• Jim Grant Explains How To Hedge Against The Coming Money Paradrop

  Submitted by Christopher Gisiger via Finanz Und Wirtschaft,

  James Grant, Wall Street expert and editor of the investment journal Grant’s Interest Rate Observer, warns of ever more extreme central bank policies and bets on the comeback of gold.

  The global financial markets are under severe stress. The postponed interest rate hike in the United States, the fast cooldown of the Chinese economy and the crash in the commodity complex are causing a great amount of unease among investors. Fear is growing that the world slips into recession. "Central bank policy is intended to paper over the cracks in the systems. Seven years after the outbreak of the financial crisis we’re paying for this with a lack of growth", says James Grant. The sharp thinking editor of the iconic Wall Street newsletter Grant’s Interest Rate Observer draws worrisome parallels between the command based central planning of the Chinese economy and the economic policies in the West. He also doubts that Fed Chair Janet Yellen is the right fit for the top job at the world’s most powerful central bank. Looking for protection he points to gold and shares of gold miners.

  *  *  *

  Jim, since the fall of Lehman Brothers seven years have passed now. In what kind of world are investors living in today?

  It seems longer ago, doesn’t it? Certain things have not changed. The first of those permanent things is the nature of human beings who operate in markets and their tendency to buy high and sell low. That is just as it was the day before Lehman failed and it’s just as it will be forever. What’s new and different is the larger than life presence of government in our markets, both with respect to regulation and with respect to the management and the production and the manipulation of money.

  Are you referring to super low interest rates?
  There is nothing so terribly new about very low interest rates. In the 19th century interest rates fell for most of the area from the end of the Napoleonic wars in 1815 to the turn of the 20th century. But something new under the sun might be very well the hyperactivity of our central banks.

  But without their interventions we might be even worse off today.
  We are living in the age of magical thinking. Governments through central banks have muscled down money market interest rates to zero and in some cases below zero. Not content with that, they have implemented what economists chose to call "the portfolio balance channel". That’s a very fancy phrase meaning higher stock prices in the interest of rising aggregate demand. That was the theory of the Bernanke Fed and it certainly was the theory of the Chinese communists who sponsored the fly away levitation of the Shanghai A-shares. So the world over – and this goes for Europe as well – central bankers have taken it upon themselves to sponsor great bull markets in the hopes of making people spend more because they will feel richer. That was the theory. But they neglected to think through the full consequences of these policies.

  The slowdown in China is putting the financial markets under a lot of stress. How bad is the situation?
  If I were a member of the ruling elite of the Chinese communist party I would say to myself: "Wait a second, we were just doing what the capitalist West was doing for the sake of economic recovery:  Manipulating interest rates, administering asset prices through QE and inducing people through broad winks and nudges to taking risks and thereby seeding bull markets. When things went to smash in 2008 they didn’t arrest short sellers but they did threaten them as well. So what are we doing that’s different?" What China is doing different is that they’re doing it more ham handed. But aren’t there rather obvious analogies between old fashioned marxist central planning of the entire economy and our style of western central banking in which they seek to impose certain outcomes through the manipulation of prices?

  Is China set for a hard landing?
  I think China is very worrying. The macroeconomic data are largely made up and their methods are almost predestined to fail as the methods of command and control and suppression of the price mechanism are always predestined to fail. And then, on top of that, what’s scary is the reaction of the West: Instead of questioning those principles we talk about that the Chinese are just not as proficient in these techniques.

  China was a main concern for the Federal Reserve not to raise interest rates at their recent meeting. Was this the right decision?
  I was hoping that they would choose to act if only as a mercy to change the subject. I mean can we talk about something more interesting like the weather? Of course, it’s not just about one quarter of one percent of scarcely discernable monetary tightening. It’s about the idea of something in the way of a normal structure of interest rates in the time to come. But here it is again: Seven years after the fall of Lehman the biggest and supposedly most dynamic, most resilient economy in the world is still not strong enough to absorb that. That is the message from the Fed. So no wonder the markets are worried.

  Usually stocks rally when the Fed stays easy. Not this time. Is Fed Chair Janet Yellen still on top of things?
  Here is a a very revealing fact: According to the Wall Street Journal when Janet Yellen goes to the airport to catch a flight she arrives hours early. Now, what does that tell you about her personality type? She’s really, really anxious. I think this is a personality type that perhaps is better suited not for high command. If a difficult decision needs to be taken a person who’s so anxious or so much of an impulsive risk minimizer is perhaps not the best qualified to take sometimes a leap into the dark. But that’s what investing and the management of money is everything about: At one point you have to take a leap in the dark because you can’t know the future. So this says a lot about a person who manages the world’s reserve currency without thinking of making too much of it.

  So far there are few signs of inflation however. If anything, economists are concerned about deflation.
  We see no inflation in the supermarket but we have already seen a great deal of it on Wall Street. Also, what exactly is wrong with low inflation? Many accredited economists and central bankers want us to think that unless the rate of debasement of money is 2% or higher we’re all in danger of some catastrophic economic event. Says who? This is one of these moments in which I feel utterly isolated from mainstream financial and monetary thinking. I ask myself: Are we at Grant’s crazy or are they? I guess we’ll know more in twenty years.

  So what’s next for the global financial markets?
  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.

  You’re saying there’s an accident waiting to happen?
  The central banks lifted off the stock market so that aggregate demand is going to rise. But they forgot to consider that aggregate supply is likely also to rise: Oil drillers will have it easier to find financing with which to drill the marginal well and to produce the marginal barrel of oil. This will weight on the market causing lower oil prices which will lead the central bankers in return to print still more money to save us from what they call "the risk of deflation." So it’s seemingly a never ending, circular process of so called stimulus leading to still more stimulus and unconventional ideas leading to radical ideas. I dare to say that we have not yet seen the most radical brainwaves of the mandarins running our central banks.

  What do you think this will look like?
  They don’t keep those things as a secret. They talk quite openly about "direct monetary funding" which is what Milton Friedman had in mind when he coined the phrase “helicopter money”. So the next idea is just bypassing the banking system altogether and mailing out checks to the citizens.

  Would something like that even work?
  All this monetary stimulus does two things in a reciprocal way: It pushes failure into the future and brings consumption into the present. Providing marginal businesses with very cheap credit is inviting companies that have passed their useful days of their commercial lives to pretending some kind of an afterlife thanks to the subsidies from the central banks. But capitalism is inherently a dynamic system based on entrepreneurship and to new inventions. It’s a little bit like the forest for the trees: You need life but you also need death. Without death there is no room for a new generation and what you get is Japan: Standing timbers of ancient age, none of them too healthy. Quantitative easing and artificially low interest rates reduce the dynamics, the growth and the vibrancy of economic life.

  Now the fear of corporate failures is growing. You can see that in the widening spreads in the junk bond market.
  The junk bond market has been characterized by very loose protections to the creditors. Those protections have been mainly eviscerated or weakened during this cycle of very aggressive lending and borrowing. That’s why I think the recovery rates on junk bonds in default will be lower and the final permanent losses to capital will be higher this cycle. But this should not be confused with the apocalypse. This is how finance works. This is the cycle of psychology of bull markets and bear markets, of boom and bust: There is euphoria and that mellows to complacency and at length it ripens to apprehension and then to fear and finally to abject terror – and that’s when you buy!

  So where do you see opportunities for investors right now? Emerging markets for instance have crashed already pretty hard.
  We see the beginnings of opportunity in some of the emerging markets. Still, I don’t think this is the moment to get involved broadly. But at least some securities have been marked down to levels at which  you can say: "Ok, that’s at least interesting". One of them is Sberbank. It’s a very good bank and it happens to be in Russia, a rather forbidding place at the moment. But Sberbank came through the 2008/09 experience with shining colors, its management is first rate and it has terrific scale. So altogether it’s a first rate bank now greatly under strain owned to the difficulties in Russia. But I think it will survive and do well. Another interesting stock is the Moscow Stock Exchange. Like Sberbank it’s well managed, cheap and a good business. There are also Avianca, an airline in Colombia and Grupo Nutresa, a midcap food distributor and processor which is called the Nestlé of Columbia.

  Where else do you see opportunities?
  This is a monetary moment. I think we are looking at the beginning of the world’s reappraisal of the words and deeds of central bankers like Janet Yellen and Mario Draghi. What we’re waiting for is a sufficient recognition of the monetary disorder. You see monetary disorder manifested in super low interest rates, in the mispricing of credit broadly and you see it in the escalation of radical monetary nastrums that are floating out of the various central banks and established temples of thought: Negative real rates, negative nominal rates and the idea of helicopter money. So you need some hedge against things not going according to the script and that makes gold and gold mining equities terrifically interesting now.

  Are there any gold mining stocks you would recommend specifically?
  Anything that the Canadian mining entrepreneur Pierre Lassonde is involved with, is interesting. He is a very unusual mining entrepreneur because he is a businessman first and and geologist second. He wants a return on investment rather than just digging a hole in the ground out of which comes gold. He is involved especially with Euro-Nevada and with a very low priced speculative mining company called Newgold. Barrick Gold is another stock that is an attractive speculation because it is highly encumbered and in the not so distant future it faces a debt drama. But the shares are priced for that and if gold goes higher they have huge potential.

  

  

  

  

  

• Paul Craig Roberts Warns "The Entire World May Go Down The Tubes Together"

  Submitted by Paul Craig Roberts,

  Washington’s IQ follows the Fed’s interest rate – it is negative. Washington is a black hole into which all sanity is sucked out of government deliberations.

  Washington’s failures are everywhere visible. We can see the failures in Washington’s wars and in Washington’s approach to China and Russia.

  The visit of Chinese President Xi Jinping, was scheduled for the week-end following the Pope’s visit to Washington. Was this Washington’s way of demoting China’s status by having its president play second fiddle to the Pope? The President of China is here for week-end news coverage? Why didn’t Obama just tell him to go to hell?

  Washington’s cyber incompetence and inability to maintain cyber security is being blamed on China. The day before Xi Jinping’s arrival in Washington, the White House press secretary warmed up President Jinping’s visit by announcing that Obama might threaten China with financial sanctions.

  And not to miss an opportunity to threaten or insult the President of China, the US Secretary of Commerce fired off a warning that the Obama regime was too unhappy with China’s business practices for the Chinese president to expect a smooth meeting in Washington.

  In contrast, when Obama visited China, the Chinese government treated him with politeness and respect.

  China is America’s largest creditor after the Federal Reserve. If the Chinese government were so inclined, China could cause Washington many serious economic, financial, and military problems. Yet China pursues peace while Washington issues threats.

  Like China, Russia, too, has a foreign policy independent of Washington’s, and it is the independence of their foreign policies that puts China and Russia on the outs with Washington.

  Washington considers countries with independent foreign policies to be threats. Libya, Iraq, and Syria had independent foreign policies. Washington has destroyed two of the three and is working on the third. Iran, Russia, and China have independent foreign policies. Consequently, Washington sees these countries as threats and portrays them to the American people as such.

  Russia’s President Vladimir Putin will meet with Obama next week at the UN meeting in New York. It is a meeting that seems destined to go nowhere. Putin wants to offer Obama Russian help in defeating ISIS, but Obama wants to use ISIS to overthrow Syrian President Assad, install a puppet government, and throw Russia out of its only Mediterranean seaport at Tartus, Syria. Obama wants to press Putin to hand over Russian Crimea and the break-away republics that refuse to submit to the Russophobic government that Washington has installed in Kiev.

  Despite Washington’s hostility, Xi Jinping and Putin continue to try to work with Washington even at the risk of being humiliated in the eyes of their peoples. How many slights, accusations, and names (such as “the new Hitler”) can Putin and Xi Jinping accept before losing face at home? How can they lead if their peoples feel the shame inflicted on their leaders by Washington?

  Xi Jinping and Putin are clearly men of peace. Are they deluded or are they making every effort to save the world from the final war?

  One has to assume that Putin and Xi Jinping are aware of the Wolfowitz Doctrine, the basis of US foreign and military policies, but perhaps they cannot believe that anything so audaciously absurd can be real. In brief, the Wolfowitz Doctrine states that Washington’s principal objective is to prevent the rise of countries that could be sufficiently powerful to resist American hegemony. Thus, Washington’s attack on Russia via Ukraine and Washington’s re-militarization of Japan as an instrument against China, despite the strong opposition of 80 percent of the Japanese population.

  “Democracy?” “Washington’s hegemony don’t need no stinkin’ democracy,” declares Washington’s puppet ruler of Japan as he, as Washington’s faithful servant, over-rides the vast majority of the Japanese population.

  Meanwhile, the real basis of US power—its economy—continues to crumble. Middle class jobs have disappeared by the millions. US infrastructure is crumbling. Young American women, overwhelmed with student debts, rent, and transportation costs, and nothing but lowly-paid part-time jobs, post on Internet sites their pleas to be made mistresses of men with sufficient means to help them with their bills. This is the image of a Third World country.

  In 2004 I predicted in a nationally televised conference in Washington, DC, that the US would be a Third World country in 20 years. Noam Chomsky says we are already there now in 2015. Here is a recent quote from Chomsky:

  “Look around the country. This country is falling apart. Even when you come back from Argentina to the United States it looks like a third world country, and when you come back from Europe even more so. The infrastructure is collapsing. Nothing works. The transportation system doesn’t work. The health system is a total scandal–twice the per capita cost of other countries and not very good outcomes. Point by point. The schools are declining . . .”

  Another indication of a third world country is large inequality in the distribution of income and wealth. <a href="https://en.wikipedia.org/wiki/List_of_countries_by_income_equality and https://www.cia.gov/library/publications/the-world-factbook/fields/2172…. “>According to the CIA itself, the United States now has one of the worst distributions of income of all countries in the world. The distribution of income in the US is worse than in Afghanistan, Albania, Algeria, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Benin, Bosnia/Herzegovina, Burkina Faso, Burundi, Cambodia, Cameroon, Canada, Cote d’Ivoire, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, France, Germany, Ghana, Greece, Guinea, Guyana, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kenya, South Korea, Kyrgyzstan, Laos, Latvia, Liberia, Lithuania, Luxembourg, Macedonia, Malawi, Mali, Malta, Mauritania, Mauritius, Moldova, Mongolia, Montenegro, Morocco, Nepal, Netherlands, New Zealand, Nicaragua, Niger, Nigeria, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Senegal, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Taiwan, Tajikistan, Tanzania, Timor-Leste, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, UK, Uzbekistan, Venezuela, Vietnam, and Yemen.

  The concentration of US income and wealth in the hands of the very rich is a new development in my lifetime. I ascribe it to two things.

  One is the offshoring of American jobs. Offshoring moved high productivity, high-value-added American jobs to countries where the excess supply of labor results in wages well below labor’s contribution to the value of output. The lower labor costs abroad transform what had been higher American wages and salaries and, thereby, US household incomes, into corporate profits, bonuses for corporate executives, and capital gains for shareholders, and in the dismantling of the ladders of upward mobility that had made the US an “opportunity society.”

   

  The other cause of the extreme inequality that now prevails in the US is what Michael Hudson calls the financialization of the economy that permits banks to redirect income away from driving the economy to the payment of interest in service of debt issued by the banks.

  Both of these developments maximize income and wealth for the One Percent at the expense of the population and economy.

  As Michael Hudson and I have discovered, neoliberal economics is blind to reality and serves to justify the destruction of the economic prospects of the Western World. It remains to be seen if Russia and China can develop a different economics or whether these rising superpowers will fall victim to the “junk economics” that has destroyed the West. With so many Chinese and Russian economists educated in the US tradition, the prospects of Russia and China might not be any better than ours.

  The entire world could go down the tubes together.

  

  

  

  

  

• Reflexivity Wrecks Fed Credibility, Crushes 2016 Rate Hike Hopes

  With Janet Yellen choking back the vomit as she shifted The Fed's stance to a "hawkish hold," markets remain just as confused (and disconnected) as they were after The FOMC's "dovish hold." The problem, as Deutsche explains, is The Fed's reliance on 'conventional' inflation dynamics (and its mean-reversion – higher in this case) as opposed to actual market expectations (which are collapsing), leaving them open to a major Type II policy error –  the risk of rejecting something that is, in actuality, true. The Fed's credibility is teetering on the brink as inflation 'reflexivity' – that is, Fed expectations strengthen the dollar, depress risk in general and commodities in particular, with lower commodities driving headline inflation lower – raises the prospect that the Fed fails to raise rates at all in 2016.

  For many asset classes there has been nothing but a roundtrip, risk on before the Fed, replaced by risk off. However the momentum especially in say high yield, some dollar pairs (especially vs. EM) and to some extent equities appears to be headed towards revisiting what had been earlier sell-off lows in the China devaluation panic.

   

  For some investors the Fed’s failure to raise rates is viewed as the culprit in the risk reversal, even though for many investors the Fed was viewed as being in a “dovish hold”, reflecting a more sanguine outlook for inflation as well as global growth concerns. The former view suggests that the Fed is still very much on track for hikes later this year and all will therefore be well as the start to normalization will instill confidence in the economic outlook and “remove” uncertainty that might otherwise be plaguing risk assets. And consistent with this it is the official view of our economist colleagues that the Fed will raise rates in December and then again twice more in 2016.

   

  Yellen, in her speech late last week, specifically included herself in the group of FOMC members that expect to raise rates later this year and as such seemed to redirect the market’s perception of the September decision toward a “hawkish hold” rather than a “malign” dovish hold. The malign dovish hold is one in which the Fed delays lift-off because it is concerned about the vigor of activity domestically and abroad. The hawkish hold, in contrast, leaves rate hikes on the table for 2015, and is likely to keep downward pressure on inflation, risk assets, the general level of yields, and the slope of the curve.

   

  The potential issue with Yellen’s position is that it is based largely on an entirely conventional view of inflation dynamics, whereby headline inflation over time is expected to revert to the more stable core measure. This entails assigning a greater “weight” to inflation survey data rather than traded market inflation compensation, posits that the long-run inflation trend is unchanged, and assumes no changes in the relationship between core and headline inflation. This is all conventional stuff, but remains exposed to risks that inflation dynamics have changed. For example, we have highlighted statistical evidence that suggests that headline inflation “Granger causes” core inflation rather than vice versa since the crisis in the US, with a similar and somewhat more robust effect evident in the European HICP data.

   

  This result could be deceptively important in that, if it persists, it suggests that expectations of Fed hikes could be having a negative effect on the inflation metric that drives them. That is, Fed expectations strengthen the dollar, depress risk in general and commodities in particular, with lower commodities driving headline inflation lower.

   

  This would be less problematic if headline inflation did not feed back into the core measure, as base effects would lead the decline in headline inflation to dissipate over time. The problem is that there is demonstrable pass through into core, with the risk being that “transitory” influences could in fact be depressing the longer-run trend. Even if this statistical behavior is a transitory cyclical effect stemming from the financial crisis, the reality is that 1) the dollar linkage demonstrates the relevance of the global economy, and 2) other major economies are in worse shape than the US economy.

  Ultimately the issue remains Type 2 error risk – the risk of rejecting something that is, in actuality, true.

  Risk assets remain negatively correlated with real yields – a signal distinct from pre-crisis behavior that we interpret as reflecting market concerns over a policy error. While it is possible that risk-off dynamics will be limited in scope and hence acceptable if not desirable, it is also possible that risk off could overly tighten financial conditions in a fashion that precludes, rather than reflects, a more balanced recovery domestically and abroad.

  We think there are scenarios for the next few months that might allow the Fed to raise rates, even this year. However we continue to believe these scenarios are unlikely to materialize and the market is therefore prone to dismiss them.

   

  In our view they do not represent good risk/reward for investors. On the contrary we think the path of least resistance for market pricing is to continue to deflate Fed expectations through 2016.

   

  The prospect that the Fed fails to raise rates at all in 2016 is rising. Almost by its very nature we think the market needs to ease financial conditions for the Fed first, if the Fed is going to be able to achieve lift off.

  Morgan Stanley confirms this "paradox" as they note…

  We see an unusual discrepancy in real yields vs. inflation breakevens in the US and the Eurozone. Forward real yields imply the Fed will tighten monetary policy above our estimate of the real terminal rate, even though inflation breakevens price a large and persistent inflation undershoot.

   

  In our view, either real rates are too high or breakevens are too low. If inflation breakevens are right about persistently low inflation, the Fed will not be able to normalize real rates, let alone take them into restrictive territory. Nevertheless, the market is pricing this scenario when viewed through the lens of 5-year forward 5-year (5y5y) and 10y20y real yields and inflation breakevens.

   

  

   

  Could the Fed embark on a hiking cycle that, in its totality, would amount to a policy mistake? Could the Fed tighten monetary conditions to the extent that inflation never returns to its own 2 percent inflation target? This seems implausible to us, especially in light of the cautious nature of the Fed’s recent decision to delay liftoff at the September FOMC meeting. For the Fed to make one policy mistake is human. For the Fed to make a series of policy mistakes over a multi-year period is unthinkable.

  The TIPS market appears to be pricing in a lengthy policy mistake.

  

   

  We give the last word to Deutsche Bank who raise considerable doubts about risk assets in either a "dovish" or "hawkish" Fed world… Much has been discussed around why the market seems so divided on whether the Fed should be hiking or delaying amidst what on paper looks like a tight labor market.

  • The argument for hiking is that inflation risks are around the corner and it is unlikely that global woes alone can derail the US economy, even if they temporarily weaken inflation.
  • The argument for delaying is that even if you accept the underlying strength of the US economy (secular stagnation fears aside, etc.), balance sheet economics dominates the business cycle and may be a leading indicator of future economic weakness, while the cycle itself is a lagging indicator of prior financial conditions.

  The easiest way to appreciate balance sheet concerns is in terms of (risk) asset price returns, reflecting deleveraging in various sectors, especially energy and commodities, which shows up in emerging market currency stress, high yield and to some extent equities. Real yields (on Treasuries) are essentially “too high” for these asset prices to stabilize and the danger is that financial conditions continue to tighten.

  

  In turn this raises the risk that the domestic corporate sector, facing weaker pricing power at home and abroad, curtails the expansion to defend profits and manage an otherwise deteriorating debt burden.

  *  *  *

  So to sum up…

  • It was a hawkish hold after all. Yellen dispelled any uncertainty in her speech late last week. That leaves us bearish risk and looking for sub-2 percent in 10y yields with a flattening of the curve.
  • We think the risk of Type 2 error should dominate the Fed’s thinking because the balance sheet leads the business cycle. While some sectors are still enjoying what were less restrictive conditions a year or two ago, the effect of deleveraging is evident in energy and commodities more generally, high yield and equities. Rising real rates have been negative for asset prices, and pre-crisis dynamics suggest that this negative correlation reflects market concerns over a policy error. Rate hikes are likely to cause further tightening of financial conditions, ultimately hindering growth.
  • The path of least resistance for market pricing is to continue to depress rate hike expectations, to the extent that the Fed might not be able to raise rates at all through the end of 2016.

  Once again The Fed falls foul of linear-thinking as reflexivity leaves them wishing to appear dovishly hawkish… is it any wonder Yellen is sick of it.

  Or put another way, the more (potentially erroneously) economically-confident "hawkish" The Fed talks, the less and less likely 'markets' are to price in long-run economic growth, thus defeating The Fed's hope not to surprise the market… get back to work Mr. Yellen.

  

  

  

  

  

• Rumors Persist That The CIA Helps Export Opium From Afghanistan

  Submitted by Kit O'Connell via TheAntiMedia.org,

  Despite billions spent to eradicate opium crops in Afghanistan, the crop is more popular than ever there, leading many to wonder whether some U.S. forces may actually be encouraging its growth and the heroin it later becomes.

  In July, the Centers for Disease Control warned of record-breaking numbers of heroin deaths in the United States. “Heroin use more than doubled among young adults ages 18–25 in the past decade,” the CDC reported.

  In the same month, it was reported that opium production is stronger than ever in Afghanistan, which now produces 90 percent of the world’s supply of the plant that’s refined to create heroin. This rise in production would have been impossible prior to the U.S.-led invasion, and it comes despite some $8.4 billion spent in counternarcotics efforts by the U.S., specifically designated to wipe out opium production in Afghanistan.

  In fact, as Global Post reported in October, under the watchful eye of the U.S., opium use expanded to new parts of Afghanistan and growers now make use of modern, advanced agricultural technologies.

  With photos circulating in 2010 that show U.S. soldiers patrolling opium fields, questions remain about what America’s real involvement may be in the opium trade. As Abby Martin noted in a 2014 investigation for Media Roots, while the Taliban had all but eradicated opium, it began to thrive just months after American forces replaced the Taliban-led government in 2001.

  Martin noted that the CIA has long been tied to the global drug trade, where it’s accused of putting more effort into controlling rather than eradicating illicit substances. She added,

  “Circumstantial evidence aside, there is no conclusive proof that the CIA is physically running opium out of Afghanistan. However, it’s hard to believe that a region under full US military occupation – with guard posts and surveillance drones monitoring the mountains of Tora Bora – aren’t able to track supply routes of opium exported from the country’s various poppy farms (you know, the ones the US military are guarding).”

  According to a January report from Mother Jones, the DEA agent formerly in charge of the agency’s efforts in Afghanistan reported repeated conflict between DEA eradication efforts and CIA agents:

  “[Edward] Follis says the DEA and CIA often bumped heads in Afghanistan. … While hinting that the CIA sometimes turned a blind eye to the Afghan drug trade, Follis won’t get into specifics. In his book, [‘The Dark Art: My Undercover Life in Global Narco-Terrorism,’] he writes, ‘Almost everywhere in the world I worked, I had static with the CIA. We’re often working the same terrain, but with different legal and moral parameters … They exist completely in the shadows.’”

  Among the groups profiting off the Afghan opium trade — and the failed efforts to eradicate it — is the mercenary group Academi, better known by its former name, Blackwater. In April, RT reported that Academi earned $569 million from counternarcotics contracts in Afghanistan.

  “[T]he notorious company has been the biggest beneficiary of counternarcotics expenditure in the war-torn country,” RT wrote.

  Watch “The Worst Narco-State in History? After 13-Year War, Afghanistan’s Opium Trade Floods the Globe” below:

  

  

  

  

  

• Gold "Tightness": When There's No More To Sell, There's No More To Buy (At Any Price)

  Submitted by Chris Martenson via PeakProsperity.com,

  One of our long-running themes here is that the truly historic and massive flows of gold from West to East is (someday) going to stop, for the simple reason that there will be no more physical bullion left to move. 

  It’s just a basic supply vs. demand issue.  At current rates of flow, sooner or later the West will entirely run out of physical gold to sell to China and India.  Although long before that hard limit, we suspect that the remaining holders of gold in the West will cease their willingness to part with their gold. 

  So the date at which “the West runs out of gold to sell” is somewhere between now and whenever the last willing Western seller parts with their last ounce.  As each day passes, we get closer and closer to that fateful moment. 

  This report centers on preponderance of fascinating data revealing the extent of the West's massive dis-hoarding of physical gold, for the first time, begins to allow us to start estimating the range of end-dates for the flow to the East.

  Here’s the punchline: there’s an enormous and growing disconnect between the cash and physical markets for gold. This is exactly what we would expect to precede a major market-shaking event based on a physical gold shortage.

  Stopping the Flows

  There are only two outcomes that will stop the process of Western gold flowing East, one illegitimate and the other legitimate. 

  1. It becomes illegal to sell gold.  This is the favored approach of central planners who prefer to force change by dictate rather than via free markets and free will.   Unfortunately, this strain of political intervention is dominant in the West, particularly in the US and EU.
  2. The price of gold dramatically rises. A large increase in the price of gold will (paradoxically) cause greater demand for gold in the West and (sensibly) less demand in the East. This is what should legitimately happen given current supply and demand dynamics. But it may not. 

  There’s always a 3^rd option, we suppose: economically carpet-bombing China and India's financial systems to scare/force some gold back out. Consider such an approach along the ‘economic hitman’ lines of thinking. 

  This would be done, for example, by having outside interests sell the Rupee furiously, driving down its value and forcing the Indian monetary authorities to defend it by using up foreign reserves to buy the Rupee. Then wait for India to run out of foreign reserves and then casually ‘suggest’ that its government use gold sales to continue defending its currency.  India's leaders would have to find ways to somehow ‘coax’ gold from its citizens.  I think we can all imagine the sorts of draconian rules and penalties that desperate governments would deploy in such a situation.

  As a side note, I believe this is the same process that was used to ‘coax’ a lot of gold out of the GLD trust since 2012. After enough bear raids on the price of gold, which began somewhat suspiciously almost exactly on the date that QE3 was announced, Western gold ‘investors’ lost interest in the yellow metal, sold their GLD shares in droves, and hundreds of tons of gold were liberated from that stockpile.

  What is truly odd from a chart perspective: this hammering down of gold started just after it had broken to the upside out of a textbook perfect triangle, when it looked seemingly ready to head off to higher values:

  

  But in the days immediately following the QE3 announcement, gold shed $100, then barely recovered, and just wandered lower until it was violently slammed from $1550 to $1350 over one night (of course) in April 2013.

  Now this was highly fortuitous for the ever-lucky Federal Reseve. After launching the largest money printing campaign in US history, the Fed did not need gold heading any higher, possibly providing a signal that would cast doubt on the wisdom or possible effectiveness of its easy-money policies. Policies, mind you, that the years since have proven to do little more than enrich the banker class and the 0.1%, as well as lard the system with extraordinary levels of new indebtedness and liquidity.

  The Fed Indeed Cares About Gold

  Gold, when unfettered, has a habit of sending signals that the Fed really doesn’t like. Therefore the Fed is at the top of everyone’s suspect list when it comes to wondering who might be behind the suspicious gold slams. Whether the Fed does it directly is rather doubtful; but they have a lot of useful proxies out there in their cartel network.

  To reveal the extent to which gold sits front and center in the Fed’s mind, and how they think of it, here’s an excerpt from a 1993 FOMC meeting’s full transcript. Note that the full meeting notes from Fed meetings are only released years after the fact. The most recent ones available are only from 2009. Listen to what this FOMC voting member had to say about gold:

  At the last meeting I was very concerned about what commodity prices were doing. And as you know, they got lucky again and told us that the rate of inflation was higher than we thought it was.

   

  Now, I know there's nothing to it but they did get lucky. I've had plenty of econometric studies tell me how lucky commodity prices can get. I told you at the time that the reason I had not been upset before the March FOMC meeting was that the price of gold was well behaved.

   

  But I said that the price of gold was moving. The price of gold at that time had moved up from 328 to 344, and I don't know what I was so excited about! I guess it was that I thought the price of gold was going on up. Now, if the price of gold goes up, long bond rates will not be involved.

   

  People can talk about gold's price being due to what the Chinese are buying; that's the silliest nonsense that ever was. The price of gold is largely determined by what people who do not have trust in fiat money system want to use for an escape out of any currency, and they want to gain security through owning gold.

   

  A monetary policy step at this time is a win/win. I don't know what is going to happen for sure. I hope Mike is correct that the rate of inflation will move back down to 2.6 percent for the remaining 8 months of this calendar year. If we make a move and Mike is correct, we could take credit for having accomplished this and the price of gold will soon be down to the 328 level and we can lower the fed funds rate at that point in time and declare victory.

  (Source – Fed)

  There it is, in black and white from an FOMC member’s own mouth spelling out the primary reason why I hold gold: I lack faith in our fiat money system. He nailed it.  Or rather, I have very great faith that the people managing the money system will print too much and ultimately destroy it. Same thing, said differently.

  And of course the people at the Fed are acutely aware of gold's role as a barometer of people’s faith in ‘fiat money.’ Of course they track it very carefully, discuss it, and worry about it when it is sending ‘the wrong signals.’ I would, too, if in their shoes.

  The Federal Reserve Note (a.k.a. the US dollar) is literally nothing more than an idea.  It has no intrinsic value. America's money supply is just digital ones and zeros careening about the planet, accompanied by a much smaller amount of actual paper currency. The last thing an idea needs is to be exposed as fraudulent. Trust is everything for a currency — when that dies, the currency dies.

  The other thing you can note from these FOMC minutes is that gold pops up 19 times in the conversation. The Fed members are are actively and deliberately discussing its price, role in setting interest rates, and the psychological impact of a rising or falling gold price.

  Later in that same meeting Mr. Greenspan says:

  My inclination for today–and I'm frankly most curious to get other people's views–would be to go to a tilt toward tightness and to watch the psychology as best we can. By the latter I mean to watch what is happening to the bond market, the exchange markets, and the price of gold…

   

  I have one other issue I'd like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here. If we are dealing with psychology, then the thermometers one uses to measure it have an effect. I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market.

   

  There's an interesting question here because if the gold price broke in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology. Now, we don't have the legal right to sell gold but I'm just frankly curious about what people's views are on situations of this nature because something unusual is involved in policy here. We're not just going through the standard policy where the money supply is expanding, the economy is expanding, and the Fed tightens. This is a wholly different thing.

  The recap of all this is that the Fed watches the price of gold carefully, frets over whether the price of gold is ‘sending the right signals’ to market participants, and pays attention to gold's impact on market psychology (with an eye to controlling it).

  In short, the Fed keeps a close eye on the "golden thermometer".

  Back to the supply story for gold.  Not long after gold began its downward price movement in 2012, the GLD trust began coughing up a lot of gold, eventually shedding more than 500 tonnes; a truly massive amount.

  

  (Source)

  In my mind, the absolute slamming of gold in 2013 was done by a few select entities and represents one of the clearest cases of price manipulation on the recent record.  While we can debate the reasons ‘why’ gold was manipulated lower or ‘who’ did it, to me, there’s no question about how it was done. Or that it was done. 

  Massive amounts of paper gold were dumped into a thin overnight market with the specific intent of driving down the price of gold.

  It’s an open and shut case of price manipulation. Textbook perfect. 

  Even if these bear raids were performed by self-interested parties that made money while doing it, you can be sure the Fed was smiling thankfully in the background and that the SEC wasn’t going to spend one minute looking into whether any securities laws were broken (especially those related to price manipulation). Gold's falling "thermometer" was exactly what the central planners wanted the world to see.

  Down and Out

  The paper markets for gold are centered in the US, while the physical market for gold is centered in London (but increasingly Shanghai).  It’s safe to say that the paper markets set the spot price, while the physical movement of gold originates in London.

  What’s increasingly obvious is the growing disconnect between the paper and physical markets. This is exactly what we’d expect to see if the paper markets were pushing in one direction (down) while physical gold was heading in a different direction (out).

  The tension between these ‘down and out’ movements is building and, according to a senior manager of one of the largest gold refineries in the world located in Switzerland, the current price of gold “has no correlation to the physical market.”

  He notes a lot of on-going tightness in the physical market. Unsurprisingly, gold is moving from West to East with vaults in London supplying much of the physical metal that's being refined into fresh kilo bars and sent off to China and India.

  But given the astonishing amount of physical demand, why has the price of gold been heading steadily lower over the past several years? 

  The aforementioned Swiss refiner is equally perplexed:

  If I am honest, the only thing I could share now with you would be that I’m perplexed about the discrepancy between the prices and the situation of the physical market. This is something I still do not understand and is a riddle for me every day. For all people who are interested in precious metals, the physical side of this business should be given more emphasis.

  (Source – Transcript)

  There’s no mystery as to demand going up in China and India as the price went down. Interested buyers will buy more at a lower price.

  But its a big mystery as to why Western “investors” seem more interested in selling gold than buying it right now.

  Evidence of Physical Tightness

  Besides the first-hand experience of the Swiss refiner, there have been numerous stories in the main stream press also pointing to tightness in the London physical gold market as well as relentless demand from China and India being the driver of that condition:

  Gold demand from China and India picks up

  Sep 2, 2015

   

  London’s gold market is showing tentative signs of increased demand for bullion from consumers in emerging markets, after the price of the precious metal fell to its lowest level in five years in July.

   

  The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants.

   

  “[The rise] does indicate there is physical tightness in the market for gold for immediate delivery,” said Jon Butler, analyst at Mitsubishi.

   

  The move comes as Indian gold demand picked up in July, with shipments of gold from Switzerland to India more than trebling. Most of that gold is likely to originally come from London before it is melted down into kilobars by Swiss refineries, according to analysts.

   

  In the first half of this year, total recorded exports of gold from the UK were 50 per cent higher than the first half of 2014, on a monthly average basis, according to Rhona O’Connell, head of metals for GFMS at Thomson Reuters. More than 90 per cent was headed for a combination of China, Hong Kong and Switzerland.

   

  London remains the world’s biggest centre for trading and storing gold.

  (Source)

  Shipments and exports are up very strongly and nearly all of that gold is headed to just two countries; China and India. 

  India Precious Metals Import Explosive – August Gold 126t, Silver 1,400t

  Sept 10, 2015

   

  In the month of August 2015, India imported 126 tonnes of gold and 1,400 tonnes of silver, according to data from Infodrive India. Gold import into India is rising after a steep fall due to government import restrictions implemented in 2013.

   

  Year-to-date India has imported 654 tonnes of gold, which is 66 % up year on year. 6,782 tonnes in silver bars have crossed the Indian border so far this year, up 96 % y/y.

   

  Gold import is set to reach an annualized 980 tonnes, which would be up 26 % relative to 2014 and would be the second highest figure on (my) record – my record goes back to 2008.

   

  Silver import is on track to reach an annualized 10,172 tonnes, up 44 % y/y! This would be a staggering 37 % of world mining.

  (Source)

  With China and India’s combined appetite for gold being higher than total world mining output, it only stands to reason that somebody has to be parting with their physical gold and those entities appear to be substantially located in the US and UK.

  When There's No More To Sell, There's No More To Buy

  All the above evidence of a tightening physical market for gold is just the tip of the iceberg.

  In Part 2: Why Gold Is Headed Higher & May Be Unavailable At Any Price we look at the frightening inventory declines in bullion storage that the LBMA and the COMEX have experienced over the past year.

  We then lay out how this deliberate suppression of gold prices by the central planners is destined to end: with MUCH higher prices for gold, and much less availability. In fact, there is high likelihood we will experience a point at which it may be nearly impossible for the average investor to acquire physical gold, as there will be no sellers willing to part with it.

  Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

   

  

  

  

  

  

• Question Of The Day

  Presented with no comment…

   

  

   

  Source: Investors.com

  

  

  

  

• Meet The Man Who Prevented World War III

  Submitted by Erico Matias Tavares via Sinclair & Co.,

  You may have never heard of Vasili Arkhipov. And yet life as we know it on this planet could have ended if it were not for his crucial intervention during the Cuban Missile Crisis.

  Born in 1926, Arkhipov saw action as a minesweeper during the Soviet-Japanese war in August 1945. Two years later he graduated from the Caspian Higher Naval School, serving in the Black Sea and Baltic submarine fleets – just in time for the start of the Cold War, which would stay with him for the rest of his service.

  During the 1950s the Soviets became very concerned about the US’ lead in submarines. They eventually rushed the development and construction of the K-19, the first of two new Hotel-class ballistic missile submarines. However, things did not go smoothly. Eleven people died due to accidents and fires during the construction phase. To top everything off, the champagne bottle used in the inauguration ceremony failed to break.

  These were frightening omens for the crew. But they could scarcely imagine the events that would unfold soon after.

  Arkhipov was appointed deputy commander of the K-19 in its maiden voyage in July 1961, under the command of Captain Nikolai Zateyev. After a few days conducting exercises off the coast of Greenland, the submarine developed a major leak in its reactor coolant system, leading to the failure of the cooling pumps. Radio communications were affected and the crew was unable to contact Moscow.

  With no backup system, Zateyev ordered the seven members of the engineering crew to come up with a solution and avoid a nuclear meltdown. This required the men to work in high radiation for extended periods. Sacrificing their own lives, they bootstrapped a secondary coolant system and kept the reactor from a meltdown.

  The incident irradiated the entire crew, including Arkhipov. All members of the engineering crew and their divisional officer died of radiation exposure within a month. Fifteen more sailors died from the aftereffects of radiation exposure over the following two years. This incident was immortalized in the 2002 Hollywood movie “K-19: The Widowmaker”, starring Harrison Ford and Liam Neeson (both featuring terrible Russian accents).

  The Cold War started heating up soon after. In July of 1962, Soviet leader Nikita Khrushchev agreed to Cuba’s request to place nuclear missiles in Cuba as a deterrent to future US interference, pursuant to the Bay of Pigs invasion debacle a few years earlier. In mid-October, a US reconnaissance airplane produced evidence of medium and long range Soviet ballistic missiles on the site, sending alarm bells ringing in Washington DC.

  US President John F. Kennedy promptly established a military blockade to prevent further missiles from entering Cuba and demanded that the missiles be dismantled and returned to the Soviet Union. Over the following days the world came close to the brink of nuclear war as the two blocks vigorously asserted their positions.

  Nobody realized at the time just how close to disaster they really were. And that’s where Arkhipov would make his decisive contribution to world history.

  Arkhipov was second-in-command in the nuclear-armed Foxtrot-class submarine B-59, part of a flotilla of four submarines protecting Soviet ships on their way to Cuba. On October 27, as they approached the US imposed quarantine line, US Navy ships in pursuit started dropping depth charges to force the B-59 to surface for identification – completely unaware that it was carrying nuclear weapons.

  The explosions rocked the submarine which went dark except for emergency lights. With the air-conditioning down, temperature and carbon dioxide levels rose sharply. The crew was hardly able to breathe.

  Unable to contact Moscow and under pressure from the Americans for several hours, Captain Valentin Savitsky finally lost his nerve. He assumed that war had broken out between the two countries and decided to launch a nuclear torpedo. He would not go down without a fight.

  However, unlike the other submarines in the flotilla, the three officers onboard the B-59 had to agree unanimously to launch the nuclear torpedo. As the other officer sided with Savitsky, only Arkhipov stood in the way of launching World War III.

  An argument broke out between the three, but Arkhipov was able to convince the Captain not to launch the torpedo. How was he able to prevail under such stressful conditions? He was actually in charge of the entire flotilla and as such was equal in rank to Savitsky. But the reputation he had gained during the K-19 incident may have been the decisive factor in convincing the other officers to abort the launch. That detail may have made all the difference.

  The submarine eventually surfaced and awaited orders from Moscow, averting what would have been a nuclear holocaust. The Cuban Missile Crisis ended a few days later.

  This crucial episode of the Cold War only became known to the West after the collapse of the Soviet Union many years later.

  Arkhipov continued to serve in the Soviet Navy, commanding submarines and later submarine squadrons. He was promoted to rear admiral in 1975 and became head of the Kirov Naval Academy. In 1981, he was promoted to vice admiral, retiring a few years later. The radiation he was exposed to in the K-19 incident contributed to his death in 1998, at age 72. 

  It is frightening to ponder how closely the civilized world came to the brink of extinction. It was only a click away, with two out of three in favor.

  It may not have been the only time either. Who knows how many more Soviet and American personnel played a decisive role in averting nuclear annihilation? One person can indeed change the fate of the world.

  We should never let their stories be forgotten.

  

  

  

  

  

• As A Very "Grim" Earnings Season Unfolds, All Eyes Will Be On This Company

  Earlier this week we said that with the third quarter just days away from the history books, Wall Street is preparing for the worst earnings season since 2009, with Factset further noting that “if the index reports a decline in earnings for Q3, it will mark the first back-to-back quarters of earnings declines since 2009.”

  We presented the following table from ISI which showed that not only is the US now officially in a revenue recession, with every single quarter in 2015 set to post a decline from the previous year, with even the overly optimistic consensus case of a 4% increase in Q1 2016 revenues unable to regain sales last seen in Q3 2014, but S&P500 expected earnings in Q1 2016 of 119, a 6% increase from the previous year, will barely put the market back to levels seen in Q3 2014. 

  

  But before we get there we have to get through Q3: a quarter when not only revenues are set to tumble another 5%, but this time not even hundreds of billions in buybacks will prevent the  EPS from sliding, and according to Factset, Q3 EPS are set to tumble 4.5%.

  In other words, while the revenue recession continues, the S&P 500 is about to enter its first earnings recession in six years.

  Earlier today the mainstream media caught up noting that “Wall Street is bracing for a grim earnings season, with little improvement expected anytime soon” and added some facts of its own: expectations for future quarters are falling as well. A rolling 12-month forward earnings per share forecast now stands near negative 2 percent, the lowest since late 2009, when it was down 10.1 percent, according to Thomson Reuters I/B/E/S data.

  

  “The 3.9 percent estimated decline in third-quarter profits – down sharply from a July 1 forecast for a 0.4 percent dip – would be the first quarterly profit decline for the S&P 500 since the third quarter of 2009.”

  “Earnings recessions aren’t good things. I don’t care what the state of the economy is or anything else,” said Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston. Michael is clearly paid the “big bucks” for a reason.

  Another investor paid big bucks is Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta, Georgia, who cited earnings growth as one of the drivers of the market: “How can we drive the market higher when all of these signals aren’t showing a lot of prosperity?”

  How indeed.

  And while in the past attention has traditionally fallen on AAPL as the marginal source of growth, this time not even AAPL can save the market-leading tech sector. As we showed two weeks ago, even with AAPL, Q3 Info-Tech EPS are set to record their first annual drop since Q2 2013. Should AAPL stumble if as some suggest iPhone 6S sales are far weaker than expected, and watch the bottom fall out from under the market.

  

   

  But it isn’t AAPL that everyone will be looking at this quarter – the company that will make or break the Q3 earnings season is not even a tech company at all, but a financial: it’s Bank of America.

  The reason, as Factset points out, is that thanks to a base effect from a very weak Q3 in 2014, Bank of America is not only projected to be the largest contributor to year-over-year earnings growth for the Financials sector, but it is also projected to be the largest positive contributor to year-over-year earnings for the entire S&P 500!

  The positive contribution from Bank of America to the earnings for the Financials sector and the S&P 500 index as a whole can mainly be attributed to an easy comparison to a year-ago loss. The mean EPS estimate for Bank of America for Q3 2015 is $0.36, compared to year-ago EPS of -$0.01. In the year-ago quarter, the company reported a charge for a settlement with the Department of Justice, which reduced EPS by $0.43. Bank of America has only reported a loss in two (Q1 2014 and Q3 2014) of the previous ten quarters.

  

  This is how big BofA’s contribution to Q3 earnings season will be: if Bank of America is excluded from the index, the estimated earnings growth rate for the Financials sectors would fall to 0.7% from 8.2%, while the estimated earnings decline for the S&P 500 would increase to -5.9% from -4.5%.

  

  In other words, if BofA has some major and unexpected litigation provision or some “rogue” loss as a result of marking its deeply underwater bond portfolio to market as Jefferies did last week pushing its fixed income revenue (not profit) negative, the drop in the S&P will increase by a whopping 30%, and all due to just one company.

  Finally, if the market which has been priced to perfection for years finally cracks – and by most accounts it will be on the back of bank earnings which have not been revised lower to reflect a reality in which the long awaited recovery was just pushed back to the 8th half of 2012, and where trading revenues are again set to disappoint – then the recently bearish David Tepper will once again have the final laugh because not only will the new direction in corporate revenues and earnings by confirmed, but a very violent readjustment in the earnings multiple would be imminent. As a reminder, Tepper hinted that the new fair multiple of the S&P 500 would drop from 18x to 16x. Applying a Q3 EPS of 114 and, well, readers can do their own math…

  

  

  

  

  

• The UN Unveils Plan Pushing For Worldwide Internet Censorship

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  The United Nations has disgraced itself immeasurably over the past month or so.

  In case you missed the following stories, I suggest catching up now:

  The UN’s “Sustainable Development Agenda” is Basically a Giant Corporatist Fraud

  Not a Joke – Saudi Arabia Chosen to Head UN Human Rights Panel

  Fresh off the scene from those two epic embarrassments, the UN now wants to tell governments of the world how to censor the internet. I wish I was kidding.

  From the Washington Post:

  On Thursday, the organization’s Broadband Commission for Digital Development released a damning “world-wide wake-up call” on what it calls “cyber VAWG,” or violence against women and girls. The report concludes that online harassment is “a problem of pandemic proportion” — which, nbd, we’ve all heard before.

   

  But the United Nations then goes on to propose radical, proactive policy changes for both governments and social networks, effectively projecting a whole new vision for how the Internet could work.

