great and stimulus is working as it jumps to 4-month highs. However, Caixin’s Services PMI shows a sudden drop near 2015 lows suggesting the need for moar stimulus now… take your pick, it’s all farce!

   

  

   

  Yuan (on- and off-shore) are both flat following the fixing but stocks are reversing yesterday’s divergence (CSI-300 and Shanghai flat to lower, ChiNext and Shenzhen jumping higher).

   

  Charts: Bloomberg

  

  

  

  

  

• Mexico Faces Its Biggest Corporate Default In Two Decades As Construction Giant Misses Bond Payment

  Back in August, we said that “Something Is Very Wrong At Mexico’s Largest Construction Company…” 

  “Let’s say, for argument’s sake, that you’re a big company in an emerging market and suddenly, a commodities crash for the ages and a “surprise” devaluation by the world’s engine for global growth and trade sends your country’s currency into a veritable tailspin,” we wrote. “If that were the case, just about the worst possible situation you could find yourself in would go something like this (adapted from Bloomberg): “Eighty-five percent of [your] backlog is denominated in the [home currency], which plunged to a record low this week [and] almost half of [your] debt is in foreign currencies, mostly dollars.”

  That was the situation facing Empresas ICA SAB which had just spooked bond investors by selling a key 3% stake in an airport operator for $56 million in order to pay down debt.

  Well, after turning in its worst quarter in nearly a decade and a half in October, Empresas ICA SAB missed an interest payment this week in what Bloomberg says is “just a prelude to what’s likely to be the biggest default in Mexico in at least two decades.” Some $31 million in debt service payments came due on Monday and the company elected to utilize a 30-day grace period to try and make the payment.

  “Under the terms of the indenture governing the 2024 Notes, the use of the 30-day grace period does not result in an event of default,” the company said, cheerfully. 

  Carlos Legaspy, a money manager who holds ICA bonds due in 2017, 2021 and 2024, wasn’t as optimistic: “Do I think they’re going to pay within 30 days? No. The 30 days are not going to make any difference.” Here’s a look at the 2024s:

  

  And the 2021s and 2017s:

  

  And as for the equity, well, no luck there either: 

  

  Moody’s is disgusted. “The use of the 30-day grace period does not constitute an event of default in itself, however, it reflects the precarious liquidity of the company and is a likely precursor to more formal refinancing process or distressed exchange,” the ratings agency said on Wednesday, on the way to downgrading ICA to Caa3, from B3. Here’s more: 

  The negative outlook reflects the ongoing uncertainty as the company enters this new phase of negotiations with its creditors, payment risk on upcoming interest and debt maturity payments, and the possibility that missed coupon payments beyond grace period results in a more formal debt restructuring filing. The outlook also entails the possibility that recovery for bondholders will not be commensurate within the Caa3 rating, leading to further downgrades. For example, recovery could be affected if the company launches a distressed exchange resulting in lower than anticipated recovery or if as a result of a distressed sale of assets the company is not able to raise cash enough to cover outstanding debt.

  S&P, who apparently concurs with Carlos Legaspy’s assessment of ICA’s prospects, also cut the company by three levels on Wednesday, noting that there’s a “high probablity” that the 30-day grace period will not help when it comes to avoiding default. 

  “The Mexico City-based builder, which hired Rothschild & Co. as a financial adviser in October, has struggled to shore up its finances as a collapse in oil prices prompted the government to cut spending,” Bloomberg goes on to say, adding that “the peso’s slide has swelled the company’s obligations.” Here’s how ICA compares to previous defaults in Mexico:

  

  “If ICA does not make payment within 30 days, it would be considered an event of default,” BoAML reminds us, before noting that what you’re likely to get is a cross-default on the 2017s and 2021s (shown above). For any BofA clients who may be concerned, don’t worry, your broker apparently has enough sense to avoid defaulted bonds: “we’re underweight on ICA’s bonds on liquidity concerns.”

  In the end, it will be haircut time for creditors and this will go down as just one more example of what happens when the EM growth story shrivels up and dies. We’ll close with another quote from Carlos Legaspy, who is aggravated at ICA’s handling of the liquidity crunch: 

  “It’s extremely frustrating. It shows that they’re kind of flying a little bit by the seat of their pants and that’s always not comforting.”

  

  

  

  

  

• Visualizing The Greatest Economic Collapses In History

  The very first major economic collapse in recorded history occurred in 218-202 BC when the Roman Empire experienced money troubles after the Second Punic War. As a result, bronze and silver currencies were devalued. As HowMuch.net depicts in the video below economic collapses date back thousands of years. While many countries today still feel the effects of the most recent Global Financial Crisis, it is important to note that economic troubles are not unique to the present-day, but rather date back to some of the oldest civilizations.

   

   

  Crisis by Type

  While no two crises are exactly the same, economic collapses can be categorized into the following types:

  • Fiscal: inability of the government to finance its regular activities

  • Credit: reduction in the general availability and accessibility of loans

  • Financial: value of financial institutions or assets suddenly drop

  • Currency: doubt as to whether a country’s central bank has enough reserves to maintain the country’s fixed exchange rate

  • Economic: country experiences sudden downturn brought on by a financial crisis

  • Hyperinflation: extremely rapid period of inflation, usually caused by fast printing of money

  • Supply Side Shock: unexpected event that changes supply of product, resulting in a sudden change in price

  • Speculative Bubble: spike in asset value with a particular industry caused by exaggerated expectations of future growth

  • Stock Market Crash: sudden decline of stock prices across a large part of the market

  The first collapse that occurred in the Roman Empire in the year 202 BC would be classified as a currency collapse. 235 years later, the Roman Empire experienced a financial crisis, caused by the decrease in land prices thereby making difficult for borrowers to pay back loans. As a result, interest loans from the wealthy became scarce.  

