• CeNTRaL PLaNNiNG!

  

  

  

  

  

• Government Wants To "Implant Recipients Of Welfare Assistance With Satellite-Tracked Chips"

  Submitted by Mac Slavo via SHTFPlan.com,

  Implantable RFID tracking chips. You know, to stop terrorism.

  And to keep tabs on all the welfare queens, in order to keep tax dollars accountable.

  There will be other rationales, too.

  But really, governments just want to do all the spying they can within their power – and right now, technology offers more power than ever before to carry out universal surveillance, track and trace every person and every thing and put civil rights in the backseat where they belong.

  The latest proposal from a politician in the Finnish government seems like a near-future dystopic film, but may not be far reality.

  It’s not much of a stretch to imagine that the U.S., Britain or other governments in Europe would do this too, if they could get away with it.

  In fact, an RFID chipped population could only be years away.

  Sputnik News reports:

  A politician from Finland’s conservative Finns Party suggested implanting welfare recipients with satellite-tracking chips following news that some recipients continued receiving payments after leaving the country to join ISIL.

  A member of Finland’s right-wing Finns Party, Pasi Maenranta, has suggested implanting all recipients of government assistance with satellite-tracked chips if they choose to leave the country.

   

  Maenranta made the proposal after Finnish media revealed that some recipients of government assistance continued to receive payments after leaving the country to join ISIL in Syria and Iraq.

   

  “The law should be changed: To receive payments from Kela [the Social Insurance Institution], one has to tell exact data about your location using your personal code, read by a satellite. It is also possible to implant electronic chips to all going abroad, who for example receive medical welfare from Kela,” Maenranta wrote on his Facebook page.

  It is true that Western governments essentially created ISIS, by agitating angry Muslims with continued aggression, while at the same time funding the “new al Qaeda” extremist group via the misguided efforts to arm and bankroll “Libyan rebels” and “Syrian rebels.”

  Really, the Pentagon and NATO have been building up our own enemy, and using its horrendous violence to frighten the public back into the War on Terror.

  Under the new twist, Muslim immigration to the West has been increased, and Western governments have been subsidizing future jihadists, too. Many are on the government dole, until and even after, they decide to leave and join ISIS/ISIL.

  Meanwhile, normal struggling citizens who accept government assistance might be tracked via an implanted chips… betraying all the rights governments in “free countries” are supposed to protect. They might not be doing anything wrong at all, but now they are under constant watch.

  But as George W. Bush famously said, “they hate us for our freedoms,” right?

  

  

  

  

  

• The #1 Reason Why Donald Trump Is What America Needs (And Deserves)

  Submitted by Simon Black via SovereignMan.com,

  Just a few weeks ago, US talk show host Stephen Colbert was asked if he thought that Donald Trump had a chance of becoming President of the United States.

  Colbert responded sincerely. “Honestly, he could. And that’s not an opinion of Trump. That’s my opinion of our nation.”

  He’s right. The Land of the Free may very well be ready for something completely different. And Trump certainly seems able to deliver.

  He is, after all, unique in his field. Donald Trump has never served in politics, and his blunt style is almost the exact opposite of every other major candidate.

  But there’s one thing that really sets him apart, that, in my opinion, makes him the most qualified person for the job:

  Donald Trump is an expert at declaring bankruptcy.

  When the going gets tough, Trump stiffs his creditors. He’s done it four times!

  Candidly, this is precisely what the Land of the Free needs right now: someone who can stop beating around the bush and just get on with it already.

  As history shows, a default is inevitable.

  The calculus is quite simple: when governments take on too much debt, they start having to divert a huge amount of their tax revenue just to pay interest.

  This means that, at a minimum, the government has to sacrifice many of the promises they made to their citizens. They cut other programs in order to have enough money to pay interest.

  But that’s not too popular. So instead they typically just borrow more money… until they’re borrowing money just to pay interest on money they’ve already borrowed.

  This makes the problem exponentially worse.

  Debt skyrockets. And soon the government is spending more on interest payments than national defense. (The US is almost at this point).

  Eventually a bankrupt government has no choice: either default on their bondholders, or default on the obligations they made to their citizens. Or both.

  This could take the form of a ‘selective default’. For example, the US government could default on the $2.4 trillion that it owes the Federal Reserve.

  Or the $1.2 trillion that it owes China.

  These are both possibilities.

  But the prospect of default on “risk free” US government bonds would throw the global financial system into a tailspin; not to mention it would be the final nail in the coffin for the US dollar’s dominant reserve status.

  Fortunately there are easier options for Uncle Sam.

  The biggest debts that are owed by the US government are the obligations they owe to you.

  Specifically, all the benefits like Social Security and Medicare they promised to American taxpayers.

  The US government’s own numbers estimate these obligations at nearly $42 TRILLION, completely dwarfing what they owe China, or anyone else.

  Then there’s the obligation they have to preserve the purchasing power of the $12 trillion held by the American people.

  That’s the current value of the money supply in the United States right now.

  History shows that debasing a nation’s currency is one of the easiest and most effective ways for bankrupt governments to plunder their citizens’ wealth, little by little over time.

  As I explain in today’s podcast, the hard reality that most people don’t seem to get is that the US government is bankrupt.

  This isn’t some wild assertion or conspiracy theory; their own financial statements show that the government’s ‘net worth’ is NEGATIVE $17.7 trillion.

  And yes, the US is already borrowing money just to pay interest.

  In fact the combined expenses of interest on the debt plus mandatory entitlements like Social Security nearly exceed their entire tax revenue.

  In other words, you could eliminate nearly everything we think of as government– the EPA, the IRS, Homeland Security, etc. and it wouldn’t make a dent in the national debt.

  When things get this dire, it doesn’t matter who sits in the chair.

  You might as well elect a chimpanzee in the hopes that Mister Bubbles might accelerate the decline.

  Donald Trump may very well be that chimpanzee. Especially given his unparalleled experience in declaring bankruptcy.

  Nations that pass the economic point of no return can’t rebuild until they hit rock bottom.

  And the US is way past that point. So let’s get on with it already and hit the reset button.

  *  *  *
  Join me for more in today’s podcast as I break down the details of the US government’s $60 trillion in liabilities– and what you can do about it.

  click image for full podcast…

  

  

  

  

  

  

• The Future (As Predicted By Science Fiction)

  Based on speculative fiction, the following visualization analyzes 62 ‘foretold’ future events (social, scientific, technological, or political). Many are catastrophic, but, in the end – good news – in 802,701 the world will still exist and everything will be more or less ok…

   

  

   

  Source: OurWorldInData.org

  

  

  

  

  

• The Crisis Is Spreading: China, Australia, Brazil, Canada, Sweden…

  Earlier today, we posted an excerpt from IceCap Asset Management’s latest letter to investors focusing on the farce that is the Greek bailout #3, which can be summarized simply by the following table…

  

  … and Keith Dicker’s assessment which was that “for Greece, it’s mathematically impossible to repay its debt” and that the Greek “economy continues to plummet to deeper depths and is now -33% less than where it was in 2008.”

  But the truth is that for all the endless drama, Dicker continues, “the Greek debt crisis isn’t THE crisis. Rather it is simply a symptom of a much larger global debt crisis.”

  The problem is that the “larger global debt crisis” is finally metastasizing and spreading to more places, all of which are large enough that they can not be simply swept under the rug, like Greece.

  * * *

  IceCap’s Keith Dicker continues:

  We’ve written before that governments all around the world have borrowed too much money and the weight of these debts are choking economic growth.

  And to make matters worse – these very same governments and their central banks have implemented various plans that have only made matters worse.

  Our view has not changed – the global debt crisis has escalated to a point where the government bond bubble has inflated itself to become the mother of all bubbles. It’s going to burst, and when it does it wont be pretty.

  Further evidence to support our view is as follows:

  Canada – the collapse in oil and commodity markets has pushed the country into recession and the Canadian Dollar to decline to levels lower than that reached during the 2008 crisis.

  Oil dependent provinces Alberta and Newfoundland remain in deep denial. Since everyone in these provinces have only ever experienced a booming oil market, many naively believe things will bounce back – and quickly.

  Meanwhile, both Toronto and Vancouver housing markets also remain in denial as they continue to go gangbusters. Buyers today are likely buying at all-time highs.

  And as we predicted last year, the Bank of Canada has cut (not raised) interest rates twice in the last 6 months.

  We fully expect the Bank of Canada to eventually cut interest rates to 0% and start a money printing program as well. And for the stunner – NEGATIVE interest rates will not be that far behind.

  Australia – Over the last 20 years, China has been viewed as the growth engine of the world, and justifiably so. With annual growth rates between 8% to 15%, China’s economy was literally eating every rock, stalk and barrel of practically every commodity in the world.

  And naturally, any country or company that produced these commodities made a tonne of money – including Australia.

  Today, China’s growth rate has slowed to about 3% which is a dramatic slow down compared to what it achieved in the past. This slowdown and China’s effort to even maintain these rates, will have significant repercussions around the world.

  And the first up to bear the brunt of this slowdown is its closest supplier of raw materials – Australia.

  With dark clouds on the economic horizon, the Australian government and central bank is doing everything possible to prevent the unpreventable recession.

  Interest rates have been reduced to all-time historical lows, meanwhile the Australian Dollar has plummeted -25% over the last year. Yet – the negative outlook has not improved.

  Brazil – Like Australia, Brazil has benefitted immensely from China’s growth. And now, also like Australia, it too is feeling the affects of the dramatic Chinese slowdown.

  The economy has now declined for 12 consecutive months making it both the longest and deepest recession in 25 years.

  But wait – it gets worse. Despite declining growth, inflation continues to soar higher causing interest rates to rise as well.

  And if that wasn’t bad, also know that the Brazilian currency has fell off the cliff at -53%.

  Sweden – Unlike Australia and Brazil, Sweden relies very little on China as a buyer of last resort. Yet, the Swedish economy is also not very hot these days.

  In fact, instead of spectacular and dramatic declines in anything, it is doing the exact opposite – it just isn’t moving.

  While Sweden isn’t in the Eurozone, it is smack dab next to it and that in itself is reason enough for the lack of growth. We’ve written before how the debt crisis in the Eurozone is acting like a giant, slow moving tornado that is sucking the life out of the economy and everything near by. And unfortunately for Sweden, it is very near by.

  While economic growth in the Nordic state hasn’t declined, it hasn’t accelerated either – and this is what has many worried.

  So worried, that the central bank shocked everyone not once but twice, by first announcing that they would begin to print money, and then when they announced that interest rates would be NEGATIVE.

  These actions are so severe, that we need to repeat them:

  1) MONEY PRINTING
  2) NEGATIVE INTEREST RATES

  It is hoped that these actions will cause people and companies to loosen their wallets and start spending again. Yet, what the government and the central bank doesn’t understand is that these actions will actually make the problem worse.

  As the global economy continues to move as we expect, there is nothing Sweden can do to change what is coming – a global recession and a significantly weaker Krona.

  China, Australia, Brazil, Canada, Sweden – it is beyond us how anyone can declare the crisis isn’t spreading. Be prepared – there are going to be lots of opportunities to both make and lose money.

  But first, you have to recognize what is happening.

  * * *

  IceCap’s full letter below

  

  

  

  

  

• Americans Are Finally Waking Up To "False Flag" Terror

  From Washington's blog via GlobalResearch.ca,

  Governments Admit They Carry Out False Flag Terror

  Governments from around the world admit they carry out false flag terror:

  • A major with the Nazi SS admitted at the Nuremberg trials that – under orders from the chief of the Gestapo – he and some other Nazi operatives faked attacks on their own people and resources which they blamed on the Poles, to justify the invasion of Poland. Nazi general Franz Halder also testified at the Nuremberg trials that Nazi leader Hermann Goering admitted to setting fire to the German parliament building, and then falsely blaming the communists for the arson

  • Soviet leader  Nikita Khrushchev admitted in writing that the Soviet Union’s Red Army shelled the Russian village of Mainila in 1939, and declared that the fire originated from Finland as a basis launching the Winter War four days later

  • Israel admits that an Israeli terrorist cell operating in Egypt planted bombs in several buildings, including U.S. diplomatic facilities, then left behind “evidence” implicating the Arabs as the culprits (one of the bombs detonated prematurely, allowing the Egyptians to identify the bombers, and several of the Israelis later confessed) (and see this and this)

  • The CIA admits that it hired Iranians in the 1950′s to pose as Communists and stage bombings in Iran in order to turn the country against its democratically-elected prime minister

  • The former Italian Prime Minister, an Italian judge, and the former head of Italian counterintelligenceadmit that NATO, with the help of the Pentagon and CIA, carried out terror bombings in Italy and other European countries in the 1950s and blamed the communists, in order to rally people’s support for their governments in Europe in their fight against communism. As one participant in this formerly-secret program stated: “You had to attack civilians, people, women, children, innocent people, unknown people far removed from any political game. The reason was quite simple. They were supposed to force these people, the Italian public, to turn to the state to ask for greater security”(and see this)(Italy and other European countries subject to the terror campaign had joined NATO before the bombings occurred). And watch this BBC special

  • As admitted by the U.S. government, recently declassified documents show that in the 1960′s, the American Joint Chiefs of Staff signed off on a plan to blow up AMERICAN airplanes (using an elaborate plan involving the switching of airplanes), and also to commit terrorist acts on American soil, and then to blame it on the Cubans in order to justify an invasion of Cuba. See the following ABC news report; the official documents; and watch this interview with the former Washington Investigative Producer for ABC’s World News Tonight with Peter Jennings.

  • 2 years before, American Senator George Smathers had suggested that the U.S. make “a false attack made on Guantanamo Bay which would give us the excuse of actually fomenting a fight which would then give us the excuse to go in and [overthrow Castro]“.

  • And Official State Department documents show that – only nine months before the Joint Chiefs of Staff plan was proposed – the head of the Joint Chiefs and other high-level officials discussed blowing up a consulate in the Dominican Republic in order to justify an invasion of that country. The 3 plans were not carried out, but they were all discussed as serious proposals

  • The South African Truth and Reconciliation Council found that, in 1989, the Civil Cooperation Bureau (a covert branch of the South African Defense Force) approached an explosives expert and asked him “to participate in an operation aimed at discrediting the ANC [the African National Congress] by bombing the police vehicle of the investigating officer into the murder incident”, thus framing the ANC for the bombing

  • An Algerian diplomat and several officers in the Algerian army admit that, in the 1990s, the Algerian army frequently massacred Algerian civilians and then blamed Islamic militants for the killings (and see this video; and Agence France-Presse, 9/27/2002, French Court Dismisses Algerian Defamation Suit Against Author)

  • Senior Russian Senior military and intelligence officers admit that the KGB blew up Russian apartment buildings and falsely blamed it on Chechens, in order to justify an invasion of Chechnya (and see this report and this discussion)

  • According to the Washington Post, Indonesian police admit that the Indonesian military killed American teachers in Papua in 2002 and blamed the murders on a Papuan separatist group in order to get that group listed as a terrorist organization.

  • The well-respected former Indonesian president also admits that the government probably had a role in the Bali bombings

  • As reported by BBC, the New York Times, and Associated Press, Macedonian officials admit that the government murdered 7 innocent immigrants in cold blood and pretended that they were Al Qaeda soldiers attempting to assassinate Macedonian police, in order to join the “war on terror”.

  • Although the FBI now admits that the 2001 anthrax attacks were carried out by one or more U.S. government scientists, a senior FBI official says that the FBI was actually told to blame the Anthrax attacks on Al Qaeda by White House officials (remember what the anthrax letters looked like). Government officials also confirm that the white House tried to link the anthrax to Iraq as a justification for regime change in that country

  • Former Department of Justice lawyer John Yoo suggested in 2005 that the US should go on the offensive against al-Qaeda, having “our intelligence agencies create a false terrorist organization. It could have its own websites, recruitment centers, training camps, and fundraising operations. It could launch fake terrorist operations and claim credit for real terrorist strikes, helping to sow confusion within al-Qaeda’s ranks, causing operatives to doubt others’ identities and to question the validity of communications.”

  • United Press International reported in June 2005:
    
    

    U.S. intelligence officers are reporting that some of the insurgents in Iraq are using recent-model Beretta 92 pistols, but the pistols seem to have had their serial numbers erased. The numbers do not appear to have been physically removed; the pistols seem to have come off a production line without any serial numbers. Analysts suggest the lack of serial numbers indicates that the weapons were intended for intelligence operations or terrorist cells with substantial government backing. Analysts speculate that these guns are probably from either Mossad or the CIA. Analysts speculate that agent provocateurs may be using the untraceable weapons even as U.S. authorities use insurgent attacks against civilians as evidence of the illegitimacy of the resistance.

  • Undercover Israeli soldiers admitted in 2005 to throwing stones at other Israeli soldiers so they could blame it on Palestinians, as an excuse to crack down on peaceful protests by the Palestinians

  • Quebec police admitted that, in 2007, thugs carrying rocks to a peaceful protest were actually undercover Quebec police officers (and see this)

  • At the G20 protests in London in 2009, a British member of parliament saw plain clothes police officers attempting to incite the crowd to violence

  • A Colombian army colonel has admitted that his unit murdered 57 civilians, then dressed them in uniforms and claimed they were rebels killed in combat

  • U.S. soldiers have admitted that if they kill innocent Iraqis and Afghanis, they then “drop” automatic weapons near their body so they can pretend they were militants

  • The highly-respected writer for the Telegraph Ambrose Evans-Pritchard says that the head of Saudi intelligence – Prince Bandar – admitted last the Saudi government controls “Chechen” terrorists

  

  Painting by Anthony Freda

  So Common … There’s a Name for It

  This tactic is so common that it was given a name for hundreds of years ago.

  “False flag terrorism” is defined as a government attacking its own people, then blaming others in order to justify going to war against the people it blames. Or as Wikipedia defines it:

  False flag operations are covert operations conducted by governments, corporations, or other organizations, which are designed to appear as if they are being carried out by other entities.

   

  The name is derived from the military concept of flying false colors; that is, flying the flag of a country other than one’s own. False flag operations are not limited to war and counter-insurgency operations, and have been used in peace-time; for example, during Italy’s strategy of tension.

  The term comes from the old days of wooden ships, when one ship would hang the flag of its enemy before attacking another ship in its own navy. Because the enemy’s flag, instead of the flag of the real country of the attacking ship, was hung, it was called a “false flag” attack.

  Indeed, this concept is so well-accepted that rules of engagement for naval, air and land warfare all prohibit false flag attacks.

  Leaders Throughout History Have Acknowledged False Flags

  Leaders throughout history have acknowledged the danger of false flags:

  “This and no other is the root from which a tyrant springs; when he first appears he is a protector.”
  – Plato

   

  “If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy.”
  – U.S. President James Madison

   

  “A history of false flag attacks used to manipulate the minds of the people! “In individuals, insanity is rare; but in groups, parties, nations, and epochs it is the rule.”
  ? Friedrich Nietzsche

   

  “Terrorism is the best political weapon for nothing drives people harder than a fear of sudden death”.
  – Adolph Hitler

   

  “Why of course the people don’t want war … But after all it is the leaders of the country who determine the policy, and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship … Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is to tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country.”
  – Hermann Goering, Nazi leader.

   

  “The easiest way to gain control of a population is to carry out acts of terror. [The public] will clamor for such laws if their personal security is threatened”.
  – Josef Stalin

  People Are Waking Up to False Flags

  People are slowly waking up to this whole con job by governments who want to justify war.

  More people are talking about the phrase “false flag” than ever before.

  

  

  

  

  

• America's Economic Reset Will Trigger Global Recession, New Crises

  Submitted by Eugen Bohm-Bawerk

  

  In Episode 1 we showed how the US labour market changed dramatically from the 1970s on back of excess money printing which allowed Americans to buy tradable goods on the international market, hollowing out its own manufacturing base, and essentially creating an unsustainable consumer driven economy where the broad masses get their employment within service sector.

  We will now take that a step further and look at what this has meant for the US worker. As our first chart shows, non-supervisory real wages stagnated in the early 1970s and has essentially remained flat ever since.

  Measured labour productivity on the other hand continued upward, but its rate of growth shifted down. More on this in our next blog post.

  

  The American middle class, i.e. the non-supervisory workers, managed to grow their consumption in the midst of stagnating wages through

  • moving to two income households (women constitute almost 50 per cent of the labour force today)

  

  • by increasing debt

  

  It should be clear that when the share of women in the labour force has reached 50 per cent and further leverage of a shrinking household income has become counterproductive the end-game has started. The only way to increase living standards from here will be the old fashioned way; consume less than you produce and productively invest the surplus.

  This brings us back to the previous post, where we suggested the end-game will be one where global manufacturing powerhouses such as China, Japan and Germany will discover their overexposure to exports to the same extent that the US is overexposed to its service sector. As Americans start to save more, invest it domestically and rebuild their manufacturing base global exporters will be forced to do the opposite. Needless to say, this change will not come voluntarily, but through recession, financial crisis and necessity. Excesses must be liquidated at some point, no matter.

  But why did US wages stagnate? Simple, through  a Faustian bargain they traded highly productive jobs in the manufacturing sector for low productive jobs in the service sector. While it felt great at the time – we are all amazed to see the convenient lifestyle Americans live – it came with long term consequences.

  As the US employment changed toward part-time, low benefit, low paid service sector jobs the quality in the overall labour market deteriorated. We have made a job quality index to depict just this. Unsurprisingly, this index, along with so many, peaks right after Bretton-Woods collapses. And the really scary thing is how it has completely fallen off a cliff in the period after the financial crisis.

  

  And while we could conclude this missive here, we will repeat an argument we made in How the FOMC got institutionally corrupt because it is a direct result of the changes that has occurred in the US labour market.

  The so-called wealth effect that rules today’s macroeconomic model output brings quacks and charlatans like Greenspan to claim that stock market gains cause economic growth; perversely enough they are semi-right due to faulty concept of  GDP  and the way inflated asset values in the US can be used as leverage to purchases tradable goods on the international market. The last chart today talks volumes about what is going on in US policy circles, and why things have become as confused as they are.

  

  

  

  

  

  

• Why the Next Round of the Crisis Will Be Exponentially Worse Than 2008

  As you know, we’ve been calling for a bond market crisis for months now. That crisis has officially begun in Greece, and will be spreading in the coming months. Currently it’s focused in countries that cannot print their own currencies (the PIIGS in Europe, particularly Greece).

   

  However, China and Japan are also showing signs of trouble and ultimately the bond crisis will be coming to the US’s shores.

   

  However, it’s critical to note that crises do not unfold all at once. The Tech Bubble, for instance, which was both obvious and isolated to a single asset class, took over two years to unfold.

   

  As terrible as the bust was, that crisis was relatively small as far as the damage. At its peak, the market capitalization of the Tech Bubble was less than $15 trillion. Moreover, it was largely isolated to stocks and no other asset classes.

   

  By way of contrast, the bond bubble is now well over $199 trillion in size. And if we were to include credit instruments that trade based on bonds, we’re well north of $600 trillion.

   

  Not only is this exponentially larger than global GDP (~$80 trillion), but because of the structure of the banking system the implications of this bubble are truly systemic in nature.

   

  Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile).

   

  The reason for this is because it is far more likely for a company to go belly up than a country.

   

  Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc.) as the senior most asset on bank balance sheets.

   

  Because banking today operates under a fractional system, banks control the amount of currency in circulation by lending money into the economy and financial system.

   

  These loans can be simple such as mortgages or car loans… or they can be much more complicated such as deriviative hedges (technically these would not be classified as “loans” but because they represent leverage in the system, I’m categorizing them as such).

   

  Bonds, specifically sovereign bonds, are the assets backing all of this.

   

  And because of the changes to leverage requierments implemented in 2004, (thanks to Wall Street lobbying the SEC), every $1 million in sovereign bonds in the system is likely backstopping well over $20 (and possibly even $50) million in derivatives or off balance sheet structured investment vehicles.

   

  Globally, the sovereign bond market is $58 trillion in size. 

   

  The investment grade sovereign bond market (meaning sovereign bonds for countries with credit ratings above BBB) is around $53 trillion. And if you’re talking about countries with credit ratings of A or higher, it’s only $43 trillion.

   

  This is the ultimate backstop for over $700 trillion in derivatives. And a whopping $555 trillion of that trades based on interest rates (bond yields).

   

  The significance of these developments cannot be overstated. The financial system today is even more leveraged than it was in 2008. The US alone has 30% more debt in the financial system… and even less bonds backstopping it because of the Fed’s QE programs.

   

  A new crisis is approaching. Smart investors are preparing now, BEFORE it hits.

   

  If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

   

  We made 1,000 copies available for FREE the general public.

   

  As we write this, there are less than 15 left.

   

  To pick up yours, swing by….

  http://www.phoenixcapitalmarketing.com/roundtwo.html

   

  Best Regards

   

  Phoenix Capital Research

   

  Our FREE e-letter: www.gainspainscapital.com

   

   

   

  

  

  

  

• China's Debt Load To Hit 250% Of GDP In 5 Years, IMF Says

  Anyone who follows China knows that the country faces a particularly vexing problem when it comes to debt. The way we explain it is simple: Beijing is attempting to deleverage and re-leverage simultaneously. Needless to say, this isn’t possible, but that hasn’t stopped China from trying, as is clear from the multitude of contradictory policies and directives that have emanated from Beijing over the course of the last nine months. 

  Nowhere is the confusion more apparent than in China’s handling of its local government debt problem. In an effort to skirt official limits on borrowing, the country’s provincial governments racked up an enormous amount of off-balance sheet liabilities. These loans carried higher interest rates than would traditional muni bonds and ultimately, servicing the debt became impossible. In order to help provinces deleverage, Beijing launched a program whereby high interest LGFV loans can be swapped for new local government bonds that carry substantially lower interest rates. In fact, yields on the new bonds are close to yields on general government bonds meaning provincial governments are saving somewhere on the order of 300 to 400 bps. But there’s a problem. Banks aren’t particularly keen on swapping a higher yielding asset for a lower yielding one. The PBoC’s solution was to allow the new bonds to be swapped for central bank cash which the banks could then re-lend into the real economy. The problem with this is that it transforms a deleveraging effort (the local government refi program) into a re-leveraging program (the LTRO component). Shortly after the program was launched, the PBoC effectively negated the entire effort when it moved to loosen restrictions on the very same LGVF loans that caused the problem in the first place. 

  Admittedly, lengthy discussions about fiscal mismanagement across China’s various provincial governments doesn’t make for the most exciting reading, but it’s hugely important from a big picture perspective. Why? Here’s why:

  

  That’s from the IMF and as you can see, local government debt will account for an estimated 45% of GDP by the end of this year. If one looks at what is classified as “general government debt”, China’s debt-to-GDP ratio looks pretty good – especially by today’s standards. Simply counting central government debt and local government bonds, the country’s debt-to-GDP ratio is just a little over 20%. Thus, if you fail to include the provincial LGVF debt burden, the effect is to dramatically understate China’s debt-to-GDP.

  Below, find two charts from the IMF, the first showing China’s actual debt-to-GDP (i.e. including LGFV financing) and another showing China’s total debt-to-GDP (which includes corporate debt and which you’ll note is set to hit 250% of GDP by 2020). We’ve also included some color from the Fund’s debt sustainability analysis.

  

  

  From the IMF:

  Without reforms, growth would gradually fall to around 5 percent in 2020, with steeply increasing debt ratios.

   

  The general government debt is slightly above 20 percent of GDP over the projection periods. Augmented debt, however, rises to about 71 percent of GDP in 2020 from less than 57 percent of GDP in 2014. Even with the favorable interest rate-growth differential, augmented debt rises over the medium term as the augmented deficit is assumed to decline gradually. 

   

  The augmented debt level is also sensitive to a contingent liability shock, which would push debt to near 100 percent of GDP in 2020. Such a shock, for instance, could be a large-scale bank recapitalization or financial system bailout to deal, for example, with a potential rise in NPLs from deleveraging. A combined macrofiscal shock would increase the debt-to-GDP ratio from about 71 percent to 78 percent in 2020.

  

  

  

  

• Liar, Liar, Pantsuit On Fire

  But will it matter?

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Approaching A Global Deflationary Crisis?

  Submitted by Brian Davey via CredoEconomics.com,

  Anyone with any sense for global economic trends ought to be worried. The signs are everywhere of a serious deflationary crisis. It is obvious that Chinese growth is falling. The prices for energy and the raw materials that feed the growth economy keep falling. The demand for Chinese exports is down too. Stock Markets in Asia are falling, despite attempts to prop them up. Countries are being tempted to export their problems abroad – for example by competitive devaluation. In Europe its obvious that a “solution” is being cobbled together for the Euro and Greek crisis even though no one at all believes that it will work. At the same time the policy response of “quantitative easing” which has kept interest rates down very low has reached the end of the road. With interest rates at or near to zero the scope for addressing the crisis through monetary policy (low interest rates) is exhausted. Many pundits believe that low interest rates have not encouraged productive investment but speculative bubbles – the creation of capacity in fields that in the long run will not pay, or fuelled a casino style speculation, a giant bubble of bets that could soon collapse, bringing the global economy down with it.

  So what is going on? How do we explain the situation? In this paper I am going to argue that there are a number of ways of understanding and addressing what is developing into a global crisis. The desire to make the crisis understandable can convert into a temptation to make it seem simpler than it is. At its most banal we have the explanations that neo liberal German politicians are prone to – like the idea that the crisis is because of a lack of confidence and trust and that this can be resolved (in Europe) purely and simply by countries following the Eurozone rules. If the confidence and trust are restored then all will be well and the market will restore prosperity.

  A more adequate story is needed than this – and it is one that needs to focus on global trends not just in Europe but in the USA, the so-called developing world and above all in China. This story has a number of different plots and sub plots, not one. We need to understand how the sub plots interweave. The story is one of debt, competitive imbalances and an energy crisis and all need to be told. To make the story even more complicated we need to keep in mind too that an even more important story, that of climate change, has to be held in our minds too. If and when humanity has any chance of resolving these crises it will have to resolve that one at the same time. Will this be possible? I don’t know – what I do know is that there is a theory, by archeologist Joseph Tainter, that humanities’ problem solving capacities are limited by complexity. A friend is currently trying to get me to use twitter. However I am daunted by reducing complex situations to short simple messages. Understanding the global economy is like entering a labyrinth. As I get older I notice that some people become famous because of the clarity in the way that they write. What may not be noticed is that the apparent clarity in a political economic message is often the result of simplification. The popularity of neo-liberal economcs is like that.
  So lets look at the ways of describing the crisis. In summary this can be described as the interrelationship between 4 processes.

  (1) Structural policy stupidity – policy governance cannot cope with the complexity of the crisis. Politicians cannot cope with communicating complex messages to their peoples nor find the mechanisms to cope with the complexity of the issues.

   

  (2) Problems are also caused by uneven development between countries and sectors which cannot be sustained without methods for recycling purchasing power from the more competitive countries to the less competitive ones. These imbalances become most problematic when capital export from surplus to deficit countries slows which happens when growth slows in the deficit countries.

   

  (3) The crisis is both cause and effect of a rising amount of debt – personal, corporate, state and financial sector – which has acted as a drag on growth. As growth falls all kinds of debt become more difficult to service so the monetary authorities have tried to push interest rates down. Nevertheless the finance sector has tended to become both more speculative and more predatory as there is a “hunt for yield”. Interest rates rise when risk premiums are imposed on distressed borrowers (including states), money making occurs through financing arrangements based on “passing the risk parcel” exploiting the naivety of lenders about complex financial arrangements and by the promotion of asset price bubbles. The bigger players are rescued during crises but the smaller players (including tax payers and those who lose their state benefits) are made to pay.

   

  (4) The crisis is the result of reaching “the limits of economic growth” and, in particular, because of resource depletion in the energy sector. This is less obvious because of currently low and falling energy and commodity prices but we need to study the experience of the energy sector over last few years, not just the immediate situation. The immediate fall in commodity and energy prices is a result of the onset of the crisis – a crisis which very high and rising energy prices up until recently helped bring on. The high energy prices have been compatible with a high level of debt only because interest rates have been so low and because there has been a “hunt for yield”, something that would pay more than leaving money on deposit paying very little.

  Depletion of resources in the energy and mining sector means that it is taking more energy than before to extract energy (and other mined resources) and this has pushed up the costs of extraction of energy and other minerals. High energy costs act as a drag on the growth of the economy as a whole – because energy costs, like interest rates, enter into the production of virtually everything else. This is particularly acute problem in the energy sector itself as the energy sector is such a huge user of energy. The energy companies need a high price for energy otherwise they cannot actually make a profit. However, if energy prices are high for too long the economy wilts.

  The development of unconventional oil and gas has been possible because quantitative easing has made a large amount of money to Wall Street at a low interest rate and they have been “searching for yield” – looking for somewhere to put this money to earn a high rate of interest. This funded the voracious capital expenditure needs of the industry with its high drilling intensity. However it pre-supposed that prices would remain high enough for long enough to cover costs and this has not happened. The problem is set to get a lot worse as depletion speeds up.

  So, to repeat, the best way to tell the story of this crisis needs to relate ALL of these elements together – policy failure, debt, imbalances, energy. Each element is causatively connected to the others but sometimes in a time lagged way which obscures the relationships. Together these elements are bringing about what some observers are calling “secular stagnation”.

  “Stanley Fischer, vice-chairman of the US Federal Reserve, has laid out the predicament that forecasters face. Half way through each year, economists have had to explain why their global growth forecasts were too optimistic, he said, and this has happened “year after year”. While growth rates have been falling across the world, it’s not yet clear whether this is all a hangover from the 2008 crash or something more fundamental.”

  In my view it is “something more fundamental”. It is related to reaching the limits to growth – and this has to do with fossil fuel and materials depletion and the end of cheap energy. However, this does not exclude a partial truth in the other narratives that economists are using to explain low growth.

  In the reminder of this article I run through each of these themes in more depth.

  Explanation number one: “structural policy stupidity”

  First of all structural policy stupidity – all politics must be sold in one way or another to the governed. Even autocrats strive to govern with ideas as well as through simple fear. The rhetoric of politicians must to some degree match the way people think about things – that means one ingredient for successful politics is where politicians succeed in appealing to popular illusions embodied in “common sense”. One such popular illusion is that states have to arrange their finances using the same principles that ordinary households use to run their personal finances. Never mind that this is not true – the politicians who pursue policies and use a rhetoric that appeals to the “person in the street” viewpoint have a head start. As a number of economists have noted these politicians work with an ultra simple (and wrong) model of economic reality – that if governments follow rules and don’t borrow excessively this will inspire confidence and trust and economies will grow, spurred on by competition. It does not matter that this idea may actually be self defeating when an economy is slipping into recession – the important point is that collective illusions persist when they fulfil a collective purpose for those that hold them. In this case a key collective purpose of “the balanced budget illusion” is that it makes communicating with electorates so much easier. It enables a message of “we cannot afford” and “being cruel to be kind” to be directed against vulnerable groups who can be more easily scapegoated.

  Complex messages are not popular and don’t sell well even if they more accurately reflect reality. Please note here that I am saying something more than politicians are mistaken – my argument is that ideas like the balanced budget illusion is more than “a mistake”. It is an illusion that has a structural function in the political process. It is not an accident that this particular theme repeats itself in history again and again. There is no reason to believe that once an idea has been rejected by one generation after a bitter learning experience, that a subsequent generation that have not been through the same learning experience will not have to learn it the hard way all over again.

  One of the sayings of the management theorist Stafford Beer was that “the purpose of a system is what it does”. I really like this because it cuts through all the rhetorical justifications and excuses. If a system like the Eurozone is ruining its less competitive members in favour of the more competitive ones then this is the purpose of the system. Were it not the purpose of the system most powerful players in it would change it.

  In this regard the very structure of the Eurozone has proved ideal for putting the banking and financial elite of Europe out of reach of democratic political processes. The currency is managed at a level out of the reach of any one state with the finances of each state disciplined by a set of rules that enforces close to a balanced budget. Given the inevitable crises each government that becomes vulnerable then has to cede more and more economic policy to financial interests who are free to impose neo-liberal policies like privatisation quasi automatically. The “coup” against Greece was a design feature of the Euro and delivers the primacy of finance over any pretence of democratic politics.

  Given the complexity of eurozone governance, in which every state is supposed to have a say and decisions must be passed back to all of these governments, it seems as if governance requires a set of rules that governments adhere to, otherwise there would be endless re-negotiations for each new situation, and for each state, that would go on forever. In an interview in the New Statesman Yanis Varoufakis explained this when he described the viewpoint of Wolfgang Schaueble.

  “Schäuble was consistent throughout. His view was ‘I’m not discussing the programme – this was accepted by the previous government and we can’t possibly allow an election to change anything. Because we have elections all the time, there are 19 of us, if every time there was an election and something changed, the contracts between us wouldn’t mean anything.’”

  If you think about it this is not only a recipe for the negation of democracy it is the negation of any kind of economic policy discussion or policy variability. A common currency zone cannot work in these circumstances because it is paralysed by its complexity into ever being unable to adapt its economic policy. The default is then to a neo-liberal assumption of a balanced budget (or budget surplus, free market rules and privatisation). All it can do is to follow a set of pre-determined rules. In this case the policy that destroys economies like that of Greece appears as the price paid to avoid endless renegotiations.
  The problem for the Eurozone and the global economy is that this is leading to a massive deflation….or maybe from an elite viewpoint this is not so negative. Maybe this is not “policy stupidity” but a cunning plan???

  In a massive crisis in which only the super elite are rescued and everyone else ruined there would be a further massive concentration of wealth and power. Perhaps members of the super elite – the 1% of the 1% – think in this way. Or maybe I am paranoid.

  Explanation number two – too much debt

  

  Some economists think that that somehow debt doesn’t matter since, supposedly, debt transfers purchasing power from debtors to creditors who will spent it instead so debt is not supposed to affect “aggregate demand”. Alas this misunderstands the mechanisms of bank credit creation. In order for money creation and demand expansion to occur in the current system there is a requirement that more bank credit creation – i.e. more borrowing from banks – takes place. If individuals and companies are maxed out (“peak debt”) and if they are reluctant to take on more debt then aggregate demand cannot be increased. In fact, even if the central bank pumps out more money through “quantitative easing” this will do little or nothing to increase demand. The central bank will create money to buy bonds from banks but the money created and paid over will remain unused by the banks and the velocity of circulation will fall. The single demand expansion influence is that interest rates are lower and this is supposed to encourage investment – something that does not happen if the conditions for expansion do not otherwise exist. What happens instead is that money goes into speculation.

  Meanwhile if companies and individuals are maxed out they will be making an effort to pay back their debts to the banks. When this happens money is destroyed and goes out of circulation. More particularly chain reactions from defaults and collapsing confidence destroys the trust and confidence on which the financial system works and leads to massive deflation. Now this situation of collapsing purchasing power in the private economy could in theory be balanced out by government spending leading to the governments running deficits – but that’s against the eurozone rules.

  Explanation number three – global imbalances/failing mechanisms to recycle purchasing power

  Another explanation for current stagnation is the breakdown of mechanisms for dealing with international trade and financial imbalances. In his book The Global Minotaur Yanis Varoufakis, describes the history of the post war economy by focusing on the story of how trade and financial imbalances were managed – particularly the imbalances between the USA and the rest of the world, but also imbalances in the Eurozone. As he explains, unless there is a mechanism for recycling surpluses from countries in trade surplus back to countries in trade deficit then purchasing power drains away from the deficit countries who are put in a deflationary squeeze as is happening to Greece currently. In the initial period after world war two the USA was dominant in the global economy and was in trade surplus to the rest of the world. It used the financial flows into America that were generated by its surplus of exports over imports by investing back into the rebuilding of countries like Germany and Japan and more generally into the American design for the postwar economy as bulwark against communism. The recycling of surpluses back into deficit countries kept the boom going. But you won’t catch Germany recycling its surpluses back into Greece now.

  The answer to an export surplus in one country which occurs over and against import surpluses in other countries is for the countries with the export surplus to use the money that they earn in capital export back to the deficit countries. They invest in those countries. However, that implies that there is something in the deficit countries that is an attractive focus for investment. It implies that those countries are growing – which brings the argument round full circle. For decades the USA was the largest economy in the world and a growing economy. This meant that when the US first went into what was to be a long running trade deficit it was still worth Germans, Japanese or Chinese parking their dollar earnings as deposits into Wall Street banks or using them to lend to the US government. The dollars earned by Germany, Japan and later by China could be invested in the US economy or they could be used to buy oil. This was also because, by agreement with countries like Saudi Arabia, oil had to be purchased in dollars. This arrangement partly broke down however when Wall Street crashed in 2007 – in large part because it was operating a criminal business model. Loans were made to people who it was known would never be able to pay them back and packaged up with other assets and then sold on across the world to pension funds and other financial institutions who picked up the risk parcel, misled by ratings agencies. The ratings agencies were paid to say that the “toxic trash” was AAA grade.

  Turning the finance explanation upside down

  So, to come back to the story – yes the current problems are due to too much debt. Yes, mechanisms for recycling global financial flows arising out of trade imbalances no longer work so well after Wall Street and other banksters in London and Frankfurt are seen to be run by crooks….but one can argue that these two phenomena are also the result of the failure to grow, as much as the cause. You can turn at least a part of the argument on its head.

  What I mean by that is that a rising amount of debt in general and troubled debt in particular is not just a cause of faltering growth – the faltering growth is a cause of the increasing amount of troubled debt.

  Debt is not usually seen to be a problem for companies and individuals where their income is rising and sufficiently secure for people to pay the interest. It is when people find that their real income is stagnating or falling that more debt becomes distressed debt and distressed debt becomes the lender business model. Prudential lending pays in a growing economy with growing investment opportunities – but the temptation to resort to predatory lending occurs when there is an awareness of, even a decision to exploit, the desperation of people in trouble. This becomes part of the model. What happens when a country, or a company, or an individual, cannot pay? The answer is that the interest rate that they are supposed to pay for any new credit rises dramatically because they are now supposed to pay the lender “a risk premium”. This is the last stage of a process of debt accumulation. When a debt pyramid comes crashing down it does so because, just before it crashes, debt servicing costs get dramatically worse as “risk premiums” are loaded onto borrowers.

  This “risk premium” might lead one to suppose that lenders actually are tolerating a higher level of risk for which they must be compensated – however this is only partly true for the biggest players. When the biggest players are deemed “too big to fail” they get backed by politicians so the “risk” is taken off – that is, after all, what happened to the German and French banks that lent to Greece. The deal stitched up by the IMF and the ECB meant that they got bailed out and the debt loaded onto the Greek people. So while risk premiums allow banks to increase their take the real risks do not rise commensurately.

  The temptation to borrow under increasingly unfavourable conditions is not like borrowing to invest or to buy an asset with the secure expectation of a rising income. As debt increases the business model for lenders becomes more and more making money with distressed debt, vulture funds, passing the risk parcel and toxic trash. It occurs because borrowing states, institutions and individuals resort to what becomes a kind of gambling considered as a last resort, as an attempt at a way out of a desperate situation. That’s one of the ideas of Prospect Theory. Normally people are risk averse, they don’t risk what little they still have if they have anything left – however they do gamble when all of their other options seem hopeless anyway. Underlying all of this is that the rising incomes are no longer there. By way of contrast the institutions lending are not taking real risks because they have friends in very high places.

  Turning the imbalance argument around

  One can turn the idea about imbalances the other way round too. In one way of looking at the situation it seems that growth falters because the mechanisms to handle imbalances by recycling surpluses break down. No doubt there is truth in this but you can turn that idea round – i.e. it is when growth falters that the mechanisms to handle imbalances by recycling surpluses dry up. As we have argued the way to recycle surpluses is through capital export – the purchasing power flows back to the deficit countries not as money to purchase their goods as imports into the surplus countries but rather as money to buy into the industries and economies of the deficit countries, as investment. But who is going to invest into a stagnant or contracting economy?

  Look what happened to the German privatisation of East Germany. The institution that was entrusted to sell off East German industry, the Treuehand, made a big loss. How could that be? When the East German economy was merged with the West German economy it was at the rate of one East German mark for one West German mark. This was an early lesson of what would happen in the eurozone except that it all happened inside Germany itself. The East Germans could not compete after reunification, just like the Greeks cannot compete now. So most East German businesses were making huge losses. However, if you want to sell off companies then you have to sell them as going concerns. You have to keep them going before you sell them….which often meant making huge losses. What they got for the sale of these companies never covered these losses.

  Wolfgang Schaueble knows this – he was involved. They will not make any money selling Greek assets either. When the Austrian Railways considered a takeover of the Greek railways they said they would only do this if the Greek railways were given away. Unless Greece is growing and prospering there will be very little capital export into Greece to actually buy privatised assets.

  So, to summarise the argument so far: slowing growth can be explained by increasing debt reaching its limits and the breakdown of mechanisms to even imbalances by recycling purchasing power from surplus to deficit countries. On the other hand the fact that debt is reaching its limits and surplus recycling limits are breaking down can be explained by slowing growth. Both are true in both directions of causation and what we are seeing here is a “vicious cycle” in operation.

  Explanation number four – the energy crisis

  Now let’s add the fourth way of looking at the issues. Let us start by making a distinction between growth of production and growth of production capacity. Growth of production can occur if there is spare capacity in an economy in the form of unemployed resources which can be brought back into utilisation – but for growth to be long term there must be a growth of the capacity of an economy.

  This depends upon expenditure in capital formation – the creation of buildings, equipment and infrastructure. Capital formation is an energy intensive business because infrastructure, buildings and equipment require energy in their production – plus they require an energy throughput for their utilisation. The point about energy is that it is required for every good or service purchased. Even a haircut requires electric light or warmth in the barbers shop and to run electric clippers. Anything that enters into the production of all goods and services is a cost of production that all share. So if the cost of energy rises so does the cost of producing everything.

  The nearest comparable example of a cost that enters into the production of all goods and services is interest rates. Virtually all individuals and companies must borrow so the interest rate enters into the cost of all production and into many everyday living expenses too. You can argue therefore that the real reason that interest rates have been driven down so low by central bankers is that energy costs have been so high. It is has not been possible for the economy to sustain BOTH high interest rates AND the higher energy prices. This is the reason for the stagnation.

  Most energy intensive of all is investment in the energy and mining sector. The amount of energy required to tap and process energy is rising as it becomes harder to find, extract, process and transport oil, gas and coal from smaller, deeper, more remote, and harder to tap geological sources.

  Slowing growth of global productive capacity is the result of the global economy running up against ecological system limits. This is particularly apparent in the climate crisis and the costs that occur as a result of this but, more immediately too, in the economics of extracting fossil fuels. The long run trend is towards rising energy costs which acts as a drag upon the growth of the productive capacity of the global economic system. The most energy intensive sector of all is the energy sector itself. We can see that if we compare the amount of energy used per hour of human activity in the energy and mining sector compared to the amount of energy used per hour of human activity in other economic sectors. (This is the so called exosomatic metabolic rate). These figures are for Catalonia in 2005 because the academics who have studied this issue are mainly at the University of Barcelona but one can expect comparable figures in other places. The rates are 2,000 Megajoules per hour of human activity devoted to energy and mining. This compares to 2.8 Megajoules per hour outside of paid work in households, 75 Megajoules per hour in services and government, 331 Megajoules per hour in the building and manufacturing sector (not including energy and mining) and 175 MJ/h in agriculture. As a matter of fact 11% of the energy throughput of society was taken by the energy sector itself – even though only 0.0945% of the time of everyone in Catalonia was devoted to energy and mining.

  With energy and mining being the most energy intensive sector one would expect the impact of rising energy costs to be felt initially and most powerfully in the energy and mining sector itself. This has indeed been the case. In a presentation by Steve Kopits of the Douglas Westwood Consultancy he shows this graph (CAGR = compound annual growth rate).

  

  As can be seen the capital expenditure required per barrel of oil in the exploration and production sector has increased enormously. To extract oil is requiring greater and greater amounts of investment in exploration and production.

  We can see very clearly what is happening if we look at the statistics for fracking for shale oil in the USA. The fact that the US oil and gas industry has had to resort to fracking is a sign that American oil and gas fields are highly depleted and near to exhaustion. As an analyst called Arthur Berman puts it, fracking is the “retirement party” of the oil and gas industry. It is not a new beginning. As a matter of fact the USA, Russia and Saudi Arabia almost produce an identical amount of oil but look at the difference in the way that they produce it:

  USA = 11.7 MMBl/d, 35,669 wells, 297 million feet
  Russia = 10.9 MMbls/d, 8688 wells, 83 million feet
  Saudi Arabia = 11.4 MMBls/d, 399 wells, 3 million feet [2]

  In order to extract a roughly equivalent amount of oil the US industry has to drill almost 100 times the footage in wells and drill 90 times the number of wells. It is obvious that that will require an enormous amount of energy to get out an equivalent amount of oil (and gas) and that the cost will be a lot higher. But is this investment actually profitable? The answer is that it is only profitable at higher and higher oil prices. Different oil and gas companies require different prices to break even but, according to Kopits most of the oil companies require an oil price of at least $100 for new investment in conventional oil production to be profitable. High prices are needed in the unconventional sector too and most of the fracking companies in the USA have not been making money for several years. In the last year the price has fallen even lower.

  So how come that they are still around? How come they have not gone bust? There are several kinds of reply to this.

  Firstly, in economics things happen if people take a view of the future in which they believe that they will be profitable – even if subsequent experience shows this not to be the case. No one can know the future exactly so every investment is to some degree a gamble. A whole economic sector can share the same gamble and invest on the assumption that they will make money even if this turns out not to the case – and indeed they can be encouraged to. An oil sector drilling 90 times the number of wells and 100 times the footage is going to be immensely profitable for the companies selling and/or hiring out the drilling rigs, pipelines, tankers and other equipment. As the saying goes – in a gold rush sell shovels. A coalition can form around illusions that are profitable to some powerful players who make a lot of money even while others lose. A vested interest coalition pursuing a delusion is called a Granfalloon. It is important to realise that it is in the interests of the Granfalloon to keep on hyping their message in order to keep the money flowing. (This does not mean that the members of a Granfalloon are intentionally misleading – it means that there is an element of confirmation bias in the way that they interpret and describe things. We all do this to some degree – it is very difficult not to select and interpret available information in a way that confirms ones existing preconceptions, one’s faiths).

  Secondly, at this time with interest rates very low there have been very few places where businesses in the finance sector can make much money. There is a temptation to make money on a gamble and the oil and gas industry has been a place for Wall Street to make another gamble. This is especially the case as the collateral for the industry is in the ground. However, when the sub-prime mortgage boom went bust after 2007 banks were left with a lot of houses. Shifting them was not so easy – finding a use for the assets of insolvent fracking companies is likely to prove even more of a problem. How many banks have the expertise to run fracking companies?

  Thirdly in economics things happen with a time lag. Even if companies are making a loss they do not immediately go bust. They and their creditors may take the view that the unfavourable conditions are temporary and more credit may be extended to bridge them over what are assumed to be temporary hard times. If oil and gas prices have fallen they may still be able to sell at a higher price because they have insured themselves by selling their oil and gas already on the futures market. To respond to soon would be to lay off workers, and break up teams that would be difficult to reassemble. The temptation is to hang on, assume that difficulties are temporary and to tell the world that there are no problems, that everything is just fine, that the latest technologies make it possible to produce at a profit at even lower prices. If one looks at the figure however this does not appear to be what is happening. That part of the oil and gas pursuing new development, and particularly in countries where depletion is already advanced, are caught in a dilemma that unconventional oil and gas is expensive oil and gas – and the market cannot be made to pay these high prices over a long enough period to make the development of their part of the industry profitable.

