• The Failed Moral Argument For A "Living Wage"

  Submitted by Ryan McMaken via The Mises Institute,

  With Labor Day upon us, newspapers across the US will be printing op-eds calling for a mandated “living wage” and higher wages in general. In many cases, advocates for a living wage argue for outright mandates on wages; that is, a minimum wage set as an arbitrary level determined by policymakers to be at a level that makes housing, food, and health care “affordable.”

  Behind this effort is a philosophical claim that employers are morally obligated to pay “a living wage” to employees, so they can afford necessities (however ambiguously defined) on a single wage, working forty hours per week. This moral argument singles out employers as the morally responsible party in the living wage equation, even though the variables that determine a living wage go far beyond the wage earned.

  For example, as I discussed here, the living wage is a function not simply of the wage, but of the cost of housing, food, health care, transportation, and a myriad of other factors. Where housing costs are low, for example, the living wage will be lower than it would be in a place where housing costs are high.

  So, what matters is not the nominal wage paid by the employer, but the real wage as determined by the cost of everything that a wage is used to purchase.

  Why Is Only the Employer Responsible?

  So, if it’s the real wage that matters, why is there a fixation on the nominal wage itself? After all, wages, in real terms, could be increased greatly by forcing down food costs and rents. So, why is there not a constant drum beat for grocers to lower their prices to make necessities affordable? Why are activists not picketing outside grocery stores for their high prices? Why are they not outside KB Homes headquarters for KB’s apparently inhumane efforts at selling homes at the highest prices that the market will bear? Why are people not picketing used car dealers for not lowering their prices to make transportation affordable for working families? And why are gas stations strangely exempted from protests over the high cost of gasoline? Certainly, all of these merchants are just as instrumental in determining real wages as any employer. Grocers, landlords, home sellers, and the owner of the corner gas station can put a huge dent in the family budget when they allow their “greed” to impel them to charge the highest prices they can get away with in the market place.

  And yes, it’s true that plenty of activists regularly denounce landlords as “slumlords” or greedy capitalists for charging the highest rents the market will bear. And there are still plenty of activists who argue for price controls on rents and food. But they’re in a small minority nowadays. The vast majority of voters and policymakers recognize that government-dictated prices on food and housing lead to shortages. Setting a price ceiling on rents or home prices simply means that fewer housing units will be built, while setting a price ceiling on eggs, or milk or bread will simply mean that fewer of those staples will be brought to market.

  Such assertions are barely even debated anymore, as can be seen in the near-extinction of new rent-control efforts in the political sphere. You won’t see many op-eds this Labor Day arguing for price controls on fruit, gasoline, and apartments. You won’t see any articles denouncing homeowners for selling their homes at the highest price they can get, when they really should be slashing prices to make homeownership more affordable for first-time homebuyers.

  So, for whatever reason, homeowners, grocers, and others are exempt from the wrath of the activists for not keeping real wages low. The employers, on the other hand — those who pay the nominal wage — remain well within the sights of the activists since, for some arbitrary reason, the full moral obligation of providing a living wage falls on the employer.

  Were food prices to go up by 10 percent in the neighborhood of Employer X, who is responsible? “Why, the employer, of course,” the living-wage activists will contend. After all, in their minds, it is only the employer who is morally obligated to bring up real wages to match or exceed an increase in the cost of living.

  So while price controls on food, housing, and gasoline are generally recognized as a dead end, price controls on wages remain popular. The problem, of course, as explained here, here, here, and here, is that by setting the wage above the value offered by a low-skill worker, employers will simply elect to not hire low-skill workers.

  A Low Wage Is Unacceptable, but a Zero Wage Is Fine

  And this leads to the fact that when faced with high wages, employers will seek to replace employers with non-human replacements — such as these automated cashiers at McDonalds — or other labor-saving devices.

  But this phenomenon is simply ignored by the living-wage advocates. Thus, the argument that employers are morally obligated to not pay low wages becomes strangely silent in the face of workers earning no wage at all.

  Indeed, we see few attempts at passing laws mandating that employers hire human beings instead of machines. While it’s no doubt true that some neo-Luddites would love to see this happen, virtually no one argues that employers not be allowed to employ labor-saving devices. Certainly, anyone making such an argument is likely to be laughed out of the room since most everyone immediately recognizes that it would be absurd to pass laws mandating that a road builder, for example, hire people with shovels instead of using bulldozers and paving machines.

  Meanwhile, successes by living-wage advocates in other industries — where automation is not as immediately practical — have only been driving up prices for consumer goods. Yes, living wages in food, energy, and housing sectors will squeeze profits and bring higher wages for those who luckily keep their jobs, but the mandates will also tend to raise prices for consumers. This in turn means that real wages in the overall economy have actually gone down, thanks to a rising cost of living.

  All in all, it’s quite a bizarre strategy the living-wage advocates have settled on. It consists of raising the prices of consumer goods via increasing labor costs. Real wages then go down, and, at the same time, many workers lose their jobs to automation as capital is made relatively less expensive by a rising cost of labor. While the goal of raising the standard of living for workers and their families is laudable, it’s apparent that living wage advocates haven’t exactly thought things through.

   

  

  

  

  

  

• Common Core Or "Communist Core"

  You know things have become bad when… Common core is so wonderful that Lily Tang Williams, a Chinese-American mother of three who grew up in Communist China, says it reminds her of her oppressive, statist nature of her childhood education.

   

  “Communist” Core…

   

  Source: Freedomworks

  h/t Alt-Market.com

  

  

  

  

  

• Peter Schiff Warns: Meet QT – QE's Evil Twin

  Submitted by Peter Schiff via Euro Pacific Capital,

  There is a growing sense across the financial spectrum that the world is about to turn some type of economic page. Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring. There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas. While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet "Quantitative Tightening," the pesky, problematic, and much less disciplined kid brother of "Quantitative Easing."  Now that QE is ready to move out…QT is prepared to take over.

   

  For much of the past generation foreign central banks, led by China, have accumulated vast quantities of foreign reserves. In August of last year the amount topped out at more than $12 trillion, an increase of five times over levels seen just 10 years earlier. During that time central banks added on average $824 billion in reserves per year. The vast majority of these reserves have been accumulated by China, Japan, Saudi Arabia, and the emerging market economies in Asia (Shrinking Currency Reserves Threaten Emerging Asia, BloombergBusiness, 4/6/15). It is widely accepted, although hard to quantify, that approximately two-thirds of these reserves are held in U.S. dollar denominated instruments (COFER, Washington DC: Intl. Monetary Fund, 1/3/13), the most common being U.S. Treasury debt.

   

  Initially this "Great Accumulation" (as it became known) was undertaken as a means to protect emerging economies from the types of shocks that they experienced during the 1997-98 Asian Currency Crisis, in which emerging market central banks lacked the ammunition to support their free falling currencies through market intervention. It was hoped that large stockpiles of reserves would allow these banks to buy sufficient amounts of their own currencies on the open market, thereby stemming any steep falls. The accumulation was also used as a primary means for EM central banks to manage their exchange rates and prevent unwanted appreciation against the dollar while the Greenback was being depreciated through the Federal Reserve's QE and zero interest rate policies.

   

  The steady accumulation of Treasury debt provided tremendous benefits to the U.S. Treasury, which had needed to issue trillions of dollars in debt as a result of exploding government deficits that occurred in the years following the Financial Crisis of 2008. Without this buying, which kept active bids under U.S. Treasuries, long-term interest rates in the U.S. could have been much higher, which would have made the road to recovery much steeper. In addition, absent the accumulation, the declines in the dollar in 2009 and 2010 could have been much more severe, which would have put significant upward pressure on U.S. consumer prices.

   

  But in 2015 the tide started to slowly ebb. By March of 2015 global reserves had declined by about $400 billion in just about 8 months, according to data compiled by Bloomberg. Analysts at Citi estimate that global FX reserves have been depleted at an average pace of $59 billion a month in the past year or so, and closer to $100 billion per month over the last few months (Brace for QT…as China leads FX reserves purge, Reuters, 8/28/15). Some think that these declines stem largely by actions of emerging economies whose currencies have been falling rapidly against the U.S. dollar that had been lifted by the belief that a tightening cycle by the Fed was a near term inevitability.

   

  It was speculated that China led the reversal, dumping more than $140 billion in Treasuries in just three months (through front transactions made through a Belgian intermediary – solving the so-called "Belgian Mystery") (China Dumps Record $143 Billion in US Treasurys in Three Months via Belgium, Zero Hedge, 7/17/15). The steep decline in the Chinese stock market has also sparked a flight of assets out of the Chinese economy. China has used FX sales as a means to stabilize its currency in the wake of this capital flight.

   

  The steep fall in the price of oil in late 2014 and 2015 also has led to diminished appetite for Treasuries by oil producing nations like Saudi Arabia, which no longer needed to recycle excess profits into dollars to prevent their currencies from rising on the back of strong oil. The same holds true for nations like Russia, Brazil, Norway and Australia, whose currencies had previously benefited from the rising prices of commodities.

   

  Analysts at Deutsche Bank see this liquidation trend holding for quite some time. However, new categories of buyers to replace these central bank sellers are unlikely to emerge. This changing dynamic between buyers and sellers will tend to lower bond prices, and increase bond yields (which move in the opposite direction as price). Citi estimates that every $500 billion in Emerging Markets FX drawdowns will result in 108 basis points of upward pressure placed on the yields of 10-year U.S. Treasurys (It's Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington, Zero Hedge, 8/27/15). This means that if just China were to dump its $1.1 trillion in Treasury holdings, U.S. interest rates would be about 2% higher. Such an increase in rates would present the U.S. economy and U.S. Treasury with the most daunting headwinds that they have seen in years. 

   

  The Federal Reserve sets overnight interest rates through its much-watched Fed Funds rate (that has been kept at zero since 2008). But to control rates on the "long end of the curve' requires the Fed to purchase long-dated debt on the open market, a process known as Quantitative Easing. The buying helps push up bond prices and push down yields. It follows then that a process of large scale selling, by foreign central banks, or other large holders of bonds, should be known as Quantitative Tightening.

   

  Potentially making matters much worse, Janet Yellen has indicated the Fed's desire to allow its current hoard of Treasurys to mature without rolling them over. The intention is to shrink the Fed's $4.5 trillion dollar balance sheet back to its pre-crisis level of about $1 trillion. That means, in addition to finding buyers for all those Treasurys being dumped on the market by foreign central banks, the Treasury may also have to find buyers for $3.5 trillion in Treasurys that the Fed intends on not rolling over. The Fed has stated that it hopes to effectuate the drawdown by the end of the decade, which translates into about $700 billion in bonds per year. That's just under $60 billion per month (or slightly smaller than the $85 billion per month that the Fed had been buying through QE). Given the enormity of central bank selling, and the incredibly low yields offered on U.S. Treasurys, I cannot imagine any private investor willing to step in front of that freight train.

   

  So even as the Fed apparently is preparing to raise rates on the short end of the curve, forces beyond its control will be pushing rates up on the long end of the curve. This will seriously undermine the health of the U.S. economy even while many signs already point to near recession level weakness. Just this week, data was released that showed U.S. factory orders decreasing 14.7% year-over-year, which is the ninth month in a row that orders have declined year-over-year. Historically, this type of result has only occurred either during a recession, or in the lead up to a recession. 

   

  The August jobs report issued today, which was supposed to be the most important such report in years, as it would be the final indication as to whether the Fed would finally move in September, provided no relief for the Fed's quandaries. While the headline rate fell to a near generational low of 5.1%, the actual hiring figures came in at just 173,000 jobs, which was well below even the low end of the consensus forecast. Private sector hiring led the weakness, manufacturing jobs declined, and the labor participation rate remained at the lowest level since 1976. So even while the Fed is indicating that it is still on track for a rate hike, all the conditions that Janet Yellen wanted to see confirmed before an increase are not materializing. This is a recipe for more uncertainty, even while certainty increases overseas that U.S. Treasurys are troubled long term investments.

   

  The arrival of Quantitative Tightening will provide years' worth of monetary headwinds. Of course the only tool that the Fed will be able to use to combat international QT will be a fresh dose of domestic QE. That means the Fed will not only have to shelve its plan to allow its balance sheet to run down (a plan I never thought remotely feasible from the moment it was announced), but to launch QE4, and watch its balance sheet swell towards $10 trillion. Of course, these monetary crosscurrents should finally be enough to capsize the U.S. dollar.

  

  

  

  

  

• For "Fearful, Erratic Markets", China's Reserves Are The New Risk-On/Off Trigger: Goldman

  Don’t look now, but China’s FX reserves may become the market’s most important risk-on/ risk-off trigger. 

  Just as the world finally woke up – with the standard two or three year lag – to what we’ve been saying about an acute lack of liquidity in bond markets on the way to making corporate bond market liquidity the talk of the financial universe, so too has everyone suddenly realized why we began shouting about the death of the petrodollar last November. The drawdown of EM FX reserves – or, as Deutsche Bank calls it, the end of the “Great Accumulation” – means a withdrawal of liquidity from global markets and the cessation of the perpetual bid for US paper that had been sustained for years by the buildup of emerging markets’ war chests. 

  Now, between falling commodity prices and the global currency wars, the assets in those war chests are being sold, and that means the Fed faces a very, very difficult decision on whether to hike. 

  It also means that market participants will be watching EM FX reserves more closely than they have at any other time since the Asian Financial Crisis, and that, in turn means that data on reserves, and especially on China’s reserves, is set to become very important as a catalyst for risk-on/ risk-off behavior. On that note, we bring you the following commentary from Goldman out this morning.

  *  *  *

  From Goldman

  Following the RMB devaluation some weeks ago, markets have been erratic, fearful that the initial move was the beginning of a larger devaluation cycle that could disrupt global markets. We don’t believe this, in part because we think the RMB is close to our estimate of ‘fair value’, as we showed in a recent FX Views, so that the rationale for a bigger weakening does not look strong to us. That said, markets remain sceptical and are looking to August FX reserves, which will be published overnight (New York time) Sunday to Monday. Consensus (according to data collated by Bloomberg) expects total foreign exchange reserves to fall to $3,580bn from $3,651bn in July, a drop of -$71bn. We estimate valuation effects for the month around $21bn, driven mostly by the rise in EUR/$, which means that the underlying “flow” change in reserves would be -$92bn. Combining this with consensus for the August trade surplus ($49bn) and assuming that the current account surplus is lower due to service outflows, the underlying net capital outflows could be north of $100bn, which seems to us to be a reasonable approximation of market expectations. We think risks are skewed to the upside relative to this consensus estimate.

  Given how worried markets have been about China, a better-than-expected reserves number holds the potential for risk assets to rally as devaluation fears abate. That said, the next data point on FX reserves will not be the definitive word on flows, since PBoC FX reserves in recent quarters have not been a good predictor of “true” flows as measured by the Balance of Payments (BoP). In particular, the mapping from PBoC reserves to BoP flows went off track from Q4 last year, with PBoC reserves first over-predicting reserve accumulation in Q4 and Q1, by $50bn and $100bn respectively, and then under-predicting in Q2 (by $100bn). In other words, some caution will still be advised in drawing conclusions on flows, where we see the BoP data as the ultimate arbiter. Our EM strategy team has discussed the broader EM context here.

  An additional perspective can be gleaned by looking at official foreign exchange reserves in the rest of non-Japan Asia (NJA), where we also include information on forward books when that is available (Hong Kong, Philippines, Indonesia, Thailand, Malaysia, Korea, India and Singapore). Data for most countries are available through July, but the Bank of Thailand publishes weekly data for the bulk of August. We estimate FX-valuation-adjusted declines in reserves (including forward books) at -$9.2bn for Malaysia in July alone, at -$5.8bn for Thailand in July and August, at -$3.6bn for Indonesia and -$2.9bn for Hong Kong. These declines in official FX reserves are sizeable, and the example of THB suggests that depreciation pressures more generally may have risen materially. The look across the region therefore bolsters our view of potentially bigger outflows from China than is implied by consensus.

  

  

  

  

  

• Bread & Circuses: The Shady, Slimy & Corrupt World Of Taxpayer Funded Sports Stadiums

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Like pretty much everything in the modern U.S. economy, wealthy and connected people fleecing taxpayers in order to earn even greater piles of money is also the business model when it comes to sports stadiums. Many cities have tried to make voter approval mandatory before these building boondoggles get started, but in almost all cases these efforts are thwarted by a powerful coalition of businessmen and corrupt politicians. Sound familiar? Yep, it a microcosm for pretty much everything else in America these days.

  To get you up to speed, here are a few excerpts from an excellent Pacific Standard magazine article:

  Over the past 15 years, more than $12 billion in public money has been spent on privately owned stadiums. Between 1991 and 2010, 101 new stadiums were opened across the country; nearly all those projects were funded by taxpayers. The loans most often used to pay for stadium construction—a variety of tax-exempt municipal bonds—will cost the federal government at least $4 billion in taxpayer subsidies to bondholders. Stadiums are built with money borrowed today, against public money spent tomorrow, at the expense of taxes that will never be collected. Economists almost universally agree that publicly financed stadiums are bad investments, yet cities and states still race to the chance to unload the cash. What gives?  

   

  To understand this stadium trend, and why it’s so hard for opponents to thwart public funding, look to Wisconsin. Last month, Governor Scott Walker signed a bill to spend $250 million on a new basketball arena for the Milwaukee Bucks. (The true cost of the project, including interest payments, will be more than $400 million.)

  Isn’t Scott Walker supposed to be “Mr. Fiscal Conservative?”

  The story of what’s happening in Milwaukee is remarkable, if not already familiar. Step one: A down-on-its-luck team is purchased by a group of billionaire investors. Step two: The owners nod to their “moral responsibility” to keep the team in its hometown,while simultaneously lobbying for a new stadium. Step three: The team threatens to abandon its hometown for greener pastures—and newer facilities—in another city. Step four: The threat scares up hundreds of millions of public dollars in stadium financing. Step five: The new stadium opens, boosting the owners’ investment, while sloughing much of the financial risk onto taxpayers. As New York Times columnist Michael Powell wrote, “From start to desultory end, Milwaukee offered a case study in all that is wrong with our arena-shakedown age.”

   

  That’s not to say the Bucks plan was entirely unopposed. Last year, a coalition of religious and community groups known as Southeastern Wisconsin Common Ground tried to fight the arena proposal. It called for a voter referendum on the bond issue, and lobbied for money to improve Milwaukee’s public parks and playing fields. Powell explains the rest:

   

  The local business community—which includes several members who have ownership shares in the team—dismissed such ideas as impractical. “The Bucks took control of the strategy from the start,” said Bob Connolly, a member of Common Ground. “They pushed the referendum idea right to the side.” Months later, when Common Ground leaders turned to usually friendly local foundations for more funding, they found themselves turned away. You are, they were told several times, too political.

   

  The lesson is clear: It is incredibly difficult to fight these projects. And Milwaukee is not alone. In St. Louis, for example, a judge recently struck down a city ordinance requiring voters to approve public spending on a new stadium for the Rams. Back in June, when Glendale, Arizona, tried to back out of its atrocious dealwith the National Hockey League’s Coyotes, the team quickly slapped the city with a lawsuit. Meanwhile, in building a new billion-dollar home in Minneapolis, the Minnesota Vikings found a loophole around a state law mandating that all public spending on sports teams be put to a vote.

   

  Not surprisingly, publicly funded stadiums face the least opposition in cities with strong growth coalitions, which Eckstein and Delaney define as the “institutionalized relationship between headquartered local corporations and the local government.” A coalition can claim to represent the interests of a community—not an outrageous claim on its face, since it comprises the powerful and prominent local leaders—while shielding team owners from both direct criticism and grassroots opposition. This is precisely what’s happening in Milwaukee. Here’s the Times’ Powell again:

   

  The hedge fund owners proved deft with ownership shares, handing these out to prominent Wisconsin businessmen and Republicans, including the developer Jon Hammes. Hammes has become national finance co-chairman for Walker, a Republican presidential candidate. The Capital Times recently reported that a political action committee connected to Hammes contributed $150,000 to the governor in late spring. 

   

  Economists have proposed antitrust lawsuits against leagues and stricter naming rights for teams, as Slate suggested in March, but neither idea has gained much traction. A Florida proposal would have shared team revenues with the public—a somewhat radical idea that Deadspin boldly declared “The Best Idea for Stadium Financing We’ve Ever Heard“—but it was quickly deemed illegal.

  Sharing revenues with the taxpayers funding the stadium: Illegal.

  Blatantly corrupt private-public partnership cartels: Perfectly legal.

  Two words: Banana Republic.

  In case you forgot the ultimate casino-gulag partnership of them all…

  America in 2013: Florida Football Stadium Named After a Private Prison Company

  Now here’s the always brilliant John Oliver on the issue. Enjoy:

  

  

  

  

  

• What Happens Next?

  Just like in 1929, The Dow just dropped 13%, bounced, and is retesting the lows… as all the ‘experts’ comfort a restless investor crowd

   

  

   

  So what happens next?

   

  

   

  Remember – it’s different this time… again.

   

  Charts: Bloomberg

  

  

  

  

  

• The Season Of The Glitch (Or "Why Retail Investors Have No Chance")

  Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

  Over the past two months, more than 90 Wall Street Journal articles have used the word “glitch”. A few choice selections below:

  Bank of New York Mellon Corp.’s chief executive warned clients that his firm wouldn’t be able to solve all pricing problems caused by a computer glitch before markets open Monday.

  – “BNY Mellon Races to Fix Pricing Glitches Before Markets Open Monday”, August 30, 2015

   

  A computer glitch is preventing hundreds of mutual and exchange-traded funds from providing investors with the values of their holdings, complicating trading in some of the most widely held investments.

  – “A New Computer Glitch is Rocking the Mutual Fund Industry”, August 26, 2015

   

  Bank says data loss was due to software glitch.

  – “Deutsche Bank Didn’t Archive Chats Used by Some Employees Tied to Libor Probe”, July 30, 2015

   

  NYSE explanation confirms software glitch as cause, following initial fears of a cyberattack.

  – “NYSE Says Wednesday Outage Caused by Software Update”, July 10, 2015

   

  Some TD Ameritrade Holding Corp. customers experienced delays in placing orders Friday morning due to a software glitch, the brokerage said..

  – “TD Ameritrade Experienced Order Routing, Messaging Problems”, July 10, 2015 

  Thousands of investors with stop-loss orders on their ETFs saw those positions crushed in the first 30 minutes of trading last Monday, August 24th. Seeing a price blow right through your stop is perhaps the worst experience in all of investing because it seems like such a betrayal. “Hey, isn’t this what a smart investor is supposed to do? What do you mean there was no liquidity at my stop? What do you mean I got filled $5 below my stop? Wait… now the price is back above my stop! Is this for real?”  Welcome to the Big Leagues of Investing Pain.

  What happened last Monday morning, when Apple was down 11% and the VIX couldn’t be priced and the CNBC anchors looked like they were going to vomit, was not a glitch. Yes, a flawed SunGard pricing platform was part of the proximate cause, but the structural problem here – and the reason this sort of dislocation WILL happen again, soon and more severely – is that a vast crowd of market participants – let’s call them Investors – are making a classic mistake. It’s what a statistics professor would call a “category error”, and it’s a heartbreaker.

  Moreover, there’s a slightly less vast crowd of market participants – let’s call them Market Makers and The Sell Side – who are only too happy to perpetuate and encourage this category error. Not for nothing, but Virtu and Volant and other HFT “liquidity providers” had their most profitable day last Monday since … well, since the Flash Crash of 2010. So if you’re a Market Maker or you’re on The Sell Side or you’re one of their media apologists, you call last week’s price dislocations a “glitch” and misdirect everyone’s attention to total red herrings like supposed forced liquidations of risk parity strategies. Wash, rinse, repeat.

  The category error made by most Investors today, from your retired father-in-law to the largest sovereign wealth fund, is to confuse an allocation for an investment. If you treat an allocation like an investment… if you think about buying and selling an ETF in the same way that you think about buying and selling stock in a real-life company with real-life cash flows… you’re making the same mistake that currency traders made earlier this year with the Swiss Franc (read “Ghost in the Machine” for more). You’re making a category error, and one day – maybe last Monday or maybe next Monday – that mistake will come back to haunt you.

  The simple fact is that there’s precious little investing in markets today – understood as buying a fractional ownership position in the real-life cash flows of a real-life company – a casualty of policy-driven markets where real-life fundamentals mean next to nothing for market returns. Instead, it’s all portfolio positioning, all allocation, all the time. But most Investors still maintain the pleasant illusion that what they’re doing is some form of stock-picking, some form of their traditional understanding of what it means to be an Investor. It’s the story they tell themselves and each other to get through the day, and the people who hold the media cameras and microphones are only too happy to perpetuate this particular form of filtered reality.

  Now there’s absolutely nothing wrong with allocating rather than investing. In fact, as my partners Lee Partridge and Rusty Guinn never tire of saying, smart allocation is going to be responsible for the vast majority of public market portfolio returns over time for almost all investors. But that’s not the mythology that exists around markets. You don't read Barron’s profiles about Great Allocators. No, you read about Great Investors, heroically making their stock-picking way in a sea of troubles. It’s 99% stochastics and probability distributions – really, it is – but since when did that make a myth less influential? So we gladly pay outrageous fees to the Great Investors who walk among us, even if most of us will never enjoy the outsized returns that won their reputations. So we search and search for the next Great Investor, even if the number of Great Investors in the world is exactly what enough random rolls of the dice would produce with Ordinary Investors. So we all aspire to be Great Investors, even if almost all of what we do – like buying an ETF – is allocating rather than investing.

  The key letter in an ETF is the F. It’s a Fund, with exactly the same meaning of the word as applied to a mutual fund. It’s an allocation to a basket of securities with some sort of common attribute or factor that you want represented in your overall portfolio, not a fractional piece of an asset that you want to directly own. Yes, unlike a mutual fund you CAN buy and sell an ETF just like a single name stock, but that doesn’t mean you SHOULD. Like so many things in our modern world, the exchange traded nature of the ETF is a benefit for the few (Market Makers and The Sell Side) that has been sold falsely as a benefit for the many (Investors). It’s not a benefit for Investors. On the contrary, it’s a detriment. Investors who would never in a million years consider trading in and out of a mutual fund do it all the time with an exchange traded fund, and as a result their thoughtful ETF allocation becomes just another chip in the stock market casino. This isn’t a feature. It’s a bug.

  What we saw last Monday morning was a specific manifestation of the behavioral fallacy of a category error, one that cost a lot of Investors a lot of money. Investors routinely put stop-loss orders on their ETFs. Why? Because… you know, this is what Great Investors do. They let their winners run and they limit their losses. Everyone knows this. It’s part of our accepted mythology, the Common Knowledge of investing. But here’s the truth. If you’re an Investor with a capital I (as opposed to a Trader with a capital T), there’s no good reason to put a stop-loss on an ETF or any other allocation instrument. I know. Crazy. And I’m sure I’ll get 100 irate unsubscribe notices from true-believing Investors for this heresy. So be it.

  Think of it this way… what is the meaning of an allocation? Answer: it’s a return stream with a certain set of qualities that for whatever reason – maybe diversification, maybe sheer greed, maybe something else – you believe that your portfolio should possess. Now ask yourself this: what does price have to do with this meaning of an allocation? Answer: very little, at least in and of itself. Are those return stream qualities that you prize in your portfolio significantly altered just because the per-share price of a representation of this return stream is now just below some arbitrary price line that you set? Of course not. More generally, those return stream qualities can only be understood… should only be understood… in the context of what else is in your portfolio. I’m not saying that the price of this desired return stream means nothing. I’m saying that it means nothing in and of itself. An allocation has contingent meaning, not absolute meaning, and it should be evaluated on its relative merits, including price. There’s nothing contingent about a stop-loss order. It’s entirely specific to that security… I want it at this price and I don’t want it at that price, and that’s not the right way to think about an allocation.

  One of my very first Epsilon Theory notes, “The Tao of Portfolio Management,” was on this distinction between investing (what I called stock-picking in that note) and allocation (what I called top-down portfolio construction), and the ecological fallacy that drives category errors and a whole host of other market mistakes. It wasn’t a particularly popular note then, and this note probably won’t be, either. But I think it’s one of the most important things I’ve got to say.

  Why do I think it’s important? Because this category error goes way beyond whether or not you put stop-loss orders on ETFs. It enshrines myopic price considerations as the end-all and be-all for portfolio allocation decisions, and it accelerates the casino-fication of modern capital markets, both of which I think are absolute tragedies. For Investors, anyway. It’s a wash for Traders… just gives them a bigger playground. And it’s the gift that keeps on giving for Market Makers and The Sell Side. 

  Why do I think it’s important? Because there are so many Investors making this category error and they are going to continue to be, at best, scared out of their minds and, at worst, totally run over by the Traders who are dominating these casino games. This isn’t the time or the place to dive into gamma trading or volatility skew hedges or liquidity replenishment points. But let me say this. If you don’t already understand what, say, a gamma hedge is, then you have ZERO chance of successfully trading your portfolio in reaction to the daily “news”. You’re going to be whipsawed mercilessly by these Hollow Markets, especially now that the Fed and the PBOC are playing a giant game of Chicken and are no longer working in unison to pump up global asset prices.

  One of the best pieces of advice I ever got as an Investor was to take what the market gives you. Right now the market isn’t giving us much, at least not the sort of stock-picking opportunities that most Investors want. Or think they want. That’s okay. This, too, shall pass. Eventually. Maybe. But what’s not okay is to confuse what the market IS giving us, which is the opportunity to make long-term portfolio allocation decisions, for the sort of active trading opportunity that fits our market mythology. It’s easy to confuse the two, particularly when there are powerful interests that profit from the confusion and the mythology. Market Makers and The Sell Side want to speed us up, both in the pace of our decision making and in the securities we use to implement those decisions, and if anything goes awry … well, it must have been a glitch. In truth, it’s time to slow down, both in our process and in the nature of the securities we buy and sell. And you might want to turn off the TV while you’re at it.  

  

  

  

  

  

• Here Are The "Unlikely" Cities Bloomberg Says Will Drive The US Economy

  Back in May we highlighted a report from Georgetown that endeavored to show which college majors were most likely to help students land high-paying jobs upon graduation. 

  While this would be important under any circumstances, it’s especially important today. Why? Two reasons, i) far from a steady creator of breadwinner jobs, the US economy routinely churns out bartenders and waiters, while the BLS has a habit of “vanishing” the jobless and creating what we’ve called a “statistical mirage” which makes it appear as though unemployment is falling even as the labor force participation rate plunges to multi-decade lows, and ii) graduates are now leaving school with more debt than ever and without decent employment, that debt burden leads to all manner of problems including the postponement of household formation. 

  The report was unequivocal. To wit: “STEM (science, technology, engineering, and mathematics), health, and business majors are the highest paying, leading to average annual wages of $37,000 or more at the entry level and an average of $65,000 or more annually over the course of a recipient’s career.”

  Setting aside the glaring question of whether one wants to count $37,000 a year as “high paying,” the point is that STEM jobs are apparently where it’s at these days unless you plan to become a bulge bracket CEO, a benchmark rate manipulator, or perhaps a doctor. And for anyone out there wondering where the best STEM jobs are, Bloomberg has you covered. Below, find the graphics (which you can click on to access the interactive versions) and some attendant commentary from Bloomberg:

  

  

  From Bloomberg:

  A decade ago, Richard Myers was the director of the Department of Genetics at the Stanford University School of Medicine, where he enjoyed the fruits of a rich endowment and his pick of faculty members and graduate students. So he left behind some befuddled scientists when, in 2008, he left Palo Alto, Calif., for Huntsville, Ala., to launch an independent research lab, the HudsonAlpha Institute.

   

  “‘My God, you’re leaving Stanford for Alabama?’” Myers recalls colleagues asking. “‘What’s wrong with you?’”

   

  Huntsville may not seem like an obvious place to base a center for genomics, a branch of biology concerned with DNA sequences that requires expensive hardware and even greater investment in human capital. Alabama ranks in the bottom 10 U.S. states for educational attainment and median income.

   

  Yet Huntsville, nestled in a hilly region in the northern part of the state, turns out to be a great place to recruit high-tech workers. As of May 2014, 16.7 percent of workers in the metropolitan area held a job in science, technology, engineering, or mathematics—STEM, for short—making it the third most technical workforce in the country after San Jose, Calif., and Framingham, Mass., a Bloomberg analysis of Labor Department statistics shows.

   

  Huntsville is one of a growing number of smaller U.S. cities, far from Silicon Valley, that are seeking to replace dwindling factory jobs by reinventing themselves as tech centers. Across the Midwest, Northeast, and South, mayors and governors are competing to attract tech companies and workers. 

   

  Much more in the full post here

  

  

  

  

  

• "This Time May Be Different": Desperate Central Banks Set To Dust Off Asia Crisis Playbook, Goldman Warns

  Early last month, Bloomberg observed that plunging currencies were “handcuffing bankers from Chile to Colombia.” The problem was described as follows:

  Central bankers in commodity-dependent Andes economies aren’t even considering interest-rate cuts to revive growth, even as prices for oil, copper and other raw materials collapse.

   

  That’s because the deepening price slump is also dragging down currencies in Colombia and Chile — a swoon that’s fanning inflation and tying policy makers’ hands.

  That was six days before China’s decision to devalue the yuan. 

  Needless to say, Beijing’s entry into the global currency wars did nothing to help the situation and indeed, since the yuan devaluation, things have gotten materially worse. The real, for instance, has plunged 10.5%, the Colombian peso is down 6.6%, the Mexican peso is off 4.4%, and the Chilean peso is down a harrowing 8% (thanks copper). And again, that’s just since China’s devaluation.

  Meanwhile, plunging commodity prices, falling Chinese demand, and depressed global trade aren’t helping LatAm economies. Just ask Brazil, where the sellside GDP forecast cuts are coming in fast (Morgan Stanley being the latest example) now that virtually every data point one cares to observe shows an economy that’s sliding into depression.

  Of course a plunging currency, FX pass through inflation, and a soft outlook for growth is a pretty terrible place to be in if you’re a central bank, but that’s exactly where things stand for the “LA-5” (believe it or not, that’s not a reference to the Lakers, it’s short for Brazil, Chile, Colombia, Mexico, and Peru), who very shortly will be forced to decide whether the risks associated with further FX weakness outweigh those of hiking rates into a poor economic environment.

  For Goldman, the outlook is clear: LatAm central banks will, in “stark” contrast to counter-cyclical measures adopted during the crisis, hike in a desperate attempt to shore up their currencies and control inflation. 

  First, we have the test:

  The LA-5 economies are, once again, being tested. They currently face an acute external shock involving a combination of: low (likely for long) commodity prices, incoming monetary policy normalization in the US, and weaker CNY and growth in China with the latent risk of a sharper economic slowdown. 

  The last time these countries were tested, they had sufficient room to maneuver counter-cyclically:

  The Global Financial Crisis of 2008-09 (GFC) provided almost the perfect applied experiment to test the shock-absorbing capacity of the new institutional framework. And the results were remarkably positive. The spike in risk aversion in the initial stages of the crisis was followed by sizeable capital outflows from EMs. Yet, officials across the LA-5 did not attempt to stop the hemorrhage of capital and the ensuing pressures on local currencies by hiking interest rates or by tightening fiscal belts (which would have been the classic pro-cyclical response of the past). To the contrary, the authorities managed to loose fiscal stances and cut interest rates aggressively to support domestic demand, letting exchange rates depreciate significantly along the way. 

  This time around, however, policy flexibility is severely constrained:

  Financial conditions are very accommodative and most currencies are now slightly in undervaluation territory. Initial conditions differ considerably from those prevalent at the beginning of the GFC. Broad financial conditions are, on average, more accommodative today than before (lower real rates and currencies that underwent large adjustments since mid-2013 and are now, on average, slightly undervalued versus domestic fundamentals). Furthermore, with the notable exception of Mexico, inflation has been accelerating across the region (Exhibit 3) and is now tracking above the respective targets, the fiscal stances are on average weaker, and external imbalances are generally wider. 

   

  
  

  And the crisis – at least as it relates to LatAm, is actually more acute:

  Arguably, these combined shocks may pose greater risks to the region compared to the challenges faced during the GFC as the later was largely a DM centered event. In fact, current external headwinds have compounded the effects of domestic developments in places (e.g., Brazil and to some extent Chile), imparting a sizeable adverse shock to sentiment and a negative impulse to growth across the LA-5 economies. 

  With less policy flexibility and a more acute crisis, comes a divergent response:

  Against this backdrop, the continuation of a bearish FX market may be soon followed by higher policy rates, despite admittedly sluggish real business cycles all across the region. That is, a pro-cyclical monetary reaction may be imminent in a number of places – Chile, Colombia, Mexico, and Peru. Policy pro-cyclicality is knocking on the door. 

   

  
  

  What’s particularly interesting here is that round after round of the type of counter-cyclical policy measures Goldman suggests saved the LA-5 in the wake of the 2008 meltdown have not only failed to resuscitate the global economy, but have in fact contributed to the current worldwide deflationary supply glut that is at least partially to blame for the economic malaise plaguing EMs and the attendant pressure on commodity currencies.

  That pressure has now put LatAm’s financially integrated countries in the position of having to hike rates even as the outlook for their economies – the same economies which were presumably saved by counter-cyclical post-crisis measures – deteriorates. Meanwhile, if the Fed hikes, it will only put further pressure on EM FX, which could serve to drive inflation still higher, prompting a still more hawkish EM CB response which would in turn put still more pressure on their underlying economies. 

  In the end, Goldman concludes that should LatAm resort to pro-cyclical measures to shore up their currencies at the expense of their economies, it will represent a return to the policies adopted by EMs during the Asian Financial Crisis. This would appear to provide the final piece of evidence we need to conclusively determine that all pundit/analyst protestations aside, we have indeed turned back the clock two decades and sit on the verge of another outright emerging market meltdown. And on that note, we’ll give the final word to Goldman:

  The LA-5 economies have already spent part of their policy ammunition fighting the initial stages of the current turmoil. In the meantime, a number of economies are still grappling with visible domestic (inflation/fiscal deficits) and external (current account deficits) imbalances. Therefore, the room to ease policy further, i.e., to adopt counter-cyclical policies, is now much more limited than in the past. To the contrary, in some cases monetary tightening may be needed (despite weaker real business cycles) in order to continue to attract foreign capital, anchor domestic currencies and preserve the integrity of the respective inflation targeting frameworks. Hence, we may soon enter a period of weaker FX and higher policy and market rates: i.e., market dynamics that would resemble more the 1997 Asian Financial Crisis (where the authorities hiked rates to stabilize the respective domestic currencies despite the recessionary real sector dynamics) rather than the 2008-09 Global Financial Crisis (where weakening currencies coincided with sharply declining short-term interest rates). 

  

  

  

  

  

• Martin Armstrong "Astonished" At Hillary Email Scandal

  Submitted by Martin Armstrong via ArmstrongEconomics.com,

  

  The most incredible aspect of Hillary’s e-mail scandal is the media’s total dismissal of a simple fact — Hillary DID NOT use the government’s e-mail system — she used her own. She claimed she was unaware that you could have two e-mails on one phone. That alone shows that she is not qualified to be president.

  Nonetheless, that can ONLY mean that she sent top-secret e-mails through her personal e-mail service. All of her discussions with foreign governments whom donated to her charity were also in her private e-mails.

  If you work for the government and opt to send all OFFICIAL e-mails through your private unsecured server because you assumed you could only have one: wouldn’t you assume that national security comes before personal e-mails?

  This is just amazing. Obviously, Hillary has lied about the e-mails for how did she conduct business as part of her job without using a government system? If you had to choose between the two, it would seem that the country should come first.

  Now her staff is taking the Fifth Amendment and refusing to testify. Obviously, the only reason to take the Fifth requires the risk of a crime.

  

  

  

  

  

• What Does It Mean If The Fed Hikes… And If It Doesn't

  Today’s jobs report was supposed to be a tiebreaker for the Fed’s September rate decision, giving fed funds and eurodollar traders some respite after a summer that has been a gut-wrenching, dramamine-chewing rollercoster. It did not, in fact it boosted uncertainty, with the probability of a September rate hike rising from 26% to 30%.

  

   

  In other words, any hope for clarity was promptly dashed with a job report that once again was both bad and good, depending on one’s bias.

  Which means that the September 17th decision will come to the absolute wire, with little if any guidance available in the 13 days left until what may be the Fed’s first rate hike in 9 years… or not.

  Here is an oddly accurate explanation of what it means if the Fed does hike rates on September, and alternatively, what it means if Yellen punts once again, and leaves the decision to the October or December meeting, or just punts to 2016 and onward altogether. As a reminder, Goldman does not expect the Fed to hike on September 17.

  On Wall Street only 2 things matter: interest rates and earnings. Everything else is noise unless it impacts rates and earnings. No-one impacts interest rates more than the Fed. So the Fed’s September 17th rate hike decision is a big deal.

   

  Should the Fed decide to raise interest rates, it will be the first Fed hike since June 29th 2006. In the 110 months that have since past, global central banks have cut interest rates 697 times, central banks have bought $15 trillion of financial assets, zero [or negative] interest rates policies have been adopted in the US, Europe & Japan. And, following the Great Financial Crisis of 2008, both stocks and corporate bonds have soared to all-time highs thanks in great part to this extraordinary monetary regime.

   

  As noted above, a rate hike with a stroke ends this era. So:

   

  If they don’t hike…

  • It’s an admission that Wall Street threatens to reverse the recovery on Main Street
  • It will lead to a short-term relief rally on Wall Street
  • It will be relatively positive for EM/commodities/resources, as it unwinds the higher US growth/rates/dollar narrative
  • It will be positive for higher-yielding assets
  • It will be positive for growth > value, as the Fed is confirming the deflationary recovery
  • In short, if the Fed’s failure to hike does not lead investors to completely abandon hope on growth and scurry into gold, cash & volatility, then look for the “barbell of 1999” to reemerge: Über-growth & Über-value were massive outperformers after the Asia crisis (Chart 9).

  

   

  If they do hike…

  • Watch the long-end
  • If the long-end concurs with the Fed’s view of economic recovery, then banks, cyclicals and value stocks will receive a bid. Asset allocation toward “strong dollar” & “Fed tightening plays” will harden, with the exception that value will likely outperform growth
  • If the long-end rallies, signaling a policy mistake, then cash, volatility, gold & defensive growth will be the way to go.

  Most importantly, if the long-end rallies, it’s almost over and get ready to bail on any outperforming long-end position, as the reaction itself will signal the beginning of the end of the fiat regime.

  

  

  

  

  

  

• The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play

  The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed’s hiking intentions, with China, or even the ongoing “1998-style” carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program “hasn’t been as successful as we’d hoped.”

  Why? “It’s simply because they are running out. There are simply too few of these structured products out there.”

  So six months later, the ECB begrudgingly admitted what we said in March 2015, in “A Complete Preview Of Q€ — And Why It Will Fail“, was correct. Namely this:

  … the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.

   

  … while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.

   

  Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.

  (Actually, we said all of the above first all the way back in 2012, but that’s irrelevant.)

  So aside from the ECB officially admitting that it has become supply*constrained even with security prices at near all time highs, why is this so critical?