   

  Under U.S. law — the law that, not coincidentally, governs most of the world’s largest online platforms — intermediaries such as Twitter and Facebook generally can’t be held responsible for what people do on them. But the United Nations proposes both that social networks proactively police every profile and post, and that government agencies only “license” those who agree to do so.

  People are being harassed online, and the solution is to censor everything and license speech? Remarkable.

  How that would actually work, we don’t know; the report is light on concrete, actionable policy. But it repeatedly suggests both that social networks need to opt-in to stronger anti-harassment regimes and that governments need to enforce them proactively.

   

  At one point toward the end of the paper, the U.N. panel concludes that “political and governmental bodies need to use their licensing prerogative” to better protect human and women’s rights, only granting licenses to “those Telecoms and search engines” that “supervise content and its dissemination.”

  So we’re supposed to be lectured about human rights from an organization that named Saudi Arabia head of its human rights panel? Got it.

  Regardless of whether you think those are worthwhile ends, the implications are huge: It’s an attempt to transform the Web from a libertarian free-for-all to some kind of enforced social commons.

   

  This U.N. report gets us no closer, alas: all but its most modest proposals are unfeasible. We can educate people about gender violence or teach “digital citizenship” in schools, but persuading social networks to police everything their users post is next to impossible. And even if it weren’t, there are serious implications for innovation and speech: According to the Electronic Frontier Foundation, CDA 230 — the law that exempts online intermediaries from this kind of policing — is basically what allowed modern social networks (and blogs, and comments, and forums, etc.) to come into being.

  If we’re lucky, perhaps the Saudi religious police chief (yes, they have one) who went on a rampage against Twitter a couple of years ago, will be available to head up the project.

  What a joke.

   

  

  

  

  

  

• China Cannot Let This Happen

  Submitted by John Rubino via DollarCollapse.com,

  After borrowing — and largely wasting — $15 trillion during the Great Recession, China now looks like a typical decadent developed-world country, complete with slow growth, anemic consumer spending and unstable financial markets.

  But it’s not France, Canada or the US, where recessions happen and voters peacefully replace one major party with the other. China, within living memory, has seen civil unrest beget open rebellion beget multi-decade civil war.

  Just as Germany is never going back to hyperinflation, China will not tolerate mass protests. Which means it somehow has to find jobs for the tens of millions of citizens who aspire to middle class life. This need for growth at any price explains the borrowing/infrastructure binge of the past five years. And soon it will explain a massive devaluation/QE program. From Monday’s Wall Street Journal:

  China’s Workers Stumble as Factories Stall

   

  XIGUOZHUANG, China—For decades, an army of migrant workers drove China’s boom times, flocking to its cities to sew T-shirts, assemble iPhones, or build apartment blocks and Olympic stadiums.

   

  The arrangement helped millions of poor, rural Chinese join a new consumer class, though many also paid a heavy price.

   

  Now, many migrant workers struggle to find their footing in a downshifting economy. As factories run out of money and construction projects turn idle across China, there has been a rise in the last thing Beijing wants to see: unrest.

   

  In Xiguozhuang, a village among cornfields some 155 miles south of Beijing, it had been rare to see working-age men for much of the year. This year, however, many of the men are at home, sidelined by a fading property boom.

   

  “Times are tough now,” said Wang Hongxing, a 39-year-old father of three who has worked at building sites across China’s northeast since his teens, but who has spent the past two months tending his farmland plot. “There are too many workers and wages are dropping.”

   

  But for other migrants, especially those of a younger generation who took jobs in factories along China’s coast, a return to farming isn’t an option. Nor do they necessarily want to join the service sector China sees as a cornerstone in its shift to a new economic model.

   

  Wang Chao dropped out of school when he was 15 and left his home in Anhui province. After a series of jobs up and down China’s east coast, he felt he had struck gold with a job in a textile factory near his hometown.

   

  The factory closed in July. Mr. Wang, now 19, and other workers gathered recently outside the factory premises to demand back wages. He says he is owed two months’ pay, or about 2,000 yuan, or $320. The owner of the factory, which produces cheap trousers, told workers he is in deep debt and can’t afford to pay them. He couldn’t be reached to comment.

   

  Mr. Wang hopes he can find another factory job. In Shanghai, he worked in a restaurant but doesn’t want to do that again. “Factory work is so much more comfortable in comparison, and better paid,” he said.

   

  As a result of a rural-to-urban flow that many scholars say is likely the largest in history, roughly 55% of China’s 1.37 billion people now live in cities, compared with just under 18% in 1978.

   

  The migrant workforce now numbers some 274 million but the pace of its expansion has slowed, and many economists believe China now faces a shortage of unskilled labor in urban areas. A mismatch of workers’ skills and aspirations with actual labor demand has exacerbated the problem.

   

  …In August, after the factory a which made Power Wheels cars and other toys for Mattel Inc., shut its doors, hundreds of workers protested to demand unpaid wages.

   

  Such unrest has become more common. China Labour Bulletin, a Hong Kong-based watchdog, has tracked more than 1,600 labor protests and strikes in China since January, already exceeding last year’s overall tally of 1,379.

   

  The malaise has even affected workers at major state-owned enterprises. In May, thousands of workers staged protests over proposed layoffs at China National Erzhong Group Co., a debt-riddled machinery maker in Sichuan. Workers shared images on social media of banners criticizing company officials. One read: “360 yuan! How can we live on that!”

   

  In response to such disputes, local authorities have at times adopted harsh tactics, including sending police officers to break up strikes and detain protesters. But in some cases authorities have also sought to appease workers.

   

  The recent unrest is still far from the massive protests that swept over China in the late 1990s and early 2000s as state-owned enterprises laid off tens of millions of workers and local governments expropriated farmland around emerging cities for development.

   

  But the rise in frequency of strikes and protests has caused concern in Beijing, which in March urged bureaucrats across the country to prioritize “harmonious labor relations.”

  Take a surplus of young men (the result of China’s one-child policy which put a premium on male children), combine it with a shortage of good jobs, and the obvious result is instability.

  The equally-obvious solution? Easier money designed to get people borrowing and spending. So now it’s just a question of which central bank is first to address its country’s crisis (slow growth and a massive influx of refugees for the eurozone, slow growth and a demographic implosion for Japan, slow growth and global chaos for the US, and now slow growth leading to civil unrest for China) with a massive devaluation. China, given its history, might be the odds-on favorite.

  

  

  

  

  

• "Risky Business": Companies Are Now Funding Share Buybacks By Selling Bonds To Other Companies

  One of this year’s key narratives has been the degree to which US stocks have benefited from a perpetual, price insensitive bid. By that we of course mean corporate buybacks, which one might fairly characterize as having replaced the monthly flow lost to the Fed taper. 

  

  The buyback bonanza shown above is of course sponsored by ZIRP. Put simply, when borrowing costs are close to zero and when the market has become completely myopic as it relates to assessing performance, it makes sense to issue debt and plow the proceeds into EPS-inflating share repurchases. Throw in the fact that the FED-induced hunt for yield has forced risk averse investors out of govies and into corporate credit and you have a kind of goldilocks scenario for corporate issuance and buybacks. 

  This all comes at cost. That is, you can’t simply keep leveraging the balance sheet to artificially inflate earnings. Eventually, some of the proceeds from debt sales need to go towards capex or wage growth or something that’s conducive to boosting productivity, long-term growth, and competitiveness. However, that simply won’t happen in a world governed by what Hillary Clinton correctly (yes, she has managed to get at least something right believe it or not) calls the “tyranny of the next earnings report.” 

  Once you understand all of the above, you can begin to see why a lack of market depth in the secondary market for corporate credit is so dangerous.

  

  You have an environment that encourages record issuance and the proliferation of bond funds along with the now ubiquitous hunt for yield means any and all supply is promptly snapped up. But if those bonds ever have to be sold in a pinch, there’s no one home at dealer desks thanks to Volcker.  

  All of this would be bad enough as it is, but as WSJ reports, it’s exacerbated by the fact that companies are now funding their own share buybacks by selling bonds to .. wait for it.. other companies. Here’s more:

  Companies reaching for better returns on their cash have found a new favorite investment—other companies’ bonds—and they are loading up.

   

  Cash-rich companies like Apple Inc., Oracle Corp. and Johnson & Johnson are snapping up corporate bonds sold by highly rated companies such as Verizon CommunicationsInc. and Gilead Sciences Inc.

   

  More than half of corporate cash held by U.S. companies this August was invested in investment-grade corporate bonds, a record, according to investment-software company Clearwater Analytics. Meanwhile, treasurers have reduced their companies’ holdings of more traditional investments such as U.S. Treasurys, commercial paper and bank certificates of deposit.

   

  
  

   

  Companies are betting highly rated corporate bonds are safe repositories for cash that will pay higher rates than more traditional bank deposits or money-market funds. But they are also increasing the risk to an asset where principal protection is the priority.

   

  If interest rates rise quickly, the value of their lower-yielding existing bonds could plummet. A major market disruption could also make it difficult for companies to sell their holdings if they need the cash. Either could lead to write-downs or actual losses if they sell at lower prices than they paid.

   

  For now, treasurers are figuring the bet isn’t that risky. Companies’ balance sheets are in good shape, and buyers are focusing on bonds that mature within five years, which carry lower risks than bonds that take longer to mature.

   

  “To get more return, you have to take more credit risk,” said a treasurer at a large technology company that has actively been buying corporate bonds.

  Well yes, and to be sure, when companies are flush with cash it’s important to figure out how best to invest it, but then again, you now have corporate Treasurers talking like sellside credit strategists and needless to say, when you’re buying all kinds of corporate bonds at the tail end of a credit supercycle, you’re liable to get burned badly (on paper anyway) if and when rates start to rise.

  Of course companies should also consider what would happen in the event of an economic meltdown. After all, the very same conditions that would lead to a downturn and force corporate management teams to raise cash will also serve to make the secondary market for corporate credit even more illiquid than it already is. In other words, if you think there’s a dearth of buyers now, just wait until someone hits the panic button and when the firesale starts (likely after someone at a Vanguard or a BlackRock tries to transact in size to meet a wave of redemptions), corporate treasurers will find themselves in a decisively unenviable position.

  We close with the following from Harvard’s Victoria Ivashina:

  “This is a risky business. Can they get it wrong? Absolutely they can get it wrong.”

  

  

  

  

  

• Kentucky Politician Files Lawsuit Claiming A First Amendment Right To Accept Bribes

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  It’s a rare and precious moment when a politician does something which perfectly demonstrates what he or she really thinks about democracy and power. This is one of those times.

  From the Intercept:

  The Supreme Court, in its Citizens United decision, ruled that corporations have a First Amendment right to spend unlimited amounts in elections. Now politicians in Kentucky are claiming they have a Constitutional right to receive gifts from lobbyists.

   

  In a lawsuit filed in U.S. District Court, Republican Kentucky state Sen. John Schickel, along with two Libertarian political candidates, are suing to overturn state ethics laws, claiming that the campaign contribution limit of $1,000 and a ban on gifts from lobbyists and their employers are a violation of their First and Fourteenth Amendment rights.

   

  The lawsuit notes that lobbyists and the employers of lobbyists are prohibited by Kentucky law from inviting legislators to parties, offering gifts, or paying for food for legislators. “This infringes on the legislator’s, lobbyist’s, and employer of lobbyist’s right to freedom of association, and freedom of speech,” Schickel claims in the suit.

   

  Kentucky’s ethics laws were passed in 1992 after an FBI investigation exposed a number of local politicians selling their votes.

   

  Corporations have increasingly turned to new interpretations of the First Amendment as a legal strategy.

   

  Bond-rating agencies that gave high grades to toxic mortgage-backed securities claimed in court that doing so was their First Amendment right. Lobbyists have argued that food-labeling laws undermine the meat industry’s right to free speech. And similarly, AT&T recentlyargued that net neutrality violates the ISP industry’s First Amendment rights.

  Two words: Banana Republic.

  

  

  

  

  

• Hillarinochio 2.0 – More Clinton Lies Exposed As Hidden Petraeus Emails Come To Light

  Another day, another "what difference does it make" lie exposed for the mainstream media to ignore and excuse as simple witch-huntery. However, this 'lie' is unarguable and proves once again that Hillarinochio seems to believe she is above the law.  The Obama administration has discovered a chain of emails (exchanged with retired Gen. David Petraeus when he headed the military’s U.S. Central Command, responsible for running the wars in Iraq and Afghanistan) that Clinton failed to turn over when she provided what she said was the full record of work-related correspondence as secretary of state, officials told The Associated Press on Friday. Is it any wonder her support has been plunging recently?

   

  

   

  Clinton has repeatedly denied wrongdoing.

  "When I did it, it was allowed, it was above board. And now I’m being as transparent as possible, more than anybody else ever has been," she said earlier this week, and attempted an apology.

  But as CBS reports, once again her lies have been exposed…

  The Obama administration has discovered a chain of emails that Hillary Rodham Clinton failed to turn over when she provided what she said was the full record of work-related correspondence as secretary of state, officials told The Associated Press on Friday, adding to the growing questions related to the Democratic presidential front-runner’s unusual usage of a private email account and server while in government.

   

  The messages were exchanged with retired Gen. David Petraeus when he headed the military’s U.S. Central Command, responsible for running the wars in Iraq and Afghanistan. They began before Clinton entered office and continued into her first days at the State Department. They largely pertained to personnel matters and don’t appear to deal with highly classified material, officials said, but their existence challenges Clinton’s claim that she has handed over the entirety of her work emails from the account.

  Speaking of her emails on CBS’ “Face the Nation” this week, Clinton said, “We provided all of them.” But the FBI and several congressional committees are investigating.

  The State Department’s record of Clinton emails begins on March 18, 2009 — almost two months after she entered office. Before then, Clinton has said she used an old AT&T Blackberry email account, the contents of which she no longer can access.

   

  The Petraeus emails, first discovered by the Defense Department and then passed to the State Department’s inspector general, challenge that claim. They start on Jan. 10, 2009, with Clinton using the older email account. But by Jan. 28 — a week after her swearing in — she switched to using the private email address on a server based out of her home in Chappaqua, New York, that she would rely on for the rest of her tenure. There are less than 10 emails back and forth in total, officials said, and the chain ends on Feb. 1.

   

  The officials weren’t authorized to speak on the matter and demanded anonymity. But State Department spokesman John Kirby confirmed that the agency received the emails in the “last several days” and that they “were not previously in the possession of the department.”

  *  *  *
  Separately Friday, State Department officials said they were providing the Benghazi-focused probe more email exchanges from senior officials pertaining to Libya. The committee broadened its scope after examining tens of thousands of documents more specifically focused on the Benghazi attack.

  *  *  *

  As we noted previously, Republicans are demanding an explanation (why aren't Democrats also?) why she can't keep her lies straight. As for the process being a witch hunt, indeed in some ways it just may be…

  

   

  And now we look forward to the upcoming Congressional kangaroo court in which the American population will be asked "what difference does it make" how many email devices Hillary used.

  

  

  

  

  

• Goldman Strikes Again: Did A Probe Into "Global Warming" Fraud Cost A Prime Minister's Job

  When Tony Abbott became Australia’s prime minister in September 2013, the chain of events that would prematurely end his tenure may already have been in motion: just a few months later China would order its out of control shadow banking system to put on hold its debt issuance machinery, which as we reported a year ago, ground to a complete stop around November 2014 (which also was the explanation for the dramatic slowdown in the US economy over the winter as the collapse in China’s Total Social Financing growth sent a deflationary ripple effect around the globe), which – as we warned at the time – would have dire consequences on all of China’s “feeder” economies, namely Brazil and Australia.

  But while we have been tracking the implosion of Brazil’s economy since December, long before the rest of the world noticed the calamitous collapse of what was once Latin America’s most vibrant economy, it was a very recent event in Australia – not the country’s parallel economic slowdown also due to China’s hard landing: that was painfully clear long in advance – that took many by surprise. Namely, the resignation of Tony Abbott almost exactly two years after becoming Prime Minister.

  And while it is easy to blame his admission of failure on external factors, namely the Chinese slowdown, a very surprising finding has emerged over the past few days, one which reveals Abbott’s “ouster” in a totally different light.

  According to Freedom of Information documents obtained by Australia’s ABC, now-former prime minister Tony Abbott’s own department discussed setting up an investigation into the Bureau of Meteorology amid media claims it was exaggerating estimates of global warming.

  Yes, it appears that the prime minister himself had dared to question to prevailing status quo on “global warming.”

  ABC reports that in August and September 2014, The Australian newspaper published reports questioning the Bureau of Meteorology’s (BoM) methodology for analyzing temperatures, reporting claims BoM was “wilfully ignoring evidence that contradicts its own propaganda.”

  Naturally, the BoM strongly rejected assertions it was altering climate records to exaggerate estimates of global warming. Nevertheless, as the following document obtained by the ABC shows, just weeks after the articles were published, Mr Abbott’s own department canvassed using a taskforce to carry out “due diligence” on the BoM’s climate records.

  As it turns out, late in 2014 the Australia government set up a taskforce to provide advice on post 2020 emissions reduction targets ahead of the United Nations Paris climate change conference in December 2015. The Department of Prime Minister and Cabinet originally wanted the taskforce to also conduct “due diligence to ensure Australia’s climate and emissions data are the best possible, including the Bureau of Meteorology’s Australian temperature dataset”.

  An accompanying brief seen by Mr Abbott noted that “in recent articles in The Australian, the BoM was accused of altering its temperature data records to exaggerate estimates of global warming”. To wit from the ABC:

  “The way the Bureau manages its climate records is recognised internationally as among the best in the world,” the brief said.

  “Nevertheless, the public need confidence information on Australia and the world’s climate is reliable and based on the best available science.”

  Inexplicably, instead of letting it go as most “status quo” governments always do, the cabinet kept pushing with demands for audits: audits which, if taken too far, may reveals some truly very “inconvenient truths” if not so much about global warming, as about the propaganda behind it and the firms that stood to profit from such propaganda.

  The pressure intensified when Mr Abbott’s business advisory council chair Maurice Newman wrote an opinion piece in the paper, demanding a Government-funded audit and review of the Bureau.

   

  The concerns centred on the Bureau’s temperature homogenisation process — the method in which it adjusts temperatures for weather sites based on factors like trees casting shade or influencing wind or if the station is moved.

  It was then that the pushback started in earnest: enter Greg Hunt, Australia’s Environment Minister who would do everything in his power to halt Abbott’s crusade to “audit” the BoM.  In a letter to Abbott in November 2014, Hunt called for the removal of the due diligence clause, pointing out that he and his parliamentary secretary, Simon Birmingham, had already “established a strengthened governance oversight of the bureau’s ongoing work in this area.” In other words, “trust us” – we are the government… we work for you.

  Both the Department of Environment and Environment Minister Greg Hunt argued against having the taskforce investigate the Bureau. One Department of Prime Minister and Cabinet bureaucrat described a Department of Environment official as being “on a campaign” to get the references to BoM removed from the taskforce’s responsibilities.

   

  Further documents appear to show Mr Hunt convinced senior cabinet members to remove any references of “due diligence” or “quality assurance”.

   

  In a letter to Mr Abbott written on November 18 last year, Mr Hunt highlighted the fact the “draft terms of reference refers to the taskforce doing due diligence on the Bureau of Meteorology’s Australian temperature data set”.

   

  “In doing this, it is important to note that public trust in the Bureau’s data and forecasts, particularly as they relate to bushfires and cyclones, is paramount,” it said. “Given the recent publicity about the Bureau’s temperature data sets, Senator Birmingham and I established a strengthened governance oversight of the Bureau’s ongoing work in this area.”

  Said otherwise, don’t you dare question global warming or else the public may lost faith in the Bureau of Meteorology’s forecasts about “bushfires and cyclones.” One couldn’t possibly make this up if one tried.

  As for the assurance Greg Hunt gave to Abbott to drop his audit, it basically was a promise to “self-regulate” better through a, drumroll, technical advisory forum:

  The strengthened governance of the Bureau that Mr Hunt referred to is the setting up a Technical Advisory Forum to review and provide advice on the Bureau’s temperature data — a recommendation from an earlier review of the Bureau’s processes.

   

  “It is important to emphasise that this is primarily a matter of meteorology, statistics and data assurance,” Mr Hunt wrote in his letter to Mr Abbott.

  This, of course, is a page right out of the Keynesian/monetarist playbook: one can’t sow seeds of doubt in the mind of the public that the most sacrosanct assumptions about the world are wrong by open government probes be it by auditing the Fed, or Hillary’s email server… or Australia’s meteorological data, so instead let’s just take their word that all the data will be scrubbed and double checked.

  A 2011 review found the Bureau’s data and analysis methods met world’s best practice but recommended a group be set up to review progress on the development and operation of the temperature data. 

   

  The 2015 panel included eminent statisticians and members have told the ABC they were in no doubt that it was set up in response to the newspaper articles. A draft letter from Mr Abbott addressed to Mr Hunt showed that Mr Abbott wanted personal updates on the panel’s review.

   

  “The credibility of Government agencies is important and must be ensured,” the letter read.

  And while the review naturally cleared the BoM of any data “goal-seeking” when it was released in June, perhaps the threat of future such audits was simply too much – three months later Abbott was gone.

  This is not Abbott’s first concern about either met data, or global warming. As the Guardian notes, Abbott previously questioned the reliability of climate science, but when he was prime minister he repeatedly said he accepted the climate was changing and humans made “a contribution”. In other public statements, Abbott said coal was “good for humanity” and wind turbines were “visually awful”.

  Perhaps the recent probe into the “statistics and data” behind the Australian Bureau of Meteorology were the straw that broke the camel’s back: clearly Abbott was not going to be appeased and would continue his probes and audits into the “conventional wisdom” behind global warming, a persistence which threatened one firm more than any other.

  Goldman Sachs.

  While we hardly have to remind readers that it is Goldman that conceived of the carbon-credit market, and was behind cap and trade, here is an (in)convenient summary of who the true puppetmaster is behind the worldwide infatuation with stopping “global warming”, and who stands to benefit the most as the world is manipulated into doing everything to kill global warming dead in its tracks, courtesy of Matt Taibbi:

  …Fast-forward to today. it’s early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs – its employees paid some $981,000 to his campaign – sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.Gone are HankPaulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm’s co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits – a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade.

   

  The new carbon-credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.

   

  Here’s how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy “allocations” or credits from other companies that have managed to produce fewer emissions: President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.

   

  The feature of this plan that has special appeal to speculators is that the “cap” on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand-new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison’s sake, the annual combined revenues of all’ electricity suppliers in the U.S. total $320 billion.

   

  Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they’re the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief ofstaff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank’s environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson’s report argued that “voluntary action alone cannot solve the climate-change problem.” A few years later, the bank’s carbon chief, Ken Newcombe, insisted that cap-and-trade alone won’t be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, “We’re not making those investments to lose money.”

   

  The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Hanis. Their business? Investing in carbon offsets, There’s also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech … the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy-futures market?

   

  “Oh, it’ll dwarf it,” says a former staffer on the House energy committee.

   

  Well, you might say, who cares? If cap-and-trade succeeds, won’t we all be saved from the catastrophe of global warming? Maybe – but cap-and-trade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap-and-trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax-collection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it’s even collected.

   

  Cap-and-trade is going to happen. Or, if it doesn’t, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees – while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.

  In short: trillions are at stake for Goldman as long as the “fight” against global warming continues. And as noted above, cap-and-trade is going to happen or “something like it will” – Goldman’s future revenues depend on it.

  In fact, the only thing that can crush this finely orchestrated plan to generate billions in private profits from the mass euphoria to “save the planet” funded, naturally, entirely by the taxpayer, is a critical piece of evidence that the data and statistics behind “global warming” has been fabricated,  something which very well may have occurred had Abbott’s plan for an audit gone too far.

  And so Abbott suddenly became a major liability, if not so much for Australia, then certainly for Goldman Sachs.

  In retrospect, while Abbott completely unexpected exit on September 14 was a shock, his Prime Ministerial replacement should come as no surprise at all: Malcolm Turnbull, as we noted, just happened to be Chairman of Goldman Sachs Australia from 1997-2001. The same Turnbull who was deposed as opposition leader in 2009 over his support for a carbon tax and an emissions trading scheme, a “scheme” that, when fully implemented, would lead to huge monetary windfalls for none other than Turnbull’s former employer: Goldman Sachs.

  So was Goldman the responsible party behind Abbott’s ouster? One can only speculate, however one thing is certain: any concerns and fears of “probes” or “audits” into Australia’s global warming “data and statistics” are now history.

  * * *

  ABC’s full FOIA revealing Abbott’s probe of BoM “data” below:

  

  

  

  

  

• Three Strategies To Make Your Life Easier As Times Get Harder

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  No risk, no gain. But risk can deliver staggering, crushing losses if it isn't limited or hedged.

  Times are going to get harder going forward, for all the reasons that are already visible in today's headlines. So what can we do to make our own lives easier as times get tougher? Here are three suggested strategies:

  1. Don't get enmeshed with dysfunctional people, families or businesses. When we're young, we're adept at making excuses for people in dysfunctional families and enterprises. We expect them to work their way out of their dysfunctions. We think we can help in this process.

  Alas, we can't. People usually can't rid themselves of dysfunction without an extraordinary effort. Getting enmeshed with a dysfunctional person/family/business can only drag you down. The only way to avoid the mess is to avoid the dysfunctional person/family/business in the first place. Wish them well and get out.

  2. Be fanatical about reducing fixed costs. This sounds so obvious, but it's really the key to surviving hard times and building productive wealth, i.e. the kind that yields income, rain or shine.

  Remarkably, people may acknowledge this in an abstract fashion but few actually live by it. The vast majority let their fixed costs rise with their income. Businesses move to pricier digs once they start feeling flush, and people move up to costlier vehicles, homes, clothing, vacations, etc.

  The ideal business has been stripped of fixed costs. For example: rent on home office: zero. Labor overhead: zero, if you hire only other free-lancers-contractors.

  Management guru Peter Drucker made the point about reducing fixed costs another way. He famously noted that "businesses don't have profits, all they have is costs." (a paraphrase)

  In other words, there's no guarantee of additional revenues/sales or profits; all we know for sure is our fixed costs, i.e. what we have to pay monthly even if our revenues are zero.

  Some fixed costs rise despite our fanatic focus. Healthcare costs rise until we qualify for Medicare. That's a given. Our only way to reduce healthcare costs is be fanatical about being healthy.

  Servicing debt is a fixed cost. You have to service the debt whether you're making money or not. So eliminating debt is one critical way to reduce fixed costs.

  Frugality is exceedingly useful, but frugality is not quite the same as being fanatical about reducing fixed costs. Understanding the difference is an important part of this strategy.

  3. Learn how to calculate and manage risk. Risk is the ultimate yin/yang. If you don't take any risks, you're limited to a salary: the employer takes the risk and rewards, you get the salary and no upside.

  But if you take a risk, you can lose the gamble: the investment, the job, the house, the enterprise.

  You want to score a ten-bagger (ten-fold increase) in the stock market? Well, belly up to the roulette wheel, because most of the bets that pay off that big are extraordinarily risky.

  There is no way to eliminate risk. Life is risk. Doing great things requires taking risks. The "safe way" offloads risk and reward to others. You want the big reward, you have to take the big risk.

  When the tide is raising all boats, it's remarkably easy to rank yourself as a genius who manages risk effortlessly. Rising tides are not a good test. Its the ebb tide, when every investment is crashing in value, that tests risk management.

  It boils dowm to this: understand the risks you're taking (especially when your mutual fund manager assures you everything in your fund is low-risk) and set limits on the risks you're taking on.

  No risk, no gain. But risk can deliver staggering, crushing losses if it isn't limited or hedged (and hedges have limits, too). Anything else is illusion. This will become evident to all within the next decade as all the "sure things" melt into thin air.

  

  

  

  

  

• Japan's Abe Unveils New 'Arrows' Wish List: 20% GDP Growth, Higher Birth Rate, & Flying Pig

  Having completed his militarist plans, Japanese Prime Minister Shinzo Abe appears to have gone full fantasy-tard with his latest "plans" for the demographically-dead and debt-destroyed nation. "Creating a strong economy will continue to be my top priority," Abe said, a goal he has stunningly under-achieved as Japan heads for its 5th recession in 4 years, but, as Bloomberg reports, it is his new "arrows" of economic hope that has left analysts scratching their heads – 20% economic growth (when its gone nowhere for years), a higher birth rate (as the aging of the nation accelerates and interest in sex plunges), and allegedly a goose that lays golden eggs (well why not?). The collapse of Abe's approval says it all about his 'plan'.

  As Japan heads for a Quintuple Dip recession…

  

   

  Abe proposes three new policy pillars without tying them to his previous plan. As Bloomberg reports, it has left analysts scratching their heads…

  Speaking Thursday after his reappointment as leader of Japan’s ruling party, Abe unveiled three new "arrows" of his so-called Abenomics plan — a strong economy, child-care support and social security. When he took office in 2012, he had championed another trio — monetary stimulus, flexible fiscal policy and structural reforms.

   

  But with the new policies sounding more like objectives rather than measures to achieve them, the risk is this fresh framework muddies his communication battle to encourage Japanese households and companies to spend rather than save.

   

  "Investors like details, but all he’s done is announce targets," said Mari Iwashita, chief market economist at SMBC Friend Securities Co. in Tokyo. "The growth strategy, one of the original three arrows, has branched off into three new arrows."

   

  Speaking to reporters Thursday, Abe avoided mentioning monetary or fiscal policy, as well as tricky regulatory reforms that many economists say are already too slow. Instead, he focused on his new three objectives:

  • A strong economy, with a new gross domestic product target of 600 trillion yen ($5 trillion), up from the current 500 trillion yen. He gave no time-frame for achieving this goal.
  • Increased support for families with children to help increase the fertility rate to 1.8 births per woman, up from 1.43 in 2013.
  • Social security, including help for those who combine work and care for elderly relatives.

  As The Wall Street Journal notes, however, while Japanese stocks have boomed, business spending and private consumption have remained anemic over the past year, indicating that neither businesses nor consumers have regained confidence in the long-term outlook for Japan’s economy.

  Economists also point out that the goal could be seen as a repackaging of long-standing annual targets of 2% real growth and 2% inflation over the next five years.

  *  *  *

  But, with the population aging rapidly…

  

  And interest in sex and reproduction dwindling…

  

  Abe said Thursday he would combat the demographic woes facing Japan, whose 127-million population is aging and shrinking, threatening its status as the world’s third-largest economy.

  He certainly needs to do something…

   

  

   

  "We will put the brakes on the trend toward an aging population and the falling number of children and keep the population at 100 million 50 years from now," Abe said at party headquarters in Tokyo, without spelling out how this would be achieved.

  Many economists and investors believe structural changes, or the “third arrow” of Abenomics, are key to unlocking robust growth in Japan. But they have mostly been disappointed that Mr. Abe hasn’t gone far enough in implementing those changes, and say he isn’t likely to pick too many fights before next year’s election.

  *  *  *

  But it appears the public has finally begun to see through all the promises…

  

  "His intention to tackle the demographic issue is good," said Masamichi Adachi, senior economist at JP Morgan Securities Japan. "I’m totally in agreement with that."

  Even so, the former Bank of Japan official said that the growth target isn’t meaningful as Abe didn’t explain how, or even when, he hoped to achieve it.

  *  *  *

  More hopes and dreams sold to an aging gullible public and supported by a Central Bank that is nearing its limit of asset-purchasing.

  Charts: Bloomberg

  

  

  

  

  

• China's "Credit Mystery" Deepens, As Moody's Warns On Shadow Financing

  Last month, we took a detailed look at what we said could be a multi-trillion yuan black swan. 

  
  

  In short, one of China’s many spinning plates is the country’s vast shadow banking complex which allowed local governments to skirt borrowing restrictions leading directly to the accumulation of debt that totals some 35% of GDP and which has channeled trillions into speculative investments via the proliferation of maturity mismatched wealth management products. 

  One of the problems with the system is that it allows Chinese banks to obscure credit risk.

  As Fitch noted earlier this year, some 40% of credit exposure is effectively carried off balance sheet in China’s banking sector, making it virtually impossible to assess the extent to which banks are exposed. When considered in combination with the unofficial policy whereby the PBoC forces lenders to roll bad debt thus artificially suppressing NPLs, a picture emerges of a system that’s decidedly opaque. Here’s what we said back in May:

  The percentage of  loans which are not yet classified as non-performing but which are nonetheless doubtful is much higher than the headline NPL figure and in fact, [Fitch] seems to suggest that some Chinese banks (notably the largest lenders) may be under-reporting their special mention loans. But ultimately it’s irrelevant because between bad assets that are ultimately transferred to AMCs, loans that are channeled through non-bank financial institutions and carried as “investments classified as receivables”, and off-balance sheet financing, nearly 40% of credit risk is carried outside of traditional loans, rendering official NPL data essentially meaningless in terms of assessing the severity of the problem.

  Well don’t look now, but according to Moody’s, the practice of obscuring credit risk using one or more of the methods delineated above and outlined in these pages on any number of occasions looks to be getting worse. Here’s Bloomberg:

  China’s riskier banks are investing more customer funds in financing that is kept off their loan books, making it harder for rating companies to gauge their asset quality.

   

  There has been a surge in a balance-sheet item known as receivables, which often includes shadow funding such as trusts and wealth products, said Moody’s Investors Service. Fitch Ratings said it is hard to analyze this escalation in activity. Listed banks excluding the Big Four saw short-term investments and other assets — which include receivables — jump 25 percent in the first half, compared with total asset growth of 12 percent, data compiled by Bloomberg show.

   

  Slower growth in the world’s second-largest economy coupled with “still significant” credit expansion prompted Standard & Poor’s to cut its view of the banking industry’s economic risk to negative from stable this week. Shadow-finance assets, estimated at 41 trillion yuan ($6.4 trillion) by Moody’s at the end of 2014, have become more attractive as five interest-rate cuts by the central bank since November curbed profits from lending.

   

  “Our concern with some of these investment positions is banks are using them as a way to bypass lending restrictions,” said Grace Wu, a senior director at Fitch in Hong Kong. “Unlike bank loans, they don’t get reported into loan provisions, so it’s more difficult for us to ascertain the asset quality.”

   

  

   

  The nation’s shadow-banking industry emerged as a way for creditors to circumvent lending restrictions and for savers to attain yields higher than the legally capped deposit rate. It includes trusts, asset-management plans and wealth-management products, which package loans into products for buyers.

   

  Shanghai Pudong Development Bank Co.’s receivables made up about a quarter of assets as of June 30, according to its semi-annual financial statement. Out of 1.1 trillion yuan of receivables, 82 percent were trusts and asset-management plans that purchase trust loans, while 11 percent were other lenders’ wealth management products.

   

  The receivables climbed in the first half because the bank invested more in other lenders’ guaranteed WMPs as well as in asset-management products derived from bills issued by large banks, Shanghai Pudong said in an e-mail. It added that its credit and liquidity risks are both manageable.

  Make no mistake, assessing the risk posed by China’s shadow banking system is famously difficult and has confounded more than a few analysts and commentators, but the simple, one-line takeaway here is that NPLs at Chinese banks are likely to be orders of magnitude greater than the headline figures and indeed, we suggested as much more than two years ago:

  China is preparing to admit that the level of problem Local Government Financing Vehicle debt is double what was first reported just two years ago, something many suspected but few dared to voice in the open. But not only that: since the likely level of Non-Performing Loans (i.e., bad debt) within the LGFV universe has long been suspected to be in 30% range, a doubling of the official figure will also mean a doubling of the bad debt notional up to a stunning and nosebleeding-inducing $1 trillion, or roughly 15% of China’s goal-seeked GDP! We wish the local banks the best of luck as they scramble to find the hundreds of billions in capital to fill what is about to emerge as the biggest non-Lehman solvency hole in financial history (without the benefit of a Federal Reserve bailout that is). 

  And while the consequences of a banking sector implosion are hard to assess, the fallout from social upheaval is even more indeterminate. We bring that up because as we saw last month with Shan Jiuliang head of Fanya Metals Exchange, when WMP investors suspect they may have been misled about the safety of their investment, things can go south rather quickly and what the above suggests is that far from scaling back their use of shadow conduits, at least some mid-tier banks are dramatically increasing their exposure. 

  For those interested, we’ve included our full review of Chinese WMPs below.

  *  *  *

  “Wealth management products in China have come under the spotlight after a series of missed payments raised concerns over the shadow banking sector that often directs credit to firms shut out from bank lending or capital markets,” Reuters said in February, after reporting that CITIC (China’s top brokerage), was looking at ways to repay investors after the issuer of one of the wealth management products the broker sold missed a $1.12 million payment to investors.

  That news came a little over a year after the now infamous “Credit Equals Gold #1 Collective Trust Product” incident and a subsequent default scare on a similar product backed by loans to a struggling coal company. 

  Although wealth management products and CTPs (which differ from WMPs) are often described as “murky” and “opaque”, the basic concept is fairly simple. WMPs are marketed to investors as a way to get more bang for their buck (er.. yuan) than they would with bank deposits. Funds from these investors are then invested at a higher rate. If the assets investors’ money is used to fund run into trouble, that’s not good news for WMP investors. Simple. 

  The main issue here is the sheer size of the market. As FT notes, “in 2010, as regulators tried to rein in the explosion in bank credit resulting from the country’s Rmb4tn economic stimulus plan, banks turned to trusts to help them comply with lending controls.” So essentially, trusts helped banks offload credit risk at the behest of the PBoC. Here’s the process whereby banks use trusts to get balance sheet relief:

  

  The amount of trust loans outstanding in China has ballooned to nearly CNY7 trillion (total trust assets under management is something like CNY14 trillion) and now, Hebei Financing Investment Guarantee Group – which, as Caixan notes, is “the largest loan guarantee company in the northern province of Hebei [and] is wholly owned by the provincial regulator of state-owned assets” – is apparently broke, and that’s bad news because it guaranteed some CNY50 billion in loans made by dozens of trusts who in turn issued wealth management products to investors. 

  In short, if Hebei can’t guarantee the loans, WMP investors could be forced to take a loss and as anyone who follows developments in China’s financial markets knows, Beijing is not particularly keen on permitting SOEs to collapse – especially if there’s a risk of rattling retail investors’ fragile psyche. Here’s FT with the story:

  Eleven shadow banks have written an open letter to the top Communist party official in northern China’s Hebei province asking for a bailout that would enable the bankrupt credit guarantee company to continue to backstop loans to borrowers. If the guarantor cannot pay, it could spark defaults on at least 24 high-yielding wealth management products (WMPs).

   

  Hebei Financing Investment Guarantee Group has guaranteed Rmb50bn ($7.8bn) in loans from nearly 50 financial institutions, according to Caixin, a respected financial magazine. More than half of this total is from non-bank lenders, mainly trust companies, who lent to property developers and factories in overcapacity industries 

   

  The letter appeals directly to the government’s concern about social stability and the fear of retail investors protesting the loss of “blood and sweat money”. The 11 companies sold 24 separate WMPs worth Rmb5.5bn.

   

  “The domino effect from the successive and intersecting defaults of these trust products involves a multitude of financial institutions, an immense amount of money, and wide-ranging public interests,” 10 trust companies and a fund manager wrote to Zhao Kezhi, Hebei party secretary.

   

  “In order to prevent this incident from inciting panic among common people and creating an unnecessary social influence, we represent more than a thousand investors, more than a thousand families, in asking for a resolution.”

   

  Hebei Financing stopped paying out on all loan guarantees in January, when its chairman was replaced and another state-owned group was appointed as custodian.

   

  Though Hebei Financing guaranteed loans underlying WMPs, the products themselves did not guarantee investors against losses. Caixin reported that several trust companies, fearing reputational damage, have used their own capital to repay investors. 

   

  The 11 groups behind the recent letter have taken a different approach, pressuring the government for a rescue.

  There a few things to note here. First, the reason the underling assets are going bad is because WMP investors’ money was funneled into real estate development and all manner of other parts of the economy which are now struggling mightily. Second, the idea that China should allow for defaults on trust products is nothing new. In fact, we’ve been saying just that for at least a year. Finally, and perhaps most importantly, the banks’ playing of the social instability card underscores an argument we made when China’s equity market was in the midst of its harrowing plunge last month. In “Why China’s Stock Collapse Could Lead To Revolution” we warned that “it is only a matter of time before all the ‘nouveau riche’ farmers and grandparents see all their paper profits wiped out and hopefully go silently into that good night without starting mass riots or a revolution.”

  Yes, “hopefully”, but maybe not because as is becoming increasingly clear by the day, simultaneously micro managing the stock market, the FX market, the command economy, the media, and just about every other corner of society is becoming a task too tall even for the Politburo and sooner or later, something is going to break and shatter the “everything is under control” narrative.

  Whether or not the catalyst for widespread social upheaval will be a catastrophic chain reaction in the shadow banking system we can’t say for sure, but as FT reminds us, technical defaults on trust products have in the past been met with “public protests by angry investors at bank branches.”

  Here’s a snapshot of WMP issuance (note the durations as it gives you an idea of what kind volume we’re talking about on maturing products):

  

  As you might have noticed from the above, it appears that maturity mismatch could be a real problem here. Here’s what the RBA had to say about this in a bulletin dated June of this year:

  A key risk of unguaranteed bank WMPs is the maturity mismatch between most WMPs sold to investors and the assets they ultimately fund. Many WMPs are, at least partly, invested in illiquid assets with maturities in excess of one year, while the products themselves tend to have much shorter maturities; around 60 per cent of WMPs issued have a maturity of less than three months (Graph 5). A maturity mismatch between longer-term assets and shorter-term liabilities is typical for banks’ balance sheets, and they are accustomed to managing this. However, in the case of WMPs, the maturity mismatch exists for each individual and legally separate product, as the entire funding source for a particular WMP matures in one day. This results in considerable rollover risk. 

   

  

  In other words, the WMP issuers are perpetually borrowing short to lend long. The degree to which this is the case apparently varies depending what type of WMP (or trust product) one is looking at, and we will mercifully spare you the breakdown of the market by type (other than to include the pie chart shown below), but the important thing to note here is that it seems highly likely that at least CNY8 trillion in WMPs are exposed to the “considerable rollover risk” mentioned above.

  

  Allow us to explain how this could end. If China allows a state-run guarantor like Hebei Financing Investment Guarantee Group (the subject of the FT article cited above) to go broke and that in turn triggers losses for investors in WMP products, demand for those WMPs will dry up – and right quick. If that happens, WMPs will stop rolling, freezing the market and triggering a cascade of forced liquidations of the underlying (likely illiquid) assets. 

  It’s either that, or China bails everyone out. As the RBA concludes, “a key issue is whether the presumption of implicit guarantees is upheld or the authorities allow failing WMPs to default and investors to experience losses arising from these products.”

  And while that is certainly a key issue, the key issue is what those investors will do next.

  

  

  

  

  

• Fed Refuses To Comment On Yellen's Health

  While the world was focused on the content of Yellen’s Thursday speech in Amherst for clues on whether the Fed Chair would back off her disturbingly dovish outlook on the world, what was the real surprise was the delivery: as we showed previously, there was a very troubling 100 second interval at the very end of the 50 minute, 5,000+ word speech, in which the 69-year old Yellen suddenly seemed unable to read the words on the page, was rereading the same phrase over and over, paused for long stretches at a time, and then had a violent reaction that forced her to end her speech prematurely. Watch it again below.

  In the aftermath of the incident, a narrative was quickly cobbled together that Yellen had suffered from dehydration, but based on her actions and behavior, that seems improbable.

  But more disturbing was the Fed’s reaction. As the WSJ reports, a Federal Reserve spokeswoman declined Friday to say if Chairwoman Janet Yellen resumed a normal work schedule or sought follow-up medical attention a day after she appeared ill near the end of a long speech in Amherst, Mass. Ms. Yellen returned to Washington on Friday.

  From the WSJ:

  The Fed chairwoman, 69 years old, faltered roughly 50 minutes into a lecture on the economy and inflation Thursday at the University of Massachusetts Amherst. She stumbled over her prepared text, paused for long stretches several times, missed and jumbled some words in the text, and coughed before concluding her speech and leaving the stage.

   

  The stumbles were unusual for Ms. Yellen, who has spoken at length in the past at congressional testimony, news conferences and other settings without appearing off-balance.

   

  The Fed spokeswoman, Michelle Smith, on Thursday said Ms. Yellen “felt dehydrated at the end of a long speech under bright lights” and was seen by emergency medical technicians as a precaution, but “felt fine afterward” and attended a dinner on campus.

  Bloomberg News reported Ms. Yellen appeared fine after her dinner and flew back to Washington on Friday from Hartford, Conn., telling fellow passengers at the airport that she felt better. “I look good now, don’t I?” she said, according to the news outlet.

  Ms. Smith said Friday she didn’t want to comment beyond the Thursday statement.

  Why the secrecy? In the New centrally-planned Normal, in which everything is a function of money printing, where the S&P500 is always just one Fed statement away from a crash, and where the head of the Federal Reserve is ostensibly a far more powerful figure than even the US president (a figure whose health is extensively evaluated for suitability ahead of the job), the public has a right and an obligation to know how fit to serve Yellen truly is, because whatever Thursday’s two minute swoon was, it was not mere dehydration.

  Finally as we showed by the market reaction…

  

  … equity futures most certainly took the sudden concerns about Yellen’s health into consideration when making buying and selling decision. Perhaps it is time to discuss just how credible and realistic the Fed’s contingency plans  are in a world in which Yellen is no longer fit to serve – a world in which former Bank of Israel head Stanley Fischer would be poised to take control over the world’s most important central bank?

  

  

  

  

  

• The Dollar may Consolidate Before Moving Higher

  The US dollar rose against all the major and emerging market currencies over the past week, save the Russian ruble, which gained about 1.5%.  Comments from several Fed officials, and most notably Yellen, drove home the message which arguably was diluted after the FOMC meeting: A rate hike this year is still the most likely scenario.  This helped bolster the greenback. 

   

  On the other hand, ECB officials, including Draghi, underscored that the ECB is not yet ready to expand, extend, or alter the composition of its asset purchase scheme.  And despite the core CPI in Japan falling back into deflation territory, the BOJ’s Kuroda does not appear to be on the verge of increasing its aggressive asset purchase plan, though many expect him to do so at the end of next month. 

   

  The euro lost about 1% against the dollar last week and returned to the lower end of this month’s range after setting the high the day after the FOMC meeting.  The lower end of the range is found in the $1.1080-$1.1100 area.  The technical indicators are soft, and the five-day average has slipped back below the 20-day average.  Yet there is not strong momentum, and it looks like continued range-trading.  Initially, the $1.1300-$1.1330 area may contain upticks.

   

  The dollar has spent the month coiling in a triangle pattern against the yen.  Ahead of the weekend, with Yellen’s help, and rising stocks and US bond yields, the dollar broke higher.  The JPY121.25 high was the greenbacks best since September 10.  It is not uncommon to see false breaks from triangle patterns.  The close was just below the top of the pattern.  A convincing upside break would suggest a measuring objective near JPY122.50.  The technical indicators are supportive, but between the Tankan and US jobs figures, there are plenty of potential fundamental drivers. 

   

  Sterling is a dog.  It lost more than 2% against the US dollar over the past week.  It has fallen five cents since the post-FOMC high near $1.5660.  Before the weekend, sterling traded near $1.5150, which represents its lowest level since early May.    The technical indicators are soft, and the five-day moving average has broken below the 20-day average.  It spends the second half of last week below the 200-day moving average (~$1.5340).  Additional support is seen near $1.5080, with the $1.50 area of greater psychological significance.    Sterling is very streaky lately.   Recall it had a nine-day losing streak in late-August into September.  It then rallied but now has a new six-session losing streak. 

   

  The Australian dollar lost 2.5% against the US dollar last week.  It was weighed down by the poor Caixin preliminary flash manufacturing PMI for China.  Also, rate cut speculation is also picking up again.   After peaking post-Fed near $0.7280, the Aussie slumped to about $0.6940 on September 24 but reversed strongly and closed back above $0.7000. Follow through buying before the weekend was limited, which suggests the downside pressure has not been alleviated.   Stochastics and MACDs are still pointing lower, and the five-day moving average crossed below the 20-day at the end of last week.   Nevertheless, we suspect the risk is to the upside ahead of US jobs data, with potential toward $0.7100-$0.7125.  