  Below is a look at some instances in which each of the other seven types of crisis above were experienced either globally or by a specific country.

  Fiscal: The European debt crisis has been ongoing since 2009 when Greece, Portugal, Ireland, Spain and Cyprus had trouble repaying their government debt.

  Credit: The Crisis of 1763 began in Amsterdam with the collapse of Leendert Pieter de Neufville and spread to Germany and Scandinavia.

  Economic: From 1050-1100, Europe experienced economic decline, mainly due to the Great Invasions. This economic collapse ends in the 12th century with innovations in agriculture and textiles.  

  Hyperinflation: From 235-285 AD, emperors in the Roman Empire devalued currency rather than make unpopular budget cuts.

  Supply Side Shock: In 1970, the world’s major industrial countries entered into an energy crisis, with countries facing substantial petroleum shortages, real and perceived, as well as elevated prices.

  Speculative Bubble: After several years of a booming internet industry, stocks began to sharply decline in 1999, affecting major economies, including U.S., Germany, Great Britain, and Italy.  

  Stock Market Crash: The Wall Street Crash of 1929, or Black Tuesday, was the most devastating stock market crash in the history of the U.S.

   

  Surviving Collapses

  Despite the devastating effects throughout time, economies were able to recover from multiple collapses. For instance, the Roman Empire experienced currency and hyperinflation crises over five centuries while various countries in Europe have endured a number of crises over the last millennium. Below is a list of countries ranked by the amount of crises survived per country.

  • 1 crisis: South Africa, Israel, Mexico, Indonesia

  • 2 crises: India, Chile, Thailand, New Zealand

  • 3 crises: Australia, Canada, Japan, Brazil, Ukraine, Latvia, Estonia, Lithuania

  • 4 crises: Argentina, Andorra

  • 5 crises: China, Russia, Romania

  • 6 crises: Algeria, Morocco, Libya, Tunisia, Sweden, Norway

  • 7 crises: Finland

  • 8 crises: Ireland

  • 9 crises: Macedonia, Albania, Bosnia and Herzegovina, Turkey, Bulgaria, Serbia

  • 10 crises: Croatia, Switzerland, Germany, Croatia, Cyprus, Slovenia

  • 11 crises: Austria, Greece, Netherlands

  • 13 crises: Spain, Italy, Portugal

  • 26 crises: United States

  With only 239 years of existence as a country, the United States has experienced double the number of crises as Spain, Italy, and Portugal, which are much older societies. This equates to approximately one crisis every 9 years! Over time, the United States developed a boom-to-bust economic cycle, commencing with the Panic of 1819 when a depression was caused by bank failures. These cycles vary with time and severity. Given the strength of the U.S. economy and sophistication of its capital markets, the U.S. is able to have shorter cycles by effectively adjusting policy when the economy expands and contracts. Under this cycle theory, one would expect the next U.S. economic collapse to occur in 2025, probably much sooner.   

  Patterns of the Past

  When the Industrial Revolution began in Europe in the 18th and 19th centuries, timing between economic collapses became notably shorter. Instead of having over 100-200 years of crisis-free periods, the 19th century began to see a sharp decline in the length of time, with a crisis occurring approximately once every decade. While the length of time has varied between collapses, it is evident that economic collapses became not only more frequent, but also more widespread. The first instance of a global crisis was experienced across Europe and the U.S. in 1873-1879 in which multiple countries experienced a worldwide price recession called the Long Depression. Over one hundred years later, stock markets around the world crashed during Black Monday, beginning in Hong Kong. Progress in technology and telecommunications has created greater accessibility among countries in the present-day. As a result, the ripple effects of events, both good and bad, spread faster and are sometimes unavoidable.

  Source: HowMuch.net

  

  

  

  

  

• Turkey's Geopolitical Value

  Submitted by Guillermo Valencia, founding partner of MacroWise

  Turkey’s Geopolitical Value

  “Who controls the food supply controls the people? who controls the energy can control whole continents? who controls money can control the world.”

        – Henry Kissinger

  Europe’s energy dependency

  Gas distribution is a powerful motive behind the Syrian war.

  The biggest gas importer in the world is the European Union (EU), which invests around 263 billion dollars a year in this energy resource. Main exporters to Europe are Russia and Norway.

  Due to the current Ukrainian conflict, dependency on Russia as the main gas supplier has become a risk for the national safety of the countries that comprise this political community.

  Avoiding dependence of gas coming from Russian is a top priority for the European Union

  The latter has exposed the need to build gas pipelines that are not under Russian control, reason why the European Union has been exploring alternatives to diversify the supply. Among their options, there are countries that have the world’s greatest gas reserves. On one hand, there are Eurasian countries like Iran and Qatar? on the other hand, there is the Caucasian region with territories such as Azerbaijan and Turkmenistan.

