• Paul Craig Roberts: A Prescription For Peace & Prosperity

  Submitted by Paul Craig Roberts,

  The question is often asked: “What can we do?” Here is a prescription for peace and prosperity.

  We will begin with prosperity, because prosperity can contribute to peace. Sometimes governments begin wars in order to distract from unpromising economic prospects, and internal political stability can also be dependent on prosperity.

  The Road to Prosperity

  For the United States to return to a prosperous road, the middle class must be restored and the ladders of upward mobility put back in place. The middle class served domestic political stability by being a buffer between rich and poor. Ladders of upward mobility are a relief valve that permit determined folk to rise from poverty to success. Rising incomes throughout society provide the consumer demand that drives an economy. This is the way the US economy worked in the post-WWII period.

  To reestablish the middle class the offshored jobs have to be brought home, monopolies broken up, regulation restored, and the central bank put under accountable control or abolished.

  Jobs offshoring enriched owners and managers of capital at the expense of the middle class. Well paid manufacturing and industrial workers lost their livelihoods as did university graduates trained for tradable professional service jobs such as software engineering and information technology. No comparable wages and salaries could be found in the economy where the remaining jobs consist of domestic service employment, such as retail clerks, hospital orderlies, waitresses and bartenders. The current income loss is compounded by the loss of medical benefits and private pensions that supplemented Social Security retirement. Thus, jobs offshoring reduced both current and future consumer income.

  America’s middle class jobs can be brought home by changing the way corporations are taxed. Corporate income could be taxed on the basis of whether corporations add value to their product sold in US markets domestically or offshore. Domestic production would have a lower tax rate. Offshored production would be taxed at a higher rate. The tax rate could be set to cancel out the cost savings of producing offshore.

  Under long-term attack by free market economists, the Sherman Antitrust Act has become a dead-letter law. Free market economists argue that markets are self-correcting and that anti-monopoly legislation is unnecessary and serves mainly to protect inefficiency. A large array of traditionally small business activities have been monopolized by franchises and “big box” stores. Family owned auto parts stores, hardware stores, restaurants, men’s clothing stores, and dress shops, have been crowded out. Walmart’s destructive impact on Main Street businesses is legendary. National corporations have pushed local businesses into the trash bin.

  Monopoly has more than economic effect. When six mega-media companies have control of 90 percent of the American media, a dispersed and independent press no longer exists. Yet, democracy itself relies on media helping to hold government to account. The purpose of the First Amendment is to control the government, but today media serves as a propaganda ministry for government.

  Americans received better and less expensive communication services when AT&T was a regulated monopoly. Free trade in communications has resulted in the creation of many unregulated local monopolies with poor service and high charges. AT&T’s stability made the stock a “blue-chip” ideal for “widow and orphan” trust funds, pensions, and wealth preservation. No such risk free stock exists today.

  Monopoly was given a huge boost by financial deregulation. Federal Reserve chairman Alan Greenspan’s claim that “markets are self-regulating” and that government regulation is harmful was blown to pieces by the financial crisis of 2007-2008. Deregulation not only allowed banks to escape from prudent behavior but also allowed such concentration that America now has “banks too big to fail.” One of capitalism’s virtues and justifications is that inefficient enterprises fail and go out of business. Instead, we have banks that must be kept afloat with public or Federal Reserve subsidies. Clearly, one result of financial deregulation has been to protect the large banks from the operation of capitalism. The irony that freeing banks from regulation resulted in the destruction of capitalism is lost on free market economists.

  The cost of the Federal Reserve’s support for the banks too big to fail with zero and negative real interest rates has been devastating for savers and retirees. Americans have received no interest on their savings for seven years. To make ends meet, they have had to consume their savings. Moreover, the Federal Reserve’s policy has artificially driven up the stock market with the liquidity that the Federal Reserve has created and also caused a similar bubble in the bond market. The high prices of bonds are inconsistent with the buildup in debt and the money printed in order to keep the debt afloat. The dollar’s value itself depends on quantitative easing in Japan and the EU.

  In order to restore financial stability, an obvious precondition for prosperity, the large banks must be broken up and the distinction between investment and commercial banks restored.

  Since the Clinton regime, the majority of the Treasury secretaries have been top executives of the troubled large banks, and they have used their public position to benefit their banks and not the US economy. Additionally, executives of the large banks comprise the board of the New York Fed, the principal operating arm of the Federal Reserve. Consequently, a few large banks control US financial policy. This conspiracy must be broken up and the Federal Reserve made accountable or abolished.

  This requires getting money out of politics. The ability of a few powerful private interest groups to control election outcomes with their campaign contributions is anathema to democracy. A year ago the Republican Supreme Court ruled that the rich have a constitutional right to purchase the government with political campaign contributions in order to serve their selfish interests.

  These are the same Republican justices who apparently see no constitutional right to habeas corpus and, thus, have not prohibited indefinite detention of US citizens. These are the same Republican justices who apparently see no constitutional prohibition against self-incrimination and, thus, have tolerated torture. These are the same Republican justices who have abandoned due process and permit the US government to assassinate US citizens.

  To remove the control of money over political life would likely require a revolution. Unless prosperity is to be only for the One Percent, the Supreme Court’s assault on democracy must be overturned.

  The Road to Peace is Difficult

  To regain peace is even more difficult than to regain prosperity. As prosperity can be a precondition for peace, peace requires both changes in the economy and in foreign policy.

  To regain peace is especially challenging, not because Americans are threatened by Muslim terrorists, domestic extremists, and Russians. These “threats” are hoaxes orchestrated in behalf of special interests. “Security threats” provide more profit and more power for the military/security complex.

  The fabricated “war on terror” has been underway for 14 years and has succeeded in creating even more “terror” that must be combated with enormous expenditures of money. Apparently, Republicans intend that monies paid in Social Security and Medicare payroll taxes be redirected to the military/security complex.

  The promised three-week “cakewalk” in Iraq has become a 14 year defeat with the radical Islamic State controlling half of Iraq and Syria. Islamist resistance to Western domination has spread into Africa and Yemen, and Saudi Arabia, Jordan, and the oil emirates are ripe fruit ready to fall.

  Having let the genie out of the bottle in the Middle East, Washington has turned to conflict with Russia and by extension to China. This is a big bite for a government that has not been able to defeat the Taliban in Afghanistan after 14 years.

  Russia is not a country accustomed to defeat. Moreover, Russia has massive nuclear forces and massive territory into which to absorb any US/NATO invasion. Picking a fight with a well-armed country with by far the largest land mass of any country shows a lack of elementary strategic sense. But that is what Washington is doing.

  Washington is picking a fight with Russia, because Washington is committed to the neoconservative doctrine that History has chosen Washington to exercise hegemony over the world. The US is the “exceptional and indispensable” country, the Uni-power chosen to impose Washington’s will on the world.

  This ideology governs US foreign policy and requires war in its defense. In the 1990s Paul Wolfowitz enshrined the Wolfowitz Doctrine into US military and foreign policy. In its most bold form, the Doctrine states:

  “Our first objective is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union. This is a dominant consideration underlying the new regional defense strategy and requires that we endeavor to prevent any hostile power from dominating a region whose resources would, under consolidated control, be sufficient to generate global power.”

  As a former member of the original Cold War Committee on the Present Danger, I can explain what these words mean. The “threat posed formerly by the Soviet Union” was the ability of the Soviet Union to block unilateral US action in some parts of the world. The Soviet Union was a constraint on US unilateral action, not everywhere but in some places. This constraint on Washington’s will is regarded as a threat.

  A “hostile power” is a country with an independent foreign policy, such as the BRICS (Brazil, Russia, India, China, and South Africa) have proclaimed. Iran, Bolivia, Ecuador, Venezuela, Argentina, Cuba, and North Korea have also proclaimed an independent foreign policy.

  This is too much independence for Washington to stomach. As Russian President Vladimir Putin recently stated, “Washington doesn’t want partners. Washington wants vassals.”

  The Wolfowitz doctrine requires Washington to dispense with governments that do not acquiesce to Washington’s will. It is a “first objective.”

  The collapse of the Soviet Union resulted in Boris Yeltsin becoming president of a dismembered Russia. Yeltsin was a compliant US puppet. Washington became accustomed to its new vassal and absorbed itself in its Middle Eastern wars, expecting Vladimir Putin to continue Russia’s vassalage.

  However at the 43rd Munich Conference on Security Policy, Putin said: “I consider that the unipolar model is not only unacceptable but also impossible in today’s world.”

  Putin went on to say: “We are seeing a greater and greater disdain for the basic principles of international law. And independent legal norms are, as a matter of fact, coming increasingly closer to one state’s legal system. One state and, of course, first and foremost the United States, has overstepped its national borders in every way. This is visible in the economic, political, cultural and educational policies it imposes on other nations. Well, who likes this? Who is happy about this?”

  When Putin issued this fundamental challenge to US Uni-power, Washington was preoccupied with its lack of success with its invasions of Afghanistan and Iraq. Mission was not accomplished.

  By 2014 it had entered the thick skulls of our rulers in Washington that while Washington was blowing up weddings, funerals, village elders, and children’s soccer games in the Middle East, Russia had achieved independence from Washington’s control and presented itself as a formidable challenge to Washington’s Uni-power. Putin and Russia have had enough of Washington’s arrogance.

  The unmistakable rise of Russia refocused Washington from the Middle East to Russia’s vulnerabilities. Ukraine, long a constituent part of Russia and subsequently the Soviet Union, was split off from Russia in the wake of the Soviet collapse by Washington’s maneuvering. In 2004 Washington had tried to capture Ukraine in the Orange Revolution, which failed to deliver Ukraine into Washington’s hands. Consequently, according to Assistant Secretary of State Victoria Nuland, Washington spent $5 billion over the following decade developing NGOs that could be called into the streets of Kiev and in developing political leaders who represented Washington’s interests.

  Washington launched its coup in February 2014 with orchestrated “demonstrations” that with the addition of violence resulted in the overthrow and flight of the elected democratic government of Victor Yanukovych. In other words, Washington destroyed democracy in a new country with a coup before democracy could take root.

  Ukrainian democracy meant nothing to Washington intent on seizing Ukraine in order to present Russia with a security problem and also to justify sanctions against “Russian aggression” in order to break up Russia’s growing economic and political relationships with Europe.

  Having launched on this reckless and irresponsible attack on a nuclear power, can Washington eat crow and back off? Would the neoconservative-controlled mass media permit that? The Russian government, backed 89% by the Russian people, have made it clear that Russia rejects vassalage status as the price of being part of the West. The implication of the Wolfowitz Doctrine is that Russia must be destroyed.

  This implies our own destruction.

  What can be done to restore peace? Obviously, the EU must abandon NATO and declare that Washington is a greater threat than Russia. Without NATO Washington has no cover for its aggression and no military bases with which to surround Russia.

  It is Washington, not Russia, that has an ideology of “uber alles.” Obama endorsed the neoconservative claim that “America is the exceptional country.” Putin has made no such claim for Russia. Putin’s response to Obama’s claim is that “God created us equal.”

  In order to restore peace, the neoconservatives must be removed from foreign policy positions in the government and media. This means that Victoria Nuland must be removed as Assistant Secretary of State, that Susan Rice must be removed as National Security Adviser, that Samantha Power must be removed as US UN ambassador.

  The warmonger neoconservatives must be removed from Fox ‘News,’ CNN, the New York Times, Washington Post, and Wall Street Journal, and in their places independent voices must replace propagandists for war.

  Clearly, none of this is going to happen, but it must if we are to escape armageddon.

  The prescription for peace and prosperity is sound. The question is: Can we implement it?

  

  

  

  

• "I Sure Am Glad There's No Inflation"

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  I sure am glad there's no inflation, because these "stable prices" the Federal Reserve keeps jaw-jacking about are putting us in a world of hurt.

  We are constantly bombarded with two messages about inflation:

  1. Inflation is near-zero

  2. This worries the Federal Reserve terribly, because stable prices are deflationary and deflation is (for reasons that are never explained) like the financial Black Plague that will wipe out humanity if it isn't vanquished by a healthy dose of inflation (i.e. getting less for your money).

  Those of us outside the inner circles of power are glad there's no inflation, because we'd rather get more for our money (deflation) rather than less for our money (inflation). You know what I mean: the package that once held 16 ounces now only holds 13 ounces. A medication that once cost $79 now costs $79,000. (This is a much slighter exaggeration than you might imagine.)

  Our excellent F-18 Super Hornet fighter aircraft cost us taxpayers $54 million a piece. Now the replacement fighter, the wallowing collection of defective parts flying in close proximity known as the F-35 costs $250 million each–unless you want an engine in it. That'll cost you extra, partner.

  Despite all these widely known examples of rampant inflation, every month we're told there's no inflation. Just to reassure myself there's no inflation, I looked up a few charts on the St. Louis Fed's FRED database.

  I have to say, I'm scratching my head here because the cost of things has gone up a lot since 2000.

  The consumer price index is up 38% from 2000. Now if somebody were to give me a choice between getting 10 gallons of gasoline and 10 gallons minus 3.8 gallons of gasoline, I'd take the 10 gallons. So how the heck can a 38% increase be near-zero inflation?

  If I took $38 of every $100 you earned, would you reckon I'd taken next to nothing from you? Do you earn 38% more than you did in 2000? If so, congratulations; most people can't answer "yes."

  

  Urban-area rents are up 56% from 2000. Now this is even worse inflation, because you just paid $156 for what used to cost you only $100.

  

  State and local government taxes are up 75% since 2000. And this doesn't even include the rip-off fishing license fees that have gone through the roof, the boat registration fees that have shot to the moon, and the legal-looting parking ticket that used to be $12 and is now $60.

  Taxes naturally rise with the economic expansion due to rising population, which has gone up about 13.8% since 2000: from 281 million residents of the USA to 320 million in 2015. So taxes rising a few percentage points each year along with growth and population would make sense. But 75%?

  

  I've got a real treat for all you parents, uncles, aunts and grandparents who are planning to put the kids through college: the costs have only risen about 100% since 2000. That means instead of scraping up $80,000 per kid (assuming they can get all their required classes and grind the thing out in four years) you now need to scrape up $160,000 per kid.

  

  The price index for college tuition grew by nearly 80 percent between August 2003 and August 2013. Now to make this apples to apples with the rest of the data here, we need to add in the nearly 5 missing years: from 1/1/2000 to 8/1/2003 and from 8/1/2013 to 8/1/2015. I'd say putting the increase at 100% is being conservative.

  I sure am glad there's no inflation, because these "stable prices" the Federal Reserve keeps jaw-jacking about are putting us in a world of hurt. If we had honest-to-goodness inflation, that would push us right over the edge.

  

  

  

  

  

• Hillary Clinton's FBI Investigation Is A "Criminal Probe": Post

  Following the embarrassing Snafu two weeks ago, in which the NYT reported, then unreported, that Hillary Clinton had sent at least four emails from her personal account containing classified information during her time heading the State Department and as a result both the DOJ and FBI had gotten involved (with lots of confusion over what is active and what is passive voice) many were confused: was or wasn’t the DOJ or FBI involved, and if not, why not? After all, there was sufficient evidence of enough negligence to merit at least a fact-finding mission.

  Last night we got a part of the answer, when WaPo reported that what the NYT reported, then unreported, was in fact accurate: “The FBI has begun looking into the security of Hillary Rodham Clinton’s private e-mail setup, contacting in the past week a Denver-based technology firm that helped manage the unusual system, according to two government officials.

  Also last week, the FBI contacted Clinton’s lawyer, David Ken­dall, with questions about the security of a thumb drive in his possession that contains copies of work e-mails Clinton sent during her time as secretary of state.”

  As a reminder, David Kendall is “a prominent Williams & Connolly attorney who defended former CIA director David Petraeus against charges of mishandling classified information.” That Clinton has resorted to using him reveals just how far she thinks this could escalate.

  As the WaPo further added, “the FBI’s interest in Clinton’s e-mail system comes after the intelligence community’s inspector general referred the issue to the Justice Department in July. Intelligence officials expressed concern that some sensitive information was not in the government’s possession and could be “compromised.” The referral did not accuse Clinton of any wrongdoing, and the two officials said Tuesday that the FBI is not targeting her.”

  Maybe that’s true, or maybe that’s how the Amazon Post was told to spin the narrative. However, moments ago a far less liberal outlet, came out with its own interpretation of the ongoing FBI escalation involving Hillary, and according to the NY Post, “the FBI investigation into former Secretary of State Hillary Rodham Clinton’s unsecured e-mail account is not just a fact-finding venture — it’s a criminal probe, sources told The Post on Wednesday.”

  The feds are investigating to what extent Clinton relied on her home server and other private devices to send and store classified documents, according to a federal source with knowledge of the inquiry.

   

  “It’s definitely a criminal probe,” said the source. “I’m not sure why they’re not calling it a criminal probe.

  Well, there are several reasons, one of which is that a presidential candidacy would be all but scuttled if they had to fight a criminal probe at the same time as they were trying to convince the rest of the US of their pristine moral character.

  The DOJ [Department of Justice] and FBI can conduct civil investigations in very limited circumstances,” but that’s not what this is, the source stressed. “In this case, a security violation would lead to criminal charges. Maybe DOJ is trying to protect her campaign.”

  Clinton’s camp has downplayed the inquiry as civil and fact-finding in nature. Clinton herself has said she is “confident” that she never knowingly sent or received anything that was classified.

  As reported on July 24, the inspector general told Congress that of 40 Clinton e-mails randomly reviewed as a sample of her correspondence as secretary of state, four contained classified information. Post adds that “if Clinton is proven to have knowingly sent, received or stored classified information in an unauthorized location, she risks prosecution under the same misdemeanor federal security statute used to prosecute former CIA Director Gen. David Petraeus, said former federal prosecutor Bradley Simon.”

  Which also explains why she hired his lawyer.

  The statute — which was also used to prosecute Bill Clinton’s national security adviser, Sandy Berger, in 2005, is rarely used and would be subject to the discretion of the attorney general.

   

  Still, “They didn’t hesitate to charge Gen. Petraeus with doing the same thing, downloading documents that are classified,” Simon said. “The threshold under the statute is not high — they only need to prove there was an unauthorized removal and retention” of classified material, he said.

   

  “My guess is they’re looking to see if there’s been either any breach of that data that’s gone into the wrong hands [in Clinton’s case], through their counter-intelligence group, or they are looking to see if a crime has been committed,” said Makin Delrahim, former chief counsel to the Senate Judiciary Committee, who served as a deputy assistant secretary in the Bush DOJ.

   

  “They’re not in the business of providing advisory security services,” Delrahim said of the FBI. “This is real.”

  To be sure, this may just be the Post trying to stir the pot with its “sources” ahead of what promises to be the most watched republican primary debate in history. But on the off chance Rupert Murdoch’s outlet is accurate, then one wonders why and how did Obama greenlight such an investigation, whose blessing could only come from the very top.

  And if the administration has decided to sacrifice Hillary, whose favorability numbers just plunged to the point she may not need outside help to prematurely end her presidential run, just who does the current regime have in mind for the next US president?

  

  

  

  

  

• US Allows Ally Turkey to Bomb Only Group Effectively Fighting ISIS

  Submitted by Naji Dahl via Anti-Media,

  Late in July, the Anti-Media reported that Turkey joined the U.S. led coalition conducting airstrikes against the Islamic State (IS, ISIS, ISIL). Since then, it has become clear that Turkey’s strategy is part of a larger agreement with the U.S. to conduct a war against “extremism” in the region.

  The deal between the U.S. and Turkey has the following contours: Turkey will allow the U.S. to use its military base at Incirlik to conduct airstrikes against the Islamic State. In exchange, the U.S. will allow Turkey to create a buffer zone on Syrian soil free of Islamic State and Kurdish fighters. The stated aim of the “safe zone” is to create a refuge for internally displaced Syrian civilians inside Syria. According to the New York Times,

  “The plan would create what officials from both countries are calling an Islamic State-free zone controlled by relatively moderate Syrian insurgents, which the Turks say could also be a ‘safe zone’ for displaced Syrians.”

  

  For Turkey, however, the real aim is to prevent the YPG Kurdish fighters from linking up their three zones of control (Efrin, Kobani, and Cizir pictured below; Tal Abyad is already under YPG control) in northern Syria with each other. These Kurdish fighters also happen to be the sole force that has shown the ability to effectively defeat ISIS in battle. However, the real aim of Turkey was voiced by the leader of the Kurdish opposition party—HDP— in the Turkish parliament, Selahattin Demirtas:

  “‘Turkey doesn’t intend to target IS with this safe zone. The Turkish government was seriously disturbed by Kurds trying to create an autonomous state in Syria,’ he said, adding that ‘the safe zone is intended to stop the Kurds, not IS.'”

  

  It is a poorly-kept secret that the YPG intends to create an independent state in northern Syria, known as Rojava. The YPG has already been accused of ethnically cleansing the non-Kurds from that region as a precursor for a Kurdish state. The YPG—and its civilian arm, the PYD—are linked to the PKK (Kurdistan Workers Party), a Kurdish separatist group that Turkey, the U.S., and the E.U. consider a terrorist organization. At 14.5 million, Turkey has the largest population of Kurds in the southeastern part of its territory. The PKK waged a long war with the Turkish state during the 1980s and the 1990s that killed about 30,000 people.

  Encouraged by the gains of the YPG in northern Syria, the PKK seems to have re-started its war with Turkey. This new war started when on July 2oth, an IS suicide bomber blew herself up in the southern Turkish border town of Suruc. The attack killed 32 Kurdish youths and left more than 100 wounded. The Kurdish youths were meeting to organize a rebuilding effort of the town of Kobani in Syria. Suruc played a pivotal role in helping YPG rebels take control of Kobani and Tal Abyad from IS.

  The PKK blamed the IS attack on the indifference the Turkish state has shown towards IS. The PKK retaliated against the Turkish state by killing two Turkish police officers. These attacks were followed by another that killed three Turkish soldiers, a police officer, and a civilian. On August 2nd, a car bomb killed two Turkish soldiers and injured 31 when it blew up close to a police station in the Southeastern Turkish town of Dogubayazit.

  For its part, the Turkish military responded by attacking PKK positions in northern Iraq (the Kurdistan Regional Government of Iraq has allowed the PKK to have bases there). There are also reports that the Turkish military attacked YPG positions in northern Syria. Not only that, the Turkish state has initiated a crack-down on PKK and other militants, arresting 590 people on terror charges inside Turkey. Even more sinister is president Erdogan’s call to strip the immunity of parliamentarians with alleged ties to the PKK.

  According to sociologist Max Weber, a state is an entity that has a boundary, has sovereignty (controls what happens within its boundary), has the ability to legitimately use force, and the ability to tax and borrow. Whenever any of these functions are threatened, a state responds with violence towards the source of the threat.

  The PKK poses a serious threat to Turkey’s territorial integrity and sovereignty. It is hard to fathom a situation where Turkey will ever allow an independent Kurdish state, whether in northern Iraq, in Syria, or in Turkey. For the Turkish state, the Kurdish threat is far more serious than the threat from ISIS. If the Kurds are successful in their bid for their own state, they will detach about a third of Turkey’s territory (to understand the seriousness of the Kurdish challenge to the Turkish state, just imagine what the American government would do if a separatist Mexican movement sought to detach the southwest from the United States and create an independent state). The seriousness is underscored by the declarations of the president of Turkey regarding a Kurdish state. In contrast, the Islamic State has no such aims on Turkey and does not have the wherewithal to undertake such an enterprise—even if it wanted to. Turks have a long history of secularism and are not receptive to the strict Islamism of ISIS. For the time being, therefore, the Turkish state will pretend to be fighting ISIS while directing its violence towards the PKK and the YPG.

  If the violence between the PKK and YPG and the Turkish state spirals out of control, it is highly likely that a military coup d’etat will take place against the AKP (the Islamic-based Justice and Development party of Erdogan). The military will jail leading government politicians, end democratic rule, wage war against the PKK/YPG, restore order, and then return power to civilian hands. This has happened three times in modern Turkish history—in 1960, 1971, and 1980. If conditions continue to deteriorate inside and outside Turkey, a coup is likely to happen again.

  

  

  

  

  

• Iran Refuses UN Inspector Access To Scientists, Caught Trying To "Clean Up" Suspected Nuclear Site

  Surprise! In what must be the most predictable geopolitical event in recent days, WSJ reports that Iran has refused to let United Nations inspectors interview key scientists and military officers to investigate allegations Tehran maintained a covert nuclear-weapons program. This comes hours after CNN reported that the intelligence community believes Iran has been attempting to clean up the suspected nuclear site at Parchin prior to the arrival of international inspectors based on new satellite imagery. While the administration attempts to 'clear up' any misunderstandings, Senate Foreign Relations Committee Chairman Bob Corker told reporters. "It was not a reassuring meeting…I would say most members left with greater concerns about the inspection regime than we came in with."

  For now, the landmark nuclear agreement forged between world powers and Iran on July 14 in Vienna is on hold. As The Wall Street Journal reports, Iran’s stance complicates the International Atomic Energy Agency’s investigation into Tehran’s suspected nuclear-military program—a study that is scheduled to be finished by mid-October, as required by the treaty.

  The IAEA and its director-general, Yukiya Amano, have been trying for more than five years to debrief Mohsen Fakhrizadeh-Mahabadi, an Iranian military officer the U.S., Israel and IAEA suspect oversaw weaponization work in Tehran until at least 2003.

   

  Mr. Amano said Tehran still hasn’t agreed to let Mr. Fakhrizadeh or other Iranian military officers and nuclear scientists help the IAEA complete its investigation. The Japanese diplomat indicated that he believed his agency could complete its probe even without access to top-level Iranian personnel.

   

  Tehran has repeatedly denied it ever had a secret nuclear weapons program.

   

  But Mr. Amano said in a 25-minute interview in Washington that Iran still hasn’t agreed to provide access to Mr. Fakhrizadeh or other top Iranian military officers and nuclear scientists to assist the IAEA in completing its probe.

   

  “We don’t know yet,” Mr. Amano said about the agency’s interview requests. “If someone who has a different name to Fakhrizadeh can clarify our issues, that is fine with us.

  But, as CNN reports, the intelligence community believes Iran has been attempting to clean up the suspected nuclear site at Parchin prior to the arrival of international inspectors based on new satellite imagery, a senior intelligence official told CNN on Wednesday.

  The commercial imagery shows that Iran has moved heavy construction equipment to the area. But the senior intelligence official, who is familiar with the imagery in question, said the U.S. is confident that such sanitization efforts cannot succeed because radioactive materials, if present, are extremely difficult to conceal.

   

  "The (International Atomic Energy Agency) is familiar with sanitization efforts and the international community has confidence in the IAEA's technical expertise," the official said.

   

  Sen. Chris Coons, D-Delaware, told reporters on Tuesday that he has "concerns about the vigorous efforts by Iran to sanitize Parchin."

   

  A furious lobbying effort by both supporters and foes of the Iran nuclear deal continues in the Senate ahead of a mid-September vote on the agreement. On Wednesday, Senate Majority Leader Mitch McConnell said the Iran debate will begin on the Senate floor on Sept. 8 after the August recess is over.

  As The Journal concludes,

  Mr. Amano visited Capitol Hill on Wednesday in a bid to assure skeptical U.S. lawmakers the IAEA is capable of implementing a vast inspections regime of Iran’s nuclear facilities and clarifying the weaponization issue.

  Senate Republicans and skeptical Democrats, however, left the 90-minute closed-door meeting frustrated that Mr. Amano refused to share the agency’s classified agreements on access to Iranian military sites, scientists and documents.

  “I would say most members left with greater concerns about the inspection regime than we came in with,” Senate Foreign Relations Committee Chairman Bob Corker (R., Tenn.) told reporters. “It was not a reassuring meeting.”

  *  *  *
  Somewhere Benjamin Netanyahu is doing "the told you so" dance… as Kerry's deal and Obama's legacy hang by a thread.

  

  

  

  

  

• Chinese Stocks Tumble Despite Margin Debt Rises As Virtu Is Unleashed To Provide "Liquidity" After Citadel Ban

  No lesser liquidity-providing high-frequency-trading never-a-losing-trade shop than Virtu financial has been 'allowed' to trade Chinese capital markets. Coming just days after Citadel's ban, one can only assume that Chinese regulators made a deal with the devil CEO Doug Cifu to levitate markets at any and every cost in order to pick up pennies in front of de-leveraging, over-margined army of farmers and grandmas now seeking exits. Sure enough for the second day in a row margin debt is on the rise again. The retail-dominated Chinese stock market will be ripe picking for the HFTs, as long as not to many are allowed and a tail-chasing flash-crash ensues… but for now its appears yesterday afternoon's selling pressure continues with CSI-300 down almost 2% at the open.

  Each bounce yesterday saw immediate selling pressure..

  

   

  All that matters for now is keeping Shanghai Composite above the 200-day moving average…

  

   

  So today's key level will be what happens when SHCOMP hits 3574?

   

  And it appears the 200DMA will be tested again…

  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1.7% TO 3,802.93
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.9% TO 3,625.50

  

   

  As Bloomberg reports, Virtu Financial Inc., one of the world’s biggest high-speed trading firms, has started trading in its 35th country: China.

  The company reached an agreement during the second quarter with a Chinese brokerage house to provide liquidity on “a very limited basis,” according to Virtu Chief Executive Officer Doug Cifu. Virtu is using automated market-making strategies to buy and sell commodities listed in mainland China. In other markets, it trades other assets including stocks and currencies.

   

  “This agreement is the first step in what we view as a very long process,” Cifu said in a conference call on Wednesday. He did not identify the firm’s Chinese partner.

   

  …

   

  Mainland exchanges have frozen 38 accounts, including one owned by Citadel Securities, as the local authorities investigate algorithmic traders.

   

  “We are certainly cognizant of the recent market volatility in China, and the regulatory scrutiny being placed on electronic trading by the local regulator,” Cifu said. “Long term, we view China as an established capital market with volumes comparable to the largest markets in which we operate.”

   

  Virtu will confine its presence to Chinese data centers. It won’t be opening offices or “putting boots on the ground,” he said.

  What does it take for famers to learn?

  • *SHANGHAI EXCHANGE MARGIN DEBT RISES FOR SECOND DAY

  Another crash it would appear…

  *  *  *

  Having tried (and failed) with everything so far, it seems China is willing to unleash HFT hell on their retail citizens… we suspect Virtu's agreement will be torn up if stocks drop any more..

  

  

  

  

  

• Japan's Dire Message To Yellen: "Don't Raise Rates Soon"

  Originally posted at KesslerCompanies.com,

  We think it is more useful to compare economics and interest rates in

  • the period since 2007 in the U.S. (The Great Recession) with
  • the period since 1990 in Japan (Japan’s 2+ lost decades) as well as
  • the period after 1929 in the US (The Great Depression)

  ...because they are all periods of a ‘balance-sheet recession’ (or similarly, ‘secular stagnation’).

  Many commentators and policy makers don’t fully appreciate or acknowledge this distinction from the more frequent ‘inventory-cycle’ type recessions.

  There are so many parallels between these three that it is next to impossible to dismiss the comparison. (note: for a previous writing of ours on this topic, click here) Using this, there is an important lesson for the Fed to consider now in weighing whether to raise rates.

  In the two charts below, we’ve offset US interest rates to Japan’s interest rates by 16 years to roughly align the major peaks in their respective main stock markets. The charts each cover a 27 year period. Other than the US lowering rates quicker than in Japan (Ben Bernanke’s main legacy), and Japan’s term rates starting the cycle in the 8%+ range, these charts are quite similar; interest rates steadily grind lower over a long period of time.

  Soon after the ‘NOW’ line in the comparison below, Japan raised rates one time in August 2000 (top chart) from 0.0% to 0.25%, yet almost immediately, term interest rates crashed as the economy faltered. Within 7 months, the Bank of Japan had to lower short-term rates back to 0.15% in February 2001 (note: the US interest rate target is already at 0.125%, not 0%). As US short-term interest rate expectations are priced now (dotted blue line in lower chart), the market expects a continuous Fed raising cycle to about 3% in 2024. We continue to think that the Fed Funds rate will be forced to stay much lower than that over the next 10 years, and all rates across the yield curve will need to drop to reflect that.

  

  But there is a more specific issue that the Federal Open Market Committee (FOMC) faces at their next few meetings. The FOMC have, for a very long time, predictably moved their policy levers in opposition to the state of macroeconomics. In taking a survey of economics now, the US economy could easily warrant a further easing of policy. Wage stagnation, output gap slack, global recession-level commodity prices, sub-target inflation, China’s slowdown in its early stages, the rest of the world’s central banks in an easing mode, and US production indicators showing weakness are each, by themselves, a good reason not to raise rates. 

  Yet, part of the FOMC is contemplating a ‘philosophical’ rate rise this year simply because the Fed funds rate has been near 0% for close to 7 years, and it somehow seems reckless to them to leave the rate low indefinitely.

  Our suggestion to the FOMC as we approach these dates is to be extra careful, look at the historical comparisons, and don’t underestimate the trust the markets have for the FOMC to act rationally. We all expect the FOMC to act counter-cyclically; a rate rise now would be pro-cyclical, or making the problem worse. Anything FOMC members say after a ‘philosophical’ rate rise would greatly diminish its value. This comparison with Japan suggests that raising rates prematurely is detrimental and avoidable.

   

  

  

  

  

  

• Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed's Blessing

  Two weeks ago, Morgan Stanley made a decisively bearish call on oil, noting that if the forward curve was any indication, the recovery in prices will be “far worse than 1986” meaning “there would be little in analysable history that could be a guide to [the] cycle.”

  As we said at the time, “those who contend that the downturn simply cannot last much longer are perhaps ignoring the underlying narrative that helps to explain why the situation looks like it does.”

  “At heart,” we continued, “this is a struggle between the Fed’s ZIRP and the Saudis, who appear set to outlast the easy money that’s kept US producers alive.” This is an allusion to the fact that the weakest players in the US shale industry – which the Saudis figure they can effectively wipe out – have been able to hold on thus far thanks largely to accommodative capital markets.

  But persistently low crude prices – which, if you believe Morgan Stanley, are at this point driven pretty much entirely by OPEC supply – are taking their toll on producers the world over. That is, the damage isn’t confined to US producers.

  In fact, the protracted downturn in prices is slowly killing the petrodollar and exporters sucked liquidity from global markets for the first time in 18 years in 2014. To let Goldman tell it, a “new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn” by 2018.

  As Bloomberg noted a few months back, the turmoil in commodities has produced a “concomitant drop in FX reserves … in nations from oil producer Oman to copper-rich Chile and cotton-growing Burkina Faso.”

  And don’t forget Saudi Arabia which, as you can see from the chart below, isn’t immune to the ill-effects of its own policies.

  

  The financial strain comes at an inopportune time for the Saudis and indeed, as we noted when the country moved to open its stock market to foreign investment in June, “the move to allow direct foreign ownership of domestic equities [may reflect the fact that] falling crude prices and military action in Yemen have weighed on Saudi Arabia’s fiscal position.”

  “Our forecast is for Brent to average US$54 per barrel in 2015 [and] at this price, we expect total Saudi government revenues to fall by some 41% in 2015.[resulting] in [sharp] cuts to expenditures,” Citi said at the time.

  Now that Saudi boots are officially on the ground in Yemen (if only to provide “training“) and now that it appears the Kingdom is prepared to step up its military efforts in Syria, the financial strain from lower crude prices looks set to drive the Saudis into the bond market. Here’s FT with more:

  Saudi Arabia is returning to the bond market with a plan to raise $27bn by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the world’s largest oil exporter.

   

  Bankers say the kingdom’s central bank has been sounding out demand for an issuance of about SR20bn ($5.3bn) a month in bonds — in tranches of five, seven and 10 years — for the rest of the year.

   

  The latest plans represent a major expansion of that programme, which bankers believe could even extend into 2016, given the outlook for the oil price.

   

  Saudi Arabia’s resort to further domestic borrowing highlights the challenges facing the region’s largest economy amid one of the steepest falls in the oil price in recent decades. Brent, the international benchmark, has dropped from $115 a barrel in June last year to about $50 this week.

   

  Oil’s decline accelerated in November when Opec, the producers’ cartel, decided not to cut output, a major departure from its traditional policy of trimming production to prop up prices. Saudi Arabia said it was an attempt to defend market share against rivals such as the US shale industry.

   

  But the decision to ride out a sustained period of lower prices has put a huge strain on the finances of major oil exporters, including Saudi Arabia which requires an oil price of $105 a barrel to balance its budget.

   

  The kingdom has drained $65bn of its fiscal reserves to maintain government spending since the oil price plunge began. Sama currently has $672bn in foreign reserves, down from their peak of $737bn in August 2014.

   

  The plan to resort to capital markets, if confirmed, demonstrates the priority Riyadh is placing on maintaining government spending, despite the pressure cheap oil is putting on its budget.

   

  The monthly bond issuance plan would only cover part of the deficit, which economists estimate will reach SR400bn this year amid falling revenues and continuing high expenditure on big infrastructure projects, public sector wages and the continuing war in Yemen.

  In case the irony here isn’t clear, allow us to explain.

  Saudi Arabia has effectively kept oil prices suppressed in an effort to wipe out the US shale industry which has only managed to stay afloat this long because Fed policies have kept monetary conditions loose and driven investors into HY credit and other risk assets. Now, Saudi Arabia is set to take advantage of the very same forgiving capital markets that have served to keep its US competition in business as persistently low oil prices and two armed conflicts look set to strain the Kingdom’s finances. 

  Of course one option for keeping the cash drain to a minimum would be to avoid getting involved in multiple regional proxy wars – but where’s the fun in that? 

  

  

  

  

  

• Police Officer Caught On Tape Discussing "Ways To Kill A Black Man And Cover It Up"

  Earlier this week we reported a stunning statistic: in July, the US police had killed 118 people mostly through gunfire, the highest number of police “induced” fatalities in 2015, and on pace for a record 1150 deaths for all of 2015.

  To be sure, most of these deaths took place in the “ordinary course” of police business, primarily in self-defense. However, two things are troubling:

  • first is that even after a surge in police violence and scandals involving on tape killings of innocent people, the US still has no comprehensive record of the number of people killed by law enforcement, which is why the Guardian tasked itself with its The Counted initiative;
  • second, that on numerous cases, the killings took place in “less than ordinary course”, usually involving the police officer making a rash judgment that cost the victim their life, and in many cases shooting without a clear cause.

  But the worst example of what is increasingly, and broadly, referred to as “police brutality”, are cases such as that of Alexander City officer Troy Middlebrooks, was, as NBC reports, was “caught on a secret recording discussing ways to kill a black man and cover it up” by planting bogus evidence.

  

  Alexander City police officer Troy Middlebrooks. The secret recording of his comments was played to police chiefs and the mayor. Photograph: Alabama state bureau of investigation

  The recording, which was first reported by the Guardian and subsequently by NBC News, captures Middlebrooks during a May 2013 visit to a home where the suspect, Vincent Bias, was visiting relatives.  At one point, the officer pulls Bias’ brother-in-law – who is white – aside and tells him he doesn’t trust Bias. Middlebrooks had arrested Bias on drug charges weeks earlier, and was clearly frustrated that he had made bail.

  Middlebrooks tells Bias’ brother-in-law, that if he were the suspect’s relative, he would “fucking kill that motherfucker” and “before the police got here I would put marks all over my shit to make it look like he was trying to fucking kill me. I god damn guarantee. What it would look like? Self-fucking defense. Fuck that piece of shit. I’m a lot different from a lot of these other folks. I’ll fucking tell you what’s on my fucking mind.”

  At another point, Middlebrooks tells the brother-in-law that Bias “needs a goddamn bullet.”

  And since this is America, and since the entire episode was recorded, a month after that incident, Bias’ lawyers told the city they intended to sue the city of 14,875 people for $600,000. They drafted a lawsuit that accused Alexander City police of harassing him, and included the contention that Middlebrooks also called Bias the N-word. Bias’ legal notice was passed to the city’s insurance company, which arranged a settlement of far smaller amount: $35,000, according to Alexander City’s attorney, Larkin Radney.

  With that agreement, Bias never sued and the incident was quietly settled out of court and ended with the officer keeping his job, according to legal documents and interviews with lawyers and officials involved in the case.

  Middlebrooks, meanwhile, remains on the job. Chief Robinson, who is black, told the Guardian that Middlebrooks was disciplined, but he declined the paper’s request for details.

  Robinson defended Middlebrooks, saying, “He was just talking. He didn’t really mean that.”

  The chief also told the paper that he personally disagreed with the city’s decision to settle with Bias. “It’s a whole lot different if you hear both sides,” Robinson said. It also makes itt seem that the Chief was happy to admit guilt and settle for the smallest possible fine.

  On the other hand, why did Bias rush to accept the judgment if he too thought he had a case? “Bias, 49, told NBC News that he took the money in hopes of moving away from Alexander City, where he claims he was unfairly targeted by police, in part because of his race.” Well, sure, but he wouldn’t have the money if he hadn’t been unfairly targeted.

  Then it got even more surreal:  Bias said that after the recording surfaced, and he threatened a lawsuit, the police added to the drug charges against him until he felt he had no choice but to plead guilty. “They forced my hand,” he said. Bias said he served 14 months in a county jail, and was released two months ago.

  * * *

  Within months of the recording, Middlebrooks was the first officer to respond to a controversial fatal shooting by a colleague of an unarmed black man in the city. He was closely involved in handling the scene and gave a key account of what happened to state investigators. His fellow officer was eventually cleared of any wrongdoing and both men continue to police the city of about 15,000 people about 55 miles north-east of Montgomery.

  * * *

  The biggest travesty in this episode is not the subsequent courtroom screw up, and who did what or why, but the fact that a cop, whether he meant it or not, made it very clear and and on the leaked record, that among the various other standard operating procedures in a policeman’s arsenal, is to kill a suspect while fabricating evidence to stage an episode of self-defense, in this case with a racial bias. Whether he did mean it or not is irrelevant because this is precisely the ammunition the Louis Farrakhans of the world need when in their violent fire and brimstone sermons, they call on those present to “rise up and kill those who kill us“, i.e., white people.

  Because they can simply claim this is in retaliation to what “that guy” did, or said. And that is how race wars really start: not with one explicit catalyst, but with countless small but very meaningful escalations, until finally the shooting starts for real.

  The Middlebrooks recording is below

  

  

  

  

  

• China Responds To US Declaration Of Cyber War

  Authored Op-Ed via Government mouthpiece Xinhua,

  The United States is on the brink of making another grave mistake under the name of protecting cyber security, as it is reportedly considering retaliatory measures against China for unfounded hacking accusations.

  Senior U.S. government and intelligence officials were quoted by a U.S. newspaper as saying Friday that President Barack Obama's administration has determined to retaliate against China for its alleged theft of personnel information of more than 20 million Americans from the database of the Office of Personnel Management (OPM), but the forms and specific measures of the retaliation have not been decided.

  The report added that Obama has allegedly ordered his staff to come up with "a more creative set of responses," while a U.S. official hinted that the United States will employ "a full range of tools to tailor a response."

  The decision came amid a growing chorus in the United States demonizing China as the culprit behind the massive breach of the OPM computer networks. As witnessed by most past similar cases, the U.S. government, Congress and media once again called for punishing China for this after a top U.S. intelligence official indirectly pointed a finger at China.

  Obviously, cyber security has become another tool for Washington to exert pressure on China and another barrier that restrains the further development of China-U.S. relations.

  Washington will be blamed for any adverse effects this might have on its ties with China, as all the U.S. accusations against China were made without providing concrete evidence.

  The U.S. government was also self-contradictory for declining to directly name China as the attacker on the one hand, while deciding to target China for retaliation on the other.

  By repeatedly blaming China for hacking into its government computers, Washington apparently tries to portray Beijing as the No. 1 bad guy in cyber space, but this is doomed to fail because the United States is the most powerful country with the most advanced cyber technologies.

  As exposed by former U.S. defense contractor Edward Snowden, the U.S. government has been notoriously and blatantly engaged in worldwide surveillance operations against numerous other countries. To divert criticism against its relentless espionage activities, it portrays itself as a victim of cyber attacks.

  By heating up the issue of the OPM hacking, Washington perhaps also aims to pressure China to restore the bilateral cyber work group which was suspended last year after Washington sued five Chinese military officers on so-called charges of commercial espionage despite strong protests from China.

  China has repeatedly stated that it is against all forms of cyber attacks and will crack down on them, as it has long been a major victim of such illegal activities, many of which originated from the United States.

  China has also called for conducting cooperation with the U.S. side and any other country to protect cyber security and its peaceful order.

  Just like protecting its territorial sovereignty and integrity, China is strongly determined to protect the safety of its cyber space and reserves all rights to counter any outside threats and intrusions. It will meet any form of political or economic retaliation with corresponding countermeasures.

  The United States, which made a mistake last year with its false charges against the Chinese officers, should not repeat the mistake by taking retaliatory measures against China over the OPM incident.

  If it stubbornly implements retaliatory measures against China in cyber space, it will be known for being a cyber bully and will have to shoulder responsibility for escalating confrontation and disrupting the peaceful order in the cyber space.

  

  

  

  

  

• Me So Einhorny!

  Greetings from the Starbucks on the Google campus, which is cram-packed with people and laptops (these aren’t Google employees, naturally; just slobs like me; I hang out here a lot because there’s a Tesla supercharger here, and I can suck down all the electricity I want for free).

  Anyway, when I saw all the chatter about how Keurig Green Mountain was getting its balls blown off after-hours, I was reminded of a post I did way back in November. The post relayed the news that, at long last, famed hedge fund manager David Einhorn was throwing in the towel on his GMCR short position. Here’s a snippet from that post:

  

  Well, David Einhorn has clay feet, just like you and me, so………naturally……….this very public announcement came within days of the stock’s highest point in history. From that point, well, things looked sort of like this (including after-hours action tonight, which is why I’m using TOS Charts instead of my beloved ProphetCharts). It’s basically down nearly 70%…….

  

  It just goes to show you……..sometimes you have to be just a little more patient. (And in case you think this is an oddball exception, Einhorn actually just announced his fund had its worst month since August 2008).

  A few other unrelated things on my mind……

  • Even I’ve had it up to the proverbial “here” with the Steve Jobs worship. On the radio today, while I was hearing endless coverage of the new opera based on Cold Mountain (!) they let it be known that another opera was in the works for 2017………..about the life of Steve Jobs.
  • Why do I keep getting the feeling that the Tesla X is going to suck once it’s finally released? Every time Musk talks about it (and keep in mind, this goddamned thing has been delayed over and over again, and I’m one of tens of thousands of people with a paid reservation) he whines about how challenging it is. And it always comes back to those gull-wing doors. Just you watch: those doors are going to be failing left and right. The fact they keep bringing up what a nightmare the doors are just tells you it’s going to be a problem, because even with my Model S, one of the (relatively simple!) door handles doesn’t work anymore.
  • Oh, and while I’m griping about Tesla, one other thing………..I think their success is starting to hurt them. It used to be that I could come in at once for service. These days, they are scheduling appointments nearly two months out! I frankly think Tesla has peaked, and – – how shall I say this – – there won’t be any operas commissioned about Elon Musk’s life in the coming years.

  

  

  

  

• China's Plunge Protection "National Team" Bought 900 Billion In Stocks, Goldman Calculates

  In, “The Complete Guide To China’s CNY 4 Trillion Margin Doomsday Machine,” we presented a comprehensive look at the various backdoor channels the country has used to skirt official restrictions on leveraged stock trading. Here, courtesy of BofAML, is a breakdown of these channels and the bank’s best estimates of their size.

  

  The dramatic sell-off that made international headlines last month and, along with the Greek drama, dominated financial market news, was precipitated by an unwind in these unofficial margin lending channels.

  In a frantic attempt to restore the equity bubble that has for the better part of a year served as a distraction for China’s flagging economic growth and bursting property bubble, Beijing unleashed a plunge protection effort of epic proportions that included everything from threatening to arrest sellers to using China Securities Finance Corp. as a state-controlled margin lender.

  In short, the PBoC, with the help of the country’s banks, helped CSF mushroom into a multi-trillion yuan Frankenstein and now that the mentality of the retail crowd (which in China had accounted for around 80% of daily turnover) has transformed from “buy the dip and get rich” to “sell the rip and break even,”any indication that CSF is set to exit the market is greeted with panic by market participants. 

  Here with a breakdown of just how much money has been funneled into Chinese equities by the so-called “national team” and on how, just like the Fed with QE, the PBoC will find that a swift exit is effectively impossible, is Goldman.

  *  *  *

  From Goldman

  China musings: How much has the government bought in the market?

  The Chinese government’s recent measures to support the domestic equity market through the so-called ‘national team’ institution are being frequently discussed by investors and in the media. In this commentary, we estimate the amount of money the ‘national team’ has spent to support the market, the remaining capital left available for use, the sectors that have likely benefitted from government support, the potential overhang on the equity market from government support measures, and our views on the equity market over coming months.

  1. We estimate the ‘national team’ has spent around Rmb860-900bn to support the domestic equity market.

  Our estimate is based on two dimensions: (1) top-down analysis based on our liquidity model; and (2) bottom-up analysis based on fund flow changes in key investment channels based on public information released by relevant media sources.

  (1) Top-down approach: This method suggests the ‘national team’ bought approximately Rmb900bn in the market.

  (2) Bottom-up approach: The ‘national team’ has bought around Rmb860bn if we sum up each channel.

  Potential size, investment direction and the stock holders of the ‘national team’.

  (i) The potential capital available for market support is roughly Rmb2tn (including the money already spent). According to public information released by media sources including Sina and Caijing (July 24, 2015), 17 commercial banks have lent CSFC nearly Rmb1.3tn in total. CSFC’s own debt issuance plus the PBOC’s multi-channel liquidity injections imply a total of around Rmb2tn. It seems the government still has sufficient support capacity in the pipeline.

  (ii) Government support has largely focused on large-cap blue chips and certain defensive sectors. Due to insufficient high-frequency data for fund flows across sectors, we used the sectors’ performance fluctuation from end-June to July and concluded that supportive capital has mostly flowed into large-cap blue chips or certain defensive sectors, such as banks, insurance, F&B and healthcare. Admittedly, the ‘national team’ has also invested in some ChiNext stocks and SME stocks according to media reports and the listed companies’ reports, although these investments appear to have taken up only a small proportion of the total government buying.

  (iii) Which entities actually hold the stocks? Based on information from public media (Sina and Caijing), the ‘national team’ bought stock through three channels: 1) CSFC bought stocks directly (at least Rmb400bn); 2) subscribing to some major mutual funds (around Rmb200bn); and 3) CSFC provided credit lines for some brokers (around Rmb260bn).

  3. Short-term market implications

  (1) Potential index range-trading in the near term

  a. Given the ample liquidity that the ‘national team’ still has, we expect market volatility to moderate and for A shares to find support in the mid-3000 level (around the previous dip, 3400 on the CSI300 Index). Recent trading patterns suggest that government support may be forceful around this level.

  b. On the other hand, the media reports (Caijing, July 8, 2015) suggest that the regulatory authorities are dissuading institutional investors from reducing positions before the SHCOMP Index reaches 4500 (approximately 4600 for the CSI300 Index). Therefore, this level is now widely regarded as the upper range limit for near-term market performance. Once the index exceeds this level, we believe investors such as brokerage proprietary desks will be able to reduce positions.

  (2) Market concerns over the exit by the ‘national team’ from its supporting measures

  Many clients have expressed their concern over the ‘national team’s’ potential exit from the market and view this as a supply overhang. In our view, the probability of a rash exit is low as the market has not yet stabilized and the government has no pressing need for the funds. Moreover, two notable examples of exits from government direct or indirect support for equity markets show long waiting periods: The Hong Kong Monetary Authority took four years to divest stock purchased during the Asian Financial Crisis in 1998 and the Federal Reserve in the US began to taper its quantitative easing policy in 2013, five years after initiating its first round of quantitative easing in late 2008.

