• Supply and Demand Report 6 Sep, 2015

  This was a fairly quiet week in the market for the metals, with a min-rally on Thursday especially in silver which hit almost $15. By the end of the week, the price of gold was down $13 and the price of silver was up 3 cents. The action was elsewhere (e.g. equities and currencies).

  We don’t think that the price action necessarily tells us anything by itself. That’s why we look at it in the light of the basis action—the spread between spot and futures. What happened to the fundamentals 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 this week, though it is still in what most people would call a breakout. 

  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, and the scarcity (i.e. cobasis) of gold went up along with it.

  The fundamental price retreated slightly, but it’s still $120 over the market price. Gold remains on sale at a discounted price.

  Now let’s look at silver.

  The Silver Basis and Cobasis and the Dollar Price
  
  

  The price was basically flat and the cobasis fell slightly.

  The silver fundamental price remains more than 50 cents above the market price.

  It should be noted that we calculate a fundamental gold to silver ratio over 80, and the market ratio is currently 77.

   

  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

  

  

  

  

• One Thing Colombia and Canada Have in Common

  By Chris at www.CapitalistExploits.at

  Driving the back streets of Medellin a few weeks ago I found it interesting to see the various little pockets to the city. In the poor parts of town I noticed on a couple of occasions taxi drives running their vehicles on empty. I’ve seen this before in countries where there is a lack of sufficient working capital to be able to keep the tank full. Disposable income is low or non-existent…

  There are, however, pockets where we found the burgeoning middle class which give credence to the statistical numbers. Here there are delightful tree lined neighborhoods, boutique art stores, restaurants, coffee shops and Land Cruisers beginning to cramp up the streets of Medellin. Colombia has indeed a rising and growing middle class, though there still exists a large disparity in wealth.

  

  One measure used by economists to determine this ratio of rich to poor is the Gini coefficient. A Gini score of 0 would mean a perfect distribution of income and expenditure in a society and a number of 100 represents absolute inequality. This has important ramifications as often there exists a higher propensity for civil unrest as the number gets higher. Conversely the lower this number, the more equal and oftentimes stable a country. Colombia, according to the World Bank, sport a score of 53.5, though this is taken from 2012. I suspect this figure is actually lower today – it’s been falling each year since early 2000s.

  The trend appears to be going in the right direction…

  We’ve had our eye on Colombia for some time. One reason we haven’t jumped in earlier is that we’ve been cognizant that it’s a resource economy and when we first began taking notes we were already a decade into the resource bull market. Not optimum!

  Buying into a market without assessing the risks is never a good idea. As we’ve been discussing for the last 12 months or so there is an underlying trade at work: the unwinding of the USD carry trade which saw capital pour into resources. As the resource bull rolled over, capital infusions reduced and then began to reverse. We’re of the opinion that this is still in its infancy.

  The collapse of Chinese demand and the dollar bull market has already wiped something like $5 trillion of commodity driven revenues from the global system. The repercussions are only beginning to be felt. This promises to get really interesting!

  As recently discussed, Chile is a great example of the risks we’re concerned about with respect to all emerging markets.

  Chile is tied to copper much in the same way Colombia’s economy is tightly tied to oil. When the demand for copper is high then the Chilean economy and peso does well. Chile is a poster child country which saw a lot of people piling into at the top of the resource boom and as such the currency became overvalued even more than it would have if you were to play the currency by understanding copper.

  This scared us and never really made sense as all too often what we saw when we looked was foreign buying by retail investors. Retail investors for the most part are unsophisticated, act spontaneously without critical thought and fail to do their own research. This is even more true in markets outside of their own borders. When I see foreign money coming into an economy, and while this isn’t necessarily a bad omen, when that foreign money is retail investors it’s a red flag and the risk reward is rarely good.

  Case in point. I’d often see comparisons made between real estate in the US with real estate in emerging markets without considering differing credit conditions, vastly different cost structures, income levels or political climes, or even more stunningly dumb, comparisons made with agricultural land prices with those in the US on price alone. You just can’t do that!

  Yield matters, access to capital matters, and you’ll find the yields on farmland in developed countries are typically multiples of that in emerging markets. There is a reason that farmland in emerging markets often sells at a discount to developed world farmland. For example, the average dairy cow in the US has a yield 5x that of one in Mexico. Investors who fail to stop to analyse this are doomed to buy into all sorts of silly ideas and end up getting completely hosed.

  

  Colombian peso over the past 2 years…

  

  … and the South African rand during the same period

  With that in mind we have been looking at Colombia. What is of interest to us is real estate in Medellin, a city that is growing rapidly and has more infrastructure being built than any other in the country. For me the most important risk is that of the capital markets which translates into the availability of credit and this heavily influences the pricing of risk. Pricing of risk always translates itself into the currency and that is where our biggest risk and greatest potential lies.

  Let’s Go Back First and Start with the Capital Markets

  The 1970s and 80s saw some truly impressive growth in Miami. Swanky condominiums, 5 star hotels, luxury car dealerships – all of these were built on Colombian drug money. Specifically, the Medellin cartel who supplied up to 90% of the US cocaine market and 80% of the global cocaine market. The cartel was so incredibly profitable that it was bringing in more than $70M a day at its height. They were making so much money that they were spending over $2,000 per day on little rubber bands to hold the cash together, with millions of dollars which rotted and were eaten by rats.

  Miami was essentially offshore financed by Colombia. The capital flows ran all the way back to the coca fields in Colombia. While drug trafficking still exists today it’s a mere fraction of its former self. Today instead Colombia relies on commodities such as oil and coffee with the energy sector accounting for 8% of GDP and 40% of revenues in the balance of payments and about 50% of total exports. What this tells me is that much of this is financed much more by the US. Credit lines today run to NYC not the coca fields of the Medellin cartel. Funding of this nature is true of most emerging markets who enjoy immature credit markets and limited domestic capital. The risk equation is substantially different.

  During the resource bull private sector debt in emerging market corporates exploded. Historically it’s been unusual for such funding to be conducted in anything other than dollars. Now we have a perfect storm: collapsing commodity prices translating into a collapse in revenues for these corporates. As they pare back exposure they do so by buying back their dollar shorts. As the dollar strengthens they very quickly find themselves unable to pay their debts. It’s going to happen! We fully expect a massive blow up in emerging markets. I mentioned recently that Turkey and South Africa looked pretty precarious and this morning I woke to find that Turkey’s currency is going into free fall, violence has erupted on the streets and the government has begun arresting journalists. Does it spread?

  What This Means for Colombia?

  In speaking with people in Colombia I found a complacency amongst most of them. The same sort of complacency that existed in Southeast Asia even as the Asian crisis was taking hold.

  When you don’t have control over your own credit markets you’re vulnerable to global capital flows and this is where Colombia is at risk. The flip side of this is that domestic credit is still nascent. Only 72.5% of Colombians have a bank account and fewer than 3% have a mortgage. During the 2008 crisis Colombia fared very well though if you recall oil hadn’t fall out of bed quite so spectacularly so the considerations right now are somewhat different.

  The hedge fund manager in Manhattan, Tokyo or London doesn’t care much about whether or not Colombia, Chile, South Africa, etc. are sound fundamentally. His VAR (value at risk) models begin to blow out and he hits the sell button. This becomes a self reinforcing cycle. It’s quite beautiful to watch.

  The risk here, the single biggest risk, is the currency. Get it wrong and it’s incredibly easy to be wiped out. I think we’ve got at least 2-3 more years of devaluation ahead. Oil and the Colombian peso are likely to stay low for some period of time.

  At our recently concluded Seraph meet in Medellin we heard from Felipe Campos at Alianza Valores. I was really impressed with Felipe’s grounded approach and thorough research which extends beyond the narrow borders of Colombia. His presentation included this chart below which really highlights the dependence on energy that Colombia has. This will continue to be reflected in the peso.

  

  Another really fascinating chart was how closely linked the Canadian dollar is to the Colombian peso. I’d never realised how closely tied the two economies are. This also provides a means of hedging Colombian exposure in the currency markets. The COP is tough to hedge for retail guys and even when you’re hedging a $50M+ position, it’s still expensive. Hedge with the loonie?

  

  To all those Canadians who suffer under the misguided idea that Canada has a diversified economy, this above chart shows how closely tied both these economies are. The connective tissue? Oil.

  As long as oil stays low, the peso remains under pressure.

  This will pressure the economy and we expect to find some truly exceptional opportunities in a country that has so many good things going for it in the long term. The time to get your ducks in a line is well beforehand because when the opportunities start showing up two things happen:

  1. Your emotional part of your brain will tell to stay away, and
  2. You’ll have a tough time raising any capital because people will be looking at terrible headline news and will be reluctant to invest.

  We’re preparing now. If we’re wrong, we’ll know within the next couple of years and we’ll still be sitting on cash. If we’re correct, we will be buying prize assets for cents on the dollar because while we are very very long the dollar right now we’re not so naive to think that this will last forever. Like previous dollar bull markets it’ll turn around and this time it may not come back as the problems in the US financial position are unsustainable.

  – Chris  

   

  “Luck is a matter of preparation meeting opportunity.” – Lucius Annaeus Seneca

  

  

  

  

• China's "S&P" Limit Up 10%, Banks Plunge 5% As Xinhua Confirms "Stock Market Stabilized"

  Presented with little comment aside from a snarky glare as Xinhua's headline "After a roller coaster rush since July 2014, China's stock market has stabilized and risks have been released to some extent, the securities regulator said Sunday." CSI-300 was limit up 10% shortly after the open, then was hammered 5% lower. CSI Banks Index is down 5% and Shanghai Composite was not as easily manipulated and is down 0.5%!!

   

  

   

  But China Banks are geting hammered…

  

   

  Who was responsible for the magical levitation? Simple!!

  Spot The Difference!

  

   

  Welcome to the "markets"

   

  Charts: Bloomberg

  

  

  

  

  

• CyberWar & The False Comfort Of Mutually Assured Destruction

  Submitted by Jim Rickards via Bonner & Partners,

  During a recent financial war-game exercise at the Pentagon, I recommended that the SEC and New York Stock Exchange buy a warehouse in New York and equip it with copper-wire hardline phones, handheld battery-powered calculators, and other pre-Internet equipment. This facility would serve as a nondigital stock exchange with trading posts.

  The SEC would assign 30 major stocks each to the 20 largest broker-dealers, who would be designated specialists in those stocks. This would provide market making on the 600 largest stocks, covering more than 90% of all trading on a typical day.

  Orders would be phoned in on the hardwire analog phone system and put up for bids and offers by the specialists to a crowd of live brokers. This is exactly how stocks were traded until recently. Computerized and algorithmic trading would be banned as nonessential. Only real investor interest would be represented in this nondigital venue.

  In the event of a shutdown of the New York Stock Exchange by digital attack, the nondigital exchange would be activated. The U.S. would let China and Russia know this facility existed as a deterrent to a digital attack in the first place.

  If our rivals knew we had a robust nondigital Plan B, they might not bother to conduct a digital attack in the first place.

  Russia Strikes the Nasdaq

  Financial warfare attacks vary in their degree of sophistication and impact. At the low end of the spectrum is a distributed denial of service (DDoS) attack. This is done by flooding a targeted server with an overwhelming volume of message traffic so that either the server shuts down or legitimate users cannot gain access. In such attacks, the target is not actually penetrated, but it is disabled by the message traffic jam.

  The next level of sophistication is a cyberhack, in which the target, say, a bank account record file or a stock exchange order system, is actually penetrated. Once inside, the attacking cyberbrigade can either steal information, shut down the system, or plant sleeper attack viruses that can be activated at a later date.

  In 2010, the FBI and Department of Homeland Security located such an attack virus planted by Russian security services inside the Nasdaq stock market system. You have probably noticed that unexplained stock market outages and flash crashes are happening with increasing frequency. Some of these events may be self-inflicted damage by the exchanges themselves in the course of software upgrades, but others are highly suspicious and the exact causes have never been disclosed by exchange officials.

  
  A recently revealed classified map showing cyberattacks by the Chinese government against U.S. interests. Notice the concentration of attacks against technology targets in San Francisco, financial targets in New York, and military and intelligence targets in the Washington-Virginia area.

  The most dangerous attacks of all are those in which the enemy penetrates a bank or stock exchange not to disable it or steal information but to turn it into an enemy drone. Such a market drone can be used by attackers for maximum market disruption and the mass destruction of Americans’ wealth, including your stocks and savings.

  In this scenario, an attacker could penetrate the order entry system of a major stock exchange such as the New York Stock Exchange or one of the order-matching dark pools operated by major investment banks, such as the SIGMA X system controlled by Goldman Sachs. Once inside the order entry system, the attacker would place large sell orders on highly liquid stocks such as Apple or Facebook.

  Other system participants would then automatically match these orders in the mistaken belief that they were real trades. The sell orders would keep flooding the market until eventually other participants lowered their bids and began to deflect the selling pressure to other exchanges.

  An attack of this type would be launched on a day when the market was already down 3% or more, about 550 points on the Dow Jones index. Using exogenous events like that to increase the power of a planned attack is called a “force multiplier” by military strategists.

  The result could be a market decline of 20% or more in a single day, comparable to the stock market crash of October 1987 or the crash of 1929. You would not have to trade anything or be in the market during the attack; you would be wiped out based on the market decline even if you did nothing.

  The False Comfort of Mutually Assured Destruction

  Another type of highly malicious attack is to penetrate the account records system of a major bank and then systematically erase account balances in customers’ deposit accounts and 401(k)s. If the attack extended to backup databases, you or other customers might have no way of proving you ever owned the deleted accounts.

  Some analysts respond to such scenarios by saying that the U.S. has cyberwarfare attack capabilities that are just as effective as our enemies’. If Iran, China, or Russia ever launched a cyberfinancial attack on the U.S., we could retaliate.

  The threat of retaliation, they claim, would act as a deterrent and prevent the enemy attack in the first place. This is similar to the doctrine of “mutually assured destruction,” or MAD, that prevented nuclear conflict between the U.S. and Russia during the Cold War.

  This analysis is highly flawed and gives false comfort. MAD worked during the Cold War because both sides wanted to avoid existential losses. In financial warfare, the losses may be existential for the U.S., but this is not true for Russia, China, and Iran. Because they are far less developed than the U.S., their markets could be destroyed and it would have little impact on their overall economy or national security.

  Many stocks in Russia and China are owned by U.S. and European investors, so any damage would come back to haunt Western interests.

  The technological warfare capabilities may be symmetric, but the potential damage is asymmetric, so the deterrent effect on China and Russia is low. There is essentially nothing stopping Russia, Iran, or China from launching a “first strike” financial warfare attack if it serves some other national strategic purpose.

  Be Prepared

  What can you do to preserve wealth when these cyberfinancial wars break out?

  The key is to have some portion of your total assets invested in nondigital assets that cannot be hacked, wiped out or disrupted by financial warfare.

  Such assets include gold, silver, land, fine art, and private equity that is usually represented by a paper contract and does not rely on electronic-exchange trading for liquidity.

  For gold, I recommend you have a 10% allocation to physical gold if you don’t already.

  As an investor, you have enough to be concerned about just taking into account factors like inflation, deflation, Fed policy, and the overall state of the economy. Now you have another major threat looming – financial warfare, enabled by cyberattacks and force multipliers. The time to take defensive action by acquiring some nondigital assets is now.

  

  

  

  

  

• China Stocks "Death Cross", Default Risk Hits 2-Year High As Regulators Promise G-20 'Whatever It Takes' To Stabilize Market

  Even before China reopened from its 5-day holiday, regulators were pitching Chinese stocks as cheap (37.3x P/E) and less-margined (+108% YoY) and promised to "safeguard stability" in a "variety of forms" seemingly pouting cold water on The FT's recent report (and the malicious instigator of China's market crash). All of this is quite ironic, given China's chief central bankers admitted "the chinese bubble has burst." As stocks open, CSI-300 (China's S&P 500) has confirmed a 'Death Cross' which in 2008 was followed by a further 60% decline. More troubling, however, is the incessant rise in interbank rates as despite CNY530bn of liquidity injected in the last 3 weeks, overnight rates have doubled. China credit risk jumps to 2-year highs and AsiaPac stocks are generally lower at the open (as US futures dumped'n'pumped) not helped by Japanese weakness on BoJ tapering concerns. PBOC strengthened the Yuan fix for the 4th day in a row – the most since Sept 2010.

  After 3 days of stronger Yuan fixes into Wednesday of last week (before China closed), PBOC went even further – fixing Yuan 0.21% stronger, extending the streak to 4 days and 0.73% stroger – the biggest 4-day move in 5 years…

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3584 AGAINST U.S. DOLLAR

  

   

  China's "S&P 500" just suffered a Death Cross (50-day moving average crossing below the 200-day moving-average)…

  

   

  It did not end well on previous occasions and we note that Shanghai Composite is likely to suffer this technical signal within the next week also.

  AsiaPac stocks are weaker…

  • *MSCI ASIA PACIFIC INDEX EXTENDS LOSS TO 1%
  • *FTSE CHINA A50 INDEX FUTURES FALL 1.1% IN SINGAPORE

  Dow Futures algorithmically extinguished all the stops above Friday's highs and below Friday's lows before tumbling back to unch…

  

  *  *  *

  However, even before tonight's weakness began…

  Speaking via the government's unofficial mouthpiece – Xinhua – China Securities Regulatory Commission promised…

  *CHINA'S ECONOMY IS STABILIZING, IMPROVING, NDRC SAYS

  *NDRC SEES CHINA ABLE TO ACHIEVE ANNUAL ECONOMIC GROWTH TARGET

   

  we want to continue to stabilize the market and prevent systemic risk as a primary task to stabilize the market – to repair market…

   

  when violent abnormal fluctuations in the market which may lead to systemic risks, the China Securities Finance Co., Ltd. will continue to play a role, safeguarding stability in a variety of forms.

  In addition, CSRC seemingly started pitching Chinese stocks as 'cheap' again noting that the P/E ration has tumbled (yeah but Shenzhen sticll 37.3x forward guesstimates) and laverage has dropped (yeah margiun debt is down CNY1 trillion but it is still up 100% YoY)…

  Cheap?

  

   

  However, most troubling of all is the doubling of overnight lending rates in the Chinese interbank market… Despite CNY 530bn in liquidity injections in the last 3 weeks alone…

  

   

  SHIFON has doubled!!!!

  

   

  Indicating Chinese banks are under massive liquidity stress… and implicitly the government too…

  • *AG BANK, BOCOM CORE CAPITAL RATIO BELOW BASEL TARGETS: SCMP
  • *MOODY'S: CHINESE BANKS WILL FACE RISING OP PRESSURE

  

   

  China is now credit riskier than Italy, Spain, and Saudi Arabia.

   

  *  *  *

  Away from China, Japanese markets are turmoiling after BOJ Tapering concerns mount…

  

   

  and not helped by Toshiba's massive accounting fraud loss…

  • *TOSHIBA POSTS 37.8B YEN FY14 NET LOSS AFTER ACCOUNTING SCANDAL

  Sending USDJPY plunging…

  

   

  Paging Mr.Kuroda…

  

   

  As everyone awaits South Korea's rate decision later this week… The carnage in Korean trade is unmistakable in the following Barclays chart:

  

  As for what this means for Korean monetary policy, no surprise here: more easing.

  We now expect the BoK to deliver a further 25bp rate cut in Q4, most likely in October. We see an outside chance of an earlier move, at the 11 September meeting, but we continue to believe that the BoK will prefer to move after the initial delivery of the fiscal supplementary spending and the US FOMC meeting on 17-18 September. Also, we now expect the first rate hike in Korea in Q3 16, rather than in late Q1 16. Moreover, with key indicators for the services economy showing a healthy post-MERS rebound, we believe the urgency to act immediately is still low. We believe the existing focus on engineering a weaker KRW bias – possibly by stockpiling essential commodities such as fuel – will remain.  

  Of course, further easing by South Korea, or even an outright devaluation, means the ball will then be in the court of Korea's trade competitors, who will then be compelled to match the Korean move with further easing (or devaluation) of their own, and so on, until one can no longer sweep the global recession under the rug. It isn't called the global race to the bottom for nothing.

   

  Charts: Bloomberg

  

  

  

  

  

• SeX WiTH AN EMaiL SeRVeR…

  

  

  

  

  

• Why The New Car Bubble's Days Are Numbered

  Having recently detailed the automakers' worst nightmare – surging new car inventories – supply; amid rapidly declining growth around the world (EM and China) – demand;

  Automakers just unleashed a massive production surge to keep the dream alive…

  

   

  With inventories at record highs (having risen for 61 straight months)…

  

   

  Which would be fine if sales were keeping up – but they are not…

  

   

  It appears the bubble in new car sales is about to be crushed by yet another unintended consequence of The Fed's lower for longer experiment.

  Edmunds.com estimates that around 28% of new vehicles this year will be leased – a near-record pace…

  

   

  Which means…

  13.4 million vehicles (leased over the past 3 years in The US) – compared with just 7 million in the three years to 2011 – are set to spark a massive surplus of high-quality used cars.

   

  Great for consumers (if there are any left who have not leased a car in the last 3 years) but crushing for automakers' margins as luxury used-care prices are tumbling just as residuals have surged.

  As The Wall Street Journal explains,

  Consumers focused on the dollar amount of their monthly payment have taken advantage of low interest rates to sometimes buy more car than they might otherwise be able to afford.

   

  But, aside from the actual cost of the vehicle, rates are only part of the equation determining monthly payments. The other is what auto makers and their financing arms think the residual value will be once a typical 36-month lease is up.

   

  Those values surged after the financial crisis.

  Now, a surfeit of off-lease vehicles is starting to depress prices, particularly for expensive vehicles.

  Three-year old, used premium luxury-car prices are down by nearly 7% from a year ago, according to Edmunds.com data. Along with Fed interest-rate increases, that would make leases less of a bargain and used cars more attractive.

   

  That new-car smell may soon involve more of a splurge.

  And if you are relying on more easing from The PBOC… it has made absolutely no difference whatsoever in the past 10 years…

  

   

  And all of this on top of the fact that the subprime auto loan market is set to collapse…

  We're gonna need a biggerer bailout… or more chemical plant explosions…

  To sum up…

  • The only way automakers are making sales is by lowering credit standards to truly mind-numbing levels and increasing residuals to make the monthly nut affordable…. that cannot last.
  • China's economic collapse has crushed forecasts for the automakers.
  • Inventories of new cars are already at record highs.
  • Inventories of luxury high-quality used cars is at record highs and prices are tumbling.
  • And July saw a massive surge in producton.
  • What comes next is simple… a production slump – just ask The Atlanta Fed.

  

  

  

  

  

• The "Great Unwind" Has Arrived

  Submitted by Doug Noland via Credit Bubble Bulletin,

  It’s my overarching thesis that the world is in the waning days of a historic multi-decade experiment in unfettered finance. As I have posited over the years, international finance has for too long been effectively operating without constraints on either the quantity or the quality of Credit issued. From the perspective of unsound finance on a globalized basis, this period has been unique. History, however, is replete with isolated episodes of booms fueled by bouts of unsound money and Credit – monetary fiascos inevitably ending in disaster. I see discomforting confirmation that the current historic global monetary fiasco’s disaster phase is now unfolding. It is within this context that readers should view recent market instability.

  It’s been 25 years of analyzing U.S. finance and the great U.S. Credit Bubble. When it comes to sustaining the Credit boom, at this point we’ve seen the most extraordinary measures along with about every trick in the book. When the banking system was left severely impaired from late-eighties excess, the Greenspan Fed surreptitiously nurtured non-bank Credit expansion. There was the unprecedented GSE boom, recklessly fomented by explicit and implied Washington backing. We’ve witnessed unprecedented growth in “Wall Street finance” – securitizations and sophisticated financial instruments and vehicles. There was the explosion in hedge funds and leveraged speculation. And, of course, there’s the tangled derivatives world that ballooned to an unfathomable hundreds of Trillions. Our central bank has championed it all.

  Importantly, the promotion of “market-based” finance dictated a subtle yet profound change in policymaking. A functioning New Age financial structure required that the Federal Reserve backstop the securities markets. And especially in a derivatives marketplace dominated by “dynamic hedging” (i.e. buying or selling securities to hedge market “insurance” written), the Fed was compelled to guarantee “liquid and continuous” markets. This changed just about everything.

  Contemporary finance is viable only so long as players can operate in highly liquid securities markets where price adjustments remain relatively contained. This is not the natural state of how markets function. The bullish premise of readily insurable/hedgeable market risks rests upon those having written protection being able to effectively off-load risk onto markets that trade freely without large price gaps/dislocations. And, sure enough, perceptions of liquid and continuous markets do create their own reality (Soros’ reflexivity). Sudden fear of market illiquidity and dislocation leads to financial crashes.

  U.S. policymaking and finance changed profoundly after the “tech” Bubble collapse. Larger market intrusions and bailouts gave way to Federal Reserve talk of “helicopter money” and the “government printing press” necessary to fight the scourge of deflation. Mortgage finance proved a powerful expedient. In hindsight, 2002 was the fateful origin of both the historic mortgage finance Bubble along with “do whatever it takes” central banking. The global policy response to the 2008 Bubble collapse unleashed Contemporary Finance’s Bubble Dynamics throughout the world – China and EM in particular.

  There are myriad serious issues associated with New Age finance and policymaking going global. The bullish consensus view holds that China and EM adoption of Western finance has been integral to these economies’ natural and beneficial advancement. Having evolved to the point of active participants in “globalization,” literally several billion individuals have the opportunity to prosper from and promote global free-market Capitalism. Such superficial analysis disregards this Credit and market cycles’ momentous developments.

  The analysis is exceptionally complex – and has been so for a while now. The confluence of sophisticated finance, esoteric leverage, the highly speculative nature of market activity and the prominent role of government market manipulation has created an extremely convoluted backdrop. Still, a root cause of current troubles can be boiled down to a more manageable issue: “Contemporary finance” and EM just don’t mix. Seductively, the two appeared almost wonderfully compatible – but that ended with the boom phase. For starters, the notion of “liquid and continuous” markets is pure fantasy when it comes to “developing” economies and financial systems. As always, “money” gushes in and rushes out of EM. Submerged in destabilizing finance, EM financial, economic and political systems become, as always, overwhelmed and dysfunctional. And as always is the case, the greater the boom the more destabilizing the bust.

  In general, reckless “money” printing has over years produced a massive pool of destabilizing global speculative finance. Simplistically, egregious monetary inflation (along with zero return on savings) ensured that there was way too much “money” chasing too few risk assets. Every successful trade attracted too much company. Successful strategies spurred a proliferation of copycats and massive inflows. Strong markets were flooded with finance. Perceived robust economies were overrun. Popular regions were completely inundated. To be sure, the post-crisis “Global Reflation Trade” amounted to history’s greatest international flow of speculative finance. Dreadfully, now comes The Unwind.

  From individual trades, to themes to strategic asset-class and regional market allocations, speculative “hot money” flows have reversed course. Global deleveraging and de-risking have commenced. The fallacy of “liquid and continuous” markets is being exposed. Faith that global central bankers have things under control has begun to wane. And for the vast majority in the markets it remains business as usual. Another buying opportunity.

  Whether on the basis of an individual trade or a popular theme, boom-time success ensured that contemporary (trend-following and performance-chasing) market dynamics spurred speculative excess and associated structural impairment. They also ensured latent Crowded Trade fragilities (notably illiquid and discontinuous “risk off” markets).

  Crowded Trade Dynamics ensure that a rush for the exits has folks getting trampled. Previous relationships break down and time-tested strategies flail. “Genius” fails. When the Crowd decides it wants out, the market turns bereft of buyers willing and able to take the other side of the trade. And the longer the previous success of a trade, theme or strategy the larger The Crowd – and the more destabilizing The Unwind. Previous performance and track records will offer little predictive value. Models (i.e. “risk parity” and VAR!) will now work to deceive and confound.

  Today, a Crowd of “money” is rushing to exit EM. The Crowd seeks to vacate a faltering Chinese Bubble. “Money” wants out of Crowded global leveraged “carry trades.” In summary, the global government finance Bubble has been pierced with profound consequences. Of course there will be aggressive policy responses. I just fear we’ve reached The Unwind phase where throwing more liquidity at the problem only exacerbates instability. Sure, the ECB and BOJ could increase QE – in the process only further stoking king dollar at the expense of faltering energy, commodities, EM and China. And the Fed could restart it program of buying U.S. securities. Bolstering U.S. markets could also come at the expense of faltering Bubbles around the globe.

  It has been amazing to witness the expansion of Credit default swap (CDS) markets to all crevices of international finance. To see China’s “shadow banking” assets balloon to $5 Trillion has been nothing short of astonishing. Then there is the explosion of largely unregulated Credit insurance throughout Chinese debt markets – and EM generally. I find it incredible that Brazil’s central bank would write $100 billion of currency swaps (offering buyers protection against devaluation). Throughout it all, there’s been an overriding certitude that policymakers will retain control. Unwavering faith in concerted QE infinity, as necessary. The fallacy of liquid and continuous markets persisted so much longer than I ever imagined.

  I feel I have a decent understanding of how the Fed and global central bankers reflated the system after the 2008 mortgage finance Bubble collapse. The Federal Reserve collapsed interest-rates to zero, while expanding its holdings (Fed Credit) about $1 Trillion. Importantly, the Fed was able to incite a mortgage refinance boom, where hundreds of billions of suspect “private-label” mortgages were transformed into (money-like) GSE-backed securities (becoming suitable for Fed purchase). The Fed backstopped the securities broker/dealer industry, the big banks and money funds. Washington backed Fannie, Freddie and the FHLB, along with major derivative players such as AIG. The Fed injected unprecedented amounts of liquidity into securities markets, more than content to devalue the dollar. Importantly, with the benefit of international reserve currency status and debt denominated almost exclusively in dollars, U.S. currency devaluation appeared relatively painless.

  These days I really struggle envisaging how global policymakers reflate after the multi-dimensional collapse of the global government finance Bubble. We’re already witness to China’s deepening struggles. Stimulus over the past year worked primarily to inflate a destabilizing stock market Bubble that has gone bust. They (again) were forced to backtrack from currency devaluation. Acute fragilities associated both with massive financial outflows and enormous amounts of foreign currency-denominated debt were too intense. Markets are skeptical of Chinese official signals that the renminbi will be held stable against the dollar. Market players instead seem to be interpreting China’s efforts to stabilize their currency as actually raising the probability for future abrupt policy measures (significant devaluation and capital controls) or perhaps a highly destabilizing uncontrolled breakdown in the peg to the U.S. dollar.

  And as China this week imposed onerous conditions on some currency derivative trading/hedging, it’s now clear that Chinese officials support contemporary market-based finance only when it assists their chosen policy course. How long will Chinese officials tolerate bleeding the nation's international reserves to allow “money” to exit China at top dollar?

  …

  I wholeheartedly agree with the statement “technical factors can push the market away from fundamentals.” Indeed, that’s been the case now for going on seven years. A confluence of unprecedented monetary inflation, interest-rate manipulation, government deficits and leveraged speculation inflated a historic divergence between securities markets Bubbles and underlying fundamentals. The global Bubble is now faltering. Risk aversion is taking hold. De-leveraging is accelerating.

  The yen jumped 2.2% this week. Japanese stocks were hit for 7%. The Brazilian real sank 7.3%. The South African rand dropped 4.2%. The Turkish lira dropped another 2.9% and the Russian ruble sank 5.0%. China sovereign CDS surged, pulling Asian CDS higher throughout. The Hang Seng China H-Financials Index sank another 7.4% this week, having now declined 39% from June highs. From my vantage point, market action points to serious unfolding financial dislocation in China. It also would appear that a large swath of the leveraged speculating community is facing some real difficulty.

  After a rough trading session and an ominous week for global markets, I was struck by Friday evening headlines. From the Wall Street Journal: “An Investor’s Field Guild to Bottom Fishing;” “Global CEOs See Emerging Markets As Rich With Opportunity.” From CNBC: “Spike in Volatility Creates ‘Traders Paradise.” And from the Financial Times: “Wall Street Waiting for Those Buy Signals;” “Time to Buy EM Stocks, History Suggests;” “Why I’m Adding Emerging Markets Exposure Despite China Wobble;” “G20 Defies Gloom to Forecast Rise in Growth.”

  There still seems little recognition of the seriousness of the unfolding global market dislocation. It’s destined to be a wrenching bear market – at best.

  

  

  

  

  

• The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play

  The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed’s hiking intentions, with China, or even the ongoing “1998-style” carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program “hasn’t been as successful as we’d hoped.”

  Why? “It’s simply because they are running out. There are simply too few of these structured products out there.”

  So six months later, the ECB begrudgingly admitted what we said in March 2015, in “A Complete Preview Of Q€ — And Why It Will Fail“, was correct. Namely this:

  … the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.

   

  … while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.

   

  Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.

  (Actually, we said all of the above first all the way back in 2012, but that’s irrelevant.)

  So aside from the ECB officially admitting that it has become supply*constrained even with security prices at near all time highs, why is this so critical?

  Readers will recall that just yesterday we explained why “Suddenly The Bank Of Japan Has An Unexpected Problem On Its Hands” in which we quoted BofA a rates strategist who said that “now that GPIF’s selling has finished, the focus will be on who else is going to sell. Unless Japan Post Bank sells JGBs, the BOJ won’t be able to continue its monetary stimulus operations.“

  We also said this:

  “in 6-9 months, following the next major market swoon when everyone is demanding more action from the BOJ, “suddenly” pundits will have discovered the biggest glitch in the ongoing QE monetization regime, namely that the BOJ simply can not continue its current QE program, let along boost QE as many are increasingly demanding, unless it finds willing sellers, and having already bought everything the single biggest holder of JGBs, the GPIF, had to sell, the BOJ will next shakedown the Post Bank, whose sales of JPY45 trillion in JGBs are critical to keep Japan’s QQE going.

   

  The sale of that amount, however, by the second largest holder of JGBs, will only last the BOJ for the next 3 months. What next? Which other pension fund will have the massive holdings required to keep the BOJ’s going not only in 2016 but also 2017 and onward. The answer: less and less.

  Once again to be accurate, the first time we warned about the biggest nightmare on deck for the BOJ (and ECB, and Fed, and every other monetizing central bank) was back in October 2014, when we cautioned that the biggest rish was a lack of monetizable supply.

  We cited Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who said that at the scale of its current debt monetization, the BOJ could end up owning half of the JGB market by as early as in 2018. He added that “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation.“

  

  This was our summary:

  The BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existant and getting worse by the day. All that would take for a massive VaR shock scenario to play out in Japan is one exogenous JGB event for the market to realize just how little actual natural buyers and sellers exist.

  That said, our conclusion, which was not to “expect the media to grasp the profound implications of this analysis not only for the BOJ but for all other central banks: we expect this to be summer of 2016’s business” may have been a tad premature.

  The reason: overnight the IMF released a working paper written by Serkan Arslanalp and Dennis Botman (which was originally authored in August), which confirmed everything we said yesterday… and then some.

  Here is Bloomberg’s summary of the paper:

  The Bank of Japan may need to reduce the pace of its bond purchases in a few years due to a shortage of sellers, said economists at the International Monetary Fund.

   

  There is likely to be a “minimum” level of demand for Japanese government bonds from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management requirements, said IMF economists Serkan Arslanalp and Dennis Botman.

  Here are the excerpts from the paper:

  We construct a realistic rebalancing scenario, which suggests that the BoJ may need to taper its JGB purchases in 2017 or 2018, given collateral needs of banks, asset-liability management constraints of insurers, and announced asset allocation targets of major pension funds.

   

  … there is likely to be a “minimum” level of demand for JGBs from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management (ALM) requirements. As such, the sustainability of the BoJ’s current pace of JGB purchases may become an issue.

  Back to Bloomberg:

  While Governor Haruhiko Kuroda said in May that he expects no obstacles in buying government bonds, the IMF analysts join Nomura Securities Co. and BNP Paribas SA in questioning the sustainability of the unprecedented debt purchases.

  Who in turn merely joined Zero Hedge who warned about precisely this in October of last year.

  Back to the IMF paper, which notes that in Japan, where there is a limited securitization market, the only “high quality collateral” assets are JGBs, and as a result of the large scale JGB purchases by the JGB, “a supply-demand imbalance can emerge, which could limit the central bank’s ability to achieve its monetary base targets. Such limits may already be reflected in exceptionally low (and sometimes negative) yields on JGBs, amid a large negative term premium, and signs of reduced JGB market liquidity.”

  To the extent markets anticipate limits, the rise in inflation expectations could be contained, which may mitigate incentives for portfolio rebalancing and create a self-fulfilling cycle that undermines the BoJ’s objectives.

  For those surprised by the IMF’s stark warning and curious how it is possible that the BOJ could have put itself in such a position, here is the explanation:

  So far, the BoJ’s share of the government bond market is similar to those of the Federal Reserve and still below the Bank of England (BOE) at the height of their QE programs. Indeed, the BoE held close to 40 percent of the conventional gilt market at one point without causing significant market impairment. Japan is not there yet, as the BoJ held about a quarter of the market at end-2014. But, at the current pace, it will hold about 40 percent of the market by end-2016 and close to 60 percent by end-2018. In other words, beyond 2016, the BoJ’s dominant position in the government bond market will be unprecedented among major advanced economies.

  

  As we expanded yesterday, the biggest issue for the BOJ is not that it has problems buying paper, but that there are simply not enough sellers: “under QQE1, only around 5 percent of BoJ’s net JGB purchases from the market came from institutional investors. In contrast, under QQE2, close to 40 percent of net purchases have come from institutional investors between October 2014 and March 2015.”

  

   

  This is where things get back for the BOJ, because now that the BOJ is buying everything official institutions have to sell, the countdown has begun:

  given the pace of BoJ purchases under QQE2 and projected debt issuance by the government (based on April 2015 IMF WEO projections of the fiscal deficit), we estimate that Japanese investors could shed some ¥220 trillion of JGBs until end-2018 (Table 2, Figure 4). In particular, Japanese insurance companies and pension funds could reduce their government bond holdings by ¥44 trillion, while banks could sell another ¥176 trillion by end-2018, which would bring their JGB holdings down to 5 percent of total assets. At that point, the BoJ may have to taper its JGB purchases.

  

   

  Then there are the liquidity issues:

  As the BoJ ascends to being a dominant player in the JGB market, liquidity is likely to be affected, implying that economic surprises may trigger larger volatility in JGB yields with potential financial stability implications. As noted in IMF (2012), demand-supply imbalances in safe assets could lead to deteriorating collateral quality in funding markets, more short-term volatility jumps, herding, and cliff effects. In an environment of persistent low interest rates and heightened financial market uncertainty, these imbalances can raise the frequency of volatility spikes and potentially lead to large swings in asset prices.

  This, too, is precisely what we warned yesterday would be the outcome: “the BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existant and getting worse by the day.”

  The IMF paper conveniently provides some useful trackers to observe just how bad JGB liquidity is in real-time.

  

  The IMF is quick to note that the BOJ does have a way out: it can simply shift its monetization to longer-dated paper, expand collateral availability using tthe BOJ’s Securited Lending Facility (which basically is a circular check kiting scheme, where the BOJ lends banks the securities it will then repurchase from them), or simply shift from bonds to other assets: “the authorities could expand the purchase of private assets. At the moment, Japan has a relatively limited corporate bond market (text chart). Hence, this would require jumpstarting the securitization market for mortgages and bank loans to small and medium-sized enterprises which could generate more private assets for BoJ purchases.”

  But the biggest risk is not what else the BOJ could monetize – surely the Japanese government can always create “monetizable” kitchen sinks… but what happens when the regime shifts from the current buying phase to its inverse:

  As this limit approaches and once the BoJ starts to exit, the market could move from a situation of shortage to one with excess supply. The term premium could jump depending on whether the BoJ shrinks its balance sheet and on the fiscal deficit over the medium term.

  When considering that by 2018 the BOJ market will have become the world’s most illiquid (as the BOJ will hold 60% or more of all issues), the IMF’s final warning is that “such a change in market conditions could trigger the potential for abrupt jumps in yields.”

  At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops.

  But ignoring the endgame for Japan, and recall that BofA triangulated just this when it said that “the BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation“, what’s worse for Abe is that the countdown until his program loses all credibility has begun.

  What happens then? As BNP wrote in an August 28-dated report, “Once foreign investors lose faith in Abenomics, foreign outflows are likely to trigger a Japanese equities meltdown similar to the one observed during 2007-09.”

  And from there, the contagion will spread to the entire world, whose central banks incidentally, will be faced with precisely the same question: who will be responsible for the next round of monetization and desperately kicking the can one more time.

  But before we get to the QE endgame, we first need to get the interim point: the one where first the markets and then the media realizes that the BOJ – the one central banks whose bank monetization is keeping the world’s asset levels afloat now that the ECB has admitted it is having “problems” finding sellers – will have no choice but to taper, with all the associated downstream effects on domestic and global asset prices.

  It’s all downhill from there, and not just for Japan but all other “safe collateral” monetizing central banks, which explains the real reason the Fed is in a rush to hike: so it can at least engage in some more QE when every other central bank fails.

  But there’s no rush: remember to give the market and the media the usual 6-9 month head start to grasp the significance of all of the above.

  Source: IMF

  

  

  

  

  

• Why Hillary Can't Tell If Her Email Is Classified

  Presented with no comment…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• ESPN: Cutting The Cord Or Political Turn Off?

  Submitted by Mark St.Cyr,

  The catchphrase that seems to be picking up more and more steam is “cutting the cord” when referring to those that are dropping traditional cable TV for viewing choices or alternatives by other means. The reasons why differ greatly. For some its price, or affordability. For others, its convenience with the growing numbers of alternatives. And for some; they just refuse to pay for anything in a zealot like fashion. Although each group has different reasons the outcome is the same: diminishing viewership.

  However, is “cutting the cord” really the reason for ESPN’s loss of millions viewers? Or, is that the easiest crutch of an excuse for what might really be happening? After all, media is, and always will be, the king of “inflated” numbers. So much so I garner when a CEO of any media company reads a term like “double seasonally adjusted” they smirk and think – “Rookies.”

  It’s just the way it has, is, and will be played; and everyone understands it. None more so than those within the business itself, which is why a few things struck me.

  Why wouldn’t ESPN™ (or Disney™ its parent company) go to great efforts to include or push the narrative that “cord cutting” doesn’t necessarily mean “all” that cut have tuned off? In other words: why aren’t numbers from alternative viewing sources highlighted as to show they might not be viewing there – but they are over here? Unless – they aren’t.

  And if they’re not – why not? After all, there’s probably no other content infringement policing company for copyright and other applicable ownership rights than Disney and all its subsidiaries. You aren’t going to see it for free or on alternative platforms unless they want or allow for it. Period.

  This would also imply if they allowed it (anywhere) it would be accounted for ( i.e., click views, etc.) in some manner of form from across the internet to help take the edge off. i.e., Sure we lost millions from cable, but as you can see here, they’ve just migrated over to this service/platform as an alternative. Monetizing the alternative is a work in progress. etc., etc.

  However, that seems not to be the case. The case appears – they’ve not only cut: they’ve tuned out or turned off the programming entirely. Why?

  It’s hard to say. However, if I use myself as an example, I believe I know a large part of the underlying reason:

  ESPN (like a few notable others such as NBC™) has seemingly transformed at near hyper-speed from sports reporting – to political sports reporting. The political edge now rampant throughout the shows, games, interviews, et al is overbearing, overburdening, and overdone.

  Here’s what I know from my own experience: It has become near impossible to turn on something that was originally created for pure entertainment value without now being bombarded with how the “political football” issue of the day is being addressed by the commentators, sideline crews, as well as players and coaches. e.g., I tuned in to watch a football game – not a game about how today’s “political football” is handled and won. i.e., gun control, domestic violence, civil unrest, global warming, etc., etc., on, and on.

  Important issues all. However, is there no respite today as to maybe catch a breather and just enjoy a sporting event and its minutia without having today’s “political football” and all its baggage forced down my throat by sports casters, players, and more? It would be one thing if these shows mentioned these topics when appropriate. But now? One would think they were watching a Sunday morning news show rather than a sports channel. Everyday 24/7.

  When I’ve watched it seems the reason for their existence (i.e., the game) is an inconvenience that must be tolerated till they can get back to what they believe really matters: the “political issue” of the day.

  Yes, I know I’m probably overstating. Yet, that’s how I feel today when I’ve tried to watch most ESPN programming as well as others. My immediate reaction? Many times I’ve turned off a game entirely: for continuing was akin to waiting for another comment as to cue a push of the bamboo chutes deeper.

  Personally, I grew so sick of it I now watch about a third, if that, of any sports TV I had watched previous. Again: specifically for this reason.

  If I want “political football” TV there are far more choices and views to get it from. Sports were at one time a sanctuary from the realities of everyday life. There one cared only about their team. Could throw all their passion (and distaste) behind them. Hate them one day, love them the next with no regards as to affecting society. It was a place to blow off steam, have fun, and armchair quarterback yourself into the Hall of Fame of “If I were on the field – I would have called that play and won!” all time greats.

  Today? It’s near impossible to escape and has been picking up steam. Need I say (or not say?) Washington Red____s?

  Listen, I’m not addressing whether or not you agree with what should, or should not, be done. I’m just trying to illustrate this as just one of the latest that shows in great detail just how one will not be able to escape the discussion that is purely based in the “political football” arena.

  Some sportscasters now will not say the name; even if they are the on-air live, play-by-play talent, and stumble all over themselves and their play-by-play calls trying to avoid it. Players will be asked from both the sidelines, booths, with others appearing via satellite, questioning them to defend how they can even put on the uniform for that day’s game. Insinuation, implication, and innuendo will be the “play calling” as opposed to what is transpiring on the field of actual play.

  Again, as I stated earlier: whether or not you agree or disagree with the topic, just this one is a representative of all the others. If it’s not a name change – its gun control. If it’s not that – it’s another. Everyday 24/7. The game now seems to be the filler as opposed to the “issue of the day.” Need I remind anyone of that great illustration of just how determined sportscasters are now going to force the “political football” down viewers throats than NBC™ Bob Costa’s gun control rant on Sunday Night Football™?

  Agreeing, or disagreeing with his take is irrelevant. My point is: I don’t turn to a sporting event, or, sports commentary program, to hear the opinion/opinions of today’s sportscasters view on the “political issue” of the day. I tune in to see sports. Period.

  This seems lost on ESPN and the others as of late. And if I’m a microcosm of what others are doing. What we’re not doing is cutting the cord and viewing it elsewhere. We’re actually giving a spin to the old Timothy Leary idea:

  We’re tuning out and turning off. Entirely.

  

  

  

  

  

• Dow Dip-Buyers Evident After Futures Open With Another Mini-Flash-Crash

  As Dow futures opened ahead of this evening’s China open (after being closed since Wednesday), it appears someone (or something) decided it was time to test down 100 points to Friday’s pre-ramp lows. Of course that mini-flash-crash has now been followed – since stops were run – with a 140 point ripfest, we assume gunning for the stops just above Friday’s late-day highs…

   

  

   

  Other moves of note ahead of the China open are a sizable surge in Bitcoin (looming Yuan devaluation?)

  

   

   

  Charts: Bloomberg and Bitcoinwisdom.com

  

  

  

  

  

• Three Reasons Why Saudi Arabia Flip-Flopped On Iran. And Now Supports The US "Nuclear Deal"

  Back in April, when the first outline of the Iran nuclear deal first appeared, Saudi Arabia (together with Israel) would have none of it. As the Atlantic Council summarized back then, “Saudi Arabia and Israel find themselves in the same camp as opponents of a nuclear deal with Iran, but the Sunni kingdom and Jewish state have very different reasons for their opposition. Israelis are concerned mainly with a nuclear-armed Iran, while the Saudis worry more about Iran’s growing regional influence, analysts said March 16 at the Atlantic Council…. for the Saudis … it’s been a traditional concern about Iran’s intentions in the Gulf.”

  One month later, the Saudi snub was heard around the globe when King Salman skipped a summit of Gulf Arab leaders at Camp David, which was widely interpreted as the latest embarrassment for the US president by a long-time mid-east US ally.

  And then, a few months later, just as the new Saudi KJng Salman arrived in the US for his first trip since assuming the throne in January (and rented out all 222 rooms at the Washington D.C. Four Seasons hotel), something unexpected happened: Saudi Arabia gave its blessings for the Iran deal. This is what Deutsche Welle reported on Friday:

   Saudi Foreign Minister Adel al-Jubeir said on Friday that President Barack Obama had assured the Saudi king that the deal agreed in July with Iran prevents Tehran from acquiring nuclear weapons, includes inspections of military and suspected sites and has a provision for re-imposing sanctions should Iran violate the agreement.

   

  Al-Jubeir said that under those conditions, Saudi Arabia would support the deal.

   

  “Now we have one less problem for the time being to deal with, with regards to Iran,” al-Jubeir said after a meeting between the king and Obama on Friday. “We can now focus more intensely on the nefarious activities that Iran is engaged in in the region.

  As BBC confirmed, “Saudi Arabia has said it is happy with President Obama’s assurances that the recent nuclear deal with Iran will not imperil the Gulf states. Saudi Foreign Minister Adel al-Jubeir said his country was satisfied that the deal would contribute to security and stability in the Middle East.”

  

  So what prompted the Saudis to change their mind in such a short time frame? There were three main reasons.