   

  The New Zealand dollar has been trading broadly sideways in its trough through September.  It closed firmly ahead of the weekend, at its best level since September 9.  Near-term potential extends toward $0.6450.  

   

  The US dollar recorded new multi-year highs against the Canadian dollar on September 24 just below CAD1.3420.  The five-day moving average crossed back above the 20-day average.  The technical indicators do not suggest the move is exhausted.   A break of CAD1.3260 would signal a corrective phase.   In the bigger picture, the next key technical objective is found near CAD1.40. 

   

  The November crude oil futures contract was little changed last week.  The broad consolidation that has characterized this month’s activity has carved out a descending triangle.  The down sloping line connecting the highs comes in $47.00-$46.30 over the course of next week.  The horizontal line that marks the lower part of the triangle is found around $43.30.  This is a bearish pattern, and a downside break should be respected. 

   

  US 10-year Treasury yields largely moved sideways here in September.  With one day exception (September 24), the yield has stayed above 2.10%.  On the top side, the yield poked through 2.25% for three days in the middle of the month.  Technical indicators are not generating strong signals, which warns of continued consolidation. 

   

  The S&P 500 reversed lower on September 17 after reaching a high of 2020.  Follow through selling this week took the index down to 1909, off which a hammer candlestick pattern was recorded on September 24.  Buying before the weekend lifted the S&P 500 to almost 1953, which was just beyond the 38.2% retracement objective and just shy of the 20-day moving average (1956), but the close was poor and a retest on the 1900 area looks likely.  A break would signal a return to the late August lows around 1865-1870.  

   

   

  Observations from the speculative positioning in the futures market:

   

  1.  The first bucket we look at consists of the euro, Swiss franc, and sterling.  These currencies saw only minor gross position adjustments.  The 5.3k cut in gross long franc positions was the only gross position adjustment of more than 3.2k contracts.    However, the minor adjustments were sufficient to swing the net sterling position long for the first time since the last week in August.  After spending one-week net long, speculators swung back to hold a small net short position in francs.

   

  2.  The second bucket is the yen.  Both bulls and bears were active.  The gross long position rose 11.8k contracts to 48.3k.  The gross short position grew by 8.7k contracts to 72/0.  

   

  3.  The third bucket is the dollar bloc.  There were two substantial (10k contracts or more) gross position adjustments.  The bulls are picking a bottom by increasing their gross long position by 124k contracts to 40.9k.  The bears are not convinced, and added 3.7k contracts to their gross short position, raising it to 79.3k.  The Aussie bulls chopped their gross long position by 16.5k contracts to 42.7k.  The gross short position was trimmed by 4.3k contracts.  

   

  4.  The fourth bucket is the Mexican peso. Speculators began turning around their net short position. The gross long position more than doubled by jumping 25.9k contracts to 47.6k.  A little more than 17k short contracts were covered, leaving 60k.  The net short position fell to 12.4k from 55.3k contracts.  

   

  5.  The net short 10-year US Treasury position was reduced to 8.5k contracts from 39.5k.  This was the result of new speculative longs being established (33.7k contracts).  Gross shorts were increased by 2.8k contracts.  

   

  6.  The net long speculative light sweet crude oil futures position rose by 20k contacts to 259.4k. This was largely the result of 16.7k gross short contracts being bought back.  The gross long position rose by 3.4k contracts (to 229.8k)

  

  

  

  

  

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• The Table Is Set For The Next Financial Crisis

  Submitted by Jim Quinn via The Burning Platform blog,

  

  The housing market peaked in 2005 and proceeded to crash over the next five years, with existing home sales falling 50%, new home sales falling 75%, and national home prices falling 30%. A funny thing happened after the peak. Wall Street banks accelerated the issuance of subprime mortgages to hyper-speed. The executives of these banks knew housing had peaked, but insatiable greed consumed them as they purposely doled out billions in no-doc liar loans as a necessary ingredient in their CDOs of mass destruction.

  The millions in upfront fees, along with their lack of conscience in bribing Moody’s and S&P to get AAA ratings on toxic waste, while selling the derivatives to clients and shorting them at the same time, in order to enrich executives with multi-million dollar compensation packages, overrode any thoughts of risk management, consequences, or  the impact on homeowners, investors, or taxpayers. The housing boom began as a natural reaction to the Federal Reserve suppressing interest rates to, at the time, ridiculously low levels from 2001 through 2004 (child’s play compared to the last six years).

  

   

  Greenspan created the atmosphere for the greatest mal-investment in world history. As he raised rates from 2004 through 2006, the titans of finance on Wall Street should have scaled back their risk taking and prepared for the inevitable bursting of the bubble. Instead, they were blinded by unadulterated greed, as the legitimate home buyer pool dried up, and they purposely peddled “exotic” mortgages to dupes who weren’t capable of making the first payment. This is what happens at the end of Fed induced bubbles. Irrationality, insanity, recklessness, delusion, and willful disregard for reason, common sense, historical data and truth lead to tremendous pain, suffering, and financial losses.

  Once the Wall Street machine runs out of people with the financial means to purchase a home or buy a new vehicle, they turn their sights on peddling their debt products to financially illiterate dupes. There is a good reason people with credit scores below 620 are classified as sub-prime. Scores this low result from missing multiple payments on credit cards and loans, having multiple collection items or judgments and potentially having a very recent bankruptcy or foreclosure. They have low paying jobs or no job at all. They do not have the financial means to repay a large loan. Giving them a loan to purchase a $250,000 home or a $30,000 automobile will not improve their lives. They are being set up for a fall by the crooked bankers making these loans. Heads they win, tails the dupe gets kicked out of  that nice house onto the street and has those nice wheels repossessed in the middle of the night.

  The subprime debacle that blew up the world in 2008 was created by the Federal Reserve, working on behalf of their Wall Street owners. When interest rates are set by central planners well below levels which would be set by the free market, based on risk and return, it creates bubbles, mal-investment, and ultimately financial system disaster. Did the Fed, Wall Street, politicians, and people learn their lesson? No. Because we bailed them out with our tax dollars and have silently stood by while they have issued $10 trillion of additional debt to solve a debt problem. The deformation of our financial system accelerates by the day.

  The $3.5 trillion of QE, six years of 0% interest rates for Wall Street (why are credit card interest rates still 13%?), and $8 trillion of deficit spending by the Federal government have provided the outward appearance of economic recovery, as the standard of living for most Americans has declined significantly. With real median household income still 6.5% BELOW 2007 levels, 7.3% BELOW 2000 levels, and about equal to 1989 levels, the only way the ruling class could manufacture a fake recovery is by ramping up the printing presses and reigniting a housing bubble and an auto bubble. They even threw in a student loan bubble for good measure.

  

  The entire engineered “housing recovery” has had a suspicious smell to it all along. The true bottom occurred in 2009 with an annual rate of 4 million existing home sales. An artificial bottom of 3.5 million occurred in 2010 after the expiration of the Keynesian first time home buyer credit that lured more dupes into the market. The current rate of 5.31 million is at 2007 crash levels and on par with 2001 recession levels. With mortgage rates at record low levels for five years, this is all we got?

  

  What really smells is the number of actual mortgage originations that have supposedly driven this 35% increase in existing home sales. If existing home sales are at 2007 levels, how could mortgage purchase applications be 55% below 2007 levels? If existing home sales are up 35% from the 2009/2010 lows, how could mortgage purchase applications be flat since 2010?

  

  New home sales are up 80% from the 2010 lows, but before you get as excited as a CNBC bimbo over the “surging” new home sales, understand that new home sales are still 60% BELOW the 2005 high and 25% below the 1990 through 2000 average. So, in total, there are 1.5 million more annual home sales today than at the bottom in 2010. But mortgage originations haven’t budged. That’s quite a conundrum.

  

  As you can also see, the median price for a new home far exceeds the bubble highs of 2005. A critical thinking individual might wonder how new home sales could be down 60% from 2005, while home prices are 15% higher than they were in 2005. Don’t the laws of supply and demand work anymore? The identical trend can be seen in the existing homes sales market. The median price for existing home sales of $228,700 is an all-time high, exceeding the 2005 bubble levels. Again, sales are down 30% since 2005. I wonder who is responsible for this warped chain of events?

  

  You guessed it – the Federal Reserve. There is no doubt these Wall Street captured academics with their models, theories, formulas, and Keynesian beliefs have created another immense bubble that endangers a global financial system already teetering on the brink of collapse due to central bank shenanigans by EU, Japanese, and Chinese central bankers. QE and ZIRP have encouraged rampant gambling by amoral greed driven financial institutions. John Hussman sums up the “solution” implemented by the serial bubble blowers at the Fed.

  The main impact of suppressed interest rates is to encourage yield-seeking speculation, to give low quality creditors access to the capital markets, to misallocate scarce saving, to subsidize leveraged carry trades, to reduce the long-term accumulation of productive capital, and to foment serial bubbles and crashes.

  The suppressed interest rates and Yellen Put have encouraged Wall Street hedge funds, banks, finance companies, and fly by night mortgage brokers to finance a buy and rent scheme, house flippers, and once again subprime borrowers. The withholding of foreclosures from the market and the hedge fund purchase of millions of homes drove home prices higher. The artificially low mortgage rates also allowed people to buy more house than they normally could buy, thereby driving home prices even higher. This market manipulation has now priced out all but the richest Americans from buying a home. As expected, the Wall Street machine has decided to try and steal home with two outs in the bottom of the ninth. They’ve decided loaning money to people who are incapable of repaying the loan will surely work this time.

  Existing home sales fell in August by 4.8%, and the rate of increase has been decelerating over the last twelve months. Hedge funds stopped buying, first time buyers are few as they are saddled with student loan debt, and the middle class doesn’t have the financial wherewithal to trade up. The Wall Street debt machine is running out of financially able customers, so they’ve ramped up subprime lending at the worst possible time. While overall existing home sales were up 6.2% over last year, the number of subprime first mortgage originations was up 30.5%, subprime home equity loans was up 29.5%, and subprime home equity lines of credit rose 20.4%. The percentage of subprime mortgage loans is the highest since 2008. While prime lending declines, subprime lending accelerates. This will surely end well.

  And this is being promoted by the government through the FHA. Subprime mortgages  are increasingly being underwritten by thinly capitalized non-banks and guaranteed by FHA. In 2012, when this data was first tracked, large banks represented 65.4% of FHA-backed loans. That number is now 29.6%. In their place, non-banks now represent 62.2% of the FHA lending. These fly by night outfits, who proliferated during the 2003 – 2008 subprime disaster, have little or no capital cushion and when these mortgages begin to default they will go bankrupt quickly, leaving the FHA (you the taxpayer) on the hook for the inevitable losses.

  The FHA has been directed by their politician benefactors to pump up the housing market at any cost. You can get an FHA loan with a credit score as low as 500, so long as you have a 10% down payment. And once you hit a 580 credit score, you only need a 3.5% down payment. The FHA is exempt from the qualified mortgage requirement of a 43% debt-to-income ratio. Many loans have a debt-to-income above 55%. The FHA only looks at mortgage payments in their calculation. The FHA is willing to accept a gift or inheritance as a down payment. You could have no savings, a 500 FICO, a 50% debt-to-income and an inheritance and that would be sufficient to get you a loan.

  These fly by night mortgage companies are created by slimy get rich quick hucksters who are willing to take huge risks, because there is a big difference between the risk that faces the company, and the risk that faces the owner.  He will take incredibly rich commissions on all loans he books. Wall Street is again packaging these subprime slime loans into high yielding mortgage backed securities and getting the rating agencies to stamp it with a AAA rating.

  

  Foolish investors receiving a good yield and a guarantee from the US government, are as clueless as they were in 2008. The owner of the mortgage company doesn’t care about default risk, since some other sucker has assumed that risk. When the mortgage company goes bankrupt, the owner has no personal liability. When it all blows up again, an already bankrupt FHA will be on the hook, which really means the taxpayer will pay again. You are underwriting the new subprime crisis.

  This exact same scenario is also playing out in the economically important auto market. It is clear the Fed, Treasury, Wall Street and the politicos in D.C. decided they needed to re-inflate the housing and auto bubbles to provide the appearance of economic recovery so they could resume their looting and pillaging of the national wealth. They have succeeded in ramping up auto sales from the 10.4 million annual rate in 2009 to 17.5 million in 2015, if you can call these sales. Short-term rentals is a better description. Auto leasing now accounts for 30% of “sales” (up from 22% in 2012), while subprime auto “sales” accounted for another 23.5%. The vast majority of the other sales are done with 7 year 0% financing. Does that sound like a sound business formula?

  And now they’ve run out of dupes. The seasonally adjusted annual rate of sales for August 2015 was 17.2 million, flat with August 2014 and down from 17.5 million in July 2015. As the auto sales have gone flat and are poised to fall, the Wall Street finance machine has ramped up subprime lending from 18% of all loans in 2010 to 23.5% today. With overall sales flat with last year, subprime lending is up 9.6% in the last year. The pace of subprime auto loans has been more than double the pace of prime auto loans since 2010.

  

  Over 10% of subprime auto loans are delinquent within the first twelve months. Subprime auto loan delinquency rates are soaring by 20% at Ally Financial. Santander is a Lehman Brothers in the making as their total delinquency rate approaches 20%. A critical thinking person might wonder why automaker profits are in decline, while GM and Ford stock prices are well below 2011 levels, if the auto market is booming.

  The table is set for the next financial crisis. The apologists for the warped ideology that has resulted in $10 trillion of additional debt being layered on the original un-payable $52 trillion, argue subprime lending is lower than the 2008 peak, so all is well. They fail to realize the system is far more fragile and will collapse once the next Lehman moment arrives. The country is already in, or headed into recession. All economic indicators are flashing red. The stock market has fallen over 10% in the last month. Virtually every new car owner you see driving that fancy BMW, Lexus, or Volvo is underwater on their auto loan. Home price growth has stalled at record levels. Mortgage rates are poised to rise from record lows. We all know what happens next. Look out below.

  Some people never learn. They follow the same path that destroyed their finances in the past. Wall Street is desperately packaging the increasing amounts of subprime slime in new derivatives of mass destruction and peddling them to clients, while shorting those same derivatives. It’s called the Goldman Sachs method. When home prices begin to tumble, these derivatives will self-destruct again. What is happening today is nothing more than rearranging the deck chairs on the Titanic. The iceberg has been struck, we’re taking on water, and this sucker is going to sink. Game Over.

  

  “Part of the reason the Fed found it so difficult last week to justify a move away from zero interest rates is that the Fed seems incapable of recognizing, much less admitting, the speculative risks it has created. The strongest reason to normalize monetary policy was to reduce those risks, but the proper time to have done that was years ago. At this point, obscene equity valuations are already baked in the cake on valuation measures that are reliably correlated with actual subsequent stock market returns. At this point, hundreds of billions of dollars of low-grade covenant-lite debt have already been issued at risk premiums that are next to nothing. The bursting of this bubble is no longer avoidable. If history is any guide, policy makers will manage the resulting disruption by the seat of their pants, since they seem incapable of learning from history itself.” – John Hussman

  

  

  

  

  

• FaReWeLL To THe WeeP…

  

  

  

  

  

• Why US Rates Can Never Rise: In 1 Awkward Chart

  Just before the FOMC decided to not decide last Thursday, we asked if the scuffle depicted below was Japanese lawmakers’ attempt to act out what they imagined might go on in the Eccles Building during what was billed as the most important Fed decision in recent history:

  We went on to note that Japan – which, you’re reminded, is the poster child for Keynesian insanity with a debt load that now totals ¥1,057,224,000,000,000 – tried to raise rates at one point, only to reverse course within seven months.

  Now that the Fed is allegedly set to hike at some point in the not-entirely-distant future, and now that Japan has completely lost its mind and declared that despite Abenomics’ abysmal and demonstrable failure, the economy will somehow expand at a 20% clip going forward, we thought this an oppotune time to demonstrate, with one helpful infographic, why the US can never raise rates. Put simply: the US is second only to Japan on the list of countries with the worst debt to central government revenue ratios.

  

  Coming soon to Washington:

  

  

  

  

  

  

• Guest Post: Climate Fanatics Run Into Public Relations Snag

  Submitted by Pater Tenebrarum via Acting-Man.com,

  Scientists Turn into Stalinists

  Last week, we happened across a press report about a group of climate scientists so eager to shut up their critics that they want to employ the State’s police, courts and jailers for the purpose. Specifically, a group of academic (and presumably tenured) climate alarmists supporting the “CAWG” theory (CAWG=”catastrophic anthropogenic global warming”) have written a letter to president Obama, attorney-general Lynch and OSTP director Holdren, demanding that so-called “climate deniers” (or the organizations allegedly supporting them) be prosecuted under the RICO act (you can see the document here (pdf) – already its first paragraph is “alarming”, as they inter alia brag about things they have incorrectly predicted to happen for more than 35 years, such as an increase in “extreme weather”).

   

  

  This is not the first time that climate alarmists are letting their inner Stalin hang out and are trying to impose a spot of Lysenkoism for the “good of humanity”. For those not au fait with Lysenko: the man was an influential Soviet biologist who came up with an erroneous theory “based on dialectic materialism” about how to improve crop yields. It never worked, but over the 44 years during which his influence lasted (!), more than 3,000 biologists were either fired, jailed and even executed for opposing his views (a number of modern-day radical climate alarmists are also on record for demanding the harshest imaginable punishments for “deniers”).

  The Debate over the Poorly Conceived AGW Theory is not Over

  Here are a few excerpts from the letter we want to briefly comment on:

  “The risks posed by climate change, including increasing extreme weather events, rising sea levels, and increasing ocean acidity – and potential strategies for addressing them – are detailed in the Third National Climate Assessment (2014), Climate Change Impacts in the United States. The stability of the Earth’s climate over the past ten thousand years contributed to the growth of agriculture and therefore, a thriving human civilization. We are now at high risk of seriously destabilizing the Earth’s climate and irreparably harming people around the world, especially the world’s poorest people.

  (emphasis added)

  Apart from the absurd insinuation that only “government-funded science is good science”, as if none of the people involved had any self-interests, science is not the result of some imaginary “consensus” or attains the status of holy writ once its conclusions appear in a government-sponsored paper. As an example, it took the “consensus” 40 years to accept Alfred Wegener’s theory on continental drift, by which time he was dead.

  In principle there is nothing wrong with employing a conceptual approach in the natural sciences, but eventually, empirical data must bear hypotheses out. It is moreover not true that we can “afford” to bring industrial civilization to a standstill on the off-chance that the alarmists might be right one day, especially considering how wrong they have been so far.

  Let us just briefly address the handful of things listed above. “Extreme weather events” like hurricanes and tropical cyclones have actually done the precise opposite of what has been and continues to be widely claimed – their frequency has declined to multi-decade lows (e.g. in Australia, the “lowest level of cyclone activity in modern history” was reported last year. US readers will have noticed that since Katrina a decade ago and the intrusion of Sandy, hurricane activity has actually been de minimis – statistics confirm it loud and clear).

   

  

  Global tropical cyclone frequency hits a multi-decade low – click to enlarge.

   

  Rising sea levels: it appears the rise is so slow that the catastrophes that have been predicted since at least 1980 not only have not happened, but that the opposite has occurred in these cases as well. No Micronesian islands have sunk beneath the waves – au contraire, they are growing. Of the 50 million “climate refugees” that were certain to swamp us by 2010, only one has shown up to date, and this seems to be a case of someone trying to get a residence and work permit in a developed country by means of an innovative method. The exact opposite of the alarmist predictions happened in this case as well: the very regions that were supposed to be the main source of “climate refugees” and should have been almost depopulated by now have seen the strongest population growth on the planet.

  We haven’t followed the debate on the “acidification of the oceans” very closely, but we note that there definitely is a debate, as this notion appears to be based on questionable data (a.k.a. “sparse and contradictory evidence”). Lastly, even the alarmists are acknowledging that there has been a near 19 year “pause” in global warming (although NOAA is scandalously altering past surface temperature records from their actually measured to “assumed” values, in order to create a warming trend literally from thin air). They have hitherto seen fit to provide 66 different excuses for why the forecasts of their models have been so completely wrong. It is very mean of Mother Nature that she refuses to cooperate with the alarmist agenda. Of course, that the central premise of the AGW theory might actually be wrong isn’t even considered by these worthies (luckily they haven’t yet found ways to retroactively fiddle with the satellite data).

   

  

  The Pause – satellite measurements have detected no warming for nearly 19 years

   

  The sentence that “the poor will be endangered” unless we regulate industrialized civilization out of existence is preposterous in the extreme. Again, if you assume the exact opposite to be true, you will be correct. In the past, human civilization has flourished whenever temperatures were a lot warmer than they are today (e.g. during the medieval warm period, vineyards thrived in the Scandinavian countries and global population growth and progress both accelerated greatly).

  One of the biggest problems with the economically damaging regulations demanded by the alarmists is precisely that they cynically deprive the world’s poor of the possibilities for development the rich countries had at their disposal (see this report for details). In fact, much of the proposed legislation is ultimately nothing but a socialist wealth distribution scheme (that will not only redistribute, but ultimately destroy wealth) – as its major political proponents are occasionally admitting in unguarded moments. As has been noted elsewhere, this is simply “ideology masquerading as science”.

   

  Suppression of Dissent to Preserve the Gravy Train

  It seems to us, all of the above should be seen as grounds for vigorous debate, both on the scientific and the political level, before any more harm is done by costly (and ultimately useless) legal activism. However, this definitely isn’t how the letter writers are seeing it:

  “We appreciate that you are making aggressive and imaginative use of the limited tools available to you in the face of a recalcitrant Congress. One additional tool – recently proposed by Senator Sheldon Whitehouse – is a RICO (Racketeer Influenced and Corrupt Organizations Act) investigation of corporations and other organizations that have knowingly deceived the American people about the risks of climate change, as a means to forestall America’s response to climate change.”

  In other words, those who disagree with the alarmists (which is ever easier to do as one after another of their predictions fails to come true) should be treated like the mafia or similar criminal organizations. Needless to say, this would not exactly be conducive to scientific or policy debate. We have yet to see the opponents of string theory demand the jailing of its proponents (or vice versa), in spite of their fierce disagreements.

  Our first thought was therefore that one should probably “follow the money” – that the alarmists are probably increasingly worried that their gravy train might be derailed; that their lavish grants and privileges, including their role as “philosopher kings” advising the politically powerful, could come under threat as empirical evidence against their theories keeps piling up. This has inter alia also led to a recent rash of ever more hysterical apocalyptic predictions (see e.g. the laughable “sea level rise” panic outburst from Über-alarmist Dr. James Hansen, which is even denounced by his fellow AGW alarmists – i.e., it is too absurd even for them).

  Before we found the time to write this missive, reality has struck in the form of a rather sizable PR problem for the leader of the group of letter writers – and it has indeed to do with “lavish grants”. As Climate Depot reports, “Scientist leading effort to prosecute climate skeptics under RICO ‘paid himself & his wife $1.5 million from govt climate grants for part-time work’”. You couldn’t make this up.

  George Mason University Professor Jagadish Shukla a Lead Author with the UN IPCC, reportedly made lavish profits off the global warming industry while accusing climate skeptics of deceiving the public. Shukla is leader of 20 scientists who are demanding RICO (Racketeer Influenced and Corrupt Organizations Act) charges be used against skeptics for disagreeing with their view on climate change.

   

  Shukla reportedly moved his government grants through a ‘non-profit’. The group “pays Shukla and wife Anne $500,000 per year for part-time work,” Prof. Roger Pielke Jr. revealed. “The $350,000-$400,000 per year paid leader of the RICO 20 from his ‘non-profit’ was presumably on top of his $250,000 per year academic salary,” Pielke wrote. “That totals to $750,000 per year to the leader of the RICO 20 from public money for climate work and going after skeptics. Good work if you can get it,” Pielke Jr. added. 

  (emphasis added)

  AGW has indeed become an “industry”, albeit an entirely taxpayer funded one. It looks more and more like a giant racket. If it were only a racket, there would be no problem – but it also pursues an agenda, under the pretense that we need to “save the planet” from what increasingly looks like natural variations we have little or no influence over. The agenda however has a clear leftist-authoritarian bent, as all the demands and already implemented policies involve more regulation and government control over the economy, are harmful to economic development and progress, are bound to condemn the poor to remaining poor, and aim at redistributing wealth in a manner that will simply end up destroying it to the benefit of a handful of cronies.

  That people obviously benefiting greatly from this racket have the gall to demand that the State treat their critics as major criminals in Stalinesque fashion is really jaw-dropping chutzpa.

  Conclusion

  The caste of climate alarmists reminds us strongly of assorted doomsayers throughout history. They have almost become a kind of priestly caste, accusing us of committing the alleged “sin” of capitalism, even while they reserve for themselves the right to partake of its fruits to an extent few others are able to (as Greenpeace founder Patrick Moore notes, “environmentalism has become a religion”). Mind, we don’t believe genuine environmental concerns should be ignored, but AGW looks more and more like a contrived non-issue. The hysteria that has been on display of late is probably an indication though that its proponents are actually losing the debate.

  

  

  

  

  

• Why Brazil Is Not Coming Back Anytime Soon (In 1 Depressing Chart)

  Forget currency collapses, capital outflows, crashing confidence, and current account carnage, there is one major reason why Brazil – no matter what – will not bounce back quickly…

   

  As alive and well as the entrepreneurial spirit maybe (though with confidence at record lows, we suspect otherwise), it takes a stunning 83 days to "start a business" in Brazil…16x longer than in the US and almost 3x longer than China and India.

  

   

  So absent massive and far-reaching reforms to collapse the bureacratic quagmire that is the corrupt government of Brazil (and crush the government sector's employment), no matter what actions, interventions, and confidence-inspiring acts the central planners undertake, the growth spirit simply won't be there!!!

   

  Source: Goldman Sachs

  

  

  

  

  

• From ZIRP To NIRP – Accelerating The End Of Fiat Currencies

  Submitted by Alasdair Macleod via GoldMoney.com,

  The sudden end of the Fed’s ambition to raise interest rates above the zero bound, coupled with the FOMC’s minutes, which expressed concerns about emerging market economies, has got financial scribblers writing about negative interest rate policies (NIRP).

  Coincidentally, Andrew Haldane, the chief economist at the Bank of England, published a much commented-on speech giving us a window into the minds of central bankers, with zero interest rate policies (ZIRP) having failed in their objectives.

  Of course, Haldane does not openly admit to ZIRP failing, but the fact that we are where we are is hardly an advertisement for successful monetary policies. The bare statistical recovery in the UK, Germany and possibly the US is slender evidence of some result, but whether or not that is solely due to interest rate policies cannot be convincingly proved. And now, exogenous factors, such as China’s deflating credit bubble and its knock-on effect on other emerging market economies, are being blamed for the deteriorating economic outlook faced by the welfare states, and the possible contribution of monetary policy to this failure is never discussed.

  Anyway, the relative stability in the welfare economies appears to be coming to an end. Worryingly for central bankers, with interest rates at the zero bound, their conventional interest rate weapon is out of ammunition. They appear to now believe in only two broad options if a slump is to be avoided: more quantitative easing and NIRP. There is however a market problem with QE, not mentioned by Haldane, in that it is counterpart to a withdrawal of high quality financial collateral, which raises liquidity issues in the shadow banking system. This leaves NIRP, which central bankers hope will succeed where ZIRP failed.

  Here is a brief summary of why, based on pure economic theory, NIRP is a preposterous concept. It contravenes the laws of time preference, commanding by diktat that cash is worth less than credit. It forces people into the practical discomfort of treating physical possession of money as worth less than not possessing it. Suddenly, we find ourselves riding the train of macroeconomic fallacies at high speed into the buffers at the end of the line. Of course, some central bankers may sense this, but they are still being compelled towards NIRP through lack of other options, in which case holding cash will have to be banned or taxed by one means or another. This would, Haldane argues, allow them to force interest rates well below the zero bound and presumably keep them there if necessary.

  One objective of NIRP will be to stimulate price inflation, and Haldane also tells us that economic modelling posits a higher target of 4%, instead of the current 2%, might be more appropriate to kick-start rising prices and ensure there is no price deflation. But to achieve any inflation target where ZIRP has failed, NIRP can be expected to be imposed for as long as it takes, and all escape routes from it will have to be closed. This is behind the Bank of England’s interest in the block-chain technology developed for bitcoin, because government-issued digital cash would allow a negative interest rate to be imposed at will with no escape for the general public.

  Fortunately for the general public this remedy cannot be implemented yet, so it can be ruled out as a response to today’s falling stock markets and China’s credit contraction. What is deeply worrying is the intention to pursue current interest rate policies even beyond a reductio ad absurdum, with or without the aid of technology.

  In considering NIRP, Haldane’s paper fails to address an even greater potential problem, which could easily become cataclysmic. By forcing people into paying to maintain cash and bank deposits, central bankers are playing fast-and-loose with the public’s patient acceptance that state-issued money actually has any value at all. There is a tension between this cavalier macroeconomic attitude and what amounts to a prospective tax on personal liquidity. Furthermore, NIRP makes the hidden tax of monetary inflation, of which the public is generally unaware, suddenly very visible. Already ZIRP has created enormous unfunded pension liabilities in both private and public sectors, by requiring greater levels of capital to fund a given income stream. Savers are generally unaware of this problem. But how do you value pension liabilities with NIRP? Anyone with savings, which is the majority of consumers, is due for a very rude awakening.

  We should be in no doubt that increasing public awareness of the true cost to ordinary people of monetary policies, by way of the debate that would be created by the introduction of NIRP, could have very dangerous consequences for the currency. And once alerted, the public will not quickly forget. So not only are the central banks embarking on a course into the unknown, they could also set off uncontrollable price inflation by creating widespread public aversion to maintaining any cash balances at all.

  The only reason any particular form of money has exchange value is because people are prepared to exchange goods for it, which is why relative preferences between money and goods give money its value. Normally, people have a range of preferences about a mean, with some preferring money relative to goods more than others and some preferring less. The obvious utility of money means that the balance of these preferences rarely shifts noticeably, except in the event of a threat to a complacent view. For this reason, monetary inflation most of the time does not undermine the status as money of central bank issued currency.

  The trouble comes when the balance of these preferences shifts decisively one way or the other. At an extreme, if no one wants to hold a particular form of money, it will quickly become valueless, irrespective of its quantity, just like any other unwanted commodity. This is the logical outcome of negative interest rates, and subsequent increases in interest rates sufficient to stabile the purchasing power of currencies is no longer an option, given the high levels of public and private debt everywhere.

  Therefore, we need to watch closely how this debate over NIRP develops. If the Bank of England is looking at ways to overcome the zero bound on a permanent basis, it is a fair bet that it is being looked at by other central banks in private as well. And if NIRP gains traction at the Top Table, the life-expectancy of all fiat currencies could become dramatically shortened.

  

  

  

  

  

• "Pet Rocks" Are Booming In Brazil

  It appears there is one ‘currency’ worth holding on to when a nation’s fiat fraud is exposed…

   

  

   

  Real “wealth” preservation.

   

  Charts: Bloomberg

  

  

  

  

  

• California Lake Mysteriously Runs Dry Overnight, Thousands Of Fish Dead

  Perhaps it is because the world has grown habituated to its unique set of “liquidity” problems, but California’s record, and ongoing, drought has not been receiving much media coverage in recent weeks. Perhaps it should be, because according to a report by CBS Sacramento, the mystery that recently surrounded the water levels at Lake Mead and Lake Powell, has spilled over to a water reservoir in Northern California.

   

  But then reality bit with a sudden realization that a hawkish-er Yellen actually said absolutely nothing different from what she said last week…and they are hanging on by a thread…

   

  The last time we had a closing in stocks on a Friday as ugly as this was Aug 21st (before Black Monday)

  Chinese stocks were supported all week (with Xi's visit to the US) until last night… with SHCOMP roundtripping to unchanged

  

   

  And while Europe rallied on Yellen and BMW today, it remains notbaly hard hit post-FOMC…

  

   

  The Biggest News Today was Biotechs and Junk Bonds Bloodbathery…

  Biotechs were monkey-hammered this week with a 12% plunge… down 6 days in a row

  

   

  To Dec 2014 levels – the biggest weekly drop since Aug 2011

  

   

  As S&P Biotech ETF had its worst day since August 2011…

  

   

  Biotechs are down 26% from the $91.11 highs on 7/20

  

   

  Who is to blame? Shrekli's Greed or Clinton's Populism

  

   

  High yields bonds were slammed this week. HYG (The HY Bond ETF) saw its biggest weekly drop since Dec 2014 and closed at its lowest since Nov 2011…

  

   

  And HYG was in charge of stocks today…

  

  *  *  *

  The exuberance and carnage today was (once again) all about USDJPY… it appears a failed momo ramp past 121.00 around 2pmET was the trigger (along with Biotech accelerating lower)

  

   

  And Futures show the price action all day long…

  • Overnight Yellen
  • 0450ET BMW "Allclear"
  • 0830ET GDP Up
  • 0930ET Boehner resignation
  • 1400ET USDJPY/Biotechs fail

  

   

  Leaving cash indices roundtripping on the day… (Dow helped by NKE's adding 60-70 points)

  

   

  And it's a bloodbath since post-FOMC peak euphoria… Small Caps & Trannies worst…

  

   

  Financials outperformed today (with a gap open after Yellen's speech) and Healthcare worst today (and on the week)…

  

   

  Financials gains today (on Yellen) were entirely ignored by credit markets… how many more times do you buy that hope?

  

   

  Leaving Nasdaq in the red year-to-Date…

  

   

  Let's not forget CAT this week that saw no bounce at all today…

  

   

  and another hedge fund hotel – SUNE was crushed today and this week as it appears for the 3rd month in a row, month-end liquidations are slamming…

  

   

  *  *  *

  So with the equity bloodbathery out of the way…

  Treasury yields ended the week modestly higher after a big ramp higher this morning (releived a little as bonds rallied on equity weakness this afternoon)…

  

   

  The USDollar Index gapped up on Yellen's speech last night but went nowhere after that (even as JPY weakness offset EUR strenght)

  

   

  Commodities were mixed on the week with Gold and Crude higher, silver modestly lower, and copper clubbed… (not ethe morning shenanigans everyday)

  

   

  Copper tumbled over 4% on the week – its biggest weekly drop since Nov 2014, closing at its lowest since May 2009…

  

   

  And Gold broke above its 100-day moving-average again… will it hold this time…

  

   

  Charts: Bloomberg

  Bonus Chart: The Market is macro-data-dependent… so what data is The Fed imagining?

  

  

  

  

  

• Artist's Impression Of Current Fed Policy

  Presented with no comment…

   

  

   

  h/t @FedPorn

  

  

  

  

  

• The Bear Market Catalysts

  As we showed earlier, at this point any debate whether or not the S&P500 is driven purely by the “outside money” injected by the Fed, is over: financial markets are now down since the end of QE3, while cash is the only asset that is rising because the Fed is no longer actively debasing the US currency (it will again, but not right now). Feel free to ignore and/or mock any so-called expert who still idiotically argues it is anything but money printing.

  

   

  But while we know what happened in the past, what everyone wants to know is what will happen, and whether the recent correction will morph into a far more serious bear market (such as the one that just slammed the recently bubbly biotech sector).

  Here, according to BofA’s Michael Hartnett, are the key bear market catalysts that everyone should be watching.

  1. Peak in liquidity

  QE & zero rates reflated financial assets significantly. The only assets that QE did not reflate were cash, volatility, the US dollar and banks. Cash, volatility, the US dollar are all outperforming big-time in 2015, which tells you markets have been forced to discount peak of global liquidity/higher Fed funds. Frequent flash cashes (oil, UST, CHF, bunds, SPX) tell the same story. Peak in liquidity = peak of excess returns = trough in volatility.

  2. Deflationary recovery

  The QE loser that has remained a loser is the bank sector. The banks have underperformed in 2015 because the economy has disappointed and the recovery has remained exceptionally deflationary. The bank recovery in 2013/14 therefore has not been validated by a move higher in bond yields (Chart 4)

  

  3. Manufacturing recession

  More recently, investors have witnessed weak manufacturing activity and profits, led most visibly by negative growth in Chinese exports (which partly caused the Chinese devaluation). Investor hopes of a much-awaited handoff from a (storming) liquiditydriven bull market to a (calmer) EPS-driven market have been dashed, and fears of a global manufacturing recession are on the rise.

  

  4. Capitulation of the “strong $” & “TINA” trades

  Fear of US/global EPS recession & thus abject “Quantitative Failure” after 601 rate cuts and zero/negative rates and $15trn of asset purchases and a multitude of currency devaluations…have caused a big recent reversal of two of the most stubborn trades of 2015:

  1. The “strong $ trade”…investors have been forced to reduce longs in Europe & Japan
  2. The “TINA trade”…investors have been forced to reduce longs in Equities, Discretionary, Tech, Banks).

  Indeed, despite the fact that EM/commodities/resources continue to visibly discount a “deflationary bust”, the “longs” revealed in the Sept FMS have actually underperformed the “shorts” (Chart 6) in the recent crash. The “longs” are down 8.0% since Aug 19th, while the “shorts” are down 5.4%.

  

  

  

  

  

• Margin Debt Drops: Healthy Pullback, Or Budding Headwind?

  Via Dana Lyons' Tumblr, 

  Pullback in Margin Debt is healthy… unless it signifies the start of a larger decline.

  In our post yesterday on household stock investment, we discussed what we call “background indicators”. These various investment metrics describe the longer-term conditions in the marketplace, but are not catalysts themselves. Thus, we consider them to be measures of potential risk should a catalyst come along to trigger a decline. In that case, the potential risk begins to manifest itself in actual risk. Considering it is near its all-time highs, we consider household stock investment to carry significant potential risk. Another background indicator signaling the same is NYSE margin debt.

  Margin debt refers to the amount of money borrowed for the purposes of leveraging a stock position. The higher the level of margin debt, the more leverage in the system – and the greater the amount of potential risk. As of April this year, NYSE margin debt was at an all-time high at more than $500 billion. Over the past few months, the level has moderated a bit. After August’s market rout, margin debt sat at $473 billion, down 6.7% from the highs.

   

  

   

  So is this a healthy pullback in potential risk? Or is it a beginning of a larger trend whereby more potential risk will become actualized risk? There is no way to know for sure, however, there have been a few similar declines in margin debt in the past 15 years. Specifically, since 1999, NYSE margin debt has seen a drawdown from its high of at least 6.7% on 4 other occasions

  • April 2000
  • August 2007
  • May 2010
  • August 2011

  Obviously the first two instances saw the pullback morph into substantial, longer-term retrenchments, coinciding with cyclical bear markets in stocks. The other two occurrences, while coinciding with painful stock market pullbacks at the time, did not lead to a longer retrenchment in margin debt. And, in fact,by the time we knew what margin debt had done in May 2010 and August 2011, the correction in stocks was almost over.

  There are obvious similarities between the 2010 and 2011 instances with our current situation, especially 2011. So it is entirely possible that the current market pullback has almost run its course. However, there are also differences. In 2010 and 2011, neither the stock market nor margin debt were at all-time highs. They were in 2000 and 2007, however.

  So which is it? We can’t know but there is one thing that may be relevant to keep in mind. Considering the elevated near-all-time high readings, if it is the beginning of a larger decline in margin debt, the resulting move in margin debt and in stocks will be much larger than that of a mere short-term correction. Thus, while the odds of each outcome may be equal (as far as we know), the consequences of each are much different.

  In any bull market, certain excesses are built up during its duration. The build up of these excesses, in metrics like margin debt, can serve as a tremendous tailwind for the market…as long as they continue to rise. However, when the music stops and the market declines, these tailwinds become headwinds. This is particularly true of margin debt as margin selling necessarily exacerbates the damage in a large decline.

  We do not know for sure if the recent margin debt retrenchment is the beginning of a longer trend. However, given the record high levels it recently achieved, should a longer, more serious decline in the stock market be starting, the large potential risk represented by record margin debt levels will turn into large actual risk.

  *  *  *

  More from Dana Lyons, JLFMI and My401kPro.

  

  

  

  

  

• Obama Promised Healthcare Premiums Would Fall $2,500 Per Family; They Have Climbed $4,865

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  How’s that Obamacare working out for you? That’s what I thought.

  Considering that pretty much every single thing Obama promised when he was running for President turned out to be an outright lie, we shouldn’t be surprised this is also the case when it comes to his so-called “signature achievement.” Before getting into the meat of this post, let’s take a trip down memory lane and watch a video clip of Obama on the 2008 campaign trail.

  As you can see, he didn’t just say it once or twice. He said it over, and over and over again. Now here’s what actually happened.

  From Investors Business Daily:

  Employer-based health insurance premiums climbed 4.2% this year for family plans, according to an annual Kaiser Family Foundation report. That’s up from 3% the year before.

   

  Since 2008, average family premiums have climbed a total of $4,865.

   

  The White House cheered the news, saying it was a sign of continued slow growth in premium costs.

   

  “We will start,” Obama said back in 2008, “by reducing premiums by as much as $2,500 per family.”

   

  And Obama wasn’t talking about government subsidized insurance or expanding Medicaid or anything like that. He specifically focused on employer provided health care.

   

  For “people who already have insurance, and the employers who are providing it,” he said at one campaign event, “we will work to lower your premiums by up to $2,500 per family.”

  “We screwed some folks.”

  *  *  *

  For related articles, see:

  Yep, You Guessed It – Obamacare Website Funneling Private Consumer Info to Private Companies

  Video of the Day – Obamacare Architect Credits “Lack of Transparency” and “Stupidity of the American People” for Passage of Healthcare Law

  ObamaFraud: GAO Study Finds Almost All Fake Applicants are Approved for Subsidized ObamaCare

  Serfs Up – Average Healthcare Premiums Have Soared 39%-56% Post Obamacare

  Computer Security Expert Claims he Hacked the ObamaCare Website in 4 Minutes

  

  

  

  

  

• Watch The Latest Russian War Preparations In Syria: Satellite Imagery Update

  Over the course of the last several weeks, Europe’s worsening migrant crisis and Russia’s stepped up military support for Bashar al-Assad’s forces at Latakia have conspired to wake the entire world up to Syria’s protracted civil war. 

  The interesting thing about Russia’s involvement is the extent to which Moscow’s approach to the conflict differs from The Kremlin’s handling of the crisis in Ukraine. 

  Whereas Putin has steadfastly refused to admit the scope of Russia’s support for the separatists at Donetsk, he’s made no secret of Moscow’s intentions in Syria. 

  Note the extent to which that assessment differs from Washington’s official line. While the US insists (loudly) that it cannot discern what Russia’s intentions in Syria are, The Kremlin has been remarkably (and uncharacteristically) clear. Put simply, Russia intends to bolster the army of its ally Bashar al-Assad against any and all anti-regime elements operating inside Syria and because some of those anti-regime elements happen to be extremists, Russia is effectively waging a war on terror by default. No mystery there.

  However, because the US needs to buy time to figure out the best way to navigate an impossibly complex situation whereby Washington will either need to join its two fiercest foreign policy critics (Russia and Iran) in destroying Syrian rebels that in some cases were trained and supported by the Pentagon or else stand aside as the Russians do in a matter of months what the US air force has failed to achieve over the course of more than a year, The White House pretends to be completely confused about Putin’s intentions. This charade has piqued the public’s interest in Russia’s “mysterious” military buildup.

  Having said all of that, one should of course approach any and all “evidence” of Russia’s maneuvers with an appropriate amount of skepticism because, as we noted earlier this month, things like satellite images purporting to show just what Russia is doing and where in Syria “are the modern equivalent of Colin Powell’s vial of WMDs presented to the United Nations in 2003 to justify the war with Iraq.”

  It’s with all of the above in mind that we present the latest images that allegedly show the extent to which Russia is preparing for war from Bashar al-Assad’s seaside stronghold.

   

  

  

  

  

  

  More here:

  Al Assad Airport 24September2015 AllSourceAnalysis

  

  

  

  

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• Janet Yellen Falters During Speech, Receives Medical Attention, All-Clear Given

  For those watching Janet Yellen's speech this evening, the fact that she seemed to struggle towards the end of her speech was a surprise. Now we know why…

  • **FED'S YELLEN GETTING MEDICAL ATTENTION AFTER SPEECH -REUTERS

  It is hardly surprising given that she now carries the weight of the world's economic and market strength on her shoulders.

  As MarketWatch's Greg Robb noted, Yellen faltered at end of her speech. Last page was agonizing. I don't think she felt well but she seemed better when she left the stage.

  Bloomberg reports, Federal Reserve Chair Janet Yellen is resuming her planned schedule after feeling unwell toward the end of a speech she was giving Thursday at the University of Massachusetts at Amherst, Fed spokeswoman Michelle Smith said in an e-mailed statement.

  “Chair Yellen felt dehydrated at the end of a long speech under bright lights,” Smith wrote. “As a precaution, she was seen by EMT staff on-site at U-Mass Amherst. She felt fine afterward and has continued with her schedule Thursday evening.”

  But as you can see below, she really did not look well at all…

  The initial reaction was a dive in stocks…

  

   

  Fed Chair Janet Yellen is receiving medical attention after her speech at UMass, Reuters reports, citing an unidentified University of Massachusetts official.

  And she's fine @zerohedge pic.twitter.com/0vSNipWQUh

  — JM (@capitulaton) September 24, 2015

  Then this…

  • *YELLEN IS DEPARTING SPEECH EVENT, RESUMING SCHEDULE: U. MASS
  • *YELLEN IS HEADING TO A SCHEDULED DINNER – U. MASS SPOKESMAN

  Some Twitterati suggested that perhaps she was just sick of her speech…

  *  *  *

  All-Clear given… Buy!

  • *UMASS MEDIC RICE HELPED ATTEND TO YELLEN AFTER SPEECH
  • *YELLEN DIDN’T GO TO HOSPITAL, RICE SAYS
  • *YELLEN IS FINE, UMASS MEDIC SHAUNA RICE SAYS

  

  

  

  

  

  

• Forget The New World Order, Here's Who Really Runs The World

  Submitted by Jake Anderson via TheAntiMedia.org,

  For decades, extreme ideologies on both the left and the right have clashed over the conspiratorial concept of a shadowy secret government pulling the strings on the world’s heads of state and captains of industry.

  The phrase New World Order is largely derided as a sophomoric conspiracy theory entertained by minds that lack the sophistication necessary to understand the nuances of geopolitics. But it turns out the core idea — one of deep and overarching collusion between Wall Street and government with a globalist agenda — is operational in what a number of insiders call the “Deep State.”

  In the past couple of years, the term has gained traction across a wide swath of ideologies. Former Republican congressional aide Mike Lofgren says it is the nexus of Wall Street and the national security state — a relationship where elected and unelected figures join forces to consolidate power and serve vested interests. Calling it “the big story of our time,” Lofgren says the deep state represents the failure of our visible constitutional government and the cross-fertilization of corporatism with the globalist war on terror.

  “It is a hybrid of national security and law enforcement agencies: the Department of Defense, the Department of State, the Department of Homeland Security, the Central Intelligence Agency and the Justice Department. I also include the Department of the Treasury because of its jurisdiction over financial flows, its enforcement of international sanctions and its organic symbiosis with Wall Street,” he explained.

  Even parts of the judiciary, namely the Foreign Intelligence Surveillance Court, belong to the deep state.

  How does the deep state operate?

   A complex web of revolving doors between the military-industrial-complex, Wall Street,  and Silicon Valley consolidates the interests of defense contracts, banksters, military actions, and both foreign and domestic surveillance intelligence.

  According to Mike Lofgren and many other insiders, this is not a conspiracy theory. The deep state hides in plain sight and goes far beyond the military-industrial complex President Dwight D. Eisenhower warned about in his farewell speech over fifty years ago.

   

  While most citizens are at least passively aware of the surveillance state and collusion between the government and the corporate heads of Wall Street, few people are aware of how much the intelligence functions of the government have been outsourced to privatized groups that are not subject to oversight or accountability. According to Lofgren, 70% of our intelligence budget goes to contractors.

