• Commodity Trading Giants Unleash Liquidity Scramble, Issue Record Amounts Of Secured Debt

  Earlier today, in its latest attempt to restore confidence in its brand and business model after suffering a historic stock price collapse, Glencore – whose CDS recently blew out to a level implying a 50% probability of default – released a 4 page funding worksheet which was meant to serve as a simplied summary of its balance sheet funding obligations and lending arrangements to equity research analysts who have never opened a bond indenture, and which among other things provided a simplied and watered-down estimate of what could happen if and when the company is downgraded to junk.

  Meanwhile, in a furious race to shore up as much liquidity as possible, Glencore – which a month ago announced a dramatic deleveraging plan – and its peers have been quietly scrambling to raise billions in secured funding. Case in point none other than Glencore’s biggest competitor and the largest independent oil trader in the world, Swiss-based, Dutch-owned Vitol Group, whose Swiss unit Vitol SA earlier today raised a record $8 billion in loans.

  It is not alone.

  As Bloomberg reports, another name profiled previously here, privately-held (but with publicly-traded debt) Trafigura  “won improved terms on a $2.2 billion loan refinancing deal on Oct. 1 via a group of 28 banks. Swiss commodity traders Gunvor Group Ltd. and Mercuria Energy Group Ltd. are also marketing credit facilities totaling $2 billion.”

  Louis Dreyfus Commodities, the world’s largest raw-cotton and rice trader, said in its interim report last month that it had six revolving credit facilities with staggered maturity dates totaling $3.3 billion. In June, it amended and extended its North American facilities totaling $1.6 billion and in July it refinanced a $400 million Asian lending facility with the company securing an option to request an increase of $100 million.

   

  Noble Agri, the agricultural commodity trader majority owned by China’s Cofco Corp., attracted four new lenders to its $1.58 billion one-year revolving credit facility, people familiar with the matter said this month.

  In short – a race against time to pledge as much unencumbered collateral as possible for future funding needs, because as every CEO knows you raise capital when you can, not when you have to. Yet this is odd, because even as the companies hold investor meetings and publicly comfort investors that they are adequatly funded and see no need for a liquidity-raising scramble, that’s precisely what the world’s commodity traders are doing.

  Bloomberg’s take was more optimistic: “The transactions show banks are still eager to loan money to commodity traders even after debt concerns caused by wild swings in Glencore’s stock and bond prices.”

  The new loans and refinancing signal banks are comfortable lending to commodity traders, whose business models allow them to profit from volatility and lower financing costs amid weaker prices for raw materials.

  According to Bloomberg, Vitol’s record credit facilities from a group of 57 banks were increased by a third after the initial $6 billion sought by the trading house was oversubscribed by $2.7 billion, the Rotterdam-based company said in a statement. The facilities, refinancing a debt package signed 12 months ago, are the biggest in the firm’s 49-year history, a Vitol spokeswoman in London said.

  Then comes even more spin:

  The loan package, coming after Trafigura last week agreed to lower lending rates, suggests some analysts don’t understand the business of trading houses, which can benefit from lower commodity prices and the current contango market structure that allows them to profit by storing oil because forward prices are higher than current costs.

  Actually analysts (at least credit) understand the business of trading houses very well; what Bloomberg’s reporters don’t seems to understand, however, is the principle of muturally assured megaleverage destruction, or the implied threat for a company’s secured lending syndicate that a borrower which already has billions of exposure to banks has all the leverage in demanding even more debt. After all, should Vitol fail, it would lead to a cascade of bank failures as all the banks that have lent money to the giant commodity trader are forced to charge off their exposure, in the process leading to serial defaults among undercapitalized financial institutions.

  It is these institutions whose credit officers underwrote the loans, that are the ones who “don’t understand the business of trading houses” because based on the recent collapse in publicly traded securities, they never modelled what happens to cash flows in a world in which the price of oil, copper,  zinc, aluminum or other commodities, suffer a 50%+ plunge in prices.

  “Given the recent turbulence in the commodities space, we have been repeatedly asked by investors on the banks’ exposure to commodity traders,” analysts at Sanford C. Bernstein led by Chirantan Barua wrote in a note Monday. 

  As they well should, and in order to avoid answering, the banks are perfectly happy to throw a little more good money after lots of bad money in order to avoid remarking their entire exposure to the sector to something resembling fair value.

  But the day of remarking is coming: as Bernstein calculates, commodity traders have raised at least $125 billion of debt, of which about $75 billion is loans. In other words, there is about $75 billion in secured debt, collateralized by either inventory and/or receivables collateral whose value has cratered in the past year, and as a result the LTV on the secured loans has soared. It is this that is prompting the panicked banks to be more eager to provide funds to the suddenly distressed energy-trading sector than even the borrowers themselves. And after all, if the banks do blow up, there is always the taxpayer-funded bailout as a last reserve.

  And here is a pop quiz to either analyst, or Bloomberg writers who don’t “understand the the business of trading houses” – if you issue secured debt to shore up liquidity as a result of what is fundamentally a massively overlevered capital structure, does the pro forma debt increase or decrease. This is not a trick question.

  The good news for the Vitols of the world is that by pledging even more of their unencumbered assets to banks, they buy themselves a few more months, or quarters, of liquidity to pay down upcoming maturities and interest. Which is what Glencore did with its “doomsday” plan in early September… a plan which calmed the stock for all of two weeks before investors saw right through it for what it was: a desperate scramble to put lipstick on a declining-stage supercycle pig.

  In the meantime, the end result is this: companies that are even more levered to commodity prices in a world in which at last check commodity prices, a proxy for China’s economy, are sliding. Which, incidentally, was our thesis in March of 2014 when we said that buying Glencore CDS is the best way to trade China’s hard landing. This is precisely what happened.

  Which is why both the companies, and their lending banks, better pray that commodity prices pick upin the coming weeks and months, becuase for the Vitols, the Glencores, the Trafiguras, the Mercurias and so on, that is all that matters. Ironically, by levering up even more, they bought themselves some time now, but if and when the next leg down in the commodity supercycle takes place, the pain will only be that much greater.

  

  

  

  

  

• The Two Major Factors That Will Drive Markets In Q4 According To SocGen (Spoiler: Not The Fed)

  In the aftermath of the Fed’s September fiasco, in which Yellen single-handedly cost the Fed years if not decades of carefully scripted “credibility”, and more than unleashing a selloff has gotten us to the point where even Tier 1 banks admit that “market participants have started to question the effectiveness of monetary policy, with good reason”, we were shocked to learn that at least according to Socgen, the Fed is no longer a major factor driving the market in the fourth quarter.

  Here is SocGen’s explanation of how the Fed lost credibility.

  Monetary policy: central banks take a back seat

   

  Last month, neither the ECB’s threat to expand its QE programme nor the delay in the Fed’s rate hike succeeded in stopping the equity sell-off. Market participants have started to question the effectiveness of monetary policy, with good reason. With still a large debt overhang in many developed economies, further easing is unlikely to boost credit demand significantly from current levels. Moreover, easy financial conditions have led to a growing divergence between modest global growth and frothy valuations. This divergence culminated earlier this year in an S&P 500 P/B ratio at 2.9x (a level last seen on the eve of the Great Recession): a correction was overdue. Although growth is expected to remain solid in developed economies, corporates are now facing external headwinds, against which central banks have limited tools.

  

   

  We can only hope that SocGen is right and that the Fed will no longer be a driving force for the market, but as everyone knows this is merely a pipe dream. If anything, the Fed – which will not hike rates in 2015 – is merely taking a sabbatical until next year, when it will be forced to decide between either delivering on its promise, or losing all credibility and going straight to NIRP/QE4+.

  So if not the Fed then what, according to SocGen, will be the two major drivers behind the stock market in the last quarter of 2015? The answer:

  1) China: to remain a headwind into 2016, but…

   

  EM and, especially, commodity-dependent economies have been severely impacted by China’s slowdown this year. With globalisation, developed and emerging economies have become more integrated, thereby raising concerns of spillover effects spreading from EM to DM economies. But, DM economies seem to have been left relatively unscathed so far. This is because DM growth is mainly driven by stronger domestic spending, notably owing to lower commodity prices and better employment prospects. China should continue to weigh on global growth into 2016. But, we expect Chinese activity to stabilise somewhat near term, mostly due to a greater focus on infrastructure investment. Any sign of growth stabilisation in China could alleviate fears of a global recession: watch China’s leading indicators closely in Q4.

   

  

  And:

  2) Earnings: strong divergence between sectors

   

  US EPS growth has been very disappointing this year, with Q3 earnings likely to decline (yoy) for the second quarter in a row. Our Equity Quant team notes that profits growth has never been this weak outside of a recession. Consequently, risk aversion has increased, reinforced by fears of contagion across asset classes and notably the return of idiosyncratic risk in credit. The external headwinds of a strong USD, lower commodity prices and slower global demand should continue to weigh on sectors such as industrials, materials and energy. But, lower oil prices and a healthier job market (with the current soft patch likely to be transitory) are positive for US consumers, as reflected by strong spending data over the past months (+0.4% mom on average). As a result, sectors exposed to US consumption could still report solid EPS growth going forward. The eurozone recovery should also support earnings, allowing the Euro Stoxx to benefit from less demanding valuation levels.

   

  

  If SocGen is right then enjoy the last day before Chinese stocks reopen after its week-long holiday. As for earnings season, if today’s atrocious announcements by Yum Brands and Adobe are any indication, then not even a “recovering” China, one paradropping billions in debt rescue packages on top of insolvent banks, will be able to offset the acute earnings recession about to unfold.

  

  

  

  

  

• Fortress Backs Hundred Million Dollar Subprime, Payday Lender Scheme: "He Has Peacock Feathers Tattooed Down His Left Arm"

  “I don’t hide tattoos, I don’t take earrings out. I just don’t do that, because ultimately if you don’t like who I am, you’re not going to like what I do.”

  Who knows what that is supposed to mean, but it’s a quote from Douglas Merrill who, as Bloomberg notes, “has peacock feathers tattooed down his left arm, black fingernail polish, [and] chin-length hair.”

  Two other things Douglas has are a Ph.D. in cognitive science from Princeton and the online version of a payday lender called ZestFinance. 

  Now make no mistake, payday lenders are bad because what they do is trap low-income households in a perpetual debt cycle and they do it in the name of providing credit to those who wouldn’t normally have access to it.

  In other words: the pitch is that before you think about criticizing a payday lender for charging an APR that amounts to 30%, you should actually think about whether you should be praising them for helping America’s downtrodden debt serfs get into still more debt. 

  Of course we’re employing quite a bit of trademark sarcasm here. Payday lenders have been proven time and again to be largely predatory in nature, capitalizing off of the desperation of poor people albeit with a business model that comes with substantial risk because.. well… because the business model depends on collecting interest payments from those same poor people who have just been made poorer-er-er by the fact that they took out yet another loan they most certaintly can’t afford to service. 

  Anyway, Fortress is ready to jump in on this to the tune of hundreds of millions:

  “I don’t lie about who I am,” [Merrill] said in an interview from the startup’s headquarters among the pawn shops and souvenir stores on Hollywood Boulevard in Los Angeles. “I don’t hide tattoos, I don’t take earrings out. I just don’t do that, because ultimately if you don’t like who I am, you’re not going to like what I do.”

   

  The funding from Fortress, which manages about $72 billion, will help ZestFinance make more of its Basix installment loans, which are capped at $5,000, last as long as three years and carry annual rates of up to 36 percent. Borrowers often use the money to consolidate credit-card debt or pay for medical expenses, Merrill said.

   

  His unusual appearance in the financial world is a luxury he can afford. ZestFinance is among a crop of startups leading a technology-driven push to make lending easier and cheaper. Wall Street firms and other large institutional money managers have taken note, writing big checks to participate in the fast-growing businesses.

   

  Avant Inc., one of ZestFinance’s competitors, said last week that it had raised $325 million from investors including private-equity firm General Atlantic and JPMorgan Chase & Co. Social Finance Inc., which helps borrowers from elite colleges consolidate student debt, said a day later that it raised $1 billion from investors including Japan’s SoftBank Group Corp. and affiliates of Dan Loeb’s hedge-fund firm Third Point LLC.

   

  ZestFinance gained notoriety in recent years for its approach to underwriting some of the most challenging borrowers. By sifting through oceans of data, Merrill and his colleagues created models that are being used to provide an online alternative to payday loans. Still, they’re not cheap: Some carry annual percentage rates of as high as 390 percent.

  Right.

  What could possibly go wrong here?

  Here’s a guy with a PhD lending money provided by a firm whose cost of capital is basically zero to borrowers whose credit is terrible and these loans carry APRs that approach 400%. 

  Let’s call this what it is: this is just nonsense and what will end up happening is that these loans will end up in the collateral pool of a CDO at some point and the very same hedge funds and PE houses that are providing the financing will end up betting against the loans they effectively made in a hilarious Abacus CDO redux that mainstreet with neither care about, remember, nor understand, which will be great news for Merrill and Wall Street because that means they can continue to perpetuate the business model.

  
  

  

  

  

  

  

• Is Russia Plotting To Bring Down OPEC?

  Submitted by Dalan McEndree of OilPrice

  Is Russia Plotting To Bring Down OPEC?

  President Putin’s recent moves in the Middle East—to shore up Bashar al-Assad’s regime in Syria through deployment of combat aircraft, equipment, and manpower and build-out of air-, naval-, and ground-force bases, and the agreement in the last week with Iran, Iraq, and Syria on intelligence and security cooperation—could contribute to Russian efforts to combat the myriad negative pressures on Russia’s vital energy industry.

  Live by Energy…

  Energy is the foundation of Russia, its economy, its government, and its political system. Putin has highlighted on various occasions the contribution Russia’s mineral wealth, in particular oil and natural gas, must make for Russia to be able to sustain economic growth, promote industrial development, catch up with the developed economies, and modernize Russia’s military and military industry.

  Even a casual glance at the IMF’s World Economic Outlook statistics for Russia shows the tight correlation since 1992 between GDP growth on the one hand and oil and gas output, exports, and prices on the other (economic series available here). According to the IMF’s 2015 Article Iv Consultation-Press Release and Staff Report, published August 3, oil and natural gas exports comprised 65 percent of exports, 52 percent of the Federal government budget, and 14.5 percent of GDP in 2014. Including their domestic contribution, hydrocarbons represent ~30 percent of GDP.

  While oil and natural gas are crucial to Russia, Russia’s crude and natural gas are crucial to its neighbors on the Eurasian landmass. Russia supplied about 30 percent (146.6 bcm) of Europe’s natural gas in 2014, and about 25 percent of its crude (3.5 mmbbl/day) in 2013. Russia’s oil and natural gas are also important to its Asian and Central Asian neighbors.

  It is not only the commodities that make Russia crucial, but its massive land-based infrastructure for their distribution throughout the Eurasian landmass. As Tatiana Mitrova, head of the oil and gas department, Energy Research Institute, Russian Academy of Sciences, pointed out regarding natural gas in The Geopolitics of Russian Natural Gas:

  “Russia has a unique transcontinental infrastructure in the heart of Eurasia (150,000 km of trunk pipelines), which also makes it a backbone of the evolving, huge Eurasian gas market (which could include Europe, North Africa, the Commonwealth of Independent States (CIS), Caspian Sea region, and Northeast Asia). Control over the transportation assets in this region together with vast gas reserves make Russia the key element of this new market.”

  The land-based oil distribution network is smaller, but also important. The 4,000 km Druzhba pipeline delivers about 1 mmbbl/day of crude to Europe—about 30 percent of total shipments to Europe. In the Far East, Rosneft shipped 22.6 million tons of crude to China in 2014 through the East Siberian Pacific Ocean (ESPO) pipeline.

  The Russian government continues to seek to extend and expand the natural gas distribution infrastructure—into Europe, with various proposed pipeline projects (Nord Stream 2, Turkish Stream 2, 3, and 4, South European Pipeline), and into China, with two large pipeline projects, Power of Siberia Pipeline (to supply China from East Siberia), and the proposed Altai pipeline (to supply China from West Siberia).

  …Death by Energy

  In the last few years, the threats to Russia’s energy industry have multiplied and intensified. They pose an existential threat to the industry and therefore to the Russian economy:

  – The revenues Russia can earn from its crude and natural gas exports face intense pressure. The Saudi decision to let the market set prices and to pursue market share, has led to steep declines in crude and petroleum product prices. The decision also has impacted natural gas export prices negatively, since, for Russia’s long-term supply agreements, they wholly or partially are indexed to oil prices. The transition in Europe to hybrid natural gas pricing models (which take European spot hub prices into account) also has pressured natural gas pricing. (Natural gas data from Gazprom).

  

  (Click to enlarge)

  Adding to the revenue pain, natural gas export volumes have been falling, according to Gazprom (which has a monopoly on pipeline exports), as have domestic volumes within Russia:

  

  (Click to enlarge)

  It is therefore not surprising that the aforementioned IMF Article Iv Consultation-Press Release and Staff Report projected sharp declines in 2015 and 2016 from 2014 levels for oil export revenues ($109.8 billion and $96 billion respectively) and natural gas export revenues ($12 billion and $14.3 billion respectively).

  

  (Click to enlarge)

  Since these IMF projections are based on $60.1 and $65.8 per barrel prices in 2015 and 2016, oil export revenues will undershoot these pessimistic IMF projections, as crude prices are projected to stay below $60 through 2016 (EIA estimates for Brent are $54.07 and 58.57 in 2015 and 2016 respectively).

  – The U.S. and European Union’s decisions to impose—and maintain—sanctions on Russia after its invasion and annexation of Crimea and invasion and informal annexation eastern Ukraine will pile more pressure on the Russian energy industry. They include bans on financing for and the supply of critical equipment and technology to important Russian energy projects. Novatek and its partners Total and Chinese National Petroleum Company still lack $15 billion of the $27 billion needed to finance the Yamal LNG plant. Denis Khramov, Russia’s deputy Minister of Natural Resources, said September 28 at a conference in Russia’s Far East that Rosneft and Gazprom are delaying some offshore drilling by two to three years because of sanctions and low oil prices. The sanctions are also impeding Gazprom’s ability to develop the Chayandinskoye and Kovyktinskoye fields in eastern Siberia, from which it plans to supply natural gas to China under the bilateral $400 billion, thirty year deal signed in 2014.

  – Following the Russian invasion of Crimea and eastern Ukraine, The European Union is now even more determined to reduce its dependence on Russia for natural gas and to force Gazprom submit to EU competition rules. Europe has sought and continues to seek alternatives Russian natural gas (among them, U.S. LNG and Iranian pipeline and/or LNG). The European Commission, the European Union’s executive body, has refused to bless Gazprom’s proposed 55 bcm/year Nord Stream 2 natural gas pipeline project, citing existing surplus Gazprom pipeline capacity into Europe and insufficient future demand for Russian natural gas. Also, the EU Commission in April charged Gazprom with violating the EU’s anti-trust laws for anti-competitive practices and unfair pricing in Central and Eastern Europe. If found guilty, Gazprom could face substantial fines of around $1 billion. Even if Gazprom avoids fines and manages to reach a settlement with the EU, as it hopes to do, its European market share and pricing will remain under pressure into the future.

  – The emergence of the U.S., along with Canada, as powerful crude, NGL, and natural gas producers is also a major concern for the Russian economy. This has transformed the U.S. from a market for Russian crude and natural gas (via LNG) to a global competitor. If, as seems increasingly likely, the ban on crude exports is lifted, U.S. crude will compete with Russian crude in several key markets. It would also force foreign suppliers to seek other markets for all or part of the exports they previously sent to the U.S. This in turn would intensify competition among these crude exporting countries for share in those markets. In regard to natural gas, its explosive output growth in the U.S. undercut Gazprom’s rationale for its Baltic LNG project (10 mtpa), turned the U.S. into a major (potential) LNG competitor in global LNG import markets, and, via the U.S. toll- and Henry Hub- pricing model, weakened Gazprom’s ability to insist on oil-indexed, long-term contracts.

  Saving Russian Energy (and Russia) through the Middle East?

  Putin’s moves in the Middle East could help Russia address the impact of these threats to the Russian energy industry. They potentially enhance the attractiveness of Russian crude and natural gas supplies compared to those from Saudi Arabia and its Gulf Arab allies.

  In the selection of crude and natural gas suppliers, security is a key consideration for importers. Wary of U.S. naval power, the Chinese, for example, prefer pipeline natural gas supplies over seaborne LNG supplies. Importers therefore must take into consideration the potential threats to transport. In this critical area, Russia enjoys a decided advantage over Saudi Arabia and the Gulf Arab producers, which depend on sea transport through the Persian Gulf and the Red Sea to ship their oil and LNG.

  Each of the three routes from these two bodies of water passes through a “choke point” (from the Red Sea, through the Suez Canal to Europe and through the Mandeb Strait to Asia, from the Persian Gulf through the Strait of Hormuz). By adding an airbase to their military presence in Syria, the Russians—coordinating with Iran, Syrian President Assad, and eventually possibly Iraq—would have the capability to disrupt shipments from Persian Gulf and Red Sea terminals.

  Russia’s export channels are less susceptible to disruption. With the exception of LNG exports to Asia from Sakhalin, Russia sends natural gas to its customers via pipeline. About 70 percent of Russia’s seaborne oil exports are susceptible to choke points (shipments from two ports on the Gulf of Finland through the Baltic Sea to the Atlantic and one port on the Black Sea through the Turkish Strait/Bosporus to the Mediterranean), while 30 percent are not (pipeline shipments to Europe and ESPO pipeline shipments to the port of Primorsk near Vladivostok).

  Putin’s moves also are strengthening Russia’s influence with OPEC. Russia already has extensive and close ties with Iran and Venezuela, and is now laying the basis for such ties with Iraq. Putin has aligned Russia with OPEC’s have nots–the members lacking financial resources to withstand low crude prices for an extended period and that have objected to Saudi policies (Iran, Iraq, Angola, Nigeria, Libya, Algeria, Ecuador, and Venezuela)—against the haves (Saudi Arabia, Kuwait, the UAE, and Qatar). He has continually supported Venezuelan President Maduro’s calls for an emergency OPEC meeting on prices and his efforts to persuade Saudi Arabia to reverse its policy. Most recently, in the beginning of September, Putin told Maduro that the two countries “must team up to shore up oil prices”.

  In addition, Russia’s deputy prime minister in charge of energy policy, Arkady Dvorkovich, in the beginning of September made comments that, in tone and substance, mocked Saudi policy, saying that “OPEC producers are suffering the ricochet effects of their attempt to flush out rivals by flooding the world with excess output,” expressing doubt that OPEC members “really want to live with low oil prices for a long time,” and implying that Saudi policy is irrational.

  Indeed, Russia can be seen as maneuvering to split OPEC into two blocs, with Russia, although not a member, persuading the “Russian bloc” to isolate Saudi Arabia and the Gulf Arab OPEC members within OPEC. This might persuade the Saudis to seek a compromise with the have nots.

  A strategic alliance with Iran and Iraq offers Putin two more potential avenues to pressure the Saudis. They can test Saudi determination to defend their market share at any price and its wherewithal financially to do so. Iran claims it can raise crude output by one million barrels within six or so months of the lifting of sanctions. The Saudis may be calculating that Iran must first rehabilitate its oil fields and that Iran, cash poor, cannot do so quickly. If this is the case, Russia could step in, offer Iran financing, and force the Saudis to contemplate prices staying lower longer than they anticipated and therefore continuing pressure on their economy.

  Russia also could cooperate with Iran and Iraq to take market share from Saudi Arabia in the vital Chinese market. As a recent Bloomberg article pointed out, Saudi Arabia, Iran, Russia, Iraq and other countries are vying intensely for sales to China, the second largest import market and the major source of demand growth in coming years. Coordinating their pricing and consistently offering the Chinese prices below the Saudi price, they could seek to win market share. Such a price war would pressure the competitors’ currencies.

  Since the Russians allow the Ruble to float, Iran maintains an informal and unofficial peg for its Rial to the US$, and Iraq has indicated it is willing to adjust its peg if necessary, while the Saudis are committed to the Riyal’s peg to the US$, Russia, Iran, and Iraq would have any advantage over Saudi Arabia. To the extent that Iran and Iraq allowed their currencies to adjust, Russian, Iranian, and Iraqi revenues in local currency terms would not decline as much as Saudi revenues fixed in US$ (and might even increase) as their currencies depreciated.

  Results

  Each of these opportunities offers the possibility to address the pressures on the Russian energy industry. However, Putin will have to play his cards carefully. Played heavy-handedly, he could intensify fears in Europe of excessive dependence on Russian energy supplies and awaken such fears in China. This could lead the Europeans and Chinese to search for other suppliers. In addition, mismanaged confrontation with the U.S. and Europe in and over Syria could lead to broadening and strengthening of economic and financial sanctions. Moreover, neither Iran nor Iraq will want to become overly dependent on Russia, which lacks the resources they need develop their energy industries.

  Finally, the opportunities assume Putin’s gambits in Syria and with Syria, Iran, and Iraq in intelligence and security cooperation will succeed. And this, given the Soviet experience in Afghanistan and Putin’s experience in eastern Ukraine, is far from certain.

  

  

  

  

  

• A "Heroic" Ben Bernanke Blames Congress For Poor Economic Recovery

  Make no mistake, Ben Bernanke is a “courageous” guy. 

  When the world was on the verge of collapse in 2008 thanks in no small part to the post dot-com bubble policies of his predecessor, the former Fed chair wants you to know that he did what was needed to save the world and he will tell you all about it in his new memoir “The Courage To Act”, which can be yours on Kindle for the weird price point of just $16.05 (or, in unconventional monetary policy terms, about a QE millisecond).

  Of course perhaps more than any other post-crisis DM central banker, Bernanke has a lot of explaining to do. That is, it isn’t immediately clear why, if Ben wants to contend that the Keynesian dominoe effect he set off in 2008 is such a success, that inflation expectations are still mired in the deflationary doldrums in Japan and Europe and why global demand and trade are stuck at stall speed.

  Of course what you do if you’re a Keynesian central planner in today’s low-growth world is blame lawmakers because after all, when monetary policy fails to bring about the promised defibrillator shock to global demand, you can always pin the whole debacle on an ineffective legislature. Here’s FT with Bernanke’s take:

  The former chairman of the Federal Reserve has hit out at Congress for failing to do its part to bolster America’s rebound from the financial crisis, saying the US central bank had been unfairly criticised when the recovery “failed to lift all boats”.

   

  In his newly published memoir, Ben Bernanke admitted the Fed had failed to spot some of the dangers building before the financial crash, and said that the controversial rescues of Bear Stearns and the insurance company AIG had damaged its political standing and “created new risks to its independence”.

   

  As suggested by the title of his book, The Courage to Act, Mr Bernanke argues that the Fed’s policies under his leadership were justified and helped usher in a stronger recovery than in many other countries. He draws a sharp contrast with the euro area, where monetary and fiscal policies had been “much tighter than demanded by economic conditions,” helping explain the miserable recovery in that economic bloc.

   

  
  

   

  Mr Bernanke levels frequent criticism at Congress in the book, calling for less confrontation and implicitly contrasting the bitter partisanship on Capitol Hill with a collegiate, consensus-building approach within the Fed.

   

  The publication come as Congress struggles to reach agreement on budget plans that would ensure highway building is funded and avoid a punishing fiscal clampdown after temporary spending measures lapse in December.

   

  Mr Bernanke writes: “The Fed can support overall job growth during an economic recovery, but it has no power to address the quality of education, the pace of technological innovation, and other factors that determine if the jobs being created are good jobs with high wages.

   

  “That’s why I often said that monetary policy was not a panacea — we needed Congress to do its part. After the crisis calmed, that help was not forthcoming. When the recovery predictably failed to lift all boats, the Fed often, I believe unfairly, took the criticism.”

  Fortunately for Bernanke’s successors at the Fed, there are now plenty of loud calls for monetary policy and fiscal policy to be merged which means that no longer will “heroes” like Ben have to worry about recalcitrant lawmakers, they’ll simply be able to order the issuance of bonds which they themselves will purchase, and as absurd as you might think that sounds, it’s where things are headed because as we outlined last month, it now looks like “they” are actually going to go “there” with the helicopter money drops. It’s just too bad Ben isn’t around to preside over the insanity.

  

  

  

  

  

• Putin Has Just Put An End to the Wolfowitz Doctrine

  4-Star General Wesley Clark noted:

  In 1991, [powerful neocon and Iraq war architect Paul Wolfowitz] was the Undersecretary of Defense for Policy – the number 3 position at the Pentagon. And I had gone to see him when I was a 1-Star General commanding the National Training Center.

   

  ***

   

  And I said, “Mr. Secretary, you must be pretty happy with the performance of the troops in Desert Storm.”

   

  And he said: “Yeah, but not really, because the truth is we should have gotten rid of Saddam Hussein, and we didn’t … But one thing we did learn [from the Persian Gulf War] is that we can use our military in the region – in the Middle East – and the Soviets won’t stop us. And we’ve got about 5 or 10 years to clean up those old Soviet client regimes – Syria, Iran, Iraq – before the next great superpower comes on to challenge us.”

  (Skip to 3:07 in the following video)

   

  The hawks overthrew Soviet allies Iraq and Libya.

  And they’ve been pushing for regime change in Syria for years.

  By bombing Isis, Al Nusra and other jihadis in Syria who are focused on overthrowing Russian ally Assad, Putin has put an end to the Wolfowitz doctrine.

  

  

  

  

• NYSE Short Interest Surges To Record, Pre-Lehman Level

  There are two ways of looking at the NYSE short interest, which as of September 15 surged by 1.4 billion to 18.4 billion shares or just shy of the level hit on July 31, 2008:

  • Either a central bank intervenes, or a massive forced buying event occurs, and unleashes the mother of all short squeezes, sending the S&P500 to new all time highs, or
  • Just as the record short interest in July 2008 correctly predicted the biggest financial crisis in history and all those shorts covered at a huge profit, so another historic market collapse is just around the corner.

  

  The correct answer will be revealed in the coming weeks or months.

