• The Hype Surrounding Today's Federal Reserve's Interest Rate Decision is Way Overblown

  Today the Federal Reserve will meet and announce at 2PM NY time whether or not they are hiking rates. The fact that there is so much mainstream media attention being placed on this announcement as one that could tank the US stock markets if they announce a rate hike versus cause it to soar if they announce further delays is absurd if one pauses for a rational second to consider the following. The US Federal Reserve cut interest rates to 0.00% to 0.25% on 16 December 2008, and it has been at this level for more than 6½ years now! Furthermore, starting in about the last quarter of 2009, the mainstream media has been speculating that the Feds would raise interest rates. This means that for 23 consecutive quarters, the mainstream media has speculated that the Feds would raise interest rates, and for 23 straight quarters, the Feds have issued a bunch of rambling nonsense about “subdued inflation trends” and low US unemployment imbedded within a non-wavering statement that they will maintain a fed funds rate at 0% to 0.25%. Just check out the consistency of the statements they have released every few months for the past 6½ consecutive years below (I have only posted their decision from one statement per year though all FOMC statements every year for the past 6½ years state the same basic nonsense.)

   

  Release Date: August 12, 2009

  “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

  Release Date: August 10, 2010

  “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

  Release Date August 9, 2011

  “The Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

  Release Date: August 1, 2012

  “The Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

  Release Date: July 31, 2013

  “The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

  Release Date: July 30, 2014

  “In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.”

  Release Date: July 29, 2015

  “The Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.”

   

  Even more ridiculous is the Fed’s modification of this standardized statement after stating in 2013 that they would hike interest rates if the “official” (but very fake) unemployment rate dropped below 6.5 % and their “official” (but very fake) inflation statistic was projected to be “no more” than 2.5%. Given that the latest “official” inflation rate through the 12 months ended July 2015 was 0.2%, which is “no more” than the given 2.5% inflation target, and the latest “official” inflation rate was 5.10%, well below the 6.5% target at which the Feds stated they would start raising the Fed Funds rate in 2013, one would think that an interest rate hike today was guaranteed if one trusts the bankers’ rhetoric. However, if one simply looks at the facts, one will realize that the Feds’ word is worth next to nothing, as all their policy decisions are driven by what is best for their masters (industrialists, statists and corporatists), and never by what is best for the country.

   

  The facts are as follows. The “official” unemployment rate has been below 6.5% and the “official” inflation rate has been “no more” than 2.5% for 17 consecutive months. Consequently, we have met the conditions for 17 consecutive months for the Feds to start raising interest rates but yet no interest rate raise has transpired. Why? Janet Yellen knew that if she raised interest rates 17 months ago (when their stated conditions for raising interest rates were initially met), that this action would have had disastrous consequences for US stock markets and for hundreds of trillions of notional amounts of derivative contracts, the vast majority of which are directly tied to interest rates. Furthermore, it appears that 17 months ago, they had not yet provided ample opportunity to their crony corporate friends to exit the US stock market. Consequently, they could not have chosen to start manufacturing a stock market decline 17 months ago for fear of angering the ruling class that lords over them. Consequently, the Federal Reserve bankers merely altered the language contained in their statements regarding the conditions that had to be met for them to start raising interest rates. Instead of stating that they would raise interest rates if projected inflation was “no more” than 2.5% and if unemployment dropped below 6.5%, they stated that they would only raise interest rates by assessing realized and expected “progress…towards its objectives of maximum employment and 2% inflation.”

   

  The facts show the total absurdity of paying attention to anything Central Bankers state, as their statements should have zero credibility among the people after this inspection of their past statements and actions. Unsurprisingly, mainstream media journalists seem to be waiting with bated breath upon every word that comes forth from Janet Yellen’s lips. Furthermore, to add to this mountain of absurdity, is a 0.25% rate raise even significant after nearly 7 consecutive years of 0% to 0.25% interest rates? When Nixon took the world off the Bretton Woods standard in 1971, and Jimmy Carter called upon Paul Volcker to repair the world’s loss of faith in the USD, note that Volcker raised Fed Funds rates by a whopping 10.75% from 4.75% to 15.5% in less than two years from 1977 to 1979, and then again, by another 4.5% in the next year to 20%. Today, even a 2% raise in interest rates seems unfathomable, as such an interest rate raise may cause so many defaults on interest rate driven derivative contracts that chaos and financial Armageddon may ensue.

   

  In other words, it is absurd that the global financial system today is so fragile and so overblown with hot air, that the more than quadrillion dollars of notional value of derivatives and the entire US stock market’s fate is now balanced on a fulcrum that could tip into a deep slide by interest rate increases that would be viewed as insignificant and piddling just a few decades ago. This is absurdity at its finest. Furthermore, if you wonder why I don’t refer to the “official” $700+ trillion of derivatives contracts in use today, since an accounting trick was used to knock the notional value of global derivatives overnight in half from $1.4 quadrillion to $700 trillion a few years back, yes, the real notional value of global derivatives is still $1.4 quadrillion.

   

  So will the Feds raise interest rates later today? Given their past history, I believe the answer is no and that they are engaging in the same bluster and using their mainstream media pawns to spread propaganda that they may raise interest rates. Consequently, this would allow the MSM to spin continued inaction and paralysis on their end into a “positive” for US stock markets. However, this is pure speculation on my end as predicting the decisions of psychopaths is not a science or an art or even worthy of anyone’s attention. We all know that the US Federal Reserve causes massive price distortions that the MSM likes to falsely call “booms”. We all know as well that the US Federal Reserve bankers deliberately unwind the massive price distortions they create from time to time, ensuring that their crony corporate friends are informed of this move well in advance of the time they decide to execute it. History has proven that crony industrialists and corporatists don’t tend to have their riches destroyed by “busts”. Quite to the contrary, they tend to enrich themselves on the “bust” cycle of this equation as well. To crony corporatists, the artificially engineered “bust” part of the cycle is just another opportunity to become even richer.

   

  Consequently, this is not an article about predicting the Feds decision on interest rates later today, because as I stated, there is no science or art or even anything to be gained by predicting the moves of psychopaths. To do so is tantamount to flipping a coin, stating that it will come up heads, and when it does, to pat oneself on the back in an absurd congratulatory manner for this accurate “prediction”. Who cares if I’m right and the Feds do nothing as usual? Even more importantly, who cares if I’m wrong and the Feds hike interest rates? A guess is just a guess and nothing more. Whatever the decision today, there will likely be a knee-jerk reaction to this decision in US stock markets, and it could even be a significant knee-jerk reaction, but if the Fed bankers decide not to raise interest rates, this is NOT a win for the US stock market despite any short-term knee-jerk reaction that may falsely interpret this decision as a win. On the contrary, unless the Feds decide to raise interest rates by 0.50%, a 0.25% raise is not going to really affect any markets significantly in the long run unless they are followed by quarterly raises every quarter. In the end, whatever the Feds announce at 2PM NY time today should not affect your long-term outlook on markets as neither of the two possible decisions will significantly alter the future fate of global markets. Instead, the most important thing to understand is the massive fraud that is systemic in the global financial system and to allow a deep and complex understanding of this fraud to drive your investment decisions. This understanding is much more important than the Fed’s interest rate decision later today. If one doesn’t understand the systemic fraud in this system, one will be driven to poor decisions by knee-jerk reactions to short-term events rather than to build and formulate a strategy that will ignore short-term knee-jerk reactions and survive and thrive in the long-term. With off-the-charts volatility in US, Japanese, Chinese and European markets caused by 6-sigma and 7-sigma events, as I discuss in the below vlog, trying to build an investment strategy around these banker-created, HFT algo driven, short-term volatile events is pure foolishness.

   

  This article is a commentary on the complete absurdity of the state of our global financial system that has been created by foolish Central Banker monetary policies designed to benefit only the smallest sliver of society, the disinformation that passes as “news” today, the lack of integrity in MSM financial journalism, and the fact that one must separate the wheat from the chaff to understand how to formulate intelligent investment strategies moving forward no matter if the Feds decide to do nothing or decide to hike interest rates by a piddling 0.25% later today. Oh, and one last comment. Yes I do realize, and have realized for decades, that the official economic indicators stated by governments worldwide are falsified. Real inflation in the US is a minimum of 2% to 3% higher than the “official” statistic and real unemployment in the US is a minimum of 4 to 5 times higher than the “official” 5.10% statistic. But since the Feds used these fake statistics in their statements to provide the timeline of when they would hike the Fed Funds rate, I thought that it would be particularly absurd to illustrate that even when their fake targets are met using their fake statistics, the Fed bankers still renege on their previous promises to raise interest rates due to the calamity that significantly higher interest rates would wreak upon the notional 1.4 quadrillion of outstanding derivatives contracts.

   

  Additional commentary available below in our latest SmartKnowledgeU vlogs:

   

  SKU_Vlog_005: Use 6 Sigma Events to Predict Market Behaviorv

  SKU_ Vlog_006: We’re in a Bear Market for Honor & Integrity

  SKU_Vlog_007: Society Has Success All Wrong

   

   

  About the author: JS Kim is the Managing Director of SmartKnowledgeU, a fiercely independent investment research, analysis and education firm that provides investment and wealth preservation strategies to combat the systemic fraud of the global banking and investment industry. Come by SmartKnowledgeU to learn more. Click on this link to download a free excerpt to JS Kim’s book, The Golden Gift (Solutions to our Global Banking & Monetary Crisis), available until 18 September 2015 only.

  

  

  

  

• GOP Debate Post-Mortem: Trump Top, Fiorina Flourish, Carson Crumbles

  While Lindsay Graham was a clear winner in the undercard (like being the tallest midget?), the main event was a mosh-pit of anatagonistic self-abuse for The GOP as candidates ran rough-shod over each other and the moderators. Fiorina stood up to Trump (though not too aggressively) and Trump replied how beautiful Fiorina's face was, Paul was bowled over (by Trump), and Trump was ironically dismissed as "a great entertainer" as the debate took place in great entertainer Ronald Reagan's library. It was clear that "the rest" of the GOP field was not about to let Trump dominate… and he didn't but the night was, in one word, chaos. Trump spoke the most as expected and in most polls was voted as 'winner' with Fiorina gaining most.

  The top searched candidates from tonight's #CNNDebate: 1) @realDonaldTrump 2) @CarlyFiorina 3) @JebBush

  — Google Politics (@googlepolitics) September 17, 2015

  CNN's Jeff Zeleny seemed to confirm social media's view that Graham was the undercard winner

  Sen. Lindsey Graham had the strongest performance of any candidate in the first debate. Graham topped the talk-time…

  • Graham: 19:47
  • Santorum: 15:38
  • Jindal: 13:06
  • Pataki: 10:58

  From start to finish, his one-liners delighted the crowd, his command of policy was unmatched, particularly on national security and foreign policy. He exuded substance. And he shows that experience pays. The question is whether voters want that experience. And, of course, whether he will ever be able to debate the full field.

  But the bookies sum it all up… Odds to suspend/end campaign by Nov. 1

  George Pataki

  • Odds pre-debate: 40%
  • Odds post-debate: 55%

  Lindsey Graham

  • Odds pre-debate 42%
  • Odds post-debate 42%

  Rick Santorum

  • Odds pre-debate: 34%
  • Odds post-debate: 40%

  Bobby Jindal

  • Odds pre-debate: 33%
  • Odds post-debate: 40%

  So Pataki is gone? Which is somewhat comical given Trump's later comment that

  "Pataki wouldn't be elected dog-catcher right now"

  *  *  *

  

  The main event started with what felt like an hour of introductions then the big one hit…

  

  The first heads-up was Fiorina vs Trump as she positioned him as a "great entertainer," which is ironic given the debate was being held in Ronald Reagan's (an entertainer) library, but declined to answer if Trump was "qualified" to put his finger on the nuclear button:

  • *FIORINA SAYS UP TO VOTERS TO DECIDE IF TRUMP IS QUALIFIED

  Then Trump began…

  • *TRUMP SAYS RAND PAUL SHOULDN'T BE ON DEBATE STAGE

  Which the eye surgeon swung at…

  • *PAUL SAYS TRUMP'S ATTACKS ARE WHAT HAPPENS IN `JUNIOR HIGH'

  Carson came across quiet again…

  Retired Neurosurgeon Ben Carson was surging in the polls coming into Wednesday night’s debate, but he has done little this evening to draw voters to his candidacy. He has had few, if any, memorable statements.

  But actually spoke more than last time and managed some good points…

  Carson: It's time for the government to get out of the way and let the people decide how they want to run their country #GOPDebate

  — PBS NewsHour (@NewsHour) September 17, 2015

  Carson: Our children will have no future if we put our heads in the sand #GOPDebate

  — PBS NewsHour (@NewsHour) September 17, 2015

  Bush had more of a presence that last time but his most notable moment was to Trump's negativity on his brother…

  “Your brother’s administration gave us Barack Obama because the last 3 years were such a disaster.”

   

  “It was such a disaster those last few months that Abraham Lincoln couldn’t have been elected,” Trump says at CNN’s Republican presidential debate

   

  Bush opened back-and-forth by saying of Trump: “The lack of judgment and lack of understanding about how the world works is really dangerous”

  Bush: My brother kept us safe #GOPDebate

  — PBS NewsHour (@NewsHour) September 17, 2015

  or put another way…

  Here's a quick recap of that Trump/Jeb exchange. #CNNDebate pic.twitter.com/cJr6JMjw1u

  — daveweigel (@daveweigel) September 17, 2015

  But disappointed his mum…

  Sorry Mom

  — Jeb Bush (@JebBush) September 17, 2015

  Jeb: I smoked weed 40 years ago pic.twitter.com/irRPnpgl14

  — POLITICO Video (@POLITICOvideo) September 17, 2015

  Trump and Cruz were the most "uncivil" according to US News…

  Everyone except for @realdonaldtrump and @tedcruz is being pretty civil right now http://t.co/aaIzvlGY9u pic.twitter.com/LlAEsgaoet

  — U.S. News (@usnews) September 17, 2015

  *  *  *

   

  Donald Trump summed it all it in 7 seconds

  I think Trump just did all the emoji faces in 7 seconds. pic.twitter.com/hC18pVxKgh

  — Jason Mustian (@jasonmustian) September 17, 2015

  Responding to Paul, Trump pounded him with "I never attacked him on his looks, and believe me, there’s plenty of subject matter right there.”

  But Paul made some good points…

  Rand Paul: There will always be a Bush or Clinton for you if you want to go back to Iraq #GOPDebate

  — PBS NewsHour (@NewsHour) September 17, 2015

  Mid way through, CNN re-ignited the Trump-Fiorina battle…

  Fiorina responds to Trump: "I think women all over this country heard very clearly what Mr. Trump said" #GOPDebate pic.twitter.com/LQDAMCDn7q

  — New York Post (@nypost) September 17, 2015

  The only thing Kasich said was:

  • *KASICH SAYS TAX RATES ON CARRIED INTEREST SHOULD NOT BE CHANGED

  Trump added:

  • *TRUMP ON TAXES: THE HEDGE FUND GUYS WON'T LIKE ME

  For a brief moment, there was some agreement with Trump…

  “We are the only ones dumb enough, stupid enough” to offer citizenship to babies born in U.S. to parents here illegally “and we take care of the baby for 85 years,” Donald Trump.

   

  Trump says 14th amendment says birthright citizenship “is not correct and in my opinion it makes absolutely no sense”

   

  Rand Paul says “I hate to admit it but Mr. Trump has a point here” and says there’s never been a “direct supreme court case” on children born to immigrants in the U.S. illegally

   

  Carly Fiorina says you “cant just wave your hands and say the 14th amendment is going to go away.” “It will take an extremely arduous vote in congress” and “a long arduous process in court”

  Politico offers some inisght with Trump's 7 most memorable debate lines…

  1. First words: “I’m Donald Trump. I wrote the art of the deal. I say not in a braggadocious way. I’ve made billions and billions of dollars.”

   

  2. Asked to respond to Carly Fiorina: “First of all, Rand Paul shouldn’t even be on this stage. He’s number 11.”

   

  3. On himself: “Believe me. My temperament is very good, very calm.”

   

  4. On Paul: “I never attacked him on his looks, and believe me there’s plenty of subject matter right there.”

   

  5. On George Pataki: “He wouldn’t be elected dog-catcher right now.”

   

  6. On his multiple bankruptcies: “People are very, very, impressed with what I’ve done. The business people.”

   

  7. A left-handed compliment to Jeb Bush: “More energy tonight. I like that.”

  Trump and Bush managed the handshake that Trump and Carson didn't…

  Ever-ready gives Humble some skin. https://t.co/qbJW3a19Eo

  — Matt Fuller (@MEPFuller) September 17, 2015

  And here is CNN's protracted way of adding to ad revenues… POTUS nicknames…

   

  #trueheart #unit1 #secretariat #harley #everready #humble #onenation #angel #gator #duckhunter #justiceneversleeps

  — drew olanoff (@drew) September 17, 2015

  *  *  *

   

  As expected, Trump spoke most… more than Paul, Walker, & Huckabee combined

  Two hours in, who has spoken the longest? pic.twitter.com/tn3JbcQ4xQ

  — Post Politics (@postpolitics) September 17, 2015

  Quite different allocations that last time…

  

  *  *  *

  Polls suggested trump was the clear winner…

  

  But the big surge by Fiorina and plunge for Carson was most notable.

  As CNN notes, the second Republican debate was supposed to be the one where candidates like Jeb Bush, Scott Walker and other would-be frontrunners ganged up on Trump.

  But Trump's greatest antagonist on Wednesday night was Carly Fiorina. Fiorina, who got into the main event at the 11th hour, was aggressive and concise in taking on Trump.

   

  She countered his attacks against her business acumen, challenged his remarks about her appearance, and demonstrated her knowledge of foreign policy — a slight against Trump's inability to cite specifics in a recent Meet The Press interview.

   

  No one on stage Wednesday night showed as much passion, nor demonstrated as much poise, as Fiorina –– which could yield major results among Republicans who don't support Donald Trump.

  And as Google Politics shows, search interest in Fiorina and Trump soared…

  Take a look at how @google search interest for @CarlyFiorina & @realDonaldTrump spiked over the past 1.5 hours → pic.twitter.com/cqqsl38WH9

  — Google Politics (@googlepolitics) September 17, 2015

  We are all winners though…

  Let's all agree on this: we all won for having watched this CNN debate.

  — Chris Ciaccia (@Chris_Ciaccia) September 17, 2015

  *  *  *

  The final results of @Newsweek's #GOPDebate bingo: http://t.co/Lu2XVvBGNj pic.twitter.com/ksVdNjsYP1

  — Polly Mosendz (@polly) September 17, 2015

  Finally, this excellent tweet summed up the circus perfectly…

   

  The questions being asked at this debate versus the answers pic.twitter.com/nsMjSywzSA

  — sam (@samlabell) September 17, 2015

  

  

  

  

  

• The Real Reasons Why The Fed Will Hike Interest Rates

  Submitted by Brandon Smith via Alt-Market.com,

  For the past several months, the chorus of voices crying out over the prospect of a Federal Reserve interest rate hike have all been saying essentially the same thing – either they can’t do it, or they simply won’t do it. This is the same attitude the chorus projected during the initial prospects of a QE taper. Given the trends and evidence at hand I personally will have to take the same position on the rate hike as I did with the taper – they can do it, and they probably will do it before the year is over.

  I suppose we may know more after the conclusion of the Fed meeting set for the 16^th and 17^th of this month. August retail sales data and industrial production numbers have come in, and they are not impressive even with the artificial goosing such stats generally receive. However, I do not expect that they will have any bearing whatsoever on the interest rate theater. The Fed’s decision has already been made, probably months in advance.

  The overall market consensus seems to be one of outright bewilderment, so much so that markets have reentered the madness of "bad news is good news" as stocks explode on any negative data that might suggest the Fed will delay. The so-called experts cannot grasp why the Fed would even entertain the notion of a rate hike at this stage in the game. Hilariously, it is Paul Krugman who is saying what I have been saying for the past year when he states:

  "I really find it quite mysterious that the Fed is eager to raise rates given that, they’re going to be wrong one way or the other, we just don’t know which way. But the costs of being wrong in one direction are so much higher than the costs of being the other."

  Yes, why does the Fed seem so eager? Every quarter since the bailouts began no one has been asking for interest rates to increase. No one. Only recently has the Bank for International Settlements warned of market turmoil due to the long term saturation of markets caused by low interest policies, yet it was the BIS that had been championing low rates and easy money for years. The IMF has warned that a U.S. rate increase at this time would cause a market crisis, yet the IMF has also been admonishing low rate policies, policies that they had also been originally supporting for years.

  Confused yet? The investment world certainly seems to be. In fact, the overall market attitude towards a rate hike appears to be a heightened sense of terror, and I believe this has been amply reflected in global stock behavior over the past three months in particular. With thousands of points positive and negative spanned in only a couple of trading sessions, stock market indexes around the world are beginning to behave like seizure victims, jerking and convulsing erratically.

  This has, of course, all been blamed on China’s supposed economic “contagion.” But you can read why that is utter nonsense in my article “Economic crisis goes mainstream – What happens next?”

  The bottom line is, the Federal Reserve has been the primary driver of the massive financial bubbles now in place in most of the world’s markets, and much of this was accomplished through ZIRP (zero interest rate policy). Hopefully many of the readers here can recall the tens of trillions of dollars of overnight lending by the Fed to international banks and corporations that was exposed during the initial TARP (Troubled Asset Relief Program – aka bailout) audit. You know, the trillions in lending that mainstream naysayers claimed was "not" contributing to the overall debt picture of the U.S. Well, reality has shown that ZIRP and overnight lending has indeed directly and indirectly created debt bubbles in numerous areas.

  The most vital of areas at this time is perhaps the debts accrued by major banks and companies that have relied on overnight loans to facilitate massive stock buybacks. It has been these buybacks that have artificially supported stocks for years, and whenever ZIRP was not enough, the Fed stepped in with yet another QE program to give particular indicators a boost. The main purpose of this strategy was to ensure that markets would NOT reflect the real underlying instability of our economic system. The Fed has been pumping up banks and markets not only in the U.S., but across the globe.  Why?  We'll get to that, but keep in mind that it takes time and careful strategy to wear down a population and condition them to accept far lower living standards as the "new normal" (and it takes a sudden crisis event to convince a population to be happy with such low standards given the frightening alternative).

  Even with near zero interest, companies have still had to utilize a high percentage of profits in order to continue the stock buyback scam. We have finally arrived at a crossroads in which these companies will be forced to either stop buybacks altogether, or await another even more comprehensive stimulus infusion from the Fed. A rate increase of .25 percent might seem insignificant, until you realize that banks and companies have been cycling tens of trillions of dollars in ZIRP through their coffers and equities. At that level, a minor increase in borrowing costs swiftly accumulates into untenable debts. A rate increase will kill all overnight borrowing, it will kill stock buybacks, and thus, it will kill the fantasy that is today's stock market.

  This is why so many analysts simply cannot fathom why the Fed would raise rates, and why many people fully expect the introduction of QE4. But we need to ask some fundamental questions here…

  Again, as Krugman ponders (or doesn’t ponder, since I believe he is an elitist insider with full knowledge of what is about to happen), why does the Fed seem so eager to raise rates if the obvious result will be a drawn out market crash? Is it possible, just maybe, that the Fed does not want to prop up markets anymore? Is it possible that the Fed’s job is to destroy the American economy and the dollar, rather than protecting either? Is it possible that the Fed is just a useful tool, an institutionally glorified suicide bomber meant to explode itself in the most populated area it can find to cause maximum damage for effect? Wouldn’t this dynamic go a long way in explaining why the Fed has taken every single action it has taken since its underhanded inception in 1913?

  Will the Fed raise rates this week? I still think the Fed may "surprise" with a delay until December in order to give one more short term boost to the markets, but as I read the mainstream economic press I find the newest trend indicates I could be wrong. The trend I am speaking of has only launched in the past couple of days in the mainstream media, as outlets such as the Financial Times and CNN are now publishing arguments which claim a Fed rate hike is a “good thing”.  While it may be a "good thing" in the long run as it is vital for everything that is over-inflated in our economy to fall away and leave that which is real behind, a return to true free markets without ZIRP manipulation is NOT what the mainstream media is promoting.

  The mainstream pro-rate hike arguments are in most cases predicated on completely fabricated notions of economic recovery. CNN states:

  "At a time when the U.S. economy is chugging along at over 2% growth and the unemployment rate reflects almost full employment, there’s not much of a case for the Fed’s key interest rate to remain at historic lows…"

  As I outlined in my series written at the beginning of this year titled “One last look at the real economy before it implodes,” any growth in gross domestic product (GDP) is a farce driven primarily by government debt spending and inflation in particular necessities rather than recovery in the core economy and on main street. And, unemployment numbers are the biggest statistical con-game of all, with more than 93 million Americans not counted on the Labor Department’s rolls as unemployed because they no longer qualify for benefits.

  For a couple of months, some of the mainstream has pulled its head out of its posterior and actually begun asking the questions alternative analysts have been asking for years about the potential risks of returning market volatility and “recession” (which is really an ongoing program of hyperstagflationary collapse) in the wake of a world without steady and open fiat stimulus.  Yet, suddenly this week certain MSM establishment mouthpieces are claiming “mission accomplished” in the battle for fiscal recovery and cheerleading for a rate hike?

  What this tells me is that the narrative is being shifted and a rate hike is indeed on the way, perhaps even this week.

  It is important to note that this stampede over the edge of the cliff is not only being triggered by the Federal Reserve. Most central banks and China's PBOC in particular is definitely part of the bigger problem, but only because China is working alongside international bankers to further their goal of total economic interdependence and centralization. China’s avid pursuit of SDR (special drawing rights) inclusion and its close relationship to the IMF and the BIS must be taken into account if one is to understand why the current fiscal crisis is developing the way it is.

  China has recently announced it will be opening its onshore currency markets to foreign central banks, which essentially guarantees the inclusion of the yuan into the IMF’s SDR global currency basket by the middle of next year. The IMF’s decision to delay China’s inclusion until 2016 was clearly a calculated effort to make sure that they did not receive any blame for the market meltdown they know is coming; a meltdown that will accelerate to even more dangerous proportions as central banks begin to move away from the dollar as the world reserve and petro-currency.

  In preparation for the global shift away from the dollar, China has begun dumping dollar denominated assets at historic levels while Chinese companies have begun reducing the amount of dollars they borrow for international transactions. Is this selloff designed to liquidate assets in order to support China’s ailing markets? No, not really.

  China has been planning a decoupling from the U.S. dollar since at least 2005 when it introduced yuan denominated “Panda Bonds”, which at the time the media laughed at as some kind of novelty. In only ten years, China has slowly but surely spread yuan denominated instruments around the world in order to make China an alternative economic engine to the U.S.  China, working with the BIS and IMF, have set the dollar up for an extreme devaluation and the U.S. Treasury has been set up for inevitable bankruptcy; and guess who will ride to our rescue when all seems lost?  That's right – the IMF and the BIS.

  Will the Fed’s rate hike make U.S. bonds more desirable? Probably not.  After a short term initial boost U.S. debt instruments will return to the path of de-dollarization. In the end, I believe the Fed rate hike will encourage more selling by the largest bond holders who will seek to make as much profit as possible until the bottom begins to fall out of the dollar. As China continues to sell off their treasury and dollar holdings, there will come a time when other global investors will feel forced to sell as well to avoid being the last idiot holding the bag when extreme devaluation takes place.

  The Fed rate hike is a kind of openly engineered trigger event; one which will likely occur before the end of the year. The major globalist players within the BIS and IMF are separating themselves from this trigger as much as possible today, while warning of a coming crisis they helped to create.

  The Fed seems to be a sacrificial appendage at this point, a martyr for the cause of globalization and centralization. Bringing down the U.S. and the dollar, or at least greatly diminishing the U.S. to third world status, has the potential to greatly benefit the Fabian socialists at the top of the pyramid. Such a crisis makes the idea of centralization and global economic administration a more enticing concept.

  With a complex and disaster-prone system of interdependence causing social strife and chaos, why not just simplify everything with a global currency and perhaps even global governance? The elites will squeeze the collapse for all it’s worth if they can, and a Fed rate hike may be exactly what they need to begin the final descent.

  

  

  

  

  

• Beijing's South China Sea Military Buildup Continues: The Dramatic Visual Evidence

  On Tuesday, Reuters, citing unnamed US officials, reported that Washington will not look to impose sanctions on Chinese entities allegedly behind hundreds of cyber attacks on US targets prior to Chinese President Xi Jinping’s visit to Washington next week. 

  The proposed sanctions are a sore spot for Beijing and some analysts were concerned that their imposition could jeopardize Xi’s visit. Others suggested that not moving ahead swiftly risked sending the wrong message about how seriously the US takes the alleged cyber intrusions, but that concern seems to have taken a backseat to polite diplomacy. “Imposing sanctions before Xi’s high-profile visit, which will include a black tie state dinner at the White House hosted by President Barack Obama, would be a diplomatic disaster,” one source told Reuters. 

  The decision underscores the difficult position the US finds itself in when attempting to craft the appropriate response to China’s new role as a key player on the international stage. Indeed, the world is closer to bipolarity now than at any time since the Cold War, which means a heavy handed approach by the Americans is simply not an attractive option. Nowhere is this dilemma more apparent than in the US’s response to Beijing’s land reclamation efforts in the South China Sea. 

  The construction of what’s now likely to be more than 3,000 acres of new sovereign territory atop reefs in the Spratlys has raised eyebrows among Washington’s regional allies and tensions heightened considerably after the PLA essentially threatened to shoot down a US spy plane over the new islands earlier this year. China also faces allegations from Japan that its oil and gas operations in the East China Sea violate an agreement to develop the fields jointly. 

  Despite the fact that China claimed to have largely completed its dredging efforts in the Spratlys in June, Bonnie Glaser, a senior adviser at the Center for Strategic and International Studies in Washington, tells a different story. Here’s what Glaser has to say about a series of new images shown below and available at the Asia Maritime Transparency Initiative:

  China is still dredging in the South China Sea. Satellite imagery of Subi Reef taken in early September shows dredgers pumping sediment onto areas bordered by recently built sea walls and widening the channel for ships to enter the waters enclosed by the reef. On Mischief Reef, a dredger is also at work expanding the channel to enable easier access for ships, possibly for future use as a naval base.

   

  This activity comes in the wake of assertions by China that its land reclamation has ended in the Spratly Island chain. On August 5, during the ASEAN Regional Forum in Kuala Lumpur, Chinese foreign minister Wang Yi told reporters, “China has already stopped. You look, who is building? Take a plane and look for yourself.” He did not pledge that China would refrain from construction and militarization on the newly-created islands, however.

   

  Wang Yi reiterated that China’s construction on the islands is mainly “to improve the working and living conditions of personnel there” and for “public good purposes.” To date, however, China’s activity appears focused on construction for military uses. Recently built structures on Fiery Cross Reef include a completed and freshly painted 3,000-meter runway, helipads, a radar dome, a surveillance tower, and possible satellite communication facilities.

   

  Apparent Chinese preparations for building lengthy airstrips on Subi and Mischief raise questions about whether China will pose challenges to freedom of navigation in the air and sea surrounding those land features in the future.

   

  The persistence of dredging along with construction and militarization on China’s artificial islands underscore Beijing’s unwillingness to exercise self-restraint and look for diplomatic paths to reduce tensions with its neighbors, the United States, and other nations with an interest in the preservation of peace and stability in the South China Sea. U.S. calls for all claimants in the South China Sea to halt land reclamation, construction, and militarization have been rejected by China, which views the status quo as unfavorable to its interests.

   

  On the eve of President Xi Jinping’s visit to the United States, Beijing appears to be sending a message to President Barack Obama that China is determined to advance its interests in the South China Sea even if doing so results in heightened tensions with the United States.

  And more from Gregory Poling, a fellow with the Sumitro Chair for Southeast Asia Studies and the Pacific Partners Initiative at CSIS and AMTI director.

  Earlier this year, the addition of an airfield on Fiery Cross Reef provided a more southerly runway capable of handling most if not all Chinese military aircraft. And in June, satellite photos indicated that China was preparing to lay down another runway at Subi Reef. New photos taken on September 3 show grading work at Subi, providing further evidence that runway construction there is planned. Meanwhile work at the Fiery Cross airfield is well advanced, with China recently laying down paint.

   

  Satellite photos taken on September 8 contain an unanticipated development, indicating that China may be preparing to construct another airstrip at Mischief Reef. These images show that a retaining wall has been built along the northwest side of the reef, creating a roughly 3,000-meter rectangular area. 

  And the new visuals:

  

  

  

  

  We’ll close with the following from Robert Kaplan, a senior fellow at the Center for a New American Security in Washington who spoke to Bloomberg: 

  “The Chinese have a classic Sun Tzu philosophy of incremental steps. Because it is small steps, the Americans and their allies will not be able to respond in a strong fashion because they will seem to be over reacting. That is what makes China’s approach so infuriating.”

  

  

  

  

• China Injects More Liquidity, Strengthens Yuan As Foreigners Dump Record Amount Of Japanese Stocks

  The evening started with disappointing Japanese trade data cross the board – weakest imports, exports, and trade balance in 6 months – which follows the largest selling of Japanese stocks by foreigners ever. China opened with the first rise in margin debt in 6 days, stocks were mixed in the pre-open after last night's epic farce ramp. PBOC strengthened the Yuan fix modestly and also injected another CNY 40 billion.

   

  Japanese trade data was disappointing…

  • *JAPAN AUG. EXPORTS RISE 3.1% Y/Y, EST.. +4.3%
  • *JAPAN AUG. IMPORTS FALL 3.1% Y/Y, EST -2.5%
  • *JAPAN AUG. TRADE DEFICIT IS 569.7B YEN, EST 540.0B

  All at 6-month lows and missed expectations.

  Foreigners have never sold more Japanese stocks ever…

  

   

  Which explains why The BoJ was buying so heavily!! And for now, a rampacious bid open is being sold…

  

   

  *  *  *

  Then China opens..

  And Margins are on the rise again…

  • *SHANGHAI MARGIN DEBT BALANCE RISES FIRST TIME IN FIVE DAYS

  Stocks are mixed after last night's epic ramp idiocy..

  • *CHINA'S SHANGHAI COMPOSITE INDEX FALLS 1% TO 3,119.89 AT OPEN
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 0.7% TO 3,287.66

  

   

  Regulator's pressure appears to be paying off…

  MS & CS have ceased offering synthetic short products under Shanghai-Hong Kong Stock Connect. Good boys!!

  — Simon Ting (@simonting) September 17, 2015

  PBOC added more liquidity…

  • *CHINA PBOC TO CONDUCT REVERSE REPOS: TRADER
  • *PBOC TO INJECT 40B YUAN WITH 7-DAY REVERSE REPOS: TRADER

  And then strengthgened the Yuan fix…

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3670 AGAINST U.S. DOLLAR

  

   

   

  Charts: Bloomberg

  

  

  

  

  

• The Fallacy Of "Buy Land – They're Not Making Any More"

  Submitted by Peter St.Onge via The Mises Institute,

  “Buy land — they’re not making any more!” is an old investing chestnut, and a common sense one to boot. Economically, it’s also completely false.

  As counterintuitive as it may seem, we make land all the time. It just doesn’t look like land.

  Why? Because land’s value doesn’t come from its ability to cover up the naked earth. Land’s value comes from its economic usefulness. From the value of things that can be done using that land (Rothbard’s “marginal revenue product” of the land). And that value is, indeed, changing all the time. Economically, from a price perspective, then, we make land all the time.

  Step back a moment and ask why land has value anyway. Why do people want land? Well, obviously, because you can put stuff there — including yourself — plus buildings, swimming pools, and factories.

  Now, anybody who’s visited West Texas knows there is plenty of building space in the world. You could drive for hours and meet nobody. There’s lots of space for that factory of yours. But it’s not really space itself that makes land valuable. It’s location. As in, there’s only so much room in Manhattan. Or Central London.

  Once again, though, it’s not the actual space that matters. It’s the access. Put a strip mall on Manhattan surrounded by crocodile-filled moats and snipers and it will have low value. The value is in access. So Manhattan is valuable because it’s easy to get to other parts of Manhattan. And it’s easy for other people to get to you. Customers, partners, and friends can all easily visit you if your apartment or office is in Manhattan, moatless and sniperless.

  So if it’s the access that matters, are they making new access? Of course. They’re doing it all the time.

  New highways, new exits, new streets, mass transit, pedestrian malls are being regularly constructed. These all effectively “make new land” because they offer access to existing space. They turn relatively “dead zones” into "useful zones," or new land.

  What are some of the meta-trends on land as investment, then?

  First: roads. This was a bigger value-driver a generation ago in the US, as new roads made the suburbs more accessible, helping to drain many cities even as US population grew. Outside the US (Mexico, Thailand, Russia), new roads are still a big deal, and even in the US, new highways can reshape values — draining old neighborhoods and building value in new ones. The decline of cities like Baltimore or Detroit are partly thanks to those beautiful roads that redistribute access to the suburbs.

  Second: population. In the US “rust belt” of declining manufacturing, many regions have dropped in price simply because people are leaving. Detroit homes for $100 is emblematic, although of course there are also political reasons some cities are so cheap — in particular, taxes and crime.

  And that brings us to politics. Real estate can be cheapened shockingly quickly by taxes and crime, and those traditional drivers have been joined in recent decades by environmental politics.

  Environmentalists, by taking land off the market, effectively squeeze the remaining accessible locations. Driving up the price. Regions like Seattle or San Francisco are poster children of this environmental squeeze, with modest homes even in remote suburbs costing upward of a million dollars. On the other extreme, cities like Dallas or Houston have kept prices down despite exploding populations by allowing farmland to be converted to residential, commercial, or industrial use.

  Beyond the access and political angles, land is also vulnerable to “network effects.” In other words, the neighbors matter. Gentrification or urban decay can be hard to predict. Even in a compact city with rising population like Washington, DC, it can be hard to predict where the middle class or rich want to colonize, and where they want to flee.

  There are clues, of course — in large US cities, gays moving into a neighborhood, new coffee shops or art galleries are some leading indicators that property prices might swing up. But gentrification has it’s own mind; even in a booming city it might go into some other neighborhood. New York’s Harlem or Silicon Valley’s East Palo Alto are two very accessible locations with low prices because of perceptions of the neighbors.

  So, while they’re not “making” land, they are constantly making things that affect land price. Access, regulations, changing neighbors. These are the kinds of factors that make land valuable, not it’s ability to cover the earth.

  And so land comes back to earth, joining boring old commodities like wheat or copper. Just as vulnerable to changing supply and demand factors.

  And if you are looking for something they’re not “making more of?” Well, gold does come close. Hence its appeal. They do mine new gold all the time, but the costs are high enough that gold is a very “inelastic” commodity. It comes close to “they’re not making more.”

  Beyond that? Develop your ultimate resource: yourself.

   

  

  

  

  

  

• "Truthful" Trump, "Calm" Carson & The Naysaying-Nine – 2nd Republican Debate Live Feed

  And then there were eleven (in tonight's main event). With everyone ready to rumble with The Donald, Carson ever-so-quietly gaining ground, and Fiorina showing face alongside the men, tonight's Round Two of the Republican Presidential Nomination debate should be full of fireworks. Trump is odds-on to have the most to say but all eyes will likely be on CNN's anchors (and whether they go full Megyn Kelly), just what will Trump say, the rematch of Rand vs Christie, and of course the mano-a-womano Trump-Fiorina slam, especially after President Obama said there is "nothing patriotic about talking down America," or, it appears, telling the truth. Grab some popcorn…

   

  The frantic fifteen…(Note – Santorum, Jindal, Pataki, Graham were all demoted to the under-card debate earlier at 6pmET)

  

   

  And the front-runners…

  

   

  Trump tops the Searches…

   

  CNN explains the rules – no biting, no punching below the waist…

   

  Live Stream (via CNN)… (click image for link to CNN feed – no embed provided)

  

  *  *  *

  And do not forget to fill out your Bingo Card…

  

  *  *  *

  NBC News offers A Viewer's Guide to Tonight's Debate

  Given just how much has changed in the GOP race after the first debate and given the upcoming end to the fundraising quarter (Sept. 30!), the pressure is on for the 11 Republican candidates to perform at tonight's second debate in California at 8:00 pm ET. We'll find out which of the second-tier candidates (who all thought they'd be first tier by now) moves up or falls back. Think Walker, Paul, Rubio, Christie, Huckabee, and Kasich. Here's what each candidate needs to do:

  • Donald Trump: He needs to keep defying political gravity. Once again, he's probably going to feel like Bruce Lee in a Kung Fu movie — with everyone (opponents, moderators) coming after him. Can he fend them off once again? He's also a candidate in need of a second act (we think). Can he put some policy meat on the bones?
  • Ben Carson: Can the mild-mannered Carson keep the momentum he has in the polls? Once you lose it, you often don't get it back. And this is his first time FRONT and CENTER. So he can't just disappear for periods of a time, even if he wants to.
  • Jeb Bush: Tagged as Mr. Low Energy by Trump, Jeb needs to be able to flex his muscles — especially with Republicans looking to see how he might fare against Hillary. He also should be prepared for other candidates NOT named Trump to come after him as a way to show off their OWN anti-establishment bona fides.
  • Marco Rubio: Maybe no one had a better debate last time around but so little to show for it afterward. He might be the most talented unscripted pol in the stage. Can he show it again?
  • Scott Walker: Maybe no one needs a strong performance more than Walker does. From first or second in the polls to 10th place, Walker needs to turn things around ASAP. As aides told NBC's Kelly O'Donnell: "If he gets the chance to mix it up, he's going to" do that.
  • Carly Fiorina: Like Carson, she needs to keep her momentum. And with a likely clash coming with Trump, she can't back down. (As she told CNBC's John Harwood: "Mr. Trump's going to be hearing quite a lot from me.")
  • Ted Cruz: As he's become Robin to Trump's Batman, can Cruz steal the spotlight, especially with a possible government shutdown looming?
  • Mike Huckabee: He sure got his Kim Davis moment a few days ago (and largely shut out Cruz from sharing the stage). With a Davis question likely coming, can Huckabee demonstrate, like he did in 2007-2008, that he still has what it takes to be the GOP's best debate performer?
  • Rand Paul: Paul was definitely feisty in the first debate, but it didn't get much traction. What does he do to stand out this time? Like Walker, he's a candidate who, financially speaking, badly needs a good showing.
  • John Kasich: His advertising push in New Hampshire has paid dividends so far. Can he use this debate to catapult himself in the national polls, too?
  • Chris Christie: In addition to Walker, Christie needs a strong performance — just to avoid being left out of the conversation heading into October's third GOP debate.

  And, as we noted previously, while initial denial by virtually everyone, especially the so-called pundits none of whom anticipated Trump's unprecedented surge in the polls, turned slowly into much publicized anger, now comes the bargaining phase, and as Bloomberg political commentator Mark Halperin who admits spending "about 60 percent of my waking hours talking about Donald Trump" explores, the panicked GOP establishment is now scrambling to find ways to "stop" the Trump Juggernaut.

  According to him, the core GOP and especially his republicans contenders, may attack Trump through four possible frames:

  • Trump can’t be trusted because he is an egomaniac with a bad character.
  • Trump is a liberal and unprincipled.
  • Trump is not close to being fit to be a serious president or commander-in-chief.
  • Trump is a politician, not a businessman/outsider.

  But what Trump (and every GOP establishmentarian) really cares about…

  

  

  

  

  

  

• In China 1300 Hedge Funds "Did Not Fight The Central Bank" And Are Now Liquidating

  When it comes to manipulating stock markets, there is the Western way in which central banks either directly, or – like in the US – indirectly, thanks to a very close relationship between the NY Fed and the world’s most levered hedge fund Citadel, documented here since 2010 – in which central bank trading desks end up buying index futures or merely use massively-sized orders to spoof the market higher (and very rarely lower), and then there is the Chinese way in which the local plunge protection team named the “National Team”, which has already spent around $300 billion to (ineffectively) halt the bursting of the Chinese stock bubble – buys individual stocks.

  The problem with both strategies is that they both ultimately fail to keep asset prices artificially propped up, but while the western approach at least provides some temporary relief which in the case of the S&P has now lasted almost 7 years, the Chinese approach is an abysmal failure, especially since unlike the US, China’s PPT – whether it wants to or not – has to report its single-name stock purchases.

  Recall on July 22 we reported that China’s Securities Finance Corp, the central bank-backed market bailout institution, had quietly become among top 10 shareholders of many listed-firms. “Among its various other investments, at least eight firms have confirmed that the CSF is now a top-10 shareholder, which include property developer Dulexe Family, Hualan Biological Engineering, resource purifying developer SJ Environment Protection, Yunnan Tin Company Group, Fujian Cosunter Pharmaceutical Co, Hunan Er-Kang Pharmaceutical Co, digital map provider NavInfo Co, and retailer Friendship & Apollo.”

  This direct intervention in individual names would continue for over a month, and it had spectacular results… for a very brief period of time.

  As Bloomberg reports, “Eastern Gold Jade rallied by the 10 percent daily limit on Aug. 17, the first trading day after disclosing China Securities Finance had accumulated a 4.2 percent stake as its third-biggest shareholder.”

  When the filings came in – showing China Securities Finance Corp. had taken major stakes in companies as part of its market-rescue effort – traders jumped to buy what they dubbed on social media as “the King’s favorite concubines.” It was a drunken orgy of backrunning the central bank. No risk right? Wrong.

  Because that’s when the hangover started, and gains quickly evaporated with the stock of Eastern Gold Jade tumbling 49% in the month since the announcement, compared with a 24 percent retreat for the Shanghai Composite. Even after the losses, the Shenzhen-based company – which reported a 37 percent drop in net income last year – trades at 4.7 times price-to book.