  In conclusion

  The story thus described is one in which the world economy could be heading into a massive economic meltdown. The authors of the famous Limits to Growth, writing in 1972, thought it likely that unless humanity could adjust to the limits that there would be an overshoot and collapse sometime in the future. The crisis of 2007-2008 gave a preliminary taste of what that kind of collapse might look like. The after shocks in the Eurozone and what has been happening in Greece likewise give us a picture of what the future might be like for all of us.

  What this does not mean however is that there will be some general realisation, some mass epiphany or “Aha” moment when everyone realises in a blinding flash of insight that humanity has reached the limits of growth. There are also limits to the extent to which people change their basic faiths about the world. Such flashes of insight about their real situation do sometimes happen when people are thrown into troubled times and circumstances that challenge all that they believe. However, even then most people are reluctant to abandon their faiths as that could leave them even more disorientated and fearful – living in a world that suddenly appears a lot less secure, and facing a future that is a lot less rosy, than they previously believed.

  Most mainstream economists and politicians will continue to believe that the task at hand is “get growth going again” and, in the vast tangle of connected events, will privilege those connections and processes for their mental attention that confirm their viewpoint on what is wrong, the other people who are responsible for what has gone wrong – and what must be done to remove these people. To drum up support for themselves elite politicians of this type will no doubt identify favourite scapegoats and enemies to demonise.

  The worst futures would be where these kind of politicians get a mass following, sponsored financially by the elite, and lead emerging fascist movements.

  The best of all futures would be where these kind of political leaders drift into irrelevance because a popular majority gravitate to those who have positive community level responses of sharing, mutual aid and re-localisation connected to ecological design – and link this to a new approach to politics that supports the transformation at the base of society. This would go together with a new politics of finance to replace the debt based money system and a new politics of energy that keeps the carbon in the ground. A politics of this type would not be about “getting growth going again”. It would be about creating economic arrangements that create security for communities while conserving resource use. This would involve a revival of the commons and a solidarity economy, making growth unnecessary for a good life.

  

  

  

  

  

• Airline Begins Weighing Passengers, Will 'Exclude' Heavy Flyers

  In 2013, Samoan Air became the world's first airline to charge passengers according to their their weight. Now, two years later, Uzbekistan Airways has gone one further than the pay-by-weight model. The Tashkent-based airline has installed special weighing machines in the departure gate zones to weigh people and their hand luggage, noting that some overweight people could be excluded from busy flights on smaller planes if limits are exceeded.

  

   

  As The Daily Mail reports,

  Passengers will be put in three categories – men, women and children – and the company, who are based in Tashkent, have promised not to reveal the weight of individual passengers.

  Of course, its for your own safety…

  The company said they needed to know the weights of both people and their luggage because it was important, especially with smaller planes.

   

  In a statement they said: 'Uzbekistan Airways airline is carrying out the procedure of pre-flight weighing in order to determine the average weight of passengers with hand luggage.

   

  'According to the laws of the International Air Transport Association, airlines are obliged to carry out regular procedures of pre-flight control such as weighing passengers with hand luggage in order to observe the requirements for ensuring flight safety.

   

  'After passing check-in on a flight and prior to boarding into the aircraft, we will ask you to pass the weighing procedure with a special weighing machine placed in the departure gate zone.

   

  'The weighing record will only contain the corresponding passenger category (i.e. male/ female/ children). As for the rest, the full confidentiality of results is guaranteed.

   

  'We appreciate your assistance and thank you in advance for the help in the solution of our common task of flight safety.'

  This is not the first time an airline has instituted the pay-as-you-weigh model, but Uzbekistan's plan to exclude heavier passengers is an escalation… (as CNN reports)

  "The next step is for the industry to make those sort of changes and recognize that, 'Hey, we are not all 72 kilograms [about 160 pounds] anymore and we don't all fit into a standard seat,'" Chris Langton, Samoa Air chief executive told CNN in 2013.

   

  "What makes airplanes work is weight. We are not selling seats, we are selling weight."

  The airline's motto?

  "A kilo is a kilo is a kilo!"

  Of course, the truly sad thing about the airliness need to do this is the 'growing' gurth of a global population spoiled by fake wealth.

  *  *  *

  Of course, there is always alternative travel methods…

  

   

  *  *  *

  Finally. there is this… (via The Guardian)

  A man is suing an airline, claiming he injured his back after sitting next to an obese man who coughed a lot.

   

  James Andres Bassos has taken Etihad Airways to court in Queensland, Australia, saying he was forced to twist and contort his body for long periods on a flight in 2011 from Sydney to Dubai.

   

  Bassos’s district court claim states the “grossly overweight” passenger was spilling into his seat, coughing frequently and had fluid coming from his mouth.

   

  After five hours he asked to be moved but airline staff allegedly refused. Half an hour later, Bassos complained again and he was moved to a crew seat.

   

  However, he had to return to his seat next to the man later for another hour, and again for the final 90 minutes of the flight for security reasons, according to court documents.

   

  Bassos is claiming damages for personal injuries, saying that being forced to twist his body for such a long time to avoid contact with the other passenger gave him a back injury and exacerbated an existing back condition.

  Seriously…

   

  

  

  

  

  

• When Internet Zillions Slipped My Grasp

  From the Slope of Hope: I’ve been writing this blog for so long (over a decade), I sometimes despair that my uninteresting life will stop yielding anything worth writing about. Yes, the blog is principally about technical analysis of stocks, but I like to share anecdotes from time to time, and every time I compose a good anecdote I figure that, welp, that’s the last shareable morsel of my life. So far, though, I wind up thinking of another one, sooner or later.

  So here I am again.

  I started my company, Prophet Financial Systems, in 1992 (and, for those interested, I produced an entire video series called The Prophet’s Tale which describes its history, all the way up through when I sold it to Ameritrade).

  For the first few years, it was really just a historical data company that provided daily updates via modem; in other words, just about the least sexy high-tech outfit one could imagine. The Silicon Valley was a relatively moribund place in those days. Apple was very much on the wane, the commercial Internet didn’t exist, and most companies in this area weren’t any more thrilling to be at than, say, Johnson & Johnson, duPont, or General Dynamics.

  Things changed swiftly in the middle of 1995, however. The “big bang” was Netscape’s public offering. A much smaller event took place just one day before that, however. An electronic discussion board was launched called Silicon Investor, run by a couple of brothers (Jeff and Brad Dryer) that had moved from Kansas to the Bay Area to chase their high-tech entrepreneurial dreams.

  In a stunning example of being at the right place at the right time, Silicon Investor took off like a shot. There was nothing – – absolutely nothing – – remarkable about the web site’s design or functionality. However, it quickly became the go-to place to talk about high-tech stocks, and back in those days, there weren’t many other places to do so. The nature of communities is that once members find a home, they tend to stay there, so even as superior discussion platforms came along, the crowds still flocked to Silicon Investor.

  My own tiny company, Prophet, had built a simple charting platform, and I was looking for customers. I reached out to Brad and Jeff, and we got together at the Just Desserts coffee shop to learn about each other’s businesses and talk it over. They were good guys, and we set up an arrangement for me to provide charts to their site.

  It wasn’t really clear to me how popular their site was, though, until the news hit on April 23, 1998 that Silicon Investor had been bought by go2net for $33,000,000 in stock. Now keep in mind this was just a discussion board we’re talking about, little more sophisticated than the dial-up BBS’s I had enjoyed back in 1981 on my TRS-80. But the magic word those days was “eyeballs”, and Silicon Investor had lots of them, even though it had virtually no revenue.

  Most (if not all) of you are wondering what go2net was. Well, in those days, search engines pretty much sucked. A few companies decide to put together a “meta” search engine, the thought being that if you execute a search against a bunch of crappy search engines, maybe the consolidated results will be semi-decent. So that was pretty much what go2net did: they would submit searches to the search engines of the day and produce a list of the results.

  Of course, that was enough to create a public company (symbol GNET) which was worth hundreds of millions of dollars. (The fact that I can’t even find an image to show you what a go2net screen looked like kind of tells you how lasting and impactful the technology was). And with all that overvalued stock on hand, it was pretty simple to snap up an even smaller site like Silicon Investor for an impossibly high figure.

  Now I was watching all of this with great interest, naturally, because I had my only little business, also in the Silicon Valley, and also devoted to stock market traders, that I’d have loved to sell to go2net (or anyone!) as well. I thought, hell, my site is nicer, my technology is better, and it’s very complementary – – – why not pursue the same outcome? I’ve always had this fantasy that, in this Valley, if you work hard enough, you eventually get tapped with the magic wand, and voila, you’re suddenly rich and famous (I, errr, have dispatched this notion in my mind as of now). So i figured…………the stars had finally lined up!

  So I contacted Brad, and he said, sure, he’d tell the management at go2net about me and my business and see if there was any interest.

  A few days later, the light on my answering machine was flashing. I pressed Play, and there was a message from go2net’s CFO, suggesting I pull some information together about Prophet and mail it to him, and if it looked promising, arrange for a meeting up in Seattle. I could scarcely believe my ears. I excitedly went to press Play to listen to the message again, but in my enthusiasm, I pressed Erase instead. ARGH! I frantically emailed Brad to tell him what had happened and to try to figure out the name of the guy who called. Brad just about died laughing at my message and looped back to me shortly thereafter with the guy’s name and email.

  So I was on my own. After providing some basic financials and product background on Prophet to the CFO, he agreed it would make sense to fly me up to Seattle to meet with Russell Horowitz, go2net’s founder. I felt like I was living in a dream, because everything was happening so fast, just like I hoped it would. I imagined it wouldn’t be long before there would be a press release about Prophet and the princely sum paid for it. I would join in the glorious maelstrom of cash flying around the west coast in the late 1990s.

  “Knock ’em dead!” my wife said to me as she dropped me off at San Francisco International.

  Arriving at the high-rise tower that housed go2net, I was flush with anticipation. I met with the CFO, both of the Dryers, and was escorted in to meet the big man: Russell Horowitz, which was in his late 20s and looked cherubic with a head full of curly, lengthy hair. I was dazzled by their cool office, accustomed as I was to slumming it in a spare bedroom of my house.

  I gave Russ a demonstration of the products I had created, walked him through my patent portfolio of inventions, and discussed some of my plans for future products. He seemed satisfied with what he was hearing, so he handed me back over to the CFO.

  It was at that point I started to run out of answers, because the CFO was interested in seeing my financials. The only “financials” I had was a checking account, and my principal goal there was that it had a positive, and growing, balance at all times. This exposed the first real weakness in my tiny outfit, which was that I was completely unsophisticated about metrics. I didn’t have traffic data, financial reporting, or any of the other stuff that I considered too tiresome to bother with as a one-man shop. I promised the CFO I’d pull the information together and get it to him.

  The second weakness, and this was more severe, was Prophet’s scope. I never sought to have a “millions of eyeballs” business. Mine was in very much a niche market, and its numbers reflected that. I was hoping that wouldn’t weigh on their decision, since I was offering them was technology and, for whatever it was worth, my own vision as to where we could take it. To this day, I believe they would have been wise to make the acquisition.

  As you’ve surely gathered by now, no such acquisition took place. Although the meeting was all smiles and handshakes, it was pretty silent thereafter. I don’t know the reason they decided not to proceed. Maybe there wasn’t enough critical mass of “stuff” to interest them. But, for whatever reason, I was left on my own, slogging away in the spare bedroom, and no gigantic stock certificate was dropped into my lap.

  The irony is that, over time, Prophet kept growing, and it was a pretty good little business. I know it’s quaint, but we had real revenues, real profits, didn’t require any VC funding, and we eventually sold for $8 million in cash (as opposed to really, really, really overvalued stock.) It’s rounding error in the world of Silicon Valley, but for me, it was a great outcome on what had been a long journey.

  So what if go2net had, in fact, bought Prophet? I’m really not sure, because I don’t know (a) what the price would have been, although it certainly would have been much more than $8 million (b) what the holding period of the stock would have been (c) when I would have sold it, although knowing me, I’d probably  be anxious to convert the stock into cash as quickly as legally permitted.

  The path that go2net took, however, is plain to see. GNET stock continued to soar in value, along with all Internet companies, and it was purchased for nearly $3 billion (!) by InfoSpace (a company which itself has since fallen from grace, and which how has adopted the completely lame name of Blucora.) I’ve marked on the chart below the point when InfoSpace bought go2net:

  

  The arrow marks the approximate point when Infospace bought go2net

  As is plain from the chart above, InfoSpace went into a death spiral, losing something like 99% of its value. I would encourage you to read this fascinating piece of investigative journalism from The Seattle Times, published in March 2005, showing what kinds of insane shenanigans were happening with executives dumping stock through any means necessary. Here’s one particularly hilarious tidbit, illustrating (once again) the Orwellian language that investment banks use:

  Merrill Lynch had made millions as a consultant in the Go2Net merger. But Blodget had lost confidence in InfoSpace, records show. He asked a colleague to remove the stock from the brokerage house’s most-favored-stocks list.

  “Can we please reset this stupid price target and rip this piece of junk off whatever list it’s on?” he wrote Oct. 20. “If you have to downgrade it, downgrade it.”

  It took seven weeks, but on Dec. 11, Merrill Lynch downgraded InfoSpace to “accumulate.” The decision pummeled the stock, which fell 16 percent that day.

  Got that? “Accumulate” means “This stock sucks” to normal people. OK, we’re clear now.

  Horowitz, of course, had made zillions of dollars through all of this. He bought a $20 million spread in one of Seattle’s ritzy neighborhoods and was featured in this bizarre report in which he fires a warning shot at a guy who he saw digging up some plants from the front of his property.

  On Sept. 24, a Saturday night around 9 p.m., Horowitz saw a man digging up the plants outside the fence and along his front curb on one of his video monitors. According to the police report, he went outside, past the front fence, taking his gun as a precaution.

  Horowitz “later explained that he has had two death threats in the last six months and he was fearful that perhaps this incident might somehow be related to the threats,” the police report states. A spokesman for Horowitz said they were less specific than death threats but a cause for concern nonetheless. The Seattle Police were unaware of any threats.

  I suspect maybe the death threats could have been from ordinary, non-rich people who had had their heads handed to them by losing big on InfoSpace stock. But I digress.

  Not wanting to sit idle, Horowitz moved on with some other original go2net people to put together a new Seattle firm named Marchex which also went public (He seems quite proficient at it!) As you can see, Marchex’s performance isn’t going to win many accolades these days, except from securities litigators:

  

  Marchex isn’t exactly setting the world on fire

  You may wonder how the Dryer brothers wound up after all this. I have no earthly idea. I don’t know if they managed to dump their stock and be set for life, or if they hung on through the bitter end and wound up with pennies on the dollar. I was so disappointed at the non-sale that took place, I just fell out of touch with them completely.

  I was curious, however, to see how the site looked. I hadn’t even peeked at it since the Internet bubble, and I figured 20 years – twenty years! – after its founding, it was probably pretty slick by now. Here’s what it looks like today.

  

  Hey, SI. 1995 called, and they want their web design back.

  So, yes, the site above was once considered one of the hottest properties on the web. I read that it was re-sold to a firm for $250,000 in cash a few years ago. That’s still probably about $200,000 too high.

  We are, of course, in the throes of a bubble right now that makes the Internet bubble look like child’s play. There are still companies like Clinkle (which I’ve written about repeatedly) which garner tens of millions of venture capital and fizzle into nothing, and Facebook’s $22 billion acquisition of the Whatsapp mobile app (with all of $10 million of revenue behind the business) makes acquiring Silicon Investor for $33 million seem like the most prudent investment of the century.

  I enjoy my work, and I enjoy building small businesses (I am engaged in a new one at this very moment, far removed from my everyday blogging), but I’ve accepted that I’m never going to be touched by that magic wand. I’ve observed things around here long enough, though, to realize that the wand is sometimes a wand, and sometimes it’s a bludgeon.

  

  

  

  

• Caught On Tape: Hillary Clinton Explains Why She Loves Snapchat

  Sometimes laughter is the best medicine, especially when you’re running a Presidential campaign that’s rapidly losing momentum thanks to an FBI investigation into your e-mailing habits and a suddenly popular socialist who is surging in the polls.

  And while we appreciate a good joke now and again, we think this might come across as a bit sinister to some “everyday American” folks…

  

  

  

  

  

• Grossly Inflated Gargantuan Asset Prices

  

  Submitted by StealthFlation.org

  STEALTHFLATION: An intractable economic condition that inevitably arises as excessively issued fiat currency compulsively pursues non-productive wealth assets in a grossly over-leveraged economy, which has been artificially reflated by the Central Banking authorities, in a misguided attempt to synthetically engineer growth via extreme monetization.  (ie: Counterfeit Quantitative Easing & Interest Rate Suppression)

  This ill-advised monetary regime effectively prevents the real economy on the ground from realizing the healthy normalization of free market forces crucial to genuine capital formation, authentically derived from bona fide industrious production generating actually earned savings, the very life blood essential to inducing legitimate and sustainable economic growth.

  Under the imposition of StealthFlation, contrived asset prices are grossly inflated deliberately eliciting a vapid wealth effect, while the generative velocity of money is extinguished. Meaningless Equity Markets are pointlessly driven higher by the perverse implementation of impotent stock buybacks. Worse still, the seeds of hyperinflation are sown, as the compromised overtly financialized economy becomes increasingly dependent upon the interminable entirely destructive monetization.

  Also known as, wishful thinking and robbing Peter to pay Paul.

  

  This entirely synthesized approach to capital formation brings about the following disastrous conditions:

  1) Engenders dormant velocity of money, concealing embedded future inflationary risks to the economy.

  2) Produces highly unstable and recurring capital market asset bubbles.

  3) Drives superfluous misallocation of true investment capital, disregarding and disadvantaging the crucial SME sector.

  4) Generates excessive foreign exchange / capital market volatility and unpredictability, disrupting deliberate business development and planning.

  5) Delivers lethargic economic at the groundlevel activity with limited unsustainable growth.

  6) Encourages deleterious off-shoring of the manufacturing base.

  7) Facilitates fantastic fiscal deficit spending sprees.

  8) Decreases median incomes and new job creation.

  9) Spawns extreme income inequality and social discontentment.

  10) Eviscerates the essence of money by compromising the means of exchange and its crucial role as a conduit for savings.

  Visualizing the Vanishing Velocity of Money Vortex 

  

  The inflationary risks are deliberately concealed and remain latent due to the synthetic suppression of determinant free capital market forces.  However, the grossly excessive supply of money has definitively been created, and it will debase the currency, it’s just a matter of time, same as it ever was………..

  When an economy is healthy, there is much buying and selling and money tends to move around quite swiftly. Unfortunately, the U.S. economy is manifesting the precise opposite of that these days.  In fact, the velocity of M1 & M2 has fallen to near all-time record lows. This is a very serious indication that the underlying economy has entered a period of extreme stagnation.

  In its infinite wisdom, the Federal Reserve has been attempting to counter this economic standstill by absolutely flooding the financial system with newly printed money.  As it always does, this has created monumental financial and fixed asset bubbles. However, it has not addressed what is fundamentally and structurally wrong with our economy.  On a very basic level, the amount of real economic activity that we are witnessing is not anywhere near where it should be, and the anemic flow of money through our economy is proof positive of the ongoing dilemma.

  

  Clearly, the transmission mechanism between the relentless synthetic origination of fresh money by the monetary miracle men and the velocity at which that new money is circulating in the real underlying economy on the ground is completely disconnected, FUBAR. Why is this?  Well, it’s really not that difficult to comprehend.

  First of all, much of the supposed economic activity generated today is not being driven from the bottom up by the healthy deployment of excess savings, naturally created from genuine self-sustaining productive industrious economic activity at the fundamental level, but rather in an unnatural fashion, force fed from the top down via the easy street ZIRP/QE induced debt financing incessantly being encouraged by our misguided megalomaniac monetary authorities.

  Perhaps even more malignant, the largest capital market of them all, namely the U.S. bond market has been put down by the Fed’s activist zero bound anesthesiologist. Thus, the utterly comatose American treasury market is no longer facilitating the natural growth of traditional savings income streams generated via secure interest bearing accounts and prudential savings products throughout the financial system’s depository structure.  In short, the healthy income flows constructively generated from legitimate savings produced from genuine economic activity, namely people going to work every day, has been effectively terminated by these wizards of wanton monetary policy at the wayward central bank.

  Let’s face it, if the major pension funds can’t generate 5-6% per year holding conservative debt instruments in order to meet their massive obligations, they are up a creek without a paddle.  They require substantive returns in order to remain solvent. The Fed understands this all too well, they are most concerned on that score, and so should you be.

  Having thoroughly shut down the sound, well established and effective channels of capital formation, which have consistently engendered bona fide and constructive growth over the years through the virtuous avenues of productive savings, the foolish authorities have left themselves utterly hamstrung with only one risky road to travel down. Indeed, now that they have totally cracked the transmission on our fiscally busted and broken down American bus, they have become 100% reliant on the equity market to drive their top fuel funds into the U.S. economy via the wealth effect.   Pedal to the metal at 2,150 SPX mph.  Make no mistake my friends, we are on a crash course, and we will hit the wall.

  Got Gold?

  

  

  

  

  

  

• How Keynes Almost Prevented The Keynesian Revolution

  Submitted by Mark Tovey via The Mises Institute,

  October 30, 1929. A brisk autumn’s day in Manhattan. The Savoy-Plaza Hotel’s thirty-three stories cast a long shadow over Central Park. At the base of the hotel a financier lies freshly fallen, motionless, while his last breath, wrenched from the lungs by force of impact, is now a red mist of gore in the air.

  Sirens and uniforms. The suicide spot quickly becomes crowded by spectators, who form a vision-impairing ring-fence of backs, much to the annoyance of elbow-throwers at the periphery. Winston Churchill stands at his hotel window looking down on the mess. To nobody’s surprise, the police will find an empty wallet and five margin calls in the dead man's pockets.1

  Churchill’s curtains flutter shut, and we are left to wonder whether anyone — Churchill included — can yet see his clumsy, cigar-wielding hand in it all; whether anyone realizes that, had Churchill as Chancellor of the Exchequer only restored the gold standard at a lower exchange rate, as Keynes had recommended, the Wall Street Crash of 1929 could have been averted (or at least ameliorated).

  Alas, by ignoring Keynes in 1925, Churchill triggered a calamity so severe that it not only inspired one man to kill himself beneath the British statesman’s very window but, more insidiously, also provided the impetus for the economics profession’s rejection of the “classical” axioms. As Keynes’s biographer Robert Skidelsky writes, Keynes “did not believe in the system of the ideas by which economists lived; he did not worship at the temple.” And while “in former times he would have been forced to recant, perhaps burnt at the stake, as it was … the exigencies of his times enabled him to force himself on his church.”

  1925: Britain’s Return to the Gold Standard

  The pound sterling’s link to gold was severed at the start of WWI. After eleven years of unfettered inflation, Chancellor of the Exchequer Winston Churchill restored convertibility at the pre-war level of 4.25 pounds per ounce of gold.

  Keynes, quite rightly, took exception to this particular detail: expecting Britain’s global customers to go on paying the same gold-price for the weakened pound was unrealistic. At this exchange rate the pound would be overvalued, and the only cure would be a sustained period of deflation — which was “certain to involve unemployment and industrial disputes.” Indeed, in 1926 a general strike crippled Britain for nine days.

  What Keynes did not predict, however, was how Churchill’s blunder would later bring about an easing of monetary policy in America. And even supposing Keynes had predicted this side effect, would he have understood its implications for long-run sustainability? (Recall that both F.A. Hayek and Keynes predicted a crash would occur in 1929: Hayek because interest rates were too low, Keynes because they were too high!)

  1927: At the Fed (With Cap in Hand)

  American sellers (in particular) were accepting British gold in exchange for goods, but were dissuaded from returning it due to the unfavorable rate of exchange. As a result, Britain’s gold supplies diminished at a rapid rate, which made the authorities understandably twitchy: how could they keep their pledge to convert pounds into gold if they had none?

  In response, the Governor of the Bank of England, Montagu Norman, set off across the Atlantic and, with much pleading, persuaded the Federal Reserve to ease monetary policy. By lowering interest rates and raising inflation, the Fed stemmed gold flows into America, giving the British a much-needed respite from the ill-effects of Churchill’s costly pound.

  With this episode of soft-hearted internationalism came an upswing in the Wall Street boom and “from that date,” wrote Lionel Robbins, “according to all the evidence, the situation got completely out of control.”

  In The Great Crash, a very popular account of the lead up to the Great Depression, John Kenneth Galbraith writes:

  the rediscount rate of the New York Federal Reserve was cut from 4 to 3.5 percent. Government securities were purchased in considerable volume with the mathematical consequence of leaving the banks and individuals who had sold them with money to spare. The funds that the Federal Reserve made available were either invested in common stocks or … they became available to help finance the purchase of common stocks by others. So provided with funds, people rushed into the market.

  Galbraith goes on to quote a member of the Federal Reserve Board who, with hindsight, called the operation “one of the most costly errors” committed by a banking system “in 75 years.”

  Galbraith finishes: “the view that the action of the Federal Reserve in 1927 was responsible for the speculation and collapse which followed has never been seriously shaken.”

  John Maynard Who?

  When Keynes wrote against returning to the gold standard at pre-war parity in 1925, he did so with the expectation that he might actually influence policy. As a younger, unknown man he had worked at the Treasury for a brief stint, leaving a legendary impression; and by 1925, six years after his best-seller The Economic Consequences of the Peace, he was a famous man whose words carried weight.

  It is not outlandish then to imagine a world in which Keynes got his way. In such a world, the Wall Street crash and ensuing depression might never have happened – without the costly pound, the Fed would have had no impetus to inflate. Keynes would subsequently have found the economics profession less rattled, less willing to abandon its “classical” axioms in favor of his new-fangled approach. Keynes might have averted Keynesianism.

  

  

  

  

  

• Spot The Difference

  The two main economic systems in the world today…

   

  

   

  h/t @RudyHavenstein

  

  

  

  

• Global Consumer Confidence Tumbles

  Consumer confidence deteriorated in most countries in July.

  

  While some of the deterioration was likely due to sentiment effects around the situation in Greece/Europe and the market volatility in China, rather than fundamental deterioration (which will be confirmed at the end of August if sentiment rebounds) it is worth paying attention to the trends in global consumer confidence, as it generally tends to reflect the prevailing global macro winds.

  Indeed, if you track the trends in consumer confidence against changes in bond yields, you can see a loose relationship (which would be logical as falling demand is consistent with falling bond yields).

  

   

  The further drop in oil would tend to be supportive for consumer confidence meaning we would probably would expect to see a rebound in the August numbers (which will be available in early September) – something to keep a close eye on as a warning sign for global demand.

  Source: AMP Capital

  

  

  

  

  

• Guess What Happens Next

  Courtesy of Keith Dicker of IceCap Asset Management

  Well, if you’re not Greeked-out by now you should be. After all, the Greek debt crisis has been spinning in and out of control for 5 years and counting.

  Why should it be any different this time?

  Everyone knows there is no way on this earth that Greece will ever be able to repay these debts. Unless the Greek economy can grow faster and longer than it has ever grown before, AND it can avoid the political temptation to never again spend more money than it collects in taxes – then just maybe it stands a chance of paying off some of the over $400 Billion it owes.

  

  In today’s age of money printing, negative interest rates, and bank bailouts, many have become somewhat desensitized to “billions” and “trillions”. Yet, we assure you $400 billion for Greece is a lot of money.

  For perspective, Australia owes about $1.3 trillion in various loans. If Australia suddenly entered a debt crisis on the same scale as Greece, its debt owing would skyrocket to nearly $2.5 trillion, or put another way – about $106,000 for every man, woman and child.

  For Greece, it’s mathematically impossible to repay its debt. If anyone else tells you otherwise, it means they have no understanding whatsoever of how real economies actually work.

  The sharpest and brightest minds at the IMF, the EU and the ECB (collectively referred to as the TROIKA) all agree that the solution to the Greek crisis is for Greece to pay more in taxes, for the Greek government to spend less money, and to continue to pay off its debt.

  Let’s think about this for a very quick second:

  1. Greeks have to pay more taxes, which means less money is available for spending
  2. the Greek Government has to spend less money, which means less money is available for spending
  3. and of the money that the Greek government does spend, more of it has to be used to repay its debt, which means less of it is available for real spending;

  And considering that economic growth is a function of aggregate spending, how on earth can any sane person expect the Greek economy to recover and grow?

  The answer: they can’t. For further proof why it doesn’t work and it will never work, you just have to look at Iceland.

  Iceland was the very first country wiped out by the 2008 global debt crisis. The Icelandic government and the Icelandic banks completely mismanaged everything for which they were financially responsible.

  And when everything hit the fan – no one come running to save them, in fact, the complete opposite happened. Both Britain and the Netherlands threatened to completely wipe Iceland off the global financial map.

  At the time, Icelandic banks offered regular banking accounts in Britain and the Netherlands that paid 6% interest. Considering other global banks offered 3% and less, and also considering that the vast majority of people in the world have no idea how a bank is structured; thousands of British and Dutch savers blindly ploughed their savings into these Icelandic bank accounts.

  After all, it was a bank deposit, it was guaranteed by the bank and 6% is greater than 3%. Where was the risk with this?

  Next, when the crisis hit Iceland – all bank accounts were frozen, and the savings of many British and Dutch investors melted away.

  Suddenly, the risk with 6% was crystal clear. Naturally, the British and Dutch governments both demanded their citizens be repaid for making stupid investment decisions.

  The Icelandic government meanwhile, finally woke from their frozen state and assessed the situation. Not only did the government not have enough money to repay bank depositors, it didn’t have enough money to pay themselves.

  And since no one would lend Iceland any money – the country was officially broke. The rivers would stop running, the glaciers would stop flowing, and the thermal baths would stop steaming – or so we were told.

  Instead, Iceland allowed its banks to collapse, allowed its currency to drop by over 70%, decided not to pay back all of the money it owed, and finally – it actually imprisoned certain bank executives for putting the country into such a financially toxic position.

  A comparison between the Icelandic approach and the European approach forced upon Greece is as follows:

  

   

  And as for the outcome, the chart below clearly shows the economic recovery experienced by both countries, over the exact same time frame, and using completely opposite solutions.

  

   

  Iceland’s economy has recovered from the depths of the crisis and is now only -3% less than where it was in 2008.

  Greece’s economy continues to plummet to deeper depths and is now -33% less than where it was in 2008.

  The Icelandic recovery has not been perfect. Locals and foreign investors have been unable to get money out of the country. Originally, capital controls were expected to last 6 months. 7 years later they are finally being relaxed. That’s a long time not being able to access your money.

  In addition, prices for all things soared with inflation hitting 20% at one point. Job losses also soared with unemployment tripling.

  Yes, bad times were had – yet the country and economy survived. Greece meanwhile, continues to be subjected to a 100% guaranteed doomed strategy.

  

  

  

  

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• Peddling The Corruption Of Liberty

  Submitted by Tibor Machan via Acting-Man.com,

  Liberty’s Detractors

  Ever since the idea of individual liberty has achieved some measure of credibility over the world, those who would be unseated by its limited triumph had to find some way to discredit it or trump it somehow. One way was to re-christen servitude, to make it appear like an even more important kind of liberty than what individual liberty, properly understood, amounts to.

   

  

  Puppets and puppeteers…

  When a human being is free in the most important, political sense, he or she is sovereign. This means he or she governs his or her own life—others must refrain from intruding on this life, plain and simple. That life may be fortunate or not, rich or not, beautiful or not, and many other things or not, but what matters is that that life is no one else’s to mess with. One gets to run it, no one else does.

  Now this is a very uncomfortable idea for all those folks who see all kinds of benefits from running other people’s lives. But they cannot champion this now in so many words, what with individual liberty having gained solid standing, so the only way to remedy matters for them is to claim that their oppression brings even greater freedom to people than the respect and protection of individual liberty.

   

  The Ruse of “Positive” Freedoms

  So, we have the kind of “freedoms” propounded by Franklin D. Roosevelt, the freedoms now dubbed “positive.” These freedoms do not get rid of those who would use you, interfere with you, invade your life, rob, kill, or assault you but promise, to the contrary, to take good care of you without your having to do much by invading others, by violating their individual liberties.

  These are the entitlement rights offered up by proponents of the welfare state, all those who claim that government is best when it is generous, when it becomes the Nanny State—meaning, when it enslaves Peter to serve Paul:

   

  

  Franklin D. Roosevelt: made a nanny state out of a Republic. Benjamin Franklin once noted that the founders had given US citizens a Republic, “if you can keep it”. This afterthought turned out to be prophetic.

  I am not sure about what exactly motivates this ruse—some of it is surely the thirst for power. When you want to enslave people, promise them a special kind of liberty. Castro managed to win over millions of Cubans this way, as did other Marxists in Eastern Europe and in Latin America, as well as some jihadists.

  Maybe a few folks actually honestly believed that this kind of political alternative is best for us all, but it is difficult to imagine what would persuade them of such a fraudulent notion. Giving people this “positive” freedom must always involve depriving other people of their individual liberty, their “negative” freedom, which is to say, their sovereignty and their freedom from having others interfere with their lives, from depriving them of their resources and labor and regulating (nudging) them to the hilt.

   

  

  Marxists and other ideologues of their ilk all have in common that they promise their supporters a better material life than they could achieve otherwise. Not only have they never named the price their subjects would have to pay, but their promises turned out to be false as well.

   

  Clear Thinking and Eternal Vigilance Required

  Now, there is little that can be done about this in the short run—when people put their minds to such deceptions, the only ultimate defense is clear thinking and vigilance, which is unfortunately always in short supply and needs to be slowly cultivated. Too many people are tempted by the promise of effortless living, of getting all their problems solved at the point of a gun turned on others who will be coerced to come up with the solutions.

   

  

   

  This is such a sweet notion to those who are lazy, who feel left out, or who believe that they are entitled to everything all those who are better off already have going for them, so the power-hungry have a good marketing ploy here.

  Envy, maybe, or the bogus political ideologies promoted by those who just must step in to govern the world as they see fit—as I say, I am not sure what kind of mental acrobatics manages to allow people to live with themselves in peace who perpetrate such fraud.

  Despite the fact that there is little one can do in response, other than to keep spelling out just what a ruse it all is, perhaps now and then institutional barriers can also be built. Yet, since they too depend upon ideas, ideas that are so easily corrupted, the only real answer is the old one about eternal vigilance. I say, it’s worth it, so let’s go for it.

  

  

  

  

  

• The Richest Zip Codes In America In One Map

  The Hamptons. Beverly Hills. Greenwich, CT. These places are the stomping grounds of the rich and famous. Today’s infographic, courtesy of Visual Capitalist, maps out all of the richest zip codes in America, leaving no country club or gated community unturned.

  For each state, the richest three cities or neighborhoods are shown along with the associated number of tax returns. This is a more in-depth version of a similar graphic we posted months ago that showed the incredible wealth in counties surrounding Washington D.C.

  Also included in today’s post is the 100 highest tax-paying zip codes throughout the United States.

  

  

  

  

  

  

• Peter Schiff: The Shot Not Heard Around The World

  Submitted by Peter Schiff via Euro Pacific Capital,

  China’s recent move to devalue the yuan has sent shock waves through the global financial markets and has convinced most observers that a new front in the global currency wars has begun. The move has caused many observes to envision a new round of competitive devaluations around the globe in which the race to the bottom will intensify. In this scenario they envision that the U.S. dollar will solidify its standing as the only strong currency. This misses the point entirely.

   

  In the past, most of the action in the "currency wars" had been focused on the efforts that many nations undertook to prevent their currencies from rising against the U.S. dollar, which itself was being weakened by a perpetually easy Federal Reserve and persistently negative U.S. trade and budget deficits. But with the dollar now strengthening significantly, the Chinese government has become concerned that the yuan, which has remained largely tethered to the dollar, had become too strong against other currencies, particularly its primary trading partners in Asia and the Pacific. To remain competitive locally, it decided to ease the tether to the dollar and instead let its currency float more freely. The purpose and implications of this significant pivot has largely escaped the U.S. media. In reality, the move raises the likelihood that the yuan will rise significantly when the dollar resumes its long-term bear market, not that it will remain weak forever.

   

  It is surprising how quickly market observers ascribed the recent losing streak on Wall Street to jitters over the 2% yuan devaluation. The development provided a convenient excuse for those who continue to deny that any economic weakness in the U.S. is chronic and self-generated. But why should America be so concerned with a small drop in the yuan? After all, we have supposedly done quite nicely for ourselves economically even while currencies like the yen and the euro, and all the other major currencies around the world, have fallen more than 20% against the dollar since May of last year.

   

  In truth, the U.S. markets had been selling off for days before any change in policy from Beijing became remotely clear. With U.S. economic data deteriorating, corporate earnings falling, and 95% of economists forecasting a rate hike in the next few months, a sharp sell-off of already wildly valued stocks could be considered a logical development that needs no overseas explanations. But given that this is a reality that no one prefers to acknowledge, the yuan devaluation comes at a convenient time.  

   

  The last round of the currency wars began around 2010, when pronounced dollar weakness resulting from the Fed’s Quantitative easing experiment and the Federal government’s annual trillion dollar plus deficits had caused the dollar to fall sharply against most other major currencies except the yuan, which did not rise because the Chinese were enforcing a peg against the dollar. To affect the linkage, China had to accumulate trillions of U.S. dollar reserves, with the added benefit to America of keeping a lid on long-term interest rates and consumer prices, that would not have been there absent China’s help. As a result, many currencies gained value against the dollar and yuan simultaneously. Faced with such scary prospects, many countries devalued to keep things in equilibrium; hence the race toward the bottom.

   

  In contrast, I believe this time around Beijing was forced to act because the continuously surging dollar had been bringing the yuan along for an unwanted ride upward. This resulting movement against other currencies was not driven by fundamentals and put China at a disadvantage against its local trading partners.

   

  By letting their currency float more freely, their principle concern was not their exchange rate with the dollar, which had remained largely fixed, but their exchange rates with currencies like the Japanese yen, the Australian dollar, the euro, the Canadian dollar, and other emerging market currencies in Latin America and South East Asia. This shows where the Chinese are placing their priorities. 

   

  While making its devaluation announcement, Beijing said that it wanted its currency “to reflect fundamentals” and to no longer simply mirror the movement of the dollar. It acknowledged the fact that its peg to the dollar was problematic and that it wanted a better, more natural mechanism. This is the key to understanding the announcement: The Chinese are preparing for a time in which the financial world does not spin in orbit around the dollar. Such a reality must make us think about the future.

   

  Perhaps the Chinese feel as I do that the current dollar rise has all the earmarks of a classic bubble. After all, a major part of the dollar rally over the past year has been the hollow beliefs that the U.S. economy has fully recovered and that the Fed, in 2015 and 2016, will be able to raise interest rates and shrink its balance sheet substantially even while the world’s other major central banks continue to deliver stimulus. If they see the fallacies that I do inherent in these naïve assumptions, they may be sparing a thought or two as to their best course of action if the dollar bear market resumes, as it surely must.

   

  What will happen if current trends continue and the U.S. economy slips back toward recession? Any sober reading of the current economic data, which shows anemic investment, minimal productivity growth, barely positive GDP growth, wage stagnation, and falling labor participation, should allow for the strong possibility that recession is looming in the U.S. If it occurs, or to prevent it from occurring in an election year, the Fed will be forced to immediately shelve its tightening plans (if it even has any) and instead deliver another round of QE. When that occurs the confidence that inspired the dollar’s rise will prove to have been misplaced, and the rally nothing more than another Fed-induced bubble.

   

  By decoupling from the dollar now, China is sending a message that it may be prepared to let it fall later. This means that when the dollar starts to fall in earnest, China may not be there to catch it. This will also mean that the biggest foreign buyer of Treasury bonds will likely be sitting on its hands when deteriorating U.S. finances force the Treasury to begin issuing trillions of new bonds annually. So when the U.S. needs China’s help the most, it will be unwilling to provide it.

   

  In the absence of a Chinese backstop that the U.S. has for too long taken for granted, when the dollar resumes its decline, the fall will be much more pronounced. This will also generate significant upward pressure on both U.S. consumer prices and interest rates that was absent five years ago, when Chinese buying provided a huge cushion to the U.S. economy. In fact, data indicates that China is already paring the amount of Treasuries held in reserve. That means a full blown dollar crisis may not have been averted, but merely postponed, with the dire warnings of U.S. hyperinflation potentially coming true after all.

   

  The move may also rekindle to the Chinese appreciation for gold as a safe haven asset as the yellow metal has surged in yuan terms over the past few weeks. Increased buying in China indicates that this may indeed be the case.

   

  

   

  Given the importance of gold to the typical Chinese investor, the yuan/gold exchange rate may become more important globally than the gold/dollar rate.

  

  

  

  

  

• Chinese Air Pollution Kills 4,000 People Each Day (And Why It Will Kill Many More)

  Every quasi-mushroom cloud has a silver lining. That was our cynical conclusion yesterday when we noticed that as part of China’s tragic Tianjin mega-explosion, thousands of channel-stuffed cars parked at the Chinese port which likely would have quietly rusted away into the epic nothingness of China’s unprecedented excess capacity of pretty much everything, were destroyed, thereby one-time reducing at least some of the gargantuan slack in the Chinese economy.

  

  

   

  Which got us thinking: if natural disasters, either accidental or man made, are a tangential blessing to the Chinese economy, why stop at the Tianjin explosion? What about the biggest bogeyman facing China today – its environmental catastrophe, demonstrated best by the impenetrable, carciongenic and toxic smog resulting from the accelerated industrialization of the country, and which the citizens of Beijing, Shanghai, and increasingly more cities, have to breathe in day after day?

  It has hardly been a secret that the unprecedented level of pollutants in the Chinese air would impair life expectancy and lead to extensive health problems, but even we were surprised to find out the quantification of China’s air problem: according to one study, an average of 4,000 people a day are killed in China, as a result of the dense smog.

  According to Bloomberg, “deaths related to the main pollutant, tiny particles known as PM2.5s that can trigger heart attacks, strokes, lung cancer and asthma, total 1.6 million a year, or 17 percent of China’s mortality level, according to the study by Berkeley Earth, an independent research group funded largely by educational grants. It was published Thursday in the online peer-reviewed journal PLOS One from the Public Library of Science.”

  “When I was last in Beijing, pollution was at the hazardous level: Every hour of exposure reduced my life expectancy by 20 minutes,” Richard Muller, scientific director of Berkeley Earth and a co-author of the paper, said in an e-mail. “It’s as if every man, woman and child smoked 1.5 cigarettes each hour.”

  To be sure, Chinese authorities have acknowledged the air pollution situation after heavy smog enveloped swathes of the nation including Beijing and Shanghai in recent years. As a result, they’ve adopted air quality standards, introduced monitoring stations and cleaner standards for transportation fuel while shutting coal plants and moving factories out of cities. So far, however, all the proactive measures seem to have little result.

  “The PM2.5 concentrations far exceed standards, endangering people’s health, though air quality has improved in the first half in the 358 Chinese cities,” said Dong Liansai, climate and energy campaigner at Greenpeace East Asia.

  As Bloomberg further reports, Muller and co-author Robert Rohde analyzed four months of hourly data for some 1,500 ground stations in China. They then employed a model used by the World Health Organization to calculate the disease burden.

  They found that 92 percent of China’s population experienced at least 120 hours of unhealthy air during the April 5, 2014, to Aug. 5, 2015 study period. For 38 percent of the population, the average pollution level across the entire four-month period was deemed unhealthy.

  Here one may wonder whether the US DOE funded Berkley researchers were pursuing some specific, anti-coal agenda, as confirmed by the following assessment:

  “the Berkeley Earth researchers also examined where the pollutants were detected and concluded that the sources of PM2.5s matching those for sulfur dioxide suggests most of the pollution comes from burning coal.

   

  “Sources of pollution are widespread but are particularly intense in a northeast corridor that extends from near Shanghai to north of Beijing,” the researchers wrote. “Extensive pollution is not surprising since particulate matter can remain airborne for days to weeks and travel thousands of kilometers.”

   

  China gets about 64 percent of its primary energy from coal, according to National Energy Administration data. It’s closing the dirtiest plants while still planning new, cleaner ones. The country is expected to shut 60 gigawatts of plants from 2016 to 2020 though three times as many plants are scheduled to be built using newer technology, according to Sophie Lu, a Bloomberg New Energy finance analyst in Beijing.

   

  To cut reliance on coal, the nation also wants to derive 20 percent of its energy from renewables and nuclear by 2030, almost double the current share.

  But whether it is due to coal or not, is irrelevant: the truth is that China does have a problem with preserving its environment and keeping the quality of its air. Some examples shown previously:

  

  Pollution from a factory in Yutian, 100km east of Beijing  

   

  

  

  

  Smog In Beijing

   

  

   Fishermen clean up oil at an oil spill site near Dalian Port, Liaoning province

   

  

  Heavily Polluted River In Jiaxing, Zhejiang

   

  

  Journalist takes a sample of red polluted water in the Jianhe River in Luoyang

   

  

  Heavily Polluted River

  * * *

  Which got us thinking: if the Tianjin explosion unclogged the car channel stuffing problem, if only for a few days, then perhaps China pollution serves a different, more ulterior purpose.

  Recall that the US social security trust fund is going broke faster by the day since Americans refuse to die at the age they were expected to die when social security was first conceived 80 years ago. As a result, because of progress one of the biggest entitlement systems in the US is on the verga of default.

  When it comes to pension and retirement benefits, the US, with its 330 million people, is nothing compared to China with its 1.2 billion and rising. So what is the best way to “resolve” this problem? Perhaps by introducing an external agent, one that culls the population at a pace of 4000 (and rising rapidly) per day.

  Because while the number of deaths resulting from China’s smog is astounding, something else very surprising is how little progress has been achieved in the battle to clean up China’s air in the past several years, especially since any long-lasting clean up would also lead to a permanent reduction in the industrial output of China’s manufacturing heartland and lead to, drumroll, a violent drop in GDP, a drop which as the current episode demonstrates, would lead to a collapse in the Chinese stock market, an even greater pop in the housing and credit bubble, and far more violent devaluation of the local currency with the attendant negative global economic impact. Not to mention lead to an extension in the longevity of China’s population, which the local actuaries have just one word for: crisis.

  Which is why despite all the rhetoric, and all the “reform” don’t expect China’s pollution problem to get better. In fact, expect it to deteriorate substantially because in the immortal words of that other famous communist, “When there’s a person, there’s a problem. When there’s no person, there’s no problem” and China’s pollution is taking care of 4000 problem each and every day…

  

  

  

  

  

• Greeks Flock To Grassroots Alternative Currencies In Affront To Euro Debt Slavery

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  When Christos Papaioannou noticed his car needed new tires, the Greek computer engineer bought them with euros—but used an alternative currency, called TEM, to pay his mechanic for the labor.

   

  His country has avoided a catastrophic exit from the common currency, at least for now. But a small but growing number of cash-strapped Greeks, who are still grappling with strict money-withdrawal limits, have found another route in TEM and other unconventional payment systems like it.

   

  Before then, Ms. Sotiropoulou said she was only aware of two such programs. No official record of the number of alternative currencies and local bartering systems appears to exist in Greece. But according to an Athens-based grass roots organization called Omikron Project, there are now more than 80 such programs, double the number in 2013. They vary in size, from dozens of members to thousands.

   

  – From the Wall Street Journal article: Alternative Currencies Flourish in Greece as Euros Are Harder to Come by

  Hundreds of millions of people throughout the Western world are being forced to admit an obvious, yet uncomfortable reality. Democracy is dead. Your vote and your voice doesn’t matter. Not at all.

  No group of people understand this as intimately as the Greeks. They voted for one thing, got something else, and in the process were unceremoniously reminded of their political irrelevance. The Greeks are now in a position to show the rest of us how it’s done. Communities need to take matters into their own hands and tackle challenges at the grassroots level. Nowhere is this more impactful and necessary than in the monetary realm, and some Greeks are already leading the charge.

  From the Wall Street Journal:

  When Christos Papaioannou noticed his car needed new tires, the Greek computer engineer bought them with euros—but used an alternative currency, called TEM, to pay his mechanic for the labor.

   

  His country has avoided a catastrophic exit from the common currency, at least for now. But a small but growing number of cash-strapped Greeks, who are still grappling with strict money-withdrawal limits, have found another route in TEM and other unconventional payment systems like it.

   

  “Money is sparse right now, but people still have the same skills and knowledge they had before the crisis,” said Mr. Papaioannou, part of a cooperative that founded TEM in the port city of Volos and one of nearly 1,000 registered users of the alternate currency there.

  “Money is sparse right now, but people still have the same skills and knowledge they had before the crisis.”

  Read that line over and over and over again until you realize how simple, elegant and accurate it is.

  TEM—a sophisticated form of barter whose name is the Greek acronym for Local Alternative Unit—was founded in 2010 in the early months of Greece’s debt crisis with less than a dozen members. Now it includes dozens of participating local businesses that use the system to sell goods and services, including prepared food, haircuts, doctor visits, or even for renting an apartment.

   

  It is a localized version of what Greece might have to turn to if a tentative bailout agreement reached this week is derailed, or ultimately fails. Before his resignation last month, former Finance Minister Yanis Varoufakis floated the idea of setting up a parallel-currency system based on IOUs in the event that Greece could no longer stay afloat using euros. Without a rescue, the idea of using IOUs is seen as the country’s most likely alternative.

   

  Before then, Ms. Sotiropoulou said she was only aware of two such programs. No official record of the number of alternative currencies and local bartering systems appears to exist in Greece. But according to an Athens-based grass roots organization called Omikron Project, there are now more than 80 such programs, double the number in 2013. They vary in size, from dozens of members to thousands.

   

  “The problems that existed have only gotten worse, and the new deal is going to create problems of its own that will deepen the crisis in certain areas,” said Mehran Khalili, one of the founders of Omikron. “The logical response is to create groups to react to that and fill those gaps that are going to exist because of the unsustainable situation that Greece has found itself in.

   

  Experts say TEM and other local currencies work best side-by-side with the euro, not as a replacement. 

  “Experts” say. Yeah, the same so-called “experts” who destroyed the world economy and turned the planet into a thieving oligarchy. I think I’ve had enough “expert” economic advice for one lifetime.

  One notable example of alternative currencies used during a crisis was in the 1930s during the Great Depression, when the Austrian town of Wörgl decided to fight the economic downturn by printing its own money. Economists called the result a miracle: Employment boomed, while inflation remained subdued. During the economic depression that struck Argentina in 1998 and lasted till 2002, people formed barter networks and several provinces introduced their own currencies.

   

  The alternate currencies have their limitations: The use of TEM, for example is restricted to those people and local businesses that choose to accept them, and won’t directly help people struggling to meet their monthly utility bills.

   

  Maria McCarthy, a British woman who lives in Volos with her Greek husband and children, has earned and spent over 10,000 TEMs in four years by offering English and guitar lessons. She also sells secondhand clothes and other material goods in Volos’ biweekly marketplace, where almost everything besides euros are exchanged.

   

  Mr. Papaioannou says he has paid for renovating parts of his home as well as food and clothing with the currency, and an increasingly larger share of his computer-repair work is done through transactions with TEM.

   

  “You’re used to a method of doing things,” he said, “and suddenly, you realize there are other ways too.”

  You’ve gotta love the Greek spirit. You can knock them down, you can embarrass them, but you can’t kill their spirit. Everyone else on the planet must recognize that what is being done to Greece will be done to us all in turn. We must show totally solidarity with them against the euro-fascists.

