• Meanwhile In Greece, Pension Funds Tap Emergency Loans

  This has not been a great year to be a pensioner in Greece. 

  Over the course of the country’s fraught bailout talks, Greece’s pension system was frequently in the troika’s crosshairs. As for PM Alexis Tsipras, pension cuts were generally considered to be a so-called “red line” and intractable disagreements over pension reform quite frequently resulted in the total breakdown of negotiations. 

  Meanwhile, the increasingly untenable financial situation and acute liquidity squeeze very often meant that payments to pensioners were in doubt, even as Athens went out of its way to assure the public that whatever funds were left in Greece’s depleted coffers would go to public sector employees before they would go to EU creditors or to Christine Lagarde. 

  The situation reached it’s “heartbreaking” low point on July 1 when Greek banks that had been shuttered after the institution of capital controls opened for a few hours to ration payments to long lines of pensioners who were forced to effectively beg for €120. 

  In theory, the bailout agreement – while promising more austerity and more pressure on the bloated pension system – should at least guarantee that there will be money in the banks to make monthly payments, but that assumption now looks to be in doubt because as Kathimerini reports, both IKA and ETAA are tapping a contingency fund that guarantees social security programs for fear that the provisions of the bailout will not provide for sufficient enough savings to fund the remainder of this year’s payouts. Here’s the story:

  Greece’s state insurance funds are resorting to external loans to cover their needs as fears grow that the measures of the third bailout will not be enough to cover the rest of 2015’s liquidity needs.

   

  The Unified Fund for the Self-Employed (ETAA) received funding from the Generational Solidarity Insurance Fund (AKAGE) to cover its legal and notary workers’ branch. A similar application for 180 million euros has been approved by the board of the country’s biggest insurance fund, the Social Insurance Institute (IKA).

   

  A ministerial decision by Labor Minister Giorgos Katrougalos and Alternate Finance Minister Dimitris Mardas foresees economic assistance to the tune of 20 million euros from AKAGE to ETAA to cover part of the latter’s deficit.

  Of the course the punchline to the idea that funds from AKAGE will be used “to cover part of ETAA’s deficit” is this:

  The deficit of AKAGE is expected to grow due to the dramatic increase in unemployment, political and economic uncertainty, capital controls, the measures of the third memorandum and the early elections, which are expected to impact on the revenues of insurance funds this autumn.

  So in short, the pension funds are broke as is the contingency fund meant to guarantee payouts from those funds. 

  So Greece, we truly do wish you the best of luck and as you head back to the polls next month, don’t forget, if things get really bad, you can always storm the mint…

  

  

  

  

  

  

• Denver Police Arrest "Jury Nullification" Activist For Passing Out Informational Pamphlets

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Most of you will be familiar with the concept of jury nullification. Unfortunately, the vast majority of Americans are not. This is precisely why Mark Iannicelli set up a “Jury Info” booth outside the Lindsay-Flanigan Courthouse in Denver. In a nutshell, jury nullification is the idea that jurors can “can ignore the law and follow their conscience when they believe the law would dictate a miscarriage of justice.” In other words, jurors have the right to judge the law as well as the facts. As you will see in the video at the end, this concept has centuries of precedence in these United States behind it.

  When you recognize the vast power that such a concept holds, you recognize why it would be so hated by statists and authoritarians across the land. That is precisely why Mr. Iannicelli was arrested and charged with handing out information.

  For a little background, read the following from the Denver Post:

  Denver prosecutors have charged a man with seven counts of jury tampering after they say he tried to influence jurors by passing out literature on jury nullification on Monday.

  Mark Iannicelli, 56, set up a small booth with a sign that said “Juror Info” in front of the city’s Lindsay-Flanigan Courthouse courthouse, prosecutors say. 

   

  The Denver District Attorney’s Office says Iannicelli provided jury nullification flyers to jury pool members.

  Jury nullification is when jurors believe a defendant is guilty of the charges but reject the law and return a not guilty verdict.

  In response to what appears to be a clear attack on freedom of speech, the Denver Post editorial board published an admirable defense of Mr. Iannicelli several weeks after his arrest. Here are a few excerpts:

  It is astonishing that Denver police would arrest someone for handing out political literature outside a courthouse.

   

  It’s even more astonishing that prosecutors would charge that person with seven felony counts of jury tampering.

   

  Now, fortunately,  civil rights attorney David Lane has filed a lawsuit in federal court on behalf of other jury nullification activists. They want an injunction to stop the city from violating their First Amendment rights should they too wish to pass out literature.

   

  They deserve to get one.

   

  Jury nullification is understandably controversial — and is especially resented by courts and prosecutors. It is the notion that jurors can ignore the law and follow their conscience when they believe the law would dictate a miscarriage of justice. But it is hardly a new concept.

   

  In the 19th century, Northern juries refused to convict abolitionists for harboring runaway slaves. In the 20th century, juries often balked at enforcing Prohibition and later, on occasion, at what they considered overly harsh drug laws or laws governing sexual behavior.

   

  Jury nullification had a darker strain, too, as Southern juries would sometimes refuse to convict white defendants guilty of racial violence.

   

  The point is that jury nullification is not some crank theory concocted out of the blue.

   

  As First Amendment scholar Eugene Volokh has written, “It’s clear that it’s not a crime for jurors to refuse to convict even when the jury instructions seem to call for a guilty verdict.”

   

  Those who believe the public needs to know about this possibility should have every right to publicize their views — even outside a courthouse.

   

  Their jury nullification literature, as it happens, merely offered general statements, such as, “Juror nullification is your right to refuse to enforce bad laws and bad prosecutions.”

   

  Four years ago, prosecutors in New York City charged a retired chemistry professor with jury tampering after he stood outside a federal courthouse handing out information on jury nullification. But Judge Kimba M. Wood of federal district court wouldn’t buy it. She ruled that prosecutors needed to show the protester meant to influence jurors in a specific case, and dismissed all charges.

  Denver officials should be held to no less of a standard.

  So where do things stand now?

  The good news is that Denver’s city attorney has come to the aid of the activists, setting up a fight between him and the district attorney. Once again, from the Denver Post:

  Denver’s city attorney has directed the police and sheriff’s department to stop arresting people passing out jury nullification literature in front of the courthouse.

   

  The order was revealed Friday in U.S. District Court during a hearing involving a lawsuit against the city and Denver police chief Robert White.

   

  The lawsuit was filed earlier this month on behalf of activists who want to distribute jury nullification information outside the Lindsey-Flanigan courthouse. They sued after two others who were handing out pamphlets were  charged with seven counts of jury tampering by District Attorney Mitch Morrissey.

   

  The lawsuit argues that the arrests are a violation of free speech rights and asks for a federal injunction against further arrests.

   

  The lawsuit also named Denver Chief Judge Michael Martinez, who on Thursday issued an order barring demonstrations, protests, distributing literature, proselytizing and other activities on the courthouse grounds.

   

  City Attorney Scott Martinez said his staff argued that the Denver judge’s order was overly broad. They also argued against arrests targeting people handing out jury nullification literature.

   

  The city attorney’s office also has taken a position that their actions do not violate state law.

   

  “We agree that the court house steps are a public forum and that people can pass out information, including pamphlets, in accordance with the First Amendment,” the city attorney said.

   

  The city attorney’s position is unusual in that it is siding with the very people who are suing the city. It also pits the city attorney’s office against the district attorney’s office, which filed criminal charges.

  Well done Mr. Martinez.

  If you want a little more info on jury nullification, check out the following video featuring a much younger Ron Paul:

   

  Part 2:

  *  *  *

  For related articles, see:

  The War on Free Speech – U.S. Department of Justice Subpoenas Reason.com Over Comment Section

  French Authorities Demonstrate Defense of Free Speech by Arresting 54 People for Free Speech

  Statists Declare War on Free Speech – College Students Banned from Handing Out Constitutions in Hawaii

  

  

  

  

  

• Is Asia Set For Another Financial Crisis? Here's Goldman's Take

  As the emerging market meltdown accelerates, plunging half of EM equity bourses into bear market territory and wreaking unspeakable havoc on currencies from LatAm to Asia-Pac, analysts and commentators alike have scrambled to find historical analogs that can serve as a guidepost when assessing the damage and, more importantly, predicting where things go from here. 

  One historical episode that’s received quite a bit of attention in the wake of the yuan deval is the Asian Financial Crisis of 1997/1998 and indeed, FX strategists from across the bulge bracket have done their best to catalogue the similarities (e.g. low real rates, increasing debt, exogenous shock factor, commodity transmission mechanism, similarities between Japanese and Chinese REER appreciation in the lead up, etc.) and point out the differences. 

  For commentary from Morgan Stanley and BofAML, see “The Ghost Of 1997 Beckons, Can Asia Escape?.”

  Below, find excerpts from Goldman’s take.

  *  *  *

  From Goldman

  Asian FX weakness is stirring memories of the Asian Financial Crisis (AFC) and raising questions on how Asia’s fundamentals look now, compared with the mid-1990s. 

  Given that Asia’s current account positions are in much better shape now than the mid-1990s – and indeed since the ‘taper tantrum’ period in 2013, given the notable improvement in the current account deficits of India and Indonesia – focus is on the challenges to Asia’s external balances that may emerge from portfolio outflows. 

  Foreigners also hold substantial proportions of outstanding debt in some markets – around 40% in Malaysia and Indonesia. 

  Given the size of foreign holdings of Asian equity and debt, should foreigners reduce their portfolio holdings by 2-3% over the course of a month, it would broadly offset the region’s current account surpluses, leaving their external balances in a shakier position. During the ‘taper tantrum’ period, foreigners sold markedly more than 3% of their portfolio holdings through June and July 2013, highlighting the risk that portfolio outflows could cause further Asian currency weakness. The small current account deficits in India and Indonesia make their respective currencies most vulnerable. The high concentration of foreign holdings of Malaysian and Indonesian debt suggests that the MYR and IDR could be vulnerable to notable foreign selling of local currency debt.

  Recent Asian currency weakness has increased the focus on Asia’s external debt levels given that currency depreciation raises the cost of servicing the debt. Post the Global Financial Crisis (GFC), external debt has risen in India, Indonesia, Malaysia, Thailand and Taiwan, but has fallen in the Philippines and Korea. Malaysia has the highest level of external debt in the region at over 60% of GDP.

  External debt is above the levels recorded prior to the AFC in Malaysia, Taiwan and Korea, but below AFC levels elsewhere. Indeed, Malaysia’s external debt is equivalent to the peaks reached in Indonesia and the Philippines prior to the AFC.

  Across the region, foreign currency denominated debt makes up at least 50% of external debt, rising to close to 100% in the Philippines. However, maturity also matters: the level of short-term external debt is judged to be the most vulnerable part of external debt given that it may need to be rolled over in a period of market tension. Short-term external debt makes up around 50% of external debt in Malaysia and China, but less than one-third elsewhere. 

  The ability of a central bank to lean against FX volatility depends on whether or not the country in question has an adequate amount of FX reserves. FX reserves have fallen across the region due to valuation losses on the non-Dollar holdings and/or for intervention purposes. In some cases, this drop has been notable – by 31% in Malaysia, since the middle of 2013 and by 17% in Thailand since early 2011. Indonesian FX reserves have fallen by 7% since February. We examine the adequacy of Asia’s FX reserves on several typical metrics:

  Import cover is defined as the number of months imports can be sustained should all inflows cease. The IMF uses three months’ import coverage as the benchmark for reserves. FX reserves across Asia more than satisfy this criterion. Regional import coverage tends to be between 6 and 10 months, with a high of 22 months for China and a low of 6 months for Malaysia.

  The ratio of reserves to short-term debt: the most widely used metric for reserve adequacy is the Greenspan-Guidotti rule of 100% coverage of short-term debt. The rationale is that countries should have enough reserves to resist a significant withdrawal of short-term foreign capital. The level of Malaysia’s short-term debt is equivalent to the level of FX reserves. 

  The ratio of reserves to broad money is less frequently used a measure of adequate FX reserves. This metric is designed to capture the risk of capital flight, in particular outflows of deposits of domestic residents. The upper limit of a prudent range for reserve holdings is 20%. Reserves in China and Korea do not cover 20% of broad money (they only cover 18% of broad money), but everywhere else the coverage is well above 20%.

  Broadly, Asian FX reserves can be judged to be adequate, with the exception of Malaysia, where FX reserves now barely cover short-term debt.

  In comparison to their status prior to the Asian Financial Crisis, Asia’s fundamentals are (broadly) in better shape. Consequently, we are unlikely to see explosive FX weakness. But other factors are at play, including large debt overhangs in some countries, the sharp decline in commodity prices and political uncertainty in some countries. On the other side of the FX equation, we expect US Dollar strength to continue on the back of solid US growth and the prospect of Fed tightening in coming months. We therefore expect Asian currencies to continue to depreciate. 

  

  

  

  

  

• China Devalues Yuan To Fresh 4-Year Lows, Arrests Top Securities Firm Exec As Stocks Slide Despite Rate Cuts

  Update: Chinese stocks are seeing no lift whatsoever from the rate cuts…

  CSI-300 is fading fast…

  

   

  And

  • *SHANGHAI COMPOSITE INDEX SLIDES 3.3%
  • *SUGA: HOPE CHINA RATE CUT WILL CONTRIBUTE TO CHINA GROWTH

  

   

  Confusion reigns at Bloomberg also… (look at URL – original title, and compared to title posted at 8pmET)…

  

  And now…

  

  h/t Beermunk

  As we detailed earlier:

  The Asia morning begins mixed in stock markets, The PBOC explains itself "this is not a shift in monetary policy," – except it is the first such set of measures since 2008, further deleveraging as China margin debt drops CNY1 Trillion from June peak to lowest since March, Regulators begin probing securities firms (and their malicious short sellers), Index futures trading fees will be raised and trading positions restricted. Stocks are limping only modestly higher (after the rate cuts) as Yuan is fixed at 6.4043 – the lowest since August 2011.

   

  Yuan fix weaker for 2nd day to new 4 year lows…

  • *CHINA SETS YUAN REFERENCE RATE AT 6.4043 AGAINST U.S. DOLLAR
  • *CHINA LOWERS YUAN FIXING TO WEAKEST SINCE AUG. 2011

  

   

  Before China opens, it's worth noting that all the post-China close, pre-China open exuberance from the PBOC multiple rate cut has been eviscerated…

  

   

  So The PBOC explains why it did something it hasn't done since 2008…

  • *PBOC'S MA SAYS RATE CUTS NOT A SHIFT OF MONETARY POLICY: XINHUA
  • *PBOC'S MA SAYS RATE CUTS TO KEEP MODERATE CREDIT GROWTH: XINHUA
  • *PBOC'S MA SAYS CHINA MONETARY POLICY REMAINS PRUDENT: XINHUA

  The rate cut did have some impact…

  • *CHINA ONE-YEAR IRS FALLS 7 BPS TO 2.47%
  • *CHINA ONE-YEAR IRS HEADS FOR BIGGEST DROP SINCE JUNE
  • *CHINA SEVEN-DAY REPO RATE DROPS 25 BPS TO 2.30%

  And stocks are only marginally higher..

  • *CHINA'S CSI 300 STOCK-INDEX FUTURES RISE 0.7% TO 2,852
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN UP 0.5% TO 2,980.79

  

  And bearin mind that…

  • *ABOUT 17% OF MAINLAND STOCKS STILL HALTED FROM TRADING

  Some more good news as deleveraging continues… lowest since March 2015

  • *CHINA MARGIN TRADING DEBT DROPS 1 TRILLION YUAN FROM JUNE PEAK
  • *SHANGHAI MARGIN DEBT BALANCE HALVES FROM JUNE RECORD HIGH – Balance is lowest since Jan. 12

  

  But more restrictions are put in place:

  • CHINA TO RAISE TRANSACTION FEES ON STOCK INDEX FUTURES TRADING – EXCHANGE STATEMENT
  • CHINA TO RESTRICT TRADING POSITIONS IN STOCK INDEX FUTURES – EXCHANGE STATEMENT

  As things are not going well in the Communist intervention – so the probes begin (as ForexLive reports)

  The South China Morning Post report that four brokers say the CSRC is probing their business

  • Haitong Securities, GF Securities, Huatai Securities and Founder Securities
  • All made stock exchange statements that they had received notices from the China Securities Regulatory Commission
  • For suspected failure to review and verify clients' identities

  Along similar lines, Xinhua reported:

  • 8 people from Citic Securities were being investigated for  possible involvement in illegal securities trade
  • A staff member from Caijing magazine was also being probed for spreading rumours
  • A current and a former staff member at the CSRC  were also being investigated for suspected insider trading

  

  *  *  *

  This morning, as China wakes up…

  They. Didn't. Sell pic.twitter.com/LURxnikMyR

  — zerohedge (@zerohedge) August 25, 2015

   …And realizes that PBOC policy changes have not been working.  As BofAML explained,

  The combined rate and RRR cuts announced today, clearly targeted to boost A-share market sentiment in our view, may provide some temporary sentiment relief. However, we doubt that this represents the bottom of the market…

   

  

  It appears to us that the government has significantly reduced its direct purchase in the market in recent days and is now trying to replace the direct intervention with the softer, more market oriented, and indirect support. We doubt this will work beyond a few days. As a result, we recommend selling into any rebound. A few things worth highlighting:

  • Psychologically, the cuts may have some impact in the short term because they are the first combined interest rate and universal RRR cuts since Dec 2008, after a sharp market fall. Nevertheless, we doubt the impact will be significant as they are already the eighth cut to either rate or RRR since late 2014.
  • The key overhangs of the A-share market are stretched valuation and high leverage. It’s our view that the only way that the government can hold up the market is by being the buyer of last resort, i.e., the direct support that the government appears to be withdrawing
  • From real economy’s perspective, we doubt monetary loosening is the solution to China main problem – overcapacity/a lack of consumption, and leverage. All it does may be to encourage property speculation, likely using more leverage
  • If the government fails to defend the A-share market ultimately, the key risk we should watch out for is financial system instability.

  It's not just BofA that is not buying it… As Bloomberg reports, China’s latest cuts in RRR and interest rates will limited boost to stks, according to most analysts and economists. Move is mainly aimed at supporting economy, not starting another mkt rescue.

  DEUTSCHE BANK
  Move largely in-line with expectations, reaffirmed leadership’s policy priority is growth support: strategist Yuliang Chang
  Stk mkt appears oversold amid “jittery” sentiment
  Recommends investors buy H-shrs to position for macro improvement

   

  EVERBRIGHT SEC.
  Cuts should not be interpreted as beginning of fresh round of strong mkt rescue; move may help stabilize capital mkts though boost to stk mkt will be limited: chief economist Xu Gao
  Cuts won’t be able to reverse mkt trend; focus seen returning to macro fundamentals amid valuation bubble burst, deleveraging, pressure from exit of earlier rescue policies
  Need for govt to intervene in stk performance greatly reduced after decline in leveraged positions; stk mkt declines posing less threat to financial stability
  Mkt rescue policies exited steadily, though at slower pace

   

  GUOTAI JUNAN SEC.
  Cuts to improve overly pessimistic mkt sentiment, reduce possibility of further accelerated decline in mkt: analysts led by Qiao Yongyuan
  Shanghai Composite may trade in range 2,800-3,200 pts
  Sees relative gains in:
  Stks with high div.: transport, home appliances, auto, financials, property
  Low valuation with earnings support: food & beverage, power
  Beneficiaries of fiscal policies: rail transit

   

  JPMORGAN
  Cuts to bring temporary support for stk mkt; earlier correction in stks partly due to disappointment over later- than-expected RRR cut: chief China economist Zhu Haibin
  Absence of govt support during recent mkt declines indicate changes in intervention strategy, which is focused more on mkt mechanism restoration than maintaining index level

   

  MACQUARIE
  Central bank reacted to shore up confidence in stk mkt to stop panic: analysts led by Larry Hu

   

  UBS
  Cuts signal authorities’ determination of arresting passive tightening and safeguarding financial stability, should help boost sentiment in financial mkts: economists led by Wang Tao

   

  BNP PARIBAS
  Cuts look like response to panic selling in A-shr mkt, main aim is to support economy: analyst Judy Zhang
  Banks to be key beneficiaries of cuts as earnings more sensitive to asset quality improvement than NIM contraction
  H-shr-listed China banks present attractive risk/reward for long-term investors

   

  CICC
  Monetary easing good for valuation recovery in property stks: analysts led by Yu Zhang
  Strong momentum in property sales to continue into Sept., Oct. after reduction in mortgage repayment
  Buy CR Land, COLI on dips; sees >30% upside in H-shr property players

  *  *  *

  Putting China's demise into context – off the March 2009 lows…

  

   

  And here's a gentle reminder of who to listen to from now (or not!)…

  July 7: "Goldman Sachs Says There’s No China Stock Bubble, Sees Rally" http://t.co/LhQFDfWfPB

  — zerohedge (@zerohedge) August 25, 2015

  Charts: Bloomberg

  

  

  

  

  

• "Biggest Rally Of 2015" Crashes Into Biggest Reversal Since Lehman

  Did you drink the Kool-Aid?

   

  It appears not everyone did… The first 6-day losing streak for the S&P 500 since July 2012…

  

  The S&P 500 has gapped up +3% and closed down on the day only once since the inception of the futures, 10/16/08 (h/t @sentimenttrader)

   

  Call that a bounce-back…?

   

  Across asset-classes the last 2 days have been 'eventful' to say the least…

  

   

  The Dow is down almost 700 points from the post-PBOC highs!!!

  

   

  Stocks bounced, half-heartedly… but Nasdaq was on target for its best day of the year… (and best since the first trading day of 2013's meltup) before they puked it all back in the last hour…

  

   

  Cash indices remain red on the week as once again Nasdaq was driven up to unchanged before the selling pressure resumed..

  

   

  While we are well aware of the 'hope' priced into this rebound, the actual gains from the China rate cut

  

   

  VIX was total chaos…

  

   

  None other than Eric Hunsader summed it all up perfectly…

  U.S. Stock Market back to trading like a banana republic

  — Eric Scott Hunsader (@nanexllc) August 25, 2015

  What was really driving stocks today was simple – USDJPY fun-durr-mentals…

  

   

  Utes were worst today (as rates soared) and Tech remains the winner on the week – though all S&P sectors are under water…

  

   

  Still financials did not look overly excited…

  

   

  Treasury yields were battered higher today – biggest rise in 10Y yields (13bps) since Feb 2015…the late-day selloff in stocks put a modest bid into bonds… We can't help but wonder if this move is rate-lock-buying ahead of panic-last-minute corporate issuance before rates go up in Spetember

  

   

  The US Dollar was bid as EUR weakened but JPY was critical…

  

   

  Commodities were mixed with crude and copper bouncing back in anticipation and comfort at the rate cut as PMs dumped as the USD levitated…

  

   

  Charts: Bloomberg

  Bonus Chart: We're Gonna Need Another Rate Cut…

  

  Bonus Bonus Chart: Is China really to blame?

  

   

  Bonus Bonus Bonus Chart: Trade Accordingly…

  /ES Balding Top pattern on the 5-minute pic.twitter.com/WiD8nB3Ulj

  — StockCats (@StockCats) August 25, 2015

  

  

  

  

• Saudi Arabia Paying American Lobbyists To Spread Anti-Iran Propaganda

  Submitted by Carey Wedler via TheAntiMedia.org,

  Though the Saudi Arabian government publicly declared its tentative support for the widely-praised Iran nuclear deal last month, new reports reveal it is secretly funding propaganda efforts to undermine it. A new group called the American Security Initiative has spent over $6 million on advertisements criticizing the deal — using money supplied by the Saudi monarchy.

  The president of the American Security Initiative Norm Coleman is a former Republican senator who now runs the lobbying firm, Hogan Lovells. He is a registered lobbyist for Saudi Arabia and his firm is on retainer for the Saudi monarchy at a rate of $60,000 per month.

  According to The Intercept, “In July 2014, Coleman described his work as ‘providing legal services to the Royal Embassy of Saudi Arabia’ on issues including ‘legal and policy developments involving Iran and limiting Iranian nuclear capability.’”

  Other founders of the American Security Initiative include former Senator Joe Lieberman ( a Democrat) and former Senator Saxby Chambliss (a Republican), who works at DLA Piper, yet another firm hired to lobby on behalf of the Saudi monarchy. Opposition to the deal enjoys bipartisan support.

  The lobbying effort has run commercials in nine states — Arizona, Colorado, Connecticut, Indiana, Maryland, Montana, North Dakota, Virginia, and West Virginia — and was initiated in partnership with a group called Veterans Against the Deal. One ad features a maimed Iraq War veteran who ominously warns that “Every politician who is involved in this will be held accountable. They will have blood on their hands.”

  The Iran deal is set to be voted on in September, but the Saudi government has a vested interest in its failure. This is not only because of longstanding divides between Sunni and Shiite factions, but because relief from economic sanctions on Iran could increase Iran’s oil exports and threaten Saudi dominance of the market, which has already started to wane. Further, as The Intercept observed, “The crises in Syria and in Yemen have become proxy wars between the two nations as Saudi Arabia and Iran are playing an active role in fueling opposing sides in both conflicts.”

  Last month, Defense Secretary Ashton Carter announced that the Saudi government had abandoned many of its apprehensions toward the deal, moving to endorse it. However, according to Reuters, an official from the Saudi government revealed that he behind the scenes, the deal is still very much scorned. “We have learned as Iran’s neighbors in the last 40 years that goodwill only led us to harvest sour grapes,” he said on the condition of anonymity.

  Though the Saudi monarchy has been widely criticized for its inhumane policies —including everything from brutal beheadings to life-threatening lashes inflicted on bloggers — the government continues to exert powerful influence over American leadership (according to Wikileaks, it has paid for media influence in other countries, as well). It rivals the Israeli lobby, which has also invested heavily in demonizing the Iran nuclear agreement. Last month, Israeli lobbying group AIPAC spent $20 million in 20 states to advertise against the agreement. Opposition to the deal comes even as the crux of the accord cripples Iran’s nuclear capabilities.

  The glaring, underlying irony of the deal is that three of its biggest opponents — a bipartisan assembly of American lawmakers, the Saudi monarchy, and the Israeli government — are a far greater threat to peace than the admittedly oppressive Iranian government. The lawmakers who oppose the deal are the same ones who advocate perpetual American war, which has killed countless innocent civilians. Saudi airstrikes against the Houthi insurgency in Yemen are repeatedly slaughtering civilians. Israel’s ongoing occupation of Palestine creates a steady stream of needless innocent deaths.

  In the face of the new revelations about Saudi manipulation of public perception surrounding the Iran deal, statements from the monarchy are now tinged with irony:

  “Given that Iran is a neighbour, Saudi Arabia hopes to build with her better relations in all areas on the basis of good neighborliness and non-interference in internal affairs,” a Saudi official said last month.

  

  

  

  

  

• CNBC: No Need For A Fork – It’s Done

  Submitted by Mark St. Cyr

  CNBC: No Need For A Fork – It’s Done

  Yesterday I wrote on what I considered a very strange development that took place on CNBC™ in regards to one of the morning shows where Jim Cramer produced, then read on-air, an email he received (and stated only he had) from Tim Cook of Apple™ about China’s health as far as he saw it. As I wrote yesterday this hit me in that “Wait, what?” type moment. So much so I instinctively hit the record button as to watch it later to make sure I truly did hear correctly. For the implications would be far from subtle. Why?

  Never mind whether it may have legal ramifications or not for the moment. What was said, how it was obtained, and exactly who knew what, when, and where struck me as an obvious “something just doesn’t seem right here.” No SEC or law degree needed. Just common sense.

  Add to this was also the timing. Right before the open where liquidity has shown to be at its most vulnerable (meaning lack there of) where it’s basically the window where HFT, headline reading algos feast upon stop runs and more clearing out what many consider the “order book” of the market every morning. This phenom has been detailed in near scholarly work by Eric Scott Hunsader at a company called Nanex™.

  So with this understanding; anyone with a modicum of insight as to what these “markets” have now become listened to this email exchange and could draw conclusions near immediately what would follow such a revelation. And sure enough it seemed to do exactly what one inferred as the market steamrolled back 1000 Dow points in what seemed mere minutes, with HFT’s gorging on any and all orders available. (It’s been reported yesterday was one of HFT’s most profitable days just for some context.)

  The issue? A lot (and I’ll wager to say – a whole lot) of the remaining Mom and Pop retail customers with their 401K’s that are still left in this market, if they weren’t steamrolled themselves, may have been scarred with orders they thought protected their stops, only to find the rules allowed those “stops” to turn into market orders (i.e., what ever someone wants to pay) and were filled at levels they never dreamed of selling or buying at.

  Some of these types of order fills have been reported to have transpired at cents on the dollar. (i.e., you wanted to sell at $1 to preserve your money and during the chaos – your order was filled and sold at .05 cents or vice versa) It’s said some of the egregious ones have been broken (e.g., cancelled) however, we can all imagine there are a far greater number that will not. i.e., you wanted to sell at $1 and it was filled at .35 cents as an example. I guess you would be asked to take solace in that – at least you did better than a nickel. Feel better?

  As I said yesterday I hadn’t watched a morning show on CNBC in years and have stated my reasons ad nauseam over those years. Yet, I would guess, just like you, with such turmoil currently taking place you may have also decided to flip over and see what two cents they might be adding to the discussion. So, like yesterday, I once again did just that: only to have all my past revelations reassured as to thwart any doubt that watching this channel is an absolute waste of time. And, in my opinion: does more harm than give insight into the markets for any of today’s very few retail investors. (One caveat: I do watch their Asia Squawk™ programming)

  When I tuned in I happened on what I thought was perfect timing because the guest was Joseph Saluzzi, partner/co-founder of Themis Trading™. There probably isn’t a person more abreast in everything HFT than Mr. Saluzzi. The other trait he has that’s desperately needed in today’s environment is: he can make the complexities of HFT and its effect on the markets understandable to the lay person. So with that in mind I thought what an opportunity to expand further insight into what I’m sure are many frightened retail investors as to understand what these “markets” have morphed into. For the topic was HFT, the sell-off, and liquidity.

  And what took place? Nothing more than irrelevant causational assumptions asked by one of the hosts. And, as Mr. Saluzzi tried to explain the why’s of the inherent dangers – he was either talked over (as in questioned) as if what he was saying wasn’t addressing the issue. Or worse – seemed to be dismissed in a tone or tenor of  “Thanks, for that info – we’ll let you know next time we need another 5 minutes of dead air to fill.” What a freakin’ shame is all that came to my mind.

  What an absolute missed opportunity to ask some real pointed questions in regards to what truly is making these markets, in my opinion; unstable.

  Here you had a person that could answer any question one needed enlightening on when it comes to HFT and liquidity issues, that can explain it in understandable sound bites that are informed as well as actionable – and they seemed not only to care less – but rather – cared more about how quickly the segment could be over. I guess HFT and liquidity isn’t news that needs to be reported with any depth or insight to its viewers. After all, maybe that is the case – no viewers.

  Or, maybe there’s another viewer. One especially suited, and Pavlovian in nature that feeds on the information that now is disseminated there: The HFT, algorithmic, headline reading machines themselves.

  After all, if Mom and Pop (what’s left of them) aren’t watching any longer as proved via their last Neilsen™ ratings (last as in they no longer report them.) then I guess you turn to the one viewer that desperately needs “headlines” to work with: The HFT cabal themselves. After all, who needs viewers when there’s a market moving mass of machines just waiting for the right headline to cross the network?

  The problem with this is two-fold. Whether it’s intentional or accidental. The more Mom and Pop tunes out – the less to feed on for the HFT’s till eventually there’s no one left to feed on except for themselves – and I believe you are witnessing in real-time this exact phenom which will be brought on not only quicker, but with more ferocity moving forward. For Mom and Pop are not coming back to either the “markets” or CNBC. They’re done.

  And just as an addendum to my article yesterday. It seems I wasn’t the only one who said “Wait, what?”  ZeroHedge™ asked the same question and posted it at about the same time I did in far greater detail. Then later in the evening I was sent a note sending me to the New York Times™. It seems the issues I raised are indeed worth questioning. From the article:

  Bill Singer, a regulatory lawyer, said he expected the S.E.C. to investigate the context of the email and provide guidelines as to whether companies can disclose financial information this way to selected news reporters.

   

  “I can see here that Cook is literally dancing on the edge of a razor,” he said. “At the end of the day it’s one of the largest companies in the world telling one reporter via a private email that our ongoing quarter is actually going to surprise people, and I consider that material.”

  As I stated then as I do now, it raises a lot of questions to exactly “who” is the target audience. Mom and Pop retail that were basically the bread and butter reasons for the channel and programming? Or, someone (or something) other?

  A reasonable question I’ll contend when one audience is still rushing to the exits as shown in any credible inflow/outflow analysis. While for all intents and purposes is also no longer considered “market moving” participants. While the other: moves the markets at whim for the select few still participating.

  I contend HFT already has a “captured” audience, and doesn’t need to pay advertising fees on-top of their subsequent co-location and other incidentals. They don’t need the lights, sets, and hosts on a near 24 hour basis to give them pragmatic “financial insights.” Yet, the very life blood that made these markets (the retail 401K holder) is exactly the one that does. And from what I witnessed, they’re not only not getting it, when they try one last time they understand – there’s none to be had and hit the off button realizing how much time they just wasted. Or worse: their money.

  Someone needs to remember “Last one out – please turn off the lights.” For inasmuch of what I witnessed today, using myself as an example. If this is what remains going forward? No one’s coming back.

  

  

  

  

  

• The Latest Currency War Entrant: India Warns May Retaliate To Chinese Devaluation

  When China moved to devalue the yuan earlier this month, it was seen by virtually everyone for exactly what it was: a tacit admission that the country’s economy was in freefall and a desperate attempt to boost exports stinging from REER appreciation of more than 14% in just a little over twelve months. 

  Of course coming out and accusing China of entering the global currency wars for the sole purpose of supporting the export-driven economy isn’t something that’s politically correct and if you’re China, you want to deflect that criticism so naturally, there was plenty of polite talk about the need to allow the yuan to move in a more market determined way and that rhetoric squares nicely with China’s SDR inclusion hopes. 

  Ultimately though, trade competitiveness is now front and center in everyone’s minds, especially Asia ex-Japan nations who will now see their respective REERs appreciate even as the weaker yuan means demand from the mainland will be suppressed. 

  And while we’ve talked plenty about the impact on Asia-Pac and LatAm (especially Brazil, where the trade ministry immediately acknowledged the adverse effect of the yuan deval), we haven’t yet mentioned India where yesterday, in the midst of the turmoil, Central bank governor Raghuram Rajan sought to calm nervous markets by reassuring the world that India is not, for now anyway, in any danger thanks to ample FX reserves and a low CA. Here’s more from Reuters:

  Central bank governor Raghuram Rajan told a banking conference Asia’s third-largest economy was in a good position relative to other countries to withstand the current global markets volatility.

   

  “India is better placed compared to other countries with low current account deficit, and fiscal deficit discipline, moderate inflation, low short-term foreign currency liabilities, very sizeable base of forex reserves,” he said.

   

  “We will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee.”

   

  The rupee fell to as low as 66.74 per dollar on Monday, its lowest since September 2013, as Asian markets reeled under fears of a China-led global economic slowdown.

   

  The 30-share Sensex dropped 5.94 percent, its biggest daily percentage fall since Jan. 7, 2009. The index fell to as low as 25,624.72 points at one point, its lowest intraday level since Aug. 11, 2014.

  Amusingly, Rajan also pledged to stick to a disciplined monetary policy noting that “rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading.”

  Be that as it may, economic realities are economic realities and a currency war is a currency war, which is why, we suppose, the Indian government’s chief economic advisor Arvind Subramanian thinks the country might just have to hit back. Here’s Bloomberg:

  India may need to respond to China’s monetary policy stance

   

  India’s exports to be hurt if global slowdown persists, ET Now television channel reports, citing Finance Minister’s Chief Economic Adviser Arvind Subramanian.

  Underscoring this is the following from Deutsche Bank:

  India’s export sector continues to be under pressure, with merchandise exports contracting yet again in July by 10.3%yoy. The weakness in India’s exports is striking (this is the eighth consecutive month of decline), not only in terms of past trend, but also from a cross country perspective. Indeed, India’s exports performance has been the weakest in the region thus far in 2015. In the first quarter of the current fiscal year (April-June’15), Indian exports have contracted by 17%yoy, one of the sharpest declines on record. The main reason for such a weak Indian export performance can be attributed to the sharp decline in oil exports (down 51%yoy between April-June’15), which constitute 18% of total exports. 

  
  

  Another factor that could likely explain the weak performance of exports is the probable overvaluation of the rupee. As per RBI’s 36-country trade based real effective exchange rate, rupee remains overvalued at this juncture and this could be impacting exports to some extent, in our view. 

   

  
  

   

  Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. As can be seen from the chart [below], global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.

   

  

  And that, in turn, helps to explain this (from Citi):

  The likelihood of a rate cut at the RBI policy review on September 29 has risen given the downside surprise from July CPI inflation and the disinflationary impulse from the continued slide in commodity prices. But market pricing does not seem too far from that outcome. 1y ND-OIS is pricing in about 80% probability of a 25bp rate cut in September (and unchanged rates thereafter). 

  So while we wait to see if indeed India decides to return fire, the ECB isn’t biting. Or at least that’s the line from Vice President Vitor Constancio who, as MNI reports, “on Tuesday signalled that he saw no reason for the ECB to step up policy support, as it was too early to assess what impact economic turmoil in China and renewed oil prices declines would have on medium-term price stability.” 

  “It is really too early to understand the effect of what is happening, which is now being corrected. Markets are now correcting the initial overreaction to the events in China. [The] yuan devaluation is not a major factor” for the euro-area inflation outlook, Constancio continued. So while Europe may be putting on a brave face for the time being, if exports from the currency bloc’s economic growth engine (Germany) begin to take a hit from the weaker yuan, we shall see how calm the ECB remains.

  

  

  

  

  

  

• Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks

  On August 11, China devalued its currency, and in the subsequent 3 days the onshore Yuan, the CNY, tumbled by some 4% against the dollar. Then, as if by magic, the CNY stabilized when China started intervening massively, only this time not through the fixing, but in the actual FX market.

  This means that while China has previously been dumping reserves as a matter of FX policy, after August 11 it was intervening directly in the FX market, with the intervention said to really pick up after the FOMC Minutes on August 19, the same day the market finally topped out, and has tumbled into a correction since then. The result was the same: massive FX reserve liquidations to defend the currency one way or the other.

  And yet something curious emerges when comparing the traditionally tight, and inverse, relationship between the S&P and the Treausry long-end: the drop in yields has not been anywhere near as profound as the tumble in stocks. In fact, the 30 Year is wider now than where it was the day China announced the Yuan devaluation.

  

  Why is that?

  We hinted at the answer on two occasions earlier (here and here) and yet the point is so critical, and was missed by virtually all readers, that it deserves to be repeated once again: as part of China’s devaluation and subsequent attempts to contain said devaluation, it has been purging foreign reserves at an epic pace. Said otherwise, China has sold an epic amount of Treasurys in the past two weeks.

  How epic? We turn it over to SocGen once again:

  The PBoC cut the RRR for all banks by 50bp and offered additional reductions for leasing companies (300bp) and rural banks (50bp). All these will take effect as of 6 September, and the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate.  In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.

  There you have it: in the past two weeks alone China has sold a gargantuan $106 (or more) billion in US paper just as a result of the change in the currency regime!

  But wait, there’s more: recall that one months ago we posted that “China’s Record Dumping Of US Treasuries Leaves Goldman Speechless” in which we reported that China has sold some $107 billion in Treasurys since the start of 2015.

  When we did that article, we too were quite shocked at that number. However, we – just like Goldman – are absolutely speechless to find out that China has sold as much in Treasurys in the past 2 weeks, over $100 billion, as it has sold in the entire first half of the year!

  In retrospect, it is absolutely amazing that the 10 and 30 Year Bonds have cratered considering the amount of concentrated selling by China.

  But the bigger question is how much more does China have left to sell, if this pace of outflows continues. Here is SocGen again:

  From an operational perspective, China’s FX reserves are estimated to be two-thirds made up of relatively liquid assets. According to TIC data, China held $1,271bn US treasuries end-June 2015, but treasury bills and notes accounted for only $3.1bn. The currency composition is said to be similar to the IMF’s COFER data: 2/3 USD, 1/5 EUR and 5% each of GBP and JPY. Given that EUR and JPY depreciation contributed the most to the RMB’s NEER appreciation in the past year, it is plausible that

  the PBoC may not limit its intervention to selling only USD-denominated assets.

   

  * * *

   

  China’s FX reserves are still 134% of the recommended level, or in other words, around $900bn (1/4 of total) and can be used for currency intervention without severely impacting China’s external position.

  Should the current pace of liquidity outflows continue, and require the dumping of $100 billion in FX reserves, read US Treasurys, every two weeks this means China has, oh, call it some 18 weeks of intervention left.

  What happens when China liquidates all of its Treasury holdings is anyone’s guess, and an even better question is will anyone else decide to join China as its sells US Treasurys at a never before seen pace, and best of all: will the Fed just sit there and watch as the biggest offshore holder of US Treasurys liquidates its entire inventory…

  

  

  

  

  

• "It's Not The US Economy, It's Just Stocks Stupid!!"

  Well… Maybe it was the US economy all along?

   

  

   

  Just ask Jack Bouroudjian from 2,000 Points ago: August 19th – Chair Yellen, please take your victory lap…

  Remember, bull markets don’t end because the central bank starts to raise rates — they end when the central bank stops raising rates.

  Or maybe when the world realizes the entire rally is smoke an mirrors…

  Charts: Bloomberg

  

  

  

  

  

• ReTuRN OF THe GRiM MaRKeT ReaPeR

  

   

  I looked, and behold, an ashen horse; and he who sat on it had the name Market Collapse; and Zero Hedge was following with him.

  

  

  

  

• What Can the Fed Do to Hold Back the Crisis? Not Much.

  The financial system is in uncharted waters… and it's not clear that the Fed has a clue how to navigate them.

  A number of key data points suggest the US is entering another recession. These data points are:

  1)   The Empire Manufacturing Survey

  2)   Copper’s sharp drop in price

  3)   The Fed’s own GDPNow measure

  4)   The plunge in corporate revenues

  Why does this matter? After all, the US typically enters a recession every 5-7 years or so.

  This matters because interest rates are currently at zero. Never in history has the US entered a recession when rates were this low. And it spells serious trouble for the financial system going forward.

  Firstly, with rates at zero, the Fed has little to no ammo to combat a contraction. Some Central Banks have recently cut rates into negative territory. However, this is politically impossible in the US, particularly with an upcoming Presidential election.

  This ultimately leaves QE as the last tool in the Fed’s arsenal to address an economic contraction.

  However, at $4.5 trillion, the Fed’s balance sheet is already so monstrous that it has become a systemic risk in of itself. And the Fed knows this too… Janet Yellen, before she became Fed Chair, was worried about how the Fed could safely exit its positions back when its balance sheet was only $1.3 trillion during QE 1 in 2009.

  Moreover, it’s not clear that the Fed could launch another QE program at this point. For one thing there is that aforementioned upcoming Presidential election. Another QE program would just be fuel for the fire that is growing public anger with Washington’s meddling in the economy. And this would lead to greater scrutiny of the Fed and its decision making.

  Even if the Fed were to launch another QE program in the next 15 months, it’s not clear how much it would accomplish. A psychological shift has hit the markets in which investors’ faith in Central Bank policy is no longer sacrosanct.

  Consider China, where despite rampant money printing, the stock market has continued to implode, crashing to new lows. China’s Central Bank is pumping $29 billion into its stock markets per day.  This bought a few weeks of a bounce before Chinese stocks continued to collapse.

   

  

   

  In short, as we predicted, Central Banks will indeed be powerless to stop the next Crisis as it spreads. The Fed could potentially go “nuclear” with a massive QE program if the markets fall far enough, but this would only accelerate the pace at which investors lose confidence in Central Banks’ abilities to rein in the carnage.

  Smart investors should start preparing now. What happened on Monday was just a taste of what's coming…

  If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

  You can pick up a FREE copy if you …

  Click Here Now!

  Best Regards

  Graham Summers

  Chief Market Strategist

  Phoenix Capital Research

   

  

  

  

  

• New UN Privacy Chief Proclaims – UK Digital Surveillance Is "Worse Than Orwell"

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Cannataci says we are dealing with a world even worse that anything Orwell could have foreseen. “It’s worse,” he said. “Because if you look at CCTV alone, at least Winston was able to go out in the countryside and go under a tree and expect there wouldn’t be any screen, as it was called. Whereas today there are many parts of the English countryside where there are more cameras than George Orwell could ever have imagined. So the situation in some cases is far worse already.

   

  – UN Privacy chief, Joseph Cannataci

  The UN special rapporteur on privacy, Joseph Cannataci, pulls no punches when it comes to privacy. It’s hard to disagree with what he has to say.

  From the Guardian:

  The first UN privacy chief has said the world needs a Geneva convention style law for the internet to safeguard data and combat the threat of massive clandestine digital surveillance.

  Speaking to the Guardian weeks after his appointment as the UN special rapporteur on privacy, Joseph Cannataci described British surveillance oversight as being “a joke”, and said the situation is worse than anything George Orwell could have foreseen.

   

  He added that he doesn’t use Facebook or Twitter, and said it was regrettable that vast numbers of people sign away their digital rights without thinking about it.

   

  One thing that is certainly going to come up in my mandate is the business model that large corporations are using

   

  “Some people were complaining because they couldn’t find me on Facebook. They couldn’t find me on Twitter. But since I believe in privacy, I’ve never felt the need for it,” Cannataci, a professor of technology law at University of Groningen in the Netherlands and head of the department of Information Policy & Governance at the University of Malta, said.

   

  Appointed after concern about surveillance and privacy following the Edward Snowden revelations, Cannataci agreed that his notion of a new universal law on surveillance could embarrass those who may not sign up to it. “Some people may not want to buy into it,” he acknowledged. “But you know, if one takes the attitude that some countries will not play ball, then, for example, the chemical weapons agreement would never have come about.”

   

  Cannataci came into his new post in July after a controversial spat involving the first-choice candidate, Katrin Nyman-Metcalf, who the Germans in particular thought might not be tough enough on the Americans.

   

  But for Cannataci – well-known for having a mind of his own – it is not America but Britain that he singles out as having the weakest oversight in the western world: “That is precisely one of the problems we have to tackle. That if your oversight mechanism’s a joke, and a rather bad joke at its citizens’ expense, for how long can you laugh it off as a joke?”

   

  However, Cannataci says we are dealing with a world even worse that anything Orwell could have foreseen. “It’s worse,” he said. “Because if you look at CCTV alone, at least Winston [Winston Smith in Orwell’s novel 1984] was able to go out in the countryside and go under a tree and expect there wouldn’t be any screen, as it was called. Whereas today there are many parts of the English countryside where there are more cameras than George Orwell could ever have imagined. So the situation in some cases is far worse already.

   

  “The way we handle it is going to be the difference. But Orwell foresaw a technology that was controlling. In our case we are looking at a technology that is ever-developing, and ever-developing possibly more sinister capabilities.” Because of this, the Snowden revelations were very important, he said.

   

  “We have a number of corporations that have set up a business model that is bringing in hundreds of thousands of millions of euros and dollars every year and they didn’t ask anybody’s permission. They didn’t go out and say: ‘Oh, we’d like to have a licensing law.’ No, they just went out and created a model where people’s data has become the new currency. And unfortunately, the vast bulk of people sign their rights away without knowing or thinking too much about it,” he said. 

  Now that we’ve got that out of the way…

  Yes, the UK is particularly bad when it comes to privacy, as has been noted on many occasions. See:

  Top Computer Security Expert Warns – David Cameron’s Plan to Ban Encryption Would “Destroy the Internet”

  The Mindset of UK Prime Minister David Cameron – It’s Not Enough to Follow the Law, You Must Love Big Brother

  Britain’s “War on Terror” Insanity Continues – David Cameron Declares War on Encryption

  “Minority Report”-esque Big Brother Billboards are Coming to England

  Press Rebellion in the UK – British Media Launches Protest Against Spying, as GCHQ Places Investigative Journalism in Same Category as Terrorism

  

  

  

  

  

• Is China Quietly Targeting A 20% Devaluation?

  When China took the “surprising” (to anyone who was naive enough to think that the country’s economy isn’t in absolute free fall) step of resorting to a dramatic yuan devaluation on the heels of multiple ineffectual policy rate cuts, Beijing pitched the move as a “one-off” effort to erase a ~3% persistent dislocation in the market. 