  And just like 13F clones end up getting burned more often than not, so too unfortunately for the Chinese copycats, an endorsement from the equity market’s savior has done nothing to ensure outsized returns. In fact, as Bloomberg adds, it was just the opposite – the stock picks have trailed the broader market. The 46 companies that reported the agency as a top 10 shareholder in the past two months lost an average 29 percent since the announcement, versus a 21 percent drop for the Shanghai Composite Index.

  One suggestion proposed by BBG is that the underperformance is a sign that the pace of China Securities Finance purchases is slowing as authorities become less concerned about an equity-market freefall. “While the agency will remain in the market for years to come, it won’t normally step in unless there’s unusual volatility and systemic risks, the China Securities Regulatory Commission said on Aug. 14.”

  However, we fail to see where the systemic risk was overnight when the Shanghai Composite soared by nearly 6% at one point before closing up 4.9% its biggest intraday surge in years, after two days of vicious declines in Chinese stocks. Far more likely, the fast buyers realized upside was capped and with memories of the recent collapse still fresh in everyone mind, fast buyers turned even faster sellers especially since the government backstop was no longer guaranteed.

  But if the pain was focused only on retail sellers, that would be understandable – after all “mom and pop” (or grandma and farmer in China’s case) are best known for buying high (and on margin), and selling low.  However, in a separate Bloomberg piece we learn that a far bigger loser than retail were China’s supposed “smartest money” investors, the countless hedge funds formed in the past year to chase the artificial market surge.

  From Bloomberg:

  The newfangled industry, short on expertise and ways to protect itself from market declines, has seen almost 1,300 funds liquidate amid China’s $5 trillion stocks selloff, and a similar number may be at risk, according to Howbuy Investment Management Co. Now, a government crackdown on short selling and other hedging strategies have made prospering in a bear market difficult.

   

  In the most devastating blow to domestic hedge funds, China has imposed new restrictions on trading in stock-index futures, a key investment strategy to dampen volatility and avoid big losses.

   

  “It spells the end, at least temporarily, for China domestic hedge funds,” Hao Hong, chief China strategist at BOCOM International Co. in Hong Kong, said in an interview.

  There is a key difference between US “hedge funds” and those in China: most of them are long-only, meaning they bet solely on rising markets. “Even before government restrictions on practices such as short-selling, many limited hedging so they maximize benefits from a market that had advanced almost 50 percent in the two years through 2014 and rallied another 60 percent through mid-June. William Ma, Hong Kong-based chief investment officer of Gottex Penjing Asset Management (HK Ltd.), said that most of the liquidated funds were launched in April and May when valuations were high, making them the “first and largest wave” of closures. While funds set up late last year or early in 2015 still face liquidation risk if the market drops further, they are fewer in number and have high cash positions, said Ma, whose firm invests in hedge funds.”

  The bottom line: “more than 50 percent of long-only new products launched this year have liquidated, according to estimates from Guo Tao, a board member of the Hedge Fund Talents Association, affiliated with the Zhejiang provincial government, whose members collectively manage about 300 billion yuan.”

  And to think, if only these hedge funds had not blindly followed in the footsteps of the PBOC, and copycatted its strategies, they would still be alive.

  The irony is even greater: if only these hedge funds had fought the Chinese version of the Fed, and shorted the stocks the PBOC had been buying, while shorting the overall market, they would be massively outperforming now. Perhaps there is a lesson in there, somewhere as the world awaits the Fed’s most “important decision ever”…

  Then again, not everyone blew up: “The real hedge funds,” which use risk-management tools including stock index futures, recorded mostly positive returns in the June to August period amid the market turmoil, Guo said.

  Ah yes, speaking of indices, going back to the first topic, the deplorable performance of the Chinese PPT, Bloomberg notes “in terms of what it bought, the government fund has done a terrible job,” said Francis Lun, chief executive officer at Geo Securities Ltd. in Hong Kong. “They should have just bought index stocks.”“

  Indeed they should: after all that’s what the Fed does. Actually, what China should have done is even simpler – listen to our advice:

  Hey @NYFed_News can you please send Kevin Henry to China to teach them how to manipulate markets? This is embarrassing

  — zerohedge (@zerohedge) August 25, 2015

  

  

  

  

  

• Massive 8.3 Magnitude Quake Shakes Chile, Tsunami Waves Arrive, Copper Jumps

  A powerful earthquake strikes off the coast of Chile.

  The quake, originally measured at 7.2, has reportedly been upgraded to 8.3. 

  “Widespread hazardous tsunami waves are possible”, warns the Pacific Tsunami Warning Center. 

  Copper is jumping:

  

  From the USGS:

  The United States Geological Survey, using computer models, estimates that some 1.1 million people may have felt strong shaking as a result of the earthquake. This includes about 54,000 people who may have experienced “very strong” shaking, and some 4,000 who may have experienced “severe” shaking. The worst hit city would have been Illapel. Nearly 10 million others may have felt light to moderate shaking.

  

  

  And from CBS:

  U.S. officials said the quake struck just offshore in the Pacific at 7:54 p.m. and was centered about 141 miles north-northwest of Santiago. It said the quake was 4.8 miles below the surface.

   

  Chile’s emergency office warned that big waves caused by the quake could hit the coast by 11 p.m.

   

  The National Weather Service warning tsunami waves could strike Hawaii around 2:30 a.m. Thursday, local time.

  More from AP:

  A powerful magnitude-8.3 earthquake shook Chile’s capital Wednesday night, causing buildings to sway and people to take refuge in the streets. Several strong aftershocks hit within minutes as tsunami alarms sounded in the nearby port of Valparaiso.

   

  There were no immediate reports on any injuries or damage, but communications were disrupted.

   

  Chilean authorities issued a tsunami alert for the country’s entire coast, and U.S. officials posted an alert for Hawaii. Chile’s emergency office warned that big waves caused by the quake could hit the coast by 11 p.m.

   

  The U.S. Geological Survey initially reported the quake at a preliminary magnitude of 7.9 but quickly revised the reading upward to 8.3. U.S. officials said the quake struck just offshore in the Pacific at 7:54 p.m. (6:54 p.m. EDT, 1154 GMT) and was centered about 141 miles (228 kilometers) north-northwest of Santiago. It said the quake was 4.8 miles (5 kilometers) below the surface.

   

  A magnitude-8.8 quake and ensuing tsunami in central Chile in 2010 killed more than 500 people, destroyed 220,000 homes, and washed away docks, riverfronts and seaside resorts. That quake released so much energy, it actually it shortened the Earth’s day by a fraction of a second by changing the planet’s rotation.

   

  Chile is one of the world’s most earthquake-prone countries because just off the coast, the Nazca tectonic plate plunges beneath the South American plate, pushing the towering Andes cordillera to ever-higher altitudes.

   

  The strongest earthquake ever recorded on Earth happened in Chile — a magnitude-9.5 tremor in 1960 that killed more than 5,000 people.

  And here’s a look at the drama, as it unfolded:

  Evacuation underway in Valparaiso, Chile, following strong offshore quake; tsunami threat in effect – @huella_digital pic.twitter.com/W704iESV9E

  — Tech Insider (@TechNewzInsider) September 16, 2015

  Tsunami travel time and propagation forecast maps for magnitude-8.3 earthquake off Chile via @NWS_NTWC pic.twitter.com/qQ0jstvJsz

  — BuzzFeed Storm (@BuzzFeedStorm) September 16, 2015

  Wooooow! Se sintio muy fuerte el sismo en mi trabajo, (Jumbo La Reina) #santiago #sismoensantiago #lacagá pic.twitter.com/NyHl7wCDjM

  — SebaFuentes (@SebaFuentes_Lce) September 16, 2015

  Llegó el primer tren de olas. El mar ya llegó a la Av. Borgoño en #Concón #Terremoto #Tsunami pic.twitter.com/IkTEa4xOc4

  — Revista Decosta (@revistadecosta) September 17, 2015

  @24HorasTVN #tsunami llegan olas a playa laboca de #concon pic.twitter.com/PCmGo2hsic

  — Lorna Jara (@ljarau) September 17, 2015

  

  

  

  

  

• "Total Failure": Pentagon Spends $41 Million Training "Four Or Five" Syrian Fighters

  Earlier today, US Central Command Gen. Lloyd Austin III seemed to suggest that US SpecOps were fighting alongside YPG in Syria. As we noted when the news hit, if true that won’t go over well with Turkey’s Erdogan, Washington’s brand new coalition partner against ISIS who has made no secret of his distrust for the YPG.

  Four hours later, the Pentagon claimed that Austin’s words were taken out of context and that in fact, US forces had not (yet) played a combat role. But just in case Washington does finally decide to admit that US boots are indeed on the ground along with Russian boots, it can always simply point to its own miserable operational failure as justification for why the previous arrangement just wasn’t going to cut it when it comes to “degrading” militant capabilities. Read on.

  As you may recall, earlier this year the Pentagon decided to try its hand at training an “appropriately vetted [group] of Syrian opposition recruits” whose mission would be to “degrade and ultimately defeat ISIL.”

  There are two immediately amusing things about the effort: 1) the notion of “appropriate vetting,” and 2) this effectively represented the DoD training a new group of Syrian fighters in an effort to destroy another group of Syrian fighters that were trained by the CIA but who ended up adding “establish medieval caliphate” to a list of operational objectives that was only supposed to include “destabilize and ultimately remove Bashar al-Assad.” 

  As we reported around three months after the new initiative was launched, things weren’t going particularly well.

  As of July, only 54 fighters had been trained and towards the end of the month – on the 30th to be specific – the group suffered its most embarrassing setback to date when its commander and deputy commander were captured by none other than al-Qaeda (who is rapidly becoming a terrorist also-ran) near the Syrian-Turkish border. 

  We’d be remiss if we didn’t point out just how ridiculous that turn of events truly was. Effectively, the newest group of US-trained Syrian fighters was on their way to fight ISIS, another group of US-trained Syrian fighters, when their leaders were captured by al-Nusra, an offshoot of al-Qaeda, whose founder and allies received US support during the Soviet-Afghan war. 

  Let’s just call that “blowback squared” or maybe “blowback cubed.”

  Of course that wasn’t the first time al-Nusra had succeeded in disrupting a US effort to train a contingent of Syrian “freedom fighters.” As The New York Times reminded us in July, last year the group “dealt a more serious blow to the CIA program, attacking and dismantling its main groups, the Syrian Revolutionaries Front and Harakat Hazm, and seizing some of their American-supplied, sophisticated antitank missiles.”

  If you thought this story couldn’t possibly get any more ridiculous, you’d have been wrong because on Wednesday, Gen. Lloyd Austin, head of the U.S. Central Command (mentioned above) and Undersecretary of Defense for Policy Christine Wormuth gave an update on the latest Pentagon effort to train and arm Syrian fighters and conceded that it was highly unlikely the DoD would hit its target of fielding a contingent that numbers more than 5,000 by the end of the year.

  What are they basing their pessimistic outlook on, you ask?  This (via Foreign Policy): 

  Only about “four or five” U.S.-trained Syrian rebels remain on the battlefield to take on the Islamic State.

  That’s right. “Four or five.” 

  

  So the only thing that the DoD’s estimate of the actual number of fighters currently on the ground has in common with the Pentagon’s original goal of recruiting 5,400 by the end of the year, is that both figures have a “4” and a “5” in them.

  And how much taxpayer money was spent to train and arm this anti-ISIS “force”, you ask? 

  Around $41 million. 

  We’ll leave you with following assessment from Sen. Kelly Ayotte (R-N.H.) and Sen. Jeff Sessions (R-Ala.):

  “Let’s not kid ourselves, that’s a joke. This is just a total failure.”

  

  

  

  

  

• Will They Or Won't They? Five Fed Scenarios & The Market Impact

  Tomorrow's FOMC decision is the dominant topic for investors and traders across all asset classes, with FX, perhaps, the most sensitive to perceived changes (and instigator of trades via carry). As Credit Suisse details, FX volatility remains notably elevated and along with the uncertain flows surrounding so-called "risk parity" trading strategies, and the fact that 2y Treasury yields at around 0.80% are at their highest levels since 2011 – despite the less than 30% chance of a Fed hike priced in for tomorrow – only adds to the sense of uncertainty about the Fed's reaction function. In this light, how do we see the various possibilities that could emerge from tomorrow's FOMC? Here are Credit Suisse's 5 scenarios…

  As Exhibit 2 shows, short term FX implied volatility is at elevated levels, with curves typically inverted between the 1-week and 2-week tenors.

  

  Even beyond the immediacy of this Fed decision, the high likelihood that the Fed will still hike in 2015 even if it passes on doing so this week is contributing to levels of 3m implied volatility being near the highs of the year. As a result implied volatility curves are also inverted further out, for example between the 3m and 1y tenors (see Exhibit 3).

  

  An obvious contributory factor this elevated level of tension has been more general risk aversion and volatility in wider asset markets. Since June the market has had to contend with a variety of problems ranging from collapsing commodity prices to Chinese equities plunging to pressure on EM space and tremendous FX reserve declines to fears of poor performance for so-called "risk parity" trading strategies. 

  As Exhibit 4 shows, this has led not only to the more obvious price moves but also to highly unusual ones such as a sharp decline in US swap spreads (linked to the idea that bond holders such as risk-parity investors and EM central banks are offloading Treasuries).

  

  Such developments only deepen the sense that new and confusing forces are plaguing markets, raising the required risk premium for providing FX liquidity and by implication adding to implied volatility premia. 
   
  As for the Fed meeting, the market is pricing in around a 30% chance of a rate hike at this stage. But it still expects to see a rate hike come through by December. Our economists also believe domestic US data momentum is positive enough to compel the Fed to hike this year and think the only strong argument against doing so is the overseas environment and recent related volatility in asset markets globally. As touched on above, the fact that 2y Treasury yields at around 0.80% are at their highest levels since 2011 – despite the less than 50% chance of a Fed hike priced in for tomorrow – only adds to the sense of uncertainty about the Fed's reaction function.

  

  As Exhibits 6 – 7 show, despite the prevailing impression of extreme USD strength, all that has happened in the past 12 months is that the USD has moved back towards what might be considered fair value from the extremely undervalued levels last seen 12 months ago. And since the 18 March FOMC, which saw the Fed's future interest rate projections considerably lowered, the Fed's broad trade-weighted USD index has failed to make significant ground despite the collapse in many EM currencies. EUR and JPY have proved stubborn since then, while even CNY has seen only a marginal move lower (so far) despite the noise caused by last month's devaluation.

  In this light, how do we see the various possibilities that could emerge from tomorrow's FOMC? Here we consider 5 scenarios:

  1. A surprisingly hawkish Fed: We define this as a rate hike combined with no downgrade of future terminal rate projections. In this case we would expect the USD to resume trend appreciation and rally by at least 5% by the end of the year on a broad TWI basis.

   

  2. The Fed hikes but qualifies this by producing suppressed terminal rate expectations among other caveats: This should allow the USD to gain ground in line with our existing relatively muted forecast profile for the next 3 months. But the upside move is likely to be short and sharp as the subsequent period of suppressed rate expectations will reduce the potential for rate-differential and by extension FX volatility and trends.

   

  3. The Fed does not hike but makes it clear there is a high chance of a hike this year, while keeping its terminal rate expectations similar to current projections: We would expect a similar reaction to Scenario #2 above. But to the extent that the market can continue to hope for a protracted Fed hiking cycle and material monetary policy divergences persisting with other countries, there may be more lasting opportunities to establish USD longs than the case with Scenario #2.

   

  4. The Fed does not hike, it makes it clear there is a high chance of a hike this year, but still lowers its terminal rate projections: We would a modest USD sell-off of around 2-3% over a period of a couple of 1-2 weeks as the market would wonder if the Fed ever gets into a position to hike rates at all. We would use this as an opportunity to buy USD vs currencies of countries where a policy ease is likely (for example AUD or JPY) or where there are underlying and unsolved fragilities (such as EM currencies like BRL or TRY).

   

  5. A clearly dovish Fed that takes the idea of rate hikes off the table for at least 6 months: This would prove a material shock to the market and should result in material losses for the USD on a TWI basis of at least 5% in the remainder of 2015. This scenario would stress our existing USD-bullish forecast profile unless we were to expect relatively rapid dovish tilts in response by other central banks.

  To be clear, as discussed previously, we are not in the camp that sees the start of a Fed hike cycle as signaling the peak of USD strength. While we accept that this was more or less true in the 2004-6 Fed hiking cycle, that was only because conditions outside the US were so good then that other central banks were hiking even more aggressively, and the USD was used as a carry currency. That picture bears little resemblance to current global circumstances. 

  

  

  

  

  

• Is This The Biggest Double-Top Ever?

  Presented with no comment…

   

  

   

  h/t @NorthmanTrader

  

  

  

  

• Sep 17 – Obama Threatens China With Retaliation Over Hacking

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 17/100 EXTREME FEAR

  PREVIOUS CLOSE: 16/100 EXTREME FEAR

  ONE WEEK AGO: 13/100 EXTREME FEAR

  ONE MONTH AGO: 12/100 EXTREME FEAR

  ONE YEAR AGO: 37/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 15.36% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 21.35. This is a neutral reading and indicates that market risks appear low.

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

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – I JUST LOVE MY NEW SWEATER….

   

  UNUSUAL ACTIVITY

  PAH FEB 25 CALLS .. 2250 @$.50 by offer

  HD OCT 115 CALL Activity 3.30 1900+ on offer

  RIG OCT 15 CALL Activity on offer

  HPQ SEP 28.5 CALL Activity 5k+ @$.22 on offer

  More Unusual Activity…

  HEADLINES

   

  US homebuilder confidence hits near 10-year high

  Moody’s: Fed hike would show strength of US recovery

  US Pres Obama digs in on spending cuts as US shutdown looms

  Obama threatens China with retaliation over hacking

  S&P: Japan downgraded to A+/A-1, stable outlook

  BOC’s Cote: C$ consistent with historical relationship with oil

  OECD Lowers Global Economic Forecast

  BoE Carney sticks to rate view, others more hawkish

  ECB Constancio: QE relatively small so far, has scope

  ECB Weidman: Cheap money cannot spur sustained growth

  ECB Nowotny calls inflation rate a big problem

  AB InBev approaches SABMiller to explore $275bn tie-up

   

  GOVERNMENTS/CENTRAL BANKS

  OECD Lowers Global Economic Forecast –WSJ

  S&P: Japan Ratings Lowered To ‘A+/A-1’; Outlook Is Stable

  Moody’s: Possible Fed hike shows strength of US recovery but potential volatility in EM capital flows

  US Pres Obama digs in on spending cuts as US shutdown looms –FT

  Obama threatens China with retaliation over hacking –USA Today

  BOC’s Cote: Current CAD level consistent with historical relationship with oil –ForexLive

  US Sen Reid: GOP Has ‘No Plans’ to Avert Government Shutdown –MNI

  BoE Carney sticks to rate view, others more hawkish –Rtrs

  BoE McCafferty Is Concerned That Inflation Could ‘Outpace’ Projection –Rtrs

  BOE Weale: Not Voting Hike Due China, New Commodity Price Fall –MNI

  BoE Forbes Says A Rate Hike Is Needed In The Not Too Distant Future

  BoE Agents See Some Hiring Difficulties In Skilled Roles –MNI

  ECB Lowers Capital Ratio At The Request Of The French Banking –El Pais

  ECB Constancio: QE Relatively Small So Far, Has Scope –Rtrs

  ECB Weidman: Cheap Money Cannot Spur Sustained Growth –Rtrs

  ECB Nowotny Calls Inflation Rate A Big Problem –Nasdaq

  Riksbank Minutes Show Optimism Over Inflation Prospects –MorningStar

  FIXED INCOME

  Yields remain high on Bund yield jump, Fed uncertainty –Rtrs

  UBS: Buy Treasuries and sell Bunds –FT

  Goldman: Markets Unprepared for Fed as Treasuries Seesaw –BBG

  FX

  USD: Dollar edges lower after subdued inflation reading –MW

  GBP: Sterling off to the races, up by over 1% –FT

  GBP: BOE Carney: Not Discussed Sterling Exchange Rate With Osborne –MNI

  ENERGY/COMMODITIES

  WTI futures settle +5.75% at $47.15

  US DOE Crude Inventories (WoW) Sep-11: -2104K (est 2000K; prev 2570K)

  US DOE Distillate Inventories (WoW) Sep-11: 3060K (est 300K; prev 952K)

  US DOE Cushing Crude Inventories (WoW) Sep-11: -1906K (est -311K; prev -897K)

  US DOE Gasoline Inventories (WoW) Sep-11: 2840K (est -500K; prev 384K)

  US DOE Refinery Utilization (WoW) Sep-11: 2.20% (est -0.55%; prev -1.90%)

  CRUDE: Crude jumps as US stockpiles unexpectedly drop –FT

  CRUDE: Russia Energy Min Novak: Russia doesn’t see need to cuy oil output –BBG

  O&G: Moody?s: See Oil And Gas Levels To Stay Near Recent Low Levels Moving Into 2016

  China Raises Retail Fuel Prices –Xinhua

  EQUITIES

  S&P 500 provisionally closes +0.9% at 1,995

  DJIA provisionally closes +0.8% at 16,736

  Nasdaq provisionally closes +0.6% at 4,889

  M&A: AB InBev approaches SABMiller to explore $275bn tie-up –FT

  M&A: Potash Corp, K+S not actively discussing takeover –Rtrs

  EARNINGS: FedEx Trims 2016 Forecast as First-Quarter Earnings Fall Short –BBG

  MARKETS: Short interest in S&P 500 shoots up ahead of Fed –FT

  TECH: Apple Watch bug delays software update –FT

  BANKS: Goldman’s Blankfein on Fed hike: ‘I wouldn’t do it’ –CNBC

  FUNDS: US equity ETFs have just racked up 2 massive daily inflows –FT

  O&G: Moody’s: oil firms ‘well positioned’ for downturn –FT

  O&G: Glencore raises ?1.6bn ($2.5bn) through share placement –FT

  EMERGING MARKETS

  OECD downgrades China growth forecasts –FT

  CSRC assistant chairman Zhang Yujan disciplined for serious violations –ForexLive

  Fitch: Brazil to remain in recession rest of this year with increased risks to 2016 f’csts

  Fitch Affirms Argentina Foreign Currency IDR at ‘RD’

  Thai Central Bank Holds Rate As Government Eyes Stimulus –BBG

   

  Emerging market stock allocations at all-time low –Rtrs

  

  

  

  

  

• This Is The Satellite Image That Supposedly Proves The Presence Of Russian "Troops And Aircraft" In Syria

  In a day of diplomatic snafus by the Pentagon, which first admitted it had spec ops forces in Syria (remember when it was just “advisors” and the Obama administration was blaming Russia for escalating the conflict by daring to join the fight against ISIS and sending its own troops in Damascus) then promptly retracted, using the old “there was no Freudian slip” explanation, the US promptly needed another diversion to cast the blame back in Putin’s court.

  Which brings us to our post from Monday in which “anonymous” US officials told Reuters that “Russia has positioned about a half dozen tanks at a Syrian airfield where it has been steadily building up defenses” with Reuters adding that “one of the U.S. officials said seven Russian T-90 tanks were seen at the airfield near Latakia, a stronghold of Syrian President Bashar al-Assad. The two U.S. officials said Russia had also positioned artillery there” adding that “the two U.S. officials said Russia had also positioned artillery, which they said appeared.”

  Our request was simple: “We can only hope the “anonymous” US officials will soon provide photographic evidence of their claims.”

  Today, we got this “evidence” when Foreign Policy magazine released a satellite image which, according to the author Jeffrey Lewis “Leaves No Doubt That Russia Is Throwing Troops and Aircraft Into Syria.”

  On Sept. 4, the New York Times published an article suggesting that Russia had shipped prefabricated housing and a transportable air traffic control station to an airfield near Latakia. It was a great scoop, but I was pretty baffled that the New York Times didn’t bother to purchase a satellite image of the facility. Had they done so, they would have realized that they buried the lede.

   

  The satellite image shows far more than prefabricated housing and an air traffic control station. It shows extensive construction of what appears to be a military canton at Bassel al-Assad International Airport (named for Bashar’s elder brother, who died in a car accident in 1994). This canton appears designed to support Russian combat air operations from the base and may serve as a logistical hub for Russian combat forces.

   

  The scale of the construction goes even further. A large area of ground has been cleared in many different parts of the air base. There are pallets and crates everywhere. Trucks are visible driving into the site. The image drives home the implication of all those flights and shipments heading to Syria: Russia is substantially expanding its involvement.

  Is there “no doubt” as the author claims this is happening? We leave it to readers to decide. One thing that is certain is that earlier today it was the US which first admitted it had spec ops in Syria in what could be the most inconvenient Freudian slip in recent “proxy war” history, and then was promptly forced to retract it.

  As for Russian forces “undoubtedly” throwing troops into Syria, well – decide for yourself. Here is FP’s before and after satellite image “evidence.” It’s important because images such as these are the modern equivalent of Colin Powell’s vial of WMDs presented to the United Nations in 2003 to justify the war with Iraq.

  Before:

  

  and After:

  

  

  

  

  

• Crime Pays In America: United CEO Exits With $21M Package Despite Corruption Probe

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Crime and corruption pay in America; you just have to be a corporate CEO, Wall Street executive, senior member of the military-industrial-intelligence complex or a politician. These so-called “elites” have perverted American justice to such a degree that not only are they now entirely above the law, they’re actually rewarded for unethical and crony behavior even after they get caught.

  Nothing sums up how completely fraudulent and corrupt the U.S. economy has become than the following story, which describes how the United Airlines CEO who stepped down in the midst of a corruption probe is rewarded with a $21 million exit package, “free flights for life,” and free parking in downtown Chicago forever. No, I’m not making this up.

  From the Omaha World-Herald:

  When Jeff Smisek stepped down as United Airlines’ chief executive last week amid a federal corruption probe, he didn’t walk away empty-handed. He will receive at least $21 million in cash and stock, fly free for the rest of his life and keep his company car.

   

  Then there is the parking.

   

  He can park free in downtown Chicago and at airports in Houston and Chicago for the rest of his life.

   

  The full value of Smisek’s exit package could be even higher — he’s still eligible for the incentive pay that accumulated before his resignation. In all, Bloomberg estimates he will walk away with $28.6 million. That’s more than double his pay last year, which reached $12.8 million.

   

  Smisek’s resignation was tied to a federal investigation into whether the air carrier launched a money-losing flight from Newark, New Jersey, to Columbia, South Carolina, to benefit the influential then-chairman of the Port Authority of New York and New Jersey, who owned a vacation home near Columbia.

   

  Smisek’s tenure was also pockmarked by technical glitches that briefly grounded United’s fleet this year, and a difficult merger with Continental.

  You see, he wasn’t just rewarded for corruption, he was incompetent too.

  “This is very, very typical,” said Charles Elson, chairman of the University of Delaware’s Weinberg Center for Corporate Governance.

   

  Less typical: Smisek’s non-cash compensation, including the company car, health insurance and the lifetime of free flights (and companion tickets), compensation experts say. United is even picking up the tax bill for the free flights, which the company has estimated could come to more than $437,000.

   

  “From the worker’s perspective, it’s obviously a different mentality,” said Molly Sheerer, a spokeswoman for the union, which is in the midst of contract negotiations with the airline. “We believe there’s something wrong when an executive is awarded over $25 million for failing to do his job.”

  Now here’s the real kicker…

  “The way that CEO employment agreements are written, you really have to commit a felony before they can fire you and not pay you anything,” said Paul Hodgson, a partner at BHJ Partners, a compensation research firm. “Just being bad at your job or immoral or unethical or whatever is not enough usually.”

  Heads I win, tails you lose.

  Just another day in the imperial Banana Republic.

  

  

  

  

  

• Please Ignore The Freudian Slip: Pentagon Backtracks, Denies US Special Forces Are In Syria

  When NBC reported earlier that DoD confirmed US special forces were on the ground in Syria “assisting Kurdish forces in fight against ISIS” it crashed the entire carefully-structured US diplomatic narrative. Not that US spec ops are or are not on the ground in Syria – of course they are – but just like with the Russia/Ukraine escalation and even the Greek negotiation with Brussels, the question has always been one of PR spin: who will be the first to admit responsibility for upcoming escalation and who will be stuck with the blame if the ‘worst case’ scenario were to unravel.

  As such US admission would then permit Russia to admit its own troops are on the ground in Syria, “purely to fight ISIS of course” and nothing to do with protecting their vital interest, i.e., Syrian territorial sovereignty from being used by Qatar gas pipelines, in the process setting off the next stage of pre-war foreplay, one in which both sides officially admit they are on the ground, if not to challenge ISIS, then certainly to use the Assad presidency as a proxy smokescreen for whatever comes next.

  Which is why we were counting the minutes until the scrambling Pentagon would vehemently deny the NBC report. The answer: just under 4 hours.

  

  Which incidentally may be the first official “please ignore the Freudian slip” excuse in Pentagon history.

  

  

  

  

• How Underfunded Are US Corporate Pension Plans?

  To be sure, we’ve written quite a bit about both public and private pension plans this year. Most notably, we’ve chronicled the deplorable state of the pension system in Illinois, where a State Supreme Court ruling in May set a de facto precedent for pension reform bids across the country. 

  But while the focus – here and elsewhere thanks to America’s growing state and local government fiscal crisis – has been on the public sector, seven years of ZIRP has taken its toll on private sector pension plans. 

  We touched on this briefly in March when we noted that ECB QE could end up widening pension deficits dramatically and as FT reported last month, “UK companies are paying less towards meeting their pension shortfalls than at any point since 2009, even as aggregate pension deficits reach their highest level in five years.” 

  For those wondering about the extent to which falling discount rates have served to create a giant, multi-hundred billion dollar underfunded liability for S&P companies, look no further than the following graphic from Citi’s Matt King which should come with a caption that reads: “You’re welcome pensioners — The Fed.” 

  

  More color, from Mercer:

  The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies dropped by 2% to 81% as of August 31st, 2015, rising interest rates mitigated losses in equity markets. As of August 31st, 2015, the estimated aggregate deficit of $423 billion USD increased by $44 billion as compared to the end of July. Funded status is now up by $81 billion USD from the $504 billion USD deficit measured at the end of 2014, according to Mercer,[1] a global consulting leader in advancing health, wealth and careers.

  

  

  

  

  

• The Fed's Pain-Relieving Policies "Have Made The System More Vulnerable To A Crash"

  Authored by Rand Paul and Mark Spitznagel, originally posted op-ed at The Wall Street Journal,

  The recent tumult in U.S. equity markets has prompted many analysts to urge the Fed to postpone any increase in interest rates. This advice assumes that rock-bottom interest rates are balm for a weak economy, with the only possible side effect being price inflation. Yet it is the Fed’s artificially low interest rates that set up the economy for the 2008 crisis, not to mention previous crises.

  The “doves” are right to point out that higher interest rates will lead to a repricing of many securities, aka a crash. But years of near-zero interest rates have made this inevitable. Continuing on the current course will only allow structural distortions caused by these interest rates to fester and an inevitable reckoning that will be much worse than seven years ago.

  The master fallacy underlying so much economic commentary is to imagine that a handful of experts in Washington should be setting the price of borrowing money. Instead, the Fed should set markets free.

  In their theory of business cycles, the Austrian economists Ludwig von Mises and Friedrich Hayek explained several decades ago that artificially cheap credit misleads entrepreneurs and investors into doing the wrong things—which in the current financial context includes making unsustainable, levered investments in risky assets, including companies loading up on debt to buy back and boost the price of their stock. Low interest rates may create an illusion of robust markets, but eventually rates spike, assets are suddenly revealed to be too highly priced, and debt unpayable. Many firms have to cut back production or shut down, unemployment rises and the boom goes bust.

  The Austrian diagnosis leads to an unorthodox prescription: Rather than provide “stimulus” to boost demand during a slump, the Federal Reserve and Congress should stand aside. Recessions are a painful but necessary corrective process as resources—including labor—are guided toward more sustainable niches, in light of the errors made during the giddy boom period.

  In 2000 the stock market, bloated by earlier Fed rate cuts, started falling when the tech bubble burst. Markets bottomed out in 2002, as the Fed slashed rates. Although people hailed then-chairman Alan Greenspan as “the Maestro” for providing a so-called soft landing, in hindsight he simply replaced the dot-com bubble with a housing bubble.

  When the housing bubble eventually burst, the crisis was much worse than in 2000. When Lehman Brothers failed in September 2008, it seemed as if the whole financial infrastructure was in jeopardy. And Fed Chairman Ben Bernanke followed the same playbook: cut interest rates.

  When near-zero-percent interest rates did not jump-start the economy, the Fed launched a series of “quantitative easing” (QE) programs, buying unprecedented amounts of Treasurys and mortgage-backed securities. The Fed has roughly quintupled its balance sheet, going from $905 billion in early September 2008 to almost $4.5 trillion today.

  The U.S. stock market rose with each new wave of QE. Does this wealth represent genuine economic progress? Economic growth is still far below previous recoveries. Unfortunately, the performance of equities, as well as the unprecedented increase in public and private debt, may be another asset bubble in the making, leading to another inevitable crisis likely worse than in 2008.

  At its core, the market economy is a homeostatic mechanism that self-corrects by cleansing mistakes from the system. When policy makers—in the Fed or Congress—try to spare us from all pain, they cripple that mechanism and ironically make the system vulnerable to a major crash.

  Consider an analogy. When the U.S. Forest Service took a zero-tolerance approach to forest fires 100 years ago, what ultimately happened was a massive wildfire at Yellowstone National Park in 1988 that wiped out more than 30 times the acreage of any previously recorded fire. Paradoxically, by refusing to allow small fires to run their natural course, the forest managers made the entire park vulnerable to a giant inferno.

  What is true of forests holds for the economy: When governments create a lie, whether it’s a fabricated ecology of no fires or a fabricated economy of no failures, the truth reveals itself even more violently than otherwise. Attempts to stop any dips in the stock market with monetary stimulus postpone the necessary adjustments to how and where resources and workers are deployed. Interest rates are a vital signal in the market; they must be allowed to do their job—that is, they must be allowed to be free.

  The sooner Fed officials withdraw their artificial monetary injections and let interest rates rise to their natural level set by free markets rather than government decree, the sooner the economy can return to genuine, sustainable growth.

  

  

  

  

  

• Refugees Vs Riot Police: A Photo Album From The Frontlines Of Europe's Migrant Crisis

  Earlier this week, Hungarian Prime Minister Viktor Orban moved to stem the flow of Syrian refugees across his country’s border with Serbia by first constructing a 100-mile fence and subsequently authorizing the arrest and prosecution of migrants who attempt to breach the barrier and enter the country illegally. 

  Orban then sent the military and mounted police to patrol the border.

  This left thousands of asylum seekers bound for Germany stranded in Serbia, staring up at 12 feet of razor wire and pondering a new route to the German “promised land.” For its part, Serbia has been transporting migrants to the border with Croatia, which says it will “direct” the refugees to where they want to go. 

  

  Needless to say, Orban’s border crackdown transformed an already tense situation into a veritable powder keg and on Wednesday, Hungary sent in the riot police at which point the angry migrants reportedly “became aggressive” and tried to breach the fence. 

  Next came the tear gas and water cannons. 

  Below, find the visuals courtesy of Reuters:

  

  

  

  

  

  

  

  

  

  

  

  

  *  *  *

  And meanwhile, in Germany…

  

  

  

  

  

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• U.S. Rejected Offers by Afghanistan, Iraq, Libya and Syria to Surrender … and Proceeded to Wage War

  The Daily Mail reported last year:

  A self-selected group of former top military officers, CIA insiders and think-tankers, declared Tuesday in Washington that a seven-month review of the deadly 2012 terrorist attack has determined that [Gaddafi offered to abdicate as leader of Libya.]

  ‘Gaddafi wasn’t a good guy, but he was being marginalized,’ [Retired Rear Admiral Chuck ] Kubic recalled. ‘Gaddafi actually offered to abdicate’ shortly after the beginning of a 2011 rebellion.

  ‘But the U.S. ignored his calls for a truce,’ the commission wrote, ultimately backing the horse that would later help kill a U.S. ambassador.

   

  Kubic said that the effort at truce talks fell apart when the White House declined to let the Pentagon pursue it seriously.

   

  ‘We had a leader who had won the Nobel Peace Prize,’ Kubic said, ‘but who was unwilling to give peace a chance for 72 hours.’

  Similarly, Saddam Hussein allegedly offered to let weapons inspectors in the country and to hold new elections. As the Guardian reported in 2003:

  In the few weeks before its fall, Iraq’s Ba’athist regime made a series of increasingly desperate peace offers to Washington, promising to hold elections and even to allow US troops to search for banned weapons. But the advances were all rejected by the Bush administration, according to intermediaries involved in the talks.

  Moreover, Saddam allegedly offered to leave Iraq:

  “Fearing defeat, Saddam was prepared to go peacefully in return for £500million ($1billion)”.

   

  “The extraordinary offer was revealed yesterday in a transcript of talks in February 2003 between George Bush and the then Spanish Prime Minister Jose Maria Aznar at the President’s Texas ranch.”

   

  “The White House refused to comment on the report last night. But, if verified, it is certain to raise questions in Washington and London over whether the costly four-year war could have been averted.”

  According to the tapes, Bush told Aznar that whether Saddam was still in Iraq or not, “We’ll be in Baghdad by the end of March.” See also this and this.

  Susan Lindauer (after reading an earlier version of this essay by Washington’s Blog) wrote:

  That’s absolutely true about Saddam’s frantic officers to retire to a Villa in Tikrit before the invasion. Except he never demanded $1 BILLION (or $500 MILLION). He only asked for a private brigade of the Iraqi National Guard, which he compared to President Clinton’s Secret Service detail for life throughout retirement. I know that for a fact, because I myself was the back channel to the Iraqi Embassy at the U.N. in New York, who carried the message to Washington AND the United Nations General Assembly and Security Council. Kofi Annan was very much aware of it. So was Spain’s President Asnar. Those historical details were redacted from the history books when George Bush ordered my arrest on the Patriot Act as an “Iraqi Agent”– a political farce with no supporting evidence, except my passionate anti-war activism and urgent warnings that War in Iraq would uncover no WMDs, would fire up a violent and bloody counter-insurgency, and would result in Iran’s rise as a regional power. In 2007, the Senate Intelligence Committee hailed my warnings in Jan. 2003 (as the Chief Human Intelligence covering Iraq at the U.N.) to be one of the only bright spots in Pre-War Intelligence. Nevertheless, in 2005 and again in 2008, I was declared “incompetent to stand trial,” and threatened with “indefinite detention up to 10 years” on Carswell Air Force Base, in order to protect the cover up of Iraqi Pre-War Intelligence.

  (The New York Times has covered Lindauer at least 5 times, including here and here.)

  On October 14, 2001, the Taliban offered to hand over Osama bin Laden to a neutral country if the US halted bombing if the Taliban were given evidence of Bin Laden’s involvement in 9/11.

  Specifically, the Guardian noted in 2001:

  Returning to the White House after a weekend at Camp David, the president said the bombing would not stop, unless the ruling Taliban “turn [bin Laden] over, turn his cohorts over, turn any hostages they hold over.” He added, “There’s no need to discuss innocence or guilt. We know he’s guilty” …

   

  Afghanistan’s deputy prime minister, Haji Abdul Kabir, told reporters that the Taliban would require evidence that Bin Laden was behind the September 11 terrorist attacks in the US.

   

  “If the Taliban is given evidence that Osama bin Laden is involved” and the bombing campaign stopped, “we would be ready to hand him over to a third country”, Mr Kabir added.

  However, as the Guardian subsequently pointed out:

  A senior Taliban minister has offered a last-minute deal to hand over Osama bin Laden during a secret visit to Islamabad, senior sources in Pakistan told the Guardian last night.

   

  For the first time, the Taliban offered to hand over Bin Laden for trial in a country other than the US without asking to see evidence first in return for a halt to the bombing, a source close to Pakistan’s military leadership said.

  And the Guardian reports today:

  Russia proposed more than three years ago that Syria’s president, Bashar al-Assad, could step down as part of a peace deal, according to a senior negotiator involved in back-channel discussions at the time.

   

  Former Finnish president and Nobel peace prize laureate Martti Ahtisaari said western powers failed to seize on the proposal. Since it was made, in 2012, tens of thousands of people have been killed and millions uprooted, causing the world’s gravest refugee crisis since the second world war.

   

  Ahtisaari held talks with envoys from the five permanent members of the UN security council in February 2012. He said that during those discussions, the Russian ambassador, Vitaly Churkin, laid out a three-point plan, which included a proposal for Assad to cede power at some point after peace talks had started between the regime and the opposition.

   

  But he said that the US, Britain and France were so convinced that the Syrian dictator was about to fall, they ignored the proposal.

   

  ***

   

  “There was no question because I went back and asked him a second time,” he said, noting that Churkin had just returned from a trip to Moscow and there seemed little doubt he was raising the proposal on behalf of the Kremlin.

   

  Ahtisaari said he passed on the message to the American, British and French missions at the UN, but he said: “Nothing happened because I think all these, and many others, were convinced that Assad would be thrown out of office in a few weeks so there was no need to do anything.”

  Similarly, Bloomberg reported in 2012:

  As Syria slides toward civil war, Russia is signaling that it no longer views President Bashar al-Assad’s position as tenable and is working with the U.S. to seek an orderly transition.

   

  ***

   

  After meeting with French President Francois Hollande, among the most adamant of Western leaders demanding Assad’s departure, Putin said Russia was not invested in Assad staying.

   

  ***

   

  “We aren’t for Assad or for his opponents,” Putin told reporters in Paris on June 1. “We want to achieve a situation in which violence ends and a full-scale civil war is avoided.”

  And yet, as with Gaddaffi, Saddam Hussein and Bin Laden, the U.S. turned down the offer and has instead prosecuted war.  See this and this.

  Postscript: An offer by Russia for Assad to leave is not the same as an offer by Assad himself. However, because the Syrian government would have long ago fallen without Russia’s help, the distinction is not really that  meaningful.

  

  

  

  

• Head Of China's 'Goldman Sachs' Probed For Insider Trading As "Market Purification" Continues

  Imagine for a moment the sentiment shock for mainstream Americans if Goldman Sachs' Lloyd Blankfein was probed for insider-trading and publicly scapegoated for causing a nation's equity market (and economy) to collapse. While it may be true, it would never happen in America… But in China, as part of what authorities call "purifying the markets," the president of China’s biggest brokerage has been swept up in a widening campaign to root out financial wrongdoing and assign blame for the nation’s $5 trillion stock rout. As Bloomberg notes, shares are falling further in today's markets as the probe of Citic Securities President Cheng Boming comes after the state-run Xinhua News Agency reported last month that four executives at Citic had admitted to so-called insider trading.

   

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  As Bloomberg reports,

  Since the market crash, China’s targets have ranged from so-called “malicious” short sellers to a journalist from business magazine Caijing whose report was alleged to have caused market panic. Authorities say they want to “purify” the market.

   

  “There does seem to be a bit of a witch hunt for a scapegoat at the moment, but I think this is mostly signaling by the authorities that they will not tolerate what they perceive as ‘unhelpful’ selling in the market,” Tony Hann, a London-based money manager at Blackfriars Asset Management, which oversees about $350 million, said in an e-mail.

   

  Citic confirmed the police investigation of Cheng in a statement to Shanghai’s stock exchange. A brokerage spokeswoman declined to comment further.

   

  

   

  …

   

  “The rumor of this investigation had already been on the streets for some time,” said Castor Pang, the head of research at Core-Pacific Yamaichi Hong Kong, referring to the Cheng probe. “The central government may use this case to accelerate its probe into insider trading and tighten regulation further.”

  *  *  *

  Citic shares are hitting fresh 11-month lows…

  

  

  

  

  

  

• How To Solve The Immigration Crisis Fast, Easy, & Cheap!

  Submitted by Paul Rosenberg via FreemansPerspective.com,

  No, I’m not kidding. I can solve the immigration and refugee crises without more wars, without rounding people up like animals, and while boosting the GDP. It’s not hard. All you have to do is stop thinking inside the same old status quo.

  Here’s the plan:

  #1: The Fed provides loans to build new cities. Seeing that they were recently spending $85 billion per month buying up mortgage debt and Treasuries, we’ll take that as a cap. We’ll buy up farmland (or forest or desert) and start installing utilities. There’s such an incredible amount of open land that we’ll have thousands of spots to choose from.

   

  #2: The federal and state governments forbear all income taxes from anyone who opens a business in the new cities for as long as they operate those businesses. Think they’ll come?

   

  #3: The federal and state governments forbears all taxes from undocumented immigrants (and their families) who choose to reside in the new cities. They also forebear all enforcement of immigration laws upon them. Wanna bet they’ll show up?

   

  #4: The federal and state governments forbear all taxes, regulations, fines, bases, offices, employees, services, and impositions for 100 years in the new cities. “Outside the status quo,” remember?

   

  #5: The federal and state governments guarantee that entry and exit to/from these cities will be unimpeded.

   

  #6: Federal and state governments agree that they will provide no welfare, disability, or any other handout programs in the new cities for 100 years. We don’t want a dependent class.

   

  Oh, and one more thing:

   

  #7: No person or corporation who has done business with any federal or state government over the past 10 years shall be considered for any such loans; nor shall anyone with more than incidental political involvement. A panel of radical anarcho-capitalists shall decide.

  There are a few fine points that could be added, but these seven major points just about do it. The plan falls short of philosophical perfection (witness the Federal Reserve being named in it), but it had to be something that would work tomorrow morning, and this would.

  And Then…

  And then we’ll have an excellent free-for-all. These cities would become the places to be. Businesses would start looking for facilities the next morning. Hundreds of them, maybe thousands. Immigrants would flock to the cities.

  Libertarian and entrepreneurial types, disgusted by the status quo, would load up and drive to the new cities just to get away from regulations. Nonconformists of a dozen descriptions would start buying property, even without tax breaks.