   

  

  

  

  

  

• Using Hollywood Movies To Call Market Tops

  Previously we reported on Horseman Capital’s uncanny ability to generate market-beating returns (outperforming 98% of peers since 2012) despite having a net -50% short position offset by treasury longs. Now, we take a quick detour into one of the prop investment bets used by Horseman’s CIO, Russel Clark, namely Hollywood’s ability to pull a Dennis Gartman, and make a dramatic appearnace at all the key market inflection points.

  From the July Horseman Letter:

  I notice with interest, that Hollywood still retains its unmatched ability to call market tops. 2014 film, “Jack Ryan: Shadow Recruit” details a plan by Russia to crash the US dollar and destabilise the American financial system. At the time of the film’s release, 34 rubles bought 1 USD, while at time of writing you require 62 rubles to buy 1 USD. If anything, you could argue that sanctions, plus the US deal with Iran have been a plan hatched by the US to crash the ruble and destabilise the Russian financial system!

  Another 2014 film was “Interstellar” a film I enjoyed so much that I think I have seen it three or four times. Curiously, the film begins in the future, but is never explicit in dates. A search on the internet has most people suggesting the film being set in 2060s or 2070s. The film implies that in the 2030 or 40s declining natural resources causes technological progress to reverse and humans to seek a new planet to call home. Curiously, since Interstellar’s release date sugar prices have fallen 35%, milk prices by 45%, and oil prices by 35%.

  While I generally cite Hollywood for its reverse indicator power, the literature world can also work. 2014 release and Man Booker Prize nominated “Bone Clocks”, by David Mitchell of Cloud Atlas fame, also imagines a future where energy and technology becomes increasingly scarce, and that China is the dominant country globally. This comes in a story set in 2045, although we can assume that the crisis occurs in the 2030s.

  The themes in Bone Clocks seem to match up quite closely with the 2012 film “Looper” which I discussed in my Hollywood note. The film was set in 2044 and depicted a future where the US had fallen apart. The protagonists in the film solely used gold, silver and Renminbi as currency, implying that the US dollar had continued to fall in value. We can see that the creative industry views on commodities have been proven wrong. However, the assumption in Bone Clocks and Looper that China will continue to be ascendant versus the US has not been disproved. From an economic and   currency perspective, China has continued to be the one currency that has held its value versus the US dollar recently, and the economy has continued to grow at 7% a year.

  There are signs of weakness emerging from the Chinese economic growth perspective and more and more companies report slowing growth. Furthermore, the People’s Bank of China has recently suggested widening of the trading band for the Renminbi to allow more flexibility. Perhaps a first step to devaluing? Your fund remains long bonds and short equities.

  * * *

  The above letter was written just a few days before China devalued its currency by the most on record.

  

  

  

  

  

• 10 Disturbing Facts Most Americans Are Too Fearful To Face

  Submitted by Bernie Suarez via ActivistPost.com,

  Sometimes you have to put out information in hopes that those who haven’t heard this will at least absorb a fraction of it. If you haven’t heard this and you absorb just one of these random points, I believe that may be enough to cause a major paradigm shift in your life or in the life of someone you know. Here are 10 random, mostly recent but some archival information that is factual and verifiable for anyone willing to look it up.

  1. Genetically Modified Foods are illegal in many countries for health and medical reasons all the while the U.S. passes laws making GMO labeling illegal.

  You may be thinking, say what? That’s right. U.S. citizens are being propagandized daily and are being practically forced to blindly consume GMOs while countries like Austria, Bulgaria, Germany, Greece, Hungary, Ireland, Japan, Luxembourg, Madeira, New Zealand, Peru, Australia, Russia, France and Switzerland all have booted Monsanto and their GMO crops from their countries. That’s like being booted out of a town for being a rapist and child molester only to have that same person settle into the next town over and become a grade school teacher or pastor. Now imagine the citizens of that other town having a law forced on them that says rapists and child molesters must be allowed to teach little kids and run churches. That’s what we’re talking about here.

  While humanity in other countries wakes up fully to the dangers of GMO foods, Monsanto and other GMO food producers are having a feast in the U.S. buying out politicians, distorting news, research and evidence that proves GMO foods are directly linked to cancer. Like a scene from a bad movie, only it’s not a movie. Actually it’s YOUR life if you are in the United States dealing with this nightmare.

  As bizarre as it seems, only in the U.S. do criminal corporations like Monsanto enjoy the benefits of the support of the political and legal system. A bird’s eye view of the situation clearly shows how corrupt and evil the control system in the United States really is. Sadly, most Americans have no idea that they are being lied to every day and lured into eating dangerous cancer-causing and health-destroying food just so that someone can profit from your disease later on.

  2. As a result of “Act of 1871″ by the 41st Congress, the United States “Corporation” was created to trample the original Republic.

  Shockingly, this fraudulent synthetic corporate government entity is the only “United States” most people in America know today. And this non-governmental corporate entity covering a 10-square-mile grid in Washington D.C. parades as a sovereign legitimate government and has been doing so for over 100 years.

  Of all the things that need to be repaired and reversed in the United States, this single issue is one of the most important root issues for people to wrap their heads around.

  Imagine the impact of getting a real grassroots movement of people to push awareness of the truth of the current District of Columbia U.S. Corporate Government and the corresponding imitation Constitution OF the United States (instead of “For” the United States as stated in the original organic document).

  This is one of those issues that most people don’t know where to start, how to apply this idea, and how to lead this idea in a meaningful way so they simply give up. The fact is that people are afraid to face this mega-sized issue with overwhelming implications for the average person.

  3. “7 countries in 5 years.”

  This wide open confession came straight out of the mouth of U.S. General Wesley Clark years after the illegal invasion of Iraq. The General openly spilled the beans on the U.S. military’s plan to illegally invade 7 countries in the Middle East under the lie of the war on terror. Shockingly, to this day no war crimes trials have taken place. No one has been executed, convicted or imprisoned for these massive crimes against humanity. Shockingly, the criminals even still make TV appearances and prance around the country offering their opinions and enjoying a comfortable life appearing at events and speaking.

  In fact, General Wesley Clark himself ended up being promoted to lead NATO units in the Middle East. He has even made recent propaganda appearances on TV playing into the Jade Helm “master the human domain” psyop teasing freedom lovers with Hitler-like rhetoric about caging anyone who doesn’t agree with the U.S. government!

  4. The U.S. military and its defense contractors have over 150+ live and legitimate patents for spraying the sky with nano-particles, all the while the masses are told it’s a “conspiracy.”

  Those still unaware of this may be shocked to know these patents are not even hidden from the public. You can read them all for yourself. Despite this open knowledge these programs roll on comfortably as we have observed their spraying techniques change from various forms of chemtrails to aerosolized plumes/injections or chembombs to a mixture of both.

  Astoundingly, we are now living at a time when we are surrounded by a generation of young Americans that think tic-tac-toe is normal in the sky. They think that crazy lines in the sky are part of nature. They see advertisements with lines in the sky and think nothing of it. They have no idea that not long ago there was a time when there were no lines in the sky at all. They have no concept of blue skies and clear starry nights. Shockingly and sadly an integral part of this lack of knowledge is the fear of knowing. More than any other topic, probably the spraying of our skies is cloaked in fear and anxiety of what to do if it is true. Many people would rather not know.

  5. As briefly mentioned in #3, the United States Military is currently conducting an admitted A.I. psychological operation on the human domain as people carry on as usual.

  It’s called Jade Helm and right now learning more about Jade Helm for many Americans means putting down that remote control, turning off that ballgame, pausing the video game or missing their favorite TV show. It takes work to research this and, more importantly, the insecurity that comes with knowing that our own military is studying you the individual to control you is again too profound to really understand for some. They might ask, why would the military do this? Not knowing that the new world order has been planned for over 100 years now.

  This is another issue that is too overwhelming for the average person to understand or, more importantly, face head-on. SOCOM documents exposed by researchers are clear about the intention of Jade Helm Jade 2 software and no matter how much you ignore it, it’s still here, it’s very real and it’s in motion as we speak.

  6. The entire debt-based fiat worthless paper money circulating in the U.S. is supplied and controlled by a private corporation with no legal authority to do so.

  We call them the Federal Reserve. It’s the illegal private banking system created officially in 1913 under the Federal Reserve Act which Congress gave a green light to. This single act essentially handed the United States of America to a gang of private bankers with no accountability to the people. Along with the Act of 1871, this Federal Reserve Act is also one of the most significant and horrific turning points in the history of America. An act that accounts for many of the problems and sufferings in America for now over 100 years.

  If enough people could finally wrap their heads around this single reality, that a private illegal mob of banksters have psyched out and enslaved Americans, fooling them into accepting their fake fiat currency while ensuring their perpetual enslavement, the full-on revolution would start today.

  7. Throughout the history of humanity people do things by planning it out; this simple act of organizing is considered bizarre, unlikely and improbable by a generation of brainwashed people controlled by one hypnotic phrase – “conspiracy”!

  That’s right. You may be reading this and thinking this refers to you. The simple phrase “conspiracy” or “conspiracy theory” has singlehandedly mind-controlled millions of Americans like no other word or phrase has. Unfortunately, there is no way around it. “Conspiracy” is a substitute word for an otherwise ordinary act of planning or coordinating. Something all people do, especially groups like corporations and governments. You MUST plan, organize, or “conspire” to do things. That’s how things get done!

  8. The U.S. has been caught numerous times militarily defending, arming, supplying and training ISIS fighters.

  Here we are at the one-year anniversary of the ISIS super psyop American TV marketing campaign, and today the ISIS psyop has been blown wide open more often than the amount of times the global warming movement has been exposed as lies. These reports trapping U.S. and Israeli (NATO) governments in baldfaced staged lies and capturing solid evidence of their support for ISIS have gone completely ignored and censored by U.S. mainstream media to keep the ISIS psyop narrative going in the minds of Americans.

  The situation is so controlled and so propagandized that even if every member of ISIS went on TV tomorrow exclusively expressing their partnership with the CIA and Mossad, the very next day U.S. mainstream media will present another ISIS story telling you how much they are the enemy and need to be defeated. Make no mistake, this control system is completely immune and entirely unfazed by truth, hard evidence and hard facts.

  9. Turning back the clock – 5 Israeli men were caught, arrested, fingerprinted and detained on September 11th 2001.

  After they were celebrating the destruction of the world trade center seconds after the buildings were destroyed, while the buildings burned AND while the rest of America watched in shock and tears. These men were later mysteriously released back to Israel where they bragged on camera about being in New York City to “document the event”. The history of Israeli entities’ involvement in the 9/11 attacks are particularly concrete, yet the frightening reality is that today’s U.S. mainstream media acts like none of this ever happened.

  For this reason it’s always good to remind everyone that this is very real. The individuals names are Sivan Kurzberg, Paul Kurzberg, Yaron Shonvel, Oded Ellner and Omer Gavriel Marmari and they were given a clean pass back to Israel by then Chief of Justice Department Michael Chertoff. Of course Chertoff would later become Director of George Bush’s Homeland Security and play a significant role in writing the Patriot Act. Plainly put, one of the head masterminds of 9/11 essentially singlehandedly released a handful of key 9/11 suspects and allowed them to fly peacefully and freely back to their Israel homeland to brag about what they did.

  10. In the U.S, like it was with Hitler’s Germany, propaganda is perfectly legal.

  Most Americans have no idea this is the case. They don’t realize that the U.S. corporate fraudulent government can legally lie to you every single day to get you to believe whatever they want you to believe and then turn around behind closed doors and laugh at you for believing their legal lies. Try telling that to most Americans and see how they look at you.

  This is another example of a hard-to-handle lie that is pushed on Americans every day; and the average working American has no time to truly wrap their heads around this stunning fact so they bury their heads in the sand instead, unwilling to look at the issue because they fear they won’t know what to do with the information.

  It’s no wonder that today’s TV shows and comedic rants are often shaped to put a positive slant on lying. To trivialize the seriousness and the consequences of lying. They even make lying seem like an evil necessity or even a cool trend. Most people are completely unaware of these subliminal messages that endorse the control of a government whose survival is dependent on continuous lies and deceit.

  Solutions

  Let’s keep sharing the information and forcing people to look at this information. These are just 10 random issues I felt are important, but there could be another 10 here just as easily. Information is spreading and people are getting this. Sometimes it takes hitting rock bottom before people take action and start to think differently. Whatever drives someone you can always be sure that pushing the information will help accelerate this process. Let’s keep doing that and if you agree share this information with someone and give them something to think about.

  

  

  

  

  

  

• This Alarming Indicator Is Back At A Level Last Seen 10 Days Before The Bear Stearns Collapse

  One of the most disturbing and recurring themes highlighted on this site over the past year has been the ever greater disconnect between the worlds of equity and fixed income, whether in terms of implied volatility, or actual underlying risk.

  

   

  It turns out there is an even more acute, and far more concerning divergence, which was conveniently pointed out overnight by Bank of America’s Yuriy Shchuchinov, one which again looks at the spread between credit and equity. Specifically, BofA notes that in just the past two weeks, credit spreads from our HG corporate bond index have widened another 9bps to 164bps while equity volatility is down another percentage point (although technically BofA uses the 3rd VIX futures as its measure of equity volatility rather than VIX itself to get a smoother series that is less affected by the daily noises and seasonalities).

  This is how the resulting dramatic divergence looks like:

  

   

  Why is this notable?

  In BofA’s own words: “this spread currently translates into 10.26 bps of credit spread per point of equity vol, the level reached on March 6, 2008 – ten days before Bear Stearns was forced to sell itself to JP Morgan for $2/sh. Recall that – unlike the credit market – the equity market well into 2008 was very complacent about the subprime crisis that led to a full blown financial crisis.”

  

  In other words: unprecedented equity complacency matched by a state of near bond market panic.

  BofA is quick to note that it is “not predicting another financial crisis” but believes “it is important to keep highlighting to investors across asset classes that conditions in the high grade credit market are currently very unusual.”

  BofA’s conclusion:

  The key reason for this weakness is that our market has transitioned from “too much money chasing too few bonds” to “too many bonds chasing too little money”. That shift is motivated by the impending Fed rate hiking cycle as issuance, M&A and other shareholder friendly activity has been accelerated while at the same time demand has declined. Again, we are not trying to predict a crisis – only to point out that the upcoming rate hiking cycle appears to concern issuers and investors so much that they have been taking real actions that have repriced our market lower relative to equities to an extent that we have only seen during the financial crisis.

  And, of course, there is the whole deflationary commodity collapse-slash-China crash/devaluation/bursting credit/housing/market bubble, which also is a screaming read flag, but which stocks have also decided to ignore because, well, “central banks got their back.” Until they don’t.

  In the meantime, we can’t wait to find if this is the first time in the history of capital markets when it is stocks that are right, and bonds wrong. Because if not, we are confident that nobody, certainly no equity traders, is positioned in a way that another Bear Stearns-type blow up will be merely chalked away to the ever growing list of things that one should simply ignore and focus on an S&P which remains just a few percentage points below its all time record high.

  

  

  

  

  

• One-In-A-Billion "Hiccups" Are Happening All The Time, Citi Warns Something Is Wrong

  Earlier this year JP Morgan’s letter to shareholders, Jamie Dimon let it slip that there are some very disturbing things going on in today’s capital markets. Prices can gap in illiquid markets, Dimon explained, and that has the very real potential to spark a panic, causing illiquidity to spread to previously liquid markets. Dimon warned that one should not be fooled by relatively tight bid-asks; it’s market depth tells the true story, and as JP Morgan’s Nikolaos Panigirtzoglou will tell you, some markets (the Treasury market for instance) are getting quite thin indeed. 

  The dangers associated with a widespread lack of market depth are of course exacerbated by the presence of HFTs. This was on full display during last October’s Treasury flash crash. Here’s what Dimon had to say on the subject: “..then on one day, October 15, 2014, Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations– an unprecedented move – an event that is supposed to happen only once in every 3 billion years or so.” “Some currencies recently have had similar large moves,” Dimon added, referencing the carnage that accompanied the SNB’s abandonment of the euro peg in January (as well as countless other flash crashes and rips) and presaging precisely what we’ve seen this week on the heels of China’s move to devalue the yuan. 

  The takeaway from all of this is not, as Dimon concluded, that statistics can’t be trusted, but rather that when things that are supposed to happen once every 3 billion years start happening once every three months, or every three weeks, then something is definitively broken. 

  Here, courtesy of Citi’s Matt King, is a look at some of the major one in a billion year events that have taken place over the last four years:

  

  As King notes, either there’s a “widespread case of the hiccups”, or something else is very, very wrong.

  

  

  

  

  

• US Military Uses IMF & World Bank To Launder 85% Of Its Black Budget

  Submitted by Jake Anderson via TheAntiMedia.org,

  Though transparency was a cause he championed when campaigning for the presidency, President Obama has largely avoided making certain defense costs known to the public. However, when it comes to military appropriations for government spy agencies, we know from Freedom of Information Act requests that the so-called “black budget” is an increasingly massive expenditure subsidized by American taxpayers. The CIA and and NSA alone garnered $52.6 billion in funding in 2013 while the Department of Defense black ops budget for secret military projects exceeds this number. It is estimated to be $58.7 billion for the fiscal year 2015.

  What is the black budget? Officially, it is the military’s appropriations for “spy satellites, stealth bombers, next-missile-spotting radars, next-gen drones, and ultra-powerful eavesdropping gear.”

  However, of greater interest to some may be the clandestine nature and full scope of the black budget, which, according to analyst Catherine Austin Fitts, goes far beyond classified appropriations. Based on her research, some of which can be found in her piece “What’s Up With the Black Budget?,” Fitts concludes that the during the last decade, global financial elites have configured an elaborate system that makes most of the military budget unauditable. This is because the real black budget includes money acquired by intelligence groups via narcotics trafficking, predatory lending, and various kinds of other financial fraud.

  The result of this vast, geopolitically-sanctioned money laundering scheme is that Housing and Urban Devopment and other agencies are used for drug trafficking and securities fraud. According to Fitts, the scheme allows for at least 85 percent of the U.S. federal budget to remain unaudited.

  Fitts has been researching this issue since 2001, when she began to believe that a financial coup d’etat was underway. Specifically, she suspected that the banks, corporations, and investors acting in each global region were part of a “global heist,” whereby capital was being sucked out of each country. She was right.

  As Fitts asserts,

  “[She] served as Assistant Secretary of Housing at the US Department of Housing and Urban Development (HUD) in the United States where I oversaw billions of government investment in US communities…..I later found out that the government contractor leading the War on Drugs strategy for U.S. aid to Peru, Colombia and Bolivia was the same contractor in charge of knowledge management for HUD enforcement. This Washington-Wall Street game was a global game. The peasant women of Latin America were up against the same financial pirates and business model as the people in South Central Los Angeles, West Philadelphia, Baltimore and the South Bronx.”

  This is part of an even larger financial scheme. It is fairly well-established by now that international financial institutions like the World Trade Organization, the World Bank, and the International Monetary Fund operate primarily as instruments of corporate power and nation-controlling infrastructure investment mechanisms. For example, the primary purpose of the World Bank is to bully developing countries into borrowing money for infrastructure investments that will fleece trillions of dollars while permanently indebting these “debtor” nations to West. But how exactly does the World Bank go about doing this?

  John Perkins wrote about this paradigm in his book, Confessions of an Economic Hitman. During the 1970s, Perkins worked for the international engineering consulting firm, Chas T. Main, as an “economic hitman.” He says the operations of the World Bank are nothing less than “pure economic colonization on behalf of powerful corporations and banks that use the United States government as their tool.”

  In his book, Perkins discusses Joseph Stiglitz, the Chief Economist for the World Bank from 1997-2000, at length. Stiglitz described the four-step plan for bamboozling developing countries into becoming debtor nations:

  Step One, according to Stiglitz, is to convince a nation to privatize its state industries.

   

  Step Two utilizes “capital market liberalization,” which refers to the sudden influx of speculative investment money that depletes national reserves and property values while triggering a large interest bump by the IMF.

   

  Step Three, Stiglitz says, is “Market-Based Pricing,” which means raising the prices on food, water and cooking gas. This leads to “Step Three and a Half: The IMF Riot.” Examples of this can be seen in Indonesia, Bolivia, Ecuador and many other countries where the IMF’s actions have caused financial turmoil and social strife.

   

  Step Four, of course, is “free trade,” where all barriers to the exploitation of local produce are eliminated.

  There is a connection between the U.S. black budget and the trillion dollar international investment fraud scheme. Our government and the banking cartels and corporatocracy running it have configured a complex screen to block our ability to audit their budget and the funds they use for various black op projects. However, they can not block our ability to uncover their actions and raise awareness.

  

  

  

  

  

• ISIS Unleashed Mustard Gas Attack In Iraq, US Officials Claim

  A long time ago, in a proxy war far, far away, some YouTube videos (around 100 of them apparently) “proved” that Bashar al-Assad’s regime had unleashed a horrific chemical attack on its own people.

  In a lengthy report subtly titled “Syrian Government’s Use of Chemical Weapons on August 21, 2013,” US officials laid out their reasoning for trusting the veracity of the clips, and while you can read the entire report here, the punchline is this: “We have identified one hundred videos attributed to the attack, many of which show large numbers of bodies exhibiting physical signs consistent with, but not unique to, nerve agent exposure. We assess the Syrian opposition does not have the capability to fabricate all of the videos.”

  That’s right, the US very nearly started World War 3 based on Washington’s assessment of the Syrian opposition’s video editing capabilities. 

  Fast forward to March when, almost two years after the first round of YouTube chemical attack videos nearly led to US strikes on Damascus, Washington still hadn’t managed to stir up enough public support for an invasion (which may have something to do with the fact that most Americans couldn’t even identify Syria on a map let alone tell you anything about its four-year old civil war) and lo and behold Reuters reported that “a group monitoring the Syrian civil war said government forces carried out a poison gas attack that killed six people in the northwest, and medics posted videos of children suffering what they said was suffocation.”

  That prompted the John Kerry to send the following message to the Syrian regime: “Assad must be held accountable for atrocious behavior [and] military pressure may be needed to oust [him]”

  Well, five months later and the American public still doesn’t care about Syria or Assad (after all, there are more pressing issues to worry about, like Cecil), but one thing it does care about is ISIS which is why now, the West will try to tie Islamic State to chemical weapons and see if that’s effective at bolstering support for boots on the ground. Here’s CNN: 

  The U.S. is investigating what it believes are “credible” reports that ISIS fighters used mustard agent in an attack against Kurdish Peshmerga this week, causing several of them to fall ill, U.S. officials working in at least three separate parts of the Obama administration said Thursday.

   

  All of them strongly emphasized more intelligence is being gathered on exactly what may have happened near the town of Makhmour in northern Iraq.

   

  
  

  And here’s WSJ explaining that ISIS most likely obtained the mustard gas in Syria or maybe in Iraq where stockpiles belonging to Assad and Saddam Hussein, respectively, were supposed to have been destroyed but weren’t: 

  Islamic State militants likely used mustard agent against Kurdish forces in Iraq this week, senior U.S. officials said Thursday, in the first indication the militant group has obtained banned chemicals.

   

  The officials said Islamic State could have obtained the mustard agent in Syria, whose government admitted to having large quantities in 2013 when it agreed to give up its chemical-weapons arsenal.

   

  The possibility that Islamic State obtained the agent in Syria “makes the most sense,” said one senior U.S. official. It is also possible that Islamic State obtained the mustard agent in Iraq, officials said, possibly from old stockpiles that belonged to Saddam Hussein and weren’t destroyed.

   

  U.S. intelligence agencies are still investigating the source and how it could have been delivered this week on the battlefield, officials said.

   

  Islamic State has taken control of territory in Syria close to where President Bashar al-Assad’s forces stored chemical weapons, including mustard agent. The regime said in 2013 that all of its mustard stockpiles had been destroyed, either by Syrian forces themselves or by international inspectors.

   

  Inspectors, however, have subsequently said they weren’t able to verify claims by the Syrian government that it had burned hundreds of tons of mustard agent in earthen pits. U.S. intelligence agencies now say they believe Damascus hid some caches of deadly chemicals from the West, possibly including mustard.

  WSJ goes on the say that as of now, it’s “unclear how much mustard Islamic State might have obtained,” and the German ministry says we won’t know for sure whether any mustard was spread until a team of German experts (who are “on their way to the scene”) have had a chance to assess the situation. “What it was exactly we don’t know,” a spokesman said. 

  But that’s ok because the US does know courtesy of multiple “independent reports.” And if that’s not good enough for you, just ask Congressman Adam Schiff, a ranking member of the House Permanent Select Committee on Intelligence:

  “Did ISIS find some mustard? We think they did. We think they have used it.”

   

  
  

  And John McCain agrees, as is clear from the following tweet, in which the Senator encourages you to read a completely unbiased WSJ Opinion piece called “Islamic State Gets Mustard Gas: Assad’s stockpiles weren’t destroyed, and the jihadists have them”.

  “Foreign policy failures have a way of compounding…” – Must-read @WSJopinion on #ISIS getting chemical weapons: http://t.co/7yUjIJGzlH

  — John McCain (@SenJohnMcCain) August 14, 2015

  McCain – who, you’re reminded, is the poster child for foreign policy failures in Syria and Ukraine – seems to have completely missed the irony in his retweeting an article in which the very first line reads: “foreign-policy failures have a way of compounding.” 

  In any event, we suspect it won’t be long before John Kerry tells the nation that it might be necessary to use further “military pressure” to hold ISIS accountable for their “atrocious behavior” which is now in direct contravention of another international warfare “norm”. As for seeing “proof” that Islamic State did indeed “find and use some mustard,” don’t hold your breath (unless there’s mustard gas around):

  While there have been accounts posted in social media about the incident, the officials said they have independent information that strongly led them to assess there was a use of chemical weapons. The officials would not tell CNN what evidence led them to this belief.

  

  

  

  

  

• Did David Tepper Just Call The Market Top… And Is The Appaloosa Billionaire Losing His Touch

  Once upon a time, when hedge funds did not make daily TV and media appearances in hopes of finding buyers for whatever they were selling (i.e., were “bullish” on) and vice versa for shorts, 13F filings were the holy grail of alpha chasers and piggybackers everywhere. However, in recent years, hedge funds have become as media friendly as some of the biggest monopoly money talking heads to grace CNBC daily, and as a result hedge fund holdings are known far in advance of the mandatory 45 day 13F reporting date after the end of the quarter. Not only that, but with central banks dominating capital markets, what hedge fund XYZ does is hardly as exciting any more.

  Still, one name that many enjoy tracking is Appaloosa billionaire David Tepper due to his contagious bullishness for a bigger part of the centrally-planned ramp since 2009, which has also resulted in massive paydays for Tepper: he has consistently been among the top 5 best paid hedge fund managers this decade. Which is great: after all, the Fed’s wealth effect is precisely there to benefit the likes of David and his hedge fund peers. For everyone else, well, as Janet Yellen says “get some assets.

  So how did Tepper do in Q2? In a word: lousy. In another word: the man who recently was on CNBC pitching a 20x P/E multiple as the new normal, may have just called the market top.

  First, a quick flip through the names in his most recent 13F reveals that in the second quarter Tepper took notable new positions in AAPL and BABA. It is not exactly a secret that since the second quarter when AAPL stock was trading near its all time highs, both names have gone straight down, with AAPL recently entering a correction, while BABA has met obstacle after legal obstacle, and as recently as this week tumbled to all time post-IPO lows. If only it were singles week every week…

  Worse, while Tepper was building his AAPL and BABA stake, he was liquidating his exposure in GOOG (via some $190 million in Class C shares as well as GOOG calls), just before GOOG exploded to the upside.

  Most troubling, however, is that while in recent quarters Tepper had consistently carried over a levered upside bet in the market, in the form of SPY and QQQ calls (which as of March 31 were a massive $1.3 billion in share equivalents), in Q2 he unwound his entire call exposure. And not just in single name stocks, but in the two key ETFs noted above. Since the market went sideways during the second quarter, these positions certainly did not generate alpha, and if used as a hedge, they lost money vs the other revealed long equities positions (13Fs do not reveal shorts or credit positions, either cash or CDS).

  Which begs the question: having unwound his two largest positions, which at face value are nothing more than levered bullish bets on the S&P500 and Nasdaq, did Tepper, in addition to apparently losing his touch, also call the top in the market?

  Full Appaloosa 13-F breakdown.

  

  Source: 13F

  

  

  

  

  

• Weekend Reading: Chinese Food (For Thought)

  Submitted by Lance Roberts via STA Wealth Management,

  Another week of market volatility with no real ground gained. Interestingly, that is just how I started last Friday's missive.

  As I said then, the recent market volatility has been enough to give you indigestion and this week has been much of the same due to China's recent currency moves. But, despite the back and forth action this past week, the markets have held longer-term bullish trend support which keeps the bulls in charge for now.

  

  However, this certainly does not suggest that investors remain complacent. The ongoing deterioration in fundamentals, economics and technicals suggest that risk currently outweighs the potential reward for now. With respect to the technical front, the ongoing deterioration in relative strength, momentum, and breadth, combined with a compression of price action, have only been witnessed at more important market peaks in the past.

  "Bull markets" do not die on their own. Their death is generally dictated by the onset of an unexpected catalyst that creates enough "panic selling" to spark a liquidation cycle. Does the current situation in China rise to such a level? Maybe. It is an issue I began discussing this past June, and there may be a danger in dismissing the issue too quickly. 

  There are many questions that remain to be answered. What does China's devaluation really say about their economy? Could this be the start of a bigger issue with the worlds 2nd largest economy? Does China pose a bigger threat to the US economy than currently believed? Does the uncertainly in the markets due to China keep the Federal Reserve rate hikes on hold in September?

  These are the questions we will try and answer this weekend. For now, "Keep Calm and Eat Chinese Food."

  ---

  1) Is The Global Economy Sinking Into Recession by Ed Yardeni via Dr. Ed's Blog

  "China's July trade figures remained on the soft side. On a seasonally adjusted basis, imports fell 2.1% m/m and 8.1% y/y. Some of that weakness reflected the drop in oil prices. However, imports excluding petroleum still fell 3.4% y/y during June, suggesting weak domestic demand. Exports declined 4.9% m/m last month and 8.3% y/y, suggesting weak global demand.

   

  Exports have been essentially flat now since early 2013."

  

  Read Also: Yuan And You, How China's Currency Affects US Consumers by Kim Hjelmgaard via USA Today

   

  2) Making Sense Of China's Currency Move by Mohamed El-Erian via Bloomberg

  "With this move, China explicitly joins other nations trying to capture economic activity outside their borders, and it is doing so as the global economy is struggling to generate sufficient growth. The decision therefore provides many signals about what ails China and the global economy, and has implications for financial markets.

   

  But by heeding this advice now, China has done more than devalue its currency by almost 2 percent, the largest single-day move in two decades. By choosing this particular moment to alter its currency system, it is also attempting to respond — via foreign-exchange policy — to one of the biggest challenges facing the global economy, that of generating growth."

  

  Read Also: China Can't Risk Global Chaos Of Currency Devaluation by Ambrose Evans-Pritchard via The Telegraph

   

  3) 5-Things You Need To Know About China's Move  by Carlos Tejada via WSJ

  "Here are the 5-things you need to know

  • What did they do?
  • Why did they do it?
  • What does this mean for the rest of the world?
  • What does this mean for the markets?
  • What's next?"

  Read Also: China's Currency Move Could Spark A Wave Of Deflation by Heather Stewart via The Guardian

  

   

  4) Currency War? How China Devaluation May Impact Fed by Matthew Belvedere via CNBC

   

  Read Also: China Devaluation Brings Stocks To A Death Cross by Anthony Mirhaydari via The Fiscal Times

   

  5) China's Troubling Lurch Back To Socialism by Weifeng Zhong via Real Clear Markets

  "China reminds us of what Hayek calls "The Fatal Conceit," the belief that the government is better than markets in setting prices, that it can manage a form of "Capitalism Light." But interventions such as these will surely be counterproductive, and will rightly concern both domestic and international investors who rely heavily on economic freedoms. This means that the economic damage from the Chinese government's piecemeal attempts to be more responsive to its citizenry will be significant. We should be glad that the Chinese people are enjoying greater freedom to express their views and influence public policy. However, piecemeal pacification is no substitute for genuine political freedom, and it is in clear conflict with China's transition to a market economy. Hayek would have predicted that the process can only end in two ways: either socialism with totalitarianism, or capitalism with democracy. From today's vantage point, that means we can expect far more turmoil in the Chinese economy in the coming months."

  Read Also: Until It Makes Reforms, China's Markets Will Struggle by Doug Elliott via Real Clear Markets

  ---

  Fortune Cookies

  The Warren Buffett Way To Avoid Major Bear Markets by Jesse Felder via The Felder Report

  The New TVA – New Thoughts About Old Ideas by Dr. Ben Hunt via Epsilon Theory

  Drop In Withholding Tax Receipts Suggests Something Amiss With Employment by Lee Adler via David Stockman's ContraCorner

  Even The Fed Admits Recession Looms: Q3 GDP Slashed To 0.7% by Tyler Durden via ZeroHedge

  ---

  "In the midst of chaos, there is also opportunity" – Sun Tzu

  Have a great weekend.

  

  

  

  

  

• Chinado Sparks Bullion's Best Week In 3 Months; US Stocks, Bonds Shrug

  This seemed appropriate…

   

  China's stock markets had their best week since the crash began…

  

   

  As Yuan had its biggest weekly drop since 1994…

  

   

  Which meant massive EURCNH carry unwinds.. leading to European stocks 2nd worst week since December…

  

   

  Prior to today, the S&P has closed lower on 10 of the last 12 Fridays – this has not happened since 2007…But today – thanks to old news on AAPL and old news on Europe's bailout… we melted up…

  

   

  Trannies outperformed on the week, as today's panic-buying meltup saved the week

  

   

  In case you wondered what triggered the late-day meltup – it was AAPL, surging on news that they are further ahead with a car…WTF!?

  • *APPLE CAR PROJECT MAY BE FURTHER ALONG THAN EXPECTED: GUARDIAN

  

   

  Biotechs took it on the china again, down 7 days in a row and 4 weeks in a row (which follows the weakest inflows in 11 weeks)… this is the worst 4-week slide since April 2014…

  

   

  But energy stocks were SOMEHOW the week's best performers… After 14 straight weeks lower… this was Energy's best week in over 6 months!!

  

   

  Although reality is setting in the last 2 days…

  

   

  VIX smashed back down to a 12 handle…

  

   

  Treasury markets roundtripped to practically unchanged on the week – having rallied 15-20bps Monday thru Wednesday…

  

   

  Credit markets dumped this week.. and stocks retraced to them 3 times before the last 2 days meltups…

  

   

  FX marksts saw some volatility early in the week before China backed off.. leaving the USD lower against the majors (driven by EUR strength from CNH carry unwinds)… USD Index biggest weekly drop in 2 months

  

   

  But The USDollar had its strongest week against Asian currencies since Lehman…

  

   

  PMs outperformed industrial commodities this week…

  

   

  Gold and Silver's best week in 3 months – even after the clubbing today…

  

   

  Front-month WTI Crude has now fallen 9 weeks in a row…

  

   

  Charts: Bloomberg

  

  

  

  

• Tianjin: Before & After

  The two explosions that ripped through an industrial area in the coastal city of Tianjin, China, on Wednesday night created huge fireballs, knocked down doors and shattered windows up to several miles away. As NY Times reports, at least 50 people were killed and more than 500 injured. Here is the aftermath…

   

  

  

  Source: ABC

  Hundreds of nearby cars were incinerated and two Public Security Bureau buildings were destroyed.

  

  There were injuries and broken windows in several apartment buildings close to the blast site.

  
  Source: NYTimes

   

  Finally, this dreadful video… wrong place, wrong time…

   

  Or perhaps how 1000s of carry traders felt this week….

  

  

  

  

• The Economissed Track Record: In January 75% Of Experts Said The Fed Would Have Hiked By Now

  If PhD economists were serious about getting things right, they would have a tough job. That goes double for PhD economists charged with making policy decisions based on their conclusions. 

  That’s because economics (like sociology and political science and astrology) isn’t a real science. It’s a pseudo-science. And as is the case with other pseudo-sciences, it’s flat out impossible to discover laws and immutable truths, no matter what anyone told you in your undergrad economics course. 

  Of course PhD economists aren’t really serious about getting things right, which means that in reality, their jobs are remarkably easy. Here’s the job description: make predictions that are almost never right and then make up any reason you want to explain away the fact that you were wrong. These explanations run the gamut from intentional obfuscation via opaque statistical tinkering (“residual seasonality”) to comically absurd attempts to turn common sense into an excuse for poor outcomes (“snow in the winter”). 

  And while economists by the very nature of their jobs are already predisposed to getting it wrong almost all the time, that tendency is amplified when economists try to predict what other economists are going to do. We might call this “stupidity squared”, and it’s readily observable in its natural habitat when economists attempt to predict when the Fed will raise rates. 

  When “forecasters” are surveyed on the timing of a Fed hike (or cut) what you get is one group of economists trying to guess at what another group of economists mistakenly thinks about the direction of the economy, and as you can see from the graph shown below, this is definitely not a case where two wrongs make a right. 

  

  Some color from WSJ:

  An overwhelming majority of private forecasters polled think the Federal Reserve will begin raising short-term interest rates next month, capping a historic era of unprecedented monetary stimulus.

   

  About 82% of economists surveyed Friday through Tuesday by The Wall Street Journal said the Fed’s first rate increase will come in September, versus 13% who said the central bank will wait until December.

   

  “I don’t think there’s unanimity, by any means, on the [rate-setting Federal Open Market] Committee,” said Joel Naroff, president of Naroff Economic 

   

  Advisors, who said he expects a liftoff in September. But, he said, “I think there’s a general consensus that they need to go as soon as possible.”

   

  Last month, 82% of economists predicted a September liftoff and 15% said the U.S. central bank would wait until December.

   

  In June, 72% said the first rate increase would come in September versus 9% who expected a first move in December.

  Summing up everything discussed above is WSJ’s Ben Leubsdorf:

  Back in January, 75% of economists thought the Fed would have raised rates by now http://t.co/ED29B2vv2n pic.twitter.com/WQ5B3xdo5w

  — Ben Leubsdorf (@BenLeubsdorf) August 13, 2015

  And finally, a video representation of economists responding to poor “forecasting”… “I make the weather…”:

  

  

  

  

• America (In 1 Cartoon)

  You have to believe to receive…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• China Says Plunge Protection Team Will Prop Up Stocks "For Years To Come" If It Has To

  Perhaps it’s a case of something getting lost in translation (so to speak), but Chinese authorities have a remarkable propensity for saying absurd things in a very straightforward way as though there were nothing at all odd or amusing about them.

  For example, here’s what the CSRC said on Friday about the future for China Securities Finance (aka the plunge protection team):

  “For a number of years to come, the China Securities Finance Corp. will not exit (the market).”

  For anyone who hasn’t followed the story, Beijing transformed CSF into a trillion-yuan state-controlled margin lender after a harrowing unwind in the half dozen or so backdoor leverage channels that helped inflate Chinese equities earlier this year caused stocks to plunge 30% in the space of just three weeks.

  CSF has since become something of an international joke, as the vehicle, along with an absurd effort to halt trading in nearly three quarters of the country’s stocks, came to symbolize the epitome of market manipulation – and that’s saying something in a world where everyone is used to rigged markets. 

  

  And because Beijing wanted to get the most manipulative bang for their plunge protection buck (err… yuan) the PBoC went on to count loans made to CSF by banks towards total loan growth in July. In other words, China acted as is if forced lending to a state-run stock buying entity represented real, organic growth in demand for credit. 

  

  Now, apparently, the practice of using CSF to “stabilize” stocks and artificially prop up loan “demand” will become standard procedure. Here’s more from AFP:

  China’s market regulator on Friday vowed to stabilise the volatile stock market for a “number of years”, saying a state-backed company tasked with buying shares will have an enduring role.

   

  “For a number of years to come, the China Securities Finance Corp. will not exit (the market). Its function to stabilise the market will not change,” the China Securities Regulatory Commission (CSRC) said in a statement on its official microblog.

   

  The China Securities Finance Corp. (CSF) has played a crucial role in Beijing’s stock market rescue, which was launched after Shanghai’s benchmark crashed 30 percent in three weeks from mid-June.

   

  The regulator’s comments were the first time it has given any indication of how long it would intervene to support equities.

   

  Authorities gave the CSF huge funding to buy shares and subsequent speculation the government was preparing to withdraw from the stock market has spooked investors.

   

  The statement added the CSF will only enter the market during times of volatility.

   

  ”When the market drastically fluctuates and may trigger systemic risk, it will continue to play a role to stabilise the market in many ways,” said the statement, which quoted CSRC spokesman Deng Ge.

  So essentially, the PBoC will now do precisely what the BoJ does on nearly every single day that sentiment on the Nikkei looks to be slipping. The only difference is that the BoJ doesn’t necessarily try to hide the fact that it’s amassing a $100 billion portfolio of equities whereas Beijing is keen on maintaining that because CSF’s balance sheet is technically separate from the PBoC’s, there’s “no such thing as Chinese QE.” This claim may be getting harder to justify however, because as Bloomberg noted just moments ago, the balance sheet is expanding. 

   People’s Bank of China’s balance sheet showed that its “claims on other financial corporations” increased 200b yuan in July, signaling lending to China Securities Finance, Shanghai Securities News reports.

   

   

  “Claims on other financial corporations” consist mainly of loans the central bank extended to financial cos., the report says, citing book written earlier by officials at PBOC’s statistics department.

  In any event, plunge protection is here to stay in China, and that’s probably not a good thing when it comes to supporting the country’s bid for MSCI index inclusion, which means the CSRC is caught between making sure investors don’t get the “wrong” message about the government’s willingness to prop up stocks and making sure the rest of the world gets the “right” message about market liberalization.

  Fortunately, this impossible balancing act is sure to lead to an endless flow of amusing contradictory rheotoric and with that in mind, we’ll close with the following quote, which you’ll be sure to note comes from the very same people who made the comments cited above, on the very same day.

  “With market fluctuations gradually shifting to normal, from wild and abnormal, we should let the market exercise its function of self-adjustment.”

  

  

  

  

  

• Guest Post: A Trump "Morning In America"

  Submitted by starfcker via The Burning Platform blog,

  This week marks a seminal shift in the presidential campaign of Donald Trump. This is the week the establishment rolled over and began to accept that he is their front runner. The wild attacks and blatant put downs will be muted from here on out as the establishment struggles to come to grips with their new reality. Trump has proven to be an immensely popular and muscularly resilient candidate. He has survived fire that would have killed any ordinary candidate.

  His reward will be to watch a batch of the so-called serious candidates be exiled to the sidelines. The Rick Perrys of the world, the Lindsay Grahams of the world, were valuable to the establishment at 5% support. They have no value at 0%. 5%, 10 times could have allowed an unpopular Jeb Bush to win a lot of primaries with a surprisingly low percentage of the vote, as long as the minor candidates siphoned off some of the rest. With a half of dozen of them at 0%, that strategy is toast.

  Republican kingmakers are nothing if not pragmatic, they want results for their money. They aren’t getting it. They are unhappy. They are angry. But like a chameleon changing colors, they want to be on the winning side. They all know Trump, they also know they can deal with Trump, so they will. The Blitzkrieg is over. Trump survived. The establishment sacrificed many of their finest media plants this past weekend. Every one of them ended up looking like exactly what they are, cheap desperate prostitutes, willing to say whatever was required of them, as long as their paychecks kept coming .

  Media brands that took a dozen years to build, are now damaged goods. Where will Trump take this, who knows? But the man knows how to make a deal, the man knows how to win, and the man knows how to set a mark so people don’t screw with him in the future. It must suck to be Megyn Kelly, Chris Wallace, and Bret Baier, and know that you are shut out from the Trump circus for the indefinite future. May their shows suffer damage as a result? They might, and it’s certainly a fate no one else is going to risk. Lots of bazookas got laid down at their feet by the mercenary media this week. They took their best coordinated shot at him, and failed. CNN doesn’t have the ratings muscle to go after him in the next debate the way Fox did. Look for a totally different and much less confrontational take on Donald Trump starting now.

  *  *  *

  TrumpZilla strikes…

  

  

  

  

  

  

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• Freedom And Central Planning Can Never Coexist

  Submitted by Brandon Smith via Alt-Market.com,

  The average person is a statist, whether he realizes it or not. It is important that liberty activists recognize and accept this fact because the truth of our limitations as a movement determines the kinds of solutions into which we should ultimately put our time and energy. The fantasy of a final grand march of an awake and aware majority on the doorsteps of power is just that: a fantasy. Some people might argue that given more time, such an event could be organized or could happen spontaneously. But these people seem to forget that the immediacy of any crisis inspires awareness and cuts the bindings of complacency for only a certain percentage of any given population. With “more time” often comes more complacency, not less.

  So, history becomes a kind of balancing act, with crisis generating the necessity of intelligent and moral action in some people but rarely, if ever, in most people (even during the American Revolution, in which patriots represented a stark minority). The reason that the culture of freedom consistently plateaus and remains stuck at underdog status is because human beings are, first, often acclimated to the idea that crises are things that only happen to other people, and, second, they are obsessed with the idea that governments should retain prohibitory and administrative power over the public as a means to "prevent" crisis from occurring (the sheepdog and sheep mentality).

  Not all people necessarily “love” their current government, but many citizens tend to see the idea of government as an inevitability of a stable society. They assume pre-eminence of the state because they have never known anything else. Not only that, but as people separate into political and ideological factions, often based on false paradigms (such as the false left/right paradigm), they covet government as a kind of tool or weapon that can be used for “the greater good” if only their side had total control of it. Very few people in this world want to shrink government down to a manageable size comparable to that which existed just after the American Revolution, and even fewer would entertain the idea of erasing central governments entirely. The allure of the federalized state as a means to impose ideological control over others is intoxicating.

  Central planning acolytes see society as a a single unit, or engine, in which all the people are parts rather than autonomous individuals.  They believe that if any part acts outside of the bounds of the engine, the entire machine could break.  According to their fuzzy logic, everything you do as an individual affects everyone else, therefore, the collective state must mold and control each individual's behavior in order to ensure that what you do as a singular person does no harm to the whole.  This philosophy is the primary rationale for EVERY push for centralization, but it is based on a faulty premise.

  Governments are run by people, people commonly more flawed and corrupt than the average citizen.  Central planners adore the use of government as a means to reign in populations and to compel conformity and "oneness", but centrally planned systems always revert to a divided structure in which a criminal minority separates itself from the collective in order to rule over that collective.  The elites actions violate the integrity of the engine as they attempt to drive the engine according to their own twisted ideals, leading to disaster and the end of the supposedly safe environment which the central planners had originally claimed was the benefit of central planning.  Thus, the central planning model is an inherently self destructive and foolish one.

  At bottom, the only viable purpose of any central government is to safeguard individual liberty. All other claims and supposed benefits are irrelevant. Infrastructure, food and water, health, education, public security, etc: All of these issues can be provided for voluntarily at a local level by common people without the aid of a central authority.  The original intent of the U.S. Constitution and Bill of Rights was to LIMIT government to the job of ensuring the continuance of a free citizenry.  One could certainly argue that that role has been lost; not because of the constitution itself, but because of the lack of vigilance needed to defend the integrity constitution.  One could also argue that the very nature of a federal government is one of inevitable corruption; many of the founding fathers did as the document was drafted, after all.

  I will say that the constitution and the Bill of Rights are representations of natural law and inherent conscience, and it has taken elitists over two centuries to mostly dismantle them.  At this point, a complete end to any form of federalization may be called for, but the founders certainly tried their best to create a government system that could be controlled by the people.

  It was war, of course, that was used to dismantle constitutional protections…

  Most of the outside or foreign threats we face today as a nation (threats often used to rationalize centralized government and standing armies) or have faced in the past century were directly or indirectly CREATED by our own government apparatus and by the banking class through covert means.  Funding and training of Americas future enemies has been a grand pastime for the power brokers and politicians that reside in this very country.  Without such people and the structures they exploit, it is not outlandish to suggest that the past hundred years could have been a period of peace and prosperity rather than mass death through engineered war, state culling, and mass enslavement through artificial debt constructs.

  In a culture where vigilance is encouraged rather than labeled paranoia, in a culture where productivity is enabled rather than obstructed, in a culture where free thought is treated with interest rather than disdain, government holds no value.

  The only people who understand the true nature of government and still value the existence of an overreaching state are the people who would like to take advantage of the unchecked power such a state affords. We often call these people “elitists.” They often call themselves elitists. Big government serves only the interests of these elites. Everyone else is either a hapless victim of it, a useful idiot in service of it, or a revolutionary opposed to it.

  When a government becomes a power mechanism for a select few, it has lost all relevance. When a government like ours here in America violates the tenets of individual liberty despite its constitutional mandate, in the name of “protecting” individual liberty, that government no longer serves any purpose. Even further, when a government’s policies are designed only to ensure its own continued dominance rather than the freedom and prosperity of the citizenry, that government becomes separate from the people and is, by extension, an enemy to the citizenry.

  Governments and the elites behind them retain control over populations through the use of central planning. Central planning is essentially a bureaucratic structure that bottlenecks productivity, resources, academia and ideas until all progress and expression require approval. That is to say, central planning is a machine that turns rights into privileges. It also sets up bureaucracy as the final arbiter of who is considered an authority in any particular field and who is a “layman.” These designations are not based on individual ability, intelligence or accomplishment. Rather, they are based on subservience and the level of blind faith in the establishment each person is willing to display in order to attain professional status.

  Some of the most ignorant people in any given field or profession are often those deemed “experts” by establishment institutions, from politics, to law, to medicine, to economics, to science, to history, etc. The sad fact is mainstream experts are rarely the most knowledgeable, but they are the most indoctrinated.

  As central planning gains ground, it moves away from more subtle institutional dependencies into full-bore tyranny. The line between permission and despotism is razor-thin, and this is where we in the U.S. stand today. Most nations around the globe are socialized nations, with central planning as the very foundation on which their societies stand. For the most part, these cultures are disarmed and servile with a modicum of perceived freedom that is treated as a privilege granted by the state rather than an inborn right of natural law. Yes, many societies have “freedoms,” as America does; but the difference is that these societies can have their freedoms confiscated at any given moment on the whim of the political elite. They have no recourse to obstruct such an action and no power to remove the offending system that rules over them when they finally get fed up.

  In the U.S., central planning is surely prevalent and socialization is on a fast track. But Americans, whether they know it or not, still retain the ability of independent response — as we saw at Bundy Ranch, for instance, or in the defense of shopkeepers in Ferguson, Missouri, despite threats from government. We will lose our advantage of independent action if we allow the following changes to occur within our culture without a fight.

  Disarmament

  A disarmed population is utterly useless, philosophically and organizationally impotent, and easily ruled. Take a look at simpering weakling societies like the U.K., which prohibits anyone under the age of 18 to purchase plastic knives and punishes victims of crime for physically defending themselves. Governments that seek to undermine personal liberty ALWAYS disarm their respective populations if they can get away with it. In America, the only reason we have not yet been disarmed is because the establishment understands that revolution would immediately follow any attempt and that revolution would be seen as justified. I believe ultimately that disarmament in the U.S. will not be fully attempted until after a national crisis has been triggered.

  Centralized Health Standards

  The real purpose of Obamacare was not to provide universal health insurance. Such a task is utterly impossible in an economic system that is in the midst of decline with an aging population and reduced profit opportunities for the young. Socialism works only as long as there is someone from whom to steal money and resources. No, the purpose of Obamacare was to bond the healthcare industry to government in such a way as to make it an official appendage of the state.