  Source: NYSE

  

  

  

  

  

• How Developed Markets Become Banana Republics: "Debt Is A Much Easier Way To Gather Consensus"

  Perhaps the most dangerous thing about where the world seems to be headed now that central bankers have not only lost credibility in the minds of investors, but in their own minds as well, is that it’s not entirely clear what will happen to society if credit suddenly dries up. 

  That is, if the central bank put finally disappears and the market is once again free to purge speculative excess and correct the rampant misallocation of capital, the days of easy money will quickly come to an end as rational actors begin to make decisions based on prudence and fundamentals rather than on the assumption that because the cost of capital is effectively zero, and because central planners will never “allow” the system to fail, credit can safely be extended to unworthy borrowers. 

  We’ll likely get an early indication regarding the market’s tolerance for a return to some semblance of normalcy in the coming months as capital markets become less forgiving towards the exceedingly uneconomic US shale space. But as mentioned above, the truly interesting question is what happens when everyone else starts to get the bankrupt shale driller treatment because after all, in a world where everybody is living on cheap credit, metaphorically speaking we’re all just broke US oil producers, surviving on debt and the willingness of our neighbors to finance that debt. 

  It’s against that backdrop that we bring you the following excerpts from RBS’ Alberto Gallo, whose latest note takes a look at the history and proliferation of the fiat regime.

  *  *  *

  From RBS

  Bretton Woods ended shortly after (1971), while Fannie, Freddie and various other programmes that followed marked the gradual change to a monetary system based on fiat currencies, and later on, on fiat credit. 

  

  The use of government subsidies to encourage private borrowing to purchase a house, a car, or any other goods was since then imitated in other developed countries. It was the start of the so-called let-them-eat-credit policies and the transformation of democracies into debt-based democracies. No government, wrote now RBI Governor Rajan, prefers the tough reality of declining growth or of a crisis. Debt is a much easier way to gather consensus, and to postpone structural issues.

  
  

  “Politicians are resourceful people. Their political skill lies partly in proposing solutions that keep their constituents happy without venturing into the rocky terrain of real reform. In the case of inequality, politicians know intuitively that households ultimately care most about their consumption over time; incomes are only a means to obtaining that consumption stream. A smart politician can see that if somehow the consumption of middle-class householders keeps rising, if they can afford a new car every few years and the occasional exotic holiday, and best of all, a new house, they might pay less attention to their stagnant monthly paychecks. And one way to expand consumption, even while incomes stagnate, is to enhance access to credit.”

  *  *  *

  For now, we’ll forgive the fact that that quote comes from a central banker that just days ago slashed rates by 50 bps in an epic dovish lean that surprised 51 out of 52 economists and simply note that the dynamic described above is exactly how a developed, powerhouse economy gradually becomes a banana republic and if EM continues to follow this blueprint, the roundtrip from frontier market to investment grade and then back to frontier “junk” won’t take long. 

  

  

  

  

  

• The Trans-Pacific Partnership: Permanently Locking In The Obama Agenda For 40% Of The Global Economy

  Submitted by Mike Snyder of End of the American Dream

  

  We have just witnessed one of the most significant steps toward a one world economic system that we have ever seen.  Negotiations for the Trans-Pacific Partnership have been completed, and if approved it will create the largest trading bloc on the planet.  But this is not just a trade agreement.  In this treaty, Barack Obama has thrown in all sorts of things that he never would have been able to get through Congress otherwise.  And once this treaty is approved, it will be exceedingly difficult to ever make changes to it.  So essentially what is happening is that the Obama agenda is being permanently locked in for 40 percent of the global economy.

  The United States, Canada, Japan, Mexico, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam all intend to sign on to this insidious plan.  Collectively, these nations have a total population of about 800 million people and a combined GDP of approximately 28 trillion dollars.

  Of course Barack Obama is assuring all of us that this treaty is going to be wonderful for everyone…

  In hailing the agreement, Obama said, “Congress and the American people will have months to read every word” before he signs the deal that he described as a win for all sides.

   

  “If we can get this agreement to my desk, then we can help our businesses sell more Made in America goods and services around the world, and we can help more American workers compete and win,” Obama said.

  Sadly, just like with every other “free trade” agreement that the U.S. has entered into since World War II, the exact opposite is what will actually happen.  Our trade deficit will get even larger, and we will see even more jobs and even more businesses go overseas.

  But the mainstream media will never tell you this.  Instead, they are just falling all over themselves as they heap praise on this new trade pact.  Just check out a couple of the headlines that we saw on Monday…

  • Time Magazine: “Pacific Trade Deal Is Good for the U.S. and Obama’s Legacy”
  • The Washington Post: “The Trans-Pacific Partnership is a trade deal worth celebrating”

  Overseas it is a different story.  Many journalists over there fully recognize that this treaty greatly benefits many of the big corporations that played a key role in drafting it.  For example, the following comes from a newspaper in Thailand…

  You will hear much about the importance of the TPP for “free trade”.

   

  The reality is that this is an agreement to manage its members’ trade and investment relations — and to do so on behalf of each country’s most powerful business lobbies.

  These sentiments were echoed in a piece that Zero Hedge posted on Monday…

  Packaged as a gift to the American people that will renew industry and make us more competitive, the Trans-Pacific Partnership is a Trojan horse. It’s a coup by multinational corporations who want global subservience to their agenda. Buyer beware. Citizens beware.

  The gigantic corporations that dominate our economy don’t care about the little guy.  If they can save a few cents on the manufacturing of an item by moving production to Timbuktu they will do it.

  Over the past couple of decades, the United States has lost tens of thousands of manufacturing facilities and millions of good paying jobs due to these “free trade agreements”.  As we merge our economy with the economies of nations where it is legal to pay slave labor wages, it is inevitable that corporations will shift jobs to places where labor is much cheaper.  Our economic infrastructure is being absolutely eviscerated in the process, and very few of our politicians seem to care.

  Once upon a time, the city of Detroit was the greatest manufacturing city on the planet and it had the highest per capita income in the entire nation.  But today it is a rotting, decaying hellhole that the rest of the world laughs at.  What has happened to the city of Detroit is happening to the entire nation as a whole, but our politicians just keep pushing us even farther down the road to oblivion.

  Just consider what has happened since NAFTA was implemented.  In the year before NAFTA was approved, the United States actually had a trade surplus with Mexico and our trade deficit with Canada was only 29.6 billion dollars.  But now things are very different.  In one recent year, the U.S. had a combined trade deficit with Mexico and Canada of 177 billion dollars.

  And these trade deficits are not just numbers.  They represent real jobs that are being lost.  It has been estimated that the U.S. economy loses approximately 9,000 jobs for every 1 billion dollars of goods that are imported from overseas, and one professor has estimated that cutting our trade deficit in half would create 5 million more jobs in the United States.

  Just yesterday, I wrote about how there are 102.6 million working age Americans that do not have a job right now.  Once upon a time, if you were honest, dependable and hard working it was easy to get a good paying job in this country.  But now things are completely different.

  Back in 1950, more than 80 percent of all men in the United States had jobs.  Today, only about 65 percent of all men in the United States have jobs.

  Why aren’t more people alarmed by numbers like this?

  And of course the Trans-Pacific Partnership is not just about “free trade”.  In one of my previous articles, I explained that Obama is using this as an opportunity to permanently impose much of his agenda on a large portion of the globe…

  It is basically a gigantic end run around Congress.  Thanks to leaks, we have learned that so many of the things that Obama has deeply wanted for years are in this treaty.  If adopted, this treaty will fundamentally change our laws regarding Internet freedom, healthcare, copyright and patent protection, food safety, environmental standards, civil liberties and so much more.  This treaty includes many of the rules that alarmed Internet activists so much when SOPA was being debated, it would essentially ban all “Buy American” laws, it would give Wall Street banks much more freedom to trade risky derivatives and it would force even more domestic manufacturing offshore.

  The Republicans in Congress foolishly gave Obama fast track negotiating authority, and so Congress will not be able to change this treaty in any way.  They will only have the opportunity for an up or down vote.

  I would love to see Congress reject this deal, but we all know that is extremely unlikely to happen.  When big votes like this come up, immense pressure is put on key politicians.  Yes, there are a few members of Congress that still have backbones, but most of them are absolutely spineless.  When push comes to shove, the globalist agenda always seems to advance.

  Meanwhile, the mainstream media will be telling the American people about all of the wonderful things that this new treaty will do for them.  You would think that after how badly past “free trade” treaties have turned out that we would learn something, but somehow that never seems to happen.

  The agenda of the globalists is moving forward, and very few Americans seem to care.

  

  

  

  

  

• Russian Embassy Trolls Saudi Arabia On Twitter

  As regular readers and foreign policy critics the world over are no doubt acutely aware, the US, Saudi Arabia, Qatar, and Turkey have gotten themselves in a bit of a quagmire in Syria and Moscow has been keen on pointing it out. Still, The Kremlin has thus far observed some semblance (and we do emphasize the word “some”) of decorum in criticizing the West’s approach as Moscow has generally confined its scolding to what at least seem like serious foreign policy critiques. 

  That just went out the window – Russia is now openly mocking Riyadh, Doha, and Washington and as if the following weren’t brazen enough as it stands, note that it emanates from the UAE… 

  Find the right #Syrian rebel to arm – non-trivial task to start your day with | #Syria #????? #ISIL #Nusra #???? pic.twitter.com/Gc60dVAn7D

  — Russian Embassy, UAE (@RusEmbassyUAE) October 5, 2015

  

  

  

  

  

• The Phrase That Launches Recessions

  Submitted by Pater Tenenbrarum of Acting Man

  It Can’t Get Any Worse?

  On Friday, shortly after the release of the payrolls report, we asked half in jest whether the time had finally come for the market to interpret bad news as bad news, and not as an opportunity to speculate on more central bank largesse. As someone remarked to us later: “You had to ask”.

  

  Photo credit: Paul Cross

   

  Apparently a slightly later released news item informing us that “factory orders hit the skids” was taken as a buy signal of the “it can’t get any worse” sort. Normally it is considered bullish when the market rises on ostensibly bad news – and very often, this is actually the correct interpretation of such market action. However, one must be careful when the fundamental backdrop is subject to severe deterioration. Readers may recall that commentary on the markets was brimming over with the same type of argument in late 2007 and early 2008. In October 2007, the market in its unending wisdom priced the shares of Fannie Mae at $73 for instance.

   

  

  SPX, 10 minute chart – after initially sliding on Friday, the market quickly recovered and has rallied quite a bit since then 
  click to enlarge.

   

  The point is this: Although as a trader one must always respect market action, especially in the short term, one must at the same time avoid to ascribe to the mass of market participants a degree of wisdom they simply don’t possess. The market very often “knows” nothing and frequently tends to get things completely wrong. If that were not so, there would never be any buying or selling opportunities, but plenty of those obviously exist.

   

  The “Throwing of the Light Switch”

  Anyway, over the weekend we caught up a little on our reading, and inter alia came across an article at Wolfstreet a friend had pointed out to us, which discusses the recent weakness in US manufacturing data.

  What struck us was a comment made by the CEO of a manufacturing company in the context of the latest Kansas manufacturing survey release. As Wolf street notes, according to the survey, “the future composite index and the indexes for the future production, shipments, and new orders all dropped to their worst levels since 2009”. Here is what the CEO said:

  “It feels like someone just flipped the switch to ‘off’ without any concrete reasoning,” one of the executives commented.

  (emphasis added)

  We immediately recognized that phrase – we have heard it twice before, and it has stuck with us ever since. In fact, we have mentioned it a few times when occasion demanded in past articles. The first time we heard this phrase was in late 2000, in an interview with the CEO of a telecom equipment provider. Paraphrasing: “It’s as if someone had just thrown a light switch – orders have suddenly disappeared”.

  The next time we heard the phrase uttered was in late 2007 – this time in connection with a mortgage credit company. Ever since, we have filed it away as an anecdotal reference to the onset of recessions. And lo and behold, the phrase is popping up again in a district manufacturing survey.

  Over the weekend we also looked at the latest EWI financial forecast (a monthly publication focused on US markets). In one section, the authors discuss the recent prevalence of individual stocks and corporate bonds crashing even while the market as a whole seems to be holding up relatively well. They also ponder whether certain corners of the bond market that are lately attracting funds from those fleeing the junk bond market for their perceived safety are really as safe as is widely assumed. The following turn of phrase stood out to us in this context:

  “Our view is that Glencore’s “flash crash” will turn out to be one of many “light-switch” declines, and not just in commodity-related businesses. Already, a plethora of stocks in a wide range of industries have quietly crashed over 50% this year. The industries range from specialty retail (Aeropostale, -78%) to coffee (Keurig Green Mountain, -67%) to semiconductors (Micron Technology, -61%) and the Internet (Groupon, -61%).”

   

  [and further below, in the discussion of corporate debt]:

   

  “As the charts of Glencore’s stock and its credit default swaps illustrate, the “light switch” moments are starting to appear.”

  (emphasis added)

  So there you have the same phrase again, only this time in connection with financial market behavior. As the accompanying chart shows, junk bond spreads are exhibiting a distinct similarity to how they looked just ahead of the most recent recessions and bear markets:

   

  

  Junk bond spreads with a proposed wave count by EWI – click to enlarge..

   

  This synchronicity in this turn of phrase is of course not a coincidence – both the sudden disappearance of manufacturing orders and the “quiet flash crashes” of individual stocks from a wide range of industries coupled with persistent weakness in junk bonds, are symptoms of the same underlying phenomenon.

  Conclusion

  When we see the phrase about a “light switch suddenly being flipped to ‘off’” or a variant thereof popping up in reports about the economy or descriptions of market behavior, our ears are perking up. Admittedly, a sample of two is not exactly the mother of all sample sizes. Then again, anecdotal evidence is by its nature not statistical, but rather reflects the perceptions of people, in this case people intimately involved with the underlying businesses or markets.

  We tend to believe that such evidence is actually important. Both in 2000 and 2007 we encountered this phrase shortly after the stock market (in the form of the S&P 500) had put in an all time high or a retest of an all time high. Even the very first time in 2000 it struck us as significant. The reason in this case was that only half a year earlier, there had been much talk of “equipment shortages” and even (hold on to your hat ) “DRAM shortages”.

  When manufacturers see their orders suddenly dry up, something is very wrong in the economy already (note also, this tends to happen before any material effects on employment become evident. A sudden rise in initial claims would definitely cinch it). In light of this, stock market rebounds, even impressive ones, should be viewed with a healthy dose of skepticism.

  Charts by: StockCharts, Elliott Wave International

  

  

  

  

  

• Barry Diller: "If Trump Wins I'll Move Out Of The Country"

  IAC/Interactive Chairman Barry Diller spoke with Bloomberg’s Erik Schatzker about many things including the state of the TV industry, Tinder, and Jack Dorsey at the Bloomberg Markets Most Influential Summit in New York today. However, the one thing that caught our attention was the prominent Democrat’s characterization of what he would do if Donald Trump wins the presidential election.

  His quote:

  “If Donald Trump doesn’t fall, I’ll either move out of the country or join the resistance. I just think it’s a phenomenon of reality television as politics and I think that that is how it started. Reality television, as you all know, is based on conflict. All he is is about conflict and it’s all about the negative conflict. He’s a self-promoting huckster who found a vein, a vein of meanness and nastiness.”

  //

  The reality is that many, if not most US corporate executives, comfortable with the close relationship their money has with D.C. career politicians whom they know they can buy and manipulate without reproach, share Diller’s sentiment.

  Which is why one wonders if despite all his various misgivings, having Trump in the oval office may well be worth if only for the mass exodus of all those who have co-opted US democracy, who have equated corporations with people, who have put the “crony” in crony capitalism, and who have been the sole beneficiaries of the $3 trillion in Fed asset purchases to date, purchases which are set to continue shortly.

  

  

  

  

  

• Oct 7 – IMF Warns On Worst Global Growth Since Financial Crisis

  EMOTION MOVING MARKETS NOW: 30/100 FEAR

  PREVIOUS CLOSE: 32/100 FEAR

  ONE WEEK AGO: 13/100 EXTREME FEAR

  ONE MONTH AGO: 10/100 EXTREME FEAR

  ONE YEAR AGO: 5/100 EXTREME FEAR

  Put and Call Options: NEUTRAL During the last five trading days, volume in put options has lagged volume in call options by 30.48% as investors make bullish bets in their portfolios. This is a lower level of put buying than has been the norm during the last two years and is a neutral indication.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 19.40. This is a neutral reading and indicates that market risks appear low.

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

   

  PIVOT POINTS

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

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

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

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

   

  MEME OF THE DAY – BEIJING AFTER VOLKSWAGEN

   

  UNUSUAL ACTIVITY

  FOLD .. JAN 9 and 10 CALLS on the offer

  MDT activity in the NOV 72.5 CALLS

  FUND  Senior Portfolio Manager P    18,231  A  $ 5.9175

  LPCN – President and CEO P    2,000  A  $ 12  P    700  A  $ 11.6799 P    1,300  A  $ 11.676

  More Unusual Activity…

  HEADLINES

   

  IMF warns on worst global growth since financial crisis

  IMF: Fed should wait for firmer inflation before hiking

  IMF sees China slowdown risks, urges Beijing to float yuan

  EIA raises 2015 global oil demand forecast

  Opec sees oil market stabilising, says low prices will not persist

  CA Ivey Purchasing Managers Index SA Sep: 53.7 (est 54; prev 58)

  ECB Liikanen: ECB should avoid hasty QE action, stay patient

  Fonterra dairy prices +9.9%

   

  GOVERNMENTS/CENTRAL BANKS

  IMF warns on worst global growth since financial crisis –FT

  IMF: Fed Shld Await ‘Firmer Signs’ Infl Rising Before Liftoff –MNI

  Atlanta Fed GDPNow Forecast 1.1% (prev 0.9%)

  ECB Liikanen: ECB shouldn’t take hasty policy response to recent inflation decline –BZ

  Ifo: Eurozone Recovery Driven By Domestic Demand

  EU to close tax loopholes for multinationals –CNBC

  UK FCA Introduces New Rules On Whistleblowing

  Fitch: Portugal Vote Means Policy Continuity but Some Risks

  RBA satisfied Australia’s economy ‘weathering the storm’ –AFR

  TPP : With deal’s details still a mystery, Japan parliament unlikely to meet –Nikkei

  FIXED INCOME

  US sells 3-year notes at 0.895% vs 0.901% WI –ForexLive

  Treasury yields turn lower after IMF cuts global-growth outlook –MW

  COMMENT: Has Liquidity Risk in the Treasury and Equity Markets Increased? –NY Fed Liberty Street Economics

  FX

  EUR: EURUSD shows first 55DMA/200DMA Golden Cross in 16 mths –Laidi

  SWIFT: Yuan overtakes Japanese Yen as world?s 4th largest payment currency –People

  IDR: Indonesia?s Rupiah Logs Biggest One-Day Gain In Over Six Years –WSJ

  ENERGY/COMMODITIES

  WTI futures settle +4.9% at $48.53 per barrel

  Brent futures settles +5.4% at $51.92 per barrel

  Oil rises, as market eyes less U.S. output, Saudi-Russia talks –Rtrs

  Opec chief: Could See 2016 Non-OPEC Supply Growth Of Zero Or Negative –Rtrs

  Opec: Global Oil to Cut Spending by $130 Billion –WSJ

  EIA: Crude Output to Fall Through mid 2016, Price Outlook Same –MNI

  IEA’s Birol: Oil upstream investment drop is biggest in history –Rtrs

  EQUITIES

  EARNINGS: PepsiCo revenue beats as North America sales rise –CNBC

  EARNINGS: Strong dollar drags on SABMiller earnings –FT

  M&A: AmerisourceBergen buys Pharmedium Healtchare for $2.575bn –Biz Wire

  M&A: Suncor seeking to win over investors on Canadian Oil Sands bid –BBG

  M&A: Johnson Controls is in early stage talks to buy EnerSys –DJ

  GREECE: Greece’s Piraeus Port Sale Delayed A Few Weeks –Rtrs

  FUNDS: Bain to liquidate $2.2bln absolute return capital fund –BBG

  CONSUMER: Tesco And Fraud Office Hold Talks Over Deal –Sky

  TECH: EU says Facebook Data Transfer Deal Invalid –Sky

  AUTOS: VW scandal: staff told all carmaker’s investments are under review –Guardian

  C&E: Shell boss sees signs of oil price recovery but warns of ‘spike’ –Guardian

  C: DuPont Co. chief Ellen Kullman will retire at mid-month, company says –NJ

  M&A: Irish central bank opposes takeover of forex broker Avatrade –ForexLive

  LetterOne in talks to acquire Eon oil and gas assets –FT

  Bombardier offered to sell majority stake in troubled CSeries program to Airbus, sources say

  EMERGING MARKETS

  IMF sees China slowdown risks, urges Beijing to float yuan –Rtrs

  Polish Central Bank Holds Rates, As Expected –Nasdaq

   

  Fitch: Lower Russian Bank Capital Ratio Would Be Credit Negative

  

  

  

  

  

• Earnings Still Matter

  From the Slope of Hope: Many years ago, if you asked someone what drove stock prices, they would give you a simple, honest answer: earnings. If a company had strong earnings, and those earnings were projected to grow, then the stock price was strong. If not, then not.

  Take a time machine back to that same person and tell them about the new world in which what drives stock prices is the USD/JPY. Yep, the ratio of the US dollar to the Japanese Yen is what everyone follows, pip by pip (tonight being yet another example, as everyone is tied up in knots as to what that chortling buffoon Kurado is going to announce). What the USD/JPY has to do with honest-to-God equity value is beyond me.

  In spite of this, earnings still matter, and as we head into another earnings season, the bulls better pray to whatever pagan gods they worship that company after company magically defy the downturn that the economy is quite obviously entering. It isn’t off to a good start this evening, however, as the charts below show.

  First off, there is YUM, which is the organization that owns the fine dining establishments Kentucky Fried Chicken, Taco Bell, and Pizza Hut. I guess even the morbidly obese typical American gastropod has had his fill over low-quality, over-salted, over-greased crap that these dreadful little venues crank out, as the stock has lost nearly one-fifth of its market cap after hours (after having already dropped substantially in recent months):

  

  Software make Adobe is having a relatively gentle time of it, as its percentage loss is (as of this writing, at least) still confined to the single digits. All the same, it’s pretty ugly out there.

  

  These are just two companies out of the thousands that will be reporting in the weeks ahead. Let’s hope this is representative of plenty of bad news to come.

  

  

  

  

• SocGen Models A Chinese Hard-Landing; Sees The S&P Crashing 60%

  Now that even permabulls are openly discussing a recession as a possibility for the US economy, a comparable and far more dire scenario is making the mainstream rounds: a China hard-landing.

  Earlier today, SocGen decided to model out what what would happen to equities in just such a scenario. In fact, it took it one step further and combined this with what an “EM lost decade”, one which increasingly looks more realistic, would look like.

  This is what it found:

  Our model indicates the US equity market could potentially drop by 30% in the event of an ‘EM lost decade’ and by 60% in the event of a China hard landing (i.e. S&P 500 back to its lows).

  The silver lining will depend on just how aggressive the response to such a collapse will be:

  The amplitude of the correction would be a function of the policy response. In both scenarios, we think global equities would rebound strongly after
  having overshot (i.e. equities to price in a more optimistic scenario).

  SocGen then provides the following seven investment recommendations for what would be more or less an apocalypse for risk assets:

  

  While the above are largely self-exlanatory, SocGen adds the following explainer:

  The 2015 summer sell-off highlighted how nervous the markets are regarding any risk coming from China: the S&P 500 index lost 11% in one week, the Eurostoxx 50 fell 16% and the Nikkei was down 13%. Whatever the scenario (hard landing or EM lost decade), if China’s GDP growth were to drop by c. 2% between 2015 and 2016, volatility would jump and the equity market would price in a lack of future growth (i.e. via a spike in the risk premium).

  

  And some more details:

  ‘EM lost decade’ scenario: a square root-shaped equity market

   

  Stressing our equity risk premium model indicates that the S&P 500 could potentially drop by 30% to 1400pts due to a strong move in the risk premium during 2016. In such a scenario, the market could quickly rebound (by year-end 2016) in line with commodity prices. We would expect support from central banks and the resilience of the US and European economies to support developed equity markets, which should gradually recover, albeit to a lower level. We thus imagine a square root-shaped scenario in which European equities would underperform US equities, but would then rebound stronger (on the back of a lower oil price, weaker currency, a more aggressive ECB and more attractive valuations).

   

  ‘Chinese hard-landing’ scenario: a V-shaped equity market trend

   

  In our hard-landing scenario, a theoretical drop in China’s GDP growth from 6.9% in 2015 to 3.0% in 2016 and its consequences would have a major impact on global corporate earnings. We would expect a sharp sell-off of global equities in such a scenario. Our risk premium model indicates that the S&P 500 could in theory return to its lows (around 800pts). But then again the deflationist shock could prompt the central banks to turn more aggressive and support the equity markets to prevent the S&P 500 from sliding into such a bear market. We think that after such a shock the global equity market would rebound strongly on a return to growth in China and central banks actions.

  * * *

  So while hardly coming as a surprise to anyone, the resultant devastation across global equity markets will mean that more than even a US recession, this explains why the Fed’s 4th mandate is precisely one that focuses on both Chinese markets and the economy, because suddenly the Fed has realized that the biggest risk to the S&P 500 is not domestic, but one stemming from China whose jugging of a real estate, credit, investment, banking and equity bubble will surely take up all the Fed’s resources in the coming years.

  

  

  

  

  

• Silver Coin Premiums Soar Above 50%

  Courtesy of Sharelynx’ Nick Laird who tracks precious metal premium by vendor, we continue our recent series showing the discrepancy between paper and physical metals, in this case silver. As Nick notes, APMEX price premiums are a lot higher than the Monex. And as can be seen in the charts below, premiums rose above 50% for 1-19 coins & above 40% for 500 plus coins.

  

   

  For now, gold is stable.

  

  

  

  

  

  

• Biotechs Butchered As Oil Orgasms In Otherwise Uneventful Day

  Update: both YUM and ADBE are crashing at this moment, the first down 16%, the second down 11%, after both admitted they had been “overoptimistic” and cut and guided lower. YUM Q3 revenue was $3.43bn, vs Exp. $3.66bn and EPS was $1.00 vs Exp. $1.06, while ADBE said it now expecteds EPS of $2.70 vs previous expectations of $3.20, on revenue of $5.7bn vs $5.94bn prior.

  ***

  After soaring some 100 points since the terrible Friday payrolls data, and nearly 6% in the past week…

  

   

  … today the S&P went very much nowhere, even despite yet another solid push in the USDJPY overnight…

  

   

  … which was subsequently picked up by the 5Y as the correlation between TSYs and equities promptly became dominant while the announcement of the 12% cut in DuPont EPS served to push the stock as much as 12% higher on hopes the company will promptly agree to become the latest actvist fodder, one which will issue billions in debt to fund stock buybacks.

  

   

  All throughout the day, the dollar index (DXY) continued to slide, and closed at the LOD, rapidly approaching the pre-FOMC level.

  

  But the real story of the day was the bifurcation between momo stocks, manifested in this case by biotechs which were mauled once again, tumbling over 6% at the lows, and down 24% from the recent highs, closing fractionally down for the year…

  

   

  … and crude oil, which soared over 6% from the day lows without a clear catalyst although there was speculation that geopolitical risks out of Syria where US and Russian planes are literally within dogfight distance, are finally catching up to oil traders.

  

   

  But perhaps the biggest, and most under-reported story, remains the unexpected demand for safety in the shape of 3Month bills, whose yields tumbled following the FOMC and have been increasingly negative in the days since, closing at -0.005%. Is the bond market really hinting at NIRP?

  

  And now all eyes to the BOJ when tonight around 11pm Eastern, Japan’s central bank is expected do and say precisely… nothing. After all, as we explained, this is the last bullet both the BOJ and the ECB have, and they will delay as long as possible before boosting QE, and would much rather leave the heavy lifting to the Fed.

  

  

  

  

• Prominent Permabull Says Correction Not Over Yet, Expect "Final Capitulation"

  Back in January 2012, all was well with the centrally-planned world: Gluskin Sheff’s David Rosenberg was staunchly bearish, while his arch-nemesis, Wells Capital’s Jim Paulsen, was the opposite. This rivalry culminated with Rosenberg writing an extensive breakdown of his showdown with “bullish strategist” Paulsen at a CFA event (see “David Rosenberg Explains What (If Anything) The Bulls Are Seeing“) in which he said that the one thing that he could “identify as market positive” was valuations, to wit: “we do understand that P/E ratios at current low levels do serve up a certain degree of confidence that there is some downside protection to the overall market here.”

  Fast forward three years, and the world, while still centrally-planned more so than ever now that the BOJ has and the ECB is about to join the massive monetization fray, has been thrown into conventional wisdom turmoil. The reason is that while David Rosenberg infamously flip-flopped from bear to bull (although supposedly he may be contemplating turning bearish again, though who knows after the last 3-day rally) three years ago, none other than permabull Jim Paulsen has come out with a very uncharacteristic and skeptical assessment of the market, in which he does not urge readers of his monthly letter on economic and market perspectives to yet again go all-in and BTFD, but to instead realize that the correction is not yet over and that he expects “a more fearful investment culture suggesting a final capitulation and more importantly, a lower stock market valuation level able to withstand a less hospitable recovery.“

  First, Paulsen’s take on the torrid market rally unleashed by the worst jobs report in years:

  Finding a bottom in the stock market may well be a fool’s game, but that does not stop us fools from trying. A strong rally last week accentuated by a surprisingly weak jobs report on Friday allowed the stock market to successfully retest its initial August correction low for the second time. This show of technical strength has buoyed expectations of a coming year end market rally.

   

  While equities may be finding renewed upward momentum in the current quarter, our guess (and it is just that) is the stock market correction is not yet over. In our view, a quick recovery back near all-time highs would leave the stock market with many of the same vulnerabilities that started the correction. Consequently, we would not be surprised if the stock market tests its correction low yet again and perhaps even fails before reaching a final bottom.