  First, as we reported some time ago, since the primary driver behind the Iran “deal” is not the Obama State Department but the US military-industrial complex, which is hoping for yet another regional flash point to capitalize on selling weapons into yet another war, one of the side deals cut with the Saudis to make the Iran deal more appetizing was a $1bn arms agreement, which senior US officials told the NYT would provide weapons for the Saudi military for the campaign against the jihadist group Islamic State and the Houthi rebel movement in Yemen.  The deal primarily comprised missiles for US-made F-15 fighter jets, the officials said. More importantly, it boosts US GDP at a time when the US is desperate for any incremental growth.

  Second, as Al Arabiya reported yesterday, Saudi Arabia unveiled a giant raft of investment and partnership potential opportunities in sectors including oil and gas, civil infrastructure, and banking as part of a 21st century vision of the cooperation between the two long-term allies, sources told Al Arabiya News on Saturday. The vision was presented by Saudi Deputy Crown Prince and Defense Minister Mohammad bin Salman, who also heads the kingdom’s economic and development council.

  The list of proposals includes the kingdom’s state-run oil giant Saudi Aramco rolling out new projects in refining, distribution and support over a five-year period.

   

  Mining was also mentioned as a “promising” sector, with plans to work with U.S. companies to extract vast deposits of phosphate, bauxite and silica.

   

  In the healthcare sector, Saudi authorities seeking to double the clinical capacity in the next five years are slated to work with U.S. health insurers to set in place a new national program.

   

  Foreign direct investment – which so far has been a rarity in the kingdom – is also mentioned as being among the plans, with major U.S. retailers expected to be invited to set up shop.

  Who will benefit the most from all of this? Why the US again:

  U.S. banks and finance firms are also to be invited to enter Saudi, with retail and commercial institutions mentioned by sources. American lenders are also suggested to tap in to the kingdom’s lucrative mortgage market.

   

  With the Saudi government ramping up investment in free zones, roads, and communication networks, the kingdom will soon “aim to employ and rely completely on U.S. construction companies,” sources told Al Arabiya News.

   

  The proposals were based on studies conducted by leading business and technology consultants, including Booz Allen Hamilton and BCG.

   

  On Friday, during Saudi King Salman’s visit to Washington, the king told reporters that his country must allow more opportunities for U.S. and the kingdom to do business.

  Because if the US can’t growth from within, and it the domestic US oil industry is now in shambles with mass shale defaults just over the horizon, what better place to invest money than the country whose oil production policies are among the key drivers for collapsing oil prices.

  Third, and perhaps most important, is that with oil at $50 and lower, Saudi Arabia is in dire financial straits as we have been covering extensively over the past month, leading to fear not only about the record Saudi budget deficit, but also concerns that the Saudi Riyal could be the next currency to lose its USD peg and devalue.Which means that just like US shale companies, Saudi Arabia is suddenly all too reliant on capital markets access, and the generosity of creditors to fund its record budget deficit, which is only set to rise (as we previews back in November 2014). AFP with the explanation:

  Saudi Arabia will cut spending and issue more bonds as it faces a record budget shortfall due to falling oil prices, the finance minister said on Sunday. The kingdom — the biggest Arab economy and the world’s largest oil exporter — is facing an unprecedented budget crunch after crude prices dropped by more than half in a year to below $50 a barrel.

   

  “We are working… to cut unnecessary expenditure,” Assaf told Dubai-based CNBC Arabia in Washington, where he is accompanying King Salman on a visit.

   

  He said the government would issue more conventional treasury bonds and Islamic sukuk bonds to “finance the budget deficit” — which is projected by the International Monetary Fund at a record $130 billion (117 billion euros) for this year.

   

  The kingdom has so far issued bonds worth “less than 100 billion riyals ($27 billion/24 billion euros)” to help with the shortfall, he said, without providing an exact figure. “We intend to issue more bonds and could issue sukuk for certain projects… before the end of 2015,” Assaf said.

  Recall that in addition to China and the rest of the EMs and petro-exporters, Saudi too has been burning through US reserves (i.e., mostly Treasurys): “Jadwa said that by the end of July the government had withdrawn $82 billion from its reserves, reducing the assets to $650 billion. The reserves are expected to drop to $629 billion by the end of the year, Jadwa said.” We’ll take the under.

  To summarize: in order to get the Saudis to “agree” to the Iran deal, all the US had to do is remind King Salman, that as long as oil is where it is to a big extent as a result of Saudi’s own record oil production, crushing countless US oil corporations and leading to the biggest layoffs in Texas since the financial crisis, the country will urgently need access to yield-starved US debt investors.

  If in the process, US corporations can invest in Saudi Arabia (and use the resulting assets as further collateral against which to take out even more debt), while US military corporations sell billions in weapons and ammo to the Saudi army, so much the better.

  And that is why Saudi King Salman flipflopped on short notice.

  And then, there is Donald Trump…

  I will be in Washington D.C. on Wednesday,1 P.M.,in front of the Capitol, to protest the horrible and incompetent deal being made with Iran.

  — Donald J. Trump (@realDonaldTrump) September 6, 2015

  

  

  

  

  

• 11,000 Icelanders Offer To House Syrian Refugees

  Submitted by Michaela Whitton via TheAntiMedia.org,

  The Icelandic government is reconsidering its national refugee quota after a social media campaign resulted in over 11,000 Icelanders offering up a room in their homes to refugees.

  As Europe struggles to cope with unprecedented levels of those seeking shelter, residents of the sparsely populated Nordic island country resorted to direct action to pressure their leaders.

  Iceland was recently awarded the title of “most peaceful country” in the Global Peace Index, with Syria ranking the least peaceful. With a population of 330,000 — less than many European cities — the country’s government had previously stated it could only take in 50 people this year.

  Taking matters into their own hands, over 16,000 Icelanders joined a Facebook page created on Sunday to pressurize the Icelandic government into accepting more refugees.

  In addition to offering rooms in homes, people have pledged financial support with air fares, language teaching, clothing, food, and toys, and the page has been inundated with messages of gratitude from Syrians, some of whom are writing from refugee camps.

  As a result of the outpouring of support, Icelandic Prime Minister Sigmundur David Gunnlaugsson announced that a committee is being formed to re-assess the country’s current policy.

  Founder of the Facebook group, author and professor, Bryndis Bjorgvinsdottir, said her country’s attitude was being changed by tragic news reports. “I think people have had enough of seeing news stories from the Mediterranean and refugee camps of dying people and they want something done now,” she told Iceland’s RUV television.

  Undoubtedly, thousands of people across the globe are equally horrified. Inspired by Iceland’s example, social media campaigns have sprung up and united those who are dismayed by the pitiful humanitarian response to the crisis. As distressing images and stories of the hurdles and barriers faced at every turn by those seeking sanctuary saturate the European press, similar schemes have snowballed throughout Europe.

  In Britain, more and more people are condemning the government’s shameful response to the crisis — a response particularly ironic considering most refugees are fleeing conflicts that the U.K.’s imperialist interventions have directly contributed to.

  Not prepared to sit back, groups like Citizens UK are pressuring U.K. leaders to step up to the plate. More than 250,000 Brits have signed a petition calling for Britain to take its fair share of Syrian refugees.

  Ireland’s ”Pledge a Bed” campaign was overwhelmed with thousands of offers of spare rooms within hours of its launch while hundreds of Germans have offered to share their homes on the Refugees Welcome website.

  Swiftly following suit and not to be outdone, offers of support haven’t stopped at Europe’s shores. A U.S. group called Open Homes, Open Hearts US – for Syrian refugees launched earlier this week.

  With no easy answers and no end in sight, the political firestorm will continue, as will the global outrage at the humanitarian tragedy. The only thing clear is that if the West were prepared to accept more refugees, desperate families wouldn’t be forced to rely on smugglers or to climb into perilous boats and refrigeration lorries.

  

  

  

  

  

• This Is What A Short Squeeze Looks Like

  Brent crude prices eased 0.7% to $49.61/bbl last week as Iranian sanctions relief proceeds toward fruition.  WTI crude gained nearly 2% as the 2nd largest speculative short position since 2006 in NYMEX futures and options leaves the prompt market significantly unbalanced and extremely susceptible to upside catalysts.

  

   

  The current spike in money manager short position (136 million barrels at last count) is second only to the 178 million barrel short that occurred in March of this year which caused both the initial plunge to $45/bbl as well as the subsequent rally back to the $60 level. 

  

   

  Recent history suggests that despite weak fundamentals, crude prices are more likely to rise further before falling again.

   

  h/t Alpman

  

  

  

  

  

• The Collapse Of The NY Taxi Cartel

  Submitted by Pater Tenebrarum via Acting-Man.com,

  The Market Breaks Monopolies Government has Created

  It turns out that it is not a good idea to create speculation revolving around interventionist government policies. Ever since Uber appeared on the scene, the previously coddled taxi industry is in trouble – and apparently nowhere more so than in NY City.

   

  

  In NYC, there is a special situation: in the 1930s, the city created the “taxi medallion”, artificially limiting the number of taxis allowed to work in the city. These medallions have become objects of speculation and have been thoroughly financialized.

  As Jeffrey Tucker reports, Uber has apparently busted the taxi cartel and destroyed the medallion market in the process:

  “An age-old rap against free markets is that they give rise to monopolies that use their power to exploit consumers, crush upstarts, and stifle innovation. It was this perception that led to “trust busting” a century ago, and continues to drive the monopoly-hunting policy at the Federal Trade Commission and the Justice Department.

   

  But if you look around at the real world, you find something different. The actually existing monopolies that do these bad things are created not by markets but by government policy. Think of sectors like education, mail, courts, money, or municipal taxis, and you find a reality that is the opposite of the caricature: public policy creates monopolies while markets bust them.

   

  […]

   

  In New York, we are seeing a collapse as inexorable as the fall of the Soviet Union itself. The app economy introduced competition in a surreptitious way. It invited people to sign up to drive people here and there and get paid for it. No more standing in lines on corners or being forced to split fares. You can stay in the coffee shop until you are notified that your car is there.

   

  In less than one year, we’ve seen the astonishing effects. Not only has the price of taxi medallions fallen dramatically from a peak of $1 million, it’s not even clear that there is a market remaining at all for these permits. There hasn’t been a single medallion sale in four months. They are on the verge of becoming scrap metal or collector’s items destined for eBay.”

  (emphasis added)

  In the meantime, the “medallion magnates” (people who in some cases control hundreds of medallions) and others have come crying for a government bailout. It turns out they borrowed a lot of money using the medallions as collateral – a potentially deadly mistake as has now turned out.

  Here is an interesting video by Reason TV on the topic:

  The collapse of the NY Taxi cartel

   

  Conclusion

  It is interesting that the free market has actually found a way to undermine a cartel that up until recently appeared to be completely safe. In some cities, Uber is being fought tooth and nail to protect the sinecures of the established taxi industry. It is a microcosm of the cronyism that is the rule almost everywhere these days.

  Just think about how greatly our lives would improve if all the regulations that have been designed for no other reason than to protect established businesses against competition from upstarts were rescinded.

   

  

  

  

  

  

• Presenting Five Channels Of Contagion From China's Hard Landing

  Before China’s bursting equity bubble grabbed international headlines, and before the PBoC’s subsequent devaluation of the yuan served notice to the world that things had officially gotten serious in the global currency wars, all anyone wanted to talk about when it came to China was a “hard landing.” Indeed for what seems like forever, the bogeyman hiding in every economist’s closet was a sharper-than-expected deceleration in China’s economy which, as everyone is now acutely aware, is the engine for global growth and trade. 

  Of course no one knows where China’s official output numbers actually come from. They could be some amalgamation of real data and NBS tinkering (much like what you get from the BEA in the US) or they could come straight from the imagination of Xi Jinping. There’s also a strong possibility that a lack of robust statistical controls mean China routinely understates its deflator, leading to perpetually overstated GDP growth during times of plunging commodity prices – times like now.

  But whatever the case, China’s “shock” devaluation effectively telegraphed the “real situation” (to quote the NBS). That is, policy rate cuts had failed to boost growth and the situation was in fact becoming so precarious that the PBoC was willing to loosen up on the dollar peg that had caused the yuan to appreciate by some 15% on a REER basis over the course of just 12 months, putting untold pressure on the export-driven economy.

  The message was clear: China is landing and it’s landing hard. 

  
  

  Now, the task is to determine what the channels are for contagion and on that note, we go to RBS’ Alberto Gallo who has more.

  *  *  *

  Via RBS

  The contagion from China’s economic slowdown is deep and widespread, with profound implications for both emerging and developed markets. 

  There are five main channels of contagion for credit: 

  1. Exports and revenue exposure. Economies for which China is the largest trading partner will suffer from lower demand: Brazil, Chile, Australia, Peru, Thailand and Malaysia. Specific sectors in developed markets will also be affected, especially Germany and Italy. A number of sectors in DM credit with high dependence on Chinese revenue could be vulnerable, including German carmakers (VW, Daimler, BMW), luxury goods manufacturers (LVMH), and telecoms companies. 

  2. Banking system exposure. Among countries which report to the BIS, South Korea, Australia and the UK have the largest proportion of foreign claims in China. For the UK and Australia, exposure is concentrated among a few banks, specifically HSBC, Standard Chartered and ANZ. UK banks are more exposed than Australian banks, as their loans to China represent up to 30% of their total lending, whereas loans to Asia are generally less than 5% of Australian bank lending (except for ANZ at 14%). 

  3. Commodity dependence. With China consuming nearly half of the world’s industrial metal supply, slower growth may weigh on supply-demand dynamics and directly lower commodity prices. Countries that rely on commodity exports, and specifically China’s consumption of them, are especially vulnerable. 

  4. Petrodollar demand for $-denominated fixed income asset investment. Lower commodity prices also mean oil exporters will have lower revenues and less savings to invest in $-denominated fixed income assets. The yearly flow of Petrodollars may shrink to around $280bn/year this year from $700bn in 2014, according to our estimates based on average annual oil prices and lifting costs. If we assume that 30% of oil proceeds is invested in $ fixed income, then the decline is roughly equivalent to $100bn/year in lower demand for dollar assets. This is equivalent to the increase in net supply of Treasuries or $ IG corporates YoY. 

  5. Currency depreciation and a high proportion of hard currency debt increase solvency risks for EM corporates. While EM sovereigns generally do not rely on hard-currency debt much more than in the past, EM firms have boosted their share of hard-currency debt over the past decade. The portion of $-denominated bonds from foreign firms is now a quarter of the total US IG market. Many EM firms have a large proportion of their debt in hard currency. We have previously highlighted the vulnerability of some EM firms in particular, such as Chinese real estate developers. 

  *  *  *

  Bonus: The updated China contagion flowchart 

  

  

  

  

  

  

• Presenting Five Channels Of Contagion From China's Hard Landing

  Before China’s bursting equity bubble grabbed international headlines, and before the PBoC’s subsequent devaluation of the yuan served notice to the world that things had officially gotten serious in the global currency wars, all anyone wanted to talk about when it came to China was a “hard landing.” Indeed for what seems like forever, the bogeyman hiding in every economist’s closet was a sharper-than-expected deceleration in China’s economy which, as everyone is now acutely aware, is the engine for global growth and trade. 

  Of course no one knows where China’s official output numbers actually come from. They could be some amalgamation of real data and NBS tinkering (much like what you get from the BEA in the US) or they could come straight from the imagination of Xi Jinping. There’s also a strong possibility that a lack of robust statistical controls mean China routinely understates its deflator, leading to perpetually overstated GDP growth during times of plunging commodity prices – times like now.

  But whatever the case, China’s “shock” devaluation effectively telegraphed the “real situation” (to quote the NBS). That is, policy rate cuts had failed to boost growth and the situation was in fact becoming so precarious that the PBoC was willing to loosen up on the dollar peg that had caused the yuan to appreciate by some 15% on a REER basis over the course of just 12 months, putting untold pressure on the export-driven economy.

  The message was clear: China is landing and it’s landing hard. 

  
  

  Now, the task is to determine what the channels are for contagion and on that note, we go to RBS’ Alberto Gallo who has more.

  *  *  *

  Via RBS

  The contagion from China’s economic slowdown is deep and widespread, with profound implications for both emerging and developed markets. 

  There are five main channels of contagion for credit: 

  1. Exports and revenue exposure. Economies for which China is the largest trading partner will suffer from lower demand: Brazil, Chile, Australia, Peru, Thailand and Malaysia. Specific sectors in developed markets will also be affected, especially Germany and Italy. A number of sectors in DM credit with high dependence on Chinese revenue could be vulnerable, including German carmakers (VW, Daimler, BMW), luxury goods manufacturers (LVMH), and telecoms companies. 

  2. Banking system exposure. Among countries which report to the BIS, South Korea, Australia and the UK have the largest proportion of foreign claims in China. For the UK and Australia, exposure is concentrated among a few banks, specifically HSBC, Standard Chartered and ANZ. UK banks are more exposed than Australian banks, as their loans to China represent up to 30% of their total lending, whereas loans to Asia are generally less than 5% of Australian bank lending (except for ANZ at 14%). 

  3. Commodity dependence. With China consuming nearly half of the world’s industrial metal supply, slower growth may weigh on supply-demand dynamics and directly lower commodity prices. Countries that rely on commodity exports, and specifically China’s consumption of them, are especially vulnerable. 

  4. Petrodollar demand for $-denominated fixed income asset investment. Lower commodity prices also mean oil exporters will have lower revenues and less savings to invest in $-denominated fixed income assets. The yearly flow of Petrodollars may shrink to around $280bn/year this year from $700bn in 2014, according to our estimates based on average annual oil prices and lifting costs. If we assume that 30% of oil proceeds is invested in $ fixed income, then the decline is roughly equivalent to $100bn/year in lower demand for dollar assets. This is equivalent to the increase in net supply of Treasuries or $ IG corporates YoY. 

  5. Currency depreciation and a high proportion of hard currency debt increase solvency risks for EM corporates. While EM sovereigns generally do not rely on hard-currency debt much more than in the past, EM firms have boosted their share of hard-currency debt over the past decade. The portion of $-denominated bonds from foreign firms is now a quarter of the total US IG market. Many EM firms have a large proportion of their debt in hard currency. We have previously highlighted the vulnerability of some EM firms in particular, such as Chinese real estate developers. 

  *  *  *

  Bonus: The updated China contagion flowchart 

  

  

  

  

  

  

• Europe's Biggest Bank Dares To Ask: Is The Fed Preparing For A "Controlled Demolition" Of The Market

  Why did we focus so much attention yesterday on a post in which the IMF confirmed what we had said since last October, namely that the BOJ’s days of ravenous debt monetization are coming to a tapering end as soon as 2017 (as willing sellers simply run out of product)? Simple: because in the global fiat regime, asset prices are nothing more than an indication of central bank generosity. Or, as Deutsche Bank puts it: “Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system.“

  The problem is that the BOJ and the ECB are the only two remaining central banks in a world in which Reverse QE aka “Quantitative Tightening” in China, and the Fed’s tightening in the form of an upcoming rate hike (unless the Fed loses all credibility and reverts its pro-rate hike bias), are now actively involved in reducing global liquidity. It is only a matter of time before the market starts pricing in that the Bank of Japan’s open-ended QE has begun its tapering (followed by a QE-ending) countdown, which will lead to devastating risk-asset consequences. The ECB, which is also greatly supply constrained as Ewald Nowotny admitted yesterday, will follow closely behind.

  But while we expanded on the Japanese problem to come in detail yesterday, here are some key observations on what is going on in both the US and China as of this moment – the two places which all now admit are the culprit for the recent equity selloff, and which the market has finally realized are actively soaking up global liquidity.

  Here the problem, as we initially discussed last November in “How The Petrodollar Quietly Died, And Nobody Noticed“, is that as a result of the soaring US dollar and collapse in oil prices, Petrodollar recycling has crashed, leading to an outright liquidation of FX reserves, read US Treasurys by emerging market nations. This was reinforced on August 11th when China joined the global liquidation push as a result of its devaluation announcement, a topic which we also covered far ahead of everyone else with our May report “Revealing The Identity Of The Mystery “Belgian” Buyer Of US Treasurys”, exposing Chinese dumping of US Treasurys via Belgium.

  We also hope to have made it quite clear that China’s reserve liquidation and that of the EM petro-exporters is really two sides of the same coin: in a world in which the USD is soaring as a result of Fed tightening concerns, other central banks have no choice but to liquidate FX reserve assets: this includes both EMs, and most recently, China.

  Needless to say, these key trends covered here over the past year have finally become the biggest mainstream topic, and have led to the biggest equity drop in years, including the first correction in the S&P since 2011. Elsewhere, the risk devastation is much more profound, with emerging market equity markets and currencies crashing around the globe at a pace reminiscent of the Asian 1998 crisis, while in China both the housing and credit, not to mention the stock market, bubble have all long burst.

  Before we continue, we present a brief detour from Deutsche Bank’s Dominic Konstam on precisely how it is that in the current fiat system, global central bank liquidity is fungible and until a few months ago, had led to record equity asset prices in most places around the globe. To wit:

  Let’s start from some basics. Global liquidity can be thought of as the sum of all central banks’ balance sheets (liabilities side) expressed in dollar terms. We then have the case of completely flexible exchange rates versus one of fixed exchange rates. In the event that one central bank, say the Fed, is expanding its balance sheet, they will add to global liquidity directly. If exchange rates are flexible this will also mean the dollar tends to weaken so that the value of other central banks’ liabilities in the global system goes up in dollar terms. Dollar weakness thus might contribute to a higher dollar price for dollar denominated global commodities, as an example. If exchange rates are pegged then to achieve that peg other central banks will need to expand their own balance sheets and take on dollar FX reserves on the asset side. Global liquidity is therefore increased initially by the Fed but, secondly, by further liability expansion, by the other central banks. Depending on the sensitivity of exchange rates to relative balance sheet adjustments, it is not an a priori case that the same balance sheet expansion by the Fed leads to greater or less global liquidity expansion under either exchange rate regime. Hence the mere existence of a massive build up in FX reserves shouldn’t be viewed as a massive expansion of global liquidity per se – although as we shall show later, the empirical observation is that this is a more powerful force for the “impact” of changes in global liquidity on financial assets.

  That, in broad strokes, explains how and why the Fed’s easing, or tightening, terms have such profound implications not only on every asset class, and currency pair, but on global economic output.

  Liquidity in the broadest sense tends to support growth momentum, particularly when it is in excess of current nominal growth. Positive changes in liquidity should therefore be equity bullish and bond price negative. Central bank liquidity is a large part of broad liquidity and, subject to bank multipliers, the same holds true. Both Fed tightening and China’s FX adjustment imply a tightening of liquidity conditions that, all else equal, implies a loss in output momentum.

   

  

  But while the impact on global economic growth is tangible, there is also a substantial delay before its full impact is observed. When it comes to asset prices, however, the market is far faster at discounting the disappearance of the “invisible hand”:

  Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system. The loss of reserves represents not just a direct loss of outside money but also a reduction in the multiplier. There should be no expectation that the multiplier is quickly restored through offsetting central bank operations.

  Here Deutsche Bank suggests your panic, because according to its estimates, while the US equity market may have corrected, it has a long ways to go just to catch up to the dramatic slowdown in global plus Fed reserves (that does not even take in account the reality that soon both the BOJ and the ECB will be forced by the market to taper and slow down their own liquidity injections):

  Let’s start with risk assets, proxied by global equity prices. It would appear at  first glance that the correlation is negative in that when central bank liquidity is expanding, equities are falling and vice versa. Of course this likely suggests a policy response in that central banks are typically “late” so that they react once equities are falling and then equities tend to recover. If we shift liquidity forward 6 quarters we can see that the market “leads” anticipated” additional liquidity by something similar. This is very worrying now in that it suggests that equity price appreciation could decelerate easily to -20 or even 40 percent based on near zero central bank liquidity, assuming similar multipliers to the post crisis period.

   

  

  

  Some more dire predictions from Deutsche on what will happen next to equity prices:

  If we only consider the FX and Fed components of liquidity there appears to be a tighter and more contemporaneous relationship with equity prices. The suggestion is at one level still the same, absent Fed and FX reserve expansion, equity prices look more likely to decelerate and quite sharply.

   

  The Fed’s balance sheet for example could easily be negative 5 percent this time next year, depending on how they manage the SOMA portfolio and would be associated with further FX reserve loss unless countries, including China allowed for a much weaker currency. This would be a great concern for global (central bank liquidity).

  Once again, all of this assumes a status quo for the QE out of Europe and Japan, which as we pounded the table yesterday, are both in the process of being “timed out”

  The tie out, presumably with the “leading” indicator of other central bank action is that other central banks have been instrumental in supporting equities in the past. The largest of course being the ECB and BoJ. If the Fed isn’t going doing its job, it is good to know someone is willing to do the job for them, albeit there is a “lag” before they appreciate the extent of someone else’s policy “failure”.

  Worse, as noted yesterday soon there will be nobody left to mask everyone one’s failure: the global liquidity circle jerk is coming to an end.

  What does this mean for bond yields? Well, as we explained previously, clearly the selling of TSYs by China is a clear negative for bond prices. However, what Deutsche Bank accurately notes, is that should the world undergo a dramatic plunge in risk assets, the resulting tsunami of residual liquidity will most likely end up in the long-end, sending Treasury yields lower. To wit:

  … if investors believe that liquidity is likely to continue to fall one should not sell real yields but buy them and be more worried about risk assets than anything else. This flies in the face of recent concerns that China’s potential liquidation of Treasuries for FX intervention is a Treasury negative and should drive real yields higher.… More generally the simple point is that falling reserves should be the least of worries for rates – as they have so far proven to be since late 2014 and instead, rates need to focus more on risk assets.

   

  The relationship between central bank liquidity and the byproduct of FX reserve accumulation is clearly central to risk asset performance and therefore interest rates. The simplistic error is to assume that all assets are treated equally. They are not – or at least have not been especially since the crisis. If liquidity weakens and risk assets trade badly, rates are most likely to rally not sell off. It doesn’t matter how many Treasury bills are redeemed or USD cash is liquidated from foreign central bank assets, US rates are more likely to fall than rise especially further out the curve. In some ways this really shouldn’t be that hard to appreciate. After all central bank liquidity drives broader measures of liquidity that also drives, with a lag, economic activity.

  Two points: we agree with DB that if the market were to price in collapsing “outside” money, i.e. central bank liquidity, that risk assets would crush (and far more than just the 20-40% hinted above). After all it was central bank intervention and only central bank intervention that pushed the S&P from 666 to its all time high of just above 2100.

  However, we also disagree for one simple reason: as we explained in “What Would Happen If Everyone Joins China In Dumping Treasurys“, the real question is what would everyone else do. If the other EMs join China in liquidating the combined $7.5 trillion in FX reserves (i.e., mostly US Trasurys but also those of Europe and Japan) shown below…

  

  … into an illiquid Treasury bond market where central banks already hold 30% or more of all 10 Year equivalents (the BOJ will own 60% by 2018), then it is debatable whether the mere outflow from stocks into bonds will offset the rate carnage.

  And, as we showed before, all else equal, the unwinding of the past decade’s accumulation of EM reserves, some $8 trillion, could possibly lead to a surge in yields from the current 2% back to 6% or higher.

  In other words, inductively reserve liquidation may not be a concern, but practically – when taking in account just how illiquid the global TSY market has become – said liquidation will without doubt lead to a surge in yields, if only occasionally due to illiquidity driven demand discontinuities.

  * * *

  So where does that leave us? Summarizing Deutsche Bank’s observations, they confirm everything we have said from day one, namely that the QE crusade undertaken first by the Fed in 2009 and then all central banks, has been the biggest can-kicking exercise in history, one which brought a few years of artificial calm to the market while making the wealth disparity between the poor and rich the widest it has ever been as it crushed the global middle class; now the end of QE is finally coming.

  And this is where Deutsche Bank, which understands very well that the Fed’s tightening coupled with Quantiative Tightening, would lead to nothing short of a global equity collapse (especially once the market prices in the inevitable tightening resulting from the BOJ’s taper over the coming two years), is shocked. To wit:

  This reinforces our view that the Fed is in danger of committing policy error. Not because one and done is a non issue but because the market will initially struggle to price “done” after “one”. And the Fed’s communication skills hardly lend themselves to over achievement. More likely in our view, is that one in September will lead to a December pricing and additional hikes in 2016, suggesting 2s could easily trade to 1 ¼ percent. This may well be an overshoot but it could imply another leg lower for risk assets and a sharp reflattening of the yield curve.

  But it was the conclusion to Deutsche’s stream of consciousness that is the real shocker: in it DB’s Dominic Konstam implicitly ask out loud whether what comes next for global capital markets (most equity, but probably rates as well), is nothing short of a controlled demolition. A premeditated controlled demolition, and facilitated by the Fed’s actions or rather lack thereof:

  The more sinister undercurrent is that as the relationship between negative rates has tightened with weaker liquidity since the crisis, there is a sense that policy is being priced to “fail” rather than succeed. Real rates fall when central banks back away from stimulus presumably because they “think” they have done enough and the (global) economy is on a healing trajectory. This could be viewed as a damning indictment of policy and is not unrelated to other structural factors that make policy less effective than it would be otherwise – including the self evident break in bank multipliers due to new regulations and capital requirements.

  What would happen then? Well, DB casually tosses an S&P trading a “half its value”, but more importantly, also remarks that what we have also said from day one, namely that “helicopter money” in whatever fiscal stimulus form it takes (even if it is in the purest literal one) is the only remaining outcome after a 50% crash in the S&P:

  Of course our definition of “failure” may also be a little zealous. After all why should equities always rise in value? Why should debt holders be expected to afford their debt burden? There are plenty of alternative viable equilibria with SPX half its value, longevity liabilities in default and debt deflation in abundance. In those equilibria traditional QE ceases to work and the only road back to what we think is the current desired equilibrium is via true helicopter money via fiscal stimulus where there are no independent central banks. 

  And there it is: Deutsche Bank saying, in not so many words, what Ray Dalio hinted at, namely that the Fed’s tightening would be the mechanistic precursor to a market crash and thus, QE4.

  Only Deutsche takes the answer to its rhetorical question if the Fed is preparing for a “controlled demolition” of risk assets one step forward: realizing that at this point more QE will be self-defeating, the only remaining recourse to avoid what may be another systemic catastrophe would be the one both Friedman and Bernanke hinted at many years ago: the literal paradropping of money to preserve the fiat system for just a few more days (At this point we urge rereading footnote 18 in Ben Bernanke’s “Deflation: Making Sure “It” Doesn’t Happen Here” speech)

  While we can only note that the gravity of the above admission by Europe’s largest bank can not be exaggerated – for “very serious banks” to say this, something epic must be just over the horizon – we should add: if Deutsche Bank (with its €55 trillion in derivatives) is right and if the Fed refuses to change its posture, exposure to any asset which has counterparty risk and/or whose value is a function of faith in central banks, should be effectively wound down.

  * * *

  While we have no way of knowing how this all plays out, especially if Deutsche is correct, we’ll leave readers with one of our favorite diagrams: Exter’s inverted pyramid.

  

  

  

  

  

  

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• The Concept Of Money And The Money Illusion

  Submitted by Koos Jansen via BullionStar.com,

  Awareness about the concept of money is making a comeback. Gone are the decades in which the global citizenry was fooled to leave this subject to economists, governments and banks – a setup that has proven to end in disaster. The crisis in 2008 has spawned debate about what money is, where it comes from and where it should come from. These developments inspired me to write a post on the concept of money and the money illusion. (All examples in this post are simplified.) 

  The Concept Of Money

  Money is a collective human invention

  First, let us have a look at the fundamentals of money. How did Money evolve? Thousand and thousands of years ago before any trade occurred homo sapiens use to be self-sufficient; families or small communities grew that their own crops, fished the seas, raised cattle and made their own tools.

  When barter emerged the necessity to be self-sufficient ceased to exist. A farmer that grew tomatoes and carrots could exchange some of his production output for bananas or oranges if he wished to do so. There was no necessity for the farmer to grow all crops he wished to consume, when there was an option to trade.

  Farmers participating in a barter economy were incentivized to specialize in production, because they could escalate their wealth (gain more goods) by producing fewer crops on a greater scale. Through trade increased productivity (efficiency of production) could be converted into wealth, as the more efficient commodities were produced, the higher the exchange value of the labor put in to produce them. Consequently, barter economized production among its participants.

  By exchanging, human beings discovered ‘the division of labor’, the specialization of efforts and talents for mutual gain… Exchange is to cultural evolution as sex is to biological evolution.    

  From Matt Ridley.

  Direct exchange (barter) was a severely limited form of trade because it relied on the mutual coincidence of demand. An orange farmer in demand for potatoes had to find a potato farmer in demand for oranges in order to trade. If he could find a potato farmer in demand for oranges and agree on the exchange rate (price) a transaction occurred. But, often there was no mutual coincidence of demand. When all potato farmers were not in demand for oranges the orange farmer could not exchange his product for potatoes. In this case there was no trade, no one could escalate his or her wealth.

  This is how money came into existence: the orange farmer decided to exchange his product for a highly marketable commodity. A bag of salt, for example, could be preserved longer than oranges and was divisible in small parts. He could offer it to a potato farmer, who in turn could store the salt for future trade or consumption. If no potato farmer was in demand for oranges, surely one was to accept salt in exchange. Eventually, the orange farmer succeeded via salt to indirectly exchange his product for potatoes. The medium used for indirect exchange is referred to as money.

  In the early stages of indirect exchange there were several forms of money. When economies developed the best marketable commodity surfaced as the sole medium of exchange. A single type of money has the advantage that the value of all goods and services in an economy can be measured in one unit, all prices are denominated in one currency – whereas in barter the exchange rate of every commodity is denominated in an array of other commodities. One set of prices makes trade more efficient, transparent and liquid. Often precious metals, like gold or silver, were used as money as precious metals are scarce (great amounts of value can be transported in small weights), indestructible (gold doesn’t tarnish or corrode) and divisible (gold can be split or merged).

  Money is supposed to serve three main purposes:

  1) a medium of exchange,

  2) a store of value,

  3) a unit of account.

  Indirect exchange is not restricted by mutual coincidence of demand; every participant in the economy offers and accepts the same medium of exchange, which enormously eases trade. The boost money has given to global wealth is beyond comprehension, the concept of money has been an indispensable discovery of civilisation.

  We must realize the subject of money is always a matter of trust, because money in itself has no use-value for us humans. An orange, car, shoebox, t-shirt or house does have use-value. Money does not have use-value as it’s not the end goal of a participant in the economy, the end goal is goods and services. Therefor, what we use as money is a social contract to be used in trade and to store value, always based on trust.

  Commodity money (like precious metals) does have some use-value, which it derives from its industrial applications. The majority of commodity money’s exchange value is based on its monetary applications, the residual is based on its industrial applications (use-value). If a commodity is abandoned from being used as money, the monetary value leaves and what is left is the use-value. The exchange value of money equals the amount of goods and services it can be traded for at any given moment, popularly called its purchasing power.

  After commodity money came fiat money. The nature of the latter is fundamentally different. From Wikipedia:

  Fiat money is currency which derives its value from government regulation or law. The term derives from the Latin fiat (“let it be done”, “it shall be”).

  Fiat money is what nowadays is used all around the globe. Instead of being picked by all participants in a free market as the best marketable commodity, it’s created by central banks and it can exist in paper, coin or digital form. Out of thin air and without limitation it can be brought into existence by printing paper bills or typing in digits into a computer. When fiat money is created it’s exchanged for assets a central bank puts on its balance sheet, after the first exchange the money can start circulating in the economy. A central bank can buy any asset, but usually it will be government bonds. Whereas commodity money has its value anchored in the free market economy, the value of fiat money is simply determined by the board of governors of a central bank. Throughout history central banks have been able to control the value of fiat money for relatively short periods, over longer periods the value of fiat money is wiped out inevitably.

  The value of commodity money is anchored to the value of all goods and services in a free market, because it requires capital and labor to produce commodity money. This is how the anchor mechanism works (in our example gold is the sole medium of exchange: a simplified gold standard). Say, gold mines increase production output in order to literally make more money. The amount of gold circulating in the economy starts to grow faster than the amount of goods and services it can be traded for. The value of gold will decline relative to goods and services, as there is an oversupply of gold. In this price inflationary scenario it would be more profitable for economic agents to produce other goods than gold, as gold’s purchasing power is falling. When gold miners shift to alternate businesses and mines are closed the amount of gold in circulation starts to grow slower than the amount of goods and services it can be traded for, as a result the value of gold will increase relative to goods and services. In this price deflationary scenario gold’s purchasing power increases, which eventually incentivizes entrepreneurs to start mining gold again, until there is an oversupply of gold, etcetera. Gold used as money on a gold standard is not exclusively subjected to this mechanism. Simply put, in any economy entrepreneurs will grow potatoes when they are expensive and stop growing them when they are cheap. A free market economy in theory stabilizes the value of gold. In reality, for several reasons, gold’s exchange value is not exactly constant, but over longer periods gold’s purchasing power is impressive and more constant than any fiat currency.

  

  Courtesy Sharelynx.

  In the above chart we can see the green line resembling the index price of goods and services in the United Kingdom since the sixteenth century. The blue line resembles the index price of gold. Both are denominated in pounds sterling on a logarithmic scale. When the index price of gold overshoots the index price of goods and services gold’s purchasing power – the red line – will rise and vice versa. If your savings had been in fiat money since 1950, your purchasing power would have declined by 94 % as the index price of goods and services rose from 400 to 7,000. If your savings had been in gold since 1950, your purchasing power would have been fairly constant (actually would have increased). The green line takes off at the same time when the gold standard was abandoned from which point in time the currency was no longer tied to gold and became fiat.

  Fractional Reserve Banking And The Money Illusion

  Both commodity money and fiat money can be used for fractional reserve banking. The roots of banking go back many centuries to fraudulent practices by blacksmiths. When people used to own gold coins and bring it to a blacksmith for safekeeping they got a receipt that stated a claim on gold in the vault. These receipts began circulating as money substitutes, instead of having to carry gold coins or bars it was more convenient to make payment with lightweight receipts – this is how paper money was born. Blacksmiths noticed few receipts were redeemed for metal. The gold backing those receipts was just lying idle in their vaults or so they thought. Subsequently, they began issuing more receipts than they could back with gold. Covertly lending out money at an attractive interest rate appeared to be profitable. Naturally, the risk was that when customers found out and simultaneously redeemed their receipts, the blacksmiths went bankrupt. More importantly, not all customers holding a receipt got their gold.

  Essentially, modern day banking works in a similar fashion although the scheme has been refined. In 1848 a Supreme Court in the United Kingdom ruled:

  Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it. … The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.

  Guess what. Your money at the bank is not your money. A bank deposit is a loan to the bank, which should justify the fact banks only have a fraction of outstanding liabilities (receipts) in reserve. Let us examine this modern day practice of banking and the creation of what I call illusionary money. In our simplified example there is only book entry money, nowadays digital.

  The process begins with the European Central Bank (ECB) that creates 10,000 euros, by the stroke of a keyboard, to buy bonds. The seller of these bonds is Paul who receives the 10,000 euros and deposits these funds at bank A. The ECB’s policy is that commercial banks are required to hold 10 % of all deposits in reserve. Meaning, bank A can lend 90 % of Paul’s money to John who needs money to buy a boat. When John borrows these 9,000 euros and receives the funds in his bank account, something remarkable has taken place. John now has 9,000 euros at his disposal, but Paul still owns 10,000 euros. Miraculously 9,000 euros has been created out of thin air! Before bank A had lend 9,000 euros to John there was only 10,000 euros in existence created by the ECB. After the loan there is 19,000 euros “in existence”, John’s 9,000 euros on top of Paul’s 10,000 euros. Bank A has created 9,000 euros through fractional reserve banking.

  And it doesn’t end there. When John buys a 9,000 euro sailing yacht from Bob, Bob deposits these funds at bank B. For this bank the same rules apply, it’s only required to hold 10 % of the 9,000 euros in reserve, so it lends 8,100 euros to Michael. Another 8,100 euros is created out of thin air, now there is 27,100 euros in existence! Needless to say, Michael’s money will be deposited at a bank and multiplied by 90 % as well, and the new money will multiplied by 90 % as well – you get the picture. Eventually, out of the initial 10,000 euros created by the ECB a fresh 90,000 euros can be created by commercial banks at a required reserve ratio of 10 %.

  The degree to which commercial banks can procreate money from central bank money is referred to as the money multiplier (MM), which is the inverse of the reserve requirement ratio (RRR). A smaller RRR will result in a higher MM, and vice versa, as the smaller a bank’s reserves, the more it can lend (create). Money created by a central bank is called base money and money created by commercial banks is called credit (note, on a gold standard, the gold was base money). If banks make loans they create credit and the total money supply in the economy expands, if these loans are repaid (or default) the money supply shrinks. In the next chart we can see how 10,000 units of base money procreate 90,000 units of credit through 50 stages of fractional reserve banking (RRR = 10 %).

  

  Note, the total money supply in the economy nowadays is compounded of less than 10 % base money and more than 90 % credit! For the sake of simplicity I’ve used a reserve requirement ratio of 10 %.

  The essence of fractional reserve banking is exactly the same as what the blacksmiths did. When all customers run to a bank to get their money out, the bank has to admit it doesn’t have all the money. Banking thrives on the presumption not all money will be withdrawn from a bank at once. That is, until that happens. Millions of banks have gone bust in the past and many will in the future. The question is not if a bank can go bust, but when, as banks are by definition insolvent in holding a fraction of deposits in reserve. After the bankruptcy of investment bank Lehman Brothers in 2008 an economic depression was triggered and governments globally bailed out banks whose insolvent nature was exposed.

  The fact banks are by definition insolvent is “strangely” accepted throughout society. People know banks go belly up when everybody rushes to get their money out, though they’re less aware of alternatives to storing money at the bank. This situation can be explained by the fact people are fooled by how banks operate. In high school and university students are taught banks simply facilitate in lending out money from depositors, striking a profit on the difference in interest rates. While actually banks create money to lend out, whereby a fraction of the initial deposit is held in reserve and the insolvent state is conceived. Most people that work at banks are not even aware about the fine details of credit creation. Henry Ford once said:

  It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

  The bait for fractional reserve banking is of course interest. Why do you receive interest on a bank deposit? Basically, because you lend your money to the bank and receive interest for the risk of losing it – the golden rule is: no risk no return. Banks have to offer interest or no one would hand over their money. Then banks charge borrowers a higher interest rate than they pay on deposits and the wheel of credit starts turning round. Until the expansion of credit sends up asset bubbles that eventually pop and the house of cards comes tumbling down. The real problem starts to surface when the money supply shrinks prices and incomes decline. This makes it harder for everyone to repay debt to banks, pushing bank bankruptcies. Deflation is a huge threat for the fractional reserve system.

  The most intriguing fact is that credit simply doesn’t exist. Credit is created through an accounting trick. If more than a fraction of all bank customers want to withdraw their “money”, it’s just not there. Credit only exists as book entries and in our minds. If customers have 1,000,000 euros deposited at a bank in total, they think they truly own that money, whereas in reality there is only a fraction of the 1,000,000 euros held by the bank in reserves. Yet every financial decision they make is based upon the amount of money they think they own. The lion share of their money only exists in their minds. This is what I call the money illusion, in which most of us on this planet are submerged. Will we ever awaken from this dream and will the real value of money and credit be exposed?

  

  

  

  

  

• The Petrostate Hex: Visualizing How Plunging Oil Prices Affect Currencies

  Every day, the world consumes 93 million barrels of oil, which is worth $4.2 billion.

  Oil is one of the world’s most basic necessities. At least for now, all modern countries rely on oil and its derivatives as the backbone of their economies. However, the price of oil can have significant swings. These changes in price can have profound implications depending on whether an economy is a net importer or net exporter of crude.

  Net exporters, countries that sell more oil abroad than they bring in, feel the sting when prices plunge. Less revenue gets generated, and this can impact everything from balancing the budget to the value of their currency in the world market.

  Net importers, on the other hand, benefit from lower prices as it decreases input costs for production. For example, a country like Japan only meets 15% of its energy needs domestically, and must import 3.5 million barrels of oil each day. A lower oil price significantly decreases these costs.

  For many major net exporters of oil, changes in oil prices are highly correlated with their currencies. With oil prices crashing over the last year, currencies such as the Canadian dollar and Russian ruble have been highly impacted in terms of USD. But the impact of oil on currency depends on how central banks approach to policy.

   

  

  Courtesy of: Visual Capitalist

  

  

  

  

  

• Why Hedge Fund Hot Shots Finally Got Hammered

  Submitted by David Stockman via Contra Corner blog,

  The destruction of honest financial markets by the Fed and other central banks has created a class of hedge fund hot shots that are truly hard to take. Many of them have been riding the bubble ever since Alan Greenspan got it going after the crash of 1987 and now not only claim to be investment geniuses, but also get downright huffy if the Fed or anyone else threatens to roil the casino.

  Leon Cooperman, who is an ex-Goldman trader and now proprietor of a giant fund called Omega Advisors, is one of the more insufferable blowhards among these billionaire bubble riders. Earlier this week he proved that in spades.

  It seems that his fund had a thundering loss of more than 10% in August during a downdraft in the stock market that the Fed for once took no action to counter. But rather than accept responsibility for the fact that his portfolio of momo stocks took a dive during a wobbly tape, Cooperman put out a screed blaming the purportedly unfair tactics of other casino gamblers:

  Lee Cooperman, the founder of Omega Advisors, has joined the growing chorus of investors blaming last week’s stock market sell-off — and his own poor performance in August — on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater.

  Well now. Exactly how was Bridgewater counting the cards so as to cause such a ruction at the gaming tables?

  In a word, Ray Dalio, the storied founder of the giant Bridgewater “All-Weather” risk parity fund, has been doing the same thing as Cooperman, and for nearly as many decades. Namely, counting the cards held-out in plain public view by the foolish monetary central planners domiciled in the Eccles Building.

  To be sure, Dalio’s fund has had superlative returns and there is undoubtedly some serious algorithmic magic embedded in Bridgewater’s computers. But at the end of the day its all a function of broken capital markets that have been usurped and rigged by the Fed.

  The only thing your need to know about the vaunted “risk parity” strategies that have served Bridgewater and their imitators so handsomely, and which have now aroused the ire of more primitive gamblers like Cooperman, is the graph below:
  

  ^SPX data by YCharts

  The above, of course, is the Fed’s “wealth effects” printing press at work. There have been about 30 identifiable “dips” since the March 2009 low and every one of them have been bought by the casino gamblers. And for good reason.

  The Bernanke Fed’s egregious, desperate and utterly unwarranted bailout of Wall Street at the time of the post-Lehman crash taught the gamblers a profound lesson. That is, they could be exceedingly confident that the Fed would keep the free money flowing at all hazards, and that it would resort to any price rigging intervention as might be necessary to keep the stock averages rising.

  Indeed, never in all of history have a few ten thousand punters made so many trillions in return for so little economic value added. But what Dalio did in this context was to invent an even more efficient machine to strip-mine the Fed’s monumental largesse.

  To wit, Bridgewater’s computers buy more stocks on the “rips”, when equity volatility is falling and prices are rising; and then on the “dips” they rotate funds into more bonds when equity volatility is rising and the herd is retreating to the safe haven of treasuries and other fixed income securities, thereby causing the price of the latter to rise.

  In short, there is a payday in every type of short-run financial weather because Bridgewater’s computers are monetary sump pumps; they constantly purge volatility from the portfolio.

  But here’s the thing. The above chart could never exist in an honest free market.

  You couldn’t create algorithms to safely pump out volatility and milk the market on alternating strokes because the regularity of the waves on which it is based are not natural; they are the handiwork a central bank that has been taken hostage by the casino gamblers.

  Nor is “hostage” too strong a word. In the days of Paul Volcker and William McChesney Martin anybody who even speculated about 80 months of ZIRP would have been assigned to the William Jennings Bryan school of monetary crankery.

  As it happened, however, in the last few weeks the long reign of the global money printers has begun to sprout fractures. Over on the other side of the earth in China what had become a 20-year long $4 trillion cumulative “bid” for US treasuries and other DM fixed income securities has gone serious “offers”.

  This will prove to be one of the great financial pivots of history. During the course of their stupendous inflation of China’s $28 trillion Credit Ponzi, the red suzerains of Beijing bought treasuries hand over fist and thereby kept their price rising and the volatility of the world bond market falling.

  To be sure, this wasn’t charity for America’s debt besotted shoppers and governments. It was done in order to peg the RMB exchange rate and thereby keep its mercantilist export machine humming and the people grateful to their beneficent  communist party rulers.

  But at length it became too much of a good thing because every time the Peoples Bank Of China (PBOC) bought Uncle Sam’s debt it similtaneously expanded the internal banking system and supply of RMB credit. Moreover, after Beijing launched its madcap infrastructure building campaign in response to the the 2008 financial crisis the phony construction and investment boom which ensued attracted increasing waves of hot money from abroad, thereby inflating the domestic Chinese economy to a fever pitch.

  In fact, the PBOC was forced to let the RMB slowly rise against the dollar to keep its banking system from becoming a financial runaway. But the steadily rising RMB drastically accelerated the inflow of foreign capital and speculative funds into the Chinese economy, thereby filling the vaults of the PBOC to the brim at more than $4 trillion early this year compared to a few hundred billion at the turn of the century.

  

  But these weren’t monetary reserves in any meaningful or historic sense of the term; they were the fruits of an utterly stupid mercantilist trade policy and the conversion of a naïve old man, and survivor of Mao’s depredations, to the view that communist party power could be better administered from the end of a printing press than from the barrel of a gun.

  But Mr. Deng merely unleashed a Credit Monster that sucked in capital and resources from all over the globe into a domestic whirlpool of digging, building, borrowing, investing and speculation that was inherently unstable and incendiary. It was only a matter of time before this edifice of economic madness began to wobble and sway and to eventually buckle entirely.