  Seeing the effort for what it most certainly was – a tacit admission of underlying economic malaise and a last ditch effort to rescue the export-driven economy via an epic beggar thy neighbor along with the whole damn EM neighborhood competitive devaluation – analysts were quick to note that the PBoC may ultimately be targeting a 10% or more depreciation in order to provide a sufficient boost to exports. 

  Well, official protestations to the contrary, it appears as though even some Party agencies are assuming a much weaker yuan both over the near- and medium-term. Here’s Bloomberg:

  Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter.

   

  The research further factors in the yuan falling to 8 to the dollar by the end of 2016, according to the people, who asked not to be identified because the studies haven’t been made public. 

   

  Those projections — which suggest a depreciation of more than 8 percent by Dec. 31 and about 20 percent by the end of 2016 — were adopted after the currency was devalued this month and compare with analysts’ forecasts for the yuan to reach 6.5 to the dollar by the end of this year.

   

  While the rate used in the research isn’t a government target, it suggests China may allow the yuan to fall further after a depreciation in which the currency was allowed to weaken by nearly three percent on Aug. 11 and 12. The yuan weakened for a second day in Shanghai to 6.4124.

   

  “It wouldn’t be totally unreasonable for China to allow a weakening like this,” said Zhou Hao, an economist at Commerzbank AG in Singapore, referring to the 7 level against the dollar at the end of this year. “A certain level of depreciation can be accepted according to China’s international payments situation, but it may bring unforeseeable pressure on foreign debt repayments and capital outflows.”

   

  The rate used in the research constitutes reference levels used for economic assessments and projections, according to the people. The PBOC didn’t respond to a fax seeking comment.

  A dollar-yuan rate of 7 would be a more than 8 percent depreciation from Tuesday’s level. At an Aug. 13 briefing on the yuan, PBOC Deputy Governor Yi Gang dismissed the idea that China would devalue the yuan by 10 percent to boost exports, calling it “nonsense.”

  Yes, “nonsense”, just like how Chinese QE “doesn’t exist” despite the fact that untold billions in stocks have been transferred from CSF to the sovereign wealth fund just so the PBoC can continue to insist that its balance sheet isn’t expanding. 

  In any event, a more dramatic devaluation may ultimately be necessary not only to boost exports, but to alleviate the necessity of interveing constantly to arrest the yuan’s slide. As BNP’s Mole Hau put it in a note out Monday, “what appears to have happened is that, whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term.” Which explains why the FX reserve drain may well be continuing unabated causing the massive liquidity crunch that’s forced the PBoC to inject hundreds of billions of liquidity via reverse repos and ultimately forced today’s RRR cut. 

  Of couse as we said earlier today, “while global markets received China’s announcement with their typical ‘a central bank just came to our rescue’ exuberance, the reality is that as least today’s RRR cut will have zero impact on spurring aggregate demand, and is merely a delayed response to FX interventions that have already taken place [which means] for China to net ease, it will have to do more, much more [but] ironically, doing so, will merely accelerate the capital outflows as a result of the ongoing plunge in the CNY, which leads to the circular logic of China’s intervention … the more it intervenes in an attempt to stabilize every aspect of its economy and finance, the more it will have to intervene, until either it wins, or something snaps.”

  Ultimately, that “something” may end up being the daily yuan management effort because the intervention game is getting expensive and incremental easing will only make it more so.

  A free float may be the better option and if the passages excerpted above from Bloomberg are any indication, the yuan is going to be much, much lower by the end of next year one way or another. The only question is how much pain China incurs on the way there. We’ll close with the following quote from SocGen:

  If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.

  

  

  

  

  

• 1929 And Its Aftermath – A Contra-Keynesian View Of What Really Happened

  Submitted by Murray N. Rothbard via The Mises Institute,

  [First published in Inquiry, November 12, 1979.]

  A half-century ago, America — and then the world — was rocked by a mighty stock-market crash that soon turned into the steepest and longest-lasting depression of all time.

  It was not only the sharpness and depth of the depression that stunned the world and changed the face of modern history: it was the length, the chronic economic morass persisting throughout the 1930s, that caused intellectuals and the general public to despair of the market economy and the capitalist system.

  Previous depressions, no matter how sharp, generally lasted no more than a year or two. But now, for over a decade, poverty, unemployment, and hopelessness led millions to seek some new economic system that would cure the depression and avoid a repetition of it.

  Political solutions and panaceas differed. For some it was Marxian socialism — for others, one or another form of fascism. In the United States the accepted solution was a Keynesian mixed-economy or welfare-warfare state. Harvard was the focus of Keynesian economics in the United States, and Seymour Harris, a prominent Keynesian teaching there, titled one of his many books Saving American Capitalism. That title encapsulated the spirit of the New Deal reformers of the ’30s and ’40s. By the massive use of state power and government spending, capitalism was going to be saved from the challenges of communism and fascism.

  One common guiding assumption characterized the Keynesians, socialists, and fascists of the 1930s: that laissez-faire, free-market capitalism had been the touchstone of the US economy during the 1920s, and that this old-fashioned form of capitalism had manifestly failed us by generating, or at least allowing, the most catastrophic depression in history to strike at the United States and the entire Western world.

  Well, weren’t the 1920s, with their burgeoning optimism, their speculation, their enshrinement of big business in politics, their Republican dominance, their individualism, their hedonistic cultural decadence, weren’t these years indeed the heyday of laissez-faire? Certainly the decade looked that way to most observers, and hence it was natural that the free market should take the blame for the consequences of unbridled capitalism in 1929 and after.

  Unfortunately for the course of history, the common interpretation was dead wrong: there was very little laissez-faire capitalism in the 1920s. Indeed the opposite was true: significant parts of the economy were infused with proto–New Deal statism, a statism that plunged us into the Great Depression and prolonged this miasma for more than a decade.

  In the first place, everyone forgot that the Republicans had never been the laissez-faire party. On the contrary, it was the Democrats who had always championed free markets and minimal government, while the Republicans had crusaded for a protective tariff that would shield domestic industry from efficient competition, for huge land grants and other subsidies to railroads, and for inflation and cheap credit to stimulate purchasing power and apparent prosperity.

  It was the Republicans who championed paternalistic big government and the partnership of business and government while the Democrats sought free trade and free competition, denounced the tariff as the “mother of trusts,” and argued for the gold standard and the separation of government and banking as the only way to guard against inflation and the destruction of people’s savings. At least that was the policy of the Democrats before Bryan and Wilson at the start of the 20th century, when the party shifted to a position not very far from its ancient Republican rivals.

  The Republicans never shifted, and their reign in the 1920s brought the federal government to its greatest intensity of peacetime spending and hiked the tariff to new, stratospheric levels. A minority of old-fashioned “Cleveland” Democrats continued to hammer away at Republican extravagance and big government during the Coolidge and Hoover eras. Those included Governor Albert Ritchie of Maryland, Senator James Reed of Missouri, and former Solicitor General James M. Beck, who wrote two characteristic books in this era: The Vanishing Rights of the States and Our Wonderland of Bureaucracy.

  But most important in terms of the depression was the new statism that the Republicans, following on the Wilson administration, brought to the vital but arcane field of money and banking. How many Americans know or care anything about banking? Yet it was in this neglected but crucial area that the seeds of 1929 were sown and cultivated by the American government.

  The United States was the last major country to enjoy, or be saddled with, a central bank. All the major European countries had adopted central banks during the 18th and 19th centuries, which enabled governments to control and dominate commercial banks, to bail out banking firms whenever they got into trouble, and to inflate money and credit in ways controlled and regulated by the government. Only the United States, as a result of Democratic agitation during the Jacksonian era, had had the courage to extend the doctrine of classical liberalism to the banking system, thereby separating government from money and banking.

  Having deposed the central bank in the 1830s, the United States enjoyed a freely competitive banking system — and hence a relatively “hard” and noninflated money — until the Civil War. During that catastrophe, the Republicans used their one-party dominance to push through their interventionist economic program. It included a protective tariff and land grants to railroads, as well as inflationary paper money and a “national banking system” that in effect crippled state-chartered banks and paved the way for the later central bank.

  The United States adopted its central bank, the Federal Reserve System, in 1913, backed by a consensus of Democrats and Republicans. This virtual nationalization of the banking system was unopposed by the big banks; in fact, Wall Street and the other large banks had actively sought such a central system for many years. The result was the cartelization of banking under federal control, with the government standing ready to bail out banks in trouble, and also ready to inflate money and credit to whatever extent the banks felt was necessary.

  Without a functioning Federal Reserve System available to inflate the money supply, the United States could not have financed its participation in World War I: that war was fueled by heavy government deficits and by the creation of new money to pay for swollen federal expenditures.

  One point is undisputed: the autocratic ruler of the Federal Reserve System, from its inception in 1914 to his death in 1928, was Benjamin Strong, a New York banker who had been named governor of the Federal Reserve Bank of New York. Strong consistently and repeatedly used his power to force an inflationary increase of money and bank credit in the American economy, thereby driving prices higher than they would have been and stimulating disastrous booms in the stock and real-estate markets. In 1927, Strong gaily told a French central banker that he was going to give “a little coup de whiskey to the stock market.” What was the point? Why did Strong pursue a policy that now can seem only heedless, dangerous, and recklessly extravagant?

  Once the government has assumed absolute control of the money-creating machinery in society, it benefits — as would any other group — by using that power. Anyone would benefit, at least in the short run, by printing or creating new money for his own use or for the use of his economic or political allies.

  Strong had several motives for supporting an inflationary boom in the 1920s. One was to stimulate foreign loans and foreign exports. The Republican party was committed to a policy of partnership of government and industry, and to subsidizing domestic and export firms. A protective tariff aided inefficient domestic producers by keeping out foreign competition. But if foreigners were shut out of our markets, how in the world were they going to buy our exports? The Republican administration thought it had solved this dilemma by stimulating American loans to foreigners so that they could buy our products.

  A fine solution in the short run, but how were these loans to be kept up, and, more important, how were they to be repaid? The banking community was also confronted with the curious and ultimately self-defeating policy of preventing foreigners from selling us their products, and then lending them the money to keep buying ours. Benjamin Strong’s inflationary policy meant repeated doses of cheap credit to stimulate this foreign lending. It should also be noted that this policy subsidized American investment banks in making foreign loans.

  Among the exports stimulated by cheap credit and foreign loans were farm products. American agriculture, overstimulated by the swollen demands of warring European nations during World War I, was a chronically sick industry during the 1920s. It had awakened after the resumption of peace to find that farm prices had fallen and that European demand was down. Rather than adjusting to postwar realities, however, American farmers preferred to organize and agitate to force taxpayers and consumers to keep them in the style to which they had become accustomed during the palmy “parity” years of the war. One way for the federal government to bow to this political pressure was to stimulate foreign loans and hence to encourage foreign purchases of American farm products.

  The “farm bloc,” it should be noted, included not only farmers; more indirect and considerably less rustic interests were also busily at work. The postwar farm bloc gained strong support from George N. Peek and General Hugh S. Johnson; both, later prominent in the New Deal, were heads of the Moline Plow Company, a major manufacturer of farm machinery that stood to benefit handsomely from government subsidies to farmers. When Herbert Hoover, in one of his first acts as president — considerably before the crash — established the Federal Farm Board to raise farm prices, he installed as head of the FFB Alexander Legge, chairman of International Harvester, the nation’s leading producer of farm machinery. Such was the Republican devotion to “laissez faire.”

  But a more indirect and ultimately more important motivation for Benjamin Strong’s inflationary credit policies in the 1920s was his view that it was vitally important to “help England,” even at American expense. Thus, in the spring of 1928, his assistant noted Strong’s displeasure at the American public’s outcry against the “speculative excesses” of the stock market.

  The public didn’t realize, Strong thought, that “we were now paying the penalty for the decision which was reached early in 1924 to help the rest of the world back to a sound financial and monetary basis.” An unexceptionable statement, provided that we clear up some euphemisms. For the “decision” was taken by Strong in camera, without the knowledge or participation of the American people; the decision was to inflate money and credit, and it was done not to help the “rest of the world” but to help sustain Britain’s unsound and inflationary policies.

  Before the World War, all the major nations were on the gold standard, which meant that the various currencies — the dollar, pound, mark, franc, etc. — were redeemable in fixed weights of gold. This gold requirement ensured that governments were strictly limited in the amount of scrip they could print and pour into circulation, whether by spending to finance government deficits or by lending to favored economic or political groups. Consequently, inflation had been kept in check throughout the 19th century when this system was in force.

  But world war ruptured all that, just as it destroyed so many other aspects of the classical-liberal polity. The major warring powers spent heavily on the war effort, creating new money in bushel baskets to pay the expense. Inflation was consequently rampant during and after World War I and, since there were far more pounds, marks, and francs in circulation than could possibly be redeemed in gold, the warring countries were forced to go off the gold standard and to fall back on paper currencies — all, that is, except for the United States, which was embroiled in the war for a relatively short time and could therefore afford to remain on the gold standard.

  After the war, the nations faced a world currency breakdown with rampant inflation and chaotically falling exchange rates. What was to be done? There was a general consensus on the need to go back to gold, and thereby to eliminate inflation and frantically fluctuating exchange rates. But how to go back? That is, what should be the relations between gold and the various currencies?

  Specifically, Britain had been the world’s financial center for a century before the war, and the British pound and the dollar had been fixed all that time in terms of gold so that the pound would always be worth $4.86. But during and after the war the pound had been inflated relatively far more than the dollar, and thus had fallen to about $3.50 on the foreign-exchange market. But Britain was adamant about returning the pound, not to the realistic level of $3.50, but rather to the old prewar par of $4.86.

  Why the stubborn insistence on going back to gold at the obsolete prewar par? Part of the reason was a stubborn and mindless concentration on saving face and British honor, on showing that the old lion was just as strong and tough as before the war. Partly, it was a shrewd realization by British bankers that if the pound were devalued from prewar levels England would lose its financial preeminence, perhaps to the United States, which had been able to retain its gold status.

  So, under the spell of its bankers, England made the fateful decision to go back to gold at $4.86. But this meant that Britain’s exports were now made artificially expensive and its imports cheaper, and since England lived by selling coal, textiles, and other products, while importing food, the resulting chronic depression in its export industries had serious consequences for the British economy. Unemployment remained high in Britain, especially in its export industries, throughout the boom of the 1920s.

  To make this leap backward to $4.86 viable, Britain would have had to deflate its economy so as to bring about lower prices and wages and make its exports once again inexpensive abroad. But it wasn’t willing to deflate since that would have meant a bitter confrontation with Britain’s now-powerful unions. Ever since the imposition of an extensive unemployment-insurance system, wages in Britain were no longer flexible downward as they had been before the war. In fact, rather than deflate, the British government wanted the freedom to keep inflating, in order to raise prices, do an end run around union wage rates, and ensure cheap credit for business.

  The British authorities had boxed themselves in: They insisted on several axioms. One was to go back to gold at the old prewar par of $4.86. This would have made deflation necessary, except that a second axiom was that the British continue to pursue a cheap credit, inflationary policy rather than deflation. How to square the circle? What the British tried was political pressure and arm-twisting on other countries, to try to induce or force them to inflate too. If other countries would also inflate, the pound would remain stable in relation to other currencies; Britain would not keep losing gold to other nations, which endangered its own jerry-built monetary structure.

  On the defeated and small new countries of Europe, Britain’s pressure was notably successful. Using their dominance in the League of Nations and especially in its Financial Committee, the British forced country after country not only to return to gold, but to do so at overvalued rates, thereby endangering those nations’ exports and stimulating imports from Britain. And the British also flummoxed these countries into adopting a new form of gold “exchange” standard, in which they kept their reserves not in gold, as before, but in sterling balances in London.

  In this way, the British could continue to inflate; and pounds, instead of being redeemed in gold, were used by other countries as reserves on which to pyramid their own paper inflation. The only stubborn resistance to the new order came from France, which had a hard-money policy into the late 1920s. It was French resistance to the new British monetary order that was ultimately fatal to the house of cards the British attempted to construct in the 1920s.

  The United States was a different situation altogether. Britain could not coerce the United States into inflating in order to save the misbegotten pound, but it could cajole and persuade. In particular, it had a staunch ally in Benjamin Strong, who could always be relied on to be a willing servitor of British interests. By repeatedly agreeing to inflate the dollar at British urging, Benjamin Strong won the plaudits of the British financial press as the best friend of Great Britain since Ambassador Walter Hines Page, who had played a key role in inducing the United States to enter the war on the British side.

  Why did Strong do it? We know that he formed a close friendship with British financial autocrat Montagu Norman, longtime head of the Bank of England. Norman would make secret visits to the United States, checking in at a Saratoga Springs resort under an assumed name, and Strong would join him there for the weekend, also incognito, there to agree on yet another inflationary coup de whiskey to the market.

  Surely this Strong–Norman tie was crucial, but what was its basic nature? Some writers have improbably speculated on a homosexual liaison to explain the otherwise mysterious subservience of Strong to Norman’s wishes. But there was another, and more concrete and provable, tie that bound these two financial autocrats together.

  That tie involved the Morgan banking interests. Benjamin Strong had lived his life in the Morgan ambit. Before being named head of the Federal Reserve, Strong had risen to head of the Bankers Trust Company, a creature of the Morgan bank. When asked to be head of the Fed, he was persuaded to take the job by two of his best friends, Henry P. Davison and Dwight Morrow, both partners of J.P. Morgan & Co.

  The Federal Reserve System arrived at a good time for the Morgans. It was needed to finance America’s participation in World War I, a participation strongly supported by the Morgans, who played a major role in bringing the Wilson administration into the war. The Morgans, heavily invested in rail securities, had been caught short by the boom in industrial stocks that emerged at the turn of the century. Consequently, much of their position in investment-banking was being eroded by Kuhn, Loeb & Co., which had been faster off the mark on investment in industrial securities.

  World War I meant economic boom or collapse for the Morgans. The House of Morgan was the fiscal agent for the Bank of England: it had the underwriting concession for all sales of British and French bonds in the United States during the war, and it helped finance US arms and munitions sales to Britain and France. The House of Morgan had a very heavy investment in an Anglo-French victory and a German-Austrian defeat. Kuhn, Loeb, on the other hand, was pro-German, and therefore was tied more to the fate of the Central Powers.

  The cement binding Strong and Norman was the Morgan connection. Not only was the House of Morgan intimately wrapped up in British finance, but Norman himself — as well as his grandfather — in earlier days had worked in New York for the powerful investment banking firm of Brown Brothers, and hence had developed close personal ties with the New York banking community. For Benjamin Strong, helping Britain meant helping the House of Morgan to shore up the internally contradictory monetary structure it had constructed for the postwar world.

  The result was inflationary credit, a speculative boom that could not last, and the Great Crash whose 50th anniversary we observe this year. After Strong’s death in late 1928, the new Federal Reserve authorities, while confused on many issues, were no longer consistent servitors of Britain and the Morgans. The deliberate and consistent policy of inflation came to an end, and a corrective depression soon arrived.

  There are two mysteries about the Great Depression, mysteries having two separate and distinct solutions. One is, why the crash? Why the sudden crash and depression in the midst of boom and seemingly permanent prosperity? We have seen the answer: inflationary credit expansion propelled by the Federal Reserve System in the service of various motives, including helping Britain and the House of Morgan.

  But there is another vital and very different problem. Given the crash, why did the recovery take so long? Usually, when a crash or financial panic strikes, the economic and financial depression, be it slight or severe, is over in a few months or a year or two at the most. After that, economic recovery will have arrived. The crucial difference between earlier depressions and that of 1929 was that the 1929 crash became chronic and seemed permanent.

  What is seldom realized is that depressions, despite their evident hardship on so many, perform an important corrective function. They serve to eliminate the distortions introduced into the economy by an inflationary boom. When the boom is over, the many distortions that have entered the system become clear: prices and wage rates have been driven too high, and much unsound investment has taken place, particularly in capital-goods industries.

  The recession or depression serves to lower the swollen prices and to liquidate the unsound and uneconomic investments; it directs resources into those areas and industries that will most-effectively serve consumer demands — and were not allowed to do so during the artificial boom. Workers previously misdirected into uneconomic production, unstable at best, will, as the economy corrects itself, end up in more secure and productive employment.

  The recession must be allowed to perform its work of liquidation and restoration as quickly as possible, so that the economy can be allowed to recover from boom and depression and get back to a healthy footing. Before 1929, this hands-off policy was precisely what all US governments had followed, and hence depressions, however sharp, would disappear after a year or so.

  But when the Great Crash hit, America had recently elected a new kind of president. Until the past decade, historians have regarded Herbert Clark Hoover as the last of the laissez-faire presidents. Instead, he was the first New Dealer.

  Hoover had his bipartisan aura, and was devoted to corporatist cartelization under the aegis of big government; indeed, he originated the New Deal farm-price-support program. His New Deal specifically centered on his program for fighting depressions. Before he assumed office, Hoover determined that should a depression strike during his term of office, he would use the massive powers of the federal government to combat it. No more would the government, as in the past, pursue a hands-off policy.

  As Hoover himself recalled the crash and its aftermath,

  The primary question at once arose as to whether the President and the federal government should undertake to investigate and remedy the evils. … No President before had ever believed that there was a governmental responsibility in such cases. … Presidents steadfastly had maintained that the federal government was apart from such eruptions … therefore, we had to pioneer a new field.

  In his acceptance speech for the presidential renomination in 1932, Herbert Hoover summed it up:

  We might have done nothing. … Instead, we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. … No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times.

  The massive Hoover program was, indeed, a characteristically New Deal one: vigorous action to keep up wage rates and prices, to expand public works and government deficits, to lend money to failing businesses to try to keep them afloat, and to inflate the supply of money and credit to try to stimulate purchasing power and recovery. Herbert Hoover during the 1920s had pioneered the proto-Keynesian idea that high wages are necessary to assure sufficient purchasing power and a healthy economy. The notion led him to artificially raising wages — and consequently to aggravating the unemployment problem — during the depression.

  As soon as the stock market crashed, Hoover called in all the leading industrialists in the country for a series of White House conferences in which he successfully bludgeoned the industrialists, under the threat of coercive government action, into propping up wage rates — and hence causing massive unemployment — while prices were falling sharply. After Hoover’s term, Franklin D. Roosevelt simply continued and expanded Hoover’s policies across the board, adding considerably more coercion along the way. Between them, the two New Deal presidents managed the unprecedented feat of making the depression last a decade, until we were lifted out of it by our entry into World War II.

  If Benjamin Strong got us into a depression and Herbert Hoover and Franklin D. Roosevelt kept us in it, what was the role in all this of the nation’s economists, watchdogs of our economic health? Unsurprisingly, most economists, during the depression and ever since, have been much more part of the problem than of the solution. During the 1920s, establishment economists, led by Professor Irving Fisher of Yale, hailed the 20s as the start of a “New Era,” one in which the new Federal Reserve System would ensure permanently stable prices, avoiding either booms or busts.

  Unfortunately, the Fisherites, in their quest for stability, failed to realize that the trend of the free and unhampered market is always toward lower prices as productivity rises and mass markets develop for particular products. Keeping the price level stable in an era of rising productivity, as in the 1920s, requires a massive artificial expansion of money and credit. Focusing only on wholesale prices, Strong and the economists of the 1920s were willing to engender artificial booms in real estate and stocks, as well as malinvestments in capital goods, so long as the wholesale price level remained constant.

  As a result, Irving Fisher and the leading economists of the 1920s failed to recognize that a dangerous inflationary boom was taking place. When the crash came, Fisher and his disciples of the Chicago School again pinned the blame on the wrong culprit. Instead of realizing that the depression process should be left alone to work itself out as rapidly as possible, Fisher and his colleagues laid the blame on the deflation after the crash and demanded a reinflation (or “reflation”) back to 1929 levels.

  In this way, even before Keynes, the leading economists of the day managed to miss the problem of inflation and cheap credit and to demand policies that only prolonged the depression and made it worse. After all, Keynesianism did not spring forth full-blown with the publication of Keynes’s General Theory in 1936.

  We are still pursuing the policies of the 1920s that led to eventual disaster. The Federal Reserve is still inflating the money supply and inflates it even further with the merest hint that a recession is in the offing. The Fed is still trying to fuel a perpetual boom while avoiding a correction on the one hand or a great deal of inflation on the other.

  In a sense, things have gotten worse. For while the hard-money economists of the 1920s and 1930s wished to retain and tighten up the gold standard, the “hard-money” monetarists of today scorn gold, are happy to rely on paper currency, and feel that they are boldly courageous for proposing not to stop the inflation of money altogether, but to limit the expansion to a supposedly fixed amount.

  Those who ignore the lessons of history are doomed to repeat it — except that now, with gold abandoned and each nation able to print currency ad lib, we are likely to wind up, not with a repeat of 1929, but with something far worse: the holocaust of runaway inflation that ravaged Germany in 1923 and many other countries during World War II. To avoid such a catastrophe we must have the resolve and the will to cease the inflationary expansion of credit, and to force the Federal Reserve System to stop purchasing assets, and thereby to stop its continued generation of chronic, accelerating inflation.

  

  

  

  

  

• So This Is Why The "Smart Money" Was Selling The Most Stocks In History

  Precisely two months ago, we reported something very troubling, namely that “The “Smart Money” Just Sold The Most Stocks In History.” This is what BofA reported at the time: “BofAML clients were big net sellers of US stocks in the amount of $4.1bn, following four weeks of net buying. Net sales were the largest since January 2008 and led by institutional clients—after three weeks of net buying, institutional clients’ net sales last week were the largest in our data history.”

  

   

  Just to make sure the message was heard loud and clear we followed up ten days later with “The “Smartest Money” Is Liquidating Stocks At A Record Pace: “Selling Everything That’s Not Bolted Down“

  We got definitive confirmation that the truly “smartest money in the room”, those who dabble not in the bipolar public markets but in private equity had indeed started “selling everything that is not nailed down” several years ago hitting a climax this past quarter, when Bloomberg reported that two years after Leon Black’s infamous statement, “other private-equity firms are following suit – dumping stakes into the markets at a record clip.”

   

  According to Bloomberg data, firms including Blackstone Group and TPG have been “capitalizing on record stock markets around the world to sell shares, mostly in their companies that have already gone public. Globally, buyout firms conducted 97 stock offerings in the second quarter, more than in any other three-month period.”

  What happened next should not have been a surprise to our readers: as we reported shortly thereafter, the divergence between the “smart money flow” and the S&P 500 – which at this point was merely reflecting HFT momentum ignition traps and the occasional stray retail investor – had reached unseen proportions:

  

   

  So following the biggest (and only) market correction in years, the biggest weekly surge in the VIX ever, the second wholesale market flash crash in history coupled with the first ever limit down trade in the Nasdaq and the E-Mini, not to mention the biggest intraday bearish reversal since Lehman, it would appear that the “smart money” was aptly named (and hopefully wasn’t selling to you).

  And, lo and behold, following the dramatic market moves of the past two weeks, the S&P has finally caught up with the Smart Money flow.

  

   

  A quick reminder of the “Smart Money Flow” index in question:

  The Bloomberg Smart Money Flow Index is calculated by taking the action of the Dow in two time periods: the first 30 minutes and the close. The first 30 minutes represent emotional buying, driven by greed and fear of the crowd based on good and bad news. There is also a lot of buying on market orders and short covering at the opening. Smart money waits until the end and they very often test the market before by shorting heavily just to see how the market reacts. Then they move in the big way. These heavy hitters also have the best possible information available to them and they do have the edge on all the other market participants. To  replicate this index, just start at any given day, subtract the price of the Dow at 10 AM from the previous day’s close and add today’s closing price.  Whenever the Dow makes a high which is not confirmed by the SMFI there is trouble ahead.

  Starting sometime in February, the smart money started getting out of Dodge, and yes, “there was troubled ahead.”

  

  

  

  

• Aug 26 – Turnaround Tuesday as China Cuts Rates

  EMOTION MOVING MARKETS NOW: 3/100 EXTREME FEAR

  PREVIOUS CLOSE: 3/100 EXTREME FEAR

  ONE WEEK AGO: 14/100 EXTREME FEAR

  ONE MONTH AGO: 10/100 EXTREME FEAR

  ONE YEAR AGO: 34/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 10.17% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility: EXTREME FEAR The CBOE Volatility Index (VIX) is at 36.02 and indicates that investors remain concerned about declines in the stock market.

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

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – IT’S THE JERKS

   

  UNUSUAL ACTIVITY

  KING vol pop to highs SEP 14 CALL ACTIVITY @$.20 2000+ Contracts

  PFE NOV 38 CALLS block @$.24 on offer 19713 Contracts

  HZNP SEP 30 CALLS block @$1.45 on offer 3900 Contracts

  UNFI President and CEO Purchase 5,500  @$45.24

  CMRX Director Purchase 1,000 @$47.38

  More Unusual Activity…

   

  HEADLINES

   

  Turnaround Tuesday as China cuts rates

  PBOC cuts rates by 25 bps, RRR by 50 bps

  PBOC: Economy still facing downwards pressure

  China Premier Li: We have the ability to hit annual economic targets

  China Premier Li: No Basis For Continued CNY Depreciation

  Questions over Li Keqiang’s future amid China market turmoil –FT

  US CBO improves deficit view, sub-2% PCE seen to mid-2017

  Fed Discount Rate Mins: 5 Fed banks vote for discount rate hike, 6 vote to hold, 1 votes for cut

  US Consumer Confidence Index Aug: 101.5 (Est 93.4; Rev Prev 91.0)

  US New Home Sales Jul: 507k (Est 510k; Rev Prev 481k)

  US New Home Sales (MoM) Jul: 5.40% (est 5.80%; rev prev -7.70%)

  US FHFA House Price Index (MoM) Jun: 0.20% (Est 0.40%, prev 0.40%)

  US Richmond Index Aug: 0 (est 10; prev 13)

  ECB Constancio: ECB ready to act if inflation outlook changes materially

  ECB Constancio: European stocks are ‘fairly valued’

   

  GOVERNMENTS/CENTRAL BANKS

  Fed Discount Rate Mins: Five Fed banks renew calls for discount rate hike

  Fed Discount Rate Mins: Minneapolis Fed again votes to cut discount rate by 25bps

  Fed Discount Rate Mins: Six banks voted to hold discount rate

  US CBO improves deficit view, sub-2% PCE seen to mid-2017 –MNI

  FED COMMENT: Summers, Dalio raise prospect of QE4 from the Fed –FT

  BoC Schembri: Canada macroprudential housing policy is working –BBG

  ECB Constancio: ECB ready to act if inflation outlook changes materially –Rtrs

  ECB Constancio: Chinese economy is not decelerating strongly –Rtrs

  ECB Constancio says European stocks are ‘fairly valued’ –FT

  ECB: E949.0m borrowed using overnight loan facility –Livesquawk

  ECB: E162.3bn deposited overnight –Livesquawk

  Ifo economist: China to be bigger factor for German business –Rtrs

  Japanese PM Advisor Hamada: BoJ should consider acting if yen rises sharply –WSJ

  Senior Japan ruling party member Toshihiro Nikai calls for fiscal spending amid stocks rout –ET

  Swiss parliament panel grills SNB’s Jordan on negative rates impact –Rtrs

  CHINA

  China cuts RRR ratio by 50 bps to 18%, effective 6 Sept –BBG

  China cuts 1yr deposit rate and lending rate by 25 bps each –BBG

  PBOC Removes fixed deposit rate ceiling for more than 1yr –BBG

  PBOC: Economy still facing downwards pressure –BBG

  PBOC: Cuts will provide long term liquidity –BBG

  PBOC gauges MLF demand this week –BBG

  China plans to cut stamp tax on stock trading to 0.05% –Hexun via BBG

  China Premier Li: We have the ability to hit annual economic targets –MNI via ForexLive

  China Premier Li: No Basis For Continued CNY Depreciation –MNI via ForexLive

  Questions over Li Keqiang’s future amid China market turmoil –FT

  Germany EcoMin Gabriel: German economy has no fear for Chinese turmoil -ForexLive

  France EcoMin Macron: China poses risks to global economic recovery –ForexLive

  FIXED INCOME

  US sells 2-year notes to tepid demand –Rtrs

  Fed RRP $73.2bn, 32 bidders (prev $73.8bn, 32 bidders) –Livesquawk

  Bund hit after China rate cut lessens need for safety –FT

  UK DMO to sell £3.75bn 1.5% 2021 gilt on 2/Sept –Livesquawk

  Eonia settles at -0.135% (prev -0.126%) –Livesquawk

  FX

  USD: Dollar recovers against euro, yen –MW

  EUR: French EconMin Macron: China developments to push up EUR, may ‘handicap’ policymakers –ForexLive

  EUR COMMENT: The Euro Emerges as Unlikely Safe Haven –BBG

  JPY: Japanese PM Advisor Hamada: BoJ should consider acting if yen rises sharply –WSJ

  GBP: Pound bounces back against the euro despite predictions that China crisis could delay UK rate rises –Daily Mail

  ENERGY/COMMODITIES

  CRUDE: WTI futures settle 2.8% higher at $39.31 per barrel –Livesquawk

   

  MARKETS: Commodity prices pushed higher after China cut –FT

  CRUDE: Oil rallies but still near six-and-a-half-year lows –Rtrs

  CRUDE: Iran’s oil investments shrink on crude slump –BBG

  CRUDE COMMENT: Opec ‘feels the heat’ on oil, but will it cut? –CNBC

  CRUDE: BP restarts large crude distillation unit at Whiting –BP

  METALS: Trafigura to exit LME’s metals storage business –FT

  METALS: EU antitrust regulators are probing precious-metals trading following a US investigation –BBG

  EQUITIES

  MARKETS: US stocks soar at open after market tumult –FT

  POLICY: ECB’s Constancio says European stocks are ‘fairly valued’ –FT

  M&A: Nippon Life to pay Y300-Y400bn for Mitsui Life –Nikkei via BBG

  M&A: Monsanto ups bid for Syngenta –CNBC

  EARNINGS: Best Buy shares soar after earnings beat –CNBC

  O&G: BHP Billiton posts worst profit in 11 years, maintains dividend –SMH

  INDUSTRIALS: Boeing looks through turbulence with rosy China view –FT

  FX: GE will seek compensation for FX loan conversion in Poland –BI

  CRA: S&P: United Technologies Corp. Ratings Affirmed Following Announcement Of Sikorsky Sale And Share Buybacks

  EMERGING MARKETS

  CHINA: Shanghai Comp closed down 7.6% before (before PBOC cut rates) –BBC

   

  RUSSIA: Russia Cuts 2015 Outlook But Sees Growth In 2016 –MW

  

  

  

  

  

• Dollar Depeg Du Jour: 32-Year Old Hong Kong FX Regime In The Crosshairs

  On Monday, we brought you two charts which vividly demonstrated market expectations for the abandonment of more currency pegs in the wake of Kazakhstan’s decision to float the tenge and China’s “unexpected” move to devalue the yuan.

  As you can see from the following, the market seems to be convinced that Saudi Arabia and UAE, under pressure from falling crude revenue, will ultimately be either unwilling or unable to maintain their dollar pegs (incidentally, the Saudis did succeed in jawboning USDSAR forwards down 125bps on Tuesday): 

  

  Of course no discussion of global dollar pegs and entrenched FX regimes would be complete without mentioning the Hong Kong dollar and as you can see, the 12-month forward chart looks remarkably similar to those shown above:

  

  Needless to say, the dynamic here is complicated by the degree to which Hong Kong is effectively wedded to US monetary policy (which is itself now thoroughly confused), the extent to which HKD has tended to sit at the strong end of the band, economic links to the mainland, exposure to weakening regional currencies via tourism, and expectations of an eventual yuan peg.

  Below, for what it’s worth, is some commentary from the sellside.

  *  *  *

  From Citi

  Our long-standing house view remains that the HKD peg will stay status quo, with an eventual re-peg to RMB when the latter is fully convertible. The LERS has weathered HK through even larger external shocks since 1983, and it is an important sign of stability for businesses in HK, and policymakers of HK and China. The current Linked Exchange Rate System is likely to withstand regional FX moves, but the economy would have to adjust with (1) moderate raw food prices decline with a lag, (2) other second-round price impacts from an overall slower economy, but (3) likely sharper reversals in asset prices appreciation that we have witnessed in recent years (as already started in the equity market, and worries could spread to the property market).

  RMB and other regional FX depreciation will make tourist shopping more expensive…It is important to gauge both tourist arrivals and tourists spending trends — if we start seeing even tourist arrivals fall, then it will be quite worrying, and should force shop rents to fall more broadly and faster.

  From BNP

  Predictably, Hong Kong’s peg with the USD has, once again, come under scrutiny. On the same day Kazakhstan abandoned control of its exchange rate, one-month implied volatility of HKD options spiked to a ten-year high (Chart 1). 

  Periodic bouts of price and pay swings are inevitable, as Hong Kong has effectively delegated the determination of its monetary policy to the US, even when the business cycles of the two economies do not move in tandem. As the Federal Reserve moves ever closer to delivering the first interest rate hike in almost a decade, Hong Kong is condemned to import tighter US monetary policy. In fact, Hong Kong is caught in a pincer movement between a prospective US monetary policy tightening and the continued slowdown and travails of the mainland economy with whom Hong Kong’s economic cycle is increasingly more correlated. Downward pressures on domestic costs and asset prices, including property values, will build, adding to more popular discontent against the peg (Chart 2). 

  

  But painful as the operation of the peg may be in the short term, there remains a distinct lack of alternatives.  

  From Barclays

  In contrast to other currency pegs, including the VND and SAR, the HKD is not facing depreciation pressures due to the capital outflows but rather the contrary. In fact, over the past year the HKD has been trading near the strong side of the Convertibility Undertaking of 7.75 (Figure 3), despite the rising USD against most majors and EM currencies. Even after the PBoC announced changes to the USDCNY fixing mechanism, after an initial spike spot USDHKD has moved little, although HKD forwards and option vols have moved more sharply in recent days. 

  

  Importantly, unlike the oil producers, Hong Kong does not face the same extent of downward pressures on its current account and fiscal balances due to the collapse in oil and commodity prices. That said, it is likely that Hong Kong will face more downward pressures on business activity and BoP services receipts due to China’s growth slowdown. This raises the question was to whether the link to the USD and the US monetary policy – especially now that the Fed is closer to tightening – remains relevant for the Hong Kong SAR given the growth drag from China.

  A depreciating CNY could perhaps make it easier for the Hong Kong and Chinese authorities to change the anchor of the HKD currency peg, although there are few signs that a policy change will happen in the near term. The HKMA has said that pegging to a strong and appreciating CNY would pose downward pressures on Hong Kong’s domestic prices (including wages, consumer prices and property prices), or could lead to structural deflationary pressures.

  *  *  *

  Finally, it’s worth noting that, back in 2011, Bill Ackman took to a 150-page presentation to explain why betting on an HKD revaluation was a slam dunk.

  Bonus: History of the peg via Citi

  
  

  

  

  

  

  

• Cutting Through The HFT Lies: What Really Happened During The Flash Crash Of August 24, 2015

  One of the fallacies being propagated about yesterday’s flash crash, is that somehow HFTs came riding in as noble white knights and rescued the market from a collapse instead of actually causing it. This particular lie is worth a few quick observations and explanations of what really happened.

  What did not happen, is what Doug Cifu, the CEO of HFT titan Virtu, the firm which as we have profiled repeatedly in the past has lost money on 1 day in 6 years…

  

  … told CNBC when he said it wasn’t Virtu’s fault the market did not work for anyone as a result of countless HFT glitches: “we don’t cause volatility, as a market maker we’re absorbing volatility and we think we soften it.”

  The most amusing bit was when Cifu said that “we’re really just in the role of transferring risk from natural buyers to natural sellers.” Considering Virtu and its “special sauce” has never actually taken on risk with its trading record, discussing risk is a little rich for the owner of the Florida Panthers, and here’s why: in a note by Credit Suisse’s Laura Prostic (the typos are because she is in S&T) we now know precisely what happened:

  HFT is typically 50% of overall volm, but they have to walk away in this heightened vol envt, which dramatically reduces liquidity. Hightened vol was mainly unwinding of hedges, not panic.

  Anyone who actually trades (and is not part of the Modern Market initiative) knows that this precisely what happens every time there is a spike in market vol: HFTs simply walk away leading to the dreaded “HFT STOP” moment, creating a feedback loop of even less liquidity, and even more volatility, until circuit breakers are finally hit or asset prices hit limits. Yesterday, for the first time in history, not only the S&P500, but the Nasdaq and the DJIA all hit their particular “limit down” triggers.

  Credit Suisse also directly refutes what Doug Cifu said: HFTs, far from not causing volatility, merely step aside when volatility surges  thus leading to such stunners as VIX soaring above 50 overnight (with the CBOE too ashamed to even report what it would have been in the first 30 minutes of trading).

  

  This also ties in with the summary in our last night’s post comparing the flash crashes of 2010 and 2015:

  The good news is that with liquidity inevitably collapsing ever further to a state of near singularity with ongoing central bank interventions, and with markets broken beyond repaid, we will very soon have a repeat flash crash like today, one which will provide enough satisfactory answers to the question of just happened that lead to a market that was completely broken for nearly an hour, and where the VIX was so very off the charts, the CBOE was afraid to show it for at least thirty minutes.

   

  One thing is certain though: while the market dies a slow, painful, miserable death, the biggest HFTs will continue pocketing millions. Such as Virtu: “Virtu Financial Inc., one of the world’s largest high-frequency trading firms, was on track to have one of its biggest and most profitable days in history Monday amid a tumultuous 24 hours for world markets, according to its chief executive.”

  As we previously reported, while Virtu may have fabricated its role in yesterday’s events, there was one truth: it had an amazingly profitable day because as a result of the total chaos, HFTs were able to frontrun block orders from a mile away and as a result of soarking bid/ask spreads, Virtu raked in millions by simply capitalizing on the chaos it and its peers have created. As Cifu said then “Our firm is made for this kind of market.” We quickly corrected him: “your firm made this kind of market.”

  But back to the lies: earlier today the WSJ reported the following:

  The speed and depth of the drop harked back to the flash crash of May 2010, when program-driven trading produced a self-reinforcing wave of selling. This time around, high-frequency trading firms like Virtu Financial Inc. and Global Trading Systems LLC were buyers that helped U.S. stocks rebound midday from their early slump.

   

  “We were catching those falling knives,” said Ari Rubenstein, co-founder of Global Trading Systems.

  Actually no. What happened is that in early trading the entire market was in freefall, and the only thing that saved it was the various major market indices hitting their limit down levels for the first time in history – not even during the Flash Crash of 2010 did this happen. The following Nanex chart documents this beyond a doubt.

  

   

  If HFTs did anything, it was merely to frontrun the buy orders once the selling wave – halted thanks to limit downs being hit – had exhausted itself, and the buying scramble was unleashed around 9:35am leading to a 5% move in less than 10 minutes! It was here that Virtu made its colossal profits, however not from taking the least amount of risk, but merely from frontrunning order flow into a stil chaotic market with gargantuan bid-ask spreads, which incidentally not only does not provide liquidity, but reduces it as it competes with other buy offers for any market offers, also known as “providers” of liquidity, only to immediately flip the transaction to those buyers which Virtu knew with 100% certainty were just behind it. In any other market this would be illegal, except for one in which Reg NMS has made such frontrunning perfectly legal (courtesy of billions spent by the same HFTs who now benefit from it).

  So what was the real contribution of HFTs: an unprecedented failure of ETFs to trade with their underlying securities and vice versa. As we said yesterday: “for minutes at a time, there was an unprecedented disconnect in ETF fair value as hedge funds sold off ETFs however correlation arbitrageurs were unable to capitalize on the discrepancy with the underlying leading to historic, and extremely lucrative divergences.”

  Others added:

  … experts are still scratching their heads over what may have caused these ETFs to nosedive. One possible explanation is that liquidity providers — think high-speed traders and other Wall Street firms — charged with stabilizing the market weren’t there when needed. That’s what happened during the flash crash of 2010. “When markets get hairy, sometimes those liquidity providers step out of the way to avoid getting run over,” said Matt Hougan, CEO of ETF.com.

  So while we await for the first clear break of the ETF model, thanks to none other than HFTs, here is a visual example of what really happened: some 220 ETFs which all fell by 10% yesterday!

  

   

  But it wasn’t just the “transitory” failure of the ETF model: yesterday the Nasdaq ETF, the QQQ, had its widest 1 minute price swing in history. Yes, the NASDAQ!
  

  

   

  And just in case there is still any confusion if yesterday’s event was indeed a flash crash, the answer is yes, most certainly, as can be seen by the 15% tumble in QQQs right at the open. That, ladies and gentlemen, is the definition of a flash crash.

  

  Again: thank you HFTs.

  With that we leave matters into the SEC’s capable hands which we know will do absolutely nothing until the time comes when the next marketwide crash does not see a promptly rebound, and the time to finally point the finger at the HFTs comes. It’s just a matter of time, plus someone has to be a scapegoat for the real, and biggest, market manipulator in history: the Federal Reserve.

  And since, naturally, the complicit and corrupt SEC won’t do anything, expect another wave of retail investors to drop out of the market forever and to never come back, having seen yet again what a truly broken and rigged casino it has become.

  Finally, while we are delighted that firms like Virtu make outside profits on days in which the market crashes and leads to untold losses for retail investors, we have just one simple request – please don’t take us for fools anymore:  by now everyone knows all of your tricks, and can see right through your bullshit.

  So, dear Virtu, frontrun whoever you have to, other HFTs, hedge funds, mutual funds, or whoever else is left in this quote-unquote market, and have another Madoff year (one with zero trading losses) but you will have to do it without what was once called the “investing public.” They are now permanently gone until two things happen: i) the market is once again a market, not artificially propped up by $14 trillion in central bank liquidity which makes every asset “price” a illusion, and ii) HFT frontrunning is no longer legal, endorsed and blessed by the SEC, the regulators and all law enforcement agencies.

  

  

  

  

  

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• The Raging Fire Within

  I’ve been trading the stock market for nearly thirty years, virtually non-stop. Today (that is, Monday, August 24) easily ranks in the top five strangest, craziest days in the thousands upon thousands of trading days I’ve ever witnessed. I felt like I was entering a cage of gorillas that had just ingested a large quantity of PCP. It felt dangerous and really, really unpredictable.

  As I mentioned on my lengthy Saturday post:

  I expect (and, again, hope – – because, God forgive me, I’m actually long five ETFs in size right now) we get a meaningful relief rally, carrying us up to the psychologically-important 17,000 level. At that point, please don’t be anywhere between me and my keyboard, because I am going to be shorting anything with a ticker symbol in size.

  Well, God most certainly did not forgive me. If this permabear’s time machine was working, he’d go back to Thursday morning, warn the slightly-younger Tim to not cover a single position, and further warn him not to buy a single thing.

  Instead, I waited sleeplessly through Sunday night and early Monday morning for the opening bell to see how big a chunk of flesh those longs would take out of my 55 (much smaller) short positions. Well, the “tax” was quite hefty. Hedging as I did wiped out half of the profits I would have had otherwise, just as covering wiped out half my profits the prior Friday. I had relinquished tens of thousands of dollars of extra profit just to be – – well – – “safe.”

  

  I think we can all agree that approximately nobody anticipated the Dow falling 1,000 points right from the start of Monday morning. Frankly, the kind of “lift” I am seeing at the moment I am typing this (with the ES up 42 points) is more along the lines of what I thought would happen.

  But the past few days have generated countless stories of triumph or woe, because in a market this volatile, you are going to have some accidental millionaires, and you’re going to have some people absolutely wiped out, never to enter the markets again.  Keep in mind the VIX was at 10 – 10!!!!!! – only a few weeks ago, and today it roared into the mid-50s. This is without precedent.

  I tend to think in metaphors and analogs, so here is what I have in mind for your consideration: think about a forest. In a large forest, from time to time, there are naturally-occurring fires. These take place due to, say, a lightning strike, and what happens is that all the dry underbrush lights up and damages the forest to a certain degree. Some trees are killed. Some animals are killed. There is loss.

  But, once the fire burns out of its own accord, life begins anew. The soil is rich with nutrients. More sunlight gets through to the surviving trees, and they flourish. The forest grows stronger. And, sooner or later, another fire will take place, but through this repeating cycle, in spite of Bambi getting killed from time to time, things improve and are relatively stable.

  The same can be said for a financial market which is allowed to rise and fall based on naturally-occurring market forces. Some people get hurt along the way. Some people prosper. But, on the whole, the system works, and it works in such a way that it is fair and, in the grand scheme of things, beneficial.

  What we have, instead, is a forest that hasn’t been allowed to catch fire. The forest has been drenched with water every day, for years on end, to ensure that no spark can take hold. Lightning still takes place, but it is simply snuffed out on wet tinder. The layers of dead limbs, leaves, and other crinkly detritus accumulate on the ground, and soon you have a forest that is several feet deep in tinder.