  Readers will recall that just yesterday we explained why “Suddenly The Bank Of Japan Has An Unexpected Problem On Its Hands” in which we quoted BofA a rates strategist who said that “now that GPIF’s selling has finished, the focus will be on who else is going to sell. Unless Japan Post Bank sells JGBs, the BOJ won’t be able to continue its monetary stimulus operations.“

  We also said this:

  “in 6-9 months, following the next major market swoon when everyone is demanding more action from the BOJ, “suddenly” pundits will have discovered the biggest glitch in the ongoing QE monetization regime, namely that the BOJ simply can not continue its current QE program, let along boost QE as many are increasingly demanding, unless it finds willing sellers, and having already bought everything the single biggest holder of JGBs, the GPIF, had to sell, the BOJ will next shakedown the Post Bank, whose sales of JPY45 trillion in JGBs are critical to keep Japan’s QQE going.

   

  The sale of that amount, however, by the second largest holder of JGBs, will only last the BOJ for the next 3 months. What next? Which other pension fund will have the massive holdings required to keep the BOJ’s going not only in 2016 but also 2017 and onward. The answer: less and less.

  Once again to be accurate, the first time we warned about the biggest nightmare on deck for the BOJ (and ECB, and Fed, and every other monetizing central bank) was back in October 2014, when we cautioned that the biggest rish was a lack of monetizable supply.

  We cited Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who said that at the scale of its current debt monetization, the BOJ could end up owning half of the JGB market by as early as in 2018. He added that “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation.“

  

  This was our summary:

  The BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existant and getting worse by the day. All that would take for a massive VaR shock scenario to play out in Japan is one exogenous JGB event for the market to realize just how little actual natural buyers and sellers exist.

  That said, our conclusion, which was not to “expect the media to grasp the profound implications of this analysis not only for the BOJ but for all other central banks: we expect this to be summer of 2016’s business” may have been a tad premature.

  The reason: overnight the IMF released a working paper written by Serkan Arslanalp and Dennis Botman (which was originally authored in August), which confirmed everything we said yesterday… and then some.

  Here is Bloomberg’s summary of the paper:

  The Bank of Japan may need to reduce the pace of its bond purchases in a few years due to a shortage of sellers, said economists at the International Monetary Fund.

   

  There is likely to be a “minimum” level of demand for Japanese government bonds from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management requirements, said IMF economists Serkan Arslanalp and Dennis Botman.

  Here are the excerpts from the paper:

  We construct a realistic rebalancing scenario, which suggests that the BoJ may need to taper its JGB purchases in 2017 or 2018, given collateral needs of banks, asset-liability management constraints of insurers, and announced asset allocation targets of major pension funds.

   

  … there is likely to be a “minimum” level of demand for JGBs from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management (ALM) requirements. As such, the sustainability of the BoJ’s current pace of JGB purchases may become an issue.

  Back to Bloomberg:

  While Governor Haruhiko Kuroda said in May that he expects no obstacles in buying government bonds, the IMF analysts join Nomura Securities Co. and BNP Paribas SA in questioning the sustainability of the unprecedented debt purchases.

  Who in turn merely joined Zero Hedge who warned about precisely this in October of last year.

  Back to the IMF paper, which notes that in Japan, where there is a limited securitization market, the only “high quality collateral” assets are JGBs, and as a result of the large scale JGB purchases by the JGB, “a supply-demand imbalance can emerge, which could limit the central bank’s ability to achieve its monetary base targets. Such limits may already be reflected in exceptionally low (and sometimes negative) yields on JGBs, amid a large negative term premium, and signs of reduced JGB market liquidity.”

  To the extent markets anticipate limits, the rise in inflation expectations could be contained, which may mitigate incentives for portfolio rebalancing and create a self-fulfilling cycle that undermines the BoJ’s objectives.

  For those surprised by the IMF’s stark warning and curious how it is possible that the BOJ could have put itself in such a position, here is the explanation:

  So far, the BoJ’s share of the government bond market is similar to those of the Federal Reserve and still below the Bank of England (BOE) at the height of their QE programs. Indeed, the BoE held close to 40 percent of the conventional gilt market at one point without causing significant market impairment. Japan is not there yet, as the BoJ held about a quarter of the market at end-2014. But, at the current pace, it will hold about 40 percent of the market by end-2016 and close to 60 percent by end-2018. In other words, beyond 2016, the BoJ’s dominant position in the government bond market will be unprecedented among major advanced economies.

  

  As we expanded yesterday, the biggest issue for the BOJ is not that it has problems buying paper, but that there are simply not enough sellers: “under QQE1, only around 5 percent of BoJ’s net JGB purchases from the market came from institutional investors. In contrast, under QQE2, close to 40 percent of net purchases have come from institutional investors between October 2014 and March 2015.”

  

   

  This is where things get back for the BOJ, because now that the BOJ is buying everything official institutions have to sell, the countdown has begun:

  given the pace of BoJ purchases under QQE2 and projected debt issuance by the government (based on April 2015 IMF WEO projections of the fiscal deficit), we estimate that Japanese investors could shed some ¥220 trillion of JGBs until end-2018 (Table 2, Figure 4). In particular, Japanese insurance companies and pension funds could reduce their government bond holdings by ¥44 trillion, while banks could sell another ¥176 trillion by end-2018, which would bring their JGB holdings down to 5 percent of total assets. At that point, the BoJ may have to taper its JGB purchases.

  

   

  Then there are the liquidity issues:

  As the BoJ ascends to being a dominant player in the JGB market, liquidity is likely to be affected, implying that economic surprises may trigger larger volatility in JGB yields with potential financial stability implications. As noted in IMF (2012), demand-supply imbalances in safe assets could lead to deteriorating collateral quality in funding markets, more short-term volatility jumps, herding, and cliff effects. In an environment of persistent low interest rates and heightened financial market uncertainty, these imbalances can raise the frequency of volatility spikes and potentially lead to large swings in asset prices.

  This, too, is precisely what we warned yesterday would be the outcome: “the BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existant and getting worse by the day.”

  The IMF paper conveniently provides some useful trackers to observe just how bad JGB liquidity is in real-time.

  

  The IMF is quick to note that the BOJ does have a way out: it can simply shift its monetization to longer-dated paper, expand collateral availability using tthe BOJ’s Securited Lending Facility (which basically is a circular check kiting scheme, where the BOJ lends banks the securities it will then repurchase from them), or simply shift from bonds to other assets: “the authorities could expand the purchase of private assets. At the moment, Japan has a relatively limited corporate bond market (text chart). Hence, this would require jumpstarting the securitization market for mortgages and bank loans to small and medium-sized enterprises which could generate more private assets for BoJ purchases.”

  But the biggest risk is not what else the BOJ could monetize – surely the Japanese government can always create “monetizable” kitchen sinks… but what happens when the regime shifts from the current buying phase to its inverse:

  As this limit approaches and once the BoJ starts to exit, the market could move from a situation of shortage to one with excess supply. The term premium could jump depending on whether the BoJ shrinks its balance sheet and on the fiscal deficit over the medium term.

  When considering that by 2018 the BOJ market will have become the world’s most illiquid (as the BOJ will hold 60% or more of all issues), the IMF’s final warning is that “such a change in market conditions could trigger the potential for abrupt jumps in yields.”

  At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops.

  But ignoring the endgame for Japan, and recall that BofA triangulated just this when it said that “the BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation“, what’s worse for Abe is that the countdown until his program loses all credibility has begun.

  What happens then? As BNP wrote in an August 28-dated report, “Once foreign investors lose faith in Abenomics, foreign outflows are likely to trigger a Japanese equities meltdown similar to the one observed during 2007-09.”

  And from there, the contagion will spread to the entire world, whose central banks incidentally, will be faced with precisely the same question: who will be responsible for the next round of monetization and desperately kicking the can one more time.

  But before we get to the QE endgame, we first need to get the interim point: the one where first the markets and then the media realizes that the BOJ – the one central banks whose bank monetization is keeping the world’s asset levels afloat now that the ECB has admitted it is having “problems” finding sellers – will have no choice but to taper, with all the associated downstream effects on domestic and global asset prices.

  It’s all downhill from there, and not just for Japan but all other “safe collateral” monetizing central banks, which explains the real reason the Fed is in a rush to hike: so it can at least engage in some more QE when every other central bank fails.

  But there’s no rush: remember to give the market and the media the usual 6-9 month head start to grasp the significance of all of the above.

  Source: IMF

  

  

  

  

  

• Weekend Reading: View From The Edge

  Submitted by Lance Roberts via STA Wealth Management,

  Earlier this week, I posted a fairly in-depth look at the recent correction to try and determine whether this is simply just a correction in a bull market, or potentially something worse. To wit:

  "But the underlying fundamental and economic data have been weak for some time, yet the market continued its unabated rise. The Bulls have remained firmly in charge of the markets as the reach for returns exceeded the grasp of the underlying risk. It now seems that has changed. For the first time since 2007, as we see initial markings of a potential bear market cycle.

   

  The first chart below shows the long-term trend of the market."

  

  "The bottom part of the chart is the most important. For the first time since 2000 or 2007, the market has now registered a momentum based "sell" signal. Importantly, this is a very different reading that what was seen during the 2010 and 2011 "corrections" and suggests the current correction may be more significant."

  I continue to suspect that the weak market internals, deterioration in earnings and a generally weak economic backdrop that odds reside with the "bears" for now. However, we have all been surprised by what happens "next" particularly when the Federal Reserve stands at the helm. 

  With that in mind, and a dismal August month now behind us, our weekend reading list once again takes a look at the markets from the seemingly "edge of the cliff."

  ---

  THE LIST

  1) Don't Blame China For Market Woes by Ben Stein via CBS News

  "August is the cruelest month.

   

  A good chunk of my savings disappeared as the stock market convulsed, and we're down at some points by well over 10 percent. Why did it happen?

   

  The pundits and analysts appeared and said it was because of the Chinese devaluation and possible serious weakness in China. This, in turn, would devastate U.S. exports, supposedly, to China and sink the ship of our prosperity."

  Read Also: Jim Chanos – 5 Things About China by Linette Lopez via Business Insider

   

  2) Bad August Months Lead To Worst Septembers by Anora Mahmudova

  ""In the 11 instances since 1945 when the S&P 500 fell more than 5% in August, September returns were negative 80% of the time, averaging a decline of 4%, said Sam Stovall, U.S. equity strategist at S&P Capital IQ.

   

  History is a good guide, but not necessarily a gospel,"

  

  Read Also: Why This Market Sell-Off Could Keep Going by Paul Lim via Time

   

  3) Nobody Panic – This Is Just A Retest by Ron Insana via CNBC

  "Of course, if the market's internal strength deteriorates further on the second wave down, it could be indicative of something more serious.

   

  But right now, we haven't seen any sign of that, so panic would be premature.

   

  It has long been my view that U.S. stocks are in the midst of a secular, or long-term, bull market that is likely in its 5th or 6th inning.

   

  Prior to this correction, it had been 46 months since U.S. markets had suffered a pullback of more than 10 percent. Corrections occur, on average, every 18 months, so this was long overdue."

  Read Also: This Is The Start Of The Sell Off by Bill Bonner via ContraCorner

   

  4) If The Market Hits This Level, Then Get Nervous by Heather Long via CNN Money

  "Time will tell who is right. But remember that we live in an era where computer trading dominates the American stock market. The "robots" that are making a lot of trading calls aren't sitting around pondering China's economy. They are paying attention to whether stocks fall below key levels.

   

  What are those levels? No one knows exactly. But these two metrics are worth watching. If these thresholds are crossed, both computer and human traders will consider it a game-changer point."

   

  

  Also Read: How To Survive A Market Crash by Brett Arends via MarketWatch

   

  5) Why Fear Dominates Investors Sentiment by John Shmuel via Financial Post

  "One difference is that corporate balance sheets and the U.S. economy remain strong. Another is that China, which has been a large source of fear recently, still has significant policy tools available to help it spur growth and calm markets there and, by extension, around the world.

   

  'This episode does not match equity declines in the major sustained financial crises of the last 20 years,' Oxford Economics said.

   

  That does not mean that markets can't go lower. Canaccord notes that the current correction has two analogs in the 1998 and 2011 corrections, with the former preceding a rise in U.S. interest rates and the latter being driven by worries over China and emerging markets."

  Read Also: Don't Buy The Stock Market Dip This Time by Jeff Erber via Real Clear Markets

  ---

  Other Reading

  Market Still Isn't Where Its Going by Joe Calhoun via Alhambra Partners

  If You Need To Reduce Risk, Do It Now by John Hussman via Hussman Funds

  Best Tweets In August by Meb Faber via Meb Faber Research

  Recession Odds Surge To Highest Since 2011 via ZeroHedge

  This Is The Worst Environment For Investors By Jesse Felder via The Felder Report

  ---

  "Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the time to sell." – John Templeton

  Have a great weekend.

  

  

  

  

  

• Dow Drops To 17-Month Lows As Hope-Filled Dead-Cat-Bounce Dies

  The last 2 weeks in markets…

  And to all those who took Cramer's advice to buy the dips…

   

  Some big moves this week…

  • Dow Industrials lowest weekly close since April 2014
  • Dow Transports lowest weekly close since May 2014
  • S&P 500 lowest weekly close since Oct 2014's Bullard lows
  • Nikkei dumped over 7% this week – worst week since April 2014
  • Utilities collapsed 5.1% this week – worst week since March 2009
  • Financials lowest weekly close since Oct 2014's Bullard lows
  • Biotechs lowest weekly close since Feb 2015
  • Investment Grade Corporate Bond Spreads worst since June 2013
  • Treasury Curve (2s30s) flattened 6bps today – biggest drop in 2 weeks.
  • JPY strengthened 2.4% on week against the USD – strongest week since August 2013 (up 4.5% in 3 weeks) – major carry unwind!
  • AUD plunged 3.5% on week against the USD – worst week since January 2015 and worst 4-weeks since Oct 2014 – China proxy

  So before we start, Japan was really ugly…

  

   

  And some context for the US equity index drops…

  

   

  With everything red year-to-date… (and since the end of QE3, only Nasdaq is clinging to the green)

  

   

  A quiet Friday before Labor Day weekend provided no juice for momo ignition and apart from a brief algo-driven pop on payrolls, stocks were a one-way-street lower…until the late-day VIX-smash ramp which closed ugly…

  

   

  And Futures show an ugly night turned even uglier…

  

   

  On the week, evereything is red…

  

   

  Dow Futures give us some context for the last 2 week's moves. Bounce dies at Fib61.8% retracement, breaks through 50% and makes lower high as today tested post Black-Monday lows…

  

   

  FANG is FUBAR… (post FOMC Minutes)

  

   

  Financials continues to get hammered (as investors rushed to the safety of Homebuilders this week!?!) – but the panic-buying in the last hour saved it from being a lot worse…

  

   

  Utilities had their worst week since March 2009..

  

   

  But financials have further to fall to catch up with counterparty risk…

  

   

  Just as we saw lasty Friday, VIX was smashed lower in the last hour… which makes perfect sense given Monday is a holiday and China reopens after 3 days of being closed during extreme moves in EM FX and global equity markets…

  

   

  After some VIX complex shenanigans midweek, SPY continues to coverge down to XIV (though the latter is also being squeezed to lows).

  

   

  Since the FOMC Minutes, gold and the long bond are modest losers and stocks big losers…

  

   

  Investment Grade Credit spreads rose 4bps this week, ending with the widest weekly close since June 2013

  

   

  This is why it matters!! Bye Bye Buybacks

  

   

  Thank to today's plunge, Treasury yields ended the week lower after China closed… Note that 2Y is unch today, 10Y -3.5bps, 30Y -4.5bps

  

   

  with a dramatic 6bps 2s30s curve flattening on the day (post-payrolls)

  

   

  The US Dollar ended the week unchanged against the majors… but that hid the stunning moves in JPY (USDJPY dropped 2.4% on the week – its worst since Auguist 2013) and AUD (-3.6% – biggest weekly drop in 8 months, worst 4-week drop in a year)…

  

   

  Commodities on the week were a mixed bag with crude up on the week and copper notably lower overnight to negative. Gold & Silver modestly lower… The 8-10ET period remains insanely volatile…

  

   

  Crude had a wild week as Monday and Tuesday's idiocy and noite today's pump'n'dump after rig counts unexpectedly declined…

  

   

  And finally before everyone points out how crazy the bond yields are relative to stocks etc… and the 'economy' – perhaps it was stocks that were wrong all along!!

  

   

  Charts: Bloomberg

  Bonus Chart: Nikkei joins SHCOMP and SPX in the red for 2015…

  

   

  Bonus Bonus Chart" "Just one wafer thin 25bps rate hike"

  h/t @RudyHavenstein

  

  

  

  

• Chinese Roulette

  Sunday night looms…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• No Inflation Friday: The Government Admits Its Own Statistics Are Phony

  Submitted by Simon Black via SovereignMan.com,

  In an article that first appeared in Fortune magazine on December 10, 2001, Warren Buffett penned a great letter about falling prices:

  “When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying– except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”

  He’s right. Any rational human being actually LIKES falling prices.

  We enjoy getting a great deal, and we like it when our money goes further.

  To Buffett’s point, investors are a major exception and prefer investing when prices go up, i.e. their money buys less of a high quality asset.

  But there’s one more giant exception that Buffett didn’t mention: economists.

  Economists quiver in fear at the prospect of falling prices.

  They call it ‘deflation’, and it’s a force so dreaded that central bankers have threatened to drop bricks of cash from helicopters in order to prevent it.

  Instead, economists prefer INFLATION, i.e. that the things you buy become more expensive.

  We can look at official statistics to get a sense of inflation, but these numbers are totally meaningless.

  When I was a kid, my father earned enough money to support his family with a single salary.

  We had a house, a car, an occasional vacation, and we never missed a meal. All on one income.

  But those days are long gone. Now it’s almost obligatory to live in a dual-income household just to make ends meet.

  The official statistics never paint this picture.

  They focus on some palatable number, telling us the inflation rate is 2%, and then adjust their computational methods to derive that figure.

  In fact, the US federal government has changed the way it calculates inflation at least twenty times since the mid 1980s.

  And it’s obvious that they have a huge incentive to do so.

  The #1 expense of the federal government today is the mandatory entitlement programs that are paid out to seniors in the US– primarily Social Security.

  It’s nearing $1 trillion annually and eats up a third of all tax revenue.

  The government is required by law to increase the amount of money paid to Social Security recipients each year through what’s called a COLA, or cost of living adjustment.

  Essentially they’re adjusting your monthly Social Security payment to keep up with inflation. Or at least, the inflation that they’re willing to admit.

  This is where they have a huge incentive to fudge the numbers.

  If the real rate of inflation is 5%, but they only give a 2% COLA, the government saves 3%. That’s almost $30 billion.

  (Ironically this is 3x the size of the annual budget for the Department of Labor, which is responsible for calculating the inflation statistics.)

  But by doing this the government is effectively stealing from seniors.

  There’s actually been a new law proposed in Congress to prevent this from happening anymore.

  It’s known as HR 3074, and it was written “for the purpose of establishing an accurate Social Security COLA. . .”

  So even the government admits that their inflation numbers are a bunch of baloney.

  But sadly, according to the legislative watchdog GovTrack.us, this bill has a 0% chance of being passed. So I wouldn’t expect a solution anytime soon.

  In fact, this problem will likely get worse given how transfixed economists are on the deflation threat.

  Their concern is that the Chinese economic slowdown and currency devaluation will cause a wave of falling prices around the world.

  But there’s a very curious effect at work here that most people forget:

  It’s entirely possible (and now very likely) to have BOTH inflation AND deflation. At the same time.

  Assets and investments can fall, while at the same time the prices of retail goods and services rise.

  In other words, the value of your investment portfolio goes down, but your grocery bill goes up.

  It’s also important to point out that not all prices rise and fall equally.

  Gas prices may be down from a year ago in the US. But as the recently-released Hotels.com Hotel Price Index shows, hotel prices are up sharply.

  Salt Lake City: 8%. Raleigh: 5%. Portland: 9%. Washington DC: 5%. Los Angeles: 8%.

  I’ve seen the effects of this dual inflation/deflation phenomenon as I’ve traveled around the world in places like Argentina, Greece, and Indonesia.

  It is a very real threat. And it may now be coming to US shores.

  But everyone is focused exclusively on the deflation side.

  You’ll get laughed at in financial circles if you mention the word ‘inflation’ anymore. It’s being completely ignored… even denied.

  They’re pretending like half the problem doesn’t even exist, which is seriously foolish.

  Inflation is a long-term disease. Quarter by quarter the numbers may change. But over the long run it’s like a cancer, slowly eating away at your lifestyle.

  It’s not a question of either/or. It’s not a debate over inflation VS. deflation. It’s only a matter of WHEN we’ll end up with BOTH. And how well you’re prepared for it.

  

  

  

  

  

• #Wynn-ing? Casino Magnate Joins Trump Campaign

  In yet another somewhat surreal twist in The Donald’s path to The White House, Fox Business reports the long, sometimes contentious relationship between Donald Trump and Steve Wynn has taken another turn, with the Las Vegas casino magnate serving as an unofficial adviser to Trump’s presidential campaign. Having known each other for 30 years, Fox’s Gasparino notes that they have clashed in the past (Wynn on Turmp in 1998 “He’s a fool,” and Trump on Wynn “he’s a very strange guy.”) but in recent years both have been critical of the leftward tilt of the Democratic Party and president Obama.

  

  As Fox Business reports,

   People close to both men say Trump has been in constant contact with Wynn in recent weeks as his insurgent campaign to win the Republican 2016 presidential nomination continues to pick up steam—something press officials representing Trump and Wynn would not deny. These people say Wynn has offered advice and counsel to Trump on various issues, including whether Trump would rule out a third-party run, as he is expected to do later this afternoon.

   

  “They are talking regularly,” said one GOP operative with first-hand knowledge of the conversations. “Trump calls and asks Steve ‘how am I doing,” and then Steve tells him.”

   

  Michael Weaver, a spokesman for Wynn, told FOX Business that Wynn “speaks regularly to many of the candidates and whenever possible gives his best thoughts and ideas to them.  He and Mr. Trump have known each other socially for many years.   His conversations with Mr. Trump have not been much different than his conversations with the other candidates.”

   

  Weaver added: “I’m aware that he suggested to Mr. Trump that a third-party run would be unwise.”

   

  Likewise, Trump spokeswoman Hope Hicks also would not deny the discussions. “They have been friends for 30 years and they have always had a great relationship,” she told FOX Business.

  Despite some tensions over the 30 years they have known each other, Gasparino reports, the two have more recently patched up their relationship.

  According to one published report, Trump attended Wynn’s wedding, and according to people who know both men, the relationship has flourished to the point that Trump is now in nearly constant contact with Wynn about his presidential campaign.

   

  Trump’s choice of Wynn, the head of Wynn Resorts, as an unofficial political adviser seems odd since the casino tycoon isn’t known for his political acumen, but according to GOP operatives, it fits in with the temperament of Trump’s campaign. At least so far, Trump has eschewed the normal trappings of a major presidential campaign. He hasn’t hired top political advisers, and according to one GOP operative, he hasn’t commissioned one private poll to weigh voter sentiment.

  *  *  *

  Of course, if you believe Paull Farrel, none of this matters – the market is done no matter what…

  A mega crash is coming, dropping half off its peak, down below Dow 5,000. Not just another 1,000-point correction like last month. But a heart-stopping collapse coinciding with the 2016 elections … then a long systemic recession … probably lasting till the 2020 presidential election, maybe longer … no matter who’s in the White House, Doanld Trump, Jeb Bush or Hillary Clinton.

  

  

  

  

  

• "It's All Gold"- Saudi King Arrives In DC, Books All Rooms At The Four Seasons

  Over the past month or so, we’ve spent quite a bit of time detailing the effect the death of the petrodollar has had on Saudi Arabia’s financial position. Recapping briefly, Riyadh’s move to Plaxico itself in an effort to bankrupt the US shale space late last year has forced the kingdom to draw down its petrodollar reserves to ensure that ordinary Saudis aren’t affected by plunging crude. Add in a proxy war (or two) and you get a budget deficit of 20% to go along with the first current account deficit in ages. The cost of maintaining the riyal’s peg to the dollar doesn’t help either. 

  

  The situation described above has caused the Saudis to tap the debt market to help fill the gap and indeed, some estimates show the country’s currently negligible debt-to-GDP ratio climbing by a factor of 10 by the end of next year. 

  But make no mistake, all of the above should not be mistaken as a suggestion that the Saudis aren’t rich – very rich, and if you had any doubts about that, consider the following description from Politico of King Salman’s arrival in Washington for his first meeting with President Obama:

  In anticipation of King Salman bin Abdulaziz of Saudi Arabia’s stay, the Four Seasons hotel in Georgetown has done some redecorating — literally rolling out red carpets in order to accommodate the royal’s luxurious taste.

   

  Eyewitnesses at the property have seen crates of gilded furniture and accessories being wheeled into the posh hotel over the past several days, culminating in a home-away-from-home fit for the billionaire Saudi monarch, who is in Washington for his first White House meeting with President Barack Obama tomorrow.

   

  “Everything is gold,” says one Four Seasons regular, who spied the deliveries arriving at the hotel. “Gold mirrors, gold end tables, gold lamps, even gold hat racks.” Red carpets have been laid down in hallways and even in the lower parking garage, so the king and his family never have to touch asphalt when departing their custom Mercedes caravan.

   

  
  

   

  The guests staying at the 222-room hotel for the next couple of days are all part of the 79-year-old king’s entourage of Saudi diplomats, family members and assistants, one source said; a full buyout of the entire property was reserved for the visit. Guests who had booked to stay at the Four Seasons during the royal visit have apparently been moved to other luxury hotels in town. A call to the Four Seasons confirmed the hotel is sold out Thursday, Friday and Saturday nights.

   

  King Salman, who ascended the throne in January, has a habit of displacing commoners for his own comforts; this summer, during a sojourn to the French Riviera, his eight-day stay forced the closure of a popular beach, enraging locals. Salman rolls deep, with a reported 1,000-person delegation joining him for his seaside August vacation.

   

  Wall St. Journal reporter Carol Lee snapped this photograph of Salman’s entourage arriving at Andrews Air Force Base on Thursday:

  Saudis seem to have enough vehicles for King Salman’s visit – the car fleet parked at Joint Base Andrews pic.twitter.com/Gk4aLzuVL2

  — Carol Lee (@carolelee) September 3, 2015

  The king will reportedly discuss a number of rather pressing issues with the Obama administration including Riyadh’s involvement in Yemen, where, as we detailed on Thursday, a former US counterterrorism “success story” is now on the verge of splitting into two separate countries. Of course the Iran nuclear deal will also come up, especially in light of the fact that, as The New York Times noted earlier this week, “Republicans are considering legislative options to counter the deal, including the possible reimposition of sanctions the agreement is supposed to lift,” now that the President has secured the support he needs to sustain a veto of a GOP challenge.

  Perhaps more importantly, the two leaders will also discuss Syria and oil prices, with the latter issue now having a rather outsized impact on America’s shale producers as well as on US majors’ capex plans. Needless to say, the real question from a geopolitical perspective is whether Obama and King Salman come to any closed-door agreements on Syria where, as Al Jazeera delicately puts it, the US and Saudi Arabia are set to orchestrate a “managed political transition.”

  

  *  *  *

  Meanwhile, over at The White House blog:

  

  

  

  

  

• Meanwhile In Submerging Markets: An FX Bloodbath

  Things were already bad enough for emerging markets going into August. Persistently low commodity prices, slumping demand from China, depressed global trade, and a “diminutive” septuagenarian waving around a loaded rate hike pistol in the Eccles Building had served to put an enormous amount of pressure on the world’s emerging economies.

  And then, the unthinkable happened. 

  No longer able to watch from the sidelines as the export-driven economy continued to buckle from the pain of the dollar peg, China devalued the yuan. What happened next was nothing short of a bloodbath. The carnage is documented below.

  First note that just moments after the PBoC’s yuan move we said the following:

  Biggest immediate loser from China’s devaluation: Brazil

  — zerohedge (@zerohedge) August 11, 2015

  Well sure enough, with the exception of the kwacha, the Belarusian ruble, and the tenge (which went to a free float overnight late last month), that has proven to be demonstrably correct as you can see from the following overview of EM FX performance since China’s deval:

  

  And here’s the big picture which also shows that EM FX has fallen 16 of the last 18 weeks with this week being the worst stretch since March:

  

  Now just imagine what this will look like if the Fed pulls the trigger…

  

  

  

  

  

  

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• Paul Craig Roberts: The Rise Of The Inhumanes

  Submitted by Paul Craig Roberts,

  America’s descent into totalitarian violence is accelerating. Like the Bush regime, the Obama regime has a penchant for rewarding Justice (sic) Department officials who trample all over the US Constitution. Last year America’s First Black President nominated David Barron to be a judge on the First US Circuit Court of Appeals in Boston.

  Barron is responsible for the Justice (sic) Department memo that gave the legal OK for Obama to murder a US citizen with a missile fired from a drone. The execution took place without charges presented to a court, trial, and conviction. The target was a religious man whose sermons were believed by the paranoid Obama regime to encourage jihadism. Apparently, it never occurred to Obama or the Justice (sic) Department that Washington’s mass murder and displacement of millions of Muslims in seven countries was all that was needed to encourage jihadism. Sermons would be redundant and would comprise little else but moral outrage after years of mass murder by Washington in pursuit of hegemony in the Middle East.

  Barron’s confirmation ran into opposition from some Republicans, some Democrats, and the American Civil Liberties Union, but the US Senate confirmed Barron by a vote of 53-45 in May 2014. Just think, you could be judged in “freedom and democracy America” by a fiend who legalized extra-judicial murder.

  While awaiting his reward, Barron had a post on the faculty of the Harvard Law School, which tells you all you need to know about law schools. His wife ran for governor of Massachusetts. Elites are busy at work replacing law with power.

  America now has as an appeals court judge, no doubt being groomed for the Supreme Court, who established the precedent in US law that, the Constitution not withstanding, American citizens can be executed without a trial.

  Did law school faculties object? Not Georgetown law professor David Cole, who enthusiastically endorsed the new legal principle of execution without trial. Professor Cole put himself on the DOJ’s list of possible federal judicial appointees by declaring his support for Barron, whom he described as “thoughtful, considerate, open-minded, and brilliant.”

  Once a country descends into evil, it doesn’t emerge. The precedent for Obama’s appointment of Barron was George W. Bush’s appointment of Jay Scott Bybee to the US Court of Appeals for the Ninth Circuit. Bybee was John Yoo’s Justice (sic) Department colleague who co-authored the “legal” memos justifying torture despite US federal statutory law and international law prohibiting torture. Everyone knew that torture was illegal, including those practicing it, but these two fiends provided a legal pass for the practitioners of torture. Not even Pinochet in Chile went this far.

  Bybee and Yoo got rid of torture by calling it “enhanced interrogation techniques.” As Wikipedia reports, these techniques are considered to be torture by Amnesty International, Human Rights Watch, medical experts who treat torture victims, intelligence officials, America’s allies, and even by the Justice (sic) Department. https://en.wikipedia.org/wiki/Jay_Bybee

  Others who objected to the pass given to torture by Bybee and Yoo were Secretary of State Colin Powell, US Navy General Counsel Alberto Mora, and even Philip Zelikow, who orchestrated the 9/11 Commission coverup for the Bush regime.

  After five years of foot-dragging, the Justice (sic) Department’s Office of Professional Responsibility concluded that Bybee and his deputy John Yoo committed “professional misconduct” by providing legal advice that was in violation of international and federal laws. The DOJ’s office of Professional Responsibility recommended that Bybee and Yoo be referred to the bar associations of the states where they were licensed for further disciplinary action and possible disbarment.

  But Bybee and Yoo were saved by a regime-compliant Justice (sic) Department official, David Margolis, who concluded that Bybee and Yoo had used “poor judgement” but had not provided wrong legal advice.

  So, today, instead of being disbarred, Bybee sits on a federal court just below the Supreme Court. John Yoo teaches constitutional law at the University of California, Berkeley, School of Law, Boalt Hall.

  Try to imagine what has happened to America when Harvard and Berkeley law professors create legal justifications for torture and extra-judicial murder, and when US presidents engage in these heinous crimes. Clearly America is exceptional in its immorality, lack of human compassion, and disrespect for law and its founding document.

  Hitler and Stalin would be astonished at the ease with which totalitarianism has marched through American institutions. Now we have a West Point professor of law teaching the US military justifications for murdering American critics of war and the police state. http://www.theguardian.com/us-news/2015/aug/29/west-point-professor-target-legal-critics-war-on-terror Also here: http://www.informationclearinghouse.info/article42758.htm The professor’s article is here: http://warisacrime.org/sites/afterdowningstreet.org/files/westpointfascism.pdf

  William C. Bradford, the professor teaching our future military officers to regard moral Americans as threats to national security, blames Walter Cronkite for loosing the Tet Offensive in the Vietnam War by reporting the offensive as an American defeat. Tet was an American defeat in the sense that the offensive proved that the “defeated” enemy was capable of a massive offensive against US forces. The offensive succeeded in the sense that it demonstrated to Americans that the war was far from over. The implication of Bradford’s argument is that Cronkite should have been killed for his broadcasts that added to the doubts about American success.

  The professor claims to have a list of 40 people who tell the truth who must be exterminated, or our country is lost. Here we have the full confession that Washington’s agenda cannot survive truth.

  I am unaware of any report that the professor has been censored or fired for his disrespect for the constitutionally protected right of freedom of expression. However, I have seen reports of professors destroyed because they criticized Israel’s war crimes, or used a word or term prohibited by political correctness, or were insufficiently appreciative of the privileges of “preferred minorities.” What this tells us is that morality is sidetracked into self-serving agendas while evil overwhelms the morality of society.

  Welcome to America today. It is a land in which facts have been redefined as enemy propaganda, a land in which legally protected whistleblowers are redefined as “fifth columns” or foreign agents subject to extermination, a land in which America is immune from criticism and all crimes are blamed on those whom Washington intends to rule.

  Barron, Bybee, Yoo, and Bradford are members of a new species—the Inhumanes—that has risen from the poisonous American environment of arrogance, hubris, and paranoia.

  

  

  

  

  

• Losing Faith? Traders Dump Japanese Stocks At Fastest Pace In History

  The narrative of the omnipotent central banker continues to be questioned with China's inability to save its own market the latest incarnation of investors losing faith. Nowhere has the religious zealotry been more fervent than in trading Japanese stocks where Abe and Kuroda have broken every independent rule in their manipulation of wealth-giving stocks. However – it appears their time is up, as Bloomberg reports, foreigners dumped 1.43 trillion yen of Japanese equities in the three weeks through Aug. 28, Tokyo Stock Exchange data updated Thursday show. That’s the most for any three-week span on record, overtaking the period when Bear Stearns Cos. collapsed in 2008.

   

  Global investors are pulling money out of Japan’s equity market at the fastest pace since at least 2004, according to Mizuho Securities Co. As Bloomberg details,

  Foreigners last week sold a net 1.85 trillion yen ($15.4 billion) of Japanese stocks and equity index futures, the biggest combined outflow since Mizuho began tracking the data more than a decade ago, said Yutaka Miura, a Tokyo-based senior technical analyst at the brokerage. Investors are fleeing amid concern about China’s economic outlook and the prospect of higher interest rates in the U.S., he said.

   

  “This is a result of investors dumping global risk assets,” said Miura. “Japanese stocks have performed well since the start of the year, so similar to what’s happening in Europe, we’re seeing people take profits.”

   

  Foreigners dumped 1.43 trillion yen of Japanese equities in the three weeks through Aug. 28, Tokyo Stock Exchange data updated Thursday show. That’s the most for any three-week span on record, overtaking the period when Bear Stearns Cos. collapsed in 2008.

   

  

   

  Net stock sales totaled 707 billion yen last week, and investors also reduced positions in index futures by 1.14 trillion yen, exchange data show. Cumulative flows for 2015 are still positive, with foreigners buying a net 1.1 trillion yen of equities through last week.

  As one local broker noted,

  “The sell-off started in China," Clarke said. “Investors couldn’t sell there in the end so selling spread to Asia, and Japan especially as it has a greater liquidity. This eventually spread to Europe and the U.S.”

  Time for some moar QQE Mr. Kuroda? Oh wait – you can't!!

  

  

  

  

  

• Why China Liquidations May Not Spike US Treasury Yields

  Via Scotiabank’s Guy Haselmann

  There has been quite a bit of market chatter this week about how central bank selling of foreign exchange (FX) reserves could cause Treasury yields to soar. The market has branded this action ‘Quantitative Tightening’; borrowing the term from a note written by a London-based markets strategist.  Investors seem quick to conclude that it will result in higher yields on Treasury securities. I disagree with this simplified assumption and will use this note to explain why.

  Yes, I remain bullish on long-dated Treasuries securities.    

  First some facts. No one disputes that central banks have been selling reserves. Aggregate global foreign exchange reserves fell to $11.43 trillion in Q1 from $11.98 trillion last summer. The aggregate amount most likely fell even further in Q2 and Q3 as Chinese economic growth concerns impacted global markets. These reserves are mostly held in G7 currencies, 64% percent of which are held in US dollars. Since the aggregate amount is measured and reported in US dollars, it should be noted that part of the decline is due to the fall in dollar terms of the reserves held in euros and yen. 

  To understand its impact on Treasuries – or German, UK, or Japanese bonds for that matter – it is important to understand why central banks have been selling. The decline (selling) is driven by a combination of factors, such as: a Chinese economic slowdown; the preparation of a looming Fed interest rate hike; the Renminbi devaluation; a depreciating domestic currency; capital outflows; and lower revenues from collapsed commodity prices.

  How do these factors lead to the selling of FX reserves?  Put simply, some countries are selling reserves in an attempt to either support falling local currencies or to offset capital flight. If an investor, for example, sells a Renminbi asset for dollars, China can sell some Treasuries to buy the Renminbi and support its currency and currency peg. If the investor chooses to invest the USD into Treasuries, then there is no net effect.

  More importantly, a probable driving force behind this transaction could be that the outlook for economic growth and inflation has fallen. In addition, there may simply be a flight to the safety of Treasuries in a world of growing central bank and political uncertainty (and one of greater imbalances and instability). Furthermore, as global capital markets have entered a new higher volatility regime, portfolios are forced to decrease risk accordingly.  Any central bank selling will be worse for equities than Treasuries. 

  Admittedly, de-risking is not a one-way bullish bet on bonds since leveraged carry trades and ‘risk-parity’ portfolios will need to do some selling. This is difficult to quantify. In addition, a slower growth world has depressed the price of oil leading to fewer petrol dollars being recycled back into Treasuries.

  However, I believe demand for Treasuries will more than offset central bank selling. Treasury selling by central banks is temporary, while the economic factors causing the action will be longer lasting. Weaker foreign currencies will mean cheaper goods being sent to the US. This will keep downward pressure on US consumer prices, and the proceeds of which will be recycled into US Treasuries.

  There is no doubt that the Chinese economy is in a material economic slowdown. Policy officials’ aggressive actions and scare tactics against equity short sellers could continue to cause capital flight. However, this does not mean that China is going to sell large quantities of Treasuries. There is too much co-dependency between the US consumer and Chinese exporter. 

  Destabilizing the US Treasury market with large sales would be tantamount to shooting themselves in the foot. Therefore, if capital flows became too large China would rather impose a penalty on outflows, than sell too many Treasury securities. Last week, Beijing imposed a 20% penalty in Renminbi forwards – that bet against currency depreciation.

  There was huge liquidation of FX reverses during the 1997 South East Asian currency crisis. The 10-year Treasury bounced around in a volatile range for many months, only making slow progress to lower yields over time despite scary market conditions. Ironically, it was only after the IMF granted loans, and the selling dissipated as the crisis eased, that Treasury yields fell markedly.

  In addition, demand from private pensions should increase. Penalties for underfunding will rise again on January 1st, so the incentives to expand LDI will increase. There is a shortage of high quality duration.

  Lastly, the Fed may choose a reinvestment schedule for maturing Treasury securities in 2016 that keeps the weighted-average-maturity of its balance sheet stable. If this happens, duration will be extracted from the secondary market to fix the duration of its balance sheet.   

  Foreign Demand for Dollars

  Due to low rates (zero lower bound), the amount of US dollar issuance by foreign corporations has risen from around $2 trillion in 2007 to around $8 trillion today (a 4X increase). I will guess that the average weighted maturity of this new issuance is 6 years. That would mean that any debt issued in 2009 is coming due this year.

  If the money stayed in US dollars, repayment would be less difficult. However, much of the proceeds were repatriated into domestic currencies. Since many foreign currencies have depreciated by 20%-60%, these liabilities have increased significantly in local currency terms. Many companies are scrambling to get dollars or hedge their currency exposures as they prepare to meet their obligations.  

  Central banks may have to find clever ways to offset or smooth these flows. Relative to the size of their economies, $8 trillion in outstanding liabilities is an enormous amount. This is likely one of several forces giving a relentless bid to the USD against certain currencies.

  September FOMC

  A sporting event is most enjoyable when the game is fair and competitive and when referees are rarely noticed. Central Banks should be viewed in the same light. To their dismay, they would admit that they are too visible and the source of daily news.  Part of the problem is that central banks have entered a dangerous cycle of investors expecting more stimuli for each and every economic wobble. (Hope-ium is highly addictive.)

  The markets began today in ‘risk-on’ mode due to ECB quasi-promises of doing whatever it takes.

  The first hike in nine years has been lingering above markets for well over a year.  Rightly or wrongly, there have been reasons and excuses to delay it.   Further delay will be damaging to markets and destructive for confidence.  The time for a hike has arrived. The best way to arrest these unhealthy conditions is to ‘rip the band aid off’ by hiking in two weeks and then sitting back and watching.  

  Elevated market volatility or international fragility should not deter the Fed from hiking.  A pause would actually cause more uncertainty and keep a hike looming over the market for longer. 

  One reason, the US Treasury curve has been steepening is the belief that the Fed will delay hiking rates until 2016. Some investors believe the Fed prefers a steeper curve; thus supporting their expectations for delay. I disagree with that prediction and rationale. 

  I agree that a hike would almost assuredly flatten the curve. This would occur because investors would either think that the Fed made a mistake, or because they would decrease expectations for growth and inflation given the fragility of the international economies. 

  However, I believe the Fed would not be bothered by a drop in long yields, because it would help support the housing market. Moreover, banks (who benefit from a steeper curve) already receive a subsidy (arbitrage) from interest on their excess reserves, and do not receive much margin in loans anyway.

  The bottom line is that I remain a bond bull and advise investors not to give into the hype of Chinese selling. (Moreover, the employment report tomorrow at this point does not matter.)  I expect long-dated yields to fall materially despite an interest rate hike by the FOMC at the September or October meeting. The next 50 basis point move in 10’s and 30’s is to lower yields and likely to happen before the end of the year.  

   “Over investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money.” –Irving Fisher

  

  

  

  

  

• The 2030 Agenda: This Month The UN Launches A Blueprint For A New World Order With The Help Of The Pope

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

  Did you know that the UN is planning to launch a “new universal agenda” for humanity in September 2015?  That phrase does not come from me – it is actually right in the very first paragraph of the official document that every UN member nation will formally approve at a conference later this month.  The entire planet is going to be committing to work toward 17 sustainable development goals and 169 specific sustainable development targets, and yet there has been almost a total media blackout about this here in the United States. 