  

   

  The gas pipelines that would connect the Caucasus and Iran, and that are priority for the European Union are the following:

  Nabucco and Transcaspia: It connects Azerbaijan with Eastern Europe, passing through Turkey. This gas pipeline exists, but Azerbaijan’s reserves are not enough to cover the energy demand of the European Union. The construction of the transoceanic gas pipeline through the Caspian Sea would connect the supply from Turkmenistan and Kazakhstan with Europe. These countries barely make up 3% of global gas exports.

  Qatar-Saudi Arabia-Syria-Turkey: Qatar exports 11% of global gas. Building this gas pipeline will be a direct threat to Russia’s supremacy over the control of gas. Syria and Russia have been military allies since the Cold War. Furthermore, Syria’s government’s circle of power is comprised of Alawites, a Shiite sect. Iran is not only the Shiite epicenter, but also provides military support to Syria.

  Turkey, Saudi Arabia, Qatar, the United States, the European Union and other Gulf countries have supported several rebel groups against the regime of Bashar al-Asad, indirectly contributing to the strengthening of the Islamic State within the region.

  Islamic (Iran-Iraq-Syria-Lebanon): Iran has gas reserves comparable to Russia. Building a gas pipeline that goes through Iraq, Syria and Lebanon and ends in the Mediterranean is a diversification alternative for the European Union. The motives for the United States and the European Union to lift the economic embargo on Iran lies in its strategic value. In turn, the country has been asked not to enrich nuclear power plants.

  After the fall of Saddam Hussein (Sunni dictator), and the withdrawal of the United States’ troops from Iraq, a power void was left in this mostly Shiite country. Said void allowed for Iran’s geopolitical expansion and the creation of the Islamic State as a reactionary Sunnite force to the Shiite expansion in the region.

  The consequences of power’s hidden snag

  One of the consequences of these power struggles was the strengthening of the Islamic State, a Frankenstein that is out of its creators’ control, and is now a common enemy to the U nited States, the European Union, Russia and Iran. Turkey, Saudi Arabia, Qatar and other Persian Gulf countries have been pressured by their western allies to fight this group. Nonetheless, these countries have common interests with the Islamic State within Iraq and Syria.

  Low oil prices and geopolitical + Iranian deal could make the Gulf countries currency pegs very fragile.

  Turkey is the next key region in this conflict, since the only alternative gas pipeline that supplies Russia, and comes from Asia (Nabucco), passes through Turkey. Future conflicts between Turkey and Russia will be part of the Russian strategy within the region. The only difference is that Turkey belongs to NATO and scaling the conflict will have global repercussions. Beyond predicting the next conflict, the key point is that the geopolitical risk is not priced in the region. Saudi Arabia, Kuwait, Qatar, credit default swaps (CDS) below 100 bps and Turkey and Russia CDS at 270 bps levels are not reflecting the geopolitical tension in the region.

  

  

  

  

  

• "Equities Peak 12-18 Months After A Peak In Margins; We Are Now 15 Months After The Peak In Margins"

  Two months ago, we looked at historical examples of what happens with the US economy any time corporate profit margins suffer a drop as large as the one experienced over the past 12 months when margins have plunged by (at least) 60 bps. The outcome: a recession on 5 out of 6 prior occasions.

  

   

  And while the economy is already feeling the recessionary impact of sliding margins as predicted in early October, with the manufacturing ISM printing at its lowest level since the recession, an even more important question is what happens to the stock market now that margins have peaked. On this topic, most have been mum with the usual “answer” being that margins will keep rising. Alas, as even Goldman recently showed they won’t.

  So assuming margins have peaked in this cycle, what does that mean for stocks? For the very simple answer we go to Credit Suisse according to which “equities peak 12-18 months after a peak in margins.” 

  Where are we now? “we are now 15 months after the peak in margins.”

  

  So, give or take three more months?

  

  

  

  

  

• The One Record That Was Broken On Black Friday That Mainstream Media Will Not Be Excited About

  While overall retail sales disappointed following President Obama's impassioned plea to Americans that the world is in grave danger from terrorists but they should go about their usual business of spend-spend-spend-ing on Black Friday, it appears they did buy one thing. As USA Today reports, more Americans had their backgrounds checked purchasing guns on Black Friday than any day on record, according to data released by the FBI this week.

  Friday's purchases came the same day as the mass shooting incident in Colorado Springs that killed three people and injured nine others.

  On Saturday, President Obama called for tighter controls of "weapons of war" in the wake of the Planned Parenthood shooting.

  "This is not normal," Obama said. "We can't let it become normal. If we truly care about this — if we're going to offer up our thoughts and prayers again, for God knows how many times, with a truly clean conscience — then we have to do something about the easy accessibility of weapons of war on our streets to people who have no business wielding them. Period. Enough is enough."

  As USA Today reports,

  The National Instant Criminal Background Check System processed 185,345 requests on Nov. 27, one of the largest retail sales days in the country.

   

  "This was an approximate 5% increase over the 175,754 received on Black Friday 2014," wrote Stephen Fischer, the FBI's chief of multimedia productions. "The previous high for receipts were the 177,170 received on 12/21/2012."

   

  Previous spikes for background checks, conducted before a gun buyer can obtain a firearm, occurred after prominent mass shootings, like in December 2012 in the wake of the Sandy Hook Elementary School shooting.