  So, in this instance, when a spark manages to get through, you don’t have a run-of-the-mill fire: you have an apocalypse. The natural give-and-take of the organic system has been suppressed, and a towering inferno rages with a ferocity that seems surreal. You have, at long last, a calamity on your hands.

  And that, my friends, is that we’ve been witnessing the past few trading days. Fire Marshall Yellen (and retired Fire Marshall Bernanke) have utterly perverted the natural order of things, and we are only now beginning to pay the price. The fire, I firmly believe, has only just started. We will indeed have some violent relief rallies along the way, but as we look at charts like these……….

  

  

  ……….my only conclusion is that the sensational bearish setups are firmly in place and, once the bounce is complete, you will be witness to a fury of plunging price quotes that will, in the end, prove that Monday, August 24th, was simply a shot across the bow.

  

  

  

  

• Brazil's Economy Is Now A Job Destruction Machine

  In more ways than one (or two, or three) Brazil is the poster child for the global emerging market unwind that, thanks to China’s yuan devaluation, has accelerated dramatically over the course of the last week. 

  To be sure, the combination of slowing demand from China, the (now lower) possibility of a Fed rate hike, and, perhaps most importantly, the end of the commodities supercycle which has seen prices crash to their lowest levels of the 21st century, would be more than enough to put Latin America’s most important economy into a tailspin.

  But unfortunately, a political crisis stemming from allegations of fiscal book cooking and corruption charges tied to Petrobras where President Dilma Rousseff was chairwoman for seven years have exacerbated the country’s woes and recently, Brazilians went (back) to the streets by the hundreds of thousands to call for Rousseff’s impeachment. 

  

  The fallout for the real economy has been catastrophic and indeed Brazilians suffered through the worst growth-inflation outcome (i.e. stagflation) in over a decade during Q2. Whether or not Rousseff can survive (politically speaking, we hope) and whether or not the government can hit primary fiscal surplus targets is an open question, but as we noted on Thursday, the populace is under tremendous pressure in the meantime with unemployment rising for a seventh consecutive month and soaring to its highest level in half a decade in July.

  On that note, we bring you the following chart and commentary from Barclays which underscores precisely what we said last month, namely that Brazil may well be in the midst a depression:

  

  In July, 157,905 jobs were eliminated in Brazil, compared to the creation of 11,796 positions in July 2014, according to data from CAGED, Brazil’s employment register. Year-to-date, 547,738 job positions have been eliminated (versus the creation of 504,914 jobs in the same period of 2014). In seasonally adjusted terms, today’s print is compatible with 140,939 job eliminations, pretty close to the historical low of -154,355 in June (Figure 1).

   

  Sector-wise, the industrial and retail sectors accumulate the largest job eliminations, which together sums up to 454k. The construction sector follows with a job destruction of 152k, and the only positive highlight is the agricultural sector, which created 99k formal jobs (Figure 2).

   

  The magnitude of the deterioration of the labor market continues to surprise in Brazil. This week the unemployment rate rose by the fastest pace in the historical series, with the data showing that even more people are looking for job positions, however without finding them (see Brazil unemployment rate: Increased pace of deterioration).

   

  The consequence of this is an even more prolonged recession, as disposable income falls and household consumption contracts. Coupled with business confidence indexes for August showing further drops to minimum-lows, this suggests that the worst in terms of growth is still ahead of us.

  Which means that BofAML is exactly right to say that out of all the charts one cares to examine for Brazil, the most important one may ultimately be this:

  

  

  

  

  

  

• The Raping Of America: Mile Markers On The Road To Fascism

  Submitted by John Whitehead via The Rutherford Institute,

  “Freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed.”—Martin Luther King Jr.

  There’s an ill will blowing across the country. The economy is tanking. The people are directionless, and politics provides no answer. And like former regimes, the militarized police have stepped up to provide a façade of law and order manifested by an overt violence against the citizenry.

  Despite the revelations of the past several years, nothing has changed to push back against the American police state. Our freedoms—especially the Fourth Amendment—continue to be choked out by a prevailing view among government bureaucrats that they have the right to search, seize, strip, scan, spy on, probe, pat down, taser, and arrest any individual at any time and for the slightest provocation.

  Despite the recent outrage and protests, nothing has changed to restore us to our rightful role as having dominion over our bodies, our lives and our property, especially when it comes to interactions with the government.

  Forced cavity searches, forced colonoscopies, forced blood draws, forced breath-alcohol tests, forced DNA extractions, forced eye scans, forced inclusion in biometric databases—these are just a few ways in which Americans continue to be reminded that we have no control over what happens to our bodies during an encounter with government officials. Thus far, the courts have done little to preserve our Fourth Amendment rights, let alone what shreds of bodily integrity remain to us.

  Indeed, on a daily basis, Americans are being forced to relinquish the most intimate details of who we are—our biological makeup, our genetic blueprints, and our biometrics (facial characteristics and structure, fingerprints, iris scans, etc.)—in order to clear the nearly insurmountable hurdle that increasingly defines life in the United States.

  In other words, we are all guilty until proven innocent.

  Worst of all, it seems as if nothing will change as long as the American people remain distracted by politics, divided by their own prejudices, and brainwashed into believing that the Constitution still reigns supreme as the law of the land, when in fact, we have almost completed the shift into fascism.

  In other words, despite our occasional bursts of outrage over abusive police practices, sporadic calls for government reform, and periodic bouts of awareness that all is not what it seems, the police state continues to march steadily onward.

  Such is life in America today that individuals are being threatened with arrest and carted off to jail for the least hint of noncompliance, homes are being raided by police under the slightest pretext, and roadside police stops have devolved into government-sanctioned exercises in humiliation and degradation with a complete disregard for privacy and human dignity.

  Consider, for example, what happened to Charnesia Corley after allegedly being pulled over by Texas police for “rolling” through a stop sign. Claiming they smelled marijuana, police handcuffed Corley, placed her in the back of the police cruiser, and then searched her car for almost an hour. They found nothing in the car.

  As the Houston Chronicle reported:

  Returning to his car where Corley was held, the deputy again said he smelled marijuana and called in a female deputy to conduct a cavity search. When the female deputy arrived, she told Corley to pull her pants down, but Corley protested because she was cuffed and had no underwear on. The deputy ordered Corley to bend over, pulled down her pants and began to search her. Then…Corley stood up and protested, so the deputy threw her to the ground and restrained her while another female was called in to assist. When backup arrived, each deputy held one of Corley’s legs apart to conduct the probe.

  As shocking and disturbing as it seems, Corley’s roadside cavity search is becoming par for the course in an age in which police are taught to have no respect for the citizenry’s bodily integrity.

  For instance, 38-year-old Angel Dobbs and her 24-year-old niece, Ashley, were pulled over by a Texas state trooper on July 13, 2012, allegedly for flicking cigarette butts out of the car window. Insisting that he smelled marijuana, he proceeded to interrogate them and search the car. Despite the fact that both women denied smoking or possessing any marijuana, the police officer then called in a female trooper, who carried out a roadside cavity search, sticking her fingers into the older woman’s anus and vagina, then performing the same procedure on the younger woman, wearing the same pair of gloves. No marijuana was found.

  David Eckert was forced to undergo an anal cavity search, three enemas, and a colonoscopy after allegedly failing to yield to a stop sign at a Wal-Mart parking lot. Cops justified the searches on the grounds that they suspected Eckert was carrying drugs because his “posture [was] erect” and “he kept his legs together.” No drugs were found.

  Leila Tarantino was subjected to two roadside strip searches in plain view of passing traffic during a routine traffic stop, while her two children—ages 1 and 4—waited inside her car. During the second strip search, presumably in an effort to ferret out drugs, a female officer “forcibly removed” a tampon from Tarantino. Nothing illegal was found. Nevertheless, such searches have been sanctioned by the courts, especially if accompanied by a search warrant (which is easily procured), as justified in the government’s pursuit of drugs and weapons.

  Meanwhile, four Milwaukee police officers were charged with carrying out rectal searches of suspects on the street and in police district stations over the course of several years. One of the officers was accused of conducting searches of men’s anal and scrotal areas, often inserting his fingers into their rectums and leaving some of his victims with bleeding rectums. Halfway across the country, the city of Oakland, California, agreed to pay $4.6 million to 39 men who had their pants pulled down by police on city streets between 2002 and 2009.

  It’s gotten so bad that you don’t even have to be suspected of possessing drugs to be subjected to a strip search.

  In the wake of the U.S. Supreme Court’s ruling in Florence v. Burlison, any person who is arrested and processed at a jail house, regardless of the severity of his or her offense (i.e., they can be guilty of nothing more than a minor traffic offense), can be subjected to a strip search by police or jail officials without reasonable suspicion that the arrestee is carrying a weapon or contraband.

  Examples of minor infractions which have resulted in strip searches include: individuals arrested for driving with a noisy muffler, driving with an inoperable headlight, failing to use a turn signal, riding a bicycle without an audible bell, making an improper left turn, engaging in an antiwar demonstration (the individual searched was a nun, a Sister of Divine Providence for 50 years). Police have also carried out strip searches for passing a bad check, dog leash violations, filing a false police report, failing to produce a driver’s license after making an illegal left turn, having outstanding parking tickets, and public intoxication. A failure to pay child support can also result in a strip search.

  It must be remembered that the Fourth Amendment to the U.S. Constitution was intended to prevent government agents from searching an individual’s person or property without a warrant and probable cause (evidence that some kind of criminal activity was afoot). While the literal purpose of the amendment is to protect our property and our bodies from unwarranted government intrusion, the moral intention behind it is to protect our human dignity.

  Unfortunately, the indignities being heaped upon us by the architects and agents of the American police state—whether or not we’ve done anything wrong—don’t end with roadside strip searches. They’re just a foretaste of what is to come.

  As I make clear in my book Battlefield America: The War on the American People, the government doesn’t need to strip you naked by the side of the road in order to render you helpless. It has other methods, less subtle perhaps but equally humiliating, devastating and mind-altering, of stripping you of your independence, robbing you of your dignity, and undermining your rights.

  With every court ruling that allows the government to operate above the rule of law, every piece of legislation that limits our freedoms, and every act of government wrongdoing that goes unpunished, we’re slowly being conditioned to a society in which we have little real control over our lives. As Rod Serling, creator of the Twilight Zone and an insightful commentator on human nature, once observed, “We’re developing a new citizenry. One that will be very selective about cereals and automobiles, but won’t be able to think.”

  Indeed, not only are we developing a new citizenry incapable of thinking for themselves, we’re also instilling in them a complete and utter reliance on the government and its corporate partners to do everything for them—tell them what to eat, what to wear, how to think, what to believe, how long to sleep, who to vote for, whom to associate with, and on and on.

  In this way, we have created a welfare state, a nanny state, a police state, a surveillance state, an electronic concentration camp—call it what you will, the meaning is the same: in our quest for less personal responsibility, a greater sense of security, and no burdensome obligations to each other or to future generations, we have created a society in which we have no true freedom.

  Government surveillance, police abuse, SWAT team raids, economic instability, asset forfeiture schemes, pork barrel legislation, militarized police, drones, endless wars, private prisons, involuntary detentions, biometrics databases, free speech zones, etc.: these are mile markers on the road to a fascist state where citizens are treated like cattle, to be branded and eventually led to the slaughterhouse.

  If there is any hope to be found it will be found in local, grassroots activism. In the words of Martin Luther King Jr., it’s time for “militant nonviolent resistance.”

  First, however, Americans must break free of the apathy-inducing turpor of politics, entertainment spectacles and manufactured news. Only once we are free of the chains that bind us—or to be more exact, the chains that “blind” us—can we become actively aware of the injustices taking place around us and demand freedom of our oppressors.

  

  

  

  

  

• Chinese Stocks Are Crashing; Yuan Devalues, Deposit Rate Spikes To Record High, Japan Denies "G7 Response" Planned

  Following yesterday's bloodbath (and the continued carnage around the world), AsiaPac stocks are lower with Japan unable to mount any sustained bounce despite every effort to lift JPY. The propaganda-fest is in full swing as Amari claims JPY is safe-haven asset and Aso denies any coordinated G7 response is being planned (which means they are all feverishly trying to figure out how to 'save' the world again from a 4-day stock drop). China is ugly with stocks down hard in the pre-open (CSI-300 -4.3%) as offshore Yuan depo rates spike to 22.9% – a record high – as liquidity outflows must be accelerating (as PBOC adds another CBNY150bn liquidity). China devalues Yuan 0.2% – most in 11 days.

  Carnage –

  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 6.4% TO 3,004.13
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 6.3% TO 3,070.01

  This is the 5th day of crashing Chinese stocks in a row…

  

   

  Chinese Stocks are down 14% since Friday!!

  

   

  Year-to-date, Shangahi is now down 6.2% and CSI-300 (China's S&P) is down a stunning 15%!

  

   

  Where China will stop (or atleast aim for) – when QE-Lite (PSL) was unleashed…

  

   

  The Japanese are in full propaganda mode…

  • *SUGA: WATCHING MARKET MOVES ATTENTIVELY
  • *ASO: FX MOVES HAVE BEEN ROUGH ("rough" – well that's one word for complete and utter carnage)
  • *ASO: CONTINUING TO CLOSELY WATCH MARKET MOVES
  • *ASO: I HAVEN'T CONTACTED U.S. TREASURY (which means he has!)
  • *ASO: NOT AT STAGE FOR G-7, G-20 RESPONSE (which means there is)
  • *AMARI: UP TO BOJ TO DECIDE ON ADDL EASING (how's that last QQE2 working out?)
  • *AMARI: YEN IS BEING BOUGHT AS SAFE ASSET (nope it's a forced carry unwind sorry!)
  • *AMARI:YEN SEEN AS SAFE ASSET SHOWS VALUATION OF JAPAN ECONOMY (what utter crap!)

  So we await the coordinated response to the global vicious circle of carry unwinds and forced liquidations… but remember, RRR cuts so far have done absolutely nothing to hold back wave after wave of frenzied malicious Chinese sellers just wanting out of the ponzi.

  The talk is not working as Chinese stocks are weak in the pre-open…

  • *FTSE CHINA A50 SEPT. FUTURES DROP 3.4% IN SINGAPORE
  • *CHINA CSI 300 STOCK-INDEX FUTURES FALL 4.3%

  

  Some good news… China is deleveraging…

  • *SHANGHAI MARGIN DEBT DECLINES TO LOWEST IN FIVE MONTHS

  As China devalues Yuan by most in 11 days..

  • *PBOC WEAKENS YUAN FIXING BY 0.2%, MOST SINCE AUG. 13
  • *CHINA SETS YUAN REFERENCE RATE AT 6.3987 AGAINST U.S. DOLLAR

  

  And China adds yet more liquidity…

  • *PBOC TO INJECT 150B YUAN WITH 7-DAY REVERSE REPOS: TRADER

  The desperation to keep liquidity from flooding out is very evident:

  • *ONE-WEEK OFFSHORE YUAN DEPOSIT RATE JUMPS 840 BPS TO 22.9%
  • *YUAN DEPOSIT RATE HEADED FOR RECORD CLOSE IN HONG KONG

  

   

  "Some are converting yuan back into USD or HKD amid the devaluation,’’ says Lawrence Kung, head of deposits department at Wing Lung Bank in Hong Kong

  *  *  *

  Hope continues for a huge broad-based RRR cut but The PBOC – just as it said – remains fixed on small targeted liquidity injections. This will not please the 'people' or Jim Cramer… "they know nothing."

  *  *  *

  And finally, we could not have put it better than The Onion as they explain how the "Shoddy Chinese-Made Stock Market Collapses"…

  Proving to be just as flimsy and precarious as many observers had previously warned, the Chinese-made Shanghai Composite index completely collapsed Monday, sources confirmed.

   

  “Sure, it looked fine from the outside, but anybody who saw it up close knew that it was of such poor quality that it wasn’t built to last,” said Allen Sigman of the London School of Economics, adding that the stock market, which he described as a crude knockoff of Western versions, was practically slapped together overnight and featured countless obvious structural weak points.

   

  “They pretty much ignored regulations, and inspections were a joke. The only surprise is that it didn’t fall apart sooner.” Sigman added that he just hopes there weren’t too many people who were hurt in the disaster.

  *  *  *

  We assume that is satire… though it does seem a little too real.

  

  

  

  

  

• Paul Craig Roberts: Central Banks Have Become A Corrupting Force

  Authored by Paul Craig Roberts and Dave Kranzler via PaulCraigRoberts.org,

  Are we witnessing the corruption of central banks? Are we observing the money-creating powers of central banks being used to drive up prices in the stock market for the benefit of the mega-rich?

  These questions came to mind when we learned that the central bank of Switzerland, the Swiss National Bank, purchased 3,300,000 shares of Apple stock in the first quarter of this year, adding 500,000 shares in the second quarter. Smart money would have been selling, not buying.

  It turns out that the Swiss central bank, in addition to its Apple stock, holds very large equity positions, ranging from $250,000,000 to $637,000,000, in numerous US corporations — Exxon Mobil, Microsoft, Google, Johnson & Johnson, General Electric, Procter & Gamble, Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, Pepsico, Coca Cola, Disney, Valeant, IBM, Gilead, Amazon.

  Among this list of the Swiss central bank’s holdings are stocks which are responsible for more than 100% of the year-to-date rise in the S&P 500 prior to the latest sell-off.

  What is going on here?

  The purpose of central banks was to serve as a “lender of last resort” to commercial banks faced with a run on the bank by depositors demanding cash withdrawals of their deposits.

  Banks would call in loans in an effort to raise cash to pay off depositors. Businesses would fail, and the banks would fail from their inability to pay depositors their money on demand.

  As time passed, this rationale for a central bank was made redundant by government deposit insurance for bank depositors, and central banks found additional functions for their existence. The Federal Reserve, for example, under the Humphrey-Hawkins Act, is responsible for maintaining full employment and low inflation. By the time this legislation was passed, the worsening “Phillips Curve tradeoffs” between inflation and employment had made the goals inconsistent. The result was the introduction by the Reagan administration of the supply-side economic policy that cured the simultaneously rising inflation and unemployment.

  Neither the Federal Reserve’s charter nor the Humphrey-Hawkins Act says that the Federal Reserve is supposed to stabilize the stock market by purchasing stocks. The Federal Reserve is supposed to buy and sell bonds in open market operations in order to encourage employment with lower interest rates or to restrict inflation with higher interest rates.

  If central banks purchase stocks in order to support equity prices, what is the point of having a stock market? The central bank’s ability to create money to support stock prices negates the price discovery function of the stock market.

  The problem with central banks is that humans are fallible, including the chairman of the Federal Reserve Board and all the board members and staff. Nobel prize-winner Milton Friedman and Anna Schwartz established that the Great Depression was the consequence of the failure of the Federal Reserve to expand monetary policy sufficiently to offset the restriction of the money supply due to bank failure. When a bank failed in the pre-deposit insurance era, the money supply would shrink by the amount of the bank’s deposits. During the Great Depression, thousands of banks failed, wiping out the purchasing power of millions of Americans and the credit creating power of thousands of banks.

  The Fed is prohibited from buying equities by the Federal Reserve Act. But an amendment in 2010 – Section 13(3) – was enacted to permit the Fed to buy AIG’s insolvent Maiden Lane assets. This amendment also created a loophole which enables the Fed to lend money to entities that can use the funds to buy stocks. Thus, the Swiss central bank could be operating as an agent of the Federal Reserve.

  If central banks cannot properly conduct monetary policy, how can they conduct an equity policy? Some astute observers believe that the Swiss National Bank is acting as an agent for the Federal Reserve and purchases large blocs of US equities at critical times to arrest stock market declines that would puncture the propagandized belief that all is fine here in the US economy.

  We know that the US government has a “plunge protection team” consisting of the US Treasury and Federal Reserve. The purpose of this team is to prevent unwanted stock market crashes.

  Is the current stock market decline welcome or unwelcome?

  At this point we do not know. In order to keep the dollar up, the basis of US power, the Federal Reserve has promised to raise interest rates, but always in the future. The latest future is next month. The belief that a hike in interest rates is in the cards keeps the US dollar from losing exchange value in relation to other currencies, thus preventing a flight from the dollar that would reduce the Uni-power to Third World status.

  The Federal Reserve can say that the stock market decline indicates that the recovery is in doubt and requires more stimulus. The prospect of more liquidity could drive the stock market back up. As asset bubbles are in the way of the Fed’s policy, a decline in stock prices removes the equity market bubble and enables the Fed to print more money and start the process up again.

  On the other hand, the stock market decline last Thursday and Friday could indicate that the players in the market have comprehended that the stock market is an artificially inflated bubble that has no real basis. Once the psychology is destroyed, flight sets in.

  If flight turns out to be the case, it will be interesting to see if central bank liquidity and purchases of stocks can stop the rout.

  

  

  

  

  

• Is This The Next Dollar Peg To Fall?

  On Monday, we showed you the dramatic visual evidence in support of Kazakh PM Karim Massimov’s contention that “at the end of the day, most of the oil-producing countries will go into the free floating regime [including Saudi Arabia and the United Arab Emirates because] for the next three to five, maybe seven years, the price for commodities will [not] come back to the level that it used to be at in 2014.” 

  Expectations for an FX regime change in Saudi Arabia in the face of a ballooning budget gap and the first current account deficit in a decade are readily apparent in riyal 12-month forwards and just to drive the point home, have a look at the following, which shows that anticipation for a dirham deval is running at a veritable fever pitch: 

  

  For more on the genesis of the “new era”, see “Why It Really All Comes Down To The Death Of The Petrodollar.”

  

  

  

  

  

• Aug 25 – China Bloodbath Rattles Global Markets

  EMOTION MOVING MARKETS NOW: 3/100 EXTREME FEAR

  PREVIOUS CLOSE: 5/100 EXTREME FEAR

  ONE WEEK AGO: 12/100 EXTREME FEAR

  ONE MONTH AGO: 10/100 EXTREME FEAR

  ONE YEAR AGO: 34/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 10.07% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility: EXTREME FEAR The CBOE Volatility Index (VIX) is at 40.74 and indicates that investors remain concerned about declines in the stock market.

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

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – IT’S THE JERKS

   

  UNUSUAL ACTIVITY

  IDTI Vol weakness SEP 19 PUT ACTIVITY @$1.25 on offer 4500+ Contracts

  SLB SEP 80 PUT ACTIVITY @$1.31 on offer 4000+ Contracts

  PYPL SEP WEEKLY4 PUTS on the BID @$1.35 3700 Contracts

  SPLS DEC 15 CALLS on the OFFER @$.90-.95 6000 Contracts

  SEMI – CEO Purchased $300k+ total

  AVHI Director Purchase 1,920 @$ 13.9989 Purchase 1,280 @$13.99

  More Unusual Activity…

   

  HEADLINES

   

  China bloodbath rattles global markets

  Stocks, dollar softer as commodities hammered

  WTI settles at 6.5yr lows at $38.24/bbl

  US 10y yield briefly dips below 2% on flight to safety

  VIX spikes to highest in three years

  WH: US Treasury closely monitoring financial markets

  Ex US Tsy Sec Summers: ‘Far from clear’ next Fed move a hike

  SF Fed: Fed not likely to be misled by noise in GDP and PCE data

  NABE Policy Survey: 77% See Liftoff in 2015; 37% Expect Sept

  DoubleLine’s Gundlach sees another ‘major leg down’ in US stocks

  German Dax equity index technically enters bear market

  BoE asked to review code of conduct for rate-setters

  ECB PSPP: EUR279.761B (Prev EUR269.875B)

  ECB CBPP3: EUR1090.179B (Prev EUR108.059B)

  ECB ABSPP: EUR11.218B (Prev EUR10.961B)

   

  GOVERNMENTS/CENTRAL BANKS

  SF Fed: Fed not likely to be misled by noise in GDP and PCE data

  White House: US Treasury Department is closely monitoring financial markets –Livesquawk

  Fed RRP (24 Aug): $73.8bn and 32 bidders (prev 35 bidders, $92.4bn) –Livesquawk

  Ex US Tsy Sec Summers: ‘Far from clear’ next Fed move a hike –Twitter

  NABE Policy Survey: 77% See Liftoff in 2015; 37% Expect Sept –MNI

  FORECASTS: Barclays pushes call for Fed hike from Sept to March -FT

  BlackRock’s Rieder: ‘Window is closing’ on Fed to move in September –Rtrs

  LOOK AHEAD: What to expect from the Fed’s Jackson Hole meeting –BBG

  UK FinMin Osborne: China not a specific G20 item –ForexLive

  BoE asked to review code of conduct for rate-setters –CityAM

  OVERNIGHT: Japan Abe: Sympathises with BoJ difficulty in hitting infl tgt amid oil drop –MNI

  GREECE: Popular Unity party will get the baton to try and form a government –Koutsomitis

  GREECE: Moody’s: Tsipras resignation a credit positive for Greece

  GEOPOLITICS

  North, South Korea reach deal to ease tensions –Yonhap

  FIXED INCOME

  US 10y yield briefly dips below 2%, first time since April –WSJ

  US 10y B/E rate below 1.5%, first time since May 2009 –FT

  US HY squeezed by rush to exit –FT

  ECB PSPP (21 Aug): EUR279.761B (Prev EUR269.875B)

  ECB CBPP3: EUR1090.179B (Prev EUR108.059B)

  ECB ABSPP: EUR11.218B (Prev EUR10.961B)

  Eonia closes -0.126% (prev -0.119) –Livesquawk

  UK DMO planning 2 short, 2 medium, 3 long, 3 linker issues next Qtr –MNI

  FX

  USD: Dollar under pressure after China rout –Rtrs

  USD COMMENT: The Fed is looking at a very different dollar than Wall St –BBG

  EUR: Euro climbs to new 8-month high vs USD –FT

  EUR COMMENT: Euro shorts still have a big buffer to play with –ForexLive

  CAD: Canadian Dollar Hits 11-Year-Low Against US Dollar –WSJ

  ILS: Shekel on the up after rate decision –FT

  ZAR: South Africa rand hits all-time low against the dollar –BBC

  ZAR: SARB Says Could Consider FX Intervention If Fin. Stability Is Risked

  HKD: Bears look to HK dollar risks –FT

  ENERGY/COMMODITIES

  CRUDE: WTI futures settle 5.5% lower at $38.24 per barrel –Livesquawk

  CRUDE: Brent futures settle 6.1% lower at $42.69 per barrel –Livesquawk

  CRUDE: Oil slides to 6-year low as commodities tumble –FT

  CRUDE: East Libyan state oil firm wants to discuss contracts –Malta Times

  COMMODS: Broad commodities selloff after China Black Monday — WSJ

  METALS: Gold climbs to fresh 7-week high as global equities, U.S. dollar tumble –Investing

  EQUITIES

  COMMENT: DoubleLine’s Gundlach sees another ‘major leg down’ in US equities –Rtrs

  VOLS: VIX rises to highest level in over 3 years –MW

  BIOTECH: US biotech index enters bear market –FT

  M&A: Southern Co becomes No.2 U.S. utility with $8 bln AGL deal –Rtrs

  M&A: FTC clears Pfizer acquisition of Hospira –StreetInsider

  M&A: Monsanto sweetens offer for Syngenta to CHF470 a share –Rtrs

  M&A: Markit to Buy Foreign Exchange Trading Company DealHub –WSJ

  TECH: Apple’s Cook: Still seeing strong growth in China –CNBC

  TECH: Apple CEO Tim Cook may have violated SEC rules with Jim Cramer email –MW

  O&G: Shell eyes Iran, to pay debt when sanctions end –Rtrs

  SUPERMARKETS: Carrefour Announces Planned Acquisition of Rue du Commerce –BW

  EXCHANGES: Nasdaq poised to launch FX trading platform-top executive –StreetInsider

  AUTOS: GM China joint venture building $470 mln green car plant –Rtrs

  EMERGING MARKETS

  CHINA: China stocks drop 8.5% –Guardian

  CHINA PRIMER: China’s latest stock market crash: the basics

  China NDRC: China expects economic growth to be stable in H2 2015 –ForexLive

   

  China pension fund to invest in stock market –BBC

   

  

  

  

  

  

• The Stunning Comparisons Between The "Flash Crash" Of August 24, 2015 And May 6, 2010

  Following today’s stunning not one but countless flash crashes, many have asked: just how was the flash crash of August 24, 2015 different from that of May 6, 2010. The answer is shown in the Nanex chart below, and the simple summary is that 2015’s was orders of magnitude worse than 2010’s as a result of E-Mini liquidity that was orders of magnitude worse throughout the entire day.

  In fact, the trough liquidity on May 6 is where ES liquidity was throughout the entire day on August 24, 2015.

  

   

  The outcome of this total liquidity devastation was what we summarized just after the open:

  Curious why few if any traders can actually execute any trades, whether buys or sells? The reason is that despite the relative calmness of the index prints, what is going on beneath the surface is an unprecedented wave of constant halt and unhalts as all stop levels were taken out, many in circuit breaker territory, making it virtually impossible for any matching enginge to, well, match buyers and sellers. The resulting halts made it impossible for regular traders to step in, requiring central banks to buy via the CME’s Central Bank Incentive Program, to restore some market stability.

  

   

  So to be technically accurate, what happened in May 2010 was one marketwide flash crash, while today we had a market paralysis which was the direct result of countless distributed, isolated mini flash events, all of which precipitated the market’s failure for the first 30 minutes of trading.

  Nanex provides some other truly amazing charts showing the first minutes of trading and how there was practically no market for a period of about 30 minutes due to every single HFT algo going haywire almost as the same time…

  At the open in $AAPL today, the price varied between $92 and $97. Many, many times. Each dot a trade pic.twitter.com/zOQ5eYYzgJ

  — Eric Scott Hunsader (@nanexllc) August 24, 2015

  $GE liquidity during the open. Wow. pic.twitter.com/Tb8KOf6l56

  — Eric Scott Hunsader (@nanexllc) August 24, 2015

  Opening liquidity in $JPM was crazy: pic.twitter.com/5xpad4L9Qk

  — Eric Scott Hunsader (@nanexllc) August 24, 2015

  … in the process leading to what may have been the most dramatic collapse in ETF logic to date.

  The market farce was so profound, and the outcry from the handful of people who still care about “markets” large enough that even CNN had no choice but to opine:

  Normally there are a few dozen trading halts a day. But Monday wasn’t a normal day with 1,200 halts. “That’s huge. I’ve never seen that many halts,” said Dennis Dick, a market structure consultant at Bright Trading. Dick said he believes the stock market may have suffered even worse losses if it weren’t for the trading pauses. “The circuit breakers are designed to prevent a full-on flash crash. Those circuit breakers kind of saved the day,” he said.

  Maybe, then again, the circuit breakers gave us a glimpse into the ETF endgame:

  The circuit breakers were implemented more than 600 times on ETFs, the increasingly-popular securities that trade like stocks. ETFs hold a basket of stocks, removing the risk of betting on a single company. ETF.com examined the pricing action and discovered at least eight ETFs that showed “flash-crash” style drops at the opening of trading.

   

  * * *

  ETFs that experienced panic selling are far larger and wouldn’t be expected to have that kind of turbulence. For example, the iShares Select Dividend ETF (DVY) plummeted as much as 35% at its lows.

   

  That’s a stunning move considering this BlackRock (BLK)-backed ETF is worth over $13 billion and is focused on stable American stocks that have a long history of paying dividends.

   

  None of this ETF’s top holdings — like Lockheed Martin (LMT), Philip Morris Internationa (PM)l and McDonald’s (MCD) — suffered losses north of 11%.  It was even worse for the Guggenheim S&P 500 equal weight ETF (RSP). The $10 billion fund, which holds some well-known stocks like Chipotle (CMG) and ConAgra (CAG), plummeted nearly 43% at one point on Monday.

   

  Another popular ETF that seeks to capitalize on the booming cybersecurity business plummeted as much as 32%. The ETF, PureFunds ISE Cyber Security ETF (HACK), has a market value of more than $1.2 billion.

  Said otherwise, for minutes at a time, there was an unprecedented disconnect in ETF fair value as hedge funds sold off ETFs however correlation arbitrageurs were unable to capitalize on the discrepancy with the underlying leading to historic, and extremely lucrative divergences.

  At this point, experts are still scratching their heads over what may have caused these ETFs to nosedive. One possible explanation is that liquidity providers — think high-speed traders and other Wall Street firms — charged with stabilizing the market weren’t there when needed. That’s what happened during the flash crash of 2010.

   

  “When markets get hairy, sometimes those liquidity providers step out of the way to avoid getting run over,” said Matt Hougan, CEO of ETF.com. Despite the steep selloffs, Hougan said ETFs generally “functioned well” during the market difficulty.

  The bottom line, as Themis Trading’s Joe Saluzzi summarized, “Something went wrong here. Somewhere along the way, the ETF pricing model was broken today.” Noting that there are more than $3 trillion in ETF assets, Saluzzi said: “They better hope they don’t have a confidence problem there.”

  The good news is that with liquidity inevitably collapsing ever further to a state of near singularity with ongoing central bank interventions, and with markets broken beyond repaid, we will very soon have a repeat flash crash like today, one which will provide enough satisfactory answers to the question of just happened that lead to a market that was completely broken for nearly an hour, and where the VIX was so very off the charts, the CBOE was afraid to show it for at least thirty minutes.

  One thing is certain though: while the market dies a slow, painful, miserable death, the biggest HFTs will continue pocketing millions. Such as Virtu: “Virtu Financial Inc., one of the world’s largest high-frequency trading firms, was on track to have one of its biggest and most profitable days in history Monday amid a tumultuous 24 hours for world markets, according to its chief executive.”

  “Our firm is made for this kind of market,” said the CEO, Douglas Cifu.

  

  Correction: your firm made this kind of market.

  

  

  

  

  

• Behold: Insanity

  This is not normal… Dow futures moved over 4,500 points intraday today!!!

   

  

  

  

  

  

  

• Why Government Hates Cash

  Submitted by Joseph Salerno via The Mises Institute,

  In April it was announced that Greece was imposing a surcharge for all cash withdrawals from bank accounts to deter citizens from clearing out their accounts. So now the Greeks will have to pay one euro per 1,000 euros that they withdraw, which is one-tenth of a percent. It doesn’t seem very big, but the principle at work is extremely big because what they’re in effect doing is breaking the exchange rate between a unit of bank deposits and a unit of currency.

  Why would they do this? Why would they want to do this? Well, it’s one of the anti-cash policies that mainstream economists have vigorously been promoting.

  PAVING THE WAY FOR NEGATIVE INTEREST

  To make the calculations easier, and to illustrate the effect, let’s say that the Greek “surcharge” is ten dollars for every 100 dollars withdrawn. Now, instead of being able to convert one euro in your checking account into one euro in cash, on demand, you will only be able to buy one euro in cash by spending 1.10 euros in your bank accounts. That’s a negative 10-percent rate in some sense. That is to say that you can only take out one euro from the bank if you’re willing to pay 1.10 euros. So, you would only really get ninety cents for every dollar that you wanted to withdraw and that’s very significant because this means it will be more expensive to buy an item with cash than with bank deposits.

  At the same time, the Greek government made it very clear that if you deposit the cash in the banks, you don’t get 1.10 euros of bank money for every euro you deposit.

  So the system is now structured to lock the money in the banks. Now, what does that allow them to do? If you lose 10 percent every time you withdraw one euro in cash, they can lower the interest rate that you get on bank deposits to negative 5 percent, or negative 6 percent. You still wouldn’t withdraw your cash from the banks even if the interest rate went negative.

  What we are witnessing is a war on cash in which governments make it either illegal or inconvenient to use cash. This, in turn, allows governments the ability to spy on and regulate financial transactions more completely, while also allowing governments more leeway in manipulating the money supply.

  THE ORIGINS OF THE WAR ON CASH

  It all started really with the Bank Secrecy Act of 1970, passed in the US, which requires financial institutions in the United States to assist US government agencies in detecting and preventing money laundering. That was the rationale. Specifically, the act requires financial institutions to keep records of cash payments and file reports of cash purchases or negotiable instruments of more than $10,000 as a daily aggregate amount. Of course, this is all sold as a way of tracking criminals.

  The US government employs other means of making war on cash also. Up until 1945, there were 500 dollar bills, 1,000 dollar bills, and 10,000 dollar bills in circulation. There was even a 100,000 dollar bill in the 1930s with which banks made clearings between one another. The US government stopped issuing these bills in 1945 and by 1969 had withdrawn all from circulation. So, in the guise of fighting organized crime and money laundering, what’s actually occurred is that they made it very inconvenient to use cash. A one hundred dollar bill today has $15.50 worth of purchasing power in 1969 dollars, when they removed the last big bills.

  THE PROBLEM IS INTERNATIONAL

  The war on cash in Sweden has gone probably the furthest and Scandinavian governments in general are notable for their opposition to cash. In Swedish cities, tickets for public buses no longer can be purchased for cash; they must be purchased in advance by a cell phone or text message — in other words, via bank accounts.

  The deputy governor of the Swedish Central Bank gloated, before his retirement a few years back, that cash will survive “like the crocodile,” even though it may be forced to see its habitat gradually cut back.

  The analogy is apt since three of the four major Swedish banks combined have more than two-thirds of their offices no longer accepting or paying out cash. These three banks want to phase out the manual handling of cash at their offices at a very rapid pace and have been doing that since 2012.

  In France, opponents of cash tried to pass a law in 2012 which would restrict the use of cash from a maximum of 3,000 euros per exchange to 1,000. The law failed, but then there was the attack on Charlie Hebdo and on a Jewish supermarket, so immediately the state used this as a reason for getting the 1,000 maximum limit. They got their maximum limit. Why? Well, proponents claim that these attacks were partially financed by cash.

  The terrorists used cash to purchase some of the stuff they needed. No doubt, these murderers also wore shoes and clothing and used cell phones and cars during the planning and execution of their mayhem. Why not ban these things? A naked barefoot terrorist without communications is surely less effective than the fully clothed and equipped one.

  Finally, Switzerland, formerly a great bastion of economic liberty and financial privacy, has succumbed under the bare-knuckle tactics of the US government. The Swiss government has banned all cash payments of more than 100,000 francs (about $106,000), including transactions involving watches, real estate, precious metals, and cars. This was done under the threat of blacklisting by the Organization of Economic Development, with the US no doubt pushing behind the scenes. Transactions above 100,000 francs will now have to be processed through the banking system. The reason is to prevent the catch-all crime, of course, of money laundering.

  Chase Bank has also recently joined the war on cash. It’s the largest bank in the US, a subsidiary of JP Morgan Chase and Co., and according to Forbes, the world’s third largest public company. It also received $25 billion in bailout loans from the US Treasury. As of March, Chase began restricting the use of cash in selected markets. The new policy restricts borrowers from using cash to make payments on credit cards, mortgages, equity lines, and auto loans.

  Chase even goes as far as to prohibit the storage of cash in its safe deposit boxes. In a letter to its customers, dated April 1, 2015, pertaining to its “updated safe deposit box lease agreement,” one of the high-lighted items reads, “You agree not to store any cash or coins other than those found to have a collectible value.” Whether or not this pertains to gold and silver coins with no collectible value is not explained, but of course it does. As one observer warned, “This policy is unusual, but since Chase is the nation’s largest bank, I wouldn’t be surprised if we start seeing more of this in this era of sensitivity about funding terrorists and other illegal causes.” So, get your money out of those safe deposit boxes, your currency and probably your gold and silver.

  ONLY (SUPERVISED) SPENDING IS ALLOWED

  Gregory Mankiw, a prominent macroeconomist, came up with a scheme in 2009: the Fed would announce that a year from the date of the announcement, it intended to pick a numeral from 0 to 9 out of a hat. All currency with a serial number ending in that numeral, would instantly lose status as legal tender, causing the expected return on holding currency to plummet to -10 percent. This would allow the Fed to reduce interest rates below zero for a year or even more because people would happily loan money for say, -2 percent or -4 percent because that would stop them from losing 10 percent.

  Now the reason given by our rulers for suppressing cash is to keep society safe from terrorists, tax evaders, money launderers, drug cartels, and other villains real or imagined. The actual aim of the ?ood of laws restricting or even prohibiting the use of cash is to force the public to make payments through the financial system. This enables governments to expand their ability to spy on and keep track of their citizens’ most private financial dealings, in order to milk their citizens of every last dollar of tax payments that they claim are due.

  Other reasons for suppressing cash are (1) to prop up the unstable fractional reserve banking system, which is in a state of collapse all over the world, and (2) to give central banks the power to impose negative nominal interest rates. That is, to make you spend money by subtracting money from your bank account for every day you leave it in the bank account and don’t spend it.

  

  

  

  

  

• Did Tim Cook Violate Regulation "Fair Disclosure" By Emailing Jim Cramer To Save AAPL Stock This Morning

  Earlier today, as AAPL stock was plummeting and had lost a whopping $75 billion in market cap, dropping as low as $92/share, CNBC’s Jim Cramer pulled a rabit out of a hat, or in this case a previously undisclosed email out of his inbox. An email from AAPL CEO Tim Cook which said the following (as subsequently conveyed by Cramer to CNBC viewers):

  Jim,

   

  As you know, we don’t give mid-quarter updates and we rarely comment on moves in Apple stock. But I know your question is on the minds of many investors.

   

  I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August. Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last 2 weeks.

   

  Obviously I can’t predict the future, but our performance so far this quarter is reassuring. Additionally, I continue to believe that China represents an unprecedented opportunity over the long term as LTE penetration is very low and most importantly the growth of the middle class over the next several years will be huge.

   

  Tim

  While we are delighted by Tim Cook’s subjective take of AAPL’s Chinese prospects, we have a different question: where is the public filing that accompanies this letter which constitutes nothing short of a private business update with an outside, and unregulated by Apple, market cheerleader?

  Because as the AAPL reaction to Tim’s letter, which was clearly in Cramer’s private possession for at least 1 millisecond before it was made public (and thus we don’t know who else may have had access to it before its public dissemination), just how is this not a Regulation Fair Disclosure violation?

  Needless to say, the fate of AAPL, which is the most important stock in the world, held by a record 181 hedge funds, determines the intraday (and not only) fate of the entire market.

  Remember: the fate of AAPL determines the fate of the US stock market pic.twitter.com/04NAbgVR2k

  — zerohedge (@zerohedge) August 24, 2015

  And for those who may have missed it, this is what AAPL’s stock has done today, ever since this clearly market moving letter, helped AAPL regain an unprecedented $80 billion in market cap since the lows.

  

   

  We are eagerly looking to find an 8K public filing of Tim Cook’s letter among AAPL’s EDGAR filings, even if it will have taken place hours after the market moving event, or alternatively, perhaps the SEC or any other authorities who were not too stunned to react today, can explain just why this is not a Reg FD violation?

  Then again, with AAPL leading the S&P rapidly into the green, we are confident this, too, will be promptly forgotten and swept under the carpet of “whatever it takes to keep the market green.”

  

  

  

  

  

• Coming To America? China Censors Bad Market Talk Amid Meltdown

  Back in July, after a dramatic unwind in the half dozen or so backdoor margin lending channels that had helped drive Chinese stocks to nosebleed levels triggered a terrifying 30% decline (vaporizing billions in paper profits in the process), the Politburo predictably stepped in to rescue the market. 

  However, when it started to become clear that a succession of declarations, directives, policy rate cuts, and even threats weren’t going to be enough to alleviate the pressure on equities, Beijing looked to take back the narrative by banning the use of certain undesirable phrases.

  
  

  Here’s what happened (as detailed in “China Bans Use Of Terms ‘Equity Disaster’ And ‘Rescue The Market’“):

  Although it’s not possible to know exactly what the mood is among Party officials in China regarding the inexorable slide in stock prices that’s unfolded over the course of the last three weeks, it’s reasonable to assume that at least some officials in Beijing are in the throes of Politburo panic after watching some $3 trillion in market value disappear into thin (and probably polluted) air. 

   

  Amid the turmoil, China has resorted to an eye-watering array of policy maneuvers, pronouncements, and plunge protection schemes aimed at arresting the slide.

   

  Nothing has worked.

   

  Not suspending compulsory liquidation for unmet margin calls, not billions in committed market support from brokerages, not a PBoC backstop for the CFSC, and not even a ban on selling by the Social Security Council. 

   

  And so, with every attempt to manipulate the market higher falling flat in the face of selling pressure from the hairdresser/ farmer/ banana vendor day trading crowd (which has now thrown in the towel on the whole “it’s easier than farm work” theory and now just wants to break even and head for the hills) the only thing left for China to do is “fix” the narrative.

   

  In other words, when banning selling doesn’t work, the logical next step is to ban talking about selling. As FT reports, one domestic journalist, who did not want to be named, said the government had banned local media from using the terms ‘equity disaster’ and ‘rescue the market’ in their reports on the stock market.”

  Given the above it shouldn’t come as a surprise that after Chinese stocks collapsed overnight, Beijing has reportedly banned discussion and forbade “negative market reports.”

  BREAKING: Chinese authorities issued notice to state media to censor negative market reports following #BlackMonday pic.twitter.com/hQ6vbksYtw

  — George Chen (@george_chen) August 24, 2015

  So with the censorship machine in high gear, Xi Jinping had better hope that Beijing can at least still exert some control over the narrative because as we saw over the weekend when angry investors captured the head of Fanya Metals Exchange, and as is clear from the outcry surrounding the chemical blast in Tianjin, the public is restless, and the collapse of the stock market might just be the catalyst for social upheaval.

  

  

  

  

  

• Return To Junk Status "Only A Matter Of Time" For Latin America's Most Important Economy: Barclays

  Brazil’s embattled President Dilma Rousseff suffered another setback on Monday when Vice President Michel Temer elected to drop his role as Rousseff’s day-to-day liaison in Congress.

  As Reuters reports, “Temer is an important ally of Rousseff and his decision will further hamstring the unpopular president, who is facing calls for her resignation or impeachment as the economy flounders.” Here’s more: 

  Temer’s decision is seen as a prelude to the departure of his Brazilian Democratic Movement Party (PMDB), the nation’s largest, from the governing coalition of the Workers’ Party to field its own candidate in 2018.

   

  Valor Economico newspaper reported on Friday that the PMDB would formally announce its decision to break with the Rousseff government at a party congress on Nov. 15.

   

  PMDB officials told Reuters the party would break with Rousseff’s coalition at some point because it plans to field its own presidential candidate in 2018, but it was not considering leaving this year. The PMDB controls both houses of Congress and its break with the government would seriously weaken Rousseff.

  The move comes as the government elected to drop one in four ministries in an effort to rein in spending although, as one Sao Paulo political analyst told Reuters, “[Temer’s decision] will reinforce market worries about the government’s ability to execute economic policies.”

  Those worries come as the country struggles to cope with both fiscal and current account deficits and a nasty bout of stagflation, all of which we’ve discussed at length. Visually, the problem looks like this:

  

  

  The political and economic turmoil (with the latter punctuated by a horrendous unemployment print for July) couldn’t come at a worse time.

  The country sits at the center of the global EM unwind and between the uncertainties surrounding the government’s ability to implement austerity combined with the pain from falling commodity prices and sluggish demand from China, there are now very real questions about how long the country can maintain its investment grade rating.

  Here’s Barclays with more:

  The global and domestic environments have soured, and the clock is ticking for Brazil to prove its creditors that it still belongs to the investment grade club. The Fed is about to embark on policy normalization that should, albeit gradually, put the period of easy dollar funding behind us. China seems to be accepting the inevitable fact that its large economy is structurally slowing and has so far resisted fighting the slowdown with fiscal stimulus as it did in the past. Commodity prices have been responding to this new outlook for some time, and they now look particularly vulnerable following China’s recent steps. 

   

  For Brazil, the global backdrop, while still better than during most of its history, feels hostile relative to the one it faced in its recent past.

   

  As they should, excesses have been exposed by tough times; however, this time, policy mismanagement likely carries more blame than complacency to the now gone good times. Brazil’s fiscal slippage accelerated ahead of the elections (Figure 1), in line with most of LatAm’s well-documented historical pattern. To varying degrees, most observers were not surprised by the Rousseff administration’s decision to boost spending before the polls. The surprise, instead, was how it handled it after winning the election.

   

  The Petrobras corruption scandal eroded what was left of President Rousseff’s already damaged political goodwill.

   

  This backdrop has left the country in a recession, its fiscal accounts shaky and consumer sentiment depressed. Latent social unrest may deprive the already weakened administration of the vigor needed to keep the country from losing its hard-earned investment grade rating.

   

  The country is at a crossroads and markets are taking note. With the economy contracting and the central bank raising rates, 2y inflation breakevens are receding from recent highs. At the same time, however, long-dated breakevens are creeping up, likely a sign of rising fiscal concerns. Markets may be pricing risks that Brazil’s challenging fiscal dynamics could end up being monetized (Figure 2).