  That time came in 2015—-roughly 30 years after Mr. Deng proclaimed it is glorious to be rich. So saying, he did not have a clue that a credit swollen simulacrum of capitalism run by communist apparatchiks was a doomsday machine.

  In any event, what is happening in China now is that the speculators—-both domestic and foreign—–see that the jig is up. That is especially the case after Beijing’s incredibly botched effort to alleviate its massive corporate debt problem by inciting a $5 trillion stock market bubble that is now being blown to smithereens.

  This has happened notwithstanding the party bosses sending out truckloads of cash to arrest the stock market’s collapse and then doubling down by sending fleets of paddy wagons to arrest any one who might be tempted into overzealous offers to sell what the PBOC is trying to buy. It means that confidence in the Red Ponzi has at last been shattered.

  Accordingly, money is leaking out of China thru a thousand rivulets, by-ways and financial back alleys.  To prevent the RMB exchange rate from plunging and thereby inciting even more capital fright and flight, the PBOC has shifted into reverse gear in a large, sustained and strategic way—-as opposed to tactical FX management—– for the first time since the putative miracle of red capitalism incepted.

  Ray Dalio wasn’t counting on this because despite Bridgewater’s proficiency in concocting trading algorithms, its vaunted macroeconomics staff consists of standard issue Keynesians—-with a dash of Minskyites thrown in for good measure. Alas, they were not prepared for the possibility that Austrians have said is inevitable all along.

  To wit, that Beijing’s experiment with Red Capitalism would eventually end in a crackup boom, causing the seemingly endless Red Bid for US treasuries to become a disruptive and unwelcome Red Offer to sell hundreds of billions of said paper and like and similar dollar/euro/yen liabilities.

  To make a long story short, during the gyrations of August bond prices didn’t rise like they were supposed to when the stock market plunged by 12% to its Bullard Rip low at 1867 on the S&P 500. Accordingly, Bridgewater’s risk party portfolio became swamped with too much volatility on both the bond and equity side of Dalio’s big boat. So the algorithmic sump pumps went into over-time dumping stocks in order to drain the ship.

  Consequently, Bridgewater wiped out its entire profits for the year in a few days during August, pushing the momo chasers like Cooperman into the drink in the process. Needless to say, the capsizing Big Boats in the casino are now firing at each other, but also lining-up for a full court press at the Eccles Building.

  Ray Dalio has already said its time for QE4. He apparently realizes that the Fed’s big fat bid is needed to replace the missing Red Bid in the treasury market, and thereby get his risk parity algorithms working again.

  At the same time, Goldman today sent out its chief economist to pronounce that today’s Jobs Friday report tipped the case to no rate increase at the Fed’s upcoming September meeting. Why we need an 81st month of ZIRP when 80 months so far have not succeeded, he didn’t say.

  No matter. You can be sure of this. If the market holds above next week’s retest of the 1967 Bullard Rip low, the Fed will likely announce a “one and done” move in September, causing the casino to stage a short-lived, half-heated rally.

  By the same token, if the market drops through the Bullard Rip low, the Fed will plead market instability and defer its 25 bps pinprick yet again, thereby causing the same short-lived half-hearted rally.

  What won’t happen, however, is another leg higher in the phony bull market engineered by the Fed and its fellow- traveling central banks. That’s because the global “dollar short” is finally coming home to roost.

  For nearly two decades the central banks of EM mercantilists have been buying treasury paper, as have the commodity producers and the petro-states. So doing they have helped the Fed drive the benchmark rate to absurdly non-economic levels.

  That’s what happens when the printing press is used to generate $12 trillion of so-called FX reserves and $22 trillion of total footings for the consolidated monetary roach motels of the world, otherwise known as central banks and sovereign wealth funds.

  In turn, this massive stash became the collateral for the private issuance of friskier dollar denominated corporate and sovereign credits throughout the EM world, thereby slacking the thirst for yield among desperate money managers.

  But now China’s house of cards is cratering, causing economies to plunge throughout the worldwide China supply chain. Witness Brazil where industrial production is down 8% from a year ago, and slipping rapidly from there; or South Korea where exports have plunged by double digits.

  Metaphorically speaking, dollars are hightailing back to the Eccles building. China and the petro-states are selling and off-shore dollar lenders are effectively making a margin call.

  At length, both the epic bond bubble and the monumental stock bubble so recklessly fueled by the Fed and the other central banks after September 2008 will burst in response to the deflationary tidal wave now cresting.

  Needless to say, that eventuality will be the death knell for the risk parity trade. It will cause the volatility seeking algos to eat their own portfolios alive.

  Can the masters of the universe hanging around in the Hedge Fund Hotels say “portfolio insurance”?

  

  Leon Cooperman and his momo chasing compatriots will soon be praying for an event as mild as October 1987.

  

  

  

  

  

• Guest Post: China’s Worst Nightmare – The US’s Oil Weapon

  Submitted by Tingbin Zhang, founder of the independent Chinese economic think tank “Zhonghua Yuan Institute“

  China’s Worst Nightmare – The US’s Oil Weapon

  China’s islanding building on the four-mile-long and two-mile-wide Subi Reef in the South China Sea has put The US in a tight spot. To protect its ally from China’s aggression, The US will be left with little choice but to constrain China by military means. However, the US won’t directly engage China in the war in the foreseeable future, because the US dominates China with its superior naval and air force and the only way for China to level the playing field is to apply nuclear weapons. The nuclear nature of Sino-American warfare will make both the world no.1 and no.2 economy the fallen giants.
   
  So there is a possibility that The US might use its oil weapon instead to strike at the core of China’s weakness – it’s huge dependence on oil import. At the moment, China imports 55% of its oil, almost half of which sails from countries in the Persian Gulf?which accounts to 5.3 Million Barrels per Day and is around 75% of  Saudi Arabia’s production. As a matter of fact, China’s reliance on Middle Eastern oil has gradually grown in line with its rapid-increasing demand for oil. Right now, China has achieved the equivalent of the peak of U.S. Oil import dependence and is not slowing down a bit. The single largest source of China’s crude oil imports is Saudi Arabia.

  China’s state oil reserves of 475,900,000 barrels (75,660,000 m3) plus the enterprise oil reserves of 209,440,000 barrels (33,298,000 m3) will only provide around 90 days of consumption or a total of 684,340,000 barrels (108,801,000 m3).

  Meanwhile, This US is inching towards the energy independence. With the technological breakthroughs of shale gas and tight oil, the US has started an energy revolution: U.S. crude oil production has increased by 50% since 2008. With that increase, as well as more efficient cars, oil imports have come down from their high of 60% in 2005 to 35% today—as low as in 1973. With domestic production and gasoline mileage still increasing, imports will continue to decrease. It’s also impressive that U.S. natural gas production has increased by nearly 33% since 2005, and shale gas has gone from 2% of  output  in 2000  to  44% today.

  As of 2013, the United States is the world’s second largest producer of crude oil, after Saudi Arabia, and second largest exporter of refined products, after Russia.According to BP Plc’s Statistical Review of World Energy, the U.S. has surpassed Russia as the biggest oil and natural-gas producer in 2014. While looking at total energy, the U.S. was over 70% self-sufficient in 2008. In May 2011, the US became a net exporter of refined petroleum products.

  With the newly acquired oil might, the US can trick Iran to block the Strait of Hormuz without any economic damage onto the US itself, in order to strike a severe blow to China’s fragile economy. First, The US congress will reject the Iran nuclear deal; and second, The US will give the nod to Isreal’s air strike against Tehran’s nuclear facilities. And then, Iran will retaliate by blocking the Strait of Hormuz. The Strait is the only sea passage from the Persian Gulf to the open ocean. Once it’s blocked, China will scramble to meet its oil demands. In China, the inflation will jump up; the China yuan will plummet, and an economic meltdown will come to bear.

  China will succumb to the US’s might of oil weapon to save itself from political, economic and social collapse. The oil weapon will achieve what the military can’t achieve at less cost. This scenario is something China should be really worried about.

  

  

  

  

  

• The Margin Debt Time-Bomb

  Submitted by Brian Pretti via PeakProsperity.com,

  What is perhaps the greatest risk to individual investors these days?

  Is it the potential for a decline in corporate earnings based on a slowing global economy?  Is it that current valuation levels in both equities and fixed income instruments are much nearer historic highs than not? Is the biggest risk a US Fed that will soon raise interest rates for the first time in close to a decade?

  Although all of these are specific investment risks we face in the current cycle, my contention is that the single largest risk to investors is a risk that has been present since the beginning of what we have come to know as modern financial markets.  The single largest risk to investors is themselves.  By that, I mean the influence of human emotion and psychology in decision making.

  We Are Our Own Worst Enemies

  After many years of managing through market cycles, it seems pretty clear to me that humans are uniquely wired incorrectly for long-term investment success.  When asset prices double, we want those assets twice as bad. When asset prices drop in half, we want nothing to do with them. Isn’t this exactly what we saw in US residential real estate markets a decade ago?  Isn’t this what we experienced with the rise in dot-com stocks in 1999 and their demise over the three following years?  Human decision making shapes the rhythmic bull and bear market character of asset prices. We know the two most prominent emotions that drive markets higher and lower are those of fear and greed.

  If we turn the clock back far enough in early human history, we know that humans ran in packs.  Strength and protection was found in a pack or herd.  It was when humans ventured away from the protection of the herd (consensus thinking) that they were physically vulnerable.  The fight or flight mechanism has been an integral part of human development over time.  Several thousands of years later, these learned decision making responses are simply hard to “turn off.”  We find comfort in decision making within the herd.  When confronted with challenge, it’s either fight or flight.  These ingrained human character traits are why we often see investors buy much nearer a top and sell close to market bottoms.  Decision making driven by emotion, as opposed to logic, is the single greatest impediment to long term investment success.  There is an old saying in the markets: “Human decision making never changes, only the wallets do.”

  Human Emotions Meet Animal Spirits

  Just what does this have to do with decision making in the current environment?  Remember, as investors, controlling our emotions is probably the single greatest obstacle to sound decision making.  As such, we need to anticipate potential emotional triggers so we can better confront and allay our own human responses to market outcomes.  There is probably no greater human emotional trigger than actual price volatility itself.  If we can anticipate and understand why price volatility may occur, we hope to dampen our own emotions and objectively steer through the vagaries of market cycles.

  What we are seeing in the current market environment as a catalyst for potential heightened forward market price volatility is the current level of NYSE margin debt outstanding.  You may be familiar with the financial market characterization of “animal spirits.”  The concept of “animal spirits” is integrally intertwined with human emotion, in this case meaningfully heightened confidence.  There probably is no greater show of human confidence in the investment markets than borrowing to fund an investment.  Certainly, leveraged investors expect a return above their cost of capital, with expectations usually much higher than just this simple metric.  The direction and level of margin debt outstanding at any time is a reflection of these so called “animal spirits,” it is a reflection of human confidence.

  The Margin Debt Time-Bomb

  Let’s have a look at where we now stand.  As of July month end, NYSE margin debt outstanding stood just below a record level of $500 billion.  It hit a new all-time high right alongside the equity market itself, exactly in line with what we would expect in terms of the emotional side of human decision making.

  

  A few observations regarding the consistent patterns of human decision making seen in the historical rhythm of margin debt are important.  First, it is clear that margin debt peaks very close to the final run to cycle highs in stocks with each bull market cycle.  Remember, when asset prices double, we as humans want them more than ever, but when prices are cut in half, we avoid them like the plague.  At the recent peak, margin debt was up just shy of $50 billion this year after being flat in all of last year.  After these near vertical historical accelerations at cycle tops, margin debt has peaked and begun to decline while stocks temporarily go on to new highs – this divergence being the tell-tale indicator equities have peaked for the cycle.   Because this data comes to us with a bit of a short-term lag, it’s seen in hindsight.  At July month end, the S&P traded above 2100, while margin debt balances fell just shy of $18 billion.  On a very short-term basis, this divergence was established in July.

  Where we go ahead will now be important.  Official NYSE August margin debt levels will not be available for a number of weeks, but it’s a very good bet margin debt levels contracted again in August, perhaps noticeably.  As I watched the Dow open down over 1000 points a number of Monday’s back, it was clear margin liquidation drove the open.  Price insensitive selling dominated early trading in many an asset price gap down.

  As we step back and reflect on “rational” decision-making, it would be much more appropriate (and profitable) if margin debt outstanding peaked near the bottom of each market cycle (low prices) and shrank near the top.  As long as human decision makers susceptible to emotion are involved, that is not to be.   

  The final important observation germane to our current circumstances is that when market prices turn down, margin debt levels drop like a rock.  Think about leverage.  It works so well when the price of assets purchased using leverage rise.  Yet leveraged equity can be eaten alive in a declining price environment.  Forced liquidations are simply price insensitive selling.  Of course, this will only occur after prices have already dropped meaningfully enough to either force margin calls, or cause margined investors to liquidate simply in order to remain solvent or limit loss.  We have certainly seen a bit of this in recent weeks.

  Why is all of this talk about margin debt important? 

  In Part 2: The Criticality Of Monitoring Margin Debt Closely From Here we explore how ever higher levels of margin debt represent tomorrow’s heightened price volatility in some type of a stressed market environment, whether that be a meaningful correction or outright bear market.

  Both are an eventuality, the only question is When?

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

   

  

  

  

  

  

• "We Do Not Think This Is Sustainable": Barclays Warns On Massive Cost Of China's FX Intervention

  One of the most important things to understand about China’s doomed attempt to simultaneously manage the stock market, the economy, a deleveraging in some sectors, a re-leveraging in others, and the yuan is that it’s bound to produce all manner of conflicting directives and policies that trip over each other at nearly every turn. One rather poignant example of this is the attempt to rein in shadow lending without choking off credit growth. Another – and the one that will invariably receive the most attention going forward – is the push and pull on money markets by the PBoC’s FX intervention and offsetting liquidity injections. 

  Recall that Beijing’s open FX ops in support of the yuan necessitate the drawdown of the country’s vast store of USD reserves. In other words, they’re selling USTs. The effect this historic liquidation of US paper will have on global liquidity, core yields, and Fed policy has become the subject of fierce debate lately although, as we’ve been at pains to make clear, this is really just a continuation of the USD asset dumping that was foretold nearly a year ago when Saudi Arabia killed the petrodollar.

  In any event, when China liquidates its reserves, it sucks liquidity out of the system. That works at cross purposes with the four RRR cuts the PBoC has implemented so far this year. In short, Beijing, in a desperate attempt to boost lending and invigorate the decelerating economy, has resorted to multiple policy rate cuts, but to whatever degree those cuts freed up banks to lend, the near daily FX interventions undertaken after the August 11 deval effectively offset the unlocked liquidity. 

  What this means is that each successive round of FX intervention must be accompanied by an offsetting RRR cut lest managing the yuan should end up completely negating the PBoC’s attempts to use policy rates to boost the economy – or worse, producing a net tightening. What should be obvious here is that this is a race to the bottom on two fronts. That is, the more you intervene in the FX market the more depleted your reserves and the more you must cut RRR until eventually, both your USD assets and your capacity to deploy policy rate cuts are exhausted. There are only two ways to head off this eventuality i) move to a true free float, or ii) implement a variety of short- and medium-term lending ops to offset the tightening effect of FX interventions in the hope of forestalling further RRR cuts. Clearly, this is a spinning plate if there ever was one, as attempting to figure out exactly what the right mix of RRR cuts and band-aid reverse repos is to offset FX interventions is well nigh impossible. It’s against this backdrop that Barclays is out with what looks like one of the more cogent attempts yet to outline and illustrate the above and explain why it simply isn’t sustainable. Below, find some notable excerpts. 

  First, here’s Barclays explaining what we’ve said for weeks and what BNP recently highlighted as well, namely that while the PBoC used to manipulate the fix to control the spot, it now simply manipulates the spot to control the fix, which in fact leads to less of a role for the market, not more:

  Since China’s FX policy change on 11 August, spot CNY has traded close to the daily fixings. However, this apparent success may have come at a heavy cost. While the daily USDCNY fixings are more aligned to the previous day’s close, the close itself appears not to fully reflect market forces.

  Of course less of a role for markets means more of a role for the PBoC, and that means FX reserve liquidation. There’s been no shortage of attempts to quantify the burn rate, but for what it’s worth, here’s Barclays estimate:

  Our analysis suggests that the PBoC stepped up its FX intervention to USD122bn in August, from ~USD50bn in July, which underscores the significant pressure from capital outflows. Nonetheless, this suggests that the recent relative stability of spot USDCNY could be misleading. Based on the available data for FX intervention in July and our estimates for August, the PBoC has spent around USD172bn on intervention in both July and August. While the PBoC has huge FX reserves (USD3.65trn as of July 2015), if the current level of capital outflow pressures is sustained, we believe this currency defence could become costly. If the pace of FX intervention remains at USD86bn per month, we estimate that the PBoC could lose up to USD510bn of its reserves between June and December 2015, which would represent a nonnegligible decline of 14%.

   

  
  

  As should be clear from everything said above, FX interventions and liquidity injections are, as Barclays puts it, simply two sides of the same coin, and to the extent the interventions continue, so too will the liquidity ops. Here’s an in-depth look:

  

  So what’s the solution? Well, there isn’t one. As Barclays concludes, until expectations of further yuan weakness subside, the situation can’t stabilize: “We do not think the present policy is sustainable given the associated costs in terms of FX reserves depletion and liquidity imbalances [and] as such, we maintain our view that the CNY will need to depreciate further to stabilise capital outflows; we forecast a further 7% fall by year-end.”

  So unless suddenly everything is fixed or, as SocGen puts it, “for the RMB to appreciate compared to its current value will require a very positive environment for EM coupled with a cessation of capital outflows and a vibrant cyclical growth and an export recovery,” the road ahead looks rather precarious, and not just for China, but for the Fed and by extension for the entire global economy. And on that note, we’ll close with what we said earlier this week:

  As the Fed debates whether or not to hike, and how much, the acceleration in Chinese capital outflows starting on August 11 has set the path for the Fed, and at this point any incremental delay in hiking merely adds more to the already vast cross-capital and currency confusion around the globe. However, no longer is the Fed’s quandary open ended: with every passing day, China is suffering incremental tens of billions in capital flight and reserve liquidation, and thus, tighter global financial conditions, as can be expected from the unwind of the world’s largest depository of USD-denominated reserves.

   

  Finally, what all of this really means, is that having pushed China to the point of dissociating itself from the USD peg officially, the more the Fed tightens, the more China will have to push back through devaluation or otherwise, and the more capital outflows it will be subject to, thereby amplifying the Fed’s tightening posture around the globe. In this very unstable arrangement, suddenly the smallest policy error will reverberate exponentially, and result in the only possible outcome: the Fed’s admission of policy failure by adopting a tightening bias, and ultimately launching another phase of monetary easing, be it QE4 or perhaps even the long-overdue and much anticipated Friedmanesque “helicopter money” episode.

  

  

  

  

  

• What QE Actually Impacted

  The end of excess liquidity & the end of excess profits always spelt the end of excess returns, as BofAML notes, especially as the hand-off from psychotic monetary stimulus to economic recovery has been so lame in nominal terms.

   

  

   

  But, as Gavekal Capital explains, the 'gains' from QE are even more tenuous than previously believed…

  The Federal Reserve’s balance sheet has now been relatively unchanged for about 10 months. Total asset at the Fed are about $61 billion higher than they were one year ago. It sounds like a lot but considering total assets are currently $4.48 trillion, $61 billion is a drop in the bucket.

  

  During the various QE programs in the US, a useful template to track different market and economic indicators was to plot them against the 3-month change in total Fed assets (see some of our older posts here, here, and here). Now that we have gone nearly a year since the taper ended, let’s check in on some relationships.

  QE certainly affected asset prices. For government bonds, yields widened as the Fed’s balance sheet expanded and have narrowed as the Fed’s balance sheet has stopped growing. For corporate bonds, spreads over treasury narrowed as the Fed was expanding its balance sheet and have since widened substantially as the Fed’s balance sheet has stopped expanding. Breakeven inflation expectations have dropped significantly as the Fed’s balance sheet has stopped growing as well.

  

  

  

  

  

   

  Stocks were positively affected as well. The 12-month change in the S&P 500 has fairly closely tracked the 3-month change in Fed assets. Momentum in the market has also tracked the change in Fed assets.

  

  

  

  

   

  The effect on economic indicators is much more mixed. QE seems to have clearly impacted the manufacturing PMIs. However, the effect on manufacturing IP itself is tougher to discern.

  

  

  

  

   

  It’s tough to see if QE had much effect on house prices. And it certainly didn’t matter to the consumer or small business owners. However, it seems to have negatively impacted economic surprises and increased perceived macro risks in the world as it was winding down.

  

  

  

  

   

  Finally, QE didn’t seem to make much of a difference for nominal GDP or employment.

  

  

   

  Unfortunately, overall it seems that QE had a much larger impact on bond and stock prices than on real economic activity. Government bond yields widened when the Fed was expanding its balance sheet while corporate spreads over bond yields narrowed. Stock prices were positively impacted by QE as well and have lost a lot of momentum since QE ended. Manufacturing surveys, in the US and globally, have been affected by QE but real economic indicators such as employment, small business intentions, and GDP have shown little relationship to changes in the Fed’s balance sheet level.

  

  

  

  

• Look For These Trades To Blow Up As The Rally Ends

  What are the most crowded trades currently (and hence where the next round of carnage is coming from)? Long the US Dollar? Short US Treasuries? Long VIX? Think again…

   

  

   

  And none of them ended well. Which is why this…

  

   

  …might be the start of something very ugly.

   

  Source: BofAML

  

  

  

  

  

• Europe's Biggest Bank Dares To Ask: Is The Fed Preparing For A "Controlled Demolition"

  Why did we focus so much attention yesterday on a post in which the IMF confirmed what we had said since last October, namely that the BOJ’s days of ravenous debt monetization are coming to a tapering end as soon as 2017 (as willing sellers simply run out of product)? Simple: because in the global fiat regime, asset prices are nothing more than an indication of central bank generosity. Or, as Deutsche Bank puts it: “Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system.“

  The problem is that the BOJ and the ECB are the only two remaining central banks in a world in which Reverse QE aka “Quantitative Tightening” in China, and the Fed’s tightening in the form of an upcoming rate hike (unless the Fed loses all credibility and reverts its pro-rate hike bias), are now actively involved in reducing global liquidity. It is only a matter of time before the market starts pricing in that the Bank of Japan’s open-ended QE has begun its tapering (followed by a QE-ending) countdown, which will lead to devastating risk-asset consequences. The ECB, which is also greatly supply constrained as Ewald Nowotny admitted yesterday, will follow closely.

  But while we expanded on the Japanese problem to come in detail yesterday, here are some key observations on what is going on in both the US and China as of this moment – the two places which all now admit are the culprit for the recent equity selloff, and which the market has finally realized are actively soaking up global liquidity.

  Here the problem, as we initially discussed last November in “How The Petrodollar Quietly Died, And Nobody Noticed“, is that as a result of the soaring US dollar and collapse in oil prices, Petrodollar recycling has crashed, leading to an outright liquidation of FX reserves, read US Treasurys by emerging market nations. This was reinforced on August 11th when China joined the global liquidation push as a result of its devaluation announcement, a topic which we also covered far ahead of everyone else with our May report “Revealing The Identity Of The Mystery “Belgian” Buyer Of US Treasurys”, exposing Chinese dumping of US Treasurys via Belgium.

  We also hope to have made it quite clear that China’s reserve liquidation and that of the EM petro-exporters is really two sides of the same coin: in a world in which the USD is soaring as a result of Fed tightening concerns, other central banks have no choice but to liquidate FX reserve assets: this includes both EMs, and most recently, China.

  Needless to say, these key trends covered here over the past year have finally become the biggest mainstream topic, and have led to the biggest equity drop in years, including the first correction in the S&P since 2011. Elsewhere, the risk devastation is much more profound, with emerging market equity markets and currencies crashing around the globe at a pace reminiscent of the Asian 1998 crisis, while in China both the housing and credit, not to mention the stock market, bubble have all long burst.

  Before we continue, we present a brief detour from Deutsche Bank’s Dominic Konstam on precisely how it is that in the current fiat system, global central bank liquidity is fungible and until a few months ago, had led to record equity asset prices in most places around the globe. To wit:

  Let’s start from some basics. Global liquidity can be thought of as the sum of all central banks’ balance sheets (liabilities side) expressed in dollar terms. We then have the case of completely flexible exchange rates versus one of fixed exchange rates. In the event that one central bank, say the Fed, is expanding its balance sheet, they will add to global liquidity directly. If exchange rates are flexible this will also mean the dollar tends to weaken so that the value of other central banks’ liabilities in the global system goes up in dollar terms. Dollar weakness thus might contribute to a higher dollar price for dollar denominated global commodities, as an example. If exchange rates are pegged then to achieve that peg other central banks will need to expand their own balance sheets and take on dollar FX reserves on the asset side. Global liquidity is therefore increased initially by the Fed but, secondly, by further liability expansion, by the other central banks. Depending on the sensitivity of exchange rates to relative balance sheet adjustments, it is not an a priori case that the same balance sheet expansion by the Fed leads to greater or less global liquidity expansion under either exchange rate regime. Hence the mere existence of a massive build up in FX reserves shouldn’t be viewed as a massive expansion of global liquidity per se – although as we shall show later, the empirical observation is that this is a more powerful force for the “impact” of changes in global liquidity on financial assets.

  That, in broad strokes, explains how and why the Fed’s easing, or tightening, terms have such profound implications not only on every asset class, and currency pair, but on global economic output.

  Liquidity in the broadest sense tends to support growth momentum, particularly when it is in excess of current nominal growth. Positive changes in liquidity should therefore be equity bullish and bond price negative. Central bank liquidity is a large part of broad liquidity and, subject to bank multipliers, the same holds true. Both Fed tightening and China’s FX adjustment imply a tightening of liquidity conditions that, all else equal, implies a loss in output momentum.

   

  

  But while the impact on global economic growth is tangible, there is also a substantial delay before its full impact is observed. When it comes to asset prices, however, the market is far faster at discounting the disappearance of the “invisible hand”:

  Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system. The loss of reserves represents not just a direct loss of outside money but also a reduction in the multiplier. There should be no expectation that the multiplier is quickly restored through offsetting central bank operations.

  Here Deutsche Bank suggests your panic, because according to its estimates, while the US equity market may have corrected, it has a long ways to go just to catch up to the dramatic slowdown in global plus Fed reserves (that does not even take in account the reality that soon both the BOJ and the ECB will be forced by the market to taper and slow down their own liquidity injections):

  Let’s start with risk assets, proxied by global equity prices. It would appear at  first glance that the correlation is negative in that when central bank liquidity is expanding, equities are falling and vice versa. Of course this likely suggests a policy response in that central banks are typically “late” so that they react once equities are falling and then equities tend to recover. If we shift liquidity forward 6 quarters we can see that the market “leads” anticipated” additional liquidity by something similar. This is very worrying now in that it suggests that equity price appreciation could decelerate easily to -20 or even 40 percent based on near zero central bank liquidity, assuming similar multipliers to the post crisis period.

   

  

  

  Some more dire predictions from Deutsche on what will happen next to equity prices:

  If we only consider the FX and Fed components of liquidity there appears to be a tighter and more contemporaneous relationship with equity prices. The suggestion is at one level still the same, absent Fed and FX reserve expansion, equity prices look more likely to decelerate and quite sharply.

   

  The Fed’s balance sheet for example could easily be negative 5 percent this time next year, depending on how they manage the SOMA portfolio and would be associated with further FX reserve loss unless countries, including China allowed for a much weaker currency. This would be a great concern for global (central bank liquidity).

  Once again, all of this assumes a status quo for the QE out of Europe and Japan, which as we pounded the table yesterday, are both in the process of being “timed out”

  The tie out, presumably with the “leading” indicator of other central bank action is that other central banks have been instrumental in supporting equities in the past. The largest of course being the ECB and BoJ. If the Fed isn’t going doing its job, it is good to know someone is willing to do the job for them, albeit there is a “lag” before they appreciate the extent of someone else’s policy “failure”.

  Worse, as noted yesterday soon there will be nobody left to mask everyone one’s failure: the global liquidity circle jerk is coming to an end.

  What does this mean for bond yields? Well, as we explained previously, clearly the selling of TSYs by China is a clear negative for bond prices. However, what Deutsche Bank accurately notes, is that should the world undergo a dramatic plunge in risk assets, the resulting tsunami of residual liquidity will most likely end up in the long-end, sending Treasury yields lower. To wit:

  … if investors believe that liquidity is likely to continue to fall one should not sell real yields but buy them and be more worried about risk assets than anything else. This flies in the face of recent concerns that China’s potential liquidation of Treasuries for FX intervention is a Treasury negative and should drive real yields higher.… More generally the simple point is that falling reserves should be the least of worries for rates – as they have so far proven to be since late 2014 and instead, rates need to focus more on risk assets.

   

  The relationship between central bank liquidity and the byproduct of FX reserve accumulation is clearly central to risk asset performance and therefore interest rates. The simplistic error is to assume that all assets are treated equally. They are not – or at least have not been especially since the crisis. If liquidity weakens and risk assets trade badly, rates are most likely to rally not sell off. It doesn’t matter how many Treasury bills are redeemed or USD cash is liquidated from foreign central bank assets, US rates are more likely to fall than rise especially further out the curve. In some ways this really shouldn’t be that hard to appreciate. After all central bank liquidity drives broader measures of liquidity that also drives, with a lag, economic activity.

  Two points: we agree with DB that if the market were to price in collapsing “outside” money, i.e. central bank liquidity, that risk assets would crush (and far more than just the 20-40% hinted above). After all it was central bank intervention and only central bank intervention that pushed the S&P from 666 to its all time high of just above 2100.

  However, we also disagree for one simple reason: as we explained in “What Would Happen If Everyone Joins China In Dumping Treasurys“, the real question is what would everyone else do. If the other EMs join China in liquidating the combined $7.5 trillion in FX reserves (i.e., mostly US Trasurys but also those of Europe and Japan) shown below…

  

  … into an illiquid Treasury bond market where central banks already hold 30% or more of all 10 Year equivalents (the BOJ will own 60% by 2018), then it is debatable whether the mere outflow from stocks into bonds will offset the rate carnage.

  And, as we showed before, all else equal, the unwinding of the past decade’s accumulation of EM reserves, some $8 trillion, could possibly lead to a surge in yields from the current 2% back to 6% or higher.

  In other words, inductively reserve liquidation may not be a concern, but practically – when taking in account just how illiquid the global TSY market has become – said liquidation will without doubt lead to a surge in yields, if only occasionally due to illiquidity driven demand discontinuities.

  * * *

  So where does that leave us? Summarizing Deutsche Bank’s observations, they confirm everything we have said from day one, namely that the QE crusade undertaken first by the Fed in 2009 and then all central banks, has been the biggest can-kicking exercise in history, one which brought a few years of artificial calm to the market while making the wealth disparity between the poor and rich the widest it has ever been as it crushed the global middle class; now the end of QE is finally coming.

  And this is where Deutsche Bank, which understands very well that the Fed’s tightening coupled with Quantiative Tightening, would lead to nothing short of a global equity collapse (especially once the market prices in the inevitable tightening resulting from the BOJ’s taper over the coming two years), is shocked. To wit:

  This reinforces our view that the Fed is in danger of committing policy error. Not because one and done is a non issue but because the market will initially struggle to price “done” after “one”. And the Fed’s communication skills hardly lend themselves to over achievement. More likely in our view, is that one in September will lead to a December pricing and additional hikes in 2016, suggesting 2s could easily trade to 1 ¼ percent. This may well be an overshoot but it could imply another leg lower for risk assets and a sharp reflattening of the yield curve.

  But it was the conclusion to Deutsche’s stream of consciousness that is the real shocker: in it DB’s Dominic Konstam implicitly ask out loud whether what comes next for global capital markets (most equity, but probably rates as well), is nothing short of a controlled demolition. A premeditated controlled demolition, and facilitated by the Fed’s actions or rather lack thereof:

  The more sinister undercurrent is that as the relationship between negative rates has tightened with weaker liquidity since the crisis, there is a sense that policy is being priced to “fail” rather than succeed. Real rates fall when central banks back away from stimulus presumably because they “think” they have done enough and the (global) economy is on a healing trajectory. This could be viewed as a damning indictment of policy and is not unrelated to other structural factors that make policy less effective than it would be otherwise – including the self evident break in bank multipliers due to new regulations and capital requirements.

  What would happen then? Well, DB casually tosses an S&P trading a “half its value”, but more importantly, also remarks that what we have also said from day one, namely that “helicopter money” in whatever fiscal stimulus form it takes (even if it is in the purest literal one) is the only remaining outcome after a 50% crash in the S&P:

  Of course our definition of “failure” may also be a little zealous. After all why should equities always rise in value? Why should debt holders be expected to afford their debt burden? There are plenty of alternative viable equilibria with SPX half its value, longevity liabilities in default and debt deflation in abundance. In those equilibria traditional QE ceases to work and the only road back to what we think is the current desired equilibrium is via true helicopter money via fiscal stimulus where there are no independent central banks. 

  And there it is: Deutsche Bank saying, in not so many words, what Ray Dalio hinted at, namely that the Fed’s tightening would be the mechanistic precursor to a market crash and thus, QE4.

  Only Deutsche takes the answer to its rhetorical question if the Fed is preparing for a “controlled demolition” of risk assets one step forward: realizing that at this point more QE will be self-defeating, the only remaining recourse to avoid what may be another systemic catastrophe would be the one both Friedman and Bernanke hinted at many years ago: the literal paradropping of money to preserve the fiat system for just a few more days (At this point we urge rereading footnote 18 in Ben Bernanke’s “Deflation: Making Sure “It” Doesn’t Happen Here” speech)

  While we can only note that the gravity of the above admission by Europe’s largest bank can not be exaggerated – for “very serious banks” to say this, something epic must be just over the horizon – we should add: if Deutsche Bank (with its €55 trillion in derivatives) is right and if the Fed refuses to change its posture, exposure to any asset which has counterparty risk and/or whose value is a function of faith in central banks, should be effectively wound down.

  * * *

  While we have no way of knowing how this all plays out, especially if Deutsche is correct, we’ll leave readers with one of our favorite diagrams: Exter’s inverted pyramid.

  

  

  

  

  

  

• Whither The Economy?

  Submitted by Paul Craig Roberts,

  The great problem with corporate capitalism is that publicly owned companies have short time horizons. Unlike a privately owned business, the top executives of a publicly owned corporation generally come to their positions late in life. Consequently, they have a few years in which to make their fortune.

  As a consequence of the short-sightedness of reformers and Congress, the annual salaries of top executives were capped at $1 million. Amounts in excess are not deductible for the company as an expense. The exception is “performance-related” pay, which has no limit. The result is that the major part of executive pay comes in the form of performance bonuses. Performance means a rise in the price of the company’s shares.

  Performance bonuses can be honestly obtained by good management or mere luck that results in a rise in the company’s profits. However, there are a number of ways in which performance bonuses can be less legitimately obtained, almost all of which result in short-term gains to executives and shareholders and long-term damage to the corporation and economy.

  Replacing American workers with foreign workers is one way. The collapse of communism in Russia and China and the collapse of socialism in India resulted in the under-utilized Indian and Chinese labor forces becoming available to American corporations. Pushed by “shareholder advocates,” Wall Street, and large retailers, US manufacturing corporations began closing their manufacturing plants in the US and producing offshore the goods, and later the services, that they market to Americans.

  From the standpoint of the short-term interests of executives and shareholders, this decision made sense. But to transform manufacturing companies into marketing companies, as happened for example to Apple Computer, which apparently does not own a single factory, was a strategic mistake for the long-term. By offshoring the production of their products, US corporations transferred technology, physical plant, and business knowhow to China. American corporations are now dependent on China, a country that the idiots in Washington are endeavoring to turn into an enemy.

  Further downside comes from the fact that research, development, and innovation are connected to the manufacturing process, because it is difficult for these important functions to be successful in a sterile atmosphere removed from the production process. As time goes by, US companies are transformed from manufacturing enterprises into sales organizations and lose connection to the work process, and these functions relocate abroad with the manufacturing jobs.

  Offshoring manufacturing jobs left Americans with fewer high-value-added well-paid jobs, and the US middle class downsized. Ladders of upward mobility were taken down. Income and wealth distributions worsened. In effect, the One Percent got richer by giving away US incomes and GDP to China. Economists who shilled for the offshoring corporations promised new and better jobs to take the place of the lost manufacturing jobs, but as I have pointed out for years, there is no sign of these promised jobs in the payroll jobs releases or ten-year jobs projections.

  Jobs offshoring began with manufacturing, but the rise of the high speed Internet made it possible to move offshore tradable professional skills, such as software engineering, Information Technology, various forms of engineering, architecture, accounting, and even the medical reading of MRIs and CT-Scans. The jobs and careers of university graduates were sent abroad and denied to Americans. Many of the jobs that remained in the US were given to foreign workers brought in on H1-B and L-1 work visas based on the obviously false claim that there was a shortage of talent in the US.

  The gains in executive bonuses and shareholder capital gains were achieved by destroying the economic prospects of millions of Americans and by reducing the growth potential of the US economy. In the long-run this means the demise of the US as a world power. As I forecast in 2004, “the US will be a Third World country in 20 years.”

  As jobs offshoring ran its course and had fewer remaining gains to offer the One Percent, short-term greed turned to new ways of wrecking both corporations and the US economy in behalf of executive and shareholder gains. Executives of utility companies, for example, forewent maintenance and upgrades and used the money instead to buy back their own shares. If you have ever wondered why you can’t get faster Internet in your area or why your electricity is constantly interrupted, this is probably the cause.

  Executives also use the company’s profits to repurchase shares, and when they lack profits executives arrange bank loans to the companies in order to buy back shares. Executive “performance pay” goes up, but the corporations are left more heavily indebted and thus more vulnerable to recession and foreign competition. In recent years, buybacks and dividends have used up most of corporate profits, leaving the corporations bereft of updates and reserves.

  Publicly owned capitalism’s short-term time horizon is also apparent with regard to nature’s resources and the environment. Ecological economists, such as Herman Daly, have established the fact that environmental destruction is the consequence of corporations moving many of the waste costs associated with their activities off their profit and loss statements and onto the environment. As other ways of artificially raising corporate profits and share prices become exhausted, expect corporations to push harder against pollution control measures. As the environment declines in its ability to produce new resources and to absorb wastes or pollution—for example the large growing dead areas in the Gulf of Mexico—the planet’s ability to sustain life withers.

  President Richard Nixon established the Environmental Protection Agency in order to reduce the external or social costs that corporations impose on the environment. However, the polluting industries were not slow in taking over or capturing the agency, as University of Chicago economist George Stigler predicted.

  A basis of economic theory is the absurd assumption that man-made capital is a perfect substitute for nature’s capital. This means that if the environment is used up and ruined, not to worry. Innovation and technology will substitute for nature. This absurd foundation of economic theory is why there are so few ecological economists. Economics teaches not to worry about the environment.

  To sum up, the One Percent have enriched themselves at the expense of the economy’s potential and everyone else.

  Where does the economy stand at the present time, a question on many of your minds? I am not a seer. Nevertheless, various things are obvious. In the US consumer demand is constrained by high debt and the absence of growth in real median family income. Evidence of the constrained US consumer shows up in lackluster real retail sales and in year-over-year declines in factory orders. On September 2, Zero Hedge reported that factory orders had fallen for 9 consecutive months.

  As I point out, the monthly payroll jobs announcements are always overblown and consist largely of lowly-paid, part-time, domestic service employment. The 5.3% unemployment rate is phony, because it does not count any discouraged workers, and there are millions of them. Indeed, the absence of jobs is the reason the labor force participation rate has continually declined, a contradiction to the alleged recovery. On September 1, the Economic Cycle Research Institute reported that the US government’s data on employment/population ratios by education shows that the employment/population ratio for those with high school and college diplomas is lower now than when the alleged economic recovery began in June 2009. The only job gains have been for those without a high school diploma, the cheapest labor available in the US. Clearly, these are not jobs that will produce any rebound in consumer demand. And clearly education is not the answer.

  The main economic releases from Washington—the ones that make the headline news: the unemployment rate, payroll jobs, GDP, and the consumer price index—are worthless. The unemployment rate does not include millions of unemployed, the CPI is rigged to undercount inflation, and as inflation is undercounted, real GDP is over-reported. Indeed, in my opinion and that of economic-statistician John Williams of shadowstats.com, nominal GDP deflated with a correct measure of inflation shows essentially no growth during the alleged recovery. What the government and financial media call economic growth is essentially price rises or inflation.

  What is happening to America is that all of the surplus in the system accumulated over decades of success is being used up. Americans have had no interest income from their savings since the Federal Reserve decided to print trillions of dollars with which to purchase the troubled financial assets of a small handful of mega-banks. In other words, the Federal Reserve decided that, contrary to the propaganda about serving the public interest, the Fed exists to serve a few oversized banks, not the American people or their economy. As an institution, the Federal Reserve is so corrupt that it should be shut down.

  The elderly avoid the stock market, because a decline can be long-lasting and eat up a large chunk of one’s savings. The same can happen from long-term bonds. Therefore, older people prefer shorter term interest instruments. The Federal Reserve’s zero interest rate policy means that older people are using up their savings, at the expense of their peace of mind and their heirs, in order to prevent a collapse in their standard of living. The elderly are also drawing down their savings in support of unemployed children and grandchildren. Unable to find jobs that will support the formation of a household or even an individual existence, many young college educated Americans are living with parents or grandparents, something I have not previously seen in my lifetime.

  All the while the corrupt financial media pump us full of good economic news.

  Many readers want to know if the stock market decline is over. It remains to be seen. In my opinion two opposite forces are at work. Based on earnings and the economy’s prospects, stocks are overvalued. However, the appearance of a successful economy is important to Washington’s power, and this brings in the Plunge Protection Team, a US Treasury/Federal Reserve team that intervenes to support the market. Wall Street managed to get the team created in 1988, and in the recent troubled days there are signs of it in operation. For example, suddenly during a time of market decline strong purchasing appeared, arresting the decline. Normally, optimistic purchasers who interpret declines as buying opportunities wait until the decline is over. They do not buy into the middle of a decline.

  Today most stock purchases are made by money managers, such as mutual funds and pension funds. Individuals do not account for much of the market. Money managers are judged by their performance relative to their peers. As long as they move up or down with their peers, they are safe. Once the professionals see that government is supporting the market, they support it. This behavior is bolstered by greed. Participants want the market to go up, not down. Therefore, even if money managers understand that stocks are a bubble, they will support the bubble as long as they think the Plunge Protection Team is holding up the market.

  The unanswered question in the minds of money managers is whether the Treasury and Fed are committed to maintaining an overvalued market or whether they are just holding it up long enough for their well-connected friends to get out. Only time will tell.

  My book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West, will introduce you to the damage done by jobs offshoring and to the mistaken assumption of economists that the environment puts no constraints on economic growth.

  The other part of the story comes from Michael Hudson, who explains the financialization of the economy and the transformation of the financial sector, which once financed the production of real goods and services, into a money-sucking leach that sucks all life out of the economy into its own profits. I recently posted a link to Pam Martens’ review of his book, Killing The Host.

  If you can absorb my book, Michael Hudson’s book, and one of Herman Daly’s books, you will have a much firmer grasp on economics than economists have. Go to it.

  

  

  

  

  

• Putin Confirms Scope Of Russian Military Role In Syria

  Over the past 48 hours or so, we’ve seen what certainly appears to be visual confirmation of a non-negligible Russian military presence in Syria. For anyone coming to the story late, overt Russian involvement would seem to suggest that the geopolitical “main event” (so to speak), may be closer than anyone imagined.

  

  Russia’s excuse for being in Syria is the same as everyone else’s: they’re there, ostensibly, to fight ISIS. As we mentioned yesterday, and as we’ve detailed exhaustively as it relates to Turkey, the fact that ISIS has become a kind of catch-all, go-to excuse for legitimizing whatever one feels like doing is a dangerous precedent and Turkey’s crackdown on the Kurds proves beyond a shadow of a doubt that Islamic State will serve as a smokescreen for more than just the preservation/ouster (depending on which side you’re on) of Bashar al-Assad. 

  Having said all of that, going into the weekend Russia had yet to confirm publicly that it had commenced military operations in Syria despite the fact that it’s the next closest thing to common knowledge that at the very least, the Kremlin has provided logistical support and technical assistance for a period that probably spans two or more years. 

  But on Friday, Vladimir Putin looks to have confirmed the scope of Russia’s military role, even if he stopped short of admitting that Russian troops are engaged in combat. Here’s The Telegraph:

  Russia is providing “serious” training and logistical support to the Syrian army, Vladimir Putin has said, in the first public confirmation of the depth of Russia’s involvement in Syria’s civil war.

  And while the highlighted passage there is actually impossible to prove given that the term “depth” is subjective, it certainly does appear that Putin is now willing to concede that support for Assad goes far beyond “political”. Here’s AFP as well:

  Asked whether Russia could take part in operations against IS, Putin said: “We are looking at various options but so far what you are talking about is not on the agenda.”

   

  “To say we’re ready to do this today — so far it’s premature to talk about this. But we are already giving Syria quite serious help with equipment and training soldiers, with our weapons,” RIA Novosti state news agency quoted Putin as saying.

  And back to The Telegraph briefly:

  Speculation is growing that Russia has significantly expanded its involvement in recent months, including with deliveries of advanced weaponry, a raft of spare parts for existing machines, and the deployment of increasing numbers of military advisers and instructors.

   

  Last week Syrian state television released images showing an advanced Russian-built armoured personnel carrier, the BTR-82a, in combat. Videos have also appeared in which troops engaged in combat appear to shout instructions to one another in Russian.

  Of course whether or not the troops Russia has on the ground were sent to Syria with explicit orders to join the fighting is largely irrelevant when the bullets start flying. As Pavel Felgenhaeur, an independent commentator on Russian military affairs told The Telegraph, “it was quite conceivable that members of the advisory mission occasionally found themselves in combat or had even suffered casualties.” 

  So in other words, they’re at war, and even as Putin is now willing to admit, with a two year (at least) lag, that Russian boots are indeed on the ground, it may be a while before he admits to their role in direct combat and if Ukraine is any guide, he might never acknowledge the extent of Russia’s involvement. But make no mistake, the Russian presence has nothing to do with the “threat” ISIS poses to the world and everything to do with ensuring that Assad’s forces can fight on – at least for now. 

  The absurd thing about the whole effort is that ISIS itself is now just cannon fodder both for Russia and for the US led coalition flying missions from Incirlik that Turkey has suggested may soon include Saudi Arabia, Qatar, and Jordan. Even more ridiculous is the fact that since none of this has anything to do with eradicating ISIS in the first place, the bombing of ISIS targets by the US, Turkey, and Russia doesn’t really serve much of a purpose at all.

  That is, everyone’s just biding time to see how far the other side is willing to go in support of their vision for Syria’s political future – a political future which, as we noted yesterday, almost certainly will not be decided at the ballot box, that is unless it’s after US Marines have stormed Damascus at which point the US will benevolently allow whatever civilians are still alive in Syria to choose between two puppet leaders vetted and supported by Washington. 

  And lest anyone should forget what this is all about…

  

  

  

  

  

  

• So That's Why Obama Went To Alaska

  So that’s why he went to Alaska…

  Threats…

  

  Source: Investors.com

   

  …And Priorities…

  

   

  Source: Townhall.com

   

  

  

  

  

  

• Did COMEX Counterparty Risk Just Reach A Record High?

  The last few months have seen a steady drip-drip-drip increase in US, European, and Chinese bank credit risks, even as stock prices rose (aside from the latter). The turning point appears to have been the downturn in oil prices as traders began to hedge their counterparty risk in massive levered derivative positions tied to commodities. But it is not just banks… COMEX counterparty risk mut sbe on the rise, as Jesse's Cafe Americain notes, the 'claims per ounce of gold' deliverable at current prices has spiked higher once again, to a record 126:1.

   

  Bank credit risk is rising…

  

   

  And, as Jesse's Cafe Americain details, we suspect so is COMEX's…The 'claims per ounce of gold' deliverable at current prices has spiked higher once again, to 126:1.

  

   

  As soon as the 'active month' of August was over at The Bucket Shop, JPM took a chunk of gold back off the registered for delivery roster.   In the silver market JPM is gaining the reputation for a large physical silver hoard, and the role of a 'fireman' to maintain the stability of leverage in supply and demand.

   

  These spikes higher in the ratio of open interest to deliverable bullion at current prices is not something that has happened in the past fifteen years at least.   And neither has the steady increase in the ratio which we have been seeing in the past couple of years.  

   

  

   

  The Financial Times has finally noticed that the price for 'borrowed' gold bullion that is taken to Switzerland for re-refining and then final shipment to Asia for purchase and withdrawal is rising.

   

  These are signs that one might expect to see in a late stage gold pool in which the manipulation of a market has gone too far for too long.   One thing you can say about the financial speculators is that they never know when to quit.   Remember the London Whale?   He never stopped until the rest of the professional participants raised a fuss that he was disrupting the entire market!

   

  The clever quislings for the bullion banks will note that an actual default on the Comex is unlikely, and they are right.  It is not really a 'physical delivery' exchange, but is now primarily a betting shop.  There is plenty of gold in the warehouses, if you do not concern yourself with the niceties of property rights.  And claims can be force settled in cash on a declaration of force majeure. 

   

  Heck, as we saw in the case of MFGlobal,  when JPM shoved to the front of the assets allocation line, even receipts for actual physical gold owned outright can be forced settled in cash.   If you hold gold in a registered warehouse or an unallocated account,  then your ownership is philosophically 'conceptual.'