  Already, we have seen the push for the use of doctors as government informants, the issuance of forced vaccinations regardless of religious orientation or philosophical objection, increased taxation in the name of “harmonization” of care, etc. Beyond all this, the system must continue to perpetuate its own usefulness. And, I have no doubt that one day we will see such things as mandated health appraisals of individuals up to and including psychological health, as well as restricted care based on age, life habits or even ideological orientation. If the state can have your flight status restricted merely for your political beliefs, then why not one day have your access to medical care restricted?

  Population Planning

  We have heard it said many times that people should be required to attain a “license” before they are allowed to have children, but who gets to decide who is eligible for the “privilege” of children? Well, under a population planning scenario the state and its central planners do, of course. And what makes such people so ethically competent as to deserve this power over the right to family? Not a thing. In many cases, bureaucrats are the most psychopathic and unintelligent people in any given society.

  Some people might argue that this kind of development is unthinkable in America and not a legitimate concern. But already in the U.S. we have seen instances of Child Protective Services abducting children belonging to parents with political conflicts with the existing establishment and living habits outside of the mainstream. We also live in a system in which many parents are forced by law to hand over their children to state-controlled schools for half of every weekday (as home-schoolers are attacked as aberrant child abusers). We are only a short step away from a world in which having a child invites as much government intrusion and restriction as rearing a child.

  Overt Militarization Of Police

  Yes, many people would claim that overt militarization of police has already occurred. I would say that they haven’t seen anything yet. We do not yet live in a country where jacked out cops with armor and M4 carbines stand on every street corner 24/7, but it won’t be long before this becomes our everyday environment. With politicians openly suggesting extreme measures to combat “lone wolf terrorists,” up to and including internment camps for “disloyal Americans” (thanks for at least being honest about your intentions, Wesley Clark), all it would take is one large-scale attack to inspire enough confusion in the population to provide cover for a full-blown police state. Central planning survives and thrives through fear. Fear is defeated through preparedness, planning and mindset.

  Resource Management

  A person cannot plan or prepare for crisis if he is not allowed to manage his own resources. In Venezuela today, the government has locked down all food production and is rationing out necessary supplies through sophisticated electronic tracking due to economic crisis. Make no mistake, America is just as vulnerable to financial disaster as any Third World nation, if not more so. Resource management will be the inevitable result. In fact, the Obama administration has already positioned itself for resource management through his National Defense Resources Preparedness Executive Order. Government officials will call preppers “hoarders” and argue that no one person should be allowed to have more than he needs.  Once again, the argument will be that the self preservation mentality of individuals actually harms the collective.

  Centralized Economy

  We already have a centralized and socialized economy for the most part, but private trade and production are still possible. Central planning is designed to wipe out alternative forms of trade and subsistence so that all people can be made dependent on the singular state. As in Venezuela, we should expect that economic declines will be used as a rationale for a clampdown on individual trade. The only way to fight these kinds of measures is for average people to become avid producers and be willing to fight back physically against confiscation and government-controlled rationing.

  Beyond trade controls, centralization will culminate in economic “harmony” through multilateral currency schemes, ending in a one-world currency. A single currency system by default calls for a single economic authority, and this by default calls for a single political authority. A one-world currency is not only a fiscal coup for central planners; it is also a stepping stone toward world government.

  Cashless Society

  A cashless system is a kind of unholy grail for central planners because it allows for total control of economic trade. Electronic-based currency systems can be dictated from the comfort of a computer, and savings can be erased or limited arbitrarily. Cashless systems also allow banking structures to operate without the normal consequences of supply and demand fundamentals. Today, even in our massively corrupt financial system, one cannot get around the concrete effects of diminishing demand, endless debt obligations and criminal fiat creation. We are seeing these effects vividly so far in 2015, just as we saw then in 2008. In a completely cashless system, though, debts can vanish, capital can be stolen and shifted away from the public in a more precise manner, taxes can be excised without waiting for taxpayers to comply, and demand can be artificially generated with digital fiat directed to the correct accounts without any trail to follow.

  Of course, there will be damages. But, those damages will be foisted upon the general public incrementally until Third World living standards become normal, and no one will be the wiser after a couple of generations. Control of the population would be absolute, while any dissent could be met with immediate financial reprisal, as activists are sentenced to starvation.

  The examples listed above may be measured as extreme, but every single one has support within our existing government structure either legally or through actual programs already being implemented. The speed at which they might occur is an unknown, but the desire for them by central planners is absolutely certain. There is no good or benevolent form of central planning. There is no scenario in which the system will not be abused because such power concentrated in the hands of any group of human beings invites abuse. Therefore, the only prudent course, the only solution to the absolute terror of complete state power, is to reduce government down to a shell of its current size or to remove its existence entirely and focus on localized systems and independent trade and infrastructure development. If the federalized state as an edifice no longer exists, then it can no longer be exploited by evil people.

  

  

  

  

  

• Meet Wesley Edens, The New "Subprime King"

  In early March, something terrible happened and almost no one noticed. 

  Springleaf, the subprime lending unit of AIG (the poster child for misjudging credit risk via CDS) bought OneMain, another subprime lender that’s been relegated to Citi’s Citi Holdings trash bin for years. We called it a “match made in subprime hell.” And we were right. 

  Both Springleaf and OneMain are in the personal loan business, which means they lend relatively small amounts to borrowers who use the money for all manner of things. Some of these loans are then run through Wall Street’s securitization machine. The result: paper which generally falls into the always treacherous “other” or “esoteric” category of the consumer ABS space. So far, 2015 has seen about $10 billion in supply and total issuance of consumer ABS backed by “other” credits should come in at around $30 billion for the year – that’s up sharply from just $13.2 billion in 2014. As we discussed in detail when the deal first hit the wires, Springleaf and OneMain have together spearheaded the unlikely re-emergence of ABS backed by subprime personal loans. In 2013 for instance, Springleaf did a $604 million ABS deal backed by nearly 200,000 personal loans (average FICO 602) with maturities ranging from 2-4 years and carrying fixed rates as high as 35%. Springleaf was back at it not four months later, contemplating another $400 million ABS deal. In 2014, the company set up two VIEs for the purpose of selling almost $900 million in ABS backed by consumer loans, and in February, the company priced a $1.16 billion deal. For its part, OneMain did a $760 million deal in April of last year (backed by quite a few unsecured loans) followed by a $1.2 billion dollar deal around three months later. The company went on to do 2015’s first securitization backed by consumer loans, a January deal that was upsized to $1.2 billion. 

  The important point here is that before Springleaf and OneMain’s efforts these deals were dead. As we said more than two years ago, “one thing that was hardly ever sold even in the peak days of the 2007 credit bubble were securitizations based on personal-loans, the reason being even back then everyone’s memory was still fresh with the recollection that it was precisely personal-loan securitization that was at the core of the previous, and in some ways worse, credit bubble – that of the late 1990s, which resulted with the bankruptcy of Conseco Finance.”

  Earlier this month, Springleaf disclosed that the deal for OneMain may be delayed because unsurprisingly, the Justice Department has “expressed potential concerns.” In what might very well be an effort to put a friendly face on what otherwise looks like an attempt to create a subprime lending powerhouse with some $14 billion in possibly-toxic receivables, Wesley Edens, chairman and co-founder of Fortress Investment Group, which has a majority stake in Springleaf took advantage of a profile piece in WSJ to remind the world that it’s “not a shameful thing helping people finance themselves” – even at 26%. Below are some notable excerpts from the piece. Consider Edens’ comments along with what we’ve said above, and draw your own conclusions.

  Wesley Edens still rues his decision not to bet against subprime mortgages before the financial crisis. That left Fortress Investment Group LLC, the private-equity and hedge-fund firm where he is co-founder and co-chairman, exposed to big losses that sank its stock price below $1.

   

  On Wall Street, the best way to get over a losing trade is to bounce back with a winner. Mr. Edens is enjoying a surprising whopper: subprime loans.

   

  A resurgence in loans to Americans with scuffed or limited credit is giving Fortress one of the largest financial windfalls in the history of the private-equity industry.

   

  The New York company’s majority stake in subprime lender Springleaf Holdings Inc. has ballooned in value to $3.5 billion—putting the firm’s gain at more than 27 times Fortress’s original investment of $124 million in 2010. Buying the stake was Mr. Edens’s idea.

   

  The giant gains have helped offset recent stumbles by Fortress in its “macro” hedge-fund business—and made Mr. Edens the new subprime king.

   

  

   

  “It’s not how I want my epitaph to read,” he says of the label, “but it’s not a shameful thing helping people finance themselves. It’s not a bad thing.”

   

  Today’s expanding subprime-loan market is different from the last one. This boom is fueled largely by auto loans, credit cards and personal loans, which appeal to borrowers straining under the limp economic recovery and puny wage gains.

   

  More than one-third of all auto, credit-card and personal loans from the start of January to the end of April went to subprime borrowers, according to the latest available data from credit-reporting firm Equifax Inc. That is the highest percentage since 2007.

   

  Lenders made 53.7 million auto, credit-card and personal loans in the first four months of 2015, up 46% from 2010. Originations of personal loans, like those made by Springleaf, are up 22% in the same period.

   

  Mr. Edens and other Fortress executives are pushing hard to get even bigger in subprime lending. In March, Springleaf agreed to pay Citigroup Inc. about $4.25 billion in cash for the bank’s OneMain Financial unit.

   

  If the deal is completed, Springleaf would become the largest lender focused on subprime in the U.S., with about 2.5 million customers and 2,000 branches.

   

  Mr. Edens says Springleaf won’t contribute to a new subprime meltdown no matter how big it gets. The reason: Unlike lenders who sank during the financial crisis, Springleaf says it verifies each applicant’s income and won’t make the loan unless it is sure the borrower can pay it back.

   

  “Lending to people without great credit wasn’t the problem,” he says. Instead, too many Americans got too much credit from lenders based on inflated real-estate values.

   

  “A lot of people live paycheck to paycheck, and if they don’t have financing it’s not good for the country,” Mr. Edens adds. “This is a more humane way of people dealing with credit.”

   

  Springleaf makes secured and unsecured personal and auto loans of as much as $25,000. All the loans have fixed interest rates. The average loan is about $4,300 and usually is repaid in 19 months. The company sees a potential market of 120 million Americans who need cash.

   

  The average interest rate on Springleaf’s loans is 26%. Consumer advocates criticize the high rates on many subprime loans and say lenders often pile on additional fees with products such as credit insurance. Many borrowers have to get new loans to pay off old ones, consumer advocates argue.

   

  Springleaf says high interest rates are needed because about 6% of its borrowers default each year. 

   

  Springleaf has benefited from banks’ skittishness about subprime personal loans. At the end of the second quarter, the company had 958,000 customer accounts, up 11% from a year earlier.

   

  Now the company is expanding in auto lending and other areas, though it has no current plans to make mortgage loans. Springleaf has told investors it will target customers with FICO scores of 500 to 750, especially those with scores of less than 699. 

  

  

  

  

  

• Is The Currency War Over? China Revalues Yuan 0.05% Stronger

  Heading into the China session, offshore Yuan signaled a 1% devaluation was on the cards. Of course, all media eyes were focused on the disaster in Tianjin but after 3 days of what was supposed to a 'one-off' adjustment, The PBOC has in fact surprised with a modestly stronger fix at 6.3975 from yesterday's 6.4010 Fix. That leaves the CNY Fix devaluation to a 4.60% loss in 4 day. Of course, its a bit hypocritical of Americans or Europeans to regard the Chinese as mean and nasty and currency warriors because they're letting their currency adjust against a constantly-devaluing dollar and euro. The US has been devaluing the dollar for years, but that's a-ok for Wesrern commentators, apparently. It appears – judging by the opening devaluation and closing intervention – that China is as set on crushing the herd of one-way carry traders as any export-enhancing currency debasement.

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3975 AGAINST U.S. DOLLAR
  • *PBOC YUAN REFERENCE RATE STRENGTHENS 0.05%

  

  Offshore Yuan signalled some further devaluation was coming… no matter how much The PBOC denies its 10% goal…

  

   

  Note the last 2 days have seen intervention at the close of the day – shaking out as many carry traders as possible…

  

   

  Chinese stock futures are rising modestly after the week-long drift lower..

  *  *  *

  Finally, here is an interesting Austrian perspective on why China devalued the Yuan (via The Menger Center's Paul-Martin Foss),

  Taking a look at this chart of the Dollar/Yuan exchange rate, you can understand why the Chinese government took the action that it did. The chart is denominated in yuan to dollars. The more yuan per dollar, the weaker the yuan and the stronger the dollar; the fewer yuan per dollar, the stronger the yuan and the weaker the dollar. You can see that the yuan has been continuously strengthening over the past ten years. Remember that as a currency strengthens, exports from that country become more expensive. A good that cost 100 yuan back in 2005 would mean a dollar cost of a little over $12. A 100-yuan good today would cost over $16. That’s why the Chinese government originally tried to keep the yuan pegged to the dollar, so as not to make the exports it relied upon for economic growth more expensive abroad. But after much pressure from the US and other Western countries, the government depegged the yuan, allowing it to trade in a narrow band and appreciate against the dollar.

   

  

   

  Remember the dynamic that was going on, too. Chinese firms would export to the United States. US importers would pay Chinese firms in dollars. Those dollars would come back to China, where the exporters wanted to change them into yuan. Now what to do with all those dollars? Well, the Chinese government used them to purchase US Treasury bonds. Of course, the US wanted to take advantage of this, so the Federal Reserve created even more money out of thin air, increasing the money supply, with more and more of those dollars going overseas to purchase Chinese goods. And then the Chinese government would soak up more of the US government’s debt. Cheap goods and our debt is covered? That’s a win-win in any government’s book.

   

  Take a look at the chart of the M2 money supply, the broadest money supply measure the Fed still publishes.

   

  

   

  As the M2 money supply increases (devaluing the dollar), it seems that the yuan strengthens against the dollar. If you look at the actual data behind these charts, there’s a -0.91 correlation between M2 and the yuan/dollar exchange rate over the past 10 years. If you strip out the new pegging period from mid-2008 to mid-2010, there’s a -0.96 correlation from mid-2005 to mid-2008, and a -0.85 correlation from mid-2010 to today, which rises again to -0.96 if you remove the data from the interventionist period beginning in early 2014. Yes, correlation doesn’t equal causation, but these numbers aren’t mere coincidence. The US government wanted to take full advantage of the dollar’s position as the world’s reserve currency, exporting dollars to China in exchange for cheap consumer goods, while simultaneously making US exports of capital-intensive goods to China cheaper.

   

  Any American reactions to China’s devaluation moves must be seen as hypocritical. Just as the US government took advantage of the Bretton Woods system to print more dollars than it had gold, it has engaged in a similar beggar-thy-neighbor policy with respect to China, exporting devaluing dollars to China in exchange for Chinese-made goods. It is perfectly understandable that China would rather not have its monetary policy guided by decisions made in Washington. All the hand-wringing in Washington is just for show. American politicians wanted to enjoy the benefits of inflation, getting something for nothing, and they don’t want it to stop. So they try to paint China as the bad guy for reacting to loose American monetary policy. It goes without saying that none of this would be an issue if we could just get government out of the money creation business. But that’s a story for another day.

  *  *  *

  As The Mises Institute's Ryan McMaken sums up:

  China has devalued the Yuan for the third day in a row. For many, this has aroused fears of a currency war. But, its a bit hypocritical of Americans or Europeans to regard the Chinese as mean and nasty and currency warriors because they're letting their currency adjust against a constantly-devaluing dollar and euro. The US has been devaluing the dollar for years, but that's a-ok for Western commetators, apparently. Now, as Frank Hollenbeck has pointed out, devaluing the currency to favor exporters is a bad idea, but that's nevertheless what Europe, the US, and Japan have been doing for years – unofficially. The fact that China is now trying to get in on the game is just the expected outcome of the current global monetary race to the bottom…

  * * *

  So China rattled its monetary sabre… wobbled a few EMs, crushed European carry trades, and flexed its muscles by not turning up at today's 30Y auction in the US… message sent loud and clear?!

  

  

  

  

  

• Neocon 'Godfather' Warns Against "Too Much Transparency" In Government

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Although he’s attempted to distance himself from it in recent years, there is little doubt about the role American political scientist, Francis Fukuyama, has played in popularizing the cancerous ideology know as neo-conservatism.

  In case you harbor any doubts, he was one of the signatories to Bill Kristol’s infamous open letter to George W. Bush on September 20, 2001, which amongst other things, argued for military involvement in Iraq. A move that ultimately manifested in 2003, and represents one of the greatest foreign policy blunders in U.S. history. Here’s the Iraq section from that letter, signed by Mr. Fukuyama:

  We agree with Secretary of State Powell’s recent statement that Saddam Hussein “is one of the leading terrorists on the face of the Earth….” It may be that the Iraqi government provided assistance in some form to the recent attack on the United States. But even if evidence does not link Iraq directly to the attack, any strategy aiming at the eradication of terrorism and its sponsors must include a determined effort to remove Saddam Hussein from power in Iraq. Failure to undertake such an effort will constitute an early and perhaps decisive surrender in the war on international terrorism. The United States must therefore provide full military and financial support to the Iraqi opposition. American military force should be used to provide a “safe zone” in Iraq from which the opposition can operate. And American forces must be prepared to back up our commitment to the Iraqi opposition by all necessary means.

  Of course, what Mr. Fukuyama is most famous for, is the ridiculous assertion in his book, The End of History and the Last Man, that the worldwide spread of liberal democracies and free market capitalism of the West and its lifestyle may signal the end point of humanity’s sociocultural evolution and become the final form of human government.

  Not only is such a concept infantile on it’s face, but it has already been proven completely wrong. Not only have all Western liberal democracies morphed into grotesque neo-feudal, surveillance state panopticon oligarchies since he wrote the book, but we are seeing a dramatic spread of ISIS throughout the Middle East, ironically birthed from the unnecessary war he encouraged.

  I still don’t know why Mr. Fukuyama is celebrated, other than perhaps to serve as some flimsy celebrity-intellectual backing for the status quo’s favorite pastimes — war mongering and authoritarianism.

  In case you still harbor any doubts about who this guy is, and where he is coming from, he recently wrote an Op-ed in the Financial Times arguing that too much government transparency is a bad thing.

  It is clear that there are vast areas in which modern governments should reveal more. Edward Snowden’s revelations of eavesdropping by the National Security Agency has encouraged belief that the US government has been not nearly transparent enough. But is it possible to have too much transparency? The answer is clearly yes: demands for certain kinds of transparency have hurt government effectiveness, particularly with regard to its ability to deliberate.

   

  The problem with the Freedom of Information Act is different. It was meant to serve investigative journalists looking into abuses of power. But today a large number of FOIA requests are filed by corporate sleuths trying to ferret out secrets for competitive advantage, or simply by individuals curious to find out what the government knows about them. The FOIA can be “weaponised”, as when the activist group Judicial Watch used it to obtain email documents on the Obama administration’s response to the 2012 attack on the US compound in Benghazi.

   

  In Europe, where there is no equivalent to the FACA or the Sunshine Act, governments can consult citizens’ groups more flexibly. There is, of course, a large and growing distrust of European institutions by citizens. But America’s experience suggests that greater transparency requirements do not necessarily lead to more trust in government.

  Oh yes Francis, and look how well Europe has turned out.

  Given that “transparency” has such positive connotations, it is hard to imagine a reversal of these measures. But the public interest would not be served if the internal deliberations of the US Federal Reserve or the Supreme Court were put on CSPAN, as some have demanded. 

  Maintaining Federal Reserve secrecy seems to be right on the tip of his tongue. Very interesting.

  Legislators and officials must preserve deliberative space, just as families need to protect their privacy when debating their finances or how to deal with a wayward child. And they need to be able to do so without donning a straitjacket of rules specifying how they must talk to each other, and to citizens.

  What monumental nonsense. Once a neocon, always a neocon.

  

  

  

  

  

• The College Bubble 2.0

  On Monday, we got some color on Hillary Clinton’s $350 billion plan to make college more affordable.  As we recently noted, students and former students across the country owe more than $1.2 trillion in college loans – doled out by our government in the name of helping high school graduates further their education, and as Bill Ackman so eloquently put it earlier this year, "there’s no way they’re going to pay it back." But at this point, extra funding is backfiring. Half of young graduates are either unemployed or only working part-time, which is a startling sign that the jig is up. In conjunction with the poor economy, new technology, developing markets killing jobs, and the massive increase in applicants with degrees, the value of college degrees is drastically falling in the economy of today. College is in a bubble, and it is going to pop soon…

  The following video should open a few more eyes to the startling crisis facing today's young adults and the American higher education system…

  *  *  *

  And as we recently noted, one hedge fund is attempting to take advantage of that, hoping for the next "Big Short."

  These worries showed up earlier this year when Moody’s put billions in student loan-backed ABS on review for downgrade. Many of the deals in question are sponsored by loan servicer Navient, which was spun off from Sallie Mae in 2014. 

  Now, one Boston-based hedge fund is building a short position on what it says is "runaway inflation in post-secondary education" by shorting the likes of Navient and other names tied to to the student loan bubble.

    Here’s Bloomberg with more:

  FlowPoint Capital Partners, the $15 million hedge fund co-founded by Charles Trafton, is betting against companies such as student-loan servicer Navient Corp. to profit from what it calls a college bubble bursting in slow motion.

   

  The Boston-based firm is building positions against stocks of textbook publishers, student lenders and real estate companies that focus on college housing, Trafton said in an interview. Changes in the more than $1 trillion student loan market could hurt companies such as Navient, Sallie Mae and Nelnet Inc., according to a July investor letter from the firm.

   

  Businesses "levered to runaway inflation in post-secondary education are susceptible to growth and margin shocks," the firm wrote in the letter.

   

  

  So there, ladies and gentlemen, is one way to trade the bubble if you believe expecting the nation's graduates to somehow fork over $1.2 trillion is unrealistic in a job market where landing a gig as "head bartender" is sometimes the best one can hope for if you happen to have majored in anything other than petroleum engineering. 

  We wonder how many hedge funds are hard at work with Wall Street creating customized deals full of the worst student loan credits they can find with the sole intention of betting against them.

  

  

  

  

  

• Greek Parliament In Eleventh Hour Discussions On Bailout- Live Feed

  Greek lawmakers are now set to vote on the final draft of the country’s third bailout program. If the proposal doesn’t clear parliament, eurozone finance ministers will likely delay implementation of the ESM program, setting up the possibility that Athens will be forced to tap the remaining funds in the EFSM for a bridge loan in order to make a €3.2 billion payment to the ECB next week.

  More from Bloomberg:

  Greece will be forced to accept a bridge loan if lawmakers don’t approve the country’s bailout before a meeting of euro-area finance ministers later Friday, Finance Minister Euclid Tsakalotos says in parliament.

   

  Euro-area finance ministers late won’t sign off on plan if it hasn’t yet been passed through Greek parliament.

  As a reminder, the MOU includes around 40 new laws, including what Kathimerini describes as “a barrage of new taxes.” Here’s a rundown: 

  A diesel fuel tax for farmers going from 66 euros per 1,000 liters to 200 euros/1,000 liters from October 1, 2015, and to 330 euros by October 1, 2016. Farmers’ income tax to be paid in advance will rise from 27.5 percent to 55 percent. Income tax for farmers is set to rise from 13 to 20 percent for 2016 and to 26 percent for 2017.

   

  Freelancers will be subject to a gradual increase from 55 to 75 percent in advanced tax payments for income earned in 2015, increasing to 100 percent in 2016. The 2 percent tax break for single payments on income tax is also being abolished from January 1, 2015.

   

  Private education, previously untaxed, will be taxed at 23 percent, including the tutoring schools (frontistiria) that most Greeks send their children to but excluding preschools. Reduced value-added tax rates for islands are to be abolished completely by the end of 2016, with enforcement staggered across three groups of islands from October 1, 2015 to January 1, 2017.

  As we noted earlier, expect some MPs in Tsipras’ coalition government to vote against the deal (incidentally, Panagiotis Lafazanis announced the formation of a new “political movement” today), but between the PM’s call for an end to Syriza infighting earlier this month and the support of opposition parties, the bailout will likely pass.

  Live feed: 

  Full bailout documents

  Greek Bailout Draft

  

  

  

  

  

• Don't Look Now, But The Subprime Auto Bubble May Be Bursting

  Well, it’s official: the cat is out of the bag on what’s “driving” (no pun intended) record US auto sales.

  Anyone who frequents these pages is by now well-versed in the idea of “originate to sell.” It’s the dynamic that helped create the housing bubble and it’s now in full effect in the auto loan space. 

  The concept is simple. When demand is strong for paper backed by a particular type of asset, Wall Street obliges by cranking up the securitization machine. Thanks in part to the Fed-induced hunt for yield demand for auto loan-backed ABS has been strong. Supply should come in at around $125 billion this year – that’s up 25% from 2014 and accounts for more than half of total consumer loan-backed issuance. Here are the latest projections from BofAML:

  

  In this environment, competition among lenders keen on getting in on lucrative securitizations heats up – the more fierce the competition, the less scrupulous the underwriting and before you know it, you’ve got tens if not hundreds of billions in paper floating around backed by loans to underqualified buyers. 

  It doesn’t take a securitized products strategist to figure out what happens next (although as Ben Bernanke showed us in 2006, it is apparently far too complex for a PhD economist). Borrowers who never should have been given loans in the first place start to default and the ABS collateral pools quickly transform from collections of pristine credits to steaming cesspools. 

  We’ve talked until we’re blue in the face about the lunatic terms being extended to buyers in the auto market, but the following bullet points (derived from Experian’s Q1 data) are always worth recapping:

  • Average loan term for new cars is now 67 months — a record.
  • Average loan term for used cars is now 62 months — a record.
  • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
  • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
  • The average amount financed for a new vehicle was $28,711 — a record.
  • The average payment for new vehicles was $488 — a record.
  • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

  That’s the story and it’s one we’ve told before, but just so it’s clear that everyone else is now catching up, here’s Bloomberg with a summary of a new Nomura note:

  Losses on car loans taken out by bad-credit borrowers are continuing to climb, thanks in part to the flood of rookie auto finance companies that have entered the market in recent years. You can see the rise in subprime borrowers struggling to make car payments in monthly data on bond deals sold on Wall Street. So-called subprime auto asset-backed securities (ABS) bundle together car loans and then sell them to big investors.

   

  July reports show that annualized net losses on such bonds—a measure of the cost of bad debt—rose 1.45 percentage points over the past year to reach 6.6 percent last month, according to Nomura analysts.

   

  What’s driving the rise? Nomura has an idea.

   

  “The significantly weaker performance in the subprime auto sector is being driven by an increase in issuance from the lesser established issuers,” researchers led by Lea Overby said in a report.

  Smaller, newer bond issuers fueled 37 percent of the sales of subprime bonds last year, up from 27 percent in the previous year, according to Nomura’s figures. 

   

  
  

   

  As the small upstarts fight for market share, the concern is that they’ll lower their standards too much and drag established lenders with them, inviting even greater trouble down the line. Many of the new players are backed by the biggest private-equity firms, which are under pressure to produce relatively quick returns.

  For those curious to learn more about these “small upstarts” who may be “lowering their standards too much,” look no further than “Meet Skopos Financial, The New King Of Deep Subprime,” excerpts from which are included below.

  *  *  *

  Texas-based Skopos Financial has both raised and lowered the bar at the same time by setting a new standard for what counts as questionable collateral while simultaneously proving that in a NIRP world, investors are willing to plumb the FICO depths for yield.

  Via Bloomberg:

  Skopos Financial, a four-year-old auto finance company based in Irving, Tex., sold a $149 million bond deal consisting of car loans made to borrowers considered so subprime you might call them—we dunno—sub-subprime?

   

  Details from the prospectus show a whopping 20 percent of the loans bundled into the bond deal were made to borrowers with a credit score ranging from 351 to 500—the bottom 6 percent of U.S. borrowers, according to FICO. As a reminder, the cut-off for “prime” borrowers is generally considered to be a credit score of around 620. More than 14 percent of the loans in the Skopos deal were made to borrowers with no score at all.  That means the Skopos deal has a slightly higher percentage of no-score borrowers than the recent subprime auto securitization recently sold by Santander Consumer, which garnered plenty of attentionfor its dive into “deep subprime” territory.

   

  
  

  Who is Skopos Financial you ask? We’ll let them tell the story in their own words:

  In 2011, Skopos Financial opened its doors with one goal in mind making tough, deep subprime auto loans easier to finance for dealers.

   

  Leveraging our sophisticated, patented iLender technology and visionary management team, Skopos provides a streamlined process for franchise dealers to finance customers with low credit scores.

    

  As an indirect auto lender, Skopos offers solutions for car buyers with no credit, low FICO scores, or a previous bankruptcy, repossession or foreclosure. And the best part is the speed. Skopos’ dealers enjoy fast underwriting, fast approvals and fast funding.

  Yes, the “best part is speed.” We suppose the process is quite efficient considering there appear to be no underwriting standards whatsoever. 

  As for the “visionary” management team, have a look at the following profiles which seem to indicate that at least for some industry veterans, Santander Consumer isn’t quite subprime-y enough (note that there’s a Countrywide link in there as well for good measure):

  

  

  

  

  

  

• Gold, The Fed, Exter’s Pyramid – When John Exter Met Paul Volcker

  Submitted by GoldCore

  Gold, The Fed, Exter’s Pyramid – When John Exter Met Paul Volcker

  We have a fascinating dialogue with many readers. One of our readers living in the U.S. has first hand experience of people involved at the highest levels of the Federal Reserve. He is very concerned about the astronomical levels of debt in the U.S. and internationally and the fact that this debt continues to balloon in a completely unsustainable way.

  

  With his permission, we are publishing his recent email to me (mark.obyrne at goldcore.com) in its entirety. It is about a private meeting between ex-New York Fed Vice President John Exter and ex Fed Chairman Paul Volcker. We have added a few images in order to help understand the gravity of the building financial and monetary risks of today.

  Hi Mark,

   

  While reading your piece last week on the US Federal debt having reached $18 trillion, it brought back my memory of a visit John Exter and I had with Fed Chairman Paul Volcker, back in 1981.  It was a instance I’ll never forget!

   

  John and I had a mutual billionaire widow client whose husband had been a Washington DC real estate magnet. He had died suddenly and she decided she wanted to have a part of her assets in physical gold and mining stocks. I recall she set the allocation at $50 million.

   

  The widow had us travel to DC for a morning consultation followed by a luncheon. It was early April 1981 and 91 day US Treasury Bill rates were near 18%.

   

  Our luncheon ended around 1:30 PM and we had a few hours to kill before our flight back to New York.

   

  John Exter and Paul Volcker knew each other having been at the New York Fed as Vice Presidents and John decided he’d phone Volcker to see if he could see us before our return flight. Volcker took the call, said he would cancel his afternoon engagements and to come right over to the Fed. We got to the Fed and there were 36? high lumber piles of one foot long 2?X4? pieces all around Volcker’s office and the offices of his staff. Sky high interest rates had turned the construction industry down and the masses of unemployed construction workers were mailing Volcker the 2X4 pieces with nasty messages written on them in protest of the high rates.

   

  John and I were at the Fed in a private conversation with Volcker for nearly three hours and in fact we nearly missed our flight because we stayed so long.

   

  US Federal debt, in 1981 was rising through the $1 trillion level and I remember Volcker lamenting over the situation and asking John what he would recommend to get a handle on Federal spending. John gave Volcker a stern lecture on the Fed’s expansionary policies and told him the Fed would eventually end up destroying the whole American economy and the dollar because the Fed had become a prisoner of it’s own expansionism and it was something it couldn’t stop. John and Volcker discussed all the pitfalls of Keynesian and monetarism and Volcker didn’t rule out an eventual collapse of the dollar and second deflationary depression. I remember Volcker asking John when he would begin dropping short term rates and John commented that rates would have to drop soon or else the economy would fall off a cliff. It’s interesting that it wasn’t long after our session that rates started to come down.

   

  The meeting was an experience of a lifetime for me to be sitting there in Volcker’s office listening to one gold standard economist central banker conversing with a Keynesian economist central banker. John Exter spelled out his scenario for Volcker and warned him of how badly the Keynesian experiment would end if it went on for an extended period of time. Volcker just sat there and listened and showed his concern.

   

  Here we are 33 years later with US Federal Debt of $18 trillion with the country’s GDP at $17 trillion. A pretty disturbing situation, to say the least!

   

  

   

  Volcker has joined my old club The Pilgrims of the United States which is based out of New York. I’ve been a member for nearly 40 years but don’t get back for meetings and events because of the travel distance. I hear Volcker goes to all the events and a fellow Pilgrim friend has approached him at meetings and when the late John Exter’s name is mentioned Volcker stops and has nothing but kind things to say about him.

   

  Thought you’d be interested in learning of my anecdotal experience.

   

  Best regards,

  —————-

  When reading this, some will say that this was in the past and these are different times and may not understand this warning from our recent history. However, it offers a lesson from the past that has significant relevance for today. The debasement of currency has ended in economic debacles in every single country, in every single instance throughout history.

  Today, we see currency debasement internationally on a global scale – this has never happened before and has never been seen throughout history. The uber Keynesians attack those who warn about monetary risks and proclaim that none of the ‘goldbugs’ warnings have come to pass. Except of course, possibly the worst financial crisis that the world has ever seen and meager, unsustainable recovery.

  We would caution that ‘yet’ may be the appropriate word here and we should all be vigilant and focus on the long terms risks – not the short term panaceas, tentative recoveries and massive asset bubbles of today.

  

  

  

  

• This Is One Way China Deals With Its Massive Auto Excess Inventory

  Inventories of US autos in China recently exploded, as sales collapsed, leaving 1000s of vehicles gathering dust in Chinese ports… such as Tianjin. With credit collapsing – except for buying stocks on margin – it appears the Chinese have found an alternative way to drawdown that inventory…

   

  

  

  

  

   

  With inventories at record levels…

  

   

  And inventories-to-sales flashing recession red. One wonders if Automaker management 'hopes' for some more apocalyptic scenarios in global ports to drawdown this stack of vehicles that no one is buying.

  

  

  

  

  

• Oil Flash Crashes To Gundlach's Geopolitically "Terrifying Levels"

  Forced liquidation… capitulation … contract roll… or “liquidity provision” gone awry? You decide.

  

  As Nanex puts it “you said you needed to go faster to provide liquidity. This chart determined that was a lie.”

  *  *  * 

  And don’t forget: in a January interview with FuW, DoubleLine’s Jeff Gundlach explained his concerns about the oil market not being “unequivocally good” for everyone…

  Question: The crash in the oil market is already causing jitters in the financial markets around the globe. What is your take on that?

   

  Gundlach: Oil is incredibly important right now. If oil falls to around $40 a barrel then I think the yield on ten year treasury note is going to 1%. I hope it does not go to $40 because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be – to put it bluntly – terrifying.

  Gundlach is right historically… large and rapid rises and falls in the price of crude oil have correlated oddly strongly with major geopolitical and economic crisis across the globe. Whether driven by problems for oil exporters or oil importers, the ‘difference this time’ is that, thanks to central bank largesse, money flows faster than ever and everything is more tightly coupled with that flow.

   

  

   

  So is the 50%-plus YoY drop in oil prices about to ’cause’ contagion risk concerns for the world?

  

  

  

  

  

• Behind The Scenes Of The Donald Trump – Roger Stone Show

  Submitted by Mark Ames, and originally published on Pando,

  

  It was just after liftoff on the flight from San Francisco to New York that Roger Stone’s face appeared on the back of Seat 9D, looking straight at me.

  Gah! Did my Virgin America flight crash? is Roger Stone’s satellite-fed face my eternal punishment? The power of Christ compels you! The power of Christ compels you!…

  But it was just CNN, a more familiar kind of Hell, and a deadlier one. Not what you want on your exit row TV monitor when you’re nursing a tequila hangover: Stone was giving a Big Exclusive interview to a bright white CNN bot named Poppy Harlow, a Heathers type who famously grieved on-air for the Steubenville rapists, “who had such promising futures, star football players”…

  The big story: Trump fired Roger Stone from his campaign, or Roger Stone quit, depending on whom you believed (which, if you believe either Trump or Roger Stone, please contact me—I have a new Florida Swampland real estate app to sell you).

  Somehow I’d missed the earlier news that Roger Stone—Dick Nixon’s dirty trickster, fascist fan of Roy Cohn, lobbyist for some of the worst dictators in the world—was running Trump’s campaign until last weekend. Or maybe I blocked it out—maybe I didn’t want to know, a sign of just how far I’ve reassimilated myself back into mainstream America’s comforting amnesia bubble.

  The problem is, I know the Roger Stone story a bit too viscerally well. I even had a brief brush with Mr. Stone during the last presidential election cycle. He responded to a post mortem I wrote on Gary Johnson’s fraudulent 2012 run for president on the Libertarian Party ticket—a political swindle that Stone managed, and whose presence led me to dig deeper into the cesspool of modern third party fake-politics.

  After my article came out in NSFWCORP [now owned by Pando], Roger Stone tweeted this compliment at me, calling me “asshole”:

  @MarkAmesExiled Many, many thanks for spelling my name right, asshole.

  — Roger Stone (@RogerJStoneJr) November 9, 2012

  Now to most ordinary folks, a political operative calling a journalist “asshole” looks rather offensive, even scandalous. It’s considered part of his charm, among journalists who tend to come from a pampered class that is easy prey to the charms of a vicious DC thug whose peculiar bluff—“telling it like it is,” crude, macho, is “refreshingly reckless” by the chickenshit standards of most of today’s journalists…

  If you know where Roger Stone comes from, it’s the closest thing to a compliment his species is capable of. Imagine a real life Repo Man guy, only without any of the lower-middle-class fun or the punk rock soundtrack—a monumentally sleazy, pro-business, Republican Party/Chamber of Commerce sewer rat version of the Harry Dean Stanton character, the only version that could possibly thrive in this cheerless, unheroic version of America that we’re stuck in.

  Roger Stone’s involvement in Trump’s run for office today is good news for anyone interested in politics who’d like an early-season bullshit cleanser. The more you know about Stone’s (and Trump’s) history, the harder it is to trust the surface, and even harder to trust the margins of that surface – those spaces on the left and right where we’re told each election season are where the real politics are at –but in fact are so rotten and so easily manipulated you almost wish you didn’t know.

  The three main takeaways you need to keep in mind in the Roger Stone-Donald Trump story are:

  1. Roger Stone’s dirty tricks specialty is manipulating voter fractures, and weaponizing anti-establishment politics to serve the electoral needs of mainstream Republican candidates;
  2. Roger Stone and Donald Trump have been working together since the mid-1980s, mostly on sleazy campaigns to help Trump’s casino business, but also in politics;  
  3. Roger Stone and Donald Trump worked together in at least two major “black bag” operations manipulating anti-establishment politics to help the mainstream Republican presidential candidate;

  First let’s start with a brief history of Roger Stone’s dirty tricks—although “dirty tricks” is one of those euphemisms that makes it sound almost fun, rather than depressing and vile. Stone got his start as a hippie-bashing Young Republican college student in the early Nixon years. He eagerly volunteered to work for Nixon’s CREEP (Committee to RE-Elect the President) operatives, who set up and funded a number of illegal campaign operations in 1971-2 to make sure that Nixon won the 1972 election.

  Political spooks are a lot like government spooks and their buddies in the underworld—they boast and bullshit a lot, and some of them, like Stone, ham it up as a bluff to swooning journalists. So it’s hard to know exactly which dirty tricks the young Roger Stone was personally responsible for, but the Nixon CREEP team that he was recruited to work for definitely was responsible for destroying the 1972 candidacy of Sen. Edward Muskie of Maine, the candidate that the Nixon team feared the most.

  The way they destroyed Muskie will be useful for us today, because Muskie comes from one of the lily-white New England states vulnerable to attacks from the race-focused left, a strategy we’ll see more of in our time.

  One of young Roger Stone’s first dirty tricks for CREEP was sending a campaign check for $200 to liberal Republican congressman (and Wilson Sonsini co-founder) Pete McCloskey on behalf of the Young Socialist Alliance, and then forwarding a copy of the receipt to the publisher of the largest daily newspaper in New Hampshire, the Manchester Union-Leader. (Stone was supposed to write the check on behalf of the Gay Liberation Front, but he was too chickenshit about having his name associated with radical gays.)

  Other tricks he and his team were involved in—installing their own mole as Muskie’s personal driver, who then passed on all sorts of confidential documents back to the CREEP team, which then leaked some of them, inciting paranoia in the Muskie staff.

  The main thing is that Nixon and his team wanted Muskie out, the Democrats divided, and an unelectable leftist to emerge from the rubble as Nixon’s opponent. What’s painful to swallow is how successful they were in manipulating that outcome.

  It was Pat Buchanan who laid out the Nixon ‘72 strategy in a memo titled “Muskie Watch,” advising that the GOP attacks should “focus on those issues that divide the Democrats, not those that unite Republicans.” Buchanan argued:

   “It should exacerbate and elevate those issues on which Democrats are divided—forcing Muskie to either straddle, or come down on one side or the other.” 

  Another 1971 Buchanan memo reads,

  Maintain as guiding political principle that our great hope for 1972 lies in maintaining or exacerbating the deep Democratic rift.

  That “deep Democratic rift” referred to the far-right populist wing of the party in the South, led by George Wallace; and the left multiracial wing of the party, represented then by black congresswoman Shirley Chisholm, and by McGovern, who wound up winning the nomination.

  Buchanan argued that having Wallace—Alabama’s symbol of segregation—run from the far-right in the 1972 Democratic primaries (but not run in November as a third party candidate, which would hurt Nixon) would divide the Democratic Party, and turn voters off. Lo and behold, they succeeded in convincing Wallace to run in the Democratic primaries in a dirty quid pro quo, and Wallace was doing a good job of dirtying and dividing the Dems until a real-life Travis Bickle stuck his pistol out from a crowd and popped Wallace’s spinal cord.

  Another Nixon strategy was funding a black left run against the Democrats and against Muskie. Thanks to an amazing, deep-researched piece on Roger Stone on a site called italkyoubored.com, I came across some incredible passages that are a kind of open black box for contemporary politics—unless of course you think Nixon was an exception, and all those bad folks were punished and banished from our peaceable kingdom.

  In an October 5, 1971 memo, Pat Buchanan—co-founder of the American Conservative magazine & Nixon’s favorite killer, the kind of guy Roger Stone dreamed of becoming (and one day, destroying)—wrote:

  Top level consideration should be given to ways and means to promote, assist, and fund a Fourth Party candidacy of the Left Democrats and/or the Black Democrats….There is nothing that can so advance the President’s chances for reelection – not a trip to China, not four and a half per cent unemployment – as a realistic black…campaign….We should continue to champion the cause of the blacks within the Democratic Party.

  As luck should have it, Muskie was hounded at his Florida hotel room during the primaries there by “angry” black picketers—who were secretly under Nixon’s White House supervision—demanding, angrily, that Muskie agree to name an African-American vice presidential candidate. [Source: Rick Perlstein’s “Nixonland”] And just as Pat Buchanan and Nixon hoped – even pledging money to fulfill that hope – New York Democrat Shirley Chisholm announced her independent run for president, the first African-American woman to ever do so. In secret Nixon White House files, Chisholm’s candidacy was part of “Operation Coal”—one of several operations under the rubric “Operation Gemstone” which culminated in the bugging of Watergate, the Democratic Party campaign headquarters.

  It’s depressing to think it came out of White House conferences like this, recorded in the secret Nixon tapes:

  SEPTEMBER 14, 1971: THE PRESIDENT, HALDEMAN [CHIEF OF STAFF], AND COLSON [WHITE HOUSE SPECIAL COUNSEL], 12:37-1:32 P.M., OVAL OFFICE

   

  Nixon continues to rage about the IRS and his friends. Colson then joins the conversation, offering his special contributions to White House dirty tricks.

   

  COLSON

  
  

  Well, Bob Brown has some friends who are going to have signs around the Muskie rallies, [saying Carl] Stokes [the black mayor of Cleveland] for vice president. This raises the point—

   

  HALDEMAN

   

  I will hope the hell that Watts do go ahead with a black president candidate.

   

  PRESIDENT NIXON

   

  So do I.

   

  HALDEMAN

   

  In fact, Buchanan has come in with a suggestion that may make a lot of sense which is that — he says if we’re going to spend $50 million in this campaign, then 10 percent of it, $5 million, ought to be devoted—

   

  PRESIDENT NIXON

   

  To the fourth party.

   

  HALDEMAN

   

  —to financing a black—

   

  COLSON

   

  Shirley Chisholm and Julian Bond.

   

  PRESIDENT NIXON

   

  Do you think that the blacks will vote for a black party?

   

  HALDEMAN

   

  Some.

   

  COLSON

   

  A lot of them will especially if—

   

  HALDEMAN

   

  Just to show that the Democratic party has no one…But Pat’s point is we’ve got to get a viable candidate — only if they get a viable candidate. If they get a Julian Bond—

   

  PRESIDENT NIXON

   

  Well, let me suggest this. Might — $5 million would finance Eugene McCarthy.

   

  HALDEMAN

   

  Well, that’s Howard Stein is working on that. There’s a good story in the U.S News, Newsweek, or something. Stein has outlined the McCarthy plan which is that he is not going to enter the primaries but he’s going to do a major speaking tour next year will go to the convention as people — the Democratic convention as the people’s candidate. If, as is expected, he’s rejected by the convention, he will then go to the fourth party. The problem is that it’s too late then go to a fourth party. You have — it takes time to get a fourth party qualified…[Remember, Wallace? Wallace did a superb job. That’s why with a black party you’ve got to get started (inaudible), so they get qualified for—]

   

  PRESIDENT NIXON

   

  All right, Bob. Put that down for discussion — not for discussion but for action. They should finance and contribute both to McCarthy and to the black thing.

   

  COLSON

   

  That’s a helluva lot—

   

  PRESIDENT NIXON

   

  We’re recognizing that McCarthy — the black won’t take any votes from us. Just like the damn Democrats contributed to [George] Wallace in Alabama. They did, you know. Jesus Christ, they were praying for Wallace to win that primary.

   

  HALDEMAN

   

  Yeah.

   

  COLSON

   

  That’s a helluva lot better use of money than a lot of things.

   

  PRESIDENT NIXON

   

  Oh, we spent — waste money on all sorts of things.

   

  HALDEMAN

   

  Okey-doke. What he’s saying is, you know, instead of some television commercials—

   

  PRESIDENT NIXON

   

  Absolutely.

   

  HALDEMAN

   

  —we can do this.

   

  COLSON

   

  Or billboards.

   

  HALDEMAN

   

  Because we’re going to need the television commercials.

   

  [Excerpts from “Abuse Of Power: The New Nixon Tapes,” by Stanley Kutler; h/t to italkyoubored—M.A.]

  With bizarre attacks and pressure mounting on all sides and Muskie growing increasingly paranoid and peeved, Nixon’s dirty tricksters wound up destroying him in one of those weird insignificant little episodes that somehow get weaponized, go viral, and destroy the candidate. A Nixon CREEPer, maybe Roger Stone, sent a phony letter to the editor to the big New Hampshire newspaper on the eve of the all-important early primary there, claiming to be written by a Muskie supporter who claimed, falsely, that he’d met Muskie in Florida (where Nixon’s White House paid blacks to picket Muskie’s hotel), and asked Muskie how he could possibly understand the problems that black Americans face given the fact that his home state Maine has so few minorities.

  The fake letter, published on the front page of the Union-Leader, claimed that Muskie rudely responded that Maine did have its minorities: “Not blacks, but we have Canucks”—and at this, according to the fake letter, Muskie burst out laughing.

  As Rick Perlstein writes in Nixonland, the smear hit Muskie from two sides—pissing off blacks, but also New Hampshire’s sizable French Canadian community. As Perlstein explained, “Muskie thought of them [French Canadians], evidently, as New England’s niggers.”

  Shortly afterwards, Muskie had his alleged meltdown in front of reporters—as snow fell on his face, he lashed back at the Nixon White House, but some national reporters mistakenly described the melting snowflakes on Muskie’s face as tears, and described his anger as a “breakdown.” Muskie was finished. Sort of like how Vermont front-runner in 2004, Howard Dean, was finished off by the one-two of Dean’s screechy “woo!” gesture, and Al Sharpton accusing Dean of being anti-black during the debates.

  As it turns out, Al Sharpton entered the 2004 Democratic primaries on the payroll and orders of Roger Stone, who directed Sharpton’s attacks from the race politics-left against Howard Dean. And as the New York Times revealed that year, it was Donald Trump who took credit for introducing Al Sharpton — a one-time FBI informant — to his old friend and lobbyist, GOP dirty trickster Roger Stone.

  But I’m getting ahead of myself here. Let’s go back again to Roger Stone, young eager NixonJugend. After Nixon was tossed out, Stone found work as National Chairman for the Young Republicans, and doing black bag jobs for Reagan in the 1980 election against incumbent president Jimmy Carter. Stone’s proudest achievement in that election was working with Joe McCarthy’s henchman, Roy Cohn, and a mobster named Fat Tony Salerno to bribe New York’s biggest third party, the Liberal Party, to put on the ballot that election’s most popular third party candidate, John Anderson. Decades later, Stone still remembered Roy Cohn fondly:

  He didn’t give a shit what people thought, as long as he was able to wield power. He worked the gossip columnists in this city like an organ.

  Roger Stone wanted to get the main third-party candidate on the New York state ballot. John Anderson was one of those earnest midwestern centrist Republicans who’d pass for liberal Democrats today. Conventional wisdom at the time held that Anderson drew votes from fellow Republican Reagan, but private polling, and Roger Stone’s experience running “third party patsies” told him the real story: Anderson drained votes from the Dem Party president, Jimmy Carter.

  Stone’s problem was that John Anderson waited too long to get his name on New York state’s ballot. So working with Roy Cohn and Fat Tony, the Reagan campaign official bribed Liberal Party leaders to get them to place Anderson’s name on the ballot for them. Here is how Stone tells his story to the Weekly Standard:

  Stone, who going back to his class elections in high school has been a proponent of recruiting patsy candidates to split the other guy’s support, remembers suggesting to Cohn that if they could figure out a way to make John Anderson the Liberal Party nominee in New York, with Jimmy Carter picking up the Democratic nod, Reagan might win the state in a three-way race. “Roy says, ‘Let me look into it.’” Cohn then told him, “’You need to go visit this lawyer’—a lawyer who shall remain nameless—‘and see what his number is.’ I said, ‘Roy, I don’t understand.’ Roy says, ‘How much cash he wants, dumbfuck.’” Stone balked when he found out the guy wanted $125,000 in cash to grease the skids, and Cohn wanted to know what the problem was. Stone told him he didn’t have $125,000, and Cohn said, “That’s not the problem. How does he want it?”

   

  Cohn sent Stone on an errand a few days later. “There’s a suitcase,” Stone says. “I don’t look in the suitcase . . . I don’t even know what was in the suitcase . . . I take the suitcase to the law office. I drop it off. Two days later, they have a convention. Liberals decide they’re endorsing John Anderson for president. It’s a three-way race now in New York State. Reagan wins with 46 percent of the vote. I paid his law firm. Legal fees. I don’t know what he did for the money, but whatever it was, the Liberal Party reached its right conclusion out of a matter of principle.”

  [In retrospect, Stone] seems to feel pretty good—now that certain statutes of limitations are up. He cites one of Stone’s Rules, by way of Malcolm X, his “brother under the skin”: “By any means necessary.” “Reagan got the electoral votes in New York State, we saved the country,” Stone says with characteristic understatement. “[More] Carter would’ve been an unmitigated disaster.”