  These cities would, within only a few years, become the coolest places on the planet – by far.

  But…

  That’s right, there won’t be any government-provided policemen or courts. And yes, I know how many people have been trained to freak out about that: “It will be murder, death, and mayhem!”

  I’ll be taking bets on that one.

  The people who come to these cities would be coming to escape from their chains and to be productive. Those are precisely the kinds of people who clean up a town. And with no taxes to pay for 100 years, they’ll have plenty of extra money to spend on whatever security services (or whatever else) they need.

  And the Results…

  These would be the results:

  1. The plan will cost the various governments nothing at all. (I’m presuming here that the loans would be repaid… which should be almost a cinch.)

  2. The skittish citizens who can’t sleep at night because of immigration could all relax; all of the scary people would be in new cities and wouldn’t be terrorizing them anymore.

  3. This would definitely juice the GDP.

  4. 10 cities of a million people each would be easy to build. Just ask the Chinese.

  5. Most of the usual troublemakers would separate from the status quo, and stop bothering them.

  6. Fun, innovation, and progress.

  So, why not?

  And this same model might do nicely in Europe. They have plenty of empty land too.

  

  

  

  

  

• Traders Fear Second China State Entity Default As Aussie Leading Index Plunges, PBOC Devalues Yuan

  Chinese equity markets are holding modest 'bounce' gains after two days of carnage.

  • *CHINA'S CSI 300 INDEX RISES 0.1% TO 3,156.62 AT BREAK
  • *CHINA'S SHANGHAI COMPOSITE RISES 0.1% TO 3,009.57 AT BREAK

   

  

  After 3 days of stronger fixes PBOC devalued the Yuan but the Ministry of Finance made it clear that "devaluation is not aimed at boosting exports," which makes us wonder, is it aimed at selling Treasuries? No additional direct liquidity injections but anxiety grows as China National Erzhong Group Co. may miss an interest payment later this month after one of its creditors filed a restructuring request, putting it at risk of becoming the second state-owned company to default in the nation’s onshore bond market.

  As Bloomberg details, uncertainty over the payment comes as deflation risks, overcapacity and spiraling corporate debt cloud the outlook for China’s economy, forecast to expand at the slowest pace since 1990 this year.

  China National Erzhong is a wholly owned subsidiary of state-owned China National Machinery Industry Corp., according to a China International Capital Corp. report in April.

   

  Today’s statement doesn’t say whether China National Erzhong will be able to pay the interest if the court rejects the creditor’s request. The statement also said there is some uncertainty over whether the court will accept the restructuring request, and said China National Erzhong is trying to raise money to pay the interest.

   

  Yields on the 2017 bonds have risen to 28.801 percent from 26.846 percent at the start of the year, ChinaBond prices show.

   

  …

   

  The smelting-equipment maker might not be able to pay a coupon that’s due Sept. 28 on its 1 billion yuan ($157 million) of 5.65 percent 2017 notes if a local court accepts the creditor’s restructuring application before that date, according to a statement posted on Chinamoney.com.cn. China National Erzhong, based in China’s western Sichuan province, issued the five-year securities in 2012 at par and the debentures are currently trading at 67.72 percent of that.

  “Because Erzhong is a state-owned company, if it defaults it may arouse investors’ concern about companies’ credit risks,” said Qu Qing, a bond analyst at Huachuang Securities Co. in Beijing.

  *  *  *

  China then makes it clear that all this currency war stuff is..

  • *YUAN DEVALUATION NOT AIMED AT BOOSTING EXPORTS: MOFCOM'S SHEN

  Confident that things are stabilizing, except that…

  • *HKMA CHAN URGES PEOPLE TO WATCH FOR RISK AND MARKET VOLATILITY
  • *HKMA CHAN SAYS CHANCE OF U.S. RAISING RATES VERY HIGH THIS YR

  But send us your money anyway!!!

  • *CHINA'S REFORM TO BENEFIT FOREIGN INVESTORS: NDRC'S LIAN
  • *CHINA MOFCOM LOOKING INTO FALLING U.S. INVESTMENT IN CHINA:SHEN
  • *CHANGES IN CHINA, U.S. MARKETS CAUSED FALL OF INVESTMENT: SHEN

  *  *  *

  As we detailed earlier…

  Following last night's double-disappointment – the absence of China's 'National Team' and the lack of moar from The BoJ, everything was not awesome when Asian markets closed. However, dismal US data has floated all boats on a sea of bad-news-is-good-news as the world holds its breath ahead of Thursday's Fedsplosion. China's weakness is spreading as Aussie Leading Index plunges most in 3 years. Trading volumes remain de minmus as 1300 hedge funds have liquidated in China in recent weeks (as the $800,000 Tibetan Mastiff bubble bursts). Tonight Japan opens with selling pressure ands China bouncing modestly higher, but it's quiet, too quiet. PBOC devalued Yuan for the first time in 4 days but one local Chinese trader opined confidently ahead of The Fed, "Mother PBOC is so worried there could be a liquidity problem that it will ensure abundant supply."

   

  Last night's Japanese open was an epic meltup in USDJPY and NKY 225 (only to give it all back when The BoJ did not "get back to work"). Tonight it starts with "malicious selling" but that was quickly ramped.

  

   

  Aussie markets are unhappy as The Westpace leading Index collapsed by the most in 3 years

  

   

  China opens with an idea...

  • *CHINA TO PROMOTE COS.' OVERSEAS DEBT REGISTRATION REFORM
  • *CHINA NDRC TO REMOVE QUOTA FOR COS.' OVERSEAS DEBT
  • *CHINA TO ENCOURAGE QUALIFIED COS. TO SELL BONDS OVERSEAS

  Which will lower the cost of borrowing (great), ensure some USD liquidity (easing PBOC pressures perhaps), but will leave Chinese corporates exposed to a devaluing Yuan (un-great).

  And then unleashes some propaganda (it's unpatriotic to move your money overseas…)

  

   

  Margin debt declines once again as Chinese Stocks push lower amid the asbence of The National Team…

  • *SHANGHAI MARGIN DEBT BALANCE DROPS TO LOWEST IN NINE MONTHS

  Shenzhen and ChiNext are getting slammed this week…

  

   

  With a small bounce in the pre-market has now faded:

  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 0.1% TO 3,149.16
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 0.2% TO 2,998.04

  PBOC stepped back in and devalues Yuan after 3 days of strengthening…

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3712 AGAINST U.S. DOLLAR

  

  More bad news for US automakers:

  • *FITCH: CHINA AUTO SECTOR MOVES INTO NEW NORMAL OF SLOWER GROWTH

  New-car sales in China may decline for the first time in more than a decade this year, as a slowing economy combines with a clampdown on lavish spending, stricter registration limits and stock-market volatility. The slowdown and unprecedented discounts dragged on the eight Chinese car dealers trading in Hong Kong, with combined net income falling by 29 percent in the first six months.

  And the death of liquidity in Chinese stock futures markets have rung the bell on the newly minuted Chinese hedge fund industry (as Bloomberg reports)…

  It’s about to get even uglier for China’s hedge funds.

   

  The newfangled industry, short on expertise and ways to protect itself from market declines, has seen almost 1,300 funds liquidate amid China’s $5 trillion stocks selloff, and a similar number may be at risk, according to Howbuy Investment Management Co. Now, a government crackdown on short selling and other hedging strategies have made prospering in a bear market difficult.

   

  It’s an inglorious turn for China’s on-again, off-again love affair with stocks, which saw the number of hedge-fund-like vehicles explode in past years as the government made it easier to register funds and introduced new financial instruments. The market rout — and the regulatory response to it — has revealed cracks in the industry that suggest it may need years to recover. In the most devastating blow to domestic hedge funds, China has imposed new restrictions on trading in stock-index futures, a key investment strategy to dampen volatility and avoid big losses.

   

  “It spells the end, at least temporarily, for China domestic hedge funds,” Hao Hong, chief China strategist at BOCOM International Co. in Hong Kong, said in an interview.

  But it is another bursting bubble that everyone is talking about… If this does not sum up the farce of China, I do not know what does…

  "The Tibetan mastiff market went crazy in 2008 when some investors, instead of dog lovers, hyped the price among rich people," he said. "The price was not reasonable at all."

   

  

   

  Many newly rich Chinese such as coal mine owners who became extremely wealthy during the price hike in commodities between 2006 and 2008 started to buy such a dog as a pet.

   

  Different from dog lovers and professional breeders, they did not have the inside knowledge about such dogs, including how to tell a real one from the mixed-blood species and even other similar kinds. As a result, the market was full of so-called Tibetan mastiffs with prices as high as 5 million yuan ($793,650) to 10 million yuan for one such dog.

   

  "Even if they paid a lot, the dogs they got were still not pure-bred Tibetan mastiffs," Peng said.

   

  However, the market still created many millionaires at the time. Some people began to trade so-called Tibetan mastiffs as a business.

  It appears The Chinese just cannot help themselves.

  But it is next week's big event that is the real deal… (post-FOMC)…

  • *CHINA'S XI TO VISIT U.S. SEPT. 22-25

  China's President Xi Jinping will visit Washington Sept. 25, the White House confirmed in a statement released late Sept. 15.

  The widely anticipated official state visit reciprocates President Barack Obama’s state visit to China in November 2014. The White House said Xi's visit “will present an opportunity to expand U.S.-China cooperation on a range of global, regional, and bilateral issues of mutual interest” and will allow Obama and Xi to “address areas of disagreement constructively.”

  Finally, we leave it to one local Chinese trader to sum up the "we have faith" attitude that somewhow still remains… (as MNI reports)

  "Mother PBOC is so worried there could be a liquidity problem that it will ensure abundant supply — liquidity is super good now so we can sit back and relax," said said Qin Xinfeng, a trader with Qingdao Rural Commercial Bank.

  But the Fed hike will nonetheless push global and Chinese markets into unknown territory.

  

  

  

  

  

• Aussie Property Market Collapse Looms As Chinese Flee Amid Capital Controls

  Given the recent admission by the Australian Central Bank that property prices "have gone crazy," it appears new Chinese 'regulations' may just kill Australia's golden goose of 'weath creation' as Aussie's largest trade partner sees its economy collapse. While the Aussies themselves proclaimed a "war on cash," it appears, as AFR reports, that Chinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing's move to tighten capital controls. With Chinese banks now limiting any overseas transfer to USD50,000 – in an effort to control capital outflows – and with China dominating the Aussie housing market, one agent exclaimed, "it has affected 70 to 80 per cent of current transactions and some have already been suspended."

   

  To date Chinese investment has been overwhelmingly focussed on the most familiar capital city property markets of Melbourne and Sydney, with around 80 per cent of foreign investment hitting Victoria and New South Wales. As PeteWargent shows, China dominated the foreign buyer of Aussie homes…

  

   

  As Bloomberg notes, Chinese buyers were approved to buy A$12.4 billion ($9.9 billion) of Australian real estate in 2013-14, the Foreign Investment Review Board said in its annual report, without differentiating between commercial and residential property. China's total approved investment in Australia was A$27.7 billion over the period, compared with the U.S.'s A$17.5 billion.

  

   

  And Q1 2015 showed no signs of a slowdown in that flood of capital to Australia…

  

   

  But now, as AFR reports, China's capital controls will kill that flow of money into Aussie property…

  Chinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing's move to tighten capital controls.

   

  One Chinese agent said the latest efforts by the central government to avoid large capital outflows were having a "significant impact" on his business.

   

  "It has affected 70 to 80 per cent of current transactions and some have already been suspended," said the agent who asked not to be named.

   

  The tighter foreign exchange rules are also set to impact the federal government's relaunched Significant Investor Visa (SIV), which provides fast-tracked residency for those investing at least $5 million into Australia.

   

  "I think it will be big, big trouble for the SIV program because the amount of money is just too large," said one Shanghai-based adviser, who sells Australian property and advises wealthy clients on their migration plans.

   

  Only seven SIV applications have been submitted since the new rules were introduced on July 1, which require investors to put their money into riskier assets such as venture capital and emerging companies.

  China has previously tolerated significant capital outflows via so called "grey channels", but has tightened up enforcement in recent weeks as the economy slows and fears over capital flight put downward pressure on the currency.

  The crackdown from Beijing has seen Chinese banks setting up watch lists for unusual transactions, according to one bank manager, who asked not to be named as he was not authorised to speak about the policy.

   

  He said the operation was aimed at cracking down on a practice whereby family and friends of those wanting to purchase a property overseas all transfer US$50,000 into an overseas account. That's the limit each Chinese individual is allowed to move out of the country each year.

   

  The purchaser then pays back his friends and family in China and uses the money from the overseas account to put down a deposit on the property.

   

  However, banks are now tracking the source of funds for overseas bank accounts that have received more than US$200,000 within 90 days, according to the bank manager, who works in Shanghai for one of the major state-owned banks.

   

  "We have always had this policy but now it has been restated and is being enforced more strictly," he said.

   

  "In the past we could find a way around these rules but now all those ways have been blocked."

   

  "I'm sure this would be having an impact on overseas property purchases," he said.

  And here is the punchline!!

  The tighter rules in China come as Sydney recorded its lowest auction clearance rate for the year this past weekend, while Melbourne has now recorded two weekends below the same time last year, according to Corelogic RP Data.

  *  *  *

  Finally, as we have noted previously,

  The problem is that Australia, after decades of effort to diversify, is looking ever more like a petrodollar economy of the Middle East, but without the vast horde of foreign currency reserves to fall back on when commodity prices fall.

   

  Instead, Australians must borrow to maintain the standards of living that the country has become accustomed to, which even some Greeks will admit is unsustainable.

  

  

  

  

  

• Governments Give Migrants A Disastrous Mix Of Social Welfare & Bureaucracy

  Submitted by Justin Murray via The Mises Institute,

  On August 27, 2015, seventy-one refugees were discovered suffocated in an abandoned, locked transport truck in Austria just across the border with Hungary. These individuals, reported as refugees fleeing from the civil war in Syria, made a trek of over 1,000 miles. This is just a long string in the growing refugee and migration crisis hitting Europe over the past few years, with 2,500 estimated deaths from capsizing ships in the Mediterranean alone, of the nearly half million people crossing into Europe over the course of 2014–2015.

  The problem is not unique to Europe. Many of these same migrants find their way to Brazil then die through the various jungle crossings attempting to reach the United States. This was true for five migrants from Ghana, an African nation, found dead in the jungles along the Panama-Colombia border This is a terrible loss of life and while most agree that “something” must be done, we have to question first what the underlying cause of this migration is and what that “something” should be.

  Underlying Cause of the Migration

  Much has already been written by the degree of instability caused by foreign war policy and the distorting effects of foreign aid that usually props up corrupt military dictatorships. The more interesting observation of the latest migration crisis is not that it is happening, but where the migrants are headed.

  In the past, refugees usually trekked the minimal distance necessary to escape fighting with a few politically popular groups receiving airfare to further distant nations, like the Somali refugees relocated to Minneapolis, Minnesota. The rest find their way to the closest safety zone away from the fighting. However, this latest wave of refugees and migrants are passing through numerous safe nations, purchasing airfare across oceans and braving a travel path that is far more dangerous than remaining at home. For example, the aforementioned seventy-one Syrians found dead in Austria chose to bypass and ignore nearly a dozen other safe countries and make their way into Austria and, presumably, further on. It is odd that a Nepalese refugee will purchase airfare to Sao Palo, Brazil then travel by roads through the Amazon jungle and cross the US-Mexico border if it was just war or natural disaster that they were fleeing.

  Public Benefits Create the Incentives

  A major driver creating the incentives to make this dangerous, life threatening journey can be summed up with a single photo:

  

   

  Above is a photo of a reference card created by human smugglers obtained by Frontex, the European Union’s border control agency. Smugglers throughout the Middle East, Turkey, and North Africa produce such cards and hand them to potential clients. In effect, refugees have ceased seeking the nearest safest refuge and are now shopping the best nations to flee to. This has created the issue that people are no longer fleeing from conflict or poverty, but fleeing toward the most lucrative benefit package. The above cards do warp the legal systems by implying that showing up is sufficient cause for asylum and the benefits are permanent and for life. However, the presence of such benefit packages does exist and is a major incentive for migrants. This explains why people fleeing Libya are crossing the Mediterranean in rickety, overcrowded boats and people are passing through four or five perfectly secure nations to reach the EU. Part of this large humanitarian crisis is generated by dangling the incentives that anyone who arrives will be given a host of benefits that are, relatively speaking to the recipient, opulent.

  The United States provides similar resettlement benefits and even includes the possibility of full family unification. With the United States, further issues exasperate with the treatment of Unaccompanied Minors, who are advertised as given an almost full ride by showing up. This accounts for the surge of fifteen-to-eighteen-year-old males crossing the US border under dangerous conditions.

  Lots of Government Paperwork

  Another driver of this behavior is how states handle migration and border control. Legitimately crossing into the nations of the EU and North America is a bureaucratic nightmare. Migrants following the rules have to obtain identity documents that are not readily available in their home nations. For example, with the United States, the petition time tends to be lengthy, requires travel to inconvenient USCIS locations in the home nation and is limited to people who have existing families or job offers because of qualified skills. If one looks at the Green Card FAQ there is little recourse for a low-skilled worker seeking a better life apart from a narrow and difficult asylum process. The entry process into the EU is similarly difficult.

  I can speak from personal experience traveling to Switzerland for my MBA that even as a US Citizen seeking a one year visa in the Schengen area is a complex, difficult task. It is hard to even comprehend what someone from Syria or Ghana has to go through to obtain legitimate entry. Even the $1,010 application fee, which provides no guarantee of acceptance, while not unreasonable by Western wealth standards, represents multiple years of earnings for some migrants. Even with legitimate refugees, the process is difficult and, with existing quotas, it would take nearly a decade to process just those displaced by the Syrian conflict.

  By making legitimate entry points all but inaccessible to most desirable migrants, the migrants are funneled through non-standard routes such as the dangerous Panama-Colombia crossing or under razor-wire fences at the Hungarian border or associate with criminal cartels that will just as readily enslave, rob, or murder the migrants as assist them across borders. These routes are selected over safe alternatives because the safe alternatives have been made unavailable by government policy.

  The Perfect Storm

  Either of the above policies creates problems, but together, we get the perfect storm. By dangling a rich benefits package in front of potential refugees and migrants, governments are creating incentives for individuals to make the journey. But by making those said benefits impossible without running a dangerous gauntlet, we end up driving more people through quite literal meat grinders. This combination is almost cruel in a sense — great benefits, but near impossible to get to them.

  The Solution

  The key solution to this problem is two-pronged.

  First, guaranteed public welfare subsidies for refugees needs to be curtailed or outright eliminated. By removing the incentives, people enticed to migrate for public benefits will disappear, greatly reducing the apparent reward for undertaking the trip. The cost of the dangerous trip remains, but the reward has just vanished. Those who are truly desperate will no longer have the incentives to travel beyond the nearest safe location.

   

  Second, the Byzantine, lengthy and costly system of legal migration needs to be scrapped. This is not entering the debate on open borders, but whether one supports open borders or not, it is difficult to argue that the current system of migration is costly and difficult for all but the best educated and most well connected. Those who seek to migrate and contribute to the host society are by and large cut off from legal avenues, leaving only the very dangerous routes available.

  While influential voices like the Pope are correct that this is a travesty, the policies promoted by him and other government officials will only make this worse. Offering assistance to migrants by rescuing them when they become troubled or allowing migrants to remain without changing the underlying bureaucratic issue will only create greater incentives for more and more people to take the same dangerous routes. Risk compensation has to be considered — the greater the safety mechanisms in place, the more risky the behavior will become. Unfortunately, the current solutions presented by officials will likely result in boats even more overloaded with people and even greater numbers traversing dangerous jungle passes.

   

  

  

  

  

  

• Ron Paul: Congress Is 'Fiddling' While The Economy Burns

  Submitted by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

  Reports that the official unemployment rate has fallen to 5.1 percent may appear to vindicate the policies of easy money, corporate bailouts, and increased government spending. However, even the mainstream media has acknowledged that the official numbers understate the true unemployment rate. This is because the government’s unemployment figures do not include the 94 million Americans who have given up looking for work or who have settled for part-time employment. John Williams of Shadow Government Statistics estimates the real unemployment rate is between 23 and 24 percent.

  Disappointingly, but not surprisingly, few in Washington, DC acknowledge that America’s economic future is endangered by excessive spending, borrowing, taxing, and inflating. Instead, Congress continues to waste taxpayer money on futile attempts to run the economy, run our lives, and run the world.

  For example, Congress spent the majority of last week trying to void the Iranian nuclear agreement. This effort was spearheaded by those who think the US should waste trillions of dollars on another no-win Middle East war. Congressional war hawks ignore how America’s hyper-interventionist foreign policy feeds the growing rebellion against the dollar’s world reserve currency status. Of course, the main reason many are seeking an alternative to the dollar is their concern that, unless Congress stops creating — and the Federal Reserve stops monetizing — massive deficits, the US will experience a Greek-like economic crisis.

  Despite the clear need to reduce federal spending, many Republicans are trying to cut a deal with the Democrats to increase spending. These alleged conservatives are willing to lift the “sequestration” limits on welfare spending if President Obama and congressional democrats support lifting the “sequestration” limits on warfare spending. Even sequestration's miniscule, and largely phony, cuts are unbearable for the military-industrial complex and the rest of the special interests that control our government.

  The only positive step toward addressing our economic crisis that the Senate may take this year is finally holding a roll call vote on the Audit the Fed legislation. Even if the audit legislation lacks sufficient support to overcome an expected presidential veto, just having a Senate vote will be a major step forward.

  Passage of the Audit the Fed bill would finally allow the American people to know the full truth about the Fed’s operations, including its deals with foreign central banks and Wall Street firms. Revealing the full truth about the Fed will likely increase the number of Americans demanding that Congress end the Fed's monetary monopoly. This suspicion is confirmed by the hysterical attacks on and outright lies about the audit legislation spread by the Fed and its apologists.

  Every day, the American people see evidence that, despite the phony statistics and propaganda emanating from Washington, high unemployment and rising inflation plague the economy. Economic anxiety has led many Americans to support an avowed socialist’s presidential campaign. Perhaps more disturbingly, many other Americans are supporting the campaign of an authoritarian crony capitalist. If there is a major economic collapse, many more Americans — perhaps even a majority — will embrace authoritarianism. An economic crisis could also lead to mob violence and widespread civil unrest, which will be used to justify new police state measures and crackdowns on civil liberties.

  Unless the people demand an end to the warfare state, the welfare state, and fiat money, our economy will continue to deteriorate until we are faced with a major crisis. This crisis can only be avoided by rejecting the warfare state, the welfare state, and fiat money. Those of us who know the truth must redouble our efforts to spread the ideas of liberty.

  

  

  

  

  

• Comexodus: JPMorgan's Vault Is One Withdrawal Away From Running Out Of Deliverable Gold

  One week ago, when we reported the record plunge in registered gold held by the various Comex gold warehouses in general, and JPMorgan in particular, which saw the “gold coverage” ratio, or the number of paper claims through open futures interest for every ounce of deliverable gold, soar to what we then thought was a record, and unsustainable 207x, we thought this situation would be promptly rectified as a few hundred thousand ounces of eligible gold would be “adjusted” back into the “registered” category.

  Not only has this not happened, but with every passing day the situation is getting progressively worse.

  

  According to the latest Comex vault data, not only was another 157K ounces withdrawn today, but the conversion of Registered into Eligible continues, and as a result another 10% of total deliverable gold was “adjusted away”, leaving just 163,334 ounces of registered gold: the lowest in Comex history.

  

  As a result, the ratio of Eligible to Registered gold is now a record high 41.2x in the history of the Comex.

  

   

  Once again the culprit for the decline was JPM which saw not only a 122,124 ounces of Eligible gold be withdrawn, reducing the total by 13% to 750K ounces, but 8.9K ounces of registered gold was pushed into the Eligible category, in the process reducing total JPM registered gold by 45% overnight to a paltry 10,777 ounces: this amounts to only 335 kilograms of gold, or just 27 bricks of “good delivery” gold.

  

   

  Finally, since aggregate gold open interest continues to remaing consistent at just about 41 million ounces of gold, today’s latest ongoing reduction in deliverable Comex gold means that as of yesterday’s close, there was a record 252 ounces of gold paper claims to every gold physical ounce of currently available and deliverable gold.

  

  To summarize: last week we were confident that JPM would promptly adjust a few hundred thousands ounces of Eligible gold back into Registered status to silence growing concerns about Comex distress. A week later we are not as concerned by the relentless surge in paper gold dilution, as we are that JPM still has not even bothered to do this. Especially since with just 335 kilograms of gold, or less than 27 bricks, JPMorgan is now just one withdrawal request away from running out of deliverable physical gold.

  

  

  

  

  

• Putin Accuses World Of "Using Terrorist Groups" To Destabilize Governments

  If you’ve followed the incessant back-and-forth between Washington and Moscow over the course of the proxy wars raging in Ukraine and Syria, you know that the Kremlin is without equal when it comes to describing US foreign policy in a way that is both succinct and accurate. 

  This was on full display earlier this year when Vladimir Putin’s Security Council released a document that carried the subtle title “About The US National Security Strategy.” We’ve also seen it on a number of occasions over the past several weeks in the wake of Russia’s stepped up military role in support of the Assad regime at Latakia. For instance, last week, Russian foreign ministry spokeswoman Maria Zakharova delivered the following hilariously veracious assessment of how Washington has sought to characterize Moscow’s relationship with Damascus:

  “First we were accused of providing arms to the so-called ‘bloody regime that was persecuting democratic activists, now it’s a new edition – we are supposedly harming the fight against terrorism. That is complete rubbish.” 

  Yes, it probably is, but let’s not forget that Russia hasn’t exactly been forthcoming when it comes to acknowledging that, like Washington, Moscow’s interest in Syria is only related to terrorism to the extent that terrorism serves as a Western tool to destabilize the Assad regime which, you’re reminded, must remain in place if Putin intends to protect Gazprom’s iron grip over Europe’s supply of natural gas. 

  Of course what that suggests is that even as Russia uses ISIS as a smokescreen to justify sending troops to Syria, the Kremlin is by definition being more honest about its motives than The White House. That is, ISIS has destabilized Assad and because Russia has an interest in keeping the regime in power, Moscow actually does have a reason to eradicate Islamic State. The US, on the other hand, facilitated the destabilization of the country in the first place by playing a role in training and arming all manner of Syrian rebels, and to say that some of them might well have gone on to fight for ISIS would be a very generous assessment when it comes to describing the CIA’s involvement (a less generous assessment would be to call ISIS a “strategic CIA asset”). That means that the US will only really care about wiping out ISIS once Assad is gone and it’s time to install a puppet government that’s friendly to both Washington and Riyadh and at that point – assuming there are no other regimes in the area that the Pentagon feels like might need destabilizing – the US military will swiftly “liberate” Syria from the ISIS “scourge.” 

  To be sure, Russia is well aware of the game being played here and if there’s anything Vladimir Putin is not, it’s shy about calling the US out, which is precisely what he did on Tuesday at a security summit of ex-Soviet countries in Dushanbe, Tajikistan. Bloomberg has more:

  Russian President Vladimir Putin said the fight against Islamic State should be the global community’s top priority in Syria, rather than changing the regime of Bashar al-Assad.

   

  “It’s necessary to think about the political transition in that country” and Assad is willing to “involve healthy opposition forces in the administration of the state,” Putin said. “But the focus today is definitely on the need to combine forces in the fight against terrorism.”

   

  Countries need to “put aside geopolitical ambitions” as well as “direct or indirect use of terrorist groups to achieve” goals that include regime change, in order to counter the threat of Islamic State, Putin said. “Elementary common sense responsibility for global and regional security demands the collective effort of the international community.”

  The first thing to note there is that Putin has essentially called the US out for using terrorists to destabilize Assad. So for anyone just looking for the punchline, that was it. Everyone else, read on.  

  At this point what should be obvious is that Vladimir Putin’s intentions in Syria are anything but unclear. Russia is openly supplying the Assad regime with military aid in an effort to prevent terrorists and extremists (some of which were trained by the US and received aid from Qatar) from facilitating the strongman’s ouster. It’s that simple and frankly, the only two things Russia hasn’t made explicitly and publicly clear (because this is international diplomacy after all, which means everyone is always lying about something) are i) the role that natural gas plays in all of this, and ii) that the Kremlin will seek to prevent anyone from overthrowing Assad, so to the extent that there are any real, well-meaning “freedom fighters” in Syria, they’ll find themselves on the wrong end of Russian tank fire just the same as ISIS.

  As clear as that is, the US must stick to the absurd notion that the Pentagon just can’t seem to get to the bottom of what Russia is doing and to the still more absurd idea that Russia – who seems to be the only outside party that’s actually interested in fighting ISIS as evidenced by the fact that there are Russian boots on the ground – is somehow hurting the very serious effort by the US and its allies to defeat Islamic radicals in Syria. Here’s Bloomberg again: 

  Russia’s intentions in Syria are unclear and it’s important for U.S. diplomats to understand them, Martin Dempsey, chairman of the U.S. Joint Chiefs of Staff, told reporters in Tallinn, Estonia, on Tuesday. While Putin’s said it wants to prevent Islamic State’s expansion, “explaining the purpose and seeing how it actually evolves on the ground are two very different things and we will be working on that,” Dempsey said.

  Right, “explaining” that your “purpose” is to take your very powerful military and defeat what amounts to a large militia that’s woefully under-armed and under-trained by comparison “and seeing how it actually evolves are two very different things.” If you buy that argument, then you are buying into the patently ridiculous idea that if the US and Russia were to bring their combined military might to bear on ISIS in Syria, that somehow the outcome of that battle would be in doubt. 

  The Pentagon knows that notion is silly, but what it also knows is that once American troops are on the ground, there’s no not routing the other militants while you’re there, so what would happen in relatively short order, is that the opposition would be all gone and then, well, what do you do with Assad?

  The much more straightforward way to go about this (unless of course you have a 9/11 and a story about WMDs buried in the desert as a cover that makes an outright, unilateral invasion possible), is to allow for the entire country to descend into chaos until one or more rebel/extremist groups finally manages to take Damascus, at which point you simply walk in with the Marines and remove them, then install any government you see fit. In the meantime, you just fly over and bomb stuff (hopefully with a coalition that includes Europe) in order to ensure that the situation remains sufficiently unstable. But now this plan won’t work, because unless we see a replay of the Soviet-Afghan war, none of Syria’s rebel groups are going to be able to rout the Russian army which means the US is stuck doing exactly what it’s doing now: trying to explain why it won’t join Russia in a coalition to eradicate ISIS while working to figure out what’s next now that the Russians are officially on the ground.

  We’ll close with the following from Alexander Golts, a military analyst and deputy editor of the online newspaper Yezhednevny Zhurnal who spoke to WSJ: 

  “The idea of this is…to show Russia as part of the alliance of civilized nations that are standing against barbarism. But that idea won’t have much of a chance, because the U.S. and the Saudis and others consider Assad the source of the problem.”

  

  

  

  

  

• How The Justice Department Is Actively Preventing Civil Asset Forfeiture Reform

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Civil asset forfeiture is one of the most unethical and barbaric practices routinely performed by law enforcement in these United States today. Naturally, the Department of Justice is doing everything it can to protect the practice.

  When I say that the rule of law is dead in America, I am not exaggerating. In fact, with each passing day it becomes increasingly obvious that the Justice Department not only has no interest in justice, it appears to view its primary role as coddling and protecting lawlessness amongst the so-called “elite” and their minions.

  Today’s post proves the point once again. The state of California is in the process of passing a civil asset forfeiture bill, and in response, the DOJ is providing talking points to the California District Attorneys’ Association so that it can more effectively fight the bill. All of this after the DOJ had previously expressed faux support for civil asset forfeiture reform.

  TechDirt reports:

  At the beginning of this year, Attorney General Eric Holder attempted to close an exploitable loophole in asset forfeiture laws. State and local law enforcement agencies often sought federal “adoption” of seizures in order to route around statutes that dumped assets into general funds or otherwise limited them from directly profiting from these seizures. By partnering with federal agencies, local law enforcement often saw bigger payouts than with strictly local forfeitures.

   

  The loophole closure still had its own loopholes (seizures for “public safety,” various criminal acts), but it did make a small attempt to straighten out some really perverted incentives. But deep down inside, it appears the DOJ isn’t really behind true forfeiture reform. In fact, it seems to be urging local law enforcement to fight these efforts by pointing out just how much money these agencies will “lose” if they can’t buddy up with Uncle Sam.

  
  

   

  A cache of documents uncovered by the Institute for Justice today demonstrate that federal law enforcement officials in the Departments of Justice (DOJ) and Treasury are collaborating with local law enforcement organizations in California to undermine efforts to reform the state’s civil forfeiture laws. The California District Attorneys Association is circulating a set of emails from officials with the DOJ and Treasury indicating that the federal government would disqualify the state from receiving funds from the federal Equitable Sharing Program if it passes the pending reforms. The documents also reveal that the DOJ has already disqualified New Mexico from participating in the program, following passage of a sweeping civil forfeiture reform bill this spring.

   

  The DOJ’s insertion into the legislative process begins with talking points delivered in emails that stress the amount of money agencies will be “losing” if they’re no longer allowed to federalize seizures. The documents show members of the Treasury Department affirming that California’s reform will “force” the DOJ to cut state law enforcement agencies out of the loop — supposedly because the Mother Ship can’t secure convictions fast enough.

  
  

  Citing “resources, desire, or technical capability,” Treasury Executive Office for Asset Forfeiture Legal Counsel Melissa Nasrah wrote in an email to Santa Barbara Senior Deputy District Attorney Lee Carter, “I highly doubt our federal agencies can figure out whether a conviction occurred in any timely manner,” and “it seems the legislation, in effect, takes decision-making authority away from Treasury. Accordingly, I think I would still advise our policy officials here that it would be prudent to not share with CA agencies should this law be passed.”

   

  Sure enough, the “warnings” from the feds are echoed in a letter from the California District Attorneys’ Association in opposition of the bill. The association expresses its abject dismay at the fact that law enforcement agencies might actually have to secure convictions to hold onto seized assets. According to the CDAA, asset forfeiture without accompanying convictions is a must because indictments and jail time alone aren’t punitive enough.

  
  

  The current version of the bill would essentially deny every law enforcement agency in California direct receipt of any forfeited assets. California’s asset forfeiture law will be changed for the worse, and it will cripple the ability of law enforcement to forfeit assets from drug dealers when arrest and incarceration is an incomplete strategy for combatting drug trafficking.

  That the DOJ has decided to pile on — despite its nominal reform efforts — is also less than shocking. After all, it takes a cut from every “adopted” investigation — all the while enabling local entities to bypass statutory safeguards meant to keep the abuse of civil forfeiture to a minimum.

  To read the entire letter from the California District Attorneys’ Association, go to the end of the TechDirt article.

  In case you still aren’t convinced of the unethical and unconstitutional nature of civil asset forfeiture, i.e., police theft, check out the following:

  Land of the Unfree – Police and Prosecutors Fight Aggressively to Retain Barbaric Right of “Civil Asset Forfeiture”

  The DEA Strikes Again – Agents Seize Man’s Life Savings Under Civil Asset Forfeiture Without Charges

  Asset Forfeiture – How Cops Continue to Steal Americans’ Hard Earned Cash with Zero Repercussions

  Quote of the Day – An Incredible Statement from the City Attorney of Las Cruces, New Mexico

  “Common People Do Not Carry This Much U.S. Currency…” – This is How Police Justify Stealing American Citizens’ Money

  Why You Should Never, Ever Drive Through Tenaha, Texas

  

  

  

  

  

• Explosive Allegation: Citigroup Leaked Central Bank Trading Activity

  For years we had been wondering when it would start: by “it” we mean angry ex-bankers, disgruntled due to either the terms of their termination, their compensation, or generally unhappy with their treatment by their former employee, standing up and blowing the whistle on crimes they witnessed while (un)happily employed.

  Then, over the past month, the answer has emerged as not one, not two, but at least six individual case have emerged in which former currency traders at Citigroup, HSBC, Lloyds and other banks have seen former employees sue their previous bosses. As Bloomberg reports, “some of the traders say they were unfairly swept up in clear-outs of currency desks at the center of regulatory probes into the manipulation of foreign-exchange markets.”

  And now they want revenge.

  The reason for the wrath is that as a result of the crackdown on FX manipulation more than 30 traders were fired, suspended or put on leave over the last two years. However, as the Tom Hayes of Libor manipulation “rain man” fame has shown, in many cases those fired were merely the lowest men on the totem pole, and their termination was meant to cover up the crimes of individuals much higher up in the food, and value, chain. Indeed, Bloomberg adds, in the years after the 2008 financial crisis, fired bankers were telling London employment judges they had been made scapegoats for systemic failings.

  Since most employment claims in the U.K. must be filed within three months of a dismissal to be allowed to proceed, they tend to come in clusters: and once one former worker shows there is little to lose, others quickly join in.

  More importantly, since damages in employment cases are normally capped at about 78,300 pounds ($121,000), unless there is a finding of discrimination or the claimant wins status as a whistle-blower, employees are suddenly incentivized to expose all the crime they have been directly or indirectly witnessed to make sure their last potential parting gift from the financial industry is large enough.

  And since few have the desire or eligibility to work in finance, they may as well go out with a bang: currency traders have little to lose by filing employment claims, according to James Davies, a London-based employment lawyer at Lewis Silkin. “If your reputation is already tarnished in the financial services sector then you’re less likely to be concerned by any adverse publicity arising from making a claim,” he said. “You’re also more likely to have the resources to make it possible to litigate.”

  Here are some examples of the already filed cases, chronicled by Bloomberg:

  Carly McWilliams, Perry Stimpson, David Madaras and Robert Hoodless all filed suits against Citigroup after they were fired amid the bank’s internal rigging investigation. Serge Sarramegna and Paul Carlier are suing HSBC and Lloyds for unfair dismissal and so-called public interest disclosure, or whistle-blowing, in relation to foreign-exchange practices. Only Stimpson’s case has reached trial so far. Carlier’s case could start as soon as Wednesday, the same day as a trial involving another Lloyds employee, Andrew Reed, is scheduled to begin. Including two discrimination complaints, as many as four banker lawsuits could be heard in London employment tribunals tomorrow.

  Of all those, the case of Stimpson is by far the most interesting one.

  

  Perry Stimpson Photographer: Luke MacGregor/Bloomberg

  Testifying at a London tribunal last week, Stimpson alleged improper conduct was endemic in the bank’s currency-trading and claimed he saw managers deliberately flout the bank’s code of conduct. The former FX trader spored nobody, and named former managers and specific examples of their misbehavior. Rules of client confidentiality could “be bent at the request of senior management,” he said.

  “I’m not here to mudsling, I’m here so the truth about foreign exchange at Citigroup is heard once and for all,” Stimpson said at the start of the case. The bank and the managers say his allegations are unfounded.

  Maybe they are, but a deeper dive into his allegations reveals something far more troubling: Citigroup may have been sending details of its central bank customers’ trading activity to other clients, Stimpson said in a witness statement to a London court on Thursday.

  Here is the kicker according to Reuters:

  “Our Investor Desk would comply with a weekly request from (a client) for details of Central Bank activity that Citi had transacted,” Stimpson said in his witness statement to an employment tribunal in London. Stimpson did not specify which central banks he was referring to.

  If anyone is confused, this means that not only do central banks trade FX on a day to day basis, something which has become increasingly clear in the past couple of years by merely observing the rigged market, but Citi was actively leaking this data to select clients!

  Stimpson adds that Jeff Feig, who was Citi’s global head of trading at the time, called a halt to sending round the “central bank survey”, as Stimpson said it was referred to, in mid-2013 because he decided it was wrong. He did not elaborate.

  Jeff Feig quit Citi in a hurry when the FX manipulation scandal was just getting started last September to join Fortress Macro as co-investment chief. He “unexpectedly” quit Fortress in this July, less than a year on the job, for “reasons unknown.” Surprisingly, it may not just be the FX manipulation catching up with him: his biggest position had been a EURCHF bet which blew up in January after the shocking SNB peg-breaker announcement. Guess he didn’t see that one coming.

  Other unprecedented and criminal violations was Citigroup’s “common practice on the Investor Desk to cut and paste details of Citibank’s order book on to Bloomberg chats at the request of customers.” Stimpson said in his statement.

  While unproven yet, these allegations are nothing short of a bombshell, and explain why Citigroup and its peers have rushed in an epic scramble to settle all FX manipulation allegations as fast as possible, to avoid precisely details such as these from coming out.

  They did not , however, anticipate scapegoats such as Perry daring to fight back.

  Of course, Citi has neither seen, nor heard, nor said nothing: a Citi spokesman said: “All of the allegations of wrongdoing being made by Mr Stimpson have been investigated and were found to be without merit.”

  You mean to say the bank investigated itself and found that it did not engage in grossly criminal behavior such as leaking central bank trades to private clients? Unpossible!

  On the other hand, Citi has its scapegoating narrative well laid out: it said Stimpson was dismissed for serious breaches of contract, alleging he shared confidential client information with traders at other banks via electronic chatrooms. Stimpson was dismissed last November in the wake of an industry scandal that resulted in banks paying more than $10 billion in fines for failing to stop traders attempting to manipulate the $5 trillion-a-day forex market.

  Because where there is gross currency manipulation, it is always just one or two traders who did it. Nobody else! They never got the idea by watching their bosses and superiors do just that, and greenlight their own manipulation. Duh.

  Ironically, Citi’s story falls apart when one digs through the evidence: Stimpson said he was strongly encouraged to gather and share more market information with colleagues and traders at other banks in order to have a broader understanding of market conditions to help the bank in its trading.  Maintaining contacts to gather information became one of his annual goals that would help dictate his year-end bonuses.

  “Dude, get yourself on a chat,” his then line manager Bob de Groot told him in 2009, according to Stimpson’s statement. “Perry has made a good effort to talk to other participants in the market, he could give a little more effort in sharing information and ideas across the business,” is what de Groot wrote in his 2009 year-end review, Stimpson claimed in his statement.

  It gets worse:

  In his testimony, Stimpson said Citigroup staff breached confidentiality around some clients and that some senior staff used inside information to trade, in contravention of the bank’s own code of conduct.

   

  In his witness statement, Stimpson said Michael Plavnik, then head of the short-term interest rate trading desk, looked to profit from trading euros around that day’s “fixing”, the daily process of setting what are effectively benchmark exchange rates used by many funds, companies and central banks around the world.

   

  Plavnik had heard Citi’s spot FX desk had a large order to buy euros at the fix. Armed with that knowledge, he bought 200 million euros before the fix to sell them back into the market at the fixing rate, Stimpson claimed in his statement.

  And, lo and behold, a Citi spokesman told Reuters that “Plavnik has not been found to have committed any misconduct.”  That is to say, who knows how many more senior bankers Plavnik could take down with him if charges were filed against even a mid-level maret rigger.

  Instead he was rewarded, more for not getting caught than any other reason: Plavnik has since been promoted to global head of short-term interest rate trading.

  That said, Stimpson is not innocent either: “Stimpson, who is representing himself, admitted that he had signed Citi codes of conduct, which covered a wide range of issues from ethics to client confidentiality, but barely paid any attention to their content.”

  Neither did anybody else, and until all these market manipulators finally end up in jail, nobody ever will.

  In the meantime, however, expect many more such scapegoats to emerge and explain to the world how all such former “conspiracy theories” were really “conspiracy fact” – who knows, maybe one day a former Fed trader will give the full explanation of just how the NY Fed’s market group manipulates the S&P500 on a day to day basis with the generous help of Citadel’s E-mini spoofing algorithms…

  

  

  

  

  

  

• Abenomics Explained (In 1 Chart & 4 Words)

  "It Does Not Work"

   

  

   

  *  *  *

  Following The BoJ's "no change" decision last night, today's spin is that it guarantees moar Abenomics printagoggery in October… Sure because that has worked so well in the past!!

  In fact, like all the rest, there is scarcely a block of the calendar since the “impossible” global panic in 2008 that hasn’t seen any of them doing something to expand their balance sheet or impress the “time-axis.” By my more conservative count, qualified as the BoJ doing something different rather than purely expanding or extending something already in progress, there have been 10 QE’s in Japan but using the numerical standard which has been applied to the Federal Reserve there may have been as many as 22 or more.

   

  

  What none of those have amounted to is an actual and sustainable economic advance; NONE, no matter how you count them. In very simple fact, the idea that central banks “need” to keep doing them in continuous fashion is quite convincing that at the very least they don’t mean what central bankers think they mean, and perhaps worse that the more they are done and to greater extents the more harm that eventually befalls. It isn’t difficult to suggest and even directly observe that Japan’s economy has shrunk during the QE age, but that fact isn’t applicable to Japan alone (there are sure too many non-adjusted data points that uncomfortably assert the same for even the US). That would seem to at least offer a basis for a “deflationary mindset” no matter the actual economic effects.

  So you truly have to wonder these kinds of days, like last week:

  Global equity markets rose on Wednesday, led by an 8 percent surge in Japanese stocks, helping lift the dollar as the prospect of more economic stimulus out of Asia soothed investors rattled by recent market turmoil.

   

  The charge into stocks pushed yields on low-risk government bonds higher, and a sale of German 10-year debt attracted bids worth less than the amount on offer. The U.S. Treasury is scheduled to auction $21 billion of 10-year paper later.

  This is not so much investing or even finance as it is a cult (calling it a religion or even ideology is unjustifiably too charitable).

   

  h/t @Not_Jim_Cramer

  Charts: Bloomberg

  

  

  

  

  

• How Our Energy Problems Lead To A Debt Collapse Problem

  Submitted by Gail Tverberg via Our Finite World blog,

  Usually, we don’t stop to think about how the whole economy works together. A major reason is that we have been lacking data to see long-term relationships. In this post, I show some longer-term time series relating to energy growth, GDP growth, and debt growth–going back to 1820 in some cases–that help us understand our situation better.