   

  The physical delivery exchanges are in other places, like the LBMA in London and especially the markets of Asia such as the Shanghai Gold Exchange.

   

  And this is where we will see the first signs of a breakdown in the gold price manipulation pool of the bullion banks, first as signs of 'tightness' in the delivery of metals, and then in the initial 'fails to deliver.'

   

  Rising prices will provide relief.  But the pool operators are not shy about pressing and doubling down, in a familiar pattern of overreach.  Remember the eventual demise of 'the London Whale?'

  And although it is hard to believe, perhaps rising prices may not be so easily allowed.

  "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. 

   

  Therefore at any price, at any cost, the central banks had to quell the gold price, manage it."

   

  Sir Eddie George, Bank of England, September 1999

  And it might not surprise anyone if it turns out that the wiseguy bullion banks are operating under the 'cover' of some bureaucratic boobs and a policy exercise gone horribly wrong.  It would be like giving a platinum credit card to a gambling addict.  Except you do not think that you ever have to pay the bills when they come due, since you are playing with other people's money.

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

   

  There's an interesting question here because if the gold price broke [lower] in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology.

   

  Now, we don't have the 'legal' right to sell gold but I'm just frankly curious about what people's views are on situations of this nature because something unusual is involved in policy here. We're not just going through the standard policy where the money supply is expanding, the economy is expanding, and the Fed tightens. This is a wholly different thing."

   

  Alan Greenspan, Federal Reserve Minutes from May 18, 1993

  Just a little 'perception management' gone horribly wrong, right?   And no one could have seen it coming.

  *  *  *

  Or put graphically…

  

   

  

  

  

  

  

• Don't Forget China's "Other" Spinning Plate: Trillions In Hidden Bad Debt

  To be sure, there’s every reason to devote nearly incessant media coverage to China’s bursting stock market bubble and currency devaluation. 

  The collapse of the margin fueled equity mania is truly a sight to behold and it’s made all the more entertaining (and tragic) by the fact that it represents the inevitable consequence of allowing millions of poorly educated Chinese to deploy massive amounts of leverage on the way to driving a world-beating rally that, at its height, saw day traders doing things like bidding a recently-public umbrella manufacturer up 2,700%.

  The entertainment value has been heightened by what at this point has to be some kind of inside baseball competition among media outlets to capture the most hilarious picture of befuddled Chinese traders with their hands on their faces and/or heads with a board full of crashing stock prices visible in the background. Meanwhile, the world has recoiled in horror at China’s crackdown on the media and anyone accused of “maliciously” attempting to exacerbate the sell-off by engaging in what Beijing claims are all manner of “subversive” activities such as using the “wrong” words to describe the debacle and, well, selling stocks. Finally, China’s plunge protection has been widely criticized for, as we put it, “straying outside the bounds of manipulated market decorum.”

  And then there’s the yuan devaluation that, as recent commentary out of the G20 makes abundantly clear, is another example of a situation where China will inexplicably be held to a higher standard than everyone else. That is, when China moves to support its export-driven economy it’s “competitive devaluation”, but when the ECB prints €1.1 trillion, it’s “stimulus.” 

  Given the global implications of what’s going on in China’s stock market and the fact that the devaluation is set to accelerate the great EM FX reserve unwind while simultaneously driving a stake through the heart of beleaguered emerging economies from LatAm to AsiaPac on the way to triggering a repeat of the Asian Financial Crisis complete with the implementation of pro-cyclical policy maneuvers from a raft of hamstrung central banks, it’s wholly understandable that everyone should focus on equities and FX. That said, understanding the scope of the risk posed by China’s many spinning plates means not forgetting about the other problems Beijing faces, not the least of which is a massive collection of debt that, thanks to the complexity of local government financing and the (related) fact that as much as 40% of credit risk is carried off balance sheet via an eye-watering array of maturity mismatched wealth management products, is nearly impossible to quantify or even to get a grip on. 

  
  

  Over the years, we’ve endeavored to detail China’s massive (and largely hidden) debt problem by drilling down into i) the local government debt saga (see here for the latest), ii) China’s management of NPLs (see here for instance), and iii) the lurking wealth management product problem (see here to read more than you ever cared to on this issue). 

  With all of the above in mind, we present the following from RBS’ Alberto Gallo who has made a valiant effort at summarizing contagion risk in China’s labyrinthine banking system.

  *  *  *

  From RBS

  The investment-driven model and fiscal stimulus have helped China achieve fast growth, but also led to rapid debt built-up. Unlike the US and Europe, which have deleveraged since the crisis, debt overhangs have kept growing in China. In common with previous examples of rapid credit growth, China now also has to tackle the collateral effects like overcapacity in industrial sectors, deteriorating asset quality and loss of growth momentum.

  

  Local governments have also become dangerously levered. Under the fiscal rules introduced in 1994, local governments in China in theory were not allowed to raise debt. Faced with revenue expenditure imbalances, they often had to circumvent the rules by creating separate entities (local government financing vehicles) to borrow, largely through shadow banking channels. An official audit released in 2014 showed that total local debt had reached RMB17.9tn ($3tn) by the middle of 2013, equivalent to 38% of GDP. This figure includes debt local governments are directly responsible for (RMB10.8tn) plus guarantees. The government has started to reform the system by allowing direct bond issuance by local governments since last year, introducing more transparency and reducing their borrowing costs. However, more radical fiscal reforms (for example, an overhaul of the payment transfer system or greater taxation power for local governments) are difficult given the complex layers of government. In China, there are five levels of governments, compared to three in most other countries. This makes it logistically difficult to closely match tax collection and spending, and sometimes can encourage regional protectionism.

  

  Banks have been the major intermediary for lending over the past years, leaving them vulnerable to rising credit risks. As shown below, most of Chinese corporates’ credit needs are still met by bank loans rather than bonds. Loans from China’s top four banks have more than doubled over the past seven years to reach 26% of GDP by H1 2015 (Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China). 

  

  Cracks are starting to appear: NPLs still look low, but are rising rapidly. According to the banks’ H1 2015 results, NPL ratios are still low at around 1.4-1.8%. However, the nominal rises in NPL amount have been significant, leading to flat profit growth for all four banks. Moreover, it has been a common practice in China for banks to roll over loans to strategic corporates when directed by the government. Such loans, though doubtful, will not be recognised as NPLs. 

  

  The government’s ability to support banks has declined. Traditionally the Chinese government has always stepped in to help banks when needed. For example, it issued special bonds to recapitalise the big four in 1998. Given the rise in banks’ loan books, the government’s ability to shoulder losses has declined. For example, bank loans increased to 130% of China’s FX reserves by FY 2014, up from 80% in 2006. 

  

  In addition, China also faces rising financial risks in the shadow banking sector. As shown above, the share of shadow banking credit has increased rapidly over the past years. As we discussed earlier, default risks remain high in the shadow banking sector. In August, ten trust companies and a fund manager requested a bailout from the top Communist party official in Hebei province (FT), following several default episodes last year.

  Conclusion: The Chinese government is aware of the build-up of financial risks in the economy, and is trying to smooth the way of debt restructuring by more monetary easing. However, it is never an easy task to engineer an orderly deleveraging process, especially as the country also faces other structural problems and is in urgent need to transform its economic model and step up financial liberalisation. 

  

  

  

  

  

• Global Economic Fears Cast Long Dark Shadow On Oil Price Rebound

  Submitted by Evan Kelly via OilPrice.com,

  After bouncing around, oil prices finished off the week with just a bit less volatility than when it started the week. WTI stayed at around $46 per barrel as of midday on September 4, with Brent holding at $50 per barrel.

  Aside from supply and demand fundamentals in the oil markets, central bank policymaking is another major factor determining the trajectory of oil prices. The European Central Bank hinted that it might consider more monetary stimulus to help the stagnant European economy. Oil prices rose on the news. The markets, however, are waiting on a much more significant announcement from the Federal Reserve this month on whether or not the central bank will raise interest rates. This summer’s market turmoil – the Greek debt crisis and the meltdown in the Chinese stock markets – has dimmed the prospect of a rate increase.

  Moreover, the global economic unease may begin to reach American shores. On September 4, the U.S. government released data for the month of August, revealing that the U.S. economy added only 173,000 jobs, a mediocre performance that missed expectations. Although an economic slowdown is no doubt a negative for oil prices, the news could provide enough justification for the Fed to hold off on raising interest rates. A delay in a rate hike could push up WTI and Brent.

  Although a slew of Canadian oil sands projects have been cancelled due to incredibly low oil prices, several large projects were already underway before the downturn. With the costs of cancellation too high, these projects continue to move forward. When they come online – several of which are expected by 2017 – they could add another 500,000 barrels per day in production, potentially exacerbating the glut of supplies not just in terms of global supply, but more specifically in terms of the flow of oil from Canada. Canadian oil already trades at a discount to WTI, now at around $15 per barrel.

  That means that when WTI dropped below $40 per barrel last week, Western Canada Select was nearing $20 per barrel. With the latest rebound to the mid-$40s, WCS is only around $30 per barrel. But with breakeven prices for many Canadian oil sands projects at $80 per barrel for WTI, oil operators in Alberta are no doubt losing sleep over their current situation. One important caveat to remember is that unlike shale projects, Canada’s oil sands operate for decades, so the immediate downturn does not necessarily ruin project economics. However, with a strong rebound in prices no longer expected in the near-term, high-cost oil sands projects are probably not where an investor wants to be.

  Low oil prices continue to take their toll. Bank of America downgraded BP to “underperform” and warned that its dividend policy faces risks.

  The EIA released a report this week that showed that there would be little effect on gasoline prices if the U.S. government lifted the ban on crude oil exports. In fact, gasoline prices could even fall because refined product prices are linked to Brent much more than WTI, so more supplies on the international market would push down Brent prices. The report lends credence to the legislative campaign on Capitol Hill to scrap the ban, a movement that is picking up steam. On the other hand, although few noticed, the EIA report also said that the refining industry could lose $22 billion per year if the ban is removed.

  So far, many members of Congress have been reluctant to weigh in on this issue for exactly that reason: it pits drillers against refiners, both of which are powerful political players. But with the potential blowback from a spike in gasoline prices no longer a huge worry, the oil industry is gaining a lot of allies in its attempt to lift the ban. However, there is an elephant in the room: the 2016 presidential election could blow up any chance of meaningful energy legislation next year. Although several Republican candidates have come out in support of lifting export restrictions, the fear of attack ads could scare away others. If the issue becomes bogged down in presidential politics, it could ultimately kill off the legislative push.

  Saudi Arabia’s King Salman arrived in Washington on September 4 to meet with U.S. President Barack Obama. The two leaders will discuss the Iran nuclear deal, a deal that the Saudi King had strongly opposed from the start, but has since begrudgingly warmed up to following security promises from the United States. If they can manage to stay on the same page with the Iran deal, the two leaders will then discuss the ongoing conflicts in Syria and Yemen. There is obviously little to no prospect that such intensely complicated conflicts will get sorted out in the near future, so more modest goals for the trip include simply building trust between the two countries. Although long-term allies, Saudi Arabia has become more mistrustful of the U.S. President following the thaw in relations between the U.S. and Iran. The trip follows what the media has called a “snub” when King Salman declined to come to Washington this past spring for a summit of other Gulf state leaders.

  An oil spill closed part of the Mississippi River after two tow boats collided on September 3. One of the boats was carrying slurry oil, which spilled into the river. One of the ruptured tanks holds 250,000 gallons, but the exact amount that spilled was unknown. The Coast Guard is working with the boat’s owner – Inland Marine Services – to determine the extent of the damage.

  Russian President Vladimir Putin met Venezuelan President Nicolas Maduro in China this week, and the two sides apparently discussed ways to stabilize oil prices. Maduro says that they agreed on “initiatives” to address low oil prices, but did not elaborate with details. In all likelihood, Maduro is engaging in a degree of bluster and wishful thinking. Neither side has the capacity to cut oil production as both are facing varying degrees of economic and financial crisis. However, earlier this week oil prices briefly spiked on news that Russia might be willing to negotiate coordinated action. Prices subsequently retreated once expectations subsided.

  In nuclear power news, France’s EDF announced yet more delays at its Flamanville reactor, France’s first nuclear reactor in more than 15 years. The reactor was supposed to be completed in 2012 at a cost of 3.3 billion euros. But multiple delays have now pushed the start date back to the end of 2018 at the earliest, with costs ballooning to at least 10.5 billion euros. The delays are a familiar problem with the new generation of nuclear reactors, just as they were with the previous models. To be sure, building nuclear power plants is highly complex, but delays and cost overruns have plagued the industry, and each setback damages the technology’s competitiveness. When France and other industrialized countries were building up their power sectors in the ‘60s, ‘70s, and ‘80s, there were few other alternatives. But, with cheap natural gas and increasingly cheap renewable energy, nuclear power developers can ill afford setbacks.

  

  

  

  

  

• China's Central Bank Chief Admits "The Bubble Has Burst"

  In a stunningly honest admission from a member of the elite, Zhou Xiaochuan, governor of China’s central bank, exclaimed multiple times this week to his G-20 colleagues that a bubble in his country had "burst." While this will come as no surprise to any rational-minded onlooker, the fact that, as Bloomberg reports, Japanese officials also confirmed Zhou's admissions, noting that "many people [at the G-20] expressed concerns about the Chinese market," and added that "discussions [at the G-20 meeting] hadn't been constructive" suggests all is not well in the new normal uncooperative G-0 reality in which we live.

   

  Surprise – The Bubble Has Burst!!

  

   

  But, as Bloomberg reports, the admission that it was a bubble and it has now burst is a notablke narrative change for the world's central bankers…

  Zhou Xiaochuan, governor of China’s central bank, couldn’t stop repeating to a G-20 gathering that a bubble in his country had “burst.”

   

  It came up about three times in his explanation Friday of what is going on with China’s stock market, according to a Japanese finance ministry official. When asked by a reporter if Zhou was talking about a bubble, Japanese Finance Minister Taro Aso was unequivocal: “What else bursts?”

   

  A dissection of the slowdown of the world’s second-largest economy and talk about the equity rout which erased $5 trillion of value was a focal point at the meeting of global policy makers in Ankara. That wasn’t enough for Aso, who said that the discussions hadn’t been constructive.

   

  …

   

  It was China, rather than the timing of an interest-rate increase by the Federal Reserve, that dominated the discussion, according to the Japanese official, with many people commenting that China’s sluggish economic performance is a risk to the global economy and especially to emerging-market nations.

   

  “It’s clear there are problems in the Chinese market, and at today’s G-20 meeting, many people other than myself also expressed that opinion,” Aso said after a meeting of finance chiefs and central bank governors.

  Did the G-20 just admit that their all-powerful omnipotence is fading?

  Meanwhile, though Jack Lew is happy to ream China as a currency manipulator, G-20 will not…

  The PBOC shocked global markets by allowing the biggest yuan depreciation in two decades on Aug. 11, when it changed the exchange-rate mechanism to give markets a bigger role in setting the currency’s level. That historic move would not get a mention in the communique, according to the Japanese official, who asked not to be named, citing ministry policy.

  • *G-20 COMMITTED TO AVOIDING PERSISTENT FX MISALIGNMENTS: DRAFT
  • *G-20 WILL `REFRAIN FROM COMPETITIVE DEVALUATIONS': DRAFT

  And – implicit in this exclamation is the fact that if it was a bubble – that has now burst – then is the PBOC admitting it is stoking a 'bubble' as opposed to supporting growth (or whatever mandate they are supposed to be living by)?

  

  

  

  

  

• Anatomy Of A Market Top, Part 1: Internal Combustion

  Via Dana Lyons' Tumblr,

  Over the past few months, we have detailed the systematic deterioration in the internals of the stock market. This trend recently reached depths historically seen only near major market tops.

  This is Part 1 of a 1 or 2-Part series on factors that are characteristic of a cyclical top in the stock market. It should really be a 3-Part series but, like Star Wars, we skipped over the 1st part of the story. Part 1A would have covered what we term the “background” conditions of the market. These background conditions – including valuation, sentiment, stock allocation, long-term price vs. trend, etc. – convey the general market environment that exists. These conditions are not catalysts or actionable indicators. Rather they reflect the market’s backdrop, instructing us as to which cyclical trends are likely to develop, at some point. Now, the status of these background conditions can persist – and for a long time. Indeed, we have been discussing the overbought/extended/high-risk nature of various of these indicators for years already. So, in a way we have covered the true Part 1 of this “Market Top” series, just not in a formal sense (our October 2013 Newsletter may have been the closest to an actual “Part 1”).

  This piece covers the “internals” of the stock market. Internals (or breadth) refer to the level of participation among stocks throughout the entire equity market. It includes metrics like the number of stocks that are advancing versus declining, the amount of volume in advancing stocks versus declining stocks, the number of stocks that are making new 52-week highs versus new lows, etc. In our view, strong internals, i.e., widespread participation among stocks, is an important ingredient of a healthy market.

  As a bull market ages, it tends to “thin out”. That is, it advances despite an ever-decreasing level of participation among all stocks. This thinning can persist for a while, and is not necessarily an immediate threat to the existence of the bull. However, eventually this “divergence” comes to a head as the relatively few (usually mega-cap) stocks still carrying the market higher are unable to continue to do the heavy-lifting. And when those stocks roll over, the foundation among the broad market of stocks does not exist to prevent a significant decline. This end-game development among the internals is quite possibly in motion as we speak.

  Does this mean the end of the bull market is near – or here? Not necessarily. No one can know that and we are not going out on a limb to make such a call. However, the deterioration in market internals has reached truly historic depths – the kind typically associated with cyclical stock market tops. Over the past few months, we have systematically journaled on our blog the veritable procession of breadth failures. Here is a sample of the profusion of evidence that we noted.

  Disclaimer: While this study is a useful exercise, JLFMI’s actual investment decisions are based on our proprietary models. Therefore, the conclusions based on the study in this newsletter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary here should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies.

  *  *  *

  NYSE Advance-Decline Line: The Grand-Daddy of Breadth Indicators

  In our view, the grand-daddy of all breadth indicators is the NYSE Advance-Decline Line (A-D Line). The A-D Line is a cumulative running total of the differential of advancing stocks minus declining stocks on the NYSE on a daily basis. If we could have just one breadth indicator for purposes of analyzing the cyclical state of the stock market, it would be the NYSE A-D Line. It provides as good a picture as anything of the health of the broad market. And recent developments here do not paint a picture of good health in the market.

  For one, on May 27, we noted that the NYSE A-D Line suffered a breakdown below its UP trendline from the 2009 low.

  

  While similar trendlines for most indices remain intact, it is not unusual for the A-D Line to suffer a breakdown first. It has often preceded breaks in the major averages, serving as a warning sign that all is perhaps not well. Note similar warnings prior to the past 2 cyclical tops.

  

  Secondly, while the trendline break was a red flag, it wasn’t the first warning sign to appear in the A-D Line – nor was it the most significant. That distinction goes to the development we noted on May 21. Specifically, the NYSE A-D Line failed to confirm the new 52-week high in the S&P 500 earlier that week. That is, the index made a new high while the A-D Line failed to do so. This is what we call a negative divergence.

  

  So why is this significant? As mentioned in that post, the NYSE A-D Line has negatively diverged before every single cyclical market top since 1966. Now most of the prior divergences had significantly more lead time than this one. However, there have been other close-range divergences so this would not be unprecedented. That said, it would not be out of the question to see the S&P 500 eventually make another higher high concurrent with a more prominent divergence in the A-D Line.

   

  New Highs-New Lows: Cyclical Breakdown

  Another of the most popular gauges of market internals relates to the number of stocks making New 52-Week Highs or 52-Week Lows. One way to track the data is to simply subtract the number of New Lows from New Highs on a daily basis. This series tends to trend over a cyclical cycle, thus providing us with signals of various significance based on the series’ behavior.

  This New Highs-New Lows indicator has been in an uptrend, in terms of higher lows, since it bottomed in 2008. However, as we pointed out in an August 21 post, like the A-D Line, this metric has also suffered a noteworthy breakdown, falling below that post-2008 Up trendline.

  

  It is possible that this breakdown is occurring within the context of an intermediate-term washout. After all, the August 21 low reading occurred partly as a result of ZERO New Highs on the NYSE. That is a development normally only associated with a capitulatory phase of a major decline (indeed, of the prior 50 Zero New High days, the S&P 500 has been a median 31% below its 52-week high, versus the current 7.5%). Therefore, the market may possibly see a mean-reversion bounce soon. However, the bigger-picture ramifications should not be missed. Similar trend breaks have ushered in an eventual acceleration in losses during the prior 2 cyclical declines.

  

   

  The Junkie Market: Too Many New Highs AND Lows

  NYSE

  While we just witnessed an extreme low number of New Highs (e.g., 0), another recent ominous development pertained to the abundance of New Highs and New Lows. Whatever the reason for this dynamic, such conditions have occurred at less than auspicious times. On July 16, we noted the occurrence in recent days of more than 100 New 52-Week Highs AND 52-Week Lows on the NYSE.

  

  Historically, this development in the market’s internals has not been kind to the market going forward.

  

  This was especially true when coming off of a recent 3-month low.

  

   

  Nasdaq

  On July 27, we noted the same situation on the Nasdaq exchange.

  

  These events were similarly unkind to the Nasdaq market, especially the past 5 such occurrences.

  

   

  NYSE AND Nasdaq

  On August 7, we highlighted those occasions in which the NYSE and the Nasdaq exchanges each saw an abundance of both New Highs and New Lows.

  

  As expected, the forward returns in the S&P 500 were quite depressed following these occurrences, particularly in the longer-term.

  

   

  The Summation Of All Fears

  Another way of measuring the cumulative state of market internals is via the McClellan Summation Index. The Summation Index is actually an oscillator that expresses the longer-term status of advances-declines, new highs-lows, etc. as either positive (above a zero line) or negative (below the zero line). While it is an oscillator, the Summation Index can, and usually does, remain positive for an extended period during favorable markets and negative for an extended period during difficult markets. Thus, it is fairly atypical of the McClellan Summation Index on either the NYSE advances-declines or the NYSE New Highs-New Lows to go negative when the S&P 500 is close to its 52-week high. It is especially unusual to see both of them below the zero line with the S&P 500 near its highs.

  Yet, as we noted on July 30, this was precisely the situation in recent weeks. This may be the single most instructive chart in illustrating the deteriorating breadth situation juxtaposed against the close proximity of the major averages to their all-time highs.

  

  Again, this type of negative breadth divergence has been a bad harbinger of things to come, eventually, for the market. A look at the forward performance of the S&P 500 following these events gives you an idea why we say this may be the most instructive data point in describing the negative divergence between prices and internals – and its potential consequences.

  

   

  Losing Weight: Even The Leaders Are Thinning

  Despite this preponderance of evidence pointing to the deterioration of the market’s internals, the major averages, as well as a select few sectors, continued to hold near their highs. The reason is that a relatively few (mainly mega-cap) stocks kept those areas propped up with their substantial weighting in the indices. However, as the relatively few strong areas of the market began to weaken, there was precious little support left to prevent a significant correction. We recently detailed such signs of deterioration even among the stronger areas of the market.

  Equal-Weight S&P 500

  We pointed out the first example of this on May 28 with respect to the S&P 500. Though the cap-weighted index was coming off a recent 52-week high, the equal-weight index was beginning to lag. As the name implies, this index applies an equal weighting to each of its components. This provides a more accurate look at the health of the broad market segment than does a cap-weighted index which can mask internal weakness if the largest stocks are still performing well.

  This has been precisely the situation beginning with the equal-weight S&P 500 index failing to confirm the cap-weighted index’s new high in May. Additionally, after attempting a relative breakout versus the cap-weighted index earlier in the year, the equal-weight S&P 500 broke down below its post-2012 uptrend, recently hitting a 2-year low.

  

   

  Equal-Weight Nasdaq 100

  The technology-heavy Nasdaq 100 (NDX) has been one of the stalwarts of this bull market, hitting a 52-week high as recently as a month ago. However, the equal-weight NDX has also noticeably thinned out, as we indicated on July 22. As with the equal-weight S&P 500, the equal-weight NDX failed to confirm the cap-weighted index’s new high in July and has broken down below its post-2012 uptrend to a 2-year low.

  

   

  Equal-Weight Consumer Discretionary

  Lastly, even the leading sectors of the market have been showing weakening internals. One example is the consumer discretionary sector, which was at an all-time high as recently as 2 weeks ago. However, looking at the sector on an equal-weight basis, one can see that the strength was due to some of the larger-cap names in the sector. On a broad, equal-weight basis, the sector has been losing steam over the past few months. Like the examples above, the equal-weight consumer discretionary index failed to confirm the cap-weighted index’s recent high and has now fallen to a 6-year low on a relative basis.

  

   

  July 20: The Turning Point?

  Internal deterioration can last for some time before it has an impact on the major averages. However, when the divergences become as pronounced as they have, there is a certain point where they come to a head. Every cycle is different, but, at times, this inflection, climax, turning point, etc. can be narrowed down to a specific day. Such days are characterized by the major averages rising to or near a new high, but accompanied by egregiously poor breadth, relatively speaking. It’s as though the market has run out of gas in its push to make one more high. Some examples of such days occurred in August 1987, July 1990. March 2000 and July/October 2007 as well as near various tops in the 1960’s-70’s.

  Obviously, these days are only identifiable in hindsight. However, we did make reference to the possibility that July 20 was one such “turning point day” in a post we titled “The Thinnest New High In Stock Market History”. Here is some of the evidence we used to back up that claim.

  NYSE

  On July 20, the S&P 500 rose to within 0.12% of its 52-week high. Since 1965, there had been 1,564 days on which the index closed higher to within 0.5% of its 52-week high. Among those days:

  July 20 had the lowest % of NYSE Advancing Issues (31.7%) of all near-highs on the S&P 500

  

   

  July 20 had the lowest % of NYSE Advancing Volume (28%) of all near-highs on the S&P 500

  

   

  July 20 had the 2nd fewest NYSE New Highs vs. New Lows (35%) of all near-highs on the S&P 500

  

   

  Nasdaq

  On July 20, the Nasdaq Composite closed at a 52-week high for the 749th time since 1988. Among those days:

  July 20 had the lowest % of Nasdaq Advancing Issues (31.6%) of all Nasdaq new highs

  

   

  July 20 had the lowest % of Nasdaq Advancing Volume (42%) of all Nasdaq new highs

  

   

  July 20 was the 2nd time ever with more Nasdaq New Lows than Highs at a Nasdaq new high

  

  To reiterate, based on the evidence above, we labeled July 20 the thinnest new high in stock market history (at least for as far back as we have data on market internals). Despite the new highs, or near highs, in the major averages, the level of participation among the broad market in attaining this new high was staggeringly and unprecedentedly low. Thus, the foundation underlying the new high was extremely weak, leaving the market exceedingly vulnerable once the relatively few advancers finally succumbed.

  Indeed, neither the S&P 500 nor the Nasdaq Composite have exceeded their July 20 close since.

  *  *  *

  Conclusion

  The not-formally written first part (1A?) on the Anatomy Of A Market Top would pertain to “background” conditions in the stock market. These conditions, such as valuation, investor allocations, long-term price versus trend, etc. orient us as to the “big-picture” market environment. Identifying the environment enables us to anticipate the types of large-scale moves that arise out of the given climate – eventually. Currently, the background conditions are as risk-laden as they come. Together, they form a market environment that has historically given rise to cyclical tops in the stock market. However, these background conditions can last for an extended period, years even, before the expected large-scale move unfolds. The fact that we have written about these elevated background conditions for several years now attests to their potential persistency. Something needs to change within the market’s structure to effect a cyclical decline.

  The first change often occurs below the surface. In Part 1 here, we explain how the deterioration of the market’s internals typically occurs in the lead-up and development of a cyclical market top. Weakening breadth, i.e., advancing versus declining issues, new highs vs. lows, etc., even as the major indices continue to make new highs, is the first sign of tangible trouble in the market. That said, this dynamic too can persist for an extended period. Indeed, such negative divergences have been occurring for as long as 12 months now.

  However, eventually these divergences reach a head. And the most egregious cases have historically occurred within close proximity to major, cyclical market tops. The deterioration of the broader market is so great that the resultant foundation of support below the surface of the popular market cap-weighted averages is nearly non-existent. Once the relatively few leaders propping up the market begin to collapse under the weight, the inevitable cyclical decline can commence.

  That is when Part 2 of the Anatomy Of A Market Top occurs: the breakdown of prices. This looks to be unfolding as we speak, so stay tuned…

  *  *  *

  More from Dana Lyons, JLFMI and My401kPro.

  

  

  

  

  

• This Has Never Happened To VIX Before

  Amid the carnage and chaos of the last two weeks, one thing has become crystal clear – the effect of massive one-way bets on 'everything', predicated on the omnipotence of central bankers, has left a market (stocks, bonds, FX, commodities) bereft of fundamental linkages and instead driven entirely by technicals (flows, forced unwinds, systematic gamma). While many 'records' were broken in terms of velocity of moves, it is the VIX complex that seems to have suffered most, and as the following chart shows, positioning is now at an extreme in both stocks, vol, and bonds once again.

  It appears that Simon Potter's favorite trade has finally been covered! Is This The Withdrawal of The Fed Put?

  Speculative traders have never – ever – been this net long VIX futures… and traders have not been this net short S&P futures since Summer 2012.

  

  The VIX curve remains deeply inverted – the longest period of backwardation since 2011's plunge.

   

  And the crowd has 'decided' to pile into bond shorts – with 5Y Futures net shorts the largest in 7 years…

  

   

  As is clear, the last time the crowd was this short, bonds ripped 250bps tighter, forcing a massive short squeeze.

   

  With such extreme positioning across the equity, vol, and bond complex, it would seem no matter what The Fed does in September, there will be blood.

  Charts: Bloomberg

  

  

  

  

  

• Exorbitant Privilege: "The Dollar Is Our Currency But Your Problem"

  Submitted by Dan Popesceau via GoldBroker.com,

  There is no better way to describe the international monetary system today than through the statement made in 1971 by U.S. Treasury Secretary, John Connally. He said to his counterparts during a Rome G-10 meeting in November 1971, shortly after the Nixon administration ended the dollar’s convertibility into gold and shifted the international monetary system into a global floating exchange rate regime that, "The dollar is our currency, but your problem.” This remains the U.S. policy towards the international community even today. On several occasions both the past and present chairpersons of the Fed, Ben Bernanke and Janet Yellen, have indicated it still is the U.S. policy as it concerns the dollar.

  Is China saying to the world, but more particularly to the U.S., “The yuan is our currency but your problem”? China’s move to weaken the Yuan against the US dollar is in fact a huge response to America’s resistance to reforming the international monetary framework. It’s telling American policy makers that the longer they delay acting on reforming the international monetary system, the harder and longer they are going to make it for the U.S. to climb out of their trade deficit and depreciate their currency to where they need it to be.

  China has been preparing for this moment for several years by accumulating gold through its central bank but also by using banks/corporations and individuals. It has in recent years signed several international agreements to bypass the US dollar in international trade and use preferably the Yuan. It has created an alternative World Bank (Asian Infrastructure Investment Bank) and a gold fund to invest in gold mining for more than 60 countries. The project is being overseen by the Shanghai Gold Exchange (SGE) and it is likely that the newly mined gold will be either traded on the SGE or be sold directly to the PBoC and other central banks. It has also bought a large amount of gold and kept the exact amount as secret as possible.

  The international monetary system is in crisis and ready to collapse. It has been since at least 1971 but it seems we are very close to the end (within five years). The International Monetary Fund (IMF) is working discreetly to have the Special Drawing Rights (SDR) replace the US dollar as the international standard. Since the delinking of the dollar from gold in 1971, the US dollar has been the de facto international standard. The IMF itself makes no bones about its ambition to establish the SDR as the global reserve currency.

  In a 2009 essay, Governor Xiaochuan of the People’s Bank of China (the Chinese central bank) also called for a new worldwide reserve currency system. He explained that the interests of the U.S. and those of other countries should be “aligned”, which is not the case in the current dollar system. Xiaochuan suggested developing SDRs into a “super-sovereign reserve currency disconnected from individual nations and able to remain stable in the long run”. What does he mean by “disconnected from individual nations”? The present SDR is a mathematical formula of the price of its composing currencies of “individual countries” with no backing whatsoever. Does he imply some kind of link to gold? That would explain many other statements in favor of gold by China’s officials and their aggressive encouragement of Chinese institutions and individuals to buy gold.

  Julian D. W. Phillips, of Gold Forecaster, says, “What has become clear in the actions of the Chinese government and the central bank is that they are determined to accelerate the Yuan’s passage to a reserve currency, hopefully with the cooperation of the IMF, but if not, they will walk their own road.” However, this is not the final objective of China. Its target is to eliminate the “exorbitant privilege” of the dollar, not just to join the “club”. China doesn’t want to destroy the dollar, only to eliminate its “exorbitant privilege”.

  With a different approach, but also very aggressively and more so since the U.S.-EU sanctions that amplified the new cold war, Russia has also accelerated its gold buying. Russia and China have also started a new payment system to avoid the U.S. dominated and controlled international payment system. Elvira Nabiullina, Chairwoman of the Russian Central Bank, said, “Recent experiences forced us to reconsider some of our ideas about sufficient and comfortable levels of gold reserves.” Also in a recent CNBC interview, Ms. Nabiullina remarked on Russia’s increasing gold reserves, saying, “We base ourselves upon the principles of diversification of our international reserves and we bought gold not only last year but during the previous years. Our gold mining industry is very well developed and it is ready to supply gold.” Dmitry Tulin, who manages monetary policy at the Central Bank of Russia, said, "The price of gold swings, but on the other hand it is a 100% guarantee from legal and political risks." Russia is boosting gold holdings as defense against “political risks”.

  In 1997 Robert Mundell, Nobel prize of economics, wrote in an article, “The problem with the pure dollar standard is that it works only if the reserve country can keep its monetary discipline.” Aristotle said something similar 2,500 years ago: “In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and god-like intelligence for kings.” It is evident that since at least the collapse of Bretton Woods the U.S. has not kept its monetary discipline and has no intention to do it.

   

  

   

  Dr. Mundell, in the same article, said, “The United States would not talk about international monetary reform … because a superpower never pushes international monetary reform unless it sees reform as a chance to break up a threat to its own hegemony … The United States is never going to suggest an alternative to its present system because it is already a system where the United States maximizes its seigniorage … the United States would be the last country to ever agree to an international monetary reform that would eliminate this free lunch (exorbitant privilege of the dollar)”. He seems to have been right. The U.S. is dragging its feet. The U.S. has not yet ratified the IMF reforms agreed even by the U.S. government in 2010. I doubt it will pass before the U.S. election at the end of 2016. This has upset not only China and Russia, but also the European Union and most of the international community.

  During the 2008 crisis that almost succeeded in bringing down the current international monetary system, gold made a stunning comeback into the system. During the crisis, gold became the only accepted guarantee in order to get liquidity. What was significant was that after having been ignored for decades, gold was coming back into the international monetary system via settlements of the Bank for International Settlements (BIS). These transactions themselves confirmed that gold was coming back into the system. They revealed the poor state of the financial system before the crisis and showed how gold has indirectly been mobilized to support the commercial banks. Gold’s old emergency usefulness has resurfaced, albeit behind closed doors at BIS in Basel, Switzerland. Since the 2008 crisis both China and Russia have accelerated their purchases and accumulation of gold by any means possible as it can be observed in the chart below.

   

  

   

  Since 2010 we have been in a G-0 world (no dominating power), in currency and gold wars and a new cold war. The world desperately needs a new world order and a new international monetary system. Will it happen after a major collapse and possibly war or through collaboration and consensus avoiding a war? It is evident to me that, as Dr. Mundell said in 1997, “Gold is going to be a part of the structure of the international monetary system for the 21^stcentury, but not in the way it has been in the past.” What form will it take? It’s hard to say now. In this adversarial environment of a cold war and currency/gold wars I can hardly see a fiat monetary system succeed (fiat SDR). That requires trust and consensus at the international level between countries. A détente, disarmament and collaboration environment was there between 1990 (end of cold war) and 2008 (start of new cold war and currency wars), but no more.

  In the conflictual environment we are now in, it looks more and more to me that gold will impose itself as the de facto money. Jim Rickards, in Currencies after the Crash, edited by Sara Eisen, said, “When all else fails, possibly including a new SDR plan, gold is always waiting in the wings as a stable, widely accepted store of value and universal money. In the end, a global struggle between gold and SDRs for supremacy as “money” may be the next great shock added to the long list of historic shocks to the international monetary system.” Any fiat SDR international settlement currency will only be postponing the inevitable “big reset” to some form of gold standard.

   

  

   

  

  

  

  

  

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• The Failed Moral Argument For A "Living Wage"

  Submitted by Ryan McMaken via The Mises Institute,

  With Labor Day upon us, newspapers across the US will be printing op-eds calling for a mandated “living wage” and higher wages in general. In many cases, advocates for a living wage argue for outright mandates on wages; that is, a minimum wage set as an arbitrary level determined by policymakers to be at a level that makes housing, food, and health care “affordable.”

  Behind this effort is a philosophical claim that employers are morally obligated to pay “a living wage” to employees, so they can afford necessities (however ambiguously defined) on a single wage, working forty hours per week. This moral argument singles out employers as the morally responsible party in the living wage equation, even though the variables that determine a living wage go far beyond the wage earned.

  For example, as I discussed here, the living wage is a function not simply of the wage, but of the cost of housing, food, health care, transportation, and a myriad of other factors. Where housing costs are low, for example, the living wage will be lower than it would be in a place where housing costs are high.

  So, what matters is not the nominal wage paid by the employer, but the real wage as determined by the cost of everything that a wage is used to purchase.

  Why Is Only the Employer Responsible?

  So, if it’s the real wage that matters, why is there a fixation on the nominal wage itself? After all, wages, in real terms, could be increased greatly by forcing down food costs and rents. So, why is there not a constant drum beat for grocers to lower their prices to make necessities affordable? Why are activists not picketing outside grocery stores for their high prices? Why are they not outside KB Homes headquarters for KB’s apparently inhumane efforts at selling homes at the highest prices that the market will bear? Why are people not picketing used car dealers for not lowering their prices to make transportation affordable for working families? And why are gas stations strangely exempted from protests over the high cost of gasoline? Certainly, all of these merchants are just as instrumental in determining real wages as any employer. Grocers, landlords, home sellers, and the owner of the corner gas station can put a huge dent in the family budget when they allow their “greed” to impel them to charge the highest prices they can get away with in the market place.

  And yes, it’s true that plenty of activists regularly denounce landlords as “slumlords” or greedy capitalists for charging the highest rents the market will bear. And there are still plenty of activists who argue for price controls on rents and food. But they’re in a small minority nowadays. The vast majority of voters and policymakers recognize that government-dictated prices on food and housing lead to shortages. Setting a price ceiling on rents or home prices simply means that fewer housing units will be built, while setting a price ceiling on eggs, or milk or bread will simply mean that fewer of those staples will be brought to market.

  Such assertions are barely even debated anymore, as can be seen in the near-extinction of new rent-control efforts in the political sphere. You won’t see many op-eds this Labor Day arguing for price controls on fruit, gasoline, and apartments. You won’t see any articles denouncing homeowners for selling their homes at the highest price they can get, when they really should be slashing prices to make homeownership more affordable for first-time homebuyers.

  So, for whatever reason, homeowners, grocers, and others are exempt from the wrath of the activists for not keeping real wages low. The employers, on the other hand — those who pay the nominal wage — remain well within the sights of the activists since, for some arbitrary reason, the full moral obligation of providing a living wage falls on the employer.

  Were food prices to go up by 10 percent in the neighborhood of Employer X, who is responsible? “Why, the employer, of course,” the living-wage activists will contend. After all, in their minds, it is only the employer who is morally obligated to bring up real wages to match or exceed an increase in the cost of living.

  So while price controls on food, housing, and gasoline are generally recognized as a dead end, price controls on wages remain popular. The problem, of course, as explained here, here, here, and here, is that by setting the wage above the value offered by a low-skill worker, employers will simply elect to not hire low-skill workers.

  A Low Wage Is Unacceptable, but a Zero Wage Is Fine

  And this leads to the fact that when faced with high wages, employers will seek to replace employers with non-human replacements — such as these automated cashiers at McDonalds — or other labor-saving devices.

  But this phenomenon is simply ignored by the living-wage advocates. Thus, the argument that employers are morally obligated to not pay low wages becomes strangely silent in the face of workers earning no wage at all.

  Indeed, we see few attempts at passing laws mandating that employers hire human beings instead of machines. While it’s no doubt true that some neo-Luddites would love to see this happen, virtually no one argues that employers not be allowed to employ labor-saving devices. Certainly, anyone making such an argument is likely to be laughed out of the room since most everyone immediately recognizes that it would be absurd to pass laws mandating that a road builder, for example, hire people with shovels instead of using bulldozers and paving machines.

  Meanwhile, successes by living-wage advocates in other industries — where automation is not as immediately practical — have only been driving up prices for consumer goods. Yes, living wages in food, energy, and housing sectors will squeeze profits and bring higher wages for those who luckily keep their jobs, but the mandates will also tend to raise prices for consumers. This in turn means that real wages in the overall economy have actually gone down, thanks to a rising cost of living.

  All in all, it’s quite a bizarre strategy the living-wage advocates have settled on. It consists of raising the prices of consumer goods via increasing labor costs. Real wages then go down, and, at the same time, many workers lose their jobs to automation as capital is made relatively less expensive by a rising cost of labor. While the goal of raising the standard of living for workers and their families is laudable, it’s apparent that living wage advocates haven’t exactly thought things through.

   

  

  

  

  

  

• Common Core Or "Communist Core"

  You know things have become bad when… Common core is so wonderful that Lily Tang Williams, a Chinese-American mother of three who grew up in Communist China, says it reminds her of her oppressive, statist nature of her childhood education.

   

  “Communist” Core…

   

  Source: Freedomworks

  h/t Alt-Market.com

  

  

  

  

  

• Peter Schiff Warns: Meet QT – QE's Evil Twin

  Submitted by Peter Schiff via Euro Pacific Capital,

  There is a growing sense across the financial spectrum that the world is about to turn some type of economic page. Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring. There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas. While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet "Quantitative Tightening," the pesky, problematic, and much less disciplined kid brother of "Quantitative Easing."  Now that QE is ready to move out…QT is prepared to take over.

   

  For much of the past generation foreign central banks, led by China, have accumulated vast quantities of foreign reserves. In August of last year the amount topped out at more than $12 trillion, an increase of five times over levels seen just 10 years earlier. During that time central banks added on average $824 billion in reserves per year. The vast majority of these reserves have been accumulated by China, Japan, Saudi Arabia, and the emerging market economies in Asia (Shrinking Currency Reserves Threaten Emerging Asia, BloombergBusiness, 4/6/15). It is widely accepted, although hard to quantify, that approximately two-thirds of these reserves are held in U.S. dollar denominated instruments (COFER, Washington DC: Intl. Monetary Fund, 1/3/13), the most common being U.S. Treasury debt.

   

  Initially this "Great Accumulation" (as it became known) was undertaken as a means to protect emerging economies from the types of shocks that they experienced during the 1997-98 Asian Currency Crisis, in which emerging market central banks lacked the ammunition to support their free falling currencies through market intervention. It was hoped that large stockpiles of reserves would allow these banks to buy sufficient amounts of their own currencies on the open market, thereby stemming any steep falls. The accumulation was also used as a primary means for EM central banks to manage their exchange rates and prevent unwanted appreciation against the dollar while the Greenback was being depreciated through the Federal Reserve's QE and zero interest rate policies.

   

  The steady accumulation of Treasury debt provided tremendous benefits to the U.S. Treasury, which had needed to issue trillions of dollars in debt as a result of exploding government deficits that occurred in the years following the Financial Crisis of 2008. Without this buying, which kept active bids under U.S. Treasuries, long-term interest rates in the U.S. could have been much higher, which would have made the road to recovery much steeper. In addition, absent the accumulation, the declines in the dollar in 2009 and 2010 could have been much more severe, which would have put significant upward pressure on U.S. consumer prices.

   

  But in 2015 the tide started to slowly ebb. By March of 2015 global reserves had declined by about $400 billion in just about 8 months, according to data compiled by Bloomberg. Analysts at Citi estimate that global FX reserves have been depleted at an average pace of $59 billion a month in the past year or so, and closer to $100 billion per month over the last few months (Brace for QT…as China leads FX reserves purge, Reuters, 8/28/15). Some think that these declines stem largely by actions of emerging economies whose currencies have been falling rapidly against the U.S. dollar that had been lifted by the belief that a tightening cycle by the Fed was a near term inevitability.

   

  It was speculated that China led the reversal, dumping more than $140 billion in Treasuries in just three months (through front transactions made through a Belgian intermediary – solving the so-called "Belgian Mystery") (China Dumps Record $143 Billion in US Treasurys in Three Months via Belgium, Zero Hedge, 7/17/15). The steep decline in the Chinese stock market has also sparked a flight of assets out of the Chinese economy. China has used FX sales as a means to stabilize its currency in the wake of this capital flight.

   

  The steep fall in the price of oil in late 2014 and 2015 also has led to diminished appetite for Treasuries by oil producing nations like Saudi Arabia, which no longer needed to recycle excess profits into dollars to prevent their currencies from rising on the back of strong oil. The same holds true for nations like Russia, Brazil, Norway and Australia, whose currencies had previously benefited from the rising prices of commodities.

   

  Analysts at Deutsche Bank see this liquidation trend holding for quite some time. However, new categories of buyers to replace these central bank sellers are unlikely to emerge. This changing dynamic between buyers and sellers will tend to lower bond prices, and increase bond yields (which move in the opposite direction as price). Citi estimates that every $500 billion in Emerging Markets FX drawdowns will result in 108 basis points of upward pressure placed on the yields of 10-year U.S. Treasurys (It's Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington, Zero Hedge, 8/27/15). This means that if just China were to dump its $1.1 trillion in Treasury holdings, U.S. interest rates would be about 2% higher. Such an increase in rates would present the U.S. economy and U.S. Treasury with the most daunting headwinds that they have seen in years. 

   

  The Federal Reserve sets overnight interest rates through its much-watched Fed Funds rate (that has been kept at zero since 2008). But to control rates on the "long end of the curve' requires the Fed to purchase long-dated debt on the open market, a process known as Quantitative Easing. The buying helps push up bond prices and push down yields. It follows then that a process of large scale selling, by foreign central banks, or other large holders of bonds, should be known as Quantitative Tightening.

   

  Potentially making matters much worse, Janet Yellen has indicated the Fed's desire to allow its current hoard of Treasurys to mature without rolling them over. The intention is to shrink the Fed's $4.5 trillion dollar balance sheet back to its pre-crisis level of about $1 trillion. That means, in addition to finding buyers for all those Treasurys being dumped on the market by foreign central banks, the Treasury may also have to find buyers for $3.5 trillion in Treasurys that the Fed intends on not rolling over. The Fed has stated that it hopes to effectuate the drawdown by the end of the decade, which translates into about $700 billion in bonds per year. That's just under $60 billion per month (or slightly smaller than the $85 billion per month that the Fed had been buying through QE). Given the enormity of central bank selling, and the incredibly low yields offered on U.S. Treasurys, I cannot imagine any private investor willing to step in front of that freight train.

   

  So even as the Fed apparently is preparing to raise rates on the short end of the curve, forces beyond its control will be pushing rates up on the long end of the curve. This will seriously undermine the health of the U.S. economy even while many signs already point to near recession level weakness. Just this week, data was released that showed U.S. factory orders decreasing 14.7% year-over-year, which is the ninth month in a row that orders have declined year-over-year. Historically, this type of result has only occurred either during a recession, or in the lead up to a recession. 

   

  The August jobs report issued today, which was supposed to be the most important such report in years, as it would be the final indication as to whether the Fed would finally move in September, provided no relief for the Fed's quandaries. While the headline rate fell to a near generational low of 5.1%, the actual hiring figures came in at just 173,000 jobs, which was well below even the low end of the consensus forecast. Private sector hiring led the weakness, manufacturing jobs declined, and the labor participation rate remained at the lowest level since 1976. So even while the Fed is indicating that it is still on track for a rate hike, all the conditions that Janet Yellen wanted to see confirmed before an increase are not materializing. This is a recipe for more uncertainty, even while certainty increases overseas that U.S. Treasurys are troubled long term investments.

   

  The arrival of Quantitative Tightening will provide years' worth of monetary headwinds. Of course the only tool that the Fed will be able to use to combat international QT will be a fresh dose of domestic QE. That means the Fed will not only have to shelve its plan to allow its balance sheet to run down (a plan I never thought remotely feasible from the moment it was announced), but to launch QE4, and watch its balance sheet swell towards $10 trillion. Of course, these monetary crosscurrents should finally be enough to capsize the U.S. dollar.

  

  

  

  

  

• For "Fearful, Erratic Markets", China's Reserves Are The New Risk-On/Off Trigger: Goldman

  Don’t look now, but China’s FX reserves may become the market’s most important risk-on/ risk-off trigger. 

  Just as the world finally woke up – with the standard two or three year lag – to what we’ve been saying about an acute lack of liquidity in bond markets on the way to making corporate bond market liquidity the talk of the financial universe, so too has everyone suddenly realized why we began shouting about the death of the petrodollar last November. The drawdown of EM FX reserves – or, as Deutsche Bank calls it, the end of the “Great Accumulation” – means a withdrawal of liquidity from global markets and the cessation of the perpetual bid for US paper that had been sustained for years by the buildup of emerging markets’ war chests. 