  Paulsen addresses what he views as the four main challenges for the market:

  Despite the weak jobs report last week, the U.S. unemployment rate remains poised to fall below 5 percent within months. Consequently, even modest economic growth can now produce wage and price pressures, mandate higher interest rates, lower both stock and bond valuations and force Wall Street to finally wave goodbye to its great liquidity friend. Simply reviving Chinese economic growth or bottoming commodity prices may not end this stock market swoon. Today’s turbulence is more about correcting market vulnerabilities built up over the past six years, and finding a new foundation that will allow this bull market to resume as the U.S. economy moves toward full employment.

   

  In our view, the stock market faces four major challenges.

   

  First, in recent years investors have become more calm and confident than at any time in this recovery. Undoubtedly, investor confidence has cracked a bit during this correction. Some quantitative measures of investor sentiment now suggest bearishness (a positive for the stock market).

   

  However, while debatable, our current qualitative assessment of investor mindsets is that they remain fairly constructive about the future. Most media stories are not preaching the end of the world and most Wall Street strategists have maintained bullish year end targets. Moreover, financial market action is not consistent with real fear. There has been no huge and sustained rush to the safe haven U.S. treasury, U.S. dollar or gold. Finally, cyclical stock sectors have done as well or better than traditional defensive sectors in the last couple months. Industrials, consumer discretionary and emerging market stocks have been outperforming in the last couple months. Since its start, the premise behind this bull market has been “climbing a perpetual wall of worry”. Today, though, rather than  a risk, most seem to perceive the current correction more as a buying opportunity in an ongoing bull market. Once this correction finds its final bottom, we suspect many more investors will likely fear a full-fledged bear market and a heightened risk of recession.

   

  Second, at its recent peak, the trailing price-earnings multiple on the U.S. stock market reached almost 19 times earnings and is still about 17.6 times today. Trading at 19 times earnings in a recovery with a zero interest rate, low and stable inflation and no cost-push pressures is not problematic. However, the stock market is likely to go searching for better valuation support if the normal tensions associated with a recovery nearing full employment begin pressuring the financial markets.

   

  Third, after six years, the U.S. earnings recovery is showing signs of aging. Profit margins are near all time record highs  and compared to the last few years, earnings are likely to grow much more slowly during the balance of this recovery. Since profit margins cannot rise much higher, should sales  growth remain tepid so will earnings results. Alternatively, should sales growth accelerate, pressures on profit margins are likely to intensify nullifying much of the positive impact of stronger economic growth and keeping earnings performance tepid.

   

  Finally, whether it is this year yet or in 2016, the U.S. is imminently headed toward an interest rate reset. Does the current relatively high price-earnings multiple, an investment community which mostly perceives the correction as a great buying opportunity, a recovery with amazingly weak productivity and an aging corporate earnings cycle represent a good foundation for stocks to withstand a rate hike?

  Where does Paulsen see the market heading in the near-term:

  Most likely, the contemporary bull market is not over. However, the current correction may prove deeper and longer than most now expect. Should the stock market quickly return to its recent highs, the vulnerabilities that produced this correction will remain challenging.

   

  * * *

   

  Maybe the S&P 500 declines below 1800 before this correction finds a final bottom. A second break below the initial crash low in August would produce widespread fears of recession and calls for the end of this bull market rather than the popular “buy on the dip” mentalities recently evident. Moreover, and perhaps most importantly, near 1800, the S&P 500 would be selling about 15 times trailing earnings (close to its long-term 145 year historical average), which represents a much more sustainable level in an economy facing slower earnings growth, somewhat higher inflation and rising shortterm and long-term interest rates.

   

  Admittedly, there is nothing scientific about 15 times earnings. Perhaps, the stock market will find good support at 16 times or maybe it will need to fall to 14 times? Who knows? It is guesswork at best. However, we think the stock market still faces some vulnerability and until it achieves a better fundamental footing, it is not likely to sustain a meaningful advance.

  As a reminder, it was none other than David Tepper who one month ago infamously lowered his own “fair value” P/E multiple from 18x to a range of 14x-16x, noting that under these parameters the S&P 500 would trade between 1680 and 1920 within the next six to twelve months, or 1800 at the mid-point, using a $120 2016E EPS. We wonder if Paulsen was listening…

  Finally, Paulsen’s summary:

  The strong stock market rally during the last few days has pushed the S&P 500 near its highest closing level since the correction began in late August. This has boosted optimism that the recent selloff may be ending. While this could certainly prove to be the case, we remain less sanguine that the vulnerabilities, which initially produced this correction, have yet to be resolved.

   

  Ultimately, we expect a more fearful investment culture suggesting a final capitulation and more importantly, a lower stock market valuation level able to withstand a less hospitable recovery as the economy nears full employment.

  So to summarize, among the more prominent recent (perma)bull to bear conversions we have Tepper, Icahn, Gundlach and now, arguably, Paulsen, who may not be “bearish” but who clearly is not a happy buyer here. On the other hand, the bulls are Gartman and Cramer. Trade accordingly

  

  

  

  

  

• Glencore Explains What Would Happen If It Is Downgraded To Junk

  As part of its ongoing scramble to defend itself against “speculators” and concerns about its balance sheet, earlier today Glencore released a 4 page “funding worksheet” detailing all of its obligations.

  Among the highlights was Glencore’s disclosure of total available liquidity as of this moment, which the firm reported to be materially above its June level of $10.5 billion:

  At 30 June 2015, available committed liquidity was $10.5 billion (p. 71 of 2015 Half-Year Report). As of today, committed available liquidity is materially above June’s level, given the recent $2.5 billion equity placement, the business generating positive free cashflow and the ongoing focus on delivery of the various other debt reduction measures, including lower net working capital. Further delivery of the debt reduction programme, including the $2 billion target for asset disposals, will similarly enhance liquidity levels.

  It also presented its sources of funding among which the well-known $31.1 billion in bonds, as well as $20 billion in short-term funding split between a $15.25 revolver (of which a “substantial portion” is undrawn), $1.2 billion in AR/Inventory secured funding, and $3.4 billion in bilateral bank facilities. Glencore was quick to point out the gullibility of its bank lenders: “No financial covenants, no rating events of default or rating prepayment events, no material adverse change events of default or material adverse change prepayment events.”

  Next Glencore details the terms of its notes and cross-guarantees which it lays out as follows:

  $36.5 billion notes outstanding at 30 June 2015, including $1.9 billion maturing in October 2015. See Appendix for full details.

  • Notes are issued on a pari passu basis, applying a cross guarantee structure introduced at the time of the Xstrata acquisition (see Moody’s and S&P reports dated 7 May 2013 and 19 June 2013, respectively).
  • Glencore Group bonds (issued by Glencore Funding LLC, Glencore Finance (Europe) AG and Glencore Australia Holdings Pty Ltd) have guarantees from Glencore plc, Glencore International AG and Glencore (Schweiz) AG (previously Xstrata (Schweiz) AG).
  • Following the Xstrata acquisition, legacy Xstrata bonds (issued by Xstrata Finance (Canada) Limited, Xstrata Canada Financial Corp, Xstrata Canada Corporation and Xstrata Finance (Dubai) Limited) also now have guarantees from Glencore plc and Glencore International AG, implemented by way of supplemental indentures.
  • Similarly, the outstanding USD notes issued by Viterra Inc. in August 2010 have guarantees in place from Glencore plc and Glencore International AG.

  Glencore also notes the $17.9 billion in Letter of Credit commitments it had outstanding as of June 30:

  As part of Glencore’s ordinary sourcing and procurement of physical commodities and other ordinary marketing obligations, the selling party (or Glencore voluntarily) may request that a financial institution act as either a) the paying party upon the delivery of product and qualifying documents through the issuance of a letter of credit or b) the guarantor by way of issuing a bank guarantee accepting responsibility for Glencore’s contractual obligations.

   

  The LC is not incremental exposure to that already reported in the financial statements. An LC is only a “contingent” obligation, disclosed as such in Glencore’s financial statements i.e. becomes a liability in the event that Glencore does not perform on an already recorded liability. The underlying transaction / procurement liability is recognised within “Trade Payables” in Glencore’s balance sheet. At 30 June 2015, $17.9 billion of such LC commitments have been issued on behalf of Glencore, with the respective liabilities reflected within the $28.1bn of recorded accounts payables. The contingent obligation settles simultaneously with the payment for such commodity. Availability is substantially higher, such that the vast majority of these Glencore facilities remain undrawn.

  An interesting tangent is when Glencore discusses it readily marketable inventories:

  Represents those marketing inventories that are contractually sold or hedged. At June 30 2015, total inventories were $23.6 billion, of which Marketing RMI were $17.7 billion.

   

  For corporate leverage purposes Glencore accounts for RMI as being readily convertible to cash due to their very liquid nature, widely available markets and the fact that price exposure is covered by either a forward physical sale or hedge transaction.

  Which brings up the very interesting question: with Glencore touting its revolver availability, and its various secured facilities, just how is Glencore marking the fair value of its inventories, because a ton of copper a year ago as collateral is worth just a little bit more than a ton of copper currently. We are confident Glencore’s banks are aware of this.

  But finally, and most importantly, Glencore presents what it believes would happen if it is downgraded from Investment Grade to Junk. This is what it says:

  Glencore is undertaking measures to strengthen its balance sheet, including a material debt reduction, that the company expects shall serve to protect and maintain a strong BBB/Baa credit rating.

   

  In the event of a downgrade by Standard & Poor’s and/or Moody’s from current ratings to the level(s) immediately below, a ratings’ grid in the $6.8 billion 5-year revolving credit facility provides for a modest additional margin step-up. As this 5-year revolving credit facility is expected to remain fully undrawn, the net additional effect would only be 35% of this modest step-up margin, being the applicable commitment fee only. The maximum margin for sub-investment grade rating from either Standard & Poor’s or Moody’s is 1.10%. There is no ratings grid in relation to the $8.45 billion revolving credit facility. In addition, there are $4.5 billion of bonds outstanding, where a 125bps margin step-up would apply, in the event that the bonds were rated sub-investment grade by either major ratings agency.

  Which reminds us of the waterfall analysis being shared around in the weeks before the AIG downgrade unleashed a series of events that ultimately led to the insurance company’s bail out. It too presented glowing picture of the potential risks. In the end it was very deficient. One can only hope that Glencore has learned the lesson of never misrepresenting the worst case scenario.

  Full letter below (link)

  Glencore Funding

  

  

  

  

  

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• World's Largest Sovereign Wealth Fund Is Forced To Begin Liquidating Assets

  One of the biggest stories of this summer, as previewed originally here in November of 2014, has been the dramatic shift in the direction of capital flow from toward emerging markets (and China), to away from emerging markets (and China). The reason for this has been the double whammy of the soaring dollar, and the collapse in oil prices which as we said one year ago, would lead to the first negative global petrodollar export balance in 18 years…

  

  …  a topic which the IIF finally picked up and expanded on last week when it likewise calculated that capital outflows from emerging markets are on track to exceed inflows this year for the first time since 1988.

  

   

  We first dubbed this phenomenon Reverse QE, a name which Deutsche Bank subsequently “reverse-engineering” into Quantitative Tightening, a different name for the same thing – the removal of excess liquidity from the market by way of obtaining liquidity for existing reserve assets, also known as “selling.”

  However, while Reverse QE, or QT, or whatever one wants to call it has become traditionally associated with Emerging Markets and petroleum exporters, nobody had linked it with one of the most advanced Developed Markets in the world which also happens to be an oil exporter, the market with the largest sovereign wealth fun in the world: Norway.

  That is about to change because as Bloomberg reports, “the future may already be here”, a future in which Norway’s gargantuan $830 billion sovereign wealth fund, the product of two decades of capital accumulation courtesy of Norway’s vast petroleum reserves and oil trade, is forced to begin liquidating its vast assets.

  According to Bloomberg, Norway could as soon as next year start making withdrawals from its massive $830 billion sovereign wealth fund, which is a nest egg for “future generations.”

  The start of asset sales marks a historic shift for said “nest egg” which was not supposed to be tapped for many more years. Unfortunately for Norway, which has already spent recent years using a growing chunk of its oil revenue to plug deficits while at the same time building the wealth fund…

  

  … tax revenue from petroleum extraction are down 42% which means budget spending in 2016 will outstrip income.

  The real problem for Noway is simple: the very procyclical plunge in oil prices.

  As Bloomberg calculates, taxes collected on petroleum extraction reached 138 billion kroner in the first three quarters of the year, down over 40% from 238.2 billion kroner in the same period a year earlier, according to Statistics Norway. But while oil-linked revenues are plunging, spending is going nowhere but up:

  The government said in May its non-oil budget deficit, or spending in real terms, would be a record 180.9 billion kroner ($21.6 billion). With its crude output waning and prices falling, the government saw petroleum income dropping to 251.6 billion kroner this year, almost 30 percent lower than its October projections. Those estimates assumed oil at about $69 a barrel.

  Brent crude has averaged $56 so far this year, and has been below $50 for the past several months, presenting a huge challenge: how to tap the revenue shortfall.

  The answer is simple, if unpleasant: break open the piggy bank, or in this case, start selling the securities held in the Norwegian sovereign wealth fund.

  “We have reached a point where we will from now on see that the oil-corrected balance will be above the cash flow — that’s based on oil prices increasing slowly in the future,” said Kyrre Aamdal, senior economist at DNB ASA in Oslo. Tapping the fund’s returns marks a turning point that wasn’t expected to come for “several more years,” he said.

   

  Tapping the fund to cover budget needs comes at a time when the managers of the fund, set up to safeguard the wealth of future generations, warn that it also faces diminished returns ahead amid record-low interest rates.

  To be sure, government officials, terrified of revealing the unpleasant truth to the people, are pretending that the funding shortfall can be covered only with dividend and interest income:

  Government officials and economists contend that only investment returns from the fund will be used for the budget, meaning it will not actually shrink in size. By using interest and dividends to cover the deficit, “no one will ever need to break the piggy bank,” said Knut Anton Mork, senior economist at Svenska Handelsbanken AB in Oslo. Oeyvind Schanke, chief investment officer for asset strategies at the Oslo-based fund, said in an interview last month it will be able to use the cash it gets from dividends and bond interest payments to make shifts in the portfolio, rather than having to sell assets.

  Populist rhetoric aside, the SWF will have no choice but to sell: “capital coming into to the fund has already started to dwindle. Inflows were just 17 billion kroner in the first half of this year, compared with a quarterly average of 60 billion kroner over the past 10 years. Central bank Governor Oeystein Olsen, who oversees the fund as head of the bank’s board, said in February that oil around $60 would mean transfers to the fund “may come to a halt.”

  Oil is now nearly 20% lower, and as goes the price oil, so go the inflows into the fund. Which means that any month now, if not already, Norway will shift from net buyer of global financial assets to a net seller, in the process joining the Emerging Markets and, of course, China in soaking up even more liquidity, mostly USD-denominated, out of the market, in the process removing much of the liquidity injected by the Fed and its peer central banks.

  This situation will only deteriorate that much further, and force the wealth fund to sell even more assets should the Fed hike rates, pushing the dollar even higher, and sending the price of oil crashing below. In fact, the coordinated selling of US-denominated assets will be precisely the catalyst that sends the global stock market tumbling, and ultimately serve as the catalyst for NIRP and/or QE4.

  The only question is whether Yellen has finally figured this out and will proceed straight to the NIRP/QE4 part or whether she will subject the market to 6-9 months of gut-wrenching volatility as the world’s largest sovereign wealth fund realizes what it means to try to sell billions of assets into an illiquid, bidless, market.

  In the meantime, and completely independent of what Yellen does in the near future, what was until recently a parabolic move higher in assets…

  

  … is about to see its first ever decline.

  

  

  

  

  

• Role Reversal In The New Cold War

  Submitted by Justin Raimondo via Anti-War.com,

  This past weekend marks the twenty-fifth anniversary of the reunification of Germany, an event that formalized the end of the cold war. The so-called “German Democratic Republic,” one of the most repressive of the Soviet-imposed regimes established in the wake of World War II, was no more. It imploded without a shot being fired.

  The largely bloodless revolution that swept across Eastern Europe, toppling Communist dictatorships from Berlin to Budapest, soon penetrated the epicenter of the “evil empire” itself – and the Union of Soviet Socialist Republics evaporated like mist on a sunlit morning. It was the end of the cold war, and peoples all over the world breathed a joyful sigh of relief – and yet that joy was not shared by all.

  The cadre of that troublesome little sect known as the neoconservatives weren’t convinced that the Soviets were on their last legs: they had opposed the arms control agreements signed by Ronald Reagan in the Kremlin’s twilight years, attacking them as signs of “appeasement” and arguing that any rapprochement with the Soviets would give them breathing room and the strength to gather their forces for one last push against the West. The United States, they averred, should take the opportunity to push harder and institute a policy of “rollback,” because only a foreign policy of aggression could defeat the Evil Empire once and for all.

  They were wrong.

  What happened, instead, is that the captive nations of the Soviet bloc rose up all on their own, without any substantial support from us, and overthrew their oppressors. Not because we had weakened the USSR in any significant way, but because a system that never worked to begin with had finally reached its endpoint. As the great libertarian theoretician Ludwig von Mises had predicted as early as 1920 that it would.

  Indeed, it could be argued that all our efforts during the cold war era had merely strengthened the Leninist project, unnaturally extending its lifespan. For Joseph Stalin realized two vital facts early on:

  1) That in spite of Soviet propaganda, the Russian economy was no match for the West, and that it was necessary to build up Soviet industry on a massive scale. Thus began the various Five Year Plans that sought to make the leap from a backward agricultural economy into something resembling an industrial powerhouse.

   

  2) That the old Bolshevik ideology of “proletarian internationalism” – the idea that the World Revolution was a perquisite for the survival of the Soviet state – had to be ditched. The Trotskyists, who clung to the original Leninist conception, were purged, and in the place of the old party line the Stalinists substituted Soviet “patriotism,” i.e. Russian nationalism, as the official ideology of the post-Leninist Kremlin.

  While the economic project of the Stalinist regime rendered dubious results – slave labor cannot serve as the basis of a modern economic order, and the inability of the Soviet system to overcome the calculation problem could not be overcome – their ideological revisionism met with more success. Instead of appealing to some abstract ideal, i.e. egalitarianism, the theories of Karl Marx, etc., they instead evoked loyalty to real-world allegiances: in short, they became “patriots,” in whatever country they were operating in.

  In Russia, Soviet propaganda focused on the “Great Patriotic War” against Germany during World War II – of course downplaying Stalin’s pact with Hitler and their joint invasion of Poland, which sparked the conflict to begin with. Sure, the Russian people had to wait on line for the simplest items, but, the regime told them – with some justification – that the West was getting ready to destroy them, just as Hitler had tried to do, and that only the Soviet government could protect Holy Mother Russia from a repeat of that horrific catastrophe in which millions perished.

  In the Third World, where the Soviets were engaged in an ideological battle with Western-backed regimes, they posed as champions of “national liberation,” and – abjuring purely communist slogans – called for a “national democratic revolution” and inveighed against “foreign domination,” denouncing the brutalities of colonialism. This is what made the victory of the Communist-dominated National Liberation Front of Vietnam possible, and it energized Marxist insurrections throughout Asia, Africa, and Latin America. Fidel Castro never revealed himself as a Communist until well after taking power because he realized what Stalin discovered long before the Cuban revolution overthrew a US-supported despot: that nationalism – allegiance to a really-existing entity, rather than a moral or ideological abstraction – has the power to inspire people to resist.

  So while economic reality eventually overcame the Soviets, and doomed their system to failure from the beginning, they managed to survive as long as they did – and inspire a global movement – in large part due to the energy imparted to them by the West. The very effort to “roll back” Communism had the opposite result, generating a nationalistic reaction that aided the Soviets to such an extent that, for a while, it looked – on the surface – as if they had the advantage. Communism, you’ll recall, was supposed to be the “wave of the future,” along with all the other totalitarian movements – fascism and national socialism – that gained ascendancy in the wake of World War I. As it turned out, Marxism proved to be a dead end, albeit one that had all the appearance of an idea whose time had come.

  Looking back on the demise of the Soviets, one can see that the same hubris that blinded the Communists to their own imminent decline and fall has its echoes in today’s world.

  The Western response to the Communist implosion was, at first, quite reasonable. In negotiations with Mikhail Gorbachev, who saw the Soviet empire crumbling all around him, Western leaders guaranteed that NATO would not move eastward. As Joshua Shifrinson, citing declassified US government documents, argued in Foreign Affairs:

  “The story begins in the months after the fall of the Berlin Wall, as policymakers struggled to determine whether and how a divided Germany might reunify. By early 1990, U.S. and West German officials decided to seek reunification. Uncertain about whether the Soviets would be willing to withdraw from East Germany, they decided to offer a quid pro quo.

   

  “On January 31, West German Foreign Minister Hans-Dietrich Genscher publicly declared that there would be “no expansion of NATO territory eastward” after reunification. Two days later, US Secretary of State James Baker met with Genscher to discuss the plan. Although Baker did not publicly endorse Genscher’s plan, it served as the basis for subsequent meetings between Baker, Soviet President Mikhail Gorbachev, and Soviet Foreign Minister Eduard Shevardnadze. During these discussions, Baker repeatedly underlined the informal deal on the table, first telling Shevardnadze that NATO’s jurisdiction ‘would not move eastward’ and later offering Gorbachev ‘assurances that there would be no extension of NATO’s current jurisdiction eastward.’ When Gorbachev argued that ‘a broadening of the NATO zone’ was ‘not acceptable,’ Baker replied, ‘We agree with that.’ Most explicit was a meeting with Shevardnadze on February 9, in which Baker, according to the declassified State Department transcript, promised ‘ironclad guarantees that NATO’s jurisdiction or forces would not move eastward.’ Hammering home the point, West German Chancellor Helmut Kohl advanced an identical pledge during meetings in Moscow the next day.

   

  “At that point, it was easy to see the outline of a new strategic landscape coming into view: Germany would reunify, the Soviet Union would pull back, and NATO would halt in place. According to any ordinary sense of the term ‘east,’ all of the countries to which NATO later expanded would have remained outside the Western orbit. As a diplomatic cable summarizing Baker’s meetings put it, ‘The Secretary made clear that the US had supported the goal of [German] unification for years; that we supported a unified Germany within NATO, but that we were prepared to ensure that NATO’s military presence would not extend further eastward.’”

  Yet the domestic pressures in the US for NATO expansion were too strong to let this guarantee stand for very long. NATO maintains standards for its member militaries, and the upgrades required for the entry of the East European countries would prove immensely profitable for US weapons makers – who soon launched a campaign for NATO expansion that had its tentacles reaching into both political parties. And there was also the inherently expansionist dynamic embedded in all global empires, such as the American. This was fueled by the ideological Kool-Aid of the “end of history” fable, pushed by the neoconservatives, who dreamed of a Hegelian “universal homogenous state” – to be established by the United States.

  As NATO pushed up to the gates of Moscow, what happened, oddly enough, is that the Americans and the Russians switched roles. The former, invoking a militant “democratic” internationalism, adopted the revolutionary rhetoric and mindset of the early pre-Stalinist communists, while the latter took up the conservatizing role abandoned by Washington.

  Which is where we are today – except that the danger posed by Washington is far greater than any the old Soviet empire could have mustered, for two reasons:

  1) The Soviet economic system was inherently unworkable, and ended the only way it could have ended. On the other hand, the American economic system is the mightiest industrial machine the world has ever known: capitalism has created enormous wealth, and while we’ve eaten a lot of our seed corn and built up an enormous mountain of debt, the system is still coasting along on the achievements of the past.

   

  2) Stalin was essentially an “isolationist,” that is, he didn’t want to get too involved in the affairs of other countries, concerned as he was with cementing his own despotic rule at home. That’s why he ditched the old Leninism, drove Trotsky into exile, and declared the official Soviet doctrine of “socialism in one country.” In the US, however, “isolationism” is out of style: both parties support an “internationalist” foreign policy, differing only in the details of how to apply the general principle of empire-building on a global scale.

  What all this means is that the world’s wealthiest nation has now decided it can and should rule the world – and has embarked on a campaign, consisting of both military and “soft power” aspects, to achieve just that. And while this effort effectively undermines whatever claim the US once had to be being the leader of the “Free” World – as Edward Snowden revealed, and as the continuous erosion of our constitutional liberties underscores every day – Washington still wields the banner of “freedom” to great effect, especially when compared with the regimes it seeks to overthrow.

  Baldly stated, the United States government is the greatest danger to peace and freedom the world has ever known. This is true precisely because it has held aloft the torch of liberty for so long, an example to the world of what a society based on individual freedom can achieve. That is the great paradox of American power. As we abandon our libertarian heritage – even as we retain the forms of a constitutional republic – we destroy what made our power possible.

  The process is reversible: we can restore our old republic – but only if we give up the mirage of empire. If we continue to pursue the fatal dream of a beneficent internationalism, America will lose itself, dissolve its unique character – and wreak destruction, not only on its own people but on the peoples of the world. In switching roles with the Soviets, we prefigure their fate: and the resulting implosion is going to shake the world to its foundations in a way that the fall of the Kremlin never did. In programming our own self-destruction, we will likely drag much of the world with us.

  Those are the stakes, and they are high – too high for us anti-interventionists to rest for a single moment.

   

  

  

  

  

  

• Gun Sales Soar After Surge In US Mass Shootings

  Just as was evidenced after the 2007 shootings at Virginia Tech, after Columbine and Tucson in 2011, and following the theater shootings in Aurora, Colorado in 2012, US gun sales have soared following the mass-shooting at Umpqua Community College in Oregon, which killed 10 people and injured seven others. As The FT reports, gun sales this year could surpass the record set in 2013, when gun purchases surged after the December 2012 Sandy Hook murders.

  As The FT reports,

  Business has been brisk for Larry Hyatt, owner of Hyatt Guns in North Carolina, since the Oregon community college shooting last week that left 10 people dead, including the 26-year-old suspect.

   

  Mr Hyatt saw an even bigger surge in customers after the 2012 massacre at Sandy Hook Elementary School in Connecticut that left 26 people dead, including 20 children, before the gunman killed himself.

   

  …

   

  However, the calls for tighter gun laws lead to an increase in weapons sales. “Once the public hears the president on the news say we need more gun controls, it tends to drive sales,” said Mr Hyatt, who owns one of the largest gun retailers in the US. “People think, if I don’t get a gun now, it might be difficult to get one in the future. The store is crowded.”

   

  “We don’t want our business to be based on tragedy but we have to deal with what we have no control over,” Mr Hyatt said. “And after these shootings and then the calls for tougher gun laws, we see a buying rush.”

  In the first nine months of this year, 15.6m of the background checks needed to purchase guns from federally licensed sellers have been processed, compared with the 15.5m applications in the same period in 2013, according to the National Instant Criminal Background Check System.

  Strong sales this year have also boosted the earnings for the two of the largest gun manufacturers in the US. Smith & Wesson and Sturm, Ruger & Co have seen their stocks rise this year by over 88% and 67% respectively.

   

  

   

  As Wired wrote back in 2012, the sharp spike in gun sales following mass shootings is not a new occurence and appears to happen for several reasons…

  The desire to protect one's self In many cases, gun shootings followed by 24/7 media coverage prompt citizens to arm themselves, according to testimonies. In Aurora, for instance, Jake Meyers of Rocky Mountain Guns and Ammo told The Post shoppers cited self-protection when checking out new weapons. "A lot of it is people saying, 'I didn't think I needed a gun, but now I do,' " Meyers said. "When it happens in your backyard, people start reassessing — 'Hey, I go to the movies.'"

   

  The fear of stricter gun laws Another logical factor is that gun owners' or soon-to-be-gun owners' sense a tide of gun control regulations following a massacre and seek to purchase guns ahead of fast-moving laws. Paul Helmke, president of the Brady Campaign to Prevent Gun Violence, spoke to this following a 60 percent uptick in gun sales in the aftermath of the Tucson shootings in 2011. "Some Americans fear tougher gun control laws in the aftermath of Saturday’s attack so they want to stock up now," he told Politico. “What it shows is maybe gun owners in Arizona and these other states feel that there’s going to be some change in the law, which is what I hope our elected officials” trying to enact. Obviously, that fear has been unfounded. Since coming into office, Obama has been virtually silent on the issue of gun control, despite the protestations of liberals.

   

  The feeling of uncertainty It's important to remember, spikes in guns sales don't just coincide with shooting sprees. They also coincide with violent events of any kind, as Fredrick Kunkle at The Washington Post reported. "People also rushed to buy guns after the 1992 riots in Los Angeles and the breakdown of order in New Orleans after Hurricane Katrina." That has led some industry experts and law enforcement officials to point to a general feeling of uncertainty as a driver of gun buying habits. "People often buy firearms during periods of uncertainty," Gary Kleck, a researcher at Florida State University's College of Criminology and Criminal Justice, told the paper.

  As Pew's most recent research found, America remains divided over the 'guns' issue:

  Pew’s latest survey, conducted in July this year, found that opinions had remained largely unchanged since the Sandy Hook massacre.

   

  Almost eight in 10 people surveyed supported laws to prevent people suffering from mental illness buying firearms, while 70 per cent backed the creation of a database on gun sales and almost 60 per cent wanted to see assault weapons banned.

   

  “The public continues to be more evenly divided in fundamental attitudes about whether it is more important to control gun ownership or to protect the right of Americans to own guns,” Pew’s report said.

   

  “Currently, 50 per cent say it is more important to control gun ownership, while 47 per cent say it is more important to protect the right of Americans to own guns.”

  

  

  

  

  

• Peter Schiff: The Fed Has Created A "Bad Is Good" Economy

  Submitted by Peter Schiff via Euro Pacific Capital,

  The popular belief that the U.S. economy has been steadily recovering has endured months of disappointing data without losing much of its appeal. A deep bench of excuses, ranging from the weather to the Chinese economy, has been called on to justify why the economy hasn't built up any noticeable steam, and why the Fed has failed to move rates off zero, where they have been for seven years. But the downright dismal September jobs report that was released last Friday may prove to be the flashing red beacon that even the most skilled apologists can't explain away. The report should make it abundantly clear that we are far closer to recession than recovery. But old notions die hard and, shockingly, most economists still believe that we have hit a temporary speed bump not a brick wall. But at some point healthy hope turns into dangerous delusion. We may have just turned that corner.