  The UN document promises that this plan will “transform our world for the better by 2030“, and yet very few Americans have even heard of the 2030 Agenda at this point.  Instead, most of us seem to be totally obsessed with the latest celebrity gossip or the latest nasty insults that our puppet politicians have been throwing around at one another.  It absolutely amazes me that more people cannot understand that Agenda 2030 is a really, really big deal.  When will people finally start waking up?

  As I discussed in a previous article, the 2030 Agenda is taking the principles and goals laid out in Agenda 21 to an entirely new level.  Agenda 21 was primarily focused on the environment, but the 2030 Agenda addresses virtually all areas of human activity.  It truly is a blueprint for global governance.

  And later this month, nearly every nation on the entire planet is going to be signing up for this new agenda.  The general population of the planet is going to be told that this agenda is “voluntary” and that it is all about “ending poverty” and “fighting climate change”, but that is not the full story.  Unfortunately, there is so much positive spin around this plan that most people will not be able to see through it.  Just check out an excerpt from a piece that was published on the official UN website yesterday…

  The United Nations General Assembly today approved a resolution sending the draft ‘2030 Agenda for Sustainable Development’ to Member States for adoption later this month, bringing the international community “to the cusp of decisions that can help realize the… dream of a world of peace and dignity for all,” according to Secretary-General Ban Ki-moon.

   

  “Today is the start of a new era. We have travelled a long way together to reach this turning point,” declared Mr. Ban, recounting the path the international community has taken over the 15 years since the adoption of the landmark Millennium Development Goals (MDGs) towards crafting a set of new, post-2015 sustainability goals that will aim to ensure the long-term well-being of our planet and its people.

   

  With world leaders expected to adopt the text at a 25-27 September summit in New York, the UN chief said Agenda 2030 aims high, seeking to put people at the centre of development; foster human well-being, prosperity, peace and justice on a healthy planet and pursue respect for the human rights of all people and gender equality.

  Who doesn’t “dream of a world of peace and dignity for all”?

  They make it all sound so wonderful and non-threatening.

  They make it sound like we are about to enter a global utopia in which poverty and inequality will finally be eradicated.  This is from the preamble of the official 2030 Agenda document…

  This Agenda is a plan of action for people, planet and prosperity. It also seeks to strengthen universal peace in larger freedom. We recognise that eradicating poverty in all its forms and dimensions, including extreme poverty, is the greatest global challenge and an indispensable requirement for sustainable development. All countries and all stakeholders, acting in collaborative partnership, will implement this plan.

   

  We are resolved to free the human race from the tyranny of poverty and want and to heal and secure our planet. We are determined to take the bold and transformative steps which are urgently needed to shift the world onto a sustainable and resilient path.

   

  As we embark on this collective journey, we pledge that no one will be left behind. The 17 Sustainable Development Goals and 169 targets which we are announcing today demonstrate the scale and ambition of this new universal Agenda.

  If it is a “universal agenda”, then where does that leave those that do not want to be part of it?

  How will they assure that “no one will be left behind” if there are some nations or groups that are not willing to go along with their plan?

  The heart of the 2030 Agenda is a set of 17 Sustainable Development Goals…

  Goal 1 End poverty in all its forms everywhere

  Goal 2 End hunger, achieve food security and improved nutrition and promote sustainable agriculture

  Goal 3 Ensure healthy lives and promote well-being for all at all ages

  Goal 4 Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

  Goal 5 Achieve gender equality and empower all women and girls

  Goal 6 Ensure availability and sustainable management of water and sanitation for all

  Goal 7 Ensure access to affordable, reliable, sustainable and modern energy for all

  Goal 8 Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

  Goal 9 Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

  Goal 10 Reduce inequality within and among countries

  Goal 11 Make cities and human settlements inclusive, safe, resilient and sustainable

  Goal 12 Ensure sustainable consumption and production patterns

  Goal 13 Take urgent action to combat climate change and its impacts*

  Goal 14 Conserve and sustainably use the oceans, seas and marine resources for sustainable development

  Goal 15 Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss

  Goal 16 Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

  Goal 17 Strengthen the means of implementation and revitalize the global partnership for sustainable development

  Once again, many of those sound quite good.

  But what do many of those buzzwords actually mean to the elite?

  For instance, what does “sustainable development” actually mean, and how does the UN plan to ensure that it will be achieved globally?

  This is something that was discussed in a recent WND article…

  But what is “sustainable development?”

   

  Patrick Wood, an economist and author of “Technocracy Rising: The Trojan Horse of Global Transformation,” says it’s clear the U.N. and its supporters see sustainable development as more than just the way to a cleaner environment. They see it as the vehicle for creating a long-sought new international economic order, or “New World Order.”

   

  Wood’s new book traces the modern technocracy movement to Zbigniew Brzezinski, David Rockefeller and the Trilateral Commission in the early 1970s.

  And Wood is quite correct.  The environment is a perfect vehicle for the elite to use to bring in their version of utopia, because just about every possible form of human activity affects the environment in some way.  Ultimately, they hope to centrally plan and strictly regulate virtually everything that we do, and we will be told that it is necessary to “save the planet”.

  And they will never come out and openly call it a “New World Order” because “sustainable development” sounds so much nicer and is so much more acceptable to the general population.

  Needless to say, there wouldn’t be much room for individual liberty, freedom or good, old-fashioned capitalism in the world that the elite are trying to set up.  In fact, the U.N.’s number one sustainable development official has essentially publicly admitted this…

  “This is probably the most difficult task we have ever given ourselves, which is to intentionally transform the economic development model, for the first time in human history,” Figueres, who heads up the U.N.’s Framework Convention on Climate Change, told reporters in February.

   

  “This is the first time in the history of mankind that we are setting ourselves the task of intentionally, within a defined period of time, to change the economic development model that has been reigning for the at least 150 years, since the industrial revolution,” Figueres said.

  They plan to “intentionally transform the economic development model”?

  And so what will this new system look like?

  How will they achieve this “utopia” that they are promising us?

  Sadly, they are just selling the same lies that have been sold to people for thousands of years.  Paul McGuire, the co-author of a new book entitled “The Babylon Code: Solving the Bible’s Greatest End-Times Mystery“, commented on this recently…

  Deep inside every man and woman is the longing for a far better world, a world without war, disease, death, and pain. Our present world is a cruel world in which every life ends in death. From the beginning of time Mankind has sought to use science and technology to create a perfect world, what some would call Utopia or Paradise. As the Human Race began to organize itself, a Scientific or Technocratic Elite rose to power by promising the masses that they could build this perfect world. Ancient Babylon represented the first historical attempt to build paradise on earth.

  In ancient times, Babylon was the very first attempt to create a type of “global government”, and ever since then the global elite have been trying to recreate what Babylon started.

  The promise is always the same – the elite swear that they have finally figured out how to create a perfect society without poverty or war.  But in the end all of these attempts at utopia always end up degenerating into extreme forms of tyranny.

  On September 25th, the Pope is traveling to New York to give the opening address at the conference where the 2030 Agenda will be launched.  He will be urging all of humanity to support what the UN is trying to do.  There are countless millions that implicitly trust the Pope, and they will buy what he is selling hook, line and sinker.

  Don’t be fooled – the 2030 Agenda is a blueprint for a New World Order.  Just read the document for yourself, and imagine what our world would actually look like if they have their way.

  They want to fundamentally transform our planet, and the freedom that you are enjoying today is simply not acceptable.  To the elite, giving people freedom and liberty is dangerous because they believe it hurts the environment and causes societal chaos.  According to their way of thinking, the only way to have the kind of harmonious utopia that they are shooting for is to tightly regulate and control what everyone is thinking, saying and doing.  Their solutions always involve more central planning and more control in their own hands.

  So what do you think?

  Should we hand the global elite that kind of power and control?

  If not, then we all need to start speaking out about this insidious agenda while we still can.

  

  

  

  

  

• US Equity Futures Mini-Flash-Crash As Japanese Econ Minister Opens Mouth

  Just as the machines had learned the “Buy when Japan opens” signal, Japanese leaders unleash their usual stream of utter tripe and break the bid. Tonight’s chosen member was Japanese Economy Minister Amari who said “it is important for markets to act calmly, not move in a volatile manner,” adding “stock markets are not reflecting fundamentals,” reflecting on the fact that G-20 ministers had discussed China and “monetary tightening was likely in some advanced countries.” This sparked a plunge in USDJPY and an instant 100-point plunge in Dow futures.

   

  US equity futures mini-flash-crash

  

   

  Led by USDJPY…

  

   

  It appears the admission that an advanced nation was likely to tighten combined with his calls for calm were seen as increasing the odds of a rate hike being imminent for The Fed.

   

  It looks like The BoJ will have to get back to work tonight, since China is still on holiday. As it appears Kuroda likes this level (the red dashed line)…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Flashpoint: White House Confirms Russian Presence In Syria, Warns It Is "Destabilizing"

  Two days ago we reported something which we had anticipated for a long time but nonetheless did not expect to take shape so swiftly: namely, that with Assad’s regime close to collapse and fighting a war on three different fronts (one of which is directly supported by US air and “advisor” forces), Putin would have no choice but to finally intervene in the most anticipated showdown in recent history as “Russian fighter pilots are expected to begin arriving in Syria in the coming days, and will fly their Russian air force fighter jets and attack helicopters against ISIS and rebel-aligned targets within the failing state.”

  This was indirectly confirmed the very next day when an al-Nusra linked Twitter account posted pictures of a Russian drone and a Su-34 fighter jet – the kind which is not flown by the Syrian air force – flying over the Nusra-controlled western idlib province.

  

   

  Another twitter account said to have captured Russian soldiers in Zabadani “while fighting for Assad”

  

   

  Also, one day after our report, the Telegraph reported that “Syrian state TV reportedly broadcasts footage of Russian soldiers and armoured vehicle fighting alongside pro-Assad troops.” According to the article, “the video footage claimed to show troops and a Russian armoured vehicle fighting Syrian rebels alongside President Bashar al-Assad’s troops in Latakia. It is reportedly possible to hear Russian being spoken by the troops in the footage.”

  It added that “a Russian naval vessel was photographed heading south through the Bosphorus strait carrying large amounts of military equipment, according to social media and a shipping blog” while “an unnamed activist with the Syrian rebel group the Free Syrian Army told The Times: “The Russians have been there a long time.“

  “There are more Russian officials who came to Slunfeh in recent weeks. We don’t know how many but I can assure you there has been Russian reinforcement.” “

  Then earlier today we got the closest thing to a confirmation from the White House itself which confirmed that “it was closely monitoring reports that Russia is carrying out military operations in Syria, warning such actions, if confirmed, would be “destabilising and counter-productive.“

  Obama spokesman Joshn Earnest essentially confirmed Russia was already operating in Syria when he said that “we are aware of reports that Russia may have deployed military personnel and aircraft to Syria, and we are monitoring those reports quite closely.”

  “Any military support to the Assad regime for any purpose, whether it’s in the form of military personnel, aircraft supplies, weapons, or funding, is both destabilising and counterproductive.”

  And another confirmation: “a US official confirmed that “Russia has asked for clearances for military flight to Syria,” but added “we don’t know what their goals are.”

  “Evidence has been inconclusive so far as to what this activity is.”

  Other reports have suggested Russia has targeted Islamic State group militants, who have attacked forces loyal to Russian-backed Syrian leader Bashar al-Assad.

  Both the White House and the Pentagon refused to say whether they had intelligence suggesting the reports were accurate.

  Of course, what is left unsaid is that since Russia is there under the humanitarian pretext of fighting the evil ISIS, the same pretext that the US, Turkey, and the Saudis are all also there for, when in reality everyone is fighting for land rights to the most important gas pipeline in decades, the US is limited in its diplomatic recoil.

  Indeed as we sarcastically said last week: “See: the red herring that is ISIS can be used just as effectively for defensive purposes as for offensive ones. And since the US can’t possibly admit the whole situation is one made up farce, it is quite possible that the world will witness its first regional war when everyone is fighting a dummy, proxy enemy which doesn’t really exist, when in reality everyone is fighting everyone else!”

  * * *

  Which now effectively ends the second “foreplay” phase of the Syrian proxy war (the first one took place in the summer of 2013 when in a repeat situation, Russia was supporting Assad only the escalations took place in the naval theater with both Russian and US cruisers within kilometers of each other off the Syrian coast), which means the violent escalation phase is next. It also means that Assad was within days of losing control fighting a multi-front war with enemies supported by the US, Turkey and Saudi Arabia, and Putin had no choice but to intervene or else risk losing Gazprom’s influence over Europe to the infamous Qatari gas pipeline which is what this whole 3 years war is all about.

  Finally, it means that the European refugee crisis, which is a direct consequence of the ISIS-facilitated destabilization of the Syrian state (as a reminder, ISIS is a US creation meant to depose of the Syrian president as leaked Pentagon documents have definitively revealed) is about to get much worse as 2013’s fabricated “chemical gas” YouTube clip will be this years “Refugee crisis.” It will be, and already has been, blamed on Syria’s president Assad in order to drum up media support for what is now an inevitable western intervention in Syria.

  The problem, however, has emerged: Russia is already on the ground, and will hardly bend over to any invading force.

  Finally, while we have no way of knowing how the upcoming armed conflict will progress, now may be a safe time to take profits on that oil short we recommended back in October, as the geopolitical chess game just shifted dramatically, and with most hedge funds aggressively short, any realization that the middle east is suddenly a far more violent powderkeg – one which may promptly include the Saudis in any confrontation – could result in an epic short squeeze.

  

  

  

  

• Europe's Refugee Crisis "Out Of Control", Hungary PM Rages "This Is A German Problem, Not An EU Problem"

  The current refugee crisis is not an EU problem, but rather "a German problem," according to Hungary's Prime Minister Viktor Orban as his nation's borders are swamped with foreigners seeking to travel on to Germany. "People in Europe are full of fear because they see that the European leaders are not able to control the situation," he exclaimed after a meeting with EU President Schultz. He is right, of course, as we detailed here and here, but the sheer scale of the tragedy is worst than many could imagine. Orban defended his decision to erect a fence along its southern border with Serbia, saying: "we don’t do this for fun, but because it is necessary," adding rather pointedly that his country was being "overrun" with refugees, most of whom, according to the prime minister, were not Christians.

   

  The disturbing image of a drowned Syrian boy has crystallized the crisis across Europe for most of the rest of the world…

  

   

  And this morning's actions…

   

  As refugees flood into Europe from across The Middle East and Africa… (At least 450,000 of Syria’s pre-2011 Christian population of 1.17 million are either internally displaced or living as refugees abroad.)

  

   

  As AFP explains, it shows no signs of abating…

   

  As The FT reports,

  Europe is facing the most serious refugee crisis since the end of the second world war.

   

  In response, EU leaders are acting in very different ways. Angela Merkel, the German chancellor, has taken the humanitarian high ground, declaring that her country will receive up to 800,000 asylum applicants this year and confronting the anti-immigrant voices in her country. By contrast, David Cameron seems to be taking a mean approach, strictly limiting the number of refugees Britain will receive.

  And Hungary's Prime Minister is now daring to speak out – demanding action from his 'colleagues' in The Union…

  "We Hungarians are full of fear, people in Europe are full of fear because they see that the European leaders, among them prime ministers, are not able to control the situation," Orban said on Thursday, after a meeting with European Parliament President Martin Schulz in Brussels.

   

  The prime minister added: "I came here to inform the president that Hungary is doing everything possible to maintain order. We are creating now in the Hungarian parliament a new package of regulations, we set up a physical barrier and all these together will provide a new situation in Hungary and in Europe from September 15. Now we have one week of preparation time."

   

   

  On Thursday, Hungarian police allowed hundreds of migrants inside Budapest's main railway station, but then the authorities canceled all trains to Western Europe, causing chaos.

   

  Hundreds of people, many of them fleeing conflicts zones in the Middle East with their children, took a waiting train by storm, trying to push kids through open windows, hoping they would be allowed to continue their journey west to Austria, Germany and further afield. But signs in Hungarian said there were no west-bound trains, Reuters reported. It's unclear why the police had suddenly withdrawn, having stopped more than 2,000 migrants from entering for two days.

   

  Hungary is currently building a 3.5 meter-high fence on its southern border with Serbia designed to deter migrants. So far this year, 140,000 have been caught entering the country.

   

   

  Following talks with the president of the European Parliament Martin Schulz, Orban noted the current refugee crisis was not an EU problem, but rather "a German problem," as he put it.

   

  According to Orban, none of the migrants want to "stay in Hungary."

   

  "All of them want to go to Germany," the Hungarian prime minister said.

  *  *  *

  As we concluded previously,

  The refugee issue can and will not be solved by the EU, or inside the EU apparatus, at least not in the way it should. Nor will the debt issue for which Greece was merely an ‘early contestant’. The EU structure does not allow for it. Nor does it allow for meaningful change to that structure. It would be good if people start to realize that, before the unholy Union brings more disgrace and misery and death upon its own citizens and on others.

   

  However this is resolved and wherever the refugees end up living, we, all of us, have the obligation to treat them with decency and human kindness in the meantime. We are not.

  Russia appears to get it…

  Refugee crisis in Europe reaches “catastrophic” level as result of “irresponsible” approach to provoking regime change, Russian Foreign Ministry spokeswoman Maria Zakharova tells reporters in Moscow.

  Which means this is the tip of iceberg compared to what is coming…

  The media focus on a truck in Austria where 70 human beings died, and on a handful of children somewhere who were more dead than alive when discovered. These reports take away from the larger issue, that there are dozens such cases which remain unreported, where there are no camera’s present and no human interest angle to be promoted that a news outlet thinks it can score with.

   

  Brussels and Berlin must throw their energy and their efforts at ameliorating the circumstances in the countries the refugees are fleeing. They need to acknowledge the role they have played in the destruction of these countries. But the chances of any such thing happening are slim to none. Therefore countries like Greece and Italy must draw their conclusions and get out, or they too will be sucked down into the anti-humanitarian vortex that the EU has become.

   

  Europe needs to look at the future of this crisis in very different ways than it is doing now. Or it will face far bigger problems than it does now.

   

  Italy’s Corriere della Sera lifted part of the veil when it said last week (Google translation):

   

  The desperation of millions of human beings, manipulated by traffickers and by terrorist groups is also an instrument of disintegration of the countries of origin and of destabilization of the host countries.

   

  It is estimated that sub-Saharan Africa will have 900 million more inhabitants in the next twenty years. Of these, at least 200 million are young people looking for work. The chaos of their countries of origin will push them further north.

   

  That is the future. It will no more go away by itself, and by ignoring it, than the present crisis, which, devastating as it may be, pales in comparison. Europe risks being overrun in the next two decades. And as things stand, it has no plans whatsoever to deal with this, other than the military, and police dogs, barbed wire, tear gas, fences and stun grenades.

  This lack of realism on both the political and the humane level will backfire on Europe and turn it into a very unpleasant place to be, both for Europeans and for refugees. Most likely it will turn the entire continent into a warzone.

  The only solution available is to rebuild the places in Syria and Libya et al that the refugees originate from, and allow them to live decent lives in their homelands. If Brussels, and Washington, fail to realize this, things will get real ugly. We haven’t seen anything yet.

  So far the EU changes have been a disaster…

  

   

  And all this to get a gas pipleine across Syria!!!

  

  

  

  

  

• As China Parks Its Ships Next To Alaska, Here's Obama

  As Xi and Putin stand proudly before the parade of China's military might and Chinese navy ships enter the Bering Sea for the first time ever, President Obama is busy doing other things just a few hundred miles away…

   

  

   

  Ironic really, as Reuters reports,

  The rise of selfie photography in some of the world's most beautiful, and dangerous, places is sparking a range of interventions aimed at combating risk-taking that has resulted in a string of gruesome deaths worldwide.

   

  …

   

  Several governments and regulatory bodies have now begun treating the selfie as a serious threat to public safety, leading them to launch public education campaigns reminiscent of those against smoking and binge drinking.

  *  *  *

  One wonders where Obama will selfie next?

  

  

  

  

  

  

• Why Economics Matters

  Submitted by Jeff Deist via The Mises Institute,

  This article is a selection from a June 19 presentation at a lunchtime meeting of the Grassroot Institute in Honolulu at the Pacific Club. The talk was part of the Mises Institute’s Private Seminar series for lay audiences. To schedule your own Private Seminar with a Mises Institute speaker, please contact Kristy Holmes at the Mises Institute.

  First let me say that what we today call “Austrian economics” flows from the great legacy of classical economics, with the very important modification economists now call the “marginal revolution.” Austrian economics is also a term that describes a healthy and vibrant (though often oppositional) modern school of economic thought. It originated with intellectual giants like Carl Menger and Ludwig von Mises, names I’m sure many of you are familiar with. These economists were from Austria, hence the term.

  There was a landmark conference at South Royalton, Vermont in 1974, attended by the likes of Murray Rothbard and Milton Friedman, that revitalized the Austrian movement and helped it regain prominence in the latter part of the twentieth century. Milton Friedman was in attendance, and that’s when he famously remarked that “There is only good economics and bad economics.”

  And of course that’s true. Schools of thought should not be rigid, or dogmatic, or too narrowly defined. But classifying various economists and theories into groups or family trees does indeed help us make sense of economics. It helps us understand how we arrived at a time and place where Ben Bernanke, Paul Krugman, Thomas Piketty, and Christine Lagarde are viewed as modern mainstream thinkers rather than the radicals they are when compared to the whole history of the field.

  

  Image courtesy of Peter Cresswell.

  We supplied some photocopies that roughly trace the history of economic thought. Notice the split in the 1930s, not coincidentally during the Great Depression, between Mises and John Maynard Keynes. Up until then, from about 1850 forward, Austrian economics was mainstream economics. But as you can see, most of today’s mainstream economists fall somewhere under the umbrella of Keynes, and they tend to focus on variants of Keynes’s ideas about aggregate demand.

  But at least they focus on something!

  Ignorance of Economics Is not Bliss

  Which leads me to my topic today: “Why Any Economics Matters.” I say “any” because at this point the entire subject appears to be lost on the average American. Economics is not a popular topic among the general population, it would seem. When economics is discussed at all, it’s in the context of politics — and politics gives us only the blandest, safest, most meaningless platitudes about economic affairs.

  Bernie Sanders or Hillary Clinton simply are not going to talk much in economic terms or present detailed economic “plans.” On the contrary, they — will assume rightly — that most Americans just don’t have any interest beyond sloganeering like “1%,” “social justice,” “greed,” “paying their fair share,” and the like.

  Candidates on the Right won’t be much better. They’d prefer to talk about other subjects, but when they do broach economics they’re either outwardly protectionist like Donald Trump or deadly dull.  Who is inspired by flat tax proposals?

  Americans simply aren’t much interested in the details, or even the accuracy, of the economic pronouncements of the political class. We want bread and circuses.

  Consider what people talk about on Facebook: lots of posts about family. Lots of posts about celebrities, and sports. Lots of posts about food, health, and exercise. Some posts about politics, culture, race, and sex, but usually only to support one side or bash the other.

  Not much, ladies and gentlemen, in the way of economics. And I submit that might be a very healthy thing. After all — we’re rich! Only a wealthy society does not have to focus on the subsistence-level concerns of adequate food and shelter, hot running water, clothing, electricity, and the like.

  So let’s not be too hard on people for not spending their free time reading economics. Leisure itself is a very important activity, and represents a form of economic trade-off.

  But economics matters very much, and we ignore it at our own peril. Economics is like gravity, or math, or politics — we may not understand it, or even think about it much, but it profoundly affects us whether we like it or not.

  Economics as a subject has been captured by academia, and academics like Krugman are not so subtle when they imply that lay persons should leave things to the experts. It’s like team sports — we may be introduced to it when we’re young, but only the professionals do it for a living as adults.

  Yet once we understand that all human action is economic action, we understand that we can’t escape or evade our responsibility to understand at least basic economics. To think otherwise is to avoid responsibility for our own lives.

  While we shake our heads when twenty year olds can’t read at the college level or do simple algebra, we don’t worry much whether they never take economics. We would be alarmed if our children couldn’t perform basic math to know how much change they should get at a cash register, but we send them out into the world far more susceptible to being cheated by politicians. Why do we want our kids to learn at least basic geography, chemistry, and physics? And grammar, spelling, literature, history, and civics? We want them to know these things so they can navigate their lives properly as adults

  But somehow we’ve come to believe economics should be left to academics and policy wonks. And worse yet, we don’t protest when kids grow up to become adults with little or no knowledge of economics, yet still have strong opinions about economic issues.

  Ignorance of basic economics is so widespread that we ought to have a specific word for it, like we have for illiteracy or innumeracy.  

  The aforementioned Murray Rothbard had this to say: 

  It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a “dismal science.” But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

  I’m sure we’re all familiar with this phenomenon on social media, which seems perfectly suited to vociferous unfounded opinions.

  Let’s consider the minimum wage issue, as one example that’s been in the news lately:

  Wages are nothing more than prices for labor services. When the price for something rises, demand drops — and you have more unemployed people than you otherwise would. Pure and simple Econ 101.

   

  Yet what percentage of Americans today have even seen a downward sloping demand chart in a high school or college class?

  It is this great and widespread ignorance of economics that plagues our ludicrous political landscape. It allows politicians to attack capitalism, and make demagogues out of entrepreneurs. It allows politicians to blame free markets for the very economic problems caused by the state and its central bank in the first place — like the dot com implosion, like the housing bubble, like the Crash of 2008, like the unsustainable equity prices commanded by US stock markets today.

  In short, ignorance of economics allows some very big falsehoods to be accepted as fact by large numbers of people. And it’s only going to get worse as the presidential election of 2016 unfolds.

  Read the full text here.

   

  

  

  

  

  

• Turkey Arrests Journalists, Sets Up Terrorist "Tip Line" As Currency Plunges, Violence Escalates

  Last month, Turkey’s central bank had a chance to give the plunging lira some respite by preempting the Fed and hiking rates.

  Only they didn’t.

  And not only did they not hike, they made it clear that tightening would only occur once the Fed tightened and then made matters immeasurably worse by proceeding to stumble through a “roadmap” of how they planned to deal with DM policy normalization. That, combined with political turmoil, an escalating civil war (and yes, that’s what it is), and pressure on EM in general has led directly to further weakness for TRY:

  

  We bring this up because Turkey, like Brazil, is a country to keep an eye on and not only because of the prominent role it will ultimately play in deciding the fate of Syria’s Bashar al-Assad, but because much like Brazil, things seem to get worse by the day both economically and politically. Take Thursday for instance, when inflation came in hot, prompting Goldman to suggest that the central bank had indeed missed its window. Here’s Goldman:

  Headline and core inflation accelerated sequentially in August, on broad-based price increases. This trend will likely continue, as renewed exchange rate weakness passes through to domestic prices in the coming months, and food disinflation loses momentum. We continue to forecast end-2015 CPI at 8.2% but with moderate upside risks.

   

  In our view, the CBRT may have missed an opportunity to start normalising/simplifying its policy framework by keeping all policy rates unchanged in the August MPC meeting. This raises the risk of earlier and more aggressive rate hikes than we have been forecasting. We reiterate our long-held Conviction View to own Turkey protection, through 5-year CDS spreads.

  And a bit more from Credit Suisse:

  We are revising our headline inflation forecasts higher. Following the lira’s depreciation in August and the recent upside surprises to food price inflation, we are revising our end-2015 inflation forecast to 8.6% from 7.8% previously and our end-2016 inflation forecast to 7.4% from 7.2% previously. 

  And for a more general assessment of the growing economic malaise we got to BofAML: 

  Turkish macro seems to be facing a perfect storm as both domestic and external uncertainties are weighing down on GDP growth. The run rate of GDP growth has slowed down to 2%, TRY weakness keeps CPI inflation sticky close to 8%, weak FX revenues and consumption driven GDP growth keeps CAD around 6% of GDP, and CBT is unlikely to deliver market’s expectation of sharply higher TRY rates to put an end to TRY weakness. Since TRY is still not at oversold levels and further EMFX cannot be ruled out, we believe macro will not be supportive of Turkish asset prices in the near-term. In the meantime, we expect some populism in macro policies until the November elections, as stakes are high. 

  So all around bad. Of course one of the main drivers of the market’s declining confidence in Turkey is the political turmoil that’s gripped the country since June when AKP lost its parliamentary majority for the first time in over a decade throwing President Recep Tayyip Erdogan’s plan to transform the country’s political system into an executive presidency into doubt. Not one to give up easily (especially when it comes to consolidating his power), Erdogan proceeded to launch an ad hoc military offensive against the PKK in an attempt to undermine support for the pro-Kurdish HDP ahead of new elections. Now, with elections set for November, the witch hunt has officially kicked into high gear. 

  Earlier this week, 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. This is of course 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.” The British journalists were reportedly released on Thursday while Mohammed Ismael Rasool (the Iraqi) was not.

  But the media crackdown didn’t stop there. On Tuesday, Turkish police raided Koza-Ipek Media which, as AFP notes, “owns the Turkish dailies Bugun and Millet, the television channels stations Bugun TV and Kanalturk and the website BGNNews.com and is close to Erdogan’s political rival, the US-based Muslim cleric Fethullah Gulen.” 

  “I’m worried that operations targeting the media will create great concern across the world about the state of democracy in Turkey,” Turkey’s new EU affairs minister and HDP member Ali Haydar Konca said.

  Indeed. Perhaps even more alarming were reports that Ankara will now set up a terrorist tip hotline, complete with monetary awards. “Turkey to reward informants on tips about ‘terrorists'”, Bloomberg reported on Monday, citing Gazette. 

  It also looks like Erodgan will station soldiers at the polling stations when Turkey goes back to the ballot box in November – you know, for “security” purposes. Here’s Hurriyet:

  Security forces will take all necessary measures to ensure election safety on Nov. 1 in a bid to avoid the repetition of problems that allegedly occurred in the June 7 polls, President Recep Tayyip Erdo?an has said.

  Yes “the problems”, namely that AKP lost its parliamentary majority. But that’s nothing the military can’t solve. Here’s Erdogan himself (note the chilling passage in bold):

  “I believe our government, our Armed Forces and Interior Ministry will take all measures for election safety so that we’ll get through [the polls] with minor damage. I presume that what happened in the June 7 [elections] will not be repeated on Nov. 1 as part of election safety.”

  And because that still isn’t enough, Turkey is now arresting the relatives of its own (dead) soldiers for criticizing Erdogan:

  From Bloomberg, citing Anadolu Agency:

  Turkey arrests relative of killed soldier on Erdogan insult. Man allegedly insulted President Tayyip Recep Erdogan during memorial ceremony for Turkish soldier killed in roadside bombing last month.

  In this type of environment – that is, in a country where the President is not only willing to start a civil war to regain an absolute majority in parliament on the way to forcibly changing the constitution, but also willing to throw journalists in prison for attempting to cover said civil war – it becomes difficult to distinguish real escalations from potential false flags. After all, the more “attacks” blamed on PKK, the less voter support for HDP, which is why it’s easy to cast a wary eye towards Wednesday’s Molotov cocktail attack on an AKP district branch, an attack which was promptly blamed on “a group of PKK supporters” by AKP mouthpiece Daily Sabah:

  A goup of PKK supporters have attacked an AK Party district branch with Molotov cocktails on Wednesday night in the eastern Bitlis province’s Hizan district. No one was injured in the attack but the branch office was reportedly left unusable.

   

  The district firefighters immediately intervened and managed to extinguish the fire in the building. 

   

  AK Party Provincial Head Nesrullah Tanglay told the state-run Anadolu Agency reporters: “Through these attacks, they are trying to downbeat our party’s organizations before the elections on November 1.”

   

  

  Bear in mind that this is all being carried out with the explicit blessing of Washington and NATO thanks to the fact that Erdogan has managed to trade a brutal crackdown not only on his political rivals (on the way to negating the results of a free election and thereby completely undermining the democratic process), but now also on the press (who are apparently only allowed to cover the story if they’re willing to parrot the AK Party line), for a promise to assist in the campaign against ISIS which is of course really nothing more than a thinly veiled effort to invade a sovereign country and overthrow its government. And as if that weren’t enough, Anakara will now pay the public for terrorist “tips” dialed in to a dedicated hotline.

  What absolutely must not be lost in all of this is that this is i) a NATO member and ally of The White House, and ii) an investment grade country. 

  And because, when taken together, all of the above is somewhat disconcerting for all kinds of reasons, we’ll close with a bit of comic relief, via Bloomberg:

  Erdogan to set up Presidential TV channel before election. 24-hr news channel to broadcast Turkish President Recep Tayyip Erdogan’s speeches and events Zaman reports, without saying where it got the information.

  

  

  

  

  

• Peak Obedience

  Submitted by Paul Rosenberg via FreeMansPerspective.com,

  Warnings about Peak Oil have circulated widely in recent years, and if accurate, they are important. Peak oil, however, pales in comparison to something that’s happening right in front of us… and something that is a good deal more dangerous: Peak Obedience.

  If that concept strikes you as odd, I can understand why: We’ve all been living inside of an obedience cult. (And I choose these words carefully.)

  In our typical “scary cult” stories, we find people who have given up their own functions of choice and who then do crazy things because they are told to by some authority. While inside their cult, however, it all makes sense; it’s all self-reinforcing.

  So, inside a cult of obedience, obedience would seem proper; it would seem righteous; and more than anything else, it would seem normal. And I think that very well describes the Western status quo.

  Obedience, however, should not seem normal to us. Obedience holds our minds in a “child” state, and that is not fitting for any healthy person past their first few years of life. It also presupposes that the people we obey have complete and final knowledge; and in fact, they do not: politicians, central bankers, and the other lords of the age have been wrong – obviously and publicly wrong – over and over.

  So, obedience is not a logical position to take. But we all know why we take it; and that reason is fear. The mass of humanity obeys because they are afraid to do otherwise. All the “philosophy of governance” explanations are merely attempts to distract us from the truth: people believe they’ll be hurt if they don’t obey.

  We are taught not to think in such stark terms, of course. Those “philosophy of governance” explanations give us reasons to believe that obedience is the good and heroic thing to do. Still, we know the truth.

  But that truth about fear, even though important, is not the point I’d like you to take away from this article. My primary point is this:

  When we obey, we make ourselves less conscious; we make ourselves less alive.

  Why Obedience Is Peaking

  I covered this in far more depth in issue #40 of my subscription letter, but I would like to provide a brief explanation here.

  Over the past two centuries, authority has benefitted from a perfect storm of influences. There was never such a time previously, and there probably will never be another. Briefly, here’s what happened:

  Morality was broken

  For better or worse, Western civilization had a consistent set of moral standards from about the 10^th century through the 17^th or 18^th century. Then, through the 20^th century, those standards were broken.

  Note that I did not say morality was changed. The cultural morality of the West was not replaced, but broken. The West has endured a moral void ever since.

  Previously, people routinely compared authority’s decrees to a separate standard (most often the Bible), to see if they held up. But with Western morals broken, authority was freed from restraint.

  Economies of scale

  Factories made it much cheaper to produce large numbers of goods than the old way, in individual workshops. Economists call this an economy of scale. Thus a cult of size began, making “obedience to the large” seem normal.

  Fiat currency

  Fiat currency has allowed governments to spend money without consequences. It allowed politicians to wage war and to provide free food, free education, and free medicine… all without overtly raising taxes. Fiat currency made it seem that politics was magical.

  Mass conditioning

  Built on the factory model, massive government institutions undertook the education of the populace. And more important than their overt curriculum (math, reading, etc.) was their invisible curriculum: obedience to authority. Here, to illustrate, is a quote from the esteemed Bertrand Russell, who is himself quoting Johann Gottlieb Fichte, the founding father of public schooling:

  Education should aim at destroying free will so that after pupils are thus schooled they will be incapable throughout the rest of their lives of thinking or acting otherwise than as their school masters would have wished.

  Mass media

  Mass media turbocharged authority and obedience in the 20^th century. It was authority’s dream technology.

  All of these things, and others, created an unnatural peak for authority. But now, this perfect storm is receding.

  Peak Obedience Is Brittle

  Through the 20^th century, the people of the West built up a very high compliance inertia. They complied with the demands of authority and taught their children to do the same, until it became automatic. People obeyed simply because they had obeyed in the past.

  Authority quickly became addicted to this situation, basing their plans on receiving every benefit of the doubt.

  Automatic obedience, however, is a brittle thing. Economies of scale are failing, the money cartel has been exposed, government schools have lost respect, mass media is fading away, and the game continues because the populace is distracted and afraid. And that will not last forever.

  The ‘walls’ of reflexive compliance are growing thinner. Any serious break may ruin the structure.

  And Then?

  It has long been understood that complex systems breed more complexity, and eventually break themselves. As central authorities try to solve each problem they face, they inevitably create others. Eventually the system becomes so complex, and its costs so much, that new challenges cannot be solved. Then the system and its authority fail, as they did recently in the Soviet Union.

  Sooner or later, this is going to happen here. (If that seems impossible to you, please reflect on the current state of the mighty Roman Empire.) But again, that’s not my primary point. Obedience matters to you right now: today and every other day.

  Obedience turns the best parts of you off. It degrades and kills your creativity; it undercuts your effectiveness and especially your sense of satisfaction.

  Don’t sign away your life, no matter how many others do. Live consciously.

  

  

  

  

  

• FX Traders Fear "Worst Case Scenario" For Brazil As FinMin Cancels Travel Plans, Rousseff Meets With Lula

  It’s not that we want to pick on Brazil, it’s just that simply put, it’s one of the most important emerging markets in the world, which means that when depressed demand from China, plunging commodity prices, a shock devaluation from the PBoC, and the generally lackluster pace of global trade conspire to trigger an emerging market meltdown, Brazil is very likely to end up at the center of it all and sure enough, that’s exactly what’s happened. 

  Late last week, we noted that Brazil officially entered a recession in Q2, a quarter which also ushered in the worst stagflation in a decade and saw unemployment rise to five-year highs. Then on Monday, the government officially threw in the towel on running a primary surplus (striking a major blow to market confidence in the process) and then yesterday, we got a look at industrial production in July which missed wildly, coming in at -1.5% m/m versus consensus of -0.01%. Meanwhile, exports cratered 24%.

  We could go on. And bear in mind that the budget issue is complicated by the fact that Rousseff’s political woes are making budget cuts next to impossible to pass. As Italo Lombardi, senior LatAm economist at StanChart told Bloomberg earlier this week, the admission that the country would likely miss its primary surplus target underscores the trouble “Finance Minister Joaquim Levy faces in winning congressional approval for austerity measures and pushes Brazil’s credit rating closer to junk status.” “Politics are making Levy’s life very difficult,” Lombardi added.

  So difficult in fact, that he may now resign and that, according to at least one trader, would be the worst scenario possible. Here’s Bloomberg with more:

  Brazil’s real declined for a fifth straight day and fell to a new 12-year low as speculation grew that Finance Minister Joaquim Levy is closer to leaving his post amid budget turmoil.

   

  A gauge of the rout’s momentum rose to a five-month high as a Valor Pro newswire columnist, citing unidentified people at presidential palace, reported that Levy canceled a trip to the Group of 20 meeting in Turkey and planned to talk with President Dilma Rousseff later Thursday. In a setback for Brazil, the Treasury scrapped an auction of local fixed-rated government bonds for the first time in 19 months as yields at a six-year high made borrowing expensive.

   

  “Seeing Levy leave would be worse than Rousseff stepping down or even her impeachment,” Guilherme Esquelbek, a currency trader at Correparti Corretora de Cambio, said from Curitiba, Brazil. “His departure is the worst scenario we can have right now.”

  Meanwhile, Copom is stuck between a rock and a hard place – that is, they can’t hike to support the currency because the economy is in such terrible shape. Here’s Goldman on Wednesday’s MPC decision to hold Selic at 14.25%:

  One could argue that given the drifting currency (approximately 20% since June) it would even demand additional rate hikes if the monetary authority’s objective is still to, with reasonable confidence, drive inflation to the 4.50% target by end-2016. However, given the rapidly deteriorating real activity picture and heightened political/institutional noise and uncertainty, near-term rate hikes are unlikely.  

   

  

   

  And in the wake of last week’s GDP data and Monday’s confirmation of the budget blues, Barclays is out with a bit of decisively negative commentary both on the outlook for the economy and for the fiscal situation. Here’s more:

  We now forecast a 3.2% fall of real GDP in Brazil in 2015, to be followed by a 1.5% contraction the next year. The downside surprise in Q2 and the deeper recession in the second half of this year also imply a negative contribution to next year’s growth. Household consumption should continue contributing negatively to headline growth, together with fixed asset investment. 

   

  

   

  The disappointment with fiscal execution, coupled with the lack of capacity of the government to negotiate structural changes in how expenditures grow, leads us to expect a fiscal primary deficit for this year and next of 0.3% and 0.5% of GDP, respectively. For 2015, the fiscal measures approved in Congress were reduced meaningfully from the original proposal and are contributing with only 0.53% of GDP to the fiscal balance. Even including those, we forecast total real fiscal revenues to fall 3.2%, as the growth slowdown is having the biggest negative contribution on this year’s result.

   

  

   

  And the inevitable result (as we’ve been saying for months): 

  The implication is a downgrade in less than one year. We believe the rating agencies will take off the investment grade rating in H1 16, starting likely in April by S&P, given the increased pace of deterioration of the macroeconomic juncture and the disappointment relatively to the agencies’ forecasts. Moody’s could follow suit in the second half of the year, if it becomes clear that the country will fail to achieve real GDP growth and the primary surplus as percentage of GDP near 2%, as the agency expects for 2017. At this point, it is very hard to foresee any meaningful change in the political and/or economic scenario that could avoid such an outcome.

   

  

  Finally, in what is always the surest sign that a market-moving rumor is probably true, we got the official government denial this afternoon:

  • LEVY SAYS HAS NO PLANS TO LEAVE BRAZIL GOVT: EL PAIS

  Underscoring how serious the situation truly is, the headlines are still coming in with Bloomberg reporting that former President Luiz Inacio Lula da Silva “will travel to Brasilia tonight to meet with President Dilma Rousseff” for a one-on-one where the two will discuss “higher pressure on Finance Minister Joaquim Levy, 2016 budget proposal and possible restoration of CPMF tax.” 

  Clearly, this is bad news. All sarcasm and jokes aside, it looks as though Brazil may be about to step off the ledge here. You now have a President with an approval rating of just 8% convening an emergency meeting with the former President, a finance minister on the verge of pulling a Varoufakis, a plunging currency, a hamstrung central bank, and a nightmarish fiscal situation. 

  So… who wants tickets to next summer’s Olympic games in Rio? 

  

  

  

  

  

  

• Ask The Expert – Ted Butler

   

   

  Hold your real assets outside of this system in a private non-government controlled facility   –>  http://www.321gold.com/info/053015_sprott.html

   

   

   

  Ask The Expert – Ted Butler

  (Click For Original & Transcript)

   

   

   

  Ted Butler is one of the world’s most respected precious metals analysts. His perspective is highly valued by the everyday investor as well as large stakeholders in the investment world.Ted started as a broker in the early 1970’s but began his journey as an independent analyst over 20 years ago. Today, Ted’s writings are renowned for their formidable insights, particularly into the silver market where he has garnered significant acclaim for his knowledge of price manipulation by big banks.