  Moreover, while Wall Street and the federal government suck money out of the economy, relegating tens of millions of people to food stamps and incarcerating more people than China — a totalitarian state with four times more people than us — the deep state has, since 9/11, built the equivalent of three Pentagons, a bloated state apparatus that keeps defense contractors, intelligence contractors, and privatized non-accountable citizens marching in stride.

  After years of serving in Congress, Lofgren’s moment of truth regarding this matter came in 2001. He observed the government appropriating an enormous amount of money that was ostensibly meant to go to Afghanistan but instead went to the Persian Gulf region. This, he says, “disenchanted” him from the groupthink, which, he says, keeps all of Washington’s minions in lockstep.

  Groupthink — an unconscious assimilation of the views of your superiors and peers — also works to keep Silicon Valley funneling technology and information into the federal surveillance state. Lofgren believes the NSA and CIA could not do what they do without Silicon Valley. It has developed a de facto partnership with NSA surveillance activities, as facilitated by a FISA court order.

  Now, Lofgren notes, these CEOs want to complain about foreign market share and the damage this collusion has wrought on both the domestic and international reputation of their brands. Under the pretense of pseudo-libertarianism, they helmed a commercial tech sector that is every bit as intrusive as the NSA. Meanwhile, rigging of the DMCA intellectual property laws — so that the government can imprison and fine citizens who jailbreak devices — behooves Wall Street. It’s no surprise that the government has upheld the draconian legislation for the 15 years.

  It is also unsurprising that the growth of the corporatocracy aids the deep state. The revolving door between government and Wall Street money allows top firms to offer premium jobs to senior government officials and military yes-men. This, says Philip Giraldi, a former counter-terrorism specialist and military intelligence officer for the CIA, explains how the Clintons left the White House nearly broke but soon amassed $100 million. It also explains how former general and CIA Director David Petraeus, who has no experience in finance, became a partner at the KKR private equity firm, and how former Acting CIA Director Michael Morell became Senior Counselor at Beacon Global Strategies.

  Wall Street is the ultimate foundation for the deep state because the incredible amount of money it generates can provide these cushy jobs to those in the government after they retire. Nepotism reigns supreme as the revolving door between Wall Street and government facilitates a great deal of our domestic strife:

  “Bank bailouts, tax breaks, and resistance to legislation that would regulate Wall Street, political donors, and lobbyists. The senior government officials, ex-generals, and high level intelligence operatives who participate find themselves with multi-million dollar homes in which to spend their retirement years, cushioned by a tidy pile of investments,” said Giraldi.

  How did the deep state come to be?

  Some say it is the evolutionary hybrid offspring of the military-industrial complex while others say it came into being with the Federal Reserve Act, even before the First World War. At this time, Woodrow Wilson remarked,

  “We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”

  This quasi-secret cabal pulling the strings in Washington and much of America’s foreign policy is maintained by a corporatist ideology that thrives on deregulation, outsourcing, deindustrialization, and financialization. American exceptionalism, or the great “Washington Consensus,” yields perpetual war and economic imperialism abroad while consolidating the interests of the oligarchy here at home.

  Mike Lofgren says this government within a government operates off tax dollars but is not constrained by the constitution, nor are its machinations derailed by political shifts in the White House. In this world — where the deep state functions with impunity — it doesn’t matter who is president so long as he or she perpetuates the war on terror, which serves this interconnected web of corporate special interests and disingenuous geopolitical objectives.

  “As long as appropriations bills get passed on time, promotion lists get confirmed, black (i.e., secret) budgets get rubber stamped, special tax subsidies for certain corporations are approved without controversy, as long as too many awkward questions are not asked, the gears of the hybrid state will mesh noiselessly,” according to Mike Lofgren in an interview with Bill Moyers.

  Interestingly, according to Philip Giraldi, the ever-militaristic Turkey has its own deep state, which uses overt criminality to keep the money flowing. By comparison, the U.S. deep state relies on a symbiotic relationship between banksters, lobbyists, and defense contractors, a mutant hybrid that also owns the Fourth Estate and Washington think tanks.

  Is there hope for the future?

  Perhaps. At present, discord and unrest continues to build. Various groups, establishments, organizations, and portions of the populace from all corners of the political spectrum, including Silicon Valley, Occupy, the Tea Party, Anonymous, WikiLeaks, anarchists and libertarians from both the left and right, the Electronic Frontier Foundation, and whistleblowers like Edward Snowden and others are beginning to vigorously question and reject the labyrinth of power wielded by the deep state.

  Can these groups — can we, the people — overcome the divide and conquer tactics used to quell dissent? The future of freedom may depend on it.

  

  

  

  

  

• "Hawkish"-er Yellen & Japanese Deflation Spark Uncertainty Across AsiaPac

  The evening started on a high note when Janet Yellen's survival giving a speech warranted a 100 point rip in Dow futures (and USD strength). Then Japan stepped up with its first deflationary CPI print since April 2013 (which of course was met with stock-buying because moar QQE is overdue but that soon faded). EM FX is tumbling further (with Malaysia leading the charge). Chinese credit risk jumps tro a new 2 year high (as SHIBOR remains entirely manipulated flat) as China halts its 4-day devaluation with a tiny nudge stronger in the Yuan fix.

   

  In the words of Flash Gordon, "She's alive…" so BTFYDD because she seemed a tad more hawkish

  

   

  and USD strength…

  

   

  And then Japanese CPI data hit and showed Abenomics imploding as the country dips backinto deflation…

  

   

  Which sparked panic-buying in Japanese stocks (moar QQE?) only to give it al lback as China opened…

  

   

  EM FX not happy at the USD strength and Yellen hawkishness…

  • *RINGGIT HEADS FOR BIGGEST FOUR-DAY DROP SINCE 1998
  • *MALAYSIA'S KEY STOCK INDEX OPENS DOWN 0.6% AT 1,604.15
  • *SINGAPORE'S STRAITS TIMES INDEX FALLS 0.6% TO 2,829.68 AT OPEN
  • *SOUTH KOREA'S KOSPI INDEX FALLS 0.5%

  India is closed for a holiday.

  Asian FX is sliding once again….

  

   

  In China this worries us… It appears the new target for PBOC stability is funding rates (overnight SHIBOR) which has now been dead for 3 weeks amid massive liquidty adjustments, stocks swing, credit risk surges and CNY devaluations…

  

  That is a new 2 year high for Chinese default risk.

  Looks a lot like the tortured manipulation that happened in USDCNY before it imploded a month ago…

  

  Chinese stocks are modestly lower…

  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 0.4% TO 3,130.85
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 0.4% TO 3,272.67
  • *HONG KONG'S HANG SENG INDEX FALLS 0.1% IN PREMARKET

  As PBOC halts its 4-day devaluation (just)

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3785 AGAINST U.S. DOLLAR

  

   

  Charts: Bloomberg

  

  

  

  

  

• "Doomsday" Arctic Seed Vault Tapped For First Time In History As Syrian Civil War Threatens Biodiversity

  With Russian boots officially on the ground at Latakia and with rumors circulating that the PLA may arrive within weeks, Syria has officially replaced eastern Ukraine as the most likely theatre for the start of World War 3. 

  While we certainly hope that cooler heads will prevail, the determination on the part of Washington, Riyadh, and Doha to oust the Assad regime simply isn’t compatible with Tehran and Moscow’s efforts to preserve the existing global balance of power which means that something will ultimately have to give and if it becomes clear that Iran is set to benefit in any way from whatever the outcome ends up being, expect Benjamin Netanyahu to make another trip to The Kremlin, only next time, he won’t be so cordial. 

  For those who – much like a certain CIA “strategic asset” – are looking for signs that Syria’s four-year old, bloody civil war might mark the beginning of the apocalypse, look no further than the Svalbard Global Seed Vault which was tapped for first time in history in response to the uncertain future of Aleppo. Here’s Reuters:

  Syria’s civil war has prompted the first withdrawal of seeds from a “doomsday” vault built in an Arctic mountainside to safeguard global food supplies, officials said on Monday.

   

  The seeds, including samples of wheat, barley and grasses suited to dry regions, have been requested by researchers elsewhere in the Middle East to replace seeds in a gene bank near the Syrian city of Aleppo that has been damaged by the war.

   

  “Protecting the world’s biodiversity in this manner is precisely the purpose of the Svalbard Global Seed Vault,” said Brian Lainoff, a spokesman for the Crop Trust, which runs the underground storage on a Norwegian island 1,300 km (800 miles) from the North Pole.

   

  The vault, which opened on the Svalbard archipelago in 2008, is designed to protect crop seeds – such as beans, rice and wheat – against the worst cataclysms of nuclear war or disease.

   

  It has more than 860,000 samples, from almost all nations. Even if the power were to fail, the vault would stay frozen and sealed for at least 200 years.

   

  The Aleppo seed bank has kept partly functioning, including a cold storage, despite the conflict. But it was no longer able to maintain its role as a hub to grow seeds and distribute them to other nations, mainly in the Middle East.

  In other words, the violence in and around Aleppo now poses a threat to global food supplies by curtailing the production of seeds for drought-resistant crops.

  As far-fetched as that might sound on the surface, the threat is apparently real enough to have prompted the first withdrawal in history from a seed bank built into the side of a frozen mountain. Here’s more on the Svalbard “doomsday” vault from the official website:

  Worldwide, more than 1,700 genebanks hold collections of food crops for safekeeping, yet many of these are vulnerable, exposed not only to natural catastrophes and war, but also to avoidable disasters, such as lack of funding or poor management. Something as mundane as a poorly functioning freezer can ruin an entire collection. And the loss of a crop variety is as irreversible as the extinction of a dinosaur, animal or any form of life.

   

  Remote by any standards, Svalbard’s airport is in fact the northernmost point in the world to be serviced by scheduled flights – usually one a day. Its remoteness enhances the security of the facility, yet local infrastructure in the nearby small Norwegian settlement of Longyearbyen is excellent. The Vault is thus accessible, and seeds can easily be transported to and retrieved from Svalbard.

   

  The Seed Vault has the capacity to store 4.5 million varieties of crops. Each variety will contain on average 500 seeds, so a maximum of 2.5 billion seeds may be stored in the Vault.

   

  Currently, the Vault holds more than 860,000 samples, originating from almost every country in the world. Ranging from unique varieties of major African and Asian food staples such as maize, rice, wheat, cowpea, and sorghum to European and South American varieties of eggplant, lettuce, barley, and potato. In fact, the Vault already holds the most diverse collection of food crop seeds in the world.

   

  The focus of the Vault is to safeguard as much of the world’s unique crop genetic material as possible, while also avoiding unnecessary duplication. It will take some years to assemble because some genebanks need to multiply stocks of seed first, and other seeds need regenerating before they can be shipped to Svalbard.

   

  A temperature of -18ºC is required for optimal storage of the seeds, which are stored and sealed in custom made three-ply foil packages. The packages are sealed inside boxes and stored on shelves inside the vault. The low temperature and moisture levels inside the Vault ensure low metabolic activity, keeping the seeds viable for long periods of time.

  And here’s a look at the outside and inside of the repository that would be tapped in the event a cataclysm threatens global food supplies:

  

  

  

  

  

  

  

  

  

  

• America's "Lumbering" Economy

  While crude and copper have been christened the great economic forecasters of our time, the data shows that there is another, more highly correlated, commodity to the economic cycle. Lumber prices are the most correlated with ISM and GDP of all industrial commodities and that is a problem…

  First, Lumber prices have collapsed to 4 year lows. The 33% Year-over-year plunge is the biggest since the financial crisis and is flashing a big red recession alarm…

  

   

  Second, Lumber prices have historically led stocks and are pointing to significant downside from here…

  

   

  and finally, Third, it appears lumber's decline points to notable downside for manufacturing…

  

   

  But apart from that, everything is fine… Oh wait…

  

   

  Charts: Bloomberg and @Not_Jim_Cramer

  

  

  

  

  

• China Set To Deploy Nuclear Sub That Can Hit US Mainland Targets, Pentagon Says

  China has made two things absolutely clear this year: 1) if Beijing thinks you may be inclined to sell stocks into a falling market, the consequences for you could be dire, and 2) the PLA navy is quite serious about projecting China’s maritime ambitions to the rest of the world.

  Evidence of the latter point is readily observable in the South China Sea, where dredgers have been busy for months building man-made islands atop reefs in the Spratlys much to the chagrin of Washington and its regional allies.

  Then there was the PLA’s unexpected arrival in Yemen back in March when a naval frigate showed up in Aden and evacuated 225 foreign nationals.

  

  (Chinese soldiers in Yemen)

  And who can forget the five ships that cruised by just 12 miles off the coast of Alaska as Obama toured the state.

  As if all of that wasn’t enough, at least one commander in Bashar al-Assad’s Syrian Arab Army now claims Chinese personnel are on their way to Latakia. 

  All of this comes as Beijing rolls out a new maritime initiative as outlined in the government’s 2015 defense strategy white paper. Here’s an excerpt from the report:

  In line with the strategic requirement of offshore waters defense and open seas protection, the PLA Navy (PLAN) will gradually shift its focus from “offshore waters defense” to the combination of “offshore waters defense” with “open seas protection,” and build a combined, multi-functional and efficient marine combat force structure. The PLAN will enhance its capabilities for strategic deterrence and counterattack, maritime maneuvers, joint operations at sea, comprehensive defense and comprehensive support.

  Now, even as Xi Jinping makes the rounds in the US and attempts to provide the American public with some clarity on a number of issues not the least of which is cyber security, the Pentagon says China is set to deploy a nuclear submarine armed with JL-2 missiles that have the range to hit the US. Here’s Bloomberg with the story:

  A new Chinese nuclear submarine designed to carry missiles that can hit the U.S. will likely deploy before year’s end, the Pentagon said, adding to Obama administration concerns over China’s muscle-flexing in Asia.

   

  China’s navy is expected this year to conduct the first patrol of its Jin-class nuclear-powered submarine armed with JL-2 submarine-launched ballistic missiles, the Pentagon’s Defense Intelligence Agency said in a statement. It declined to give its level of confidence on when the new boat will be deployed or the status of the missile.

   

  “The capability to maintain continuous deterrent patrols is a big milestone for a nuclear power,” Larry Wortzel, a member of the congressionally created U.S.-China Economic and Security Review Commission, said in an e-mail. “I think the Chinese would announce this capability as a show of strength and for prestige.”

   

  Wortzel said his commission’s 2015 report probably will include a comment from PLA Navy Commander Admiral Wu Shengli, who said the submarine-missile combination is “a trump card that makes our motherland proud and our adversaries terrified.”

   

  China’s increased naval might, as well as its assertion to territory in the contested South China Sea and East China Sea, has helped spur the region’s largest military buildup in decades and caused disquiet in the U.S. about its role as the region’s peace keeper.

   

  China currently has at least four Jin-class submarines. Fifty-one years after the country carried out its first nuclear test, patrols by the new submarines will give Xi greater agility to respond to a nuclear attack, according to analysts.

   

  “Of all the PLA strategic deterrence capabilities, the sea-based link is the most closely guarded secret because it is meant to be the most secure of the deterrents for China,” said Koh, who studies China’s naval modernization. 

   

  The JL-2 “has nearly three times the range” of China’s current sea-launched ballistic missile “which was only able to range targets in the immediate vicinity of China,” the U.S. Office of Naval Intelligence said in an April report on China’s Navy. The JL-2 “underwent successful testing in 2012 and is likely ready to enter the force,” it said. “Once deployed it will provide China with a capability to strike targets” in the continental U.S., it said.

  For those curious, here is the JL-2 in action:

  And here’s a bit more color from the Pentagon’s annual report to Congress:

  The PLA Navy places a high priority on the modernization of its submarine force. China continues the production of JIN-class nuclear-powered ballistic missile submarines (SSBNs). Three JIN-class SSBNs (Type 094) are currently operational, and up to five may enter service before China proceeds to its next generation SSBN (Type 096) over the next decade. The JIN-class SSBN will carry the new JL-2 submarine-launched ballistic missile (SLBM) with an estimated range of 7,400 km. The JIN-class and the JL-2 will give the PLA Navy its first credible sea-based nuclear deterrent. China is likely to conduct its first nuclear deterrence patrols with the JIN-class SSBN in 2014.

  Ultimately, the deployment was planned and as indicated above, this doesn’t exactly come as a surprise to anyone in military circles, but what it does do is underscore the idea that the return to bipolarity is more likely to see China as the counterbalance to US hegemony than it is to see a resurrgent Russia retake its place as US spoiler par excellence. Of course Beijing and Moscow seem generally to be on the same page as evidenced by their security council veto coordination on Syria which means that between the two, the balance of power could move against the US especially if Washington’s warnings about the UK’s declining military capabilities prove accurate.

  *  *  *

  Full report on PLA navy from US Office of Naval Intelligence

  2015 Pla Navy Pub Print

  

  

  

  

  

• Half Of Americans Think "Government Is An Immediate Threat To Liberty"

  Submitted by Mac Slavo via SHTFPlan.com,

  Government poses a threat to liberty, that much is clear.

  But what may be surprising is that almost half of Americans clearly identified government as a clear and “immediate” threat, and are obviously outraged about what is going on.

  Oddly, the number of angry Americans has remained consistent in poll number ever since about 2006 during George W. Bush’s second term, maintaining around 46-49% throughout Barack Obama’s entire presidency.

  And yet, things continue to get worse and worse with each political cycle, and each new president.

  Gallup reported that:

  Almost half of Americans, 49%, say the federal government poses “an immediate threat to the rights and freedoms of ordinary citizens,” similar to what was found in previous surveys conducted over the last five years.

   

  The remarkable finding about these attitudes is how much they reflect apparent antipathy toward the party controlling the White House, rather than being a purely fundamental or fixed philosophical attitude about government.

   

  […] during the Republican administration of George W. Bush, Democrats and Democratic-leaning independents were consistently more likely than Republicans and Republican-leaning independents to say the federal government posed an immediate threat.

   

  […] during the Democratic Obama administration, the partisan gap flipped, with Republicans significantly more likely to agree.

   

  […]

   

  Still, the persistent finding in recent years that half of the population views the government as an immediate threat underscores the degree to which the role and power of government remains a key issue of our time… numerous other measures show that the people give their government some of the lowest approval and trust ratings in the measures’ history.

  So why does the situation between the people and government continue to deteriorate?

  The complaints about government’s abuse of powers reaches across the isle, and straddles both parties in the White House, yet people tend to direct their anger only at the current president – thus falling for the ruse of blaming the puppet, and not the system.

  As Americans shift blame about the state of affairs back-and-forth with every election, most miss the point about why these things are happening – someone is writing reports and creating policies that allow these things to happen. All the Congress and President do is approve them, and deflect attention towards who is running the show.

  What are Americans upset about, according to polls?:

  Overall, Americans who agree that the government is an immediate threat tend to respond with very general complaints echoing the theme that the federal government is too big and too powerful, and that it has too many laws. They also cite nonspecific allegations that the government violates freedoms and civil liberties, and that there is too much government in people’s private lives.

   

  [also…]

   

  perceptions that the government is “socialist,” that the government spends too much, that it picks winners and losers such as the wealthy or racial and ethnic minorities, that it is too involved in things it shouldn’t be and that it violates the separation of powers.

   

  [as well as…]

   

  freedom of speech, freedom of religion, the overuse of police and law enforcement, government surveillance of private citizens including emails and phone records, government involvement in gay marriage issues, overregulation of business, overtaxing, the healthcare law and immigration.

  The vast majority of these issues happen under the mis-leadership of both parties, progressing without fail through the years.

  It is time that Americans embrace their anger at government, and focus their attention past the politicians to the real problem.

  Start with the bankers, follow the money, and see where it goes…

  

  

  

  

  

• Presenting The "QE Infinity Paradox", Or "The Emperor Is Naked, Long Live The Emperor"

  Perhaps the most important thing to understand about what was widely billed as the most important FOMC decision in recent history, is that by “removing the fourth wall” (to quote Deutsche Bank), the Fed effectively reinforced the reflexive relationship between its decisions, economic outcomes, and financial market conditions.

  In simpler terms, differentiating between cause and effect is now more difficult than ever as Fed policy affects markets which in turn affect Fed policy and so on. 

  This sets the stage for any number of absurdly self-referential outcomes.

  For instance, the Fed needs to remain on hold to guard against the possibility that a soaring dollar triggers an EM meltdown that would then feed back into developed markets, forcing the FOMC to reverse itself. But delaying liftoff sends a downbeat message about the state of the US economy which triggers the selling of domestic risk assets. Hiking would solve this as it would signal the Fed’s confidence in the outlook for the US economy, but that would be USD-positive which is bad news for EM. 

  A similarly absurd circular dilemma presents itself if we take the view that the Fed missed its window to hike and is now creating more nervousness and uncertainty with each meeting that passes without liftoff. Here’s how former Treasury economist Bryan Carter put it to Bloomberg: “short-end rates move higher as the Fed gets closer to hiking, and that causes the dollar to strengthen, and that causes global funding stresses. They are creating the conditions that are causing the external environment to be weak, and then they say they can’t hike because of those same conditions that they have created.”

  When you tie the reflexivity problem in with the fact that the excessive use of counter-cyclical policy is leading to the creation of ever larger asset bubbles by effectively short circuiting the market’s natural ability to purge speculative excess and correct the misallocation of capital, what you get is a never-ending loop whereby the consequences of unconventional monetary policy serve as the excuse for doubling and tripling down on those same policies. 

  It’s with all of the above in mind that we present the following flow chart from RBS’ Alberto Gallo who illustrates the “QE infinity paradox”:

  

  

  

  

  

  

• Uncomfortably Revisiting Yellen's Bubble Doctrine

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  There is growing turmoil in buybacks that threatens the very fabric of the stock bubble. That was always the primary transmission of the foundation of its current manifestation, corporate debt, into asset prices; especially the huge run following QE3 and QE4. As represented by the S&P 500 Buyback Index, this liquidity propensity has found a durable reverse. After peaking all the way back in late February, the index is now more than 12% below that level after sustaining the August 24 liquidation.

  

  The fact that this reversal is seven months in the making more than suggests a potential major shift. As the NYSE Composite, stocks were not long for continued momentum against the “dollar.” Buybacks seemed to have weathered the first piece of the first “dollar” wave, but as junk debt there was always conjoined a limit.

  Some say expectations around the Federal Reserve have a lot to do with the buyback decline. Even though the central bank elected to keep its benchmark rate near zero Thursday, fears of higher rates are causing companies to rethink their capital return program, posits Boris Schlossberg of BK Asset Management.

   

  “Even though rates have not gone up, we clearly are in a tightening position in terms of monetary policy, and I think they’re looking ahead and saying, ‘Do I really want to finance this thing with no-longer-cheap money that we used to have a couple months ago?'” Schlossberg said Tuesday in a ” Trading Nation ” segment.

  I have little doubt that the causation effect claimed above is slightly misplaced, as “monetary tightening” isn’t the Fed so much as the eurodollar standard; that is just one mainstream method of trying to reconcile what is now seen with the financial plumbing remained misunderstood and largely hidden. As with the junk bond bubble, there is undoubtedly a correlation between re-assessing stock repurchases and the bald reductions of issuance in corporate credit. That hasn’t changed throughout this year, instead having gained further in this second “dollar” wave. Yet again, we see the “dollar” intrude in unwelcome fashion (to the bubbles).

  

  The problem once momentum fades is that investor attention turns toward valuations that were repeatedly ignored before. As long as everything is moving upward and any fundamental downside is completely contained (in perception) as “transitory” then valuations are easily set aside as one form of rationalization. The effect of reversing momentum is for a more honest measurement; particularly by force of change in economic sentiment which is almost always concurrent.

  To that end, valuations remain as they have been for the past several years. Stock prices are out of alignment with any historical trend (except the one weakly conjured by Bernanke to attempt self-justification, which instead actually furthered the score against him). Worse, some forms of valuation are subject the same kind of statistical subjectivity that has plagued main accounts like GDP and the Establishment Survey (trend-cycle).

  In the Tobin’s Q measure of valuation for the stock bubble, the basis (denominator) is Nonfinancial Corporate Net Worth. Revisions in this segment of the Financial Accounts of the United States (formerly Flow of Funds) have followed the pattern of revisions in GDP; upward until the last benchmark which reduced 2012 and 2013 figures while preserving the levels for 2014 and 2015. That had the effect, on GDP, of reducing growth rates in the first period while thus increasing them in the second. Corporate net worth is somewhat derived from that economic view, and its revised results are somewhat reflective of that.

  

  The numerator for Tobin’s Q is corporate equities (the classification now changed with this Q2 update from equity liabilities to market value of corporate equities) which somehow are continually revised downward. The net result is a vision of Tobin’s Q that is less outlier (but still historically high).

  

  Even with these revisions and the decline in valuation intensity, the current calculated Tobin’s Q for Q2 2015 remains at the 90th percentile. The level for my modified Q ratio (which subtracts the market value of real estate from net worth, so as to not “justify” one bubble with another) remains above the 92nd percentile.

  

  Robert Shiller’s CAPE’s current reading, also down from 2014, of 24.3 is also just about the 90th percentile but in a data series that goes back almost a century and a half. And if we exclude the obvious bubble period after 1995, 24.3 would have been in the 99th percentile for the period 1871-1995 (which shows you just how much the past two decades have skewed and screwed valuations).

  

  That truly becomes a serious consideration where the eurodollar, the mother and proginator of all these bubbles, is no longer the assumed basis. In other words, if “investors” have been expecting “dollar” liquidity and eurodollar financial resources as a root for maintaining valuations and that turns out as a false assumption (like 2008) what becomes the true underlying value for stocks? Certainly not something close to the 90th percentile.

  *  *  *

  Without direct momentum, valuation and fundamentals begin to govern which is why, I believe, QE3 pushed the market as much as it did; it promised to provide both with a direct attachment to the corporate bubble to project that perfection. The lack of momentum in 2015 is the stock “market” waking up to the falsification of those assumptions as QE aided the debt-based flow but little else (and that spans the globe). Again, extreme valuations are trouble at any time, even when they are “justified” by economic expectations. That is the Yellen Doctrine whereby a bubble isn’t a problem when it leads to or even just leads recovery and booming growth.

  That theory is, of course, as absurd as it sounds. The problem right now is that even if you buy into it, as so many did literally as well as rationalizing, the booming growth is still, at some point, necessary. That may be why the FOMC is so insistent upon “strong” no matter how much that is demonstrably assaulted. We are clearly at that point where it does not want to remain; if the growth doesn’t show up soon, then by this very count stocks are in a bubble and worse, already on the downslope. It is the raw force of the “dollar” in all forms, to rebuke Yellen by compelling sanity of asset bubbles, stripped of further financial inequality, making investors come to terms with reality rather than continued fantasy.

  

  

  

  

  

• The One Phrase That Actually Matters In Yellen's Speech: "Nominal Interest Rates Cannot Go Much Below Zero"

  While many are focusing on the latest attempt by Yellen to restore some Fed confidence, even if it means confusing the market even more and sound far more hawkish than last week’s FOMC statement, which showed once and for all that the mandate of the Fed is the stock market and global risk pricing stability, and is written by Goldman Sachs, with an emphasis on the circular assumption that inflation is under control because, well, it is under control…

  Wow – Yellen Speech Word Cloud pic.twitter.com/Dxl2SkMWtC

  — Not Jim Cramer (@Not_Jim_Cramer) September 24, 2015

  … which naturally is something to be expected from a speech titled “Inflation Dynamics”, the one phrase in the quite massive speech of 5531 words, had nothing to do with inflation, and everything to do with the Fed’s deflation “reaction function”, i.e., NIRP.

  This is what Yellen said in her speech dissecting the theory, if not practice, of inflation:

  …the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities.

  So just a “little” then? Which is what exactly: -0.25%? -1.0%? -2.5%? Or, as Albert Edwards suggested earlier today: -5%? Yellen explains:

  … the lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate. As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low.

  Well, no: not less room – more room: negative room! What is the most negative inflation, pardon deflation, can get? Very:

  This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace.

  Just in case it was lost, here it is again, from footnote 9:

  Because of the inconvenience of storing and protecting very large quantities of currency, some firms are willing to pay a premium to hold short-term government securities or bank deposits instead. As a result, several foreign central banks have found it possible to push nominal short-term interest rates somewhat below zero

  And there you have it: while Yellen is desperate to regain some of the Fed’s lost credibility with the September rate indecision, what she is really doing is reciting Bernanke’s Nov 2002 speech: “Deflation: Making Sure “It” Doesn’t Happen Here.” Only, the US already has deflation. Which is why it is better to call Yellen’s version: “Depression: Making Sure “It” Doesn’t Happen Here” and just like Bernanke’s 2002 speech hinted at LSAP, aka QE, so Yellen’s speech, academic in its discussion of theoretical inflation, is really a warning that the Fed is now actively considering negative rates as its primary “reaction function.”

  After all, it’s not like Kocherlakota would come up with negative dots out of the blue.

  * * *

  As for the big picture from Yellen’s speech, Pedro said it best:

  The Fed seems to be losing confidence in its own confidence.

  — Pedro da Costa (@pdacosta) September 24, 2015

  

  

  

  

  

• All The Gold In The World

  For the companies exploring for gold, a deposit that has more than one gram of gold for every tonne of earth is an exciting prospect. In fact, in our 2013 report summarizing the world’s gold deposits, we found that the average grade of gold deposits in the world is around that amount: about 1.01 g/t.

  Think about that for a moment. One gram (0.035 oz) is equal to the mass of a small paper clip. This small amount of gold is usually not even in one place – it is dispersed through a tonne of rock and dirt in smaller amounts, most of the time invisible to the naked eye. For some companies that have the stars align with easy metallurgy, a deposit near surface, and open pit potential, this gram per tonne deposit may even somehow be economic.

  It’s hard to believe that such a small amount of gold could be worth so much, and that is why great visualizations can help us understand the rarity of this yellow metal. Luckily, the folks at Demonocracy.info have done the heavy lifting for us, putting together a series of 3D visualizations of gold bullion bars showcasing the world’s gold that has been mined thus far. Note: these visualizations are a couple of years old and optimistically have the value of gold pegged at US$2,000 per oz, presumably for the ease of calculations.

  For those interested, we have also put together a similar slideshow on the topic, showing how much gold, silver, copper, and other metals are mined each year.

  
  Smaller denominations of gold plates: 1 gram, 5 grams, 10 grams, 20 grams, and 1 troy oz of gold.

  
  Larger denominations of gold plates: 50 grams, 100 grams, 250 grams, 500 grams, and 1 kg of gold.

  
  This 400 oz gold bar, at $2,000 per oz gold, is worth the $800,000 cash beside it. The gold bar is extremely heavy, weighing more than three full milk jugs.

  
  Here’s what one tonne of gold looks like. At $2,000 per oz, it’s worth $64.3 million.

  
  Gold is so heavy that the suspension of an average truck would break if it held anymore than pictured above. Even if the truck’s suspension broke, the load of gold in the back could buy 2,660 brand new trucks at an MSRP of $40,000 per truck.

  
  Here’s 10 tonnes of gold compared to 100 tonnes of the yellow metal.

  
  This semi-truck is carrying the maximum load it can legally carry, which is about about 25 tonnes. Here there are 24.88 tonnes of gold, worth $1.6 billion.

  
  The Northrop Grumman B2 Spirit Bomber program cost $44.75 Billion for a total of 21 units built, which averages to $2,130,952,380 per unit. Shown here is the amount of gold it costs to buy one unit.

  
  Here’s the entire gold reserves of the United States government, which is 8,133.5 tonnes.

  
  Here’s the world’s gold reserves by government circa 2012. This is slightly outdated, with China and Russia both having significant increases since then.

  
  All gold mined in history, stacked in 400 oz bars. The 166,500 tonnes here is actually divided into four levels: the bottom level is jewelry (50.5% of all gold), the 2nd level is private investment (18.7%), the third level is world governments (17.4%), and the highest level is other uses for gold such as industry (13.4%).

  
  Lastly, we finish off with an image of all of the world’s mined gold in one cube with dimensions of 20.5m. If it was all melted, it would fit within the confines of an Olympic Swimming Pool.

  Source: Visual Capitalist

  *  *  *

  Want to learn everything you need to know about gold in about 20 minutes? Our five-part Gold Series covers everything from its rich history, supply and geology, demand drivers, investment properties, and market trends.

  

  

  

  

• Cleaner Than A Volkswagen

  

  

  Meme Created using FinanceLOL

  

  

  

  

• Yellen "Do-Over" Speech – Live Feed

  Highlights

  • YELLEN:STILL SLACK BUT LABOR MARKET MADE CONSIDERABLE PROGRESS
  • YELLEN:RISK INFL EXPCTS GET UNMOORED TO DWNSIDE, WARRANTS EASE
  • YELLEN: BELOW 2% INFL LIKELY DUE TO TRANSITORY FACTORS
  • YELLEN SAYS MOST ON FOMC `INCLUDING MYSELF’ EXPECT 2015 LIFTOFF
  • YELLEN SAYS FOMC VIEWS MAY CHANGE IF ECONOMY `SURPRISES US’
  • YELLEN SAYS ECONOMY ‘NOT FAR AWAY FROM FULL EMPLOYMENT’

  Preview

  When risk sold off last week in the wake of the Fed’s so-called “clean relent,” it signalled at best a policy mistake and at worst the loss of any and all credibility. To be sure, the FOMC was facing a number of Catch-22s. That is, there probably was no “right” answer per se, but because the Fed put itself in that position by not hiking when it had the chance, the fact that they were up against a lose-lose scenario got them no sympathy. 

  

  Tonight, Yellen will get what some are billing as a kind of “do over” opportunity when she delivers a speech (written by Jan Hatzius?) in Amherst, Massachusetts, on “Inflation Dynamics and Monetary Policy. A note to the Fed: the only thing you need to know about “inflation dynamics” is that trillions in global QE hasn’t worked to boost inflation expectations.

  The market will of course hang on every word in an effort to discern how likely liftoff is to occur before the end of the year.

  *YELLEN: SEES INITIAL INCREASE IN FED FUNDS RATE LATER THIS YR

  And Market says “no”!

  

   

  As it appears The Market is indeed ‘macro-data-dependent’ even if The Fed isn’t…

  

  *  *  *

  Full Text

  In my remarks today, I will discuss inflation and its role in the Federal Reserve’s conduct of monetary policy. I will begin by reviewing the history of inflation in the United States since the 1960s, highlighting two key points: that inflation is now much more stable than it used to be, and that it is currently running at a very low level. I will then consider the costs associated with inflation, and why these costs suggest that the Federal Reserve should try to keep inflation close to 2 percent. After briefly reviewing our policy actions since the financial crisis, I will discuss the dynamics of inflation and their implications for the outlook and monetary policy.

  Historical Review of Inflation

   

  A crucial responsibility of any central bank is to control inflation, the average rate of increase in the prices of a broad group of goods and services. Keeping inflation stable at a moderately low level is important because, for reasons I will discuss, inflation that is high, excessively low, or unstable imposes significant costs on households and businesses. As a result, inflation control is one half of the dual mandate that Congress has laid down for the Federal Reserve, which is to pursue maximum employment and stable prices.

   

  The Federal Reserve has not always been successful in fulfilling the price stability element of its mandate. The dashed red line in figure 1 plots the four-quarter percent change in the price index for personal consumption expenditures (PCE)–the measure of inflation that the Fed’s policymaking body, the Federal Open Market Committee, or FOMC, uses to define its longer-run inflation goal.1 Starting in the mid-1960s, inflation began to move higher. Large jumps in food and energy prices played a role in this upward move, but they were not the whole story, for, as illustrated here, inflation was already moving up before the food and energy shocks hit in the 1970s and the early 1980s.2 And if we look at core inflation, the solid black line, which excludes food and energy prices, we see that it too starts to move higher in the mid-1960s and rises to very elevated levels during the 1970s, which strongly suggests that something more than the energy and food price shocks must have been at work.

   

  A second important feature of inflation over this period can be seen if we examine an estimate of its long-term trend, which is plotted as the dotted black line in figure 1. At each point in time, this trend is defined as the prediction from a statistical model of the level to which inflation is projected to return in the long run once the effects of any shocks to the economy have fully played out.3 As can be seen from the figure, this estimated trend drifts higher over the 1960s and 1970s, implying that during this period there was no stable “anchor” to which inflation could be expected to eventually return–a conclusion generally supported by other procedures for estimating trend inflation.

   

  Today many economists believe that these features of inflation in the late 1960s and 1970s–its high level and lack of a stable anchor–reflected a combination of factors, including chronically overheated labor and product markets, the effects of the energy and food price shocks, and the emergence of an “inflationary psychology” whereby a rise in actual inflation led people to revise up their expectations for future inflation. Together, these various factors caused inflation–actual and expected–to ratchet higher over time. Ultimately, however, monetary policy bears responsibility for the broad contour of what happened to actual and expected inflation during this period because the Federal Reserve was insufficiently focused on returning inflation to a predictable, low level following the shocks to food and energy prices and other disturbances.

   

  In late 1979, the Federal Reserve began significantly tightening monetary policy to reduce inflation. In response to this tightening, which precipitated a severe economic downturn in the early 1980s, overall inflation moved persistently lower, averaging less than 4 percent from 1983 to 1990. Inflation came down further following the 1990-91 recession and subsequent slow recovery and then averaged about 2 percent for many years. Since the recession ended in 2009, however, the United States has experienced inflation running appreciably below the FOMC’s 2 percent objective, in part reflecting the gradual pace of the subsequent economic recovery.

   

  Examining the behavior of inflation’s estimated long-term trend reveals another important change in inflation dynamics. With the caveat that these results are based on a specific implementation of a particular statistical model, they imply that since the mid-1990s there have been no persistent movements in this predicted long-run inflation rate, which has remained very close to 2 percent. Remarkably, this stability is estimated to have continued during and after the recent severe recession, which saw the unemployment rate rise to levels comparable to those seen during the 1981-82 downturn, when the trend did shift down markedly.4 As I will discuss, the stability of this trend appears linked to a change in the behavior of long-run inflation expectations–measures of which appear to be much better anchored today than in the past, likely reflecting an improvement in the conduct of monetary policy. In any event, this empirical analysis implies that, over the past 20 years, inflation has been much more predictable over the longer term than it was back in the 1970s because the trend rate to which inflation was predicted to return no longer moved around appreciably. That said, inflation still varied considerably from year to year in response to various shocks.

   

  As figure 2 highlights, the United States has experienced very low inflation on average since the financial crisis, in part reflecting persistent economic weakness that has proven difficult to fully counter with monetary policy. Overall inflation (shown as the dashed red line) has averaged only about 1-1/2 percent per year since 2008 and is currently close to zero. This result is not merely a product of falling energy prices, as core inflation (the solid black line) has also been low on average over this period.

   

  Inflation Costs

  In 2012 the FOMC adopted, for the first time, an explicit longer-run inflation objective of 2 percent as measured by the PCE price index.5 (Other central banks, including the European Central Bank and the Bank of England, also have a 2 percent inflation target.) This decision reflected the FOMC’s judgment that inflation that persistently deviates–up or down–from a fixed low level can be costly in a number of ways. Persistent high inflation induces households and firms to spend time and effort trying to minimize their cash holdings and forces businesses to adjust prices more frequently than would otherwise be necessary. More importantly, high inflation also tends to raise the after-tax cost of capital, thereby discouraging business investment. These adverse effects occur because capital depreciation allowances and other aspects of our tax system are only partially indexed for inflation.6 

   

  Persistently high inflation, if unanticipated, can be especially costly for households that rely on pensions, annuities, and long-term bonds to provide a significant portion of their retirement income. Because the income provided by these assets is typically fixed in nominal terms, its real purchasing power may decline surprisingly quickly if inflation turns out to be consistently higher than originally anticipated, with potentially serious consequences for retirees’ standard of living as they age.7 

   

  An unexpected rise in inflation also tends to reduce the real purchasing power of labor income for a time because nominal wages and salaries are generally slow to adjust to movements in the overall level of prices. Survey data suggest that this effect is probably the number one reason why people dislike inflation so much.8 In the longer run, however, real wages–that is, wages adjusted for inflation–appear to be largely independent of the average rate of inflation and instead are primarily determined by productivity, global competition, and other nonmonetary factors. In support of this view, figure 3 shows that nominal wage growth tends to broadly track price inflation over long periods of time.

   

  Inflation that is persistently very low can also be costly, and it is such costs that have been particularly relevant to monetary policymakers in recent years. The most important cost is that very low inflation constrains a central bank’s ability to combat recessions. Normally, the FOMC fights economic downturns by reducing the nominal federal funds rate, the rate charged by banks to lend to each other overnight. These reductions, current and expected, stimulate spending and hiring by lowering longer-term real interest rates–that is, nominal rates adjusted for inflation–and improving financial conditions more broadly. But the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities.9 Thus, the lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate. As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low. This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace.10 For this reason, pursuing too low an inflation objective or otherwise tolerating persistently very low inflation would be inconsistent with the other leg of the FOMC’s mandate, to promote maximum employment.11 

   

  An unexpected decline in inflation that is sizable and persistent can also be costly because it increases the debt burdens of borrowers. Consider homeowners who take out a conventional fixed-rate mortgage, with the expectation that inflation will remain close to 2 percent and their nominal incomes will rise about 4 percent per year. If the economy were instead to experience chronic mild deflation accompanied by flat or declining nominal incomes, then after a few years the homeowners might find it noticeably more difficult to cover their monthly mortgage payments than they had originally anticipated. Moreover, if house prices fall in line with consumer prices rather than rising as expected, then the equity in their home will be lower than they had anticipated. This situation, which is sometimes referred to as “debt deflation,” would also confront all households with outstanding student loans, auto loans, or credit card debt, as well as businesses that had taken out bank loans or issued bonds.12 Of course, in this situation, lenders would be receiving more real income. But the net effect on the economy is likely to be negative, in large part because borrowers typically have only a limited ability to absorb losses. And if the increased debt-service burdens and declines in collateral values are severe enough to force borrowers into bankruptcy, then the resultant hardship imposed on families, small business owners, and laid-off workers may be very severe.13 

   

  Monetary Policy Actions since the Financial Crisis

  As I noted earlier, after weighing the costs associated with various rates of inflation, the FOMC decided that 2 percent inflation is an appropriate operational definition of its longer-run price objective.14 In the wake of the 2008 financial crisis, however, achieving both this objective and full employment (the other leg of the Federal Reserve’s dual mandate) has been difficult, as shown in figure 4. Initially, the unemployment rate (the solid black line) soared and inflation (the dashed red line) fell sharply. Moreover, after the recession officially ended in 2009, the subsequent recovery was significantly slowed by a variety of persistent headwinds, including households with underwater mortgages and high debt burdens, reduced access to credit for many potential borrowers, constrained spending by state and local governments, and weakened foreign growth prospects. In an effort to return employment and inflation to levels consistent with the Federal Reserve’s dual mandate, the FOMC took a variety of unprecedented actions to help lower longer-term interest rates, including reducing the federal funds rate (the dotted black line) to near zero, communicating to the public that short-term interest rates would likely stay exceptionally low for some time, and buying large quantities of longer-term Treasury debt and agency-issued mortgage-backed securities.15 

   

  These actions contributed to highly accommodative financial conditions, thereby helping to bring about a considerable improvement in labor market conditions over time. The unemployment rate, which peaked at 10 percent in 2009, is now 5.1 percent, slightly above the median of FOMC participants’ current estimates of its longer-run normal level. Although other indicators suggest that the unemployment rate currently understates how much slack remains in the labor market, on balance the economy is no longer far away from full employment. In contrast, inflation has continued to run below the Committee’s objective over the past several years, and over the past 12 months it has been essentially zero. Nevertheless, the Committee expects that inflation will gradually return to 2 percent over the next two or three years. I will now turn to the determinants of inflation and the factors that underlie this expectation.

   

  Inflation Dynamics

  Models used to describe and predict inflation commonly distinguish between changes in food and energy prices–which enter into total inflation–and movements in the prices of other goods and services–that is, core inflation. This decomposition is useful because food and energy prices can be extremely volatile, with fluctuations that often depend on factors that are beyond the influence of monetary policy, such as technological or political developments (in the case of energy prices) or weather or disease (in the case of food prices). As a result, core inflation usually provides a better indicator than total inflation of where total inflation is headed in the medium term.16 Of course, food and energy account for a significant portion of household budgets, so the Federal Reserve’s inflation objective is defined in terms of the overall change in consumer prices.

   

  What, then, determines core inflation? Recalling figure 1, core inflation tends to fluctuate around a longer-term trend that now is essentially stable. Let me first focus on these fluctuations before turning to the trend. Economic theory suggests, and empirical analysis confirms, that such deviations of inflation from trend depend partly on the intensity of resource utilization in the economy–as approximated, for example, by the gap between the actual unemployment rate and its so-called natural rate, or by the shortfall of actual gross domestic product (GDP) from potential output. This relationship–which likely reflects, among other things, a tendency for firms’ costs to rise as utilization rates increase–represents an important channel through which monetary policy influences inflation over the medium term, although in practice the influence is modest and gradual. Movements in certain types of input costs, particularly changes in the price of imported goods, also can cause core inflation to deviate noticeably from its trend, sometimes by a marked amount from year to year.17 Finally, a nontrivial fraction of the quarter-to-quarter, and even the year-to-year, variability of inflation is attributable to idiosyncratic and often unpredictable shocks.18 

   

  What about the determinants of inflation’s longer-term trend? Here, it is instructive to compare the purely statistical estimate of the trend rate of future inflation shown earlier in figure 1 with survey measures of people’s actual expectations of long-run inflation, as is done in figure 5. Theory suggests that inflation expectations–which presumably are linked to the central bank’s inflation goal–should play an important role in actual price setting.19 Indeed, the contours of these series are strikingly similar, which suggests that the estimated trend in inflation is in fact related to households’ and firms’ long-run inflation expectations.20 

   

  To summarize, this analysis suggests that economic slack, changes in imported goods prices, and idiosyncratic shocks all cause core inflation to deviate from a longer-term trend that is ultimately determined by long-run inflation expectations. As some will recognize, this model of core inflation is a variant of a theoretical model that is commonly referred to as an expectations-augmented Phillips curve.21 Total inflation in turn reflects movements in core inflation, combined with changes in the prices of food and energy.

   

  An important feature of this model of inflation dynamics is that the overall effect that variations in resource utilization, import prices, and other factors will have on inflation depends crucially on whether these influences also affect long-run inflation expectations. Figure 6 illustrates this point with a stylized example of the inflation consequences of a gradual increase in the level of import prices–perhaps occurring in response to stronger real activity abroad or a fall in the exchange value of the dollar–that causes the rate of change of import prices to be elevated for a time.22 First, consider the situation shown in panel A, in which households’ and firms’ expectations of inflation are not solidly anchored, but instead adjust in response to the rates of inflation that are actually observed.23 Such conditions–which arguably prevailed in the United States from the 1970s to the mid-1990s–could plausibly arise if the central bank has, in the past, allowed significant and persistent movements in inflation to occur. In this case, the temporary rise in the rate of change of import prices results in a permanent increase in inflation. This shift occurs because the initial increase in inflation generated by a period of rising import prices leads households and firms to revise up their expectations of future inflation. A permanent rise in inflation would also result from a sustained rise in the level of oil prices or a temporary increase in resource utilization.

   

  By contrast, suppose that inflation expectations are instead well anchored, perhaps because the central bank has been successful over time in keeping inflation near some specified target and has made it clear to the public that it intends to continue to do so. Then the response of inflation to a temporary increase in the rate of change of import prices or any other transitory shock will resemble the pattern shown in panel B. In this case, inflation will deviate from its longer-term level only as long as import prices are rising. But once they level out, inflation will fall back to its previous trend in the absence of other disturbances.24 

   

  A key implication of these two examples is that the presence of well-anchored inflation expectations greatly enhances a central bank’s ability to pursue both of its objectives–namely, price stability and full employment. Because temporary shifts in the rate of change of import prices or other transitory shocks have no permanent influence on expectations, they have only a transitory effect on inflation. As a result, the central bank can “look through” such short-run inflationary disturbances in setting monetary policy, allowing it to focus on returning the economy to full employment without placing price stability at risk. Indeed, the Federal Reserve has done just that in setting monetary policy over the past decade or more. Moreover, as I will discuss shortly, these inflation dynamics are a key reason why the FOMC expects inflation to return to 2 percent over the next few years.