  *  *  *

  It appears Thanksgiving is a popular time in America to reaffirm the right to bear arms as other Black Friday shopping days in 2014, 2013 and 2012 occupied the FBI's "top 10" list of the most background checks processed in a 24-hour period.

  

   

  But the overall trend of rising background checks continues…

  

   

  *  *  *

  Of course, today's mass shooting in San Bernardino, CA already brought comments from Hillary…

  I refuse to accept this as normal. We must take action to stop gun violence now. -H https://t.co/SkKglwQycb

  — Hillary Clinton (@HillaryClinton) December 2, 2015

  

  

  

  

  

• The Deep State & The War On Cash

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

  An Attention-Grabbing Headline

  “The first shot in the War on Cash?”

  The headline caught our attention. We’d just finished researching and writing about the “Deep State” for the latest issue of our monthly publication, The Bill Bonner Letter.

  This is something you’re likely to hear more about. The Deep State describes the way the U.S. government really works, rather than the way it’s supposed to work.

  Over the years – hardly noticed by the press or the public – a group of insiders has taken control of Washington.

   

  

  Originally the term “Deep State” was coined to describe various anti-democratic coalitions within the political system of Turkey (Turkish: derin devlet). In them meantime the term is widely used to describe all types of “state-within-the-state” type arrangements, the real power behind the throne, so to speak.

   

  Some of them are familiar government hacks and politicians. Some, largely anonymous, are in the private sector. And some represent foreign governments, foreign businesses (notably banks), and foreign organizations.

  These zombies and cronies – who number in the thousands – have much more power and authority than 100 million voters. Research shows that if they want legislation, they get it.

  Voters, on the other hand, get what they want only rarely… and probably only because the insiders want the same thing. The insiders get the money, too. The tens of trillions of dollars diverted into boondoggle bailouts, QE, and ZIRP, for example – they had to go to someone.

  And now the Deep State is setting itself up to get even more…

   

  

  Now you know why it had such large eyes and such big teeth …

   

  Two Kinds of “Cash”

  Dr. Matthew Partridge in our London office reports for Money Week magazine that a small Swiss bank has become the first retail bank in the world to charge customers negative interest on their deposits.

  A number of central banks – including the Swiss National Bank – have already taken benchmark interest rates below zero. But, beginning next year, Alternative Bank Schweiz (ABS) will be the world’s first bank to pass those negative rates on to customers.

   

  

  Alternative Bank Schweiz is a so-called “sustainable” bank that tries to save the planet by funding all sorts of “green” and “ethical” investments. The “ethical investment” fad is in our opinion largely based on exploiting people’s gullibility (the same principle is at work in expensive bottled water and many “bio food” items). This is not meant to cast aspersions on ABS specifically, since there exist of course also organizations and individuals in this field who are genuinely trying to do good. We are instinctively wary of do-gooders and world improvers though, as they usually either strive to enlist the coercive power of the State or thrive on exploiting the innate guilt of first world populations (guilt over having it better than others and allegedly destroying the planet in the process).

   

  In a letter to its customers, ABS said it would charge account holders 0.125% a year to hold their “cash” deposits to protect its profit margins. And anyone with 100,000 Swiss francs ($97,316) or more on deposit will have to pay 0.75% a year. Let’s stop here for a moment and clarify…

  There are “cash deposits” and there is “cash.” Cash deposits are an oxymoron. If you say you have cash in the bank, you are mistaken. The bank doesn’t really hold “your” cash. It owes you money. If it goes broke, you’ll stand in line with other creditors to get it (subject to whatever guarantees may be in place… and however well they may work).

  Cash in hand is different. It is physical. Paper. You can do what you want with it. And you don’t pay a negative interest rate. Which is why the feds want to ban cash. They say it will make it easier for them to stimulate the economy.

  As long as you can hold physical cash, you have an easy way to escape negative interest rates: You just take the money out of the bank and put it in your home safe. But if physical cash is illegal, you have no choice. You have to keep “your money” on deposit at the bank… and take whatever negative rate the bank imposes on you.

   

  

  Sheer insanity: the Swiss National Bank has set three month LIBOR at an average of minus 75 basis points.

   

  Total Control

  Of course, the idea that taking away your money will stimulate economic growth is ridiculous. As former banker, hedge fund manager, and expert on the fiat money system Warren Mosler recently told Bonner & Partners Investor Network subscribers:

  “First, central bankers have got the interest rate thing backward. They think lowering rates will somehow stimulate the economy.

   

  But negative interest rates are just a tax. You start off with a certain amount of money – say, $100. If the rate is negative 1%, then you have $99 at the end of a year.

  Isn’t there some theory that says when people’s money goes away, and they have less, they spend less?”

  If negative rates don’t really encourage spending, why bother? This brings us to the real danger of banning cash… and perhaps the real reason the feds want to do it – more control.

  Reports William N. Griggs at The Free Thought Project under the headline “Drone Pilots have Bank Accounts and Credit Cards Frozen by Feds for Exposing U.S. Murder”:

  “For having the courage to come forward and expose the drone program for the indiscriminate murder that it is, four vets are under attack from the government they once served.

  The U.S. Government failed to deter them through threats of criminal prosecution, and clumsy attempts to intimidate their families. Now, four former Air Force drone operators-turned-whistleblowers have had their credit cards and bank accounts frozen, according to human rights attorney Jesselyn Radack.