  In other words, Roger Stone is boasting about buying American democracy, using the mob and third party candidates. It’s funny, because during last week’s GOP debate, Trump bragged about buying off half the GOP candidates as well as Hillary Clinton and Nancy Pelosi, and gaining all the access he wanted by giving them cash…and he also refused to rule out running as a third party candidate.

  * * * *

  In 1988, Roger Stone was a Big DC lobbyist, working for Black, Manafort & Stone, whose list of dictator-clients included Zaire’s Mobutu, deposed dictator Ferdinand Marcos, Somalia’s deposed dictator, and the apartheid-backed Angolan death squad thug and witch burner, Jonas Savimbi. Stone got partial credit in creating the most notorious racist political ad in modern times to help elect George Bush Sr in 1988 — the Willie Horton ad, used to frighten white American voters into believing that a President Dukakis would open up the prisons and jails on weekends, allowing sexually-charged black criminals to run wild in white suburban neighborhoods, raping and strangling white women for kicks.

  By this time, Trump had already started working with Roger Stone. Both were big fans of Roy Cohn; both enjoyed talking like Goodfellas characters in public and watching the normals swoon over their macho act. But more than anything, both were interested in cashing in on the booming casino business.

  Sometimes this meant buying favors from politicians to get casinos opened; sometimes it meant running dirty campaigns to get rival casinos closed. This is what happened in 2000, when Trump and Stone were fined $250,000 for setting up a fake “family values” front group in New York, the Institute for Law and Society, to run a series of racist ads against a planned Indian casino in the Catskills that Trump feared would drain business from his casinos in Atlantic City.

  So Trump and Stone whipped up anti-Indian racism to protect Trump’s business. The ad they ran featured a dark photo of a hypodermic needle and drug gear, and the text warned:

  The St. Regis Mohawk Indian Tribe proposes to open a gambling casino at the Monticello Race Track in Sullivan County.

   

  How much do you really know about the St. Regis Mohawk Indians?

   

  Are these the new neighbors we want? The St. Regis Mohawk Indian record of criminal activity is well documented. This proposed Monticello Indian Casino will bring increased crime and violence to Sullivan County.

  That year, 2000, was a busy year for the Donald Trump-Roger Stone partnership.

  Stone had been hired by the George W. Bush campaign to carry out two major black bag jobs that we know of: Sabotaging the Florida recount vote, using a mob of “angry” Cubans and Republican “preppies” to storm a Miami-Dade recount and stop it in its tracks, which Stone — hired for the job by James Baker — succeeded in doing.

  How Roger Stone and Donald Trump destroyed George W. Bush’s potential rivals in 2000 is less well known. That year, George W. Bush faced two known threats, and Roger Stone was tasked with neutralizing them: Pat Buchanan, whose 1992 run nearly crippled Bush’s father in the primaries; and Ross Perot’s Reform Party, which drained enough votes in ’92 and ’96 to ensure Clinton victories.

  So in the lead-up to the 2000 election, Roger Stone cleverly cajoled Pat Buchanan into taking control of Perot’s Reform Party, then used his friend Donald Trump to run a rival campaign against Buchanan for the Reform Party candidacy—only to drop out of the race, and attack Buchanan’s Reform Party as a cesspool full of Hitler lovers and racists. Stone inserted moles like William Von Raab, secretly funded by Trump, into Buchanan’s campaign, according to the Village Voice.

  The operation wound up destroying the Reform Party’s brand and burying it for good, stinking it up too much for a late entry by Ross Perot. The Reform Party’s chairman, Pat Choate, called the “Trump/Stone operation” a “Republican dirty trick” meant to “disgust people and drive them away from the Reform Party. They were doing everything in their power to make a mess.”

  The point, however, is that it worked: The Reform Party and Pat Buchanan caused no damage whatsoever to George W. Bush’s election bid in 2000, unlike Ralph Nader’s effect on Al Gore’s run.

  After neutralizing the Reform Party and blocking the Florida recount with his hired “Brooks Brothers mob” Roger Stone was rewarded by President Bush by being put in charge of the Bush-Cheney 2000 transition team’s Indian Bureau Affairs appointments. Even in this, Trump did a solid for Stone, signing his name on a fake letter written by Stone in order to sink the nomination of the “wrong” Indian tribal leader who wasn’t Stone’s man. The fake Trump letter ensured that Stone’s man, Neal McCaleb, was given the job as head of Bush’s Indian Affairs Bureau instead. The Indian leader whose nomination was killed by the Trump-Stone letter later complained to the Village Voice,

  “I don’t know why Trump did that,” says Martin, who’d never spoken to Trump. “I don’t think he and I have ever been in the same city at the same time.

  In early 2004, with former Vermont governor and articulate antiwar candidate Howard Dean electrifying Democrats and antiwar voters and posing a potentially deadly threat to the Bush campaign, Roger Stone secretly funded and staffed Al Sharpton, and sent him into the Democratic Party primaries to smear Howard Dean and suck the life and joy out of his campaign. It worked.

  Again, quoting the great Village Voice reporting by Wayne Barrett from 2004:

  While Bush forces like the Club for Growth were buying ads in Iowa assailing then front-runner Howard Dean, Sharpton took center stage at a debate confronting Dean about the absence of blacks in his Vermont cabinet. Stone told the Times that he “helped set the tone and direction” of the Dean attacks, while Charles Halloran, the Sharpton campaign manager installed by Stone, supplied the research. While other Democratic opponents were also attacking Dean, none did it on the advice of a consultant who’s worked in every GOP presidential campaign since his involvement in the Watergate scandals of 1972, including all of the Bush family campaigns.

  The Times quoted Trump in 2004 taking credit for introducing Al Sharpton to Roger Stone. But it was Barrett’s merciless reporting on Sharpton’s “blackface bucks”—the legions of race-baiting Republicans who donated cash and resources to Sharpton’s anti-Howard Dean run—that is something worth re-reading today, as we’re already seeing stunts like using black Tea Party activists to play the same old racism card and thereby sabotage and suck the life out of another popular Vermont candidate, Bernie Sanders….

  The last thing white liberals and lefties want to be caught doing is criticizing any black political leader, even if that leader is a rightwing mole and FBI snitch like Al Sharpton. As Barrett reminded readers in 2004,

  Sharpton and Stone are, in a sense, brothers under the skin, outlandish personalities too large to be bound by the constraints that govern the rest of us. Stone was the registered agent in America for Argentina’s intelligence agency, sucking up spy novels; Sharpton was a confidential informant for the FBI, wiring up on black leaders for the feds. Stone is a fashion impersonator, dressing like a hip-hop dandy; Sharpton, having shed his gold medallion and jogger suits, now looks like a smooth banker. Stone was involved in Watergate at the age of 19; Sharpton was a boy-wonder preacher. Stone’s mentor from the days of his youth was Roy Cohn; Sharpton’s was James Brown. Sharpton is a minister without a church; Stone is almost as rootless, having left the powerhouse Washington firm he helped form years ago. Each reinvents himself daily, if not hourly, as if nothing in their past matters.

  In their latest incarnations, Al Sharpton is an MSNBC black liberal and Democratic Party loyalist; Roger Stone is a Libertarian prankster fighting the two-party stranglehold; and Donald Trump is a right-wing populist shaking up the system because by gum, he just doesn’t care and he doesn’t need to care.

  That’s one, very dumb, very gullible way of putting it.

  Another way of putting it is this: Donald Trump and Roger Stone have spent the past few decades conning the public by exploiting fractures — anti-establishment politics, and anti-establishment outrages. Until now, there’s been a consistent logic and purpose to every single sleazy black bag “Trump/Stone operation”: elect the mainstream Republican candidate, and enrich Trump and Stone.

  Do you really think this election is any different?

  

  

  

  

  

• What Happens Next?

  The last three times Asian currencies collapsed against the US Dollar at this rate, the global financial system was shaken to the core. With China piling on this time, we wonder – what happens next, as a tsunami of deflation is exported towards the shores of the "we'll hike no matter what" Fed's American shores…

  What happens next?

  

  Note: USDollar strength relative to Asian currencies is indicated by a lower index – i.e this chart implies an USD per "Asian currency" rate – how many USDollars can an "asian currency" unit buy?

  A glance at the chart and one might wonder if this time is different… and we break the 18 year trendline.

  With Q3 GDP estimates tumbling, we leave it to SocGen's Albert Edwards to sum up what happens next…

  We have long believed that we are only one misstep from outright deflation in the west with core inflation in both the US and eurozone at just 1%. We expect the acceleration of EM devaluations to send waves of deflation to the west to overwhelm already struggling corporate profitability and take us back into outright recession. As investors realise yet another recession beckons, without any normalisation of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008.

   

  His conclusion: "Low growth (and low inflation) to prompt more QE – everywhere!"

  h/t SocGen's Albert Edwards

  Chart: Bloomberg

  

  

  

  

  

• What China's Devaluation Means For The Future Of The Dollar

  Submitted by Simon Black via SovereignMan.com,

  As the saying goes, “Fool me once, shame on you. Fool me twice, shame on me.”

  (… to which George W. Bush famously added after flubbing the aphorism on live TV, “can’t fool me again!”)

  For months, despite every shred of data pointing to a weaker economy, China’s currency has been strengthening.

  This was really counterintuitive. When an economy is weak, its currency tends to suffer.

  But that didn’t happen in China.

  Even when China’s stock market suffered one of the biggest crashes in history a few weeks ago, the currency barely moved.

  None of this made any sense.

  Just look at Greece– problems in that single nation, one of the smallest economies in Europe, dragged down the currency used by 18 other nations in Europe to its lowest level in more than a decade.

  But when problems broke in China, the renminbi actually got stronger. And party bosses insisted that they would not devalue their currency.

  Fool me once.

  Yesterday they showed the world what their promises really mean: nothing. And in a surprise announcement, they devalued the renminbi by roughly 2%.

  2% might not sound like very much. But in currency markets, especially for a major one like China’s, 2% is a huge move.

  Curiously, in the very same announcement, Chinese officials stated that they would not devalue the currency again, and that Tuesday’s move was a one-time thing.

  Fool me twice.

  Less than 24-hours later they did it again — a second devaluation that saw the renminbi tumble to as low as 6.57 per US dollar, a 6% decline in roughly 36 hours.

  Again, this is a steep drop for a currency, and I expect that there’s more to come.

  All of this raises an interesting question about the future of the US dollar.

  Because if an economy as large and powerful as China’s has had to concede defeat, does this mean that “King Dollar” will rule forever?

  No chance.

  Remember that the dollar’s strength is derived from its status as the primary global reserve currency.

  Nearly every government, commercial bank, and central bank in the world holds US dollars in reserve, and the dollar is used as the primary currency in global trade.

  Whether in Saudi Arabia or South Africa, a barrel of oil is priced in US dollars. Even jets manufactured in France and sold to European airlines are priced in US dollars.

  But this status is by no means written in stone. The US dollar is not the first global reserve currency, and it won’t be the last.

  We can go back in time to the Byzantine solidus, or the Venetian gold ducat, or the Spanish dollar, or the British pound, and see that no reserve currency lasts forever.

  Especially when its fundamentals are so poor.

  The US government is insolvent. Its major institutions and pension funds are insolvent. The central bank is borderline insolvent.

  These are not any wild assertions; their own financial statements admit their insolvency.

  Which means that there’s nothing underpinning the dollar’s reserve status except confidence.

  And confidence is very fickle. Like a high school popularity contest, it wanes and it booms.

  Right now that confidence is on an upswing, primarily because every other major option looks really bad.

  The euro is acting out its Oedipal complex. Japan is a complete fiscal disaster spending over 25% of tax revenue just to pay interest. And China is rapidly deteriorating.

  Sure there are some outliers like the Swiss franc that are in better shape. But the market for Switzerland’s currency is far too small to absorb trillions of dollars in global capital flows.

  In the beauty pageant of major currencies, the US dollar is clearly the least ugly at the moment.

  And I think anyone owning dollars should look at this as a gift.

  Right now we have a tremendous opportunity to sell what’s expensive and buy what’s cheap.

  The dollar hasn’t been this expensive in years. And many non-dollar assets haven’t been this cheap… ever.

  Here in Turkey, the lira is at its lowest level in history. The South African rand is at its lowest level in history. We wrote about Indonesia’s rupiah on Monday.

  I’m looking at real estate in Colombia at the moment where US dollar buyers can pick up high quality property for less than the cost of construction.

  In Chile, the cheap exchange rate and slowing economy helped our fund to recently close on a farm at $4.3 million that cost $10 million less than two years ago.

  In Australia there are a number of junior mining stocks that are trading for less than the amount of cash that they have in the bank.

  There are countless deals like this all over the world… especially if you’re buying in US dollars.

  It’s foolish to expect that any reserve currency will last forever.

  And it’s even crazier to expect a reserve currency with such pitiful fundamentals as the US dollar to last forever.

  But markets are not orderly and efficient. They are chaotic.

  Which means that, on rare occasions, enormous opportunities present themselves to buy high quality assets on the cheap.

  That opportunity is now.

  

  

  

  

  

• From $1,300 Tiger Penis To $800K Snipers: The Complete Black Market Price Guide

  Late last year, we said that “hookers and blow” were set to lift Britain over France as the world’s fifth largest economy. 

  And we weren’t joking. 

  As The Telegraph noted when the figures were released, “the Centre for Economics and Business Research said Britain’s acceleration was boosted by the inclusion of sex and drugs to UK growth.”

  

  France, on the other hand, has taken the moral high ground by “refus[ing] to comply with EU rules because it does not consider [drug use and prostitution] to be ‘voluntary commercial activities'”.

  “Voluntary” or not, failing to include the illicit activities which drive the world’s shadow economies could lead to material miscalculations. And besides, even if one wants to argue that illegality is impossible to measure, surely making an honest attempt to come up with an accurate representation of economic output is preferable to the BEA’s now standard practice of simply “adjusting” the real data in order to get a goalseeked outcome. As WSJ put it last June, “if drug sales aren’t counted in a place where people spend half their income on drugs, one could conclude, wrongly, that the population saved half its money.” The U.N. made a similar argument back in 2008 when it contended that “accounts as a whole are liable to be seriously distorted” if governments refuse to include all transactions. 

  Fortunately for anyone looking to get a read on the going rate for the various goods and services which comprise the world’s black markets (and in some countries serve as a much needed boon for GDP), Havocscope has a price list for everything you’ve ever wanted to buy (and everything you wouldn’t touch even with Mario Draghi’s hands) from someone in a dark and smoky back alley. 

  First, a bit on Havocscope’s methodology: 

  Data listed within Havocscope’s website is collected from credible open-source documents such as newspapers, government reports and academic journals. The source for the figure is clearly listed on each data post. This allows users to see where the information has come from, judge the credibility of the source, and pursue further research if necessary.

  That seems fair enough, and so, without further ado, we present current price lists for a veritable smorgasbord of illegal goods and services.

  AK-47 and Other Guns on the Black Market

  • Afghanistan$1,500
  • Afghanistan-Kabul$1,500 for US issued Night Vision Googles
  • Australia$15,493 in Sydney
  • Average price of AK-47 worldwide$534
  • Canada$2,000 for handgun, $600 to rent
  • Europe$400 to $900 for Rocket Launchers and AK-47s
  • Iraq$800, with Osama Bin Laden’s favorite model for $2,000
  • Iraq-Bullets$0.15 to $0.45 per bullet
  • Iraq-Rocket Launcher$100, $50 per grenade
  • Mexico-AK-47$1,400 on US border/$3,000 in South
  • Mexico-Gernade$100 to $500 for M67 Grenade
  • Niger Delta-AK-47$75
  • Philippines$120 for .22 Caliber Magnum Black Widow
  • Profit in the U.S.$500 for selling AK-47 to Drug Cartels
  • Somalia$400 for Russian AK-47, $600 for North Korean AK-47
  • Sudan$86 for AK-47, $33 for child
  • Syria$2,100 for AK-47, $2,000 for RPG
  • Thailand$2,600 for gun
  • United States$400 in California’s black market
  • United States-Small Pistol$20 to $100 in Dallas, TX
  • United States – Straw PurchaserUp to $500 per gun

  Bribes

  • Afghanistan – Election Bribes$1 to $18 per vote
  • Afghanistan – Police Bribe$100,000 to be Police Chief
  • Afghanistan Average Bribe Amount$214 in 2012
  • Africa – Bribe Payments of Govt Officials$20 to $40 Billion
  • Amount of Bribes Paid Worldwide$1 Trillion per year
  • Bangladesh – Bribes Paid per Household$86
  • Businesses – Rise in Market Value from Bribes$11 for $1 in bribe
  • Cambodia – Bribes for Fishing Permit$50
  • Cambodia – Bribes to Operate Fake License Shop$2.50 per day
  • Cambodia – Citizens Paying Bribes to Receive Services72%
  • China – Bribe to become a City Assemblyman$44,000
  • China – Bribes to Education Officials$10,000 for School Admission
  • China – Bribes to Rail Ministry$14,897 for job as Train Attendant
  • China – Impact of Bribes on Drug Prices20%
  • Companies Asked to Pay Bribes Worldwide28%
  • Croatia – Average Bribe Payment$300
  • Czech Republic Average Bribe Amount$248 to $497
  • Education Corruption1 in 6 students pay bribes
  • Greece- Bribes Paid by Families$2,500 to Public Officials
  • Guatemala – Bribes from Drug Traffickers$2,500 to Public Officials
  • Haiti – Bribe to Border Official for Human Trafficker$400 per immigrant
  • Illegal Loggers$25,000 to $50,000 in bribes for permits
  • India – Bribe to Sell DVDs$0.18 to Police
  • India – Bribes to Police to Sell Water$0.18 to Police
  • India – Families Paying Bribes4 million families
  • Indonesia – Bribe to Chief Justice$250,000
  • Indonesia – Bribe to Oil Regulator$600,000
  • Indonesia – Bribes to Prison Guard$500 to use cell phone
  • Indonesia – Businesses Paying Bribes60%
  • Iraq – Bribes to Prison Guards$100 to Take a Single Shower
  • Ivory Coast – Bribes at Traffic Checkpoints$300 Million
  • Kenya – Bribes to Customs and Port Officials$5,797 per shipment
  • Kenya -Average Bribes Paid Per Month16
  • Mexico – Amount of Bribes Paid$2.75 Billion in 2010
  • Mexico – Average Bribe Paid$14
  • Mexico – Bribes Collected by Police65% less than $6,000
  • Mexico – Bribes Paid by Drug Cartel to Police$1.2 Billion Per Year
  • Mexico – Sinaloa Cartel Boss to Escape Prison$2.5 Million
  • Nigeria – Bribes Accepted by Government Workers$3.2 Billion
  • Nigeria – Bribes Paid by Shell$2 Million in bribes, $14 Million in profit
  • North Korea – Bribes to Border Guard by Defector$6,000
  • North Korea – Bribes to Inspectors$2,000 per visit
  • Pakistan – Bribe to Police from Artifact Smuggler$10.62 per day of digging
  • Pakistan – Bribes Paid by Smugglers$1,200 to Police Chiefs
  • Peru – Bribe to Stop Logging Investigation$5,000
  • Romania – Bribe to Receive Brain Surgery$6,500
  • Romania – Bribes Paid Per Day$1 Million
  • Romania – Bribes to Hospital For Employment$40,000
  • Russia – Average Bribe Paid$189
  • Russia – Bribes to Forest OfficialsCases of Vodka
  • Russia – Business Bribe$10,000
  • Russia – Education Admission Bribes$1 Billion
  • Russian -Amount of Bribes Paid$5.9 Billion in 2010
  • South AfricaTraffic Police Ask for Most Bribes
  • Thailand – Bribes to Police to Allow Human Smuggling$160 per migrant
  • Thailand – Kickback and Bribes to Officials25-35% of project value
  • Thailand -Impact of Bribes on Economy$3.3 Billion
  • Ukraine – Bribes to Police$1,000 from brothel owners
  • United Kingdom – People who Paid Bribes1 in 20
  • United States – Bribe to Border Agent$15,000
  • United States – Bribes to Prison Guard$5,000 to pass meth
  • United States – Bribes to TSA Screener$2,400 for each suitcase
  • United States – Corruption At Workplace60% believe common
  • Vietnam – Bribes to Forest Official$2,300

  Prices of Computer Hackers and Online Fraud

  • AdWords$1,000 to drain competitors AdWords budget
  • Botnet – Canada$270 for 1,000 computers
  • Botnet – France$200 for 1,000 computers
  • Botnet – Russia$200 for 1,000 computers
  • Botnet – United Kingdom$240 for 1,000 computers
  • Botnet – United States$180 for 1,000 computers
  • Botnet – Worldwide$35 for 1,000 computers
  • Credit Card – Premium Card with Big Balance$250
  • Credit Card and Social Security Number$5
  • DDOS a Website$911,000 for gambling website
  • Doxing Someone$25 to $100
  • Email Addresses – Gmail$200 for 1,000
  • Email Addresses – Hotmail$12 for 1,000
  • Email Addresses – Yahoo$10 for 1,000
  • Facebook Likes$15 for 1,000
  • Facebook Spam$13 for page with 30,000 fans
  • Hacked Webcam of Boy$0.01
  • Hacked Webcam of Girl$1
  • Hacking Classes$75
  • Online Bank Account – EU4 – 6% of account balance
  • Online Bank Account – USA2% of account balance
  • Online Extortion$50 to $15,000 in Sextortion Blackmail
  • Online Funds to CashCommission between 9% to 40% of Amount
  • Online Game Hackers$16,000 per month in China
  • PayPal Account6 to 20% of account balance
  • Remote Administration Tool$40 for Blackshades
  • Stolen Health Insurance Information$1,200 to $1,300
  • Twitter Followers$15 for 10,000 Fake Followers
  • Website Traffic$1 for 1,000 fake visitors

  Cost to Hire a Hitman

  • Argentina$3,749 to $5,555
  • Australia$13,610 to $83,000
  • BoliviaBetween $4,000 to $15,000
  • ColombiaBase Salary of $600: $2,000 to $4,000 per hit
  • France – Monaco$330,000
  • India – MumbaiBetween $35 to $900
  • Italy – Mafia Hitman$3,700 for kneecapping, $27,000 for hit
  • Mexico – Ciudad Juarez$85 to Minors
  • Mexico – Police Chief$20,832 to target Police Chief
  • Mexico – Sinaloa$35
  • Mexico – Teenage Boys$10,00 to $50,000 per killing
  • Mexico – Teenage Girls$1,000 for 2-Week Salary to 16 year old girl
  • Philippines Death Squad$110 per hit
  • Spain$27 to $69,000
  • United States and United KingdomFew hundred to $25,000
  • United States Soldier$5,000 by Juarez Drug Cartel
  • United States Soldier – Group of Snipers$800,000 for group of 3

  Exotic Animals for Sale

  • Abalone$52 per kilogram
  • African Grey Parrot$2,000
  • Arowana Fish$20,000
  • Australian Lizard$7,500
  • Baby Elephant in Thailand$7,000
  • Bear – Complete $4,500 in Taiwan
  • Bear Bile$200,000 per pound
  • Bear Paws$50 for set of 4
  • Black Cockatoo$31,000 in Australia
  • Butterfly (Queen Alexandra)$8,195
  • Chimpanzee (Live)$50
  • Clouded Leopard$5,700 in China
  • Dog Meat$29 in Vietnam
  • Elephant$28,200
  • Elephant Tusk$1,800 in Vietnam
  • Frog Legs$11 for a dozen pairs in France
  • Geckos from New Zealand$1,300 in Europe
  • Geckos in the Philippines$2,300
  • Gila Monster$1,500
  • Gorillas$400,000
  • Iguanas$10,600
  • Ivory$850 per kilo in Asia
  • Ivory with Carvings$3,000 per kilo
  • Komodo Dragon$30,000
  • Leopard$5,000
  • Leopard Tortoise$403
  • Monkey in Europe$123
  • Monkey in Thailand$55
  • Orangutan$45,000
  • Owl$250 in India
  • Pangolin$1,000
  • Pangolin – Meat$300 per kilogram
  • Pangolin – Scales$3,000 per kilogram
  • Panther$5,000
  • Ploughshare Tortoise$4,000
  • Polar Bear Skin$7,760 to $9,930
  • Puppies trafficked from Ireland$255 to $1,275 in the UK.
  • Rhino Horn Dagger$14,000
  • Rhino Horns$65,000 per kilogram
  • Rhino Horns (Crushed for medicine powder)$10 in Vietnam
  • Shark Fins$100 per kilogram
  • Sloths$30 in Colombia
  • Snake Venom$215,175 per liter
  • Snakes (Banded kraits)$2,190 in India
  • Snow Leopard Pelt$1,000 in Afghanistan
  • Spotted Salamander$103 on the Internet
  • Tiger (Dead)$5,000
  • Tiger (Live)$50,000
  • Tiger – Baby$3,200
  • Tiger Bone$2,000
  • Tiger Bone Wine$88
  • Tiger Penis$1,300
  • Tiger Remains$70,000 in China
  • Tiger Skin$35,000
  • Tortoises$10,000 in Madagascar
  • Totoaba Fish – Bladder$200,000 in China
  • Turtle – Chinese Golden Coin$20,000
  • Turtle Eggs$1 in Costa Rica

  Organ Trafficking Prices and Kidney Transplant Sales

  • Average paid by Kidney Buyer$150,000
  • Average paid to Seller of Kidney$5,000
  • Kidney broker in the Philippines$1,000 to $1,500
  • Kidney broker in Yemen$60,000
  • Kidney buyer in China$47,500
  • Kidney buyer in Egypt$20,000
  • Kidney buyer in Israel$125,000 to $135,000
  • Kidney buyer in Moldova$100,000 to $250,000
  • Kidney buyer in Singapore$300,000
  • Kidney buyer in South Africa$200,000
  • Kidney buyer in Thailand$10,000
  • Kidney buyer in United States$120,000
  • Kidney buyers in Saudi Arabia$16,000
  • Kidney seller in Bangladesh$2,500
  • Kidney seller in China$15,000
  • Kidney seller in Costa Rica$20,000
  • Kidney seller in Egypt$2,000
  • Kidney seller in India$1,000
  • Kidney seller in Israel$10,000
  • Kidney seller in Kenya$650
  • Kidney seller in Moldova$2,500 to $3,000
  • Kidney seller in Pakistan$10,000
  • Kidney seller in Peru$5,000
  • Kidney seller in Romania$2,700
  • Kidney seller in Thailand$3,000 to $5,000
  • Kidney seller in the Philippines$2,000 to $10,000
  • Kidney seller in Turkey$10,000
  • Kidney seller in Ukraine$200,000
  • Kidney seller in Vietnam$2,410
  • Kidney seller in Yemen$5,000
  • Kidney Traffickers in Turkey$10,000 profit
  • Kidney Transplant Operation – China$15,200
  • Kidney Transplant Operation – Europe$32,000
  • Liver buyer in China$21,900
  • Liver seller in China$3,660
  • Lung seller in EuropeAsking price of $312,650

  Fake ID Cards, Driver Licenses, and Stolen Passports

  • Average Price of a Stolen Passport for Sale$3,500
  • Black Market Driver License – New Jersey$2,500 to $7,000
  • Black Market Passport – Nepal$6,961
  • Black Market Passport – Peru$1,750
  • Black Market Passport – Sweden$12,200
  • Black Market Passport and Visa – Australia$15,000
  • Blank Stolen Passport – UK$1,642
  • Fake Green Card$75 to $300
  • Fake Birth Certificate – Cuba$10,000 to $50,000
  • Fake Car License Plate in Cambodia$4.50 to $10
  • Fake Driver License – California$200
  • Fake Driver License – Confiscated in New York1,450 in 2012
  • Fake ID Card – Malaysia$771 (includes smuggling)
  • Fake ID Card – New York$160 in 90 min
  • Fake ID Confiscated – Arizona2,064 from students in 2010
  • Fake ID Confiscated from China1,700 in 3 months at one airport
  • Fake ID from China$300 for 1, $400 for 2
  • Fake ID Papers for Residency – USA$2,500 per set
  • Fake IDs for Sale – United States$0.1 Billion ($100 Million)
  • Fake Passport – Australia$806
  • Fake Passport – China$10,000 to $25,000
  • Fake Passport – China (Alter Photo)$3,500 to $5,000
  • Fake Passport – Egypt, Germany, Morocco$6,830 to Syrian Refugees
  • Fake Passport in Thailand – Basic$245 in 2 hours
  • Fake Passport in Thailand – Higher Quality$1,000 to $1,250
  • Fake Passports in India$294
  • Fake Social Security Card$75 to $300
  • Lost or Stolen Passport Reported11 Million in 2010
  • Passport Selling – Thailand$200
  • Stolen ID to buy Health Insurance$1,250

  Cocaine Prices

  • Kuwait$330 per gram (User Submitted)
  • United States$300 to $8 (UN) |$30 (User Submitted) per gram
  • Australia$300 per gram
  • Japan$269.5 per gram
  • Egypt$205.5 per gram
  • Ukraine$189.6 per gram
  • Denmark$180 per gram (User Submitted) | $89 per gram (UN)
  • New Zealand$179.3 per gram
  • Moldova$155.4 per gram
  • Norway$154.45 per gram
  • Saudi Arabia$133.5 per gram
  • Romania$132.5 per gram
  • Estonia$127.2 per gram
  • Iran$126.3 per gram
  • Jordan$126.3 per gram
  • Cyprus$119.2 per gram
  • Philippines$119 per gram
  • Pakistan$118.7 per gram
  • Latvia $112.6 per gram
  • Montenegro$111.2 per gram
  • Sweden$110.6 per gram
  • Greece$110.3 per gram
  • China$106.9 per gram (Hong Kong)
  • Finland$106 per gram
  • Czech Republic$104.8 per gram
  • Croatia$99.4 per gram
  • Austria$97.3 per gram
  • Indonesia$96.5 per gram
  • Switzerland$95.6 per gram
  • Bulgaria$94.9 per gram
  • Ireland$92.7 per gram
  • Italy$91.6 per gram
  • Serbia$88.2 per gram
  • Germany$86.9 per gram
  • Thailand$86.0 per gram
  • Zimbabwe$80 per gram (Crack)
  • Israel$80 per gram
  • Poland$53 per gram
  • France$79.5 per gram
  • Spain$79.5 per gram
  • Albania$79.5 per gram
  • Lithuania$78.9 per gram
  • Turkey$78.2 per gram
  • Hungary$72.1 per gram
  • Belgium$67.1 per gram
  • United Kingdom$61.5 per gram
  • Portugal$61.0 per gram
  • Netherlands$58.7 per gram
  • Cuba$56.7 per gram
  • Lebanon$40.0 per gram
  • South Africa$32.7 per gram
  • Nigeria$32.5 per gram
  • El Salvador$24 per gram
  • Paraguay$20 per gram
  • Costa Rica$17 per gram
  • Guatemala$13.3 per gram
  • Brazil$12 per gram
  • Haiti$10 per gram
  • Chile$8.8 per gram
  • Venezuela$9.3 per gram
  • Honduras$9.2 per gram
  • Dominican Republic$8 per gram
  • Argentina$5.9 per gram
  • Ecuador$5.0 per gram
  • Peru$4.5 per gram
  • Bolivia$3.5 per gram
  • Colombia$3.5 per gram

  Ecstasy Pills Prices

  • Myanmar$68.1 per pill
  • South Korea$56.0 per pill
  • Norway$44.1 per pill
  • Montenegro$41.7 per gram
  • Egypt$40.2 per pill
  • United States$35.5 per pill
  • Japan$33.65 per pill
  • Vietnam$32.5 per pill
  • Australia$32.1 per pill
  • Thailand$29.65 per pill
  • New Zealand$28.7 per pill
  • Philippines$27.5 per pill
  • Chile$25 per pill
  • Costa Rica$25 per pill
  • Ecuador$25.0 per pill
  • Colombia$22.6 per pill
  • Italy$22.0 per pill
  • Dominican Republic$21 per pill
  • Singapore$20.25 per pill
  • Finland$19.9 per pill
  • Switzerland$19.1 per pill
  • Romania$18.9 per pill
  • Sweden$16.2 per pill
  • Malaysia$16.0 per pill
  • Jamaica$14.5 per pill
  • Spain$13.6 per pill
  • Greece$13.2 per pill
  • Cyprus$13.2 per pill
  • Honduras$13.0 per pill
  • Brazil$12 per pill
  • Israel$12 per pill
  • Czech Republic$10.5 per pill
  • Zimbabwe$10 per pill
  • Austria$9.7 per pill
  • Venezuela$9.4 per pill
  • Turkey$9.3 per pill
  • Indonesia$9.0 per pill
  • Denmark$8.9 per pill
  • Bulgaria$8.8 per pill
  • Germany$8.7 per pill
  • France$7.9 per pill
  • Latvia$7.5 per pill
  • Guatemala$6.6 per pill
  • Ireland$6.6 per pill
  • Estonia$6.6 per pill
  • Iran$6.2 per pill
  • South Africa$5.8 per pill
  • Belgium$5.7 per pill
  • Cambodia$5 per pill
  • Portugal$5 per pill
  • Hungary$4.8 per pill
  • United Kingdom$4.8 per pill
  • Lithuania$4.6 per pill
  • China$4.5 per pill
  • Netherlands$3.9 per pill
  • Croatia$3.3 per gram
  • Serbia$2.65 per pill
  • Poland$1.7 per pill

  Heroin Prices

  • Brunei$1330.4 per gram
  • New Zealand$717.4 per gram
  • Japan$683.6 per gram
  • Georgia$650 per gram
  • Australia$500 (User Submitted-Perth)|$50.4 per gram (UN)
  • Sweden$276.5 per gram
  • Denmark$213.6 per gram
  • United States$200 (UN) | $110 (User Submitted) per gram
  • Ireland$198.7 per gram
  • Estonia$190.75 per gram
  • Norway$169.1 per gram
  • United Arab Emirates$165.0 per gram
  • Finland$159.0 per gram
  • South Korea$140.0 per gram
  • Latvia$132.5 per gram
  • Moldova$126.3 per gram
  • Bangladesh$125.0 per gram
  • Ukraine$123.9 per gram
  • Singapore$123.9 per gram
  • Philippines$108.8 per gram
  • Cyprus$106.0 per gram
  • Indonesia$98.95 per gram
  • Austria$97.3 per gram
  • Thailand$83 per gram
  • Italy$80.6 per gram
  • Spain$80.4 per gram
  • Costa Rica$77.2 per gram
  • Lithuania$76.6 per gram
  • Croatia$72.9 per gram
  • El Salvador$69.0 per gram
  • China$66.9 per gram
  • Nepal$64.6 per gram
  • United Kingdom$61.5 per gram
  • Romania$55.05 per gram
  • Bulgaria$54.3 per gram
  • France$53.0 per gram
  • Poland$53.0 per gram
  • Czech Republic$52.3 per gram
  • Netherlands$50.8 per gram
  • Brazil$50 per gram
  • Guatemala$49.0 per gram
  • Hungary$48.1 per gram
  • Germany$48.0 per gram
  • Switzerland$47.8 per gram
  • Myanmar$47.1 per gram
  • Portugal$46.7 per gram
  • Greece$46.3 per gram
  • Saudi Arabia$42.2 per gram
  • Jordan35.1 per gram
  • South Africa$35.0 per gram
  • Belgium$31.8 per gram
  • Turkey$31.1 per gram
  • Albania$30.5 per gram
  • Israel$28.0 per gram
  • Zimbabwe$27.1 per gram
  • Serbia$26.5 per gram
  • Montenegro$23.6 per gram
  • Egypt$22.35 per gram
  • Dominican Republic$21.0 per gram
  • Iran$20.2 per gram
  • Colombia$20.1 per gram
  • Lebanon$15.0 per gram
  • Ecuador$13.0 per gram
  • Venezuela$11.6 per gram
  • India$10.93 per gram
  • Malaysia$8.88 per gram
  • Nigeria$6.8 per gram
  • Honduras$5.3 per gram
  • Cambodia$5.0 per gram
  • Pakistan$3.0 per gram
  • Afghanistan$2.4 per gram
  • Kenya$1.9 per gram

  Meth Prices per Gram

  • Australia$641.4 per gram
  • New Zealand$573.9 per gram
  • South Korea$562.0 per gram
  • Switzerland$286.7 per gram
  • Philippines$214.1 per gram
  • Indonesia$203.8 per gram
  • Saudi Arabia$199.7 per gram
  • Singapore$184.25 per gram
  • Japan$125.3 to $683.6 per gram
  • Afghanistan$105 per gram
  • Germany$89.2 per gram
  • United Kingdom$88.45 per gram
  • China$72.9 per gram
  • Malaysia$52.7 per gram
  • Czech Republic$52.3 per gram
  • Finland$45.9 per gram
  • Spain$30.5 per gram
  • South Africa$27.0 per gram
  • Sweden$25.3 per gram
  • Ukraine$25.0 per gram
  • Austria$16.7 per gram
  • Hungary$14.4 per gram
  • Myanmar$13.6 per gram
  • Latvia$13.2 per gram
  • Honduras$13.0 per gram
  • Lithuania$12.7 per gram
  • North Korea$11 per gram
  • Moldova$5.0 per gram
  • Bangladesh$4.5 per tablet
  • United States$3.0 to $500.0 per gram
  • Cambodia$1.6 per gram
  • Laos$1.0 per tablet

  Profits from the Business of Crime and Illegal Jobs

  • Afghanistan – Taliban$200 Million a year from Opium
  • Antique Looter1 percent of final sale price
  • Asian Massage Parlor – New Jersey, United States$108,000 per year
  • Asian Massage Parlor – Washington DC, United States$1.2 Million per year
  • Assassin – Colombia$600 monthly retainer, $3,000 per hit
  • Assassin – Mexico$3,000 to teenagers
  • Bootlegger – Pakistan$4,000 per year
  • Bride Trafficker Broker – Cambodia$1,500 per bride
  • Child Beggar – Pakistan$1.88 to $2.36 per day
  • Child Beggar – Thailand$20 per day
  • Child Begging Ring – China$40,000 per year
  • Child Begging Ring – Saudi Arabia$15,000 per month
  • Cigarette Smuggler – Mali$200 per trip, $2,000 if cocaine
  • Cigarette Smuggling – USA$500,000 from One Run
  • Cigarette Truck Unloader – Indian Reservation, USA$200 per truck
  • Coal Mining – Mexico$25 Million by Los Zetas
  • Coca Farmer – Peru$9,860 per year, $1,554 growing coffee
  • Cockfighting – Management of Matches$2,000 a day
  • Cockfighting – Prize Money for Winning Rooster$15,000
  • Counterfeit Dollars – Peru$20,000 for every $100,000 in fakes
  • Counterfeit Drug Seller$450,000 based on $1,000 investment
  • Crystal Meth Smuggler – Indonesia$311 per trip
  • Custom Officials – Mexico$1 Million per shipment passed through
  • Driver License Broker – Afghanistan$10,000 per year
  • Drug Dealer – Rio de Janeiro$15 Million in Favelas
  • Drug Mule – Indonesia$15,000 to swallow 76 capsules of heroin
  • Drug Mule – Panama$5,000 per trip
  • Drug Mule – Paraguay Local$200 per trip
  • Drug Mule – Paraguay Tourist$3,970 per trip
  • Drug Mule – Teen in Mexico$50 to $100 per trip across border
  • Drug Smugglers – Guatemala$600 Million to $800 Million per year
  • Extortionist – Guatemalan Prison $6,000 a week
  • Extortionist Gang – Colombia$100,000 per month
  • Fake Degrees – Europe$50 Million per year to 15,000 customers
  • Fake Degrees Online Website$5 Million in 9 years
  • Fake Viagra Seller- South Korea$0.84 per tablet
  • Football Match Fixing Syndicate$15 Billion per year
  • Gambling Runners – Singapore$1,957 per day handling bets
  • Gold Smuggler – India$33.50 for 10 grams
  • Gun Straw Purchasers – United States$500 per gun for Mexican Drug Cartel
  • Heroin Dealer – Ireland$694 per week
  • High Class Escort – Florida, United States$80,000 a month
  • Human Smugglers – Indonesia$1 Million per boat to Australia
  • Human Smugglers – South Korea$2,500
  • Human Trafficker – Canada$79,380 per year
  • Human Trafficker – New York City$100,000 per year
  • Human Trafficker – United Kingdom$77,000 per year
  • Human Trafficker – Vietnam$470 to move victim to China
  • Kidnappers – Virtual Kidnappers$1,000 to $3,000 per ransom
  • Legal Brothel Owner40 to 50 percent of sex workers earnings
  • Logger – Madagascar$1.33 per kilo for illegal timber
  • Marijuana Plant – United States$2,200
  • Meth Trafficking – Thailand$168 per trip
  • Money Launderer – Mexico15 cents to each dollar laundered
  • Money Mule – United Kingdom8 percent of cash laundered
  • Oil Thieves – Nigeria$6,098 per day
  • Online Dating Scammers – Ivory Coast$13,000 a month
  • Online Drug Dealer$3 Million for Top Seller on Silk Road
  • Online Extortion$500 to $15,000 in “sextortion”
  • Online Game Hacker$16,000 a month in China
  • Online Streaming Website$4.4 Million for largest sites
  • Opium Farmer – Afghanistan$4,900 vs $770 for wheat farmer
  • Opium Farmer – Myanmar$6 per day vs. $1.20 for rice
  • Opium Farmer – Students$15 to $20 per day during season
  • Organ Trafficker – Turkey$10,000 profit
  • Passport Seller – Thailand$200 to sell own passport
  • Pickpockets – Barcelona, Spain$6,132 per week
  • Pimp$67,200 per year
  • Pirate – Somalia$30,000 to $75,000 per hijacking
  • Pirated Book Seller – Mumbai, India$2 per book
  • Pirated DVD Seller – Los Angeles$50,000 a month
  • Pirated DVD Seller – Mexico$2 Million per day
  • Pirated Movie Uploader$1 to $2 per 1,000 views
  • Poppy Farmer – Afghanistan$10,000 per year, $120 if wheat
  • Prison Guard – United States$3,000 to $5,000 Smuggling Contraband
  • Prostitute – Brazil$100,000 (High-End Prostitute)
  • Prostitute – Calcutta, India$1.85 a day
  • Prostitute – Cannes, France$40,000 a night
  • Prostitute – Jamaica$470 per day
  • Prostitute – Java, Indonesia$952 per month
  • Prostitute – Kuwait$570 per month
  • Prostitute – Male Prostitute in LondonHigh of $49,000
  • Prostitute – Orange Country, California$700 a day
  • Prostitute – Pennsylvania, United States$20,000 a week
  • Prostitute – South Korea$70 per session
  • Prostitute – UgandaUp to $500 a night
  • Prostitute – Washington, DC$500 per day
  • Prostitutes – Filipino Women in Japan$150 Million a year
  • Ransomware$5 Million a year
  • Roma Thief$7,000 a month
  • Spam Sellers – Russia$60 Million a year
  • United States Workers$2 Trillion Not Reported to IRS

  

  

  

  

• Navajo Nation Vows To Hold EPA Accountable As Colorado River Poisoner Identified

  Having admitted responsibility for the poisoning of Colorado's Animus River, Mining.com reports The EPA has now been forced to admit that there was 3 milion gallons of toxic wastewater – triple their previous estimates. While EPA leadership held a press conference yesterday taking responsibility, it appears they are pointing the blame finger at the contractor, who they have now chosen to identify as Missouri-based Environmental Restoration which is one of the largest EPA emergency cleanup contractors. It is the main provider for the EPA’s emergency cleanup and rapid response needs in the region that covers Colorado, as well as in several other parts of the country – awarded $381 million in federal contracts since 2007. As the river slowly returns to normal (on the surface), The Navajo Nation, with many residents along the river, declared a state of emergency this week, vowing to hold the EPA fully responsible for its spill, and have demanded that the EPA provide the affected tribes with water until the river is once again usable.

   

  The EPA Admits the Colorado River spill was three times bigger than expected… (via OilPrice.com, by Cecilia Jamasmie via Mining.com)

  EPA says that about 3 million gallons of toxic wastewater, triple previous estimates, have poured from an old Colorado gold mine into local streams since last week.

   

  The U.S. Environmental Protection Agency said Sunday the spill caused accidentally by one of its clean-up teams working at an old Colorado gold mine has tripled in volume.

   

  The leak, containing high concentrations of heavy metals such as arsenic, mercury and lead, is now estimated to have reached about three million gallons of toxic wastewater, triple than originally estimated.

   

  According to the first statement released by the EPA, the contaminated water was hiding out behind debris near the Gold King Mine entrance, where the crew was working with heavy machinery. The mine waste poured out into a nearby creek, eventually leading to the Animas River where the spill spread.

   

  

   

  These images, courtesy of the Environmental Protection Agency, show the mouth of the Gold King Mine tunnel (left), and the channeled runoff on the mine dump (right).

   

  The discharge was still flowing at the rate of 500 gallons per minute yesterday, four days after the spill began at the Gold King Mine, the EPA added.

   

  

  Image courtesy of U.S. Environmental Protection Agency.

   

  The agency has been diverting the ongoing release into two newly built settling ponds where the waste was being treated with chemicals to lower its acidity and to filter out dissolved solids before being discharged to Cement Creek.

  

  Image courtesy of U.S. Environmental Protection Agency.

   

  The federal unit has also set up a website to provide constant updates on the situation.

   

  EPA reiterated the spill does not threaten local sources of drinking water and the main contaminants responsible for the leak’s mustard-like colour are unlikely to be dangerous.

  

  Image courtesy of U.S. Environmental Protection Agency.

   

  Still, recreational activity on the affected waterways has been suspended until the orange-coloured plume has fully dissipated.

  

   

  And now The EPA appears to be trying to distance itself from the actual event. As The Wall Street Journal reports, the previously unnamed contractor involved in the spil has now been identified (by the EPA) as Missouri-based Environmental Restoration LLC…

  The EPA, which was overseeing the servicing of the mine, had previously said an unnamed outside contractor was using heavy equipment when it accidentally triggered a breach in the abandoned Gold King Mine, letting out wastewater that had built up inside it.

   

  “Environmental Restoration LLC was working at the direction at EPA in consultation with the Colorado Division of Reclamation, Mining and Safety,” an EPA official said on Wednesday.

   

  …

   

  According to various government documents, Environmental Restoration had signed an agreement to provide emergency protection from pollutants from the Gold King Mine, near Durango, Colo., in the southwestern part of the state. The spill has fouled the nearby Animas River, turning its water mustard yellow in the initial several days after the spill on Aug. 5.

   

  The money to fund the Gold King Mine cleanup comes out of EPA’s Superfund budget, according to Scott Sherman, a former deputy assistant administrator at EPA during the George W. Bush administration who oversaw Superfund and other waste programs.

   

  Environmental Restoration is one of the largest EPA emergency cleanup contractors. It is the main provider for the EPA’s emergency cleanup and rapid response needs in the region that covers Colorado, as well as in several other parts of the country. It worked on the cleanup for some of the highest-profile disasters in recent history, including the aftermath of Hurricane Katrina, the Sept. 11, 2001, terrorist attack ground zero cleanup, and the Deepwater Horizon Gulf of Mexico spill remediation, according to the company’s website.

   

  From October 2007 through this month, Environmental Restoration has been awarded $381 million in federal contracts, according to government procurement data compiled on USAspending.gov. The vast majority—more than $364 million—of that total was for work for the EPA.

  Which makes you wonder, when revenues are all spoonfed by the government no matter what, just how 'careful' are you going to be? As we noted yesterday, this disaster was entirely foreseeable.

  And, as TheAntiMedia.org reports, The Navajo Nation has vowed to hold The EPA accountable…

  The Navajo Nation declared a state of emergency this week after the Environmental Protection Agency (EPA) revealed they were responsible for not one, but three million gallons of toxic mining wastewater spilled into the Animas River in Colorado. According to the EPA, the contamination is composed of cadmium, arsenic, lead, aluminum, and copper.

   

  Navajo Nation President Russell Begaye vowed to hold the EPA fully responsible for its spill, saying “The EPA was right in the middle of the disaster, and we intend to make sure the Navajo Nation recovers every dollar it spends cleaning up this mess and every dollar it loses as a result of injuries to our precious Navajo natural resources.” 

   

  According to Indian Country Today, “Residents along the San Juan River have been warned to stay away from the waterway. It is closed until further notice and should not be used to water crops or feed animals.”

   

  The Navajo Nation has demanded that the EPA provide the affected tribe(s) with water until the river is once again usable. It is currently unclear whether or not the agency will comply with this demand. Civil lawsuits now seem to be the restitution to recover damages from this spill since it is highly unlikely the EPA will pay any upfront fines for the leak, according to a former EPA official.

   

  Navajo Nation President Begaye has “instructed Navajo Nation Department of Justice to take immediate action against the EPA to the fullest extent of the law to protect Navajo families and resources.”

   

  Other damages to the local recreation economy and ecosystem are expected to add up, though the extent of the damages is not known at this time.

   

  This is just the most recent case where Native American land was polluted, not to mention where their basic necessities and rights were violated by the federal government. In many of these instances, little to nothing was done to compensate them for the damage.

   

  The Navajo Nation is no stranger to environmental negligence at the hands of the federal government and greedy corporations, which make their money extracting resources from native lands. For decades, uranium was mined from their land. According to the EPA,

   

  “Today the mines are closed, but a legacy of uranium contamination remains, including over 500 abandoned uranium mines (AUMs) as well as homes and drinking water sources with elevated levels of radiation. Potential health effects include lung cancer from inhalation of radioactive particles, as well as bone cancer and impaired kidney function from exposure to radionuclides in drinking water.”

   

  Despite the EPA’s claims to the contrary, this contamination is yet to be legitimately addressed even though the last uranium mines were shut down in 1986. In fact, the uranium industry is still trying to open new mines in or near Navajo land, despite the fact that the mess remains from previous mining operations. The Navajo Nation is still fighting for it to be cleaned up and to attain compensation for the countless victims who have fallen ill from radiation exposure.

   

  Currently, Native American Indians face another dire threat to their environment and resources from Big Oil interests and their in-pocket politicians, who are pushing for the construction of the Keystone XL Pipeline. The controversial pipeline is facing heavy opposition from indigenous groups because it would pass through reservation land in the U.S., extracting oil from prized native areas in Canada. While much is made from both the right and left about the pros and cons of the pipeline, these politicians and interest groups have so far disregarded the Native Americans’ concerns about the project.

  As Anti-Media concludes…

  The bottom line is that there are many environmental problems afflicting Native Americans and their land, and much of the time, these issues are neglected and even sustained by the people who cause them. Most times, complaints about these abuses fall on deaf government ears.

   

  The EPA’s toxic spill into the Animas River serves to highlight the continued abuses that indigenous populations in North America have suffered at the hands of governments and moneyed-interests since Europeans first “discovered” the Americas.

  *  *  *

  Summing it all up…

  It's not illegal when the government does it. pic.twitter.com/TehP7tCYne

  — Dean Clancy (@DeanClancy) August 13, 2015

  

  

  

  

• Released Hillary Clinton Emails Reveal… She Was Reading A Book On How To Delete Emails

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  As I’ve said many times before, the best part about Hillary Clinton running for President, is that she’s so unbelievably corrupt and shady, not a week goes by without a new scandal or embarrassment. It makes the insulting charade of U.S. elections at least somewhat comical.

  In the latest gaffe, we learn (through her own emails), that she asked to borrow a book titled, Send: Why People Email So Badly and How to Do It Better.” Chapter Six of this book is titled, “The Email That Can Land You In Jail,” which includes a section titled: “How to Delete Something So It Stays Deleted.”

  You can’t make this stuff up.