   

  The report was horrific any way you slice it. The consensus of economists had expected to see 203,000 new jobs in September, not a particularly impressive number, but at least it would have been an improvement from the 173,000 new jobs that were added in August. Not only did September miss substantially, at just 142,000 jobs, but August was revised down to 136,000 (Bureau of Labor Statistics) (there were economists who had even expected August to be revised up to as high 247,000). This means that the last three months have averaged just 167,000 jobs, a level that is not even close to where we should have been in a real recovery. But it gets worse from there.

   

  The labor force participation rate got even lower still, dropping from 62.6% of working age adults, to just 62.4%, a near-40 year low. In September, another 579,000 potential workers gave up looking for jobs altogether and simply left the labor force. This figure dwarfs the 142,000 people that actually found jobs. Those lucky enough to still be working saw no increase in their hourly wages (the consensus had expected a .2% increase) and their average workweek ticked down from 34.6 hours to 34.5. In short, in September, fewer Americans worked, and those who did had fewer hours and lower pay. This is not supposed to be what a recovery looks like.

   

  Even after the Fed surprised markets back in September by failing to raise interest rates for the first time in nine years, most economists still strongly believed that the Fed was on track to do so this year. Just prior to Friday's jobs report, a full 94% of economists in a Reuters survey saw a hike coming this year. No word yet on how much these expectations may have changed since Friday's jobs report, but my guess is that they won't fall nearly as much as they should. Many a happy economist took to the airwaves last week to explain that two more jobs reports will be issued before the Fed's December meeting. They insisted that those reports could provide the impetus that the Fed needs to finally pull the trigger.

   

  But Janet Yellen said months ago that she would need to see "further improvements" in the labor market before she felt fully comfortable in raising rates. Since she made that statement, not only has the labor market not improved, it has actually retrogressed considerably. The fact that the headline unemployment rate has remained at a very low 5.1% is immaterial, as that rate has been low for some time without prompting any rate hikes. Yellen has already conceded that the official unemployment rate is not the benchmark she is using to assess the strength of the labor market. Instead, she is focused on labor force participation, wages, and the proliferation of involuntary part-time work. On these scores we continue to move further away from any potential rate hike.

   

  But rather than questioning the Fed's credibility in missing another forecast, most economists are lauding it for supposedly seeing weakness that others missed, which allowed it to wisely do nothing in September. But I see this simply as a continuation of the Fed's long-standing playbook: Talk the economy up through optimistic statements while continually holding off an actual rate hike that the Fed is concerned could undermine an economy teetering on the brink of recession. I did not expect the Fed to raise rates in September, and I don't expect them to do so in December either, or at all in 2016, for that matter. I expect the Fed shares this view but they know any public utterance could be disastrous. Despite the fact that I was one of the few economists to declare no hikes in 2015, the media has continued to ignore and ridicule my forecasts.

   

  Dazzled by the Fed's many statements of gaining economic strength, Wall Street has, by contrast, been completely blind to the many, many signs of gathering weakness. In September, factory orders were down year-over-year for the 10th month in a row, according to the Census Bureau's August Factory Orders report. As far as I know, this has never happened outside of a recession. But good luck finding anyone on Wall Street who shares my opinion that these figures suggest that a recession is already underway. My position is buttressed by the steady torrent of disappointing production numbers contained in the regional Fed surveys. But since manufacturing is no longer considered an important sector for the American economy, those once important surveys are no longer even mentioned in main-stream press.

   

  In addition, the Atlanta Fed's "GDPNow" statistics, which attempt to offer a real time glimpse at economic conditions, gets similarly short shrift in the media. That number currently stands at just .9% annualized growth. However, consensus on Wall Street for Q3 GDP remains at 2.4%. Those forecasts should have been slashed months ago. But they have not. Based on the reports that I am seeing, I believe that there is a good chance that the barely positive growth rate that the Atlanta Fed is seeing for Q3, could turn negative. After all, jobs reports have been revised down in six of the last eight months (BLS). What makes economists think that this trend will suddenly reverse? It is, therefore, more likely that the awful employment picture for September will even get worse. A negative GDP print in the third and fourth quarters of this year, which would qualify as a recession, is a possibility that Wall Street has not even considered, let alone prepared.

   

  If weakening conditions prevent the Fed from pulling the rate hike trigger by December, can we really expect it to do it in the election year of 2016? With the economy already on thin ice, a rising rate environment may likely push the economy into recession if it somehow isn't already there. This will play directly into the hands of the Republicans who will be able to hammer the outgoing Obama Administration's economic legacy, thereby handing the election to the GOP. Does anyone really expect the left-leaning Federal Reserve led by Janet Yellen to do that? Given that, we may not see a rate increase until 2017, even if conditions improve, which is a dubious proposition. Predictably, Goldman Sachs' chief economist Jan Hatzius came out with a statement today predicting the first move may not come until 2017. Look for many other influential economists to follow suit.

   

  My view is that it is far more likely that we will see a fresh round of Quantitative Easing before we see a rate hike. As far as I know, however, I am still one of the only economists making this "outrageous" forecast.

   

  The biggest practical implications of all this is that the commodity and foreign currency markets, which have been so thoroughly decimated by expectations of imminent rate hikes in the U.S., should reverse course. In the past, the dollar has generally risen on the anticipation of rate hikes and has sold off when the Fed actually delivered on those expectations. This is the classic "buy the rumor, sell the fact" trade.  But what will happen when the Fed fails to deliver? Then all we have is false rumor and no fact. In such a scenario, reversals in the "bid up" dollar and in "beaten down" commodities like gold, silver, copper, and oil, could be dramatic. This could be especially true when you consider all the global economic problems that would be solved by a weaker dollar. Already we are seeing the markets drifting in that direction. Today silver hit a three-month high, and other commodities are finally getting up off the mat. It's been a long time coming, and I expect that it's a pattern that will take hold for a long time to come.

   

  When the jobs report was released last Friday, markets reacted initially with a sharp 200-point sell off. For a while, traders seemed to forget that it's not the economy that has driven the markets but Fed stimulus. They thought bad news was actually bad news. But that "perverse" sentiment didn't last. Once it became clearer (to some) that rate hikes this year were less likely, the markets reversed course and completed a 450-point reversal to the upside. The Fed has created a phony "bad is good economy" and we are not about to snap out of it any time soon.

   

  I expect that once the threat of rate hikes is finally and officially taken off the table, the Wall Street rally will continue. But those gains will be attenuated by a weaker dollar and depressed earnings by domestically focused companies. In that case, it may be better to search for stocks outside the dollar and for the potential benefit of rising share prices and a rising currency. Given how far those assets have been beaten down (see my commentary of July 6th), the opportunities may be worthwhile.

   

  

  

  

  

  

• An Up Close And Personal Look At The Russian Firepower Deployed In Syria

  As Moscow’s air campaign in Syria enters its sixth day, both the West and The Kremlin have put their respective media propaganda machines into overdrive. 

  In many respects, the geopolitical stakes for both sides are the highest they’ve been in decades. The West cannot afford to stand by and watch Russia do in a matter of weeks what the US has failed to accomplish in 13 months. Put simply: if Moscow declares victory over ISIS within the next month or two (and that appears as likely as not), Washington will be left to explain to a bewildered public what just happened. To the uninitiated, it will appear as though Russia’s military is far superior to the US Army when it comes to fighting terror and on top of that, Iran’s now well publicized role will not only cast further doubt on the nuclear deal, but will also raise questions about the contention that Tehran is committed to financing and exporting terror. 

  For Russia, the powerplay in Syria represents nothing short of a return to the world stage after decades of flying below the radar as a second rate superpower. Putin has now proven that Moscow can project its influence with virtual impunity and as Monday’s “accidental” violation of Turkish airspace suggests, The Kremlin is getting more brave by the day in the face of what certainly looks like a de facto surrender by the West. 

  All of the above presents a real challenge when it comes to analyzing the conflict. That is, with both sides in full-on spin mode, getting at the truth is even more difficult than it would normally be in an East vs. West standoff and while US foreign policy is something of an easy target when it comes to pointing out hypocrisy and outright incompetence, one also has to be careful to avoid taking the Russian line at face value because after all, this is all just a contest to control the narrative and thus to help determine how history will remember the Syrian civil war. 

  With all of that said, watching Russia effectively humiliate the West by bragging day in and day out is nothing if it’s not amusing, and indeed, as we said on Sunday, the leaked diplomatic cable from 2006 which outlines Washington’s intent to effectively start a civil war in Syria leaves one completely uninclined to be at all sympathetic to the ridiculous situation the US and its allies have found themselves in and on that note, we present the following rundown from Sputnik and RT, respectively, of just what type of hardware Moscow is using on the way to routing anti-regime elements in Syria.

  Of course one could easily create a similar profile for Washington’s military hardware with the only difference being that the US likes to perpetuate the myth that there’s a degree of separation between the Army, the government, and weapons manufacturers.

  From Sputnik:

  A wide range of missiles and bombs equipped with advanced guidance systems are currently being used by Russia in its air campaign against Islamic State militants in Syria.

   

  During precision airstrikes, Russian weaponry is launched from high altitudes to evade mobile air-defense systems.

   

  The precision bombs typically use the GLONASS navigation system to destroy targets, the Russian developed alternative to GPS, whereas missiles are guided by a weapons system operator.

   

  

   

  The precision weapons include is the KAB guided bomb, which includes two modifications such as KAB-250 and KAB-500.The KAB-250 bomb was designed in the 2000s for the Russian fifth generation PAK-FA fighter jet. Its distinctive egg-shaped form can be explained by the fact that this bomb is mounted in inside the plane’s bays.

   

  

   

  The bomb is also used by advanced Russian warplanes, including the Su-34 bombers, which are currently taking part in the air operation in Syria. The aircraft drop these bombs on Islamic State targets from an altitude of 5,000 meters.

   

  The concrete-piercing BETAB-500 bombs are equipped with a jet booster, which allows the bombs to completely destroy any underground installation.

   

  

  From RT:

  The Su-34 is a strike fighter and the most modern aircraft to take part in Russia’s operation against Islamic State in Syria. 

   

  Its development began in the mid-’80s as a replacement for the Su-24, with the country’s military receiving the first batch of new warplanes in 2006. 

   

  The jet is designed for the supersonic penetration of enemy airspace at treetop level in the most severe weather and battle conditions. 

   

  The two-pilot strike fighter is sometimes referred to as ‘a flying tank’ due to an armored cockpit and efficient standoff weapons, which enable it to survive not only missile fragments, but even direct hits from small caliber arms.

   

  

   

  The Su-24 is a tactical bomber meant to fly below the radar and hit ground targets from low altitudes. The military wanted the plane to have short take-off and landing capabilities to so that it could be used on small airfields.

   

  An early prototype had four turbojet engines that complemented two main engines during take-off. The scheme, however, proved to be very inefficient, so instead designers gave it variable-sweep wings.

   

  The plane first entered service in the early 1970s. A decade later a better variant called Su-24M with a different radar and targeting equipment needed for more precise weapons was introduced. This model is the backbone of Russia’s tactical bomber. Sukhoi continues upgrading the aircraft.

   

  

   

  Su-25 is another Russian Air Force work horse, introduced in early 1980s. The jet was designed for close air support – that is, to directly help ground forces engage the enemy.

   

  

  
  

  

  

  

  

• Nickels, Meet Steamroller: Embattled Bank Suckers Hedge Funds Into EM Insurance Bet

  Are you looking to make a terrible investment decision?

  Well sure you are, isn’t everyone?

  And thanks to the fact that it appears we may now be testing the limits of the market’s collective patience with the notion of central bank omnipotence, there are plenty of bad investment opportunities out there to choose from. 

  That said, you always want to go big or go home, which is why what you might want to do is go out and ask a struggling emerging markets lender what its worst “assets” are and then offer to insure those assets against default so that said lender can then go out and invariably make more terrible decisions on the way to hopefully creating a non-negligible amount of systemic risk. 

  If that sounds crazy to you, that’s because it most certainly is, but don’t tell the buysiders who inexplicably decided to go long EM credit risk at the worst possible time in decades via their participation in a synthetic CLO from none other than Standard Chartered. Here’s Bloomberg:

  Imagine this pitch: Buy a complicated, derivatives-based deal tied to emerging-markets debt. Right now. In a shaky credit market.

   

  The expected response might be laughter — or speechlessness. But Standard Chartered pulled off just such a deal in the past few weeks, selling a $236.3 million piece of a synthetic collateralized loan obligation to a group of hedge funds in a risk-transfer maneuver.

   

  Did I mention this is Standard Chartered? The London-based bank has been accused of breaching U.S. sanctions against Iran, shook up its upper management a few months ago and does a lot of business in China. Its shares have lost more than 20 percent so far this year.

   

  Standard Chartered’s deal was aimed at lowering the amount of money it must hold to offset riskier holdings. The bank reduced its capital charges by millions of dollars on a $3.5 billion pool of debt by paying hedge funds to insure against potential losses.

   

  The bank had a ready-made audience,and other big banks have completed billions of dollars of similar deals in recent years.

   

  But this one took an extra leap of faith. About 17 percent of the reference loans were domiciled in China, some 17 percent in Hong Kong and 7 percent in India, according to the prospectus dated Sept. 23. Also, this deal came after Standard Chartered shook up its upper management and as China’s slowest growth in more than two decades roils Southeast Asia.

  Now look, there’s never really a “good” time to start moving credit risk from imperiled banks onto your own balance sheet, and apparently, the hedge funds that got into the mezz tranches here are getting something like an 11% yield which looks great in a world dominated by ZIRP, but one can’t help but wonder if this isn’t going to be a disaster. 

  Bloomberg characterizes this as “a complicated, derivatives-based deal,” which is a typical characterization for synthetic CDOs. Not to take anything away from that description (because bless their hearts, it’s probably just a well meaning attempt to warn readers that they’re about to be subjected to some financial alphabet soup), but these deals aren’t really all that complicated conceptually. Here’s how this works: I have some loans I made that I think are probably bad and it’s keeping me from making more bad loans because the regulators don’t like the amount of risk I’m taking, so what I’ll do is I’ll periodically pay you some spread over a benchmark rate I probably manipulated and then you’ll agree to pay up when these loans go bad. Because they aren’t my problem anymore, I get to go to my regulators and say “see, these guys are on the hook, not me, so now please let me go out and make more of these bad loans” and of course because the cost of capital is zero, it’s a sweet deal for me, even if I fooled you into believing that the CDS premium I’m paying you is attractive. 

  In case that’s not clear enough, allow us to simplify further: metaphorically speaking, the hedge funds that participated in this deal just knowingly issued a whole bunch of flood insurance on a bevy of homes in New Orleans knowing that hurricane Katrina is coming. 

  Of course there are no certainties in the world and if EM doesn’t suffer a complete meltdown, then anyone who agreed to provide doomsday insurance in return for a thousand basis points of yield is going to look very, very smart and we certainly won’t begrudge them their (fiat) profits, but just note that you heard it here first – this is picking up nickels in front of a steamroller.

  

  

  

  

• How The Chinese Will Establish A New Financial Order

  Submitted by Porter Stansberry via InternationalMan.com,

  For many years now, it’s been clear that China would soon be pull­ing the strings in the U.S. financial system.

  In 2015, the American people owe the Chinese government nearly $1.5 trillion.

  I know big numbers don’t mean much to most people, but keep in mind… this tab is now hundreds of billions of dollars more than what the U.S. government collects in ALL income taxes (both cor­porate and individual) each year. It’s basically a sum we can never, ever hope to repay – at least, not by normal means.

  Of course, the Chinese aren’t stupid. They realize we are both trapped.

  We are stuck with an enormous debt we can never realistically repay… And the Chinese are trapped with an outstanding loan they can neither get rid of, nor hope to collect. So the Chinese govern­ment is now taking a secret and somewhat radical approach.

  China has recently put into place a covert plan to get back as much of its money as possible – by extracting colossal sums from both the United States government and ordinary citizens, like you and me.

  The Chinese “State Administration of Foreign Exchange” (SAFE) is now engaged in a full-fledged currency war with the United States. The ultimate goal – as the Chinese have publicly stated – is to cre­ate a new dominant world currency, dislodge the U.S. dollar from its current reserve role, and recover as much of the $1.5 trillion the U.S. government has borrowed as possible.

  Lucky for us, we know what’s going to happen. And we even have a pretty good idea of how it will all unfold. How do we know so much? Well, this isn’t the first time the U.S. has tried to stiff its foreign creditors.

  Most Americans probably don’t remember this, but our last big currency war took place in the 1960s. Back then, French President Charles de Gaulle denounced the U.S. government’s policy of print­ing overvalued U.S. dollars to pay for its trade deficits… which allowed U.S. companies to buy European assets with dollars that were artificially held up in value by a gold peg that was nothing more than an accounting fiction. So de Gaulle took action…

  In 1965, he took $150 million of his country’s dollar reserves and redeemed the paper currency for U.S. gold from Ft. Knox. De Gaulle even offered to send the French Navy to escort the gold back to France. Today, this gold is worth about $12 billion.

  Keep in mind… this occurred during a time when foreign govern­ments could legally redeem their paper dollars for gold, but U.S. citizens could not.

  And France was not the only nation to do this… Spain soon re­deemed $60 million of U.S. dollar reserves for gold, and many other nations followed suit. By March 1968, gold was flowing out of the United States at an alarming rate.

  By 1950, U.S. depositories held more gold than had ever been assembled in one place in world history (roughly 702 million ounces). But to manipulate our currency, the U.S. government was willing to give away more than half of the country’s gold.

  It’s estimated that during the 1950s and early 1970s, we essentially gave away about two-thirds of our nation’s gold reserves… around 400 million ounces… all because the U.S. government was trying to defend the U.S. dollar at a fixed rate of $35 per ounce of gold.

  In short, we gave away 400 million ounces of gold and got $14 billion in exchange. Today, that same gold would be worth $620 billion… a 4,330% difference.

  Incredibly stupid, wouldn’t you agree? This blunder cost the U.S. much of its gold hoard.

  When the history books are finally written, this chapter will go down as one of our nation’s most incompetent political blunders. Of course, as is typical with politicians, they managed to make a bad situation even worse…

  The root cause of the weakness in the U.S. dollar was easy to understand. Americans were consuming far more than they were producing. You could see this by looking at our government’s annual deficits, which were larger than ever and growing… thanks to the gigantic new welfare programs and the Vietnam “police ac­tion.” You could also see this by looking at our trade deficit, which continued to get bigger and bigger, forecasting a dramatic drop (eventually) in the value of the U.S. dollar.

  Of course, economic realities are never foremost on the minds of politicians – especially not Richard Nixon’s. On August 15, 1971, he went on live television before the most popular show in Ameri­ca (Bonanza) and announced a new plan…

  The U.S. gold window would close effective immediately – and no nation or individual anywhere in the world would be allowed to exchange U.S. dollars for gold. The president announced a 10% surtax on ALL imports!

   

  Such tariffs never accomplish much in terms of actually altering the balance of trade, as our trading partners simply put matching charges on our exports. So what actually happens is just less trade overall, which slows the whole global economy, making the impact of inflation worse.

   

  Of course, Nixon pitched these moves as patriotic, saying: “I am determined that the American dollar must never again be a hos­tage in the hands of international speculators.”

   

  The “sheeple” cheered, as they always do whenever something is done to “stop the speculators.” But the joke was on them. Within two years, America was in its worst recession since WWII… with an oil crisis, skyrocketing unemployment, a 30% drop in the stock market, and soaring inflation. Instead of becoming richer, millions of Americans got a lot poorer, practically overnight.

  And that brings us to today…

  Roughly 40 years later, the United States is in the middle of anoth­er currency war. But this time, our main adversary is not Europe. It’s China.

   

  And this time, the situation is far more serious. Our nation and our economy are already in an extremely fragile state. In the 1960s, the American economy was growing rapidly, with decades of expansion still to come. That’s not the case today.

  This new currency war with China will wreak absolute havoc on the lives of millions of ordinary Americans, much sooner than most people think. It’s critical over the next few years for you to understand exactly what the Chinese are doing, why they are doing it, and the near-certain outcome.

  

  

  

  

  

• A New "Red Line"

  Presented with no comment…

   

  

   

  Source: Investors.com

  

  

  

  

  

• Have We Reached A "Peak Water" Tipping Point In California?

  Submitted by Gaius Publius via DownWithTyrannry blog,

  

  It may be a see-saw course, but it's riding an uphill train.

  A bit ago I wrote, regarding climate and tipping points:

  The concept of "tipping point" — a change beyond which there's no turning back — comes up a lot in climate discussions. An obvious tipping point involves polar ice. If the earth keeps warming — both in the atmosphere and in the ocean — at some point a full and permanent melt of Arctic and Antarctic ice is inevitable. Permanent ice first started forming in the Antarctic about 35 million years ago, thanks to global cooling which crossed a tipping point for ice formation. That's not very long ago. During the 200 million years before that, the earth was too warm for permanent ice to form, at least as far as we know.

   

  We're now going the other direction, rewarming the earth, and permanent ice is increasingly disappearing, as you'd expect. At some point, permanent ice will be gone. At some point before that, its loss will be inevitable. Like the passengers in the car above, its end may not have come — yet — but there's no turning back….

   

  I think the American Southwest is beyond a tipping point for available fresh water. I've written several times — for example, here — that California and the Southwest have passed "peak water," that the most water available to the region is what's available now. We can mitigate the severity of decline in supply (i.e., arrest the decline at a less-bad place by arresting its cause), and we can adapt to whatever consequences can't be mitigated.

   

  But we can no longer go back to plentiful fresh water from the Colorado River watershed. That day is gone, and in fact, I suspect most in the region know it, even though it's not yet reflected in real estate prices.

  Two of the three takeaways from the above paragraphs are these: "California and the Southwest have passed 'peak water'" and "most in the region know it." (The third takeaway from the above is discussed at the end of this piece.)

  "For the first time in 120 years, winter average minimum temperature in the Sierra Nevada was above freezing"

  My comment, that "most in the region know it," is anecdotal. What you're about to read below isn't. Hunter Cutting, writing at Huffington Post, notes (my emphasis):

  With Californians crossing their fingers in hopes of a super El Niño to help end the state's historic drought, California's water agency just delivered some startling news: for the first time in 120 years of record keeping, the winter average minimum temperature in the Sierra Nevada was above freezing. And across the state, the last 12 months were the warmest on record. This explains why the Sierra Nevada snow pack that provides nearly 30% of the state's water stood at its lowest level in at least 500 years this last winter despite precipitation levels that, while low, still came in above recent record lows. The few winter storms of the past two years were warmer than average and tended to produce rain, not snow. And what snow fell melted away almost immediately.

   

  Thresholds matter when it comes to climate change. A small increase in temperature can have a huge impact on natural systems and human infrastructure designed to cope with current weather patterns and extremes. Only a few inches of extra rain can top a levee protecting against flood. Only a degree of warming can be the difference between ice-up and navigable water, between snow pack and bare ground.

   

  Climate change has intensified the California drought by fueling record-breaking temperatures that evaporate critically important snowpack, convert snowfall into rain, and dry out soils. This last winter in California was the warmest in 119 years of record keeping, smashing the prior record by an unprecedented margin. Weather records tend to be broken when a temporary trend driven by natural variability runs in the same direction as the long-term trend driven by climate change, in this case towards warmer temperatures. Drought in California has increased significantly over the past 100 years due to rising temperatures. A recent paleoclimate study found that the current drought stands out as the worst to hit the state in 1,200 years largely due the remarkable, record-high temperatures.

  The rest of Cutting's good piece deals with what the coming El Niño will do. Please read if that interests you.

  There's an easy way to think about this. Imagine the thermostat in your home freezer is broken and the temperature inside goes from 31 degrees to 33 degrees overnight, just above freezing, with no way to turn it down. Now imagine the Koch Bros (and "friends of carbon" Democrats) have emptied your town of repair people — every last one of them is gone. It's over, right? Everything in the freezer is going to thaw. Then the inside is going to dry out. And everyone in your house who doesn't already know this will figure it out. All because of a two-degree change in temperature that can't be reversed.

  When it comes to climate, two non-obvious rules apply:

  • Change won't be linear; there will be sudden bursts at tipping points.
  • Pessimistic predictions are more likely to be right than optimistic ones.

  Most people get this already, even if they haven't internalized it. Which is why most people already know, or strongly suspect, that California and the American Southwest have already crossed a line from which there will be no return. This revelation, from the state's water agency, just adds numbers. Time to act decisively? Do enough people think so?

  Negative and Positive Takeaways

  I said that two of the three takeaways about California, from the text I quoted at the beginning, were these: "California and the Southwest have passed 'peak water'" and "most in the region know it." The third is from the same sentence: "though it's not yet reflected in real estate prices"  — meaning farm land as well as urban property.

  It's just a matter of time, though. Prices will fall as awareness hits, awareness that future prices can only fall. Note that prices in bear markets tend to be decidedly non-linear. And when that awareness does hit, when land is cheap, insurance expensive and the population in decline, nothing coming out of the mouths of the Kochs — or methane-promoting politicians in the Democratic Party — will change a single mind. (In terms of our playful freezer metaphor, you know the thing's going to end up in the yard, right? It just hasn't been carted out yet.)

  But that's just the negative takeaway. There's a positive takeaway as well. It's not over everywhere, not yet. From the same piece quoted at the top, referring to the tipping point of extreme weather:

  This [incidence of extreme weather] is "a" tipping point, not "the" tipping point. We have slid into a "new normal" for weather, but please note:

  • We're talking only about the weather, not a host of other effects, like extreme sea level rise. I don't think we've passed that tipping point yet.
  • We can stop this process whenever we want to — or rather, we can force the "carbon bosses" and their minions in government to stop whenever we want to stop them. They have only the power we collectively allow them to have.

  It really is up to us, and it really is not too late in any absolute sense. For my playfully named (but effective) "Easter Island solution," see here. For a look at one sure way out, see here.

  Will it take a decidedly non-linear, noticeably dramatic, event to create critical mass for a real solution? If so, we could use it soon, because the clock is ticking. It may be a see-saw course, but it's riding an uphill train. (Again, the real solution, expressed metaphorically, is here. Expressed directly, it's here. Everything less is a delaying tactic.)

  

  

  

  

• Caught On Tape: Furious French Workers Attack Air France Executives, Rip Their Clothes Off

  Earlier today amid the general gloom of Europe’s sliding non-manufacturing PMIs, the one place that stood out like a sore thumb bucking the deteriorating trend, was France which not only posted an increase from August but also beat expectations.

  We strongly doubt this metric has any basis in reality because among numerous other contrary-specific factors, Bloomberg reported that as part of Air France’s long-running spat with workers over cost cuts, violence erupted earlier today as protesters stormed a meeting where managers were presenting plans for 2,900 jobs cuts, causing executives to flee with their clothes in tatters.

  According to the report, human resources chief Xavier Broseta and Pierre Plissonnier, the head of long-haul flights, scaled an eight-foot high fence to escape, shielded by security guards, with Broseta emerging shirtless and Plissonnier with his suit shredded.

  Casting some serious doubt on the service PMI “recovery” is that the attacks happened Monday as Air France told its works council that after the failure of productivity talks with pilots last week some 300 cockpit crew, 900 flight attendants and 1,700 ground staff might have to go. The cuts could include the first forced dismissals since the 1990s, according to the carrier, which subsequently postponed the meeting.

  The company, unhappy with the terrible publicity that the photos and video clips presented below will unveil about the corporate culture at Air France, promptly tried to downplay the incident, saying in a statement that “these attacks were made by isolated and particularly violent individuals as the demonstration by personnel on strike was going on calmly,” adding that a complaint had been filed for aggravated violence. We expect many more complains will be filed before the latest surge in anger at the upcoming layoffs dissipates.

  It’s not just bad news for up to 3,000 soon to be unemployed workers but for Boeing too, which may be about to see the first scrapping of Dreamliner orders:

  Under the savings plan announced today, Air France’s fleet would be reduced by 14 jets, with orders for Boeing Co. 787s scrapped and aging Airbus Group SE A340s phased out. The Air France-KLM Group unit indicated there was scope for compromise should unions come forward with serious savings measure.

   

  Air France said last week it was planning cuts to jobs, jets and routes in the absence of a deal with pilots, who had been asked to work more hours for the same pay to help end annual losses that began in 2011. Government ministers had urged the sides to continue talking so that jobs could be saved.

  The upcoming layoffs were once again blamed almost entirely on events in Asia: “The changes would require a shrinking of Air France’s network, with a reduction in frequencies and more sweeping seasonal capacity cuts next year, following by the termination of some routes in 2017, especially to Asia, where competition is toughest. Frequencies to 22 destinations would be affected.”

  Expect more outbursts of violence and even more profits for tailors in Paris, confirming the Keynesian “torn suit fallacy”, because the job cuts are said to be implemented around mid-December at the earliest, or just in time for the holidays.

  Meanwhile, this is the outcome as the anger of several thousand French workers finally spills over.

  

  

  

  

  

  

  

   

  And roll the tape:

  

  

  

  

• Saudi Oil Minister Puts On Brave Face Amid Severe Headwinds: "Eventually, Economic Producers Will Prevail"

  As the EM world looks on helplessly while Saudi Arabia’s war with the US shale complex (and, by extension, with the Fed) serves to keep crude prices depressed putting enormous pressure on commodity currencies and accelerating emerging market outflows, the question is whether Riyadh’s SAMA piggy bank can outlast the various capital market lifelines available to America’s largely uneconomic shale drillers. 

  It’s tempting to simply say “yes.” That is, with the next round of revolver raids due in days and with HY spreads blowing out amid jittery US markets, it seems unlikely that maligned US producers will be able to survive for much longer, and despite the fact that data out yesterday shows Riyadh’s FX reserves falling to a 32-month low, the Saudi war chest still amounts to nearly $700 billion,  giving the kingdom plenty of ammo. However, between maintaining subsidies, defending the riyal peg, and fighting two proxy wars, Saudi Arabia’s fiscal situation has deteriorated rapidly, forcing Riyadh to tap the bond market in an effort to help plug a hole that amounts to some 20% of GDP. 

  Given the above, some have dared to suggest that in fact, the Saudis could lose this “war” just as they may be set to lose their status as regional power broker to Tehran thanks to Iran’s partnership with Moscow in the ongoing effort to shore up Assad in Syria and wrest control of Baghdad from the US.