   

  ‘My drone operators went public this week and now their credit cards and bank accounts are frozen,’ Radack lamented on her Twitter feed. This was done despite the fact that none of them has been charged with a criminal offense – but this is a trivial formality in the increasingly Sovietesque American National Security State.”

   

  

  The four former drone pilots and whistle-blowers whose electronic financial life was simply erased as punishment for their audacity to inform the public about the murderous practices of the drone program. No court order or indictment was required – the State simply flipped a switch, depriving them of the means to defend themselves. Land of the Free, indeed.

   

  If we are forced to keep our money in the bank… and cash is outlawed… the Deep State will have total economic control over us all.

   

  

  

  

  

  

• UK Passes Vote To Begin Syria Airstrikes

  And just like that another country has decided it would send its fighter planes in the already congested skies above Syria, when moments ago the UK parliament decided, in a 397 to 223 vote, to begin airstrikes on Syria.

  According to the vote, U.K. lawmakers backed Prime Minister David Cameron’s plan to extend air strikes against Islamic State from Iraq into Syria, after the opposition Labour Party split over whether to support military action.

  The House of Commons in London voted in favor of a motion by Cameron’s government authorizing action. Lawmakers had earlier rejected an amendment that would have blocked the use of military force.

  The 10 1/2 hours of debate saw many tetchy speeches and interventions, but the best received came from Labour foreign-affairs spokesman Hilary Benn, ending the debate by taking the opposite side of the argument from his leader, Jeremy Corbyn, a career-long opponent of military interventions.

  “We must now confront this evil,” Benn said, as Corbyn sat in silence beside him. “It is now time for us to do our bit in Syria.”

  What the RAF’s fighters will instead confront upon their campaign, which is set to begin imminently, is a lot of Russian dogfighters, each armed with Air to Air missiles thanks to Turkey, making the probability of a deadly chance encounter above Syria that much higher.

  

  

  

  

• 2 Suspects Dead (1 Male, 1 Female), 3rd Detained After Mass Shooting Leaves 14 Dead, 17 Wounded In San Bernardino

  Update 10: AP reports, a law enforcement official says a workplace dispute probed as possibility in California shooting. Officials say gunmen were probably American citizens "not terrorists."

  NY Daily News has a few thoughts…

  Fusillade à #SanBernardino: la une du @NYDailyNews https://t.co/1xc5TwxTDK pic.twitter.com/HokRyq29jg

  — Carole Aoun (@caroleaoun) December 3, 2015

  Update 9: Police confirm an explosive device was found inside the building where the shooting took place. 2 suspects dead (1 male, 1 female), 3rd person detained after running from SUV shootout scene (unclear if involved in shooting). 1 officer wounded.

  #SanBernardino police chief: Third person was seen running from SUV scene, person is detained. Unknown if involved pic.twitter.com/oFniWLpGIu

  — BuzzFeed News (@BuzzFeedNews) December 3, 2015

  1 male, 1 female suspect dead after #SanBernardino shooting : https://t.co/z2gq7cVtZR pic.twitter.com/xvNoMDgUHZ

  — ABC 4 News (@abc4utah) December 3, 2015

  #SanBernardino Shooting: Bomb squad continues to investigate possibly-explosive device at Inland Regional Center pic.twitter.com/Hv3O55GTMS

  — Intl. Business Times (@IBTimes) December 3, 2015

  Update 8: Authorities are serving search warrants at a building in Redlands, where on of the suspects may be originally from.

  Authorities are serving search warrants at a building in Redlands, @SereneOnScene reports. #breaking #pursuit LIVE: https://t.co/d0126ZB5CX

  — CBS Los Angeles (@CBSLA) December 3, 2015

  Update 7: The San Bernardino Police chief Burguan tweets that "suspects are down" and one officer is wounded. Unclear if any are still on the loose.

  Suspects are down, one officer wounded. Details still unfolding.

  — Chief Jarrod Burguan (@SBPDChief) December 3, 2015

  And here is an audio recording of the gun battle which took place earlier:

  We just received this AUDIO capturing some of the gun battle sent by a witness on #snapchat. #SanBernardino pic.twitter.com/xE4546XHDs

  — Gadi Schwartz (@GadiNBCLA) December 3, 2015

   

  Update 6: Still more conflicting information, this time from the chief of police according to whom while 2 suspects are being "dealt with" (which supposedly means one killed and one down), while one is still possibly at large. The police is currently searching for the third suspect.

  UPDATE: Police in #SanBernardino: 2 suspects down after police chase, possibly one outstanding. "still very active situation."

  — Breaking News Feed (@pzf) December 3, 2015

  MORE: 1 possible suspect still outstanding in #SanBernardino shooting: https://t.co/cbh6uXffkp pic.twitter.com/EHYdlj8qs3

  — ABC News (@ABC) December 3, 2015

  Update 5: the latest from NBC confirms that while one suspect in custody, the number of suspects shot has grown to two which may account for all three of the original suspects reported at the original crime scene.

  BREAKING: 1 suspect in custody, 2 shot in #SanBernardino shooting that killed at least 14 https://t.co/jUael0Kzyk pic.twitter.com/GnwmVplfl6

  — NBC News (@NBCNews) December 2, 2015

  There is a conflicting report according to which one suspect is still at large and has barricaded in a nearby home.