  

   

  From ABC News:

   

  The last batch of Hillary Clinton emails released by the State Department included one from Clinton asking to borrow a book called “Send: Why People Email So Badly and How to Do It Better,” by David Shipley and Will Schwalbe.

   

  Clinton has not said why she requested the book, but it includes some advice that is particularly interesting in light of the controversy over her unconventional email arrangement at the State Department and her decision to delete tens of thousands of emails she deemed to be purely personal.

   

  Take, for example, Chapter Six: “The Email That Can Land You In Jail.” The chapter includes a section entitled “How to Delete Something So It Stays Deleted.”

   

  The chapter advised that to truly delete emails may require a special rewriting program “to make sure that it’s not just elsewhere on the drive but has in fact been written over sixteen or twenty times and rendered undefinable.”

   

  But Shipley and Schwalbe warn that deleting emails could lead to future legal troubles.

   

  Here’s a screenshot of the email from ABC:

  

  Smell blood yet Bernie?

  Bernie Sanders Takes the Lead from Hillary in Latest New Hampshire Poll

  *  *  *

  For related articles, see:

  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

   

  

  

  

  

  

• Goldman Is Officially A Bank: Bailed Out Hedge Fund Will Allow Muppets To Give Their Savings To Lloyd Blankfein

  The last time former Goldman employee and then Treasury Secretary Hank Paulson bailed out the hedge fund known as Goldman Sachs, and its closest peers (but not its biggest fixed income competitor Lehman Brothers of course), even the traditionally confused American public pushed back on the structure of the bailout which converted the Goldman holding company into an FDIC-insured company, which led many to ask: just where are Goldman’s deposits?

  The answer, of course, was nowhere, so perhaps in anticipation of the logical pushback against its second, upcoming bailout which would see the taxpayer-backed depositor insurance company once again provide trillions in cash to banks as well as the glorified hedge funds such as Goldman, the firm moments ago decided to do something it has never done before: become an actual bank with checking accounts and such.

  It did so by announcing moments ago it would acquire GE’s Capital Bank’s online deposit platform, as in online checking accounts, including $8 billion in deposits and $8 billion in brokered CDs, thereby providing Goldman with a virtually costless source of $16 billion in funds. Costless, because under ZIRP, Goldman pays precisely zero interest for the unsecured liability also known as a deposit.

  from the PR:

  Goldman Sachs Bank USA (“GS Bank”) announced today it has entered into an agreement with GE Capital Bank (“GECB”) to acquire GECB’s online deposit platform and assume GECB’s approximately $8 billion in online deposit accounts and $8 billion in brokered certificates of deposit for an expected total of approximately $16 billion of deposits at closing. GS Bank will acquire no financial assets in the transaction other than cash associated with the deposit liabilities.

   

  “This transaction achieves greater funding diversification and strengthens the liquidity profile of GS Bank by providing an additional deposit gathering channel.  The establishment of this channel represents the advancement of a key funding objective for the firm,” said Liz Beshel Robinson, Treasurer of The Goldman Sachs Group, Inc.

   

  Scott Roberts, President of GECB, said: “We are pleased to transition our depositor relationships to GS Bank, a large, stable institution with a focus on customer service. I am personally excited at the prospect of joining GS Bank, along with my team, to work towards a seamless transition of depositor accounts and to assist in managing the platform going forward.”  “We look forward to welcoming and serving GECB’s online deposit customers at GS Bank with the high standard of service they have come to expect.  We also look forward to working with our new colleagues from GECB,” said Esta Stecher, Chief Executive Officer of GS Bank.

   

  As part of the transaction, GS Bank will extend offers of employment to substantially all of GECB’s employees dedicated to supporting the online deposit platform. As GECB’s deposit platform is online only, the transaction does not include the purchase of any physical assets.

  Of course, when the next systemic crash does come, anyone holding more than the FDIC insured maximum will be promptly bailed-in alongside all other unsecured creditors, which is why we doubt Goldman will have much success in gathering zero-cost depositor capital despite the bank’s desire  for “greater funding diversification” (one may wonder why Goldman needs said diversification now… rhetorically).

  Or perhaps we are wrong: just look at Greece – instead of taking every opportunity to empty out the local banks, the domestic savers who clearly have no idea that all the Greek government has done is to buy a few months of time, are once again eager to put their money in the same banks which just a few weeks ago refused to give money to its rightful owners.

  Maybe Goldman is merely betting that when it comes to human stupidity, it truly is infinite. In which case, it probably made the right decision. Otherwise, well, step aside Spiderman Towel…

  

  … it’s time for the Blankfein Towel.

  

  

  

  

  

• Oilpocalypse Beats Buyback Bonanza – Traders Sell Everything

  Another Yuan devaluation, PBOC propaganda, dismal European data, flat US retail sales and recessionary US inventory data… everything must be awesome!! But then again…

   

  Summing up today: Sell bonds, sell emerging market stocks, sell gold, sell silver, sell US Dollars, sell crude oil, sell European bonds… and Sell VIX… BTFD In US Equities… but once the AAPL buybacks stopped… Sell Stocks too!!

  

   

  Still could be worse, could be SHAK management trying to dump a secondary on the greater fools…

  

   

  On the day, stocks tanked after the "good" retail sales news but quickly rallied back helped by weak inventories data…things went very quiet for a few hours before the late day saw a wave of selling hit stocks…

  A reminder of what the "good" news looked like…

  "Retail sales were very strong" pic.twitter.com/4giKgQ3yEL

  — zerohedge (@zerohedge) August 13, 2015

   

  

  Leaving only The Dow marginally higher on the day…

  

   

  On the week…Nasdaq pulls back to unch with Small Caps red…

  

   

  Finally Energy stocks started to leak back to credit and  oil reality..

  

   

  Energy stocks catching down to reality…

  

   

  VIX picking back up again after testing 13.00…

  

   

  Energy credit risk hit new record highs…

  

   

  Credit markets were weak all day…

  

   

  Treasury Yields rose for the 2nd day, leaving all but 2Y higher on the week… (a weak 30Y auction with a 1.8bps tail sparked late weakness)

  

   

  The US Dollar index limped very modestly higher on the day as EURUSD tested back down to 1.1100 before bouncing…

  

   

  Commodities were mixed despite a flat dollar (copper rallied marginally as the rest were hit)…

  

   

  As WTI was hammered to new 6-year lows… this will be the 9th wek in a row of falling prices…

  

   

  Charts: Bloomberg

  Bonus Chart: Offshore Yuan suggests another 1% devaluation in the Yuan Fix tonight…

  

  

  

  

  

• These 11 CEOs Are The Most Overpaid Relative To Their Employees

  Earlier this month, we learned that the average employee at 10 legendary “Unicorn startups” is valued at somewhere around $8 million. These startups include Uber, Airbnb, Snapchat, Palantir, SpaceX, Pinterest, Dropbox, Wework, Theranos, and Square. 

  These “businesses” are valued at a combined $165 billion courtesy of the largely arbitrary and completely ridiculous methodologies employed by founders and their enthusiastic VC backers. Nevermind the fact that between them, they generate but $4 billion in revenue.

  Meanwhile, employees at real businesses are worth far less. Take McDonald’s for instance (which, even in its diminished state, still brings in more revenue in three months than all of the Unicorns listed above pull in over the course of a year – combined) where the enterprise value per employee is a paltry (by comparison) $200,000.  

  

  But while the value per employee may vary widely across corporate America and Silicon Valley, one thing is constant – a vast disparity between the average worker and the C-suite.

  As we noted at the end of June, CEOs in the US are back to making an average of 300 times what their employees make and although that’s short of the all-time high set near the peak of the dot-com bubble, we aren’t far from the top.

  

  Now, Bloomberg is out with a new study based on their own calculations and while it seems that their computation methods are predisposed to understating the case compared to the Economic Policy Institute’s figures (shown above), the data still suggests that for at least three American CEOs, the gap between their compensation and that of their employees is even wider than the 303:1 ratio from the preceding chart. 

  Here’s Bloomberg’s list:

  

  More color:

  McDonald’s might have some explaining to do.

   

  The fast-food chain has one of the highest ratios of CEO pay to that of the company’s average worker, at 644 to 1, according to data compiled by Bloomberg. Under a requirement approved last week by the U.S. Securities and Exchange Commission, public companies such as McDonald’s will have to disclose a similar metric annually, handing new ammunition to critics of C-suite pay packages.

   

  McDonald’s former chief executive officer isn’t even close to topping the list of highest-earning U.S. execs last year, but that doesn’t matter. The figure the SEC is requiring measures CEO pay against the median compensation of all employees, an unfavorable ratio when your workforce includes a lot of burger flippers and fry cooks.

   

  Some companies where top managers earned millions more last year than the $7.3 million paid to McDonald’s Don Thompson (who stepped down in March) actually have lower ratios. Examples include JPMorgan Chase and hospital operator Community Health Systems, both of which have pay gaps exceeding 200 to 1, which are still among the widest of all U.S. companies.

   

  To be sure, estimates relying on data that are currently available will probably differ from what companies report when the SEC rule kicks in two years from now. For instance, the SEC is allowing companies to omit a limited percentage of workers overseas, where wages might be lower.

   

  Bloomberg estimated average worker pay by identifying businesses’ reported salaries and benefits expenses, and dividing that by the total number of workers. 

   

  
  

  

  

  

  

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• Ireland Refuses To Extradite Man To US Because Prison System Is Too Inhumane

  Submitted by Cassius Methyl via TheAntiMedia.org,

  Throughout the world, the U.S. prison system is often seen as inhumane and excessively large.

  The American prison system is so reviled, in fact, that Irish officials recently refused to extradite an alleged terrorist to the U.S. The court cited concerns that if he were sent to the U.S., he would probably be placed in Colorado’s “Supermax” prison, ADX Florence (Administrative Maximum Facility). The prison is nicknamed Colorado’s “Alcatraz of the Rockies.”

  Irish High Court Justice Aileen Donnelly went as far as to write a 333-page report about why the suspect shouldn’t be extradited. One highlight from the court’s ruling was that incarceration at ADX Florence prison would amount to “cruel and unusual punishment.”

  Donnelly said the prison “amounts to a breach of the constitutional requirement to protect persons from inhuman and degrading treatment and to respect the dignity of the human being.”

  “[P]rolonged exposure to involuntary solitary confinement exacts a significant physiological toll, is damaging to the integrity of the mind and personality, and is damaging to the bodily integrity of the person,” she continued.

  According to the Los Angeles Times, “An Irish resident originally from Algiers, Damache, 50, [is]accused of using online chat rooms to recruit American women into a would-be terrorist cell operating in this country and Europe.

  One man and two women, including Damache’s wife, have already been convicted in U.S. courts of providing material support to terrorists. And Damache was captured by Irish authorities in 2010 in Dublin on a separate charge of making a telephone death threat and held without bail.”

  In 2011, Damache was indicted from a distance in a Philadelphia court on “charges of plotting to assassinate a Swedish cartoonist who depicted the prophet Muhammad as a dog.”

  Damache was released in May after serving his time, but the U.S. is still pushing for his extradition.

  “I always had faith in the Irish legal system,” he said in a statement presented by his lawyers. “After more than five years in jail, I am looking forward to moving on with my life here.”

  The Colorado prison has held some of the most well-known criminals in American history, keeping them in solitary confinement with extremely limited access to outside communication. Notorious inmates include Timothy McVeigh and other people accused of high level terrorism—such as Zacarias Moussaoui, the only person convicted in a civilian court for involvement in the 9/11 attacks.

  Lawyers have even argued that incarceration at ADX Florence is worse than the death penalty. Defense expert Mark Bezy called it “a mechanism to cut off an inmate’s communications with the outside world.”

  *  *  *

  The Irish court’s refusal to extradite Damache adds to a growing trend of nations that opt to exercise their own sovereignty amid pressure from powerful American influence.

  Such nations are increasingly moving to decide issues for themselves as they refuse to be persuaded into following the orders of a more powerful empire.

  

  

  

  

  

• Japan-Korea Tensions Rise – 80 Year-Old Veteran Self-Immolates In Anti-Japan Protest

  With China already stoking fears in The South China Sea (and now entering the currency war) and Japan re-militarizing (and having led the currency war for years) it appears tension within Asian nations is escalating. The latest egregious example of these tensions is evident, as Reuters reports, an 80-year old South Korean set himself on fire on Wednesday during a protest calling for Japan to apologize for forcing Korean girls and women to work in military brothels during World War Two, days ahead of the anniversary of the end of hostilities.

  Warning: Graphic

  As Reuters reports,

  The self-immolation occurred during a regular weekly demonstration outside the Japanese embassy ahead of the Aug. 15 anniversary marking 70 years since the end of Japan's colonial occupation of the Korean peninsula.

   

  With the anniversary looming, Wednesday's protest was larger than usual, with about 2,000 demonstrators, including three of the 47 known surviving Korean "comfort women", as they were euphemistically called by Japan, organizers said.

   

  Bystanders covered the man with protest banners to put out the flames and paramedics took him to hospital.

   

  

   

  The man, identified as Choi Hyun-yeol by a civic group with which he was affiliated, was in critical condition with burns to his neck, face, and upper torso, a hospital professor said.

   

  "The patient is old and has severe burns so his survival can't be guaranteed," the professor told reporters.

   

  …

   

  South Korea's ties with Japan have long been strained by what Seoul sees as Japanese leaders' reluctance to atone for the country's wartime past, including a full recognition of its role in forcing Korean girls and women to work in brothels.

  *  *  *

  With old war tensions mixing with new war tensions, Asia is quickly becoming yet another tinderbox in the centrally planned world.

  

  

  

  

  

• Did The EPA Intentionally Poison Animas River To Secure SuperFund Money?

  A week before The EPA disastrously leaked millions of gallons of toxic waste into The Animas River in Colorado, this letter to the editor was published in The Silverton Standard & The Miner local newspaper, authored by a retired geologist detailing verbatim, how EPA would foul the Animas River on purpose in order to secure superfund money…

  "But make no mistake, within seven days, all of the 500gpm flow will return to Cememnt Creek. Contamination may actually increase… The "grand experiment" in my opinion will fail.

   

  And guess what [EPA's] Mr. Hestmark will say then?

   

  Gee, "Plan A" didn't work so I guess we will have to build a treat¬ment plant at a cost to taxpayers of $100 million to $500 million (who knows).

   

  Reading between the lines, I believe that has been the EPA's plan all along"

  

   

  Sound like something a government entity would do? Just ask Lois Lerner…

  As we concluded previously,

  The EPA actually has no concern for the environment, they just happen to use the environment as a cover story to create laws and gain an advantage for the companies that lobbied for exemptions to the agency’s regulations, and to collect money in fines. There are solutions outside the common government paradigm, and that is mainly the ability for individuals, not governments, to hold polluters personally and financially accountable.

  h/t Stephen

  

  

  

  

  

• Understanding Why The Clinton Emails Matter

  Submitted by Peter van Buren via WeMeantWell.com,

  In the world of handling America’s secrets, words – classified, secure, retroactive – have special meanings. I held a Top Secret clearance at the State Department for 24 years and was regularly trained in protecting information as part of that privilege. Here is what some of those words mean in the context of former Secretary of State Hillary Clinton’s emails.

  The Inspectors General for the State Department and the intelligence community issued a statement saying Clinton’s personal email system contained classified information. This information, they said, “should never have been transmitted via an unclassified personal system.” The same statement voiced concern that a thumb drive held by Clinton’s lawyer also contains this same secret data. Another report claims the U.S. intelligence community is bracing for the possibility that Clinton’s private email account contains multiple instances of classified information, with some data originating at the CIA and NSA.

  A Clinton spokesperson responded that “Any released emails deemed classified by the administration have been done so after the fact, and not at the time they were transmitted.” Clinton claims unequivocally her email contained no classified information, and that no message carried any security marking, such as Confidential or Top Secret.

  The key issue in play with Clinton is that it is a violation of national security to maintain classified information on an unclassified system.

  Classified, secure, computer systems use a variety of electronic (often generically called TEMPESTed) measures coupled with physical security (special locks, shielded conduits for cabling, armed guards) that differentiate them from an unclassified system. Some of the protections are themselves classified, and unavailable in the private sector. Such standards of protection are highly unlikely to be fulfilled outside a specially designed government facility.

  Yet even if retroactive classification was applied only after Clinton hit “send” (and State’s own Inspector General says it wasn’t), she is not off the hook.

  What matters in the world of secrets is the information itself, which may or may not be marked “classified.” Employees at the highest levels of access are expected to apply the highest levels of judgment, based on the standards in Executive Order 13526. The government’s basic nondisclosure agreement makes clear the rule is “marked or unmarked classified information.”

  In addition, the use of retroactive classification has been tested and approved by the courts, and employees are regularly held accountable for releasing information that was unclassified when they released it, but classified retroactively.

  It is a way of doing business inside the government that may at first seem nonsensical, but in practice is essential for keeping secrets.

  For example, if an employee were to be handed information sourced from an NSA intercept of a foreign government leader, somehow not marked as classified, she would be expected to recognize the sensitivity of the material itself and treat it as classified. In other cases, an employee might hear something sensitive and be expected to treat the information as classified. The emphasis throughout the classification system is not on strict legalities and coded markings, but on judgment. In essence, employees are required to know right from wrong. It is a duty, however subjective in appearance, one takes on in return for a security clearance.

  “Not knowing” would be an unexpected defense from a person with years of government experience.

  In addition to information sourced from intelligence, Clinton’s email may contain some back-and-forth discussions among trusted advisors. Such emails are among the most sensitive information inside State, and are otherwise always considered highly classified. Adversaries would very much like to know America’s bargaining strategy. The value of such information is why, for example, the NSA electronically monitored heads of state in Japan and Germany. The Freedom of Information Act recognizes the sensitivity of internal deliberation, and includes a specific exemption for such messages, blocking their release, even years after a decision occurred. If emails discussing policy or decisions were traded on an open network, that would be a serious concern.

  The problem for Clinton may be particularly damaging. Every email sent within the State Department’s own systems contains a classification; an employee technically cannot hit “send” without one being applied. Just because Clinton chose to use her own hardware does not relieve her or her staff of this requirement.

  Some may say even if Clinton committed security violations, there is no evidence the material got into the wrong hands – no blood, no foul. Legally that is irrelevant. Failing to safeguard information is the issue. It is not necessary to prove the information reached an adversary, or that an adversary did anything harmful with the information for a crime to have occurred. See the cases of Chelsea Manning, Edward Snowden, Jeff Sterling, Thomas Drake, John Kiriakou or even David Petraeus. The standard is “failure to protect” by itself.

  None of these laws, rules, regulations or standards fall under the rubric of obscure legalities; they are drilled into persons holding a security clearance via formal training (mandatory yearly for State Department employees), and are common knowledge for the men and women who handle America’s most sensitive information. For those who use government computer systems, electronic tools enforce compliance and security personnel are quick to zero in on violations.

  A mantra inside government is that protecting America’s secrets is everyone’s job. That was the standard against which I was measured throughout my career and the standard that should apply to everyone entrusted with classified information.

  

  

  

  

  

• 19-Year Old Sets Own Ferrari On Fire Because He Wanted A New One

  On October 24, 2014, the 19-year old son of a wealthy Swiss businessman walked into a brothel in the Bavarian town of Augsburg.

  Although by almost any standard he led a rather splendid existence, on this particular night he had reached his breaking point. The problem: he drove a 2011 Ferrari 458 Italia.

  

  That may look nice enough, but the issue is that there’s a 2014 Ferrari Italia, and let’s face it, no one – and we mean no one – would want to be caught dead in the vehicle shown above when the one shown below is just waiting to be driven off the lot. 

  

  Of course this is exactly the type of situation that insurance – or, more acurately, insurance fraud – is for.

  And so this young man – allegedly with the help of the Ferrari dealer – did what anyone would do in this situation: he drove to Bavaria, went to see a prostitute (one needs an alibi), and paid two accomplices $15,000 to douse the old junker in gasoline and light it on fire. 

  Part of the plan worked. From Tages-Anzeiger (Google translated): 

  He visited the neighboring brothel with other colleagues. Meanwhile, the two helpers poured a gasoline-nitro-mixture to the leather seats of the black sport car and set it on fire. The car exploded with a loud bang and burned out.

  

  

  He even remembered to remove “the expensive specialty rims and carbon fiber parts.” 

  Initially, authorities came to the conclusion that the incident was retaliation for unpaid hooker fees. From 20 Minutes (Google translated from French):

  Initially, the Bavarian authorities believed a settlement account in prostitution.

  Yes, a “settlement account in prostitution,” but security camera footage and phone records told a different story. Ultimately, investigators concluded that this was all a not-so-elaborate ploy to collect the insurance money on the way to buying the newer model. 

  Asked by a judge why he had gone to such lengths given that his father had bought him 14 other cars (including a Lamborghini) as well as “several properties” worth in excess of $25 million, he confessed that although his monthly allowance (between CHF5,000 and CHF10,000) was generous enough, it wasn’t sufficient to cover the difference between the 2011 and the 2014 458s and he didn’t feel comfortable telling his father the truth – namely, that the 2011 458 “no longer pleased him.” 

  For his troubles, the young man received 30 months of probabtion and a €30,000 fine. There was no word on whether he was able to get the 2014 Speciale. 

  So although we think the moral of the story is quite obvious here, we’ll spell it out for you anyway: for anyone who thinks they’re having a bad day just remember that it could always be worse. You could be driving a 2011 Ferrari 458 Italia.

  

  

  

  

  

• Chinese Devaluation Extends To 3rd Day – Yuan Hits 4 Year Low, Japan Escalates Currency Race-To-The-Bottom Rhetoric

  The "one-off" adjustment has now reached its 3rd day as The PBOC has now devalued the Yuan fix by 4.65% back to July 2011 lows.

  Even before this evening's date with debasement history, Japan felt the need to step up the currency war rhetoric. Following disappointing Machine Orders data, Abe advisors Hamada warned that "Japan can offset Yuan devaluation by monetary easing," and so the race to the bottom escalates. China has its own problems as BofAML's leading economic indicator showed "the foundation for a growth recovery is not solid, facing more downward pressure," and while confusion reigns over why The PBOC would intervene at the close to strengthen the Yuan last night, the reality is the commitment isn’t to a devaluation for China’s exports, but undoubtedly its actions are directed toward trying to keep the wholesale finance interfaces somewhat orderly.  Finally, China’s devaluation couldn’t come at a worse time for Argentina – about a quarter of the country’s $33.7 billion of foreign reserves are now denominated in yuan, which suffered its biggest loss since 1994 on Tuesday.

  Having devalued the (onshore) Yuan fix by 3.5% in the last 2 days, China did it again… shifting Yuan to 4 year lows

  • *CHINA SETS YUAN REFERENCE RATE AT 6.4010 AGAINST U.S. DOLLAR

  

   

  Offshore Yuan dropped back to 6.50…

  

   

  And China Stocks have opened lower…

  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 1% TO 3,975.2

  S&P  Futures are fading…

  

  Some more liquidity needed…

  • *PBOC TO INJECT 40B YUAN WITH 7-DAY REVERSE REPOS: TRADER

  And sure enough, not be outdone, Japan threatens to re-escalate the currency war…

  • *ABE ADVISER HAMADA SAYS CHINA'S FX MOVE WILL TEND TO BOOST YEN
  • *HAMADA: JAPAN CAN OFFSET YUAN DEVALUATION BY MONETARY EASING
  • *HAMADA:BOJ MAY EASE IF CHINA MOVE HITS EXTERNAL DEMAND TOO MUCH

  But China has it's own problems, as BofAML notes, China LEAP (leading economic activity pulse) fell to-3.9% YoY in July from -2.6% in June, as five of the seven LEAP components weakened.

  Similarly, other macro activity data released in July worsened from a surprisingly strong June and disappointed the market. It suggests the foundation for a growth recovery is not solid, and economic growth faces more downward pressure as financial sector activity has slowed after the recent stock market slump.

   

  

   

  On the demand side, housing starts further declined to 16.4% yoy in July after dropping 14.3% in June. We think destocking could still be ongoing in tier 3-4 cities and the housing market recovery has yet to drive acceleration in housing starts. Auto sales growth slumped to -7.1% YoY from -2.3%, likely due to weakening consumer demand for some big-ticket items amid stock market turmoil while staple good sales remained resilient.

   

  Production-side components were mixed, with weaker power and steel output growth but slightly better cement output growth. Power and steel output growth was particularly poor in July, likely due to plummet in commodity and raw material prices on a bearish growth outlook amid stock market turmoil.

   

  Medium- to long-term loan growth edged down by 0.8pp, but if taking into account local government debt swap, the decline would be 0.3pp instead.

  *  *  *

  The fallout from China's decision is going global…

  China’s devaluation couldn’t come at a worse time for Argentina.

   

  About a quarter of the country’s $33.7 billion of foreign reserves are now denominated in yuan, which suffered its biggest loss since 1994 on Tuesday.

  *  *  *

  And finally, here is Jeffrey Snider of Alhambra Investment Partners discussing the other reality of what is occurring in China – as opposed to the paint-by-numbers version spun on TV – explaining why the PBOC would seemingly “allow” devaluation one day and then act against it the very next. They are just trying to hold on for dear life, managing imbalances that are beyond their grasp.

  While everyone remains sure that the PBOC is actively trying to “allow” the yuan to depreciate as some kind of export catalyst, the “dollar” continues to show (not suggest) otherwise. Liquidity and “dollar” markets are still roiled rather than soothed, especially the US treasury market where the bid right at the open (what look very much like continued collateral calls) pushes more like a combination of October 15 and January 15.

   

  

   

  As if to underscore the runaway nature, the PBOC apparently intervened against this “devaluation” just last night. From the Wall Street Journal:

   

  Tuesday, the People’s Bank of China surprised global markets with what looked like a win-win currency depreciation for the country—appearing to cede more control of its exchange rate to market forces, which the International Monetary Fund and others have long urged it to do, while also helping Chinese exporters.

   

  Its intervention only one day later raised questions about its commitment to an exchange rate driven more by supply and demand and less by government direction.

   

  The Journal’s confusion here is demonstrated by what is a mistaken assumption in the first paragraph leading to the mystery of the second. The PBOC’s commitment isn’t to a devaluation for China’s exports, but undoubtedly its actions are directed toward trying to keep the wholesale finance interfaces somewhat orderly. When the yuan was trading exactly sideways for nearly five months, that was the same setup; the PBOC was keeping the yuan stable so that it wouldn’t devalue and thus signal the depth of the “dollar” financing strain.

   

  That is the problem orthodox commentary and theory has with wholesale finance, they just don’t get it. Devaluation of currency doesn’t mean that in this context just as a “strong dollar” isn’t anything like the term. Both are forms of internal disruption, the direction of that is just an expression of what manner of wholesale finance is becoming most unruly. Credit-based “money” systems do not operate like the currency systems from before 1971. Floating currencies aren’t really that, so much as they are just another form of traded liabilities in global banking.

   

  

   

  The Chinese have a “dollar” problem just the same as the Swiss, Brazilians and the rest (including the dollar). There is a global retreat in eurodollar funding that is wreaking havoc, expectedly, globally. And in China that is particularly true as the Chinese banks through external corporates joined the “dollar short” several years back. Joined now under PBOC “reform”, there has been an almost hostility if not at least disfavor over the “dollar” intrusion as it has been taken as one primary element of the bubbles (what mainstream mistakes for “hot money”). As a result, the PBOC has been almost chasing “dollars” out of the system in an attempted orderly purge.

   

  That led to what looked like historic “outflows” in 2015 as “dollar” conditions for the Chinese “short”, so it is absolutely no surprise to see this occurring now. The only mystery has been, as I have been writing for some time, what the PBOC was doing to counteract it during those five months. That would tell us both how serious the turmoil was and how ineffective whatever intervention would ultimately be.

   

  From July 22:

  The yuan has suddenly, right at the March FOMC meeting, gone limp. Trading has been confined, except for very brief, intraday outbursts, to an increasingly narrow range. Given its behavior particularly as a full part of the reform agenda to that point, this amounts to what can only be hidden and inorganic factors. Whether that means PBOC intervention is unclear, though suggested by even TIC, but this is the most important and unexplained dynamic in the “dollar” world at present.

   

  Perhaps the June TIC updates will help shed some light on what has been going on with China’s “dollar short”, but I doubt it. The nature and especially the scale of what might be happening in the money markets has global implications, and may (conjecture on my part) start to explain the reversal in the Chinese stock bubble and ultimately even relate to the “dollar’s” renewed disruption in July so far.

   

  Earlier July 8:

  It’s not enough to notice how this [zero yuan volatility] is odd, as it appears, given wider circumstances, to be almost odd with a purpose. Whenever uncertainties grew about China’s reform, especially “allowing” defaults, “dollar” supplies tightened significantly and the yuan devalued. Given the fragility of the current situation, you can understand why, possibly, the PBOC might not want too much to get so far out of hand and so they may be supplying “dollars” to maintain orderly money markets both onshore and off. Given the plunge in import activity they may not really need to supply all that much, particularly in combination with prior and intended outflows as they effectively tried to chase speculators out of the country. Perhaps they did too much?

   

  Whatever the case may ultimately be, it bears close scrutiny for several reasons. First, if this is correct (a very big “if”) then the financial system in China is worse, far worse, than it appears. Second, central bank attempts such as this are extremely finite as they are, over time, hugely inefficient. The PBOC might just be throwing everything in its arsenal at the financial system short of open “flood” declarations (which are themselves destabilizing; declaring an open emergency is as much confirmation of how bad everything is) trying to calm everything down in order to reassess. [emphasis added]

   

  That is why the PBOC would seemingly “allow” devaluation one day and then act against it the very next. They are just trying to hold on for dear life, managing imbalances that are beyond their grasp. That is what occurred last night, as the Wall Street Journal confirms that Chinese banks were “selling” dollars on the PBOC’s behalf; which is, in the wholesale context, supplying “dollars.” The currency translation is just the recognition of that imbalance, which is in many forms like this kind of convertibility almost a “run.”

   

  The PBOC then instructed state-owned Chinese banks to sell dollars on its behalf in the last 15 minutes of Wednesday’s trading, according to people close to the state banks.

   

  The central bank took it as far as it could and then the “dollar” dam just burst on really bad economic data that was expected instead to confirm the bottom. At this point, it looks like they are left only to try to mitigate the damage they had been for five months hoping would never occur as the global economy was supposed to have healed on its own long before then (which was nothing more than FOMC and orthodox pipe dreams).

  Another central bank has fallen prey to the decomposing “dollar”, as the global tremors of such central bank upsets ripple further and further.

   

  

  

  

  

  

• 6 Years And One Witch Hunt Later, Goldman Changes Its Mind On "Secret Sauce" Software

  For anyone who didn’t read Flash Boys or who hasn’t otherwise apprised themselves of the history behind the proliferation of the parasitic, vacuum tubes that have embedded themselves between real buyers and sellers in order to extract a tax on each and every trade in the name of “providing liquidity”, you might have missed out on the sad story of Sergey Aleynikov, the Russian computer programmer and target of a six-year Goldman witch hunt.

  In 2010, a federal court convicted Aleynikov of stealing trading code from Goldman. As WSJ notes, Aleynikov was “acquitted of those charges on appeal, then charged again by the Manhattan District Attorney and convicted a second time, [before] a state judge dismissed the case last month on grounds that prosecutors failed to show enough evidence to support the verdict.”

  

  And while the Manhattan DA is appealing the ruling, Goldman is busy doing the exact same thing that Aleynikov is supposedly “guilty” of – distributing open source code. Here’s WSJ with the story:

  Goldman will soon offer clients access to more of its in-house tools, such as high-powered databases that analyze markets and manage risk, according to the firm’s executives. Those proprietary systems have long been key elements enabling Goldman to sidestep market turmoil and ring up outsized profits in better conditions.

   

  Given direct access to these tools, Goldman clients could use the technology to build their own trading systems and potentially make purchases independent of the firm.

   

  But the firm’s executives believe the upside outweighs those concerns. Goldman is betting that its clients, such as hedge funds and other money managers, will use the individual applications, or apps, to develop strategies and then execute their trades with the firm.

   

  By deepening ties with those clients, Goldman hopes it will pick up other business from them as well.

  The development has been a centerpiece of a new technology strategy developed by R. Martin Chavez, the firm’s chief information officer.

   

  “We’re constantly asking ourselves about all of it,” Mr. Chavez said. “Is this software better for clients and the planet if it’s inside Goldman? Or is it better if we extend the platform to clients, or in some cases does a spinout into open source or a company make more sense?”

  Now clearly, there are all kinds of amusing things about that last statement, including the notion that anything going on over at 200 West is good “for the planet” (they’re just “doing God’s work” over there, you know), but the idea that the firm now sees the utility in actively distributing open source code when by all accounts what Aleynikov took with him on the way out the door wasn’t proprietary at all, is evidence of blatant hypocrisy on the part of current management or complete incompetence on the part of those who came before – or both. 

  Furthermore, one wonders what happened to the notion that allowing this type of code to fall into the “wrong” hands, would be the capital markets equivalent of giving al-Qaeda a suitcase nuke. Remember, Goldman’s contention when Aleynikov was arrested was that the code he allegedly stole (the open source code) could be used to “manipulate markets in unfair ways.” Does that, by extension, mean that Goldman will now equip its most important clients with the tools to manipulate markets? 

  Well yes, but that doesn’t mean they weren’t already doing that. Here’s the Journal again:

  The concept of giving clients potentially valuable information in hopes of winning business isn’t unprecedented: Goldman and other investment banks have for years given clients trading ideas and market research on the same presumption.

  Of course given what we know about the tendency for Goldman to “muppetize” clients who take the firm’s “recommendations” at face value, we can’t help but wonder if the same fate isn’t in store for anyone who buys what the bank is selling (or giving away) in terms of software. 

  In any event, one thing we’re quite sure of is that Goldman won’t be trying to convince the Manhattan DA that given the firm’s enlightened stance on open source software, the torment of Sergey Aleynikov should finally come to an end.

  

  

  

  

  

• Albert Edwards: "Prepare For Sub-1% Treasury Yields And Another Financial Crisis"

  Make no mistake, warns SocGen's Albert Edwards, this is the start of something big, something ugly. For while the west has been heaving a sigh of relief over the past few months that deflation pressures have abated somewhat – especially at the core level – we have been emphasising that deflation has only been intensifying in Asia and that like any puss-filled boil, this deflationary pressure would soon need to be lanced…

  We have long believed that we are only one misstep from outright deflation in the west with core inflation in both the US and eurozone at just 1%. We expect the acceleration of EM devaluations to send waves of deflation to the west to overwhelm already struggling corporate profitability and take us back into outright recession. As investors realise yet another recession beckons, without any normalisation of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008.

  *  *  *
  Aside from the relentlessly weak economic and inflation data out of China in recent months (notwithstanding the surge in pork prices), the one thing that has changed dramatically over the last 18 months is China’s huge swing into a Balance of Payments deficit. This has exerted chronic downward pressure on the renminbi, forcing the Peoples Bank of China (PBoC) to start selling its vast foreign exchange reserves to prop up the beleaguered currency (FX reserves have slid $300bn over the last four quarters). Now, though it was only a little over two months ago the IMF declared the renminbi to be no longer undervalued, many of us felt the situation had gone far beyond that stage and that indeed, the currency was substantially overvalued, especially with the rest of Asia devaluing alongside the Japanese yen. The most shocking illustration of China’s loss of competitiveness in recent years is the 50% surge in its Real Effective Exchange Rate (REER) against the US (see chart below).

  

  In some ways the question is not whether the renminbi is competitive or uncompetitive. The problem is that the renminbi is unambiguously less competitive than it was. This comes at a time when the Chinese economy is struggling and the stock market bubble is bursting. We have always said renminbi devaluation would not be a preferred policy lever, but it was one that would be yanked vigorously if needed – viz FX intervention to stop the renminbi falling is effectively a monetary tightening, the last thing China needs at present! Many had felt it would continue to keep the renminbi stable while the IMF was still deliberating whether to admit the renminbi into the IMF’s basket of reserve currencies (SDR). But the IMF’s announcement last week to defer a decision until the autumn of 2016 may well have been sufficient reason for the PBoC to stand aside from FX intervention and bow to the inevitable. 

  The key thing here is that Tuesday’s devaluation is not just a one-off – you will see persistent weakness from hereon in. For although the PBoC said the move was a one-time adjustment to reflect changes in the way it calculates the daily fix, it also said that the price would be set “in conjunction with demand and supply conditions in the foreign exchange market and exchange rate movements of the major currencies”. To all but the most PollyAnna’ish of observers that means this is the start of a major renminbi devaluation because of the massive downward market pressure the currency is under via the BoP deficit.

  

  This move will transform perceptions about the resilience of the US economy. The recent strength of the trade-weighted US dollar has already contributed to deflation being imported into the US (see right-hand chart above), at a time when core consumer price inflation is already too low. Up until now Japanese yen devaluation has been the main driver of falling US import prices (see top right-hand chart above). Another way to view this is to look at the level of US import prices from various countries/regions since the start of this recovery (see chart below). Despite much talk of Japanese exporters maintaining dollar prices to expand margins and profits, dollar import prices have definitely slumped and China is about to catch up with Japan! For although the renminbi Is not actually included in the trade-weighted DXY calculation, the Fed estimate China’s importance to be 21% of their own broad tradeweighted dollar index – a steep rise from only 15% a decade ago. Japan by contrast currently accounts for 7% of the index, but it has been yen devaluation that has helped heap pressure on China to devalue. Watch that dark blue line below closely.

  

  Many observers, such as myself, believe the US dollar has now entered a secular bull market irrespective whether the Fed raises interest rates in September or not. But in any case, with an ongoing renminbi (read EM …) currency devaluation now underway, the US will import even more of the world’s unwanted deflation. We see this as the end-game in this cycle. With US profits already falling (sharply in the case of whole economy profits), the cycle is already very vulnerable indeed, as it is the business investment component of GDP that causes recessions.

  While investors have already talked about the eurozone looking similar to Japan, a deflationary recession also beckons for the US. Core inflation on the Fed’s preferred measure (core PCE) is hovering around the 1% level and a new round of in the currency war will see a move in core inflation below zero to accompany the headline rate.

  

  Prepare for sub-1% 10y Treasury yields and another financial crisis as policy impotence is soon revealed to all. 

  Source: SocGen

  

  

  

  

  

• There's More To Come – Offshore Yuan Signals Further Devaluation Tonight

  Despite 2 significant interventions to stall what is likely an avalanche of wrong-way carry trade unwinds (or perhaps to stop the boat swinging to the other side too much), offshore Yuan has continued to depreciate since China closed and now implies another 1% devaluation is looming (having been up to a 2.6% discount earlier in the day).

   

  PBOC intervened in CNY overnight…

  

   

  But CNH remains adamant that more devaluation is coming…

  

   

  CNH nailed it overnight… will it be right again tonight?

   

  Charts: Bloomberg

  

  

  

  

  

• Mysterious Dip Buyer Found – Goldman Buyback Desk Has Busiest Day Since 2011

  On Tuesday, in “Even The Dumb Money Is Dumping Stocks Now,” we highlighted weekly flows data from BofAML which showed that not only were hedge funds and institutional clients (still) selling in the five days ended 8/07, but private clients were net sellers for a second consecutive week, dumping the most equities in a year. 

  But not everyone was selling last week.

  Stocks still benefited from the perpetual corporate management bid that’s helped to sustain the equity rally since the flow from that other price insensitive buyer (the Fed) tapered off. 

  

  Given the above – and given everything we’ve said this year about debt-funded corporate buybacks buoying equities – no one should be surprised that Wednesday’s magical levitation came courtesy of US corporations. Here’s Bloomberg with more: 

  Who did the buying as U.S. stocks staged the biggest turnaround in three years? The companies that issued them.

   

  The Goldman Sachs Group Inc. unit that executes share buybacks for clients had its busiest day since 2011 on Wednesday, according to a note from the firm’s corporate agency desk. Based on the value of equities repurchased, volume handled by the bank set a record. The note was confirmed by spokeswoman Tiffany Galvin.

   

  Corporations have emerged as one of the biggest sources of fresh cash in the stock market, eclipsing even mutual funds with more than half a trillion dollars spent last year, according to data compiled by S&P Dow Jones Indices. They swooped in and bought again on Wednesday as the Standard & Poor’s 500 Index flirted with its largest two-day selloff since January.

  In short, today should serve as a real-world example of what GMO’s Ben Inker said in the firm’s latest quarterly letter: “…in order to see massive changes in the price of a security, you don’t need the price-insensitive buyer to become a seller. You merely need him to cease being the marginal buyer. If price-insensitive buyers actually become price-insensitive sellers, it becomes possible that price falls could take asset prices significantly below historical norms.”

  Oh, and by the way, here’s what we said early in the session:

  Quick, add more cash to the AAPL buyback.

  — zerohedge (@zerohedge) August 12, 2015

  

  

  

  

  

• Why More Conflict Is Inevitable In The Middle East

  Submitted by Erico Matias Tavares via Sinclar & Co.,

  We all know how sectarian, religious and political differences have thrown many Middle Eastern countries into chaos and armed conflict. But there is a deeper factor at play which deserves greater recognition: severe water scarcity.

  This scarcity will not be addressed overnight, no matter who ends up prevailing in those conflicts. As such, the region will very likely continue to suffer from significant turmoil for many years to come.

  Using satellite data, scientists from the University of California (Irvine), NASA and the National Center for Atmospheric Research found that large parts of the arid Middle East region saw a dramatic loss of freshwater reserves over a seven-year period starting in 2003. This is shown in the following map:

  

  Parts of Turkey, Syria, Iraq and Iran along the Tigris and Euphrates river basins lost some 144 cubic kilometers of total stored freshwater – almost the total amount of water in the Dead Sea. The scientists attributed the majority of this loss to pumping from underground reservoirs.

  Indeed, Syria and Iraq are facing severe water availability issues, compounded by the fact that the majority of their renewable water resources comes from other countries. As such, the Euphrates River – which has sustained Mesopotamian civilization from its very start – is critically important for them.

  However, rampant demand, wasteful government policies, intensive agriculture, pesticides and industrial use have all substantially reduced both the quality and the quantity of water available. According to a Chatham House study, this overexploitation has curtailed the flow of the Euphrates from Turkey to downstream countries by at least 40% since 1972.

  This is a major concern for the 27 million people across these three countries who depend on these water supplies directly, and many millions more reliant on the food and energy coming out of that region. All the wars since 2003 have only made matters worse.

  It is not surprising then that the Islamic State is securing strongholds along the river and using them to exert pressure on their enemies. But there is one thing that the opposing factions in the brutal war raging across Syria and Iraq agree on, and that is accusing Turkey of further reducing their fair share of water supplies from the Euphrates. The latter will soon complete an ambitious US$35 billion dam and irrigation works program, which will put further pressure downstream.

  Other countries in the region are facing even more severe water problems. Take Yemen for instance, a country with 24 million people and one of the lowest per capita water availability levels in the world. Critical water supply sources are being depleted so rapidly that they will become exhausted before the end of the decade. Dwindling oil production has hit the economy hard, at a time when big investments in infrastructure are needed to tackle the issue. And now there’s a conflict raging between Yemeni factions, internally and against Saudi Arabia.

  So we can see another pattern emerging beyond the sectarian power play across the region… and arguably even more significant: where water supplies become acutely scarce, armed conflict rapidly follows.

  An Explosive Mix

  The population growth rate in the Middle East is one of the highest in the world. From 1990 to 2010, population in that region as a whole increased by 50% – 124 million people in absolute terms, more than four times the increase in the European Union over the same period. In some of the most parched countries that increase has been absolutely staggering, as shown in the following table:

  

  Population (MM) and Military Expenditures (constant 2011 US$) in Selected Middle East Countries: 1990 – 2010

  Source: World Bank, OECD, SIPRI.
  (a) Yemen is from 1990 to 2008 and UAE from 1997 to 2010.

  These are quite young populations as most of the growth has been organic. And it’s always the young who tend to get really agitated when a problem emerges. Military expenditures in most of these countries have increased at rates even higher than population. So not only there is a rapidly expanding number of people facing a dire water situation; they also have more weapons at their disposal.

  Accordingly, the world and its superpowers should not be surprised by the expansion of armed conflict across the Middle East we have witnessed in recent years. And unfortunately things might get even worse from here.

  Policy Implications

  There is no civilization without water. If current water trends persist, pardon the hyperbole but large parts of the Middle East may turn into one of the worst humanitarian disasters the world has ever seen, particularly given the large size of those populations.

  The immediate consequence is of course a continuation if not expansion of armed conflicts across the region, as people fight over the remaining drops of water.

  Desperate civilians will try to get out any way they can. Italy and especially Greece are already overwhelmed by the flood of migrants crossing the Mediterranean. Just imagine those flows increasing by many multiples over the coming years.

  

  And it’s not only civilians who are looking to come across. The map above shows the ultimate territorial ambitions of the Islamic Caliphate. Seems farfetched particularly as many of those countries are NATO members or part of China, but this will not dissuade them from trying by any means. Time and demographics are on their side, with large pools of disillusioned young people at their disposal (with relatives and sympathizers already in Europe), as well as potential access to advanced weaponry manufactured in the West, Russia and China.

  In light of all of this, the lack of a concrete strategy and response thus far by European Union leaders is truly baffling. It is becoming increasingly obvious that they will not be able to solve this problem just by throwing some money at it and moving a few refugees around; not when its scale can dramatically increase in magnitude.

  What will this do to the Middle East’s main export, crude oil? Our guess is that producing countries will continue to expand production, even if prices in the world markets correct further. After all they have big bills to pay: fighting insurgents, ramping up their defenses, investing in infrastructure, importing food (to mitigate domestic production declines)… But if any slack in capacity is exhausted, or worse, conflict expands to the point where their upstream or logistical infrastructure is impaired, then supply could quickly go the other way.

  While conventional, tar sands and tight oil producers in North America may get the last laugh, it is clear that the world economy needs the abundant reserves of the Middle East.

  It is also curious to note how ill equipped Western central banks would be to deal with the inflationary consequences of an oil supply shock. Why? Because any material increase in interest rates would blow up government budgets in many developed countries, given the high debt loads that they have taken on since the 2008 financial crisis.

  Rather than adding more fuel to the Middle Eastern fire, it seems that the world’s superpowers have a vested interest to negotiate and implement credible solutions to the unfolding catastrophe in the region.

  Unfortunately, such vision and leadership seem to be in even shorter supply than water in the Middle East.

  

  

  

  

  

• Why Credit Market Moves Are Now "Hyperbolic," Citi Explains

  We’ve made no secret of our views on just how precarious corporate credit markets have become. 

  For anyone in need of a refresher, the dynamic is very simple. The ZIRP-induced hunt for yield has driven investors away from risk-free assets and into anything that promises to generate at least some semblance of income. Corporate management teams have taken advantage of the situation to issue record amounts of debt, the proceeds from which have either been plowed into EPS-inflating, stock-boosting buybacks, or used to keep struggling businesses (like heavily indebted drillers, for instance) in business. The proliferation of fixed income ETFs and mutual funds have helped funnel retail money into areas of the bond market where it might normally have never penetrated. Meanwhile, Wall Street has pulled back from its traditional role as warehouser (i.e. liquidity provider). The result: record issuance of corporate credit and record low liquidity in the secondary market. In other words, a very crowded theatre, and an ever shrinking exit. 

  Making matters worse is the fact that retail money tends to chase returns, resulting in a “positive” rather than a “negative” feedback loop, where mean reversion simply falls by the wayside.

  With that in mind, we present the following graphic which, while simple, has quite a bit of explanatory value. 

  Via Citi’s Matt King: 

  

  

  

  

  

  

• Charting A Decade Of Yuan Moves

  China’s central bank has taken global markets by surprise with a historic shift in its management of the yuan. As Bloomberg's Tom Orlik notes, The PBOC also signaled that going forward it would adopt a more hands-off approach to the exchange rate. Given the current direction of market pressure, that likely means depreciation. The yuan has already fallen to 6.3858 at the close of trading on Wednesday afternoon, from 6.2097 at Monday's close — a level last seen in the summer of 2012. In this chart, we map out the history of moves in the yuan in the decade since the PBOC broke the dollar peg in 2005… and all the rhetoric that will now be undone…

   

  

  Source: Bloomberg Briefs

  

  

  

  

  

• 12 Signs That An Imminent Global Financial Crash Has Become Even More Likely

  Submitted by Michael Snyder via The Economic Collapse blog,

  Did you see what just happened?  The devaluation of the yuan by China triggered the largest one day drop for that currency in the modern era.  This caused other global currencies to crash relative to the U.S. dollar, the price of oil hit a six year low, and stock markets all over the world were rattled.  The Dow fell 212 points on Tuesday, and Apple stock plummeted another 5 percent.

  As we hurtle toward the absolutely critical months of September and October, the unraveling of the global financial system is beginning to accelerate.  At this point, it is not going to take very much to push us into a full-blown worldwide financial crisis.  The following are 12 signs that indicate that a global financial crash has become even more likely after the events of the past few days…

  #1 The devaluation of the yuan on Tuesday took virtually the entire planet by surprise (and not in a good way).  The following comes from Reuters…

  China’s 2 percent devaluation of the yuan on Tuesday pushed the U.S. dollar higher and hit Wall Street and other global equity markets as it raised fears of a new round of currency wars and fed worries about slowing Chinese economic growth.

  #2 One of the big reasons why China devalued the yuan was to try to boost exports.  China’s exports declined 8.3 percent in July, and global trade overall is falling at a pace that we haven’t seen since the last recession.

  #3 Now that the Chinese have devalued their currency, other nations that rely on exports are indicating that they might do the same thing.  If you scan the big financial news sites, it seems like the term “currency war” is now being bandied about quite a bit.

  #4 This is the very first time that the 50 day moving average for the Dow has moved below the 200 day moving average in the last four years. This is known as a “death cross”, and it is a very troubling sign.  We are just about at the point where all of the most common technical signals that investors typically use to make investment decisions will be screaming “sell”.

  #5 The price of oil just closed at a brand new six year low.  When the price of oil started to decline back in late 2014, a whole lot of people were proclaiming that this would be a good thing for the U.S. economy.  Now we can see just how wrong they were.

  At this point, the price of oil has already fallen to a level that is going to be absolutely nightmarish for the global economy if it stays here.  Just consider what Jeff Gundlach had to say about this in December…

  And back in December 2014, “Bond King” Jeff Gundlach had a serious warning for the world if oil prices got to $40 a barrel.

  “I hope it does not go to $40,” Gundlach said in a presentation, “because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be — to put it bluntly — terrifying.”

  #6 This week we learned that OPEC has been pumping more oil than we thought, and it is being projected that this could cause the price of oil to plunge into the 30s…

  Increased pumping by OPEC as Chinese demand appears to be slackening could drive oil to the lowest prices since the peak of the financial crisis.

   

  West Texas Intermediate crude futures skidded through the year’s lows and looked set to break into the $30s-per-barrel range after the Organization of the Petroleum Exporting Countries admitted to more pumping and China devalued its currency, sending ripples through global markets.

  #7 In a recent article, I explained that the collapse in commodity prices that we are witnessing right now is eerily similar to what we witnessed just before the stock market crash of 2008.  On Tuesday, things got even worse for commodities as the price of copper closed at a brand new six year low.

  #8 The South American debt crisis of 2015 continues to intensify.  Brazil’s government bonds have been downgraded to just one level above junk status, and the approval rating of Brazil’s president has fallen into the single digits.

  #9 Just before the financial crisis of 2008, a surging U.S. dollar put an extraordinary amount of stress on emerging markets.  Now that is happening again.  Emerging market stocks just hit a brand new four year low on Tuesday thanks to the stunt that China just pulled.