  

  

  

  

  

  

  

• "Debt Is A Fickle Witch"

  Via The Liscio Report,

  Size matters. Just ask Roy Scheider. As incredulous as it may seem, I only recently sat myself down to watch that American scare-you-out-of-the-water staple Jaws for the first time. As a baby born in 1970, the movie at its debut in 1975 was hugely inappropriate for my always precocious, but nevertheless only five-year old self. And by the time this Texas girl and those Yankee cousins of mine were pondering breaking the movie rules during those long-ago summers in Madison, Connecticut, it was not Jaws but rather Brat Pack movies that tempted us. We started down our road of movie rebellion with St. Elmo's Fire, then caught up with a poor Molly Ringwald in Pretty in Pink and then really stretched our boundaries with Less than Zero – you get the picture.    

  And so finally during this long, hot summer of 2015, a seemingly appropriate time with our country gripped from coast to coast with real-life shark hysteria, I watched Jaws for the first time and heard Roy Scheider as Chief Martin Brody utter those words, "You're gonna need a bigger boat."     

  Prophetically, the reality might just be that the collective "we," and quite possibly sooner than we think, really will need a bigger boat. That is, as it pertains to the global debt markets, which have swollen past the $200 trillion mark this year rendering the great white featured in Jaws which can be equated with past debt markets as defenseless and small as a small, striped Nemo by comparison.

  The question for the ages will be whether size really does matter when it comes to the debt markets. It's been more than three years since Bridgewater Associates' Ray Dalio excited the investing world with the notion that the levered excesses that culminated in the financial crisis could be unwound in a "beautiful" way. A finely balanced combination of austerity, debt restructuring and money printing could provide the pathway to a gentle outcome to an egregious era. In Mr. Dalio's words, "When done in the right mix, it isn't dramatic. It doesn't produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ration of debt-to-income go down. That's a beautiful deleveraging." 

  I'll give him the slow growth part. Since exiting recession in the summer of 2009, the economy has expanded at a 2.1-percent rate. I know beauty is in the eye of the beholder but the wimpiest expansion in 70 years is something only a mother could feign admiration for. That not-so-pretty baby still requires the wearing of deeply tinted rose-colored glasses to maintain the allusion.     

  As for the money printing, $11 trillion worldwide and counting certainly checks off another of Dalio's boxes. But refer to said growth extracted and consider the price tag and one does begin to wonder. As for debt restructuring, it's questionable how much has been accomplished. There's no doubt that some creditors, somewhere on the planet, have been left holding the proverbial bag — think Cypriot depositors and (yet-to-be-determined) Energy Future Holdings' creditors. Still, the Fed's extraordinary measures in the wake of Lehman's collapse largely stunted the culmination of what was to be the great default cycle. Had that cycle been allowed to proceed unhampered, there would be much less in the way of overcapacity across a wide swath of industries.    

  Instead, as a recent McKinsey report pointed out, and to the astonishment of those lulled into falsely believing that deleveraging is in the background quietly working 24/7 to right debt's ship, re-leveraging has emerged as the defeatist word of the day. Apparently, the only way to supply the seemingly endless need for more noxious cargo to fill the world's rotting debt hulk is by astoundingly creating more toxic debt. Since 2007, global debt has risen by $57 trillion, pushing the global debt-to-GDP ratio to 286 percent from its starting point of 269 percent.    

  Of course, the Fed is not alone in its very liberal inking and priming of the presses. Central banks across the globe have been engaged in an increasingly high stakes race to descend into what is fast becoming a bottomless abyss in the hopes of spurring the lending they pray will jump start their respective economies. Perhaps it's time to consider the possibility that low interest rates are not the solution.    

  Debt is a fickle witch. When left to its own devices, which it has been for nearly seven years with interest rates at the zero bound, it tends to get into trouble. Unchecked credit initially seeps, and eventually finds itself fracked, into the dark, dank nooks and crannies of the fixed income markets whose infrastructures and borrowers are ill-suited to handle the capacity. Consider the two flashiest badges of wealth in America – cars and homes. These two big-line items sales' trends used to move in lockstep — that is until the powers that be at the FOMC opted to leave interest rates too low for too long.

  In Part I, aka the housing bubble, home sales outpaced car sales as credit forced its way onto the household balance sheets of those who could no more afford to buy a house than they could drive a Ferrari. True deleveraging of mortgage debt has indeed taken place since that bubble burst, mainly through the mechanism of some 10 million homes going into foreclosure. It's no secret that credit has resultantly struggled mightily to return to the mortgage space since.     

  Today though, Part II of this saga features an opposite imbalance that's taken hold. Car sales have come unhinged from that of homes and are roaring ahead at full speed, up 76 percent since the recession ended six years ago, more than three times the pace of home sales over the same period. It's difficult to fathom how car sales are so strong. Disposable income, adjusted for inflation, is up a barely discernible 1.5 percent in the three years through 2014. Add the loosest car lending standards on record to the equation and you quickly square the circle. Little wonder that the issuance of securities backed by car loans is racing ahead of last year's pace. If sustained, this year will take out the 2006 record. At what cost? Maybe the record 16 percent of used car buyers taking out 73-84 month loans should answer that question.    

  To be sure, car loans are but a drop in the $57 trillion debt bucket. The true overachievers, at the opposite end of the issuance spectrum, have been governments. The growth rate of government debt since 2007 has been 9.3 percent, a figure that explains the fact that global government debt is nearing $60 trillion, nearly double that of 2007. The plausibility of the summit to the peak of this mountain of debt is sound enough considering the task central bankers faced as the global financial system threatened to implode (thanks to their prior actions, mind you). In theory, government securities are as money good as you can get. Practice has yet to be attempted.    

  The challenge when pondering $200 trillion of debt is that it's virtually impossible to pinpoint the next stressor. Those who follow the fixed income markets closely have their sights on the black box called Chinese local currency debt. A few basics on China and its anything-but-beautiful leverage. Since 2007 China's debt has quadrupled to $28 trillion, a journey that leaves its debt-to-GDP ratio at 282 percent, roughly double its 2007 starting point of 158 percent. For comparison purposes, that of Argentina is 33 percent (hard to borrow with no access to debt markets); the US is 233 percent while Japan's is 400 percent. If Chinese debt growth continues at its pace, it will rocket past the debt sound barrier (Japan) by 2018. As big as it is, China's debt markets have yet to withstand a rate-hiking cycle, hence investors' angst.    

  My fear is of that always menacing great white swimming in ever smaller circles closer and closer to our shores. I worry about sanguine labels attached to untested markets. US high-grade bonds come to mind in that respect even as investors calmly but determinately exit junk bonds. Over the course of the past decade, the US corporate bond market has doubled to an $8.2 trillion market. A good portion of that growth has come from high yield bonds. But the magnificence has emanated from pristine issuers who have had unfettered access to the capital markets as starved-for-yield investors clamor to debt they deem to have a credit ratings close to that of Uncle Sam's. Again, labels are troublesome devils. Remember subprime AAA-rated mortgage-backed securities?

  We've grown desensitized to multi-billion issues from high grade companies. Most investors sleep peacefully with the knowledge that their portfolios are indemnified thanks to a credit rating agency's stamp of approval. Mom and pop investors in particular are vulnerable to a jolt: the portion of the bond market they own through perceived-to-be-safe mutual funds and ETFs has doubled over the past decade. Retail investors probably have little understanding of the required, intricate behind-the-scenes hopscotching being played out by huge mutual fund companies. This allows high yield redemptions to present a smooth, tranquil surface with little in the way of annoying ripples. That might have something to do with liquidity being portable between junk and high grade funds – moves made under the working assumption that the Fed will always step in and assure markets that more cowbell will always be forthcoming rather than risk the slightest of dramas unfolding. Once the reassurance is acknowledged by the market, all can be righted in the ledgers. It's worked so far. But investors have yet to even consider selling their high grade holdings. It's unthinkable.     It's hard to fathom that back in 1975 when I was a kindergartener, security markets' share of U.S. GDP was negligible. Forty years later, liquidity is everywhere and always a monetary phenomenon. That is, until it's not.

  Nary are any of us far removed from a poor stricken soul who has suffered a fall from grace. In the debt markets, a "fallen angel" is a term assigned to a high grade issuer that descends to a junk-rated state. It could just as easily refer to any credit in the $200 trillion universe investors perceive as being risk-free. Should the need arise, will there be enough room on policymakers' boats to provide seating for every fallen angel? That is certainly the hope. But what if the real bubble IS the sheer size of the collective balance sheet? If that's the case, we really are gonna need a bigger boat.  

   

  

  

  

  

  

• Six Warning Signs That The Economy Is In Trouble

  Submitted by Tony Sagami via MauldinEconomics.com,

  On July 14, I wrote about the danger developing in the transportation sector, and things are looking even worse today. Here’s what I mean:

  Look Out Below #1: Royal Dutch Shell reported its quarterly results last week—$3.4 billion, down from $5.1 billion for the same quarter a year ago—and warned that “today’s oil price downturn could last for several years.”

  

  In anticipation of tough times, Shell slashed its 2015 capital expenditure budget by 20% and is going to lay off 6,500 high-paying jobs (not Burger King-type jobs) this year.

  Look Out Below #2: UPS is a very good barometer of the consumer end of our economy: It’s the largest component of the Dow Jones Transportation Average both by sales and market valuation.

  

  And UPS isn’t very confident about the US economy. Here is what UPS CEO David Abney said in a recent conference call with analysts:

  If you just look at in [sic] January, the GDP forecast we thought was going to be about 3.1%. Now the thinking in July is about 2.3%, so let’s say a pretty significant decrease.

  Why so glum?

  The continued strength of the US dollar and I think this impending rate hike by the Fed appears to be holding back some US growth.

  Abney has good reason to complain: UPS’s revenue fell 1.2% over the last 12 months. Not good.

  Look Out Below #3: Rolls Royce may be best known for its luxury limousines, but the heart of its business is making engines for jet airplanes. Along with General Electric, the company dominates the aerospace engine business.

  

  Business isn’t so good. Rolls Royce just issued its fourth profit warning in the last year and a half and is shutting down its $1.56 billion share buyback, introduced a year ago, to conserve cash.

  The problem? Weak demand for its jet engines.

  Hey, if Rolls Royce doesn’t want to buy its own stock… why should you?

  Look Out Below #4: The reason Rolls Royce is suffering is that the airborne freight market is shrinking. While the passenger cabins you and I sit in may be full, the belly of the plane where the cargo freight is held is growing increasingly empty.

  

  The International Air Transport Association (IATA) reported that air freight load factors have dropped to lows not seen since 2009.

  “The expansion in volumes we saw in 2014 has ground to a halt, and load factors are falling… we have to recognize that business confidence is flat and export orders in decline,” said the CEO of IATA, Tony Tyler.

  Look Out Below #5: The trans-ocean freight business isn’t doing any better; the number of idle container ships has increased two months in a row.

  

  The number of idle ships (over 500 20-foot-equivalent units) has jumped from 82 to 108. Yup… business is so bad that the owners of 108 ships don’t have any business whatsoever.

  “The traditional peak summer season has so far failed to provide a boost to vessel demand, as the weak cargo outlook is forcing carriers to cut back on their capacity deployment plans,” reported Alphaliner, a container shipping watchdog.

  Look Out Below #6: The reason why all these transportation companies are struggling is that global trade is simply shrinking.

  

  Moreover, world trade is falling at the fastest pace we’ve seen since the last financial crisis. Global trade shrank 1.2% in May from the previous month, and the little-followed World Trade index (which tracks import and export volume) fell to 135.1 in May.

  Look, transportation companies prosper when the economy is rocking and rolling. However, they are among the first to feel a business slowdown when things turn downward.

  My bashing of the transportation industry is just as much of a warning about the overall economy as transportation stocks. Do you have a contingency plan to protect your portfolio when things turn ugly?

  The best time to prepare for trouble… is before trouble arrives.

  

  

  

  

• For Commodities, It's 2008 All Over Again

  18 of the 22 components in the Bloomberg Commodity Index have dropped at least 20% from recent closing highs, meeting the common definition of a bear market.

  

   

  As Bloomberg details, that’s the same number as at the end of October 2008, when deepening financial turmoil sent global markets into a swoon.

  Dear Commodity Investors – Welcome back to 2008!!

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  Charts: Bloomberg

  

  

  

  

  

• 8 Financial Experts That Are Warning A Great Financial Crisis Is Imminent

  Submitted by Michael Snyder via The Economic Collapse blog,

  Will there be a financial collapse in the United States before the end of 2015?  An increasing number of respected financial experts are now warning that we are right on the verge of another great economic crisis.  Of course that doesn’t mean that it will happen.  Experts have been wrong before.  But without a doubt, red flags are popping up all over the place and things are lining up in textbook fashion for a new financial crisis.  As I write this article, U.S. stocks have declined four days in a row, the Dow is down more than 750 points from the peak of the market in May, and one out of every five U.S. stocks is already in a bear market.  I fully expect the next several months to be extremely chaotic, and I am far from alone.  The following are 8 financial experts that are warning that a great financial crisis is imminent…

  #1 During one recent interview, Doug Casey stated that we are heading for “a catastrophe of historic proportions”…

  “With these stupid governments printing trillions and trillions of new currency units,” says investor Doug Casey, “it’s building up to a catastrophe of historic proportions.”

   

  Doug Casey, a wildly successful investor who’s the head of the outfit Casey Research, is predicting doom and gloom for the global economy.

  “I wouldn’t keep significant capital in banks,” he told Reason magazine Editor-in-Chief Matt Welch. “Most of the banks in the world are bankrupt.”

  #2 Bill Fleckenstein is warning that U.S. markets could be headed for calamity in the coming months…

  Noted short seller Bill Fleckenstein, who correctly predicted the financial crisis in 2007, says he is one step closer to opening up a short-focused fund for the first time since 2009. In the meantime, Fleckenstein says the entire market could be heading for calamity in the coming months.

   

  “The market is uniquely crash-prone,” Fleckenstein told CNBC’s “Fast Money” this week. “I think the market is very brittle because of high-frequency trading, ETFs, a lot of momentum investors. I don’t think there’s going to be any painless back door.”

  #3 Richard Russell believes that the bear market that is coming “will tear apart the current economic system”…

  From my standpoint, this is the strangest period that I have gone through since the 1940s. The Industrials are declining faster than the Transports. If this continues, at some point the Industrials will touch the Transports. When that happens, I believe a bear market will be signaled, as both Industrials and Transports accelerate on the downside.

   

  I expect a brief period of higher prices which will draw in the amateurish retail public. This brief breather will be followed by an historic bear market that will tear apart the current economic system.

  #4 Larry Edelson is “100% confident” that a global financial crisis will be triggered “within the next few months”…

  “On October 7, 2015, the first economic supercycle since 1929 will trigger a global financial crisis of epic proportions. It will bring Europe, Japan and the United States to their knees, sending nearly one billion human beings on a roller-coaster ride through hell for the next five years. A ride like no generation has ever seen. I am 100% confident it will hit within the next few months.”

  #5 John Hussman is warning that market conditions such as we are observing right now have only happened at a few key moments throughout our history…

  In any event, this is no time to be on autopilot. Look at the data, and you’ll realize that our present concerns are not hyperbole or exaggeration. We simply have not observed the market conditions we observe today except in a handful of instances in market history, and they have typically ended quite badly (see When You Look Back on This Moment in History and All Their Eggs in Janet’s Basket for a more extended discussion of current conditions). In my view, this is one of the most important moments in a generation to examine all of your risk exposures, the extent to which you believe historical evidence is informative, your tolerance for loss, your comfort or discomfort with missing out on potential rallies even in a wickedly overvalued market, and your true investment horizon.

  #6 During a recent appearance on CNBC, Marc Faber suggested that U.S. stocks could soon plummet by up to 40 percent…

  The U.S. stock market could “easily” drop 20 percent to 40 percent, closely followed contrarian Marc Faber said Wednesday—citing a host of factors including the growing list of companies trading below their 200-day moving average.

   

  In recent days, “there were [also] more declining than advancing stocks, and the list of 12-month new lows was very high on Friday,” the publisher of The Gloom, Boom & Doom Report told CNBC’s “Squawk Box.”

   

  “It shows you a lot of stocks are already declining.”

  #7 In a previous article, I noted that Henry Blodget of Business Insider is suggesting that U.S. stocks could soon drop by up to 50 percent…

  As regular readers know, for the past ~21 months I have been worrying out loud about US stock prices. Specifically, I have suggested that a decline of 30% to 50% would not be a surprise.

   

  I haven’t predicted a crash. But I have said clearly that I think stocks will deliver returns that are way below average for the next seven to 10 years. And I certainly won’t be surprised to see stocks crash. So don’t say no one warned you!

  #8 Egon von Greyerz is even more bearish.  He recently told King World News that we are heading for “the most historic wealth destruction ever”…

  Eric, there are now more problem areas in the world, rather than stable situations. No major nation in the West can repay its debts. The same is true for Japan and most of the emerging markets. Europe is a failed experiment for socialism and deficit spending. China is a massive bubble, in terms of its stock markets, property markets and shadow banking system. Japan is also a basket case and the U.S. is the most indebted country in the world and has lived above its means for over 50 years.

   

  So we will see twin $200 trillion debt and $1.5 quadrillion derivatives implosions. That will lead to the most historic wealth destruction ever in global stock, with bond and property markets declining at least 75 – 95 percent. World trade will also contract dramatically and we will see massive hardship across the globe.

  So are they right?

  We’ll know soon.

  And of course they are not the only ones with a bad feeling about what is ahead.  A recent WSJ/NBC News survey found that 65 percent of all Americans believe that the country is currently on the wrong track.

  Also, Gallup’s Economic Confidence Index just plunged to the lowest level that we have seen so far in 2015…

  Americans confidence in the US economy dropped sharply in July to its lowest level in 2015, according to a new US Economic Confidence Index rating released by Gallup on Tuesday.

   

  “Gallup’s Economic Confidence Index declined to an average of —12 in July from —8 in June. This is the lowest monthly average since last October, and is a noticeable departure from the +3 average in January,” the polling company said.

   

  Gallup said that “unsettled economic” conditions, including tumult in Chinese markets and uncertainty in Europe over a Greek debt deal, as well as US stock market volatility are factors driving lower confidence in the US economy.

  These “bad feelings” are also reflected in the hard economic data.  U.S. consumer spending has declined for three months in a row, and U.S. factory orders have fallen for eight months in a row.

  The numbers are screaming that we are heading for another major recession.

  But could it be possible that this is just another false alarm?

  Could it be possible that the blind optimists are right and that everything will work out okay somehow?

  

  

  

  

  

• "I Pay $271 A Month To Schools And I Don't Have Kids": Illinois Bureaucracy Sucks Homeowners Dry

  Ever since the Illinois Supreme Court struck down a pension reform bid in May, prompting Moody’s to downgrade the city of Chicago to junk, the state’s financial woes have becoming something of a symbol for the various fiscal crises that plague state and local governments across the country. 

  The state High Court’s decision was reinforced late last month when a Cook County judge ruled that a plan to change Chicago’s pensions was unconstitutional.

  As we’ve discussed at length, these rulings set a de facto precedent for lawmakers across the country and will make it exceedingly difficult for cities and states to address a pension shortfall which totals anywhere between $1.5 trillion and $2.4 trillion depending on who you ask.

  For Illinois, the situation is especially vexing. As you can see from the following graphics, the state’s unfunded pension problem is quite severe. 

  

  (Charts: Chicago Tribune)

  As the New York Times explains, “pension costs in many American states and cities are growing much faster than the money available to pay them, causing a painful squeeze. Officials who try to restore balance by reducing pensions in some way are almost always sued; outcomes of these lawsuits vary widely from state to state. Some of the worst problems have been brewing for years in Illinois, particularly in Chicago, where the city’s pension contributions have long been set artificially low by lawmakers in Springfield, the state capital. With more and more city workers now retiring, a $20 billion deficit has materialized.”

  And while we’ve spent quite a bit of time discussing the various issues involved in the pension debate from overly optimistic return assumptions to the use of pension-obligation bonds as stopgap measures, even we were surprised to learn just how convoluted the fiscal situation truly is in Illinois.

  As the following excerpts from a Reuters special report make clear, Illinois is in bad shape, and fixing things isn’t going to be easy.

  *  *  *

  From Reuters

  “Multitude of local authorities soak Illinois homeowners in taxes“

  Mary Beth Jachec [a] 53-year-old insurance manager gets a real estate tax bill for 20 different local government authorities and a total payout of about $7,000 in 2014. They include the Village of Wauconda, the Wauconda Park District, the Township of Wauconda, the Forest Preserve, the Wauconda Area Public Library District, and the Wauconda Fire Protection District.

  Jachec, looking at her property tax bill, is dismayed. “It’s ridiculous,” she said.

  A lot has been said about the budget crisis faced by Illinois – the state government itself is drowning in $37 billion of debt, and has the lowest credit ratings and worst-funded pension system among the 50 U.S. states. But at street level, the picture can be even more troubling.

  The average homeowner pays taxes to six layers of government, and in Wauconda and many other places a lot more. In Ingleside, 55 miles north of Chicago, Dan Koivisto pays taxes to 18 local bodies. “I pay $271 a month just to the school district alone,” he said. “And I don’t have children.”

  The state is home to nearly 8,500 local government units, with 6,026 empowered to raise taxes, by far the highest number in the U.S. 

  Many of these taxing authorities, which mostly rely on property tax for their financing, have their own budget problems. That includes badly underfunded pension funds, mainly for cops and firefighters.

  A Reuters analysis of property tax data shows that the sheer number of local government entities, and a lack of oversight of their operations, can lead to inefficient spending of taxpayer money, whether through duplication of services or high overhead costs. It leads to a proliferation of pension funds serving different groups of employees. And there are also signs that nepotism is rife within some of the authorities.

  On average, Illinois’ effective property taxes are the third highest in the U.S. at 1.92 percent of residential property values.

  In many Illinois cities and towns, high taxation still isn’t enough to keep up with increasing outlays, especially soaring pension costs, and some services have been cut. For example, in the state capital Springfield, pension costs for police and fire alone will this year consume nearly 90 percent of property tax revenues, according to the city’s budget director, Bill McCarty. 

  Sam Yingling, a state representative who until 2012 was supervisor of Avon Township, north of Chicago, has become an outspoken critic of the multiple layers of local government.

  Yingling said when he left the township three years ago, the township supervisor’s office had annual overheads from salaries and benefits of $120,000. He claimed its sole mandated statutory duty was to administer just $10,000 of living assistance to poor residents.

  The large number of local governments is a legacy of Illinois’ 1870 constitution, which was in effect until 1970. The constitution limited the amount that counties and cities could borrow, an effort to control spending.

  So when a new road or library needed building, a new authority of government would be created to get around the borrowing restrictions and to raise more money. Today, for example, there are over 800 drainage districts, most of which levy taxes.

  And it isn’t only the number of authorities that is a concern. Illinois has about one sixth of America’s public pension plans – 657 out of almost 4,000.

  Local authorities in Illinois are mandated by law to keep the Illinois Municipal Retirement Fund, with 400,000 local government members, fully funded. They had to contribute $923 million in 2014, up from $543 million in 2005.

  However, there is no such requirement for the local pension funds. The result: Many of these funds throughout the state are woefully underfunded, and some have less than 20 percent of what they need to meet obligations.

  *  *  *

  The piece – which you’re encouraged to read in full as it contains several of the most egregious examples of government waste and inefficiency you’ll ever come across – goes on to say that reform simply isn’t an option, as the Illinois legislature is filled with lawmakers who have at one time or another themselves benefited from the state’s sprawling local bureaucracies. Reuters also says it has identified nearly a dozen instances where husbands employ wives, mothers employ daughters, and fathers hire sons,” suggesting nepotism weighs heavily on the already elephantine system. 

  Bear in mind that this is the same state whose court system refuses to allow efforts at pension reform to move forward, and while all of this may seem like a recipe for default disaster, just remember, PIMCO sees a lot of “long-term value” in Chicago’s debt.

  

  

  

  

  

• Scotiabank Warns "The Fed Is Cornered And There Are Visible Market Stresses Everywhere"

  Via Scotiabank's Guy Haselmann,

  Part One, China

  An economic slowdown is underway in China.  This is reflected in the steep drop in the commodity complex and in the currencies of emerging market countries. Large imbalances are being worked off as Beijing attempts to shift the composition of its growth.  Policy decision are not always economic.

  New sources of growth are being sought by Beijing as deleveraging occurs.  Since officials care foremost about social stability, they try to preserve as many current jobs as possible during their attempt at economic transformation.  During this period, banks might be averse to calling in loans.  State owned enterprises (SOEs) are pressured to keep producing, so that workers can continue to receive a pay check.  The result is over-production and downward pressure on prices.
   
  Part Two, The Seven Year Fed Subsidy

  The Fed’s zero interest rate policy has provided a subsidy to investors for the past 7 years.  The lure of easy profits from cheap money was wildly attractive and readily accepted by investors. The Fed “put” gave investors great confidence that they could outperform their exceptionally low cost of capital.  These implicit promises by central banks encouraged trillions of dollars into ‘carry trades’ and various forms of market speculation.

  Complacent investors maintain these trades, despite the Fed’s warning of a looming reduction in the subsidy, and despite a balance sheet expected to shrink in 2016.  It has been a risk-chasing ‘game of chicken’ that is coming to an end.  Changing conditions have skewed risk/reward to the downside.  This is particularly true because financial assets prices are exceptionally expensive.

  Maybe investors do not believe ‘lift-off’ looms, because the Fed has changed its guidance so many times.  Or maybe, investors are interpreting plummeting commodity prices and the steep fall in global trade as warning signs that global growth and inflation are under pressure.  Is this why the US 30 year has rallied 40 basis points in the past 3 weeks?  (see my July 17th note, “Bonds are Back”)

  Either scenario creates a paradox for risk-seeking investors.  If the US economy continues on its current slow progress pace, then the Fed will act on its warning and hike rates in September.  However, if the Fed does not hike in September it is likely because problems from China, commodities, Greece, or emerging markets (etc) cause the global outlook to deteriorate further.  Neither scenario should be good for risk assets.
   
  Part Three, “Carry Trade”

  During the 2008 crisis, Special Investment Vehicles (SIVs) were primarily responsible for freezing the interbank lending market. SIVs were separate entities set up primarily to earn the ‘carry’ differential between short-dated loans and longer-dated assets purchased with the proceeds of the loans. This legal structure allowed banks to own billions of dollars of securities (CDOs and such) off of their balance sheets. Since the entities were wholly-owned with liquidity guarantees, the vehicles received the same attractive funding rates as the parent banks.

  When the housing crisis (and Lehman collapse) spurred loan delinquencies, banks had to place all of these hidden securities onto their balance sheets. Since the magnitude of the SIV levered assets was unknown to others, bank solvency was questioned, and interbank lending froze.  Many of these securities had to be sold at fire sale prices, i.e., prices well below their economic value.

  When the Fed begins to normalize rates, trillions in carry trades will likely begin to unwind.  The similarity to 2008 is glaring, except that banks no longer own SIVs.  Regulations have chased the ‘carry trades’ from the banking system into the shadow banking system where officials can’t see or measure the risk. The banking system today is, no doubt, far less exposed, but too many sellers could overwhelm the depth of the market, leading to asset price contagion that filters into the real economy.   

  The FOMC is probably fearful of such an outcome, and its unknown impact on the broader economy, which could explain why it has delayed ‘lift-off’.  It may also be the reason why the Fed emphasizes that the pace of rate normalization will be “gradual”, and will remain “overly-accommodative”.   Unfortunately, the Fed recognizes that speculators do not wait to retreat in an orderly manner.  They are also fully aware that regulations have impaired market liquidity; figuratively shrinking the exit doors.  This is where ‘macro-prudential’ comes in. 
   
  Part Four, Counter-Productive Policies Back the Fed into a Corner

  Few lessons have been learned by market ‘booms’, and the ‘busts’ that always follow.  ‘Booms’ occur when the Fed diverges the price of money too far below the ‘natural rate of interest’.  Easy money flows into ever less-productive assets.  As prices are pushed ever-higher, the yield drop cascades down the capital curve.  The process cannot be sustained. High prices directly infer lower future returns.  Late-stage investors receive the lowest return with the highest level of risk (game of chicken).

  These cycles are tragic because ‘busts’ have negative consequences that are worse than the ‘booms’ are beneficial.  During the ‘bust’, elevated asset prices go back down to their original or fundamental value. They may even overshoot on the downside due to the regulatory limitations that have been put in place during the ‘boom’ years.

  The ‘wealth effect’ is, at a minimum, reversed during the ‘bust’.  There is no ‘free lunch’.  More importantly, after the ‘bust’, the newly acquired higher levels of debt remain.  The result is a lower natural economic growth rate, lower levels of future investment, and more regulation, which all lead to decreased profits.

  Zero interest rates undermine market incentive structures.   Share buybacks have surpassed capital expenditures. Cheap money makes acquisitions attractive relative to new investment projects. Why not, cheap money implies high uncertainty.  Furthermore, excess liquidity encourages malinvestment and over-capacity, and acts as a headwind for both of the Fed’s dual mandates.

  Experimental monetary policy over the past seven years should reveal that attempts at artificial monetary inflation are ineffective. Yet, they give no hints of discarding this failed ideology. Unless this ideology changes, ever-greater quantities of printing just to repair the inevitable bust will be required as the chosen response.  No wonder why Bitcoin is intriguing and confidence in fiat currencies has come into question.

  ·    “Two roads converged in the woods and I took the one less traveled by and that has made all the difference.” – Robert Frost

  Part Five, Notice the Warning Signs

  There are warning signs and visible market stresses beyond those mentioned yesterday.  To list them all is beyond the scope of this note.

  Nonetheless, the impact of a slowing China is being under-estimated by markets.  The steep drop in commodities is telling us something about demand. (It’s not just oil: suppliers don’t frack copper)

  Equity market ‘internals’ are deteriorating and momentum is faltering.

  Similar to 2008, the subprime corporate sector (CCC-rated credits) are showing cracks beyond the energy sector, e.g., into chemicals and technology.  This is typically a late-stage phenomenon and a warning sign of growing risk aversion.

  FOMC members are threatening ‘lift-off’, but markets don’t believe them, because they have ‘moved the goal posts’ of their guidance so many times.  The Fed appears to want an ideal set of conditions which rarely ever materializes. Investors are inclined to stay fully invested until they actually see a hike with their own eyes.  Complacency is high.  Anyone who has entered the financial industry in the past 9 years has never witnessed a rate hike.

  Investing during ZIRP and QE has more to do with fully capitalizing on aggressive Fed policy, and less about finding value for the long run.  The investment industry is so focused on short term investment results that decisions are motivated by the necessity of beating peers and benchmarks in order to keep one’s job. 

  Yet, “lift-off” will reduce the Fed’s subsidy.  Total rate normalization is the removal of ‘the gift’ provided to the private sector.  The process in getting there will be the catalyst that begins the reduction of carry trades and market speculation.

  Positional unwinds may begin as a trickle, but morph into a cascade. Those who try to hold on will likely confront a shrinking Fed balance sheet in 2016.  Investors should do their own homework to understand what this is likely to mean for risk assets (Hint: it’s not a good result).

  *  *  *
   
  Part Six, Portfolio Adjustment Recommendations During Policy Pivot (with a few forecasts thrown in)

  Raise cash levels.  Cash has great optionality enables it to be deployed at better levels.  With rates so low, cash has never had such a low opportunity cost.

   

  Increase portfolio liquidity, while reducing portfolio volatility.

   

  Buy long-dated on-the-run Treasury securities, or the highest quality and most liquid corporate bonds.  I expect an abrupt ‘risk-off’ trade as the Fed begins ‘normalization’ that will bring UST 10’s and 30’s well thru 2% and 2.75%, respectively.  I can envision this happening prior to the September FOMC meeting.

  • If the Fed hikes it will likely help the long end.
  • If the global economy sputters due to China or due to other factors that force the Fed to remain on hold, then long Treasuries will again perform well.
  • If the Fed loses its window of opportunity to hike due to worsening financial and economic conditions then it has few tools left to provide further stimulus.  Moreover, markets might begin to question the effectiveness of past actions and not believe future ones. In such, cries of “more Fed” which have benefited financial assets over the past few years would no longer help risk assets.

  Own US Treasuries versus European debt.

   

  Investors should decrease trades that try to play the Fed subsidy too aggressively even in a world of ‘gradual’.

   

  Take down equity beta and hidden betas.  Hedge, buy puts, sell calls, and buy tail risk on equity exposures.

   

  Set up for a long term structural bull market in the US Dollar.

  • As mentioned, slowing demand for industrial commodities from China is putting significant pressure on the budgets of emerging market countries and commodity exporters. Some of these countries may be incentivized to boost revenues by selling more at discounted prices. EM currencies have been leaking lower all year and have room to fall to levels not seen since the early part of this century.  (Own USD:  EM = lower still, EUR<100, $/CAD>1.40, AUD<.6500)

  Commodities are over-sold, but have been struggling to have any bounce at all. This week the CRB commodity index fell below its 2009 low, sinking to a level last seen in 2003. In many areas, supply continues to surpass any increases in demand.  Oil risks testing the $40 support level.  Other industrial commodities risk falling to multi-decade lows. (Supply destruction takes time, and demand is slow to pick up).

  Investor outperformance in the next year will likely come from defensive strategies and reversing to risk under-weights with an emphasis on liquidity and reducing portfolio volatility.

  “Actions speak louder than words, but not nearly as often” – Mark Twain

  

  

  

  

  

• Mapping The Global War On Terror

  Thanks in no small part to ISIS’ uncanny (not to mention highly suspicious) film editing capabilities, the global war on terror is back in the limelight this year as the black flag-waving, marauding militants have served notice that not only did the death of Osama Bin Laden not spell the beginning of the end for the jihadist cause, but in fact, the world has entered a new era in which the advent of the “lone wolf” attack effectively means Islamic State-inspired terror can strike anywhere, anytime.

  Or at least that’s the narrative, and if the events that have transpired in Turkey and Syria over the last several weeks prove anything, it’s that the terror narrative is just as effective today as it was 13 years ago when it comes to justifying the aggressive pursuit of narrow political and/or geopolitical agendas that might otherwise prove to be decisively unpopular. 

  And so, as the US gets set to justify another invasion of a sovereign country by claiming that the war on terror demands it, we bring you the following map from BofAML which purports to show every terrorist attack worldwide perpetrated since 2000.

  Some “highlights” from 2013 include:

  • 9,814 total attacks
  • Nearly 18,000 people killed
  • Attacks highly concentrated

  

  

  

  

  

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• Yield Purchasing Power: $100M Today Matches $100K in 1979

  by Keith Weiner

   

  I wrote a story about poor Clarence who retired in 1979, and even poorer Larry who retired last year. I created these characters to challenge the notion of calculating a real interest rate by subtracting inflation. The idea is that the decline of a currency can be measured by the rate of price increases. This price-centric view leads to the concept of purchasing power—the amount of stuff that a dollar can buy. It’s the flip side of prices. When prices rise, purchasing power falls.

  Recall in the story, Clarence retired in 1979. At the time, inflation was running at 14% but he could only get 11% interest. Real interest was -3%, and Clarence had a problem. He was losing his purchasing power.

  Suppose Clarence bought gold. The purchasing power of gold held steady for the rest of his life (see this chart of oil priced in gold). Gold does solve this problem. However, gold has no yield. Clarence is only jumping out of the frying pan and into the fire. Sure, he escapes dollar debasement, but then he gets zero interest.

  Let’s look at how zero interest impacts Larry. He makes $25/month on his million dollars. Obviously he can’t live on that. So he gives up his nest egg, for eggs. For a year, he feasts on omelets. Since inflation was
  slightly negative, the same swap in 2015 nets him the same plus a few additional quiches.

  Through the lens of purchasing power, we don’t focus on the liquidation of Larry’s wealth. We ignore—or take it for granted—that he’s trading his life savings for bread. We only ask how many loaves he got.

  

  If you had a farm, would you consider trading it away, to feed your family for a year? I hope not. A farm should grow food forever. Its true worth is its crop yield, not the pile of bacon from a one-time deal.

  How perverse is that? It’s nothing more than what zero interest is forcing Larry to do.

  A dollar still buys about as much as it did last year. Larry’s purchasing power didn’t change much. However, debasement continues to wreak its destruction.  Steady purchasing power does not mean that the dollar is holding its value.

  It means that prices are wholly inadequate for measuring monetary decay.

  Our monetary disaster becomes clear when we look at the collapse in yield purchasing power. This new concept does not tell you how many groceries you can get by liquidating your capital. It tells how much you can buy with the return on it.

  In 1979, Clarence’s $100,000 savings earned enough to support his middle class lifestyle. In 2014, Larry’s million dollars didn’t earn enough to pay his phone bill. To live in the middle class, Larry would need over a
  hundred million bucks. That’s a pitiful income to make on such a massive pile of cash. It reveals a hyperinflation in the price of capital, which has gone up 1100X in 35 years.

  It also shows that the productivity of capital is collapsing. Back in Clarence’s day, businesses earned a high return on capital. It was high enough for Clarence to get 11% interest in a short-term CD. Unfortunately, the dollar rot is in the advanced stage now. There is scant interest to be earned. Return on capital is low, and so borrowers can’t pay much.

  Retirees suffer first, because they can’t earn wages. Normally they would depend on interest, but now they’re forced to live like the Prodigal Son. They consume their wealth, leave nothing for the next generation, and hope
  they don’t live too long. Zero interest rates has reversed the tradition of centuries of capital accumulation.

  Purchasing power may look fine, but yield purchasing power shows the true picture of monetary collapse.

   

  This article is from Keith Weiner’s weekly column, called The Gold Standard, at the Swiss National Bank and Swiss Franc Blog SNBCHF.com.

  

  

  

  

• They Live, We Sleep: A Dictatorship Disguised As A Democracy

  Submitted by John Whitehead via The Rutherford Institute,

  “You see them on the street. You watch them on TV. You might even vote for one this fall. You think they’re people just like you. You're wrong. Dead wrong.”—They Live

  We’re living in two worlds, you and I.

  There’s the world we see (or are made to see) and then there’s the one we sense (and occasionally catch a glimpse of), the latter of which is a far cry from the propaganda-driven reality manufactured by the government and its corporate sponsors, including the media.

  Indeed, what most Americans perceive as life in America—privileged, progressive and free—is a far cry from reality, where economic inequality is growing, real agendas and real power are buried beneath layers of Orwellian doublespeak and corporate obfuscation, and “freedom,” such that it is, is meted out in small, legalistic doses by militarized police armed to the teeth.

  All is not as it seems.

  This is the premise of John Carpenter’s film They Live (1988), in which two migrant workers discover that the world’s population is actually being controlled and exploited by aliens working in partnership with an oligarchic elite. All the while, the populace—blissfully unaware of the real agenda at work in their lives—has been lulled into complacency, indoctrinated into compliance, bombarded with media distractions, and hypnotized by subliminal messages beamed out of television and various electronic devices, billboards and the like.

  It is only when homeless drifter John Nada (played to the hilt by the late Roddy Piper) discovers a pair of doctored sunglasses—Hoffman lenses—that Nada sees what lies beneath the elite’s fabricated reality: control and bondage.

  When viewed through the lens of truth, the elite, who appear human until stripped of their disguises, are shown to be monsters who have enslaved the citizenry in order to prey on them. Likewise, billboards blare out hidden, authoritative messages: a bikini-clad woman in one ad is actually ordering viewers to “MARRY AND REPRODUCE.” Magazine racks scream “CONSUME” and “OBEY.” A wad of dollar bills in a vendor’s hand proclaims, “THIS IS YOUR GOD.”

  When viewed through Nada’s Hoffman lenses, some of the other hidden messages being drummed into the people’s subconscious include: NO INDEPENDENT THOUGHT, CONFORM, SUBMIT, STAY ASLEEP, BUY, WATCH TV, NO IMAGINATION, and DO NOT QUESTION AUTHORITY.

  This indoctrination campaign engineered by the elite in They Live is painfully familiar to anyone who has studied the decline of American culture. A citizenry that does not think for themselves, obeys without question, is submissive, does not challenge authority, does not think outside the box, and is content to sit back and be entertained is a citizenry that can be easily controlled.

  In this way, the subtle message of They Live provides an apt analogy of our own distorted vision of life in the American police state, what philosopher Slavoj Žižek refers to as dictatorship in democracy, “the invisible order which sustains your apparent freedom.”

  We’re being fed a series of carefully contrived fictions that bear no resemblance to reality. The powers-that-be want us to feel threatened by forces beyond our control (terrorists, shooters, bombers). They want us afraid and dependent on the government and its militarized armies for our safety and well-being. They want us distrustful of each other, divided by our prejudices, and at each other’s throats. Most of all, they want us to continue to march in lockstep with their dictates.

  Tune out the government’s attempts to distract, divert and befuddle us and tune into what’s really going on in this country, and you’ll run headlong into an unmistakable, unpalatable truth: the moneyed elite who rule us view us as expendable resources to be used, abused and discarded.

  In fact, a 2014 study conducted by Princeton and Northwestern University concluded that the U.S. government does not represent the majority of American citizens. Instead, the study found that the government is ruled by the rich and powerful, or the so-called “economic elite.” Moreover, the researchers concluded that policies enacted by this governmental elite nearly always favor special interests and lobbying groups.

  In other words, we are being ruled by an oligarchy disguised as a democracy, and arguably on our way towards fascism—a form of government where private corporate interests rule, money calls the shots, and the people are seen as mere subjects to be controlled.

  Consider this: it is estimated that the 2016 presidential election could cost as much as $5 billion, more than double what was spent getting Obama re-elected in 2012.

  Not only do you have to be rich—or beholden to the rich—to get elected these days, but getting elected is also a surefire way to get rich. As CBS News reports, “Once in office, members of Congress enjoy access to connections and information they can use to increase their wealth, in ways that are unparalleled in the private sector. And once politicians leave office, their connections allow them to profit even further.”

  In denouncing this blatant corruption of America’s political system, former president Jimmy Carter blasted the process of getting elected—to the White House, governor’s mansion, Congress or state legislatures—as “unlimited political bribery… a subversion of our political system as a payoff to major contributors, who want and expect, and sometimes get, favors for themselves after the election is over.”

  Rest assured that when and if fascism finally takes hold in America, the basic forms of government will remain. As I point out in my book Battlefield America: The War on the American People, fascism will appear to be friendly. The legislators will be in session. There will be elections, and the news media will continue to cover the entertainment and political trivia. Consent of the governed, however, will no longer apply. Actual control will have finally passed to the oligarchic elite controlling the government behind the scenes.

  By creating the illusion that it preserves democratic traditions, fascism creeps slowly until it consumes the political system. And in times of “crisis,” expediency is upheld as the central principle—that is, in order to keep us safe and secure, the government must militarize the police, strip us of basic constitutional rights, criminalize virtually every form of behavior, and build enough private prisons to house all of us nonviolent criminals.

  Clearly, we are now ruled by an oligarchic elite of governmental and corporate interests. We have moved into “corporatism” (favored by Benito Mussolini), which is a halfway point on the road to full-blown fascism.

  Vast sectors of the economy, government and politics are managed by private business concerns, otherwise referred to as “privatization” by various government politicians. Just study modern government policies. “Every industry is regulated. Every profession is classified and organized,” writes economic analyst Jeffrey Tucker. “Every good or service is taxed. Endless debt accumulation is preserved. Immense doesn’t begin to describe the bureaucracy. Military preparedness never stops, and war with some evil foreign foe, remains a daily prospect.”

  In other words, the government in America today does whatever it wants.

  Corporatism is where the few moneyed interests—not elected by the citizenry—rule over the many. In this way, it is not a democracy or a republican form of government, which is what the American government was established to be. It is a top-down form of government and one which has a terrifying history typified by the developments that occurred in totalitarian regimes of the past: police states where everyone is watched and spied on, rounded up for minor infractions by government agents, placed under police control, and placed in detention (a.k.a. concentration) camps.

  For the final hammer of fascism to fall, it will require the most crucial ingredient: the majority of the people will have to agree that it’s not only expedient but necessary. But why would a people agree to such an oppressive regime? The answer is the same in every age: fear.

  Fear makes people stupid.

  Fear is the method most often used by politicians to increase the power of government. And, as most social commentators recognize, an atmosphere of fear permeates modern America: fear of terrorism, fear of the police, fear of our neighbors and so on.

  The propaganda of fear has been used quite effectively by those who want to gain control, and it is working on the American populace.

  Despite the fact that we are 17,600 times more likely to die from heart disease than from a terrorist attack; 11,000 times more likely to die from an airplane accident than from a terrorist plot involving an airplane; 1,048 times more likely to die from a car accident than a terrorist attack, and 8 times more likely to be killed by a police officer than by a terrorist, we have handed over control of our lives to government officials who treat us as a means to an end—the source of money and power.

  We have allowed ourselves to become fearful, controlled, pacified zombies.

  In this regard, we’re not so different from the oppressed citizens in They Live. Most everyone keeps their heads down these days while staring zombie-like into an electronic screen, even when they’re crossing the street. Families sit in restaurants with their heads down, separated by their screen devices and unaware of what’s going on around them. Young people especially seem dominated by the devices they hold in their hands, oblivious to the fact that they can simply push a button, turn the thing off and walk away.

  Indeed, there is no larger group activity than that connected with those who watch screens—that is, television, lap tops, personal computers, cell phones and so on. In fact, a Nielsen study reports that American screen viewing is at an all-time high. For example, the average American watches approximately 151 hours of television per month.

  The question, of course, is what effect does such screen consumption have on one’s mind?

  Psychologically it is similar to drug addiction. Researchers found that “almost immediately after turning on the TV, subjects reported feeling more relaxed, and because this occurs so quickly and the tension returns so rapidly after the TV is turned off, people are conditioned to associate TV viewing with a lack of tension.” Research also shows that regardless of the programming, viewers’ brain waves slow down, thus transforming them into a more passive, nonresistant state.

  Historically, television has been used by those in authority to quiet discontent and pacify disruptive people. “Faced with severe overcrowding and limited budgets for rehabilitation and counseling, more and more prison officials are using TV to keep inmates quiet,” according to Newsweek.

  Given that the majority of what Americans watch on television is provided through channels controlled by six mega corporations, what we watch is now controlled by a corporate elite and, if that elite needs to foster a particular viewpoint or pacify its viewers, it can do so on a large scale.

  If we’re watching, we’re not doing.

  The powers-that-be understand this. As television journalist Edward R. Murrow warned in a 1958 speech:

  We are currently wealthy, fat, comfortable and complacent. We have currently a built-in allergy to unpleasant or disturbing information. Our mass media reflect this. But unless we get up off our fat surpluses and recognize that television in the main is being used to distract, delude, amuse, and insulate us, then television and those who finance it, those who look at it, and those who work at it, may see a totally different picture too late.

  This brings me back to They Live, in which the real zombies are not the aliens calling the shots but the populace who are content to remain controlled.

  When all is said and done, the world of They Live is not so different from our own. As one of the characters points out, “The poor and the underclass are growing. Racial justice and human rights are nonexistent. They have created a repressive society and we are their unwitting accomplices. Their intention to rule rests with the annihilation of consciousness. We have been lulled into a trance. They have made us indifferent to ourselves, to others. We are focused only on our own gain.”

  We, too, are focused only on our own pleasures, prejudices and gains. Our poor and underclasses are also growing. Racial injustice is growing. Human rights is nearly nonexistent. We too have been lulled into a trance, indifferent to others.

  Oblivious to what lies ahead, we’ve been manipulated into believing that if we continue to consume, obey, and have faith, things will work out. But that’s never been true of emerging regimes. And by the time we feel the hammer coming down upon us, it will be too late.

  

  

  

  

  

• Chinese Stock Short Squeeze Stalls After IMF Delays Decision On Yuan SDR Inclusion

  Yesterday afternoon’s meltup short-squeeze in China – after regulators announced their latest restrictions on short-selling – has stalled in the early trading tonight following The IMF’s decision to delay inclusion of Yuan in the SDR pending a review in September 2016. Though this will be a disappointment to the Chinese, the door is still open though given waringse from BMW and Toyota over “normalizing” auto sales, the market problems may be morphing quickly into economic problems.

  Chinese stocks see a modest lift at the open…

  

   

  The IMF has delayed its decision on including The Yuan in The SDR…

  • *IMF ISSUES REPORT ON CRITERIA FOR YUAN RESERVE-CURRENCY STATUS
  • *IMF STAFF PROPOSES DELAYING ANY CHANGE IN SDR TO SEPT. 2016
  • *IMF SAYS `SIGNIFICANT WORK REMAINS’ ON REVIEW OF YUAN IN SDR
  • *IMF: OPERATIONAL ISSUES MUST BE RESOLVED IF YUAN PART OF SDR
  • *IMF: YUAN MADE `SUBSTANTIAL PROGRESS’ ON INTL USE SINCE 2010

  As Bloomberg reports, though there is a delay the endgame remains in sight…

  The International Monetary Fund said the yuan trails its global counterparts in major benchmarks and that “significant work” in analyzing data is needed before deciding whether to grant the Chinese currency reserve status.

   

  IMF staff members also opened the door to a possible delay in any approval with a proposal to postpone by nine months, until September 2016, the implementation of a change in the basket of currencies that make up the lender’s Special Drawing Rights, according to an update on the five-yearly review released Tuesday. The IMF said postponing the change would make the transition to a new basket smoother.

   

  The report suggests that while approval by the IMF board isn’t yet assured, it’s within reach, and the decision will come down to more than just the staff’s assessment. China has been pushing for the yuan to join the dollar, euro, yen and pound in the SDR basket; while countries such as France have welcomed China’s push, the U.S. has urged the nation to keep moving toward a flexible exchange rate and undertaking financial reforms.

   

  “The ultimate assessment by the board will involve a significant element of judgment,” the IMF report said.

   

  The postponement sets the stage for the IMF to add the SDR to the yuan just before Chinese President Xi Jinping hosts a meeting of Group of 20 leaders next year, said David Loevinger, managing director of emerging-markets sovereign research at asset manager TCW Group Inc. in Los Angeles.

  “The end game is obvious,” said Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department. “If the Chinese make this a priority, it’s pretty certain President Xi will have his deliverable at the G-20.”

  But problems remain…

  • *CHINA CAR SALES SLOWDOWN ‘HEADWIND’ FOR GASOLINE DEMAND: BMI

  As Bloomberg reports,

  China has gone from growth engine to source of concern for carmakers including BMW AG and Toyota Motor Corp., with both warning Tuesday that the sales slowdown in the world’s biggest market will probably last through year-end.

   

  BMW said decelerating delivery growth in China may force it to lower this year’s profitability goals, as consumers spooked by a stock-market rout and flagging economy stop spending on cars. Toyota likewise warned that higher costs and lower prices are making competition tougher.

   

  “Things may well get worse from here,” Max Warburton, an analyst at Sanford C. Bernstein Ltd., wrote in a note on Tuesday. “The market continues to deteriorate.”

   

  Carmakers are struggling to adjust to what BMW has called a “normalization” of a market that has grown eightfold since 2000, pushing it past the U.S. as the world’s biggest car market in 2009.

  which is neither unequivocally good for refiners or automakers.

  

  

  

  

  

• Fed Lunacy Is To Blame For The Coming Crash

  Submitted by Jim Quinn via The Burning Platform blog,

  This week John Hussman’s pondering about the state of our markets is as clear and concise as it’s ever been. He starts off by describing the difference between an economy operating at a low level versus a high level. He’s essentially describing a 2% GDP economy versus a 4% GDP economy. We have been stuck in a low level economy since 2008. And there is one primary culprit for the suffering of millions – The Federal Reserve and their Wall Street Bank owners. They are the reason incomes are stagnant, the labor participation rate is at 40 year lows, savers can only earn .25% on their savings, and consumers have been forced further into debt to make ends meet. Meanwhile, corporate America and the Wall Street banks are siphoning off record profits, paying obscene pay packages to their executives, buying off the politicians in Washington to pass legislation (TPP) designed to enrich them further, and arrogantly telling the peasants to work harder.

  In economics, we often describe “equilibrium” as a condition where demand is equal to supply. Textbooks usually depict this as a single point where a demand curve and a supply curve intersect, and all is right with the world.

  In reality, we know that economies often face a whole range of possible equilibria. One can imagine “low level” equilibria where producers are idle, jobs are scarce, incomes stagnate, consumers struggle or go into debt to make ends meet, and the economy sits in a state of depression – which is often the case in developing countries. One can also imagine “high level” equilibria where producers generate desirable goods and services, jobs are plentiful, and household income is sufficient to demand all of that output.