  #BREAKING: One Suspect Still at Large in #SanBernadino

  — Breaking911 (@Breaking911) December 3, 2015

  San Bernardino police: "I believe there is still possibly a suspect outstanding"

  — Breaking911 (@Breaking911) December 3, 2015

  According to a third report, a pipe bomb was recovered from the suspect SUV.

  MORE: Law enforcement officials say pipe bomb was recovered from suspects in SUV https://t.co/ZKzS7ojK0f pic.twitter.com/iBopyUorxK

  — RT America (@RT_America) December 2, 2015

   

  Update 4: According to CBS, one of the suspects is now down and another one is in custody, while a SWAT team prepares to search the suspect's bullet-ridden SUV

  BREAKING: Police say one suspect down, one in custody, @CBSLA reports; SWAT team has yet to approach vehicle. pic.twitter.com/rRb10HFKfi

  — CBSN (@CBSNLive) December 2, 2015

  UPDATE: Armored shield approaching dark-colored SUV. #breaking #pursuit LIVE: https://t.co/d0126ZB5CX pic.twitter.com/K3ttso3UCz

  — CBS Los Angeles (@CBSLA) December 2, 2015

   

  Here's Obama:

  Watch: @POTUS speaks to @CBSNews on the shooting in San Bernardino. https://t.co/pA56EzrzUW https://t.co/SO0cE5nfCX

  — The White House (@WhiteHouse) December 2, 2015

  Update 3: High speed chase underway on freeway and reports of arrests made. This has culminated with a shoot out with the police, in which a black SUV probably belonging to the suspect has been perforated by gunfire with helicopter cameras showing that at least on suspect has been shot while an officer is also down after the suspect ran away.

  

   

  Heavily shot-up SUV…

  

   

  Someone is down:

  I haven't seen anything like this on Live TV since the Hollywood Bank Shootout. San Bernardino just had a shootout. pic.twitter.com/DoJSnSj9cz

  — Hi_I'm_RICHIEEEE (@rizman1) December 2, 2015

  Police  described the case as "a domestic terrorist type situation" at the moment, and a Bomb Threat Reported at Loma Linda University Medical Center in San Bernadino.

  They got somebody #SanBernardino More shots fired! They are calling for EMTS pic.twitter.com/WR7yOtbzFM

  — Blake Dearing (@DeletedElite) December 2, 2015

  Just north of the 10 freeway, on San Bernardino Ave., there have been shots fired between officers and suspects. pic.twitter.com/KoPJ1JSmbI

  — reported.ly (@reportedly) December 2, 2015

  Update 2: Police confirm:

  • *POLICE SAY UP TO THREE PEOPLE OPEN FIRE IN CALIF.
  • *POLICE SAY UP TO 14 PEOPLE MAY BE DEAD IN CALIF.
  • *POLICE SAY UP TO 14 PEOPLE MAY BE WOUNDED

  Update 1: The three suspects are believed to be armed with AK-47-type weapons, a local law enforcement official told CNN

  Police storming Inland Center earlier…

   

  Looks like @DHSgov Homeland Security is circling the #SanBernardino area. pic.twitter.com/h63V7GXIZQ

  — Mr. Green (@Mario_Greenly) December 2, 2015

   

  As we previously noted,

  Police are investigating a report of shots fired in San Bernardino. As CBS LA reports, San Bernardino Fire officials are reporting at least 20 victims and 12 reported casualties in a shooting in the 1300 block of South Waterman. Authorities are advising all motorists to stay away from the area around the Inland Regional Center, a center serving people with developmental disabilities in San Bernardino and Riverside counties.

  The Inland Regional Center is a sprawling three-story center serving people with developmental disabilities in San Bernardino and Riverside counties. The non-profit private agency, whose site crashed due to traffic due to news of the shooting, employs nearly 700 people and serves more than 30,000 residents with developmental disabilities for ages ranging from infants to seniors 60 years and older, according to the center’s Facebook page.

  Investigators were searching the building and have yet to clear it. Police said there were reports of one to three shooters involved.

  Marcos Aguilera's wife was in the building when the gunfire erupted. He said a shooter entered the building next to his wife's office and opened fire.

  "They locked themselves in her office. They seen bodies on the floor," Aguilera said, adding that his wife saw ambulances taking people out of the building on stretchers.

  According to the latest update, police confirm three shooters at large wearing masks, body armor and armed with rifles.

  The ATF and the FBI have arrived on the scene of the shooting.

  San Bernardino is deploying heavily armed cops to universities, hospitals, and Planned Parenthood.

  According to the latest news, the Waterman discount mall in San Bernardino, CA has been evacuated.

  *  *  *

  Live Feeds…

  ABC Breaking News | Latest News Videos

  Police looking for 3 white males dressed in military gear. At least 20 injured (and latest reports say 12 dead).

  SBFD units responding to reports of 20 victim shooting incident in 1300 block of S. Waterman. SBPD is working to clear the scene.

  — San Bernardino Fire (@SBCityFire) December 2, 2015

  Hard Closure at Orange Show Rd/ Waterman and Park Center Circle in San Bernardino. AVOID THE AREA POLICE ACTIVITY!

  — SB County Sheriff (@sbcountysheriff) December 2, 2015

  .@SanBernardinoPD has confirmed an active shooter in the area of Orange Show Rd/ Waterman Ave near Park center. #SBCSD assisting.