  When I look at these long-term time series, I come to the conclusion that what we are doing now is building debt to unsustainably high levels, thanks to today’s high cost of producing energy products. I doubt that this can be turned around. To do so would require immediate production of huge quantities of incredibly cheap energy products–that is oil at less than $20 per barrel in 2014$, and other energy products with comparably cheap cost structures.

  Our goal would need to be to get back to the energy cost levels that we had, prior to the run-up in costs in the 1970s. Growth in energy use would probably need to rise back to pre-1975 levels as well. Of course, such a low-price, high-growth scenario isn’t really sustainable in a finite world either. It would have adverse follow-on effects, too, including climate change.

  In this post, I explain my thinking that leads to this conclusion. Some back-up information is provided in the Appendix as well.

  Insight 1. Economic growth tends to take place when a civilization can make goods and services more cheaply–that is, with less human labor, and often with less resources of other kinds as well.

  When an economy learns how to make goods more cheaply, the group of people in that economy can make more goods and services in total because, on average, each worker can make more goods and services in his available work-time. We might say that members of that economy are becoming more productive. This additional productivity can be distributed among workers, supervisors, governments, and businesses, allowing what we think of as economic growth.

  Insight 2. The way that increased productivity usually takes place is through leveraging of human labor with supplemental energy from other sources.

  The reason why we would expect supplemental energy to be important is because the amount of energy an individual worker can provide is not very great without access to supplemental energy. Analysis shows that human energy amounts to about 100 watts –about equal to the energy of a 100-watt light bulb.

  Human energy can be leveraged with other energy in many other forms–the burning of wood (for example, for cooking); the use of animals such as dogs, oxen, and horses to supplement our human labor; the harnessing of water or wind energy; the burning of fossil fuels; and the use of nuclear energy. The addition of increasingly large amounts of energy products tends to lead to greater productivity, and thus, greater economic growth.

  As an example of one kind of leveraging, consider the use of oil for delivering goods in trucks. A business might still be able to deliver goods without this use of oil. In this case, the business might hire an employee to walk to the delivery location and carry the goods to be delivered in his hands.

  A big change occurs when oil and other modern fuels become available. It is possible to manufacture trucks to deliver goods. (In fact, modern fuels are needed to make the metals used in building the truck.) Modern fuels also make it possible to build the roads on which the truck operates. Finally, oil products are used to operate the truck.

  With the use of a truck, the worker can deliver goods more quickly, since he no longer has to walk to his delivery locations. Thus, the worker can deliver far more goods in a normal work-day. This is the way his productivity increases.

  Insight 3. Growth in GDP has generally been less than 1.0% more than the growth in energy consumption. The only periods when this was not true were the periods 1975-1985 and 1985-1995. 

  This is an exhibit I prepared using data from the sources listed.

  

  Figure 1. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

  The difference between energy growth and GDP growth is attributed to Efficiency and Technology. In fact, energy use and technology use work hand in hand. People don’t buy oil just to have oil; they buy oil for the services that devices using oil can provide. Efficiency is important too. If a device is cheaper to use, thanks to efficient use of energy, consumers find it more affordable (if the cost of the device itself is not too expensive). Thus, efficiency can lead to more use of energy.

  The period between 1975 and 1985 was the period when the developed economies were making many changes including

  • Changes to make automobiles smaller and more fuel efficient
  • Replacement of oil-fired electricity generation with nuclear (which needed no fossil fuels for ongoing fuel) and with coal
  • Replacement of home heating using oil with more modern heating units, not using oil

  Some of this effort continued into the 1985-1995 period, as newer cars gradually replaced older cars, and modern furnaces gradually replaced oil-fired furnaces. Thus, we should not be surprised that the 1975-1985 and 1985-1995 periods were the ones with unusually high growth in Efficiency/Technology.

  Insight 4. The value of energy to society is not the same as the cost of extracting it, refining it, and shipping it to the desired end location.

  The value of energy to society reflects the additional goods and services that we as a society can produce, thanks to the benefits energy adds to the system as a whole. This value can be either higher or lower than the cost of extracting the energy from the ground, processing it, and delivering it so that it will work in our devices.

  If the price of oil, or of other energy products, is low, we would expect the cost of production to be lower than its value to society. We can visualize the relationship to be as shown in Figure 2. It is the low price that provides the leveraging benefit of oil.

  

  Figure 2. Illustration by author.

  In the example given in Insight 2 of the worker, driving a truck over a road to deliver goods, there are actually many “players” involved:

  • The company extracting the oil
  • The government of the company extracting the oil
  • The business making the truck
  • The government of the country building the road
  • The business hiring the worker delivering the goods
  • The worker himself

  The benefit of the efficiency gain is shared among the different players listed above. How this sharing is done is based on relative price levels and government tax levels. Thus, there are many different types of entities (which I refer to on Figure 2 as “consumers”) all getting a benefit from the leveraging impact of the oil products, at the same time.

  The value to society of oil and of other energy products is pretty much fixed, based on the energy content (in Btus or whatever other unit a person desires). The value to society can change a little with energy efficiency, if we learn to pave roads with less use of energy products, and if we learn to manufacture trucks with less use of energy products, and if we can make the trucks that use less diesel per mile.

  If the cost of producing oil or other energy product rises (in other words, the left bar in Figure 2 gets taller), then the “gap” between the cost of production and the value to society (right bar) may fall too low. The amount of money to distribute, resulting from the gain that comes from using energy to leverage human labor, falls. None of the entities involved can get an adequate distribution: There is less money to pay interest payments on debt; there is less money to pay dividend payments to stockholders; there is less money to give the workers raises. In fact, it reminds me of the situation described in my post Why We Have an Oversupply of Almost Everything (Oil, labor, capital, etc.)

  If there is too little gap between the selling price of oil and its value to society, there gets to be pressure for the price of oil to fall. Partly, this comes from low wage increases (because wages are being squeezed). If workers cannot buy finished products such as homes and cars, the price of commodities such as steel and oil tends to drop. This seems to be the situation today. Partly this pressure come from the fact that society can live for a while with “squeezed margins. Eventually, some of the “pain” needs to go back to the oil producers (difference between left bar and middle bar on Figure 2), instead of only being borne by the oil consumers (difference between middle bar and right bar on Figure 2). This is why we should expect the kind of oil price drop we have experienced in the past year.

  Insight 5. We would expect world economic growth to slow as oil prices rise, because of Insights (1) and (2).

  According to (1), we need to make goods increasingly cheaply to cause increasing economic growth. Oil is the energy product with the highest use worldwide. If its cost rises, it takes a huge amount of savings elsewhere in the system to allow the combination to still produce goods increasingly cheaply.

  According to (2), it is the energy content that needs to rise. With higher prices, consumers can afford less. As a result, they tend to consume less, in energy content. This lower energy consumption lowers the leveraging of human energy, so there tends to be less economic growth.

  

  Figure 3. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

  Figure 3 shows world oil prices. Given Insights (1) and (2), we would expect the rate of economic growth to slow during the 1975-1985 period and during the 2005-2015 period, and indeed they do, in Figure 1.

  Insight 6. Increasing debt seems to be a major driver of demand growth, and thus energy consumption.

  There are many reasons why we would expect debt to be hugely beneficial to economic growth:

  Debt is used to “smooth” many kinds of transactions. For example, the payment of wages to an individual represents a kind of debt, since otherwise, the employer would need to pay the worker daily, using the type of goods produced by the business–something that would be very inconvenient.

  Debt is also helpful in enabling big financial transactions, such as the purchase of a house or a factory or a car. With debt, the amount that needs to be saved up in advance is greatly reduced. Most of the cost can be paid in monthly installments over the life of the item purchased. If debt is used to pay for a factory, the output of the factory can be used to repay the debt.

  An indirect impact of adding debt is that it helps raise the price of commodities, such as oil, steel, and electricity. This happens because with the use of debt, “demand” for expensive products like homes, factories, and cars is greater, because more people and businesses can afford to buy them, thanks to the availability of debt. These expensive products are made with commodities like steel, wood, oil, and coal. With more debt, the prices of these commodities tend to balance at a higher level than they would otherwise. For example, oil prices may balance at $100 per barrel, instead of $70 per barrel. At these higher price levels, production from higher-cost sources becomes profitable–for example, oil from deeper wells, water from desalination, and coal transported over longer distances.

  Because of these benefits of debt use, it is hard for me to imagine that fossil fuel extraction could have occurred without the use of very large amounts of debt. I first discussed this issue in Why Malthus Got His Forecast Wrong.

  Figure 4 shows an estimate of how world debt has grown, on an annual, inflation-adjusted basis, compared to inflation-adjusted GDP. (See the Appendix for additional information.)

  

  Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See Appendix for information regarding calculation.

  Figure 4 indicates that the growth of debt spurted about 1950. One influence may have been John Maynard Keynes’ book, The General Theory of Employment, Interest and Money, written in 1936. This book advocated the use of additional debt to stimulate economies that were growing at below their full potential. We also know that governments with war debts needed to offset the repayment of these war debts with new “peace debts” (debt available to businesses and consumers) if they didn’t want their economies to shrink for lack of debt growth. See my post The United States’ 65-Year Debt Bubble.

  Insight 7. Once inflation-adjusted oil prices passed $20 per barrel, a change took place. We started needing much more debt to generate a dollar of GDP.   

  This problem can be seen on Figure 4–the lines diverge, starting in the 1975-1985 period. Up until about 1975, the rise in debt levels was similar to GDP growth. In fact, if we look at Figure 1, energy growth also tended to grow with debt and GDP in the pre-1975 time period. After 1975, we started needing increasing amounts of debt to generate GDP growth.

  We can understand the need for more debt by thinking about how leveraging really works. Leveraging works because of the energy content of the supplemental energy. To get the desired quantity of energy content, a larger dollar amount of investment is needed to produce the same quantity of energy, if the cost of producing the energy product is higher.

  Most people look at debt growth as a percentage of GDP growth, but this misses an important dynamic: is our problem occurring because debt growth is high, or because GDP growth in response to the debt growth is low? When I look at Figure 4, my conclusion is that when energy costs were low–basically at pre-1975 levels of $20 a barrel for oil, and similarly cheap levels for nuclear and other fossil fuels–it was possible for debt growth to approximately match GDP growth. Once energy costs started to rise, more debt was needed. Some of this was additional debt related directly to the process of creating energy products; some of this debt related to international trade and to buyers’ need to finance higher-cost end products.

  Based on Figure 4, even the drop back to the $30 to $40 per barrel range in the 1985 to 2000 period didn’t fix the rising debt to GDP ratio problem. To truly fix the situation, we need to get the cost of producing fuels to a low enough level that they can profitably be sold at the equivalent of less than $20 per barrel. With diminishing returns, this seems to be impossible.

  Insight 8. Adding more energy efficiency may require more debt growth as well.

  The biggest spurt of debt came in the 1975-1985 period. If we compare Figure 4 to Figure 1, and consider what was happening at that time, quite a bit of this additional debt may have related to changes associated with increased energy efficiency: new efficient nuclear electricity generation to replace generation of oil with electricity; new more efficient home heating to replace old oil based heating units; and the building of new, more fuel-efficient cars.

  Insight 9. The limit we are reaching can be viewed as a debt limit.

  If demand really comes from additional debt, then what we need to keep GDP growth high is debt that grows sufficiently rapidly. (An alternative way of keeping demand high would be through rising wages of non-elite workers. Unfortunately, these wages tend to be depressed by diminishing returns–a problem I wasn’t able to cover in this post. See my post, How Economic Growth Fails.)

  Many people believe that energy demand can rise endlessly. It seems to me that this belief is very close to the belief that the ratio of debt to GDP can rise endlessly. 

  Insight 10. Our debt system is very close to a Ponzi Scheme.

  A Ponzi Scheme is a fraudulent investment program in which the operator promises a high rate of return to investors. Instead of obtaining these returns from true profits, the operator funds payouts to existing investors using ever-rising amounts of new investment. Eventually the plan fails, from lack of new investment dollars.

  Our economic growth situation is not fraudulent, but otherwise it has uncomfortable similarities to a Ponzi Scheme. Instead of adding new investors each year, our economy needs to increase its amount of debt each year, in order to continue to grow GDP. GDP would not grow on its own, without additional investment funded by debt. To make matters worse, the required amount of additional debt rises, as the cost of producing additional energy products rises.

  According to McKinsey Global Institute, global debt amounted to 286% of GDP in mid-2014. It had been “only” 246% of GDP in 2000. A person can see from Figure 4 that even with this rate of debt growth, both energy growth and GDP growth are slowing in recent time periods. The answer would seem to be to add more debt growth. Unfortunately, adding more debt puts us in a position where debt repayments becomes too high relative to ongoing spending needs.

  It is this debt problem that leads to my concern that we are headed for a near-term financial system crash. Even purposely slowing debt growth tends to make the economy slow, and thus lead to a crash. Because of the Ponzi nature of our arrangement, any kind of  slowing of debt growth is likely to lead to a debt crash, for several reasons:

  • With lower debt, commodity prices are likely to stay low, or fall further. Our economy’s long-term tendency toward inflation will shift toward deflation, making all existing debt harder to repay.
  • Without a rapid rise in debt, the price of oil and other commodities will tend to stay low, leading to huge defaults in these sectors.
  • Once debt defaults start, lenders are likely to require higher interest rates to compensate for rising level of defaults.

  *  *  *

  Appendix: Background on Long Term World GDP, Energy, and Debt Indications

  Economic theories have grown up over roughly 200 years without the benefit of information regarding the relationship between economic growth, debt, and the use of energy products, on an aggregate basis. Long-term data is mostly compiled on an individual country basis; many countries are missing from standard listings, especially for recent years and for very old years, making unadjusted summations of the amounts shown misleading. Fluctuations in currency levels add to the confusion.

  Because of these issues, it is quite possible for economists to develop theories, but never have good aggregate data to test them against. Aggregate data is very important to me, because we now live in a globalized world. It is hard to make sense of the world economy, if the group of oil exporting nations shows one pattern, the group of newly industrialized countries shows another pattern, and US, Europe, and Japan show a third pattern. Analyses limited to a handful of countries “like us” can provide very distorted indications.

  Fortunately, there are some data sources that permit aggregation of data for the world as a whole. In particular, the USDA Economic Research Service conveniently “fills in the blanks” with reasonable estimates of GDP, making it possible to sum indications to a world total, at least for 1969 and subsequent. Another source of world GDP data is the  “Maddison Project,” started by Angus Maddison and now updated by Bolt and van Zanden. Long-term world energy data is also available from BP for 1965 and subsequent years, and from Smil, for the years 1820 to 2008, but there are data differences that need to be bridged to combine them.

  Figure 1A is a repeat of Figure 1 above, showing the long-term trend in world GDP, broken down between growth in energy use and other changes, primarily related to improvement in technology and greater efficiency.

  

  Figure 1A. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

  Based on Figure 1A, growth of energy consumption ranged from 52% to 89% of GDP growth. Over the period 1965 to present, growth in energy consumption averaged 68% of GDP. Some academic research gives a similar result. Gael Geraud, who analyzes the results for 50 countries between 1970 and 2011, says that in the timeframe he studied, “The long-run output elasticity evolved between 60% and 70%.” Geraud’s results contrast with an economic theory that says that energy is only responsible for a share of economic growth proportional to its cost as a percentage of GDP–typically something like 8%.

  If we look at the Efficiency/Technology piece separately, the only times it contributed more than 1% per year to economic growth were during the 1975-1985 and 1985-1995 timeframes, when GDP growth exceeded energy growth by 1.4% and 1.3% respectively. This was the time when major changes to the economy were being made in response to price spikes of the 1970s. As indicated in Figure 4A, this was also the time when increases in debt were very high relative to GDP growth, suggesting that very high debt growth is needed to produce these higher efficiency gains.

  Figure 2A shows another way of looking at the same data as in Figure 1A. The slope of the fitted line is .97, indicating that energy consumption and GDP have tended to grow at almost the same rate over the long term.

  

  Figure 2A. Data in Figure 1, displayed in X-Y chart format.

  Of course, the extraction of energy products is enabled by technology growth. Consumers want the use of end products (like refrigerators and cars), not the use of the fuel itself.  Increased energy efficiency also enables growth in energy use, because it makes products cheaper for buyers, enabling economic growth. For example, Figure 3A shows the rapid growth in electricity usage in the 1900 to 1998 time period, as US electricity prices fell.

  

  Figure 3A. Ayres and Warr Electricity Prices and Electricity Demand, from “Accounting for growth: the role of physical work.”

  Another thing besides technology and energy efficiency that enables the extraction of fossil fuels is growth in debt. Here again, there is a problem with inadequate data, on a long-term worldwide basis. We have some information about recent global debt ratios to GDP  based on a McKinsey study. In addition, Bawerk provides a graph showing a long-term rise in the ratio of US total credit market debt to GDP. Longer-term debt patterns related to US Federal debt by itself are also available. One thing that becomes clear is that there has been a strong upward trend in debt levels, relative to GDP, for the US and for the world, for a very long period.

  If we use worldwide data to the extent it is available, and substitute US total debt ratios on early periods, we can make a reasonable approximation to how this growth in debt must have taken place. To correct for inflation, I have applied these debt to GDP ratios to the inflation-adjusted GDP amounts underlying Figure 1A. Once we have debt amounts on an inflation-adjusted basis, it is possible to calculate average annual growth rates in this inflation-adjusted debt. This is what I show in Figure 4A.

  

  Figure 4A. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods.

  Since 1975, energy has gradually been changing to require much more debt per unit of energy produced, for three reasons:

  1. The overall cost of production of these energy products rose starting in the mid-1970s. As a result, debt went “less far” when it came to producing additional barrels of oil or kilowatt-hours of electricity.
  2. The nature of energy production began shifting toward greater use of front-end investment compared to ongoing expense. This change led to a need for more debt, because front-end investment tends to be financed by debt, while ongoing expense does not. Examples requiring heavy front-end investment include oil sands, oil from shale, deep-sea oil projects, wind turbines, and solar PV.
  3. If investment costs are low, oil and gas companies can often use profits from prior projects to finance new projects, so there is no real need for borrowing. When profits are squeezed by rapidly rising extraction costs, as has been the case in recent years, oil companies begin to borrow to pay ordinary expenses, such as paying dividends. They are so cash-strapped that almost any expense needs to be accomplished using debt.

  The rest of the economy has also experienced a greater need for debt as energy prices rise. For example, oil imported at a high price requires much more debt than oil imported at a low price. A house built using expensive oil and other energy products is more expensive to purchase, so requires a higher mortgage. When automobiles are made to be more fuel efficient, this tends to raise their cost and thus, the amount of debt required by those purchasing those automobiles.

  It is clear that this increase in debt ratios cannot continue endlessly, for reasons discussed in the main text. Perhaps those evaluating alternative energy sources should be computing estimated “energy return on debt investment” ratios for these new sources. The ideal new energy source will be very close to self-funding, with little build-up of debt.

  

  

  

  

  

• Presenting The Presidential Money Maps: Here's Where The Checks Come From

  Donald Trump has made a few things abundantly clear in the months since announcing his candidacy for The White House. Here are a few points Trump has been keen to communicate unequivocally: 1) illegal immigrants have to go, 2) China is “winning” at “everything”, 3) there are no “losers” allowed, and 4) he is very, very rich. 

  That last point means the brazen billionaire is self-funding his campaign, a move he hopes will set him apart in the minds of voters.

  To be sure, the idea that politicians are influenced by their campaign donors and that this is everywhere and always a bad thing plays well with large swaths of the electorate. Trump hopes his message – “no one controls me” – will resonate in a country that’s largely fed up with business as usual inside the Beltway and indeed, given the scrutiny on the Clinton Foundation and what influence its donors might have exercised in the past, the self-funded campaign card might be something Trump can play effectively when debating Hillary – assuming she gets her party’s nomination. 

  Of course campaign finance has been a thorny issue for years and although one can disagree with Trump on quite a few of his positions, one thing that isn’t debatable is this: where the money comes from matters. 

  On that note, we present the following maps which break down where (geographically speaking) the candidates in this election cycle are getting their checks. You can view the full collection here – presented below are the particularly notable maps followed by color on each from Bloomberg:

  Super-PAC contributions:

  

  This map shows only the contributions to super-PACs and other independent groups supporting a presidential candidate. These groups can accept donations of unlimited size from individuals, unions and corporations. (Campaigns can’t accept corporate or union money and are limited to $2,700 per individual per race.) Notice that even in Democratic enclaves like New York and San Francisco, the big money is flowing mostly to GOP candidates.

  Million dollar or more donors:

  

  Jeb Bush

  

  Jeb Bush was the fundraising leader in the first half of 2016, pulling in $115 million, mostly through his super-PAC. Not surprisingly, the former Florida governor leaned heavily on his home state, but he also picked up large checks from across the country. He had a lower number of donations than some of his rivals—possibly because he waited until later in the year to declare his candidacy and become eligible to accept direct campaign contributions.

  Hillary Clinton

  

  Hillary Clinton’s contributors skew more toward the coasts than the leading Republicans’, and didn’t write any checks larger than about $1 million.

  Bernie Sanders

  

  Only about $3 million of the $15 million raised by Bernie Sanders in the first half appears on the map below. That’s because the rest came from donors who gave such small amounts—under $200—that their names and addresses weren’t required to be disclosed. Sanders attracted small-dollar contributions from across the country while discouraging the formation of any super-PACs to support him.

  Donald Trump

  

  

  

  

  

• Sep 16 – US House Plans Vote On Bill To Lift Ban On Oil Exports

  EMOTION MOVING MARKETS NOW: 17/100 EXTREME FEAR

  PREVIOUS CLOSE: 13/100 EXTREME FEAR

  ONE WEEK AGO: 13/100 EXTREME FEAR

  ONE MONTH AGO: 11/100 EXTREME FEAR

  ONE YEAR AGO: 38/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 14.81% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 22.54. This is a neutral reading and indicates that market risks appear low.

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

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – I JUST LOVE MY NEW SWEATER….

   

  UNUSUAL ACTIVITY

  MYE Director Purchase 5,000 @$12.7959

  DG Chief Executive Officer Purchase 4,300 @$70.7253                      

  NVET Director Purchase 10,000 @$4.786

  HPQ Oct weekly2 28 CALLS active @$.61-.62

  P Sep weekly4 CALL Activity 20 CALLS 700+ @$.39

  YNDX SEP 11 CALL Activity @$.45 1k+

  More Unusual Activity…

  HEADLINES

   

  ECB Nowotny hints at extension of QE program

  US House plans vote on Bill to lift ban on oil exports

  White House doesn’t support House Bill to lift crude export ban

  Challenger: Holiday retail hiring expected to be flat in 2015

  Basel Committee: Global banks reach almost all 2019 capital standards

   

  GOVERNMENTS/CENTRAL BANKS

  Atlanta Fed GDPnow Q3 2015 (15/Sept): 1.5% (prev 1.5% on 3/Sept)

  ECB’s Nowotny hints at extension of QE program –ForexLive

  ECB Nowotny: Emergency liquidity provision should remain with national cbanks –Rtrs

  ECB Nouy: European deposit insurance scheme will take time –Rtrs

  ECB: Eurozone house prices are rising –FT

  BOI Visco: Italy out Of recession, Bad Bank to support NPL sales –MNI

  Italy Debt Chief Cannata: ECB is not jeopardizing secondary market liquidity –ForexLive

  French economists protest ex-banker’s nomination to central bank –Rtrs

  EU Dombrovskis: Greek debt relief talks could start next month –MNI

  Riksbank’s Jansson: Intervention definitely a possibility –ForexLive

  BOJ Kuroda: Japan’s virtuous economic cycle is working –ForexLive

  Australian businesses hail Turnbull toppling of Abbott –FT

  GEOPOLITICS

  US not planning China cyber sanctions before Xi visit –Rtrs

  North Korea restarts main nuclear complex –FT

  FIXED INCOME

  Two-Year Treasury Yield Approaches Four-Year High Before Fed Meeting –WSJ

  Treasury yields rise on mixed economic data ahead of Fed meeting –MW

  Political uncertainty in Spain widens bond spreads –FT

  Italy Debt Chief Cannata: China turmoil could reduce purchases of Italian debt –MNI

  Moody’s: European Covered Bonds’ Rating Stability Will Strengthen

  CORPORATES: Boozy bonds lead flood of euro debt sales –FT

  CORPORATES: Poor investor demand meant Tuesday’s corporate deals struggled to generate price traction –IFR

  HY: Fitch: US HY ETF Trading Volume, Flows Could Create Disconnects

  COMMODITIES AND ENERGY

  CRUDE: WTI futures settle +1.3% at $44.59 per barrel

  CRUDE: Brent futures settle +0.6% at $46.63 per barrel

  CRUDE: House Plans Vote on Bill to Lift Ban on Oil Exports –WSJ

  CRUDE: White House does not support House bill to lift ban on US crude exports –CNN

  METALS: Gold falls as traders mull data to gauge Fed’s next move –MW

  METALS: Copper buoyed by China’s import window –FT

  ENERGY: Britain braced for long, snowy winter as strongest El Nino since 1950 expected –Tele

  EQUITIES

  S&P 500 provisionally closes +1.3% at 1,978

  DJIA provisionally closes +1.4% at 16,601

  Nasdaq provisionally closes +1.1% at 4,860

  RETAIL: Challenger: Holiday retail hiring expected to be flat in 2015 –WSJ

  BANKS: Basel Committee of Banking Supervision report finds global banks reach almost all 2019 capital standards –FT

  BANKS: One US banker is ready to raise rates, regardless of Fed –BBG

  FUNDS: Fund managers say psychological scars fuel investor jitters –FT

  INDUSTRIALS: GE to move turbine jobs to Europe, China due to EXIM bank closure –Rtrs

  INDUSTRIALS: Bezos’ space startup Blue Origin lifting off in Florida –WSJ

  INDUSTRIALS: Lockheed Martin eyes UK submarine hunter competition –Flight Global

  SERVICES: UPS to hire up to 95000 workers for holiday season –Rtrs

  C&E: Glencore slumps to record low, erasing gains since debt plan –BBG

  Glencore launches $2.5bn share placement –FT

  C&E: Schlumberger bid for Eurasia stake could face new conditions –RIA

  TECH: Cisco router attacks duck cyber defenses, hit 4 countries –CNBC

  TECH: ARM sees $200M investing boost to revenue by 2020 –MW

  AUTOS: GM executives stick to Europe profit goal for 2016 –BI

  AUTOS: BMW chief collapses on stage at motor show –FT

  HEDGE FUNDS: Pershing Square Analysis Details Significant Similarities between Herbalife and FTC-Alleged Pyramid Scheme Vemma

  BANKS: Delayed HBOS Probe Inches Towards Conclusion –Sky

  BANKS: Portugal ends talks to sell Novo Banco as bids too low –Rtrs

  MEDIA: CBS Entertainment Head Nina Tassler to Step Down –WSJ

  EMERGING MARKETS

  Kyle Bass warns of mounting bad debt in China –MW

  China to clear up non-real-name stock accounts –Business News via BBG

   

  BRAZIL: BCB’s Tombini says downgrade reinforced need for adjustments –Rtrs

   

  

  

  

  

  

• Bankers Will Be Jailed In The Next Financial Crisis

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Jesus College, Cambridge hosted, once more, the world’s leading Symposium on Economic Crime, and over 500 distinguished speakers and panelists drawn from the widest possible international fora, gathered to make presentations to the many hundreds of delegates and attendees.

   

  What became very quickly clear this year was the general sense of deep disgust and repugnance that was demonstrated towards the global banking industry.

   

  I can say with some degree of certainty now that a very large number of academics, law enforcement agencies, and financial compliance consultants are now joined, as one, in their total condemnation of significant elements of the global banking sector for their organised criminal activities.

   

  Many banks are widely identified now as nothing more than enterprise criminal organisations, who engage in widespread criminal practice and dishonest conduct as a matter of course and deliberate commercial policy.

   

  – From the excellent article: The Banking Criminals Exposed

  My prediction is that bankers will be jailed in the next economic/financial crisis. Lots and lots of bankers.

  It may seem to many that those working within this profession will remain above the law indefinitely in light of the lack of any accountability whatsoever since the collapse of 2008. It may seem that way, but extrapolating this trend into the future is to ignore a monumentally changed political environment around the world. From the ascendancy of Donald Trump and Bernie Sanders here in the U.S., to Jeremy Corbyn becoming Labour leader in the UK, big changes are certainly afoot.

  I have become convinced of this change for a little while now, but we won’t really see evidence of it until the next collapse. However, something I read earlier today really brought the point home for me. Rowan Bosworth-Davies recently attended the 33rd Cambridge International Symposium on Economic Crime and provided us with some notes in an excellent piece titled, The Banking Criminals Exposed. Here are a few excerpts:

  Jesus College, Cambridge hosted, once more, the world’s leading Symposium on Economic Crime, and over 500 distinguished speakers and panelists drawn from the widest possible international fora, gathered to make presentations to the many hundreds of delegates and attendees.

   

  This Symposium has indeed become an icon among other international gatherings of its knd and over the years, it has proved to be highly influential in the driving and development of international policy aimed at combating international financial and economic crime.

   

  What became very quickly clear this year was the general sense of deep disgust and repugnance that was demonstrated towards the global banking industry.

   

  I can say with some degree of certainty now that a very large number of academics, law enforcement agencies, and financial compliance consultants are now joined, as one, in their total condemnation of significant elements of the global banking sector for their organised criminal activities.

   

  Many banks are widely identified now as nothing more than enterprise criminal organisations, who engage in widespread criminal practice and dishonest conduct as a matter of course and deliberate commercial policy.

   

  Speaker after speaker addressed the implications of the scandalous level of PPI fraud, whose repayment and compensation schedules now run into billions of pounds.

   

  Some speakers struggled with the definition of such activity as ‘Mis-selling’ and needed to be advised that what they were describing was an institutionalized level of organised financial crimes involving fraud, false accounting, forgery and other offenses involving acts of misrepresentation and deceit.

   

  One of the side issues which came out of this and other debates, was the general and genuine sense of bewilderment that management in these institutions concerned, (and very few banks and financial houses have escaped censure for this dishonest practice) have walked away from this orgy of criminal antics, completely unscathed. The protestations from management that these dishonest acts were carried out by a few rogue elements, holds no water and cannot be justified.

   

  In the end, I sat there, open-mouthed while evidence against the same old usual scum-bag financial institutions, was unrolled, and a lengthy list of agencies, all apparently dedicated to dealing with fraud and financial crime, lamely sought to explain why they were powerless to help these victims.

   

  This was followed by a lengthy list of names of major law firms, and Big 5 accounting firms who were willing to join with these pariah banks to bring complex and expensive legal actions against these victims, bankrupting them, forcing them from their homes, repossessing properties they had worked for years to create, while all the time, the regulators and the other agencies, including to my shame and regret, certain spineless police forces, stood by and sought to justify their inaction.

   

  At one stage, we were shown how banks ritually and deliberately take transcripts of telephone calls made between complainants and the bank, and deliberately and systematically go through these conversations, re-editing them and reproducing them in a format which is much more favourable to the bank.

   

  For the first time, I found routine agreement among delegates that the banking industry had become synonymous with organised crime. Many otherwise more conservative attendees expressed their grave concern and their repugnance at the way in which so many of our most famous banking names were now behaving. It is becoming very much harder to believe that the banks will be able to rely on the routine support they have traditionally enjoyed from most ordinary members of the public.

   

  The election of Jeremy Corbyn to the leadership of the labour Party means that banking crime and financial fraud will now become an electoral issue.

   

  But now, the new Labour leadership will focus the attention of the electorate on the relationship between the Tory party and their very crooked friends in the City, and the degree of protection that the Square Mile gangsters and their Consiglieri, their Capos, and their Godfathers will become much more identifiable. Bank crime will now become much more identifiable as a City practice and their friends in the Tories will be seen as being primary beneficiaries.

  Things are moving in the direction of justice. At a glacial place for sure, but moving they are.

   

  

  

  

  

  

• WTO's Stark Warning On Global Trade: "The Timing Belt On The Global Growth Engine Is Off"

  One narrative we’ve built on this year is that the subpar character of the global economic recovery isn’t just a consequence of a transient downturn in demand from China whose transition from an investment-led, smokestack economy towards a model driven by consumption and services has effectively caused the engine of global growth to stall. Rather, it seems entirely possible that an epochal shift has taken place in the post-crisis world and the downturn in global trade which many had assumed was merely cyclical, may in fact be structural and endemic. 

  We touched on this in “Emerging Market Mayhem: Gross Warns Of ‘Debacle’ As Currencies, Bonds Collapse,” when we highlighted a WSJ piece that contained the following rather disconcerting passage: “Central to this emerging-market slump is the unprecedented weakness of world trade, which has now grown by less than global output for the past four years, unique since World War II.”

  This echoes concerns we voiced in May, when BofAML was out warning that if “wobbling” global trade turned out to be structural rather than cyclical, “then EM economies should not count on meaningful demand boosts coming from above-trend growth in DM.”

  Most recently, we looked at freight rates (which, incidentally, Goldman predicted earlier this year will remain subdued until 2020) noting that despite a dead cat bounce in the Baltic Dry, “freight rates on the world’s busiest shipping route have tanked this year due to overcapacity in available vessels and sluggish demand for transported goods. Rates generally deemed profitable for shipping companies on the route are at about US$800-US$1,000 per TEU. In other words, at current prices shippers are losing half a dollar on every booked contractual dollar at current rates.”

  Now, WSJ is back with a fresh look at the new normal for global trade and unsurprisingly, the picture they paint based largely on WTO data and projections, is not pretty. Here’s more:

  For the third year in a row, the rate of growth in global trade is set to trail the already sluggish expansion of the world economy, according to data from the World Trade Organization and projections from leading economists.

   

  Before the recent slump, the last time trade growth underperformed the rate of an economic expansion was 1985.

   

  “We have seen this burst of globalization, and now we’re at a point of consolidation, maybe retrenchment,” said WTO chief economist Robert Koopman. “It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should.”

   

  Since rebounding sharply in 2010 after the financial crisis, trade growth has averaged only about 3% a year, compared with 6% a year from 1983 to 2008, the WTO says.

   

  Few see any signs that trade will soon regain its previous pace of growth, which was double the rate of economic expansion before 2008. In 2006, global trade volumes grew 8.5%, compared with a 4% expansion in global GDP.

   

  This year the WTO is expected to cut its 2015 trade forecast a second time after a sudden contraction in the first half of the year—the first such decline since 2009.

   

  “It’s fairly obvious that we reached peak trade in 2007,” said Scott Miller, trade expert at the Center for Strategic and International Studies, a Washington, D.C., think tank.

  And this, bear in mind, is the environment into which the Fed intends to hike, even as the emerging economies which have been hit the hardest by the slowdown in trade (which has served to depress commodities and wreak havoc on commodity currencies) would likely suffer from accelerated capital outflows in the wake of an FOMC liftoff. 

  What’s also notable here is that this comes as central banks have engaged in round after round of easing in a desperate, multi-trillion quest to boost global growth, suggesting that competitive devaluations are a zero sum game and to the extent that individual countries can boost exports in the short term by devaluing, that gain comes at someone else’s expense, meaning, in The Journal’s words, “foreign-exchange moves have little chance of raising trade overall” and even if they did, the backdrop of depressed demand means that what many EMs are producing, no one now wants, irrespective of how cheap it may be.

  Make no mistake, the most worrying part of the new normal for trade is what it portends for emerging markets. We’ve already seen Brazil’s investment grade rating cut by S&P as the country careens headlong into fiscal, political, and economic crises. As Morgan Stanley put it in August, Brazil is the epicenter and one can reasonably expect that other EMs will follow in its footsteps should the WTO’s projections about the sturctural nature of depressed global demand and trade prove accurate. What comes next is the descent of the emerging world into frontier status, and as we’ve put it on several occasions, after that it will be time to break out the humanitarian aid packages.

  Of course, as we mentioned late last month, there is one more possibility: central banks could learn how to print trade. 

  

  

  

  

  

• Separating Fed Delusion From Reality: The Environment Is Fraught With Risk

  Submitted by Michael Lebowitz via 720Global.com,

  The facts presented in this article may lead one to question the Fed’s comprehension of the debt dynamics restricting economic growth. 

  The 720 Global Proprietary U.S. Economic Trend Model

  The 720 Global U.S. Economic Trend Model aggregates 8 key economic statistics comparing data from the prior 3 months to the average of the 6 months preceding those 3 months. As seen below, the model shows improvement since the results were first published 6 months ago.

  

  Despite the improving trend, the current level (green data point) indicates data is worse off today than when the Fed previously took steps to ease monetary policy as denoted by the red data points and the yellow shaded range. The recent improvement in economic trends is driven in part by a recovery from weak economic data witnessed in the first quarter of 2015. As time goes by and the poor data is removed as a model input, the results will stabilize or turn lower barring an unforeseen pickup in economic activity. 

  Citi Economic Surprise Index

  Similar to the output from the 720 Global model shown above, the Citi Economic Surprise Index has also risen recently as a result of a relative recovery from the economic slowdown in the first quarter. Citi’s index (graphed below) compares current economic indicators to Wall Street economists’ expectations. Like the 720 Global model, the current index level (green data point) resides at similar levels seen prior to the Fed’s actions to ease monetary policy.

  

   

  While the indicator has improved, it remains in negative territory implying current economic data is still falling short of expectations.

  CPI and 5 year x 5year Forward Inflation Expectations

  Inflation, as measured by CPI, is well below any other inflationary reading since the financial crisis. While CPI has stabilized it remains significantly lower than the range where prior monetary easing occurred. Additional CPI weakness is likely if the U.S. dollar continues to appreciate and thus forces commodity prices lower and further increase imported deflationary pressures. Recently released data supports this claim. Import price data released September 10, 2015 fell 11.40% (year over year), its 13th drop in a row.

  

   

  CPI weakness is not just 720 Global’s prediction, implied inflation expectations also point to a similar inflation outlook, as seen in the second chart below.

  

  Illusion or Reality

  As was the case in March, the data continues to suggest that the Fed is contemplating actions inconsistent with those they have taken in the past. It is possible the Fed is motivated to increase interest rates to support the illusion that their higher interest rate projections and rosy economic forecasts are finally coming to fruition. In the infamous words of George Bush “mission accomplished”. Based strictly on the facts, 720 Global begs to differ.

  It is incumbent upon investors to separate illusion from reality. Economic growth rates of years past are not likely in the years ahead. Enormous amounts of debt amassed over the past 30 years coupled with scant productivity growth will continue to choke economic growth. For over 2 decades Federal Reserve monetary policy has been devoted to the stimulation of debt growth via low interest rates and more recently a sharply increased money supply. It is highly likely the blood has been drawn from this stone and the economy is left with a debt burden that has become too onerous to service.  

  Investing in such a misunderstood and distorted economic environment is fraught with risk especially for those failing to grasp this reality. While current Fed monetary policy is clearly unsustainable, the Fed runs the risk of severely damaging asset markets with any deviations from such policy. 

  Questionable Track Record 

  This article concludes by highlighting the lack of appreciation by the Fed, many economists and market participants for the debt burden and its deleterious effect on economic growth. We start with a reminder of the incredible lack of foresight Janet Yellen, Federal Reserve Chairwoman, had prior to the financial crisis of 2008/09 and then continue with comments, quotes, charts and statistics that demonstrate the inaccuracy of the “conventional wisdom” that has prevailed through much of the time period after the financial crisis. 

  

  Finally, the bar chart below shows the individual Federal Open Market Committee (FOMC) participant projections in the years 2012, 2013 and 2014 of their expectations for the Fed Funds rate in 2015.

  

   

  Only 1 Federal Reserve member in 2012 and 2014 and 2 in 2013 believed the Fed Funds rate would be at its current level.

  

  

  

  

  

• This Is Why Hewlett-Packard Just Fired Another 30,000

  Remember when Hewlett-Packard announced it would fire 58,000 in February just so the company could spend even more billions on stock buybacks to make its shareholders filthier rich?

  

   

  Alas, since then things have gone south not only for HPQ stock but also for the company’s buybacks activity…

  

   

  … and so Meg Whitman clearly needed to spend even more on buybacks. But where to get the money? Wait, here’s an idea: lets fire another 30,000!

   Sure enough, just out from Bloomberg:

  • HPE CFO SEES 2.7BN RESTRUCTURING LEADING TO 25K-30K JOB CUTS
  • HP: BY 2018 40% OF ES EMPLOYEES WILL BE IN HIGH-COST LOCATIONS

  More details from Bloomberg on the latest restructuring bloodbath out of Hewlett-Packard :

  • sees FY16 FCF $2b-$2.2b, with normalized FCF $3.7b.
  • Sees FY16 adj. EPS $1.85-$1.95
  • Sees FY16 operating cash flow $5b-$5.2b
  • Sees cutting 25k-30k jobs as part of restructuring, with GAAP charges $2.7b
  • Sees returning at least 50% of FCF to holders through ~$400m in dividends and the remaining in share repurchases
  • Says will consider strategic partnerships, investments and M&A “in the right circumstances”
  • Earlier, co. said sees HPE cloud rev. ~$3b in FY2015 growing over 20% with similar pace expected over next “several years”
  • Said enterprise services business on target for 7%-9% oper. margin target and for reducing $1.4b in costs for 2015; sees similar cost reduction pace continuing next year

  And so, dear 30,000 formerly-well paid computer engineers and technicians: welcome to the fast-food recovery. And don’t forget to BTFD with all that spare cash.

  Now, where is that 25bps rate hike because the economy is just too strong…

  

  

  

  

  

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• Are We Heading Into a "Debt Supernova"?

  Financial luminaries such as Ray Dalio, Kenneth Rogoff, Bill Gross, Kyle Bass, BCA Research,  John Mauldin and Martin Armstrong think that we’re at the end of a debt supercycle.

  Former director of the Office of Management and Budget said we’re facing a “debt supernova“.

  Former Fed chief Alan Greenspan said recently

  Debt, deficits and entitlement programs are all coming to a head in a few months, all over the world.

  The European chief executive of Goldman Sachs Asset Management warns:

  There is too much debt and this represents a risk to economies.

  ***

  The demographics in most major economies – including the US, in Europe and Japan – are a major issue – and present us with the question of how we are going to pay down the huge debt burden. With life expectancy increasing rapidly, we no longer have the young, working populations required to sustain a debt-driven economic model in the same way as we’ve managed to do in the past.

  The world’s most prestigious financial institution, the Bank of International Settlements (BIS) – known as the “Central Banks’ Central Bank” –  writes:

  We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines …

   

  The sum of non-financial private and government debt has not fallen
  since the crisis ….  Total debt in advanced
  economies has continued to expand (by 36 percentage points of GDP since 2007),
  with some exceptions mainly reflecting the recent decline in private sector debt in a
  limited number of countries. Meanwhile, total debt in emerging market economies
  has risen even more (by 50 percentage points).

   

  ***

   

  Aggregate private debt has barely stabilised, let alone started to correct downwards, even in the corporate sector. And government debt continues to rise steadily, in a manner reminiscent of Japan’s trend deterioration in the 1990s.

  BIS notes that this is a recipe for disaster:

  Early warning indicators of banking stress pointed to risks arising from strong credit
  growth …. Credit-to-GDP gaps – the deviation of private sector credit from
  its long-term trend – were well above 10% in Brazil and China. This ratio was also
  above 10% for a number of [other] countries … including Indonesia, Singapore and Thailand …. In the past, two thirds of all readings above this threshold were followed by serious banking strains in the subsequent three years.

  It’s not just conservatives who think that debt is too high.  Liberals think so as well.

  And see this.

  

  

  

  

• USDJPY, Nikkei 225 Tumbles After Disappointing "No Change" From Bank Of Japan

  We noted earlier the premature exuberation in USDJPY and Nikkei 225 – despite most of the sell-side not expecting anything from The BoJ – and it appears the banks were right and the FOMO traders wrong. The Bank of Japan made no change to its monetary policy (no increased buying, no shift in ETF allocations, and no NIRP for now). BoJ members spewed forth their usual mix of “everything is awesome” and “any quarter now” for the recovery but the market wasn’t buying it. That leaves only one thing left to cling to for a “we must buy” crowd – no change today ‘guarantees’ moar QQE in October.

  “No Change”

  • *BANK OF JAPAN LEAVES MONETARY POLICY UNCHANGED AS FORECAST
  • *BOJ RETAINS PLAN FOR 80T YEN ANNUAL RISE IN MONETARY BASE
  • *BOJ: CPI LIKELY TO BE ABOUT 0% FOR TIME BEING
  • *BOJ: TO CONTINUE QQE UNTIL STABLE 2% INFLATION MAINTAINED

  Nikkei plunges…

  

   

  And USDJPY tumbled…

  

   

  Of course – the propaganda attached to the statement was sickening…

  • *BOJ SAYS EASING IS EXERTING INTENDED EFFECTS (a collapse in householding spending and real wages)
  • *BOJ SEES ECONOMY CONTINUING TO RECOVER MODERATELY (heading back into 4th recession in 4 years)

  It’s not our fault…

  • *BOJ: EXPORTS, PRODUCTION AFFECTED BY SLOW DOWN IN EMERGING MKTS

  “More or less” is the new normal…

  • *BOJ: PRODUCTION HAS BEEN MORE OR LESS FLAT
  • *BOJ: EXPORTS HAVE BEEN MORE OR LESS FLAT
  • *YAMAMOTO: JAPANESE ECONOMY IS TREADING WATER

  Better spend some more on ETFs…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Public School Students Are The New Inmates In The American Police State

  Submitted by John Whitehead via The Rutherford Institute,

  “Every day in communities across the United States, children and adolescents spend the majority of their waking hours in schools that have increasingly come to resemble places of detention more than places of learning. From metal detectors to drug tests, from increased policing to all-seeing electronic surveillance, the public schools of the twenty-first century reflect a society that has become fixated on crime, security and violence.”—Investigative journalist Annette Fuentes

  In the American police state, you’re either a prisoner (shackled, controlled, monitored, ordered about, limited in what you can do and say, your life not your own) or a prison bureaucrat (police officer, judge, jailer, spy, profiteer, etc.).