   

   

   

   

   

   

  
  

  Please email with any questions about this article or precious metals HERE

  

  

  

  

• 4 Charts Show Why This Rally May Become A Rout!

  Submitted by Harry Dent via EconomyandMarkets.com,

  There’s a reason why I warn you to get out of a bubble a little early rather than a little late. It’s because the first wave down tends to happen in a matter of a few weeks or months, sometimes days. It’s fast and furious.

  I know this because I’ve studied every major bubble in modern history – all the way back to the infamous tulip bubble in 1637, when a single tulip cost more than most people made in a single year! And what I’ve seen in each case, without exception, is that bubbles do not correct in nice stair steps when they’re coming off their highs. They burst, crash, collapse, clatter, clang – however you want to say it!

  When the bubble deflates, it typically crashes 50% minimum to as high as 90%. But it’s that first wave down that can wipe out 20% to 50% right off the bat!

  Below I have four charts that make the argument for me.

  They show the 1929 bubble burst… the 1987 crash… the 2000 “Tech Wreck”… and the latest of 2015 from the Red Dragon itself – China’s Tsunami.

  In each case, the fact that these bubbles were destined to burst were only obvious to the few that weren’t in denial. Most give into the bubble logic that new highs are the new norms. They think: “This time is different.” It’s not! It never is.

  It’s always hard to predict exactly when bubbles will peak and crash. It’s like dropping grains of sand on the floor. A mound will build up – becoming like a Hershey’s kiss that grows more narrow at the top. At some point, one grain of sand will cause the avalanche. Who knows which grain of sand that one will be!

  Here are those charts. Like I said, they speak for themselves!

  

  What does that tell you!? EVERY bubble bursts. Bam, pow – no exceptions! So hopefully you understand why I keep harping on about this.

  I’m just as amazed as anyone that this global bubble has gone on as long as it has. But it’s finally started to crash.

  You can tell by following a series of recent tops in major markets:

  Transports in November…

   

  Utilities in January…

   

  Germany’s DAX index and Britain’s FTSE in April…

   

  What looks to be the Dow and S&P 500 in May…

   

  China’s Shanghai index in June…

   

  And the Nasdaq looks to have peaked in July.

  Now that we’re in the classic “crash season,” the situation only looks worse. This season technically started in mid-August, and won’t end until mid-October. This is not to say the chaos won’t continue later on into the end of this year. It just means the worst decline, this first wave down, is likely to come in the next several weeks.

  So consider this current bounce a gift. The signs are all there that this global bubble is done. Use this time to get out of any passive investments in stocks.

   

  

  

  

  

  

• Bridgewater's 'All-Weather' Fund Goes Negative For 2015 After Risk-Parity's Worst Quarter Since Lehman

  The $80 billion Bridgewater All Weather Fund, a risk-parity model managed by hedge fund titan Ray Dalio, was down 4.2% in August, according to Reuters citing two people familiar with the fund's performance. This leaves the fund down 3.76% for 2015 as the frameworks for these funds are forced mechanically to reposition as correlations and volatilities across asset classes break down. Just as we saw in the summer of 2013's Taper Tantrum, the last 2 weeks have seen 4 to 5 sigma swings in daily returns and 'generic' risk-parity funds have suffered the biggest 3-month losses since the financial crisis.

   

  And here is the simple reason why these funds 'broke'… China selling Treasuries to meet liquidity needs as global carry trades were unwound and smashed stocks lower 'broke' the historical relationship between stocks and bonds. Since the so-called "risk parity" strategy is supposed to make money for investors if bonds or stocks sell off, though not simultaneously.

  

   

  And this did not help the multi-asset funds – the USD-Commodity correlation regime flipflopped…

  

   

  Simply put, the historical relationships between asset classes (volatilities and correlations) that are used to construct optimal "risk-parity" funds in order that 'risk' is balanced and hedged across bonds and stocks (for example) broke down dramatically:

  First, realized volatilities exploded relative to historical (or even forecast volatilities) that are used to weight exposures; and

   

  Second, the correlation regime entirely flipped for multiple asset classes – entirely breaking any 'expected' diversification or hedges.

  And the result…based on Salient Risk's Risk Parity fund index, the last 3 months have seen a 10.7% drop – the most since the financial crisis (and worse than the mid 2013 plunge). Some context for the recent moves may help:

  • Friday August 21st – 4 Sigma plunge
  • Monday August 24th – 5 Sigma crash
  • Thursday August 27th – 5 Sigma Spike
  • Tuesday September 1st – 4 Sigma collapse

  Risk manage that!

  

   

  Which explains why we also saw the big drop in mid 2013 (Taper Tantrum) when – just as this past 2 weeks – bonds sold off and stocks sold off…before a complete flip-flop right aftre the June FOMC meeting.

  

   

  We asked in August 2013 – When Will Risk Parity Funds Blow Up Again? – it appears we have our answer.

  As UBS' Stephane Deo noted then (and JPMorgan has confirmed now), that in a rising rate environment, so-called risk-parity portfolios were susceptible to draw-down as yields 'gap' higher.

  As UBS noted at the time, which seems just as crucial now, it is not the actual rate increases (or decoupling) but the "speed limit" or velocity of the moves and with liquidity either 'on' of 'off' now, the gappiness of moves increased the potential threat from risk-parity funds.

  And as JPMorgan's head quant noted today, the management of this exposure (i.e. the selling) is only half-way through.

  Risk Parity strategies de-lever when asset volatility and correlation increase. In our report last week, we estimated that risk parity outflows from equities may total $50-100bn on account of the increase in market volatility and risky asset correlations. These rebalances have started, but, given their typically slower rebalance frequency (e.g. monthly), are largely incomplete. We believe the bulk of the risk parity flows are yet to come, and this may add selling pressure to equities over the next 1-3 weeks. To illustrate this point, one can look at a sample multi-asset Risk Parity strategy such as the Salient Risk Parity index. The beta of this index to the S&P 500 (shown in the figure above) reached highs of 60% in early August, and has dropped to about 45% currently (compared to a beta of 0% during some of the previous episodes of market volatility).

  Charts: Bloomberg

  

  

  

  

  

• Sep 4 – ECB's Draghi: Greece Not Ready Yet For ECB To Buy Its Bonds
  Follow The Market Madness with Voice and Text on FinancialJuice

   

  EMOTION MOVING MARKETS NOW: 11/100 EXTREME FEAR

  PREVIOUS CLOSE: 10/100 EXTREME FEAR

  ONE WEEK AGO: 12/100 EXTREME FEAR

  ONE MONTH AGO: 21/100 EXTREME FEAR

  ONE YEAR AGO: 48/100 NEUTRAL

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 24.35% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 26.09. This is a neutral reading and indicates that market risks appear low.

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

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC) 

   

  MEME OF THE DAY – DUBAI GOLD DEALER OLYMPICS

   

  UNUSUAL ACTIVITY

  MBLY SEP 55.5 PUT ACTIVITY 1500 @$2.90 on offer

  TSM OCT 20 CALLS 4694 block @$.95 right by offer

  RAD JAN 9 CALLS 3K @$.54 on offer

  SAEX 10% Owner P 11,394 A $ 3.02 P 17,693 A $ 2.95

  TBPH .. SC 13G Filed by GlaxoSmithKline .. 24.5%

  More Unusual Activity…

   

  HEADLINES

   

  ECB’s Draghi Unveils Revamped QE Program

  ECB’s Draghi pledges more QE if needed

  ECB’s Draghi: Greece not ready yet for ECB to buy its bonds

  ECB Keeps All 3 Main Rates Unchanged As Expected

  US ISM Non-Manf. Composite (Aug): 59.0 (est 58.2, prev 60.3)

  US Trade Balance (USD) (Jul): -41.86B (Est -42.20B, Rev Prev -45.21B)

  US Initial Jobless Claims (Aug 22): 282K (Est 275K, Rev Prev 270K)

  US Markit Services PMI (AUG F): 56.1 (Est 55, Prev 55.2)

  Atlanta Fed Q3 GDPNow Forecast Updated +1.5% (Prev +1.3%)

  US Tsy Sec Lew: No concern yet in financial institutions from market turmoil

  IMF Official: Fed Can Keep Their Rates Low Until Wage/Price Inflation Is Seen

  Greek leftists put on brave face as poll shows conservatives pulling ahead

  U.S. stocks lose steam as oil prices pull back

  Oil futures mark 5th gain in 6 sessions

   

  GOVERNMENT/CENTRAL BANKS

  ECB’s Draghi Unveils Revamped QE Program –BBG

  ECB’s Draghi pledges more QE if needed –CNBC

  ECB Main Refinancing Rate (Sep 3): 0.05% (Est 0.05%, Prev 0.05%)

  ECB Deposit Facility Rate (Sep 3): -0.20% (est -0.20%, prev -0.20%)

  ECB Marginal Lending Facility (Sep 3): 0.30% (est 0.30%, prev 0.30%)

  Atlanta Fed Q3 GDPNow Forecast Updated +1.5% (Prev +1.3%)

  US Tsy Sec Lew: No concern yet regarding financial institutions from market turmoil –Rtrs

  IMF Official: Fed Can Keep Their Rates Low Until Wage/Price Inflation Is Seen –RTE

  IMF: Market volatility alone not reason for concern over yuan –Rtrs

  EZ official: G20 discussing China, Fed rates and will not discuss Greece

  Greek leftists put on brave face as poll shows conservatives pulling ahead –Rtrs

  GEOPOLITICAL

  China flexes muscles with World War II military extravaganza –CNN

  Iran supreme leader: Sanctions must be lifted, not suspended –Israel Times

  Migrant crisis ‘a German problem’ – Hungary’s Orban –BBC

  FIXED INCOME

  Treasury prices edge higher on dovish ECB, U.S. jobs data eyed –RTRS

  Portugal’s Bonds Lead Gains In Periphery as ECB Raises QE Asset-Buying Limit –BBG

  US Tsy Reduces Size of Next Week’s Bill Sales –Tsy

  ECB’s Draghi: Greece not ready yet for ECB to buy its bonds –Rtrs

  FX

  EUR: Dovish Draghi hits euro and Bund yields –FT

  USD: Dollar Mixed As Investors Await August Employment Report –RTT

  CAD: Loonie Climbs on Positive Trade Data, Higher Oil Prices –WBP

  Yuan pessimism eases on China central bank efforts, Asia FX sentiment less bearish –Rtrs poll

  COMMODITIES/METALS

  Oil futures mark 5th gain in 6 sessions –MktWatch

  Saudi Aramco Cuts October Crudes to U.S. as Refinery Demand Falls –BBG

  US EIA Natural Gas Storage Change (Aug 28): 94 (est 90, prev 69)

  Gold plunges nearly 1% as ECB lowers inflation, GDP forecasts –Investing.com

  Copper Prices Climb Amid Respite From Chinese Selling –WSJ

  Anglo American in talks to sell troubled platinum mines –FT

  EQUITIES

  INDEX: U.S. stocks lose steam as oil prices pull back –MktWatch

  INDEX: Eurozone stocks rally after Draghi comments –Rtrs

  INDEX: ECB bond buying hint lifts FTSE higher –BBC

  EARNINGS: Medtronic profit and sales beat expectations –MktWatch

  EARNINGS: Campbell Soup Sales Fall Due to Strong Dollar, Weak Demand –Fox

  BANKING: UniCredit weighing 10,000 job cuts in revamp –BBG

  AUTOS: VW’s finance chief set to become new chairman –Rtrs

  TECH: Microsoft has acquired VoloMetrix –MsftNews

  TECH: Japan Display CEO hints at strong Apple orders ahead of new iPhone launch –Rtrs

  MEDIA: AOL to buy Millennial Media at a 31% premium –MktWatch

  MINING: Joy Global cuts guidance as profit, sales miss –MktWatch

  CONSUMER GDS: General Mills sellS Green Giant to B&G Foods for $765mln –USAToday

  CONSUMER GDS: Genesco profit, sales rise above expectations –MktWatch

  CONSUMER GDS: Lululemon’s stock up after Wedbush puts it on a ‘best ideas’ list –MktWatch

  HEALTHCARE: CVS: tobacco ban led to a decrease in cigarette purchases –MktWatch

  EMERGING MARKETS

  Lira Weakens After Turkey Inflation Miss as Rates Seen Too Low –BBG

  Brazilian Real Drops for Fifth Day as Levy Seen Closer to Exit –BBG

  Rand Leads Emerging-Currency Declines as Economic Data Weighs –Rtrs

  Indian Stocks Rebound From 13-Month Low as Metalmakers Advance –BBG

   

  Ruble Holds Firm as Official Moots Return of Dollar Purchases –BBG

  

  

  

  

  

• Is This Where The US Recession Is Hiding?

  On the surface, US industrial production – the most important component of any manufacturing recovery, or alternatively recession – is solid. In August, Industrial Production surged by 0.6% which was the biggest sequential increase since November. Of course, as we have shown, the only reason industrial production is strong is because of subprime debt-funded auto purchases which have sent new motor vehicle production soaring in recent months, but as long as the recovery narrative is intact, what’s another “little” auto subprime bubble: surely the Fed can make it disappear in “15 minutes.”

  On the other hand, there is a huge flashing red light when looking at the entire industrial lifecycle of US manufactured products: while production is brisk, end demand in the form of completed sales, is crashing.

  And this is where the alarm buzzer for the US economy goes off, because while industrial production does suggest the recovery is stable, the ratio of US inventory to sales has tumbled to levels indicative of recession, which also means that while US factories are humming, their output is accumulating in warehouses, overflowing parking lots and storage facilities.

  So to answer the question: yes, the US recession is hiding just under the “question mark” at the unexplained and perplexing divergence between industrial production, and actual end sales…

  

  …. all of which result in a record inventory stockpiling which as we showed before, is what recently boosted Q2 GDP to an unsustainable 3.7% growth rate.

  

  What happens when the inventory liquidation finally arrives as end demand fails to materialize? One word: recession.

  And just to preempt the next question: how much longer can the can be kicked, here is Bank of America’s explanation:

  During the past four US manufacturing recessions (ex-GFC), global EPS has declined by 16% on average peak-to-trough. Since current EPS is already down 8.5% since mid-2014, this suggests another 8-9% downside in this worst-case scenario.

  With China’s help, we are almost there.

  

  

  

  

  

• US To Slap Chinese Hackers With Sanctions Ahead Of Xi Visit

  Early last month, the Obama administration made a bold decision.

  The White House decided, after careful deliberations, that the cyber attack on the Office of Personnel Management was, to quote The New York Times, “so vast in scope and ambition that the usual practices for dealing with traditional espionage cases [do] not apply.” In short:

  This came just days after a “secret” NSA map “leaked” to the press showing the alleged frequency of cyber intrusions emanating from China. Here’s the map:

  

  “The prizes that China pilfered during its ‘intrusions’ included everything from specifications for hybrid cars to formulas for pharmaceutical products to details about U.S. military and civilian air traffic control systems,” intelligence sources told NBC, who broke the story. 

  We summed up six months of ridiculous back-and-forth cyber banter as follows:

  The release of the map marked the culmination of a cyber attack propaganda campaign which began with accusations that North Korea had attempted to sabotage Sony, reached peak absurdity when Penn State claimed Chinese spies had taken control of the campus engineering department, and turned serious when Washington blamed China for what was deemed “the largest theft of US government data ever.” Whether all of this is cause for the Pentagon to activate the ‘offensive’ component of its brand new cyber strategy remains to be seen.

  Now, FT says the US is ready to respond to by “slapping sanctions on Chinese companies connected to the cyber theft of US intellectual property.” Furthermore, the US is apparently prepared to risk announcing the sanctions ahead of Xi Jinping’s first official visit to the US. Here’s FT:

  The Obama administration has for months been preparing a raft of sanctions to respond to mounting commercial espionage from China. Three US officials said the sanctions would probably be unveiled next week, just weeks before Chinese President Xi Jinping makes his first state visit to America.

   

  Officials have been divided over whether the administration should impose the sanctions before the Xi visit. Proponents argue that the US needs to show China that it is serious about tackling cyber espionage. But opponents worry that such timing would seriously damage the visit.

   

  The state department had been pushing for the sanctions to come after it, according to people familiar with the situation. But law enforcement officials argued against waiting because of the serious nature of the cyber attacks.

   

  One official said the move would probably come next week, after the US Labour Day holiday. He said the White House wanted to avoid slapping China with sanctions immediately before the visit, to give China time to cool down before Mr Xi meets President Barack Obama in Washington.

   

  China wants to boost Mr Xi’s status as a global leader, but his visit — which will include a 21-gun salute and a big banquet — will be overshadowed by the Pope’s, which will attract huge media coverage, and also the move to impose sanctions.

   

  One former US official said: “The cyber sanctions could really throw a spanner in things. There is no reason to embarrass the president of China. It would crater the visit.”

  Yes, “no reason to embarrass” Xi, because after all, Xi is not a man who enjoys being embarrassed. Just ask any of the 200 people who were arrested over the past week for conspiring to use the stock market selloff as an “opportunity to maliciously concoct rumors to attack [the] Party and national leaders.” 

  So we will await the details on the first round of US “cyber sanctions” against the legions of Chinese hackers who have apparently stolen everything from the blueprints for electric cars to delicate information about America’s ultra-modern airtraffic control network, and in the meantime, simply ask whether another set of “sanctions” are being prepared in response to the PLA navy’s unprecedented operations off the coast of Alaska.

  And meanwhile, in China…

  

  

  

  

  

  

• Is It Over Yet?

  Submitted by Lance Roberts via STA Wealth Management,

  Could Additional ECB QE Cure The US Market

  This morning the European Central Bank (ECB) seemed forced to "do something" given the recent market weakness. With inflation expectations collapsing, markets declining and economic growth weak, the best hope for market "bulls" at the moment was an expansion of the ECB's current QE program.

  Mario Draghi, head of the ECB, did not fail to deliver by increasing the share limit for QE from 25% to 33% (the size of the program was NOT increased). However, ironically, they also cut inflation forecasts for 2015-2017. I say ironically because the QE program is specifically meant to drive inflation towards to the magical 2% mark. 

  The question is whether an expansion the current QE program will have any real impact on the markets, inflation or economic growth?

  It was just six months ago that the ECB launched their initial quantitative easing program to much fanfare and hopes of a swift economic recovery. So far, results have been disappointing. As noted by The Economist:

  "GDP in the second quarter of 2015 from Eurostat are disappointing. The consensus among economists was that the 19-strong currency club would grow by 0.4%, the same as in the first quarter. Instead the pace of quarterly growth slowed a little, to 0.3%, leaving output 1.2% higher than a year ago."

  Inflation has also been non-existent despite the ECB's monetary interventions. Consumer prices in the Eurozone are barely higher than now than a year ago. As stated above, at just 0.2% currently, the ECB has a long way to go, as does the Federal Reserve, to reach target levels of 2%.

  However, for investors, it is the potential impact of additional ECB QE on the domestic markets that counts. The problem is that all QE programs are not equal. As shown in the chart below, I have noted the Fed's QE programs and the effect on domestic markets and the ECB's program. 

  

  It is clear that the expansion of the Fed's balance sheet, and the subsequent boost to bank reserves, led to immediate impacts to asset prices. When the programs ended, asset prices struggled. As noted, the ECB's current QE program has had little effect on boosting domestic asset prices due to the lack of increase in domestic liquidity. 

  While the ECB's action may stabilize the markets temporarily, it seems unlikely that this action will reverse the current negative trends and momentum in the markets.

  ISM Defies Economic Strength Hopes

  One of the most watched economic reports, besides the monthly employment report, is the Institute of Supply Management (ISM) Manufacturing and Services indices. Currently, there is a very interesting divergence going on between the two with services showing strength while manufacturing wanes. Since both measures are historically correlated, such divergences tend not to last indefinitely. 

  However, since what we are after is a view of the health of the overall economy, we can combine the two into a single index to see the overall trend. 

  

  As I have shown, the composite ISM index has a history of cyclical rebounds and declines primarily driven by inventory restocking cycles caused by the ebb and flow of the real economy. 

  Such a rebound cycle was witnessed during the 2nd quarter of 2015, as inventories were replenished following the exceptionally cold winter season. While pundits were ecstatic over the 3.7% print of GDP in the second quarter, the ISM composite currently suggests the manufacturing rebound has likely concluded. As such, Q3 GDP will likely print well below 2% in the months ahead. 

  We can find further confirmation of that suggestion by looking a core durable goods which excludes aircraft and defense spending.

  

  The most recent report on core durable goods suggests that future ISM reports will likely remain weak and with winter fast approaching puts already weak economic growth at risk. 

  Is It Over Yet?

  It is THE question that is on every investor's mind right now; is the correction over yet? The honest answer is that no one really knows. However, from a technical perspective my suspicion is that current market volatility is likely to be with us for quite some time longer. 

  I discussed earlier this week the technical backdrop of the market currently stating:

  

  "For the first time since 2000 or 2007, the market has now registered a momentum based 'sell' signal. Importantly, this is a very different reading that what was seen during the 2010 and 2011 'corrections' and suggests the current correction may be more significant.

  The chart also confirmed by numerous other indications that also support the 'mark of the bear.'"

  While the rebound over the last two days were certainly welcome, I have suggested over the past two weeks to continue raising cash during such opportunities. The reason is that while August was indeed a weak month, statistically speaking September has often been worse.

  As my friend Anora Mahmudova pointed out recently:

  "In the 11 instances since 1945 when the S&P 500 fell more than 5% in August, September returns were negative 80% of the time, averaging a decline of 4%, said Sam Stovall, U.S. equity strategist at S&P Capital IQ. History is a good guide, but not necessarily a gospel"

  

   "The correction we've had so far, if we assume that was the bottom, was too shallow by historical standards. Especially if you consider that it was the first 10% correction in 44 months. The median decline after going more than 30 months since the prior decline in excess of 10% was 19.9%," Stovall said."

  With earnings declining, economic growth forecasts weak and many mutual funds needing to rebalance portfolios as the end of the quarter approaches, there is sufficient pressure to push stocks lower in the weeks ahead. 

  The REAL RISK currently is not missing some of the upside if the bull market does begin to resume, but rather catching the downside if this correction turns into a full-fledged bear. 

  Just some things worth thinking about.

  

  

  

  

  

Digest powered by RSS Digest

• America – Good, Bad Or Ugly? Part 1: The Bad

  Submitted by Thad Beversdorf via FirstRebuttal.com,

  I wanted to start with The Bad and then move on to The Ugly so that I can end on a positive note with The Good.

  So over the past couple days I’ve read several articles in which someone who is publicly an adamant proponent of righteous behaviour was exposed as being a complete hypocrite (think essentially any politician).  And this really got me to thinking about the epidemic that has befallen America.  We no longer have anyone in positions of trust acting with any sense of integrity.  Our policymakers, bankers, corporations, unions, etc., all of these institutions have become nothing but a mechanism to enhance the personal positions of those who have the ability to directly or indirectly control the actions of those institutions.

  By the late 1990’s the world was in the most prolonged period of global peace since WWII.  Accordingly, military budgets around the world were being slashed.  And so those with the powers that be decided the world therefore required some new wars to ensure peace continued (not kidding that is exactly what they argued), as I evidenced in an article last year, The Most Essential Lessons of History that No One Wants to Admit.  Now the thing is, it’s not just politicians and policymakers that are devoid of any common decency these days but those who can manipulate every facet of our society.

  Let’s look at central bankers for instance.  The other day David Stockman wrote a great article highlighting the ridiculousness of statements by the Fed Vice Chair, Stanley Fischer.  The point is Fischer is either out of touch, out of his mind or lying to us.  But it’s not just at the highest levels that we see this type of human decay.  Not at all.  Let’s look to an area that so many of us know intimately, the financial services sector.  Now there are a lot of examples we could use here but let’s look at a particularly interesting firm infamous for its culture of indiscretions.  Jefferies LLC, which used to be Jefferies & Company Inc., is a mid tier investment bank, similar to Goldman Sachs in that it has no retail branches.

  In 2012 Richard Handler, CEO of Jefferies, was actually the highest paid banker on Wall Street.  And not to be left out in the cold, Handler’s number two, Brian Friedman also topped the charts as discussed in a Bloomberg article from 2013 which explored the credit risk such payouts create.  Now making absurd amounts of money may or may not be ethical but what I find more interesting is the blatant hypocrisy of guys like Richard and Brian.  As has been written about many times (e.g. here and here) is the fact that Richard and Brian put out a monthly company wide letter with words of ‘wisdom’ that are to guide and encourage their employees to rise above the fray.  They look something like this from a recent monthly letter…

  “…By the way, the capitalism concept really never took hold in Russia because the only way lasting, open markets work is through transparency, a culture of integrity and rule-following, and a true legal system.”

  Now that sounds admirable on the surface, however, the reality when we look at the culture at Jefferies is anything but above the fray.

  Remember Jesse Litvak?  He’s the only banker that has been personally prosecuted, convicted and sent to prison for fraud related to TARP and was a Jefferies Managing Director at the time.  Now for those of you that don’t remember, Litvak was caught lying to a customer when an employee of his accidentally sent that client an email exposing the lie.  In the end, Litvak tried to explain away his actions to the court by saying it was common practice at Jefferies.  The government agreed according to a quote from a bloomberg report, “Litvak wasn’t the only employee who lied to his customers, the government said. ”

  Now some might feel well one example doesn’t prove a corrupt culture, right?  And I only wish it were but a fleeting example, unfortunately though isn’t.  Perhaps the most outrageous banking scandal of all time was Sage Kelly, Head of Global Health Care Investment Banking, for Jefferies.  Sage Kelly is the real deal.  He is Wall Street anthropomorphized in all its glory as depicted in a classic article by the boys at ZeroHedge.  And again it appears that it wasn’t just poor behaviour by one man but a culture taken on by several top investment bankers at Jefferies.  And surely the severely outlandish culture adopted by these bankers is not the type of behaviour that goes unnoticed.  For unlike artists, legends in banking are known, not in death, but in the here and now.

  What is less known is that Jefferies was actually sued by UBS for the way in which they acquired Sage and his Investment banking group from UBS, as this article by the NYT describes.  But it appears that for Richard Handler and his executive officers, being called out for inappropriate behaviour is not a deterrent as some 3 years later Jefferies was sued by Newedge for the very same thing, as described in this FT article.  It’s beginning to seem that despite Richard and Brian’s monthly words of moral and ethical enlightenment to their employees, it is them that have failed to live up to the benchmark they preach.

  Now when a CEO is making $58M a year he should be held to a higher standard of accountability.  But what we find is quite the opposite, as we regularly see now in America those in positions of notable status are exempt from consequences.  The Rich Handlers, Donald Rumsfelds, Hilary Clintons of the world reap all the upside and zero downside.  Similar to the market having a Fed put, members of America’s upper class have a legal put.  They simply are not held to the same standard to which the rest of us are held.  And so if Litvak had the letters CEO in front of his name surely he would have been spared any prison time.  Instead a large fine would have been paid into the Treasury’s General Fund and all would have been forgiven.

  And so the consequences are worn by the non-elites, that is, the rest of us.  The Rumsfeld lies that took us to Iraq and all of the subsequent continued fallout (now ISIS) are worn by soldiers fighting a synthetic enemy created in a social laboratory to perpetually expand defense industry contracts.  The selling of favours and foreign policy deals by Hillary are worn by the families that lost loved ones in Benghazi.  The multiple failures of Handler to properly manage risk and culture inside his firm led to rising legal and regulatory costs and declining business further leading him to shut down, only three years after purchasing, Pru Bache, a 130 year old company that had weathered the worst of storms.  His failures are worn by thousands of non-six-figure income financial services sector employees that lost their jobs when he closed the doors on the 130 year old company but while he continues to receive his 8 figure compensation.

  We can all think of literally a hundred examples of the legal put provided to those in the American upper class.  And while any single example has a story of tragedy behind it, it is the assumed immunity we give across the board to those with a notable status that perpetuates their self serving indifference to those for which their duties are naturally responsible but now unaccountable.   Yet we give them immunity, in part, because they do a fantastic job of portraying themselves as having concern for right and wrong and falling on wrong only due to circumstances outside of their control.

  This really pinpoints the issue.  While we listen to politicians, central bankers and CEO’s preach publicly about doing what’s right, ensuring economic stability, protecting the middle class and watching out for our employees and customers, it’s all absolute bullshit now isn’t it.  That is, while guys like Rich and Brian pretend to be angelic proponents of good behaviour their firm is clearly an absolute disgrace in an industry already known for its lack of integrity.  And it’s surely not just Jefferies but the general corporate and political culture in this nation that suffers from a lack of accountability and a lack of character.  Apologies and fines are great but they don’t deter the bad behaviour that always lands on the rest of us, that much is clear.

  This nation has become a land where character and integrity are secondary to profits for the few and self serving interests of the powerful.  And as we are seeing already for the third time in this millennium’s infancy, stability and prosperity can be but short lived for even the highest paid CEO’s in such a world.

  In Part II, I am going to expose The Ugly by releasing a recorded conversation of perhaps, contextually, the ugliest example of just how callous and inhumane our banking executives have become.  Watch for it.

  

  

  

  

  

• China's "Historic" 70th Victory Day Parade: Live Webcast

  For those wondering why Chinese futures aren’t crashing as of this moment, only to surge in the last hour of trading like plunge protected clockwork, the reason (and also the patriotic alibi behind China’s “National Team” valiant, if failed, attempts to get a green Shanghai Composite close the past three days) is shown below: this is what Tiananmen Square looked like moments ago before the start of China’s “historic” 70th V-day parade celebrating the anniversary of the end of the second world war as well as China’s victory over Japan, not necessarily in that order (it is still unclear if those five Chinese ships parked off of Alaska are in any way related to today’s festivities).

  Here, via Xinhua, is a list of China’s contributions in the war effort:

  • 1 million — Since the July 7 Incident in 1937, when full-scale war against Japanese aggression broke out, the Chinese battlefield tied up about 1 million Japanese troops, or two thirds of the total Japanese army.
  • This allowed the Soviet Union to deploy more than half a million troops from the Far East to the country’s major battlefield with the German Nazis, thus accelerating its victory against Germany.
  • 1.5 million — As the major battlefield of the Pacific War, China inflicted heavy casualties on the Japanese aggressors, costing them 1.5 million troops, which makes up more than 70 percent of total Japanese military casualties in the war.
  • 1.28 million — After the war, more than 1.28 million Japanese troops surrendered their weapons to China, accounting for about 50 percent of those who surrendered overseas.
  • 35 million — China was one of the crucial fighters in WWII and made tremendous sacrifices during the war. According to incomplete statistics, Chinese military and civilian casualties added up to approximately 35 million.
  • That accounts for one third of the total casualties suffered by all countries during WWII.

  What makes this year’s parade unique is that for the first time in addition to the countless participants from the People’s Liberation Army, nearly 1000 troops from 17 countries will participate in the parade.

  The preparations started early as this video of downtown Beijing confirms. Alternatively, this is what China’s capital will look like once the SHCOMP is back to 2000:

  China’s #VDay parade military vehicles move to downtown Beijing. pic.twitter.com/Px67g3bJoJ

  — China Xinhua News (@XHNews) September 3, 2015

  Then the troops starting arriving:

  Video: Troops gather near Tian’anmen Square, ready for China #Vday parade that marks 70th anniv of WWII end pic.twitter.com/3DeEcNXJvQ

  — China Xinhua News (@XHNews) September 3, 2015

  Troops are all lined up along Chang’an Street in #Beijing, all prepared for the grand #VDay parade. pic.twitter.com/EwC2dFCxS2

  — People’s Daily,China (@PDChina) September 2, 2015

  All Set to Go: Troops are standing by near #Tiananmen Square for the kick off of the #VDay parade. pic.twitter.com/K7TWIPnfpm

  — People’s Daily,China (@PDChina) September 2, 2015

  … then the foreign soldiers:

  Replay: Foreign soldiers from 17 countries train in Beijing for today’s #VDay parade http://t.co/AfkAauzNfV pic.twitter.com/5GMS6GZbsU

  — China Xinhua News (@XHNews) September 3, 2015

  … and the people:

  Audience are arriving at the scene for the grand #VDay military parade, which is starting in an hour and a half. pic.twitter.com/W8LAyKJS0L

  — People’s Daily,China (@PDChina) September 3, 2015

  … the occasional celebrity:

  Kungfu star @EyeOfJackieChan is seen at the scene of #Beijing #Vday military parade among other spectators pic.twitter.com/xhU1Eh4uLd

  — China Xinhua News (@XHNews) September 3, 2015

  … then the generals:

  Chinese troops and foreign military are preparing for the kick off of the #VDay parade in #Beijing. pic.twitter.com/yHOkjm9mBi

  — People’s Daily,China (@PDChina) September 3, 2015

  Until finally Xi himself showed up:

  #VDay President Xi Jinping and his wife Peng Liyuan take photo with heads of foreign delegations and their spouses. pic.twitter.com/U9r2IRDwBm

  — People’s Daily,China (@PDChina) September 3, 2015

  Chinese President #XiJinping and his wife welcome S. Korean President #ParkGeun-hye ahead of #VDay parade. pic.twitter.com/tcRwpCV9p6

  — China Xinhua News (@XHNews) September 3, 2015

  And, naturally, the guests of honor among which none other than Vladimir Putin:

  Live: President #XiJinping & first lady Peng Liyuan greet #Putin ahead of China’s #VDay parade @KremlinRussia_E pic.twitter.com/5lifr4SU7H

  — China Xinhua News (@XHNews) September 3, 2015

   

  Finally, for those sitting in front of their computer in Chinese stock market rollercoaster withdrawal, here is a live feed from Beijing to fill the transitory void in your lives:

  

  

  

  

  

• "It's A Tipping Point" Marc Faber Warns "There Are No Safe Assets Anymore"

  Markets have "reached some kind of a tipping point," warns Marc Faber in this brief Bloomberg TV interview. Simply put, he explains, "because of modern central banking and repeated interventions with monetary policy, in other words, with QE, all around the world by central banks – there is no safe asset anymore." The purchasing power of money is going down, and Faber "would rather focus on precious metals because they do not depend on the industrial demand as much as base metals or industrial commodities," as it's now "obvious that the Chinese economy is growing at nowhere near what the Ministry of Truth is publishing."

   

  Faber explains more… "I have to laugh when someone like you tries to lecture me what creates prosperity"

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  Some key exceprts…

  On what central banks hath wrought…

  I think that because of modern central banking and repeated interventions with monetary policy, in other words, with QE, all around the world by central banks there is no safe asset anymore. When I grew up in the '50s it was safe to put your money in the bank on deposit. The yields were low, but it was safe.

   

  But nowadays, you don't know what will happen next in terms of purchasing power of money. What we know is that it's going down.

  On the idiocy of QE…

  in my humble book of economics, wealth is being created through, essentially, a mixture of capital spending, and land and labor. And if these three production factors are used efficiently, it then creates a prosperous society, as America became prosperous from its humble beginnings in 1800, or thereabout, to the 1960s, '70s. But it's ludicrous to believe that you will create prosperity in a system by printing money. That is economic sophism at its best.

  On the causes of iunequality…

  unfortunately the money that was made in U.S. stocks wasn't distributed evenly. And we have precise statistics, by the way published by the Federal Reserve, who actually benefited from the stock market boom post-2009. This is not even one percent of the population. It's 0.01 percent. They took the bulk.

   

  And the majority of Americans, roughly 50 percent, they don't own any shares anyway. And in other countries, 90 percent of the population do not own any shares. So the printing of money has a very limited impact on creating wealth.

  On China's lies… and its commodity contagion…

  I indicated on this program already a year ago, the Chinese economy was decelerating already then. It's just that the fund managers didn't want to accept it.

   

  And now it's obvious that the Chinese economy is growing at nowhere near what the Ministry of Truth is publishing in China, but more likely either no growth at all or maybe around two percent, but no more than that.

   

  So that has a huge impact on commodity prices, and in turn it has a huge impact on the economies of all the raw material producers around the world from Latin America, to Australasia, Russia, Middle East, Africa and so forth. And these countries then with falling commodity prices have less money to buy, also less money to buy American goods.

  On Asian currency devaluation… and a Chinese economic collapse…

  Yes. These countries just followed the example of what Mr. Draghi and Kuroda tried to achieve with lowering the value of their currencies, which is actually to create a depression in real incomes and a contraction of world GDP in dollar terms, and a contraction of world trade in dollar terms, which is of course negative for economic growth around the world.

   

  Well, I mean, we have to put the achievements of China and also of President Xi in the context of what China was 20, 30 years ago, and what it is today. And it's a remarkable change. Now will China have a very serious setback? And don't forget, the U.S. after 1800 had numerous financial crises, and depressions, and the Civil War, and went through World War I, and through the depression years, and World War II and so forth. And the country continued to grow.

   

  I think China is, from a cyclical point of view now, in a very serious downturn, serious. And from a secular point of view, I think there is still tremendous growth opportunity in China in the long run. But, as I said, cyclically I think they're going to have a tough time

  On where to invest…

  I would rather focus on precious metals, gold, silver, platinum because they do not depend on the industrial demand as much as base metals, as industrial commodities.

   

  If I had to turn anywhere, where, as you say, the opportunity for large capital gains exists, and the downside risk is in my opinion, limited, it would be the mining sector, specifically precious metals, mining companies, in other words, gold shares.

   

  I would buy mining stocks. I am not saying they will go up, but I think they will go down less than a lot of other shares. And by the way, if you ask me about relative value, I think emerging markets are not yet cheap, cheap, but I think the return expectation I would have over the next seven to 10 years by investing in emerging markets would be much higher than, say, in U.S. stocks. The U.S. market is overhyped and is expensive in terms of valuations from a historical perspective. Emerging markets are no longer terribly expensive.
   

  

  

  

  

  

• Who Would Win World War 3? The Infographic

  For those unaware, China is conducting a massive military parade on Wednesday to commemorate the 70th anniversary of the end of World War II.

  The event – which is accompanied by a three-day public holiday – is important for Xi Jinping, who is keen to project China’s strength to the world, especially in the wake of the country’s economic deceleration and highly publicized stock market meltdown. 

  Of course the parade also comes amid heightened tensions between Washington and Beijing.

  China’s land reclamation efforts in the South China Sea – where the PLA has constructed nearly 3,000 acres of new sovereign territory atop reefs – has regional US allies on edge. The dispute came to a head earlier this year when China effectively threatened to shoot down a US spy plane carrying a CNN crew over the Spratlys. 

  It’s against this backdrop that we recently brought you infographics demonstrating China’s South China Sea naval superiority on the way to asking who would win a maritime conflict. Below, courtesy of CNN, is a simple infographic which puts the militaries of the US and China side by side on the way to making a comparison that may well become increasingly relevant in the new bipolarity.

  

  

  

  

  

• Guest Post: Trump Can Win The GOP Nomination

  Submitted by Bruce Bartlett via The Fiscal Times,

  To save myself from answering this question repeatedly, these are the thoughts I have had about Trump since he became a presidential candidate, which were partly expressed in a Politico article over a month ago.

  First of all, I think his support is firm and shows no sign of diminishing. He has already weathered storms such as his criticism of John McCain that would have doomed any other candidate. Anyone who thinks he is the current version of Cain, Bachmann, Santorum or other nutcase that briefly led the GOP field in 2012 is dead wrong.

  Keep in mind also that in primary elections, one doesn’t need majority support to win in a field with multiple candidates. And intensity of support is often more important than the percentage. Support for the designated favorite of party insiders is often exaggerated in polls and I think Trump’s supporters are unusually motivated.

  Second, Trump’s positions on the issues are largely irrelevant to his success. None of his supporters care whether a wall across Mexico is remotely feasible or that he regularly flip-flops on the issues. What he is selling is attitude and a certain fascistic form of leadership. He will get things done, his supporters believe. And it’s less important what he will do than that he will do something.

  Ironically, Republicans brought this on themselves in two ways. To begin with, they grossly oversold what they could do just with control of Congress. The Republican base really seems to have simply forgotten about the presidential veto or the Senate filibuster. They seem to have thought all they had to do was pass bills with a simple majority and they would magically become law. How else to explain voting over and over and over again to repeal Obamacare. It makes no sense unless my assumption is correct.

  Additionally, Republicans are suffering from the gridlock that they themselves caused. We all know that nature abhors a vacuum, but I think it abhors gridlock as well. That has always been the appeal of fascism and it would be very foolish to believe that Americans are immune from its attractive qualities of getting things done that need to get done. And let us not forget that Trump is talking about genuine problems even if his solutions are simplistic or even wrongheaded.

  My third point in Trump’s favor is his willingness to fund his own campaign and ability to run such a campaign on the cheap. By the latter, I mean that he started his campaign with close to 100% name ID and he has the amazing ability to get massive free media exposure any time he wants it. The mainstream media seem powerless to ignore the newsworthiness of anything he says about anything at any time in any place. In lieu of a traditional campaign staff, all Trump needs are the PR people he has long employed, a scheduler and a pilot for his plane.

  Related to this, I would note that Trump has a very powerful ally in the form of talk radio. Rush Limbaugh and Mark Levin have been especially strong in their support for Trump, in part because Trump’s base and theirs are one and the same. It is extremely valuable to any candidate to have such a megaphone at his disposal, whipping up support, attacking his enemies, explaining away his mistakes etc. This also explains why Trump can treat Fox News with the disdain it deserves. It helped create the Trump monster, thinking he could be controlled, and discovered to its horror than he cannot.

  Fourth, as a consequence, the traditional means of controlling an out-of-control candidate are not available to the GOP leadership. They cannot deny him media exposure or money or organizational support because he doesn’t need them. Moreover, the anointed GOP nominee, Jeb Bush, has turned out to be a remarkably poor politician. His ineptness makes me wonder how he ever got elected dog catcher. And the rest of the GOP field lacks the name ID or support to catch up. But, importantly, because several have deep pocketed supporters, they too can afford to stay in the race indefinitely, keeping the field divided to Trump’s advantage..

  This means it is very unlikely that the stop-Trump forces can coalesce around one candidate. The field will remain divided until the end, meaning that Trump needs no more support than he has now to win the nomination. As I have said repeatedly, the key to understanding Trump is not the ceiling on his support, but the floor, which appears higher than the ceiling of all the other candidates.

  Lastly, I think many Republicans simply delude themselves that Trump is not a serious candidate who cannot, for some reason, get the nomination. I say, don’t underestimate his ego, which we know is and always has been enormous. If he can win the GOP nomination, why shouldn’t he go for it? I would also point to the example of Wendell Willkie, a very Trump-like candidate who won the GOP nomination in 1940. Then as now, he took advantage of the fact that as the anti-government party, Republicans are unusually attracted to non-politicians.

  I am not yet ready to predict that Trump will be the GOP nominee, but I am disinclined to bet against him. I honestly don’t see how any of his current opponents can beat him. I think his odds of winning the nomination are better than even. Whether he can win the general election is another question that I will discuss at a later date.

  Final note – the Democrats’ growing disarray plays into Trump’s hands because it reduces the importance of electability as a prime requirement for the GOP nominee.