  But don’t tell that to Saudi Arabia’s Oil Minister Ali al-Naimi who says that despite all the uncertainty, the economics of oil exploration and production will prevail at the end of the day. Here’s Reuters, citing Economic Times:

  Saudi Arabia’s Oil Minister Ali al-Naimi believes economic producers will prevail over higher-cost suppliers and OPEC’s share of the market will rise, India’s Economic Times newspaper reported on its website on Monday.

   

  In comments suggesting Saudi Arabia, the world’s top oil exporter, is sticking to its policy of defending market share rather than supporting prices, Naimi told the paper the drop in oil prices was less of a problem than fluctuations.

   

  “The world needs a reliable, sustainable supply. Best way to do it is to make sure that demand and supply should be equal, so there will not be fluctuation of price. The biggest problem for everybody, producer and consumer today, is fluctuation — the ups and downs,” he was quoted as saying.

   

  Referring to reports that the number of drilling rigs deployed by U.S. shale producers is falling, Naimi said: “Eventually, economic producers will continue to prevail,” the paper reported.     

   

  Naimi disagreed with analysts who believe OPEC’s market share would fall further, the paper reported. “On the contrary, OPEC’s market share will be higher,” he said.

  Maybe so, but make no mistake, this is a precarious time for the Saudis. If the US shale complex finally folds under the weight of its own debt, bad economics, and less forgiving capital markets allowing Riyadh to raise prices again having secured the future of the country’s market share, and if Iran and Russia end up being content with preserving the regional balance of power and don’t move to push the issue in Iraq and Yemen once they’re done “saving” Syria, then the Saudis may well weather the storm. 

  However, there are quite a few things that can go wrong here that would serve to destabilize the situation and if the rumors about a rebellion within the royal family are true, the slightest misstep could end up being catastrophic.

  

  

  

  

  

• Treasury Sells 3-Month Bills At 0% Yield For First Time Ever

  “Investors” are so desperate to hold on to short-term paper that they paid $100 for a 3-month Treasury-bill at today’s auction. That is a 0% yield – for the first time ever – lower even than the auction right after Lehman’s bankruptcy in Nov 2008.

   

  

  Chart: Bloomberg

  It is probably safe to say that NIRP is next, followed by more negative yields further to the right of the curve, as the US gradually becomes Europe.

  But don’t worry: as Yellen admitted during her healthcare-scare speech, “nominal interest rates cannot go much below zero“, just a little.
  

  

  

  

  

  

• Russia Escalates Syria Proxy War: Threatens Full Naval Blockade Of Syria

  Last week, NATO’s supreme allied commander for Europe, General Philip Breedlove, suggested that Russia has effectively declared a no-fly zone in Syria. 

  That contention was supported by Moscow’s rather bold move to effectively instruct the US-led coalition to keep its planes out of the sky starting last Wednesday. Ultimately, The Kremlin has declared a monopoly on Syrian air space for the duration of Russia’s military campaign, marking an epic embarrassment for Washington, and serving notice to the anti-regime forces operating in Syria that there’s a new sheriff in town. 

  Well, don’t look now, but in addition to the de facto no-fly zone, some experts are out suggesting that Russia is set to use its Black Sea fleet to enforce a blockade on the Syrian coast. Here’s Sputnik:

  Russia’s Black Sea Fleet may be used in Syria to blockade the Syrian coastline and deliver armaments, as well as possibly deliver artillery strikes, the head of Russian State Duma’s defense committee and former Black Sea Fleet commander Vladimir Komoyedov said.

   

  “Regarding the large-scale use of the Black Sea Fleet in this operation, I don’t think it will happen, but in terms of a coastal blockade, I think that it’s quite [possible]. The delivery of artillery strikes hasn’t been excluded; the ships are ready for this, but there is no point in it for now. The terrorists are in deep, where the artillery cannot reach,” Komoyedov said.

   

  Komoyedov added that the size of the naval grouping used in the operation will depend on the intensity of the fighting. He noted that currently, the navy’s Mediterranean flotilla is currently sufficient for actions in the given area.

   

  Komoyedov also said that auxiliary vessels will certainly be used in the operation against ISIL to deliver armaments as well as military and technical equipment.

  Meanwhile, the aerial bombardment continues unabated as Russian warplanes have reportedly destroyed “a terrorist base in the woods” where tanks – which are ironically Soviet made- were stationed. Here’s RT:

  The Russian Air Force in Syria has conducted 25 sorties on 9 Islamic State installations in the last 24 hours, eliminating a disguised terrorist base equipped with tanks, a command center and a communication hub, the Defense Ministry reported.

   

  Russian bombers taking off from Khmeimim airbase knocked out a terrorist base hidden in the woods near the city of Idlib, eliminating 30 vehicles, among which were several Soviet-made T-55 tanks.

   

  “Six airstrikes hit the base, and the terrorists’ equipment was fully destroyed,” Konashenkov said. 

  And here’s the video which purportedly shows the attack on the hidden ISIS base:

  While according to Russian weatherwomen, mother nature is smiling on The Kremlin’s efforts (via The Guardian):

  It’s warm and sunny in Syria – and conditions are perfect for flying fighter jets and launching airstrikes, according to a weather report broadcast on Russian state television. 

   

  “Russian aerospace forces are continuing their operation in Syria. Experts say the timing for it was chosen very well in terms of weather,” said the forecaster in a segment aired on Rossiya 24 on Sunday, standing in front of a screen showing a Sukhoi Su-27 fighter jet with the words “flying weather”.

  For those wondering how long it would be before an “accident” took place, “inadvertently” pitting Russian fighter planes against NATO, we got the answer on Monday as Turkey scrambled F-16s to the border after Russia allegedly violated Ankara’s air space. Here’s a bit of color from BBC:

  Russia said the incident was a “navigational error” and that it has “clarified” the matter to Ankara.

   

  Turkish jets patrolling the border were also “harassed” by an unidentified plane on Sunday, Turkey said.

   

  Turkey, a Nato member, has called the Russian strikes a “grave mistake”.

   

  Turkish Prime Minister Ahmet Davutoglu told Turkish TV that the rules of engagement were clear, whoever violates its airspace.

   

  “The Turkish Armed Forces are clearly instructed. Even if it is a flying bird, it will be intercepted,” he said.

  Only, that’s not true, because the first time Ankara shoots down a Russian “flying bird”, Erdogan will have a real war on his hands and will swiftly discover that while bombing air force-less Kurdish separatists with impunity is easy, dog fights with Russian fighter pilots are not, and just about the last thing Turkey needs with inflation soaring and the lira tumbling and elections looming is to go to war with Russia. 

  In any event, the situation is clearly escalating, and as the Russians get more bold with each passing NATO bluff and subsequent fold, the stakes get still higher. As hyperbolic as it may sound, the West is now one Erodgan miscalculation away from open warfare with Russia and Moscow looks to be just days away from enforcing a full naval blockade of what is rapidly becoming a Mid-East Kremlin colony.

  

  

  

  

  

• US Government Accused Of "War Crime" By Doctors Without Borders In Bombing That Killed 22

  In the aftermath of Saturday’s tragic and unprecedented bombing of an Afghanistan hospital by the US air force, one which killed 22 and continued for 30 minutes after mission command has been allegedly notified of the “error” which the US initially claimed was “collateral damage”, the Doctors without Borders physician group in charge of operating the hospital has come out swinging and has equated the US bombing of a hospital to engaging in nothing short of a war crime.

  According to AFP, “pressure mounted on Washington Monday to come clean over the apparent US airstrike on an Afghan hospital that killed 22, an incident the Pentagon chief said was “confused and complicated” but which medical charity MSF branded a war crime.”

  MSF general director Christopher Stokes, however, had no intention of waiting:

  “Under the clear presumption that a war crime has been committed, MSF demands that a full and transparent investigation into the event be conducted by an independent international body.”

  Stokes also hit out at claims by Afghan officials that insurgents were using the hospital as a position to target Afghan forces and civilians.

  “These statements imply that Afghan and US forces working together decided to raze to the ground a fully functioning hospital with more than 180 staff and patients inside because they claim that members of the Taliban were present,” he said.

  “This amounts to an admission of a war crime. This utterly contradicts the initial attempts of the US government to minimise the attack as ‘collateral damage’.”

  Others joined in: UN rights chief Zeid Ra’ad Al Hussein has also called for a full and transparent probe, noting: “An air strike on a hospital may amount to a war crime.”

  To be sure, the US which has done everything in its power in the past week to divert attention to Russian bombardment in Syria as attacks on Syrian “civilians” and “moderate rebels”, had a canned response: Defense Secretary Ashton Carter expressed sadness over the “tragic loss of life” but warned that the investigation will not be swift.

  “The situation there is confused and complicated so it may take some time to get the facts, but we will get the facts, but we will be full and transparent about sharing them,” he told reporters on a flight to Madrid at the start of a European tour.

  Then, moments ago after the US government did in fact admit, again, it was at fault, the DwB once again lashes out at the US government with the following statement:

  “Today the US government has admitted that it was their airstrike that hit our hospital in Kunduz and killed 22 patients and MSF staff. Their description of the attack keeps changing—from collateral damage, to a tragic incident, to now attempting to pass responsibility to the Afghanistan government. The reality is the US dropped those bombs. The US hit a huge hospital full of wounded patients and MSF staff. The US military remains responsible for the targets it hits, even though it is part of a coalition. There can be no justification for this horrible attack. With such constant discrepancies in the US and Afghan accounts of what happened, the need for a full transparent independent investigation is ever more critical.”

  So what is the US response? Why desperately attempt to pivot once again to Russian “war crimes”

  • NATO URGES RUSSIA TO STOP HARMING CIVILIANS, SYRIAN OPPOSITION

  And the biggest US strategic asset in the region, of course: ISIS.

  More importantly, we fail to find any historical precedent for a Nobel Peace Prize winner having been accused of engaging in war crimes just several short years later.

  

  

  

  

  

  

• How America's "Think Tanks" Are Compromised & Bought Off By Foreign Governments

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  The think tanks do not disclose the terms of the agreements they have reached with foreign governments. And they have not registered with the United States government as representatives of the donor countries, an omission that appears, in some cases, to be a violation of federal law, according to several legal specialists who examined the agreements at the request of The Times.

   

  As a result, policy makers who rely on think tanks are often unaware of the role of foreign governments in funding the research.

   

  Several legal experts who reviewed the documents, however, said the tightening relationships between United States think tanks and their overseas sponsors could violate the Foreign Agents Registration Act, the 1938 federal law that sought to combat a Nazi propaganda campaign in the United States. The law requires groups that are paid by foreign governments with the intention of influencing public policy to register as “foreign agents” with the Justice Department.

   

  At least one of the research groups conceded that it may in fact be violating the federal law.

   

  – From the New York Times article: Foreign Powers Buy Influence at Think Tanks

  Liberty Blitzkrieg readers will be under no illusions when it comes to the role “Think Tanks” play within America’s crony, unethical, slimy and entirely compromised political system. Nevertheless, the recent New York Times article exposing how foreign governments, likely illegally, use them to buy influence in Washington D.C., is extremely important and disturbing. Let’s examine a few excerpts.

  From the New York Times:

  WASHINGTON — The agreement signed last year by the Norway Ministry of Foreign Affairs was explicit: For $5 million, Norway’s partner in Washington would push top officials at the White House, at the Treasury Department and in Congress to double spending on a United States foreign aid program.

   

  But the recipient of the cash was not one of the many Beltway lobbying firms that work every year on behalf of foreign governments.

   

  It was the Center for Global Development, a nonprofit research organization, or think tank, one of many such groups in Washington that lawmakers, government officials and the news media have long relied on to provide independent policy analysis and scholarship.

   

  The money is increasingly transforming the once-staid think-tank world into a muscular arm of foreign governments’ lobbying in Washington. And it has set off troubling questions about intellectual freedom: Some scholars say they have been pressured to reach conclusions friendly to the government financing the research.

   

  The think tanks do not disclose the terms of the agreements they have reached with foreign governments. And they have not registered with the United States government as representatives of the donor countries, an omission that appears, in some cases, to be a violation of federal law, according to several legal specialists who examined the agreements at the request of The Times.

   

  As a result, policy makers who rely on think tanks are often unaware of the role of foreign governments in funding the research.

  And you wonder why U.S. foreign policy is such an epic disaster…

  “It is particularly egregious because with a law firm or lobbying firm, you expect them to be an advocate,” Mr. Sandler added. “Think tanks have this patina of academic neutrality and objectivity, and that is being compromised.”

   

  The arrangements involve Washington’s most influential think tanks, including the Brookings Institution, the Center for Strategic and International Studies, and the Atlantic Council. Each is a major recipient of overseas funds, producing policy papers, hosting forums and organizing private briefings for senior United States government officials that typically align with the foreign governments’ agendas.

   

  Most of the money comes from countries in Europe, the Middle East and elsewhere in Asia, particularly the oil-producing nations of the United Arab Emirates, Qatar and Norway, and takes many forms. The United Arab Emirates, a major supporter of the Center for Strategic and International Studies, quietly provided a donation of more than $1 million to help build the center’s gleaming new glass and steel headquarters not far from the White House. Qatar, the small but wealthy Middle East nation, agreed last year to make a $14.8 million, four-year donation to Brookings, which has helped fund a Brookings affiliate in Qatar and a project on United States relations with the Islamic world.

  Recall that Qatar was one of the major funders of ISIS in the early days. For more, see:

  America’s Disastrous Foreign Policy – My Thoughts on Iraq

  Some scholars say the donations have led to implicit agreements that the research groups would refrain from criticizing the donor governments.

   

  “If a member of Congress is using the Brookings reports, they should be aware — they are not getting the full story,” said Saleem Ali, who served as a visiting fellow at the Brookings Doha Center in Qatar and who said he had been told during his job interview that he could not take positions critical of the Qatari government in papers. “They may not be getting a false story, but they are not getting the full story.”

  Oh, they’re getting a false story.

  In interviews, top executives at the think tanks strongly defended the arrangements, saying the money never compromised the integrity of their organizations’ research. Where their scholars’ views overlapped with those of donors, they said, was coincidence.

   

  “Our currency is our credibility,” said Frederick Kempe, chief executive of the Atlantic Council, a fast-growing research center that focuses mainly on international affairs and has accepted donations from at least 25 countries since 2008.

  If that’s the case, I’d be loading up on the tenge way before buying Atlantic Council rupee.

  In their contracts and internal documents, however, foreign governments are often explicit about what they expect from the research groups they finance.

   

  “In Washington, it is difficult for a small country to gain access to powerful politicians, bureaucrats and experts,” states an internal reportcommissioned by the Norwegian Foreign Affairs Ministry assessing its grant making. “Funding powerful think tanks is one way to gain such access, and some think tanks in Washington are openly conveying that they can service only those foreign governments that provide funding.”

   

  Several legal experts who reviewed the documents, however, said the tightening relationships between United States think tanks and their overseas sponsors could violate the Foreign Agents Registration Act, the 1938 federal law that sought to combat a Nazi propaganda campaign in the United States. The law requires groups that are paid by foreign governments with the intention of influencing public policy to register as “foreign agents” with the Justice Department.

   

  “I am surprised, quite frankly, at how explicit the relationship is between money paid, papers published and policy makers and politicians influenced,” said Amos Jones, a Washington lawyer who has specialized in the foreign agents act, after reviewing transactions between the Norway government and Brookings, the Center for Global Development and other groups.

   

  At least one of the research groups conceded that it may in fact be violating the federal law.

   

  “We have to respect their academic and intellectual independence,” Mr. Otaka, the Japanese Embassy spokesman, said in a separate interview. But one Japanese diplomat, who asked not to be named as he was not authorized to discuss the matter, said the country expected favorable treatment in return for donations to think tanks.

   

  “If we put actual money in, we want to have a good result for that money — as it is an investment,” he said.

   

  But three lawyers who specialize in the law governing Americans’ activities on behalf of foreign governments said that the Center for Global Development and Brookings, in particular, appeared to have taken actions that merited registration as foreign agents of Norway. The activities by the Center for Strategic and International Studies and the Atlantic Council, they added, at least raised questions.

   

  “The Department of Justice needs to be looking at this,” said Joshua Rosenstein, a lawyer at Sandler Reiff.

  But of course, the “Justice” Department will not be looking into anything.

  Now how about this gem…

  Michele Dunne served for nearly two decades as a specialist in Middle Eastern affairs at the State Department, including stints in Cairo and Jerusalem, and on the White House National Security Council. In 2011, she was a natural choice to become the founding director of the Atlantic Council’s Rafik Hariri Center for the Middle East, named after the former prime minister of Lebanon, who was assassinated in 2005.

   

  But by the summer of 2013, when Egypt’s military forcibly removed the country’s democratically elected president, Mohamed Morsi, Ms. Dunne soon realized there were limits to her independence. After she signed a petition and testified before a Senate Foreign Relations Committee urging the United States to suspend military aid to Egypt, calling Mr. Morsi’s ouster a “military coup,” Bahaa Hariri called the Atlantic Council to complain, executives with direct knowledge of the events said.

   

  Ms. Dunne declined to comment on the matter. But four months after the call, Ms. Dunne left the Atlantic Council.

   

  Ms. Dunne was replaced by Francis J. Ricciardone Jr., who served as United States ambassador to Egypt during the rule of Hosni Mubarak, the longtime Egyptian military and political leader forced out of power at the beginning of the Arab Spring. Mr. Ricciardone, a career foreign service officer, had earlier been criticized by conservatives and human rights activists for being too deferential to the Mubarak government.

   

  Scholars at other Washington think tanks, who were granted anonymity to detail confidential internal discussions, described similar experiences that had a chilling effect on their research and ability to make public statements that might offend current or future foreign sponsors. At Brookings, for example, a donor with apparent ties to the Turkish government suspended its support after a scholar there made critical statements about the country, sending a message, one scholar there said.

   

  “It is the self-censorship that really affects us over time,” the scholar said. “But the fund-raising environment is very difficult at the moment, and Brookings keeps growing and it has to support itself.”

   

  But in 2012, when a revised agreement was signed between Brookings and the Qatari government, the Qatar Ministry of Foreign Affairs itself praised the agreement on its website, announcing that “the center will assume its role in reflecting the bright image of Qatar in the international media, especially the American ones.” Brookings officials also acknowledged that they have regular meetings with Qatari government officials about the center’s activities and budget, and that the former Qatar prime minister sits on the center’s advisory board.

   

  Mr. Ali, who served as one of the first visiting fellows at the Brookings Doha Center after it opened in 2009, said such a policy, though unwritten, was clear.

   

  “There was a no-go zone when it came to criticizing the Qatari government,” said Mr. Ali, who is now a professor at the University of Queensland in Australia. “It was unsettling for the academics there. But it was the price we had to pay.”

  The price “we the people had to pay is…

  

  The above excerpts are just a small part of the story. I suggest you read the entire article, as it also explains how the mad dash to push the corporate giveaway, Trans Pacific Partnership (TPP) agreement, was partly funded by foreign payoffs to think tanks.

  

  

  

  

  

• Bad News Piles On For Hedge Fund Hotel SunEdison: First $315MM Margin Call, Now Mass Layoffs

  It has been a long way up and quick ride down for SunEdison but bad news keeps piling up for the hedge fund hotel even as it dead-cat-bounces again. As the stock bounces, just as it bounced in September after Steve Cohen's Point72 exposed their stake and JPM jumped to the rescue, uncertainty remains extreme. Amid a surge in debt and increasingly negative operating cash-flow, the plunge in stock (asset) price may have triggered a cross-collateral margin call of around $315 million. Furthermore, mass layoffs are on the cards as the CEO attempts to "optimize" the business.

   

  Another squeeze…

  

  Charts: Bloomberg

  Some investors have dumped the stock due to low oil prices and turmoil in commodity markets — a problem for other public solar companies as well. However, short sellers have targeted SunEdison more than its competitors.

  Recent acquisitions have nearly doubled SunEdison's debt load and increased negative operating cash flow. The Vivint acquisition, which wasn't an obvious fit with SunEdison's culture and traditional business of building large solar-power plants, added to investor skepticism.

   

  The stock has become a playground for hedge funds.

  But uncertainty remains extreme…

  SunEdison may have triggered a collateral call on its $410 million margin loan, a report from CreditSights says, citing a decline in the financially-linked TerraForm Power Inc (known as a "yieldco," the spin-off of a related business venture), which fell 36% in September and continued to slide, down 49% year ­to ­date.

   

  

   

  After sifting through four different SEC documents – a 10Q at SunEdison, an equity prospectus at TerraForm, a convertible bond 8K from SunEdison and a margin loan agreement at SunEdison… the report concludes it is possible SunEdison to be dragged down by TerraForm and the added burden of posting cash collateral for the margin loan that was backed by stock.

   

  CreditSights says the margin loan is yet another example of lack of disclosure but they reiterate their our conclusion on the collateral call.

  As Creditsights concludes…

  there are a lot of moving parts to SunEdison and the more we find the more negative we get on the sponsor company of TerraForm Power.

  And now, as GreenTechMedia.com's Stephen Lacey reports, SunEdison is now culling its workforce.

  According to a company-wide memo from CEO Ahmad Chatila released on September 30, SunEdison will be laying off around 10 percent of its 7,300 employees. Many employees received notices on Friday.

   

  "Overall, the proposed changes result in an overall reduction of about 30%, 20% being from non-labor expenses and about 10% from headcount reduction. And this process will take some time to complete. Most of the changes will be announced during the fourth quarter with some final steps expected in the first quarter of 2016," reads the memo.

   

  The staff reduction will come through integrating acquired companies and "eliminating redundancy." It will also come from simplifying management structures in different areas of the business, and focusing on a smaller range of geographic regions.

   

  The cuts have reached all the way to the VP level, but not the executive level. Sources within the company expressed worry and surprise that the cuts didn't impact the architects of the Vivint acquisition.

   

  When asked for comment, SunEdison would not address the cuts specifically.

   

  "We are proposing to take several actions around the world to optimize our business, align with current and expected market opportunities and position ourselves for long-term growth. In October we plan to provide investors with a more comprehensive view of our business structure and go-forward strategic growth plan in a conference call," wrote spokesperson Gordon Handelsman in an email.

  More details on SunEdison's plans to "align with current and expected market opportunities" will be forthcoming this week.

  

  

  

  

  

• Oct 6 – Fed's Rosengren: Door Still Open For 2015 Fed Rate Hike

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 33/100 FEAR

  PREVIOUS CLOSE: 20/100 EXTREME FEAR

  ONE WEEK AGO: 12/100 EXTREME FEAR

  ONE MONTH AGO: 10/100 EXTREME FEAR

  ONE YEAR AGO: 5/100 EXTREME FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 25.65% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 19.54. This is a neutral reading and indicates that market risks appear low.

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

   

  PIVOT POINTS

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

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

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

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

   

  MEME OF THE DAY – BEIJING AFTER VOLKSWAGEN

   

  UNUSUAL ACTIVITY

  FOLD .. JAN 9 and 10 CALLS on the offer

  MDT activity in the NOV 72.5 CALLS

  FUND  Senior Portfolio Manager P    18,231  A  $ 5.9175

  LPCN – President and CEO P    2,000  A  $ 12  P    700  A  $ 11.6799 P    1,300  A  $ 11.676

  More Unusual Activity…

  HEADLINES

   

  Fed’s Rosengren: Door Still Open For 2015 Fed Rate Hike

  BOJ may need to ease again as prospect of Fed rate hike fades –Nikkei

  ECB: French, Dutch, Lithuanian cbanks to trial reverse auctions

  ECB PSPP: +EUR8.271Bn To EUR346.15Bn (prev +EUR11.161Bn To EUR337.879Bn)

  ECB Post-Summer Boost to Bond Purchases Slows Near Month End

  US, 11 nations on verge of historic Pacific Rim trade accord

  Russia mulls oil talks

  Saudis say Opec market share will increase

  UK FinMin Osborne: There a lot of risks in world economy

  DoJ: BP settlement will cost $20.8bn

   

  GOVERNMENTS/CENTRAL BANKS

  Fed’s Rosengren: Door Still Open For 2015 Fed Rate Hike –MW

  US, 11 nations on verge of historic Pacific Rim trade accord –WaPo

  Ford, others say trade deal lacks currency protections

  ISM’s Nieves says a slowdown in retail was linked to stocks and confidence –ForexLive

  ECB: French, Dutch, Lithuanian C. Banks To Trial Reverse Auctions –BBG

  BOJ may need to ease again as prospect of Fed rate hike fades

  UK FinMin Osborne: There a lot of risks in world economy –ForexLive

  UK FinMin Osborne: We will build a budget surplus in UK –FT

  PMI: Eurozone Shows Signs Of Growth Waning At End Of Solid Q3 –Markit

  PMI: Weakest Rise In UK Activity In Nearly 2.5-Years In September –Markit

  Germany FinMin Schaeuble: Too early to talk about delays in the Greek plan –ForexLive

  Portugal Government Re-Elected Despite Painful Austerity –Yahoo

  Greek Budget To Forecast EUR3.4 Bln Rev. Shortfall In 2015 –EFSYN

  Fitch: EU Bank Resolution Paths Diverge, Coordination Important

  Italy FinMin Padoan will tomorrow announce proposals for common funds to finance cyclical unemployment benefits in the EZ –BBG

  FIXED INCOME

  ECB PSPP: +EUR8.271Bn To EUR346.15Bn (prev +EUR11.161Bn To EUR337.879Bn)

  ECB CBPP: +EUR 2.548Bn To EUR122.803Bn (prev +EUR1.993Bn To EUR120.255Bn)

  ECB ABSPP: +EUR385Mn To EUR13.150Bn (prev +EUR759Mn To EUR12.765Bn)

  ECB Post-Summer Boost to Bond Purchases Slows Near Month End

  Portuguese bonds at five-month high after election –FT

  Central Banks Lose Bond-Market Credibility as Woes Mount –BBG

  FX

  FX: Currency trading volumes pull back in September –FT

  USD: Dollar Ticks Down After ISM Non-manufacturing Survey

  BANKS: Banks face erosion of business around currency fix –FT

  ENERGY/COMMODITIES

  WTI futures settle +1.6% at $46.26 per barrel

  Brent futures settle +2.3% at $49.25 per barrel

  Brent crude jumps most in two weeks –FT

  Oil prices rise on China stimulus hopes –MW

  Russia mulls oil talks –CNBC

  Saudi’s Naimi says OPEC share of the oil market will increase –ForexLive

  More pain ahead for copper – Barclays

  EQUITIES

  BofA, Deutsche Bank slice S&P 500 forecasts –FT

  DoJ: BP settlement will cost $20.8 billion –WaPo

  M&A: Potash Corp. Withdraws $8.8bn Offer For German Rival K+S –WSJ

  M&A: Suncor makes C$6.6bn bid for Canadian Oil Sands –FT

  Canadian Oil Sands unlikely to engage with Suncor on basis of current proposals –Rtrs source

  M&A: Nestle in talks to merge international ice cream ops with R&R –Rtrs

  ACTIVIST: Trian Takes $2.5bn stake in General Electric –MW

  ACTIVIST: Trian buys more Dupont shares –CNBC

  TECH: Jack Dorsey back in the flock as permanant Twitter boss –CityAM

  TECH: Google takes stake in messaging startup Symphony, valuing company at $650M –BI

  BANKS: UK launches Lloyds bank shares sell-off –Daily Mail

  BANKS: Banks face erosion of business around currency fix –FT

  M&A: Full Takeover Of Glencore Is Not On The Agenda –Telegraph

  COMMODS: Glencore Surges In Hong Kong Amid Unit Sale Talks –Rtrs

  ECONOMY: UK Firms See Least Certain Outlook In 2.5 Years –Deloitte

  BREXIT: Prudential May Quit Britain Over New EU Diktat –Sunday Times

  AIRLINES: Air France To Announce Job Cuts Under New Restructuring Plan –BizTimes

  TECH: The UK is the e-commerce capital of the EU –CityAM

  RETAIL: American Apparel files for bankruptcy protection –FT

  TECH: Facebook Says Planned Software Changes Caused Outages –WSJ

  RETAILS: Moody’s: US Apparel And Footwear Industry Outlook Drops To Stable As Strong Dollar Squeezes Earnings

  BANKS: ANZ limits lending to clean coal –AFR

  EMERGING MARKETS

  World Bank Trims 2015, 2016 East Asia Forecasts, Cites China, US Rate Risks –Rtrs

  Modi and Merkel vow trade talks and 2.25 billion green energy dollars –Rtrs

   

  Nigerian central bank chief hints at import ban end –FT

  

  

  

  

  

• Nomi Prins: How Trump Became Trump And What That Means For The Rest Of Us

  Authored by Nomi Prins via TomDispatch.com,

  Trumpocrisy

  The Donald’s Finances and the Art of Ignoring Conflicts and Contradictions

  The 2016 election campaign is certainly a billionaire’s playground when it comes to “establishment candidates” like Hillary Clinton and Jeb Bush who cater to mega-donors and use their money to try to rally party bases. The only genuine exception to the rule this time around has been Bernie Sanders, who has built a solid grassroots following and funding machine, while shunning what he calls “the billionaire class” that fuels the super PACs.

  Donald Trump, like Ross Perot back in the 1992 and 1996 elections, has played quite a different trick on the money-saturated American political system.  He has removed the billionaire as middleman between citizen plebeians and political elites, and created a true .00001% candidate, because he’s… well, a financial elite unto himself, however conveniently posed as the country’s straight-talking “everyman.”

  Despite his I-can-buy-but-can’t-be-bought swagger, Trump’s persona has been carefully constructed to deflect even the most obvious questions of conflict of interest that his wealth and deal-making history should bring up. He claims that he would govern (or dictate) as he is, no apologies or bullshit. But would he?

  The billionaire-as-president is a new prospect for America. The only faintly comparable situation in our history came before the Crash of 1929, when President Calvin Coolidge, who famously declared that “the business of America is business,” reappointed mogul Andrew Mellon as his treasury secretary, just as President Warren Harding had done before him. A walking conflict of interest, Mellon left Washington during Herbert Hoover’s administration to avoid Congressional scrutiny of his personal business endeavors. He was later investigated by the Department of Justice for falsifying tax information in his own business empire.