  Indeed, at a time when we are all viewed as suspects, there are so many ways in which a person can be branded a criminal for violating any number of laws, regulations or policies. Even if you haven’t knowingly violated any laws, there is still a myriad of ways in which you can run afoul of the police state and end up on the wrong side of a jail cell.

  Unfortunately, when you’re a child in the American police state, life is that much worse.

  Microcosms of the police state, America’s public schools contain almost every aspect of the militarized, intolerant, senseless, overcriminalized, legalistic, surveillance-riddled, totalitarian landscape that plagues those of us on the “outside.”

  From the moment a child enters one of the nation’s 98,000 public schools to the moment she graduates, she will be exposed to a steady diet of draconian zero tolerance policies that criminalize childish behavior, overreaching anti-bullying statutes that criminalize speech, school resource officers (police) tasked with disciplining and/or arresting so-called “disorderly” students, standardized testing that emphasizes rote answers over critical thinking, politically correct mindsets that teach young people to censor themselves and those around them, and extensive biometric and surveillance systems that, coupled with the rest, acclimate young people to a world in which they have no freedom of thought, speech or movement.

  If your child is fortunate enough to survive his encounter with the public schools, you should count yourself fortunate.

  Most students are not so lucky.

  By the time the average young person in America finishes their public school education, nearly one out of every three of them will have been arrested.

  More than 3 million students are suspended or expelled from schools every year, often for minor misbehavior, such as “disruptive behavior” or “insubordination.” Black students are three times more likely than white students to face suspension and expulsion.

  For instance, a Virginia sixth grader, the son of two school teachers and a member of the school’s gifted program, was suspended for a year after school officials found a leaf (likely a maple leaf) in his backpack that they suspected was marijuana. Despite the fact that the leaf in question was not marijuana (a fact that officials knew almost immediately), the 11-year-old was still kicked out of school, charged with marijuana possession in juvenile court, enrolled in an alternative school away from his friends, subjected to twice-daily searches for drugs, and forced to be evaluated for substance abuse problems.

  As the Washington Post warns: “It doesn’t matter if your son or daughter brings a real pot leaf to school, or if he brings something that looks like a pot leaf—okra, tomato, maple, buckeye, etc. If your kid calls it marijuana as a joke, or if another kid thinks it might be marijuana, that's grounds for expulsion.”

  Many state laws require that schools notify law enforcement whenever a student is found with an “imitation controlled substance,” basically anything that look likes a drug but isn’t actually illegal. As a result, students have been suspended for bringing to school household spices such as oregano, breath mints, birth control pills and powdered sugar.

  It’s not just look-alike drugs that can get a student in trouble under school zero tolerance policies. Look-alike weapons (toy guns—even Lego-sized ones, hand-drawn pictures of guns, pencils twirled in a “threatening” manner, imaginary bows and arrows, even fingers positioned like guns) can also land a student in detention.

  Acts of kindness, concern or basic manners can also result in suspensions. One 13-year-old was given detention for exposing the school to “liability” by sharing his lunch with a hungry friend. A third grader was suspended for shaving her head in sympathy for a friend who had lost her hair to chemotherapy. And then there was the high school senior who was suspended for saying “bless you” after a fellow classmate sneezed.

  Unfortunately, while these may appear to be isolated incidents, they are indicative of a nationwide phenomenon in which children are treated like suspects and criminals, especially within the public schools.

  The schools have become a microcosm of the American police state, right down to the host of surveillance technologies, including video cameras, finger and palm scanners, iris scanners, as well as RFID and GPS tracking devices, employed to keep constant watch over their student bodies.

  Making matters worse are the police.

  Students accused of being disorderly or noncompliant have a difficult enough time navigating the bureaucracy of school boards, but when you bring the police into the picture, after-school detention and visits to the principal’s office are transformed into punishments such as misdemeanor tickets, juvenile court, handcuffs, tasers and even prison terms.

  In the absence of school-appropriate guidelines, police are more and more “stepping in to deal with minor rulebreaking—sagging pants, disrespectful comments, brief physical skirmishes. What previously might have resulted in a detention or a visit to the principal’s office was replaced with excruciating pain and temporary blindness, often followed by a trip to the courthouse.”

  Thanks to a combination of media hype, political pandering and financial incentives, the use of armed police officers to patrol school hallways has risen dramatically in the years since the Columbine school shooting (nearly 20,000 by 2003). Funded by the U.S. Department of Justice, these school resource officers (SROs) have become de facto wardens in the elementary, middle and high schools, doling out their own brand of justice to the so-called “criminals” in their midst with the help of tasers, pepperspray, batons and brute force.

  The horror stories are legion.

  One SRO is accused of punching a 13-year-old student in the face for cutting the cafeteria line. That same cop put another student in a chokehold a week later, allegedly knocking the student unconscious and causing a brain injury. In Pennsylvania, a student was tased after ignoring an order to put his cell phone away.

  Defending the use of handcuffs and pepper spray to subdue students, one Alabama police department reasoned that if they can employ such tactics on young people away from school, they should also be permitted to do so on campus.

  Now advocates for such harsh police tactics and weaponry will tell you that school safety should be our first priority lest we find ourselves with another Sandy Hook. What they will not tell you is that such shootings are rare. As one congressional report found, the schools are, generally speaking, safe places for children.

  In their zeal to crack down on guns and lock down the schools, these cheerleaders for police state tactics in the schools might also fail to mention the lucrative, multi-million dollar deals being cut with military contractors such as Taser International to equip these school cops with tasers, tanks, rifles and $100,000 shooting detection systems.

  Indeed, the transformation of hometown police departments into extensions of the military has been mirrored in the public schools, where school police have been gifted with high-powered M16 rifles, MRAP armored vehicles, grenade launchers, and other military gear. One Texas school district even boasts its own 12-member SWAT team.

  According to one law review article on the school-to-prison pipeline, “Many school districts have formed their own police departments, some so large they rival the forces of major United States cities in size. For example, the safety division in New York City’s public schools is so large that if it were a local police department, it would be the fifth-largest police force in the country.”

  The ramifications are far-reaching.

  The term “school-to-prison pipeline” refers to a phenomenon in which children who are suspended or expelled from school have a greater likelihood of ending up in jail. One study found that “being suspended or expelled made a student nearly three times more likely to come into contact with the juvenile justice system within the next year.”

  Not content to add police to their employee rosters, the schools have also come to resemble prisons, complete with surveillance cameras, metal detectors, drug-sniffing dogs, random locker searches and active shooter drills. The Detroit public schools boast a “‘$5.6 million 23,000-sq ft. state of the art Command Center’ and ‘$41.7 million district-wide security initiative’ including metal detectors and ID system where visitors’ names are checked against the sex offender registry.”

  As if it weren’t bad enough that the nation’s schools have come to resemble prisons, the government is also contracting with private prisons to lock up our young people for behavior that once would have merited a stern lecture. Nearly 40 percent of those young people who are arrested will serve time in a private prison, where the emphasis is on making profits for large megacorporations above all else.

  Private prisons, the largest among them being GEO and the Corrections Corporation of America, profit by taking over a state’s prison population for a fee. Many states, under contract with these private prisons, agree to keep the prisons full, which in turn results in more Americans being arrested, found guilty and jailed for nonviolent “crimes” such as holding Bible studies in their back yard. As the Washington Post points out, “With the growing influence of the prison lobby, the nation is, in effect, commoditizing human bodies for an industry in militant pursuit of profit… The influence of private prisons creates a system that trades money for human freedom, often at the expense of the nation’s most vulnerable populations: children, immigrants and the poor.”

  This profit-driven system of incarceration has also given rise to a growth in juvenile prisons and financial incentives for jailing young people. Indeed, young people have become easy targets for the private prison industry, which profits from criminalizing childish behavior and jailing young people. For instance, two Pennsylvania judges made headlines when it was revealed that they had been conspiring with two businessmen in a $2.6 million “kids for cash” scandal that resulted in more than 2500 children being found guilty and jailed in for-profit private prisons.

  It has been said that America’s schools are the training ground for future generations. Instead of raising up a generation of freedom fighters, however, we seem to be busy churning out newly minted citizens of the American police state who are being taught the hard way what it means to comply, fear and march in lockstep with the government’s dictates.

  As I point out in my book Battlefield America: The War on the American People, with every school police raid and overzealous punishment that is carried out in the name of school safety, the lesson being imparted is that Americans—especially young people—have no rights at all against the state or the police.

  I’ll conclude with one hopeful anecdote about a Philadelphia school dubbed the “Jones Jail” because of its bad reputation for violence among the student body. Situated in a desperately poor and dangerous part of the city, the John Paul Jones Middle School’s student body had grown up among drug users, drug peddlers, prostitutes and gun violence. “By middle school,” reports The Atlantic, most of these students “have witnessed more violence than most Americans who didn't serve in a war ever will.”

  According to investigative reporters Jeff Deeney, “School police officers patrolled the building at John Paul Jones, and children were routinely submitted to scans with metal detecting wands. All the windows were covered in metal grating and one room that held computers even had thick iron prison bars on its exterior… Every day… [police] would set up a perimeter of police officers on the blocks around the school, and those police were there to protect neighbors from the children, not to protect the children from the neighborhood.”

  In other words, John Paul Jones, one of the city’s most dangerous schools, was a perfect example of the school-to-prison, police state apparatus at work among the nation’s youngest and most impressionable citizens.

  When management of John Paul Jones was taken over by a charter school that opted to de-escalate the police state presence, stripping away the metal detectors and barred windows, local police protested. In fact, they showed up wearing Kevlar vests. Nevertheless, school officials remained determined to do away with institutional control and surveillance, as well as aggressive security guards, and focus on noncoercive, nonviolent conflict resolution with an emphasis on student empowerment, relationship building and anger management.

  The result: a 90% drop in serious incidents—drug sales, weapons, assaults, rapes—in one year alone. As one fifth-grader remarked on the changes, “There are no more fights. There are no more police. That's better for the community.”

  The lesson for the rest of us is this: you not only get what you pay for, but you reap what you sow.

  If you want a nation of criminals, treat the citizenry like criminals.

  If you want young people who grow up seeing themselves as prisoners, run the schools like prisons.

  But if you want to raise up a generation of freedom fighters, who will actually operate with justice, fairness, accountability and equality towards each other and their government, then run the schools like freedom forums. Remove the metal detectors and surveillance cameras, re-assign the cops elsewhere, and start treating our nation’s young people like citizens of a republic and not inmates in a police state.

  

  

  

  

  

• USDJPY Surges Ahead Of BoJ Statement, China Strengthens Yuan As Washington Folds On Cybersecurity Sanctions

  It appears someone is betting on Kuroda and his cronies to do something later this evening (just like they did as The Fed stopped QE3 back in October) in some wierd monetray policy quid pro quo of – dump Yen all you like as long as the carry trade is alive and well. USDJPY is up from 119.85 to 120.50 (and NKY up over 400 points from US session lows), as perhaps the fact that The BoJ's ETF-buying kitty is running dry at a crucial time. Chinese equity markets are extending yesterday's losses as margin debt declines to a 9 month low (still +62% YoY), injects another CNY50bn and strengthens the Yuan fix for the 3rd day in a row; but in a somewhat embarrassing move, Washington has decided not to impose sanctions on China ahead of Xi's first state visit next week.

   

  Japan was excited…

  JPY dumping against the USD is some odd anticipation of moar QQE from Kuroda…

  

  Because the last 10 have worked so well.

  This is what the big banks think…

  Goldman Sachs: A key focus point in BOJ Governor Kuroda’s press conference will be the potential influence of the US FOMC rate hike on the BOJ’s decision making on its own monetary policy given that the FOMC will have its policy meeting on Sep 16-17. The other point is the impact of the renewed crude oil price decline and foreign demand risk on the BOJ’s 2% inflation target and the BOJ’s responses to this impact

   

  We can find little in the way of hard data to corroborate the BOJ’s “virtuous circle” between wages and consumption. BOJ governor Haruhiko Kuroda spoke recently in New York about a second virtuous circle which sees rising corporate earnings spurring capex, but this is also looking somewhat tenuous, in our view. The BOJ has tended to focus only on the fall in crude oil prices as a reason for the recent CPI slowdown. That said, we think the BOJ will be eventually acknowledge rising downside risks in the much more fundamental form of the output gap, wages and inflation expectations, all of which the BOJ itself has said will be key to gauging the medium-term price outlook. Accordingly, our base scenario is still premised on the BOJ easing monetary policy further at its end-October monetary policy meeting.

   

  The exhaustion of additional monetary stimulus options is something of a problem. We think it would be difficult for the central bank to accelerate JGB purchases from the current ¥80 tn per year given the gradual reduction in the scope for purchasing.

   

  BoAML: Taking a broader view of Japan’s economic outlook, we identify three check-points for maintaining our (and probably BoJ’s) optimistic view. First, non-financial corporations' profit margins reached an all-time high in 2Q, as shown in Financial Statements Statistics of Corporations by Industry, and conditions for corporate earnings are good. Although margin improvement has started to feed through to capital expenditure and household income / consumption, the current pace is still moderate. Whether or not this benign cycle of earnings translating into expenditure accelerates far enough in 3Q onwards for the government and BoJ to achieve their policy targets will be one key element to watch. Second, trends in the US economy here on. We believe contribution of external demand to 3Q growth will be zero or slightly negative. Japan’s exports to China are expected to remain weak, affected by the slowdown in China. In this context we believe the extent to which a revival in Japan’s exports to the US (via the economic recovery there) can offset the weak exports to China will be a key aspect in external demand outlook. Third, impact of the turmoil in the financial markets since mid-August. Our main scenario is for heightened risk-aversion in the financial markets proving temporary. However, if a 10%-plus rise in the yen and/or a fall in the stock market were to persist (Nikkei 225 drops below 18,000, or yen appreciates and approaches ¥115/$), this will likely have a material impact on Japan’s economy, and hence, merits continued vigilance.

   

  Citi: With renewed weakness in crude oil prices since summer partly reflecting worrisome developments in the Chinese economy, the BoJ’s scenario for the CPI reaching the vicinity of 2% YoY around the first half of FY2016 now looks even less likely to materialize, in our view. However, if inflation does not pick up as policymakers anticipate solely because of declining energy prices, the BoJ may not take additional easing measures unless inflationary expectations are affected negatively. We note, however, there are already early signs for declining inflationary expectations, albeit still tentative at the moment.

   

  Deutsche: The question is whether the BoJ will ease further, but we see little likelihood of this. The BoJ will probably only ease further in response to events that would make the outlook for 2% inflation impossible. Inflation expectations could fall due to a decline in oil prices like last year, but oil prices have not fallen to the extent they did in 2014. In addition, regarding the output gap, BoJ Governor Haruhiko Kuroda at the Upper House Financial Affairs Committee on the 10th said "There is a good chance that GDP will be positive in Jul-Sep", indicating that he does not anticipate a decline in the underlying trend in inflation due to economic deterioration. If the BoJ does ease further we expect it would focus on qualitative measures such as increasing ETF purchases and extending the duration of JGB purchases. In that case, we expect the superlong sector would outperform. Kuroda indicated on the 10th that the Bank was not considering reducing or abolishing the IOER rate. A rate cut, including negative rates, is unlikely. BoJ Board Member Sayuri Shirai's panel discussion remarks on the 8th gave numerous reasons for maintaining the IOER rate, but we see one compelling explanation for why the Bank cannot use negative rates. Excluding the BoJ, the banks' surplus deposits have enabled the smooth absorption of JGBs equaling over 200% of GDP. The probability that negative rates would destabilize the JGB market therefore makes such a policy unlikely from the perspective of managing national risk.

  Which can all be summed up thus – "we do not think The BoJ has any good reason to ease tonight… but then again, you never know!"

  So, of course, where USDJPY goes – so goes Nikkei 225… Up 400 points from US session lows…

  

  *  *  *

  Then China slams open…

  With an immediate ban on anything that doesn't say "everything is awesome"

  • *CHINA TO SHUT STATE CULTURE COS. WITH IMPROPER CONTENT: XINHUA

  More open mouth operations…

  • *CHINA SHOULD STABILIZE YUAN INSTEAD OF LET IT FALL: INFO DAILY
  • *UNCERTAINTY BROUGHT BY YUAN FALL WOULD HURT EXPORTS: INFO DAILY

  China strengthens the Yuan fix for the 3rd day in a row and inject snoather CNY50bn

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3665 AGAINST U.S. DOLLAR
  • *PBOC TO INJECT 50B YUAN WITH 7-DAY REVERSE REPOS: TRADER
  • *HONG KONG DOLLAR QUOTED NEAR UPPER END OF PERMITTED RANGE

  

  After last night's tumble…

  

   

  Chinese equity markets are extending losses at the open…

  • *FTSE CHINA A50 SEPT. FUTURES ADVANCE 0.5%
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 2.2% TO 3,208.74
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 2.3% TO 3,043.80

  But flows continue to leave…

  • *CHINA END-AUG. EQUITY FUNDS NET VALUE FALLS 44% ON MONTH

  As delveraging continues…

  • *SHANGHAI MARGIN DEBT BALANCE FALLS TO NINE-MONTH LOW

  But bear in mind, margin debt remains +62% YoY…

  

  *  *  *

  And finally, Washington folds ahead of China's visit… (as WaPo reports)

  The United States will not impose economic sanctions on Chinese businesses and individuals before the visit of China President Xi Jinping next week, a senior administration official said Monday.

   

  The decision followed an all-night meeting on Friday in which senior U.S. and Chinese officials reached "substantial agreement" on several cybersecurity issues, said the administration official, who spoke on the condition of anonymity because of the topic's sensitivity.

   

  The potential for sanctions in response to Chinese economic cyberespionage is not off the table and China's behavior in cyberspace is still an issue, the official said. "But there is an agreement, and there are not going to be any sanctions" before Xi arrives on Sept. 24, the official said.

   

  The breakthrough averted what would have raised a new point of tension with the Chinese that could have overshadowed the meeting — and Xi's first state visit.

   

  "They came up with enough of a framework that the visit will proceed and this issue should not disrupt the visit," the official said. "That was clearly [the Chinese] goal." 

  Charts: Bloomberg

  

  

  

  

  

• Fourth Turning: Crisis Of Trust, Part 2

  Submitted by Jim Quinn via The Burning Platform blog,

  In Part 1 of this article I discussed the catalyst spark which ignited this Fourth Turning and the seemingly delayed regeneracy. In Part 2 I will ponder possible Grey Champion prophet generation leaders who could arise during the regeneracy.

  

  The nearly seven year reign of Barack Obama has resulted in furthering wealth inequality, in spite of his socialistic rhetoric. Notwithstanding his Nobel Peace Prize, military spending is at all-time highs and we are engaged in actual and proxy wars across the Middle East and in the Ukraine. Race relations have never been worse. Poverty levels have never been worse. Real median household income is lower than it was in 1989. Real hourly wages are at 50 year lows. Home ownership has plunged to 50 year lows, as middle class workers have been kicked out of their homes and young people are saddled with so much student loan debt and bleak job opportunities they will never have an opportunity to own. The ownership society pushed by Clinton and Bush, with the proliferation of Wall Street created “exotic” subprime mortgages, peddled to people incapable of paying their mortgages, blew up the world in 2008, and the fall out will last for decades.

  

  Meanwhile, Wall Street banks have reaped $700 billion of ill-gotten profits since 2010 as the Federal Reserve has handed them trillions of interest free funds to gamble with, while rigging the financial markets, and paying their executives obscene bonuses. The hubris and arrogance of the Wall Street titans is appalling, as they buy politicians, write toothless financial regulations (Dodd Frank) for their bought off politicians to pass, report fraudulent financial results with the stamp of approval from the FASB, blatantly rig interest rate, currency, stock and commodities markets, and use deception and propaganda to distract and mislead the public through their corporate media mouthpieces – dependent upon Wall Street advertising revenue to thrive.

  And still, Obama has not prosecuted one banker for the largest control fraud in world history, as he assumed the role of useful puppet to the vested financial interests. I’m sure he will be paid handsomely after he leaves office in 2017, just as Bill Clinton, Alan Greenspan, and Ben Bernanke have been richly rewarded by their Deep State benefactors for a job well done.

  

  Illegal immigrants are pouring over our borders with encouragement from the Obama administration. Obamacare has proven to be a giveaway to health insurance conglomerates, hospital corporations, and drug companies, as insurance costs are driven higher, care deteriorates, and deficits soar ever higher. The welfare state has grown to immense proportions, with 46 million Americans remaining on food stamps, proving the reported unemployment rate of 5.1% to be a fraud. The labor participation rate of 62.6% is at levels last seen in 1977 and far below the 67.1% rate achieved from 1997 through 2000. The politicians and corporate media applaud $600 billion deficits as an achievement, while 10,000 Boomers turning 65 per day is guaranteed to drive future deficits back over $1 trillion per year.

  Laurence Kotlikoff, economics professor at Boston University, reveals the truth about our true fiscal mess. Our unfunded liabilities are too damn big and our current deficits are a lie:

  “I told them the real (2014) deficit was $5 trillion, not the $500 billion or $300 billion or whatever it was announced to be this year. Almost all the liabilities of the government are being kept off the books by bogus accounting. The government is 58% underfinanced. Social Security is 33% underfinanced. So, the entire government enterprise is in worse fiscal shape than Social Security is, but they are both in terrible shape. So, how much is America on the hook for in the future?  If you take all the expenditures that the government is expected to make, as projected by the Congressional Budget Office (CBO), all the spending on defense, repairing the roads, paying for the Supreme Court Justices’ salaries, Social Security, Medicare, Medicaid, welfare, everything and take all those expenditures into the future and compare that to all the taxes that are projected to come in, and the difference is $210 trillion.  That’s the fiscal gap.  That’s our true debt.”

  We now know for sure Barack Obama is not the Grey Champion of this Fourth Turning. He has only worsened the three core elements of this Crisis – debt, civic decay, and global disorder. Since his ascension to power, U.S. and global debt has expanded at an astounding rate never seen in world history. Class, race, political and cultural divides have grown to vast proportions. The world is exploding in violence, refugees flooding over borders, civil wars, proxy wars, riots, currency wars and economic depressions caused by U.S. military interventions and monetary policies.

  The world is becoming increasingly chaotic and the American people are seeking a leader who can bring order, make tough decisions, and capture the zeitgeist of this moment in history. They are in search of a prophet generation (Boomer) Grey Champion, whose arrival marks the moment of darkness, adversity and peril as the Fourth Turning careens towards its climax. The Grey Champion doesn’t necessarily have to be a good person, but they must lead and display tremendous confidence in their cause and path. Franklin, Lincoln, and FDR have many detractors, but during their Fourth Turnings, they most certainly led, casting aside obstacles (sometimes illegally) and enduring dark days and bleak prospects for success. Is there someone of that stature ready to lead the American people now?

  Gray Champion?

  

  

  “Americans have always been blind to the next turning until after it fully arrives.

  Most of today’s adult Americans grew up in a society whose citizens dreamed of perpetually improving outcomes: better jobs, fatter wallets, stronger government, finer culture, nicer families, smarter kids, all the usual fruits of progress. Today, deep into the Third Turning, these goals feel like they are slipping away. Many of us wish we could rewind time, but we know we can’t – and we fear for our children and grandchildren.

  Many Americans wish that, somehow, they could bring back a saecular spring now. But seasons don’t work that way. As in nature, a saecular autumn can be warm or cool, long or short, but the leaves will surely fall. The saecular winter can hurry or wait, but history warns that it will surely be upon us.

  We may not wish the Grey Champion to come again – but come he must, and come he will.” – The Fourth Turning – Strauss & Howe – 1997

  When Strauss and Howe wrote these words eighteen years ago, halfway through the Unraveling, the American Dream was already turning into a nightmare. Perpetually improving outcomes have turned into a perpetually declining standard of living for most Americans. Fear for the futures of our children and grandchildren were warranted. Millennials have been lured into and enslaved by $1.3 trillion of student loan debt, left with limited job opportunities and low pay, priced out of the housing market, and handed a $200 trillion bill by their elders. Despite factual data showing that default rates on for-profit student loans were even three times as high as subprime mortgages in the early 2000s, the government took over the student loan market in 2009 and proceeded to dole out $500 billion (taxpayer money) in new debt over the next six years to anyone that could fog a mirror and scribble an X on a loan document.

  The criminal enterprises known as for profit colleges such as: University of Phoenix, Corinthian, ITT Tech, Strayer, and Devry, have absconded with the money, provided dreadful education, graduated about 20% of enrollees, and left millions of suckers with billions of debt. With default rates now exceeding 50%, students are angry, demanding relief from their own stupidity. Hard working taxpayers who have struggled to put themselves and their kids through college are angry they will foot the bill for defaults that anyone with a high school diploma could see would happen. Trust in the government’s decision making process and motives have been rightfully shattered.

  It is clear the Obama administration purposely enslaved young people in debt to artificially lower the unemployment rate for political purposes. The issuance of colossal amounts of subprime auto loan debt (begun by Ally Financial when it was owned by the Federal government) has also been politically motivated to artificially increase GDP figures and pump up the financial results of the US automakers (GM, Chrysler) saved with taxpayer funds in 2009. There are no free markets left. Everything is manipulated for a political reason or to benefit a particular constituent. The average American pays the price, while the connected .1% are further enriched.

  

  When young people protested against the true enemies of the people on Wall Street in 2011, they were maced, beaten, tear gassed, trampled by horses and imprisoned by the enforcers of the surveillance police state. The working middle class has seen their real wages stagnate for the last 50 years, as the dollar was unpegged from gold, politicians were free to run up the national debt with no short term consequences, and citizens were turned into consumers through media propaganda, the peddling of debt by Wall Street, and the complete and utter failure of our educational system.

  While working class Americans have seen no advancement in their real wages in almost a half century, the cost of their food, energy, education, healthcare, housing, and taxes have risen astronomically. It is no coincidence the Wall Street bankers stepped in to offer prodigious levels of consumer debt in the form of credit card, mortgage and auto loans to allow Americans to pretend their standard of living hasn’t fallen. Excessive levels of debt leads to excessive profits for the moneyed interests. The last 35 years have been a grand national delusion.

  

  Trust in the economic system, financial markets, political parties, mainstream media, and generational social contract has been destroyed. Rampant irresponsible fraud, abuse, deception, and deceit by the moneyed interests, lackey politicians, their government apparatchiks, media mouthpieces, and legal system have shattered the illusion the establishment is looking out for your best interests. The revelations by Edward Snowden of illegal mass surveillance, militarization of local police forces, military exercises in US cities, attempts to roll back the 2^nd Amendment, and trying to control the internet has revealed the true nature of the corporate fascist state. The disintegration of trust began slowly after 9/11 but accelerated rapidly over the last three years. Our leaders have done the exact opposite of what needed to be done after 2008. Everything they have implemented has failed. The average American is worse off than they were in 2009 at the depths of the recession.

  The highly educated, white collar, sociopath masters of the universe have captured the levers of power in this country. The world is enthralled and mesmerized by a gray haired academic troll-like figure who will ascend her monetary throne and pronounce whether her and her fellow central bank lackeys will raise an obscure inconsequential interest rate from 0% to .25%. This is nothing but a meaningless diversion as her owners (Wall Street banks), their corporate brethren, captured politicians, pliable judiciary, and media mouthpieces rig the financial markets to enrich themselves while impoverishing the masses and drowning current and future generations in un-payable debt. Harry Markopolos, who uncovered Bernie Madoff’s Ponzi scheme, while the SEC and criminal co-conspirator Wall Street bankers willfully ignored the blatant easily identifiable fraud, captures the essence of why trust in our economic, financial, regulatory, political, judicial and journalistic systems has collapsed:

  “Government has coddled, accepted, and ignored white collar crime for too long. It is time the nation woke up and realized that it’s not the armed robbers or drug dealers who cause the most economic harm, it’s the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most. They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives.” – Harry Markopolos, Congressional Testimony

  The men who retain the levers of power are the same men who were in command when the Crisis struck in 2008. They are even more powerful and rich today than prior to the financial collapse provoked by their unbridled greed and avarice. They believed they could engineer a recovery by promoting confidence in the Wall Street banks through the issuance of prodigious amounts of debt to solve a crisis caused by too much debt. Total debt outstanding in the U.S. rose from $52 trillion in 2009 to $59 trillion today, at the behest of the government and their Federal Reserve cohorts.

  While rational thinking Americans have continued to pay down their mortgage debt and reduce credit card usage, the Federal government through their insolvent (if using mark to market accounting) entities Fannie and Freddie, along with their monopoly on student loan issuance, and their massive deficit spending, have accounted for more than 100% of the $7 trillion increase. Total global debt approaches $230 trillion, up approximately $70 trillion since the crisis began.

  

  The mood change in the country is palpable as economic misery besets the middle class; race wars break out in urban ghettos across the land; push back against the police state intensifies; distrust of a rigged financial system keeps people out of the market; young people are priced out of the housing market by Wall Street price manipulation; productive good paying jobs dwindle; government bureaucrats prove themselves inept at everything they attempt; illegal immigrants pour over the southern border overwhelming the social safety net when it is already stretched thin; and faith in both political parties is close to zero. The regeneracy has been delayed, but this has allowed the anger, bitterness, and dismay with the government to grow to staggering proportions. The country is growing desperate for someone to lead. Ignoring the debt, civic decay and global disorder is no longer acceptable. It’s time for someone to step forward and tell the people the truth.

  “Soon after the catalyst, a national election will produce a sweeping political realignment, as one faction or coalition capitalizes on a new public demand for decisive action. Republicans, Democrats, or perhaps a new party will decisively win the long partisan tug of war. This new regime will enthrone itself for the duration of the Crisis. Regardless of its ideology, that new leadership will assert public authority and demand private sacrifice. Where leaders had once been inclined to alleviate societal pressures, they will now aggravate them to command the nation’s attention. The regeneracy will be solidly under way.” – The Fourth Turning – Strauss & Howe – 1997

  The Grey Champion is likely to be elevated through an election, but it isn’t a requirement. Ben Franklin and Samuel Adams were the intellectual and firebrand Grey Champions of the American Revolution. They inspired the revolutionaries through writings and oratory. Lincoln and FDR were elected Grey Champions, but Lincoln only won 40% of the popular vote in a four way race, while FDR won in a landslide with 57% of the vote over Hoover. It was clear Lincoln didn’t have a mandate, as Southern states began seceding after his election. No one can argue Franklin, Adams, Lincoln or FDR united everyone in a common cause. They actually aggravated the societal pressures that had been ignored or deferred by their predecessors. Compromise was not an option for these men. They were going to lead based upon their own criteria. You were either with them or against them. And many were against them.

  It is widely believed only 20% of colonial Americans were strong supporters of the American Revolution, with 20% Loyalists, and the rest sitting on the fence. Franklin’s own son remained a Loyalist throughout the fight. Half the country departed the Union upon Lincoln’s election and his support in the North was lukewarm at best. Lincoln captured 55% of the vote in the 1864 election, with only northern states voting. Even though FDR won landslide popular vote victories in 1932 and 1936, his detractors and enemies were many. FDR’s confiscation of gold and antagonism toward big business convinced a number of wealthy businessmen to approach General Smedley Butler to lead a coup against FDR and install a fascist regime to run the country. So, it is clear Grey Champions are not universally loved or supported. They have the ability to ignore the complexity of life and focus on one simple imperative: society must prevail.

  Until three months ago the 2016 presidential election was in control of the establishment. The Party was putting forth their chosen crony capitalist figureheads – Jeb Bush and Hillary Clinton. They are hand-picked known controllable entities who will not upset the existing corrupt system. They are equally acceptable to Goldman Sachs, the Federal Reserve, the military industrial complex, the sickcare industry, mega-corporate America, the moneyed interests, and the never changing government apparatchiks. The one party system is designed to give the appearance of choice, while in reality there is no difference between the policies of the two heads of one party and their candidate products. But now Donald Trump has stormed onto the scene from the reality TV world to tell the establishment – You’re Fired!!!

  As Hillary’s crimes and lies catch up to her and Jeb Bush drowns in a sea of irrelevance, low energy, and passionless rhetoric, Trump and Bernie Sanders have surged ahead in the polls. The country is tired of the Clinton and Bush dynasties. They are tired of the existing ruling authority. My initial reaction to Trump’s entering the presidential race was scorn. He’s a bloviating, egocentric, self-promoting, reality TV parody of himself. After seeing him in action for the last three months it has become apparent the country deserves a president like Trump.

  He represents everything we’ve become as a nation. Sound bites, no substance, self-involved, boastful, and in constant attack mode are the qualities necessary to lead America today. Facebook twitter nation merits a president like Trump. Bill Clinton playing sax on Arsenio and Obama’s weekly guest appearances on the Daily Show or Jimmy Fallon Show has already tainted and made a mockery of the office of the president.

  Trump was born in 1946 putting him in the Boomer Prophet generation, so he fits the mold of Grey Champion from a generational perspective. Hillary and Jeb are also Boomers, with Sanders from the Silent generation. Trump has struck a nerve with a wide swath of middle class America with his anti-illegal immigration rhetoric, disdain for the elitist mainstream media, unflinching assessment of his second string GOP opponents, and exuberant confidence in his own abilities.

  Building a wall on our southern border, going after billionaire hedge fund managers, cutting government spending, and negotiating trade deals that don’t ship American jobs overseas, are resonating with fed up households across America. Some polls show Trump with significant support among blacks and Hispanics. The linear thinking supporters of the status quo are flabbergasted and outraged by Trump’s popularity. The ruling classes never anticipate the mood shift of the peasants as they look down on the masses from their gated estates and penthouse suites. The country is looking for someone who can tear down the entire fetid, corrupt, rotting structure.

  The moneyed interests are still betting on Hillary or Jeb, but they are getting nervous. There is still time for them to pull the old Ross Perot play by threatening Trump or his family with harm or making him an offer he can’t refuse in financial terms. But, with the Middle East awash in blood, refugees flooding into Europe, China experiencing an epic meltdown, oil producing countries suffering depressions, emerging market economic systems collapsing under the weight of unpayable promises, the Federal Reserve panicked as recession approaches with interest rates at zero bound, and stock, bond and real estate bubbles approaching the inescapable pin, the stars are aligning for a 2^nd crisis more perilous and catastrophic than the 2008 catalyst event. The onset of phase two of this Crisis in 2016 will produce a populace more desperate, less trusting of the establishment and likely to turn towards someone like Trump, in despair.

  No matter who is elected in November 2016, there is no turning back. Winter is here and Spring is many years away. Grim times will befall the world. The potential for tragic consequences is growing by the day. The storm clouds are gathering on the horizon. There will certainly be famine, chaos, death, destruction, and war. Let’s pray our Grey Champion can lead us through the valley of death to a new High.

  

  “The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it.” – Strauss & Howe – The Fourth Turning

  In Part 3 I will try to assess which channels of distress are likely to burst forth with the molten ingredients of this Fourth Turning, and lastly make some educated guesses about potential climaxes.

  

  

  

  

  

• Caught On Tape: Topless Femen Protesters Storm Muslim Debate "Whether Wives Should Be Beaten"

  If Europe was concerned about Christian-Muslim cross religious and cultural differences before, and in light of the recent influx of Syrian refugees into the continent, events over the weekend confirmed such concerns are poignantly valid.

  This Saturday, during a conference at the Muslim Salon in Pontoise near Paris on the role of Muslim women, two Muslim fundamentalist imams were debating the question of “whether wives should be beaten or not”, Telegraph reports that two Femen protester activists, aged 25 and 31, “ripped off their Arab-style cloaks and jumped on to the stage on Saturday evening. One had the slogan “No one subjugates me” inked across her torso. The other bore the words “I am my own prophet.”

  

  Chaos immediately erupted. The imams promptly left the stage but not before taking a long, hard look at the half-nued protesters, who grabbed microphones and shouted feminist slogans in French and Arabic before being roughly bundled off the stage by about 15 men and handed over to police. Video footage of the incident shows a man apparently kicking one of the women.

  Telegraph adds that according to Ms Shevchenko, a spokeswoman for the feminist group, some of the men shouted “dirty whores” and “kill them”. She thanked the police for protecting the two women, who were taken into custody. They were released after being questioned by prosecutors, who said they would continue investigating what happened. Conference organisers said they would press charges against the activists.

  They were not alone in taking exception to the presence of fundamentalist preachers at the event, where shopping and cooking were showcased as appropriate “feminine activities”. One speaker at the conference has reportedly posted calls on social networks for women to veil their faces or risk hellfire and sexual assault in the afterlife.

  The showdown took place after nearly 6,000 people signed an online petition against the event. At the same time, twitter posts called for the protesters to be stoned or collectively raped. On Facebook, the conference organisers urged Muslims to “stand together” and attend the final day of the event on Sunday. They said it was “the victim of an anti-Muslim media frenzy.”

  The chaos that erupted when the women stormed the stage was caught on video.

  

  

  

  

  

• Iraq War Veteran Blows Whistle On Shameless Propaganda Being Taught At Police Academies

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Before getting into the meat of this post, I want to start off by stating a fact: There is no “war on police” happening in America today. What is happening is a growing movement of people who want police accountability, profess a desire to reform the justice system so that we stop incarcerating people for the  oxymoron of “victimless crimes,” and an end to the widespread thieving of the public without due process via a practice known as civil asset forfeiture.

  I’ve covered these topics extensively over the years. Here are just a few examples:

  The United States: 5% of the World’s Population, 25% of its Prisoners

  Don’t Mess with Texas – Police Raid and Shutdown Lemonade Stand Run by 7 and 8-Year-Old Girls

  Chart of the Day – America’s Prison Population Over the Past 100 Years

  Denver Police Arrest “Jury Nullification” Activist for Passing Out Informational Pamphlets

  Land of the Unfree – Police and Prosecutors Fight Aggressively to Retain Barbaric Right of “Civil Asset Forfeiture”

  The DEA Strikes Again – Agents Seize Man’s Life Savings Under Civil Asset Forfeiture Without Charges

  Asset Forfeiture – How Cops Continue to Steal Americans’ Hard Earned Cash with Zero Repercussions

  The public grievances listed earlier are reasonable demands which any civilized culture would insist upon. Nevertheless, many police departments across the country are taking these criticisms as part of some imagined “war on police” which simply doesn’t exist. Rather than showing even a sliver of introspection by looking inward at the mistakes policing has made in recent years, many officers are becoming defensive, combatant and have resorted to lies in order to dismiss the concerns of the public.

  This is precisely what an Iraq war veteran witnessed recently while training at a police academy. He shared his story with the Daily Beast under the pseudonym Clayton Jenkins. Here are some excerpts:

  The War on Cops is a grossly inaccurate response to recent police killings which are on track for another year that will rival the safest on record. Gunfire deaths by police officers are down 27 percent this year, according to the Officer Down memorial page, and police killings in general are at a 20-year low, given current numbers for 2015. Police deaths in Barack Obama’s presidency are lower than the past four administrations, going all the way back to Ronald Reagan’s presidency.

   

  Not a single iota of evidence supports a War on Police, but it has become a battle cry among some in the academy.

   

  Over 80 percent of police departments in the United States are facing issues with low recruitment numbers. As an Iraq War veteran I sought to solidify my chance of employment working in law enforcement by attending a local police academy. I enjoyed serving my country as military police and will do such now as a sworn police officer back home.

   

  What are they telling us in a post-Michael Brown academy? The culture of police brutality is infrequently addressed, but what is continually mentioned is the notion that there is a War on Police.

   

  “The Obama Administration and Eric Holder are undermining the police. We have officers dying left and right and he’s dicking off in Alaska,” says one of my instructors, referring to the president’s trip to Alaska last week.

   

  I understand as a law enforcement professional—and as someone capable of fairly reading mountains of data—that the Drug War has been unfairly used as a tool of oppression against the black community. It is why the American public overall has shown they have less confidence in police in recent times.

   

  But there is no War on Police. This Us vs. Them mentality still prevails even in fresh academy cadets. Perhaps some of these people will become future jackbooted, truncheon wielding oppressors. Or perhaps they will encounter the reality that betrays the fear they are taught.

  Now watch the following recruitment video for the Portsmouth, Virginia police department…

  Meanwhile, a Portsmouth officer was recently indicted after fatally shooting 18-year-old William Chapman after he was caught shoplifting.

  This looks like a scene from Gaza, not the America we imagine.

  

  Please tell me. Who has declared war on who?

   

  

  

  

  

  

• Goldman Warns: VIX Is Not Going Back To Low-Teens, No Matter What Fed Does

  While equities do tend to be lower one-, two-, and three-months after a Fed rate hike, S&P 500 realized volatility and VIX levels have been fairly well contained. However, Goldman Sachs warns not to expect VIX to calm down and settle back into the low teens like it was from 2013 to mid-August 2015. New normal trend VIX levels should now be 4-5 points higher than the average level of 14 experienced in 2013-2014 given the current state of the economy.

  Via Goldman Sachs,

  Question: Where are we now in terms of historical VIX levels and levels of S&P 500 realized market volatility?

  Answer: The VIX is at 23.2, about 3 pts above its 1990-present average and 9 points above its 2013-2014 average.

  The VIX landed at 23.2 last Friday. That is about three points below its median level of 26 over the last three recessions, 3.4 points above its long-run average of 19.8 back to 1990 and nine points above its 2013-2014 average of 14.2. S&P 500 one-month realized volatility currently stands at 31.7, ten-day at 26.7. A VIX trading well below short-term realized market volatility suggests the options market is expecting a moderation in market swings going forward relative to what we experienced in August. That may also mean that option investors are also expecting no hike this week.

  Question: If the Fed doesn’t hike this week will the VIX go down.

  Answer: Yes. 38% of recent SPX options flow has been short-dated and that flow may roll to longer maturities.

  We do think the VIX moves lower if the Fed doesn’t hike this week. Why? Because options have an expiration date. There has been a tremendous amount of uncertainty priced post China’s currency devaluation plus additional uncertainty surrounding the September 17 meeting. Investors have flocked to short-dated weekly S&P 500 options to trade the recent market swings. We estimate that on a typical day since mid-August 38% of options traded on the SPX have had maturities of ten days or less.

   

  

   

  That number has approached 50% over the last five trading days. If the Fed does not hike, hedges may be taken off or rolled out to later meeting dates. That could apply downward pressure on shorter-dated options, leading to a lower VIX. At the same time, that may just push out the duration or timing of the uncertainty; which could mean that the VIX could swing lower only to shift higher prior to the next few meetings.

  Question: Even if the VIX calms down will it settle back into the low teens like it was from 2013 to mid-August 2015?

  Answer: We don’t think so. The U.S. economic landscape & cross asset metrics both suggest a VIX in the high-teens.

  Point 1. The business cycle: In last week’s edition of The Buzz we estimated that baseline VIX levels of 18 would be justified given the current U.S. economic landscape. Our point is not that the VIX will go to 18 tomorrow. It is that trend VIX levels should now be 4-5 points higher than the average level of 14 experienced in 2013-2014 given the current state of the economy. In the same way that we have argued that VIX levels in the high 20’s and above are consistent with recessions (and therefore the VIX should have dropped over the past couple of weeks) we also argue that VIX levels in the high teens are more consistent with the current ISM level in the low 50’s. VIX levels in the low teens are more consistent with ISM levels in the upper 50’s.

   

  Point 2. Cross asset risk levels are higher: Our benchmarking work in the last two editions of The Buzz suggested that VIX levels were around 5 points low relative to EM FX, U.S. HY spreads, oil and rates moving into mid-August. Our point here is that if the VIX was listening to other markets then baseline levels of 18-19 would have been justified in mid-August before the equity decline. While the economic data could improve, at the current time the U.S. economic picture and cross asset analysis both suggest similar baseline VIX numbers of 18-19.

   

  The counterpoint to the thesis that a VIX in the high-teens may be justified would be that with so much short-dated option flow in the system, if the Fed doesn’t hike, the VIX might collapse as investors trade out of shorter-dated options. There are few data releases between the September and October to convince the committee to hike in October, which leaves the VIX with two months to potentially swing lower. Options markets are clearly focused on EM as well therefore a VIX collapse back to the low teens may require a global reduction in risk, which might take a while.

  Question: How have equities and the VIX reacted around past rate hikes?

  Answer: Equities lower on moderate volatility.

  In the remainder of this report we focus on how S&P 500 returns, VIX and SPX realized volatility levels have reacted around past rate hikes. Our analysis shows that while equities do tend to be lower one-, two-, and three-months after a Fed rate hike, S&P 500 realized volatility and VIX levels have been fairly well contained. One argument for why that has happened is that the Fed doesn’t tend to hike into a weak economy. U.S. GDP rates and ISM levels have been strong surrounding the first rate hike. What worries many investors now is that if the Fed does hike this week they would be hiking during a period of high uncertainty surrounding the U.S. and global economic landscape at the same time that financial conditions have been deteriorating. The cushion may simply be lower now than in the past. The implications and potential imbalances around six years of zero interest rates and global central bank adjustments have also worried investors. If the Fed does hike this week equities may take it poorly unless the communication is for a slow normalization path.

  *  *  *

  S&P 500 returns are typically lower once the Fed starts raising rates

  We analyze S&P 500 returns and peak to trough max drawdowns prior to and post the last three rate hike cycles.

  

  S&P 500 returns and max drawdowns prior to the initial rate hikes in 1994, 1999, 2004

  • S&P 500 returns prior to each rate hike were positive: Median S&P 500 returns were +5%, +7%, and +17%, during the 3-, 6-, and 12-months before the initial hike. The S&P 500 was up 3/3 times in the month prior by a median of +2.9%. We take that to mean that good news was good news and the S&P 500 was responding to a stronger economy.
  • Max Drawdown Analysis: While returns three months leading into the first rate hike were positive over each of the three periods, the ride was not always smooth. The maximum peak-to-trough S&P 500 returns in the three months prior to each rate hike were: -1.6%, -6.3% and -5.8% in 1994, 1999 and 2004, respectively.