  

  

  

  

  

• Meanwhile, In Sweden, Banks Are Refusing To Open Savings Accounts

  Early in July, Sweden’s Riksbank proved its dedication to the post-crisis central bank mantra of “if it’s broken, break it some more” when, after becoming the first country to witness observable, indisputable evidence of QE’s failure, the central bank pushed rates further into negative territory and expanded QE. 

  The problem for Sweden, as we documented in “For The First Time Ever, QE Has Officially Failed”, is that QE had soaked up so much of the available high quality collateral that bond yields and the krona were moving in the wrong direction (i.e. higher) meaning that more QE would only exacerbate the situation, leading to still higher yields and a stronger currency. Incidentally, to avoid distorting the market even further, Morgan Stanley thinks the Riksbank may have to resort to mortgage bonds in the not-so-distant future. 

  Of course as we’ve seen, things can always get NIRP-er-er in the new paranormal which is why the market is pricing in a 50% chance of more easing from the Riksbank at tomorrow’s meeting. 

  The problem is that if you go NIRP and still are not able to achieve the kind of economic outcomes you were looking for by essentially forcing depositors to choose between a tax on their savings and pulling money out and spending it, well then the next logical thing to do is to stop accepting deposits, which is apparently what it’s come to in Sweden. Here’s more from Radio Sweeden:

  Richard Landén from Helsingborg, southwest Sweden, tried to open a simple savings account at Swedbank. But the bank wanted him to move over his entire account, including his monthly salary deposits and any savings he had.

   

  “You have to be an complete customer, they said. It’s either that or nothing at all, apparently,” Landén told Swedish Radio News.

   

  Swedbank declined to comment on the case.

   

  Sweden’s central bank has cut its key interest rate, the repo rate, to -0.35 percent, meaning making a profit on savings alone has become nearly impossible. The central bank will announce its next interest rate decision on Thursday.

   

  Exactly how many people have been denied opening a savings account is hard to say. But savings advisor Claes Hemberg at Avanza Bank thinks it’s a new trend. Several customers have been in touch with him about it

   

  “Yes, savers get in touch and ask: ‘Can the bank refuse me?'” he said.

   

   

  “I think it’s pretty bad style. At the same time, I have been a customer there before five years ago and has been very well treated. In this case, it was quite the contrary. It was a strange attitude from the beginning, I think,” says Landen.

   

  According to Swedish law, barring any extenuating circumstances like suspected money laundering or large debts, banks are not allowed to deny anyone from opening an account.

  But deny they apparently will, because “simple” (i.e. probably small) savings accounts are nothing but a cost center, money-losing hassle and because anyone looking to open such an account isn’t likely to be an individual with vast economic resources (i.e. is likely to be middle income at best), and because those types of people have a far higher propensity to spend what’s in their pocket (see chart below) shutting them out kills two birds with one humiliating denial stone by alleviating the bank of the aggravation of servicing their accounts and by refusing to allow people to save, thereby effectively forcing the issue in terms of M2 velocity.

   

  So in other words Mr. Landén from Helsingborg, either give the bank enough of your business to matter or else go do your patriotic duty and spend whatever you had planned to save. The Riksbank will thank you for it.

  

  

  

  

  

• Heresy! China Won't Stick To IMF, World Bank Lending "Religion" With AIIB

  Back in April, China was flying high. The stock market had reached dizzying heights on the back of an unprecedented surge in margin debt, creating billions in paper profits for millions of farmers and housewives turned day traders. Around the same time, Beijing had accidentally pulled off a major diplomatic coup. The China-led Asian Infrastructure Investment bank had just wrapped up a wildly successful membership drive after a surprise decision by the UK to back the new venture opened the floodgates and emboldened other US allies who, despite Washington’s best efforts to convince them otherwise, decided to join up.

  The effort to recruit members was in fact so successful, that Beijing went out of its way to dispel the notion that the new bank represented an attempt on China’s part to usher in a new era of yuan hegemony and rewrite the rules of the post-War global economic order. 

  Despite the Politburo’s best efforts to toe the line between acknowledging the bank’s early success and unnerving Western members who, although happy to participate, are still acutely aware that a dying hegemon is still a hegemon and therefore would prefer it if Beijing didn’t rub the whole thing in Washington’s face, it was abundantly clear to everyone involved that the AIIB represented no less than a changing of the guard and a revolution against the US-dominated multilateral institutions that many emerging countries believe have failed to respond to seismic shifts in the global economy. 

  Unfortunately for China, the AIIB was forced to take a back seat in terms of media coverage to the country’s dramatic equity market meltdown and, subsequently, to the devaluation of the yuan which, you’re reminded, will play an outsized role in any financing extended by the new lender. But as the carnage in financial markets grabs the headlines, the AIIB is quietly making preparations to officially commence operations and as Reuters notes, China is set to “rewrite the unwritten rules of global development finance” by doing away with certain conditionalities required by Western multilateral lenders. Here’s Reuters with the story:

  The Asian Infrastructure Investment Bank (AIIB) will require projects to be legally transparent and protect social and environmental interests, but will not ask borrowers to privatize or deregulate businesses for loans, four sources with knowledge of the matter said.

   

  By not insisting on some free market economic policies recommended by the World Bank, the AIIB is likely to avoid criticism leveled against its rivals, who some say impose unreasonable demands on borrowers.

   

  It could also help Beijing stamp its mark on a bank regarded by some in the government as a political as much as an economic project, and reflects scepticism in China about the virtues of free market policies advocated in the West.

   

  “Privatization will not become a conditionality for loans,” said a source familiar with internal AIIB discussions, but who declined to be named because he is not authorized to speak publicly on the matter.

   

  “Deregulation is also not likely to be a condition,” he added. “The AIIB will follow the local conditions of each country. It will not force others to do this and do that from the outside.”

   

  A reduced focus on the free market could give the AIIB greater freedom to run projects, said a banker at a development bank who declined to be named.

   

  For example, development banks that finance a water treatment plant may require the price of treated water to be raised to recoup costs, even if local conditions are not conducive to higher prices.

   

  The AIIB, on the other hand, could avoid hiking prices and rely instead on other sources of financing, such as government subsidies, to defray costs, he said.

   

  A successful AIIB that sets itself apart from the World Bank would be a diplomatic triumph for China, which opposes a global financial order it says is dominated by the United States and under-represented by developing nations.

   

  Criticism of international development lending is not new, said Susan Engel, a professor at Australia’s University of Wollongong who has studied the impact on the World Bank of free market ideas often referred to as the Washington Consensus.

   

  “It’s a religion – this commitment to the involvement of the private sector even in sectors where, in fact, their involvement is shown to do harm,” Engel said of the U.S.-based lender.

  By not insisting on privatization for funds – which has recently manifested itself in the auctioning of Greek state assets in exchange for loans from Brussels and ultimately, from the IMF – the AIIB will give borrowers a choice, which will in turn allow them to select the financing option that they believe best fits their particular circumstances. This echoes comments made by Nomura’s Rich Koo in July. Recall: 

  Until now the IMF was the only choice for countries in need of financial assistance, which meant they had no choice but to accept the economic and fiscal reforms it demanded.

   

  But if the IMF has competition, countries in need of help will most likely shop around for the institution offering the easiest terms.

  While that choice may, as Koo goes on to note, lead some countries to “delay necessary reforms,” it may also allow everyone involved to avoid the type of mistakes that are inevitable when decisions are made unilaterally. That is, to the extent the IMF is fallible (and if they are anything, it’s fallible), the existence of an alternative could prove invaluable in a crisis scenario. We go briefly back to Koo:

  There is something to be said for the US argument that there should be only one refuge for economically troubled nations which takes responsibility for ensuring they carry out necessary reforms. However, that view is based on the underlying assumption that the US and the IMF will correctly diagnose the problems it encounters.

   

  In reality, the US and the IMF completely misread the Asian currency crisis that began in 1997, and their errors caused tremendous damage to crisis-struck countries in the region.

   

  The decision of many Asian countries to participate in the AIIB is probably due in part to a distrust of the US born during the currency crisis.

  And with that, we will conclude with the following question: How ironic will it be when the first loans China makes through the AIIB are to the very same Asian countries who supported the new lender because of their negative experience with US-led institutions during the last Asian Financial Crisis, but whose descent into a replay of that crisis is the direct result of China’s move to devlaue the yuan?

  

  

  

  

• The QE End-Game Decision Tree: Not "If" But "When" Central Banks Lose Control

  Make no mistake, the writing has been on the wall for quite some time and we haven’t been shy about pointing it out.

  Central banks are losing control.

  Trillions upon trillions in post-crisis asset purchases haven’t given the global economy the defibrillator shock the world’s central planners were depending on to bring about a sustained and robust recovery.

  Indeed, the opposite appears to have materialized.

  Subdued demand and trade looks to have become structural and endemic rather than cyclical and rather than create “healthy inflation”, seven years of accommodative monetary policy has only served to bury the world in a global deflationary supply glut. And that’s just the big picture. The more granular we get, the more apparent it is that central banks are no longer in the driver’s seat.

  Inflation expectations across the eurozone have collapsed despite Mario Draghi’s best efforts to assure the public that PSPP has been an overwhelming success and similarly, inflation expectations have tumbled in the US ahead of a expected rate hike which looks less likely by the day. Meanwhile, in Sweden, the Riksbank has sucked so much high quality collateral from the system that QE has actually reversed itself, giving the world its first look at what happens when QE demonstrably fails. And let’s not forget Japan, where the world’s most hilariously absurd example of central bankers gone stark raving mad has done exactly nothing to pull the country out of the deflationary doldrums.

  And so here we stand, on the precipice of crisis with central banks having run out of both ammunition and credibility. In short, it’s time to ask if central banks have officially lost control. For the answer, and for the “QE end-game decision tree”, we go to BNP.

  Note that if CB’s do lose it, the likely scenario is: “deflation, vicious cycle… economic depression”.

  *  *  *

  From BNP

  Not “IF” but “WHEN central banks lose control?”

  The global financial repression pushed investors to invest cash in risky assets, such as property and equity. The scale of global policy interventions is trumping all fundamental factors for now. Investors should keep in mind that the road is never straight and next month should be full of potentially disruptive events impacting sharply overcrowded assets and trades. History shows that such misallocation of resources creates bubbles that can last before fully blowing; the question is not if, but when.

  Risk assets and risk parameters would be massively affected in the event central banks lose control; in the meantime, EDS Asia believes that central bank maturities that use forward guidance matter more than the QE process itself. The Fed and the ECB have been providing guidance which partly explains the low short-term volatility. The BoJ is moving toward this behaviour, managing the news flow: therefore there is a case for the NKY index going up slowly with a lower upfront volatility and a term structure closer to the US one: in that sense, we have started to observe an “SPX-isation of the NKY Index” in the past few months before this summer’s risk-off, as short dated volatility was trading lower. In China, the PBoC intervention learning curve is steep; this is the reason we believe the next equity leg up will be accompanied by an elevated volatility regime.

  The quantitative easing started in the US more than six years ago and the SPX index, as well as selective risky assets, are now hovering at the high end of their valuation histories. Recent price actions are testimony of the fragility of imbalances built over the years. Investors may recall the Japan easing experience in 2005 and 2006; an early exit, together with a global financial crisis, caused a Japanese equities meltdown (between mid-2007 and late-2008).

  In the decision tree, EDS Asia addresses the potential “QE end-game scenarios” [attempting to] answer the question “Are central banks losing control?” and providing a time horizon and probabilities affecting each path, which should allow investors to get a clearer overview. 

  

  

  

  

  

  

• Martin Armstrong Warns: The #1 Terrorist Group Is You, Domestic Citizens

  Understand this now. As Jim Quinn explains, YOU are the enemy of the state. They don’t give a shit about you. They treat you as sheep and cows to be sheared and milked. If you start questioning them, they will slaughter you. They have militarized the police forces and put you under 24 hour surveillance because they fear an uprising. There only a few hundred thousand of them and there are millions of us. A conflict is looming.

  As Armstrong Economics' Martin Armstrong details, government talks about Islamic terrorists, but their number one fear is YOU.

   

  

  The internment camps are for you, not Islamic extremists. Government CANNOT honor its promises so it will not even try.

  They are confiscating money everywhere, doubling fines, and punishing people for insane things.

  A neighbor received a ticket and a $200 fine for using a cell phone while driving. The use? Looking at the Google Maps. She even went to court with her phone records to prove she was not on the phone. The judge declared that she should have looked at that BEFORE she left. I suppose if you write down the directions and look at the piece of paper that is OK, you just can’t look at it on your phone. That applies to even looking at the time on your phone.

   

  The government claims it wants to eliminate guns to protect society. The problem will be that the criminals do not buy their guns at a store. They want to disarm the public because you are their number one fear as outlined in this discussion paper.

  

  

  

  

  

• China Explained (In 1 Image)

  Presented with no comment… (because we do not want to be “detained”)

   

  

   

  h/t @pdacosta

  

  

  

  

  

• Presenting Never-Ending QE In One Easy Flowchart

  In case you haven’t noticed, the world’s central banks are locked in an epic race to the devaluation bottom in desperate pursuit of a post-crisis economic recovery that never came despite trillions in worldwide QE and on August 11, in the currency war equivalent of the United States entering World War II, China devalued the yuan, serving notice that, to quote Xi Jinping, “the lion has woken up.”

  China’s move has sent shockwaves through the emerging market world and caused the Fed to reconsider the timing of the ever elusive “liftoff” and now, with the sputtering engine of global growth and trade set to export its deflation across the globe, countries like India and South Korea must decide how to respond. 

  Because we know the mechanics of the currency war and the endless loop of competitive easing can be a bit confusing at times, we present the following simplified, circular flow chart from Morgan Stanley which should serve as a helpful guide to the never ending “beggar thy neighbor” loop. 

  

  From MS:

  At the beginning of the game, the global economy is at an arbitrary point of equilibrium, similar to a chess board, with the pieces representing policy tools that are used to achieve one’s goal—growth and inflation—the king. Once a central bank makes an initial move to achieve a new equilibrium, it sets in motion a sequence of moves from other central banks, which we refer to as the opening repertoire. Suddenly, the game becomes unbalanced and requires more policy changes until a new equilibrium is achieved.

  

  

  

  

  

• Why The Federal Reserve Should Be Audited

  Submitted by John Crudele via NYPost.com,

  It is time for a comprehensive audit of Janet Yellen ’s Federal Reserve – and not just for the reasons presidential candidate Rand Paul and others have given.

  The Fed needs to be audited to see if its ruling body has broken the law by manipulating financial markets that are outside its jurisdiction. A thorough investigation of the Fed will show once and for all if its former chief Ben Bernanke and current Chairwoman Yellen should go to jail.

  I know, that’s a bold statement coming as it does on Sept. 1, 2015, with Wall Street still in half-bloom. But it won’t be so preposterous some day in the future if the stock market suffers a full-blown economy-busting collapse and Congress and everyone else are looking for scalps.

  The Fed should be audited as a brokerage firm would be — its financial holdings, its transactions, market orders, emails and phone calls. Special attention should be given to what is called the “trade blotter” at the Federal Reserve Bank of New York, which handles all market transactions for the Fed.

  The Fed’s dealing with foreign central banks — especially at times of market stress — should be given special attention. Trades in the wee hours of the morning should be in the spotlight.

  Not surprisingly, the Fed is strongly opposed to an audit and sees it as an intrusion into its autonomy. Washington shouldn’t be intimidated.

  Autonomy? Hah! That ended when the central bank started playing footsie with Wall Street.

  Let’s look at what happened to the stock market last week, and it’ll explain what I think those who audit the Fed need to look for.

  As you probably remember, stocks were headed for oblivion on Monday, Aug. 24. The Dow Jones industrial average was down 1,089 points early in the day before the index rallied for a close that was “only” 588 points lower.

  China’s problems. Weak US economic growth. Greece. The possibility of an interest-rate hike. Those and other issues were the root causes of last Monday’s woe.

  But Wall Street’s real problem is that there is a bubble in stock prices created by years of risky monetary policy by the Fed. Quantitative easing, or QE — the experiment in money printing that has kept interest rates super-low — hasn’t helped the economy (and even the Federal Reserve Bank of St. Louis concluded that). But QE did force savers into the stock market whether they wanted to take the risk or not.

  None of that is illegal.

  But the Fed now finds itself in the awkward position of having to protect the stock market bubble it created. So Yellen and her board of governors must have been pretty nervous when the Dow and other market indexes fell by an unprecedented amount on Aug. 24.

  Then, overnight, there was massive buying of Standard & Poor’s 500 Index futures contracts. This was the remedy proposed by a guy named Robert Heller back in 1989 just after he left the Fed board. The Fed, Heller proposed, should rig the stock market in times of collapse.

  Were those contracts being bought overnight by some Wall Street cowboy for whom potential losses in the disastrous market were of no concern? Or was it the Fed propping up the market?

  Stock prices initially reacted well to the mysterious overnight buying on Tuesday, and the Dow was up 442 points — until it wasn’t anymore. The blue-chip index finished Tuesday, Aug. 25, with a loss of more than 200 points.

  Then the same magical buying of S&P futures contracts happened Tuesday night and early Wednesday morning. Stocks again went up at the opening on Wednesday, but this time the gain held.

  Credit was given to William Dudley, the head of the NY Fed I mentioned above, who offered his soothing opinion that interest rates probably wouldn’t be raised by the Fed at its September meeting.

  “Once again, the Federal Reserve helped save the day for investors,” the New York Times wrote in a front-page article that cited Dudley’s speech.

  But that wasn’t true — not unless Dudley’s speech leaked ahead of time. Stocks were up before Dudley’s talk and actually fell when he began speaking. That was probably due to the fact that Dudley pooh-poohed the idea of another dose of QE.

  Wall Street got lucky the rest of the week ahead of this past weekend’s St. Louis Fed annual conference in Jackson Hole, Wyo. Plus, the month of August was coming to an end — usually a time when traders pretty up their books.

  Money managers don’t want stocks to go down right before their performance is locked in and reported to clients.

  The Fed has certain mandated responsibilities. It is supposed to keep inflation within a certain range. It is also charged with protecting the US dollar. Plus — and this is a modern-day responsibility — the Fed is supposed to help the economy and keep unemployment low.

  Even if you agree with Heller that the market sometimes needs help, there is an enormous risk in doing this too often.

  First, traders come to think that there is no risk in the stock market — a belief that has been proven wrong time and again.

   

  Second, investors have no way of telling what the real value of stocks is.

   

  And third, certain well-placed people on Wall Street will always know what the Fed is doing and benefit from it. And when the financial elite benefit, regular folks suffer.

  It’s time to find out what the Fed has been up to. In this case, ignorance isn’t bliss — it’s costly.

  

  

  

  

  

• Sep 3 – Obama Secures Iran Nuclear Deal With Barbara Mikulski Vote

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 10/100 EXTREME FEAR

  PREVIOUS CLOSE: 9/100 EXTREME FEAR

  ONE WEEK AGO: 5/100 EXTREME FEAR

  ONE MONTH AGO: 22/100 EXTREME FEAR

  ONE YEAR AGO: 42/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 25.22% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 26.09. This is a neutral reading and indicates that market risks appear low.

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

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – DUBAI GOLD DEALER OLYMPICS

   

  UNUSUAL ACTIVITY

  MU SEP 20 CALL ACTIVITY @$.11 on OFFER 2400+ Contracts

  FAST SEP 38 PUT ACTIVITY ON OFFER @$.70 2500+ Contracts

  TWTR DEC 50 CALLS 1500+ @$.15 .. also activity in the DEC 40 calls

  APLE EVP, Chief Legal Counsel P    5,592  A  $ 17.88

  MTZ 10% Owner Purchase 10,000 A $15.98 and Purchase 5,000 A $15.63

  More Unusual Activity…

   

  HEADLINES

   

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

  US ADP Employment Change Aug: 190K (est 200K; rev. 177K, prev 185K)

  Gross Says Fed Move May Be Too Little Too Late Amid Turmoil

  EU’s Moscovici calls for comprehensive debate in Eurozone reform

  Greece to miss 2015 privatisation sales target: agency chief

  Obama secures Iran nuclear deal with Barbara Mikulski vote

  DOE US Crude Oil Inventories (WoW) Aug-28: 4667K (est 900K; prev -5452K)

  Baxalta Said to Abandon Takeover Talks With Drugmaker Ariad

  Spielberg’s DreamWorks to split from Disney

   

  GOVERNMENTS/CENTRAL BANKS

  Fed’s Beige Book: Economic activity continues to expand modestly –Fed

  Gross Says Fed Move May Be Too Little Too Late Amid Turmoil –BBG

  EU’s Moscovici calls for comprehensive debate in Eurozone reform –Welt [Transalted]

  Greece to miss 2015 privatisation sales target: agency chief –Rtrs

  Merkel Ally Spahn Sees IMF Joining Greek Bailout, Lauds Tsipras –eKathimerini

  IMF Hopes For Orderly Transition For China To Internationalize Yuan –Rtrs

  China regulator says punishes three stock trading platforms –Rtrs

  China futures exchange further tightens rules on stock index futures trading –Rtrs

  Polish Central Bank Base Rate Left Unchanged At 1.50%, As Expected –Nasdaq

  GEOPOLITICS

  Obama secures Iran nuclear deal with Barbara Mikulski vote –CNN

  Russian Northern Fleet to practise nuclear-powered submarine rescue in Barents Sea –TASS

  China and South Korea agree to seek a 3-way summit with Japan in Oct. or Nov. –BBG

  FIXED INCOME

  Bond yields higher after Fed’s Beige Book –CNBC

  US bond yields head higher as jobs data looms –FT

  Sudden Dry Spell for Bond Sales –WSJ

  European banks fight back in fixed income –FT

  FX

  Dollar gains strength while EM currencies tumble heavily –FT

  Euro Falls Before ECB Policy Meeting –BBG

  USD/JPY Meanders in Shallow Range Around 120.00 –WBP

  Ruble Falls Second Day as Citigroup Sees Further Weakness on Oil –BBG

  China’s yuan slips on pre-holiday dollar demand despite intervention –Rtrs

  ENERGY/COMMODITIES

  WTI settles up 1.85%, at $46.25 a barrel –CNBC

  Gold eases after 4-day gain, awaiting signal on U.S. rates –Rtrs

  Copper rebounds as Chinese stock market pares losses –Rtrs

  DOE US Crude Oil Inventory Change (WoW) Aug-28: 4667K (est 900K; prev -5452K)

  DOE US Distillate Inventory Change (WoW) Aug-28: 115K (est 1000K; prev 1436K)

  DOE Cushing OK Crude Inventory Change (WoW) Aug-28: -388K (est 400K; prev 256K)

  OPEC oil output in Aug falls from record on Iraq disruption –Rtrs survey

  Shell Nigeria lifts force majeure on Bonny Light Crude –Rtrs

  Gold demand from China and India picks up –FT

  El Nino expected to take toll on sugar and rice prices –FT

  EQUITIES

  Wall St up 1 pct as China fears ease –Rtrs

  European stocks stage modest pre-ECB rebound –FT

  FTSE closes positive, follows Wall Street gains –RTRS

  Baxalta Said to Abandon Takeover Talks With Drugmaker Ariad –BBG

  Spielberg’s DreamWorks to split from Disney –Hollywood Reporter

  Citi Joins Bid For GBP 13bln Taxpayer Bank Assets –Sky News

  Tesco Prefers Buyout Firm MBK’s Bid For South Korea Unit –Rtrs

  Online Gambling Firm GVC ‘Not Prepared To Walk Away’ From Bwin –Rtrs

  Rebekah Brooks to return to News UK as CEO –MktWatch

  EU regulators clear Shell purchase of BG Group –RTRS

  Vivendi Earnings Rise, Boosted By Sale of Brazilian Unit –WSJ

  Fitch Downgrades E.ON to ‘BBB+’, Stable Outlook

  EMERGING MARKETS

  South Africa Doesn’t Warrant Negative Outlook, Moody’s Says –BBG

  China Futures Exchange: To Further Tighten Rules On Stock Index Futures Trading –Rtrs

   

  Puerto Rico Electric Says Agreement Reached With Bondholders –BBG

  

  

  

  

  

• Central Banks Nervous As Alternative Currency With David Bowie's Face Goes Viral

  Submitted by John Vibes via TheAntiMedia.org,

  One of the best ways for the general public to take power back is to develop alternative currencies — both local and global — that allow people to trade outside of the corporate-government banking systems and central bank notes.

  Many people in different areas of the world have been moderately successful at implementing local currencies, such as Mountain Hours or Ithaca Hours, which have gained traction in the U.S.

  In London, an interesting alternative currency bearing the face of pop singer David Bowie has recently come into circulation. According to Market Watch, the local currency is specialized for the Brixton community in southwest London. It is officially called the “Brixton Pound.”

  

   

  Tom Shakhli, manager of the Brixton Pound effort, said:

  “They are using it because they want to feel connected to the local area. Every time you use it, you’re like a financial activist. You’re taking part in this act which is subverting the norm, which is to hand over your £10 note very passively.”

  Shakhli pointed out that the project is intended to make a statement about the foundation of money, as well as provide an alternative to the current monopoly.

  Shakhli said that his main goal with the project is to ask:

  “What is money? Does it have to be either printed by the state or created by the banks? Why can’t money be localized? Why can’t money feature a pop star or a black historian? Does it have to feature establishment figures?”

  So far, there are currently 200 local businesses that have signed up to participate in the Brixton Pound program.

  The increasingly popular Brixton Pound is making central banks nervous — and rightly so. Following the success of the Brixton Pound, new alternative local currencies are now popping up all over the U.K. The Oxford Pound, Kingston Pound, and Palace Pound are just a few of the currencies that have been recently introduced. The Bank of England has been forced to respond to these local currencies because of their popularity, deeming them “voucher schemes” and warning the public that they are unprotected when using them.

  A document released by the Bank of England claims that:

  “Local currency schemes lead to significant and unanticipated impacts on aggregate economic activity.”

  According to the document, the Bank of England will also attempt to delegitimize local currencies by

  “Design[ing] features and marketing material [to] help users recognise that local currency paper instruments are like vouchers and not banknotes.”

  *  *  *

  For the economy to really be in the hands of the people, it is necessary to decentralize the currency and to have an open-source network of competing currencies that are community based and easily exchangeable. While it is impossible to predict how we will trade a century or even five years from now, we can still observe how people are innovating within their own areas and take those lessons into account for when state and bank issued currencies finally diminish in value to the point where they are unusable.

  

  

  

  

  

• Second Largest US Pension Fund To Sell 12% Of Stocks Holdings In Advance Of "Another Downturn"

  While many continue to debate if what with every passing day increasingly looks like a global recession, one from which the US will not decouple no matter how many “virtual portfolio” asset managers claim the contrary, there are those who without much fanfare are already taking proactive steps to avoid the kind of fallout that the markets have hinted in the past month of trading, is inevitable. Some such as Calstrs: the nation’s second largest pension fund with $191 billion in assets (smaller only than Calpers), which as the WSJ reports is “considering a significant shift away from some stocks and bonds amid turbulent markets world-wide.”

  The move represents “one of the most aggressive moves yet by a major retirement system to protect itself against another downturn.” A downturn which the pension fund implicitly suggests, is now inevitable.

  According to the WSJ, the top investment officers of the California State Teachers’ Retirement System will move as much as $20 billion, or 12% of the fund’s portfolio, into “U.S. Treasurys, hedge funds and other complex investments that they hope will perform well if markets tumble, according to public documents and people close to the fund.”

  Actually considering the relative underperformace of hedge funds, which have largely underperformed the market both during the upcycle, and have fared no better during the volatility of the past month, Calstrs may want to just buy whatever Treasurys China has to sell. Which, incidentally, also answers a suddenly very pertinent question: if China is selling US paper, who will buy it? Well, pension funds for one – the same entities who have had an abnormally heavy allocation to stocks in recent years, and now are seeking to cash out. Which while favorable for bond yields, is hardly good news for stocks – because in this illiquid market, and painfully thin tape, just who will buy the tens of billions of stocks that pension funds will decide to sell.

  And it will certainly be more than just Calstrs: once one fund announces such a dramatic shift in strategy, most tend to follow.

  So when will the Calstrs reallocation take place? According to WSJ,” the board is expected to discuss the proposal at a meeting later today in West Sacramento, Calif. A final decision won’t be made until November.  The new tactic—called “Risk-Mitigating Strategies” in Calstrs documents posted on its website—was under discussion for several months as the fund prepared for a scheduled three-year review of how it invests assets for nearly 880,000 active and retired school employees. But the recent volatility around the world has provided a fresh reminder of how exposed Calstrs’ investments are when markets swoon.”

  Furthermore, as the WSJ points out, the question is now that the market appears to have topped out (at least until the next QE), what will be the proper distribution between stocks and bonds in a typical pension fund portfolio.

  Pension funds across the U.S. are wrestling with how much risk to take as they look to fulfill mounting obligations to retirees, and the fortunes of most are still heavily linked with the ebbs and flows of the global markets despite efforts to diversify their investments. State pension plans have nearly three-quarters, or 72%, of their holdings in stocks and bonds, according to Wilshire Consulting.

  That number is certain to decline in the coming months.

  What is also notable is that while Calstrs’ is at least considering investing in hedge funds, its cousin, the California Public Employees’ Retirement System, decided last year to exit all hedge-fund investments. Other pensions seeking to become more conservative have beefed up stakes in bonds or international stocks. “Calstrs Chief Investment Officer Christopher Ailman said in an interview he hopes the potential shift could help stub out heavy losses during gyrations because the investments don’t generally track as closely with market swings.”

  Actually they do: if the past few years have shown anything, it is that not only do “hedge” funds not hedge, in broad terms, they are merely highly levered beta chasers, who will gate their LPs at the first sign of abnormal market turbulence. Which is why we wouldn’t be surprised if Calstrs ends up reallocating entirely in plain vanilla Treasurys.

  As for the punchline, as usual it is saved for last: “Calstrs has not made any major moves in recent weeks amid the turmoil in China and the U.S. markets. Mr. Ailman said he knew there would be turbulence after Asian markets tumbled last month, but he said Calstrs chose to stay put because it views itself as a long-term investor and because its largess means it has limited countermoves when stock prices fall.”

  Ah, “a long-term investor” – the legendary words every asset managers uses when they have a position that is so underwater, they have no choice but to hold on. Who can possibly forget Norway’s sovereign wealth fund which was investing in Greek bonds for “infinity“…

  * * *

  And while a US pension fund is at least doing the prudent thing, and preparing to rotate out of the riskiest asset just as the market tops out, here comes Japan where things traditionally are upside down, and where we read that with the largest pension fund in the world, the GPIF, having maxed out its allocation “dry powder”, another massive pension funds is set to start selling bonds to buy stocks, even as the Nikkei continues to flirt with decade highs. Bloomberg reports:

  As the world’s biggest pension fund nears the end of its switch from sovereign bonds into stocks, investors are looking at Japan Post Bank Co. as the next actor big enough to move markets.

   

  The postal lender, the biggest holder of Japanese government bonds after the central bank, sold 5.1 trillion yen ($42 billion) in JGBs in the three months ended June, after offloading a record amount of the debt last fiscal year. The $1.2 trillion Government Pension Investment Fund, known as the whale, said last week stock and fixed-income holdings were all within 3 percentage points of their targets, suggesting it has almost completed a planned shift into riskier assets including global bonds and shares.

   

  The Bank of Japan needs to find about 45 trillion yen in JGBs from the market to meet its annual goal for boosting money supply to stimulate the economy. Japan Post Bank, with 49.2 percent of its 206.5 trillion yen held in domestic debt, fits the profile and needs to seek higher profits ahead of a possible public share sale this year.

   

  The postal bank said in April it plans to increase investments in assets aside from JGBs, such as foreign securities and corporate bonds, by 30 percent to 60 trillion yen in the fiscal year ending March 2018.

   

  Like GPIF, Japan Post Bank has been reducing its dependency on domestic government bonds. The bank owned 101.6 trillion yen in sovereign debt at the end of June, with the ratio falling below 50 percent of holdings for the first time. Unlike GPIF, however, Japan Post Bank hasn’t been increasing domestic stocks. It held just 900 million yen of local equities at the end of the first quarter, unchanged from March.
  

  It will be soon. So good luck Japanese pensioners: nothing screams fiduciary responsibility quite like your asset manager dumping a safe, government backed asset (even if there are 1.1 quadrillion of them) and buying a risky one which is trading at the highest price and valuation since the dot com bubble.

  Then again, with Japan’s demographic crisis where more adult than infant diapers are sold every year, a little proactive culling of the top-heavy pyramid – courtesy of a few million “so sorry, all your pension funds have vaporized” letter – may be just what the deranged Keynesian doctor ordered.

  

  

  

  

  

• eVIXeration & Gartman Send Stocks Soaring "Back To Normal"

  This seemed appropriate after last night's BOJ and PBOC efforts and today's oil idiocy…

  And then this utter farce…a 1% surge in the S&P and 4 point crash in VIX in the last 30 minutes!!

  

   

  The VIX front-end term-structure "normalizes" out of backwardation – but back-end remains stressed…

  

   

  As this was the longest period of backwardation since 2011's plunge

  

   

  On NO VOLUME!

  

   

  So let's start with stocks – which CNBC reflected on as "back to normal" with today's 275 point rally in The Dow

  Thank you very much-o, Mr. Kuroda… As the media began their pre-open jawboning this morning they had the backdrop of a triple-digit gain in The Dow to support any and every bullish – everything's fine – mantra – all thanks to a 120 point rip the moment Japan opened… Until the l;ast 30 minute spanic buying onmthe back of VIX clubbing, stocks went nowhere…

  

   

  But of course, no one cares – its tonight's news headlines that count – and Trannies are up 2% as

  

   

  But on the week, it all remains red…

  

   

  Which dragged Nasdaq barely into the green year-to-date!

   

  Do not get too excited…

  

   

  VIX dropped 15% today – its biggest drop in almost 2 months

   

  20 minutes to eVIXerate

  — zerohedge (@zerohedge) September 2, 2015

   

  We note VIX was crushed around the market break mid-afternoon and VXX was presured to the lows of the day (first non-short-squeeze in a few days…)

  

   

  After Europe closed, HY bonds were not loving it…

  

   

  Bonds were battered again during the US session leaving 30Y 6bps higher on the week (even as stocks remain well red)…

  

   

  but we note the collapse on 2Y swap spreads (and 5Y) continues…

  

   

  The US Dollar drifted higher on the day but remains lower on the week – notably quiet day in FX markets (especially JPY anchored at 120)…

  

   

  Gold was modestkly weaker but silver jumped. Crude and Copper were joined at the hip in this morning's melt-up…

  

   

  Silver was an illiquid mess….

  

   

  So let's just have a look at the day in Crude!!! (just like yesterday we ripped into the NYMEX close then faded)…

  

   

  With China closed for the rest of Parade Week, we wonder what market gets monkeyhammered tonight? (Don't forget FTSE A50 Futures trade in Signapore 😉

  Charts: Bloomberg

  

  

  

  

• Is It A Correction Or A Bear Market?

  Submitted by John Murphy,

  What Difference Does It Make?

  There's a debate in professional circles as to whether the stock market is in a correction or a bear market. It makes a difference. Let's define what they are. A stock market "correction" is a drop of more than 10%. Most corrections average about -15%. A bear market is a drop of 20% or more. Bear market losses have averaged -30%, and last longer than corrections. The last two bear markets between 2000 and 2002 and 2007 to 2009 lost -50%. Those losses were much bigger than most bear markets. Those precise definitions can lead to problems however. The price bars in Chart 1 show the S&P 500 losing -21% during 2011 from May to the start of October. That qualified as a bear market.

  

   Closing prices, however, lost -19% which signaled a correction. I recall a debate at the time as to whether or not that qualified as a bear market. As it turned out, 2011 was only a correction. Moving averages "death crosses" often signal a bear market, but not always. Chart 2 shows the (blue) 50-day average falling below the red 200-day average during 2010 and 2011 for the SPX. [50 and 200day EMAs also turned negative both years].

  

  The SPX lost -17% in 2010 before turning back up. That was also a correction. Bear markets don't always last a long time either. Bear markets in 1987, 1990, and 1998 lasted only three months, and bottomed during October. 

  A LONGER-RANGE LOOK AT THE S&P 500…

  The monthly bars in Chart 3 show the last two bear markets in the S&P 500 starting in 2000 and 2007 which lost -50% and 57% respectively; and the SPX reaching a new record in spring 2013 which ended the "lost decade" of stocks that started in 2000. The horizontal line drawn over the 2000/2007 peaks should act a solid floor beneath the price bars. A drop to that flat line would represent a drop of 26% which would qualify as a bear market. But that would still leave the SPX in a secular uptrend.

  

  The rising trendline drawn under the 2009/2011 lows shows potential support near 1700. A retest of that support line would represent an SPX lost of 20% which qualifies as a bear market. Chartwise, however, an SPX drop into bear market territory (-20% to 26%) would still be within its long-term uptrend. So it might not matter that much after all whether we're in a "correction" or "bear market" as long as the secular uptrend remains intact.

  S&P 500 RUNS INTO SELLING…

  Last week, I used Fibonacci retracement lines over the Dow Industrials to identify levels where more selling was likely. Chart 4 applies those (red) lines to the S&P 500 measured from its July high to its August low.
  

  The SPX has already run into selling near 2000 which was a 50% bounce. It has lost ground since then, but remains above last week's climactic low. The SPX will probably "back and fill" for a month or two in an attempt to repair recent technical damage. That would take us into October which has marked the bottom of most previous corrections. In the meantime, a retest of the August low wouldn't be surprising. That would be an important test. As long as last October's low remains intact, I will continue to lead toward the "correction" camp. But there are enough negative warnings to justify a very cautious stance.

  

  

  

  

  

• #WhiteLiesMatter

  Lies, Damn Lies, and Political speech… It appears little white lies matter.. and so do blatant black ones…

   

  

   

  Source: Townhall

  

  

  

  

  

• With China's Markets Closed For 2 Days, The "National Team" Comes To America

  Following China’s adoption of Nasdaq surveillance technology (to catch those malicious sellers), it appears ‘Murica decided to borrow The National Team for the last 30 minutes of the day today.

  We need stock higher, so dump VIX, ramp AAPL, and all is well.

  

   

  As AAPL vol was crushed: a 5 vol crash in the last 30 minutes!

  

   

  … all to get The Nasdaq Green for 2015:

  

   

  Open, daily manipulation – it’s not only for the Chinese.

  

  

  

  

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• Former CIA Boss and 4-Star General: U.S. Should Arm Al Qaeda

  Former CIA boss and 4-star general David Petraeus – who still (believe it or not) holds a lot of sway in Washington – suggests we should arm Al Qaeda to fight ISIS.

  He’s not alone …

  As we’ve previously shown, other mainstream American figures support arming Al Qaeda … and ISIS.

  The U.S. actually did knowingly support Al Qaeda in Libya. And also in Syria.

  And we actually ARE supporting ISIS to some extent.

  Truly, America’s foreign policy is insane.

  

  

  

  

• The Alarming Regularity of 6 and 7-Sigma Events Illustrates Why a Deep Understanding of Banker-Induced Fraud is a Necessity

  In today’s SmartKnowledgeU_Vlog_005, we discuss why an intelligent investment strategy is impossible without incorporation of market & banker fraud analysis, something that we have incorporated heavily into our strategies since we launched our company in mid-2007. Understanding market fraud allowed us to position our portfolio short the US stock market before the fall out occurred these past few weeks, as we even publicly posted this warning about an “imminent” US market collapse to our twitter account on 19 August, 2015, just one day before the US stock markets began free-falling.

   

   

   

  In addition to shorting US markets and closing out positions at very quick and substantial gains, our understanding of banker pricing fraud in gold and silver futures markets also allowed us to short gold and silver into the US stock market free fall and quickly close out our short gold and short silver positions respectively for very quick +5.27% and +16.24% gains. In our latest vlog below, we discuss why understanding the meaning behind these 5, 6, 7, and even 16–sigma events that are occuring with alarming regularity in global financial markets has been critical to maintaining positive yields this year in the short-term, will be critical to maintaining strongly positive yields over the long-term, and is necessary in   formulating intelligent low-risk strategies to cope with the massive asset and market volatility that we have been experiencing, and that will likely accelerate in future months.

   

  

   to watch the above vlog, please click the image above

  
  

  About the Vlogger: JS Kim is the Managing Director and Chief Investment Strategist of SmartKnowledgeU. His Crisis Investment Opportunities newsletter has respectively outperformed the Philadelphia Gold & Silver Index, the Australian ASX200, the London FTSE and the US S&P 500 by +125.53%, +76.92%, +69.07% and +27.63% (investment period from inception on 15 June, 2007 until present day on 2 September, 2015). For more information and access to our annual returns, please visit smartknowledgeu.com

  

  

  

  

• The Alarming Regularity of 6 and 7-Sigma Events Illustrates Why a Deep Understanding of Banker-Induced Fraud is a Necessity

  In today’s SmartKnowledgeU_Vlog_005, we discuss why an intelligent investment strategy is impossible without incorporation of market& banker fraud analysis, something that we have incorporated heavily into our strategies since we launched our company in mid-2007. Understanding market fraud allowed us to position our portfolio short the US stock market before the fall out occurred these past few weeks, as we even publicly posted this warning about an “imminent” US market collapse to our twitter account on 19 August, 2015, just one day before the US stock markets began free-falling.

   

   

   

  In addition to shorting US markets and closing out positions at very quick and substantial gains, our understanding of banker pricing fraud in gold and silver futures markets also allowed us to short gold and silver into the US stock market free fall and quickly close out our short gold and short silver positions respectively for very quick +5.27% and +16.24% gains. In our latest vlog below, we discuss why understanding the meaning behind these 5, 6, 7, and even 16–sigma events that are occuring with alarming regularity in global financial markets has been critical to maintaining positive yields this year in the short-term, will be critical to maintaining strongly positive yields over the long-term, and is necessary to  intelligently formulating strategies to cope with the massive asset volatility that we have been experiencing and that will likely accelerate in future months.

   

  

   to watch the above vlog, please click the image above

  
  

  About the Vlogger: JS Kim is the Managing Director and Chief Investment Strategist of SmartKnowledgeU. His Crisis Investment Opportunities newsletter has respectively outperformed the Philadelphia Gold & Silver Index, the Australian ASX200, the London FTSE and the US S&P 500 by +125.53%, +76.92%, +69.07% and +27.63% (investment period from inception on 15 June, 2007 until present day on 2 September, 2015). For more information and access to our annual returns, please visit smartknowledgeu.com

  

  

  

  

• Sheep Led To The Slaughter: The Muzzling Of Free Speech In America

  Submitted by John Whitehead via The Rutherford Institute,

  “If the freedom of speech be taken away, then dumb and silent we may be led, like sheep to the slaughter.”—George Washington

  The architects of the American police state must think we’re idiots.

  With every passing day, we’re being moved further down the road towards a totalitarian society characterized by government censorship, violence, corruption, hypocrisy and intolerance, all packaged for our supposed benefit in the Orwellian doublespeak of national security, tolerance and so-called “government speech.”

  Long gone are the days when advocates of free speech could prevail in a case such as Tinker v. Des Moines. Indeed, it’s been 50 years since 13-year-old Mary Beth Tinker was suspended for wearing a black armband to school in protest of the Vietnam War. In taking up her case, the U.S. Supreme Court declared that students do not “shed their constitutional rights to freedom of speech or expression at the schoolhouse gate.”