   

  On balance, the evidence suggests that inflation expectations are in fact well anchored at present. Figure 7 plots the two survey measures of longer-term expected inflation I presented earlier, along with a measure of longer-term inflation compensation derived as the difference between yields on nominal Treasury securities and inflation-indexed ones, called TIPS. Since the late 1990s, survey measures of longer-term inflation expectations have been quite stable; this stability has persisted in recent years despite a deep recession and concerns expressed by some observers regarding the potential inflationary effects of unconventional monetary policy. The fact that these survey measures appear to have remained anchored at about the same levels that prevailed prior to the recession suggests that, once the economy has returned to full employment (and absent any other shocks), core inflation should return to its pre-recession average level of about 2 percent.

   

  This conclusion is tempered somewhat by recent movements in longer-run inflation compensation, which in principle could reflect changes in investors’ expectations for long-run inflation. This measure is now noticeably lower than in the years just prior to the financial crisis.25 However, movements in inflation compensation are difficult to interpret because they can be driven by factors that are unique to financial markets–such as movements in liquidity or risk premiums–as well as by changes in expected inflation.26 Indeed, empirical work that attempts to control for these factors suggests that the long-run inflation expectations embedded in asset prices have in fact moved down relatively little over the past decade.27 Nevertheless, the decline in inflation compensation over the past year may indicate that financial market participants now see an increased risk of very low inflation persisting.

   

  Although the evidence, on balance, suggests that inflation expectations are well anchored at present, policymakers would be unwise to take this situation for granted. Anchored inflation expectations were not won easily or quickly: Experience suggests that it takes many years of carefully conducted monetary policy to alter what households and firms perceive to be inflation’s “normal” behavior, and, furthermore, that a persistent failure to keep inflation under control–by letting it drift either too high or too low for too long–could cause expectations to once again become unmoored.28 Given that inflation has been running below the FOMC’s objective for several years now, such concerns reinforce the appropriateness of the Federal Reserve’s current monetary policy, which remains highly accommodative by historical standards and is directed toward helping return inflation to 2 percent over the medium term.29 

   

  Before turning to the implications of this inflation model for the current outlook and monetary policy, a cautionary note is in order. The Phillips-curve approach to forecasting inflation has a long history in economics, and it has usefully informed monetary policy decisionmaking around the globe. But the theoretical underpinnings of the model are still a subject of controversy among economists. Moreover, inflation sometimes moves in ways that empirical versions of the model, which necessarily are a simplified version of a complicated reality, cannot adequately explain. For this reason, significant uncertainty attaches to Phillips curve predictions, and the validity of forecasts from this model must be continuously evaluated in response to incoming data.

   

  Policy Implications

  Assuming that my reading of the data is correct and long-run inflation expectations are in fact anchored near their pre-recession levels, what implications does the preceding description of inflation dynamics have for the inflation outlook and for monetary policy?

   

  This framework suggests, first, that much of the recent shortfall of inflation from our 2 percent objective is attributable to special factors whose effects are likely to prove transitory. As the solid black line in figure 8 indicates, PCE inflation has run noticeably below our 2 percent objective on average since 2008, with the shortfall approaching about 1 percentage point in both 2013 and 2014 and more than 1-1/2 percentage points this year. The stacked bars in the figure give the contributions of various factors to these deviations from 2 percent, computed using an estimated version of the simple inflation model I just discussed.30 As the solid blue portion of the bars shows, falling consumer energy prices explain about half of this year’s shortfall and a sizable portion of the 2013 and 2014 shortfalls as well. Another important source of downward pressure this year has been a decline in import prices, the portion with orange checkerboard pattern, which is largely attributable to the 15 percent appreciation in the dollar’s exchange value over the past year. In contrast, the restraint imposed by economic slack, the green dotted portion, has diminished steadily over time as the economy has recovered and is now estimated to be relatively modest.31 Finally, a similarly small portion of the current shortfall of inflation from 2 percent is explained by other factors (which include changes in food prices); importantly, the effects of these other factors are transitory and often switch sign from year to year.

   

  Although an accounting exercise like this one is always imprecise and will depend on the specific model that is used, I think its basic message–that the current near-zero rate of inflation can mostly be attributed to the temporary effects of falling prices for energy and non-energy imports–is quite plausible. If so, the 12-month change in total PCE prices is likely to rebound to 1-1/2 percent or higher in 2016, barring a further substantial drop in crude oil prices and provided that the dollar does not appreciate noticeably further.

   

  To be reasonably confident that inflation will return to 2 percent over the next few years, we need, in turn, to be reasonably confident that we will see continued solid economic growth and further gains in resource utilization, with longer-term inflation expectations remaining near their pre-recession level. Fortunately, prospects for the U.S. economy generally appear solid. Monthly payroll gains have averaged close to 210,000 since the start of the year and the overall economy has been expanding modestly faster than its productive potential. My colleagues and I, based on our most recent forecasts, anticipate that this pattern will continue and that labor market conditions will improve further as we head into 2016.

   

  The labor market has achieved considerable progress over the past several years. Even so, further improvement in labor market conditions would be welcome because we are probably not yet all the way back to full employment. Although the unemployment rate may now be close to its longer-run normal level–which most FOMC participants now estimate is around 4.9 percent–this traditional metric of resource utilization almost certainly understates the actual amount of slack that currently exists: On a cyclically adjusted basis, the labor force participation rate remains low relative to its underlying trend, and an unusually large number of people are working part time but would prefer full-time employment.32 Consistent with this assessment is the slow pace at which hourly wages and compensation have been rising, which suggests that most firms still find it relatively easy to hire and retain employees.

   

  Reducing slack along these other dimensions may involve a temporary decline in the unemployment rate somewhat below the level that is estimated to be consistent, in the longer run, with inflation stabilizing at 2 percent. For example, attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring. Similarly, firms may be unwilling to restructure their operations to use more full-time workers until they encounter greater difficulty filling part-time positions. Beyond these considerations, a modest decline in the unemployment rate below its long-run level for a time would, by increasing resource utilization, also have the benefit of speeding the return to 2 percent inflation. Finally, albeit more speculatively, such an environment might help reverse some of the significant supply-side damage that appears to have occurred in recent years, thereby improving Americans’ standard of living. 33 

   

  Consistent with the inflation framework I have outlined, the medians of the projections provided by FOMC participants at our recent meeting show inflation gradually moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate of the rate expected to prevail in the longer run. These projections embody two key judgments regarding the projected relationship between real activity and interest rates. First, the real federal funds rate is currently somewhat below the level that would be consistent with real GDP expanding in line with potential, which implies that the unemployment rate is likely to continue to fall in the absence of some tightening. Second, participants implicitly expect that the various headwinds to economic growth that I mentioned earlier will continue to fade, thereby boosting the economy’s underlying strength. Combined, these two judgments imply that the real interest rate consistent with achieving and then maintaining full employment in the medium run should rise gradually over time. This expectation, coupled with inherent lags in the response of real activity and inflation to changes in monetary policy, are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.

   

  By itself, the precise timing of the first increase in our target for the federal funds rate should have only minor implications for financial conditions and the general economy. What matters for overall financial conditions is the entire trajectory of short-term interest rates that is anticipated by markets and the public. As I noted, most of my colleagues and I anticipate that economic conditions are likely to warrant raising short-term interest rates at a quite gradual pace over the next few years. It’s important to emphasize, however, that both the timing of the first rate increase and any subsequent adjustments to our federal funds rate target will depend on how developments in the economy influence the Committee’s outlook for progress toward maximum employment and 2 percent inflation.

   

  The economic outlook, of course, is highly uncertain and it is conceivable, for example, that inflation could remain appreciably below our 2 percent target despite the apparent anchoring of inflation expectations. Here, Japan’s recent history may be instructive: As shown in figure 9, survey measures of longer-term expected inflation in that country remained positive and stable even as that country experienced many years of persistent, mild deflation.34 The explanation for the persistent divergence between actual and expected inflation in Japan is not clear, but I believe that it illustrates a problem faced by all central banks: Economists’ understanding of the dynamics of inflation is far from perfect. Reflecting that limited understanding, the predictions of our models often err, sometimes significantly so. Accordingly, inflation may rise more slowly or rapidly than the Committee currently anticipates; should such a development occur, we would need to adjust the stance of policy in response.

   

  Considerable uncertainties also surround the outlook for economic activity. For example, we cannot be certain about the pace at which the headwinds still restraining the domestic economy will continue to fade. Moreover, net exports have served as a significant drag on growth over the past year and recent global economic and financial developments highlight the risk that a slowdown in foreign growth might restrain U.S. economic activity somewhat further. The Committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy. That said, in response to surprises affecting the outlook for economic activity, as with those affecting inflation, the FOMC would need to adjust the stance of policy so that our actions remain consistent with inflation returning to our 2 percent objective over the medium term in the context of maximum employment.

   

  Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.

   

  Conclusion

  To conclude, let me emphasize that, following the dual mandate established by the Congress, the Federal Reserve is committed to the achievement of maximum employment and price stability. To this end, we have maintained a highly accommodative monetary policy since the financial crisis; that policy has fostered a marked improvement in labor market conditions and helped check undesirable disinflationary pressures. However, we have not yet fully attained our objectives under the dual mandate: Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. But I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

  Here’s some (possibly) helpful context from Bloomberg:

  Janet Yellen has a chance this week to do one of two things: emphasize that the Federal Reserve remains on track to raise interest rates in 2015, or validate the view of many investors that liftoff will be delayed until next year.

   

  “The market is really second-guessing them,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York. “There doesn’t seem to be an easy way to get from where we are today to a rate hike in 2015 without some additional volatility. The market just isn’t there.”

   

  The communications challenge for Yellen and her colleagues is how to describe two competing forces as they weigh liftoff: downward pressure on inflation coming from slumping prices of imported goods and commodities due to a stronger dollar and slowing growth in China, versus steady U.S. consumer demand that they believe should push domestic prices higher as unemployment falls and the labor market tightens further.

   

  The jobless rate is already low at 5.1 percent and the median forecast of Fed officials last week showed it averaging 5 percent for the final quarter of the year. On the other hand, inflation as measured by their preferred gauge has been under their 2 percent target since April 2012 and was just 0.3 percent in the 12 months through July.

   

  The picture is further clouded by the ongoing instability in financial markets that could serve as a warning that U.S. growth prospects may not be as insulated from a global slowdown as the Fed’s forecasters expect.

   

  

  

  

  

  

• The Oligarch Recovery: 30 Million Americans Have Tapped Retirement Savings Early In Last Year

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  The ongoing oligarch theft labeled an “economic recovery” by pundits, politicians and mainstream media alike, is one of the largest frauds I’ve witnessed in my life. The reality of the situation is finally starting to hit home, and the proof is now undeniable.

  Earlier this year, I published a powerful post titled, Use of Alternative Financial Services, Such as Payday Loans, Continues to Increase Despite the “Recovery,” which highlighted how a growing number of Americans have been taking out unconventional loans, not simply to overcome an emergency, but for everyday expenses. Here’s an excerpt:

  Families’ savings not where they should be: That’s one part of the problem. But Mills sees something else in the recovery that’s more disturbing. The number of households tapping alternative financial services are on the rise, meaning that Americans are turning to non-bank lenders for credit: payday loans, refund-anticipation loans, pawnshops, and rent-to-own services.

   

  According to the Urban Institute report, the number of households that used alternative credit products increased 7 percent between 2011 and 2013. And the kind of household seeking alternative financing is changing, too.

   

  It’s not the case that every one of these middle- and upper-class households turned to pawnshops and payday lenders because they got whomped by an unexpected bill from a mechanic or a dentist. “People who are in these [non-bank] situations are not using these forms of credit to simply overcome an emergency, but are using them for basic living experiences,” Mills says.

  Of course, it’s not just “alternative financial services.” Increasingly desperate American citizens are also tapping whatever retirement savings they may have, including taking the 10% tax penalty for the privilege of doing so. In fact, 30 million Americans have done just that in the past year alone, in the midst of what is supposed to be a “recovery.”

  From Time:

  With the effects of the financial crisis still lingering, 30 million Americans in the last 12 months tapped retirement savings to pay for an unexpected expense, new research shows. This undercuts financial security and underscores the need for every household to maintain an emergency fund.

   

  Boomers were most likely to take a premature withdrawal as well as incur a tax penalty, according to a survey from Bankrate.com. Some 26% of those ages 50-64 say their financial situation has deteriorated, and 17% used their 401(k) plan and other retirement savings to pay for an emergency expense.

   

  Two-thirds of Americans agree that the effects of the financial crisis are still being felt in the way they live, work, save and spend, according to a report from Allianz Life Insurance Co. One in five can be called a post-crash skeptic—a person that experienced at least six different kinds of financial setback during the recession, like a job loss or loss of home value, and feel their financial future is in peril. 

  So now we know what has kept meager spending afloat during this pitiful “recovery.” A combination of “alternative loans” and a bleeding of retirement accounts. The transformation of the public into a horde of broke debt serfs is almost complete.

  Don’t forget to send your thank you card to you know who:

  

  *  *  *

  For related articles, see:

  The Oligarch Recovery – Study Shows Real Wages Have Plunged for Low Income Workers During the “Recovery”

  The Oligarch Recovery – Low Income Americans Can’t Afford to Live in Any Metro Area

  The Oligarch Recovery – Renting in America is Most Expensive Ever

  Another Tale from the Oligarch Recovery – How a $1,500 Sofa Costs $4,150 When You’re Poor

  The Face of the Oligarch Recovery – Luxury Skyscrapers Stay Empty as NYC Homeless Population Hits Record High

  Census Data Proves It – There Was No Economic Recovery Unless You Were Already Rich

  Use of Alternative Financial Services, Such as Payday Loans, Continues to Increase Despite the “Recovery”

  

  

  

  

  

• Bank of Spain Responds, Promises It Is Not Confiscating Catalonia's Gold

  On Wednesday, some were curious to know why a line of armored vans was stationed outside the Bank of Spain’s Barcelona branch.

  

  Our interest was piqued when we remembered that on Sunday, Catalans will vote in what might as well be an independence referendum. 

  We’ll spare readers a lengthy discussion of the history behind the independence movement and just note that CDC and ERC need 68 seats for an absolute parliamentary majority. If they hit that threshold, they’ll push quickly for an independent Catalonia. Based on the latest polls, it looks like it’s going to be close:

  

  It doesn’t require a leap of logic to draw a connection between what looked like unusual activity at a central bank branch in the Catalan capital and this Sunday’s vote and so, we took the opportunity to ask the following: “Is the Bank Of Spain quietly pulling its gold from Catalonia ahead of this weekend’s vote?”

  The answer, according to The Bank Of Spain itself who was kind enough to send us a letter this morning, is “no.” We present their response below without further comment:

  Good morning,

   

  Regarding the story posted by Tyler Darden on 09/23/2015 under the headline Is The Bank Of Spain Quietly Pulling Its Gold From Catalonia Ahead Of This Weekend’s Vote?, we want to point out the following:

   

  Nothing extraordinary happened yesterday in the building of Banco de España in Barcelona. A number of armoured vans were stationed for a while in the street because of the increased movement of cash being distributed to the commercial banks prior to the banking holiday in Barcelona today (followed in many cases by another non-working day tomorrow or “Puente” as it is called in Spanish).

   

  We gladly provided this explanation yesterday to the media which happened to ask us about the matter (which was not the case of VilaWeb, that did not contact the Banco de España regarding this –or any other- matter).

   

  And, by the way, there is no gold in this site of Banco de España in Barcelona.

  

  

  

  

  

• Caught On Tape: Anarchy – When Chicken Prices Hit Record Highs

  We have all watched the dramatic and disturbing scenes from Venezuela as 'average joes' fight over the last bar of soap or sheet of toilet paper as prices soar beyond anyone's control… and said "that could never happen here." Well with stealth-flation leaking into everyday prices wherever you look (as long as 'you' are not The Fed), we may have just witnessed the awakening. With prices for chicken having hit record highs, residents of America are brawling over the last winged feast…

  When this occurs…

  

   

  This eventually happens…

   

  "could never happen here"

  Chart: Bloomberg

  

  

  

  

  

• Gold Pops, Dollar Drops, As CATastrophe Slaps Stocks Ahead Of Yellen "Do-Over" Speech

  Despite a lot of effort today…

   

  BMW fears battered European stocs – not helped at all by a 4th day of China devaluation wringing the carry trade out of EUR… CAT crushed hopes early on and weak US data pushed stocks lower but Crude's rampathon lifted stocks (as JPY lost its mojo) and then JPM's quant fell on his sword

  

   

  Cash indices roundtripped but were unable to get green…

  

   

  And since the post-FOMC peak…

  

   

  CAT was the big loser after cutting outlooks and slashing jobs…

  

   

  VIX was higher on the day but those crazy tails were very evident again…

  

   

  And the JPM comment drove the algos wild…

  

   

  The whole day was one of roundtrips…around Europe's close…

  

   

  Credit continues to push lower…

  

   

  As US Financials see credit surge back towards Black Monday wides…

  

   

  Treasury yields tumbled as stocks sold off then began to ramp back higher as Europe closed…

  

   

  The USD Dollar dumped early on as Yuan devaluation sparked more EURCNH unwinds (and EUR strength) but once again as soon as Europe closed a mysterious bid for USDs re-emerged ahead of Asia…

  

   

  Commodities generally rose on the day with gold and silver most notable.

  

   

  Close up on crude's roundtrip

  

   

  But it was gold and silver that stood out…

  

   

  Charts: Bloomberg

  

  

  

  

• One By One the Central Banks Are Losing Control

  Since 2008, the Keynesians running global Central Banks had always suggested that there was no problem too great for them to handle. They’d promised to do “whatever it takes,” to maintain the financial system and print the world back to growth.

   

  Thus far, we’d seen some pretty aggressive moves. The most aggressive was committed by the Bank of Japan, which announced a single QE program equal to 24% of Japanese GDP in April 2013.

   

  However, the SNB was the first Central Bank to actually reach the point at which it had to decide between printing a truly insane amount of money relative to GDP (50%+) or simply giving up.

   

  It chose to give up.

   

  In many ways, the SNB was cornered by the ECB into this situation. I think this is why the SNB decided to make its announcement on a Thursday as opposed to over the weekend (when Central Banks usually announce bad news to minimize the market impact). The SNB wanted to cause mayhem, likely because it was frustrated by the ECB’s upcoming QE program of which the SNB was undoubtedly aware in advance.

   

  This situation has since progressed with an even larger, more important Central Bank buckling to market forces.

   

  That Central Bank is China.

   

  As we’ve noted before, China’s economy is in tatters. At best it is growing around 3.5%. At worst it isn’t growing at all. And with its currency closely linked with the US Dollar (which is in a bull market) Chinese exporters were getting destroyed.

   

  So what did China do? It chose to devalue the Yuan.

   

  In short, a new player is in the global currency war. And it represents the second largest economy in the world. Having said that, we want you to take note of a few lessons from this situation:

   

  1)   There are in fact problems that are too big for Central Banks to manage.

   

  2)   Central Banks are in fact individual entities. True, they try to coordinate their moves, but when push comes to shove, it will be each Central Bank for itself. This trend will be increasing going forward.

   

  3)   Central Banks have no problem lying about the significance of a situation right up until they shock the market (both the SNB and the PBOC’s moves were suddenly announced).

   

  Of these, #1 is the most important. Since the mid-‘80s, the general consensus has been that there is no problem too great that Central Banks cannot fix it. This has been the case because most crisis that have occurred during that period were either isolated to a particular market (Asian Crisis, Latin American Crisis, Russian Ruble Crisis, etc.) or a particular asset class (Tech Bubble, Housing Bubble, etc.).

   

  This situation has resulted in less and less volatility in the financial system, combined with increased risk taking on the part of investors. As a result, the necessary deleveraging has never been permitted to occur and the financial system has become increasing leveraged (meaning more and more debt).

   

  You can see this in the below chart revealing total credit market instruments in the US (this only includes investment grade bonds, junk bonds, and commercial paper). The deleveraging of the 2008 crisis which nearly took down the entire financial system was a mere blip in a mountain of debt (and this doesn’t even include US sovereign debt, emerging market debt, derivatives, etc.).

   

  Today, when you include global debt issuance, we are facing a debt super crisis, the likes of which has never existed before: $100 trillion in global bonds, with an additional $555 trillion in derivatives.

   

  Central Banks, by printing money, began a war of competitive devaluation in 2008. This worked fine when they were coordinating their moves to prop the system up from 2009-2011. We even had some coordinated efforts by the Fed and the ECB to push the markets higher in 2012 in order to benefit President Obama’s re-election campaign.

   

  However, 2012 marked the high water mark for Central Bank intervention without political repercussions. From that point onward, all Central Bank began to lose their political capital rapidly.

   

  1.     In Japan, the Bank of Japan’s policies are demolishing the Middle Class. The number of Japanese living on welfare just hit a record and real earnings and household spending have been in a free fall since the middle of 2014.

   

  2.     In Europe, the ECB’s President Mario Draghi has admitted in parliament that he was concerned about a “deflationary death spiral” and admitted that QE was the last tool left. Half of the ECB’s Board is against his direction.

   

  3.     In the US, the Fed is now being targeted by Congress. Legislation has been introduced to audit the Fed AND force it to abide by the Taylor Rule. Also, the Fed appears to be losing control of the system as it failed to increase interest rates and stocks STILL collapsed.

   

  4.     In China, deflation is spiraling out of control with a stock market crash, housing bubble bursting, and economic downturn that is more serve than most realize.

   

  The significance of these developments cannot be overstated. Central Banks will be increasingly acting against one another going forward. There will more surprises and more volatility across the board. Eventually it will culminate in a Crash that will make 2008 look like a picnic.

   

  Smart investors are preparing now, BEFORE it hits.

   

  If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

   

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

   

  As we write this, there are less than 10 left.

   

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  Best Regards

   

  Phoenix Capital Research

   

  Our FREE e-letter: www.gainspainscapital.com

   

   

  

  

  

  

• Is Goldman Preparing To Sacrifice The Next "Lehman"

  One of the more “unmentionable” conspiracy theories surrounding the demise of Lehman Brothers in 2008 is that this “shocking” event was in fact a well-choreographed and carefully scripted “controlled demolition”, with the Lehman Bankruptcy – the event that officially unleashed the Great Financial Crisis – getting the express prior permission of both Ben Bernanke and Hank Paulson, a former Goldman employee, whose motive was the elimination of the one firm that was then Goldman’s biggest competitor in the FICC space, and whose subsequent bailout of his former employer (Goldman Sachs and all other insolvent banks) would lead to the preservation of trillions in worthless equity courtesy of the biggest taxpayer funded bailout in history, and with billions in excess reserves parked on Goldman’s balance sheet smoothing the bank’s transition through a historic recession.

  Fast forward to this week when as we reported previously, following a surge in its Credit Default Swaps, the “doomsday” scenario for Glencore is now on the table, because the market suddenly realized that Glencore’s most valuable asset, not its mines, or its trading operations, but its investment grade rating, could be stripped away.

  This is what we said, after we noted that GLEN CDS had just hit a multi-year wide of 464bps (precisely as we said it would over a year ago):

  We expect this CDS blowout to continue.

   

  What’s worse, if the company is downgraded from investment grade to junk, watch as the “commodity Lehman” scenario for Glencore, which much more than a simple copper miner just happens to be one of the world’s biggest commodity trading desks, comes full cricle leading to waterfall collateral liquidations and counterparty freeze-outs as suddenly the world is reminded that there is a vast difference between a real and a rehypothecated commodity, and that all collateral rehypothecation chains are only as strong as the weakest counterparty!

  Long story short: if and when Glencore loses its Investment Grade rating, it’s more or less game over, if not for the company’s already mothballed mining operation then certainly for its trading group, where “junking” would lead to numerous collateral shortfalls and margin call waterfalls, reminiscent of the ratings agency downgrade of AIG that culminated with the US bailout of the insurer.

  Therefore we were not surprised earlier today to see Glencore stock crash to a new record low below 100p even as the CDS blow out continued.

  

   

  We were, however, very surprised by the catalyst, because the company that managed to successfully hammer Glencore, which in our view is nothing short of the commodity “Lehman” (or perhaps AIG) was none other than Goldman, which earlier today released a report which is essentially blueprint for not only how to take away Glencore’s precious investment grade rating, but taken a few steps further, how to unleash this cycle’s commodity “Lehman event” (once again, Glencore is first and foremost a trading desk which serves as a counterparty with trillions in derivatives notional exposure to virtually every other commodity using and trading entity in the world) and taken to the extreme, how to “force” the Fed to finally unleash the helicopter money should Glencore’s failure be the catalyst the pushes the entire world into a deflationary recession, if not outright depression.

  This is what Goldman said earlier in a note titled “Much progress made but the song remains the same”

  We update our estimates for Glencore following the completion of its equity placement on September 16, in which it raised its target of $2.5bn. We also update our estimates to incorporate our commodity analysts’ lower thermal coal forecasts ($58/54/52/t for 2015/16/17E) and lower met coal forecasts ($91/85/90/t), which impacts Glencore’s 2016/17/18E EBITDA by c.15-18%… On lower estimates we reduce our 12-month price target to 130p (was 170p).

   

  Implications

   

  Since announcing c.$10bn of debt reduction measures on September 7 and completing a 9.9% equity placing, shares have retreated a further 14%. In our view investors are not yet convinced that Glencore has gone far enough to totally allay fears that the industrial assets can service the new lower debt level. Our scenario analysis suggests that using GS estimates for commodities prices and FX rates, Glencore’s IG rating would be secure in the medium term, but our estimates for zinc, nickel and coal prices are higher than spot prices. When we run the same analysis using spot commodity prices and spot FX rates, most of Glencore’s credit metrics would be at the border of required ranges to maintain its IG rating. Finally, a 5% drop in spot commodity and flat FX would see most of Glencore’s credit rating metrics fall well outside the required range to maintain its IG rating, suggesting concerns would quickly resurface. Glencore has a few levers left – further lowering capex, signing streaming deals and releasing more working capital. Recent underperformance suggests that the measures exercised are insufficient and more is needed. We remain Neutral rated but expect continued volatility in the near term.

  Why is Glencore’s IG rating so critical? As explained above, Glencore is really not so much the Lehman as the AIG of the commodity world: without an investment grade rating, a self-reinforcing collapse will begin that could ultimately terminate Glencore’s trading desk, in the process liquidating one of the world’s biggest commodity trading counterparties.

  From Goldman:

  Glencore’s trading business relies heavily on short-term credit to finance commodity deals and its financing costs would increase if it were to lose its Investment Grade credit rating. In addition, it could even lose some counterparties due to increased counterparty risk.

  That’s putting it mildly: what a junking of Glencore would do, is start a collateral demand waterfall cascade that the cash-strapped company simply would not be able to sustain.

  So having laid out the strawman, Goldman next, very conveniently, explains just what would take for the Investment Grade trap to slam shut:

  it would only take a c.5% fall in spot commodities prices for concerns about its credit rating to resurface

   

  While Glencore’s announced measures have allayed near-term concerns about the potential for its credit rating to be downgraded, its high leverage to commodity prices is demonstrated in our scenario analysis, where we estimate just a c.5% drop in spot commodity prices would see concerns resurface about the potential for its credit rating to be downgraded. In addition, given the latest guidance on capex of c.$4bn in FY17, we believe there is limited flexibility for the company to make any further cuts while maintaining its production targets.

  Wait, high leverage to commodity prices as the biggest risk factor? Where have we seen this before? Oh yes, in our March 2014 post (saying to buy GLEN CDS) which showed the one thing nobody was looking at at the time; Glencore’s, wait for it, high leverage to commodity prices!

  

   

  For those who enjoy playing with numbers, here is Goldman’s real “Doomsday” scenario: the one which sees Glencore’s IG rating stripped. As Goldman admits, all it would take is a small 5% drop in commodity prices from here:

  If commodity prices were to fall 5% from current levels – which we do not consider to be a far-fetched assumption given the downside risk to commodity consumption in China – we believe that concerns about its IG credit rating would quickly resurface. Under this scenario, we estimate that most of Glencore’s credit rating metrics would fall well outside the required ranges to maintain its IG rating, and as early as the next reporting period (FY15).

   

  Although Glencore has a few levers left in the event commodity prices continue their leg down (such as deferring capex and executing streaming deals), the key point to highlight is that executing these options would take time. That said the recent announcement by Silver Wheaton that it is working with Glencore on the streaming deal highlights that management is focused on bolstering its balance sheet.

  Charted:

  

  It goes without saying that courtesy of HFTs and China’s hard landing, a 5% drop in commodities could happen overnight.

  So if one is so inclined, and puts on the conspiracy theory hat mentioned at the beginning of this post, Goldman may have just laid out the strawman for the next mega bailout which goes roughly as follows:

  1. Commodity prices drop another 5%
  2. The rating agencies get a tap on their shoulder and downgrade Glencore to Junk.
  3. Waterfall cascade of margin and collateral calls promptly liquidates Glencore’s trading desk and depletes the company’s cash, leaving trillions of derivative contracts in limbo. Always remember: the strongest collateral chain is only as strong as its weakest conterparty. If a counterparty liquidates, net exposure becomes gross, and suddenly everyone starts wondering where all those “physical” commodities are.
  4. Contagion spreads as self-reinforcing commodities collapse launches deflationary shock wave around the globe.
  5. Fed and global central banks are called in to come up with a “more powerful” form of stimulus
  6. The money paradrop scenario proposed by Citigroup yesterday, becomes reality

  Too far-fetched? Perhaps. But keep an eye out for a Glencore downgrade from Investment Grade. If that happens, it may be a good time to quietly get out of Dodge for the time being. Just in case.

  

  

  

  

  

  

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• Paul Craig Roberts: Democracy Has Departed The West

  Authored by Paul Craig Roberts,

  Before the West spreads democracy abroad maybe it could get some for itself. The US is an oligarchy in which government is answerable to six powerful private interest groups. In Europe governments are answerable to the EU, Washington, and private bankers and not to their peoples. In the UK the military brass has declared its hold on the reins of power.

  Jeremy Corbyn is the first Labourite to lead the Labour Party in a long time. Considering the stupidity and immorality of the Tories, Corbyn could become prime minister of Britain. Should this occur, Corbyn would shift the budget priorities away from supporting Washington’s wars toward refurbishing the social welfare state that made life for ordinary Britishers more secure and less stressful.

  A senior serving general of the British army said that the army would not allow the people to “put a maverick in charge of the country’s security. The Army just wouldn’t stand for it and would use whatever means possible, fair or foul, to prevent that.”

  In other words, a democratic outcome unacceptable to the English military will be overthrown. Just like in Egypt.

  Here we have the incongruity of Washington and London bringing democracy to others through what Vladimir Putin calls “airstrike democracy,” while tolerating a democracy deficit themselves. The safest conclusion is that democracy is a cloak for an aggressive agenda, not a value in itself to the US and UK elites, who rule and who intend to continue to rule these countries for their personal benefit.

  Jonathan Cook reports that the use of “whatever means possible, fair or foul,” against Labour prime ministers who actually stood for the people rather than for the elites is not unique to Corbyn. Labour Prime Minister Harald Wilson faced similar pressure and resigned. 

  As far as I can tell, not only has democracy departed the Western world, but also compassion, empathy for others, morality, integrity, respect for truth, justice, faithfulness, and self-respect. Western civilization has become a hollow shell. There is nothing left but greed and coercion and the threat of coercion. When I read—hopefully incorrect reports—that Russia’s President Putin desires to be a partner of the West, I wonder why such a powerful country, which has emerged into light out of darkness, wants to be Satan’s partner. I assume that the reports are untrue or that Putin is acting in the interest of humankind to defuse the dangerous situation created by Washington and its NATO sock puppets.

  Russia should not forget the courageous speech that Venezuelan President Hugo Chavez gave to the UN on September 20, 2006. Standing at the podium, Chavez said that on the previous day George W. Bush stood here, “Satan himself, speaking as if he owned the world. You can still smell the sulfur.” The purpose of America, Chavez said, is “to preserve the pattern of domination, exploitation and pillage of the peoples of the world.”

  Chavez’s words were too much truth for US politicians. Nancy Pelosi, the multimillionaire Speaker of the US House of Representatives, said that such a speech was to be expected from an “everyday thug.”

  Elsewhere the response was different. Rafael Correa, currently President of Ecuador, said that Chavez had insulted Satan, because although Satan is evil like Washington, he is al least intelligent, and Washington is completely stupid.

  The Western World is on its last legs. Unemployment is horrendous for European and American youth—primarily for the educated. Young American women, driven by student debt, advertise on Internet sites for “sugar daddies” to whom they will supply sex for financial support. The easy answer—“education is the solution”— is a lie. Ph.Ds cannot get jobs, because university budgets are cut in order to save money for wars and bank bailouts and 75% of the remaining budget is used by administrations to pay themselves large salaries and perks. NYU, for example, provides its higher administrative personnel with expensive summer homes. University presidents in America have multimillion dollar incomes, while the students drown in debt.

  The Wall Street Mentality—unlimited Greed—has taken over American life, and this greed has been exported to Europe, which had achieved a sharing relationship between labor and capital. Today Europe, like the US, is an opportunity wasteland for the young. Greece has been sacrificed for the private bankers, and Italy, Spain, and Portugal are waiting in the wings. In the place of independent European countries, a fascist centralized authority is rising.

  As millions of refugees from Washington and its NATO enablers’ wars seek refuge in Europe, budgets for social welfare are further pressed.

  In recent years we have witnessed that private bankers acting through the EU were able to appoint the governments of the allegedly democratic governments of Greece and Italy.

  In the Western World the aristocracy of wealth is being re-established. If Russia and China join this “partnership,” then billions of peoples will be ruled by a handful of mega-rich elites.

  The world is on the knife edge. The West is lost. Russia and China could go down with the West, because both Russia and China suffered tyranny and look to the West for the paths to freedom and liberty. But Western paths lead to “domination, exploitation and pillage of the peoples of the world.”

  Will Russia and China participate in the pillage, or will they resist it, standing firm for humanity?

  

  

  

  

  

• Is Volkswagen About To Unleash The Next Deflationary Wave?

  With the new car bubble peaking, and the world's automakers having ramped up production across the globe after seeing Fed-driven signals that all is well and all is going to get better…

  

   

  …the slowdown in China already has many hitting the panic button (with production plunging, capacity utilization tumbling, and workweeks tumbling).

  

   

  With this week's 'exogenous' diesel-defect 'event', the inventory-problem that US automakers are facing…

  

   

  …is nothing compared to the potentially catacylysmic wave of deflationary pricing (and deflationary lack of demand for raw materials) that VW faces with its record inventory.

   

  Inventories of Finished Goods…

  

  Charts: Bloomberg

  The last time inventories spiked on this scale… right into an 'exogenous' event… it ended very very badly!

  Think we are exaggerating, think again… (via Reuters)

  The Volkswagen emissions scandal has rocked Germany's business and political establishment and analysts warn the crisis at the car maker could develop into the biggest threat to Europe's largest economy.

   

  Volkswagen is the biggest of Germany's car makers and one of the country's largest employers, with more than 270,000 jobs in its home country and even more working for suppliers.

   

  Volkswagen Chief Executive Martin Winterkorn paid the price for the scandal over rigged emissions tests when he resigned on Wednesday and economists are now assessing its impact on a previously healthy economy.

   

  "All of a sudden, Volkswagen has become a bigger downside risk for the German economy than the Greek debt crisis," ING chief economist Carsten Brzeski told Reuters.

   

  "If Volkswagen's sales were to plunge in North America in the coming months, this would not only have an impact on the company, but on the German economy as a whole," he added.

   

  Volkswagen sold nearly 600,000 cars in the United States last year, around 6 percent of its 9.5 million global sales.

   

  …

   

  In 2014, roughly 775,000 people worked in the German automobile sector. This is nearly two percent of the whole workforce.

   

  In addition, automobiles and car parts are Germany's most successful export — the sector sold goods worth more than 200 billion euros ($225 billion) to customers abroad in 2014, accounting for nearly a fifth of total German exports.

   

  "That's why this scandal is not a trifle. The German economy has been hit at its core," said Michael Huether, head of Germany's IW economic institute.

  Some observers also see some irony in the scandal.

  While the German economy defied the euro zone debt crisis and, so far, the economic slowdown in China, it could now be facing the biggest downside risk in a long while from one of its companies.

   

  "The irony of all of this is that the threat could now come from the inside, rather than from the outside," Brzeski said.

  When the largest carmaker in the world faces a sudden (and extremely likely) implosion in sales at the same time as holding a record inventory having ramped at a record pace in the last two quarters, the ripple through into the German economy, European economy, and world economy is extremely deflationary… which leaves only one thing – Moar QE, or QQE, or Q€.

  *  *  *

  And, as we explained before, if you are relying on more easing from The PBOC… it has made absolutely no difference whatsoever in the past 10 years…

  

  Charts: Bloomberg

  And all of this on top of the fact that the subprime auto loan market is set to collapse…

  To sum up…

  • The only way automakers are making sales is by lowering credit standards to truly mind-numbing levels and increasing residuals to make the monthly nut affordable…. that cannot last.
  • China's economic collapse has crushed forecasts for the automakers.
  • Inventories of new cars are already at record highs.
  • Inventories of luxury high-quality used cars are at record highs and prices are tumbling.
  • And July saw a massive surge in producton.
  • What comes next is simple… a production slump

  We're gonna need a German bailout… or more chemical plant explosions…

  

  

  

  

  

• Japanese Stocks Tumble After Holiday, China Default Risk Hits 2 Year Highs As Yuan Weakens For 4th Day

  AsiaPac stocks are broadly lower at the open, folowing US' lead as after being closed for 3 days, Japanese stocks open and catch down to global weakness with Nikkei 225 at 2-week lows. It appears it is time to "get back to work Mr.Kuroda," as stocks are below Black Monday's lows. Following last night's dismal data, China credit risk rose once again to new 2 year highs. Once again, industrial metals are under pressure with iron ore, copper, and aluminum all lower (following "peak steel" comments). After 3 days of weakening (and Xi's comments that China won't weaken), PBOC weakend the Yuan fix again, pushing the offshore-onshore spread to 2-week wides (over 500 pips apart).

   

  After 3 days of holidaying, selling resumes in Japanese stocks… ahead of tonight's Japan PMI.

  

   

   

  The good news to start the day in China, delveraging begins again…

  • *SHANGHAI MARGIN DEBT BALANCE FALLS FIRST TIME IN THREE DAYS

  As it appears the excitement of high beta fraud is back with ChiNext and Shenzhen outperforming this week…

  

   

  But the path remains similar (albeit a little faster)…

  

   

  Once again China injects more liquidity…

  • *PBOC TO INJECT 80B YUAN WITH 14-DAY REVERSE REPOS: TRADER

  And industrial metals are all lower after…

  • *CHINA STEEL OUTPUT TO DROP TO 810 MLN TONS IN `15: CUSTEEL
  • *CHINA STEEL OUTPUT HAS PEAKED, CUSTEEL'S YANG SAYS IN I'VIEW

  But China default risk continues to leak higher…

  

   

  Following Xi's comments that China will not devalue the Yuan (and 3 days of devaluing the Yuan), PBOC weakened the Yuan fix again tonight…

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3791 AGAINST U.S. DOLLAR

  

   

   

  Notably the spread between Onshore and Offshore Yuan has pushed to a 2-week high…

  

   

  Charts: Bloomberg

  

  

  

  

  

• The Worst Part Is Central Bankers Know Exactly What They Are Doing

  Submitted by Brandon Smith via Alt-Market.com,

  The best position for a tyrant or tyrants to be in, at least while consolidating power, is tyranny by proxy. That is to say, the most dangerous tyrants are those the people do not recognize: the tyrants who hide behind scarecrows and puppets and faceless organizations. The worst position for the common citizen to be in is a false sense of security and understanding, operating on the assumption that tyrants do not exist or that potential tyrants are really just greedy fools acting independently from one another.

  Sadly, there are a great many people today who hold naïve notions that our sociopolitical dynamic is driven by random chaos, greed and fear. I’m sorry to say that this is simply not so, and anyone who believes such nonsense is doomed to be victimized by the tides of history over and over again.

  There is nothing random or coincidental about our political systems or economic structures. There are no isolated tyrants and high-level criminals functioning solely on greed and ignorance. And while there is certainly chaos, this chaos is invariably engineered, not accidental. These crisis events are created by people who often refer to themselves as “globalists” or “internationalists,” and their goals are rather obvious and sometimes openly admitted: at the top of their list is the complete centralization of government and economic power that is then ACCEPTED by the people as preferable. They hope to attain this goal primarily through the exploitation of puppet politicians around the world as well as the use of pervasive banking institutions as weapons of mass fiscal destruction.

  Their strategic history is awash in wars and financial disasters, and not because they are incompetent. They are evil, not stupid.

  By extension, perhaps the most dangerous lie circulating today is that central banks are chaotic operations run by intellectual idiots who have no clue what they are doing. This is nonsense. While the ideological cultism of elitism and globalism is ignorant and monstrous at its core, these people function rather successfully through highly organized collusion. Their principles are subhuman, but their strategies are invasive and intelligent.

  That’s right; there is a conspiracy afoot, and this conspiracy requires created destruction as cover and concealment. Central banks and the private bankers who run them work together regardless of national affiliations to achieve certain objectives, and they all serve a greater agenda. If you would like to learn more about the details behind what motivates globalists, at least in the financial sense, read my article 'The Economic Endgame Explained.'

  Many people, including insiders, have written extensively about central banks and their true intentions to centralize and rule the masses through manipulation, if not direct political domination. I think Carroll Quigley, Council on Foreign Relations insider and mentor to Bill Clinton, presents the reality of our situation quite clearly in his book “Tragedy And Hope”:

  "The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank … sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

  This "world system of financial control" that Quigley speaks of has not yet been achieved, but the globalists have been working tirelessly towards such a goal.  The plan for a single global currency system and a single global economic authority is outlined rather blatantly in an article published in the Rothschild owned 'The Economist' entitled 'Get Ready For A Global Currency By 2018'.  This article was written in 1988, and much of the process of globalization it describes is already well underway.  It is a plan that is at least decades in the making.  Again, it is foolhardy to assume central banks and international bankers are a bunch of clumsy Mr. Magoos unwittingly driving our economy off a cliff; they know EXACTLY what they are doing.

  Being the clever tyrants that they are, the members of the central banking cult hope you are too stupid or too biased to grasp the concept of conspiracy. They prefer that you see them as bumbling idiots, as children who found their father’s shotgun or who like to play with matches because in your assumptions and underestimations they find safety. If you cannot identify the agenda, you can do nothing to interfere with the agenda.

  I have found that the false notion of central bank impotence is growing in popularity lately, certainly in light of the recent Fed decision to delay an interest rate hike in September. With that particular event in mind, let’s explore what is really going on and why the central banks are far more dangerous and deliberate than people are giving them credit for.

  The argument that the Federal Reserve is now “between a rock and a hard place” keeps popping up in alternative media circles lately, but I find this depiction to be inaccurate. It presumes that the Federal Reserve "wants"  to save the U.S. economy or at least wants to maintain our status quo as the “golden goose.” This is not the case.  America is not the golden goose.  In truth, the Fed is exactly where it wants to be; and it is the American people who are trapped economically rather than the bankers.

  Take, for instance, the original Fed push for the taper of quantitative easing; why did the Fed pursue this in the first place? QE and zero interest rate policy (ZIRP) are the two pillars holding up U.S. equities markets and U.S. bonds. No one in the mainstream was demanding that the Fed enact taper measures. And when the Fed more publicly introduced the potential for such measures in the fall of 2013, no one believed it would actually follow through. Why? Because removing a primary support pillar from under the “golden goose” seemed incomprehensible to them.

  In September of that year, I argued that the Fed would indeed taper QE. And, in my article “Is The Fed Ready To cut America’s Fiat Life Support?” I gave my reasons why. In short, I felt the Fed was preparing for the final collapse of our economic system and the taper acted as a kind of control valve, making a path for the next leg down without immediate destabilization. I also argued that all stimulus measures have a shelf life, and the shelf life for all QE and ZIRP is quickly coming to an end. They no longer serve a purpose except to marginally slow the collapse of certain sectors, so the Fed is systematically dismantling them.

  I received numerous emails, some civil and some hostile, as to why I was crazy to think the Fed would ever end QE. I knew the taper would be instituted because I was willing to accept the real motivation of central banks, which is to undermine and destroy economies within a particular time frame, not secure economies or kick the can indefinitely. In light of this, the taper made sense. One great pillar is gone, and now only ZIRP remains.

  After a couple of meetings and preplanned delays, the Fed did indeed follow through with the taper in December of that year. In response, energy markets essentially imploded and stocks became steadily more volatile over the course of 2014, leading to a near 10% drop in early fall followed by foreign QE efforts and false hints of QE4 by Fed officials as central banks slowed the crisis to an easier to manage pace while easing the investment world into the idea of reduced stimulus policies and reduced living standards; what some call the "new normal".

  I have held that the Fed is likely following the same exact model with ZIRP, delaying through the fall only to remove the final pillar in December.

  For now, the Fed is being portrayed as incompetent with markets behaving erratically as investors lose faith in their high priests. This is exactly what the bankers that control the Fed prefer. Better to be seen as incompetent than to be seen as deliberately insidious. And who knows, maybe a convenient disaster event in the meantime such as a terrorist attack or war (Syria) could be used to draw attention away from the bankers completely.

  Strangely, Bloomberg seems to agree (at least in part) with my view that the taper model is being copied for use in the rate hike theater and that a hike is coming in December.

  Meanwhile, some Federal Reserve officials once again insinuate that a hike will be implemented by the end of the year while others hint at the opposite.

  Other mainstream sources are stating the contrary, with Pimco arguing that there will be no Fed rate hike until 2016.  Of course, Pimco made a similar claim back in 2013 against any chance of a QE taper.  They were wrong, or, they were deliberately misleading investors.

  Goldman Sachs is also redrafting their predictions and indicating that a Fed rate hike will not come until mid-2016. With evidence indicating that Goldman Sachs holds considerable influence over Fed policy (such as exposed private meetings on policy between Fed officials and banking CEO's), one might argue that whatever they “predict” for the rate hike will ultimately happen. However, I would point out that if Goldman Sachs is indeed on the inside of Fed policy making, then they are often prone to lying about it or hiding it.

  During the taper fiasco in 2013, Goldman Sachs first claimed that the Fed would taper in September. They lost billions of dollars on bad currency bets as the Fed delayed.

  Then, Goldman Sachs argued that there would be no taper in December of that year; and they were proven to be wrong (or disingenuous) once again.

  Today, with the interest rate fiasco, Goldman Sachs claimed a Fed rate hike would likely take place in September. They were wrong. Now, once again, they are claiming no rate hike until next year.

  Are we beginning to see a pattern here?

  How could an elitist-run bank with proven inside connections to the Federal Reserve be so wrong so often about Fed policy changes? Well, losing a billion dollars here and there is not a very big deal to Goldman Sachs. I believe they are far more interested in misleading investors and keeping the public off guard, and are willing to sacrifice some nominal profits in the process. Remember, these are the same guys who conned nations like Greece into buying toxic derivatives that Goldman was simultaneously betting against!

  The relationship between international banks like Goldman Sachs and central banks like the Federal Reserve is best summed up in yet another Carroll Quigley quote from “Tragedy And Hope”:

  "It must not be felt that these heads of the world’s chief central banks were themselves substantive powers in world finance. They were not. Rather, they were the technicians and agents of the dominant investment bankers of their own countries, who had raised them up and were perfectly capable of throwing them down. The substantive financial powers of the world were in the hands of these investment bankers (also called “international” or “merchant” bankers) who remained largely behind the scenes in their own unincorporated private banks. These formed a system of international cooperation and national dominance which was more private, more powerful, and more secret than that of their agents in the central banks."