  Now, between falling commodity prices and the global currency wars, the assets in those war chests are being sold, and that means the Fed faces a very, very difficult decision on whether to hike. 

  It also means that market participants will be watching EM FX reserves more closely than they have at any other time since the Asian Financial Crisis, and that, in turn means that data on reserves, and especially on China’s reserves, is set to become very important as a catalyst for risk-on/ risk-off behavior. On that note, we bring you the following commentary from Goldman out this morning.

  *  *  *

  From Goldman

  Following the RMB devaluation some weeks ago, markets have been erratic, fearful that the initial move was the beginning of a larger devaluation cycle that could disrupt global markets. We don’t believe this, in part because we think the RMB is close to our estimate of ‘fair value’, as we showed in a recent FX Views, so that the rationale for a bigger weakening does not look strong to us. That said, markets remain sceptical and are looking to August FX reserves, which will be published overnight (New York time) Sunday to Monday. Consensus (according to data collated by Bloomberg) expects total foreign exchange reserves to fall to $3,580bn from $3,651bn in July, a drop of -$71bn. We estimate valuation effects for the month around $21bn, driven mostly by the rise in EUR/$, which means that the underlying “flow” change in reserves would be -$92bn. Combining this with consensus for the August trade surplus ($49bn) and assuming that the current account surplus is lower due to service outflows, the underlying net capital outflows could be north of $100bn, which seems to us to be a reasonable approximation of market expectations. We think risks are skewed to the upside relative to this consensus estimate.

  Given how worried markets have been about China, a better-than-expected reserves number holds the potential for risk assets to rally as devaluation fears abate. That said, the next data point on FX reserves will not be the definitive word on flows, since PBoC FX reserves in recent quarters have not been a good predictor of “true” flows as measured by the Balance of Payments (BoP). In particular, the mapping from PBoC reserves to BoP flows went off track from Q4 last year, with PBoC reserves first over-predicting reserve accumulation in Q4 and Q1, by $50bn and $100bn respectively, and then under-predicting in Q2 (by $100bn). In other words, some caution will still be advised in drawing conclusions on flows, where we see the BoP data as the ultimate arbiter. Our EM strategy team has discussed the broader EM context here.

  An additional perspective can be gleaned by looking at official foreign exchange reserves in the rest of non-Japan Asia (NJA), where we also include information on forward books when that is available (Hong Kong, Philippines, Indonesia, Thailand, Malaysia, Korea, India and Singapore). Data for most countries are available through July, but the Bank of Thailand publishes weekly data for the bulk of August. We estimate FX-valuation-adjusted declines in reserves (including forward books) at -$9.2bn for Malaysia in July alone, at -$5.8bn for Thailand in July and August, at -$3.6bn for Indonesia and -$2.9bn for Hong Kong. These declines in official FX reserves are sizeable, and the example of THB suggests that depreciation pressures more generally may have risen materially. The look across the region therefore bolsters our view of potentially bigger outflows from China than is implied by consensus.

  

  

  

  

  

• Bread & Circuses: The Shady, Slimy & Corrupt World Of Taxpayer Funded Sports Stadiums

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Like pretty much everything in the modern U.S. economy, wealthy and connected people fleecing taxpayers in order to earn even greater piles of money is also the business model when it comes to sports stadiums. Many cities have tried to make voter approval mandatory before these building boondoggles get started, but in almost all cases these efforts are thwarted by a powerful coalition of businessmen and corrupt politicians. Sound familiar? Yep, it a microcosm for pretty much everything else in America these days.

  To get you up to speed, here are a few excerpts from an excellent Pacific Standard magazine article:

  Over the past 15 years, more than $12 billion in public money has been spent on privately owned stadiums. Between 1991 and 2010, 101 new stadiums were opened across the country; nearly all those projects were funded by taxpayers. The loans most often used to pay for stadium construction—a variety of tax-exempt municipal bonds—will cost the federal government at least $4 billion in taxpayer subsidies to bondholders. Stadiums are built with money borrowed today, against public money spent tomorrow, at the expense of taxes that will never be collected. Economists almost universally agree that publicly financed stadiums are bad investments, yet cities and states still race to the chance to unload the cash. What gives?  

   

  To understand this stadium trend, and why it’s so hard for opponents to thwart public funding, look to Wisconsin. Last month, Governor Scott Walker signed a bill to spend $250 million on a new basketball arena for the Milwaukee Bucks. (The true cost of the project, including interest payments, will be more than $400 million.)

  Isn’t Scott Walker supposed to be “Mr. Fiscal Conservative?”

  The story of what’s happening in Milwaukee is remarkable, if not already familiar. Step one: A down-on-its-luck team is purchased by a group of billionaire investors. Step two: The owners nod to their “moral responsibility” to keep the team in its hometown,while simultaneously lobbying for a new stadium. Step three: The team threatens to abandon its hometown for greener pastures—and newer facilities—in another city. Step four: The threat scares up hundreds of millions of public dollars in stadium financing. Step five: The new stadium opens, boosting the owners’ investment, while sloughing much of the financial risk onto taxpayers. As New York Times columnist Michael Powell wrote, “From start to desultory end, Milwaukee offered a case study in all that is wrong with our arena-shakedown age.”

   

  That’s not to say the Bucks plan was entirely unopposed. Last year, a coalition of religious and community groups known as Southeastern Wisconsin Common Ground tried to fight the arena proposal. It called for a voter referendum on the bond issue, and lobbied for money to improve Milwaukee’s public parks and playing fields. Powell explains the rest:

   

  The local business community—which includes several members who have ownership shares in the team—dismissed such ideas as impractical. “The Bucks took control of the strategy from the start,” said Bob Connolly, a member of Common Ground. “They pushed the referendum idea right to the side.” Months later, when Common Ground leaders turned to usually friendly local foundations for more funding, they found themselves turned away. You are, they were told several times, too political.

   

  The lesson is clear: It is incredibly difficult to fight these projects. And Milwaukee is not alone. In St. Louis, for example, a judge recently struck down a city ordinance requiring voters to approve public spending on a new stadium for the Rams. Back in June, when Glendale, Arizona, tried to back out of its atrocious dealwith the National Hockey League’s Coyotes, the team quickly slapped the city with a lawsuit. Meanwhile, in building a new billion-dollar home in Minneapolis, the Minnesota Vikings found a loophole around a state law mandating that all public spending on sports teams be put to a vote.

   

  Not surprisingly, publicly funded stadiums face the least opposition in cities with strong growth coalitions, which Eckstein and Delaney define as the “institutionalized relationship between headquartered local corporations and the local government.” A coalition can claim to represent the interests of a community—not an outrageous claim on its face, since it comprises the powerful and prominent local leaders—while shielding team owners from both direct criticism and grassroots opposition. This is precisely what’s happening in Milwaukee. Here’s the Times’ Powell again:

   

  The hedge fund owners proved deft with ownership shares, handing these out to prominent Wisconsin businessmen and Republicans, including the developer Jon Hammes. Hammes has become national finance co-chairman for Walker, a Republican presidential candidate. The Capital Times recently reported that a political action committee connected to Hammes contributed $150,000 to the governor in late spring. 

   

  Economists have proposed antitrust lawsuits against leagues and stricter naming rights for teams, as Slate suggested in March, but neither idea has gained much traction. A Florida proposal would have shared team revenues with the public—a somewhat radical idea that Deadspin boldly declared “The Best Idea for Stadium Financing We’ve Ever Heard“—but it was quickly deemed illegal.

  Sharing revenues with the taxpayers funding the stadium: Illegal.

  Blatantly corrupt private-public partnership cartels: Perfectly legal.

  Two words: Banana Republic.

  In case you forgot the ultimate casino-gulag partnership of them all…

  America in 2013: Florida Football Stadium Named After a Private Prison Company

  Now here’s the always brilliant John Oliver on the issue. Enjoy:

  

  

  

  

  

• What Happens Next?

  Just like in 1929, The Dow just dropped 13%, bounced, and is retesting the lows… as all the ‘experts’ comfort a restless investor crowd

   

  

   

  So what happens next?

   

  

   

  Remember – it’s different this time… again.

   

  Charts: Bloomberg

  

  

  

  

  

• The Season Of The Glitch (Or "Why Retail Investors Have No Chance")

  Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

  Over the past two months, more than 90 Wall Street Journal articles have used the word “glitch”. A few choice selections below:

  Bank of New York Mellon Corp.’s chief executive warned clients that his firm wouldn’t be able to solve all pricing problems caused by a computer glitch before markets open Monday.

  – “BNY Mellon Races to Fix Pricing Glitches Before Markets Open Monday”, August 30, 2015

   

  A computer glitch is preventing hundreds of mutual and exchange-traded funds from providing investors with the values of their holdings, complicating trading in some of the most widely held investments.

  – “A New Computer Glitch is Rocking the Mutual Fund Industry”, August 26, 2015

   

  Bank says data loss was due to software glitch.

  – “Deutsche Bank Didn’t Archive Chats Used by Some Employees Tied to Libor Probe”, July 30, 2015

   

  NYSE explanation confirms software glitch as cause, following initial fears of a cyberattack.

  – “NYSE Says Wednesday Outage Caused by Software Update”, July 10, 2015

   

  Some TD Ameritrade Holding Corp. customers experienced delays in placing orders Friday morning due to a software glitch, the brokerage said..

  – “TD Ameritrade Experienced Order Routing, Messaging Problems”, July 10, 2015 

  Thousands of investors with stop-loss orders on their ETFs saw those positions crushed in the first 30 minutes of trading last Monday, August 24th. Seeing a price blow right through your stop is perhaps the worst experience in all of investing because it seems like such a betrayal. “Hey, isn’t this what a smart investor is supposed to do? What do you mean there was no liquidity at my stop? What do you mean I got filled $5 below my stop? Wait… now the price is back above my stop! Is this for real?”  Welcome to the Big Leagues of Investing Pain.

  What happened last Monday morning, when Apple was down 11% and the VIX couldn’t be priced and the CNBC anchors looked like they were going to vomit, was not a glitch. Yes, a flawed SunGard pricing platform was part of the proximate cause, but the structural problem here – and the reason this sort of dislocation WILL happen again, soon and more severely – is that a vast crowd of market participants – let’s call them Investors – are making a classic mistake. It’s what a statistics professor would call a “category error”, and it’s a heartbreaker.

  Moreover, there’s a slightly less vast crowd of market participants – let’s call them Market Makers and The Sell Side – who are only too happy to perpetuate and encourage this category error. Not for nothing, but Virtu and Volant and other HFT “liquidity providers” had their most profitable day last Monday since … well, since the Flash Crash of 2010. So if you’re a Market Maker or you’re on The Sell Side or you’re one of their media apologists, you call last week’s price dislocations a “glitch” and misdirect everyone’s attention to total red herrings like supposed forced liquidations of risk parity strategies. Wash, rinse, repeat.

  The category error made by most Investors today, from your retired father-in-law to the largest sovereign wealth fund, is to confuse an allocation for an investment. If you treat an allocation like an investment… if you think about buying and selling an ETF in the same way that you think about buying and selling stock in a real-life company with real-life cash flows… you’re making the same mistake that currency traders made earlier this year with the Swiss Franc (read “Ghost in the Machine” for more). You’re making a category error, and one day – maybe last Monday or maybe next Monday – that mistake will come back to haunt you.

  The simple fact is that there’s precious little investing in markets today – understood as buying a fractional ownership position in the real-life cash flows of a real-life company – a casualty of policy-driven markets where real-life fundamentals mean next to nothing for market returns. Instead, it’s all portfolio positioning, all allocation, all the time. But most Investors still maintain the pleasant illusion that what they’re doing is some form of stock-picking, some form of their traditional understanding of what it means to be an Investor. It’s the story they tell themselves and each other to get through the day, and the people who hold the media cameras and microphones are only too happy to perpetuate this particular form of filtered reality.

  Now there’s absolutely nothing wrong with allocating rather than investing. In fact, as my partners Lee Partridge and Rusty Guinn never tire of saying, smart allocation is going to be responsible for the vast majority of public market portfolio returns over time for almost all investors. But that’s not the mythology that exists around markets. You don't read Barron’s profiles about Great Allocators. No, you read about Great Investors, heroically making their stock-picking way in a sea of troubles. It’s 99% stochastics and probability distributions – really, it is – but since when did that make a myth less influential? So we gladly pay outrageous fees to the Great Investors who walk among us, even if most of us will never enjoy the outsized returns that won their reputations. So we search and search for the next Great Investor, even if the number of Great Investors in the world is exactly what enough random rolls of the dice would produce with Ordinary Investors. So we all aspire to be Great Investors, even if almost all of what we do – like buying an ETF – is allocating rather than investing.

  The key letter in an ETF is the F. It’s a Fund, with exactly the same meaning of the word as applied to a mutual fund. It’s an allocation to a basket of securities with some sort of common attribute or factor that you want represented in your overall portfolio, not a fractional piece of an asset that you want to directly own. Yes, unlike a mutual fund you CAN buy and sell an ETF just like a single name stock, but that doesn’t mean you SHOULD. Like so many things in our modern world, the exchange traded nature of the ETF is a benefit for the few (Market Makers and The Sell Side) that has been sold falsely as a benefit for the many (Investors). It’s not a benefit for Investors. On the contrary, it’s a detriment. Investors who would never in a million years consider trading in and out of a mutual fund do it all the time with an exchange traded fund, and as a result their thoughtful ETF allocation becomes just another chip in the stock market casino. This isn’t a feature. It’s a bug.

  What we saw last Monday morning was a specific manifestation of the behavioral fallacy of a category error, one that cost a lot of Investors a lot of money. Investors routinely put stop-loss orders on their ETFs. Why? Because… you know, this is what Great Investors do. They let their winners run and they limit their losses. Everyone knows this. It’s part of our accepted mythology, the Common Knowledge of investing. But here’s the truth. If you’re an Investor with a capital I (as opposed to a Trader with a capital T), there’s no good reason to put a stop-loss on an ETF or any other allocation instrument. I know. Crazy. And I’m sure I’ll get 100 irate unsubscribe notices from true-believing Investors for this heresy. So be it.

  Think of it this way… what is the meaning of an allocation? Answer: it’s a return stream with a certain set of qualities that for whatever reason – maybe diversification, maybe sheer greed, maybe something else – you believe that your portfolio should possess. Now ask yourself this: what does price have to do with this meaning of an allocation? Answer: very little, at least in and of itself. Are those return stream qualities that you prize in your portfolio significantly altered just because the per-share price of a representation of this return stream is now just below some arbitrary price line that you set? Of course not. More generally, those return stream qualities can only be understood… should only be understood… in the context of what else is in your portfolio. I’m not saying that the price of this desired return stream means nothing. I’m saying that it means nothing in and of itself. An allocation has contingent meaning, not absolute meaning, and it should be evaluated on its relative merits, including price. There’s nothing contingent about a stop-loss order. It’s entirely specific to that security… I want it at this price and I don’t want it at that price, and that’s not the right way to think about an allocation.

  One of my very first Epsilon Theory notes, “The Tao of Portfolio Management,” was on this distinction between investing (what I called stock-picking in that note) and allocation (what I called top-down portfolio construction), and the ecological fallacy that drives category errors and a whole host of other market mistakes. It wasn’t a particularly popular note then, and this note probably won’t be, either. But I think it’s one of the most important things I’ve got to say.

  Why do I think it’s important? Because this category error goes way beyond whether or not you put stop-loss orders on ETFs. It enshrines myopic price considerations as the end-all and be-all for portfolio allocation decisions, and it accelerates the casino-fication of modern capital markets, both of which I think are absolute tragedies. For Investors, anyway. It’s a wash for Traders… just gives them a bigger playground. And it’s the gift that keeps on giving for Market Makers and The Sell Side. 

  Why do I think it’s important? Because there are so many Investors making this category error and they are going to continue to be, at best, scared out of their minds and, at worst, totally run over by the Traders who are dominating these casino games. This isn’t the time or the place to dive into gamma trading or volatility skew hedges or liquidity replenishment points. But let me say this. If you don’t already understand what, say, a gamma hedge is, then you have ZERO chance of successfully trading your portfolio in reaction to the daily “news”. You’re going to be whipsawed mercilessly by these Hollow Markets, especially now that the Fed and the PBOC are playing a giant game of Chicken and are no longer working in unison to pump up global asset prices.

  One of the best pieces of advice I ever got as an Investor was to take what the market gives you. Right now the market isn’t giving us much, at least not the sort of stock-picking opportunities that most Investors want. Or think they want. That’s okay. This, too, shall pass. Eventually. Maybe. But what’s not okay is to confuse what the market IS giving us, which is the opportunity to make long-term portfolio allocation decisions, for the sort of active trading opportunity that fits our market mythology. It’s easy to confuse the two, particularly when there are powerful interests that profit from the confusion and the mythology. Market Makers and The Sell Side want to speed us up, both in the pace of our decision making and in the securities we use to implement those decisions, and if anything goes awry … well, it must have been a glitch. In truth, it’s time to slow down, both in our process and in the nature of the securities we buy and sell. And you might want to turn off the TV while you’re at it.  

  

  

  

  

  

• Here Are The "Unlikely" Cities Bloomberg Says Will Drive The US Economy

  Back in May we highlighted a report from Georgetown that endeavored to show which college majors were most likely to help students land high-paying jobs upon graduation. 

  While this would be important under any circumstances, it’s especially important today. Why? Two reasons, i) far from a steady creator of breadwinner jobs, the US economy routinely churns out bartenders and waiters, while the BLS has a habit of “vanishing” the jobless and creating what we’ve called a “statistical mirage” which makes it appear as though unemployment is falling even as the labor force participation rate plunges to multi-decade lows, and ii) graduates are now leaving school with more debt than ever and without decent employment, that debt burden leads to all manner of problems including the postponement of household formation. 

  The report was unequivocal. To wit: “STEM (science, technology, engineering, and mathematics), health, and business majors are the highest paying, leading to average annual wages of $37,000 or more at the entry level and an average of $65,000 or more annually over the course of a recipient’s career.”

  Setting aside the glaring question of whether one wants to count $37,000 a year as “high paying,” the point is that STEM jobs are apparently where it’s at these days unless you plan to become a bulge bracket CEO, a benchmark rate manipulator, or perhaps a doctor. And for anyone out there wondering where the best STEM jobs are, Bloomberg has you covered. Below, find the graphics (which you can click on to access the interactive versions) and some attendant commentary from Bloomberg:

  

  

  From Bloomberg:

  A decade ago, Richard Myers was the director of the Department of Genetics at the Stanford University School of Medicine, where he enjoyed the fruits of a rich endowment and his pick of faculty members and graduate students. So he left behind some befuddled scientists when, in 2008, he left Palo Alto, Calif., for Huntsville, Ala., to launch an independent research lab, the HudsonAlpha Institute.

   

  “‘My God, you’re leaving Stanford for Alabama?’” Myers recalls colleagues asking. “‘What’s wrong with you?’”

   

  Huntsville may not seem like an obvious place to base a center for genomics, a branch of biology concerned with DNA sequences that requires expensive hardware and even greater investment in human capital. Alabama ranks in the bottom 10 U.S. states for educational attainment and median income.

   

  Yet Huntsville, nestled in a hilly region in the northern part of the state, turns out to be a great place to recruit high-tech workers. As of May 2014, 16.7 percent of workers in the metropolitan area held a job in science, technology, engineering, or mathematics—STEM, for short—making it the third most technical workforce in the country after San Jose, Calif., and Framingham, Mass., a Bloomberg analysis of Labor Department statistics shows.

   

  Huntsville is one of a growing number of smaller U.S. cities, far from Silicon Valley, that are seeking to replace dwindling factory jobs by reinventing themselves as tech centers. Across the Midwest, Northeast, and South, mayors and governors are competing to attract tech companies and workers. 

   

  Much more in the full post here

  

  

  

  

  

• "This Time May Be Different": Desperate Central Banks Set To Dust Off Asia Crisis Playbook, Goldman Warns

  Early last month, Bloomberg observed that plunging currencies were “handcuffing bankers from Chile to Colombia.” The problem was described as follows:

  Central bankers in commodity-dependent Andes economies aren’t even considering interest-rate cuts to revive growth, even as prices for oil, copper and other raw materials collapse.

   

  That’s because the deepening price slump is also dragging down currencies in Colombia and Chile — a swoon that’s fanning inflation and tying policy makers’ hands.

  That was six days before China’s decision to devalue the yuan. 

  Needless to say, Beijing’s entry into the global currency wars did nothing to help the situation and indeed, since the yuan devaluation, things have gotten materially worse. The real, for instance, has plunged 10.5%, the Colombian peso is down 6.6%, the Mexican peso is off 4.4%, and the Chilean peso is down a harrowing 8% (thanks copper). And again, that’s just since China’s devaluation.

  Meanwhile, plunging commodity prices, falling Chinese demand, and depressed global trade aren’t helping LatAm economies. Just ask Brazil, where the sellside GDP forecast cuts are coming in fast (Morgan Stanley being the latest example) now that virtually every data point one cares to observe shows an economy that’s sliding into depression.

  Of course a plunging currency, FX pass through inflation, and a soft outlook for growth is a pretty terrible place to be in if you’re a central bank, but that’s exactly where things stand for the “LA-5” (believe it or not, that’s not a reference to the Lakers, it’s short for Brazil, Chile, Colombia, Mexico, and Peru), who very shortly will be forced to decide whether the risks associated with further FX weakness outweigh those of hiking rates into a poor economic environment.

  For Goldman, the outlook is clear: LatAm central banks will, in “stark” contrast to counter-cyclical measures adopted during the crisis, hike in a desperate attempt to shore up their currencies and control inflation. 

  First, we have the test:

  The LA-5 economies are, once again, being tested. They currently face an acute external shock involving a combination of: low (likely for long) commodity prices, incoming monetary policy normalization in the US, and weaker CNY and growth in China with the latent risk of a sharper economic slowdown. 

  The last time these countries were tested, they had sufficient room to maneuver counter-cyclically:

  The Global Financial Crisis of 2008-09 (GFC) provided almost the perfect applied experiment to test the shock-absorbing capacity of the new institutional framework. And the results were remarkably positive. The spike in risk aversion in the initial stages of the crisis was followed by sizeable capital outflows from EMs. Yet, officials across the LA-5 did not attempt to stop the hemorrhage of capital and the ensuing pressures on local currencies by hiking interest rates or by tightening fiscal belts (which would have been the classic pro-cyclical response of the past). To the contrary, the authorities managed to loose fiscal stances and cut interest rates aggressively to support domestic demand, letting exchange rates depreciate significantly along the way. 

  This time around, however, policy flexibility is severely constrained:

  Financial conditions are very accommodative and most currencies are now slightly in undervaluation territory. Initial conditions differ considerably from those prevalent at the beginning of the GFC. Broad financial conditions are, on average, more accommodative today than before (lower real rates and currencies that underwent large adjustments since mid-2013 and are now, on average, slightly undervalued versus domestic fundamentals). Furthermore, with the notable exception of Mexico, inflation has been accelerating across the region (Exhibit 3) and is now tracking above the respective targets, the fiscal stances are on average weaker, and external imbalances are generally wider. 

   

  
  

  And the crisis – at least as it relates to LatAm, is actually more acute:

  Arguably, these combined shocks may pose greater risks to the region compared to the challenges faced during the GFC as the later was largely a DM centered event. In fact, current external headwinds have compounded the effects of domestic developments in places (e.g., Brazil and to some extent Chile), imparting a sizeable adverse shock to sentiment and a negative impulse to growth across the LA-5 economies. 

  With less policy flexibility and a more acute crisis, comes a divergent response:

  Against this backdrop, the continuation of a bearish FX market may be soon followed by higher policy rates, despite admittedly sluggish real business cycles all across the region. That is, a pro-cyclical monetary reaction may be imminent in a number of places – Chile, Colombia, Mexico, and Peru. Policy pro-cyclicality is knocking on the door. 

   

  
  

  What’s particularly interesting here is that round after round of the type of counter-cyclical policy measures Goldman suggests saved the LA-5 in the wake of the 2008 meltdown have not only failed to resuscitate the global economy, but have in fact contributed to the current worldwide deflationary supply glut that is at least partially to blame for the economic malaise plaguing EMs and the attendant pressure on commodity currencies.

  That pressure has now put LatAm’s financially integrated countries in the position of having to hike rates even as the outlook for their economies – the same economies which were presumably saved by counter-cyclical post-crisis measures – deteriorates. Meanwhile, if the Fed hikes, it will only put further pressure on EM FX, which could serve to drive inflation still higher, prompting a still more hawkish EM CB response which would in turn put still more pressure on their underlying economies. 

  In the end, Goldman concludes that should LatAm resort to pro-cyclical measures to shore up their currencies at the expense of their economies, it will represent a return to the policies adopted by EMs during the Asian Financial Crisis. This would appear to provide the final piece of evidence we need to conclusively determine that all pundit/analyst protestations aside, we have indeed turned back the clock two decades and sit on the verge of another outright emerging market meltdown. And on that note, we’ll give the final word to Goldman:

  The LA-5 economies have already spent part of their policy ammunition fighting the initial stages of the current turmoil. In the meantime, a number of economies are still grappling with visible domestic (inflation/fiscal deficits) and external (current account deficits) imbalances. Therefore, the room to ease policy further, i.e., to adopt counter-cyclical policies, is now much more limited than in the past. To the contrary, in some cases monetary tightening may be needed (despite weaker real business cycles) in order to continue to attract foreign capital, anchor domestic currencies and preserve the integrity of the respective inflation targeting frameworks. Hence, we may soon enter a period of weaker FX and higher policy and market rates: i.e., market dynamics that would resemble more the 1997 Asian Financial Crisis (where the authorities hiked rates to stabilize the respective domestic currencies despite the recessionary real sector dynamics) rather than the 2008-09 Global Financial Crisis (where weakening currencies coincided with sharply declining short-term interest rates). 

  

  

  

  

  

• Martin Armstrong "Astonished" At Hillary Email Scandal

  Submitted by Martin Armstrong via ArmstrongEconomics.com,

  

  The most incredible aspect of Hillary’s e-mail scandal is the media’s total dismissal of a simple fact — Hillary DID NOT use the government’s e-mail system — she used her own. She claimed she was unaware that you could have two e-mails on one phone. That alone shows that she is not qualified to be president.

  Nonetheless, that can ONLY mean that she sent top-secret e-mails through her personal e-mail service. All of her discussions with foreign governments whom donated to her charity were also in her private e-mails.

  If you work for the government and opt to send all OFFICIAL e-mails through your private unsecured server because you assumed you could only have one: wouldn’t you assume that national security comes before personal e-mails?

  This is just amazing. Obviously, Hillary has lied about the e-mails for how did she conduct business as part of her job without using a government system? If you had to choose between the two, it would seem that the country should come first.

  Now her staff is taking the Fifth Amendment and refusing to testify. Obviously, the only reason to take the Fifth requires the risk of a crime.

  

  

  

  

  

• What Does It Mean If The Fed Hikes… And If It Doesn't

  Today’s jobs report was supposed to be a tiebreaker for the Fed’s September rate decision, giving fed funds and eurodollar traders some respite after a summer that has been a gut-wrenching, dramamine-chewing rollercoster. It did not, in fact it boosted uncertainty, with the probability of a September rate hike rising from 26% to 30%.

  

   

  In other words, any hope for clarity was promptly dashed with a job report that once again was both bad and good, depending on one’s bias.

  Which means that the September 17th decision will come to the absolute wire, with little if any guidance available in the 13 days left until what may be the Fed’s first rate hike in 9 years… or not.

  Here is an oddly accurate explanation of what it means if the Fed does hike rates on September, and alternatively, what it means if Yellen punts once again, and leaves the decision to the October or December meeting, or just punts to 2016 and onward altogether. As a reminder, Goldman does not expect the Fed to hike on September 17.

  On Wall Street only 2 things matter: interest rates and earnings. Everything else is noise unless it impacts rates and earnings. No-one impacts interest rates more than the Fed. So the Fed’s September 17th rate hike decision is a big deal.

   

  Should the Fed decide to raise interest rates, it will be the first Fed hike since June 29th 2006. In the 110 months that have since past, 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.

   

  As noted above, a rate hike with a stroke ends this era. So:

   

  If they don’t hike…

  • It’s an admission that Wall Street threatens to reverse the recovery on Main Street
  • It will lead to a short-term relief rally on Wall Street
  • It will be relatively positive for EM/commodities/resources, as it unwinds the higher US growth/rates/dollar narrative
  • It will be positive for higher-yielding assets
  • It will be positive for growth > value, as the Fed is confirming the deflationary recovery
  • In short, if the Fed’s failure to hike does not lead investors to completely abandon hope on growth and scurry into gold, cash & volatility, then look for the “barbell of 1999” to reemerge: Über-growth & Über-value were massive outperformers after the Asia crisis (Chart 9).

  

   

  If they do hike…

  • Watch the long-end
  • If the long-end concurs with the Fed’s view of economic recovery, then banks, cyclicals and value stocks will receive a bid. Asset allocation toward “strong dollar” & “Fed tightening plays” will harden, with the exception that value will likely outperform growth
  • If the long-end rallies, signaling a policy mistake, then cash, volatility, gold & defensive growth will be the way to go.

  Most importantly, if the long-end rallies, it’s almost over and get ready to bail on any outperforming long-end position, as the reaction itself will signal the beginning of the end of the fiat regime.

  

  

  

  

  

  

• The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play

  The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed’s hiking intentions, with China, or even the ongoing “1998-style” carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program “hasn’t been as successful as we’d hoped.”

  Why? “It’s simply because they are running out. There are simply too few of these structured products out there.”

  So six months later, the ECB begrudgingly admitted what we said in March 2015, in “A Complete Preview Of Q€ — And Why It Will Fail“, was correct. Namely this:

  … the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.

   

  … while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.

   

  Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.

  (Actually, we said all of the above first all the way back in 2012, but that’s irrelevant.)

  So aside from the ECB officially admitting that it has become supply*constrained even with security prices at near all time highs, why is this so critical?

  Readers will recall that just yesterday we explained why “Suddenly The Bank Of Japan Has An Unexpected Problem On Its Hands” in which we quoted BofA a rates strategist who said that “now that GPIF’s selling has finished, the focus will be on who else is going to sell. Unless Japan Post Bank sells JGBs, the BOJ won’t be able to continue its monetary stimulus operations.“

  We also said this:

  “in 6-9 months, following the next major market swoon when everyone is demanding more action from the BOJ, “suddenly” pundits will have discovered the biggest glitch in the ongoing QE monetization regime, namely that the BOJ simply can not continue its current QE program, let along boost QE as many are increasingly demanding, unless it finds willing sellers, and having already bought everything the single biggest holder of JGBs, the GPIF, had to sell, the BOJ will next shakedown the Post Bank, whose sales of JPY45 trillion in JGBs are critical to keep Japan’s QQE going.

   

  The sale of that amount, however, by the second largest holder of JGBs, will only last the BOJ for the next 3 months. What next? Which other pension fund will have the massive holdings required to keep the BOJ’s going not only in 2016 but also 2017 and onward. The answer: less and less.

  Once again to be accurate, the first time we warned about the biggest nightmare on deck for the BOJ (and ECB, and Fed, and every other monetizing central bank) was back in October 2014, when we cautioned that the biggest rish was a lack of monetizable supply.

  We cited Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who said that at the scale of its current debt monetization, the BOJ could end up owning half of the JGB market by as early as in 2018. He added that “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation.“

  

  This was our summary:

  The BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existant and getting worse by the day. All that would take for a massive VaR shock scenario to play out in Japan is one exogenous JGB event for the market to realize just how little actual natural buyers and sellers exist.

  That said, our conclusion, which was not to “expect the media to grasp the profound implications of this analysis not only for the BOJ but for all other central banks: we expect this to be summer of 2016’s business” may have been a tad premature.

  The reason: overnight the IMF released a working paper written by Serkan Arslanalp and Dennis Botman (which was originally authored in August), which confirmed everything we said yesterday… and then some.

  Here is Bloomberg’s summary of the paper:

  The Bank of Japan may need to reduce the pace of its bond purchases in a few years due to a shortage of sellers, said economists at the International Monetary Fund.

   

  There is likely to be a “minimum” level of demand for Japanese government bonds from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management requirements, said IMF economists Serkan Arslanalp and Dennis Botman.

  Here are the excerpts from the paper:

  We construct a realistic rebalancing scenario, which suggests that the BoJ may need to taper its JGB purchases in 2017 or 2018, given collateral needs of banks, asset-liability management constraints of insurers, and announced asset allocation targets of major pension funds.

   

  … there is likely to be a “minimum” level of demand for JGBs from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management (ALM) requirements. As such, the sustainability of the BoJ’s current pace of JGB purchases may become an issue.

  Back to Bloomberg:

  While Governor Haruhiko Kuroda said in May that he expects no obstacles in buying government bonds, the IMF analysts join Nomura Securities Co. and BNP Paribas SA in questioning the sustainability of the unprecedented debt purchases.

  Who in turn merely joined Zero Hedge who warned about precisely this in October of last year.

  Back to the IMF paper, which notes that in Japan, where there is a limited securitization market, the only “high quality collateral” assets are JGBs, and as a result of the large scale JGB purchases by the JGB, “a supply-demand imbalance can emerge, which could limit the central bank’s ability to achieve its monetary base targets. Such limits may already be reflected in exceptionally low (and sometimes negative) yields on JGBs, amid a large negative term premium, and signs of reduced JGB market liquidity.”

  To the extent markets anticipate limits, the rise in inflation expectations could be contained, which may mitigate incentives for portfolio rebalancing and create a self-fulfilling cycle that undermines the BoJ’s objectives.

  For those surprised by the IMF’s stark warning and curious how it is possible that the BOJ could have put itself in such a position, here is the explanation:

  So far, the BoJ’s share of the government bond market is similar to those of the Federal Reserve and still below the Bank of England (BOE) at the height of their QE programs. Indeed, the BoE held close to 40 percent of the conventional gilt market at one point without causing significant market impairment. Japan is not there yet, as the BoJ held about a quarter of the market at end-2014. But, at the current pace, it will hold about 40 percent of the market by end-2016 and close to 60 percent by end-2018. In other words, beyond 2016, the BoJ’s dominant position in the government bond market will be unprecedented among major advanced economies.

  

  As we expanded yesterday, the biggest issue for the BOJ is not that it has problems buying paper, but that there are simply not enough sellers: “under QQE1, only around 5 percent of BoJ’s net JGB purchases from the market came from institutional investors. In contrast, under QQE2, close to 40 percent of net purchases have come from institutional investors between October 2014 and March 2015.”

  

   

  This is where things get back for the BOJ, because now that the BOJ is buying everything official institutions have to sell, the countdown has begun:

  given the pace of BoJ purchases under QQE2 and projected debt issuance by the government (based on April 2015 IMF WEO projections of the fiscal deficit), we estimate that Japanese investors could shed some ¥220 trillion of JGBs until end-2018 (Table 2, Figure 4). In particular, Japanese insurance companies and pension funds could reduce their government bond holdings by ¥44 trillion, while banks could sell another ¥176 trillion by end-2018, which would bring their JGB holdings down to 5 percent of total assets. At that point, the BoJ may have to taper its JGB purchases.

  

   

  Then there are the liquidity issues:

  As the BoJ ascends to being a dominant player in the JGB market, liquidity is likely to be affected, implying that economic surprises may trigger larger volatility in JGB yields with potential financial stability implications. As noted in IMF (2012), demand-supply imbalances in safe assets could lead to deteriorating collateral quality in funding markets, more short-term volatility jumps, herding, and cliff effects. In an environment of persistent low interest rates and heightened financial market uncertainty, these imbalances can raise the frequency of volatility spikes and potentially lead to large swings in asset prices.

  This, too, is precisely what we warned yesterday would be the outcome: “the BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existant and getting worse by the day.”

  The IMF paper conveniently provides some useful trackers to observe just how bad JGB liquidity is in real-time.

  

  The IMF is quick to note that the BOJ does have a way out: it can simply shift its monetization to longer-dated paper, expand collateral availability using tthe BOJ’s Securited Lending Facility (which basically is a circular check kiting scheme, where the BOJ lends banks the securities it will then repurchase from them), or simply shift from bonds to other assets: “the authorities could expand the purchase of private assets. At the moment, Japan has a relatively limited corporate bond market (text chart). Hence, this would require jumpstarting the securitization market for mortgages and bank loans to small and medium-sized enterprises which could generate more private assets for BoJ purchases.”

  But the biggest risk is not what else the BOJ could monetize – surely the Japanese government can always create “monetizable” kitchen sinks… but what happens when the regime shifts from the current buying phase to its inverse:

  As this limit approaches and once the BoJ starts to exit, the market could move from a situation of shortage to one with excess supply. The term premium could jump depending on whether the BoJ shrinks its balance sheet and on the fiscal deficit over the medium term.

  When considering that by 2018 the BOJ market will have become the world’s most illiquid (as the BOJ will hold 60% or more of all issues), the IMF’s final warning is that “such a change in market conditions could trigger the potential for abrupt jumps in yields.”

  At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops.

  But ignoring the endgame for Japan, and recall that BofA triangulated just this when it said that “the BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation“, what’s worse for Abe is that the countdown until his program loses all credibility has begun.

  What happens then? As BNP wrote in an August 28-dated report, “Once foreign investors lose faith in Abenomics, foreign outflows are likely to trigger a Japanese equities meltdown similar to the one observed during 2007-09.”

  And from there, the contagion will spread to the entire world, whose central banks incidentally, will be faced with precisely the same question: who will be responsible for the next round of monetization and desperately kicking the can one more time.

  But before we get to the QE endgame, we first need to get the interim point: the one where first the markets and then the media realizes that the BOJ – the one central banks whose bank monetization is keeping the world’s asset levels afloat now that the ECB has admitted it is having “problems” finding sellers – will have no choice but to taper, with all the associated downstream effects on domestic and global asset prices.

  It’s all downhill from there, and not just for Japan but all other “safe collateral” monetizing central banks, which explains the real reason the Fed is in a rush to hike: so it can at least engage in some more QE when every other central bank fails.

  But there’s no rush: remember to give the market and the media the usual 6-9 month head start to grasp the significance of all of the above.

  Source: IMF

  

  

  

  

  

• Weekend Reading: View From The Edge

  Submitted by Lance Roberts via STA Wealth Management,

  Earlier this week, I posted a fairly in-depth look at the recent correction to try and determine whether this is simply just a correction in a bull market, or potentially something worse. To wit:

  "But the underlying fundamental and economic data have been weak for some time, yet the market continued its unabated rise. The Bulls have remained firmly in charge of the markets as the reach for returns exceeded the grasp of the underlying risk. It now seems that has changed. For the first time since 2007, as we see initial markings of a potential bear market cycle.

   

  The first chart below shows the long-term trend of the market."

  

  "The bottom part of the chart is the most important. For the first time since 2000 or 2007, the market has now registered a momentum based "sell" signal. Importantly, this is a very different reading that what was seen during the 2010 and 2011 "corrections" and suggests the current correction may be more significant."

  I continue to suspect that the weak market internals, deterioration in earnings and a generally weak economic backdrop that odds reside with the "bears" for now. However, we have all been surprised by what happens "next" particularly when the Federal Reserve stands at the helm. 

  With that in mind, and a dismal August month now behind us, our weekend reading list once again takes a look at the markets from the seemingly "edge of the cliff."

  ---

  THE LIST

  1) Don't Blame China For Market Woes by Ben Stein via CBS News

  "August is the cruelest month.

   

  A good chunk of my savings disappeared as the stock market convulsed, and we're down at some points by well over 10 percent. Why did it happen?

   

  The pundits and analysts appeared and said it was because of the Chinese devaluation and possible serious weakness in China. This, in turn, would devastate U.S. exports, supposedly, to China and sink the ship of our prosperity."

  Read Also: Jim Chanos – 5 Things About China by Linette Lopez via Business Insider

   

  2) Bad August Months Lead To Worst Septembers by Anora Mahmudova

  ""In the 11 instances since 1945 when the S&P 500 fell more than 5% in August, September returns were negative 80% of the time, averaging a decline of 4%, said Sam Stovall, U.S. equity strategist at S&P Capital IQ.

   

  History is a good guide, but not necessarily a gospel,"

  

  Read Also: Why This Market Sell-Off Could Keep Going by Paul Lim via Time

   

  3) Nobody Panic – This Is Just A Retest by Ron Insana via CNBC

  "Of course, if the market's internal strength deteriorates further on the second wave down, it could be indicative of something more serious.

   

  But right now, we haven't seen any sign of that, so panic would be premature.

   

  It has long been my view that U.S. stocks are in the midst of a secular, or long-term, bull market that is likely in its 5th or 6th inning.

   

  Prior to this correction, it had been 46 months since U.S. markets had suffered a pullback of more than 10 percent. Corrections occur, on average, every 18 months, so this was long overdue."

  Read Also: This Is The Start Of The Sell Off by Bill Bonner via ContraCorner

   

  4) If The Market Hits This Level, Then Get Nervous by Heather Long via CNN Money

  "Time will tell who is right. But remember that we live in an era where computer trading dominates the American stock market. The "robots" that are making a lot of trading calls aren't sitting around pondering China's economy. They are paying attention to whether stocks fall below key levels.

   

  What are those levels? No one knows exactly. But these two metrics are worth watching. If these thresholds are crossed, both computer and human traders will consider it a game-changer point."

   

  

  Also Read: How To Survive A Market Crash by Brett Arends via MarketWatch

   

  5) Why Fear Dominates Investors Sentiment by John Shmuel via Financial Post

  "One difference is that corporate balance sheets and the U.S. economy remain strong. Another is that China, which has been a large source of fear recently, still has significant policy tools available to help it spur growth and calm markets there and, by extension, around the world.

   

  'This episode does not match equity declines in the major sustained financial crises of the last 20 years,' Oxford Economics said.

   

  That does not mean that markets can't go lower. Canaccord notes that the current correction has two analogs in the 1998 and 2011 corrections, with the former preceding a rise in U.S. interest rates and the latter being driven by worries over China and emerging markets."

  Read Also: Don't Buy The Stock Market Dip This Time by Jeff Erber via Real Clear Markets

  ---

  Other Reading

  Market Still Isn't Where Its Going by Joe Calhoun via Alhambra Partners

  If You Need To Reduce Risk, Do It Now by John Hussman via Hussman Funds

  Best Tweets In August by Meb Faber via Meb Faber Research

  Recession Odds Surge To Highest Since 2011 via ZeroHedge

  This Is The Worst Environment For Investors By Jesse Felder via The Felder Report

  ---

  "Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the time to sell." – John Templeton

  Have a great weekend.

  

  

  

  

  

• Dow Drops To 17-Month Lows As Hope-Filled Dead-Cat-Bounce Dies

  The last 2 weeks in markets…

  And to all those who took Cramer's advice to buy the dips…

   

  Some big moves this week…

  • Dow Industrials lowest weekly close since April 2014
  • Dow Transports lowest weekly close since May 2014
  • S&P 500 lowest weekly close since Oct 2014's Bullard lows
  • Nikkei dumped over 7% this week – worst week since April 2014
  • Utilities collapsed 5.1% this week – worst week since March 2009
  • Financials lowest weekly close since Oct 2014's Bullard lows
  • Biotechs lowest weekly close since Feb 2015
  • Investment Grade Corporate Bond Spreads worst since June 2013
  • Treasury Curve (2s30s) flattened 6bps today – biggest drop in 2 weeks.
  • JPY strengthened 2.4% on week against the USD – strongest week since August 2013 (up 4.5% in 3 weeks) – major carry unwind!
  • AUD plunged 3.5% on week against the USD – worst week since January 2015 and worst 4-weeks since Oct 2014 – China proxy

  So before we start, Japan was really ugly…

  

   

  And some context for the US equity index drops…

  

   

  With everything red year-to-date… (and since the end of QE3, only Nasdaq is clinging to the green)

  

   

  A quiet Friday before Labor Day weekend provided no juice for momo ignition and apart from a brief algo-driven pop on payrolls, stocks were a one-way-street lower…until the late-day VIX-smash ramp which closed ugly…

  

   

  And Futures show an ugly night turned even uglier…

  

   

  On the week, evereything is red…

  

   

  Dow Futures give us some context for the last 2 week's moves. Bounce dies at Fib61.8% retracement, breaks through 50% and makes lower high as today tested post Black-Monday lows…

  

   

  FANG is FUBAR… (post FOMC Minutes)

  

   

  Financials continues to get hammered (as investors rushed to the safety of Homebuilders this week!?!) – but the panic-buying in the last hour saved it from being a lot worse…

  

   

  Utilities had their worst week since March 2009..

  

   

  But financials have further to fall to catch up with counterparty risk…

  

   

  Just as we saw lasty Friday, VIX was smashed lower in the last hour… which makes perfect sense given Monday is a holiday and China reopens after 3 days of being closed during extreme moves in EM FX and global equity markets…

  

   

  After some VIX complex shenanigans midweek, SPY continues to coverge down to XIV (though the latter is also being squeezed to lows).

  

   

  Since the FOMC Minutes, gold and the long bond are modest losers and stocks big losers…

  

   

  Investment Grade Credit spreads rose 4bps this week, ending with the widest weekly close since June 2013

  

   

  This is why it matters!! Bye Bye Buybacks

  

   

  Thank to today's plunge, Treasury yields ended the week lower after China closed… Note that 2Y is unch today, 10Y -3.5bps, 30Y -4.5bps

  

   

  with a dramatic 6bps 2s30s curve flattening on the day (post-payrolls)

  

   

  The US Dollar ended the week unchanged against the majors… but that hid the stunning moves in JPY (USDJPY dropped 2.4% on the week – its worst since Auguist 2013) and AUD (-3.6% – biggest weekly drop in 8 months, worst 4-week drop in a year)…

  

   

  Commodities on the week were a mixed bag with crude up on the week and copper notably lower overnight to negative. Gold & Silver modestly lower… The 8-10ET period remains insanely volatile…

  

   

  Crude had a wild week as Monday and Tuesday's idiocy and noite today's pump'n'dump after rig counts unexpectedly declined…

  

   

  And finally before everyone points out how crazy the bond yields are relative to stocks etc… and the 'economy' – perhaps it was stocks that were wrong all along!!

  

   

  Charts: Bloomberg

  Bonus Chart: Nikkei joins SHCOMP and SPX in the red for 2015…

  

   

  Bonus Bonus Chart" "Just one wafer thin 25bps rate hike"

  h/t @RudyHavenstein

  

  

  

  

• Chinese Roulette

  Sunday night looms…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• No Inflation Friday: The Government Admits Its Own Statistics Are Phony

  Submitted by Simon Black via SovereignMan.com,

  In an article that first appeared in Fortune magazine on December 10, 2001, Warren Buffett penned a great letter about falling prices:

  “When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying– except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”

  He’s right. Any rational human being actually LIKES falling prices.

  We enjoy getting a great deal, and we like it when our money goes further.

  To Buffett’s point, investors are a major exception and prefer investing when prices go up, i.e. their money buys less of a high quality asset.

  But there’s one more giant exception that Buffett didn’t mention: economists.

  Economists quiver in fear at the prospect of falling prices.

  They call it ‘deflation’, and it’s a force so dreaded that central bankers have threatened to drop bricks of cash from helicopters in order to prevent it.

  Instead, economists prefer INFLATION, i.e. that the things you buy become more expensive.

  We can look at official statistics to get a sense of inflation, but these numbers are totally meaningless.

  When I was a kid, my father earned enough money to support his family with a single salary.

  We had a house, a car, an occasional vacation, and we never missed a meal. All on one income.

  But those days are long gone. Now it’s almost obligatory to live in a dual-income household just to make ends meet.

  The official statistics never paint this picture.

  They focus on some palatable number, telling us the inflation rate is 2%, and then adjust their computational methods to derive that figure.

  In fact, the US federal government has changed the way it calculates inflation at least twenty times since the mid 1980s.

  And it’s obvious that they have a huge incentive to do so.

  The #1 expense of the federal government today is the mandatory entitlement programs that are paid out to seniors in the US– primarily Social Security.

  It’s nearing $1 trillion annually and eats up a third of all tax revenue.

  The government is required by law to increase the amount of money paid to Social Security recipients each year through what’s called a COLA, or cost of living adjustment.

  Essentially they’re adjusting your monthly Social Security payment to keep up with inflation. Or at least, the inflation that they’re willing to admit.

  This is where they have a huge incentive to fudge the numbers.

  If the real rate of inflation is 5%, but they only give a 2% COLA, the government saves 3%. That’s almost $30 billion.

  (Ironically this is 3x the size of the annual budget for the Department of Labor, which is responsible for calculating the inflation statistics.)

  But by doing this the government is effectively stealing from seniors.

  There’s actually been a new law proposed in Congress to prevent this from happening anymore.

  It’s known as HR 3074, and it was written “for the purpose of establishing an accurate Social Security COLA. . .”

  So even the government admits that their inflation numbers are a bunch of baloney.

  But sadly, according to the legislative watchdog GovTrack.us, this bill has a 0% chance of being passed. So I wouldn’t expect a solution anytime soon.

  In fact, this problem will likely get worse given how transfixed economists are on the deflation threat.

  Their concern is that the Chinese economic slowdown and currency devaluation will cause a wave of falling prices around the world.

  But there’s a very curious effect at work here that most people forget:

  It’s entirely possible (and now very likely) to have BOTH inflation AND deflation. At the same time.

  Assets and investments can fall, while at the same time the prices of retail goods and services rise.

  In other words, the value of your investment portfolio goes down, but your grocery bill goes up.