  S&P 500 returns and max drawdowns post the initial rate hikes in 1994, 1999, 2004

  • S&P 500 Returns on the day the Fed hiked rates were -2.3%, 1.6% and 0.4% with a median return of +0.10% one-week after the Fed started raising rates. S&P 500 returns were negative one-, two-, and three months after each initial rate hike across each period. The median S&P 500 return was -5.9% three-months post rate hike.
  • Max Drawdown Analysis: Peak to trough drawdowns were larger after a hike than before. We estimate that the max drawdowns three-months after a rate hike were -7.2%, -10.6%, -6.8% (1994, 1998, 2004).

  The impact of rate hikes on volatility has historically been muted

  

  S&P 500 realized volatility levels in 1994 and 2004 were low going into and sub-10 coming out of the first rate hike. The maximum level of S&P 500 1m realized volatility in the year prior to the 1994 and 2004 rate hikes was 17.1 with a max VIX level of 22.7 on a rolling daily basis. One-month realized volatility was sub-10 one month after both initial hikes and the maximum VIX level in the one-month surrounding the initial hikes was a modest 17.3. VIX levels three-months after the initial hike were 16.2 and 13.2 in 1994 and 2004, respectively.

  The first rate hike in June of 1999 was sandwiched between the fallout from Long Term Capital Management over the back half of 1998 and the bursting of the tech bubble in the spring of 2000. In short, realized volatility was elevated coming into 1999. That said, realized volatility declined into the June rate hike and was also lower 1m later. One-month realized volatility levels were around 20 one- and three-months prior to the first hike and were lower afterward; at 14, 19 and 18, one-, two- and three-months after the hike. Higher levels of realized volatility meant that VIX levels were also higher in 1999 relative to 1994 and 2004. The VIX landed at 21.1 on the day of the rate hike and was 24.6 and 26.5 one- and three-months after the first hike.

  Bottom line: While S&P 500 returns were lower post the last three rate hikes, S&P 500 realized volatility and VIX levels were moderate, with no volatility spikes.

  

  

  

  

  

• Jeffrey Brown: To Understand The Oil Story, You Need To Understand Exports

  Submitted by Adam Taggart via PeakProsperity.com,

  Despite the attention-grabbing economic volatility that is dominating headlines, it's important to keep our eye on the energy story firmly in focus. This is especially true as the headlines we regularly read about Peak Oil being dead " are "manifestly false" according to this week's podcast guest, petroleum geologist Jeffrey Brown. 

  As concerning as the fact that global oil production has plateaued over the past decade, despite trillions invested in trying to goose it higher, are Brown's forecasting model for oil exports. His Export Land Model shows how rising internal consumption can swing (and has swung) countries from major exporters to permanent importers within a dizzyingly short period of time:

  The crucial issue to understand about what has happened after 2005 is that we’ve had a very large increase in global gas production and natural gas liquids, but a much slower increase in crude plus condensate.

   

  So, what I think has happened is the actual crude oil production has basically flatlined while the liquids associated with natural gas production, condensate and natural gas liquids, have continued to increase. So, we ask for the price of oil, we get the price of Brent or WTI; but when you ask for the volume of oil, you get some combination of crude, condensate, natural gas liquids, biofuels. So, the fact is that substitution has worked and is working in that they’re bringing on alternative substitutes, but they're only partial substitutes. The actual, physical volume of crude oil production has probably been flat to down since 2005. Over the past ten years, it has taken us trillions of dollars, basically, to keep us on an undulating plateau in actual crude oil production. What happens going forward?

   

  So, basically, the conventional wisdom is the fact that we’ve seen an increase in liquids production, seems there’s no evidence of the peak in sight. And, I think in regard to crude oil production, that argument is manifestly false. I think that we’ve probably seen a peak in actual crude oil production, 45 and lower API gravities, despite trillions of dollars of upstream capex expenditures.

   

  I started wondering in late 2005 what happens to oil exports from an exporting country, given a production decline and rising consumption. And, so I just started, I just constructed a simple little model. I assumed a production of about two million barrels a day or so at peak, consumption of one, and assumed production falls about 5% per year, basically what the North Sea did, and assumed consumption increases to 2.5% per year. What the model showed was that exports, net exports would go to zero in only nine years, even though a roughly modest production decline. So, the easy way to state it is giving an ongoing, inevitable decline in production, unless an exporting country cuts their domestic oil consumption at the same rate as the rate of decline in production, or at a faster rate, it’s a mathematical certainty that the net export decline rate, what they actually ship out to consumers will exceed the rate of decline in production. And, furthermore, it accelerates. 

  Click the play button below to listen to Chris' interview with Jeffrey Brown (43m:48s)

   

  

  

  

  

  

• Barclays Slashes China GDP Projections After Weak Data

  When looking at forecasts for China’s GDP growth it’s best to ignore the projection itself and focus on the direction of the revision. 

  That is, there’s still a certain degree to which the sellside has to retain some semblance of politeness when it comes to estimating Chinese output and indeed, even if some trailblazing research team were to decide to break decorum and officially cut estimates to between 0% and 4% (which probably represents a more accurate estimation of how the economy is actually performing) it would be largely pointless because there’s exactly zero chance of the NBS admitting anything like that. Given that, it’s not so much about whether the number is 6.8% or 6.7 or 6.6%, it’s about whether analysts see continued downside risks on the horizon.

  With that in mind, and against the backdrop of the worst FAI growth in 15 years, we bring you the following excerpts from Barclays where the EM research team has cut its estimates for Chinese GDP growth in 2015/2016 (note the expectations for monetary policy and the bit about equity and FX turmoil weighing on sentiment).

  *  *  *

  From Barclays

  We lower our 2015 GDP growth forecast to 6.6%y/y (from 6.8%) and to 6.0% for 2016 (from 6.6%). The downward revisions reflect the faster-than-earlier-expected slowdown in both property investment (to 3.5% YTD) and manufacturing investment (to 8.9% YTD) and continued headwinds to investment into 2016. The new (and lower) base following the NBS 2014 GDP revision on 9 September added c.10bp to the 2015 forecast. In detail, the latest manufacturing PMI as well as the August data confirmed a deterioration in sequential momentum in Q3. Despite strong property sales (14.7% y/y in August), developers have focused on inventory rundowns and earnings growth rather than new construction. As a result, the double-digit contraction in housing starts has persisted for 10 months (-16.7%). Meanwhile, falling commodity prices and a widening PPI deflation rate (to -5.9%) are discouraging manufacturers’ inventory restocking amid soft domestic and external demand. The stock market crash and rising CNY depreciation expectations are also hurting investor and consumer confidence, adding downward pressure to growth in the coming quarters. Looking into 2016, we believe the three major headwinds highlighted in the medium term – excess capacity in many industries, oversupply in the housing market and high debt burdens (especially among local governments) – together with anti-corruption and policy uncertainties will continue to weigh on growth.

  We continue to look for more fiscal and monetary easing to support growth but we don’t expect that to change the economy’s structural softening trend. The weakness in recent data confirms that growth is losing momentum despite a fast-growing service sector (rising to 50% of GDP and growing at 8.4% YTD in Q2 2015). This suggests more fiscal support and monetary easing are required to stabilise growth. Indeed, to cushion the growth slowdown, the central government has recently announced a series of measures to support infrastructure investment, such as underground pipes, water and clean energy. These measures include bond issues and PBoC capital injection to policy banks, a third round of local government debt swap (CNY3.2trn in total), and accelerated projects approval by the NDRC. On monetary policy, our base case continues to look for one more interest rate cut in Q4 to lower the real cost of funding and 2 RRR cuts to offset the liquidity drain from capital outflows. Despite the intensifying capital control measures post the 11 August FX regime shift and the PBoC’s heavy intervention in the FX markets, we expect the capital outflows to persist in the coming quarters. That said, to stabilise the USDCNY in the near term, the PBoC will likely continue to be reactive rather than preemptive in monetary easing. And a stronger USDCNY target set by the PBoC will imply more RRR cuts in the near term.

  

  

  

  

  

  

• A Panicked Brazil Promises Billions In Austerity, Does 180 On Budget After Downgrade

  Exactly two weeks after conceding that a primary surplus was no longer in the cards after budget data in July came in meaningfully worse than expected, Brazil is scrambling to restore some semblance of confidence in the government’s ability to close a yawning budget gap by implementing austerity even as political turmoil has made embattled FinMin Joaquim Levy’s life a living hell of late. 

  On the heels of a painful S&P downgrade, Brazil now says it plans to enact some BRL26 billion in primary spending cuts for the 2016 budget on the way to achieving in a primary surplus that amounts to 0.7% of GDP.

  In other words, a complete 180 from what the government said prior to the downgrade.

  Needless to say, reconciling tax increases and budget cuts with the party mandate won’t be easy. “Budget cuts and tax increases discussed by govt in response to Brazil’s credit rating downgrade don’t agree with central tenets of Workers’ Party,” Bloomberg notes, citing an unnamed party official. 

  Particularly divisive will be the CPMF revival which isn’t likely to be approved. Here’s Bloomberg with a bit more on the announcement: 

  Finance Minister Joaquim Levy proposed a new round of spending cuts and tax increases that are designed to close the budget gap and protect Brazil from further credit downgrades.

   

  The government will reduce 26 billion reais ($6.8 billion) in expenditures from next year’s budget in large part by capping salaries of civil servants and suspending exams for new entrants, Levy said Monday. Brazil also plans to raise 28 billion reais in revenue by boosting taxes, including a levy on financial transactions.

   

  “We know this effort to cut spending will only take us so far, so as would happen in any country in the world in a moment of reduced economic activity and tax income, you have to seek out other resources,” Levy told reporters. “We’re trying to find that balance.”

   

  Obviously, the market will cast a wary eye towards the effort even as one assumes Brazil is to be applauded for trying, especially given the hugely contentious political environment and the threat of further social upheaval. 

  And here’s Goldman with the full breakdown:

  The authorities announced today a number of spending cuts and expenditure saving measures (worth an estimated R$26.0bn) and tax increases and a reduction of a number of tax breaks/benefits (estimated to yield approximately R$45.8bn). The key objective is to improve the federal government fiscal balance from the -R$30.5bn (-0.5% of GDP) deficit announced on August 29, to a +R$34.4bn (+0.55% GDP) surplus.

   

  Most of the proposed adjustment will come from higher taxes; particularly from the reinstatement of the controversial Financial Transactions Tax at a rate of 0.2% which is expected to yield a substantial R$32bn.

   

  Minister Levy stated that the tax should “not last more than 4 years.” Furthermore, approximately R$10bn will come from the reduction in projected outlays with civil servants which is likely to elicit strong rejection by the main public sector unions.

   

  Many of the measures require Congressional approval of several pieces of legislation which, in our assessment, adds significant implementation risk. Given the administration record low level of popularity and its weak and increasingly fragmented support base in Congress we expect some of these measures to face significant resistance (to be either rejected or watered down during the legislative debate), particularly the approval of the widely rejected CPMF tax.

   

  In all, we expect the 2016 budget discussion to be a drawn-out, jumpy and noisy process with a significant risk that only a subset of the proposed measures will clear Congress and with fiscal yields below the government proposal. Furthermore, we could not fail to notice that in today’s announcement there were no medium- and long-term fiscal measures to arrest the projected upward drift in mandatory spending (e.g., social security reform).

   

  Overall, we remain of the view that a deep, permanent, structural fiscal adjustment remains front-and-center on the policy agenda to restore both domestic and external balance. In our assessment, at the end of the fiscal consolidation process Brazil needs to end up with a primary surplus of 3.0% to 3.5% of GDP (which is still quite distant from today’s fiscal reality). This would be the level of primary surplus that would put gross public debt on a clear declining trajectory; something that is required for Brazil to rebuild fiscal buffers and regain policy room to use fiscal counter-cyclically, whenever needed and appropriate.

   

  Given the very slow pace of fiscal consolidation, and its poor quality geared towards tax hikes and investment cuts), the burden of current account adjustment will likely continue to fall disproportionately on monetary policy and the BRL.

  The question now, is whether this was a good move.

  That is, is it better to simply stick with the projection of a primary deficit and let the market be pleasantly surprised if things miraculously turn a corner, or is it better to try and head off further pressure on the country’s credit rating by rolling out a largely non-credible plan to plug the budget gap and risk surprising on the down side?

  We’ll see, but at least in the short term, Goldman is probably correct to assume that in the absence of a stable political situation, the BRL will remain in focus and if FX pass-through picks up and the Fed hikes, we may need to see a Selic hike. 

  For an indication of how things are going, simply watch the data points on this chart:

  

  

  

  

  

  

• "Ineffective & Reckless" Fed Is An "Engine of Disaster"

  Excerpted from John Hussman's Weekly Market Comment,

  The beauty of truth, and the beast of dogma

  Other “relationships” that are used to justify activist monetary policy have similarly weak support when one actually takes the effort to examine the data. You’ll find a similar shotgun scatter of uncorrelated points if you plot unemployment versus general price inflation, for example. It’s unfortunate that the Federal Reserve is actually allowed and even encouraged to impose massive distortions on the U.S. economy based on relationships that are indistinguishable from someone sneezing on a sheet of graph paper.

  We do know one thing very clearly, and we should have learned it during the housing bubble – suppressed interest rates encourage yield-seeking speculation, enable low-quality creditors access to the capital markets, direct scarce savings toward unproductive malinvestment, subsidize leveraged carry-trades, and unleash a whole host of “structured” products “engineered” by financial institutions to directly or indirectly piggyback on the good faith and credit of Uncle Sam.

  When you examine historical data and estimate actual correlations and effect sizes, the dogmatic belief that the Fed can “fine tune” anything in the economy is utter hogwash. At the same time, the demonstrated ability of the Fed to provoke yield-seeking speculation and malinvestment is as clear as day. An activist Federal Reserve is an engine of disaster and little more. Even with the best intentions, a dogmatic Fed, unrestrained by reasonable rules and constraints, is a reckless and deceptive beast, constantly offering to heal the nation with precisely the same actions that inflicted the wounds in the first place.

  Truth, on the other hand, is beautiful. Economic relationships that are supported in real-world data are a sight to behold. You want to see some relationships you can count on? The chart below shows the relationship between the 3-month Treasury bill and the ratio of the monetary base (currency and bank reserves) to nominal GDP, in data since 1929. Notice something. Without paying banks interest to hold excess reserves idle in the banking system, the Fed could reduce its balance sheet by more than one-third (over $1.4 trillion) without pushing short-term interest rates above zero. That excess base money does nothing to support the real economy.

  Nobody’s desired level of saving, consumption, or real investment changes just because the Fed has chosen to force the economy to hold more base money and fewer Treasury bonds. But somebody has to hold that cash at every point in time – and nobody wants to hold it. So it simply acts as a hot potato, encouraging yield-seeking speculation in the financial markets. In my view, the most urgent action the Federal Reserve should take is to cease reinvestment of principal as the holdings on its balance sheet mature, in order to reduce this massive pool of idle base money, which does nothing but to promote speculation. No increase in interest rates would need to result from that action.

  …

  After years of speculation, we currently estimate a 10-year nominal expected total return for the S&P 500 close to zero – much the same as we projected in real time at the market peak in 2000. The Federal Reserve seems to have no idea what it has done. Poor long-term market returns and severe interim losses are now baked in the cake as a result of obscene valuations. There is no way to undo this outcome – only to manage the consequences.

  

  With regard to a possible quarter-point hike this week in the amount of interest that the Fed pays banks on idle excess reserves, our view – frankly – is that it doesn’t matter. From a longer-term standpoint, poor stock market returns and the likelihood of 40-55% market losses from the recent peak are already baked in the cake.

  Across the pond, our friend Albert Edwards at SocGen strikes the right note, I think:

  “The clamour for the Fed not to enact the long-awaited ¼% rate hike next week is growing by the day. Misgivings come not just from reputable mainstream commentators, but now also the World Bank has repeated the IMF’s recent words of caution in advising delay. What a load of nonsense! My esteemed colleague Kit Juckes characterizes the current consensus thinking as ‘If the Fed hikes, pestilence, plague and never-ending deflation will follow.’ Well even those like me who see a deflationary bust awaiting think the Fed should hike next week – because the longer you leave it, the bigger the financial market excesses become, and the bigger the risk of financial dislocation and global recession ensuing. Have we learned nothing from the 2008 Great Recession? Just get on with it!”

  …

  The real problem isn’t what the Fed may do, but the ultimately unavoidable consequences of what the Fed has already done. The cost of reckless Fed-induced yield seeking will likely be felt first in the financial markets as previous paper gains evaporate, while defaults on excessive low-quality covenant-lite credit will emerge over the course of the economic cycle, and the impact of malinvestment will be to limit productivity and economic growth over the longer run. This is all rather inevitable except in the eyes of those who haven’t watched and memorized a dozen adaptations of the same movie.

  Again, as I noted in The Line Between Rational Speculation and Market Collapse, investors should remember that the Fed did not tighten in 1929, but instead began cutting interest rates on February 11, 1930 – nearly two and a half years before the market bottomed. The Fed cut rates on January 3, 2001 just as a two-year bear market collapse was starting, and kept cutting all the way down. The Fed cut the federal funds rate on September 18, 2007 – several weeks before the top of the market, and kept cutting all the way down.

   

  “What will matter significantly for investors is the condition of market internals, credit spreads, and other risk-sensitive measures in the event that U.S. economic activity begins to further reflect the downturn that is already evident abroad. It is that evidence of investor risk-preferences that will determine the proper response to any change in Fed policy.”

  In short, my view is that activist Fed policy is both ineffective and reckless (and the historical data bears this out), and that the Federal Reserve has pushed the financial markets to a precipice from which no gentle retreat is ultimately likely. Similar precipices, such as 1929 and 2000, and even lesser precipices like 1906, 1937, 1973 and 2007 have always had unfortunate endings (see All Their Eggs in Janet’s Basket for a review). A quarter-point hike will not cause anything. The causes are already baked in the cake. A rate hike may be a trigger with respect to timing, but that’s all. History suggests we should place our attention on valuations and market internals in any event.

  

  

  

  

  

• "The Danger Is That It Bursts Just Like In The US": Sweden Goes Full Krugman, Gets Massive Housing Bubble

  Earlier this year, Riksbank Deputy Governor Per Jansson expressed his displeasure with comments made in April of last year by everyone’s favorite Nobel laureate Paul Krugman. The dispute revolves around Sweden’s decision in 2010 to raise rates, a move Krugman says turned the country into a Japan-style deflationary deathtrap. To wit, from Krugman’s blog: 

  “In 2010 Sweden’s economy was doing much better than those of most other advanced countries. But unemployment was still high, and inflation was low. Nonetheless, the Riksbank — Sweden’s equivalent of the Federal Reserve — decided to start raising interest rates.”

   

  “There was some dissent within the Riksbank over this decision. Lars Svensson, a deputy governor at the time — and a former Princeton colleague of mine — vociferously opposed the rate hikes. Mr. Svensson, one of the world’s leading experts on Japanese-style deflationary traps, warned that raising interest rates in a still-depressed economy put Sweden at risk of a similar outcome. But he found himself isolated, and left the Riksbank in 2013.”

   

  “Sure enough, Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.”

  Krugman went on to accuse the Riksbank of being a bunch of job-hating heretics who don’t believe that printing mountains of fiat currency solves economic problems and who are motivated by an overwhelming desire to perpetuate global inequality by enriching creditors at the expense of impoverished debtors. They are, Krugman said, sadomonetarists. 

  For his part, Per Jansson wasn’t particularly pleased with Krugman’s assessment, suggesting that he “write fewer articles and have more of a look at the data and then come back again.”

  “I don’t know why he does that; it’s a mystery and it doesn’t make him come across as a guy who is very well informed,” Jansson added.

  Why did Sweden start raising rates in 2010? Well, as we noted in March, “the bank’s actions were not indicative of an institution suffering from some psychotic desire to drive up unemployment and inflict pain upon the masses, they were in fact based on ‘normal things’ like inflation and a housing bubble and the fact that the rate of household credit expansion was running some 50% ahead of overall economic growth.”

  In any event, Krugman needn’t have been concerned, because as you can see from the following, and as discussed here on Sunday evening, Sweden not only stopped hiking, but in fact plunged headlong into NIRPdom.

  

  So one would think, if Krugman is correct, that cutting rates by 235 bps since 2011 all the way down to -0.35% would have things humming along nicely in terms of “healthy” inflation. Only, that’s not what’s happened. This is:

  

  Meanwhile, the housing bubble and household credit expansion issues the Riksbank was so concerned about have predictably gotten far worse thanks to record low rates. To wit, from Bloomberg: 

  The worsening housing shortage — exacerbated by record immigration — and surging house prices reveal that deeper financial instability risks lie ahead.  The combination of already too-high household debt and negative rates “may ultimately be very costly for the economy,'” the central bank said last week in its monetary policy report.

   

  
  

  And as we saw earlier this month when the Riksbank remained on hold ahead of Mario Draghi, keeping a lid on krona strength (i.e. fighting to ensure that inflation doesn’t crater) may turn out to be increasingly difficult going forward with the ECB widely expected to expand PSPP, meaning that ironically, once everyone goes full Keynes, it makes it ever more difficult for anyone to realize the benefits because one country’s easing simply negates another’s, necessitating still more easing by the first country, and around we go. Case in point, from Riksbank Governor Stefan Ingves: “…any rapid strengthening of krona would pose risk to inflation rise [so] Riksbank won’t be passive if ECB makes big changes in its policy.”

  Worse still, not only is Sweden bumping up against diminishing returns in its easing efforts, but as we discussed at length in July, for a time things had actually begun to move in the wrong direction, as investors fretted about the lack of market depth created by the Riksbank’s QE program. “The financial conditions — the currency and the bond yields — are moving in the wrong direction,” Roger Josefsson, chief economist at Danske Bank A/S told Bloomberg. So in other words, even as risks associated with NIRP (e.g. excessive debt buildup and a worsening housing bubble) have materalized, some of expected benefits (e.g. rising inflation) have not, which certainly begs the question if the risk/reward profile associated with NIRP and expanded QE is still attractive.

  Of course it’s not all bad. Unemployment has fallen dramatically and GDP data from previous quarters was revised up in what Goldman called a “non-neglible way” on Friday.

  

  But the question one has to ask here is this: what, ultimately, has ZIRP and then NIRP and QE actually done for Sweden? The effect on inflation has clearly been muted (the Riksbank’s protestations aside) and the effect on the housing market has been to inflate what looks like a rather formidable bubble. Meanwhile, the global currency wars mean the upward pressure on the krona is likely to persist no matter what the Riksbank does. If we assume that GDP and unemployment would have, at least to some extent, improved on their own, one could quite plausibly make the argument that all Sweden has done with monetary policy since 2010 is embed an enormous amount of risk into the economy without getting much back.

  Of course when that rather inconvenient suggestion is made, central bankers in the new normal almost always blame lawmakers or regulators or someone other than themselves and Sweden is apparently no different. Here, for instance, is what the bank had to say earlier this month:

  “Low interest rates contribute to the trends of rising house prices and increasing indebtedness in the Swedish household sector continuing. Current debt levels already pose a substantial risk to the Swedish economy. It is thus essential that the Riksdag (the Swedish parliament), the Government and other authorities implement measures to reduce this risk. If no measures are taken, this, in combination with the low level of interest rates, will further increase the risks, which may ultimately be very costly for the economy.”

  As for Ingves, well, he’s not optimistic (via FT):

  Sweden’s central bank governor has warned that new crisis-busting tools policymakers are embracing around the world to counter asset bubbles and other financial dangers are susceptible to political inaction and turf wars.

   

  Stefan Ingves, governor of the Riksbank, said so-called macroprudential policies — such as capital requirements and leverage limits — had so far failed in Sweden where house prices and personal debt levels have soared to record levels.

   

  “Macroprudential, particularly if markets are going up, up, up is about saying ‘no’. Apparently that’s hard to do,” Mr Ingves said.

  One could easily say the same thing about the Riksbank although, to be fair, the central bank would also be in control of macroprudential policy making if it had its way, but that doesn’t exonerate NIRP. That is, we might replace one word from the quote above and get this: “sound money, particularly if markets are going up, up, up is about saying ‘no’ but apparently that’s hard for central bankers to do.” At least one banker in Stockholm agrees: 

  “To have such a low interest rate at the same time as Sweden has rather good economic growth and rapid increases in house prices — it seems crazy,” said one senior banker.

  But Ingves has his story and he’s sticking to it: “We deal with inflation, we keep an eye on the exchange rate, we do our best to reach our inflation target. But that means that somebody else has to deal with the problem we have in our housing market.” 

  On that note, we’ll close with the following from Lars Jonung, professor emeritus at Lund University, who told newspaper Dagens Nyheter the following:

  “[The Riksbank] have lowered rates too much, absolutely. It creates meaningful financial risks and increases household debt. The danger is that it bursts just as it did in the US and Iceland.”

   

  *  *  *

  Bonus: As Krugman said last week in the Japanese context, countries “need to reach a point where everyone believes that they have pulled out of deflation. And then if that can be believed, then they may be able to stay out of trouble thereafter”.

  Do you “believe” in “hockeynesian” success stories? The Riksbank apparently does…

  

  

  

  

  

  

• Sep 15 – US Rate Hikes Will Bring Volatility To EMs
  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 13/100 EXTREME FEAR

  PREVIOUS CLOSE: 14/100 EXTREME FEAR

  ONE WEEK AGO: 10/100 EXTREME FEAR

  ONE MONTH AGO: 11/100 EXTREME FEAR

  ONE YEAR AGO: 43/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 15.22% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 24.25. This is a neutral reading and indicates that market risks appear low.

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

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – HEY GIRL…

   

  UNUSUAL ACTIVITY

  MYE Director Purchase 5,000 @$12.7959
  DG Chief Executive Officer Purchase 4,300 @$70.7253                      
  NVET Director Purchase 10,000 @$4.786
  HPQ Oct weekly2 28 CALLS active @$.61-.62
  P Sep weekly4 CALL Activity 20 CALLS 700+ @$.39
  YNDX SEP 11 CALL Activity @$.45 1k+

  More Unusual Activity…

  HEADLINES

  Malcolm Turnbull becomes Australian PM after Abbott ousted

  NY Fed: Consumers Expect Lower Short- and Medium-Term Inflation

  Opec raises 2015 global oil demand growth forecast, cuts 2016

  Genscape data shows a potential inventory draw –ForexLive

  ECB PSPP: +13.022bn to EUR314.469bn (prev +11.91bn to 301.447bn)

  ECB CBPP: +3.892bn to EUR116.107bn (prev +1.099bn to 112.215bn)

  ECB ABSPP: +366m to EUR11.86bn (prev +382m to 11.494bn)

  ECB Bonnici: Too early to decide on new stimulus

  ECB Weidmann: Data shows need for steady hand

  ECB Coeure: Euro members need to share more sovereignty on economic policy

  CA Teranet/National Bank HPI (YoY) (Aug): 5.40% (prev 5.10%)

  ESMA raises its market risk indicator to highest level

  BIS Highlights Trouble Spots for Global Economy –WSJ

  S&P: US rate hikes will bring volatility to EMs

   

  GOVERNMENTS/CENTRAL BANKS

  Malcolm Turnbull becomes Australian PM after Abbott ousted –Rtrs

  NY Fed: Consumers Expect Lower Short- and Medium-Term Inflation

  ECB Bonnici: It’s ‘Too Early’ To Decide On New Stimulus –ForexLive

  ECB Coeure: Euro members need to share more sovereignty on economic policy –BBG

  ECB Weidmann: Data Shows The Need For A Steady Hand — ForexLive

  ECB Review Of Greek Banks Under Way, Could Be Done End-October –BBG

  Draghi seen expanding QE by economists fearing shallow recovery –BBG Poll

  Bloomberg survey of economists has the majority seeing the ECB raising QE –ForexLive

  BoE Weale: Rates Will Rise Relatively Soon –Rtrs

  EU Dijsselbloem: Eurozone Must Share More Banking Risks –Rtrs

  Riksbank Gov Ingves Sees Flaws In Crisis-Busting Tools –FT

  Syriza and ND deadlocked in polls –Kathimerini

   

  GEOPOLITICS

  Russian Envoy: Syria seeks peace conference in Moscow –BBG

  French President Hollande: French airstrikes will be necessary in Syria –Rtrs

  MARKETS RISK WARNINGS:

  ESMA raises its market risk indicator to highest level

  BIS Highlights Trouble Spots for Global Economy –WSJ

  FIXED INCOME

  ECB PSPP: +13.022bn to EUR314.469bn (prev +11.91bn to 301.447bn)

  ECB CBPP: +3.892bn to EUR116.107bn (prev +1.099bn to 112.215bn)

  ECB ABSPP: +366m to EUR11.86bn (prev +382m to 11.494bn)

  PBOC allows liquidity injection tools in interbank market –MNI

  Italy Public Debt At E2.199.2 Trillion in July, State Revs Rise –MNI

  UK households are sitting on a £173bn debt time bomb –Mail

  CORPORATES: Sanofi tests waters with chunky offer –IFR

  FX

  EM FX: EM currencies tumble back to 2002 levels –FT

  HKD: HKMA sells $6.59bn to market to bolster HKD within trading band –Rtrs

  JPY and EUR COMMENT: Goldman says QE to weigh on yen and euro as Fed holds this week –BBG

  ENERGY/COMMODITIES

  WTI futures settle -1.4% at $44.00 per barrel

  Brent futures settle -3.7% at $46.37 per barrel

  CRUDE: Opec raises 2015 global oil demand growth forecast, cuts 2016 estimate

  CRUDE: Genscape data shows a potential inventory draw –ForexLive

  CRUDE: Moody’s: Sustained overcapacity, low oil prices will pressure global offshore drillers through 2017

  METALS: Copper Slides, China Data Reinforces Demand Fears –CNBC

  GASOLINE: Gasoline Leads Oil Prices Lower –WSJ

  EQUITIES

  S&P 500 provisionally closes -0.4% at 1,952

  DJIA provisionally closes -0.4% at 16,370

  Nasdaq provisionally closes -0.4% at 4,805

  M&A: Mylan commences offer to acquire Perrigo

  M&A: Oil Search Turns Down Woodside’s $8bn Takeover Plan –Rtrs

  M&A: Solera Agrees To $6.5Bln Acquisition By Vista Equity Affiliate –MW

  M&A: Qualcomm Acquires Capsule, No Terms Disclosed –Forbes

  M&A: Trinity Mirror in talks to buy rival Local World –Rtrs

  RETAIL: Alibaba blasts Barron’s story that warns of 50% stock drop –MW

  TECH: Apple says iPhone pre-orders are looking good –CNBC

  TECH: Nintendo Names Tatsumi Kimishima As President to Succeed Iwata –BBG

  TECH: Facebook Looks to Bring Virtual Reality to Mobile Devices

  BANKS: Bank Of America Officials Worried About Moynihan Vote –WSJ

  BANKS: Credit Suisse Said Nearing $80 Million Settlement Over Dark Pool –BBG

  BANKS: Deutsche Bank to cut workforce by a quarter –Rtrs sources

  BANKS: Deutsche Bank Prepares To Shut Russian Operations –Rtrs source

  AUTOS: Ford Europe Post 12% Increase In Sales For August –BBG

  AUTOS: Porsche and Audi unveil electric cars to take on Tesla –Rtrs

  CRA: Moody’s changes outlook on E.ON’s Baa1 rating to negative

  INDUSTRIALS: Airbus Set to Open Jetliner Production Plant in the US –WSJ

  EMERGING MARKETS

  CHINA: PBOC Ma Jun: Chinese Economy Will Do Better Than Market Expectations –Forexlive

  CHINA: China Banks Sell Massive CNY723.8 Bln In Forex In August –MNI

  CHINA: China seizes up to $157bn of unspent local government budgets –Rtrs

  S&P: US rate hikes will bring volatility to EMs

  CHINA: Bank lending accelerates in China –FT

   

  MALAYSIA: Malaysia central bank keeps rate on hold –MW 

  

  

  

  

  

• Stunning Video Emerges As 1000s Flee California Wildfires After Governor Calls 'State Of Emergency'

  As if the drought was not disheartening enough, wildfires are now raging across many parts of northen and southern California focing Governor Jerry Brown to call a state of emergency. Nowhere is the crisis more evident than in NorCal's Lake County where, as The LA Times reports, the untamed wildfire forced chaotic evacuations, is consuming hundreds of homes and businesses, and has outrun the efforts of a growing army of firefighters to corral it. However, as the following clip shows, one car-driver ran the gauntlet and managed to outrun "the worst tragedy Lake County has ever seen," in a scene right out of a disaster movie.

  The pictures from CA's newest fire are simply apocalyptic. Too hot, too dry, for too long pic.twitter.com/1tEXCbY1L0

  — Bill McKibben (@billmckibben) September 14, 2015

   

  

   

  As Reuters reports,

  A swiftly spreading wildfire destroyed hundreds of homes and forced thousands of residents to flee as it roared unchecked through the northern California village of Middletown and nearby communities, fire officials said on Sunday.

   

  The so-called Valley Fire, now ranked as the most destructive among scores of blazes that have ravaged the drought-stricken Western United States this summer, came amid what California fire officials described as "unheard of fire behavior" this season.

   

  A separate fire raging since Wednesday in the western Sierras has leveled more than 130 buildings and was threatening about 6,400 other structures, with thousands of residents under evacuation orders there, too, the California Department of Forestry and Fire Protection (Cal Fire) reported.

   

  Governor Jerry Brown declared a state of emergency in both areas, and mandatory evacuations were expanded as shifting winds sent flames and ash from the Valley Fire toward a cluster of towns in the hills north of Napa Valley wine country.

  As the following clip shows, locals had no time to prepare as they ran the gauntlet to survival…

  "Middletown is basically gone," said one local evacuee.

  "I saw flames all around … The wind was insane. I have never been so scared," she said.

   

  Mark Donpineo, 54, said he and two friends were trapped by the fire for four hours Saturday evening at a golf course in Hidden Valley Lake, taking cover in a culvert until the flames had passed.

   

  "We got some towels, wetted them down and basically saw the fire coming. You could hear explosions of propane tanks, the ridge was totally on fire, trees were blowing up," he said.

   

  Meanwhile, Cal Fire reported that 81 homes and 51 outbuildings had been lost in the four-day-old Butte Fire, which has charred more than 65,000 acres in the mountains east of Sacramento but was 20 percent contained.

   

  As of Sunday, firefighters were battling nearly three dozen large blazes or clusters of fires in California and six other Western states, according to the National Interagency Fire Center in Boise, Idaho.

  Sheriff Brian Martin described the fire as “the worst tragedy Lake County has ever seen.”

  

  

  

  

  

• A Flock Of Black Swans

  Submitted by Jeff Thomas via InternationalMan.com,

  In 1999, the Federal Reserve, under Alan Greenspan, convinced the US Congress to repeal the Glass-Steagall Act, which had been passed in 1932 to eliminate banks’ abilities to offer loans far beyond the actual level of their deposits.

  When I learned of this development in 1999, I anticipated that it was put through to allow banks to once again recklessly loan money and that the outcome would be essentially the same as what occurred in 1929 – a depression of major proportions.

  Major depressions do not occur overnight. They go in downward waves, interrupted at intervals by false recovery waves. The first major event of what would become the Greater Depression took place in 2007 with the housing crash. A year later, right on cue, came the first of the stock market crashes.

  Since then, the US Federal Reserve and the governments and central banks of much of the world have been involved in Band-Aid solutions to postpone further crashes, in spite of the fact that the economy is, in fact, a “dead economy walking.”

  The Band-Aids have been many and various and, at some point, one of them will fail. The fact that they are all Band-Aids and not true solutions assures that, when the first one lets go, they will all fail in succession. Only at this point will the average person understand that we have been in the early stages of a depression all along.

  What will happen will be a sudden and unseen event – a trigger that suddenly sends the economy downward, followed by another, then another, as the economy tumbles inexorably downward.

  Along the way, emergency measures will be utilised to “save” the economy. They will be drastic, including confiscation of bank deposits, plus massive money creation. There will be dramatic inflation and very possibly, hyperinflation.

  But the collapse will continue, unstoppably. Like any house of cards, once it begins to actually fall, no further Band-Aids will stop the inevitable.

  So, what might that trigger be?

  Well, there is literally no one in the world who might predict that with certainty. The reason is that as so many Band-Aids have been used by so many countries in so many areas of the economy, no one can say which one will fail first: which one will be the actual trigger that causes the chain reaction.

  I believe that we are now closing in on that time. The house of cards is becoming evermore fragile and we will not need to wait much longer before the event occurs. As we get closer, increasing numbers of people are seeing the writing on the wall and, more and more, I’m being asked the same two questions.

  “What Will the Fatal Trigger Be?”

  Here’s a brief list of possible triggers:

  • Creditors dump US debt back into the US market
  • Commodity prices spike
  • A crash occurs in the stock or bond market
  • A backlash occurs from countries sanctioned by the US
  • European countries default on their debt
  • The US dollar ends as the petrocurrency (causing a sale in US treasuries)
  • The US or EU introduce significant tariffs, diminishing world trade
  • Interest rates rise, as they did in 1929
  • The paper gold market crashes, when the shortage of physical gold is revealed
  • Banks freeze or confiscate deposits
  • FATCA accelerates the demise of the US dollar as the default currency
  • A credit collapse occurs (followed by dramatic inflation or hyperinflation)

  Any of the above is capable of triggering a collapse (and, as stated, this is not by any means an exhaustive list). Therefore, it would be wise to keep an eye out for indicators that one of them may occur. Any one of them that appears to be nearing the point of becoming a reality would suggest that the tipping point may occur soon.

  “How Will I Know in Advance?”

  Whatever advance warning you may have will be based on how closely you’re following the indicators that any of the possible triggers may be nearing fruition. Some, like the overbought stock market or the rise in commodity prices could kick in at any time.

  Others, such as a bank freeze on deposits, or the collapse of the ETF market in gold, could happen quite suddenly and without any warning at all.

  In discussing the above condition with investors, they often say, “Well, if it’s inevitable and I can’t time the event, there’s no use thinking about it. We’re all going to go down with the ship, so why bother?”

  Quite frankly, I’m astonished that so many investors are so complacent that they’re prepared to shrug their shoulders and accept their own economic demise, yet this assumption is very common.

  The enemy is not the coming events; the enemy is complacency toward those events.

  The investor therefore has two viable choices: to either get blindsided by events and become an economic casualty, or be prepared (as much as possible) for the crashes, regardless of what the trigger might turn out to be.

  Creating an Escape Plan

  There can be no perfect solution – one which allows you to retain your present life, exactly as it is, within the system, whilst the system around you is in a state of collapse.

  What can be done, however, is to remove your wealth and yourself from the system as much as possible, so that the impact of the collapse is minimised.

  As a basic set of assumptions, you might consider one or more of the following actions:

  • Remove all cash from exposure to bank freezes and confiscations by placing your money (other than three months of expenses) in banks in countries where no confiscation laws exist (i.e., outside of the EU, US and Canada).
  • Convert a major portion of your cash into precious metals, to be stored in a minimum-risk jurisdiction, such as Singapore, Hong Kong or the Cayman Islands.
  • If you’re a citizen and resident of a major country that is likely to be a casualty, create a place of legal domicile in an alternate country.
  • Invest in land and/or built property in that country, or similar jurisdiction (property is the most difficult asset for any government to confiscate). Choose a country that has no annual property tax, if possible.

  This is only the most basic of formats, but it works well, either in its entirety, or in part.

  Many readers may say, “But I’m not wealthy. I can’t do any of those things.”

  Again, this is complacency talking.

  Anyone with $1,000 can create a foreign bank account. Anyone who additionally has the price of an ounce of gold can begin to remove his wealth, no matter how small, from risk.

  Anyone with a skill can secure employment in a country where the damage is likely to be lesser than in his home country.

  The cloud on the horizon is a flock of black swans. No one can predict when they might land. What can be said for certain is that, at some point, they most certainly will.

  *  *  *

  A big part of any strategy to reduce your political risk is to place some of your savings outside the immediate reach of the thieving bureaucrats in your home country. Obtaining an offshore bank account is a convenient way to do just that.

  That way, your savings cannot be easily confiscated, frozen, or devalued at the drop of a hat or with a couple of taps on the keyboard. In the event that capital controls are imposed, an offshore bank account will ensure that you have access to your money when you need it the most.

  In short, your savings in an offshore bank will largely be safe from any madness in your home country.

  Despite what you may hear, offshore banking is completely legal and is not about tax evasion or other illegal activities. It’s simply about legally diversifying your political risk by putting your liquid savings in sound, well-capitalized institutions where they’re treated the best.

  You may want to check out Going Global, our comprehensive publication where we discuss our favorite banks and jurisdictions for offshore banking including, crucially, those that still accept Americans as clients and allow them to open accounts remotely for small minimums.

  Normally, this book retails for $99. But we believe this book is so important, especially right now, that we’ve arranged a way for US residents to get a free copy. Click here to secure your copy.

  

  

  

  

  

• The Tortoise? Or The Hair?

  Maybe it is ‘different’ this time…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• "There's Just No Cash" Oil Price Increase Will Not Come Fast Enough To Save Alberta

  Submitted by David Yager via OilPrice.com,

  “There’s just no cash.” That’s the Coles Notes from a senior banker describing the book of oil service loans he manages for one of Alberta’s leading lenders. There’s simply not enough cash flow to support current levels of debt.

  Bankers and borrowers have kicked the can down the road about as far as they can as more oilfield service (OFS) and exploration and production (E&P) companies default on their loans and seek more relief on lending covenants. While a significant oil price increase to lift all the sinking boats will surely come, it won’t happen soon enough. More of the same won’t work.

  Oil industry debt is everyday news. But the discussion is about the symptoms, not the ailment.

  Companies cannot borrow their way out of debt. Equity capital is only available at distressed valuations. Specialized OFS assets will fetch only a fraction of replacement cost—if somebody actually wants them. Although oil and gas reserve valuations are down by half, borrowers are being forced to sell them anyway to repair balance sheets. The last four months of 2015 will be very difficult for any company with meaningful amounts of debt. Same for their lenders, the other signatories to the loan agreement.

  As the banker said, “There’s just no cash.” Here’s what it means.

  The foundation of global credit markets is based upon the borrower’s capability, obligation and commitment to pay the money back. The amount of money anybody can or should borrow is dependent upon free cash. Not forecast cash flow, not earnings before interest, taxes, depreciation, and amortization (EBITDA), not good intentions. Free cash. How much money is available to service debt after all the other bills are paid. This is the key factor behind every credit application, from a car loan or home mortgage to an operating line of credit or senior secured term debt. The more free cash you generate, the more you can borrow. When free cash drops, the opposite is true.

  But what happens when an entire industry can no longer service previous levels of debt?

  ARC Financial produces a weekly chart calculating revenue, spending and upstream cash flow for the entire Canadian E&P sector for the current and preceding 14 years. Selected data has been reproduced below. MNP added 1998, 1999 and 2000 from prior reports. ARC calculates total revenue from all oil and gas produced, then deducts direct lifting and operating costs, taxes and royalties and the administrative cost of running the business. The result is “after-tax cash flow,” which is the free cash available for exploration, development, dividends and, of course, debt servicing.

  

  Gross revenue from production sales is in blue and after-tax cash flow in red. The green line is 2015’s estimated cash flow compared to prior years. The figures are not corrected for inflation.

  While the 2014 numbers aren’t finalized, ARC estimates total revenue was an all-time record $149.2 billion, generating after-tax cash flow of $67.1 billion, the second-highest in history. Combined with capital inflows from debt and equity and inter-company transfers, E&Ps invested $75 billion on conventional and oilsands capital expenditures (CAPEX, not shown). CAPEX in 2014 was also at an all-time record which created fabulous revenue and earnings for OFS.

  This year is brutal. ARC expects revenue to plunge 33.6 percent to $99 billion, the lowest number since 2009. Except for the recession, you have to go back to 2004 to find total revenue that low. But because today’s production mix is increasingly composed of high-cost oilsands, cash flow is expected to be only $28.9 billion, 43 percent of 2014’s levels. This is the lowest level of after-tax cash flow generated by producers since 2001.

  ARC’s estimated CAPEX this year is only $39.1 billion, 52 percent of last year’s levels. That’s why the active rig count is the lowest in years.

  If the whole industry only has 43 percent of 2014’s cash flow, then in theory it can only carry 43 percent of last year’s debt. Of course, debt is not evenly distributed but the point is clear; the industry’s macro balance sheet is under severe stress. When Canada’s Big Six banks reported their earnings for the third quarter ended July 31, 2015 it was noted these lenders had total exposure to the upstream oil and gas industry of about $44 billion. Including other sources of debt (bonds, other banks, equipment leasing companies), this figure is likely only a fraction of total obligations. It could easily be $60 billion, probably much more. With so many private operators complete figures are impossible to compile.

  At current oil prices, too many producers are not generating enough free cash for their debt levels. For oilsands, some bitumen is undoubtedly produced at a cash loss. Success at current prices is based entirely on geology. Some reservoirs are less price sensitive than others. Some E&Ps have less debt than others. Hedges on future production locked in last year at much higher prices cushioned the problem. As they expire, they cannot be replaced.

  When you see reports that some producers are cutting staff, slashing dividends and selling properties, that’s because they’ve hit the debt-to-free-cash wall. OFS is also in tough shape. E&Ps have demanded suppliers cut prices and vendors have complied. Free cash from operations is either nominal or non-existent. Some are in default, some are in special credit and some are insolvent. Service companies are also slashing or cancelling dividends. Like E&Ps, you pay your shareholders AFTER you have paid your banker.