  Goldman Sachs and other major banks act in concert with the Fed (or even dictate Fed actions) in conditioning public psychology as much as they manipulate finance. First and foremost, globalists require confusion. Confusion is power.  What better way to confuse and mislead the investment world than to place bad bets on Fed policy changes?

  Heading into the end of 2015, we are only going to be faced with ever mounting mixed messages and confusion from the mainstream media, international banks and central banks. It is important to always remember, though, that this is by design. A common motto of the elite is “order out of chaos,” or “never let a good crisis go to waste.” Think critically about why the Fed has chosen to push forward with earth-shaking policy changes this year that no one asked for. What does it have to gain? And realize that if the real goal of the Fed is instability, then it has much to gain through its recent and seemingly insane actions.

  

  

  

  

  

• The Wind At Our Backs

  On my Tastytrade show recently, I’ve been mentioning how I believe the bears have “the wind at their backs” now. I pondered to myself what precisely what I meant by that phrase, and I wanted to share some thoughts on where my head is at on this topic.

  From March 2009 through December 2014, the bulls had the wind at their backs. Early on, it was a full-on gale-force hurricane, provided by the $18 trillion of freshly-minted, asset-inflating “money” provided by the helpful central banks of (a) China (b) Europe (c) Japan (d) the good old US of A.

  

  During those long, awful years, almost any downtick was bought. It took a few years for the market to get completely and utterly confident of this unseen wind. In 2010 and 2011, the market had some pretty big bouts of weakness, which got bears like me excited, but those drops were swiftly shaken off.  From October 2011 forward, the dips became more and more shallow, and it eventually reached a point that bears were put into the position of the proverbial picking up dimes in front of a steamroller.

  The entire Buy The F*cking Dip meme (BTFD) became well-entrenched and well-known. Every single spate of weakness was a buying opportunity, and the momentum of worldwide markets went into a full-blown whirlygig-spin in China, as uneducated farmers and bumpkins wandered into new brokerage offices and handed over their savings to make easy money in the completely fake Chinese stock market.

  As we sit here now, of course, things have changed quite a bit, but my thesis is that the BTFD psyche is still fairly deeply-ingrained. After all, this psychosis has been with us for seven years – SEVEN YEARS – now, and it’s not just going to disappear overnight. It’s going to take many, many disappointments on the part of the bulls until they finally get the message (just as it took many, many years for dullards like me to finally realize that shorting wasn’t working out so great).

  So, in miniature, we wind up with situations like what I posted about at 5:30 this morning, a time which the bulls were naturally celebrating, since a hard drop on the ES (summoned by dreadful economic data from China) had been reversed into a maybe-there’s-more-easing gain. The image I sloppily put together suggested a reversal at that time, and that was within a single ES point of being the high of the day.

  In other words, in spite of a nearly 30-point reversal in favor of the bulls overnight, the wind was at the back of the bears. Even though the feeling sucked at the time, we frankly had nothing to worry about, because as incredible as it may seem, it’s the bears (all three of us) that are in charge now, as opposed to the government welfare queens known as equity bulls.

  I am aggressively positioned right now. I have 117 – count ’em, 117 – short positions, and although there isn’t a single instance where I don’t hold my breath with fear before I fire up my iPad to see where the market is at, the cold fact of the matter is that anyone who looks at the chart below and thinks we are at the cusp of anything resembling a bull market is clinically insane and should be locked up for the protection of themselves and society at large:

  

  

  

  

  

• Government Shutdown & Debt Limit Questions Answered

  A federal shutdown due to a funding lapse looks no less likely than it did two weeks ago, and Goldman Sachs believes the probability is nearly 50%. The Senate is expected to begin voting later this week on a funding extension, but the House looks unlikely to act until shortly before the September 30 deadline. The following attempts to answer the main questions surrounding the shutdown, debt limit, and ramifications…

  • The current debate does not involve the debt limit. However, Congress looks increasingly likely to set the next expiration of spending authority around the time of the debt limit deadline. This is likely to lead to renewed negotiations to increase the caps on spending for 2016 and 2017, but could also cause greater uncertainty among consumers and market participants than a shutdown alone would.
  • Based on recent daily cash flows at the Treasury, we estimate that the upcoming deadline to raise the debt limit is likely to fall slightly earlier than we previously expected, potentially coming around mid-November.

  Q: Why are we talking about a shutdown again?

  Congressional Republicans lack the votes to pass the spending bill they want, but are hesitant to pass a simple extension instead. Federal spending authority expires September 30, and some conservative lawmakers have announced they will only support an extension that strips the Planned Parenthood Federation of American (PPFA) of federal funding. There is sufficient support in the House to do so, but not in the Senate, and the President would be very likely to veto such a bill. By contrast, it is likely that a “clean” extension of spending authority that does not address the issue could pass both chambers of Congress and become law, albeit with more Democratic support than Republicans. That may be how the issue ultimately gets resolved, but Republican congressional leaders are likely to first try to pass their preferred legislation.

  Q: Is Congress any closer than they were two weeks ago to resolving the funding extension and avoiding a government shutdown?

  Not really. On September 18, the House passed legislation to defund PPFA. The Senate considered similar legislation over the summer, but it won only 53 votes, 7 short of the 60 normally needed to move forward. Neither chamber has voted yet to extend spending authority past the current September 30 expiration, though preparations are being made in the Senate to do so.

  Q: What is the outlook?

  Murky. Two weeks ago we wrote that we thought the probability of a shutdown was nearly 50%, though we leaned slightly against a lapse in funding actually occurring. Since then, the political temperature around the issue has fallen and risen; Republican leaders have offered potential plans to avoid a shutdown, but none have won the support of the group of Republican lawmakers in the House driving the opposition to a clean extension of spending authority. At this point we continue to lean slightly against a shutdown, but it would hardly be surprising if it did ultimately happen, particularly because some Republican leaders might ultimately see a short shutdown as the best way out of the current situation.

  Q: What’s the schedule from here?

  Things may start to move later this week. The Senate is expected to vote on legislation later this week to extend government spending authority past September 30. The initial version is likely to include a provision to block funding to PPFA. Assuming this first attempt fails, Senate Republicans are then likely to bring up a “clean” extension of spending authority. The House, which is in recess until Thursday (September 24), looks unlikely to take up spending legislation this week, and may wait to receive whatever spending extension the Senate passes. The upshot is that, unsurprisingly, it looks like the issue will be resolved no sooner than September 30.

  Q: How does the current situation compare to the 2013 shutdown?

  They look very similar. With only a week to go before the funding deadline, the situation bears close resemblance to the situation in 2013, when congressional Republicans were split over whether to use the extension of spending authority to block implementation of the Affordable Care Act (ACA). At that point, there had been sufficient support in the House to do so, but not in the Democratic-majority Senate; the Senate now has a Republican majority, but they still lack the 60 votes needed to send legislation that Democrats oppose to the President’s desk. The ultimate decision is seen to rest with House Speaker Boehner who, just like in 2013, faces pressure from conservative members of his caucus to reject a clean spending extension, even if doing so results in a shutdown.

  That said, the current situation differs from 2013 in some respects. The PPFA issue has received a fair amount of attention, but it does not appear to be as politically salient as the ACA was in 2013. At that point, around 80 House Republicans signed on to the plan to use spending legislation to block ACA implementation; only about 30 have signed on to the current gambit. Public opinion polls show less unanimity among self-identified Republicans this time around as well; a smaller majority opposes PPFA than opposed the ACA in 2013. In one recent poll, a majority of Republicans, despite supporting the defunding of PPFA in principle, opposed shutting down the government over it, in contrast to 2013 when some polling suggested a narrow majority of Republicans supported shutting the government as a way to block ACA implementation.

  Q: What would the economic effect of a shutdown be?

  Real GDP growth in Q4 would decline by at least -0.2pp for each week the government is shut down. We think about a potential shutdown having four basic effects: (1) the direct effect of furloughing federal workers; (2) the direct effect of reduced federal spending on purchased goods and services; (3) the direct effect on private-sector activities (e.g., halted projects awaiting federal approvals, etc), and (4) the indirect effect of a shock to confidence on employment, investment and consumer spending. The first category has the largest effect, we believe. If a shutdown occurs next week and were handled the same way as prior shutdowns, about 40% of federal workers would be sent home—the rest would be exempted because of their job responsibilities—representing about $2bn in lost compensation for each week that funding lapsed and lowering real GDP growth in Q4 by just under 0.2pp for each week of shutdown. That effect would roughly reverse in Q1 (assuming the shutdown had ended) as federal output returns to a normal level.

  The direct effect on federal procurement of goods and services would be much smaller, particularly at the outset, since delayed orders would likely be made up once the shutdown has ended. We would expect virtually no effect on federal investment and purchases of durable goods, which have long lead times and generally rely on private-sector production that would be unaffected by the shutdown. There are some examples of contracted services that might be affected—for example, janitorial and food services for which there would be no need if federal employees were not at work—but these are relatively small. Anecdotally, federal procurement of services actually declined at a slower sequential rate in Q42013 than it did in any of the four prior quarters.

  The direct and indirect effects on the private sector are harder to quantify. The White House Office of Management and Budget released a report shortly after the 2013 shutdown that detailed some effects of the shutdown on private activity, such as stalled transportation and energy projects and delayed export shipments due to a halt in processing of federal permits and export licenses; and delays in lending due to the inability to verify income via the Internal Revenue Service (IRS), for example. It is difficult to estimate what effect this might have had on output, particularly since much of the postponed activity was probably made up during the same quarter.

  On a monthly basis, our Current Activity Index declined slightly in October 2013, though less than it did around other important fiscal deadlines and well within its typical month to month range (Exhibit 1, left panel). That said, one area where the effect of the shutdown did show up fairly clearly was consumer confidence, where sentiment dropped for three weeks, bottoming around the time the debt limit was finally increased on October 16 of that year (Exhibit 1, right panel). Overall, this sort of effect suggests that there could be a modest negative impact on growth from a shutdown beyond the direct effect from furloughed workers, so we would expect that each week of shutdown should reduce real GDP growth in the quarter by at least 0.2pp. That said, assuming a shutdown is short-lived, the growth effect would reverse the following quarter.

  

   

  Q: What would happen to economic data releases?

  Nearly all government data releases would be postponed. In 2013, virtually all scheduled releases of economic data collected by the federal government were postponed until after the government reopened. There are two notable exceptions: first, jobless claims numbers were released on schedule in 2013, even though other key labor market data, like the monthly employment report, were not. Second, the Fed continued to release data on schedule because, as an independent agency, it does not rely on Congress for funding. Releases from private organizations (e.g., ISM, NFIB, Conference Board and University of Michigan, to name a few) would be unaffected.

  Q: How would financial markets respond?

  We would expect a muted market reaction. The main reason is that the shutdown itself is likely to be seen as a temporary event with little bearing on the medium-term outlook. While it is true that previous shutdowns have been associated with a rise in equity volatility, as shown in Exhibit 2, this was generally the case with shutdowns that overlapped with debt limit deadlines—the 1990 and 2013 shutdowns—rather than other shutdowns where the debt limit deadline was not about to be reached.

  

   

  Q: Does this debate have anything to do with the debt limit?

  Not yet. Unlike the last government shutdown, which happened to overlap with a debt limit deadline two weeks later, raising the debt limit isn’t currently being debated. However, the extension of spending authority that is expected to pass soon may be constructed so that it expires around the time of the next debt limit deadline later this year.

  Q: When will the debt limit be reached?

  Probably in November. The Treasury estimates that the “extraordinary measures” it uses to increase borrowing capacity under the debt limit will not be exhausted before late October. As of the end of August, the Treasury appeared to have exhausted most of its bookkeeping strategies, with only about $60bn remaining (mainly the $23bn of the Exchange Stabilization Fund that is invested in Treasuries and $36bn related to the Civil Service Retirement and Disability Fund). However, it also has a substantial cash balance ($146bn as of September 18), which will provide an additional cushion once the Treasury exhausts its borrowing capacity. In the past, the Treasury has based the projected deadline for raising the debt limit that it announces to Congress assuming that the cash balance will not be allowed to go under $50bn, though on occasion it has allowed it to dip to $30bn preceding a debt limit increase.

  

   

  If the Treasury once again bases the deadline it announces to Congress on a $50bn minimum cash balance, we would expect the deadline to fall sometime in mid-November (Exhibit 3). Absent an increase in the debt limit, Treasury’s cash balance would probably run dry sometime by early December. This is in line with our previous estimate, as well as the Congressional Budget Office’s August estimate, though cash flows over the last few weeks—in particular, revenues were a touch lighter than we expected—suggest the deadline might come closer to the front of the late-November to early-December range we had previously estimated in July.

  

  

  

  

  

• Confession Of An Economist: Writing To Impress Rather Than Inform

  If you have ever felt that in addition to being a quasi cargo cult (which in the case of central planners borders on religious dogma) rather than an actual science, not to mention far more destructive, economics was purposefully obtuse and opaque, meant to sound sophisticated and generally “baffle with bullshit” when in reality it was hollow, often contradictory and sometimes meaningless by design, then the following confession by David Hakes, professor of economics at the University of Northern Iowa is for you.

  In it the economist explains how he was turned down when he wrote articles that could easily be understood by a broad audience. So he made them more difficult to understand and got published immediately.

  Reader can form their own conclusion.

  from Econ Journal Watch

  Confession of an Economist: Writing to Impress Rather than Inform

  Think back to your first years in graduate school. The most mathematically complex papers required a great deal of time and effort to ead. The papers were written as if to a private club, and we felt proud when we successfully entered the club. Although I copied the style of these overly complex and often poorly written papers in my first few research attempts, I grew out of it quite quickly. I didn’t  do so on my own. I was lucky to be surrounded by mature confident researchers at my first academic appointment. They taught me that if you are confident in your research you will write to include, not exclude. You will write to inform, not impress. It is with apologies to my research and writing mentors that I report the following events.

  The preference falsification in which I engaged was to intentionally take a simple clear research paper and make it so complex and obscure that it successfully impressed referees. That is, I wrote a paper to impress rather than inform—a violation of my most closely held beliefs regarding the proper intent of research. I often suspected that many papers I read were intentionally complex and obscure, and now I am part of the conspiracy.

  A colleague presented a fairly complex paper on how firms might use warranties to extract rent from certain users of their products. No one in the audience seemed to follow the argument. Because I found the argument to be perfectly clear, I repeatedly defended the author and I was able to bring the audience to an understanding of the paper. The author was so pleased that I was able to understand his work and explain it to others that he asked me if I was willing to coauthor the paper with him. I said I would be delighted.

  I immersed myself in the literature for a few of months so that I could more precisely fit our contribution into the existing literature. We managed to reduce the equations in the paper to six. At this stage the paper was perfectly clear and was written at a level so that it could reach a broad audience. When we submitted the paper to risk, uncertainty, and insurance journals, the referees responded that the results were self-evident. After some degree of frustration, my coauthor suggested that the problem with the paper might be that we had made the argument too easy to follow, and thus referees and editors were not sufficiently impressed. He said that he could make the paper more impressive by generalizing the model. While making the same point as the original paper, the new paper
  would be more mathematically elegant, and it would become absolutely impenetrable to most readers. The resulting paper had fifteen equations, two propositions and proofs, dozens of additional mathematical expressions, and a mathematical appendix containing nineteen equations and even more mathematical expressions. I personally could no longer understand the paper and I could not possibly present the paper alone.

  The paper was published in the first journal to which we submitted. It took two years to receive one referee report. The journal sent it out to a total of seven referees, but only one was able to write a report on it. Apparently he was sufficiently impressed. While the audience for the original version of the paper was broad, the audience for the published version of the paper has been reduced to a very narrow set of specialists and mathematicians. Even for mathematicians, the paper may no longer pass a cost-benefit test. That is, the time and effort necessary to read the paper may exceed the benefits received from reading it. I am now part of the conspiracy to intentionally make simple ideas obscure and complex.

  The story does not end here. A year later at an economics conference I sat on a panel composed of editors of economics journals. The session was charged with instructing young professors on how to get published. Because I was involved in a number of other sessions, I paid little attention to the names and affiliations of my colleagues on the panel. When it was my turn to speak, along with other advice, I told the story described above. When the next panelist was introduced, I was embarrassed to see that he was the editor of the journal that had published our incomprehensible paper. To reduce the level of embarrassment for both of us, I explained that our paper was handled through the U.S. editorial office of his journal, not the U.K. office which he manages. As an aside, to demonstrate just how small the world has become, we later discovered that my eldest daughter had studied in the editor’s department while in the United Kingdom during the previous semester.

  In conclusion, I wish I could promise that in the future I will always write to inform rather than to impress. But although confession may be good for the soul, it does not inoculate us from future sin. If in the future a referee or an editor suggests that I “generalize the model” or “make the model dynamic” when I feel that the change is an unnecessary complication which will likely cloud the issue rather than illuminate it, I will probably do as they requested rather than fight for clarity. That situation aside, I plan to redouble my efforts to write to inform rather than impress, to advise young researchers to do the same, and to be careful when criticizing referees and editors because they may be sitting next to me.

  h/t zeetubes

  

  

  

  

  

• In Major Humiliation, Government Admits Nearly 6 Million Fingerprints Were Stolen In OPM Hack

  What began with an alleged attempt by Kim Jong-un to sabotage Seth Rogen and James Franco for plotting to assassinate his likeness on film, and what reached peak absurdity when Penn State claimed that Chinese hacker spies had taken control of the university’s engineering department, culminated with what’s been variously described as “the largest theft of US government data ever” and an attack “so vast in scope and ambition that the usual practices for dealing with traditional espionage cases [do] not apply.”

  Those rather dramatic sounding characterizations refer of course to the alleged breach of the Office of Personnel Management by Chinese hackers. 

  That attack compromised some 22 million government employees. For its part, Beijing initially called the accusations that the attack emanated from China “irresponsible” and “groundless.”

  Amusingly, the counter-hacking system that is supposed to prevent things like this from happening is called “Einstein” and by the US government’s own admission, it’s already obsolete. Unfortunately, Congress’ now famous inability to do what they were elected to do (i.e. legislate) has left the US unable to pass a cyber security initiative that would help the US better protect itself against attacks like that which occurred on the OPM. 

  In any event, cyber security was back in the spotlight (actually it never really left) last week when the US decided that slapping Chinese entities with sanctions for their alleged role in hundreds of cyber attacks on the US over the course of the last half decade was probably a bad idea ahead of a visit by Chinese President Xi Jinping, who some analysts predicted simply would not make the trip if Washington was unwilling to do Beijing the courtesy of waiting until Xi was back in China before handing down sanctions. 

  But while the Obama administration did indeed relent on the timing of the cyber sanctions, new revelations regarding the theft of “biometric ID authentication markers” (a.k.a fingerprints) look set to make Xi’s visit a bit more uncomfortable than it otherwise would have been, especially in light of comments he made in a speech in Seattle. Here’s Wired with more:

  When hackers steal your password, you change it. When hackers steal your fingerprints, they’ve got an unchangeable credential that lets them spoof your identity for life. When they steal 5.6 million of those irrevocable biometric identifiers from U.S. federal employees—many with secret clearances—well, that’s very bad.

   

  On Wednesday, the Office of Personnel Management admitted that the number of federal employees’ fingerprints compromised in the massive breach of its servers revealed over the summer has grown from 1.1 million to 5.6 million. OPM, which serves as a sort of human resources department for the federal government, didn’t respond to WIRED’s request for comment on who exactly those fingerprints belong to within the federal government. But OPM had previously confirmed that the data of 21.5 million federal employees was potentially compromised by the hack—which likely originated in China—and that those victims included intelligence and military employees with security clearances.

   

  The revelation comes at a particularly ironic time: During the U.S. visit of Chinese president Xi Jinping, who said at a public appearance in Seattle that the Chinese government doesn’t condone hacking of U.S. targets, and pledged to partner with the U.S. to curb cybercrime.

   

  “As part of the government’s ongoing work to notify individuals affected by the theft of background investigation records, the Office of Personnel Management and the Department of Defense have been analyzing impacted data to verify its quality and completeness,” reads OPM’s statement posted to its website. “During that process, OPM and [the Department of Defense] identified archived records containing additional fingerprint data not previously analyzed. Of the 21.5 million individuals whose Social Security Numbers and other sensitive information were impacted by the breach, the subset of individuals whose fingerprints have been stolen has increased from a total of approximately 1.1 million to approximately 5.6 million.”

  And while the government was of course in full damage control mode, swearing that “as of now, the ability to misuse fingerprint data is limited,” they better be right, because as Wired goes on to note, “the national security implications of having the fingerprints of high-level federal officials in the hands of hackers who are potentially employed by a foreign government” are far from clear. 

  Now all of that assumes that a state actor is indeed behind the attack and frankly, assuming that to be true is to accept the narrative that China, Iran, and Russia have now formed a kind of cyber “Axis of Evil” and that narrative plays right into the hands of policymakers who are desperate to perpetuate the existing juxtaposition of world powers. 

  What comes next we can’t say but one thing seems abundantly clear: regardless of who’s doing the hacking, the US government is completing inept when it comes to stopping it and on that note, we close with the following from Senator Ben Sasse:

  “The American people have no reason to believe that they’ve heard the full story and every reason to believe that Washington assumes they are too stupid or preoccupied to care about cyber security.”

  

  

  

  

  

• The Colossal Failure Of Central Bank 'Trickledown'

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  With global economic perceptions finally creeping toward financial perceptions (not stocks) despite the enormous and mostly ongoing “stimulus” almost everywhere, it is useful to review once more the assumed general mechanisms.

  

   

  Step 1 is really the most basic and traditional element of central banking, as liquidity, broadly speaking here, is currency elasticity in its more modern format. Increasing liquidity is supposed to lead to Step 2, more credit/debt. Step 2 flows to Step 3, which is (hopefully) the bulk of that debt “creating” some real economy “demand.” Step 4 is where spending (demand), even if concentrated in certain parts of the economy (redistribution), leads to more jobs and productive investment which broadens out (“trickle out”) the redistributionary flow to the rest.

  For the most part, central banks (including the Fed) are stuck on Step 1 almost a decade later. There has been some flow to Step 2 (credit) but it’s abundantly clear that an enormous proportion of that debt elevation has yielded very little toward Step 3, intead a great deal in fostering asset price inflation. Even if you argue that Step 3 has been yielded into the real economy to some limited extent, it is beyond dispute that it hasn’t led to Step 4.

  When economists speak of “clogged transmission channels” this is the receiver of that ire; how Step 1 can be so successful yet not transmute into Step 2 and beyond has left economists and monetary policymakers exasperated (and stuck within themselves). The wholesale monetary system, by contrast, isn’t so certain about even liquidity, meaning that there isn’t even any real evidence to suggest that Step 1 has been completed. The most direct evidence offered about liquidity is only that there hasn’t been another panic, but that is an exceedingly low standard to the point of irrelevance. If monetary theory is to do what it proclaims, that is nowhere near enough (especially as even that minimal capacity is highly questionable again this year).

  A great deal of focus in central banking has been trying to go beyond Step 1, to induce some form of bank “reserves” to become the bedrock association of traded flow toward debt creation. The Japanese have been here for a quarter century, with nearly all of this century so far spent within some QE or another with that common intent. The results in the real economy particularly since QQE/QE10 have been disastrous.

  

  Real wages in July (the latest figures) were positive for the first time in more than two years – but only because “inflation”, one of the primary economic factors from Step 1 that is supposed to help transmit economic growth, has done the opposite as expected and intended. But that “inflation” calculation obscures somewhat the damage already done by QQE since June real wages were down 3% year-over-year despite the lower “inflation” number. June is the second most important month for Japanese as it represents one of the two “bonus months” for payouts, and to stumble that badly for June before figuring any price changes is pretty clear evidence of not only nothing beyond Step 1 for QQE, but that it may actually be harmful beside.

  

  So where the Bank of Japan might point to the unemployment rate as some kind of positive economic reflection of their monetary influence, as the Fed and Bernanke so often do, underlying that narrow labor view is all continued decay and rot. Actual labor utilization and output in Japan remains on the decline. At least when the earthquake and tsunami devastated the Japanese economy in 2011 it was a temporary setback; QQE, on the other hand, has clearly been a more or less permanent, depressive influence.

  

  With labor and earned incomes under such strain, it is little wonder “demand” has been continually suppressed. Credit doesn’t even factor. Household spending in July was barely positive (year-over-year) nominally and thus barely negative in real terms (again, “aided” by low “inflation” contrary to stated objectives). That result would be difficult on its own, but when compared to July 2014 it reveals the extent of the ongoing devastation; nominal household spending last July was 2% below July 2013, whereas real household spending was about -6%! To be flat or slightly contracting from last year’s trough is devastating.

  

  Given that it has been almost two and a half years now for QQE and the fact that it isn’t possible any longer to ignore or just dismiss (transitory?) this perpetual decay, the Bank of Japan has forced itself into yet another trap – but only one of its own making (yes, it styles the conditions for this trap and then forces itself into it, which is as absurd as it sounds; but that is monetary reality inside the orthodox bubble).

  Sources say the Bank of Japan has been quietly brainstorming the idea of overhauling its massive monetary stimulus programme over time, casting doubt on officials’ confident assertions that it can keep buying up government bonds for several more years.

   

  Sources familiar with the BOJ’s thinking say stepping up its 80 trillion yen ($665 billion) per year asset buying remains its go-to option if deflationary pressures persist, given a limited arsenal of obvious policy alternatives.

   

  But they say the central bank isn’t ruling out breaking with the money-printing programme over the longer term, as it has had little success in accelerating inflation toward its 2 percent target since it began in April 2013.

   

  “If the medicine isn’t working, you wonder whether it makes sense to keep prescribing more,” one of them said on condition of anonymity.

  Finally, some appeal toward actual science, using simple and basic observation instead of ridiculous models and regressions that have proven time and again to be useless, at best? Have we finally reached the point of central banks waking up to their fallacies? The article quoted above even makes the claim that a former BoJ policymaker actually declared QQE was never meant to “last another five, 10 years.” None of the prior QE’s were, either, so instead “temporary” measures become escalations.

  

  Again, the purpose of all of this has been to try to get beyond Step 1; all to no avail. To now add QQE to that dim view should force some serious reckoning and accountability, stripping monetary and even orthodox economic theory back down to its basic philosophies and reconstructing how they are all wrong. This would include, of course, realizing how “money” itself has evolved under the wholesale framework and how that relates to the serial asset bubbles and massive financial imbalances that might themselves be the pathology of turning this monetary “stimulus” into the very depressant thwarting Step 1 in the first place.

  

  That is what you would expect of any discipline supposedly dedicated to the scientific endeavor. If you do something and it doesn’t work but then do more of it to experiment with the dosage and your target intentions instead make it worse, you not only stop the dosage quantification experiment you halt the entire program altogether. Anyone, however, with even a passing familiarity with mainstream economics as it is and central bank practicing of it can guess what BoJ might be considering (rumored or not):

  If the BOJ bumps into trouble buying JGBs, some analysts say it could abandon the 0.1 percent interest the central bank pays on reserves the financial institutions park in BOJ accounts, or even charge a fee for them. That might particularly hurt regional banks, which are already struggling with thin margins on bond investments.

   

  “The BOJ can combine this step with an increase of risky asset purchases and call it a new version of QQE,” said Ryutaro Kono, chief Japan economist at BNP Paribas, who was once considered a candidate to fill a BOJ board vacancy.

   

  “That would effectively mean shifting the BOJ’s target to interest rates from the volume of money.”

  There are no words. After fourteen and a half years of heavy intervention in Step 1, all producing a much smaller and more fragile economy, the “answer” is to go back to Step 1 of Step 1?

  

  Japan is a useful analog in so many ways, not just about what the US and global economy can (has already?) become if allowed to follow into this same circle of Hell. It pretty much proves the incapacity of orthodoxists toward anything outside of their so very limited understanding and appreciation. In other words, the global economy is left wholly dependent on only populist revolt.

  

  

  

  

• Your Complete Guide To A World In Which The Fed Is No Longer In Control

  Back in December 2013 we pointed out something that virtually nobody had noted or discussed: when it comes to “credit” creation, China’s $15 trillion in freshly-created bank loans since the financial crisis – ostensibly the global credit buffer that allowed China to not get dragged down by the western recession – dwarfed the credit contribution by DM central banks.

  

  This is how we simplified what was happening at the time:

  In order to offset the lack of loan creation by commercial banks, the “Big 4” central banks – Fed, ECB, BOJ and BOE – have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world “Big 4” central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse.

   

  How does this compare to what China has done? As can be seen on the chart below, in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion, as we showed yesterday. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined!

   

  And that is how – in a global centrally-planned regime which is where everyone now is, DM or EM – your flood your economy with liquidity. Perhaps the Fed, ECB or BOJ should hire some PBOC consultants to show them how it’s really done.

  This dramatic divergence in credit creation continued for about a year, then gradually Chinese new loans topped out primarily due to regulation slamming shut debt creation in the shadow banking space, and since credit accumulation resulted in parallel build up in central bank reserves, the current period of debt creation going into reverse has led to not only China’s currency devaluation but what we first warned was Reverse QE, and has since picked up the more conventional moniker “Quantitative Tightening.”

  But while China’s credit topping process was inevitable, a far more sinister development has emerged: as we showed earlier, while DM central banks – excluding the Fed for the time being – have continued to pump liquidity at full blast into the global, fungibly-connected, financial system, there has been virtually no impact on risk assets…

  

  … especially in the US where the S&P is now down not only relative to the end of QE3, but is down 5% Y/Y – the biggest annual drop since 2008.

  This cross-flow dynamic is precisely what David Tepper was trying to explain to CNBC two weeks ago when the famous hedge fund manager declared the “Tepper Top” and went quite bearish on the stock market.

  This dynamic is also the topic of a must-read report by Citi’s Matt King titled quite simply: “Has the world reached its credit limit?” and which seeks to answer a just as important question: “Why EM weakness is having such a large impact”, a question which we hinted at 2 years ago, and which is now the dominant topic within the financial community, one which may explain why development market central bank liquidity “has suddenly stopped working.”

  King’s explanation starts by showing, in practical terms, where the world currently stands in terms of the only two metrics that matter in a Keynesian universe: real growth, and credit creation.

  

  His summary: there has been plenty of credit, just not much growth.

  So the next logical question is where has this credit been created. Our readers will know the answer: the marginal credit creator ever since the financial crisis were not the DM central banks – they were merely trying to offset private sector deleveraging and defaults; all the credit growth came from Emerging Markets in general, and China in particular.

  

   

  So while we now know that EMs were the source of credit creation, why care? Why does it matter if credit was mostly being created in EMs vs DMs, and isn’t credit created anywhere essentially the same? The answer is a resounding no, as King further explains.

  First, looking at credit creation in the post-crisis developed markets reveals something troubling: because credit creation takes places mostly in markets and is locked in central bank “outside” money which does not enter the broad monetary system, as opposed to bank credit creation in which banks issue loans thereby creating both new loans and deposits, i.e., money, the direct impect of DM central bank liquidity injections has been to created asset-price inflation. However, the offset has been far lower broad money creation – as there is far less credit demand in the first place – leading to no incremental investment, and far lower economic multipliers.

  

  Alternatively, it should come as no surprise that credit creation in EMs is the opposite: here money creation took place in the conventional loan-deposit bank-intermediated pathway, with a side effect being the accumulation of foreign reserves boosting the monetary base. Most importantly, new money created in EMs, i.e., China led to new investment, even if that investment ultimately was massively mis-allocted toward ghost cities and unprecedented commodity accumulation. It also led to what many realize is the world’s most dangerous credit bubble as it is held almost entirely on corporate balance sheets where non-performing loans are growing at an exponential pace.

  

  The good news is that at least initially the EM credit multiplier is far higher than in the DM.

  The bad news, is that even the stimulative effect of the EM multiplier is now fading.

  

   

  As a result, instead of going toward economic growth, even EM credit creation has been corrupted by the “western” bug, and is being allocated toward asset-price inflation… such as housing and markets.

  

  * * *

  The above lays out the market dynamic that took place largely uninterrupted from 2008 until the end of 2014.

  And then something changed dramatically.

  That something is what we said started taking place last November when we pointed out the “death of the petrodollar“, when as a result of the collapse in oil prices oil exporters started doing something they have never done before: they dipped into their FX reserves and started selling. This reserve liquidation first among the oil exporting emerging market, is essentially what has since morphed into a full blown capital flight from the entire EM space, and has also resulted in China’s own devaluation-driven reserve (i.e., Treasury) liquidation, which this website also noted first back in May.

  As King simply summarizes this most important kink in the story, after years of reserve accumulation, EMs have now shifted to reserve contraction which, in the simplest possible terms means, “money is being destroyed” which in turn is the source of the huge inflationary wave slowly but surely sweeping over the entire – both EM and DM – world.

  

   

  Ok, EMs are selling. But where is the money going? And won’t dumping of Treasurys push yields higher. Answering the second question first, we remind readers of a note from several weeks ago titled “Why China Liquidations May Not Spike US Treasury Yields” which is precisely what DB also said, and which Citi agrees with: while there may be upward pressure on yields it will likely be temporary, especially if there is an even greater risk-aversion reaction in risk assets. The result to EM TSY selling would be a selloff in stocks, which in turn would push investors into the “safety” of bonds, thus offsetting Chinese selling.

  

   

  But while one can debate what the impact on money destruction would be on equities and treasurys, a far clearer picture emerges when evaluting the impact on the underlying economy. As King, correctly, summarizes without the capex boost from energy (which won’t come as long as oil continues its downward trajectory), and DM investment continues to decline, there is an unprecedented build up in inventory, which in turn is pressuring both capacity utilization, the employment rate, and soon, GDP once the inevitable inventory liquidation takes place.

  

  The take home is highlighted in the chart above, but just in case it is missed on anyone here it is again: the “fundamentals point overwhelmingly downwards.”

  But wait, won’t central banks react this time as they have on all those prior occasions (QE1, QE2, Operation Twist, QE3, BOE QE1, BOJ QQE1, ECB QE1, etc)? Well, they’ll surely try… but even they know that every incremantal attempt to stimulate the private sector will have increasingly less impact. In other words, the CBs are not out of firepower, it is just that their ammo is almost nil. The reason for that: the “multiplier have fallen” because after 7 years of doing the same thing, this time it just may not work…

  

  Furthermore, while we have listed the numerous direct interventions by central banks over the past 7 years, the reality is that an even more powerful central bank weapon has been central bank “signalling”, i.e., speaking, threatening and cajoling. As Citi summarizes “The power of CBs’ actions has stemmed more from the signalling than from the portfolio balance effect.“

  

  So now that the “signalling” pathway is fading, all that’s left are the flows – the same flows which, with very good reason, left David Tepper scratching his head. Flows, which, when one takes into account emerging market reserve liquidation to offset central bank purchases, paints  a very ugly picture: one in which the central banks are for the first time since 2009, finally losing control as their inflows are unable to offset the EM outflows.

  

   

  Where does that leave us? Well, all else equal, the New New Normal, the world in which central banks are no longer in control as a result of EM reserve liquidation, will be world in which slower credit growth translated into, you guessed it, slower overall growth, or as Citi states the conudnrum: “Even a deceleration in credit growth is negative for GDP growth.”

  This is precisely the secular stagnation which we have been warning about since 2009.

  

   

  * * *

  What is the conclusion?

  It’s not a pretty one for either the central bankers, nor the Keynesian economists, nor those who believe asset prices can keep rising in perpetuity, because it means that payment for the free lunch from the past 7 years is finally coming due.

  

  But at least it is a simple conclusion: we are now at the credit plateau, or as Citi puts it: “Credit growth requires willing borrowers as well as lenders; we may be nearing the limits for both.”

  

  

  

  

  

• Endgame: Putin Plans To Strike ISIS With Or Without The U.S.

  On Sunday, we noted that Washington’s strategy in Syria has now officially unravelled.

  John Kerry, speaking from London following talks with British Foreign Secretary Philip Hammond, essentially admitted over the weekend that Russia’s move to bolster the Assad regime at Latakia effectively means that the timing of Assad’s exit is now completely indeterminate. Here’s how we summed up the situation:

  Moscow, realizing that instead of undertaking an earnest effort to fight terror in Syria, the US had simply adopted a containment strategy for ISIS while holding the group up to the public as the boogeyman par excellence, publicly invited Washington to join Russia in a once-and-for-all push to wipe Islamic State from the face of the earth. Of course The Kremlin knew the US wanted no such thing until Assad was gone, but by extending the invitation, Putin had literally called Washington’s bluff, forcing The White House to either admit that this isn’t about ISIS at all, or else join Russia in fighting them. The genius of that move is that if Washington does indeed coordinate its efforts to fight ISIS with Moscow, the US will be fighting to stabilize the very regime it sought to oust. 

  Revelations (which surprised no one but the Pentagon apparently) that Moscow is coordinating its efforts in Syria with Tehran only serve to reinforce the contention that Assad isn’t going anywhere anytime soon, and the US will either be forced to aid in the effort to destroy the very same Sunni extremists that it in some cases worked very hard to support, or else admit that countering Russia and supporting Washington’s regional allies in their efforts to remove Assad takes precedence over eliminating ISIS. Because the latter option is untenable for obvious reasons, Washington has a very real problem on its hands – and Vladimir Putin just made it worse.

  As Bloomberg reports, The Kremlin is prepared to launch unilateral strikes against ISIS targets if the US is unwilling to cooperate. Here’s more: 

  President Vladimir Putin, determined to strengthen Russia’s only military outpost in the Middle East, is preparing to launch unilateral airstrikes against Islamic State from inside Syria if the U.S. rejects his proposal to join forces, two people familiar with the matter said.

   

  Putin’s preferred course of action, though, is for America and its allies to agree to coordinate their campaign against the terrorist group with Russia, Iran and the Syrian army, which the Obama administration has so far resisted, according to a person close to the Kremlin and an adviser to the Defense Ministry in Moscow.

   

  Russian diplomacy has shifted into overdrive as Putin seeks to avoid the collapse of the embattled regime of Bashar al-Assad, a longtime ally who’s fighting both a 4 1/2 year civil war and Sunni extremists under the banner of Islamic State. Israeli Prime Minister Benjamin Netanyahu flew to Moscow for talks with Putin on Monday, followed by Turkish President Recep Tayyip Erdogan on Tuesday.

   

  Putin’s proposal, which Russia has communicated to the U.S., calls for a “parallel track” of joint military action accompanied by a political transition away from Assad, a key U.S. demand, according to a third person. The initiative will be the centerpiece of Putin’s one-day trip to New York for the United Nations General Assembly on Sept. 28, which may include talks with President Barack Obama.

   

  “Russia is hoping common sense will prevail and Obama takes Putin’s outstretched hand,” said Elena Suponina, a senior Middle East analyst at the Institute of Strategic Studies, which advises the Kremlin. “But Putin will act anyway if this doesn’t happen.”

  And that, as they say, it that. Checkmate.

  

  The four-year effort to oust Assad by first supporting and then tolerating the rise of Sunni extremists (presaged in a leaked diplomatic cable) has failed and the Kremlin has officially served a burn notice on a former CIA “strategic asset.”

  There are two things to note here. 

  First, Russia of course is fully aware that the US has never had any intention of eradicating ISIS completely. As recently as last week, Moscow’s allies in Tehran specifically accused Washington of pursuing nothing more than a containment policy as it relates to ISIS, as allowing the group to continue to operate in Syria ensures that the Assad regime remains under pressure. 

  Second, even if Russia does agree to some manner of managed transition away from Assad, you can be absolutely sure that Moscow is not going to risk the lives of its soldiers (not to mention its international reputation) only to have the US dictate what Syria’s new government looks like and indeed, Tehran will have absolutely nothing of a regime that doesn’t perpetuate the existing Mid-East balance of power which depends upon Syria not falling to the West. Additionally – and this is also critical – Russia will of course be keen on ensuring that whoever comes after Assad looks after Russia’s interests at its naval base at Tartus. This means that even if the US, Saudi Arabia, and Qatar are forced to publicly support a managed transition, Washington, Riyadh, and Doha will privately be extremely disappointed with the outcome which begs the following question: what will be the next strategy to oust Assad and will it be accompanied by something even worse than a four-year-old bloody civil war and the creation of a band of black flag-waving militants bent on re-establishing a medieval caliphate?

  

  

  

  

  

• Caption Contest: Pope "Outs" Obama?

  It’s all clear now…

  

  

  Source: @billyoblenis

  

  

  

  

  

• Is The Bank Of Spain Quietly Pulling Its Gold From Catalonia Ahead Of This Weekend's Vote?

  This weekend, Catalonia’s long-running push for independence from Spain could get a boost if separatists manage to secure an absolute parliamentary majority in regional elections. Here’s a brief summary via FT for those unfamiliar: 

  If the independence movement has its way, the Catalan regional election on Sunday will bring [the independence process] to a dramatic climax. Should the pro-secession parties gain an absolute majority in parliament, they will press ahead with a plan to separate the prosperous region from the rest of Spain within 18 months.

   

  Both the pro- and anti-independence sides look to Barcelona as the crucial battleground. Global tourist magnet, former Olympic host city and all-round architectural jewel, the city has traditionally been seen as an uphill climb for the independence campaign. Supporters of the union with Spain expect Barcelona and its densely populated suburbs to act as their main line of defence against the secessionist onslaught.

   

  “What happens to Catalonia on September 27 will not depend on the independentistas. It will depend on the men and women in the metropolitan area of Barcelona who are not independentistas, and who traditionally don’t vote in the regional elections. If they vote this time, no one will be able to break Catalonia away from the rest of Spain,” Xavier García Albiol, the leader of the conservative Popular party in Catalonia, said this week.

  As for how likely it is that CDC and ERC will be able to secure the 68 seats they need to move forward with independence, Citi thinks they’ll ultimately come up short, but as the following graphs show, it’s a close call:

  

  Against that backdrop, we present the following with no further comment other than to ask if perhaps the Bank of Spain knows something everyone else doesn’t and is preparing for every contingency.

  Via VilaWeb (Google translated):

  This afternoon held an unusual movement in the branch of the Bank of Spain, Barcelona, ??Catalonia Square. Over thirty armored vans were entering and leaving the building shortly after an unknown direction. Many people have the photographed. The Bank of Spain has refused to comment on the operation or indicate that it was but people working in the area have said that is not a normal deployment.

   

  Several readers VilaWeb explained that Monday early morning was a similar deployment.

   

  

   

  

   

  
  

  
  

  

  

  

  

• Petrobras Default Looms Under $90B Dollar-Denominated Debt

  There is blood on the streets wherever you look in Brazil today, but probably of most interest to the hundreds of US asset managers (the ones managing your mutual funds) is what happens to Petrobras as it remains so widely held. As we noted below, bond prices are collapsing and default risk is soaring, and with the nation's currency collapsing amid the lower-for-longer oil prices, $90 billion of dollar-denominated debt could soon potentially be too burdensome for the company to repay.

  Default Risk is exploding…

  

  And as New York Shock Exchange details,

  S&P recently lowered Brazil's credit rating to junk status. It later downgraded 60 corporate and infrastructure entities in Brazil, including cutting Petrobras (NYSE:PBR) two notches to "BB." Petrobras has been reeling from a corruption scandal that reportedly involved Petrobras' executives and directors awarding suppliers over-inflated contracts in exchange for kickbacks. The scandal has cost the company billions of dollars, and has been a blow to the reputation of Brazil's President Dilma Rousseff.

  PBR is off about 70% over the past year, versus a 50% decline for the Brazilian ETF (NYSEARCA:EWZ) and flat growth for the S&P 500 (NYSEARCA:SPY). Investors should continue to avoid PBR for the following reasons:

  Stagnant Revenue And Earnings

  When it rains, it pours for Petrobras. In addition to the corruption scandal, a free fall in oil prices has stymied the company's revenue growth. For the first half of 2015, Petrobras' revenue was down 27% Y/Y from $71.4 billion to $52.0 billion, while EBITDA growth was flat. EBITDA margin increased to 26% in the first half of 2015 from 19% in the year-earlier period, as the company slashed cost of sales, SG&A expense and R&D.

  To stem cash burn, Petrobras slashed its five-year capital spending by 40% and has been canceling drilling contracts with suppliers such as Sete Brasil and Vantage Drilling (NYSEMKT:VTG). These are prudent steps given that oil prices are off 60% from their Q2 2014 peak and the global economy is showing signs of slowing. If sub-$60 oil prices are the new normal, stagnant revenue and earnings growth may be in the cards regardless of the company's cost-cutting measures. 

  $90B Dollar-Denominated Debt

  Zero interest rates in the U.S. have prompted investors to look to emerging markets for higher yields. Investors have provided dollar-denominated debt to companies like Petrobras at higher rates than U.S. treasuries, but lower than what companies in emerging markets could get locally. Borrowing in dollars and paying in Brazilian real had previously not been a problem.

  

   

  However, the real has depreciated over 38% against the dollar over the past year, making un-hedged dollar-denominated debt prohibitively expensive.

  In Q2, Petrobras had $134 billion in debt load, which equated to about 4.9x run-rate EBITDA – junk levels. About 70% (over $90 billion) of that was dollar-denominated, which means that it will probably take more real for Petrobras to repay its debt going forward.

  If China continues to devalue the yuan or if the U.S. raises interest rates, it could spur more capital flight out of Brazil and pressure the real further. Either way, I believe Petrobras' dollar-denominated debt will appreciate to levels that could potentially become too burdensome for the company to repay.

   

  

  

  

  

  

• 24 Sep – ECB's Nowotny Says He's Wary of Expanding Bond-Buying Program

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 31/100 FEAR

  PREVIOUS CLOSE: 31/100 FEAR

  ONE WEEK AGO: 16/100 EXTREME FEAR

  ONE MONTH AGO: 3/100 EXTREME FEAR

  ONE YEAR AGO: 16/100 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 21.89% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 22.44. 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 – I JUST LOVE MY NEW SWEATER….