  The problem is that troubled economies don’t just naturally slide up to “high level” equilibria. Low level equilibria are typically supported and reinforced by a whole set of distortions, constraints, and even incentives for the low level equilibrium to persist. In developing countries, these often take the form of legal restrictions, price controls, weak property rights, political and civil instability, savings disincentives, lending restrictions, and a full catastrophe of other barriers to economic improvement. Good economic policy involves the art of relaxing constraints where they are binding, and imposing constraints where their absence allows the activities of some to injure or violate the rights of others.

  In the United States, observers seem to scratch their heads as to why the economy has shifted down to such a low level of labor force participation. Even after years of recovery and trillions of dollars directed toward persistent monetary intervention, the economy seems locked in a low level equilibrium. Yet at the same time, corporate profits and margins have pushed to record highs, contributing to gaping income disparities.

  Dr. Hussman presents his case against the Federal Reserve as clearly as anything I’ve ever read. Bailing out criminally negligent Wall Street banks with taxpayer money, allowing fraudulent accounting to cover up insolvency, printing $3 trillion out of thin air and handing it to the Wall Street banks, penalizing savings while encouraging consumers and corporations to go further into debt, and gearing all of your efforts towards creating stock, bond, and real estate bubbles, is the height of lunacy – unless you are a captured entity working on behalf of a corrupt status quo.

  From our perspective, the fundamental reason for economic stagnation and growing income disparity is straightforward: Our current set of economic policies supports and encourages a low level equilibrium by encouraging debt-financed consumption and discouraging saving and productive investment. We permit an insular group of professors and bankers to fling trillions of dollars about like Frisbees in the simplistic, misguided, and repeatedly destructive attempt to buy prosperity by maximally distorting the financial markets.

  We offer cheap capital and safety nets to too-big-to-fail banks by allowing them to speculate with the same balance sheets that we protect with deposit insurance. We pursue easy monetary fixes aimed at making people “feel” wealthier on paper, far beyond the fundamental value that has historically backed up that wealth. We view saving as dangerous and consumption as desirable, failing to recognize a basic accounting identity: there can only be a “savings glut” in countries that fail to stimulate investment.

  We leave central bankers in charge of our economic future because we’re too timid to directly initiate or encourage productive investment through fiscal policy. When zero interest rates don’t do the trick, we begin to imagine that maybe negative interest rates and penalties on saving might coerce people to spend now. Look around the world, and that same basic policy set is the hallmark of economic failure on every continent.

  Our leaders have failed the American people. We had an opportunity as a country in 2009 to purge our system of our unpayable debt. We could have allowed the orderly liquidation of the Too Big To Fail Wall Street banks, GM, Chrysler, and thousands of other over indebted bloated corporate pigs. We would have had a short deep depression. The excesses would have been wrung out of our economic system and we would have experienced a real recovery based upon savings and investment. Instead we allowed politicians and central bankers to do the complete opposite. We believed their lies. The system was not going to collapse if the Wall Street banks went down. Rich people and bankers would have been wiped out.

  When a country allows its central bank to encourage yield-seeking speculative malinvestment; suppresses interest rates in a way that punishes those on fixed incomes and destroys the incentive to save; allows too-big-to-fail institutions to use deposit insurance as a public subsidy to expand trading activity instead of traditional banking; focuses fiscal policy on boosting transfer payments to make up for lost income without at the same time encouraging investment – both private and public – that could create new sources of income; that country is going to keep failing its people.

  Jim Grant, Bill Gross and a number of other truth telling financial analysts have described how QE and ZIRP have done nothing but allow zombie corporations which should have gone bankrupt to survive and contribute to the low level economy we are experiencing. The creative destruction essential to produce a dynamic economy has been outlawed by the Federal Reserve. The encouragement of consumption through low interest rates has failed. Economies grow through investment, not consumption.

  Every economy funnels its income toward factors that are most scarce and useful. If a country diverts its resources toward consumption and speculation rather than productive investment, it shelters the profitability of existing companies by making their capital more scarce and therefore more profitable, while at the same time discouraging new job creation. A vast pool of unused labor also has little ability to demand more compensation. In contrast, when an economy encourages productive investment at every level, more jobs are created, and yet capital becomes less scarce – so profit margins fall back to normal. The income from economic activity is then available to both labor and capital, rather than funneling income into a basket that reads “winner-take-all.”

  It seems the Fed’s motto is: “The Lunacy Will Continue Until Moral Improves”. The Fed has accomplished only one thing over the last six years – creating multiple bubbles with no exit plan that will not pop those bubbles. The Fed has trapped themselves and there is no way out. They must either raise rates now and trigger the next market collapse or wait and trigger an even larger collapse. Hussman thinks legislation may be necessary to restrain the Fed, but he fails to realize the politicians are captured by the very banks who control the Fed.

  We need to re-think which constraints are actually binding us. With trillions of dollars sitting idly in bank reserves, and interest rates next to zero, the Federal Reserve continues to behave as if bank reserves and interest rates are a binding constraint – that somehow loosening those further might free the economy to grow. This is lunacy. Fed policy is no longer relieving constraints; it is introducing distortions. That – not the exact level of wage growth, inflation, or unemployment – is the primary reason to normalize policy, and to start along that path as soon as possible. Current Fed policy discourages saving while diverting the little saving that remains toward yield-seeking malinvestment. If the members of the FOMC cannot restrain themselves from extraordinary policy distortions on their own, it may be time for legislation to explicitly remove the discretion from their hands.

  Those who think low interest rates will forever sustain extremely overvalued financial markets are kidding themselves. First of all, the Fed can’t ease. When interest rates are at 0%, there is no place left to go. The credibility of the Fed is already declining rapidly. Once faith in their ability to elevate markets is lost, the collapse will commence. The slope of hope will become the crash of cash.

  The difficulty with creating a bubble of speculative distortion is that there is always hell to pay, and once valuations have already been driven to extreme levels, that hell is baked in the cake. It can’t be avoided, and once investors have shifted toward risk-aversion, history indicates it can’t even be managed well. Recall that the Fed was easing persistently and continuously throughout the 2000-2002 and 2007-2009 market collapses. As a reminder of how fruitless official interventions can be once investors have shifted to risk-aversion, I’ve reprinted the instructive chart that Robert Prechter of EWT published in October 2008, as the S&P 500 was on its way to the 700 level. Investors who actually believe that Fed easing creates a “put option” for stocks have a very short memory of the past two bear market collapses.

  

  As Sergeant Esterhaus used to say on Hill Street Blues, be careful out there. We are presently at the 2nd most overvalued point in stock market history. It’s dangerous out there. The Fed doesn’t have your back. Anyone in the stock market today has a high likelihood of losing 50% of there money in a very short time. If you think you can get out when everyone else decides to get out, you’re a lunatic. Lunacy does seem to be the primary trait amongst our financial elite, political class, and willfully ignorant masses.

  

  Be careful here – deteriorating internals matter. The condition of market internals is precisely the same hinge that – in market cycles across history – has separated overvalued markets that continued to advance from overvalued markets that collapsed through a trap door.

  Put simply, the recent market peak represents the second most overvalued point in history for the capitalization-weighted stock market, and the single most overvalued point in history for the broad market.

  When weak participation has been accompanied by rich valuations, scarce bearish sentiment, and recent market highs, the number of instances narrow to some of the worst points in history to invest.

  When weak participation, rich valuations and scarce bearish sentiment accompanied a record high in the same week, the handful of instances diminish to surround the precise market highs of 1973, 2000, and 2007, as well as 1929 on imputed sentiment data – and the week ended July 17, 2015.

  Understand that the present deterioration of market internals is broad-based, unusual, and historically dangerous.

  Read Hussman’s Weekly Letter

  

  

  

  

  

• Russia Ready To Send Paratroopers To Syria

  As Syria’s civil war enters its fourth year, it’s become something of an open secret that ISIS, for all their bluster and Hollywood-level video editing capabilities, are at best an unhappy side effect of efforts to train and arm the Syrian resistance and at worst, are a “strategic asset” funded and supported by coalition governments. 

  In other words, there is indeed a geopolitical chess match going on here that will have far-reaching consequences when the blood and dust settle, but it has nothing to do with ISIS’ far-fetched quest to establish a Medieval caliphate and everything to do with installing a government in Syria that will be more friendly to the interests of the West and its Middle Eastern allies. 

  ISIS will remain in play as long as they are necessary, but once the time comes for the US to clean up the mess left by Syria’s three-front war once and for all, that will be all she wrote for this particular CIA asset. Until then, everyone apparently gets to use Islamic State as an excuse to pursue their own political agenda, as evidenced by Turkey’s new war on “terrorists.” Not wanting to miss an opportunity to justify what would otherwise be a rather brash declaration, Russia is reportedly ready to send in the paratroopers should Syria request Moscow’s help in battling terrorist elements. Here’s more via Tass:

  The Russian Airborne Troops are ready to assist Syria in countering terrorists, if such a task is set by Russia’s leaders, commander of the Airborne Troops Colonel-General Vladimir Shamanov told reporters on Tuesday.

   

  

  (USSR paratroopers ca. 1975)

   

  “Of course we will execute the decisions set forth by the country’s leadership, if there is a task at hand,” Shamanov said, in response to a Syrian reporter’s question about the readiness of the Russian Airborne Troops to render assistance to Syria’s government in its battle against terrorism.

   

  Shamanov noted that Russia and Syria have “long-term good relations.” “Many Syrian experts, including military, received education in the Soviet Union and in Russia,” Shamanov added.

   

  
  

  In other words, two (or three, or four) can play at the “use ISIS as an excuse to go to war with our real enemies” game and just like the US can send in trainers and “forward spotters” to protect its interests in Iraq, so too can Russia send in a few airborne troops to protect its interests in Damascus. 

  It’s now only a question of political will and as we’ve outlined on a few occasions recently, it’s not entirely clear how much longer Vladimir Putin is willing to support Bashar al-Assad in the face of the debilitating, Saudi-engineered slump in crude prices and the biting economic sanctions imposed on the Kremlin by Europe.

  

  

  

  

  

• Dramatic Footage Of Saudi Tanks Invading Yemen

  There are competing accounts as to exactly what happened at the Al Anad airbase in Yemen on Monday, where Saudi-backed forces loyal to President Abed Rabbo Mansour Hadi reportedly routed Houthi rebels, marking the latest in a series of setbacks for the Iran-backed group which forced Hadi to flee to Riyadh earlier this year, plunging Yemen into a bloody civil war. 

  According to the Houthis, coalition forces were “crushed” and their vehicles destroyed, but a spokesman for the Popular Resistance said most of the base was in coalition hands. Here’s WSJ:

  Forces fighting for a Saudi-led military coalition in Yemen have defeated the country’s Houthi rebels at a strategic southern air base, the Yemeni defense ministry said Tuesday.

   

  The Houthis denied that the base had fallen. However, if it has been captured this would extend a recent turning of the tide in favor of the coalition in the four-month-old conflict.

   

  The defense ministry said the operation at Al Anad, a large complex from which the U.S. had launched drone attacks against Al Qaeda in the Arabian Peninsula before the recent instability, was “a true representation of national will and noble sacrifices that are being made to liberate Yemen from the grip of overthrowing militias.”

   

  A report Tuesday by the Houthi-run Saba news agency denied that Al Anad base had been taken, citing an unnamed military official. The Houthis had “crushed all [coalition] offensives” against the base and destroyed scores of military vehicles,  Houthi spokesman Nasruddin Amer said Monday evening.

   

  If confirmed, the turn of fortunes in favor of the coalition at Al Anad build upon a string of recent gains in the south by the allies, which include Saudi Arabia, the U.A.E., Qatar, Bahrain, Egypt and a number of other Arab states.

   

  Houthi rebels have been driven from Aden in recent weeks, setting the stage for coalition forces to make a further push northward into other Houthi-controlled areas.

  Here’s footage of the actual battle courtesy of RT:

  And here’s footage of Saudi tanks pushing north as the coalition offensive gathers steam: 

  *  *  *

  Importantly, Saudi and coalition boots are now officially on the ground in Yemen, under the guise of tank trainers. Here’s The Washington Post:

  Saudi and Emirati troops are assisting Yemeni pro-government forces at al-Anad by operating many of the tanks and sophisticated military equipment, military officials said.

   

  A Yemeni military official said thus far, few Yemeni troops have been trained in operating the tanks that have arrived by sea from Gulf allies in recent weeks. He added that the Yemeni military sought help from coalition countries in the al-Anad operation, calling them “partners in the liberation operation of Aden and other provinces.”

  Obviously, that seems like a rather transparent way of saying that the recent “turning of the tide” in Yemen may indeed be attributable to the fact that the Houthis are now fighting an open war with the Saudi army which turns out to be quite a bit more challenging than urban warfare in the backalleys of Aden with poorly trained Hadi holdouts.

  In any event, we suppose the real question is whether Iran is willing to stand by and watch as the Houthis are dismantled by Saudi Arabia, or whether Tehran decides it’s time to provide more than just “logistical support”, at which point Yemen’s proxy “conflict” will officially morph into a regional sectarian war. 

  

  

  

  

• Inflation Nation: College Textbook Prices Soar 1000% Since 1977

  Wondering why the drop-out rate from college is so high? One reason could be that a stunning 65% of students avoided buying textbooks due to the cost. As NBCNews reports, textbook prices have risen over three times the rate of inflation from January 1977 to June 2015, a 1,041 percent increase – dwarfing the government’s official CPI data. Just as government-subsidized healthcare has ‘enabled’ dramatic rises in the costs of drugs so government-subsidized education has sparked hyperinflation-esque pricing in college textbooks

  As NBCNews reports, students hitting the college bookstore this fall will get a stark lesson in economics before they’ve cracked open their first chapter. Textbook prices are soaring. Some experts say it’s because they’re sold like drugs.

  According to NBC’s review of Bureau of Labor Statistics (BLS) data, textbook prices have risen over three times the rate of inflation from January 1977 to June 2015, a 1,041 percent increase.

   

  “They’ve been able to keep raising prices because students are ‘captive consumers.’ They have to buy whatever books they’re assigned,” said Nicole Allen, a spokeswoman for the Scholarly Publishing and Academic Resources Coalition.

   

  In some ways, this is similar to a pharmaceutical sales model where the publishers spend their time wooing the decision makers to adopt their product. In this case, it’s professors instead of doctors.

   

  “Professors are not price-sensitive and they then assign and students have no say,” said Ariel Diaz, CEO of Boundless, a free and low-cost textbook publisher.

   

  

   

  But whether individual students are paying a literal 1,041 percent more today than they were in 1977 is not the question, said Mark Perry, a professor of economics at the University of Michigan who has tracked rising textbook prices for years.

   

  “College textbook prices are increasing way more than parents’ ability to pay for them,” he said. At the extreme end, one specialized chemistry textbook on his campus costs $400 at the campus bookstore.

  How rising textbook prices mirrors rising drug costs…

  

  

  

  

  

• Some Clear Thinking About The Price Of Gold

  Submitted by Simon Black via Sovereign Man blog,

  On April 2, 2001, the price of gold closed the market trading session at $255.30.

  And that was the lowest price that gold has seen ever since.

  In US dollar terms, gold closed the 2001 calendar year higher than it did in 2000. Then it did the same thing again in 2002. And again in 2003.

  In fact, after reaching its low in April 2001, gold closed higher for twelve consecutive years– something that had never happened before in ANY financial market with ANY asset.

  Then came a correction; the price started falling, and gold is now on track for 2015 to be its third down year in a row.

  What’s incredible is that, despite its history of gains, and 5,000 years of tradition behind it, gold is rapidly becoming one of the most widely despised assets.

  But before we pronounce it dead and write the final gold eulogy, however, let’s consider the following:

  1) Nothing goes up (or down) in a straight line. After 12 straight years of unprecedented gains with any asset class, it’s not unusual to have a meaningful correction.

  (Just imagine how severe the correction in stocks will be. . .)

  And like all frantic booms which go way past sustainable levels, corrections also overshoot fair value.

  This correction in the gold market could easily last for several more years, with prices potentially well below $1,000.

  But then we could just as easily see another massive surge all the way past $2,000 and beyond.

  That’s the nature of these markets– to be extremely fickle (and highly manipulated).

  Even over a period of a few years, the market can show about as much maturity as a middle school lunchroom, complete with pubescent gossip and inane popularity contests.

  But it’s rather short-sighted to completely lose confidence in an asset that has a 5,000 year track record because of a few down years.

  2) The gold price shed nearly 5% after the government of China announced recently that they owned 1,658 metric tons of gold.

  This amount was lower than what many investors and analysts had been expecting, and the price of gold dropped as a result.

  My question- since when did anyone start believing official reports from the Chinese government?

  Seriously. The Chinese have a vested interest in understating their gold holdings.

  They know that doing so will push the price of gold LOWER, which is exactly what they want.

  China is sitting on trillions of dollars in reserves right now, a portion of which they’re rapidly trying to rotate OUT of US dollars.

  So it’s clearly beneficial to the Chinese government if they can sell dollars while they’re strong and buy gold while it’s cheap.

  And if they can push gold to become cheaper, even better for them.

  3) Remember why you own gold to begin with.

  Gold is a very long-term store of value. Notwithstanding a few down years, gold has maintained its purchasing power for thousands of years.

  Paper currencies come and go. They get devalued, revalued, and extinguished altogether.

  How much would you be able to buy today with paper money issued by the 7th century Tang Dynasty? Nothing. It no longer exists.

  Or a pound sterling from 1817? Very little. It’s barely pocket change today.

  Yet the gold backing up that same pound sterling from 1817 is worth over $250 today (165 pounds).

  Even in modern history, the gold backing up a single US dollar from 1971 is worth vastly more than the paper currency that was printed 44 years ago.

  But even more importantly, aside from being a long-term store of value, gold is a hedge— a form of money that acts as an insurance policy against a dangerously overleveraged financial system.

  How much will your dollars and euros buy you in the event of real financial calamity? Or if there’s a major government default or central bank failure?

  No matter what happens in the financial system– whether it collapses under its own weight, or cryptofinance technology revolutionizes how we do business– gold ensures that you’re protected.

  4) Resist the urge to value gold in paper currency. We all have this tendency– we invest in something, and then hope it goes up in value.

  But that’s a mistake with gold. It’s a hard thing for some people to do, but try to stop yourself from thinking about gold in terms of its paper price.

  (It’s also important to remember that there’s a huge disconnect between the ‘paper price’ of gold, and the physical price of gold.)

  Remember, gold is not an investment; there are plenty of better options out there if you’re looking for a great speculation.

  So the notion of trading a stack of paper currency for gold, only to trade the gold back for a taller stack of paper currency misses the point entirely.

  5) Having said that, if you find it too difficult to do this, and you catch yourself constantly refreshing the gold price and checking your portfolio, you might own too much.

  Listen to your instincts; if you’re always feeling frantic about the daily gyrations in the market, lighten your load.

  Don’t love anything that won’t love you back. Stay rational. Own enough gold that, in the event of a crisis, you will feel comfortable that you have enough ‘real savings’… but don’t own so much that you’re constantly worrying about the paper price.

  

  

  

  

  

• Peter Schiff: What If "They" Are Wrong (Again)?

  Submitted by Peter Schiff via Euro Pacific Capital,

  While the world can count dozens of important currencies, when it comes to top line financial and investment discussions, the currency marketplace really comes down to a one-on-one cage match between the two top contenders: the U.S. Dollar and the Euro.

  In recent years the contest has become a blowout, with the Dollar pummeling the Euro into apparent submission. Based on the turmoil created by the European Debt Crisis and the continuing problems in Greece and other overly indebted southern tier European economies, many investors may have come to assume that Euro boosters will be forced to ultimately throw in the towel and call off the entire experiment, thereby leaving the Dollar completely unchallenged as the champion currency, now and for the foreseeable future. This is a stunning turnaround for a currency that was seen just a few years ago as a credible threat to supplant the dollar as the world's reserve.

    

  Putting aside the fact that there are many important currency relationships besides the euro/dollar axis, economists, journalists, and investors have forgotten the 16-year history of the Euro and how the currency has survived and prospered after many had assumed it might be consigned to the dustbin of history.

    

  The Euro was created in 1992 by the Maastricht Treaty (which created the European Union) but did not come into being as an accounting unit (not a physical currency) until January of 1999. In the lead up to its launch, many had argued that the Euro would become the heir to the rock solid Deutsche Mark, the German currency that had risen to preeminence on the back of Germany's post war resurgence, high savings rate, enviable trade balance, and post-Soviet unification. With German bankers in a firm leadership position in the European Central Bank and the European Union, many had hoped that the new Euro would adopt the virtues of the Mark. As a result, the Euro debuted with a value of 1.18 dollars. But the honeymoon was short-lived.

    

  Almost immediately from the point it began freely trading the Euro began to encounter severe headwinds. The Russian debt default and the Asian currency crisis in the late 1990's caused investors to sell assets in the emerging markets and seek safe havens in the dominant economies. This provided a crucial early test for the Euro. But the new currency failed to attract much of this fast flowing transnational investment flow. On the other hand, the U.S. markets and the U.S. Dollar were beckoning as extremely attractive targets.

    

  In the second term of Bill Clinton's presidency, America, at least on paper, looked very strong. From 1998-2000, based on Bureau of Economic Analysis (BEA) figures, GDP growth averaged 4.4%, which is roughly four times the rate that we have seen since 2008. The expanding economy and the relative spending restraints that had been made by the Clinton Administration and the newly elected Republican Congress resulted in hundreds of billions of annual U.S. government surpluses, the first such black ink in generations. Many economists comically concluded that the surpluses would become permanent (in fact they lasted just a few years). At the same time, U.S. stock markets were notching some of the biggest gains in their history. From the beginning of 1997 to the end of 1999 the Dow Jones surged by approximately 69%. The tech heavy Nasdaq, the epicenter of the "dotcom" bubble, rallied by an eye popping 294%.

   

  As a result, international money began pouring into the Dollar, taking the wind out of the sails of the newly launched Euro. The stretched valuations that had pushed up U.S. stocks to nosebleed levels failed to dissuade investors from piling in well into the mid-point of 2000. Not only had Wall Street spread the gospel of the new economy, where negative earnings and high debt no longer mattered, but many were convinced that the interventionist tendencies of the Alan Greenspan-led Federal Reserve would protect investors against losses.

   

  As a result of these forces, the Euro first fell to below parity against the dollar on January 27, 2000 when it closed at 98.9 U.S. cents, a fall of 16% from its debut. After that psychological barrier was breached, the selling intensified. By May 8, 2000 the Euro traded at just 89.5 U.S. cents, an additional 9% decline in just three months. This prompted news stories like a BBC article entitled "Was the Euro a Mistake?" Top economists and investors began wondering if the new currency would last much longer.

   

  The Euro's reputation was further tarnished in September of 2000 when Danish voters rejected their country's plans to adopt the Euro. The distaste shown by a small country widely considered squarely in the mainstream of Western European culture was a huge black eye for the Euro experiment. The pessimism sent the currency down another 6% in just one month following the Danish election, reaching what would become an all-time low of just 82.7 U.S. cents on October 25, 2000. At that level the Euro had fallen a full 30% from its debut valuation. It looked like game over. The Euro vs. Dollar was shaping up to be a Bambi vs. Godzilla scenario.

    

  By the late 1990's gold had been in a bear market that had lasted almost 20 years. As a result, investor sentiment for the metal, which had historically been considered a safe haven asset, was at an all-time low. As a result, many Europeans moved into the dollar to seek shelter instead. At that time gold was trading below Euros 300 per ounce (FRED, FRB St. Louis). Those who had exchanged their Euros for Dollars (when the Euro was 83 cents) would have seen those holdings decline by 50% over the following eight years. On the other hand gold nearly doubled in Euro terms over the same time frame. As this article is being written, gold is now trading at 1,000 Euros per ounce (even after the recent big drop) while the Euro hovers around $1.10. So Europeans who bought and held Dollars continuouslywhen the Euro hit its low in 2000 would be down 25%, but those who bought and held gold instead would have seen those holdings triple. (Past performance does not guarantee future results).

   

  The bursting of the dotcom bubble in mid-2000 finally caused a decisive break with the investment trends that had predominated in the previous number of years (see my recent article "The Big Picture"). Just as the dotcom wealth began disappearing, taking the U.S. federal budget surpluses with it, the emerging markets began to recover, and the much-maligned Euro started getting some attention.

    

  By January 5, 2001 the Euro had hit 95.4 cents, a stunning 15.3% rally in just over two months. And although the Euro zigzagged substantially over the next year and a half (with an early retreat in 2002, causing the Organization for Economic Cooperation and Development (OECD) to wonder whether the Euro was a "Doomed Currency"), by the second half of 2002 the uptrend was firmly in place, with the Euro reaching parity again with the Dollar by July 15, 2002, 30 months after it had fallen below that level. By April 22, 2008 the Euro traded at $1.60 to the Dollar, a price that represented a 36% increase over its debut level and a stunning 93% rally from its October 2000 low.

    

  But when the Financial Crisis of 2008 reached full flower in August, September, and October of 2008, investors once again panicked as they had eight years before. In seeking a safe haven, they once again chose the U.S. Dollar (perhaps motivated by the low valuations then assigned to the greenback). As funds began flowing out of the Euro and into the Dollar, the Euro dropped rapidly. By the end of October the Euro only fetched $1.26, a 21% drop from its April high. But when the markets stabilized in 2009 so did the Euro. It essentially traded sideways against the Dollar over the next two years, reaching back to $1.46 by June 6, 2011.

   

  

  Compiled by Euro Pacific Capital using data from the Federal Reserve Economic Data (FRED) from Federal Reserve Bank (FRB) of St. Louis

   

  When the European debt crisis really started grabbing headlines in 2011, with yields on sovereign debt of the so-called PIIGS nations (Portugal, Italy, Ireland, Greece, and Spain) widening to record territory in comparison to the sovereign bonds of Germany, scrutiny of the Euro came into question once again. The uncertainty over possible bailouts for European banks that were holding potentially toxic government debt was too much uncertainty for the market to handle. The pressure on the Euro was intensified by the slowing Eurozone economy. These forces combined helped to push the Euro down steadily during 2012 and 2013.

    

  But the straw that really broke the camel's back came at the end of 2014 when it became clear that the European Central Bank, under the new leadership of Mario Draghi, would finally succeed in short-circuiting the anti-bailout restrictions of the Maastricht Treaty and outflank the objections of the German financial and political establishment in order to bring full blown Quantitative Easing (QE) to the Eurozone. The QE program essentially involves creating Euros out of thin air in order to buy government debt and hold down long-term interest rates.

    

  Expectations about European QE came at a time when most observers concluded that the U.S. economy was finally on track for a strong recovery in 2015 and that the Federal Reserve (which has already showered the United States with almost six full years of QE) had finally done away with the program and would begin raising rates for the first time in almost 10 years. Despite a languishing economy, the U.S. markets had once again delivered stellar returns, with the S&P 500 rising 64% between 2011 and 2014, doing so without ever experiencing a correction of more than 10%.

    

  These movements provided a strong rationale for investors to sell Euros and buy Dollars. In the 12 months from May 2014 to May 2015 the Euro fell by about 20%. When it bottomed out at $1.05 on March 11, 2015, the Euro had fallen 34% from its peak seven years earlier. This revived the opinions that the Euro was dead and that the Dollar would be the only real reserve currency for the foreseeable future.

    

  But what if the assumptions about a U.S. economic recovery and Fed rate hikes were wrong? Could observers be mistaken now about the trajectory of the Dollar vs. the Euro as they were back in 2000? While some had warned that the dotcom bubble of 2000 could end badly, very few understood how deeply the mania was the root of the economic expansion and how severely the final flameout would threaten the entire economy. Similarly, very few had foreseen the dangers that the housing and mortgage bubble had presented to the wider economy in 2008. The economic and market contractions in 2000 and 2008 might have been much worse if the Fed had not been able to cut interest rates by almost 500 basis points in the face of the crises. (No such options are available if the economy contracts today). In other words, complacency can be very dangerous, especially if there is no ammunition to combat a crisis if it arrives unexpectedly .

   

  Confidence is the only thing that really undergirds modern fiat currencies. But confidence can be very ephemeral…disappearing as quickly as it arrives. The U.S. Dollar benefits from confidence that the Euro currency may just be unworkable, that the U.S. economy will continue to improve, and that the Fed will raise rates throughout the remainder of 2015 and into 2016. If these expectations are unfulfilled, there could be a Euro reversal.

    

  When a trend remains in place for a while, people tend to think it will continue forever. When it reverses, the shock can be widespread. Just as currency speculators over-estimated the strength of the U.S. economy in 2000, I believe they are making the same mistake again today. But the U.S. economy is actually much weaker and more vulnerable now than it was in 2000. If the spell of confidence surrounding the Dollar is broken, it may also reverse the fortunes of other beaten down currencies. This could present a sea change in the global investment landscape for which wise investors should be prepared.

   

  

  

  

  

  

• We, The Sheeple

  Presented with no comment…

   

  

   

  Source: Investors.com

  

  

  

  

  

• "You're Gonna Need a Bigger Boat" – Does Size Matter When It Comes To The Debt Markets

  Back in June we presented for the first time the writing of former Dallas Fed advisor to president Dick Fisher, Danielle DiMartino, who in a CNBC interview slammed The Fed for “allowing the [market] tail to wag the [monetary policy] dog,” warning that “The Fed’s credibility itself is at stake… they have backed themselves into a very tight corner… the tightest ever.”

  As she further warned in her first op-ed for the Liscio Report “the hope today is that the current era of easy monetary policy will have no deep economic ramifications. Such thinking, though, may prove to be naive… All retirees’ security is thus at risk when the massive overvaluation in fixed income and equity markets eventually rights itself.”

  Today she follows it up with another insightful piece, looking at the record stock of global debt, some $200 trillion and rising exponentially, and frames the “question for the ages” namely whether “size really does matter when it comes to the debt markets.” As she correctly observes “it’s virtually impossible to pinpoint the next stressor” in the great debt collapse game.

  And while she keeps with the theme of the piece – that the massive wall of debt will need ever bigger boats – by throwing in the occasional analogy to great white sharks, the true “animalistic” symbols relevant to the current global economy are of a more heavenly nature:

  Nary are any of us far removed from a poor stricken soul who has suffered a fall from grace. In the debt markets, a “fallen angel” is a term assigned to a high grade issuer that descends to a junk-rated state. It could just as easily refer to any credit in the $200 trillion universe investors perceive as being risk-free. Should the need arise, will there be enough room on policymakers’ boats to provide seating for every fallen angel? That is certainly the hope. But what if the real bubble IS the sheer size of the collective balance sheet? If that’s the case, we really are gonna need a bigger boat.  

  Actually, what we will need if and when the great pyramid of trillions upon trillions of claims, guarantees, promises to repay, robosigned mortgages and collateral chains in which suddenly the weakest links decide to let all inbound calls go straight to voicemail, is an asset without counterparty risk.

  There is only one such asset: the oldest one; the one which those whose job is to create artificial faith in insolvent counterparties deem neccesary to cast as a “barbarous relic” – the asset which just happens to be at the very bottom of the Exter pyramid.

  

  The one asset which, in the words of J.P.Morgan himself, is money. Nothing else.

  * * *

  From The Liscio Report, by Danielle DiMartino

  You’re Gonna Need a Bigger Boat

  Size matters. Just ask Roy Scheider. As incredulous as it may seem, I only recently sat myself down to watch that American scare-you-out-of-the-water staple Jaws for the first time. As a baby born in 1970, the movie at its debut in 1975 was hugely inappropriate for my always precocious, but nevertheless only five-year old self. And by the time this Texas girl and those Yankee cousins of mine were pondering breaking the movie rules during those long-ago summers in Madison, Connecticut, it was not Jaws but rather Brat Pack movies that tempted us. We started down our road of movie rebellion with St. Elmo’s Fire, then caught up with a poor Molly Ringwald in Pretty in Pink and then really stretched our boundaries with Less than Zero – you get the picture.   

  And so finally during this long, hot summer of 2015, a seemingly appropriate time with our country gripped from coast to coast with real-life shark hysteria, I watched Jaws for the first time and heard Roy Scheider as Chief Martin Brody utter those words, “You’re gonna need a bigger boat.”    

  Prophetically, the reality might just be that the collective “we,” and quite possibly sooner than we think, really will need a bigger boat. That is, as it pertains to the global debt markets, which have swollen past the $200 trillion mark this year rendering the great white featured in Jaws which can be equated with past debt markets as defenseless and small as a small, striped Nemo by comparison.

  The question for the ages will be whether size really does matter when it comes to the debt markets. It’s been more than three years since Bridgewater Associates’ Ray Dalio excited the investing world with the notion that the levered excesses that culminated in the financial crisis could be unwound in a “beautiful” way. A finely balanced combination of austerity, debt restructuring and money printing could provide the pathway to a gentle outcome to an egregious era. In Mr. Dalio’s words, “When done in the right mix, it isn’t dramatic. It doesn’t produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ration of debt-to-income go down. That’s a beautiful deleveraging.”

  I’ll give him the slow growth part. Since exiting recession in the summer of 2009, the economy has expanded at a 2.1-percent rate. I know beauty is in the eye of the beholder but the wimpiest expansion in 70 years is something only a mother could feign admiration for. That not-so-pretty baby still requires the wearing of deeply tinted rose-colored glasses to maintain the allusion.    

  As for the money printing, $11 trillion worldwide and counting certainly checks off another of Dalio’s boxes. But refer to said growth extracted and consider the price tag and one does begin to wonder. As for debt restructuring, it’s questionable how much has been accomplished. There’s no doubt that some creditors, somewhere on the planet, have been left holding the proverbial bag — think Cypriot depositors and (yet-to-be-determined) Energy Future Holdings’ creditors. Still, the Fed’s extraordinary measures in the wake of Lehman’s collapse largely stunted the culmination of what was to be the great default cycle. Had that cycle been allowed to proceed unhampered, there would be much less in the way of overcapacity across a wide swath of industries.   

  Instead, as a recent McKinsey report pointed out, and to the astonishment of those lulled into falsely believing that deleveraging is in the background quietly working 24/7 to right debt’s ship, re-leveraging has emerged as the defeatist word of the day. Apparently, the only way to supply the seemingly endless need for more noxious cargo to fill the world’s rotting debt hulk is by astoundingly creating more toxic debt. Since 2007, global debt has risen by $57 trillion, pushing the global debt-to-GDP ratio to 286 percent from its starting point of 269 percent.   

  Of course, the Fed is not alone in its very liberal inking and priming of the presses. Central banks across the globe have been engaged in an increasingly high stakes race to descend into what is fast becoming a bottomless abyss in the hopes of spurring the lending they pray will jump start their respective economies. Perhaps it’s time to consider the possibility that low interest rates are not the solution.   

  Debt is a fickle witch. When left to its own devices, which it has been for nearly seven years with interest rates at the zero bound, it tends to get into trouble. Unchecked credit initially seeps, and eventually finds itself fracked, into the dark, dank nooks and crannies of the fixed income markets whose infrastructures and borrowers are ill-suited to handle the capacity. Consider the two flashiest badges of wealth in America – cars and homes. These two big-line items sales’ trends used to move in lockstep — that is until the powers that be at the FOMC opted to leave interest rates too low for too long. In Part I, aka the housing bubble, home sales outpaced car sales as credit forced its way onto the household balance sheets of those who could no more afford to buy a house than they could drive a Ferrari. True deleveraging of mortgage debt has indeed taken place since that bubble burst, mainly through the mechanism of some 10 million homes going into foreclosure. It’s no secret that credit has resultantly struggled mightily to return to the mortgage space since.    

  Today though, Part II of this saga features an opposite imbalance that’s taken hold. Car sales have come unhinged from that of homes and are roaring ahead at full speed, up 76 percent since the recession ended six years ago, more than three times the pace of home sales over the same period. It’s difficult to fathom how car sales are so strong. Disposable income, adjusted for inflation, is up a barely discernible 1.5 percent in the three years through 2014. Add the loosest car lending standards on record to the equation and you quickly square the circle. Little wonder that the issuance of securities backed by car loans is racing ahead of last year’s pace. If sustained, this year will take out the 2006 record. At what cost? Maybe the record 16 percent of used car buyers taking out 73-84 month loans should answer that question.   

  To be sure, car loans are but a drop in the $57 trillion debt bucket. The true overachievers, at the opposite end of the issuance spectrum, have been governments. The growth rate of government debt since 2007 has been 9.3 percent, a figure that explains the fact that global government debt is nearing $60 trillion, nearly double that of 2007. The plausibility of the summit to the peak of this mountain of debt is sound enough considering the task central bankers faced as the global financial system threatened to implode (thanks to their prior actions, mind you). In theory, government securities are as money good as you can get. Practice has yet to be attempted.   

  The challenge when pondering $200 trillion of debt is that it’s virtually impossible to pinpoint the next stressor. Those who follow the fixed income markets closely have their sights on the black box called Chinese local currency debt. A few basics on China and its anything-but-beautiful leverage. Since 2007 China’s debt has quadrupled to $28 trillion, a journey that leaves its debt-to-GDP ratio at 282 percent, roughly double its 2007 starting point of 158 percent. For comparison purposes, that of Argentina is 33 percent (hard to borrow with no access to debt markets); the US is 233 percent while Japan’s is 400 percent. If Chinese debt growth continues at its pace, it will rocket past the debt sound barrier (Japan) by 2018. As big as it is, China’s debt markets have yet to withstand a rate-hiking cycle, hence investors’ angst.   

  My fear is of that always menacing great white swimming in ever smaller circles closer and closer to our shores. I worry about sanguine labels attached to untested markets. US high-grade bonds come to mind in that respect even as investors calmly but determinately exit junk bonds. Over the course of the past decade, the US corporate bond market has doubled to an $8.2 trillion market. A good portion of that growth has come from high yield bonds. But the magnificence has emanated from pristine issuers who have had unfettered access to the capital markets as starved-for-yield investors clamor to debt they deem to have a credit ratings close to that of Uncle Sam’s. Again, labels are troublesome devils. Remember subprime AAA-rated mortgage-backed securities?

  We’ve grown desensitized to multi-billion issues from high grade companies. Most investors sleep peacefully with the knowledge that their portfolios are indemnified thanks to a credit rating agency’s stamp of approval. Mom and pop investors in particular are vulnerable to a jolt: the portion of the bond market they own through perceived-to-be-safe mutual funds and ETFs has doubled over the past decade. Retail investors probably have little understanding of the required, intricate behind-the-scenes hopscotching being played out by huge mutual fund companies. This allows high yield redemptions to present a smooth, tranquil surface with little in the way of annoying ripples. That might have something to do with liquidity being portable between junk and high grade funds – moves made under the working assumption that the Fed will always step in and assure markets that more cowbell will always be forthcoming rather than risk the slightest of dramas unfolding. Once the reassurance is acknowledged by the market, all can be righted in the ledgers. It’s worked so far. But investors have yet to even consider selling their high grade holdings. It’s unthinkable.     It’s hard to fathom that back in 1975 when I was a kindergartener, security markets’ share of U.S. GDP was negligible. Forty years later, liquidity is everywhere and always a monetary phenomenon. That is, until it’s not.

  Nary are any of us far removed from a poor stricken soul who has suffered a fall from grace. In the debt markets, a “fallen angel” is a term assigned to a high grade issuer that descends to a junk-rated state. It could just as easily refer to any credit in the $200 trillion universe investors perceive as being risk-free. Should the need arise, will there be enough room on policymakers’ boats to provide seating for every fallen angel? That is certainly the hope. But what if the real bubble IS the sheer size of the collective balance sheet? If that’s the case, we really are gonna need a bigger boat.  

  

  

  

  

  

• TEPCO Officials To Be Tried for Role In Fukushima Meltdown

  Submitted by Andy Tully via OilPrice.com,

  A Japanese citizens’ judicial committee has overruled government prosecutors and forced them to bring three former executives of the Tokyo Electric Power Co. (TEPCO) to trial on charges of criminal negligence for their inability to prevent the 2011 nuclear disaster at the Fukushima Daiichi nuclear power plant. But it appears unlikely that the defendants can be convicted.

  The decision by the panel of 22 anonymous citizens, was reached July 17 but not announced until July 31. It overrules two previous decisions by the Tokyo prosecutors not to indict the former executives. The defendants are Tsunehisa Katsumata, 75, chairman of Tokyo Electric Power Co. at the time of the crisis, along with Sakae Muto, 65, and Ichiro Takekuro, 69, who were then vice presidents of the utility.

  Decisions by the prosecutors in September 2013 and in January 2015 said they lacked sufficient evidence to bring criminal charges against the three men. In response, the citizens’ panel voted twice to demand the former executives’ indictment, trumping the prosecutors’ decisions.

  Such citizens’ committees became a powerful features of Japan’s judicial system after World War II in an effort to combat government abuse of power. Their members are chosen by lottery and the panelists’ identities are kept secret. While they’re powerful, these committees are seldom used.

  The committee concluded that the three defendants hadn’t taken necessary steps to reinforce the Fukushima Daiichi power plant, situated on Japan’s Pacific coast and therefore vulnerable to severe damage if it were struck by a tsunami in the earthquake-prone region.

  That fear was realized in March 2011 when a Pacific tsunami slammed into Japan, causing widespread destruction, including such heavy damage to three of the four reactors at Fukushima Daichi that they melted down and began leaking radiation. The accident forced the evacuation of tens of thousands of people from the general vicinity of the power plant.

  The decision was good news for surviving victims of the disaster. “We had given up hope that there would be a criminal trial,” said Ruiko Muto, who leads the Fukushima Nuclear Disaster Plaintiffs Group, which represents about 15,000 people, including residents displaced by the accident and their supporters. “We’ve finally gotten this far.”

  But the victory may be merely symbolic because most legal observers say it’s unlikely the rigors that the defendants will face will go beyond giving public testimony at trial. There’s also little likelihood any of them will be convicted of a criminal charge because Japanese prosecutors, with 99 percent conviction rates, rarely bring charges unless they are virtually certain they can win the cases.

  Cases imposed on them by citizens’ judicial committees are generally those in which prosecutors have concluded lack enough evidence to convict. One former prosecutor, Nobuo Gohara, told The New York Times that virtually all of such cases end in acquittals.

  In the TEPCO case, for example, Gohara said the prosecutors now must prove that the defendants were guilty of criminal oversight of the Fukushima Daiichi power plant by failing to predict the huge tsunami that caused the disaster and neglecting to protect the facility sufficiently.

  Further, Gohara said, it will be extremely challenging for the prosecutors to prove that the meltdowns at three of the plant’s reactors even killed anyone. Several people died while the area was being evacuated in 2011, but most were elderly who were too weak to be moved during the chaos of moment. But he stressed that no one so far has died from radiation poisoning.

  “This is a very unusual case,” Gohara said. “The hurdles to conviction are high.”

  

  

  

  

  

• Twin Trillion-Dollar Bubbles Prompt Dramatic Rise In Non-Mortgage Debt

  Don’t look now, but the US is staring down not one but two trillion-dollar bubbles, both of which have been documented here extensively. 

  The first is the US auto loan bubble which has ballooned to $900 billion on the back of loose underwriting standards. Don’t believe easy credit is behind the inexorable rise in auto loan debt? Consider the following Q1 statistics from Experian which we never tire of showing:

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

  Sitting behind the auto lending boom is Wall Street’s securitization machine which will churn out around $100 billion in auto loan-backed paper this year (for perspective, that accounts for around half of total projected consumer ABS issuance). The longer the Fed-driven hunt for yield persists, the more demand they’ll be for this paper and the more demand there is, the easier it will be to get a car loan and larger the bubble will become. 

  Meanwhile, the nation’s student debt bubble has reached epic proportions, with students and former students laboring (or perhaps “not laboring” is more appropriate given what we know about how difficult it is for degreed millennials to find good jobs) under a debt burden that averages $35,000 per student and totals a staggering $1.2 trillion in aggregate. As we’ve detailed exhaustively, debt service payments on these loans are causing delays in household formation and driving up demand for rentals in a market that’s already red hot thanks to the fact that the collapse of the housing bubble turned a nation of homeowners into a nation of renters. 

  Considering all of the above, we weren’t at all surprised to learn that US households’ non-mortgage debt is soaring and the two main drivers are student loan debt and auto loans. Here’s more from HousingWire:

  Black Knight Financial Services analyzed U.S. mortgage holders’ levels of non-mortgage-related debt and found those levels are at their highest in over 10 years.

   

  What we’ve found is that mortgage holders today are carrying more non-mortgage debt than at any point in the past 10 years, with an average of $25,000 per borrower. That’s $1,400 more on average than one year ago, and nearly $2,600 more than in 2011,” he said. “The primary driver of this increase is a rise in auto-related debt, which accounted for 81% of the overall non-mortgage debt increase over the past four years. We also noticed a clear correlation between non-mortgage debt and borrowers inquiring about a new mortgage, with those who have recent mortgage inquiries on their credit reports carrying nearly 40% more debt than borrowers who do not.”

   

  Black Knight found that the student loan debt of U.S. mortgage holders is at all-time high: 15% of mortgage holders are carrying student loan debt, with average balances of nearly $35,000. The average student loan debt for all mortgages has more than doubled since 2006, and the share of mortgage holders carrying that debt has increased by 44% over that 9-year span.

  Here are some of the key findings:

  • Black Knight found that U.S. mortgage holders are carrying the most non-mortgage debt they have – an average of approximately $25,000 each – in over 10 years
  • Student loan debt among mortgage holders is at an all time high 
  • Among mortgage holders, student loan debt has increased by roughly 56% since 2006, to an average balance of nearly $35,000 
  • The share of borrowers carrying student loan debt has increased by 44% in that same time span
  • 48% of mortgage holders have automobile debt as well
  • Auto debt accounted for 81% of the increase in overall non-mortgage debt among mortgage holders over the past 4 years
  • Nearly 15% of those with homes in the lowest 20% of values are still underwater, compared to just 1.7% of those in the top 20%
  • Some 5.7 million borrowers lack enough equity in their homes to cover the cost to sell them

  

  

  

  

  

• Chart Of The Day – Americans Are Not Happy

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Readers of this site don’t need me to tell you, but the following statistics from the Wall Street Journal prove that despite record stock prices and non-stop propaganda, fewer and fewer people are believing the hype.

  We learn that:

  On a benchmark measure of Americans’ unease, 65% of those surveyed said the country is on the wrong track. That is the highest level of unease since November 2014, and nears the levels seen at other historical moments of voter discontent.

   

  In May 1992, after H. Ross Perot had launched his populist independent run for president, 71% said the country was on the wrong track. In September 2007, when frustration with President George W. Bush was peaking, wrong-track sentiment was 63%.

   

  The new poll also found increased pessimism about the economy: 24% said they thought the economy would get worse over the next year, up from 17% in December.

  Now, here’s that chart:

  

  What’s so interesting about the above, other than the elevated levels of dissatisfaction six years into an “economic recovery,” is to look at when in recent history Americans were starting to think things were on the right track. Specifically, Americans became encouraged around 2009.

  Barack Obama said all the right things, and a lot of people believed him. He had a chance to do the right thing, and people wanted him to do just that. Instead, he proved to be nothing but a shameless oligarch coddler, who essentially continued George W. Bush’s presidency without a hitch. Once that became clear, perceptions about a “wrong track” America starting surging again.

   

  So yeah, Americans are NOT happy, and they have every right to be pissed off.

  

  

  

  

• Why Turkey's "ISIS-Free Zone" Is The Most Ridiculous US Foreign Policy Outcome In History

  The truly incredible thing about US foreign policy outcomes is that there are seemingly no limits on how absurd they can be. Indeed, Washington’s uncanny ability to paint itself into policy corners and create the most thoroughly flummoxing geopolitical quagmires in the history of statecraft knows absolutely no bounds. 

  This was on full display back in April when Iran-backed Houthi rebels armed with some $500 million in small arms, ammunition, night-vision goggles, vehicles and “other supplies” that the Defense Department “donated” and then subsequently lost track of when US-backed President Abed Rabbo Mansour Hadi fled to Riyadh, looked set to loot the Aden branch of Yemen’s central bank. Then there was the extremely unfortunate situation that unfolded in Mosul, Iraq last summer when militants that may well have received training from the US at some point overran the city and captured some 2,300 humvees and at least one Black Hawk helicopter which would not have been parked in Mosul in the first place were it not for Washington’s ill-advised decision to invade Iraq for the second time in barely a decade in the wake of the 9/11 terrorist attacks.  

  As ridiculous as those incidents most certainly were (and there are of course countless other examples), the situation currently playing out on Syria’s border with Turkey may mark a new high (or low, depending on how you look at it) point for US foreign policy – and that truly is saying something. 

  Over the past several days, we’ve traced the escalating violence in Turkey to the ongoing conflict between Ankara and the PKK and to a landmark election outcome which saw President President Recep Tayyip Erdogan lose his absolute majority in parliament for the first time in over a decade. Here’s a brief recap: 

  Last week, it became abundantly clear that Turkey’s newfound zeal for accelerating the demise of Islamic State is motivated chiefly by President Recep Tayyip Erdogan’s desire to nullify a ballot box victory by the pro-Kurdish HDP, which grabbed 13% of the vote and won party representation in June in an election that also saw AKP lose its absolute majority for the first time in over a decade. Now, Erdogan looks set to call for new elections as “efforts” to build a coalition government have largely failed. Erdogan needs but a two percentage-point swing to restore AKP’s absolute majority, which would in turn pave the way for his push to consolidate power by altering the structure of the government. A conveniently timed suicide bombing in Suruc that killed 32 people in late July was promptly pinned on ISIS sympathizers, setting off a chain of events that would culminate in NATO backing a renewed Turkish offensive against the Kurdish PKK. The escalation of violence between PKK forces and the Turkish army should help Erdogan undermine HDP’s popularity ahead of new elections. Long story short: Turkey is essentially using a mock campaign against Islamic State to justify a renewed conflict with the PKK (they’re all “terrorists” after all) which Ankara will promptly cite as evidence of why voters should not back HDP when elections are held again in a few months. 

  In exchange for backing Ankara’s offensive against the PKK and by extension, Erdogan’s political agenda, the US gets to use Turkey’s Incirlik Air Base to launch strikes on ISIS. As noted above, Turkey is ostensibly also executing airstrikes against the group (that’s part of the deal) but it’s abundantly clear to everyone involved that Ankara – which has long been suspected of cooperating with ISIS and has provided funding to other extremist groups fighting for control of Syria – is only concerned with eradicating the PKK, and if that means weakening YPG, PKK’s Syrian affiliate in the process, then so be it. 

  The problem here – and this is where one can begin to see why this particular situation wins the blue ribbon for US foreign policy gone awry – is that YPG is extremely effective when it comes to fighting ISIS and indeed, the US has conducted airstrikes to support the group’s efforts to drive Islamic State from northern Syria. Here’s WSJ with more:

  The U.S.-led coalition fighting the extremist group has conducted numerous airstrikes over the past year to back the Kurdish YPG militia in northern Syria, which has proved to be the most effective ground force fighting Islamic State.

   

  Before Syria’s war erupted four years ago, the country’s Kurds were concentrated in three enclaves spread along the northern border. Over the past year, they have risen up to beat back advancing Islamic State fighters, most notably in the border town of Kobani.

   

  The YPG advances have allowed Kurdish forces to establish authority over more Syrian territory than before the war, according to the Institute for the Study of War, which tracks control of land in the fight against Islamic State. In recent months, backed by U.S. airstrikes, the YPG has forced Islamic State fighters out of 2,000 square miles of territory in northern Syria—an area the size of Delaware—according to the U.S. military.

   

  Since regime forces withdrew from Kurdish areas, the Syrian Kurds have secured a degree of newfound autonomy that has fueled aspirations for independence across the region. They have set up their own administration and defense forces that have started taking responsibility for security in the three Kurdish cantons. The YPG victory over Islamic State in the town of Tal Abyad this summer established a physical link between two of the three Kurdish cantons for the first time.

  So essentially, YPG has defeated ISIS in northern Syria, taken complete control of the area, and indeed, only one swath of land separates the group from commanding the entire border with Turkey.