  It’s also important to point out that not all prices rise and fall equally.

  Gas prices may be down from a year ago in the US. But as the recently-released Hotels.com Hotel Price Index shows, hotel prices are up sharply.

  Salt Lake City: 8%. Raleigh: 5%. Portland: 9%. Washington DC: 5%. Los Angeles: 8%.

  I’ve seen the effects of this dual inflation/deflation phenomenon as I’ve traveled around the world in places like Argentina, Greece, and Indonesia.

  It is a very real threat. And it may now be coming to US shores.

  But everyone is focused exclusively on the deflation side.

  You’ll get laughed at in financial circles if you mention the word ‘inflation’ anymore. It’s being completely ignored… even denied.

  They’re pretending like half the problem doesn’t even exist, which is seriously foolish.

  Inflation is a long-term disease. Quarter by quarter the numbers may change. But over the long run it’s like a cancer, slowly eating away at your lifestyle.

  It’s not a question of either/or. It’s not a debate over inflation VS. deflation. It’s only a matter of WHEN we’ll end up with BOTH. And how well you’re prepared for it.

  

  

  

  

  

• #Wynn-ing? Casino Magnate Joins Trump Campaign

  In yet another somewhat surreal twist in The Donald’s path to The White House, Fox Business reports the long, sometimes contentious relationship between Donald Trump and Steve Wynn has taken another turn, with the Las Vegas casino magnate serving as an unofficial adviser to Trump’s presidential campaign. Having known each other for 30 years, Fox’s Gasparino notes that they have clashed in the past (Wynn on Turmp in 1998 “He’s a fool,” and Trump on Wynn “he’s a very strange guy.”) but in recent years both have been critical of the leftward tilt of the Democratic Party and president Obama.

  

  As Fox Business reports,

   People close to both men say Trump has been in constant contact with Wynn in recent weeks as his insurgent campaign to win the Republican 2016 presidential nomination continues to pick up steam—something press officials representing Trump and Wynn would not deny. These people say Wynn has offered advice and counsel to Trump on various issues, including whether Trump would rule out a third-party run, as he is expected to do later this afternoon.

   

  “They are talking regularly,” said one GOP operative with first-hand knowledge of the conversations. “Trump calls and asks Steve ‘how am I doing,” and then Steve tells him.”

   

  Michael Weaver, a spokesman for Wynn, told FOX Business that Wynn “speaks regularly to many of the candidates and whenever possible gives his best thoughts and ideas to them.  He and Mr. Trump have known each other socially for many years.   His conversations with Mr. Trump have not been much different than his conversations with the other candidates.”

   

  Weaver added: “I’m aware that he suggested to Mr. Trump that a third-party run would be unwise.”

   

  Likewise, Trump spokeswoman Hope Hicks also would not deny the discussions. “They have been friends for 30 years and they have always had a great relationship,” she told FOX Business.

  Despite some tensions over the 30 years they have known each other, Gasparino reports, the two have more recently patched up their relationship.

  According to one published report, Trump attended Wynn’s wedding, and according to people who know both men, the relationship has flourished to the point that Trump is now in nearly constant contact with Wynn about his presidential campaign.

   

  Trump’s choice of Wynn, the head of Wynn Resorts, as an unofficial political adviser seems odd since the casino tycoon isn’t known for his political acumen, but according to GOP operatives, it fits in with the temperament of Trump’s campaign. At least so far, Trump has eschewed the normal trappings of a major presidential campaign. He hasn’t hired top political advisers, and according to one GOP operative, he hasn’t commissioned one private poll to weigh voter sentiment.

  *  *  *

  Of course, if you believe Paull Farrel, none of this matters – the market is done no matter what…

  A mega crash is coming, dropping half off its peak, down below Dow 5,000. Not just another 1,000-point correction like last month. But a heart-stopping collapse coinciding with the 2016 elections … then a long systemic recession … probably lasting till the 2020 presidential election, maybe longer … no matter who’s in the White House, Doanld Trump, Jeb Bush or Hillary Clinton.

  

  

  

  

  

• "It's All Gold"- Saudi King Arrives In DC, Books All Rooms At The Four Seasons

  Over the past month or so, we’ve spent quite a bit of time detailing the effect the death of the petrodollar has had on Saudi Arabia’s financial position. Recapping briefly, Riyadh’s move to Plaxico itself in an effort to bankrupt the US shale space late last year has forced the kingdom to draw down its petrodollar reserves to ensure that ordinary Saudis aren’t affected by plunging crude. Add in a proxy war (or two) and you get a budget deficit of 20% to go along with the first current account deficit in ages. The cost of maintaining the riyal’s peg to the dollar doesn’t help either. 

  

  The situation described above has caused the Saudis to tap the debt market to help fill the gap and indeed, some estimates show the country’s currently negligible debt-to-GDP ratio climbing by a factor of 10 by the end of next year. 

  But make no mistake, all of the above should not be mistaken as a suggestion that the Saudis aren’t rich – very rich, and if you had any doubts about that, consider the following description from Politico of King Salman’s arrival in Washington for his first meeting with President Obama:

  In anticipation of King Salman bin Abdulaziz of Saudi Arabia’s stay, the Four Seasons hotel in Georgetown has done some redecorating — literally rolling out red carpets in order to accommodate the royal’s luxurious taste.

   

  Eyewitnesses at the property have seen crates of gilded furniture and accessories being wheeled into the posh hotel over the past several days, culminating in a home-away-from-home fit for the billionaire Saudi monarch, who is in Washington for his first White House meeting with President Barack Obama tomorrow.

   

  “Everything is gold,” says one Four Seasons regular, who spied the deliveries arriving at the hotel. “Gold mirrors, gold end tables, gold lamps, even gold hat racks.” Red carpets have been laid down in hallways and even in the lower parking garage, so the king and his family never have to touch asphalt when departing their custom Mercedes caravan.

   

  
  

   

  The guests staying at the 222-room hotel for the next couple of days are all part of the 79-year-old king’s entourage of Saudi diplomats, family members and assistants, one source said; a full buyout of the entire property was reserved for the visit. Guests who had booked to stay at the Four Seasons during the royal visit have apparently been moved to other luxury hotels in town. A call to the Four Seasons confirmed the hotel is sold out Thursday, Friday and Saturday nights.

   

  King Salman, who ascended the throne in January, has a habit of displacing commoners for his own comforts; this summer, during a sojourn to the French Riviera, his eight-day stay forced the closure of a popular beach, enraging locals. Salman rolls deep, with a reported 1,000-person delegation joining him for his seaside August vacation.

   

  Wall St. Journal reporter Carol Lee snapped this photograph of Salman’s entourage arriving at Andrews Air Force Base on Thursday:

  Saudis seem to have enough vehicles for King Salman’s visit – the car fleet parked at Joint Base Andrews pic.twitter.com/Gk4aLzuVL2

  — Carol Lee (@carolelee) September 3, 2015

  The king will reportedly discuss a number of rather pressing issues with the Obama administration including Riyadh’s involvement in Yemen, where, as we detailed on Thursday, a former US counterterrorism “success story” is now on the verge of splitting into two separate countries. Of course the Iran nuclear deal will also come up, especially in light of the fact that, as The New York Times noted earlier this week, “Republicans are considering legislative options to counter the deal, including the possible reimposition of sanctions the agreement is supposed to lift,” now that the President has secured the support he needs to sustain a veto of a GOP challenge.

  Perhaps more importantly, the two leaders will also discuss Syria and oil prices, with the latter issue now having a rather outsized impact on America’s shale producers as well as on US majors’ capex plans. Needless to say, the real question from a geopolitical perspective is whether Obama and King Salman come to any closed-door agreements on Syria where, as Al Jazeera delicately puts it, the US and Saudi Arabia are set to orchestrate a “managed political transition.”

  

  *  *  *

  Meanwhile, over at The White House blog:

  

  

  

  

  

• Meanwhile In Submerging Markets: An FX Bloodbath

  Things were already bad enough for emerging markets going into August. Persistently low commodity prices, slumping demand from China, depressed global trade, and a “diminutive” septuagenarian waving around a loaded rate hike pistol in the Eccles Building had served to put an enormous amount of pressure on the world’s emerging economies.

  And then, the unthinkable happened. 

  No longer able to watch from the sidelines as the export-driven economy continued to buckle from the pain of the dollar peg, China devalued the yuan. What happened next was nothing short of a bloodbath. The carnage is documented below.

  First note that just moments after the PBoC’s yuan move we said the following:

  Biggest immediate loser from China’s devaluation: Brazil

  — zerohedge (@zerohedge) August 11, 2015

  Well sure enough, with the exception of the kwacha, the Belarusian ruble, and the tenge (which went to a free float overnight late last month), that has proven to be demonstrably correct as you can see from the following overview of EM FX performance since China’s deval:

  

  And here’s the big picture which also shows that EM FX has fallen 16 of the last 18 weeks with this week being the worst stretch since March:

  

  Now just imagine what this will look like if the Fed pulls the trigger…

  

  

  

  

  

  

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• Paul Craig Roberts: The Rise Of The Inhumanes

  Submitted by Paul Craig Roberts,

  America’s descent into totalitarian violence is accelerating. Like the Bush regime, the Obama regime has a penchant for rewarding Justice (sic) Department officials who trample all over the US Constitution. Last year America’s First Black President nominated David Barron to be a judge on the First US Circuit Court of Appeals in Boston.

  Barron is responsible for the Justice (sic) Department memo that gave the legal OK for Obama to murder a US citizen with a missile fired from a drone. The execution took place without charges presented to a court, trial, and conviction. The target was a religious man whose sermons were believed by the paranoid Obama regime to encourage jihadism. Apparently, it never occurred to Obama or the Justice (sic) Department that Washington’s mass murder and displacement of millions of Muslims in seven countries was all that was needed to encourage jihadism. Sermons would be redundant and would comprise little else but moral outrage after years of mass murder by Washington in pursuit of hegemony in the Middle East.

  Barron’s confirmation ran into opposition from some Republicans, some Democrats, and the American Civil Liberties Union, but the US Senate confirmed Barron by a vote of 53-45 in May 2014. Just think, you could be judged in “freedom and democracy America” by a fiend who legalized extra-judicial murder.

  While awaiting his reward, Barron had a post on the faculty of the Harvard Law School, which tells you all you need to know about law schools. His wife ran for governor of Massachusetts. Elites are busy at work replacing law with power.

  America now has as an appeals court judge, no doubt being groomed for the Supreme Court, who established the precedent in US law that, the Constitution not withstanding, American citizens can be executed without a trial.

  Did law school faculties object? Not Georgetown law professor David Cole, who enthusiastically endorsed the new legal principle of execution without trial. Professor Cole put himself on the DOJ’s list of possible federal judicial appointees by declaring his support for Barron, whom he described as “thoughtful, considerate, open-minded, and brilliant.”

  Once a country descends into evil, it doesn’t emerge. The precedent for Obama’s appointment of Barron was George W. Bush’s appointment of Jay Scott Bybee to the US Court of Appeals for the Ninth Circuit. Bybee was John Yoo’s Justice (sic) Department colleague who co-authored the “legal” memos justifying torture despite US federal statutory law and international law prohibiting torture. Everyone knew that torture was illegal, including those practicing it, but these two fiends provided a legal pass for the practitioners of torture. Not even Pinochet in Chile went this far.

  Bybee and Yoo got rid of torture by calling it “enhanced interrogation techniques.” As Wikipedia reports, these techniques are considered to be torture by Amnesty International, Human Rights Watch, medical experts who treat torture victims, intelligence officials, America’s allies, and even by the Justice (sic) Department. https://en.wikipedia.org/wiki/Jay_Bybee

  Others who objected to the pass given to torture by Bybee and Yoo were Secretary of State Colin Powell, US Navy General Counsel Alberto Mora, and even Philip Zelikow, who orchestrated the 9/11 Commission coverup for the Bush regime.

  After five years of foot-dragging, the Justice (sic) Department’s Office of Professional Responsibility concluded that Bybee and his deputy John Yoo committed “professional misconduct” by providing legal advice that was in violation of international and federal laws. The DOJ’s office of Professional Responsibility recommended that Bybee and Yoo be referred to the bar associations of the states where they were licensed for further disciplinary action and possible disbarment.

  But Bybee and Yoo were saved by a regime-compliant Justice (sic) Department official, David Margolis, who concluded that Bybee and Yoo had used “poor judgement” but had not provided wrong legal advice.

  So, today, instead of being disbarred, Bybee sits on a federal court just below the Supreme Court. John Yoo teaches constitutional law at the University of California, Berkeley, School of Law, Boalt Hall.

  Try to imagine what has happened to America when Harvard and Berkeley law professors create legal justifications for torture and extra-judicial murder, and when US presidents engage in these heinous crimes. Clearly America is exceptional in its immorality, lack of human compassion, and disrespect for law and its founding document.

  Hitler and Stalin would be astonished at the ease with which totalitarianism has marched through American institutions. Now we have a West Point professor of law teaching the US military justifications for murdering American critics of war and the police state. http://www.theguardian.com/us-news/2015/aug/29/west-point-professor-target-legal-critics-war-on-terror Also here: http://www.informationclearinghouse.info/article42758.htm The professor’s article is here: http://warisacrime.org/sites/afterdowningstreet.org/files/westpointfascism.pdf

  William C. Bradford, the professor teaching our future military officers to regard moral Americans as threats to national security, blames Walter Cronkite for loosing the Tet Offensive in the Vietnam War by reporting the offensive as an American defeat. Tet was an American defeat in the sense that the offensive proved that the “defeated” enemy was capable of a massive offensive against US forces. The offensive succeeded in the sense that it demonstrated to Americans that the war was far from over. The implication of Bradford’s argument is that Cronkite should have been killed for his broadcasts that added to the doubts about American success.

  The professor claims to have a list of 40 people who tell the truth who must be exterminated, or our country is lost. Here we have the full confession that Washington’s agenda cannot survive truth.

  I am unaware of any report that the professor has been censored or fired for his disrespect for the constitutionally protected right of freedom of expression. However, I have seen reports of professors destroyed because they criticized Israel’s war crimes, or used a word or term prohibited by political correctness, or were insufficiently appreciative of the privileges of “preferred minorities.” What this tells us is that morality is sidetracked into self-serving agendas while evil overwhelms the morality of society.

  Welcome to America today. It is a land in which facts have been redefined as enemy propaganda, a land in which legally protected whistleblowers are redefined as “fifth columns” or foreign agents subject to extermination, a land in which America is immune from criticism and all crimes are blamed on those whom Washington intends to rule.

  Barron, Bybee, Yoo, and Bradford are members of a new species—the Inhumanes—that has risen from the poisonous American environment of arrogance, hubris, and paranoia.

  

  

  

  

  

• Losing Faith? Traders Dump Japanese Stocks At Fastest Pace In History

  The narrative of the omnipotent central banker continues to be questioned with China's inability to save its own market the latest incarnation of investors losing faith. Nowhere has the religious zealotry been more fervent than in trading Japanese stocks where Abe and Kuroda have broken every independent rule in their manipulation of wealth-giving stocks. However – it appears their time is up, as Bloomberg reports, foreigners dumped 1.43 trillion yen of Japanese equities in the three weeks through Aug. 28, Tokyo Stock Exchange data updated Thursday show. That’s the most for any three-week span on record, overtaking the period when Bear Stearns Cos. collapsed in 2008.

   

  Global investors are pulling money out of Japan’s equity market at the fastest pace since at least 2004, according to Mizuho Securities Co. As Bloomberg details,

  Foreigners last week sold a net 1.85 trillion yen ($15.4 billion) of Japanese stocks and equity index futures, the biggest combined outflow since Mizuho began tracking the data more than a decade ago, said Yutaka Miura, a Tokyo-based senior technical analyst at the brokerage. Investors are fleeing amid concern about China’s economic outlook and the prospect of higher interest rates in the U.S., he said.

   

  “This is a result of investors dumping global risk assets,” said Miura. “Japanese stocks have performed well since the start of the year, so similar to what’s happening in Europe, we’re seeing people take profits.”

   

  Foreigners dumped 1.43 trillion yen of Japanese equities in the three weeks through Aug. 28, Tokyo Stock Exchange data updated Thursday show. That’s the most for any three-week span on record, overtaking the period when Bear Stearns Cos. collapsed in 2008.

   

  

   

  Net stock sales totaled 707 billion yen last week, and investors also reduced positions in index futures by 1.14 trillion yen, exchange data show. Cumulative flows for 2015 are still positive, with foreigners buying a net 1.1 trillion yen of equities through last week.

  As one local broker noted,

  “The sell-off started in China," Clarke said. “Investors couldn’t sell there in the end so selling spread to Asia, and Japan especially as it has a greater liquidity. This eventually spread to Europe and the U.S.”

  Time for some moar QQE Mr. Kuroda? Oh wait – you can't!!

  

  

  

  

  

• Why China Liquidations May Not Spike US Treasury Yields

  Via Scotiabank’s Guy Haselmann

  There has been quite a bit of market chatter this week about how central bank selling of foreign exchange (FX) reserves could cause Treasury yields to soar. The market has branded this action ‘Quantitative Tightening’; borrowing the term from a note written by a London-based markets strategist.  Investors seem quick to conclude that it will result in higher yields on Treasury securities. I disagree with this simplified assumption and will use this note to explain why.

  Yes, I remain bullish on long-dated Treasuries securities.    

  First some facts. No one disputes that central banks have been selling reserves. Aggregate global foreign exchange reserves fell to $11.43 trillion in Q1 from $11.98 trillion last summer. The aggregate amount most likely fell even further in Q2 and Q3 as Chinese economic growth concerns impacted global markets. These reserves are mostly held in G7 currencies, 64% percent of which are held in US dollars. Since the aggregate amount is measured and reported in US dollars, it should be noted that part of the decline is due to the fall in dollar terms of the reserves held in euros and yen. 

  To understand its impact on Treasuries – or German, UK, or Japanese bonds for that matter – it is important to understand why central banks have been selling. The decline (selling) is driven by a combination of factors, such as: a Chinese economic slowdown; the preparation of a looming Fed interest rate hike; the Renminbi devaluation; a depreciating domestic currency; capital outflows; and lower revenues from collapsed commodity prices.

  How do these factors lead to the selling of FX reserves?  Put simply, some countries are selling reserves in an attempt to either support falling local currencies or to offset capital flight. If an investor, for example, sells a Renminbi asset for dollars, China can sell some Treasuries to buy the Renminbi and support its currency and currency peg. If the investor chooses to invest the USD into Treasuries, then there is no net effect.

  More importantly, a probable driving force behind this transaction could be that the outlook for economic growth and inflation has fallen. In addition, there may simply be a flight to the safety of Treasuries in a world of growing central bank and political uncertainty (and one of greater imbalances and instability). Furthermore, as global capital markets have entered a new higher volatility regime, portfolios are forced to decrease risk accordingly.  Any central bank selling will be worse for equities than Treasuries. 

  Admittedly, de-risking is not a one-way bullish bet on bonds since leveraged carry trades and ‘risk-parity’ portfolios will need to do some selling. This is difficult to quantify. In addition, a slower growth world has depressed the price of oil leading to fewer petrol dollars being recycled back into Treasuries.

  However, I believe demand for Treasuries will more than offset central bank selling. Treasury selling by central banks is temporary, while the economic factors causing the action will be longer lasting. Weaker foreign currencies will mean cheaper goods being sent to the US. This will keep downward pressure on US consumer prices, and the proceeds of which will be recycled into US Treasuries.

  There is no doubt that the Chinese economy is in a material economic slowdown. Policy officials’ aggressive actions and scare tactics against equity short sellers could continue to cause capital flight. However, this does not mean that China is going to sell large quantities of Treasuries. There is too much co-dependency between the US consumer and Chinese exporter. 

  Destabilizing the US Treasury market with large sales would be tantamount to shooting themselves in the foot. Therefore, if capital flows became too large China would rather impose a penalty on outflows, than sell too many Treasury securities. Last week, Beijing imposed a 20% penalty in Renminbi forwards – that bet against currency depreciation.

  There was huge liquidation of FX reverses during the 1997 South East Asian currency crisis. The 10-year Treasury bounced around in a volatile range for many months, only making slow progress to lower yields over time despite scary market conditions. Ironically, it was only after the IMF granted loans, and the selling dissipated as the crisis eased, that Treasury yields fell markedly.

  In addition, demand from private pensions should increase. Penalties for underfunding will rise again on January 1st, so the incentives to expand LDI will increase. There is a shortage of high quality duration.

  Lastly, the Fed may choose a reinvestment schedule for maturing Treasury securities in 2016 that keeps the weighted-average-maturity of its balance sheet stable. If this happens, duration will be extracted from the secondary market to fix the duration of its balance sheet.   

  Foreign Demand for Dollars

  Due to low rates (zero lower bound), the amount of US dollar issuance by foreign corporations has risen from around $2 trillion in 2007 to around $8 trillion today (a 4X increase). I will guess that the average weighted maturity of this new issuance is 6 years. That would mean that any debt issued in 2009 is coming due this year.

  If the money stayed in US dollars, repayment would be less difficult. However, much of the proceeds were repatriated into domestic currencies. Since many foreign currencies have depreciated by 20%-60%, these liabilities have increased significantly in local currency terms. Many companies are scrambling to get dollars or hedge their currency exposures as they prepare to meet their obligations.  

  Central banks may have to find clever ways to offset or smooth these flows. Relative to the size of their economies, $8 trillion in outstanding liabilities is an enormous amount. This is likely one of several forces giving a relentless bid to the USD against certain currencies.

  September FOMC

  A sporting event is most enjoyable when the game is fair and competitive and when referees are rarely noticed. Central Banks should be viewed in the same light. To their dismay, they would admit that they are too visible and the source of daily news.  Part of the problem is that central banks have entered a dangerous cycle of investors expecting more stimuli for each and every economic wobble. (Hope-ium is highly addictive.)

  The markets began today in ‘risk-on’ mode due to ECB quasi-promises of doing whatever it takes.

  The first hike in nine years has been lingering above markets for well over a year.  Rightly or wrongly, there have been reasons and excuses to delay it.   Further delay will be damaging to markets and destructive for confidence.  The time for a hike has arrived. The best way to arrest these unhealthy conditions is to ‘rip the band aid off’ by hiking in two weeks and then sitting back and watching.  

  Elevated market volatility or international fragility should not deter the Fed from hiking.  A pause would actually cause more uncertainty and keep a hike looming over the market for longer. 

  One reason, the US Treasury curve has been steepening is the belief that the Fed will delay hiking rates until 2016. Some investors believe the Fed prefers a steeper curve; thus supporting their expectations for delay. I disagree with that prediction and rationale. 

  I agree that a hike would almost assuredly flatten the curve. This would occur because investors would either think that the Fed made a mistake, or because they would decrease expectations for growth and inflation given the fragility of the international economies. 

  However, I believe the Fed would not be bothered by a drop in long yields, because it would help support the housing market. Moreover, banks (who benefit from a steeper curve) already receive a subsidy (arbitrage) from interest on their excess reserves, and do not receive much margin in loans anyway.

  The bottom line is that I remain a bond bull and advise investors not to give into the hype of Chinese selling. (Moreover, the employment report tomorrow at this point does not matter.)  I expect long-dated yields to fall materially despite an interest rate hike by the FOMC at the September or October meeting. The next 50 basis point move in 10’s and 30’s is to lower yields and likely to happen before the end of the year.  

   “Over investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money.” –Irving Fisher

  

  

  

  

  

• The 2030 Agenda: This Month The UN Launches A Blueprint For A New World Order With The Help Of The Pope

  Submitted by Michael Snyder via The End of The American Dream blog,

  Did you know that the UN is planning to launch a “new universal agenda” for humanity in September 2015?  That phrase does not come from me – it is actually right in the very first paragraph of the official document that every UN member nation will formally approve at a conference later this month.  The entire planet is going to be committing to work toward 17 sustainable development goals and 169 specific sustainable development targets, and yet there has been almost a total media blackout about this here in the United States. 

  The UN document promises that this plan will “transform our world for the better by 2030“, and yet very few Americans have even heard of the 2030 Agenda at this point.  Instead, most of us seem to be totally obsessed with the latest celebrity gossip or the latest nasty insults that our puppet politicians have been throwing around at one another.  It absolutely amazes me that more people cannot understand that Agenda 2030 is a really, really big deal.  When will people finally start waking up?

  As I discussed in a previous article, the 2030 Agenda is taking the principles and goals laid out in Agenda 21 to an entirely new level.  Agenda 21 was primarily focused on the environment, but the 2030 Agenda addresses virtually all areas of human activity.  It truly is a blueprint for global governance.

  And later this month, nearly every nation on the entire planet is going to be signing up for this new agenda.  The general population of the planet is going to be told that this agenda is “voluntary” and that it is all about “ending poverty” and “fighting climate change”, but that is not the full story.  Unfortunately, there is so much positive spin around this plan that most people will not be able to see through it.  Just check out an excerpt from a piece that was published on the official UN website yesterday…

  The United Nations General Assembly today approved a resolution sending the draft ‘2030 Agenda for Sustainable Development’ to Member States for adoption later this month, bringing the international community “to the cusp of decisions that can help realize the… dream of a world of peace and dignity for all,” according to Secretary-General Ban Ki-moon.

   

  “Today is the start of a new era. We have travelled a long way together to reach this turning point,” declared Mr. Ban, recounting the path the international community has taken over the 15 years since the adoption of the landmark Millennium Development Goals (MDGs) towards crafting a set of new, post-2015 sustainability goals that will aim to ensure the long-term well-being of our planet and its people.

   

  With world leaders expected to adopt the text at a 25-27 September summit in New York, the UN chief said Agenda 2030 aims high, seeking to put people at the centre of development; foster human well-being, prosperity, peace and justice on a healthy planet and pursue respect for the human rights of all people and gender equality.

  Who doesn’t “dream of a world of peace and dignity for all”?

  They make it all sound so wonderful and non-threatening.

  They make it sound like we are about to enter a global utopia in which poverty and inequality will finally be eradicated.  This is from the preamble of the official 2030 Agenda document…

  This Agenda is a plan of action for people, planet and prosperity. It also seeks to strengthen universal peace in larger freedom. We recognise that eradicating poverty in all its forms and dimensions, including extreme poverty, is the greatest global challenge and an indispensable requirement for sustainable development. All countries and all stakeholders, acting in collaborative partnership, will implement this plan.

   

  We are resolved to free the human race from the tyranny of poverty and want and to heal and secure our planet. We are determined to take the bold and transformative steps which are urgently needed to shift the world onto a sustainable and resilient path.

   

  As we embark on this collective journey, we pledge that no one will be left behind. The 17 Sustainable Development Goals and 169 targets which we are announcing today demonstrate the scale and ambition of this new universal Agenda.

  If it is a “universal agenda”, then where does that leave those that do not want to be part of it?

  How will they assure that “no one will be left behind” if there are some nations or groups that are not willing to go along with their plan?

  The heart of the 2030 Agenda is a set of 17 Sustainable Development Goals…

  Goal 1 End poverty in all its forms everywhere

  Goal 2 End hunger, achieve food security and improved nutrition and promote sustainable agriculture

  Goal 3 Ensure healthy lives and promote well-being for all at all ages

  Goal 4 Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

  Goal 5 Achieve gender equality and empower all women and girls

  Goal 6 Ensure availability and sustainable management of water and sanitation for all

  Goal 7 Ensure access to affordable, reliable, sustainable and modern energy for all

  Goal 8 Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

  Goal 9 Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

  Goal 10 Reduce inequality within and among countries

  Goal 11 Make cities and human settlements inclusive, safe, resilient and sustainable

  Goal 12 Ensure sustainable consumption and production patterns

  Goal 13 Take urgent action to combat climate change and its impacts*

  Goal 14 Conserve and sustainably use the oceans, seas and marine resources for sustainable development

  Goal 15 Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss

  Goal 16 Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

  Goal 17 Strengthen the means of implementation and revitalize the global partnership for sustainable development

  Once again, many of those sound quite good.

  But what do many of those buzzwords actually mean to the elite?

  For instance, what does “sustainable development” actually mean, and how does the UN plan to ensure that it will be achieved globally?

  This is something that was discussed in a recent WND article…

  But what is “sustainable development?”

   

  Patrick Wood, an economist and author of “Technocracy Rising: The Trojan Horse of Global Transformation,” says it’s clear the U.N. and its supporters see sustainable development as more than just the way to a cleaner environment. They see it as the vehicle for creating a long-sought new international economic order, or “New World Order.”

   

  Wood’s new book traces the modern technocracy movement to Zbigniew Brzezinski, David Rockefeller and the Trilateral Commission in the early 1970s.

  And Wood is quite correct.  The environment is a perfect vehicle for the elite to use to bring in their version of utopia, because just about every possible form of human activity affects the environment in some way.  Ultimately, they hope to centrally plan and strictly regulate virtually everything that we do, and we will be told that it is necessary to “save the planet”.

  And they will never come out and openly call it a “New World Order” because “sustainable development” sounds so much nicer and is so much more acceptable to the general population.

  Needless to say, there wouldn’t be much room for individual liberty, freedom or good, old-fashioned capitalism in the world that the elite are trying to set up.  In fact, the U.N.’s number one sustainable development official has essentially publicly admitted this…

  “This is probably the most difficult task we have ever given ourselves, which is to intentionally transform the economic development model, for the first time in human history,” Figueres, who heads up the U.N.’s Framework Convention on Climate Change, told reporters in February.

   

  “This is the first time in the history of mankind that we are setting ourselves the task of intentionally, within a defined period of time, to change the economic development model that has been reigning for the at least 150 years, since the industrial revolution,” Figueres said.

  They plan to “intentionally transform the economic development model”?

  And so what will this new system look like?

  How will they achieve this “utopia” that they are promising us?

  Sadly, they are just selling the same lies that have been sold to people for thousands of years.  Paul McGuire, the co-author of a new book entitled “The Babylon Code: Solving the Bible’s Greatest End-Times Mystery“, commented on this recently…

  Deep inside every man and woman is the longing for a far better world, a world without war, disease, death, and pain. Our present world is a cruel world in which every life ends in death. From the beginning of time Mankind has sought to use science and technology to create a perfect world, what some would call Utopia or Paradise. As the Human Race began to organize itself, a Scientific or Technocratic Elite rose to power by promising the masses that they could build this perfect world. Ancient Babylon represented the first historical attempt to build paradise on earth.

  In ancient times, Babylon was the very first attempt to create a type of “global government”, and ever since then the global elite have been trying to recreate what Babylon started.

  The promise is always the same – the elite swear that they have finally figured out how to create a perfect society without poverty or war.  But in the end all of these attempts at utopia always end up degenerating into extreme forms of tyranny.

  On September 25th, the Pope is traveling to New York to give the opening address at the conference where the 2030 Agenda will be launched.  He will be urging all of humanity to support what the UN is trying to do.  There are countless millions that implicitly trust the Pope, and they will buy what he is selling hook, line and sinker.

  Don’t be fooled – the 2030 Agenda is a blueprint for a New World Order.  Just read the document for yourself, and imagine what our world would actually look like if they have their way.

  They want to fundamentally transform our planet, and the freedom that you are enjoying today is simply not acceptable.  To the elite, giving people freedom and liberty is dangerous because they believe it hurts the environment and causes societal chaos.  According to their way of thinking, the only way to have the kind of harmonious utopia that they are shooting for is to tightly regulate and control what everyone is thinking, saying and doing.  Their solutions always involve more central planning and more control in their own hands.

  So what do you think?

  Should we hand the global elite that kind of power and control?

  If not, then we all need to start speaking out about this insidious agenda while we still can.

  

  

  

  

  

• US Equity Futures Mini-Flash-Crash As Japanese Econ Minister Opens Mouth

  Just as the machines had learned the “Buy when Japan opens” signal, Japanese leaders unleash their usual stream of utter tripe and break the bid. Tonight’s chosen member was Japanese Economy Minister Amari who said “it is important for markets to act calmly, not move in a volatile manner,” adding “stock markets are not reflecting fundamentals,” reflecting on the fact that G-20 ministers had discussed China and “monetary tightening was likely in some advanced countries.” This sparked a plunge in USDJPY and an instant 100-point plunge in Dow futures.

   

  US equity futures mini-flash-crash

  

   

  Led by USDJPY…

  

   

  It appears the admission that an advanced nation was likely to tighten combined with his calls for calm were seen as increasing the odds of a rate hike being imminent for The Fed.

   

  It looks like The BoJ will have to get back to work tonight, since China is still on holiday. As it appears Kuroda likes this level (the red dashed line)…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Flashpoint: White House Confirms Russian Presence In Syria, Warns It Is "Destabilizing"

  Two days ago we reported something which we had anticipated for a long time but nonetheless did not expect to take shape so swiftly: namely, that with Assad’s regime close to collapse and fighting a war on three different fronts (one of which is directly supported by US air and “advisor” forces), Putin would have no choice but to finally intervene in the most anticipated showdown in recent history as “Russian fighter pilots are expected to begin arriving in Syria in the coming days, and will fly their Russian air force fighter jets and attack helicopters against ISIS and rebel-aligned targets within the failing state.”

  This was indirectly confirmed the very next day when an al-Nusra linked Twitter account posted pictures of a Russian drone and a Su-34 fighter jet – the kind which is not flown by the Syrian air force – flying over the Nusra-controlled western idlib province.

  

   

  Another twitter account said to have captured Russian soldiers in Zabadani “while fighting for Assad”

  

   

  Also, one day after our report, the Telegraph reported that “Syrian state TV reportedly broadcasts footage of Russian soldiers and armoured vehicle fighting alongside pro-Assad troops.” According to the article, “the video footage claimed to show troops and a Russian armoured vehicle fighting Syrian rebels alongside President Bashar al-Assad’s troops in Latakia. It is reportedly possible to hear Russian being spoken by the troops in the footage.”

  It added that “a Russian naval vessel was photographed heading south through the Bosphorus strait carrying large amounts of military equipment, according to social media and a shipping blog” while “an unnamed activist with the Syrian rebel group the Free Syrian Army told The Times: “The Russians have been there a long time.“

  “There are more Russian officials who came to Slunfeh in recent weeks. We don’t know how many but I can assure you there has been Russian reinforcement.” “

  Then earlier today we got the closest thing to a confirmation from the White House itself which confirmed that “it was closely monitoring reports that Russia is carrying out military operations in Syria, warning such actions, if confirmed, would be “destabilising and counter-productive.“

  Obama spokesman Joshn Earnest essentially confirmed Russia was already operating in Syria when he said that “we are aware of reports that Russia may have deployed military personnel and aircraft to Syria, and we are monitoring those reports quite closely.”

  “Any military support to the Assad regime for any purpose, whether it’s in the form of military personnel, aircraft supplies, weapons, or funding, is both destabilising and counterproductive.”

  And another confirmation: “a US official confirmed that “Russia has asked for clearances for military flight to Syria,” but added “we don’t know what their goals are.”

  “Evidence has been inconclusive so far as to what this activity is.”

  Other reports have suggested Russia has targeted Islamic State group militants, who have attacked forces loyal to Russian-backed Syrian leader Bashar al-Assad.

  Both the White House and the Pentagon refused to say whether they had intelligence suggesting the reports were accurate.

  Of course, what is left unsaid is that since Russia is there under the humanitarian pretext of fighting the evil ISIS, the same pretext that the US, Turkey, and the Saudis are all also there for, when in reality everyone is fighting for land rights to the most important gas pipeline in decades, the US is limited in its diplomatic recoil.

  Indeed as we sarcastically said last week: “See: the red herring that is ISIS can be used just as effectively for defensive purposes as for offensive ones. And since the US can’t possibly admit the whole situation is one made up farce, it is quite possible that the world will witness its first regional war when everyone is fighting a dummy, proxy enemy which doesn’t really exist, when in reality everyone is fighting everyone else!”

  * * *

  Which now effectively ends the second “foreplay” phase of the Syrian proxy war (the first one took place in the summer of 2013 when in a repeat situation, Russia was supporting Assad only the escalations took place in the naval theater with both Russian and US cruisers within kilometers of each other off the Syrian coast), which means the violent escalation phase is next. It also means that Assad was within days of losing control fighting a multi-front war with enemies supported by the US, Turkey and Saudi Arabia, and Putin had no choice but to intervene or else risk losing Gazprom’s influence over Europe to the infamous Qatari gas pipeline which is what this whole 3 years war is all about.

  Finally, it means that the European refugee crisis, which is a direct consequence of the ISIS-facilitated destabilization of the Syrian state (as a reminder, ISIS is a US creation meant to depose of the Syrian president as leaked Pentagon documents have definitively revealed) is about to get much worse as 2013’s fabricated “chemical gas” YouTube clip will be this years “Refugee crisis.” It will be, and already has been, blamed on Syria’s president Assad in order to drum up media support for what is now an inevitable western intervention in Syria.

  The problem, however, has emerged: Russia is already on the ground, and will hardly bend over to any invading force.

  Finally, while we have no way of knowing how the upcoming armed conflict will progress, now may be a safe time to take profits on that oil short we recommended back in October, as the geopolitical chess game just shifted dramatically, and with most hedge funds aggressively short, any realization that the middle east is suddenly a far more violent powderkeg – one which may promptly include the Saudis in any confrontation – could result in an epic short squeeze.

  

  

  

  

• Europe's Refugee Crisis "Out Of Control", Hungary PM Rages "This Is A German Problem, Not An EU Problem"

  The current refugee crisis is not an EU problem, but rather "a German problem," according to Hungary's Prime Minister Viktor Orban as his nation's borders are swamped with foreigners seeking to travel on to Germany. "People in Europe are full of fear because they see that the European leaders are not able to control the situation," he exclaimed after a meeting with EU President Schultz. He is right, of course, as we detailed here and here, but the sheer scale of the tragedy is worst than many could imagine. Orban defended his decision to erect a fence along its southern border with Serbia, saying: "we don’t do this for fun, but because it is necessary," adding rather pointedly that his country was being "overrun" with refugees, most of whom, according to the prime minister, were not Christians.

   

  The disturbing image of a drowned Syrian boy has crystallized the crisis across Europe for most of the rest of the world…

  

   

  And this morning's actions…

   

  As refugees flood into Europe from across The Middle East and Africa… (At least 450,000 of Syria’s pre-2011 Christian population of 1.17 million are either internally displaced or living as refugees abroad.)

  

   

  As AFP explains, it shows no signs of abating…

   

  As The FT reports,

  Europe is facing the most serious refugee crisis since the end of the second world war.

   

  In response, EU leaders are acting in very different ways. Angela Merkel, the German chancellor, has taken the humanitarian high ground, declaring that her country will receive up to 800,000 asylum applicants this year and confronting the anti-immigrant voices in her country. By contrast, David Cameron seems to be taking a mean approach, strictly limiting the number of refugees Britain will receive.

  And Hungary's Prime Minister is now daring to speak out – demanding action from his 'colleagues' in The Union…

  "We Hungarians are full of fear, people in Europe are full of fear because they see that the European leaders, among them prime ministers, are not able to control the situation," Orban said on Thursday, after a meeting with European Parliament President Martin Schulz in Brussels.

   

  The prime minister added: "I came here to inform the president that Hungary is doing everything possible to maintain order. We are creating now in the Hungarian parliament a new package of regulations, we set up a physical barrier and all these together will provide a new situation in Hungary and in Europe from September 15. Now we have one week of preparation time."

   

   

  On Thursday, Hungarian police allowed hundreds of migrants inside Budapest's main railway station, but then the authorities canceled all trains to Western Europe, causing chaos.

   

  Hundreds of people, many of them fleeing conflicts zones in the Middle East with their children, took a waiting train by storm, trying to push kids through open windows, hoping they would be allowed to continue their journey west to Austria, Germany and further afield. But signs in Hungarian said there were no west-bound trains, Reuters reported. It's unclear why the police had suddenly withdrawn, having stopped more than 2,000 migrants from entering for two days.

   

  Hungary is currently building a 3.5 meter-high fence on its southern border with Serbia designed to deter migrants. So far this year, 140,000 have been caught entering the country.

   

   

  Following talks with the president of the European Parliament Martin Schulz, Orban noted the current refugee crisis was not an EU problem, but rather "a German problem," as he put it.

   

  According to Orban, none of the migrants want to "stay in Hungary."

   

  "All of them want to go to Germany," the Hungarian prime minister said.

  *  *  *

  As we concluded previously,

  The refugee issue can and will not be solved by the EU, or inside the EU apparatus, at least not in the way it should. Nor will the debt issue for which Greece was merely an ‘early contestant’. The EU structure does not allow for it. Nor does it allow for meaningful change to that structure. It would be good if people start to realize that, before the unholy Union brings more disgrace and misery and death upon its own citizens and on others.

   

  However this is resolved and wherever the refugees end up living, we, all of us, have the obligation to treat them with decency and human kindness in the meantime. We are not.

  Russia appears to get it…

  Refugee crisis in Europe reaches “catastrophic” level as result of “irresponsible” approach to provoking regime change, Russian Foreign Ministry spokeswoman Maria Zakharova tells reporters in Moscow.

  Which means this is the tip of iceberg compared to what is coming…

  The media focus on a truck in Austria where 70 human beings died, and on a handful of children somewhere who were more dead than alive when discovered. These reports take away from the larger issue, that there are dozens such cases which remain unreported, where there are no camera’s present and no human interest angle to be promoted that a news outlet thinks it can score with.

   

  Brussels and Berlin must throw their energy and their efforts at ameliorating the circumstances in the countries the refugees are fleeing. They need to acknowledge the role they have played in the destruction of these countries. But the chances of any such thing happening are slim to none. Therefore countries like Greece and Italy must draw their conclusions and get out, or they too will be sucked down into the anti-humanitarian vortex that the EU has become.

   

  Europe needs to look at the future of this crisis in very different ways than it is doing now. Or it will face far bigger problems than it does now.

   

  Italy’s Corriere della Sera lifted part of the veil when it said last week (Google translation):

   

  The desperation of millions of human beings, manipulated by traffickers and by terrorist groups is also an instrument of disintegration of the countries of origin and of destabilization of the host countries.

   

  It is estimated that sub-Saharan Africa will have 900 million more inhabitants in the next twenty years. Of these, at least 200 million are young people looking for work. The chaos of their countries of origin will push them further north.

   

  That is the future. It will no more go away by itself, and by ignoring it, than the present crisis, which, devastating as it may be, pales in comparison. Europe risks being overrun in the next two decades. And as things stand, it has no plans whatsoever to deal with this, other than the military, and police dogs, barbed wire, tear gas, fences and stun grenades.

  This lack of realism on both the political and the humane level will backfire on Europe and turn it into a very unpleasant place to be, both for Europeans and for refugees. Most likely it will turn the entire continent into a warzone.

  The only solution available is to rebuild the places in Syria and Libya et al that the refugees originate from, and allow them to live decent lives in their homelands. If Brussels, and Washington, fail to realize this, things will get real ugly. We haven’t seen anything yet.

  So far the EU changes have been a disaster…

  

   

  And all this to get a gas pipleine across Syria!!!

  

  

  

  

  

• As China Parks Its Ships Next To Alaska, Here's Obama

  As Xi and Putin stand proudly before the parade of China's military might and Chinese navy ships enter the Bering Sea for the first time ever, President Obama is busy doing other things just a few hundred miles away…

   

  

   

  Ironic really, as Reuters reports,

  The rise of selfie photography in some of the world's most beautiful, and dangerous, places is sparking a range of interventions aimed at combating risk-taking that has resulted in a string of gruesome deaths worldwide.

   

  …

   

  Several governments and regulatory bodies have now begun treating the selfie as a serious threat to public safety, leading them to launch public education campaigns reminiscent of those against smoking and binge drinking.

  *  *  *

  One wonders where Obama will selfie next?

  

  

  

  

  

  

• Why Economics Matters

  Submitted by Jeff Deist via The Mises Institute,

  This article is a selection from a June 19 presentation at a lunchtime meeting of the Grassroot Institute in Honolulu at the Pacific Club. The talk was part of the Mises Institute’s Private Seminar series for lay audiences. To schedule your own Private Seminar with a Mises Institute speaker, please contact Kristy Holmes at the Mises Institute.

  First let me say that what we today call “Austrian economics” flows from the great legacy of classical economics, with the very important modification economists now call the “marginal revolution.” Austrian economics is also a term that describes a healthy and vibrant (though often oppositional) modern school of economic thought. It originated with intellectual giants like Carl Menger and Ludwig von Mises, names I’m sure many of you are familiar with. These economists were from Austria, hence the term.

  There was a landmark conference at South Royalton, Vermont in 1974, attended by the likes of Murray Rothbard and Milton Friedman, that revitalized the Austrian movement and helped it regain prominence in the latter part of the twentieth century. Milton Friedman was in attendance, and that’s when he famously remarked that “There is only good economics and bad economics.”

  And of course that’s true. Schools of thought should not be rigid, or dogmatic, or too narrowly defined. But classifying various economists and theories into groups or family trees does indeed help us make sense of economics. It helps us understand how we arrived at a time and place where Ben Bernanke, Paul Krugman, Thomas Piketty, and Christine Lagarde are viewed as modern mainstream thinkers rather than the radicals they are when compared to the whole history of the field.

  

  Image courtesy of Peter Cresswell.

  We supplied some photocopies that roughly trace the history of economic thought. Notice the split in the 1930s, not coincidentally during the Great Depression, between Mises and John Maynard Keynes. Up until then, from about 1850 forward, Austrian economics was mainstream economics. But as you can see, most of today’s mainstream economists fall somewhere under the umbrella of Keynes, and they tend to focus on variants of Keynes’s ideas about aggregate demand.

  But at least they focus on something!

  Ignorance of Economics Is not Bliss

  Which leads me to my topic today: “Why Any Economics Matters.” I say “any” because at this point the entire subject appears to be lost on the average American. Economics is not a popular topic among the general population, it would seem. When economics is discussed at all, it’s in the context of politics — and politics gives us only the blandest, safest, most meaningless platitudes about economic affairs.

  Bernie Sanders or Hillary Clinton simply are not going to talk much in economic terms or present detailed economic “plans.” On the contrary, they — will assume rightly — that most Americans just don’t have any interest beyond sloganeering like “1%,” “social justice,” “greed,” “paying their fair share,” and the like.

  Candidates on the Right won’t be much better. They’d prefer to talk about other subjects, but when they do broach economics they’re either outwardly protectionist like Donald Trump or deadly dull.  Who is inspired by flat tax proposals?

  Americans simply aren’t much interested in the details, or even the accuracy, of the economic pronouncements of the political class. We want bread and circuses.

  Consider what people talk about on Facebook: lots of posts about family. Lots of posts about celebrities, and sports. Lots of posts about food, health, and exercise. Some posts about politics, culture, race, and sex, but usually only to support one side or bash the other.

  Not much, ladies and gentlemen, in the way of economics. And I submit that might be a very healthy thing. After all — we’re rich! Only a wealthy society does not have to focus on the subsistence-level concerns of adequate food and shelter, hot running water, clothing, electricity, and the like.

  So let’s not be too hard on people for not spending their free time reading economics. Leisure itself is a very important activity, and represents a form of economic trade-off.

  But economics matters very much, and we ignore it at our own peril. Economics is like gravity, or math, or politics — we may not understand it, or even think about it much, but it profoundly affects us whether we like it or not.

  Economics as a subject has been captured by academia, and academics like Krugman are not so subtle when they imply that lay persons should leave things to the experts. It’s like team sports — we may be introduced to it when we’re young, but only the professionals do it for a living as adults.

  Yet once we understand that all human action is economic action, we understand that we can’t escape or evade our responsibility to understand at least basic economics. To think otherwise is to avoid responsibility for our own lives.

  While we shake our heads when twenty year olds can’t read at the college level or do simple algebra, we don’t worry much whether they never take economics. We would be alarmed if our children couldn’t perform basic math to know how much change they should get at a cash register, but we send them out into the world far more susceptible to being cheated by politicians. Why do we want our kids to learn at least basic geography, chemistry, and physics? And grammar, spelling, literature, history, and civics? We want them to know these things so they can navigate their lives properly as adults

  But somehow we’ve come to believe economics should be left to academics and policy wonks. And worse yet, we don’t protest when kids grow up to become adults with little or no knowledge of economics, yet still have strong opinions about economic issues.

  Ignorance of basic economics is so widespread that we ought to have a specific word for it, like we have for illiteracy or innumeracy.  

  The aforementioned Murray Rothbard had this to say: 

  It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a “dismal science.” But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

  I’m sure we’re all familiar with this phenomenon on social media, which seems perfectly suited to vociferous unfounded opinions.

  Let’s consider the minimum wage issue, as one example that’s been in the news lately:

  Wages are nothing more than prices for labor services. When the price for something rises, demand drops — and you have more unemployed people than you otherwise would. Pure and simple Econ 101.

   

  Yet what percentage of Americans today have even seen a downward sloping demand chart in a high school or college class?

  It is this great and widespread ignorance of economics that plagues our ludicrous political landscape. It allows politicians to attack capitalism, and make demagogues out of entrepreneurs. It allows politicians to blame free markets for the very economic problems caused by the state and its central bank in the first place — like the dot com implosion, like the housing bubble, like the Crash of 2008, like the unsustainable equity prices commanded by US stock markets today.

  In short, ignorance of economics allows some very big falsehoods to be accepted as fact by large numbers of people. And it’s only going to get worse as the presidential election of 2016 unfolds.

  Read the full text here.

   

  

  

  

  

  

• Turkey Arrests Journalists, Sets Up Terrorist "Tip Line" As Currency Plunges, Violence Escalates

  Last month, Turkey’s central bank had a chance to give the plunging lira some respite by preempting the Fed and hiking rates.