  So, if too many outfits are seriously over-levered for current prices, now what? How this affects different companies is as diverse as the companies themselves. The quickest way to de-lever balance sheets is to sell things—either shares or assets—to raise cash. But to whom? At what price? What if this can’t be done?

  Lenders are also in this mess up to their nostrils. They’ve been hoping this problem would just go away, a strategy with significant merit considering the alternative. The first quarter of 2015 was mostly shock and awe as prices tumbled. Where’s the bottom? It came on March 17 when benchmark West Texas Intermediate (WTI) crude closed US$43.39. Or so everyone thought. The first quarter average price was US$48.54. Awful, but surely it couldn’t get worse.

  The second quarter looked promising as WTI recovered significantly, reaching US$61.36 on June 10. The average price in Q2 was US$57.85. There was optimism that the worst was over. Borrowers requesting covenant waivers and forbearance letters were, for the most part, accommodated. No need to panic. Rising oil prices saved the day in 2009. Perhaps this would happen again.

  But the summer of 2015 has been brutal and set the tone for the rest of the year. Oil started to slide in July, averaging only US$50.90, and fell further in August until WTI reached a new six year low of US$38.22 on August 24. It closed on Friday September 4 at US$45.77. Futures markets, which showed materially higher forward prices earlier this year, indicate few believe crude will recover soon. The October 2016 WTI price was only US$51.59 on September 4. October 17 was US$55.47. No hedging opportunities now.

  What will lenders do? When Canada’s Big Six banks reported results for the quarter ended July 31, 2015, they declared Gross Impaired Loans of $13.8 billion, about $1.8 billion more than the same period in 2014. They set aside more funds for bad oil and gas loans but also published explanations of how their oilpatch exposure was manageable. But things got much worse in August. This figure will surely rise for year-end reports prepared as of October 31, 2015.

  In the next few months, non-performing loans (offside of covenants) will be split into two categories: salvageable and hopeless. The former could live to fight another day. The latter may end up with new owners, new lenders or completely insolvent with assets auctioned to the highest bidder.

  Salvageable loans will be those where management has demonstrated its understanding of the seriousness of breaching covenants and will have done everything possible to work with the bank, keep the credit in place and preserve shareholders’ equity. This includes cutting costs, slashing or eliminating dividends and raising equity or selling assets to reduce debt and de-leverage. Key elements include lender relationship management, presentation of all relevant data, credible forecasts and respect for who is really driving the bus. Covenants will be amended and stretched. There will be a serious effort by lenders to keep these borrowers and loans solvent to maintain the debt as an asset on their own balance sheets.

  Hopeless loans will be dealt with increasingly expeditiously. These are companies with business models that no longer work or companies which are unable or unwilling to present the information lenders require to further amend credit terms that have already been amended. Impossible demands for cash will be made from asset sales or equity injections. When this can’t be done, the file will be moved to special credit. There, the lender will do whatever it must to recover as much cash as possible. Options include selling the debt or the assets at whatever price can be secured. Shareholders’ equity will be zero, current management will likely be replaced and companies may disappear.

  Back in the last half of the 1980s, things were equally awful. Then, at least one major bank converted its loan to a drilling contractor to equity, in the form of preferred shares, coined “distress prefs.” The covenants were as rigid as the debt, but it worked. Whether lenders and borrowers will become this creative this time is not yet known. The story goes the largest drilling contractor in Canada in the 1980s was the Royal Bank of Canada. It’s safe to say they don’t ever want to get back into this business.

  There are significant pools of capital – equity and debt – waiting patiently to exploit opportunities. Valuations and calling the bottom have been major obstacles. Lenders will take care of that. Owners and equity holders on the wrong side of their debt will no longer be in a position to dictate price or value. Deals will get done.

  There is great remorse on all sides. Companies are realizing when business was good they got greedy and tried to grow faster than cash flow permitted, and used debt instead of equity to lever shareholder returns. Lenders are realizing they loaned money to management teams which talked a good story but in the end didn’t have the business model or know-how to manage the company through a serious and prolonged slump.

  To remain competitive, the Canadian oilpatch must seriously de-lever. Everybody – lenders and borrowers – will be taking a haircut until total debt is in line with free cash. Many companies will become “second owner businesses” as new lenders or owners restructure and reduce debt until it reaches a level the market can support.

  It would be great to be wrong but oil prices will not solve this problem anytime soon.

  

  

  

  

  

• Enough Already! Raise The Rate To 3 Percent

  Submitted by Calibrated Confidence

  Enough Already! Raise The Rate To 3 Percent

  Raise the Federal Funds Rate (FFR). Move the range to 0.25-0.50 percent and do it on a surprise announcement.  We should raise the rate to 3 percent overnight.  TV and all the pundits look at the same headline data and say the economy is strong.

  The analysts have their confidence in their proclamations regarding the impact of raising rates according to the recent flood of equity specific “defensive” notes.  One economist who emailed Benzinga believes any increase in rates will benefit banks through the interest paid on reserves, provided the monetary bases keeps expanding, as the Fed typically sets the IOER paid on reserves to the upper-bound of the FFR.  Let us see how well the money managers have taken advantage of all this time to diversify and prepare for any impacts from a rate increase, whether detrimental to prices or beneficial to regional banks like popular opinion says (risk parity strategies be damned).

  The 10-Year Real Rate has rebounded from negative territory and currently sits at 2.21 percent as of August, below the average of 2.40 percent since Jan 1962. Looks like the economy is saved following the brutal beating unleashed on the savers of this country in order to achieve balance in the universe by making sure GDP maintains 3 percent growth Y/Y, which it didn’t but don’t tell anyone.

  

  Introduce a little anarchy. If the economy is so strong and everyone is so well prepared, then take the rate to 3 percent overnight. Why pretend to walk the FFR up in 25 bps increments for 18-24 months? The weakness in regional Fed District Economic Conditions Index 3-Month Average as reported in the most recent Beige Book does not appear to be impacting the future earnings expectation of the S&P 500 constituents as the index remains elevated since conditions declined beginning around Q4 2010:.

  

  Take FFR to 3 Percent overnight.  Just do it!  What are you waiting for?  Yes you can, just do it!

  Since data isn’t being analyzed in the proper perspective we can just say Net Interest Margins are growing, it’s all awesome, hike those rates and expand the monetary base and keep the QE alive for the banks (although it’ll be more subtle and we know how much the Fed likes to be subtle):

  

   

  Everything is so wonderful that a rate hike would equate to saying the Fed has won. Seven years of ZIRP and a few selling periods when the Fed stopped POMO’s and QE injections, we can easily say with extreme confidence that the Fed won. And by won we mean didn’t ruin the system entirely. Except they did.

  We still have elevated levels of people not working who want a job now and a skewed participation rate thanks to demographics in the US:

  

   

  ….our debt is at an unfathomable, unrepayable and national security threat level.

  

   

  It’s all awesome again!  So much so that we should take the FFR to 3 percent overnight, not just 0.25-0.50 bps. Remember, everything is awesome again! Oh yeah, and everything is priced in according to the TV people so there’s nothing to even worry about right? Right. Wrong.  We’re repeating 2011 and we’ve wasted a year of price discovery now that we’re under 2014 levels for this same time last year.

  

   

  Sector ETFs have broken down but that doesn’t mean the economy isn’t awesome. The only data that appears to be important this time around is Housing/Auto Sales and the Jobless Rate (Unemployment Rate).

  

   

  Consumers who have heard from their evening news channels and regional newspapers that everything is so rosy have gone out and boosted expenditures while maintaining a flat savings rate (savings as a percent of disposable income).

  

  People are consuming, oil is low, and, according to analysts, the recent selloff in equities has provided households with a windfall opportunity to buy companies well-positioned in sectors with strong-growth prospects and historically low EV/EBITDA multiples. Things are so fantastic right now that no one even cares about the Margin Debt levels and the fact that the borrowing of capital is being used to get long the market. For the sake of this piece we will ignore this and never focus here again because a 3 percent overnight hike in the FFR would have no impact here or anywhere else right?  No but let’s get back to the bullish story about sun-drenched fields and Unicorns on Rainbows.

  The Buffett Indicator is a mere 2 Standard Deviations away from its mean and still below the peak in 2008, so clearly we are in a stable and rational economy given the percent of Corporate Earnings to GDP, everything is still awesome until we hit at least three Standard Deviations right?

  

   

  This piece is meant to be tongue in cheek. The current state of global markets is unstable at best. The underlying fundamentals used to place value on assets are skewed and have become severely disconnected from the pricing mechanism. Recently Ray Dalio’s Risk Parity trading has been blamed for the market correction.  The strategy has been around since 2010 and blaming it for the current turmoil is dangerous mostly because it ignores China’s FX actions, the 19+ central bank interest rate cuts in Q1 2015, and the growth of equity-linked OTC Derivatives according to data from the Bank for International Settlements aside from the FX drama, Greece, and Australian “default”.

  The seriousness attached to the speculation of a bounded range increase in FFR to 0.25-0.50 percent from 0.00-.0.25 percent is ridiculous. If the economy is so strong, as has been reiterated daily in newspapers and on TV, then 25bps should be nothing. If things are so great, let us go for 3 percent. The Swiss National Bank removed its 1.20 Euro peg and the Franc has retraced more than 78 percent of that initial move. Why can’t the Fed show some conviction and spike rates? Here’s to 3 percent FFR on amazing US economic strength!

  

   

  If it truly is widely believed things are so awesome then take rates to 3 percent and get some ammo back in the Fed’s pocket because we’re going to need it when one of these unstable and overly indebted sovereign nations begins the next leg of the epic current war. Maybe then the CME can stop incentivizing the US Fed and global central banks to trade S&P 500 e-mini futures:

  

  

  

  

  

  

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• Gold, Silver, and Horse Betting Report 13 Sep, 2015

  Consider the sport of betting on the sport of horse racing. It’s actually similar to the analysis of the gold and silver markets. How’s that?

  First, there is the manic-depressive crowd. Sometimes (as we are told—we don’t hang out at race tracks) the bettors sometimes get overly excited about a horse with slim chances to win, or get totally unexcited about a strong horse. The track responds by lowering or raising the payout for winning, respectively. The more betting on a horse, the lower the payout.

  The track does not care which horse is likely to win or not win. What it wants to do is take its rake from the total bets placed. It does this by making a spread between what it takes in on all the horses, and what it will have to pay out if any given horse wins. We don’t know the precise formula, but if horse X gets ¼ of the total bets then the payout if X wins had better be less than 4:1.

  In keeping with our theme of emphasizing spread rather than price, there is a spread that smart bettors should be paying attention to. A smart horse bettor should have a way of assessing the probability of X winning (and for every other horse in the race). He should bet when the payout is higher than the probability of winning. Suppose in the frenzy of betting on X, almost no one bets on Y. So Y pays 10:1. If a bettor assesses Y’s odds as 5:1, it’s a good bet. Yes, the horse is not probable to win. However, the payout is greater than the odds. Given enough bets with 5:1 odds and 10;1 payouts, a bettor will win in the long run.

  We admit to not knowing much about betting at racetracks. There may be lots of reasons why this scheme is not practical (not least of which is being accurate in assessing odds for each horse). That’s not the point, and we certainly don’t recommend anyone to start betting on horse racing.

  The point is that the “house” focuses on spread. Sophisticated operators focus on spread. You should focus on spread too.

  Mainstream analysis often dismiss gold as having no value, on grounds that they know not how to assess it. Gold bugs often like to divide some measure of the quantity of dollars by some measure of the quantity of gold to get an intrinsic value. This exercise in arithmetic usually shows that gold is massively underpriced.

  Both approaches are equally wrong.

  The fact is that virtually all of the gold mined over the millennia is still in human hands. The proportion for silver is lower, but still orders and orders of magnitude greater than that of any other commodity. This means that the people on this planet do value gold and silver, without much regard to quantity already held. The value they place on the metals can be measured at the margin. How?

  By studying spreads.

  We can theorize that people will value gold and silver more highly (i.e. value the dollar at a much lower level). But that is not a measurement of the current market reality. It is speculation. Perhaps smart speculation. It may even be based on sound economics. But it’s nothing to do with the current market and supply and demand conditions within it.

  …

  Monday was a holiday in the US (Labor Day), so it was a short week.

  The prices of the metals went down, with the gold move slightly larger than the silver. Yes, but what happened to the spreads of the metals this week? Read on…

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

         The Prices of Gold and Silver 

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

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

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

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

  Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio moved down again this week. Is it bouncing off support, or just correcting before it goes higher? Read on… 

  The Ratio of the Gold Price to the Silver Price 

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

  Here is the gold graph.

         The Gold Basis and Cobasis and the Dollar Price
  
  

  The price of the dollar rose slightly, but the scarcity (i.e. cobasis) of gold backed off slightly. At least for the October contract.

  The fundamental price did not move much. It’s still over $1,270.

  Now let’s look at silver.

  The Silver Basis and Cobasis and the Dollar Price
  
  

  While the price of the dollar went up (i.e. the price of silver, measured in dollars went down) the scarcity rose.

  The silver fundamental price rose, and is now about a dollar over the market price.

  The fundamental ratio moved down slightly, but is still over 80.

   

  Monetary Metals may sponsor an event in London in early October, and another in Sydney in late October, to discuss economics and markets, with a focus on how to approach saving, investing, and speculating. Please let us know if you may be interested in attending either one here.

   

  © 2015 Monetary Metals

  

  

  

  

• A Refugee Crisis Made In America

  Submitted by Philip Giraldi via TheAmericanConservative.com,

  On April 29th, 2008 I had a Saul on the Road to Damascus moment. I had flipped open the Washington Post and there, on the front page, was a color photo of a two year old Iraqi boy named Ali Hussein being pulled from the rubble of a house that had been destroyed by American missiles. The little boy was wearing shorts and a t-shirt and had on his feet flip-flops. His head was hanging back at an angle that told the viewer immediately that he was dead.

  Four days later on May 3rd a letter by a Dunn Loring Virginia woman named Valerie Murphy was printed by the Post. Murphy complained that the Iraqi child victim photo should not have been run in the paper because it would “stir up opposition to the war and feed anti-US sentiment.” I suppose the newspaper thought it was being impartial in printing the woman’s letter, though I couldn’t help but remember that the neocon-dominated Post had generally been unwilling to cover anything antiwar, even ignoring a gathering of 300,000 protesters in Washington in 2005. Rereading the woman’s complaint and also a comment on a website suggesting that the photo of the dead little boy had been staged, I thought to myself, “What kind of monsters have we become.” And in truth we had become monsters. Bipartisan monsters wrapped in the American flag. Bill Clinton’s Secretary of State Madeleine Albright once said that killing 500,000 Iraqi children through sanctions was “worth it.” She is now a respected elder statesman close to the Hillary Clinton campaign.

  I had another epiphany last week when I saw the photo of the little Syrian boy Aylan Kurdi washed up on a Turkish beach like a bit of flotsam. He was wearing a red t-shirt and black sneakers. I thought to myself that many Americans will shake their heads when looking at the photo before moving on, more concerned about Stephen Colbert’s debut on the Late Show and the start of the NFL season.

  The little boy is one of hundreds of thousands of refugees trying to get to Europe. The world media is following the crisis by focusing primarily on the inability of unprepared local governments to deal with the numbers of migrants, asking why someone somewhere can’t just “do something.” This means that somehow, as a result, the vast human tragedy has been reduced to a statistic and, inevitably, a political football.

  Overwhelmed by thousands of would-be travelers, Hungary suspended train service heading towards Western Europe while countries like Serbia and Macedonia deployed their military and police along their borders in a failed attempt to completely block refugees. Italy and Greece have been overwhelmed by migrants arriving by sea. Germany, to its credit, is intending to process up to 800,000 refugee and asylum applications, mostly from Syria, while Austria and Sweden have also indicated their willingness to accept many more. Immediate neighbors of the zone of conflict, notably Turkey, Lebanon and Jordan are hosting more than three million of those who are displaced, but the wealthy Arab Gulf countries and Saudi Arabia have done little or nothing to help.

  Demands for a European unified strategy to deal with the problem are growing, to include sealing borders and declaring the seas off of preferred departure points in North Africa and Asia to be military zones where undocumented ships and travelers will be intercepted and turned back. One also has to suspect that the refugee crisis might be exploited by some European politicians to justify NATO “humanitarian” intervention of some sort in Syria, a move that would have to be supported by Washington. But while the bickering and maneuvering goes on, the death toll mounts. The recent discovery of 71 dead would-be migrants who suffocated in the back of a locked truck found in Austria, to include five children and a toddler, horrified the world. And that was before the dead three year old on the Turkish beach.

  Many of the would-be migrants are young men looking for work in Europe, a traditional enterprise, but most of the new arrivals are families escaping the horrors of war in Syria, Iraq, Afghanistan, and Yemen. Their plight has been described in the media in graphic terms, families arriving with nothing and expecting nothing, fleeing even worse conditions back at home.

  The United States has taken in only a small number of the refugees and a usually voluble White House has been uncharacteristically quiet about the problem, possibly realizing that allowing in a lot of displaced foreigners at a time when there is an increasingly heated debate over immigration policy in general just might not be a good move, politically speaking. But it should perhaps be paying some attention to what caused the problem in the first place, a bit of introspection that is largely lacking both from the mainstream media and from politicians.

  Indeed, I would assign to Washington most of the blame for what is happening right now. Since folks inside the beltway are particularly given to making judgements based on numerical data they might be interested in the toll exacted through America’s global war on terror. By one not unreasonable estimate, as many as four million Muslims have died or been killed as a result of the ongoing conflicts that Washington has either initiated or been party to since 2001.

  There are, in addition, millions of displaced persons who have lost their homes and livelihoods, many of whom are among the human wave currently engulfing Europe. There are currently an estimated 2,590,000 refugees who have fled their homes from Afghanistan, 370,000 from Iraq, 3,880,000 million from Syria, and 1,100,000 from Somalia. The United Nations Refugee Agency is expecting at least 130,000 refugees from Yemen as fighting in that country accelerates. Between 600,000 and one million Libyans are living precariously in neighboring Tunisia.

  The number of internally displaced within each country is roughly double the number of those who have actually fled and are seeking to resettle outside their homelands. Many of the latter have wound up in temporary camps run by the United Nations while others are paying criminals to transport them into Europe.

  Significantly, the countries that have generated most of the refugees are all places where the United States has invaded, overthrown governments, supported insurgencies, or intervened in a civil war. The invasion of Iraq created a power vacuum that has empowered terrorism in the Arab heartland. Supporting rebels in Syria has piled Pelion on Ossa. Afghanistan continues to bleed 14 years after the United States arrived and decided to create a democracy. Libya, which was relatively stable when the U.S. and its allies intervened, is now in chaos, with its disorder spilling over into sub-Saharan Africa.

  Everywhere people are fleeing the violence, which, among other benefits, has virtually obliterated the ancient Christian presence in the Middle East. Though I recognize that the refugee problem cannot be completely blamed on only one party, many of those millions would be alive and the refugees would for the most part be in their homes if it had not been for the catastrophic interventionist policies pursued by both Democratic and Republican administrations in the United States.

  It is perhaps past time for Washington to begin to become accountable for what it does. The millions of people living rough or in tents, if they are lucky, need help and it is not satisfactory for the White House to continue with its silence, a posture that suggests that the refugees are somehow somebody else’s problem. They are, in fact, our problem. A modicum of honesty from President Barack Obama would be appreciated, perhaps an admission that things have not exactly worked out as planned by his administration and that of his predecessor. And money is needed. Washington throws billions of dollars to fight wars it doesn’t have to fight and to prop up feckless allies worldwide. For a change it might be refreshing to see tax money doing some good, working with the most affected states in the Middle East and Europe to resettle the homeless and making an honest effort to come to negotiated settlements to end the fighting in Syria and Yemen, both of which can only have unspeakably bad outcomes if they continue on their current trajectories.

  Ironically, American hawks are exploiting the photo of the dead Syrian boy to blame the Europeans for the humanitarian crisis while also demanding an all-out effort to depose Bashar al-Assad. Last Friday’s Washington Post had a lead editorial headlined “Europe’s Abdication,” and also featured a Michael Gerson op-ed urging immediate regime change in Syria, blaming the crisis solely on Damascus. The editorial railed against European “racists” regarding the refugee plight. And it is not clear how Gerson, an evangelical neoconservative former speech writer for George W. Bush, can possibly believe that permitting Syria to fall to ISIS would benefit anyone.

  We Americans are in something approaching complete denial about how truly horrible our nation’s recent impact on the rest of the world has been. We are universally hated, even by those who have their hands out to receive their Danegeld, and the world is undoubtedly shaking its head as it listens to the bile coming out of the mouths of our presidential candidates. Shakespeare observed that the “evil that men do lives after them,” but he had no experience of the United States. We choose to dissimulate regarding the bad choices we make followed up with lies to justify and mitigate our crimes. And still later the evil we do disappears down the memory hole. Literally.

  In writing this piece I looked up Ali Hussein, the little Iraqi boy who was killed by the American bomb. He has been “disappeared” from Google, as well has the photo, presumably because his death did not meet community standards. He has likewise been eliminated from the Washington Post archive. The experience of Winston Smith in George Orwell’s 1984 immediately came to mind.

  

  

  

  

  

• US Futures Jump Unaware Gartman Short Has Been Stopped Out, China Hugs Flatline

  Following a string of weak economic news out of both Japan and the US, it was China’s turn to disappoint which it did over the weekend with the worst fixed-asset investment data – the primary driver of China’s GDP – since 2000, as well as yet another miss in Chinese industrial output, just the latest two indications that China’s economy is grinding to a halt if not slamming into reverse.

  

   

  The result: just like with Japan’s latest dramatic economic deterioration, China’s data was merely taken as yet another indication the PBOC will be forced to ease more in the coming days. As Reuters reported, “the data add to expectations that Beijing will respond with more measures to prop up the economy. “The numbers fit with our view that China will have to roll out more monetary easing,” said Fumio Nakakubo, Japan CIO at UBS’s wealth management division.”

  Because if it hasn’t worked so far, it is only because not enough has been applied right?

  That, however, may not work for Japan where there has been a resurgence in calls for more easing out of the BOJ although as we first noted last year, and as the IMF confirmed last week, the BOJ no longer can boost QE simply because there is nothing incremental it can buy. It also explains why Reuters reported earlier that “Bank of Japan policymakers are in no mood to expand monetary stimulus this week, sources familiar with their thinking say, even as poor data challenges their presumption that economic recovery will boost inflation to its 2 percent target next year.”

  There is still hope for an October rate hike, but just like September, the closer we get to the date, the more unlikely such a hike will “suddenly” become as even the BOJ is now officially out of QQE boosting ammo, and the best it can hope for is to last until 2017 without prematurely tapering.

  And while the Shanghai Composite opened green only to turn red moments ago as doubt starts to creep in that someone, anyone will ease more…

  

   

  … we don’t expect much of a move from China. As the following chart shows, ever since the Chinese government killed trading in Chinese index futures last week, the “market” is anything but – and has literally flatlined as virtually nobody trades anymore. In other words, China has successfully CYNKed its entire stock market.

  

   

  Earlier, the PBOC modestly raised the Yuan, pushing it higher by 0.02% to 6.3709, up from 6.3750, although even that move seems rather unremarkable by recent standards – as if even China is now waiting for the Fed.

  

   

  For now, US equity futures are higher on the day, rising by 9 point after being 14 points higher ealier, driven mostly by USDJPY correlation algos, and perhaps by Goldman’s conviction that the Fed will not hike in September and may delay hiking until 2016 altogether.

  

   

  However, we expect this initial euphoria higher to fade momentarily, once the vacuum tubes realize that the catalyst of Friday’s surge higher, namely Gartman’s latest flipflopping is no longer on the table. As a reminder, this is how we paraphrased Dennis in “A Warning For The Bears: Gartman Goes Short S&P Futures, “Very Worried In Catholic Terms“

  NEW RECOMMENDATION: we wish to sell the S&P futures short this morning, fearing that a major top hss developed and that the recent consolidation in the stock market is precisely that: a consolidation before the next leg downward.

   

  We’ll sell the S&P future short and will buy the December T-note at the same time, with the S&P trading 1933.00 as we write and with the Dec T-note future trading 127 ¼. We’ll risk no more than 1.5% on either position and we look for the consolidation in the S&P to resolve itself sharply lower as discussed at length above.

  Well, as of tonight, just 1 trading day after his latest reco, Gartman has been stopped out as his 1.5% limit was hit when futures rose above 1962 this evening.

  So with Gartman no longer a 100% assured fade, the algos are now flying blind and anything is possible.

  That said, for the real action we will just have to wait until Thursday when the Fed either proceeds with the first rate hike in 9 years or, far more likely, postponed once again… due to “risk management” considerations of course.

  

  

  

  

  

• An Angry China May Cancel Xi Trip To Washington Over US Cyber Sanctions

  A little over a week ago, FT suggested that the US was set to slap China with sanctions in retaliation for what the US claims are a series of cyber attacks. The news came a month after the NSA leaked a “secret” map to the press which purported to show the locations of hundreds of cyber intrusions which NBC said were used “to steal corporate and military secrets and data about America’s critical infrastructure, particularly the electrical power and telecommunications and internet backbone.”

  Furthermore, the report continued, “the prizes that China pilfered during its ‘intrusions’ included everything from specifications for hybrid cars to formulas for pharmaceutical products to details about U.S. military and civilian air traffic control systems.” NBC cited “intelligence officials.”

  The release of the map and subsequent indication that the Obama administration felt it needed to send a message in the wake of the OPM hack described as “the largest theft of US government data ever,” marked the culmination of a long cyber propaganda campaign which began with accusations that North Korea had attempted to sabotage the release of a Seth Rogen film and reached peak absurdity when Bloomberg reported that Chinese hacker spies had taken control of the Penn State engineering department. 

  Ultimately, all of this prompted the administration to “prepare a raft of sanctions to respond to [the] mounting commercial espionage,” FT reported. The problem with applying the sanctions now however, is that Xi Jinping is preparing to visit Washington and as anyone who knows anything about Xi is fully aware, he is not a man who enjoys being embarrassed, a fact that’s led some officials to voice concerns about the wisdom of leveling the sanctions now as opposed to after Xi and Obama have met and the Chinese President is back home in Beijing. The thinking is essentially this: “why risk making things awkward when the US could just wait and apply the sanctions later, allowing Xi to save face?” 

  Well sure enough, it now looks like the very idea that Washington is set to move ahead with the sanctions may be enough to prompt Xi to cancel the trip altogether. The Hill has more:

  Sanctions punishing China for hacking U.S. companies could drive Beijing to cancel President Xi Jinping’s upcoming U.S. visit, according to experts and former administration officials.

   

  The Asian power is increasingly anxious about the potential of economic penalties ahead of what’s seen as an important summit for the future of the U.S.-China relationship.

   

  “The Chinese right now are getting very concerned because they understand this will create embarrassing optics around the visit for them,” said Samm Sacks, China analyst at the Eurasia Group, a political risk consulting firm, who has advised government agencies on Chinese tech policy.

   

  While some experts and former White House cybersecurity officials are wary the administration will aggravate Beijing just days before Xi lands in Washington, current officials have privately indicated sanctions may be imminent.

  Then again, The White House is also concerned that its reputation (or whatever is left of it as it relates to relations with China) will be damaged if the US allows a diplomatic visit to dictate America’s response to what’s been billed as aggressive cyber warfare: 

  “If they don’t announce the sanctions soon,” Sacks said, “it makes the Obama administration look weak.”

   

  But when those penalties hit is a major question.

   

  Many see little upside to timing the sanctions this close to the meetings. After months of anticipation, such a move would eliminate any chance of a worthwhile dialogue on cybersecurity at the summit and compound the inevitable blowback, policy specialists agreed.

   

  “You’re not going to get any better chance to talk to them than right now,” said Jason Healey, a former director of cyber infrastructure protection at the White House. “If I were Obama, I would want some running room.” 

   

  Healey and others believe the rumors are meant simply as a message to the Chinese delegation as it prepares to make the trip stateside.

   

  “My sense was that the leaks were happening to try and create some kind of pressure on the Chinese as they come into the summit, to get some type of traction with them,” said Chinese cyber policy expert Adam Segal, a senior fellow at the Council on Foreign Relations.

   

  Others have heard the leaks were not intentional, and came from hard-liners within the administration who want to press forward with sanctions.

   

  Either way, the U.S. is in a rare position to apply cybersecurity pressure on China. Many believe the White House has less to lose than its counterpart during the upcoming summit.

   

  Within the Obama administration, “there’s a tolerance of having a bad visit,” Sacks said.

  Beijing officials are more concerned about the international community’s perception of the meetings, foreign policy experts agreed.

   

  “They want to send the signal about [Xi’s] arrival on the international stage,” Segal explained.

  In the end, this is just further evidence of worsening relations between the US and China. If the situation is so tenuous that sanctions related to hacking have the potential to derail a meeting between the leaders of the two countries which now preside over a world that’s returned to bipolarity for the first time since the fall of the USSR, then constructive dialogue around issues like China’s military buildup in the Spratlys or, more recently, the presence of the Chinese navy off the coast of Alaska may be all but impossible going forward and as Russian foreign minister Sergei Lavrov reminded the US last week, when dialogue isn’t possible, “unintended incidents” are more likely to occur.

  Of course something tells us Xi wasn’t really looking forward to the trip in the first place so we doubt he’ll be losing sleep…

  

  

  

  

  

  

• Monsanto Stunned – California Confirms 'Roundup' Will Be Labeled "Cancer Causing"

  Submitted by Claire Bernish via TheAntiMedia.org,

  California just dealt Monsanto a blow as the state’s Environmental Protection Agency will now list glyphosate – the toxic main ingredient in the U.S.’ best-selling weedkiller, Roundup – as known to cause cancer.

  Under the Safe Drinking Water and Toxic Enforcement Act of 1986 — usually referred to as Proposition 65, its original name — chemicals that cause cancer, birth defects, or other reproductive harm are required to be listed and published by the state. Chemicals also end up on the list if found to be carcinogenic by the International Agency for Research on Cancer (IARC) — a branch of the World Health Organization.

   

  In March, the IARC released a report that found glyphosate to be a “probable carcinogen.”

  Besides the “convincing evidence” the herbicide can cause cancer in lab animals, the report also found:

  “Case-control studies of occupational exposure in the U.S.A., Canada, and Sweden reported increased risk for non-Hodgkin lymphoma that persisted after adjustments to other pesticides.”

  California’s decision to place glyphosate on the toxic chemicals list is the first of its kind. As Dr. Nathan Donley of the Center for Biological Diversity said in an email to Ecowatch, “As far as I’m aware, this is the first regulatory agency within the U.S. to determine that glyphosate is a carcinogen. So this is a very big deal.”

  Now that California EPA’s Office of Environmental Health Hazard Assessment (OEHHA) has filed its “notice of intent to list” glyphosate as a known cancer agent, the public will have until October 5th to comment. There are no restrictions on sale or use associated with the listing.

  Monsanto was seemingly baffled by the decision to place cancer-causing glyphosate on the state’s list of nearly 800 toxic chemicals. Spokesperson for the massive company, Charla Lord, told Agri-Pulse that

  "Glyphosate is an effective and valuable tool for farmers and other users, including many in the state of California. During the upcoming comment period, we will provide detailed scientific information to OEHHA about the safety of glyphosate and work to ensure that any potential listing will not affect glyphosate use or sales in California.”

  Roundup is sprayed on crops around the world, particularly with Monsanto’s Roundup-Ready varieties — genetically engineered to tolerate large doses of the herbicide to facilitate blanket application without harming crops. Controversy has surrounded this practice for years — especially since it was found farmers increased use of Roundup, rather than lessened it, as Monsanto had claimed.

  Less than a week after the WHO issued its report naming glyphosate carcinogenic, Monsanto called for a retraction — and still maintains that Roundup is safe when used as directed.

  On Thursday, an appeals court in Lyon, France, upheld a 2012 ruling in favor of farmer Paul Francois, who claimed he had been chemically poisoned and suffered neurological damage after inhaling Monsanto’s weedkiller, Lasso. Not surprisingly, the agrichemical giant plans to take its appeal to the highest court in France.

  It’s still too early to tell whether other states will follow California’s lead.

  

  

  

  

  

• Lord Of The Flies: Dystopia Is Arriving

  Submitted by Dave Kranzler via Investment Research Dynamics,

  Paper money eventually returns to its intrinsic value – zero  – Voltaire

  I was driving around Denver yesterday doing my “boots on the ground” due diligence scouting of the local housing market.  I continue to see some “sold” and “under contract” signs but I’m seeing a pile-up forming in new “for sale,” “price reduced,” and “for rent” signs.   The traffic update on the sports radio reported a back-up at an intersection in Denver caused by a fist-fight that had broken out between two drivers.  This country is sliding back into neanderthal times.

  The U.S. economic system is slipping into dystopia and the Government/Fed is doing everything it can to try and prevent the process.  The two most obvious signs of this are the perpetual market interventions by the PPT to prevent a stock market dump and the relentless propaganda flowing through the mainstream media which originates from the policy-implementing elitists (business and political).  Both efforts are insidious attempts to force control over our system

  Overnight this week, the S&P 500 e-mini futures were halted twice.   The SPX mini is the Fed’s choice intervention tool because it can direct the market with minimal capital requirements.  The e-mini is hyper-sensitive to big orders and tends to lead the big SPX directionally because of this.   The emini trading was halted after a sudden plunge in the futures at 5:51 a.m. EST, after which a massive buy order (the PPT) hit the tape and spiked the eminis straight up. The market was halted again after the spike up stalled and the emini was about to plunge again.   You can see the action here:   E-mini Market Halt

  The graphic linked above was provided by Nanex’s Eric Hunsader.  Prior to the market’s first market halt, Hunsader tweeted:  “emini getting tossed around like a rag doll:”

  

  I found Hunsader’s allusion to “Lord of the Flies” to be quite haunting. For me it encapsulates the societal, political and economic direction in which the United States is headed. Rule of Law has been completely eroded by corrupt Presidents and citizen nonchalance. Many beside me have alluded to the fact that the U.S. political system now resembles that of a Central American Banana Republic. That’s no secret to anyone who cares to peek at reality.

  But where this whole process starts to get scary is when that needle heads toward “Lord of the Flies.” That is the point at which we will see and experience the truly dark side of humanity. Too me the outbreak of fistfights at traffic intersections and the herds of panhandlers standing on busy urban and suburban corners reflects the movement of that needle past Banana Republic to the left…

  I’m not an e-wave theory advocate but there’s merit to some of the analysis.  Robert McHugh is probably the most skilled practitioner of it these days and he’s run 5 different “wave” scenarios – all of them suggest a high probability of serious market crash coming soon – he specifically references the August sell-off as “gentle” in comparison.

  If this stock market does what we all know it will do eventually, which is seek a level that reflects its true underlying intrinsic value, all hell will break loose in this country and we’ll start hearing reports of much worse occurrences than fist-fights at traffic intersections.

  What is the “intrinsic value” of the S&P 500?  Based studying the earnings of enough S&P 500 companies using the GAAP accounting standards that were in place 20-30 years ago – vs. non-GAAP, adjusted-GAAP, and new GAAP accounting applications used today – I would suggest that S&P 500 has “fair value” around the 500-600 level.  A large portion of reported net income/EPS is income that is non-cash and is manufactured by new accounting gimmicks.

  The S&P 500 hit 666.79, which is in my “fair value” range, intra-day on March 6, 2009 (no, I don’t read any significance into “666”).  We saw how the Fed and the Treasury responded: they began dumping trillions of printed dollars into the banking system and drastically altered some of the GAAP accounting rules – i.e. they changed the rules of the game.  This was in response to the S&P 500 seeking fair value.

  What is frightening to contemplate, in the context of Eric Hunsader’s haunting Tweet, is what the Government’s response will look like this time around when the PPT loses control – which I believe is occurring now – and the S&P plummets again in an attempt to seek it’s proper level.  Remember:  just like water, the stock market eventually always finds its own level.

  

  

  

  

  

• What Happens When Central Banks Hike Rates In The "New Normal"

  Ten days ago, using Bank of America data, we summarized what it means to live in the New Normal: “In the 110 months [since the last Fed hike] global central banks have cut interest rates 697 times, central banks have bought $15 trillion of financial assets, zero [or negative] interest rates policies have been adopted in the US, Europe & Japan. And, following the Great Financial Crisis of 2008, both stocks and corporate bonds have soared to all-time highs thanks in great part to this extraordinary monetary regime.”

  Indeed, what has happened in the past 7 years is nothing short of the greatest attempt ro reflate asset prices (if not so much the economy – that will come when the helicopters start paradropping bags of cash) the world has ever seen, driven entirely by the central banks and China. In fact, it is now so obvious even JPM finally figured it out.

  

  However, while the desperate attempt to monetize a quarter of global GDP in tradable assets just to boost the confidence (and wealth) of the “1%” is no longer lost on anyone, the reality is that some banks did try to tighten monetary conditions and hike rates.

  This is how they fared. According to the WSJ: “In the seven years since the world’s central banks responded to the financial crisis by slashing interest rates, more than a dozen banks in the advanced world have tried to raise them again. All have been forced to retreat.”

  

  So the question then becomes: if the Fed does hike on Thursday as two-thirds of economists predict (we doubt it: Goldman said no rate hike until December, and more likely, not until 2015… in fact Goldman said “the Fed should think about easing” and what Goldman wants Goldman gets), will it be the first bank that avoids having to promptly “unhike”, which is unlikely or far more realistically – how long until the Fed is forced to admit “policy defeat” and go right back to ZIRP, or perhaps even NIRP, ultimately sliding right into QE4.

  Alas, by now the script of hiking just to have an alibi to ease has become so trite even Deutsche Bank last weekend had the temerity to ask “Is The Fed Preparing For A “Controlled Demolition” Of The Market“?

  We’ll know in 4 days.

  

  

  

  

  

• Peter Hambro: "It's Virtually Impossible To Get Physical Gold In London"

  Submitted by Koos Jansen via BullionStar.com,

  Just after my colleague Ronan Manly wrote a very extensive article on how much gold is left in London (not much), Petropavlovsk Chairman and Co-Founder Peter Hambro discusses gold at Bloomberg Television. He, like Manly, concludes there is very little physical gold left in London. From Mr Hambro:

  My baseline is they [the Chinese] have been buying and the Indian have been buying in enormous quantities. It’s virtually impossible to get physical gold in London to ship to those countries. We get permanent requests from Russia, would we please sell our physical gold to India and China. Because there is no physical, only endless promises. And I really worry that the market, that paper market, could be stamped on and people will say “sorry we’ll have a financial close out”, and it’s all over.

  Perhaps this quote explains why UK gold export directly to China in June was not a net outflow from the UK – because there is little gold left in London (Manly, Hambro) and thus the UK had to ramp up import from the US in June to send forward to China.

  BPlayer(null, {“id”:”sZ~Uri4MRJunO9fg5JSKjA”,”htmlChildId”:”bbg-video-player-sZ~Uri4MRJunO9fg5JSKjA”,”serverUrl”:”http://www.bloomberg.com/api/embed”,”idType”:”BMMR”,”autoplay”:false,”log_debug”:false,”ui_controls_popout”:false,”wmode”:”opaque”,”share_metadata”:{“canonical_url”:”http://bloom.bg/1JUhpRp”},”use_share_overlay”:true,”video_autoplay_on_page”:false,”use_js_ads”:true,”ad_code_prefix”:””,”ad_tag_gpt_preroll”:true,”ad_tag_gpt_midroll”:true,”ad_tag_sz_preroll”:”1×7″,”ad_tag_sz_midroll”:”1×7″,”ad_tag_sz_overlay”:”1×7″,”ad_network_id_preroll”:”5262″,”ad_network_id_midroll”:”5262″,”ad_network_id_overlay”:”5262″,”ads_vast_timeout”:10000,”ads_playback_timeout”:10000,”use_comscore”:true,”comscore_ns_site”:”bloomberg”,”comscore_page_level_tags”:{“bb_brand”:”bbiz”,”bss_cont_play”:0,”bb_region”:”US”},”use_chartbeat”:true,”chartbeat_uid”:”15087″,”chartbeat_domain”:”bloomberg.com”,”vertical”:”business”,”ad_tag_overlay”:”business/videooverlay”,”use_parsely”:true,”source”:”BBIZweb”,”module_conviva_insights”:”enabled”,”conviva_account”:”c3.Bloomberg”,”zone”:”video”,”ad_tag_cust_params_preroll”:””,”width”:640,”height”:360,”ad_tag”:””,”ad_tag_midroll”:””,”offsite_embed”:true});

   

  The Financial Times reported on similar gold shortages in London. From the FT (2 September):

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

   

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

  I’ve also asked BullionStar CEO Torgny Persson in Singapore what he’s currently seeing in the precious metals markets. He replied there are shortages in both the gold and silver market. From Mr Persson:

  I just got off the phone with A-Mark which is one of the world’s largest wholesalers. They are reporting that they have no gold and silver at all live available, that they have stopped taking orders for Silver Maples and Silver Philharmonics altogether and that Silver Eagles are available first in the end of November. For Pamp, there is similarly long delivery times for all minted gold bars.

   

  We still have most products in stock because we stocked up as massively as we could in the last weeks but for many products, we are unable to replenish as of now when we run out.

   

  Big squeeze with shortages starting now both on the wholesale/retail level and at the bulk level… Unless the paper price is reverting up, it may not subside this time around and then the paper fiat mess (including paper prices of gold and silver) is in trouble. If it goes to the point of shortages at the bulk level like 1kg gold bars and 1000 oz silver bars, the emperor will stand without clothes.

  To be continued…

  

  

  

  

  

• 1 In 3 Americans Would Support A Military Coup… In America

  One topic that seems to be of great concern to a relatively large swath of the US public is the militarization of American cities.

  Indeed, with each passing “confrontation” between protesters and police, “protecting and serving” seems to look more and more like “subduing and controlling.” 

  The fear of military and police overreach came to a head this year in the lead up to the US Spec Ops Command’s multi-state “training exercise” dubbed Jade Helm 15. Thanks to a few viral internet campaigns and some badly-timed Wal-Mart closures, some US citizens came to believe that the federal government had devised a plan to institute martial law in Texas. 

  Be that as it may, if there’s anything Americans fear more than overt oppression enacted by force it’s covert oppression enacted by a nefarious combination of crony capitalism and corrupt (not to mention largely incompetent) politicians, which we suppose explains why nearly a third of Americans say they would support a military coup in the US. Here’s more from YouGov:

  The United States military has long embraced the idea of civilian control of national affairs, and apart from certain rare moments the American officer corps has faithfully followed the orders of their civilian superiors.

   

  YouGov’s latest research shows, however, that officers in the military are held in much greater esteem than their civilian superiors, and that they are widely viewed as having the best interests of the country in mind instead of their own selfish concerns. 70% of Americans believe that military officers generally want what is best for the country. When it comes to Congressmen, however, 71% of Americans believe that they want what is best for themselves, along with 59% for local politicians. 

   

  

   

  29% of Americans could imagine a situation in which they would support the military seizing control of the federal government, while 41% could not imagine such a situation. 

   

  Republicans (43%) are more than twice as likely as Democrats (20%) to say that they could conceive of a situation in which they would support a military coup in the United States. Independents tend to say that they could not (38%) rather than could (29%) imagine supporting a coup.

   

  

   

  We present that with no further comment other than to note that Abraham Wyner, director of the undergrad program in statistics at Wharton, suggests you remember that selection bias makes online polling “worse than just about any other way you can put together a poll.”

  

  

  

  

  

• Civil Asset Forfeiture Has Enabled Police To Become The New "Highwaymen"

  Submitted by Jeff Thomas via InternationalMan.com,

  The Highwayman has a romantic image as a bold, 18th-century scallywag who would ride up to a coachload of aristocrats on his horse, shouting, “Stand and deliver!” Having relieved the aristocrats of their purses, he would gallop off.

  Today, the Highwayman is being revived in a big way in the US. But, far from being a scofflaw, he is, in fact, the law. He wears a badge and the law protects him in his roadside robberies.

  The revival is the result, in part, of both the defunding of police departments (creating a demand for law enforcement departments to seek money from other sources) and the encouragement of the federal government for an overall expansion of the police state.

  The legal justification for such highway robbery is the police practice of civil forfeiture, which has been on the books for decades. Civil forfeiture allows law enforcement to seize property (including cash, cars, and even homes) without having to prove the owners are guilty of a crime.

  In many cases, drivers are not charged with any crime at all, not even a traffic citation. In fact, one Florida sheriff has noted that the best targets are those who are obeying the speed law. He knows whereof he speaks, having seized over $6.5 million on the highways of Florida. (Quite an advance on the size of the purses seized by the 18^th-century highwayman.)

  Typically, police stop a car and make the usual request to see license and registration. If the driver asks why he was stopped, a vague explanation may be offered by the officer, or he may simply ignore the question, then demand a search of the car or the driver’s person. The officer then seizes cash and other valuables as potential “evidence” of a crime (suspected drug dealing is a common accusation).

  In some cases, police threaten drivers that, if they are not cooperative, their children may be taken by Child Protective Services.

  The burden of proof is on the driver. In order to regain his possessions, he must prove his innocence in a court. However, in most cases, no charges are made, so there is no court case to try. Whether charges are made or not, law enforcement agencies are entitled to keep 100% of the forfeiture proceeds. Although they are required to keep records on forfeiture, in many cases, police departments avoid or even refuse to provide such information when requested.

  Although police may prey on people anywhere, including in small towns, the most prevalent location is on highways, the further from civilisation the better. In this way, the driver knows that he’s in the middle of nowhere facing a man with both a badge and a gun. He might consider himself lucky to be left with just his car, so that he can drive away from the robbery and not be left on the pavement with no car and no money. For many, this is enough incentive to allow police to take what they want…and not file any complaint.