  Trump is, by his own admission, a dealmaker who has, since the 1970s, utilized self-promotion and his own growing celebrity to make money.  Nonetheless, he denies the importance of money itself. His quasi-autobiography, The Art of the Deal, opens with this now-familiar tall tale: “I don’t do it for the money. I’ve got enough, much more than I’ll ever need. I do it to do it. Deals are my art form.”

  Today, he asserts that he is worth a cool $10 billion, having long been cagey about just how much he has. That figure, too, may be more scam than reality. Forbes pegs Trump's fortune at $4 billion in its 2015 top billionaires list, where he places 405th in the world and 133rd in the U.S.  In his 92-page Federal Election Committee financial filing, which doesn’t require the disclosure of his total wealth, the value of his global enterprises, assets, debts, and income sources are listed in ranges, rather than exact figures. More than 20 items are characterized as worth “over $50 million.”

  He has at least $1.4 billion in assets and $285 million in debt, if we use just $50 million as a guesstimate on those items; $2.8 billion in assets and $570 million in debt, if we pick the figure of $100 million instead. In other words, we still don’t know what he’s worth. As with so much else, we just have to take his word for it.

  Consider the presidency as Donald Trump’s ultimate deal. And don’t think for a second that if he entered the Oval Office his money and deal-making lust and every conflict of interest that went with them wouldn’t follow him there.

  He claims to be an open book — “the definition of the American success story,” as his campaign website puts it.  He wants people to believe (as his acolytes do) that he’s just like us — except for the hair — only richer, more successful, and (not to mince words) better. That narrative has, of course, been carefully constructed for our consumption, which means, if he succeeds, we are part of his chosen art form, his deal.  

  Though you might not know it from the incessant media coverage of his candidacy or his P.T. Barnum-ish self-glorification, there are plenty of pieces missing from his financial story that call into question both his skill as a dealmaker and his business acumen.  Though there’s been much discussion of how money from the Koch Brothers and other billionaire donors might influence 2016’s candidates, there’s been little discussion of how Trump might be influenced by the billionaire backing him: himself.

  Celebrity Apprentice

  The Trump phenomenon has delivered ratings to networks and, arguably, the apolitical to their TV sets. It’s probably sold a lot of cars, judging from the commercials that went with the recent Republican debates. A record 24 million people watched the first one on Fox News.  That event was, in fact, such an obvious triumph for Fox that CNN upped the ante, expanding the second debate to a full (some would say endless) three hours. As Trump noted, “I guess it was to sell commercials.” CNN similarly shattered its prior election debate records, averaging 23 million viewers.

  All of this has been a boon for The Donald, who clearly has a remarkable ability to glue cameras to him and use the media to his advantage, a skill he honed starting with his first Manhattan deal in 1973. When Trump went on ABC’s This Week with George Stephanopoulos on August 23rd, he dispatched Jeb Bush this way: “We need a person with a lot of smarts, a lot of cunning, and a lot of energy. And Jeb doesn't have that,” while dissing Scott Walker as a governor whose “state is really in trouble.” Walker just left the race. Jeb continues to falter. Call it Trump magic.

  The Donald has long perfected two proven strategies for winning: attack and deflect. On both counts, he is a TV veteran. Appearing on NBC’s Late Night with David Letterman in 1987 to promote The Art of the Deal, his skill in deflecting attention from aspects of his life that might otherwise diminish his aura was already on full display. When Letterman probed the particulars of Trump’s personal wealth multiple times, he dodged effectively, insisting, “You’ll never get it out of me.” He also deflected his host’s question about the degree to which his father’s money contributed to his success. “He was a solid guy and a bright guy, I learned a lot” was about all Letterman could dig out of him on Fred Trump.

  And here’s an irony: for all his edginess, Trump’s savvy in avoiding what might embarrass or confine him makes him much more of a politician that he’d like us to believe.  His father, however, provided Trump with far more guidance and help than that “self-made man” would care for us to realize.  So let’s start with a little tour of his celebrity apprenticeship.

  Fred Trump was born in Queens, New York, in 1905. According to The Donald, Fred's father had emigrated to the United States from Sweden in 1885.  Fred himself would convert a business in low-income housing into a $300 million fortune.

  A year after leaving high school, Fred built his first home in Woodhaven, Queens. “It cost a little less than $5,000 and he sold it for $7,500,” his son proudly wrote years later. 

  By 1929, Fred was building larger homes. When the Depression hit, he bought a bankruptcy mortgage-service company, which he sold for a profit a year later. In 1934, he returned to building lower-priced homes in the depressed Flatbush area of Brooklyn. During the next dozen years, he would build 2,500 of them in Brooklyn and Queens. 

  Trump and his father had an "a relationship that was almost businesslike,” The Donald would later write and from Fred he would, he’s testified, learn toughness, though “I also realized that if I ever wanted to be known as more than Fred Trump’s son, I was eventually going to have to go out and make my own mark.”

  Think, for instance, of George W. Bush’s urge to surpass his father’s record of political power — and war making. But don’t imagine for a moment that Trump struck out on his own any more than the young Bush did. Trump recounts his first major deal as Swifton Village, a foreclosed apartment complex in Cincinnati that he said he bought with his father in 1969, while still in college. (Cincinnati Magazine claims the purchase was Fred’s exclusively.) The price was $6 million and in 1972, they resold it for $12 million, according to Trump (and a far more modest $6.75 million according to other estimates).

  But Cincinnati was never The Donald’s dream. He wanted Manhattan from the beginning. His first deal there started in 1973 with a desire to purchase the old Penn Central rail yards at 34th Street on the West side of the island.

  At that time, New York was a complete financial mess. That summer, Trump came across a newspaper story about the Penn Central Railroad bankruptcy filing. Penn Central trustees had hired a small LA-based investment management company led by Victor Palmieri to sell its assets, including its long abandoned yards in the West thirties and sixties. Ever the con artist, Trump recalled, “I couldn’t sell him on my experience or my accomplishments, so instead I sold him on my energy and my enthusiasm.”

  Trump initially proposed building middle-income housing on the site with government financing. When the city became mired in financial problems and money for public housing dried up, he switched to Plan B and “began promoting the site as ideal for a convention center.”

  Trump still did nothing without his father’s involvement.  As their development firm had no official name, they decided to call it the Trump Organization, which covered them both and, they hoped, had a certain gravitas. Over the next several years, Trump solicited support from New York Mayor Abe Beame, who belonged to the same club as his father and to whom his father and he gave money, as he later wrote, “like all developers.” Palmieri would give Trump his virgin credibility with the press as his choice for developer, swearing to Barron’s that “he’s larger than life.”

  On July 29, 1974, the New York Times featured a front-page story on how the Trump Organization secured options to buy the two waterfront sites from Penn Central for $62 million. However, it was Mayor Ed Koch who, in 1978, gave Trump’s pet project for a future convention center at West 34th Street his official stamp of approval by agreeing to buy the site. That site would eventually become the Javits Convention Center.

  It was the symbolic, if not financial break The Donald had been waiting for. As for the West 60th street site, due to numerous problems, he let the option expire in 1979. In a sense, Donald Trump would never look back, but he would have to look down often enough.

  Trump’s Bankruptcies

  As Carly Fiorina made crystal clear to almost 23 million Americans in the second Republican debate (the topic had been broached in the first one), Trump’s companies have officially gone bankrupt four times since 1991, or as Trump spun it, “I used the law four times and made a tremendous thing. I’m in business. I did a very good job.”

  While that’s a small number of bankruptcies relative to the hundreds of companies that comprise his empire, they represented a fair amount of debt. There was the Trump Taj Mahal (with $1 billion in debt) in Atlantic City in 1991 and the Trump Plaza Hotel in Atlantic City in 1992 (with $550 million in debt). Trump Hotels and Casino Resorts, the company created from the post-bankruptcy ashes of the Taj Mahal, the Trump Plaza, and also Trump Marina in Atlantic City filed for Chapter 11 bankruptcy protection (with $1.8 billion of debt) in 2004. Bankruptcy number four, Trump Entertainment Resorts (the post-bankruptcy company created to take over the remains of Trump Hotels and Casino Resorts) filed for Chapter 11 bankruptcy protection (with $1.74 billion of debt) in February 2009.

  While Trump owned 28% of its stock, as he told Bloomberg News upon resigning from the board four days before the $53 million bond payment that forced it into bankruptcy was due, “I have nothing to do with it. I’m not in it. I’m not on the board.”

  He continues to argue that the Atlantic City bankruptcies weren’t his fault, but attributable to the casino environment of that moment.  Though there is some truth to that, he glosses over his method of creating new companies to purchase the bankrupt ones, after shedding their debts, and his convenient exit timing from management posts to shed blame.

  While four of his companies officially went down for the count, he had many companies that didn’t and, as he has repeatedly said, he himself never declared personal bankruptcy (so his credit score likely remains in fine shape).  Keep in mind, though, that, hard as it is to find consistent basic information about Trump’s various disasters, the count of his unofficial bankruptcies would undoubtedly run significantly higher.  After all, a number of his companies effectively went bankrupt by closing down or being bought out at bargain basement prices.

  In 1989, for instance, Trump purchased the Eastern Air Shuttle, connecting New York, Boston, and Washington, D.C. with hourly flights, for roughly $365 million. But the Trump name didn’t carry the day and passengers didn’t pony up for the line’s fancier seats and gold lavatory fixtures. Instead, in 1990 Trump defaulted on the loans he had taken out to finance the company, and its ownership reverted to its creditors, led by Citibank. The Trump Shuttle was then merged into a new corporation, Shuttle Inc., and in April 1992, its routes were assumed by USAir Shuttle, which is one way the rich make problems disappear.

  In April 2006, at a Trump Tower gala, Trump’s son Donald, Jr. promised that Trump Mortgage would become the nation's number one home-loan lender. In a CNBC interview shortly afterwards, Trump said, “Who knows about financing better than I do?” Eight months later, the company closed down amid the crashing housing market and negative publicity over an unfortunate hiring choice. Trump’s CEO, E.J. Ridings, had lied on his résumé. His previously advertised “top” spot at one of Wall Street’s “most prestigious banks” turned out to have been as a lowly broker — for one week. As Trump continually reminds us, he only has the best people work for him.

  Then there was “Trump University,” active from 2005 to 2010, where, for $25,000-$35,000, students could assumedly learn how to become real-estate gods like Trump. According to related lawsuits, they were then enticed to take out credit cards under phony business names to help pay for the privilege, and to inflate their income by projecting profits from non-existing businesses.

  Earlier this month, New York Attorney General Eric Schneiderman told the New York Daily News that approximately 600 former students have filed suit against the “university” in Manhattan Supreme Court. Similar suits are pending in California. Schneiderman claimed Trump banked $5 million personally from the scam. Trump had also ignored 2005 warnings not to use the word “university” in the name.

  Of course, if ordinary Americans declare bankruptcy due to unforeseen or difficult circumstances, they are regularly stigmatized as lazy deadbeats. The Trumps of our world, however, being rich enough to launch corporate bankruptcy protection filings, are seen as savvy dealers.  In this sense, Trump couldn’t have been savvier, since he’s survived one potential financial catastrophe after another. Unfortunately, his experiences have absolutely no applicability to ordinary Americans, even though, as David Dayen wrote at the Intercept, “Everyone would have benefited from relieving primary mortgage debt, the absence of which led to at least six million foreclosures.“

  Trump International

  It’s evident from Trump’s recent comments that his foreign policy ideas haven’t evolved much since he last seriously thought about running for president in 2011 when he wrote the first version of a campaign book, Time to Get Tough (updated for his 2016 bid). 

  Then, too, he talked about “getting China to stop playing currency charades,” while declaring his “great respect for the people of China” and blaming “our leaders and representatives” for making terrible deals with their leaders that have cost American jobs.  What Trump didn’t discuss then, and doesn’t discuss now, is how U.S. companies, his own included, produce and sell in China because they make more money doing that. Though he regularly complains that we don't manufacture anything here anymore, neither does he bother to explain his own patriotism shortfall, since he and his daughter, Ivanka, have clothing lines made in China (and Mexico, that land of “rapists,” and Bangladesh, a country continuously in violation of human rights for garment workers).

  Absent any sense of irony, he has blamed Chinese currency manipulation for making him set up shop in China and claims China is “killing us.” This, though the Chinese stock markets have recently been hammered, the Yuan is weakening, and the country’s growth is slowing, hardly signs of an imminent threat. It’s a great Trumpian combo, though: anti-China anger plays well with the xenophobic crowd, while a weaker Yuan keeps costs down on Trump’s clothing business. A deal, after all, is a deal.

  According to the Trump Organization website and his Federal Election Commission financial disclosures, he has operations practically worldwide, but notably not in Russia.  Yet Trump has had his eye on doing business there for a long time. As far back as 1987, when it was still the Soviet Union, he wanted to erect a Trump Tower in Moscow’s Red Square. In 2013, he was still talking about the possibility in Vladimir Putin’s Russia. Perhaps because of his ongoing business interests (or their mutual maverick styles), Trump, unlike his Republican presidential opponents for whom the Russian president is little short of the devil incarnate, regularly claims that he will have a “great relationship” with Putin.

  As for Trump’s Mexican border wall and the fantasy of getting the Mexican government to pay for it, Trump has made hay with the immigration issue.  You wouldn’t know, listening to him, that the number of illegal immigrants has dropped significantly since the financial crisis. On the Late Show recently, Trump doubled down on his wall, comparing it to the Great Wall of China and suggesting that “we can have a great and beautiful wall, we'll have our border, and guess what, nobody comes in unless they have their papers." This from the man who has a borderless record of outsourcing jobs and tax revenues to Mexico and elsewhere.

  All of this adds up to a vast set of potential conflicts of interest and downright deception should Donald Trump ever set foot in the White House, a subject that is at the heart of what might be called Trumpocrisy in the present campaign, but seldom part of the debate by or about The Donald himself.

  The Polls

  For now, Trump remains the clear GOP frontrunner in terms of composite polling results. His polling success has been predicated since announcing his candidacy on a cocktail of bravado, media exposure, tactical hits on opponents as if they were competitors for one of his casino deals, and the wholesale avoidance of any serious discussion of the financial baggage he brings with him into the election season. Can there be any question that, for the man who wanted to leave his father’s helping hand behind, bagging the Oval Office would be the ultimate step in outshining Fred Trump’s legacy? It’s less clear what the rest of us get out of it.

  Trump assures us that he wouldn’t let his business dealings interfere with his politics, but is he really prepared to step away from all Trump Organization matters globally? Does anyone believe that his deal-making instincts will die in the Oval Office? Or would building Trump Tower in Moscow be the touchstone for any future conversation with Putin about Ukraine and Syria? Would his acts be indicative of what happens — consider Bill Clinton netting high speaking fees from countries in which then-Secretary of State Hillary Clinton was conducting foreign policy — when you fuse public office and private power? In historical terms, it would be as if a Morgan or a Rockefeller were running the country and his private business affairs at the same time, creating the quintessential conflict of public and private interest.

  Unfortunately, we are used to politicians saying whatever they think they need to say to be elected president, and falling way short of their campaign promises on the job. Even scarier would be the notion of selling America to the craftiest bidder. The election may be more than a year away, but isn’t it time to dig beneath the carefully crafted persona that is Trump and unearth the person and the full spectrum of his business dealings? To see the real Donald Trump is to plunge into all the conflicts of interest he denies, the financial tricks he dispenses, the crucial details he obfuscates, and the flimflam he offers up day in, day out.

  

  

  

  

  

• Syria Ground War Imminent? U.S. Accuses Russia Of Launching Syrian Land Campaign

  While the US was been surprised and angered by the stunningly fast turn of events in Syria where in the span of less than a month Russia unleashed a massive, Syria-based airborne campaign against what it says are ISIS terrorists, even as the US accuses Putin of targeting “moderate rebels”, it has had little recourse in accusing Putin of violating Syrian sovereignty: after all Russia is the only nation that Syria has officially invited to eradicate the “terrorist threat” that is ISIS.

  Then, last Friday, Syria raised the stakes once again, when as Bloomberg reported a loyalist of the Assad regime said “terrorism cannot only be fought from the air,” making an appeal for more military involvement to defeat Islamic State.

  In a defiant speech at the United Nations General Assembly in New York, Syrian Foreign Minister Walid al-Muallem criticized the current approach to fighting the group that has conquered swathes of territory and was encroaching on President Bashar al-Assad’s coastal stronghold in Latakia. Those gains triggered Russian intervention.

   

  “Air strikes are useless unless they are coordinated with the Syrian Arab army, the only force to combat terrorism,” al-Muallem, who also holds the title of deputy prime minister, told a largely empty assembly hall on Friday, the last day of speeches.

  The logical implication is that Syria will next invite, if it hasn’t already done so, Russian troops to join the Russian airforce in eradicating the great ISIS strawman which until recently was the pretext for “coalition” forces to bombard Syria with complete disregard for Syrian sovereignty, and the intention of destroying Assad’s military so the CIA can conclude a regime change with a pro-western leader, one which will permit the passage of a Qatar gas pipeline.

  Whether or not this assessment is accurate is irrelevant, because earlier today the US decided to jump right on it, and as CNN reported, accordint to the latest U.S. assessment of Moscow’s activity in western Syria, “Russia has moved several ground combat weapons and troops into the area to potentially back up Syrian forces in the field planning to attack anti-regime forces, according to two U.S. defense officials.”

  The U.S. views the move as Russia “stepping up its ground activity” in Syria to attack those forces, rather than ISIS elements, according to one of the officials.

   

  It’s believed the Russians are positioning the weapons to be able to support a Syrian ground offensive, the officials said.

   

  The equipment includes several piece of artillery, as well as four BM-30 multiple-launch rocket systems — all considered to be highly accurate weapons. The latter is capable of rapid-fire rocket launches. Several weeks ago, Russia moved about half a dozen artillery pieces into Latakia port.

   

  The U.S. originally had thought that might be for defense of the port, but the latest move is an indication of potential ground attacks in the coming days, the official said. The weapons have been spotted between Homs and Idlib and west of Idlib.

   

  It is not clear if they’re now in final position for possible artillery strikes.

   

  The officials also said that Russia has moved electronic jamming equipment into Syria. Both a truck-mounted system and a number of pods that can go on aircraft have been observed. This could potentially give the Russians the ability to jam electronics of coalition aircraft.

  Naturally, when playing the diplomatic game, one never admits or denies one’s true intentions until well after the fact, and moments ago the speaker of the Russian Federation Valentina Matviyenko denied. According to Interfax, Matviyenko said Russia has no intention of taking part in ground operations in Syria.

  “We do not intend, and we will not engage in any ground operations” said Matvienko in the meeting with the head of Jordan’s Senate president Abdelraouf al-Rawabdeh. She stressed that the Russian air campaign in Syria is to support the actions of the regular Syrian army against terrorists.

  Which, ironically, is the excuse for US presence in Syria too.

  What happens next? A very likely course of events is that despite Russia’s denials, the Pentagon will use the gambit of a Russian ground campaign, credible or not, to get permission from Congress to send a “small”, at first, then bigger ground force of US troops in Syria to, you guessed it, “fight ISIS“, but really to do everything to prevent Russian troops from taking over key strategic positions.

  What happens then? Well, with the previously discussed Russian naval campaign of Syria as a likely next step, and with both US and Russian warplanes already flying back and forth above Syria, and now both superpowers having a legitimate, if only in the eyes of their own media, justification to dispatch land troops, what was until now a mere proxy war is about to become full blown land combat on Syrian soil, one which will soon involve both Russian and US ground, sea and airborne forces.

  The last missing step will be when US cruisers, destroyers and/or battleships park next to the Syrian coastline, within earshot (and every other “shot”) away from comparable Russian warships. Keep tabs on the weekly US naval update, because once several US warships weigh anchor in the vicinity of Syria that will be the catalyst for the next and final escalation.

  At that point, the world will be one false flag away from what some could call another world war, only this time one launched not in Serbia but Syria.

  

  

  

  

  

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

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

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

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

  "History tells us we’re probably finished.

   

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

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

   

   

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

  Further key excerpts include:

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

   

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

   

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

   

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

   

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

  

  

  

  

  

• Emerging Market Meltdown May Plunge Global Economy Into Recession

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

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

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

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

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

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

   

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

   

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

   

  

   

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

   

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

   

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

   

  
  

   

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

   

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

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

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

   

  
  

   

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

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

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

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

  
  

  

  

  

  

  

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

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

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

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

   

  7/1/05 – Interview on CNBC

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

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

   

  7/1/05 – Interview on CNBC

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

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

   

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

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

   

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

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

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

   

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

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

   

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

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

   

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

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

   

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

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

   

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

  The Federal Reserve is not currently forecasting a recession.

   

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

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

   

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

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

   

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

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

   

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

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

   

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

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

   

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

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

   

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

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

   

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

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

  … Or summarized:

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

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

  Why do we bring this up?

  Two reasons:

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

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

  Q. Should somebody have gone to jail.

   

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

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

  Nuf said. Continuing with Bernanke’s answer:

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

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

  The whole thing is 4:20 into the exchange.

   

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

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

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

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

  

  

  

  

  

• The Perilous Misperception That Central Bankers Have Mitigated Market Risk

  Via Doug Noland's Credit Bubble Bulletin,

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

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

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

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

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

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

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

   

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  

  

  

  

  

• The American 'Recovery' In 1 Chart

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

   

  

   

  Chart: Bloomberg

  

  

  

  

  

• There Will Be Blood – Part II

  By Chris at www.CapitalistExploits.at

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

  —————————— 

  Date: 10 December 2014

  Subject: There Will Be Blood – Part II

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

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

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

  

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

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

  

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

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

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

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

  

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

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

  ——————————

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

  – Chris 

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

   

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

  

  

  

  

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

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

  

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

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

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

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

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

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

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

  Here’s RT:

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

   

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

   

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

   

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

   

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

   

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

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

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

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

  Summed up in 10 priceless seconds…

  

  

  

  

  

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

  By Louis Cammarosano of Smaulgld

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

  Shanghai Gold Exchange

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

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

  Shanghai Gold Exchange vs. Global Mining Production

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

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

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

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

  Shanghai Gold Exchange Withdrawals vs. Comex Deliveries

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

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

  These following two charts illustrate the point:

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

  

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

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

  

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

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

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

  China Updates its Gold Holdings

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

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

  

  Chinese gold reserves grew by 16 tonnes in August.

  

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

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

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

  * * *

  How does all that gold get to China?

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

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

  COMEX Hong Kong Gold Kilobar Withdrawals Through September 30, 2015

  

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

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

  China is the world’s largest gold producer:

   

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

  Volume of Gold Withdrawals on the Shanghai Gold Exchange

  

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

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

  

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

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

  

  China also imports unreported amounts of gold through Shanghai.

  * * *

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

  

  

  

  

  

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

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

   

   

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

   

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

   

  Well government happens to be a little different than that.

   

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

  

  

  

  

  

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

  Authored by Mark St.Cyr,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

   

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

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

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

  

  

  

  

  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  

  

  

  

  

• Here Come The Money Helicopters!

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

  $10 Trillion Goes to Money Heaven

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

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

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

   

  

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

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

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

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

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

   

  

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

   

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

   

  Our Trade of the Decade Sours

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

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

   

  

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

   

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

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

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

   

  

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

  Cartoon by Li Feng

   

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

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

   

  

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

   

  QE for the People

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

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

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

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

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

   

  

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

  Illustration via adamsmith.org

   

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

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

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

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

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

  Stay tuned…

   

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

  

  

  

  

  

• Hanging By A Thread

  Via NorthmanTrader.com,

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

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

  Let’s walk through some key charts:

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

  

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

  

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

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

  

  

  

  

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

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

  

  This divergence is especially notable given the larger context:

  

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

  What do bulls have going for them?

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

  

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

  2003:

  

  2006:

  

  2010:

  

  2011:

  

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

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

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

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

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

  Got a trade plan?

  

  

  

  

  

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

  JV?

   

  

   

  Source: Townhall.com

  

  

  

  

  

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

   

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

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

  Full preivew

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

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

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

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

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

   

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

   

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

   

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

   

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

   

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

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

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

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

   

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

   

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

   

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

   

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

  And here’s Deutsche Bank’s election preview:

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

   

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

   

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

   

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

   

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

   

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

  Finally, here’s Citi’s take:

  Portuguese Elections: A Mainstream Political Battle

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

   

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

  
  

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

  

  

  

  

  

• A Worrying Set Of Signals

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

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

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

   

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

   

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

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

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

   

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

   

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

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

  So the question is –

  How To Position For A US Recession

  By Charles Gave

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

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

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

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

  

  A few results are immediately clear:

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

  

  

  

  

  

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

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

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

  — zerohedge (@zerohedge) July 10, 2014

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

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

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

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

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

  

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

  What does this mean for the big picture?

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

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

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

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

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

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

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

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

  

  

  

  

  

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

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

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

  

   

  From the New York Times:

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

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

  

  

  

  

  

• ReDLiNe…

  .

   

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

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

  

  

  

  

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

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

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

  

  

  … whose shareholders vastly overlap.

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

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

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

  

  

  

  

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

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

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

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

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

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

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

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

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

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

   

  

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

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

  

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

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

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

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

  

  

  

  

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

  Submitted by Michael Lebowitz of 720 Global

  Shorting the Federal Reserve – Part Deux

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

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

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

  Before The Presses Rolled

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

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

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

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

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

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

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

  April 1790

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

  

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

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

  Fall 1790

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

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

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

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

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

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

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

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

  June 1791

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

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

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

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

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

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

  December 1791

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

  April?July 1792

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

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

  French Revolution

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

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

  Conclusion

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

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

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

  

  

  

  

  

• Global Dollar Funding Shortage Intesifies To Worst Level Since 2012

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

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

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

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

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

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

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

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

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

  More from JPM:

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

   

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

  The conclusion:

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

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

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

  

  

  

  

  

• Manifesto – The Values of Value Investing

  

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

  Manifesto

  By Vitaliy Katsenelson, CFA

  Part One: Introduction

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

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

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

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

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

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

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

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

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

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

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

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

  Part Two: The Values of Value Investing 

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

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

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

  

  

  

  

• Who Owns Your Presidential Candidate?

  By Jake Anderson of Antimedia

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

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

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

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

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

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

  JEB BUSH

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

  Corporate and other Special Interest donors (top 5):

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

  Super PAC/“Dark Money”:

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

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

  Other wealthy members of the PAC include:

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

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

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

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

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

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

  HILLARY CLINTON  

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

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

  Corporate and other Special Interest donors (top 5):

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

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

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

  Super PAC/”Dark Money”:

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

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

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

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

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

  CHRIS CHRISTIE

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

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

  Other America Leads donors include:

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

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

  BERNIE SANDERS

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

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

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

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

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

  JOHN KASICH

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

  Corporate and other Special Interest donors:

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

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

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

  Super PAC/”Dark Money”:

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

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

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

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

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

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

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

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

  CARLY FIORINA

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

  Corporate and other Special Interest donors (top 5):

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

  Super PAC/”Dark Money”:

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

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

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

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

  MARCO RUBIO

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

  Corporate and other Special Interest donors (top 5):

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

  Super PAC/”Dark Money”:

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

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

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

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

  DONALD TRUMP

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

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

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

  TED CRUZ

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

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

  Corporate and other Special Interest donors (top 5):

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

  Super PAC/”Dark Money”:

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

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

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

  BEN CARSON

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

  Corporate and other Special Interest donors (top 5):

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

  Super PAC/”Dark Money”:

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

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

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

  MIKE HUCKABEE

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

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

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

  RAND PAUL

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

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

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

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

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

  

  

  

  

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

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

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

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

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

  Which brings us to the punchline:

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

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

  

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

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

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

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

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

  

  

  

  

  

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

  Submitted by Eugen Bohm-Bawerk 

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

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

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

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

  

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

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

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

  

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

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

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

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

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

  

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

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

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

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

  

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

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

  

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

  

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

  

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

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

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

  Ceterum censeo Federal Reserve esse delendam

  

  

  

  

  

• Physical Cash Poses a HUGE Problem For Central Banks

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

   

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

   

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

   

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

   

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

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

   

  This is precisely what happened in 2008…

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

  This is just the beginning.

   

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

   

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

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

  Survive the Fed's War on Cash.

   

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

   

  To pick up yours, swing by….

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

   

  Best Regards

  Phoenix Capital Research

   

   

   

   

  

  

  

  

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

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

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

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

  Obama’s meandering response:

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

   

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

   

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

   

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

   

  So what was the question again?  (Laughter.)

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

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

   

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

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

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

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

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

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

  

  

  

  

  

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

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

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

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

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

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

   

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

   

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

   

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

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

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

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

  

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

   

  

   

  

  

  

  

  

  

• Stock Market Reaches Key Post-Crash Milestone

  By Dana Lyons, partner at J. Lyons Fund Management

  Stock Market Reaches Key Post-Crash Milestone

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

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

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

  

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

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

  Our conclusion from that piece was this:

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

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

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

  

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

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

  

  

  

  

  

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

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

  

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

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

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

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

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

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

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

  Here’s RT:

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

   

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

   

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

   

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

   

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

   

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

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

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

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

  Summed up in 10 priceless seconds…

  

  

  

  

  

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

  Submitted by Hardscrabble Farmer, courtesy of The Burning Platform

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

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

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

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

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

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

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

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

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

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

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

  I could go on but you get the picture.

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

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

  

  

  

  

  

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

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

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

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

  

   

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

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

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

   

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

   

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

  Who are the biggest European culprits.

  

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

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

  Finally, to paraphrase Dr. House, everybody lies.

  

  

  

  

  

• I MiSS BoeHNeR…

  

  

  

  

  

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

  By SM Gibson of Antimedia

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

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

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

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

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

  It gets worse.

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

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

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

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

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

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

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

  “Civilians aren’t dying?” Fang asked.

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

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

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

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

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

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

  

  

  

  

  

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

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

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

   

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

   

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

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

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

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

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

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

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

   

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

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

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

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

   

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

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

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

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

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

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

  

  

  

  

  

• Dollar Bulls Bends,but Will They Break?