  Only they didn’t.

  And not only did they not hike, they made it clear that tightening would only occur once the Fed tightened and then made matters immeasurably worse by proceeding to stumble through a “roadmap” of how they planned to deal with DM policy normalization. That, combined with political turmoil, an escalating civil war (and yes, that’s what it is), and pressure on EM in general has led directly to further weakness for TRY:

  

  We bring this up because Turkey, like Brazil, is a country to keep an eye on and not only because of the prominent role it will ultimately play in deciding the fate of Syria’s Bashar al-Assad, but because much like Brazil, things seem to get worse by the day both economically and politically. Take Thursday for instance, when inflation came in hot, prompting Goldman to suggest that the central bank had indeed missed its window. Here’s Goldman:

  Headline and core inflation accelerated sequentially in August, on broad-based price increases. This trend will likely continue, as renewed exchange rate weakness passes through to domestic prices in the coming months, and food disinflation loses momentum. We continue to forecast end-2015 CPI at 8.2% but with moderate upside risks.

   

  In our view, the CBRT may have missed an opportunity to start normalising/simplifying its policy framework by keeping all policy rates unchanged in the August MPC meeting. This raises the risk of earlier and more aggressive rate hikes than we have been forecasting. We reiterate our long-held Conviction View to own Turkey protection, through 5-year CDS spreads.

  And a bit more from Credit Suisse:

  We are revising our headline inflation forecasts higher. Following the lira’s depreciation in August and the recent upside surprises to food price inflation, we are revising our end-2015 inflation forecast to 8.6% from 7.8% previously and our end-2016 inflation forecast to 7.4% from 7.2% previously. 

  And for a more general assessment of the growing economic malaise we got to BofAML: 

  Turkish macro seems to be facing a perfect storm as both domestic and external uncertainties are weighing down on GDP growth. The run rate of GDP growth has slowed down to 2%, TRY weakness keeps CPI inflation sticky close to 8%, weak FX revenues and consumption driven GDP growth keeps CAD around 6% of GDP, and CBT is unlikely to deliver market’s expectation of sharply higher TRY rates to put an end to TRY weakness. Since TRY is still not at oversold levels and further EMFX cannot be ruled out, we believe macro will not be supportive of Turkish asset prices in the near-term. In the meantime, we expect some populism in macro policies until the November elections, as stakes are high. 

  So all around bad. Of course one of the main drivers of the market’s declining confidence in Turkey is the political turmoil that’s gripped the country since June when AKP lost its parliamentary majority for the first time in over a decade throwing President Recep Tayyip Erdogan’s plan to transform the country’s political system into an executive presidency into doubt. Not one to give up easily (especially when it comes to consolidating his power), Erdogan proceeded to launch an ad hoc military offensive against the PKK in an attempt to undermine support for the pro-Kurdish HDP ahead of new elections. Now, with elections set for November, the witch hunt has officially kicked into high gear. 

  Earlier this week, in a move dubbed “unsubstantiated, outrageous and bizarre” by Amnesty International, Turkey arrested three Vice News journalists (two British citizens and an Iraqi) for allegedly “engaging in terror activity” on behalf of ISIS. This is of course just the latest example of Ankara using the NATO-backed ISIS offensive as an excuse to eradicate pro-Kurdish sentiment. According to The New York Times (and according to common sense) the reporters’ only real “crime” was “covering the conflict between Kurdish separatists and the Turkish state.” The British journalists were reportedly released on Thursday while Mohammed Ismael Rasool (the Iraqi) was not.

  But the media crackdown didn’t stop there. On Tuesday, Turkish police raided Koza-Ipek Media which, as AFP notes, “owns the Turkish dailies Bugun and Millet, the television channels stations Bugun TV and Kanalturk and the website BGNNews.com and is close to Erdogan’s political rival, the US-based Muslim cleric Fethullah Gulen.” 

  “I’m worried that operations targeting the media will create great concern across the world about the state of democracy in Turkey,” Turkey’s new EU affairs minister and HDP member Ali Haydar Konca said.

  Indeed. Perhaps even more alarming were reports that Ankara will now set up a terrorist tip hotline, complete with monetary awards. “Turkey to reward informants on tips about ‘terrorists'”, Bloomberg reported on Monday, citing Gazette. 

  It also looks like Erodgan will station soldiers at the polling stations when Turkey goes back to the ballot box in November – you know, for “security” purposes. Here’s Hurriyet:

  Security forces will take all necessary measures to ensure election safety on Nov. 1 in a bid to avoid the repetition of problems that allegedly occurred in the June 7 polls, President Recep Tayyip Erdo?an has said.

  Yes “the problems”, namely that AKP lost its parliamentary majority. But that’s nothing the military can’t solve. Here’s Erdogan himself (note the chilling passage in bold):

  “I believe our government, our Armed Forces and Interior Ministry will take all measures for election safety so that we’ll get through [the polls] with minor damage. I presume that what happened in the June 7 [elections] will not be repeated on Nov. 1 as part of election safety.”

  And because that still isn’t enough, Turkey is now arresting the relatives of its own (dead) soldiers for criticizing Erdogan:

  From Bloomberg, citing Anadolu Agency:

  Turkey arrests relative of killed soldier on Erdogan insult. Man allegedly insulted President Tayyip Recep Erdogan during memorial ceremony for Turkish soldier killed in roadside bombing last month.

  In this type of environment – that is, in a country where the President is not only willing to start a civil war to regain an absolute majority in parliament on the way to forcibly changing the constitution, but also willing to throw journalists in prison for attempting to cover said civil war – it becomes difficult to distinguish real escalations from potential false flags. After all, the more “attacks” blamed on PKK, the less voter support for HDP, which is why it’s easy to cast a wary eye towards Wednesday’s Molotov cocktail attack on an AKP district branch, an attack which was promptly blamed on “a group of PKK supporters” by AKP mouthpiece Daily Sabah:

  A goup of PKK supporters have attacked an AK Party district branch with Molotov cocktails on Wednesday night in the eastern Bitlis province’s Hizan district. No one was injured in the attack but the branch office was reportedly left unusable.

   

  The district firefighters immediately intervened and managed to extinguish the fire in the building. 

   

  AK Party Provincial Head Nesrullah Tanglay told the state-run Anadolu Agency reporters: “Through these attacks, they are trying to downbeat our party’s organizations before the elections on November 1.”

   

  

  Bear in mind that this is all being carried out with the explicit blessing of Washington and NATO thanks to the fact that Erdogan has managed to trade a brutal crackdown not only on his political rivals (on the way to negating the results of a free election and thereby completely undermining the democratic process), but now also on the press (who are apparently only allowed to cover the story if they’re willing to parrot the AK Party line), for a promise to assist in the campaign against ISIS which is of course really nothing more than a thinly veiled effort to invade a sovereign country and overthrow its government. And as if that weren’t enough, Anakara will now pay the public for terrorist “tips” dialed in to a dedicated hotline.

  What absolutely must not be lost in all of this is that this is i) a NATO member and ally of The White House, and ii) an investment grade country. 

  And because, when taken together, all of the above is somewhat disconcerting for all kinds of reasons, we’ll close with a bit of comic relief, via Bloomberg:

  Erdogan to set up Presidential TV channel before election. 24-hr news channel to broadcast Turkish President Recep Tayyip Erdogan’s speeches and events Zaman reports, without saying where it got the information.

  

  

  

  

  

• Peak Obedience

  Submitted by Paul Rosenberg via FreeMansPerspective.com,

  Warnings about Peak Oil have circulated widely in recent years, and if accurate, they are important. Peak oil, however, pales in comparison to something that’s happening right in front of us… and something that is a good deal more dangerous: Peak Obedience.

  If that concept strikes you as odd, I can understand why: We’ve all been living inside of an obedience cult. (And I choose these words carefully.)

  In our typical “scary cult” stories, we find people who have given up their own functions of choice and who then do crazy things because they are told to by some authority. While inside their cult, however, it all makes sense; it’s all self-reinforcing.

  So, inside a cult of obedience, obedience would seem proper; it would seem righteous; and more than anything else, it would seem normal. And I think that very well describes the Western status quo.

  Obedience, however, should not seem normal to us. Obedience holds our minds in a “child” state, and that is not fitting for any healthy person past their first few years of life. It also presupposes that the people we obey have complete and final knowledge; and in fact, they do not: politicians, central bankers, and the other lords of the age have been wrong – obviously and publicly wrong – over and over.

  So, obedience is not a logical position to take. But we all know why we take it; and that reason is fear. The mass of humanity obeys because they are afraid to do otherwise. All the “philosophy of governance” explanations are merely attempts to distract us from the truth: people believe they’ll be hurt if they don’t obey.

  We are taught not to think in such stark terms, of course. Those “philosophy of governance” explanations give us reasons to believe that obedience is the good and heroic thing to do. Still, we know the truth.

  But that truth about fear, even though important, is not the point I’d like you to take away from this article. My primary point is this:

  When we obey, we make ourselves less conscious; we make ourselves less alive.

  Why Obedience Is Peaking

  I covered this in far more depth in issue #40 of my subscription letter, but I would like to provide a brief explanation here.

  Over the past two centuries, authority has benefitted from a perfect storm of influences. There was never such a time previously, and there probably will never be another. Briefly, here’s what happened:

  Morality was broken

  For better or worse, Western civilization had a consistent set of moral standards from about the 10^th century through the 17^th or 18^th century. Then, through the 20^th century, those standards were broken.

  Note that I did not say morality was changed. The cultural morality of the West was not replaced, but broken. The West has endured a moral void ever since.

  Previously, people routinely compared authority’s decrees to a separate standard (most often the Bible), to see if they held up. But with Western morals broken, authority was freed from restraint.

  Economies of scale

  Factories made it much cheaper to produce large numbers of goods than the old way, in individual workshops. Economists call this an economy of scale. Thus a cult of size began, making “obedience to the large” seem normal.

  Fiat currency

  Fiat currency has allowed governments to spend money without consequences. It allowed politicians to wage war and to provide free food, free education, and free medicine… all without overtly raising taxes. Fiat currency made it seem that politics was magical.

  Mass conditioning

  Built on the factory model, massive government institutions undertook the education of the populace. And more important than their overt curriculum (math, reading, etc.) was their invisible curriculum: obedience to authority. Here, to illustrate, is a quote from the esteemed Bertrand Russell, who is himself quoting Johann Gottlieb Fichte, the founding father of public schooling:

  Education should aim at destroying free will so that after pupils are thus schooled they will be incapable throughout the rest of their lives of thinking or acting otherwise than as their school masters would have wished.

  Mass media

  Mass media turbocharged authority and obedience in the 20^th century. It was authority’s dream technology.

  All of these things, and others, created an unnatural peak for authority. But now, this perfect storm is receding.

  Peak Obedience Is Brittle

  Through the 20^th century, the people of the West built up a very high compliance inertia. They complied with the demands of authority and taught their children to do the same, until it became automatic. People obeyed simply because they had obeyed in the past.

  Authority quickly became addicted to this situation, basing their plans on receiving every benefit of the doubt.

  Automatic obedience, however, is a brittle thing. Economies of scale are failing, the money cartel has been exposed, government schools have lost respect, mass media is fading away, and the game continues because the populace is distracted and afraid. And that will not last forever.

  The ‘walls’ of reflexive compliance are growing thinner. Any serious break may ruin the structure.

  And Then?

  It has long been understood that complex systems breed more complexity, and eventually break themselves. As central authorities try to solve each problem they face, they inevitably create others. Eventually the system becomes so complex, and its costs so much, that new challenges cannot be solved. Then the system and its authority fail, as they did recently in the Soviet Union.

  Sooner or later, this is going to happen here. (If that seems impossible to you, please reflect on the current state of the mighty Roman Empire.) But again, that’s not my primary point. Obedience matters to you right now: today and every other day.

  Obedience turns the best parts of you off. It degrades and kills your creativity; it undercuts your effectiveness and especially your sense of satisfaction.

  Don’t sign away your life, no matter how many others do. Live consciously.

  

  

  

  

  

• FX Traders Fear "Worst Case Scenario" For Brazil As FinMin Cancels Travel Plans, Rousseff Meets With Lula

  It’s not that we want to pick on Brazil, it’s just that simply put, it’s one of the most important emerging markets in the world, which means that when depressed demand from China, plunging commodity prices, a shock devaluation from the PBoC, and the generally lackluster pace of global trade conspire to trigger an emerging market meltdown, Brazil is very likely to end up at the center of it all and sure enough, that’s exactly what’s happened. 

  Late last week, we noted that Brazil officially entered a recession in Q2, a quarter which also ushered in the worst stagflation in a decade and saw unemployment rise to five-year highs. Then on Monday, the government officially threw in the towel on running a primary surplus (striking a major blow to market confidence in the process) and then yesterday, we got a look at industrial production in July which missed wildly, coming in at -1.5% m/m versus consensus of -0.01%. Meanwhile, exports cratered 24%.

  We could go on. And bear in mind that the budget issue is complicated by the fact that Rousseff’s political woes are making budget cuts next to impossible to pass. As Italo Lombardi, senior LatAm economist at StanChart told Bloomberg earlier this week, the admission that the country would likely miss its primary surplus target underscores the trouble “Finance Minister Joaquim Levy faces in winning congressional approval for austerity measures and pushes Brazil’s credit rating closer to junk status.” “Politics are making Levy’s life very difficult,” Lombardi added.

  So difficult in fact, that he may now resign and that, according to at least one trader, would be the worst scenario possible. Here’s Bloomberg with more:

  Brazil’s real declined for a fifth straight day and fell to a new 12-year low as speculation grew that Finance Minister Joaquim Levy is closer to leaving his post amid budget turmoil.

   

  A gauge of the rout’s momentum rose to a five-month high as a Valor Pro newswire columnist, citing unidentified people at presidential palace, reported that Levy canceled a trip to the Group of 20 meeting in Turkey and planned to talk with President Dilma Rousseff later Thursday. In a setback for Brazil, the Treasury scrapped an auction of local fixed-rated government bonds for the first time in 19 months as yields at a six-year high made borrowing expensive.

   

  “Seeing Levy leave would be worse than Rousseff stepping down or even her impeachment,” Guilherme Esquelbek, a currency trader at Correparti Corretora de Cambio, said from Curitiba, Brazil. “His departure is the worst scenario we can have right now.”

  Meanwhile, Copom is stuck between a rock and a hard place – that is, they can’t hike to support the currency because the economy is in such terrible shape. Here’s Goldman on Wednesday’s MPC decision to hold Selic at 14.25%:

  One could argue that given the drifting currency (approximately 20% since June) it would even demand additional rate hikes if the monetary authority’s objective is still to, with reasonable confidence, drive inflation to the 4.50% target by end-2016. However, given the rapidly deteriorating real activity picture and heightened political/institutional noise and uncertainty, near-term rate hikes are unlikely.  

   

  

   

  And in the wake of last week’s GDP data and Monday’s confirmation of the budget blues, Barclays is out with a bit of decisively negative commentary both on the outlook for the economy and for the fiscal situation. Here’s more:

  We now forecast a 3.2% fall of real GDP in Brazil in 2015, to be followed by a 1.5% contraction the next year. The downside surprise in Q2 and the deeper recession in the second half of this year also imply a negative contribution to next year’s growth. Household consumption should continue contributing negatively to headline growth, together with fixed asset investment. 

   

  

   

  The disappointment with fiscal execution, coupled with the lack of capacity of the government to negotiate structural changes in how expenditures grow, leads us to expect a fiscal primary deficit for this year and next of 0.3% and 0.5% of GDP, respectively. For 2015, the fiscal measures approved in Congress were reduced meaningfully from the original proposal and are contributing with only 0.53% of GDP to the fiscal balance. Even including those, we forecast total real fiscal revenues to fall 3.2%, as the growth slowdown is having the biggest negative contribution on this year’s result.

   

  

   

  And the inevitable result (as we’ve been saying for months): 

  The implication is a downgrade in less than one year. We believe the rating agencies will take off the investment grade rating in H1 16, starting likely in April by S&P, given the increased pace of deterioration of the macroeconomic juncture and the disappointment relatively to the agencies’ forecasts. Moody’s could follow suit in the second half of the year, if it becomes clear that the country will fail to achieve real GDP growth and the primary surplus as percentage of GDP near 2%, as the agency expects for 2017. At this point, it is very hard to foresee any meaningful change in the political and/or economic scenario that could avoid such an outcome.

   

  

  Finally, in what is always the surest sign that a market-moving rumor is probably true, we got the official government denial this afternoon:

  • LEVY SAYS HAS NO PLANS TO LEAVE BRAZIL GOVT: EL PAIS

  Underscoring how serious the situation truly is, the headlines are still coming in with Bloomberg reporting that former President Luiz Inacio Lula da Silva “will travel to Brasilia tonight to meet with President Dilma Rousseff” for a one-on-one where the two will discuss “higher pressure on Finance Minister Joaquim Levy, 2016 budget proposal and possible restoration of CPMF tax.” 

  Clearly, this is bad news. All sarcasm and jokes aside, it looks as though Brazil may be about to step off the ledge here. You now have a President with an approval rating of just 8% convening an emergency meeting with the former President, a finance minister on the verge of pulling a Varoufakis, a plunging currency, a hamstrung central bank, and a nightmarish fiscal situation. 

  So… who wants tickets to next summer’s Olympic games in Rio? 

  

  

  

  

  

  

• Ask The Expert – Ted Butler

   

   

  Hold your real assets outside of this system in a private non-government controlled facility   –>  http://www.321gold.com/info/053015_sprott.html

   

   

   

  Ask The Expert – Ted Butler

  (Click For Original & Transcript)

   

   

   

  Ted Butler is one of the world’s most respected precious metals analysts. His perspective is highly valued by the everyday investor as well as large stakeholders in the investment world.Ted started as a broker in the early 1970’s but began his journey as an independent analyst over 20 years ago. Today, Ted’s writings are renowned for their formidable insights, particularly into the silver market where he has garnered significant acclaim for his knowledge of price manipulation by big banks.

   

   

   

   

   

   

  
  

  Please email with any questions about this article or precious metals HERE

  

  

  

  

• 4 Charts Show Why This Rally May Become A Rout!

  Submitted by Harry Dent via EconomyandMarkets.com,

  There’s a reason why I warn you to get out of a bubble a little early rather than a little late. It’s because the first wave down tends to happen in a matter of a few weeks or months, sometimes days. It’s fast and furious.

  I know this because I’ve studied every major bubble in modern history – all the way back to the infamous tulip bubble in 1637, when a single tulip cost more than most people made in a single year! And what I’ve seen in each case, without exception, is that bubbles do not correct in nice stair steps when they’re coming off their highs. They burst, crash, collapse, clatter, clang – however you want to say it!

  When the bubble deflates, it typically crashes 50% minimum to as high as 90%. But it’s that first wave down that can wipe out 20% to 50% right off the bat!

  Below I have four charts that make the argument for me.

  They show the 1929 bubble burst… the 1987 crash… the 2000 “Tech Wreck”… and the latest of 2015 from the Red Dragon itself – China’s Tsunami.

  In each case, the fact that these bubbles were destined to burst were only obvious to the few that weren’t in denial. Most give into the bubble logic that new highs are the new norms. They think: “This time is different.” It’s not! It never is.

  It’s always hard to predict exactly when bubbles will peak and crash. It’s like dropping grains of sand on the floor. A mound will build up – becoming like a Hershey’s kiss that grows more narrow at the top. At some point, one grain of sand will cause the avalanche. Who knows which grain of sand that one will be!

  Here are those charts. Like I said, they speak for themselves!

  

  What does that tell you!? EVERY bubble bursts. Bam, pow – no exceptions! So hopefully you understand why I keep harping on about this.

  I’m just as amazed as anyone that this global bubble has gone on as long as it has. But it’s finally started to crash.

  You can tell by following a series of recent tops in major markets:

  Transports in November…

   

  Utilities in January…

   

  Germany’s DAX index and Britain’s FTSE in April…

   

  What looks to be the Dow and S&P 500 in May…

   

  China’s Shanghai index in June…

   

  And the Nasdaq looks to have peaked in July.

  Now that we’re in the classic “crash season,” the situation only looks worse. This season technically started in mid-August, and won’t end until mid-October. This is not to say the chaos won’t continue later on into the end of this year. It just means the worst decline, this first wave down, is likely to come in the next several weeks.

  So consider this current bounce a gift. The signs are all there that this global bubble is done. Use this time to get out of any passive investments in stocks.

   

  

  

  

  

  

• Bridgewater's 'All-Weather' Fund Goes Negative For 2015 After Risk-Parity's Worst Quarter Since Lehman

  The $80 billion Bridgewater All Weather Fund, a risk-parity model managed by hedge fund titan Ray Dalio, was down 4.2% in August, according to Reuters citing two people familiar with the fund's performance. This leaves the fund down 3.76% for 2015 as the frameworks for these funds are forced mechanically to reposition as correlations and volatilities across asset classes break down. Just as we saw in the summer of 2013's Taper Tantrum, the last 2 weeks have seen 4 to 5 sigma swings in daily returns and 'generic' risk-parity funds have suffered the biggest 3-month losses since the financial crisis.

   

  And here is the simple reason why these funds 'broke'… China selling Treasuries to meet liquidity needs as global carry trades were unwound and smashed stocks lower 'broke' the historical relationship between stocks and bonds. Since the so-called "risk parity" strategy is supposed to make money for investors if bonds or stocks sell off, though not simultaneously.

  

   

  And this did not help the multi-asset funds – the USD-Commodity correlation regime flipflopped…

  

   

  Simply put, the historical relationships between asset classes (volatilities and correlations) that are used to construct optimal "risk-parity" funds in order that 'risk' is balanced and hedged across bonds and stocks (for example) broke down dramatically:

  First, realized volatilities exploded relative to historical (or even forecast volatilities) that are used to weight exposures; and

   

  Second, the correlation regime entirely flipped for multiple asset classes – entirely breaking any 'expected' diversification or hedges.

  And the result…based on Salient Risk's Risk Parity fund index, the last 3 months have seen a 10.7% drop – the most since the financial crisis (and worse than the mid 2013 plunge). Some context for the recent moves may help:

  • Friday August 21st – 4 Sigma plunge
  • Monday August 24th – 5 Sigma crash
  • Thursday August 27th – 5 Sigma Spike
  • Tuesday September 1st – 4 Sigma collapse

  Risk manage that!

  

   

  Which explains why we also saw the big drop in mid 2013 (Taper Tantrum) when – just as this past 2 weeks – bonds sold off and stocks sold off…before a complete flip-flop right aftre the June FOMC meeting.

  

   

  We asked in August 2013 – When Will Risk Parity Funds Blow Up Again? – it appears we have our answer.

  As UBS' Stephane Deo noted then (and JPMorgan has confirmed now), that in a rising rate environment, so-called risk-parity portfolios were susceptible to draw-down as yields 'gap' higher.

  As UBS noted at the time, which seems just as crucial now, it is not the actual rate increases (or decoupling) but the "speed limit" or velocity of the moves and with liquidity either 'on' of 'off' now, the gappiness of moves increased the potential threat from risk-parity funds.

  And as JPMorgan's head quant noted today, the management of this exposure (i.e. the selling) is only half-way through.

  Risk Parity strategies de-lever when asset volatility and correlation increase. In our report last week, we estimated that risk parity outflows from equities may total $50-100bn on account of the increase in market volatility and risky asset correlations. These rebalances have started, but, given their typically slower rebalance frequency (e.g. monthly), are largely incomplete. We believe the bulk of the risk parity flows are yet to come, and this may add selling pressure to equities over the next 1-3 weeks. To illustrate this point, one can look at a sample multi-asset Risk Parity strategy such as the Salient Risk Parity index. The beta of this index to the S&P 500 (shown in the figure above) reached highs of 60% in early August, and has dropped to about 45% currently (compared to a beta of 0% during some of the previous episodes of market volatility).

  Charts: Bloomberg

  

  

  

  

  

• Sep 4 – ECB's Draghi: Greece Not Ready Yet For ECB To Buy Its Bonds
  Follow The Market Madness with Voice and Text on FinancialJuice

   

  EMOTION MOVING MARKETS NOW: 11/100 EXTREME FEAR

  PREVIOUS CLOSE: 10/100 EXTREME FEAR

  ONE WEEK AGO: 12/100 EXTREME FEAR

  ONE MONTH AGO: 21/100 EXTREME FEAR

  ONE YEAR AGO: 48/100 NEUTRAL

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 24.35% 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 26.09. 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 is slightly greater than the number hitting highs and is at the lower end of its range, indicating extreme fear.

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC) 

   

  MEME OF THE DAY – DUBAI GOLD DEALER OLYMPICS

   

  UNUSUAL ACTIVITY

  MBLY SEP 55.5 PUT ACTIVITY 1500 @$2.90 on offer

  TSM OCT 20 CALLS 4694 block @$.95 right by offer

  RAD JAN 9 CALLS 3K @$.54 on offer

  SAEX 10% Owner P 11,394 A $ 3.02 P 17,693 A $ 2.95

  TBPH .. SC 13G Filed by GlaxoSmithKline .. 24.5%

  More Unusual Activity…

   

  HEADLINES

   

  ECB’s Draghi Unveils Revamped QE Program

  ECB’s Draghi pledges more QE if needed

  ECB’s Draghi: Greece not ready yet for ECB to buy its bonds

  ECB Keeps All 3 Main Rates Unchanged As Expected

  US ISM Non-Manf. Composite (Aug): 59.0 (est 58.2, prev 60.3)

  US Trade Balance (USD) (Jul): -41.86B (Est -42.20B, Rev Prev -45.21B)

  US Initial Jobless Claims (Aug 22): 282K (Est 275K, Rev Prev 270K)

  US Markit Services PMI (AUG F): 56.1 (Est 55, Prev 55.2)

  Atlanta Fed Q3 GDPNow Forecast Updated +1.5% (Prev +1.3%)

  US Tsy Sec Lew: No concern yet in financial institutions from market turmoil

  IMF Official: Fed Can Keep Their Rates Low Until Wage/Price Inflation Is Seen

  Greek leftists put on brave face as poll shows conservatives pulling ahead

  U.S. stocks lose steam as oil prices pull back

  Oil futures mark 5th gain in 6 sessions

   

  GOVERNMENT/CENTRAL BANKS

  ECB’s Draghi Unveils Revamped QE Program –BBG

  ECB’s Draghi pledges more QE if needed –CNBC

  ECB Main Refinancing Rate (Sep 3): 0.05% (Est 0.05%, Prev 0.05%)

  ECB Deposit Facility Rate (Sep 3): -0.20% (est -0.20%, prev -0.20%)

  ECB Marginal Lending Facility (Sep 3): 0.30% (est 0.30%, prev 0.30%)

  Atlanta Fed Q3 GDPNow Forecast Updated +1.5% (Prev +1.3%)

  US Tsy Sec Lew: No concern yet regarding financial institutions from market turmoil –Rtrs

  IMF Official: Fed Can Keep Their Rates Low Until Wage/Price Inflation Is Seen –RTE

  IMF: Market volatility alone not reason for concern over yuan –Rtrs

  EZ official: G20 discussing China, Fed rates and will not discuss Greece

  Greek leftists put on brave face as poll shows conservatives pulling ahead –Rtrs

  GEOPOLITICAL

  China flexes muscles with World War II military extravaganza –CNN

  Iran supreme leader: Sanctions must be lifted, not suspended –Israel Times

  Migrant crisis ‘a German problem’ – Hungary’s Orban –BBC

  FIXED INCOME

  Treasury prices edge higher on dovish ECB, U.S. jobs data eyed –RTRS

  Portugal’s Bonds Lead Gains In Periphery as ECB Raises QE Asset-Buying Limit –BBG

  US Tsy Reduces Size of Next Week’s Bill Sales –Tsy

  ECB’s Draghi: Greece not ready yet for ECB to buy its bonds –Rtrs

  FX

  EUR: Dovish Draghi hits euro and Bund yields –FT

  USD: Dollar Mixed As Investors Await August Employment Report –RTT

  CAD: Loonie Climbs on Positive Trade Data, Higher Oil Prices –WBP

  Yuan pessimism eases on China central bank efforts, Asia FX sentiment less bearish –Rtrs poll

  COMMODITIES/METALS

  Oil futures mark 5th gain in 6 sessions –MktWatch

  Saudi Aramco Cuts October Crudes to U.S. as Refinery Demand Falls –BBG

  US EIA Natural Gas Storage Change (Aug 28): 94 (est 90, prev 69)

  Gold plunges nearly 1% as ECB lowers inflation, GDP forecasts –Investing.com

  Copper Prices Climb Amid Respite From Chinese Selling –WSJ

  Anglo American in talks to sell troubled platinum mines –FT

  EQUITIES

  INDEX: U.S. stocks lose steam as oil prices pull back –MktWatch

  INDEX: Eurozone stocks rally after Draghi comments –Rtrs

  INDEX: ECB bond buying hint lifts FTSE higher –BBC

  EARNINGS: Medtronic profit and sales beat expectations –MktWatch

  EARNINGS: Campbell Soup Sales Fall Due to Strong Dollar, Weak Demand –Fox

  BANKING: UniCredit weighing 10,000 job cuts in revamp –BBG

  AUTOS: VW’s finance chief set to become new chairman –Rtrs

  TECH: Microsoft has acquired VoloMetrix –MsftNews

  TECH: Japan Display CEO hints at strong Apple orders ahead of new iPhone launch –Rtrs

  MEDIA: AOL to buy Millennial Media at a 31% premium –MktWatch

  MINING: Joy Global cuts guidance as profit, sales miss –MktWatch

  CONSUMER GDS: General Mills sellS Green Giant to B&G Foods for $765mln –USAToday

  CONSUMER GDS: Genesco profit, sales rise above expectations –MktWatch

  CONSUMER GDS: Lululemon’s stock up after Wedbush puts it on a ‘best ideas’ list –MktWatch

  HEALTHCARE: CVS: tobacco ban led to a decrease in cigarette purchases –MktWatch

  EMERGING MARKETS

  Lira Weakens After Turkey Inflation Miss as Rates Seen Too Low –BBG

  Brazilian Real Drops for Fifth Day as Levy Seen Closer to Exit –BBG

  Rand Leads Emerging-Currency Declines as Economic Data Weighs –Rtrs

  Indian Stocks Rebound From 13-Month Low as Metalmakers Advance –BBG

   

  Ruble Holds Firm as Official Moots Return of Dollar Purchases –BBG

  

  

  

  

  

• Is This Where The US Recession Is Hiding?

  On the surface, US industrial production – the most important component of any manufacturing recovery, or alternatively recession – is solid. In August, Industrial Production surged by 0.6% which was the biggest sequential increase since November. Of course, as we have shown, the only reason industrial production is strong is because of subprime debt-funded auto purchases which have sent new motor vehicle production soaring in recent months, but as long as the recovery narrative is intact, what’s another “little” auto subprime bubble: surely the Fed can make it disappear in “15 minutes.”

  On the other hand, there is a huge flashing red light when looking at the entire industrial lifecycle of US manufactured products: while production is brisk, end demand in the form of completed sales, is crashing.

  And this is where the alarm buzzer for the US economy goes off, because while industrial production does suggest the recovery is stable, the ratio of US inventory to sales has tumbled to levels indicative of recession, which also means that while US factories are humming, their output is accumulating in warehouses, overflowing parking lots and storage facilities.

  So to answer the question: yes, the US recession is hiding just under the “question mark” at the unexplained and perplexing divergence between industrial production, and actual end sales…

  

  …. all of which result in a record inventory stockpiling which as we showed before, is what recently boosted Q2 GDP to an unsustainable 3.7% growth rate.

  

  What happens when the inventory liquidation finally arrives as end demand fails to materialize? One word: recession.

  And just to preempt the next question: how much longer can the can be kicked, here is Bank of America’s explanation:

  During the past four US manufacturing recessions (ex-GFC), global EPS has declined by 16% on average peak-to-trough. Since current EPS is already down 8.5% since mid-2014, this suggests another 8-9% downside in this worst-case scenario.

  With China’s help, we are almost there.

  

  

  

  

  

• US To Slap Chinese Hackers With Sanctions Ahead Of Xi Visit

  Early last month, the Obama administration made a bold decision.

  The White House decided, after careful deliberations, that the cyber attack on the Office of Personnel Management was, to quote The New York Times, “so vast in scope and ambition that the usual practices for dealing with traditional espionage cases [do] not apply.” In short:

  This came just days after a “secret” NSA map “leaked” to the press showing the alleged frequency of cyber intrusions emanating from China. Here’s the map:

  

  “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,” intelligence sources told NBC, who broke the story. 

  We summed up six months of ridiculous back-and-forth cyber banter as follows:

  The release of the map marked the culmination of a cyber attack propaganda campaign which began with accusations that North Korea had attempted to sabotage Sony, reached peak absurdity when Penn State claimed Chinese spies had taken control of the campus engineering department, and turned serious when Washington blamed China for what was deemed “the largest theft of US government data ever.” Whether all of this is cause for the Pentagon to activate the ‘offensive’ component of its brand new cyber strategy remains to be seen.

  Now, FT says the US is ready to respond to by “slapping sanctions on Chinese companies connected to the cyber theft of US intellectual property.” Furthermore, the US is apparently prepared to risk announcing the sanctions ahead of Xi Jinping’s first official visit to the US. Here’s FT:

  The Obama administration has for months been preparing a raft of sanctions to respond to mounting commercial espionage from China. Three US officials said the sanctions would probably be unveiled next week, just weeks before Chinese President Xi Jinping makes his first state visit to America.

   

  Officials have been divided over whether the administration should impose the sanctions before the Xi visit. Proponents argue that the US needs to show China that it is serious about tackling cyber espionage. But opponents worry that such timing would seriously damage the visit.

   

  The state department had been pushing for the sanctions to come after it, according to people familiar with the situation. But law enforcement officials argued against waiting because of the serious nature of the cyber attacks.

   

  One official said the move would probably come next week, after the US Labour Day holiday. He said the White House wanted to avoid slapping China with sanctions immediately before the visit, to give China time to cool down before Mr Xi meets President Barack Obama in Washington.

   

  China wants to boost Mr Xi’s status as a global leader, but his visit — which will include a 21-gun salute and a big banquet — will be overshadowed by the Pope’s, which will attract huge media coverage, and also the move to impose sanctions.

   

  One former US official said: “The cyber sanctions could really throw a spanner in things. There is no reason to embarrass the president of China. It would crater the visit.”

  Yes, “no reason to embarrass” Xi, because after all, Xi is not a man who enjoys being embarrassed. Just ask any of the 200 people who were arrested over the past week for conspiring to use the stock market selloff as an “opportunity to maliciously concoct rumors to attack [the] Party and national leaders.” 

  So we will await the details on the first round of US “cyber sanctions” against the legions of Chinese hackers who have apparently stolen everything from the blueprints for electric cars to delicate information about America’s ultra-modern airtraffic control network, and in the meantime, simply ask whether another set of “sanctions” are being prepared in response to the PLA navy’s unprecedented operations off the coast of Alaska.

  And meanwhile, in China…

  

  

  

  

  

  

• Is It Over Yet?

  Submitted by Lance Roberts via STA Wealth Management,

  Could Additional ECB QE Cure The US Market

  This morning the European Central Bank (ECB) seemed forced to "do something" given the recent market weakness. With inflation expectations collapsing, markets declining and economic growth weak, the best hope for market "bulls" at the moment was an expansion of the ECB's current QE program.

  Mario Draghi, head of the ECB, did not fail to deliver by increasing the share limit for QE from 25% to 33% (the size of the program was NOT increased). However, ironically, they also cut inflation forecasts for 2015-2017. I say ironically because the QE program is specifically meant to drive inflation towards to the magical 2% mark. 

  The question is whether an expansion the current QE program will have any real impact on the markets, inflation or economic growth?

  It was just six months ago that the ECB launched their initial quantitative easing program to much fanfare and hopes of a swift economic recovery. So far, results have been disappointing. As noted by The Economist:

  "GDP in the second quarter of 2015 from Eurostat are disappointing. The consensus among economists was that the 19-strong currency club would grow by 0.4%, the same as in the first quarter. Instead the pace of quarterly growth slowed a little, to 0.3%, leaving output 1.2% higher than a year ago."

  Inflation has also been non-existent despite the ECB's monetary interventions. Consumer prices in the Eurozone are barely higher than now than a year ago. As stated above, at just 0.2% currently, the ECB has a long way to go, as does the Federal Reserve, to reach target levels of 2%.

  However, for investors, it is the potential impact of additional ECB QE on the domestic markets that counts. The problem is that all QE programs are not equal. As shown in the chart below, I have noted the Fed's QE programs and the effect on domestic markets and the ECB's program. 

  

  It is clear that the expansion of the Fed's balance sheet, and the subsequent boost to bank reserves, led to immediate impacts to asset prices. When the programs ended, asset prices struggled. As noted, the ECB's current QE program has had little effect on boosting domestic asset prices due to the lack of increase in domestic liquidity. 

  While the ECB's action may stabilize the markets temporarily, it seems unlikely that this action will reverse the current negative trends and momentum in the markets.

  ISM Defies Economic Strength Hopes

  One of the most watched economic reports, besides the monthly employment report, is the Institute of Supply Management (ISM) Manufacturing and Services indices. Currently, there is a very interesting divergence going on between the two with services showing strength while manufacturing wanes. Since both measures are historically correlated, such divergences tend not to last indefinitely. 

  However, since what we are after is a view of the health of the overall economy, we can combine the two into a single index to see the overall trend. 

  

  As I have shown, the composite ISM index has a history of cyclical rebounds and declines primarily driven by inventory restocking cycles caused by the ebb and flow of the real economy. 

  Such a rebound cycle was witnessed during the 2nd quarter of 2015, as inventories were replenished following the exceptionally cold winter season. While pundits were ecstatic over the 3.7% print of GDP in the second quarter, the ISM composite currently suggests the manufacturing rebound has likely concluded. As such, Q3 GDP will likely print well below 2% in the months ahead. 

  We can find further confirmation of that suggestion by looking a core durable goods which excludes aircraft and defense spending.

  

  The most recent report on core durable goods suggests that future ISM reports will likely remain weak and with winter fast approaching puts already weak economic growth at risk. 

  Is It Over Yet?

  It is THE question that is on every investor's mind right now; is the correction over yet? The honest answer is that no one really knows. However, from a technical perspective my suspicion is that current market volatility is likely to be with us for quite some time longer. 

  I discussed earlier this week the technical backdrop of the market currently stating:

  

  "For the first time since 2000 or 2007, the market has now registered a momentum based 'sell' signal. Importantly, this is a very different reading that what was seen during the 2010 and 2011 'corrections' and suggests the current correction may be more significant.

  The chart also confirmed by numerous other indications that also support the 'mark of the bear.'"

  While the rebound over the last two days were certainly welcome, I have suggested over the past two weeks to continue raising cash during such opportunities. The reason is that while August was indeed a weak month, statistically speaking September has often been worse.

  As my friend Anora Mahmudova pointed out recently:

  "In the 11 instances since 1945 when the S&P 500 fell more than 5% in August, September returns were negative 80% of the time, averaging a decline of 4%, said Sam Stovall, U.S. equity strategist at S&P Capital IQ. History is a good guide, but not necessarily a gospel"

  

   "The correction we've had so far, if we assume that was the bottom, was too shallow by historical standards. Especially if you consider that it was the first 10% correction in 44 months. The median decline after going more than 30 months since the prior decline in excess of 10% was 19.9%," Stovall said."

  With earnings declining, economic growth forecasts weak and many mutual funds needing to rebalance portfolios as the end of the quarter approaches, there is sufficient pressure to push stocks lower in the weeks ahead. 

  The REAL RISK currently is not missing some of the upside if the bull market does begin to resume, but rather catching the downside if this correction turns into a full-fledged bear. 

  Just some things worth thinking about.

  

  

  

  

  

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• America – Good, Bad Or Ugly? Part 1: The Bad

  Submitted by Thad Beversdorf via FirstRebuttal.com,

  I wanted to start with The Bad and then move on to The Ugly so that I can end on a positive note with The Good.

  So over the past couple days I’ve read several articles in which someone who is publicly an adamant proponent of righteous behaviour was exposed as being a complete hypocrite (think essentially any politician).  And this really got me to thinking about the epidemic that has befallen America.  We no longer have anyone in positions of trust acting with any sense of integrity.  Our policymakers, bankers, corporations, unions, etc., all of these institutions have become nothing but a mechanism to enhance the personal positions of those who have the ability to directly or indirectly control the actions of those institutions.

  By the late 1990’s the world was in the most prolonged period of global peace since WWII.  Accordingly, military budgets around the world were being slashed.  And so those with the powers that be decided the world therefore required some new wars to ensure peace continued (not kidding that is exactly what they argued), as I evidenced in an article last year, The Most Essential Lessons of History that No One Wants to Admit.  Now the thing is, it’s not just politicians and policymakers that are devoid of any common decency these days but those who can manipulate every facet of our society.

  Let’s look at central bankers for instance.  The other day David Stockman wrote a great article highlighting the ridiculousness of statements by the Fed Vice Chair, Stanley Fischer.  The point is Fischer is either out of touch, out of his mind or lying to us.  But it’s not just at the highest levels that we see this type of human decay.  Not at all.  Let’s look to an area that so many of us know intimately, the financial services sector.  Now there are a lot of examples we could use here but let’s look at a particularly interesting firm infamous for its culture of indiscretions.  Jefferies LLC, which used to be Jefferies & Company Inc., is a mid tier investment bank, similar to Goldman Sachs in that it has no retail branches.

  In 2012 Richard Handler, CEO of Jefferies, was actually the highest paid banker on Wall Street.  And not to be left out in the cold, Handler’s number two, Brian Friedman also topped the charts as discussed in a Bloomberg article from 2013 which explored the credit risk such payouts create.  Now making absurd amounts of money may or may not be ethical but what I find more interesting is the blatant hypocrisy of guys like Richard and Brian.  As has been written about many times (e.g. here and here) is the fact that Richard and Brian put out a monthly company wide letter with words of ‘wisdom’ that are to guide and encourage their employees to rise above the fray.  They look something like this from a recent monthly letter…

  “…By the way, the capitalism concept really never took hold in Russia because the only way lasting, open markets work is through transparency, a culture of integrity and rule-following, and a true legal system.”

  Now that sounds admirable on the surface, however, the reality when we look at the culture at Jefferies is anything but above the fray.

  Remember Jesse Litvak?  He’s the only banker that has been personally prosecuted, convicted and sent to prison for fraud related to TARP and was a Jefferies Managing Director at the time.  Now for those of you that don’t remember, Litvak was caught lying to a customer when an employee of his accidentally sent that client an email exposing the lie.  In the end, Litvak tried to explain away his actions to the court by saying it was common practice at Jefferies.  The government agreed according to a quote from a bloomberg report, “Litvak wasn’t the only employee who lied to his customers, the government said. ”

  Now some might feel well one example doesn’t prove a corrupt culture, right?  And I only wish it were but a fleeting example, unfortunately though isn’t.  Perhaps the most outrageous banking scandal of all time was Sage Kelly, Head of Global Health Care Investment Banking, for Jefferies.  Sage Kelly is the real deal.  He is Wall Street anthropomorphized in all its glory as depicted in a classic article by the boys at ZeroHedge.  And again it appears that it wasn’t just poor behaviour by one man but a culture taken on by several top investment bankers at Jefferies.  And surely the severely outlandish culture adopted by these bankers is not the type of behaviour that goes unnoticed.  For unlike artists, legends in banking are known, not in death, but in the here and now.

  What is less known is that Jefferies was actually sued by UBS for the way in which they acquired Sage and his Investment banking group from UBS, as this article by the NYT describes.  But it appears that for Richard Handler and his executive officers, being called out for inappropriate behaviour is not a deterrent as some 3 years later Jefferies was sued by Newedge for the very same thing, as described in this FT article.  It’s beginning to seem that despite Richard and Brian’s monthly words of moral and ethical enlightenment to their employees, it is them that have failed to live up to the benchmark they preach.

  Now when a CEO is making $58M a year he should be held to a higher standard of accountability.  But what we find is quite the opposite, as we regularly see now in America those in positions of notable status are exempt from consequences.  The Rich Handlers, Donald Rumsfelds, Hilary Clintons of the world reap all the upside and zero downside.  Similar to the market having a Fed put, members of America’s upper class have a legal put.  They simply are not held to the same standard to which the rest of us are held.  And so if Litvak had the letters CEO in front of his name surely he would have been spared any prison time.  Instead a large fine would have been paid into the Treasury’s General Fund and all would have been forgiven.

  And so the consequences are worn by the non-elites, that is, the rest of us.  The Rumsfeld lies that took us to Iraq and all of the subsequent continued fallout (now ISIS) are worn by soldiers fighting a synthetic enemy created in a social laboratory to perpetually expand defense industry contracts.  The selling of favours and foreign policy deals by Hillary are worn by the families that lost loved ones in Benghazi.  The multiple failures of Handler to properly manage risk and culture inside his firm led to rising legal and regulatory costs and declining business further leading him to shut down, only three years after purchasing, Pru Bache, a 130 year old company that had weathered the worst of storms.  His failures are worn by thousands of non-six-figure income financial services sector employees that lost their jobs when he closed the doors on the 130 year old company but while he continues to receive his 8 figure compensation.

  We can all think of literally a hundred examples of the legal put provided to those in the American upper class.  And while any single example has a story of tragedy behind it, it is the assumed immunity we give across the board to those with a notable status that perpetuates their self serving indifference to those for which their duties are naturally responsible but now unaccountable.   Yet we give them immunity, in part, because they do a fantastic job of portraying themselves as having concern for right and wrong and falling on wrong only due to circumstances outside of their control.

  This really pinpoints the issue.  While we listen to politicians, central bankers and CEO’s preach publicly about doing what’s right, ensuring economic stability, protecting the middle class and watching out for our employees and customers, it’s all absolute bullshit now isn’t it.  That is, while guys like Rich and Brian pretend to be angelic proponents of good behaviour their firm is clearly an absolute disgrace in an industry already known for its lack of integrity.  And it’s surely not just Jefferies but the general corporate and political culture in this nation that suffers from a lack of accountability and a lack of character.  Apologies and fines are great but they don’t deter the bad behaviour that always lands on the rest of us, that much is clear.

  This nation has become a land where character and integrity are secondary to profits for the few and self serving interests of the powerful.  And as we are seeing already for the third time in this millennium’s infancy, stability and prosperity can be but short lived for even the highest paid CEO’s in such a world.

  In Part II, I am going to expose The Ugly by releasing a recorded conversation of perhaps, contextually, the ugliest example of just how callous and inhumane our banking executives have become.  Watch for it.

  

  

  

  

  

• China's "Historic" 70th Victory Day Parade: Live Webcast

  For those wondering why Chinese futures aren’t crashing as of this moment, only to surge in the last hour of trading like plunge protected clockwork, the reason (and also the patriotic alibi behind China’s “National Team” valiant, if failed, attempts to get a green Shanghai Composite close the past three days) is shown below: this is what Tiananmen Square looked like moments ago before the start of China’s “historic” 70th V-day parade celebrating the anniversary of the end of the second world war as well as China’s victory over Japan, not necessarily in that order (it is still unclear if those five Chinese ships parked off of Alaska are in any way related to today’s festivities).

  Here, via Xinhua, is a list of China’s contributions in the war effort:

  • 1 million — Since the July 7 Incident in 1937, when full-scale war against Japanese aggression broke out, the Chinese battlefield tied up about 1 million Japanese troops, or two thirds of the total Japanese army.
  • This allowed the Soviet Union to deploy more than half a million troops from the Far East to the country’s major battlefield with the German Nazis, thus accelerating its victory against Germany.
  • 1.5 million — As the major battlefield of the Pacific War, China inflicted heavy casualties on the Japanese aggressors, costing them 1.5 million troops, which makes up more than 70 percent of total Japanese military casualties in the war.
  • 1.28 million — After the war, more than 1.28 million Japanese troops surrendered their weapons to China, accounting for about 50 percent of those who surrendered overseas.
  • 35 million — China was one of the crucial fighters in WWII and made tremendous sacrifices during the war. According to incomplete statistics, Chinese military and civilian casualties added up to approximately 35 million.
  • That accounts for one third of the total casualties suffered by all countries during WWII.

  What makes this year’s parade unique is that for the first time in addition to the countless participants from the People’s Liberation Army, nearly 1000 troops from 17 countries will participate in the parade.