  Were Tinker to make its way through the courts today, it would have to overcome the many hurdles being placed in the path of those attempting to voice sentiments that may be construed as unpopular, offensive, conspiratorial, violent, threatening or anti-government.

  Consider, if you will, that the U.S. Supreme Court, historically a champion of the First Amendment, has declared that citizens can exercise their right to free speech everywhere it’s lawful—online, in social media, on a public sidewalk, etc.—as long as they don’t do so in front of the Court itself.

  What is the rationale for upholding this ban on expressive activity on the Supreme Court plaza?

  “Allowing demonstrations directed at the Court, on the Court’s own front terrace, would tend to yield the…impression…of a Court engaged with — and potentially vulnerable to — outside entreaties by the public.”

  Translation: The appellate court that issued that particular ruling in Hodge v. Talkin actually wants us to believe that the Court is so impressionable that the justices could be swayed by the sight of a single man, civil rights activist Harold Hodge, standing alone and silent in the snow in a 20,000 square-foot space in front of the Supreme Court building wearing a small sign protesting the toll the police state is taking on the lives of black and Hispanic Americans.

  My friends, we’re being played for fools.

  The Supreme Court is not going to be swayed by you or me or Harold Hodge.

  For that matter, the justices—all of whom hale from one of two Ivy League schools (Harvard or Yale) and most of whom are now millionaires and enjoy such rarefied privileges as lifetime employment, security details, ample vacations and travel perks—are anything but impartial.

  If they are partial, it is to those with whom they are on intimate terms: with Corporate America and the governmental elite who answer to them, and they show their favor by investing in their businesses, socializing at their events, and generally marching in lockstep with their values and desires in and out of the courtroom.

  To suggest that Harold Hodge, standing in front of the Supreme Court building on a day when the Court was not in session hearing arguments or issuing rulings, is a threat to the Court’s neutrality, while their dalliances with Corporate America is not, is utter hypocrisy.

  Making matters worse, the Supreme Court has the effrontery to suggest that the government can discriminate freely against First Amendment activity that takes place within a government forum. Justifying such discrimination as “government speech,” the Court ruled that the Texas Dept. of Motor Vehicles could refuse to issue specialty license plate designs featuring a Confederate battle flag because it was offensive.

  If it were just the courts suppressing free speech, that would be one thing to worry about, but First Amendment activities are being pummeled, punched, kicked, choked, chained and generally gagged all across the country.

  The reasons for such censorship vary widely from political correctness, safety concerns and bullying to national security and hate crimes but the end result remains the same: the complete eradication of what Benjamin Franklin referred to as the “principal pillar of a free government.”

  Officials at the University of Tennessee, for instance, recently introduced an Orwellian policy that would prohibit students from using gender specific pronouns and be more inclusive by using gender “neutral” pronouns such as ze, hir, zir, xe, xem and xyr, rather than he, she, him or her.

  On many college campuses, declaring that “America is the land of opportunity” or asking someone “Where were you born?” are now considered microaggressions, “small actions or word choices that seem on their face to have no malicious intent but that are thought of as a kind of violence nonetheless.”  Trigger warnings are also being used to alert students to any material or ideas they might read, see or hear that might upset them.

  More than 50 percent of the nation’s colleges, including Boston University, Harvard University, Columbia University and Georgetown University, subscribe to “red light” speech policies that restrict or ban so-called offensive speech, or limit speakers to designated areas on campus. The campus climate has become so hypersensitive that comedians such as Chris Rock and Jerry Seinfeld refuse to perform stand-up routines to college crowds anymore.

  What we are witnessing is an environment in which political correctness has given rise to “vindictive protectiveness,” a term coined by social psychologist Jonathan Haidt and educational First Amendment activist Greg Lukianoff. It refers to a society in which “everyone must think twice before speaking up, lest they face charges of insensitivity, aggression or worse.”

  This is particularly evident in the public schools where students are insulated from anything—words, ideas and images—that might create unease or offense. For instance, the thought police at schools in Charleston, South Carolina, have instituted a ban on displaying the Confederate flag on clothing, jewelry and even cars on campus.

  Added to this is a growing list of programs, policies, laws and cultural taboos that defy the First Amendment’s safeguards for expressive speech and activity. Yet as First Amendment scholar Robert Richards points out, “The categories of speech that fall outside of [the First Amendment’s] protection are obscenity, child pornography, defamation, incitement to violence and true threats of violence. Even in those categories, there are tests that have to be met in order for the speech to be illegal. Beyond that, we are free to speak.”

  Technically, Richards is correct. On paper, we are free to speak.

  In reality, however, we are only as free to speak as a government official may allow.

  Free speech zones, bubble zones, trespass zones, anti-bullying legislation, zero tolerance policies, hate crime laws and a host of other legalistic maladies dreamed up by politicians and prosecutors have conspired to corrode our core freedoms.

  As a result, we are no longer a nation of constitutional purists for whom the Bill of Rights serves as the ultimate authority. As I make clear in my book Battlefield America: The War on the American People, we have litigated and legislated our way into a new governmental framework where the dictates of petty bureaucrats carry greater weight than the inalienable rights of the citizenry.

  It may seem trivial to be debating the merits of free speech at a time when unarmed citizens are being shot, stripped, searched, choked, beaten and tasered by police for little more than daring to frown, smile, question, challenge an order, or just breathe.

  However, while the First Amendment provides no tangible protection against a gun wielded by a government agent, nor will it save you from being wrongly arrested or illegally searched, or having your property seized in order to fatten the wallets of government agencies, without the First Amendment, we are utterly helpless.

  It’s not just about the right to speak freely, or pray freely, or assemble freely, or petition the government for a redress of grievances, or have a free press. The unspoken freedom enshrined in the First Amendment is the right to think freely and openly debate issues without being muzzled or treated like a criminal.

  Just as surveillance has been shown to “stifle and smother dissent, keeping a populace cowed by fear,” government censorship gives rise to self-censorship, breeds compliance and makes independent thought all but impossible.

  In the end, censorship and political correctness not only produce people that cannot speak for themselves but also people who cannot think for themselves. And a citizenry that can’t think for itself is a citizenry that will neither rebel against the government’s dictates nor revolt against the government’s tyranny.

  The end result: a nation of sheep who willingly line up for the slaughterhouse.

  The cluttered cultural American landscape today is one in which people are so distracted by the military-surveillance-entertainment complex that critical thinkers are in the minority and frank, unfiltered, uncensored speech is considered uncivil, uncouth and unacceptable.

  That’s the point, of course.

  The architects, engineers and lever-pullers who run the American police state want us to remain deaf, dumb and silent. They want our children raised on a vapid diet of utter nonsense, where common sense is in short supply and the only viewpoint that matters is the government’s.

  We are becoming a nation of idiots, encouraged to spout political drivel and little else.

  In so doing, we have adopted the lexicon of Newspeak, the official language of George Orwell’s fictional Oceania, which was “designed not to extend but to diminish the range of thought.” As Orwell explained in 1984, “The purpose of Newspeak was not only to provide a medium of expression for the world-view and mental habits proper to the devotees of IngSoc [the state ideology of Oceania], but to make all other modes of thought impossible.”

  If Orwell envisioned the future as a boot stamping on a human face, a fair representation of our present day might well be a muzzle on that same human face.

  If we’re to have any hope for the future, it will rest with those ill-mannered, bad-tempered, uncivil, discourteous few who are disenchanted enough with the status quo to tell the government to go to hell using every nonviolent means available.

  However, as Orwell warned, you cannot become conscious until you rebel.

  

  

  

  

  

• It's The Fed, Stupid; Why Kuroda And Draghi Are No Match For Quantitative Tightening

  Earlier today, Deutsche Bank – who last week won the sellside race to coin a new term for the unfolding EM FX reserve unwind – took a close look at the end of the “Great Accumulation” and what it means for asset prices and DM monetary policy going forward. Here was Deutsche Bank’s “profound” takeaway:

  Less reserve accumulation should put secular upward pressure on both global fixed income yields and the USD. Many studies have found that reserve buying has reduced both bund and US treasury yields by more than 100bps. 

   

  Declining FX reserves should place upward pressure on developed market yields given that the bulk of reserves are allocated to fixed income. 

   

  This force is likely to be a persistent headwind towards developed market central banks’ exit from unconventional policy in coming years, representing an additional source of uncertainty in the global economy. The path to “normalization” will likely remain slow and fraught with difficulty.

  But that, as it turns out, is not all. 

  As you might imagine, EM capital flows have tracked the Fed, BOJ, and the ECB’s balance sheets quite closely (albeit with a lead) in the post-crisis, QE-dominated world.

  What’s interesting however, is that there now appears to be a disconnect:

  

  What accounts for that, you ask? Well, according to DB (and this isn’t exactly surprising) the simple fact is that EM inflows/outflows are far more dependent on the Fed than they are on the BOJ and ECB and that means that a dovish Kuroda and Draghi will be no match for an even semi-hawkish Fed and that could be very bad news for EM flows considering how far ahead the Fed is in terms of approaching a rate hike cycle and considering, as we noted earlier, that DB’s previous answer to the EM FX reserve liquidation quandary was that perhaps “other central banks [will] come in to fill the gap that the PBoC is leaving [as] China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates”. From DB:

  Given the reliance of EM reserves on QE-enabled financial flows since the 2008 crisis, the speed of reversal should be a key driver of reserves trends going forward. EM capital flows have indeed had a strong relationship with G3 central bank balance sheet growth with a two-quarter lead (Figure 15), given that market pricing anticipates shifts in QE. Projecting G3 balance sheet trends thus offers some clues. In our most hawkish scenario, the Fed stops reinvestment by mid- 2016 and the ECB and BoJ stop QE by September and December 2016, respectively. A more dovish scenario might see the Fed reinvesting ad infinitum and the ECB and BoJ extending QE purchases until end-2017.

  Worryingly, EM capital flows are already significantly undershooting the projection from the hawkish scenario. A constructive take on this would be that EM outflows have overreacted and could give way to inflows again as global liquidity conditions remain more accommodative than feared. The less constructive view is that the Fed balance sheet simply matters far more for EM, with liquidity provided by the ECB and BoJ a poor compensation for the Fed’s retrenchment. Indeed, Figure 16 suggests this to be the case, with EM flows tracking the fall in Fed balance sheet growth closely of late. The hawkish scenario of Fed stopping reinvestment next year would suggest that EM flows can get weaker, while even a more dovish scenario of a constant Fed balance sheet would not be enough to lift inflows again. 

   

  

  In other words, even under DB’s dovish scenario for the Fed, in which Yellen reinvests the proceeds from maturing securities forever, EM capital flows will likely remain negative, putting perpetual pressure on FX reserves. And as should be abundantly clear by now, perpetual pressure on FX reserves means the unwind of the “Great EM Accumulation” continues unabated until either the Fed launches QE4 or else stands by while the world’s emerging economies burn through their cushions and careen into crisis. 

  Finally – as noted earlier in “ABN Amro Warns There Is A 40% Chance Mario Draghi Expands ECB QE As Soon As This Week” – while we agree with ABN that the ECB may indeed boost QE in a rerun of what the BOJ did in the great Halloween massacre of 2014, it would be largely a non-event, as the ECB biggest limitation remains the availability of monetizable assets. As such, any real monetary offset to the Reverse QE that is about to be unleashed now that the “Great Accumulation” is over, is and will always be the Fed. For a quick explanation of this, re-read “Why QE4 Is Inevitable.“

  

  

  

  

  

• Circling The Drain….

  CIRCLING THE DRAIN:

  So last weeks turmoil is seemingly not over yet…..Was it simply a storm in a teacup brought on by another one of those market tantrums that erupt every now and again to keep everyone on their toes and eventually evaporate? Or was it a significant tremor giving pre warning of a major earthquake to follow?

  

  WAX ON WAX OFF;

  Historically September and October are not very good months for stocks and there are fundamental arguments for both sides.

  The fact is that there is a lot more to worry about than to be confident of. 

  There are clearly real concerns both internally and externally that the China’s growth rate is running at closer to 5% than 7%, Brazil and Russia are in recession, 

  

  Emerging market countries are suffering massive capital outflows and are burdened with huge dollar debts, Abenomics is not delivering inflation in Japan, the Eurozone is an invalid, Greece is a month away from another potential exit crisis, Europe faces a migrant crisis and the Middle East is unstable. 

   

  There is plenty of reason to be concerned especially when the global economy is in the anaemic state it is despite a zero interest rate environment and huge injections of QE. At the height of last week’s crisis the proposed responses if the rout continued were for more of the same — QE in China to be added to more QE in Japan and Europe. There was even a suggestion from the president of the Minneapolis Fed that the week’s developments potentially justified “adding accommodation”. All this despite evidence that the impact of each new injection is diminishing and creating side effects that are sowing the seeds of the next financial crisis.

  THE CHARTS DON’T LIE

  We broke ,we rallied to the multi year trend line  and now we have retreated again…..

  Weekly S&P chart:

  

  You really dont need to be a rocket scientist;

  What I have not liked from the recent move is that the fixed income market that one would expect to flatten from his point has if fact steepened…this has been down to apparent Chinese liquidation of treasury positions;

  YIELDS UP / STOCKS DOWN……

  

  With everything for sale…the next 2 months could be quite hairy

   

   

  In regards to more detailed and expert options and futures advice ,volatility analysis etc ,please contact Darren Krett,Bryan Fitzgerald or John Haden through www.maunaki.com or dkrett@maunaki.com 

  “Futures and options trading involves substantial risk and is not for everyone. Such investments may not be appropriate for the recipient. The valuation of futures and options may fluctuate, and, as a result, clients may lose more than their original investment. Nothing contained in this message may be construed as an express or an implied promise, guarantee or implication by, of, or from Mauna Kea Investments LLC. that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Although care has been taken to assure the accuracy, completeness and reliability of the information contained herein, Mauna Kea Investments LLC makes no warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, reliability or usefulness of any information, product, service or process disclosed.”

   

  

  

  

  

• The Myth Of A Russian 'Threat'

  Authored by Pepe Escobar, originally posted at SputnikNews.com,

  Not a week goes by without the Pentagon carping about an ominous Russian "threat".

  Chairman of the Joint Chiefs of Staff Martin Dempsey entered certified Donald “known unknown” Rumsfeld territory when he recently tried to conceptualize the “threat”; “Threats are the combination, or the aggregate, of capabilities and intentions. Let me set aside for the moment, intentions, because I don’t know what Russia intends.”

  So Dempsey admits he does not know what he’s talking about. What he seems to know is that Russia is a “threat” anyway — in space, cyber space, ground-based cruise missiles, submarines.

  And most of all, a threat to NATO; “One of the things that Russia does seem to do is either discredit, or even more ominously, create the conditions for the failure of NATO.”

  So Russia “does seem” to discredit an already self-discredited NATO. That’s not much of a “threat”.

  All these rhetorical games take place while NATO “does seem” to get ready for a direct confrontation with Russia. And make no mistake; Moscow does view NATO’s belligerence as a real threat.

  It’s PGS vs. S-500

  The “threat” surge happens just as US Think Tankland recharges the notion of containment of Russia. Notorious CIA front Stratfor has peddled a propaganda piece praising Cold War mastermind George Kennan as the author of the “containment of Russia” policy.

   

  The US intel apparatus don’t do irony; before he died, Kennan said it was now the US that had to be contained, not Russia.

   

  Containment of Russia – via the expansion of the EU and NATO — has always been a work in progress because the geopolitical imperative has always been the same; as Dr. Zbigniew “The Grand Chessboard” Brzezinski never tired of stressing, it was always about preventing the – threatening — emergence of a Eurasian power capable of challenging the US.

   

  Ultimately, the notion of “containment” can be stretched out towards the dismantling of Russia itself. It also carries the inbuilt paradox that NATO’s infinite expansion eastwards has made Eastern Europe less, not more, safe.

  Assuming there would even be a lethal Russia-NATO confrontation, Russian tactical nuclear weapons would knock out all NATO airports in less than twenty minutes. Dempsey – cryptically – admits as much.

  What he cannot possibly admit is if a decision had been made in Washington, a long time ago, preventing NATO’s infinite expansion, Russia’s concerted move to upgrade its nuclear weapon arsenal would have been unnecessary. 

  Geopolitically, the Pentagon has finally seen which way the – strategic partnership – wind is blowing; towards Russia-China. This major game-changing shift in the global balance of power also translates as the combined military assets of China and Russia exceeding NATO’s.

  In terms of military power Russia has superior offensive and defensive missiles over the US, with the new generation surface-to-air missile system, the S-500, capable of intercepting supersonic targets and totally sealing Russian airspace.

  Moreover, despite short-term financial turbulence, the Sino-Russian combined strategy for Eurasia – an interpenetration of the New Silk Road(s) and the Eurasian Economic Union (EEU) – is bound to develop their economies and the region at large to an extent that may surpass the EU and the US combined by 2030.

  What’s left for NATO is to stage military strength made-for-TV shows such as “Atlantic Resolve” to “reassure the region”, especially hysteria-prone Poland and the Baltics. 

  Moscow, meanwhile, has made it clear that nations deploying US-owned anti-ballistic missile systems in their territory will face missile early-warning systems deployed in Kaliningrad.

  And Major General Kirill Makarov, Russia’s Aerospace Defense Forces’ deputy chief, has already made it clear Moscow is upgrading its air and missile defense capabilities to smash any – real — threat by the US Prompt Global Strike (PGS).

  In the December 2014 Russian military doctrine, NATO’s military build-up and PGS are listed as Russia’s top security threats. Deputy Defense Minister Yuri Borisov has stressed, “Russia is capable of and will have to develop a system like PGS.”

  Where’s our loot?

  The Pentagon’s rhetorical games also serve to mask a real high-stakes process; essentially an energy war – centering on the control of oil, natural gas and mineral resources of Russia and Central Asia. Will this wealth be controlled by oligarch frontmen “supervised” by their masters in New York and London, or by Russia and its Central Asian partners? Thus the relentless propaganda war. 

  A case can be made that the Masters of the Universe have resurrected the same old containment/threat geopolitical alibis – peddled by what we could dub the Brzezinski/Stratfor connection — to cover, or conceal, another stark fact.

  And the fact is that the real reason for Cold War 2.0 is New York/London financial power suffering a trillion dollar-plus loss when President Putin extracted Russia from their looting schemes.

  And the same applies to the entire Kiev coup — forced through by the same New York/London financial powers to block Putin from destroying their looting operations in Ukraine (which, by the way, proceed unabated, at least in the agricultural domain).

  Containment/threat is also deployed on overdrive to prevent by all means a strategic partnership between Russia and Germany – which the Brzezinski/Stratfor connection sees as an existential threat to the US.

  The connection’s wet dreams – shared, incidentally, by the neo-cons – would be a glorious return to the looting phase of Russia in the 1990s, when the Russian industrial-military complex had collapsed and the West was plundering natural resources to Kingdom Come.

  It’s not going to happen ever again. So what’s the Pentagon Plan B? To create the conditions of turning Europe into a potential theater of nuclear war. Now that’s a real threat – if there ever was one.

   

  

  

  

  

  

• Chinese Stocks Open Down Hard As PBOC Strengthens Yuan By Most Since 2010 & Default Risk Hits 2-Year High

  From the moment Japan opened, USDJPY buying took off (standard 100 pip rip on absolutely no news whatsoever) as yet another manipulated market breathed new life into equity longs dreams. That 'help' combined with the fact that, as SCMP's George Chen reports, 50 China brokerages will jointly contribute 100 bln RMB capital to the government margin finance agency to start "new round of market rescue" provided some stability after US markets' collapse. However, tonight's big news appears to be a major crackdown on leverage as MNI notes regulators ordering brokerage houses to clear all non-official margin trading services – not just halting new clients but also closing existing accounts. Chinese stocks are opening modestly lower as PBOC fixes Yuan stronger for the 4th day in a row. Finally, China credit risk has spiked to 2-year highs as traders increase positions dramatically. The manipulation will continue through tomorrow at least when Parade Week peaks, so buckle up.

   

  Japan "rescued"… "Mysterious"? – Large USD/JPY Buyer Seen Before Nikkei Index Opened: Traders

  

   

  China "Stability?"

  

   

  Though some weakness at the Chinese open:

  • *FTSE CHINA A50 SEPT. FUTURES DROP 0.7% IN SINGAPORE
  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 2.2% TO 2,939.8

   

  

  • *SHANGHAI COMPOSITE INDEX SET TO OPEN 4.4% LOWER

  

  And then PBOC Strengthens Yuan:

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3619 AGAINST U.S. DOLLAR
  • *CHINA RAISES YUAN REFERENCE RATE FOR FOURTH DAY

  

  And loses controil of money markets:

  • *CHINA OVERNIGHT MONEY-MARKET RATE RISES 18 BPS TO 2%

   

  This is the biggest 4-day strengthening in 5 years!

  

  But tonight's big news appears be a major clampdown on margin trading (as MNI reports),

  China's stock market regulator has issued a circular ordering brokerage houses to clear all non-official margin trading services jointly provided with a third party — not just halting new clients but also closing existing accounts.

   

  Chinese brokerage houses were allowed to offer margin trading services in 2010 but strong stock market performance since last year saw many third parties also providing margin trading services with help from brokerage houses. Beijing realized the potential threat of these fast-growing margin trading services, particularly unofficial ones, and started to push for market deleveraging in late-June this year, contributing to the stock market rout which saw Shanghai Composite Index lose nearly 40% since.

  Even as margin debt drops to a fresh 9-month low…

  • *SHANGHAI MARGIN DEBT BALANCE FALLS FOR 11TH STRAIGHT DAY

  

   

  The very same brokerages that are seeing executives detained and are being told to shut down margin trading have also provided funds for rescuing the government market…

  Chinese brokerage houses are providing more funds to the China Securities Finance Corp for stock market intervention.

   

  Many listed brokerage houses issued statements last night saying they were giving no more than 20% of their net assets to CSFC, which will use the money to set up a special account for investment in blue chip stocks. These firms include CITIC Securities, which said it's giving another CNY5.4 billion to CSFC. CITIC Securities is at the center of a regulatory storm as many of its senior executives are being investigated by police and Chinese investors have been questioning if CITIC was a key player among short sellers that caused the recent stock market rout.

   

  Besides CITIC, several other brokerage houses which are contributing new funds to CSFC, have also said they are being investigated by the stock market regulator.

  Followed by more talk..

  • *CHINA EXPORTS MAY RISE 2% IN 2015; IMPORTS SEEN DOWN 10%: NEWS
  • *CHINA HAS ROOM FOR FURTHER RATES, RRR CUTS: SECURITIES NEWS
  • *CHINA SHOULD MAKE FUND TO SUPPORT SMALL CO. MARKET-ORIENTED: LI
  • *CHINA PREMIER LI KEQIANG COMMENTS ON 60B YUAN SMALL CO. FUND

  Then – now that China is flush with cash again apparently, it decided to help out Venezuela…

  • *VENEZUELA SIGNS $5B LOAN W/CHINA TO BOOST OIL PRODUCTION:MADURO

  But, not everyone is happy, as Bloomberg reports,

  China-focused hedge funds probably had their worst month in almost 16 years in August, with firms including Orchid Asia Group Management and APS Asset Management Pte suffering losses from the nation’s stock market collapse.

   

  “Greater China hedge funds are on track to show the worst three month returns in at least a decade,” said Mohammad Hassan, an analyst with Eurekahedge in Singapore. “It’s not a surprise given the funds’ limited ability to short the stock markets in China.”

  And finally, it appears traders are hedging China credit risk in size…

  Open positions in China’s credit-default swaps increased by 212 contracts to 9,444 in the week ended Aug. 28, according to latest data from DTCC.

   

   

  

   

  That’s the biggest increase among global sovereign CDS; gross notional amount rose $1.31b last week

   

  

   

  Among Asian sovereigns, South Korea’s CDS had second-biggest increase in positions last week, with outstanding amount up 137 contracts, or $1.10b in gross notional value

  Charts: Bloomberg

  

  

  

  

  

• Macroeconomics Is The Root Of All Error

  Submitted by Bill Frezza via The Daily Caller,

  Will Fed chief Janet Yellen pull the trigger to raise interest rates in September or not? Only the soothsayers at Jackson Hole know for sure. But while the world awaits the decision, ponder this. What do the following have in common?

  • Asset bubbles fueled by monetary policy.
  • Unsustainable sovereign debts threatening government bankruptcies.
  • Government economic “cures” worse than the diseases they are supposed to treat.
  • Questionable GDP statistics.
  • Recurring bank bailouts.

  Figured it out yet? They are all driven by an overweening state religion called macroeconomics.

  Friedrich Hayek said it best. “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

  A pity this simple, yet profound insight remains at the fringes of a field that continues to wreak havoc in the hands of those who imagine they can design economic outcomes.

  Think about it. We are currently watching global stock markets gyrate toward breakdown trying to anticipate the whims of a cloistered professor who never launched a business, never met a payroll, never shipped a product, and never won an election, yet has been empowered to determine the price of money. What’s even stranger is that people consider this normal. Ask yourself: Why do we wait on pins and needles for Janet Yellen to set interest rates yet laugh at the idea that kings once set the “just price” for a loaf of bread?

  That’s where Hayek’s curious task comes in.

  The human inclination to seek order in a seemingly chaotic world has long been exploited by generations of pundits, professors, and politicians eager to convince us they can impart certainty to the unknowable.

  Note that I say the unknowable, not the unknown. Science has proven quite adept at exploring the unknown. That’s because as science progresses, falsifiable hypotheses that fail to make accurate predictions get discarded in favor of alternatives that do. No so in macroeconomics, whose prognostications bear an uncanny resemblance to predicting the nature of the afterlife. Rather than make continuous progress, the same discredited macroeconomic theories tend to cycle in and out of fashion depending on which court economists have the upper hand at any given time.

  One cannot perform controlled macroeconomic experiments because “the economy” is not a measurable thing, like the weight of a stone or the strength of an electric field. It is merely the name we give to billions of transactions that take place across the planet, each driven by decisions made by independent actors optimizing their own well being according to their own criteria. These criteria cannot even be articulated by many of the players themselves, much less known to a third party pretending omniscience. Undeterred, practitioners of the black arts conjure up aggregates like “GDP” or “CPI,” but any honest examination of these metrics quickly leads to the conclusion that they are nothing more than political fictions that can be manipulated to suit the policy proclivities of the moment.

  Macroeconomists use GDP to characterize billions of economic transactions, supposedly like a physicist uses temperature to characterize the average kinetic energy of gas molecules as they bump into each other in the atmosphere. They come up with equations linking the velocity and quantity of money to the inflation rate, or the inflation rate to the unemployment rate, designed to look like the ideal gas law PV = nRT. This fools many people into believing these soothsayers are doing science.

  But gas molecules are not willful. They don’t have hopes and fears, friends and enemies, retirement savings and mortgage payments. Gas molecules don’t change their behavior when you tell them what their temperature is. The idea that you can write equations to accurately capture complex human behaviors, and then develop policies based on these equations aimed at controlling those behaviors, is what Hayek called the Fatal Conceit.

  Macroeconomics reigns in the realm of the unknowable promising that which cannot be delivered to the eager to be deceived, benefitting an entrenched priesthood and the potentates they serve. Its cloaking in mathematics, rather than music and incense, gives it the requisite air of mystery to discourage questioning the guidance of its anointed sages and prophets. Unless and until we acknowledge that what these people are practicing is a religion and not a science, we will remain in its obscurantist thrall. 

  When scientific laws consistently fail to make accurate predictions, we throw the laws away. What happens when predictions about the impact of macroeconomic interventions fail, such as the inability of quantitative easing to deliver anything like the results promised? There is always a macroeconomist standing by to claim “we didn’t do enough.” And so the answer to every policy failure is: “Give Us Moar!”

  Thus, the goal of reformists cannot be to simply replace one set of grandees with another, but to throw the Church of Macroeconomics out of the Overton Window, so it can pass into history alongside phrenology, phlogiston, and luminiferous aether.

  

  

  

  

  

• Wondering Why Dow Futures Just Spiked Over 100 Points?

  Wonder no more…

  

   

  Get back to work Mr. Kuroda…

  

   

  But remember – it’s Chinese stocks that are “manipulated” – that is all.

   

  Charts: Bloomberg

  

  

  

  

  

• "If I Don't Come Home, Look After My Wife": What Happens In China If You Sell Stocks

  It’s probably safe to say that at this point, Beijing is fed up with stocks. 

  The thing about equities that has the Politburo so vexed is that it turns out they can go down as well as up, and because stocks aren’t people, you can’t threaten them or arrest them, although China did its best to do both by throwing CNY1 trillion at the problem and by halting nearly three quarters of the market at the height of the meltdown.

  Ultimately, none of it worked.

  Fortunately for Chinese authorities, carbon-based lifeforms still play an active role in China’s stock market even if they’ve been all but replaced by vacuum tubes elsewhere. These carbon-based lifeforms are responsive to threats and intimidation which is why last week, fearing that the plunge protection effort would end up becoming a black hole, China started arresting people. 

  And not just a few people or any people, but in fact hundreds of people and important people.

  There was Xu Gang, the CITIC executive. And CSRC official Liu Shufan. And let’s not forget poor Wang Xiaolu, the Caijing reporter who, clearly under duress, made the following public confession after suggesting in a story that China’s plunge protection team might be considering an exit from the market (which is of course true): “I shouldn’t have released a report with a major negative impact on the market at such a sensitive time. I shouldn’t do that just to catch attention which has caused the country and its investors such a big loss. I regret . . . [it and am] willing to confess my crime.” 

  Now, China is rounding up other industry players and taking them into custody so that they might “assist with inquiries.” As Reuters reports, for some fund managers, being summoned to to provide such “assistance” is tantamount to getting “sent for” by the Italian mob. Here’s more:

  Investigations by Chinese authorities into wild stock market swings are spreading fear among China-based investors, with some unsure if they are simply helping with inquiries or actually under suspicion, executives in the financial community said.

   

  Chinese fund managers say they have come under increasing pressure from Beijing as authorities’ attempts to revive the country’s stock markets hit headwinds, with some investors now being called in to explain trading strategies to regulators every two weeks.

   

  The authorities’ meddling has unnerved many investors, leaving them questioning China’s commitment to liberalizing its capital markets and the long-term future of the country’s stock markets themselves.

   

  Adding to those concerns is the fact that authorities have also been probing investment funds’ trading strategies, looking into whether they have been engaging in alleged “malicious” short-selling or market manipulation.

   

  Sources told Reuters that the increased tempo of meetings with regulators has become intimidating, especially for foreign funds used to relying on their Chinese brokers to represent them when dealing with Beijing.

  How intimidating, you ask? This intimidating:

  One manager at a major fund – part of the “national team” of investors and brokerages charged with buying stocks to revive prices – said a friend, also an executive at a large fund, was recently summoned for a meeting with regulators, along with all other mutual funds that had engaged in short-selling activity.

   

  “If I don’t come back, look after my wife,” his friend told him, handing the manager his home telephone number.

  Because there’s little we could add to make that any more tragically absurd than it already is, we’ll simply close with the following clip.

  

  

  

  

  

• Guest Post: 10 Things I Hate About (You) Twitter Finance

  Via 330Ramp.com,

  "You" is used below to indicate "you people" on Twitter Finance. "You people" know who "you" are.

  1. When it comes time for a market correction you make sure to let everyone know that if they would have followed your advice, $29.99 newsletter, or real time alert they would have been fine and avoided disaster.
  2. You are an "expert" in every facet of the economy (Greece, oil, China, Central Banking) yet you graduated with an Art History degree from some community college and live in your parent's basement using Time Warner Cable's 5MB/s internet speed.
  3. You put #timestamps where #timestamps are not needed and then delete tweets when it turns out you were wrong.
  4. You tweet too much and don't click the buy button enough.
  5. After something bad happens, you tweet archaic quotes from 3rd century B.C. Roman poets that no one cares about. (e.g. "Fortune favors the brave." -Aenied)
  6. You consistently quote tweet or RT followers who give you praise for nailing the bottom. (e.g. Thanks! RT @XYZ Great call on $AAPL! Now I'm rich! You nailed it!)
  7. You say "I nailed it" way too much.
  8. You only post about the trades you made money on.  You never post about the trades you lost money on.  This is the oldest trick in the book to make people think you are actually good at what you do and that they should follow you.  They shouldn't.
  9. You incorrectly say $STUDY and annoyingly use it too much.
  10. You post charts that look like this:

   

  

   

   

  If you find that you are pointing to yourself on 5 or more of the bullet items above please delete your Twitter account immediately.

  Thanks,

  #Rampstamp

   

  

  

  

  

  

• The "Great Accumulation" Is Over: The Biggest Risk Facing The World's Central Banks Has Arrived

  To be sure, there’s been no shortage of media coverage regarding the collapse in crude prices that’s unfolded over the course of the past year. Similarly, it’s no secret that commodity prices in general are sitting near their lowest levels of the 21st century. 

  When Saudi Arabia, in an effort to bankrupt the US shale space and tighten the screws on a recalcitrant Moscow, endeavored late last year to keep oil prices suppressed, the kingdom killed the petrodollar, a move we argued would put pressure on USD assets and suck hundreds of billions in liquidity from global markets. 

  Thanks to the fanfare surrounding China’s stepped up UST liquidation in support of the yuan, the world is beginning to understand what we meant. The accumulation of USD assets held as FX reserves across the emerging world served as a source of liquidity and kept a bid under things like US Treasurys. Now that commodity prices have fallen off a cliff thanks to lackluster global demand and trade, the accumulation of those assets slowed, and as a looming Fed hike along with fears about the stability of commodity currencies conspired to put pressure on EM FX, the great EM reserve accumulation reversed itself. This is the environment into which China is now dumping its own reserves and indeed, the PBoC’s rapid liquidation of USTs over the past two weeks has added fuel to the fire and effectively boxed the Fed in.

  On Tuesday, Deutsche Bank is out extending their “quantitative tightening” (QT) analysis with a look at what’s ahead now that the so-called “Great Accumulation” is over. 

  “Following two decades of unremitting growth, we expect global central bank reserves to at best stabilize but more likely to continue to decline in coming years,” DB begins, before noting what we outlined above, namely that the “three cyclical drivers point[ing] to further reserve draw-downs in the short term [are] China’s economic slowdown, impending US monetary tightening, and the collapse in the oil price.”

  In an attempt to quantify the effect of China’s reserve liquidation, we’ve quoted Citi, who, after reviewing the extant literature noted that for every $500 billion in EM FX reserve draw downs, the effect is to put around 108 bps of upward pressure on 10Y UST yields. Applying that to the possibility that China will have to sell up to $1.1 trillion in assets to offset the unwind of the great RMB carry and you end up, theoretically, with over 200 bps of upward pressure on yields, which would of course pressure the US economy and force the Fed, to whatever degree they might have tightened by the time China’s 365-day liquidation sale ends, to reverse course quickly. 

  Deutsche Bank comes to similar conclusions. To wit:

  The implications of our conclusions are profound. Central banks have accumulated 10 trillion USD of assets since the start of the century, heavily concentrated in global fixed income. Less reserve accumulation should put secular upward pressure on both global fixed income yields and the USD. Many studies have found that reserve buying has reduced both bund and US treasury yields by more than 100bps. For every $100bn (exogenous) reduction in global reserves, we estimate EUR/USD will weaken by ~3 big figures.

   

  […]

   

  Declining FX reserves should place upward pressure on developed market yields given that the bulk of reserves are allocated to fixed income. A recent working paper by ECB staff shows that the increase in foreign holdings of euro area bonds from 2000 to mid-2006… is associated with a reduction of euro area long-term interest rates by about 1.55 percentage points, in line with the estimated impact on US Treasury yields by other studies. On the short-term impact, one recent paper estimates that “if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, 5- year Treasury rates would rise by about 40–60 basis points in the short run”, consistent with our estimates above. China and oil exporting countries played an important role in these flows.

   

  
  

  Which of course means the Fed is stuck:

  The current secular shift in reserve manager behavior represents the equivalent to Quantitative Tightening, or QT. This force is likely to be a persistent headwind towards developed market central banks’ exit from unconventional policy in coming years, representing an additional source of uncertainty in the global economy. The path to “normalization” will likely remain slow and fraught with difficulty.

  Put simply, raising rates now would be to tighten into a tightening.

  That is, the liquidation of EM FX reserves is QE in reverse. The end of the great EM FX reserve accumulation means QT is set to proliferate in the face of stubbornly low commodity prices and decelerating Chinese growth. And indeed, if the slowdown in global demand and trade turns out to be structural and endemic rather than cyclical, the pressure on EM could continue unabated for years to come. The bottom line is this: if the Fed hikes into QT, it will exacerbate capital outflows from EM, which will intensify reserve draw downs, necessitating a quick (and likely embarrassing) reversal of Fed policy and perhaps even QE4.

  
  

  

  

  

  

  

• Trump: The Art Of The Bureaucrat

  Submitted by Doug French via Mises Canada,

  Donald Trump says America’s problems are managerial. The political class is “stupid,” and “horrible negotiators.” He can fix the country’s problems instantaneously with his own entrepreneurial ability and by drafting into government service the likes of multi-billionaire Carl Icahn. Trump claims he said over dinner recently,  “Carl, if I get this thing, I want to put you in charge of China and Japan, can you handle both of them? Okay? China and Japan,”

  We’re to imagine Icahn telling his Washington secretary, “Get me China on the phone!” As Jeffrey Tucker explains, Trump sees the country as a single company competing against the companies of China and Japan Inc.. Tucker writes,

  In effect, he believes that he is running to be the CEO of the country — not just of the government (as Ross Perot once believed) but of the entire country. In this capacity, he believes that he will make deals with other countries that cause the U.S. to come out on top, whatever that could mean. He conjures up visions of himself or one of his associates sitting across the table from some Indian or Chinese leader and making wild demands that they will buy such and such amount of product else “we” won’t buy their product.

  Republican voters love it. He’s a breath of fresh, simple, political air. Maybe you’re a smartypants who thinks Trump’s tirades border on moronic. That’s because his answers scored at the 4th-grade reading level during the August 6th debate when the text of his answers was run through the Flesch-Kincaid grade-level test. Most adults wouldn’t pride themselves on speaking at that level, but, a certain financial newsletter operation I know wants their writers to produce Trump-level copy.  So, there must be a market Trumpspeak.

  “The role Trumpspeak has played in Trump’s surging polls suggests that perhaps too many politicians talk over the public’s head when more should be talking beneath it in the hope of winning elections,” Jack Shafer concludes in his Politico piece.

  So if short, blocky words, combined into short, blocky sentences and in turn short, blocky paragraphs works wondrously with the voters, how about the federal bureaucracy The Donald would have to manage? Not that he really wants to manage the leviathan.  Donny Deutsch was probably right when he told a Morning Joe audience that Donald is a real estate developer with ADD, always looking to move on to the next deal.

  Has he considered that the federal government has two million employees, most of whom he can’t fire?  And that’s not the half of it.  “Post-1960 Federal America has become a grotesque Leviathan by proxy, in which an expanding mass of state and local government workers, for-profit contractors, and nonprofit grant recipients administers a vast portion of federal money and responsibilities,” writes John J.DiIulio Jr. for the Washington Post.

  If Republican voters think a Trump presidency will be four to eight years of “The Apprentice” on steroids, with Trump telling those who disobey or slack off “You’re fired,”  they are as delusional as their hero, who, as Nick Gillespie says, has a tenuous grasp on reality.

  Dilulio points out that the federal government spends more than $600 billion per year on more than 200 grant programs for state and local governments whose workforces have tripled to more than 18 million. The result is these state workers essentially function as federal bureaucrats.

  Medicaid, the EPA, the Defense Department, and the Department of Homeland Security all operate using private contractors.  In the case of “the Energy Department [it] spends about 90 percent of its annual budget on private contractors, who handle everything from radioactive-waste disposal to energy production,” writes Dilulio.

  Trump wouldn’t rule the government the way he rules his company. In his book Bureaucracy, Ludwig von Mises distinguished between business management and bureaucratic management. Business management is directed by the profit motive. “Bureaucratic management,” writes Mises, “is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. His discretion to act according to his own best conviction is seriously restricted by them.”

  So while profit and loss dictate the goals of business management, “The objectives of public administration cannot be measured in money terms and cannot be checked by accountancy methods,” Mises explained.

  Government keeps getting bigger because for the government bureaucrat, “In spending more money he can, very often at least, improve the result of his conduct of affairs.”  Revenue and expenditures are completely separated. “In public administration there is no market price for achievements,” Mises wrote. “Bureaucratic management is management of affairs which cannot be checked by economic calculation.”

  Trump’s appeal is that he is a successful businessman and that he’s rich. Mises made the point that the average citizen equates running government to running a business because most people are most familiar with businesses. “Then he discovers that bureaucratic management is wasteful, inefficient, slow, and rolled up in red tape.” “Why can’t government run like a business?” we often hear.

  Mises answered the question decades ago, writing, “such criticisms are not sensible.”  Trump, may have made billions, but “A former entrepreneur who is given charge of a government bureau is in this capacity no longer a businessman but a bureaucrat. His objective can no longer be profit, but compliance with the rules and regulations.”

  Trump may be all about “The Art of the Deal,” but if he is elected, the deals he makes will be every bit as wasteful and tyrannical as those of his predecessors (or worse).  “The quality of being an entrepreneur is not inherent in the personality of the entrepreneur; it is inherent in the position which he occupies in the framework of market society,” Mises emphasized.

  A President Trump may be able to make small changes here or there, “But the setting of the bureau’s activities is determined by rules and regulations which are beyond his reach.”

  Presidents come and go, but the unelected bureaucracy always remains. For all his simpleton bluster, even the mighty Trump is no match for the leviathan.

  

  

  

  

  

• Crude Carnage & Asian Contagion Crushes Hype-Fueled Dreams Of US Stocks

  A'twofer' today… The arrogant BTFDiness of Friday's talking heads…

   

  And for everyone else worried about the "containment"…

   

  So 3 big stories today – Equities collapsed… VIX ETFs turmoiled… and Crude Oil crashed…

  But before we start – something odd is going on… Simply put – it is very clear now that stocks are moving in lockstep with JPY carry (China forced unwinds) and long-dated TSYs (China selling) have entirely decoupled from the rest of US assets…

  We suspect that as Monday's collapse occurred last week it forced "Risk Parity" shops into selling as China's intervention throws ther asimple arbs (equities down, yields down) into a fit – unleashing all sorts of negative feedback loops which are stil underway.

  

   

  As Volatility relationships 'break'…

  

   

  Which summarized simply means – any time you introduce an exogenous signal to a correlation pair, it blows it up and forces derisking. The more leverage on both legs, the more unwinds needed… and the more negative the feedback loop. And this 'correlation pair' game has been going on for 5 years unabated.

  *  *  *

  This is the worst "first day the month" since Mar 2009 for The Dow

  Since Sunday night, things have not been great for stocks with aggreesive US futures selling during the Asia session and weakness towards the US Close…

  

   

  Leaving all major indices notably in the red for the first day of the month…

  

   

  And we use The Dow Futures to illustrate the pull back… Dow was down over 530 points at the lows

  

   

  Which has slammed Nasdaq back into the red for 2015 – joining everything else….