  #10 Things are not so great in the United States either.  The ratio of wholesale inventories to sales in the United States just hit the highest level since the last recession.  What that means is that there is a whole lot of stuff sitting in warehouses out there that is waiting to be sold in an economy that is rapidly slowing down.

  #11 Speaking of slowing down, the growth of consumer spending in the United States has just plummeted to multi-year lows.

  #12 Deep inside, most of us can feel what is coming.  According to Gallup, the number of Americans that believe that the economy is getting worse is almost 50 percent higher than the number of Americans that believe that the economy is getting better.

  Things are lining up perfectly for a global financial crisis and a major recession beginning in the fall and winter of 2015.

  But just because things look like they will happen a certain way does not necessarily mean that they will.  All it takes is a single “event” of some sort to change everything.

  

  

  

  

  

• Emerging Market Currencies To Crash 30-50%, Jen Says

  Less than 24 hours ago, we argued that although it might have seemed as though Brazil hit rock bottom in Q2 when it suffered through the worst inflation-growth mix in over a decade, things were likely to get worse still.

  The country, which is also coping with twin deficits and a terribly fractious political environment, is at the center of what Morgan Stanley recently called “a triple unwind of EM credit, China’s leverage, and US monetary easing” and now that its most critical trading partner has officially entered the global currency war, all roads lead to further devaluation of the faltering BRL. 

  And it’s not just the BRL. As Bloomberg reports, former IMF economist Stephen Jen (who called the 1997 Asian crisis while at Morgan Stanley) thinks EM currencies could fall by an average of 30% going forward on the back of the PBoC’s move to devalue the yuan. Here’s more: 

  [The] devaluation of the yuan risks a new round of competitive easing that may send currencies from Brazil’s real to Indonesia’s rupiah tumbling by an average 30 percent to 50 percent in the next nine months, according to investor and former International Monetary Fund economist Stephen Jen.

   

  Volatility measures were already signaling rising distress in emerging markets even before China’s shock move. An index of anticipated price swings climbed above a rich-world gauge at the end of July, reversing the trend seen for most of the past six months.

   

  
  

   

  “If this is the beginning of a new phase in Beijing’s currency policy, it would be the biggest development in the currency world this year,” said Jen, founder of London-based hedge fund SLJ Macro Partners LLP. “The emerging-market currency weakening trend is now going global.”

   

  Latin America is a particular concern because of the region’s high levels of corporate debt, said Jen

   

  Jen recommends selling the real, rupiah and South African rand — all currencies of commodity exporters, which rely on China for a large chunk of their foreign earnings. 

   

  As well as the drop in raw-materials prices, the prospect of higher interest rates in the U.S. has also drawn away investment, pushing a Bloomberg index of emerging-market exchange rates down 20 percent in the past year. A Latin American measure headed for its 13th monthly loss out of 14, while an Asian gauge plunged Tuesday to its lowest in six years.

  And a bit more color from WSJ:

  If China’s devaluation deepens, pressure to weaken currencies could become particularly intense in other Asian nations that export large amounts to China or compete with Beijing in other markets. Asian currencies tumbled on Tuesday, notably the South Korean won, Australian dollar and Thai baht, as investors bet China’s move could lead to further monetary easing in those nations. Many Asian nations have cut rates this year and could be forced to take further action in coming months.

   

  “A new theme has emerged—one of Asian currency weakness,” said Wai Ho Leong, an economist in Asia at Barclays.

  To be sure, it’s all down hill from here, and on that note, we’ll reprise our conclusion from last week’s “Emerging Market Mayhem” piece: Between an inevitable (if now delayed) Fed hike, stubbornly low commodities prices, the entry of the world’s most important economy into the global currency wars, and, perhaps most importantly from a big picture, long-term perspective, a seismic shift in the pace of global demand and trade, we could begin to see a wholesale shift in which the markets formerly known as “emerging” quickly descend into “frontier” status and after that, well, cue the “humanitarian aid” packages.

  *  *  *

  Here’s a look at the damage since Monday, right before the devaluation:

  

  

  

  

  

  

• "Severe Correction Or Cyclical Bear" Ahead: Leuthold Major Trend Index Turns Negative

  Courtesy of The Leuthold Group,

  Based on data for the week ended August 7th, the Major Trend Index dropped to a NEGATIVE reading of 0.90, led by declines in both the Attitudinal and Momentum/Breadth/Divergence work. The topping action evident in the MTI and other disciplines is consistent with either a severe correction, or a cyclical bear in the near future. We’ve therefore cut net equity exposure in both the Leuthold Core and Leuthold Global Funds to 38%, down from 48% in late July, and 61-62% in late June. A further reduction is possible in the days ahead.

  Sentiment has clearly cooled off from the ebullience seen throughout 2014 and early this year, and some analysts contend there’s a new “wall of worry” for the stock market to climb (concerns over China’s market air pocket, crude’s retest of March lows, and the weak quarterly earnings season now in progress). But the MTI’s Attitudinal category staged a sharp drop last week, reflecting bearish flips in three models tracking investor preferences between stocks and bonds.

  The Momentum/Breadth/Divergence category also recorded a small loss on the week, reflecting further weakness in market breadth and small losses in the chart scores. Yet the net reading for this category is still positive at +92; the weakness to date has largely been concentrated in “anticipatory” indicator groupings related to momentum, breadth, and industry leadership. We obviously prefer acting on this type of evidence rather than waiting for formal bear signals from indicators based on the major indexes, but the markets don’t always afford us that opportunity.

  

  The Supply/Demand category carries the smallest potential weight of the five categories but can be an important swing factor at major turning points. The current category reading is a bearish –93, reflecting evidence of increasing institutional selling across three measures.

  *  *  *

  Full August letter below…

  Leuthold Group – From August 2015 Green Book

  

  

  

  

  

• Solyndra 2.0 Nears Bankruptcy As Bonds Collapse To Record Lows

  Two weeks ago we introduced you to Abengoa – the Spanish renewable-energy company – that received over $230 million in US taxpayer subsidies and loos set to become Solyndra 2.0. While all the politicians have taken their pound of flesh, Abengoa bonds have collapsed for five days in a row, now trading at record lows around 45 cents on the dollar – flashing the bankruptcy imminent light. Solyndra 2.0?  

  Abengoa 2020s fell over 5 points today to around 45 cents on the dollar…

  

   

  As we concluded previously, the company’s political connections are emblematic of an industry that remains reliant on taxpayer subsidies, according to William Yeatman, a senior fellow specializing in energy policy at the Competitive Enterprise Institute.

  “It could not be more clear that this company could not survive without access to government favors from political friends,” Yeatman said, citing its reliance on the Renewable Fuels Standard and continued financial support from DOE.

   

  “Alas, the same can be said for the green energy industry as a whole, which would fast wither and die absent a steady diet of taxpayer and ratepayer subsidies,” Yeatman said.

   

  In addition to its DOE subsidies, Abengoa received $185 million in financing in 2012 and 2013 through the U.S. Export-Import bank as former New Mexico Gov. Bill Richardson (D) sat on the boards of both the federal agency and the company it was subsidizing.

   

  Despite extensive federal support for the company, Alhalabi described a culture of disregard for workplace safety and environmental contamination. Concern over high costs has led to lackluster engineering work at the company’s Mojave facility that could result in an “environmental disaster,” he said.

  Solyndra 2.0? Another one off? Or another symptom of the Oligrachic ignorance of where the money comes from…It appears US taxpayers can kiss that money goodbye…

  “The equity increase gives the impression that the company urgently needs cash,” said Fischer. “They’ve not done enough to win back investors’ trust.”

  

  

  

  

  

• Asset-Price Inflation Enters Its Dangerous Late Phase

  Submitted by Brendan Brown via The Mises Institute,

  Asset price inflation, a disease whose source always lies in monetary disorder, is not a new affliction. It was virtually inevitable that the present wild experimentation by the Federal Reserve — joined by the Bank of Japan and ECB — would produce a severe outbreak. And indications from the markets are that the disease is in a late phase, though still short of the final deadly stage characterized by pervasive falls in asset markets, sometimes financial panic, and the onset of recession.

  Global Signs of Danger

  A key sign of danger, recognizable from historical patterns of how the disease progresses, is the combination of steep speculative temperature falls in some markets, with still-high — and in some cases, soaring — temperatures in other markets. Another sign is some pull-back in the carry trade, featuring, in particular, the uncovered arbitrage between a low (or zero) interest rate, and higher rate currencies. For now, however, this is still booming in some areas of the global market-place.

  Specifically, we now observe steep falls in commodity markets (also in commodity currencies and mining equities) which were the original area of the global market-place where the QE-asset price inflation disease attacked (back in 2009–11).

  Previously hot real estate markets in emerging market economies (especially China and Brazil) have cooled at least to a moderate extent. Most emerging market currencies — with the key exception of the Chinese yuan — once the darling of the carry traders, are in ugly bear markets. The Shanghai equity market bubble has burst.

  Yet in large areas of the high-yield credit markets (including in particular the so-called covenant-lite paper issued by highly leveraged corporations) speculative temperatures remain at scorching levels. Meanwhile, Silicon Valley equities (both in the public and private markets), and private equity funds enjoy fantasy valuations. Ten-year Spanish and Italian government bond yields are hovering below 2 percent, and hot spots in global advanced-economy real estate — whether San Francisco, Sydney, or Vancouver — just seem to get hotter, even though we should qualify these last two observations by noting the slump in the Canadian and Australian dollars. Also, there is tentative evidence that London high-end real estate is weakening somewhat.

  How to Identify Late Stages of Asset Inflation

  We can identify similar late phases of asset price inflation characterized by highly divergent speculative temperatures across markets in past episodes of the disease. In 1927–28, steep drops of speculative temperature in Florida real estate, the Berlin stock market, and then more generally in US real estate, occurred at the same time as speculative temperatures continued to soar in the US equity market. In the late 1980s, a crash in Wall Street equities (October 1987) did not mark the end-stage of asset price inflation but a late phase of the disease which featured still-rising speculation in real estate and high-yield credits.

  In the next episode of asset price inflation (the mid-late 1990s), the Asian currency and debt crisis in 1997, and the bursting of the Russian debt bubble the following year, accompanied still rising speculation in equities culminating in the Nasdaq bubble. In the episode of the mid-2000s, the first quakes in the credit markets during summer 2007 did not prevent a further build-up of speculation in equity markets and a soaring of speculative temperatures in winter 2007–08 and spring 2008 in commodity markets, especially oil.

  What insights can we gain from the identification of the QE-asset price inflation disease as being in a late phase?

  The skeptics would say not much. Each episode is highly distinct and the disease can “progress” in very different ways. Any prediction as to the next stage and its severity has much more to do with intuition than scientific observation. Indeed some critics go as far as to suggest that diagnosis and prognosis of this disease is so difficult that we should not even list it as such. Historically, such critics have ranged from Milton Friedman and Anna Schwartz (who do not even mention the disease in their epic monetary history of the US), to Alan Greenspan and Ben Bernanke who claimed throughout their years in power — and these included three virulent attacks of asset price inflation originating in the Federal Reserve — that it was futile to try to diagnose bubbles.

  We Can’t Ignore the Problem Just Because It’s Hard to Measure

  Difficulties in diagnosis though do not mean that the disease is phantom or safely ignored as just a minor nuisance. That observation holds as much in the field of economics as medicine. And indeed there may be a reliable way in which to prevent the disease from emerging in the first place. The critics do not engage with those who argue that the free society’s best defense against the asset price inflation disease is to follow John Stuart Mill’s prescription of making sure that “the monkey wrench does not get into the machinery of money.”

  Instead, the practitioners of “positive economics” demonstrate an aversion to analyzing a disease which cannot be readily identified by scientific measurement. Yes, the disease corrupts market signals, but by how much, where, and in what time sequence? Some empiricists might acknowledge the defining characteristic of the disease as “where monetary disequilibrium empowers forces of irrationality in global markets.” They might agree that flawed mental processes as described by the behavioral finance theorists become apparent at such times. But they despair at the lack of testable propositions.

  Mis-Measuring Increases in Asset Prices

  The critics who reject the usefulness of studying asset price inflation have no such qualms with respect to its twin disease — goods and services inflation. After all, we can depend on the official statisticians!

  In the present monetary inflation, a cumulative large decline in equilibrium real wages across much of the labor market, together with state of the art “hedonic accounting” (adjusting prices downward to take account of quality improvements) has meant that the official CPI has climbed by “only” 11 percent since the peak of the last business cycle (December 2007). The severity of the asset price inflation disease makes it implausible that the official statisticians are measuring correctly the force of monetary inflation in goods and services markets.

  What Is the Final Stage?

  A progression of the asset price inflation disease into its final stage (general speculative bust and recession) would mean the end of monetary inflation and also inflation in goods and services markets. What could bring about this transition? Most plausibly it will be a splintering of rose-colored spectacles worn by investors in the still hot speculative markets rather than Janet Yellen’s much heralded “lift-off” (raising official short-term rates from zero). What could cause the splinter?

  Perhaps it will be a sudden rush for the exit in the high-yield credit markets, provoked by alarm at losses on energy-related and emerging market paper. Or financial system stress could jump in consequence of the steep falls of speculative temperature already occurring (including China and commodities). Perhaps there will be a run from those European banks and credit funds which are up to their neck in Spanish and Italian government bonds. Or the Chinese currency could tumble as Beijing pulls back its support and the one trillion US dollar carry trade into the People’s Republic implodes. Perhaps scandal and shock, accompanied by economic disappointment will break the fantasy spell regarding US corporate earnings, especially in Silicon Valley. As the late French President Mitterrand used to say, “give time to Time!”

   

  

  

  

  

  

• Schizo Stocks Shrug Off China, Europe Fears As Dow Roundtrips 700 Points In Giant Stop Hunt

  Translating every mainstream business media channel this week…

   

  The Dow gave up all of its post-QE3 gains…

  

   

  Which leaves this – Fed 'flow' vs stock performance – once again the most important chart in US equity investing…

  

  h/t @Not_Jim_Cramer

  It appears the market is threatening (or calling the bluff of) The Fed… QE or else…

  Across asset classes the day broke down into 3 sections – China (gappy pressure), Europe (carry unwinds escalate) and post-Europe US session (buy stocks and STFU!!)…

  

   

  US equities gapped lower on China's double whammy devaluation overnight and kept tumbling through the European close.. then levitated magically to get the S&P just green for the week (algos running stops)

  

   

  But cash indices all ended the day in the green for the week…

  

   

  The S&P and Nasdaq managed to hold green for the day… and Dow closed unch…

  

   

  Almost 700 point roundtrip in The Dow…

  

   

  Humpday Humor… come on!!!

  

  

   

  VIX was demolished after surging up to recent highs over 16… The Twin Peaks Of Vol…

  

   

  Stocks keep rallying away from and then plunging back towards HY credit…

  

   

  Treasury yields were mixed with all but the long-end very modestly lower in yield on the day after a mini-meltup in yields after Europe closed…

  

   

  The dollar tumbled further as EURCNH cary trades unwound en masse…

  

   

  Note – it appears hope today was driven by the fact that the PBOC appeared to step in and support onshore Yuan towards the close..

  

   

  Commodities were mixed today with crude and copper flat (after early weakness) and gold and silver surging…

  

   

  Summing it all up…

  Faith restored. +33 handles off the lows. Thanks for playing.

  — Stalingrad & Poorski (@Stalingrad_Poor) August 12, 2015

   Charts: Bloomberg and @Not_Jim_Cramer 

  Bonus Chart: Deja Vu – time speeding up…

  

  

  

  

  

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• The FBI Considers The IRS & DOJ, Domestic Terrorists

  Submitted by Thad Beversdorf via FirstRebuttal.com,

  Eventually it was bound to happen.  The ever increasing ambiguous laws that allow the government to prosecute, or worse, simply negate all Constitutional protections of its citizens would come back to hang them.  In an unusual circumstance, what is essentially one party in D.C. when it comes to matters of covering up governmental criminality, has split into a two party system.  Specifically, a sect of the Republican party known as Tea Partiers pushed unrelentingly to expose the criminality acted upon members of its own tribe by various government agencies.

  The Tea Party was formed by a group of individuals around the country who wanted to get back to the ideals of the Constitution i.e freedom.  But the Constitution is kryptonite to the system.  And so those who organize to promote the Constitution were targeted by the highest levels of government.  What better weapon to attack those whose intention is to defend the Constitution than an unconstitutional agency that has essentially unquestioned authority.  After all it is always unclear who watches the watchman.  Well in this particular case, the FBI and DOJ would seem to have jurisdiction over actions consistent with those of the IRS.

  Under the FBI’s own definition of a ‘Domestic Terrorist’ one MUST consider the IRS to be a terrorist organization as evidenced by the very recent discoveries surrounding the IRS’s own actions.

  “Domestic terrorism” means activities with the following three characteristics:

  • Involve acts dangerous to human life that violate federal or state law;
  • Appear intended (i) to intimidate or coerce a civilian population; (ii) to influence the policy of a government by intimidation or coercion; or (iii) to affect the conduct of a government by mass destruction, assassination. or kidnapping; and
  • Occur primarily within the territorial jurisdiction of the U.S. …”

  While the first characteristic seems to imply violence is necessary it should be noted that under the FBI’s definition of ‘International Terrorism’ they explicitly include ‘Violent acts’ within the definition.

  “International terrorism” means activities with the following three characteristics:

  • Involve violent acts or acts dangerous to human life that violate federal or state law;
  • Appear to be intended (i) to intimidate or coerce a civilian population; (ii) to influence the policy of a government by intimidation or coercion; or (iii) to affect the conduct of a government by mass destruction, assassination, or kidnapping; and
  • Occur primarily outside the territorial jurisdiction of the U.S., or transcend national boundaries in terms of the means by which they are accomplished, the persons they appear intended to intimidate or coerce, or the locale in which their perpetrators operate or seek asylum.*

  The distinction of violence within the international but not domestic definition is surely not an oversight.  But by doing so it leaves open the opportunity to define a non violent act to be construed as indirectly dangerous to human life (e.g. Snowden’s actions).  But certainly wrongfully putting someone inside a federal prison for tax evasion would be considered dangerous to human life.  According to the following revelations through emails obtained via court orders by Judicial Watch (a nonpartisan government watchdog), that is exactly what the IRS, DOJ and FBI were conspiring to do.

  “These new documents show that the Obama IRS scandal is also an Obama DOJ and FBI scandal,” said Judicial Watch President Tom Fitton. “The FBI and Justice Department worked with Lois Lerner and the IRS to concoct some reason to put President Obama’s opponents in jail before his reelection. And this abuse resulted in the FBI’s illegally obtaining confidential taxpayer information. How can the Justice Department and FBI investigate the very scandal in which they are implicated?”

   

  On April 16, 2014, Judicial Watch forced the IRS to release documents revealing for the first time that Lerner communicated with the DOJ in May 2013 about whether it was possible to launch criminal prosecutions against targeted tax-exempt entities. The documents were obtained due to court order in an October 2013 Judicial Watch FOIA lawsuit filed against the IRS.

   

  Those documents contained an email exchange between Lerner and Nikole C. Flax, then-chief of staff to then-Acting IRS Commissioner Steven T. Miller discussing plans to work with the DOJ to prosecute nonprofit groups that “lied” (Lerner’s quotation marks) about political activities…”

  But it begs the question then again, if the DOJ and FBI are also implicated in the domestic terrorism (according to the FBI’s own definition) who is left to prosecute?

  Well it is we the people.  It shouldn’t matter if you are Democrat or Republican.  We have a clear and identifiable gross abuse of government at the highest levels.  The abuse falls under the FBI’s own definition of domestic terrorism, a definition they would not hesitate to use against you or your family if it suited their objectives.  And so call it the Golden Rule or Kantian Categorical Imperatives or simple justice, but it is imperative to the people’s rule over its representative governing body to prosecute all involved to the highest levels and to the maximum penalty of the law.

  The abuse by those who have been granted incredible powers under the trust of the nation need to be dealt the most severe consequences.  Our very response to this matter will underpin the relationship between the people and its government for generations.  

  If we allow such astonishing government abuses, which have now been overtly evidenced and confessed by at least some of the guilty parties, to be lightly dealt with then we blatantly fail to defend every subsequent generation of Americans from ever worse abuses.  We fail as Americans.  The result of this investigation over the coming months will likely show that we the people have lost all sense of what it means to be an American.  That said, I remain doubtingly hopeful that I am proven wrong.

  

  

  

  

  

• Mapping 1083 People Killed By Cops In The Last Year

  One year ago, an 18-year old black man was fatally shot in Ferguson, Missouri by a police officer. Michael Brown’s death ignited a country-wide debate about the excessive amount of violence that occurs at the hand of police – particularly to African-Americans. Since then, at least 1,083 people have been killed by police in America…

  California has been at the forefront of police violence, with at least 176 deaths alone. Five cities in the United States have had more than ten deaths over this time period: New York, Houston, Oklahoma City, Phoenix, and Los Angeles.

  All but two states (Vermont and Rhode Island) have had fatal incidents involving police.

   

  

   

  h/t VisualCapitalist

  Source: VICE News

  

  

  

  

  

• John Kerry Warns "Dollar Will Cease To Be Reserve Currency Of The World" If Iran Deal Rejected

  Scaremongery… or maybe the whole point, as Obama's former chief economist noted, is to lose reserve status. Take That China!!

   

   

  As Jared Bernstein previously explained…

  There are few truisms about the world economy, but for decades, one has been the role of the United States dollar as the world’s reserve currency. It’s a core principle of American economic policy. After all, who wouldn’t want their currency to be the one that foreign banks and governments want to hold in reserve?

  But new research reveals that what was once a privilege is now a burden, undermining job growth, pumping up budget and trade deficits and inflating financial bubbles. To get the American economy on track, the government needs to drop its commitment to maintaining the dollar’s reserve-currency status.

  The reasons are best articulated by Kenneth Austin, a Treasury Department economist, in the latest issue of The Journal of Post Keynesian Economics (needless to say, it’s his opinion, not necessarily the department’s). On the assumption that you don’t have the journal on your coffee table, allow me to summarize.

  It is widely recognized that various countries, including China, Singapore and South Korea, suppress the value of their currency relative to the dollar to boost their exports to the United States and reduce its exports to them. They buy lots of dollars, which increases the dollar’s value relative to their own currencies, thus making their exports to us cheaper and our exports to them more expensive.

  In 2013, America’s trade deficit was about $475 billion. Its deficit with China alone was $318 billion.

  Though Mr. Austin doesn’t say it explicitly, his work shows that, far from being a victim of managed trade, the United States is a willing participant through its efforts to keep the dollar as the world’s most prominent reserve currency.

  When a country wants to boost its exports by making them cheaper using the aforementioned process, its central bank accumulates currency from countries that issue reserves. To support this process, these countries suppress their consumption and boost their national savings. Since global accounts must balance, when “currency accumulators” save more and consume less than they produce, other countries — “currency issuers,” like the United States — must save less and consume more than they produce (i.e., run trade deficits).

  This means that Americans alone do not determine their rates of savings and consumption. Think of an open, global economy as having one huge, aggregated amount of income that must all be consumed, saved or invested. That means individual countries must adjust to one another. If trade-surplus countries suppress their own consumption and use their excess savings to accumulate dollars, trade-deficit countries must absorb those excess savings to finance their excess consumption or investment.

  Note that as long as the dollar is the reserve currency, America’s trade deficit can worsen even when we’re not directly in on the trade. Suppose South Korea runs a surplus with Brazil. By storing its surplus export revenues in Treasury bonds, South Korea nudges up the relative value of the dollar against our competitors’ currencies, and our trade deficit increases, even though the original transaction had nothing to do with the United States.

  This isn’t just a matter of one academic writing one article. Mr. Austin’s analysis builds off work by the economist Michael Pettis and, notably, by the former Federal Reserve chairman Ben S. Bernanke.

  A result of this dance, as seen throughout the tepid recovery from the Great Recession, is insufficient domestic demand in America’s own labor market. Mr. Austin argues convincingly that the correct metric for estimating the cost in jobs is the dollar value of reserve sales to foreign buyers. By his estimation, that amounted to six million jobs in 2008, and these would tend to be the sort of high-wage manufacturing jobs that are most vulnerable to changes in exports.

  Dethroning “king dollar” would be easier than people think. America could, for example, enforce rules to prevent other countries from accumulating too much of our currency. In fact, others do just that precisely to avoid exporting jobs. The most recent example is Japan’s intervention to hold down the value of the yen when central banks in Asia and Latin America started buying Japanese debt.

  Of course, if fewer people demanded dollars, interest rates – i.e., what America would pay people to hold its debt – might rise, especially if stronger domestic manufacturers demanded more investment. But there’s no clear empirical, negative relationship between interest rates and trade deficits, and in the long run, as Mr. Pettis observes, “Countries with balanced trade or trade surpluses tend to enjoy lower interest rates on average than countries with large current account deficits, which are handicapped by slower growth and higher debt.”

  Others worry that higher import prices would increase inflation. But consider the results when we “pay” to keep price growth so low through artificially cheap exports and large trade deficits: weakened manufacturing, wage stagnation (even with low inflation) and deficits and bubbles to offset the imbalanced trade.

  But while more balanced trade might raise prices, there’s no reason it should persistently increase the inflation rate. We might settle into a norm of 2 to 3 percent inflation, versus the current 1 to 2 percent. But that’s a price worth paying for more and higher-quality jobs, more stable recoveries and a revitalized manufacturing sector. The privilege of having the world’s reserve currency is one America can no longer afford.

  *  *  *

  In the global race to debase, Reserve currency status is a curse!

  

  

  

  

  

• An Economic Earthquake Is Rumbling

  Submitted by Bob Livingston Via Personal Liberty Digest,

  While the people sleep, an economic earthquake rumbles underneath. The day that they begin to feel the quake draws near.

  History will record that in this decade more people will lose more money (forget about the trillions of dollars already lost) than at any time in our history, including during the Great Depression.

  At the same time, a very small group has made and will make huge sums of money.

  During the Y2K scare (a real hoax) many people stored food. Then, after Y2K, many people wanted to dump their cache; and some did.

  We advised readers at the time to store food simply because of the crisis world we live in, but to store those foods that you could rotate and consume. Stored food is a hedge against inflation. It’s a hedge against natural disaster. It’s a hedge against economic collapse. It was our advice before, and it has been our advice since.

  This advice is still valid. People who don’t have some stored food don’t realize how dependent they are on the system and government. Of course, the system was designed and created to make the people dependent on government. That makes them easier to control.

  Many people have been in hard times since 2008, thanks to bursting housing and derivatives bubbles — both fueled by the Federal Reserve’s money printing and both predicted by meand by many other writers. For those of us who are not well-connected (those of us who are not in the 1 percent), there has been no relief. While the banksters got bailouts and Wall Street and the banksters benefited from the money printers, the middle class was impoverished. Savings were wiped out.

  More working-age people than ever before are not working. More young workers than ever before are still living with their parents because they are either out of work or working at low-paying jobs. More people than ever before are on the government dole. Welfare pays more than most jobs. Retirement funds have been cashed out and spent on living expenses.

  Wages have not kept up with inflation — not the phony inflation numbers peddled by the Fed and the propaganda media, but real inflation.

  Printing-press money is fertile ground for expanding world crisis. Crisis is excellent cover for national and international chicanery. Boy, we have it!

  How can anyone who is paying attention not recognize these tremors for what they are?

  The default rate of companies with the lowest credit rating is at its highest level since 2013.

  The auto loan debt bubble is at $900 billion, fueled by easy credit and long-term loans (more than 60 months on even used cars) that put the car buyer upside down as he drives off the lot and keeps him there. U.S. mortgage holders are carrying the most non-mortgage debt they’ve had in more than 10 years; 81 percent of that is automobile debt. Student-loan debt held by mortgage holders is the highest it’s ever been, with the average balance owed at nearly $35,000. Almost 5.7 million homeowners remain underwater on their mortgages.

  We see bad inflation in the immediate future. Inflation in housing and consumer goods exceeds the Fed’s stated inflation goal of 2 percent, but Fed Chair Janet Yellen is talking about raising interest rates to kick-start more inflation. But a deflationary collapse has started in commodities, oil and gold. The dollar is rising. Today’s dollar index chart mirrors the dollar index chart pre-2008 collapse.

  U.S. dollar assets are in a slow-motion crash. A financial asset is any paper asset, such as CDs, bank accounts, U.S. government bonds, etc. While we sleep, we are losing our savings. The U.S. stock market is in a QE-driven bubble that will soon burst.

  Inflation and deflation are both forms of wealth destruction and impoverishment. Now think about this: The U.S. government has an official and stated policy of currency destruction through inflation. This is voluntary destruction of the currency. If instead we have deflation because of the collapse of debt, we still have currency destruction.

  Besides, the U.S. dollar and U.S. financial assets pay almost no interest. Plus, it’s now official U.S. and World Bank policy to take your money in the event of another collapse as we saw in 2008. They call it a “bail in.” That is a code word for “what’s yours is really theirs.”

  Wisdom dictates getting out of dollar assets ASAP! I long ago, way before the 2008 crash, cashed out my IRA and took the penalty. Many of the readers of my Letter did, too. It was well worth it. The government is also eyeballing your IRA, 401(k) and pension even now. Stealing it from you and replacing it with government paper would knock a big hole in the so-called “government debt” and prop up the system for a while longer.

  The Greeks ignored the warning signs of their failing economy to their detriment. They were left standing in long lines, waiting to withdraw meager amounts of their own rationed cash, and diving in dumpsters for food because the shelves were bare.

  Sooner or later, inflation skyrockets. Paper money economies always crash in the end, and their currencies end up worthless.

  At some point, there will be a panic. Many people will realize that the debt pyramid is collapsing. Most who see what’s happening will not act. The herd instinct suggests that only a few will bail out in time; but the majority will act in panic, too late. We saw it in Greece. We saw it in Cyprus.

  “Oh, yes,” you say. “It cannot happen here in the U.S.; or if it does, it won’t be for some time.” But it has awesome potential at any time. Why in the world take the chance? Prudent and wise people always plan for eventualities that the crowd can’t see.

  In hyperinflation, there is actually a shortage of paper money. The paper money production cannot keep up with prices. Now that we have electronic money, prices and inflation can go higher than the mind can imagine. The Fed is manipulating the consumer price index to cover inflation. This allows them to maintain zero interest rates on U.S. debt, but it also means zero interest on savings.

  Things are in place for huge inflation now. They think the people won’t know if they just kill the indicators. This is really a fantasy world. Since the money creators own the mass media, it seems that they can make the people believe anything, more fiction than fact.

  When we tell you to buy gold and silver coins and gold stocks; to store some food, water and ammo; and to buy Swiss annuities in Swiss francs, we are talking preservation of your assets, as well as survival financially and physically.

  Don’t trust the banks. Most are bankrupt. Don’t put your gold and silver coins in the safe deposit box. Keep them at home and keep them secret. Don’t keep more cash in the bank than is necessary to cover about a month’s worth of bills. This is a flashing red alert.

  Many tens of thousands of people who have their trust in the government system (U.S. currency) are headed dead ahead into impoverishment.

  

  

  

  

  

• Global Markets Turmoil After China Extends Currency War To 2nd Day – Devalues Yuan To 4 Year Lows

  Chinese stocks opened lower, extending yesterday's losses, after The PBOC weakened its Yuan FIX dramatically for the 2nd consecutive day (from 6.1162 Monday to 6.2298 last night to 6.3306). Offshore Yuan fell another 9 handles against the USD after China closed but was hovering at 6.40 as the market opens (now at 11 hnadles weaker at 6.51). Bear in mind the utter devastation in Chinese credit markets that data showed occurred in July, it remains ironic that for the 3rd days in a row, Chinese margin debt balances grew. Before the real fun and games started, Chinese officials once again exclaimed that their data is real (denying any mismatches between GDP Deflator and CPI) as China CDS spiked to 2 year highs. US equity futures are tumbling, bonds bid, and gold bouncing off the initial jerk lower.

  PBOC makes some comments (like last night's)…

  • *PBOC SAYS NO ECONOMIC BASIS FOR YUAN'S CONSTANT DEVALUATION
  • *PBOC SAYS YUAN WON'T CONTINUOUSLY DEVALUE
  • *PBOC SAYS MOVE OF YUAN REFERENCE PRICE IS NORMAL
  • *CHINA YUAN MECHANISM CHANGE MAKES FIXING RATES MORE REASONABLE

  And then there is this (from Xinhua):

  China's state-owned news 4-year lowsagency Xinhua said: "China is not waging a currency war; merely fixing a discrepancy."

   

  "The central parity rate revision was designed to make the yuan more market-driven and in line with market expectations," it said in a comment piece published on its web site.

   

  "The lower exchange rate was just a byproduct, not the goal."

  The "one-off" adjustment has now become two… some context for the size of this move…

  • *MNI: CHINA PBOC WED YUAN FIXING LOWEST SINCE OCT 11, 2012

  

   

  Onshore Yuan breaks above 6.41 – trades to 4 years lows against the USD…

  

   

  US markets are reacting dramatically…

  

   

  US Treasury yields are collapsing…

  

   

  Offshore Yuan is collapsing…

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3306 AGAINST U.S. DOLLAR
  • *OFFSHORE YUAN TUMBLES 1.6% AFTER PBOC SETS FIXING LOWER

  

   

  War is begun… (via Ransquawk)

  

   

  Offshore Yuan has been leaking lower since China closed…

  

   

  Yesterday was mixed with the broadest indices all ending in the red…

  

   

  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 0.8% TO 3,982.8
  • *CHINA FTSE A50 STOCK-INDEX FUTURES EXTEND LOSSES TO 2.6%

  

  But…

  • *SHANGHAI EXCHANGE MARGIN DEBT RISES FOR THIRD DAY (will they never learn?)
  • *CHINA STATS OFFICIAL DENIES MISMATCH OF GDP DEFLATOR AND CPI (if you just keep saying evcentually everyone will believe)

  GDP deflator index reflects prices of all final goods and services produced in China, much broader than that of CPI which only reflects consumer prices, Xu Xianchun, a deputy head at National Bureau of Statistics, writes in an article in People’s Daily.

  We think they do protest too much.

  China Credit Risk surged to 2 year highs…

  

  *  *  *

  There’s been plenty of talk about what China’s "unexpected" (to everyone but us, apparently) move to devalue the yuan will mean for the country’s flagging economy and for Beijing’s efforts to promote the internationalization of the renminbi via a bid for SDR inclusion, but as Chinese stocks open for trading on the "day after" (so to speak) we thought it worth previewing what the move might mean for Chinese equities.

  We present the following breakdown from Goldman with the obvious caveat that, as Tuesday’s farcical data from the PBoC on loan growth in July made abundantly clear, when it comes to China’s equity markets, one must always factor in the plunge protection "national team." 

  *  *  *

  From Goldman

  Our framework to think about FX depreciation on equities – Three main transmission mechanisms

  We try to assess the potential impact of RMB depreciation on the equity markets through various micro and macro channels. In general, we think the macro-to-market transmission mechanisms (especially an unexpected one as in this case) could be summarized as follows:

  Translation exposure—Universally, offshore-listed Chinese companies’ book values and earnings (if CNY-denominated) will be deflated when they are being converted into HKD or USD for financial reporting purposes. Lower book values and earnings would increase the P/B and P/E ratios, effectively making Chinese companies less attractively valued to USD-based investors.

   

  Transaction and economic exposure— Assuming other non-USD currencies did not move along with the CNY, export-oriented companies would likely benefit due to a more competitive exchange rate and a mostly RMB cost base.

   

  Impact on equity risk premium (ERP)—Using the exchange rate as a policy tool to manage the cycle should render a higher level of domestic monetary policy independence for policymakers and should partly ease investor concern about further domestic imbalances (e.g. over-investment, overcapacity, debt buildup, etc). Barring an abrupt depreciation case, the higher FX flexibility may shore up investor confidence on China's short-term growth outlook, thereby helping to suppress the currently-high equity risk premium, which seems to have priced in significant macro and micro growth risks, in our view.

  That said, the consequential uncertainty regarding capital outflows could offset some of the positives. 

  Impact on equities: Not all depreciations are created equal

  The abovementioned transmission mechanisms do not take into account the magnitude of and the speed at which the depreciation may take place. We aim to better quantify the market ramifications based on the following hypothetical scenario:

  – One-off reset for now, and moderate depreciation leading up to and post the SDR decision: Assuming the RMB doesn't significantly further depreciate by the end of this year, we believe the macro growth impact will be modest, and the ramifications will likely manifest primarily in the stock markets through the translation and transaction/ economic channels.

  At the stock level, we identify stocks which may be disproportionately impacted from a few different angles and approaches:

  1) GS/GH covered stocks for which our analysts see highest positive and negative earnings sensitivity to 1% of RMB depreciation vs. the USD

  

  2) Export-oriented companies (not only GS covered names) which have high US revenue exposure

  

  3) Stocks (not only GS covered names) which have relatively high USD-denominated debt and financial leverage

  

  (ZH: And here's a look at the bigger picture based on historical episodes of depreciation):

  

  *  *  * 

  And by the look of it, FX carry traders are expecting more volatility to remain the norm… Last time we saw this – in 2011, it too a year for vol to normalize…

  • *VOLATILITY OF YUAN FIXING COULD RISE TEMPORARILY: PBOC

  

   

  As mentioned earlier this devaluation is likely not a one-time event but rather the beginning of an ongoing and persistent depreciation of the CNY versus the USD. The embedded USD short position within the carry trades will begin to result in losses and margin calls as the USD appreciates versus the CNY, thus forcing investors to liquidate some of their positions. These trades, which took years to amass, could unwind abruptly and exert an influence of historic magnitude on markets and economies.

   

  Charts: Bloomberg and Goldman Sachs

  

  

  

  

  

• How Much More Faith In Central Banks Is Left?

   

  Carry traders just got their fingers burnt by central bankers, again.

  As Bloomberg reports,

  The People’s Bank of China’s decision to cut its daily reference rate by 1.9 percent triggered the yuan’s biggest one-day drop since the nation ended a dual-currency system in January 1994. That’s bad news for carry traders, drawn to the yuan by its stability. Until Tuesday’s surprise move, the central bank kept it in a tight range of 6.1887 to 6.2205 against the dollar since the start of April, according to prices compiled by Bloomberg.

   

  

   

  The PBOC’s decision is just the latest misfortune for these traders.

   

  A Deutsche Bank index of carry trades had already dropped to 510.31 Monday, from 546.71 at the end of last year, after the Swiss National Bank ditched its exchange-rate cap in January, sending the franc soaring and wiping out returns.

   

  

   

  “There are people who have seen the implausibility of China devaluing — because they said they wanted stability — as justifying owning the currency in one form or another, simply for carry,” said Kit Juckes, a London-based strategist at Societe Generale SA. “It’s another domino that has fallen.”

   

  Investors in carry trades borrow in one currency to invest in another where interest rates are higher. They profit both from the rate differential and any appreciation in the purchased asset. Higher volatility can hurt returns because adverse price moves can wipe out the benefit from the pick-up in rates.

  Twice in eight months is enough to shatter anyone's illusion that central banks really have control. But perhaps just as worrisome for the central-bank-omnipotence meme, is how last night's action was translated to the masses (as Epsilon Theory's Ben Hunt explains)

  Everything under heaven is in chaos; the situation is excellent.
   ? Mao Zedong (1893 – 1976)

   

  A quick email on China’s currency devaluation last night. The news itself is big enough, but it’s the Narrative that’s developing around the devaluation that has my risk antennae quivering like crazy. What do I mean? I mean that initial media efforts to portray the devaluation as a one-time “adjustment” that’s in-line with prior policy have been overrun by stories of “shock” and disjuncture. This is true even within Rupert Murdoch’s various media microphones, which tend strongly to toe the Beijing party line. Moreover, the devaluation is not being described in Western media as Chinese “stimulus”, which it surely is and would send markets higher if portrayed in this light, but as Chinese “currency competition” and as a sign that the growth problems in China are more severe than Western central bankers would like to believe. Or more precisely, would like to have YOU believe.

   

  What’s the Truth with a capital T about Chinese growth, Fed intentions, and the future price of growth-sensitive assets like oil? I have no idea and neither does anyone else. Seriously.

   

  But what I do know is that the Common Knowledge about Chinese growth – what everyone thinks that everyone thinks about Chinese growth – is dramatically changed for the worse today, and it’s a change that will accelerate unless the Narrative shifts. That could happen. I still have nightmares about how the Narrative around the ECB’s OMT program shifted from “Draghi’s Blunder” to “Draghi’s Bold Move” within a single day in the pages of the Financial Times in the summer of 2012. But unless and until that Narrative shifts, the path forward for the Fed just got much more perilous.

   

  And that’s why the 10-year US Treasury is at 2.12% as I write this note. Unless and until that Narrative shifts, the path forward for oil and any other global growth-sensitive asset or security just got much more perilous. And that’s why oil is at $43 as I write this note. 

   

  One last point, focused on what’s next for China. As with everything else here in the Golden Age of the Central Banker, my crystal ball is broken. But I think that I’ve got the right lens for viewing China and its political dynamics, and you can read about it in two Epsilon Theory notes: “The Dude Abides: China in the Golden Age of the Central Banker” and “Rosebud”.

  As mentioned earlier this devaluation is likely not a one-time event but rather the beginning of an ongoing and persistent depreciation of the CNY versus the USD. The embedded USD short position within the carry trades will begin to result in losses and margin calls as the USD appreciates versus the CNY, thus forcing investors to liquidate some of their positions. These trades, which took years to amass, could unwind abruptly and exert an influence of historic magnitude on markets and economies.

  *  *  *

  Change is afoot.

  

  

  

  

  

• The Fed Is Out Of Options, "QE Is All It Can Do Here" Art Cashin Predicts

  Weakness in commodities "is not transitory," Art Cashin tells CNBC, if you look at things like copper, "this is really a deflationary push… where things can get a little out of control." The Fed says they must get off zero interest rates because,, as Cashin notes, "they can't do anything else." However, as the venerable floorman who has seen it all explains, "they're in a kind of silly loop where they did QE expecting a reaction… didn't get it.. and then they did QE again because it didn't live up to their expectations… but I think they have no other options, if things get negative on the economy, QE is all they can do."

  Which is exactly what we said a month ago…

  GUNDLACH SAYS IF FED TIGHTENS, WILL HAVE TO CUT AGAIN. Actually it will have to do QE4 which is the whole point

  — zerohedge (@zerohedge) July 15, 2015

  Even the CNBC anchors realize the folly of Fed ways now, noting "but aren't they just pushing on a string?" Indeed they are and as Scotiabank's Guy Haselmann noted earlier, it will cost us…

  Fed policy today and over the past several years may prove to be counter-productive in the long-run.

   

  Sustainable growth is best served by an interest rate where capital is deployed efficiently.  The long-run consequences of policy during the past few years could easily mean lower long-run potential growth and inflation.  Today’s consumption and market speculation was paid for with huge amounts of accumulated debt. 

   

  Tomorrow’s revenues will have to be steered toward servicing that debt.  Future revenue will also have to replenish the deficient levels of R&D and infrastructure investment of the past few years.

  Cashin explains The Fed's bind…

   

  h/t Lesley M

  

  

  

  

  

• The Cable Industry's Scariest Chart

  Recent price volatility in the media sector got us wondering: is “Cord cutting” the home cable box in favor of online entertainment really hitting critical mass?  To answer that question, ConvergEx's Nick Colas turned to our old friend Google Trends.

  This resource allows you to track how many Americans are searching the Internet for terms like “Cancel cable” or “Netflix” and see multiyear trends in such activity.  In a representative cross section of 9 key searches we find that yes, consumers are exploring their options but it is early days yet.  “Cancel cable” is hitting new highs in terms of search volume, but “Get cable” searches still outnumbers it by 9.9x.  The bad news: 5 years ago the ratio was 14x. 

   

  

   

  As for content searches, the search data shows a mixed bag. “HBO” searches are ramping higher, but “ESPN” and “Nickelodeon” are solidly lower.

   

  The big three traditional networks – ABC, NBC, and CBS – are all lower as well.  The upshot is that the media landscape has been in flux for several years – Wall Street is only beginning to catch up now.  That means more volatility to come as investors begin to discount a distinctly more uncertain future for these names.

  You can date the modern era for entertainment to a very specific date: October 23, 2001. That is when Steve Jobs announced the launch of the iPod to a cluster of obviously skeptical (and occasionally bored) journalists. The presentation is vintage Jobs, but without the fanboy hype and spontaneously raucous applause that would be hallmarks of later Apple product launches.  Indeed, Jobs sounds at times to be a tad uncomfortable, even as he walks through the merits of a hard drive based music player. Customer acceptance was slow.  It took Apple three years to sell 3 million units. Things finally started to click in 2004, with Jobs making it to the cover of Newsweek flashing a fourth generation iPod with the words “iPod, Therefore i Am”.

  The rest is pretty much history.  The iPod led to the iPhone – that launch presentation was a good deal better received – in 2007 and the iPad in 2010.  The point here is that even in the supposedly fast-paced world of consumer technology, mass adoption takes time.  Years, not days or months.  But when the momentum starts to build, you know it.

  Such is the case with the seemingly sudden consumer interest in “Cord cutting” – shorthand for people cancelling their cable TV subscriptions in favor of online entertainment resources.  For the better part of the last 30 years, cable has been one of the “Stickiest” items in a household budget.  During recessions, cable TV companies barely skipped a beat as customers would – if necessary – delay a mortgage payment or a credit card bill in favor of keeping uninterrupted access to television entertainment. The stability of those cash flows allowed many cable companies to grow with debt-financed capital, giving shareholders outsized returns. Now the news that some cable companies are losing customers is forcing capital markets to reconsider just how loyal cable customers might be and what that means for every company in the entertainment industry ecosystem.

  To analyze some of the underlying consumer behaviors, we turn to Google Trends.  This tool, available for free online, allows you to track how many times Google users have searched for a specific term over time.  For example, enter “Get a dog” into Trends and specify US users, and you’ll see that interest in dog ownership is on the rise in the U.S. and the most pooch-friendly states are West Virginia, Kentucky, and Arkansas.  The search term “Get a cat” is only about half as popular on Google, in case you were wondering…

  Turning back to cable TV and entertainment trends, here are 9 sample Google Trends analyses that seem to tell the story…

  1.    “Cancel cable”.  As you would expect, Google search interest in this term is rising rapidly.  Indexed to the number of such searches in July 2010, for example, there are 1.6x more such queries now.  One noticeable seasonal factor: searches for cancelling cable peak at this time of year since households tend to move during the summer.  Also worth noting: the search “Get cable” still outnumbers “cancel cable” by 89:9, or  9.9x.  Still, “Get cable” as a search query hasn’t grown in 2 years, where “cancel cable” certainly has.  Also worrisome: New York and California, two large markets, are also in the top 5 states where “Cancel cable” is most popular.

   

  2.    “Cable TV”.  Overall interest in cable tv is on the wane, according to the Google Trends data.  The graph of search volumes looks like a gentle range of hills, with each peak through time slightly lower than the previous one.  Over the last decade, searches for “Cable TV” are down 24%.

   

  3.    “Netflix”.  On a global basis, Google searches for Netflix continue to climb and have doubled since 2011.  In the U.S. the story is different, with searches for the company flat since 2011.  Interestingly, the domestic markets that search the most for the online entertainment company are predominantly rural: Idaho, Maine, Montana, New Mexico and Utah.

   

  4.    “HBO”.  This granddaddy of cable content has seen dramatic growth in search volumes since 2011.  Since that time, four times the number of Google search users have queried for “HBO”.  We suspect the April 2011 launch of “Game of Thrones” might have something to do with that pickup and highlights what desirable content can do for interest in a given distribution channel.

   

  5.    DirecTV and Dish TV.  Satellite TV still seems to be a growth business according to the Trend data.  DirecTV gets roughly 4x the number of searches as Dish and is seeing more growth in Google searches of late.  Search interest in Dish is, however, stable to up modestly.

   

  6.    The Big Three Networks – ABC, NBC, and CBS.  The long term trend lines for all three major networks are slowly moving lower, as you would expect.  ABC still has the lead, with NBC and CBS currently even.  Interestingly, “HBO” searches now tie those for NBC and CBS.

   

  7.    ESPN and Nickelodeon.  Google search interest in ESPN peaked in September 2012 and was down 16% from those highs two years later in September 2014.  Measure from July 2014 to July 2015, the drop is 34%.  Nickelodeon’s drop in Google search volumes over the last year is 29%.

   

  8.    “Buy TV” versus “Buy iPhone”.   A phone screen and earbuds is now as viable a video system as an old wooden console television was to the Baby Boom generation. The Google Trend data shows this well, with searches related to TV purchases now as numerous as those related to iPhone purchases.  Layer in the other smartphone makers and more people search for purchase information about phones than televisions.

   

  9.    “HDMI”.  OK, this one is a little nerdy, but it really tells the whole story.  In order to take advantage of online entertainment while still using your regular television, chances are you’ll need an HDMI (High Definition Multimedia Interface) plug and a device like Apple TV or Google Chromecast. The number of Google searches for HDMI in the U.S. climbed steadily through 2012 and have leveled off since. That means that consumers already knew about (and had likely purchased a TV with) the necessary hardware to take advantage of online offerings long before the recent “Cord cutting” concerns.  When the cable tv cord gets cut physically, it is the HDMI port that takes up the virtual slack.

  The upshot of these results is clear: the change in consumer attention away from cable and to other sources of entertainment has been a long time in the making.  Interest in everything from ESPN to broadcast channels has been on the wane for years.  Compelling content like HBO’s Game of Thrones drives search eyeballs and, it seems, viewers as well.  And consumers were upgrading their hardware long before they knew they wanted to watch Netflix or Amazon original programming streaming on the Internet.

  Does this mean cable TV is doomed or no one will watch broadcast TV again?  Of course not.  Consumers largely stopped buying Compact Discs when iTunes really hit, but they didn’t stop listening to music. Even the “Original” iPod design that Jobs showed back in 2001 wasn’t exactly new, with inspirations from a 1950s transistor radio and a more modern land line phone. And that worked out pretty well…

  

  

  

  

• "It's A Friggin' Mess": The Pentagon Sums Up Syria Fight

  On Monday, nine people were killed across Turkey in a wave of attacks that included a shooting at the US Consulate, a bombing at a police station, a gun battle at the same police station, an attack on a military helicopter by “Kurdish rebels”, and a roadside bombing. 

  The violence is the latest escalation in hostilities between Ankara and various “extremist” groups and for President Tayyip Erdogan, each new attack serves as still more evidence of the incipient threat posed by the PKK and other “terrorists” he says are operating within and around the country’s borders. 

  Of course what Erdogan really cares about is undermining the pro-Kurdish HDP prior to snap elections which he hopes will restore his absolute majority in parliament. Lumping the PKK in with ISIS has allowed Ankara to obtain NATO’s blessing for an offensive which has so far been focused on the Kurds but which Foreign Minister Mevlut Cavusoglu swears will shift towards ISIS as soon as newly-arrived US F-16s are prepared to fly missions from Incirlik which, as noted here last week, will supposedly serve as the hub for a new comprehensive fight against Islamic State. It’s been suggested that Saudi Arabia, Qatar, and Jordan may contribute to the effort. 

  All of this is of course designed to provide everyone involved (the US, Turkey, Qatar, and Saudi Arabia) with an excuse to remove Bashar al-Assad from Damascus. Russia isn’t so keen on this, as removing Assad threatens to undermine Moscow’s influence in the region but more importantly, could clear the way for the long-delayed Turkey-Qatar natural gas pipeline which would be an outright disaster for Gazprom and could serve to break the Kremlin’s leverage over Europe by freeing it from its dependence on Russian energy. 