  Great, right? Wrong. Here’s The Journal again:

  The U.S. and Turkey have reached an understanding meant to assure the Ankara government that plans to drive Islamic State militants from a proposed safe zone in northern Syria won’t clear the way for Kurdish fighters to move in.

   

  The U.S.-allied Turkish government is embroiled in a decades-old conflict with its own Kurdish minority. Turkey has resisted working with the YPG out of concern that the militants are laying the groundwork for the creation of a new Kurdish nation along Syria’s northern border with Turkey.

   

  Two weeks ago, Turkey agreed to launch airstrikes targeting Islamic State fighters in Syria and allow the U.S. to use bases on its soil for the first time to do the same. At Turkey’s urging, the U.S. agreed to use airstrikes to protect a border zone free of Islamic State and controlled by moderate Syrian rebels.

   

  The Syrian Kurdish militia has pushed toward the eastern banks of the Euphrates River, the edge of Islamic State-controlled areas on the other side. The border zone the U.S. and Turkey want to set up is on the western side of the river.

   

  

   

  YPG leaders said Monday they would work closely with allies, including the U.S.-led coalition and moderate rebel forces such as the Free Syrian Army or FSA, in the fight against Islamic State—also known as ISIS or ISIL.

   

  However, they said they had made no commitment not to cross the Euphrates.

   

  “The initial plan is to move to liberate the western side of the Euphrates once the areas to the east have been cleared of ISIS,” said Idres Nassan, a senior Kurdish official in Kobani. 

  That may have been the “initial plan”, and indeed it certainly sounds like a good one, especially considering that, as is clear from the map above, it would mean YPG would have succeeded in driving ISIS completely off the country’s northern border, but that plan will apparently have to change now because Washington, after supporting YPG on the battlefield for the better part of a year, will now deliberately prevent the group from doing what they do best (defeating ISIS in northern Syria) because Ankara wants to ensure that the imagined “ISIS-free zone” (that’s the actual term) is also a Kurd-free zone:

  The area where Turkey hopes to establish the border zone is filled with ethnic Turkmen and Arabs and Turkish leaders fear that the Kurdish fighters will try to drive them out.

   

  “That’s a red line,” said one Turkish official. “There are almost no Kurds in the area that would be the ISIL-free zone. Forcing the issue would trigger a new wave of ethnic cleansing, which is unacceptable to us.”

  To be sure, Washington isn’t entirely oblivious to how ridiculous this looks:

  Keeping Kurdish fighters from moving farther west restricts America’s ability to work in northwestern Syria with a Kurdish militia that has proved an effective fighting force. U.S. officials have offered Turkey reassurances that they won’t rely on the YPG in that area, but have sought to give themselves wiggle room to work with the Kurdish fighters in that area if the needs arise.

  Crystallizing the above and putting it in context is admittedly quite challenging because after all, trying to make sense of something so thoroughly nonsensical is probably an exercise in futility, but nevertheless, we’ll try to untangle the situation as best we can. Turkey has long been criticized for not taking an active role in combatting the ISIS threat that is quite literally on the country’s doorstep. Quite possibly, that reluctance stems from an amicable relationship between ISIS and Ankara and that relationship might well have remained amicable if Erdogan hadn’t lost his grip on parliament in June. Now, the country’s relationship with the militants will become a casualty of Erdogan’s ruthless politically-motivated crackdown on the Kurdish PKK which, thanks to their classification as a “terrorist” group, is now sanctioned by the US which is of course using ISIS as an excuse to facilitate the ouster of Assad, a goal Washington shares with Ankara. Lost in the shuffle is YPG who, unlike the US and Turkey, is actually concerned with defeating Islamic State and is indeed on the verge of doing just that, but will sadly be stopped in their tracks by the same US military which has so far supported them because allowing YPG to complete their sweep of northern Syria risks aggravating Turkey which is a NATO member and which the US figures it may need once Assad is gone and the Qatar-Turkey natural gas pipeline gets the go ahead. 

  So the US is now quite literally impeding the progress of the group which has so far “proven to be the most effective ground force fighting Islamic State,” and the general public is so obtuse that most people will completely miss the completely ridiculous fact that the excuse the US and Turkey are giving for their efforts to stop YPG from routing ISIS in northern Syria is that the two countries are currently working on building an “ISIS-free zone” and YPG, which has in fact made virtually the entire northern border region “ISIS-free”, is not welcome due to its fighters’ ethnicity. 

  

  

  

  

  

• Politicians Seek Short-Term Advantages By Lecturing Capitalists About The Long Term

  Submitted by Gary Galles via The Mises Institute,

  Hillary Clinton’s latest campaign salvo attacked “quarterly capitalism,” the supposedly irresponsible corporate focus on short-term results at the expense of long-term growth. She promised government fixes.

  Short-Termism, Share Prices, and Incentives

  Is there too much short-termism in business firms? To answer this, let’s look at participants’ incentives.

  Shareholders own the present value of their pro-rata share of net earnings, not just present earnings. They do not want to hurt themselves by sacrificing good investments today which raise that expected present value. Owners often tarred as too selfish do not ignore those consequences. Critics also confuse short-term corporate results as the goal, when they are actually valuable indicators of the likely future course of net earnings. Just because good short-term results raise stock prices does not imply excessive short-termism.

  Since share prices are both a primary metric for managerial success and basis for their rewards, and they reflect the present value of expected future net earnings, managers’ time horizons reflect shareholders’ time horizons, stretching far beyond immediate measures.

  Bondholders, who want to be paid back, incorporate the future, where repayment risks lie, in their choices. Workers and suppliers are also sensitive to firms’ future prospects, and the prospect of those relationships being terminated if things start turning south forces consideration of the future in present choices.

  Beyond misinterpreting share price responses to good short-term results as short-term bias, Clinton’s main proof of short-termism was that firms have increased stock buybacks, supposedly sacrificing worthwhile investments by returning funds to shareholders. She ignores that those funds will largely be invested elsewhere with better prospects. But she also ignores that the buyback binge reflects the Fed’s long-term artificial cheapening of borrowed money. When debt financing gets cheaper relative to equity financing, firms substitute toward debt. But a firm substituting debt financing for an equal amount of equity controls no fewer funds for future-oriented investments.

  The Role of the Fed and Government Intervention

  Confusing business responses to artificial Fed interventions as business-caused only begins the list of government created biases toward short-termism. Constant proposals to raise corporate tax rates and worsen capital gains treatment in the future reduce the after-tax profitability of good investments. Regulatory mandates and impositions pile up, with far more put in the pipeline for the future, doing the same. Energy policy threatens huge increases in costs, reducing likely investment returns. And the list goes on.

  That government regulators will put more emphasis on the future than the private sector is also contradicted by political incentives. Owners bear predictable future consequences in current share prices, but politicians’ incentives are far more short-sighted.

  Government Is More Short-Term Oriented Than the Private Sector

  An election loser will be out of office, and capture no appreciable benefit from efforts invested. So when an upcoming election is in doubt, everything goes on the auction block to buy short-term political advantage. And politicians’ incentives drive those facing the DC patronage machine. That is why so much “reform” meets Ambrose Bierce’s definition of “A thing that mostly satisfies reformers opposed to reformation.” The mere passage of bills in the political nick of time, even largely unread ones, can be declared victorious legacies, with harmful consequences never effectively brought to bear on decision-makers.

  Not only is politics inherently more short-sighted than private ownership and voluntary contractual arrangements, there is a cornucopia of examples of government short-termism at the expense of the future, whose magnitude dwarfs anything they promise to reform.

  Unwinding Social Security and Medicare’s 14-digit unfunded liabilities will punish future generations, caused by massive government overpromising to buy earlier elections. Other underfunded trust and pension funds threaten similar future atonement for earlier short-term “sins.” Expanding government debt similarly represents future punishment for short-term political payoffs. Foreign and military policy have similarly turned away from dealing with long-term issues. But serious long-run issues like immigration escape serious attention because “public servants” are afraid of short-run interest group punishment.

  Political attacks on short-termism, and reforms to fix it, are beyond confused. They ignore financial market participants’ clear incentives to take future effects into account. They are clueless about what provides evidence of short-termism. They treat private sector responses to government impositions as private sector failures. They ignore far worse political incentives facing “reformers.” And they act as if the most egregious examples of short-termism in America, all government progeny, don’t exist.

  There is little to Clinton’s criticism and alleged solutions beyond misunderstanding and misrepresentation. We should recognize, with Henry Hazlitt, that “today is already the tomorrow which the bad economist yesterday urged us to ignore,” and that expanding government’s power to do more of the same is not in Americans’ interests.

   

  

  

  

  

  

• Creditors May Have To Hire Pirates To Seize Oil Ship From "Deadbeat" Ex-Billionaire

  Sometimes it’s not worth it for creditors to seize collateral when a deal goes bad. 

  Just ask Deutsche Bank, or any of the other investment banks which would have been forced to book billions in mark-to-market losses on Canadian asset-backed commercial paper deals gone bad in 2007 had they chosen to collect the available collateral and cancel their swaps rather than negotiate a restructuring. 

  Or you could ask OSX Brasil SA bondholders who are technically entitled to take possession of an oil ship the size of the Chrysler building which is currently sitting 130 miles off Brazil’s coast.

  As Bloomberg explains, OSX effectively forfeited its claim on the ship when the company – part of former billionaire Eike Batista’s crumbled empire – defaulted in March, giving creditors the option to sail out and tow the vessel in. 

  The issue, of course, is that there are significant logistical problems associated with repossessing a giant oil ship and while creditors work on figuring those problems out, OGpar (another Batista venture) is still pumping 10,000 barrels of oil a day, because…well…because why not if no one is going to come and stop you.

  To add insult to injury, OGpar is refusing to pay the nearly $300,000/day rental fee to use the vessel, money which, considering OSX is bankrupt, presumably also belongs to creditors. Here’s more from Bloomberg:

  The clash is the latest chapter in the saga of Brazil’s once-richest man, an investor-darling-turned-pariah who sold shares in six companies in a span of six years and lost more than $30 billion even faster when his commodities and energy empire collapsed. It’s also a cautionary tale for Brazilian creditors, whose claims can get tied up for years and even decades in the nation’s maze-like legal system.

   

  [Bondholders] could try to seize the ship, but only if a court and the government approves. And the tumble in crude prices means the vessel isn’t worth what they’re owed, anyway. They could leave the rig to OGpar while waiting for asset prices to rebound, but the oil producer is refusing to pay rental fees of as much as $265,000 a day.

   

  OSX’s bondholders — including Redwood Capital Management LLC, DW Partners LP and Rimrock Capital Management LLC — are asking a Brazilian court to make OGpar pay $70 million in past-due fees.

   

  Batista and OgPar and OSX’s management “are doing what they can to abuse the Brazilian legal system to prevent investors from being paid what they are owed,” said Ruben Kliksberg, a partner at hedge fund Redwood Capital. Batista and the management teams, as well as courts, “are having a material impact on the reputation of Brazil as a foreign investment jurisdiction.”

  Maybe so, but as OGpar CEO Paulo Narcelio will patiently explain to you, the company (which is also bankrupt) is trying to squeeze out a living here, and if it is forced to pay the money it owes, then the offshore oil operation that it shouldn’t be allowed to run in the first place will cease to be economically viable.

  OGpar Chief Executive Officer Paulo Narcelio said paying the $70 million could force the Rio de Janeiro-based company to shut down and liquidate. OGPar also has been operating under bankruptcy protection since 2013.

   

  The oil company is producing only about 10,000 barrels a day — about 10 percent of capacity — from the vessel in Brazil’s offshore Tubarao Martelo field. Paying the full daily rate would make the operation unprofitable, Narcelio said.

   

  “There will only be losers if they keep insisting,” Narcelio said in an interview in Rio de Janeiro. “It’s stupidity. They’re portfolio-management kids just out of college, and they think they’re powerful.”

  Yes, these newly graduated greenhorns were under the mistaken impression that the bond covenants represented legally-binding agreements between creditors and borrowers (thanks a lot undergrad finance professors). What these “kids” don’t understand is that in a world ruled by debt, “insisting” that people pay back what they borrowed produces nothing but “losers.”

  You know, it’s the old “if I owe you a dollar that’s my problem, but if I owe you a 1,000 foot oil ship, that’s your problem” argument – or something. 

  As Bloomberg goes on to note, “disconnecting and hauling away the 284,000-ton vessel would cost millions of dollars and require approval from Brazil’s oil regulator and maybe even the Navy,” meaning there aren’t really any good options here for the bondholders.

  Well, that’s not entirely true.  

  Leonardo Theon de Moraes, a bankruptcy expert in Sao Paulo who spoke to Bloomberg did say that there was one possibly cheaper alternative creditors could pursue: 

  “The costs of executing the collateral are very high unless creditors send pirates from Algeria to go and get the vessel.”

   

  
  

  

  

  

  

  

• Goldman Is Confused: If The Economy Is Recovering, Then How Is This Possible

  Following last week’s news that household formation jumped and was revised higher, the logical consequence is that young Americans living in their parents’ basement must finally be moving out.

  They are not.

  In fact, as the chart below from Goldman shows, Millennials are doing anything but moving out, a development that has left Goldman’s economists stumped.

  Below is a chart showing that the share of young people (18-34) living with parents has held steady over the last half year, and close to the highest since the financial crisis.

  

   

  This is how Goldman frames its confusion:

  “The share of young people living with their parents–which rose sharply during the recession and its aftermath–finally began to decline in 2014. But over the last six months, this decline seems to have stalled.“

  But the economy is recovering, jobs are plenty, credit is available to all. How can this be???

  Unless… it is all baseless propaganda meant simply to inspire confidence in rigged data.

  Unpossible, right? Well, even Goldman is no longer so sure:

  We find that the share of young people living with their parents has increased relative to pre-recession rates for all labor force status groups, not just the unemployed and underemployed. Overall, above-average youth underemployment rates alone account for about one-third of the increase in the share of young people living with their parents, and lagged effects of the recession probably account for a bit more.

  Goldman tries to explain this counterintuitive… assuming the “intuitive” is that the economy is recovering.

  To what extent do current labor market conditions explain the elevated rate of young people living with their parents? To answer this question, we use the CPS micro data to calculate the share of 18-34 year olds living with their parents by labor market status (employed, voluntary part-time, involuntary part-time, unemployed, and not in the labor force). Because the data are noisy and not seasonally adjusted, we use the 12-month average ending June 2015 and then compare with the 2007 average. Our first finding, shown [below] is that the percentage living with parents is higher across all labor force status classifications. Even among the employed, the share of young people living with their parents remains about 2pp higher than in 2007.

  The Share of Young People Living with Parents Has Risen for All Labor Force Status Groups

  

  And then another nail in the “economy is recovering” coffin:

  What accounts for the rest? Part of the explanation is likely that the legacy of the recession wears off only gradually, and looking at current employment status therefore understates the degree to which this is ultimately a labor market problem. Indeed, using a panel of state-level data constructed from the CPS, we find that the effect of unemployment shocks on the share of young people living with their parents dissipates slowly. Why might this be? While moving into a rental unit usually presents a lower hurdle than becoming a homeowner, young people who now have jobs but struggled in recent years might not have enough savings to cover an initial deposit or might fall short of landlords’ expectations for a potential tenant’s credit score, savings, or income history.

   

  Three other factors might also have played a role. First, researchers at the New York Fed and the Fed Board have found evidence that rising student debt and poor credit scores have contributed to the elevated share of young people living with their parents. Second, the median age at first marriage has increased at a faster than usual rate since 2007 (1.8 years for men and 1.4 years for women). While economic conditions might have played a role, we have found evidence that marriage rates are an important determinant of headship rates. Third, as Exhibit 4 shows, rent-to-income ratios are at historic highs, especially for young people. The future trajectory of these three factors is less clear, suggesting that the share of 18-34 year-olds living at home might not fully return to pre-recession rates.

  Rent-to-Income Ratios Are Quite High, Especially for Young People

  

  It’s not just Goldman that can’t wrap its head around this most fundamental refutation that contrary to the propaganda, there is no recovery for the biggest, and most important, US generation currently alive. Here is more from USA Today:

  Despite continued signs of economic recovery, a growing number of Millennials are moving back in with Mom and Dad.

   

  The percentage of Millennials living with their parents increased from 24% in 2010 to 26% in the first third of 2015, according to a Pew Research Center report, which is based on Census data. The study, which was released last week, compared figures to 2010 because it was the beginning of the economic recovery and one of the worst years for the labor market, said Richard Fry, senior economist at Pew. This is despite a lower unemployment rate. In 2010, that rate was 12.4%; it has fallen to 7.7% so far in 2015, according to Pew.

   

  Roughly the same number of Millennials — 25 million — head their own households today since before the recession in 2007, said the report.

   

  The data are bad news for the housing industry, which is looking for a boost from young, first-time buyers.

   

  “The pattern of household formation has become unglued from the job market,” Fry says. “This is concerning because … there’s a lot of spending that goes with setting up households. Young adults are not establishing more households, and that’s proving to be one of the drags on the housing recovery and the larger economy.”

  To summarize: a terrible labor market for the young generation as a result of “sticky” elderly workers who can’t fall back on interest from their savings thanks to the Fed’s ZIRP policy and are thus unable to retire clearing the labor market for the nextt generation, an unprecedented student debt load, and soaring rents which Millennial incomes simply can not cover.

  And that is why the economy is far worse than anyone in the mainstream media will admit.

  But wait, because here comes the paradoxical punchline: as more and more Millennials are stuck in the basement for whatever reason, and refuse to be a part of the labor force, the immediate implication is that due to their inertness, and unwillingness to even try to get a job, the US labor force participation rate is crashing and artificially low as millions of young Americans remain either in their parents’ basement or in college (with the benefit of a very generous student loan from Uncle Sam). The result – a chart which looks eerily comparable to the one up top, showing the number of Millennials living with their parents: the US labor force participation rate inverted.

  

   

  Why is this a paradox?

  Because as the participation rate declines, so does the unemployment rate (thanks to a record 94 million Americans not in the labor force). In fact, the worse the US economy is for tens of millions of millennials, the lower the broader unemployment rate drops, sending a false signal to the Fed and economists that the economy is actually stronger!

  And the supreme irony: the worse the economy, and the lower the unemployment rate, the closer the Fed is to hiking rates. In fact, as Lockhart hinted today, the Fed may well hike rates in just one month due to one massive misinterpretation of what is really going on in an economy in which a record number of people choosing not to look for work, but to continue playing Xbox in their parents’ basement… right next to their bed.

  No wonder Goldman is confused. As for the Fed hiking right into what is by implication an economy that is grinding to a halt if not already in recession, well… just read our notes on what happened when the very same Fed woke up the “Ghost of 1937” in an almost identical scenario.

  The outcomes, one of which was the second World War, were anything but pleasant…

  

  

  

  

  

• AAPLocalypse & Lockhart-nado Spoil Stock Party; Dollar & Bond Yields Surge

  The last week in stocks (and Apple and Twitter) in 19 seconds…

   

  Strength in China on new short-selling-curbs provided very littlc comfort for US investors. Early strength quickly faded as Dennis Lockhart peed in the Kool-Aid…

  

   

  On the day…only Trannies closed green…

  

   

  From Lockhart's comments, S&P and Dow were weak…

  

   

  And since Friday… Dow and Smal lCaps underperform

  

   

  The machines were in charge as AAPL selling pressure demanded index support to sustain institutional sells…

  

   

  With AAPL getting clubbed…

  

   

  VIX was as gappy as a hillbilly's teeth…

  

   

  Treasury yields all rose notably after Lockhart jawboned…

  

   

  Which drove the curve to its flattest in almost 4 months…and flattening at the fastest pace this year

  

   

  The Dollar Index surged after Lockhart's comments as money fled EUR and CHF…

  

   

  Dollar strength sparked more commodity weakness…

  

   

  Fed credibility remains near zero as the long-bond tracks reality and short-end tracks Fed promises… As one witty chap said "Data Dependent, my arse!!"

  

   

  Charts: Bloomberg

  Bonus Chart: Just a little reminder – The Fed f##ked up before…"The Fed exit strategy completely failed as the money supply immediately contracted; Fed tightening in H1’37 was followed in H2’37 by a severe recession and a 49% collapse in the Dow Jones."

  

  

  

  

  

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• Washington's "Fifth Columns" Inside Russia And China

  Submitted by Paul Craig Roberts,

  It took two decades for Russia and China to understand that “pro-democracy” and “human rights” organizations operating within their countries were subversive organizations funded by the US Department of State and a collection of private American foundations organized by Washington. The real purpose of these non-governmental organizations (NGOs) is to advance Washington’s hegemony by destabilizing the two countries capable of resisting US hegemony.

  Washington’s Fifth Columns pulled off “color revolutions” in former Russian provinces, such as Georgia, the birthplace of Joseph Stalin and Ukraine, a Russian province for centuries.

  When Putin was last elected, Washington was able to use its Fifth Columns to pour thousands of protesters into the streets of Russia claiming that Putin had “stolen the election.” This American propaganda had no effect on Russia, where the citizen back their president by 89%. The other 11% consists almost entirely of Russians who believe Putin is too soft toward the West’s aggression. This minority supports Putin as well. They only want him to be tougher. The actual percentage of the population that Washington has been able to turn into treasonous agents is only 2-3 percent of the population. These traitors are the “Westerners,” the “Atlantic integrationists,” who are willing for their country to be an American vassal state in exchange for money. Paid to them, of course.

  But Washington’s ability to put its Fifth Columns into the streets of Moscow had an effect on insouciant Americans and Europeans. Many Westerners today believe that Putin stole his election and is intent on using his office to rebuild the Soviet Empire and to crush the West. Not that crushing the West would be a difficult thing to do. The West has pretty much already crushed itself.

  China, obsessed with becoming rich, has been an easy mark for Washington. The Rockefeller Foundation is supporting pro-American Chinese professors in the universities. US corporations operating in China create superfluous “boards” to which the relatives of the ruling political class are appointed and paid high “directors’s fees.” This compromises the loyalty of the Chinese ruling class.

  Hoping to have compromised the Chinese ruling class with money, Washington then launched its Hong Kong NGOs in protests, hoping that the protests would spread into China and that the ruling class, bought with American money, would be slow to see the danger.

  Russia and China finally caught on. It is amazing that the governments of the two countries that Washington regards as “threats” were so tolerant of foreign-financed NGOs for so long. The Russian and Chinese toleration of Washington’s Fifth Columns must have greatly encouraged the American neoconservatives, thus pushing the world closer to conflict.

  But as they say, all good things come to an end.

  The Saker reports that China finally has acted to protect itself from Washington’s subversion: http://www.vineyardsaker.co.nz/2015/07/30/chinas-ngo-law-countering-western-soft-power-and-subversion-by-eric-draitser/

  Russia, also, has acted in her defense: http://www.globalresearch.ca/kicked-out-of-russia-moscow-challenges-washingtons-orwellian-national-endowment-for-democracy/5466082

  Also: http://www.globalresearch.ca/why-russia-shut-down-national-endowment-for-democracy-ned-fronts/5466119

  We Americans need to be humble, not arrogant. We need to acknowledge that American living standards, except for the favored One Percent, are in long-term decline and have been for two decades. If life on earth is to continue, Americans need to understand that it is not Russia and China, any more than it was Saddam Hussein, Gaddafi, Assad, Yemen, Pakistan, and Somalia, that are threats to the US. The threat to the US resides entirely in the crazed neoconservative ideology of Washington’s hegemony over the world and over the American people.

  This arrogant goal commits the US and its vassal states to nuclear war.

  If Americans were to wake up, would they be able to do anything about their out-of-control-government? Are Europeans, having experienced the devastating results of World War I and World War II, capable of understanding that the incredible damage done to Europe in those wars is minuscule compared to the damage from nuclear war?

  If the EU were an intelligent and independent government, the EU would absolutely forbid any member country from hosting a US anti-ballistic missile or any other military base anywhere close to Russia’s borders.

  The Eastern European lobby groups in Washington want revenge on the Soviet Union, an entity that is no longer with us. The hatred transmits to Russia. Russia has done nothing except to have failed to read the Wolfowitz Doctrine and to realize that Washington intends to rule the world, which requires prevailing over Russia and China.

  

  

  

  

  

• Trump Tops Pre-Debate Polls, Slams Koch Conference Attendees As "Puppets"

  Another weekend of glad-handing and Sunday talk-shows and still The Donald dominates the GOP Presidential nominee race. With all eyes firmly glued on this week's debate, Trump had a few choice words for those who attended the Koch brothers' biannual conference (which he was not invited to), tweeting "I wish good luck to all the Republican candidates that traveled to California to beg for money etc. from the Koch Brothers… Puppets?" As WSJ reports, Mr. Trump poses a more delicate short-term challenge for the GOP, thanks to high name recognition, celebrity appeal and a populist message that taps a powerful anti-Washington vein.  "I don’t think you should underestimate how frustrated people are," Florida Sen. Marco Rubio said Sunday during a lunch at the Koch gathering. "Mr. Trump has tapped into some of that."

   

  Still ahead…

  

   

  As The Wall Street Journal reports,

  Mr. Trump’s unanticipated ascent coincided with the arrival of five other Republican presidential candidates at a luxury resort here over the weekend to audition for hundreds of wealthy donors convened by billionaire industrialists Charles and  David Koch. It’s a gathering that exposes both the promise and the limits of a new campaign financing system for the GOP. More money is flowing into the race, but the party and the candidates have less control over how those dollars are spent. The contenders also risk appearing beholden to deep-pocketed backers.

   

  The biannual Koch conference set the stage for the busiest week yet in the nominating contest, with a candidate forum Monday in New Hampshire and the first candidates’ debate on Thursday in Cleveland.

   

  The Koch conference is an unrivaled convergence of roughly 450 conservatives who have pledged at least $100,000 a year to various political and ideological endeavors. Many are also financing individual presidential candidates and the so-called super PACs that support them.

   

  Outside donors are taking on roles once solely performed by candidates and the party, from television ads to voter outreach. The Koch network plans to spend about $900 million in the run-up to the 2016 election, with about a third of that total devoted to influencing elections outcomes. Yet, these donors don’t always see eye-to-eye with GOP leaders in Washington and could prove nettlesome for a Republican president.

   

  The Koch network, for example, sparred with the Republican National Committee over who controls the vast repository of voter data that GOP candidates at every level of the ballot will need to turn out supporters next fall. The two sides recently reached a deal to share information, but the pact gives an entity backed by the Kochs a central role overseeing the party’s data-collection efforts for the foreseeable future. Candidates also rely increasingly on Koch-financed groups to organize their grassroots events.

  *  *  *
  It seems Jimmy Carter was right after all,

  “It violates the essence of what made America a great country in its political system. Now it’s just an oligarchy with unlimited political bribery being the essence of getting the nominations for President or being elected President. And the same thing applies to governors, and U.S. Senators and congress members. So, now we’ve just seen a subversion of our political system as a payoff to major contributors, who want and expect, and sometimes get, favors for themselves after the election is over. …

   

  At the present time the incumbents, Democrats and Republicans, look upon this unlimited money as a great benefit to themselves. Somebody that is already in Congress has a great deal more to sell.”

  *  *  *

  Mr Trump did not seem too worried…

  I wish good luck to all of the Republican candidates that traveled to California to beg for money etc. from the Koch Brothers. Puppets?

  — Donald J. Trump (@realDonaldTrump) August 2, 2015

  It's going to be a busy week…

   

  

  

  

  

  

  

• Connecticut On Its Latest Cash Grab: It’s Not Greed When We Do It

  Submitted by Christopher Westley via The Mises Institute,

  Those possessing the anti-capitalist mentality — so ascendant in our culture today — often critique market actors as being solely motivated by “greed.” Surely economic systems based on nobler motivations, they say, would better promote the long-run interests of the planet.

  The Voluntary Marketplace Uses Greed as Motivation to Serve Others

  This is an issue I deal with in detail in my Principles of Economics classes. The fascinating point about the market system isn’t that it is based on greed, but rather that it forces those motivated by greed to act in ways that promote the social interest. If you want to get rich, say by x amount, then you better improve the lives of consumers, through voluntary transactions, by some amount greater than x.

  Such are the economic means of acquiring wealth, explained in more detail in 1922 by the German sociologist Franz Oppenheimer, writing at a time before his discipline transmogrified into an enterprise predicated on supporting greater state intervention.

  However, problems arise when those motivated by greed find ways to acquire wealth through coercion. Oppenheimer called these the political means (as opposed to the voluntary means of the marketplace), and we witness them today when (1) firms benefit from their relationships to the state as opposed to the consumer, and (2) the state itself uses its legal monopoly on violence to acquire wealth.

  A New Death Tax in Connecticut

  These ideas ran through my head when I read about the new probate court “fees” approved by the Connecticut legislature this month, reinforcing its status as being among the worst states in which to die. Whereas the maximum fee for settling estates there was $12,500, it can now go as high as $100,000, and in some cases, well over $1 million. These “fees” are in addition to estate taxes that range between 7.2 to 12 percent on estates greater than $2 million.

  The “fees” were justified on an expected budget shortfall of $32 million that the legislature wanted to fill, but I wondered: Where was the outcry from the greed-police? One can imagine the reaction if, due to poor fiscal management, Costco or Best Buy announced they were going to double or triple prices on their popular items to account for losses. Yet, governments do this all the time, and somehow, it is never considered greed when political means are used to acquire wealth.

  Adding to the irony is the fact that resources are more likely to be squandered when forced out of private hands and into the public sector, where incentives to waste today promote bigger budgets tomorrow, and where crony capitalism is fed. Resources that might have been saved and directed to productive uses are instead directed to various interest groups and well-connected firms.

  Capital Arises from Thriftiness, Not Greed

  Those who would encourage greater transfers of wealth to the public sector forget that

  [c]apital is not a free gift of God or of nature. It is the outcome of a provident restriction of consumption on the part of man. It is created and increased by saving and maintained by the abstention from dissaving. Neither have capital or capital goods in themselves the power to raise the productivity of natural resources and of human labor. Only if the fruits of saving are wisely employed or invested, do they increase the output per unit of the input of natural resources and of labor. If this is not the case, they are dissipated or wasted.

   

  The accumulation of new capital, the maintenance of previously accumulated capital and the utilization of capital for raising the productivity of human effort are the fruits of purposive human action. They are the outcome of the conduct of thrifty people who save and abstain from dissaving, viz., the capitalists who earn interest; and of people who succeed in utilizing the capital available for the best possible satisfaction of the needs of the consumers, viz., the entrepreneurs who earn profit. [Mises, The Anti-Capitalist Mentality, pp. 84–85]

  Capital is actually a gift of the thrifty, and it is not free. There’s no surprise that states with no death taxes whatsoever attract capital from places like Connecticut. Its pols are between a rock and a hard place, with the rock being the need to finance the current level of redistribution (and to never, ever reduce it), and the hard place being the increasing willingness of the pilfered to engage in tax avoidance. Its legislature must be the trust attorney’s best friend.

  Sick minds deemed the supply of death perfectly inelastic and therefore worthy of tax. But it’s not just people who die in Connecticut. Wealth does too, illustrating what happens when greed is unconstrained by market forces. Some writers might consider Connecticut’s economy something of a model worth emulating, but the fact is that Connecticut — like every other tax jurisdiction — grows its public sector at the expense of its private, and that when capital predictably flows elsewhere, economic opportunity diminishes.

  

  

  

  

  

• China Stocks Open Marginally Higher As Regulators Unleash More 'Measures'

  Chinese stocks are opening flat to marginally higher – still lower from Friday’s close – despite the government unleashing yet more ‘measures’ in the name of stability. Having banned 5 accounts – reportedly including Fed-favorite Citadel – China is blaming excess market volatility on short-term short-sellers and has put in place curbs on short-selling that force traders to hold for at least one day. On the bright side, margin traders reduced exposure for the seventh day in a row, reducing outstanding balances to 5-month lows.. which leaves the median China stock trading at a remarkable 61x reported earnings (compared with 12x in Hong Kong).

   

  As Bloomberg details,

  Investors who borrow shares must now wait one day to pay back the loans, according to statements from the Shanghai and Shenzhen stock exchanges issued after the close of trading on Monday. This prevents investors from selling and buying back stocks on the same day, a practice that may “increase abnormal fluctuations in stock prices and affect market stability,” the Shenzhen exchange said.

   

  The short-selling curbs are the latest measures the government is taking to prop up share prices and prevent market manipulation after an almost $4 trillion selloff. Regulators are probing “malicious” short selling and have examined the futures trading accounts of foreign investors. They’ve also banned stock sales by major shareholders, suspended initial public offerings and compelled state-run institutions to support the market with equity purchases.

  As Reuters adds,

  “This is apparently aimed at increasing the cost of shorting and easing selling pressure on the market,” said Samuel Chien, a partner of Shanghai-based hedge fund manager BoomTrend Investment Management Co.

   

  He added, though, that short-selling was already difficult, referring to other efforts to limit the practice. These include a move by Chinese brokerages to limit short-selling business.

  *  *  *

  But for now it is having only modest impact…

  

   

  The more measures they apply, the higher the price of pork goes and the more squeezed by inflationary pressures – no matter how bad the economy – the PBOC is to not cut RRR.

  

   

  In other words, a 21% surge in pork prices – a major component of China CPI – forces the PBOC toapply piecemeal measures and not apply broad based  cuts to stimulate the economy. So while some talking heads pray for more bad data in China, they are missing the crucial panic factor – soaring food prices will mean more social unrest than plunging stock prices.

   

  Charts: Bloomberg

  

  

  

  

  

• The Rent is Too Damn High: San Fran Residents Pay $1,000/Mth To Live In Shipping Containers

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  There’s nothing quite like a grotesquely lopsided “economic recovery” in which a handful of cities boom, while the rest of the nation stagnates. Even worse, millennials living in such chosen cities face one of two options. Either live in mom and dad’s basement, or face a standard of living far more similar to 19th tenement standards than the late 1990’s tech boom.

  With that out of the way, I want to introduce you to what a $1,000 per month rental in the San Francisco Bay area looks like. Shipping containers:

  

  Don’t worry, there’s a lovely garden out back:

   

  

  We learn more from Bloomberg:

  Luke Iseman has figured out how to afford the San Francisco Bay area. He lives in a shipping container.

   

  The Wharton School graduate’s 160-square-foot box has a camp stove and a shower made of old boat hulls. It’s one of 11 miniature residences inside a warehouse he leases across the Bay Bridge from the city, where his tenants share communal toilets and a sense of adventure. Legal? No, but he’s eluded code enforcers who rousted what he calls cargotopia from two other sites. If all goes according to plan, he’ll get a startup out of his response to the most expensive U.S. housing market.

   

  “It’s not making us much money yet, but it allows us to live in the Bay Area, which is a feat,” said Iseman, 31, who’s developing a container-house business. “We have an opportunity here to create a new model for urban development that’s more sustainable, more affordable and more enjoyable.”

   

  As many as 60,000 San Franciscans live in illegal housing, according to the Department of Building Inspection.

   

  Iseman collects $1,000 a month for each of the 11 structures parked in the 17,000-square-foot warehouse he rents for $9,100. Tenants include a Facebook Inc. engineer, a SolarCity Corp. programmer and a bicycle messenger.

  It’s not even San Francisco proper either, this is in Oakland. You could probably catch $2k per month for a cargo box in the Mission.

  Iseman used to pay $4,200 a month in San Francisco’s Mission District for a two-bedroom apartment with a slanted floor and mosquito-breeding puddles.

  He bought his metal box for $2,300, delivery included, then cut out windows with a plasma torch and installed a loft bed, shower and bamboo flooring. He estimates his all-in cost at $12,000, and plans to sell refashioned containers for about $20,000 through his company, Boxouse.

   

  “What we’re doing is converting industrial waste into a house in a couple of weeks,” said Iseman, who also founded a pedicab fleet. Meanwhile, he doesn’t plan on seeking city approval for cargotopia, whose location he asked not be identified. “I’d rather ask forgiveness than ask permission.”

  I want to be clear that I’m not knocking Mr. Iseman for starting this project. He seems to be a well-meaning, entrepreneurial guy trying to make the best out of a bad situation and solve a very real problem on his own. What I am knocking is the criminally corrupt American oligarchy, which left this legacy to our youth due to their unfathomable greed, cronyism and nearsightedness.

  Of course, I’ve covered this trend several times over the past several years…

  NYC Residents Will Pay $2-3k a Month for “Micro-Apartments” as Luxury Car Sales Outpace Regular Car Sales

  Coming to San Francisco…Tenement Sized Apartments!

  Back to 19th Century Living in NYC: Bloomberg Proposes “Tenement Sized” Apartments for $2K a Month

  

  

  

  

  

• The Complete Breakdown Of Every Hillary And Bill Clinton Speech, And Fee, Since 2013

  Earlier today, when we reported that based on Hillary Clinton’s latest tax disclosure, she and her husband had made $139 million in gross income since 2007 most of its from private speaking fees, the one aspect that readers founds most fascinating was the breakdown of all the bribes better known as speeches given by the two Clintons (who in Hillary’s words came out of the White House “dead broke”) in 2013 as well as the going rate.

  So due to popular demand, we appended to the 2013 speech detail first released last week the full breakdown of Hillary’s and Bill’s 2014 and 2015 speeches which had been provided previously as part of her mandatory disclosure in May of this year.

  As Politico cautions, the disclosure omits an unknown number of speeches that the Clintons delivered while directing the payment or honoraria to the Clinton Foundation, despite instructions on the and guidance from the U.S. Office of Government Ethics, saying that honoraria directed to a charity should be reported.

  Still, as readers will note, even the “modest” data that Hillary chose to share is quite stunning.

  We hope it will surprise nobody that the bulk of speeches were bought and paid for by Wall Street and affiliated “financial entities” because that’s what hollow populist pandering is all about – pretending to be an “everyday American” while getting paid tens of millions by Wall Street and America’s biggest corporations.

  How many millions?

  Since 2013 Bill Clinton has been paid $26.6 million for 94 speeches; Hillary’s grand total is slightly less: $21.7 million for 92 private appearances.

  Below we present the full breakdown of every publicly disclosed speech event by Hillary Clinton, together with the associated fee.

  

  And likewise for Bill Clinton:

  

  And a visual way of showing the above data.

  Hillary:

  

   

  Bill:

  

  Source: Hillaryclinton.con and Politco

  Bonus footage: sometime in addition to hundreds of thousands of dollars for speeking for 50 minutes, Hillary would also get a shoe as an added bonus:

  

  

  

  

  

• Comex On The Edge? Paper Gold "Dilution" Hits A Record 124 For Every Ounce Of Physical

  Over the few days, we got what was merely the latest confirmation that when it comes to sliding gold prices, consumers of physical gold just can’t get enough.

  As the Times of India reported over the weekend, India’s gold imports shot up by 61% to 155 tonnes in the first two months of the current fiscal year “due to weak prices globally and the easing of restrictions by the Reserve Bank. In April-May of the last fiscal, gold imports had aggregated about 96 tonnes, an official said.”

  This follows confirmations previously that with the price of gold sliding, physical demand has been through the roof, case in point: “US Mint Sells Most Physical Gold In Two Years On Same Day Gold Price Hits Five Year Low“, “Gold Bullion Demand Surges – Perth Mint and U.S. Mint Cannot Meet Demand“, “Gold Tumbles Despite UK Mint Seeing Europeans Rush To Buy Bullion” and so on. Indicatively, as of Friday, the US Mint had sold 170,000 ounces of gold bullion in July: the fifth highest on record, and we expect today’s month-end update to push that number even higher.

  

  But while the dislocation between demand for physical and the price of paper gold has been extensively discussed here over the years, most recently in “Gold And The Silver Stand-Off: Is The Selling Of Paper Gold And Silver Finally Ending?”, something unexpected happened at the CME on Friday afternoon which may be the most important observation yet.

  Recall that in the middle of 2013, in an extensive series of articles, we covered what was then a complete collapse in Comex vaulted holding of registered (i.e., deliverable) gold.  At the time the culprit was JPM, where for some still unexplained reason, the gold held in the newest Comex’ vault plunged by nearly 2 million ounces in just six short months.

  More importantly, the collapse in registered Comex gold sent the gold coverage ratio (the number of ounces of “paper” gold open interest to the ounces of “physical” registered gold) soaring from under 20 where, or roughly in line with its long-term average, to a whopping 112x. This means that there were a total of 112 ounces of claims for every ounces of physical gold that could be delivered at any given moment.

  Gradually, the Comex raid was relegated to the backburner when starting in 2014 the amount of registered gold tripled from the upper 300k range to 1.15 million ounces one year ago, at which point the slide in Comex registered gold started anew.

  Which brings us to Friday afternoon, also known as month end position squaring, when in the latest daily Comex gold vault depository update we found that while some 270K in Eligible gold had been withdrawn mostly from JPM vaults, what caught our attention was the 25,386 ounces of Registered gold that had been “adjusted” out of registered and into eligible. As a reminder, eligible gold is “gold” that can not be used to satisfy inbound delivery requests without it being converted back to registered gold first, which makes it mostly inert for delivery satisfaction purposes.

  

   

  Most importantly, this 25,386 oz reduction in deliverable Comex gold from 376,906 on Thursday pushed the amount of registered Comex gold to an all time low: at 351,519 ounces, or just barely over 10 tons, registered Comex gold has never been lower!

  

   

  Incidentally, as part of the month-end redemption requests, we saw a whopping 22% of the eligible gold in Kilo-bar format (where there is no registered, just eligible) be quietly whisked away from Brink’s vaults: unlike traditional ounce-based contracts, the kilo format traditionally serves as an indication of Chinese demand, and if withdrawals on par with those seen on July 31 persist, it will soon become clear that Chinese buyers are once again scrambling for the safety of gold now that their stock market bubble has blown up.

  

  This covers the sudden surge in demand for physical gold as manifested by CME data.

  Meanwhile, over in “paper gold” land, things remained unchanged: as shown in the chart below, the aggregate gold open interest rose modestly to 43.5 million ounces up from 42.9 million the day before.

  

   

  While on its own, gold open interest – which merely represents the total potential claims on gold if exercised – is hardly exciting, as we have shown previously it has to be observed in conjunction with the physical gold that “backs” such potential delivery requests, also known as the “coverage ratio” of deliverable gold.

  It is here that things get a little out of hand, because as the chart below shows, all else equal, the 43.5 million ounces of gold open interest and the record low 351,519 ounces of registered gold imply that as of Friday’s close there was a whopping 123.8 ounces in potential paper claims to every ounces of physical gold.

  This is an all time record high, and surpasses the previous period record seen in January 2014 following the JPM gold vault liquidation.

  

  Another way of stating this unprecedented ratio is that the dilution ratio between physical gold and paper gold has hit a record low 0.8%.

  Indicatively, the average paper-to-physical coverage ratio since January 1, 2000 is a “modest” 19.1x. As of Friday it had soared to more than 6 times greater.

  Which brings us to the usual concluding observations:

  First: as we have said previously, at a time when all the gold selling (and naked shorting) is in the paper markets and when demand for physical gold is once again off the charts, with soaring purchases not only in India but also in the US, where is this gold going? Clearly not into CME gold vaults, which are once again a source of physical gold, and as the above shows, have never had less deliverable gold.

  Second, total Comex gold has dropped to such precarious levels in the past and while on many occasions market observers have asked if the Comex is close to a failure to deliver, aka a default of the CME’s gold warehouse, it has always avoided such a fate. Still, one wonders: the 10+ tons of deliverable gold at the Comex are now worth a paltry $383 million. It would not be very complicated for a next generation “Hunt Brother” to buy some $400 million in Comex gold, and promptly demand delivery: after all the gold crash of two weeks ago saw some $2.7 billion in paper gold dumped in the most illiquid market – why can’t it be done in reverse. What would happen next is unknown, but unless somehow the Comex found a way of converting millions of ounces of Eligible gold into Registered, the CME would simply be unable to satisfy such a delivery request.

  Third: while there are still over 7 million ounces of Eligible gold, why the recent spike in “adjustments” of eligible to registered gold (i.e., missing a warehouse receipt)?

  Finally, we assume the mainstream press will once again start paying close attention to the total, and especially registered, gold held at the Comex: at a pace of 25K a day, the gold vaults that make up the CME’s vaulting system would be depleted in just under two weeks of daily withdrawals.

  In any case, we are very curious to see how this latest dramatic face off in the long-running war between paper and physical gold, concludes.

  

  

  

  

  

• First Default By U.S. Commonwealth In History: Puerto Rico Fails To Make Required Debt Payment

  Over the weekend Puerto Rico was supposed to make a modest principal and interest payment of some $58 million due on Public Finance Corp. bonds, which however few expected would be satisfied. As a reminder, on Friday, Victor Suarez, the chief of staff for Governor Alejandro Garcia Padilla, said during a press conference in San Juan that the government simply does not have the money.

  Moments ago Melba Acosta, president of the Government Development Bank, confirmed as much, when he announced that only $628,000 of the $58 million payment, or just about 1%, had been paid.

  Below is the full statement from Acosta on the service of PFC Bonds:

  Today, Government Development Bank for Puerto Rico (“GDR”) President Melba Acosta Febo issued the following statement on the service of Public Finance Corporation (PFC) bonds:

   

  Due to the lack of appropriated funds for this fiscal year the entirety of the PFC payment was not made today. This was a decision that reflects the serious concerns about the Commonwealth’s liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico to ensure the essential services they deserve are maintained.

   

  “PFC did make a partial payment of Interest in respect of its outstanding bonds. The partial payment was made from funds remaining from prior legislative appropriations in respect of the outstanding promissory notes securing the PFC bonds. In accordance with the terms of these bonds, which stipulate that these obligations are payable solely from funds specifically appropriated by the Legislature, PFC applied these funds—totaling approximately $628.000—to the August 1 payment.”

  WSJ adds that the payment to bondholders is the first skipped since Governor Alejandro Garcia Padilla in June said the island’s debts were unsustainable and urged negotiations with creditors in an effort to restructure about $72 billion. “Still, analysts said it isn’t likely to provoke an acute market wide reaction from investors, many of whom have been inching away for the commonwealth for years.”

  Except for those hedge funds who haven’t, and have been BTFD in hopes of another bailout of course.

  And confirming that making just 1% of the contractual payment is not the same as making 100% of it, moments ago Moody’s confirmed what most had already known:

  • MOODY’S VIEWS PUERTO RICO IN DEFAULT

  More via CNBC:

  “Moody’s views this event as a default,” Emily Raimes, vice president at Moody’s Investors Service, said in a statement, adding that payment of “debt service on these bonds is subject to appropriation, and the lack of appropriation means there is not a legal requirement to pay the debt, nor any legal recourse for bondholders.

   

  “This event is consistent with our belief that Puerto Rico does not have the resources to make all of its forthcoming debt payments. This is a first in what we believe will be broad defaults on commonwealth debt,” she added.

  In other words, small or not, PR has failed a mandatory principal repayment and is now in default under the PFC bonds. Up next, as per Bloomberg’s preview “the default promises to escalate the debt crisis racking the island, where officials are pushing for what may be the biggest restructuring ever in the municipal market.”

  “An event like this is significant enough that it could hurt prices for Puerto Rico bonds,” said Richard Larkin, director of credit analysis at Herbert J Sims & Co. in Boca Raton, Florida. “I can’t believe a default on debt with Puerto Rico’s name will go unnoticed.”

  It is unclear if creditors will now threaten the commonwealth with a “temporary” expulsion from the dollarzone as part of their hardball negotiating tactics. Nor is it clear if Schauble is still willing to trade Puerto Rico for Greece.

  What is clear is that the first default by a US commonwealth is now in the history books.

  

  

  

  

  

  

• Pictures Worth A Thousand Words: Coafeidian, The Chinese Eco-City That Became A Ghost Town

  Authored by Gilles Sabrie, originally posted at The Guardian,

  "As precious as gold…" That was how then-president Hu Jintao described Caofeidian during his visit in 2006. It was pledged to be "the world’s first fully realised eco-city" – yet 10 years and almost $100bn later, only a few thousand inhabitants have moved to this land reclaimed from the sea.. as yet another 'centrally planed' idea is completely FUBAR.

  China’s ‘eco-cities’: empty of hospitals, shops and people

  

  The leftover gate from a construction site – for a road that doesn’t lead anywhere. Caofeidian eco-city, begun in 2003, is located 200km southeast of Beijing. All photographs: Gilles Sabrie

  

  Locals fish for crabs in the Bohai Sea as construction sites stand idle in the background. Caofeidian, in Hebei province, was originally a small island that has expanded using land reclaimed from the sea.

  

  The ‘eco-city’ was made possible through huge bank loans. Once it was half-built, these loans were halted and many projects suspended due to the rising cost of raw materials and a lack of government support.

  

  The knock-on effects are also to be seen in this abandoned tourist resort by the shore of Bohai Sea.

  

  A lone worker inside Caofeidian city’s mostly abandoned industrial park. He works for a company producing solar panels – a heavily subsidised industry in China that is plagued by over capacity.

  

  Caofeidian eco-city was planned to accommodate one million inhabitants, yet only a few thousand live there today. It has joined the growing ranks of China’s ghost cities.

  

  A torn poster showing the original plan for Caofeidian Environmental Industries Park. Government and state owned industrial enterprises are said to have invested 561 billion yuan (US $91bn) in the area over the past decade, but the park was never completed.

  

  A shopping mall modelled on a traditional Italian city was finished, but businesses haven’t moved owing to the small number of city residents.

  

  Behind the empty mall, a branch of Tangshan University is under construction. The provincial government is moving it to Caofeidian to make up for the lack of businesses in the new city.

  

  Security guards by Cafofeidian harbour, where coal and iron ore are unloaded to feed the Shougang steel mill. The mill was moved from Beijing to Caofeidian in 2006, but is mired in debt.

  

  Bridge to nowhere: a six-lane road span was abandoned after 10 support pylons had been erected.

  

  An Japanese factory stands idle in the Caofeidian Sino-Japanese eco-industry park. The factory moved from Tangshan city, attracted by government incentives, but never re-started operations.

  

  Empty residential buildings in Caofeidian eco-city. Once described as the world’s first fully realised eco-city, Caofeidian is now struggling to pay daily interest rates on the billions of yuan borrowed to build it.

  

  

  

  

  

• Obama's Climate Fascism Is Another Nail In The Coffin For The U.S. Economy

  Submitted by Michael Snyder via The Economic Collapse blog,

  Is Barack Obama trying to kill the economy on purpose?  On Sunday, we learned that Obama is imposing a nationwide 32 percent carbon dioxide emission reduction from 2005 levels by the year 2030.  When it was first proposed last year, Obama’s plan called for a 30 percent reduction, but the final version is even more dramatic.  The Obama administration admits that this is going to cost the U.S. economy billions of dollars a year and that electricity rates for many Americans are going to rise substantially.  And what Obama is not telling us is that this plan is going to kill what is left of our coal industry and will destroy countless numbers of American jobs.  The Republicans in Congress hate this plan, state governments across the country hate this plan, and thousands of business owners hate this plan.  But since Barack Obama has decided that this is a good idea, he is imposing it on all of us anyway.

  So how can Obama get away with doing this without congressional approval?

  Well, he is using the “regulatory power” of the Environmental Protection Agency.  Congress is increasingly becoming irrelevant as federal agencies issue thousands of new rules and regulations each and every year.  The IRS, for example, issues countless numbers of new rules and regulations each year without every consulting Congress.  Government bureaucracy has spun wildly out of control, and most Americans don’t even realize what is happening.

  In the last 15 days of 2014 alone, 1,200 new government regulations were published.  We are literally being strangled with red tape, and it has gotten worse year after year no matter which political party has been in power.

  These new greenhouse gas regulations are terrible.  The following is a summary of what Obama is now imposing on the entire country…

  Last year, the Obama administration proposed the first greenhouse gas limits on existing power plants in U.S. history, triggering a yearlong review and 4 million public comments to the Environmental Protection Agency. In a video posted to Facebook, Obama said he would announce the final rule at a White House event on Monday, calling it the biggest step the U.S. has ever taken on climate change.

  The final version imposes stricter carbon dioxide limits on states than was previously expected: a 32 percent cut by 2030, compared to 2005 levels, senior administration officials said. Obama’s proposed version last year called only for a 30 percent cut.