   

  Doubts about the fiscal plan are thus raising questions of whether the central bank will remain committed to honor its inflation target at all times. The central bank, which is not independent, will be left between a rock and a hard place. On one hand it will be tempted to ease rates to support its battled economy as soon as near-term inflation and expectations stabilize. On the other, it will have to keep a hawkish eye on long-dated breakevens to avoid worsening credibility concerns.

   

  

  *  *  *

  The takeaway: “We conclude that, under current circumstances, it is only a matter of time until Brazil loses its investment grade status.”

  Or, summed up in a picture:

  
  

  

  

  

  

  

• In Less Than 10 Years, The Federal Reserve Has Driven Millions Of American Women Into Prostitution

  Submitted by SouthBay Research

  Hookernomices: In less than 10 years, the Federal Reserve Has Driven Millions of American Women into Prostitution

  Mainstreaming Prostitution: Beginning last year, the Bank of England included prostitution in GDP measurements.  According to the Office of National Statistics, prostitution generated $9B a year, adding 0.7% to the UK GDP.  They aren’t alone: Sweden, Norway and a few other European countries already include it.  And if you can measure it, you can tax it.  And legalization is necessary for measurement.

  Prostitution is legal in most of the developed world.  In fact, of the G20 countries, prostitution is illegal in just 5: China, South Korea, Saudi Arabia, South Africa, and, of course, the United States.

  Mainstreaming Prostitution US-Style: Seeking Arrangement

  Leave it to the 1% to find a way around the law.

  SeekingArrangement.com (SA) is a website catering to men and women who exchange sex for compensation, like an allowance or paying bills like student loans and rent.  It has 4.5M registered users

  • 3.3M Sugar Babies
  • 1.2M Sponsors (aka Sugar Daddies & Mommies)
  • Average age of Sugar Baby: 21
  • Average age of Sugar Daddy/Mommy: 45
  • Average Income of Sugar Daddy/Mommy: $500K
  • Average compensation: $5K per month

  

  The Economic Relevance of SA – It’s where the 1% converges with the 99%.

  Earning $500K or more and spending $60K per year on a mistress: this is the 1%.  Needing help with college loans and rent: this is the other 99%.

  It’s not an online dating website.  If someone wants a relationship or a liaison, there are plenty of other sites like Craigslist and Ashley Madison.

  Is it a prostitution website?  According to SA they are not, repeat not, engaged in prostitution.  Their disclaimer: “An arrangement is not an escort service.  SeekingArrangement in no way, shape or form supports escorts or prostitutes using our website for personal gain.” 

  Seeking Arrangement: A Form of Prostitution, for the 1%.  As a prostitution website, it may not be as explicit as WhatsYourPrice or Backpage, but SA has at its core a business transaction: companionship with extras in return for cash and/or the equivalent.  Or, as they call it themselves, a dating site with “mutually beneficial relationships.”  And the Sugar Babies aren’t paid, they are given an allowance.  A financial arrangement for sex is prostitution, and when it involves millions of participants, it’s worth measuring.

  Why Can’t Millions of Young Women Afford Rent

  SeekingArrangement: A Sign of Today’s Financial Stress 

  Millions of college students and recent grads are struggling to make ends meet.  Talk about excess supply: there is a 3:1 ratio of Babies to Daddies/Mommies.  Sugar Babies need help with their basics: college loans, rent, & car payments.  (Which works well for Daddies/Mommies because these can be hidden as business expenses, which is helpful when dealing with the IRS and/or the spouse.)

  The Unbearable Weight of Rent  Rent is now 40% of income in most major metro cities.  It’s 50% in New York. 

  Following the recent Recession, home ownership began to plunge while rental vacancies dropped.  Clearly people were being squeezed out of home ownership and forced into renting.  Home ownership has collapsed to 40 year lows, rental vacancies has dropped to 30 year lows.  The connection is simple: housing is unaffordable and more people have to rent.

  

  But how can this be?  The National Realtor Association’s Housing Affordability Index assures us that housing affordability has never been better.  Young people should be snatching up homes and leaving apartments.

  

  The Reality: Housing is Incredibly Unaffordable

  The difference between buying a house today and buying a house in the last cycle is that yesterday’s buyers didn’t need a down payment.  Today they need 20%.

  San Francisco’s median home price just hit $1M.  What recent college graduate has $200K cash for the down payment?  It’s like saying Disneyland rides are free, why aren’t more families going – and conveniently forgetting about the $100 per person entry fee, super high airfares, and hotel costs

  For young people, renting is the only option.  And that presents another problem.

  Out of Control Rent

  From 2000-2014, incomes have grown 25% while rents have grown 53%. 
  Housing used to require 25% of incomes.  Today it is bumping 40% in all major metro areas.  50% in New York.

  The result: today’s young people can’t buy homes.  And neither can they afford rents. 
  That’s why millions have turned to the newly legalized form of prostitution: Seeking Arrangement.

  How The Fed Created the Jump in Prostitution 

  Real estate inflation is outpacing incomes by such a wide margin thanks to loose monetary policy under Greenspan and then Bernanke.  It has led to real estate being bid up, making both homes and rental properties more expensive.  Landlords in turn pass along the higher prices.

  It’s a case of economic policy run amuck.  Real estate development can boost the economy, under the right conditions: lots of jobs and economic activity get generated when homes are built or refurbished.  And there is the wealth effect when home prices rise.  But when taken to extremes – as it is today and was in the previous economic cycle consumer spending gets squeezed out in order to pay mortgages and rent.  It becomes an incredibly unproductive use of capital.

  (Almost as unfortunate, having created the problem of runaway housing inflation, the government has decided that the best solution is to address it via wage inflation by dictating higher minimum wages.)  

  Simply put, we have a surge in college-age prostitution and it’s the Fed’s fault. It gives new meaning to the term “perverse monetary policies”

  

  

  

  

  

• Marc Faber: The Global Economy Is Entering An Epic Slump

  Submitted by Adam Taggart via PeakProsperity.com,

  Famed investor and author of the Gloom, Doom, Boom Report, Marc Faber, returns to the podcast this week to discuss the slowdown in the global economy, signs of which he claims are multiplying fast all around the world.

  He predicts the next year is going to be an especially bruising one for investors, and recommends a combination of diversification and defense for those with financial capital to protect:

  I do not believe that the global economy is healing. I believe that the global economy is heading into a slump once again.

   

  We have a slowdown practically everywhere and if you take out the fudging of statistics, the economy for the median household everywhere in the world is not doing particularly well. If the global economy were doing so fantastically well, how would it be that commodities collapsed to the extent that they have declined? Or how would it be that the currencies of American markets and some of them have actually declined by more than 50 percent against the U.S. dollar in the last three years. How would this happen? So I do not believe that we have a healing of the global economy. On the contrary, I believe that the global economy is slowing down and that essentially equity markets are not particularly attractive.

   

  Preceding every bubble, you have a huge expansion of credit. That was the case in the period ’97 to 2000, and in the period 2003 to 2007, and on previous occasions in economic history. In the case of China, credit as a percent of the economy has grown by more than 50% over the last five years, which is essentially a world record. And in my view, its economy is slowing down rapidly. I had a drink with a friend of mine the other day who has car dealerships, luxury car dealerships, in China. He said sales have hit a brick wall. Not 'slowed down'; a brick wall. And indeed, exports were down and car sales were down in July. I think that this will then spill over again into other emerging economies because China is a large buyer of commodities and a large trading partner to other countries.

   

  I travel extensively. I can see roughly what is going on. So I really believe that the American market complex is not doing well at the present time. And everywhere, people basically are faced with rising costs of living and essentially declining currencies so that the persons in power goes down. So it's not a pretty picture. 

  Click the play button below to listen to Chris' interview with Marc Faber (37m:21s)

   

  

  

  

  

  

• Guest Post: Is Trump Worse Than Hitler?

  Submitted by James H. Kunstler via Kunstler.com,

  Even the formerly august New York Times grants that Donald J. Trump has ignited a voter firestorm of grievance against a dumb show election process that rewards a craven avoidance of real issues. Immigration is actually a stand-in for the paralysis, incompetence, overreach, and bloatedness of government generally in our time — but it is a good doorway into the larger problem.

  Immigration is a practical problem, with visible effects on-the-ground, easy to understand. I’m enjoying the Trump-provoked debate mostly because it is a pushback against the disgusting dishonesty of political correctness that has bogged down the educated classes in a swamp of sentimentality. For instance, Times Sunday Magazine staffer Emily Bazelon wrote a polemic last week inveighing against the use of the word “illegal” applied to people who cross the border without permission on the grounds that it “justifies their mistreatment.” One infers she means that sending them back where they came from equals mistreatment.

  It’s refreshing that Trump is able to cut through this kind of tendentious crap. If that were his only role, it would be a good one, because political correctness is an intellectual disease that is making it impossible for even educated people to think — especially people who affect to be political leaders. Trump’s fellow Republicans are entertainingly trapped in their own cowardliness and it’s fun to watch them squirm.

  But for me, everything else about Trump is frankly sickening, from his sneering manner of speech, to the worldview he reveals day by day, to the incoherence of his rhetoric, to the wolverine that lives on top of his head. The thought of Trump actually getting elected makes me wonder where Arthur Bremer is when we really need him.

  Did any of you actually catch Trump’s performance last week at the so-called “town meeting” event in New Hampshire (really just a trumped-up pep rally)? I don’t think I miscounted that Trump told the audience he was “very smart” 23 times in the course of his remarks. If he really was smart, he would know that such tedious assertions only suggest he is deeply insecure about his own intelligence. After all, this is a man whose lifework has been putting up giant buildings that resemble bowling trophies, some of them in the service of one of the worst activities of our time, legalized gambling, which is based on the socially pernicious idea that it’s possible to get something for nothing.

  I daresay that legalized gambling has had a possibly worse effect on American life the past three decades than illegal immigration. Gambling is a marginal activity for marginal people that belongs on the margins — the back rooms and back alleys. It was consigned there for decades because it was understood that it’s not healthy for the public to believe that it’s possible to get something for nothing, that it undermines perhaps the most fundamental principle of human life.

  Trump’s verbal incoherence is really something to behold. He’s incapable of expressing a complete thought without venturing down a dendritic maze of digressions, often leading to an assertion of how much he is loved (another sign of insecurity). For example, when he attacked Jeb’s (no last name necessary) statement that we have to show Iraqi leaders that “we have skin in the game,” Trump invoked the “wounded warriors,” saying “I love them. They’re everywhere. They love me.” In the immortal words of Tina Turner, “what’s love got to do with it?”

  Trump’s notion that he can push around world leaders such as Vladimir Putin by treating them as though they were president of the Cement Workers’ Union ought to give thoughtful people the vapors. It doesn’t seem to occur to Trump that other countries could easily get pugnacious towards us. He would have us in a world war before the inaugural parade was over.

  The trouble is that it’s not inconceivable Trump could get elected. Farfetched, perhaps, but not out of the question. The USA is heading for a very rough patch of history — as those of you with your eyes on the stock indexes lately may suspect. The country stands an excellent chance of waking up some morning soon to discover it is broke and broken. When that happens, all the anxiety and animus will be focused on looking for scapegoats, and they are likely to be the wrong ones. World leaders considered Hitler a clown in the early going, too, you know. But the Germans were wild about him. He pushed a lot of the right buttons under the circumstances. Trump is worse than Hitler. And the American people, alas, are now surely a worse lot of ignorant, raging, tattooed slobs than the German people were in 1933. Be very afraid.

  

  

  

  

  

• The Ghost Of 1997 Beckons, Can Asia Escape? Morgan Stanley, BofA Weigh In

  Needless to say, the past 24 hours have done nothing to dispel worries that we’re spiraling towards a repeat of the Asian Financial Crisis. 

  Asia ex-Japan currencies have been battered along with their EM counterparts worldwide on the back of China’s move to devalue the yuan which seemed to telegraph Beijing’s concern about the true state of the country’s flagging economy.

  This has driven commodities to their lowest levels of the 21st century (yes, you read that correctly), pressuring EM FX from LatAm to Asia-Pac and sparking worries that emerging economies – even those armed with far higher FX reserves than they held two decades ago – may be ill-equipped to cope with accelerating outflows.

  Indeed the similarities between the current crisis and that which unfolded in 1997/98 were so readily apparent that many analysts began to draw comparisons and that may have added fuel to fire over the past week.

  Now, there seems to be a concerted effort to calm the market by explaining that while there are similarities, there are also differences. Of course this goes without saying. No two crises are identical and as the old saying goes, “history doesn’t repeat, but it does rhyme,” and to the extent some of the imperiled economies are in better shape to defend themselves this time around (e.g. because they are in a better position from an FX reserve and capital account perspective) that’s a positive, but when attempting to cope with a meltdown, it may be more important to look at where things are similar and on that note, here’s some color from Morgan Stanley and BofAML.

  *  *  *

  From Morgan

  As highlighted in our answer to the question on “What is wrong with Asia’s macro story”, the region today has a number of similarities with the 1990s cycle in terms of a misallocation led by a low real rate environment led and then an adjustment cycle triggered by reversal in US Fed monetary policy.

  Specifically: 

  • A low real rates environment – aided by starting point of high excess saving and easy monetary policy in the US. 
  • Domestic misallocation – in both cycles, there has been trailing misallocation of resources into unproductive areas. This is best seen in the rise in the region’s ICOR in both cycles. 
  • Debt build-up – Since 2008, the region’s debt to GDP has risen by 52ppt, to 206% in 2014. Similarly in the 1990s, there had been a buildup of debt in the run-up to the Asian Financial Crisis. 
  • External trigger – the adjustment phase in both cycles had been triggered by the rise in US real rates and appreciation of the US dollar (though in this cycle, the slowdown in China has been an additional factor in driving the adjustment). 

  

   

  *  *  *

  From BofAML:

  Can Asia escape the ghost of 1997?

  The aftermath of CNY devaluation

  Asian financial markets are seeing an intensification of selling pressure in the aftermath of the recent CNY devaluation. Investors are now asking if this is a repeat of the 1997 Asian financial crisis that was preceded by China’s 1994 devaluation. Our Asia Chief Economist, Hak Bin Chua, touched upon the similarities last week (see Tremors from China’s devaluation), but in light of the impending sense of crisis it is worthwhile exploring the issue further and asking whether Asia can escape history repeating itself. 

  Revisionist history and the blame game

  The CNY’s recent depreciation and subsequent sell-off in global markets naturally prompts investors to put the blame on China’s doorstep and revisit its 1994 depreciation as the cause of the 1997 Asia financial crisis. The difficulty in blaming China for the 1997 crisis is that its economy was much smaller at the time, and not integrated into the WTO trade system. Its “devaluation” resulted from a merging of two exchange rates (one for trade and another for investments) producing a net devaluation of 7-8% (according to World Bank estimates) as the bulk of Chinese exports were already sold at the swap market exchange rate. This measure is much lower compared to the nominal 33% devaluation.

  However, there are two alternative explanations for Asia’s 1997 crisis. The first is the “crony capitalism” narrative, in which Asia undertook unsustainable short-term FX borrowing to finance unsustainable current account deficits. This FX borrowing was guaranteed against implicit FX pegs that funded questionable investments. These investments were premised on the thesis of an Asian Miracle that proved unfounded and resulted in capital outflows and a collapse of Asian currency pegs.

  The second explanation is that the seeds of the Asian financial crisis were sown by the 1985 Plaza Accord, which was aimed at halting USD strength and reversing JPY weakness. Ultimately, the subsequent JPY appreciation deflated Japan’s economic bubble in the early 1990s. Asia then faced a triple whammy of slower Japanese growth, ensuing JPY depreciation and a Fed tightening cycle initiated in 1994.

  Japan vs China this time

  No doubt the truth lies somewhere in between these three narratives. But it is worth exploring the similarity between China and Japan. Indeed, the CNY has embarked on a sustained appreciation since its managed float in July 2005 under pressure from G7 countries to “rebalance” its economy.

  Chart 1 shows the similarity of the JPY REER appreciation since the Plaza Accord with the CNY appreciation since 2005 and the call from congressmen Graham and Schumer for a 30% appreciation. Another stylized feature of both economies was their sustained property market appreciation and asset bubble risk – this is illustrated in Chart 2. In nominal terms, the JPY appreciated 65% versus the USD in the decade following the Plaza Accord. Meanwhile, the CNY appreciated 22% since the 2005 de-peg from the USD.

  

  The final key commonality between the Asia crisis and now is the transmission through falling commodity prices and its aftershocks for EM commodity producers, especially those with pegged exchange rates and a negative terms of trade shock. Kazakhstan’s FX shift from peg to float and risk premium being built into GCC FX forwards for the Saudi rial and Omani rial illustrate this fragility now.

  

  

  

  

  

• "They're Getting Away With Murder": Trump Blasts "Paper-Pushing Hedge Fund Guys" On Taxes

  A couple of weeks ago, Carl Icahn took to Twitter to “accept” Donald Trump’s offer to become Secretary of Treasury should America, in a fit of extreme frustration with business as usual inside the Beltway, do the previously unthinkable and put Trump in The White House. 

  1/3 After last night’s debate I decided to accept @realDonaldTrump offer for Secretary of Treasury.

  — Carl Icahn (@Carl_C_Icahn) August 7, 2015

  According to a series of statements Trump made on Friday at a “pep rally” held at an Alabama football stadium, Icahn would also be in charge of negotiating trade deals with Japan and China in a Trump administration.

  “Everyone is killing us” Trump told a crowd estimated at about 20,000, adding that when he was told of China’s move to devalue the yuan he heard a “sucking action.”

  But lest anyone should think that Trump’s cozy relationship with Uncle Carl means the Teflon Don would go easy on billionaire hedge fund managers, the GOP frontrunner told CBS’ Face The Nation on Sunday that the hedgies are just a bunch of “paper pushers [that] get away with murder” from a tax perspective. Here’s Reuters:

  “The hedge fund guys didn’t build this country. These are guys that shift paper around and they get lucky,” Trump said.

   

  “They are energetic. They are very smart. But a lot of them – they are paper-pushers. They make a fortune. They pay no tax. It’s ridiculous, ok?”

   

  Trump’s comments were referring to the so-called “carried interest loophole” – a provision in the tax code which allows private equity and hedge fund managers pay taxes at the capital gains rate instead of the ordinary income rate.

   

  Many fund managers are in the top income bracket, but the capital gains tax bracket is only 20 percent.

   

  While these individuals are also required to pay an additional 3.8 percent surtax on their net investment income, this total rate is still far lower than the 39.6 percent rate that top wage earners must pay on their ordinary income.

   

  “Some of them are friends of mine. Some of them, I couldn’t care less about,” Trump said.

  Trump went on to suggest that he would move to restore America’s Middle Class which, as regular readers are no doubt aware, is being eroded by a monetary policy regime bent on inflating the value of the assets most likely to be concentrated in the hands of the wealthy.

  “I want to lower the rates for the middle class. The middle class is the one, they’re getting absolutely destroyed. This country doesn’t have—won’t have a middle class very soon,” he said. 

  But he wasn’t done.

  Trump then took to Fox & Friends on Monday morning to explain why he doesn’t support anything that even looks like a flat tax before suggesting that no matter what she says on the campaign trail, Hillary Clinton can’t be trusted to eliminate the carried-interest loophole because when she hangs out in the Hamptons, it’s “with the hedge fund guys.” Here’s WaPo:

  “The one problem I have with a flat tax is that rich people are paying the same as people that are making very little money,” Trump, who is worth an estimated $2.9 billion, said Monday morning on “Fox & Friends.” “I think there should be a graduation of some kind.”

   

  Clinton said she’d close the loophole, and while Trump didn’t mention carried interest specifically, he did say that hedge-fund managers should pay more in taxes.

   

  “They should be taxed a fair amount of money,” he said, without offering details. “They’re not paying enough tax.”

   

  He later criticized Clinton as being too close to Wall Street.

   

  “The hedge-fund guys are the ones that are giving her the money,” he said. “When she was in the Hamptons, she was with the hedge-fund guys.”

  Reading the above, one is left to wonder if Trump is leaving himself open to criticism regarding the consistency of his message. That is, when one is a billionaire and has just endorsed another billionaire (who is perhaps the most recognizable hedge fund manager in the history of capital markets) to be Treasury Secretary, to then turn around and call billionaire hedge fund managers “paper pushers” who “didn’t build this country” and consistently “get away with murder” at tax time, might well strike some voters as contradictory or even hypocritical, even if the idea that an unfair tax system is contributing to the demise of the Middle Class turns out to be a message that resonates with large blocks of voters.

  If building a platform on an ad hoc basis ultimately proves to be sustainable, then all the better for Trump’s chances, but even if he were to run as an independent, it’s critical that voters be able to figure out how the pieces fit together. That is, it’s not enough to be consistent and emphatic on individual issues (e.g. “I’m tough on immigation” and “I think billionaires should pay more taxes“), Trump will eventually need to figure out how to take his positions on the issues and turn them into a cohesive platform that voters can understand and, perhaps more importantly, that doesn’t end up tripping over itself when the debates start getting serious.

  If he can do that successfully, then the rest of the field – both Republicans and Democrats alike – may face an uphill battle when it comes to slowing Trump’s momentum. 

  In the meantime, things seem to still be going well:

  New Reuters Poll just came out and has me at 32%, highest number yet.The silent majority is back and we will MAKE AMERICA GREAT AGAIN!

  — Donald J. Trump (@realDonaldTrump) August 23, 2015

  *  *  *

  Bonus: Trump’s new campaign message for Jeb Bush

  Even Barbara Bush agrees with me.

  A video posted by Donald J. Trump (@realdonaldtrump) on Aug 24, 2015 at 10:15am PDT

  

  

  

  

  

• Peter Schiff Warns "The Fed Is Spooking The Markets, Not China"

  Submitted by Peter Schiff via Euro Pacific Capital,

  Fasten your seat belts, this ride is getting interesting. Last week the Dow Jones Industrial Average was down more than 1,000 points, notching its worst weekly performance in four years. The sell-off took the Dow Jones down more than 10% from its peak valuations, thereby constituting the first official correction in four years. One third of all S&P 500 companies are already in bear market territory, having declined more than 20% from their peaks. Scarier still, the selling intensified as the week drew to a close, with the Dow losing 530 points on Friday, after falling 350 points on Thursday. The new week is even worse, with the Dow dropping almost 1,100 points near the open today before cutting its losses significantly. However, no one should expect that this selling is over. The correction may soon morph into a full-fledged bear market if the Fed makes good on its supposed intentions to raise interest rates this year. Have no illusions, while most market observers are quick to blame the sell-off on China, this market was given life by the Fed, and the Fed is the only force that will keep it alive.

  

   
  The Dow has now blown through the lows from October 2014, when fears over life without quantitative easing and zero percent interest rates had caused the markets to pull back about 5%. Back then when market fear began spreading, St. Louis Fed President James Bullard publically issued a few choice words which reassured the markets that the Fed stood ready to reignite the QE engines if the economy really needed a fresh dose of stimulus. By the end of the year the Dow had rallied 10%.
   
  Amid last week's carnage, Mr. Bullard was at it once again. But instead of throwing the market a much needed life preserver, he threw it an unwanted anchor. He offered that the economy was still strong enough to warrant a rate increase in September. He was careful to say, however, that the Fed is still "data dependent" and will therefore base its decision on information that will come out over the next three weeks. So after nearly seven years of zero percent interest rates, the most momentous decision the Fed has made since the Great Recession will be dictated by a few weekly data points that have yet to emerge. Haven't seven years of data provided them enough information already? What's next? Will they have to check the five-day forecast to insure that there will be no rain before they pull the trigger?
   
  As I have been saying for years, the Fed has always known that the fragile economy created through stimulus might prove unable to survive even the most marginal of rate increases. But in order to instill confidence in the markets, it has pretended that it could. Wall Street has largely played along in the charade, insisting that rate increases were justified by an apparently strengthening economy and needed to restore normalcy to the financial markets.
   
  But the recovery Wall Street had anticipated never arrived, and traders who had earlier demanded that the Fed get on with the show, have now panicked that the rate hikes are about to occur in the face of a weakening economy. As a result, we are seeing a redux of the 2013 "taper tantrum" when stocks sold off when the Fed announced that it would be winding down its QE purchases of bonds.
   
  The question now is how much further the markets will have to fall before the Fed comes to the rescue by calling off any threatened rate increase? What else could pull the markets out of the current nose dive?
   
  Think about where we are. Stock valuations are extremely high and earnings are falling and the economy is clearly decelerating. The steady march upward in stock prices has been enabled by a wave of cheap financing and share buybacks. There are very few reasons to currently suspect that earnings, profits, and share prices will suddenly improve organically. This market is just about the Fed. After one of the longest uninterrupted bull runs in history, bearish investors have learned the hard way that they can't fight the Fed. So why should they now expect to win when the Fed is posturing that its about to embark on a tightening cycle? 
   
  If the Fed were to do what it pretends it wants to do (embark on a tightening campaign that brings rates to about 2.0% in 18 months), and in the process ignore the carnage on Wall Street, I believe we would see a consistent sell off in which most of the gains made since 2009 would be surrendered. After all, how much of those gains came from bona fide improvements in the economy? It was all about the twin props of Quantitative Easing and zero percent interest rates. The Fed has already removed one of the props, and it's no accident that the markets have gained no ground whatsoever in the eight months since the QE program was officially wound down.
   
  As the market considers a world without the second prop, a free fall could ensue. Now that we have broken through the October 2014 lows, there is very little technical support that should come in to play. A free fall in stocks could be an existential threat to an already weak economy.  It should be clear the Janet Yellen-controlled Fed would not want to risk such a scenario. This is why I believe that if the sharp sell off in stocks continues, we will get a clear signal that rate hikes are off the table.
   
  Of course, even if it does throw us that bone, the Fed will pretend that the weakness was unexpected and that it does not come from within (but is caused by external forces coming from China and Europe). Using that excuse, it will attempt to prolong the bluff that its delay is just temporary. For now at least Wall Street is happy to play along with the blame China game. This ignores the fact that China has had much bigger sell offs in recent weeks that did not lead to follow-on losses on Wall Street. I think the problems in China are the same problems confronting other emerging economies, namely the fear of a Fed tightening cycle that would weaken U.S. demand, depress commodity prices while simultaneously sucking investment capital into the United States, and away from the emerging markets, as a result of higher domestic interest rates and the strengthening dollar. 
   
  But if a temporary halt in rate hike rhetoric is not enough to stem the tide, a more definitive repudiation may be needed. Such an admission should finally open some eyes on Wall Street about the true nature of the economy and the unjustified strength of the U.S. dollar. That already may be happening. The dollar index closed at 95 on Friday…down from a high of 98 two weeks prior. On Monday, the index blew through the 93.50 support level and dropped more than 3% in just one day, down to intraday low of 92.6. Who knows where it stops now?
   
  Gold is rallying in the face of the crisis and has moved quickly back to $1,160, up around $80 in just two weeks. The bounce in gold must be causing extreme angst on Wall Street. Just two weeks ago, amid widening conviction that gold would fall below $1,000, it was revealed that hedge funds, for the first time, held net short positions on gold. Those trades are not working out. With the major currencies and gold now strengthening against the dollar, the greenback has had some success against far lesser rivals like the Thai baht and the Kazakhstan tenge. But these victories against currencies largely tied to commodities may be the last fights the dollar wins for a while, especially if Janet Yellen finally comes clean about the Fed's inherent dovishness. Those currencies now falling the farthest may be the biggest gainers if the Fed shelves rate increases.
   
  Some still cling to the belief that the Fed will deliver one or two token 25 basis point rate increase before year end. But this could expose the Fed to a bigger catastrophe than doing nothing at all. If it actually raises rates, and the crisis on Wall Street intensifies, further weakening an already slowing economy, the Fed would have to quickly reverse course and cut back to zero. This would put the Fed's cluelessness and impotency into very sharp focus. From its perspective anything is better than that. If it does nothing, and the economy continues to slow, ultimately "requiring" additional stimulus, it will at least appear that its caution was justified.
   
  Unfortunately for the Fed, it won't be able to get away with doing nothing for too much longer. Events may soon force it to show its hand. Then perhaps some may notice that the Fed is holding absolutely nothing and has been bluffing the entire time.

  

  

  

  

  

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• The Exquisite Market Setup, 23 Aug

  There is an exquisite setup building once again. Tight fundamentals in the gold market apply upwards pressure on the price. For quite a while, we have been saying gold’s fundamental price was around a hundred bucks above the market price. Well, the market price moved up $46 this week. What happened to the fundamental price? You’ll have to read on to see (no cheating and reading ahead!) but suffice to say it’s quite a bit higher than the market.

  At the same time, the fundamental price of silver is below the market price. We included a graph last week, showing that gold is being sold at a discount and silver at a premium to their fundamental prices. The price of silver moved up this week, though it didn’t move like gold. It was up, then down, then up, then back down, ending a mere nine cents higher than last week. In fact, on Friday, the price of gold went up about 0.8% but the price of silver dropped 1.7%.

  And this is the crux. According to popular belief, the prices of the metals are supposed to move together. Silver is supposed to go up when gold goes up, only more. This is due to money printing, inflation, economic fear, anticipation of further policy madness from the Fed, or whatever. It’s much clearer when you price everything in gold.

  The fundamentals for silver just aren’t there right now. What happens when a trading thesis is believed by just about everyone?

  These are the market upsets about which stories are told years later.

  Could we see gold with a 13 handle and silver with a 14 handle?  Read on…

  First, here is the graph of the metals’ prices.

         The Prices of Gold and Silver
  
  

  We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.

  One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

  Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.

  With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

  Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio moved up sharply this week. 

  The Ratio of the Gold Price to the Silver Price
  
  

  For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

  Here is the gold graph.

         The Gold Basis and Cobasis and the Dollar Price
  
  

  The price of the dollar dropped considerably, from 27.9mg to 26.8mg gold (i.e. the price of gold rose). However, the cobasis didn’t drop much and the basis (i.e. abundance) actually fell a bit.

  The fundamental price moved up almost as much as the market price, and it’s still about a hundred bucks above the market.

  There are two interesting points worth noting here. One, if this rising price of gold gets traders excited, there’s no reason why the market price couldn’t overshoot. Second, the rising price could motivate stackers to go out and buy before the price goes even higher. In other words, the fundamental could rise as well, in a positive feedback loops.

  We make no prediction of $1,300+ gold. We are interested in valuing the metal, not timing the market. However, as market observers we see $1,300 as quite possible without much of a stretch.

  Now let’s look at silver.

  The Silver Basis and Cobasis and the Dollar Price
  
  

  The price of silver went up. However, the cobasis (i.e. scarcity) is much lower than in gold—negative—and it fell.

  We calculate a fundamental price of silver more than 50 cents below the market price.

  Next week, we will talk about how we calculate fundamental prices and how they differ from the market price.

  
  

  Monetary Metals will be in New York City on Friday afternoon, September 11. You are cordially invited to join us for a discussion of economics and markets, with a focus on how to approach saving, investing, and speculating. Midtown. RSVP here.

   

  © 2015 Monetary Metals

  

  

  

  

• "Black Monday" – Shanghai Composite Goes Red For The Year, Wiping Out 60% In Gains, 2000 Stocks Limit Down

  Black Monday! #ChinaStocks join global panic selloff, dive 8.5%, worst since Asian financial crisis at midday pic.twitter.com/nLHoFf34bV

  — China Xinhua News (@XHNews) August 24, 2015

  FACTS: By midday break, nearly 2000 stocks down 10% daily limit in Chinese market — only 13 stocks up; Shanghai benchmark index down 8.45%

  — George Chen (@george_chen) August 24, 2015

   

  But… but… pension funds are “allowed” to buy stocks.

  Judging by the first few minutes of trading in the first thing to open this evening on the mainland, the CSI 300 Index Futures which immediately tumbled by 4% to 3340, China’s attempt to deflect attention from the fact that it did not do a 50-100 bps RRR cut is not doing too well.

  

  Some other indicative levels which are in line with the CSI:

  • Shanghai Composite to open -3.8%, some 130 points below the 3,500 “hard line” support level below which it is a nothing but air back to 2000
  • Shenzhen down 4.3%
  • ChiNext down 5.1%

  That said, we expect the National Team to not give up without a big fight, and forcefully step in any minute and do everything in its power to prevent the resultant plunge in the Shanghai Composite which is set to open shortly, or else SHCOMP 2000 beckons, and with it lots and lots of social unrest.

  * * *

  Update: Shanghai Composite now down -5.7%

  

   

  And the 3,500 support is now gone.

  

   

  Update 2: Shanghai Composite crashing, now down 7%

  

   

  Update 3 and final: SHANGHAI COMPOSITE INDEX ERASES YEAR’S GAINS

  

  

  

  

  

  

• US Equity Futures Are Crashing

  Moments ago, without any specific catalyst, US equity futures just plunged when in thin, illiquid tape, a seller took out about 30 consecutive bid levels and as of last check, the ES was down as much as -48 to just 1923, or 2.5%, after being down a modest -13 minutes ago.

  It is unclear just what is going on, or whether some prop desk or hedge fund just got tapped out, and/or how the Fed will react but the last time we had action like this, the Fed confused a liquidating SocGen trader for an economic collapse, and cut rates by 75 bps in January of 2008. This time it does not have that luxury.

  

  So while we await the Fed’s response we watch in stunned amazement at a meltdown the likes of which we have not seen in years. Alternatively, if the Fed has nothing up its sleeve, the good news is that limit down for ES is just about 1870, so only 60 points more.

  * * *

  Update: just when it seemed that a BTFDer had emerged, even more focused selling took ES to new lows, and as of moments ago ES was down as low as 1913, down a whopping 58 points, and officially in 10% correction territory. Also, we are now down to about 50 points from limit down.

  

  

  

  

  

  

• 10Y Slides Back Under 2%, Precisely What Goldman Said Could Not Happen

  Remember trade #2 from Goldman’s list of top trade recommendations for 2015?

  

   

  Um, yeah…. well, moments ago the 10Y just dropped below 2% for the first time since April.

  

  End result: tomorrow, Goldman’s cafeteria will once again be proudly serving Kermit flambe.

  

  

  

  

  

• SocGen: "Markets Have Lost Faith In Monetary Policies"

  Aside from a few skeptical strategists, SocGen’s economists such as Michala Marcussen, have been ever so happy to drink the Kool-Aid of a US, and global, recovery that never comes and of a rate hike which until a few weeks ago was “imminent”… and suddenly isn’t even though nothing in the US economy has supposedly deteriorated. Which is why we were very surprised to read a note from none other than Marcussen, in which the formerly hopiumy economist , confirms what we have always known: that sooner or later, everyone will admit the truth.

  From SocGen

  Less confidence in central bank puts

   

  As noted above, the most notable feature of recent market price action is that there has been no visible comfort taken on risky assets from the idea that central banks may step in with further liquidity injections to alleviate the situation. To our minds, this reflects two main points. First, the fact that the tremendous amounts of liquidity injected to date have produced less than spectacular economic results. Clearly, markets have lost faith in the ability of unorthodox monetary policies to kick start the economy over time. This also fits the findings of academic literature suggestion diminishing returns from subsequent rounds of QE. Second, central banks have clearly become more concerned about the potential risks to financial stability from indefinitely inflating asset prices, suggesting that they may be slower to step in.

   

  Should the current situation – contrary to our expectations – spill over to a full blown crisis, we have little doubt that central banks would act. The lesson from the last crisis was that as the crisis deepened, central banks became more unorthodox in their approach. While part of the debt service costs of the public sector have been monetised (as central banks hand back profits from the carry of government bonds to the government coffers), actual debt has not been monetised. Moreover, political constraints have kept fiscal policy considerations in check in the bulk of the major economies. This raises an interesting question on whether fiscal policy expansion, backed by central banks, becomes the tool to fight the next crisis.

  * * *

  So… central bank intervention does little (or nothing, as the St. Louis Fed admitted as well), and yet SocGen has “little doubt that central banks would act.”

  Come to think of it, so do we, because while the world knows Einstein’s definition of insanity, here is what his definition of idiot would be: a central banker.

  As such, perhaps it is worth reminding readers that from the very beginning of this website, we predicted that the unleashing of QE, first in the US, and then everywhere else – the biggest policy mistake ever conducted by central bankers everywhere – has just one very logical ending: helicopter paradrops.

  

  

  

  

  

  

• Angry Chinese Investors Capture Head Of Metals Exchange In Predawn Hotel Raid

  Meet Shan Jiuliang. 

  

  He’s the head of Fanya Metals Exchange and he was captured in a daring predawn raid in Shanghai on Saturday. 

  

  As FT notes, “Fanya is a forum for trading minor metals like indium and bismuth that has also functioned as a shadow banking conduit — not only leveraging metal deposited with the exchange as collateral for loans, but offering high interest investment products to retail investors.”

  If that sounds familiar to you, it should. Just last week in “The 8 Trillion Black Swan: Is China’s Shadow Banking System About To Collapse?,” we took a fresh look at the dizzying array of wealth management products and collective trust products that are, together, a CNY17.2 trillion industry in China. Summarizing a (very) long and convoluted story, WMPs are marketed to investors through banks as a high yielding alternative to savings deposits. Investors aren’t often aware of exactly what they’re investing in or how risky it might be or that in many cases, issuers borrow short to lend long resulting in a perpetual case of maturity mismatch. 

  “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,” the RBA said in a report, to which we responded that in the event investors are forced to take losses, “the key issue is what those investors will do next.”

  Well, now we know.

  First they will stage angry protests and then, if their money is not returned to them in about a month, they will travel from all corners of the country, stake out a hotel, kidnap the issuer of the WMP and haul him away to jail. Here’s FT with the story:

  The head of a Chinese exchange that trades minor metals was captured by angry investors in a dawn raid and turned over to Shanghai police, as the investors attempted to force the authorities to investigate why their funds have been frozen.

   

  Investors have been protesting for weeks after the Fanya Metals Exchange in July ceased making payments on financial investment products. The exchange, based in the southwestern city of Kunming, bought and stockpiled minor metals such as indium and bismuth, while also offering high interest, highly-liquid investment products from its offices in Shanghai and its financing branch in Kunming.

   

  Some investors flew in from faraway cities to join hundreds more surrounding a luxury hotel in Shanghai before dawn on Saturday. When Fanya founder Shan Jiuliang attempted to check out, they manhandled him into a car before delivering him to the nearest police station. Shanghai police took Mr Shan into custody and promised to work with local authorities in Yunnan province to investigate what has happened to investors’ money. They later released him without charge.

   

  The demonstrations in Shanghai and Kunming and the exchange’s unusual accumulation of several years’ supply of some metals have so far failed to attract much public attention from regulators. A report by the local regulator identifying the exchange as one of the bigger investment risks in Yunnan was redacted to remove reference to Fanya late last year.

   

  The exchange began to experience liquidity problems this spring. Fanya is estimated to hold several years’ supply of minor metals used in some high-tech and military applications, which it purchased at above-market prices. The exchange’s travails are pressuring prices for some of these metals, as traders anticipate it will have to sell its stockpile.

   

  The exchange, which has acknowledged it has problems, is backed by several of China’s minor metals miners. It has said it has found a buyer but won’t identify the company. Mr Shan “was deceiving us. He admitted to us that there is no buyout group,” said one disgruntled investor surnamed Gu, who participated in the rainy early morning raid.

   

  Mr Shan has been holding regular meetings with exchange backers since problems first surfaced this spring and was on the way to Guangzhou for a business trip when captured.

  As you can see, we are not at all joking when we contend that any move by China to allow for defaults and permit market forces to play a larger role in determining which investments eventually sour is likely to be met with a severe public backlash, especially for something like WMPs where investors believe they may have been deceived. 

  If Shan Jiuliang’s bad weekend is any indication of what’s in store for the Politburo once the PBoC loses complete control of the stock market, managing the yuan and restoring economic growth may be the least of Xi Jinping’s worries. 

  
  

  

  

  

  

  

• Bloomberg's Commodity Index Just Hit A 21st Century Low

  After the Bloomberg commodity index crashed overnight, having tumbled for each of the past 4 years, this happened:

  • BLOOMBERG COMMODITY INDEX SLIDES TO LOWEST LEVEL SINCE 1999

  Said otherwise, the lowest level in the 21s centiry. 

  

  Yup, rate hike any minute now.

  

  

  

  

  

• They're Gonna Need A Bigger Balance Sheet

  Submitted by Jim Quinn via The Burning Platform blog,

  Driving home from work on Friday night I found it terribly amusing listening to the “business journalists” on the local news station trying to explain the 531 point plunge in the Dow and the 1,105 point plummet from the Tuesday high. The job of these faux journalist mouthpieces for the status quo is not to report the facts, analyze the true factors underlying the market, or seek the truth. Their job is to calm the masses, keep them sedated, and paint the rosiest picture possible.

  The brainless twit who reported the stock market bloodbath immediately went into the mode of counteracting the impact of what was happening. She said the market is overreacting, as the country has strong job growth, low inflation, a strongly recovering housing market, and an improving economy. The fact that everything she said was a complete and utter falsehood was exacerbated by her willful ignorance of the Fed created bubble leading to the most overvalued stock market in history. How can these people pretend to be business journalists when they haven’t got a clue about stock market valuations and just say what they are told to say?

  Anyone who listens to a mainstream media pundit, talking head, or spokes bimbo deserves the reaming they are going to receive. They are paid to lie, obfuscate, spin, and propagandize on behalf of their corporate media executives, who are beholden to Wall Street bankers, mega-corporations, and the government for their advertising dollars. The mainstream media is nothing but entertainment for the masses, part of the bread and circuses designed to distract the dumbed down, iGadget addicted, ignorant masses.

  The entire stock market bubble has been created and sustained by the Federal Reserve and their QE and ZIRP schemes to prop up insolvent Wall Street banks, enrich corporate executives, and produce the appearance of a recovering economy. The wealth was supposed to trickle down to the masses, but the trickle has been yellow in appearance and substance. The average American is far worse off today than they were in 2007, with the Greater Depression Part 2 underway.

  The Fed balance sheet currently stands at $4.5 trillion. Seven years ago this week it stood at $931 billion. Seven years before that it stood at $641 billion. From August 2001 through August 2008 the Fed grew their balance sheet by 45%. This period encompassed a recession, dot.com implosion, and a housing crash. Since 2008 the Fed felt it necessary to increase their balance sheet by 383% even though we have supposedly been in an economic recovery for over six years, with unemployment back to 2007 levels, corporate profits at record highs, and everything back to normal if you listen to the mainstream media.

  Someone needs to explain the correlation between the Fed balance sheet and the S&P 500 to the bubble headed spokes models  on CNBC, Fox, CNN, and MSNBC. The economic recovery is nothing but a debt saturated fraud, propped up by subprime auto loans, 7 year 0% auto financing schemes, enslaving young people in student loan debt that will never be repaid, pretending unemployed people aren’t unemployed, under-reporting inflation to suppress wages and inflate GDP, and artificially inflating stock, real estate, and bond markets with negative real interest rates.

  Anyone who doubts the sole purpose of QE1, QE2, and QE3 was to boost the stock market and create the glorious “wealth affect”, is either blind, dumb or a direct beneficiary of the scheme. When the S&P 500 bottomed at 666 in March 2009, the Fed balance sheet stood at $1.9 trillion. In June of that year, the official end of the recession, the Fed balance sheet stood at $2.1 trillion. If the recession was over in June 2009, why would the Fed possibly need to more than double their balance sheet over the next five years? If the crisis had passed, as we’ve been told by the mainstream media, politicians, and central bank academics, what possible reason would the Fed have for pumping heroine into the veins of the criminal Wall Street cabal?

  The reason is quite simple. The Fed is owned and controlled by Wall Street. Do you need any more proof than knowing Helicopter Ben makes more ($300,000) from a sixty minute lunchtime speech at a Bank of America banker bacchanal than he made per year as Federal Reserve Chairman. The chart below provides the remaining proof. From the March low of 666, the S&P 500 went up by 200%, to over 2,000 when the Fed reluctantly ended QE3 on October 29, 2014. Do you think it was just a coincidence the Fed balance sheet also expanded by 200% since QE started in late 2008?

  

  The mouthpieces for the oligarchy have contended this was all just a coincidence. They have been told to spread propaganda about fundamentals, economic recovery, job growth, and rising earnings per share. Is it also a coincidence the S&P 500 is exactly where it was on September 30, 2014 as the Fed stopped pumping heroine into the arms of Wall Street traders? The market went up 200% in five years, in virtual lockstep with the Fed balance sheet. The Fed balance sheet has been virtually flat for the last year and the S&P 500 is virtually flat in the last year. No correlation there. The mainstream media needs to distract you from seeing the truth. Look over there at Caitlyn Jenner. How about that Trump. Black Lives Matter. Time for fantasy football. Whatever you do, don’t look behind the curtain and realize the people running the Federal Reserve are corrupt, captured, and clueless on what to do next.

  

  The Great and Powerful Fed has had the curtain pulled back to reveal a doddering old lady and a gaggle of flying monkey academics attempting to bluster their way out of the box they have created for themselves at the behest of their Wall Street owners. The global economy is in free fall and the Fed talking heads are still speechifying about a lousy .25% increase in the Fed Funds rate, as if it means anything to anyone in the real world of paying bills, going to work, buying groceries, and living life. Do these pompous pricks actually think a minuscule increase in an obscure interest rate will impact the average household whose real income is lower than it was in 1989? The gall of these academic pinheads is breathtaking to behold.

  The only thing propping up our stock market over the last year has been the insane lemming like behavior of corporate CEOs across the land, borrowing at record low rates thanks to the Fed, and using the proceeds to buy back $2.3 billion of their own stock in order to “enhance shareholder value” and of course enrich themselves through their stock incentive compensation plans. Our market had also been seen as a safe haven by Chinese billionaires and rich Europeans seeking shelter from the storms sweeping across their continents. Last week’s stock market implosion will scare the CEO lemmings into halting their buybacks as they calculate the amount of value destruction they inflicted on shareholders, while the interest on the debt keeps rising.

  You can be sure the discussions among the elite members of the Deep State – Fed central bankers, foreign central bankers, the heads of the biggest Wall Street banks, Treasury Department apparatchiks, Washington politicians, heads of the corporate media outlets, influential corporate CEOs, and powerful billionaires – are happening this weekend in an effort to keep their debt based ponzi scheme going. They know only one solution – print more money (QE4), increase government debt levels, fake the economic data, and utilize their propaganda outlets to calm the masses with more lies.

  Can these desperate measures work again? Maybe temporarily, but their impact lessens each time they roll them out. They will never voluntarily abandon the addiction to credit expansion because it is the only thing sustaining the wealth of the Deep State. These sociopath arrogant egotists would rather destroy the world financial system than admit they were wrong. Ludwig von Mises explained what will happen many decades ago.

  

  “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

  

  

  

  

  

• This Advice Has Cost Investors a Sh*tload of Money

  Perhaps, like me, you’ve been hearing “the dollar is going to die” rhetoric nonstop for the last few years.

  Our stance, well documented in these pages here, here, here and here, amongst many, many other posts, has been that for the last 12 months we’ve been long, and remain long – very, very long!

  Last week I woke to 3 articles forwarded to me by some friends. I don’t typically pay any attention to these particular investment writers, as I categorize them in the “marketers,” not “professionals” basket.

  The reason they were forwarded to me was to point out the duplicity. All three have been in the “dollar’s going to Hell” basket, and equally interesting, literally overnight all three have begun the spin process of changing their tune! The “unexpected” PBOC devaluation of the renminbi has been the catalyst.

  Politicians could actually learn a few tricks from these guys! Here are a couple of the rules of their playbook:

  Rule number 1: Never admit to being 100% wrong, and;

  Rule number 2: Ensure you spin any market event to appear as if, “Why yes, of course we knew all along that the RMB was going to devalue.”

  Quite frankly, the articles my friends forwarded me are a pig to read. They are filled with emotionally laden sound bytes, arrogance, inaccuracies, and logic which, like a cardboard cutout, simply goes soggy in the rain. It gives me a headache, and as I read through them, I found myself yelling obscenities at my computer.

  It’s commendable in a morbid, psychologically imbalanced sort of way. A few simple Google searches reveal the deception, but no matter, press on we must, and revel in the fact that the vast majority of sheep will never do any meaningful due diligence.

  When I see that sort of duplicity, then all credibility disappears for me. We have to be able to acknowledge our mistakes otherwise we’re bound to repeat them.

  We’ve gotten things wrong before and we’ll certainly get them wrong again, but I always encourage a debate on the topics. Nothing can be more valuable than a rigorous debate in order to flesh out and better understand. After all, what if I’m wrong?

  I have no particular ilk with any of these “investment experts,” aka “newsletter writers.” As a keen observer of market psychology and history I view them simply as another cog in the zeitgeist wheel which I find fascinating. Wolves will be wolves and sheep will be sheep.