   

  UNUSUAL ACTIVITY

  ACI OCT 2.5 PUT ACTIVITY 9K @$.52 on offer

  AET  … OCT WEEKLY1 118 CALL Activity @$2.40 right by offer 3400+

  GE OCT WEEKLY1 25 CALLS 5k+ @$.29 on offer

  FENX EVP and COO purchase 3k @ 8.03

  MHFI President,SPCIQ/SNL Financial P    5,500  A  $ 92.8484

  More Unusual Activity…

  HEADLINES

   

  ECB’s Nowotny Says He’s Wary of Expanding Bond-Buying Program – BBG

  ECB’s Jazbec: No Discussions On Exiting, Prolonging QE Currently

  ECB Sources: GC May Prefer Econ. Monitoring To Oct Action – MNI Sources

  ECB Said To Replace Deutsche Bank, State Street In ABS Program – BBG

  ECB Announces New Secretary To Its Decision-Making Bodies

  ECB’s Linde Warns Of Increased Downside Risks To Spain’s Econ – RTRS

  Swiss EconMin: SNB Is Working To Weaken Franc Well Above 1.20 – WBP

  Fitch: US Govt Shutdown Would Not Have Direct Ratings Impact

  Japan’s Nishimura: China May Delay Japan 2% Inflation Tgt – ForexLive

  EZ Flash PMI Rounds Off Best Quarter For 4-Years Despite Dip In September

  German Government ‘Knew VW Was Rigging Emissions Test’ – Telegraph

  Deutsche Bank, JPM Downgrade VW On Emissions Scandal – Digital Look

  K+S Investors Urge Management To Reconsider Potash Corp Offer – WSJ

  Santander Hikes Cost Cuts Target To EUR3 Bln By 2018 – RTRS

  Total Cuts Oil Output Target As Low Prices Expected To Persist – BBG

  China Inks Deal To Buy 300 Boeing Jets – AP

   

  GOVERNMENT/ CENTRAL BANK NEWS

  ECB’s Nowotny Says He’s Wary of Expanding Bond-Buying Program – BBG

  ECB’s Jazbec Says Too Early To Discuss Modifying QE – RTRS

  ECB Announces New Secretary To Its Decision-Making Bodies

  Bank Of Spain Warns Of Increased Downside Risks To Spanish Economy – RTRS

  EU Favours Insurers, Private Equity In Capital Markets Plan – Document Via RTRS

  Fitch: US Govt Shutdown Would Not Have Direct Ratings Impact

  Swiss EconMin: SNB Is Working To Weaken Franc Well Above 1.20 – WBP

  Japan’s Nishimura: China Could Cause Delays To Japan 2% Infl. Tgt – ForexLive

  FIXED INCOME NEWS

  Treasurys Eye 5-Year Auction – CNBC

  ECB: Eurosystem Adjusts Purchase Process In ABS Programme

  Germany Sold EUR3.32 Bln In 2017 Bonds (avg yield -0.26%; bid cover 2.4 vs 1.4)

  FX NEWS

  Dollar Index Holds At 1-Month Highs In Risk-Off Trade – Investing.com

  USD/JPY Bearish Below 120.35/80 – Commerzbank Via FXStreet

  EUR/USD: Off Lows Amid Rising Stocks – FXStreet

  GBP/USD: Sterling Launches Its Fourth Session Of Losses – WBP

  China State Banks Intervene To Support Offshore Yuan – RTRS Sources

  ENERGY/ COMMODITIES NEWS

  Gold Price Hit By Rates Anxiety And Stronger Dollar – The Week

  Base Metals Claw Higher But Sentiment Remains Downbeat – Fast Markets

  Oil Nears $50 As US Stock-Draw Balances China Data – Investing.com

  EQUITY NEWS

  US Stock Futures Rise As Investors Digest Global PMIs – MarketWatch

  Asian Stock Mkts Lower After Weak China Factory Data, Europe Up As VW Rebounds – US News

  Energy Stocks Help FTSE Mount Recovery – Citywire

  German Government ‘Knew VW Was Rigging Emissions Test’ – Telegraph

  Deutsche Bank Cuts DAX Forecast On VW Woes – FT

  Deutsche Bank, JPMorgan Downgrade VW On Emissions Scandal – Digital Look

  Several K+S Investors Urge Management To Reconsider Potash Corp Offer – WSJ

  Santander Hikes Cost Cuts Target To EUR3 Bln By 2018 – RTRS

  Swiss Re Pays $2.45 Bln For Guardian Financial Services – WSJ

  Total Cuts Oil Output Target As Low Prices Expected To Persist – BBG

  BBA Aviation To Buy Landmark For $2.07 Bln – MarketWatch

  Diageo Op Profit To Be Hurt By Currency Moves – MarketWatch

  China Inks Deal To Buy 300 Boeing Jets – AP

  Moody’s: Litigation And Conduct Remediation Charges Pose Risks For UK’s Largest Banks

  Former Trader Sues Lloyds For Unfair Dismissal After Libor Probe – CNBC

  EMERGING MARKET NEWS

  Russia Pledges Counter Measures If United States Upgrades Nuclear Arms In Germany – RTRS

   

  Emerging Market Slump Raises Fears Of Capital Controls – Gulf Base

  

  

  

  

  

• Dear Janet: Here Is The Circle Jerk You Have Created Explained In 54 Words

  On Monday in “When Doves Cry: Bedeviled By Dollar ‘Dilemma’, Trapped Fed Faces FX Catch-22,” we described precisely why the Fed’s new reaction function simply can’t work given prevailing market conditions.

  The Fed adopted the so-called “clean relent” precisely because it knew that the strong dollar would, as Goldman put it, “go through the roof” at the slightest sign of hawkishness. Of course a soaring dollar would likely be more than enough to send the EM world careening into crisis as China’s new currency regime and depressed commodity prices have conspired to push commodity currencies to the brink. The resulting outflows and subsequent meltdown would almost invariably feed back into advanced economies forcing the Fed to do an embarrassing about face. Unfortunately however, US investors interpreted the Fed’s move to postpone liftoff as a sign that Yellen was worried about the economy leading directly to the worst possible outcome: risk off sentiment that triggered a post-FOMC selloff. In short: 

  The new reaction function seems to involve sensitivity to both domestic and global financial markets. In the current environment where a positive assessment of the outlook for the US economy is required to keep a bid under risk assets (i.e. in an environment where good news is good news again) but in which EM is one “symbolic” Fed hike away from careening headlong into crisis, the new reaction function can’t possibly work. 

   

  

  What the above should suggest, perhaps more than anything else, is that there’s a certain reflexivity to the entire thing and it’s especially evident when we look at how the Fed got itself into the current predicament. 

  There’s a certain line of argumentation that says the Fed missed its window to hike and ever since, the uncertainty has only grown with each passing FOMC meeting. That uncertainty serves to perpetuate outflows from EM and now, the Fed is set to use those very outflows as an excuse for why it must postpone liftoff.

  With that, we’ll close with the following concise formulation of the reflexivity problem from former Treasury economist Bryan Carter who spoke to Bloomberg:

  ”Short-end rates move higher as the Fed gets closer to hiking, and that causes the dollar to strengthen, and that causes global funding stresses. They are creating the conditions that are causing the external environment to be weak, and then they say they can’t hike because of those same conditions that they have created.” 

   

  
  

  

  

  

  

  

• The Fed's Alice In Wonderland Economy – What Happens Next?

  Submitted by Nick Giambruno via InternationalMan.com,

  After the president of the United States, the most powerful person on the planet is the chairman of the Federal Reserve.

  Ask almost anyone on the street for the name of the U.S. president, and you’ll get a quick answer.

  But if you ask the same person what the Federal Reserve is, you’ll likely get a blank stare.

  They don’t know – partly due to the institution’s deliberately obscure name – that the Fed is really the third iteration of the country’s central bank. Or that the Fed manipulates the nation’s economic destiny by controlling the money supply.

  And that’s just how the Fed likes it. They’d prefer Boobus americanus not understand the king-like power they wield.

  By simply choosing to utter the right words, the chairman of the Fed can create or extinguish trillions of dollars of wealth both in and outside of the U.S. He holds the economic fate of billions of people in his hands.

  So it’s no shocker that investors carefully parse everything he says. They have to, if they want to be successful. Some even go as far as to analyze the almighty chairman’s body language. Of course, the mainstream financial media revere the Fed.

  You may recall the unhealthy spectacle that occurred in 1996. That’s when Alan Greenspan, the Fed chairman at the time, spoke the now famous phrase “irrational exuberance” in what should have otherwise been a dull and forgettable speech.

  Investors heard Greenspan’s phrase to mean that the Fed would soon raise interest rates to slow the global economy.

  It’s worth mentioning that Greenspan didn’t actually say the Fed would raise rates. Nor did he intend to signal that.

  Nonetheless, the reaction was swift and panicky. U.S. markets were closed at the time, but stocks in Japan and Hong Kong dropped 3%. The German stock market fell 4%. When trading started in the U.S. market the next day, the market opened down 2%.

  Billions of dollars of wealth vanished in a period of 16 hours.

  That’s the absurd power over the global economy that the Federal Reserve gives to one human being.

  The words of the chairman can make or break the fortunes of anyone with a brokerage account.

  The Fed’s Alice in Wonderland Economy

  I almost fell out of my chair when I heard it…

  A journalist recently asked Janet Yellen, the current chair of the Federal Reserve, if the central bank would keep interest rates at 0% forever.

  Her response: “I can’t completely rule it out.”

  I was stunned.

  The deferential financial media hurried to ignore the significance of that statement. Instead, it acted the way big city police might act after making a messy arrest on a busy sidewalk. “Move along folks, nothing to see here!”

  Clearly, there was something to see. Something very important.

  Yellen’s words came amidst one of the most anticipated economic pronouncements in a generation… whether the Fed would finally raise interest rates for the first time in nine years. Short-term rates have been at zero since the 2008 financial crisis.

  Interest rates are simply the price of borrowing money. Setting them at an artificial level is nothing other than price fixing. Not surprisingly, it has led to enormous amounts of malinvestment and other distortions in the economy.

  Malinvestment is the result of faulty decision-making. Any investor or business can make a mistake, but central bank manipulation of interest rates subsidizes bad, wasteful decisions.

  Cheap borrowing costs trick companies. It causes them to plow money into plants, equipment, and other assets that appear profitable because borrowing costs are low. Only later, when the profits don’t show up, do they discover that the capital was wasted.

  Seven years of quantitative easing (QE) and Fed-engineered zero interest rates have drawn the U.S. and much of the world into an unsustainable "Alice in Wonderland" bubble economy riddled with malinvestment.

  The pundits had expected that, at this recent meeting, the Fed would move to raise rates just a little and give the global economy a tiny taste of sobriety.

  Not even that nudge materialized.

  Instead, the Fed sat on its hands. It kept interest rates at zero.

  And Janet Yellen couldn’t even rule out that rates would stay at zero forever.

  If she can’t even do that, how is she going to start a sustained series of rate hikes, as many of those same pundits now expect her to do a few months down the road?

  The truth is, seven years of 0% yields and successive rounds of money printing has so distorted the U.S. economy that it can’t handle even the tiniest increase in interest rates. It would be the pin that pricks the biggest stock and bond market bubble in all of human history. The Fed cannot let that happen.

  What Happens Next

  It’s clear that the Fed can’t raise interest rates in any meaningful way. It would trigger a financial meltdown that would quickly force them to reverse course.

  The Fed might be able to get away with a token increase, but that’s all.

  In other words, the Fed has trapped itself.

  Former Fed chairman Ben Bernanke admitted as much recently when he said he didn’t expect rates to normalize in his lifetime.

  And then, we have the current chair Janet Yellen saying that rates might stay at zero forever!

  Yellen’s belief that she has the power to suppress interest rates until the end of time is a frightening sign.

  As powerful as the Fed is, it isn’t stronger than the markets. A crisis in the markets could force rates higher even if the Fed doesn’t want them to go there. And the longer the Fed tries to sustain abnormalities like QE and 0% interest rates, the more likely it is that the whole business will end with the markets crushing the Fed.

  And that’s not even considering a collapse of the petrodollar system or China pushing the establishment of a New Silk Road in Eurasia…two catalysts that would likely force interest rates higher.

  So I’ll go ahead and disagree with Yellen and rule out the possibility that rates might stay at zero forever. They won’t, because they can’t.

  At the next sign of a market swoon or of a weakening economy, or with the next episode of deflationary jitters, the Fed will again ramp up the easy money. It could be another round of QE. Or the Fed could push interest rates into negative territory. If that fails, the Fed could go for the nuclear option and drop freshly printed money out of helicopters as Bernanke once infamously suggested – or, more likely, into everyone’s bank account. They’ll do whatever it takes, no matter what the eventual damage to the dollar’s value.

  Whatever the details, one thing should be clear. This politburo of unaccountable central planners is the greatest risk to your financial wellbeing today.

  What You Can Do About It

  It’s a terrifying thought that the actions of a few people at the Fed so endanger your financial security.

  But the facts are worse than that. There’s more to worry about than just the financial effects. The social and political implications of the Fed’s actions are even more dangerous.

  An economic depression and currency inflation (perhaps hyperinflation) are very much in the cards. These things rarely lead to anything but bigger government, less freedom, and shrinking prosperity. Sometimes they lead to much worse.

  Fortunately, your destiny doesn’t need to be hostage to what’s coming.

  *  *  *

  We’ve published a groundbreaking step-by-step manual that sets out the three essential measures all Americans should take right now to protect themselves and their families.

  

  

  

  

  

• Stocks Slide On Dreary Draghi, Crude Clobbering, & Brazilian Battering

  Who is responsible for all this? Janet – what say you?

  And why she needs to pull an emergency rate hike to calm anxious markets…

   

  Before we start on US markets, a couple of under the surface things that happened… There has been a bloodbath in Greek banks this week that has been underway…

  

   

  The Brazilian Real is collapsing-er…

  

   

  With a total meltdown after the close…

  

   

  The late-day plunge appears to due to impeachment comments:

  • Brazil’s lower house President Eduardo Cunha will address questions on impeachment procedures in response to opposition request, opposition lawmaker Mendonca Filho says.
  • Key to impeachment process is whether Cunha accepts or denies impeachment request: Mendonca Filho
  • Opposition needs to consider its next steps very carefully, should meet on the matter: Mendonca Filho
  • Lawmakers have up to 5 sessions to appeal if he denies impeachment request: Mendonca Filho
  • Congress will kill govt request to re-introduce CPMF tax: Mendonca Filho

   

  The Nasdaq Biotech index broke key support today…

  

   

  Meanwhile, The S&P 500 Put/Call Ratio has surged 12% in the last 5 days – the biggest such surge since 2009… (after which the S&P fell 9%)…

  

   

  Quite a rollercoaster day today, as futures show, a big dump on China PMI disappointment, a ramp on weak EU data and Q€ chatter, and a drop on Draghi dreariness…

  

   

  Cash indices all closed lower as Nasdaq tumbled in th elast few seconds to red…

  

   

  Leaving indices all red on the week…

  

   

  And down hard since The Post-FOMC Peak…

  

   

  Materials are the weakest post-FOMC, Utes the best (thought still red) and Financials down around 4%…

  

   

  And ahead fo Yellens peaking tomorrow, VIX term striucture slid lower…

  

   

  Credit continues to tumble…

  

   

  Treasury yields trod water in a very narrow 2bps range today…

  

   

  But The US Dollar tumbled after Europe closed (having held in steady until then).. JPY strength and AUD weakness (biggest 3-day drop since January) most notable…

  

   

  As is clear AUDJPY was the overnight driver of equity correlation algos, then EURJPY took over to the EU close, then USDJPY was back in charge…

  G182

   

  Commodities generally drifted higher on the day as USD limped lower… apart from crude's collapse…(which oddly retraced perfectly to gold for the week)

  

   

  Crude has been moronically algorithmic this week (once again)…

  

   

  Perhaps this is why…

  Crude inventories fall → oil prices jump → cash-strapped producers ramp production → crude inventories rise → oil prices drop → repeat ?.

  — Mark Constantine (@vexmark) September 16, 2015

  Charts: Bloomberg

   

  

  

  

  

• More Have Died From Selfies Than Shark Attacks Since 2013

  It appears Darwin was on to something after all. In the most stunning statistic of the new narcissistic normal's sharing economy, The Sydney Morning Herald reports that, since 2013, deaths from shark attacks have been outnumbered by deaths while taking a selfie.

  At least 11 people have died this year while trying to take a selfie, according to a Wikipedia page that tracks media reports of selfie-related injuries and deaths. At least 11 people died while trying to photograph themselves in 2014, according to the list.

   

  By comparison, just three people were killed in shark attacks last year, according to statistics from the University of Florida's International Shark Attack File. An average of six people a year have died from shark attacks in the decade to 2014 and Mashable reports that eight people have been killed in shark attacks so far this year.

   

  

   

  The figures say as much about shark fatalities as they do about the dangers of not paying attention to your surroundings – or worse, intentionally putting yourself in harm's way for the sake of a Facebook or Instagram post.

   

  And although the Wikipedia list is by no means comprehensive (at least three deaths, listed below, have not been recorded) it makes for sobering reading.

   

  Falls were the most common cause of death, accounting for eight of the 22 deaths listed over the two years, as well as the death of a 21-year-old Singaporean man, not listed on the Wikipedia page, who fell from a seaside cliff in Bali.

   

  The latest recorded death is of a Japanese tourist who slipped and fell down the stairs at the Taj Mahal on September 18.

  *  *  *
  And while some selfies are "to die for"…

  

  

  

  In Russia, the danger has apparently become so acute that in July police launched a campaign urging people to take care after about 100 people were reportedly injured while taking selfies.

  "A cool selfie could cost you your life," the Interior Ministry warned in a brochure accompanying a video and website listing risky locations to take selfies.

   

  Other tips from the Russian campaign include: "A selfie on the railway tracks is a bad idea if you value your life" and "A selfie with a weapon kills".

  

  

  

  

  

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• The Crisis Of The Now: Distracted & Diverted From The Ever-Encroaching Police State

  Submitted by John Whitehead via The Rutherford Institute,

  “When a population becomes distracted by trivia, when cultural life is redefined as a perpetual round of entertainments, when serious public conversation becomes a form of baby talk, when, in short, a people become an audience and their public business a vaudeville act, then a nation finds itself at risk: culture-death is a clear possibility.”—Author Neil Postman

  Caught up in the spectacle of the forthcoming 2016 presidential elections, Americans (never very good when it comes to long-term memory) have not only largely forgotten last year’s hullabaloo over militarized police, police shootings of unarmed citizens, asset forfeiture schemes, and government surveillance but are also generally foggy about everything that has happened since.

  Then again, so much is happening on a daily basis that it’s understandable if the average American has a hard time keeping up with and remembering all of the “events,” manufactured or otherwise, which occur like clockwork and keep us distracted, deluded, amused, and insulated from reality while the government continues to amass more power and authority over the citizenry.

  In fact, when we’re being bombarded with wall-to-wall news coverage and news cycles that change every few days, it’s difficult to stay focused on one thing—namely, holding the government accountable to abiding by the rule of law—and the powers-that-be understand this. As investigative journalist Mike Adams points out:

  This psychological bombardment is waged primarily via the mainstream media which assaults the viewer by the hour with images of violence, war, emotions and conflict.

   

  Because the human nervous system is hard wired to focus on immediate threats accompanied by depictions of violence, mainstream media viewers have their attention and mental resources funneled into the never-ending ‘crisis of the NOW’ from which they can never have the mental breathing room to apply logic, reason or historical context.

  Consider if you will the regularly scheduled trivia and/or distractions in the past year alone that have kept us tuned into the various breaking news headlines and entertainment spectacles and tuned out to the government’s steady encroachments on our freedoms:

  Americans were riveted when the Republican presidential contenders went head-to-head for the second time in a three-hour debate that put Carly Fiorina in a favored position behind Donald Trump; Hillary Clinton presented the softer side of her campaign image during an appearance on The Tonight Show with Jimmy Fallon; scientists announced the discovery of what they believed to be a new pre-human species, Homo naledi, that existed 2.8 million years ago; an 8.3 magnitude earthquake hit Chile; massive wildfires burned through 73,000 acres in California; a district court judge reversed NFL player Tom Brady’s four-game suspension; tennis superstar Serena Williams lost her chance at a calendar grand slam; and President Obama and Facebook mogul Mark Zuckerberg tweeted their support for a Texas student arrested for bringing a homemade clock to school.

  That was preceded by the first round of the Republican presidential debates; an immigration crisis in Europe; the relaxing of Cuba-U.S. relations; the first two women soldiers graduating from Army Ranger course; and three Americans being hailed as heroes for thwarting a train attack in France. Before that, there was the removal of the Confederate flag from the South Carolina statehouse; shootings at a military recruiting center in Tennessee and a movie theater in Louisiana; the Boy Scouts’ decision to end its ban on gay adult leaders; the first images sent by the New Horizons spacecraft of Pluto; and the victory over Japan of the U.S. in the Women’s World Cup soccer finals.

  No less traumatic and distracting were the preceding months’ newsworthy events, which included a shooting at a Charleston, S.C., church; the trial and sentencing of Boston Marathon bomber suspect Dzhokhar Tsarnaev; the U.S. Supreme Court’s affirmation of same-sex marriage, Obamacare, lethal injection drugs and government censorship of Confederate flag license plates; and an Amtrak train crash in Philadelphia that left more than 200 injured and eight dead.

  Also included in the mix of distressing news coverage was the death of 25-year-old Freddie Gray while in police custody and the subsequent riots in Baltimore and city-wide lockdown; the damning report by the Dept. of Justice into discriminatory and abusive practices by the Ferguson police department; the ongoing saga of Hillary Clinton’s use of a private email account while serving as secretary of state; the apparently deliberate crash by a copilot of a German jetliner in the French Alps, killing all 150 passengers and crew; the New England Patriots’ fourth Super Bowl win; a measles outbreak in Disneyland; the escalating tensions between New York police and Mayor Bill de Blasio over his seeming support for anti-police protesters; and a terror attack at the Paris office of satire magazine Charlie Hebdo.

  Rounding out the year’s worth of headline-worthy new stories were protests over grand jury refusals to charge police for the deaths of Eric Garner and Michael Brown; the disappearance of an AirAsia flight over the Java Sea; an Ebola outbreak that results in several victims being transported to the U.S. for treatment; reports of domestic violence among NFL players; a security breach at the White House in which a man managed to jump the fence, cross the lawn and enter the main residence; and the reported beheading of American journalist Steven Sotloff by ISIS.

  That doesn’t even begin to touch on the spate of entertainment news that tends to win the battle for Americans’ attention: Bruce Jenner’s transgender transformation to Caitlyn Jenner; the death of Whitney Houston’s daughter Bobbi Kristina Brown; Kim Kardashian’s “break the internet” nude derriere photo; sexual assault allegations against Bill Cosby; the suicide of Robin Williams; the cancellation of the comedy The Interview in movie theaters after alleged terror hack threats; the wedding of George Clooney to Amal Alamuddin; the wedding of Angelina Jolie and Brad Pitt; the ALS ice bucket challenge; and the birth of a baby girl to Prince William and Kate.

  As I point out in my book Battlefield America: The War on the American People, these sleight-of-hand distractions, diversions and news spectacles are how the corporate elite controls a population by entrapping them in the “crisis of the NOW,” either inadvertently or intentionally, advancing their agenda without much opposition from the citizenry.

  Professor Jacques Ellul studied this phenomenon of overwhelming news, short memories and the use of propaganda to advance hidden agendas. “One thought drives away another; old facts are chased by new ones,” wrote Ellul.

  “Under these conditions there can be no thought. And, in fact, modern man does not think about current problems; he feels them. He reacts, but he does not understand them any more than he takes responsibility for them. He is even less capable of spotting any inconsistency between successive facts; man’s capacity to forget is unlimited. This is one of the most important and useful points for the propagandists, who can always be sure that a particular propaganda theme, statement, or event will be forgotten within a few weeks.”

  But what exactly has the government (aided and abetted by the mainstream media) been doing while we’ve been so cooperatively fixated on whatever current sensation happens to be monopolizing the so-called “news” shows?

  If properly disclosed, consistently reported on and properly digested by the citizenry, the sheer volume of the government’s activities, which undermine the Constitution and in many instances are outright illegal, would inevitably give rise to a sea change in how business is conducted in our seats of power.

  Surely Americans would be concerned about the Obama administration’s plans to use behavioral science tactics to “nudge” citizens to comply with the government’s public policy and program initiatives? There would be no end to the uproar if Americans understood the ramifications of the government’s plan to train non-medical personnel—teachers, counselors and other lay people—in “mental first aid” in order to train them to screen, identify and report individuals suspected of suffering from mental illness. The problem, of course, arises when these very same mental health screeners misdiagnose opinions or behavior involving lawful First Amendment activities as a mental illness, resulting in involuntary detentions in psychiatric wards for the unfortunate victims.

  Parents would be livid if they had any inkling about the school-to-prison pipeline, namely, how the public schools are being transformed from institutions of learning to prison-like factories, complete with armed police and surveillance cameras, aimed at churning out compliant test-takers rather than independent-minded citizens. And once those same young people reach college, they will be indoctrinated into believing that they have a “right” to be free from acts and expressions of intolerance with which they might disagree.

  Concerned citizens should be up in arms over the government’s end-run tactics to avoid abiding by the rule of law, whether by outsourcing illegal surveillance activities to defense contractors, outsourcing inhumane torture to foreign countries, causing American citizens to disappear into secret interrogation facilities, or establishing policies that would allow the military to indefinitely detain any citizen—including journalists—considered a belligerent or enemy.

  And one would hope American citizens would be incensed about being treated like prisoners in an electronic concentration camp, their every movement monitored, tracked and recorded by a growing government surveillance network that runs the gamut from traffic cameras and police body cameras to facial recognition software. Or outraged that we will be forced to fund a $93 billion drone industry that will be used to spy on our movements and activities, not to mention the fact that private prisons are getting rich (on our taxpayer dollars) by locking up infants, toddlers, children and pregnant women?

  Unfortunately, while 71% of American voters are “dissatisfied” with the way things are going in the United States, that discontent has yet to bring about any significant changes in the government, nor has it caused the citizenry to get any more involved in their government beyond the ritualistic election day vote.

  Professor Morris Berman suggests that the problems plaguing us as a nation—particularly as they relate to the government—have less to do with our inattention to corruption than our sanctioning, tacit or not, of such activities. “It seems to me,” writes Berman, “that the people do get the government they deserve, and even beyond that, the government who they are, so to speak.”

  In other words, if we end up with a militarized police state, it will largely be because we welcomed it with open arms. In fact, according to a recent poll, almost a third of Americans would support a military coup “to take control from a civilian government which is beginning to violate the constitution.”

  So where does that leave us?

  As legendary television journalist Edward R. Murrow warned, “Unless we get up off our fat surpluses and recognize that television in the main is being used to distract, delude, amuse, and insulate us, then television and those who finance it, those who look at it, and those who work at it, may see a totally different picture too late.”

   

  

  

  

  

  

• "Keep Reporting On Bright Economic Future" – China Ministry Of Truth Demands Media "Properly Interpret" Data

  The following censorship instructions, issued to the media by government authorities, have been leaked and distributed online. As China Digital Times reports, propaganda directives issued by the Xinhua News Agency and the Central Propaganda Department show that Chinese media are being instructed to "properly interpret economic data," and "promote discourse on China’s bright economic future."

  As China Digital Time reports, two leaked images of propaganda directives issued by the Xinhua News Agency and the Central Propaganda Department show that Chinese media are being instructed to report positively on the economy. CDT has translated both.

  The first below is the Xinhua notice, which asks its various departments to draft plans for “promoting the discourse on China’s bright economic future.”

  

  Office of the Xinhua News Agency Editor-in-Chief

  Notice

  To the departments of Domestic News (Central Government Procurement Center), International News, Domestic News for Overseas Service, Photography, Reference News, and Audio-Video; the CNC [China Xinhua News Network Corporation], Xinhua Online, the New Media Center; all media reporting platforms; and the Editorial Department:

   

  In keeping with the spirit of notifications from superior authorities and Agency leadership requirements, the focus for the month of September will be strengthening economic propaganda and guiding public opinion (the related notification is in the attachment that follows). This includes taking the next step in promoting the discourse on China’s bright economic future and the superiority of China’s system, as well as stabilizing expectations and inspiring confidence. We request that your departments take immediate action to plan related reporting; identify individuals to take responsibility; and confirm reporting topics, individuals responsible for those topics, and publication dates.

   

  Please plan related reporting. After the responsible parties within the relevant department have signed off on the plan, send it to the Creative Planning Center at the editor-in-chief’s office through 0A prior to 5 p.m. on September 9, and fax the leadership signature page to 63071200.

  The topic formatting should be as follows:

  1. Topic (Responsible Party: Department Name, Individual’s Name; Publication Date: Month, Day)

  Contact: Wang Xiaoshun [Office:] 51366 [Cell:] 13661390548

  Office of the Editor-in-Chief

  September 7, 2015 [Chinese]

  *  *  *

  The second is the first page of a document issued by the Central Propaganda Department, marked as notice number 320 for the year 2015, asking state media and outlets affiliated with the state to “properly interpret economic data.”

  

  Communist Party of China Central Propaganda Department

  Notice 2015 #320

  Notice Regarding Increased Economic Propaganda and Guidance in the Near Term

   

  To the People’s Daily, Xinhua News Agency, Guangming Daily, Economic Daily, China Daily, China National Radio, China Central Television, China Radio International, China News Service, and subordinate emerging media outlets:

   

  According to instructions from central leadership comrades, all news media outlets must continue to deepen their study and transmission of the spirit of Secretary-General Xi Jinping’s series of important speeches, revolving around the strategic positioning of the “Four Comprehensives,” combined with deep concern for public opinion. The focus for the month of September will be strengthening economic propaganda and guiding public opinion, as well as overall planning for domestic- and foreign-facing propaganda and Internet propaganda, in order to take the next step in promoting the discourse on China’s bright economic future and the superiority of China’s system, as well as stabilizing expectations and inspiring confidence.

  1. Properly interpret economic data. In September, the National Bureau of Statistics will successively release for circulation important information on changes in means of production and market prices and the monthly reports on the consumer price index, industry production price index, above-scale industry production, and total value of retail sales for consumer goods. In the near future, listed banks will also successively announce their annual reports for the first half of the year. Every news media outlet must interview representatives and experts from the National Bureau of Statistics of China, the China Banking Regulatory Commission, and other relevant organizations; properly interpret economic data; and correctly report on new changes in economic market conditions and relevant industry management.

  1. Strengthen propaganda related to economic highlights and their effects. Closely follow economic market conditions, and diligently… [Chinese]

  Both state and independent media have been pressured to keep economic reporting upbeat and to downplay the stock market crash last month as well as slumps earlier in the summer.

  Detained Caijing reporter Wang Xiaolu confessed on CCTV to “causing panic and disorder” with a negative story, while almost 200 others have been taken into custody for “spreading rumors” about stories including the stock market turmoil.

  A directive from August 25 requires that Chinese websites delete specific essays about the crash, while in June the State Administration of Press, Publication, Radio, Film, and Television instructed TV and radio stations to “rationally lead market expectations to prevent inappropriate reports from causing the market to spike or crash.”

  

  

  

  

  

• ADB Joins OECD, WTO In Dismal Assessment Of Global Growth

  Exactly a week ago, we highlighted a WSJ piece which quoted WTO chief economist Robert Koopman as saying the following about the outlook for global growth: “We have seen this burst of globalization, and now we’re at a point of consolidation, maybe retrenchment. It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should.” 

  Explaining further, The Journal noted that “for the third year in a row, the rate of growth in global trade is set to trail the already sluggish expansion of the world economy.” 

  In no uncertain terms: global growth and trade are grinding to a halt, something we’ve been keen to drive home this year using a variety of data points not the least of which are freight rates which, as Goldman noted back in May are likely to remain depressed until 2020, dead cat bounces in the Baltic Dry notwithstanding (for more on this, see here). 

  All of the above was confirmed last Wednesday by the OECD which cut their forecast for global growth to 3% in 2015 and 3.6% in 2016. 

  

  Of course one of the main problems is decreased demand from China, where sharply decelerating economic growth threatens to plunge the entire emerging world into crisis as the country’s previously insatiable appetite for raw materials suddenly disappeared leaving countries like Brazil out in the cold. Also hard hit is emerging Asia, where the turmoil in China combined with the threat of an imminent Fed hike has created conditions that may ultimately usher in the return of the 1997/98 Asian Currency Crisis (indeed, Malaysia’s central bank governor Zeti Akhtar Aziz has been at pains to reassure the market that the country isn’t set to return to capital controls to shore up the plunging ringgit). 

  Against this backdrop it shouldn’t come as a surprise that the ADB slashed its growth outlook for the region on Tuesday citing a laundry list of factors, most of which are outlined above. Here’s more:

  Softer growth prospects for the People’s Republic of China (PRC) and India, and a slow recovery in the major industrial economies, will combine to push growth in developing Asia for 2015 and 2016 below previous projections.

   

  ADB now sees gross domestic product (GDP) growth for the region coming in at 5.8% in 2015 and 6.0% in 2016—below the March forecasts of 6.3% for both years.

   

  
  

   

  “Developing Asia is expected to continue to be the largest contributing region to global growth despite the moderation, but there are a number of headwinds in play such as currency pressures, and worries about capital outflows,” said ADB Chief Economist Shang-Jin Wei. “In order to be resilient to international interest rate fluctuations and other financial shocks, it is important to implement macroprudential regulations that, for some countries, may entail some capital flow management such as limiting reliance on foreign currency borrowing.” 

   

  The PRC—the world’s second largest economy—has seen growth moderate due to a slowdown in investment and weak exports in the first 8 months of 2015. Growth is now seen at 6.8% in 2015, down from 7.2% projected earlier, and below the 7.3% posted in 2014. 

   

  External demand weakness and a slower-than-expected pace of enacting key reforms are holding back India’s growth acceleration, with the pace in 2015 now seen at 7.4%, down from 7.8% forecast earlier. 

  Southeast Asia meanwhile is bearing the brunt of the slowdown in the PRC—one of its key markets—as well as subdued demand from industrial countries, with growth in 2015 now seen at 4.4%, before bouncing back to 4.9% in 2016. 

   

  Soft global commodity prices, including oil and food, are keeping price pressures low with regional inflation projected to decline to 2.3% in 2015, from 3.0% in 2014, although a pickup is expected in 2016. Net capital outflows from developing Asian markets which gained pace in the first part of 2015, exceeding $125 billion in the first quarter, remain a concern as investors anticipated a near term US interest rate hike. As a consequence the region has seen rising risk premiums and weakening exchange rates which could further impede growth momentum, the report said. 

   

  A strengthening US dollar poses a threat to Asian companies with large foreign currency exposure, with data showing that the share of foreign currency debt among firms in Viet Nam, Sri Lanka, and Indonesia exceeds 65%. In addition, a declining appetite by the PRC for energy, metals and other commodities, and soft global prices, is a worry for a number of developing Asian commodity-focused export economies, including Mongolia, Indonesia, Azerbaijan, and Kazakhstan. 

  As that pretty much speaks for itself, we’ll close with what we said last week in the wake of the OECD’s most recent report:  

  The big picture takeaway is that slowly but surely, all of the very “serious” people are coming to the same conclusion. Namely that the outlook for global growth and trade is grim, especially by historical standards, and that – although OECD doesn’t say this – should serve as a damning indictment of the idea that economic outcomes can be engineered from on high by central planners. The sad reality however, is that far from admitting that the coordinated Keynesian response to the crisis has failed and perhaps even exacerbated the slowdown in growth and trade by perpetuating a global deflationary supply glut, slowing growth will instead be trotted out as an excuse to double down on the very same policies that aren’t working.

  

  

  

  

  

• US Equity Futures, Yuan Plunge After China Manufacturing PMI Collapses To March 2009 Lows

  US equity futures plunged (Dow -140)

  

  *  *  *

  Following Xi's earlier speech reassuring Yellen that the "Chinese economy is stable," and the Yuan tumbled 0.25% against the USD ahead of the data. China's Flash Manufacturing PMI printed a disastrous 47.0 (against expectations of a slight rise to 47.5 from August's 47.3). This is the lowest print since March 2009.

  The Yuan was tumbling heading into the data…

  • *OFFSHORE YUAN DROPS 0.25% VS DOLLAR BEFORE CHINA CAIXIN PMI

  

  Then the data hit..

  • *CHINA CAIXIN FLASH MANUFACTURING PMI AT LOWEST SINCE MARCH 2009
  • *CHINA SEPT. CAIXIN FLASH MANUFACTURING PMI AT 47; EST. 47.5

  

   

  With across the board weakness…

  

   

  Commenting on the Flash China General Manufacturing PMI™ data, Dr. He Fan, Chief Economist at Caixin Insight Group said:

  “The Caixin Flash China General Manufacturing PMI for September is 47.0, down from 47.3 in August. The decline indicates the nation’s manufacturing industry has reached a crucial stage in the structural transformation process. Overall, the fundamentals are good. The principle reason for the weakening of manufacturing is tied to previous changes in factors related to external demand and prices. Fiscal expenditures surged in August, pointing to stronger government efforts on the fiscal policy front. Patience may be needed for policies designed to promote stabilization to demonstrate their effectiveness.”

   

  Maybe if only the Fed hiked just a little the global economy wouldn't be headed for recession

  — zerohedge (@zerohedge) September 23, 2015

   

  Charts: Bloomberg

  

  

  

  

  

• In New York City, Workers With Full Time Jobs Are Living In Homeless Shelters

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Puleo added he has “never seen” the homeless situation this bad.

   

  Dilcy Benn, president of the union’s Local 1505, said more than 100 of the 1,000 parks workers she represents are living in shelters and at least another four, including Torres, are living on the streets on Staten Island and The Bronx.

   

  – From the Market Watch article: Hundreds of Full-Time New York City Workers are Homeless

  One of the main data points that pundits and politicians who claim there is an “economy recovery” point to is jobs created. Please tell me, what good is a job if it can’t earn you a roof over your head?

  Welcome to the Oligarch Recovery.

  

   

  From Market Watch:

  Angelo Torres punches in to work at 5 a.m. each weekday and spends the next eight hours cleaning up debris on Staten Island’s Midland Beach.

   

  It’s a grueling job, says the veteran Parks Department maintenance worker, but also a welcome escape from the uncertainty of living on the streets as one of the city’s more than 300 full-time workers who are homeless.

  “I cry every night thinking this isn’t really happening, but it is,” Torres, 45, told The Post.

   

  Torres earns $33,662 a year but says it’s not enough to find four walls and a roof to call his own in a city where, according to StreetEasy, the median rent is $2,690 a month. 

   

  So he has spent the past four months living out of his beat-up 2001 Chevy Blazer with tinted windows. He has two small bags of belongings to his name.

   

  “Everyone’s like, ‘Take a shower and wash your clothes!’ They don’t know what is going on. It hurts a lot. I work for the city. I never thought this would happen to me,” he said.

   

  “A city job was always the gateway out of poverty,” said Joseph Puleo, president of Local 983 of District Council 37, which represents 3,000 blue-collar city workers.

   

  “You knew you had a pension, a good job and didn’t have to worry, but those days are gone,” he said.

   

  Puleo added he has “never seen” the homeless situation this bad.

   

  Some full-time workers in DC 37 — whose locals represent a total of 121,000 city workers — earn just $24,000 a year.

   

  Dilcy Benn, president of the union’s Local 1505, said more than 100 of the 1,000 parks workers she represents are living in shelters and at least another four, including Torres, are living on the streets on Staten Island and The Bronx.

   

  It was unclear how many members were homeless before they began working for the city. The city’s Department of Homeless Services refused to comment.

   

  Sokunbi Olufemi, of Communications Workers of America Local 1182, which represents 1,800 city traffic and sanitation enforcement agents, places much of the blame on de Blasio.

   

  “Our mayor is traveling all over the world and most states in America talking about payment equality, but he hasn’t fixed the roof in his own house,” Olufemi said. “His roof is leaking, and he refuses to fix it.”

  That’s how city employees are treated in the one place that benefited more than any other from the taxpayer bailout of Wall Street. At least financial service industry bonuses were saved.

  

  

  

  

  

• Oliver Stone: Forget ISIS, America Is The Real Threat To The World

  Submitted by Jake Anderson via TheAntiMedia.org,

  Many people thought Oliver Stone’s days of rankling the establishment were over. Many people were wrong. His 2012 book and TV series, The Untold History of the United States, suggests the iconic filmmaker is renewing efforts to challenge the mainstream narrative regarding American exceptionalism, economic imperialism, and our government’s “nefarious involvement” in the Middle East.

  To complete the 10-part documentary series and 750 page book, Stone collaborated with World War 2 scholar Peter Kuznick. The controversial filmmaker says that in assessing American history since the 1930s, it’s our involvement in the Middle East that really grabbed his attention.

  “We’ve destabilized the entire region, created chaos. And then we blame ISIS for the chaos we have created,” Stone said.

  According to Stone, the U.S. government’s destabilizing role actually goes back much further than ISIS. His new series pinpoints moments of American intrusion in the region as far back as the 1930s and follows it all the way to the CIA-backed Iranian coup in 1953, support for Afghanistan-based, anti-Soviet Union militants in the 1980s, George H.W. Bush’s Iraq invasion of 1990, and present-day efforts in Iran, Syria, and other countries.

  Stone etched his way into the hearts and minds of the American public in the mid-to-late 1980s with two films depicting powerful experiences from the Vietnam War. Platoon and Born on the 4th of July represent Stone’s confusion over his own service in the war, for which he earned a Bronze Star and a Purple Heart.

  Stone’s JFK famously questioned the mainstream narrative of the assassination of President John F. Kennedy, endearing the filmmaker to conspiracy theory circles for decades with a fictional account of a lawyer bringing the U.S. government to trial for its role in the assassination.

  In recent years, Oliver Stone has received less acclaim for films like World Trade Center, which failed to question the mainstream narrative of 9/11, and W., which gave relatively gentle treatment to George W. Bush’s presidency.

  Stone’s 2012 series, The Untold History of the United States, is a return to the intellectual form of one of his earliest successes, Salvador, which was strongly critical of the U.S.-supported right wing military of the Salvadoran Civil War. The last episode in the series is called Bush & Obama: Age of Terror. It covers the following subjects:

  • The Project For A New American Century, a neoconservative think tank that called for a Pearl Harbor-type event to catalyze military action in the Middle East
  • The tyranny of neoconservatives who pushed us to war with Iraq using faulty intelligence
  • The rushing through of the Patriot Act, which stripped Americans of a wide variety of civil liberties while bestowing legal precedent to the new surveillance state
  • The national brainwashing and fear-mongering of the War on Terror
  • Invading Afghanistan to defeat some of the same terrorists the U.S. armed and trained two decades earlier
  • Unconstitutional torture and interrogation tactics at Guantanamo Bay
  • The mainstream media’s facilitation of war through propaganda and corporate collusion
  • Obama selling out to J.P. Morgan Chase, Goldman Sachs, Citigroup, General Electric, and Big Pharma
  • The $700 billion financial bailout paid for by workers, pensioners, homeowners, small businessmen, and students with loans
  • The rise of CEO compensation amid the collapse of the middle class
  • Obama’s failure to deliver hope, change, or transparency, his prosecution of government whistleblowers, his fortification of Bush’s national security state (though he repudiated the unilateralism of Bush, he doubled down on troops and, according to Stone, “lacked the courage of a John F. Kennedy”)
  • Obama’s targeted drone strikes on Afghanistan, Iraq, Pakistan, Yemen, Libya, and Somalia (includes a breathtaking clip of his remark to troops: “Unlike the old empires, we don’t make these sacrifices for territory or for resources….We do it because it’s right.”

  Stone says his documentary series is an alternative approach to American history, one he hopes will fight the“educational crime” of exposing today’s schoolchildren to the propaganda of standard textbooks and television programs.

  On this note, Stone doesn’t mince words:

  “American exceptionalism has to be driven out of our curriculums. We’re not under threat. We are the threat.”

  

  

  

  

  

• PBOC Devalues Yuan For 3rd Day As President Xi Reminds The Fed "China's Economy Is Stable" – Live Feed

  Following last night's ADB China growth downgrade, and warnings from The IMF's Lagarde that a "China slowdown is a major risk to the global economy," the weakness seen in Europe and US is continuing across AsiaPac tonight ahead of China's much-watched PMI data (though we are not sure why – since no "bad news" excuse is needed to enable super-easy policy). With Xi in the US, one would imagine a 'beat' for PMI will be engineered, although industrial metals are extending their losses. Credit markets area nxious with Malaysia CDS at 2011 highs, Philippines highest since 2014, and China back on the rise. Xi begins his speech tonight reminding The Fed that China "is the biggest developing nation in the world," and its economy "is stable" despite Yellen's fears.

  President Xi live from Seattle…

  • *XI SAYS CHINA DREAM IS THE PEOPLE'S DREAM
  • *XI SAYS CHINA IS BIGGEST DEVELOPING NATION IN THE WORLD
  • *CHINA HAS 200M PEOPLE THAT LIVE IN POVERTY, XI SAYS
  • *XI SAYS CHINA HAS 300M MIDDLE-INCOME EARNERS
  • *XI SAYS MORE THAN 85 MILLION CHINESE LIVE WITH DISABILITIES
  • *DEVELOPMENT IS TOP PRIORITY FOR CHINA, XI SAYS
  • *CHINA ECONOMY WILL MAINTAIN STABLE, RELATIVE FAST GROWTH: XI
  • *CHINA'S ECONOMY IS IN REASONABLE RANGE, XI SAYS
  • *CHINA TO MAINTAIN MEDIUM TO HIGH GROWTH RATE: XI
  • *XI SAYS CHINA TO AVOID PANIC ON STOCK MARKET
  • *XI SAYS CHINA'S STOCK MARKET HAS REACHED PHASE OF SELF-RECOVERY
  • *CHINA OPPOSED TO CURRENCY WARS: XI
  • *YUAN RATE DOESN'T HAVE FOUNDATION FOR CONTINUOUS FALL, XI SAYS
  • *CHINA WON'T DEVALUE TO BOOST EXPORTS: XI
  • *CHINA'S DEVELOPMENT MUST RELY ON REFORM, XI SAYS
  • *XI SAYS CHINA WILL NEVER CLOSE ITS OPEN DOOR TO OUTSIDE WORLD
  • *CHINA WON'T CHANGE POLICY FOR OVERSEAS INVESTMENT, XI SAYS
  • *CHINA WELCOMES COOPERATION WITH MULTINATIONAL COS., XI SAYS
  • *CHINA IS A STAUNCH DEFENDER OF CYBER SECURITY, XI SAYS
  • *XI SAYS CHINA READY TO SET UP CYBERCRIME MECHANISM WITH U.S.
  • *CHINA TO SET UP DIALOGUE WITH U.S. ON FIGHTING CYBER CRIME: XI
  • *CHINA TO CONTINUE FIGHT AGAINST CORRUPTION, XI SAYS
  • *CHINA STICKS TO PEACEFUL DEVELOPMENT PATH, XI JINPING SAYS
  • *CHINA WON'T SEEK POWER EXPANSION, XI SAYS
  • *XI WELCOMES U.S. TO JOIN ASIAN INFRASTRUCTURE INVESTMENT BANK
  • *DISAGREEMENT BETWEEN CHINA, U.S. IS UNAVOIDABLE, XI SAYS

  And then this!!

  • *XI SAYS CHINA WILL TREAT ALL MARKET PLAYERS FAIRLY

  Apart from short-sellers, right?

  *  *  *

  First, for your viewing pleasure, here is USDJPY ripping higher on the Japanese open… despite Japan being closed…

  

   

  Because Kuroda never takes a day off!!!

  And then the propaganda began…

  • *CHINA 7% OF ECONOMIC GROWTH IS CREDIBLE: NDRC

  And so was The Fed to most people until last Thursday.

  *  *  *

  The IMF stuck its beek in again…

  • *LAGARDE SAYS GLOBAL PRODUCTIVITY SLOWDOWN IS TROUBLING
  • *LAGARDE SAYS CHINA SLOWDOWN IS MAJOR RISK FOR GLOBAL ECONOMY

  China also announced new initiatives to ponzi-up the finance system…

  • *CHINA CITY BANKS TO PROVIDE LIQUIDITY TO EACH OTHER: CHINA NEWS

  Or "pass the hot potato collateral chain of counterparty risk" as some in The West might call it.

  Industrial metals continue to tumble…

  Metals extended losses in London ahead of a Chinese factory gauge expected to show the country’s manufacturing sector in contraction for a seventh month. Zinc traded near the lowest level since 2010.

   

  Aluminum fell 0.3 percent, adding to a 1.7 percent decline on Tuesday and continuing a sell-off across metals amid concerns about China’s demand. Copper slid 0.2 percent after posting its biggest loss since July.

   

  

   

  Credit markets are showing some strains…

  • Five-year credit-protection costs for Malaysia rose 19 bps yesterday, most since Jan. 6, to 206.5 bps, highest close since Oct. 2011, according to CMA New York data.

  

  • Philippines 5-year CDS rose 9 bps, most since Dec. 12, to 128.5 bps, highest daily close since Aug. 24
  • China’s 5-year CDS rose 5 bps to 121 bps, highest close since Sept. 1

  Marginb debt rose for the second day in a row…

  • *SHANGHAI MARGIN DEBT BALANCE CLIMBS FOR SECOND DAY

  And China stocks are extending losses…

  • *FTSE CHINA A50 INDEX FUTURES FALL 1.3% IN SINGAPORE
  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 0.7% TO 3,218.8

  

  And The PBOC devalued the Yuan fix for the 3rd day in a row…

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3773 AGAINST U.S. DOLLAR
  • *CHINA SETS YUAN REFERENCE RATE AT WEAKEST LEVEL SINCE AUG. 31

  

   

  We leave it to Jim Chanos to sum it all up – from Xi's speech-of-pure-comedic-genius to devlauing the Yuan most in a month while explainin that they are not…

  Chanos on Shanghai:“It’s just a highly speculative market “It’s like a pig on LSD. You don’t know which way it’s going to run.”