  In America today, the burning of coal produces approximately 40 percent of the electrical power used by Americans each year.

  So what is this going to do to our electricity bills?

  You guessed it – at this point even the Obama administration is admitting that they are going to go up.  The following comes from Fox News…

  The Obama administration previously predicted emissions limits will cost up to $8.8 billion annually by 2030, though it says those costs will be far outweighed by health savings from fewer asthma attacks and other benefits. The actual price is unknown until states decide how they’ll reach their targets, but the administration has projected the rule would raise electricity prices about 4.9 percent by 2020 and prompt coal-fired power plants to close.

   

  In the works for years, the power plant rule forms the cornerstone of Obama’s plan to curb U.S. emissions and keep global temperatures from climbing, and its success is pivotal to the legacy Obama hopes to leave on climate change. Never before has the U.S. sought to restrict carbon dioxide from existing power plants.

  And we must keep in mind that government projections are always way too optimistic.  The real numbers would almost surely turn out to be far, far worse than this.

  In addition, these new regulations are going to complete Barack Obama’s goal of destroying our coal industry.  In a previous article, I included an excerpt from a recent news article about how some of the largest coal producers in America have just announced that they are declaring bankruptcy…

  On Thursday, Bloomberg reported that the biggest American producer of coking coal, Alpha Natural Resources, could file for bankruptcy as soon as Monday.

  Competitor Walter Energy filed for bankruptcy earlier this month, and several others have done the same this year.

  Barack Obama has actually done something that he promised to do.

  He promised to kill the coal industry, and he is well on the way to accomplishing that goal.

  Of course Hillary Clinton thinks that this is a splendid idea.  She called Obama’s plan “the floor, not the ceiling”, and she is pledging to do even more to reduce greenhouse gas emissions.  The following comes from the Washington Post…

  Democratic presidential front-runner Hillary Rodham Clinton pledged Sunday that if elected she will build on a new White House clean-energy program and defend it against those she called “Republican doubters and defeatists.”

   

  Clinton was the first 2016 candidate to respond to the ambitious plan that President Obama will debut on Monday. Details of the program, which aims to cut greenhouse-gas pollution, were released over the weekend. The new regulation will require every state to reduce emissions from coal-burning power plants.

  And you know what?

  The climate control freaks will never be satisfied.  Since just about all human activity affects the climate in some way, they will eventually demand control over virtually everything that we do in the name of “saving the planet”.  That is why I call it “climate fascism” – in the end it is all about control.

  During the month of September, the Pope is going to travel to the United Nations to give a major speech to kick off the conference at which the UN’s new sustainable development agenda will be launched.  As I have documented previously, this new agenda does not just cover greenhouse gas emissions and the environment.  It also addresses areas such as economics, agriculture, education and gender equality.  It has been called “Agenda 21 on steroids”, and it is basically a blueprint for governing the entire planet.

  Unfortunately, that is ultimately what the elite want.

  They want to micromanage the lives of every, man, woman and child on the globe.

  They will tell us that unless people everywhere are forced to reduce their “carbon footprints” that climate catastrophe is absolutely certain, but their “solutions” always mean more power and more control in their hands.

  Barack Obama promised to fundamentally transform America, and he is doing it in hundreds of different ways.  These new greenhouse gas regulations are just one example.  Our nation is being gutted like a fish, and most Americans don’t seem to care.

  What in the world will it take for this country to finally wake up?

  

  

  

  

  

• Why The U.S. Is the Next Greece: Doug Casey On America's Economic Problems

  “With these stupid governments printing trillions and trillions of new currency units,” warns investor Doug Casey, “it’s building up to a catastrophe of historic proportions.” In an excellent brief interview with Reason magazine Editor-in-Chief Matt Welch, Casey expounds on the US noting that “as any institution gets larger and older it inevitably becomes corrupt and fails.” What to do? “I wouldn’t keep significant capital in banks,” he exclaimed, “most of the banks in the world are bankrupt. That didn’t stop the “brain dead” Greeks who left their money in banks as all the signs were on the wall, he notes as he addresses whether gold is a good investment in 2015, and offers back-handed bright side: Catastrophes create many opportunities to earn a profit.

   

  

  

  

  

  

• Breaking Down China's $23 Trillion Debt Pile

  Back in April, we highlighted Beijing’s “massive debt problem“, noting that as of last year, total debt in China amounted to some $28 trillion when you include government debt, corporate debt, and household borrowing. 

  As Bloomberg noted at the time – and as we’ve discussed extensively – Beijing is facing the virtually impossible task of trying to de-leverage and releverage at the same time.

  “Various parts of the government don’t always seem to be working from the same playbook,” Bloomberg observed, before quoting Credit Agricole’s Dariusz Kowalczyk who pointed out the “obvious contradiction between attempts to deleverage the economy and attempts to boost growth.”

  Indeed, there are times when the scale seems to tip in favor of deleveraging. For instance, Beijing has recently shown a willingness to tolerate defaults and the case of Baoding Tianwei Group Co even suggested that in some instances, state-affiliated companies may not receive immediate government support. Nevertheless, the abrupt 180 on LGVF financing and the transformation of the local government debt restructuring initiative into the Chinese version of LTROs betrays the extent to which China is still reluctant to deleverage its economy in the face of flagging growth. 

  Against that backdrop we bring you the following graphic from Bloomberg which breaks down China’s massive debt pile and shows the degree to which it’s grown over the past decade.

  

  

  

  

  

• Jimmy Carter Rages At What The U.S. Has Become: "Just An Oligarchy With Unlimited Political Bribery"

  Submitted by Eric Zeusse,

  On July 28th, Thom Hartmann interviewed former U.S. President Jimmy Carter, and, at the very end of his show (as if this massive question were merely an aftethought), asked him his opinion of the 2010 Citizens United decision and the 2014McCutcheon decision, both decisions by the five Republican judges on the U.S. Supreme Court. These two historic decisions enable unlimited secret money (including foreign money) now to pour into U.S. political and judicial campaigns. Carter answered:

  “It violates the essence of what made America a great country in its political system. Now it’s just an oligarchy with unlimited political bribery being the essence of getting the nominations for President or being elected President. And the same thing applies to governors, and U.S. Senators and congress members. So, now we’ve just seen a subversion of our political system as a payoff to major contributors, who want and expect, and sometimes get, favors for themselves after the election is over. …

   

  At the present time the incumbents, Democrats and Republicans, look upon this unlimited money as a great benefit to themselves. Somebody that is already in Congress has a great deal more to sell.”

  He was then cut off by the program, though that statement by Carter should have been the start of the program, not its end. (And the program didn’t end with an invitation for him to return to discuss this crucial matter in depth — something for which he’s qualified.)

  So: was this former President’s provocative allegation merely his opinion? Or was it actually lots more than that? It was lotsmore than that.

  Only a single empirical study has actually been done in the social sciences regarding whether the historical record shows that the United States has been, during the survey’s period, which in that case was between 1981 and 2002, a democracy (a nation whose leaders represent the public-at-large), or instead an aristocracy (or ‘oligarchy’) — a nation in which only the desires of the richest citizens end up being reflected in governmental actions. This study was titled “Testing Theories of American Politics,” and it was published by Martin Gilens and Benjamin I. Page in the journal Perspectives on Politics, issued by the American Political Science Association in September 2014. I had summarized it earlier, on 14 April 2014, while the article was still awaiting its publication.

  The headline of my summary-article was “U.S. Is an Oligarchy Not a Democracy Says Scientific Study.” I reported: "The clear finding is that the U.S. is an oligarchy, no democratic country, at all. American democracy is a sham, no matter how much it's pumped by the oligarchs who run the country (and who control the nation's 'news' media).” I then quoted the authors’ own summary: “The preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.” 

  The scientific study closed by saying: “In the United States, our findings indicate, the majority does not rule—at least not in the causal sense of actually determining policy outcomes.” A few other tolerably clear sentences managed to make their ways into this well-researched, but, sadly, atrociously written, paper, such as: “The preferences of economic elites (as measured by our proxy, the preferences of ‘affluent’ citizens) have far more independent impact upon policy change than the preferences of average citizens do.” In other words, they found: The rich rule the U.S.

  Their study investigated specifically “1,779 instances between 1981 and 2002 in which a national survey of the general public asked a favor/oppose question about a proposed policy change,” and then the policy-follow-ups, of whether or not the polled public preferences had been turned into polices, or, alternatively, whether the relevant corporate-lobbied positions had instead become public policy on the given matter, irrespective of what the public had wanted concerning it.

  The study period, 1981-2002, covered the wake of the landmark 1976 U.S. Supreme Court decision, Buckley v. Valeo, which had started the aristocratic assault on American democracy, and which seminal (and bipartisan) pro-aristocratic court decision is described as follows by wikipedia: It “struck down on First Amendment grounds several provisions in the 1974 Amendments to the Federal Election Campaign Act. The most prominent portions of the case struck down limits on spending in campaigns, but upheld the provision limiting the size of individual contributions to campaigns. The Court also narrowed, and then upheld, the Act's disclosure provisions, and struck down (on separation of powers grounds) the make-up of the Federal Election Commission, which as written allowed Congress to directly appoint members of the Commission, an executive agency.”

  Basically, the Buckley decision, and subsequent (increasingly partisan Republican) Supreme Court decisions, have allowed aristocrats to buy and control politicians. 

  Already, the major ‘news’ media were owned and controlled by the aristocracy, and ‘freedom of the press’ was really just freedom of aristocrats to control the ‘news’ — to frame public issues in the ways the owners want. The media managers who are appointed by those owners select, in turn, the editors who, in their turn, hire only reporters who produce the propaganda that’s within the acceptable range for the owners, to be ‘the news’ as the public comes to know it.

  But, now, in the post-Buckley-v.-Valeo world, from Reagan on (and the resulting study-period of 1981-2002), aristocrats became almost totally free to buy also the political candidates they wanted. The ‘right’ candidates, plus the ‘right’ ‘news’-reporting about them, has thus bought the ‘right’ people to ‘represent’ the public, in the new American ‘democracy,’ which Jimmy Carter now aptly calls “subversion of our political system as a payoff to major contributors.”

  Carter — who had entered office in 1976, at the very start of that entire era of transition into an aristocratically controlled United States (and he left office in 1981, just as the study-period was starting) — expressed his opinion that, in the wake now of the two most extreme pro-aristocratic U.S. Supreme Court decisions ever (which are Citizens United in 2010, andMcCutcheon in 2014), American democracy is really only past tense, not present tense at all — no longer a reality.

  He is saying, in effect, that, no matter how much the U.S. was a dictatorship by the rich during 1981-2002 (the Gilens-Page study era), it’s far worse now.

  Apparently, Carter is correct: The New York Times front page on Sunday 2 August 2015 bannered, "Small Pool of Rich Donors Dominates Election Giving,” and reported that:

  "A New York Times analysis of Federal Election Commission reports and Internal Revenue Service records shows that the fund-raising arms race has made most of the presidential hopefuls deeply dependent on a small pool of the richest Americans. The concentration of donors is greatest on the Republican side, according to the Times analysis, where consultants and lawyers have pushed more aggressively to exploit the looser fund-raising rules that have fueled the rise of super PACs. Just 130 or so families and their businesses provided more than half the money raised through June by Republican candidates and their super PACs.”

  The Times study shows that the Republican Party is overwhelmingly advantaged by the recent unleashing of big-corporate money power. All of the evidence suggests that though different aristocrats compete against each other for the biggest chunks of whatever the given nation has to offer, they all compete on the same side against the public, in order to lower the wages of their workers, and to lower the standards for consumers’ safety and welfare so as to increase their own profits (transfer their costs and investment-losses onto others); and, so, now, the U.S. is soaring again toward Gilded Age economic inequality, perhaps to surpass the earlier era of unrestrained robber barons. And, the Times study shows: even in the Democratic Party, the mega-donations are going to only the most conservative (pro-corporate, anti-public) Democrats. Grass-roots politics could be vestigial, or even dead, in the new America.

  The question has become whether the unrestrained power of the aristocracy is locked in this time even more permanently than it was in that earlier era. Or: will there be yet another FDR (Franklin Delano Roosevelt) to restore a democracy that once was? Or: is a President like that any longer even possible in America?

  As for today’s political incumbents: they now have their careers for as long as they want and are willing to do the biddings of their masters. And, then, they retire to become, themselves, new members of the aristocracy, such as the Clintons have done, and such as the Obamas will do. (Of course, the Bushes have been aristocrats since early in the last century.)

  Furthermore, the new age of aristocratic control is not merely national but international in scope; so, the global aristocracy have probably found the formula that will keep them in control until they destroy the entire world. What’s especially interesting is that, with all of the many tax-exempt, ‘non-profit’ ‘charities,’ which aristocrats have established, none of them is warring to defeat the aristocracy itself — to defeat the aristocrats’ system of exploitation of the public. It’s the one thing they won’t create a ‘charity’ for; none of them will go to war against the expoitative interests of themselves and of their own exploitative peers. They’re all in this together, even though they do compete amongst themselves for dominance, as to which ones of them will lead against the public. And the public seem to accept this modern form of debt-bondage, perhaps because of the ‘news’ they see, and because of the news they don’t see (such as this).

   

  

  

  

  

  

• What's The Difference Between Hillary, Snowden And Manning?

  As the race for The White House heats up, it’s looking increasingly likely that the biggest threat to Hillary Clinton’s bid for the US Presidency will in fact be Hillary Clinton. 

  On the GOP side, Donald Trump has thus far proven to be “gaffe proof”, as a series of vitriolic attacks against everyone from Mexicans to war heroes has only served to increase his lead over rivals, prompting some to brand the incorrigible billionaire the “Teflon Don”, after the late New York crime boss John Gotti. Fortunately for Hillary, Trump’s popularity has further splintered an already divided Republican party, and in the eyes of some commentators, this makes the road (back) to The White House that much easier for Clinton. 

  That is unless the controversy surrounding her handling of classified e-mails mushrooms into a bigger public relations nightmare than it already is and as we noted late last month, it now looks as though it won’t be easy for the presumed Democratic frontrunner to shake accusations that she violated protocol.

  “It’s not that Donald Trump needed help in his juggernaut campaign across the GOP presidential primary, but the flamboyant billionaire got an unexpected present from the WSJ which may have just crippled the chances of his biggest democrat competitor as well, Hillary Clinton,” we wrote, introducing a WSJ piece which cited an internal government review showing that the former Secretary of State, “sent at least four emails from her personal account containing classified information during her time heading the State Department.” Here’s more from McClatchy:

  The classified emails stored on former Secretary of State Hillary Clinton’s private server contained information from five U.S. intelligence agencies and included material related to the fatal 2012 Benghazi attacks, McClatchy has learned.

   

  Of the five classified emails, the one known to be connected to Benghazi was among 296 emails made public in May by the State Department. Intelligence community officials have determined it was improperly released.

   

  Revelations about the emails have put Clinton in the crosshairs of a broadening inquiry into whether she or her aides mishandled classified information when she used a private server set up at her New York home to conduct official State Department business.

   

  While campaigning for the 2016 Democratic presidential nomination, Clinton has repeatedly denied she ever sent or received classified information. Two inspectors general have indicated that five emails they have reviewed were not marked classified at the time they were stored on her private server but that the contents were in fact “secret.”

  That last passage is critical. Having a security clearance comes with a certain amount of responsibility and those who are privy to potentially sensitive information are expected to exercise good judgement. 

  In other words, whether or not the information carried a giant red “top secret” stamp isn’t the relevant question, nor is “no harm no foul” a legitimate after the fact defense. 

  And that, apparently, is the difference between a Clinton and say a Manning or a Snowden – that is, holding Hillary (or any other member of what Jimmy Carter would call America’s “political oligarchy”) to the same standards as everyone else turns out to be an uphill battle. 

  

  Here’s Peter Van Buren writing for Reuters with more on what’s wrong with Clinton’s defense.

  *  *  *

  What everyone with a Top Secret security clearance knows – or should know

  In the world of handling America’s secrets, words – classified, secure, retroactive – have special meanings. I held a Top Secret clearance at the State Department for 24 years and was regularly trained in protecting information as part of that privilege. Here is what some of those words mean in the context of former Secretary of State Hillary Clinton’s emails.

  The Inspectors General for the State Department and the intelligence community issued astatement saying Clinton’s personal email system contained classified information. This information, they said, “should never have been transmitted via an unclassified personal system.” The same statement voiced concern that a thumb drive held by Clinton’s lawyer also contains this same secret data. Another report claims the U.S. intelligence community is bracing for the possibility that Clinton’s private email account contains multiple instances of classified information, with some data originating at the CIA and NSA.

  A Clinton spokesperson responded that “Any released emails deemed classified by the administration have been done so after the fact, and not at the time they were transmitted.” Clinton claims unequivocally her email contained no classified information, and that no message carried any security marking, such as Confidential or Top Secret.

  Yet even if retroactive classification was applied only after Clinton hit “send” (and State’s own Inspector General says it wasn’t), she is not off the hook.

  What matters in the world of secrets is the information itself, which may or may not be marked “classified.” Employees at the highest levels of access are expected to apply the highest levels of judgment, based on the standards in Executive Order 13526. The government’s basic nondisclosure agreement makes clear the rule is “marked or unmarkedclassified information.”

  In addition, the use of retroactive classification has been tested and approved by the courts, and employees are regularly held accountable for releasing information that was unclassified when they released it, but classified retroactively.

  It is a way of doing business inside the government that may at first seem nonsensical, but in practice is essential for keeping secrets.

  For example, if an employee were to be handed information sourced from an NSA intercept of a foreign government leader, somehow not marked as classified, she would be expected to recognize the sensitivity of the material itself and treat it as classified.

  In other cases, an employee might hear something sensitive and be expected to treat the information as classified. The emphasis throughout the classification system is not on strict legalities and coded markings, but on judgment. In essence, employees are required to know right from wrong. It is a duty, however subjective in appearance, one takes on in return for a security clearance.

  “Not knowing” would be an unexpected defense from a person with years of government experience.

  In addition to information sourced from intelligence, Clinton’s email may contain some back-and-forth discussions among trusted advisors. Such emails are among the most sensitive information inside State, and are otherwise always considered highly classified.

  The problem for Clinton may be particularly damaging. Every email sent within the State Department’s own systems contains a classification; an employee technically cannot hit “send” without one being applied. Just because Clinton chose to use her own hardware does not relieve her or her staff of this requirement.

  Some may say even if Clinton committed security violations, there is no evidence the material got into the wrong hands – no blood, no foul. Legally that is irrelevant. Failing to safeguard information is the issue. It is not necessary to prove the information reached an adversary, or that an adversary did anything harmful with the information for a crime to have occurred. See the cases of Chelsea Manning, Edward Snowden, Jeff Sterling, Thomas Drake, John Kiriakou or even David Petraeus. The standard is “failure to protect” by itself.

  

  

  

  

  

• Fed Finally Figures Out Soaring Student Debt Is Reason For Exploding College Costs

  Back in May 2014, in one of its patented utterly worthless “analyses” (that cost taxpayers several tens of thousands of dollars) the San Francisco Fed, home of such titans of central planning thought as Janet Yellen, asked “is it still worth going to college.” Not surprisingly, its answer was yes after some contrived mathematics that completely forgot to include just one thing: debt.

  At the time, we had the following comment:

  Oddly enough, having perused the paper several times, and having done
  a word search for both “loan” and “debt” (both of which return no
  hits), we find zero mention of one particular hockeystick. This one:

   

  

   

  Perhaps for the San Fran Fed to be taken seriously one of these
  years, it will actually do an analysis that covers all sides of a given
  problem, instead of just the one it was goalseeked to “conclude” before
  any “research” was even attempted.

  An analysis, even a painfully simple one, such as the one we put together less than a month later:

  It is common knowledge that in the hierarchy of bubbles, not even the stock market comes close to the student loan bubble. If it isn’t, one glance at the chart below which shows the exponential surge in Federal student debt starting just after the great financial crisis, should put the problem in its context.

   

  

   

  And while we have previously reported that a shocking amount of the loan proceeds are used to fund anything but tuition payments, a major portion of the funding does manage to find itself to its intended recipient: paying the college tuition bill.

   

  Which means that with student debt being so easily accessible anyone can use (and abuse), it gives colleges ample room to hike tuition as much as they see fit: after all students are merely a pass-through vehicle (even if one which for the most part represents non-dischargeable “collateral”) designed to get funding from point A, the Federal Government to point B, the college treasury account.

   

  It should thus come as no surprise that in a world in which colleges can hike tuition by any amount they choose, and promptly be paid courtesy of the federal government, and with endless amounts of propaganda whispering every day in the ears of impressionable potential students the only way they can get a well-paying job is to have a college diploma (see San Francisco Fed’s latest paper confirming just this) there is no shortage of applicants willing to take on any amount of debt to make sure this cycle continues, that soaring tuition costs are one of the few items not even the BLS can hedonically adjust to appear disinflationary.

   

  End result: tutitions have literally expoded across the country in both public and private colleges.

  None of this was rocket science, in fact that ultra cheap, widely available government-funded student debt is the cause for soaring prices, in this case college tuitions, is so obvious even tenured economists at the Federal Reserve should be able to get it.

  Well, we are delighted to report that about 7 years after it was glaringly obvious to everyone except the Fed of course, now – with the usual half decade delay – even the NY Fed has finally figured out what even 5 year olds get.

  As the WSJ helpfully reminds us, the federal government has boosted aid to families in recent decades to make college more affordable. However “a new study from the New York Federal Reserve faults these policies for enabling college institutions to aggressively raise tuitions.”

  The implication is the federal government is fueling a vicious cycle of higher prices and government aid that ultimately could cost taxpayers and price some Americans out of higher education, similar to what some economists contend happened with the housing bubble.

  But… but… the San Fran Fed said… 

  Could it be possible that the Fed itself, with its imbecilic monetary policies, and the Federal government with its resultant $1.2 trillion in cheap debt, is the cause for tuition prices which are soaring by 6% every year, some three times higher than the increase in broad wages?

  Not only is it possible, but it is precisely what has happened. And now, even the Fed has figured it out.

  

  The heresy continues:

  “There’s widespread concern among policy makers and college officials that it has become too easy for students to borrow large amounts of money without necessarily appreciating what they are getting into,” said Terry Hartle of the American Council on Education, a trade group representing college and university presidents.

   

  The government’s student-credit spigot burst open in recent decades as Americans sought a leg up in an increasingly sophisticated economy, and accelerated during the last recession. Annual student-loan disbursements—which include some private loans but come mostly from the federal government—more than doubled between 2001 and 2012 to $120 billion, according to the New York Fed’s David O. Lucca, Taylor Nadauld and Karen Shen.

  The math became so clear even economists, even Fed economists, finally figured it out:

  Federal student loans allow Americans to borrow at below-market rates with scant scrutiny of their credit and no assessment of their ability to repay. Meanwhile, federal Pell grants, which help low-income college students and don’t need to be repaid, more than tripled to more than $30 billion a year between 2001 and 2012. Education tax credits roughly quadrupled to about $20 billion a year.

   

  The cost of getting a degree similarly exploded. From 2000 to 2014, consumers’ out-of-pocket costs for college and graduate-school tuition rose 6% a year, on average, according to the Labor Department’s consumer-price index. By comparison, medical-care inflation looks meek at an average 3.8%. Overall consumer prices climbed 2.4% a year.

  And so on.

  What is most embarrassing about this above is not that what has been patently common sensical has finally been confirmed, but that the this was so confusing to the “smartest central planners in the room”, it took them years upon years, and not only faulty analysis (thank you San Fran Fed) to finally get it right.

  What will they figure out next: the buying E-Minis to prop up the S&P, after having monetized 30% of all 10Year equivalents, is a recipe for the greatest disaster ever? But at least also today the Fed (ironically the San Fran edition) finally admitted that the US economy can’t function without bubbles, so there…

  In fact, the only sensible thing out of this entire hodge-podge of Fed economist BS, was one of the comments to the WSJ piece, which stands on its own merit:

  Any first WEEK student of economics knows that more money begets higher prices – regardless of whether it is higher education or the housing market – and that throwing tax dollars at the problem only makes things worse.  This study was a waste of money, but what it really shows is that basic economics shouldn’t wait for “higher education” and should be taught in high school.

  The problem, dear commentator is that the Fed’s only purpose to exist, is to throw tax, or newly printed, dollars at problems.

  

  

  

  

  

• Fed Admits Economy Can't Function Without Bubbles

  In short, the dot-com bust was the last chance for the Fed to pivot and liberate the American economy from the corrosive financialization it had fostered. A determined policy of higher interest rates and renunciation of the Greenspan Put would have paved the way for a return to current account balance, sharply increased domestic savings, the elevation of investment over consumption, and a restoration of financial discipline in both public and private life. Needless to say, the Fed never even considered this historic opportunity. Instead, it chose to double-down on the colossal failure it had already produced, driving interest rates into the sub-basement of historic experience. This inexorably triggered the next and most destructive bubble ever. – David Stockman, The Great Deformation

  Over the course of the roughly twelve and a half years from Black Monday to the beginning of the end for the dot-com bubble, the Fed effectively engineered a mania by facilitating the explosion of bank loans, GSE debt, and the shadow banking complex, which together grew from under $5 trillion in 1987 to $17 trillion by the beginning of 2000.

  For evidence that this expansion was indeed the work of monetary authorities and was not funded by an increase in America’s savings, look no further than the following chart which shows an accommodative Fed and an increasingly savings averse American public:

  

  When the Nasdaq collapsed, the Fed was given an opportunity to restore some semblance of order and discipline to a market that had learned to rely on the Greenspan put. Instead, it chose to inflate a still larger bubble and now, courtesy of Janet Yellen’s friends at the San Francisco Fed, we know precisely why. 

  *  *  *

  From the San Francisco Fed

  Interest Rates and House Prices: Pill or Poison? 

  Wild swings in asset prices over the past 20 years and the associated boom-bust cycles have sparked considerable debate about how monetary policy might play a stabilizing role. 

  We can now calculate how much interest rates would have had to increase relative to the historical record to keep housing prices in check. Figure 4 displays the historical U.S. post-World War II ratio of house prices to income, stated in log terms so that changes can be read approximately as percentage changes. That ratio had declined steadily until 2002. Using a linear approximation from 1950 to 2002, we extrapolate the trend rate through 2006. We then calculate the percent difference between actual observed house prices and this trend, which turns out to be about 40%. A similar number would result from comparing house prices to the consumer price index, so this difference is not particular to our choice of normalization. The United Kingdom suffered a similar 40% house price boom. Since a 1 percentage point increase in the short rate translates into about a 4.4% decline in house prices, keeping house prices on trend would have required about an 8 percentage point increase in the federal funds rate in 2002 according to our calculations.

  
  

  What actually happened? The federal funds rate, the Fed’s short-term policy rate, stayed between 1% and 1.25% from the end of 2002 until the middle of 2004. Starting in June 2004, the federal funds rate rose 4.25 percentage points, reaching 5.25% by June 2006. In our experiment, the rate would have been about 8 percentage points higher at the end of 2002, but would have ended at about the same level observed in June 2006. That is, preemptive interest rate policy would have been extraordinarily tight in 2002 then would have gradually abated to around the level eventually reached in June 2006. By our calculations, such a large increase in interest rates would have depressed output more than the Great Recession did, roughly speaking.

  What is the takeaway then? Slowing down a boom in house prices is likely to require a considerable increase in interest rates, probably by an amount that would be widely at odds with the dual mandate of full employment and price stability. Moreover, the Fed would need a crystal ball to foretell house price booms. In restraining asset prices, while the power of interest rate policy is uncontestable, its wisdom is debatable.

  *  *  *

  Got that? In other words, the Fed would have needed to hike rates by 800 bps in the wake of the dot-com collapse in order to prevent the housing bubble. That would have purged the system and gradually, the FOMC could have eased by around 300 bps over the next four years. That policy course would have prevented the speculative bubble that brought capital markets the world over to their knees in 2008. 

  And why didn’t the Fed do this? Because “such a large increase in interest rates would have depressed output more than the Great Recession did, roughly speaking.” In other words, thanks to Alan Greenspan, the US economy cannot function under a normalized monetary policy regime, “roughly speaking.”

  We suppose the only question now is this: if rates needed to be 9.25% in 2002 in order to completely disabuse markets of the idea that the Fed will everywhere and always move to support asset prices, how high should rates be today?

  

  

  

  

  

• "The Worldwide Credit Boom Is Over, Now Comes The Tidal Wave Of Global Deflation"

  Submitted by David Stockman via Contra Corner blog,

  If you want a cogent metaphor for the central bank enabled crack-up boom now underway on a global basis, look no further than today’s scheduled chapter 11 filling of met coal supplier Alpha Natural Resources (ANRZ). After becoming a public company in 2005, its market cap soared from practically nothing to $11 billion exactly four years ago. Now it’s back at the zero bound.

  

  ANRZ Market Cap data by YCharts

  Yes, bankruptcies happen, and this is most surely a case of horrendous mismanagement. But the mismanagement at issue is that of the world’s central bank cartel.

  The latter have insured that there will be thousands of such filings in the years ahead because since the mid-1990s the central banks has engulfed the global economy in an unsustainable credit based spending boom, while utterly disabling and falsifying the financial system that is supposed to price assets honestly, allocate capital efficiently and keep risk and greed in check.

  Accordingly, the ANRZ stock bubble depicted above does not merely show that the boys, girls and robo-traders in the casino got way too rambunctious chasing the “BRICs will grow to the sky” tommyrot fed to them by Goldman Sachs. What was actually happening is that the central banks were feeding the world economy with so much phony liquidity and dirt cheap capital that for a time the physical economy seemed to be doing a veritable jack-and-the-beanstalk number.

  In fact, the central banks generated a double-pumped boom——first in the form of a credit-fueled consumption spree in the DM economies that energized the great export machine of China and its satellite suppliers; and then after the DM consumption boom crashed in 2008-2009 and threatened to bring the export-mercantilism of China’s red capitalism crashing down on Beijing’s rulers, the PBOC unleashed an even more fantastic investment and infrastructure boom in China and the rest of the EM.

  During the interval between 1992 and 1994 the world’s monetary system—–which had grown increasingly unstable since the destruction of Bretton Woods in 1971——took a decided turn for the worst. This was fueled by the bailout of the Wall Street banks during the Mexican peso crisis; Mr. Deng’s ignition of export mercantilism in China and his discovery that communist party power could better by maintained from the end of the central bank’s printing presses, rather than Mao’s proverbial gun;  and Alan Greenspan’s 1994 panic when the bond vigilante’s dumped over-valued government bonds after the Fed finally let money market rates rise from the ridiculously low level where Greenspan had pegged them in the interest of re-electing George Bush Sr. in 1992.

  From that inflection point onward, the global central banks were off to the races and what can only be described as a credit supernova exploded throughout the warp and woof of the world’s economy. To wit, there was about $40 trillion of debt outstanding in the worldwide economy during 1994, but this figure reached $85 trillion by the year 2000, and then erupted to $200 trillion by 2014. That is, in hardly two decades the world debt increased by 5X.

  To be sure, in the interim a lot of phony GDP was created in the world economy. This came first in the credit-bloated housing and commercial real estate sectors of the DM economies through 2008; and then in the explosion of infrastructure and industrial asset investment in the EM world in the aftermath of the financial crisis and Great Recession. But even then, the growth of unsustainable debt fueled GDP was no match for the tsunami of debt itself.

  At the 1994 inflection point, world GDP was about $25 trillion and its nominal value today is in the range of $70 trillion—-including the last gasp of credit fueled spending (fixed asset investment) that continues to deliver iron ore mines, container ships, earthmovers, utility power plants, deep sea drilling platforms and Chinese airports, highways and high rises which have negligible economic value. Still, even counting all the capital assets which were artificially delivered to the spending (GDP) accounts, and which will eventually be written-down or liquidated on balance sheets, GDP grew by only $45 trillion in the last two decades or by just 28% of the $160 trillion debt supernova.

  Here is what sound money men have known for decades, if not centuries. Namely, that this kind of runaway credit growth feeds on itself by creating bloated, artificial demand for materials and industrial commodities that, in turn, generate shortages of capital assets like mines, ships, smelters, factories, ports and warehouses that require even more materials to construct. In a word, massive artificial credit sets the world digging, building, constructing, investing and gambling like there is no tomorrow.

  In the case of Alpha Natural Resources, for example, the bloated demand for material took the form of met coal. And the price trend shown below is not at all surprising in light of what happened to steel capacity in China alone. At the 1994 inflection point met coal sold for about $35/ton, but at that point the Chinese steel industry amounted to only 100 million tons. By the time of the met coal peak in 2011, the Chinese industry was 11X larger and met coal prices had soared ten-fold to $340 per ton.

  And here is where the self-feeding dynamic comes in. That is, how we get monumental waste and malinvestment from a credit boom. In a word, the initial explosion of demand for commodities generates capacity shortages and therefore soaring windfall profits on in-place capacity and resource reserves in the ground.

  These false profits, in turn, lead speculators to believe that what are actually destructive and temporary economic rents represents permanent value streams that can be capitalized by equity owners.

  But as shown below, eventually the credit bubble stops growing, materials demand flattens-out and begins to rollover, thereby causing windfall prices and profits to disappear. This happens slowly at first and then with a rush toward the drain.

  ANRZ is thus rushing toward the drain because it got capitalized as if the insanely uneconomic met coal prices of 2011 would be permanent.

  

  Needless to say, an honest equity market would never have mistaken the peak met coal price of $340/ton in early 2011 as indicative of the true economics of coking coal. After all, freshman engineering students know that the planet is blessed (cursed?) with virtually endless coal reserves including grades suitable for coking.

  Yet in markets completely broken and falsified by central bank manipulation and repression, the fast money traders know nothing accept the short-run “price action” and chart points. In the case of ANZR, this led its peak free cash flow of $380 million in early 2011 to be valued at 29X.
  

  ANRZ Free Cash Flow (TTM) data by YCharts

  Self-evidently, a company that had averaged $50 to $75 million of free cash flow in the already booming met coal market of 2005-2008 was hardly worth $1 billion. The subsequent surge of free cash flow was nothing more than windfall rents on ANZR’s existing reserves, and, accordingly, merited no increase in its market capitalization or trading multiple at all.

  In fact, even superficial knowledge of the met coal supply curve and production economics at the time would have established that even prices of $100 per ton would be hard  to sustain after the long-term capacity expansion than underway came to fruition.

  This means that ANRZ’s sustainable free cash flow never exceeded about $80 million, and that at its peak 2011 capitalization of $11 billion it was being traded at 140X. In a word, that’s how falsified markets go completely haywire in a central bank driven credit boom.

  As it happened, the full ANZR story is far worse. During the last 10 years it generated $3.2 billion in cash flow from operations——including the peak cycle profit windfalls embedded in its reported results.   Yet it spent $5 billion on CapEx and acquisitions during the same period, while spending nearly another $750 million that it didn’t have on stock buybacks and dividends.

  Yes, it was the magic elixir of debt that made ends appear to meet in its financial statements. Needless to say, the climb of its debt from $635 million in 2005 to $3.3 billion presently was reported in plain sight and made no sense whatsoever for a company dependent upon the volatile margins and cash flows inherent in the global met coal trade.

  So when we insist that markets are broken and the equities have been consigned to the gambling casinos, look no farther than today’s filing by Alpha Natural Resources.

  Markets which were this wrong on a prominent name like ANRZ at the center of the global credit boom did not make a one-time mistake; they are the mistake.

  As it now happens, the global credit boom is over; DM consumers are stranded at peak debt; and the China/EM investment frenzy is winding down rapidly.

  Now comes the tidal wave of global deflation. The $11 billion of bottled air that disappeared from the Wall Street casino this morning is just the poster boy—–the foreshock of the thundering collapse of inflated asset values the lies ahead.

  

  

  

  

  

• Despite VIX Flash-Crash, Stocks Slammed As Crude Crashes To 5-Month Lows

  "We got this…" Right up until around 55 seconds in the following clip…

  China was ugly…

  

   

  And Greece crashed 30% at the open…

  

   

  An early bounce and the ubiquitous pre-EU close ramp both failed to hold stocks which had an ugly day… notice the dump after Europ closed and the ramp after 330ET… as VIX was smashed

  

   

  Energy stocks led the downturn…

  

   

  As WTI led stocks broadly…

  

   

  Carnage in AAPL and TWTR…

  

   

  as stocks catch down to bond yields…

  

   

  VIX flash crashed in a desprate bid to get S&P back to VWAP… right as PR defaulted

  

   

  AND sure enough S&P Futs tagged VWAP and turned around…

  

   

  It appears hope is fading that Macro will help us…

  

   

  Treasury yields leaked higher overnight but plunged after weak data…

  

   

  The US Dollar pushed generally higher today with a retracement into the EU close that then recovered to the days highs…

  

   

  Commodities continueed to get clobbered…

  

   

  But crude was utterly carnaged today…

  

   

  Charts: Bloomberg

  Bonus Chart: Main Street Lost!!

  

  

  

  

  

• The World Explained In One Chart

  We could not have put it better – Progress indeed…

   

  

  
  

  Source: @Not_Jim_Cramer

  

  

  

  

  

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• Chinese Economy Crashes To 2-Year Low; China Stocks Plunge, Asian Stocks Test 2015 Lows

  Yet again the endless reasurance from the talking heads of the world is proven fallacious as the crash in China's stock market has apparently crashed its economy. China's Manufacturing PMI final print for July collapsed to 47.8 – its lowest since July 2013. The reaction is not pretty. China is down 4-8% from Friday's highs (led by high beta high-flyers in ChiNext), most Asian markets are down 2-3%, and the broad MSCI Asia Ex-Japan index is once again testing the lowest levels of 2015. But apart from that, China is contained…

   

  Economy collapsed… but but but the clever people on TV said it wouldn't matter that stocks plunged?

  

   

  Chinese stocks tumble…

  

   

  As does most of Asia…

  

   

  Which has smashed Asian stocks to their lowest in 2015…

  

   

   

   

   

  Charts:Bloomberg

  

  

  

  

• History's Future

  One of the assumptions about technical analysis’ efficacy is that history tends to repeat itself and, based on historical examples, the future can be anticipated with greater clarity than just hopeful guessing (a skill bulls exhibit with particular panache).

  I tripped across an interesting example of this far afield from the world of finances. It has more to do with geopolitics. Check out this quote from a historian made before the cold war ever started and see if, based on what happened, it rings true (I’ve boldfaced some parts):

  Today there are two great peoples on earth who, starting from different points, seem to advance toward the same goal: these are the Russians and the Anglo-Americans. Both grew up in obscurity; and while the attention of men was occupied elsewhere, they suddenly took their place in the first rank of nations, and the world learned of their birth and their greatness nearly at the same time. All other peoples seem to have almost reached the limits drawn by nature, and have nothing more to do except maintain themselves; but these two are growing. All the others have stopped or move ahead only with a thousand efforts; these two alone walk with an easy and rapid stride along a path whose limit cannot yet be seen. The American struggles against obstacles that nature opposes to him; the Russian is grappling with men. The one combats the wilderness and barbarism; the other, civilization clothed in all its arms. Consequently the conquests of the American are made with the farmer’s plow, those of the Russian with the soldier’s sword. To reach his goal the first relies on personal interest, and, without directing them, allows the strength and reason of individuals to operate. The second in a way concentrates all the power of society in one man. The one has as principal means of action liberty; the other, servitude. Their point of departure is different, their paths are varied; nonetheless, each one of them seems called by a secret design of Providence to hold in its hands one day the destinies of half the world.

  So when do you think this prediction was made? Perhaps during the mayhem of World War 2, as a scholar looked past the war to anticipate what was ahead?

  Nope. The above was written in the 1830s, over a hundred years before World War 2 even began, by Alexis de Tocqueville in “Democracy in America”. Pretty astonishing, isn’t it? Could you imagine making a sweeping prediction about the world’s construct in the year 2120 and being more or less correct? I, for one, am in awe of the foresight required to have speculated with such prescience. Nostradamus had nothing on this guy.

  

  

  

  

• Monsters Of Ukraine: Made In The USA

  Submitted by Justin Raimondo via AntiWar.com,

  We’re in the summer doldrums of the news cycle, a perfect time for our government and the media – or do I repeat myself? – to drop certain inconvenient stories down the Memory Hole. My job, of course, is to retrieve them….

  Remember Ukraine? I seem to recall blaring headlines about a supposedly “imminent” and “massive” Russian invasion of that country: the Anglo-Saxon media was ablaze with a veritable countdown to D-Day and we were treated to ominous sightings of Russian troops and tanks gathering at the border, allegedly just awaiting the order from Putin to take Kiev. And it turns out there has been an invasion, of sorts – although it isn’t a Russian one. It’s the Kiev regime’s own foot-soldiers returning from the front and turning on their masters.

  The war is going badly for the government of oligarch Petro Poroshenko. The east Ukrainians, who rose in revolt after the US-sponsored coup threw out democratically elected President Viktor Yanukovych, show no signs of giving up: they’ve repulsed the “anti-terrorist” campaign launched by Kiev, withstanding relentless bombardment of their cities and enduring many thousands of casualties, not to mention widespread destruction. Indeed, the brutal protracted war waged by Kiev against its own “citizens” has arguably steeled the rebels’ resolve and made any thought of reconciliation unthinkable.

  As is usual with violent fanatics, the war aims of the Kiev coup leaders – to bring the eastern provinces back into the fold – have been rendered impossible by their methods and conduct. The de facto blockade imposed on the east has bound the separatists all the more tightly to Russia, and so economics as well as searing hatred of a government the easterners regard as “fascist” has sealed the country’s fate.

  Unable to crack the rebels’ resolve, the “revolutionaries” who once gathered in the Maidan have begun to turn on each other. Poroshenko, fearful of the rising power of the far-right militias who make up the backbone of his makeshift army, has ordered their dissolution – and the rightists are resisting.

  A standoff between the Right Sector militia and Ukrainian police the other day culminated in a pitched battle as the rightists attacked police positions in Mukachevo, in western Ukraine, and took a six-year-old boy hostage. A dispute over control of the local cigarette smuggling operation had ended with two Right Sector thugs killed and seven others – it’s not clear which side they belonged to – injured. The rightists used grenade launchers to pulverize two police cars. Oh well, no worries, Washington will send replacements…. for both the cars and the launchers.

  The big problem for the Kiev regime is that Right Sector and allied far-rightist militias are the core of their military operation against the east. Right Sector provided the muscle of the Maiden revolution, standing in the front lines against the widely feared Berkut special forces loyal to Yanukovych. If these thugs must be reined in, then the success of the “anti-terrorist” campaign is doubtful: yet Kiev is increasingly unwilling to pay the high price of appeasing their increasingly troublesome Praetorians.

  The aftermath of the Mukachevo stand off was a clear victory for the rightists, who saw their leader, Dmytro Yarosh, a member of parliament, negotiating with the Interior Ministry – and Right Sector militia blocking the road from Kiev to the scene of the fighting. The result was an announcement from the Interior Ministry that the police chief of Mukachevo has been suspended, pending an “investigation” of the charges of aiding and abetting smuggling.

  In short, Right Sector emerged victorious. Following up their victory, the group declared that a national referendum will be held – without gathering the required signatures, and under their sponsorship – on multiple questions, essentially demanding that their entire program for the nation be adopted. They call for a formal declaration of war against Russia, a complete blockade of the eastern provinces, martial law, and the legalization of their militias. Oh yes, and they also want the present government, up to and including Poroshenko, to be impeached.

  Mired in debt, and rapidly sinking into an economic abyss, Ukraine is literally coming apart at the seams – and the ugly underside of the Maiden “revolution” is being exposed to the light of day. The most recent atrocity is the uncovering of a torture chamber used by members of the “Tornado” Battalion, another far-right grouping, in which militia members kidnapped, tortured, raped, and robbed citizens in the eastern Luhansk region, where the government is fighting to retain some modicum of control. Eight members of the Tornado militia were recently arrested and are being held by military prosecutors in Kiev: the Tornado “volunteers,” who mostly consist of ex-convicts, defend their actions by claiming that this is just retaliation because they uncovered a smuggling operation run by local officials – who, they say, are collaborating with the rebels. They initially refused to lay down their arms and barricaded themselves into their camp.

  The Aidar Battalion, also operating in eastern Ukraine, has been accused by Amnesty International of committing war crimes: that was in 2014, but the charges were largely ignored until the local governor began to complain. Aidar’s leader, member of parliament Serhiy Melnychuk, of the ultra-nationalist Radical Party, has been stripped of immunity from prosecution and charged with kidnapping, issuing threats, and operating a criminal gang.  Melnychuk, while admitting there was “some looting,” attributed the dissolution of the Aidar Battalion by authorities to “Russian propaganda” and revealed that some members are still operating independently in Luhansk.

  Then there’s the openly neo-Nazi Azov Brigade, whose members sport fascist symbols from the World War II era, and whose leader, Andriy Biletsky, declares that the goal of his group is to “lead the White Races of the world in a struggle for their survival.” There was so much bad publicity surrounding the Azov Battalion that the US Congress unanimously passed legislation forbidding any aid to the group – a provision, as this piece by Joseph Epstein in the Daily Beast points out, that is essentially unenforceable:

  “In an interview with The Daily Beast, Sgt. Ivan Kharkiv of the Azov battalion talks about his battalion’s experience with U.S. trainers and US volunteers quite fondly, even mentioning US volunteers engineers and medics that are still currently assisting them. He also talks about the significant and active support from the Ukrainian diaspora in the US As for the training they have and continue to receive from numerous foreign armed forces. Kharkiv says ‘We must take knowledge from all armies… We pay for our mistakes with our lives.’

   

  “Those US officials involved in the vetting process obviously have instructions to say that US forces are not training the Azov Battalion as such. They also say that Azov members are screened out, yet no one seems to know precisely how that’s done. In fact, given the way the Ukrainian government operates, it’s almost impossible.”

  Yes, your tax dollars are going to arm, train, and feed neo-Nazis in Ukraine. That’s what we bought into when Washington decided to launch a regime change operation in that bedraggled corner of southeastern Europe. Your money is also going to prop up the country’s war-stricken economy – albeit not before corrupt government officials rake their cut off the top.

  Dmytro Korchynsky, who heads a group of several far-right “volunteers” gathered together in “St. Mary’s Battalion,” declares his goal of organizing a “Christian Taliban” that will put Ukraine in the forefront of an effort to “lead the crusades,” adding: “ Our mission is not only to kick out the occupiers, but also revenge. Moscow must burn.”

  That’s a goal American neocons and their liberal enablers can get behind, but Korchynsky’s invocation of the Taliban ought to make the rest of us step back from that precipice. For it was the US, in the throes of the last cold war, that coalesced, funded, trained, and armed what later became the Afghan Taliban – and we all know where that road led.

  Once again, in our endless search for foreign monsters to destroy, we’re creating yet more foreign monsters who will provide the next excuse for future crusades. It’s a perpetual motion machine of foreign policy madness – and the War Party likes it that way.

  

  

  

  

  

• Something Just Snapped: Container Freight Rates From Asia To Europe Crash 23% In One Week

  One of the few silver linings surrounding the hard-landing Chinese economy in recent weeks has been the surprising resilience and strength of the Baltic Dry Index: even as Chinese commodity demand has cratered in 2015, this “index” has more than doubled in the past few months from all time lows, and at last check was hovering just over 1,100.

  

   

  Many were wondering how it was possible that with accelerating deterioration across all Chinese asset classes, not to mention the bursting of various asset bubbles, could global shippers demand increasingly higher freight rates, an indication of either a tight transportation market or a jump in commodity demand, neither of which seemed credible.

  We may have the answer.

  It appears that the recent spike in shipping rates was analogous to the dead cat bounce in crude oil prices: a speculator-driven anticipation for a sustainable rebound that never took place. And now, just like with crude prices, it is all crashing down…. again.

  According to Reuters, shipping freight rates for transporting containers from ports in Asia to Northern Europe dropped 22.8 per cent to $400 per 20-foot container (TEU) in the week ended last Friday, data from the Shanghai Containerized Freight Index showed.

  

  Freight rates on the world’s busiest shipping route have tanked this year due to overcapacity in available vessels and sluggish demand for transported goods. Rates generally deemed profitable for shipping companies on the route are at about US$800-US$1,000 per TEU. In other words, at current prices shippers are losing half a dollar on every booked contractual dollar at current rates.

  According to Shanghai data, it was the third consecutive week of falling freight rates on the world’s busiest route. Container freight rates have so far increased in 5 weeks this year but fallen in 23 weeks.

  In the week to Friday, container freight rates fell 24 percent from Asia to ports in the Mediterranean, fell 4.4 per cent to ports on the US West Coast and were down 3.7 per cent to ports on the US East Coast.

  Maersk Line, the global market leader with more than 600 vessels and part of Danish oil and shipping group AP Moller-Maersk, was one of the few container shipping companies to make a profit last year. The company controls around one fifth of all transported containers from Asia to Europe.

  Should the dead cat bounce in shipping rates indeed be over, and if the accelerate slide continues at the current pace, not only will shippers mothball key transit lanes, but the biggest concern for global economy, the unprecedented slowdown in world trade volumes, which we flagged a week ago, will be not only confirmed but is likely to unleash yet another global recession.

  

  Unless, of course, central planners learn how to print trade and quite soon at that…

  

  

  

  

  

• The Population Bomb

  Submitted by Adam Taggart via PeakProsperity.com,

  In 1968, Paul Ehrlich released his ground-breaking book The Population Bomb, which awoke the national consciousness to the collision-course world population growth is on with our planet's finite resources. His work was reinforced several years later by the Limits To Growth report issued by the Club of Rome.

  Fast-forward almost 50 years later, and Ehrlich's book reads more like a 'how to' manual. Nearly all the predictions it made are coming to pass, if they haven't already. Ehrlich admits that things are even more dire than he originally forecasted; not just from the size of the predicament, but because of the lack of social willingness and political courage to address or even acknowledge the situation:

  The situation is much more grim because, of course, when the population bomb was written, there were 3.5 billion people on the planet. Now there are 7.3 billion people on the planet. And we are projected to have something on the order of 9.6 billion people 35 years from now. That means that we are scheduled to add to the population many more people than were alive when I was born in 1932. When I was born there were 2 billion people. The idea that, in 35 years when we already have billions of people hungry or micronutrient-malnourished, we are somehow going to have to take care of 2.5 billion more people is a daunting idea.

   

  I think it's going to get a lot worse for a lot more people. You've got to remember that each person we add disproportionately causes ecological damage. For example, human beings are smart. So human beings use the easiest to get to, the purest, the finest resources first.

   

  When thousands of years ago we started to fool around with copper, copper was lying on the surface of the earth. Now we have at least one mine that goes down at least two miles and is mining copper that is about 0.3% ore. And yet we go that deep and we refine that much. Same thing the first commercial oil well in the United States. We went down 69.5 feet in 1859 to hit oil. The one off in the Gulf of Mexico started a mile under water and went down a couple of more miles before it had the blow-out that ruined the Gulf of Mexico.

   

  Each person you add has to be fed from poorer land, drink water that has to be pumped from deeper wells or transported further or purified more, and have their materials sourced from other depleting resources. And so there is a disproportion there. When you figure that we are going to have to try and feed several billion more people and that the agricultural system itself, the food system supplies something like 30% of the greenhouse gases we put into the atmosphere. Those greenhouse gases are changing the climate rapidly, yet rapid climate change is the big enemy of agriculture — you can see that we are heading down a road that leads to a bridge that’s out. And we are not paying any attention to trying to apply the brakes

  Click the play button below to listen to Chris' interview with Paul Ehrlich (47m:06s)

  

  

  

  

  

• Citadel Barred From Trading In China After Regulator Accuses "Automated Trading" Unit Of Manipulation

  Define irony: for the past 7 years, Wall Street’s worst kept secret is that Citadel, the world’s most levered hedge fund, has been the NY Fed’s just slightly more than arms-length enforcer of market stability, by which we mean spoofer, buyer and otherwise “plunge protector” in the equity and E-mini futures markets. The secret got even less “secret” when of all the possible hedge funds blogger Ben Bernanke could have gone to, he picked the Chicago HFT powerhouse, confirming the cozy and tight relationship between the Federal Reserve and the firm which has been increasingly linked to market manipulation not only in equities but bonds and virtually all other asset classes.