  Along the same lines, another tale that’s been as popular as a Kim Kardashian nipple slip video, has been this idea that investors should be long the RMB because really, no really, it’s going to replace the dollar soon, and possibly even while you sleep this evening. Yep, it’s gonna happen that fast. Never mind it’d be the first reserve currency in the history of the world to disappear overnight (and there are sound reasons why this is the case), but let’s not let rigorous analysis get in the way of sensationalism.

  Before you send me any emails about the insolvency of the US government let me stop you right there. Yes, the US government is bankrupt (I know that “technically” that isn’t possible, but you get my drift). Yes, they have a pension nightmare and yes, the country is a police state. But, looking at the world in isolation, together with an oft agenda-driven myopic view, needs to be seen for what it is – marketing – nothing more and nothing less. No different to that “must have” shampoo that miraculously gets you a gorgeous, loving, nymphomaniac girlfriend.

  Why?

  I never fully understood why people would write such rubbish, and how they get away with it. It wasn’t until just the other day, during a conversation with a friend, that it all made perfect sense to me.

  My friend, who I’ll leave anonymous so as to not get him into any trouble, is a true “professional investor” who authors an investment newsletter (or two). His niche is value investing, and year after year he’s soundly beaten the market. All he focuses on is finding great companies that have a high probability of success and capital appreciation. Novel idea.

  Our discussion ran to the publishing business, and this is when it all made sense to me. Publishing houses test “copy,” and when they find “copy” that works well, they devise a product around it and sell it. Boom!

  I remarked how bass-ackward this really is. Marketing hype sans rigorous intellectual and analytical thought. No matter… if the narrative works marketers push it and push it big.

  My friend’s particular newsletter is less financially successful than many of its competitors, even though, like clockwork, it beats them all hands down on a pure return basis.

  Shortly after this conversation I spoke with a long time reader who has become a friend. We discussed a purchase of land in Chile which he made some time ago. I pointed out that he’s lost over 50% on his investment in dollar terms since 2011, and over 40% since 2013. It wasn’t something he’d thought about, and thankfully he is un-leveraged.

  To break even on this investment he now needs 100% appreciation. Think about that for a moment. What’s more is I think the Chilean peso goes even lower. In fact, it’s just broken a long-term trend line (as have some other LatAm currencies, including the Colombian Peso), and this is where we get big acceleration phases. We think you have to be short. We may be wrong, and of course we have been in the past. Our thinking, if interested, is laid out in our report entitled: USD Bull Report.

  Chilean peso

  My friend (now a bit more depressed than he was before our call) and I discussed what likely lies in store. He was (falsely?) comforted by the idea that this is temporary, a short-term setback for the Chilean economy and currency. I think this is a huge risk. Failing to understand why the USD is rallying in the first place means that the odds of understanding why and when it will end are vanishingly thin.

  Part of the disconnect lies in failing to understand global capital flows, why the USD is rallying, and why on the balance of probability we’re still at the beginning of this run, not near the end.

  Back to China and the RMB
  

  I’ve heard the argument that China can sell their USD holdings to defend the RMB. Even if that were the case this fails to take into account the entire picture. There are many reasons for China to devalue, not the least of which is that it’s politically palatable. They are still an export driven economy who have seen their currency rise substantially against their competitors such as Japan.

  Trying to quantify their FX reserves as a % of GDP is nuts. Their numbers are bollocks and can’t be trusted. Mark Hart has a more meaningful measure of reserve adequacy. This is FX reserves divided my M2.

  2/ the best measure of reserve adequacy is fx reserves/m2. China’s is 17%: $3.69T/$21.49T. Pre 97 crisis Asian tigers averaged apprx 28%

  — Mark Hart (@MarkHar13514700) August 11, 2015

  This means that with a meaningful capital flight China will NOT have sufficient reserves to defend its currency.

  The USD will be strong NOT because it’s the reserve currency, that has always been the case, but it’s NOT the answer now. The USD will be strong principally due to an unwinding of the carry trade. If you don’t understand this you’ll be lost.

  If you have to pay back a loan to an individual who is insolvent it doesn’t matter a damn. You still have to pay that money back. That the US Government is insolvent is IRRELEVANT right now.

  The low hanging fruit then?

  Turkish lira

  Poster child of external debt.

  

  South African rand

  Both of these two currencies are at major long term resistance levels. If they break from here it’s waterfall time. 

  

  Colombian peso

  

  Korean won

  Bottom line? Don’t go walking into an investment without understanding its context.

  When someone (newsletter writer or other “professional”) has a vested interest in telling you something, make sure you understand their bias and their agenda. One day, when I’m involved in a fund or funds (soon), please be sure to question me on my bias and my agenda. You’ll get the truth.

  Until then (soon) I have no stake in the fight, other than to make money by being positioned correctly.

  – Chris

   

  “Fortunately for serious minds, a bias recognized is a bias sterilized.” – Benjamin Haydon

  

  

  

  

• Crude Snaps Below $40 : Gartman Stopped Out Of Oil Long

  It was inevitable.

  As we reported first on Friday, the best contrarian indicator the market has ever known, perhaps even better than the legendary FX titan, Tom Stolper, Dennis Gartman recommended clients invest their monopoly money alongside his, in a short gold, long crude trade: one which has lost about 5%on both legs in 24 hours. To wit:

  CRUDE OIL PRICES ARE LOWER BUT WE ARE CHANGING OUR VIEW ON PRICES for having been overtly and rather relentlessly… and very publically… bearish, we are this morning turning bullish of crude oil and we are turning so because the term structure shifts mandate that we do so…. We do not make this statement lightly for this is a material shift in our view of the energy market… a very material shift.

   

  * * *

   

  Amidst the carnage of the global stock markets this morning and even in light of the sustained bear market in crude oil, the narrowing of the contangos in Brent and WTI brings us to become a buyer of crude as noted at length above. We’ll buy a unit of crude oil, split between Brent and WTI, upon receipt of this commentary. We shall, for the moment, give these prices the latitude to move 3% against us, hoping that we can tighten that up when we  return Monday.

  Moments ago, the $40 support level for oil finally snapped… 

  

  … and with its so did Gartman’s oil stop loss level, which means Gartman is now stopped out.

  Normally this would mean going long, however in this case China has yet to open and following the disappointment of no RRR-cut, tonight’s commodity carnage may just be beginning.

  

  

  

  

  

• "Long, Slow, And Painful": Barclays Documents The End Of The Commodities Supercycle

  Emerging markets will remain in focus this week as the world watches anxiously to see if China’s move to devalue the yuan will ultimately transform an already precarious situation into an outright crisis.

  Slowing demand from China has been the major concern for commodity exporters and indeed, wide open capital markets (thanks to ultra accommodative monetary policies across the globe) have served to keep struggling producers afloat, perpetuating a global deflationary supply glut.

  Saudi Arabia’s attempt to squeeze the US shale complex has only exacerbated the problem, as persistently low crude prices put further pressure on the commodities space as well as on the FX reserves of oil producing countries. When China devalued the yuan, it validated the suspicions of those who had assumed that the country’s economy was in far worse shape than anyone at the NBS was willing to admit. Additionally, it marked a new escalation in the global currency wars and threatens to undermine the export competitiveness of many an emerging economy.

  Now, markets are in turmoil and the dramatic plunge in EM currencies threatens to upend markets the world over on the way to ushering in a new financial crisis.

  

  If we have indeed entered a “new era”  – to quote Kazakh Prime Minister Karim Massimov – for crude and for commodity prices more generally, it could have widespread implications for everything from oil producers’ FX regimes to demand for USD assets. As Goldman noted earlier this year, “the new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn over the next three years.” That could portend a meaningful loss of liquidity across some asset classes.

  It’s against this backdrop that we bring you the following commentary from Barclays on the outlook for commodities in the new era.

  *  *  *

  From Barclays

  “Long, slow, and painful (probably with more to come..)”

  It is an old saying in commodities that the best cure for low prices is low prices. Market participants are now asking how much further prices need to fall and how long they need to stay there to bring supply and demand back in to balance and halt the price declines across a broad swathe of different raw materials markets. The fear is that just as the upside of the supercycle brought an unprecedented and long period of historical price highs, the plunge to the downside is shaping up to be equally dramatic and may yet have a way to run. In terms of depth, length and breadth, this is already a much more severe commodity price downturn than any the market has experienced in recent history. The 15% decline in the broad-based Bloomberg Commodity Index since May means prices are on average about a third lower than they were a year ago, only half what they were when the initial recovery from the financial crisis peaked in March 2011 and only a third of the all-time highs for the index hit in 2008. Almost all the gains associated with the so-called “commodity supercycle” have been eroded, and the index is back at levels not seen since 2002.

  

  There are three key structural factors that are reinforcing the long-term downtrend in commodity prices. The bad news for producers is that it is difficult to see any of them easing in the short term. 

  Broken China 

  First is the slowdown in China and a shift in its economic growth model leading to a big reduction in overall commodity demand growth rates. Over the past five years, Chinese demand for oil, copper and aluminium has risen on average by about 6%, 9% and 13%, respectively, each year. We forecast those growth rates will slow to 3%, 2.4% and 2.5%, respectively, for the next five years, and the transition to those much slower growth rates is under way (see Figure 3). 

  Last week’s China devaluation spooked commodities markets because it underlined just how difficult it is for China’s policymakers to manage such a large-scale transition. However, it will do little to improve the competitiveness of China’s manufacturing sector, and although there are hopes that infrastructure spending is about to pick up a little, the massive indebtedness of China’s local governments mean any improvement is likely to be quite modest compared with previous stimulus programs.

  Just too much 

  The second factor is the fact that many important commodity markets remain hugely oversupplied and the producer adjustment process still has a long way to run. In every commodity price downcycle, commodity producers tend to hang on for as long as they can even when margins are cash-negative, in the hope that others will close first. However, this time oversupply is being made a lot worse by fierce competition for market share. This is most evident in the oil market where OPEC countries have made market share gains a specific aim and the group has raised its production by more than 1m b/d so far this year. While its high level of output may be difficult to sustain due to threats in some OPEC countries such as Iraq, there is little sign yet of any marked OPEC declines.

  

  Our third and final structurally bearish factor for commodities is the long-term upward trend in the value of the dollar, which, in our view, still has some way to run. This is putting downward pressure on producer cost curves and ensuring even lower prices are required to bring about cuts to output, while at the same time raising prices in non-dollar currencies and, thus, reducing price-sensitive demand.

  Figure 4 shows how the decline in commodity prices has become intertwined with the falling currencies of major producers. These two trends are tending to reinforce each other. Commodity prices fall, leading to reduced growth prospects in commodity-producing countries such as Brazil, Australia or South Africa. That puts downward pressure on local currencies, which reduces producer operating costs in those countries and means that even lower prices are needed to force them to cut back. In this way the vicious circle continues.

  While it may come as welcome relief to some, the last thing the commodities markets need right now is a short-lived price recovery. There is little doubt that the Q2 rally in oil prices – by enabling producers to lock in decent margins by selling forward and encouraging some US tight oil producers to start drilling again – has lengthened the downside for oil prices by prolonging the supply-side adjustment process. A repeat of that process will just prolong the pain even more.

  

  

  

  

  

• "Savage Speed" – A Look Inside Market Crash Statistics

  Submitted by Salil Mehta via Statistical Ideas blog,

  It was surely a frightening week in global financial markets.  The largest 500 American stocks (S&P) dropped 6%.  China's Shanghai Stock Exchange (SSE) doubled this risk, as it dropped 12%.  Now there is an overall fear in the markets that we have not seen in years.  While these perilous risk statistics should not be something new, the surprising jolt this week provides a renewed opportunity to review crash measures within a broader context, to boldly target your portfolio.

  Let's look at the worst weekly loss for the S&P, in each month from 2007 through August 14 (or right up until last week).  Geometrically approximated for symmetry.  We see in blue that the distribution of this monthly "worst weekly loss" has generally been similar to the same ranked values from the past couple of years (2103/2014).  Now towards the bottom of the chart we can better ascertain that the more severe "worst weekly losses", were even worse in the years earlier than this (so 2007 through 2012).  

  We'll prove out these numerical measurements here, but if you are dispassionate about the mathematics then don't fear.  Please just skim what is immediately below -and head straight to the first illustration afterwards- to continue reading.  In October 2008, the worst weekly risk was -20% (this makes October the 24th worst month for "worst weekly loss" of 24 months in 2007/2008).  Hence it is plotted in red ~98 percentile at the bottom of the vertical axis below.  Not perfectly the 100th percentile (0% rank) due to probability math.  Also in the same 2007/2008 series, the next worst month for the "worst weekly loss" statistic was the following month of November.  That month saw a -9% change and being 2^nd worst out of 24 means being ranked about 4% higher on the vertical axis, from where the -20% data is shown:

  2/24 (for second worst of 24) – 1/24 (for worst of 24) 
  = 1/24 
  ~4% more favorable rank

  Similarly all of the axis tick marks, for all of the complete 2-year periods shown, are ~4% apart on this inverse distribution axis (i.e., 98%, 94%, 90%, etc.)  For 2015, up until this month of August there were 7 months, and the worst weekly loss of them was January's -3% change.  The lowest blue data shown represents that month (and 7th worst of 7 months is ~93 percentile at the bottom of the vertical axis).  To summarize, the worst ~6% of months (100%-94 percentile) in 2007/2008 was about -9% and much worse than for 20015 where it was about -3%.  

  Also for completeness, we see that the most favorable "worst weekly loss" among months in each of the time periods shown below (so towards the top of the chart) was essentially a non-event at ~0%.  We all know that we are no longer at that tail of the distribution!
   

  

   

  So next we identify with a black star how last week (5 days though August 21) compares with the 2015 series to date.  We see that last week's -6% change for the S&P is completely out of line with the rest of 2015, and it is beyond anything we've seen since before 2013!  Despite this multi-year record blasting across the news, one also can not fully state that 2015 though is a trend reversion to the risk we experienced during the global financial crisis, since the red 2007/2008 risk statistics are almost all higher than the entire blue statistics shown above.  

  We perform the same exercise again, but for the SSE.  We see in blue again the distribution of the "worst weekly losses", and it has generally not been similar to the distribution of the previous couple years (2103/2014).  But unlike with the S&P, 2015 risk statistics are instead closely aligned to the same risk measure from the global financial crisis era 2007/2008 (again, in red).  And this narration stays the same, across the complete collapse risk distribution (i.e., the vertical axis).
   

  

  We again show with a black star how last week compares with the prior 2015 series to date.  We see that last week's -12% change for the SSE is here completely inline with the rest of 2015 (and also within range of 2007/2008)!  Unlike for the U.S., last week's loss in China wasn't their 2015 worst nor 2^nd worst (those even worse months were earlier this summer when the SSE begun to crash).  Also, here one can fully state that 2015 (regardless of how the rest of the year turns out) is a trend reversion to the risk we experienced during the global financial crisis, since the red 2007/2008 risk statistics nicely overlap the blue 2015 statistics.  Both colors are also mostly completely more severe than the entire 2009 through 2014 risk statistics shown above!  We might see these articles (here, here) for idea generation on future month's SSE risk and whether it might continue to be high.

   

  We will further accommodate those unwavering in their false position that there is a broad mathematical relationship between both of these countries' time series (and using China's proximate market burst as a pretext to interpolate back history).  See the raw monthly plot below, contrasting both indexes.  We see that last week's (still highlighted with a black star) joint losses for the U.S. and China are mostly a shock within the 2015 context (blue), for mostly the U.S. but not as much for China.
   

   

  

  We see that either the correlation of individual time periods, or of all of these time periods combined (so ignoring the time series colorings), does not exist as a routine matter.  With markets, there will always be one-off exceptions (see this Top Article in Pensions & Investments); our goal with this article is to simply present a framework for high-level risk analysis.  The overall correlation doesn't exist, even with the one mad, worst weekly joint-loss shown for October 2008 (-20% SSE and -14% S&P).  This data without context should have been considered an outlier.  And the 2015-only correlation between China and the U.S. also doesn't exist, even though this year has the most probabilistic potential for it, as the variance among the SSE is extraordinarily high (this is referred to as the sum of squares in probability language).  Lastly, we can collectively respect that the joint losses were more severe in 2007/2008 (red) then they are this year (blue + black star).

  We are not breaking new theoretical ground in this article since that's not required.  The mathematical rigor of these relationships have already been recorded in these articles, sorted by order of consequence: here, here, here, here.  It is worth noting that at some point one may want to reallocate to the risky market.  Clearly no one should have been 100% stocks a week ago (particularly high ? stocks).  Someone was buying stocks a week ago, and many were selling in fear through yesterday (August 21).  One might want to instead try that in reverse to make money (buy at a discount and sell at a premium).  We should also note that the developed markets was subjected to record-setting wealth annihilation at the end of last week.  It is wise to be carefully attentive now, with the given global market volatility.

  We can all call attention to nervous economic data, but there are also some core measures (GDP, employment, etc.) showing the U.S. economy is not in chaos.  While possible, it is not the expectation that we should expect risk statistics to be worse than the 2007/2008 measures from the global financial crisis.  What makes a market is having differing opinions at nearly all times.  It is therefore educational for people caught off guard last week to see –once more– that markets can drop at a savage speed (as opposed to the overall magnitude), regardless of whatever foggy economic situation we are in (or market participants believe them to be).

  

  

  

  

  

• Risk Appears Seriously Wounded

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  Stocks aren’t quite as immune to financial disruption in the middle of 2015 as they had been previously. The last major, comprehensive selloff was also in tandem with “dollar” disorder back last October 15. This time, the motion was more erosion than “event”; at least until the past week. Just like crude oil, stocks lost their momentum back in early May (and broader index price indications dating back to last July and the first “dollar” rumble) and had more or less been stuck like the yuan doing nothing until the open break recently.

  

  What may, in the intermediate term, be much more significant is that the S&P Buyback Index has been sinking during the whole of that interim period. Whether or not that indicates less actual buyback activity is not clear, but the suggestion is more than reasonable given the buyback scheme as a separate equity liquidity junction. That it has continued since really March brings up more economic and corporate cash flow factors (another facet in the “dollar”, both as earnings and debt opportunity) in these companies than financial issues with the “markets” more broadly.

  

  Whatever the case, for the first time since 2012, after today’s robust selling, the S&P 500 is negative on a yearly basis. The Buyback Index is likely showing the same lack of momentum, though that is an assumption as the final index value for today’s trading hasn’t been posted.

  

  The broader NYSE Composite is down 7.2% on a yearly basis and 8.2% since last July 3 at the “dollar’s” outset.

  

  That brings stocks back into the same discussion as the corporate credit bubble. Junk prices continue to sell down, both retail and institutional. The HYG mutual fund broke to a new low again today, down over 10% since its high back on June 25, 2014. There are clear liquidity indications in that price as well as a fundamental shift in overall risk perceptions.

  

  The Leveraged Loan Index, as HYG, continues to drop to new multi-year lows. The last time the market value component was at 953 was January 5, 2012!  As usual, since these are the most liquid 100 names in leveraged loans, it is almost certainly the best case for the class; with leveraged loan prices elsewhere likely much more dramatic.
  

  I think we are starting to see the legend of QE fade into nothing more than memory, exposing all these “markets” to the very real dangers of the fundamental economy, globally, that never joined the hype. As noted this morning, it was perhaps a bit “easier” to ignore the first “dollar” wave as it crashed into January as though it were just a bump on the road to sufficiency, but this second crash is both more severe and constraining; not the least of which because, as it takes on new and greater proportions than the first, it demonstrates pretty conclusively all that was wrong about the suppositions that supported rationalizations for so long.

  Does that mean QE5? It might, but at this point is there any illusion left? After all, this broad selloff comes just as this week market perceptions turned the FOMC supposedly “dovish” once more. In the past that would have been at least a more than one-day rally, and a sharp one, but again I think the entire focus has changed from “accommodation” even in potential to simple confirmation of the no longer abstract economic and financial danger. I have no idea if that means a top, but this market increasingly looks very, very tired if not seriously wounded.

  

  

  

  

  

  

• Futures Stumble Out Of The Gate, Slide 0.6% On Lack Of Chinese RRR Cut: What Happens Next?

  On Friday, ahead of the closing stock rout, we forecast that the biggest risk for anyone staying long over the weekend was a disappointment out of China, where the sellside had gotten so excited that a 50-100bps RRR cut was imminent, that the lack of one would surely send futures sliding.

  As noted earlier, everyone is expecting a 50-100 bps RRR cut this weekend. The risk is there isn’t one http://t.co/oU5t45ERWw

  — zerohedge (@zerohedge) August 21, 2015

  Sure enough, as we noted earlier today, much to everyone’s surprise and disappointment, the PBOC did nothing (for reasons we speculated upon earlier).

  Which bring us to this evening’s S&P futures, which opened for trading minutes ago, and as expected gapped by over 0.6% after the Chinese disappointment, down 19 points to 1952 and looking quite heavy as several key support level as in the crosshairs.

  

   

  The key carry driver for all US equity action, the USDJPY, is not looking too healthy either and just hit its lowest level since July 8 as the Yen is soaring on carry trade unwinds:

  

  To be sure, the real action in tonight’s illiquid market will not be in US futures, at least not until Europe opens, but in China, where it will be up to the “National Team” to prevent a massive rout now that the PBOC has told stocks they are on their own for the time being..

  Also keep an eye on crude: after an initial gap lower the black gold is trying to stabilize the drop. Perhaps it is waiting for Gartman to confirm he is still long before crashing below $40.

  

   

  So what happens next? It’s clearly anyone’s guess so here courtesy of Bloomberg is a selection of quite a few guesses including some pundits, most of whom predicted smooth sailing until year end, who suddenly and very dramatically changing their tune.

  • “It’s going to be pretty deep. … We’re in the camp that this is not yet a big move. It’s scary, and those last two day trends look ugly.” — Doug Ramsey, CIO at Leuthold Weeden Capital Management, who sees losses in S&P 500 reaching 20%
  • “When Europe and China eclipse the U.S. we chug along, but when they’re in a down market, that’s when the U.S. really dominates. … From a quality perspective, all the boxes are checked off in the U.S. and that becomes more important to investors again.” — Savita Subramanian, equity strategist at Bank of America, who cites optimism about the biggest U.S. cos.
  • “There is a relatively more ominous slowdown going on in emerging markets — and that’s what the trade is all about right now.” — Gina C. Martin Adams, equity strategist at Wells Fargo Securities, told New York Times
  • “These are names that people look at — if they can run their business well, then the economy is doing well. … So when Apple misses and sells off hard, it’s bolstering that fact that we don’t have an equity market to trust.” –Larry Weiss, head of U.S. trading at Instinet in New York, speaking about the most popular U.S shares
  • “People are saying, ’I want out.’ … It is difficult to see the bottom with all these depreciating currencies.” — Ricardo Adrogue, emerging-markets-debt investor at Babson Capital, told New York Times
  • “People are saying ‘I told you so,’ but that warning has been in place too long—you would have had to be a superhero to know what would happen.” — Katie Stockton, chief technical strategist at BTIG, commenting on narrow leadership in the bull market to WSJ
  • “Hopefully, Asian governments don’t panic from the current market turmoil and resort to knee-jerk decisions. … Competitive currency devaluations can become a zero-sum game if all countries resort to it.” — Sandy Mehta, CEO of Hong Kong-based Value Investment Principals
  • “There’s no way the U.S. is going to remain an island with so much turmoil going on around the rest of the world.” — Paul Zemsky, head of multi-asset strategies at Voya Investment Management
  • “If at the beginning of the year, you told anyone that theFed would be 50/50 about raising rates at their next meeting and the 10-year yield was approaching 2%, they would think you were nuts.” — Antonin Cronin, a Treasury bond trader at Société Générale, told WSJ
  • “You have to talk about the Fed and the absence of any trigger-style warnings. … That’s a critical reason why everything gets interpreted as supporting the Fed’s caution, and that’s in direct contrast to the thinking we had just last week.” — Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee
  • “A nasty storm is probable, not just possible [in countries like Brazil and South Africa]. … But I do not anticipate a crisis or even very tense moments in Asia. The main reason is that the Asian Crisis of 1997 already cleansed Asia’s financial system and Asia’s resilience ought to be higher.” — Stephen Jen, co-founder of SLJ Macro Partners

  Bottom line: not looking good for the BTFDers but don’t count your chickens, or dead bulls, just yet – if Gartman suddenly turns bearish, or is stopped out of his crude long in 15 more cents, a mass bear slaughter is about to be unleashed…

  

  

  

  

  

• The World Explained (In 2 Cartoons)

  But they said “it” didn’t matter?

   

  

   

  

   

  Source: Sunday Funnies

  

  

  

  

  

• Does Capitalism Cause Poverty?

  Authored by Ricardo Hausmann, originally posted at Project Syndicate,

  Capitalism gets blamed for many things nowadays: poverty, inequality, unemployment, even global warming. As Pope Francis said in a recent speech in Bolivia: “This system is by now intolerable: farm workers find it intolerable, laborers find it intolerable, communities find it intolerable, peoples find it intolerable. The earth itself – our sister, Mother Earth, as Saint Francis would say – also finds it intolerable.”

  But are the problems that upset Francis the consequence of what he called “unbridled capitalism”? Or are they instead caused by capitalism’s surprising failure to do what was expected of it? Should an agenda to advance social justice be based on bridling capitalism or on eliminating the barriers that thwart its expansion?

  The answer in Latin America, Africa, the Middle East, and Asia is obviously the latter. To see this, it is useful to recall how Karl Marx imagined the future.

  For Marx, the historic role of capitalism was to reorganize production. Gone would be the family farms, artisan yards, and the “nation of shopkeepers,” as Napoleon is alleged to have scornfully referred to Britain. All these petty bourgeois activities would be plowed over by the equivalent of today’s Zara, Toyota, Airbus, or Walmart.

  As a result, the means of production would no longer be owned by those doing the work, as on the family farm or in the craftsman’s workshop, but by “capital.” Workers would possess only their own labor, which they would be forced to exchange for a miserable wage. Nonetheless, they would be more fortunate than the “reserve army of the unemployed” – a pool of idle labor large enough to make others fear losing their job, but small enough not to waste the surplus value that could be extracted by making them work.

  With all previous social classes transformed into the working class, and all means of production in the hands of an ever-dwindling group of owners of “capital,” a proletarian revolution would lead humanity to a world of perfect justice: “From each according to his ability, to each according to his needs,” as Marx famously put it.

  Clearly, the poet and philosopher Paul Valéry was right: “The future, like everything else, is no longer what it used to be.” But we should not make fun of Marx’s well-known prediction error. After all, as the physicist Niels Bohr wryly noted, “Prediction is difficult, especially about the future.”

  We now know that as the ink was drying on the Communist Manifesto, wages in Europe and the United States were beginning a 160-year-long rise, making workers part of the middle class, with cars, mortgages, pensions, and petty bourgeois concerns. Politicians today promise to create jobs – or more opportunities to be exploited by capital – not to take over the means of production.

  Capitalism could achieve this transformation because the reorganization of production allowed for an unprecedented increase in productivity. The division of labor within and across firms, which Adam Smith had already envisioned in 1776 as the engine of growth, allowed for a division of knowhow among individuals that permitted the whole to know more than the parts and form ever-growing networks of exchange and collaboration.

  A modern corporation has experts in production, design, marketing, sales, finance, accounting, human resource management, logistics, taxes, contracts, and so on. Modern production is not just an accumulation of buildings and equipment owned by Das Kapital and operated mechanically by fungible workers. Instead, it is a coordinated network of people that possess different types of Das Human-Kapital. In the developed world, capitalism did transform almost everyone into a wage laborer, but it also lifted them out of poverty and made them more prosperous than Marx could have imagined.

  That was not the only thing Marx got wrong. More surprisingly, the capitalist reorganization of production petered out in the developing world, leaving the vast majority of the labor force outside its control. The numbers are astounding. While only one in nine people in the United States are self-employed, the proportion in India is 19 out of 20. Fewer than one-fifth of workers in Peru are employed by the kind of private businesses that Marx had in mind. In Mexico, about one in three are.

  Even within countries, measures of wellbeing are strongly related to the proportion of the labor force employed in capitalist production. In Mexico’s state of Nuevo León, two-thirds of workers are employed by private incorporated businesses, while in Chiapas only one in seven is. No wonder, then, that per capita income is more than nine times higher in Nuevo León than in Chiapas. In Colombia, per capita income in Bogota is four times higher than in Maicao. Unsurprisingly, the share of capitalist employment is six times higher in Bogota.

  In poverty-stricken Bolivia, Francis criticized “the mentality of profit at any price, with no concern for social exclusion or the destruction of nature,” along with “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

  But this explanation of capitalism’s failure is wide of the mark. The world’s most profitable companies are not exploiting Bolivia. They are simply not there, because they find the place unprofitable. The developing world’s fundamental problem is that capitalism has not reorganized production and employment in the poorest countries and regions, leaving the bulk of the labor force outside its scope of operation.

  As Rafael Di Tella and Robert MacCulloch have shown, the world’s poorest countries are not characterized by naive trust in capitalism, but by utter distrust, which leads to heavy government intervention and regulation of business. Under such conditions, capitalism does not thrive and economies remain poor.

  Francis is right to focus attention on the plight of the world’s poorest. Their misery, however, is not the consequence of unbridled capitalism, but of a capitalism that has been bridled in just the wrong way.

   

  

  

  

  

  

• Government Gives Away Billions In Grants To Students Who Never Graduate

  In “Who Is Stoking The Trillion Dollar Student Debt Bubble?,” we highlighted the rather disconcerting fact that in 2014, the US government gave out some $16 billion in loans to students attending colleges that graduated fewer than a third of their students after six years. 

  As WSJ suggested, accrediting agencies are part of the problem. “One problem may be that the accreditation game suffers from similar conflicts of interest as those which caused ratings agencies like Moody’s and S&P to rate subprime-ridden MBS triple-A in the lead-up to the crisis,” we argued. 

  In the end, the disbursal of billions in federal aid to students attending schools where they’re unlikely to graduate is, like lending to students that attend for-profit colleges that the government is fully aware will likely one day be shut down, just another example of the misappropriation of taxpayer funds. 

  Well, if you needed further evidence of this, look no further than the Pell grant program.

  As NBC reminds us, “Pell grants are given to low-income families and, unlike student loans, do not need to be paid back – [they] are the costliest education initiative in the nation.”

  Well, the costliest until the across-the-board debt forgiveness, but in any event, it turns out that despite the fact that taxpayers have dumped $300 billion into the program since 2000, “the government keeps no official tally of what proportion of those who receive the grants end up getting degrees.”

  

  Now, a new report from The Hechinger Report shows that billions in taxpayer money is (literally) given away to students who never graduate. Here’s more:

  A Hechinger Report analysis of Pell grant graduation rate data from a cross section of colleges and universities — which is not otherwise publicly reported anywhere — suggests that billions of dollars in taxpayer-funded Pell grants nationwide go to students who never earn degrees.

   

  And while some schools with large numbers of Pell recipients have strong graduation rates for those students, the ones receiving the biggest share of the money often do not.

   

  In a quirk of federal policy, individual institutions do have to disclose the graduation rates of their students who receive Pell grants, when asked. And while some resisted doing so, or released them only in response to public-record requests, the Hechinger analysis of 32 of the largest private and 50 of the largest public universities — and tens of thousands of Pell grant students — shows that more than a third of Pell recipients at those schools hadn’t earned degrees even after six years.

   

  “We’re talking huge amounts of money and huge numbers of people,” said Richard Vedder, an economist and director of the Center for College Affordability and Productivity.

   

  Pell grants cost taxpayers $31.4 billion in fiscal year 2015, more than double what was spent on them in 2007. Since then, the maximum award has increased by more than $1,200 per student per year and the number of students applying for the grants is up by 7 million.

   

  The program has grown so fast that Republicans have proposed freezing the maximum annual Pell award at the current $5,775 for the next 10 years. The money given to the students first goes to the college to pay tuition and fees, and anything left over can be used for books and living expenses. Unlike loans, Pell grants do not have to be repaid, whether or not a student ever graduates.

   

  Most recipients of Pell grants come from families earning less than $40,000 a year.

   

  In January 2014, Congress gave the Department of Education 120 days to produce, for the first time, Pell grant graduation rates for every university and college in the country. The department finally released the months-overdue report in November, but did not break down the information by institution, citing problems with the data, and was only able to analyze 70 percent of Pell recipients. Only 39 percent of the 1.7 million students in its sample earned a bachelor’s degree in six years.

  Data from testing-qris.silk.co

  

  

  

  

  

• "The War On Drugs Is Over, And We Lost… We Can't Arrest Our Way Out Of This"

  Submitted by Claire Bernish via TheAntiMedia.org,

  Situated on the coast of Massachusetts, Gloucester’s claims to fame include its status as “America’s original seaport,” as well as being the real-life location on which events in the movie The Perfect Storm (2000) were based. Now, the small town has a new reason to be the center of attention: its police have been granting complete amnesty to drug users who come to the station seeking help, even if they come bearing the remainder of their stash.

  On March 6th of this year, Gloucester Chief of Police Leonard Campanello wrote a Facebook post much like he normally did. But this particular post bemoaned four deaths to heroin and opiates in just two months — for a city with less than 30,000 residents.

  Frustrated, and without any forethought, Campanello added what would turn out to be a propitious statement to that post:

  “If you are a user of opiates or heroin, let us help you. We know you do not want this addiction. We have resources here in the City that can and will make a difference in your life. Do not become a statistic.”

  The response was immediate and overwhelmingly positive. Where one of Campanello’s typical posts would collect, perhaps, a dozen ‘likes’ — this post garnered 1,234 likes and, according to the Washington Post, “more views than there were people in the city.”

  Obviously, he’d hit on the crux of a problem with the different approach that was sorely needed.

  “The war on drugs is over,” Campanello said. “And we lost. There is no way we can arrest our way out of this. We’ve been trying that for 50 years. We’ve been fighting it for 50 years, and the only thing that has happened is heroin has become cheaper and more people are dying [emphasis added].”

  On May 4th, he posted a lengthy update after considering what he’d stumbled onto with that first extemporaneous post.

  “Any addict who walks into the police station with the remainder of their equipment (needles, etc.) or drugs and asks for help will NOT be charged. Instead we will walk them through the system toward detox and recovery. We will assign them an “angel” who will be their guide through the process. Not in hours or days, but on the spot. Addison Gilbert and Lahey Clinic have committed to helping fast track people that walk into the police department so that they can be assessed quickly and the proper care can be administered quickly [emphasis added].”

  Though it was unclear what the repercussions of such a bold move would be, after over 33,000 likes and 30,000 shares for the updated post, there was no denying Campanello had found a better alternative to penalizing those struggling with addiction. Over 4,000 comments sang the praises of the program — a few even compared the approach to Portugal’s success decriminalizing all drugs. Most echoed sentiments like, “Well done!” and“Finally someone gets it right!” and even “Bravo!! More compassion and humanity in our justice system. You are leading by example. And I think the results will validate your decision [emphasis added].”

  And validate they have.

  Campanello said this week that over 100 addicts have already taken advantage of the opportunity — and one in six have come from out-of-state, including a person who traveled all the way from California to ask for help. It’s certainly a switch to see so many flock to the very police who, in the past, would have arrested and jailed every one of them.

  “It’s extremely important for a police department to treat all people with respect,” said Campanello. “Law enforcement doesn’t exist to judge people.”

  And as for cost? An update on the “Gloucester Initiative Angel Program” in an August 10th post stated: “$5000 for 100 lives.”

  Going even further, Campanello approached a local CVS pharmacy and explained the program and the need for Nasal Narcan, which can reverse an overdose. Without insurance, the drug cost $140, but after hearing about the revolutionary program, CVS made it available for $20 a pack — so Campanello started providing it to addicts free of charge.

  “The police department will pay the cost of the Nasal Narcan for those without insurance. We will pay for it with money seized from drug dealers during investigations. We will save lives with the money from the pockets of those who take them,” he said.

  With so many people taking advantage of the program, Chief Campanello and the Gloucester Police Department, as well as their various partners, have formed a non-profit organization called The Police Assisted Addiction and Recovery Initiative (P.A.A.R.I.) “to bridge the gap between the police department and opioid addicts seeking recovery.” Its website states, “Rather than arrest our way out of the problem of drug addiction, P.A.A.R.I. committed police departments:

  • “Encourage opioid drug users to seek recovery.”

  • “Help distribute life saving opioid blocking drugs to prevent and treat overdoses.”

  • “Connect addicts with treatment programs and facilities.”

  • “Provide resources to other police departments and communities that want to do more to fight the opioid addiction epidemic.”

  Though it is perhaps premature to estimate the program’s overall success, three Massachusetts cities will soon be implementing programs based on Campanello’s model.

  What started as frustration and anger about the nation’s growing problem with heroin and opiate addiction hastily posted to Facebook has become a possible future model for police departments around the country — and tangible hope for addicts and their loved ones.

  Four deaths in two months in the small coastal town appeared to indicate the continuance of a frightening trend — but in the over five and a half months since, there have been “Just two,” said Campanello.

  In mid-June, Gloucester Police wrote another post on the official Facebook page that speaks volumes of the program. It states:

  “A reporter asked one of my officers last night: ‘Do you see a common thread in all addicts?’ Without hesitation, the officer responded: ‘Absolutely. They’re all human beings.”

  

  

  

  

  

• Why Has The Government Stopped Reporting Lake Mead Water Levels?

  For months we have been warning that "Vegas is screwed" as water levels continue to plunge in its most crucial reservoirs. Non-government experts are waving red flags that something must be done (and even NASA scientists fear the worst) while the government remains quiet. And then just 3 months ago, Lake Mead water levels mysteriously plunged to levels that were perilously close to emergency for Vegas water supply, then quickly reverted after the government confirmed that a malfunctioning indicator was at fault. 

  Now, we note, having given them time to 'fix' whatever problem there may be, Lake Mead water levels have not been reported since July 9th – six weeks??!!

  

   

  As Jim R notes rather eloquently,

  In the spirit of data obfuscation a la China and Obama, Lake Mead’s daily reporting has not been posted for six (6!) weeks.

   

  At last report (July 9) the lake was 0.6 inch above the critical 1075’ level that will initiate a new round of water wars in the Southwest, including a possible crimp in the IV drip that sustains Phoenix and Tucson. 

  As a reminder,

  If the water level is below 1,075 feet elevation – 4 feet below today’s level – by January 1, 2016, it will trigger a federal water emergency… and water rationing.

   

  Las Vegas Review Journal reported that forecasters expect the level to drop to 1073 feet by June, before Lake Powell would begin to release more water. Assuming “average or better snow accumulations in the mountains that feed the Colorado River – something that’s happened only three times in the past 15 years,” the water level on January 1 is expected to be barely above the federal shortage level.

  So, We have one simple question – why did the government stop reporting Lake Mead Water Levels six weeks ago?

  

  

  

  

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• Why It Really All Comes Down To The Death Of The Petrodollar

  Last week, in the global currency war’s latest escalation, Kazakhstan instituted a free float for the tenge. The currency immediately plunged by some 25%. 

  The rationale behind the move was clear enough. The plunge in crude prices along with the relative weakness of the Russian ruble had severely strained Kazakhstan, which is central Asia’s largest crude exporter. As a quick look at a chart of the tenge’s effective exchange rate makes clear, the pressure had been mounting for quite a while and when China devalued the yuan earlier this month, the outlook for trade competitiveness worsened. 

  What might not be as clear (on the surface anyway) is how recent events in developing economy FX markets following the devaluation of the yuan stem from a seismic shift we began discussing late last year – namely, the death of the petrodollar system which has served to underwrite decades of dollar dominance and was, until recently, a fixture of the post-war global economic order. 

  

  In short, the world seems to have underestimated how structurally important collapsing crude prices are to global finance. For years, producers funnelled their dollar proceeds into USD assets providing a perpetual source of liquidity, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop. That all came to an abrupt, if quiet end last year when a confluence of economic (e.g. shale production) and geopolitical (e.g. squeeze the Russians) factors led the Saudis to, as we put it, Plaxico themselves and the US.

  The ensuing plunge in crude meant that suddenly, the flow of petrodollars was set to dry up and FX reserves across commodity producing countries were poised to come under increased pressure. For the first time in decades, exported petrodollar capital turned negative. 

  

  That set the stage for a prolonged downturn in emerging market currencies, and as worries about China’s economy – the engine of global growth and trade – grew, so did the pressure.

  

  Thus when Beijing moved to devalue the yuan, it drove a stake through the heart of the EM world by simultaneously i) validating concerns about weak Chinese growth, thus guaranteeing further pressure on commodities, ii) delivering a staggering blow to the export competitiveness of multiple emerging economies, iii) depressing demand from the mainland by making imports more expensive. Thanks to the conditions that resulted from the death of the petrodollar (e.g. falling FX reserves and growing fiscal headwinds), the world’s emerging markets were in no position to defend themselves against the fallout from the yuan devaluation. Complicating matters is a looming Fed hike. Included below is a look at flows into (or, more appropriately, “out of”) EM bonds. As Barclays notes, the $2.5 billion outflow in the week to August 21 is the highest level since February of last year. 

  

  We are, to put it mildly, entering a not-so-brave new world and the shift was catalyzed by the dying petrodollar. Kazakhstan’s move to float the tenge is but the beginning and indeed Kazakh Prime Minister Karim Massimov told Bloomberg on Saturday that the world has entered “a new era” and that soon, any and all petro currency dollar pegs are set to fall like dominoes. Here’s more:

  Currency pegs in crude-producing nations are set to topple as the world enters a “new era” of low oil prices, according to the prime minister of Kazakhstan, which rattled markets this week with a surprise decision to abandon control of its exchange rate.

   

  “At the end of the day, most of the oil-producing countries will go into the free floating regime,” including Saudi Arabia and the United Arab Emirates, Karim Massimov said in an interview on Saturday in the capital, Astana. “I do not think that for the next three to five, maybe seven years, the price for commodities will come back to the level that it used to be at in 2014.”

   

  Central Asia’s biggest energy producer cut its currency loose on Thursday, triggering a 22 percent slide in the tenge to a record low versus the dollar. The move followed China’s shock devaluation of the yuan the week before, which drove down oil prices on concern global growth will stutter and nudged nations with managed exchange rates toward competitive devaluations of their own.

   

  More than $3.3 trillion has been erased from the value of global equities after China’s decision spurred a wave of selling across emerging markets. Brent crude touched a six year-low of $45.07 per barrel on Friday, while the Dow Jones Industrial Average entered a correction.

   

  “After I watched what is happening on the financial market and stock market in the U.S. on Friday night, I thought that we did it at the right time,” Massimov, 50, said in his office in the government’s headquarters. The decision avoided “big speculation and pressure this weekend in Kazakhstan,” he said.

   

  The central bank spent $28 billion this and last year to support the tenge, including $10 billion in 2015, Kazakh President Nursultan Nazarbayev said this week. After its slump on Thursday, the currency rallied 7.4 percent to close at 234.99 against the dollar a day later. The country’s dollar bonds due July 2025 climbed after the announcement, lowering the yield nine basis points to 5.74 percent in the last two days of the week.

   

  Before the currency shift, Kazakhstan was at a competitive disadvantage to Russia, its neighbor and top trading partner along with China. The tenge had fallen by only 7.6 percent against he dollar in the 12 months up to Aug. 20, compared with a 46 percent depreciation for the ruble, while crude had plummeted 55 percent in the period.

  We discussed this in great detail on Friday (with quite a bit of color on the fiscal impact for Saudi Arabia) and we’ve included a chart from Deutsche Bank which should have some explanatory and predictive value below, but the big picture takeaway is that the world is now beginning to feel the impact of the petrodollar’s quiet demise, and because this is only the beginning, we’ve included below the entire text of the petrodollar’s obituary which we penned last November .

  

  *  *  *

  How The Petrodollar Quietly Died And Nobody Noticed

  Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

  The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements, leading to, among other thing, such discussions as, in today’s FT, why China’s Renminbi offshore market has gone from nothing to billions in a short space of time.

  And yet, few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico’ed both itself, and its closest Petrodollar trading partner, the US of A.

  As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their “petrodollars” out of world markets this year, citing a study by BNP Paribas (more details below). Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.

  A consequence of this year’s dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed.

  This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

  But no more: “this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations.”

  In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.

  

  According to BNP, Petrodollar recycling peaked at $511 billion in 2006, or just about the time crude prices were preparing to go to $200, per Goldman Sachs. It is also the time when capital markets hit all time highs, only without the artificial crutches of every single central bank propping up the S&P ponzi house of cards on a daily basis. What happened after is known to all…

  “At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out,” said David Spegel, global head of emerging market sovereign and corporate Research at BNP.

   

  Spegel acknowledged that the net withdrawal was small. But he added: “What is interesting is they are draining rather than providing capital that is moving global liquidity. If oil prices fall further in coming years, energy producers will need more capital even if just to repay bonds.”

  In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.

  Which is hardly great news: because in a world in which central banks are actively soaking up high-quality collateral, at a pace that is unprecedented in history, and led to the world’s allegedly most liquid bond market to suffer a 10-sigma move on October 15, the last thing the market needs is even less liquidity, and even sharper moves on ever less volume, until finally the next big sell order crushes the entire market or at least force the [NYSE|Nasdaq|BATS|Sigma X] to shut down indefinitely until further notice. 

  So what happens next, now that the primary USD-recycling mechanism of the past 2 decades is no longer applicable? Well, nothing good.

  Here are the highlights of David Spegel’s note Energy price shock scenarios: Impact on EM ratings, funding gaps, debt, inflation and fiscal risks.

  Whatever the reason, whether a function of supply, demand or political risks, oil prices plummeted in Q3 2014 and remain volatile. Theories related to the price plunge vary widely: some argue it is an additional means for Western allies in the Middle East to punish Russia. Others state it is the result of a price war between Opec and new shale oil producers. In the end, it may just reflect the traditional inverted relationship between the international value of the dollar and the price of hard-currency-based commodities (Figure 6). In any event, the impact of the energy price drop will be wide-ranging (if sustained) and will have implications for debt service costs, inflation, fiscal accounts and GDP growth.

  Have you noticed a reduction of financial markets liquidity?

  Outside from the domestic economic impact within EMs due to the downward oil price shock, we believe that the implications for financial market liquidity via the reduced recycling of petrodollars should not be underestimated. Because energy exporters do not fully invest their export receipts and effectively ‘save’ a considerable portion of their income, these surplus funds find their way back into bank deposits (fuelling the loan market) as well as into financial markets and other assets. This capital has helped fund debt among importers, helping to boost overall growth as well as other financial markets liquidity conditions.

  Last year, capital flows from energy exporting countries (see list in Figure 12) amounted to USD812bn (Figure 3), with USD109bn taking the form of financial portfolio capital and USD177bn in the form of direct equity investment and USD527bn of other capital over half of which we estimate made its way into bank deposits (ie and therefore mostly into loan markets).

  

  

  

  The recycling of petro-dollars has benefited financial markets liquidity conditions. However, this year, we expect that incremental liquidity typically provided by such recycled flows will be markedly reduced, estimating that direct and other capital outflows from energy exporters will have declined by USD253bn YoY. Of course, these economies also receive inward capital, so on a net basis, the additional capital provided externally is much lower. This year, we expect that net capital flows will be negative for EM, representing the first net inflow of capital (USD8bn) for the first time in eighteen years. This compares with USD60bn last year, which itself was down from USD248bn in 2012. At its peak, recycled EM petro dollars amounted to USD511bn back in 2006. The declines seen since 2006 not only reflect the changed  global environment, but also the propensity of underlying exporters to begin investing the money domestically rather than save. The implications for financial markets liquidity – not to mention related downward pressure on US Treasury yields – is negative.

  * * *

  Even scarcer liquidity in US Capital markets aside, this is how BNP sees the inflation and growth for energy exporters:

  Household consumption benefits: While we recognise that the relationship is not entirely linear, we use inflation basket weights for ‘transportation’ and ‘household & utilities’ (shown in the ‘Economic components’ section of Figure 27) as a means to address the differing demand elasticities prevalent across countries. These act as our proxy for consumption the consumption basket in order to determine the economic benefit that would result as lower energy prices improve household disposable income. This is weighted by the level of domestic consumption relative to the economy, which we also show in the ‘Economic components’ section of Figure 27.

  Reduced industrial production costs: Outside the energy industry, manufacturers will benefit from falling operating costs. Agriculture will not benefit as much and services will benefit even less.

  Trade gains and losses: Lost trade as a result of lower demand from oil-producing trade partners will impact both growth and the current account balance. On the other hand, better consumption from many energy-importing trade partners will provide some offset. The percentage of each country’s exports to energy producing partners represents relative to its total exports is used to determine potential lost growth and CAR due to lower demand from trade partners.