  The preparations started early as this video of downtown Beijing confirms. Alternatively, this is what China’s capital will look like once the SHCOMP is back to 2000:

  China’s #VDay parade military vehicles move to downtown Beijing. pic.twitter.com/Px67g3bJoJ

  — China Xinhua News (@XHNews) September 3, 2015

  Then the troops starting arriving:

  Video: Troops gather near Tian’anmen Square, ready for China #Vday parade that marks 70th anniv of WWII end pic.twitter.com/3DeEcNXJvQ

  — China Xinhua News (@XHNews) September 3, 2015

  Troops are all lined up along Chang’an Street in #Beijing, all prepared for the grand #VDay parade. pic.twitter.com/EwC2dFCxS2

  — People’s Daily,China (@PDChina) September 2, 2015

  All Set to Go: Troops are standing by near #Tiananmen Square for the kick off of the #VDay parade. pic.twitter.com/K7TWIPnfpm

  — People’s Daily,China (@PDChina) September 2, 2015

  … then the foreign soldiers:

  Replay: Foreign soldiers from 17 countries train in Beijing for today’s #VDay parade http://t.co/AfkAauzNfV pic.twitter.com/5GMS6GZbsU

  — China Xinhua News (@XHNews) September 3, 2015

  … and the people:

  Audience are arriving at the scene for the grand #VDay military parade, which is starting in an hour and a half. pic.twitter.com/W8LAyKJS0L

  — People’s Daily,China (@PDChina) September 3, 2015

  … the occasional celebrity:

  Kungfu star @EyeOfJackieChan is seen at the scene of #Beijing #Vday military parade among other spectators pic.twitter.com/xhU1Eh4uLd

  — China Xinhua News (@XHNews) September 3, 2015

  … then the generals:

  Chinese troops and foreign military are preparing for the kick off of the #VDay parade in #Beijing. pic.twitter.com/yHOkjm9mBi

  — People’s Daily,China (@PDChina) September 3, 2015

  Until finally Xi himself showed up:

  #VDay President Xi Jinping and his wife Peng Liyuan take photo with heads of foreign delegations and their spouses. pic.twitter.com/U9r2IRDwBm

  — People’s Daily,China (@PDChina) September 3, 2015

  Chinese President #XiJinping and his wife welcome S. Korean President #ParkGeun-hye ahead of #VDay parade. pic.twitter.com/tcRwpCV9p6

  — China Xinhua News (@XHNews) September 3, 2015

  And, naturally, the guests of honor among which none other than Vladimir Putin:

  Live: President #XiJinping & first lady Peng Liyuan greet #Putin ahead of China’s #VDay parade @KremlinRussia_E pic.twitter.com/5lifr4SU7H

  — China Xinhua News (@XHNews) September 3, 2015

   

  Finally, for those sitting in front of their computer in Chinese stock market rollercoaster withdrawal, here is a live feed from Beijing to fill the transitory void in your lives:

  

  

  

  

  

• "It's A Tipping Point" Marc Faber Warns "There Are No Safe Assets Anymore"

  Markets have "reached some kind of a tipping point," warns Marc Faber in this brief Bloomberg TV interview. Simply put, he explains, "because of modern central banking and repeated interventions with monetary policy, in other words, with QE, all around the world by central banks – there is no safe asset anymore." The purchasing power of money is going down, and Faber "would rather focus on precious metals because they do not depend on the industrial demand as much as base metals or industrial commodities," as it's now "obvious that the Chinese economy is growing at nowhere near what the Ministry of Truth is publishing."

   

  Faber explains more… "I have to laugh when someone like you tries to lecture me what creates prosperity"

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  Some key exceprts…

  On what central banks hath wrought…

  I think that because of modern central banking and repeated interventions with monetary policy, in other words, with QE, all around the world by central banks there is no safe asset anymore. When I grew up in the '50s it was safe to put your money in the bank on deposit. The yields were low, but it was safe.

   

  But nowadays, you don't know what will happen next in terms of purchasing power of money. What we know is that it's going down.

  On the idiocy of QE…

  in my humble book of economics, wealth is being created through, essentially, a mixture of capital spending, and land and labor. And if these three production factors are used efficiently, it then creates a prosperous society, as America became prosperous from its humble beginnings in 1800, or thereabout, to the 1960s, '70s. But it's ludicrous to believe that you will create prosperity in a system by printing money. That is economic sophism at its best.

  On the causes of iunequality…

  unfortunately the money that was made in U.S. stocks wasn't distributed evenly. And we have precise statistics, by the way published by the Federal Reserve, who actually benefited from the stock market boom post-2009. This is not even one percent of the population. It's 0.01 percent. They took the bulk.

   

  And the majority of Americans, roughly 50 percent, they don't own any shares anyway. And in other countries, 90 percent of the population do not own any shares. So the printing of money has a very limited impact on creating wealth.

  On China's lies… and its commodity contagion…

  I indicated on this program already a year ago, the Chinese economy was decelerating already then. It's just that the fund managers didn't want to accept it.

   

  And now it's obvious that the Chinese economy is growing at nowhere near what the Ministry of Truth is publishing in China, but more likely either no growth at all or maybe around two percent, but no more than that.

   

  So that has a huge impact on commodity prices, and in turn it has a huge impact on the economies of all the raw material producers around the world from Latin America, to Australasia, Russia, Middle East, Africa and so forth. And these countries then with falling commodity prices have less money to buy, also less money to buy American goods.

  On Asian currency devaluation… and a Chinese economic collapse…

  Yes. These countries just followed the example of what Mr. Draghi and Kuroda tried to achieve with lowering the value of their currencies, which is actually to create a depression in real incomes and a contraction of world GDP in dollar terms, and a contraction of world trade in dollar terms, which is of course negative for economic growth around the world.

   

  Well, I mean, we have to put the achievements of China and also of President Xi in the context of what China was 20, 30 years ago, and what it is today. And it's a remarkable change. Now will China have a very serious setback? And don't forget, the U.S. after 1800 had numerous financial crises, and depressions, and the Civil War, and went through World War I, and through the depression years, and World War II and so forth. And the country continued to grow.

   

  I think China is, from a cyclical point of view now, in a very serious downturn, serious. And from a secular point of view, I think there is still tremendous growth opportunity in China in the long run. But, as I said, cyclically I think they're going to have a tough time

  On where to invest…

  I would rather focus on precious metals, gold, silver, platinum because they do not depend on the industrial demand as much as base metals, as industrial commodities.

   

  If I had to turn anywhere, where, as you say, the opportunity for large capital gains exists, and the downside risk is in my opinion, limited, it would be the mining sector, specifically precious metals, mining companies, in other words, gold shares.

   

  I would buy mining stocks. I am not saying they will go up, but I think they will go down less than a lot of other shares. And by the way, if you ask me about relative value, I think emerging markets are not yet cheap, cheap, but I think the return expectation I would have over the next seven to 10 years by investing in emerging markets would be much higher than, say, in U.S. stocks. The U.S. market is overhyped and is expensive in terms of valuations from a historical perspective. Emerging markets are no longer terribly expensive.
   

  

  

  

  

  

• Who Would Win World War 3? The Infographic

  For those unaware, China is conducting a massive military parade on Wednesday to commemorate the 70th anniversary of the end of World War II.

  The event – which is accompanied by a three-day public holiday – is important for Xi Jinping, who is keen to project China’s strength to the world, especially in the wake of the country’s economic deceleration and highly publicized stock market meltdown. 

  Of course the parade also comes amid heightened tensions between Washington and Beijing.

  China’s land reclamation efforts in the South China Sea – where the PLA has constructed nearly 3,000 acres of new sovereign territory atop reefs – has regional US allies on edge. The dispute came to a head earlier this year when China effectively threatened to shoot down a US spy plane carrying a CNN crew over the Spratlys. 

  It’s against this backdrop that we recently brought you infographics demonstrating China’s South China Sea naval superiority on the way to asking who would win a maritime conflict. Below, courtesy of CNN, is a simple infographic which puts the militaries of the US and China side by side on the way to making a comparison that may well become increasingly relevant in the new bipolarity.

  

  

  

  

  

• Guest Post: Trump Can Win The GOP Nomination

  Submitted by Bruce Bartlett via The Fiscal Times,

  To save myself from answering this question repeatedly, these are the thoughts I have had about Trump since he became a presidential candidate, which were partly expressed in a Politico article over a month ago.

  First of all, I think his support is firm and shows no sign of diminishing. He has already weathered storms such as his criticism of John McCain that would have doomed any other candidate. Anyone who thinks he is the current version of Cain, Bachmann, Santorum or other nutcase that briefly led the GOP field in 2012 is dead wrong.

  Keep in mind also that in primary elections, one doesn’t need majority support to win in a field with multiple candidates. And intensity of support is often more important than the percentage. Support for the designated favorite of party insiders is often exaggerated in polls and I think Trump’s supporters are unusually motivated.

  Second, Trump’s positions on the issues are largely irrelevant to his success. None of his supporters care whether a wall across Mexico is remotely feasible or that he regularly flip-flops on the issues. What he is selling is attitude and a certain fascistic form of leadership. He will get things done, his supporters believe. And it’s less important what he will do than that he will do something.

  Ironically, Republicans brought this on themselves in two ways. To begin with, they grossly oversold what they could do just with control of Congress. The Republican base really seems to have simply forgotten about the presidential veto or the Senate filibuster. They seem to have thought all they had to do was pass bills with a simple majority and they would magically become law. How else to explain voting over and over and over again to repeal Obamacare. It makes no sense unless my assumption is correct.

  Additionally, Republicans are suffering from the gridlock that they themselves caused. We all know that nature abhors a vacuum, but I think it abhors gridlock as well. That has always been the appeal of fascism and it would be very foolish to believe that Americans are immune from its attractive qualities of getting things done that need to get done. And let us not forget that Trump is talking about genuine problems even if his solutions are simplistic or even wrongheaded.

  My third point in Trump’s favor is his willingness to fund his own campaign and ability to run such a campaign on the cheap. By the latter, I mean that he started his campaign with close to 100% name ID and he has the amazing ability to get massive free media exposure any time he wants it. The mainstream media seem powerless to ignore the newsworthiness of anything he says about anything at any time in any place. In lieu of a traditional campaign staff, all Trump needs are the PR people he has long employed, a scheduler and a pilot for his plane.

  Related to this, I would note that Trump has a very powerful ally in the form of talk radio. Rush Limbaugh and Mark Levin have been especially strong in their support for Trump, in part because Trump’s base and theirs are one and the same. It is extremely valuable to any candidate to have such a megaphone at his disposal, whipping up support, attacking his enemies, explaining away his mistakes etc. This also explains why Trump can treat Fox News with the disdain it deserves. It helped create the Trump monster, thinking he could be controlled, and discovered to its horror than he cannot.

  Fourth, as a consequence, the traditional means of controlling an out-of-control candidate are not available to the GOP leadership. They cannot deny him media exposure or money or organizational support because he doesn’t need them. Moreover, the anointed GOP nominee, Jeb Bush, has turned out to be a remarkably poor politician. His ineptness makes me wonder how he ever got elected dog catcher. And the rest of the GOP field lacks the name ID or support to catch up. But, importantly, because several have deep pocketed supporters, they too can afford to stay in the race indefinitely, keeping the field divided to Trump’s advantage..

  This means it is very unlikely that the stop-Trump forces can coalesce around one candidate. The field will remain divided until the end, meaning that Trump needs no more support than he has now to win the nomination. As I have said repeatedly, the key to understanding Trump is not the ceiling on his support, but the floor, which appears higher than the ceiling of all the other candidates.

  Lastly, I think many Republicans simply delude themselves that Trump is not a serious candidate who cannot, for some reason, get the nomination. I say, don’t underestimate his ego, which we know is and always has been enormous. If he can win the GOP nomination, why shouldn’t he go for it? I would also point to the example of Wendell Willkie, a very Trump-like candidate who won the GOP nomination in 1940. Then as now, he took advantage of the fact that as the anti-government party, Republicans are unusually attracted to non-politicians.

  I am not yet ready to predict that Trump will be the GOP nominee, but I am disinclined to bet against him. I honestly don’t see how any of his current opponents can beat him. I think his odds of winning the nomination are better than even. Whether he can win the general election is another question that I will discuss at a later date.

  Final note – the Democrats’ growing disarray plays into Trump’s hands because it reduces the importance of electability as a prime requirement for the GOP nominee.

  

  

  

  

  

• Meanwhile, In Sweden, Banks Are Refusing To Open Savings Accounts

  Early in July, Sweden’s Riksbank proved its dedication to the post-crisis central bank mantra of “if it’s broken, break it some more” when, after becoming the first country to witness observable, indisputable evidence of QE’s failure, the central bank pushed rates further into negative territory and expanded QE. 

  The problem for Sweden, as we documented in “For The First Time Ever, QE Has Officially Failed”, is that QE had soaked up so much of the available high quality collateral that bond yields and the krona were moving in the wrong direction (i.e. higher) meaning that more QE would only exacerbate the situation, leading to still higher yields and a stronger currency. Incidentally, to avoid distorting the market even further, Morgan Stanley thinks the Riksbank may have to resort to mortgage bonds in the not-so-distant future. 

  Of course as we’ve seen, things can always get NIRP-er-er in the new paranormal which is why the market is pricing in a 50% chance of more easing from the Riksbank at tomorrow’s meeting. 

  The problem is that if you go NIRP and still are not able to achieve the kind of economic outcomes you were looking for by essentially forcing depositors to choose between a tax on their savings and pulling money out and spending it, well then the next logical thing to do is to stop accepting deposits, which is apparently what it’s come to in Sweden. Here’s more from Radio Sweeden:

  Richard Landén from Helsingborg, southwest Sweden, tried to open a simple savings account at Swedbank. But the bank wanted him to move over his entire account, including his monthly salary deposits and any savings he had.

   

  “You have to be an complete customer, they said. It’s either that or nothing at all, apparently,” Landén told Swedish Radio News.

   

  Swedbank declined to comment on the case.

   

  Sweden’s central bank has cut its key interest rate, the repo rate, to -0.35 percent, meaning making a profit on savings alone has become nearly impossible. The central bank will announce its next interest rate decision on Thursday.

   

  Exactly how many people have been denied opening a savings account is hard to say. But savings advisor Claes Hemberg at Avanza Bank thinks it’s a new trend. Several customers have been in touch with him about it

   

  “Yes, savers get in touch and ask: ‘Can the bank refuse me?'” he said.

   

   

  “I think it’s pretty bad style. At the same time, I have been a customer there before five years ago and has been very well treated. In this case, it was quite the contrary. It was a strange attitude from the beginning, I think,” says Landen.

   

  According to Swedish law, barring any extenuating circumstances like suspected money laundering or large debts, banks are not allowed to deny anyone from opening an account.

  But deny they apparently will, because “simple” (i.e. probably small) savings accounts are nothing but a cost center, money-losing hassle and because anyone looking to open such an account isn’t likely to be an individual with vast economic resources (i.e. is likely to be middle income at best), and because those types of people have a far higher propensity to spend what’s in their pocket (see chart below) shutting them out kills two birds with one humiliating denial stone by alleviating the bank of the aggravation of servicing their accounts and by refusing to allow people to save, thereby effectively forcing the issue in terms of M2 velocity.

   

  So in other words Mr. Landén from Helsingborg, either give the bank enough of your business to matter or else go do your patriotic duty and spend whatever you had planned to save. The Riksbank will thank you for it.

  

  

  

  

  

• Heresy! China Won't Stick To IMF, World Bank Lending "Religion" With AIIB

  Back in April, China was flying high. The stock market had reached dizzying heights on the back of an unprecedented surge in margin debt, creating billions in paper profits for millions of farmers and housewives turned day traders. Around the same time, Beijing had accidentally pulled off a major diplomatic coup. The China-led Asian Infrastructure Investment bank had just wrapped up a wildly successful membership drive after a surprise decision by the UK to back the new venture opened the floodgates and emboldened other US allies who, despite Washington’s best efforts to convince them otherwise, decided to join up.

  The effort to recruit members was in fact so successful, that Beijing went out of its way to dispel the notion that the new bank represented an attempt on China’s part to usher in a new era of yuan hegemony and rewrite the rules of the post-War global economic order. 

  Despite the Politburo’s best efforts to toe the line between acknowledging the bank’s early success and unnerving Western members who, although happy to participate, are still acutely aware that a dying hegemon is still a hegemon and therefore would prefer it if Beijing didn’t rub the whole thing in Washington’s face, it was abundantly clear to everyone involved that the AIIB represented no less than a changing of the guard and a revolution against the US-dominated multilateral institutions that many emerging countries believe have failed to respond to seismic shifts in the global economy. 

  Unfortunately for China, the AIIB was forced to take a back seat in terms of media coverage to the country’s dramatic equity market meltdown and, subsequently, to the devaluation of the yuan which, you’re reminded, will play an outsized role in any financing extended by the new lender. But as the carnage in financial markets grabs the headlines, the AIIB is quietly making preparations to officially commence operations and as Reuters notes, China is set to “rewrite the unwritten rules of global development finance” by doing away with certain conditionalities required by Western multilateral lenders. Here’s Reuters with the story:

  The Asian Infrastructure Investment Bank (AIIB) will require projects to be legally transparent and protect social and environmental interests, but will not ask borrowers to privatize or deregulate businesses for loans, four sources with knowledge of the matter said.

   

  By not insisting on some free market economic policies recommended by the World Bank, the AIIB is likely to avoid criticism leveled against its rivals, who some say impose unreasonable demands on borrowers.

   

  It could also help Beijing stamp its mark on a bank regarded by some in the government as a political as much as an economic project, and reflects scepticism in China about the virtues of free market policies advocated in the West.

   

  “Privatization will not become a conditionality for loans,” said a source familiar with internal AIIB discussions, but who declined to be named because he is not authorized to speak publicly on the matter.

   

  “Deregulation is also not likely to be a condition,” he added. “The AIIB will follow the local conditions of each country. It will not force others to do this and do that from the outside.”

   

  A reduced focus on the free market could give the AIIB greater freedom to run projects, said a banker at a development bank who declined to be named.

   

  For example, development banks that finance a water treatment plant may require the price of treated water to be raised to recoup costs, even if local conditions are not conducive to higher prices.

   

  The AIIB, on the other hand, could avoid hiking prices and rely instead on other sources of financing, such as government subsidies, to defray costs, he said.

   

  A successful AIIB that sets itself apart from the World Bank would be a diplomatic triumph for China, which opposes a global financial order it says is dominated by the United States and under-represented by developing nations.

   

  Criticism of international development lending is not new, said Susan Engel, a professor at Australia’s University of Wollongong who has studied the impact on the World Bank of free market ideas often referred to as the Washington Consensus.

   

  “It’s a religion – this commitment to the involvement of the private sector even in sectors where, in fact, their involvement is shown to do harm,” Engel said of the U.S.-based lender.

  By not insisting on privatization for funds – which has recently manifested itself in the auctioning of Greek state assets in exchange for loans from Brussels and ultimately, from the IMF – the AIIB will give borrowers a choice, which will in turn allow them to select the financing option that they believe best fits their particular circumstances. This echoes comments made by Nomura’s Rich Koo in July. Recall: 

  Until now the IMF was the only choice for countries in need of financial assistance, which meant they had no choice but to accept the economic and fiscal reforms it demanded.

   

  But if the IMF has competition, countries in need of help will most likely shop around for the institution offering the easiest terms.

  While that choice may, as Koo goes on to note, lead some countries to “delay necessary reforms,” it may also allow everyone involved to avoid the type of mistakes that are inevitable when decisions are made unilaterally. That is, to the extent the IMF is fallible (and if they are anything, it’s fallible), the existence of an alternative could prove invaluable in a crisis scenario. We go briefly back to Koo:

  There is something to be said for the US argument that there should be only one refuge for economically troubled nations which takes responsibility for ensuring they carry out necessary reforms. However, that view is based on the underlying assumption that the US and the IMF will correctly diagnose the problems it encounters.

   

  In reality, the US and the IMF completely misread the Asian currency crisis that began in 1997, and their errors caused tremendous damage to crisis-struck countries in the region.

   

  The decision of many Asian countries to participate in the AIIB is probably due in part to a distrust of the US born during the currency crisis.

  And with that, we will conclude with the following question: How ironic will it be when the first loans China makes through the AIIB are to the very same Asian countries who supported the new lender because of their negative experience with US-led institutions during the last Asian Financial Crisis, but whose descent into a replay of that crisis is the direct result of China’s move to devlaue the yuan?

  

  

  

  

• The QE End-Game Decision Tree: Not "If" But "When" Central Banks Lose Control

  Make no mistake, the writing has been on the wall for quite some time and we haven’t been shy about pointing it out.

  Central banks are losing control.

  Trillions upon trillions in post-crisis asset purchases haven’t given the global economy the defibrillator shock the world’s central planners were depending on to bring about a sustained and robust recovery.

  Indeed, the opposite appears to have materialized.

  Subdued demand and trade looks to have become structural and endemic rather than cyclical and rather than create “healthy inflation”, seven years of accommodative monetary policy has only served to bury the world in a global deflationary supply glut. And that’s just the big picture. The more granular we get, the more apparent it is that central banks are no longer in the driver’s seat.

  Inflation expectations across the eurozone have collapsed despite Mario Draghi’s best efforts to assure the public that PSPP has been an overwhelming success and similarly, inflation expectations have tumbled in the US ahead of a expected rate hike which looks less likely by the day. Meanwhile, in Sweden, the Riksbank has sucked so much high quality collateral from the system that QE has actually reversed itself, giving the world its first look at what happens when QE demonstrably fails. And let’s not forget Japan, where the world’s most hilariously absurd example of central bankers gone stark raving mad has done exactly nothing to pull the country out of the deflationary doldrums.

  And so here we stand, on the precipice of crisis with central banks having run out of both ammunition and credibility. In short, it’s time to ask if central banks have officially lost control. For the answer, and for the “QE end-game decision tree”, we go to BNP.

  Note that if CB’s do lose it, the likely scenario is: “deflation, vicious cycle… economic depression”.

  *  *  *

  From BNP

  Not “IF” but “WHEN central banks lose control?”

  The global financial repression pushed investors to invest cash in risky assets, such as property and equity. The scale of global policy interventions is trumping all fundamental factors for now. Investors should keep in mind that the road is never straight and next month should be full of potentially disruptive events impacting sharply overcrowded assets and trades. History shows that such misallocation of resources creates bubbles that can last before fully blowing; the question is not if, but when.

  Risk assets and risk parameters would be massively affected in the event central banks lose control; in the meantime, EDS Asia believes that central bank maturities that use forward guidance matter more than the QE process itself. The Fed and the ECB have been providing guidance which partly explains the low short-term volatility. The BoJ is moving toward this behaviour, managing the news flow: therefore there is a case for the NKY index going up slowly with a lower upfront volatility and a term structure closer to the US one: in that sense, we have started to observe an “SPX-isation of the NKY Index” in the past few months before this summer’s risk-off, as short dated volatility was trading lower. In China, the PBoC intervention learning curve is steep; this is the reason we believe the next equity leg up will be accompanied by an elevated volatility regime.

  The quantitative easing started in the US more than six years ago and the SPX index, as well as selective risky assets, are now hovering at the high end of their valuation histories. Recent price actions are testimony of the fragility of imbalances built over the years. Investors may recall the Japan easing experience in 2005 and 2006; an early exit, together with a global financial crisis, caused a Japanese equities meltdown (between mid-2007 and late-2008).

  In the decision tree, EDS Asia addresses the potential “QE end-game scenarios” [attempting to] answer the question “Are central banks losing control?” and providing a time horizon and probabilities affecting each path, which should allow investors to get a clearer overview. 

  

  

  

  

  

  

• Martin Armstrong Warns: The #1 Terrorist Group Is You, Domestic Citizens

  Understand this now. As Jim Quinn explains, YOU are the enemy of the state. They don’t give a shit about you. They treat you as sheep and cows to be sheared and milked. If you start questioning them, they will slaughter you. They have militarized the police forces and put you under 24 hour surveillance because they fear an uprising. There only a few hundred thousand of them and there are millions of us. A conflict is looming.

  As Armstrong Economics' Martin Armstrong details, government talks about Islamic terrorists, but their number one fear is YOU.

   

  

  The internment camps are for you, not Islamic extremists. Government CANNOT honor its promises so it will not even try.

  They are confiscating money everywhere, doubling fines, and punishing people for insane things.

  A neighbor received a ticket and a $200 fine for using a cell phone while driving. The use? Looking at the Google Maps. She even went to court with her phone records to prove she was not on the phone. The judge declared that she should have looked at that BEFORE she left. I suppose if you write down the directions and look at the piece of paper that is OK, you just can’t look at it on your phone. That applies to even looking at the time on your phone.

   

  The government claims it wants to eliminate guns to protect society. The problem will be that the criminals do not buy their guns at a store. They want to disarm the public because you are their number one fear as outlined in this discussion paper.

  

  

  

  

  

• China Explained (In 1 Image)

  Presented with no comment… (because we do not want to be “detained”)

   

  

   

  h/t @pdacosta

  

  

  

  

  

• Presenting Never-Ending QE In One Easy Flowchart

  In case you haven’t noticed, the world’s central banks are locked in an epic race to the devaluation bottom in desperate pursuit of a post-crisis economic recovery that never came despite trillions in worldwide QE and on August 11, in the currency war equivalent of the United States entering World War II, China devalued the yuan, serving notice that, to quote Xi Jinping, “the lion has woken up.”

  China’s move has sent shockwaves through the emerging market world and caused the Fed to reconsider the timing of the ever elusive “liftoff” and now, with the sputtering engine of global growth and trade set to export its deflation across the globe, countries like India and South Korea must decide how to respond. 

  Because we know the mechanics of the currency war and the endless loop of competitive easing can be a bit confusing at times, we present the following simplified, circular flow chart from Morgan Stanley which should serve as a helpful guide to the never ending “beggar thy neighbor” loop. 

  

  From MS:

  At the beginning of the game, the global economy is at an arbitrary point of equilibrium, similar to a chess board, with the pieces representing policy tools that are used to achieve one’s goal—growth and inflation—the king. Once a central bank makes an initial move to achieve a new equilibrium, it sets in motion a sequence of moves from other central banks, which we refer to as the opening repertoire. Suddenly, the game becomes unbalanced and requires more policy changes until a new equilibrium is achieved.

  

  

  

  

  

• Why The Federal Reserve Should Be Audited

  Submitted by John Crudele via NYPost.com,

  It is time for a comprehensive audit of Janet Yellen ’s Federal Reserve – and not just for the reasons presidential candidate Rand Paul and others have given.

  The Fed needs to be audited to see if its ruling body has broken the law by manipulating financial markets that are outside its jurisdiction. A thorough investigation of the Fed will show once and for all if its former chief Ben Bernanke and current Chairwoman Yellen should go to jail.

  I know, that’s a bold statement coming as it does on Sept. 1, 2015, with Wall Street still in half-bloom. But it won’t be so preposterous some day in the future if the stock market suffers a full-blown economy-busting collapse and Congress and everyone else are looking for scalps.

  The Fed should be audited as a brokerage firm would be — its financial holdings, its transactions, market orders, emails and phone calls. Special attention should be given to what is called the “trade blotter” at the Federal Reserve Bank of New York, which handles all market transactions for the Fed.

  The Fed’s dealing with foreign central banks — especially at times of market stress — should be given special attention. Trades in the wee hours of the morning should be in the spotlight.

  Not surprisingly, the Fed is strongly opposed to an audit and sees it as an intrusion into its autonomy. Washington shouldn’t be intimidated.

  Autonomy? Hah! That ended when the central bank started playing footsie with Wall Street.

  Let’s look at what happened to the stock market last week, and it’ll explain what I think those who audit the Fed need to look for.

  As you probably remember, stocks were headed for oblivion on Monday, Aug. 24. The Dow Jones industrial average was down 1,089 points early in the day before the index rallied for a close that was “only” 588 points lower.

  China’s problems. Weak US economic growth. Greece. The possibility of an interest-rate hike. Those and other issues were the root causes of last Monday’s woe.

  But Wall Street’s real problem is that there is a bubble in stock prices created by years of risky monetary policy by the Fed. Quantitative easing, or QE — the experiment in money printing that has kept interest rates super-low — hasn’t helped the economy (and even the Federal Reserve Bank of St. Louis concluded that). But QE did force savers into the stock market whether they wanted to take the risk or not.

  None of that is illegal.

  But the Fed now finds itself in the awkward position of having to protect the stock market bubble it created. So Yellen and her board of governors must have been pretty nervous when the Dow and other market indexes fell by an unprecedented amount on Aug. 24.

  Then, overnight, there was massive buying of Standard & Poor’s 500 Index futures contracts. This was the remedy proposed by a guy named Robert Heller back in 1989 just after he left the Fed board. The Fed, Heller proposed, should rig the stock market in times of collapse.

  Were those contracts being bought overnight by some Wall Street cowboy for whom potential losses in the disastrous market were of no concern? Or was it the Fed propping up the market?

  Stock prices initially reacted well to the mysterious overnight buying on Tuesday, and the Dow was up 442 points — until it wasn’t anymore. The blue-chip index finished Tuesday, Aug. 25, with a loss of more than 200 points.

  Then the same magical buying of S&P futures contracts happened Tuesday night and early Wednesday morning. Stocks again went up at the opening on Wednesday, but this time the gain held.

  Credit was given to William Dudley, the head of the NY Fed I mentioned above, who offered his soothing opinion that interest rates probably wouldn’t be raised by the Fed at its September meeting.

  “Once again, the Federal Reserve helped save the day for investors,” the New York Times wrote in a front-page article that cited Dudley’s speech.

  But that wasn’t true — not unless Dudley’s speech leaked ahead of time. Stocks were up before Dudley’s talk and actually fell when he began speaking. That was probably due to the fact that Dudley pooh-poohed the idea of another dose of QE.

  Wall Street got lucky the rest of the week ahead of this past weekend’s St. Louis Fed annual conference in Jackson Hole, Wyo. Plus, the month of August was coming to an end — usually a time when traders pretty up their books.

  Money managers don’t want stocks to go down right before their performance is locked in and reported to clients.

  The Fed has certain mandated responsibilities. It is supposed to keep inflation within a certain range. It is also charged with protecting the US dollar. Plus — and this is a modern-day responsibility — the Fed is supposed to help the economy and keep unemployment low.

  Even if you agree with Heller that the market sometimes needs help, there is an enormous risk in doing this too often.

  First, traders come to think that there is no risk in the stock market — a belief that has been proven wrong time and again.

   

  Second, investors have no way of telling what the real value of stocks is.

   

  And third, certain well-placed people on Wall Street will always know what the Fed is doing and benefit from it. And when the financial elite benefit, regular folks suffer.

  It’s time to find out what the Fed has been up to. In this case, ignorance isn’t bliss — it’s costly.

  

  

  

  

  

• Sep 3 – Obama Secures Iran Nuclear Deal With Barbara Mikulski Vote

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 10/100 EXTREME FEAR

  PREVIOUS CLOSE: 9/100 EXTREME FEAR

  ONE WEEK AGO: 5/100 EXTREME FEAR

  ONE MONTH AGO: 22/100 EXTREME FEAR

  ONE YEAR AGO: 42/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 25.22% 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 26.09. 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 is slightly greater than the number hitting highs and is at the lower end of its range, indicating extreme fear.

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – DUBAI GOLD DEALER OLYMPICS

   

  UNUSUAL ACTIVITY

  MU SEP 20 CALL ACTIVITY @$.11 on OFFER 2400+ Contracts

  FAST SEP 38 PUT ACTIVITY ON OFFER @$.70 2500+ Contracts

  TWTR DEC 50 CALLS 1500+ @$.15 .. also activity in the DEC 40 calls

  APLE EVP, Chief Legal Counsel P    5,592  A  $ 17.88

  MTZ 10% Owner Purchase 10,000 A $15.98 and Purchase 5,000 A $15.63

  More Unusual Activity…

   

  HEADLINES

   

  Fed’s Beige Book: Economic activity continues to expand modestly

  US ADP Employment Change Aug: 190K (est 200K; rev. 177K, prev 185K)

  Gross Says Fed Move May Be Too Little Too Late Amid Turmoil

  EU’s Moscovici calls for comprehensive debate in Eurozone reform

  Greece to miss 2015 privatisation sales target: agency chief

  Obama secures Iran nuclear deal with Barbara Mikulski vote

  DOE US Crude Oil Inventories (WoW) Aug-28: 4667K (est 900K; prev -5452K)

  Baxalta Said to Abandon Takeover Talks With Drugmaker Ariad

  Spielberg’s DreamWorks to split from Disney

   

  GOVERNMENTS/CENTRAL BANKS

  Fed’s Beige Book: Economic activity continues to expand modestly –Fed

  Gross Says Fed Move May Be Too Little Too Late Amid Turmoil –BBG

  EU’s Moscovici calls for comprehensive debate in Eurozone reform –Welt [Transalted]

  Greece to miss 2015 privatisation sales target: agency chief –Rtrs

  Merkel Ally Spahn Sees IMF Joining Greek Bailout, Lauds Tsipras –eKathimerini

  IMF Hopes For Orderly Transition For China To Internationalize Yuan –Rtrs

  China regulator says punishes three stock trading platforms –Rtrs

  China futures exchange further tightens rules on stock index futures trading –Rtrs

  Polish Central Bank Base Rate Left Unchanged At 1.50%, As Expected –Nasdaq

  GEOPOLITICS

  Obama secures Iran nuclear deal with Barbara Mikulski vote –CNN

  Russian Northern Fleet to practise nuclear-powered submarine rescue in Barents Sea –TASS

  China and South Korea agree to seek a 3-way summit with Japan in Oct. or Nov. –BBG

  FIXED INCOME

  Bond yields higher after Fed’s Beige Book –CNBC

  US bond yields head higher as jobs data looms –FT

  Sudden Dry Spell for Bond Sales –WSJ

  European banks fight back in fixed income –FT

  FX

  Dollar gains strength while EM currencies tumble heavily –FT

  Euro Falls Before ECB Policy Meeting –BBG

  USD/JPY Meanders in Shallow Range Around 120.00 –WBP

  Ruble Falls Second Day as Citigroup Sees Further Weakness on Oil –BBG

  China’s yuan slips on pre-holiday dollar demand despite intervention –Rtrs

  ENERGY/COMMODITIES

  WTI settles up 1.85%, at $46.25 a barrel –CNBC

  Gold eases after 4-day gain, awaiting signal on U.S. rates –Rtrs

  Copper rebounds as Chinese stock market pares losses –Rtrs

  DOE US Crude Oil Inventory Change (WoW) Aug-28: 4667K (est 900K; prev -5452K)

  DOE US Distillate Inventory Change (WoW) Aug-28: 115K (est 1000K; prev 1436K)

  DOE Cushing OK Crude Inventory Change (WoW) Aug-28: -388K (est 400K; prev 256K)

  OPEC oil output in Aug falls from record on Iraq disruption –Rtrs survey

  Shell Nigeria lifts force majeure on Bonny Light Crude –Rtrs

  Gold demand from China and India picks up –FT

  El Nino expected to take toll on sugar and rice prices –FT

  EQUITIES

  Wall St up 1 pct as China fears ease –Rtrs

  European stocks stage modest pre-ECB rebound –FT

  FTSE closes positive, follows Wall Street gains –RTRS

  Baxalta Said to Abandon Takeover Talks With Drugmaker Ariad –BBG

  Spielberg’s DreamWorks to split from Disney –Hollywood Reporter

  Citi Joins Bid For GBP 13bln Taxpayer Bank Assets –Sky News

  Tesco Prefers Buyout Firm MBK’s Bid For South Korea Unit –Rtrs

  Online Gambling Firm GVC ‘Not Prepared To Walk Away’ From Bwin –Rtrs

  Rebekah Brooks to return to News UK as CEO –MktWatch

  EU regulators clear Shell purchase of BG Group –RTRS

  Vivendi Earnings Rise, Boosted By Sale of Brazilian Unit –WSJ

  Fitch Downgrades E.ON to ‘BBB+’, Stable Outlook

  EMERGING MARKETS

  South Africa Doesn’t Warrant Negative Outlook, Moody’s Says –BBG

  China Futures Exchange: To Further Tighten Rules On Stock Index Futures Trading –Rtrs

   

  Puerto Rico Electric Says Agreement Reached With Bondholders –BBG

  

  

  

  

  

• Central Banks Nervous As Alternative Currency With David Bowie's Face Goes Viral

  Submitted by John Vibes via TheAntiMedia.org,

  One of the best ways for the general public to take power back is to develop alternative currencies — both local and global — that allow people to trade outside of the corporate-government banking systems and central bank notes.

  Many people in different areas of the world have been moderately successful at implementing local currencies, such as Mountain Hours or Ithaca Hours, which have gained traction in the U.S.

  In London, an interesting alternative currency bearing the face of pop singer David Bowie has recently come into circulation. According to Market Watch, the local currency is specialized for the Brixton community in southwest London. It is officially called the “Brixton Pound.”

  

   

  Tom Shakhli, manager of the Brixton Pound effort, said:

  “They are using it because they want to feel connected to the local area. Every time you use it, you’re like a financial activist. You’re taking part in this act which is subverting the norm, which is to hand over your £10 note very passively.”

  Shakhli pointed out that the project is intended to make a statement about the foundation of money, as well as provide an alternative to the current monopoly.

  Shakhli said that his main goal with the project is to ask:

  “What is money? Does it have to be either printed by the state or created by the banks? Why can’t money be localized? Why can’t money feature a pop star or a black historian? Does it have to feature establishment figures?”

  So far, there are currently 200 local businesses that have signed up to participate in the Brixton Pound program.

  The increasingly popular Brixton Pound is making central banks nervous — and rightly so. Following the success of the Brixton Pound, new alternative local currencies are now popping up all over the U.K. The Oxford Pound, Kingston Pound, and Palace Pound are just a few of the currencies that have been recently introduced. The Bank of England has been forced to respond to these local currencies because of their popularity, deeming them “voucher schemes” and warning the public that they are unprotected when using them.

  A document released by the Bank of England claims that:

  “Local currency schemes lead to significant and unanticipated impacts on aggregate economic activity.”

  According to the document, the Bank of England will also attempt to delegitimize local currencies by

  “Design[ing] features and marketing material [to] help users recognise that local currency paper instruments are like vouchers and not banknotes.”

  *  *  *

  For the economy to really be in the hands of the people, it is necessary to decentralize the currency and to have an open-source network of competing currencies that are community based and easily exchangeable. While it is impossible to predict how we will trade a century or even five years from now, we can still observe how people are innovating within their own areas and take those lessons into account for when state and bank issued currencies finally diminish in value to the point where they are unusable.

  

  

  

  

  

• Second Largest US Pension Fund To Sell 12% Of Stocks Holdings In Advance Of "Another Downturn"

  While many continue to debate if what with every passing day increasingly looks like a global recession, one from which the US will not decouple no matter how many “virtual portfolio” asset managers claim the contrary, there are those who without much fanfare are already taking proactive steps to avoid the kind of fallout that the markets have hinted in the past month of trading, is inevitable. Some such as Calstrs: the nation’s second largest pension fund with $191 billion in assets (smaller only than Calpers), which as the WSJ reports is “considering a significant shift away from some stocks and bonds amid turbulent markets world-wide.”

  The move represents “one of the most aggressive moves yet by a major retirement system to protect itself against another downturn.” A downturn which the pension fund implicitly suggests, is now inevitable.

  According to the WSJ, the top investment officers of the California State Teachers’ Retirement System will move as much as $20 billion, or 12% of the fund’s portfolio, into “U.S. Treasurys, hedge funds and other complex investments that they hope will perform well if markets tumble, according to public documents and people close to the fund.”

  Actually considering the relative underperformace of hedge funds, which have largely underperformed the market both during the upcycle, and have fared no better during the volatility of the past month, Calstrs may want to just buy whatever Treasurys China has to sell. Which, incidentally, also answers a suddenly very pertinent question: if China is selling US paper, who will buy it? Well, pension funds for one – the same entities who have had an abnormally heavy allocation to stocks in recent years, and now are seeking to cash out. Which while favorable for bond yields, is hardly good news for stocks – because in this illiquid market, and painfully thin tape, just who will buy the tens of billions of stocks that pension funds will decide to sell.

  And it will certainly be more than just Calstrs: once one fund announces such a dramatic shift in strategy, most tend to follow.

  So when will the Calstrs reallocation take place? According to WSJ,” the board is expected to discuss the proposal at a meeting later today in West Sacramento, Calif. A final decision won’t be made until November.  The new tactic—called “Risk-Mitigating Strategies” in Calstrs documents posted on its website—was under discussion for several months as the fund prepared for a scheduled three-year review of how it invests assets for nearly 880,000 active and retired school employees. But the recent volatility around the world has provided a fresh reminder of how exposed Calstrs’ investments are when markets swoon.”

  Furthermore, as the WSJ points out, the question is now that the market appears to have topped out (at least until the next QE), what will be the proper distribution between stocks and bonds in a typical pension fund portfolio.

  Pension funds across the U.S. are wrestling with how much risk to take as they look to fulfill mounting obligations to retirees, and the fortunes of most are still heavily linked with the ebbs and flows of the global markets despite efforts to diversify their investments. State pension plans have nearly three-quarters, or 72%, of their holdings in stocks and bonds, according to Wilshire Consulting.

  That number is certain to decline in the coming months.

  What is also notable is that while Calstrs’ is at least considering investing in hedge funds, its cousin, the California Public Employees’ Retirement System, decided last year to exit all hedge-fund investments. Other pensions seeking to become more conservative have beefed up stakes in bonds or international stocks. “Calstrs Chief Investment Officer Christopher Ailman said in an interview he hopes the potential shift could help stub out heavy losses during gyrations because the investments don’t generally track as closely with market swings.”

  Actually they do: if the past few years have shown anything, it is that not only do “hedge” funds not hedge, in broad terms, they are merely highly levered beta chasers, who will gate their LPs at the first sign of abnormal market turbulence. Which is why we wouldn’t be surprised if Calstrs ends up reallocating entirely in plain vanilla Treasurys.

  As for the punchline, as usual it is saved for last: “Calstrs has not made any major moves in recent weeks amid the turmoil in China and the U.S. markets. Mr. Ailman said he knew there would be turbulence after Asian markets tumbled last month, but he said Calstrs chose to stay put because it views itself as a long-term investor and because its largess means it has limited countermoves when stock prices fall.”

  Ah, “a long-term investor” – the legendary words every asset managers uses when they have a position that is so underwater, they have no choice but to hold on. Who can possibly forget Norway’s sovereign wealth fund which was investing in Greek bonds for “infinity“…

  * * *

  And while a US pension fund is at least doing the prudent thing, and preparing to rotate out of the riskiest asset just as the market tops out, here comes Japan where things traditionally are upside down, and where we read that with the largest pension fund in the world, the GPIF, having maxed out its allocation “dry powder”, another massive pension funds is set to start selling bonds to buy stocks, even as the Nikkei continues to flirt with decade highs. Bloomberg reports:

  As the world’s biggest pension fund nears the end of its switch from sovereign bonds into stocks, investors are looking at Japan Post Bank Co. as the next actor big enough to move markets.

   

  The postal lender, the biggest holder of Japanese government bonds after the central bank, sold 5.1 trillion yen ($42 billion) in JGBs in the three months ended June, after offloading a record amount of the debt last fiscal year. The $1.2 trillion Government Pension Investment Fund, known as the whale, said last week stock and fixed-income holdings were all within 3 percentage points of their targets, suggesting it has almost completed a planned shift into riskier assets including global bonds and shares.

   

  The Bank of Japan needs to find about 45 trillion yen in JGBs from the market to meet its annual goal for boosting money supply to stimulate the economy. Japan Post Bank, with 49.2 percent of its 206.5 trillion yen held in domestic debt, fits the profile and needs to seek higher profits ahead of a possible public share sale this year.

   

  The postal bank said in April it plans to increase investments in assets aside from JGBs, such as foreign securities and corporate bonds, by 30 percent to 60 trillion yen in the fiscal year ending March 2018.

   

  Like GPIF, Japan Post Bank has been reducing its dependency on domestic government bonds. The bank owned 101.6 trillion yen in sovereign debt at the end of June, with the ratio falling below 50 percent of holdings for the first time. Unlike GPIF, however, Japan Post Bank hasn’t been increasing domestic stocks. It held just 900 million yen of local equities at the end of the first quarter, unchanged from March.
  

  It will be soon. So good luck Japanese pensioners: nothing screams fiduciary responsibility quite like your asset manager dumping a safe, government backed asset (even if there are 1.1 quadrillion of them) and buying a risky one which is trading at the highest price and valuation since the dot com bubble.

  Then again, with Japan’s demographic crisis where more adult than infant diapers are sold every year, a little proactive culling of the top-heavy pyramid – courtesy of a few million “so sorry, all your pension funds have vaporized” letter – may be just what the deranged Keynesian doctor ordered.

  

  

  

  

  

• eVIXeration & Gartman Send Stocks Soaring "Back To Normal"

  This seemed appropriate after last night's BOJ and PBOC efforts and today's oil idiocy…

  And then this utter farce…a 1% surge in the S&P and 4 point crash in VIX in the last 30 minutes!!

  

   

  The VIX front-end term-structure "normalizes" out of backwardation – but back-end remains stressed…

  

   

  As this was the longest period of backwardation since 2011's plunge

  

   

  On NO VOLUME!

  

   

  So let's start with stocks – which CNBC reflected on as "back to normal" with today's 275 point rally in The Dow

  Thank you very much-o, Mr. Kuroda… As the media began their pre-open jawboning this morning they had the backdrop of a triple-digit gain in The Dow to support any and every bullish – everything's fine – mantra – all thanks to a 120 point rip the moment Japan opened… Until the l;ast 30 minute spanic buying onmthe back of VIX clubbing, stocks went nowhere…

  

   

  But of course, no one cares – its tonight's news headlines that count – and Trannies are up 2% as

  

   

  But on the week, it all remains red…

  

   

  Which dragged Nasdaq barely into the green year-to-date!

   

  Do not get too excited…

  

   

  VIX dropped 15% today – its biggest drop in almost 2 months

   

  20 minutes to eVIXerate

  — zerohedge (@zerohedge) September 2, 2015

   

  We note VIX was crushed around the market break mid-afternoon and VXX was presured to the lows of the day (first non-short-squeeze in a few days…)

  

   

  After Europe closed, HY bonds were not loving it…

  

   

  Bonds were battered again during the US session leaving 30Y 6bps higher on the week (even as stocks remain well red)…

  

   

  but we note the collapse on 2Y swap spreads (and 5Y) continues…

  

   

  The US Dollar drifted higher on the day but remains lower on the week – notably quiet day in FX markets (especially JPY anchored at 120)…

  

   

  Gold was modestkly weaker but silver jumped. Crude and Copper were joined at the hip in this morning's melt-up…

  

   

  Silver was an illiquid mess….

  

   

  So let's just have a look at the day in Crude!!! (just like yesterday we ripped into the NYMEX close then faded)…

  

   

  With China closed for the rest of Parade Week, we wonder what market gets monkeyhammered tonight? (Don't forget FTSE A50 Futures trade in Signapore 😉

  Charts: Bloomberg

  

  

  

  

• Is It A Correction Or A Bear Market?

  Submitted by John Murphy,

  What Difference Does It Make?

  There's a debate in professional circles as to whether the stock market is in a correction or a bear market. It makes a difference. Let's define what they are. A stock market "correction" is a drop of more than 10%. Most corrections average about -15%. A bear market is a drop of 20% or more. Bear market losses have averaged -30%, and last longer than corrections. The last two bear markets between 2000 and 2002 and 2007 to 2009 lost -50%. Those losses were much bigger than most bear markets. Those precise definitions can lead to problems however. The price bars in Chart 1 show the S&P 500 losing -21% during 2011 from May to the start of October. That qualified as a bear market.

  

   Closing prices, however, lost -19% which signaled a correction. I recall a debate at the time as to whether or not that qualified as a bear market. As it turned out, 2011 was only a correction. Moving averages "death crosses" often signal a bear market, but not always. Chart 2 shows the (blue) 50-day average falling below the red 200-day average during 2010 and 2011 for the SPX. [50 and 200day EMAs also turned negative both years].

  

  The SPX lost -17% in 2010 before turning back up. That was also a correction. Bear markets don't always last a long time either. Bear markets in 1987, 1990, and 1998 lasted only three months, and bottomed during October. 

  A LONGER-RANGE LOOK AT THE S&P 500…

  The monthly bars in Chart 3 show the last two bear markets in the S&P 500 starting in 2000 and 2007 which lost -50% and 57% respectively; and the SPX reaching a new record in spring 2013 which ended the "lost decade" of stocks that started in 2000. The horizontal line drawn over the 2000/2007 peaks should act a solid floor beneath the price bars. A drop to that flat line would represent a drop of 26% which would qualify as a bear market. But that would still leave the SPX in a secular uptrend.

  

  The rising trendline drawn under the 2009/2011 lows shows potential support near 1700. A retest of that support line would represent an SPX lost of 20% which qualifies as a bear market. Chartwise, however, an SPX drop into bear market territory (-20% to 26%) would still be within its long-term uptrend. So it might not matter that much after all whether we're in a "correction" or "bear market" as long as the secular uptrend remains intact.

  S&P 500 RUNS INTO SELLING…

  Last week, I used Fibonacci retracement lines over the Dow Industrials to identify levels where more selling was likely. Chart 4 applies those (red) lines to the S&P 500 measured from its July high to its August low.
  

  The SPX has already run into selling near 2000 which was a 50% bounce. It has lost ground since then, but remains above last week's climactic low. The SPX will probably "back and fill" for a month or two in an attempt to repair recent technical damage. That would take us into October which has marked the bottom of most previous corrections. In the meantime, a retest of the August low wouldn't be surprising. That would be an important test. As long as last October's low remains intact, I will continue to lead toward the "correction" camp. But there are enough negative warnings to justify a very cautious stance.

  

  

  

  

  

• #WhiteLiesMatter

  Lies, Damn Lies, and Political speech… It appears little white lies matter.. and so do blatant black ones…

   

  

   

  Source: Townhall

  

  

  

  

  

• With China's Markets Closed For 2 Days, The "National Team" Comes To America

  Following China’s adoption of Nasdaq surveillance technology (to catch those malicious sellers), it appears ‘Murica decided to borrow The National Team for the last 30 minutes of the day today.

  We need stock higher, so dump VIX, ramp AAPL, and all is well.

  

   

  As AAPL vol was crushed: a 5 vol crash in the last 30 minutes!

  

   

  … all to get The Nasdaq Green for 2015:

  

   

  Open, daily manipulation – it’s not only for the Chinese.