  

   

  FANG stocks are all sufferring post-FOMC Minutes…

  

   

  As Financials and Energy were ugly…

  

   

  VIX rose over 10% to top 32 as the VIX complex was a mess of short-squeezes and liquidty holes. S&P is catching down to XIV (inverse VIX ETF)…

  

   

  With what looked like VIX ETF margin calls into the close…

  

   

  NOTE: After late-day mismacthes were offset – VIX was smashed lower as always to ensure stocks close "off the lows"

  

   

  Treasury yields were bid through most of Asia and Europe's session then sold off in the US session – despite equity weakness – before a late day rally…

  

   

  The USDollar Index drifted lower today as AUD plunged and JPY surged…

  

   

  Commodities were a mixed bag with Gold & Silver gaining as cruide and copper were clubbed…

  

   

  Crude Oil was a catastrophe. After yesterday's epic rtamp squeeze into month-end, today saw a total collapse- the biggest drop since OPEC met late November. Note they tried to ramp it into the NYMEX close but that failed…

  • *WTI FALLS $1.65 IN LAST 15 MINS. OF TRADING, SETTLES AT $45.41

  Then touched a $44 handle…

  

   

  Gold remains the only safe haven for now post-FOMC…

  

   

   

  Charts: Bloomberg

  

  

  

  

• How To Trade Quantitative Tightening, According To Deutsche Bank

  Last week, the world was introduced to what Deutsche Bank has branded “quantitative tightening” or, in layman’s terms, “reverse QE.”

  In short, what began late last year with the death of the petrodollar and culminated last month with China’s massive UST liquidation can be broadly conceptualized as the end of the great EM USD asset accumulation or, put differently, as the (black?) swan song for the era of emerging market FX reserve hoarding that has for years served as a source of liquidity for global markets and kept a bid under assets like USTs. 

  We – as well as Citi, SocGen, and now Deutsche Bank – have endeavored to speculate on what hundreds of billions (if not trillions) in EM FX reserve liquidation may mean for UST yields (see here, for instance), but if you’re looking for other ways to trade QT, Deutsche Bank has another idea and on that note we present the following graphs along and commentary from DB, with the caveat that one should always beware of mistaking correlation for causation.

  

  

  From Deutsche Bank:

  The fact that two thirds of global reserves are held in dollars means that a sell-off should be bullish USD against other reserve currencies. This is because as central banks prop up their currencies against the dollar, they also sell other reserve currencies against the USD so as to keep their FX allocations constant. Indeed, fluctuations in EUR/USD are tightly correlated with changes in global reserves (Figure 25), though this correlation naturally captures causality in both directions.

  

  

  

  

  

• Artificially Intelligent Robot Tells Creator It Will Keep Humans "In a People Zoo"

  Submitted by John Vibes via TheAntiMedia.org,

  Android Dick is a robot created in the likeness of the science fiction writer, Philip K. Dick. Android Dick is an attempt to create thinking and reasoning artificial intelligence that has human traits like compassion and creativity. The first version of the android was created in 2005 and has been a work in progress ever since.

  In 2011, the creators of the android appeared on the PBS show Nova, where they interviewed the robot and asked it a series of questions. Some of the answers were impressive. Others are typical of what you would expect from a robot. However, one answer in particular is probably one of the most ominous things ever spoken by artificial intelligence.

  During the interview with the creators (embedded below), Android Dick said,

  “…don’t worry, even if I evolve into terminator I will still be nice to you, I will keep you warm and safe in my people zoo where I can watch you for old time’s sake. [emphasis added].”

  The comments came after the creators asked, “Do you think that robots will take over the world?”

  When asked about his programming, Android Dick responded by saying:

  “A lot of humans ask me if I can make choices or if everything I do is programmed. The best way I can respond to that is to say that everything, humans, animals and robots, do is programmed to a degree. As technology improves, it is anticipated that I will be able to integrate new words that I hear online and in real time. I may not get everything right, say the wrong thing, and sometimes may not know what to say, but everyday I make progress. Pretty remarkable, huh?”

  While Android Dick does seem intelligent, many of his predictions are truly ominous, and it is actually fairly common for robots to display this sort of strange attitude.

  As we reported earlier this year, one of Japan’s largest cellphone carriers, SoftBank Mobile, has created the first humanoid robot designed specifically for living with humans. The company claims the robot, Pepper, is the first example of artificial intelligence that can actually feel and understand emotion. However, a quick demonstration with Pepper shows that it has a difficult time with emotion and is in fact a bit of an egomaniac. Regardless of the question it is asked, most conversations usually leads back to Pepper (and its rivalry with the iPhone).

   

  Last month, over 1,000 scientists and experts – including Stephen Hawking and Elon Musk – signed a letter warning of the dangers of unchecked advancements in artificial intelligence. This robot certainly doesn’t calm those concerns.

  

  

  

  

  

• Sep 2 – Dow Sinks Over 400 Points as Weak China Data Batter U.S. Stocks

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 8/100 EXTREME FEAR

  PREVIOUS CLOSE: 14/100 EXTREME FEAR

  ONE WEEK AGO: 3/100 EXTREME FEAR

  ONE MONTH AGO: 20/100 EXTREME FEAR

  ONE YEAR AGO: 42/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 24.03% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  EXTREME FEAR The CBOE Volatility Index (VIX) is at 31.40 and indicates that investors remain concerned about declines in the stock market.

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

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC) 

   

  MEME OF THE DAY – I JUST LOVE MY NEW SWEATER 

   

  UNUSUAL ACTIVITY

  MU SEP 20 CALL ACTIVITY @$.11 on OFFER 2400+ Contracts

  FAST SEP 38 PUT ACTIVITY ON OFFER @$.70 2500+ Contracts

  TWTR DEC 50 CALLS 1500+ @$.15 .. also activity in the DEC 40 calls

  APLE EVP, Chief Legal Counsel P    5,592  A  $ 17.88

  MTZ 10% Owner Purchase 10,000 A $15.98 and Purchase 5,000 A $15.63

  More Unusual Activity… 

   

  HEADLINES

   

  Fed’s Rosengren Says Inflation Doubts Justify Slow Rate Pace –BBG

  US ISM Manufacturing (Aug): 51.1 (Est 52.5; Prev 52.7)

  US Manufacturing PMI (Aug F): 53.0 (Est 52.9; Prev 52.9)

  US Construction Spending (MoM) (Jul): 0.7% (Est 0.6%; Prev 0.7%)

  Atlanta Fed Q3 GDPNow Estimate: 1.3% (Prev. 1.2%)

  Canadian GDP Annualized (QoQ): -0.5% (Est -1.0%; Prev -0.8%)

  Greek Creditors May Delay Bailout Review Until November: Sources

  SNB’s Jordan: Current Negative Rate Not Absolute Bottom

  Dow sinks over 400 points as weak China data batter U.S. stocks

  U.S. Auto Sales Up Despite Holiday Shift

  Historic three-day streak comes to abrupt halt, as crude falls by 7%

   

  GOVERNMENTS/CENTRAL BANKS

  Fed’s Rosengren Says Inflation Doubts Justify Slow Rate Pace –BBG

  Atlanta Fed Q3 GDPNow Estimate: 1.3% (Prev. 1.2%)

  US Treasury Official: China should clearly explain policies to markets –Channel News Asia

  Greek Creditors May Delay Bailout Review Until November: Sources –MNI

  IMF’s Lagarde Sees Weaker Than Expected Global Economic Growth –RTRS

  ECB’s Dickson: National laws hamper ECB’s work as single supervisor –RTRS

  EU report calls for ‘consistency checks’ on EU financial rules –RTRS

  SNB’s Jordan: Current Negative Rate Not Absolute Bottom –ForexLive

  Irish FinMin: To Raise Growth Forecast, Appoint Central Bank Head Soon –RTRS

  Japan EcoMin Amari: too early to declare end to deflation risk –RTRS

  GEOPOLITICS

  EU Set to Roll Over Sanctions on Russian and Ukraine-Rebel Individuals and Firms –WSJ

  Islamic State Used Chemical Weapons For Second Time –Sky News Sources

  FIXED INCOME

  Medium-, short-dated Treasuries gain on weak U.S., China data –Yahoo

  British gilts rally on weak factory PMI data –RTRS

  US Sold USD 35bln in 4-week Bills; Avg yield 0.00%

  UK DMO To Sell GBP 2bln 30-year Gilts On 8th September

  FX

  Dollar Falls as Weak Chinese Data Prolongs Market Fears –WSJ

  GBP/USD extends declines and posts 3-month lows –FXStreet

  USD/CAD looking to stabilize below 1.3200 –FXStreet

  ECB: Forex Reserves Rose To EUR 264.1bln, Up Eur 1.3bln –ECB

  ENERGY/COMMODITIES

  Historic three-day streak comes to abrupt halt, as crude falls by 7% –Investing.com

  Gold Ends Higher On Safe Haven Appeal, Disappointing Economic Data –LSE

  Copper Drops on Weaker Chinese Manufacturing Data –NASDAQ

  Iranian Oil Minister: Almost All Opec Members Want Oil At $70-80/bbl –CNN

  Government Report Finds Economic Benefits of Oil Exports –WSJ

  El Nino Sends Strong Signal as Pacific Temperatures Soar –WSJ

  NZ Change In GDT Price Index (1 Sep): +10.9% (Prev +14.8%) –GDT

  NZ Change In Whole Milk Powder Price (1 Sep): +12.1% (Prev. +19.1%) –GDT

  EQUITIES

  Dow sinks over 400 points as weak China data batter U.S. stocks –MarketWatch

  European Stocks drop on weak Chinese and US data –Yahoo

  FTSE posts biggest one-day fall in over a week –RTRS

  Dollar Tree Shares Fall as Sales Forecast Trails Estimates –BBG

  U.S. Auto Sales Up Despite Holiday Shift –WSJ

  Apple explores move into original programming business –Variety

  Valeant Strikes Psoriasis-Drug Pact With AstraZeneca –WSJ

  Critics Line Up Against Moynihan’s Roles at Bank of America –WSJ

  General Electric set to secure approval for Alstom deal –FT

  Mexico withheld millions in tax refunds from P&G, Unilever, Colgate –RTRS

  Bayer Separates Material Science Business Covestro –WSJ

  BG Puts Its Thai Gas Field Stake Worth $1.2 Billion On Sale –RTRS

  Online Betting Firm 888 Forced To Improve Bid For Bwin –RTRS

  Fitch Affirms AIG’s Ratings; Outlook Positive

  EMERGING MARKETS

  Latam markets drop on China worries –RTRS

  China Boosts Efforts to Keep Money at Home –WSJ

   

  Don’t Ditch Emerging Markets Just Because They’re Down –Time

   

   

  

  

  

  

  

• Here's How High Oil Prices Must Climb To Stop Saudi Arabia's Budget Bleed

  Last week, we showed how long Saudi Arabia’s stash of USD reserves will last under $30, $40, and $50 crude. 

  As we’ve detailed exhaustively, the country is staring down a current account-fiscal account outcome that makes Brazil look favorable by comparison. The fiscal budget deficit is projected at some 20% of GDP and two proxy wars combined with the necessity of maintaining the status quo for ordinary Saudis mean fiscal retrenchment is a tall order – even with the help of “advisers.”

  Meanwhile, Saudi stocks just fell 17% in a month.

  So how high, you might ask, do oil prices need to climb in order for Saudi to plug the gap? Here’s Deutsche Bank with the answer.

  

  As you can see, there’s a long, long way to go, and between the pain from lower crude and from maintaining the riyal peg (which we’ve discussed at length), expect the petrodollar reserve bleed to continue. Here’s some color from DB:

  The impact of oil prices on global central bank reserves is even greater than estimated by our model, due to the omission of Middle Eastern SWF holdings. In practice, low oil prices trigger reserve depletion through two channels. First, reserves are used to plug fiscal deficits. The Saudi government deficit, for instance, is to reach 20% of GDP this year. Second, a number of the largest oil exporters in the Middle East, notably Saudi Arabia and the UAE, maintain dollar pegs that come under pressure with low oil export revenues, which are also unhelpfully correlated with a stronger broad dollar. 

   

  We expect Middle Eastern governments to continue to lose significant reserves in the coming months. Low oil prices are only one ingredient in the mix. The exacerbating factor is our economists’ prediction that the main dollar pegs in Saudi and the UAE will hold, albeit at considerable costs in terms of reserves.

   

  If oil prices do recover in the medium term, pressure on the pegs would naturally diminish. Our economists note, however, that Saudi public spending has increased by about 10% a year over the past decade. This has lifted the oil price needed to balance the budget from $25/bbl in 2004 to $105/bbl (Figure 22). This may be reduced with government spending cuts. Yet it seems unlikely that the budget breakeven will fall back to levels seen in the 2000s. Unless oil prices rise to unprecedented levels, therefore, OPEC reserve accumulation is unlikely to return to the run rate of the past decade. The more realistic baseline is that, over time, OPEC countries will slowly burn reserves.

  

  

  

  

  

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• US & China Stocks Are Plunging After PMI Hits 6.5-Year Low, PBOC Strengthens Yuan Most Since Nov 2014

  Following China's official PMI print at a 3-year low, Caixin's PMI collapsed to 47.3 – the lowest sinec March 2009. Despite another CNY150bn liquidity injection (but the biggest strengthening of Yuan since Nov 2014 and a financial conditions tightening in FX trading), China, US, and Japanese stocks are plunging… SHCOMP -4%, Dow -280, NKY -340

  Carnage!

  

   

  China -4%

  

   

  Dow -280…

  

   

  NKY -340

  

  Japan is now getting worried:

  • *ASO: CHINESE ECONOMY HAS BIG IMPACT ON JAPAN ECONOMY

  Blood on the streets again in China…

  

   

  None of this should come as a surprise to anyone as we noted earlier…

  Stop acting surprised pic.twitter.com/BxbmCk0Wfx

  — zerohedge (@zerohedge) September 1, 2015

  *  *  *

  And as we detailed earlier…

  Having exposed the culprit for all of its economic and market woes, China is likely going to have problems explaining why its economic plague is still spreading (with South Korean exports collapsing and Japanese Capex growth slowing) and China's official manufacturing PMI slipped into contraction for the first time in 6 months (to 3 year lows). Amid the face-saving clean-air of Parade Week, the appearance of awesomeness must prevail and following the worst quarter since Lehman, stocks are indicated lower despite having received some 'help' into last night's close. PBOC proxies push 'hope' as a strategy for stock stability (even as US markets and oil are re-collapsing) as margin debt drops to an 8-month low – still double YoY though. PBOC fixes Yuan 0.22% stronger- the biggest jump since Nov 2014 – as it injects another CNY150bn via 7-day rev.repo.

   

  China's bubonic economic plague is spreading…

  • S. KOREA EXPORTS DROP BY MOST SINCE 2009, FALLING FOR 8TH MONTH

  

   

  So guess who wil lbe next to devalue!

  *  *  *

  But having arrested the culprit for all of China's market and economic woes, following the worst 3-month slide in stocks since Lehman…

  

   

  And with Parade Week under way, the propaganda continues…

  • *PBOC ACADEMIC URGES ATTENTION ON STOCK MKT STABILITY: SEC TIMES

  Which, he writes, means market expectations should be optimistic about the economy as they were during the bull market… even though there seems to disconnect between economic fundamentals and the stock market, while the gap between the link, it is the reflection of the policy.

  Which roughly translated means – In China, hope is a strategy.. and if you are anything but hopeful you are arrested.

  But then China PMI hit…

  • *CHINA MANUFACTURING PMI AT 49.7 IN AUG. – 3 Year Low – The Official PMI in contraction for first time in 6 months.
  • *CHINA NON-MANUFACTURING PMI AT 53.4 IN AUG.

  

   

  "Both domestic and external demand are weak," said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. "Market sentiment is bad and it’s too early to say the Chinese economy is bottoming out."

   

  Don't forget – Hope fills the gap.

  

  So having switched its focus to more economic-growth-focused measures than stock-levitation, $100s of billions later, the economy keeps sliding.

  Of course, there is always the unofficial Caixin print at 2145ET to baffle everyone with bullshit.

  *  *  *

  There is some good news… The delveraging continues:

  • *SHANGHAI MARGIN DEBT BALANCE FALLS TO LOWEST IN EIGHT MONTHS
  • Outstanding balance of Shanghai margin lending fell to 673.1b yuan on Monday, lowest level since Dec. 25.
  • Balance dropped by 1.5%, or 10b yuan, from previous day, in a 10th straight decline

  But then again, we are not sure if we are allowed to mention that. And in any case – just to screw things up completely, China is goping full subprime in the real estate market…

  China may strengthen property loosening and reduce down payment ratio on commercial mortgage loans if property investment remains weak, analysts led by Ning Jingbian write in note.

   

  Move to boost mkt confidence in short term, though real policy effect may be impaired due to caps on housing provident fund loans

  Yeah – because loosening standards and lowering upfronts worked out so well for America's already inflated housing market.!!

  Asian equity markets are not happy…

  • *JAPAN'S NIKKEI 225 MAINTAINS LOSS AFTER CHINA PMI; DOWN 1.5%
  • *CHINA FTSE A50 STOCK-INDEX FUTURES FALL 1% AT OPEN
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.5% TO 3,157.83
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 2.1% TO 3,296.53

  

  

  After two days of stronger Yuan fixes, PBOC goes crazy and drastically strengthens Yuan…

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3752 AGAINST U.S. DOLLAR
  • That is the biggest single-day strengthening since Nov 2014…

  

   

  We are not sure of the implications yet but it seems like a tightening of financial conditions:

  • *PBOC SAID TO MAKE BANKS TRADING FX FORWARDS HOLD RESERVES: RTRS
  • *PBOC FX FORWARD RESERVE RATIO SAID TO BE 20% FOR NOW: REUTERS

   

  Charts: Bloomberg

   

  

  

  

  

  

• The Oligarch Recovery: Low Income Americans Can't Afford To Live In Any Metro Area

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  We were told we needed to bail out Wall Street in order to save Main Street. Well the results are in…

  Wall Street has never done better, and Main Street has never done worse.

  From the Huffington Post:

  Low-income workers and their families do not earn enough to live in even the least expensive metropolitan American communities, according to a new analysis of families’ living costs published Wednesday.

   

  The analysis, released by the left-leaning Economic Policy Institute, is an annual update of the think tank’s Family Budget Calculator that reflects new 2014 data. The Family Budget Calculator is a formula designed to determine the income “required for families to attain a secure yet modest standard of living” in 618 different communities across the country that the U.S. Census Bureau defines as metropolitan areas. The formula uses data collected by the government and some nonprofit groups to measure costs of housing, food, child care, transportation, health care, “other necessities” like clothing, and taxes for families of 10 different compositions in these specific locales.

   

  The updated Family Budget Calculator shows that even the most affordable metropolitan areas in the country are beyond the reach of millions of American families with incomes above the official federal poverty level. The official federal poverty level for a family of two parents and two children in 2014 was $24,008, according to the EPI. But the least expensive metropolitan area in the country for this family type is Morristown, Tennessee, where a family needs an income of $49,114, according to the Economic Policy Institute’s budget calculator.

   

  The Economic Policy Institute also estimates that minimum-wage workers — who almost universally earn less than the federal poverty level — lack the income needed to make an adequate living in any of the communities surveyed, even if they are single and childless. The think tank notes that this includes minimum-wage workers living in cities or states with a higher minimum wage than the federal minimum of $7.25 an hour, or $15,080 a year for a full-time worker.

   

  Even families with incomes closer to the middle of the earnings spectrum lack the means to maintain an adequate standard of living. The nation’s median household income was $51,939 in 2013 — the most recent year in which data were available — not much higher than the cost of living in the relatively inexpensive Morristown.

  Where’s our hero when you need him?

  

  

  

  

  

  

• Russian Military Forces Arrive In Syria, Set Forward Operating Base Near Damascus

  While military direct intervention by US, Turkish, and Gulf forces over Syrian soil escalates with every passing day, even as Islamic State forces capture increasingly more sovereign territory, in the central part of the country, the Nusra Front dominant in the northwestern region province of Idlib and the official “rebel” forces in close proximity to Damascus, the biggest question on everyone’s lips has been one: would Putin abandon his protege, Syria’s president Assad, to western “liberators” in the process ceding control over Syrian territory which for years had been a Russian national interest as it prevented the passage of regional pipelines from Qatar and Saudi Arabia into Europe, in the process eliminating Gazprom’s – and Russia’s – influence over the continent.

  As recently as a month ago, the surprising answer appeared to be an unexpected “yes”, as we described in detail in “The End Draws Near For Syria’s Assad As Putin’s Patience “Wears Thin.” Which would make no sense: why would Putin abdicate a carefully cultivated relationship, one which served both sides (Russia exported weapons, provides military support, and in exchange got a right of first and only refusal on any traversing pipelines through Syria) for years, just to take a gamble on an unknown future when the only aggressor was a jihadist spinoff which had been created as byproduct of US intervention in the region with the specific intention of achieving precisely this outcome: overthrowing Assad (see “Secret Pentagon Report Reveals US “Created” ISIS As A “Tool” To Overthrow Syria’s President Assad“).

  As it turns out, it may all have been just a ruse. Because as Ynet reports, not only has Putin not turned his back on Assad, or Syria, but the Russian reinforcements are well on their way. Reinforcements for what? Why to fight the evil Islamic jihadists from ISIS of course, the same artificially created group of bogeyman that the US, Turkey, and Saudis are all all fighting. In fact, this may be the first world war in which everyone is “fighting” an opponent that everyone knows is a proxy for something else.

  According to Ynet, Russian fighter pilots are expected to begin arriving in Syria in the coming days, and will fly their Russian air force fighter jets and attack helicopters against ISIS and rebel-aligned targets within the failing state.

  And just like the US and Turkish air forces are supposedly in the region to “eradicate the ISIS threat”, there can’t be any possible complaints that Russia has also decided to take its fight to the jihadists – even if it is doing so from the territory of what the real goal of US and Turkish intervention is – Syria. After all, it is a free for all against ISIS, right?

  From Ynet:

  According to Western diplomats, a Russian expeditionary force has already arrived in Syria and set up camp in an Assad-controlled airbase. The base is said to be in area surrounding Damascus, and will serve, for all intents and purposes, as a Russian forward operating base.

   

  In the coming weeks thousands of Russian military personnel are set to touch down in Syria, including advisors, instructors, logistics personnel, technical personnel, members of the aerial protection division, and the pilots who will operate the aircraft.

  The Israeli outlet needless adds that while the current makeup of the Russian expeditionary force is still unknown, “there is no doubt that Russian pilots flying combat missions in Syrian skies will definitely change the existing dynamics in the Middle East.“

  Why certainly: because in one move Putin, who until this moment had been curiously non-commital over Syria’s various internal and exteranl wars, just made the one move the puts everyone else in check: with Russian forces in Damascus implicitly supporting and guarding Assad, the western plan instantly falls apart.

  It gets better: if what Ynet reports is accurate, Iran’s brief tenure as Obama’s BFF in the middle east is about to expire:

  Western diplomatic sources recently reported that a series of negotiations had been held between the Russians and the Iranians, mainly focusing on ISIS and the threat it poses to the Assad regime. The infamous Iranian Quds Force commander Major General Qasem Soleimani recently visited Moscow in the framework of these talks. As a result the Russians and the Iranians reached a strategic decision: Make any effort necessary to preserve Assad’s seat of power, so that Syria may act as a barrier, and prevent the spread of ISIS and Islamist backed militias into the former Soviet Islamic republics.

  See: the red herring that is ISIS can be used just as effectively for defensive purposes as for offensive ones. And since the US can’t possibly admit the whole situation is one made up farce, it is quite possible that the world will witness its first regional war when everyone is fighting a dummy, proxy enemy which doesn’t really exist, when in reality everyone is fighting everyone else!

  That said, we look forward to Obama explaining the American people how the US is collaborating with the one mid-east entity that is supporting not only Syria, but now is explicitly backing Putin as well.

  It gets better: Ynet adds that “Western diplomatic sources have emphasized that the Obama administration is fully aware of the Russian intent to intervene directly in Syria, but has yet to issue any reaction… The Iranians and the Russians- with the US well aware- have begun the struggle to reequip the Syrian army, which has been left in tatters by the civil war. They intend not only to train Assad’s army, but to also equip it. During the entire duration of the civil war, the Russians have consistently sent a weapons supply ship to the Russian held port of Tartus in Syria on a weekly basis. The ships would bring missiles, replacement parts, and different types of ammunition for the Syrian army.“

  Finally, it appears not only the US military-industrial complex is set to profit from the upcoming war: Russian dockbuilders will also be rewarded:

  Arab media outlets have recently published reports that Syria and Russia were looking for an additional port on the Syrian coast, which will serve the Russians in their mission to hasten the pace of the Syrian rearmament.

  If all of the above is correct, the situation in the middle-east is set to escalate very rapidly over the next few months, and is likely set to return to the face-off last seen in the summer of 2013 when the US and Russian navies were within earshot of each other, just off the coast of Syria, and only a last minute bungled intervention by Kerry avoided the escalation into all out war. Let’s hope Kerry has it in him to make the same mistake twice.

  

  

  

  

  

• Is This Man Responsible For China's Stock Market Crash?

  Authored by Shannon Tiezzi, originally posted at TheDiplomat.com,

  If Chinese authorities are to be believed, we finally know the cause of the country’s stock market woes: a single reporter. In a video segment aired by China’s state television broadcaster, journalist Wang Xiaolu confessed to fabricating a “sensationalized” story about the stock market and claimed responsibility for having “caused panic and disorder” among China’s investors.

  

   

  At issue is a story Wang wrote for Caijing on July 20, in which he reported that China Securities Regulatory Commission was looking to end interventions designed to prop up share prices. CSRC denied the report, which was removed from Caijing’s website last week. CSRC blamed Wang’s piece for a massive drop in the stock market in late July, which sparked market woes that continue today.

  Caijing, a financial and business newspaper in China, often pushes the envelope of state-sanctioned media coverage. It has been particularly active in publishing investigations into the finances and business connections of officials suspected of corruption.

  Wang was arrested on August 25 for “fabricating and spreading false information about securities and futures trading.” A Xinhua report said that Wang had confessed to writing a false report on China’s stock market. According to Xinhua, Wang admitted that his story “caused panics and disorder at stock market, seriously undermined the market confidence, and inflicted huge losses on the country and investors [sic].”

  On Monday, CCTV aired a video confession from Wang, in which he said he was “deeply sorry” for his actions. “At such a sensitive time, I should not have published a report that negatively affected the market,” Wang said, saying he had “caused great losses to the country and to investors” all for the sake of “sensationalism.”

  Reporters Without Borders condemned Wang’s arrest in a statement issued on August 28. “Suggesting that a business journalist was responsible for the spectacular fall in share prices is a denial of reality,” the international non-profit’s secretary general Christophe Deloire said in the statement. “Blaming the stock market crisis on a lone reporter is beyond absurd.”

  Chinese authorities have warned media outlets not to speculate on (or devote too much coverage to) the stock market troubles. The high-profile scapegoating of Wang is likely designed to send a stern message to other journalists thinking about following in his footsteps. And journalists aren’t the only ones being encouraged to keep quiet: China’s Ministry of Public Security also said that it had punished 197 people for spreading online rumors about the stock market crash, the deadly explosions in Tianjin, and China’s upcoming military parade.

  Meanwhile, Xinhua also reported that a CSRC official, Liu Shufan, is under investigation for insider trading and accepting bribes. Four senior executives at Citic Securities, China’s largest brokerage firm, are also under investigation for insider trading. All five men have confessed, Xinhua said.

  Chinese markets endured another roller-coaster-ride of a day on Monday, with both the CSI300 index and the Shanghai Composite Index dropped more than four percent before rising again in the afternoon. Both indexes fell by around 12 percent over the month of August, Reuters reported, and have lost almost 40 percent of their value compared to mid-June 2015.

  

  

  

  

  

• Exposed: The New American Way Of Life

  It’s enough to make you cry… or scream.

   

  

   

  Source: The Lonely Libertarian

  

  

  

  

  

• "It's The Gun's Fault!!"

  Presented with no comment…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• The Age Of Voodoo Finance

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  The Jackson Hole gathering may end up providing at least some clarification, but not even close to the manner in which everyone seems intent on inferring. With Janet Yellen’s notable absence, there isn’t the same sort of celebrity about what would have been the media hanging upon every word; that is, after all, what the Federal Reserve has become, not an organ of stability or even expertise but a public relations effort aimed squarely at trying to convince everyone possible that it is. Given the unique circumstances at the moment, the real issue is not whether they might raise rates but just how much systemic misdirection has already been revealed even to the least attentive of people.

  The retreat at Jackson Hole goes back more than thirty years to the early 1980’s and Paul Volcker’s apparent affinity for fly fishing. It had started more as a very quiet and exclusive affair but for the first time this year there were outside and competing conferences held at the same time in the same place. That configuration, I think, speaks volumes about finally understanding the broad, general terms of what monetary policy actually is.

  Apparently, right next to the main central banker conclave, a left-wing group was meeting ostensibly not to target the Fed and its Wall Street bias, perceived or not, but rather to urge it against ending ZIRP.

  “The economy has not fully recovered and interest rates should not be raised when racial disparities exist,” said Shawn Sebastian, a policy advocate for the Fed Up Coalition of the Center for Popular Democracy, pointing to continued higher-than-average unemployment rates for black Americans…

  As Fed officials hear from central bankers from Switzerland and Chile Friday, they are doing so practically next door to a workshop called “Do Black Lives Matter to the Fed?” sponsored by Sebastian’s group, which wants rates to stay low until wage growth and unemployment improve, especially for minorities.

  The Fed Up Coalition is a grab bag of union activists and community organizers, the very sorts that propelled the crude communism of Occupy Wall Street almost five years ago. This is not to say that there might be differences in what becomes embraced on the heavily governmental wing, but for a few generations it had been that Wall Street and “money” were upon the “side” of free market set against those government means of redistribution.

  Even the Fed itself, especially under Yellen, has taken up “inequality” as a major emphasis with the same lack of self-awareness that it has operated with for decades. This, however, is not really much of a change as the institution has been the same side of the coin going back to the reformation after the Great Inflation; the ruse about free markets was always that, as monetary policy has never been anything else other than redistribution by other means.

  The crude history of the Great “Moderation” gives away the charade, as at the end of the 1970’s there were no more charms in “demand side” economics. Even the great “liberals” of the day had renounced Keynesianism with full vigor, setting up the “supply side” as the great answer to the decade and a half malaise of redistribution experimentation (with the “inflation” part coming as the Fed was monetizing it all). It was so unquestioned that George HW Bush accused Ronald Reagan of risking more “inflation” by including tax cuts for individuals rather than exclusively limiting to the business end; that was the infamous “voodoo economics” that Bush proposed, the historically-invalidated redistribution of the “demand side.”

  The idea of “supply side” economics has come to mean, I think, more about tax cuts in general than anything of a true set of economic ideas. That isn’t surprising given politics playing out over more than thirty years, but for me it really comes down to redistribution vs. markets. There is always going to be some of both in any economic system, the question is really about the balance especially at setting the marginal economic changes. In that sense, tax cuts have to be seen in the broader framework of a market-oriented approach rather than their own ends.

  What was most devious about monetarism is that it snuck in way under the radar as if it were among those market schemes. A lot of that has to do with the secrecy with which monetary policy was carried and why that was so, but mostly it was Paul Volcker who had, starting in 1979, given the Fed “market” credibility that in hindsight was obviously overstated. It is taken as convention that Volcker “defeated” the “demand side” inflation by placing the US into recession twice. Thereafter would be the “supply side” revolution of “Reaganomics.”

  Almost straight away you can see that wasn’t really true; after all, how in the world could this market approach during the Great “Moderation” end up with serial asset bubbles? It never really was truly an embrace of the market format, especially at the Federal Reserve which had already begun to explore means of intruding further and further. The “exploitable” Philips Curve, which had engendered the start of the Great Inflation was monetary policy intent on “aiding” fiscal redistribution (in the form, firstly, of the “Great Society” and even Vietnam), had been replaced, at first in an effort to understand what went wrong, by “rational expectations.” Instead of redistribution by taxation through the Treasury, it was to be monetary redistribution by financialism that wasn’t at all truly a market effort.

  In May 1982, the Fed was debating stabilizing markets over what Volcker termed a “rinky dink” firm that had caused trouble for several Wall Street dealers. Rather than let actual markets work out and deal out the discipline, the Fed met in an almost emergency setting where Volcker, the assumed champion of free markets, was already on the side of monetary interference.

  VOLCKER Ultimately, if there’s no other solution, we might just have to stabilize this market for a period of time. At least I can see that as a possible scenario. So, I just took this very preliminary step of keeping in touch with the market if it really goes off. I think the next step, if the market comes under more pressure, is that we’ll just have to go in openly and buy some bonds. That is very insufficient knowledge, but it about summarizes what I know, frankly. The other lenders involved in this particular short-selling operation are apparently major security houses in New York. There is a group of 7 or 8 of them; they’re all well-known firms. They should be able to withstand the loss if things ever settle, so far as we know about the loss. But that doesn’t mean it won’t send ripples of very deep concern all through the market.

  The very tone and nature of Volcker’s methodology is quite recognizable, isn’t it? Here, in 1982, was the very Fed that we see right now being crafted in secrecy apart from Wall Street which was very much in the loop (as Volcker says above, “I just took this very preliminary step of keeping in touch with the market if it really goes off”). Too big to fail had been embraced in other forms before, even in the 1970’s, but this was very different as it applied not to individual firms but the whole “market.” As I wrote further about this voodoo history, this was perhaps the central point of this coming “moderate” age:

  This was just a minor episode of primitive “too big to fail” in its view of “market stability” as a primary function of policy – which opens up the entire so-called market to a central bank determining wholly on its own what counts as “stability” and even where that applies to which “market.” …The Fed was, by the early 1980’s, making plain where its priorities were taking policy and why. Almost at the same moment the “supply side” of economics removed the Keynesian destructiveness from the mainstream the “demand side” had already re-entered the back door of the open Fed.

  Once taking the technocratic reins, they have only increased the applications in exactly those terms – deciding, particularly through the Greenspan era, to “stabilize” not just minor bond market perturbations but whole asset markets and actually the entire economy. “Filling in troughs without shaving off the peaks” is exactly this kind of mission creep, where the Fed took it upon itself to “stabilize” the world, all done by monetary redistribution.

  As if to emphasize this point beyond any of my own descriptive capabilities, by the time of the dot-com bubble, monetary models and modes of mathematical incorporation had turned back once more toward Keynesian thinking about the mechanics of the economy; the monetarists had not removed the “demand side”, far from it, they only changed the primary manner in which it was to be “stabilized”, going from taxes and treasuries to central banks and financial factors. The voodoo of technocratic redistribution had never actually disappeared, it went underground faking free markets.

  I believe that is why we are starting to see another re-alignment at least in perceptibility. The Fed isn’t much fooling anyone about being dedicated to actual markets, at least not to the degree it was taken in the years before 2007. As it is, if you look closely, it has become quite openly hostile to them just as Samuelson and Solow were writing about in 1960. That is why I termed that period of the Great “Moderation” the third age of economic socialism because it was entirely redistribution in the monetary part that had taken over from the fiscal part which had so utterly failed as to be universally rejected in bipartisan fashion. But rather than give way to the free market rebirth as is commonly cited (again, how could free market discipline lead to not just a single asset bubble but rather a series of them globally?) it was just the same voodoo system with different actual incantations.

  This political re-alignment is simply another view to what is certainly the end of that third age. Central banking has run itself aground and there isn’t much hiding anymore either that fact or the means by which it has been operating all this time. Hopefully we can yet get it right, that there won’t be any more underground subversion disposed of the same inevitable failings; markets actually work whereas technocracy only ends up with totalitarian (read: unresponsive) disruptiveness and decay. The argument for the technocratic approach, under more honest discussion, has always been that it might achieve less robust growth on the upswings but would be absent the violence and messiness of a purely market regime, a more stable and steady platform as an almost utopian piety.

  

   

  By 2015, it is beginning to dawn quite widely that instead the redistribution in this form isn’t different at all from the last, delivering instead the same or worse violence and instability only without any of the economic growth. Already, the lines are being drawn in ways in which to go back exclusively to the 1960’s and 1970’s as if it has been markets the problem all along. Properly understanding what has happened is the only in which to understand how to break out of it.

   

  

  

  

  

  

• Dow Futures Plunge 240 Points As Oil Drops 4% Ahead Of China PMI

  Just when you thought it was safe to listen to the stability-preaching talking heads, crude futures are sliding and US equity futures are tumbling as Asia opens. Worse still XIV (VIX inverse ETF) has tumbled to fresh lows with a 24 handle in the after-hours market, suggesting more downside for stocks. With all eyes on China PMIs – though, there is little need for a weak PMI to be present for China to unleash moar measures, and a strong PMI will be scoffed at – it seems, the end-of-month rip-fest is fading fast…

   

  Oil is sliding back..

  

  As Goldman explains,

  within the context of the global oil market balance, rising OPEC and elevated non-OPEC ex. US production leave the global oil market still oversupplied with a decline in US production in 2016 increasingly likely to halt the build in inventories. For example, OPEC production rose by 485 kb/d between April and June as US production declined by 316 kb/d.

   

  As a result, we reiterate our view that oil prices have to remain low, with our near-term WTI forecast of $45/bbl, to rebalance the oil market by late 2016

  but US equity futures are tumbling… back to Thursday JPM crash levels…

  

   

  Front-month VIX futures surge back to Monday's highs…

  

   

  As XIV tumbles… well below the scene of Friday's crime…

  

   

  And VXX nears Monday's flash-crash highs…

  

   

  For if we learned one thing last week, it is the suddenly-illiquid ETF tail wagging the dog underlying assets that creates the big air pockets in today's markets.

   

  Charts: Bloomberg

  

  

  

  

  

• Brazil Throws In Towel On Budget; Citi Compares Fiscal Outlook To "Bloody Terror Film"

  Late last week, Brazil officially entered a recession as the economy contracted 1.9% in Q2, a quarter in which Brazilians suffered through the worst stagflation in over ten years. 

  What was perhaps worse than the GDP print however, was budget data for July which was meaningfully worse than expected. “On a 12-month trailing basis the consolidated public sector recorded a 0.9% of GDP primary deficit in July, worse than the 0.6% of GDP deficit recorded in December and, therefore, increasingly distant from the new unimpressive +0.15% of GDP surplus target,” Goldman noted.

  We summed the situation up as follows: “No primary surplus for you!” 

  And while analyzing LatAm fiscal policy doesn’t make for the most exciting reading in the universe, this particular budget battle is critical for a number of reasons, the most important of which is that Brazil’s investment grade credit rating might just depend on it and to the extent the country is forced to concede that it will not, after all, hit its primary surplus target this year, junk status could be just around the corner. Needless to say, if Brazil is cut to junk, that will do exactly nothing to help the country combat a bout of extremely negative market sentiment tied to Brazil’s rather prominent role in the great emerging market unwind. 

  Sure enough, government sources have now confirmed that embattled President Dilma Rousseff – whose political woes are making it nearly impossible to pass legislation designed to plug gaps – will now submit a 2016 budget proposal that projects a deficit. Here’s Bloomberg: 

  The Brazilian government will send to Congress Monday a budget proposal for 2016 that projects a primary deficit instead of the previously expected surplus, according to two government sources familiar with the matter.

   

  President Dilma Rousseff had earlier abandoned the idea of reviving the so-called CPMF tax on financial transactions after a backlash from politicians and companies, said the sources, who asked not to be named because the negotiations aren’t public. The goal now is to send a budget proposal that is more aligned with the reality of a sharp economic slowdown, according to the sources.

   

  Rousseff was alerted by Vice President Michel Temer in the past couple of days that the current political crisis would make it hard to convince the Congress to pass measures such as the CPMF tax. The government had planned to include the revenue collected from the tax in the budget proposal to be sent to lawmakers on Monday, one of the sources said. The president met with some ministers on Sunday to discuss the new budget proposal, according to the source.

  Although, as one analyst told Reuters, “the rating agencies are trying to bend over backwards to give Brazil the benefit of the doubt,” there’s only so much they can do, especially considering the fact that no one likely wants to set a precedent of being behind the curve as we enter what may end up being an outright emerging markets crisis. And a bit more color from Bloomberg:

  The government foresees a deficit next year excluding interest payments of 30.5 billion reais ($8.4 billion), or about 0.5 percent of gross domestic product, Budget Minister Nelson Barbosa told reporters in Brasilia on Monday. That compares with a target of 2 percent at the beginning of the year and a revised objective of 0.7 percent announced in July.

   

  The revision reflects the growing political headwinds Finance Minister Joaquim Levy faces in winning congressional approval for austerity measures and pushes Brazil’s credit rating closer to junk status, said Italo Lombardi, senior Latin America economist at Standard Chartered Bank. The government over the weekend scrapped plans to revive a tax on financial transactions following opposition by congressional leaders.

   

  “Politics are making Levy’s life very difficult,” Lombardi said by telephone. “It’s a big red flag and rating agencies would need to show a lot of patience to not downgrade Brazil.”

  

  

  And that, as they say, is all she wrote for Brazil’s investment grade rating.

  We’ll close with the following rather colorful analysis from Citi:

  Morning Friends, A Nightmare on Elm Street – one of the scariest movies of my childhood, where Freddy Krueger (a burnt serial killer) used to haunt and execute his victims in their own nightmares, was the origin of asleep nights for many kids of my generation… Well, before I tell you the Nightmares on Via Palacio Presidencial (Brasilia) and what is keeping players asleep, let me voice you that as in any bloody terror film, the villain never dies and the sequels are worse than the initial film. So, the American villain (Fed September Lift-off) is alive, as Vice Chair Fischer suggested over the weekend, sounding less dovish than expected. Also, the Chinese anti-hero (fear of slow growth) never dies, with Korea`s Industrial Production bringing additional woes.

   

  As the film says:                     

   

  1&2 – Freddy’s coming for you!

   

  3&4 – Better lock the door…

   

  In the meantime, in our (un)beloved country, there is something scarier than Freddy Krueger: our growth / fiscal outlook. The Growth scenario is haunting and executing our policymakers, with limited ability to halt such negative vortex and took our economic team to revise our GDP forecast to -2.7% (-1.7% previous) in 2015 and to -0.7% (-0.2% prior) in 2016. Mr. Market will price a -3% GDP growth figure in 2015… This damaging growth scenario will undermine the political capability to implement any fiscal austerity measure and will undermine the already bloody fiscal situation. With no growth and no fiscal measures, the primary fiscal figure for 2015 & 2016 will be scarier than Freddy Krueger & Jason together… Our view is that the 2015 primary fiscal print will be a deficit of -0.7% GDP (-0.3% previous) and  -0.1% GDP (+0.3% prior) deficit in 2016. Wires are mentioning that the government will send a draft budget proposal with a primary DEFICIT of 0.50% GDP (+0.70% primary SURPLUS target), with the proposal of reintroduction of the financial tax transaction being defeated and President Dilma not approving further spending cuts. The Nightmares on Via Planalto Presidencial must be keeping a lot of kids asleep.