  Which is why Citadel must have been shocked to learn late last week that China had suspended trading at a brokerage account used by Citadel in China.

  When the news first broke last Friday, we asked, somewhat rhetorically, the following question:

  China Suspends Trading at Citadel Unit Brokerage Account: Nikkei. Are they suggesting the U.S. PPT is China’s Dump Enforcement Team?

  — zerohedge (@zerohedge) July 31, 2015

  Today, the WSJ had more detail on the surprising snafu involving the Fed’s favorite market intervention vehicle, confirming that Citadel said trading in one of its China accounts has been suspended, as Chinese regulators battle a steep slide in stock prices.

  The reason: China’s securities regulator said Friday it has launched a probe into automated trading and has restricted 24 stock accounts suspected of influencing stock prices. The government didn’t name any of the companies behind the restricted stock accounts. Citadel said Sunday that one of its accounts was among them.

  Of course, China’s crackdown on foreign trading is not news, and had been reported about a week ago: in its endless list of scapegoatees, China had decided that blaming “evil”, if faceless, foreign sellers would be just as effective to boost confidence in a rigged market as accusing “malicious” sellers. That remains to be seen, but what is surprising is that while Citadel is best known for propping the US market higher, China is suggesting that the same NY Fed Plunge Protection Team extension was implicated in the recent downward move, using “automated trading” or otherwise. Surely, China’s regulator would not utter a peep if like in the US, Citadel had been used to support stock prices.

  In comments on its website, the China Securities Regulatory Commission said it is investigating more than 50 instances of suspected securities violations and broken promises not to sell down share holdings as the country’s stock markets plunged in June and July. It wasn’t immediately clear why Citadel’s account had been targeted.

  WSJ quotes a Citadel spokesman who notes that “We can confirm that while one account managed by Guosen Futures Ltd.—Citadel (Shanghai) Trading Ltd.—has had its trading on the Shenzhen Exchange suspended, we continue to otherwise operate normally from our offices, and we continue to comply with all local laws and regulations.”

  What a difference a year makes: recall that in May 2014, Citadel became only the first international hedge fund to complete yuan fundraising from Chinese wealthy individuals and companies through a local unit.

  Citadel (Shanghai) Foreign Investment won regulatory approval for currency exchange on March 26, marking the first qualified domestic limited partner, or QDLP, to have successfully completed fundraising in China, according to a statement from the Shanghai government’s information office.

  The irony:

  China’s leaders have pledged to promote freer movement of capital in and out of the country and make the exchange rate more market-based for investment purposes. Shanghai started the QDLP program last year to allow international hedge funds to raise capital in the local currency in China for overseas investments, aiding the government’s experiment with capital account convertibility and advancing its plan to build Shanghai into a financial center.

  Why irony? Because a little over a year later, we find out that China is only interested in “promoting freer movement of capital” as long as it involved its stock market going higher, and the capital flowing into China, not out of it at a record pace as we commented previously.

  But still the question remains – how did Citadel attract attention to itself. The answer: “The firm has recently expanded its quantitative hedge funds there, and its securities trading business traded options this year in a trial program on the China Financial Futures Exchange.”

  Chinese media reported over the weekend that one of the restricted accounts was co-owned by Citadel and major Chinese brokerage firm Citic Securities. Citic Securities said Sunday it invested in the account in 2010, but it sold off its stake in November 2014 and no longer owns stock in the account, according to China’s official Xinhua News Agency. Citic Securities didn’t immediately reply to a request for comment.

  And while a Citadel spokesman didn’t respond to a request for comment on which side of the firm’s business was affected by the suspension, it appears that Citadel’s infatuation with market rigging via algos and “automated trading” is what set China off. Or rather the “selling” via automated trading.

  Moments ago Bloomberg confirmed as much when it reported that an official Chinese regulator urges further algorithm trading regulation, adding that China should be prudent on developing algorithm trading, Shanghai Securities News cites an unidentified official with China Securities Regulatory Commission as saying.

  Market stability were “seriously damaged” by algorithm trading combined with some abnormal trading activities, the official was cited as saying. Algorithm trading may lead to systematic risks and result would be catastrophic when algorithm trading was used to manipulate market, the official was cited as saying.

  Why are none of these risks ever brought up vis-a-vis Citadel’s market manipulation in the US? The answer is glaringly simple: because in the US, unlike China, Citadel always manipulates the market higher.

  Which leads to an even more interesting, follow up question: if Citadel’s HFT algos were indeed caught red-handed selling in China, then someone in the US must have given the local Citadel brokerage the green light to spoof Chinese stocks lower. And since by definition Citadel does not do anything market-moving without the Fed’s preapproval, one wonders if China’s paranoia that foreigners are eager to crush its market is not at least partially grounded in reality?

  

  

  

  

  

• Both Sales and Earnings Are Rolling Over With Stocks Near All-Time Highs

  Beyond multiple expansions driven by liquidity, sales and earnings drive stocks.

   

  Of the two, sales are most important for determining economic conditions. Earnings can be massaged any number of ways. However, sales cannot. Either the money came in the door or it did not.

   

  Unfortunately for the bulls, sales are falling.

   

  1Q15 sales came in 2.4% below 1Q14. And the trend has not improved since that time.

   

  General Electric (GE), JP Morgan (JPM), Microsoft (MSFT), IBM (IBM), Citigroup (C), Johnson & Johnson (JNJ), Intel (INTC), Coke (KO), Oracle (ORCL), Honeywell (HON), Goldman Sachs (GS), and American Express (AXP) have all reported a decline in Year Over Year sales for the second quarter of 2015.

   

  These companies are not unique. Across the board S&P 500 companies are posting a 4% drop in revenues.

   

  Sales are not the only metric that is tanking.

   

  Annual corporate earnings fell last year for the first time since we entered the so-called “recovery” in 2009. This is pretty incredible when you consider the sheer amount of buybacks and other accounting gimmicks used by corporations to boost their profits.

   

  Indeed, a study performed by Duke University found that roughly 20% of publicly traded firms manipulate their earnings to make them appear better than they really are. The folks who were surveyed for this study about this practice were the actual CFOs at the firms themselves.

   

  All of this gimmicky has resulted in corporate profits trading at an all time high relative to US GDP. Profits literally have nowhere to go but down as corporations have cut costs to the bone and juiced earnings through buybacks and leveraged buybacks (issuing debt to buy shares).

  

  Put simply, both sales and earnings are rolling over… at a time when the S&P 500 is close to all-time highs. This is a recipe for a correction if not a crash.

   

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

   

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

   

  We are currently down to the last 15.

   

  To pick up yours, swing by….

   

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

   

  Best Regards

   

  Phoenix Capital Research

   

   

  

  

  

  

• The Politicians’ War On Uber

  Submitted by John Stossel via Reason.com,

  Hillary Clinton gave a speech warning that the new “sharing economy” of businesses such as the ride-hailing company Uber is “raising hard questions about workplace protections.”

  Democrats hate what labor unions hate, and a taxi drivers’ union hates Uber, too. Its NYC website proclaims, “Uber has the money. But we are the PEOPLE!”

  The taxi cartels, which provide inferior service and are micromanaged by government, don’t like getting competition from efficient companies like Uber.

  Clinton didn’t mention Uber by name, but we don’t have to wonder which company she meant. The New York Times reports that Clinton contacted Uber and told them her speech would threaten to “crack down” on companies that don’t treat independent contractors as full employees. Apparently, Democrats think something’s wrong if people are independent contractors.

  But no driver is forced to work for Uber. People volunteer. They like the flexibility. They like getting more use out of their cars. It’s win-win-win. Drivers earn money, customers save money while gaining convenience, and Uber makes money. Why does Clinton insist on interfering with that?

  Clinton’s “social democrat” pal, New York’s Mayor Bill de Blasio, wants to crack down on Uber by limiting how many drivers they may hire. Uber cleverly responded with an app—a “de Blasio option”—that shows people how much longer they’d have to wait if de Blasio gets his way.

  Good for Uber for fighting back. I wish more companies did.

  Federal Express didn’t.

  FedEx Ground classified drivers as independent contractors. Again, drivers were willing to drive, FedEx Ground was willing to pay, and customers got packages faster and more reliably than they did from the U.S. Postal Service.

  But lawyers built a class action suit on behalf of FedEx drivers, saying they should be treated as employees, paying payroll tax, getting workman’s compensation, receiving benefits. FedEx settled the case for $228 million and began abandoning its independent contractor system.

  Uber’s use of independent drivers—who use their own cars—is now called analogous to FedEx’s use of delivery drivers.

  That means Uber may soon have to treat its drivers as employees. Business analysts at ZenPayroll estimate that the changes will cost $209 million. We customers will pay for that, and we’ll have fewer ride-share choices, too.

  Lawsuits and politicians’ attacks against one company have a chilling effect on others. The “independent contractor” assault will destroy all sorts of companies we’ll never even know about because now they won’t come into existence.

  Some of the entrepreneurs who dreamed of starting them will look at the additional costs, crunch the numbers and decide there’s not enough profit potential to risk investing their money.

  Who knows what odd but popular sharing-economy innovations aren’t happening even now—ones we’d use and love—because businesspeople with great ideas are frightened by the Clintons, deBlasios and lawyers?

  In France, the old-fashioned cabbies rioted against Uber, blocking Uber cars and dropping rocks on them from a bridge. Instead of arresting rioters, the French government threatened to arrest Uber executives for breaking taxi rules. Once again, without even a new law directed specifically at Uber, the enemies of free choice got their way. Paris police have been ordered to forbid use of the Uber app.

  I disagree with Jeb Bush about many things, but he was right to praise Uber for “disrupting the old order” of business.

  The New York Times responded with a sarcastic piece pointing out that when Bush used an Uber car, the driver, Munir Algazaly, didn’t recognize Bush. He said he plans to vote for Clinton, though Bush seemed like a “nice guy.” Another site mocked Bush because he talked about “hailing” an Uber, not “hiring” one. Another pointed out that the car Bush rode in had a license plate holder that said “Fresh as F—” on it. Ha, ha.

  But it’s the sneering media who miss the point. Bush is smart to see serious benefits from “reputation” businesses like Uber. Politicians and lawyers who threaten to destroy such companies threaten us all.

  

  

  

  

  

• The Tide Has Turned And These Charts Predict The Next Stop

  Submitted by Thad Beversdorf via FirstRebuttal.com,

  What we saw with the latest GDP reports is something truly remarkable.  A market that was explicitly told the past 4 years of economic growth had been overstated simply shrugged off the news.  That is, absolutely no price recalibration took place.  This really evidences beyond any doubt that there is no relationship between the economy and the market.  It further evidences the Fed’s increased proficiency in directly guiding the market.

  Now I know this is not shocking to many of us.  But to watch the market’s blatant irreverence toward a report that, with the flip of a switch, removed 12% of the presumed economic growth from the past 4 years did strike me as remarkable.  It shows that the printing of economic indicators is nothing but theater.  There is absolutely no rational market explanation that the market traded flat to up on the day when current GDP missed estimates  and the past 4 years of growth was adjusted downward, all in the midst of one of the worst seasons for YoY deteriorating corporate revenues/earnings.

  But more realistically what it suggests is the only player left in the market is the ‘buyer of last resort’, i.e. the Fed and its minion entities.  Certainly nobody wants to aggressively short the market in the face of a clear long only strategy by the Fed, but just as certainly no major money managers are longing this market.  Volume has simply dried up.

  I’ve been writing for almost a year now about the economic cannibalism that has been feeding earnings growth.  I have discussed this concept with a dire warning that feeding earnings expansion through operational contraction is a short lived meal.  And well we are now seeing the indications that the growth through contraction has now hit its inevitable end.  Have a look at the following chart which is really the only chart one needs to study at this point.  The chart depicts S&P 500 adjusted earnings per share (blue line), S&P Price level (green line), S&P 500 Revs per share (red line) and US Productivity of Total Industry (olive line).

  

  I have normalized the parametres back to the early 1990’s so that we can better understand the absurdity of what’s been taking place.  Now there is a tremendous amount of information we can pull out of this chart so stay with me here.

  The initial observation is that the past 25 years has been a series of large bubbles and subsequent busts, at least in both the price level and adjusted eps of the S&P.  Focusing on the price level we see the normalized index having two similar peaks and now into a third peak quite substantially higher than the previous two.  The first two peaks top out around 400 on the index and each subsequent reset price was down around 220.  Now one might expect that the sources of these two very similar bubbles were thus the same.  But one would be wrong.

  Notice in the first bubble that adjusted EPS topped out around 275 whereas in the second bubble they reached 450.  We often hear that because of this phenomenon equities were far more overvalued in the tech bubble than in the credit bubble.  While the conclusion is correct it creates a strawman analogy for this third and current bubble.  Specifically, that because current price to earnings is similar to that of the credit bubble that equities are fairly priced or at least relative to the tech bubble.  But this argument is a strawman fallacy.

  The tech bubble was a bubble of massive direct capital allocation stupidity. The credit bubble was a bubble of massive indirect capital allocation stupidity.  What I mean by that is the tech bubble was created by absurd capital injections directly into the secondary market (bypassing earnings), driving stock valuations to the moon.  The credit bubble was done via flooding consumers with debt which was used to prop up personal consumption which led to growth in revenues, earnings and thus stock valuations.  You can see a large increase of revenues per share between 2001 and 2007.  Now revenue growth is supposed to lead earnings growth which in turn pushes up stock valuations.  However, when revenue growth is driven by debt consumption it is temporary.  And we all learned that cold, hard fact in 2008.

  But so the argument that EPS is the figure one needs to pay attention to really misses the actual driving force which is revenue based earnings growth.  The above chart depicts that while EPS has been rising significantly for the past 7 years, revenues have been absolutely flat.  And so what we have is earnings growth pushing stock valuations massively higher but without the consumer onboard.  Very different from the credit bubble.  How does this happen?

  Well again, stock valuations are being pushed  higher through another temporary effect.  EPS growth is coming by way of operational contraction and financial engineering – meaning dividend payouts and share buybacks. This is evident in the following chart of just this latest bubble that depicts growth in stock valuations relative to growth in revenue per share, which have (notably) declined since Aug 08 (the base period).

  

  Now EPS growth from anything other than earned consumption, meaning consumption from income rather than debt can only be temporary.  (One arguable exception would be if EPS growth came from productivity, however, we see in this first chart that productivity is flat and so not the driver of EPS growth.)  And if the EPS growth is temporary it follows that the stock valuations that have grown on the back of EPS growth too is temporary.  What we are about to find and already are seeing the signs of with major technical supports breaking down is that stock valuations will reset to match each firm’s operational propensity for earnings growth (i.e. each firm’s expected sustainable future free cash flow).  We saw this inevitable result in each of the last two major bubbles.

  Interestingly if we look at the macrocosm of the capital mix between earnings and incomes what we find since moving to a pure fiat based currency in 1971 is that while incomes are very steady as a percentage of gross domestic income (GDI), profits have been more volatile.  And since the large positive inflection point of money printing in 1993, corporate profits as a percentage of GDI have gone berserk.  For investors it is imperative to understand what happens to stock valuations when profits’ share of GDI collapses.  In the following chart I have normalized, back to 1971, income and profits’ respective shares of GDI.

  

  You can see income has steadily declined as a percentage of GDI while profits’ share has bounced around.  But we can see that starting in the mid 1990’s profits’ share of GDI has seen massively growing bubbles and busts.  This is a direct result of the temporary earnings growth scenarios discussed above.   That is, rather than implementing policies that create steady long term income and earnings growth the Fed and the government have been creating policies that act as bandages.  And so while we cover up the infection for short periods, eventually the infection not only reappears but spreads resulting in a continuously worsening problem for which ever more extreme bandages need to be used to cover up the problems.

  Today there is an even bigger problem in that the world has been riding China’s coat tails of growth so to speak. But looking at the following chart what we find is a huge dislocation between China’s growth machine (i.e. industrial production) and the valuation of world equity markets.  The dislocation really began around the time the Fed implemented Operation Twist at the end of 2011, which fed directly into QE3.

  

  We can see a similar indicator of industrial growth decelerating by looking at collapsing materials prices which began to deteriorate around the same time that the above dislocation started in late 2011.

  

  

  Despite now hearing fewer and fewer industry ‘pros’ shouting their euphoric calls for 20 year bulls we still get a constant barrage of delusional analyses.  We continue to hear about a strong job market when the opposite is true.  U6 (i.e. the truest official unemployment figure) remains well into the double digits.  As reported today by MarketWatch, labour cost index is at its lowest growth rate since 1982 and the U.S. has gained only an average of 208,000 jobs a month this year, down from 260,000 in 2014, a 20% decline YoY.  Those are the real facts and those are in the face of the lowest labour participation rate since the 1970’s and the highest number of people on government subsidy programs on record.

  In short, the last 20 years has been nothing but bad policies attempting to cover up the results of previous bad policies creating a need for more extreme policies to cover up more extreme resulting fundamental problems.  This is clearly depicted in the data.  The end result is that global growth has deteriorated steadily now for the past 6 years to its lowest long term trend line in modern history, now below 2%.

  

  Like the chicken and the egg, economic output and incomes are inherently intertwined.

  

  Be prepared for the now imminent equity valuation reset.  It is true the Fed now has the ability to manipulate the market well beyond anything we’ve ever seen before.  However, it is also still true that when the bursting bubble achieves full momentum the Fed will be helpless to stop it.   While the Fed feels increasingly omnipotent they will once again learn, that while natural laws can be bent, they cannot be broken.

  

  

  

  

  

• Is This The Most Successful Trade Of The Last Decade?

  If the longs use VIX products as hedging instruments, then why would anyone take the other side? Especially in light of the fact that, as we discussed previously, only 1 in 20 "skilled" traders profit from VIX ETFs.

  Because, being short volatility can be very profitable, according to Goldman. Year-to-date this short vol index is up 56%, and selling the front-month VIX has earned a massive 114 vol points…

  

  The Short Story:  Short VIX futures index +56% ytd;  If the longs use VIX products as hedging instruments, then why would anyone take the other side? Because, being short volatility can be very profitable. The S&P 500 VIX Short-term Futures Daily Inverse Index (SPVXSPI) tracks the profitability of being short a constant maturity 1m VIX future and is the benchmark for ETPs such as the XIV and SVXY. Year-to-date this short vol index is up 56%.

   

  

   

  In low vol environments VIX futures tend to trade above VIX spot and futures typically roll down the curve to settle at VIX spot.

   

  Short VIX futures strategies profit from the contango in the VIX futures curve. The steeper the VIX term structure, the higher the (futures-spot VIX) basis, and short VIX strategies tend to be profitable as futures roll down the curve. There are many investors who try to profit from this well publicized phenomenon: sell a VIX future, capture roll down, do it again (wash, rinse, repeat).

   

  Prior to VIX Weeklys if you wanted to capture the roll-down you might have sold the front-month contract and hoped for the best. Short vol investors know that putting all of your eggs in one basket can be a risky strategy.

   

  VIX Weeklys may provide more flexibility with investors positioning for the roll-down a bit week each week by simply spreading out their monthly trades. Instead of selling $100 on the front month VIX future an investor might sell 1/4th of the notional per week which may help smooth the return profile. The VIX often mean reverts quickly so if one contract expires in the red, the other contracts may pick up the speedy mean reversion and end in the green.

   

  On the tactical side, we could see more investors positioning for a swift decline in volatility post an event (FOMC for example). 

  Shorter-dated VIX futures track VIX spot more closely

  A one-month VIX future has a beta of 0.44 to the VIX. For example, if the VIX moves up a vol point, a future with one-month left to expiration tends to move up a little less than half as much, or 0.44 vol points.

   

  Higher betas for shorter-dated tenors. The beta between a future with one week to expiry and the VIX has been 0.64 or 1.4x higher than a one-month future and 2.2x more sensitive to VIX moves than a future with three-months remaining to expiration.

   

  Many exchange traded VIX products are benchmarked to constant maturity VIX futures. As a cross check on our reaction function we create constant maturity one- to six-month VIX futures each trading day and estimate the betas back to VIX changes.  The results are very similar, with a constant maturity one-month VIX future having a beta of 0.45 to VIX changes and threemonth futures at 0.27, very close to what our reaction function would have predicted (1m: 0.44; 3m: 0.29).

   

   

  

   

  Shorter-dated VIX futures track (have more manipulative leverage) the market more closely…

  The beta between daily changes in the VIX and daily S&P 500 returns has been -1.2 using data back to 2004. A beta of -1.2 implies that for every -1% decline in the S&P 500 we would expect the VIX to go up by 1.2 vol points (say from 15 to 16.2).

   

  The beta of a one-month VIX future to S&P 500 returns is -0.60, roughly one-half the sensitivity between the VIX and market returns; about 1.5x that of a three-month future (-0.41) and 2.1x a six-month future (-0.28).  We make two important points here: (1) you cannot trade spot VIX and the betas between the tradable VIX futures and the market have historically been much lower; (2) the betas fall off dramatically as you move further out in the term structure.

   

  

   

  As a VIX future approaches settlement, its sensitivity to S&P 500 returns grows exponentially. The beta of a VIX future to S&P 500 returns moves from -0.6 on a one-month future to -0.74 on a two-week and -0.86 on a future with one-week left before VIX settlement and -1.15 with one-day left to maturity which approaches the beta of VIX spot (-1.2).

  *  *  *

  So – in summary – being short vol has been among the best performing trades of the last decade (never mind the risk-side) and, the introduction of weekly VIX futures (and the exponential decay implied by these volatility-inducing instruments) offers, according to Goldman Sachs, even more opportunity for active risk takers to sell vol, scrape premium, and face unlimited downside risk… playing the contango collapse game until there are no more musical chairs left.

  

  

  

  

  

• If Price Insensitive Buyers Become Sellers, Will The Entire Market Collapse?

  One narrative we’ve been building on for quite some time is the idea that both stocks and bonds have been propped up by a perpetual bid from price insensitive buyers. Put simply, it really doesn’t matter how overvalued something is if your primary concern is something other than maximizing your return on investment. 

  Take corporate buybacks for instance. Both equity-linked compensation and the market’s tendency to focus on quarterly results at the expense of the bigger picture have compelled corporate management teams to develop a dangerously myopic strategy that revolves around tapping corporate credit markets for cheap cash and plowing the proceeds into EPS-inflating buybacks. Whether or not this is the best use of cash is certainly debatable but when the goal is to manage earnings and appease stockholders, that doesn’t matter, and indeed, companies have an abysmal record when it comes to buying back shares at levels that later prove to be quite expensive. 

  In America, the price insensitive corporate management bid simply replaced the monthly flow the market lost when the Fed – the most price insensitive of all buyers – began to taper its asset purchases. Of course QE in all its various iterations playing out across the globe, is price insensitive buying taken to its logical extreme. With the ECB’s PSPP for instance, limits on the percentage of an individual issue that NCBs are allowed to own apply to nominal amounts meaning that, to the extent NCBs can buy bonds at a premium to par, they can effectively buy fewer bonds than they otherwise would have and still hit their purchase targets. In other words, if you overpay, it’s easier to stay under the issue cap when supply is scarce in eligible paper. So in some respects, the more EMU central banks pay for the bonds they purchase, the better. 

  In Japan, the BoJ has amassed an elephantine balance sheet full of ETFs and because one cannot classify stocks as “held to maturity”, Haruhiko Kuroda’s equity plunge protection is effectively a self-feeding loop – that is, the more stocks the central bank owns, the more it must buy in order to protect its balance sheet from the damage it would suffer were equities to sell off. 

  And then there are banks, mutual funds, and pension plans which for various reasons (regulatory and otherwise) are forced to accumulate assets at otherwise unattractive prices. 

  The question in all of this – and this may indeed become one of the most important considerations for market participants once every DM central bank bumps up against the Sweden problem – is this: what happens when the price insensitive buyers behind the inexorable rise in financial asset prices become price insensitive sellers?

  Here with more on that question and more, is GMO’s Ben Inker:

  *  *  * 

  From GMO

  Price-insensitive sellers

  The last decade has seen an extraordinary rise in the importance of a unique class of investor. Generally referred to as “price-insensitive buyers,” these are asset owners for whom the expected returns of the assets they buy are not a primary consideration in their purchase decisions. Such buyers have been the explanation behind a whole series of market price movements that otherwise have not seemed to make sense in a historical context. In today’s world, where prices of all sorts of assets are trading far above historical norms, it is worth recognizing that investors prepared to buy assets without regard to the price of those assets may also find themselves in a position to sell those assets without regard to price as well. This potential is compounded by the reduction in liquidity in markets around the world, which has been driven by tighter regulation of financial institutions, and, paradoxically, a greater desire for liquidity on the part of market participants. Making matters worse, in order to see massive changes in the price of a security, you don’t need the price-insensitive buyer to become a seller. You merely need him to cease being the marginal buyer. If price-insensitive buyers actually become price-insensitive sellers, it becomes possible that price falls could take asset prices significantly below historical norms.

  Monetary authorities

  The first group of price-insensitive buyers to confound the markets were, arguably, the monetary authorities of emerging countries, who in the 2000s began to accumulate a vast hoard of foreign exchange reserves. These reserves, which served to both protect against a recurrence of the 1997-98 currency crises and to encourage export growth by holding down their exchange rates, needed to be invested. The lion’s share of the reserves went into U.S. treasuries and mortgage-backed securities, causing Alan Greenspan and Ben Bernanke to muse about the conundrum of bond yields failing to rise as the Federal Reserve lifted short-term interest rates in the middle of the decade. I have to admit that from a return standpoint, those purchases were ultimately vindicated by the even lower bond yields that have prevailed since the financial crisis. But just because the position turned out to be a surprisingly good one, return-wise, doesn’t mean that these central banks were acting like normal investors. Their accumulation of U.S. dollars had nothing to do with a desire to invest in the U.S., in treasuries or anything else, but was rather an attempt to hold down their own currencies. 

  Developed market central banks

  The financial crisis itself created the second group of price-insensitive buyers, developed market central banks. Quantitative easing policies by a wide array of central banks have had the explicit goal of pushing down interest rates and pushing up other asset prices. While one can argue that the central banks were anything but price-insensitive in that they cared quite deeply about the prices of the assets they were buying, they certainly were not buying assets for the returns they delivered to themselves as holders, and their buying has been driven by an attempt to help the real economy, not an attempt to earn a return on assets. Since 2008, the sum of the U.S., U.K., Eurozone, and Japanese central banks have expanded their balance sheets by over $4 trillion USD, as shown in Exhibit 2. 

  

  At the moment, the most active central banks in the developed world have been the European government bonds.

  Defined benefit pension plans

  Considerations of profit and loss on their portfolios are seldom at top of mind for central bankers, making them obvious candidates as price-insensitive buyers. But regulatory pressure can push otherwise profit-focused entities in similar directions. Successive tightening of the regulatory screws on defined benefit pension funds, particularly in Europe, have forced many of them into the role of price-insensitive buyers of certain assets as well. 

  Risk parity

  Another group of price-insensitive investors are managers of risk parity portfolios. These portfolios make allocations to asset classes not with regard to pricing of assets, but rather their volatility and correlation characteristics. Their price-insensitivity comes out in a couple of ways. First, as money flows into the strategies, they are levered buyers of bonds and inflation-linked bonds in particular. Like most strategies, if the money flows out, they are forced sellers of a slice of their portfolio. Second, unlike many other investors, they will also tend to buy and sell based on changes in volatility. As the volatility of an asset falls, these strategies will tend to lever it up further, and as the volatility rises they will sell. Given that low volatility tends to be associated with rising markets and high volatility with falling markets, this gives their buy and sell decisions a certain momentum flavor. If bond prices are moving up in a steady fashion, they will tend to buy more and more as volatility falls, and in a disorderly sell-off that sees yields and expected returns rise along with rising volatility, they will sell the assets due to their higher “risk.” In fact, rising volatility in bond markets could cause a general delevering of risk parity portfolios, causing them to sell assets unrelated to bonds in order to keep their estimated volatility stable. With hundreds of billions of dollars under management in risk parity strategies and large holdings in some of the less deeply liquid areas of the financial markets such as inflation-linked bonds and commodity futures, it is easy to imagine their selling in unsettling markets under certain circumstances, such as a repeat of 2013’s “Taper Tantrum.”

  Traditional mutual funds

  While the levered nature of risk parity portfolios may cause them to punch above their weight in potentially disrupting markets, in the end it isn’t clear that they are more likely to cause trouble than the managers of traditional mutual funds.

  The mutual funds are at the mercy of client flows. As money has flowed into areas such as high yield bonds and bank loans, they have had little choice but to put it to work, and given their mandates, prospectus restrictions, and career risk, they are largely forced to buy their asset classes whether or not they think the pricing makes sense. But to an even greater degree, when redemptions come, they have no choice but to sell. This is nothing new. But what has changed is the extent to which mutual funds have seen large flows into increasingly illiquid pieces of the markets, particularly in credit, where bank loan mutual funds are 20% of the total traded bank loan market and high yield funds make up another 5%. That may not sound particularly large, but almost half of that market is made up of CLOs, which are basically static holders of loans. This makes the “free float” of the bank loan market perhaps half of the total, and should the bank loan mutual funds sell, there are not a lot of investors for them to sell to.

  This is particularly true given the changes to the regulatory landscape for the dealer community. Banks are much less likely to take bonds and loans on their balance sheet for any length of time in the course of their market-making activities.

  Conclusion

  The size of the price-insensitive market participants is impressive. Monetary authorities and developed market central banks have each bought on the order of $5 trillion worth of assets for reasons that ultimately have nothing to do with earning an investment return on them. Regulatory pressures have caused pension funds, insurance companies, and banks to do likewise. While it is somewhat harder to put precise numbers to the size of these investments, it seems a safe bet that the total is in the trillions as well. Other investors are in analagous positions for different reasons, as strategies such as risk parity and the exigences of life as a mutual fund portfolio manager push such investors to also buy assets for reasons other than the expected returns those assets may deliver. To date, these investors have tended to be buyers, and given their lack of price-sensitivity, they have pushed up prices of assets beyond historically normal levels.

  At the same time, a natural buffer for many markets against a temporary imbalance between buyers and sellers, the dealer community has been forced to significantly curtail its activities due to the regulatory regime. So if circumstances cause these price-insensitive buyers to turn around and become price-insensitive sellers, there are not a lot of candidates to take the other side. 

  Be prepared for the possibility that some of the same assets that have again and again risen to prices that many investors said were impossible show more downside volatility than investors have bargained for. 

  Full letter (.pdf)

  

  

  

  

  

• To Social Media's Horror – It 'Is' Different This Time

  Submitted by Mark St.Cyr,

  There has probably been no greater investing mantra placed upon an industry in recent memory than the now reflexive, as well as defensive response of “It’s different this time” when questioning anything Social. Trying to understand the business model along with its metrics, valuations and more is not only arduous, the response seems more akin to pulling teeth without anesthesia for those selling it, defending it, or both.

  Those that have been with me for a while know I have little use for the whole “social media” thing. Although, while I don’t use any of it myself, that doesn’t mean I don’t see value and innovation in many of them. Again, I don’t use them, nor have accounts. However, I do have share buttons on my own site for those that do. So let me be clear:

  It’s the valuations along with the metrics of their underlying business models and just how effective they are for those that are in business, along with the ROI for those businesses whether monetarily or in other ways for their time and money is what I take issue with. For as I’ve stated over and over again: “The only people making money in social media – are those selling you social media.”

  When it comes to everything social, today, recent memory is about the last 5 to 6 years. Or: post financial crisis. Basically, everything you know, or think you know about valuations, their coming into IPO existence, as well the metrics they stood on (and still use) as to “prove” those valuations has all been within the most adulterated markets in history fueled by the advent of “free money” made possible by The Fed. via QE. This is a quantitative, as well as a qualitative fact. Period.

  Never before has this (QE) been done in the history of the markets. So obscene has the valuation process become along with the metrics used to support it is why, “It’s different this time” was born. And precisely one might ask “why was that?” Well, just as a teenager who can no longer defend what they’re arguing and immediately cuts off further discussion with, “Because! Just because!” followed with “You just don’t get it!” When you’re wearing a $3K power-suit, “It’s different this time” sounds more grown up. Yet it serves the same purpose: It cuts off discussion leaving all the vagaries well intact. Nevertheless, there’s really no difference except for the wording.

  The world of everything Social has been the undisputed benefactor of all this “free money.” After all, wasn’t the term “Unicorn” applied and accepted with all its connotations as being a mythical creature that lived and breathed in the land of make-believe? Social has spun out more entities with BILLION dollar valuations that either never made, or, currently making – a single cent in net profit. Or worse; having no sales period! One can see why the “Unicorn” title was so applicable here, as well as the need for a catch phrase to deflect any nay-sayers.

  It is incontrovertible that if not for the “free money” provided by QE, many, if not most of what currently falls under the social media umbrella would not only never had come into existence (let alone with Billion dollar price tags) the perceived “hands off – unquestioning” attitude by Wall Street itself as many of the current top-tier entities spent Billions upon Billions of resource dollars making acquisitions – before they themselves have reached any true net profitability that could warrant such spending would be allowed. This in my opinion is an absolute wanton abandonment of business fundamentals and principles.

  However, it seems there is a change of mood (or realization the jig is truly up) on Wall Street.

  Back in September in my article “The Shot Heard Round The Valley World” I opined…

  “Let me go on the record here and point out what I believe will prove my point in the coming weeks and months.

   

  Currently Zuck and crew have been lauded over with the prowess in its acquisition choices. You will know everything has changed when the calls to rescind Mark Zuckerberg’s authority in having carte blanche via not needing board approval for acquisitions going forward is demanded by Wall Street.”

  What transpired during the most recent earnings call? At first what is shown to suggest as their still hitting on all cylinders they once again reiterated: they’re going to continue spending at just as impressive a rate. And the response this time? Suddenly far more concerned are those on Wall Street this time, than any time previous. The validation for it was near impossible to miss, as it was the singular point touted extensively, in unison, across all the financial media outlets. A prelude in my opinion for the coming demand I alluded to previously. An opinion I’ll contend was laughed at just months ago. Yet, suddenly – it’s no longer all that funny and is becoming a very serious probability.

  In my opinion the only reason for the stock not dropping in sympathy (i.e., like a rock) resembling its other brethren of late was only for its current liquidity for the HFT’s too feast upon in the quarter end, window dressing made ever so prevalent in today’s near non-existent participation rated “market.” However these “stick-saves” are becoming increasingly short-lived. Just look to any other recent all time high flyer this quarter. Is it a: lifetime high based on fundamental principles? Or: A speculative stop run, HFT fueled blow off top in a month end earnings period? You be the judge is all I’ll say. Yet, there are clues everywhere if – one wants to truly see.

  Remember: If the cohort of analysts or media venues that reached for every keyboard, camera, or microphone to justify why a company like Apple™ could suffer the fate of their stock gapping down some 4% or so after reporting a record-breaking 47.5 million iPhones®, an actual physical, quantifiable sale of a real product that generated Billions of actual net profits that were added to their existing coffers and the stock gets pummeled? What does that bode for the likes of many of today’s Wall Street darlings? Again, just for context: Apple delivered true net profits that produced surplus “cash” in the bank that the “Likes” of today can only dream of. Don’t let that point be lost. (Those coffers by the way are larger than the total market cap of many of today’s social darlings.)

  Whether one likes Apple, their products, or story is irrelevant. What can’t be denied is they generate net profits that result in surplus “cash” in the bank. And they were subsequently hammered. How do you think the social media space will fare going forward from here since there’s no longer any QE, but legitimate valuation fears are manifesting within all stocks in general world-wide?

  Maybe it’s just me, but I find it near laughable that these once social darlings just a few years since IPO-ing seem to be trying (or desperately seeking) ways as to find ways to expand, grow, justify, and more with anything but their raison d’être (i.e., their actual core business.) Along with every analyst as well as company figure-head contort their earlier views on why their valuations, metrics, and models are/were sound. For instance…

  Facebook™ needs to make sure everyone is still on-board with its spending (because as implied – they’re gonna!) The reasons I guess are they’re realizing “Likes” ain’t gonna cut it. Whether investors will like that or not, and by how much, we’ll know soon enough over the coming weeks, or months. However, as I expressed earlier, this earnings call was “different this time” with the near knee-jerk as well as residual hand wringing about Zuck and crew’s continued adamant stand on spending.

  And what should not be lost is how different it was as Wall Street awoke and became fully cognizant to the money they’ll be spending won’t be the “free money” afforded via QE. Rather, it will be today’s current share holders. In other words: Wall Street’s pockets.

  And what is always front and center in Wall Street’s mind is: Facebook can spend all the money it wants – just as long as it isn’t Wall Street’s. For one must remember, Facebook doesn’t make a net profit via true unadulterated GAAP earnings to warrant (in my view) the expense of it spending those BILLIONS of dollars. That was in the days of “Trust us – we know what we’re doing.” Well trust me: Those days are over. Period.

  Want another example? How about Twitter™? Let’s put them into perspective. I’ve been saying since their inception as well as IPO that this medium is truly revolutionary as to its application or niche. However, as a business model along with its valuation? I’ve railed about it for just as long. Below is an excerpt from an article I wrote in November of 2013 when Twitter was about to IPO.

  “Never mind what their stock valuations are currently. A stock is not a company. The stock today lives in a world of its own divorced from reality. What I’m talking about here is business. What and how are these enterprises going to generate income as in revenue to support these valuations? Remember, if the markets as I have been pounding my fist over the last few years is based purely by Federal Reserve interactions. Adulterating them beyond the resemblance of the financial markets everyone once understood and could agree on. Then these Wall Street darlings can not only crash to Earth without warning, more than likely the bird that should chirp the loudest will be sprawled out in the bottom of the mine shaft. Not only can it happen in the blink of an eye, that blink is now considered an eternity in today’s stock market.”

  People lined up in droves as to express how “I just didn’t get social” and a whole lot more. I was also impugned by nearly every social media “expert” as to why views from people like myself should not only be ignored – but laughed at. Many pointed at the near immediate surge in valuation as the stock ticked higher, and higher in the following months. Yet, that’s not the story today.

  The reality is that today – if you invested $1 dollar in their stock – ever. You are just about $1 away from losing money if you bought into at any time – ever. That’s because Twitter’s stock is dangerously close to falling beneath the lowest price paid/sold since it IPO’d. Again – ever! And if you were one of those whom just a mere 18 months cavalierly shouting “hashtag this!” as the stock price went higher and higher. How’s all that working for you today is all I’ll ask.

  Or maybe you’re one that couldn’t wait to sink your 401K teeth into LinkedIn™.  Once again, after years of pushing higher, and higher, it seems the new story is same as the “old story.” i.e., They seemingly needed to spend money as to gain potential “integration opportunities” by buying something (e.g. $1.5 BILLION for Lynda™) rather than investing directly and maximizing everything of what LinkedIn currently is involved in. i.e., A glorified resume writing and/or job seeker data base.

  In other words: They can’t make money via the old model as to warrant their current valuations. So, instead of doing what they do, and doing it better, enabling higher net profits, it seemed they had better buy something that can. Even if the price paid (again a reported $1.5 Billion) is money spent not from net profits – but from Wall Street’s pocket. Because for all intents and purposes, where else did it come from when using GAAP they actually lost $68 Million last quarter?

  All I can say, it appears someone made money. It just wasn’t LinkedIn, nor Wall Street, as they pounded its share price in one fell swoop some 10%. And so far, no one seems to be rushing in to buy at its now 25% plus or minus reduced “wonderful sale price” from where it stood only months ago.

  How about Yelp™? Or should I say ouch? Because as of today that’s what many whom “invested” in this once heralded “social reviewing hot bed” are currently dealing with. And to spare many from yelping or howling more like dogs than what these stocks of late have morphed into. I won’t reiterate just how “clueless” I was scorned to be when I railed about other previous “darling” valuations and business metrics such as Groupon™.

  This is the current, as well as ever-increasing pain of social reality coming to the entire social media space in my view. And I say “increasing” because I truly feel (and can argue the case) without QE – it’s over for this space as it currently stands today.

  What portends for the space is how large some of these entities remain going forward, or, actually remain. That’s all up for debate. What’s not debatable or tolerable are the previous objections as to seek clarity to reasoned questioning about the business models, and/or viability going forward.

  For the all too prevailing retort, laced with indignation, of the now well honed “well you don’t get it because – it’s different this time” will no longer suffice because – it’s different this time.

  

  

  

  

  

• Dramatic Footage: How Venezuelans Get Milk Powder

  It’s been a sad week for Venezuela.

  First, on Wednesday we showed what happens to local supermarkets when formerly Latin American paradises run out of other people’s money.

  Then, the next day we showed what happens when in the aftermath of scenes such as the one above the social mood turns violent, and how what was once supposed to be a socialist utopia paradise ends uplooking like a warzone.

  Today we show how the local population is forced to act like stampeding animals when it comes to obtaining even the most basic of staples, in this case milk powder.

  The clip below speaks for itself.

  

  

  

  

  

• The Fed's Circular Logic Exposed In 1 Simple Chart

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  I typically stay away from sentiment indicators and measures of “confidence” not just because they are of dubious construction but they often don’t mean what they are taken for. In the case of consumer confidence, you get both problems simultaneously particularly at the ends of each cycle. In other words, just as “confidence” is at its greatest point and economists, especially the FOMC, assert that as evidence for further economic gains the rug is pulled out, “unexpectedly”, and a precipitous decline just shows up.

  A few months ago I looked at the more recent break between confidence and spending. In past cycles, consumer confidence at least bore some coincident and even forward resemblance to economic activity, retail sales in particular. That broke down around 2011 as consumer “confidence” and spending have been unrelated ever since.

  

  The reason the FOMC relies so heavily on confidence measures and surveys is rational expectations. The theory asserts feelings and psychology as more important than real factors, therefore it is assumed that influencing emotions is as much economically useful as even the helicopter option. The same is true of orthodox belief in the opposite, recession, as monetary policy attempts to banish “undue” pessimism as an answer to contraction.

  With that in mind, the past year has offered what I think is a stunning rebuke to that theory. Starting in the spring of 2014, just after the nefarious cold winter, almost all the major indications jumped. The increases were questionable, and remain so, meaning that offers a useful control as far as attempting to measure the effects of pure numbers alone. Accounts like the unemployment rate, Establishment Survey and GDP surged without a matching increase in more “hard” data less subject to trend-cycle and non-seasonal seasonal adjustments. The response was striking in that the pure, number increases seemed to have worked upon at least consumer confidence (and, I would add, business confidence in the various business sentiment surveys).

  A year ago, the surge began which is also a compelling contrast since the “dollar” and global finance started at the same time to retreat. That didn’t matter, of course, as all that seems to have penetrated was the constant drumbeat of the “economy is awesome.”

  From July 2014:

  Its [Conference Board] Consumer Confidence Index reached 90.9 in July, up from 86.4 in June. It was the third straight monthly increase and the best reading since October 2007. Tuesday’s report solidly beat economists’ median forecast for a reading in the mid-80s.

   

  The report follows a five-month string of bright employment reports after a rocky start to the year that’s been mostly blamed on an economically-crippling hard winter. From February through June, the economy has added more than 1.2 million jobs and the unemployment rate has fallen to 6.1% from 6.7%.

   

  “Strong job growth helped boost consumers’ assessment of current conditions, while brighter short-term outlooks for the economy and jobs, and to a lesser extent personal income, drove the gain in expectations,” said Lynn Franco, the board’s director of economic indicators. “Recent improvements in consumer confidence, in particular expectations, suggest the recent strengthening in growth is likely to continue into the second half of this year.”

  That seemed to be the case as GDP grew nearly 4% in Q2 (since revised up) and then nearly 5% in Q3; with that “convincing” Q3 release published in December 2015. It wasn’t just the Conference Board’s estimates that surged, as everything from the University of Michigan Index to various Gallup economic tracking polls picked up the same robust “happiness.”

  

  It is difficult in these various accounts not to notice the sudden and lasting downward bend now to July 2015. There is a hard reality that has shown up this year in sharp contrast to all those supposedly interpretive numbers from later last year. As an experiment in the two parts of rational expectations, it does appear as if the first part works. It wasn’t just the quickly falling unemployment rate that was intended to be convincing of the recovery arrival, however tardy by years. Alongside that was persistent reinforcement of the narrative by policy “noise” that was undoubtedly meant to foster those perceptions; by tapering QE, then ending it and further asserting an “exit” from even ZIRP, the FOMC was inarguably trying to harden those happy acuities into a coalesced economic reality.

  That part appears to be validated, again, by at least consumer confidence if not also business confidence and even some measures of business activity (especially inventory). The second part, the more important transition, however, has been shown quite lacking. For all the immense referral to confidence and emotion, the ubiquitous TV economists talking up that 5% GDP and “best jobs market in decades” at every opportunity, it appears to have mattered so very little. In fact, as noted in May, spending very much departed at the very same time as confidence was surging.

  The retrenchment in consumer spending started during the fall but really turned downward during the Christmas holiday period; right when confidence was at its inspired apex. It has only gotten worse since that point, with actual, nominal retail sales nearly contracting (and actually doing so ex autos). Retail sales in 2015 are worse now than they were during the whole of the dot-com recession. Regardless of how you interpret that in the context of the business cycle, it is at least a disqualifying contrast to what rational expectations asserts of emotion – happy and optimistic consumers did not lead to actual spending renaissance but rather yielded to its opposite.

  I think that rightly accounts for the round trip so far in the middle of 2015, as economic reality is more of a confirmed now slump that actually bodes much worse for the rest of the year. When consumer confidence was at its peak in January, the idea of a protracted decline or even recession seemed, in the orthodox-contained mainstream, laughable. Yet here it is, now entering the second half long past the “residual seasonality” and weather-drawn obfuscations (port strike still?).

  Even the unquestioned payroll expansion has fallen to such degeneracy. The Conference Board shocked yesterday with its July 2015 decline, as the “expectations” portion of the index just collapsed from 92.8 in June to just 79.9. The reason, questionable labor markets:

  “A less optimistic outlook for the labor market, and perhaps the uncertainty and volatility in financial markets prompted by the situation in Greece and China, appears to have shaken consumers’ confidence,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement.

   

  'Americans’ assessments of current and future labor-market conditions deteriorated. The share of those who said jobs were plentiful dropped to 20.7 percent in July from 21.3 percent.

   

  The proportion of consumers expecting more jobs to become available in the next six months decreased to 13.1 percent, the lowest since November 2013, from 17.1 percent in June. [emphasis added]

  This is something that is unsurprising given 2015 in its more general sense so far. Even the vaunted Establishment Survey, still running at a high rate, has cooled somewhat. If you factor in trend-cycle, this disparity between feelings and activity becomes less surprising. In my view, especially in tandem with the break between confidence and spending, these are results of the “fake” recovery in total.

  In short, policy constructs the visible façade of recovery in the expectation that businesses and consumers will then fill it out beyond, a mechanical response to only noticeable changes. In that way, the fiscal view and the monetary view are supposed to be highly complimentary, as the government redistribution creates spending transactions financed by the monetary, central bank redistribution through asset prices and debt (modern “money”).

   

  Recovery is actually none of that, as what drives actual spending apart from forced redistribution is always opportunity; and that is not something that can be faked or reduced into mechanical, spreadsheet formality.

  I think that last part is being proven by “confidence” , as everything was supposedly going right last year, the appearance at least of the recovery arrival was as strong as perhaps it was ever going to be. In the end, again, it amounted to very little, likely even less than nothing as there is attrition to consider that these primarily monetary experiments are not neutral. There is really nothing left of last year’s “inarguable” sentiments except renewed questions of veracity all the way down to even the most basic constructions. GDP may be revised up for Q1 and Q2 may actually be 2% or more, but neither is even close to what was promised and derived from 2014’s unbridled rational expectations “experiment.”

  

  Hope, quite simply, just isn’t close to enough for a real recovery. Spending grew only worse during this “sample” period, and the fact that consumer confidence round tripped to that point shows that perfectly well. Confidence is still important to the economic system, but unlike orthodox expectations it is only a part and maybe even a small part. More than sentiment, there has to be actual jobs and wages, which I think the cycling trajectory of confidence is but another marker that those supposed job gains last year were, in fact, figments of statistical imagination. In short, the presentation of estimated job gains created broad hope in Americans not that jobs had already arrived but rather in how they thought that might signal jobs that would come. I think that is why the labor force never expanded as it should have, signaling more strongly that this was all just imaginary.

  There is an undeniable element of troubling prevarication in the whole attempt to coax unearned optimism, as taken to the extreme it means that policymakers will never quite be honest about especially realistic downsides. That may even mean, in their zeal to “fool” consumers, they fool themselves on the circular logic.

  

  

  

  

  

  

• US Police Kill 118 People In July, Highest Monthly Total Of 2015

  Early last month in “Crowdsourcing Police Brutality“, we highlighted an ongoing project at The Guardian which is attempting to tally the number of people killed by police in the US during 2015. Use of deadly force by authorities in America has become a hot button issue after several high profile cases involving the death of unarmed black suspects culminated in a night of violent protests in Baltimore. 

  In the wake of Baltimore’s “purge” (as April’s protests came to be known), two competing theories emerged about what effect the controversy has had on policing in America. We’ve outlined the two theories on a number of occasions, but for those unfamiliar, here’s a recap: 

  One theory — dubbed the “Ferguson Effect” — claims police are now reluctant to engage in “discretionary enforcement” for fear of prosecution. “Discretionary enforcement” of course refers to the use of lethal force in the line of duty and the implication seems to be that in light of recent events, law enforcement officers are afraid that their actions will be scrutinized by the public. In extreme cases, such scrutiny could culminate in social unrest, something no one individual wishes to be blamed for. 

   

  Casting doubt on the so-called Ferguson Effect is a report from The Washington Post which shows that US police are shooting and killing “suspects” at twice the rate seen in the past. More specifically, 385 people have been killed by police in 2015 alone. Unsurprisingly, minority groups are overrepresented in cases involving the fatal shooting of unarmed suspects. 

  Despite a notable spike in violence across Baltimore in the months since the riots and the persistence of violent crime in Chicago, the number of people killed by police across the country posted M/M declines in April, May, and June. In July, the trend was broken. Here’s The Guardian with more:

  July was the deadliest month of 2015 so far for killings by police after registering 118 fatalities, according to the Guardian’s ongoing investigation The Counted, which now projects that US law enforcement is on course to kill more than 1,150 people this year.

   

  The July figure brought an end to a steady decline in totals over the previous four months. After 113 people were killed in March, 101 died in April, 87 fatalities were recorded in May and 78 in June.

   

  At least 20 people killed in July – more than one in six – were unarmed, including Samuel DuBose, who was shot by University of Cincinnati officer Ray Tensing in a 19 July traffic stop that has become the latest flashpoint in protests over the police’s use of deadly force.

   

  Of the 118 people, 106 died from gunfire, making July also the first month of 2015 in which that number has exceeded 100. Two people died after officers shocked them with Tasers, two died being struck by police vehicles, and eight died after altercations in police custody.

   

  Tensing had claimed DuBose dragged him with his car, but footage recorded by Tensing’s body camera refuted his account. The officer was charged with murder on Wednesday, when at a press conference the Cincinnati prosecutor Joe Deters called the shooting “senseless” and said Tensing “should never have been a police officer”.

   

  Tensing, who turned himself in on Wednesday, was arraigned on Thursday and has been released on bail. On Friday it was announced by Deters’s office that two officers who appeared to reinforce Tensing’s false account will not be charged with any crimes.

  For those who haven’t seen the body cam footage referenced above, here is the incident:

  As a reminder, The Guardian’s effort stems from what it says is a generalized failure on the part of the US government to keep a “comprehensive record of the number of people killed by law enforcement” which it says is a “prerequisite for an informed public discussion about the use of force by police.”

  
  

  Again, we’ll leave it to readers to determine what it says about police accountability in America when other countries feel compelled to put a face and a name to hundreds of people whose deaths, if left in the hands of the US government, might have gone unnoticed or worse, undocumented. 