  Domestic FX moves are beyond the scope of our analysis. These will be tied to the level of openness of the economy and the impact of changed demand conditions among trade partners as well as dollar effects. Neither do we address non-oil related political risks (eg sanctions) or any fiscal or monetary policy responses to oil shocks.

  GDP growth

  The least impacted oil producing country, from a GDP perspective, is Brazil followed by Mexico, Argentina, Tunisia and Trinidad & Tobago. The impact on fiscal accounts also appears lower for these than most other EMs.

  Remarkably, the impact of lower oil for Russia’s economic growth is not as severe as might be expected. Sustained oil at USD80/bbl would see growth slow by 1.8pp to 0.6%. This compares with the worst hit economies of Angola (where growth is nearly 8pp lower at -2%), Iraq (GDP slows to -1.6% from 4.5% growth), Kazakhstan and Azerbaijan (growth falls to -0.9% from 5.8%).

  For a drop to USD 80/bbl, it can be seen (in Figure 27) that, in some cases, such as the UAE, Qatar and Kuwait, the negative impact on GDP can be comfortably offset by fiscal stimulus. These economies will probably benefit from such a policy in which case our ‘model-based’ GDP growth estimate would represent the low end of the likely outcome (unless a fiscal policy response is not forthcoming).

  

  

  Global growth in 2015? More like how great will the hit to GDP be if oil prices don’t rebound immediately?

  On the whole, we can say that the fall in oil prices will prove negative, shaving 0.4pp from 2015 EM GDP growth. The collective current account balance will fall 0.58pp to 0.6% of GDP, while the budget deficit will deteriorate by 0.61pp to -2.9%. This probably has the worst implications for EM as an asset class in the credit world.

  Energy exporters will fare worst, with growth falling by 1.9pp and their current account balances suffering negative pressure to the tune of 2.69pp of GDP. Budget balances will suffer a 1.67pp of GDP fall, despite benefits from lower subsidy costs. The impact of oil falling USD 25/bbl will be likely to put push the current account balance into deficit, with our analysis indicating a 0.3% of GDP deficit from a 2.4% surplus before. Fortunately, the benefit to inflation will be the best in EM and could help offset some of the political risks from reduced growth.

  As might be expected, energy importers will benefit by 0.4pp better growth in this scenario. Their collective current account will improve by 0.6pp to 1.1% of GDP.

  The regions worst hit are the Middle East, with GDP growth slowing to 0.3%, which is 3.8pp lower than when oil was averaging USD105/bbl. The regions’ fiscal accounts will also suffer most in EM, moving from a 1.7% of GDP surplus to a 1.8% deficit. Meanwhile, the CAB will drop 5.3pp, although remain in surplus at 3.9%. The CIS is the next-worst hit, from a GDP perspective, with regional growth flat-lined versus 1.91% previously. The region’s fiscal deficit will worsen from 0.7% of GDP to -1.8% and CAB shrink to 0.7% from 3% of GDP. Africa’s growth will come in 1.4pp slower at 2.8% while Latam growth will be 0.4pp slower at 2.2%. For Africa, the CAB/GDP ratio will fall by 2.4pp pushing it deep into deficit (-2.9% of GDP).

  Some regions benefit, however, with Asia ex-China growing 0.45bpp faster at 5.5% and EM Europe (ex-CIS) growing 0.55pp faster at 3.9%, with the region’s CAB/GDP improving 0.69pp, although remain in deficit to the tune of -2.4% of GDP.

  

  And so on, but to summarize, here are the key points once more:

  • The stronger US dollar is having an inverse impact on dollar-denominated commodity prices, including oil. This will affect emerging market (EM) credit quality in various ways.
  • The implications of reduced recycled petrodollars has significant ramifications for financial markets, loan markets and Treasury yields. In fact, EM energy exporters will post their first net drain on global capital (USD8bn) in eighteen years.
  • Oil and gas exporting EMs account for 26% of total EM GDP and 21% of external bonds. For these economies, the impact will be on lost fiscal revenue, lost GDP growth and the contribution to reserves of oil and gas-related export receipts. Together, these will have a significant effect on sustainability and liquidity ratios and as a consequence are negative for dollar debt-servicing risks and credit ratings.

  

  

  

  

  

  

• Where Does The Market Go From Here?

  Back in 2011, we showed the one and only correlation that has mattered to traders during the entire past 7 year period, in which capital markets lost their discounting ability and instead became policy tools micromanaged by central bankers, for an administration which equated the level of the S&P500 with policy success: that of the Fed balance sheet with everything else, and most certainly, asset and stock prices.

  

   

  Then, just before the completion of QE tapering by the Fed, we showed what was also the only chart that has mattered since October, when the Fed stopped directly propping up risk assets when the Taper ended.

  

   

  At the time, we quoted one of the few respectable strategists on Wall Street, DB’s Jim Reid who said that “since the Fed balance sheet was used as an aggressive policy tool post-GFC, the graph suggests that the S&P 500 is well correlated with the size of the Fed balance sheet with the former leading the latter by 3 months. Given that the Fed have recently signalled that they will likely be finishing expanding their balance sheet in October, 3 months before that was July. This is important as virtually all of the mega rally in the last 5 years has come in the Fed balance sheet expansion periods. The other periods have been more challenging for markets.”

  Fast forward one year when after last week’s furious selloff in stocks, the biggest in four years… stocks are precisely where they were a year ago. Just as we expected.

  In fact, on Thursday, when the S&P500 closed at 2027, we merely remarked that based on its fair Fed balance sheet value, the S&P was “almost there“, “there” being a level of just about 1970.

  Almost there pic.twitter.com/UzNDDEibcB

  — zerohedge (@zerohedge) August 20, 2015

   

  What happened on Friday? Precisely that: the convergence between the Fed’s balance sheet and the stock market, which had traded “rich” to the Fed’s BS for just under a year, finally took place, and the S&P is now trading back to where it should be, based on the Fed’s $4.5 trillion in “assets.”

  

  And so, here we are, with the S&P500 back to where it was a year ago, and where it should be based on a Fed balance sheet which amounts to 25% of US GDP.

  Which should come as a surprise to nobody: after all, it is now clear to even the most discredited self-proclaimed finance gurus well maybe not all) that it has all been a function of Fed liquidity injections into stocks (and withdrawals from other asset classes such as Treasurys which tend to flash crash on a monthly basis now).

  The only question, now that stocks are back to their fair excess-liquidity implied value, is what happens next?

  Because since it is once again shown that the S&P is all about the balance sheet, a rate hike, which make no mistake is tightening pure and simple, will simply accelerate the already violent decline. Which may be why Janet Yellen should indeed take Suze Orman’s advice and “comment on rate increases” because suddenly the new generation of 17-year-old hedge fund managers is feeling just a little vulnerable.

  Worse, the next leg up in stocks in this Pavlovian market, may well require the Fed doing precisely what we have said all along is the next inevitable step: QE4…. then 5… then 6…  and so on, until finally the helicopter money finally rains.

  

  

  

  

  

• China Chooses Her Weapons

  By Alasdair Macleod of Gold Money

  China’s recent mini-devaluations had less to do with her mounting economic challenges, and more to do with a statement from the IMF on 4 August, that it was proposing to defer the decision to include the yuan in the SDR until next October

  The IMF’s excuse was to avoid changes at the calendar year-end and to allow users of the SDR time to “adjust to a potential changed basket composition”. It was a poor explanation that was hardly credible, given that SDR users have already had five years to prepare; but the decision confirming the delay was finally released by the IMF in a statement on Wednesday 19th.

  One cannot blame China for taking the view that these are delaying tactics designed to keep the yuan out, and if so suspicion falls squarely on the US as instigators. America has most to lose, because if the yuan is accepted in the SDR the dollar’s future hegemony will be compromised, and everyone knows it. The final decision as to whether the yuan will be included is not due to be taken until later this year, so China still has time to persuade, by any means at her disposal, all the IMF members to agree to include the yuan in the SDR as originally proposed, even if its inclusion is temporarily deferred.

  China was first rejected in this quest in 2010 and since then has worked hard to address the deficiencies raised at that time by the IMF’s executive board. That is the background to China’s new currency policy and what also looks like becoming frequent updates on her gold reserves. It bears repeating that these moves had little to do with her domestic economic conditions, for the following reasons:

  • To have an economic effect a substantial devaluation would be required. That is not what is happening. Furthermore devaluation as an economic solution is essentially a Keynesian proposal and it is far from clear China’s leadership embraces Keynesian economics.
  • Together with Russia through the Shanghai Cooperation Organisation, China is planning an infrastructure revolution encompassing the whole of Asia, which will replicate China’s economic development post-1980, but on a grander scale. This is why “those in the know” jumped at the chance of participating in the financing opportunities through the Asian Infrastructure Investment Bank, which will be the principal financing channel.
  • China’s strategy in the decades to come is to be the provider of high-end products and services to the whole of the Eurasian continent, evolving from her current status as a low-cost manufacturer for the rest of the world.

  China’s leaders have a vision, and it is a mistake to think of China solely in the context of a country whose economy is on the wrong end of a credit cycle. This is of course true and is creating enormous problems, but the government plans to reallocate capital resources from legacy industries to future projects. Rightly or wrongly and unlike any western government at this point in a credit cycle, China accepts that a deflating credit bubble is a necessary consequence of a deliberate policy that supports her future plans. She is prepared to live with and manage the fall-out from declining asset valuations and business failures, facilitated by state ownership of the banks.

  Instead, to understand why she is changing the yuan-dollar rate we must look at currencies from China’s perspective. China is the world’s largest manufacturing power by far, and can be said to control global trade pricing as a result. It then becomes obvious that China is not so much devaluing the yuan, but causing a dollar revaluation upwards relative to international trade prices. She is aware that the US economy is in difficulties and that the Fed is worried about the prospect of price deflation, so lower import prices are the last thing the Fed needs. Now China’s currency move begins to make sense.

  The mini-devaluations were a signal to Washington and the rest of the world that if she so wishes China can dictate the global economic outlook through the foreign exchange markets. China believes, with good reason, that she is more politically and economically robust, and has a better grasp over the actions of her own citizens, than the welfare economies of the west in the event of an economic downturn. Therefore, she is pursuing her foreign exchange policy from a position of strength. And the increments that will now be added to gold reserves month by month are a signal that China believes she can destabilise the dollar through her control of the physical gold market, because it gently reminds us of an unanswered question always ducked by the US Treasury: what evidence is there of the state of the US’s gold reserves?

  China would probably live with a deferral of her SDR membership for another year, if there is a definite decision in October to include her currency in the SDR basket. That being the case, China must be tempted to increase pressure on all IMF members ahead of the October meeting. The strategy therefore changes from less passivity to more aggression over both foreign exchange rates and gold ownership over the next eight weeks. We can expect China to tighten the screw if necessary.

  The stakes are high, and China’s devaluation of only a few per cent has caused enough chaos in capital markets for now. But if the eventual answer is that the yuan will not be allowed to join the SDR basket, it will be in China’s interest to increase the pace of development of the new BRICS bank instead with its own version of an SDR, selling dollar reserves and underlying Treasuries to fund it. The threat that China will turn her back on the post-war financial system and the IMF would also undermine the credibility of that institution more rapidly perhaps than the dollar’s hegemony if the yuan was accepted. And if a US-controlled IMF loses its credibility, even America’s allies will desert her, just as they did to join the Asian Infrastructure Investment Bank a few months ago.

  It was always going to be the US that faced a predicament from China’s growing economic power. She has chosen to bluff it out instead of gracefully accepting the winds of change, as Britain did over her empire sixty years ago. Change in the economic pecking-order is happening again whether we like it or not and China will have her way.

  * * *

  And, as a reminder from 2013, here again is the “US vs China Currency War For Dummies”

  

  

  

  

  

  

• Speak, That I May See Thee

  My stomach rolled over when I read this post from ZeroHedge about Suze “the teeth” Orman. She tweeted out the following, indicating not only that she’s so well off that she’s just going to kick back for a year, but that she wants Yellen to “help us out” since we’ve all suffered the unspeakable calamity of stocks actually going down a few percent.

  

  Right on the heels of this, everyone’s favorite financial clown, Jim Cramer, sycophantically acknowledged the counsel of his “good friend’ and retweeted her plea:

  

  What struck me, thumbing through the reactions, was the sharp contrast between those who apparently support these two nincompoops and those who didn’t. The tone of the naysayers was along these lines:

     

  So we have a plethora of intelligent, well-spoken people pushing back against these disgusting bulls who demand to suck at the government teat until the end of time. In sharp juxtaposition to this, here’s a sampling of those who applaud Suze and Jimze:

  

  

  

  We have a smattering of bleating (“request help!”), illiteracy to a degree that I didn’t think possible (“advise” instead of “advice” and “invester’s“, which manages to not only be misspelled but also is an oaf-like way of attempting to express a plural noun), and the completely deluded notion that Janet Yellen is sitting around reading tweets from the likes of these buffoons.

  I’ve said it before, and I’ll say it again: stock market bulls are welfare queens par excellance, and I suppose we should not be surprised that since they’ve been on the dole since October 2008, that they’ve become very accustomed to what is a gargantuan version of the entire nation arranging to be receiving liability checks from the federal government since actually working is just too hard.

  

  

  

  

• Clinton Madison: Tying It All Together

  There is at least one hacked account that is sure to have been mysteriously deleted… You know, for personal reasons.

  

  h/t @joshgreenman

  

  

  

  

  

• Productivity In America Now On Par With Agrarian Slave Economy

  Submitted by Eugen Bohm-Bawerk

  In the first episode we showed how the US became an unsustainable service sector based economy from the 1970s onward when service sector employment diverged from manufacturing without a corresponding boost in productivity. In the second episode we laid out the consequences that transition has had on labour in terms of lower wages and benefits. In addition, we reiterated our argument that monetary policy has become slave to the service sector as it has become linked to the much touted wealth effect (capital consumption) that is now an integral part of the American business cycle.

  Now it is time to take a closer look at productivity measured in terms of GDP per capita. While this is not an entirely correct way to measure productivity, it does adhere to new classical growth model theories which posit that in a developed economy, reached steady state, the only way to increase GDP per capita is through increased total factor productivity. In plain English, growth in GDP per capita equals productivity growth. The reason we use this concept instead of more advanced productivity measures is to get a long enough time series to properly understand the underlying fundamental forces driving society forward.

  In our main chart we have tried to see through all the underlying noise in the annual data by looking at a 10-year rolling average and a polynomial trend line.

  In the period prior to the War of 1812 US productivity growth was lacklustre as the economy was mainly driven by agriculture and slaves (slaves have no incentive to work hard or innovate, only to work just hard enough to avoid being beaten). From 1790 to 1840 annual growth averaged only 0.7 per cent.

  As the first industrial revolution started to take hold in the north-east, productivity growth rose rapidly, and even more during the second industrial revolution which propelled the US economy to become the world largest and eventually the global hegemon (see bonus chart at the end).

  As a side note, it is worth noting that while the US became the world largest economy already by 1871, Britain held onto the role as a world hegemon until 1945. Applied to today’s situation in light of the fact that China is, by some measures, already the largest economy on the planet, it does not mean it will rule the seven seas anytime soon. In our view, they probably never will, but that is a story for another time.

  

  Adjusting for the WWII anomaly (which tells us that GDP is not a good measure of a country’s prosperity) US productivity growth peaked in 1972 – incidentally the year after Nixon took the US off gold. The productivity decline witnessed ever since is unprecedented. Despite the short lived boom of the 1990s US productivity growth only average 1.2 per cent from 1975 up to today. If we isolate the last 15 years US productivity growth is on par with what an agrarian slave economy was able to achieve 200 years ago.

  In addition, the last 15 years also saw an outsized contribution to GDP from finance. If we look at the US GDP by contribution from value added by industry we clearly see how finance stands out in what would otherwise have been an impressively diversified economy.

  

  With hindsight we know that finance did more harm than good so we can conservatively deduct finance from the GDP calculations and by doing so we essentially end up with no growth per capita at all over a timespan of more than 15 years! US real GDP per capita less contribution from finance increased by an annual average of 0.3 per cent from 2000 to 2015. From 2008 the annual average has been negative 0.5 per cent!

  In other words, we have seen a progressive (pun intended) weakening of the US economy from the 1970s and the reason is simple enough when we know that monetary policy broken down to its most basic is a transaction of nothing (fiat money) for something (real production of goods and services). Modern monetary policy thereby violates the most sacred principle in a market based economy; namely that production creates its own demand. Only through previous production, either your own or borrowed, can one express true purchasing power on the market place.

  The central bank does not need to worry about such trivial things. They can manufacture the medium of exchange at zero cost and express purchasing power on the same level as the producer. However, consumption of real goods and services paid for with zero cost money must by definition be pure capital consumption.

  Do this on a grand scale, over a long period of time, even a capital rich economy as the US will eventually be depleted. Capital per worker falls relative to competitors abroad, cost goes up and competitiveness falls (think rust-belt). Productive structures cannot be properly funded and the economy must regress to align funding with its level of specialization.

  In its final stage, investment give way for speculation, and suddenly finance is the most important industry, pulling the best and brightest away from every corner of the globe, just to find more ingenious ways to maximise capital consumption.

  As the slave economy got perverted by incentives not to work, so does the speculative fiat based economy, which consequently create debt serfs on a grand scale.

  Bonus chart:

  

  

  

  

  

  

• Jim Chanos' Dire Prediction On China: "Whatever You Might Think, It's Worse"

  “In fact, like many of us, sometimes they don’t have a clue.”

  That’s from Jim Chanos, who sat down on Friday with CNBC’s Fast Money A-Team which, like the rest of the mainstream financial media punditry, can’t seem to figure why things unravelled so quickly last week. 

  Chanos was referring to the Chinese government and more specifically to their efforts to simultaneously manage a decelerating economy, a currency devaluation, and a bursting stock market bubble.

  As we’ve said on too many occasions to count, the task is quite simply impossible, a reality which often manifests itself in contradictory policy initiatives and directives emanating from Beijing. Despite the plunge protection national team’s best efforts to channel some CNY900 billion into SHCOMP large caps, China’s stock market looks to be on the verge of an outright meltdown, and the effort to support the yuan after the devaluation is draining liquidity and tightening money markets, rendering policy rate cuts less effective even as further easing becomes more necessary with every FX intervention. 

  In short, the situation is, as Chanos puts it, “worse than you think,” and because it’s sometimes hard to get through to CNBC’s Halftime crew, Chanos reiterated the sentiment: “Whatever you might think, it’s worse.”

  See the interview below.

  

  

  

  

  

• "The Seven Year Glitch" – Has The Time Come

  A couple of interesting charts from State Street’s “Mr Risk” Fred Goodwin, courtetsy of Saxo’s Steen Jakobsen, both of which deal with business cycles, the first in the economy by way of the Citigroup surprise index which may have recently hit its local maximum and is now due for a substantial deterioration, in line with virtually all other high frequency economic indicators except for the job market which is kept afloat courtesy of low-quality, low paying waiters and bartender jobs (resulting in the “surprising” zero wage growth).

  

   

  The second one is more suggestive: it looks at key events occuring in 7 year cycles, finds that every recent multiple of the year 2015 going back in 7 year increments brings
  with it some major adverse market event, and asks: is it 2015’s turn?

  

  

  

  

  

  

• What Does The Fed Do Now? The FOMC Decision Tree

  Over the past few months, numerous so-called “experts” (they know who they are) desperately tried to come up with both their own facts and their own history by saying that, far from fearing the Fed’s decision, “a rate hike would be good for stocks.” Well, as last week’s historic VIX surge, and biggest market plunge in years confirmed, that was not the case. In fact, what happened is what we summarized in 7 words late last week:

  The Rate Hike Tantrum has finally arrived

  — zerohedge (@zerohedge) August 20, 2015

  In short: the market made it very clear that a rate hike is not welcome. Promptly other so-called “personal finance experts” joined in the demands for a bailout.

  Others, such as Bank of America, were slightly more tongue-in-cheek in their “explanation” of what it would take for the Fed to panic and not only delay rate hikes but pass Go and proceed straight to QE4 (for those who missed our post on the topic, the answer is go short Glencore and Noble Group).

  But back to the $64TN question: what does the Fed do? One attempt at an explanation taking into account last week’s market plunge comes from Nomura, which provides a “2015 Scenario Analysis” in which it “breaks down various monetary policy (rate hike options) and rates market implications ahead.”

  This is the summary:

  The minutes to the July meeting revealed that the Committee has doubts about a variety of aspects of the economic outlook, including growth, inflation, and developments abroad. Incoming data since the July FOMC meeting have not really answered those questions, all the while financial conditions have tightened materially recently. As such, we believe that the probability the FOMC will raise short-term interest rates for the first time in September has decreased materially while the probability of liftoff in December or no interest rate increase this year has increased. We now only put a 20% probability of liftoff in September (previously 35%) while we have raised the likelihood of liftoff in December to 44% (previously 40%) and liftoff after December to 36% (previously 25%). 

  Here are the details broken down by meeting:

  The September FOMC meeting

   

  We think there is only a 20% likelihood that the FOMC will decide to raise interest rates at its meeting in September. The minutes to the July meeting revealed that the Committee has doubts about a variety of aspects of the economic outlook, including growth, inflation, and developments abroad (see Minutes of the July FOMC Meeting, Policy Watch, 20 August 2015). Incoming data since the July FOMC meeting have not really answered those questions. Moreover, developments abroad, notably in China, have raised new questions about the outlook for the rest of the global economy. Last, as noted above, financial conditions have tightened materially.

   

  A decision to raise interest rates at the FOMC meeting in September would probably require a combination of factors. The economic data released between now and the meeting—both real side and inflation—would have to surprise to the upside. Developments abroad and financial conditions would have to stabilize. There would have to be a strong consensus within the Committee on the need to start the interest rate adjustment sooner rather than later. This is certainly possible, but it does not seem likely.

   

  We will get some new data between now and the September FOMC meeting (see Fig. 10). But the amount of additional information that the FOMC will have at its September meeting will be limited. An important reason why we doubt that the FOMC will raise rates in September is that there simply isn’t enough time to answer the questions that the Committee seemed to be struggling with at its meeting in July.

   

  The December Meeting

   

  If the FOMC does not raise rates at its meeting in September (and it stays on hold in October), the issues that will drive a decision in December are mostly the same. That is: a decision will depend on the outlook for growth and inflation, financial conditions, and developments abroad. We think there is a good likelihood (55%) that the economy will have evolved in a way that leads the FOMC to initiate liftoff in December. We think that positive fundamentals for consumers will drive stronger spending. We think that investment will recover as drilling activity in the oil gas sector stabilizes. We think that housing activity will continue to grow at a healthy pace. We think that growth in China will remain on target and that financial conditions are likely to stabilize. We think that labor markets will continue to improve. We think that a forward-looking assessment of inflation will be more positive. The additional time between the September and December meetings will make all of these positive developments apparent.

   

  Of course, there may not be enough progress on these measures to convince the Committee that it is time to raise short-term interest rates. Moreover, concerns about year-end issues may cause it to delay liftoff until next year.

  For what it’s worth, we remain in “concerns about year-end issues” camp (clearly the Fed realizes there is nothing quite as destructive as 6 inches of snow to the Apple Sachs Industrial Average, pardon the world’s biggest economy as the past two “harsh winters” have shown), or in the worst case: a rate hike followed promptly by QE4.

  Here, for those who naively still think the Fed is data-driven, here is Nomura’s full decision-tree.

  

  

  

  

  

  

• A Modern-Day Shoeshine Boy Moment

  By Pater Tenebrarum of Acting Man

  A Modern-Day Shoeshine Boy Moment

  There is a well-known – though likely apocryphal – anecdote from the end of the roaring 20s. It involves Joseph P. Kennedy, US ambassador to the UK from the late 1930s to mid 1940s. Before he entered the civil service and politics, he had made a name (and a fortune) for himself as a businessman and investor. On Wall Street he inter alia ran the Libby-Owens-Ford stock pool with a number of Irishmen, a loose association of investors pooling their resources and dedicated to manipulating the hell out of Libby-Owens-Ford stock by deftly using insider information to their advantage.

  Today he would be deemed a criminal, but at the time his activities on the stock exchange were perfectly legal and he was widely admired for being a wily operator. Rightly so, we should add.

  

  Meet Joseph P. Kennedy, wily Wall Street operator.
  Photo credit: Wide World Photos

   

  As the story goes, Kennedy realized several months before the crash of 1929 that he had to get out of the market. What made him realize it was this: In the winter of 1928, he decided to stop to have his shoes shined before going to his office. When the shoe-shine boy had finished, he suddenly offered Kennedy a stock tip, without having been solicited to do so: “Buy Hindenburg!”

  Kennedy is said to later have told people that he sold off his stock market positions shortly thereafter, as he was thinking: “You know it is time to sell when shoeshine boys start giving you stock tips. This bull market is over.”

  

  A member of the anonymous stock tipsters association at work
  Photo credit: pa/akg

  A Modern-Day Equivalent

  The unusual escalation in the stock market’s recent weakness (right into an options expiration – this is practically unheard of these days!) and our brief discussion of the situation yesterday (see “The Stock Market in Trouble” for details), caused us to wonder whether we could think of anything along similar lines that has happened recently.

  Of course we are no Joseph Kennedy, but we are continually exposed to market-related information, including assorted spam. Keep in mind in this context that after Kennedy received his shoeshine boy warning, the market still rose for another eight months. So there is a certain lead time involved when the shoeshine boy bell rings, and given the market’s oversold state, it may actually be ripe for a bounce here.

  As we also noted yesterday, the current bubble is not comparable to the mania that culminated in the year 2000. At the time, one could actually watch out for very close equivalents to the shoeshine boy, given the huge participation of retail traders in the market. Nowadays we have a “bubble of professionals”, so we must look for something slightly different. And we have found it – or rather, it actually fell into our lap yesterday, or rather, suddenly appeared in our inbox.

  What we found there was this ad:

  “Capture Top Momentum Opportunities! Investing in securities or asset classes with positive price momentum can potentially deliver higher returns than a traditional buy-and-hold strategy. The Horizons Managed Multi-Asset Momentum ETF (“HMA”) is the first actively managed ETF in Canada to give investors access to a globally diversified portfolio of momentum investment opportunities.”

   

  Just to make that clear, we don’t want to pick in any way on the firm offering this undoubtedly well-managed (if potentially crash-prone) product. We are quite sure countless other examples along similar lines exist, but we were certainly struck by the timing of this offer. It almost screams “shoeshine boy”.

  This became even more clear when a friend shortly thereafter pointed us to the following chart published by Bloomberg :

  

  The “momentum trade” over the past 11 months, click to enlarge.

  To be sure, the associated Bloomberg article expresses a certain degree of skepticism, which could end up giving this trade another lease of life:

  “Virtually nothing has worked better in this year’s thinning equity market than momentum, where you load up on stocks that have risen the most in the past two to 12 months and hope they keep going up. Sent aloft by sustained rallies in biotech and media shares, concern is mounting that the trade has gotten too popular, setting the stage for sharper swings.

   

  […]

   

  With breadth narrowing before the Federal Reserve raises rates, sticking with winners has been a blueprint for success in 2015.

   

  […]

   

  Individual investors have noticed. One of the largest exchange-traded funds employing the tactic, the iShares MSCI USA Momentum Index Fund, lured a record $125 million in July, boosting its total by about a fifth. It hasn’t had a single month of outflows since it started in 2013.

   

  Owning it has paid off, too: the fund is up 8.2 percent in 2015, compared with 1.8 percent in the S&P 500. Another ETF, the Powershares DWA Momentum Portfolio, recently saw assets cross $2 billion and has returned more than 7 percent this year. Still, some of the trades contributing the success have been weakening.”

  (emphasis added)

  All in all we would say that it is probably not the most auspicious moment in time to offer yet another “momentum” ETF to the public – even a “multi-asset” one.

   

  Conclusion:

  In recent days, the market’s momentum darlings have suffered a bit. We cannot say with certainty if they deserve to be called “former momentum darlings” already, as there is always a chance that they will rebound shortly. Especially with us poking fun at the concept, they might decide to poke back (good thing we are wearing glasses, so they can’t poke us in the eye).

  Readers are more than welcome to tell us their shoeshine boy stories, if they have any to tell. We would certainly consider publishing the best ones (mail us at info@acting-man.com, or alternatively use the comments section if you need to get it off your chest right away).

  

  

  

  

  

  

• Is This Where The Long Lost Nazi "Gold Train" Is Located

  Earlier this week, two people, a Pole and a German, said they may have found the legendary, long-lost Nazi train rumored to be full of gold, gems and guns, i.e., the prize possessions of years of Third Reich plunder, that disappeared just before the end of World War Two. As BBC first reported, the train was believed to have gone missing near what is now the Polish city of Wroclaw as Soviet forces approached in 1945.

  It is said, the Mail adds, that Nazis loaded all the valuables they had looted in Wroclaw, then called Breslau and part of Greater Germany, to escape the advancing Red Army. According to a local website, the train was 150m long and may have up to 300 tonnes of gold as well as unknown “hazardous materials” on board.

  

  A law firm in south-west Poland says it has been contacted by the two men who have discovered the armored train: their demand to unveil the precise whereabout of their discovery: 10% of the value of the train’s contents. Since the contents of the train has been said to be in the billions, such an agreement would make the two discoverers rich overnight.

  

  The two men who claim to have found the long lost gold train

  According to local news websites the apparent find matched reports in local folklore of a train carrying gold and gems that went missing at the end of World War Two near the gothic Ksiaz castle, which served as the Nazi’s headquarters in the area during World War II. The claim was made to a law office in Walbrzych, 3km (2 miles) from Ksiaz castle.

  

  Ksiaz castle, Nazi headquarters during World War II

  Some of the locals are skeptical, perhaps because all previous searches for the train had so far proved fruitless: Walbrzych’s local leader Roman Szelemej said he doubted the supposed find but would monitor developments. “Lawyers, the army, the police and the fire brigade are dealing with this,” Marika Tokarska, an official at the Walbrzych district council, told Reuters.

  Still this time may be different: Joanna Lamparska, a historian who focuses on the Walbrzych area, told Radio Wroclaw the train was rumored to have disappeared into a tunnel. “The area has never been excavated before and we don’t know what we might find.”

  At this point the story turns bizarre, because the latest discovery – if it is indeed that – may not be genuine: according to the Mail, a group calling itself The Silesian Research Group insists that it in fact found the legendary train here over two years ago.  The group claims the  duo who made the news this week by filing the discovery claim with local authorities pilfered their information.

  

  There is a second group of treasure hunters who claim to have found the train.
  Andzrej Boczek, one of the members, showed MailOnline where he believes it to be hidden 

  One group member, who asked not to be identified after receiving threatening phone calls from a ‘mysterious man,’ told MailOnline: ‘About two or three years ago we carried out extensive research of the area using geo-radar and magnetic readings. We came across an anomaly about 70 metres below the surface and further investigation revealed this was most likely a train.

  ‘It is well-known that the Nazis built a network of railway lines under the mountains.

  ‘And we know that in May 1945 gold and other valuables from the city of Wroclaw were being transported to Walbrzych when they disappeared between the towns of Lubiechow and Swiebodzice.’

  Resting at the foot of the Sowa (Owl) mountains in woods three miles outside of the town of Walbrzeg in western Poland, is the alleged train, filled with gold, possibly diamonds and maybe even masterpieces stolen from Polish noble families and museums. Specifically, according to the researchers, the actual train is now resting somewhere under the surface of the hill shown in the photo below.

  

  The “gold train” is said to be located under this hill

  The researcher went on: ‘During the war, there used to be an SS barracks here which was heavily guarded. And just behind the railway bridge was the entrance to the tunnel. We recorded our findings and marked the location on a map as well as storing the information on computer records.”

  Here the researcher’s story becomes even more bizarre: “We were and are convinced that this is where the gold train is. But, soon after our discovery, the map and data for the area went missing. At first we thought it had been mislaid, but then we heard about the findings of these two people and we realised they must have got hold of our information.”

  He then added that he had been ‘warned off’ talking about the subject or investigating it further” adding that “last night I received a phone call from a mysterious man who warned me to stay away from the story and to not get involved.

  “A lot of dangerous people are interested in finding this train, this could have been a warning from one of them. This man who called me knows that I know something.”

  Joanna Lamparska explains that there are two main theories about the gold train. “One is that is hidden under the mountain itself. The second is that it is somewhere around Wa?brzych. Until now, no-one has ever seen documents that confirm the existence of this train.”

  The story is given credence because under the local hills is a mammoth subterranean project called RIESE – German for giant – which was the construction of a honeycomb of tunnels, bunkers and underground stations begun in 1941. 

  Stretching from the gothic castle of Ksiaz overlooking the town of Walbrzeg they built the labyrinth deep into the surrounding mountains. The idea was to move supplies, factories and workers underground in the event of Allied bombing.

  

  One of a series of tunnels the Nazis built in the mountain

  Local explorer and treasure hunter Andrzej Boczek, who is also a member of the Silesian Research Group, guided MailOnline to the site where he says the train is buried. He said: ‘We think it is here because first of all it is between the two places were we know it disappeared. And it is just 2.37km from Ksiaz castle which was the German headquarters during the war. That’s where all treasures were taken.’

  The 55-year-old, who has been searching the region for 25 years and has already found numerous artefacts, said: ‘Also, this path used to be where the path ran down to the tunnel,’ he says pointing at a dirt track leading towards the woods. “We don’t know where the entrance is as we need permission to dig. But we have carried out tests and we know something is there. During the war this place was open to the public and then it suddenly was closed by the Germans, they clearly had a secret to hide. A man who lived nearby told me he used to see strange activity at night with trains rolling in and disappearing into the tunnel.”

  Two other locations identified by local media in Poland have since been rubbished by experts. One is close to the town of Walbrzych the other in the town of Walim, 17km away. Historian Mrs. Lamparska added: “These two areas are very well known and have been well-researched. The chances of the train being there are zero. It is likely that they found something, however, whether this is the gold train is a different matter.”

  But while the latest rumor that the legendary train has been found may end up being a red herring once again, people in the region have woken up their Indiana Jones and are rushing into the area: the news of the possible discovery has sent people from across Germany and Poland to the area with metal detectors. Germans piling on to trains the spoils of their carpetbagging in foreign lands towards the end of the war was not a rare occurrence. And the Reichsbank in Berlin, many of its buildings and vaults shattered by intense American and British air raids, used precious Deutsche Bahn rolling stock to hide treasure in regional towns, often in the cellars of fortified post offices.

  The loot was destined for a number of purposes: getaway money for high-ranking war criminals, the basis for a German resistance movement called ‘Werewolf’ intended to fight the occupiers; and to become the pension funds for generals whose vast estates bequeathed to them by a grateful Fuhrer in the east which fell into the hands of new, unforgiving owners.

  That is why the story of the 590-foot long train which steamed into the tunnel long ago has fired the imagination of many. But it also comes with many caveats, as expressed by Focus magazine in Germany, which asked: ‘Is there really a train and is it mined?

  Real or not, the story may be enough to provide an aspiring screenwriter enough ammo for the next Indiana Jones, or at least American, er European, Treasure sequel.

  Finally, for those looking for real treasure, forget the Third Reich’s plunder, which by 1945 had been mostly spent, but focus on trains and other vehicles operated by the Bank of International Settlements: the discovery of even one such train should be enough to keep a small country funded in perpetuity.

  

  

  

  

  

• Making Sense Of The Sudden Market Plunge

  Submitted by Chris Martenson of PeakProsperity

  Making Sense Of The Sudden Market Plunge

  The global deflationary wave we have been tracking since last fall is picking up steam.  This is the natural and unavoidable aftereffect of a global liquidity bubble brought to you courtesy of the world’s main central banks.  What goes up must come down – and that’s especially true for the world’s many poorly-constructed financial bubbles, built out of nothing more than gauzy narratives and inflated with hopium.

  What this means is that the traditional summer lull in financial markets has turned August into an unusually active and interesting month. August, it appears, is the new October.

  Markets are quite possibly in crash mode right now, although events are unfolding so quickly – currency spikes, equity sell offs, emerging market routs and dislocations, and commodity declines –  that it’s hard to tell for sure.  However, that’s usually the case right before and during big market declines.

  Before you read any further, you probably should be made aware that, at Peak Prosperity, our market outlook has been one of extreme caution for several years.  We never bought into so-called “recovery” because much of it was purely statistical in nature, and had to rely on heavily distorted and tortured ‘statistics’ to be believed.  Okay, lies is probably a more accurate term in many cases.

  Further, most of the gains in financial assets engineered by the central banks were false and destined to burstbecause they were based on bubble psychology, not actual returns.

  Which bubbles you ask?  There are almost too many to track. But here are the main ones:

  • Corporate bond bubble
  • Corporate earnings bubble
  • Junk bond bubble
  • Sovereign debt bubble
  • Equity bubbles in various markets (US, China) and sectors (Tech, Biotech, Energy)
  • Real estate bubbles, especially in the commodity exporting countries
  • Central bank credibility bubble (perhaps the largest and most dangerous of them all)

  What’s the one thing that binds all of these bubbles together?  Central bank money printing.

  Passing The Baton

  Operating in collusion, the world’s major central banks passed the liquidity baton back and forth between them, first from the US to Japan, then from Japan to Europe, then back to the US, then over to Europe again where it now resides.  Seemingly endless rounds of QE that didn’t always do what they were supposed to do, and plenty of things they were not intended to do.

  The purpose of printing up trillions and trillions of dollars (supposedly) was to create economic growth, drive down unemployment, and stoke moderate inflation.  On those fronts, the results have been dismal, horrible, and ineffective, respectively.

  However, the results weren’t all dismal.  Big banks reaped windfall profits while heaping record bonuses on themselves for being at the front of the Fed’s feeding trough. The über-wealthy enjoyed the largest increase in wealth gains in recorded history, and governments were able to borrow more and more money at cheaper and cheaper rates allowing them to deficit spend at extreme levels.

  But all of that partying at the top is going to have huge costs for ‘the little people’ when the bill comes due.  And it always comes due.  Money printing is fake wealth; it causes bubbles, and when bubbles burst there’s only one question that has to be answered: Who’s going to eat the losses?

  The poor populace of Greece is just now discovering that it collectively is responsible for paying for the mistakes of a small number of French and German banks, aided by the collusion of Goldman Sachs, in hiding the true state of Greek debt-to-GDP using sophisticated off-balance sheet derivative shenanigans. As a direct result, the people of Greece are in the process of losing their airports, ports, and electrical distribution and phone networks to ‘private investors’ — mainly foreigners harvesting the last cash-generating assets the Greeks have left to their names.

  Broken Markets

  As we’ve detailed repeatedly, our “markets” no longer resemble markets.  They are so distorted, both by central bank policy and technologically-driven cheating, that they no longer really qualify as legitimate markets.  Therefore we’ve taken to putting double quote marks around the word “”market”” often when we use it.  That’s how bad they’ve become.

  Where normal markets are a place for legitimate price discovery, todays “”markets”” are a place where computers battle each other over scraps in the blink of an eye, ‘investors’ hinge their decisions based on what the Fed might or might not do next, and rationalizations are trotted out by the media for why inexplicable market price movements make sense.

  Instead, we view the “”markets”” as increasingly the playgrounds of, by and for the gigantic market-controlling firms whose technology and market information have created one of the most lopsided playing fields in our lifetimes.

  Signs of these distortions abound. One completely odd chart is this one, showing that the average trading range of the Dow (ytd) was the lowest in history as of last week (before this week’s market turmoil hit).  And that was despite Greece, China, QE, Japan, oil’s slump, Ukraine, Syria, Iran and all of the other ample market-disturbing news:

  

  (Source)

  Based on the above chart, you’d think that 2015 up through mid-August was the most serene year of the last 120 years. Of course, it’s been anything but serene.

  The explanation for this locked-in trading range is a combination of ultra-low trading volume and the rise of the machines.  There have been times recently when practically 100% of market volume was just machines playing against each other…no actual investors (i.e, humans) were involved. 

  As long as there was ample liquidity, then the machines were content to just play ping pong with the “”market””. Which they did, crossing the S&P 500 over the 2,100 line 13 times before the recent sell-off took hold.

  But that’s not the most concerning part about having broken markets.  The most concerning thing centers on the fact that things that should never, ever happen in true markets are happening in todays “”markets”” all the time.

  One measure of this is how many standard deviations (std dev) an event is away from the mean. For example, if the price of a financial asset moves an average of 1% per year, with a std dev of 0.25 %, then it would be slightly unusual for it to 2%, or 3%.  However it would be highly unusual if it moved as much as 6% or 7%.

  Statistics tells us that something that 3 std dev movements are very unlikely, having only a 0.1% chance of happening.  By the time we get to 6 std devs, the chance is so small that what we’re measuring should only happen about once every 1.3 billion years. At 7 std dev, the chance jumps up to once every 3 billion years. 

  Why take it to such a ridiculous level? Because those sorts of events are happening all the time in our “”markets”” now. And that should be deeply concerning to everyone, as it was to Jamie Dimon, CEO of JP Morgan:

  ‘Once-in-3-Billion-Year’ Jump in Bonds Was a Warning Shot, Dimon Says

   

  Apr 8, 2015

   

  JPMorgan Chase & Co. head Jamie Dimon said last year’s volatility in U.S. Treasuries is a “warning shot” to investors and that the next financial crisis could be exacerbated by a shortage of the securities.

   

  The Oct. 15 gyration, when Treasury yields fluctuated by almost 0.4 percentage point, was an “unprecedented move” that would have serious consequences in a stressed environment, Dimon, the New York-based bank’s chairman and chief executive officer, said in a letter Wednesday to shareholders. Treasuries are supposed to be among the most stable securities.

   

  Dimon, 59, cited the incident as he waded into a debate about whether bank regulations implemented after the 2008 financial crisis exacerbate price declines by limiting the ability of Wall Street banks to make markets. It’s just a matter of time until some political, economic or market event triggers another financial crisis, he said, without predicting one is imminent.

   

  The Treasuries move was “an event that is supposed to happen only once in every 3 billion years or so,” Dimon wrote. A future crisis could be worsened because there “is a greatly reduced supply of Treasuries to go around.”

   

  (Source)

  While Mr. Dimon used the event to suggest that bank regulations were somehow to blame, that explanation is self-serving and disingenuous.  He’d use any excuse to try and blame bank regulations; that’s his job, I guess.

  Instead what happened was that our “”market”” structure is so distorted by computer trading algorithms, with volume so heavily distorted by their lighting-fast reflexes, that one of those ‘once in 3-billion years events’ resulted.

  This simply wouldn’t have happened if humans were still the ones doing the trading, but they aren’t. All the colored jackets have been hung up at the CME, and human market makers on the floor of the NYSE are rapidly slipping away into the sunset as algorithms now run the show.

  The good news about computers is that they allow our trading to be faster and cheaper, presumably with better price discovery.  The bad news is that nobody really understands how the whole connected universe of them interact and that, from time to time, they go nuts.

  As Mr. Dimon hinted, they have the chance of taking the next financial downturn and converting it into a certified financial meltdown

  How common are these ‘billion year events’?

  They happen all the time now. Here’s a short list:

  

  (Source)

  All of this leads us to conclude that the chance of a very serious, market-busting accident is not only possible, but that the probability approaches 100% over even relatively short time horizons. 

  The deflation we’ve been warning about is now at the door. And one of our big concerns is that we’ve got “”markets”” instead of markets, which means that something could break our financial system as we know and love it.

  From the Outside In

  One of our main operating models at Peak Prosperity is that when trouble starts it always begins at the edges and moves from the outside in.

  This is true whether you are looking at people in a society (food banks see a spike in demand well before expensive houses decline in price), stocks in a sector (the weakest companies decline first), bonds (junk debt yields spike first), or across the globe where weaker countries get in trouble first.

  What we’re seeing today is an especially fast moving set of ‘outside in’ indicators that are cropping up so fast it’s difficult to keep track of them all.  Here are the biggest ones.

  Currency Declines

  The recent declines in emerging market (EM) currencies is a huge red flag.  This combined chart of EM foreign exchange shows the escalating declines of late.

  

  (Source)

  Since last Monday, here’s the ugly truth:

  

  Many of these countries have been using precious foreign reserves to try and stem the rapid declines of their currencies, but I fear they will all run out of ammo before the carnage is over.

  What’s happening here is the reverse part of the liquidity flood that the western central banks unleashed.  The virtuous part of this cycle sees investors borrow money cheaply in Europe, the US or Japan, and then park in in EM countries, usually by buying sovereign bonds, or investing in local companies (especially those making a bundle off of the commodity boom that was happening).

  So on the virtuous side, a major currency was borrowed, and then used to buy whatever local EM currency was involved (which drove up the value of that currency), and then local assets were bought which either drove up the stock market or drove down bond yields (which move as in inverse to price).

  The virtuous part of the cycle is loved by local businesses and politicians.  Everything works great.  The currency is stable to rising, bond yields are falling, stocks are rising, and everyone is generally happy.

  However when the worm turns, and it always does, the back side of this cycle, the vicious part, really hurts and that’s what we’re now seeing.

  The investors decide that enough is enough, and so they sell the local bonds and equities they bought, driving both down in price (so falling stock markets and rising yields), and then sell the local currency in exchange for dollars or yen or euros, whichever were borrowed in the first place.

  And thus we see falling EM currencies.

  To put this in context, many of the above listed currencies are now trading at levels either not seen since the Asian currency crisis of 1997, or at levels never before seen at all.  The poor Mexican peso is one of the involved currencies, which has fallen by 12% just this year, and almost made it to 17 to the dollar early this morning (16.9950).  Battering the peso is also the low price of oil which is absolutely on track to destroy the Mexican federal budget next year.

  Stock Market Declines

  In concert with the currency unwinds we are seeing deep distress in the peripheral stock markets.  There are now more than 20 that are in ‘bear country’ meaning they’ve suffered declines of 20% or more from their peaks.

  Here are a few select ones, with Brazil being in the worst shape:

  

  

  

  

  All of these signs reinforce the idea that the great central back liquidity tsunami has reversed course and is about to create a lot of damage and suck a lot of debris out to sea.

  The Commodity Rout

  A lot of EM countries are commodity exporters.  They sell their minerals trees and rocks to the rest of the world, by which we mean to China first and foremost.

  Commodities are not just doing badly in terms of price, they are absolutely being crushed, now down some 50% over the past four years.

  

  (Source)

  Commodities tells a number of things besides the extent of EM economic happiness or pain – they tells us whether the world economy is growing or shrinking.  Right now they are saying “shrinking” which is confirmed by all of the recent Chinese import, export and manufacturing data, along with the dismal results coming out of Japan (in recession), Europe and the US.

  Conclusion Part I

  As we’ve been warning for a long time, you cannot print your way to prosperity, you can only delay the inevitable by trading time for elevation.   Now, instead of finding ourselves saddled with $155 trillion of global debt as we did in 2008, we’re entering this next crisis with $200 trillion on the books and interest rates already stuck at zero.  We are 30 feet up the ladder instead of 10 and it’s a long way down.

  What tools do the central banks really have left to fight the forces of deflation which are now romping across the financial landscape from the outside in?

  If the computers hiccup and give us some institution smashing or market busting 8 sigma move what will the authorities do?  Shut down the markets?  It’s a possibility, and one for which you should be prepared.

  Where are we headed with all this?  Hopefully not the way of Venezuela which is now so embroiled in a hyperinflationary disaster that stores are stripped clean of basic supplies, social unrest grows, and creative street vendors are now selling empanadas wrapped in 2 bolivar notes because they are, literally, far cheaper than napkins.  Cleaner?  Maybe not so much.  I wouldn’t want to eat off of currency.

  

  (Source)

  But make no mistake, the eventual outcome to all this is captured brilliantly in this quote by Ludwig Von Mises, the Austrian economist:

  There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

  The credit expansion happened between 1980 and 2008, there was a warning shot which was soundly ignored by ignorant central bankers, and now we have more, not less, debt with which to contend.

  Venezuela has already entered the ‘total catastrophe’ stage for its currency, but Japan will follow along, as will everyone eventually who lives in a country that finds itself unable to voluntarily abandon the sweet relief of booms enabled by credit creation.

  

  

  

  

  

• Deez Nuts On Top Of Hillary Clinton

  On Wednesday we documented the unlikely rise of dark horse Presidential candidate “Deez Nuts” who, at last count, was polling at or near 9% in three states. 

  Obviously, this is a story where the punchlines write themselves, and while there’s no doubt that some of Nuts’ popularity is simply a reflection of the fact that voters in Iowa, Minnesota, and North Carolina have a sense of humor, it also says something about the state of American politics and, indirectly, about Donald Trump’s rise to the top of the polls. Here’s how we put it:

  The endemic corruption, crony capitalism, rampant regulatory capture, and licentious logrolling that many voters have come to associate with the American political process has created a deep-seated desire for change and if there are two names which most certainly do not portend a break from business as usual inside the Beltway they are “Bush” and “Clinton.”