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

   

  Observations based on speculative positioning in the futures market: 

   

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

   

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

   

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

   

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

   

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

  

  

  

  

  

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• A Mosaic Of Facts – Media Weapons Of Mass Delusion

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

   

  Trailer…

   

  Full Documentary…

   

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

  

  

  

  

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

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

  As Haaretz reports,

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

   

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

   

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

   

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

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

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

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

   

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

  *  *  *

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

  

  

  

  

  

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

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

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

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

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

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

  *  *  *

  From RBS

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

  

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

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

  

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

  

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

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

  The worst is yet to come, in our view.

  *  *  *

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

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

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

  

  

  

  

  

  

• Central Banks' Secrecy & Silence On Gold Storage Arrangements

  Submitted by Ronan Manly via BullionStar.com,

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

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

  Some of those central banks may have made it into the Bank of England storage list if they had been more transparent in providing gold storage information. However, since they weren’t transparent, these banks make it into the alternative ‘non-cooperative’ list. One subset of this list is central banks, which to be fair to them, did actually respond and said that they cannot divulge gold storage information. The other subset is central banks which didn’t reply at all when I asked them about their official gold storage location details.

  The below list, although not complete, highlights 7 central banks and 1 official sector financial institution (the BIS), which, when asked where do they store their gold reserves, responded with various similar phrases saying that they could not provide this information. Between them, these 7 central banks claim to hold 1,500 tonnes of gold. Adding in the BIS which represents another 900 tonnes, in total that’s 2,400 tonnes of gold where the central banks in charge of that gold will not provide any information as to its whereabouts. Much of this 2,400 tonnes is no doubt stored (at least in name) at the FRBNY and the Bank of England, with some stored in the home countries of some of the central banks.

  I have included the 8 responses below, but have deleted any references to individuals’ names or email addresses:

  Bank of Japan: 765.2 tonnes of gold

  

   

  Bank for International Settlements (BIS): > 900 tonnes of gold

  • BIS manages 443 tonnes of gold under custody for central banks
  • BIS owns 108 tonnes of gold itself
  • BIS manages 356 tonnes of gold deposits from central banks
  • BIS has 47 tonnes of gold swaps outstanding

  

   

   

  Spain: 281.6 tonnes of gold

  

   

   

  South Africa: 125.2 tonnes of gold

  

   

   

  Thailand: 152.4 tonnes of gold

  

   

   

  Singapore: 127.4 tonnes of gold

  

   

   

  Malaysia: 37.9 tonnes of gold

  

   

   

  Paraguay: 8.2 tonnes of gold

  

  …which translates into English as …..”That information is classified and cannot be disclosed. I hope you understand“.

   

  ‘No Answer’ central banks

  I also emailed some central banks which didn’t respond to the question, ‘where are your gold reserves stored?’. They may not have responded for various reasons, including the emails may not have reached the relevant people who would normally be responsible for such matters. These banks account for another 500+ tonnes of gold reserves. Again, some of this gold is probably at the Bank of England, such as, some of Jordan’s and Kuwait’s gold, due to historical ties with the Bank of England.

  • Banque du Liban (Lebanon): 286.8 tonnes  (said to be in Lebanon and FRB New York)
  • National Bank of Kazakhstan: 208.1 tonnes
  • Central Bank of Kuwait: 79 tonnes
  • Central Bank of Jordan: 34.2 tonnes
  • Bank Al-Maghrib (Morocco): 22.1 tonnes
  • National Bank of Cambodia: 12.4 tonnes

  BIS – Transparency in name only

  The following slide, from a 2007 Bank for International Settlements presentation, shows how ridiculous the claims of central banks are when they use the meme that they are transparent and accountable, when in fact, they are nothing of the sort.

  The BIS’ response above on the gold storage question, i.e. “the information that you have requested is not made publicly available” makes a mockery of its own claims in the below slide that central banks are required to be transparent and accountable.

  The only ‘gold’ that the BIS is willing to discuss is its pie-in-the-sky corporate-speak ‘Golden Triangle’ of central bank Autonomy complimented by Transparency and Accountability when it states:

   – TRANSPARENCY – important for holding central bank to account

  – ACCOUNTABILITY – crucial counterpart of autonomy in an open society, makes transparency more credible

   (I added the 2 red arrows to the slide to highlight these points)

  

   

  Conclusion: Finland’s change of heart

  The fact that staff of some central banks won’t discuss that bank’s gold storage arrangements is no doubt an internal rule, or a storage depository rule, or some such nonsense. The nonsensical nature of their non-cooperation and evasion is highlighted by the below about-turn from the Bank of Finland, when in January 2013 it childishly told me that “We are not allowed to tell the exact depository, town or country“, and then 9 months later in October 2013, the powers-that-be at the gold depositories gave the go-ahead, for the Bank of Finland then spilled the beans, squealing that its gold was stored at a cornucopia of the usual suspects, namely, the Bank of England, the Federal Reserve Bank of New York, the Swiss National Bank, and smaller amounts at the Swedish Riksbank and the Bank of Finland.

  Given that the Bank of England, the Federal Reserve Bank of New York, and the Swiss National Bank all agreed to the Bank of Finland’s request in 2013 to publish the individual storage locations of its gold, and given that the vaults of these 3 banks store the vast majority of internationally stored central bank gold, therefore it also makes a mockery of central banks which persists in claiming that they cannot divulge information on the storage of their own gold, which in most cases is supposedly spread between the very same 3 sets of vaults.

  And after the Bank of Finland press release, which most Finns and most of the world probably didn’t even see, Helsinki and the world continued about its business as before. The point being that the storage locations of central banks’ gold reserves is not that big of a deal. Its only the central banks that make it into a big deal with their secrecy….unless of course, they are hiding something bigger, and the gold is not even where its supposed to be.

  Bank of Finland – 31 January 2013

  

   

  Bank of Finland – 25 October 2013

  

  

  

  

  

  

• Why The US Running Out Of Cash In 4 Weeks Is Good News

  Over the past several weeks, Americans (not to mention the market) were forced to grapple with the latest example of congressional infighting and outright legislative gridlock as US lawmakers narrowly averted a government shutdown in the wake of House Speaker John Boehner’s surprise resignation.

  Now, the debt ceiling battle looms ahead of Boehner’s October 30 exit and according to Treasury Secretary Jack Lew, the US will run out of money to pay its bills far sooner than originally expected – November 5, to be exact. Here’s WSJ:

  The government will run out of money to pay its bills sooner than previously thought, forcing Republican lawmakers who are already scrambling to elect new leaders to immediately confront a series of unpopular fiscal deadlines.

   

  Treasury Secretary Jacob Lew said the government would be left with just $30 billion cash on or around Nov. 5. Government outlays can be twice that level on certain weekdays, underscoring the need to raise the federal borrowing limit, Mr. Lew said in a letter late Thursday to House Speaker John Boehner (R., Ohio).

   

  “Without sufficient cash, it would be impossible for the United States of America to meet all of its obligations for the first time in our history,” Mr. Lew said in the letter.

   

  The new debt-ceiling deadline falls less than a week after Mr. Boehner will leave Congress, putting pressure on him—and an incoming Republican leadership team—to pass legislation raising the limit before that transition. Some congressional estimates had indicated the government could get by without action until December. Traders and Wall Street analysts are watching the timeline closely due to the turbulence that hits financial markets as debt-limit deadlines approach.

  And so, the stage is once again set for GOP lawmakers to use the debt ceiling as a negotiating tool in an effort to extract concessions from the White House while the rest of the world looks on incredulous at the spectacle the US creates when its lawmakers effectively blackmail themselves by threatening to force the nation into default in order to secure a bit more bargaining power.

  Of course this never ends well and only serves to i) undermine Washington’s credibility with the rest of the world, ii) increase market volatility as investors can never completely rule out the possibility that this time around, someone might actually make good on their threats, triggering a technical default somewhere, and iii) further destroy the government’s credibility in the eyes of voters to whom the entire thing appears completely absurd. Note that the latter point there speaks to why Donald Trump is polling so well in the GOP primaries – the electorate is simply fed up with lawmakers’ inability to do what they were elected to do (i.e. legislate). 

  In the end, the result will likely be the same as it always is. Some last minute can kick will ensure that the US doesn’t default and the debt limit will be raised to a number that’s even more meaningless than it is now, ensuring that America remains on track to eventually compete with Japan for world’s worst debt-to-central government revenue ratio.

  And as if the whole thing weren’t ridiculous enough as it is, consider this bit of counterintuitive silliness: the fact that the timetable for an unprecedented US default has just been moved up by a month is actually good news this time around because it means that the negotiations will likely be presided over by Boehner as opposed to his successor and because Boehner will be out the door at the end of October anyway, he’ll be free to negotiate in good faith. 

  In any event, we suppose it’s best to just give the last word to Goldman since they’re probably the ones who will end up making the final decision anyway.

  From Goldman

  USA:  Earlier Debt Limit Deadline Might Lower Risk of Disruptions

  BOTTOM LINE: Treasury Secretary Lew has notified Congress that the debt limit will need to be raised by November 5, earlier than expected. This increases the probability that it will be voted on before Speaker Boehner leaves office on October 30, which would reduce the risk of a disruptive last-minute increase in the limit.

  MAIN POINTS:

  1. In a letter to congressional leaders, Treasury Secretary Lew has indicated that the debt limit will need to be raised by November 5. This is slightly earlier than the mid-November deadline that we had recently estimated and is due, according to the Treasury, to a combination of slightly weaker-than-expected estimated taxes in September and higher-than-expected obligations associated with certain trust funds.

  2. This earlier deadline raises the probability that the House will vote to raise the debt limit prior to the time Speaker Boehner steps down on October 30. If so, this would reduce the risk of a disruptive debate on the issue, because Speaker Boehner is more likely than his successor, in our view, to allow a “clean” debt limit increase without the debate over extraneous issues that have delayed enactment until shortly before the deadline in the past.

  3. By contrast, this reduces the probability that the debt limit would be dealt with as part of a broader fiscal negotiation that also includes the extension of spending authority past the current December 11 expiration. Such a scenario would presumably involve negotiations over spending levels and other matters that could create significant uncertainty in the period leading up to the deadline, similar to the experience in the summer of 2011.

  4. That said, the path forward for increasing the debt limit is still uncertain. There has been no indication yet from congressional leaders on how they plan to proceed with increasing the debt limit in light of the new deadline. However, we recently noted the possibility that legislation to extend the Highway Bill, which expires October 29, could be a vehicle for other items, including the debt limit, and today’s announcement makes that a bit more likely, in our view.

  

  

  

  

  

• The Mind Of Mr. Putin (America's Non-Interventionist Foreign Policy Tradition Exposed)

  Submitted by Patrick Buchanan via LewRockwell.com,

  So Vladimir Putin in his U.N. address summarized his indictment of a U.S. foreign policy that has produced a series of disasters in the Middle East (that we did not need the Russian leader to describe for us).

  Fourteen years after we invaded Afghanistan, Afghan troops are once again fighting Taliban forces for control of Kunduz. Only 10,000 U.S. troops still in that ravaged country prevent the Taliban’s triumphal return to power.

  A dozen years after George W. Bush invaded Iraq, ISIS occupies its second city, Mosul, controls its largest province, Anbar, and holds Anbar’s capital, Ramadi, as Baghdad turns away from us — to Tehran.

  The cost to Iraqis of their “liberation”? A hundred thousand dead, half a million widows and fatherless children, millions gone from the country and, still, unending war.

  How has Libya fared since we “liberated” that land? A failed state, it is torn apart by a civil war between an Islamist “Libya Dawn” in Tripoli and a Tobruk regime backed by Egypt’s dictator.

  Then there is Yemen. Since March, when Houthi rebels chased a Saudi sock puppet from power, Riyadh, backed by U.S. ordinance and intel, has been bombing that poorest of nations in the Arab world.

  Five thousand are dead and 25,000 wounded since March. And as the 25 million Yemeni depend on imports for food, which have been largely cut off, what is happening is described by one U.N. official as a “humanitarian catastrophe.”

  “Yemen after five months looks like Syria after five years,” said the international head of the Red Cross on his return.

  On Monday, the wedding party of a Houthi fighter was struck by air-launched missiles with 130 guests dead. Did we help to produce that?

  What does Putin see as the ideological root of these disasters?

  “After the end of the Cold War, a single center of domination emerged in the world, and then those who found themselves at the top of the pyramid were tempted to think they were strong and exceptional, they knew better.”

  Then, adopting policies “based on self-conceit and belief in one’s exceptionality and impunity,” this “single center of domination,” the United States, began to export “so-called democratic” revolutions.

  How did it all turn out? Says Putin:

  “An aggressive foreign interference has resulted in a brazen destruction of national institutions. … Instead of the triumph of democracy and progress, we got violence, poverty and social disaster.

   

  Nobody cares a bit about human rights, including the right to life.”

  Is Putin wrong in his depiction of what happened to the Middle East after we plunged in? Or does his summary of what American interventions have wrought echo the warnings made against them for years by American dissenters?

  Putin concept of “state sovereignty” is this: “We are all different, and we should respect that. No one has to conform to a single development model that someone has once and for all recognized as the right one.”

  The Soviet Union tried that way, said Putin, and failed. Now the Americans are trying the same thing, and they will reach the same end.

  Unlike most U.N. speeches, Putin’s merits study. For he not only identifies the U.S. mindset that helped to produce the new world disorder, he identifies a primary cause of the emerging second Cold War.

  To Putin, the West’s exploitation of its Cold War victory to move NATO onto Russia’s doorstep caused the visceral Russian recoil. The U.S.-backed coup in Ukraine that overthrew the elected pro-Russian government led straight to the violent reaction in the pro-Russian Donbas.

  What Putin seems to be saying to us is this:

  If America’s elites continue to assert their right to intervene in the internal affairs of nations, to make them conform to a U.S. ideal of what is a good society and legitimate government, then we are headed for endless conflict. And, one day, this will inevitably result in war, as more and more nations resist America’s moral imperialism.

  Nations have a right to be themselves, Putin is saying.

  They have the right to reflect in their institutions their own histories, beliefs, values and traditions, even if that results in what Americans regard as illiberal democracies or authoritarian capitalism or even Muslim theocracies.

  There was a time, not so long ago, when Americans had no problem with this, when Americans accepted a diversity of regimes abroad. Indeed, a belief in nonintervention abroad was once the very cornerstone of American foreign policy.

  Wednesday and Thursday, Putin’s forces in Syria bombed the camps of U.S.-backed rebels seeking to overthrow Assad. Putin is sending a signal: Russia is willing to ride the escalator up to a collision with the United States to prevent us and our Sunni Arab and Turkish allies from dumping over Assad, which could bring ISIS to power in Damascus.

  Perhaps it is time to climb down off our ideological high horse and start respecting the vital interests of other sovereign nations, even as we protect and defend our own.

  

  

  

  

  

• Meet Seth Carpenter – Janet Yellen's Choice Of "Fed Leak" Scapegoat

  With the "above the law" Federal Reserve coming under increasing pressure to answer a Senate investigation's questions about the 2012 "leak", it appears the proximity of the probe to Janet Yellen, has forced The Fed to 'fess up and throw someone under the bus. Meet Seth Carpenter, a nominee for assistant Treasury secretary for financial markets…

  As The Wall Street Journal reports, probes into the 2012 leak of sensitive Federal Reserve policy information are widening further, with a Senate committee scrutinizing a former Fed official nominated for a position in the Obama administration.

  The Senate Finance Committee has been looking into whether the official, a Treasury Department nominee who worked as a top Fed economist at the time of the leak, relayed market-sensitive information from the Fed to policy research firm Medley Global Advisors, which in turn shared the details with its Wall Street clients, according to people familiar with the matter.

   

  …

   

  The Senate committee is looking into whether Seth Carpenter, a nominee for assistant Treasury secretary for financial markets, played a role in the 2012 leak. The panel is charged with approving nominees to senior-level positions at the Treasury Department.

   

  

   

  A person familiar with the matter said Thursday Mr. Carpenter has told the Treasury Department he never had any contact with anyone at Medley. The person added that even before the nomination, both the Treasury and the White House looked into whether Mr. Carpenter was involved, including reviewing the findings of the Fed’s inspector general, and found no evidence linking him to the leak.

   

  Mr. Carpenter didn’t respond to a request for comment on Thursday. Spokesmen for the Fed and White House declined to comment on the Senate inquiry.

  The Fed conducted its own investigation in late 2012 and early 2013 that found a “few” Fed staffers had contact with Medley, according to a memo summarizing the investigation, but it didn’t identify the people. The Fed has said it was unable to determine who provided information to Medley. Mr. Carpenter hasn't been accused of being the source of the leak.

  The spokeswoman wouldn’t say if the committee’s review of the leak has stalled Mr. Carpenter’s nomination. It has been more than a year since Mr. Obama tapped Mr. Carpenter for the position, and the committee has yet to schedule a hearing on the nomination.

   

  Mr. Carpenter “is going through the same bipartisan nomination process as every nominee referred to the Finance Committee,” said spokeswoman Julia Lawless.

  *  *  *

  Whether or not Mr Carpenter is guilty, we wish him luck.

  What better scapegoat… Republicans get to claim the scalp of an Obama nominee; and The Fed gets to point to lower level staff – not Janet – as the problem and will, we are sure, begin to firm up internal controls over sensitive information.

  

  

  

  

  

• Meet Oregon School Shooter Chris Harper-Mercer: "You're Going To See God In Just About One Second"

  Sadly, the post-mass-shooting killer profile has become something of a media tradition in the US of late as a string of violence that includes the execution of nine African American churchgoers in Charleston and the on-air murder of a TV reporter has delivered a shock to the collective psyche of Americans and served notice that tragedies like those that occurred at Columbine, Virginia Tech, and Sandy Hook may well become commonplace going forward. 

  The latest “incident” in the mass shooting tradition came on Thursday when someone described only as “a 20-year-old man” went on a rampage at Umpqua Community College in Oregon. According to some eyewitness accounts, the shooter demanded that victims “stand up and state their religion” before summarily executing them. 

  On Friday, the first details are beginning to emerge about the identity of the shooter. Here’s Reuters with more:

  The man killed by police on Thursday after he fatally shot nine people at a community college in southern Oregon was a nervy 26-year-old who lived close to the campus and described himself as shy, according to neighbors, media and online reports.

   

  A law enforcement source said multiple agencies had identified the shooter as Chris Harper-Mercer. Online directories list a man of that name as having lived in Torrance, California, before moving to Winchester, Oregon.

   

  The killer used four guns, including a type of assault rifle, in the classroom attack, CNN said. Seven people were also wounded at the Umpqua Community College in Roseburg, a timber town of about 20,000 people that adjoins Winchester.

   

  A photo posted on a MySpace profile belonging to someone named Chris Harper-Mercer, from Torrance, showed a young man with a shaved head, dark-rimmed glasses and a serious expression. He was holding a long-barreled gun.

   

  A neighbor next door to the Winchester building said Thursday night he recognized online photos of Harper-Mercer as being his neighbor.

   

  In an Internet posting on the Spiritual Passions dating and social networking site, a user posted a picture that appears to be Harper-Mercer under the user name IRONCROSS45, a handle Harper-Mercer used as his email.

   

  He described himself on the site as a 26-year-old, mixed-race “man looking for a woman.” He said he was “not religious, but spiritual,” and was a “teetotaler” living with his parents and a conservative Republican. Socially, he said, he was “shy at first” and “better in small groups.” He described himself as “always dieting” and looking for “the yin to my yang.”

  And here’s further color from The New York Times:

  Chris Harper Mercer, the man identified as the gunman in the deadly rampage at Umpqua Community College in Roseburg, Ore., on Thursday, was a withdrawn young man who neighbors said wore the same outfit every day — combat boots, green Army pants and a white T-shirt — and was close to his mother, who fiercely protected him.

  Neighbors in Winchester, Ore., and Torrance, Calif., where Mr. Mercer, 26, lived with his mother, Laurel Harper, remember a reclusive and seemingly fragile young man with a shaved head and dark glasses who seemed to recoil from social interaction.

   

  “He always seemed anxious,” said Rosario Lucumi, 51, who rode the same bus in Torrance as Mr. Mercer when she went to work. She said she believed he took it to El Camino College. “He always had earphones in, listening to music.”

   

  “He and his mother were really close,” said Ms. Lucumi, who estimated that Mr. Mercer and his mother, who shared a small one-bedroom apartment in Torrance, lived there for less than a year. “They were always together.”

   

  Bryan Clay, 18, said he once asked Mr. Mercer why he wore “a military get-up” every day.

   

  “He kind of just didn’t want of talk about it” and changed the subject, Mr. Clay said.

   

  “He didn’t say anything about himself,” he added.

   

  Mr. Mercer appeared to have sought community on the Internet. A picture of him holding a rifle appeared on a MySpace page with a post expressing a deep interest in the Irish Republican Army. It included footage from the conflict in Northern Ireland set to “The Men Behind the Wire,” an Irish republican song, and several pictures of gunmen in black balaclavas. Another picture showed the front page of An Phoblacht, the party newspaper of Sinn Fein, the former political wing of the I.R.A.

  
  

   

  A picture of Mr. Mercer also appeared on a long-dormant dating website profile registered in Los Angeles. On it, he described himself as an “introvert” with a dislike for “organized religion.”

  Here are the images from Mercer’s MySpace page…

  

  …here is the above mentioned “Spiritual Passions” profile…

  

  …and here is a review penned by someone with the same username (IRONCROSS45) after purchasing Nazi attire:

  

  According to reports, Mercer’s professed “dislike for organized religion” led him to “target” Christians, although the chilling details presented below may simply indicate that Mercer was attempting to terrorize his victims before killing them. Via CNN:

  The gunman who opened fire at Oregon’s Umpqua Community College singled out Christians, according to the father of a wounded student.

   

  Before going into spinal surgery, Anastasia Boylan told her father the gunman entered her classroom firing.

   

  “I’ve been waiting to do this for years,” the gunman told the professor teaching the class. He shot him point blank, Boylan recounted.

   

  Others were hit too, she told her family.

   

  Everyone in the classroom dropped to the ground.

   

  The gunman, while reloading his handgun, ordered the students to stand up and asked if they were Christians, Boylan told her family.

   

  “And they would stand up and he said, ‘Good, because you’re a Christian, you’re going to see God in just about one second,'” Boylan’s father, Stacy, told CNN, relaying her account.

   

  “And then he shot and killed them.”

  Mercer’s blog posts, which were penned under the name “lithium_love” have apparently been removed (see here) but here are some excerpts via CNN and via another blogger who copied the entries before they were taken down. The first two paragraphs reference Virginia shooter Vester Flanagan:

  I have noticed that so many people like him are all alone and unknown, yet when they spill a little blood, the whole world knows who they are. A man who was known by no one, is now known by everyone. His face splashed across every screen, his name across the lips of every person on the planet, all in the course of one day. Seems the more people you kill, the more you’re in the limelight.

   

  And I have to say, anyone who knew him could have seen this coming. People like him have nothing left to live for, and the only thing left to do is lash out at a society that has abandoned them.

   

  I just read about the houston cop shooting. Figured I’d post this since the response to my previous blog post on vester flanagan was so interesting. On the houston shooting it was reported that the suspect was influenced by black lives matter protests/movement. Although I don’t know if thats true, with all the issues about police and blacks/protestors in the news the past couple of years, it certainly seems like someone would be inspired to take action. With the constant chants of anti police rhetoric this was bound to happen. I don’t disagree that police brutality and excessive use of force is a problem, but killing an officer that never did anything to you is not the answer.

   

  This whole event seems similar to the one in new york earlier this year where that guy killed those two cops sitting in a parked car. The inflammatory rhetoric on both sides, whether warranted or not will only continue to agitate the situation and events such as these will happen more and more. These are just my thoughts on the matter. Will continue to post more blogs on related subjects, as well any interesting thoughts I may have.

  We’ll leave it to readers to draw their own conclusions as to what this says about race relations in America, religion, the copy cat effect, and the outright disintegration of society. We close by noting that sadly, we doubt this is the last time we’ll find ourselves profiling someone who carries out a mass shooting and we leave you with the following rather unnerving bit from The New York Times piece excerpted above:

  In the offline world, Mr. Mercer’s mother sought to protect him from all manner of neighborhood annoyances, former neighbors in Torrance said, from loud children and barking dogs to household pests. Once, neighbors said, she went door-to-door with a petition to get the landlord to exterminate cockroaches in her apartment, saying they bothered her son.

   

  “She said, ‘My son is dealing with some mental issues, and the roaches are really irritating him,’ ” Julia Winstead, 55, said. 

  

  

  

  

• The Reality Behind The Numbers In China's Boom-Bust Economy

  Submitted by Yonathan Amselem via The Mises Institute,

  Last year, the world was stunned by an IMF report which found the Chinese economy larger and more productive than that of the United States, both in terms of raw GDP and purchasing power parity (PPP). The Chinese people created more goods and had more purchasing power with which to obtain them — a classic sign of prosperity. At the same time, the Shanghai Stock Exchange Composite more than doubled in value since October of 2014. This explosion in growth was accompanied by a post-recession construction boom that rivals anything the world has ever seen. In fact, in the three years from 2011 – 2013, the Chinese economy consumed more cement than the United States had in the entire twentieth century. Across the political spectrum, the narrative for the last fifteen years has been that of a rising Chinese hyperpower to rival American economic and cultural influence around the globe. China’s state-led “red capitalism” was a model to be admired and even emulated.

  Yet, here we sit in 2015 watching the Chinese stock market fall apart despite the Chinese central bank’s desperate efforts to create liquidity through government-backed loans and bonds. Since mid-June, Chinese equities have fallen by more than 30 percent despite massive state purchases of small and mid-sized company shares by China’s Security Finance Corporation.

  But this series of events should have surprised nobody. China’s colossal stock market boom was not the result of any increase in the real value or productivity of the underlying assets. Rather, the boom was fueled primarily by a cascade of debt pouring out of the Chinese central bank.

  China’s Real Estate Bubble

  Like the soaring Chinese stock exchange, the unprecedented construction boom was financed largely by artificially cheap credit offered by the Chinese central bank. New apartment buildings, roads, suburbs, irrigation and sewage systems, parks, and commercial centers were built not by private creditors and entrepreneurs marshaling limited resources in order to satisfy consumer demands. They were built by a cozy network of central bank officials, politicians, and well-connected private corporations.

  Nearly seventy million luxury apartments remain empty. These projects created an epidemic of “ghost cities” in which cities built for millions are inhabited by a few thousand. At the turn of the century, the Chinese economy had outstanding debt of $1 trillion. Only fifteen years and several ghost cities later that debt has ballooned to an unbelievable $25 trillion. What we’re experiencing in the Chinese markets are the death throes of an economy that capital markets have realized is simply not productive enough to service that kind of debt.

  GDP and Other Crude Economic Metrics are Misleading

  GDP is meant to represent the collective value of all transactions within a certain boundary. This metric provides very little useful or accurate information about the actual quality of life in a country. GDP is artificially inflated by imputations such as the added “value” of a house owner not having to pay rent. GDP also includes government spending — such as when a government department purchases new computers. This transaction merely redirected labor and raw materials that would have otherwise been used to directly satisfy consumer demands with better or additional products. Government spending is not just “neutral,” it is actively destructive. Government purchases and sales do not operate with the same rules that other actors in the market are subject to. Thus when we look at GDP numbers from a country drunk on spending newly printed money on projects completely devoid of market signals, we should not place too much faith in them.

  The IMF report and those who took it seriously relied heavily on GDP calculations when arriving at their astounding conclusions about China’s growth. To compare the Chinese and American economies using a crude metric like GDP is like trying to gauge the athleticism of an individual by how much sweat comes out of his pores. When one economy can produce companies like Google, Boeing, Costco, and General Electric while another builds empty homes, what meaningful information could an unsophisticated metric like GDP tell us? Much to the chagrin of Keynesians, not all spending is created equal.

  Not long ago, we were haunted, not by the specter of this “red capitalism,” but by the communism of the Soviet Union. Some fifty years ago, mainstream economists blabbered tirelessly about the rising Soviet powerhouse. According to popular wisdom, the managed Soviet economy did not have the inefficiency and economic drag inherent in the “random” and “chaotic” American capitalist economy that sent some into mansions and others into bankruptcy. The widely-read Economics: An Introductory Analysis by Nobel-prize winning economist, Paul Samuelson predicted that Soviet GDP was nearly half that of the United States, but by 1984 (and surely by 1997), the strength of the Soviet economy would surpass that of the United States.

  The Soviet Union crumbled. When experts rely on crude metrics we should not be surprised when experts are wrong.

  The US Federal Reserve orchestrated an artificial boom from 2001 to 2007 through artificially low interest rates and has resumed doing so once again. Entrepreneurs operating under faulty market signals created by the Federal Reserve malinvested hundreds of billions of dollars into capital intensive projects primarily in the housing sector. We paid for our boom with millions of destroyed jobs, wasted labor, and wasted resources. The Chinese Central Bank learned nothing from the Fed’s catastrophic experiment. They will reap the same rewards.

   

  

  

  

  

  

• Presenting A First-Hand Look Inside Russia's Forward Operating Base In Syria

  When the first reports began to trickle in regarding a possible Russian military buildup at Bashar al-Assad’s seaside stronghold at Latakia, the scramble to “prove” that forces from Moscow had indeed arrived in Syria led directly to a string of conflicting reports and grainy satellite images purporting to detail the scope of Russia’s involvement. 

  As the weeks went by, and as rumors of a Russian presence were confirmed by The Kremlin, the world became even more fascinated by the idea that Moscow has officially launched an air war in a foreign country. Indeed, Russia’s overt involvement on behalf of the Assad regime marks a change of strategy for Putin, who has been careful to dispel accusations that his forces are directly involved in the fighting in eastern Ukraine. 

  Now that Russia has officially commenced combat operations, Moscow is wasting no time showing off its new staging ground. For those curious to know what a Russian forward operating base in a Middle Eastern warzone looks like, we present the following clip from RT:

  

  

  

  

  

• Foreign Policy In 140 Characters Or Less: US Ambassador Tweets Warning To Russia

  For anyone who might still be confused as to what the official position of the US and its allies is with regard to Russian military operations in Syria, you’re in luck because Washington – in conjunction with Berlin, Paris, London, Doha, Ankara, and of course Riyadh – is now tweeting out foreign policy. 