  

  

  

  

  

• The 2016 "Dream" Ticket

  Who needs bread and circuses…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Here's The Bad News That Nobody Is Telling You About The Record Lows In Initial Jobless Claims

  Submitted by Lee Adler via WallStreetExaminer.com,

  The headline, fictional, seasonally adjusted (SA) number of initial unemployment claims for last week came in at 267,000. The Wall Street economist crowd consensus guess close to the mark this week, at 272,000.

  We focus on the trend of the actual data, instead of the seasonally manipulated headline number expectations game. Facts tend to be more useful than the economic establishment’s favored fictitious numbers. Actual claims based on state by state filings were 230,430, which is another record low for this calendar week. It continues a nearly uninterrupted string of record lows that began in September 2013.

  The Department of Labor (DoL) reports the unmanipulated numbers that state unemployment offices actually count and report each week. This week it said, “The advance number of actual initial claims under state programs, unadjusted, totaled 230,430 in the week ending July 25, a decrease of 32,519 (or -12.4 percent) from the previous week. The seasonal factors had expected a decrease of 43,528 (or -16.6 percent) from the previous week. There were 257,625 initial claims in the comparable week in 2014. ”

  

  Initial Claims and Annual Rate of Change- Click to enlarge

  You can see for yourself from the chart just how extraordinarily low these numbers are.

  When using actual data we want to see if there’s any evidence of trend change. Thus we look at how the current week compares with this week in prior years, and whether there’s any sign of change. The actual change for the current week was a decrease of -32,500 (rounded). This week of July always has a large drop. Based on the data for this week from the last 10 years, the current decline was not very good, stronger than only last year (-29,500), and the same week in 2008 (also -29,500). In 2008 the economy was collapsing. The 10 year average decline for this week was -70,000.

  Is this weakness material? Week to week changes are noisy. The trend is what is important and it remains on track. Actual claims were 10.6% lower than the same week a year ago. Since 2010 the annual change rate has mostly fluctuated between -5% and -15%. This week’s data was right in the middle of that range. There’s no sign yet of a significant uptick in the trend of firings and layoffs.

  Population has been growing and the size of the workforce has as well, although not as fast as population. To get a better idea of how the claims data is performing over time, I normalize it based on the size of monthly nonfarm payrolls. Here’s where we can see just how extraordinary the current levels are. There were 1,613 claims per million of nonfarm payroll employees in the current week. This was a record low for that week of July, well below the 2007 previous record of 1,889. The 2007 extreme occurred just before the carnage of mass layoffs that was to begin a couple of months later. Employers were still clueless that the end of the housing bubble would have devastating effects. If they were clueless then, they are in an advanced state of delirium and delusion now.

  However, it is absolutely normal for employers to completely miss the signs of impending doom.

  Last week the media noted the fact that claims were lower than the record low of 1973. What they failed to mention was that that low came well after the Dow reached an all time high in January of that year. The devastating 1973-74 bear market, which cut the value of stocks by 50%, was in its early stages. This was an early example of employers being late to the funeral.

  

  Employers Late To The 1973 Funeral

  Click here to view chart if viewing in email

  Similar employer hoarding of workers has been associated with bubbles in the more recent past and has led to massive retrenchment, usually within 18 months or so. In the housing bubble, employer hoarding behavior continued well beyond the peak of that bubble in 2005-06.

  It’s worth noting that there was an institutional stock market bubble in 1972-73. It was the Nifty Fifty bubble, where the biggest best known stocks kept soaring while everything else in the market went nowhere. A bubble does not require mass public participation. Institutional bubbles are just as insidious, even more so.

  The current string of record lows in claims is now 5 months beyond the point at which other major bubbles have begun to deflate. Based on the fact that previous records were attained at and for some time after the peaks of massive bubbles, by that standard, the current financial engineering, central bank bubble finance bubble, which is very much a big money, institutional bubble, may be the bubble to end all bubbles!

  As a result of the fact that employers apparently tend to take their cues from stock prices, we cannot depend on the next downturn in the claims data to give us advance warning of a decline in stock prices, although there should at least be concurrent confirmation. However, history shows that the fact that claims are at record lows is warning enough!

  

  Initial Claims and Annual Rate of Change- Click to enlarge

  I look at an analysis of individual state claims as a kind of advance decline line for confirmation of the trend in the total numbers. The impact of the oil price collapse started to show up in state claims data in the November-January period. While most states show the level of initial claims well below the levels of a year ago, in the oil producing states of Texas, North Dakota, Louisiana, and Oklahoma, since the beginning of 2015 claims have been consistently above year ago levels. North Dakota and Louisiana claims first increased above the year ago level in November of last year. Texas reversed in late January. Oklahoma joined the wake shortly after that.

  Data for the July 25 week:

  

  Claims increased year to year in North Dakota, Oklahoma, and Texas. The drop in Louisiana this week is suspicious. It may be a reporting issue. That state has consistently shown higher year to year claims. The numbers have varied widely week to week but the trend of claims being significantly higher than the same week last year has been persistent. Texas, with a huge and more diversified economy improved in the second quarter as the price of oil rebounded and stabilized, but that improvement was temporary and new claims in Texas have been climbing in July.

  In the July 25 week, in total only 7 states had more claims than in the same week in 2014. That was down from 11, last week. This number fluctuates widely week to week with many states near even. At the end of the third quarter of 2014 just 5 states showed an increase in claims year to year. At the end of 2014 that had increased to 8. In early April this year the number had risen to 22. The number this week is the lowest it has been all year. This is yet another example of the extreme which employer hoarding of workers has reached.

  The 22 states that were higher in early April gives us a benchmark to watch, similar to an advance decline line in the stock market. If the number of states showing a year to year increase in claims should exceed 22, it should be an indication that the national trend of decreasing claims has reversed.

  I track the daily real time Federal Withholding Tax data in the Wall Street Examiner Pro- Federal Cash Flows report. The year to year growth rate in withholding taxes in real time is now running +3.5% in nominal terms. That’s equivalent to around +1.5% to 2% adjusted for wage inflation. The growth rate has dropped sharply in July after being remarkably consistent around +5-6% in the second quarter.

  Withholding tax collections tend to rise and fall in a cycle lasting three to four months. It’s too soon to tell if the July drop is the beginning of weakening in the slow growing top line of the “Tale of Two Economies,” US economy, or just part of the normal cyclical swing pattern in this data. The behavior of the data over the next several weeks will tell.

  The following is reposted from prior reports for the benefit of new visitors.

  The July 12 week was the reference week for the July payrolls survey. The numbers for that week were weaker than the June numbers, suggesting that Wall Street economists are likely to find their estimates for July are too high. Whether the cockamamie seasonally adjusted headline number reflects that reality or not is a crapshoot. It takes the BLS 7 revisions of the SA data over 5 years to fit it to the actual trend. The first release is hit or miss. But even if the number comes in below expectations, it probably will not influence the Fed, which remains hellbent on trying to get rates up sooner rather than later.

  The Fed’s favored measure of inflation, PCE, suppresses the measurement of inflation even more than the just released CPI. If the Fed believed this data, it would be even further behind the curve in recognizing that inflation is running much hotter than the official measures show than it is. The Fed knows that, and has inserted weasel words into its various propaganda releases that it will raise rates as long as the Fed thinks that inflation is moving toward the 2% target. It does not actually need to be at the target. The Fed is prepared to ignore the official measures because the members realize that they’re bogus.

  The Fed will use or ignore whatever stats it wants depending on whether they fit its preconceived narrative, which is “We’re gonna try to raise rates at least once this year, and if that doesn’t work, we’ll think of an excuse not to do it again, because raising rates is really data dependant depending on which data dependably supports our narrative, and which data we will ignore, because it all depends on dependably dependant official data, none of which is dependable.”

  The actual claims data, and actual withholding data, show the financial engineering bubble economy is still at full boil. This will continue to encourage the Fed to engage in the charade of pretending to raise interest rates sooner rather than later, but only because they have conditioned the market to expect it, a conditioning that they now regret they had undertaken. They’re walking back expectations now because they know they will have problems getting rates to go up.

  

  

  

  

  

• Russian Military Helicopter Crashes During Air Show Celebrating Airborne Forces Day, One Pilot Dead

  August 2 is the day when Russia celebrates its Airborne Forces, only this year something went very wrong, and it was all caught on tape.

  As Reuters report, one pilot died and another was injured when a helicopter crashed at an airshow in the Russian region of Ryazan on Sunday. During aerobatics at the event some 200 km (124 miles) south-east of Moscow, an Mi-28 helicopter went into a flat spin before crashing.

  RT adds that while performing a stunt at the Aviamix air show on Sunday, a helicopter belonging to the Berkuty (Golden Eagles) aerobatic team suddenly banked on one side and started to lose height.

  The moment the helicopter lost control and crashed was caught on video:

   

  Russia’s Air Force Commander-in-Chief Viktor Bondarev has ordered the grounding of all Mi-28 assault helicopters following the catastrophe in central Russia, the Defense Minister reported.

  “The crew fought to save the helicopter to the end. Unfortunately, the chief pilot died on impact – the co-pilot survived. According to the second pilot, the accident occurred due to technical failure. I have suspended all Mi-28 flights. The commission under my leadership is working to clarify the causes of the disaster,” Bondarev said.

  As of this moment, there has been no hint of industrial sabotage either through Stuxnet or Windows 10.

  

  

  

  

  

• As China Admits It Lied About Its Local Debt Levels, Local Billionaires Are Quietly Liquidating Their Assets

  It was almost exactly two years ago, when during China’s long-forgotten attempt to actively deleverage its economy (remember that? good times…) we commented on the country’s s first attempt to estimate what its local government debt is since June 2011.

  This is what we said in July 2013:

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

  Not at all surprisingly, after conducting the goalseeked “exercise” of estimating its local government debt, the final number was well below the worst case or even average scenario, while the level of NPLs was at a very leisurely pace around 1% of total.

  We promptly accused China of doing what it does best: fabricate the data, but since the housing bubble was still raging (it has since burst), and the stock market bubble (which also popped a month ago) was yet to be unveiled, few cared. Furthermore, in early 2015 China unveiled an LTRO-type plan in which in would swap out maturing local government debt with long maturities, thus hoping to firmly shove the problem with unsustainable local government debt under the rug for the (un)forseeable future.

  Then overnight something unexpected happened: Sheng Songcheng, the director of the statistics division of the People’s Bank of China (PBOC), was quoted by the National Business Daily on Saturday whereby he essentially admitted China had been lying about not only its local debt exposure but the level of NPLs across the economy.

  Quoted by Reuters, Sheng said that “downward pressure on China’s economy will persist in the second half of the year as growth in infrastructure spending and exports is unlikely to pick up.” 

  He said that Chinese companies are not optimistic about business prospects according to the central bank’s second-quarter survey, and that :pressured by uneven domestic and export demand, cooling investment and factory overcapacity, China’s economic growth is expected to slow to around 7 percent this year, the lowest in a quarter of a century, from 7.4 percent in 2014.” The Chinese GDP reality, of course, as noted here before is somehere in the 1-3% range, and based on such more credible metrics as industrial production and electricity usage, it may even be negative.

  The punchline: Sheng warned about the risks of local government debt, saying that 2 trillion yuan ($322.08 billion) in bond swaps may not be able to fully cover maturing debt, according to the report.

  What he really said, as paraphrased by Bloomberg, is that “local governments tended to not report all their debts when audited in June 2013, thus the 2 trillion yuan debt swap plan arranged this year may not cover all debts due, Sheng cited as saying.”

  Oops.

  In other words, because the local governments lied (and Beijing had no idea, none at all this was happening) China will have no choice but to engage in an even more active bailouts.

  That’s not all: as a result of China’s various bubbles bursting, the biggest problem with the nearly $30 trillion financial system in the world’s most populous country is sttarting to be revealed: its non-performing loans, i.e, the level of bad debt. According to Sheng outstanding bad loans and NPL ratio at banks rose in 1H; banks’ profit growth slowed, Sheng cited as saying. NPL ratio reached 1.87% as of end-June, report cites Sheng as saying, without specifying which banks he refers to.

  And if China is admitting a NPLs ratio of 1.87%, then the real print is probably 4-5x greater. Which means that on a system with $26 trillion in deposits, approximately $3 trillion in loans is non-performing. Or about half the market cap of Chinese stocks, and a third of Chinese GDP.

  Is the problem starting to become clear? It is to some, particularly China’s wealthiest.

  WSJ reports that having glimpsed what is coming over the horizon, China’s wealthiest are quietly starting to dumb their holdings to the greatest fools: “A property developer backed by Hong Kong billionaire Li Ka-shing has put an office and retail property project in Shanghai up for sale, according to two people familiar with the matter. A sale would mark the latest China property divestment by the investor, one of Asia’s richest, who is closely watched for signs of how he sees markets shifting.”

  This is not the first time Ka-Shing has cashed out in recent months:

  In June, Mr. Li’s Cheung Kong Property Holdings Ltd. put up for sale Century Link and Century Link Tower, a shopping mall and twin office towers currently under construction in the Pudong Lujiazui area, said people briefed on details of the offer. A Cheung Kong spokeswoman didn’t respond to requests on Sunday for comment.

  Or just before the market crashed. And then more previously:

  Over the past two years, companies backed by Mr. Li and his family have sold five office and shopping mall projects in Shanghai, Beijing, Nanjing and Guangzhou. Many investors eye moves by his companies for hints on the tycoon’s view of the property market.

   

  His companies, including Hutchison Whampoa and ARA Asset Management Ltd., have been offloading their real-estate assets as China’s economy decelerates to its slowest growth in more than two decades.

  It remains to be seen who will buy what Ka-Shing is selling: if indeed the public mood is determined by his marginal trading activity, only the government will be bold enough to acquire his assets now that he has entered a liquidation phase, especially since the asking price of just one commercial project is about $2.6 billion.

  The asking price is around 60,000 yuan per square meter, the people said. According to Cheung Kong Property’s website, the shopping mall and office project occupies a total of about 269,000 square meters, which would bring the total asking price to more than 16 billion yuan ($2.6 billion).

  To sum up: misrepresentations about local government debt, lies about bad debt levels, and now, the wealthiest locals are quietly, slowly getting out of Dodge, er, China. We can only hope that China’s desperate attempt to hold up its stock market, the final frontier before all confidence in China crumbles alongside, lasts a few months longer, or the great Chinese hard landing that has been discussed for years, and always delayed in the last moment, is now virttually inevitable.

  

  

  

  

  

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• Venezuela Increasingly Looks Like A War Zone

  Over the years, we have repeatedly poked fun at the transformation of Venezuela into a “socialist utopia” – an economy in a state of terminal collapse, where the destruction of the currency (one black market Bolivar is now worth 107 times less than the official currency’s exchange rate) and the resulting hyperinflation is only matched be barren wasteland that local stores have transformed into now that conventional supply chains are irreparably broken.

  Just this past Wednesday we showed a clip of what is currently taking place inside Venezuela supermarkets, noting that “the hyperinflationary collapse in Venezuela is reaching its terminal phase. With inflation soaring at least 65%, murder rates the 2nd highest in the world, and chronic food (and toilet paper shortages), the following disturbing clip shows what is rapidly becoming major social unrest in the Maduro’s socialist paradise… and perhaps more importantly, Venezuela shows us what the end game for every fiat money system looks like (and perhaps Janet and her colleagues should remember that).”

   

  Unfortunately, while mocking socialist paradises everywhere is a recurring theme especially once they have completely run out of other people’s money to burn through, what always follows next is far less amusing – completely social collapse, with riots, civil war and deaths not far behind.

  That is precisely what the video shown below has captured. In the clip, a demonstration against Venezuela’s poor transportation services quickly turned violent. End result: one person dead from a gunshot wound, more than 80 arrested and four shops looted on the Manuel Piar Avenue in San Felix.

  What is most distrubing is how comparable to an open war zone what was once a vibrant, rich and beautiful Latin American country has become.

  This is just the beginning: with the ongoing collapse of the economy, the resultant acts of social violence will only deteriorate and claim more innocent lives, until the “socialist utopia” ends as it always does: with the arrival of a military coup or a full blown civil war.

  

  

  

  

  

• American (Predatory) Capitalism Explained In 130 Seconds

  Now, more than ever, with Greece and Ukraine front and center, understanding how corporations take control of countries, and how capitalism drives the expansion of the Military Industrial Complex is crucial: “we have created a mutant form of predatory capitalism which has created an extremely unstable, unsustainable, unjust and very very dangerous world.”

   

  Source: http://www.studiojoho.com/

  

  

  

  

  

• Bubble Finance And A Tale Of Two Spheres

  Submitted by Doug Noland’s Credit Bubble Bulletin,

  In a tiny subsection of the analytical world, analysis is becoming more pointed and poignant. I appreciate Bill Gross’s August commentary, where he concluded: “Say a little prayer that the BIS, yours truly, and a growing cast of contrarians, such as Jim Bianco and CNBC’s Rick Santelli, can convince the establishment that their world has changed.”

  I’ll include the names Russell Napier, Albert Edwards and David Stockman as serious analysts whose views are especially pertinent. I presume each will exert minimal effect on “the establishment.”

  Back to Bill Gross: “The BIS emphatically avers that there are substantial medium term costs of ‘persistent ultra-low interest rates’. Such rates they claim, ‘sap banks’ interest margins…cause pervasive mispricing in financial markets…threaten the solvency of insurance companies and pension funds…and as a result test technical, economic, legal and even political boundaries.’ ‘…The reason [the Fed will commence rate increases] will be that the central bankers that are charged with leading the global financial markets – the Fed and the BOE for now – are wising up; that the Taylor rule and any other standard signal of monetary policy must now be discarded into the trash bin of history.”

  Count me skeptical that central bankers are on the brink of “wising up.” These days I have less confidence in the Fed than ever. For one, they are hopelessly trapped in Bubbles of their own making. Sure, crashing commodities and bubbling stock markets incite a little belated rethink. Yet I’ve seen not a hint of indication that policymakers are about to discard flawed doctrine. Devising inflationary measures – clever and otherwise – will remain their fixation. For a long time now, I’ve identified inflationism as the root cause of precarious financial and economic dynamics that will end in disaster. It’s been painful to witness the worst-case scenario unfold before our eyes.

  Ben Bernanke (and his cohorts and most of the economic community) believes much of the hardship from the Depression would have been averted had only the Fed aggressively printed money after the 1929 stock market crash. Modern-day inflationism rests on the premise that central banks (in a fiat world) can control a general price level. This view ensures that Credit and speculative Bubbles, while potentially problematic, are not to be overly feared. Discussion of mal-investment and economic imbalances is archaic and irrelevant. And somehow the view holds that Bubble risk pales in comparison to “The Scourge of Deflation.”

  After all, central bankers can always reflate system Credit and spur a generalized inflation. Stated differently, it is believed that central bankers and their electronic printing presses have the power to inflate out of deflationary Credit and economic busts. And repeated bouts of reflationary policies over recent decades have seemingly confirmed the merit of conventional doctrine. It has evolved to the point where the primary issue is whether policymakers have the determination to reflate sufficiently.

  The onus, I suppose, is on my analysis (and other “contrarians”) to convince readers that This Time Is Different. Especially over the past three years, unprecedented central bank “money” printing has corresponded with heightened disinflationary forces globally. As I note repeatedly, the upshot has been unprecedented divergence between inflating securities/asset market Bubbles and deflating fundamental economic prospects. This divergence was widened notably over recent weeks. The fact that egregious monetary inflation has been pulled to the heart of contemporary “money” and Credit – central bank Credit and sovereign debt – is as well fundamental to the “End is Nigh” Thesis.

  The work of the great Hyman Minsky plays prominently throughout my analytical framework. In particular, I appreciate his keen focus on “financial evolution.” Over time, it is inherent in finance (i.e. Credit and markets) to gravitate from the cautious and stable to the aggressive and increasingly unstable. It’s human, Credit and market nature. Minsky’s “Financial Instability Hypothesis” and the late-stage “Ponzi Finance” dynamic are more pertinent today than ever.

  Finance has evolved profoundly over the past thirty years. Evolution in central bank monetary management has been equally momentous. Over time, the increasingly unhinged global fiat financial “system” turned acutely unstable. The Fed, in particular, resorted to market intervention and nurturing non-bank Credit expansion in order to sustain booms, inflated asset markets and deep structural economic maladjustment. This required the Federal Reserve’s adoption of doctrine ensuring liquid and stable securities markets – a historic boon to leveraged speculation, the evolving (and highly leveraged) derivatives marketplace and securities prices generally.

  Fed and global central bank backstops buttressed the historic expansion in market-based finance. The proliferation of interlinked global market Bubbles drove outrageous policy experimentation. In time, the resulting globalized Bubble in market-based finance and speculation ensured that bolstering securities markets developed into the chief priority for the Fed and fellow global central bankers and officials. Just look at the Chinese over recent weeks.

  Long-time readers know I am particularly fond of the “Financial Sphere vs. Real Economic Sphere” framework. It is valuable to view these as two separate but interrelated “Spheres,” with contrasting supply/demand, price and behavioral dynamics. In simplest terms, throwing excess “money”/liquidity at these respective “Spheres” over an extended period will foster disparate dynamics and consequences. And, importantly, over recent decades the Fed and global central bank policies have gravitated toward increasingly desperate “Financial Sphere” intervention and manipulation. The crisis response to the 2008/2009 crisis and then again in 2012 were decisive.

  From Russell Napier “Most investors still believe that we live in a fiat currency world. They believe central bankers can create as much money as they believe to be necessary. Such truths are on the front page of every newspaper, but they may contain just as much truth as the headlines of their tabloid cousins. A belief in this ability to create money is the biggest mistake in analysis ever identified by this analyst. The first reality it ignores is that money, the stuff that buys things and assets, is created by an expansion of commercial bank, and not central bank, balance sheets. The massively expanded central bank balance sheets have not lifted the growth in broad money in the developed world above tepid levels. Until that happens, developed world monetary policy must be regarded as tight and not easy.”

  This is thoughtful and important analysis. I’ll approach it from my somewhat contrasting analytical framework. From CBB day one, I’ve tried to significantly broaden how we define and analyze “money” and so-called “money supply”. I draw from Mises’ “fiduciary media” and inclusion of financial instruments with the “functionality” of traditional narrow definitions of money supply (i.e. currency, central bank Credit and bank deposits). For me, the perception of a safe and liquid store of (nominal) value is critical.

  Moneyness is a market perception. The epicenter of danger lies in “money’s” virtual insatiable demand. It is prone to over-issuance. There is a powerful proclivity for government intervention, manipulation and inflation. The perception of moneyness is, in the end in a world of fiat, self-destructive.

  After the past almost seven years, I don’t question central banks’ capacity to create “money.” And my framework doesn’t ascribe special status and power to commercial bank “money” or balance sheets. Besides, U.S. M2 “money supply” has inflated about $2.5 TN in three years, or 20%. Over three years U.S. Commercial Bank Liabilities have inflated the same $2.5 TN, or almost 20%.

  The past three years have witnessed historic “money” and Credit expansion on a global basis. The fundamental problem is that global central bank (and governmental) policies over 30 years have profoundly distorted and undermined market incentive structures. This issue is not insufficient “money” – central bank, bank or otherwise. Finance has, however, been incentivized to flow in excess chiefly into the Financial Sphere, where it enjoys comforting policymaker control and support. As global maladjustment and imbalances (which engender disinflationary pressures) mount, why invest in the Real Economy Sphere when it appears so much safer and easier to chase returns in inflating central bank-supported securities market booms?

  Why would company managements not use abundant corporate cash flow to repurchase shares when waning returns make it increasingly difficult to justify Real Economy investment? Why proceed with major new investment plans when ultra-easy M&A finance favors acquisitions? Why not just join The Crowd throwing “money” at tech startups and biotech where real economic returns are irrelevant anyway? Why not just “invest” in ETFs shares that buy shares in companies that repurchase their shares? Better yet, why not invest in “safe” bond funds that invest in safe companies that safely borrow “money” to buy back their shares and make acquisitions? Above all, don’t just sit there in “money” that returns near zero when there’s been such a proliferation of “money-like” financial instruments and products with the promise decent yields and returns? You see, it’s just not a quantity of “money” issue.

  This vein of analysis offers layers of progressive complexity. Financial Sphere Bubbles over time engender major structural maladjustment. Throughout equities and debt markets, Bubble Dynamics ensure liquidity flows in progressive excess to the hot asset classes, sectors and products. If the Fed, central banks or the Chinese government seek to underpin such dynamics, momentum will eventually climax with precarious Terminal Phase “blow off” excess. This played prominently in techland in the late-nineties, housing/consumption during the mortgage finance Bubble period, in commodities and EM in the post-2008/09 crisis “global reflation trade,” and more recently (most conspicuously) in tech and biotech.

  I have argued that it is a perilous myth that central bankers these days control a general price level. They instead incentivize massive financial flows into securities markets and fashionable sectors. Over time, ramifications and consequences reach the profound. For one, excess liquidity promotes over/mal-investment. It’s only the scope and nature that remain in question.

  If major Bubble flows inundate new technology investment, the resulting surge in the supply of high-margin products engenders disinflationary pressures elsewhere. Policy responses to perceived heightened “deflation” risks then only work to exacerbate Bubbles, mounting imbalances and structural fragilities. This was a critical facet of “Roaring Twenties” analysis that was lost in time.

  Bubbles categorically redistribute and destroy wealth, and I will turn more optimistic when policymakers finally “wise up” to this harsh reality. On the one hand, progressively destabilizing Financial Sphere monetary disorder ensures deep economic maladjustment (i.e. excessive Bubble-related spending in tech, housing related, EM, commodities and China). On the other, serial securities and asset market booms and busts spur destabilizing wealth redistributions – a boon to some and economic hardship (boom and bust collateral damage) to many. Both work to foster economic stagnation – deep structural impairment impervious to central bank reflationary measures.

  Reflationary policies and attendant inflated market Bubbles can hold the consequences at bay for a while. Importantly, resulting monetary disorder works to exacerbate both Financial Sphere and Real Economy Sphere maladjustment with potentially catastrophic consequences. Economists have traditionally debated “money illusion” (notably Irvine Fisher and JM Keynes). “Wealth illusion” is today more appropriate. The U.S. economic structure remains viable – these days the “envy of the world” – only so long as perceived wealth from securities markets remains grossly inflated. The consumption-based U.S. economy requires record household sector perceived wealth (inflated Household Net Worth). And this requires ongoing loose financial conditions, strong Credit growth and buoyant financial flows.

  Because of the importance of the data, I wanted to circle back briefly to document key data released in last month’s Q1 2015 Z.1 “flow of funds” Credit report.

  As a proxy for the “U.S. debt securities market,” I combine Fed data for outstanding Treasury, Agency, Corporate and muni debt securities. I then combine this with Total Equities to come to my proxy of the “Total Securities” markets. During Q1, Total Securities jumped $759bn to a record $73.195 TN. Total Securities as a percentage of GDP jumped five percentage points to a record 414%. For perspective, this ratio began the nineties at 183%, concluded 1999 at 356% and then rose to 371% to end 2007.

  The value of U.S. Household (and non-profits) assets jumped $1.611 TN during Q1. By largest categories, Financial Assets jumped another $1.07 TN and Real Estate assets increased $500bn. And with Household Liabilities little changed for the quarter, Household Net Worth (assets minus liabilities) rose $1.6 TN to a record $84.925 TN. Over the past year, Household Net Worth inflated about $4.6 TN, with a two-year gain of $12.6 TN. Since the end of 2008, Household Net Worth has ballooned a stunning $28.4 TN, or 50%.

  One cannot overstate the integral role the inflation in Household Net Worth has played in the Fed’s reflationary policymaking. Household Net Worth ended Q1 at a record 481% of GDP. This compares to 447% to end Bubble Year 1999 and 476% in Bubble Year 2007.

  As was the case again during Q1, during the inflationary boom period, strong inflationary biases ensure that “wealth” increases a multiple of underlying Credit growth. This dynamic was on full display during both the tech and mortgage finance Bubble episodes. I recall being amazed at how $1 TN of mortgage Credit growth would fuel a $4.0 TN inflation in Household Net Worth. This “virtuous” dynamic turned vicious during the bust. The amount of new Credit required just to stabilize an inflated and maladjusted system becomes enormous.

  There is now chatter of the Chinese government intervening in the stock market to the tune of $100bn in a single session. We’ve seen how, despite repeated bailouts and debt reductions, the Greek black hole grows only bigger. Meanwhile, with commodities in freefall, it was another ominous week for EM. And these examples provide apt reminders of inflationism’s biggest flaw: once commenced, it’s about impossible to rein in. I would add that “money” printing will never resolve the issue of structural maladjustment. Monetary inflation will, however, ensure only greater quantities of “money” will be required come the inevitable bust. And those quantities will eventually bring to question confidence in “money.” Read monetary history.

  

  

  

  

  

• Welcome To Planet Obama

  “Opposite”-land…

   

  

  
  

  Source: Townhall.com

  

  

  

  

  

• This Coal Mine Valued At $630 Million In 2011 Just Sold For One Dollar

  The following photos are from Australia’s Isaac Plains coking-coal mine.

  

  

  

  

  

   

  Why is Isaac Plains relevant? Well, in 2011 at the height of the Australian mining boom, Japanese conglomerate Sumitomo thought it has spotted a bargain, and a SMH reports, it approached Tony Poli, the founder of mid-tier miner Aquila Resources with an offer: it would buy its 50% stake in Isaac Plains, at the time Aquila’s only producing mine, for $430 million.

  Market participants thought Aquila’s stake might fetch $300 million at best but Sumitomo was confident it would make a strong return, and offered almost 50% above fair value, especially since Brazil’s legendary mining company Vale owned the other 50% stake.

  Net, the total value of the Isaac Plains mine in 2011 just just about $630 million.

  It turns out Sumitomo was very, very wrong, and within a few years the writing was on the wall. In September 2014, Sumitomo and Vale shuttered the mine citing the downturn in the international coal market. Sumitomo said it would also take a writedown worth ¥30 billion ($11 million) on its Australian coal investments.

  And as SMH tongue in cheekly adds, Isaac Plains was added to the long list of coal mines up for sale – but at a price. That price was finally revealed on Thursday: the princely sum of $1.

  Why the complete collapse in price of the mine? Simple: blame China.

  As Bloomberg explains, “a slump in the price of coking coal, used to make steel, to a decade low is forcing mines to close across the world and bankrupting some producers. Alpha Natural Resources Inc., the biggest U.S. producer, plans to file for bankruptcy protection in Virginia as soon as Monday, said three people with direct knowledge of the matter. It was valued at $7.3 billion in 2008.”

  

  At the peak of the Chinese commodity bubble, which in turn resulted in a golden age for Australia’s mining companies, production from Isaac Plains hit a peak output was 2.8 million tons a year, with coal sold to steelmakers in Japan, South Korea and Taiwan.

  However, in the past year, with the bursting of the Chinese housing bubble, and the dramatic cooling off of China’s shadow banking system, the commodity demand of Chinese ghost cities has gone on hiatus, and so has the production of mines such as Isaac Plains:

  Coal’s demise is just part of a broader slump in commodity prices, which fell to the lowest in 13 years this month. The benchmark price for coking coal exported from Australia has slumped 24 percent this year to $85.40 a ton on Friday, according to prices from Steel Business Briefing. The quarterly benchmark price peaked at $330 a ton in 2011, according to Bloomberg Intelligence.

   

  The closing of Isaac Plains and a second mine in Australia shut last year, Integra Coal, led to a 7.2 percent reduction in Vale’s total coal output in the first half of 2015. It took a $343 million writedown on its Australian coal assets, part of total impairments of $1.15 billion last year, Vale said Feb. 26.

  Still, Vale’s and Sumitomo’s complete wipeout loss is someone else’s gain, in this case the new owner of Isaac Plain, which acquired the assets for a nominal tip, and merely had to fun ongoing spending and any debt obligations.

  The new owners of Isaac Plains, Stanmore Coal, hope to restart production in the first half of 2016 and estimate the mine could operate for another three years.

  The market took notice when the news of the dramatic purchase hit: Stanmore remains a minnow with a market capitalization of just $30 million. But with its shares up nearly 70 per cent on Thursday, investors have taken to the deal.

  Still, as SMH adds, sluggish coking and thermal coal prices will continue to weigh heavily however regardless of how quickly they can restart production. Metallurgical coal has fallen another 25 per cent since January to about $US82 a tonne, from more than $US300 in 2011, while thermal coal has lost 8 per cent since January to languish around $US59 a tonne, compared to about $US150 three years ago.

  Then again, with Stanmore’s cost basis virtually nil, it would be a fool not to take the discarded assets. As Kiril Sokoloff’s 13D wrote recently, “Buy when they give it away. What are they giving away now?” and recount how in 1977, “we were walking uptown in New York City with a friend who worked for a prominent trust company. He told us that the trustees of an estate had just sold a triplex on East End Avenue for $1. The reason? The $3,000 per month maintenance was “depleting the assets of the estate”.

  Last week, Glencore sold the Cosmos nickel mine for AU$24.5 million. In 2008, Xstrata Plc paid AU$3.1 billion for Jubilee Mines to gain control of Cosmos—the Perth-based company’s flagship operation.

   

  For what it’s worth, Javier Blas tweeted this week that, based on data from Citi Research, 90% of all M&A that miners did since 2007 has been written off. Makes you wonder about the current M&A boom…

  All of which makes the researcher wonder if investors are missing the big picture:

  There is a giant infrastructure investment boom just getting started in Asia and along the Silk Road. Wasn’t the whole commodity boom of the last decade based on infrastructure investment in China? Now, it will expand to all of Asia and beyond.

   

  It is interesting to note how little is being written in the West about One Belt, One Road (see related themes). China Development Bank notes that the number of cross-border projects underway in the Silk Road effort already amount to $980 billion. Reportedly, Asia’s infrastructure needs are close to $8 trillion by 2020.

  It remains to be seen if China can rebound, and if purchases such as Stanmore’s $1 acquisition of a site that has a resource of 30 million metric tons will be lucrative. At current prices, every incremental ton produced loses money. But maybe prices will rebound.

  For now, however, one thing is certain – the biggest winner is not Stanmore despite its suddenly soaring stock price, but Tony Poli, the person who sold Issac Plains at the absolute top to the naive Japanese conglomerate:

  [Poli] could barely believe his luck when Sumitomo came knocking. Then in 2014 Aquila was acquired by Baosteel and Aurizon for an eye watering $1.4 billion.  It gave the two companies access to Aquila’s West Pilbara iron ore project, but the timing could barely have been worse. Iron ore prices have slumped by more than half in the last 12 months leading to speculation Aurizon may be forced to eventually take a writedown on the value of the Aquila deal on its balance sheet.

  All of which is a very timely reminder: it is never an actual profit, until it has been booked. And as noted above, for 90% of all M&A deals in the past decade, the only thing booked is 100% losses.

  

  

  

  

  

• Gold And The Grave Dancers

  Submitted by Pater Tenebrarum via Acting-Man.com,

  The Asset They Love to Hate …

  Back in the 1960s, Alan Greenspan wrote a well-known essay that to this day is an essential read for anyone who wants to understand the present-day monetary and economic system (which is a kind of “fascism lite” type of statism, masquerading as capitalism) and especially the almost visceral hate etatistes harbor toward gold. Greenspan’s essay is entitled “Gold and Economic Freedom”, and as the title already suggests, the two are intimately connected.

   

  

  Alan Greenspan in the mid 1970s – although he later turned out to be a sell-out, his understanding of economics undoubtedly dwarfed that of his successors at the Fed (and we are not just saying this based on the essay discussed here).

  Photo credit: Charles Kelly / AP Photo

  What makes Greenspan’s essay especially noteworthy is that it manages to present both theory and history in a concise, easy to understand manner. There isn’t a word in it we would change. At one point, Greenspan provides a brief history lesson. Yes, the (relatively) free banking era in the United States in the 19^th century involved fractional reserve banking and as a result, there were frequent boom and bust cycles. However, since there was no “lender of last resort” with an unlimited money printing capacity, these business cycles were sharp and brief, and the market economy quickly righted itself every time:

  “A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.”

  (emphasis added)

  Alas, these relatively harmless business cycles provided interventionists with an opening to implement their central planning wet dreams, even though their ideas were based on what can charitably only be called appalling economic ignorance. This economic ignorance informs the monetary system to this day and we have nothing but contempt for these planners and their intellectual handmaidens.

  We cannot quantify it with any precision, but we believe it can be taken as a given that they have retarded economic progress by an order of magnitude, for reasons of compounding alone. Based on historical data, we would estimate that average real annual growth would have been at least twice as large since 1913 than it has actually been if the economy had remained free. Compounded over more than a century, this is basically the difference between what we have today and the universe of Star Trek.

   

  

  US GNP per capita in the decades before the establishment of the Federal Reserve: equitable and strong growth, unmatched before and ever since – in spite of fairly frequent boom-bust cycles click to enlarge.

  As Greenspan notes:

  “But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline — argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913.”

  (emphasis added)

  At the conclusion of his essay, Greenspan makes clear why the welfare/warfare statists just hate gold with a passion bordering on hysteria:

  “Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.”

   

  […]

   

  In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

   

  This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

  (emphasis added)

  This always was and remains true.

  Bought Off Intellectuals

  All the “justifications” for today’s system we hear from the supporters of the centrally planned fiat money dispensation are nothing but propaganda. This propaganda includes a number of historical lies (such as the old canard that “governments had no choice but to abandon the gold standard if they wanted to rescue the economy”), commingled with theoretical assertions that have been thoroughly refuted countless times.

  One of the latter is that an economy allegedly cannot grow unless the money supply grows as well (the truth is that any money supply is as good as any other, and in a free market prices would simply adjust). Another is that central banks need to be able to apply their “scientific monetary policy” to make up for the alleged deficiencies of the free market. In reality, central banking and fiat money have slowed real economic growth to a crawl and have produced boom-bust cycles of ever greater amplitude. Something like the “Great Depression” would never have been possible without a Federal Reserve and two heavily interventionist governments coming to power in a row (first Hoover’s and then FDR’s).

  The assertions listed above and similar ones are reiterated sotto voce by countless mainstream economists and the entire mainstream financial press at every opportunity. Hoever, this should be no surprise: The Federal Reserve has practically bought off the entire economics profession (incidentally, so have other central banks and assorted state-funded institutions).

  “The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession

   

  […]

   

  One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past

   

  […]

   

  A Fed spokeswoman says that exact figures for the number of economists contracted with weren’t available. But, she says, the Federal Reserve spent $389.2 million in 2008 on “monetary and economic policy,” money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009. That’s a lot of money for a relatively small number of economists.

  (emphasis added)

  In a free market, the market value of thousands of today’s hyper-specialized macroeconomists would be a tiny fraction of what they get paid by the State. In an unhampered free market economy, many of them would probably be forced to actually perform productive jobs. There would of course still be room for economists, but only the most committed and talented among them would could hope to receive funding. Absolutely no-one would bother paying for central planning advice or statist propaganda, that much is absolutely certain. Obviously these economists are highly unlikely to bite the hand that feeds them.

  As Hans-Hermann Hoppe has noted in this context:

  “There are almost no economists, philosophers, historians, or social theorists of rank employed privately by members of the natural elite. And those few of the old elite who remain and who might have purchased their services can no longer afford intellectuals financially. Instead, intellectuals are now typically public employees, even if they work for nominally private institutions or foundations. Almost completely protected from the vagaries of consumer demand (“tenured”), their number has dramatically increased and their compensation is on average far above their genuine market value. At the same time the quality of their intellectual output has constantly fallen.

   

  What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today’s intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the state, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.”

  (emphasis added)

   

  

  Economist Hans-Hermann Hoppe – a strongly committed enemy of the State, as the following quote illustrates: “[The State is] an institution run by gangs of murderers, plunderers, and thieves, surrounded by willing executioners, propagandists, sycophants, crooks, liars, clowns, charlatans, dupes and useful idiots – an institution that dirties and taints everything it touches”.

  Photo via libertarianin.org

  Given that intellectuals have great influence – the masses typically follow their lead, whether consciously or not – we shouldn’t be surprised that this “viciously statist propaganda” has become a hallmark of the mainstream press as well. This brings us back to the topic of gold.

  Premature Grave Dancing

  Readers may have noticed that there simply is no other asset that provokes more intense hatred in the mainstream press than gold. When the gold price declines as it has done since 2011, the press is literally brimming over with Schadenfreude, grave dancing exercises and anti-gold tirades. The lengthy preamble above is an attempt to explain why this is the case.

   

  

  Intense grave dancing – the poor fellow at the bottom is Mr. Gold

  Engraving by Michael Wolgemut

  Simply put, gold is the one asset that provides the most reliable indictments of central economic planning and the abominable monetary and economic system that has been forced on us by the etatistes. In spite of its innumerable failures, socialism and its close cousin, modern-day corporatism (i.e., crony socialism), remains highly popular with the intellectual class, as it provides it with influence and money beyond its wildest dreams.

  Unfortunately, it is even more popular with big business. The handful of large corporations that are controlling the press these days are not exactly big fans of the free market and its unfettered competition either. Established big business organizations prefer to keep upstart competition suppressed by means of obtaining privileges from the State. One would think that business should be against the over-regulation that characterizes today’s bureaucratic Leviathan State. This is not the case: Since it harms small emerging competitors more than established businesses, they are actually in favor of it.

  Needless to say, the most powerful industry of modern times, the fractionally reserved banking cartel, is one of the biggest beneficiaries of the system and as such provides sheer unlimited funding to keep things right as they are.

  When gold’s fall accelerated recently, we have seen an outpouring of doom-saying and thinly disguised contempt in the mainstream press that actually puts everything seen before into the shade. In a way this is surprising; after all, gold is a completely unimportant asset, right? Just think about this for a moment. If another currency, such as e.g. the yen, suffers a big decline, is it subjected to even remotely comparable vitriol in the press? Here are a few examples from the last week or so (with a few comments by us interspersed):

  From Bloomberg (Bloomberg belongs to a limousine socialist, and is well-known for its pro-central banking/ pro-money printing and anti-gold editorial line. Some of the most ludicrous articles about gold ever published have appeared on Bloomberg):

  Gold Slump Not Over as Speculators Go Net-Short for First Time – apparently Bloomberg’s authors have yet to hear about contrarian signals.

   

  Gold Is Only Going to Get Worse (“Our survey shows a majority of traders and investors aren’t optimistic”) – indeed, Bloomberg seems to be blissfully unaware of contrarian sentiment analysis.

   

  Gold Could Fall to the $1,000 Mark (video)

   

  Good Luck Bargain Hunting for Gold Miners – naturally, gold miners are even more doomed than gold itself…

   

  From the Wall Street Journal:

  Let’s Get Real About Gold: It’s a Pet Rock – actually, as we have previously pointed out, it’s a door stop, not a pet rock. We should perhaps mention here what Jason Zweig, the author of this WSJ article, wrote in 2011 right at gold’s peak. From Mr. Zweig’s WSJ Article of September 17, 2011:

   

  “Growing numbers of investing experts have been declaring that gold is a bubble: an insanely overvalued asset whose price is bound to burst. There is no basis for that opinion.”

   

  With respect to gold miners (which since then are down by more than 80%) he opined:

   

  “But there is one aspect of gold investing where it is possible to make rational estimates of value: the stocks of gold-mining companies. And, by historical standards, they seem cheap—based not on subjective forecasts of continuing fiscal apocalypse, but on objective measures of stock-market valuation.”

   

  This is really a textbook example of how market sentiment works.

   

  From Marketwatch:

  The carnage isn’t over in gold, other metals-mining stocks

   

  Study predicts gold could plunge to $350 an ounce (i.e., here come the extreme predictions, the inverse of the vast bullish consensus and the extreme bullish predictions that were made at the peak by gold bulls)

   

  And all of this was finally crowned with the following pronouncement in the Washington Post:

  Gold is doomed

   

  Interestingly the author of this article, Matt O’Brian, actually gets one thing right, although his conclusion remains utterly wrong – he writes:

   

  “When you think about it, a bet on gold is really a bet that the people in charge don’t know what they’re doing.”

   

  That’s exactly what it is Mr. O’Brian. The wrong conclusion he comes to is this one:

   

  ”But economists do, for the most part, know what they’re doing.”

   

  Yes, in some parallel universe perhaps. That people can profess such beliefs after the twin debacles of the tech and housing bust and after yet another giant asset bubble has been blown by these “economists who know what they are doing” is truly stunning. How blind and naïve can one possibly be? This article is a good example of statist propaganda. Our wise leaders know what they are doing! How can anyone doubt it!

  Just to make this clear, we are not critical of people making bearish forecasts on gold. This is perfectly legitimate, especially as gold’s fundamental drivers have at best been stuck in “neutral” for much of the time over the past few years. Occasionally, gold’s fundamentals have switched to slightly more bullish, and then have quickly flipped back again to slightly more bearish, while its technical condition wasn’t much to write home about.

  Gold primarily has vast bullish potential. The factors that are currently slightly bearish could very easily and quickly flip to outright bullish. Gold bulls have the laws of economics on their side: the greatest post WW2 experiment in global money printing on a grand scale is apodictically certain to fail and will likely result in one of the greatest economic busts of modern times.

  Still A Contrarian’s Dream

  We find the reactions in the press interesting for the following reasons:

  Firstly, as mentioned above, we find it absolutely fascinating that gold is getting so much attention. The etatistes are apparently truly afraid of gold. If it were up to them, it would probably still be illegal (just a guess, mind).

  Secondly, we also find it fascinating (and a bit depressing) how woefully uninformed the commentary on gold generally is, and this does not only apply to gold bears, but to gold bulls as well. There is hardly any market about which more nonsense is written than the gold market.

  We have discussed this at length in previous articles on this blog, such as “Misconceptions about Gold”. Robert Blumen has contributed two excellent essays on the theoretical background that explain how exactly the gold price is formed (in “What Determines the Price of Gold” and “Misunderstanding Gold Demand”). In a somewhat dated “Update on Precious Metals” we provided a list of the most important fundamental drivers of the gold price (you’ll have to scroll down a bit to the section Fundamental Drivers of the Gold Market). We should also mention Keith Weiner’s frequent “Monetary Metals Supply and Demand” reports, which delve into the nitty-gritty of whether or not the metals are moved by developments on the physical side or the actions of futures speculators.

  In spite of all this information being available for free on the intertubes, we notice that even gold bulls are still wasting time talking about things like jewelry demand and mine supply. Others keep going on about central bank buying and gold buying in China, often asserting that “demand evidently exceeds supply”, even in the face of a declining price. Demand and supply are always in balance. Price informs us about the relative urgency displayed by demanders and suppliers, and when the price declines, it indicates that the former aren’t sufficiently enthusiastic. The fact that gold moves from warehouse A (in, say, New York) to warehouse B (in Shanghai) has nothing to do with it.

  Thirdly, we regard the excessive grave dancing, and the utter conviction with which gold is declared to be “doomed” as an outstanding contrary indicator. It means that a major trend change has to be very close. This is not to say that gold cannot fall further in the short term – technically it certainly continues to look weak, and the price attractor at $1,040-1,050 presumably still beckons. However, we believe that the long term outlook has greatly improved by the three waves of extreme bearish sentiment we have seen since 2013 (at the summer 2013 low, the late 2014 low and currently).

  Even in the short term, it seems that chances are very good that a substantial rally will develop. For instance, the Daily Sentiment Index (DSI) of futures traders has recently fallen back to a record low of just 5% bulls on two consecutive occasions. A recent report by EWI contained the following chart illustrating the situation:

   

  

  From 98% bulls at the top to just 5% bulls back-to-back – how sentiment on gold moves from one extreme to another – click to enlarge.

   

  A similar message is conveyed by sentimentrader’s gold optimism index, an average of the most important gold sentiment surveys and positioning data, which we already shown in Bill Bonner’s recent article “Gold Miners, RIP”. Currently the “Gold Optix” is at its second-lowest level in history, undercutting even the low recorded in the year 2000, at the bottom of a 20 year bear market:

   

  

  Gold market participants haven’t even been this bearish back in the year 2000 – click to enlarge.

   

  As might be imagined, other market positioning and sentiment data all convey a similar message: small speculators hold a large net short position in gold futures, managed money is net short gold futures, Rydex precious metals assets are close to “wipe-out” territory, closed end bullion funds trade at vast discounts to their net asset value, GLD keeps losing gold, etc., etc.

  In short, everybody knows gold can only fall further and is positioned accordingly. If there is one truism about markets one needs to be aware of, it is this one: What “everybody knows” isn’t worth knowing. Naturally, all those who have maintained a somewhat positive view on gold in recent years (including yours truly) look like idiots right now – but there is considerable potential that assorted gold haters will be invested with this particular mantle over coming years. Don’t worry, we’ll needle them right back. 🙂

   

  Conclusion

  As we have already mentioned in our missive on the recent “Gold Panic”, when everybody in a market is looking in the same direction, it is time to pay close attention. Contrarians should really love the current juncture in the gold market. At the very least, a playable counter-trend move should be close at hand, and perhaps a long term turn is actually finally in the offing. After all, the market has by now finally more or less replicated the mid-cycle decline of 1974-1976.

  Lastly, we are actually gratified by the fact that assorted etatistes still seem so preoccupied with gold. This is a sign that gold remains an important monetary asset, one that continues to stand tall as an indictment of central economic planning, socialism and corporatism in all its forms. Even after having declined by roughly 45% from its 2011 high, gold is still up by more than 3,000% against the US dollar since the latter was cut loose from its tie to gold by Nixon’s default in 1971. This means that even with gold under pressure for four years running, the dollar has still crashed by 97% against it since 1971.

  There is little question which currency is more useful to preserving value and protecting savers and property rights, and which one is more useful for the depredations of a greedy and insatiable Leviathan State. Hence all the gold hate pouring forth in the mainstream press. It will be interesting to see what happens once the collapse of fiat money against gold resumes – especially as we think it will do so with a real bang.

   

  

  What remains of the gold stash of the Bank of England

  Photo credit: Caters News

  

  

  

  

  

• The Cyber Wars Begin: Obama Says US "Must Retaliate" Against China For Historic Data Breach

  On Friday, we highlighted a “secret” NSA map which purports to show every Chinese cyber attack on US targets over the past five years. “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. 

  

  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,” we said yesterday.

  As it turns out, the Office of Personnel Management breach will indeed be used to justify a cyber “retaliation”against China, because as The New York Times notes, “the hacking attack was so vast in scope and ambition that the usual practices for dealing with traditional espionage cases [do] not apply.” Here’s more:

  The Obama administration has determined that it must retaliate against China for the theft of the personal information of more than 20 million Americans from the databases of the Office of Personnel Management, but it is still struggling to decide what it can do without prompting an escalating cyberconflict.

   

  The decision came after the administration concluded that the hacking attack was so vast in scope and ambition that the usual practices for dealing with traditional espionage cases did not apply.

   

  But in a series of classified meetings, officials have struggled to choose among options that range from largely symbolic responses — for example, diplomatic protests or the ouster of known Chinese agents in the United States — to more significant actions that some officials fear could lead to an escalation of the hacking conflict between the two countries.

   

  That does not mean a response will happen anytime soon — or be obvious when it does. 

  So the US will do something, it just doesn’t yet know what or when or even if anyone will notice, but one thing is clear: “this aggression will not stand, man.”

  The problem with “symbolic” responses is that they are merely, well, symbolic, and any real retaliation risks escalating the “cyberconflict.” Then again, not doing anything also risks prompting an escalation:

  But over recent days, both James Clapper Jr., the director of national intelligence, and Adm. Michael S. Rogers, director of the National Security Agency and commander of the military’s Cyber Command, have hinted at the internal debate by noting that unless the United States finds a way to respond to the attacks, they are bound to escalate.

   

  Mr. Clapper predicted that the number and sophistication of hacking aimed at the United States would worsen “until such time as we create both the substance and psychology of deterrence.”

   

  This echoes the rhetoric from the DoD’s “cyber strategy” released in April which says that “deterrence is partially a function of perception [and] works by convincing a potential adversary that it will suffer unacceptable costs if it conducts an attack on the United States.” 

  For now at least, it looks like criminal charges are off the table. 