  Realizing that Assad’s badly depleted forces are likely to face defeat sooner or later, either at the hands of the various militants “freedom fighters” vying for control of the country or else at the hands of the US military which we imagine could “accidentally” end up engaging Assad’s forces directly once the air campaign against ISIS picks up, Moscow has gone back and forth between suggesting that it’s willing to negotiate for an “alternative” to Assad and saying that Russia is willing to lend military support to Damascus if it means helping to eradicate “terrorists.” Again we see that both sides are prepared to use ISIS as an excuse to turn what has so far been a thinly-veiled proxy war into an actual confrontation between East and West and although Russia may be willing to “go there” if all options are exhausted, the economic realities of collapsing crude and Western sanctions are all too real which is presumably why the Kremlin entertained Saudi foreign minister Adel al-Jubeir in Moscow on Tuesday to discuss next steps for Syria. In the end, it all came down to the fate of Assad and both sides are apparently willing to stand their ground – for now. Here’s Al Jazeera:

  Russia and Saudi Arabia have failed in talks held in Moscow to overcome their differences on the fate of Syrian President Bashar al-Assad, a central dispute in Syria’s civil war that shows no sign of abating despite renewed diplomacy.

   

  Moscow has called for coordination between the Syrian government and members of an international coalition fighting the Islamic State of Iraq and the Levant (ISIL), which controls swaths of territory in Syria and Iraq.

   

  Speaking after talks in Moscow on Tuesday, Saudi Foreign Minister Adel al-Jubeir reiterated Riyadh’s stance that Assad must go.

   

  “A key reason behind the emergence of Islamic State was the actions of Assad who directed his arms at his nation, not Islamic State,” Jubeir told a news conference after talks with Russia’s Foreign Minister Sergei Lavrov.

   

  “Assad is part of the problem, not part of the solution to the Syrian crisis. There is no place for Assad in the future of Syria,” he said.

   

  Russia’s Foreign Minister Sergei Lavrov said anti-ISIL forces united on the ground should have wide international backing. But Jubeir specifically ruled out any coalition with Assad and tension between the ministers was often visible during the conference.

  Here’s Lavrov (translated):

  For anyone not willing to sit through the audio, here is the operative quote: “I would not want any powerful state involved in attempts to solve the Syrian crisis to believe that Assad issue may be solved militarily, because the only way of such a military solution is the seizure of power [in Syria] by Islamic State and other terrorists.”

  Of course Lavrov surely realizes that ISIS seizing power in Syria would likely be just fine with the US and its regional allies. After all, when it comes to “boots on the ground” excuses that will fly with the American voter, “ISIS captures entire country” has to be right near the top of the list. 

  Meanwhile, the US and Turkey are pressing ahead with efforts to establish a so-called “ISIS-free zone” along what is virtually the only stretch of the latter’s border with Syria not under the control of the Kurdish YPG. As we discussed at length in “Why Turkey’s ‘ISIS-Free Zone’ Is The Most Ridiculous US Foreign Policy Outcome In History,” this swath of territory would likely fall under the control of the Syrian Kurds in relatiely short order (which, at least in the context of fighting ISIS, would be a good thing), were it not for the fact that they are affiliated with the PKK which means that Turkey (and by extension, the US) will have no part of it.

  

  Another group who won’t be helping to rout ISIS in the north is al-Qaeda affiliate al-Nusra, which apparently thinks the effort to prevent the Kurds from capturing the remaining terriroty along the northern border with Turkey is just as absurd as we do. Here’s The New York Times:

  The Syrian affiliate of Al Qaeda has announced its withdrawal from front-line positions against the Islamic State extremist group in northern Syria, saying that it disagrees with plans by Turkey and the United States to clear the extremists from an area along the Turkish border.

   

  In a statement on Monday, the Qaeda group, the Nusra Front, said the proposed plan was intended primarily to protect “Turkish national security” and not to advance the Syrian rebel cause.

   

  Syrian activists in the area reported the withdrawal of the Nusra Front in recent days, saying that other rebel groups had taken up their vacated positions to prevent an advance by Islamic State forces.

   

  The Nusra Front’s withdrawal from rural positions northeast of the Syrian city of Aleppo came amid newly announced steps by Turkey and the United States to fight the Islamic State in Syria.

   

  American and Turkish officials last month described plans to provide military support to Syrian rebels to clear the Islamic State, also known as ISIS or ISIL, from a roughly 60-mile strip of territory along the Turkish border. Nusra said that Turkey was interested in what its officials call a “safe zone” because it was worried about Kurdish forces that have seized much of the land across its border in Syria.

  As The Times goes on to note, one thing Nusra did not mention in the purported statement is whatever happened to all of the US-trained “freedom fighters” the group has captured over the past month or so, including those form Division 30 and, more recently, the commander and deputy of the newest group of Pentagon trainees. On that note, we’ll close with the following bit from CBS because … well … because it underscores how comically absurd this has all become.

  Late last month, the Nusra Front battled the U.S.-backed rebel faction known as Division 30 and killed, wounded or captured dozens of its fighters.

   

  Last week, U.S. officials said five Pentagon-trained fighters had been captured, probably by the Nusra Front branch in Syria. The Pentagon has lost track of some of the fighters who apparently have scattered, reported CBS News’ David Martin.

   

  “It’s a friggin’ mess,” one official said.

  *  *  *

  Bonus: summing up the above in four seconds

  

  

  

  

  

• Families Of 9/11 Victims On Verge Of Proving Government Cover-Up In Court

  Submitted by SM Gibson via TheAntiMedia.org,

  For many years, rumors have circulated regarding the U.S. government’s involvement in an active cover-up of a sinister connection between Saudi Arabia and the terrorist attacks of 9/11. In fact, 28 redacted pages from a congressional intelligence report  are said to contain damning information that implicates the Saudis in the 2001 mass murder of American citizens. Despite a bipartisan effort to release the information, the now notorious 28 pages are still being withheld from the public under the predictable guise of “national security.”

  Now, thanks to a federal lawsuit in a Manhattan court, there may be a light at the end of the tunnel.

  Two authors of the concealed pages may soon be called to testify in a court case currently pending against the kingdom of Saudi Arabia. Former FBI investigator Michael Jacobson and former Justice Department attorney Dana Lesemann, both of whom investigated the terror strikes for the FBI, were given the assignment to track down possible leads connecting Saudi officials to the hijackers and then document their findings. The evidence they compiled was recorded in the infamous 28 pages.

  The duo also went on to work with the independent 9/11 Commission, where they unveiled even more corroboration. They uncovered an association between the Saudi Consulate in Los Angeles, the Saudi Embassy in Washington D.C., and the the tragic events in 2001.

  At a court hearing on July 30, lawyers for the victims’ families stated that the most major of allegations against the Saudis were purposefully left out of the final draft of the 9/11 Commission report.

  “They were removed at the 11th hour by the senior staff,” said attorney Sean Carter, who called the decision a “political matter.”

   

  “[T]hey had documented a direct link between the Saudi government and the Sept. 11 plot based on the explosive material they had uncovered concerning the activities of Fahad al-Thumairy and Omar al-Bayoumi,” explained Carter.

  Thumairy worked as a religious cleric and Saudi diplomat in Los Angeles at the time, while Bayoumi was employed by the Saudi Arabian Civil Aviation Authority in San Diego.

  The judge presiding over the case now has a 60-90 day window to either dismiss the case or proceed on behalf of the victims’ families.

  Jerry Goldman, an attorney for the plaintiffs, feels good about the future of the proceedings.

  “(The Judge) wasn’t buying their spin,” Goldman said. “The burden is on the kingdom to prove we are wrong, and they didn’t do that.”

  With so many unanswered questions surrounding 9/11, there is no telling what may be disclosed if the case is allowed to move forward.

  The terrifying reality is that if the Saudis are found guilty of involvement in the events of 9/11, such a conclusion would only raise more questions than it would answer. Who inside the United States government would be covering for the kingdom of Saudi Arabia for so many years— and more importantly, why?

  

  

  

  

  

• Wendy's Explains What Happens When Fry Cooks Make $15/Hour

  By now, it should be abundantly clear – even to the most vocal proponents of a higher minimum wage – that across-the-board raises have very real, and sometimes unpredictable consequences. 

  At Wal-Mart for instance, a move to hike the pay floor for the retailer’s lowest paid workers hurt morale among higher paid employees, may have led to discussions to cut up to 1,000 jobs at the company’s home office in Bentonville, and quite possibly contributed to a decision to close five stores for “plumbing problems.”

  Meanwhile, at Seattle-based payments processor Gravity Payments, one CEO’s quest to create a better life for his 120 employees backfired when a move to raise the company-wide pay floor to $70,000 was accompanied by a myriad of far-reaching and unintended consequences. 

  At the most basic level, the argument against hastily construed wage hikes is that forcing employers to pay everyone more will simply prompt companies to fire people or at the very least, curtail hiring. As one Burger King franchisee recently told CBS, “[fast food] businesses are not going to pay $15 dollars an hour [because] the economics don’t work in this industry. There is a limit to what you’re going to pay for a hamburger.”

  With that in mind, we present the following commentary from Wendy’s most recent conference call with no comment:

  Todd A. Penegor – Chief Financial Officer & Senior Vice President

  Yeah. So we continue to see pressure on wages two fronts, one is minimum wages at the state level continue to increase, and as there is a war on talent to make sure that we’re competitive in certain markets. So we’ve made some adjustments to that starting wage in certain markets. The impact hasn’t been material at the moment, but we continue to look at initiatives on how we do work to offset any impact to future wage inflation through technology initiatives, whether that’s customer self-order kiosks, whether that’s automating more in the back of the house in the restaurant, and you’ll see a lot more coming on that front later this year from us.

   

  John William Ivankoe – JPMorgan Securities LLC

  Okay, understood. I mean there is obviously a lot of discussion of wage prices, wage costs and that there would be increased pricing at the franchise level to offset those increased wages, especially in markets like New York for example that are going to see some very severe increases in wage costs. So can you juxtapose the franchisees’ desire and/or need to take pricing at the store level with what sounds like an increased focus overall for the brand on value, can those two things be achieved simultaneously?

   

  Emil J. Brolick – President, Chief Executive Officer & Director

  Yeah, John, this is Emil. And our franchisees, I find them to be very astute business people, and they have a great sense of their trade areas where their restaurants are and a great I think understanding of what the competitive environment is in terms of their capacity to price. I think the reality is that what you will see in like some of these markets, the New Yorks, where there is these very significant increases, is that they will be – our franchisee will slightly likely look at the opportunity to reduce overall staff, look at the opportunity to certainly reduce hours and any other cost reduction opportunities, not just price. There are some people out there who naively say that these wages can simply be passed along in terms of price increases. I don’t think that the average franchisee believes that, and there will have to be other consequences, which is why we have pointed out that unfortunately we believe the some of these increases will clearly end up hurting the people that they are intended to help.

   

  
  

  

  

  

  

  

• How Economic Growth Fails

  Submitted by Gail Tverberg via Our Finite World blog,

  We all know generally how today’s economy works:

  

  Figure 1

  Our economy is a networked system. I have illustrated it as being similar to a child’s building toy. Ever-larger structures can be built by adding more businesses and consumers, and by using resources of various kinds to produce an increasing quantity of goods and services.

  

  Figure 2. Dome constructed using Leonardo Sticks

  There is no overall direction to the system, so the system is said to be “self-organizing.”

  The economy operates within a finite world, so at some point, a problem of diminishing returns develops. In other words, it takes more and more effort (human labor and use of resources) to produce a given quantity of oil or food, or fresh water, or other desirable products. The problem of slowing economic growth is very closely related to the question: How can the limits we are reaching be expected to play out in a finite world? Many people imagine that we will “run out” of some necessary resource, such as oil, but I see the situation differently. Let me explain a few issues that may not be obvious.

  1. Our economy is like a pump that works increasingly slowly over time, as diminishing returns and other adverse influences affect its operation. Eventually, it is likely to stop.

  As nearly as I can tell, the way economic growth occurs (and stops taking place) is as summarized in Figure 3.

  

  Figure 3. Overview of our economic predicament

  As long as (a) energy and other resources are cheap, (2) debt is readily available, and (3) “overhead” in the form of payments for government services, business overhead, and interest payments on debt are low, the pump can continue working as normal. As various parts of the pump “gum up,” the economic growth pump slows down. It is likely to eventually stop, once it becomes too difficult to repay debt with interest with the meager level of economic growth achieved.

  Commodity prices are also likely to drop too low. This happens because the wages of workers drop so low that they cannot afford to buy expensive products such as cars and new homes. Growing purchases of products such as these are a big part of what keep the economic pump operating.

  Let me explain some of the pieces of the problem that give rise to the slowing economic growth pump, and the difficulties it encounters as it slows down.

  2. “Promises,” such as government pension programs for the elderly, and promises to repair existing roads, tend to get bigger and bigger over time.

  We can understand how promises tend to grow by looking at an example I constructed:

  

  Figure 4

  Suppose a pension program begins in 2010 and gradually adds more retirees. Or suppose a road repair program starts out in 2010 with more roads gradually being added.

  The payments made each calendar year, whether for the pensions or the road repairs, are the totals at the bottom of the column. These totals keep growing, even if each retiree gets the same amount each year, and even if each road costs the same amount to repair each year. Admittedly, using 100 for all amounts is unrealistic–this is done to keep the math simple–but regardless of what numbers are used, the sum of the payments each calendar year tends to rise.

  If we look at US government expenditures as a percentage of wages, the pattern is as we might expect: government spending rises significantly faster than wages.

  

  Figure 5

  3. At least partly because of growing “promises,” it is very difficult for an economy to shrink in size without collapsing.

  We can think of many kinds of promises in addition to pensions and road repairs. One such promise is the promise by banks that they will allow depositors to withdraw funds held on deposit in the bank. Another kind of promise is the promise of debtors to repay debt with interest. All of these promises tend to grow in total quantity over time, at least in part because population grows.

  If an economy shrinks, all of these promises become very difficult to fulfill. This is the problem that Greece and other countries in financial difficulty are encountering. There is a need to reduce some program or to sell something so that the calendar year payments are not too high, relative to revenue for the year. These payments really represent a flow of goods and services to the individuals to whom the promises were made. “Printing money” does not really substitute for goods and services: pensioners expect that they will be able to buy food, medicine and housing with their pensions; those withdrawing money from a bank expect that the money will actually buy goods and services needed to live on.

  If there is a major problem with “making good” on promises, it is difficult to have an economy. It is hard to operate an economy without functioning bank accounts. Even cutting off pensions or road repairs becomes a problem.

  4. The over-arching problem as we reach diminishing returns is that workers become less and less efficient at producing desired end products.

  When an economy starts hitting diminishing returns, we find that the economy produces goods less and less efficiently. It takes more worker-hours and more resources of various kinds (for example, fracking sand and deep sea drilling equipment) to produce a barrel of oil, causing the cost of producing a barrel of oil to rise. Usually this trend is expressed as a rising cost of oil production:

  

  Figure 6

  Looked at a different way, the number of barrels of oil produced per worker starts decreasing (Figure 7). It is as if the worker is becoming less efficient. His wages should be reduced, based on his new lack of productivity.

  

  Figure 7. Wages per worker in units of oil produced, corresponding to amounts shown in Figure 6.

  There are many types of diminishing returns. They tend to lead to a smaller quantity of  end product per worker. For example, if the population of a country increases, but arable land stays the same, adding more and more farmers to a plot of arable land eventually leads to less food produced on average per farmer. (Some might say that each additional farmer adds less marginal production.) Similarly, mining ores of lower and lower concentration leads to a need to separate more and more waste material from the desired mineral, leading to less mineral production per worker.

  As another example, if a community finds itself short of fresh water, it may need to begin using desalination to produce water, instead of simply using relatively inexpensive wells. The result is a steep rise in the cost of water produced, not too different from the steep rise in the cost of oil in Figure 6. Viewed in terms of the amount of fresh water produced by each worker, the return per worker falls, as happens in Figure 7.

  If workers get paid for their work, the logical result of diminishing returns is that after a point, workers should get paid less, because what they are producing as an end product is diminishing in quantity. Workers may be making more intermediate products (such as desalination plants or fracking sand), but these are not the end products people want (such as fresh water, electricity, or oil).

  In some sense, fighting pollution leads to another form of diminishing returns with respect to human labor. In this case, increasing human effort and other resources are used to produce pollution control equipment and to produce workarounds, such as alternative higher-priced fuels. Again, wages per worker are expected to decline. This happens because, on average, each worker produces less of the desired end product, such as electricity.

  Admittedly, less pollution, such as less smog, is desired as well. However, if it is necessary to pay extra for this service, the effect is recessionary because workers must cut back on purchasing discretionary goods and services in order to have sufficient funds available to purchase the higher-priced electricity. Thus, fighting pollution using approaches that raise the price of end products is part of what slows the world’s economic growth pump.

  5. When civilizations collapsed in the past, a major cause was diminishing returns leading to declining wages for non-elite workers.

  We know how diminishing returns played out in a number of past civilizations based on the analysis conducted by Peter Turchin and Surgey Nefedov for their book Secular Cycles. They found that typically a period of rapid population growth took place after some change occurred that increased the total amount of food an economy could provide. Perhaps trees were cut down on a large plot of land, or irrigation was introduced, or a war led to the availability of land previously farmed by others. When the original small population encountered the newly available arable land, rapid growth became possible for a while–very often, for well over 100 years.

  At some point, the carrying capacity of the land was reached. Then the familiar problem of diminishing returns on human labor occurred: adding more farmers to the plot of land didn’t increase food production proportionately. Instead, the arable land needed to be subdivided into smaller plots to accommodate more farmers. Or the new farmers could only be “assistants,” without ownership of land, and received much lower wages, or went to work for the church, again at low wages. The net result was that at least part of the workers started receiving much lower wages.

  One contributing factor to collapses was the fact that required tax levels tended to grow over time. Some reasons for this growth in tax levels are described in Items (2) and (3) above. Furthermore, the pressure of growing population meant that groups needed access to more arable land–a problem that might be overcome by a larger army. Paying for such an army would require higher taxes. Joseph Tainter in The Collapse of Complex Societies writes about the problem of “growing complexity,” with rising population. This, too, might give rise to the need for more government services.

  Raising taxes became a problem when wages for much of the population were stagnating or falling because of diminishing returns. If taxes were raised too much, low-paid workers found themselves unable to buy enough food. In their weakened condition, they tended to succumb to epidemics. If taxes couldn’t be raised enough, governments had different problems, such as not being able to support a large enough army to fend off attacks by neighboring armies.

  6. The United States now has a problem with declining wages of non-elite workers, not too different from the problem experienced by civilizations that collapsed in the past.

  Figure 8 shows that on an inflation-adjusted basis, US Median Family Income has been falling in recent years. In fact, the latest value is between the 1996 and 1997 value. In a sense, this represents diminishing returns on human labor, just as has occurred with agricultural civilizations that collapsed.

  

  Figure 8

  Wages have been falling to a much greater extent among young people in the United States. Figure 9 from a report by Dettling and Hsu in the Federal Reserve Bank of St. Louis Review shows that median wages have dropped dramatically since 1989, both for young people living with parents and for young people living independently. To make matters worse, the report also indicates that the share of young people living with parents has risen during the same period.

  

  Figure 9

  In some sense, the loss of efficiency of the economy (or diminishing returns) outlined in Item 4 is making its way through to wages. The wages of young people are especially affected.

  7. Demand for goods and services comes from what workers can afford. If their wages are low, demand for goods of many kinds, including commodities, is likely to fall.

  There are many rich people in the world, but most of their wealth sits around in bank accounts, or in ownership of shares of stock, or in ownership of land, or in other kinds of investments. They use only a small share of their wealth to buy food, cars, and homes. Their wealth has relatively little impact on commodity prices. In contrast, the many non-elite workers in the world tend to spend a much larger share of their incomes on food, homes, and cars. When non-elite workers cut back on major purchases, it is likely to affect total purchases of goods like homes and cars. Other related goods, such as gasoline, home heating fuel, and the building of new roads, are likely to be affected as well.

  When the demand for finished goods falls, the demand for the commodities to produce these finished goods falls. Because of these issues, when the wages of non-elite workers fall, we should expect downward pressure on commodity prices. Commodity prices may fall back to a more affordable range, after they have spent several years at higher levels, as has happened recently.

  There is a common belief that as we approach limits, the price of oil and other commodities will spike. I doubt that this can happen for any extended period. Instead, the low wages of non-elite workers will tend to hold commodity prices down. Because of this issue, we should expect predominately low oil prices ahead, despite the continuing pressure of rising costs of production because of diminishing returns.

  The mismatch between the rising cost of commodity production and continued low commodity prices is likely to lead to a sharp drop in the supply of many types of commodities. Thus, the slowing operation of our economic growth “pump” is likely to lead to a situation where the production of commodities, including oil, falls because of low prices, not high prices. 

  8. What is needed to raise the productivity of workers is a rising quantity of energy to leverage human labor. Such energy supplies are affordable only if the price of energy products is very low.

  The amount a person can produce reflects a combination of his own labor and the resource he has to work with. If energy products are available, they act like energy slaves. With their assistance, humans can do things that they could not do otherwise–move goods long distances, quickly; operate machines (including computers) that can help a worker do tasks better and more quickly; and communicate long distance by means of the telephone or Internet. While technology plays a major role in making energy products useful, the ultimate benefit comes from the energy products themselves.

  We have been using a rising amount of energy products since our hunter-gatherer days (Figure 10). In fact, the use of energy products seems to distinguish humans from other animals.

  

  Figure 10

  Clearly, cheaper is better when it comes to the affordability of energy products since available money goes further. If gasoline costs $5 per gallon, a worker with $100 can buy 20 gallons. If gasoline costs $2 per gallon, a worker with $100 can buy 50 gallons.

  In recent years, with the high prices of energy products, world growth in energy consumption has lagged. It should not be surprising that world economic growth seems to be lagging during the same period.

  

  Figure 11. Three year average growth rate in world energy consumption and in GDP. World energy consumption based on BP Review of World Energy, 2015 data; real GDP from USDA in 2010$.

  In fact, Figure 11 seems to indicate that changes in energy consumption precede changes in world economic growth, strongly suggesting that growth in energy consumption is instrumental in raising economic growth. The recent steep drop in energy consumption suggests that the world is approaching another major recession, but this has not yet been recognized in international data.

  9. One way of describing our current problem is by saying that the economy cannot live with the high commodity prices we have been experiencing in recent years and is resetting to a lower level that is affordable. This reset is related to low net energy production. 

  If oil and other commodities could be produced more cheaply, they would be more affordable. We would not have the economic problems we have today. Energy use in Figure 11 could be rising more quickly, and that would help GDP grow faster. If GDP were growing faster, we would have more funds available for many purposes, including funding government programs, repaying debt with interest, and paying the wages of non-elite workers. We perhaps would not have the problem of falling wages of non-elite workers.

  The current “fad” for solving our energy problem is to mandate the use of intermittent renewables, such as wind and solar PV. A major problem with this approach is that such renewables make the cost of electricity production rise even faster, exacerbating our problems, instead of making them better.

  

  Figure 12 by Euan Means. Installed capacity is in Watts (W) per capita.

  To make matters worse:

  1. The way our economy works, energy flows in a given year (not on a net present value basis) are what are important, because this is the way we use energy to make goods such as foods, metals, and homes. The energy flows of renewables are very much front ended. Thus, the disparity in energy use on an energy flow basis is likely to be greater than reflected in Figure 12.
  2. What we really need from energy products is the ability to stimulate the economy in a way that adds tax revenue. Either the energy products must produce high tax revenue directly, or they must indirectly produce high tax revenue by stimulating demand for new cheaper goods, produced with the new inexpensive form of energy. This is what I think of as “adding net energy”. Wind and solar PV clearly do the opposite. Thus, they behave like “energy sinks,” rather than as products that add net energy.
  3. Modern renewables that are connected to the grid can be expected to stop working when the grid stops working. This may not be too far in the future because we need oil to operate the trucks and helicopters that maintain the electric grid. If this problem were considered in the pricing of electricity from wind and solar PV, their required prices would be higher.

  As I see it, one of the major roles of energy products is to support the growing overhead of our economy; this is what the discussion about the need for “net energy” is about. Thus, we need energy products that are cheap enough that they can be taxed heavily now, and still produce an adequate profit for those producing the energy products. If we find ourselves mostly with energy products that are producing cash flow losses for their producers, as seems to be the case today, this is an indication that we have a problem. We don’t have enough “net energy” to run our current economy.

  10. Debt and other paper assets are likely to “have a problem” as the economic growth pump falters and stops.

  Debt is absolutely essential to making an economy work because it allows businesses to “bring forward” future profits, so that they don’t have to accumulate a high level of savings prior to building a new factory or opening a new mine. Debt also allows potential buyers of expensive products such as homes, cars, and factories to pay for them on an affordable monthly payment plan. Because more buyers can afford finished goods with the use of debt, debt raises the demand for goods, and indirectly raises the prices of commodities. With these higher prices, a greater quantity of commodity extraction is encouraged.

  At some point, it becomes very difficult to support the very large amount of debt outstanding. In part, this happens because of the large accumulated amount of debt. Falling inflation-adjusted wages of rank and file workers add to the problem. In such a situation, interest rates need to be kept very low, or it becomes impossible to repay debt with interest. Even with continued low rates, defaults can eventually be expected.

  Once debt defaults begin, commodity prices are likely to drop even further. Such a drop is likely to lead to even more loan defaults, especially by commodity producers (such as oil companies) and commodity exporters. Prices of equities can be expected to drop as well, because the problems of the debt system will affect businesses of all kinds.

  Once debtors start defaulting, it will become very difficult to keep financial institutions from collapsing. International trade is likely to become a problem because financial institutions are needed to provide debt-based financial guarantees for long-distance transactions.

  

  

  

  

  

• Biggest US Dark Pool Busted For Rigging Markets, Engaging In Precisely The Manipulation It Warned Against

  One year ago, in the first ever crack down on market manipulation and rigging in HFT-infested dark pools and ATS venues, the NY AG crushed Barclay’s dark pool LX with just one lawsuit alleging the bank had misrepresented and taken advantage of gullible clients to benefit well-paying HFT parasitic scalpers who not only have never “provided liquidity” but merely frontrun whale orders and completely shut down any time the market turns against the prevailing momentum wave, in the process crushing liquidity.

  Following the Barclays debacle, which confirmed not only what Michael Lewis had said earlier in 2014 about HFT manipulation, but everything we had said about HFT manipulation since 2009, the paid defenders of the HFT criminal syndicate scrambled to prove that it was “only” one bad sheep in a herd of well-meaning, tame and well-behaved liquidity providing animals.

  A year later, enough time had passed since the Barclays bust that the more gullible elements almost believed these paid defenders of market-rigging. Then the best laid plan of vacuum tubes and men went horribly wrong when at the end of July, none other than the original dark pool, ITG, was busted for using a prop trading silo to frontrun client order flow using an HFT architecture.

  Worse, as we revealed and as was confirmed later, the person behind this latest HFT manipulation charge was none other than Hitesh Mittal, the current head trader of mega quant fund AQR, the 4th largest in the world, whose boss Cliff Asness has over the years become one of the most vocal advocates of HFT. Now we know why.

  And then, earlier today, the WSJ reported that none other than the operator of the biggest dark pool in the US by volume, Credit Suisse and its massive Crossfinder dark pool, “is in talks with regulators to settle allegations of wrongdoing at its “dark pool” with a record fine in the high tens of millions of dollars, according to people familiar with the matter.”

  From the WSJ:

  The Swiss bank is negotiating a joint settlement with the New York Attorney General and the Securities and Exchange Commission. A deal could come as soon as the next several weeks, though talks could still fall apart, the people said. The settlement under discussion would lead to the largest fine ever levied against an operator of a private trading venue.

   

  The case against Credit Suisse includes allegations that it provided unfair advantages to some traders, violated rules against pricing of stocks and didn’t adequately disclose to investors how CrossFinder works, according to the people familiar with the matter.

  What is grotesque about this story is not that yet another dark pool has been found to cater solely to HFTs i.e., the best paying clients who will always get priority treatment by banks such as Credit Suisse and Barclays simply because that’s all they do: pay to frontrun others because in a market which is rigged to the core, HFT and dark pool manipulation is now the rule. What is grotesque, is that back in December 2012, it was none other than Credit Suisse which conveniently explained and laid out all those forms of HFT manipulation which we accused virtually every HFT firm of employing since 2009… and which Credit Suisse itself is now accused of engaging in!

  This is how Credit Suisse summarized all the predatory strategies of HFT algos in the market as of 2012:

  • Quote Stuffing: the HFT trader sends huge numbers of orders and cancels
  • Layering: multiple, large orders are placed passively with the goal of “pushing” the book away
     
  • Order Book Fade: lightning-fast reactions to news and order book pressure lead to disappearing liquidity
     
  • Momentum ignition: an HFT trader detects a large order targeting a percentage of volume, and front-runs it.

  And the punchline: Credit Suisse’s Advanced Execution Services (i.e., the group behind its dark pool) was putching itself as the one venue where trading participants are immune from such abuse. From “High Frequency Trading – Measurement, Detection and Response” (which can be found on the website of edge.credit-suisse.com with a cursory title-based google search):

  Dark pools using a synthetic EBBO (consolidated book) for their reference price are at higher risk of being gamed by quote stuffing. Exhibit 10 shows an example in Ashmore Group, where the Primary Bid and Ask (represented by the outer dark red and light blue lines at 356.2 and 355.7) are static, but the Chi-X bid moves (dark blue line). The consolidated EBBO shows a locked book, with the bid equal to the ask at 356.2.

   

  This scenario could be exploited in EBBO-referenced dark pools. A gamer could place a sell order in the pool with a 356.2 limit, then place (and rapidly cancel) a Chi-X bid, also at 356.2. Any buy order pegged to mid would trade at the temporary gamed “mid” of 356.2 (as the EBBO bid and offer are both temporarily 356.2), paying the whole spread rather than half.

   

  Crossfinder (Credit Suisse’s dark pool) does not use the EBBO, preferring to use primary-only data to help minimise the chance of midpoint gaming. Furthermore, when AES detects any quote stuffing, it may add extra protections across its orders (both lit and dark) to further reduce the risk of being gamed, more details of which are discussed later from page 7.

   

  * * *

   

  Dark-only flow traded through AES (e.g. in tactics such as Crossfinder+) can minimise the chance of being affected by ‘mid-point gaming’ with by withdrawing from certain venues, raising MAQs and using tighter limits. These protections will allow the midpoint to come towards the order – enabling the strategy to participate at a temporarily more favourable price – but restrict it from moving away. 

   

  If apparent gaming occurs consistently on a particular venue or with a particular counterparty in Crossfinder, the AES Alpha Scorecard will pick this up and highlight that venue or that counterparty as exhibiting excessive “opportunistic” behaviour. Credit Suisse’s clients then have the ability to decide whether to trade on those venues or against that group of counterparties.

   

  Flow that reaches Credit Suisse’s dark pool (Crossfinder) via aggregators does not receive such protections, as Crossfinder is simply an execution venue for this flow. When interacting through AES algorithms, these additional protections are available.

  Turns out they weren’t, and that anyone who believed the Credit Suisse reps and warrants was lied to, just like in Barclays’ case, and quite likely all those parasitic HFT strategies, quote stuffing, layering, orderbook fading and momentum ignition, Credit Suisse raged against were being used against CS’own clients.

  And, just like in Barclays case, these lies will now cost the Swiss bank tens of millions, or a fraction of the profits it made abusing its clients’ trust. 

  But the biggest question, just like in the Barclays case, is whether the bulk of its carbon-based clients – we know the HFTs will never leave – will depart the Crossfinder dark pool, and send the orderflow volume on the Credit Suisse market plunging, which like with LX, will start a self-fulfilling prophecy of dark pool collapse since once the key clients leave there is no reason for anyone else to stay.

  Finally, if this is what happens, who will be winner: upstart AEX, or Goldman Sachs, which as we reported recently is back in the HFT arena and as we reported in “Why Goldman Is About To Become The Biggest HFT Firm In The World“, is likely the firm that is ordering the regulatory hits on its biggest competitors until it takes them all down one by one, in a New Normal replica of how Goldman destroyed Lehman back in 2008.

  

  

  

  

  

• 1997 Asian Currency Crisis Redux

  Submitted by Michael Lebowitz via 720Global.com,

  Second Verse, Same as the First, a Little Bit Louder and a Little Bit Worse

  China surprised the financial markets on August 11, 2015 by devaluing their currency, the Renminbi (CNY), the equivalent of 2% versus the U.S. Dollar (USD). This is the largest daily move in the CNY in over 10 years and likely the first in a series of devaluations by the Chinese government. Since 2014, the Chinese had pegged their currency to the strengthening USD and watched it appreciate against many of the world’s currencies just as the USD was doing. Over the past year for example, the USD and CNY appreciated 20%, 25% and 12% against the euro, yen and South Korean won respectively. It just so happens that these currencies are the ones used by 3 of Chinas largest trade partners. Thus, maintaining a peg to the USD eroded export growth as China’s products became more expensive for countries other than the U.S to import. Conversely, in China the rising CNY brought further deflationary pressure as goods imported from countries that use currencies other than the USD became less expensive. Now, in an effort to level the global trade playing field, China has decided that the economic harm produced by pegging to the dollar outweighs the benefits produced by a strong domestic currency.

  In December 2014 the Bank for International Settlements (BIS) warned of the growing risks associated with the global carry trade. They estimated that since 2000 the amount of such trades quadrupled in size to $9 trillion and grew 5.5x faster than global growth over the same period. The massive amount of these trades outstanding dwarfs anything seen in the past, leading the BIS to repeatedly warn of potential financial repercussions if these trades suddenly and simultaneously unwound. The Asian currency crisis of 1997, for instance, was greatly magnified due to the unwinding of an estimated $300-$500 billion of these types of carry trades.

  The carry trade that is so concerning to the BIS involves borrowing USD (typically on a leveraged basis) and investing those funds in a foreign country. This trade possesses all of the risks of a typical investment but it also layers on substantial currency risk as the borrower/investor must first convert the borrowed dollars to the currency of the country where the investment takes place. By default a USD short is created when the currency is converted.

  It is estimated that carry trades involving USD loans invested in China could represent a quarter to a third of the BIS estimated $9 trillion global carry trade. The popularity of this trade grew steadily since 2006 as strong Chinese economic growth and an appreciating CNY versus the USD made this trade lucrative on both the investment front but also from a currency perspective. The graph below shows the CNY appreciation from 2006-2013 (green arrow), the pegging of CNY to the USD in 2014-2015 (blue arrow) and last night’s 2% devaluation (circled yellow).

  

  As mentioned earlier this devaluation is likely not a one-time event but rather the beginning of an ongoing and persistent depreciation of the CNY versus the USD. The embedded USD short position within the carry trades will begin to result in losses and margin calls as the USD appreciates versus the CNY, thus forcing investors to liquidate some of their positions. These trades, which took years to amass, could unwind abruptly and exert an influence of historic magnitude on markets and economies.

  The Asian currency crisis of 1997 could prove to be a worthy example of the effects to be felt from a massive unwind of carry trades of this sort, albeit of a much lesser magnitude. Therefore, caution is urged and investorsshould prudently monitor their positions and risk tolerances. During the Asian crisis of 1997 and 1998 the following effects were felt:

  • South Korean Won declined 34% against the USD
  • Thai Baht declined 40% against the USD
  • South Korean Gross National Product (GNP) declined 34%
  • The USD index rose 13% versus a basket of other major world currencies
  • The S&P 500 fell 15% in 1997, rallied, and then dropped another 20% in 1998
  • The Japanese Nikkei index declined 36%
  • South Korean share prices declined 58%
  • The 30 year US bond yield fell from 7.0% to 4.2%
  • Crude oil prices declined 62%
  • The Asian crisis contributed to the Russian default in 1998. This in turn led to the collapse of Long Term Capital which required a $3.625 billion bailout organized by the Federal Reserve as well as a 1% reduction in the Federal Funds Rate to contain the fallout.

  

  

  

  

  

• Nassim Taleb Explains The One Thing An Investor Should Never Fail To Do

  Authored by Nassim Taleb via Absolute Return,

  Uncertainty should not bother you. We may not be able to forecast when a bridge will break, but we can identify which ones are faulty and poorly built. We can assess vulnerability. And today the financial bridges across the world are very vulnerable. Politicians prescribe ever larger doses of pain killer in the form of financial bailouts, which consists in curing debt with debt, like curing an addiction with an addiction, that is to say it is not a cure. This cycle will end, like it always does, spectacularly.

  When it comes to investing in this environment, my colleague Mark Spitznagel articulated it well: investors are left with a simple choice between chasing stocks that have an increasing chance of a crash or missing out on continued policy effects in the short term. Incorporating a tail hedge minimizes the risk in the tail, allowing investors to remain invested over time without risking ruin. Spitznagel put together a video explaining the point.

   

  To be robust, one must construct a portfolio as an engineer would a bridge and ask what your managers expect to lose should the market fall by 10%. Then ask them again what they’d expect to lose in the down 20% scenario. If that second number is more than two times more painful emotionally than the first, your portfolio is fragile. To fix the problem, add components to your portfolio that make the portfolio stronger in a crash, like actively managed put options. You will be able to build stronger, better bridges, with better returns, that will last for the long term.

  By clipping the tail, you can own more risk, the good type of risk: upside with limited downside. And rather than helplessly watching your bridge collapse, you can be opportunistic in a crash, and take the pieces from others at bargain prices to increase the size of yours.

  

  

  

  

  

• And the Renminbi Bloodletting Begins…

  By Chris at www.CapitalistExploits.at

  Last week at my son’s football game, a fellow parent remarked to me that bald heads are cool. I actually thought the guy may be off his rocker a bit, but then I figured that maybe he was trying to be nice as I’ve got more hair on my big toe than on my shaved head. Then realization struck….

  This guy was trying to comfort himself as he was trying unsuccessfully to cover his own balding pate.

  Hiding balding can drive men nuts. You can look like Donald Trump, though someone needs to tell him he looks completely ridiculous. With all the money in the world, it’s clearly not possible to get a decent looking rug, and then you’ve got to ask yourself the question, who on earth could be bothered with putting up with all the rigmarole of sticking the thing to your head all the time? And what happens when you dive in a swimming pool or venture out on a windy day?

  If rugs aren’t your thing you could shoot for a hair transplant and end up with something that looks like a seed tray in a high school science lab experiment. Or you can look like your mad uncle George – don a stripy cardigan and do the comb over.

  Let’s face it: all options at hiding it are outright terrible. There are therefore only two realistic solutions to the problem. One is to hide indoors and never come out, and the other is to reveal it, get a grip and get on with life.

  This brings me to China who have been using all means and measures to hide the true situation in their financial markets.

  Blowing through $800 billion in public and private money in an attempt to prop up their ailing stock market has produced a muted response. Based on public statements, media reports and market data, we know that Beijing has just blown through at least 5 trillion yuan. This is an unprecedented amount, equivalent to nearly 10 percent of China’s GDP, and a trillion more than they committed in response to the global financial crisis in 2008. All this to calm a stock market sell-off. I say “at least” since we don’t really know how much Beijing has done under the covers and the opacity in China is legendary.

  A Reuters article described it well:

  While the market stabilised, with the Shanghai Composite Index SSEC recovering about 20 percent by Thursday’s close from a low point around 3,300 points struck on July 8, it is still below the semi-official recovery target of 4,500 points.

   

  Beijing has thus produced the equivalent of around 1 index point gain for every $1 billion committed.

  The selling pressure is clearly not of the garden variety. The problem is that the fundamentals don’t support the still lofty valuations.

  As interesting as the stock market is, our interest lies in the currency, something we’ve been writing about since late 2014. We believed that the big move was to be in the RMB and while every man and his dog was trumpeting the end of the dollar and the rise of the yuan we felt that, while this certainly was getting investors giddy, it was plain wrong.

  Back in December in an Brad was wondering about what China’s banking system was telling us?

  I’d like to share some important excerpts:

  The behavior of the interbank lending market can provide one with a good appreciation for the liquidity of the banking system as a whole. If there is a lot of liquidity in the system (more short term assets than liabilities) the interbank rate will fall, if there is scarcity of short term assets relative to liabilities then rates will rise. So a rising interbank rate is generally associated with contracting liquidity conditions. Rapid rises in interbank lending rates are often associated with banking or credit crisis. This happened in the lead up to the GFC.

  Brad dug in and looked at interbank lending markets for a host of emerging market currencies and showed how China’s HIBOR rate was going parabolic, indicating stress in this market.

  Fast forward till today and it’s no surprise to us that the PBOC has devalued.

  

  “One Off Depreciation”

  This is what the PBOC have officially called it. Ha!

  An export driven economy with a rising currency in the midst of a global currency war has created a gigantic USD carry trade with its epicentre in the Middle Kingdom. Beijing needs a strong economy to support a strong currency and signs are everywhere that growth is falling.

  What many people don’t realise is the self-reinforcing nature of an unwinding carry trade. Each tick down in the cross rate between the funding currency (USD) and the funded currency (RMB) acts as reverse leverage and forces additional participants who are short USD to cover and buy back their USD positions.

  Just over 30 days ago when I suggested that the market was making a mistake in pricing volatility in the USD/CNH cross pair this allowed us a rare opportunity to position for a move either way for a stupidly cheap cost. While we’ve been bearish we actually had the ability to take on both positions for just 2.8% premium. I called it a gift…and it was.

  Buying both is what traders term a “straddle” but don’t get hung up on terminology. The point is that for a 2.8% premium (2.5% + 0.3%) we can hold both positions. We don’t much care which way it moves but simply that it MOVES!

  We may be looking at the last chance salon to putting on a short RMB trade before this gets out of control. When a central bank tells you it’s a “one off” event you may as well take that as a green light.

  – Chris

   

  “It’s hard to believe this will be a one-off adjustment. In a weak global economy, it will take a lot more than a 1.9 percent devaluation to jump-start sagging Chinese exports. That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.” – Stephen Roach, former Chairman of Morgan Stanley Asia

  

  

  

  

• How One Hedge Fund Is Betting Against The $1.2 Trillion Student Loan Bubble

  On Monday, we got some color on Hillary Clinton’s $350 billion plan to make college more affordable. Students and former students across the country owe more than $1.2 trillion in college loans, and as Bill Ackman so eloquently put it earlier this year, “there’s no way they’re going to pay it back.”

  The fact that America’s student loan bubble is the focus of what may well end up being one of Clinton’s most expensive policy proposals speaks volumes about the urgency of the problem. 

  Of course there are some other folks who understand how quickly the situation is deteriorating. Chief among them are Moody’s and Fitch and a few sell-side strategists who are having quite a bit of trouble figuring out how to incorporate the various IBR plans being promoted by the Obama administration into their ratings models.

  These worries showed up earlier this year when Moody’s put billions in student loan-backed ABS on review for downgrade. Many of the deals in question are sponsored by loan servicer Navient, which was spun off from Sallie Mae in 2014. 

  Now, one Boston-based hedge fund is building a short position on what it says is “runaway inflation in post-secondary education” by shorting the likes of Navient and other names tied to to the student loan bubble.

    Here’s Bloomberg with more:

  FlowPoint Capital Partners, the $15 million hedge fund co-founded by Charles Trafton, is betting against companies such as student-loan servicer Navient Corp. to profit from what it calls a college bubble bursting in slow motion.

   

  The Boston-based firm is building positions against stocks of textbook publishers, student lenders and real estate companies that focus on college housing, Trafton said in an interview. Changes in the more than $1 trillion student loan market could hurt companies such as Navient, Sallie Mae and Nelnet Inc., according to a July investor letter from the firm.

   

  Businesses “levered to runaway inflation in post-secondary education are susceptible to growth and margin shocks,” the firm wrote in the letter.

   

  
  

  So there, ladies and gentlemen, is one way to trade the bubble if you believe expecting the nation’s graduates to somehow fork over $1.2 trillion is unrealistic in a job market where landing a gig as “head bartender” is sometimes the best one can hope for if you happen to have majored in anything other than petroleum engineering. 

  We wonder how many hedge funds are hard at work with Wall Street creating customized deals full of the worst student loan credits they can find with the sole intention of betting against them. 

  

  

  

  

  

• Manic Monday Becomes Turmoil Tuesday As China Rocks The Global Boat

  In honor of China's historic devaluation, today seemed like a two-clip day… For the Traders…

  and of course… for the news media after yesterday's celebrations…

   

  Ok, having got that off our chest we start with… USDCNH's collapse (utterly destroying carry traders as implying vol exploded) has continued after China's close…

  

   

  Is it any wonder that carry trades worldwide exploded?

  US equities roundtripped all of yesterday's gains… then bounced…

  

   

  Leaving only Nasdaq red on the week though…but they did try to ramp that too…

  

   

  Weighed down by AAPL..down 5% – worst since Jan 2014…

  

   

  Dow Death Crosses…

  

   

  VIX rollercoaster continues – VIX up 13% breaking above 14…

  

   

  With a late day slam in VIX to ramp the S&P perfectly to VWAP… NOTE the institutional selling at VWAP on each bounce…and the volume difference!!

  

   

  File these two charts under the WTF folder… Energy credit spiked to 1028bps and WTI crude collapsed to a $42 handle… so it makes perfect sense that energy stocks would surge…

  

   

  Because buying Energy stocks at 22.85x is definitely a great call as credit and crude collapse…

  

   

  Submerging markets collapse to 4 year lows…

  

   

   

  Treasury yields collapsed around 9bps across the complex… The 5Y, 7Y, 10Y, and 30Y all closed below their 200DMAs

  

   

  FX markets turmoiled… commodities currencies were monkey-hammered and EUR strengthened as the most popular CNH carry pair (which led to modest USD strength)..

  

   

  Commodities were mixed with PMs up and industrials/base down…

  

   

  Precious Metals appeared to get a nod that things were coming…

  

   

  Crude Carnaged to fresh 6 year lows today… with a $42 handle… increased OPEC production (Supply) along with China growth (Demand) fears

  

   

  And Copper closed at fresh 6 year lows…

  

   

  Finally – a message from your friendly CNBC correspondent: "Flat Is The New Up"

   

  Charts: Bloomberg

  

  

  

  

• Just As Brazil Hits Rock Bottom, Things Are About To Get Even Worse

  For anyone who might have missed it, Brazil is in trouble.

  The country is “at the center of a triple unwind of EM credit, China’s leverage, and US monetary easing” (to quote Morgan Stanley) and as Goldman recently pointed out, faces a stagflationary nightmare.

  Last quarter, Brazil suffered through the worst growth-inflation mix in over ten years. As Goldman put it, “since 1Q2004 there has not been a single quarter in which we had simultaneously higher inflation and lower growth than during 2Q2015.”

  

  And then there’s the twin deficit problem. Here’s Goldman again:

  Over the last 11.5 years, we cannot identify a month with a strictly-worse fiscal-CA deficit outcome than that of May-15 (lower left quadrant is empty). In fact, at 7.9% of GDP the fiscal deficit is now the widest it has ever been since Jan-04, and there were only a few months (5 out of 137 months in the sample) were the current account deficit was marginally wider than currently.

  
  

  

  Meanwhile, as we mentioned on Monday, Dilma Rousseff is now the most unpopular democratically elected president since a military dictatorship ended in 1985, with an approval rating of just 8%. In a recent poll, 71% said they disapprove of the way Rousseff is doing her job… and two-thirds would like to see her impeached. Here’s Bloomberg summing up the situation: 

  To be sure, the president faces a host of challenges this month, not least of which is a nationwide protest planned for Aug. 16.

   

  The country’s audit court also must decide whether the government broke the fiscal law by doctoring budget results last year. A ruling against the government could provide the legal foundation to start impeachment hearings, opposition lawmakers say. Her administration says previous presidents used the same practices.

   

  Investors are concerned that the political instability will push Brazil into a deeper recession and make it increasingly vulnerable to a sovereign-credit downgrade. The real has depreciated 8.1 percent in the last month, the biggest decline among 16 major currencies tracked by Bloomberg.

   

  
  

  Given all of this, just about the last thing Brazil needed was for China to officially enter the global currency wars, which is of course exactly what happened overnight. Our response:

  Biggest immediate loser from China’s devaluation: Brazil

  — zerohedge (@zerohedge) August 11, 2015

  And the response from Brazil’s trade ministry (via Reuters):

  Brazil’s Trade Minister Armando Monteiro on Tuesday said China’s decision to devalue the yuan could hurt the country’s manufacturing exports. 

  So what lies ahead for Brazil given all of the above? Well, further BRL weakness – or at least according to Goldman. Here’s more:

  We are moving our BRL forecasts to show further downside – we expect $/BRL to reach 4.00 in 12 months (relative to 3.55 previously). A weaker BRL is part of a necessary adjustment to address the macro imbalances in Brazil; and the combination of a weak and increasingly back-loaded path of fiscal adjustment and a central bank that appears to be done with tightening policy for now suggests that the exchange rate is likely to bear more of the overall burden of absorbing the impact of the commodity price downdraft, restoring competitiveness and correcting the current account deficit. 

   

  Brazil stands at a crossroads – both roads involve currency depreciation. The combination of significant macro challenges (economic contraction, elevated inflation and large fiscal and current account deficits) and a deteriorating political and institutional backdrop means that Brazil stands at a pivotal crossroads. One road involves the risk of a further deterioration in the political backdrop morphing into a full-fledged governability and institutional crisis (potentially including the departure of key policymakers) and a further deterioration in investor (and rating agency) confidence, with an associated additional hit to an already contracting economy. The other road involves a potential stabilisation in the political picture, which in turn would provide the authorities with room to undertake necessary short- and medium-term fiscal consolidation measures, coupled with monetary easing further down the line. In either case, we think the BRL is likely to depreciate further because it is hard for us to see a route back to a more balanced set of macro outcomes in Brazil that do not involve currency weakness. Along the first road, the depreciation is likely to be sharper and disruptive, with scope for overshooting and an eventual rebound; the alternative scenario would likely involve a grinding, more controlled move, potentially encouraged by policymakers.

   

  Macro imbalances in Brazil are large, the worst in almost a decade…We have developed a simple scoring algorithm to assess the scale of internal (inflation relative to target) and external imbalances (current accounts relative to sustainable levels) and, as Exhibit 1 shows, in Brazil these imbalances are at their widest combined level in a decade. The fiscal deficit at -8.1% of GDP is also at its widest in more than 20 years, with the combined twin deficits now tracking at a disquieting 12.5% of GDP.

   

  

   

  Of course as we said late last month, the simple fact is that whether it’s China, runaway stagflation, or simple politician greed and corruption, Brazil has passed the recession phase and its economy is in absolute free fall and against a backdrop of an escalating currency war (which the country’s most important trading partner has just officially entered), unattainable fiscal targets, and protracted weakness in commodity prices, the path to stabilization and rebalancing is anything but clear, but what does seem virtually certain is that Brazil has a date with junk status in the not-so-distant future. 

  And on cue, just moments ago:

  • BRAZIL CUT TO Baa3 FROM Baa2 BY MOODY’S; OUTLOOK TO STABLE

  So that’s one step up from junk for Moody’s and one step from junk for S&P – it shouldn’t be long now, because no matter what Moody’s says, there isn’t anything “stable” about this situation.

  

  We suppose the only lingering questions are whether Rousseff will be impeached and whether economic decay, a dangerously unstable political situation, and problems of a more, shall we say, “putrid” nature, will conspire to make Rio a veritable ghost town for next summer’s Olympic games.

  Then again, this young lady doesn’t seem particularly concerned…