  We present the following from the US ambassador to the UN with no further comment other than to note that we are glad to see that countries who most certainly are not currently conducting any kind of overt or covert military operations in Syria are standing tall in the face of Russian “aggression”…

  We call on #Russia to immediately cease attacks on Syrian oppo & civilians & to focus on ISIL pic.twitter.com/61zw3h9qd7

  — Samantha Power (@AmbassadorPower) October 2, 2015

  

  

  

  

  

• The Farce Is Complete: Stocks Soar Most In 4 Years As US Job Market Disintegrates

  We suspect more than a few traders will need this tonight…

  First things first, we have this…

  Chinese stocks (trading in US) rose 6.5% today – the biggest day since May 2010:

  

   

  And this  -Today saw an epic squeeze of shorts – "most shorted" surged 5% off the opening lows which is the largest swing we could find on record

  

   

  And finally this: Today was the biggest intraday reversal higher in The Dow since 2011

  

   

  Thanks to this…

  spoofer in eMini using a order size of 584 $ES_F $SPY

  — Eric Scott Hunsader (@nanexllc) October 2, 2015

  With cash indices all ramped into green for the day:

  

   

  But there was only one thing driving US equities today… USDJPY, which got the momo going:

  

   

  So 120 will be used to launch the 3:30pm ramp

  — zerohedge (@zerohedge) October 2, 2015

  SPX would already be above 2000 if payrolls were negative

  — zerohedge (@zerohedge) October 2, 2015

  And a collapse in VIX finished it off:

  

   

  And US equities (except Small Caps) were ramped all the way into the green for the week, even Trannies

  

   

  But credit was not buying it at the end:

  

   

  Away from the silliness in stocks, everything else was 'silly' too:

  Treasuries soared at the payrolls print with yields collapsing and flattening across the curve… before Europe closed and the Treasury selling was unleashed…

  

   

  But remained lower on the week:

  

   

  The USD was crushed lower after payrolls but bid back to the moon alice after Europe closed:

  

   

  Commodities were very mixed on the week but industrials soared later in the day after precious metals exploded on payrolls data:

  

   

  But Silver (up 6%) was the big winner from Payrolls:

  

   

  And here is crude on the week… testing and failing at the week's close…ramping today onthe rig count dcline after tumbling after payrolls

  

   

  The bottom line – The Pure-Play QE Trade is back on… but be careful what you wish for because of reflexivity…

  Rate Hike Odds vs. What Determines Rate Hike Odds pic.twitter.com/qjOsJoJMx3

  — Not Jim Cramer (@Not_Jim_Cramer) October 2, 2015

  Charts: Bloomberg

   

  

  

  

  

• Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can't Pay The Interest On Their Debt

  Earlier today, Macquarie released a must-read report titled “Further deterioration in China’s corporate debt coverage”, in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with “uncovered debt”, or those which can’t even cover a full year of interest expense with profit.

  The report’s centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x.

  As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the “percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample.”

  

  To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in “uncovered debt” companies) of cash flows, was generally known.

  What wasn’t known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector.

  We now know, and the answer is truly terrifying.

  Macquarie lays it out in just three charts.

  First, it shows the “debt-coverage” curve for commodity companies as of 2007. One will note that not only is there virtually no commodity sector debt to discuss, at not even CNY1 trillion in debt, but virtually every company could comfortably cover their interest expense with existing cash flow: only 4 companies – all in the cement sector – had “uncovered debt” 8 years ago.

  

  Fast forward to 2013 when things get bad, as about a third of all corporations are now unable to cover their annual interest expense, even as the total addressable corporate debt has soared to CNY4 trillion for just the commodity sector.

  

  And then in 2014, everything just falls apart. Quote Macquarie, “more than half of the cumulative debt in this sector was EBIT-uncovered in 2014, and all sub-sectors have their share in the uncovered part, particularly for base metals (the big gray bar on the right stands for Chalco), coal, and steel.”

  Compared with the situation in 2013, while almost all sub-sectors did worse in 2014, but things appear to have worsened faster for coal companies as more red bars have moved beyond the 100% critical level for EBIT-coverage.

  It means that last year about CNY2 trillion in debt was in danger of imminent default.

  

  The situation since than has dramatically deteriorated.

  So are we now? Macquarie again: “Given the slumps in metal and coal prices so far this year, it’s quite likely the curve will have deteriorated further for commodity firms this year, with total debt getting better in the meantime.“

  In other words, it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can’t even generate the cash to pay down the interest on their debt, let alone fund repayments.

  We fully expect this to be the source of the next market freakout: when the punditry turns its attention away from macro China, which has more than enough problems to begin with, and starts to focus on the cash flow devastation in China at the micro, or corporate, level.

  

  

  

  

• Weekend Reading: Capacious Cognitions

  Submitted by Lance Roberts via STA Wealth Management,

  This past week saw the markets retest its lows. So far, those lows have held for now but the deterioration in market internals suggests that the danger is not over as of yet. As I stated earlier this week:

  "As you will notice, the reflexive rally, and subsequent failure, have tracked the original predictions very closely up to the point.

   

  With the market once again very oversold on a short-term basis, it is likely that the markets could manage a weak rally attempt over the next few days. The good news is that such an attempt will provide individuals another opportunity to reduce portfolio risk accordingly."

  

  "While the mainstream analysis remains quite bullish on the underpinnings of the market, the ongoing deterioration of market internals and fundamentals suggests something more pervasive. The chart below shows the previous post-financial crisis corrections following the end of Central Bank interventions."

  

  "As you will note, each correction was contained within a Fibonacci correction band of either 38.2% or 61.8%. It was at these correction points that the Federal Reserve responded with some form of monetary intervention or support."

  With the Federal Reserve still hinting at raising interest rates, but trapped by weak economic growth, will the next big move by the Fed be another form of monetary accommodation instead? Or, are the underlying dynamics of the economy and market really strong enough to shake off the recent weakness and continue its bullish ascent? 

  This weekend's reading list covers a variety of views on the markets and other related issues to stimulate your thinking processes. What is critically important is to have a logical and disciplined game plan for dealing with your investments. "Hoping to get back to even" has never been a successful investment strategy. 

  ---

  THE LIST

  1) Is 1700 For The SPX Still On Target by Avi Gilbert via MarketWatch

  “I also want to address the 2011 correction, to which I see many referring as the "copy" of what we are forming right now. First, the 2011 correction wave was a 2nd wave, and this is a 4th wave. The theory of alternation suggests that they should take different forms, so I am not going to expect that we will be working from the same playbook as 2011.

   

  Second, it seems as though many market participants have been referring to this market fractal as to what will happen in our current market scenario. Well, when a large segment of the market maintains the same perspective, it is quite rare to see that perspective play out. So, for that reason, I think that the market is either going to break down sooner than I expect, which is not called for in the 2011 fractal, or, more in line with my primary perspective, we go back over the high made on the day of the Fed announcement before we drop to lower lows, which is also not in line with the 2011 fractal.”

  Read Also: Ending The Markets' Short-Term Obsession by Mohammed El-Erian via Bloomberg View

   

  2) Investors Haven't Been This Bearish In 15 Years by Mark Hulbert via MarketWatch

  “Bearishness has reached an extreme not seen at least since the top of the Internet bubble in early 2000.

   

  Yet this is a bullish omen, according to the inverse logic of contrarian analysis: Extreme levels of bearishness indicate that there is a very robust "wall of worry" for the market to climb.”

   

  Read Also: 5 Things To Do BEFORE Your Portfolio Crumbles by Peter Hodson via Financial Post

  But Also Read: What Could Stop This Bear Market by Anthony Mirhaydari via The Fiscal Times

   

  3) This Is When Bonds Go Boom! by Wolf Richter via Naked Capitalism

  “This chart from LCD HY Weekly shows the distress ratio of leveraged loans as measured by S&P Capital IQ LCD (blue line) and of junk bonds as measured by BofA Merrill Lynch (red line) which depicts reality in an even harsher light than Standard and Poor's. Leveraged loans are generally secured and hold up better in a bankruptcy than bonds. But distress levels of both have recently begun to spike.

   

  These yields that are rising to distressed levels drive up the spread between corporate bond yields and US Treasury yields. The spread is a measure of perceived risk. It had dropped to ludicrously low levels. This wasn't a function of risk somehow disappearing from Planet Earth. It was a function of the Fed's beating investors into submission with its zero-interest-rate policy so that they would eliminate risk as a factor being priced into their calculus. Now risk is re-inserting itself into the calculus.”

  

  Read Also: Are Credit Markets Signaling More Pain? by Fil Zucchi via See It Market

   

  4) Carl Ichan: Market Is Way Overpriced by Carl Icahn via Zero Hedge

   

  "God knows where this is going. It's very dangerous and could be disastrous," said Icahn, who has been a consistent critic of the Fed for keeping its benchmark interest rate close to zero since late 2008.

   

  Icahn said he felt compelled to raise red flags about the state of the financial markets because he believes if more big investors had warned about subprime mortgage market in 2007, the United States might have avoided the crisis that strangled the economy the following year.

   

  In a video entitled "Danger Ahead" and released on Tuesday, Icahn said the Fed's rate policy had enabled U.S. chief executives – many of whom he describes as "nice but mediocre guys" – to pursue "financial engineering" that he said has exacerbated an already wide gap between rich and poor in America."

  Read Also: Today's Market Looks A Lot Like 2000 and 2007 by Alex Rosenberg via CNBC

   

  5) New Sign Of A Market Bubble? by Michael Hiltzik via LA Times

  "At a press briefing last week, Mike Wilson, an executive of Morgan Stanley's wealth management arm, cautioned that 'Consumers are feeling pretty good, and they are starting to spend money again, and they're starting to do dumb things. They're starting to borrow money, they're starting to maybe buy that house they shouldn't or that car they shouldn't.'

   

  That's amusing, because Morgan Stanley has been aggressively hawking non-purpose loans: its total securities-based loans totaled $38 billion at the end of 2014, a 70% increase over two years earlier according to an analysis by Paul Meyer of the Securities Litigation and Consulting Group.

   

  The firm's pitch to clients is entitled 'Invest in Your Dreams.' Among those dreams it puts in its clients' heads: 'The restaurant you've always wanted to open. That advanced degree you finally have time for. The perfect house that won't be on the market long. A 1963 Ferrari GTO, just because.'"

  (Note: Morgan Stanley is pitching "margin loans" at a time when margin debt is still near record highs. We saw similar behavior at the peak of the last two bull markets.)

  

  Read Also: Goldman Sachs Cuts Outlook For Market by Sam Ro via Business Insider

  ---

  Other Reading

  • The Buffet Valuation Indicator Levitates by Doug Short via Advisor Perspectives
  • Valuations Tend To Mean-Invert by John Hussman via Hussman Funds
  • Thoughts On Negative Rates via Philosophical Economics
  • Selling Is The Easy Part by Ben Carlson via Wealth Of Common Sense
  • Say Goodbye To The 4% Rule For Retirement by Roger Nusbaum via Advisor Perspectives
  • Slumping Manufacturing Doesn't Matter? by Jeffrey Snider via Alhambra Partners
  • S&P Predicts ECB Will Boost QE By 120% by Tyler Durden via Zerohedge

  ---

  “Risk taking is necessary for large success, it is also necessary for failure.” – Nasim Taleb

  Have a great weekend.

  

  

  

  

  

• Meet Your "Independent" Media, America

  All you need to know about the “independent”, “objective” and “impartial” US media.

  

  h/t @LibertyBlitz

  

  

  

  

• "They're Hopping Mad In The US And Saudi Arabia": Russian Strikes In Syria Spark Epic Western Media Propaganda Blitz

  We are now two days into Russia’s air campaign against anti-regime forces in Syria and both Moscow and the West are rushing to spin the narrative.

  The frantic attempt from both sides to shape public opinion has been truly amazing to behold and the sheer amount of coverage speaks to what we said on Thursday about just how important the conflict really is for the Mid-East balance of power.

  For the US, portraying Russian airstrikes as supportive of a murderous regime and as an imminent threat to civilians is key, as it allows Washington to explain away the fact that the US and its allies haven’t coordinated their efforts with Moscow. Take the following from CNN for instance, who reports that Russia has made a “strategic blunder” and that by opening an air campaign, Russia risks raising the spectre of the Soviet-Afghan war in the minds of potential jihadists who will supposedly rush into Syria to join the fight:

  There is no ambiguity now about Russia’s current tactics in Syria — they are seeking to take over the airspace in the region and be the agenda-setting force on the ground, several senior administration officials told CNN.

   

  “Yesterday’s demarche to the U.S. by Russian officials in Baghdad was clear in its intent,” one senior administration official said. “Make sure you don’t have anyone around ISIS targets and get out of the air.”

   

  And while U.S. officials have no plans to cede Russia any ground, they also said it appears that Russian President Vladimir Putin made a dramatic chess move that the Russians have not thought through — one official even called it a “strategic blunder.”

   

  Had the Russians been clear that they are providing support in Syria to prevent Syrian President Bashar al-Assad regime’s collapse — a scenario that would benefit ISIS — they might have gotten some credit on the world stage.

   

  But their very first strikes in the region hit CIA-backed anti-Assad rebel forces, Arizona Republican John McCain, chairman of the Senate Armed Services Committee, said Thursday on CNN’s “New Day.”

   

  And U.S. officials note that every bomb against a non-ISIS Sunni target puts them more in bed with Iran and Hezbollah, which are Shiite. U.S. allies in the Persian Gulf warn that this could set off a huge sectarian conflict and that the deeper the Russians get into this, the harder officials believe it will be to get a diplomatic process with the Saudis and others restarted.

   

  “It is going to be hugely tempting for the Saudis to start financing their guys again,” another senior administration official said. “Syria will be a magnet for every jihadi, who will rush to fight the Russians, just like they did in Afghanistan. The problem is while this will cause problems for the Russians, it will also mean trouble for the Gulf, when the jihadists come home.”

   

  “The Russians can’t be stupid,” another senior administration official said. “This is going to be wildly expensive. And they can’t hold out long. They know in the end there is no future for the guy (Assad) because the whole reason they had to come in is because Assad and his forces were extremely vulnerable. So we are hoping they will come to their senses, stabilize the situation and then we can agree on the Assad piece.”

  Now obviously, there are too many absurd statements there to count, but note (again) that Russia has never hid its support for Assad. When Charlie Rose told Putin on national US television that some people believe Russia is in Syria to help Assad, Putin said, quote, “well, you’re right.” On top of that, it’s glaringly obvious to anyone who knows anything about the global balance of power that Russia is there to support Assad and it’s ridiculous for anyone to suggest that Putin isn’t aware of the fact that by supporting the regime, Russia falls squarely on the side of Iran and Hezbollah. It’s also glaringly obvious that ISIS isn’t the only extremist group fighting for control of the country and the notion that the US has now finally managed to identify the “good guys” in Syria after failing to get it right for four years and that now evil Russia is deliberately targeting those good guys simply because they’re the good guys is laughable to the point that one wonders if CNN and others pushed back on being compelled to spin it that way. Additionally, it’s a little late for the US to be concerned about someone inadvertently creating a theatre that in the minds of jihadis will serve as the stage for humanity’s final battle. If Washington was worried about that they might have avoided getting involved in Syria in the first place and they definitely would have avoided training the soldiers who would go on to join the very group that’s perpetuating that idea.

  And then here’s WSJ:

  The White House challenged Russia’s claim that the airstrikes were targeting Islamic State militants, saying Thursday that Moscow was carrying out “indiscriminate military operations” in areas where the group isn’t operating. A White House official also dismissed the possibility that Russia had inadvertently bombed non-Islamic State areas. U.S. officials say the Russian military bombed one area primarily held by rebels backed by the Central Intelligence Agency and allied spy services.

   

  Contrary to claims by the Russian Ministry of Defense, none of the areas that were hit have a known Islamic State presence. At least two of the rebel factions attacked by the Russians—Tajamu Al-Ezzeh and the Central Division—have received weapons including advanced antitank missiles and funding from the U.S. and its allies, according to rebel leaders.

   

  The arc that the Russian airstrikes followed begins around the town of Jisr al-Shughour in northern Idlib province near the Turkish border and adjacent to an agricultural area known as the Ghab Plain. It cuts through the central Syrian cities of Hama and Homs and ends at the Lebanese border.

   

  

  
  

  Alawites—the regime’s base of support—are concentrated west of the arc in an area that includes Latakia province.

   

  Everything east is dominated by the country’s Sunni majority, to which most of those fighting the regime belong.

   

  A series of tit-for-tat massacres during the more than four-year conflict have solidified this sectarian fault line.

  Yes, the “sectarian fault line” has been solidified and that is a hallmark of Western intervention in the Mid-East. Syria is no different. 

  And BBC:

  Members of the US-led coalition against Islamic State have called on Russia to cease air strikes they say are hitting the Syrian opposition and civilians.

   

  In a joint statement on Friday, the US, UK, Turkey and other coalition members said Russian strikes would “only fuel more extremism”.

  And best of all there’s Al-Jazeera (which is of course owned by Qatar), who takes it up another notch by suggesting that Russia is now intentionally killing civilians:

  Russia accused of striking civilian targets in Syria

   

  Activists say warplanes are targeting civilians in areas under control of Western-backed rebels, a claim Russia denies.

  For their part, Bloomberg did the American public a favor by laying out the real story, albeit in an article that carries the title “US, Allies Demand Russia Stop Attacks On Syrian Opposition“:

  Russian forces are targeting only Islamic State, al-Qaeda affiliated Nusra Front and other terrorist groups, Foreign Minister Sergei Lavrov said Thursday in New York. The Free Syrian Army, a U.S-backed rebel group, was not among the targets and it should have a role in the political process in Syria, he added.

   

  “The goal is terrorism,” he said. “And we are not supporting anyone against their own people.”

  Assad’s government has been fighting alongside Iranian reinforcements to secure a corridor from the coastal province of Latakia, home to Assad’s Alawite minority, stretching to the capital Damascus, according to Reva Bhalla, vice president for analysis at Stratfor, a geopolitical intelligence and advisory firm based in Austin, Texas. The government has accused Qatar and Saudi Arabia of backing “terror groups,” and dismissed the criticism.

   

  “They’re hopping mad in Saudi Arabia, the U.S. And Qatar because of their defeat and the victory of Russia and Syria and the unraveling of the fact that the U.S. and its allies are not serious about fighting” Islamic State, Syrian lawmaker Sharif Shehadeh said by phone from Damascus. “Those who claim to be concerned about the Syrian people are the ones slaughtering the Syrian people through the terrorists.”

  There you go. That last passage pretty much says it all. 

  Meanwhile, the Russian propaganda machine is also in high gear as The Kremlin is jumping at the opportunity to portray Putin as the man who saved the world when no one else was willing to. Here’s Bloomberg again:

  Vladimir Putin may have caught the U.S. and its allies off guard by striking Syria, but his propaganda machine was ready.

   

  “A hundred dead terrorists,” a news presenter on Russia’s No. 2 network announced early Thursday, just hours after the bombing of what Putin has called “evil-doers” began. She then cut to a correspondent in Syria who lauded the precision of the strikes as aerial footage of the attacks supplied by the Defense Ministry aired.

   

  Over on Channel 1, the most-watched station, a parade of politicians, analysts and religious leaders — both Christian and Muslim — rolled by justifying the use of force on both legal and moral grounds. 

   

  “This is more than just military strikes against Islamic State,” said the editor of National Defense magazine, Igor Korotchenko, after parliament unanimously authorized the use of force. “We are protecting the values of humanity and taking a stand against the most extreme forms of obscurantism and terror.”

  What’s amusing there is that as overstated as it is, that narrative is actually closer to the truth than what’s being fed to the public by the Western media. 

  In any event, the important thing here is to cut through all of this and extract the bits that help to tell the story of what’s actually taking place in Syria. As we detailed on Thursday, this is effectively a Mid-East coup by Russia and Iran wherein Tehran will replace Riyadh as the regional power broker and Moscow will supplant Washington as the superpower puppet master. And on that note, we close with another excerpt from the WSJ piece cited above:

  Iran’s Foreign Ministry welcomed Russia’s military intervention in Syria on Thursday, saying it was the right step to fight terrorism and a move toward bringing stability to the region.

   

  “Fighting terrorism effectively requires a strong and serious will and has to be based on cooperation with the governments of Iraq and Syria,” Marzieh Afkham, spokeswoman for the ministry, said according to Iranian media reports.

   

  Ibrahim al-Amin, a Lebanese commentator and newspaper editor close to Hezbollah and Iran, said Moscow essentially provided a green light for a counteroffensive against rebels across the political spectrum.

   

  “From our side, we can no longer ignore the decision of the axis of resistance, backed by Russia, to not only prevent Assad’s fall but to also weaken all his foes. All his foes without any distinction,” wrote Mr. Amin in the Lebanese daily Al-Akhbar on Thursday.

   

  “We must benefit from Russian support to launch tough and decisive battles in several places in Syria,” he added.

   

  Before the latest Russian intervention, Iran played a pivotal role propping-up pro-regime militias made up largely of Alawites and Shiites. It has orchestrated thousands of Shiite fighters mainly from Lebanon and Iraq with Hezbollah being in the lead.

   

  But thousands of rebels regrouped in several enclaves north of Homs, in towns like al-Rastan and Talbiseh. Russian jets hit both civilian and military targets in these two towns and five surrounding villages, said Rashid al-Hourani, a Syrian army officer from the area who defected to the rebels in 2012.

   

  He said the airstrikes were followed with a barrage of artillery fire from several nearby positions where pro-regime Alawite and Shiite militias, including an Iran-backed group known as the Ridha Brigade, have been massing over the past few days.

  

  

  

  

  

• The Slippery Slope Of Denial

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  The ISM Manufacturing PMI was “unexpectedly” weak yet again in September. Continuing the theme spelled out by the regional manufacturing surveys (the Fed’s and the Chicago BBI), economic momentum has clearly stalled right where the “dollar” said it would. The pattern is blindingly obvious, with a huge slowdown to start the year (coincident to the first “dollar” disruptions including crude oil prices), a pause around May/June (with the “dollar” much quieter after the March FOMC) and then a pickup in August and now more dramatic deceleration in September (after the July start to the latest “run”).

  At just 50.2, the headline ISM estimate was the lowest since May 2013. New orders fell sharply from 51.7 in August (which was a multi-year low) to just 50.1. While most fixate on the assumed 50 level as an actual dividing line between growth and contraction, these sentiment surveys aren’t nearly that precise and at most offer relative interpretations about the economic direction, trends and the perhaps even the strength of those directions and trends.

  

  With such ugly numbers everywhere, the mainstream is rushing to reassure:

  The September numbers are the latest in a string of mixed reports for U.S. factories. The ISM index shows manufacturing activity has expanded for 33 straight months, though the pace has slowed markedly from last summer when it touched 58.1.

   

  Other gauges have been weaker, with the Federal Reserve’s measure of manufacturing output down in August and a recent Commerce Department report showing a drop in exports of autos and consumer goods.

  There was absolutely nothing “mixed” about factory reports in September unless you succumb to the allure of the false precision; everything is trending down and more importantly being rather quick about it. But even that is not purportedly anything to be concerned about because economists are certain that the problem lies only elsewhere:

  The figures showed export demand matched the weakest since July 2012 as economies from China to the euro area struggle to improve. While resilient spending by U.S. consumers is helping underpin manufacturing, the stronger dollar is making it more expensive for foreign buyers to purchase made-in-America merchandise.

  As if taken directly from Janet Yellen’s September press conference, particularly where she made a point of emphasizing the “strong” US economy (before reciting all the evidence that denies any such qualification), we are led to believe if not for that dollar the economy, manufacturing with it, would be booming.

  By all actual counts, if there is a resiliency being shown by US consumers and the consumer economy it has a particularly peculiar way of hiding itself. If the word “strong” was applicable beyond the simple fact it is repeated over and over by economists, consumer spending would show it somewhere. Instead, examining the catalog of consumer indications demonstrates quite the opposite. Starting with retail sales, where August counted still among the worst of the entire series, there is far, far more recession than resilience. Worse, retail sales figures across-the-board in August were more of the early-2015 variety of weakness than the less alarm of the middle of the year, following, too, the “dollar’s” path.

  

  The mainstream “strong” narrative really falls apart, however, exactly where economists and the media suggest it shouldn’t. If the dollar were truly the sole animating factor in the shocking manufacturing decline, meaning overseas weakness exclusively, then how are we supposed to reconcile imports? In other words, if this was simply the dollar making US exports “more expensive”, as is repeated blindly, and overseas economies alone in their distress, why isn’t the “strong” US consumer buying anything and everything from foreign producers? If the dollar makes exports difficult, the opposite is presumably true for imports where US consumers are flush with at least the unemployment rate.

  The export figures for July (the latest update) do follow that exchange rate suggestion. Exports collapsed yet again, down a stunning 7% for the second time in the last three months of the release. Export declines didn’t reach that level in the Great Recession until December 2008, but whereas that was a singular impulse, in 2015 exports so far have contracted steadily at or near that rate.

  

  So if the dollar exchange is the problem, combined with foreign economic deficiencies, then imports are surely surging or at the very least growing at a “strong” and steady rate.

  

  Imports from both Europe and China were flat in July, while imports from Japan, where the yen had been “devalued” a second time, dropped 6% after falling 5.5% in June. US demand seems to be shrinking at the same exact time foreign economies are stalling and plunging. That may just be a damned statistical oddity, or, more simply, the global economy is uniformly dropping with the US as a full part of that decline (“dollar”, after all).

  

  In fact, by count of even the seasonally-adjusted figures, imports are following exports a little too closely to believe that the looming (or formed) global recession is portionable or discretely separated.  The harmony between them strongly suggests instead a uniformity that can only be caused by a singular (financial) force.

  

  US consumer demand is strong, except everywhere you look to actually find it. Instead, what I think those who actually believe the mainstream narrative mean to proclaim is that there should be strong consumer demand given derivative assumptions about the Establishment Survey and unemployment rate. That is why we have been handed this cascading progression of downplaying each stage. Therefore, the only significance of these diminishing expectations is that they are clearly diminishing; and the acceleration of that deterioration might be extrapolated from the increasing intensity and quality of the nonsense meant to deny it.

  As noted yesterday, this is already well-descended the slippery slope of denial, plus one more rung:

  1. Dollar doesn’t matter, indicates strong economy relative to the world
  2. Dollar matters for oil, but lower oil prices mean stronger consumer
  3. Manufacturing slump doesn’t matter, only temporary
  4. Manufacturing declines are consumer spending, but only a small part
  5. Manufacturing declines are becoming serious, but only from overseas
  6. …

  

  

  

  

• "They Just Don't Want A Job" – The Fed's Grotesque "Explanation" Why 94.6 Million Are Out Of The Labor Force

  In a note seeking to “explain” why the US labor participation rate just crashed to a nearly 40 year low earlier today as another half a million Americans decided to exit the labor force bringing the total to 94.6 million people…

  

  

  … this is what the Atlanta Fed has to say about the most dramatic aberration to the US labor force in history: “Generally speaking, people in the 25–54 age group are the most likely to participate in the labor market. These so-called prime-age individuals are less likely to be making retirement decisions than older individuals and less likely to be enrolled in schooling or training than younger individuals.”

  This is actually spot on; it is also the only thing the Atlanta Fed does get right in its entire taxpayer-funded “analysis.”

  However, as the chart below shows, when it comes to participation rates within the age cohort, while the 25-54 group should be stable and/or rising to indicate economic strength while the 55-69 participation rate dropping due to so-called accelerated retirement of baby booners, we see precisely the opposite. The Fed, to its credit, admits this: “participation among the prime-age group declined considerably between 2008 and 2013.”

  

   

  And this is where the wheels fall off the Atlanta Fed narative. Because the regional Fed’s very next sentence shows why the world is doomed when you task economists to centrally-plan it:

  The decrease in labor force participation among prime-age individuals has been driven mostly by the share who say they currently don’t want a job. As of December 2014, prime-age labor force participation was 2.4 percentage points below its prerecession average. Of that, 0.5 percentage point is accounted for by a higher share who indicate they currently want a job; 2 percentage points can be attributed to a higher share who say they currently don’t want a job.

  And there you have it: there are nearly 100 million working-age Americans who could be in the labor force, but are not “mostly” because they don’t want a job.

  Nothing about the lack of job demand as mega corporations continue to lay workers off in droves instead of hiring, instead using every last dollar of free cash flow to buyback their own stock to boost executive compensation instead of growing their company and hire more workers.

  Nothing about the collapse in small business formation – that driver of 80% of US employment – as firm exit rates are now greater than firm entry rates

  Nothing about the inability to get a job in a world in which the rest of
  the global is lapping the US in educational and labor skills.

  Nothing about the US economy never having left the post-2008 depression where $4.5 trillion in Fed credit was created just to boost the S&P to all time highs and never making it to the actual economy (until the helicopters finally start paradropping of course)

  Nothing about millions of aging, 55 and over, Americans refusing to retire or quit their job simply because they have no return on their savings to fall back on thank to the Fed’s ZIRP, thus keeping the labor pipeline clogged and preventing younger Americans from getting promoted and achieving better paying jobs.

  Nothing about a Millennial generation encumbered with $1 trillion in debt, that is so terrified of its job prospects and having to pay down its debt, it choose instead to keep rolling and piling on to this debt by remaining in college indefinitely

  Nothing about the perverted incentive structure of a welfare state that makes it more attractive to collect generous government handouts which end up punishing hard work.

  None of that.

  You see, it is because Americans “mostly don’t want a job.”

  

  And these are the pompous academic “intellectuals” who are supposed to micromanage the US economy. But how can they fix the biggest problem facing the US economy when they fail to even accurately diagnose what the problem is?

  Which, incidentally, is why the same old Fed tools will be used and abused in hopes of kicking the can down a few more months at at time, be it QE 4, 5, 100, or ever more negative rates, both of which are coming.

  How long will this continue? Now that is a very simple question: it will continue until the dollar loses its reserve status, just like the pound before it, and the livre before that, and the guilder before that, and so on.

  

  

  

  

  

  

• US Foreign Policy Explained (In 1 Cartoon)

  Presented without comment…

   

  

   

  Source: Townhall.com