  And while some were disappointed to learn that Deez Nuts is actually a 15-year-old farm boy from Iowa (apparently at least some voters were hoping to see Nuts make a real run for The White House), his popularity is still growing and it certainly seems as though the media and at least one polling company are set to see just how far Deez Nuts can run (so to speak).

  Below, find a graphic which shows that search interest for Nuts is now greater than for Hillary Clinton along with the backstory from The New York Times.

  

  From The New York Times:

  The presidential candidate Deez Nuts was surging on Wednesday in a poll, albeit unscientific, in North Carolina.

   

  Deez Nuts was also the No. 1 trending topic on Twitter.

   

  For anyone who has fallen 24 hours behind the campaign news cycle, Deez Nuts is a registered independent, a supporter of a balanced budget and the Iran nuclear deal — and a 15-year-old farm boy from Iowa.

   

  In registering with the Federal Election Commission last month, Deez Nuts listed an address in rural Wallingford, Iowa, that is the home of Mark and 

   

  Teresa Olson. Mr. Olson, who farms 2,000 acres of corn and soybeans, said in an interview that Deez Nuts was his son Brady, who begins his sophomore year in high school next week.

   

  Like any surging candidate, Deez Nuts has been besieged with requests from the national news media since becoming an Internet meme, but has said he would be interviewed only by email. “School’s starting back up and I still have to sort this out,’’ he wrote to this reporter.

   

  Asked why Deez Nuts entered the presidential race, Brady replied, “To clear the way for a future third-party movement.’’

   

  Tom Jensen, the director of Public Policy Polling, said he added Deez Nuts to statewide survey three weeks ago because “the name makes people laugh, and it’s a long presidential election.’’

   

  But Mr. Jensen also drew a serious conclusion from the Deez Nuts surge.

   

  “I would say Mr. Nuts is the most ludicrous and unqualified third-party candidate you could have, but he’s still polling at 7, 8, 9 percent,’’ Mr. Jensen said. “Right now the voters don’t like either of the people leading in the two main parties, and that creates an appetite for a third-party candidate.’’

   

  After the North Carolina results, which were picked up by television news broadcast, Mr. Jensen thought the joke had run its course. But now that Deez 

   

  Nuts is receiving a wave of publicity, the pollster is curious to see if the Deez Nuts candidacy can be lifted higher. Mr. Jensen plans to include the independent in polls in New Hampshire this weekend and in a national survey next week.

  *  *  *

  Bonus: the Deez Nuts campaign platform from the candidate’s official campaign website

  Illegal Immigration

  I believe that anyone who is found as an illegal immigrant in this country must be deported back to their country of origin, with the lone exception of being a minor.

  Federal Budget & Government Spending

  I believe that the US Government should not be allowed to spend more than it makes from tax revenue. The reason we are in a budget crisis is because the two main parties refuse to compromise on this issue. Every federal official in either Congress, President, or the Cabinet, should immediately have their salary cut in half.  Once the budget is balanced, those salaries may slowly rise. If the budget returns negative, salaries go back to where they started.

  Abortion & Same-Sex Marriage

  I feel that as equal human beings that we should be allowed to choose how to live our lives without being discriminated by one another. At the same time however, I also understand that people believe that Christian religion outweighs government policy. But America is no longer mainly Christian. It is Christian, Jewish, Islam, Hebrew, and many others.

  Foreign Policy

  I support the work that John Kerry and the State Department did with the Iran nuclear deal, considering it took nearly two years to reach this point. Everyone wants a better deal, but that’s the whole point of negotiating. Look at your wants, then their wants, and meet in the middle. Now is the time  being respected instead of feared by other nations. I also feel that we need to stop being a world watchdog and limit our positions in international conflicts.

  Energy

  I support cutting subsidies to oil companies and giving tax incentives to individuals and corporations that implement green technology and renewable energy sources into their communities. I also support giving grants to communities for the purpose of installing municipal wind turbines, hydroelectric dams, and rooftop solar panels.

  Economy

  I support giving corporations tax incentives for the sole purpose of creating jobs IN America TO Americans FOR Americans. This will in turn stimulate the economy and make us more self-sufficient instead of relying on products from foreign countries.

  Territorial Voting Rights

  I support giving citizens in our American territories voting rights. I also support giving American Samoan citizens automatic US citizenship. I would give Puerto Rico 3 electoral votes since Puerto Rico is bigger than many states. Guam, the US Virgin Islands, and the Northern Marianas all get 2 since they are smaller, but still incorporated territories. Finally, American Samoa would only get 1 since it is still considered an “unincorporated” territory. This would bring the total of electoral votes from 538 to 548. I also support giving all 5 territories plus Washington, D.C. 1 seat in the House of Representatives instead of non-voting delegates. This would bring seats in the House from 435 to 441.

  

  

  

  

• Venezuela Announces Martial Law In Border State, Dispatches 1500 Soldiers

  While Venezuela’s collapse to a socialist singularity best defined by total economic devastation has been chronicled extensively here over the years…

  

  … to the point where neither the country’s hyperinflation, nor the total collapse of its currency…

  

   

  … nor its return to a barter economy, nor even the fact that it has run out of condoms, fake breasts, or beer engender much of a reaction, perhaps the only thing readers seem attuned to is when will the social implosion lead to renewed political tensions which will likely result in another violent political overthrow, one which may or may not involve the local military.

  Today Venezuela took a step in that direction when its president Maduro declared a state of emergency in a border region near Colombia following an attack by smugglers in which three soldiers and a civilian were injured, resulting in 60 days of martial law in five municipalities of the state of Tachira. He also said the closure of the border, announced on Thursday, will be extended until further notice.

  

  Petrol and food smugglers have increasingly clashed with officers. According to the BBC, Maduro said Colombian paramilitary groups regularly travel to Venezuela, generating chaos and shortages in order to destabilise the revolution.

  Many are openly speculating that the official explanation is bogus, and Maduro merely wants a pretext to deploy the army first to one state in which social tensions have led to violence and death as a test, then everywhere else where anti-government sentiment is on the rise.

  Maduro said an extra 1,500 soldiers had arrived to reinforce the area. “This decree provides ample power to civil and military authorities to restore peace,” he said in a broadcast on state television.

  

  It also empowers the local army to deal with the population as it sees fit, and in general to confirm that Venezuela society is rapidly spiraling out of control.

  On Wednesday, three Venezuelan army officers and a civilian were injured in riots with Colombian smugglers.

  Venezuela closed its border with Colombia for the first time last year.

  Colombian President Juan Manuel Santos has criticised the move. Mr Santos said ordinary people on both sides of the border, including children, would suffer the most.  “If we co-operate, the only ones to lose are the criminals, but if the border is closed, there is no co-ordination and the only ones to gain are the criminals,” said Mr Santos.

  Tensions run high along the porous 2,200-kilometre (1,370-mile) border.

  And unless the price of oil somehow rebounds, Venezuela, whose economy is entirely dependent on oil exports, will surely see tensions migrate to the capital Caracas, where a far more violent ending is assured, as well as the country’s inevitable default. Recall as of a few weeks ago, according to the CDS market VENZ was determined to be the state most likely to default in the coming months.

  

  Perhaps at this point the question is not whether Maduro will lose control – he will – but which US-baked banking interests will step in to wrest control of the Venezuelan oil industry from the state, and just how will this be implemented?

  

  

  

  

  

• Is It Time to Get into Crash Positions, Or Will The Market Just Enter A Glide Path Rather Than A Tailspin

  Submitted by Charles Hugh Smith from Of Two Minds

  Is It Time to Get into Crash Positions?

  Maybe this flight won’t go into a tailspin; perhaps it simply runs out of fuel.With stock markets diving around the globe, a pressing question arises: is it time to get into Crash Positions?

  In case you forgot how to get into Crash Positions, here’s a reminder:

  

  After a dizzying 500+ point drop in the Dow on Friday, should we brace for impact? There are plenty of fundamental and technical reasons to view the swoon this week as the initial downturn that presages a crash landing.

  But if we look at the last equivalent spike down in October 2014, we’re not so sure. Both spikes (October 2014 and August 2015) smashed through the lower Bollinger band, but the volume in last week’s plummet was nothing special compared to the 2014 swoon.

  Big moves have a bit more credence if they’re accompanied by massive volume.

  

  This leaves the door open to a sharp rebound, i.e. what followed the spike down last October.

  The Put-Call Ratio (CPC) has actually exceeded the spike of October 2014, suggesting fear and panic are at higher levels now than back then. Sharp peaks in the CPC typically signal market bottoms.

  

  But even if the market rebounds sharply, that doesn’t necessarily signal the return of higher highs. Recent lows in the CPC signaling extremes of complacency did not result in new highs; the market has been range-bound for months. This suggests the Bull is tiring–even if price pops back up.

  The SPX MACD has worked its way down to the neutral line, threatening to punch through to negative territory. Bad things tend to happen when MACD stumbles below the neutral line, and that suggests the next decline might be different from the spike-down-snapback pattern of last year.

  Is it time to get into Crash Positions? It never hurts to be prepared, but if the market pulls another October 2014 snapback here, the market could enter a glide path rather than a tailspin.

  Keep an eye on the fuel gauges. Maybe this flight won’t go into a tailspin; perhaps it simply runs out of fuel.

  

  

  

  

  

• The Demands For Another Fed Bailout Have Begun

  Back in August 2007, just as the quant funds had their first taste of what the upcoming collapse would look like and when the Fed for the first time realized that the subprime woes were “not contained” despite what Ben Bernanke had promised previously to Congress, financial comedy TV’s best known mascot, Jim Cramer had a meltdown on CNBC following Bear Stearns’ CFO admission that the fixed-income market turmoil was the worst in 22 years, ranting how the Fed “knows nothing” and how it should promptly bail out the financial system.

   

  Little did Bear Stearns know that less than 9 months later it would no longer exist, but not before the same Jim Cramer proclaimed Bear Stearns was “fine” and is not in trouble when it was trading at $62/share. A week later the company was insolvent and was handed to JPM for a forced take-out at $2/share.

   

  Fast forward 8 years when we just witnessed the biggest weekly market rout in 4 years and largest VIX surge in history, and when – like clockwork – the financial “experts” come crawling out demanding, you guessed it, another Fed bailout.

  Here is Suze Orman, self-described as “America’s Most Trusted Personal Finance Expert” who, hilariously enough, in a Twitter conversation with none other than financial comedy’s prime mascot made it quite clear how she feels about the market rout:

  I am taking this year off but it is hard to sit silently and watch these markets. Fed Chair Yellen help us out. Commit to no rate increases

  — Suze Orman (@SuzeOrmanShow) August 21, 2015

  Cramer’s prompt response was essentially a rerun of 2007:

  .@SuzeOrmanShow Could not be more right. Silence the Fed heads who say all is good. IMF is dead right! https://t.co/f1BV7JfSyr

  — Jim Cramer (@jimcramer) August 21, 2015

  The “trusted expert” chimes in, demanding someone do something to crush the selling which “did not need to happen” – after all only buying is allowed under central planning.

  @jimcramer Jim do something. This is so crazy. This did not need to happen. I know run for President.

  — Suze Orman (@SuzeOrmanShow) August 21, 2015

  The punchline, as usual, belongs to Cramer:

  Everyone should be following my good friend @SuzeOrmanShow as she is the most commonsensical individual in finance.

  — Jim Cramer (@jimcramer) August 21, 2015

  So let’s get this straight: when the Fed-manipulated market keeps levitating ever higher, even as the Fed itself admits QE has failed to help the economy, America’s “most trusted personal finance expert” is delighted.

  But once we have even a modest stock correction – arguably because stocks are no longer allowed to drop… ever – the same expert comes out demanding a bailout, because you see it was beyond her “expert” skills to prepare America for tthe inconceivable contingency of a market drop. And just in case her message is lost on someone, Cramer defines this same “expert” as the most commonsensical individual in finance.

  Is it any wonder that with “personal finance experts” such as these, that the personal finances of America have never been worse?

  

  

  

  

• Caught On Tape: Another Huge Chemical Warehouse Explosion Rocks China

  Who could have seen this coming? 

  Just a little over a week after a powerful explosion killed 114 and injured more than 700 in the Chinese port of Tianjin, it appears as though a second blast has occurred at a chemical warehouse, this time in China’s eastern Shandong province. A residential area is reportedly located just 1 km away.

  

  We’ll await the details which we imagine will suggest that, as was the case in Tianjin, many more tonnes of something terribly toxic were stored than is allowed under China’s regulatory regime which apparently only applies to those who are not somehow connected to the Politburo. Indeed, The People’s Daily is reporting that the plant contained adiponitrile, which the CDC says can cause “irritation eyes, skin, respiratory system; headache, dizziness, lassitude (weakness, exhaustion), confusion, convulsions; blurred vision; dyspnea (breathing difficulty); abdominal pain, nausea, [and] vomiting.”

  There are two videos shown below. As of now, there’s some confusion as to which is authentic.

  

  BREAKING: Chemical warehouse in Shandong exploded on Sat. Firefighters are at the site now pic.twitter.com/DdZ5o3k4sk

  — People’s Daily,China (@PDChina) August 22, 2015

  #BREAKING Explosion occurs to a chemical plant in E China’s Shandong on Saturday evening, flames spotted at site pic.twitter.com/CG9cRwlOAM

  — CCTVNEWS (@cctvnews) August 22, 2015

  From BBC:

  An explosion has been reported at a chemical plant in China’s eastern province of Shandong.

   

  Large flames can be seen from the site of the blast in Zibo County. There are so far no reports of any casualties.

   

  The People’s Daily said a warehouse at the plant exploded and firefighters are at the scene. There is a residential area about 1km from the plant.

   

  Earlier this month blasts in the northern city of Tianjin killed at least 116 people, with hundreds hurt.

   

  Unverified YouTube footage showed a massive explosion at the Shandong plant.

   

  It is not yet clear if homes in the Shandong area have been damaged.

  And from Reuters:

  The factory produced adiponitrile, a colorless liquid that releases poisonous gases when it reacts with fire, the People’s Daily said, citing the state-run Beijing Times.

   

  Seven fire brigades consisting of a total of 150 fire fighters and 20 fire engines were sent to the scene and fire brigades that are trained to work with fires involving chemicals are being dispatched, Xinhua said.

   

  Windows shattered in the village where the blast occurred, state media said, and tremors reverberated within 2 kilometers (1 mile) of the site of the explosion.

  

  

  

  

• Introducing The Gigantic And Dangerous Wall Street Loophole You’ve Never Heard Of

  By Mike Krieger of Liberty Blitzkrieg

  Introducing the Gigantic and Dangerous Wall Street Loophole You’ve Never Heard of

  
  

  This spring, traders and analysts working deep in the global swaps markets began picking up peculiar readings: Hundreds of billions of dollars of trades by U.S. banks had seemingly vanished.

   

  The vanishing of the trades was little noted outside a circle of specialists. But the implications were big. The missing transactions reflected an effort by some of the largest U.S. banks — including Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and Morgan Stanley — to get around new regulations on derivatives enacted in the wake of the financial crisis, say current and former financial regulators.

   

  The trades hadn’t really disappeared. Instead, the major banks had tweaked a few key words in swaps contracts and shifted some other  trades to affiliates in London, where regulations are far more lenient. Those affiliates remain largely outside the jurisdiction of U.S. regulators, thanks to a loophole in swaps rules that banks successfully won from the Commodity Futures Trading Commission in 2013.

   

  Many of the CFTC employees who were lobbied in these meetings went on to work for banks. Between 2010 and 2013, there were 50 CFTC staffers who met with the top five U.S. banks 10 or more times. Of those 50 staffers, at least 25 now work for the big five or other top swaps-dealing banks, or for law firms and lobbyists representing these banks.

   

  The lobbying blitz helped win a ruling from the CFTC that left U.S. banks’ overseas operations largely outside the jurisdiction of U.S. regulators. After that rule passed, U.S. banks simply shipped more trades overseas. By December of 2014, certain U.S. swaps markets had seen 95 percent of their trading volume disappear in less than two years.

  – From the excellent Reuters article: U.S. Banks Moved Billions of Dollars in Trades Beyond Washington’s Reach

  The following story is guaranteed to make you sick. Once again, we’re shown that following trillions in taxpayer funded bailouts and backstops, TBTF Wall Street banks immediately went ahead and focused all their attention obtaining loopholes in order to transfer risk and make billions upon billions of dollars in the financial matrix, as opposed to adding any benefit whatsoever to society.

  From Reuters:

  NEW YORK – This spring, traders and analysts working deep in the global swaps markets began picking up peculiar readings: Hundreds of billions of dollars of trades by U.S. banks had seemingly vanished.

   

  “We saw strange things in the data,” said Chris Barnes, a former swaps trader now with ClarusFT, a London-based data firm.

   

  The vanishing of the trades was little noted outside a circle of specialists. But the implications were big. The missing transactions reflected an effort by some of the largest U.S. banks — including Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and Morgan Stanley — to get around new regulations on derivatives enacted in the wake of the financial crisis, say current and former financial regulators.

   

  The trades hadn’t really disappeared. Instead, the major banks had tweaked a few key words in swaps contracts and shifted some other  trades to affiliates in London, where regulations are far more lenient. Those affiliates remain largely outside the jurisdiction of U.S. regulators, thanks to a loophole in swaps rules that banks successfully won from the Commodity Futures Trading Commission in 2013.

   

  For large investors, the products are an important tool to hedge risk. But in times of crisis, they can turn toxic. In 2008, some of these instruments helped topple major financial institutions, crashing the U.S. economy and leading to government bailouts.

   

  After the crisis, Congress and regulators sought to rein in this risk, and the banks fought back. From 2010 to 2013, when the CFTC was drafting new rules, representatives of the five largest U.S. banks met with the regulator more than 300 times, according to CFTC records. Goldman Sachs attended at least 160 of those meetings.

   

  Many of the CFTC employees who were lobbied in these meetings went on to work for banks. Between 2010 and 2013, there were 50 CFTC staffers who met with the top five U.S. banks 10 or more times. Of those 50 staffers, at least 25 now work for the big five or other top swaps-dealing banks, or for law firms and lobbyists representing these banks.

   

  The lobbying blitz helped win a ruling from the CFTC that left U.S. banks’ overseas operations largely outside the jurisdiction of U.S. regulators. After that rule passed, U.S. banks simply shipped more trades overseas. By December of 2014, certain U.S. swaps markets had seen 95 percent of their trading volume disappear in less than two years.

   

  While many swaps trades are now booked abroad, some people in the markets believe the risk remains firmly on U.S. shores. They say the big American banks are still on the hook for swaps they’re parking offshore with subsidiaries.

   

  Still, the banks’ victory on the swaps loophole leaves a concentrated knot of risk at the heart of the financial system. The U.S. derivatives market has shrunk but remains large, with outstanding contracts worth $220 trillion at face value. And the top five top banks account for 92 percent of that.

   

  In 2009, President Barack Obama tapped Gary Gensler, then 51 years old, to chair the CFTC. Liberals grumbled about Gensler’s résumé. The son of a cigarette and pinball-machine salesman in working class Baltimore, Gensler, at 30, had become the youngest banker ever to make partner at Goldman Sachs.

   

  Among other jobs, he oversaw the bank’s derivatives trading in Asia. Later, as an undersecretary of the Treasury, Gensler helped push through the 2000 law that had banned regulation of derivatives markets.

   

  Kenneth Raisler, a former Enron lobbyist representing JP Morgan, Citigroup, and Bank of America, argued in a letter that the CFTC should allow U.S. banks to do things overseas “even if those activities were not permissible for a U.S. bank domestically.”

  “Kenneth Raisler, a former Enron lobbyist representing JP Morgan, Citigroup, and Bank of America.”

  You just can’t make this stuff up. Gold Jerry, gold.

  Meanwhile, Obama was hard at work as always proving himself to be a capable banker coddler in order to ensure his payday upon leaving office.

  In his place, Obama nominated a long time aide to Democratic Senator Harry Reid, Mark Wetjen. Gensler and other pro-reform allies assumed that the veteran Democrat would vote with the Democrats on the commission.

   

  Wetjen, a derivatives newcomer, was not a conventional liberal. He came with an endorsement from the U.S. Chamber of Commerce, an opponent of the Dodd-Frank Act. As his policy adviser, Wetjen hired Scott Reinhart, former in-house counsel at the structured credit products division at Lehman Brothers – the bank whose collapse in 2008 set off the financial crisis.

   

  Rosen, the banks’ lead lawyer, discussed Wetjen often on calls with his bank clients. The newcomer, Rosen told them, was key to swinging the commission in the banks’ favor.

   

  Banks got dramatically more face time with commissioners after Wetjen’s appointment. In 2010, Gensler had met with the top five U.S. banks 13 times, and in 2011, 10 times. That was still more than any other staffer or commissioner at the CFTC.

   

  In the year after Wetjen’s appointment, Wetjen aide Reinhart met with the top five banks 36 times, more than anyone else at the CFTC. Wetjen himself met with the top banks second-most often, 34 times. Gensler met them less than half as frequently, as did nearly every other commissioner and staffer, according to the records.

   

  In June, Reinhart left the CFTC to join Rosen’s practice at Cleary Gottlieb.

   

  Gensler had little patience for the bank-friendly Wetjen, former CFTC officials say. As their disagreements sharpened, Wetjen’s pro-bank views seemed to harden, these people said.

   

  “Mark was struggling a little with the substance,” one former CFTC official said. “Gary treated Mark like he was a moron, and then Mark refused to budge.”

   

  “The fight over this provision was one of the biggest policy fights in all of Dodd Frank,” said Kelleher, of the think tank Better Markets. “Once the banks got that loophole, then a lot of that predatory behavior migrated overseas to wherever there was less regulation.”

   

  Goldman had already started moving to restructure its trading operations to get around Dodd-Frank. In March 2012, it sent out a four-page letter to its derivatives clients with an unusual demand. Goldman wanted clients to sign off on giving the bank standing permission to move a client’s swaps trades to different affiliates around the world, whenever and wherever the bank saw fit.

   

  Goldman called the letter the “Multi-entity ISDA Master Agreement.” It meant that a client might strike a derivatives deal with Goldman in New York in the morning, and that afternoon, with no disclosure, a Goldman office in London or Singapore or Hong Kong could take over the deal. With each shift, the trade could fall under different regulators.

  Perhaps I should ask John Hilsenrath whether it is “anti-Semitic” to point this out.

  Just in case you need a reminder of how incredibly putrid and corrupt Banana Republic America has become…

  

  The global inter-dealer market for interest rate swaps in Euros is one of the largest derivatives markets in the world. U.S. banks’ monthly share of the market had plunged nearly 90 percent since January 2013, from over $1 trillion to $125 billion, according to ISDA.

   

  The data were misleading. U.S. banks were still trading as vigorously as ever. But their trades, booked through London affiliates, without any credit guarantees linking them back to the U.S.,  were now showing up in the data as the work of European banks.

   

  In mid 2014, the Securities Industry and Financial Markets Association, a banking lobby in Washington, circulated a private memo to its members. The memo consisted of talking points banks could use to justify the de-guaranteed contracts and shifting of trades if questioned by regulators and lawmakers. 

  Where have you heard about the Securities Industry and Financial Markets Association, or SIFMA, before? Recall the following from the post, Ex-NSA Chief Keith Alexander is Now Pimping Advice to Wall Street Banks for $1 Million a Month:

  So what is Mr. Alexander charging for his expertise? He’s looking for $1 million per month. Yes, you read that right. That’s the rate that his firm, IronNet Cybersecurity Inc., pitched to Wall Street’s largest lobbying group the Securities Industry and Financial Markets Association (SIFMA), which ultimately negotiated it down to a mere $600,000 a month. In case you need a refresher on how much of a slimy character this guy is, I suggest you read the following posts…

  What would we have done without the bailouts…

  For related articles, see:

  Why Obama Allowed Bailouts Without Indictments by Janet Tavakoli

  Why Bailouts are Anti-American in One Minute by Max Keiser

  “Bank Lives Matter” – Obama Administration Makes Another Move to Protect Profits of Criminal Mega Banks

  Wall Street Moves to Put Taxpayers on the Hook for Derivatives Trades

  Cronyism Pays – Eric “Too Big to Jail” Holder Triumphantly Returns to His Prior Corporate Law Firm Job

  The U.S. Department of Justice Handles Banker Criminals Like Juvenile Offenders…Literally

  Why Obama Allowed Bailouts Without Indictments by Janet Tavakoli

  Elizabeth Warren Confronts Eric Holder, Ben Bernanke and Mary Jo White on Bankster Immunity

  Even Washington D.C. Insiders Admit Eric Holder is a Bankster Puppet

  

  

  

  

  

• 7 Million People Haven't Made A Single Student Loan Payment In At Least A Year

  Perhaps it’s all the talk about across-the-board debt forgiveness or maybe the total amount of outstanding student debt has simply grown so large ($1.3 trillion) that even those with no conception of how much money that actually is realize that it’s simply never going to paid back so there’s no point worrying about, but whatever the case, the general level of concern regarding America’s student debt bubble doesn’t seem to be at all commensurate with the size of the problem. 

  And it’s not just the sheer size of the debt pile that’s worrisome. There’s also the knock-on effects, such as delayed household formation and the attendant downward pressure on the homeownership rate, and of course hyperinflation in the rental market. 

  Of course one reason no one is panicking – yet – is that the severity of the problem is masked by artificially suppressed delinquency rates. As we’ve documented in excruciating detail, if one excludes loans in deferment and forbearance from the numerator in the delinquency calculation, but includes those loans in the denominator then the delinquency rate will be deceptively low. In any event, as WSJ reports, even if one looks at something very simple like, say, the number of borrowers who haven’t made a payment in a year, the picture is not pretty and it’s getting worse all the time. Here’s more:

  Nearly seven million Americans have gone at least a year without making a payment on their federal student loans, a staggering level of default that highlights how student debt continues to burden households despite an improving labor market.

   

  As of July, 6.9 million Americans with student loans hadn’t sent a payment to the government in at least 360 days, quarterly data from the Education Department showed this week. That was up 6%, or 400,000 borrowers, from a year earlier.

   

  The figures translate into about 17% of all borrowers with federal loans being severely delinquent—and that share would be even higher if borrowers currently in school were excluded. Additionally, millions of other borrowers who haven’t hit the 360-day threshold that the government defines as a default are months behind on their payments.

   

  Each new crop of students is experiencing the same problems” with repaying, said Mark Kantrowitz, a higher-education expert and publisher of the information website Edvisors.com. “The entire situation isn’t getting better.”

   

  The development carries big implications for borrowers, taxpayers and the economy. Economists have warned of student-debt defaults damaging borrowers’ credit standing, which would hurt their ability to borrow for things like cars and homes. That in turn would hamper the economy, which relies heavily on consumer purchases for economic activity. Delinquencies also drain government revenues, which are used to make future loans.

  So what’s the solution you ask? According to the government, the answer is the income based repayment plans. Here’s The Journal again:

  Education Secretary Arne Duncan said declines [in some categories of delinquencies] resulted from rising participation in income-based repayment plans, which lower borrowers’ monthly bills by tying payments to their incomes. Enrollment in the plans surged 56% over the past year among direct-loan borrowers.

   

  The administration has urgently promoted the plans, mainly through emails to borrowers, over the past two years in an effort to stem defaults. The plans set payments as 10% or 15% of their discretionary income, defined as adjusted gross income minus 150% the federal poverty level.

   

  The plans carry risks, though, for both borrowers and the government. Many borrowers’ payments aren’t enough to cover the interest on their debt, allowing their balances to grow and threatening to trap them under debt for years.

   

  At the same time, the government could be left forgiving huge amounts of debt if borrowers stay in the plans. The government forgives balances after 10, 20 or 25 years of on-time payments, depending on the plan.

   

  
  

  But aside from the fact that these plans will cost taxpayers an estimated $39 billion over the next decade – and that’s just counting those expected to enroll in plans going forward and ignoring the $200 billion or so in loans already enrolled in an IBR plan – the most absurd thing about Duncan’s claim is that, as we’ve shown, IBR programs don’t drive down delinquency rates, they just change the meaning of the term “payment”:

  

  See how that works? If you can’t afford to pay, just tell the Department of Education and they’ll enroll you in an IBR plan where your “payments” can be $0 and you won’t be counted as delinquent.

  So we suppose we should retract the statement we made above. You are correct Mr. Duncan, these plans are actually very effective at bringing down delinquencies and the method is remarkably straightforward: the government just stopped couting delinquent borrowers as delinquent.  

  

  

  

  

  

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• Paul Craig Roberts: "America Is A Gulag"

  Submitted by Paul Craig Roberts,

  America’s First Black President is a traitor to his race and also to justice.

  Obama has permitted the corrupt US Department of Justice (sic), over which he wields authority, to overturn the ruling of a US Federal Court of Appeals that prisoners sentenced illegally to longer terms than the law permits must be released once the legal portion of their sentence is served. The DOJ, devoid of all integrity, compassion, and sense of justice, said that “finality” of conviction was more important than justice.

  Indeed, the US Justice (sic) Department’s motto is: “Justice? We don’t need no stinkin’ justice!”

  Alec Karakatsanis, a civil rights attorney and co-founder of Equal Justice Under Law, tells the story here: http://www.nytimes.com/2015/08/18/opinion/president-obamas-department-of-injustice.html?_r=1

  See also here: http://www.opednews.com/articles/Obama-s-DOJ-Perpetrates-In-by-Rob-Kall-Dept-Of-Justice-DoJ_Dept-Of-Justice-DoJ-Failures_Eric-Holder_Injustice-150820-644.html

  The concept of “finality” was an invention of a harebrained Republican conservative academic lionized by the Republican Federalist Society. In years past conservatives believed—indeed, still do—that the criminal justice system coddles criminals by allowing too many appeals against their unlawful convictions. The appeals were granted by judges who thought that the system was supposed to serve justice, but conservatives demonized justice as something that enabled criminals. A succession of Republican presidents turned the US Supreme Court into an organization that only serves the interests of private corporations. Justice is nowhere in the picture.

  Appeals Court Judge, James Hill, a member of the court that ruled that prisoners did not have to serve the illegal portion of their sentences, when confronted with the Obama/DOJ deep-sixing of justice had this to say:

  “A judicial system that values finality over justice is morally bankrupt.”

  Obama’s DOJ says that there are too many black prisoners illegally sentenced to be released without upsetting the crime-fearful white population. According to Obama’s Justice (sic) Department, the fears of brainwashed whites take precedence over justice.

  Judge Hill said that the DOJ “calls itself, without a trace of irony, the Department of Justice.”

  Judge Hill added: We used to call such systems as people sitting in prison serving sentences that were illegally imposed “gulags.” “Now we call them the United States.”

  America is a gulag. We are ruled by a government that is devoid of all morality, all integrity, all compassion, all justice. The government of the United States stands for one thing and one thing only: Evil.

  It is just as Chavez told the United Nations in 2006 referring to President George W. Bush’s address to the assembly the day before: “Yesterday, at this very podium, Satan himself stood speaking as if he owned the world. You can still smell the sulfur.”

  If you are an American and you cannot smell the sulfur, you are tightly locked down in The Matrix. God help you. There is no Neo to rescue you. And you are too brainwashed and ignorant to be rescued by me.

  You are part of the new Captive Nation.

  

  

  

  

  

• How Big Are China's Man-Made Military Outposts? The Pentagon Explains

  Apparently, someone at the Pentagon thought that between the four-year civil war in Syria, the heightened violence in Turkey, the proxy war in Ukraine, and the threat of a new war in the Korean Peninsula, the geopolitical situation wasn’t unstable enough, because on Thursday the DoD issued a report entitled “Asia Pacific Maritime Security Strategy,” in which a considerable amount of space is spent discussing China’s land reclamation efforts in the Spratlys. 

  As you might recall, Beijing has embarked on an ambitious effort to build artificial islands atop reefs in the disputed waters of the South China Sea. The US and its regional allies say it’s an illegitimate attempt to redraw maritime boundaries and project military supremacy while China claims it’s simply doing what other countries in the region have been doing for years. The dispute came to a head earlier this year when the PLA essentially threatened to shoot down a US spy plane carrying a CNN crew.

  Below, find some interesting and provocative commentary from the Pentagon about the islands along with some telling visuals. Note that Beijing is all but sure to view this as an escalation. 

  *  *  *

  From Asia Pacific Maritime Security Strategy

  One of the most notable recent developments in the South China Sea is China’s expansion of disputed features and artificial island construction in the Spratly Islands, using large-scale land reclamation. Although land reclamation – the dredging of seafloor material for use as landfill – is not a new development in the South China Sea, China’s recent land reclamation campaign significantly outweighs other efforts in size, pace, and nature. 

  China’s recent efforts involve land reclamation on various types of features within the South China Sea. At least some of these features were not naturally formed areas of land that were above water at high tide and, thus, under international law as reflected in the Law of the Sea Convention, cannot generate any maritime zones (e.g., territorial seas or exclusive economic zones). Artificial islands built on such features could, at most, generate 500-meter safety zones, which must be established in conformity with requirements specified in the Law of the Sea Convention.

  

  Although China’s expedited land reclamation efforts in the Spratlys are occurring ahead of an anticipated ruling by the arbitral tribunal in the Philippines v. China arbitration under the Law of the Sea Convention, they would not be likely to bolster the maritime entitlements those features would enjoy under the Convention. Since Chinese land reclamation efforts began in December 2013, China has reclaimed land at seven of its eight Spratly outposts and, as of June 2015, had reclaimed more than 2,900 acres of land. By comparison, Vietnam has reclaimed a total of approximately 80 acres; Malaysia, 70 acres; the Philippines, 14 acres; and Taiwan, 8 acres. China has now reclaimed 17 times more land in 20 months than the other claimants combined over the past 40 years, accounting for approximately 95 percent of all reclaimed land in the Spratly Islands. 

  
  

  Though other claimants have reclaimed land on disputed features in the South China Sea, China’s latest efforts are substantively different from previous efforts both in scope and effect. The infrastructure China appears to be building would enable it to establish a more robust power projection presence into the South China Sea. Its latest land reclamation and construction will also allow it to berth deeper draft ships at outposts; expand its law enforcement and naval presence farther south into the South China Sea; and potentially operate aircraft – possibly as a divert airstrip for carrier-based aircraft – that could enable China to conduct sustained operations with aircraft carriers in the area.

  Ongoing island reclamation activity will also support MLEs’ ability to sustain longer deployments in the South China Sea. Potentially higher-end military upgrades on these features would be a further destabilizing step. By undertaking these actions, China is unilaterally altering the physical status quo in the region, thereby complicating diplomatic initiatives that could lower tensions.

  Ndaa a p Maritime Security Strategy 08142015 1300 Finalformat

  

  

  

  

  

• The Federal Reserve Is Not Your Friend

  Submitted by Rand Paul & Mark Spitznagel via Reason.com,

  Imagine that the Food and Drug Administration (FDA) was a corporation, with its shares owned by the nation's major pharmaceutical companies. How would you feel about the regulation of medications?  Whose interests would this corporation be serving? Or suppose that major oil companies appointed a small committee to periodically announce the price of a barrel of crude in the United States. How would that impact you at the gasoline pump?

  Such hypotheticals would strike the majority of Americans as completely absurd, but it's exactly how our banking system operates.

  The Federal Reserve is literally owned by the nation's commercial banks, with a rotation of the regional Reserve Bank presidents constituting 5 of the 12 voting members of the Federal Open Market Committee (FOMC), the body that sets targets for certain interest rates. The other 7 members of the FOMC are the D.C.-based Board of Governors—which includes the Fed chairperson, currently Janet Yellen—and are nominated by the President. The Fed serves its owners and patrons—the big banks and the federal government, while the rest of Americans get left behind.

  The Federal Reserve has the ability to create legal tender through mere bookkeeping operations. By the simple act of buying, for example, $10 million worth of bonds, the Federal Reserve literally creates $10 million worth of money and adds it into the system. The seller's account goes up by $10 million once the Fed's monies are received.  Nobody's account gets debited for $10 million. This is a tremendous amount of power for an institution to possess, and yet the Fed shrouds itself in secrecy and is accountable to no one.

  In December 2008, Congress summoned then-Fed Chairman Ben Bernanke to provide information concerning the enormous "emergency liquidity" programs that had begun during the financial crisis earlier that fall—all the new acronyms Wall Street analysts would come to know, such as TAF (Term Auction Facility), PDCF (Primary Dealer Credit Facility), and TSLF (Term Securities Lending Facility). Bernanke did not need Congress' permission to conduct those programs, but even worse, he refused to disclose the recipients of the $1.2 trillion in short-term loans that we now know were being administered behind closed doors.  This staggering secret loan payouts doesn't even include hundreds of billions in "swaps" to foreign central banks. Bernanke's rationale was that if the Fed announced the names of the big banks being rescued, then depositors and investors would flee, thus defeating the whole purpose of the rescue operations.

  Americans then and now were lectured that the trillions in loans and asset purchases were all for their own good and eventual benefit, to resuscitate the credit markets and bolster home values. Yet the truth remains—it is Wall Street that benefits from the Fed at the expense of Main Street.  To make things worse, in October 2008—one month after Lehman Brothers collapsed and precipitated the worst of the financial crisis—the Fed began exercising a new policy of paying interest on reserves. The Fed began to subsidize and directly pay the nation's bankers not to make loans to their customers and keep their reserves parked on deposit with the Fed.

  Today, Fed officials can give all sorts of technical explanations for that policy—a move that remains in effect today.  Yet your average depositor received no such direct subsidy and likely still receives almost no interest on short term deposits.

  It's unfortunately in keeping with Fed policies that disproportionately favor wealth—like low interest rates, a policy benefiting those that have the most assets and first access to borrowing, not for people who have little or no capital.

  No matter how much the Fed protests to the contrary, it shows little regard for the average Joe or Jane. Consider the types of assets it bought as the Fed's balance sheet exploded from $905 billion in the beginning of September 2008 to $2.2 trillion by the end of the year. (The Fed currently holds some $4.5 trillion in total assets, after the various rounds of "quantitative easing.")

  Rather than bailing out struggling homeowners who were underwater, with higher mortgage debt than their homes were worth, the Fed instead loaded up on U.S. Treasuries (its own IOUs) and mortgage-backed securities—the very same "toxic assets" that reflected the horrible judgment of many investment bankers and the ratings agencies that signed off on the shenanigans.  It is no coincidence that the federal government was able to run trillion-dollar-plus deficits for four consecutive years with no concern from the financial markets; everyone knows the Fed stands in the wings, willing to "print" new legal tender and sop up Uncle Sam's IOUs (which eventually come due, as we are now seeing in Greece).

  When it comes to money, politicians are often seen as the least trustworthy. But in the debate over income and wealth inequality, few people point the finger at the biggest benefactor of the wheeler dealer crony capitalists: the Federal Reserve. The nation's central bank, which regulates all other banks and has the power to create money simply by buying assets, should be under the utmost scrutiny. Yet, perversely, members of Congress have to fight an uphill battle just to audit the Fed. We do not want to politicize monetary policy (as our detractors allege), but rather simply shine a very bright light on this unaccountable and unchecked (and thus entirely un-American) power. By doing this, we may finally be able to rein it in.

  

  

  

  

  

• Mal-Asia: Politcal, Currency Crises Converge As Stocks Head For Bear Market

  As the great EM unwind continues unabated, we’ve noted that in some hard-hit countries, the terrible trio of falling commodity prices, decelerating Chinese demand, and looming Fed hike has been exacerbated by political turmoil. 

  In Brazil, for instance, President Dilma Rousseff’s approval rating is at 8% and voters are calling for her impeachment amid allegations of fiscal book cooking and corruption at Petrobras where she was chairwoman for seven years. This comes as the BRL looks set for further weakness and as the country grapples with stagflation and dual deficits. 

  In Turkey, President Recep Tayyip Erdogan has brought the country to the brink of civil war in an effort to nullify a strong showing at the ballot box by the pro-Kurdish HDP. In the process, he’s managed to put the lira under more pressure than it might already be under and indeed, the currency is putting in new lows against the dollar on almost daily basis. 

  Now, we turn to Malaysia where, as we documented exactly a week ago, the situation is tenuous at best and nearing a veritable meltdown at worst. As a reminder, here’s what happened last Friday:

  With some Asian currencies already falling to levels last seen 17 years ago, some analysts fear that an Asian Financial Crisis 2.0 may be just around the corner. That rather dire prediction may have been validated on Friday when Malaysia’s ringgit registered its largest one-day loss in almost two decades. As FT notes, “sentiment towards Malaysia has been damped by a range of factors including sharp falls in global energy prices since the end of June. Malaysia is a major exporter of both oil and natural gas, with crude accounting for almost a third of government revenue.” The central bank meanwhile, “has opted to step back from intervening in the market in response to the falling renminbi, unleashing pent-up downward pressure on the ringgit.” That, apparently, marks a notable change in policy. “The most immediate challenge is the limited scope of Malaysia’s central bank to step in,” WSJ says, adding that “for weeks, it tried to stem the currency’s slide, digging into its foreign-exchange reserves to prop up the ringgit and warning banks from aggressively trading against its currency.”

  As you can see from the following, Malaysia’s reserves are plunging in tandem with the ringgit’s collapse:

  

  On Thursday, central bank governor Zeti Akhtar Aziz was out reiterating that Malaysia has no plans to introduce a currency peg. That echoes comments she made last week, and along with a promise from Prime Minister Najib Razak that capital controls are not in the cards, is meant to reassure the market, where some fear the country may resort to the same drastic measures it undertook 17 years ago. Here’s Citi:

  The ringgit has traded to the weakest level vs. the US dollar since the 1998 Asian crisis, weakening by 30% even though BNM’s FX reserves have fallen $35bn over the past 12 months. On an effective exchange rate basis too, we estimate that the ringgit is just 1-2% from post-crisis lows. Together with the acceleration of the currency weakness in recent weeks and the unexpected jump in July CPI inflation to 3.3% – which we think is partly on account of the weaker currency – this has led investors to question how much further this move could extend.

   

  The proximate cause of the pressure on the ringgit has been the weakness in energy commodity prices, the strength of the US dollar, relatively weaker FX reserve cover, and growing political uncertainty in Malaysia. The pressure is also magnified by the large participation of foreign investors in local markets. Foreign investors’ holdings of debt were $54bn (government bonds alone accounted for $43.2bn) and of equities were an estimated $98bn (on market-capitalization basis) at end-July. Reports of foreign investors trimming their exposure and of local corporates responding by increasing currency hedges have thus added to market concern about the ringgit.

   

  Investors thus continue to look for a response from Malaysian policymakers. While we admit that heavy-handed measures are not warranted yet, the absence of policy intent even to restore confidence could further feed investors’ fear. Co-ordinated comments by Prime Minister Najib (who is also Finance Minister) and BNM Governor Zeti (highlighting still sufficient reserves, ruling out capital controls or a repeg) may have been such an attempt, although in these comments they did not suggest an intention to act to reverse or limit the pressure on the ringgit.

   

  
  

  Malaysia’s reserves stood at $94.5 billion as of August 14 and Zeti was quick to remind reporters that the country had built up its reserves “precisely for reversals.” Reversals like this:

  

  And lest anyone should think that there aren’t political considerations at play in Malaysia just as there are in Brazil and Turkey, note that PM Najib Razak is facing calls for a no-confidence vote amid allegations he embezzled some $700 million from the country’s development fund, charges which, when reported earlier this year by WSJ, caused the ringgit to fall to its lowest level against the dollar in a decade.

  “A vote of non-confidence is necessary now because Najib has made BN members of parliament beholden to him by giving them lucrative posts in the government,” former PM Mahathir Mohamad (who once called George Soros a “moron” for helping to trigger the ringgit’s previous collapse) said in a blog post on Thursday. From Reuters:

  Najib, under growing pressure over allegations of graft and financial mismanagement at debt-laden state fund 1Malaysia Development Bhd (1MDB), in August sacked his deputy, Muhyiddin Yassin, replaced the country’s attorney general and transferred officers involved in the 1MDB investigation.

   

  Mahathir, Malaysia’s longest-serving prime minister, has become Najib’s fiercest critic and withdrew support for him last year after the ruling Barisan Nasional (BN) coalition’s poor showing in 2013 elections.

   

  “A vote of non-confidence is necessary now because Najib has made BN members of Parliament beholden to him by giving them lucrative posts in the Government,” Mahathir said in a post published on his blog late on Thursday.

   

  “Even those who had come to me complaining about Najib’s administration before, upon being given posts in his government, have now changed their stand.”

   

  The 90-year-old, who was once Najib’s patron and remains highly influential in the country, has called for the prime minister to step down over the 1MDB furore.

  For his part, Najib says no one should attempt to “hijack his leadership” as the PM post is for Malyasian voters to “give and take away.”

  And while that may be true, this will do absolutely nothing to help the country’s already precarious situation and neither will persistently low crude prices, which is why when Citi asks (in the note cited above) “Malaysian ringgit, are we there yet?”, we would have to respond “no, probably not.”

  *  *  *

  Bonus: Stocks unhappy, nearing bear market:

  

  Bonus Bonus: In case anyone forgot

  
  

  

  

  

  

  

• China Tests Most Dangerous Nuclear Weapon of All Time

  Submitted by Zachary Zeck via The National Interest,

  China conducted a flight test of its new intercontinental ballistic missile (ICBM) this month.

  This week, Bill Gertz reported that earlier this month, China conducted the fourth flight test of its DF-41 road-mobile ICBM.

  “The DF-41, with a range of between 6,835 miles and 7,456 miles, is viewed by the Pentagon as Beijing’s most potent nuclear missile and one of several new long-range missiles in development or being deployed,” Gertz reports.

  He goes on to note that this is the fourth time in the past three years that China has tested the DF-41, indicating that the missile is nearing deployment. Notably, according to Gertz, in the latest test China shot two independently targetable warheads from the DF-41, further confirming that the DF-41 will hold multiple independently targetable reentry vehicles (MIRV).

  As I’ve noted before, China’s acquisition of a MIRVed capability is one of the most dangerous nuclear weapons developments that no one is talking about.

  MIRVed missiles carry payloads of several nuclear warheads each capable of being directed at a different set of targets. They are considered extremely destabilizing to the strategic balance primarily because they place a premium on striking first and create a “use em or lose em” nuclear mentality.

  Along with being less vulnerable to anti-ballistic missile systems, this is true for two primary reasons. First, and most obviously, a single MIRVed missile can be used to eliminate numerous enemy nuclear sites simultaneously. Thus, theoretically at least, only a small portion of an adversary’s missile force would be necessary to completely eliminate one’s strategic deterrent. Secondly, MIRVed missiles enable countries to use cross-targeting techniques of employing two or more missiles against a single target, which increases the kill probability.

  In other words, MIRVs are extremely destabilizing because they make adversary’s nuclear arsenals vulnerable to being wiped out in a surprise first strike. In the case of China, Beijing’s acquisition of a MIRVed capability is likely to force India to greatly increase the size of its nuclear arsenal, as well as force it to disperse its nuclear weapons across a greater sway of land to prevent China from being able to conduct a successful decapitation strike. Such a development in Delhi would upset the Indo-Pakistani nuclear balance, likely prompting Islamabad to take corresponding actions of its own.

  China’s acquisition of a MIRVed capability is also likely to upset the strategic balance with Russia. As Moscow’s conventional military capabilities have eroded since the fall of the Soviet Union, Russia has leaned more heavily on nuclear weapons for its national defense. It therefore seeks to maintain a clear nuclear advantage over potential adversaries like China. Beijing’s acquisition of MIRVed missiles threatens to erode this advantage.

  As Gertz’s notes, the U.S. intelligence community believes that the DF-41 will ultimately be able to carry up to 10 nuclear warheads. Such a development would likely force China to increase the size of its nuclear arsenal. To date, China and India (as well as the world’s other nuclear powers) have maintained relatively small nuclear arsenals compared with Russia and the United States.

  The introduction of MIRVed technologies into the Asian nuclear balance may render this no longer true. For this reason— along with its long-range and solid fuel—the DF-41 is the most dangerous nuclear weapon in China’s arsenal.

  

  

  

  

  

• "Teflon" Donald Trump Holds Giant "Pep Rally" At Football Stadium – Live Feed

  Live feed

  *  *  *

  Last weekend, Donald Trump served notice that he hasn’t lost his flair for the dramatic when, after a short flight from LaGuardia in his private 757, the brazen billionaire arrived at the Iowa State Fair in a $7 million Sikorsky.