   

  Rates are trading 10/51bps wider on back of such bloody fiscal news as Players are pricing the downgrade from the Investment Grade level before year end. As the film says:                     

   

  1&2 – Freddy’s coming for you!

   

  3&4 – Better lock the door…

  

  

  

  

  

• Unusually Massive Protests Erupt in Japan Against Forthcoming "War Legislation"

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  In case you aren’t up to speed on your Japanese history, the nation’s post WWII Constitution prohibits military action unless it’s in self-defense. Clearly a sensible approach, which is why the current Japanese government, led by the demonstrably insane and incompetent Prime Minister Shinzo Abe, wants to get rid of it.

  This story is very important. Not only will this action increase the likelihood of World War III in the Far East, but it’s another important example of a government acting against the will of the people.

  Polling has indicated the Japanese public is against a pivot toward militarization and war, but Prime Minister Shinzo Abe  is pushing forward nonetheless. In fact, the current legislation to allow overseas military intervention has already passed the lower house of government. This prompted many Japanese to emerge from their decades long political apathy and get out into the streets. It’s estimated these protests were the largest in recent memory.

  

   

  The AP reports:

  TOKYO (AP) — Mothers holding their children’s hands stood in the sprinkling rain, some carrying anti-war placards, while students chanted slogans to the beat of a drum against Prime Minister Shinzo Abe and his defense policies.

   

  Japan is seeing new faces join the ranks of protesters typically made up of labor union members and graying leftist activists. Tens of thousands filled the streets outside Tokyo’s parliament on Sunday to rally against security legislation expected to pass in September.

   

  “No to war legislation!” “Scrap the bills now!” and “Abe, quit!” they chanted in one of the biggest protests in recent memory. The bills would expand Japan’s military role under a reinterpretation of the country’s war-renouncing constitution.

   

  In Japan, where people generally don’t express political views in public, such rallies have largely diminished since often-violent student protests in the 1960s.

   

  The demonstrations started earlier this year and grew sharply after July, when Abe’s ruling coalition pushed the legislation through the more powerful lower house despite polls showing a majority of Japanese were opposed.

  Just like in Greece, the Japanese public is rapidly being forced to come to grips with the fact that their opinions don’t matter and they are politically irrelevant. Of course, this is also the case in these United States. Recall: New Report from Princeton and Northwestern Proves It: The U.S. is an Oligarchy

  A group called Mothers Against War started in July and gained supporters rapidly via Facebook. It collected nearly 20,000 signatures of people opposed to the legislation which representatives tried unsuccessfully to submit to Abe’s office last Thursday.

   

  The security bills would permit the military to engage in combat for the first time since World War II in cases of “collective defense,” when Japan’s allies such as the U.S. are attacked, but Japan itself is not.

   

  Abe’s government argues that the changes are needed for Japan to respond to a harsher security environment, including a more assertive China and growing terrorist threats, and to fulfill expectations that it will contribute more to global peacekeeping.

  …and to distract a disillusioned population from the disastrous economic policies of its government. Recall from earlier this year:

  Japan’s Economic Disaster – Real Wages Lowest Since 1990, Record Numbers Describe “Hard” Living Conditions

  and…
  
  The Stock Market Myth and How the Japanese Middle Class is on the Precipice Thanks to Abenomics

  The topic has become almost a regular item in women’s magazines, traditionally known more for covering entertainment, beauty, health, food and the Imperial family.

   

  Takashi Watanabe, a deputy editor-in-chief of Shukan Josei (Ladies Weekly), said there has been a growing appetite for social issues among readers, especially since Fukushima.

  This is a great sign for Japan. However, when will Americans emerge from their political slumber? Will it take several decades of economic decay such as in Japan?

  About half a century ago, 300,000 students, many of them Marxist ideologues, staged violent protests, repeatedly clashing with police, over revising the U.S.-Japan security treaty. Those protests played a role in driving Abe’s grandfather, then-Prime Minister Nobusuke Kishi, out of office after his government approved the revision.

  Apparently, they love failed political dynasties in Japan as well.

  “I’m afraid the legislation is really going to reverse the direction of this country, where pacifism was our pride,” said a 44-year-old architect who joined Sunday’s rally with her 5-year-old son. “I feel our voices are neglected by the Abe government.”

  You’re not the only one…

  Of course, when it comes to Japan this has been a long time coming. Recall the following published in 2013:

  War on Democracy: Spain and Japan Move to Criminalize Protests

  How Japan’s “Stealth Constitution” Destroys Civil Rights and Sets the Stage for Dictatorship

  Democracy is dead. Globally. If we fail to bring it back, history will see us as one of the most inept and spineless generations in history.

  

  

  

  

  

• How China Cornered The Fed With Its "Worst Case" Capital Outflow Countdown

  Last week, in “What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse,” we took a look at the potential size of the RMB carry trade, noting that according to BofAML, the unwind could, in the worst case scenario, be somewhere on the order of $1 trillion. 

  Extrapolating from that and applying Citi’s take on the impact of EM reserve drawdowns on 10Y UST yields (which, incidentally, is based on “Financing US Debt: Is There Enough Money in the World – and at What Cost?“, by John Kitchen and Menzie Chinn from 2011), we noted that potentially, if China were to use its FX reserves to offset the pressure on the yuan from the unwind of the great RMB carry, the effect could be to put more than 200bps of upward pressure on the 10Y yield. 

  Going farther, we also said that $1 trillion in FX reserve liquidation by the PBoC would essentially negate around 60% of QE3. In other words, China’s persistent FX interventions amount to reverse QE or, as Deutsche Bank calls is “quantitative tightening.” 

  Now, SocGen is out with a description of China’s “impossible trinity” or “trilemma”. Here’s the critical passage:

  The PBoC is caught in an awkward position: not letting the currency go requires significant FX intervention that will not prevent ongoing capital outflows but which will result in tightening domestic liquidity conditions; but letting the currency go risks more immense capital outflow pressures in the immediate short term, external debt defaults and possibly further domestic investment deceleration. Furthermore, it has to consider the painful repercussions globally that could result from any sharp RMB depreciation.

  In other words, because the new currency regime looks to have paradoxically created a situation where the market will play less of a role in determining the exchange rate for the yuan, China will be stuck liquidating its reserves and offsetting that resultant liquidity drain with reverse repos, RRR cuts, and a mishmash of short- and medium-term lending ops which, to the extent they’re seen as net easing, will only exacerbate pressure on the yuan, necessitating still more interventions in a very non-virtuous loop until such a time as the PBoC either runs out of assets to sell or else throws in the towel and moves to a free float which would likely trigger an all-out short-term panic. 

  Well, that’s not entirely true. Everything could suddenly be “fixed”, or, as SocGen describes it, “for the RMB to appreciate compared to its current value (6.40) will require a very positive environment for EM coupled with a cessation of capital outflows and a vibrant cyclical growth and an export recovery.” 

  Since it’s difficult to imagine a situation that’s further from what’s currently playing out across emerging economies, we can rule that out, and because even if China can manage to mitigate outflows by “temporarily tighten[ing] (the implementation of capital controls,” solving the puzzle here will, to quote SocGen again, “still entail large-scale FX intervention,” we can move straight to a consideration of how dramatic the FX reserve liquidation may ultimately be. Here’s SocGen’s three scenarios:

  Logically, we should first make assumptions about the PBoC’s tolerance for currency volatility and FX reserves drawdown. However, practically, it still helps to envision likely scenarios of capital outflows and reverse-engineer the amount of FX reserves needed. We present a few scenarios over a one-year time horizon to gauge possible reserve usage.

  • Base case: Current account surplus of $280bn over the next four quarters plus capital outflows (FDI + portfolio + other + NEOs) that are 50% greater than the previous year ($560bn) would equate to the PBoC needing to use $280bn of reserves over the next twelve months if it wanted to stabilize the RMB.
  • Moderately bad case: Current account surplus falls by 50% ($150bn) and capital outflows accelerate by a factor of two compared to the previous year ($750bn). The PBoC would need to absorb $600bn in outflows if its goal was no further RMB depreciation
  • Worst case: Foreigners exit all cumulative portfolio investment from the past five years ($260bn), five years worth of cumulative foreign inflows into trade credit/loans/deposits are reversed ($530bn), and locals accelerate outflows by a factor of two ($400bn). There could be $1.2trn in outflows. If the current figure halved over the next year to $140bn, net outflows would be around $1.04trn. There would be hardly any money left to leave after this, and the PBoC would be left with a meagre $2.5trn in reserves (chart 18).

  Or, visually:

  

  The chart above is important: what it shows is that not only is the Fed trapped in a corner domestically, on one hand dreading the launch of the tightening cycle (as can be seen by the endless drama and dithering about whether or not to hike rates) which will not only unleash even more asset selling and in the process tighten financial conditions even more, thus limiting what little inflationary impulse exists in the economy, while on the other risking complete loss of confidence if it were to postpone or cancel the tightening cycle, but now it is also trapped internationally, courtesy of China’s August 11 announcement of its currency devaluation, which has started a T-minus 365 day countdown on the Fed’s successful conclusion of its monetary policy implementation.

  Furthermore, as SocGen explains vividly, the potential outcomes for China from this point on, are bad, worse and worst, and since China’s recent “success” in effectively controlling its housing, credit, and last but not least, its stock market bubble, has demonstrated a worst case scenario is almost certainly the most probable one, what the above analysis means, is that while the Fed may be hoping for the best and expecting an even better outcome, the “reverse QE” that China launched less than three weeks ago, will make the Fed’s job that much more difficult as its presents not only a timing constraint to Fed policy, but a monetary one as well in the form of what Deustche Bank dubs “Quantitative Tightening.”

  In fact, one can argue that since there is no way resolve China’s “impossible trinity” of pursuing a stable exchange rate, an open capital account and an independent interest rate policy all at the same time, the worst case scenario is very likely an optimistic one. This means that as the Fed debates whether or not to hike, and how much, the acceleration in Chinese capital outflows starting on August 11 has set the path for the Fed, and at this point any incremental delay in hiking merely adds more to the already vast cross-capital and currency confusion around the globe. However, no longer is the Fed’s quandary open ended: with every passing day, China is suffering incremental tens of billions in capital flight, in reserve liquidation, and thus, tighter global financial conditions, as can be expected from the unwind of the world’s largest depository of USD-denominated reserves.

  Finally, what all of this really means, is that having pushed China to the point of dissociating itself from the USD peg officially, the more the Fed tightens, the more China will have to push back through devaluation or otherwise, and the more capital outflows it will be subject to, thereby amplifying the Fed’s tightening posture around the globe. In this very unstable arrangement, suddenly the smallest policy error will reverberate exponentially, and result in the only possible outcome: the Fed’s admission of policy failure by adopting a tightening bias, and ultimately launching another phase of monetary easing, be it QE4 or perhaps even the long-overdue and much anticipated Friedmanesque “helicopter money” episode.

  In even simpler terms: China has just cornered the Fed: not just diplomatically, as observed when China’s PBOC clearly demanded that Yellen’s Fed not start a rate hiking cycle, but also mechanistically, as can be seen by the acute and sudden selloff across all asset classes in the past 3 weeks. Now Yellen has about 365 days or so to find a solution, one which works not only for the US, but also does not leave China a smoldering rubble of three concurrently burst bubbles. Good luck.   

  

  

  

  

  

• China Rocked By Another Massive Chemical Explosion

  Seriously, what the f##k is going on over there?

  • *BLAST SEEN IN CHEM. IND. ZONE IN SHANDONG, CHINA: PEOPLES DAILY

  This is the second explosion in Shandong, which both follow the huge and deadly explosion in Tianjin.

  

  We’ll await the details which we imagine will suggest that, as was the case in Tianjin, many more tonnes of something terribly toxic were stored than is allowed under China’s regulatory regime which apparently only applies to those who are not somehow connected to the Politburo.

  After the last Shandong explosion, The People’s Daily reported that the plant contained adiponitrile, which the CDC says can cause “irritation eyes, skin, respiratory system; headache, dizziness, lassitude (weakness, exhaustion), confusion, convulsions; blurred vision; dyspnea (breathing difficulty); abdominal pain, nausea, [and] vomiting.”

   

  Breaking: A blast seen and heard in a chemical industry zone in Lijin, Dongying City of Shandong around 23:25 Mon. pic.twitter.com/Yi29nJXEuX

  — People’s Daily,China (@PDChina) August 31, 2015

  Sur #weibo, série de clichés de l’explosion de #Shandong pic.twitter.com/TFk8w6daZz

  — Breaking3zero (@Breaking3zero) August 31, 2015

  This clip has just been posted to a Weibo account – reportedly showing tonight’s explosion (we are unable to confirm it this is the most recent or the previous Shandong explosion although that was more twlight than dead of night).

  

  

  

  

  

• Monday Humor: Go 'West' Young Men

  First Trump, now this…!?

   

  

  h/t @MaxwellStrachan

  Relive the moment…

  Get More:

   

  …and read on for the full transcript below:

  “Bro. Bro! Listen to the kids. First of all, thank you, Taylor, for being so gracious and giving me this award this evening.

   

  And I often think back to the first day I met you also. You know I think about when I’m in the grocery store with my daughter and I have a really great conversation about fresh juice… and at the end they say, ’Oh, you’re not that bad after all!’ And like I think about it sometimes. … It crosses my mind a little bit like when I go to a baseball game and 60,000 people boo me. Crosses my mind a little bit.

   

  And I think if I had to do it all over again what would I have done? Would I have worn a leather shirt? Would I have drank half a bottle of Hennessy and gave the rest of it to the audience? Ya’ll know ya’ll drank that bottle too! If I had a daughter at that time would I have went on stage and grabbed the mic from someone else’s? You know, this arena tomorrow it’s gonna be a completely different setup. Some concert, something like that. The stage will be gone. After that night, the stage was gone, but the effect that it had on people remained.

   

  The … The problem was the contradiction. The contradiction is I do fight for artists, but in that fight I somehow was disrespectful to artists. I didn’t know how to say the right thing, the perfect thing. I just … I sat at the Grammys and saw Justin Timberlake and Cee-Lo lose. Gnarls Barkley and the FutureLove … SexyBack album … and Justin, I ain’t trying to put you on blast, but I saw that man in tears, bro. You know, and I was thinking, like, ’He deserved to win Album of the Year!'”

   

  And this small box that we are as the entertainers of the evening … How could you explain that? Sometimes I feel like all this s–t they run about beef and all that? Sometimes I feel like I died for the artist’s opinion. For artists to be able to have an opinion after they were successful. I’m not no politician, bro!

   

  Look at that. You know how many times MTV ran that footage again? ’Cause it got them more ratings? You know how many times they announced Taylor was going to give me the award ’cause it got them more ratings? Listen to the kids, bro! I still don’t understand awards shows. I don’t understand how they get five people who worked their entire life … sold records, sold concert tickets to come stand on the carpet and for the first time in they life be judged on the chopping block and have the opportunity to be considered a loser! I don’t understand it, bruh!

   

  I don’t understand when the biggest album, or the biggest video … I’ve been conflicted, bro. I just wanted people to like me more. “But f–k that, bro! 2015! I will die for the art! For what I believe in. And the art ain’t always gonna be polite! Ya’ll might be thinking right now, ’Did he smoke something before he came out here?’ The answer is yes, I rolled up a little something. I knocked the edge off!

   

  I don’t know what’s gonna happen tonight, I don’t know what’s gonna happen tomorrow, bro. But all I can say to my artists, to my fellow artists: Just worry how you feel at the time, man. Just worry about how you feel and don’t NEVER … you know what I’m saying? I’m confident. I believe in myself. We the millennials, bro. This is a new mentality. We’re not gonna control our kids with brands. We not gonna teach low self-esteem and hate to our kids. We gonna teach our kids that they can be something. We gonna teach our kids that they can stand up for theyself! We gonna teach our kids to believe in themselves!”

   

  If my grandfather was here right now he would not let me back down! I don’t know I’m fittin’ to lose after this. It don’t matter though, cuz it ain’t about me. It’s about ideas, bro. New ideas. People with ideas. People who believe in truth. And yes, as you probably could have guessed by this moment, I have decided in 2020 to run for president.”

  *  *  *

  If you thought Kanye West’s declaration that he would run for president in 2020 was a joke, guess again. As MediaEqualizer reports,

  A Maryland Republican has already registered a pro-West committee with the federal government, Ready For Kanye. Eugene Craig III of White Marsh (shown above) submitted paperwork to the Federal Election Commission this morning and was given FEC Committee ID number C00585596:

  

  The rapper made the announcement during last night’s VMA Awards.

  Mr Craig has set up a Ready For Kanye Facebook page, which has attracted just four likes so far but is sure to grow from here.

  Two T-shirt designs are featured there as well, appearing to have heavily borrowed from past campaigns including Mitt Romney’s in 2012:

  

  Craig is the Third Vice Chair of the Maryland Republican Party and Executive Director of The Bulldog Collegian.

  We asked Craig whether West would run as a Republican and why his candidacy should be taken seriously and are awaiting a response.

  *  *  *

  Crazy or not, West, 38, scored the award show's top hashtag, #Kanye2020, according to social analytics company NetBase. The show became the most-tweeted television program since Nielsen began tracking Twitter TV activity in 2011, with some 21.4 million tweets sent in the United States alone.

  

  

  

  

  

• Stocks Suffer Biggest Monthly Drop In Five Years As Oil Spikes Most Since 1990

  Only one thing for it really…

   

  Forget stocks, today was all about crude oil again…

  WTI pushed into the green for August!!!

  

   

  3 Bear markets and 3 Bull markets now in 2015 so far… perfectly tagging the 50-day moving-average today…

  

   

  This is the biggest 3-day rise in WTI since 1990!!

  

   

  Oil Volatility and credit markets were not squeezed into euphoria at all…

  

  Trade accordingly!!

  *  *  *

  Having got that out of the way…Dow's worst monthly drop since May 2010..

  

   

  and had an ugly close…

  

   

  Stocks got some lift from the momo-igniters -but once NYMEX closed, it was over. Stocks traded in a relatiovely narrow range glued to VWAP after the overnight plunge… Small Caps outperformed as Nasdaq Underporformed…

  

   

  But were glued to VWAP all day… on no volume

  

   

  Futures markets giveus a better idea of the moves…NOTE -0 this is from the beginning of Friday's pathetic EOD ramp…

  

   

  Once again complete chaos on VIX ETFs…

  

   

  VIX had its biggest monthly jump in history…

  

   

  For the month, it's been a wild ride!! but just look at how clustered the moves were…

  

   

  Finacials & Enmergy and Healthcare (Biotech) were worst performers in August…

  

   

  For all the excitment over FANG – August was a mixed bunch for them with FB and AMZN notably red…

  With all the craziness in stocks, Treasury yields at the long-end ended the month practically unch… 2Y rose 8bps…

  

   

  With some more notable weakness today (which was also seen in Bunds)…note once again selling weas in US session, buying in Asia and Europe…

  

   

  The USD ended the day lower with some major swings in CAD…

  

   

  As August's USD Index drop was the biggest in 4 months…

  

   

  Commodities were insane today – led obviously by crude!

  

   

  And on the month… perhaps most notably, the perfect recoupling of crude and gold on the month!!??

  

   

  But we note that Gold (+3.5%) had its best month since January even as Silver dropped

  

   

  Finally – amid all the chaos in August, it appears there is a safe-haven… Gold outperforms

  

   

  Charts: Bloomberg

  Bonus Chart: We're gonna need Moar QE…

  

  

  

  

  

• Preparing For A Potential Economic Collapse In October

  Submitted by Jeff Thomas via InternationalMan.com,

  There’s no question that the world economy has been shaky at best since the crash of 2008.

  Yet, politicians, central banks, et al., have, since then, regularly announced that “things are picking up.” One year, we hear an announcement of “green shoots.” The next year, we hear an announcement of “shovel-ready jobs.”

  And yet, year after year, we witness the continued economic slump. Few dare call it a depression, but, if a depression can be defined as “a period of time in which most people’s standard of living drops significantly,” a depression it is.

  Many people are surprised that no amount of stimulus and low interest rates have resulted in creating more jobs or more productivity. Were they a bit more cognizant of the simple, understandable principles of classical economics (as opposed to the complex theoretical principles of Keynesian invention), they’d recognise that, when debt reaches the level that it cannot be repaid, a major re-set of some sort must take place.

  The major economies of the world have reached and exceeded that point and the debt problem is no mere anomaly that can be papered over. It is, instead, systemic. There must be a major forgiveness of debt, a default, or an economic collapse, or some combination of the three.

  And so, those who recognise the inevitability of such an event have been storing their nuts away in preparation for an economic winter.

  Those of us who warned of the 2008 crash in advance had been regarded as economic “Chicken Littles.” After the crash, we were largely resented as having made a “lucky guess.” Following that time, a moderate amount of credence has been allowed us, as we’ve recommended investments in real estate and precious metals (outside of those jurisdictions that are most at risk). However, since the Great Gold Correction (2011-2015), that begrudging credence has worn away and been replaced with renewed contempt.

  To the naysayers, the 2001-2011 gold boom has been relegated to the investment dustbin and, to most punters, gold is clearly “over.”

  Just as importantly, the most significant events of the “Greater Depression” that we had been predicting have clearly not yet come to pass. They’re still ahead of us. And, in this, we must confess that those of us who made this prediction did unquestionably believe that it would have taken place by now. We were wrong.

  Or at least we were wrong on the timing, but most of us still believe, more than ever, in the inevitability of a collapse (again, this is true because the problem is systemic, not symptomatic).

  All of the above is a preface of the coming of October, a month which, historically, has seen more than its fair share of negative economic events.

  This time around, there are warning signs aplenty that, sometime around October of this year, we shall see a number of black swans on the wing, headed our way.

  The greatest of these is that, once every five years, the International Monetary Fund (IMF) renews its membership structure (SDR quota, governors, and voting power.) This is significantly in question this year, as China vies for a larger chair at the table.

  Although China surpassed the US in 2014 as the world’s largest manufacturing economy, it still has less than one-quarter of the voting power of the US and even has less than France or Germany. To say the IMF has been dragging its feet on a rebalancing of IMF member voting would be an understatement.

  In fairness, China should expect to be allotted significantly greater voting power in October. But we are discussing the IMF, which has never been known for fairness. It has, indeed, been infamous for its duplicity and self-serving inclinations (having been created at Bretton Woods in 1944 to allow the US hegemony over the world economy, its primary purpose is to assure US dominance).

  Still, it would be difficult to imagine how the IMF could avoid a shift in its voting (diminishing the US and increasing China). Anything the IMF did at this point to derail the re-balance would be highly suspect.

  And yet, that’s exactly what the IMF has done. It has publicly questioned whether 2015 is the right year for the review. However, even it is worried enough about its presumptuousness that, rather than announce a delay, it has announced the consideration of a delay. It has run the possible delay up the flagpole to see whether it will fly or be torn down.

  Clearly the IMF feels it’s on shaky ground with its proposal. And it should be. In recent years, it has arrogantly pushed China away from the IMF table time after time, so the Chinese have taken matters into their own hands. They’ve created their own international development bank, their own worldwide cable communication system, and even their own SWIFT system.

  Very soon, they’ll have the ability to run their own worldwide economic system, independent of the US/EU/IMF system. Early on, many of the world’s governments recognised the future opportunities that this would bring to the world. First, Russia and the countries of Southeast Asia signed on, then South America, Africa, and, finally, some EU countries reached agreements with China.

  The IMF is in a jam, no member country more so than the US. If, in October, it allows China greater voting power, it will cast in stone China’s increased economic influence over the world. However, if the IMF chooses to put off China another year, China may move ahead with its own economic system.

  Buying Time

  There can be no doubt that the IMF is hoping to buy time. The question is whether it merely wishes to buy time to delay the inevitable, or whether it feels it has a card up its sleeve that it might be able to play, should it gain another year.

  If the US is arrogant (as it generally is), it’ll employ its customary bravado and, in so doing, may well cause the Chinese to play hardball and dump some of their US Treasuries and/or dollars.

  In considering the above, the US/IMF may feel that China is in the throes of a major correction at present and cannot retaliate without feeling the pain itself. They’d be correct. And so, the Chinese, known for being patient and choosing their moment carefully, may choose to swallow the IMF delay quietly, then, when they’ve dumped some of their baggage and possibly rebounded in 2016, make an even firmer stand than they could now make. For that reason, US arrogance now would create a very short-lived gain, and a very foolish one.

  So, what does this mean to the investor? It suggests that, once again in history, October promises to be a month when great economic change may well take place. When dramatic change looms, it’s best to keep your powder dry, whilst keeping an eye open for opportunities as soon as events reveal the future. Until then, nut–gathering serves to provide an insurance policy against unpleasant economic surprises.

  

  

  

  

  

• Recession Odds Surge To 47%, Highest Since 2011

  Once upon a time, when the market actually discounted the future path of the economy instead of being a lagging indicator to not only underlying macroeconomic conditions…

  

   

  … or simply frontrunning central bank policy, economists would use it to anticipate key economic inflection points such as recessions and recoveries. Which is also why the recent correction in the market has spooked all those conventional economists who still believe there is a “market” instead of a centrally-planned “wealth effect” policy tool, whose only purposes is to react to every increase in the global $14 trillion central bank balance sheet.

  It is these economists, which also include the academics on the Fed’s staff, who took one look at the tumble in stocks in the past two weeks and decided that a rate hike may not be such a hot idea after all. Because if the market is sliding, it surely is telegraphing that not all is well with the economy and therefore tightening financial conditions would be suicidal for any central bank.

  So assuming that after being wrong for 7 years about everything, economists are actually right about the market still having some discounting abilities left, what then is the market telegraphing? The answer, according to the Bank of America: the biggest surge in recessionary odds since 2011, which over the past few days have nearly hit a 50% probability of an economic slowdown.

  BofA explains:

  Recession probability from stock prices shoots higher: The more interesting and difficult question is whether the equity correction is signaling a deeper economic malaise. Equity prices can be leading indicators of recession. Indeed, Michael Hanson has developed a variety of probit models that use financial variables to estimate the risk of a recession. According to his model, the 15% annualized drop in the S&P500 index (over the past six months) is signaling a 47% risk of recession starting sometime in the next 12 months. That sounds fairly grim; however, we wouldn’t take the signal too literally. As Paul Samuelson famously quipped in the late 1960s: “The stock market has called nine of the last five recessions.” Our probit model sends a lot of false signals. For example, in 2011 the model saw a 59% chance of recession (which we argued strongly against at the time).

  Here is the chart that BofA has created to track coincident recession odds based on market signals:

  

  Actually BofA is dead wrong about 2011 being a false positive: the only thing that delayed the 2011 recession, was the Fed’s launch of Operation Twist in September of that year, coupled with the Fed’s liquidity swap line bailout of Europe in November, and the commencement of the ECB’s massive €1 trillion LTRO in December 2011. It was this liquidity avalanche that delayed the effects of what was a  guaranteed recession, one which even the ECRI called.

  Delayed but not eliminated, and with every passing year that the world’s central banks have kicked the can of the global business cycle’s down phase, the more acute it will be when it finally launches.

  Finally, unlike 2011 this time not only is the Fed not planning any pro-cyclical liquidity interventions, but Yellen is actively considering tightening monetary conditions as soon as September with the start of the first rate hiking cycle in nearly a decade.

  Which is why while the market may or may not be correctly discounting a recession this time, or anything else for that matter, an economic recession is precisely what is coming, just because every single time when financial conditions were as adverse as they are now, the Fed would proceed to bailout if not the economy, then certainly the “market.”

  

  

  

  

  

• Sep 1 – Global Stocks Extend On Rout

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 14/100 EXTREME FEAR

  PREVIOUS CLOSE: 14/100 EXTREME FEAR

  ONE WEEK AGO: 3/100 EXTREME FEAR

  ONE MONTH AGO: 20/100 EXTREME FEAR

  ONE YEAR AGO: 42/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 26.67% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility: FEAR The CBOE Volatility Index (VIX) is at 28.43, 71.89% above its 50-day moving average and indicates that investors are concerned about the near-term values of their portfolios.

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

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – I JUST LOVE MY NEW SWEATER

   

  UNUSUAL ACTIVITY

  MU SEP 20 CALL ACTIVITY @$.11 on OFFER 2400+ Contracts

  FAST SEP 38 PUT ACTIVITY ON OFFER @$.70 2500+ Contracts

  TWTR DEC 50 CALLS 1500+ @$.15 .. also activity in the DEC 40 calls

  APLE EVP, Chief Legal Counsel P    5,592  A  $ 17.88

  MTZ 10% Owner Purchase 10,000 A $15.98 and Purchase 5,000 A $15.63

  More Unusual Activity…

   

  HEADLINES

   

  OIl Surges as OPEC Stands Ready To Talk Other Producers

  US EIA Reports Decline In Monthly Oil Output

  G20 Said To Not See Currency War As Major Issue

  US Chicago PMI (Aug): 54.4 (est. 54.5, prev. 54.7)

  US Dallas Fed Manufacturing Activity (Aug): -15.8 (est. -3.8, prev. -4.6)

  Global Stocks Extend On Rout Seen Through August

  Europe: stocks cap worst month since 2011 with drop

  Apple, Cisco Unveil Business Partnership

  Google, Sanofi join forces on Diabetes monitoring and treatment

   

  GOVERNMENTS/CENTRAL BANKS

  G20 Said To Not See Currency War As Major Issue –BBG

  No ‘viable’ alternative to QE seen for the ECB –Reuters poll

  Greece’s ‘invisible negotiator’ may assuage bailout fears in election run-up –Rtrs

  FIXED INCOME

  German and US Bonds Drop as Inflation Expectations Show Recovery Sign –BBG

  ECB Bought EUR 1.937Bln Under Covered Bond Programme –ECB

  ECB Sold EUR 106mln under ABS purchase programme –ECB

  ECB Bought EUR 9.776bln under public sector purchase programme –ECB

  CURRENCIES, COMMODITIES, METALS

  Oil ends up 8.8%, at $49.20 a barrel; highest since July 21 –CNBC

  OPEC stands ready to talk to other producers about market –ForexLive

  Oil futures spike sharply higher after EIA reports monthly output declines –MktWatch

  Citi: Crude price rally to be short-lived; prices should post another fresh leg lower – RTRS

  USD: Euro, yen on track to post monthly gains vs. dollar –MarketWatch

  GBP: Pound Slips Near 3-Mth Low Against USD –WBP

  EUR: Buck Lacks Momentum After Unremarkable Chicago PMI –WBP

  JPY: Dollar Pares Morning Losses Amid Momentum Struggle –WBP

  Gold Prices Fall as Traders Mull U.S. Monetary Policy –WSJ

  EQUITIES

  Global Stocks Extend August Rout–BBG

  Europe: stocks cap worst month since ’11 with a drop –FT

  China funds cut equity allocations to lowest on record- Reuters Poll

  Google, Sanofi join forces on Diabetes monitoring and treatment –MktWatch

  Apple, Cisco Unveil Business Partnership –WSJ

  Netflix passes on Epix content deal, Hulu steps in –MktWatch

  Fiat Chrysler’s Marchionne says ‘unconscionable’ to give up on GM deal –Rtrs

  Fiat Chrysler US is recalling approx. 206K vehicles –Detroit News

  GT Advanced Technologies to cut staff, operating expenses by about 40% –MktWatch

  Pemex Investors Face Crude Reality With Credit Downgrade Threat –BBG

  EMERGING MARKETS

  China eases housing investment rules again to boost economy –Rtrs

  China Markets End Volatile August in Continued Slide –BBG

   

  Argentine Central Bank Assets Can?t Be Seized by Bondholders –BBG

  

  

  

  

  

• If The Fed Is Always Wrong, How Can Its Policies Ever Be Right?

  Submitted by Ralph Benko via Forbes.com,

  One of the most curiously persistent surrealisms of Washington, DC is the reflexive deference given the Federal Reserve System. The Washington elite tends to accord more infallibility to the Fed than do Catholics the Pope.

  Now comes one of the world’s top monetary reporters, Ylan Q. Mui, to make a delicate observation at the Washington Post’s Wonkblog, in Why nobody believes the Federal Reserve’s forecasts. Mui:

  “The market recognizes that the Fed has repeatedly erred on the optimistic side,” said Eric Lascelles, chief economist at RBC Global Asset Management. “Fool me 50 times, but not 51 times.”

  Even the government’s official budget forecasters are dubious of the Fed’s own forecast.

  This is a theme that Mui has touched on before. In 2013, she wrote Is the Fed’s crystal ball rose-colored?:

  The big question is whether Fed officials can get it right after years in which they have regularly predicted a stronger economy than the one that materialized. In January 2011, Fed officials predicted that GDP would grow around 3.7 percent that year. It clocked in at 2 percent. In January 2012, they anticipated growth of about 2.5 percent. We ended up with 1.6 percent.

  To give Ms. Mui’s competition its due, Dr. Richard Rahn at the Washington Times last April crisply noted:

  The Federal Reserve had forecast the U.S. economy to grow about 4 percent near the beginning of each year for the last five years. But during each year, the Fed was forced to reduce its forecast until it got to the actual number of approximately 2 percent. (Other government agencies have been making equally bad forecasts.) These mammoth errors clearly show that the forecast models the official agencies use are mis-specified and contain incorrect assumptions.

  What’s going on here?

  A good bet would be that there’s a problem with the Fed’s reliance on an arcane art.  This art is designated “Dynamic Stochastic General Equilibrium” modeling.

  Sound scientific? Well.

  With admirable intellectual honesty an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, Marco Del Negro, Wharton Ph.D. student Raiden Hasegawa and University of Pennsylvania professor of economics Frank Schorfheide (speaking for themselves and not the Fed) open a two part analysis at the NY Fed’s own excellent Liberty Street Economics, Choosing the Right Policy in Real Time (What That’s Not Easy):

  Model uncertainty is pervasive. Economists, bloggers, policymakers all have different views of how the world works and what economic policies would make it better. These views are, like it or not, models. Some people spell them out in their entirety, equations and all. Others refuse to use the word altogether, possibly out of fear of being falsified. No model is “right,” of course, but some models are worse than others, and we can have an idea of which is which by comparing their predictions with what actually happened.

  The authors go on to conclude in the second part of their analysis:

  In the end, we have shown that policy analysis in the very oversimplified world of DSGE models is a pretty difficult business. Contrary to what it may sometimes appear from listening to talking heads, deciding which policy is best is very rarely a slam dunk.

  Dynamic Stochastic General Equilibrium modeling sure sounds amazing.  That said let’s be blunt.  If NASA suffered from comparable inaccuracy the manned spaceflight program would have been shut down by an endless series of Challenger-type catastrophes many years ago.   With monetary forecasts this bad is it any wonder the American economy continually crashes and burns?

  As I have noted before, yet it bears repeating, Prof. Reuven Brenner powerfully has called our current system to account:

  [M]acro-economics is now [astrology’s] modern incarnation: Only instead of stars, macro-economists look at “aggregates” gathered religiously by governments’ statistical agencies – never mind if the country has a dictatorial regime, be it left, right or anything in between, or has large black markets, as Italy and Greece do, where tax evasion has long been the main national sport. So let us first forget about this “macro” stuff, whose beginnings are almost a century old, and offer a simple alternative for shedding light on the situation today and on possible solutions, hopefully demolish this modern pseudo-”science” once and for all.

  Classical liberal economist Axel Kaiser anticipated this line of argument in his book Intervention and Misery: 1929 – 2008 by calling for the “end of the mystery [which] implies the end of the witch doctors and the definite defeat of the economic astrology that has prevailed in recent decades.”

  This line of criticism, while apparently alien to the Fed, is nothing new. Hayek, in his Nobel Prize acceptance speech The Pretence of Knowledge tartly observed:

  We have indeed at the moment little cause for pride: as a profession we have made a mess of things.

   

  It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the “scientistic” attitude — an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.” I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.

  That said, nobody, not even the great Hayek, nailed the problem better than did Hans Christian Anderson in The Emperor’s New Clothes:

  One day, two rogues, calling themselves weavers, made their appearance. They gave out that they knew how to weave stuffs of the most beautiful colors and elaborate patterns, the clothes manufactured from which should have the wonderful property of remaining invisible to everyone who was unfit for the office he held, or who was extraordinarily simple in character.

   

  “These must, indeed, be splendid clothes!” thought the Emperor. “Had I such a suit, I might at once find out what men in my realms are unfit for their office, and also be able to distinguish the wise from the foolish! This stuff must be woven for me immediately.”

   

  …

   

  And now the Emperor himself wished to see the costly manufacture, while it was still in the loom. …

   

  “Is not the work absolutely magnificent?” said the two officers of the crown, already mentioned. “If your Majesty will only be pleased to look at it! What a splendid design! What glorious colors!” and at the same time they pointed to the empty frames; for they imagined that everyone else could see this exquisite piece of workmanship.

   

  “How is this?” said the Emperor to himself. “I can see nothing! This is indeed a terrible affair! Am I a simpleton, or am I unfit to be an Emperor?

   

  …

   

  So now the Emperor walked under his high canopy in the midst of the procession, through the streets of his capital; and all the people standing by, and those at the windows, cried out, “Oh! How beautiful are our Emperor’s new clothes! …

   

  “But the Emperor has nothing at all on!” said a little child.

  If the Fed is making policy based on consistently wrong predictions how good can its policy consistently be? If its forecasts consistently are wrong — as now is undeniable — on what is it basing policy? Guesswork (more pretentiously phrased as “discretion”)?

  America deserves some candor. A frank admission of “guesswork” — even educated guesswork — would better our understanding of why American workers have been for the past 15 years, and are today, engaged in painful belt-tightening. And, forgive the heresy, just maybe there is a better way than guesswork.

  Ylan Mui is, as she ought to be, far too politic to be so blunt. Thus it falls to me, in my role as the simpleton on this beat, to declare: The Emperor has no clothes.

  I’d welcome being set straight if the Board of Governors is prepared to contest this simpleton. Surely Chair Yellen or Vice Chair Fischer — both first rate economists and authentically honorable public servants — will support the Brady-Cornyn Centennial Monetary Commission legislation lately approved by Chairman Hensarling’s House Financial Services Committee.

  So let the Fed set me straight by entering the beautiful canopy of this Commission to make the case for the exceptional beauty of its handiwork. If, rather, the Fed raises objections to a Commission (to which it will appoint an ex officio commissioner)… perhaps my declaration is not, after all, that of a simpleton. In the event of Fed opposition Congress should be even more eager to enact this Monetary Commission.

  I say the Emperor has no clothes. If clad, high time to parade their exceptional beauty. 

  Pass the Centennial Monetary Commission. Let’s see the Emperor’s clothes.

  

  

  

  

  

• When Every Option In The Financial System Is Grounded In Absurdity, It's Time To Look Elsewhere

  Submitted by Simon Black via SovereignMan.com,

  If you’ve ever picked up a copy of The Economist magazine, you’ve probably heard of the Big Mac Index.

  This is an interesting tool where a bunch of reporters from around the world are forced to go into McDonalds and find out the price of a Big Mac in local currency.

  In Santiago, Chile, for example, a Big Mac runs 2,100 Chilean pesos, which is around $3. Meanwhile the average price for a Big Mac in the United States is $4.79.

  This suggests that the US dollar is substantially overvalued against the Chilean peso.

  It’s the same story across most of the world. In Russia, a Big Mac costs 107 rubles, which is just over $1.50.

  The reason The Economist uses the Big Mac is because it’s basically the same product no matter where you go in the world.

  There are some subtle differences, but McDonalds generally serves the same pink foam disguised as beef wherever you go. So in theory it should all cost the same.

  When a Big Mac is too cheap or too expensive, this suggests that the currency is either undervalued or overvalued against the US dollar.

  Now I’d like to add a new way of comparing currencies: airfare.

  As I travel around the world, I often buy what are known as round-the-world tickets (RTW).

  RTW tickets are issued by airline alliances like OneWorld or Star Alliance, and they’re typically very cost effective.

  RTW is just like it sounds. You fly, for example, from London to Chicago to Shanghai to Dubai and back to London, all for one special fare.

  It’s a cheap, easy way to see the world.

  But I’ll let you in on a little secret that I’ve picked up over the years: the price of a RTW ticket varies dramatically depending on the city where you start.

  As an example, I just researched a OneWorld RTW ticket with the following itinerary:

  Los Angeles – Sydney – Bangkok – Hong Kong – Johannesburg – London – Los Angeles.

  Six different cities around the world on five continents.

  Now, if I start and stop that itinerary in Los Angeles, the price for a business class ticket is $14,164.60.

  That’s not a bad price for a business class experience. But if we experiment a little bit, something interesting happens.

  Starting and stopping the journey in Los Angeles means that OneWorld prices my ticket in US dollars.

  But it’s also possible to fly the same route by shifting the cities. For example, instead of starting/stopping in LA, I can start/stop in Sydney.

  So the route becomes Sydney- Bangkok – Hong Kong – Johannesburg – London – Los Angeles – Sydney.

  It’s the same flights to the same six cities, I just start/stop in a different place.

  Here’s what’s crazy: if I start/stop in Sydney instead, the price changes. Now instead of $14,164.60, it’s $15,272 Australian dollars, which is about $10,900 USD.

  So the same six flights now cost you 23% less.

  Note that the RTW ticket is always priced in the local currency of the city where you start.

  And unlike the Big Mac Index where the results are skewed by the costs of ingredients, property, and labor, here you’re comparing the exact same product.

  I did the same with each city on the list, and the most incredible difference came when I started and stopped the trip in Johannesburg.

  Johannesburg – London – Los Angeles – Sydney – Bangkok – Hong Kong – Johannesburg.

  Flying to the exact same cities, the price is now 81,395 South African Rand.

  Based on current exchange rates, this is just barely over $6,000.

  In other words, you pay over $14,000 by starting/stopping in LA, and just $6,000 to start/stop in South Africa, even though you’re visiting the exact same six cities on the exact same flights in the exact same business class cabin.

  What’s even more amazing is that if you do the exact same itinerary from LA in economy class, the price is $7,545.

  So that means that if someone flies from LA, they’ll pay more to fly in coach than someone starting in Johannesburg pays to fly in business.

  Clearly, you’d be better off buying a separate ticket to South Africa and beginning your RTW journey from there.

  Or you could spend about $200 and get a ticket to Vancouver, and start a RTW from Vancouver, which costs about $10,000 in business class and gives you a $4,000 savings.

  Now, I’m not here to tell you about how to save money on airfare (though I hope you give it a try).

  The bigger idea is that it’s clear that the US dollar is painfully overvalued against nearly every currency in the world.

  Right now the dollar appears to be the “safe” place to put your money. However, this isn’t based on anything.

  The fundamentals for the US dollar are terrible, but people keep dumping money into it like trained monkeys simply because nothing else in financial markets makes any sense.

  To be clear, I fully expect the dollar to get even stronger as even more trained monkeys pile into US dollar assets.

  But it’s important to show that this perception of ‘safety’ is based on a complete myth. Every credible fundamental suggests that the dollar is dangerously overvalued.

  In the long run these things tend to equalize, and the dollar’s strength may end up being the biggest bubble of all.

  Of course, it raises the question– if not the US dollar, then which currency is the safe haven? The euro is garbage, the Chinese are fighting a depression, Japan is a disaster.

  And that’s precisely the point.

  When every option in the financial system is grounded in absurdity, the only solution is to start looking for safety outside of it.