  — SB County Sheriff (@sbcountysheriff) December 2, 2015

  #Breaking Eye witness: A man came in started shooting, she and a group hid inside her office, they saw multiple bodies on the ground.

  — Natasha Fatah (@NatashaFatah) December 2, 2015

   

  The scene of the crime

  

   

  Police presence is building…

  

  

  

  

  

  #SanBernardino La police recherche 3 tireurs en tenue militaire. Au moins 12 morts pic.twitter.com/X0aomkOqpv

  — Breaking3zero (@Breaking3zero) December 2, 2015

  #BREAKING: Active shooter on loose in San Bernardino. Reports of 20 victims. https://t.co/jD63swrFzF #kprc2 pic.twitter.com/5KRPj6z6UH

  — KPRC 2 Houston (@KPRC2) December 2, 2015

  #SanBernardino pic.twitter.com/CSq4SQgtFy

  — Bradd Jaffy (@BraddJaffy) December 2, 2015

  BREAKING: Reports for as many as 12 people fatally shot in San Bernardino… https://t.co/UVR343oIRD pic.twitter.com/7CK9LvB5yU

  — ABC 7 Chicago (@ABC7Chicago) December 2, 2015

  Putting today's shooting in context, there have been 334 days and 351 mass shootings so far this year, not including this one.

  

   

  And here is Hillary

   

   

  I refuse to accept this as normal. We must take action to stop gun violence now. -H https://t.co/SkKglwQycb

  — Hillary Clinton (@HillaryClinton) December 2, 2015

  

  

  

  

  

• Syria Decoded: Explaining The Conflict In One Infographic

  Decoding the war in Syria is not for the faint of heart. 

  The situation on the ground is, and always has been, impossibly convoluted. The hodgepodge of rebels, militants, and jihadists battling Assad’s army for control of the country would be confusing enough on its own without having to take into account the myriad state sponsors that fund, arm, and train the opposition. 

  In addition to covert (and we use that term loosely because at this juncture, the fact that the US and its regional allies are backing the Sunni extremists operating in the country is just about the worst kept secret in the geopolitical universe) support, numerous world powers are engaged in overt military ops. Russia is in the skies above western Syria while the US, France, and (soon) Britain are flying in the east. Turkey conducts bombing runs along its border with Syria and Iran has a heavy troop presence operating under cover of Russian airstrikes. 

  Meanwhile, Ankara has been accused of enabling the Islamic State crude trade and it seems at least possible that ISIS oil eventually ends up in Israel as part of the same cargoes that contain Kurdish oil.

  Finally, the YPG is waging an honest war against Islamic State and would probably be even more successful than they already are if their “allies” in Washington were serious about the fight. 

  Oh, and al-Qaeda is around too, surviving off aid to al-Nusra from Saudi Arabia and Qatar. 

  For those looking to make sense of it all, we present the following infographic which should go some ways towards untangling what has become one of the most complex, convoluted wars in recent memory.

  

  

  

  

  

  

• Stocks Plunge Back To Bonds' Reality Amid Crude Carnage

  "Do Not Panic"…

  It appears 20 victims is just not enough to warrant a massive short-squeeze like Paris!!

  Stocks caught down to bonds' reality…

  

   

  And some longer-term (post-FOMC) context…

  

   

  Before the US opened though, China saw massive divergence in performance…

  

   

  This was the worst day for stocks in 3 weeks with high-flyer Trannies the biggest loser (as crude collapsed)…

  

   

  Futures show the action a little clearer…

  

   

  Leaving all major indices (apart from the NASDAQ's late save) in the red on the week…

  

   

  Stocks decoupled from USDJPY as ADP hit and tumbled with Crude…

  

   

  Treasury yields were mixed with the long-end flat and short-end higher (the belly was worst with 5Y +4.5bps, 30Y unch, 2Y +3bps)

  

   

  The USD jumped to 12 year highs after ADP hit but rapdily slipped lower during Crude's collapse, Yellen's speech, and the mass shooting…

  

   

  Commodities saw a gap down after ADP reported and the USD surged…

  

   

  This was WTI's worst day in 2 months and lowest close since August 27th…

  

   

  Charts: Bloomberg

  

  

  

  

• The End Of Keynesian Orthodoxy

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  On November 9, the OECD issued its twice-yearly Economic Outlook statbook, updated for projections into Q3 for most national economic accounts. Despite past enthusiasm for global prospects in 2015, the narrative has not-so-subtly shifted, a major transformation coming from an orthodox bastion like the OECD.

  Global growth prospects have clouded this year. Global growth has eased to around 3%, well below its long-run average. This largely reflects further weakness in emerging market economies (EMEs). Deep recessions have emerged in Brazil and Russia, whilst the ongoing slowdown in China and the associated weakness of commodity prices has hit activity in key trading partners and commodity exporting economies, and increased financial market uncertainty.

   

  Global trade growth has slowed markedly, especially in the EMEs, and financial conditions have become less supportive in most economies.

  It is difficult to simply accept these limitations lacking comprehensive causative processes put forth, but the fact that they are at least being recognized represents a (small) step forward. These are portrayed as if they are “things” of themselves; commodity price collapse, “financial market uncertainty”, global trade growth collapse, etc. Despite the unexamined “mystery” of all those, or maybe because of that intentional obtuseness, the OECD still expects global growth to accelerate in 2016 and really 2017. That is, of course, the same pattern that plays out year after year after year, only 2015 has already held more than the typical amount of setbacks and “unconnected” financial mysteriousness.