  On Friday evening, Trump will look to one up himself in Alabama where, sensing an opportunity to create the biggest spectacle yet, his campaign decided to move a rally originally scheduled for the Mobile, Alabama Civic Center to Ladd-Peebles Stadium. 

  

  That’s right, this evening, Donald Trump will hold what he’s calling a “pep rally” at a football field that seats 43,000 people.

  We are going to have a wild time in Alabama tonight! Finally, the silent majority is back! http://t.co/Vj8vho1ro7

  — Donald J. Trump (@realDonaldTrump) August 21, 2015

  Here’s more from The Washington Post on why there’s more to the event (from a strategy perspective) than meets the eye:

  Mobile, Ala., doesn’t usually host presidential primary rallies. But this weekend it’s expected to host a doozy. Donald Trump will take over Ladd-Peebles Stadium, usually home to high school football games on Friday nights, not presidential pep rallies. Trump’s campaign shifted from a smaller venue to the stadium after seeing big demand for tickets; it expects 35,000 to attend.

   

  As with all most things Trump, there’s a level of savvy that’s not immediately apparent on the surface.

   

  Alabama is one of the so-called SEC primary states that lands early in the cycle, adding importance that Alabama doesn’t usually have.

   

  But Mobile County also lies on the Gulf Coast, one of a string of relatively populous nearby counties. It’s close to other big population centers. New Orleans is only two hours away, and Tallahassee 3½ hours. For Trump fans willing to embark on a longer drive, Birmingham and Atlanta aren’t too far, either. 

   

  
  

   

  What Trump’s doing, clearly, is not just trying to hold a rally in Mobile. He’s trying to show strength across the entire Deep South. If his grandiose expectations come true — which they have a recent habit of doing — his point will be made.

  

  

  

  

  

• (Alleged) Footage Of Hillary's Email Scrubbing Strategy

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  We’ve posted a lot of “dismal’ stuff today, but since it’s better to laugh than to cry, we give you the following…

  I don’t know what’s more horrifying, Hillary’s blatant disregard for the law, or the thought of her doing yoga.

  Thanks for playin’

  

  *Image courtesy of William Banzai7

  *  *  *

  For related articles, see:

  Released Hillary Clinton Emails Reveal…She Was Reading a Book on How to Delete Emails

  Bernie Sanders Takes the Lead from Hillary in Latest New Hampshire Poll

  So Yeah, Hillary Clinton Did Send Classified Emails From Her Private Account After All

  Hillary Clinton Blasts High Frequency Trading Ahead of Fundraiser with High Frequency Trader

  Cartoons Mocking “Goldman Rats” and Hillary Clinton Appear All Over NYC

  Arizona State Hikes Tuition Dramatically, Yet Pays the Clintons $500,000 to Make an Appearance

  How Donations to the Clinton Foundation Led to Tens of Billions in Weapons Sales to Autocratic Regimes

  

  

  

  

  

• These Currencies Could Be The Next To Tumble In Global FX Wars

  Earlier this week, Kazakhstan moved to a free float for the tenge, prompting the currency to plunge by some 25%.

  The move came after the country’s exporters could no longer stand the pain from plunging crude prices and the RUB’s relative weakness. China’s move to devalue the yuan was the straw that broke the camel’s back.

  Here, summed up in one chart, was the problem:

  

  This “may prop up growth in the country and help [the] fiscal sector to accommodate external pressures in case they continue to mount,” Deutsche Bank said, commenting shortly after the news hit. 

  In many ways, the decision to float the tenge (like the move by Vietnam to allow the dong to swing in a wider channel) is emblematic of what’s taking place in FX markets from Brazil to South Korea.

  Shockwaves from China’s devaluation have conspired with sluggish global demand and an attendant commodities slump to wreak havoc on developing market currencies the world over. For Asia ex-Japan, the outlook is especially dire, as the PBoC’s FX bombshell threatens to undermine regional export competitiveness, put upward pressure on the region’s REER, and will likely serve to further depress demand from the mainland.

  Idiosyncratic political events have only made the situation worse for the likes of Brazil, Turkey, and Malaysia. 

  Here are some brief comments from Citi:

  Is this Asian Currency Crisis Part 2? It sure feels like it. It would be more accurate to call it the Great EM Deval-Meltdown as emerging market currencies are in freefall and another peg bites the dust overnight (Kazakhstan). There are few pegs left besides Saudi Arabia and EURCZK and both are under pressure. The 1-year SAR forwards are at 12-year wides and EURCZK is pinned to the 27.00 floor. Take a look at the white chart below right which shows Malaysian Ringgit and you can get a sense of the 1997/1998 crisis vs. now. The moves are not as big yet and volatility has not exploded in the same way but it feels like we are in an EM crisis right now. Gold agrees. RIP BRICs thesis.

  Against this backdrop, Bloomberg has taken a look at which currencies “are among those most at risk from this conflux of global developments.” Here’s more:

  • Saudi Arabia’s riyal: Armed with $672 billion in foreign reserves, Saudi Arabia, the world’s largest oil exporter, has enough capacity to hold the peg, according to Deutsche Bank AG. Nonetheless, speculators are betting on a break of the currency regime as crude oil tumbled to a seven-year low. The forwards, contracts used by traders to bet on or hedge against future price moves, fell to the weakest since 2003, implying about a 1 percent decline in the riyal over the next 12 months.
  • Turkmenistan’s mana
  • Tajikistan’s somoni
  • Armenia’s dram
  • Kyrgyzstan’s som
  • Egypt’s pound: The country has limited investors’ access to foreign currencies amid a shortage since the 2011 Arab Spring protests. Traders are betting the pound will weaken about 22 percent in a year, according to 12-month non-deliverable forwards.
  • Turkey’s lira: It’s one of the world’s worst-performing currencies since China’s devaluation on Aug. 11. An escalation in political violence and the probability of early elections compound the issues.
  • Nigeria’s naira
  • Ghana’s cedi
  • Zambia’s kwacha
  • Malaysia’s ringgit: The currency slid to a 17-year low on Thursday and foreign-exchange reserves fell below the $100 billion mark for the first time since 2010.

  Below, find a bit of color on the three highlighted currencies followed by comments from Deutsche Bank on the vulnerability of various pegs going forward.

  *  *  *

  As far as Saudi Arabia and the peg go, it’s worth noting that as we outlined in detail (here and here), the Kingdom’s financial situation looks to be deteriorating as evidenced both by the country’s move to open its stock market and by the decision to tap the bond market for cash amid a draw down in FX reserves. As we put it back in June, “the move to allow direct foreign ownership of domestic equities [may reflect the fact that] falling crude prices and military action in Yemen have weighed on Saudi Arabia’s fiscal position.” Here’s a bit of additional color from Citi:

  The impact on FX reserves has been marked. The Saudi government traditionally parks its excess revenues with SAMA, the central bank, rather than with a sovereign wealth fund as is the case in some other GCC countries. As a result, fiscal reserves are co-mingled with FX reserves as SAMA invests the government deposits alongside the rest of its funds. Figure 2 shows that since last summer, when oil prices began to fall, the Saudi government has drawn down deposits with SAMA to the tune of over $100bn as it sought to finance a growing deficit. As a consequence, this has brought down SAMA’s overall FX reserve position.

   

  

  
  

  But the decline in headline reserves is a significant factor fuelling speculation in markets that the Saudi Riyal peg to the dollar may be unsustainable, and that Saudi may follow China’s lead and revalue (depreciate) or depeg its currency. 12-month forward rates have risen to 3.78 SAR to the dollar in the past week, not a huge change from 3.75 but still the highest divergence from the spot rate since 2009, which is noteworthy. 

   

  

  And some color on Egypt, also from Citi:

  Although we had expected the recovery in the economy to suffer periodic setbacks, it is clear that the Central Bank of Egypt (CBE) has become concerned. Not only has it not raised rates in response to the rise in inflation in 1H 2015, but it also allowed the EGP to weaken further in July. Although this step down in EGP was of a smaller scale than in January, it may signal that with no significant improvement in the growth of current account outlook in 2H 2015 the CBE may allow further similar scale periodic currency adjustments.

  As for the lira, we’ve said quite a bit why it’s been under so much pressure of late. In short, political turmoil and an escalating civil war have plunged the country into crisis, undermined confidence, and sent stocks into bear market territory. For the full breakdown, see here.

  Finally, we close with comments from Deutsche bank:

  Where next?

   

  The immediate implications of the Kazakh devaluation for the rest of the EMEA region should not be exaggerated. Kazakhstan’s huge loss of competitiveness relative to its largest trading partner, with which it has a customs union, made it unique. The pressure on other dollar pegs is nevertheless understandable and to varying degrees justified. Before the tenge was allowed to float freely this week, it was 11% stronger than it had been on average over the last 10 years. The four other major currencies in the region that are even more overvalued according to this admittedly simple metric all still maintain dollar pegs: the Saudi Riyal, the United Arab Emirate dirham, the Nigerian naira, and the Egyptian pound. Bulgaria, Croatia, and Romania also peg or manage their exchange rate regimes tightly, but against the euro rather than the dollar; and in their cases, currencies look more fairly valued.

   

  

  Incidentally, you would have seen all of this coming and would have been well on your way to understanding how structurally important collapsing crude prices are to global finance had you simply read “How The Petrodollar Quiety Died, And No One Noticed,” last November.

  

  

  

  

  

• A Different Perspective On Market Valuations

  Submitted by Michael Lebowitz via 720Global.com,

  Risk is not a number. Risk is simply overpaying for an asset. 

  Investment managers who avoid overpaying for assets increase their odds of purchasing fruitful investments and limiting their drawdowns when investments turn against them. Shunning overpriced assets helps one generate steadily growing investment returns which has proven to be one of the most effective ways to grow wealth over time due to the underappreciated power of compounding. While this approach sounds straight-forward, investment prudence is typically disregarded in frothy markets such as we have today and also when markets are in the grips of fear as was most recently experienced in the financial crisis of 2008/2009. In our essay “To Win, the First Thing you have to do is not Lose”, we documented how the volatility of investment returns can significantly hamper portfolio growth over the long term. In particular it stressed that large percentage losses require even larger percentage gains to simply recover original losses.  

  This article takes a unique, common-sense approach to describe the current market’s expectations for earnings growth in order to gauge the reasonableness of valuations and ultimately prices. This analysis is intended to help determine whether the currently elevated Cyclically Adjusted Price to Earnings Ratio (CAPE 10) reflects overly optimistic prospects causing investors to “overpay” for assets or is it an assessment based on realistic earnings expectations reflective of a market that is fairly priced or possibly undervalued. This determination is important for investors to understand as CAPE 10, like most valuation statistics, is currently at an extreme when viewed through the prism of historical valuations. 

  CAPE 10 and its value

  Robert Shiller’s CAPE 10 stands out amongst price to earnings (P/E) calculations in that it incorporates earnings over ten year periods, while most other P/E measures use forecasted future earnings or a relatively short period of recent earnings. The longer time frame used in CAPE 10 provides a better measure of earnings sustainability, and according to Ben Graham and David Dodd, offers a more dependable earnings proxy. It is this approach to earnings valuation that makes CAPE 10 a successful indicator of future market returns over time. The graph below, from John Hussman of Hussman Funds documents the strong correlation between CAPE 10 and future 10-year equity returns and emphasizes the durability of this approach.

  CAPE 10 Correlation with Future Market Return

  

  The following table from “The Humility of Rates and the Arrogance of Equites”, compares prior CAPE 10 readings to the average GDP in the two years following each CAPE 10 measurement. Not surprisingly, the worst S&P 500 performance occurred when CAPE 10 was high and subsequent economic growth was weak. The best returns are achieved when a low CAPE 10 was followed by strong economic growth. The current CAPE and GDP expectations are highlighted by the box at the bottom right. The numbers in the table are annualized, so doubling the results produce the potential 2-year total return.

  2yr Annualized S&P 500 Returns at Various CAPE 10/GDP Combinations

  

  The graph and table highlight that the odds of good returns are clearly in the investors favor when CAPE 10 is low and they decrease significantly when it is elevated.

  CAPE 10 today

  Before detailing the results of the analysis, the graph below offers a current perspective of CAPE 10 valuations. 

  CAPE 10  

  

  Presently, CAPE 10 is at a level seldom witnessed. CAPE 10 is on par with levels preceding the 2008/09 financial crisis and eclipsed only by the 1990’s technology bubble and the Great Depression of the 1930’s. In each of these other instances the ultimate drawdown from the peak was over 50%! The red dotted line highlights average CAPE 10 since 1900 and the black dotted line the average since 1980. The shorter time period starting in 1980 was included as some analysts prefer to rely upon the “modern era” as a baseline for analysis. The modern era includes the technology bubble which produced unparalleled CAPE 10 readings. If one excludes data from the heart of the technology bubble (1995-2001), the average CAPE 10 for the “modern era” drops from 21.44 to 18.60 during this era, closer to the 16.58 average since 1900. Compared to the full time series and the shorter “modern era”, current CAPE 10 is 60% and 24% overvalued respectively and 43% overvalued when the technology bubble is excluded from the “modern era”. Based on the current CAPE 10 ratio, investors have overly optimistic expectations for future earnings growth and are willing to pay premiums rarely seen in over 100 years. Alternatively, investors might simply be unclear about the risks they are assuming, confused by the market distortions created by the Federal Reserve’s zero interest rate policy and quantitative easing.

  CAPE 10 analysis

  The formula used here is similar to that applied in “Shorting the Buyback Contradiction” and is employed to measure earnings expectations. The formula assumes no change in the stock price (the numerator), and then calculates the rate at which earnings (the denominator) must grow in order for the market’s current P/E ratio to match its historical average. It quantifies the earnings that investors require over a given time period. With an understanding of expected annualized earnings per share (EPS) growth, one can better determine the validity of the current premium paid for each dollar of earnings versus what investors have historically paid for each dollar of earnings. To quantify the market’s assumption for earnings growth we compare the current CAPE 10 ratio to the average CAPE 10 ratio over the aforementioned time frames.

  The table below summarizes the results. Regardless of which data set (1900 or 1980 to current) one uses and which term (3 or 5 years) one selects to allow earnings to grow, currently required EPS growth is multiples of what has occurred over the last 3-5 years. U.S. Gross Domestic Product (GDP) growth, a large driver of corporate earnings, sends the same message – expectations for future performance are way too optimistic against recent observations. That is not to say these rates of growth are impossible, but the probability seems quite low and one should question the likelihood given weak economic conditions. Using the observations since 1900 in the table below to help interpret the data, annual EPS must grow 13.78% over the next 5 years to normalize the current CAPE 10 with its historic average. This is nearly double the 7.64% annualized EPS growth and 4 times the 3.45% annualized GDP growth over the prior five years. 

  

  As opposed to solving for expected earnings as we discussed above, one can also normalize CAPE 10 by keeping EPS fixed and solving for the one-time change in price that would bring the current CAPE 10 to its historical average. Those figures (-37.70% and -19.45%) are also shown above (note they are one time price changes thus identical both time periods).  Readers are heavily cautioned that during an economic and market downturn these figures likely underestimate the potential losses. If earnings drop, as is common in recessions, the price change required to normalize would be larger than shown. Furthermore, markets rarely retrace to fair value, which is to say they have a tendency to over-correct further extending the downside risk.

  Summary

  • In the long run investment success is attained through a steady stream of growing investment returns coupled with the compounding of those returns
  • The CAPE 10 ratio and many other valuation techniques are at extreme levels rarely seen in history
  • Historical precedence foretells large drawdowns at current CAPE 10 levels
  • The earnings estimates embedded within current CAPE 10 readings are likely unrealistic
  • The combination of a normalizing CAPE 10 and a concurrent decrease in earnings would be problematic for share prices
  • Wealth preservation should be top of mind for all investment managers, especially given the extreme valuations.

  When paying a premium for equities, or any asset for that matter, one runs the serious risk of capital impairment. Worse, most professional investment managers falling prey to the bullish sentiment currently surrounding this period of extreme valuations will likely not live up to their overriding fiduciary duty – the preservation of wealth.

  Following the herd may have its benefits at times, but following the herd over a cliff never ends well. 

  Ending in the words of Seth Klarman: “Risk is not inherent in an investment; it is always relative to the price paid”

  

  

  

  

  

• Is The Oil Crash A Result Of Excess Supply Or Plunging Demand: The Unpleasant Answer In One Chart

  One of the most vocal discussions in the past year has been whether the collapse, subsequent rebound, and recent relapse in the price of oil is due to surging supply as Saudi Arabia pumps out month after month of record production to bankrupt as many shale companies before its reserves are depleted, or tumbling demand as a result of a global economic slowdown. Naturally, the bulls have been pounding the table on the former, because if it is the later it suggests the global economy is in far worse shape than anyone but those long the 10Year have imagined.

  Courtesy of the following chart by BofA, we have the answer: while for the most part of 2015, the move in the price of oil was a combination of both supply and demand, the most recent plunge has been entirely a function of what now appears to be a global economic recession, one which will get far worse if the Fed indeed hikes rates as it has repeatedly threatened as it begins to undo 7 years of ultra easy monetary policy.

  Here is BofA:

  Retreating global equities, bond yields and DM breakevens confirm that EM has company. Much as in late 2014, global markets are going through a significant global growth scare. To illustrate this, we update our oil price decomposition exercise, breaking down changes in crude prices into supply and demand drivers (The disinflation red-herring).

   

  Chart 6 shows that, in early July, the drop in oil prices seems to have reflected primarily abundant supply (related, for example, to the Iran deal). Over the past month, however, falling oil prices have all but reflected weak demand.

  

  BofA’s conclusion:

  The global outlook has indeed worsened. Our economists have recently trimmed GDP forecasts in Japan, Brazil, Mexico, Colombia and South Africa, while noting greater downside risks in Turkey due to political uncertainty. Asian exports continue to underwhelm, and capital outflows are adding to regional woes. Looking ahead, we still expect the largest DM economies to keep expanding at above-trend pace but global headwinds have intensified.

  And yet, BofA’s crack economist Ethan Harris still expects a September Fed rate hike. Perhaps the price of oil should turn negative (yes, just like NIRP, negative commodity prices are very possible) for the Fed to realize just how cornered it truly is.

  

  

  

  

  

• Cop Tries To Cook Meth At Government Science Lab, Blows Up Building

  Back on July 18, Christopher Bartley (a police lieutenant for the National Institutes of Standards and Technology), tried to refill a butane lighter. 

  Or he tried to cook a batch of meth. 

  Either way, the result was the same: he accidentally blew the windows out of a highly secured government research facility.

  Bartley, who served in the army and was recently acting chief of NIST’s police department, was on duty at around 7:30 last month when an explosion “ripped through the lab sending a blast shield flying about 25 feet.”

  Firefighters got the butane lighter explanation from Bartley, but investigators became suspicious when they found pseudoephedrine and drain opener at the scene. 

  They became even more suspicious when they found a recipe for methamphetamine.

  That discovery apparently prompted Bartley to admit that in fact, the explosion was the result of an attempt to cook meth at the site. He resigned the next day and would later be charged with “knowingly and intentionally attempt[ing] to manufacture a mixture and substance containing a detectable amount of methamphetamine.”

  Open and shut, right? Not so fast, says Bartley’s attorney, Steven VanGrack. 

  You see, what looks to everyone like one man’s attempt to use a government research lab to live out a fantasy of becoming Walter White, was actually a well meaning attempt to “understand more about this substance.” It was “unauthorized training experiment,” VanGrack continues, adding that it “clearly failed.”

  Apparently, the court is meant to believe that had Bartley succeeded in cooking the drug, he was merely going to educate his fellow officers on the process, presumably in an attempt to increase awareness. 

  “He wanted to see how to make it,” VanGrack concluded.

  And on that point, there seems to be little doubt, but as Rep. Lamar Smith (R-Texas) said after the blast made news, this isn’t exactly what taxpayer money is supposed to be funding. “The fact that this explosion took place at a taxpayer-funded NIST facility, potentially endangering NIST employees, is of great concern,” Smith said, in a letter to the Secretary of the Department of Commerce (embedded below). 

  As for the facility itself, we’ll leave you with the following description from the official government website. The punchline is highlighted for your amusement:

  Welcome to the National Institute of Standards and Technology’s web site. Founded in 1901 and now part of the U.S. Department of Commerce, NIST is one of the nation’s oldest physical science laboratories. Congress established the agency to remove a major handicap to U.S. industrial competitiveness at the time—a second-rate measurement infrastructure that lagged behind the capabilities of the United Kingdom, Germany, and other economic rivals. Today, NIST measurements support the smallest of technologies—nanoscale devices so tiny that tens of thousands can fit on the end of a single human hair—to the largest and most complex of human-made creations, from earthquake-resistant skyscrapers to wide-body jetliners to global communication networks. We invite you to learn about our current projects, to find out how you can work with us, or to make use of our products and services.

  CLS to Pritzker – Lab Explosion

  

  

  

  

  

• Paul Krugman "What Ails The World Right Now Is That Governments Aren’t Deep Enough In Debt"

  This was written by a Nobel prize winning economist without a trace or sarcasm, irony or humor. It is excerpted, and presented without commentary.

  From the NYT:

  Debt Is Good

  … the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?

  Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.

  I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.

  But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.

  Why?

  One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.

  Beyond that, those very low interest rates are telling us something about what markets want. I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so? The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.

  * * *

  [L]ow interest rates, Mr. Kocherlakota declares, are a problem. When interest rates on government debt are very low even when the economy is strong, there’s not much room to cut them when the economy is weak, making it much harder to fight recessions.  There may also be consequences for financial stability: Very low returns on safe assets may push investors into too much risk-taking — or for that matter encourage another round of destructive Wall Street hocus-pocus.

  What can be done? Simply raising interest rates, as some financial types keep demanding (with an eye on their own bottom lines), would undermine our still-fragile recovery. What we need are policies that would permit higher rates in good times without causing a slump. And one such policy, Mr. Kocherlakota argues, would be targeting a higher level of debt.

  * * *

  Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound….

  * * *

  

  * * *

  At this point we stopped reading.

  

  

  

  

  

• Weekend Reading: Is This The Big One?

  Submitted by Lance Roberts via STA Wealth Management,

  Some month's back I posted an article entitled "No One Rings A Bell At The Top" wherein I stated:

  "The current levels of investor complacency are more usually associated with late-stage bull markets rather than the beginning of new ones. Of course, if you think about it, this only makes sense if you refer to the investor psychology chart above.

   

  The point here is simple. The combined levels of bullish optimism, lack of concern about a possible market correction (don't worry the Fed has the markets back), and rising levels of leverage in markets provide the 'ingredients' for a more severe market correction. However, it is important to understand that these ingredients by themselves are inert. It is because they are inert that they are quickly dismissed under the guise that 'this time is different.'

   

  Like a thermite reaction, when these relatively inert ingredients are ignited by a catalyst, they will burn extremely hot. Unfortunately, there is no way to know exactly what that catalyst will be or when it will occur. The problem for individuals is that they are trapped by the combustion an unable to extract themselves in time."

  Of course, what I didn't realize at the time was that, on Thursday, the markets would plunge like a stone sending investors running for cover and the media scrambling for answers. What caused it? Is this THE correction? What happens now?

  This weekend's reading list is a collection of thoughts as to whether the current correction is just a buying opportunity, or whether this is Redd Foxx's "Big One."

  ---

  RETORT REPORT

  Wallace Witkowski penned: "One out of four stocks on the S&P 500 Thursday are firmly in correction territory, or down 20% or more off their 52-week highs. At last count, 133 stocks on the index are bearish, according to FactSet data."

  G Shelter retorted: "Well the Bear is just growling so far. He hasn't mauled anyone yet. He's afraid of The Bullard."

  ---

   THE LIST

  1) Tom McClellan Sees Market Decline by Tomi Kilgore via MarketWatch

  At the moment, they are telling him to be bullish on the stock market for all of his trading time frames, including those that trade every few days, weeks and months. But bulls should be ready to flee, as soon as this week.

   

  That's because McClellan said his timing models suggest 'THE' top in stocks will be hit some time over the next week. He expects "nothing good for the bulls for the rest of the year," he said in a phone interview with MarketWatch."

  

  Read Also: Great News: Investors Are Dumping US Stocks by Howard Gold via MarketWatch

   

  2) The Bulls Are In Danger Of Turning Into Lemmings by Doug Kass via Kass' Korner

  "Though the bullish cabal postulates that serious market tops and corrections can only occur in response to recession, those observers may not be focused on the changing landscape of a flat, networked and interconnected world and could be failing to properly analyze failed or less effective monetary policy.

   

  The current conditions that have presaged a possible developing global economic crisis are sui generis – in a class by itself, unique and served up by a financial culture and orthodoxy that may have never existed before. And, though history rhymes, the outgrowth of malinvestment that has been emitted from current conditions is taking different forms, as it has done in each progressive cycle."

  

  Read Also: Bear Markets & Contractions: Then And Now by Chris Ciovacco via Ciovacco Capital

   

  3) The Tide Has Turned by Thad Beversdorf via Stockman's Contra Corner

  "I've been writing for almost a year now about the economic cannibalism that has been feeding earnings growth. I have discussed this concept with a dire warning that feeding earnings expansion through operational contraction is a short lived meal. And well we are now seeing the indications that the growth through contraction has now hit its inevitable end. Have a look at the following chart which is really the only chart one needs to study at this point. The chart depicts S&P 500 adjusted earnings per share (blue line), S&P Price level (green line), S&P 500 Revs per share (red line) and US Productivity of Total Industry (olive line)."

  

  Read Also: Listen Up-The Do Ring A Bell At The Top by Jim Quinn via Stockman's Contra Corner

   

  4) Big Stocks Are Last Hope For Decaying Market by Michael Kahn via Barron's

  "We can add the already falling trend in the small-company Russell 2000 to the mix, but the S&P 500 still rules. Its resilience, thanks to the strength of a limited number of big stocks, hides the fact that market breadth has been falling since April, according to the New York Stock Exchange advance-decline line. More stocks have been falling than rising. And Wednesday afternoon the number of NYSE stocks hitting new 52-week lows soared to 267. That is more than 8% of all issues traded that day, and it is quite ominous."

  

  But Also Read: S&P 500 Ready To Rally? by Tiho via The Short Side Of Long

   

  5) Is High Yield Sending A Warning by Urban Camel via The Fat Pitch Blog

  "Spreads on high yield (junk) bonds relative to treasuries have widened. This implies heightened credit risk. The widening and narrowing of spreads is correlated to equity performance over time. Since mid -2014, these have diverged (data from Gavekal Capital).

   

  Are equities setting up for a fall? The short answer is no, at least not based on this measure alone."

  

  Read Also: Junk Is Getting Junkier by Ed Yardeni via Dr. Ed's Blog

  ---

  Other Reading

  The Genius Of Warren Buffett In 23 Quotes by Paul Merriman via MarketWatch

  A False Sense Of Security by Ben Carlson via A Wealth Of Common Sense

  After 6-Years Of QE – St. Louis Fed Admits QE Was A Mistake by Tyler Durden via ZeroHedge

  The Fuss About Market Liquidity by Yves Smith via Naked Capitalism

  Debt-Financed Buybacks Has Placed Investors On Margin by Dr. John Hussman via Hussman Funds

  ---

  "Most Bull Markets Have A Copper Ceiling" – Anthony Gallea

  Have a great weekend.

  

  

  

  

  

• Carnage: Worst Week For Stocks In 4 Years, VIX Soars Most Ever

  Only one thing seemed appropriate…

   

  *  *  *

  The mainstream media really nailed this move in the past month (here and here)

  

  

  • China's worst week since July – closes at 5 month lows
  • Global Stocks' worst week since May 2012
  • US Stocks' worst week in 4 years
  • VIX's biggest weekly rise ever
  • Crude's longest losing streak in 29 years
  • Gold's best week since January
  • 5Y TSY Yield's biggest absolute drop in 2 years

  *  *  *

  Did you get message Fed?

  

   

  THE CLEAR MESSAGE FROM THE MARKETS IS – HIKE RATES AND YOU'RE DONE, GIVE US QE4 OR IT'S ALL OVER!!!

  So let's start with stocks…

  Bloodbathery… This was the worst week for global stocks (MSCI World) since May 2012

  

   

  And the worst week for US equities since Nov 2011…

  

   

  Futures show the pain started with China PMI, then dumped as Europe collapsed,  then there was no help from the machines as gamma was so imbalanced…

  

   

  Of course we saw The BoJ in da house to help squeeze stocks with some USDJPY crushing…but that only worked for the small caps (easiest to squeeze)… and then it all collapsed…

  

   

  Putting these moves in context, the red lines show how long since the US Majors are unchanged…

  

   

  Dow enters correction… this was the 9th largest point drop in the history of The Dow…

  

   

  Financials and Energy were monkeyhammered this week (as both were completely decoupled from their credit markets)…

  

   

  Financials crash…

  

   

  And Surprise!!! Energy stocks collapse to credit…

  

   

  Who could have seen that coming?

  No brainer: short energy stocks, long credit pic.twitter.com/rC05G32OkS

  — zerohedge (@zerohedge) August 11, 2015

  Carnage in AAPL slammed the Nasdaq…

  

   

  Since QE3, all but The Nasdaq are now red… (and Nasdaq is collapsing fast)…Trannies down almost 10% since the end of QE3!!

  

   

  VIX exploded this week with the biggest jump ever…

  

   

  And The VIX ETF saw its biggest 2-day rise since 2011 (no wonder with 61.7mm shares short agaionst just 60.6mm outstanding)

  

   

  As VIX catches up to credit risk…

  

   

  and before we leave stock-land, her is perhaps the 'spookiest' chart… a Fibonnaci 61.8% extension of the 2007 high to 2009 lows 'nails the top' for now… (h/t @allstarcharts )

  

  *  *  *

  OK… so let's look at bond-land. Treasury yields collapsed this week with 10Y nearing a 1 handle… 5y yield down over 17bps is the bigest absolute drop since Sept 2013

  

   

  Leaving the entire bond complex lower in yield on the year…

  

   

  And stocks finally caught down to credot's reality…

  

   

  FX Markets have seen some serious carnage this week…

  The US Dollar index futures contract was down 2.7% on the week – its biggest drop since June 2013…

  

   

  EM FX was a disaster…

  

   

  Finally – the commodity space…

  Very mixed picture with PMs holding gains (despite Silver's slam today) as industrial commodities were clobbered…

  

   

  Bloomberg's Commodity Index is at its lowest since 1999…

  

   

  Crude oil fell to a 3 handle –

  

   

  Dropping for 8 straight weeks for the first time since 1986…

  

   

  Note that gold reversed today early on after touching its 100DMA… and silver revsed today to its 50DMA

  

   

  And finally, because we suspect the mainstream media will be looking for an excuse to explain all this carnage… here is the culprit…

  This mornings culprit for the nasty sell-off pic.twitter.com/OYbBFQyYvI

  — Stalingrad & Poorski (@Stalingrad_Poor) August 21, 2015

  Charts: Bloomberg

  Bonus Chart: Today…

  @BarbarianCap not what I'm seeing pic.twitter.com/YkvyBArsgX

  — 3:30 Ramp Capital™ (@RampCapitalLLC) August 21, 2015

  

  

  

  

• Summarizing "Investor" Thoughts Today (In 1 Cartoon)

  Presented with no comment…

   

  

   

  h/t @Stalingrad_Poor

  

  

  

  

  

• You Can Buy These Companies' Cash At Up To A 60% Discount

  Several days ago, some were confused to read a Bloomberg article about Chinese cell phone maker HTC whose market cap dipped below its net cash (it has no debt), meaning one could buy its cash at a discount. Since then HTC’s stock has continued sinking, and as of today, using CapIQ data, the company’s cash of $1.7 billion, which the market is assigning value to as its only asset, was worth about 55% more than its entire market cap. This means that if one were to buy the company today, and liquidate it as it stood the same day, one would – at least on paper – buy the company’s cash at a 36% discount and end up with an immediate cash profit of more than 50%.

  Said otherwise, HTC now has a negative Total Enterprise Value (market cap plus debt less cash).

  It isn’t the only one: in this “baby with the bathwater” selling which we have seen in the past few weeks especially in EMs and China, various other such opportunities have presented themselves, and to assist readers who may be looking to buy cash at a discount of as much as 60%, we have compiled a list of some of the most prominent global companies with a negative TEV, and whose cash can be bought at a substantial discount to fair value: in some cases as much as 60%.

  Of course, it goes without saying that if a company’s cash is trading at 60% discount below fair value, there probably is a reason. So before anyone blindly rushes into these discounted opportunities, feel free to find out first just why the cash can be bought at 40 cents on the dollar…

  

  

  

  

  

  

• Why The Market Is Crashing Into The Close: JPM Explains

  Curious why someone just pulled a trapdoor from under the market? JPM’s Marko Kolanovic, head of quant strategies explains.

  Impact of option hedging on the S&P 500 into the close

  S&P 500 put option gamma exceeded call option gamma by more than $50bn prior to the option expiry this morning. This was the highest S&P 500 put gamma imbalance ever. The impact of this imbalance was evident in the intraday market momentum developed from 3:30PM to the close yesterday. The Figure below left show yesterday’s intraday price action for the S&P 500. We note that the market selloff accelerated into the close, with a 60bp fall in the last 30 minutes. Consistent with theory on the impact of gamma hedging (see our report Impact of Derivatives Hedging), this temporary market impact reversed near the market open today (57bps recovery in the first 30 minutes, right Figure).
   
  Despite the fact that S&P 500 options expired this morning, put gamma is still higher than call gamma by ~$38bn, which is a large imbalance (on account of other S&P 500 option maturities and SPY options expiring at the close). This can lead to further selling pressure into the close today.

  Given that the market is already down ~2%, we expect the market selloff to accelerate after 3:30PM into the close with peak hedging pressure ~3:45PM. The magnitude of the negative price impact could be ~30-60bps in the absence of any other fundamental buying or selling pressure into the close.

  

  Good luck.

  

  

  

  

  

• The Stock Market Is In Trouble – How Bad Can It Get?

  Submitted by Pater Tenebrarum via Acting-Man.com,

  A Look at the Broader Market’s Internals

  We have previously discussed the stock market’s deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively.

  When more than 60% of stocks in the broader market trade below their 200 dma with the SPX not too far off an all time high, it is clear that cap-weighted indexes are helped up by an ever smaller number of big cap stocks. This typically happens near important trend changes, but it is not always certain that the market will decline significantly when such a divergence occurs.

   

  

  Is he about to make his entrance?

  Cartoon via wallstreetsurvivor.com

  One possibility is also that the market merely corrects, and resume its rally once a sufficient number of stocks becomes oversold. That said, the broader market hasn’t made any headway in more than half a year, with the volatility of major indexes and averages declining to multi-decade lows. It is certainly tempting to classify this period as one of distribution, especially given recent weakness.

  In the short term, the large number of stocks in a downtrend may actually help produce a bounce, especially as some sentiment indicators such as equity put/call ratios have increased to a level usually associated with short term lows. However, we believe one has to take a differentiated approach to interpreting sentiment and positioning data at this juncture and we will explain why in more detail further below.

  First let us look at the NYA internals mentioned above. In addition to the percentage of stocks below their 200 and 50 day moving averages, we show the cumulative NYA advance/decline line in the second chart below. The A/D line has been in a downtrend since late April.

   

  

  The NYA and the percentage of stocks still above their 200 and 50 day moving averages. The market’s momentum peak occurred more than a year ago, in early July 2014 – click to enlarge.

   

  

  The cumulative NYA A/D line has peaked in late April – then a divergence between the A/D line and the NYA was created in May. Such divergences don’t have to be meaningful, but they do occur at every major trend change. In other words, there doesn’t have to be a trend change when such divergences are spotted, but no trend change happens without them – click to enlarge.

   

  

  The CBOE equity put/call ratio is currently at 0.81 – this is in the general area (0.70-1.10) that is often associated with short term lows – click to enlarge.

   

  The Sentiment and Positioning Backdrop

  Several recent articles at Marketwatch are trying to make the point that a “contrarian bullish situation” now exists. One author writes “Great News: Investors are Dumping US Stocks”, but goes on to explain that they are instead buying international and more specifically, primarily European stocks. This makes no difference in our opinion – as long as they are buying stocks, they are not bearish.

  There continues to be a widespread conviction that retail investors have to beat down the doors and rush into the market before it can top out. We believe this is actually a “bearish hook”. This has been a “bubble of professionals” for 6 years running and this isn’t going to change anytime soon. First of all, retail investors have been burned twice over the past 15 years by two of the worst bear markets in history. Secondly, demographics dictate that retiring boomers will become sellers of stocks for a number of years. They simply cannot take the risk of buying into an overvalued market again in their retirement years.

  Anther article discusses recent sentiment/positioning data and is more interesting from our perspective. As to its assertion that “insider buying has increased and has therefore turned bullish”, we would note that insiders have been dumping stocks left and right for three years running. One or two weeks of buying are hardly making a dent in the longer term picture. Moreover, we are not appraised of the sectors in which the buying is occurring. We only know fur sure that it isn’t happening in the stocks that are actually holding the market up – i.e., assorted big cap tech, biotech, retail, etc. stocks.

  As we have recently reported, there has been a huge surge in buying by insiders in the gold sector – this is very rare, and therefore worthy of attention. We strongly suspect that insider buying is also occurring in other beaten down commodity stocks, but these stocks cannot be expected to push up the market as a whole – their share of total market cap is too small (their collapse hasn’t dragged the indexes down either after all). If e.g. the stocks of copper and iron ore producers were to rally, this would be a great relief to long-suffering holders of these shares, but it wouldn’t help the overall market much. Commodities are quite oversold though, and a rally in these sectors wouldn’t surprise us.

  Let us look at some of the other factors mentioned in the article:

  1  The Investor’s Intelligence Bull/Bear Ratio, which polls investment pros on their market outlooks, fell last week for the third week in a row, to a 10-month low of 2.16. A reading below  is a clear buy signal, and we are pretty close.

   

  2  The Chicago Board Options Exchange (CBOE) put/call ratio, on a three-day basis, recently rose to 0.8. Anything above 0.7 is bullish because it represents excessive pessimism, in that the number of puts purchased compared to calls has reached relative highs. Remember, put options give the right to buy a stock at a preset price. So they can be seen as insurance against a market decline, or a bet that a drop will happen. The put/call ratio measured over the 10 days also shows a high level of pessimism, which is bullish, says Bruce Bittles, chief investment strategist at brokerage Robert W. Baird & Co.

   

  3  The Ned Davis Research Crowd Sentiment Poll recently showed extreme pessimism, also bullish in the contrarian sense.

  We will address these in more detail further below (except for the put/call ratio, which we have already commented on above), but for now we would note that all of this is important only for the short term – and it may actually not even be overly relevant to the short term. Remember what we said above: this is a “bubble of professionals” – which has made sentiment indicators highly unreliable on the way up, as many of our readers probably recall. The question is, why should they be any more reliable on the way down?

  Furthermore, all sentiment indicators that are relevant for the long term, are in the “beyond good and evil” zone and have been there for quite some time. Three of those are shown below: Margin debt, the mutual fund cash ratio, and retail money fund assets as a percentage of the S&P’s market cap. We are commenting below the charts as to their significance.

   

  

  Margin debt is just off an all time high, well above previous peaks. If the market weakens beyond a certain point, this huge amount of margin debt could easily trigger an avalanche of forced selling. It isn’t going to sink the market per se, it just creates the potential for a very large sell-off – click to enlarge.

   

  

  Mutual fund cash to assets ratio. At an all time low of 3.2%, mutual fund managers are definitely “all in”. They are not going to be buyers if the market declines – on the contrary, if they are hit with redemptions, they will turn into forced sellers as well – click to enlarge.

   

  

  Retail money market funds as a percentage of the S&P 500 market cap sits at an all time low as well, far below previous historic low points. We can safely conclude that retail investors aren’t going to step up to the plate either – click to enlarge.

   

  At the end of June we sent a list of objections to a friend with respect to the widely touted phrase that this is such a “hated” bull market. Many of the data in the list have been put together by Robert Prechter of EWI and we added a few observations of our own. The list inter alia contains references to the Investors Intelligence (II) Poll and an indicator published by Ned Davis, which are both mentioned in the Marketwatch article quoted above. We have highlighted them.

  Once again, this list shows you something that is relevant from the perspective of a different time frame – namely the long term. A dip in the II poll may help create a short term low, but the long term data on this poll are actually nothing short of frightening. Given that this was posted in late June, some of the percentages may look slightly different by now, but not by much.

  1.  The percentage of cash in mutual funds has been below 4% for all but one of the past 70 months. At the peak of the late 1990s tech mania  in 2000, it stood at 4.2%
  2.  Rydex bear assets have practically been wiped out. The amount left in bearish Rydex funds is now so small, that the ratio between bull and bear assets has soared to nearly 30. It was at approx. 18 at the year 2000 peak.
  3.  Margin debt is at an all time high (approx. 82% above the peak level of 2000 in nominal terms), and investor net worth is concurrently at an all time low, in spite of soaring asset prices (people have borrowed so much to buy stocks, that they have record negative net worth in spite of the SPX nearly at 2200 and the NAZ at a new ATH.
  4.  If the CAPE (Shiller P/E) and Tobin’s Q ratio were to peak here, it would be their fourth, resp. second highest peaks in history (since at least 1876, so we may assume all of history, as markets never got this overvalued prior to the fiat money era). The previous peaks that were close to the current ones are the who’s who of bad times to invest in stocks, to paraphrase John Hussmann: 1929, 2000 and 2007 – that’s it. No other time in history is comparable.
  5.  The valuation of the median stock and the price/sales ratios are both at all time highs (even exceeding the year 2000 peak, which hitherto stood alone as a monument to stock market insanity).
  6.  The ratio of bullish to bearish advisors in the Investor’s Intelligence survey finally eclipsed the peak of August 1987 last year. The 30-week moving average of the bear percentage is at a 38 year low, while the 200-week moving average of the bear percentage (at 21.44%) is the lowest in the entire history of the survey. There has never been similarly persistent bullishness, which is astonishing in light of the fact that the past 15 years have seen two of the four worst bear markets in history. By the way, all these sentiment-related data are the exact opposite of their readings in 1982, when the secular bull market began. Back then, people were extremely cautious and bearish, in spite of the fact that the market was up nearly 100% from its late 1974 low. 
  7.  The ratio of money in retail money funds to market cap is – you guessed it – at an all time low, by a huge margin. It is nearly 50% below the levels recorded in 2000 and 2007. People are evidently convinced that cash is trash.
  8.  The DJIA’s dividend yield has been below 3% for 96% of the time since 1995, i.e., over the past 20.5 years, the dividend yield has been above 3% in only 9 months. Prior to 1995, it managed this feat only in a single month: in September 1929.
  9.   According to Ned Davis, the stock market allocation of US households is at its third highest since 1952 – the only two exceptions are 2000 and 2007 (not the happiest moments in time to be loaded to the gills with stocks).

  We continued as follows:

  Admittedly, none of this tells us how much bigger the bubble will become. Money supply growth is still fairly brisk (TMS-2 above 8% annualized) and administered interest rates remain at zero, with the Fed evidently scared of the 1937 precedent (their entire policy is informed by a single and highly unusual event in economic history, the Great Depression). It could thus become still crazier.

  However, it would be a big mistake to call this bull market “unloved” based on anecdotal data like postings in financial forums. In reality, it is not only one of the most overvalued, but definitely one of the most over-loved markets in history, perhaps even the most over-loved overall. Many will remember the day trading craze and CNBC’s ratings in the late 1990s, and it is true that the underlying mood seems outwardly more subdued this time around (this is no wonder, as many people have a very negative assessment of the real economy. After all, the fact that the BLS is simply not counting people as unemployed once they have been jobless for a certain time period makes them no less unemployed).

   

  Let us not forget though, it is not opinions that count, but human action. And by their actions (as evidenced by the positioning data listed above), investors have never been more certain that a bull market would continue than they are today.

  There is certainly no reason to change this assessment, even though there are now signs that the market is getting sufficiently “hated” and oversold in the short term to allow for a bounce. One must not lose sight of the fact though that in spite of the strength in the major indexes, most investors are actually losing money, simply because most stocks are actually in a downtrend since April. Sentiment is simply following prices in other words.

   

  Money Supply Growth

  As we frequently point out, there is one reason not to get carried away with bearish projections either, at least not yet – and that is the pace of money supply growth. Below you can see that broad money TMS-2 has been growing at 8.4% annualized as of the end of July, while annualized growth of narrow money M1 has re-accelerated in the week to August 3 to slightly above 10%, after dipping to as low as 6.15% at the end of July. In both cases, growth is mired in a sideways to downtrend though, and may no longer be sufficient to keep the market going higher.

   

  

  Annual growth of broad money TMS-2 – click to enlarge.

   

  

  Annual growth of M1 – click to enlarge.

   

  Conclusion

  Even if it is short term oversold, this is actually a quite dangerous market – caveat emptor, as they say.

  

  

  

  

  

• Bombshell: Clinton E-Mails Were "Classified From The Get-Go", Reuters Says

  Just last night, we reported that Hillary Clinton’s campaign had finally admitted that the former First Lady’s private e-mail server – which she used to handle sensitive information while serving as Secretary of State – did indeed contain documents that have since been marked classified. 

  The admission comes after Clinton sought to appease GOP lawmakers by turning over her personal server to the FBI. Subsequently, reports suggested the server had been wiped clean while an audit of the e-mails Clinton handed in to the State Department showed that some of the threads looked to contain chatter about the CIA’s drone program. 

  Clinton’s defense – until now anyway – is that regardless of whether some of the information was retroactively stamped “classified”, it wasn’t marked as such at the time it was sent and received and therefore, no classified information was stored on her private server. As we’ve noted, those with a security clearance are expected to exercise the highest discretion when it comes to their handling of sensitive information and as such, Clinton should have been more careful. Here’s what we said on Thursday:

  While it’s certainly disconcerting that the nation’s one-time top diplomat was sending and receiving sensitive information over an unsecure private e-mail server, the issue for Clinton – because it would probably be naive to think that anyone besides voters will actually hold her accountable – is that her handling of the ordeal has served to reinforce the perception that she’s too arrogant and untrustworthy to be given the reins to the country.

   

  That is, the public was already wary of electing yet another member of America’s political aristocracy (or oligarchy, if you will) and the fact that Clinton apparently expects Americans to believe that she had no idea the information she was receiving on her home server might one day be deemed classified (even though she’s been privy to such information in various capacities for decades) seems to underscore her arrogance and highlight her propensity to, as Jean Claude-Juncker famously put it, lie when “things become serious.”

  Now, according to Reuters, Clinton’s last line of defense – that anything which is now marked “classified” wasn’t designated as such initially – may be in question. Here’s the story:

  For months, the U.S. State Department has stood behind its former boss Hillary Clinton as she has repeatedly said she did not send or receive classified information on her unsecured, private email account, a practice the government forbids.

   

  While the department is now stamping a few dozen of the publicly released emails as “Classified,” it stresses this is not evidence of rule-breaking. 

   

  Those stamps are new, it says, and do not mean the information was classified when Clinton, the Democratic frontrunner in the 2016 presidential election, first sent or received it.

   

  But the details included in those “Classified” stamps — which include a string of dates, letters and numbers describing the nature of the classification — appear to undermine this account, a Reuters examination of the emails and the relevant regulations has found.

   

  The new stamps indicate that some of Clinton’s emails from her time as the nation’s most senior diplomat are filled with a type of information the U.S. government and the department’s own regulations automatically deems classified from the get-go — regardless of whether it is already marked that way or not.

   

  In the small fraction of emails made public so far, Reuters has found at least 30 email threads from 2009, representing scores of individual emails, that include what the State Department’s own “Classified” stamps now identify as so-called ‘foreign government information.’ The U.S. government defines this as any information, written or spoken, provided in confidence to U.S. officials by their foreign counterparts.

   

  This sort of information, which the department says Clinton both sent and received in her emails, is the only kind that must be “presumed” classified, in part to protect national security and the integrity of diplomatic interactions, according to U.S. regulations examined by Reuters.

   

  “It’s born classified,” said J. William Leonard, a former director of the U.S. government’s Information Security Oversight Office (ISOO). Leonard was director of ISOO, part of the White House’s National Archives and Records Administration, from 2002 until 2008, and worked for both the Bill Clinton and George W. Bush administrations.

   

  “If a foreign minister just told the secretary of state something in confidence, by U.S. rules that is classified at the moment it’s in U.S. channels and U.S. possession,” he said in a telephone interview, adding that for the State Department to say otherwise was “blowing smoke.”

  We’re sure they’ll be far more on this to come, and while American voters are by now very much used to having “smoke” blown at them on the campaign trail, the poll numbers for Donald Trump (and, incidentally, for dark horse candidate “Deez Nuts“) would seem to suggest that the public’s patience with being lied to by America’s political aristocracy may have run out.