  Of course, these stops and seizures violate the Fourth Amendment right to freedom from unreasonable search and seizure and at least one state judge in California has described the practice as “an institutional corruption.” Conceptually, a driver can refuse to have his car or his person inspected and can attempt to prosecute the officer, but again, the burden of proof is on the driver. As a result, prosecutions are rare and successful prosecutions rarer still.

  So, the Highwayman has returned, but he now wears a badge. What does this mean for the future? As social and economic conditions deteriorate in the US, will the country’s highways come to resemble a Mad Max scenario, but one in which many of the raiders are people in authority?

  As with so many trends in the US, EU, and similar jurisdictions, this is one of many symptoms of overall social/moral/economic/governmental deterioration, a bellwether of continued decay. Whenever a country is so far along in its decline that its “peacekeepers” make a regular habit of robbing the people they’re paid to protect, and get away with it, we may conclude that further decline is to come and it may be time to exit this particular highway.

  Unfortunately, when such crime exists from coast to coast, as it does with today’s institutionalised highwaymen, the solution is to seek out a better way of life in another country entirely. Fortunately, there are many countries where conditions are considerably better.

  *  *  *

  Editor’s Note: Because of the risk of civil forfeiture, we’ve published a groundbreaking, step-by-step manual on the three ESSENTIAL steps all Americans should take right now to protect themselves and their family.

  These steps are easy and straightforward to implement. New York Times best-selling author Doug Casey and his team describe how you can do it all from home, with very little effort. Normally, this book retails for $99. But we believe this book is so important, especially right now, that I’ve arranged a way for US residents to get a free copy. Click here to secure your copy.

  

  

  

  

  

• Is The Fed Making A Huge "Policy Mistake"? This Market Reaction Will Give The Answer

  As discussed here on Saturday and as should be abundantly clear from the sheer confusion that reigns across markets ahead of this coming week’s all important FOMC meeting where the absurd (and frankly terrifying) fact that the fate of the financial universe hinges on 25bps will be on display for all to see, the Fed is at risk of committing a policy error of epic proportions. 

  To reiterate, the use of the term “epic” here has nothing to do with the magnitude of the hike which, if it occurs at all, will be more symbolic than anything else, and everything to do with the fact that in today’s centrally planned world, which for seven years has been coasting along on an magic carpet made of printing press money even as the entire system becomes ever more unstable, the smallest policy error will reverberate exponentially. 

  To be sure, whether or not Yellen has made a mistake will become all too clear over time. All one need do is observe whether EMs careen further into chaos and/or whether the PBoC becomes even more schizophrenic, but as far as what to watch in the immediate aftermath of the FOMC announcement, we return to what we noted after September’s NFP print when we quoted BofAML. To wit: “If they do hike, watch the long-end.” 

  Why? Because if there’s a flight to safety and the long bond rallies, the Fed will know it has officially erred, or, to quote Deutsche Bank: 

  The market still looks cheap for a September policy error. We see scope for Treasuries to rally significantly from here given the likely risk-off market response to a policy error – we think 10s could rally to 1.75% given the confluence of poor market liquidity and monetary tightening from the Fed and emerging market reserve loss. 

  In this extremely untenable situation, even doing nothing could end up producing the same result if that “nothing” is communicated poorly:

  Even a hawkish hold is likely to keep downward pressure on the slope of the curve and risk asset valuations.

  And as BofA suggests, the places to be in such a scenario will be “cash, volatility, and gold.” At that point, any and all “pet rock” jokes will cease being funny and the only thing humorous will be the sudden disappearance of the transient bid for USTs once everyone who piled in simultaneously realizes that their own actions in the wake of liftoff definitively signal the loss of any credibility the Fed, and by extension, the fiat money regime itself, had left.

  

  

  

  

  

• The End Of Britain? Martin Armstrong On Jeremy Corbyn's Resurrection Of Marx

  Submitted by Martin Armstrong via ArmstrngEconomics.com,

  

  Jeremy Corbyn, the infamous Karl Marx admirer, has been elected UK opposition Labour leader. 

  Here is The Anti Media with a little color on the landslide victory…

   

  People’s favourite Jeremy Corbyn became the new leader of Britain’s Labour Party on Saturday after racing to victory with 59.5% of the vote.

   

  The election results, announced on Saturday morning from the Queen Elizabeth II Conference Centre in London, declared that 422,664 votes were cast and saw Tom Watson elected as deputy leader of the Labour Party.

   

  Corbyn now faces the resignation of up to a dozen shadow cabinet members who claim they will refuse to serve under the MP and cannot publicly support his policies. According to The Telegraph, a group of centrist MPs nicknamed “The Resistance” intends to hold a series of public policy debates about Labour’s future — in open defiance of their new leader.

   

  During the last month, the Labour leadership campaign has seen trade unions double their number of signed-up supporters and 120,000 people pay £3 to register as supporters to be able to vote. The party’s website crashed as surges of people attempted to sign up at the last minute and Labour struggled to cope with almost 400,000 new members and supporters.

   

  Corbyn’s anti-war stance and fierce criticism of regimes that others are falling over themselves to support has resulted in an unprecedented smear campaign against him, painting him as weak on terror. His biggest and best endorsement to date has to be vilification by Tony Blair, who warned the Labour Party would face annihilation if Corbyn were crowned  leader.

   

  In addition to establishment hysteria at anticipation of Saturday’s result, The Times reported that David Cameron plans to claim the new leader poses a clear threat to Britain’s security since he questioned the latest drone strikes in Syria.

  Corbyn is really communist who professes an admiration for Karl Marx. He is the new face of Britain’s opposition Labour party which will help to make a British EU exit more likely. The Marxist sophistry is rob anyone who has more.

  They never understand that we all provide our piece of the economy that creates the whole. Many are starting to realize that this could be the downturn for Britain.

  

  This is actually right on schedule for the other side of 2015.75 will be the battle of all time – Freedom v Authoritarianism.

  People like Corbyn will inspire violent and the overthrow of capitalism for what they think will be the betterment of man. They are idiots and dangerous ones at that for you cannot eradicate human nature. Yet they will try.

  I am routinely asked why to I resistance so persistently?

  What I do, I do for my family and their future. If it were just me alone, I am ready to depart this world for I do not wish to live in the world Corbyn and others like him want to create. They cannot see that they seek to enslave me for their benefit. I am free and that is the true meaning of what Patrick Henry said so eloquently – “Give me freedom, or give me Death!”

  Death to me is preferable to living in their world of subjugation. You do not appreciate what those word so profoundly mean until you are confronted with the true evil of Marxists.

   

  

  

  

  

  

• 10,000 Syrians Are Headed For The Following 180 US "Refugee Processing Centers"

  For the past several weeks it seemed as if Germany had truly become the promised land for Mideast asylum seekers, primarily those seeking to escape the Syrian civil (and global proxy) war, but according to various media reports, also a material number of “ISIS-linked terrorists.” Then it all came crashing down earlier today when Germany’s beloved by all refugees “Mutti” said genug, and with one decision shut down the border with Austria in the process unraveling decades of customs-union progress (following promptly by the Czech Republic doing the same, with Italy expected to follow suit in the hours ahead).

  Ironically, just as Europe is shutting its doors to Syrian refugees, the US is opening its own.

  On Friday, Obama said that the United States will admit 10,000 Syrian refugees for resettlement over the next 12 months, following criticism that America is not doing enough with Europe’s migrant crisis.

  How will this take place logistically? As AFP notes, “this would represent a huge increase in the number of families arriving on US soil. In the more that four years since fighting erupted barely 1,800 Syrians have been welcomed here.” Which is why the French wire service did a brief summary of the various steps involved in admitting a record number of Syrians on US soil.

  Here are the key points:

  • How will Obama’s promise be delivered and what hurdles are keeping the refugees from arriving sooner

  More than four million people have fled the fighting in Syria since 2011 and most are living in camps in Jordan, Turkey, Lebanon, Egypt and Iraq, where the UN High Commissioner for Refugees registers them. Some 18,000 of these people — chosen because they are the most vulnerable whether through family circumstances, injury or disability – have been referred to the United States for resettlement. Officers from the Department of Homeland Security fly from Washington to the camps and conduct interviews with candidates, seeking to weed out what a US official called “liars, criminals and terrorists.” Each case file is reviewed by the National Counterterrorism Center, the FBI’s terrorist screening center, the DHS, the Department of Defense and “other agencies” – US intelligence.

  “Refugees are subject to the highest level of security checks of any category of traveler to the United States,” another State Department official told reporters.Meanwhile they receive medical tests and those with communicable diseases, most commonly tuberculosis, are given treatment before they can travel to the United States, often delaying the process.

  Currently the procedure takes between 18 and 24 months from the time UNHCR recommends a refugee for resettlement and that person’s flight to America.

  It is not clear how much the screening process for Syrians costs, but the US government spent $1.1 billion last year resettling 70,000 people from around the world, or almost $16,000 per head.

  • Can the process be sped up?

  Critics note that if the United States takes two years to screen each of the 10,000 refugees Obama has promised to welcome none will have arrived before he leaves office.

  But, according to a US official, thousands of cases are already in the pipeline and will hopefully now be processed faster.

  “We have been resettling Syrian refugees in small numbers since 2011 and it was only in June of 2014 that UNHCR started submitting large numbers of referrals, between 500 and 1,000 per month,” she said.

  “Those referrals have come pretty steadily since last June to the point where we now have a critical mass. We at the State Department have already prepared the cases for more than 10,000 people.”

  * * *

  But the most important question on the minds of most Americans is the following:

  • Where will the “lucky” 10,000 Syrian refugees go?

  Well, once refugees are approved, the State Department pays the International Organization for Migration (IOM) to fly them to the United States.  Refugees sign a promissory note to repay their airfare once they are established, and they are met at the airport by members of one of nine non-government resettlement agencies contracted by the State Department.

  There are around 180 resettlement centers dispersed across the United States, where NGO workers help the new arrivals settle in and find work and accommodation in their first 30 to 90 days.

  Those who have relatives in the United States will sometimes be assigned to live near them, and most go to cities like Atlanta, San Diego or Dallas where rents are more affordable than in New York or San Francisco.

  Others end up in smaller cities like Boise, Idaho or Erie, Pennsylvania, but regardless of where they are taken they are free to move once they find their footing. After 90 days new arrivals are no longer eligible for the State Department-funded support through the resettlement agencies, but some join support programs run by the Department of Health and Human Services.

  * * *

  So where are these 180 resettlement center? They are shown on the map below:

  

   

  The full list can be found in the 35-page document sourced from the Refugee Processing Center.

   

  * * *

  All this, we again remind readers, just so a Qatari gas pipeline can cross Syria and enter Europe, ending Gazprom’s monopoly over European gas demand.

  

  

  

  

  

• Apple's Bruised Presentation: A Warning Sign Rarefied Air Is Becoming Exhaust Fumes

  Via Mark St.Cyr,

  On Wednesday of this past week Apple™ held its much-anticipated annual roll-out of new products and features to the Apple lineup. However, this latest presentation caused more head scratching as well as out right consternation than any in recent memory. There was one other, but I’ll get to that later when there’s more context as to compare.

  Whether it be within the confines of media reviews or tech blogs, it seems almost to a person the reaction to this latest event was anything but celebratory. Rather, the overarching theme revolved around the questioning of: Did they just witness the initial confirmation that many have pondered now these last few years. i.e., Has Apple lost, or, is rapidly losing their soul/spirit of innovation? Or, just the outright feeling of confirmation: without Jobs – Apple is an also ran.

  Like many I too was flummoxed when watching the event. However, unlike some I saw things a little differently. What I saw; and the way I saw it, I’ll illustrate, as well as counter how I believe many of the obvious missteps, as well as outright blunders were made should have been handled and addressed differently.

  Although I’m going to address my assertions through my business eye (for that’s what I do professionally) as if I were called into the board of Apple in a hypothetical sense and asked my opinion. I want to make sure it’s known for the record I could be what one considers an Apple “fan boy.” I use their products near exclusively and have great respect for the company. Yet, much like if I saw a family member doing the obvious wrong things; being openly harsh, critical, or straight forward in that criticism doesn’t mean any lack of respect. Quite the contrary.

  So first things first: For the first time since the inception of these stylized “Event” roll-outs one thing was clear to almost everyone that viewed it. The “presentation” along with its cinematic star quality infused theatrics more often than not didn’t help nor bolster the products or presenters. Again, for the first time that I can remember – it actually seemed to take it away.

  A few things were obvious. One of these is the incessant use of the glorious styled verbiage made famous by Apple when trying to invoke awe inspired anticipation. The problem this time were the products they were introducing. There were obvious trip wires that needed to be addressed that one could see for miles. Yet, it seemed as if Apple was going to pay no attention to them and roll them out because “They’re Apple therefore you’re going love it.”

  The Apple Watch™ fits into this category probably more than any other. The problem? It seems the push is to present the watch as a fully formed device which it clearly is not. Yes there is the nod that more and more applications are forthcoming. However, it is quite obvious the main focus is all too centered on fit and finish. The push about what band one can now choose and the on, and, on aspect of the details of these bands subliminally pushes one to assume – I guess that’s all they have to show right now.

  I believe the watch will be a great product in the future. And it’s easy to understand it’s a work in progress that needs to be out in the public a little before prime time as to see just where the market wants to take it. And there’s nothing wrong with that. That said, the more that Apple makes this almost sycophantic push towards fit and finish currently? It doesn’t hide or subvert its obvious current limitations – it pushes them more into the fore front.

  If you wanted more proof of the “We’re Apple therefore you’re going to love it” attitude that I believe allowed for the lack of self-awareness to see obvious issues or miscues. All one had to do was watch the introduction of the Apple Pencil®. It went something like this…

  Ladies and gentlemen. May I draw you’re attention to the big screen behind me and behold. Never before in the history of mankind has such a device ever been thought of by mere mortal man. Ladies and gentlemen I introduce to you – the pencil!

  And there on the screen stood what at first blush was a representation of the one thing Jobs railed against: a stylus. You could hear either a collective chuckle or, YAYYYYyyyyy….wait a what? The set up for this product buzz-killed its own introduction.

  Another was when the new IPad Pro® was revealed to show it with its newly designed specific keyboard. What seemed at first like thunderous applause drifted quickly to be silenced by the obvious knee-jerked gasp when the big screen showed what everyone instinctively recognized as a product resembling what no one seems to use or want – a Microsoft Surface®.

  These weren’t the only missteps – just the most obvious. A few others? Well, there was the “let’s show you just what you can do on this fantastic, great, super, stupendous, mind altering, supercalafragilous new product. We’ll start by bringing on our next guest speakers from – Microsoft. Even the crowd within the center went speechless. It was a clear awkward moment. Again, all self-inflicted.

  Think about it. Within the span of a few minutes a new product was introduced that for all intents and purposes can really be a game changer with applications for both personal as well as enterprise use never before available to Apple. And within the course of those minutes did nothing but leave the impression this great new product has a stylus, and a keyboard configuration that looks all to close to a Surface; and cemented that impression with introducing none other than a Microsoft representative to demonstrate how Microsoft Office™ will run on it. Again, think about that. And as bad as that progression was – it was enhanced. And not for the better in my view.

  The next guest or representative in the line up? Adobe™. You know that company which right before Jobs passed was still calling them out for shipping lousy software. One silently wondered if Pages® or Keynote® were going to still run on Apple products because other than what seemed as a hat tip to Garageband®; one was left feeling unclear. And remember, this is Apple’s premier event! The missteps as to the attention to detail of presentation flow was nothing less than stunning. I personally can not remember such outright blunders in previous roll-outs. And I was not alone, for what I heard from others who just wanted to see what was new reacted in ways I previously never encountered.

  Here was my first confirmation that it wasn’t just me. All the above overshadowed what has been the usual star of these events: The iPhone®. Nobody that I talked to could even remember what new innovation or updates were made to the newest version. All they seemed to remember was there’s now an “S” version, but other than that, it was all about “What is up with that new iPad?” Or, “A stylus?! Are you kidding me? A freaking stylus?!! WTF is up with that?!!!”

  And that seemed to be the cumulative summation I distilled from both my personal exchanges, as well as what I’ve seen in both tenor and tone reported almost everywhere.

  This is, and should be taken by Apple as a clear warning sign this bruised “Event” could be the one that spoils the “whole bunch” going forward. The event showed to my eyes in stunning clarity that Apple delivered this presentation via the viewpoint and execution of: We’re Apple – and you’re gonna love our new products and upgrades because – we’re Apple, and we’re saying so because – we’re Apple.

  Again, whether intentional or not. Too my eyes, it was a clear illustration of: Rarefied air has become breathing one’s exhaust fumes.

  Now here’s where I take a different tack from everyone else: Personally, I believe the upgrades as well as new products are noteworthy. It’s all about the delivery as well as introduction I take issue with. And this area of difficulty is a first for Apple. How they mange their way around as well as through this obvious debacle will be one of Apple’s greatest challenges post Steve Jobs in my view. For perception is just as big as product to no other company as it is to Apple.

  So that’s my descriptive view. Now let’s delve into the prescriptive.

  Right off the start let’s address the greatest of overhangs that is not, nor will not, go away unless Apple itself stops trying to push it themselves: Tim Cook is not, nor will he ever be seen in the same light as Jobs. Period, end of story. Not by anyone at Apple itself, nor the public at large. So stop trying. Again, period. It’s hurting Apple’s, as well as Mr. Cook’s image, more than it’s helping. So again – stop. Please for the love of humanity – just stop.

  Although I don’t know Mr. Cook personally I’m sure he’s a great guy, and we know he’s a competent executive for he has done some great things since Jobs passing in helping to lead and maintain Apple’s core structure. We also know Jobs had great admiration for his executive qualities. However, no one can replace Jobs. And the more one tries (or desperately hangs on to the idea) to replace rather than move forward is in effect moving backwards. This is why the more one tries – the worse the comparisons fester. And Apple seems to be trying far, far, too hard in this one area alone.

  Let me use an analogy based in music as opposed to strictly business: Van Halen didn’t “replace” David Lee Roth with Sammy Hagar. Sammy Hagar, nor the band, tried to be Van Halen with Sammy acting as a stand in replacement for Roth. Same can be said with AC/DC. Just like with first example, after Bon Scott there truly was no replacement. So they didn’t. They added Brian Johnson and the rest is history. Whether you liked or disliked the new band was exactly the point. Van Halen as well AC/DC were: a new band, and they weren’t afraid of the comparisons. They took them straight on and made no bones about it. This allowed the band to be its own force while still paying reverence to previous milestones without any regards to “What would David or Bon do?” Apple needs to apply the same or they’ll never get out from under “What would Jobs do?”

  I’ll use as proof for my assertions using a current screenshot I took from Apple’s own public webpage:

  

  (Photo Credit: Screenshot taken of Apple’s public home page)

  Why my criticism? First of all: It has nothing to do with Mr. Cook personally. The issue is: it shows or implies just how tone-deaf, blind, or nervous Apple is becoming. Apple seems to be bordering on desperate as to be trying to create a replacement figure, and it’s now far too striking as to evade the inserting for subliminal comparison (whether intended or not) of Cook as Jobs. And far too many have an instinctive gut reaction too it. And it’s not in the affirmative.

  Jobs was, and always will be, the comparison to these events as well as “the face” of Apple. Now and for the foreseeable future. If the solitary person in this type photo is not Jobs, it should only be the closest thing possible to him; and it’s not a person – it’s the product or the logo. Anything (or anyone) else stands right out as “trying too hard” in pushing a narrative. Since the passing of Jobs no person for the immediate future will meet the mark. The only “one” that can is – the product/products themselves. Anything less hurts the image as well as brand of everyone involved by my calculations.

  I believe unlike many (and I’ll wager it’s the Board itself that is the most confused on this subject) the more Mr. Cook removes himself as “the face” of Apple and puts forth the product as “the face” the more Jobs-like Apple remains in the public eye, as well as the lessening of many of the unfair comparisons Cook as well as Apple has to constantly dodge or defend against. This is where Apple is being its own worst enemy. They desperately need (as well as want) to move out from under the Jobs comparisons as time and products march on. Yet, it seems Apple itself is the one unwittingly making that trek all the more harder.

  Then there were the introductions of new or improved products. Here there were far more miscues as well as missteps than I can remember. So I’ll take just the one’s that are in my front-of-mind.

  First there were the transitions from introduction to video presentation. In a word, for someone who understands the importance of theater and seamless transitions: They were horrible. Apple once excelled at these – until recently. At this event? They were clumsy allowing for misconceptions to fester. No, not in the content and production value of the videos themselves. It was in the hand-off from presenter to video. They simply just didn’t flow.

  There was no better example of this than when the Apple Pencil® video was shown. Personally I cringed. The video’s introduction did not match the content. The content was great, but you were trying to get over the idea that this was not a stylus – first. And it felt that way. For anyone paying attention this was an obvious flaw. And it was obvious the one’s who should have been paying attention (i.e., Apple) were not or could not see it.

  The attention to details such as this was always prominent and seemed to never be lost on Jobs. However, at this event it was conspicuously not there.

  And while we’re on it let’s talk about the Pencil. Not only was the roll-out worse than bad. It actually may have set back the whole adoption cycle months if not years just based in ridicule. For nearly everyone remembers one of Jobs’ strongest arguments against anything was – the need for a stylus. And the way the introduction of the Pencil was presented did nothing to alleviate that memory. In fact, it brought it out front-and-center. It’s a shame because the Pencil truly is so much more, but again, the presentation did little to change that initial perception.

  It would not have been hard to take this issue head on and maybe have some fun with it. Make it their own post-Jobs product launch he would be proud of. It could have easily been done in my view if the obvious hurdles would have been addressed right from the get go, rather, than trying to act as if no one would remember the past. The diametric forces of awe-inspiring and ridicule enforcing left it up to the product itself to overcome them. A tough task when everything is running perfectly. Quite another when it’s happening within obvious missteps or miscues.

  An easy way to have overcome many of the obvious would have been to remind people of a few things like: When Steve was around one thing he was not afraid to do was to change his mind if one could prove that he should. (which he did many times, but you had to prove it first to convince him, not just express or think that he should) Steve would tell anyone who asked “As soon as you need a stylus you lose” and we still believe he is right. That’s why we don’t and won’t make one. So today I introduce to you a technological instrument so advanced we gave it the only name that could match it for context, simplicity, and ease of use. Ladies and gentlemen I introduce to you today – the Apple Pencil.

  It took me no longer to think of the above than to type it. It’s not perfect, but it’s far better from what was presented. i.e., act like no one’s first reaction will be: It’s a stylus! Again, this is a detail I believe would have never been allowed circa Jobs. It was far too obvious for initial reactionary ridicule. Yet, that’s exactly how it went off.

  Then there was the other obvious calamity. The gut reaction to the iPad Pro with its new smart cover keyboard. Again, here we saw Apple acting as if it there was no such thing as the Surface. It was breathtakingly tone-deaf for what would be the obvious reaction. You almost could feel the collective gasps worldwide through your monitors. Again, I personally was stunned on such a misstep.

  My argument is this all could have been so easily addressed and possibly as I’ve stated again, and again, been a turning point in the post Jobs era. And in a good way.

  If the new IPad had been presented differently showing its new size and features for general use as associated with the current versions only. They did some of this but it was far too little. What they should have done was introduce and infuse with a little more depth some of the new features and reasoning why a physical keyboard will be necessary for upcoming partnerships with new collaborative partners such as those announced with IBM™ and highlight it with more detail. People get that.

  Say things like: As game changing as the iPad was to the home and business we’ve discovered there more possibilities than ever, and these possibilities demand two new features unparalleled by any other brand today. First, with our larger screen size new enterprise functions and uses are now available that were not conducive to previous iPads. Although the bigger screen allows for a more natural feeling keyboard we know by listening to all of our customers they want an Apple designed and built dedicated IPad removable keyboard. I’m here to tell you, we heard you – and we listened. And so I introduce to you today, what at first may look like another brands however, I respectfully say: It is anything but – and here’s why…”

  Instead the keyboard attached version went up on the big screen and did nothing but put front-of-mind “what the heck is that? A Surface?! That’s the new thing?!!” The following dissertation felt like Apple believed customers had never seen a similar product. No matter how well crafted and design specific for IPad this new keyboard is. The timing and delivery for its introduction, like the Pencil, was a self inflicting buzz-kill for it. I say again, this all was so blatantly self-inflicted it was painful to watch from my view.

  One place that has yet to lose its luster, or fall into the lame, are the informative product videos showcasing Jony Ive. Here is where the Apple of yesterday still shows through today. Even though Ive is not shown there is gravitas in voice and reputation for we all instinctively understand many of these products are associated with his creative vision much like Jobs. However, these unlike the “Event” shake free of the post-Jobs gravitational pull. Why?

  The product is the feature – not a person. It’s not lost on anyone that Ive is still responsible for the products creative attributes. But it does one thing that Apple Inc. itself has not yet learned. It allows Ive and the product to stand on their own in a post-Jobs world of Apple. And I believe not only are these displaying a tenor and tone Jobs would approve of, I believe they are showing the way Apple itself needs to start addressing this issue far more head on than seemingly trying to either avoid it, or push a persona in the fear of they don’t know of any other way. That way is right under their own noses yet, they seem somehow patently blind to the obvious.

  Apple isn’t about Jobs anymore. He’s gone, and he’s not coming back. And the more Apple tries to fill that void, the deeper and wider the chasm becomes to fill by their own hand. Apple is no longer about a person – it’s about the product. And the product is the only thing capable of bridging that gap or hole left with the passing of Jobs. And the sooner Apple realizes it, and takes that to heart. The faster and better both Apple, their products, as well as the management and employees will be. Where they can all get back to doing what Jobs would be the most concerned with as well as probably proud of. i.e., Running a great company steered by smart people creating insanely great and revolutionary products second to none.

  And as for that only other “Event” I mentioned at the beginning? I could think of none other than the one that caused an even more visceral knee jerk reaction than the one hosted by Jobs himself. That event?

  One of the first where he introduced none other than Bill Gates on the big screen as a new partnership between the two rivals. Again, Jobs could have easily tried to hide the fact or, never speak about the collaboration he made with Gates at the time. There possibly was no worse time than then to even discuss such a possibility; never mind an already done deal. Yet Jobs did just that. Jobs instinctively knew – you can’t hide the 800 pound gorilla or act like it’s not there. You have to get past it one way or the other come hell or high-water. And they did just that.

  Again, the lesson for Apple today is right there in the Apple of yesterday. All they have to do is look. For the only thing in my opinion holding Apple back from moving forward and beyond – is Apple itself.

  

  h/t Goodbyeamericainaphoto

  

  

  

  

  

• Germans, Czechs Return To "Border Controls" With Austria, Riot Police Dispatched To Contain Refugee Crisis

  Two weeks ago, in what was the first official shot across the bow to Europe’s long-standing “Schengen” customs union, we reported that the Italian province of Bolzano across from the Austrian border announced it is willing to “temporarily suspend Schengen” and “restore border controls” following a request by the German state of Bavaria.

  Today, none other than Europe’s master state, Germany itself, is about to launch an ICBM at Schengen when, as BBC reports, “Germany is to reintroduce some form of controls on its border with Austria to cope with the influx of migrants, German and Austrian media report.” While the BBC said that it is not clear what measures would be introduced, it is likely that a full return to the pre-Schengen era, with extensive customs checks of every border crosser is imminent.

  BBBC further reports that”more than 13,000 migrants arrived into Munich alone on Saturday. Germany’s vice-chancellor said the country was “at the limit of its capabilities”. Germany’s Bild newspaper and Austria’s Kronen Zeitung said controls would be in place on the Bavaria-Austria border. Germany expects 800,000 migrants to arrive this year.”

  Also, according to Germany’s Spiegel, German Interior Minister, Thomas de Maiziere, would make an announcement in the coming hours. Since last month, Mr de Maiziere said the Schengen agreement, which allows free movement between a large number of European countries, could be suspended, it is quite likely that as of today, Europe’s customs union will officially be halted if only temporarily.

  Kronen Zeitung said that Bavarian police will begin to carry out checks “to determine immediately who is entitled to asylum”, but it is not clear how such checks would be made.

  Earlier on Sunday, Germany’s Vice-Chancellor Sigmar Gabriel, who is also economy minister, warned the country was being stretched to its limits by the new arrivals.

  “Europe’s inability to deal with the migrant crisis has brought even Germany to the limit of its capabilities,” he told Der Tagesspiegel newspaper. “It is not just a question of the number of migrants but also the speed at which they are arriving that makes the situation so difficult to handle.”

  Which is somewhat ironic considering the full-court media propaganda press eager to make Germany seem like the promised land for hundreds of thousands of Syrian refugees: just ealier today CBS had an article on “Angela Merkel: From debt villain to migrant heroine” in which it said “In the space of two months, German Chancellor Angela Merkel has gone from being portrayed as the heartless villain in Europe’s debt crisis to the heroine of those flooding in to find refuge on the continent.”

  Her insistence that Germany and its fellow members in the 28-nation European Union all have a duty to shelter people fleeing civil wars has cemented something similar among hopeful migrants. Some have held aloft pictures of Merkel, and she was greeted with applause and cheers at a Berlin refugee home Thursday.

  

  Oops, may want to rewrite that one quickly, especially following a report from Bild that the German government “will send 2,00 riot police to the Bavarian border, where they will “help the State to secure the border.”

  Not only that but Express reported that the “German Defence Minister has admitted that the country verges on “an emergency” after cracks have begun to emerge in the ‘German generosity’ and that some 4000 German troops have been put on standby.

  

  Germany has been viewed as a leader on Europe’s worst refugee crisis for 70 years, with Chancellor Angela Merkel’s expectation that the country will take in 800,000 this year alone.”

  However, the move appears to have backfired as German towns struggle to process the unprecedented number of arrivals.

   

  Defence Minister Ursula von der Leyen said: “For this weekend alone we have put 4,000 soldiers on standby.” 

   

  He added that the troops would be able “to pitch in in an emergency”.

  Putting Germany’s generosity, which just ended in perspective, “More migrants have arrived at Munich’s train station since the start of September than in the whole of 2014.”

  The good news for Germany is that at least the tens of thousands of Muslims migrants will have a place to pray: just as “generously” Saudi Arabia – in lieu of actually accepting any asylum seekers – offered to help Germany cope by building at least 200 mosques.  The Gulf state said it would build one mosque for every 100 Middle Eastern refugees who entered Germany. It will be busy building a lot of mosques.

  The bad news for Germany is that not only will the migrant situation not improve any time soon, but it is now in a lose-lose situation, with the facade of its former faux generosity crumbling, just as countless more migrants are set to lose their lives on their way to a promised land that no longer is.

  And confirming just that, moments ago Xinhua reported that 28 migrants were killed as a boat capsized off Greece.

  BREAKING: 28 #migrants killed in boat capsize off #Greece: report pic.twitter.com/apLOkms9Xu

  — China Xinhua News (@XHNews) September 13, 2015

  For now, however, one thing is certain: Europe may still have the Euro now that Greece is a permanent German debt colony, but the true heart of Europe, its customs union, is about to go on into indefinite V-fib as nation after nation follows in Germany’s footsteps and closes its doors to all those refugees it so generously welcomed until now.

  * * *

  Update: just minutes after we wrote the following, we got confirmation we may have been on to something. Oh, and goodbye Schengen, only for the “time being” of course. from Czech News:

  Prime Minister Bohuslav Sobotka (Social Democrats, CSSD) is going to make a public statement on the current situation, his spokesman Martin Ayrer told CTK.

   

  The Interior Ministry´s spokeswoman Petra Kucerova confirmed for CTK that the measure is linked to the launch of border checks on the German-Austrian border over the influx of refugees.

   

  Earlier today, German Interior Minister Thomas de Maiziere announced that Germany will temporarily introduce checks on its borders, the EU´s internal ones, beginning with its border with Austria. He said Germany consulted Austria before taking the step.

   

  The Czech police expected Germany to take this step, Foreigner Police spokeswoman Katerina Rendlova told CTK.

   

  “For the moment, we will react by taking our own measures, which is the reinforcement of the police on duty in the border areas. Our further steps will depend on the number of incoming migrants,” Rendlova said.

   

  She said the measures would concern the South Moravia and South Bohemia Regions, both of which border on Austria.  The police would release information about the reinforcement and further details only later.

  To the refugees (and/or masked ISIS terrorists of course) that successfully made it into Germany/Europe, congratulations. To the rest of them: better luck next time.
  

  

  

  

  

  

• Bringing "Once Great Nations" To Their Knees – Reagan Vs. Obama

  Presented with no comment…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Risk Of “Economic Totalitarianism” From “Cashless Society”

  Cash Withdrawal Limits and “Bank Holidays” Coming
  
  – Concerns that next crisis may be imminent

  – Bail-ins, withdrawal limits and negative interest rates may be imposed

  – FT proposes a ban on “barbarous relic” cash

  – Central banks and banks would have people “completely under their control”

  Collapsing commodities prices, erratic market turmoil and the bursting of Chinese bubbles are leading to a crisis in confidence in the economic system across the globe. The long-expected crisis to which the global financial and systemic crisis in 2008 may have been a mere prelude may be upon us.

  
  
  Governments have no appetite for further bailouts. The EU states have passed legislation which will make the banks or rather unfortunate and unsuspecting depositors liable for the bank’s lending and speculative profligacy.
  
  It is claimed that this is to “protect” the taxpayer. In reality it will likely lead to bail-ins – the confiscation of deposits. It is likely that that in a crisis within the banking system this bail-in mechanism would be imposed on an impromptu “bank holiday”  followed by limits on cash withdrawals as were applied in Cyprus and more recently to depositors in Greece.

  As has been pointed out by many other analysts, the unelected powers-that-be have used all their conventional weaponry to stave off the consequences of their irresponsible ultra loose monetary policies and massive buildup of debt globally – the largest ever seen in the history of the world.
  
  
  
  The typical response to a crisis has been to slash rates from somewhere around 6% – the historic post war norm in the west – to between 0% and 1%. This has stored up an even crisis in the future – the question is not if we have another crisis but when.

  With interest rates now near zero, rates cannot be slashed any further. Unless of course, further “unconventional” weaponry are deployed upon the citizens to encourage them to spend. Further QE and QE$ is likely. Another option is negative rates – where depositors are charged by banks to hold their money. Both constitute weapons of financial and monetary repression in the deepening “war on cash.”

  Bail-ins, withdrawal limits and negative interest rates would provoke a wave of withdrawals, further undermining the banking system – as was seen in Greece.

  Hence, the deep concern when the Financial Times recently proposed abolishing cash altogether.

  In a piece entitled “The Case for Retiring Another ‘Barbarous Relic” the FT laments the existence of cash. In the view of the editorial, cash limits the capacity of omniscient central banks to bully savers into parting with the fruits of their own labour to “stimulate” debt laden economies.

  “The worry is that people will change their deposits for cash if a central bank moves rates into negative territory.”

  
  Armstrong Economics
  
  Bill Bonner from Bonner and Partners has written an excellent piece on what the proposed ban on cash fully implies. He explains how such a move could have Orwellian consequences. The central bank, not to mention individual accounts, he writes, “will have you completely under their control”.

  “You will buy when and what they want you to buy. You will be forced to keep your money in a bank – a bank controlled, of course, by the feds. You will say that you have ‘cash in the bank,’ but it won’t be true. All you will have is a credit against the bank. (Bank deposits are nothing more than IOUs from your bank to you.)”

  He continues

  “You will be completely surrounded. If the feds want to force you to spend… or invest… your money, they will simply impose a ‘negative interest rate.’ They will do this by simply imposing a fee, or tax, on deposits greater than the interest rate you receive on your savings.”

  During a financial crisis following a ban on cash Bonner writes
  
  “You will be locked into a bank account with a bankrupt institution. And the feds and their bank cronies will tell you when and how you can have access to your own money.”

  Bonner also suggests that there may then be an attempt to prevent the sale of gold bullion coins and bars to the public in a desperate attempt at neutralising its qualities as a store of wealth and safe haven money.
  
  One cannot have a free market or a free society if citizens are banned from choosing which form of money and which form of payment they choose to use. Such economic totalitarianism is liable to further erode trust in the financial system and actually contribute to runs on banks. Exactly the opposite effect that the proponents of the cashless society claim to be trying to avoid.  
  
  Fostering dependence on irresponsible banks and a still very vulnerable banking sector will make the entire western financial and economic system even more vulnerable.
  
  Forcing entire nations to use electronic currency also seems imprudent at a time when electronic magnetic pulse warfare may be a key weapon of choice of terrorists and powerful state actors. Electric grids could be disabled for periods of time – rendering all commerce impossible in a cashless society.
  
  Without electricity and computer or internet access, one could not access your current and savings account or make electronic payments.
  
  Fostering absolute dependence and giving banks an even more entrenched and powerful monopoly over the issuance of credit and control of citizens savings and spending is a recipe for economic disaster. This is especially the case in an age of cyber warfare when banks have already been shown to be vulnerable to hacking.  
  
  The current drive towards a cashless society shows the importance of being diversified and not having all your savings and assets within the vulnerable financial and banking system.
  
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• Dependence On Central Banks Is "Unrealistic And Dangerous", BIS Warns

  To be sure, there’s something terribly ironic about the central bank for central banks telling the world that the market is too dependent upon central banks, but then again, the Bank for International Settlements isn’t exactly shy about making scary-sounding declarations and criticizing its board members (listed below) in its “closely-watched” (if only by those who are aware of the institution’s shadowy existence and give any credence to what they say) quarterly reviews. As we put it back in June: 

  The BIS serves to encourage and perpetuate the power and prestige of the world’s central bankers and provides a top secret forum for the monetary policy cabal to meet and commiserate safe at all times from the prying eyes of those to whom the bankers should by all rights be accountable. 

   

  In this context it’s somewhat absurd that the bank’s reports — which, as a reminder, are required reading in treasury departments and monetary policy circles around the globe — contain scathing critiques of the very same policies which were no doubt devised, tweaked, and honed over dinner and fine wine in Basel. Nevertheless, the BIS’ latest tome is replete with criticism for the idea that the very people who make up the bank’s Board of Governors are indeed omnipotent. 

  

  Last year alone for instance, the bank warned of a “puzzling” disconnect between the economy and “euphoric” markets, excessive risk taking and depressed volatility fostered by ultra accommodative monetary policy, and the effect of a strong dollar on the solvency of EM corporates. Earlier this year, the BIS joined the cacophony of analysts, pundits, and commentators suddenly screaming about the absence of liquidity in corporate credit markets. 

  Well, the bank is at it again in their latest quarterly report and although most of what’s discussed in the 187-page document will be no surprise to regular readers, BIS Head of the Monetary & Economic Department, Claudio Borio’s prepared remarks are worth a review as they serve to underscore the fact that some very “serious” people in Basel are apparently quite concerned about the risks facing their board members.

  Borio begins by noting that the defining feature of Q2 was turbulence, first in Greece, and then in China, where a multi-hundred billion yuan unwind in a half dozen backdoor margin lending channels triggered a market meltdown:

  We often look at the world as a set of still frames, rather than as a movie, as we should.

   

  The still frame of the last quarter – the period under review in this issue – has one distinguishing feature: turbulence. Initially – think of it as the left side of the frame – it was Greece that grabbed all the attention and headlines. Market participants had hardly had the time to breathe a sigh of relief when Asia, in particular China, appeared in the centre of the frame. First, the origin of the shock was the Chinese stock market, which on 8 July saw its largest one-day drop ever; then, on 12 August, it was the authorities’, admittedly rather small, devaluation of the currency as they officially shifted towards a more market-oriented exchange rate regime.

   

  The shocks in July and August set off much bigger and far-reaching tremors. Stock markets around the world weakened. More importantly, commodity prices plummeted – accelerating their previous longer-term decline – and volatility spiked. The oil price gyrations were remarkable. The price sunk to a new trough below $40 on 24 August, undoing the whole of the partial recovery in the second quarter of the year, then soared some 30% in only one week before dropping back again.

  The story progresses logically to the predictable and well-documented effect the above has had on EMs, with Borio also noting that the market’s extreme reaction to developments in China may have something to do with the extent to which market participants are hanging on every last movement in the SHCOMP and, more importantly, the yuan:

  The exchange rates of emerging market economies (EMEs), especially commodity exporters, were hit hard, and their credit spreads widened. 

   

  Why such a big difference in the response to the initial sharp drop in Chinese equity prices in June and the subsequent shocks? In part, this may reflect market participants’ selective attention. More fundamentally, though, it mirrors their shifting perceptions of background economic conditions and of the power of policy. 

  And there’s the seemingly obligatory discussion of dollar-denominated EM corporate debt, which is of course a potential landmine in an environment where capital is flowing out of EMs and where the effect of a Fed hike is magnified by the fact that in a world where asset classes have become increasingly correlated, risk-parity funds may be forced into the dollar should everything else begin to sell-off at once:

  The data reveal a certain bifurcation in global liquidity, with credit to China, Russia and, to a lesser extent, Brazil being especially weak. Here, the role of credit denominated in US dollars plays a critical role. As highlighted in a number of BIS publications, the total amount of dollar credit to non-bank borrowers outside the United States had risen by over 50% since early 2009, to 9.6 trillion by end-March 2015, and almost doubled for EMEs, to over 3 trillion. Much of it has found its way to corporates, raising serious questions about the financial vulnerabilities involved and the implications for self-reinforcing movements in exchange rates and credit spreads.

  Finally, Borio warns that increasingly interdependent “policy arrangements” have proven ineffective when it comes to smoothing out the business cycle and have in fact served only to magnify the scale of booms and busts (and argument we and others have made tirelessy for years): 

  Taking an even longer-term perspective, as argued in detail in the latest BIS Annual Report, all this points to weaknesses in domestic and international policy arrangements – arrangements that have so far been unable to constrain sufficiently the build-up and unwinding of hugely damaging financial booms and busts across countries.

  But despite all the evidence (2000, 2008, etc.) which points to the fact that attempting to use monetary policy to micromanage economic outcomes very often ends in tears, the world has nevertheless become more dependent on central banks than ever before:

  Hence a world in which debt levels are too high, productivity growth too weak and financial risks too threatening. This is also a world in which interest rates have been extraordinarily low for exceptionally long and in which financial markets have worryingly come to depend on central banks’ every word and deed, in turn complicating the needed policy normalisation. It is unrealistic and dangerous to expect that monetary policy can cure all the global economy’s ills.

  The cryptic conclusion: “All this is reminiscent of the old joke about the stranded tourist who, having asked for directions, was told: ‘If I were you, I wouldn’t start from here.'”

  We agree – we think.

  

  

  

  

  

• Equity Markets, Credit Creation, & The Central Bank's Ultimate Priority

  Submitted by Alasdair Macleod via GoldMoney.com,

  There is one class of money that is constantly being created and destroyed, and that is bank credit.

  Bank credit is created when a bank lends money to a customer; it becomes money because the customer draws down this credit to deposit in other bank accounts and to pay creditors. It is not money that is created by a central bank; it is money that is created out of thin air by commercial banks to lend. Its contraction comes about when it is repaid, or if a customer defaults.

  The recent sharp fall in equity markets is leading to two levels of contraction of bank credit. Brokers' loans to speculating investors are being unwound from record levels, notably in China and also in the US where in July they hit an all-time record of $487bn. Then there is the secondary effect, likely to kick in if there are further falls in equity prices, when equities held as loan collateral are liquidated. This is when falling stock prices can be so destructive of bank credit, and as the US economist Irving Fisher warned in 1933, a wider cycle of collateral liquidation can ensue leading to economic depression.

  Fear of an escalating debt liquidation cycle is always a major concern for central bankers, so ensuring the secondary effect described above does not occur is their ultimate priority. Macroeconomic policy is centred on ensuring that bank credit grows continually, so since the Lehman crisis any tendency for bank credit to contract has been offset by central banks creating money. The bald fact that equity markets have now lost upside momentum and appear to be at risk of a self-feeding collapse will be viewed by central bankers with increasing alarm.

  For this reason many investors believe that a bear market will never be permitted, and the combined weight of central banks, exchange stabilisation funds and sovereign wealth funds will be investing to support the markets. There is some evidence that this is the direction of travel for state intervention anyway, so state-sponsored buying into equity markets is a logical next step.

  The risk to this line of reasoning is if the authorities are not yet prepared to intervene in this way. When the S&P 500 Index halved in the aftermath of the last financial crisis, the subsequent recovery appeared to occur without significant US government buying of equities. Instead the US government might continue to rely on more conventional monetary remedies: more quantitative easing, reversing current attempts to raise interest rates, and perhaps attempting to enforce negative interest rates as well. If, in the future, state jawboning accompanying these measures does not stop the bear market from running its course, the next round of quantitative easing will have to be far larger than anything seen so far.

  Alternatively, if states by buying equities attempt to kill the bear, it will have to be through massive market intervention, aiming helicopter-distributed money at investors as well as rigging the alternatives to make them relatively less attractive. Either way, the shake-out in equities we have seen so far is a wake-up call for mainstream economists and commentators who believe in the comfort of government statistics, which seem designed to convince us all that economic growth is perpetually on its way.

  Since the Lehman crisis, investors have bought into this bullish argument to the exclusion of any likely risk that a bear market will happen. Consequently, considerable amounts of speculative money are committed to the concept of a perpetual state-guaranteed bull market; so if the destructive forces of reality do intervene, the potential for a severe fall in equity prices will be much greater than before.

  Meanwhile global bank credit looks like it is already contracting in key markets, such as China, in which case global fundamentals are definitely deteriorating. This being the case, it will take increasing amounts of newly-issued money from the central banks to perpetuate the illusion that markets are rising, and that the economy is still growing, with or without state-directed buying of equities.

  This article coms one week before the Fed's September interest rate decision, which might result in a small interest rate rise, but it is time to put the Fed's interest rate dilemma aside and instead think beyond it about the wider economic consequences of the monetary inflation necessary to ensure a perpetual bull market.