  The Justice Department is exploring legal action against Chinese individuals and organizations believed responsible for the personnel office theft, much as it did last summer when five officers of the People’s Liberation Army, part of the Chinese military, were indicted on a charge of the theft of intellectual property from American companies. While Justice officials say that earlier action was a breakthrough, others characterize the punishment as only symbolic: Unless they visit the United States or a friendly nation, none of them are likely to ever see the inside of an American courtroom.

   

  “Criminal charges appear to be unlikely in the case of the O.P.M. breach,” a study of the Office of Personnel Management breach published by the Congressional Research Service two weeks ago concluded. “As a matter of policy, the United States has sought to distinguish between cyber intrusions to collect data for national security purposes — to which the United States deems counterintelligence to be an appropriate response — and cyber intrusions to steal data for commercial purposes, to which the United States deems a criminal justice response to be appropriate.“

  Instead, the US may look to remove the so called “great firewall” which Beijing uses to censor content it considers to be subversive or otherwise objectionable.

  One of the most innovative actions discussed inside the intelligence agencies, according to two officials familiar with the debate, involves finding a way to breach the so-called great firewall, the complex network of censorship and control that the Chinese government keeps in place to suppress dissent inside the country. The idea would be to demonstrate to the Chinese leadership that the one thing they value most — keeping absolute control over the country’s political dialogue — could be at risk if they do not moderate attacks on the United States.

  So perhaps there’s a silver lining in all of this: China’s 650 million internet users may, if only for a split second, be free to surf the web without the Politburo filter.

  Of course if the US really wanted to do some cyber damage, the Pentagon could hack into China’s National Bureau of Statistics and see what the country’s real GDP figure looks like, and if that doesn’t teach them a lesson, maybe the best option would be to breach China Securities Finance Corporation and hit the “sell” button. 

  Finally, for those interested to monitor the global cyber war in real time, you can do so via Norsecorp by clicking on the following map.

  

  

  

  

  

  

• 11 Red Flags As We Enter The Pivotal Month Of August 2015

  Submitted by Michael Snyder via The Economic Collapse blog,

  

  Are you ready for what is coming in August?  All over America, economic, political and social tensions are building, and the next 30 days could turn out to be pivotal.  In July, we saw things start to turn.  As you will read about below, a major six year trendline for the S&P 500 was finally broken this month, Chinese stocks crashed, commodities crashed, and debt problems started erupting all over the planet.  I fully expect that this next month (August) will be a month of transition as we enter an extremely chaotic time in the fall and winter. 

  Things are unfolding in textbook fashion for another major global financial crisis in the months ahead, and yet most people refuse to see what is happening.  In their blind optimism, they want to believe that things will somehow be different this time.  Well, the coming months will definitely reveal who was right and who was wrong.  The following are 11 red flag events that just happened as we enter the pivotal month of August 2015…

  #1 Puerto Rico is going to default on a 58 million dollar debt payment that is due on Saturday.  Even though this has serious implications for the U.S. financial system, Barack Obama has said that there will be no bailout for “America’s Greece”.

  #2 As James Bailey has pointed out, the most important trendline for the S&P 500 has finally been broken after holding up for six years.  This is a critical technical signal that will likely motivate a significant number of investors to sell off their holdings in the weeks ahead.

  #3 The IMF is indicating that it will not take part in the new Greek debt deal.  As a result, the whole thing may completely fall apart…

  Leaked minutes of the fund’s latest board meeting, which took place on Wednesday, showed staff “cannot reach agreement at this stage” on whether to take part in the new €86bn (£60bn) bailout for Greece. The document said there were doubts over the capacity of the Athens Government to implement economic reforms, as well as the over the sustainability of the country’s sovereign debt pile, which is now projected to hit 200 percent of GDP.

   

  The German Chancellor, Angela Merkel, only sanctioned a new Greek deal earlier this month on the condition that the IMF takes part.

  #4 Italy is going down the exact same path as Greece, but Italy is going to be a much larger problem for Europe because it has a far, far larger economy.  This week, we learned that youth unemployment in Italy has reached a 38-year high of 44 percent, and Italy’s debt to GDP ratio has now hit 135 percent.

  #5 The Canadian economy has officially entered a new recession.  This is something that was not supposed to happen.

  #6 The price of oil plummeted close to 20 percent during the month of July.  It was the worst month for the price of oil that we have seen since October 2008, which just happened to be during the height of the last financial crisis.

  #7 Commodities just had their worst month in almost four years.  As I have written about previously, we witnessed a collapse in commodity prices just before the stock market crash of 2008 too.

  #8 Thanks to Barack Obama, the U.S. coal industry is imploding, and some of the largest coal producers in the entire country have just announced that they are declaring bankruptcy…

  On Thursday, Bloomberg reported that the biggest American producer of coking coal, Alpha Natural Resources, could file for bankruptcy as soon as Monday.

   

  Competitor Walter Energy filed for bankruptcy earlier this month, and several others have done the same this year.

  #9 For the month of July, the Shanghai Composite Index was down 13.4 percent.  Despite unprecedented government intervention to prop up the market, it was the worst month for Chinese stocks since October 2009.

  #10 A major red flag that a recession in the United States is fast approaching is the fact that Exxon Mobile just announced their worst earnings for a single quarter since 2009.  Compared to the same time period one year ago, Exxon Mobile’s earnings were down 51 percent.

  #11 Chevron is another oil giant that has seen earnings plunge.  In the second quarter of this year, Chevron’s earnings were down an eye-popping 90 percent from a year ago.

  And in this list I didn’t even mention the economic chaos that is happening down in South America.  For full coverage of that, please see my previous article entitled “The South American Financial Crisis Of 2015“.

  To a certain extent, I can understand why most Americans are not alarmed about the months ahead.  The relative stability of the past several years has lulled most of us into a false sense of security, and the mainstream media is assuring everyone that everything is going to be just fine and that brighter days are ahead.  At this point, many believe that it is patently absurd to suggest that we could see an economic collapse in 2015.  But of course even though the signs were glaringly apparent, very few of us anticipated the financial crisis of 2008 either.

  A few weeks ago, I authored a piece entitled “The Last Days Of ‘Normal Life’ In America“, and I stand by every single word of that article.  I truly believe that the era of debt-fueled prosperity that we have been enjoying for so long is coming to an end, and our standard of living will never again get back to this level.

  Just yesterday, I had the chance to go over and stock up on some emergency supplies at a dollar store.  It always astounds me what you can still buy for a dollar.  The combined cost of raw materials, manufacturing, packaging, shipping and retailing most of these items shouldn’t be less than a dollar, but thanks to having the reserve currency of the world we are still able to go to these big box stores and fill up our carts with lots and lots of extremely inexpensive merchandise.

  Unfortunately, this massively inflated standard of living is going to come crashing to a halt.  This next financial crisis is going to destroy the system that is currently producing such comfortable lifestyles for the vast majority of us, and that will be an extremely painful experience.

  So enjoy this summer for as long as it lasts.  Even though August threatens to be pivotal, it is going to be nothing compared to what will follow.

  Fall and winter are coming.

  Prepare while there is still time to do so.

  

  

  

  

  

• Furious Americans Demand Extradition Of Cecil-Killing Dentist As Poachers Kill Lion's Brother

  Update: The status of Cecil’s brother is now the subject of a “dispute” between conservationists.

  *  *  *

  There’s a lot going on in the world, but you wouldn’t know it if you tuned in to the nightly news because according to the mainstream media, the only thing that happened anywhere last week is that a dentist shot a lion. 

  

  (Cecil the lion is the one on the right)

  That’s right folks, Walter killed Cecil and some folks – scratch that – a lot of folks are unhappy about it.

  In fact, hundreds of protesters papered Dr. Palmer’s office with subtle messages like “rot in hell” and “there’s a deep cavity waiting for you.”

  

  

  

  As Reuters reports, Cecil’s untimely demise has the potential to put a dent in a lucrative industry by leaving a bad taste in the mouths of big game hunters, who may now hesitate before participating in this “archaic bloodsport”. Here’s more:

  Hunters longing to shoot big game in the African wild may choose a different target after public backlash against a Minnesota dentist who killed Zimbabwe’s Cecil the lion just outside a national wildlife preserve.

   

  African hunts are booked months in advance and pricey affairs, often costing $8,000 to $50,000, with approval needed from U.S. and U.N. agencies to bring back trophies such as the head of a lion to the United States.

   

  “It has left a bad taste in their mouths,” said James Jeffrey, a Houston-based international hunting agent with more than 12 years experience.

   

  “They read all those books and it is people’s dreams to go over there and do it. Some of these guys have worked their whole lives to do this one hunt,” he said.

   

  Eleven African countries issue lion hunting permits. Of them South Africa’s hunting industry is the biggest, worth $675 million, according to the Professional Hunters Association.

   

  Americans make up the bulk of non-African hunters, with 15,000 going to the continent on hunting safaris each year, according to John Jackson, president of Conservation Force, a lobby group that says regulated lion hunting helps protect the animal by giving reserve owners a financial incentive to deter poachers and cultivate stock.

   

  Supporters argue the money generated from hunts bolsters the coffers for conservation in emerging African countries that want to use their limited finances for social programs.

   

  Critics see the hunts as an archaic bloodsport, hurting species such as lions, which an academic study in 2012 said had seen a population fall of nearly 70 percent in the last 50 years.

  In response to the killing, Zimbabwe has now put a halt to big game hunts pending an investigation. From AP:

  Zimbabwean wildlife authorities say they have suspended the hunting of lions, leopards and elephants in an area favoured by hunters following the killing of a lion popular with tourists.

   

  The National Parks and Wildlife Authority said Saturday that bow and arrow hunts have also been suspended unless they are approved by the authority’s director.

   

  The authority says it is also investigating the killing of another lion in April that may have been illegal. It says it only received the information this week.

  And don’t expect the controversy to dissipate any time soon because in what is either a deliberate attempt on the part of an enterprising poacher to capitalize off the incident or else an incredibly ill-timed coincidence, Cecil’s brother Jericho was killed today by hunters. Here’s Sky News:

  The brother of Cecil the lion, Jericho, has been shot dead by poachers, the Zimbabwe Conservation Task Force has said.

   

  The organisation wrote on Facebook: “It is with huge disgust and sadness that we have just been informed that Jericho, Cecil’s brother, has been killed at 4pm today.

   

  “We are absolutely heart broken.”

   

  It is thought Jericho had been protecting Cecil’s cubs.

  And because the story obviously needed to get sadder still, those cubs will now likely die as well. 

  Via The Daily Mail:

  Before his death there had been concerns Jericho would not be able to hold the territory of Cecil’s cubs alone and could be chased away by rival lions. 

   

  Unprotected, the lionesses and cubs are now under threat and [must] move away or be killed.

   

  Last week Mr Rodrigues, told the Daily Mail Online Jericho was keeping the cubs safe from any rival males.

   

  

  (Jericho and Cecil in better times)

  As for Palmer, Zimbabwe is looking to have the dentist extradited from the US. “Environment minister Oppah Muchinguri said the dentist should be handed over to Zimbabwean officials to face justice, adding that she understood prosecutors had started the legal process to make that happen,” the Daily Mail notes. 

  And for anyone who thinks getting Palmer sent back to Zimbabwe will be like pulling teeth (so to speak), the public outcry may end up pressuing The White House into action, because as you can see from the screengrab below, a peitition to have Palmer extradicted has received the necessary number of signatures to warrant a response from The President:

   

  

   

  So in the end, we suppose the only question for Obama will be how to explain the fact that, as we reported on Thursday, the death of Cecil, as well as countless other lions, elephants, rhinos and other animals, is solely as a result of the Zimbabwe government’s corruption. A corruption, which the US government knew all about, and despite the fact that Washington knew US hunters were killing not only elephants but lions, the government’s only real concern was the “serious risks that Americans could be implicated in smuggling and poaching operations.”

  

  

  

  

• Did We Just Hit The Threshold For Short Covering In Gold?

  Two weeks ago we noted something that has never happened before in gold – hedge funds, according to CFTC, had a net short position for the first in history. The past week saw a very surprising negligible shift of just 11 contracts as the short position shrank to 11,334 contracts. However, the aggregate net long position has dropped to a level that in the past has represented a threshold for signficant short-covering (21% and 17% rallies respectively). So with hedgies as short as they have ever been in history and aggregate positioning at a historically crucial level, one wonders if gold is due for a bounce…

   

  Hedgies remain the most short they have ever been in gold…

   

  

   

  This is what happened the last time gold saw a 'low' net long position…

  

   

  and now, the aggregate net position in gold futures appears to have hit a threshold that in the past has created a significant short-covering rally…

  

   

  The last 2 times aggregate net long positions were this low, gold rallied 21% and 17%…

  Did we just reach that short-covering threshold once again?

  

  

  

  

  

• The Great Greek Fudge

  Submitted by Pieter Cleppe of Open Europe

  

  The Great Greek Fudge

  A third Greek bailout involving loans from the European Stability Mechanism (ESM), the eurozone’s bailout scheme, is now being negotiated. The start was quite rocky, with haggling over the precise location in Athens where negotiations need to take place and Greek officials once again withholding information to creditors. Therefore, few still believe that it will be possible to conclude a deal in time for Greece to repay 3.2 billion euro to the ECB on 20 August. Several national Parliaments in the Eurozone would need to approve a final deal, which would necessitate calling their members back from recess around two  weeks before the 20th, so it’s weird that French EU Commissioner Pierre Moscovici still seems so confident that the deadline can be met.

  If indeed there is no deal, Greece is likely to request a second so-called “bridge loan” to allow it to pay the ECB, firmly within the Eurozone tradition of the creditor providing the debtor cash in order to pay back the creditor. France, which is most eager to keep Greece inside the Eurozone, is afraid that bilateral bridge loans from Eurozone countries wouldn’t be approved by the more critical member states, as this would risk France having to foot this bill on its own, perhaps with Italy. Not exactly a rosy prospect for socialist French President Hollande, who’s already struggling to contain the far right anti-euro formation Front National.

  The only European fund practically available to provide a bridge loan is the European Financial Stabilisation Mechanism (EFSM), a fund created in May 2010, which has been raising 60 billion euro on the markets, with the EU’s €1 trillion Budget as collateral. The EFSM belongs not just to Eurozone member states, but to all EU member states. How on earth did the UK, which isn’t part of the Eurozone, agree to bail it out in 2010, one may wonder? The reason is that the decision to create the EFSM was taking precisely at the time of the power vacuum in the UK. Labour had just lost the election and the Conservatives were still busy negotiating a coalition with the Lib Dems. Outgoing Labour Chancellor Alistair Darling claimed to have “consulted” likely new Chancellor George Osborne, but it remains muddy who precisely gave the expensive OK. In order to correct this, PM Cameron secured a declaration from other EU leaders in December 2010 that the fund wasn’t going to be used any longer, until it was used after all, in July 2015, to provide Greece with a first bridge loan. Then not only the UK, but also the Czech Republic and Poland protested heavily, only backing down when they secured special guarantees against possible losses and a commitment that it would be illegal in the future to provide loans to Eurozone countries with the EFSM without also providing such guarantees to non-euro states.

  EU Finance Ministers are currently busy implementing the legal change, through a “written procedure”, which should be finalized before the middle of August. The Council declared in July that an “agreement” on this legal change was needed “in any case before” Greece can request a second bridge loan. Another “written procedure” is needed for that, but it’s unlikely that Finance Ministers will manage to decide this in smoke-filled rooms. With Polish elections coming up on 25 October, local opposition parties may once again rail against Polish PM Ewa Kopacz, who promised voters they wouldn’t be exposed to this. Also the UK may use this as an opportunity to extract concessions related to its own agenda for EU reform. Perhaps the French government’s sudden openness to this agenda and its welcome stance that “we need a fair treatment of the ‘out’ countries” may have been linked to the British approval for a first bridge loan.

  As always in the Eurozone, the safest bet is on another fudge, at least when it comes to the bridge loan.

  More questionable is how the IMF’s statement that it “cannot reach staff-level agreement [to participate to a third Greek bailout] at this stage” will play out, given that Greece no longer meets two of the four IMF criteria for a bailout: ability/willingness to implement reform and debt sustainability. It will only decide whether to take part in the bailout after Greece has “agreed on a comprehensive set of reforms” and after the Eurozone has “agreed on debt relief”, meaning it may even only join next year or not at all, of course. This is a problem, given that a number of Eurozone states, especially Germany and the Netherlands, have explicitly linked their willingness for a third Greek bailout to participation by the IMF. Former EU Commissioner for Monetary Affairs Olli Rehn has suggested that many countries demand IMF involvement in bailouts because they don’t trust the Commission.

  It’s not entirely clear what will be sufficient for the IMF: its President, Christine Lagarde, has discussed a write-down on the value of the country’s debt but ruled out a straight “haircut”, while mentioning an extension of debt maturities, an extension of grace periods and a maximum reduction of interest rates. The IMF carries the legacy of its former Director Dominique Strauss-Kahn, who managed to overcome opposition within the fund against taking part in the first Greek bailout in 2010. The IMF only issues loans to countries when there is prospect for debt sustainability, which clearly wasn’t the case for Greece in 2010, but the interests of supposedly “systemic” banks were considered to be more important. Now the IMF, which has never taken straight losses on loans it has issued, may be experiencing this in case of Grexit.

  As opposed to the IMF, which has completely ruled out the idea of taking losses on its lending to Greece, and contrary to the picture painted by some, Germany has made some noices suggesting it may be open to cutting its losses in Greece. German Chancellor Merkel has not only been open to extending debt maturities and lowering interest rates, but her Finance Minister Wolfgang Schäuble has said that “if you think the best way for Greece” is debt relief, then “the best way forward” is to leave the euro, adding that “a real debt haircut isn’t compatible with the membership of the currency union”. So Germany is willing to accept debt relief, if there is Grexit.

  Some have questioned Schäuble’s claim that debt relief wouldn’t be legally banned within the eurozone, as for example Financial Times columnist Wolfgang Munchau, who recently wrote: “In its landmark Pringle ruling — relating to an Irish case in 2012 — the European Court of Justice (ECJ) said bailouts are fine, even under Article 125, as long as the purpose of the bailout is to render the fiscal position of the recipient country sustainable in the long run.”

  This sounds a bit like a stretch. The ESM is very much conceived as a “European IMF”, hence the ECJ’s use of the term “sustainable”, reminiscent of the IMF’s condition to provide cash. Just like the IMF, the ESM has been set up to issue “loans”, not to provide “transfers”. Obviously, a loan with an artificially low interest rate partly counts as a “transfer”, but even for the rather politicized judges of the European Court of Justice there is an end to stretching the meaning of words.

  Therefore, apart from the case where the ECJ would completely remove the meaning of the words of its previous rulings and the ESM Treaty, EU law doesn’t allow the “loans” made to Greece to just be forgiven, as much as proponents of a Eurozone transfer union like Mr. Munchau may regret this.

  After PM Tsipras threatened with an internal referendum in his own left-wing populist Syriza party, it looks like he has secured the necessary domestic support for a third Greek bailout.

  Obstacles remain, but much of the protest in “creditor countries” seem to have been overcome. In Finland, where the coalition was at risk at some point, Foreign Minister Timo Soini has said that it “would make no sense” for his Eurosceptic Finns party to leave the Finnish coalition over this. In the Netherlands, the governing VVD party, which is skeptical to the Greek deal, has provided tacit consent for negotiations to start. In Germany, despite all the noice, Merkel enjoys a comfortable majority to get on with the third range of transfers.

  The third bailout is likely not to be sufficient to cover all Greek funding needs in the next few years, also given that expecting 50 billion euro from privatizing Greek state assets looks a little rosy. This is a problem which can be solved near the end of the bailout period, once Greece has made it through the difficult year 2015. In 2016 and 2017, the country needs to make debt repayments “only” amounting to around 6 billion euro each year.

  The IMF may in the end just back down and join in, given how it already bent its rules twice to agree to Greek bailouts. It would have been expected to provide between 10% and a third of the funding of the new bailout which may amount to 86 billion euro (and possibly more), so if the IMF wouldn’t back down, Germany and France would see their bill for the third bailout rise with another 1.7 billion and 1.3 billion euro respectively. A lot will depend on how the IMF will calculate “debt sustainaibility”. Speaking in the Dutch Parliament, Eurogroup chief Jeroen Dijsselbloem said on 16 July that the Eurozone already “agreed with the IMF to look at “debt service”, not merely at the debt to GDP levels”. In other words: because Greece’s interest burden as a percentage of GDP is even lower than the one carried by Portugal, Italy, Ireland and Spain, one can ignore the fact that its debt to GDP is at the horrendous level of 180% now. This of course overlooks the difficulty to boost that GDP, given the tax hikes and the capital controls which will be hard to remove as a result of the talk about “Grexit”. Still, a fudge looks on the cards.

  It isn’t a good idea to let the bill of Eurozone taxpayers grow even bigger, to burden an economy already crippled by debt with even more debt and to intervene deeply into domestic Greek policy choices. Opting for Grexit may have been the wisest choice for everyone. The opportunity was there, given that many Greeks had already taken their savings out of banks anyway. Also, many of the reasons to think Greece still may leave the Eurozone, like the difficulty to unwind capital controls, remain in place. We have come close, but Grexit seems to have been avoided for now. But it’s unlikely to have been referred “ad kalendas Graecas”- “until pigs can fly”.

  

  

  

  

  

• "Asia Crisis, Tech Bubble Burst, Lehman"… And Today

  While over the past several months many have been focused – finally – on the bursting of China’s 3 bubbles (credit, housing and investment), in the context of its 4th burst bubble, the stock market which the politburo is desperately trying to patch up every single day, a far scarier picture has emerged within the entire Emerging Market space, where Brazil has rapidly become a “ground zero” case study for what has moved beyond mere recession and is an accelerated collapse into economic depression, as we discussed previously.

  Bank of America notes overnight that “capitulation is already visible in bond/bank/FX correlations and “forced selling” of crowded EM growth trades.” Here is what BofA’s Michael Hartnett has to say about the EM capitulation/collapse phase:

  Despite muted asset returns, 2015 has seen the emergence of two big trends: the risk of a bubble in US health care & technology; and the crash in EM/Resources/Commodities.

   

  The journey from hubris to humiliation in EM has taken roughly 5 years. Back in late 2010, when Sepp Blatter announced that Russia & Qatar would follow Brazil as hosts of the FIFA World Cup, both China & India were on course for >10% GDP growth, EM spreads were significantly lower, and the market cap of EM ($3.7 trillion on December 1st 2010) was twice the market cap of US banks, and exceeded the combined market cap of US tech & health care. Today, the market cap of EM equities is the same, while the combined market cap of US tech, health care and banks is over $10 trillion.

   

  Note that the classic sign of crisis and capital flight, higher interest rates, falling currency, and falling bank stocks are now visible in Brazil (and elsewhere). Indeed, the correlation between Brazilian bond yields and Brazilian financials/BRL turned sharply negative during each of the past 3 systemic crises (Asia ‘98, Tech ‘02 & Lehman ’08) and is doing so again today (Chart 3).

  In other words, while the S&P continues to exist in its own inert bubble, where stocks no longer are able to discount anything and merely float on the sea of $22 trillion in liquidity created by central banks, for Brazil, the correlation between key assets classes reveals that the local situation is on par with the three greatest crises of the past two decades: the Asia Crisis, the bursting of the Tech bubble, and of course, Lehman.

  

   

  While it is naive to blame much of this on the strength of the US dollar, one thing is obvious, as BofA notes: “Structural inflection points in both EM/DM (Chart 6 & Table 3) have tended to coincide with major geopolitical events and/or policy shifts that have started or ended a multi-year move in the US dollar, e.g. Bretton Woods ‘70s, LatAm debt crisis ‘80s, Asia crisis ‘90s, Lehman 200.8”

  

  So for those who are seeking the inflection point in deciding how and whether to invest in EM, “asset allocation to EM awaits an “event” (e.g. Fed hikes, China deval, bankruptcy/ default) to create narrative of US$ peak & unambiguous EM value).”

  

  For the time being, the dominant narrative is that the US has a ways to go and will go even higher if and when the Fed starts its hiking cycle (even if riots break out among the BRIC nations which, like Brazil, are facing economic devastation).

  Unless, of course, the first rate hike is precisely the catalyst that ends the past year’s dollar surge, as the market prices in the failure of the Fed’s hiking cycle and begins trading in anticipation of the admission of such failure which will lead to an end of rate hikes once the US economy slides into all out recession (the plunge in globla trade is the biggest flashing red light in that regard) and corporate profitability moves beyond GAAP recession into all out depression, ultimately culminating with the launch of QE4 and monetary policy reverting back to square one.

  

  

  

  

  

• The Latest Government Trust Fund To Go Bankrupt

  Submitted by Sovereign Man

  The Latest Government Trust Fund To Go Bankrupt

  On June 6, 1932, President Herbert Hoover imposed the first ever national gasoline tax in the United States, initially set at 1 cent per gallon.

  It was a major success for the federal government; the tax on gasoline alone was responsible for over 15% of their 1933 tax revenue.

  What’s curious is that the Senate Finance Committee issued a report the following year stating that the federal gasoline tax should be repealed. But that never happened.

  Instead it went up.

  Under President Eisenhower, the tax increased to 3 cents per gallon. Under Reagan, 9 cents.

  It’s risen steadily through the years to a level of 18.4 cents for every gallon of unleaded fuel, and 24.4 cents per gallon of diesel.

  All of this tax revenue is –supposed– to go to the Federal Highway Trust Fund, something established back in the 1950s to finance the care and maintenance of the nation’s highways.

  And now it, too, is insolvent.

  Earlier this week I told you about Social Security’s Disability Insurance Trust Fund (DI), which will become insolvent in a matter of months.

  The DI problem (just like the rest of Social Security) has been a long time coming.

  But rather than form some meaningful solution, Congress has instead opted to commit financial fraud by commingling DI monies together with the other Social Security funds.

  Now comes the Highway Trust Fund.

  The difference between DI and the Highway Trust fund is that this one won’t be insolvent in a matter of years or months. Their own data shows that it may very well be toast… today.

  Once again- Congress to the rescue.

  Having waited until almost quite literally the last minute, their solution is to… wait for it… kick the can down the road.

  Congress has now passed a 90-day stay of execution for the Highway Trust Fund, which only delays the inevitable.

  Over the next three months they’ll sit down to the task of figuring out who to steal from.

  They’re either going to raise taxes on you.

  Or they’ll raise taxes on someone else, the costs of which will ultimately be passed on to you.

  Or they’ll simply default on their obligations to the residents of the United States to maintain the federal highway system.

  None of this should come as a surprise. This is what happens when nations go bankrupt: one by one, its major institutions fall into insolvency.

  Today it’s the Highway Fund. Tomorrow it’ll be the Pension Benefit Guarantee Corporation (we’ll talk about that one soon) and the United States Postal Service.

  Then it’ll be Social Security and Medicare. Then the Federal Reserve. And eventually it’ll be the United States government itself.

  The signs are everywhere– every single one of these hallowed institutions is flat broke.

  It’s no longer some wild assertion to say that. Their own financial statements show that they’re insolvent. And it’s not hard to figure out what happens down the road.

  Bankrupt governments invariably resort to plundering the wealth of their citizens. Inflation. Higher taxes. Confiscation of assets. Indebting unborn generations. And defaulting on the benefits promises they made to voters.

  

  

  

  

  

• Head Of Collapsed Mt.Gox Exchange Arrested With Half A Billion In Bitcoin Still Unaccounted

  Back in its 2013 heyday, when bitcoin soared from below $100 to over $1000 in the span of a few months (in no small part thanks to the collapse of the Cyprus banking system) there was only one real Bitcoin exchange: Magic: The Gathering Online Exchange, or Mt. Gox as it was better known, which had become the world’s largest hub for trading the digital currency. And then, as mysteriously as it had appeared, Mt. Gox went dark, and filed for bankruptcy after nearly half a billion dollars worth of bitcoin “disappeared.”

  We wrote at the time:

  For a case study of a blistering rise and an absolutely epic fall of an exchange that i) was named after Magic: the Gathering and ii) transacted in a digital currency which many have speculated was conceived by the NSA nearly two decades ago and was used as a honeypot to trap the gullible, look no further than Mt.Gox which after halting withdrawals for the second (and final time) has finally done the honorable thing, and filed for bankruptcy. As the WSJ reports, “Bitcoin exchange Mt. Gox said Friday it was filing for bankruptcy protection after losing almost 750,000 of its customers’ bitcoins, marking the collapse of a marketplace that once dominated trading in the virtual currency. The company said it also lost around 100,000 of its own bitcoins. Together, the lost bitcoins would be worth approximately $473 million at market prices charted by the CoinDesk bitcoin index, although the price of Mt. Gox bitcoin had fallen well below that index after it stopped bitcoin withdrawals in early February.”

   

  The punchline: speaking to reporters at Tokyo District Court Friday after the bankruptcy filing, Mt. Gox owner Mark Karpelès said technical issues had opened the way for fraudulent withdrawals, and he apologized to customers.

   

  “There was some weakness in the system, and the bitcoins have disappeared. I apologize for causing trouble.”

  In other words, oops sorry, several hundred million in Bitcoin is unaccounted for but blame the “system weakness.” This promptly led to various artistic interpretations on the Mt. Gox logo, such as this one:

  

  Some were confused if Karpeles was going to get away with nothing more than an excuse, even if – as many speculated – he had personally fabricated exchange data entries and embezzled millions of dollars for his own account.

  As a reminder, when it filed for bankruptcy in February 2014, Mt. Gox said 750,000 customer bitcoins and another 100,000 belonging to the exchange were stolen due to a software security flaw. The lost funds represented the equivalent of $480 million at the time of the bankruptcy filing. Mt. Gox also said more than $27 million was missing from its Japanese bank accounts. Karpeles, who had blamed hackers for the loss, later said he had recovered 200,000 of the lost bitcoins.

  Earlier today we got the answer when nearly 18 months after his infamous apology, Mark Karpeles was arrested in Tokyo. FT reports that Japanese police have arrested Mark Karpelès, the head of the bankrupt Japan-based bitcoin exchange Mt Gox. The arrest charge is that he made an illegal entry to the system in February 2013 and increased the balance of his account by $1 million.

  And yet, a year and a half after the exchange insolvency, nobody truly knows what happened:

  The alleged crimes involved are hard to pin down, say police sources, because of the absence of a specific laws governing the virtual currency. Police have acknowledged privately that there technical elements of the alleged disappearance of nearly $500m that “are still not properly understood”.

   

  Asked by Mt Gox to look into the matter in March Last year, the Tokyo Metropolitan Police were not able to begin their investigation until three months later. Even then, say people close to the investigation, the two police departments in charge — the cyber crime unit and the white-collar crime unit — did not properly share information.

   

  The year long investigation, say legal experts, has culminated in an arrest that will allow police to hold Mr Karpelès without charge for 23 days. If he continues to deny any wrongdoing during that time, police may alter the charge, and hold him for another 23 days.

  While Karpeles may very well be guilty of embezzlement and massive fraud against his clients, could it be the still undetermined “crimes” relating to a virtual currency will become just the excuse to keep unsavory suspects detained and/or under arrest for an indefinite period of time? Because being held for up to 46 days without any charge seems a little Guantanamoish.

  As the FT adds, “the case has exposed both the complexities of crime relating to the bitcoin virtual currency, and the profound difficulties encountered by the Japanese police as they have attempted to investigate the Mt Gox.”

  Seemingly the complexity was not as big as that encountered by US regulators and police who 7 years after the greatest criminal systemic collapse, and after the statute of limitations has now expired, have yet to arrest anyone for a multi-trillion systemic crime far greater than Karpeles’ $500 million embezzlement.

  As for the former Mt. Gox head, today’s arrest will hardly come as a surprise as it was expected for over two weeks: Japanese journalists had been encamped outside his Tokyo home for several days. Footage of him being led from his home to a police car showed Mr Karpelès wearing a T-shirt and a baseball cap.

  Mt. Gox bitcoin firm head arrested – The Japan News http://t.co/t4xFsyCsNy
  #mtgox #Bitcoin #?????? pic.twitter.com/A2M8Lyz7px

  — The Japan News (@The_Japan_News) August 1, 2015

  Mr Karpelès could, if found guilty, face up to five years in prison or a fine of as much as Y500,000 which at today’s exchange rate is just over $4000.

  So let’s do the math: steal $500 million which only you know where it is, spend 5 years in prison, and be fined $5000. Sounds like a pretty good deal…

  Anyone curious for more, there was an AMA this morning with a person representing to be Ashley Barr, the first Mt. Gox employee which gives more insight into Karpeles various pathologies. It can be found here.

  

  

  

  

  

• Greece May Miss ECB Payment As Germany Says Bailout Timeline Is Unrealistic

  Greek PM Alexis Tsipras won a hard fought victory over party rivals on Thursday when Syriza’s central committee voted to postpone an emergency congress until after formal discussions on the country’s third bailout program are complete. 

  Syriza has been grappling with bitter infighting since more than 30 MPs in Tsipras’ parliamentary coalition defected during a vote on the first set of bailout prior actions, forcing the PM to rely on opposition votes to clear the way for formal discussions with creditors. The party dispute was exacerbated by reports that ex-Energy Minister and incorrigible Grexit proponent Panayiotis Lafazanis (along with several Left Platform co-conspirators) planned to storm the Greek mint and seize the country’s currency reserves. 

  Fed up, Tsipras told 200 members of Syriza’s central committee on Thursday that essentially, they could either hold a party referendum on the bailout on Sunday or wait until September to sort things out, leading us to note that “were Syriza to vote on whether or not Greece should follow through on the agreement with creditors, the market could be in for an event that is far more dramatic and important than the original referendum.” 

  Lafazanis refused to go along with the idea. “How many referenda are we going to hold? We’ve already done one and we won with 62 per cent of the vote”, he said. Ultimately, the party approved a September congress. This gives Tsipras some “breathing space,” FT notes, “but Thursday’s highly charged debate signalled that the Left Platform, which supports an end to austerity and a ‘Grexit’ from the euro, would continue to oppose a fresh bailout.”

  And the party’s radical leftists aren’t alone in their opposition to the third program for Athens. On Thursday, FT reported that according to “strictly confidential” minutes from the IMF’s Wednesday board meeting, the Fund will not support the new bailout until the debt relief issue is decided and until it’s clear that Greece “has the institutional and political capacity to implement economic reforms.”

  Somehow, all of this must be worked out in the next three weeks. Greece must make a €3.2 billion payment to the ECB on August 20 and if the bailout isn’t in place by then, it’s either tap the remainder of the funds in the EFSM (which would require still more discussions with the UK and other decidedly unwilling non-euro states) or risk losing ELA which would trigger the complete collapse of not only the Greek economy but the banking sector and then, in short order, the government. The question is whether Germany can be reasonably expected to take it on faith that i) the Greek political situation will not eventually result in Athens walking back its austerity promises, and ii) that the IMF will eventually hold up its end of the deal once Berlin approves some manner of debt re-profiling for the Greeks. 

  Now, according to Focus magazine, there are questions as to whether the timetable for cementing the bailout agreement is realistic. German lawmakers may now have to postpone a Bundestag vote and Athens has already discussed the possibility of taking a second bridge loan from the EFSM, Focus says. Here’s more (Google translated):

  The timetable for the negotiations on a third aid package in favor of Greece is to look for an internal assessment of the federal government any more. According to the already contemplated for mid-August special session of the German Bundestag must be moved, according to government sources in Berlin.

   

  The objective pursued by the EU Commission scheduling is too closely knit, criticize experts.This was reported in its latest issue of FOCUS.

   

  Accordingly, the negotiations should be completed before August 10.On August 11, the euro zone finance ministers would approve the results before the agreement of other euro countries ratified and approved by the Parliament in Athens.Also, the Bundestag must still approve.

   

  Due to delay Greece threatens a serious cash problem.The government in Athens must, at the latest on August 20, 3.2 billion euros, the European Central Bank to transfer (ECB), which should be possible without new loans from the third aid package barely.

   

  Therefore already searched in circles of the EU Commission for ways to temporarily raise money from another pot. Speaking here a renewed bailout from the European Financial Stabilisation Mechanism is (EFSM)

   

  This is difficult, however, because the EU states will again require an indemnity outside the euro-zone in this case. As early as September Greece must further loans operate: The International Monetary Fund (IMF) then expected repayments totaling € 1.56 billion in four tranches.In addition, running on 4 September from short-term government bonds in the amount of 1.4 billion euros, which Greece must also refinance.

  And here’s the summary from Bloomberg:

  German parliament meeting that was considered for mid-August might have to be postponed as European Commission’s schedule for aid talks is “much too tight,” Focus magazine reports, citing unidentified people in German govt.

   

  Greece has to pay EU3.2b to the ECB by Aug. 20, which it may not be able to do without third aid package.

  In other words, Greece will likely need yet another bridge loan from the EFSM and that will once again require the approval of non-euro countries that will, for the second time in a month, be asked to put their taxpayers at risk in order to keep the ill-fated EMU project alive and preserve the now thoroughly discredited notion that the currency union is “indissoluble.” 

  And make no mistake, Greece and its EMU “partners” had better hope things go smoothly after August because one more bridge loan and the EFSM is tapped out, which means Brussels will have to devise some other circular funding mechanism in the event the third program (which is itself nothing more than a dressed up ponzi scheme) isn’t in place by September. 

  Or, summarized in one picture:

  

  

  

  

  

  

• German Government Launches Investigation of Journalists for Treason

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  If it were up to the Federal Attorney General and the President of the German Domestic Security Agency, two of our reporters would soon be in prison for at least two years. Today, we were officially informed about investigations against our Markus Beckedahl, Andre Meister and an unknown“ party. The accusation: Treason.

  – From Netzpolitik.org:  Suspicion of Treason“: Federal Attorney General Announces Investigation Against Us In Addition To Our Sources

  Widespread outrage across Germany is erupting following the revelation that the nation’s Attorney General has launched an investigation into treason charges for two journalists working for Netzpolitik.

  The charge is treason. The crime is journalism.

  We learn from The Guardian that:

  Germany has opened a treason investigation into a news website a broadcaster said had reported on plans to increase state surveillance of online communications.

   

  German media said it was the first time in more than 50 years journalists had faced treason charges, and some denounced the move as an attack on the freedom of the press.

   

  “The federal prosecutor has started an investigation on suspicion of treason into the articles … published on the internet blog Netzpolitik.org,” a spokeswoman for the prosecutor’s office said. 

   

  The public broadcaster ARD reported Netzpolitik.org had published an article on how the BfV was seeking extra funding to increase its online surveillance, and another about plans to set up a special unit to monitor social media, both based on leaked confidential documents.

   

  “This is an attack on the freedom of the press,” Netzpolitik.org journalist Andre Meister, targeted by the investigation along with editor-in-chief Markus Beckedahl, said in a statement. “We’re not going to be intimidated by this.”

  Cory Doctorow at Boing Boing accurately notes the shadiness and hypocrisy of it all:

  The German prosecutors who dropped all action against the US and UK spy-agencies who trampled German law and put the whole nation, up to and including Chancellor Angela Merkel, under surveillance, have decided instead to open an investigation into the bloggers at Netzpolitik, who revealed the wrongdoing.

   

  Netzpolitik are an important source of independent news, analysis and campaigning for privacy and freedom in Germany. This is a genuinely shameful moment for the nation. We stand with Netzpolitik and its supporters around the world.

  While this is horrible news, there is a silver lining. The main reason the German government feels a need to go overtly fascist, is because they are scared shitless. They are scared of the truth, of the light and of their own citizens. Such a corrupt and compromised government can’t last very long.

  Additionally, we should commend the bravery of the journalists involved. As reported by the Intercept:

  Asked if Netzpolitik would continue to report using materials gained from whistleblowers, Meister replied, “That’s our job, so of course we will continue to report about publicly relevant information, which obviously includes information from whistleblowers from state and private entities. As a matter of fact, just [yesterday] we have exposed the new ‘cyber strategy’ of the German Federal Military ‘Bundeswehr’ about offensive cyber attacks.”

   

  “If anything, all the support is showing that we must be doing the right thing, so we will continue what we do and maybe even step up the pace. … To paraphrase a Google engineer after yet another NSA leak: ‘Fuck those guys!'”

  Bravo. These guys deserve our complete and total support.

  *  *  *

  For related articles, see:

  Standard & Poor’s Warns on Germany as Anti-Euro Political Party Soars in Popularity

  Video of the Day – “End the Fed” Rallies are Exploding Throughout Germany

  Martin Luther King: “Everything Adolf Hitler did in Germany was Legal”

  

  

  

  

  

• Chinese Company Replaces Humans With Robots, Production Skyrockets, Mistakes Disappear

  “I believe that anyone who has a job and works full time, they should be able to pay the things that sustain life: food, shelter and clothing. I can’t even do that.”

  That rather depressing quote is from 61-year old Rebecca Cornick. She’s a grandmother and a 9-year Wendy’s veteran who spoke to CBS News. Rebecca makes $9 an hour and her plight is representative of fast food workers across the country who are campaigning for higher pay. 

  The fast food worker pay debate is part of a larger discussion as “states and cities across the country [wrestle] with the idea of raising the minimum wage,” CBS notes, adding that “right now, 29 states have minimums above the federal $7.25 an hour [and] four cities, including Los Angeles, have doubled their minimum to $15.”

  Proponents of raising the pay floor argue that it’s simply not possible to live on minimum wage and indeed, there’s plenty of evidence to suggest that they’re right. Opponents say forcing employers to pay more will simply mean that companies will fire people or stop hiring and indeed, as we highlighted on Friday, it looks as though WalMart’s move to implement an across-the-board pay raise for its low-paid workers may have contributed to a decision to layoff around 1,000 people at its home office in Bentonville. 

  “The reality is that most business are not going to pay $15 dollars an hour and keep their doors open,” one Burger King franchisee told CBS. “It just won’t happen. The economics don’t work in this industry. There is a limit to what you’re going to pay for a hamburger.” 

  Yes, there’s only so much people will pay for a hamburger which is why Ronald McDonald has made an executive decision to hire more efficient employees at some locations:

  

  With all of that in mind, consider the following from TechRepublic who tells the story of Changying Precision Technology Company, which has replaced almost all of its human employees with robots to great success:

  In Dongguan City, located in the central Guangdong province of China, a technology company has set up a factory run almost exclusively by robots, and the results are fascinating.

   

  The Changying Precision Technology Company factory in Dongguan has automated production lines that use robotic arms to produce parts for cell phones. 

   

  The factory also has automated machining equipment, autonomous transport trucks, and other automated equipment in the warehouse.

   

  There are still people working at the factory, though. Three workers check and monitor each production line and there are other employees who monitor a computer control system. Previously, there were 650 employees at the factory. With the new robots, there’s now only 60. Luo Weiqiang, general manager of the company, told the People’s Daily that the number of employees could drop to 20 in the future.

   

  The robots have produced almost three times as many pieces as were produced before. According to the People’s Daily, production per person has increased from 8,000 pieces to 21,000 pieces. That’s a 162.5% increase.

   

  The increased production rate hasn’t come at the cost of quality either. In fact, quality has improved. Before the robots, the product defect rate was 25%, now it is below 5%.

  So to anyone planning on picketing the local McDonald’s in an attempt to secure a 70% wage hike, be careful, because this “guy” is ready to work, doesn’t need breaks, and never makes a mistake:

  

  Let’s just hope he doesn’t become self aware.

  

  

  

  

  

• Don't Exaggerate Significance of SNB's Loss

   

  The Swiss National Bank reported a record CHF50.1 bln loss. It has got the chins wagging, but the real implications are minor.  The losses are not realized and are unlikely to be repeated.  In fact, if the SNB’s report had covered the month of July, the loss would likely have been smaller.  

   

  More of the SNB’s loss stemmed from the valuation of its foreign currency holdings in the face of franc appreciation, especially after the cap was abandoned in mid-January.  Here in July the franc fell nearly 3% against the US dollar and about 1.3% against the euro.  These two currencies account for nearly 3/4 of the SNB’s reserves.  The franc fell 2% against sterling and 1.5% against the yen.  These four currencies together account for nearly 90% of the reserves.  

   

  It addition to the currency valuation markdown, the SNB reported a CHF3.2 bln euro loss on its gold holdings.   Gold lost another 5% in July in franc terms.  These losses reduce the SNB’s equity to CHF3.425 bln, which amounts to just shy of 6% of its assets. 

   

  There are two implications, and they have nothing to do with the solvency of the Swiss National Bank.  The first implication, and one that central banks are sensitive to is reputational risk.  If the central bank losses money, doesn’t it undermine its credibility to manage the country’s economy?  While it is difficult to show that the SNB’s reputation has been harmed, its performance provides its critics with fodder. 

   

   Switzerland’s parliamentary election will be held in mid-October.  These losses allow for a politicalization of monetary policy that may not be particularly helpful.  A couple of parliamentarians are pressing the SNB to adopt a new cap for the franc (euro floor) at CHF1.15.   While this is highly unlikely to be implemented, it illustrates the frustration with the franc’s appreciation. 

   

  The SNB appears to have been given a free pass on its effort to stem the rise of the franc.  In 2013, Switzerland’s current account surplus was 10.7% of GDP.  Last  year, it fell back to 7%.  The OECD expects its to be 10.1% of GDP this year and 10.5% next year.   Countries with such substantial surpluses often come under international pressure to reduce the imbalance.  

   

  However, a closer inspection of the Swiss current account composition suggests that it is not particularly sensitive to currency appreciation.  There are three main drivers of the Swiss current account surplus and trade is not one of them.  

   

  First, the largest contributor is from investment income.  These are mostly coupon and dividends on foreign portfolio investment.  In this context we note Japan is evolving in the same direction.  Its investment income often overwhelms the trade balance on the current account.  

   

  Second, financial services are important but are not driven by currency fluctuations.  Third, officials point to what is called “merchanting.”  It is the sales of goods that do not cross Swiss borders.  This arises primarily from the commodity trading businesses that are located in Switzerland.  This activity can account for 1/4-1/3 of the Swiss current account surplus. 

   

  The other implication of the SNB’s loss is that it may be unable to make its customary payout to the federal government and cantons.  Some cantons depend on payment from the SNB to reach their fiscal targets.  The failure to make a payment in 2013 due to the fall in gold saw criticism heaped on the central bank. 

   

  The record loss of the SNB is embarrassing, and it gives its critics fresh ammunition ahead of the national election.  It could squeeze the finances of a few cantons, but it already has distributed CHF1 bln earlier this year based on last year’s profits.  Its losses, largely an accounting function and not realized, is of little economic or financial consequence. 

  

  

  

  

  

• Near-Term Dollar Outlook

  The unexpectedly record low increase in Q2 US Employment Cost Index unwound the some of the dollar’s weekly gains and neutralized the near-term technical outlook.  Next week’s nonfarm payrolls are still critical, and the weakness may put even greater burden on the jobs data to demonstrate that slack is indeed being absorbed.  

   

  The Dollar Index was poised to challenge the three-month high set on July 21 near 98.15, but the sell-off following the ECI report reversed the gains scored on the back of the FOMC statement and Q2 GDP (and upward revision in Q1).   The five-day moving average barely crossed below the 20-day average for the first time since late-June.  It did not close below 96.40 (a retreacement objective and 100-day moving average), but instead finished the week and month near the middle of the 96.00-98.00 trading range.  

   

  The euro’s five-day moving crossed above the 20-day average a day before the FOMC statement.  After the Q2 GDP data and a threat that the Greek government would collapse saw the euro briefly trade below $1.09.  It rebounded with the help of month-end demand and signs that the Greek government will survive until at least September.  Before the weekend, nearly covered the entire week’s range.   Both the RSI and MACDs are consistent with a further push higher in the euro, but how fast it reversed the pre-weekend gains, and the relatively soft close suggests the bears are still in control.  Initial support is seen near $1.0950.  It may require greater confidence of a September rate hike before the $1.08 level can be breached.     

   

  The dollar was pushing above JPY124.50, the upper end of its range since mid-June and was stopped cold by the disappointing ECI.  The fact that Japan’s CPI excluding food and energy rose to 0.6% also discourage ideas that the BOJ the needs to provide additional stimulus. Support for the dollar is seen in the JPY123.00-JPY123.30 area.   A break that could signal a move into the JPY122.00-JPY122.50  band. 

   

  Since the middle of July, sterling has tried and failed to rise above $1.5700 a handful of times.  The technical indicators suggest the bulls may have been luck next week.  The BOE meeting is expected to see 2-3 hawkish dissents to what is anticipated to be a majority decision to keep policy on hold.  The minutes and the inflation report, with an update in macro-forecasts will be announced at the same time.   Before the weekend, sterling traded on both sides of Thursday’s range.  Even though it finished the week at its highest close in two week, it was still neutral.  A move above $1.57 would encourage a run toward $1.5800.   Support is seen in the $1.5540-$1.5560. 

   

  The Australian dollar nearly posted a potential key reversal before the weekend by making fresh multi-year lows (~$0.7235) before rallying to new highs for the week (almost $0.7370), but like sterling, the close was neutral.  The 20-day moving average is found near $0.7380, and the Aussie has not closed above this average since June 25.  It also roughly corresponds with the top end of a near-term down channel.   There is a bullish divergence in the RSI, and the MACDs are turning higher.  The market may be poised test the downtrend line drawn off May, June and July highs. It is found near comes in near $0.7420 by the end of next week.  If the RBA cuts rates next week, especially given that it would surprise participants, the modestly positive technical developments would likely be negated.  

   

  News that the Canadian economy unexpectedly contracted in May sent the Canadian dollar lower.  This was partly masked by US dollar weakness.  The greenback failed to take out the July 24 multi-year high just above CAD1.3100.  The US dollar closed on its highs, however, and additional near-term gains are likely.   The next important technical target is some distance away at CAD1.3450.  Support is seen near CAD1.2940.  

   

  The September light crude futures contract has fallen for seven consecutive weeks.  It has consistently recorded lower highs and lower lows.  The MACDs are trying to turn, but the RSI has drifted lower.  Initial support is seen near $46.70 and then $45.   Resistance is seen near $50. 

   

  The fact that the US 10-year yield was little changed on the week masks the 12 bp increase seen in the first four sessions last week.  Yields reversed lower on Thursday, and the weak ECI on Friday, pushed the 10-year yield below 2.20% for the first time since July 7-9, which itself was the first time since the beginning of June.   Although the 2.0% level is more significant, yields may find support near 2.08%-2.14%.   The 2.30% area likely represents the near-term cap. 

   

  The S&P 500 flirted with the 200-day moving average at the start of the week.  By the end of the week, it was about 2.5% above the lows set on Monday. Nevertheless, the close before the weekend was poor, on session lows.    Over the past three months, buying interest has dried up near 2130.  The S&P 500 has been in a broad 2040-2135 range since early February.  It is not clear what is going to drive it out of that range. 

   

  Observations based on the speculative positioning in the futures market:  

   

  1.  There were no significant (more than 10k contracts) adjustments to gross speculative currency positioning in the CFTC reporting week ending July 28.  The run-up to the FOMC meeting may have deterred activity.  

   

  2.  A clear pattern was speculators to reduce short euro, yen and sterling positions, and expand the short position in the other currencies.  Similarly, speculators cut gross long Australian and Canadian dollar futures.

   

  3.  The divergence of monetary policy, which we argue is the key driver, also benefits sterling, where the BOE is also expected to raise rates.  The net short sterling position is the smallest since last November.  We would not be surprised if it turned positive in the coming weeks.  The net position in the Swiss franc is moving in the opposite direction.  Speculators have been net long francs since mid-March.  It is on the verge of turning short.  

   

  4. The net short Canadian dollar position (56.1k contracts) is the largest since March 2014.  It is likely to grow further.  The net short Mexican peso position continues to grow, setting a new record each time it does.  

   

  5.  Speculators turned to a net long US 10-year Treasury futures position in the previous reporting week and grew it further over the past week to stand at 65.6k contracts.  The bulls added 31.9k contracts, lifting the gross long position to 491.5k contracts.  The bears covered 6.3k short contracts, leaving 425.9k.

   

  6. Bulls and bears added to gross positioning the light sweet crude oil futures.  The gross longs rose by 11.6k contracts to 476k.  The gross shorts increased 21.9k contracts to 232.6.  This resulted in a 10.3k contract reduction in the net long position, leaving 243.4k contracts.  

  

  

  

  

  

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