  Charts: Bloomberg

  

  

  

  

  

• The Clock Is Ticking On The U.S. Dollar As World's Reserve Currency

  Submitted by Henry Hewitt via OilPrice.com,

  The View From Hubbert’s Peak

  In 1971, the American President put an end to a 2,500 year trend; the Wall Street Journal called it “Nixon’s Worst Weekend.” Considering the old boy had some really bad ones, this must have been something special. In August of that year (on Friday the 13th) it was decided that the U.S. would no longer pay out gold for its paper dollars. OPEC Ministers took note, and in September they met, deciding it would be necessary to collect more paper dollars, if possible, since gold was no longer on offer and oil was the only asset they had to sell.

  It would take another two years for those decisions to matter (during the October 1973 embargo in the wake of another Arab-Israeli war). The Oil Embargo marked the end of ‘free’ energy, and kicked off a massive rise in the price of oil because the U.S., the world’s swing producer since Colonel Drake’s Pennsylvania strike in 1859, had finally reached peak production at around 10 million barrels per day in 1970. This moment is the original Hubbert’s Peak, the beginning of decline for the U.S. oil industry, at least until recently. The surge in U.S. production since 2010 has stalled out around 9.5 mb/d and, due to the Saudi decision to give the American tight oil producers ‘a good sweating,’ that rate has begun to fall in the last few months.

  It is certainly possible that U.S. production will surpass the 1970 peak, but with low prices it is hard to say when that will be; it is also hard to say how long that will last as tight oil wells have a devilishly high rate of decline. It is worth noting, as Arthur Berman has recently done in his fine article, that even the best producers are losing money now, and lots more are being lost by those who are not the best. Making it up on volume is a dog that does not hunt for $45.

  The Wizard of Oz

  The ultimate irony for this generation of investors is that, despite the occasional obligatory chant about ‘free markets’ and the wonders of capitalism, most of the day is spent obsessing about what the world’s most important central planner will do next. By Supreme Central Planner, I mean, the Fed.

  

  “Pay no attention to that man behind the curtain”

  The ‘Man’ behind the curtain is now a woman, but the power of the Fed is not in doubt; it still illuminates the Emerald City and all who look to it for guidance and more free money, which can be printed instantaneously and in any amount. At some point, the value of ‘free money’ will fall out of the sky, like Dorothy’s house onto the ruby slippers. Are we anywhere near that point?

  On September 17, the mighty Fed decided to do nothing, continuing a 9-year inning without a rate increase. (Did the markets breathe a sigh of relief? On the first full day of trading after the announcement the S&P fell by 1.6 percent and the Dow Industrials fell nearly 300 points; so, no, they didn’t.) This Bloomberg article suggests the Fed kept its powder dry because of China. “China affects the world more than ever before, and its influence over global markets will only increase as it approaches the U.S. economy in size.”

  Gold isn’t doing much to suggest that paper money is on the ropes but you may still be forgiven for thinking gold is a crouching tiger and it is only a matter of time. Oz is the abbreviation for an ounce of gold – “Follow the yellow brick road”; that is the path of hard money. Nobody is on that path anymore, so currency wars, i.e. who can devalue the right amount at the right time to gain a competitive advantage for their nation’s trade, are to be expected.

  The Fed failed its first test in the 1930s, and the question must be asked, now that China is well on its way to becoming the world’s most important financial player, will they make the same mistake? Will they tighten the money supply to the point that disaster follows? Deutsche Bank thinks the tightening has begun, though they do not predict disaster. At this moment in the great game, turbulence in markets is not particularly reassuring. Liquidity is evaporating, in pockets, and that generally ends badly.

  It is important for non-mathematicians to understand a dilemma which is not much discussed, if realized at all. When rates are low, even small increases make a significant difference. Raising rates from 1 to 2 percent, a ‘mere’ one point rise, has the same effect on the cost of the money you borrowed as raising rates from 5 to 10 percent – it is a doubling of the cost. It took a long time to crawl out from under extremely low rates in the 1930s (as it did after the 1893 crash before the Fed came along), which included a world at war. The liquidation process did not end until the rubble bounced in Germany and buildings were vaporized in Japan.

  Central Planners have not yet figured out a way to end the problem without a liquidation event; the problems of 2008 were not allowed to run their course. In other words, there is no precedent for a rate recovery from such an enduring trend without first undergoing a massive deflation. What is different this time is that gold is no longer seen as an official backstop, though central banks still own plenty of it (for some reason). As terrifying as deflation is, hyper-inflation is worse. Consider what happened in France after 1790 and Germany after 1923.

  

  The Next Suez Moment

  1971 was symbolically pivotal in another way. The Royal Navy, symbol of British power from the time of Trafalgar on, pulled up its anchors and sailed away from Singapore (Churchill’s ‘Gibraltar of the East’), having left Aden (in Yemen) a few years before, where it kept watch over the Indian Ocean and its most prized possession, i.e. India itself, for 128 years. The liquidation of the British Empire did not happen overnight. The 30-year running gun battle with Germany leading up to the Bretton Wood’s coronation of the U.S. dollar as the world’s supreme currency was not quite the bitter end. It took another 12 years before the British ruling class learned that the sun had already set upon their power.

  On July 26, 1956, Egyptian President Gamal Abdul Nasser nationalized the Suez Canal. The British and the French, who had financed and built it along with the Egyptians, were outraged. On October 29, Israel invaded the Sinai. On November 5, British and French paratroopers landed and defeated Egyptian troops along the Suez Canal. On the following day, Ike won an overwhelming electoral victory over Adlai Stevenson and, at the height of his (and America’s) powers, he told the British and French leaders to back down. America held their notes. The world held its breath. Prime Minister Anthony Eden resigned during the crisis and events effectively marked the end of heavily indebted Britain’s time as one of the world’s great powers.

  The $64 trillion question now facing the current world’s economic superpowers, by which I mean the U.S. and China, is not whether the Fed will raise rates any time soon, but when will the Yuan replace the Greenback as the world’s reserve currency? Whether or not paper money turns to dust generally is a separate question. The U.S. is now the world’s leading debtor nation, owing something on the order of $18 trillion. This is by far the most money that has ever been owed at any time in history. Does anyone really believe that it will ever be paid back?

  Inflation (printing money) and default are the usual suspects, but the unwinding of American debt will not necessarily happen in an orderly fashion. China’s Yuan becoming the world’s reserve currency would not be a Black Swan event; it may be a Gray Swan, but we have seen this sort of thing play out many times before, and not just to Britain.

   

  

  It has been a constant throughout history that both the Operations & Maintenance (O&M) and capital costs of running an empire at some point exceed the benefits or gains obtained from having that empire. Prestige does not pay the bills. Hadrian’s Wall, a high-water mark of Roman expansion, is in a pretty bad state (like a lot of American bridges that are crumbling on the home front).

  If it were otherwise, this article would be written in Latin; Facilis descensus Averno. (Loosely translated: The descent to hell is easy. Coming back up is the hard part: Hoc opus hic labor est.) The oft-quoted phrase: “Rome wasn’t built in a day,” misses a more important point, i.e. that it took centuries for the place to fall apart. About 150 years before so-called barbarians put the Eternal City out of its misery, Constantine moved the capital to what is now Istanbul. The Bezant, a gold coin, was the western world’s supreme currency for about 800 years after that, until the Venetians ruined the city during one of the Crusades.

  The Venetians (the Ducat), Florence (the Florin), Spain (thanks to American gold and silver), and the Dutch (whose Guilder was garnished with an occasional tulip), all had their turn in the catbird seat – the supreme privilege of minting the reserve currency (and running up debts without anyone calling them in). Britannia ruled the waves and the financial system after finally beating Napoleon in 1815 and their turn did not end until 1944, after decades of war first ignited in 1914 by Victoria’s grandchildren.

  The New Face of Money 

  

  Nobody plans to give way as keeper of the supreme currency, so there is no schedule to follow and no way to know when the torch will be passed from the dollar to the Yuan. Central planners and economists, who all drink from the same cup, may acknowledge that such a thing could happen decades from now (after all, Rome didn’t fall apart in a day), but will vigorously dispute the conclusions in this article. However, history has shown that the shift comes suddenly, usually in the heat or aftermath of war.

  American troops have now been involved in the Middle East for 25 years (nearly as long as the face-off between British and German troops and navies in the 20th century) and the U.S. Navy’s Fifth Fleet is stationed in Bahrain, having filled the void left when the Royal Navy departed. The U.S. Navy is the world’s single largest consumer of oil and aircraft carriers don't come cheap. Clearly, the ‘price’ of oil is greater than we think it is, and someday this will probably be recognized as the principal cause of the dollar’s fall from grace. The temporary rise in the dollar against most other currencies is partly the result of being the best looking leper in the colony. Furthermore, an expected rise in dollar rates makes the currency seem relatively more attractive, though this is a double-edged sword.

  It should be clear now that the reserve currency status is neither a birthright nor a privilege that stays forever in one place, which means it isn’t a question of if China will replace the U.S. as title holder but when. Imagine that a Republican president in January 2017 decides to act upon a campaign pledge to tear up any agreement between the U.S. and Iran. Imagine further that an air strike is aimed at Tehran. Regardless of Iran, or who is president, what if something happened in Pakistan that brought about a large scale American military response? What would China do?

  That country has an insatiable and rising need for Btus from the Middle East and its development of a port at Gwadar is highly significant. “Beijing says it wants to use Gwadar as the hub of an energy corridor to its western province of Xinjiang. But at the same time, Beijing has secured a string of port facilities in the Indian Ocean that increasingly allow it to project its own naval power westward.”

  With a population four times that of the U.S., and a per capita car ownership rate roughly one-tenth that of the U.S., even an elementary school math student can figure that over the next decade or so, there will be a lot more cars drinking a lot more oil filling Chinese streets (even if most vehicles eventually run on electricity – a switch that will take a long time).

  A military misadventure in that part of the world would be considered a direct threat to Chinese strategic interests. As Ike said ‘no’ in 1956, Xi Jinping may well say ‘no’ this time around. What would happen if China decided, or even threatened, to sell a substantial fraction of its trillion dollar U.S. Treasury horde? This may seem unthinkable, but even if they did not, after 35 years of falling and now zero rates, the direction is only up for the cost of money, as is the cost to service debt, along with the burden to those who are most indebted (i.e. the U.S.).

  What should no longer be unthinkable is that the clock is ticking on America’s status as the holder of the reserve currency. If you still doubt this proposition, consider that China is in the process of setting up a third benchmark for oil, along with Brent and West Texas Intermediate, for trading oil futures contracts. And unlike the existing contracts, these will be traded in Renminbi. Who needs the dollar?

  

  Alexander Hamilton’s face is on the ten dollar bill for a reason; he devised the system that made the U.S. the world’s supreme financial power. (Pretty good work for a penniless orphan from the Caribbean. He was also one of the few founders who did not ever own slaves.) If he goes off the $10 bill it would be a very bad omen. Susan B. Anthony would be a good choice for the $20 bill; she is already on the roster. Andrew Jackson does not deserve to be there anyway, as he was no champion of liberty even before he betrayed the native allies who helped him defeat the British. ( In 1814 we took a little trip, along with Colonel Jackson down the mighty Mississipi . . . )

  

  https://en.wikipedia.org/wiki/Susan_B._Anthony_dollar

  Speaking of Liberty, she graced U.S. silver dollars and gold coins for a long time. In hoc signo vinces.

  

  

  

  

  

• "You're Welcome" – More Unintended Humor From The Economists At The St. Louis Fed

  Back in November 2014, when the Fed had not yet admitted its third and fourth mandates were keeping the stock market as levitated as possible and responding to economic volatility and market turbulence in China (as it did last week) we made what we thought at the time was a sarcastic tweet, yet one which captured the gist of the September FOMC statement, when we said:

  BULLARD: FED TO RAISE RATES IN 2015, TIMING DETERMINED BY DATA. Determined by DJIA he means

  — zerohedge (@zerohedge) November 14, 2014

  While the accuracy of this tweet has since been confirmed by the Fed itself, one person took offense at the contents: the person – St. Louis Fed “vice president” David Andolfatto. This was his reply, before promptly deleting his tweet:

  @zerohedge Ha ha, you are such a dickhead … it’s wonderful!

  — David Andolfatto (@dandolfa) November 14, 2014

  To be sure, Andolfatto promptly apologized after our post led to a bemused public outcry at the Fed’s own dickheadery, which unlike ours, has resulted in a record wealth transfer from the middle class to the uber wealthy, the lack of any wage growth in 7 years, a bond and stock market that flash crashes almost on a monthly basis and an economy which can not even survive a 25 basis point hike.

  We bring it up because the same vice-presidential Economist Ph.D. was the source of some unintentional humor when he sparred with none other than our friend “Rudy von Havenstein“, the patron saint of money-printing central banks (which these days means all of them) everywhere.

  The full twitter exchange, captured in images so it can’t be deleted after the fact, is as follows. It needs to commentary.

  

  

  

  

  

  

  

• China's Man-Made Military Island Outposts, The Dramatic Before And After Photos

  There’s been no shortage of coverage both in these pages and elsewhere of China’s unprecedented land reclamation efforts in the Spratlys. 

  While China isn’t the first country to create new territory in the disputed waters of the South China Sea, the scope of Beijing’s development (some 3,000 acres) sets it apart and the construction of air strips and ports (not to mention the alleged stationing of artillery) has some of Washington’s regional allies especially concerned.

  The prospect of China declaring a no-fly zone over its new islands and the idea that the PLA may attempt to curtail the movement of the US navy in and around the Spratly archipelago has only served to exacerbate the situation and now, Fiery Cross Reef has become something of a symbol for China’s maritime ambitions. 

  While we’ve presented plenty of images depicting China’s progress in turning reefs into sovereign territory, we’ve yet to show the before/after contrast and so, without further ado, here are the images which show the extent to which Beijing is literally redrawing maritime boundaries in disputed waters.

  Subi:

  

  

  Fiery Cross:

  

  

  Mischief: 

  

  

  Gaven:

  

  

  Hughes:

  

  

  Johnson South:

  

  

  Cuarteron:

  

  

  Source

  

  

  

  

• Following Public Fury, Jim Cramer-Trained CEO Who Raised Price Of Drug By 5000%, Agrees To Lower The Price

  It took just a few days, and becoming America’s most hated man in the process, for Turing Pharma CEO Martin Shkreli to fold.

  The 32 year old “hedge fund manager”, who started his career on Wall Street working under Jim Cramer, and who subsequently ended up owing now-defunct Lehman Brothers $2.3 million for a Put option gone bad (only to see Lehman collapse before the now defunct bank could collect), was the object of nationwide scorn, derision and outrage after a NYT profile of his decision to boost the price of a drug by over 5000%. Even Hillary Clinton got involved in the public outrage, first tweeting and then making it a matter of her public policy how as a result of his actions she would implement a $250 price cap on drugs to prevent such price gouging.  Earlier today, the Taiwanese Animators took “Big Pharma Douchebag” Shkreli to task with the following clip:

   

  Not surprisingly, following the biggest plunge in biotech stocks in 2015 – many have speculated that the real goal of Shkreli’s actions was to profit by shorting the biotech sector ahead of the selling which his action would have unleashed – and an epic public outcry against the diminutive “hedge fund” manager (his prior company Retrophin recently filed a federal lawsuit against Shkreli alleging that he created the biotech and took it public solely to provide stock to MSMB investors when his hedge fund became insolvent; the suit seeks $65 million in damages) NBC reported moments ago that “the pharmaceutical company boss under fire for increasing the price of the drug Daraprim by more than 5,000 percent said Tuesday he will lower the cost of the life-saving medication.”

  Martin Shkreli did not say what the new price would be, but expected a determination to be made over the next few weeks.

   

  He told NBC News that the decision to lower the price was a reaction to outrage over the increase in the price of the drug from $13.50 to $750 per pill.

   

  Turing Pharmaceuticals of New York bought the drug from Impax Laboratories in August for $55 million and raised the price. Shkreli said Tuesday the price would be lowered to allow the company to break even or make a smaller profit.

  He added that his action was “absolutely a reaction — there were mistakes made with respect to helping people understand why we took this action, I think that it makes sense to lower the price in response to the anger that was felt by people.” One would not have gotten that impression from reading his tweets over the past 4 days.

  In a phone interview with NBC Shkreli said the money from the increase would be used to develop better treatment for toxoplasmosis that have fewer side effects. “It’s very easy to see a large drug price increase and say ‘Gosh, those people must be gouging.’ But when you find out that the company is not really making any money, what does that mean?”

  Well, it means it is like 90% of “eyeball” and “biotech” companies out there, that’s what it means.

  His conclusion: “I think in the society we live in today it’s easy to want to villainize people, and obviously we’re in an election cycle where this is very, very tough topic for people and it’s very sensitive. And I understand the outrage,” Shkreli said.

  It’s even easier to villainize those who deserve it.

  But now that Shkreli’s 15 minutes of fame are over and his Twitter profile is now in “private” mode (we doubt the SEC will investigate his shorting activity of biotech indices – we are confident the young “hedge funder” will have bigger headaches to deal with soon enough) the attention should shift to the real villains – those truly big pharma companies, who do what Shkreli did but on a far vaster and grander, if less obvious, scale taking advantage of the price cushioning effects that Obamacare provides.

  We also are curious to see how Hillary’s populist outrage at Shkreli will be explained when the public realizes that it is only thanks to the benefits of socialized insurance programs such as Obamacare, of which Hillary is a staunch supporter, that such price gouging was possible in the first place.

  

  

  

  

  

• Guest Post: Is The Pope's Dream Our Totalitarian Nightmare?

  Submitted by Susan Warner via Gatestone Institute,

  • Some high-profile commentators think they smell a Marxist clothed in white papal robes, who dreams of redistributing the world's wealth. Pope Francis insists that he has little interest in Marxism and that his political advocacy against materialism, capitalism, greed and idolatry are largely religious in nature. However, the flavor of some of his statements might suggest otherwise.

  • The Pope also knows that the UN is poised to strong-arm member nations to sign on to an impossible globalist agenda that will require a total shift of the world's wealth, and a restructuring of international politics and economics with a one-world government and a universal religion at the steering wheel.

  • Even to the Pope's admirers, that sounds a less like peace and love and more like a utopian totalitarian nightmare.

  The world press is in high gear for Pope Francis's visit to Cuba and the United States this week. Recently, the Pope has stirred up a stew mixing world poverty, the evils of capitalism and global warming into an elaborate narrative that is likely to keep journalists awake for weeks to come.

  Pope Francis visits former Cuban dictator Fidel Castro at Castro's home in Havana, Cuba, on September 20, 2015. (Image source: BBC video screenshot)

  As the first ever Pope to address a joint session of Congress, he is expected to take some shots at the structural evils of free market capitalism and the unequal distribution of wealth. As early as 2013, when he penned his Apostolic Exhortation, in which he laid out his broad vision for the Catholic Church, Pope Francis has been clarifying his positions on these topics.

  With the subsequent release of his controversial encyclical on global warming in June, he established two pressing themes that will likely monopolize his coming visit.

  Climate change is expected to be the focus of his address to the UN General Assembly on September 25, as he kicks off the 2015 UN Summit on Sustainable Development and its seventeen-point utopian agenda for the entire planet, packaged in a thinly disguised reboot of Agenda 21. According to IPS news:

  "Judging by his recent public pronouncements – including on reproductive health, biodiversity, the creation of a Palestinian state, the political legitimacy of Cuba and now climate change – Pope Francis may upstage more than 150 world leaders when he addresses the United Nations, come September… The Pope will most likely be the headline-grabber, particularly if he continues to be as outspoken as he has been so far."

  Along the way, he has managed to stun even many Catholics with pronouncements about issues that they think should be none of his business.

  When the Pope's recent encyclical on global warming was first leaked to the press in June, it stirred protests that the Pope should confine his expertise to religious matters:

  "Former US senator and Republican presidential hopeful Rick Santorum, for instance, is a devout Catholic who has said he loves the pope, but has also called global warming a "hoax" and the research underlying findings of climate change 'junk science'.

   

  "In a recent interview, Santorum advised Francis to 'leave science to the scientists' and focus instead on theology and morality. The suggestion was that the pontiff, who studied chemistry as a student, has no business pronouncing on something that exceeds his competence."

  As the Pope declared war on global warming, he emphasized his continuing opposition to capitalism, materialism, selfishness and other "human factors," which he asserts are the foundational causes of the imminent destruction of the planet's ecosystem.

  Writing in the Apostolic Exhortation and the Encyclical on Global Warming, the Pope justified his view that the temperature of the planet is economic and political, and it also undergirds religious concerns — especially since the results of global warming are likely to affect the poor disproportionately.

  His public denunciations of free market capitalism started in earnest with the recent papal visit to South America, where, to cheering crowds, he made some passionate statements about poverty and economics.

  Speaking to grassroots organizers, Pope Francis declared his own personal war on capitalism, imperialism, colonialism, greed and materialism. According to CNN:

  Pope Francis delivered a fiery denunciation of modern capitalism on Thursday night, calling the "unfettered pursuit of money" the "dung of the devil" and accusing world leaders of "cowardice" for refusing to defend the earth from exploitation.

   

  Speaking to grassroots organizers in Bolivia, the Pope urged the poor and disenfranchised to rise up against "new colonialism," including corporations, loan agencies, free trade treaties, austerity measures, and "the monopolizing of the communications media.

  Fox News reported that in one of his South American speeches, the Pope admonished business, government and trade union leaders, charging them with "idolatrous" and materialistic ways. CNN quotes him at one gathering saying to a group of business leaders, politicians, labor union leaders and other civil society groups on a Saturday evening: "I ask them not to yield to an economic model which is idolatrous, which needs to sacrifice human lives on the altar of money and profit."

  Some high-profile commentators such as Rush Limbaugh think they smell a Marxist clothed in white papal robes, who dreams of redistributing the world's wealth.

  Pope Francis insists that he has little interest in Marxism and that his political advocacy against materialism, capitalism, greed and idolatry are largely religious in nature. However, the flavor of some of his statements might suggest otherwise.

  To understand how the Pope thinks, it is helpful to glimpse at some of his closest counselors on these topics.

  One advisor on his August global warming encyclical is the controversial professed atheist, Professor John Schnellnhuber, who was appointed to the Pontifical Academy of Science, and has been accused of advocating population control.

  In an interview in June with Breitbart, Lord Christopher Monckton, chief policy advisor to the Science and Public Policy Institute, and a leader in the fight against the science of climate change, questioned Schnellnhuber's role in the encyclical:

  Monckton further explained that Francis is influenced by extremist Professor John Schnellnhuber, founding director of the Potsdam Institute for Climate Impact Research, who said in 2009 at a climate conference in Copenhagen that if we let global warming continue, six billion of the seven billion people on earth will be killed by it.

   

  Monckton said that Schnellnhuber will be standing by the side of Pope Francis when they announce the encyclical next week. "The fact that Schnellnhuber is going to be there is an extremely bad sign," he declared.

   

  The fact that he will be there next to the pope suggests to Monckton that Francis is thanking him for having written the climate portion of the encyclical.

  Another of the Pope's closest advisors is Cardinal Oscar Rodriguez Maradiaga, sometimes considered "the Vice Pope" because of his charisma and influence.

  On April 13, 2013, Pope Francis appointed Maradiaga as a coordinator of the group of cardinals established to advise him in the governance of the universal church and to study a plan for revising the Apostolic Constitution on the Roman Curia. Maradiaga is apparently also considered a leading progressive voice in Catholicism.

  According to a NewsMax report from last year:

  Cardinal Oscar Rodriguez Maradiaga, a close advisor to Pope Francis, criticized the free market as "a new idol" that increases inequality and excludes the poor in a keynote speech in Washington on Tuesday. … This economy kills," he told the gathered crowd. "The hungry or sick child of the poor cannot wait."

  The "elimination of the structural causes of poverty" is another concept taken from the "Apostolic Exhortation" handbook; some suggest it sounds like a call for a revolution.

  Pope Francis undoubtedly knows that some of these ideas are not likely to go over as well in the United States as they did in Latin America. According to the New York Times,

  "As his papal jetliner was returning to Rome (from his recent visit to South America), Francis signaled that he knew his economic message was already facing criticism in the United States and pledged to study it. Some critics blame him for rebuking capitalism with an unduly broad brush. Others say he ignores that globalization has lifted hundreds of millions of people out of poverty."

  The Pope also knows, however, that the UN is poised to strong-arm member nations to sign on to an impossible globalist agenda that will require a total shift of the world's wealth, and a restructuring of international politics and economics with a one-world government and a universal religion at the steering wheel.

  Even to the Pope's admirers, that sounds a less like peace and love and more like a utopian totalitarian nightmare.

  

  

  

  

  

• Exodus 8:2

  We may be through with the past, but the past isn’t through with us.

  I’m a big fan of history, and although I’m not a trained historian, I wrote a book about history through the lens of financial markets called Panic, Prosperity, and Progress (which has 22 reviews on Amazon, averaging 4.9 out of 5 stars………..so it can’t be that terrible). As part of this, I enjoy thinking of the arcs of history, particularly financial history, and anticipating where we might be going. This post is just such an exercise.

  I will say at the outset it is hazardous to get too caught up in narratives. The one offered by our friends in Gainesville in 2009 was along the lines of “the market will fight its way back to about 950 on the S&P 500……..1,000 at the most…….and then begin its final descent to its low of 400.” I don’t have to tell you things didn’t pan out quite that way. However, my musings here aren’t based on Elliott Wave, indicators, or anything except my own vague projections about where we are heading financially and politically.

  

  I think between now and the end of next year, we’re going to see something along these lines:

  Beat the Crash: sometime before the end of October, we’re going to take out the so-called “crash” lows of August 24th. How low this is remains to be seen, although I’ll be satisfied if it’s even modestly lower. I did this post on the 20th of this month projecting what these lows might be, and most folks thought I wasn’t being bearish enough. They may be right. In fact, as I’m sitting here right now looking at that post, it would make a lot more sense to have a serious breach of the August 24 lows, considering the “next step” I’m going to lay out. Let’s just agree that the drop would be serious enough to become persistent headline news and, dare I say it, cause Gartman to declare an all-out bear market.

  Yellen’s Last Hurrah: at this point, Janet “the antichrist” Yellen will have license to do Whatever The Hell She Wants to “fix” things. This will be her last free pass to do so. None of us can know what form this salvation will take (negative interest rates? QE4? the threat of a nude Yellen sex tape unless the market rallies?) but, whatever the form, it will, in fact, cause the markets to rally more strongly and firmly then they did between the August 24 crash and the September 17 FOMC top.

  The Stall: while it will seem that Yellen’s latest gambit has worked (but we know better, right?) the equity markets will cease their ascent. My guess is that this stall will be at the approximate price levels of the August 24 lows. Let me say that again: even after another ridiculous government program, I think the best equity prices are going to muster are going to be not much different than the “panic lows” of August 24th. Once equity prices stop obeying Yellen’s desire for them to go higher, people are going to start to worry. And then……..

  All Holy Hell Breaks Loose (during a big election year, no less): this is where the real fun begins. What’s particularly interesting about this phase is that it will be right in the thick of the U.S. Presidential Election Cycle which should make things, errr, interesting.

  A Surprising Choice: November 8th, 2016 is the big day, and I put it to you that the person elected president is going to be a surprise (at least to those speculating about it right now). The tumult of 2016 is going to compel people to want, yet again, “change”, and that could come in the form of Bernie Sanders (in case the nation’s mood wants to punish the rich) or Donald Trump (in case the nation’s mood instead actually buys the notion he can make the country “great” again). It won’t be boring-as-milquetoast Joe Biden or the-only-thing-special-is-that-she-lacks-a-penis Hillary Clinton. The status quo is going to be very “out” in the world of political fashion.

  So there we have it: my wild-ass guess for the next 14 months. Let’s see how it goes.

  

  

  

  

• Top UK Hedge Fund Manager Admits: "Central Banks Made The Rich Richer"

  With each passing day, the lies and fictions we have been exposing since 2009 – from HFT, to the truth about QE, to the ultimate downfall of central banks through their own actions – are being debunked ever faster, called out and/or confirmed by increasingly more “serious” people, those who have benefited and been protected by the lie itself.

  Case in point, an Op-Ed by Paul Marshall, CIO of Marshall Wace, one of the London’s and Europe’s largest hedge funds, with an AUM of $22 billion (so he probably knows what he is talking about) which is a tour de force of slamming the countless lies shoved down the population’s throat every single day just so the rich can get richer.

  From “Central banks have made the rich richer”, first posted in the FT:

  Labour’s new shadow chancellor has got at least one thing right. Amid the brickbats thrown at John McDonnell, there is a nagging failure to acknowledge the validity of one part of his critique of the money-creation programmes of the four leading central banks. Quantitative easing, as this policy is known, has bailed out bonus-happy banks and made the rich richer. 

   

  It is a surprise that the UK opposition party and other leftwingers have not made more of this. Maybe they thought it was too complicated. It isn’t really, and it might appeal to voters’ sense of justice far more effectively than threats to raise the top rate of income tax or to introduce a financial transactions tax (which Mr McDonnell also supports).

   

  Public pronouncements about the objectives of QE are deliberately shrouded in central bank speak. Depreciation of the yen is quite obviously an indirect effect of large-scale Japanese money printing — but it would not do for Shinzo Abe, the Japanese prime minister, or Haruhiko Kuroda, the Bank of Japan governor, to say so plainly. That would be politically toxic in the American heartlands. Nor would Mario Draghi, president of the European Central Bank, acknowledge that he is artificially distorting the bond markets so that the debt-ridden governments of peripheral Europe can continue to enjoy a low cost of capital (the eurozone’s very own Ponzi scheme). But that is what he is doing.

  Instead, central bankers talk about two main objectives of QE. The first is to maintain the supply of money to the banking system, to prevent a contraction in credit from leading to a seizure of 1930s proportions.

  The second is to stimulate what they call the “portfolio channel” via the purchase of sovereign bonds. Government bonds provide the risk-free rate for financial markets, off which everything else is priced. If you suppress the risk-free rate by buying debt, you boost the price of all other assets, from credit to equities to property.

   

  Banks have been the biggest beneficiaries, with their 20- or 30-times leveraged balance sheets. Asset managers and hedge funds have benefited, too. Owners of property have made out like bandits. In fact, anyone with assets has grown much richer. All of us who work in financial markets owe a debt to QE.

  But wait, it gets better, because the inevitable next step, helicopter money, direct Treasury monetization and absolute currency debasement, is just around the corner once demands for “QE for the masses” become the next big thing (as Macquarie predicted last week).

  It is no surprise that the left is angry about this, nor that they are looking for other versions of QE that do not so directly benefit bankers and the rich. Instead of increasing the money supply by buying sovereign bonds from banks, central banks could spread the love evenly by depositing extra money in every person’s bank account. In the UK, QE increased the money supply by £375bn, or about £5,800 per person. If this money had been distributed evenly it might have been frittered away on consumption rather than making a few rich people richer and bailing out the banks. But it might have been fairer.

   

  Mr McDonnell and Jeremy Corbyn, the new Labour leader, advocate a second approach: targeting QE at infrastructure projects. The central bank would buy bonds direct from the Treasury on the understanding that the funds would be used to improve housing and transport infrastructure. The timing is flawed; the Bank of England deems further QE unnecessary, and any large money creation now would risk stoking inflation. But if the idea were kept as something to implement the next time the country faces a financial crisis, it would carry quite a lot of respectability.

   

  Some object that creating money to spend on infrastructure would undermine the central bank’s independence by forcing it to buy direct from the Treasury. Yet monetary policy has already extended well beyond its technocratic bounds into the realms of wealth distribution. QE had clear wealth effects, which could have been offset by fiscal measures. All political parties should acknowledge this. So should those of us who want free markets to retain their legitimacy.

  Coming to every “New Normal” banana republic near you…

  

  

  

  

  

• TSA Agent Caught Stealing From Passenger's Wallet At NYC Airport Checkpoint

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  TSA agents don’t get enough credit. They aren’t just experts at sexually molesting airport passengers, although they are very good at that. They have also become well known for outright theft.

  Here’s the latest from the New York Post:

  A TSA agent at JFK Airport was busted when he was caught stealing money out of a passenger’s wallet at a security checkpoint, authorities said.

   

  Joe Bangay, 37, was processing passengers at Terminal 1 around 10:30 p.m. Saturday when he swiped $61 in cash out of the passenger’s wallet, according to police.

   

  PAPD officers reviewed security footage and watched as the victim placed the wallet in a basket and laid it on the conveyor belt of the X-ray machine.

   

  The cops then witnessed Bangay allegedly pick up the wallet and pocket the money.

   

  The theft comes on the heels of several other crimes involving TSA agents.

   

  Agent Margo Lauree-Grant was arrested earlier this month for allegedly stealing a Canadian passenger’s diamond-encrusted watch at JFK.

  Don’t worry, they’re just keeping us safe.

  *  *  *

  For related criminality courtesy of the TSA, see:

  TSA Agent Arrested for Sexually Molesting South Korean Woman at NYC’s LaGuardia Airport

  TSA Agents Caught Gaming System so Male Screener Could Grope Attractive Passengers; No Criminal Charges Filed

  TSA Air Marshal Arrested for Taking Photos Up Passengers’ Skirts

  Big Brother Idiocy – TSA Spent $160 Million on Naked Body Scanners that Fail 96% of the Time

  Judicial Watch Obtains Documents Proving Systemic Sexual Abuse by TSA Workers at Airports Nationwide

  

  

  

  

  

• A Currency War That Few Economists And Analysts Notice, Much Less Understand

  Submitted by Jesse via Jesse's Cafe Americain,

  "The enormous gap between what US leaders do in the world and what Americans think their leaders are doing is one of the great propaganda accomplishments of the dominant political mythology."

  Michael Parenti

  Most economists and financial analysts think that 'currency war' merely refers to the competitive devaluations that nations sometimes engage in to help boost their domestic economies, as they had done in the 1930's for example.

   

  

   

  This time the currency war is a much more profound confrontation of differing agendas revolving around the historically unusual role of the US dollar, based on nothing more than the will of the Federal Reserve and the 'full faith and credit' of the US, as the reserve currency for global central banks and international trade.

  When a single nation begins to wield such an 'exorbitant privilege' to underwrite the speculative excesses of a crony capitalist banking system, and perhaps even more importantly, as an instrument in support of their international policy, one ought not be surprised that the rest of the world will begin to resist it.

  A currency must be policy neutral, without regard to any party if it is to be a true medium of exchange.  Can this still be said of the US Dollar as it has been managed, especially since 1990?

  As Alan Greenspan once correctly pointed out, but certainly did not heed when he was at the Fed, if a fiat dollar is managed by monetary policy such that it emulates gold, then it will be perceived as fair, and will certainly be above the particular domestic issues or international policy biases of a single nation that de facto wields the reserve currency status.

  "And so it is an odd situation where all the central bankers — while none of them are advocating a return to the gold standard — nonetheless try to replicate the various types of interest rate policies that the gold standard would have created. And it is an interesting question whether you call that regulation, or basically functioning of a central bank in stabilizing the economy."

   

  Greenspan: Role of Central Bankers Is To Emulate the Gold Standard

  It might help one to understand this if they were to imagine a world in which Russia, for example, in a quirk of history had established the ruble as the benchmark currency for the world.  The ruble was recommended for use by all nations as the means of paying for oil,  and for settling international trade even when Russia is not involved in the transaction.  Each country was thereby compelled to hold a substantial portion of its international reserves in rubles.

  And how would one be likely to react if the Russian Central Bank started using the ruble as an instrument of their international policy and extension of their quest for imperial power?  What if they began creating more rubles to underwrite the domestic bubbles which were created in their own corrupted financial system to bail out their banks and oligarchs?

  And let's be serious and think 'like the other guys' for a moment.  What if some other nation that held the enormous power of the world's reserve currency was exhibiting a crop of candidates for their leader like the current choices for the US Presidency?   I would expect that some of the rhetoric being tossed about in these debates would send a chill to the very bottom of our toes.  Who could place their confident trust in their good and selflessly wise judgement to do the right things for other nations around the world, even if it might not favor the powerful special interests that give them so many millions in campaign donations?

  Would you be content if your own government went quietly along with this abusive sort of monetary system?  Is this not indeed taxation without representation when the money supply is expanded and handed over directly to the hands of a few Bankers?

  The intransigence of the Anglo-American financial establishment to recognize the legitimate issues of the rest of the world with regards to the manner in which they have conducted their control of the IMF, the World Bank, and the international reserve currency has ignited a currency war that is now becoming increasing visible, to just about everyone it seems except for those sequestered in their ivory towers at the heart of the Empire.  Or perhaps they think it too dangerous to even acknowledge that it exists, because then they might be compelled to render an opinion on it.

  This is a 'big event' and it is all the more remarkable because the policy makers in the US act as though it is not even happening, or is not happening for any of the reasons for which it is.  They prefer to view it as a challenge to their authority, and to react uncompromisingly and with force.

  I think that historians will find the start of the currency war in the Asian currency crises and the fall of the Russian ruble in the 1990's, with the roots of it in the closing of the gold window by Nixon in 1971.    But from the following essay it seems that China and a few astute Western observers have marked it as being visible from March 2015.

  But whatever the date of its commencement, this dispute over the international monetary regime is the basis for the ongoing currency war that seeks to rebalance the terms of international trade and finance.

  It is the old story of the very powerful resisting change that benefits the few of them inordinately. And as in so many wars of the past, those few who benefit from it do not include the bottom 90% of their own people at the least.

  Most economists and analysts are ignoring this, or are unaware of it.  When they do finally wake up they will likely get busy finding ways to justify it, or dismiss it as an issue, and 'prove' that there is nothing wrong with it.  And very few will acknowledge the price of it in terms of economic stagnation and human misery.  All is well.

  Here is an excerpt of a recent article that was published in Chinese and then translated into English in the journal of the International Monetary Institute in Beijing.

  Has the US Lost its Role as the Underwriter of the Economic System?
  By Willem Middlekoop

   

  The recent news that Britain aspires to become one of the founding members of the new Asian Infrastructure Investment Bank (AIIB), has shocked many. Larry Summers, who served as a Secretary of the US Treasury between 1999 and 2001, immediately understood the significance of these developments, and wrote in an op-ed for the Washington Post:   'March 2015 may be remembered as the moment the United States lost its role as the underwriter of the global economic system. I can think of no event since Bretton Woods comparable to the combination of China's effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out.‘

   

  This British announcement was highly criticized by the US. The Financial Times quoted an unnamed US official:  'We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power. This decision was taken after no consultation with the US.‘

   

  Summers was also highly critical of the US‘ strategy toward the newly founded AIIB: 'The U.S. misjudged the situation tremendously, put pressure on allies and developing countries to under no circumstances be part of AIIB. Largely because of resistance from the right (neo-conservatives more precisely), the United States stands alone in the world in failing to approve International Monetary Fund governance reforms that Washington itself pushed for in 2009. By supplementing IMF resources, this change would have bolstered confidence in the global economy. More important, it would come closer to giving countries such as China and India a share of IMF votes commensurate with their increased economic heft.‘

   

  With Britain and many more major European countries signing up as founding members of the AIIB, the US economic hegemony has been dealt an enormous blow. For the first time since the end of the Second World War, the US is not in the driving seat during the foundation of a highly significant global institution. Of course, this will not change the world economic system overnight, but when we look back in five, ten or even fifteen years‘ time, March 2015 may be remembered as a turning point in economic history…

   

  Another criticism is that the US move to more neoliberalism and global capitalism since the 1980‘s, has led to a change in the functions of the IMF. Critics claim allies of the US receive 'bigger loans with fewer conditions‘. Foreign governments who are non-allies have to sacrifice their political autonomy in exchange for IMF-funds and often have to sell assets crucial for their economy to foreign (often US) companies.

   

  The former Tanzanian President Julius Nyerere, who was angered that debt-ridden African states were forced to hand over their sovereignty to the IMF (and World Bank), once asked:  'Who elected the IMF to be the ministry of finance for every country in the world?‘ And now the Chinese have openly asked for a 'new world wide central bank‘.

   

  Joseph Stiglitz, a former chief economist at the World Bank, has also agreed that the IMF 'was reflecting the interests and ideology of the Western financial community‘. The 'helpful hand‘ by the IMF and World Bank towards military dictatorships friendly to the West‘ has been criticized as well.

   

  It might be remembered as the start of an openly Chinese confrontation with the US over the world‘s economic leadership. As Summers points out, all of this has taken place because the Chinese leadership has had to wait a full five years for a change in the IMF-voting structure…

   

  Willem Middlekoop, International Monetary Review, International Monetary Institute, Beijing July 2015, page 32

  

  

  

  

  

• Who's Really In Charge Of Interest Rates? A Graphic Novel

  Inspired by Eugene Fama's paper, "Does the Fed Control Interest Rates?," forthcoming in the Review of Asset Pricing Studies, Chicago Booth's Capital ideas magazine exposes the awful truth of who is in charge… and it's not The Fed.

   

  

  

  

  

   

  Source: Chicago Booth Magazine

  

  

  

  

• Why Volkswagen Is Systematically Important For Germany And Europe

  It is no secret that with the rest of the US economy, and especially housing, sputtering the one bright spot for US production and manufacturing has been the automotive sector. Whether the recent strength has been a function of money-losing leases, extremely generous terms on auto loans including a new rise in subprime debt issuance is up for debate, but whatever the reason carmakers have had a few years of relative stability (with China rolling over this won’t last, but that’s a different topic).

  But if in the US automakers have been the solitary silver lining to an economy that is once again rolling over (as the Fed lack of a rate hike just confirmed), in Europe carmakers are absolutely critical, while for export powerhouse Germany, one can say the local auto industry is nothing short of systemic.

  Here are the latest facts on Germany’s automotive industry from GTAI.de

  • German automobile manufacturers produced almost 13 million vehicles in 2013 – equivalent to more than 17 percent of total global production.  Twenty-one of the world’s 100 top automotive suppliers are German companies.
  • The automotive industry is the largest industry sector in Germany. In 2014, the auto sector listed a turnover of EUR 384 billion, around 20 percent of total German industry revenue. Source: VDA 2015
  • The auto industry is the largest industrial sector in Germany, contributing about 2.7% to gross domestic product.
  • Some 20% of Germany’s exports are made up of vehicles and parts.
  • Germany is Europe’s number one automotive market; accounting for over 30 percent of all passenger cars manufactured (5.6 million) and almost 20 percent of all new car registrations (3.04 million). Source: ACEA 2015
  • Germany is home to 43 automobile assembly and engine production plants with a capacity of over one third of total automobile production in Europe. Source: ACEA 2015
  • One in every five cars worldwide carries a German brand. Source: VDA 2015
  • In 2014, automotive industry R&D expenditure reached EUR 17.6 billion, equivalent to one third of Germany’s total R&D expenditure. Source: VDA 2015
  • 21 of the world’s top 100 automotive suppliers are German companies. Source: PWC 2013
  • Around 77 percent of cars produced in Germany in 2014 were ultimately destined for international markets – a new record. Source: VDA 2015
  • R&D personnel within the German automobile industry reached a level of just over 93,000 in 2014. Around 775,000 are employed in the industry as a whole. Source: VDA 2015

  Then there is the value-chain, i.e., the suppliers and the providers of R&D for Germany’s automotive industry.

  • Germany boasts 21 of the world’s top 100 automotive OEM suppliers. Of these 21 companies, 18 belong to the top 50 automotive suppliers in Europe. Breaking the figures down further still, six belong to the top 25 global suppliers by size.
  • Exports account for almost 37 percent of 2013 revenue generated by German OEM suppliers

  

  As for why Volkswagen is the benchmark? Because not only is the Volkswagen Group the largest automaker in Germany, it is also the largest German company by revenue according to Forbes (Daimler is #3, BMW is #7). Some other facts:

  • The Volkswagen group accounts for roughly one in 10 vehicles sold globally.
  • Most German auto sales came from the Volkswagen group, which reported just over 202 billion euros in revenue in 2014.
  • Roughly 70% of Volkswagen vehicles are sold outside German borders.
  • Volkswagen employs nearly 600,000 people around the world, and more than a third of the 775,000 people who work in the auto industry in Germany.

  In short, while banking may be the most important sector to the hyper-financialized US economy, for the export-driven German economy – whose exports account for over 40% of GDP – it is all about the car companies and their massive supply chains.

  So what happened over the past 48 hours to Volkswagen, which has lost over a third of its market cap, or more than the market cap of Tesla, is nothing short of an earthshattering cataclysm to an economy where all the cogs and gears and running in a smooth, undisturbed ensemble… until everything changed overnight.

  What happens next to Volkswagen is unknown: as noted earlier a Credit Suisse laid out what may be the worst case scenario: “the balance sheet is at significant risk to deteriorate beyond the impact of the €6.5bn provision the company has announced so far. With group free cash flow generation largely dependent on China (we estimate 94% of industrial free cash flow – 78% dividend from JV), there could be increasingly risk to dividend payments.”

  But it is not so much concerns about Volkswagen as fears the entire German auto industry may be at risk.

  The best case scenario: “Even a heavy drop in diesel car production and exports would probably not subtract more than 0.2% from German GDP,” said Berenberg economist Holger Schmieding. “Demand for non-diesel cars may rise and partly offset the drop in demand for diesel-powered cars.”

  The worst? Quote Theo Vermaelen, a finance professor at INSEAD: “If nobody else has done it, the damage would be limited. If it looks like it’s more companies, not just Volkswagen, it would be a major problem for the German car industry, and the German economy overall.”

  And that’s the question German investors are wrestling with: was it just one cockroach. If it was more, the ultimate outcome will (not may) be more QE from the ECB because with Europe tentative recovery also sputtering after 6 months of ECB QE, a steak through the heart of Germany’s most important industry, will be just the black swan that sends Europe into a recession.

  So the question becomes: will Mario Draghi wait to see the fallout of the rapidly escalating Volkwsagen scandal, or will he preempt and ratchet up the bondbuying even more? Find out in the next few weeks.

  * * *

  Finally for those curious to learn more, we present what may be the winner of the “worst named corporate presentation” award for 2015 – Volkswagen’s “Stability in Volatile Times” released earlier today.

  

  

  

  

  

• VIX Spikes As Stocks Suffer Biggest Annual Loss Since 2009 On Passat Purge

  The message from the markets…

   

  Year-over-year, The Dow is down almost 5%, its biggest such decline since 2009… not that once the YoY trend turns negative, it tends to persist… (Dow is unchanged since Dec 2013)

  

   

  Futures show the pain really began when VW hit the tape early in the European session…

  

   

  On a side note, DAX is now down 17% since Draghi began Q€…

  

   

  But then again… maybe it's just EURJPY carry once again running the entire risk-on/risk-off show…

  

   

  Stocks tanked on the day… with some Papal Panic Buying the close…

  

   

  Dragged into the red for the week…

  

   

  Since Yellen lost all The Fed's credibility…

  

   

  And the year… It appeasrs everyone was desperate to keep the Nasdaq green in 2015 dream alive…

  

   

  VIX jumped over 17% today – its biggest move since Black Monday

  

   

  With an epic fat finger at the close…

  

   

  High Yield credit cointinues to flash red.. and stocks are slowly figuring it out…

  

   

  Tressury yields collapsed even more than they spiked yesterday…

  

   

  The Dollar gained ground amid EUR and AUD weakness…biggst 3-day USD Index rise in a month Once again the pattern is clear – USD selling pressure during Asia, USD buying (EUR selling) during Europe…

  

   

  Commodities slipped on dollar strength and china growth fears (after ADB)…

  

   

  But crude's utterly insane melt-up intop NYMEX Close (not unusual) is just becoming farcical…

  

   

  Charts: Bloomberg

  Bonus Chart: Beware The Papal Visit Omen…

  

   

  Bonus Bonus Chart: This one made us think maybe it's Time for Gold/Dow again… perfect roundtrip from Lehman to End QE3…

  

   

  Bonus Bonus Bonus Chart: Thinking out loud – but something broke in "currencies" when China devalued…

  

   

  Bonus Bonus Bonus Bonus Chart: Still climbing?

  I think they got this idea from me pic.twitter.com/1BVfXSpxNR

  — StockCats (@StockCats) September 22, 2015