  To this point, the organization is unwilling to see anything more than a visible economic problem for EM’s alone. Brazil and Russia have their recessions, and China its unexplained slowdown, but the rest of the “developed” world is expected to remain rather steady in growth (well, except Canada perhaps?) no matter all the global turmoil. It is the stated “risks”, however, that suggest much about the inner turmoil at these economic outposts:

  Growth would also be hit in the euro area, as well as Japan, where the short-run impact of past stimulus has proved weaker than anticipated and uncertainty remains about future policy choices.

   

  There are increasing signs that the anticipated path of potential output may fail to materialise in many economies, requiring a reassessment of monetary and fiscal policy strategies.

  So while the OECD isn’t quite ready to throw in the towel globally, they are, significantly, at least contemplating how much of their baseline is already wrong and inapplicable. This is a marked and remarkable shift from the OECD position from just before the “dollar’s” mid-2014 turn. From the May 2014 version:

  On the other hand, the pace of growth in the major emerging market economies has slowed. Part of this deceleration is benign, reflecting cyclical slowdowns from overheated starting positions – the growth rates now seen in China are undoubtedly more sustainable from both economic and environmental perspectives than the double-digit pace of a few years ago. However, managing the credit slowdown and the risk that built up during the period of easy global monetary conditions could be a major challenge.

   

  The likelihood of some of the most worrisome events that have preoccupied markets and policymakers in recent years has diminished. Risks are overall better balanced although still tiled to the downside. Financial tensions in emerging markets are one risk that could blow the global recovery off course and have bigger spillovers than anticipated It is not the only one. Falling inflation in the euro area could turn into deflation. Geopolitical risks have also increased since the start of the year.

  Despite suggesting those “risks” to the global economic forecast, and thus providing again recognition that even the OECD saw the unifying financial or monetary element, the “dollar”, as early as then, they went on, as always, to just dismiss them in their projections.

  Global growth and trade are projected to strengthen at a moderate pace through 2014 and 2015.

   

  Activity in the OECD economies will be boosted by accommodative monetary policies, supportive financial conditions and a fading drag from fiscal consolidation

   

  Growth in many of the large emerging market economies (EMEs) is expected to remain modest relative to past norms, with tighter financial and credit conditions and past policy tightening taking effect and supply-side constraints also damping potential ouput.

  And worst of all, the usual orthodox nonsense and buzzwords:

  Normal demand-side accelerator-type mechanisms, healthier corporate balance sheets and reduced uncertainty should help business investment to strengthen gradually, and thereby push up trade intensity.

  Needless to say, there is far too much of financial and economic nightmare in 2015 to be so complacent about not just 2017 but just the rest of this year – Canada, Brazil and Japan already fraying the ragged edges of even the latest outlook. That also includes the US as it has almost assuredly fallen into a manufacturing recession already. From this, we are supposed to ignore just how well that fits within this damning global economic context. The only way to project gradual global recovery is if the US manufacturing recession is a “thing” all its own, unrelated to any of the innumerable other “things” that have shown up this year; commodity price collapse, “financial market uncertainty”, global trade growth collapse, etc.

  Recent manufacturing readings for the US have only confirmed the recessionary presence, meaning it is left to individual subjectivity as to how to place it within meaningful context.

  The U.S. manufacturing sector contracted in November, falling to its worst levels since June 2009, when the economy was still in the midst of a recession, according to an industry report released on Tuesday.

   

  The Institute for Supply Management (ISM) said its index of national factory activity fell to 48.6, the first time the index has been below 50 since November 2012, after reading 50.1 in October. The reading was for expectations of 50.5, according to a Reuters poll of 77 economists.

  And how does CNBC provide said meaning?

  Frugal consumers are also holding back growth.

  

  From the OECD’s perspective, these were all just “risks” in 2014 and downplayed at that. Now that they are no longer risks but reality, and much worse reality than when even contemplated as risk, they are still treated as just risks? Such confusion stems from the anti-scientific process at the heart of economics. The discipline starts with a predetermined endpoint and then works backwards to fill in commentary and meaning. In other words, Janet Yellen says the economy will be terrific next year (after saying the same last year) and that is the defining quality for everything from there to now. Anything that gets in the way of reaching that future goalpost is “transitory” or an anomaly – no matter how regular these aberrations have become.

  In fact, they are everywhere all over the globe and demonstrate what should be a quite alarming coincidence and even coordination. How is it that the US PPI would so closely track the Chinese version if everything contained within each are nothing more than isolated variances of no particular concern, especially in the global context? If nothing else, it is just blind common sense that would realize even generically the desperate coincidence of so many financial irregularities this year as the global economy, and especially global trade, follows them. Again, these are no longer just risks.

  The resistance to such an awakening is understandable if still lamentable. If recession is truly the looming assurance, as it increasingly appears, that would mean not just the end of the recovery but the end of “accommodation” as a given force. In other words, Janet Yellen and the OECD start backwards from their endpoint because of their unshakable faith in monetarism, a faith that actually defines how they think an economy does work (and how they produce the core assumptions in their models); should that path from here to there completely unravel, so, too, does their assumed power and philosophy. So they and the media look upon what has already unraveled and claim instead that it has not; the recovery remains intact even though it has ended in a larger and larger portion of the world, including the US.